How PDGM Affects Reimbursement and Cash Flow for Home Health Agencies

The Patient-Driven Groupings Model (PDGM) represents one of the most significant changes in the reimbursement landscape for home health agencies (HHAs) in recent years. It was introduced by the Centers for Medicare & Medicaid Services (CMS) on January 1, 2020, to replace the previous Home Health Prospective Payment System (HHPPS). PDGM, which is designed to improve payment accuracy and align reimbursements more closely with patient care needs, has had a profound impact on both reimbursement rates and cash flow for home health agencies. This blog explores the key aspects of PDGM, its effects on reimbursement, and offers strategies for home health agencies to effectively manage cash flow under the new model.

1. What is PDGM?

PDGM is a new payment system used to determine how much Medicare reimburses home health agencies for providing care to patients. PDGM shifted the focus from volume-based payments to a patient-driven model, where the reimbursement rate is determined by a variety of patient characteristics, including clinical diagnosis, functional status, and comorbidities. Under PDGM, reimbursement no longer depends on the number of visits provided but instead is based on the patient’s needs and the care required.

This system was introduced to encourage better care management, reduce unnecessary services, and ensure that agencies are adequately compensated for the actual care patients need. By moving away from visit-based reimbursements, PDGM seeks to create more value in the home health sector by tying payment to outcomes, rather than simply the volume of services provided.

2. How Does PDGM Impact Reimbursement?

PDGM changes the way Medicare reimburses home health agencies by basing payments on several key factors:

a. Case Mix Groups (CMGs)

Under PDGM, the payment system is divided into 432 different case-mix groups, which are based on a combination of the following patient characteristics:

• Primary diagnosis (reason for the home health care)
• Comorbidities
• Functional status
• Timing of the episode (early or late in the episode)

Each case-mix group is assigned a different payment rate, and reimbursement is dependent on where the patient fits within these categories. The goal is for reimbursement to better reflect the complexity of care required by the patient, rather than simply the number of visits.

b. 20-Visit Limit

Under the previous payment system, agencies could provide a higher volume of visits in order to increase reimbursement. With PDGM, the system is capped at 20 visits per episode. Reimbursement is determined based on the patient’s care needs, but it is no longer tied directly to the number of visits. As a result, home health agencies now need to focus on managing the level of care required while staying within the confines of this visit limit.

c. Behavioral Adjustments

In an attempt to account for potential shifts in home health provider behavior, PDGM includes adjustments to the payment rates based on how agencies may alter their practices in response to the model. Initially, CMS implemented a 4.36% payment reduction as a response to these adjustments, though future changes are expected as the model continues to evolve.

3. Impact on Cash Flow for Home Health Agencies

The shift to PDGM has had a significant impact on the cash flow of home health agencies. These effects stem from the way reimbursement is calculated, the timing of payments, and the inherent variability in patient characteristics.

a. Faster Payment Cycle

While PDGM has improved the accuracy of reimbursements in reflecting the complexity of patient care, it has also made cash flow more unpredictable. The previous system, which was visit-based, allowed agencies to potentially accelerate payments by increasing the number of visits in a care episode. Under PDGM, the lack of a direct relationship between the number of visits and reimbursement makes it more difficult for agencies to forecast their revenues and manage working capital.

Home health agencies are also paid based on episodes, typically with 30-day billing cycles. The fact that payment is tied to patient characteristics rather than visit volume can create cash flow delays, particularly in cases where patient episodes are less predictable or if the clinical complexity of the case isn’t as high as expected. These factors can result in reduced or delayed payments, which can impact agencies’ ability to maintain consistent cash flow.

b. Higher Dependency on Accurate Coding

Under PDGM, accurate coding and proper documentation are more important than ever. Since reimbursement is linked to patient characteristics and conditions, agencies must ensure that they accurately capture all diagnoses, comorbidities, and other relevant information. Errors in coding can result in missed reimbursements or lower payment rates, which can exacerbate cash flow challenges.

Home health agencies now need to invest more in training and compliance to ensure their coding practices align with PDGM requirements. Poor coding could delay or reduce payments, putting financial pressure on agencies.

c. Effect of the 30-Day Payment Period

The 30-day payment cycle associated with PDGM means that agencies face the challenge of managing cash flow for longer periods between reimbursements. Home health agencies must fund operations during this gap, which can be especially challenging for smaller agencies or those with lower volumes of patients. Without the ability to increase visits, agencies have to focus on maintaining operational efficiency to avoid liquidity problems.

d. Potential for Denials and Audits

PDGM has introduced a more complex system of billing and reimbursement, which increases the potential for claims denials or audits. CMS has emphasized compliance and documentation under the new model, and failure to adhere to the requirements can result in payment denials. Denied claims may not only delay cash flow but also create the need for costly resubmissions and rework, which can further strain the agency’s finances.

4. Strategies for Managing Cash Flow Under PDGM

Given the challenges that PDGM poses to home health agencies, effective cash flow management has become even more important. Below are several strategies that agencies can use to optimize their cash flow under the new payment model:

a. Invest in Data Analytics and Technology

The more data home health agencies have on their patient populations, the better they can manage care and predict reimbursement. By leveraging data analytics and technology, agencies can assess patient needs more accurately, avoid coding errors, and ensure that they are properly documenting all relevant patient characteristics. Investing in electronic health records (EHR) and other software tools can help streamline the coding and billing process, improving the accuracy and speed of reimbursements.

b. Strengthen Financial Forecasting

Agencies need to develop robust financial forecasting models that can account for the variability introduced by PDGM. This includes considering different case-mix groups, the timing of patient episodes, and expected payment cycles. Effective forecasting will help agencies manage working capital needs and ensure they have the liquidity required to operate smoothly during periods of cash flow fluctuation.

c. Enhance Billing and Coding Accuracy

Training staff and investing in coding software tools are essential to ensure billing accuracy under PDGM. Agencies should regularly audit their coding and billing practices to ensure compliance with CMS regulations and avoid costly denials. By ensuring that all patient characteristics are accurately documented and coded, agencies can reduce the likelihood of errors and ensure they receive the appropriate reimbursements.

d. Improve Patient Census Management

Given that PDGM focuses more on patient needs than visit volume, home health agencies must be more strategic in managing their patient census. This includes focusing on higher-acuity patients or those with more complex medical conditions, as these patients are more likely to receive higher reimbursement rates under PDGM. Agencies should aim to maintain a diverse patient base with varying clinical needs to maximize their case-mix groups and, by extension, reimbursement.

e. Negotiate Contracts with Payers

In addition to Medicare, many home health agencies work with other payers such as Medicaid, private insurance, and managed care organizations. Under PDGM, it is essential for agencies to negotiate contracts with these payers that align with the new reimbursement structure. By securing favorable contracts with insurance providers that mirror the patient-driven nature of PDGM, agencies can ensure that they are adequately compensated for the services they provide.

5. Conclusion

The introduction of the Patient-Driven Groupings Model (PDGM) has fundamentally altered the reimbursement landscape for home health agencies. By focusing on patient characteristics rather than visit volume, PDGM ensures that reimbursements are more reflective of patient needs, but it has also introduced challenges related to cash flow management. Agencies must adapt to the new payment model by improving data analytics, strengthening coding and billing practices, and strategically managing their patient population. With these strategies in place, home health agencies can navigate the complexities of PDGM and ensure that they maintain healthy cash flow while continuing to provide high-quality care to their patients.

As the healthcare industry continues to evolve, home health agencies that embrace the changes brought about by PDGM and adapt their operations accordingly will be best positioned for success in the long run.