The Benchmark Email

...benchmarks, strategies and ideas for improving your agency
A service of Fazzi Associates, Inc.

January 20, 2006

Best Predictor of Medicare Profitability

Question:
It is our understanding that CMS has found that case mix weight is not a good predictor of profitability. Is this true? If it is, what do you find to be the major predictor of profitability??

Answer:
Yes, it is true. In the December 2005 Report to Congress: Home Health Agency Case Mix and Financial Performance, MedPac, an independent federal body established by the Balanced Budget Act of 1997 (P.L. 105-33) to advise the U.S. Congress on issues affecting the Medicare program, reported, “We found that neither case mix weight nor other variables explained much of the variation of (profit) margins among Home Health Agencies.” The other variables they looked at were size of agency, type of agency (non-profit, profit, governmental), urban versus rural and area of the country.

As you can see from this chart, all segments of home care seem to have similar results. It is, however, interesting to note the level of profitability – the mean is 15.2%, the median is 17.7%. The study involved 3,412 agencies in 2002. It did not include hospital-based agencies. MedPac has historically not included hospital profitability because of the different ways that hospitals assign cost making comparisons difficult and uneven.

In a 2005 study of the National BestWorks® Best Practice agencies, we found that the profitability of the average agency in the service was roughly the same as the MedPac’s percentages with the service’s top agencies, those in the top 25%, being significantly higher. (Note: These agencies belong to a best practice service and continually receive reports and support designed to help them identify which practices will get stronger quality results and better financial results. We would expect their quality and financial results to be higher.)

In terms of case mix weight, we also came up with the same finding as MedPac: case mix weight, type of agency, location, etc. did not correlate with high profitability. What we did find was that there was one factor that consistently correlated with higher profitability – cost per visit per discipline. Gina Mazza, the Director of BestWorks® has continually said that agencies that were able to control key practices that affect their cost per visit had higher profit margins than those agencies with high cost per visit. Of equal importance, she found that these agencies had quality scores (Home Health Compare and OBQI) that were equal to or better than the norms of the field.

For home care agencies, this is very good news. It means that by focusing on those practices, processes, staffing ratios, etc. that affect cost per visit, you will not only be able to improve your profitability, you can do it in a manner that can maintain and even enhance your overall quality, an issue that will become increasingly important in a Pay-for-Performance environment.