On November 28, 2025, the Centers for Medicare & Medicaid Services (CMS) finalized the Calendar Year 2026 Home Health Prospective Payment System (HH PPS) Rate Update. The final rule landed far more favorably than the industry feared: instead of the proposed 6.4% aggregate reduction that sent shockwaves through the sector in June 2025, the final rule implements an estimated 1.3% aggregate reduction, or approximately $220 million decrease from 2025 levels. Understand how to evaluate buyer offers in this regulatory context. Plan your exit around these regulatory changes with our exit timeline calculator.
For home health agency owners considering an exit, this rule is arguably the most important regulatory development in years. It directly affects your agency's revenue projections, which in turn drive your valuation. Understanding the mechanics of the rule, and how buyers are interpreting it, is essential for anyone planning a transaction in 2026 or beyond.
Bottom Line for Sellers
The final 1.3% cut is manageable for well-run agencies and has already been priced into buyer models. The resolution of uncertainty is actually positive for M&A activity. According to the American Physical Therapy Association, the final rule represents "a significant difference from the proposed 6.4% reduction." Buyers who paused deals during the comment period are now moving forward.
Breaking Down the Numbers
The final rule contains several overlapping adjustments that combine to produce the net 1.3% reduction. Understanding each component helps you anticipate how buyers will model your agency's future revenue.
| Component | Proposed (June 2025) | Final (Nov 2025) | Impact |
|---|---|---|---|
| Payment Update (Market Basket) | +2.7% | +2.4% | Annual inflation adjustment |
| Permanent Behavioral Adjustment | -5.653% | -1.023% | Significantly reduced |
| Temporary Behavioral Adjustment | -3.37% | -3.0% | One-year recoupment |
| Net Aggregate Impact | -6.4% | -1.3% | $220M vs $1.5B+ reduction |
Source: CMS Fact Sheet, November 28, 2025; APTA Analysis, December 9, 2025.
The Permanent Adjustment: What Changed
The most significant change between the proposed and final rule was the permanent behavioral adjustment. CMS had proposed a -5.653% permanent cut to account for what it characterized as changes in coding and case-mix behavior since the implementation of PDGM (Patient-Driven Groupings Model) in 2020. The industry argued forcefully during the comment period that CMS was conflating legitimate clinical improvements with "behavioral changes," and that the proposed cut would devastate agencies already operating on thin margins.
In the final rule, CMS reduced the permanent adjustment to -1.023%, acknowledging that its original methodology may have overstated the behavioral component. As Home Health Care News reported, the final rule "includes an estimated 2.4% rate increase, offset by an estimated final permanent adjustment of 0.9% and a final temporary adjustment factor." This represents a dramatically better outcome than what was initially proposed.
The Temporary Adjustment: A One-Year Hit
The -3.0% temporary adjustment is a one-year recoupment designed to recover what CMS considers overpayments from prior years. Unlike the permanent adjustment, this component expires after CY 2026. For valuation purposes, this is important: buyers will typically model the temporary adjustment as a one-time headwind rather than a permanent reduction in revenue capacity. A sophisticated buyer will look through the 2026 temporary hit and value your agency based on normalized earnings that exclude this non-recurring adjustment.
The TEAM Model: A New Variable
The final rule also coincides with the launch of the Transforming Episode Accountability Model (TEAM), which began in January 2026. Under TEAM, participating hospitals become financially accountable for total episode costs and outcomes, including post-acute care. This creates a powerful incentive for hospitals to partner with high-performing home health agencies that can demonstrate efficient, outcome-driven care delivery.
For agency owners, TEAM represents both an opportunity and a differentiator. Agencies with strong referral relationships, measurable clinical outcomes, and technology infrastructure to share data with hospital partners will be more valuable to buyers. According to Capstone Partners, "investors have placed premium valuations on home health operators with strong referral relationships and measurable outcomes, supported by stable clinical staffing, a robust compliance infrastructure, a modern technology infrastructure, and a diversified service mix."
How Buyers Are Interpreting the Final Rule
The M&A market's response to the final rule has been unambiguously positive. Deal volume surged in Q4 2025 as transactions that had been paused during the comment period moved forward. Buyers are interpreting the final rule through several lenses:
The worst-case scenario is off the table. The proposed 6.4% cut would have been devastating for smaller agencies with thin margins. The final 1.3% cut is manageable for well-run operations, and the market has priced it in. Buyers are no longer discounting valuations for regulatory uncertainty in the way they were during the summer of 2025.
The temporary adjustment creates a buying opportunity. Some sophisticated buyers view the 2026 temporary adjustment as a chance to acquire agencies at slightly depressed earnings and benefit from the rebound in 2027 when the temporary component expires. This can actually work in a seller's favor if you can demonstrate that your normalized earnings (excluding the temporary adjustment) support a higher valuation.
Value-based care capabilities command a premium. The combination of the final rule and TEAM is accelerating the shift toward value-based care in home health. Buyers are willing to pay more for agencies that can demonstrate outcomes-based performance, managed care contracting experience, and technology-enabled care coordination.
Payer diversification is more important than ever. Agencies heavily dependent on Medicare fee-for-service are more exposed to future CMS adjustments. Buyers are placing a premium on agencies with diversified revenue streams that include Medicare Advantage, Medicaid, and private pay. If your agency is Medicare-heavy, this is a factor that will affect your valuation multiple.
What This Means for Your Exit Timeline
The resolution of the CMS final rule has created a more favorable environment for home health M&A. If you've been waiting for regulatory clarity before exploring an exit, that clarity has arrived. The key considerations for your timeline include:
2026 earnings will reflect the temporary adjustment. If you're planning to sell based on 2026 trailing twelve-month financials, your EBITDA will include the impact of the -3.0% temporary adjustment. A good advisor will help you present normalized earnings that adjust for this one-time hit, but some buyers may still use the lower number as a negotiating lever.
2027 could be a stronger year for seller financials. With the temporary adjustment expiring, 2027 earnings should reflect a more normalized revenue environment. Selling in late 2027 or early 2028 based on 2027 trailing financials could yield higher absolute EBITDA numbers. However, waiting carries its own risks, including the possibility of new regulatory proposals in the CY 2028 rule cycle.
The buyer market is strong now. As our analysis of 2025 deal volume shows, buyer appetite is at record levels. Timing the market perfectly is impossible, but the current combination of regulatory clarity, strong buyer demand, and favorable financing conditions represents a window worth taking seriously.
Frequently Asked Questions
Does the 1.3% cut apply to all home health agencies?
The 1.3% aggregate reduction applies to Medicare home health payments nationally. Individual agency impact will vary based on case mix, geographic location, and the specific services provided. Agencies with higher-acuity patients and strong OASIS coding practices may see less impact than the national average.
Will there be additional cuts in 2027?
CMS has indicated it will continue to evaluate behavioral adjustments in future rulemaking cycles. However, the significantly reduced permanent adjustment in the 2026 final rule suggests CMS is taking a more measured approach than initially proposed. The temporary -3.0% adjustment is specific to CY 2026 and will not carry forward.
How does this affect non-medical home care agencies?
The CMS Home Health Final Rule applies specifically to Medicare-certified home health agencies. Non-medical personal care agencies that do not bill Medicare are not directly affected. However, the rule indirectly impacts the broader home care M&A market by influencing buyer sentiment and capital allocation across the sector.
Should I wait to sell until after the temporary adjustment expires?
This depends on your specific circumstances. While 2027 financials will not include the temporary adjustment, waiting carries risks including potential new regulatory proposals, changes in buyer appetite, and interest rate movements. A qualified M&A advisor can help you model both scenarios and determine the optimal timing for your situation.