By 2050, there is projected to be 90 million elderly Americans – more than double the number in 2010. As the population ages and the healthcare system shifts to a value-based environment, constituents across the landscape are highly focused on moving treatment and care into the home in an effort to increase patient satisfaction, lower cost, and provide overall higher-quality care.
We recently attended a lunch and learn with Bill Dombi, President of the National Association for Home Care & Hospice (NAHC)
, where he discussed the latest regulatory updates impacting this important area of healthcare, including the Patient-Driven Groupings Model (PDGM), Review Choice Demonstration (RCD) Programs, as well as his regulatory outlook for the hospice space. Below we highlight a number of key regulatory takeaways from that session, along with certain considerations that may shape the industry going forward.
PDGM, as discussed in an earlier TripleTree blog post
, is scheduled to become effective on January 1, 2020 and is dominating the discussion within home health. Industry leaders are projecting significant disruption, with the larger operators in the space well positioned to consolidate as smaller operators are faced with billing changes, increased regulatory burden and cash flow pressures, especially if the projected 8% behavioral adjustment takes effect.
Mr. Dombi and the NAHC have proposed Medicare legislation that will eliminate the behavioral adjustment, citing perverse incentives as providers will likely “up-code” as a mitigation strategy against the current rule. The NAHC’s proposed legislation seeks to back-end load the spending cuts targeted by CMS, softening the transition for providers. If the Congressional Budget Office (CBO) finds the NAHC legislation to be budget neutral, and it can attach to another vehicle, Mr. Dombi gives the NAHC’s proposal a high likelihood of success. A final ruling is expected in late October or early November.
The other major regulatory consideration facing home health operators is CMS’ Review Choice Demonstration Program (RCD), a prior authorization initiative currently operating in Illinois that is set to expand next into Ohio, North Carolina, Texas and Florida. RCD is a pre-claim review demonstration for Medicare claims designed to improve claim integrity and certainty around payment for providers, eventually eliminating retroactive reimbursement changes resulting from a Unified Program Integrity Contractor (UPIC) or a Recovery Audit Contractor (RAC) audit. The Illinois RCD has yielded a noticeable drop in Medicare spend, ~10% from annualized 2016-17 – extended nationwide this would represent approximately a $2 billion reduction in Medicare spend today.
On the whole, Mr. Dombi indicated that home health companies in Illinois have responded positively to the demonstration – with many seeing increased revenue as a result. While some owners noted that the cost of administering the program is high, more sophisticated organizations have adjusted processes and procedures and are enjoying the added revenue visibility. Much like PDGM, however, added complexity from RCD will drive smaller companies out of business – leading to further consolidation and market share gains for larger operators.
A majority of healthcare spending is related to end-of-life care and potentially avoidable hospital readmissions. Given that hospice care is the most cost-effective and highest quality setting for patients at the end of their lives, it enjoys bipartisan regulatory support and benefits from a stable rate environment. With few providers of scale, hospice consolidators are best positioned to gain from the growing market opportunity. As a result, the M&A market continues to see increasing amounts of recent activity, driven by top strategic providers seeking to expand their offerings through acquisitions.
Unlike home health, no paradigm-shifting regulatory changes exist on the immediate-to-medium term horizon for the hospice sector. Mr. Dombi indicated that a Medicare Advantage (MA) carve-in of hospice services is looming, with a Value-Based Insurance Design (VBID) MA demo pending, but that full implementation is likely 3+ years away. The NAHC is opposed to the carve-in, as it believes MA plans will use the benefit to dump patients into hospice.
Mr. Dombi likened the state of the industry to that of home health several years ago. Spend is increasing along with rapid growth as transaction volume increases and agencies convert from not-for-profit to for-profit. Significant headroom exists as CMS believes that hospice remains underutilized and that overall spending on hospice services is under control. CMS, however, does not want a repeat of what happened with home health in the 1990s (Operation Restore Trust
, moratorium on home health agencies, etc.) so they will continue to monitor utilization for fraudulent behavior – the leading indicators being number of live discharges and length of stay.
Reflecting on the last 18 months, we have observed the growing importance of these regulatory and demographic factors as we’ve collaborated and engaged with companies across post-acute care (including advising Hospice Partners of America on their recent acquisition by Addus HomeCare
). Market interest in the space, stemming from both strategic consolidators and private equity firms, has surged since 2018 with over 130 transactions occurring in home health and hospice. As we look ahead to the healthcare landscape in 2020, we expect to see continued disruption and intense focus on post-acute care driving future transaction activity, specifically within home health and hospice.