Medicare Home Health Payment: Nonroutine Medical Supply Data	 
Needed to Assess Payment Adjustments (15-AUG-03, GAO-03-878).	 
                                                                 
Under Medicare's prospective payment system (PPS), home health	 
agencies receive a single payment, adjusted to reflect the care  
needs of different types of patients, for providing up to 60 days
of home health care. Some home health industry representatives	 
have suggested that certain nonroutine medical supplies (such as 
wound-care dressings) should be excluded from this payment and	 
reimbursed separately because of their high cost. The Medicare,  
Medicaid, and SCHIP Benefits Improvement and Protection Act of	 
2000 required GAO to examine home health agency payments for	 
nonroutine medical supplies and recommend whether payment for any
such supplies should be excluded from the PPS.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-878 					        
    ACCNO:   A08058						        
  TITLE:     Medicare Home Health Payment: Nonroutine Medical Supply  
Data Needed to Assess Payment Adjustments			 
     DATE:   08/15/2003 
  SUBJECT:   Cost analysis					 
	     Data collection					 
	     Health care costs					 
	     Health care programs				 
	     Home health care services				 
	     Medical supplies					 
	     Medicare Program					 
	     Medicare Prospective Payment System		 

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GAO-03-878

a

GAO United States General Accounting Office

Report to Congressional Committees

August 2003 MEDICARE HOME HEALTH PAYMENT Nonroutine Medical Supply Data
Needed to Assess Payment Adjustments

GAO- 03- 878

Although Medicare*s home health payment includes the average costs of
nonroutine medical supplies, adjusted payments may not reflect variation
in supply costs across types of patients. Further, home health agencies
can be paid the same amount for treating patients with quite different
supply costs. This means that under the PPS, patients who require costly
supplies may

have problems accessing home health care and the agencies that treat them
may be financially disadvantaged. This is of particular concern for
patients who have nonroutine medical supply needs that are easily
identified prior to admission or who require supplies for which there are
no lower- cost alternatives. Excluding certain nonroutine medical supplies
from the home health

payment and reimbursing them separately would help ensure that patients
have access to these supplies and that agencies are protected financially
for providing them. At the same time, this would weaken the cost- control
incentives of the PPS as well as increase patient out- of- pocket costs.
Such a policy might be warranted, however, for nonroutine medical supplies
that are high- cost, relative to the total payment, and infrequently used
because the payment adjustment to account for differences in patient needs
may not

be adequate to compensate a home health agency for providing these
supplies. Patient care representatives suggest that an additional category
of supplies

should be excluded from the payment and reimbursed separately, namely
those that a patient had been using prior to home health care to treat an
ongoing condition. Clinical experts indicated that care has been disrupted
for some patients who require these kinds of supplies because some home
health agencies have required patients to switch supplies or limited the
supplies provided to them. Although the Centers for Medicare & Medicaid
Services (CMS) has asked home health agencies to report information on
nonroutine medical supply use and cost, they have not done so. Without
this patient- specific supply data, CMS does not have the ability to
determine whether the PPS needs to be adjusted to account for nonroutine
medical supply costs or whether certain supplies should be excluded from
the payment. Under Medicare*s prospective

payment system (PPS), home health agencies receive a single payment,
adjusted to reflect the

care needs of different types of patients, for providing up to 60 days of
home health care. Some home health industry representatives have suggested
that certain nonroutine medical supplies (such as wound- care dressings)
should be excluded from

this payment and reimbursed separately because of their high cost. The
Medicare, Medicaid, and

SCHIP Benefits Improvement and Protection Act of 2000 required GAO to
examine home health agency payments for nonroutine

medical supplies and recommend whether payment for any such supplies
should be excluded from

the PPS. GAO recommends that CMS collect and analyze the data necessary to
determine whether Medicare*s

home health payments appropriately reflect the differences in nonroutine
medical supply costs across types of patients. If any problems are
identified, CMS should modify the PPS and, if necessary, seek statutory
authority to exclude

certain nonroutine medical supplies from the home health payment. CMS
agreed with GAO*s first finding and stated that it was collecting the
necessary data to evaluate Medicare payments.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 878. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Laura A. Dummit (202) 512- 7119. Highlights of GAO-
03- 878, a report to

congressional committees

August 2003

MEDICARE HOME HEALTH PAYMENT

Nonroutine Medical Supply Data Needed to Assess Payment Adjustments

Page i GAO- 03- 878 Home Health Care Nonroutine Medical Supplies Letter 1
Results in Brief 3 Background 5 Episode Payments May Not Reflect Variation
in Nonroutine Medical Supply Costs across Patients 9 Certain Nonroutine
Medical Supplies May Warrant Exclusion from

Episode Payment 11 Conclusions 13 Recommendations for Executive Action 14
Agency Comments 14 Appendix I Comments from the Centers for Medicare &
Medicaid Services 17

Abbreviations

BBA Balanced Budget Act of 1997 BIPA Medicare, Medicaid, and SCHIP
Benefits Improvement and

Protection Act of 2000 CMS Centers for Medicare & Medicaid Services DME
durable medical equipment HCFA Health Care Financing Administration HHA
home health agency

HHRG home health resource group PPS prospective payment system Contents

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Page 1 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies August
15, 2003 Congressional Committees

The Balanced Budget Act of 1997 (BBA) mandated implementation of a
prospective payment system (PPS) for home health agencies (HHA) that would
provide a predetermined payment to cover the costs of all Medicare-
covered home health visits and medical supplies delivered during home
health care. 1 Under the PPS, HHAs receive a single payment, adjusted to
reflect the care needs of the patient, for delivering up to 60 days of
care, called a home health *episode.* This episode payment is

based on the historical national average cost of providing care, not on an
HHA*s actual costs of treating any given patient. The episode payment is
intended to cover the average costs of all home health visits and medical
supplies provided during the episode* including routine and nonroutine
medical supplies. 2 The all- inclusive payment provides HHAs with strong
incentives to control their costs of care. Strategies that HHAs can use to
control episode costs include reducing the number of visits, substituting
lower paid or less skilled personnel, providing fewer or less costly
supplies, purchasing supplies more efficiently, or treating a less
expensive mix of patients.

Under the PPS, each Medicare home health patient is assigned to a payment
group based on certain clinical and service- use characteristics, and the
episode payment is adjusted to account for differences in the average
resource needs of the patients in each payment group. Even with these
payment adjustments, the Centers for Medicare & Medicaid Services (CMS)
and home health industry representatives have raised concerns

about compensating for nonroutine medical supplies under the home health
PPS. 3 Industry representatives have questioned whether the episode

1 Pub. L. No. 105- 33, S: 4603( a), 111 Stat. 251, 467- 470 (codified at
42 U. S. C S:1395fff (2000)). 2 Routine medical supplies* such as swabs,
cotton balls, and adhesive tape* are those used during the usual course of
a large share of home health visits. Nonroutine medical supplies are used
to treat a specific patient*s illness or injury and include items such as
wound care dressings, catheters, intravenous supplies, and the supplies
used to care for an ostomy (a surgically created opening in the body for
the discharge of body wastes), such as drainage bags, pouches, and skin
barriers. 3 CMS, the agency responsible for administering the Medicare
program, 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.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies payments
include all the costs of nonroutine medical supplies and whether episode
payments for different types of patients are adjusted appropriately

to reflect their nonroutine medical supply costs. CMS officials have
acknowledged that payments may be too low for certain types of patients
who require nonroutine medical supplies, such as those requiring woundcare

supplies. Some home health industry representatives have suggested that
certain nonroutine medical supplies, such as wound- care supplies* be
excluded from the episode payment and paid for separately by Medicare.
This is because with the all- inclusive payment under the PPS, patients
requiring costly nonroutine medical supplies or HHAs serving a
disproportionate number of such patients could be disadvantaged. Paying
for expensive supplies separately could diminish concerns about access to
care for patients requiring these nonroutine medical supplies and protect
HHAs that treat them. This may be particularly appropriate for high- cost,
infrequently provided nonroutine medical supplies because Medicare*s
payment is based on the average cost of treating all patients within a
group. On the other hand, paying for specified supplies separately would
dampen the incentives for HHAs to deliver services efficiently since HHAs
would receive additional payments if they selected supplies that were
excluded from the episode payment, even if lower- cost, clinically
appropriate alternatives were available. 4 And, under Medicare payment
rules, affected patients would pay more for supplies that were excluded
from the episode payment. 5 CMS is currently assessing whether the home
health PPS requires revisions. However, the agency has concluded it does
not have the authority to exclude any supply costs from the episode

payments. In this context, the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA) required GAO to examine the
provision of nonroutine medical supplies by home health agencies and
recommend

whether payment for such supplies should be excluded from the episode
payment and paid for separately. 6 In consultation with the committees of
jurisdiction, we have examined whether (1) total HHA episode payments

4 Furthermore, Medicare spending would increase unless the average episode
payment was reduced by the cost of these supplies. 5 Beneficiary spending
would increase especially for those patients who require nonroutine
medical supplies that are not otherwise covered under Medicare.

6 Pub. L. No. 106- 554, App. F S: 505; 114 Stat. 2763, 2763A- 531.

Page 3 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies
adequately account for nonroutine medical supply costs and (2) any
nonroutine medical supplies should be excluded from the episode

payment and paid for separately by Medicare. To conduct this work, we
reviewed the provisions of BBA and the Health Care Financing
Administration*s (HCFA) interim and final rules on the home health PPS to
evaluate the design of the payment groups and adjustments. We conducted
structured interviews with nine clinical experts about the use of
nonroutine medical supplies by home health patients. The experts included
home health nurses (including specialists in wound, ostomy, and continence
care), physical therapists, universitybased researchers, and home health
agency managers. We also conducted structured interviews with
representatives from the National Association for Homecare, the Visiting
Nurse Association of America, the American Home Care Association, the
American Association for Homecare, the United Ostomy Association, and
representatives from the Wound, Ostomy, and Continence Nurses Society. We
did not directly determine if episode payments adequately accounted for
the costs of these supplies because data were not available. We conducted
our work from December 2000 through August 2003 in accordance with
generally accepted government auditing standards. During this period, CMS
expected to receive patientspecific data on the cost and utilization of
specific nonroutine medical supplies, but did not.

Although the costs of all nonroutine medical supplies were used in
establishing the average home health episode payment, adjusted payments
may not reflect all the variation in the costs of nonroutine medical

supplies for different types of patients. HCFA did not have data on the
cost or use of specific nonroutine medical supplies to develop the payment
groups or the payment adjustments. HCFA accounted for differences in
supply costs across types of patients based on the average cost of staff
time of the visits associated with the patient group. As a result, the
episode payments appropriately reflect supply costs only when they vary
with the cost of staff time. In addition, the payment groups may not
adequately distinguish among types of patients based on their need for,
and the costs of, nonroutine medical supplies. Because each payment group
can include patients with widely varying clinical conditions, there may be
some types of patients within a payment group who have above- average
costs due to their needs for these supplies. Results in Brief

Page 4 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies There are
certain nonroutine medical supplies that should be considered for
exclusion from the episode payment because of their high cost and

infrequent use and others that should be considered because of continuity
of care concerns. Payments based on average costs may not adequately
account for high- cost, infrequently provided medical supplies. As a
result, some HHAs may be unwilling to provide these supplies or will be
financially disadvantaged if they treat patients with these needs. The
clinical experts we consulted suggested that continuity of care would be
another reason for excluding certain nonroutine medical supplies from the
PPS episode payment. They noted that care had been disrupted for some
patients who had been managing a chronic condition with supplies prior to

receiving home health care. Industry representatives and wound- care
nurses we interviewed stated that this disruption has occurred because
some HHAs have required patients to switch supplies while receiving

home health care or have limited the supplies provided to patients.
However, CMS lacks data on the cost and frequency of use of individual
supply items to modify the payment groups and adjustments and to determine
whether certain nonroutine medical supply exclusions merit consideration.

We are recommending that in evaluating refinements to the PPS, the
Administrator of CMS should collect and analyze patient- specific data on
the cost and utilization of individual nonroutine medical supplies to

determine whether the payment groups and adjustments appropriately reflect
the differences in supply costs. The Administrator should also gather and
evaluate evidence on whether there have been systematic disruptions in the
care for some patients under the PPS. If these analyses indicate problems
with the current PPS, the Administrator of CMS should modify the payment
groups and adjustments to better account for these supply costs or
minimize care disruptions. If such refinements cannot resolve identified
problems, the Administrator should seek the necessary legislative changes
to exclude selected nonroutine medical supplies from the episode payment.

CMS provided written comments on a draft of this report and concurred with
the first finding. CMS stated that it was collecting the data needed to
determine whether the home health payments reflect nonroutine medical
supply cost differences across types of patients. The agency did not

address our recommendation to evaluate whether there have been disruptions
in care.

Page 5 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies
Medicare*s home health care benefit enables certain beneficiaries with
post- acute- 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
homebound; 7 require intermittent skilled nursing, or physical or speech
therapy or occupational therapy on a continuing basis; be under the care
of a physician; and have their home health care services furnished under a
plan of care prescribed and periodically reviewed by a physician. If these
conditions continue to be met, Medicare will pay for an unlimited number
of episodes of care that can include skilled nursing care; physical,
occupational, and speech therapy; medical social service; and home health
aide visits. 8 When a beneficiary begins receiving Medicare- covered home
health care,

all medical supplies except for durable medical equipment (DME) used by
the patient are covered as part of the home health care. 9 Beneficiaries
using home health care are not required to pay any deductibles or
copayments for these services and supplies.

For beneficiaries who are not receiving Medicare- covered home health
care, Medicare part B (supplementary medical insurance) covers certain
medical supplies for those not hospitalized or not in another inpatient
setting. 10 Beneficiaries are responsible for a 20- percent copayment for
all supplies and services. Medical supplies covered under part B are
limited to the devices used to replace bladder and bowel function (such as
catheters, ostomy bags, and irrigation and flushing equipment); supplies
required for 7 Beneficiaries are homebound when they have a condition that
results in a normal inability

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

8 Home health aide visits include personal care services, such as
assistance with eating, bathing, and toileting; simple surgical dressing
changes; assistance with certain medications; activities to support
skilled therapy services; and routine care of prosthetic and orthotic
devices.

9 DME is equipment that can withstand repeated use, is generally used to
serve a medical purpose, is not useful to a person without illness or
injury, and can be used in the home (such as respirators, crutches,
oxygen, and inhalators). 10 Participation in part B is voluntary (about 95
percent of beneficiaries participate) and part

B is partly financed by monthly premiums paid by enrollees. Background
Medicare Coverage of

Medical Supplies

Page 6 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies
parenteral and enteral nutrition feeding 11 (such as catheters, filters,
and nutrient solutions) and tracheostomy 12 care; and surgical wound
dressings,

if they are required for treatment of a wound caused by a surgical
procedure or after the debridement 13 of a wound. Such supplies must be
ordered by a physician and be medically necessary. Medicare has coverage
guidelines regarding the maximum number of each supply that is normally

medically necessary per month (for example, the number of catheters or
ostomy bags). 14 On October 1, 2000, HCFA implemented the PPS for home
health care. BBA stipulated that PPS payments cover all home health care
services and

supplies used to treat a beneficiary, including medical supplies, that
were paid for on a reasonable cost basis at the time of enactment. 15
Because DME was paid for on the basis of a fee schedule, it was not
required to be included in the PPS and is paid for separately. The law
also required HHAs to *consolidate* the billing and be paid for all
Medicare- covered home health services and supplies provided to patients
receiving home health care, even when they are furnished by an outside
supplier under contract to the HHA. 16 This all- inclusive payment gives
HHAs an incentive to control the total costs of care provided during the
episode, including the use of supplies. Under the home health PPS, HHAs
that deliver care for less than the payment can profit. Conversely, HHAs
will lose financially when their service costs are higher than the
payment.

Because patients who receive Medicare- covered home health care require
differing amounts of care, a basic episode payment is adjusted based on
the classification of each patient into one of 80 payment groups, called

11 Parenteral nutrition is a method of delivering nutrition and other
substances directly into a vein. Enteral nutrition includes oral feeding,
sip feeding, and tube feeding. 12 A tracheostomy is a surgically created
opening in the neck into the windpipe to provide an airway and to allow
removal of secretions from the lungs. 13 Debridement is the removal of
dead, infected, or foreign material from a wound.

14 The medical necessity for using more than the number of supplies
indicated in the coverage policies has to be documented in the patient*s
medical record. 15 BBA S: 4603( a), 111 Stat. 467.

16 BBA S: 4603( c)( 2)( B), 111 Stat. 470- 471. DME was excluded from the
consolidated billing requirement by the Medicare, Medicaid, and SCHIP
Balanced Budget Refinement Act of 1999, Pub. L. No. 106- 113, App. F, S:
305; 113 Stat. 1501, 1501A- 361, 62. Prospective Payment for

HHAs

Page 7 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies home
health resource groups (HHRG). 17 The classification is based on three
dimensions of the patient* clinical condition, functional status, and

expected use of services* that affect the total cost of the episode. 18
Patients with similar total episode costs are grouped together: the use of
nonroutine medical supplies contributes to, but does not determine, the
payment group for any type of patient. The payment for each payment group
is adjusted to reflect the average cost of providing services to patients
in that group (as determined by the average time of the skilled nursing,
home health aide, therapy, and other visits for the patients in the group)
relative to the average cost of patients across all 80 payment groups. 19
In fiscal year 2002, after adjusting for inflation, the basic episode
payment was $2,274, with the payment adjusters resulting in payments for
patients in the different HHRGs ranging from $1,197 to $6,393 per episode.

The accuracy of the adjusted payments in reflecting the cost variation
across patients depends on how well the payment groups distinguish among
types of patients (and their episode costs) and how well the payment
adjusters account for differences in total episode costs across the
different payment groups. Shortcomings in either will result in some
patients or payment groups being more financially attractive than others
for HHAs to treat. We have reported that in the first 6 months of 2001
there was considerable variation in the relationship between payments and

17 There are four clinical severity categories (ranging from minimal to
high severity), five functional classifications (ranging from requiring
little assistance with daily activities to requiring a high level of
assistance) and four levels of service use (ranging from low to high
expected resource use), for a total of 80 possible combinations.

18 The clinical condition is generally based on a primary orthopedic,
neurologic, or diabetic diagnosis; the need for intravenous, parenteral,
or enteral therapies; and the presence of vision impairment, pain, wounds
or lesions (including pressure ulcers, stasis ulcers, and

surgical wounds), dyspnea, urinary incontinence, bowel incontinence, bowel
ostomy; and behavioral problems (such as significant memory loss, impaired
decision making, physical aggression, disruptive or socially inappropriate
behavior, and delusional or paranoid behavior). The use of nonroutine
medical supplies will be reflected in the clinical dimension of a
patient*s assessment. The functional status is based on the patient*s need
for assistance with activities of daily living, including dressing,
bathing, toileting,

transferring (for example, moving from bed to chair), and locomotion. The
expected use of services is based on the patient*s use of home health
therapy services during the episode and the use of other health services
(such as nursing home or rehabilitation hospital services) prior to
receiving home health care.

19 For each visit, the minutes spent by each type of clinician (such as
home health aides, nurses, and therapists) is multiplied by the average
wage rate for the discipline of the clinician. These per- visit costs are
totaled for all visits within an episode to obtain the cost for the
episode.

Page 8 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies costs
across payment groups. 20 For example, the episode payments for 10 payment
groups averaged about 1 percent above the average estimated

episode cost, while for 10 other payment groups payments averaged almost
twice the average episode cost. On average, episode payments were about 35
percent higher than the average estimated episode cost. Home health
episode payments based on average costs may not be adequate for HHAs
serving a disproportionate number of patients with high- cost nonroutine
medical supply needs when a payment group includes few such patients. This
is because if there are few high- cost patients in a payment group, their
costs do not substantially increase the average cost for the group. In
contrast, frequently provided high- cost services and supplies would boost
average episode costs and, therefore, the payments based on them.

HCFA*s efforts to refine the PPS, including a better accounting for
nonroutine medical supply costs, began even before the PPS was
implemented. For example, the agency considered excluding the costs of
nonroutine medical supplies from the episode amount and paying for
supplies covered under part B separately. 21 HCFA concluded that it did
not have the authority to exclude nonroutine medical supplies given the
BBA requirement that all medical supplies be included in the episode
payment. The agency also modified the HHRG patient classification system
to better

reflect the costs of high- cost patients with severe wounds, such as
burns, after concerns were raised during the comment period on the
proposed rule about the payments for these patients. Even with the
revisions, HCFA officials acknowledged that the HHRGs may not adequately
differentiate among home health patients, particularly those who need
wound- care supplies, and that additional modifications might be needed.
The agency plans to examine the payment groups and the payment adjusters
using information on total episode costs, the visits provided during each
episode, and patient diagnoses. CMS will use these analyses in

20 U. S. General Accounting Office, Medicare Home Health Care: Payments to
Home Health Agencies Are Considerably Higher Than Costs, GAO- 02- 663
(Washington, D. C.: May 6, 2002).

21 This same reasoning was used to exclude from the PPS daily payment for
skilled nursing facilities certain high- cost and infrequently provided
services that could not be easily overprovided. See U. S. General
Accounting Office, Skilled Nursing Facilities: Services Excluded From
Medicare*s Daily Rate Need to be Reevaluated, GAO- 01- 816 (Washington,

D. C.: Aug. 22, 2001). Refinements to the PPS

Page 9 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies
determining if there are inadequacies in the payment groups or adjustments
that require modifications to the PPS. HCFA used the total costs
associated with furnishing home health care, including the costs of
nonroutine medical supplies, to establish the average episode payment.
HCFA estimated average total episode costs

based on 1997 audited costs of a representative sample of HHAs and updated
these costs for inflation each year through 2000* the beginning of the
home health PPS. HCFA added an amount (based on 1998 data) to the episode
payment rate to account for the separate payments that had been made to
external suppliers for nonroutine medical supplies furnished directly to
patients receiving home health care. HCFA estimated that the costs of all
nonroutine medical supplies averaged about 2 percent of

episode costs (or about $50 per episode). The adjusted payment associated
with each payment group may not reflect the variation in the cost of the
supplies used across the payment groups. When HCFA determined the payment
adjustments for the payment groups, it did not have data on the cost or
use of specific nonroutine medical supplies for different types of home
health patients. Instead of considering the costs of nonroutine medical
supplies in varying the payments across each of the payment groups, the
agency used the average cost of staff time associated with the average
number of visits. 22 For some types of patients,

such as those needing wound- care supplies and dressing changes,
increasing payments in proportion to the cost of staff time is likely to
result in an appropriate adjustment to total payments if wound- care
supply costs are proportionately higher for patients receiving more costly
staff time. However, some types of patients who have above- average
nonroutine medical supply costs may not require more costly staff time.
For example, staff may not need to spend extra time with patients who,
prior to receiving home health care, managed their own ostomy care and
will continue to do so. As a result, payments could be too low for these

types of patients. In addition, the payment groups may not adequately
distinguish among types of patients and their need for, and costs of,
nonroutine medical supplies. Each payment group can include patients with
widely varying 22 The time therapists, nurses, and aides spent with
patients were used to calculate the

payment adjustment. Episode Payments

May Not Reflect Variation in Nonroutine Medical Supply Costs across
Patients

Page 10 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies

clinical characteristics and nonroutine medical supply use. For example,
the moderate clinical severity groups can include patients with diabetes
and bowel ostomies, patients with stasis ulcers that are not healing, and
patients with Parkinson*s disease* all of whom would be assigned to the
same group even though their nonroutine medical supply costs could be
quite different. These patients could be assigned to the same payment
group, depending on their functional and service use characteristics.
Although patients within a payment group have similar total episode costs,
there could be subgroups of patients within a group who have aboveaverage
episode costs because of their nonroutine medical supply needs. Thus,
patients requiring costly nonroutine medical supplies could have more
difficulty gaining access to care, particularly since these patients are
easy to identify prior to admission.

As part of CMS*s review of the current PPS, the agency says it will try to
evaluate whether the payment groups and adjustments appropriately account
for variation in nonroutine medical supply costs across types of patients.
CMS has noted that if supply costs vary significantly for different types
of patients, the agency may modify the payment groups to account for
supply cost differences as well as staffing.

However, CMS continues to lack patient- specific data on the use and cost
of specific nonroutine medical supplies needed to assess the variation in
nonroutine medical supply costs across patients. Although the agency asked
HHAs to provide patient- specific information on the use of and charges
for wound- care supplies, HHAs have not done so, which will hamper CMS*s
ability to better account for these costs in the episode payments. 23
Unless CMS renews its pursuit of these data and successfully obtains them,
its refinements will continue to rely on aggregate nonroutine medical
supply cost information to refine the payment groups even though these
data are unlikely to be adequate to reflect the variation in supply costs
across patients.

23 When implementing the PPS, HCFA asked HHAs to include the number of
wound- care supplies used and the associated charges on their claims so
that future refinements could be made. HHA industry representatives said
the HHA computer systems could not gather these data.

Page 11 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies

Patients requiring nonroutine medical supplies are classified into many
different payment groups, so the payment for any given group, which is
based on the group*s average cost, may not account for unusually high
nonroutine medical supply costs. For example, patients with multiple

pressure ulcers, who may need extensive supplies, could be grouped into
any one of 40 payment groups, depending on the severity of the ulcers and
the patients* other clinical, functional, and service use characteristics.
Similarly, the Wound, Ostomy, and Incontinence Nurses Society found that
the few patients with ostomies were grouped into a wide range of payment
groups. 24 Due to this wide dispersion, there may not be enough patients
requiring nonroutine medical supplies assigned to any given payment group
to sufficiently increase the group*s average cost to reflect these
patients* above- average costs.

Even patients with similar clinical characteristics who are classified
into the same payment group may have widely varying nonroutine medical
supply costs. The United Ostomy Association estimated that the supply
costs for patients with ostomies vary fivefold. 25 Likewise, using the
2002 Medicare fee schedule as a proxy for supply costs, there is even more
variation across the different types of surgical dressings. 26 The costs
of nonroutine medical supplies provided during an episode for wound- care
patients could be considerably higher than the average, depending on the
types of dressings provided, the price the HHA has to pay for them, and

the number of dressing changes made during an episode. For example, an HHA
providing 24 dressing changes during a patient*s episode, with each
dressing costing $7, would incur $168 of nonroutine medical supply costs,
24 Patients with bowel ostomies represented about 2 percent of all
episodes. Of those, about 42 percent of the episodes of patients with
ostomies were grouped into the *low* clinical severity payment groups, 42
percent into the *medium* groups, and 15 percent were in the *high*
groups. Each of the three groups includes 20 HHRGs. 25 The United Ostomy
Association based its estimates on the episode data used to develop

the PPS. 26 Under the 2002 Medicare fee schedule, payments for large
dressings averaged over $9 per item for foam dressings and $174 for
collagen dressings, and were between $16 and $39 per item for hydrogel and
hydrocolloid dressings. Certain Nonroutine Medical Supplies May

Warrant Exclusion from Episode Payment

Page 12 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies

or more than three times the average supply cost. 27 If there are no
lowercost alternatives or it is not possible to reduce the number of
dressings, the HHA would be limited in its ability to provide a more cost-
effective mix of visits and supplies to care for this patient. Therefore,
some HHAs may be unwilling to provide costly supplies or will be
financially disadvantaged if they do so.

There is mixed evidence on whether there are any high- cost, infrequently
provided nonroutine medical supplies. Some of clinical experts we
consulted said there are no nonroutine medical supplies that are both
high- cost and infrequently provided. Our review of the Medicare fee
schedules for supplies indicated that most

medical supplies are relatively low cost. For beneficiaries who are not
receiving home health care, Medicare*s payment would be less than $20 for
over 80 percent of all nonroutine medical supply items. But there are some
high- priced items. For example, Medicare pays over $40 per item for
certain tracheostomy, wound- care, and ostomy supplies when provided to
patients not receiving home health care.

The clinical experts suggested, however, that including nonroutine medical
supplies in the payment has disrupted care for some patients, which could
justify excluding these supplies from the episode payment. The experts
noted that the use of nonroutine medical supplies for patients

who were self- managing a chronic condition prior to their entering home
health care could be disrupted by the cost containment strategies adopted
by some HHAs. HHA representatives and wound- care nurses told us that

under the PPS some HHAs have limited their inventories of particular types
of nonroutine medical supplies or reduced the number of supplies they
provide to patients. Such changes required some patients who had been
self- managing chronic conditions to either change the type of supply

27 The Medicare coverage guidelines indicate that hydrogel dressings with
borders are typically changed up to three times per week. With 8 weeks in
an episode, up to 24 dressing changes could be included in an episode
without requiring additional documentation. The Medicare fee schedule
amount for medium- sized (16 to 48 square inches) hydrogel dressings
without borders is at least $10, but HHAs may be able to use their volume
as leverage to obtain discounted prices. In this example, we have assumed
that an HHA can purchase supplies at 30 percent less than the fee schedule
amount. These supply costs would be higher if more expensive dressings
(such as hydrogel dressings without borders or collagen dressings) are
used, if the dressings are changed more frequently (for example,

hydrogel dressings without borders are typically changed daily), or if the
HHA purchases the supplies at a higher price than what we assumed.

Page 13 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies

(for example, the type of ostomy appliance) or number of supplies used
while receiving home health care. Such actions are most likely to have
affected patients with chronic medical conditions (such as bowel ostomies

and tracheotomies) that they self- manage, where switching products may
have impaired their sense of security and their ability to function as
normally as possible.

As part of its assessment of the effects of the home health PPS, CMS plans
to examine changes in home health utilization, including the number, type,
and duration of home health visits and the number of patients served. This
could include an examination of whether certain types of patients, such as
those requiring nonroutine medical supplies, have the same utilization

now as they did prior to the PPS. But, due to the lack of information
about individual supply items, these analyses cannot evaluate whether
patterns of self- care have been disrupted.

The adequacy of Medicare*s home health payment groups and adjustments to
reflect the variation in episode costs across patients is critical to
ensuring that patients and HHAs are not disadvantaged under the PPS. CMS
is working on refinements that might include additional payment groups,
different payment adjustments, or the exclusion of particular supplies
from the episode payment. While there are sound reasons to retain most
nonroutine medical supplies in the episode payment, excluding certain
supplies may be warranted if the payment groups will not adequately
account for their costs or if it has been demonstrated that patient access
to care or continuity of care has been disrupted.

Yet, CMS continues to lack patient- specific cost and utilization data on
individual nonroutine medical supplies needed to evaluate if the payment
groups could be improved or if certain supplies warrant consideration for
exclusion from the PPS. Because CMS*s efforts to gather these data on a
voluntary basis from HHAs have not been successful, the agency needs an
alternative data collection method. One approach would be to gather data
on the patients treated by a representative sample of HHAs, as CMS did in
establishing the average episode payment. The agency also needs to gather

systematic evidence on patterns of care to assess whether any supplies
warrant consideration for exclusion because care has been disrupted. Yet
even if these data confirm that there are high- cost and infrequently
provided nonroutine medical supplies or that care has been disrupted,
congressional authority is needed to make these exclusions. Conclusions

Page 14 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies

We are recommending that in evaluating refinements to the PPS, the
Administrator of CMS collect and analyze patient- specific data on the
cost and utilization of individual nonroutine medical supplies to
determine whether the payment groups and adjustments appropriately reflect
the differences in supply costs. The Administrator should also gather and
evaluate evidence on whether there have been systematic disruptions in the
care for some patients under the PPS. If these analyses indicate problems
with the current PPS, the Administrator of CMS should modify the payment
groups and adjustments to better account for these supply costs or
minimize care disruptions. If such refinements cannot resolve identified
problems, the Administrator should seek the necessary legislative changes
to exclude selected nonroutine medical supplies from the episode payment.

CMS provided written comments on a draft of this report. (See app. I.) CMS
noted the importance of monitoring the impact of Medicare payment changes
and improving payment systems over time. It referenced the research it is
sponsoring with regard to the home health PPS. CMS agreed

with the recommendation on the need to collect sufficient data to be able
to evaluate the appropriateness of Medicare*s payments with regard to the
provision of nonroutine medical supplies to home health patients. It
stated that it was collecting such data and plans to fund analyses of
these data, which will guide future policy decisions. CMS did not indicate
whether it

will consider changes to home health payment groups and adjustments if its
research indicates problems nor did it mention if it will investigate
whether particular types of patients are experiencing disruptions in care.
Because HHAs could identify many of the patients with costly nonroutine
medical supply needs prior to admitting them for home health care, we
believe it is important to explicitly consider this group of patients in
designing analyses of the impact of the home health PPS and to consider
changes to the payment to ameliorate any identified problems.

CMS also provided technical comments, which we incorporated as
appropriate. Recommendations for Executive Action

Agency Comments

Page 15 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies

We are sending copies of this report to the Administrator of the Centers
for Medicare & Medicaid Services, appropriate congressional committees,
and other interested parties. In addition, the report will be available at
no charge on the GAO Web site at http:// www. gao. gov. If you or your
staffs

have any questions, please call me at (202) 512- 7119. This report was
prepared under the direction of Carol Carter.

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

Page 16 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies

List of Committees

The Honorable Charles E. Grassley, Jr. Chairman The Honorable Max Baucus
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 & Medicaid Services

Page 17 GAO- 03- 878 Home Health Care Nonroutine Medical Supplies

Appendix I: Comments from the Centers for Medicare & Medicaid Services

(290036)

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