Medicare: Little Progress Made in Targeting Outpatient Therapy	 
Payments to Beneficiaries' Needs (10-NOV-05, GAO-06-59).	 
                                                                 
For years, Congress has wrestled with rising Medicare costs and  
improper payments for outpatient therapy services--physical	 
therapy, occupational therapy, and speech-language pathology. In 
1997 Congress established per-person spending limits, or "therapy
caps," for nonhospital outpatient therapy but, responding to	 
concerns that some beneficiaries need extensive services, has	 
since placed temporary moratoriums on the caps. The current	 
moratorium is set to expire at the end of 2005. The Medicare	 
Prescription Drug, Improvement, and Modernization Act of 2003	 
required GAO to report on whether available information justifies
waiving the caps for particular conditions or diseases. As agreed
with the committees of jurisdiction, GAO also assessed the status
of the Department of Health and Human Services' (HHS) efforts to 
develop a needs-based payment policy and whether circumstances	 
leading to the caps have changed.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-59						        
    ACCNO:   A41277						        
  TITLE:     Medicare: Little Progress Made in Targeting Outpatient   
Therapy Payments to Beneficiaries' Needs			 
     DATE:   11/10/2005 
  SUBJECT:   Erroneous payments 				 
	     Health care cost control				 
	     Health care costs					 
	     Medicare						 
	     Patient care services				 
	     Reporting requirements				 
	     Therapy						 
	     Beneficiaries					 
	     Outpatient care					 

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GAO-06-59

Report to Congressional Committees

United States Government Accountability Office

GAO

November 2005

MEDICARE

Little Progress Made in Targeting Outpatient Therapy Payments to
Beneficiaries' Needs

GAO-06-59

Contents

Letter 1

Results in Brief 5
Background 8
Insufficient Information Exists to Justify Waiving Therapy Caps for
Particular Conditions or Diseases 10
HHS Has Made Little Progress toward a Payment System Based on Patients'
Needs 18
Circumstances That Led to Therapy Caps Remain 22
Conclusions 26
Matter for Congressional Consideration 27
Recommendations for Executive Action 28
Agency Comments 28
Appendix I Comments from the Department of Health and Human Services 30
Appendix II GAO Contact and Staff Acknowledgments 33
Related GAO Products 34

Tables

Table 1: The Five Most Reported Diagnosis Codes Related to Outpatient
Therapy, Ranked by Frequency under Each Therapy Type, 2002 12
Table 2: Beneficiaries for Whom 2002 Medicare Payments for Outpatient
Therapy Services Would Have Exceeded Therapy Caps and by How Much 17
Table 3: Legislation Affecting Medicare Spending on Outpatient Therapy
Services, 1997-2003, and HHS Actions 19
Table 4: CMS-Contracted Studies of Outpatient Therapy Services, 2000-2004
21

Figures

Figure 1: Top 99 Most Reported Diagnosis Codes and Associated Percentage
of Medicare Beneficiaries for Whom Payments Would Have Exceeded the
Combined Cap for Physical Therapy and Speech-Language Pathology, 2002 13
Figure 2: Variation in Length of Treatment per Episode among Medicare
Beneficiaries Diagnosed with Stroke, 2002 15

Abbreviations

BBA Balanced Budget Act of 1997 BBRA Medicare, Medicaid, and SCHIP
Balanced Budget Refinement Act of 1999 BIPA Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act of 2000 CMS Centers for Medicare &
Medicaid Services HHS Department of Health and Human Services MedPAC
Medicare Payment Advisory Commission MMA Medicare Prescription Drug,
Improvement, and Modernization Act of 2003

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protection in the United States. It may be reproduced and distributed in
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separately.

United States Government Accountability Office

Washington, DC 20548

November 10, 2005 November 10, 2005

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

The Honorable Joe Barton Chairman The Honorable John D. Dingell Ranking
Minority Member Committee on Energy and Commerce House of Representatives
The Honorable Joe Barton 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 The Honorable William M. Thomas Chairman The Honorable
Charles B. Rangel Ranking Minority Member Committee on Ways and Means
House of Representatives

Medicare, the federal health program insuring more than 40 million
beneficiaries aged 65 and older or disabled, covers three outpatient
therapy services: physical therapy, occupational therapy, and
speech-language pathology. Medicare covers these services only if they are
needed to improve a patient's condition (for example, to aid stroke
recovery or combat the effects of Parkinson's disease) and are reasonable
in amount, frequency, and duration. In 2002, the most recent year for
which complete data are available, an estimated 3.7 million, or about 9
percent, of Medicare beneficiaries received one or more of these types of
outpatient therapy.11Medicare, the federal health program insuring more
than 40 million beneficiaries aged 65 and older or disabled, covers three
outpatient therapy services: physical therapy, occupational therapy, and
speech-language pathology. Medicare covers these services only if they are
needed to improve a patient's condition (for example, to aid stroke
recovery or combat the effects of Parkinson's disease) and are reasonable
in amount, frequency, and duration. In 2002, the most recent year for
which complete data are available, an estimated 3.7 million, or about 9
percent, of Medicare beneficiaries received one or more of these types of
outpatient therapy.

1Unless otherwise specified, throughout this report the terms outpatient
therapy and outpatient therapy services refer to all three therapy
categories collectively: physical therapy, occupational therapy, and
speech-language pathology.

For many years, Congress has wrestled with rising Medicare costs of
providing outpatient therapy services.2 From 1990 through 1996, spending
on these services grew at nearly double the rate of Medicare spending
overall. Some of the growth was attributed to financial incentives in
Medicare payment methods, which encouraged use of services, and to the
lack of program oversight to prevent inappropriate payments. For example,
in 1995 we reported widespread examples of overcharging Medicare for
therapy services delivered to nursing home residents, including markups
resulting from providers' exploiting regulatory ambiguity and weaknesses
in Medicare's payment rules.3 In 1997, as a means to control the spending
growth, Congress established new caps on the amount that Medicare would
pay for outpatient therapy services for a beneficiary in any given year.
These therapy caps raised concern, however, that patients with extensive
need for outpatient therapy services would be adversely
affected-particularly patients who lacked access to hospital outpatient
departments, which are exempt from the caps.4 Since 1997, the caps were
actually in effect only in 1999 and part of 2003; in other years, Congress
placed temporary moratoriums on them. The current moratorium on the
therapy caps is due to expire at the end of December 2005.5

As part of the 1997 legislation that established the therapy caps,
Congress also required the Department of Health and Human Services (HHS)
to report by 2001 on its recommendations for an alternative, "needs-based"
payment system for outpatient therapy services. We have reported that, in
contrast to less-targeted control over service use afforded by spending
limits, such a payment system could help target payments to beneficiaries
who genuinely require more services than could be paid for under the
therapy caps.6 A needs-based payment system could take into account the
type and extent of therapy warranted by a beneficiary's health and
functional status (that is, the person's ability to perform activities of
daily living, such as bathing, dressing, eating, or moving from one
location to another). In several laws enacted starting in 1997, Congress
has directed HHS to take certain actions related to the development of
such a system, including considering beneficiaries' functional status in
the design of a new outpatient therapy policy and reporting on the
development of standard instruments for assessing the health and
functional status of patients receiving Medicare services, including
outpatient therapy.7 Within HHS, the Centers for Medicare & Medicaid
Services (CMS), which administers Medicare, has major responsibilities for
this effort.

2For example, since 1973 therapy provided by one type of outpatient
therapy provider, independent physical therapists in private practice, has
been subject to annual, per-beneficiary spending limits.

3GAO, Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy in
Nursing Homes, GAO/HEHS-95-23 (Washington D.C.: Mar. 30, 1995). A list of
related GAO products appears at the end of this report.

4Under the law, the caps on Medicare outpatient therapy payments do not
apply to services provided by a hospital outpatient department. 42 U.S.C.
S: 1395l(g).

5The legislation provides for two caps per beneficiary: one for
occupational therapy and one for physical therapy and speech-language
pathology combined. The legislation set the caps at $1,500 each and
provided that these limits be indexed by the Medicare Economic Index each
year beginning in 2002. When last in place in 2003, the two caps were set
at $1,590 each.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA), which put in place the most recent moratorium on therapy caps,
directed us to report on the conditions or diseases that may justify
waiving application of the caps.8 To provide a greater range of
information about these issues, as agreed with the committees of
jurisdiction, we also examined HHS's efforts to date in developing a
needs-based payment system. This report assesses (1) available information
that could be used to justify waiving outpatient therapy caps for
particular conditions or diseases, (2) the status of HHS's efforts to base
Medicare payment policy on outpatient therapy on beneficiaries' needs, and
(3) whether the circumstances initially leading to the caps have changed.

To assess whether available information could be used to justify waiving
outpatient therapy caps for particular conditions or diseases, we reviewed
data and research including analyses of Medicare claims data by CMS
contractors. We generally relied on the published results of CMS's
contracted analyses performed on Medicare 2002 claims data.9,10 The claims
data used by CMS contractors and other health care researchers are the
most comprehensive data available for assessing Medicare outpatient
therapy and the conditions and diseases of Medicare beneficiaries for whom
payments would have exceeded the therapy caps had a moratorium on the caps
not been in place. We also reviewed the literature on therapy treatment
protocols and on the efficacy of outpatient therapy for Medicare
beneficiaries with selected conditions and diseases, and we reviewed a
related report by the Medicare Payment Advisory Commission (MedPAC), an
independent group of health care experts that advises Congress on Medicare
payment issues. To assess HHS's response to requirements for developing
instruments to ensure that Medicare payments for outpatient therapy are
targeted to beneficiaries' needs, we reviewed the legislative history of
Medicare's outpatient therapy caps, related requirements for HHS, and
studies by CMS contractors. We examined HHS's actions in response to the
legislative requirements and studies' proposals and reviewed
administrative options for ensuring that medically necessary therapy is
available to beneficiaries over the short and long terms under Medicare's
payment system. To determine whether the circumstances leading to therapy
caps-specifically, significant growth in outpatient therapy payments and a
high rate of improper payments-have changed, we reviewed preliminary CMS
estimates of overall Medicare part B expenditures,11 which include
spending on outpatient therapy services, and CMS reports on improper
payments for outpatient therapy services. Finally, we obtained the
opinions of four national organizations representing the views of key
providers of outpatient therapy services.12 We conducted our work in
accordance with generally accepted government auditing standards from
January through October 2005.

6GAO, Medicare: Outpatient Rehabilitation Therapy Caps Are Important
Controls but Should Be Adjusted for Patient Need, GAO/HEHS-00-15R
(Washington D.C.: Oct. 8, 1999).

7See, for example, the Balanced Budget Act of 1997 (BBA), Pub. L. No.
105-33, S: 4541, 111 Stat. 251, 454.

8Pub. L. No. 108-173, S: 624, 117 Stat. 2066, 2317.

9Studies based on 2002 claims data include Daniel E. Ciolek and Wenke
Hwang, Feasibility and Impact Analysis: Application of Various Outpatient
Therapy Service Claim HCPCS Edits, prepared for CMS (Baltimore, Md.:
Computer Sciences Corporation/AdvanceMed, 2004); Daniel E. Ciolek and
Wenke Hwang, Development of a Model Episode-Based Payment System for
Outpatient Therapy Services: Feasibility Analysis Using Existing CY 2002
Claims Data, prepared for CMS (Baltimore, Md.: Computer Sciences
Corporation/AdvanceMed, 2004); Daniel E. Ciolek and Wenke Hwang,
Utilization Analysis: Characteristics of High-Expenditure Users of
Outpatient Therapy Services, CY 2002 Final Report, prepared for CMS
(Baltimore, Md.: Computer Sciences Corporation/AdvanceMed, 2004); and
Daniel E. Ciolek and Wenke Hwang, Final Project Report, prepared for CMS
(Baltimore, Md.: Computer Sciences Corporation/AdvanceMed, 2004). Studies
based on other years and data include Judith M. Olshin et al., Study and
Report on Outpatient Therapy Utilization: Physical Therapy, Occupational
Therapy, and Speech-Language Pathology Services Billed to Medicare Part B
in All Settings in 1998, 1999, and 2000 (Columbia, Md.:
DynCorp/AdvanceMed, 2002); Stephanie Maxwell and Cristina Baseggio,
Outpatient Therapy Services under Medicare: Background and Policy Issues,
prepared for CMS (Washington, D.C.: Urban Institute, 2000); and Stephanie
Maxwell et al., Part B Therapy Services under Medicare in 1998-2000:
Impact of Extending Fee Schedule Payments and Coverage Limits, prepared
for CMS (Washington, D.C.: Urban Institute, 2001).

10To check the reliability of the information we used from CMS-contracted
studies, we reviewed the analysis performed by the contractor; discussed
the results with the CMS official overseeing the contract; obtained
information about the methods and analysis from the contractor,
specifically, from the principal investigator of the contracted study; and
reviewed the contractor's summary of the study's scope and methods. We
also discussed the methods and results of the analyses with provider
groups and other researchers familiar with Medicare claims data, including
representatives of the Medicare Payment Advisory Commission (MedPAC) and
the Urban Institute. We determined that the data as published were
generally reliable for our purposes. For one analysis-assessing variation
in the length of treatment received by Medicare beneficiaries according to
their diagnosis codes-we used the results from an unpublished analysis
performed by CMS's contractor AdvanceMed. We verified the reliability of
this analysis by obtaining information from the principal investigator
about the reliability checks incorporated in that analysis and determined
that the analysis was sufficiently reliable for our needs.

                                Results in Brief

We found the data and research available to date insufficient for three
reasons to identify particular conditions or diseases that would justify
waiving Medicare's outpatient therapy caps:

           o  Medicare claims data are limited in the extent to which they
           identify the actual conditions or diseases for which beneficiaries
           receive therapy because the data often do not capture the clinical
           diagnosis for which therapy is received. Further, a CMS-contracted
           analysis of claims data for 2002 does not show any particular
           conditions or diseases as more likely than others to be associated
           with payments exceeding the therapy caps.
           o  Even for diagnoses that are clearly linked to a condition or
           disease, such as stroke, the CMS-contracted analysis of 2002
           claims data shows that the length of treatment for patients with
           the same diagnosis varied widely.
           o  Because of the complexity of patient factors involved, most
           studies we reviewed do not define the amount or mix of therapy
           services needed for Medicare beneficiaries with specific
           conditions or diseases.

           It is uncertain how many beneficiaries would be adversely affected
           because they have medical needs for therapy costing more than the
           caps and yet are unable to obtain needed care because they lack
           sufficient financial resources or access to a hospital outpatient
           therapy department. The CMS-contracted analysis of 2002 claims
           data shows that more than a half million Medicare beneficiaries in
           2002 received therapy for which payments would have exceeded the
           caps had a moratorium not been in place. Provider groups also told
           us that a sizable number of beneficiaries would be adversely
           affected if the caps were enforced.

           Although congressional mandates starting in 1997 have required HHS
           to take certain actions toward developing an outpatient therapy
           payment system that considers patients' individual needs for
           therapy, the department has made little progress toward such a
           system, except to contract for a series of studies of outpatient
           therapy use by Medicare beneficiaries. Two of these contracted
           studies have reported that functional assessments of
           patients-standard evaluations that would help determine a person's
           ability to perform the functions of daily life and specific needs
           for therapy-would be required to develop a needs-based payment
           system. CMS officials also said that developing a standard patient
           assessment instrument could take 3 years or longer. In response to
           a 2000 statutory requirement for HHS to report to Congress no
           later than January 1, 2005, on the development of standard patient
           assessment instruments for patients receiving a variety of
           services, including outpatient therapy, HHS and CMS have work in
           progress, but this work does not include outpatient therapy.
           Officials attribute this exclusion to the complexity of the
           project and to limited resources.

           Circumstances that led to therapy caps do not appear to have
           changed since the caps were established. CMS assessments of
           Medicare claims data show that Medicare payments for outpatient
           therapy are still rising rapidly and that the rate of improper
           payments has increased substantially in recent years. Over a
           4-year period from 1999 through 2002, for example, Medicare
           spending for outpatient therapy more than doubled, from an
           estimated $1.5 billion to $3.4 billion. CMS's assessment of the
           error rate for outpatient therapy claims found that improper
           payments-mainly due to insufficient documentation to support the
           services claimed-grew from about 11 percent in 1998 to more than
           20 percent in 2000. CMS could reduce improper payments and the
           costs to Medicare by implementing the proposal in its contracted
           study of Medicare outpatient therapy claims to strengthen the
           agency's system for identifying and denying payment of improper
           outpatient therapy claims. Provider groups we spoke with agreed
           that such improvements in CMS's automated payment system could
           help ensure that Medicare does not pay for unneeded services.
           Furthermore, an exception process based on a medical review could
           help determine the appropriateness of payment for therapy
           services. At present, however, HHS does not have the authority to
           implement such a process or to conduct a demonstration or pilot
           project to provide exceptions to the therapy caps.

           To provide a means by which some Medicare beneficiaries could have
           access to appropriate outpatient therapy services and to obtain
           better data on the conditions and diseases of beneficiaries who
           have extensive outpatient therapy needs, we suggest that Congress
           consider giving HHS the authority to implement an interim process
           or demonstration project whereby individual beneficiaries could be
           granted an exception from the therapy caps under certain
           conditions determined by CMS. In addition, to expedite development
           of a patient assessment instrument for outpatient therapy
           services, we recommend that the Secretary of HHS include these
           services in the effort already under way to standardize the
           terminology for existing patient assessment instruments. To reduce
           payment for improper claims, we recommend that the Secretary of
           HHS implement improvements to CMS's system for identifying
           outpatient therapy claims that are likely to be improper.

           In commenting on a draft of this report, HHS did not address our
           suggestion that Congress give the department interim authority to
           allow, under certain circumstances, payments exceeding the caps.
           HHS agreed with our recommendation to include outpatient therapy
           services in its effort under way to standardize the terminology
           for patient assessment. With regard to our recommendation to
           implement improvements to CMS's automated payment system, HHS
           referred to a current initiative to improve the coding on Medicare
           claims and noted that the department is exploring methods for
           improving the automated evaluation of claims. We believe, however,
           that HHS could improve the payment system beyond the initiative
           already under way.

           Outpatient therapy services-covered under part B of the Medicare
           program-comprise physical therapy, occupational therapy, and
           speech-language pathology to improve patients' mobility and
           functioning.13 Medicare regulations and coverage rules require
           that beneficiaries be referred for outpatient therapy services by
           a physician or nonphysician practitioner and that a written plan
           of care be reviewed and certified by the providers at least once
           every 30 days. Beneficiaries receiving therapy are expected to
           improve significantly in a reasonable time and to need therapy for
           rehabilitation rather than maintenance.14 Medicare-covered
           outpatient therapy services are provided in a variety of settings
           by institutional providers (such as hospital outpatient
           departments, skilled nursing facilities, comprehensive outpatient
           rehabilitation facilities, outpatient rehabilitation facilities,
           and home health agencies) and by noninstitutional providers (such
           as physicians, nonphysician practitioners, and physical and
           occupational therapists in private practice).15 Both institutional
           and noninstitutional providers-with the exception of hospital
           outpatient departments-are subject to the therapy caps.

           For more than a decade, Medicare's costs for outpatient therapy
           services have been rising, and widespread examples of
           inappropriate billing practices, resulting from regulatory
           ambiguity and weaknesses in Medicare's payment rules, have been
           reported by us and others. In 1995 we reported, for example, that
           while state averages for physical, occupational, and speech
           therapists' salaries in hospitals and skilled nursing facilities
           ranged from about $12 to $25 per hour, Medicare had been charged
           $600 per hour or more.16 HHS's Office of Inspector General
           reported in 1999 that Medicare reimbursed skilled nursing
           facilities almost $1 billion for physical and occupational therapy
           that was claimed improperly, because the therapy was not medically
           necessary or was provided by staff who did not have the
           appropriate skills for the patients' medical conditions.17

           To control rising costs and improper payments, Congress
           established therapy caps for all nonhospital providers in the
           Balanced Budget Act of 1997.18 The Medicare, Medicaid, and SCHIP
           Balanced Budget Refinement Act of 1999 later imposed a moratorium
           on the caps for 2000 and 2001.19 The Medicare, Medicaid, and SCHIP
           Benefits Improvement and Protection Act of 2000 then extended the
           moratorium through 2002.20 Although no moratorium was in effect as
           of January 1, 2003, CMS delayed enforcing the therapy caps through
           August 31, 2003. In December 2003, the Medicare Prescription Drug,
           Improvement, and Modernization Act of 200321 placed the most
           recent moratorium on the caps, extending from December 8, 2003,
           through December 31, 2005.22 The legislation establishing the caps
           provided for two caps per beneficiary: one for occupational
           therapy and one for physical therapy and speech-language pathology
           combined. The legislation set the caps at $1,500 each and provided
           that these limits be indexed by the Medicare Economic Index each
           year beginning in 2002. When last in place in 2003, the two caps
           were set at $1,590 each.

           To process and pay claims and to monitor health care providers'
           compliance with Medicare program requirements, CMS relies on
           claims administration contractors, who use a variety of review
           mechanisms to ensure appropriate payments to providers. A system
           of automated checks (a process CMS terms "edits") flags potential
           billing errors and questionable claims. The automated system can,
           for example, identify procedures that are unlikely to be performed
           on the same patient on the same day or pairs of procedure codes
           that should not be billed together because one service inherently
           includes the other or the services are clinically incompatible.

           In certain cases, automated checks performed by CMS claims
           administration contractors may lead to additional claim reviews or
           to educating providers about Medicare coverage or billing issues.
           The contractors' clinically trained personnel may perform a
           medical review, examining the claim along with the patient's
           medical record, submitted by the physician. Medical review is
           generally done before a claim is paid, although medical review may
           also be done after payment to determine if a claim was paid in
           error and funds may need to be returned to Medicare.

           The data and research available to date are insufficient to
           determine whether any particular conditions or diseases may
           justify a waiver of Medicare's outpatient therapy caps. Medicare
           claims data are limited in the extent to which they can be used to
           identify the actual conditions or diseases for which beneficiaries
           are receiving therapies because the claims often lack specific
           diagnostic information. In addition, analyses of the claims data
           show no particular conditions or diseases as more likely than
           others to be associated with payments exceeding the therapy caps.
           The data also show that treatment for a single condition or
           disease, such as stroke, may vary greatly from patient to patient.
           Finally, available research on the amount and mix of outpatient
           therapy for people aged 65 and older with specific conditions and
           diseases also appears insufficient to justify a waiver of the
           therapy caps for particular conditions or diseases. It is
           uncertain how many beneficiaries would have medical needs for
           therapy costing more than the caps and yet be unable to obtain the
           needed care because they have either insufficient financial
           resources or no access to a hospital outpatient therapy
           department.

           Although Medicare claims data constitute the most comprehensive
           available information for Medicare beneficiaries who have received
           outpatient therapy, they do not always capture the clinical
           diagnosis for which beneficiaries receive therapy. As such, they
           are insufficient for identifying particular diseases and
           conditions that should be exempted from the caps. Patients'
           conditions or diseases are expressed in claims data through
           diagnosis codes, and the coding system allows providers to use
           nonspecific diagnosis codes that are unrelated to a specific
           clinical condition or disease.23 A CMS-contracted analysis of 2002
           Medicare outpatient therapy claims data,24 for example, found
           generic codes, such as "other physical therapy," to be among the
           most often used diagnosis codes on claim forms (see table 1).
           Moreover, current Medicare guidelines for processing claims permit
           institutional providers, such as outpatient rehabilitation
           facilities and skilled nursing facilities, to submit services from
           all three therapy types on the same claim form, with one principal
           diagnosis for the claim; a claim seeking payment for occupational
           therapy and for speech-language pathology might therefore be filed
           under "other physical therapy."

           Table 1: The Five Most Reported Diagnosis Codes Related to
           Outpatient Therapy, Ranked by Frequency under Each Therapy Type,
           2002

           Source: Ciolek and Hwang, Final Project Report (2004).

           aThe majority of outpatient speech-language pathology services are
           furnished by hospital and skilled nursing facility providers, and
           the claim forms do not contain fields for identification of a
           therapy-specific diagnosis. Often, if a beneficiary receives
           multiple therapies simultaneously, the physical therapy diagnosis
           is reported first on the claim, which may explain why the
           fifth-most frequent diagnosis code for speech-language pathology
           is "other physical therapy."

           bDifficulty in swallowing.

           cA painful condition of the lower back.

           dA sharp pain or aching in the neck.

           Analysis of 2002 claims data does not show any particular
           conditions or diseases that are more likely than others to be
           associated with payments exceeding the therapy caps for physical
           therapy and speech-language pathology combined or for occupational
           therapy. Among the top 99 most reported diagnoses for physical
           therapy and speech-language pathology, the analysis found no
           particular diagnoses associated with large numbers of
           beneficiaries for whom payments would have exceeded the combined
           physical therapy and speech-language pathology cap in 2002 had it
           been in effect (see fig. 1). A similar pattern existed for
           occupational therapy.

           Figure 1: Top 99 Most Reported Diagnosis Codes and Associated
           Percentage of Medicare Beneficiaries for Whom Payments Would Have
           Exceeded the Combined Cap for Physical Therapy and Speech-Language
           Pathology, 2002

           Note: Each dot represents the percentage of Medicare
           beneficiaries, reported under each of the 99 most reported
           diagnosis codes (arrayed from 1 to 99 along the x-axis), for whom
           payments would have exceeded the combined cap for physical therapy
           and speech-language pathology had it been in effect in 2002.

           Medicare claims data do not provide information about patients'
           therapy needs that could be used to justify waiving the therapy
           caps. Even in those cases where particular conditions or diseases,
           such as stroke or Alzheimer's disease, are identified in the
           diagnosis codes, different individuals with the same diagnosis can
           need different intensities or types of therapy. For example, one
           patient with a stroke might be able to return home from the
           hospital a day or two after admission, while another may suffer a
           severe loss of functioning and require extensive therapy of more
           than one type. The CMS-contracted analysis of 2002 claims found
           wide variation in the number of treatment days required to
           conclude an episode of care25 for beneficiaries who had the same
           "diagnosis," such as stroke. For example, the analysis found that
           while the median number of days per episode of physical therapy
           for stroke patients was 10, episode length ranged from 1 to 80
           days.26 Similarly wide ranges in treatment length for stroke
           patients appeared for occupational therapy (1 to 68 days per
           episode, median 9) and speech-language pathology (1 to 66 days per
           episode, median 7). Figure 2 shows the range in length of
           treatment per episode for patients with a diagnosis of acute
           cerebrovascular disease (stroke) for the three types of therapy.

           Figure 2: Variation in Length of Treatment per Episode among
           Medicare Beneficiaries Diagnosed with Stroke, 2002

           Note: Illustrated ranges extend only to the 99th percentile to
           eliminate extreme outliers.

           aAn "episode" in this study was defined as the date of a
           beneficiary's first therapy encounter until the last encounter for
           the same type of therapy. If a 60-day break intervened between
           therapy services of the same or a different type, the new round of
           therapy was considered a new episode.

           Available research on the efficacy of outpatient therapy for
           people aged 65 and older with specific conditions and diseases
           also appears insufficient to justify a waiver of particular
           conditions or diseases from the therapy caps. Although our
           literature review found several studies demonstrating the benefits
           of therapy for seniors and Medicare-eligible patients, this
           research generally did not define the amount or mix of therapy
           services needed for Medicare beneficiaries with specific
           conditions or diseases. One study, for example, examined the
           benefits of extensive therapy for stroke victims at skilled
           nursing facilities. The study concluded that high-intensity
           therapy may have little effect on beneficiaries' length of time
           spent in the facility when their short-term prognosis is good;
           beneficiaries with poorer prognoses, however, may benefit
           substantially from intensive therapy. Further, because of the
           complexity of patient factors involved, these studies cannot be
           generalized to all patients with similar diseases or conditions.
           In addition, MedPAC, the commission that advises Congress on
           Medicare issues, suggests that research should be undertaken on
           when and how much physical therapy benefits older patients and
           that evidence gathered from this research would assist in
           developing guidelines to determine when therapy is needed.27

           Medicare claims data suggest that payments for more than a half
           million beneficiaries would have exceeded the caps had they been
           in place in 2002. It is uncertain, however, how many beneficiaries
           with payments exceeding the caps would be adversely affected
           because they have medical needs for care and no means to obtain it
           through hospital outpatient departments. According to the
           CMS-contracted analysis of 2002 claims data, Medicare paid an
           estimated $803 million in outpatient therapy benefits above what
           would have been permitted had the therapy caps been enforced that
           year. Payments for about 17 percent of occupational therapy users
           and 15 percent of physical therapy and speech-language pathology
           service users would have surpassed the caps in 2002; these
           beneficiaries numbered more than a half million (see table 2).

           Table 2: Beneficiaries for Whom 2002 Medicare Payments for
           Outpatient Therapy Services Would Have Exceeded Therapy Caps and
           by How Much

           Source: Ciolek and Hwang, Final Project Report (2004).

           Note: Because of a moratorium, therapy caps were not in effect in
           2002; use of outpatient therapy services might have been different
           had the spending caps been in place. Because hospital outpatient
           departments are exempt from the caps, payments for services
           provided by hospital outpatient departments were excluded from
           this analysis.

           aThis study estimated that the totals above the caps represented
           23.7 percent of all outpatient therapy expenditures for 2002.

           Although the claims data show that payments for more than a half
           million beneficiaries would have exceeded the caps in 2002, it is
           unknown whether beneficiaries would have been adversely affected
           had the caps been in place. The data do not show the extent to
           which these beneficiaries were receiving care consistent with
           Medicare requirements that therapy improve a beneficiary's
           condition and be reasonable in amount, frequency, and duration.
           Also, it is not clear to what extent hospital outpatient
           departments would serve as a "safety valve" for Medicare
           beneficiaries needing extensive therapy and unable to pay for it
           on their own. Past work by us and others has noted that the
           therapy caps were integral to the Balanced Budget Act's spending
           control strategy and were unlikely to affect the majority of
           Medicare's outpatient therapy users. We reported that the hospital
           outpatient department exemption from the cap was a mitigating
           factor in the mid-1990s, essentially removing the coverage limits
           for those users who had access to hospital outpatient
           departments.28 CMS-contracted analyses of claims data for 2002,
           however, show that nearly all the Medicare beneficiaries whose
           payments would have exceeded the caps did not receive outpatient
           therapy in hospital outpatient departments. Specifically, an
           estimated 92 percent (469,850 beneficiaries) of those whose
           payments would have exceeded the combined physical therapy and
           speech-language pathology cap-and 98 percent (126,488
           beneficiaries) of those whose payments would have exceeded the
           occupational therapy cap-did not receive therapy services in a
           hospital outpatient department. These proportions, however, might
           have been different had the caps been in effect in 2002.

           Provider groups we spoke with were concerned that a sizable number
           of beneficiaries with legitimate medical needs whose payments
           would exceed the caps could be harmed. One group told us that a
           cap on outpatient therapy services would severely limit the
           opportunity for patients with the greatest need to receive
           appropriate care, and another group said that therapy caps could
           hurt beneficiaries with chronic illnesses. According to a third
           group, payments can quickly exceed the caps for beneficiaries who
           suffer from serious conditions such as stroke and Parkinson's
           disease or who have multiple medical conditions.

           Statutory mandates since 1997 have required HHS to take certain
           actions toward developing a payment system for outpatient therapy
           that considers patients' individual needs for care, but the agency
           has made little progress toward such a system. In particular, HHS
           has not determined how to standardize and collect information on
           the health and functioning of patients receiving outpatient
           therapy services-a key part of developing a system based on
           patients' actual needs for therapy.

           To curb spending growth and ensure that outpatient therapy
           services are appropriately targeted to those beneficiaries who
           need them, Congress included provisions related to these services
           in several laws enacted starting in 1997 (see table 3). These
           provisions required HHS to report to Congress in 2001 on a revised
           coverage policy for outpatient therapy services that would
           consider patients' needs. The provisions also required HHS to
           report to Congress in 2005 on steps toward developing a standard
           instrument for assessing a patient's need for outpatient therapy
           services and on a mechanism for applying such an instrument to the
           payment process. As of October 2005, HHS had not reported its
           specific recommendations on revising the coverage policy based on
           patients' needs. HHS had, however, contracted with researchers to
           conduct several analyses of Medicare claims data as a means of
           responding to the mandates.

11Medicare part B includes coverage for physician services and payments to
other licensed practitioners, clinical laboratory and diagnostic services,
surgical supplies and durable medical equipment, and ambulance services.
Medicare part A covers inpatient hospital and certain other services.

12We interviewed officials from the American Physical Therapy Association,
the American Occupational Therapy Association, the American
Speech-Language Hearing Association, and the National Association for the
Support of Long-Term Care.

                                   Background

13Physical therapy services-such as whirlpool baths, ultrasound, and
therapeutic exercises-are designed to improve mobility, strength, and
physical functioning and to limit the extent of disability resulting from
injury or disease. Speech-language pathology, included in the Medicare
definition of outpatient physical therapy services, is the diagnosis and
treatment of speech, language, and swallowing disorders. Occupational
therapy services help patients learn the skills they need to perform daily
tasks such as bathing and dressing and to function independently.

14Medicare does not cover maintenance therapy-that is, therapy services
performed to maintain, rather than improve, a beneficiary's level of
functioning. Maintenance therapy includes cases where a patient's
restoration potential is insignificant relative to the therapy required to
achieve such potential, where it has been determined that the treatment
goals will not materialize, or where the therapy is considered a general
exercise program. Medicare may, however, cover the development of a
maintenance program established during the course of covered therapy.

15Unlike physical and occupational therapists, speech-language
pathologists are not recognized as practitioners who can directly bill the
Medicare program for outpatient therapy services.

16See  GAO/HEHS-95-23.

17The improper claims were filed under Medicare part A and part B. See
Office of Inspector General, Physical and Occupational Therapy in Nursing
Homes: Cost of Improper Billings to Medicare, OEI-09-97-00122 (Washington,
D.C.: Department of Health and Human Services, August 1999).

18Pub. L. No. 105-33, S: 4541, 111 Stat. 251, 454.

19Pub. L. No. 106-113, app. F, S: 221, 113 Stat. 1501A-321, 1501A-351.

20Pub. L. No. 106-554, app. F, S: 421, 114 Stat. 2763A-463, 2763A-516.

21Pub. L. No. 108-173, S: 624(a), 117 Stat. 2066, 2317.

22Two bills were introduced in February 2005 to repeal the therapy caps:
H.R. 916 and S. 438. As of October 2005, these bills had been referred to
appropriate committees, and no further action had been taken. Another bill
under consideration in the Senate as of October 31, 2005, would extend the
moratorium on the therapy caps through 2006. See S. 1932, Deficit
Reduction Omnibus Budget Reconciliation Act of 2005.

 Insufficient Information Exists to Justify Waiving Therapy Caps for Particular
                             Conditions or Diseases

Medicare Claims Data Do Not Always Capture Clinical Diagnoses or Show Consistent
Patterns That Would Justify Waiving Therapy Caps

23Diagnosis codes from the World Health Organization's ninth revision of
its International Classification of Diseases (ICD-9 codes) are used on
Medicare part B claim forms to identify a patient's diagnosis. In addition
to clinically specific codes, such as osteoarthritis, the ICD-9 system
also includes generic codes, such as "other physical therapy,"
"occupational therapy encounter," and "speech therapy."

24Ciolek and Hwang, Final Project Report (2004).

                                               Speech-language       
Physical therapy  Occupational therapy      pathologya            
Other physical    Acute but ill-defined     Dysphagiab            
therapy           cerebrovascular disease   
Lumbagoc          Other physical therapy    Acute but ill-defined 
                                               cerebrovascular       
                                               disease               
Abnormality of    Occupational therapy      Speech therapy        
gait              encounter                 
Pain in joint,    Abnormality of gait       Abnormality of gait   
shoulder region                             
Cervicalgiad      Other general symptoms    Other physical        
                                               therapy               

Claims Data Do Not Provide Information about Patients' Therapy Needs

25An "episode" was defined in the CMS-contracted study as extending from
the date of a beneficiary's first therapy encounter until the last
encounter for the same type of therapy. For example, if the first physical
therapy encounter was on January 15 and the last was on January 22, the
physical therapy "episode" extended from January 15 through January 22. If
the same beneficiary began speech-language pathology services on January
20 and ended on January 28, the speech-language pathology episode lasted
from January 20 through January 28. If a 60-day break intervened between
therapy services of the same or a different type, the new round of therapy
was considered a new episode.

26All analyses of ranges in treatment length reflect the ranges to the
99th percentile, to eliminate extreme outliers.

Available Research Does Not Define Amount or Mix of Outpatient Therapy Needed
for Medicare Beneficiaries with Specific Diseases or Conditions

Payments for More Than a Half Million Beneficiaries Would Have Exceeded Therapy
Caps in 2002, but Adverse Effect Is Unknown

27This conclusion was part of a MedPAC letter to Congress on the
advisability of allowing Medicare fee-for-service beneficiaries to have
"direct access" to outpatient physical therapy services and comprehensive
rehabilitation facility services. MedPAC concluded that the physician
referral and review requirements are a necessary but not sufficient
mechanism to help beneficiaries receive outpatient physical therapy
services that are needed and appropriate for their clinical conditions.
MedPAC also found that providers need to be made more aware of coverage
rules for beneficiaries-for example, through increased educational
initiatives by the professional associations, the claims contractors, and
facilities in which physical therapists practice. Medicare Payment
Advisory Commission, letter to Congress (Washington, D.C.: Dec. 30, 2004).

                         Projected        Projected           Estimated 
                         number of    percentage of               total 
                     beneficiaries    beneficiaries   Average above cap 
                    whose payments   whose payments    amount (millions 
                        would have       would have above cap        of 
Cap               exceeded caps    exceeded caps (dollars) dollars)a 
Occupational                                                         
therapy                 129,509             17.4    $1,237    $160.2
Physical therapy                                                     
and                                                        
speech-language                                            
pathology               508,686             14.5    $1,263    $642.4

28GAO/HEHS-00-15R.

 HHS Has Made Little Progress toward a Payment System Based on Patients' Needs

Table 3: Legislation Affecting Medicare Spending on Outpatient Therapy
Services, 1997-2003, and HHS Actions

Law                  Key provisions            Response                    
Balanced Budget Act  Required HHS to submit,   HHS did not submit a report 
of 1997 (BBA), Pub.  no later than January 1,  to Congress by January 1,   
L. No. 105-33, S:    2001, a report including  2001. HHS, through CMS,     
4541, 111 Stat. 251, specific recommendations  contracted with the Urban   
454.                 on a revised coverage     Institute for a series of   
                        policy for outpatient     reports that were meant to  
                        therapy services under    help meet BBA's             
                        Medicare based on         requirements.a,b            
                        diagnostic category and   
                        prior use of services.    
Medicare, Medicaid,  Required HHS to compare   CMS contracted with the     
and SCHIP Balanced   and report on by June 30, Urban Institute for a       
Budget Refinement    2001, the utilization     series of reports that were 
Act of 1999 (BBRA),  patterns (nationwide and  to meant help meet BBRA's   
Pub. L. No. 106-113, by region, setting, and   requirements, including the 
app. F, S: 221, 113  diagnosis) of outpatient  requirement to study        
Stat. 1501A-321,     therapy services in 1998  utilization of outpatient   
1501A-351.           and 1999 with those on or therapy services.b          
                        after January 1, 2000,                                
                        including a review of a   CMS contracted with         
                        statistically significant AdvanceMed to meet BBRA's   
                        number of claims for      requirements for a study    
                        these services.           and report on utilization.c 
                                                  HHS did not submit a report 
                                                  to Congress by June 30,     
                                                  2001, but AdvanceMed's      
                                                  report was completed in     
                                                  September 2002.             
                        As an amendment to the    No outpatient therapy       
                        BBA reporting             payment policy designed,    
                        requirement, HHS was      therefore, no response to   
                        directed under BBRA to    "functional status"         
                        consider "functional      language.                   
                        status" and other         
                        criteria as the Secretary 
                        deemed appropriate in the 
                        design of a new           
                        outpatient therapy        
                        payment policy and to     
                        discuss methods to help   
                        ensure appropriate use of 
                        outpatient therapy.       
Medicare, Medicaid,  Required HHS to report,   HHS did not submit a report 
and SCHIP Benefits   no later than January 1,  to Congress by January 1,   
Improvement and      2005, on the development  2005. Officials told us in  
Protection Act of    of standard instruments   May 2005 that a report      
2000 (BIPA), Pub. L. for assessing the health  related to BIPA's           
No. 106-554, app. F, and functional status of  requirement was in          
S: 545, 114 Stat.    patients receiving any    progress. An HHS official   
2763A-463,           one of a variety of       anticipated submitting this 
2763A-551.           services, including       report to Congress by the   
                        speech-language           end of 2005, but it will    
                        pathology, physical       not include outpatient      
                        therapy, occupational     therapy.                    
                        therapy, and both         
                        inpatient and outpatient  
                        settings; this report is  
                        to include a              
                        recommendation on the use 
                        of such "standard         
                        instruments" for payment  
                        purposes.                 
Medicare             Required HHS to submit,   In November 2004 HHS issued 
Prescription Drug,   no later than March 31,   a report to Congress in     
Improvement, and     2004, overdue reports on  response to the BBA, BBRA,  
Modernization Act of payment for and           and MMA requirements. This  
2003 (MMA), Pub. L.  utilization of outpatient report included a review of 
No. 108-173, S: 624, therapy services.         medical claims and a        
117 Stat. 2066,                                discussion of a planned     
2317.                                          analysis of alternatives to 
                                                  current payment practices   
                                                  for outpatient therapy      
                                                  services. It did not        
                                                  specify a revised           
                                                  outpatient therapy payment  
                                                  policy.d HHS appended to    
                                                  this report seven reports   
                                                  by its contractors, the     
                                                  Urban Institute and         
                                                  AdvanceMed.e                

Source: GAO.

aThe HHS agency now known as CMS was called the Health Care Financing
Administration (HCFA) before June 2001.

bMaxwell and Baseggio, Outpatient Therapy Services (2000), and Maxwell et
al., Part B Therapy Services (2001).

cOlshin et al., Study and Report (2002).

dCenters for Medicare & Medicaid Services, Report to Congress, Medicare
Financial Limitations on Outpatient Rehabilitation Services (Baltimore,
Md.: November 2004).

eMaxwell and Baseggio, Outpatient Therapy Services (2000); Maxwell et al.,
Part B Therapy Services (2001); Olshin et al., Study and Report (2002);
Ciolek and Hwang, Feasibility and Impact Analysis (2004); Ciolek and
Hwang, Development of a Model (2004); Ciolek and Hwang, Utilization
Analysis (2004); and Ciolek and Hwang, Final Project Report (2004).

HHS's response, implemented through CMS, to the principal legislative
provisions addressing outpatient therapy services has been to contract for
a series of studies, first by the Urban Institute and then by AdvanceMed
(see table 4). In general, these studies have found that information
available from Medicare claims data is insufficient to develop an
alternative payment system based on patients' therapy needs, and a patient
assessment instrument for outpatient therapy services that collected
information on functional status and functional outcomes would be needed
to develop such a system. They have also found that a needs-based payment
system would be key to controlling costs while ensuring patient access to
appropriate therapy.

Table 4: CMS-Contracted Studies of Outpatient Therapy Services, 2000-2004

                   Key findings or                                            
Study           conclusions             Selected recommendations
Urban Institute Insufficient research   No recommendations.                
(2000)a         available on outpatient 
                   therapy practice        
                   patterns to design and  
                   implement a payment     
                   system based on         
                   diagnosis and prior use 
                   of services.            
                                           
                   Lack of functional      
                   status data on Medicare 
                   outpatient therapy      
                   patients impedes the    
                   development of such a   
                   system.                 
                                           
                   Options were identified 
                   for managing outpatient 
                   therapy, including      
                   development of a        
                   database of functional  
                   status assessments made 
                   during beneficiaries'   
                   use of outpatient       
                   therapy services.       
Urban Institute Application of          No recommendations.                
(2001)b         Medicare's physician    
                   fee schedule to skilled 
                   nursing facilities,     
                   rehabilitation          
                   agencies, and           
                   comprehensive           
                   outpatient              
                   rehabilitation facility 
                   outpatient therapy      
                   reduced spending on     
                   services in 1999 and    
                   2000.                   
AdvanceMed      Application of          No recommendations.                
(2002)c         Medicare's physician    
                   fee schedule to         
                   institutional           
                   outpatient therapy      
                   service providers       
                   reduced spending on     
                   these services before   
                   2002.                   
                                           
                   Diagnoses on claim      
                   forms do not accurately 
                   reflect the medical     
                   condition for which a   
                   patient received        
                   therapy and thus        
                   constrain CMS's ability 
                   to develop an           
                   alternative payment     
                   system based on patient 
                   condition.              
AdvanceMed      Claims data show no     The final project reportd          
(2004)d         pattern of diagnoses    discussed several options and      
                   reflecting specific     recommended implementing a "global 
                   conditions that         approach" comprising both short-   
                   consistently result in  and long-term strategies for       
                   payments for outpatient managing outpatient therapy        
                   therapy services        services, including developing a   
                   exceeding the spending  standardized outpatient therapy    
                   limits.                 patient assessment instrument to   
                                           collect clinical information       
                   Claims data will not    needed to develop a classification 
                   provide sufficient      scheme based on patient condition. 
                   information to develop  The final project report proposed  
                   a needs-based payment   eliminating the therapy caps,      
                   system.                 because they may adversely affect  
                                           some patients, and restraining     
                                           outpatient therapy spending        
                                           through improved program integrity 
                                           and limited use through, for       
                                           example:                           
                                                                              
                                              o  targeted use limits or       
                                              o  improved administrative      
                                              edits to better identify and    
                                              deny payment of improper        
                                              claims.                         

Source: GAO.

aMaxwell and Baseggio, Outpatient Therapy Services (2000).

bMaxwell et al., Part B Therapy Services (2001).

cOlshin et al., Study and Report (2002).

dCiolek and Hwang, Feasibility and Impact Analysis (2004); Ciolek and
Hwang, Development of a Model (2004); Ciolek and Hwang, Utilization
Analysis (2004); and Ciolek and Hwang, Final Project Report (2004).

As of October 2005, HHS had taken few steps toward developing a patient
assessment instrument for assessing beneficiaries' needs for outpatient
therapy. Some health care settings, including inpatient rehabilitation
facilities, home health agencies, and skilled nursing facilities, do have
patient assessment instruments to collect functional status and other
information on Medicare beneficiaries. Officials from HHS's Office of the
Assistant Secretary for Planning and Evaluation and CMS told us they were
collaborating to examine the consistency of definitions and terms used in
these settings. They expected to report to Congress by the end of 2005 (in
response to the requirement in the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act) on this effort to standardize patient
assessment terminology, although they have no plans to include outpatient
therapy services in the effort. CMS officials and one of the provider
groups we spoke with estimated that the development of a patient
assessment instrument for outpatient therapy services would take at least
3 to 5 years. HHS officials said that the complexity of the task and
resource constraints precluded them from including outpatient therapy
services in their effort to standardize other patient assessment
terminology. CMS has, however, funded a demonstration project with a
private-sector firm that has developed a patient assessment instrument
that collects functional status and functional outcomes for patients who
receive outpatient therapy services, primarily physical therapy, in
certain facilities.29 A report from the firm to CMS is expected in summer
2006.

                 Circumstances That Led to Therapy Caps Remain

Recent assessments of Medicare claims data have shown that the
circumstances that initially led to therapy caps-rising Medicare payments
for outpatient therapy and a high rate of improper payments-remain. CMS,
however, has not implemented its contracted researchers' proposal to
strengthen its system of automated checks for denying payment of improper
claims. Provider groups we spoke with agreed that Medicare was likely
paying for some medically unnecessary therapy services and that
improvements could be made to help strengthen the integrity of the payment
system.

29This demonstration project will analyze the feasibility of a
pay-for-performance system in outpatient rehabilitation settings and also
analyze the outcomes of therapy services for Medicare part B beneficiaries
(who constitute about 15 percent of the 1.6 million patients in the firm's
database) on the basis of their condition and functional status. The
project expects to identify appropriate care for particular
therapy-related diagnoses, although the data have limited applicability to
the entire Medicare population.

According to recent CMS assessments of Medicare claims data, Medicare
payments for outpatient therapy services continue to rise. Over the 4-year
period from 1999 through 2002, Medicare spending for outpatient therapy
more than doubled, from an estimated $1.5 billion to $3.4 billion,
according to the CMS-contracted analysis of 2002 claims data released in
2004.30 Although outpatient therapy spending for 2003 and 2004 has not
been fully estimated, overall Medicare part B expenditures-which include
spending on outpatient therapy services-showed rapid growth (15 percent)
from 2003 to 2004, according to CMS estimates reported in 2005.31 CMS
attributed this growth to five factors, one of which was increased use of
minor procedures such as therapy performed by physicians and physical
therapists.32 Payments for certain therapy services, for example,
increased by 24 percent or more from 2003 to 2004. CMS officials told us
that many valid reasons may exist for the significant growth in payments
for outpatient therapy. For example, they said, some of the increase in
therapy services could be due to the growth in recent years of elective
services such as knee replacements.

CMS has also recently reported that improper payments made for outpatient
therapy services have increased substantially in recent years.
Specifically, in November 2004, CMS reported that the estimated error rate
for claims rose steadily from 10.9 percent in 1998 to 20.4 percent in
2000.33 CMS reported that most of the errors were due to insufficient
documentation to support the services claimed, such as lack of evidence of
physician review and certification of treatment plans. In January 2005,
CMS reported error rates in a random sample of more than 160,000
fee-for-service claims, which included therapy services, from 2003.34 The
agency found that claims submitted for therapy services were among those
with the highest rates of payments made in error because of insufficient
documentation or medically unnecessary services.35 Such services included
procedures frequently provided by therapists, such as therapeutic
exercise,36 therapeutic activities,37 neuromuscular reeducation,
electrical stimulation, manual therapy, and physical therapy evaluation.
For example, 23.5 percent of claims for therapeutic activities lacked
sufficient documentation, resulting in projected improper payments of more
than $34 million.38 Claims for therapeutic exercises had a "medically
unnecessary" error rate of 3 percent, with projected improper payments of
more than $18 million.

30Ciolek and Hwang, Final Project Report (2004).

31Letter from the Director, Center for Medicare Management, Centers for
Medicare & Medicaid Services, to the Chair, Medicare Payment Advisory
Commission, March 31, 2005, and accompanying data.

32The five factors were increased spending for office visits (29 percent
of overall growth), increased use of minor procedures including therapy
(26 percent), more frequent and complex imaging services (18 percent),
more laboratory and other tests (11 percent), and more use of prescription
drugs in doctors' offices (11 percent). The greatest contributors to the
increase in minor procedures were the administration of drugs and physical
therapy, including procedures such as manual therapy and neuromuscular
reeducation of movement. See Center for Medicare Management Director's
letter (Mar. 31, 2005).

33Centers for Medicare & Medicaid Services, Medicare Financial Limitations
on Outpatient Rehabilitation Services (Baltimore, Md.: November 2004).

Our past work found that CMS needed to do more medical reviews of
beneficiaries receiving outpatient therapy services. We reported in 2004,
for example, that in Florida, comprehensive outpatient rehabilitation
facilities were the most expensive class of providers of outpatient
therapy services in the Medicare program in 2002.39 Per-beneficiary
payments for outpatient therapy services to providers in these facilities
were two to three times higher than payments to therapy providers in other
facilities. We recommended that CMS direct the Florida claims
administration contractor to medically review more claims from
comprehensive outpatient rehabilitation facilities.40

34Centers for Medicare & Medicaid Services, Improper Medicare
Fee-for-Service Payments Report, Fiscal Year 2004 (Baltimore, Md.: January
2005).

35An "insufficient documentation" error means that the provider did not
include pertinent patient facts (e.g., the patient's overall condition,
diagnosis, or extent of services performed), or the physician's orders or
documentation were incomplete. "Medically unnecessary" errors included
situations where the claim reviewers identified enough documentation in
the medical record to make an informed decision that the services billed
to Medicare were not medically necessary.

36Therapeutic exercises-such as treadmill use, stretching, and
strengthening-develop strength, endurance, range of motion, or
flexibility.

37Therapeutic activities-such as bending, lifting, and carrying-improve
functional performance.

38CMS's estimate of improper payments was projected because the data
collected had not been adjusted to exclude beneficiary co-payments,
deductibles, or reductions to recover previous overpayments.

39GAO, Comprehensive Outpatient Rehabilitation Facilities: High Medicare
Payments in Florida Raise Program Integrity Concerns, GAO-04-709
(Washington, D.C.: Aug. 12, 2004).

CMS's contracted researcher concluded that CMS could improve its claims
system by identifying and implementing modifications to the agency's
automated claims review system to better target payments to medically
appropriate care.41 In doing their analysis of the 2002 claims, they
identified three types of specific edits that they found to be feasible
and that would reject claims likely to be improper:

           o  Edits to control multiple billings of codes that are meant to
           be billed only once per patient per visit. The contracted
           researchers estimated that in 2002, the impact of this type of
           improper billing amounted to $36.7 million.
           o  Edits to control the amount of time that can be billed per
           patient per visit under a single code, since most conditions do
           not warrant treatment times exceeding 1 hour. The contracted
           researchers estimated that in 2002, the impact of this type of
           improper billing amounted to $24-$100 million, depending on the
           amount of time per visit billed under a given code.
           o  Edits of clinically illogical combinations of therapy procedure
           codes. In analyzing 2002 Medicare claims data, the contractor
           found limited system protections to prevent outpatient therapy
           providers from submitting claims for procedures that are illogical
           for a given diagnosis. One example, according to the contractor's
           report, was claiming for manual therapy submitted with a diagnosis
           of an eye infection. The estimated impact of improper billings
           based on illogical combinations of diagnosis and procedure codes
           in 2002 amounted to $16.7 million.

           CMS officials agreed with the contracted researcher that such
           edits are worth considering, but the agency had not implemented
           them as of October 2005. A CMS official told us, however, that CMS
           is implementing the proposed edits to control multiple billings of
           codes meant to be billed only once per patient per visit; the
           agency expects these edits to be in place in early 2006. As of
           October 2005, CMS was still considering whether to implement the
           other two types of edits. In addition to the three types of edits
           identified by the contracted researcher, the researcher proposed
           routine data analysis of Medicare claims to identify other
           utilization limits that could be applied to better target Medicare
           payments. CMS is considering whether and how to implement this
           type of analysis.

           Provider groups we spoke with agreed that Medicare was likely
           paying for some medically unnecessary therapy services and that
           improved payment edits could help ensure that Medicare did not pay
           for such services. Nevertheless, representatives from these groups
           stressed the importance of mechanisms that would allow Medicare to
           cover payments for beneficiaries who need extensive care. The
           representatives noted that an exception process, based on a
           medical review, could help determine the appropriateness of
           therapy services. Such an exception process could be invoked to
           review the medical records of beneficiaries whose providers seek
           permission for coverage of Medicare payments in excess of the
           caps. CMS officials agreed that an appeal process or waiver from
           the caps could be a short-term approach to focus resources on
           needy beneficiaries. They added that possible criteria for waiving
           the caps could include (1) having multiple conditions; (2) having
           certain conditions, levels of severity, or multiple conditions
           suggested by research as having greater need for treatment; (3)
           having needs for more than one type of service, such as
           occupational therapy and speech-language pathology; or (4) having
           prior use of services or multiple episodes in the same year. HHS
           does not, however, currently have the authority to implement a
           process, or to conduct a demonstration or pilot project, to
           provide exceptions to the therapy caps.

           Medicare payments for outpatient therapy continue to rise rapidly,
           and 20 percent or more of claims may be improper. To date,
           however, HHS has made little progress toward a payment system for
           outpatient therapy services that is based on patients' needs.
           Furthermore, while CMS is considering ways to reduce improper
           payments, it has not implemented the contractor's proposals for
           improving its claims-processing system.

           HHS has been required for years to take steps toward developing a
           payment system based on beneficiaries' needs, which would require
           developing a process for collecting better assessment information.
           Studies contracted by CMS to respond to requirements under three
           laws suggest that the department would need to develop a standard
           patient assessment instrument to define a patient's diagnosis and
           functional status and thereby determine the patient's medical need
           for therapy. In response to a statutory requirement to report on
           the standardization of patient assessment instruments in a variety
           of settings, HHS and CMS have an effort under way to study and
           report to Congress on the development of standard terminology that
           Medicare providers could use to assess patients' diagnosis and
           functional status. Although this provision requires that
           outpatient therapy services be included in this effort, HHS and
           CMS have not done so.

           Concerns remain that when the current moratorium expires and the
           caps are reinstated, some beneficiaries who have medical needs for
           therapy beyond what can be paid for under the caps may not be able
           to obtain the care they need. Some beneficiaries may not be able
           to afford to pay for care or may not have access to hospital
           outpatient departments, which are not subject to the caps. In the
           absence of patient assessment information, therefore, an interim
           process, demonstration, or pilot project may be warranted to allow
           HHS to grant exceptions to the caps. For example, such a project
           could allow beneficiaries, under circumstances that CMS
           determines, an exception to the cap on the basis of medical review
           supported by documentation from providers regarding their
           patients' needs for extensive therapy. Such a project could also
           provide CMS with valuable information about the conditions,
           diseases, and functional status of beneficiaries who have
           extensive medical needs for therapy. The information gathered
           through the project could also facilitate development of a
           standardized patient assessment process or instrument. HHS,
           however, would need legislative authority to conduct such a
           project. Although exceptions could increase Medicare payments for
           outpatient therapy, exceptions could provide one avenue for
           Medicare coverage above the caps for some beneficiaries who need
           extensive therapy. Potentially, payment increases due to
           exceptions could be offset by implementation of the
           contractor-proposed improvements, such as edits.

           To provide a mechanism after the moratorium expires whereby
           certain Medicare beneficiaries could have access to appropriate
           outpatient therapy services and to obtain better data needed to
           improve the Medicare outpatient therapy payment policy, including
           data on the conditions and diseases of beneficiaries who have
           extensive outpatient therapy needs, Congress should consider
           giving HHS authority to implement an interim process or
           demonstration project whereby individual beneficiaries could be
           granted an exception from the therapy caps.

           To expedite development of a process for assessing patients' needs
           for outpatient therapy services and to limit improper payments, we
           recommend that the Secretary of HHS take the following two
           actions:

           o  ensure that outpatient therapy services are added to the effort
           already under way to develop standard terminology for existing
           patient assessment instruments, with a goal of developing a means
           by which to collect such information for outpatient therapy, and
           o  implement improvements to CMS's automated system for
           identifying outpatient therapy claims that are likely to be
           improper.

           We provided a draft of this report to HHS for comment and received
           a written response from the department (reproduced in app. I). HHS
           did not comment on the matter for congressional consideration, in
           which we said that Congress should give HHS authority to implement
           an interim process or demonstration project whereby individual
           beneficiaries could be granted an exception from the therapy caps.
           HHS concurred with our recommendation that it ensure that
           outpatient therapy services are added to the effort already under
           way to develop standard terminology for existing patient
           assessment instruments. The department stated that it is preparing
           to contract for a 5-month study to develop a policy and payment
           guidance report as it explores the feasibility of developing a
           post-acute care patient assessment instrument.

           In commenting on our recommendation to implement improvements to
           CMS's automated system for identifying outpatient therapy claims
           that are likely to be improper, HHS discussed a national edit
           system to promote correct coding methods and eliminate improper
           coding. This national edit system has been applied to some
           therapy-related claims starting in 1996, and HHS plans to apply it
           more broadly in 2006. While the national edit system is
           complementary to the edits proposed by CMS's contracted study, CMS
           can do more by also implementing improvements to its payment
           system as suggested by the study's specific findings. HHS also
           indicated that it was exploring other methods for automated
           evaluation of claims but commented that its claims-processing
           system cannot always identify an improper claim from the
           information that is available on claim forms. We agree that the
           current system cannot always identify an improper claim, given the
           lack of information on the claim forms about a patient's actual
           needs for therapy. It was this conclusion that led to our
           recommendation that HHS include outpatient therapy in its present
           efforts to improve the collection of patient assessment
           information. We believe that CMS can make improvements to its
           current automated system to reduce improper claims, irrespective
           of its efforts to improve patient assessment information. As we
           noted in the draft report, CMS's contracted study found certain
           edits to be feasible using information already provided on claim
           forms, such as edits of clinically illogical combinations of
           therapy procedure codes.

           We are sending copies of this report to the Secretary of Health
           and Human Services, the Administrator of the Centers for Medicare
           & Medicaid Services, and other interested parties. We will also
           make copies available to others upon request. In addition, the
           report will be available at no charge on the GAO Web site at
           http://www.gao.gov.

           If you or your staff members have any questions about this report,
           please contact me at (202) 512-7119 or at [email protected]
           Contact points for our Offices of Congressional Relations and
           Public Affairs may be found on the last page of this report. GAO
           staff who made major contributions to this report are listed in
           appendix II.

           A. Bruce Steinwald Director, Health Care

           A. Bruce Steinwald, (202) 512-7119 or [email protected]

           In addition to the contact mentioned above, Katherine Iritani,
           Assistant Director; Ellen W. Chu; Adrienne Griffin; Lisa A. Lusk;
           and Jill M. Peterson made key contributions to this report.

           Medicare: More Specific Criteria Needed to Classify Inpatient
           Rehabilitation Facilities. GAO-05-366. Washington, D.C.: April 22,
           2005.

           Comprehensive Outpatient Rehabilitation Facilities: High Medicare
           Payments in Florida Raise Program Integrity Concern. GAO-04-709.
           Washington, D.C.: August 12, 2004.

           Medicare: Recent CMS Reforms Address Carrier Scrutiny of
           Physicians' Claims for Payment. GAO-02-693. Washington, D.C.: May
           28, 2002.

           Medicare: Outpatient Rehabilitation Therapy Caps Are Important
           Controls but Should Be Adjusted for Patient Need. GAO/HEHS-00-15R.
           Washington D.C.: October 8, 1999.

           Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy
           in Nursing Homes. GAO/HEHS-95-23. Washington D.C.: March 30, 1995.

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40According to a CMS official, this recommendation had not been
implemented as of August 2005.

41Ciolek and Hwang, Feasibility and Impact Analysis (2004); Ciolek and
Hwang, Final Project Report (2004).

                                  Conclusions

                     Matter for Congressional Consideration

                      Recommendations for Executive Action

                                Agency Comments

Appendix I: Comments from the Department of Health and Human Services  
Appendix I: Comments from the Department of Health and Human Services

Appendix II: Ac  Appendix II: GAO Contact and Staff Acknowledgments

                                  GAO Contact

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Highlights of GAO-06-59, a report to congressional committees

November 2005

MEDICARE

Little Progress Made in Targeting Outpatient Therapy Payments to
Beneficiaries' Needs

For years, Congress has wrestled with rising Medicare costs and improper
payments for outpatient therapy services-physical therapy, occupational
therapy, and speech-language pathology. In 1997 Congress established
per-person spending limits, or "therapy caps," for nonhospital outpatient
therapy but, responding to concerns that some beneficiaries need extensive
services, has since placed temporary moratoriums on the caps. The current
moratorium is set to expire at the end of 2005.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
required GAO to report on whether available information justifies waiving
the caps for particular conditions or diseases. As agreed with the
committees of jurisdiction, GAO also assessed the status of the Department
of Health and Human Services' (HHS) efforts to develop a needs-based
payment policy and whether circumstances leading to the caps have changed.

What GAO Recommends

GAO suggests that Congress give HHS interim authority to allow, under
certain conditions, payments exceeding the caps after the moratorium
expires. GAO recommends that HHS expedite developing a means to assess
beneficiaries' therapy needs, and HHS concurs. GAO also recommends that
HHS improve its system for identifying improper therapy claims beyond
initiatives already under way.

Data and research available are, for three reasons, insufficient to
identify particular conditions or diseases to justify waiving Medicare's
outpatient therapy caps. First, Medicare claims data-the most
comprehensive data for beneficiaries whose payments would exceed the
caps-often do not capture the clinical diagnosis for which therapy is
received. Nor do they show particular conditions or diseases as more
likely than others to be associated with payments exceeding the caps.
Second, even for diagnoses clearly linked to a condition or disease, such
as stroke, the length of treatment for patients with the same diagnosis
varies widely. Third, because of the complexity of patient factors
involved, most studies do not define the amount or mix of therapy services
needed for Medicare beneficiaries with specific conditions or diseases.
Provider groups remain concerned about adverse effects on beneficiaries
needing extensive therapy if the caps are enforced. HHS does not, however,
have the authority to provide exceptions to the therapy caps.

Despite several related statutory requirements, HHS has made little
progress toward developing a payment system for outpatient therapy that
considers individual beneficiaries' needs. In particular, HHS has not
determined how to standardize and collect information on the health and
functioning of patients receiving outpatient therapy services-a key part
of developing a system based on individual needs for therapy.

The circumstances that led to the therapy caps remain a concern. Medicare
payments for outpatient therapy are still rising significantly, and
increases in improper payments for outpatient therapy continue. HHS could
reduce improper payments and Medicare costs by improving its system of
automated processes for rejecting claims likely to be improper.

Beneficiaries for Whom 2002 Medicare Payments for Outpatient Therapy
Services Would Have Exceeded Therapy Caps, Had They Been in Place, and by
How Much

       Projected number of   Projected percentage                   Estimated 
       beneficiaries whose of beneficiaries whose       Average   total above 
       payments would have    payments would have  amount above cap (millions 
Cap       exceeded caps          exceeded caps cap (dollars)  of dollars)a 

Source: Daniel E. Ciolek and W. Hwang, Final Project Report (Baltimore,
Md.: Computer Sciences Corporation/AdvanceMed, 2004).

Note: Because of a moratorium, therapy caps were not in effect in 2002;
use of outpatient therapy services might have been different had the
spending caps been in place. Because hospital outpatient departments are
exempt from the caps, payments for services provided by hospital
outpatient departments were excluded from this analysis.

aThis study estimated that the totals above the caps represented 23.7
percent of all outpatient therapy expenditures for 2002.
*** End of document. ***