A growing number of hospital systems are turning their home health departments into freestanding businesses in preparation for lower reimbursements under the new Medicare payment system that starts Oct. 1.
The trend was forecast as early as two years ago, when Medicare first slashed payments to home health agencies (July 27, 1998, p. 40).
Among those joining the movement are BJC Health System, St. Louis; Christus Health, Irving, Texas; and the South Hills and UPMC health systems in Pittsburgh.
The trend is one more example of hospitals shedding noncore businesses to slow falling profits. This time hospitals hope that spinning off the services will make the services profitable.
"This is a reversal of a previous trend where you were acquired by a hospital and the first thing the hospital wanted to do was make you a department," said Pat Laff, principal at Laff Associates, a Northbrook, Ill.-based home-care consulting firm. Hospitals could recoup a substantial amount of overhead costs by billing them through the home health department via Medicare's cost-based reimbursement system, he said.
But there won't be any room for such cost-shifting under Medicare's new PPS, which pays agencies a flat rate for each episode of treatment.
Christus plans to consolidate home health departments throughout its 27-hospital system a year after it spun off the home health department of its three-hospital San Antonio unit.
"When we overloaded (the hospital-based agency) with all the allocated costs (from the hospitals' overhead), it did not appear to be profitable," said Deedra Hartung, vice president and administrator of the San Antonio unit. Hartung said the agency now runs a 15% profit, but she declined to provide figures.
About half of agency revenue on 50,000 annual visits stems from managed care, compared with only 10% a year ago. Medicare revenue fell to 40% from 90%, she said.
Aiming for similar results, 13-hospital BJC plans to consolidate its seven home health operations into a single freestanding agency, according to Ruth Castellano, director of operations for BJC Home Care Services. She expects to secure regulatory approvals by the end of the year.
"It used to be that hospitals had home health as a department, and that was that. We're now seeing all kinds of gyrations and iterations," said Laura Waltrip, a Tampa, Fla.-based healthcare consultant for Ernst & Young.
Take 392-bed South Hills Health System and 14-hospital UPMC Health System, both in Pittsburgh. The systems in October will consolidate their home health operations into a freestanding joint venture. Together they'll provide about 500,000 home visits a year, South Hills Vice President Robert Horn said.
The strategy isn't new. Six-hospital Atlantic Health System, Florham Park, N.J., consolidated its home health departments four years ago to prepare for capitated managed care.