Skilled Nursing Facilities: Services Excluded From Medicare's	 
Daily Rate Need to be Reevaluated (22-AUG-01, GAO-01-816).	 
								 
Congress and the Health Care Financing Administration recognized 
that certain services need to be excluded from the skilled	 
nursing facility (SNF) prospective payment system (PPS) to help  
ensure beneficiary access to appropriate care and to financially 
protect the SNFs that take care of high-cost patients. The	 
criteria used to identify services--high cost, infrequently	 
provided during a SNF stay, and likely to be overprovided--and	 
the services currently excluded appear reasonable. Although the  
criteria and current exclusions appear reasonable, questions	 
remain about whether beneficiaries have appropriate access to	 
services that are covered or whether additional services should  
have been excluded. A second concern is that Medicare coverage	 
for excluded facility services has been shifted from part A to	 
part B, which will increase beneficiary liability and program	 
spending may increase because certain services are excluded only 
when provided in hospital settings, thus discouraging the use of 
less expensive, clinically appropriate sites of service. Finally,
though providing important broad protection for beneficiaries,	 
excluding services from the PPS rate when they are provided in	 
emergency rooms may lead to overuse of this setting and could	 
unnecessarily increase Medicare spending. The Centers for	 
Medicare and Medicare Services (CMS) does not plan to collect	 
data on all services provided to beneficiaries during their SNF  
stays. Without these data, CMS will be hampered in its efforts to
update the exclusions over time. The lack of information about	 
services provided to beneficiaries during their SNF stays will	 
also severely limit efforts to refine the payment system. An	 
analysis of which settings (for example, SNF hospital outpatient 
department, ambulatory care, and emergency department) are used  
to deliver services to SNF patients is also important to ensure  
that services are provided at the most efficient and appropriate 
site.								 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-816 					        
    ACCNO:   A01629						        
  TITLE:     Skilled Nursing Facilities: Services Excluded From       
             Medicare's Daily Rate Need to be Reevaluated                     
     DATE:   08/22/2001 
  SUBJECT:   Health care cost control				 
	     Health care programs				 
	     Health care services				 
	     Skilled nursing facilities 			 
	     Medical services rates				 
	     Medicare Program					 

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GAO-01-816
     
A

Report to Congressional Committees

August 2001 SKILLED NURSING FACILITIES

Services Excluded From Medicare?s Daily Rate Need to be Reevaluated

GAO- 01- 816

GAO United States General Accounting Office

Page i GAO- 01- 816 Excluded Skilled Nursing Facility Services Letter 1

Results in Brief 2 Background 3 Certain Services Appropriately Excluded from
SNF PPS, but

Revisions to the Exclusions May Be Needed 8 Current Exclusion Policies May
Have Unintended Consequences 11 Conclusions 14 Matter for Congressional
Consideration 15 Recommendations for Executive Action 15 Agency Comments 15

Appendix I Comments From Centers for Medicare and Medicaid Services 19

Tables

Table 1: Services Excluded from the SNF PPS Rate, Regulatory or Legislative
Source, and Effective Dates 7 Table 2. Examples of Services Considered for
Exclusion from the

SNF PPS and HCFA?s Reasons for Not Excluding Them 10

Abbreviations

BBA Balanced Budget Act of 1997 BBRA Balanced Budget Refinement Act of 1999
CT Computerized axial tomography CMS Centers for Medicare and Medicaid
Services HCFA Health Care Financing Administration MRI Magnetic resonance
imaging PPS Prospective payment system RUG Resource utilization group SNF
Skilled nursing facility Contents

Page ii GAO- 01- 816 Excluded Skilled Nursing Facility Services

Page 1 GAO- 01- 816 Excluded Skilled Nursing Facility Services

August 22, 2001 Congressional Committees The Health Care Financing
Administration (HCFA) replaced its cost- based reimbursement method for
skilled nursing facility (SNF) services with a prospective payment system
(PPS) in 1998. 1 Mandated in the Balanced Budget Act of 1997 (BBA), 2 the
PPS was intended to slow Medicare SNF spending growth by paying a daily
amount based on the historical national average costs of care. This rate
covers all health care services provided to a beneficiary during each day of
a Medicare- covered SNF stay. Under this new payment approach, SNFs have
strong financial incentives to control the cost of providing a day of care.
They can do this by reducing the number of services delivered, changing to a
less costly mix of services, or minimizing the cost of each service.
However, facilities could also keep their costs down by stinting on needed
services, especially expensive ones, or avoiding patients who are likely to
need particular types of care. Facilities that cannot keep their average
daily costs below their payments will be financially disadvantaged.

To counter the possible undesirable consequences of the PPS, certain
services provided to Medicare beneficiaries during a SNF stay were excluded
from the SNF daily rate. Some of the exclusions were identified in statute
and HCFA exercised its administrative rule- making authority to exclude
others. Excluded from the rates are expensive services that generally are
not provided in SNFs- such as cardiac catheterization, magnetic resonance
imaging (MRI), radiation therapy, and selected chemotherapy services.
Separate payments are made for these excluded services so that SNFs are not
financially disadvantaged by making these services available. This is
intended to protect beneficiary access to these services and the SNFs that
care for these beneficiaries. However, if too many services are excluded
from the daily rate, the cost- control potential of the PPS could be
undermined.

1 On June 14, 2001, the Secretary of Health and Human Services (HHS) changed
the name of the Health Care Financing Administration to the Centers for
Medicare and Medicaid Services (CMS). We continue to refer to HCFA where our
findings apply to the organizational decisions and operations associated
with that name.

2 P. L. 105- 33, sec. 4432( a), 111 Stat. 251, 414 (codified at 42 U. S. C.
1395yy( e)).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 816 Excluded Skilled Nursing Facility Services

Because of concerns about beneficiary access to SNF care under the PPS and
the financial condition of facilities that provide high- cost services, the
conference report accompanying the Balanced Budget Refinement Act of 1999
(BBRA) directed us to examine the services excluded from the PPS. 3 We were
directed to: (1) analyze the appropriateness of the services excluded from
the PPS and the process for determining the exclusions, and (2) identify any
potential problems with the exclusions as implemented. To do so, we examined
HCFA program memoranda, the BBA, and the BBRA, and interviewed agency
officials. Service cost and volume data on all services provided to SNF
residents were not available so we could not systematically evaluate the
excluded services and the services that remained in the daily rate.
Therefore, we conducted structured interviews with 10 nationally recognized
clinical experts on nursing home care about the criteria and the excluded
services. They included university- based health services researchers,
clinical department chairs at nationally recognized health care facilities,
the medical directors of nursing homes in health care systems, and board
members of national medical organizations. We performed our work from July
2000 through August 2001 in accordance with generally accepted government
auditing standards.

Although the service- exclusion criteria and the services removed from the
daily payment rate appear reasonable, questions remain about whether certain
other services should also be excluded and how to modify the exclusions over
time. HCFA generally relied on three criteria in choosing services to
exclude. Excluded services must be high cost, infrequently provided during a
SNF stay, and not likely to be overprovided. Because SNFs have an incentive
under the PPS to minimize costs that are covered under the daily payment,
these criteria are intended to identify services that may be inappropriately
foregone, while maintaining the PPS incentives to control service use and
cost. However, raising concerns about beneficiary access to services that
remain in the daily rate, many of the clinical experts we interviewed
questioned whether additional services should have been excluded from the
PPS. Because information on the frequency and cost of all services provided
to beneficiaries is not available, it is difficult to confirm that the
criteria have been applied consistently and that all of the services that
meet these criteria were excluded from the PPS. CMS does not intend to
collect data on all services

3 H. R. Conf. Rep. No. 106- 479, at 854 (1999). Results in Brief

Page 3 GAO- 01- 816 Excluded Skilled Nursing Facility Services

provided to beneficiaries receiving SNF care, or to develop a process for
systematically reviewing the services included and excluded from the PPS
rate.

Current exclusion policies have three unintended consequences. First,
because of the way HCFA defined coverage for excluded facility services,
beneficiary liability is increased and beneficiaries may lose coverage for
certain services if they are excluded from the PPS. Second, some services
are excluded only if they are provided in a hospital outpatient department,
creating incentives for SNFs to refer patients to this setting, even though
there may be alternative medically appropriate sites of care that would be
less expensive for beneficiaries and the program. Finally, to ensure prompt
medical attention in emergency situations, HCFA excluded emergency room
services from the PPS rate, but the broad definition of emergency services
may result in SNFs classifying care as ?emergency? to gain separate
payments.

Congress may wish to clarify Medicare?s coverage for facility services
excluded from the SNF PPS. We are also recommending that the Administrator
of CMS exclude any service that meets the criteria, regardless of where it
is provided. To refine the SNF PPS and ensure adequate beneficiary access to
appropriate medical services, we are also recommending that CMS develop a
strategy to collect and analyze cost and utilization data on all services
provided to beneficiaries during SNF stays. In commenting on a draft of this
report, CMS stated that it can not disregard the site of service delivery in
excluding certain services because it believes it does not have the
administrative authority to do so and because these services can not be
provided safely in nonhospital settings. It acknowledged the need for
service- level data, but noted that collecting these data could meet with
considerable industry opposition.

Medicare covers skilled nursing and rehabilitative therapy for beneficiaries
being treated in SNFs for conditions related to a hospital stay. The
hospital stay must have been for at least 3 days and have occurred within 30
days before admission to the SNF. For beneficiaries who qualify, Medicare
will pay for all necessary services, including room and board, nursing care,
and ancillary services such as drugs, laboratory tests, and physical
therapy, for up to 100 days under Medicare part A, the hospital insurance
portion of Medicare. In 2001, beneficiaries are responsible for a $99 daily
copayment after the 20th day of SNF care, regardless of the cost of services
received. If the beneficiary stay is not covered under part A, Medicare will
pay for covered services, provided the Background

Page 4 GAO- 01- 816 Excluded Skilled Nursing Facility Services

beneficiary has purchased part- B supplemental insurance. Part- B covered
services include physician, hospital outpatient, and ancillary services
(such as laboratory tests and physical therapy). For most part- B services,
coinsurance is 20 percent of Medicare payments, but for services and
procedures provided in hospital outpatient departments the coinsurance is
higher.

For over a decade beginning in 1986, Medicare part- A SNF spending rose
dramatically- averaging 30 percent annually. This high growth was due to a
number of factors. Implementation of a PPS for inpatient hospital care in
1983 created an incentive to discharge patients from the hospital sooner,
which may have resulted in more beneficiaries needing SNF care. Indeed, the
number of Medicare beneficiaries receiving SNF services more than doubled
between 1983 and 1990. Technological advances also contributed to a change
in the mix of services provided by some SNFs, allowing some SNFs to offer
more complex services that had previously been delivered only in hospitals.
For example, SNFs now admit beneficiaries who require ventilator support,
specialized wound care, or intravenous medications following their hospital
stay.

Medicare?s cost- based reimbursement method for SNFs, which provided few
checks on spending, combined with minimal program oversight, contributed to
SNF expenditure growth. Medicare?s payment method controlled spending for
routine costs, such as room and board, but spending for ancillary services
and capital costs was not constrained. In most cases, ancillary services
such as therapies were provided by outside suppliers that billed the SNFs. 4
The outside suppliers? charges, in turn, became the SNFs? costs to provide
these services. These costs were reimbursed by Medicare, so that the more
SNFs spent, the more they were paid. Under this payment approach, SNFs had
no financial incentive to furnish only clinically necessary ancillary
services or to control their costs. As a result, SNFs provided more services
and higher cost services to Medicare beneficiaries, making the SNF benefit
one of the fastest growing components of Medicare.

4 In some cases, outside suppliers billed Medicare part B directly for
ancillary services, with no direct involvement by the SNF. Under this
arrangement, beneficiaries were responsible for the 20 percent coinsurance.

Page 5 GAO- 01- 816 Excluded Skilled Nursing Facility Services

In response to rising SNF spending, the BBA required a PPS for SNF services,
which HCFA began to phase- in on July 1, 1998. SNFs now receive a fixed
daily payment to cover the cost of most services provided to beneficiaries
during a part- A covered stay. Because not all patients require the same
amount of care, per diem rates are adjusted to reflect differences in
patient characteristics that affect the cost of care, as measured by the
Resource Utilization Group (RUG) system. The RUG system uses clinical and
other factors to assign each patient to 1 of 44 different RUG categories.
These categories group patients who receive similar services and therefore
have similar costs. The daily payment rate is based on the national average
cost of treating beneficiaries in that RUG category.

The PPS creates the incentive for SNFs to control their costs because they
financially benefit if their costs are below their payments, but are liable
if their costs exceed their payments. SNFs can control their costs by
reducing the number of services delivered, changing to a less costly mix of
services, or controlling the cost of each service. However, the PPS may
encourage undesirable provider responses. SNFs may lower their costs by
withholding medically necessary services, substituting lower quality
services, or avoiding higher cost beneficiaries.

In conjunction with the PPS, the BBA made each SNF financially responsible
for almost all services provided during a part- A stay, including services
rendered by an outside supplier. 5 This ?consolidated billing? provision
minimizes the potential for duplicate billing and prevents facilities from
reducing their costs by having outside providers furnish ancillary services
for additional Medicare payment. Consolidated billing results in these
services being covered under part A.

Providers have been concerned that SNF payments are too low, but our
previous work on the SNF PPS indicated that in aggregate, SNF payments are
likely to cover the costs of care needed by beneficiaries. However, we have
noted that refinements to the payment system are needed to better

5 P. L. 105- 33, Sec. 4432( b), 111 Stat. 251, 420 (codified at 42 U. S. C.
1395u( b)( 6), 1395y( a)( 18), and 1395yy( e)( 9)). Prospective Payment for

SNFs

Page 6 GAO- 01- 816 Excluded Skilled Nursing Facility Services

match payments with patient needs. 6 These refinements would be similar to
those routinely implemented in Medicare?s inpatient hospital PPS. 7

The costs of certain services provided during a SNF stay were excluded from
the calculation of the daily PPS payment and separate payments are made for
these services under part B. Because additional payments are made for these
services, SNFs do not have to cover the costs of these services under the
daily payment rate. This removes any financial disincentive to the SNF for
providing these services or admitting beneficiaries who require these
services.

Services were excluded from the PPS at three different junctures (see table
1). In mandating the implementation of a PPS, the BBA was explicit that
payments to practitioners (such as physicians) not be included under the
PPS, continuing the distinct payments Medicare generally makes for facility
and for professional services. 8 Next, in a 1998 interim final rule to
implement the PPS, HCFA identified a set of facility services to exclude
from the PPS rate. HCFA characterized these services- such as cardiac
catheterization, magnetic resonance imaging (MRI), ambulatory surgery
performed in an operating room, and emergency services- as beyond the scope
of SNF care if they were provided in a hospital outpatient department. 9

6 Nursing Homes: Aggregate Medicare payments are Adequate Despite
Bankruptcies

(GAO/ T- HEHS- 00- 192, Sept. 12, 2000); Skilled Nursing Facilities:
Medicare Payment Changes Require Provider Adjustments But Maintain Access
(GAO/ HEHS- 00- 23, Dec. 14, 1999); and Skilled Nursing Facilities: Medicare
Payments Need to Better Account for Nontherapy Ancillary Cost Variation
(GAO/ HEHS- 99- 185, Sept. 30, 1999).

7 The Secretary of HHS is required to adjust the patient classifications for
the inpatient hospital PPS at least annually. See Sec 1886 (d)( 4)( C) of
the Social Security Act. Since 1983, over 40 patient categories have been
added to the original 467 groupings. Detailed data on service use and
patient characteristics are used to improve this patient classification
system.

8 See 42 U. S. C. sect. 1395yy( e)( 2)( A)( ii). 9 If these services are
provided in a critical access hospital (a special designation of small,
rural hospitals defined by Medicare), they would also be excluded from the
PPS rate. Services Excluded From

the PPS Rate

Page 7 GAO- 01- 816 Excluded Skilled Nursing Facility Services

Table 1: Services Excluded from the SNF PPS Rate, Regulatory or Legislative
Source, and Effective Dates

Excluded services Exclusion source

(effective date)

Services provided by physicians, midwives, psychologists, nurse anesthetists
Certain dialysis- related services and drugs

BBA (July 1998)

Certain outpatient services when provided in a hospital (including
associated medically indicated ambulance transport): Cardiac catheterization
Computerized axial tomography (CT) scans and MRI Ambulatory surgery
performed in operating rooms Emergency services Radiation therapy a
Angiography a Lymphatic and venous procedures a

HCFA Interim Final Rule (July 1998) and HCFA Program Memorandum (November
1998)

Specified chemotherapy items and services Radioisotope services Customized
prosthetic devices Ambulance transportation for dialysis

BBRA (April 2000)

a The Interim Final Rule identified broad service categories of services to
exclude. The subsequent Program Memorandum issued by HCFA identified
specific billing codes within these broad categories.

Source: GAO analysis.

Because HCFA lacked statutory authority to exclude services provided during
a part- A stay from the PPS, it used its administrative rule- making
authority to redefine ?residency status? so that beneficiaries are
temporarily not SNF residents while they receive certain services in
hospital outpatient departments. 10 This site- of- service distinction
enabled HCFA to exclude these services if they were provided in a hospital
outpatient department. These facility services are then covered by

10 63 Fed. Reg. 26,252, 26, 308 (1998) (codified at 42 C. F. R. 411.15( p)
(3) (iii)). HCFA defined SNF resident in such a way as to exclude those who
are receiving ?a small number of exceptionally intensive services that lie
well beyond the scope of care that SNFs would ordinarily furnish.? HCFA
Program Memorandum, Transmittal No. A- 98- 37 (Nov. 1998). HCFA subsequently
finalized and amended this regulation. 64 Fed. Reg. 41, 644 (1999) and 65
Fed. Reg. 46,769 (2000).

Page 8 GAO- 01- 816 Excluded Skilled Nursing Facility Services

Medicare under part B, even though they are being provided during a partA
eligible stay. 11 Following the implementation of the PPS, HCFA added
radiation therapy, angiography, and lymphatic and venous procedures to the
list of services that are excluded when provided in a hospital outpatient
department. All of these facility services are excluded from the SNF rate
and are paid for separately under part B.

Based on HCFA recommendations, in the BBRA Congress excluded another set of
services from the daily rate. 12 The BBRA excluded specific services within
three broad categories (chemotherapy, radioisotopes, and customized
prosthetic devices) and it excluded ambulance transportation for dialysis.
13 The BBRA also granted the Secretary of HHS the authority to modify the
list of excluded services within these three broad categories and specified
that Medicare payments for these services would be determined in the same
way as when these services are paid for under part B.

HCFA generally relied on three criteria to guide the selection of services
to be excluded from the PPS rate. To be excluded, services had to be high
cost, infrequently needed by SNF beneficiaries, and not likely to be
overprovided. The first two criteria identify services that a SNF might
inappropriately avoid delivering or that could financially compromise a
facility that did provide them. The third criterion minimizes the
opportunities for facilities to boost Medicare revenues by providing
services for separate payment. Almost all of the clinical experts we
consulted agreed with the criteria and with the specific services excluded
from the PPS. The majority raised concerns, however, about the adequacy of
beneficiary access to certain services that were not excluded from the PPS.
Without systematic review of cost and use data for all services provided to
SNF residents, it is not possible to determine if all services that meet the
criteria were excluded. The agency does not have, nor does

11 However, if the listed service is delivered in another setting (such as
an ambulatory surgery center or imaging center) or if another (not excluded)
service is provided in a hospital outpatient department (such as an x- ray),
the beneficiary is still considered a SNF resident- and the service, and
payment for it, is included in the part- A stay.

12 P. L. 106- 113, div. B, sec. 1000( a)( 6) [H. R. 3426, title I, sec. 103(
a)], 113 Stat. 1501, 1536 and 1501A- 325 (codified at 42 U. S. C. 1395yy(
e)( 2)( A)( iii)). 13 Ambulance transportation for dialysis is excluded only
when provided in conjunction with part- B covered dialysis, which is
generally limited to beneficiaries with end- stage renal disease (ESRD).
Certain Services

Appropriately Excluded from SNF PPS, but Revisions to the Exclusions May Be
Needed

Page 9 GAO- 01- 816 Excluded Skilled Nursing Facility Services

it plan to develop, the data necessary to conduct a systematic evaluation,
nor is it developing a strategy to periodically review the excluded services
to ensure that services that meet the exclusion criteria are excluded and
paid for separately from the PPS rate.

In establishing its three criteria, HCFA excluded services that cost
substantially more than the daily SNF payment rate because the SNF would
have strong financial incentives to avoid providing them or admitting the
beneficiaries who would be likely to need them. If the highcost services
were provided infrequently, the daily payment rate, which is based on
average costs of care for a typical patient in a payment category, could be
much lower than the actual costs of treating a patient needing some of these
high- cost services. Facilities treating a disproportionate number of
beneficiaries requiring these services could be disadvantaged compared to
facilities that did not. Frequently provided high- cost services would boost
average daily costs, so they would be reflected in the PPS rate.

The third criterion, that the service not be easily overprovided, helps
ensure that the PPS minimizes overall costs by reducing the opportunity for
providers to seek additional reimbursements outside of the PPS rate.
Facilities have an incentive to ensure that they provide only medically
needed care for services that are included in the PPS rate. However, they
may be less concerned about evaluating the need for a service when the
service is paid for separately.

Clinical consultants we interviewed generally agreed that the three criteria
used to select services for exclusion are reasonable.

When deciding on the service exclusions, HCFA lacked detailed service cost
and use data to examine which services met the criteria. Instead, HCFA
relied on its staff?s clinical and institutional expertise to identify
services that appeared to meet the exclusion criteria. It also consulted
with the medical directors of the contractors responsible for processing SNF
claims and with providers. 14 To elicit public input in developing its
recommendations to Congress for services to exclude in the BBRA, HCFA held a
public meeting to receive comments on the proposed rules and to

14 The agency contracts with fiscal intermediaries (part A) and carriers
(part B) to review submitted claims and to make payments to providers.
Criteria Help Ensure

Access and Protect SNFs, Without Encouraging Unnecessary Service Use

Concerns Remain About Additional Services To Exclude From PPS

Page 10 GAO- 01- 816 Excluded Skilled Nursing Facility Services

gather suggestions for service exclusions. HCFA considered these suggestions
and some- for example, related to ambulance transport for beneficiaries with
ESRD- were adopted. But several services that were proposed for exclusion
were kept in the rate because, according to agency officials, they did not
appear to meet all three criteria (see table 2.)

Table 2: Examples of Services Considered for Exclusion from the SNF PPS and
HCFA?s Reasons for Not Excluding Them

Selected services considered for exclusion Exclusion criterion not met a

Ambulance transport not already excluded Cost Clinical social work services
Frequency Doppler flow studies b Cost; frequency Hyperbaric oxygen therapy c
Possible overprovision Modified barium swallow studies d Frequency Nuclear
medicine services Cost; possible overprovision Orthotics Frequency; possible
overprovision Stress tests Frequency

a To be considered for exclusion from the PPS, a service must be high cost,
infrequently provided, and not likely to be overprovided. b A doppler flow
study is an ultrasound procedure measuring blood flow through veins and
arteries performed to detect blockages, injury, or blood clots. c Hyperbaric
oxygen therapy is a medical treatment in which oxygen is administered at
greater than

normal pressure to a patient to treat conditions such as burns and
peripheral vascular disease. d A modified barium swallow is a procedure done
to evaluate the swallowing process for people who

are having problems speaking or swallowing food without aspirating it into
the windpipe. Source: Interviews with HCFA officials.

The clinical experts we consulted told us additional services should have
been excluded from the PPS, though they agreed the current exclusions were
reasonable. For example, all of the clinical experts we interviewed
disagreed with the agency?s policy regarding ambulance transportation. 15
They argued that without additional payment for ambulance transport
associated with excluded services beneficiary access to certain services

15 Medicare pays for ambulance transport only in those circumstances where
other means, such as taxicab service, would be medically contraindicated.
Medically necessary ambulance transport is excluded from the PPS and paid
for separately when associated with dialysis and the following services if
provided in a hospital- cardiac catheterization, MRI, CT scan, certain
ambulatory surgery procedures, emergency services, radiation therapy,
angiography, and lymphatic and venous procedures.

Page 11 GAO- 01- 816 Excluded Skilled Nursing Facility Services

could be impaired. Most experts we interviewed also thought that ambulatory
surgery for many beneficiaries, CT scans, and MRIs performed in nonhospital
settings should be excluded from the PPS regardless of where they are
provided. These services are excluded, however, only if they are provided in
a hospital outpatient setting.

There was less agreement about whether other services currently included in
the daily rate should be excluded. Some thought that excluding services
would lead to overprovision of certain services, such as modified barium
swallows, orthotics, and hyperbaric oxygen therapy. However, more often we
were told that beneficiaries who are likely to need services included in the
daily rate may face barriers to SNF admission, or as residents, may not
receive the care that they need. One expert noted that the current
exclusions may encourage the substitution of a more expensive service for a
less expensive alternative that remained in the daily rate.

With medical advances and as providers respond to payment incentives, the
services meeting the exclusion criteria are likely to shift. Certain
services that are currently excluded may not warrant exemption in the future
and, conversely, services that have not been excluded may at some time meet
the exclusion criteria. Agency officials stated that they consider modifying
which services are excluded in response to public comments they receive on
proposed PPS regulations. However, objective and systematic evaluation of
the excluded services is not possible without data on all services provided
to beneficiaries in a SNF and the costs of these services. HCFA did not have
these data available in developing the PPS and agency officials told us they
do not plan to require SNFs to include on billing records the specific
services provided during a part- A stay. These officials told us that
complete data on all services would require considerable changes to provider
billing requirements and to the computer systems that process the claims.

CMS?s current exclusion policies have three unintended consequences. First,
coverage has been shifted from part A to part B for excluded facility
services that otherwise would have been covered in the daily rate, thereby
increasing beneficiary liability. As a result of this shift in coverage and
because certain services (primarily self- administered prescription drugs)
are not covered under part B, beneficiaries would lose their coverage under
Medicare if these services were excluded from the PPS. Therefore, HCFA did
not consider excluding these services from the PPS. Second, excluding
services based on where they are provided may encourage SNFs to refer
beneficiaries to hospital outpatient departments, when other, Current
Exclusion

Policies May Have Unintended Consequences

Page 12 GAO- 01- 816 Excluded Skilled Nursing Facility Services

often less costly ambulatory settings could be appropriate. This site-
ofservice incentive is likely to increase beneficiary liability and program
spending. Finally, SNFs may have an incentive to classify certain services
as emergencies so that they are excluded from the PPS and can be paid for
separately.

The BBRA provided that the amounts paid for excluded services are to be
determined in the same way as when the services are paid for under part- B
payment rules and that the funds for the services are to come from the part-
A program. 16 The law is silent on whether coverage for these services is to
be determined under part A or part B. In its interpretation of the BBRA
language, HCFA applied part- B coverage rules to the excluded services
delivered during a part- A covered stay. In shifting coverage from part A to
part B, excluded services are subject to part- B cost- sharing requirements.
As a result, beneficiaries are responsible for the coinsurance for the
excluded services, even though they would have had no additional cost-
sharing obligations had the services remained in the PPS rate. 17

The application of part- B coverage rules also restricts the services that
HCFA considered excluding from the PPS to those covered under part B. Since
the agency has no authority to pay for non- covered services, excluding them
from the PPS and shifting their coverage to part B would eliminate any
reimbursement for them. For example, no expensive medications were excluded
from the rate because most self- administered prescription drugs are not
covered under part B. Agency officials have noted that by keeping these
services in the PPS rate, providers at least receive a higher daily payment
rate than if these services were excluded. Yet the higher daily rate is
unlikely to cover the costs of these services for any given patient, so that
SNFs would have a financial incentive to avoid admitting anyone who is on
expensive drug regimens.

16 P. L. 106- 113, div. B, sec. 1000( a)( 6) [H. R. 3426, title I, sec. 103(
a)( 3))], 113 Stat. 1501, 1536 and 1501A- 325 (codified at 42 U. S. C.
1395yy( e)( 9)). 17 Most beneficiaries have supplemental coverage, which
usually pays for part- B coinsurance. Those without supplemental coverage
would be responsible for these liabilities. HCFA?s Interpretation of

BBRA Exclusion Language Increases Beneficiary Liability and Limits Coverage

Page 13 GAO- 01- 816 Excluded Skilled Nursing Facility Services

CMS?s policy of excluding certain services only when provided in hospital
settings creates an incentive for SNFs to send beneficiaries to hospitals
rather than other ambulatory settings to receive those services. 18 The
siteof- service policy raises concerns that SNFs will make decisions about
where services will be provided based solely on financial considerations,
even though other settings may be clinically appropriate. Almost all of the
clinical experts we consulted disagreed with current policy to exclude
ambulatory surgery procedures and imaging services (CT scans and MRIs) only
when provided in hospital outpatient departments. The majority argued that
nonhospital settings provide similar services and therefore should be
treated the same as hospital outpatient departments, though several
cautioned that hospitals may be a more appropriate treatment site for
certain services provided to high- risk beneficiaries. Some of the
clinicians commented that many nonhospital settings are much better than
hospitals at handling frail elderly patients, for example, in terms of
facilitating their transportation, admission, and discharge.

This site- of- service policy also has important cost implications. Because
Medicare?s payments are often higher for services provided in hospital
outpatient settings compared with other ambulatory settings, Medicare
expenditures may be higher as well. For example, in 2001, Medicare pays
about $50 more for a CT scan of the head when furnished in an outpatient
department of a hospital compared to one furnished in a freestanding imaging
center in the same area. Likewise, beneficiary cost sharing is likely to be
substantially higher when services are provided in hospital settings
compared with other ambulatory settings.

Furthermore, ambulance transport is paid for separately only in conjunction
with the provision of the services excluded when provided in a hospital
outpatient department. 19 Most of the clinical experts we consulted
disagreed with CMS?s current policy, saying that patients receiving some of
the other excluded services, such as chemotherapy, are equally likely to
need ambulance transport.

18 Services excluded only when provided in hospital outpatient departments
include cardiac catheterization, CT scans, MRIs, ambulatory surgery
procedures performed in an operating room, emergency services, radiation
therapy, angiography, and lymphatic and venous procedures.

19 Ambulance transport is also paid for separately in conjunction with
dialysis. Exclusions Based on Site

of Service May Raise Costs to Beneficiaries and Program

Page 14 GAO- 01- 816 Excluded Skilled Nursing Facility Services

Payments for medical emergencies are made outside of the PPS rate to help
ensure appropriate treatment and protect SNFs that arrange for prompt
medical care. Medicare?s definition of what services constitute

?emergency? care is broad to provide important protection for beneficiaries.
20 However, the exclusion for emergency services, combined with the broad
definition of emergency, could invite abuse and increase Medicare
expenditures. 21 SNFs have a financial incentive to send beneficiaries to
emergency departments for nonemergent care to receive separate payments for
services that otherwise would be included in the PPS rate. The clinical
experts we consulted uniformly agreed that the provision was open to overuse
by SNFs. They gave examples of patients sent by SNFs to emergency rooms
because they needed expensive drugs or time- consuming nursing services.
While CMS is reviewing claims to make sure it is not paying twice for the
same service, it is not analyzing whether the services should have been
provided in the emergency room, nor is it identifying if particular
providers appear to be overusing the emergency room exclusion.

Congress and HCFA recognized that certain services needed to be excluded
from the SNF PPS rate to help ensure beneficiary access to appropriate care
and to financially protect the SNFs that take care of highcost patients. The
criteria used to identify services- high cost, infrequently provided during
a SNF stay, and not likely to be overprovided- and the services currently
excluded appear reasonable. Although the criteria and current exclusions
appear reasonable, questions remain about whether beneficiaries have
appropriate access to services that are covered in the rate or whether
additional services should have been excluded. A second concern is that
Medicare coverage for excluded facility services has been shifted from part
A to part B, which will increase beneficiary liability and limit the
services considered for exclusion. In addition, beneficiary liability and
program spending may increase because

20 In HCFA?s Program Memorandum A- 98- 37, HCFA defines emergency services
as ?those

necessary to prevent death or serious impairment of health and, because of
the danger to life or health, require use of the most accessible hospital
available and equipped to furnish those services? (as defined under
regulation at 42 C. F. R. sec. 424.101).

21 One study examining transfers to emergency rooms and hospitals in
California found that over a third of SNF transfers to emergency rooms were
inappropriate and could have been treated in a lower level of care. See
Debra Saliba, et al, ?Appropriateness of the Decision to Transfer Nursing
Facility Residents to the Hospital,? Journal of the American Geriatrics
Society 48: pp. 154- 163, 2000. Incentive Exists to Classify

Certain Hospital Outpatient Services as Emergencies To Gain Separate
Payments

Conclusions

Page 15 GAO- 01- 816 Excluded Skilled Nursing Facility Services

certain services are excluded only when provided in hospital settings, thus
discouraging the use of less expensive, clinically appropriate sites of
service. Finally, though providing important broad protection for
beneficiaries, excluding services from the PPS rate when they are provided
in emergency rooms may lead to overuse of this setting and could
unnecessarily increase Medicare spending.

CMS does not plan to collect data on all services provided to beneficiaries
during their SNF stays. Without these data, CMS will be hampered in its
efforts to update the exclusions over time. The lack of information about
services provided to beneficiaries during their SNF stays will also severely
limit efforts to refine the payment system. An analysis of which settings
(for example, SNF, hospital outpatient department, ambulatory care, and
emergency department) are used to deliver services to SNF patients is also
important to ensure that services are provided at the most efficient and
appropriate site.

Because coverage under part B increases beneficiary liability and limits the
services that are considered for exclusion from the SNF PPS, Congress may
wish to clarify whether Medicare coverage of facility services excluded from
the SNF PPS rate should be provided under part B or under part A.

To help ensure that services are provided in the most appropriate setting,
we recommend that the Administrator of CMS exclude services from the PPS if
they meet the exclusion criteria, regardless of where they are provided.

To refine and adjust the SNF PPS and to ensure adequate beneficiary access
to appropriate medical services, we recommend that the Administrator of CMS
develop a strategy to collect and analyze cost and utilization data on all
services provided to Medicare beneficiaries during a SNF stay.

In its comments on a draft of this report (see app. I), CMS stated that in
excluding services from the SNF PPS, it was concerned about maintaining the
integrity of the PPS and the intent of the consolidated billing requirement
that SNFs be responsible for essentially all residents? services Matter for

Congressional Consideration

Recommendations for Executive Action

Agency Comments

Page 16 GAO- 01- 816 Excluded Skilled Nursing Facility Services

provided during a Medicare part- A covered stay. It disagreed with our
recommendation to eliminate the site- of- service restriction on certain
excluded services, stating that it has used its administrative authority to
modify the BBRA provisions to the fullest extent possible and noted in its
technical comments that this recommendation needed to be directed to
Congress. It stated that these services require the intensity of hospital
outpatient settings to be provided safely and effectively but added that it
would consider reincorporating these services back into the SNF PPS rate
once they could be provided safely elsewhere. In addition, CMS agreed with
our analysis that excluding services from the PPS increases beneficiary
liability. Further, CMS acknowledged the need for cost and utilization data
but indicated that its previous efforts to collect such information met with
intense industry opposition. Finally, in its technical comments it
acknowledged that monitoring the use of emergency room services is important
and may be a focus for program safeguard contractor activities.

We agree with CMS that additional service exclusions must balance the need
to protect SNFs and beneficiaries with the need to maintain the costcontrol
potential of the PPS and be mindful of the effect exclusions have on
beneficiary liability. However, we disagree with CMS?s rationale regarding
the site- of- service exclusions. Medicare currently covers these services
in other settings for other beneficiaries. Although CMS used its broad
administrative authority to redefine SNF residency status to exclude
patients receiving certain services in hospital outpatient departments, it
gave no reason as to why it could not use this same authority to redefine
the residency status of beneficiaries receiving the same services in other
settings. We believe that services should be provided in the most
appropriate setting and that this site- of- service distinction will
effectively limit the choice of where services are provided for
beneficiaries in SNFs. Except to acknowledge that shifts in coverage
increase beneficiary liability for these services, CMS did not address the
shift in coverage from part A to part B that results from its policies. We
believe part- B payment rules could be applied to excluded services while
maintaining part- A coverage. In our Matters for Congressional
Consideration, we state that Congress should clarify if coverage for
facility services excluded from the PPS should be provided under part A or
part B. Finally, while recognizing the importance of cost and utilization
data, CMS raised concerns about the administrative burden this collection
might impose. We believe that CMS should explore less burdensome ways to
collect adequate data to evaluate the current service exclusions or
additional exclusions proposed by the industry. Without a data collection
strategy, it will be difficult to make informed decisions about refinements
to the PPS over time.

Page 17 GAO- 01- 816 Excluded Skilled Nursing Facility Services

We are sending copies of this report to the Administrator of CMS and
interested congressional committees. We will also make copies available to
others upon request.

If you have any other questions about this report, please call me at (202)
512- 7119 or Carol Carter, Assistant Director, at (312) 220- 7711. Cristina
Boccuti and Dan Lee also contributed to this report.

Laura A. Dummit Director, Health Care- Medicare Payment Issues

Page 18 GAO- 01- 816 Excluded Skilled Nursing Facility Services

List of Committees

The Honorable Max Baucus Chairman The Honorable Charles E. Grassley, Jr.
Ranking Minority Member Committee on Finance United States Senate

The Honorable Bill Thomas Chairman The Honorable Charles B. Rangel Ranking
Minority Member Committee on Ways and Means House of Representatives

The Honorable W. J. ?Billy? Tauzin Chairman The Honorable John D. Dingell
Ranking Minority Member Committee on Energy and Commerce House of
Representatives

Appendix I: Comments From the Centers for Medicare and Medicaid Services

Page 19 GAO- 01- 816 Excluded Skilled Nursing Facility Services

Appendix I: Comments From the Centers for Medicare and Medicaid Services

Appendix I: Comments From the Centers for Medicare and Medicaid Services

Page 20 GAO- 01- 816 Excluded Skilled Nursing Facility Services

Appendix I: Comments From the Centers for Medicare and Medicaid Services

Page 21 GAO- 01- 816 Excluded Skilled Nursing Facility Services (201087)

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