The Financial Impact of Interim and Prospective Payment Systems on Home Health Providers in Rural Communities

The objective of the study was to examine the financial impact of the interim payment system and prospective payment system (PPS) on home health agencies (HHAs) in rural communities. Data sources used included a survey of administrators in all rural HHAs in Pennsylvania and financial and utilization data provided by 10 rural HHAs in Northwest Pennsylvania. The results of survey showed that, under the PPS, 40% of the HHAs reported financial vulnerability and 24% expressed concern that the fiscal uncertainties arising from the PPS threatened their continued operation. Two prospective analyses were conducted to examine how HHAs would be further affected by payment rate changes implemented in October 2002 and April 2003. The Medicare margin in rural Pennsylvania was 23.3% during the period from October 2000 to June 2002. This margin was slightly higher than the free-standing home health Medicare margin (21.6%) reported in analyses conducted by the Medicare Payment Advisory Commission (MedPac). However, this Medicare margin did not include hospital-based HHAs. The payment rate changes implemented in 2002 and 2003 would increase the proportion of care episodes that incur financial losses, assuming service provision remains constant. As of April 2003, the proportion of all episodes with loss would rise to 46.9%, the proportion of low-utilization payment adjustment (LUPA) episodes with loss would rise to 91.1%, and the proportion of non-LUPA episodes with loss would rise to 40.2%. New payment mechanisms are profoundly affecting the finances of rural HHAs and the use of home health services by Medicare beneficiaries.