Medicare Home Health Benefit: Impact of Interim Payment System and Agency
Closures on Access to Services (Letter Report, 09/09/98,
GAO/HEHS-98-238).

Until 1996, Medicare spending for home health care had been rising
dramatically, consuming about $1 in every $11 of Medicare outlays in
1996, compared with $1 in every $40 in 1989. To control this rapid cost
growth, the Health Care Financing Administration was required to
implement a prospective payment system that sets fixed, predetermined
payments for home health services. Until that system is developed, home
health agencies will be under an interim payment system that imposes
limits on the cost-based payments they receive. The limits provide
incentives to control per-visit costs and the number and mix of visits
for each user. Industry representatives claim that the system's new cost
limits have caused some home health agencies to close or some
beneficiaries, particularly those with high-cost needs, to have
difficulty obtaining care. This report (1) identifies the potential
impact of the interim payment system on home health agencies; (2)
determines the number, distribution, and effect of recent home health
agency closures; and (3) assesses whether the interim payment system
could be affecting beneficiaries' access to services, particularly
beneficiaries who are expensive to serve.

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

 REPORTNUM:  HEHS-98-238
     TITLE:  Medicare Home Health Benefit: Impact of Interim Payment 
             System and Agency Closures on Access to Services
      DATE:  09/09/98
   SUBJECT:  Home health care services
             Medical expense claims
             Beneficiaries
             Health care cost control
             Patient care services
             Health resources utilization
IDENTIFIER:  Medicare Program
             Medicare Prospective Payment System
             Medicare Interim Home Health Payment System
             Connecticut
             Indiana
             Louisiana
             Missouri
             New York
             Texas
             New Mexico
             
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Cover
================================================================ COVER


Report to Congressional Requesters

September 1998

MEDICARE HOME HEALTH BENEFIT -
IMPACT OF INTERIM PAYMENT SYSTEM
AND AGENCY CLOSURES ON ACCESS TO
SERVICES

GAO/HEHS-98-238

Home Health Agency Closures

(101771)


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

  BBA - Balanced Budget Act of 1997
  HCFA - Health Care Financing Administration
  HHA - home health agency

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


B-280966

September 9, 1998

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

The Honorable Thomas J.  Bliley, Jr.
Chairman
The Honorable John D.  Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives

The Honorable William M.  Thomas
Chairman
The Honorable Fortney H.  (Pete) Stark
Ranking Minority Member
Subcommittee on Health
Committee on Ways and Means
House of Representatives

Until 1996, Medicare spending for home health care had been rising
dramatically, consuming about $1 in every $11 of Medicare outlays in
1996, compared with $1 in every $40 in 1989.  To control this rapid
cost growth, the Balanced Budget Act of 1997 (BBA) (P.L.  105-33)
required the Health Care Financing Administration (HCFA), the agency
responsible for administering the Medicare program, to implement a
prospective payment system that sets fixed, predetermined payments
for home health services.  Until that system can be developed,
agencies will be under an interim payment system, which imposes
limits on agencies' cost-based payments.\1 The limits provide
incentives to control per-visit costs and the number and mix of
visits for each user. 

Concerns have been raised about Medicare's home health interim
payment system since its implementation on October 1, 1997.\2
Industry representatives have claimed that the system's new cost
limits have caused some home health agencies to close or some
beneficiaries, particularly those with high-cost needs, to have
difficulty obtaining care.  In response to these concerns, you asked
us to (1) identify the potential impact of the interim payment system
on home health agencies; (2) determine the number, distribution, and
effect of recent home health agency closures; and (3) assess whether
the interim payment system could be affecting beneficiaries' access
to services, particularly for beneficiaries who are expensive to
serve. 

To complete this study, we conducted interviews in seven states, most
of which had a high number of closures in 1998.  These states are
Connecticut, Indiana, Louisiana, Missouri, New Mexico, New York, and
Texas.  We interviewed discharge planners in 82 hospitals and
representatives from 21 local aging organizations about their
experiences in arranging for home health services for Medicare
beneficiaries in the past year.  We also analyzed data from HCFA on
home health agency openings, voluntary closures, involuntary closures
(that is, those agencies no longer permitted to bill Medicare because
of failure to meet the program's quality or financial requirements),
and utilization by state.  These data were derived from HCFA's
administrative systems for tracking provider participation and
service utilization from payment records.  In this instance, we did
not independently assess the accuracy of these data.\3 With this
exception, this work was completed in accordance with generally
accepted government auditing standards between August 17 and August
31, 1998.  (For a detailed discussion of our scope and methodology,
see app.  I.)


--------------------
\1 Although BBA mandates that the prospective payment system for home
health care be effective in fiscal year 2000, HCFA announced in a
July 1998 hearing that implementation would be delayed because of the
resources needed to make year-2000 computer system adjustments. 

\2 The date agencies become subject to the interim payment system
depends on the starting date of their cost reporting year.  About
half of the agencies were subject to the interim payment system as of
January 1, 1998, and the rest will have become subject by September
30, 1998. 

\3 HCFA's data on home health agency closures may not be up to date
due to a lag in agencies' reporting of their Medicare-certified
status. 


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

Our work suggests that neither agency closures nor the interim
payment system, with less than a year's implementation experience,
has significantly affected the capacity of the home health industry
to provide services or beneficiary access to care.  However, our
interviews with professionals who arrange for home health services
for Medicare beneficiaries indicate that access to services may be
more difficult for beneficiaries with particular needs that make them
likelier to be expensive to serve, such as those receiving multiple
weekly visits over an extended period. 

Specifically, we noted that pressures to lower costs arising from the
design of the interim payment system's aggregate per-beneficiary cost
limit will differ across home health agencies.  The effect on an
individual agency will depend on several factors, including an
agency's base-year costs, changes in the provision of services since
the base year, how recently it entered the market, and its regional
location.  Agencies responding to pressure may avoid accepting
beneficiaries that are more expensive to serve or may reduce the
quantity of services beneficiaries receive.  The latter may have less
impact on patients in those areas where the number of services
provided has been very high. 

We also found that, despite the 554 voluntary agency closures and 206
involuntary closures nationwide from October 1997 through June 30,
1998, growth in the industry has been such that there were still more
agencies to treat Medicare beneficiaries in August 1998 than in
October 1996.  Half of the voluntary closures nationwide were
concentrated in four states.  Three of these states had experienced
growth in the number of agencies well above the national average of
33 percent, and the fourth had experienced a 20-percent net increase
in agencies before the recent spate of closures. 

Most of the hospital discharge planners and local aging organization
representatives we interviewed had not noticed a change over the past
year in the willingness or ability of home health agencies in their
areas to serve Medicare beneficiaries.  They did report, however,
that beneficiaries who were likely to be expensive in terms of the
type and amount of visits needed were more difficult to place than
other patients. 


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

Home health care is an important Medicare benefit enabling
beneficiaries with acute needs, such as recovery from joint
replacements, and chronic conditions, such as congestive heart
failure, to receive care in their homes rather than in other
settings, such as nursing homes and hospitals.\4 The dramatic
increase in Medicare spending for home health care since 1989 has
generated intense scrutiny of Medicare's payment methods and
oversight of this benefit.  The slowdown in spending growth in 1996
has not diminished these efforts, however, because of the substantial
share of Medicare outlays that remains attributable to the home
health benefit. 

More than half of all home health agencies are freestanding; the rest
are based in such institutions as hospitals, skilled nursing
facilities, and rehabilitation hospitals.  Agencies are also
classified into one of three ownership categories:  proprietary
(private, for-profit); voluntary (private, nonprofit), such as
Visiting Nurse Associations and Easter Seal Societies; and government
(operated by a state or local government).  Agency practices and home
health users can differ across agencies and geographic regions.  For
example, in 1996, we reported that proprietary agencies provided
significantly more visits than nonprofits for beneficiaries with the
same primary diagnoses.\5


--------------------
\4 To qualify for home health care, a beneficiary must be confined to
his or her residence (that is, be "homebound"); require intermittent
skilled nursing, physical therapy, or speech therapy; be under the
care of a physician; and have the services furnished under a plan of
care prescribed and periodically reviewed by a physician. 

\5 Medicare:  Home Health Utilization Expands While Program Controls
Deteriorate (GAO/HEHS-96-16, Mar.  27, 1996). 


      UNTIL RECENTLY, SPENDING
      GROWTH FOR MEDICARE'S HOME
      HEALTH BENEFIT WAS RAPID
---------------------------------------------------------- Letter :2.1

Between 1989 and 1996, Medicare spending for home health services
rose from $2.5 billion to $16.8 billion.  Concurrently, the number of
home health agencies certified to care for Medicare beneficiaries
swelled from about 5,700 in 1989 to more than 10,000 in 1997. 
Several factors account for spending growth.  Since the program's
inception, Medicare's coverage requirements for home health services
have relaxed considerably.  This has made the home health benefit
available to more beneficiaries, for less acute conditions than
originally permissible, and for longer periods of time.  In fact,
states' Medicaid programs, as payers for long-term and home-based
care, began taking advantage of Medicare's liberalized guidelines to
help cover the costs of long-term care for beneficiaries eligible for
both Medicare and Medicaid.\6

With the relaxed coverage requirements and states' Medicare
maximization policies, Medicare's home health benefit gradually has
been transformed from one that focused on patients needing short-term
care after hospitalization to one that serves chronic, long-term-care
patients as well.  Advances in medical technology and the practice of
discharging patients earlier from hospitals have also increased the
number of beneficiaries seeking home health care.  Finally, some of
this rise in spending has been due to fraudulent or abusive
practices, such as delivering unnecessary services and billing for
visits that were not provided. 

To control rapidly rising home health expenditures while ensuring the
appropriate provision of services, BBA mandated a prospective payment
system intended to reward efficient providers and financially
penalize inefficient ones.  In recognition of the time needed to
develop such a system, coupled with the need to control spending
growth immediately, BBA prescribed an interim system to pay for home
health services until the prospective system was ready.  The interim
system builds on the payment limits already in place by making them
more stringent.  These new limits, based on agencies' own prior cost
experience and average costs of agencies either regionally or
nationally, create more pressure for certain agencies than others to
lower their costs. 


--------------------
\6 A recent example is the implementation in 1996 of Minnesota's
Medicare Maximization Initiative, a program designed to teach
providers how to use Medicare for home health services, supplies, and
equipment for recipients who are dually eligible. 


      KEY FEATURES OF THE INTERIM
      PAYMENT SYSTEM
---------------------------------------------------------- Letter :2.2

Previously, agencies were paid their actual costs up to a cap based
on 112 percent of the national average cost per visit,\7 adjusted for
local wage levels and each agency's number and mix of visits.  The
BBA reduced the basis of the limit to 105 percent of the national
median per-visit cost.\8 In addition, the law added a new factor to
the payment cap calculation--an average annual per-beneficiary limit. 
The average annual per-beneficiary limit is expected to constrain
payments to more agencies by a larger average amount than even the
reduced per-visit limit. 

The per-beneficiary limit is based on the average payment for all
home health services for each beneficiary who received care during an
agency's fiscal year ending before October 1, 1994.  For an agency
that had participated in Medicare for a full year before this
date--that is, an "established" agency--the limit is calculated as 98
percent of the sum of 75 percent of the agency's average
per-beneficiary payment and 25 percent of the regional average
per-beneficiary payment.  An agency that had not participated in
Medicare for a full year by October 1994 is considered "new." A new
agency is subject to a per-beneficiary limit based on the national
median of the per-beneficiary limits for established agencies, which
is $3,356.69.\9

Basing the limits for established agencies on a blend of
agency-specific and regional average annual per-beneficiary payments
accounts for the significant service use differences across agencies
and geographic regions.  The agency-specific component accounts for
variation in the mix of patients treated across agencies and, at the
same time, reflects variations in agency efficiency.  The regional
component constrains the limit for agencies with costs that are
higher than their counterparts in the region while raising the limit
for the relatively lower-cost agencies.  The regional amounts range
from $2,548.29 in the Middle Atlantic region (New Jersey, New York,
and Pennsylvania) to $5,910.55 in the East South Central region
(Alabama, Kentucky, Mississippi, and Tennessee).\10

The use of a regional component rather than the national average
provides less disruption to payments for established agencies and
smooths the transition to a national prospective payment system. 

The per-visit limits and the new per-beneficiary limits serve as a
cap on an agency's total annual Medicare payments.  An agency,
therefore, does not need to keep the cost of each visit below the
per-visit limit or manage the services provided to each beneficiary
to keep costs below the per-beneficiary limit.  Rather, agencies can
balance high-cost visits with low-cost ones and still be paid their
costs.  Similarly, an agency can treat a mix of more intensive and
less intensive beneficiaries and still receive Medicare payments for
each service provided. 


--------------------
\7 The previous and current national per-visit cost averages are
those for freestanding agencies. 

\8 The BBA required HCFA, in computing the limits, to make no
adjustment for inflation for the period July 1, 1994, to July 1,
1996. 

\9 This limit, when applied to each new agency, will be adjusted for
local wage differences. 

\10 These are the regional levels before adjusting for local wage
differences. 


   IMPACT OF INTERIM PAYMENT
   SYSTEM, BASED ON AVERAGES,
   DIFFERS ACROSS AGENCIES
------------------------------------------------------------ Letter :3

Several factors--including an agency's base-year costs, changes in
service provision since the base year, the recency of its entry into
the market, and its regional location--partially determine the effect
of the interim payment system's per-beneficiary limit on any given
agency.  Agencies that will be under more pressure than others to
lower their costs include the following: 

  -- Those with base-year costs higher than other agencies in their
     region.  The annual average per-beneficiary limit will be below
     base-year costs for established agencies that had higher costs
     than others in their region.  This limit is designed to
     encourage inefficient, high-cost agencies to reduce costs. 
     However, differences in efficiency of providing care is not the
     only reason that costs vary across agencies; certain other
     factors producing agency differences may be beyond an agency's
     control.  For example, state Medicaid policies may cause such
     variation, because Medicaid-covered services may be substituted
     for Medicare home health visits.  Serving an urban versus a
     rural population; the numbers of other providers, including home
     health agencies, available in a market; and other factors may
     contribute as well.  How much of an agency's higher costs are
     due to such factors, as opposed to its relative efficiency, is
     not known.  Holding agencies accountable for higher-than-average
     costs without regard to this distinction may unduly penalize
     some. 

  -- Those with higher growth in visits per beneficiary than the
     average.  The more an established agency increased the number of
     visits provided per beneficiary since the base year, the more
     pressure the average annual per-beneficiary limit will create to
     reduce costs.  Between 1994 and 1997, the number of visits per
     beneficiary rose, on average, by about 4.5 percent, although
     many agencies had increases that greatly exceeded the average
     (see app.  II).  Indeed, in 10 states, the average number of
     visits increased by more than 10 percent (see fig.  1).  For
     some, this high growth boosted utilization that already greatly
     exceeded the national average.  This was the case in Louisiana,
     Oklahoma, and Texas.  In other states with large increases--like
     Delaware, Kansas, Minnesota, New Hampshire, South Dakota, and
     Virginia--use levels had been below the national average
     previously and remained so after recent increases. 
     Nevertheless, the average annual per-beneficiary limits will
     constrain payments to agencies with significant increases in
     costs from the base year in both groups of states, regardless of
     whether utilization is above or below the national average. 

   Figure 1:  Average Medicare
   Home Health Visits per User,
   Selected States, 1994 and 1997

   (See figure in printed
   edition.)

Source:  HCFA. 

  -- New agencies in states with historically high payments.  New
     agencies' average annual per-beneficiary limits are based on the
     national median of the limits across established agencies.\11
     Consequently, new agencies will have lower limits than
     established ones with high base-year costs.  In 19 states, the
     limit for new agencies falls below these states' median limits
     for the established agencies.  Thus, new agencies in these
     states may be at a disadvantage owing only to their location and
     tenure.  HCFA estimates that, for example, for an average new
     agency in Oklahoma, the per-beneficiary limit is $2,711, or
     about 45 percent less than the median limit for established
     agencies.\12 In contrast, an agency in Minnesota benefits from
     being new, as its limit exceeds the median for established
     agencies by over 50 percent.  (See app.  III, which shows
     amounts of agencies' per-beneficiary limits.)


--------------------
\11 The national limit assigned to new agencies will be adjusted for
area wage differences, which accounts for the variation in this
amount across states. 

\12 HCFA data on the average per-beneficiary limit for new agencies
are only illustrative because HCFA had to approximate the impact of
the wage adjustment and did not have complete data on all new
agencies. 


   RECENT CLOSURES DWARFED BY
   LONGER-RUN INDUSTRY GROWTH
------------------------------------------------------------ Letter :4

More agencies closed in the 9 months ending June 30, 1998, than in
recent years.\13 However, there has been such rapid growth recently
in the industry that there were still more agencies available to
treat Medicare beneficiaries in August 1998 than in October 1996. 
Since the interim payment system's implementation in October 1997
through June 30, 1998, 554 home health agencies closed voluntarily
nationwide.  An additional 206 closed involuntarily, according to
HCFA's data, because they failed to meet Medicare's quality-of-care
or financial standards.  Despite the number of closures during this
time, 45 agencies were able to open nationwide (that is, become
certified to serve Medicare beneficiaries).  Agency closures are not
unusual in the home health industry.  For example, during each of the
previous 3 years, there were, on average, 285 voluntary and 62
involuntary agency closures.  During this period, an average of 1,227
agencies opened for Medicare business each year.\14 (See fig.  2.)

   Figure 2:  Change in Number of
   Medicare-Certified Home Health
   Agencies, Fiscal Years 1995-97
   and as of August 1998

   (See figure in printed
   edition.)

Note:  HHA = home health agency. 

Source:  HCFA's On-Line Survey, Certification, and Reporting System. 

Half of all recent voluntary closures nationwide were concentrated in
four states (California, Louisiana, Oklahoma, and Texas).  In the
first three, the voluntary closures were somewhat less than 30
percent of the almost 500 agencies added between 1994 and 1997.  In
Texas, voluntary closures equaled only 11 percent of the almost 1,200
agencies added during this period.  In eight states, there were no
closures over this period.  (See app.  IV for data on openings and
closures for selected years.)

Agencies that closed voluntarily differed from the remaining agencies
in two key ways.  First, they were on average smaller, as measured by
the number of beneficiaries served.  The closed agencies treated an
average of 166 beneficiaries, compared with an average of 385
beneficiaries for the agencies that remained open.  The agencies that
closed also provided on average more visits per beneficiary--90.2
compared with 65.2.  These findings are consistent with expectations
that less efficient agencies may have the most difficulty adjusting
to the new payment limits. 

The industry has reported that over 1,000 agencies have closed since
January 1998, with almost half of the closures in Texas.  However,
what is counted as a closure depends on some definitional issues. 
The discrepancy between the industry's and HCFA's figures likely
results from the industry's inclusion of branch offices in the count
of agency closures.  However, home health agency branch offices are
not independent providers under Medicare rules.\15

Agencies may be choosing to close branch offices for reasons
unrelated to the interim payment system's cost limits.  Previously,
it may have been financially advantageous for an agency to use a
parent office, located in an urban area with high wage costs, for
Medicare billing purposes, but to actually provide services out of a
branch office in a low-wage area.  Branches may also have been used
to circumvent Medicare quality standards, because HCFA does not
require branch offices to be surveyed or certified for compliance
with Medicare requirements.\16 In 1997, HCFA issued a program
memorandum that consolidated and clarified the guidance used to
categorize an agency as a branch.  In August 1998, it reissued this
guidance defining home health agency parent, branch, and subunit
organizations.\17 Except under certain circumstances, a branch has to
be within 1-1/2 hours of its parent agency or it has to be
restructured as a subunit--in other words, certified as a Medicare
provider.  In addition, the BBA now requires payments to be based on
where the service was provided rather than the location of the
billing office.  The restructuring and site-of-service billing
requirements may have reduced the financial benefit of maintaining a
branch office, thus prompting branch closures. 

Other factors unrelated to Medicare payment changes may have
contributed to the recent spate of closures as well.  For example,
surety bond and other requirements to shore up program controls
contributed to a number of agencies dropping out of Florida's
Medicaid program.  Medicare's intention to adopt surety bond
requirements may have already screened out additional agencies that
would not have been able to comply.\18

As to whether closures, regardless of the way they are measured, have
affected capacity, it is important to note that some closures reflect
the merger of two agencies and not the actual loss of capacity.  In
addition, since home health agencies require little physical capital,
it is possible for another agency to quickly absorb the staff and
patients of a closing agency.  Thus, capacity may not necessarily be
affected. 


--------------------
\13 In this report, "closed" means that the home health agency was no
longer certified by Medicare.  Some may continue to operate, serving
other patients. 

\14 Some of these openings may reflect agency branches' converting to
become separate providers. 

\15 Branches within home health agencies are part of and under the
administrative control of the parent home health agency.  They are
not independently certified by Medicare as a provider, nor are they
required to file a Medicare cost report. 

\16 For a detailed discussion of this problem, see Medicare Home
Health Agencies:  Certification Process Ineffective in Excluding
Problem Agencies (GAO/HEHS-98-29, Dec.  16, 1997). 

\17 Subunits are a constituent of a "parent" home health agency. 
They are assigned provider numbers and are therefore counted as
independent agencies in HCFA's tabulations of home health agency
data. 

\18 BBA required Medicare-participating home health agencies to have
a surety bond effective January 1, 1998.  Because of industry
concerns, however, this requirement was suspended until at least
February 15, 1999. 


   ACCESS PROBLEMS, IF ANY, LIKELY
   LIMITED TO COSTLY BENEFICIARIES
------------------------------------------------------------ Letter :5

Overall, Medicare beneficiaries' ability to obtain home health
services does not appear to have changed significantly since the
implementation of the interim payment system in October 1997.  We
interviewed hospital discharge planners in seven states because they
are professionals who help Medicare patients leaving the hospital
find agencies that will provide them with home health services.  We
also spoke with representatives of local aging organizations in these
states for an additional perspective on access for all beneficiaries,
regardless of whether they started using home health immediately
after a hospital stay.  We chose states that had experienced a
disproportionate number of closures and that manifested diverse
service use patterns.\19 More than half the hospital discharge
planners and many representatives of local aging organizations we
interviewed indicated that they had not noticed a change in the
willingness or ability of their area's home health agencies to take
Medicare beneficiaries.  However, home health industry
representatives, commenting on our draft report, suggested that these
responses may understate the full effect of the interim payment
system in the future. 

Respondents who did notice a change often referred to issues
unrelated to interim payment system reforms.  For example, in each
state studied, one or more individuals interviewed noted that home
health agencies were more attentive than previously to ensuring that
beneficiaries meet such coverage criteria as the need for skilled
care and the requirements for being considered homebound.  This could
be a reaction to the increased scrutiny since 1995--by Medicare
program officials, the Department of Health and Human Services'
Inspector General, and other federal and state enforcement
officials--of home health claims and agency billing practices. 

Other respondents affirming a change in agency behavior presented
issues that more plausibly reflected agencies' concerns about the
interim payment system.  Discharge planners and representatives of
organizations for the aged noted agencies' caution in taking
beneficiaries who needed expensive care or frequent visits.  Under
the interim payment system, an imbalance of patients receiving
expensive visits or multiple visits for a longer-than-average period
of time could raise an agency's average per-beneficiary spending
above the new aggregate per-beneficiary limit.  Alternatively, a
greater proportion of patients needing only a limited number of
visits facilitates an agency's adjustment to the new limit. 

Although those interviewed did not cite an overall change in agency
behavior, about two-thirds of the discharge planners and more than a
third of the representatives of organizations for the aged reported
having had difficulty obtaining home health services for specific
types of Medicare patients in the last year.  We could not determine
whether this reflected greater difficulty than in previous years. 
The respondents reported that patients with intensive skilled nursing
needs and patients needing a significant number of visits over a long
period of time (rather than patients, for example, with short-term
rehabilitation needs) were the most difficult to place in home health
services.  The issue was that these patients might use services that
could result in higher costs for an agency.  However, respondents
also indicated difficulties that were related to coverage
restrictions and shortages of nurses and other skilled professionals
proficient in delivering high-technology services--problems very
likely unrelated to the interim payment system's implementation. 


--------------------
\19 See app.  IV. 


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

As home health care has become a larger share of total Medicare
spending, legislative and regulatory efforts to constrain
inappropriate growth and to control Medicare outlays have been
stepped up.  As a result, in the past year the home health industry
has been subject to new policies, including surety bond requirements,
changes in coverage guidelines, and the interim payment system.  All
of these may cause agencies to make adjustments to their business and
clinical practices to meet the program integrity and budgetary needs
of the Medicare program. 

Agencies appear to have responded to these policy changes.  There has
been a moderate upswing in the number of agencies that are no longer
certified to provide services to Medicare beneficiaries.  Recent
budget projections show that Medicare home health spending growth has
slowed from recent record high levels.  Our interviews indicate that
some agencies are more cautious about enrolling beneficiaries with
certain needs and some are reducing their costs of caring for others. 

To the extent that the agencies dropping out of the program are those
that cannot meet Medicare quality or financial requirements, the
industry has not been inappropriately constrained.  To the extent
that utilization changes represent scaling back home health visits
that were of marginal clinical value, the policy changes have had
their intended effect.  If, however, efficient agencies cannot remain
viable under the interim payment system, and high-cost beneficiaries
have difficulty obtaining appropriate services, the policies then
have had an unintended impact.  While we found that to date there do
not appear to be marked reductions in access to services, we could
not distinguish between the intended and unintended effects of the
policy changes. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

In written comments on a draft of this report, HCFA agreed with our
findings, observations, and conclusions.  Commenting on the various
changes affecting the home health industry--in addition to the
interim payment system--HCFA agreed that it is difficult to single
out the effect of any particular factor.  In response to the many
concerns regarding the impact of BBA provisions on home health
agencies, HCFA also noted that it made some administrative changes
that could ease certain agencies' financial burden.  HCFA also
provided technical comments, which we incorporated into the final
report. 

We also obtained oral comments on a draft of our report from home
health care industry representatives, including the National
Association for Home Care, the Home Health Services and Staffing
Association, and the Visiting Nurses Association of America.  They
believed the report should have emphasized the recency of the interim
payment system's implementation.  They also noted that we did not
address future projections regarding closures or effects of the
interim payment system.  Their expectation is that closures will
continue to increase and beneficiaries' access to services will be
adversely affected.  One commenter cited studies completed early this
year about the potential effects of the interim payment system, which
we did not discuss.  While we agree with those studies' conclusions
about the important role of home health care, our focus was primarily
on experience with the interim payment system over the last 11
months.  The industry representatives also provided technical
comments, which we incorporated where appropriate into the final
report. 


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

As arranged with your offices, we will send copies of this report to
the Secretary of Health and Human Services, the Administrator of
HCFA, appropriate congressional committees, and other interested
parties.  We will also make copies available to others upon request. 

If you or your staff have any questions, please call me or Susan A. 
Flanagan at (202) 512-7114.  Other major contributors to the report
were Mary Ann Curran, Laura A.  Dummit, Gloria N.  Eldridge, Hannah
F.  Fein, Roger T.  Hultgren, Shari B.  Sitron, and Michael C. 
Williams. 

William J.  Scanlon
Director, Health Financing and
 Systems Issues


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

To complete this study, we analyzed legislation and regulations
pertaining to the home health interim payment system, analyzed data
from the Health Care Financing Administration (HCFA) on the number of
Medicare-certified home health agencies and Medicare home health care
utilization, and interviewed experts in the field of home health care
referrals and service delivery. 

Using Medicare program data extracts from HCFA's Health Care
Information System and the On-Line Survey, Certification, and
Reporting System, we analyzed the annual changes in
Medicare-certified home health agencies from October 1, 1994, through
June 30, 1998.  HCFA-supplied data also allowed us to compare home
health utilization and the number of agencies across states from 1994
to 1997.  In addition, we compared characteristics of recently closed
home health agencies with those that remained open.  Finally, we used
HCFA data to analyze the per-beneficiary limits that apply to new
agencies relative to the limits for established agencies in each
state. 

To obtain qualitative information on the impact of closures and the
interim payment system, we interviewed hospital discharge planners
and representatives of local organizations for the aged in seven
states about their recent experience in finding home health services
for Medicare beneficiaries.  We used standardized protocols to elicit
their opinions on whether home health closures or changes in
admitting practices had affected beneficiary access to care.  We also
interviewed national experts on home health care, officials from
Medicare's regional intermediaries (which process Medicare home
health care claims), and officials of home health agencies that had
recently closed a branch office. 

The seven states we analyzed--Connecticut, Indiana, Louisiana,
Missouri, New Mexico, New York, and Texas--reflect a range of
experience regarding agency growth and geographic areas.  To choose
these states, we compared the number of agencies in all states in
1994 with the growth in agencies between 1994 and 1997 to ensure that
we would get information from areas that had few new agencies over
this period and areas with many openings.  We also chose states that
had relatively low absolute numbers of agencies compared with states
with high numbers.  One state (New York) had one agency closure since
October 1, 1997. 

For each study state, we randomly selected 20 acute-care general
hospitals with 50 beds or more.  We contacted discharge planners in
112 of these hospitals and completed interviews with 82. 

We also interviewed representatives of local aging organizations in
each of the seven study states.  They were identified on the basis of
recommendations from hospital discharge planners and representatives
from the states' offices on aging.  We contacted 25 local aging
organizations and interviewed 21 officials in these offices. 


AVERAGE MEDICARE HOME HEALTH
VISITS PER USER, 1994 AND 1997
========================================================== Appendix II

                                     Average
                Average visits    visits per    Percentage
State           per user, 1994    user, 1997        change
--------------  --------------  ------------  ------------
Alabama                    113           109          -3.5
Alaska                      45            43          -4.4
Arizona                     64            55         -14.1
Arkansas                    76            71          -6.6
California                  46            47           2.2
Colorado                    60            65           8.3
Connecticut                 73            75           2.7
Delaware                    43            48          11.6
District of                 42            43           2.4
 Columbia
Florida                     76            70          -7.9
Georgia                    102            93          -8.8
Hawaii                      41            36         -12.2
Idaho                       54            56           3.7
Illinois                    52            47          -9.6
Indiana                     73            69          -5.5
Iowa                        46            47           2.2
Kansas                      46            62          34.8
Kentucky                    65            68           4.6
Louisiana                  126           153          21.4
Maine                       64            64           0.0
Maryland                    37            34          -8.1
Massachusetts               87            89           2.3
Michigan                    45            48           6.7
Minnesota                   38            46          21.1
Mississippi                114           111          -2.6
Missouri                    50            50           0.0
Montana                     52            50          -3.8
Nebraska                    41            44           7.3
Nevada                      68            62          -8.8
New Hampshire               57            65          14.0
New Jersey                  40            41           2.5
New Mexico                  56            72          28.6
New York                    45            49           8.9
North Carolina              57            51         -10.5
North Dakota                42            40          -4.8
Ohio                        51            48          -5.9
Oklahoma                   106           142          34.0
Oregon                      40            32         -20.0
Pennsylvania                43            44           2.3
Rhode Island                61            65           6.6
South Carolina              67            59         -11.9
South Dakota                39            45          15.4
Tennessee                  116           101         -12.9
Texas                       97           134          38.1
Utah                        98           107           9.2
Vermont                     61            65           6.6
Virginia                    49            54          10.2
Washington                  38            30         -21.1
West Virginia               51            52           2.0
Wisconsin                   42            41          -2.4
Wyoming                     77            68         -11.7
United States               66            69           4.5
----------------------------------------------------------
Source:  HCFA. 


MEDICARE PER-BENEFICIARY LIMITS
FOR "NEW" AND "ESTABLISHED" HOME
HEALTH AGENCIES
========================================================= Appendix III

                                Illustrative
                                   aggregate
                                        per-      Ratio of
                        Median   beneficiary         "new"
                aggregate per-     limit for      provider
                   beneficiary         "new"     limits to
                     limit for     agencies,  "established
                 "established"         state    " provider
State               agencies\a    averages\b        limits
--------------  --------------  ------------  ------------
Alabama                 $4,484        $2,744         0.612
Alaska                  $3,674        $3,957         1.077
Arizona                 $3,529        $3,171         0.899
Arkansas                $3,715        $2,620         0.705
California              $3,160        $3,942         1.247
Colorado                $3,072        $3,187         1.037
Connecticut             $3,589        $4,037         1.125
Delaware                $3,015        $3,336         1.106
District of             $3,300        $3,595         1.089
 Columbia
Florida                 $3,630        $3,188         0.878
Georgia                 $4,070        $3,311         0.814
Hawaii                  $3,304        $3,417         1.034
Idaho                   $3,020        $2,921         0.967
Illinois                $2,826        $3,151         1.115
Indiana                 $3,364        $3,151         0.937
Iowa                    $2,047        $2,850         1.392
Kansas                  $2,513        $2,966         1.180
Kentucky                $3,613        $3,109         0.861
Louisiana               $5,764        $2,978         0.517
Maine                   $3,059        $3,192         1.043
Maryland                $2,900        $3,435         1.184
Massachusetts           $3,676        $3,803         1.035
Michigan                $2,868        $3,497         1.219
Minnesota               $2,186        $3,332         1.524
Mississippi             $4,977        $2,989         0.601
Missouri                $2,742        $2,976         1.085
Montana                 $2,690        $3,140         1.167
Nebraska                $2,248        $3,131         1.393
Nevada                  $3,988        $3,523         0.883
New Hampshire           $2,688        $3,594         1.337
New Jersey              $2,556        $3,919         1.533
New Mexico              $3,190        $2,993         0.938
New York                $2,605        $3,850         1.478
North Carolina          $3,005        $3,080         1.025
North Dakota            $2,156        $2,669         1.238
Ohio                    $2,615        $3,204         1.225
Oklahoma                $4,885        $2,711         0.555
Oregon                  $3,025        $3,449         1.140
Pennsylvania            $2,505        $3,451         1.378
Rhode Island            $3,711        $3,631         0.978
South Carolina          $3,591        $3,089         0.860
South Dakota            $2,197        $2,749         1.251
Tennessee               $5,521        $2,979         0.540
Texas                   $4,822        $3,072         0.637
Utah                    $4,064        $3,282         0.808
Vermont                 $2,762           Not         0.000
                                  applicable
Virginia                $3,008        $3,129         1.040
Washington              $2,888        $3,581         1.240
West Virginia           $2,755        $2,926         1.062
Wisconsin               $2,554        $3,193         1.250
Wyoming                 $3,302        $2,840         0.860
----------------------------------------------------------
Note:  An established agency is one that opened before October 1,
1993; all others are new agencies. 

\a The per-beneficiary limit for established agencies is a blend of
75 percent of an agency's own per-beneficiary payment and 25 percent
of the average payment in the region.  When the limits are compared
with an agency's costs, the regional component is adjusted for area
wage differences.  In this table, the regional component has not been
adjusted. 

\b New agencies are given a national per-beneficiary limit based on
the median of such limits for all established agencies.  In this
table, the national limit is adjusted for differences in wages based
on the location of the agency.  In calculating payments, the wage
index adjustment will be based on the place of service.  These
numbers do not reflect all new agencies. 

Source:  HCFA. 


MEDICARE-CERTIFIED HOME HEALTH
AGENCIES, 1994 TO 1997, AND
VOLUNTARY CLOSURES, FISCAL YEAR
1998
========================================================== Appendix IV

                         HHAs as of
                 --------------------------
                                                                  Voluntary
                                                 Percentage     closures,\a
                                              change (1994-   Oct. 1, 1997-    HHAs as of
State            Oct. 1, 1994  Oct. 1, 1997             97)   Jun. 30, 1998  Aug. 1, 1998
---------------  ------------  ------------  --------------  --------------  ------------
Alabama                   173           183             5.8               0           183
Alaska                     19            27            42.1               7            20
Arizona                   100           131            31.0              13           114
Arkansas                  200           206             3.0               2           202
California                617           861            39.5              74           768
Colorado                  150           201            34.0              21           174
Connecticut               115           116             0.9               7           104
District of                18            22            22.2               1            21
 Columbia
Delaware                   19            21            10.5               2            19
Florida                   305           398            30.5              20           378
Georgia                    81            96            18.5               0            97
Hawaii                     26            28             7.7               5            22
Idaho                      56            78            39.3               4            73
Illinois                  314           392            24.8              17           369
Indiana                   214           299            39.7              11           282
Iowa                      172           211            22.7               5           205
Kansas                    163           221            35.6              16           202
Kentucky                  107           111             3.7               0           112
Louisiana                 432           519            20.1              37           466
Maine                      29            51            75.9               4            47
Maryland                   74            81             9.5               3            78
Massachusetts             175           198            13.1               5           192
Michigan                  179           234            30.7               3           230
Minnesota                 232           265            14.2               2           261
Mississippi                76            70            -7.9               1            69
Missouri                  229           272            18.8              20           247
Montana                    48            62            29.2               0            61
Nebraska                   65            83            27.7               0            83
Nevada                     41            54            31.7               8            44
New Hampshire              39            46            17.9               0            46
New Jersey                 53            57             7.5               0            58
New Mexico                 80           117            46.3              11           102
New York                  214           227             6.1               1           226
North Carolina            149           162             8.7               3           166
North Dakota               33            35             6.1               1            34
Ohio                      352           472            34.1              21           452
Oklahoma                  232           389            67.7              36           336
Oregon                     81            90            11.1               6            80
Pennsylvania              312           381            22.1               4           375
Rhode Island               19            30            57.9               3            28
South Carolina             66            82            24.2               1            80
South Dakota               36            56            55.6               3            52
Tennessee                 234           232            -0.9               8           222
Texas                     961         1,949           102.8             134         1,758
Utah                       65            89            36.9              12            75
Vermont                    13            13               0               0            13
Virginia                  197           233            18.3               8           226
Washington                 59            68            15.3               2            67
West Virginia              67            92            37.3               3            88
Wisconsin                 172           181             5.2               4           176
Wyoming                    57            65            14.0               5            59
United States           7,920        10,557            33.3             554         9,842
-----------------------------------------------------------------------------------------
Note:  HHA = home health agency. 

\a This does not include the 206 closures that were involuntary
because the agencies were out of compliance with Medicare's
conditions of participation. 

Source:  HCFA's On-Line Survey, Certification, and Reporting System
data. 

RELATED GAO PRODUCTS

Medicare:  Interim Payment System for Home Health Agencies
(GAO/T-HEHS-98-234, Aug.  6, 1998). 

Medicare Home Health Benefit:  Congressional and HCFA Actions Begin
to Address Chronic Oversight Weaknesses (GAO/T-HEHS-98-117, Mar.  19,
1998). 

Medicare:  Improper Activities by Med-Delta Home Health
(GAO/T-OSI-98-6, Mar.  19, 1998; GAO/OSI-98-5, Mar.  12, 1998). 

Long-Term Care:  Baby Boom Generation Presents Financing Challenges
(GAO/T-HEHS-98-107, Mar.  9, 1998). 

Medicare Home Health Agencies:  Certification Process Ineffective in
Excluding Problem Agencies (GAO/HEHS-98-29, Dec.  16, 1997). 

Medicare Home Health:  Success of Balanced Budget Act Cost Controls
Depends on Effective and Timely Implementation (GAO/T-HEHS-98-41,
Oct.  29, 1997). 

Medicare Fraud and Abuse:  Summary and Analysis of Reforms in the
Health Insurance Portability and Accountability Act of 1996 and the
Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct.  9, 1997). 

Medicare:  Need to Hold Home Health Agencies More Accountable for
Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997). 

Medicare:  Home Health Cost Growth and Administration's Proposal for
Prospective Payment (GAO/T-HEHS-97-92, Mar.  5, 1997). 

Medicare:  Home Health Utilization Expands While Program Controls
Deteriorate (GAO/HEHS-96-16, Mar.  27, 1996). 

Medicare:  Excessive Payments for Medical Supplies Continue Despite
Improvements (GAO/HEHS-95-171, Aug.  8, 1995). 

Medicare:  Allegations Against ABC Home Health Care (GAO/OSI-95-17,
July 19, 1995). 


*** End of document. ***