Medicare Home Health Care: Payments to Home Health Agencies Are  
Considerably Higher than Costs (06-MAY-02, GAO-02-663). 	 
                                                                 
The Balanced Budget Act of 1997 significantly changed Medicare's 
home health care payments to home health agencies (HHAs). Under a
prospective payment system (PPS), HHAs are paid a fixed amount,  
adjusted for beneficiary care needs, for providing up to 60 days 
of care---termed a "home health episode."  The act also imposed  
new interim payment limits to moderate spending until the PPS	 
could be implemented. Although PPS was designed to lower Medicare
spending below what it was under the interim system, GAO found	 
that Medicare's payments for full home health care episodes were 
35 percent higher than estimated in the first six months of 2001.
These disparities indicate that Medicare's PPS overpays for	 
services actually provided, although some HHAs facing		 
extraordinary costs not accounted for by the payment system may  
be financially disadvantaged.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-663 					        
    ACCNO:   A03263						        
  TITLE:     Medicare Home Health Care: Payments to Home Health       
Agencies Are Considerably Higher than Costs			 
     DATE:   05/06/2002 
  SUBJECT:   Cost analysis					 
	     Health care costs					 
	     Health care programs				 
	     Home health care services				 
	     Managed health care				 
	     Overpayments					 
	     Medicare Interim Home Health Payment		 
	     System						 
                                                                 
	     Medicare Program					 
	     Medicare Prospective Payment System		 

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GAO-02-663
     
Report to Congressional Committees

United States General Accounting Office GAO

May 2002 MEDICARE HOME HEALTH CARE

Payments to Home Health Agencies Are Considerably Higher than Costs

GAO- 02- 663

Page i GAO- 02- 663 Medicare Home Health Care Letter 1 Results in Brief 2
Background 3

Home Health PPS Episode Payments Are Considerably Higher than Estimated
Costs of Care Provided 7 Conclusions 9 Matters for Congressional
Consideration 10 Agency Comments and Our Evaluation 10

Appendix I Scope and Methodology 14

Appendix II Comments from the Centers for Medicare and Medicaid Services 16

Appendix III GAO Contacts and Staff Acknowledgments 18

Tables

Table 1: Average Estimated Cost per Home Health Episode and Average Home
Health Episode Payment, January- June 2001 8 Table 2: Payment Amounts
Compared to Average Estimated Costs

for 10 Most Frequent Home Health Payment Groups, January- June 2001 9
Contents

Page ii GAO- 02- 663 Medicare Home Health Care Abbreviations

AAHomecare American Association for Homecare BBA Balanced Budget Act of 1997
BIPA Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of
2000

CMS Centers for Medicare and Medicaid Services HCFA Health Care Financing
Administration HHA home health agency HHRGs home health resource groups IPS
interim payment system LUPA low utilization payment amount NAHC National
Association for Home Care PEP partial episode payment PPS prospective
payment system

SAF Standard Analytic File SCIC significant change in condition VNAA
Visiting Nurse Associations of America

Page 1 GAO- 02- 663 Medicare Home Health Care May 6, 2002 Congressional
Committees

In response to rapidly rising home health spending from the late 1980s
through the mid- 1990s, the Congress enacted major changes to Medicare?s
home health payments in the Balanced Budget Act of 1997 (BBA). 1 These and
subsequent changes culminated in the implementation of a prospective payment
system (PPS) on October 1, 2000, which provides incentives to home health
agencies (HHAs) to operate efficiently. Under

the PPS, HHAs are paid a fixed amount, adjusted for a beneficiary?s care
needs, for providing up to 60 days of care, termed a home health episode.
The BBA also created an interim payment system (IPS) that imposed new
payment limits to moderate spending until the PPS could be implemented.

The PPS was designed to lower Medicare spending below what it was under the
IPS. This spending reduction was to be achieved by setting the PPS episode
payment amount so that total home health spending under the PPS in fiscal
year 2000 would equal what would have been spent had the interim limits been
reduced by 15 percent. Subsequent legislation

delayed implementation of the mandated reduction to the episode payment
amount until October 2002. 2 The Centers for Medicare and Medicaid Services
(CMS) 3 has determined that the fiscal year 2003 episode payment rate would
have to be reduced by about 7 percent to achieve the mandated level of
savings. 4 To help decide whether to implement, modify, or eliminate the
reduction

to Medicare home health payments, the Congress directed us to evaluate 1
Pub. L. No. 105- 33, title IV, subtitle G, ch. 1, 111 Stat. 251, 466- 475. 2
Section 501 of the Medicare, Medicaid and SCHIP Benefits Improvement and
Protection Act of 2000 (BIPA) (Pub. L. No. 106- 554, Appendix F., 114 Stat.
2763, 2763A- 529), delayed the mandated reduction until October 1, 2002.

3 CMS, the agency responsible for administering Medicare, was known as the
Health Care Financing Administration (HCFA) until July 1, 2001. This report
refers to the agency as HCFA when referring to actions before the name
change and as CMS when referring to actions taken since the name change. 4
For fiscal year 2003, CMS will also update the payment rate for inflation by
the increase in the home health market basket, which is projected (in April
2002) to be about 2. 1 percent. United States General Accounting Office
Washington, DC 20548

Page 2 GAO- 02- 663 Medicare Home Health Care payments under the PPS. 5 To
do this, we estimated average home health episode costs and calculated
average episode payments for the first 6

months of 2001. We also interviewed industry representatives and officials
from CMS and reviewed regulations and studies of the home health PPS. We
performed our work from November 2001 through April 2002 in accordance with
generally accepted government auditing standards. (For a discussion of our
scope and methodology, see appendix I.)

Medicare?s payments for full home health care episodes were, on average,
about 35 percent higher than the estimated costs of home health care
provided in the first 6 months of 2001. This disparity results from an
episode payment amount that was initially set assuming a higher number of
visits than was being provided prior to the PPS. After the PPS was
implemented, HHAs further reduced the number of visits provided per episode,
which lowered their costs. At the same time, a higher proportion of
beneficiaries receiving home health care was categorized into the more
intensive payment groups, which generated higher payments. 6 Across the
Medicare PPS payment groups, there was considerable variation in the
relationship between payments and estimated costs. Payments were above
estimated costs for 75 of the 80 payment groups. For five of the payment

groups, payments were slightly below or about equal to estimated costs.
These payment and cost disparities indicate that Medicare?s PPS, which was
designed to ensure adequate payments for HHAs that operate

efficiently, overpays many HHAs for the services that were actually
provided, although some HHAs that face extraordinary costs not accounted for
by the payment groups may be financially disadvantaged.

Because Medicare payments for home health care far exceed associated
estimated costs, the Congress should consider allowing the mandated
reduction to payments to be implemented. However, as we have stated before,
we believe that the incentives of the episode- based PPS need to be
moderated to protect beneficiaries from underservice, the Medicare program
from overpaying for services, and HHAs from potential 5 Section 501 of BIPA.

6 These home health payment groups are used to adjust payments to account
for differences in beneficiary care needs. They reflect three dimensions of
care: clinical severity, functional severity, and service utilization. They
are known as home health resource groups (HHRGs). Results in Brief

Page 3 GAO- 02- 663 Medicare Home Health Care underpayments. 7 Therefore, we
continue to believe that the PPS should incorporate risk sharing of
financial gains and losses between the

Medicare program and HHAs. In written comments on a draft of this report,
CMS stated that our findings are consistent with its preliminary analysis of
data from the first year of the PPS, but that HHA costs cannot be known with
certainty until Medicare cost reports are available. CMS expressed concern
about implementing risk sharing as part of the home health PPS, stating that
risk sharing is inconsistent with providing timely and predictable payments
under the PPS, is administratively difficult, and is not necessary because
our concerns about possible overpayments or underpayments to HHAs

can be addressed in other ways. Concerning CMS? first point, our episode
cost estimates are based on the actual number and mix of visits provided to
Medicare beneficiaries during the first 6 months of 2001 and the pervisit
cost estimates used by the Heath Care Financing Administration (HCFA) to set
the initial episode payments, updated for inflation and adjusted for the
change in average visit time. We note that CMS has experience in
administering payment adjustments similar to risk sharing that rely on
actual provider experience while ensuring that payments are

timely and predictable. Furthermore, monitoring activities to detect
overpayments or underpayments have not yet been implemented. In oral
comments on a draft of this report, representatives from three home

health care associations stated that they disagreed with our conclusions and
believe that a reduction in Medicare?s payments will harm the industry.
However, the magnitude of the disparity between payments and estimated costs
demonstrates that the reduction would not harm the industry. Risk sharing
would provide protection to those HHAs that may incur costs that are higher
than these estimates.

Medicare?s home health benefit enables certain beneficiaries with postacute-
care needs (such as recovery from joint replacement) and chronic conditions
(such as congestive heart failure) to receive care in their homes. To
qualify for home health care, beneficiaries must be confined to

7 U. S. General Accounting Office, Medicare Home Health Care: Prospective
Payment System Will Need Refinement as Data Become Available, GAO/ HEHS- 00-
9, (Washington, D. C.: Apr. 7, 2000) and Medicare Home Health Care:
Prospective Payment System Could Reverse Recent Declines in Spending, GAO/
HEHS- 00- 176, (Washington, D. C.: Sept. 8, 2000). Background

Page 4 GAO- 02- 663 Medicare Home Health Care their residence (?
homebound?); 8 require part- time or intermittent skilled nursing, physical
therapy, or speech therapy; be under the care of a

physician; and have the services furnished under a plan of care prescribed
and periodically reviewed by a physician. If these conditions are met,
Medicare will pay for the following types of visits: skilled nursing;
physical, occupational, and speech therapy; medical social service; and home
health aide. As long as beneficiaries continue to remain eligible for home
health services, they may receive an unlimited number of visits.
Beneficiaries are not liable for any out- of- pocket costs for this benefit.

Medicare home health payments grew at an average annual rate of 25 percent
between 1990 and 1997, more than three times the rate of spending growth for
the entire Medicare program. The growth in spending was attributable
primarily to increases in the number of visits provided and not in the
payment per visit. The number of Medicare beneficiaries receiving home
health almost doubled during that period, from 57 to 109 beneficiaries per
1,000. At the same time, the average number of visits provided per home
health user grew from 36 to 73 visits. The rapid growth

in home health use was due, in part, to the cost- based payment method.
Under the cost- based system, HHAs were paid their costs up to a per- visit
limit for each visit provided. 9 This method, at a time when there was
little program oversight, offered few incentives to provide visits
efficiently or only when needed.

By 1997, home health utilization- as measured by the number of home health
users per 1, 000 Medicare beneficiaries and the number of visits provided-
varied widely across geographic regions. For example, 48

Medicare beneficiaries per 1,000 in Hawaii received home health care in
1997. In the same year, more than 157 beneficiaries per 1,000 received home
health care in Louisiana. Meanwhile, Medicare home health users in

Washington received an average of 32 visits, compared to an average of 161
visits per user in Louisiana. This wide variation in use persisted even
after controlling for patient diagnosis. This variability is partly due to
the lack of standards for necessary or appropriate care. Furthermore, even
the most basic unit of service- the visit- was not well defined in terms of
8 Beneficiaries are homebound when they have a condition that results in a
normal inability

to leave home except with considerable and taxing effort, and absences from
home are infrequent or of relatively short duration or are attributable to
receiving medical treatment.

9 There were separate limits for each type of visit, e. g., skilled nursing
and home health aide. Pre- BBA Spending and

Service Use

Page 5 GAO- 02- 663 Medicare Home Health Care either the amount of time
spent with a patient or the type of services provided.

To constrain Medicare home health spending growth, BBA required HCFA to
replace Medicare?s cost- based, per- visit payment method with a PPS by
fiscal year 2000. 10 Until PPS could be implemented, BBA imposed spending
controls under the IPS: For 3 years beginning October 1, 1997, the IPS
incorporated tighter per- visit cost limits than had previously been in
place and subjected each HHA to an annual Medicare revenue cap, which was

the product of an HHA- specific, per- beneficiary amount and the number of
beneficiaries that the HHA served. 11 Under the PPS, an HHA receives a
single payment for all items and services furnished during each 60- day
episode of care. 12 The payment rate is based on the national average cost
of providing care in 1997, not an HHA?s actual costs. Because the payment is
divorced from an HHA?s cost of delivering care, an HHA that delivers care
for less than the payment

amount can profit; conversely, an HHA will lose financially if its service
costs are higher than the payment. To account for differences in beneficiary
care needs, PPS episode payments are adjusted from a base

rate (which was $2,115 in fiscal year 2001). These adjustments are based on
a classification system that groups home health beneficiaries into 80
payment groups. The payment for a beneficiary in the most intensive

payment group is approximately five times greater than the payment for a
beneficiary in the least intensive group. In fiscal year 2001, episode
payments ranged from $1, 114 to $5,947.

10 Section 4603 of BBA, 111 Stat. 467. The Omnibus Consolidated and
Emergency Supplemental Appropriations Act of 1999 (Pub. L. No. 105- 277,
division J, title V, Sec. 5101, 112 Stat. 2681, 2681- 914) delayed the PPS
implementation by 1 year to October 1, 2000. 11 The per- beneficiary amount
was a blend of each agency?s 1994 average annual payments for treating a
Medicare beneficiary and a regional or national average annual amount. For
agencies that had not participated in Medicare for a full year by October
1994, the amount

was based on the 1994 national median payment. 12 If four or fewer visits
are provided during the 60- day episode, Medicare makes a lowutilization
payment adjustment (LUPA) and pays a per- visit amount. HHAs receive less
than a full episode payment, known as a partial episode payment (PEP), if
the episode of care is interrupted, such as when a beneficiary elects to
transfer to another HHA, or when a beneficiary is discharged because
treatment goals are attained but then returns for additional services to the
same HHA. Payments are also adjusted when the beneficiary experiences a
significant change in condition (SCIC). An HHA may receive an additional
outlier payment for certain extremely high- cost episodes. BBA Changes to
Home

Health Payment Policies

Page 6 GAO- 02- 663 Medicare Home Health Care We have reported the strong
financial incentives under the home health PPS to reduce the costs of
providing an episode of care. 13 HHAs can do this by reducing unnecessary or
excessive visits, delivering care more

efficiently, or underserving beneficiaries. We expressed concern that it may
be hard to detect when the latter occurs. The lack of standards for
necessary or appropriate care makes it difficult to review care and take
steps to ensure that needed services are being delivered. We also said that
the PPS could lead to substantial overpayments to some HHAs relative to the
level of services being provided. Further, we noted industry concerns about
the ability of some HHAs to respond to PPS incentives to reduce their costs
and about inadequacies in the method used to adjust payments to account for
differences in beneficiary care needs. 14 As a result of these concerns, we
recommended that risk sharing be

incorporated into the PPS design. 15 Risk sharing would limit the total
losses and gains an HHA could experience over a period of time for treating
beneficiaries by establishing formulas to share losses or gains

with the Medicare program. This would involve a settlement process in which
an HHA?s actual costs of delivering care over the relevant period would be
compared to its actual payments. Such an approach would simultaneously
protect beneficiaries against underservice, the Medicare

program from overpaying for services, and HHAs serving beneficiaries with
greater than average needs when the costs are not accounted for in the
payment adjustments. HCFA did not agree with our recommendation, stating
that the PPS design and payment adjustments would address our concerns and
that risk sharing would be difficult to implement. We subsequently suggested
that the Congress consider requiring HCFA to implement risk sharing with the
PPS. 16 13 GAO/ HEHS- 00- 9, and GAO/ HEHS- 00- 176.

14 GAO/ HEHS- 00- 9. 15 GAO/ HEHS- 00- 9. 16 GAO/ HEHS- 00- 176. Financial
Incentives of

Episode- Based Payments

Page 7 GAO- 02- 663 Medicare Home Health Care The average episode payment
HHAs received to provide an episode of care in the first 6 months of 2001
was about 35 percent higher than the average estimated cost of providing
that care. 17 The average episode payment,

accounting for the mix of beneficiaries treated in the first 6 months of
2001, was $2,691. (See table 1.) During this period, we estimated that the
cost of providing an episode of care was $1,997 after adjusting for the mix
of services provided by agencies and changes in the average time spent for
each type of visit since the introduction of the PPS.

This large difference between the average episode payment and estimated cost
is due to three factors. First, the PPS episode payment amount was
calculated on the assumption that about 32 visits would be provided during
an average episode, although immediately prior to PPS implementation only
about 29 visits per episode were provided. Second, HHAs have further lowered
their costs since PPS by providing, on average, only about 22 visits per
episode during the first half of 2001. Third, HHA

payments have increased because a larger proportion of home health users
have been categorized into higher payment groups.

While the PPS adjusts payment rates to account for expected variation in
costs due to patient care needs, the relationship between average payments
and average estimated costs masks wider differences between payments and
estimated costs across the 80 home health payment groups. The relationship
between payments and estimated costs for the 10 payment groups that account
for almost half of home health episodes ranged from 72 percent above the
estimated cost to 4 percent below in the first 6 months of 2001. (See table
2.) For the five payment groups with the lowest payments relative to
estimated costs, which accounted for 8 percent of all episodes, the payment
ranged from about 9 percent below to about equal the average estimated cost
of services provided. The payment was greater than the average estimated
cost for the remaining groups.

For any HHA, the relationship between Medicare payments and the costs of
providing care will likely vary from the averages we report here. The

17 Less than 16 percent of all episodes in the first 6 months of 2001
received a LUPA. These were not included in our analysis because they are
not reflective of episode payments or costs. Episodes that required a SCIC
adjustment (which may have increased or decreased the payment), a PEP
adjustment (which reduced the payment), or an outlier adjustment (which
increased the payment) were included although SCIC, PEP, and outlier
adjustments were not reflected in our reported payments. Episodes with SCIC
or PEP adjustments were less than 5 percent and episodes with outlier
adjustments were less than 3 percent of all

episodes in the first 6 months of 2001. Home Health PPS

Episode Payments Are Considerably Higher than

Estimated Costs of Care Provided

Page 8 GAO- 02- 663 Medicare Home Health Care PPS was designed to provide
adequate payments to HHAs that operate efficiently and to provide incentives
for HHAs to become more efficient. But certain HHAs may have costs higher
than payments if they face extraordinary costs not accounted for by the PPS
payment groups.

Table 1: Average Estimated Cost per Home Health Episode and Average Home
Health Episode Payment, January- June 2001

Type of visit Estimated cost per visit Average visits per episode a Adjusted
cost per episode b Medical social services $153.59 0.20 $31.71 Speech
therapy 113.26 0.17 19.49 Occupational therapy 104.76 0.75 78.57 Physical
therapy 104.05 4.24 452.63 Skilled nursing 94.96 10.63 1,035.64

Home health aide 41.75 5.63 228.40 Total 21.63 $1,919.70

Additional costs associated with nonroutine medical supplies, other therapy

services, and changes in reporting requirements $77.11 Average estimated

cost per episode $1,996.81 Average payment per episode c $2,691.28

a Excludes all episodes with four or fewer visits. b Adjusted for any
increases or decreases in the time spent on visits in 2001 compared to 2000.
C Average payment across all payment groups, excluding low- utilization
episodes. Payment does not include 10 percent rural add- on amount for
episodes provided to rural beneficiaries beginning April 1, 2001. Source:
HCFA Final Rule, July 3, 2000, and GAO analysis of 1.48 million episodes
from CMS? home health claims (January- June 2001).

Page 9 GAO- 02- 663 Medicare Home Health Care Table 2: Payment Amounts
Compared to Average Estimated Costs for 10 Most Frequent Home Health Payment
Groups, January- June 2001

Payment group a Share of episodes (in percent) Payment amount b Payments as
a

percentage of average estimated cost

C2F2S0 8 $2,105 105 C1F2S0 8 $1,736 117 C2F2S2 5 $4,132 168 C1F2S2 5 $3,762
172 C1F1S0 5 $1,516 111 C0F1S0 4 $1,314 106 C2F1S0 4 $1,886 96 C0F2S0 4
$1,533 110 C3F4S0 3 $3,387 149 C2F4S0 3 $2,539 136

Total Share c 48 a Payment group classifications represent three dimensions
of care: clinical severity (C), functional severity (F), and service
utilization (S). There are four clinical severity levels (0- 3), five
functional severity levels (0- 4), and four service utilization levels (0-
3). b Payment does not include 10 percent rural add- on amount for episodes
provided to rural beneficiaries beginning April 1, 2001. c Share of episodes
does not total to 48 percent due to rounding. Source: HCFA Final Rule, July
3, 2000, and GAO analysis of 1.48 million episodes from CMS? home health
claims (January- June 2001). The Medicare program is paying HHAs on average
considerably more than the estimated cost of care beneficiaries are
receiving. Consequently, implementation of the BBA- mandated 15 percent
payment reduction, which would lower fiscal year 2003 PPS payments by 7
percent, should not affect HHAs? ability to serve Medicare beneficiaries.
This payment reduction would move the Medicare program closer to becoming a
prudent purchaser of home health care, but the reduction by itself is not
sufficient. A single payment to cover all services provided during a 60- day

episode of care, combined with the lack of standards for what constitutes
necessary or appropriate home health care, leaves beneficiaries vulnerable
to underservice, Medicare vulnerable to future overpayments, and HHAs with a
disproportionate number of beneficiaries with extensive needs vulnerable to
underpayments. Implementing the 15 percent reduction would not lessen these
vulnerabilities. This is why we have previously

recommended that the PPS include risk sharing to simultaneously protect
beneficiaries, the Medicare program, and HHAs. Conclusions

Page 10 GAO- 02- 663 Medicare Home Health Care The Congress should consider
making no change in the requirement for a reduction in Medicare home health
payments. We continue to urge the

Congress to require CMS to incorporate risk sharing into the PPS design. In
written comments on a draft of this report, CMS stated that our findings are
consistent with its preliminary analysis of data for the first year of the
PPS. It noted that cost report data, which are not yet available for the
first year of the PPS, would be required to determine the costs of home
health services under the PPS with certainty. CMS reiterated its concerns
about implementing risk sharing as a part of the PPS. It believes that risk
sharing would undermine the main benefit of PPS, which is payments that are

timely and predictable. Further, CMS stated its belief that the outlier
payment policy under the home health PPS and planned monitoring activities
should mitigate our concern that some HHAs may be vulnerable to
underpayments. Finally, CMS stated that risk sharing is administratively

difficult. Although cost report data would more accurately reflect an HHA?s
costs, our episode cost estimates build on historic visit costs, adjusted
for inflation and changes in visit time, and reflect actual service use, a
major determinate of episode costs. We believe that the new evidence we
present on the wide disparity between payments and estimated costs on
average

and across payment groups demonstrates the need for and the value of risk
sharing in conjunction with the home health PPS. Risk sharing would not
remove the incentives under the PPS for HHAs to provide care efficiently,
because they would continue to benefit financially when their costs are
below their payments and lose financially when their costs are above their
payments. Yet, risk sharing would mitigate extreme gains and losses under
the PPS. While the monitoring activities and refinements that CMS discusses
such as revisions to the payment groups could mitigate extreme gains or
losses, it could be some time until they are implemented.

Furthermore, outlier payments, which account for less than 3 percent of
payments, are not by themselves sufficient to protect vulnerable HHAs that
have higher than average costs across a number of patients, nor do they
protect the Medicare program from excessive spending.

We believe that CMS could overcome any administrative difficulties in
implementing risk sharing. CMS incorporated a risk- sharing arrangement in
its demonstration project on the home health PPS while ensuring predictable
and timely payments. We note that CMS has considerable Matters for

Congressional Consideration

Agency Comments and Our Evaluation

Page 11 GAO- 02- 663 Medicare Home Health Care experience in adjusting
prospective payments to providers based on expectations for a provider?s
costs in the coming year, most recently in

implementing the hospital outpatient PPS, which has a provision to protect
hospitals from losses. CMS? comments are included as appendix II. We
received oral comments on a draft of this report from representatives of
three home health care associations- American Association for Homecare
(AAHomecare), National Association for Home Care (NAHC),

and Visiting Nurse Associations of America (VNAA). These organizations
disagreed with our conclusions. All three associations expressed concern
about the effect of a potential payment reduction on the industry?s
stability

and, in particular, its ability to care for medically complex patients. The
associations said it was too early in the experience of the PPS to
accurately measure home health care use, visit costs, episode costs, or
industry profit margins. VNAA stated that our cost estimates do not reflect
current fixed costs under the PPS. NAHC raised questions about the

timeliness of payments if risk sharing is a part of the home health PPS. The
associations said that more information was needed on how lowutilization
episodes, partial episodes, and outlier payments would affect the
relationship between average episode costs and payments to HHAs.

Our results are consistent with CMS? analysis of a full year of experience
under the PPS. Our analysis of 1.48 million episodes did not consider the
payment reduction for partial episodes, payment enhancement for outliers, or
variable payment adjustments for a significant change in a beneficiary?s
condition. When calculating episode payments and estimated costs we treated
these as full episodes. The impact of these payment adjustments on average
episode payments is likely to be minimal because they are partially
offsetting and apply to less than 8 percent of episodes. Whether the visit
costs for these types of episodes is different from the average visit costs
is not known. We excluded low- utilization episodes from our analysis
because they are not paid an episode rate. HHA visits per user have been
dropping since 1997, allowing ample time for HHAs to

bring their fixed costs in line with current use patterns. The magnitude of
the difference between payments and estimated costs provides compelling
evidence that the legislated reduction would not destabilize the home health
industry. Further, risk sharing if implemented would moderate any negative
effects on the HHAs that may incur costs that are higher than these
estimates including when HHAs treat medically complex patients.

Page 12 GAO- 02- 663 Medicare Home Health Care We are sending copies of this
report to the Administrator of CMS. We will also make copies available to
others upon request. If you or your staff have any questions, please call me
at (202) 512- 7114. Other contacts and staff who contributed to this report
are listed in appendix III. Laura A. Dummit Director, Health Care- Medicare
Payment Issues

Page 13 GAO- 02- 663 Medicare Home Health Care List of Committees

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

United States Senate The Honorable W. J. ?Billy? Tauzin, Chairman The
Honorable John D. Dingell Ranking Minority Member Committee on Energy and
Commerce

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

House of Representatives

Appendix I: Scope and Methodology Page 14 GAO- 02- 663 Medicare Home Health
Care We conducted our analyses using Medicare provider, claims, and
beneficiary files for calendar years 2000 and 2001. We included only those

providers that were listed as active in each year. For episodes ending on
January 1, 2001 through June 30, 2001, we used all final bills from the home
health Standard Analytic File (SAF) for 2001 that were available as of
January 24, 2002. Our file of 1. 48 million episodes, which excludes all

low- utilization episodes, does not include any claims for the first 6
months of 2001 submitted after January 24, 2002. For 2000, we used all final
bills ending on January 1, 2000 through June 30, 2000. To compute our
estimate of average episode costs, we used HCFA?s pervisit cost estimates
that were used to establish the PPS episode rates and that were calculated
from the sample of fiscal year 1997 audited costs reports. 1 The per- visit
costs, which include all costs of home health services covered and paid for
on a reasonable cost basis, were inflated to

2001 cost levels using the market basket index for home health services.
Then we adjusted the per- visit costs to account for the change in the time
spent for each type of visit in 2001 compared to 2000. We estimated episode
costs by multiplying the adjusted per- visit cost for each type of visit by
the average mix of visits provided in each payment group in a 2001 episode.
We also added an additional amount for the costs of other services not
included in the per- visit costs. 2 Our methodology assumes that the
relationship between direct patient care costs and overhead costs has

remained the same over time and therefore that administrative costs have not
increased or decreased since the PPS.

1 See Medicare Program: Prospective Payment System for Home Health Agencies,
65 Federal Register 41,128 (2000). HCFA also made several additional
adjustments to the basic cost- per- visit calculations, including increasing
the audited cost report data for nonroutine medical supplies, and decreasing
costs for providers affected by the per- visit limits (see 65 Federal
Register 41,170). 2 The additional services include certain therapies not in
the visits, additional medical supplies, and costs associated with new
reporting requirements. See Medicare Program: Prospective Payment System for
Home Health Agencies, 65 Federal Register 41,128 (2000). Appendix I: Scope
and Methodology

Appendix I: Scope and Methodology Page 15 GAO- 02- 663 Medicare Home Health
Care We calculated the average payment as the payment amount for each of the
80 payment groups weighted by the proportion of all episodes in 2001

provided within each payment group. We interviewed CMS officials and
industry representatives from the American Association for Homecare,
National Association for Home Care, Gentiva Health Services, Rocky Mountain
Health Care, and the Visiting Nurse Associations of America regarding the
changes in provider practices since the implementation of PPS.

Appendix II: Comments from the Centers for Medicare and Medicaid Services
Page 16 GAO- 02- 663 Medicare Home Health Care Appendix II: Comments from
the Centers for Medicare and Medicaid Services

Appendix III: GAO Contacts and Staff Acknowledgments Page 18 GAO- 02- 663
Medicare Home Health Care James E. Mathews, (202) 512- 9427 Nancy Edwards,
(202) 512- 3340 In addition to those named above, Leslie V. Gordon, Dan Lee,
Carolyn Manuel- Barkin, Lynn Nonnemaker, and Paul M. Thomas made key
contributions to this report. Appendix III: GAO Contacts and Staff

Acknowledgments GAO Contacts Staff Acknowledgments (290147)

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