Sponsored by CLA
Over the summer, the home health industry faced some new potential headwinds. On June 30, the Centers for Medicare & Medicaid Services (CMS) issued its proposed rule for calendar year (CY) 2026, which proposes significant rate adjustments for the home health prospective payment system.
In this article, we will explore the most significant changes and their impact on the home health market.
What are the changes to Medicare?
There is a litany of changes included in the CY 2026 Home Health proposed rule, but the payment cuts are causing the most alarm. Under the new rule for 2026, home health payments are expected to be reduced by approximately 6.4% overall, or $1.13 billion, compared to rates in 2025. These reductions include a 4.1% permanent reduction to the standard payment rate to prevent future overpayments, as well as a temporary but indefinite 5% reduction to recoup past overpayments. According to notes in the proposed rule, payments to home health agencies in 2024 exceeded costs by 33%, so CMS feels obligated to claw back some of those profit margins to protect Medicare.
CMS claims that these changes are necessary to achieve budget neutrality, something required under the Patient-Driven Groupings Model. It’s also not the first year that CMS has implemented cuts to the standard payment rate, having done so for this year, 2024 and 2023. Adding up all the permanent rate adjustments means changes have amounted to roughly -8.79% since 2023.
Impact on the Home Health Market
Medicare accounted for roughly 35% of home care spending in the United States in 2022, so the impact will be significant on the home health market’s margins, as well as the ability of providers to operate.
Research from the Medicare Payment Advisory Commission indicates that margin levels are healthy for home health operators, which serves as one of the key justifications for the payment changes. However, other stakeholders in the industry disagree with those assessments, especially since the research only considers Medicare margins, rather than taking into account other payor sources.
According to Kalon BI Consulting, LLC, if you include Medicare Advantage in your calculations, profit margins hovered around 1.32% for home health agencies in 2023, barely up from the -1.33% in 2022. As we reported in the past, Medicare Advantage enrollees are taking up an increasingly larger share of the overall Medicare population, accounting for 54% of Medicare spending.
“A 6.4% reduction would be significant,” said Jed Cheney, Principal at CLA, in a provided statement. “Many agencies are already operating close to break-even, and further cuts could force closures, reduce access to care, and accelerate consolidation. Agencies may have to limit services, reduce staff, or turn away complex patients. Ultimately, this risks undermining the availability and quality of home-based care for vulnerable populations.”
Cheney also explained how CLA’s clients heavily depend on traditional Medicare reimbursement to offset significant losses from other payors, particularly low-reimbursed Medicare Advantage contracts. As the Medicare Advantage penetration continues to grow, it’s only going to continue to put further pressure on margins. Hence, a reduction by CMS of this magnitude only compounds the issue at hand.
And the claim that payments to home health agencies in 2024 exceeded costs by 33% also doesn’t sit right.
“That CMS statistic does not fully reflect the reality,” said Cheney. “The “33%” figure feels high because it averages across a diverse industry—smaller agencies, rural providers, and those serving high-need populations often operate on much thinner margins. The statistic likely doesn’t account for unfunded mandates, inflation, and regional cost variations.”
Additional payment cuts could harm smaller and local agencies, especially those without the resources or scale to manage these changes, which are compounded by increases in inflation and labor costs. Even larger organizations have concerns.
“These reductions are inappropriate and inconsistent with CMS’s legal mandate, will harm patient access, weaken an already stressed industry, and undermine CMS’s own cost-saving models,” said Tyler Shrive, Vice President of Government Affairs for Enhabit Home Health & Hospice, in a letter addressed to Mehmet Oz, head of CMS, and provided to LevinPro HC via email. “While our scale allows us to support some temporarily unprofitable locations, for example, that ability is not unlimited in the declining reimbursement environment of the last three years.”
Enhabit is a national provider of home health and hospice services, with 249 home health and 114 hospice locations across 34 states. According to Enhabit, the company served more than 235,000 patients in 2024.
“These cuts coincided with a time of inflation, particularly in health care labor markets, and disadvantaged the home health industry in the competition for labor—over the same period, other health care providers received meaningful reimbursement increases,” said Shrive.
It’s difficult to say what impact this will have on the M&A market, however. Will this become a driver of growth or cause investors to slow down?
“Both trends could play out. Smaller agencies will need to seek a partner to survive, at some point with cuts you need scale to make it work,” said Cheney. “However, uncertainty and reimbursement risk tend to cause some investors to pause to wait and see what plays out. This may cause valuation reductions, creating a gap between what sellers expect and what buyers can pay to achieve the necessary returns.”
Through August 2025, Home Health & Hospice activity remained stable, with 69 deals, three more than in the same period of 2024. A few of the larger players, such as Addus HomeCare and The Pennant Group, Inc., have announced transactions this year. Private equity investors remain prevalent, accounting for 36% of transactions so far in 2025.
Still, the pace seems to be slower than what we saw in 2022 and 2023, which hit 115 deals and 99, respectively. Other headwinds, such as increased regulatory scrutiny and stubbornly high interest rates, are also factors at play.
Investors seem to be turning toward providers that offer hospice services as well, since that seems to be a safer investment compared to home health agencies. In June, New Day Healthcare acquired Heritage Home Healthcare, which provides home care, hospice and skilled nursing services to more than 1,100 patients daily across New Mexico, and St. Croix Hospice LLC bought the hospice operations in Northwest and Southwest Wisconsin of Mayo Clinic Health System.
Tailwinds, such as demographic shifts and patient preferences for home-based care, are likely to continue driving deal activity. Still, depending on how CMS implements its final rule in November, the payment adjustments could force investors and dealmakers to hit pause on dealmaking.
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