Gross margin impact for 2022: Sequestration, rising wages and new IRS mileage rates

Sequestration Snapshot at Home Health Agency SimiTree

A three-month extension of the sequestration suspension and rising costs for doing business, particularly in the area of wages and transportation, are among factors likely to shape the gross margin for home health and hospice agencies in early 2022, according to SimiTree financial consultants.

Home health agencies will start 2022 with an extra 2 percent in Medicare reimbursement intact, as Congressional suspension of a punitive payment reduction known as sequestration continues through the end of March.

“Congress is bringing back sequestration in increments throughout the first half of 2022,” said SimiTree Principal Rob Simione. “The good news for home health and hospice agencies is that relief from sequestration will continue through March 31, as Congress has voted to extend the sequestration suspension.”

When sequestration resumes on April 1, agencies will see a 1 percent punitive payment reduction on Medicare claims through June 30. Full sequestration will resume on July 1, with a 2 percent punitive payment reduction on Fee-for-Service (FFS) claims.

Sequestration has been in effect since 2011, but Congress has suspended the punitive payment adjustment several times throughout 2020 and 2021 because of the COVID-19 public health emergency.

The latest suspension of sequestration through March 31 was enacted under the Protecting Medicare and American Farmers from Sequester Cuts Act. It is expected to generate approximately $100 million for hospice agencies and $90 million for home health agencies in the first quarter of the year, according to estimates from the National Association for Home Health and Hospice (NAHC).

Mileage and staffing costs on the rise

Rising transportation costs, however, could partially offset the 2 percent sequestration relief agencies see in the first quarter, depending on how they decide to handle new standard mileage rates implemented by the IRS on Jan. 1.

Mileage rates for business purposes have increased from 56 cents per mile in 2021 to 58.5 cents per mile in 2022 due to changes in fuel prices.

Many home health and hospice agencies traditionally pay staff less than the IRS mileage rate, but SimiTree consultants say rising fuel costs and increasing staff retention efforts are driving a new look at the industry’s transportation reimbursement.

“Agencies may need to get creative in mileage reimbursement,” Simione said. “They can explore options such as stipends and other ways to compensate for mileage and travel.”

Creativity could also help agencies address higher staffing costs in 2022, as a nationwide labor shortage pushes agencies to spend more on recruiting and retention efforts. Labor costs rose throughout 2021, with the cost for skilled nursing showing the strongest increase, according to data from The SimiTree Financial Monitor, SimiTree’s industry-leading analytics and benchmarking tool. The SimiTree Financial Monitor tracks and reports agency costs and other pertinent data.

Read more about the Rising Cost of Skilled Nursing.

“Agencies can explore different payment methods for staff,” Simione said. Productivity bonuses, for example, can be tied to quality measures aligning with Value-Based Purchasing. SimiTree consultants are advising agencies to focus on quality measures throughout 2022 to boost performance scores in preparation for the first performance year of VBP in 2023.

How SimiTree can help

As the industry leaders in performance, growth, and profitability, SimiTree consultants can help agencies tighten margins, shore up for the resumption of sequestration and address staffing challenges.

SimiTree’s team of VBP consulting experts can work with agencies to develop specific performance measure improvement programs.

Our consultants can also assess the impact of increasing mileage and transportation costs as part of the competitive benefits and compensation analysis we provide, and help clients better align business and care to become stronger and healthier overall.