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Cliff Stepp, left, and Phil Melugin see the value in technology but agree a hands-on approach is preferred.
Cliff Stepp, left, and Phil Melugin see the value in technology but agree a hands-on approach is preferred.

CEO Roundtable: Home Health Care

Posted online
What’s the future of health care in America? Springfield Business Journal Editorial Director Eric Olson sat down with Phoenix Home Care Inc. President Phil Melugin, Haven Healthcare LLC CEO John Ray and Integrity Home Care Inc. President Cliff Stepp. They talked trends, baby boomers and evolving payment options.

Editor’s note: Due to recording issues, a portion of Phil Melugin’s responses were submitted via email.

Eric Olson: In a word, how would you describe the home health care industry?
Cliff Stepp: Growing.
Phil Melugin: Squeezed.
John Ray: Flexible.

Olson: I am intrigued by ‘squeezed.’ What’s behind that?
Melugin: In the 1990s, we were reimbursed for costs. Health care reimbursements received directly from (the Centers for Medicare and Medicaid) have been transitioned to managed care, which by definition is intended to get payouts. They added a third entity into this mix and it’s squeezing margins.
Ray: Managed care is all about making money. Insurance companies have been like that for years. Managed care, third-party payers, get a certain quantity of money and they make more money by paying the providers less. I don’t see there has been a big cost savings to the taxpayers or the person paying for care, but I’ve seen more of an increase in the margins for the insurance companies.

Olson: What is the state of the regulatory environment and what is the impact on home care companies?
Stepp: The regulatory restrictions they place on us are increased and have a lot of negative effects on the process. In the end, it hasn’t really help the patient, the customer, at all.
Ray: Insurance companies are buying each other out. The government is trying to intercede to slow that down, but it’s happening. As they get bigger and stronger, they put pressure on the smaller providers. As the smaller providers have a harder time fighting against those pressures, they end up going by the way of acquisition into larger and larger groups. You’ll find fewer and fewer insurers and fewer and fewer providers. It takes capitalism out of it. It seems closer to socialized medicine.
Olson: What kind of impact do you expect on your businesses in a replacement or repeal of the Affordable Care Act?
Stepp: As an employer, depending on what comes out of this, if the employer mandate changes, that can have a significant impact. I’m a little nervous about what it’s going to be replaced with – it’s hard to say that’s what we want because it has a propensity to get watered down in the process. I’m not sure what we’re going to get.

Olson: What’s your worst nightmare?
Stepp: My worst nightmare as it relates to this would be a single payer system. As John mentioned earlier, that would take capitalism and competition out of it, if we have the removal of insurance companies and payers and smaller agencies. One of the things that has made this country work is capitalism, and we’re removing that slowly but surely.
Melugin: I have a little different perspective. Single payers could work with certain classes of patients: special needs children. The ideal would be to create a very broad safety net for that population.

Olson: The Kaiser Family Foundation found total home health care spending in 2012 was $78 billion, and 82 percent of that was covered by Medicare or Medicaid. Has that percentage changed today? Seen any growth in out of pocket, third-party payers or private insurance?
Stepp: We’re seeing more cases in which there is no coverage and it’s private pay.

Olson: That’d be the 8 percent paying out of pocket, according to Kaiser.
Stepp: I speculate that’s going to continue to rise. Depending on which report you look at, roughly 10,000 people a day are turning 55. Then you look at the various reports on the financial viability of Medicare in its current state and it’s a little scary. When you start adding a lot of population to what they’re trying to cover now, I don’t think there is any way funding exists today to take on several million more people.
Melugin: That $78 billion is a fraction of all health care spending, but it is the best spent money in health care. I think if that $78 billion would be $150 billion, we would be a lot closer to solving the health care crises in our country. With those population numbers, health care better explode. At Phoenix, we’ll do over $70 million this year and we have probably 60 percent of that in Medicaid and Medicare.

Olson: Private health insurance is at 7 percent and third-party payers are at 3 percent, according to the study. If the Medicare and Medicaid numbers are going to move, where do you see it shifting?
Ray: I think it’s all going to shift to managed care. They have very large budgets and advertisements deigned to get people to sign up. There is more to managed care. What happens is when you’re on Medicare at a skilled facility and skilled services, they have 100 days. Most of the time the clinical staff in that environment, will make clinical decisions on how long you’ll stay there and the level of care. The managed care facility that might not be in the state but is in charge of that individual patient, they dictate how long you’ll be there and the level of care.

It’s something all of us at this table have to keep a very close eye on because you want that provider to make money. You do, trust me, because if they don’t make money, they’re going to cut corners and those corners get cut in not so good places. We want to provide good quality care, because that’s what keeps us in business. But if the game gets stacked against us too much, eventually there will be a tipping point.

Olson: How have reimbursement rates affected the home health care business?
Ray: It’s significant and they’re shifting lower over the next 10 years.
Melugin: Direct Medicare payments currently make up 25 to 50 percent of our reimbursement depending on the market – this from 100 percent Medicare payments in the early 2000s. Managed care was intended to force preventive medicine, which is a good thing. Unfortunately the adult, blind and disabled population we serve typically have chronic illnesses. The insertion of a third party taking resources from a shrinking pool of resources has only served to reduce the reimbursement for providers, but done very little to increase preventive medicine among the population we serve.  Medicare itself has consistently cut provider rates resulting in much lower reimbursement than in the past. Medicare reimbursement is currently averaging $2,700 per episode of care as opposed to $1,800 per episode of care for managed care.    
Ray: We’re finding there are some payers we run a loss on. … (The Prospective Payment System) was devastating enough when [President Bill] Clinton ran that out but George W. Bush opened up managed care. Basically, opening up what used to be Medicare and turned it into kind of a private entity, so they make money on the spread. A lot of that money is now going to a managed care company and the less they pay out to the provider, the more profit they make. If they work their numbers right, they can get that squeeze and that’s what were seeing right now. That provider has to adapt to that with good, quality care but with a depleted workforce, especially in nursing. It’s terrible.

Olson: There is still growth occurring at your companies. At this scale, are you becoming attractive to larger companies for purchase offers?
Stepp: The end goal isn’t necessarily to dress it up to sell, but the entire system is really forcing you to become larger. Scale is really the only way we’re going to be able to produce enough of a profit with razor thin margins to really keep this going. From my perspective, margins are going to continue to get squeezed and not just from the payer source – it’s St. Louis city just passing $10 minimum wage, those kinds of things and we’re getting squeezed from both ends. Scale is one of the ways in which we can survive.
Melugin: The trend with venture capital companies seems to be focusing on niche markets in home care; for example, venture capital companies are pursuing pediatric special needs or private duty nursing programs. The reimbursement is more predictable on a national state to state basis and much less regulated than home health and hospice.  

Olson: How is technology enabling and improving care today?
Ray: In hospice, you’ve got somebody who’s struggling and typically with hospice you’ve got a nurse who’s jumping out of bed and they have to be there within an hour. With technology, you can get some observation going right away.

In home health as well, if there’s something going on, you can make some visual observation and get some vital signs to see how serious the situation is. You can act faster. It’s all about speed for us.
Stepp: Telemedicine and telemonitoring in many ways are very helpful and in some ways can become a crutch. We may be forced into doing that just because we don’t have the reimbursements to send a person out every time we’d like to or we don’t have enough people to go out. We have to leverage that tool. I’m all about technology and think we need to leverage it to the max. Having said that, it can’t replace a human touch, that human assessment; it can’t speak a kind word or give a small act of kindness.
Melugin: Technology aimed at creating efficiencies with staff during patient encounters in the home and efficiencies with volume data management with back office staff is the focus with much of the technology today.  While telemedicine has a lot of merit, it does not seem to be catching a foothold as a replacement to hands-on care by a caregiver or clinician in the home.  Also, providers responsible for receiving, interpreting and prioritizing the data coming in can easily become overwhelmed with the volume of it, which is why human intelligence remains the preferred means of gathering and disseminating pertinent medical information for our patients.  
Stepp: We’re providing care to a parent here, but the person who arranged that care, their child in many cases, may be states away. But this portal is a way for them to really stay in tune with what’s happening with their loved one.

Olson: Can you keep up with the boomer demand?
Ray: It remains to be seen. We’re always kind of bracing ourselves for the next ‘great idea’ coming down the pike. We’re always asking, ‘Is this great idea going to put us out of business?’
Stepp: We think we can, but we don’t know really what to expect. For me, and I think it would be true of all three of us, if we reach a point where the only way to survive is to cut corners and sacrifice patient care, I’m out. I don’t want any part of that. I hope it never gets there.
Melugin: I have a rather strong sense of optimism. I believe that in the end, reality will prevail. We are the most cost-effective type of health care.
The senior community is trending. The fastest- growing sector is independent living communities. They can’t build them fast enough in Springfield.

What the facility is doing is creating an environment where they can age with people very similar to them and have health care providers. As health care providers, that’s how we will care for 10-15 people with one or two caregivers.

In Missouri, nursing home care is going to cost $6,500 a month, really. Home care is $6,500 a year.
Ray: It used to be that nursing homes were a place people thought they go to die. That’s just not the case anymore and that’s a good thing.
Stepp: It’s broadening this continuum of care. In the past, you’d go to the hospital and you’d go to the nursing home and that’s it, you’re there. We now know it’s more cost effective but patients are happier in their homes and they’re more content – whether it’s a dwelling they lived in for years or a facility that’s now home – they have that freedom of being at home.

Interview excerpts by Editor Eric Olson, and Features Editor Emily Letterman,

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