Medicare Sequestration’s Return Puts Home Health Agencies in Financial Jeopardy

Home health agencies and other Medicare-reimbursed health care providers are just a couple weeks away from the return of sequestration.

For many agencies, the restart of the 2% cut will merely be a return to normal, pre-pandemic business. For others, however, it presents another cash-flow disruption that could, at worst, put some smaller operators out of business or, at the very least, add financial strain.

“The [2% cut] might not seem like a lot on the surface, but so much has changed since COVID,” Nick Seabrook, the managing principal at home health consulting firm SimiTree, told Home Health Care News. “The cost of care is definitely increasing, which makes any kind of cut to reimbursement hurt that much more.”

As mandated by the Budget Control Act, the U.S. Centers for Medicare & Medicaid Services (CMS) has been cutting Medicare reimbursements to home health agencies and other providers by 2% since 2014. Under law, payments that exceed Medicare’s cap must be returned to CMS.

Congress first suspended the 2% sequestration cuts as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act in 2020. Along with COVID-19 grant money and regulatory flexibility, the sequestration relief has been a lifeline during the past two years, according to home health care leaders.

“At a time when staffing, recruitment and retention costs are increasing, it’s certainly not a welcome resumption of a cut,” Joanne Cunningham, executive director of the Partnership for Quality Home Healthcare (PQHH), told HHCN. “Especially, at a time when the provider community is struggling, still under the weight of a changed and more intense workforce environment.”

Under current policy, the 2% sequestration cut to the Medicare base payment rate is not being applied through the end of March.

If the “sequestration holiday” is not extended, from April to June, the sequester will be a 1% cut to the base pay rate. Starting in July, the full 2% cut will be back in effect.

That may not seem like a huge cut. But it could have a drastic effect on all providers, considering the current operational landscape, Seabrook explained.

“On the surface, agencies are now really struggling from when the workforce shortage and expenses are going up,” he said. “The cost to recruit, the cost to retain has gone up exponentially. We’re seeing signing bonuses going up, retention bonuses increasing.”

Impact to Medicare

National advocacy organizations such as PQHH and the National Association for Home Care & Hospice (NAHC) are waiting to see if Congress will consider yet another extension to the moratorium on Medicare sequestration.

Calvin McDaniel, director of governmental affairs for NAHC, described the pause as “incredibly beneficial.”

“Providers have been able to use the added flexibility to offset many COVID-related expenses, such as [personal protective equipment], added staffing, overtime and lost revenues,” McDaniel wrote in an email to HHCN.

Indeed, a continued pause on sequestration would help home health providers navigate rising labor and equipment costs, along with any future volume disruptions related to the COVID-19 pandemic. More generally, though, it would keep Medicare funding at a higher-than-normal level, which is important as more care shifts into the home.

“The pause has been extremely helpful and valuable for providers as they were trying to continue to provide care to patients,” Cunningham said.

The original purpose of the emergency sequestration pause was to enable home health providers to have the resources to provide care during the COVID-19 emergency while staying afloat financially.

Along with home health agencies, hospice operators, in particular, have benefited from the holiday. Edo Banach, president and CEO of the National Hospice & Palliative Care Organization (NHPCO), said the return could jeopardize end-of-life care in the U.S.

“Some providers have already reported having to turn away patients seeking hospice care, which means those patients are likely dying in hospitals, without hospice care, and with higher costs,” Banach told HHCN sister publication Hospice News. “Cuts to Medicare payments to hospice will make those problems worse — forcing more people to die in hospitals instead of at home, reducing access to care, and increasing costs.”

Broadly, Medicare spends about $18 billion per year on home health care. A full 2% cut with no relief in the second half of 2022 would mean there would be $180 million less in home health funding this year, with an estimated $360 million less each year after that, according to McDaniel.

“NAHC is pushing for further suspension of sequestration,” he added. “It is a top legislative priority for 2022. NAHC has been in strong opposition to sequestration from its inception, as it has always served as a penalty paid by providers for nothing that they’ve done wrong.”

Additional consequences

Small providers with relatively tight financial margins could feel the greatest impact from a 2% cut coming back. But the larger companies would likewise lose out on millions of dollars in reimbursement.

Executives from Encompass Health Corporation (NYSE: EHC) detailed what kind of financial hurdles the company will face once sequestration returns during an investor conference on Wednesday.

“We estimate that for our consolidated business, that’s about a $50 million year-over-year headwind,” CFO Doug Coltharp said.

Those added headwinds could lessen industry M&A activity and have other unintended consequences.

Seabrook said he expects both small and large providers to be significantly affected by sequestration’s return. But again, the providers — mostly smaller ones — who are “skating by financially” might have a difficult time staying afloat.

“Agencies that are struggling right now are going to be impacted the most,” he said. “For the agencies who are hanging by the skin of their teeth and struggling to keep up with demand because of cost increases and staffing challenges, this is almost a death by a thousand paper cuts. This could be the paper cut that really puts them in jeopardy.”

Cunningham agreed, saying agencies with fewer resources will have a difficult time managing as usual with their cost and payment structures.

“[PQHH] members tend to be the national companies that have a multi-state presence in the home health sector, but in my years representing the home health community, I do understand the unique challenges that smaller providers have,” she said. “Any kind of negative impact to their payment structure really causes a lot of havoc, and it’s hard to manage.”

Seabrook, who was in Washington, D.C., last week, doesn’t feel optimistic about another delay.

“Everything I’ve heard is that the legislation would have had to be in place right now to put it back,” he said. “The message I’m hearing is to be planning on this 1%, 2% schedule remaining as is.”