The Home Health Value-Based Purchasing (HHVBP) Model is set to roll out nationwide on Jan. 1, 2023. While its demonstration pilot had been live in nine states beginning in 2016, that pilot ended abruptly before 2021 due to COVID-19. Under HHVBP, home health agencies will be subject to a 0-5% upward or downward reimbursement adjustment based on various performance measures.
While 2023 is the first performance (measurement) year subject to these changes, reimbursement won’t be affected until 2025. Under the model, agencies will be grouped with their cohorts based on size – but not geography. In contrast, in the demonstration, agencies were judged against only other agencies in their respective states.
After the nationwide rollout, competition will be determined based on agency size. Specifically, agencies with fewer than 60 unique survey-eligible beneficiaries in the calendar year before the performance year will be assigned to smaller-volume cohorts, while agencies with 60 or more will form part of the large-volume cohorts.
The Total Performance Score (TPS) an agency receives under HHVBP will be based on their performance in multiple areas. These performance markers include:
Five based on OASIS
Two based on claims
Five based on HHCAHPS survey quality measures
An agency’s TPS will then be weighed against the TPS of other agencies in an organization’s respective cohort, and then the corresponding payment adjustment percentage will be computed.
Impact on agency value
Once HHVBP is implemented, it will change the reimbursement landscape to some extent. While there’s not any more money coming in from Medicare, per se, worse-performing agencies will in essence pay for better-performing agencies’ adjustments.
“What some owners don’t realize is that a 5% change in revenue will have a significant impact on cashflow, or EBITDA,” said Mertz Taggart Managing Partner, Cory Mertz, “Those dollars flow straight to the bottom line, in the absence of changes to the agency’s cost structure.”
Valuation impact illustration
To display HHVBP’s potential impact on a given agency, consider the following assumptions:
The model agency will be 100% Medicare revenue
Visit volume and cost of sales will not change from performance year to payment year
General and administrative (G&A) expenses will stay fixed from year to year
Using the industry standard “multiple of EBITDA” methodology to determine value, performance year valuation may be follows:
1 – For illustration purposes only. Multiples are a function of, among other things, agency risk and marketplace.
Without the HHVBP impact, the agency’s enterprise value is $11.2 million.
Let’s look at the same agency, in the first Payment Year, with a 5% upward adjustment:
Note that, in addition to the improved EBITDA, the multiple has changed slightly, as agencies with better quality scores tend to sell at higher multiples. The benefit to the agency goes beyond a $500,000 increase in revenue. In this case, the enterprise value increased by just over $4 million, or 36%.
If an agency performed poorly enough warrant a 5% decrease, the change in valuation may look something like the following:
Here, the agency's enterprise value dropped by $3.77 million in comparison to its pre-HHVBP implementation numbers.
The swing in value is fully illustrated when comparing the best performing agency ($15.23M enterprise value) with the worst performing agency ($7.43M enterprise value).
What agencies can do to prepare for HHVBP
As explained above, an agency’s TPS, which will determine its rate adjustment, is based on relative performance on OASIS-based, claims-based and HHCAHPS Survey-based quality outcomes.
Therefore, that’s what agencies should home in on in order to get the best result and the best possible change to enterprise value.
“The agency should review and correct — if needed — internal processes and protocols to boost performance,” Mertz says. “Additionally, the agency should consider investing in the right tools and software to track outcomes data, and understand which outcomes are having the largest impact on the TPS.”
Given that the first performance year is not until 2025, many agencies are comforted by the thought that HHVBP impact is still far away. That is not the case when it comes to valuation, as we expect home health acquirers will begin to price in the potential adjustments to their target acquisitions much sooner, perhaps as early as late-2023.
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