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Are Home Health Care Agencies Profitable?

7/9/2021
by Keith Grunig

Home Health Net Worth Accounting

Home Health Profitability

There are over 11,000 home health agencies in the United states.  The size of those agencies ranges from tiny singly owned agencies all the way to very large publicly traded agencies.  Many ask if the business is profitable.  According to several articles, there is concern of agencies losing money by 2040- estimated to be 80% of home health agencies will have negative margins.  You can read that article (here).    This article was written in 2019, and we know how much has changed since then.  This article was written before PDGM was implemented, before 2021 where No Pay RAPs were implemented (in which agencies went from receiving 60% of anticipated reimbursement up front in 2019, to 20% in 2020, to $0 in 2021).  

The home health industry has been shaken to its core by implementing PDGM, then a global pandemic hit, and then messing with cash flow for RAPs.  This has caused many agencies to struggle- with some closing.  Many agencies didn't adjust or didn't want to adjust for PDGM and closed.  Some say it was designed to force smaller agencies out- forced market consolidation.  

If things were not profitable, there wouldn't be over 11,000 agencies in the country. 

Home Health Gross Profit Margin

We looked at the gross margin of several publicly held home health care companies over several years.  If you would like a link of the largest agencies in 2020, click here.  That being said, the majority of the home health providers are still small to medium sized companies.  The numbers may change slightly, but this is a good range of profit dollars and gross margin %.   This is from a great article from Health Care Appraisers.  You can access that article (here).  

 

Profit Margin for National Average Home Health Agencies

Home Care Agency Profit Margin

What does that all those numbers above mean?  It shows how much money those agencies made (Revenue), how much profit they gained after some expenses are removed (Gross Margin), and then how much money they actually made after the rest of the expenses are paid.  Those are some big numbers, but we'll break it down to an individual level.  What it shows is that agencies still made money.  What we'll show you is how you can maximize the reimbursement you make to maximize profit.  Profit is a ratio of revenue less expenses.  If you make a lot of money, but spend a lot of money, then you're not taking money to the bank and keeping it.  We're going to show you how you can take it to the bank and keep it.  

PDGM and Home Health Profit Margin

PDGM really threw the industry for a loop.  It completely changed the way that Medicare pays for home health services.  We've written several articles about it you can read them Impact of PDGMPDGM for DummiesWhat is PDGM and what will it mean for HHA? (Home Health Agencies).  Bottom line, home health agencies can not only survive PDGM, but many can thrive.  This can be done through expense controls and reimbursement maximization.  

Home Health Average Profit Margin Explained

At Home Care Answers, we have developed a platform that allows our agency partners to see how much Medicare plans on reimbursing an agency for each individual patient.  Our job is to make sure OASIS and diagnosis coding is correct.  When those two things are correct, reimbursement follows.  Star Ratings follow.  Compliance Follows.  

Here is an example of an actual patient that we have recently coded.  No protected information will be shown, but this easily demonstrates what home health agencies can expect to make (based on the average margins above) and why it is so important for agencies to use what we offer so that they can maximize what they bring home, and then control the expenses.  

What this shows is that for the full 60 day episode before we looked at the chart, the PDGM reimbursement would be $3,741.79 or $2,416.58 for the first 30 days and $1,325.21 for the next 30 days. If we used the average of the first 3 agencies (Encompass has a very diversified business and home health margin is likely much lower than illustrated but the whole company had that profit margin), we can determine how much money an average agency may take home. The average gross margin is 36.5%. So for the image above, before Home Care Answers audited the OASIS and coding, the agency could expect to receive $3,741.79. Gross margin is the money left after certain expenses are taken out. The average gross margin percent is 36.5%- meaning the agency keeps 36.5% of the total reimbursement. 36.5% of $4,759.05 is $1,365.75. These expenses would be the actual cost of care like nursing visits, physical therapy, etc. There are a few more expenses that must be taken out also like rent, mortgage or business debt as a percent, utilities as a percent of total reimbursement, taxes, etc. The net or operating margin is what the agency gets to take home or put in their pocket as actual profit. The average operating margin percent is 11.36% So in the example above, 11.36% of $3,741.79 is $425.07 is what the agency would put in the profit after all expenses are paid and if the patient stays on service through the 2 30 day periods. But wait! There's more! If you notice, after Home Care Answers looked at the OASIS and coding, we were able to help find an additional $548.65 in additional reimbursement provided the patient stays on service. If you were to do the margin calculations for the new expected reimbursement of $4,290.44, the gross margin $ or 36.5% of that is $1,566.01. That's an additional $200.26 of profit! The operating profit would be $487.39. That's $62.33 more in your pocket to keep.

OASIS Review With Financial Calculations and LUPA threshold
Here is what the math looks like:

    Average Gross Profit Average Net Profit
Financial Summary   36.50% 11.36%
Prior-Audit Amount $3,741.79 $1,365.75 $425.07
Post-Audit Amount $4,290.44 $1,566.01 $487.39
Additional Amount $548.65 $200.26 $62.33

We provide this information so you can see and maximize your profit!  

 

PDGM Tricks and Insight

We have found that many agencies are actually doing better in PDGM than anticipated.  By adjusting a few things on the cost side, like allowing a Physical Therapy Aide work with a patient instead of sending a Physical Therapist then money can be saved.  Many agencies try to front load the therapy and visits into the 1st 30 days of the episode.  This can be done.  However, agencies that are able to justifiably get patients into the 2nd 30 days of the episode are actually doing better.  The second 30 day episode is often higher margin because agencies can send aides to monitor or help that still count as billable visits but cost less, which also helps agencies avoid LUPA.  

 

Home Health Agencies and LUPA

Agencies would do well to avoid LUPA if possible.  LUPA is a Low Utilization Payment Adjustment.  If you see on the image above, we show what the LUPA threshold is, which means how many visits an agency must make to receive full reimbursement.  If agencies can avoid LUPA, justifiably keep patients into the 2nd 30 day period, we help agencies maximize reimbursement by getting OASIS and coding correct, and then leave agencies to manage expenses to maximize profit.

Home Health Quality of Earnings (Q of E)

Mergers and acquisitions continue to happen- and seemingly at increased speed.  When determining the valuation for the company, there are myriad ways of finding that.  It really boils down to EBITA.  EBITA stands for Earnings before Interest, Taxes, and Ammortization.  EBITA tells the story of how much money the agency is actually earning.  Agencies can generate a lot of revenue, but the costs may be very high, which then shows that the company isn't very profitable.  Investors want to see the quality of the earnings an agency is making.  What is the quality of the profit they are gaining?  Home Care Answers can help with increasing Quality of Earnings two fold.  1- We can ensure that reimbursement is justifiably maximized.  We're helping agencies get the most reimbursement possible from Medicare.  2- We can tell agencies or those looking into earnings what the actual valuation could and should be.  Most agencies are leaving reimbursement on the table, but have no way to quantify that number.  Home Care Answers can quantify that number, which then shows how much the agency could and should be worth.  

Above all, Home Care Answers wants to help agencies ensure that OASIS and diagnosis coding is correct and accurate.  When those things are correct and accurate, reimbursement, compliance, star ratings, and outcomes all follow.  Agencies then maximize value and Home Care Answers creates additional value for agencies.  We'd love to help put you on the path to reimbursement maxmization.  

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