January 16, 2024

By Wylie Butler, Capstone Healthcare Analyst

Last week’s JP Morgan Healthcare Conference in San Francisco revealed three overwhelming sentiments among healthcare companies, investors, and industry leaders: a consensus that deal flow will pick back up in three months, excitement about a new value-based care (VBC) concept, and general frustration with every existing VBC concept. The home and community-based services (HCBS) industry is a particularly vexing sector that we grapple with on our healthcare desk. Capstone believes home health companies will continue to struggle to capture their share of savings as care continues to shift from the institutional setting into the home, limiting opportunity.

Capstone believes home health companies will continue to struggle to capture their share of savings as care continues to shift from the institutional setting into the home, limiting opportunity.

HCBS is value-based care or “value alignment” in its purest, most boring form. Insurers spend less on the patient than a facility, patients prefer home treatment and are less likely to have complications, and healthcare providers benefit from increased volume. Under HCBS, there is no need for a benchmarking model with risk adjustment – it’s simply more cost-effective for everyone. However, the key question becomes: where do these savings go? So far, they have reverted to the Centers for Medicare and Medicaid Services (CMS) and Medicare Advantage (MA) plans.

Many healthcare investors are familiar with the bread-and-butter of Medicare VBC models, where a primary care group takes on the risk for a patient cohort, either from Medicare fee-for-service (FFS) or an MA plan. If the group saves the insurer money, they receive a cut of the savings. In this model and many others produced by CMS, savings are measured by comparing the cohort population to comparable beneficiaries. Spend less on Patient A compared to similarly aged and sickly Patient B, and providers reap the rewards.

Now, consider home health. Almost all home-based care is more economical than institutional settings. However, the challenge lies in home health cohort design. Home health beneficiaries in the current VBC model are compared only to their home health peers, limiting opportunities for providers to benefit. Despite this, home health should logically prevail in the long run, and as care shifts to the home, providers emerge victorious. Well, maybe on volume, but the savings and winnings of being a relatively cheaper provider will only yield to the insurer.

Presently, clinically similar patients exiting the hospital incur wildly varying costs for Medicare and MA plans, depending largely on the setting they attend in post-acute care. The solution? A uniform post-acute care model. Regardless of whether John Doe receives treatment in an inpatient rehabilitation facility (IRF), skilled nursing facility (SNF), or home health, the provider receives the same payment based on patient diagnosis (similar to recent home health and SNF payment model redesign). The Medicare Payment Advisory Commission (MedPAC) has been working on this model for the better part of the last decade.

CMS’s goals under the model are unclear from a 10,000 ft. view. SNFs are expected to be the sole winner (+1% in spending) among the three most common post-acute care sites of service, with IRFs losing 6% of payments and home health losing 4% of payments. Despite finally winning a cohort outside of their patient population, home health will be hit with an “adjuster” to recognize the lower cost of care, ultimately reducing payments. Insurers save, and healthcare providers lose.

Capstone believes that without outright control of a patient population, home health will continue to be a taker rather than a true negotiator in value-based care discussions. 

Capstone believes that without outright control of a patient population, home health will continue to be a taker rather than a true negotiator in value-based care discussions. 

Capstone will continue to monitor model development from CMS, MedPAC, and other insurers for our investor and corporate clients. For now, despite the promise of a lower cost of care setting that patients prefer, savings produced by HCBS providers are unlikely to be shared unless, of course, providers are in-house.

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