The Home Health Arbitrage: How CMS Just Created a Billion-Dollar Market Opportunity

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DISCLAIMER: The views and opinions expressed in this essay are solely my own and do not reflect the views, opinions, or positions of my employer, Datavant, or any of its affiliates.

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ABSTRACT

CMS’s 2026 Home Health Prospective Payment System final rule introduces significant payment reforms including a mandatory cap on therapy service utilization, expanded rural add-on payments, and new health equity adjustments. This essay proposes a revolutionary business model that exploits the gap between traditional high-intensity therapy-focused home health and the new payment incentives favoring comprehensive care coordination. The proposed venture would function as a technology-enabled care orchestration layer that helps home health agencies optimize their mix of services while capturing value through improved outcomes and reduced therapy costs. Key elements include predictive analytics for therapy utilization, automated care planning that balances medical and social needs, and a novel revenue model that shares savings generated from reduced therapy overutilization. The addressable market exceeds 3.5 million Medicare beneficiaries receiving home health annually, with potential to capture 200-400 basis points of margin improvement for participating agencies.

TABLE OF CONTENTS

What CMS Actually Changed and Why It Matters

The Therapy Utilization Problem Nobody Talks About

The Business Model: Care Orchestration as a Service

Why This Works Now and Not Three Years Ago

The Technical Architecture and Data Moat

Unit Economics and Market Sizing

Competitive Landscape and Defensibility

The Path to Exit

What CMS Actually Changed and Why It Matters

Let me start by saying that most people reading CMS rules fall into two categories: policy wonks who live for this stuff and operators who skim for the payment rate changes and move on. I am asking you to be neither. Instead, think like an investor looking for arbitrage opportunities created by regulatory change, because that is exactly what this rule creates.

The 2026 home health final rule does three things that matter. First, it implements what CMS calls a therapy utilization cap, which is bureaucratic speak for “we are going to penalize you if too many of your patients get a ton of physical therapy visits.” Specifically, if more than 58% of your thirty-day periods involve ten or more therapy visits, you start losing money on every period above that threshold. The penalty is not trivial at 5% of the payment, which on a $2,000 episode means you are giving back $100 every time you cross that line.

Second, the rule expands rural add-on payments from 3% to 5% and makes them available to a wider swath of counties. This matters because rural home health has always operated on terrible unit economics due to drive time and patient density issues. The expanded add-on does not fix the problem but it makes rural markets slightly less punishing.

Third, and this is where things get interesting, CMS introduced a health equity adjustment that provides bonus payments for agencies serving high proportions of dually eligible beneficiaries or patients in underserved areas. The adjustment is small, around 2-3% of base payment, but it signals where CMS is heading. They want agencies focused on medically complex, socially complicated patients rather than the traditional home health model of cherry-picking the easiest cases.

Now, if you are running a home health agency today, this rule creates a massive operational headache. The typical agency generates maybe 4-6% operating margin in a good year. Most agencies have built their entire care model around maximizing therapy visits because that is what the old payment system rewarded. A typical thirty-day home health period might include twelve physical therapy visits, eight skilled nursing visits, and maybe an occupational therapy evaluation. Under the new rules, that profile is suddenly underwater because you are in the penalty zone.

The immediate response from most agencies will be to arbitrarily cap therapy visits at nine per period to stay under the threshold. This is the wrong answer but it is what most operators will do because they are not thinking about the underlying care model, just the payment mechanics. And that creates the opportunity.

The Therapy Utilization Problem Nobody Talks About

Here is a dirty secret about home health that anyone who has spent time in the industry knows but nobody says out loud: a huge percentage of therapy visits are clinically unnecessary. I am not saying they are fraudulent or that therapists are not providing real services during those visits. I am saying that the marginal value of visit eight versus visit six is often negligible, and the decision to authorize that eighth visit has more to do with payment optimization than patient outcomes.

Why does this happen? Because the old home health payment model was based on therapy thresholds. If you provided six to nine therapy visits in a period, you got paid X. If you provided ten to thirteen visits, you got paid X plus 20%. This created an obvious incentive to get every patient who could tolerate it up to that ten-visit threshold. Clinical directors learned to write care plans that justified the visits, and therapists learned to find things to work on that would support the medical necessity documentation.

The result is that American home health patients get way more therapy than patients in other countries with similar outcomes. If you look at Medicare data, the average home health patient receives about nine therapy visits per sixty-day episode. In Canada, the comparable number is around four visits. Outcomes are basically identical. That five-visit difference represents pure waste, but it is waste that has been baked into the business model for two decades.

CMS knows this, which is why they are implementing the cap. But here is the problem: agencies do not have the tools or expertise to figure out which patients actually need ten therapy visits versus which patients would do fine with six. The current approach is one-size-fits-all care planning where the therapist does an initial evaluation and then basically everyone gets the same visit schedule regardless of their clinical presentation or functional trajectory.

What agencies need is a way to predict, at the time of admission, which patients will require high-intensity therapy and which patients can achieve their goals with a lower-intensity approach. They also need help redesigning care plans to substitute other interventions, like home health aide services or remote monitoring, for marginal therapy visits. And they need this to happen without sacrificing outcomes, because if readmission rates go up or functional improvement scores go down, they lose money through the value-based purchasing program.

This is not a problem you can solve by hiring smarter clinicians or implementing better training. This is a data problem and an orchestration problem. And that is where the opportunity lives.

The Business Model: Care Orchestration as a Service