De-risking Investment in a Reimbursement Compression Environment

The homecare sector represents a highly attractive market for acquisition, fueled by powerful demographic trends, particularly the aging American population. This macro-environment provides a structural tailwind for demand, bolstered by compelling evidence that home-based care is approximately 30 percent cheaper than institutional care. Investors are eager to capitalize on patient preference for care in familiar environments and the alignment with major payer goals, as both Medicare Advantage (MA) and Medicaid seek cost containment and improved outcomes.

However, the investment landscape is currently defined by a confluence of severe pressures that necessitate a pivot in acquisition strategy. Sustained profitability and scalability are critically constrained by two systemic factors: relentless Reimbursement Compression in the skilled home health sector, driven primarily by Medicare and MA policy, and a profound Workforce Stability Crisis, highlighted by an industry-average caregiver turnover rate of 77%.

A successful acquisition mandate for a search fund must immediately de-risk these challenges through targeted, quantitative research. The core strategy for value creation cannot rely solely on volume-driven growth but must prioritize efficiency-driven growth. Capital investment must be strategically directed toward technology (SaaS, Remote Patient Monitoring or RPM) and human resources (wage retention programs) that yield measurable return on investment (ROI) in the form of reduced administrative overhead, increased billable capacity, and improved quality outcomes. This roadmap outlines five critical research vectors designed to quantify these risks and validate operational opportunities prior to committing acquisition capital.

The foundation of any defensible homecare agency valuation is a conservative and nuanced understanding of government payer instability. For agencies with significant skilled health exposure, due diligence must move beyond historical revenue metrics to assess future viability under tightening regulatory controls and adverse payer contracting.

1. Medicare Reimbursement Headwinds and PDGM Recoupment

The Centers for Medicare & Medicaid Services (CMS) has initiated an aggressive policy of clawbacks following the 2020 implementation of the Patient-Driven Groupings Model (PDGM), signaling persistent, mandated cost pressure on Home Health Agencies (HHAs).

The latest regulatory actions confirm this trend. CMS finalized a permanent prospective adjustment of -1.975% to the Calendar Year (CY) 2025 Home Health Prospective Payment System (HH PPS) payment rate. This reduction is mandated by the Bipartisan Budget Act of 2018 to account for the calculated difference between assumed behavioral changes by providers and actual behavioral changes on estimated aggregate expenditures under PDGM. Furthermore, the Centers for Medicare & Medicaid Services has signaled its intent to impose deeper cuts. The proposed rule for CY 2026 includes a potential -5.0% temporary adjustment to the base payment rate. This substantial proposed temporary adjustment is designed to recoup significant retrospective overpayments identified through analysis of CY 2023 claims data, adhering to statutory requirements for retrospective overpayment recovery.

The simultaneous erosion of rates through both permanent and temporary adjustments, potentially totaling up to -7.0%, implies that the home health industry, overall, over-optimized its service delivery under the initial PDGM framework, leading to massive budgetary overruns that CMS is now required to neutralize. Consequently, an acquired agency cannot sustain its profitability simply by maximizing service volume. Instead, immediate operational strategy must pivot toward maximizing efficiency within the recalibrated payment system, focusing on optimizing service delivery within the updated low-utilization payment adjustment (LUPA) thresholds, revised functional impairment levels, and recalibrated PDGM case-mix weights finalized by CMS.

The minimal aggregate increase in Medicare payments exacerbates the financial strain. CMS estimates that Medicare payments to HHAs will increase by only 0.5% in the aggregate in CY 2025 compared to CY 2024. This marginal gain, coupled with high inflation and rising operational costs, demands cost optimization merely to maintain current margin levels. A proposed -5.0% temporary adjustment for 2026 represents a material, non-operating short-term risk to cash flow. Valuation models must therefore conservatively discount all future Medicare revenue streams, irrespective of historical performance, until the recoupment process concludes, which is anticipated after analysis of estimated aggregate expenditures through CY 2026.

2. The Medicare Advantage (MA) Margin Compression Crisis and VBC Risk

The rapid penetration of Medicare Advantage (MA) is reaching critical mass, exceeding 55% enrollment as of February 2025, and represents a fundamental structural challenge for skilled home health profitability.

Skilled home health providers face significant financial difficulties when dealing with MA payers. The rates offered by MA payers are competitive, often resulting in lean, if not negative, margins. Evidence suggests that providers are often losing money when accepting MA patients, relying heavily on profitable Fee-for-Service (FFS) reimbursements to subsidize these MA losses.

This cross-subsidization model is fundamentally unsustainable given the simultaneous erosion of the FFS revenue base (due to CMS PDGM adjustments and the continued migration of beneficiaries into MA). The simultaneous decline in FFS profitability and the financial loss associated with MA contracts creates a severe, compounding structural risk. Diligence must quantify the precise FFS subsidy required to maintain the viability of the MA patient volume. Agencies with high MA concentration and poor operational efficiency in value-based care (VBC) are highly exposed to solvency risk, making a thorough MA contract review and VBC readiness assessment mandatory components of the diligence process.

Furthermore, new utilization headwinds are emerging. The market is witnessing a shift toward Preferred Provider Organization (PPO) MA plans, which saw a 19.8% increase between 2023 and 2024, while Health Maintenance Organization (HMO) enrollment growth slowed. PPO plans historically utilize home health services at lower rates than HMO plans. This shift, driven by beneficiaries seeking greater flexibility and decentralized care, represents another potential structural headwind to utilization rates and revenue consistency in specific geographic markets.

Successfully navigating this increasingly challenging MA landscape requires robust VBC infrastructure. MA contracts, originally rooted in FFS models, are transitioning toward value-based payments and outcome reporting. To succeed, acquired agencies must demonstrate value and secure favorable contracts by implementing strategies that balance clinical integrity with contractual accountability. This includes establishing dedicated care coordination teams, integrating social determinants of health data, implementing real-time performance monitoring, and reengineering internal quality management frameworks. Agencies that have already made these investments possess a premium operational asset that directly mitigates the MA margin compression risk and should be valued accordingly.

3. Payer Source Diversification: The Private Pay Anchor

Given the regulatory volatility and margin compression in the government-funded skilled sector, strategic investment must prioritize agencies with a strong, scalable component of private-duty care. This segment offers crucial stability outside the CMS/MA reimbursement battleground.

Private pay remains the dominant payer source for the industry, contributing a substantial 64.3% of homecare agency revenue. Long-term care insurance follows as a solid secondary layer at 10.9%. This high concentration of non-governmental revenue provides a substantial buffer against political and regulatory risks inherent in Medicare. 

This strategic focus is validated by institutional investors. Private Equity firms are explicitly doubling down on non-medical, personal care segments. For example, Waud Capital Partners acquired Senior Helpers (a non-medical provider) and MedTec Healthcare to consolidate their home care assets under a new holding company, Altocare. This institutional activity affirms the high strategic value, profitability, and scalability of the private-pay model.

The acquisition thesis, therefore, should prioritize scaling the private-duty segment through superior operational efficiency and patient acquisition strategies, viewing it as the most reliable pathway to sustained EBITDA expansion and justification for favorable valuation multiples.

Table. Comparative Analysis of Home Health Reimbursement Headwinds (2025-2026)