In the last month and across a series of analyst calls (investment firms) that I field on a regular basis, a question repeats: Why is the demand for hospice declining? Of course the economist in me wants to opine in great detail about “demand” and what factors increase or decrease demand or, shift demand among substitution products, etc. For brevity, the demand lecture isn’t warranted and in actuality, the current hospice dynamics are less about an increase or decrease in demand, more about realizing where core “hospice” demand lies.
Point of fact: The demand for hospice services at the core hasn’t changed at all and in some markets, demand as expressed by referral volume is up. The trend that is evident however is that the demand as expressed in overall lengths of service has changed. This is the impact that most providers are seeing/feeling. While for some, year over year volumes are flat to down for others, volumes in terms of referrals and encounters are rising but core census is flat. The flat census expressed by the number of covered individuals on service at any one point, has flattened even with referral volumes increasing simply because stays are shorter.
What is happening in the industry is a bit like realignment of incentives and forces that as they congeal, are morphing demand as experienced by providers. Integrating these pieces paints a picture of now and near future demand in the industry.
- The Vitas Impact: Anytime the largest player in the industry is targeted by fraud and federal investigative activity, the spill-over to all providers of similar size (and the rest of the industry) shifts the market. This impact can’t be directly quantified but it is of a large magnitude. The behavioral aspects of the DOJ suit are a reminder to all providers to tread lightly in certain operational areas – namely marketing, certification and re-certification. One need look no further than the home health industry and the Amedisys targeting to see how the entirety of an industry is ultimately impacted once the microscope is fixed on the largest provider.
- Large vs. Small Providers: The substantial industry growth between 200o and 2011 (60%) occurred almost entirely in the proprietary (for-profit) sector and among large, multi-state, national scope providers. Across the same period, the non-profit and government providers shrunk in numbers. The overt scrutiny from Medpac, CMS and the OIG/DOJ is on this segment of the industry. Large False Claims actions and settlements have occurred in the “big” or “large” side of the industry, creating certain behavioral changes that shift elements of the industry demand profile. Again, the largest impact all other providers in the space as fundamentally, these large providers account for fully half of the industry patient population at any given point.
- CMS Changes and Diagnostic Scrutiny: Looking at demand and taking into account the drivers since 2000, one can easily be fooled that the core demand was larger than it is. The laxity in certification definitions within the Hospice benefit created a wide playing field as providers entered the market. Is this or was this an unveiling of pent-up demand? Hardly. It was an exploration of how demand could be quantified or in many cases created or justified to meet the supply of providers in the market. Across this same ten-year period, the fastest growing diagnoses in terms of percentage increase and volume were Non-Alzheimer’s dementia, general debility and failure to thrive. Not surprisingly, these same diagnostic (for lack of a better term) categories also profile the longest stays. By 2014, CMS will eliminate these categories as suitable for certification and require additional diagnostic coding to substantiate initial and ongoing certification. A quick review of the utilization data by diagnosis illustrates how such changes are playing out on the demand side (data courtesy of CMS – click on the link to open the media files and tab select the charts from the bottom of the spreadsheet).
Copy of Top_20_Charts_1998-2008
Reviewing the above and the attached data charts paints a clearer picture of the shifting demand components. If, as CMS and Medpac suggest, that as much as 25% of the certifications in the dementia (non-Alzheimers), general debility and failure to thrive categories don’t have any other diagnostic comorbidities suggestive of imminent death (6 months or less), than a quarter of the “demand” is logically lost. Because demand in all instances is impacted by behavior, market and individuals (single or collective), changes in behavior as a result of changes in incentives leads to adjustments in demand. In the case of hospice, this is clearly evident today and will magnify going forward. As I have stated before, the industry has too many providers chasing too few organically terminal patients.
The reality regarding the demand equation today for hospice is that the demand is still present and likely, growing. What is changing however is the methodology for accessing the demand is different. Demand for hospice providers is a function of two elements: patients with an appropriate diagnosis and length of stay. If, as is the case, certain generalized diagnoses are no longer appropriate, this doesn’t equate necessarily to a lack of demand. It does equate to a shift in demand from current (today) to future as the overall condition of the patient deteriorates and demand quantifiable through coding, becomes evident. As the market re-balances and the demand curve stabilizes along a new level of equilibrium between all providers (of which there will be fewer) and the new number of appropriately terminal patients (by definition), providers will see stability. It is certain that average lengths of stay will decline as categorically, the drivers will no longer exist. It is also certain that hospices that thrive will adjust behaviorally. For example, nursing home enrolments will no longer be the “gold mine” for many providers. Payment reform will adjust this element in the next year or two. Additionally, greater regulatory scrutiny regarding place-of-care is a certainty as CMS is paying greater attention to the diagnostic qualifiers and matching SNF MDS submissions to hospice data (heads up). The end: Volumes are flat and in some cases marginally increasing but the demand is for intense, shorter stays and more volatility in referrals. This is the new norm and providers are feeling the shift toward this revised equilibrium point.