The Regulatory Threat From Payment Do-Overs And Un-Economical Reimbursements

The Centers for Medicare & Medicaid Services issued an update to the home health payment system on June 22^nd. This proposed rule, rife with legalese and sheer complexity, should be held up as Exhibit A for why socialized healthcare schemes such as Medicare for All will never work.

The proposal’s obsessions with “aggregate expenditures” and “overall utilization” reveal one of the fundamental flaws of government-run healthcare – the belief that bureaucrats can efficiently serve individual’s needs by imposing aggregate caps and regulations based on population averages. In practice, government run healthcare inevitably implements uneconomical rules that harm patients and undermine providers’ ability to practice medicine.

Beyond demonstrating the fundamental flaw with government run healthcare, the proposed rule, if implemented, will harm patients, jeopardize the financial viability of the home healthcare industry, and raise overall healthcare expenditures in the process.

One of the most egregious provisions that will undermine the viability of the home healthcare industry is the proposed rule’s revenue claw-backs. While not framed as a claw-back, CMS essentially argues that, based on its modeling procedures, the agency overpaid home health agencies around $2 billion in 2020 and 2021. Therefore, CMS believes it is entitled to a refund.

Even assuming these claims are correct, a policy that enables an organization to renegotiate a fully executed contract is troubling. Imagine such a renegotiation scenario playing out in a private sector transaction. General Motors, for instance, has many suppliers providing a wide array of products including spark plugs, plastics, and audio equipment. GM pays its suppliers based on an assumed value per car and aggregate sales volume.

What if GM’s assumptions are wrong and each car is not worth $30,000 but only $25,000? The answer is, of course, GM earns less money. The company cannot go back to its suppliers and demand a discount because GM overpaid for its component parts relative to management’s assumed market value for the car. Nor should it be able to. The transaction between GM and its suppliers was entered into in good faith by both parties. Attempts to renegotiate terms long after the transaction has been completed are detrimental to the rule of law and an efficient market economy.

The same logic holds for CMS. CMS may believe it spent too much money on home healthcare services based on its internal modeling. Such a belief is not a justification to demand a discount on transactions that happened one to two years ago. CMS’ position as a government entity may enable it to implement policies that would elicit cries of anti-competitiveness if a private entity were to carry out the exact same actions. But the government’s stick cannot protect Medicare recipients from the economic consequences from imprudent policies.

These consequences are worsened by CMS’ proposed rate cuts. Medicare infamously undercompensates hospitals and providers creating the illusion that the program provides cost-effective healthcare services. In its assessment of Medicare’s reimbursement adequacy for hospital care, the American Hospital Association found that “in the aggregate, both Medicare and Medicaid payments fell below costs in 2020”. Specifically, hospitals “received payment of only 84 cents for every dollar spent by hospitals caring for Medicare patients in 2020.”

Given Medicare’s chronic underpayment history to hospitals, its assessment that rate cuts to home healthcare is warranted should be viewed skeptically.

More troubling, regardless of whether these rate cuts are penny wise, they are undoubtedly pound foolish. As I document here, experience demonstrates that home healthcare options are preferred by patients, improve patients’ health outcomes, and decrease total healthcare spending by reducing the need for costly hospital re-admissions and adverse health events.

Taken together, the ex-post revenue clawbacks coupled with the reimbursement cuts are expected to dampen the vitality of the home healthcare industry. If implemented, the consequences could be financial losses for more than 50 percent of the nation’s home health agencies and, not surprisingly, significant reductions in the amount of home healthcare services provided. Access issues for the millions of patients on Medicare will ensue consequently.

CMS’ proposed home healthcare rule is bad policy. In its attempt to cut costs, a laudable goal, the policy increases overall Medicare expenditures because more patients will require expensive hospital stays or medical procedures. Reduced access to lower-cost home healthcare services will also decrease patients’ quality of care. Simply put, it is a lose-lose policy that should be rejected.