In the October 22, 2004, Federal Register, CMS published the final rates for 2005 for home health services. The increase of about $51 per episode represents an inflationary increase less 0.8% mandated by Congress. CMS had originally proposed a 2.5% increase in the rates (3.3% inflation less 0.8%) but settled on a 2.3% increase instead. CMS also approved a 5% increase for beneficiaries in rural settings.

Other Changes

Outlier payments

Upon review of 100% of 2001 claims, CMS has determined that outlier episodes were only 3% of total episodes and only 3% of HHPPS payments. Medicare funding set aside for outliers in the original legislation anticipated a 5% utilization. An argument was made that the 2% differential was never spent. To adjust for this, CMS has reduced the fixed dollar loss ratio from 1.13 to 0.7.

What this means in layman’s terms is that the home health industry’s “deductible” has been lowered significantly. CMS’s “fixed dollar loss” (FDL) defined an agency’s loss at 1.13 times the wage and MSA adjusted episode rate. This FDL represents the amount of loss that an agency must bear before an episode becomes eligible for outlier payments. By reducing the percentage, CMS also reduces the deductible ($2,264.28 x 1.13 = $2,558.64 vs. $2,264.28 x 0.7 = $1,585.00). Had this not been corrected, agency losses would have increased each time the national episode rate was increased.

Change in labor and nonlabor component of PPS rate

In rebasing from 1993 to 2000, CMS, as proposed, changed the labor portion of the rate calculation. The new labor portion of the rate has been reduced from 77.668% to 76.775%. Although the “wages and salaries” weighting increased by 1.5%, in the 2000 market basket index, the “employee benefits” section actually decreased by 2.4%, causing a net drop of 0.9% in the overall portion of the rate. Conversely, the nonlabor portion of the rate increased from 22.332% to 23.225%.

Fiscal impact of changes

CMS projects these new rates would add an additional $250 million of reimbursement to the industry. It also projects an additional $60 million in the first quarter of 2005 for the 5% add-on for rural payments. (Please note: this add-on, effective April 1, 2004, will expire March 31, 2005.) It should also be noted that by extending the 2004 rates through December 31, 2004, CMS estimates savings of $90 million.

This final rule rebases and revises the home health market basket by moving the base year from FY 1993 to FY 2000 to reflect the latest available and thorough data on the structure of HHA costs.

The new rates are as follows:

These rates are before case mix and local wage index adjustments. The final PPS rule was published in the October 22, 2004, Federal Register.