Skilled Nursing Facilities: Medicare Payment Changes Require Provider
Adjustments But Maintain Access (Letter Report, 12/14/1999,
GAO/HEHS-00-23).

Pursuant to a congressional request, GAO provided information on skilled
nursing facilities, focusing on: (1) the initial effect of the skilled
nursing facility (SNF) prospective payment system (PPS) on Medicare
beneficiaries' access to care; (2) the initial effect of the SNF PPS on
providers; and (3) the role the SNF PPS has played in the poor financial
performance of large nursing home chains.

GAO noted that: (1) Medicare beneficiaries' ability to obtain needed
care does not appear to have decreased since the implementation of the
SNF PPS, although some patients may stay longer in the hospital before
being admitted to a nursing home or may receive care from other
post-acute-care providers; (2) the PPS does appear to have affected the
willingness or ability of some nursing homes to accept certain types of
Medicare patients; (3) hospital discharge planners reported that
facilities are reluctant to admit patients requiring certain high-cost
services, indicating the payments for some types of SNF patients may be
too low; (4) GAO found Medicare patients needing short-term
rehabilitation are preferred by nursing homes, raising concerns that
payments for these patients may be too high; (5) these findings were
confirmed in recent surveys of hospital discharge planners and nursing
home administrators by the Office of Inspector General of the Department
of Health and Human Services; (6) although the new payment system
results in major changes in financial incentives, it is likely that
aggregate SNF payments to providers are adequate, given that inflated
costs were used to establish the per diem payment rates; (7) however,
the case-mix classification system used to adjust payments to reflect
the needs of patients may not appropriately allocate payments across
patients and providers; (8) payments may be too low for certain types of
patients and too high for others; (9) the generally low proportion of
patient-days covered by Medicare at most nursing homes will dampen the
initial effects of PPS on providers, and the transition to the full PPS
rates was intended to give them time to adjust; (10) some facilities
will have to make bigger changes in their treatment patterns,
particularly facilities with a large proportion of patient-days covered
by Medicare, those with inefficient practices, and those that
historically furnished excessive services to patients to maximize
revenues; (11) other facilities may be more selective in their admission
policies until refinements in the classification system fully account
for differences across patients; (12) the SNF PPS is only one of the
many factors contributing to the poor financial performance of Sun
Healthcare Group, Inc., and Vencor, Inc., two corporations that operate
a large number of nursing homes; and (13) the large total losses
reported by the corporations stem from high capital-related costs that
have shrunk SNF margins, reduced demand for ancillary services, related
to several Budget Balance Act of 1997 provisions, and substantial
nonrecurring expenses and write-offs, reflecting reductions in future
anticipated earnings.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-00-23
     TITLE:  Skilled Nursing Facilities: Medicare Payment Changes
	     Require Provider Adjustments But Maintain Access
      DATE:  12/14/1999
   SUBJECT:  Nursing homes
	     Health care facilities
	     Medical expense claims
	     Health maintenance organizations
	     Managed health care
	     Health care cost control
	     Health insurance
	     Patient care services
	     Health care programs
IDENTIFIER:  Medicare Prospective Payment System
	     Medicare Program

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Cover
================================================================ COVER

Report to the Chairman and Ranking Minority Member, Committee on
Finance, U.S.  Senate and the Chairman, Special Committee on Aging,
U.S.  Senate

December 1999

SKILLED NURSING FACILITIES -
MEDICARE PAYMENT CHANGES REQUIRE
PROVIDER ADJUSTMENTS BUT MAINTAIN
ACCESS

GAO/HEHS-00-23

SNF Access Under New Payment System

(101854)

Abbreviations
=============================================================== ABBREV

  BBA - Budget Balance Act of 1997
  HCFA - Health Care Financing Administration
  OIG - Office of Inspector General
  PPS - prospective payment system
  SNF - skilled nursing facility

Letter
=============================================================== LETTER

B-283347

December 14, 1999

The Honorable William V.  Roth, Jr.
Chairman
The Honorable Daniel Patrick Moynihan
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Charles E.  Grassley
Chairman
Special Committee on Aging
United States Senate

Since the mid-1980s, Medicare spending for skilled nursing facility
(SNF) services has risen dramatically.  Between 1986 and 1998,
spending increased, on average, 30 percent annually, climbing from
$578 million to $13.6 billion.  This spending growth is due to a
number of factors.  SNF care, which once comprised relatively
low-intensity nursing care and therapy, has in recent years included
a growing number of services that previously were provided only in
hospital settings.  Changes in the nature of the services delivered
and in the facilities that furnish SNF care, as well as the
incentives of Medicare's payment method for acute hospital services,
have expanded the range of services offered.  At the same time, the
former cost-based payment method for SNF services and a lack of
appropriate program oversight encouraged SNFs to provide excessive
ancillary services to SNF patients.  As a result, the number of
Medicare beneficiaries using SNF care and the number of services
furnished to each patient have surged, making the Medicare SNF
benefit one of the fastest growing components of Medicare spending. 

In an effort to control spending growth, the Congress directed the
Health Care Financing Administration (HCFA) in the Balanced Budget
Act of 1997 (BBA) to develop a prospective payment system (PPS) for
skilled nursing facility services provided to Medicare
beneficiaries.\1 In July 1998, Medicare began the transition to a
PPS, paying fixed, predetermined rates for each day of care--a major
change from the former system of cost-based reimbursement. 
Previously, facilities benefited from furnishing more ancillary
services to Medicare patients, without regard for their services'
price or necessity.  The PPS attempts to create incentives for
providers to control their daily costs and deliver care more
efficiently. 

Since implementation of the PPS began, concerns have been raised that
weaknesses in the payment system's design may threaten access to SNF
care for some high-cost beneficiaries.  At the same time, some
nursing home chains have claimed that their eroding financial
performance is a result of the PPS.  These concerns have prompted
Congressional debates on modifications to the SNF PPS.  You asked us
to assess (1) the initial effect of the SNF PPS on Medicare
beneficiaries' access to care, (2) the initial effect of the SNF PPS
on providers, and (3) the role the SNF PPS has played in the poor
financial performance of large nursing home chains.  To do this, we
conducted a nationwide survey of hospital discharge planners,
interviewed industry analysts as well as representatives from several
nursing home chains, and reviewed financial information from two
chains, Sun Healthcare Group, Inc., and Vencor, Inc., which were
experiencing large losses and recently filed for bankruptcy.  Our
work was performed in accordance with generally accepted government
auditing standards between June and October 1999.  (For a detailed
discussion of our scope and methodology, see appendix I.)

--------------------
\1 P.L.  105-33, section 4432(a). 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Medicare beneficiaries' ability to obtain needed care does not appear
to have decreased since the implementation of the SNF PPS, although
some patients may stay longer in the hospital before being admitted
to a nursing home or may receive care from other post-acute-care
providers.  The PPS does appear, however, to have affected the
willingness or ability of some nursing homes to accept certain types
of Medicare patients.  Hospital discharge planners reported that
facilities are reluctant to admit patients requiring certain
high-cost services, including some expensive drug treatments and
infusion therapy, indicating that the payments for some types of SNF
patients may be too low.  We also found that Medicare patients
needing short-term rehabilitation are preferred by nursing homes,
raising concerns that payments for these patients may be too high. 
These findings are confirmed in recent surveys of hospital discharge
planners and nursing home administrators by the Office of Inspector
General of the Department of Health and Human Services (OIG). 

Although the new payment system results in major changes in financial
incentives, it is likely that aggregate SNF payments to providers are
adequate, given that inflated costs were used to establish the per
diem payment rates.  However, the case-mix classification system used
to adjust payments to reflect the needs of patients may not
appropriately allocate payments across patients and providers. 
Payments, therefore, may be too low for certain types of patients and
too high for others.  Congress' recent modifications to the PPS will
temporarily increase payments for certain types of patients and thus
may alleviate any current disincentives to admit patients.  But even
without these modifications, the generally low proportion of
patient-days covered by Medicare at most nursing homes dampens the
initial effects of PPS on providers, and the transition to the full
PPS rates was intended to give them time to adjust.  Some facilities
will have to make bigger changes in their treatment patterns,
particularly facilities with a large proportion of patient-days
covered by Medicare, those with inefficient practices, and those that
historically furnished excessive services to patients to maximize
revenues.  Other facilities, such as those that care for patients
with extensive resource needs and those that have changed their mix
of patients since 1995 (the year upon which payments were based), may
be more selective in their admission policies, at least in the short
term, until refinements in the classification system fully account
for differences across patients. 

The SNF PPS is only one of many factors contributing to the poor
financial performance of Sun Healthcare Group, Inc., and Vencor,
Inc., two corporations that operate a large number of nursing homes. 
The large total losses reported by the corporations stem from high
capital-related costs that have shrunk SNF margins; reduced demand
for ancillary services, related to several BBA provisions; and
substantial nonrecurring expenses and write-offs, reflecting
reductions in future anticipated earnings. 

   BACKGROUND
------------------------------------------------------------ Letter :2

The Medicare SNF benefit consists of inpatient skilled nursing and
rehabilitative services furnished by a nursing home that is
Medicare-certified.\2 To qualify for SNF services, a Medicare
beneficiary must need daily skilled nursing or rehabilitative therapy
services, generally within 30 days of a hospital stay of at least 3
days in length, and must be admitted to the nursing home for a
condition related to the hospitalization.  When the beneficiary meets
these conditions, Medicare covers all necessary services, including
room and board; nursing care; and ancillary services such as drugs,
laboratory tests, and physical therapy, for up to 100 days of care
per benefit period.\3 Beginning on the 21\st day of care, the
beneficiary is responsible for a daily coinsurance payment, which
equals $96 in 1999.  Medicare beneficiaries residing in nursing homes
who are not eligible for part A coverage of the inpatient stay\4 may
continue to receive coverage for some ancillary services, subject to
limitations on the coverage for rehabilitation therapy services under
part B.\5

Skilled nursing services are provided by both hospital-based and
freestanding facilities.  In addition, rural hospitals designated as
swing-bed facilities can use acute-care beds to provide SNF
services.\6 The number of Medicare-certified SNFs has grown, on
average, about 6 percent per year throughout the 1990s, reaching
14,860 in 1998.  About three-quarters are freestanding facilities.  A
majority (66 percent) of nursing homes are for-profit entities, and
about half are owned or operated by corporations operating multiple
facilities, known as chains.  Most patients in nursing homes have
their care paid for through the Medicaid program.  Medicare-covered
SNF days account for about 9 percent of total nursing home days. 
Prior to implementation of the PPS, Medicare revenues accounted for
about 10 percent of nursing home revenues, on average. 

The range of services furnished by nursing homes varies
substantially.  Some facilities provide traditional, low-intensity
nursing care and therapy.  Others furnish higher-intensity
rehabilitative therapies and complex medical services, such as
parenteral feeding and ventilator care, that previously were provided
only in hospital settings. 

--------------------
\2 Such facilities are referred to as SNFs. 

\3 A benefit period begins on the first day of an inpatient hospital
stay and ends 60 days after the beneficiary is discharged from the
hospital or from skilled care in a SNF or other inpatient facility
providing skilled nursing or rehabilitative services.  There is no
limit to the number of benefit periods a beneficiary may have. 

\4 Medicare part A (or hospital insurance) covers inpatient hospital,
skilled nursing facility, hospice, and certain home health care
services.  Medicare part B (or supplementary medical insurance)
covers physician and hospital outpatient services, outpatient
rehabilitation services, home health services under certain
conditions, diagnostic tests, and ambulance and other medical
services and supplies. 

\5 BBA required a $1,500 per-beneficiary cap on payments for part
B-covered physical and speech therapy services and a separate $1,500
cap on part B-covered occupational therapy.  See 42 U.S.C.
 1395l(g)(2).  Recent changes in the law delay implementation of the
spending caps until fiscal year 2002. 

\6 Hospitals participating in the Medicare swing-bed program may use
their beds for either acute care or post-acute care.  To be certified
as a swing-bed provider, a hospital must have 100 beds or fewer and
be located in a rural area.  Payments for routine SNF services
provided in swing-bed hospitals continue to be based on Medicare's
average routine payment for freestanding SNFs within each region. 
Capital and ancillary costs continue to be reimbursed on a
facility-specific cost basis.  Beginning in July 2001, swing-bed
hospitals will receive prospective payments comparable to those to
other SNFs. 

      GROWTH IN MEDICARE SPENDING
      FOR SNF SERVICES
---------------------------------------------------------- Letter :2.1

The Medicare SNF benefit has been one of the fastest-growing
components of Medicare spending.  Since 1990, Medicare expenditures
for SNF services have increased, on average, 25 percent annually,
reaching $13.6 billion in 1998.  This growth is due primarily to a
rise in the number of beneficiaries using SNF services and an
increase in the number and type of services provided to SNF patients. 
Between 1990 and 1997, the number of beneficiaries receiving SNF care
more than doubled, rising from 638,000 to 1.6 million; Medicare's
average payment per SNF day also more than doubled, from $98 in 1990
to $262 in 1998.  At the same time, the number of days of care per
SNF patient served dropped from 37 to 32.  Much of the growth in
Medicare per diem expenditures was due to increases in payments for
ancillary services.  Those payments increased 17 to 20 percent
annually between 1992 and 1995, compared with 5 to 7 percent for
routine services. 

Medicare's cost-based reimbursement method, combined with a lack of
appropriate program oversight, provided few checks on the growth in
Medicare spending for SNF services.  Ancillary cost growth, in
particular, is considered to have been excessive.\7 Before
implementation of the BBA, nursing homes were paid the reasonable
costs they incurred in providing Medicare-covered services.  Routine
costs, which include general nursing, room and board, and
administrative overhead, were subject to cost limits,\8 but payments
for ancillary services and capital-related costs were virtually
unlimited.  Indeed, as a facility's costs of ancillary services rose,
more of its overhead costs could be assigned to the program.\9
Because higher ancillary service costs triggered higher payments,
Medicare's payment method offered providers no financial incentive to
furnish only clinically necessary services or to deliver them
efficiently.  Indeed, high ancillary costs could be used to justify a
request for exceptions payments for routine costs over and above the
cost limits.\10 As a result, a provider's mix of services did not
necessarily reflect the complexity of its cases or the true needs of
its patients. 

--------------------
\7 See Medicare Post-Acute Care:  Better Information Needed Before
Modifying BBA Reforms (GAO/T-HEHS-99-192, Sept.  15, 1999);
Department of Health and Human Services, Office of Inspector General,
Office of Evaluation and Inspections, Physical and Occupational
Therapy in Nursing Homes:  Cost of Improper Billings to Medicare
(OEI-09-97-00122, Aug.  1999); Medicare:  Tighter Rules Needed to
Curtail Overcharges for Therapy in Nursing Homes (GAO/HEHS-95-23,
Mar.  1995). 

\8 For cost reporting periods beginning on or after October 1, 1997,
the cost limits (before applicable wage index adjustments) were
$110.82 for urban freestanding facilities, $108.28 for rural
freestanding facilities, $155.96 for urban hospital-based facilities,
and $137.52 for rural hospital-based facilities. 

\9 Contract arrangements with ancillary service providers were found
to result in markups of 800 percent or more over the direct cost of
the therapy service.  See Medicare:  Tighter Rules Needed to Curtail
Overcharges for Therapy in Nursing Homes (GAO/HEHS-95-23, Mar. 
1995), p.  13. 

\10 Under cost-based reimbursement, providers with reasonable costs
that exceeded the routine cost limits could be granted exceptions
from the limits if they provided information indicating that they
served patients requiring more services than average.  Those
providers were paid an amount equal to the applicable cost limit plus
an adjustment to reflect their higher costs. 

      BALANCED BUDGET ACT
      PROVISIONS AIM TO BETTER
      CONTROL COSTS
---------------------------------------------------------- Letter :2.2

On July 1, 1998, HCFA began phasing in a Medicare PPS for SNF care,
as required by the BBA.  Under the new system, facilities receive a
fixed payment for each day of care provided to a Medicare-eligible
beneficiary.\11 During a 3-year transition period, each facility's
per diem payment is a blend of a facility-specific (cost-based) rate
and a federal per diem rate.\12 The facility-specific rate is based
on the facility's 1995 average allowable costs for SNF services,
updated to the current year.\13 The federal portion of the rate is
based on the average daily cost of providing all Medicare-covered SNF
services in fiscal year 1995.  Total costs were updated for inflation
between the 1995 base year and 1999 by the SNF market-basket index
minus 1 percentage point, as required by the BBA.\14

Because not all patients require the same amount of care, the federal
per diem rate paid for each patient is case-mix adjusted.  Patients
are classified into 44 case-mix groups based on their clinical
condition, functional status, and expected use of certain services
(particularly physical, occupational, and speech therapy).\15 Each
case-mix group has an associated relative weight that reflects the
costliness of providing services to patients in that group relative
to the average costliness of patients across all groups.  The
relative weight adjusts the per diem rate up or down.  A facility
then receives the same daily payment for all its patients in each
group.  By establishing fixed payments and including all services
under the per diem payment, the PPS attempts to provide incentives
for nursing homes to deliver care more efficiently.  Facilities that
can care for beneficiaries for less than the case-mix adjusted per
diem payment can retain the difference as profit.  Those with average
costs higher than the per diem payments they receive will suffer a
loss. 

In addition to calling for a SNF PPS, the BBA requires nursing homes
to submit to Medicare all bills for Medicare-covered services
furnished to their residents, regardless of who provides the
services.\16 Previously, when facilities had agreements with external
providers to furnish ancillary services, Medicare allowed those
external providers to bill directly for services covered under part
B, even for patients in a Medicare-covered (part A) SNF stay. 
Requiring consolidated billing for all services furnished during a
Medicare-covered SNF stay in conjunction with the PPS was necessary
so that facilities could not reduce their costs simply by shifting
the provision of ancillary services to part B providers, thereby
stymieing Medicare's efforts to control total expenditures.\17

The BBA also includes a per-beneficiary payment cap of $1,500 for
part B-covered physical and speech therapy and a $1,500 cap for part
B-covered occupational therapy.\18 These limits do not pertain to
Medicare beneficiaries during a Medicare-covered SNF stay, but can
affect Medicare beneficiaries if their nursing home stay is not
covered by Medicare.  The provision likely will limit the revenues
nursing homes and other providers earn from furnishing therapy
services to nursing home patients under part B.  Recent changes in
the law delay implementation of the spending caps until fiscal year
2002. 

--------------------
\11 The per diem payments are adjusted to account for differences in
area wages. 

\12 In the first year of the transition, the blended rate is 75
percent facility-specific, dropping to 50 percent in the second year
and 25 percent in the third year.  Subsequently, payments will be
based on the federal rate only. 

\13 Base-year costs are updated to the current year by applying an
annual update factor for each intervening year equal to the increase
in the SNF market-basket index minus 1 percentage point, as required
by the BBA.  See 42 U.S.C.   1395yy(e)(3)(B)(i).  The
1-percentage-point reduction reflects congressional concern that the
base year included inappropriate costs. 

\14 The market-basket index measures the annual change in the prices
of goods and services providers use in producing SNF services. 

\15 The groups are defined by a classification system developed by
HCFA contractors.  The categories of this system are known as
Resource Utilization Groups, or RUGs.  For the Medicare SNF PPS,
version III of the classification system is being used. 

\16 See 42 U.S.C.   1395y(a)(18). 

\17 Implementation of the consolidated billing requirement has been
delayed for residents of SNFs who are not covered by Medicare (that
is, patients who have exhausted their part A SNF benefit or who were
not eligible for part A coverage). 

\18 The caps are not applicable to services furnished through
hospital outpatient departments. 

   PPS MAY SLOW SNF PLACEMENTS FOR
   CERTAIN MEDICARE BENEFICIARIES
------------------------------------------------------------ Letter :3

Our nationwide survey of 153 randomly selected hospital discharge
planners suggests that nursing home behavior is changing with regard
to admission practices.  Nursing homes have become more cautious in
accepting patients, favoring some types of patients over others when
making admission determinations.  Forty-three percent of our survey
respondents mentioned that facilities prefer to admit patients
needing short-term rehabilitation treatment, while nearly two-thirds
reported a recent increase in difficulty placing Medicare
beneficiaries needing certain types of treatment, including some
costly nontherapy ancillary services.  Yet, despite slower placements
for some Medicare beneficiaries, few beneficiaries are experiencing
barriers to appropriate care. 

According to the discharge planners, facilities have become more
cautious.  Before accepting any patient, most facilities now appear
to be assessing the beneficiary's condition more closely, requesting
medical records, reviewing drug administration charts, and even
sending staff to the hospital for in-person assessments.  This
behavior is confirmed in a recent survey of nursing home
administrators conducted by the OIG in which most administrators
stated that they now scrutinize patients' medical status to a greater
extent than they did prior to implementation of the PPS.\19 In so
doing, the nursing home may delay the hospital discharge process and
extend the beneficiary's hospital stay. 

Hospital discharge planners indicated that nursing homes favor some
types of patients over others when making admission determinations. 
About 43 percent of those surveyed indicated that, under the PPS,
nursing homes prefer to admit patients needing short-term
rehabilitation for conditions such as stroke and hip replacement.  In
fact, 31 percent of respondents reported that facilities are actively
recruiting such patients.  A recent survey of hospital discharge
planners conducted by OIG also found that patients with some
conditions (including orthopedic and stroke patients and those
requiring physical, rehabilitative, speech, and occupational
therapies) are easier to place than before the payment change.\20
OIG's survey of nursing home administrators supports this finding as
well:  46 percent of administrators in that survey reported that
under PPS they were more likely to admit patients requiring special
rehabilitation services, such as physical, occupational, or speech
therapy. 

By contrast, nearly two-thirds of the discharge planners we surveyed
reported a recent increase in difficulty placing certain Medicare
beneficiaries for a Medicare-covered SNF stay.  Urban and rural
hospitals reported difficulty placing patients at nearly an identical
rate.  The most frequently mentioned difficult placements were those
patients requiring expensive drug treatment or infusion therapy (see
table 1).  Intravenous antibiotics, which fall into both of these
categories, were cited most frequently of all specific medical
treatments.  Other treatments mentioned repeatedly included
chemotherapy and total parenteral nutrition.\21 A few medical needs
were cited as problems, not because of the treatments themselves, but
because of the transportation costs involved in providing the
treatment.\22 This appeared to be the problem for the respondents who
cited difficulty placing dialysis patients.  Our findings are
consistent with those of OIG; 58 percent of the hospital discharge
planners surveyed by OIG reported that Medicare patients requiring
extensive services such as intravenous feedings, intravenous
medications, or ventilator/respirator care have become more difficult
to place in nursing homes in the past year.  Similarly, 53 percent of
the nursing home administrators surveyed by OIG reported that they
were less likely under PPS to admit patients requiring expensive
services and supplies. 

                                Table 1
                
                Discharge Planners Reporting Slowed SNF
                  Placements, by Type of Medical Need

                                                                Percen
                                                                  tage
                                                                report
Medical need\a                                                     ing
--------------------------------------------------------------  ------
Expensive drugs                                                     48
Infusion therapy                                                     4
Ventilator care                                                     29
Dialysis                                                            28
Wound care                                                          26
Care for decubitus ulcers                                           24
Tube feeding                                                        22
----------------------------------------------------------------------
\a Categories are not mutually exclusive. 

Source:  GAO Survey of hospital discharge planners, Aug.  1999. 

While citing a recent increase in SNF placement delays among Medicare
beneficiaries, several discharge planners noted that patients
requiring certain types of complex services (such as ventilator care)
have always been more difficult to place, particularly in areas not
served by specialty facilities.  Despite this, the reports of
difficulty finding SNF beds for some patients needing certain costly
nontherapy ancillary services are consistent with our previous work,
suggesting that the case-mix classification system may not adequately
account for some high-cost groups.\23

At present, few Medicare beneficiaries are experiencing barriers to
care.  Nearly all (98 percent) of the discharge planners in our
survey indicated that other arrangements are being made for patients
who are difficult to place.  Eighty-five percent of respondents
reported that difficulty in placing patients results in longer
hospital stays.  Seventy-three percent reported finding alternative
types of post-acute care, such as home health care and long-term care
hospitals, for patients they could not place in nursing homes. 

Longer hospital stays are probably not detrimental to most patients
because they receive the care they need during their extended stay. 
Those Medicare patients who do stay in the hospital longer may
subsequently require fewer days of care once they are admitted to a
nursing home or may no longer need SNF care at all.  To the extent
that additional days in the hospital replace some SNF days, longer
hospital stays generally reduce Medicare spending for the entire
episode of illness.\24

--------------------
\19 Department of Health and Human Services, Office of Inspector
General, Office of Evaluation and Inspections, Early Effects of the
Prospective Payment System on Access to Skilled Nursing Facilities: 
Nursing Home Administrators' Perspective (OEI-02-99-00401), Oct. 
1999. 

\20 Department of Health and Human Services, Office of Inspector
General, Office of Evaluation and Inspections, Early Effects of the
Prospective Payment System on Access to Skilled Nursing Facilities
(OEI-02-99-00400, Aug.  1999). 

\21 This form of intravenous feeding supplies all of a person's
nutritional requirements.  It is a skilled service, requiring an
intravenous tube or catheter placed in a large vein to administer the
feeding solution. 

\22 Once a beneficiary has been admitted to a SNF, it may be
necessary to transport the beneficiary to a hospital or other site
for specialized care.  In this instance, the specialized services are
furnished under arrangements made by the SNF.  Following the
treatment, the beneficiary is returned to the SNF to complete the
inpatient stay.  This movement of the beneficiary, considered patient
transportation, is covered as a SNF service under part A and is
included in the per diem rate. 

\23 Nontherapy ancillary services include drugs, laboratory tests,
radiology procedures, respiratory therapy, medical supplies,
intravenous therapy, and other nonroutine services.  See Skilled
Nursing Facilities:  Medicare Payments Need to Better Account for
Nontherapy Ancillary Cost Variation (GAO/HEHS-99-185, Sept.  1999). 

\24 This is because Medicare's per-case payment to the hospital for a
patient with a given condition is the same, regardless of the length
of stay.  Longer hospital stays can increase hospital operating
costs, but not Medicare operating payments, unless the patient
reaches the threshold for cost outlier payments. 

   AGGREGATE PAYMENTS TO SNFS ARE
   LIKELY ADEQUATE, BUT SOME
   PROVIDERS MUST MAKE ADJUSTMENTS
------------------------------------------------------------ Letter :4

In aggregate, PPS payments are probably adequate and may, in fact, be
excessive given that insufficient oversight allowed base-year costs
associated with inefficient service delivery, unnecessary care, and
improper billings to be included in both the facility-specific and
the federal rates.  But the rates established for individual patients
may not appropriately reflect differing resource needs, and hence
payments may not be adequate for certain types of patients,
especially those with more extensive needs.  Some facilities will
need to modify their treatment patterns in response to the PPS.  The
adjustment to PPS may be eased, however, by two factors.  First,
Medicare patients generally constitute a small share of most nursing
homes' patients; and second, a transition period, during which rates
are based in part on each facility's own historical costs, is
intended to give providers more time to make necessary changes. 

Facilities that furnished excessive ancillary services or purchased
services inefficiently will need to make the most modifications under
PPS.  Facilities that changed their mix of patients since the base
year may make temporary adjustments, such as applying more selective
admission policies, during the transition period.  In addition,
chains that deliver ancillary services to SNFs may need to make
substantial changes in response to other BBA requirements that limit
the provision of therapy under part B and require SNFs to bill for
all services provided to their patients. 

      AGGREGATE PAYMENTS TO SNFS
      ADEQUATE, BUT REFINEMENTS
      NEEDED TO HELP MATCH
      PAYMENTS TO PATIENTS'
      SERVICE NEEDS
---------------------------------------------------------- Letter :4.1

HCFA used 1995 reported SNF costs as the basis for the federal per
diem rates under PPS.  We believe these base-year costs are likely to
be too high as a result of inefficient service provision, unnecessary
care, and improper billing for services, which went undetected due to
minimal program oversight.\25 From 1992 to 1995, payments for
ancillary services grew at triple the rate of routine services, which
despite cost limits still increased 20 percent over the period.  The
low level of utilization review makes it difficult to know how much
of the increase in ancillary service use was legitimate (because
patient needs had also grown), and how much was due to excessive
provision of services to generate additional revenues.  GAO and the
OIG also identified inappropriate billing practices and inclusion of
unreasonable costs as contributors to the rise in SNF costs.  For
example, a recent OIG report found that, during the 12-month period
ending June 30, 1998, Medicare reimbursed nursing homes almost $1
billion for improperly billed physical and occupational therapy.\26

Limited audits of cost reports meant that HCFA had little ability to
identify whether facilities were paying unreasonable amounts for
services or were charging Medicare for costs unrelated to patient
care or other unallowable costs. 

OIG recently noted in its review of the SNF PPS that the rate-setting
process did not adequately exclude improper SNF payments or the costs
for medically unnecessary care.\27 The level of overpayments is not
known, but it is likely that the PPS payment rates developed from the
1995 costs are high enough to cover appropriate care. 

Though the total dollars in the payment system are at least adequate,
two weaknesses in the case-mix classification system used in the PPS
may hamper the proper allocation of payments across patients and
facilities.  First, the classification system does not directly
account for variation in the costs of nontherapy ancillary services
across patients.  To the extent that payments do not adequately
reflect nontherapy ancillary costs, some SNFs could be overpaid,
while others could be underpaid.  Facilities treating many patients
with high nontherapy ancillary costs may be disadvantaged and might
respond by declining to admit certain types of patients.\28

Second, the classification system may not adequately differentiate
among patients and may classify them into too few groups to
accurately reflect their expected resource variation.  Because the
same payment is made for all patients in each case-mix group,
patients assigned to a group should be relatively homogeneous in
terms of their resource use.  There is some concern, however, that
this is not the case, particularly for patients needing extensive
medical ancillaries (including medication therapy and other
nontherapy ancillary services) and rehabilitative therapy.\29 Again,
there may be significant overpayment or underpayment for patients
within the case-mix groups, benefiting some facilities and putting
others at a disadvantage.  Recent changes in the law will temporarily
increase payments for certain types of patients, thereby alleviating
this concern.  In addition, certain costly nontherapy ancillary
services, such as ambulance services for patients needing regular
dialysis at a facility outside of the SNF, will be excluded from the
PPS and paid for separately. 

--------------------
\25 Balanced Budget Act:  Any Proposed Fee-for-Service Payment
Modifications Need Thorough Evaluation (GAO/T-HEHS-99-139, June 10,
1999). 

\26 Department of Health and Human Services, Office of Inspector
General, Office of Evaluation and Inspections, Physical and
Occupational Therapy in Nursing Homes:  Cost of Improper Billings to
Medicare (OEI-09-97-00122), Aug.  1999. 

\27 Department of Health and Human Services, Office of Inspector
General, Review of the Health Care Financing Administration's
Development of a Prospective Payment System for Skilled Nursing
Facilities, A-14-98-00350 (July 1998). 

\28 Skilled Nursing Facilities:  Medicare Payments Need to Better
Account for Non-Therapy Ancillary Cost Variation (GAO/HEHS-99-185,
Sept.  1999). 

\29 Research currently under way by HCFA indicates that potential
refinements to the case-mix model may include the division of the
current 44 groups or the addition of new ones.  See Medicare Program;
Prospective Payment System and Consolidated Billing for Skilled
Nursing Facilities, 64 Fed.  Reg.  41,644, 41,648 (1999) (to be
codified at 42 C.F.R.  pts.  409, 411, 413, and 489). 

      ADJUSTMENTS REQUIRED BY PPS
      LARGER FOR SOME PROVIDERS
---------------------------------------------------------- Letter :4.2

The BBA provides for a 3-year transition period to allow facilities
time to adjust to the new payment system.  Under this transition
plan, a majority of nursing homes currently receive per diem payments
from Medicare that are based largely on their own historical
costs.\30 For most facilities, the adjustments required should be
modest because Medicare payments represent a small share of revenues
(about 10 percent, on average).  HCFA estimates that Medicare
payments under the fully implemented SNF PPS would decline, on
average, 17 percent, which would reduce total nursing home revenues
by an average of 1.7 percent.\31 For individual facilities,
reductions in revenues under the PPS will be larger or smaller; for
some facilities, Medicare revenues will increase.  Facilities that
historically have served a higher proportion of Medicare patients may
experience bigger changes in their revenues, either positive or
negative, and may need to modify their treatment patterns more than
other facilities. 

PPS requires larger adjustments for providers that were inefficient
or that furnished a large number of ancillary services.  Facilities
that overprovided services in the past will have to permanently
modify their treatment patterns by furnishing fewer services.  Those
that were not cost-conscious in purchasing ancillary services and
supplies will now need to seek better prices from ancillary
providers.  Neither of these changes should adversely affect patient
care. 

For some facilities, the payment rates under the fully implemented
PPS may be higher than they are during the transition.  Among these
facilities are those that, since the base year of 1995, have changed
the mix of patients served to include more with intensive needs.  The
facility-specific portion of the rates reflects their costs of
serving patients in 1995 who had fewer needs.  Only the federal
portion of their rates will be adjusted to reflect the needs of
current patients.  During the transition period, these facilities may
adjust to the payment system by declining to admit certain patients
with greater needs.  Due to recent changes in the law, beginning on
December 15, 1999, facilities may opt to make the transition to the
federal rate immediately for cost-reporting periods beginning on or
after January 1, 2000. 

--------------------
\30 There is no transition period for facilities that were not
participating in the Medicare program in 1995.  Those facilities
began to receive the federal rate immediately. 

\31 See Medicare Program; Prospective Payment System and Consolidated
Billing for Skilled Nursing Facilities, 64 Fed.  Reg.  41,644, 41,678
(1999) (to be codified at 42 C.F.R.  pts.  409, 411, 413, and 489). 

   FINANCIAL CONDITION OF SUN AND
   VENCOR RELATED TO FACTORS OTHER
   THAN SNF PPS
------------------------------------------------------------ Letter :5

The troubled financial positions of two corporations that operate a
large number of SNFs, Sun Healthcare Group, Inc., and Vencor, Inc.,
have received much public attention in recent months.  Both
corporations reported significant losses in fiscal year 1998--$700
million and $573 million, respectively.  Sun expects a similar loss
for fiscal year 1999 ($612 million), while Vencor's estimated loss is
much smaller ($90 million).  Industry reports have blamed Medicare
payment policies for these losses and for the companies' recent
filings for bankruptcy protection.  Our analysis, however, suggests
that the financial difficulties of Sun and Vencor are the result of
several factors beyond the SNF PPS.  In fact, the SNF operations of
Vencor have remained profitable after the implementation of the PPS,
and those of Sun would have as well, had that company's capital costs
been in line with the industry average.  The losses reported by the
companies stem in large part from high capital-related costs; the
reduced demand for ancillary services, related to several BBA
provisions; and substantial nonrecurring expenses and write-offs. 

      SNF OPERATIONS NOT MAJOR
      CONTRIBUTOR TO FINANCIAL
      LOSSES
---------------------------------------------------------- Letter :5.1

In annual reports to the U.S.  Securities and Exchange Commission and
in public statements, both Sun and Vencor attribute their poor
financial position primarily to Medicare's new SNF reimbursement
method.  Sun's SNF operating revenues are expected to drop 14 percent
in FY 1999, while Vencor's SNF operating revenues will decline about
6 percent.  Nevertheless, Sun's SNF operating shortfalls represent
only 13 percent of total losses in fiscal year 1998 and 37 percent of
estimated total losses in fiscal year 1999.  Vencor posted gains in
its SNF operations in fiscal year 1998 and expects positive SNF
operating income in fiscal year 1999 as well.  Thus, factors other
than PPS have affected their financial performance. 

Sun's focus on serving a patient population with higher service needs
is one factor affecting its performance.  The corporation invested in
the equipment and staff needed to provide complex medical and
rehabilitative care during a time when doing so meant getting higher
payments from Medicare.  Thus, it may be affected more than other
facilities by any shortcomings in the PPS case-mix classification
system. 

The losses experienced by the SNF business operations of Sun and
Vencor are primarily due to increasing capital-related costs rather
than operating shortfalls.  In fact, both companies have cut their
SNF operating expenses, such as the costs of labor and supplies,
consistent with their declines in revenues, to improve their
operating performance.  Sun also indicates it has modified its
admission policies.  As a result, although Sun estimates a 14 percent
drop in operating revenue in fiscal year 1999, it projects that its
net SNF operating income (excluding capital) will decline only 9
percent.  Likewise, Vencor estimates its net SNF operating income
(excluding capital) will increase 5 percent in fiscal year 1999,
despite a 6 percent decrease in operating revenue. 

                          Table 2
          
          SNF Operating Revenues and Expenses for
          Sun Healthcare Group, Inc., and Vencor,
                 Inc., Fiscal Years 1997-99

                                                   FY 1999
                     FY 1997     FY 1998      (annualized)
----------------  ----------  ----------  ----------------
Sun Healthcare Group, Inc.
----------------------------------------------------------
Net operating         $1,156      $1,913            $1,652
 revenues\a
Operating               $950      $1,633            $1,398
 expenses\b
Capital-related         $211        $368              $481
 expenses
Net operating           ($5)       ($87)            ($227)
 income (loss)

Vencor, Inc.
----------------------------------------------------------
Net operating         $1,721      $1,621            $1,529
 revenues\a
Operating             $1,454      $1,370            $1,267
 expenses\b
Capital-related         $121        $193              $218
 expenses
Net operating           $147         $57               $45
 income (loss)
----------------------------------------------------------
Note:  Columns may not sum to total due to rounding. 

\a Net operating revenues are gross charges minus contractual and
other adjustments. 

\b Operating expenses do not include capital-related expenses. 

Source:  Sun and Vencor data provided to GAO. 

But capital-related costs for both Sun and Vencor have substantially
increased.  Sun's capital costs, already a larger share of total
costs than the industry average, are expected to grow 30 percent in
FY 1999 as its interest expenses double\32 (see fig.  1).  Similarly,
Vencor's SNF capital-related costs are expected to rise nearly 80
percent between fiscal year 1997 and fiscal year 1999, driven by a
four-fold increase in rental expenses (see fig.  2).  During that
period, Vencor reorganized into two separate, publicly held
corporations, divesting the real property side of its business from
the operating side.  Ventas, a real estate investment trust, now
leases formerly owned real estate holdings, including nursing homes,
to the operating company, Vencor.  Under the new structure, Vencor's
rental expenses rose from $42 million in fiscal year 1997 to nearly
$170 million in FY 1999. 

SNFs operated by Sun and Vencor will likely be more affected by the
SNF PPS than will typical facilities because a larger share of their
revenues comes from Medicare.  Although Medicare patients constitute
about 10 percent of total SNF patient days for both Sun and Vencor
(similar to the industry average), the corporations report that
Medicare revenues are at least 25 percent of their SNF businesses. 

   Figure 1:  SNF Capital-Related
   Expenses for Sun Healthcare
   Group, Inc., Fiscal Years
   1997-99

   (See figure in printed
   edition.)

Source:  Sun data provided to GAO. 

   Figure 2:  SNF Capital-Related
   Expenses for Vencor, Inc.,
   Fiscal Years 1997-99

   (See figure in printed
   edition.)

--------------------
\32 While capital costs for nursing homes average about 12 percent of
total costs, Sun's and Vencor's capital costs are estimated to be 26
and 15 percent, respectively, for fiscal year 1999. 

      DECLINING ANCILLARY REVENUES
      REFLECT MULTIPLE BBA
      PROVISIONS
---------------------------------------------------------- Letter :5.2

Ancillary revenues from the sale of therapy and other services to
their own nursing homes and to others have represented a substantial
share of both Sun's and Vencor's total revenues.  Prior to BBA
(fiscal year 1997), Sun reported net income for its ancillary
services business of $165 million while Vencor had net income of
nearly $104 million. 

Several BBA provisions have affected the market for ancillary
services.  First, the SNF PPS has made SNFs more cost-conscious in
purchasing contracted services--reducing both the demand for these
services and the prices SNFs are willing to pay for them.  Second,
the BBA prohibits billing Medicare part B for services furnished to
nursing home patients covered under part A.  Third, it has revised
the payments for therapy services under part B, establishing a fee
schedule instead of cost-based reimbursement and thus limiting
payments for many services.  Finally, it has imposed a
per-beneficiary cap of $1,500 for part B-covered physical and speech
therapy services and a per-beneficiary cap of $1,500 for part
B-covered occupational therapy services.  These caps primarily affect
therapy services for nursing home patients and are therefore likely
to affect ancillary providers like Sun and Vencor that furnish
services to nursing homes.  Following implementation of these
provisions, Vencor's reported net operating income for its ancillary
operations fell from $104 million to $59 million in fiscal year 1998
and is expected to decline further to $44 million in fiscal year
1999.  Sun's net operating income is expected to plummet from $230
million in fiscal year 1998 to $9 million in fiscal year 1999. 

                          Table 3
          
           Net Operating Revenues from Ancillary
            Businesses of Sun Healthcare Group,
            Inc., and Vencor, Inc., Fiscal Years
                          1997-99

                                                   FY 1999
                         FY 1997     FY 1998  (annualized)
--------------------  ----------  ----------  ------------
Sun Healthcare Group, Inc.
----------------------------------------------------------
Net operating               $775      $1,185          $732
 revenues\a
Net expenses                $611        $995          $724
Net operating income        $165        $230            $7
 (loss)

Vencor, Inc.
----------------------------------------------------------
Net operating               $641        $581          $440
 revenues\a
Net expenses                $538        $522          $396
Net operating income        $104         $59           $44
 (loss)
----------------------------------------------------------
Note:  Columns may not sum to total due to rounding. 

\a Net operating revenues are gross charges minus contractual and
other adjustments. 

Source:  Sun and Vencor data provided to GAO. 

      UNUSUAL TRANSACTIONS ACCOUNT
      FOR BULK OF CORPORATE LOSSES
---------------------------------------------------------- Letter :5.3

Most of the fiscal year 1998 and 1999 losses reported by Sun and
Vencor relate to unusual transactions, or nonrecurring charges, such
as asset impairment losses and restructuring costs (see table 4). 
Vencor reported unusual transactions of $439 million in fiscal year
1998 and estimates another $35 million to be posted in fiscal year
1999.  These entries account for more than 75 percent of Vencor's
losses for fiscal year 1998 and almost 40 percent of those for fiscal
year 1999.  Similarly, nearly $394 million of Sun's total fiscal year
1998 losses and $425 million of its total fiscal year 1999 losses are
unusual transactions. 

The bulk of these unusual transactions for both companies are the
result of asset impairment losses.  Accounting principles require
corporations to calculate and recognize asset impairment losses on
their balance sheets when it is determined that future expected
revenue streams will be lower than anticipated.\33 This is necessary
to inform investors of the performance of the company.  The loss
appearing on the income statement reflects the difference between an
asset's original value and its revised value, based on the revenue
the asset is expected to generate in the future.  These values do not
reflect the patient-care costs that are recognized by the Medicare
program.  The losses posted by Sun and Vencor may reflect a
combination of inflated purchase prices as well as reduced future
expected revenues from their assets.  For example, approximately $200
million of Vencor's impairment loss is attributable to an anticipated
reduction in the value of its goodwill.  Goodwill is an intangible
asset--such as name recognition, good customer relations, or high
employee morale--that represents the amount paid for an asset in
excess of fair market value.  These unusual transactions reflect
business and accounting practices rather than losses from current
operations.  It is not known what share of these companies' lower
projected value reflects changes due to the implementation of the SNF
PPS or other BBA provisions. 

                          Table 4
          
             Net Operating Income, Nonoperating
             Expenses, and Total Income for Sun
            Healthcare Group, Inc., and Vencor,
             Inc., for FYs 1997, 1998, and 1999

                   (Dollars in millions)

                                                   FY 1999
                       FY 1997     FY 1998    (annualized)
--------------------  --------  ----------  --------------
Sun Healthcare Group, Inc.
----------------------------------------------------------
Net operating income      $116         $29           ($72)
 (loss)
Nonoperating               $12         $22             $16
 revenues
Nonoperating
 expenses:
Unusual transactions       $20        $394            $425
Other nonoperating         $22        $302            $125
 expenses\a
Nonoperating               $42        $696            $550
 expenses
Net nonoperating         ($30)      ($674)          ($534)
 income (loss)
Income tax                 $43         $56            $0.8
Total post-tax             $43      ($701)          ($606)
 income (loss)

Vencor, Inc.
----------------------------------------------------------
Net operating income      $320        $116             $82
 (loss)
Nonoperating                $0          $0              $0
 revenues
Nonoperating
 expenses
Unusual transactions     ($14)        $439             $35
Corporate overhead         $80        $123            $113
Nonoperating               $95        $613            $172
 expenses
Net nonoperating         ($96)      ($613)          ($171)
 income (loss)
Income tax                 $89         $76            $0.2
Total post-tax           135 (     $573) (            $90)
 income $ (loss)
----------------------------------------------------------
Note:  Columns may not sum to total due to rounding. 

\a Sun's other nonoperating expenses include bad debt/losses on
accounts receivable, gain (loss) on sale of assets, dividends on
convertible preferred securities. 

Source:  Sun and Vencor data provided to GAO. 

--------------------
\33 The American Institute of Certified Public Accountants' Statement
of Financial Accounting Standards No.  121 (SFAS No.  121), entitled
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, requires such impairment losses to be
recognized. 

   CONCLUSIONS
------------------------------------------------------------ Letter :6

The BBA mandated a Medicare PPS for SNF services to replace the
cost-based reimbursement system, with the goal of fostering more
efficient provision and use of services to lower spending growth
rates.  We found little evidence that this change in payment method
has reduced access to appropriate care, although facilities are
assessing patients' conditions and projected costs of treatment more
closely, even reportedly denying admission to patients needing
certain types of services.  As a result, some beneficiaries may stay
longer in the hospital before being admitted to a nursing home for
SNF care or may receive care from other post-acute-care providers. 
Monitoring of hospital and SNF lengths of stay and admissions is
required to ensure that Medicare beneficiaries continue to have
access to medically necessary services.  The PPS represents a major
change to the previous incentives of cost-based reimbursement and, as
a result, facilities may need to modify treatment practices and
business strategies that were advantageous under the previous payment
method if they are to operate profitably. 

   AGENCY AND OTHER COMMENTS
------------------------------------------------------------ Letter :7

In written comments on a draft of this report, HCFA emphasized its
commitment to ensuring that Medicare beneficiaries retain access to
quality skilled nursing care.  HCFA acknowledged concerns that the
payment system may not fully reflect the costs of treating certain
types of patients and stated its intent to continue monitoring access
to care under the SNF PPS and to refine and improve the payment
system.  HCFA also noted that, in light of the recent reports of
financial troubles in some nursing home chains, it has taken steps to
ensure that states develop contingency plans for protecting nursing
home patients.  In addition, it has provided guidance to help states
monitor conditions in nursing homes that are experiencing financial
difficulties.  HCFA also provided technical comments, which we
incorporated where appropriate.  The agency letter is reproduced in
appendix II. 

In their comments on portions of the draft related to them, both Sun
and Vencor agreed that their financial situations were accurately
represented.  Both corporations acknowledged that their financial
difficulties are the result of many factors, not just of the PPS. 
Both expressed general concerns that the effect of the BBA is only
beginning to be felt and predicted that there will be more bankruptcy
filings among nursing home chains and perhaps among independent
nursing homes as well. 

Vencor also submitted updated financial information, consistent with
data shown in the report, illustrating that their SNF operations
remain profitable and that a substantial portion of the corporation's
overall losses pertains to other lines of business.  (We did not
include this updated information in the report because it did not
change our conclusions.  In addition, its format was different from
that of the original data submitted and therefore was difficult to
compare with information from previous years.)

Sun pointed out that part of the company's financial difficulties
stems from having higher-than-average costs.  Sun noted that such
costs were not excessive under cost-based reimbursement.  PPS,
however, a system based on national averages, will not fully cover
these costs.  Sun also said that we did not appropriately attribute
the reductions in the demand and pricing for ancillary services to
the implementation of PPS.  In fact, the report clearly states that
PPS is a factor in the reduced demand for ancillary services. 
Finally, Sun noted that its impairment losses are an accounting
recognition of the economic reality that PPS has materially devalued
Sun's nursing home assets.  At the same time, Sun acknowledged that
the company may have paid too much for the assets it acquired. 
Representatives of the corporation went on to express concern that
any reduction in the value of nursing home assets would discourage
the construction of new nursing facilities and thus adversely affect
access to care.  At the present time, however, our evidence indicates
that beneficiaries continue to receive needed care. 

Sun also expressed concern that their views about the PPS, obtained
in interviews with GAO staff, were not included in the portions of
the report Sun reviewed.  Although not attributed directly to any
individuals, the views of representatives from Sun and Vencor, as
well as from other industry participants and analysts, were an
important source of information and were incorporated into the
report. 

---------------------------------------------------------- Letter :7.1

We are sending copies of this report to Michael Hash, Acting
Administrator of HCFA, interested congressional committees, Sun
Healthcare Group, Inc., Vencor, Inc., and other interested parties. 
We will also make copies available to others upon request. 

If you have any questions, please call me or Laura Dummit, Associate
Director, at (202) 512-7119.  Major contributors to this report are
listed in appendix II. 

William J.  Scanlon, Director
Health Financing and Public Health Issues

SCOPE AND METHODOLOGY
=========================================================== Appendix I

To assess the effect of the prospective payment system (PPS) on
access to skilled nursing facility (SNF) care, we interviewed
hospital discharge planners about their recent experiences placing
Medicare beneficiaries needing SNF care in nursing homes.  Because
SNF reimbursement under Medicare is dependent on a minimum 3-day
hospital stay, nearly all Medicare beneficiaries receiving SNF
services are first evaluated by a member of the hospital discharge
staff.  Discharge planners offer valuable information because they
are professionals who help Medicare patients leaving the hospital
find nursing homes that will provide them with appropriate care.  We
used structured interviews to elicit their opinions on whether
changes in reimbursement policies have affected beneficiary access to
care. 

We identified and categorized hospitals using the Medicare Cost
Reports for calendar year 1997.  Only general short-term hospitals
were included for study.\34 Swing-bed hospitals and hospitals with an
affiliated SNF were eliminated from the pool to focus the study on
those hospitals where patients would be most at risk of experiencing
access problems.  A simple random sample was used to choose the
hospitals from the remaining population.  We contacted discharge
planners by telephone in 200 of these hospitals and completed
interviews with 153.  Urban hospitals represented two-thirds of the
respondents, although they make up only 55 percent of hospitals
nationwide.  All 50 states (and the District of Columbia) were
eligible for participation in the study; 43 were represented by the
completed surveys. 

We obtained testimony from Wall Street industry analysts to gain an
understanding of the financial incentives driving the SNF industry
before and after implementation of the Balanced Budget Act of 1997,
as well as insight into the operational history of specific nursing
home chains. 

In addition, we interviewed the presidents and, in some cases, other
senior management representatives of Sun, Vencor, and Beverly
Enterprises, Inc.  (Beverly).  Sun and Vencor were chosen for
examination because of their highly publicized financial problems and
the distinct possibility that they would petition for bankruptcy
protection under Chapter 11 of the U.S.  Bankruptcy Code.  As a
national nursing home chain not in danger of filing for bankruptcy,
Beverly offered perspective on the circumstances of Sun and Vencor. 

Documentary evidence used in analyzing the effect of PPS included
both financial information provided by Sun and Vencor, and their
corporate filings from the United States Securities and Exchange
Commission.  The filings are available under the 1934 Exchange Act
and contain material financial and business information on publicly
traded companies.  Under the act, companies are obliged to keep such
public information current by filing periodic reports on Forms 10-Q
and 10-K, and on current event Form 8-K, as applicable. 

(See figure in printed edition.)Appendix II

--------------------
\34 Psychiatric hospitals, rehabilitation hospitals, cancer
hospitals, childrens' hospitals, and long-term-care hospitals (those
with an average length of stay exceeding 25 days) were excluded from
the analysis. 

COMMENTS FROM THE HEALTH CARE
FINANCING ADMINISTRATION
=========================================================== Appendix I

(See figure in printed edition.)

GAO CONTACTS AND STAFF
ACKNOWLEDGMENTS
========================================================= Appendix III

GAO CONTACT

Laura Dummit, (202) 512-7119

STAFF ACKNOWLEDGMENTS

Carol Carter, Dana Kelley, Erin Kuhls, and Carolyn Manuel-Barkin made
key contributions to this report. 

*** End of document. ***