Medicare Home Health Agencies: Role of Surety Bonds in Increasing
Scrutiny and Reducing Overpayments (Letter Report, 01/29/99,
GAO/HEHS-99-23).
Pursuant to a congressional request, GAO evaluated the surety bond
requirements for home health agencies (HHA) participating in Medicare,
focusing on: (1) analyzing the key features of surety bonds that affect
their costs and effect; (2) examining the Florida Medicaid program's
experience with a surety bond requirements for HHAs and its relevance to
the Medicare surety bond requirement; (3) reviewing the rationale for
the surety bond requirements the Health Care Financing Administration
(HCFA) selected, the cost and availability of bonds, the benefits for
Medicare, and the implications of substituting a government note for a
surety bond as set forth in a Department of the Treasury regulation; and
(4) drawing implications from the implementation of the HHA surety bond
requirement for implementing a similar surety bond provision for durable
medical equipment (DME) suppliers, comprehensive outpatient
rehabilitation facilities (CORF), and rehabilitation agencies.
GAO noted that: (1) a surety bond is a three-party agreement in which a
company, known as a surety, agrees to compensate the bondholder if the
bond purchaser fails to keep a specified promise; (2) the terms of the
bond determine the bond's cost and the amount of scrutiny the purchaser
faces from the surety company; (3) when the terms of bonds increase the
risk of default, more firms have difficulty purchasing them; (4) the
likelihood that a firm will be unable to repay a surety increases fees
charged and collateral requirements or the surety's unwillingness to
sell it a bond; (5) Florida Medicaid's experience offers few insights
into the potential effect of Medicare's surety bonds because the state
implemented its surety bond requirement selectively, for new and problem
HHAs, in combination with several other program integrity measures; (6)
after implementation, Florida officials reported that about one-quarter
of its Medicaid-participating HHAs had left the program, however, this
exodus was not caused primarily by the surety bond requirement; (7) HCFA
requires a surety bond guaranteeing HHAs repayment of Medicare
overpayments, and it has set the minimum level of the bond as the
greater of $50,000 or 15 percent of an agency's Medicare revenues out of
concern that about 60 percent of HHAs had overpayments in 1996,
amounting to about 6 percent of Medicare's HHA spending, and that, in
their opinion, overpayments would increase in the future; (8) yet,
HCFA's experience shows that most overpayments are returned, so that the
net unrecovered overpayments were less than 1 percent of Medicare's home
health care expenditures in 1996; (9) HCFA's implementing regulation
requiring a bond guaranteeing the return of overpayments made for any
reason rather than only those attributable to acts of fraud or
dishonesty increases the risk of default; (10) sureties' scrutiny, which
focuses primarily on an agency's business practices and financial
status, is probably useful for screening new HHAs; (11) a Treasury
regulation that allows the substitution of a government note for any
federally required surety bond may undermine the purpose of the bond
because HHAs could avoid surety scrutiny; (12) the Balanced Budget Act
also requires the DME suppliers, CORFS, and rehabilitation agencies
obtain a surety bond valued at a minimum of $50,000; and (13) Medicare
will benefit from greater scrutiny of these organizations and their
stronger incentives to avoid overpayments.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: HEHS-99-23
TITLE: Medicare Home Health Agencies: Role of Surety Bonds in
Increasing Scrutiny and Reducing Overpayments
DATE: 01/29/99
SUBJECT: State-administered programs
Home health care services
Surety bonds
Health care programs
Health insurance cost control
Health insurance
Overpayments
IDENTIFIER: Florida
Medicaid Program
Medicare Home Health Care Program
Medicare Program
Medicare Prospective Payment System
Medical Equipment
Rehabilitation Programs
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO report. Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved. Major **
** divisions and subdivisions of the text, such as Chapters, **
** Sections, and Appendixes, are identified by double and **
** single lines. The numbers on the right end of these lines **
** indicate the position of each of the subsections in the **
** document outline. These numbers do NOT correspond with the **
** page numbers of the printed product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
** A printed copy of this report may be obtained from the GAO **
** Document Distribution Center. For further details, please **
** send an e-mail message to: **
** **
** **
** **
** with the message 'info' in the body. **
******************************************************************
Cover
================================================================ COVER
Report to the Chairman and Ranking Minority Member, Committee on
Finance, U.S. Senate
January 1999
MEDICARE HOME HEALTH AGENCIES -
ROLE OF SURETY BONDS IN INCREASING
SCRUTINY AND REDUCING OVERPAYMENTS
GAO/HEHS-99-23
Home Health Agency Surety Bonds
(101761)
Abbreviations
=============================================================== ABBREV
BBA - Balanced Budget Act of 1997
CORF - comprehensive outpatient rehabilitation facility
DME - durable medical equipment
HCFA - Health Care Financing Administration
HHA - home health agency
ORT - Operation Restore Trust
PPS - prospective payment system
PSB - Preferred Surety Bond
RHHI - regional home health intermediary
SBA - Small Business Administration
Letter
=============================================================== LETTER
B-280717
January 29, 1999
The Honorable William V. Roth, Jr.
Chairman
The Honorable Daniel Patrick Moynihan
Ranking Minority Member
Committee on Finance
United States Senate
Home health care--skilled nursing, therapy, and related services
provided to homebound beneficiaries--has been one of Medicare's
fastest growing benefits in recent years. Between 1990 and 1997,
spending increased from $3.7 billion to $17.8 billion, an average
annual increase of 26 percent. This growth occurred because more
beneficiaries used the services and more users received more home
health care visits. Concurrent with the rise in spending was an
increase in the number of home health agencies (HHA), which almost
doubled from 1989 to 1997, reaching 10,600 in 1997. Changes in
practice patterns and the need for home health care have contributed
to the greater use of this benefit, but inappropriate use and billing
practices have added to Medicare's HHA spending as well. Concern
about growth in spending, fraud and abuse, and inadequate oversight
led the Congress and the administration to implement a number of
initiatives to better control Medicare's home health care costs.
Of particular importance, the Balanced Budget Act of 1997 (BBA)
mandated major changes to the home health care benefit. To slow
spending, Medicare's payment method was altered and certain coverage
criteria were clarified. The act also established new requirements
for HHAs participating in Medicaid or in Medicare to shore up
Medicare's survey and certification process--the program's approach
to ensuring that only qualified providers bill for services. One of
these new requirements is the posting of a surety bond of not less
than $50,000. Applying for such a surety bond would subject an HHA's
activities to review by a surety company to determine its worthiness
to purchase the bond.
The Health Care Financing Administration (HCFA) issued the
implementing regulation for BBA's surety bond requirement on January
5, 1998. Under the regulation, HHAs are required to obtain a
financial guarantee bond designed to allow HCFA to recover delinquent
overpayments made for any reason rather than just those resulting
from fraud and abuse. For larger agencies, it also set the bond
amount at 15 percent of an HHA's Medicare revenues, higher than the
minimum $50,000 required by the BBA. Concern arose about the
appropriateness of HCFA's specification of the surety bond
requirement and its effect on home health care providers. Some HHAs
reported difficulty in obtaining bonds and asserted that the burden
of doing so was too onerous. In response, in June HCFA postponed the
date when HHAs must obtain surety bonds until February 15, 1999, at
the earliest.
You asked us to evaluate the surety bond requirement for HHAs
participating in Medicare. Specifically, you requested that we (1)
analyze the key features of surety bonds that affect their costs and
effect; (2) examine the Florida Medicaid program's experience with a
surety bond requirement for HHAs and its relevance to the Medicare
surety bond requirement; (3) review the rationale for the surety bond
requirements HCFA selected, the cost and availability of bonds, the
benefits for Medicare, and the implications of substituting a
government note for a surety bond as set forth in a Treasury
Department regulation; and (4) draw implications from the
implementation of the HHA surety bond requirement for implementing a
similar surety bond provision for durable medical equipment (DME)
suppliers, comprehensive outpatient rehabilitation facilities (CORF),
and rehabilitation agencies. See appendix I for information on our
scope and methodology.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
A surety bond is a three-party agreement in which a company, known as
a surety, agrees to compensate the bondholder if the bond purchaser
fails to keep a specified promise. The terms of the bond--the
promise, the definition of default, and the penalty for
default--determine the bond's cost and the amount of scrutiny the
purchaser faces from the surety company. Types of bonds that have
been seen as potentially appropriate for HHAs include financial
guarantee bonds with a promise to fulfill financial obligations to
the bondholder, antifraud bonds that compensate the bondholder for
losses stemming from fraud or abuse, and compliance bonds based on a
promise to conform to specified sets of terms or conditions.
Purchasers pay a fee, usually a percentage of the bond's face value,
and some must also provide collateral. Collateral is more likely to
be required when the risk of default is higher or when the purchasing
firm does not have sufficient assets to repay the surety in the event
of a default. The surety checks certain characteristics of the
purchasing firm before agreeing to issue a bond, such as its
financial situation, business practices, and its principals'
backgrounds. The relative emphasis that sureties place on these
factors varies, however, depending on the purpose of the bond. When
the terms of bonds increase the risk of default, more firms have
difficulty purchasing them. The likelihood that a firm will be
unable to repay a surety increases fees charged and collateral
requirements or the surety's unwillingness to sell it a bond.
Although often cited as an important precursor to Medicare's surety
bond requirement, Florida Medicaid's experience offers few insights
into the potential effect of Medicare's surety bonds because the
state implemented its surety bond requirement selectively, for new
and problem HHAs, in combination with several other program integrity
measures. Bonds under Florida Medicaid involve a promise that the
HHA will comply with all Florida Medicaid rules and regulations.
After implementation, Florida officials reported that about
one-quarter of its Medicaid-participating HHAs had left the program.
However, this exodus was not caused primarily by the surety bond
requirement. Few of the terminating agencies would have had to
obtain a bond since they were not new to the program. Despite the
reduction in the number of Medicaid-participating HHAs, Florida's
governor stated that there was no decline in beneficiaries' access to
home health care.
HCFA requires a surety bond guaranteeing HHAs' repayment of Medicare
overpayments, and it has set the minimum level of the bond as the
greater of $50,000 or 15 percent of an agency's Medicare revenues out
of concern that about 60 percent of HHAs had overpayments in 1996,
amounting to about 6 percent of Medicare's HHA spending, and that, in
their opinion, overpayments would increase in the future. Yet,
HCFA's experience shows that most overpayments are returned, so that
the net unrecovered overpayments were less than 1 percent of
Medicare's home health care expenditures in 1996. Further, there was
no evidence that larger agencies would be expected to have more
unreturned overpayments to justify the requirement for a larger bond.
HCFA's implementing regulation requiring a bond guaranteeing the
return of overpayments made for any reason rather than only those
attributable to acts of fraud or dishonesty increases the risk of
default. Consequently, sureties may require more HHAs to provide
collateral to obtain a bond. The regulation may also benefit the
Medicare program in terms of surety companies' scrutiny of HHAs and
their incentives to repay overpayments in order to continue to
qualify for a bond. Sureties' scrutiny, which focuses primarily on
an agency's business practices and financial status, is probably most
useful for screening new HHAs. Its value would probably diminish
with an HHA's continued participation in Medicare. A Treasury
Department regulation that allows the substitution of a government
note for any federally required surety bond may undermine the purpose
of the bond because HHAs could avoid surety scrutiny.
The BBA also requires that DME suppliers, CORFs, and rehabilitation
agencies obtain a surety bond valued at a minimum of $50,000. HCFA
has stated its intent to implement this requirement in the same way
it does for HHAs. Medicare will benefit from greater scrutiny of
these organizations and their stronger incentives to avoid
overpayments. Many of these providers receive very limited Medicare
revenue. Some may cease to participate because of the cost of
obtaining a bond. The effect on beneficiaries' access to care may
not be significant, however, because DME suppliers currently number
more than 68,000 and alternative sources of therapy exist for
beneficiaries who use CORFs and rehabilitation agencies.
BACKGROUND
------------------------------------------------------------ Letter :2
The Medicare home health care benefit covers skilled nursing,
therapy, and related services provided in beneficiaries' homes. To
qualify, a beneficiary must be confined to his or her residence (that
is, must be "homebound"); require intermittent skilled nursing,
physical therapy, or speech therapy; be under the care of a
physician; and be furnished services under a plan of care prescribed
and periodically reviewed by a physician. If these coverage criteria
are met, Medicare will pay for part-time or intermittent skilled
nursing; physical, occupational, and speech therapy; medical social
service; and home health aide visits. Only HHAs that have been
certified are allowed to bill Medicare. Beneficiaries do not pay any
coinsurance or deductibles for these services, and there are no
limits on the number of home health care visits they receive as long
as they meet the coverage criteria.
HCFA, the agency within the Department of Health and Human Services
responsible for administering Medicare, uses five regional
contractors (which are insurance companies), called regional home
health intermediaries (RHHI), to process and pay claims submitted by
HHAs and to review or audit their annual cost reports. HHAs are paid
their actual costs for delivering services up to statutorily defined
limits. During each fiscal year, HHAs receive interim payments based
on the projected per visit cost and, in some instances, the projected
volume of services for Medicare beneficiaries. At the end of the
year, each HHA submits a report on its costs and the services it has
provided and the RHHI determines how much Medicare reimbursement the
HHA has earned for the year. If the interim payments that the agency
received exceed this amount, the HHA must return the overpayment to
Medicare. Otherwise, Medicare makes a supplementary payment of the
difference between the earned reimbursement and the interim payments.
HHAs are expected to minimize overpayments and underpayments by
notifying RHHIs of changes in projected costs or volume during the
year so that their interim payments can be adjusted. Final cost
report settlements generally do not occur until 2 years after an
HHA's fiscal year ends.
The home health care benefit has been one of the fastest growing
components of the Medicare program, increasing from 3.2 percent of
total Medicare spending in 1990 to 9 percent in 1997. Medicare's
home health care expenditures rose from $3.7 billion in 1990 to $17.8
billion in 1997. The rapid growth in home health care was primarily
driven by legislative and policy changes in coverage.\1 These changes
essentially transformed the home health care benefit from one focused
on patients needing short-term posthospital care to one that also
serves chronic, long-term care patients. The growth in spending has
slowed markedly in recent years. Several factors probably
contributed to the deceleration, including HCFA's recent antifraud
measures.
While spending grew, HCFA's oversight of HHAs declined. The
proportion of home health care claims that HCFA reviewed dropped
sharply, from about 12 percent in 1989 to 2 percent in 1995, while
the volume of claims about tripled. Yet the need for such review to
ensure that Medicare pays only for services that meet its coverage
rules has not diminished. In a study of a sample of high-dollar
claims that were paid without review, we found that a large
proportion of the services did not meet Medicare's coverage
criteria.\2 Operation Restore Trust (ORT), a joint effort by federal
and several state agencies to uncover program integrity violations,
also found high rates of noncompliance with Medicare's coverage
criteria among the problematic HHAs they investigated. In addition,
RHHIs audited cost reports for only about 8 percent of HHAs each year
from 1992 through 1996.
Until recently, the number of Medicare-certified HHAs increased along
with the rise in home health care spending--from 5,700 in 1989 to
10,600 at the end of 1997.\3 Last year, we reported that HHAs were
granted Medicare certification without adequate assurance that they
provided quality care or met Medicare's conditions of
participation.\4 Moreover, once certified, there was little
likelihood that a provider would be terminated from the program.
Beginning in mid-1997, HHAs that request Medicare certification or
change ownership have had to go through an enrollment process
designed to screen out some problem providers. The process requires
HHAs to identify their principals--that is, anyone with a 5-percent
or greater ownership interest--and to indicate whether any of them
have ever been excluded from participating in Medicare. HCFA also
has proposed requiring all HHAs to reenroll every 3 years, which
would entail an independent audit of providers' records and
practices.
In the BBA, the Congress strengthened HCFA's ability to keep
potentially problematic providers out of the Medicare program by
codifying a $50,000 surety bond requirement and establishing other
participation requirements.\5
The law also required HHAs participating in Medicaid to obtain a
$50,000 surety bond. The law expanded the enrollment process by
requiring HHA owners to furnish HCFA with their Social Security
numbers and information regarding the subcontractors of which they
have direct or indirect ownership of 5 percent or more. The BBA also
provides that an HHA may be excluded if its owner transfers ownership
or a controlling interest in the HHA to an immediate family member
(or household member) in anticipation of, or following, a conviction,
assessment, or exclusion against the owner.
Subsequently, HCFA implemented additional changes to further
strengthen requirements for HHAs entering the Medicare program and to
prevent fraud and abuse.\6 For example, the surety bond regulation
imposes a capitalization requirement for home health care providers
enrolling on or after January 1, 1998. New HHAs are required to have
enough operating capital for their first 3 months in business, of
which no more than half can be borrowed funds.\7 In another
regulation, HCFA requires that an HHA serve at least ten private-pay
patients before seeking Medicare certification. This contrasts with
the previous requirement that only a single patient had to have been
served.
The BBA mandated surety bonds for Medicare suppliers of DME, CORFs,
and rehabilitation agencies as well. Like HHAs, Medicare spending
for these providers has grown rapidly in the past few years.
Further, there is general concern that providers are given inadequate
oversight and that their bills are insufficiently reviewed.
DME suppliers sell or rent covered DME (such as wheelchairs),
prosthetics, orthotics, and supplies to Medicare beneficiaries for
use in their home. In 1996, there were more than 68,000
Medicare-participating DME suppliers. From 1992 to 1996, spending
for DME increased from $3.7 billion to $5.7 billion, an average
annual increase of 11 percent. Medicare bases its payment of DME
suppliers on a fee schedule. Consequently, how much Medicare should
pay for each item is known when it is delivered. Overpayments that
should be returned to Medicare arise almost entirely from claims
submitted and paid inappropriately.
CORFs and rehabilitation agencies both provide rehabilitation
services to outpatients. CORFs offer a broad array of services under
physician supervision--such as skilled nursing, psychological
services, drugs, and medical devices--and must have a physician on
staff. Conversely, rehabilitation agencies provide physical therapy
and speech pathology services, primarily in nursing facilities, to
individuals who are referred by physicians. In 1996, there were 336
CORFs and 2,207 rehabilitation agencies. From 1990 to 1996,
Medicare's spending for CORFs grew from $19 million to $122 million,
an average annual increase of 36 percent. Spending for
rehabilitation agencies increased from $151 million to $457 million,
an average growth of 25 percent per year during the same period.
Like HHAs, CORFs and rehabilitation agencies are paid on the basis of
their costs. Therefore, the actual payment for a service is not
known until the cost report is settled, after the end of the fiscal
year. This increases the likelihood that overpayments will be made
because of unallowable costs or cost-estimation problems during the
year.
--------------------
\1 Medicare: Home Health Utilization Expands While Program Controls
Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996).
\2 Medicare: Need to Hold Home Health Agencies More Accountable for
Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997).
\3 During fiscal year 1998, 1,155 agencies quit participating in
Medicare.
\4 Medicare Home Health Agencies: Certification Process Ineffective
in Excluding Problem Agencies (GAO/HEHS-98-29, Dec. 16, 1997, and
GAO/T-HEHS-97-180, July 28, 1997).
\5 HCFA has always had implicit authority to institute a surety bond
requirement for HHAs under its statutory authority to protect the
Medicare program and has had explicit authority to do so since the
enactment of the Omnibus Budget Reconciliation Act of 1980.
\6 From September 15, 1997, until January 13, 1998, the
administration placed a moratorium on admitting new HHAs into
Medicare, except in underserved areas, while HCFA developed
regulations to implement the program integrity provisions of the
BBA--including the surety bond requirement--and to design other
procedures to target home health care fraud and abuse.
\7 The estimate of needed capital is based on the HHA's projection of
the home health care visits it will provide during the first 3 months
multiplied by the RHHI's estimate of cost per visit.
SURETY BOND SPECIFICATIONS
DETERMINE COST AND AVAILABILITY
------------------------------------------------------------ Letter :3
A surety bond is a three-party agreement. It is a written promise
made by the bond issuer, usually an insurance company, called a
surety, to back up the promise of the purchasing firm to a third
party named in the bond.\8 For example, the surety may agree to
compensate the third party if the bondholder fails to deliver a
product on time or without significant defects. In issuing a bond,
the surety signals its confidence that the bondholder will be able to
fulfill the promised obligations. In purchasing a bond, the
bondholder acknowledges its duty to indemnify--that is,
compensate--the surety when a bond is redeemed.
Surety bonds entail many different types of guarantees, depending on
what the third party requiring the bond wants to accomplish. Three
types of surety bonds have been seen as potentially appropriate for
HHAs--a financial guarantee bond, an antifraud bond, and a compliance
bond. However, while labels are often applied to different types of
bonds, the types have no strict definitions. The specific language
in each bond describes the guarantee, what constitutes default, how a
default is demonstrated, and what penalty or compensation ensues.
The bond types can be described in general terms. A financial
guarantee bond promises that the surety will pay the third party
requiring the bond financial obligations not paid by the bondholder
up to the face value of the bond. Antifraud bonds generally provide
the third party protection in the event that it incurs losses from
the bondholder's fraudulent or abusive actions. The third party
delineates what constitutes fraud or abuse for purposes of bond
default. A compliance bond generally guarantees that the bondholder
will conform to the terms of the contract with the third party
requiring the bond and that the surety will pay the third party if
the bondholder does not meet the contract's terms. This bond also
can be designed to guarantee that the bondholder complies with
specific standards, such as having a required license or conforming
to a set of regulations.
Just as surety bonds vary depending on what is being guaranteed, so
do the criteria that sureties use in assessing or underwriting a
prospective bond purchaser. There are, however, general underwriting
rules. Sureties traditionally examine what they call a firm's "3
Cs"--character, capacity (or proven ability to perform), and capital.
The emphasis that the surety places on each of these three elements
varies with the guarantee incorporated into the bond. For a bond
that guarantees that the surety will pay financial obligations, for
example, sureties emphasize the financial resources of the bond
purchaser and its principals. Sureties emphasize a bond purchaser's
character or capacity in determining whether to provide a bond that
guarantees that the surety will pay when the bonded firm acts
dishonestly, although they are still interested in the purchaser's
financial situation.
To underwrite or assess whether to provide a bond, sureties examine,
at a minimum, information about the firm--such as an organizational
plan, length of time in business, financial statements for the
current year and the previous 2 years, resumes of key individuals,
current sales and revenues, and a business plan. Sureties generally
review the credit history of a firm and, if it is privately held, of
its principals. This scrutiny is one of the benefits of requiring a
surety bond.
The cost of obtaining a bond is the fee or premium charged plus
having to provide collateral--cash or assets that can be turned into
cash. The greater the surety's risk of having to compensate the
third party without being able to recover that compensation from the
bondholder, the higher the cost. The fee is usually 1 percent to 2
percent of the face value for most commercial bonds. Collateral,
which ensures the compensation of the surety, is typically required
when there is a greater risk of a loss because of the type of
guarantee provided by the bond or the capacity of the firm to repay
the surety. For example, sureties may require collateral of firms
that do not have assets worth considerably more than the face value
of the bond.
The collateral that sureties accept may be a deed of trust on real
property, a Treasury bond, or an irrevocable letter of credit from a
bank. The costs to the bondholder of providing collateral vary
inversely with the costs to the surety for liquidating it. A
property deed may be the least costly for the bondholder to provide,
followed by a Treasury bond, and then an irrevocable letter of
credit, which generally requires the payment of a fee to the
financial institution. The latter two options require obligating
cash from operating capital. These are the most secure options for
the surety, however, since they can be liquidated with minimal costs.
For certain firms seeking a bond, a firm's principals may have to
personally guarantee that they will repay the bond issuer for any
losses. Such personal indemnity is generally required for smaller,
privately held firms but not for most nonprofit firms or those that
are publicly held. Surety industry representatives indicate that
personal indemnity provides a measure of the willingness of the
principals who benefit from the firm to stand behind their company.
The ability to obtain a surety bond varies with the bond's terms and
the characteristics of the firm. The surety industry maintains that
the narrower the definition of what a bond guarantees, the easier it
is for a firm to obtain the bond. For example, obtaining an
antifraud bond would be easier if it required payment of the penalty
only in cases involving criminal fraud rather than any type of abuse.
Large, financially healthy firms that have been in business a long
time generally have the least difficulty obtaining any surety bond.
Smaller privately held firms, new or inexperienced businesses, firms
that have filed for bankruptcy or have credit problems, and those
with little credit have more difficulty obtaining a bond.\9 Those
that have defaulted on a prior bond are likely to face the most
severe scrutiny. One surety industry representative indicated that
firms that default on one bond are unlikely to be able to obtain
another.
Anyone required by federal statute or regulation to furnish a surety
bond may substitute a U.S. bond, Treasury note, or other federal
public debt obligation of equal value.\10 According to the surety
industry, however, this option is taken only by large, well-financed
entities.
--------------------
\8 Surety bonds required by federal agencies must be obtained from
sureties on a list of about 300 sureties approved by the Treasury
Department. These sureties go through a review process in which
their solvency and other factors, such as their history and officers'
and directors' experience, are checked.
\9 The Small Business Administration (SBA) has two surety bond
guarantee programs that help construction contractors that are small
businesses obtain a bond. SBA assumes a predetermined percentage of
loss and reimburses the surety up to that amount if the contractor
defaults. See appendix II for a description of the SBA programs. A
representative of SBA told us that HHAs would not be able to
participate in the surety bond guarantee programs unless the
definition of eligible entities were changed by law.
\10 31 U.S.C. 9303.
FLORIDA'S MEDICAID SURETY BOND
REQUIREMENT HAS FEW
IMPLICATIONS FOR MEDICARE
------------------------------------------------------------ Letter :4
The Florida Medicaid surety bond requirement has often been cited as
an important precursor to Medicare's surety bond requirement.
However, the effect of Florida Medicaid's program integrity measures
has few implications for Medicare's imposition of a surety bond
requirement. Florida instituted more stringent program integrity
measures than Medicare at the same time it required the surety bond,
such as a criminal background check. The state also targets the
surety bond requirement to new and problem providers.
Florida introduced several new measures to combat fraud and abuse in
its Medicaid program in December 1995. As a result of these
measures, HHAs and other noninstitutional providers in Florida are
now subject to closer scrutiny before they can participate in
Medicaid, and home health care coverage criteria have been tightened.
One of Florida's new program participation requirements is that
certain agencies purchase a 1-year surety bond.
The surety bond requirement applies to new HHAs, those in the program
for less than a year when they reenroll, and problem agencies.\11
Each must obtain a 1-year, $50,000 surety bond. Florida officials
indicate that their primary reason for the surety bond requirement is
that in underwriting a bond surety companies check the capacity and
financial ability of providers to operate their business. They
consider such review to be an effective and administratively
efficient screening tool to keep unqualified providers from
participating in the Medicaid program. Florida officials told us
that the screening associated with obtaining a surety bond is so
important that they no longer allow providers to substitute a $50,000
letter of credit for the surety bond.\12
The required surety bond is a guarantee that the bondholder's
principals, agents, and employees will comply with Florida's Medicaid
statutes, regulations, and bulletins and will perform all obligations
faithfully and honestly. Since the surety bond requirement was
implemented, no HHAs have had claims made against their bonds.
In addition to the surety bond requirement, Florida's Medicaid
reforms included several policy changes. A new agreement was
implemented for all noninstitutional providers. They are required to
pay for a criminal background check for each principal (owners of 5
percent or more, officers, and directors) by the state Department of
Law Enforcement. Providers also must allow state auditors immediate
access to their premises and records. Other measures the Florida
Medicaid program implemented in its campaign against fraud and abuse
include new computerized claims edits and other types of claims
review to identify inappropriate billings. In addition, new
constraints on the coverage of home health care services were
imposed, including prior approval requirements for extended periods
of service.
More than one-fourth of HHAs that participated in Florida's Medicaid
program when the program integrity measures were implemented are
reported to have left Medicaid. This estimate is based on an
analysis of Medicaid provider numbers. Agencies with no provider
number after the bond requirement effective date were counted as
leaving the program. However, HHAs may stop using their provider
numbers for reasons other than leaving the program or going out of
business. Some, for example, use a new number obtained because they
merged with another agency or were sold. We were able to locate
seven of the nine largest HHAs that the state reported as having left
the Medicaid program in 1996. All seven agencies were still
providing Medicaid-covered home health care services.\13 We did not
assess what proportion of smaller agencies reported as leaving
actually did so.
The departure of HHAs from Florida's Medicaid program cannot be
attributed solely to the surety bond requirement. Bonds are required
only for new or problem providers, so the requirement does not apply
to most agencies that had been billing Medicaid. Most of the HHAs
that left Medicaid would not have needed to obtain a bond.
Florida's governor maintains that the reduction in the number of
Medicaid-participating HHAs has not affected patients' access to
care. Closures, in fact, are not a good measure of access because it
is possible for one agency to quickly absorb the staff and patients
of a closing HHA. We did not identify any systematic evaluations of
the effect of the closures, however.
--------------------
\11 Problem agencies are under investigation for fraudulent practices
or have been found to have committed fraud. The state says they are
not many because most were excluded from the Medicaid program.
\12 The director of Florida Medicaid, in commenting on a draft of the
report, said that the letter of credit also is a more difficult
instrument to administer than a surety bond because the institutions
issuing the letters of credit often need the original documents
returned at the end of their term.
\13 One HHA changed its corporate structure, which required a new
provider number. Two were acquired by another firm. Three continued
to provide Medicaid services as part of a large chain. One still
provided services and claimed to have a Florida Medicaid provider
number.
HCFA DESIGNED THE SURETY BOND
REQUIREMENT TO RECOVER
OVERPAYMENTS AND INCREASE HHA
SCRUTINY
------------------------------------------------------------ Letter :5
HCFA, concerned about increases in overpayments to HHAs, structured
the bond as a financial guarantee that agencies' Medicare
overpayments would be repaid, and it raised the required amount of
the bond for larger agencies above the $50,000 specified by the
BBA.\14 Larger HHAs participating in both Medicare and Medicaid were
required to obtain two separate surety bonds: one bond for Medicare
valued at 15 percent of Medicare revenues and one for Medicaid valued
at 15 percent of those revenues.\15 The specification of the bond
requirements and the anticipated costs raised industry concern about
their affordability and availability. Under HCFA's requirements,
bonds, however, do increase the likelihood that they will be redeemed
and, consequently, may increase the scrutiny of HHAs by surety
companies and the proportion of agencies having to provide
collateral. The requirements also provide an incentive for HHAs to
repay any overpayments so they can continue to purchase bonds.
--------------------
\14 HCFA also structured the surety bond to cover unpaid civil
monetary penalties and assessments.
\15 HHAs with combined Medicare and Medicaid revenues of $334,000 or
less were required to have only one bond for both programs. This is
because 15 percent of $334,000 equals $50,000, the minimum bond
amount.
UNRECOVERED OVERPAYMENTS ARE
CURRENTLY A SMALL SHARE OF
MEDICARE'S HHA PAYMENTS
---------------------------------------------------------- Letter :5.1
HCFA specified a financial guarantee bond in its regulation and
raised the value of the bond above the legislated minimum for larger
agencies because of its concern about the recovery of overpayments to
HHAs. HCFA believes that this type of bond will reduce Medicare's
risk of unrecovered overpayments. This risk, however, is currently
small. Uncollected overpayments represented less than 1 percent of
Medicare's 1996 spending for home health care services. Although
overpayments are expected to rise in the near term, longer-term
changes in Medicare policies will probably reduce their likelihood in
the future. The higher bond amount for larger agencies may
correspond to the level of payments they receive, but the data HCFA
used to establish the higher bond requirement were unrelated to HHA
size.
HHAs accounted for about one-fourth of all Medicare overpayments in
1996, and overpayments as a percentage of total HHA payments have
been rising. In 1993, HHA overpayments were 4 percent of total
program payments; by 1996, this had grown to 6 percent. HCFA
estimates that about 60 percent of HHAs had overpayments in 1996.
Most overpayments are recovered, however. HCFA data indicate that
unrecovered overpayments in 1996 were less than 1 percent of
Medicare's HHA payments, although even this lower percentage
overstates the problem. HCFA counts as unrecovered overpayments some
money that is not really overpayment.\16 Further, some of the actual
overpayments may be collected in the future.
HCFA and RHHI officials with whom we spoke expect to find that
overpayments in 1998 were higher than in previous years because of
the new limits on payments introduced by the BBA.\17 They estimate
that as many as 70 to 80 percent of HHAs may have overpayments for
1998. They also expect a larger proportion of overpayments to be
uncollectible because more HHAs will leave Medicare still owing
overpayments. Overpayments are problematic when HHAs terminate
because there is no readily available way to collect them. HCFA
reported that from October 1997 through September 1998, 1,155 HHAs
quit serving Medicare beneficiaries and terminated from the program.
These HHAs represent a larger proportion of terminated
Medicare-certified agencies than in previous years.
The recent spate of HHA closures and predicted increase in
overpayments stem primarily from changes in Medicare's payment,
participation, and coverage policies. Once these policies are fully
implemented, RHHIs and agencies should be better able to estimate
allowable costs, thus minimizing overpayments. HCFA also has a BBA
mandate to implement a prospective payment system (PPS) for HHAs.\18
Under PPS, HHAs will know the payment at the time of service because
they will receive a fixed, predetermined amount per unit of service,
further reducing the potential for overpayment. Once PPS is in
place, overpayments should occur only when bills are submitted and
paid for individuals who are not eligible for Medicare's benefits or
for noncovered services.
HCFA's requirement that large agencies provide a bond equal to 15
percent of their Medicare revenues increases the cost of a bond
considerably for some HHAs. HCFA officials argue that when large
agencies fail to return overpayments, the potential loss to Medicare
is greater than when smaller agencies do so. HCFA has not undertaken
any analysis to determine the relationship between unrecovered
overpayments and HHA size. In fact, larger agencies might be more
likely to return them because they have more resources to manage the
repayments and a greater incentive to remain in the Medicare program.
--------------------
\16 HCFA reported that $116 million of uncollected overpayments in
1996, or more than half, were the result of 132 HHAs leaving the
Medicare program and not filing a final cost report. HCFA
categorizes all Medicare payments to an HHA that has not filed a cost
report as overpayments, even though that HHA may have provided
covered home health care services to beneficiaries. If the
terminated agencies had gone through the year-end settlement process,
at least a portion of the payments to some of them would likely have
been appropriate.
\17 Medicare Home Health Benefit: Impact of Interim Payment System
and Agency Closures on Access to Services (GAO/HEHS-98-238, Sept. 9,
1998).
\18 The PPS was originally supposed to be in place by fiscal year
2000, but the Congress delayed the effective date until fiscal year
2001 in the Omnibus Consolidated and Emergency Supplemental
Appropriations Act for Fiscal Year 1999.
FEES ARE THE PRIMARY COST OF
BONDS FOR LARGE HHAS;
COLLATERAL IS THE LARGEST
BURDEN FOR SMALL HHAS
---------------------------------------------------------- Letter :5.2
Some information on the cost of and access to surety bonds is
available. Many HHAs shopped for and obtained bonds before the
regulation was postponed to February 15, 1999, but many others did
not. In addition, HCFA made a change to the required terms for the
bonds on June 1, 1998, that affected surety companies' potential
liability and their willingness to provide bonds to HHAs. The cost
of obtaining a surety bond is the fee or premium charged plus any
collateral that must be supplied.\19 For large HHAs, the major cost
of a surety bond is the fee, because they are required to have a bond
equalling 15 percent of program revenues. They are less likely to
have to provide collateral and the fee they pay may be a lower
percentage of the bond's face value than the fee for smaller HHAs.
Small HHAs are required to obtain the minimum $50,000 bond but are
more likely to have to put up collateral.
The range of fees for HHA bonds is comparable to other commercial
surety bonds. The surety underwriting association reports that fees
for HHA financial guarantee bonds generally range between 1 and 2
percent of their face value. Rates may be higher or lower depending
on the HHA's financial situation. Some nonprofit and privately held
for-profit HHAs that we interviewed had been quoted fees higher than
those cited by the surety industry--up to 6 percent. Some of these
quotes, however, were made before the changes in the regulation that
reduced sureties' risk.\20
One surety that underwrote about 13 percent of the HHA surety bonds
sold before the postponement of the requirement told us that its fees
ranged from 0.5 to 3 percent of the face value of the bonds. It
indicated that having a written business plan describing how the
agency would respond to the new payment rates created by the BBA,
audited financial statements, positive cash management history, and
rigorous record keeping policies and practices reduced the HHAs'
fees. This surety charged its lowest fees to nonprofit HHAs
supported directly or indirectly by public or private foundations.
Its highest fees were for providers new to the home health care
business.
We found in looking at HCFA's 1996 data that between 6,000 and 7,000
HHAs would be required to obtain a bond of more than $50,000 to
participate in Medicare (see table 1). Assuming that sureties charge
fees of 2 percent of a bond's face value, fees would begin at $1,000,
and about 2,400 HHAs would have to pay fees between $3,000 and $7,500
to obtain a bond. At that rate, fees could exceed $60,000 for large
agencies, although sureties might charge them a lower rate. Larger
agencies choosing to participate in Medicaid would pay additional
fees to obtain a second bond. HCFA specifically exempted smaller
agencies from this requirement, but the majority of HHAs will have to
obtain bonds for both programs.
Table 1
Distribution of HHAs by 1996 Medicare
Payments, Surety Bond Values, and
Estimated Premiums
Range of 1996 Estimated annual
Medicare Surety bond face fee (at 2
payments Number of HHAs\a value percent)
---------------- ---------------- ---------------- ----------------
Less than 744 $50,000 $1,000
$50,000
$50,000 to 452 $50,000 $1,000
$100,000
$100,001 to 735 $50,000 $1,000
$200,000
$200,001 to 767 $50,000 $1,000
$334,000
$334,001 to 2,854 $50,001 to $1,000 to $3,000
$1,000,000 $150,000
$1,000,001 to 2,406 $150,000 to $3,000 to $7,500
$2,499,999 $375,000
$2,500,000 to 939 $375,000 to $7,500 to
$5,000,000 $750,000 $15,000
$5,000,001 to 415 $750,000 to $15,000 to
$10,000,000 $1,500,000 $30,000
$10,000,001 to 103 $1,500,000 to $30,000 to
$20,000,000 $3,000,000 $60,000
$20,000,001 or 29 $3,000,000 + $60,000 +
more
----------------------------------------------------------------------
\a About 1,400 government-operated HHAs that may not have been
required to obtain a surety bond are included in these numbers.
\b Surety industry representatives indicated fees would generally
range from 1 to 2 percent.
Source: GAO's analysis of HCFA data.
The surety bond fee is not the only cost of obtaining a bond. Having
to provide collateral raises the cost to HHAs. Sureties report
requiring collateral because HCFA's requirement that bonds be a
financial guarantee increases the likelihood of claims. They want
collateral from HHAs that pose greater risks of not being able to
repay a surety if the bond is redeemed. Requirements for collateral
vary among sureties, but generally they require collateral of
privately held HHAs, particularly small and medium-sized agencies.
The surety cited above required collateral of new HHAs unless they
were financially strong and personal indemnity of the principals of
all privately held firms.\21
HCFA reported that about 40 percent of HHAs obtained Medicare surety
bonds before the June 1998 delay in the implementation of the
requirement (see table 2).\22 Provider-based HHAs (those that are
part of a hospital or skilled nursing facility) of any size were more
likely to secure a surety bond than other types of HHAs; freestanding
HHAs not part of a chain were least likely. It is impossible,
however, to determine the proportion of HHAs that could have secured
bonds. Surety and home health care industry representatives told us
that some providers postponed the purchase of surety bonds, waiting
for actual implementation of the requirement. They also said that
some owners did not provide the collateral and personal indemnity
that would have made it possible for them to obtain a bond. The
timing of the surety bond requirement may have affected HHA
proprietors who were particularly reluctant to use their personal
assets as collateral and to provide personal indemnity because of the
uncertainty created by the substantial changes in Medicare's payment
policy. It is not possible to determine whether they could have
purchased bonds or ultimately will.
Table 2
Distribution of HHAs With Surety Bonds
by June 1998
HHAs
with
Total surety Percen
Type of HHA HHAs bonds tage
---------------------------------------------- ------ ------ ------
Small HHAs
Provider-based 502 305 60.8
Free-standing (chain) 265 107 40.4
Free-standing (nonchain) 2,199 575 26.1
Total 2,966 987 33.3
Medium HHAs
Provider-based 638 445 69.7
Free-standing (chain) 323 137 42.4
Free-standing (nonchain) 1,699 390 23.0
Total 2,660 972 36.5
Large HHAs
Provider-based 1,279 974 76.2
Free-standing (chain) 619 312 50.4
Free-standing (nonchain) 1,916 547 28.5
Total 3,814 1,833 48.1
All HHAs 9,440 3,792 40.2
----------------------------------------------------------------------
Note: For this table, small HHAs have annual Medicare revenues of
$200,000 or less, medium HHAs have $200,001 to $1,000,000, and large
HHAs have more than $1,000,000.
Source: HCFA.
--------------------
\19 Current law prohibits Medicare's reimbursement of HHA surety bond
costs.
\20 On June 1, 1998, HCFA published technical changes to the surety
bond regulation. Previously, a surety issuing a bond covering a
particular year was liable for any overpayments made to the HHA
during that year, regardless of when those overpayments were
discovered. With the change, HCFA limited a surety's liability to
overpayments discovered in the year when the bond was in effect.
However, for an HHA that terminates from the program, HCFA has a
2-year period in which to make a claim against the bond. HCFA also
stated that the surety bond would be used as a last resort in
recovering overpayments, gave sureties the right to appeal an
overpayment finding if the HHA did not, and provided for reimbursing
the surety for any money paid that was subsequently collected from
the HHA.
\21 An initiative like the SBA program for construction contractors
could offer some relief to certain small HHAs. The SBA program,
however, reinsures bonds only for contractors that have been in
business for at least 3 years.
\22 Although almost 4,000 bonds were submitted to HCFA, the number
purchased may have been higher. A representative of the surety
company that sold about 13 percent of the bonds told us that he
believes that in some cases bonds were purchased but not forwarded to
HCFA.
FINANCIAL GUARANTEE BOND
ENSURES GREATER SCRUTINY AND
RETURN OF OVERPAYMENTS THAN
OTHER BOND TYPES
---------------------------------------------------------- Letter :5.3
A more narrowly defined antifraud bond, one triggered only by the
failure to return overpayments received fraudulently, would probably
be easier and less costly to obtain than a financial guarantee bond.
Because the specified acts of fraud would not occur frequently, the
risk of a claim against a bond would be low and sureties would
provide bonds more readily. HHAs would be unlikely to have to pledge
collateral if they could demonstrate good character and ties to the
community, although personal indemnity from principals would possibly
still be required of privately held HHAs.
HCFA's use of a financial guarantee bond for the return of
overpayments regardless of their source will ensure more scrutiny and
benefits to Medicare, however, than other types of bonds. In
underwriting this type of bond, a surety will be likely to pay
particular attention to financial statements, business practices, and
overpayment history. This scrutiny will provide the Medicare program
with several benefits. Proprietors who do not have relevant business
experience will be deterred from incurring entering the program.
Existing Medicare-certified HHAs will be examined as to business
soundness. HHAs with overpayments that do not make an effort to
repay them will be unlikely to obtain a subsequent surety bond and
will be out of the Medicare business. And, generally, all providers
will be deterred from incurring overpayments and will have incentive
to repay any that are discovered.
Screening by a surety appears to be most useful for new agencies.
The rapid increase in the number of HHAs entering the Medicare
program with little scrutiny also makes requiring surety bonds a
useful mechanism for screening HHAs already in the program. However,
the value of this scrutiny would probably diminish with an HHA's
continued participation in Medicare. Little may be gained from
repetitive scrutiny of established, mature HHAs.
The option to substitute a Treasury note or other federal public debt
obligation for a surety bond will allow well-financed firms to avoid
scrutiny. Whether this option is problematic depends on the purpose
of the surety bond. If its primary purpose is to guarantee payment,
then this causes no concern. If, however, the primary purpose is to
increase scrutiny, then the ability to substitute may undermine that
objective.
Identifying the potential effect and cost of a compliance bond would
be difficult because the terms of such a bond can vary widely. A
bond like that required by Florida Medicaid, which requires
compliance with all program rules and regulations, could effectively
create a monetary penalty for violating Medicare's conditions of
participation. Now HHAs are required to comply but have the
opportunity to address and correct deficiencies before losing their
right to participate in the program. However, in underwriting a
compliance bond, sureties might choose to avoid agencies that have
been noted for violations in the past. Even if a bond were
restricted to more serious deficiencies, sureties might be more
reluctant to provide one. Sureties are less experienced in assessing
compliance with Medicare rules and regulations than financial
capacity, so it would be more difficult for them to predict which
HHAs represent greater risk.
Representatives of the surety industry acknowledge that no surety
bond can screen out all people who want to take unfair advantage of
the Medicare program. Some individuals who want to delude the surety
will still be able to obtain surety bonds. In addition, individuals
who have no history of criminal action but who intend to defraud or
abuse the program once in could obtain bonds. Further, the
substitution of a Treasury note, U.S. bond, or other federal public
debt obligation, as allowed by Treasury regulation, eliminates any
review of an HHA's suitability or its history of performance.
SIMILAR SURETY BOND
REQUIREMENTS FOR DME SUPPLIERS,
CORFS, AND REHABILITATION
AGENCIES WILL BENEFIT MEDICARE
BUT MAY AFFECT SMALL-PROVIDER
PARTICIPATION
------------------------------------------------------------ Letter :6
HCFA intends to propose surety bond requirements for DME suppliers,
CORFs, and rehabilitation agencies that will parallel those for
HHAs--a financial guarantee bond with a face value equal to the
greater of $50,000 or 15 percent of Medicare payments.\23 As with
HHAs, Medicare will benefit from sureties' review of these providers
and the incentive created to return overpayments. There are numerous
small DME providers, making it difficult for Medicare and other
payers to monitor them. Historically, there has been general concern
about DME suppliers' business and billing practices. ORT found that
a substantial number of suppliers billed Medicare for DME either not
furnished or not provided as billed. The scrutiny provided by
sureties will offer a review of their business practices and
financial qualifications. For CORFs and rehabilitation agencies, the
likelihood of overpayments is higher than for HHAs. HCFA estimates
that in 1996, uncollected overpayments equaled 10.7 percent of the
$122 million total Medicare spending for CORFs and 6.2 percent of the
$457 million for rehabilitation agencies--significantly greater than
the less than 1 percent estimated for HHAs.
These providers' access to and costs for surety bonds will also be
comparable to those of HHAs. Larger firms or firms with more assets
and other financial resources will probably have little difficulty
obtaining a bond. Small firms and privately held ones with few
resources will be more likely to have to provide collateral and
personal indemnity to obtain one. Most of the smaller providers have
limited revenues from Medicare; we estimate from HCFA data that
between 74 and 97 percent would require a $50,000 surety bond (see
table 3). Firms that own buildings or equipment will probably not
have to pledge additional collateral if they have sufficient equity.
Table 3
Distribution of Surety Bond Face Value
Required
Rehabilitation
DME suppliers CORFs agencies
-------------- -------------- --------------
Percen Percen Percen
Surety bond required Number t Number t Number t
---------------------- ------ ------ ------ ------ ------ ------
$50,000 66,106 97 247 74 1,890 86
15% of Medicare 2,205 3 89 26 317 14
payments
Total 68,311 100 336 100 2,207 100
----------------------------------------------------------------------
Source: GAO's analysis of HCFA data.
Since many DME suppliers receive very limited Medicare revenue, they
may be more likely to cease participation in the program if they view
the surety bond requirement as too costly. The average DME supplier
receives about one-twentieth of the Medicare revenue that the average
HHA does. The effect on beneficiaries' access may not be
significant, however, given that DME suppliers currently number more
than 68,000. While CORFs and rehabilitation agencies receive more
Medicare revenue on average than DME suppliers, some may find the
costs of obtaining a surety bond a barrier to Medicare participation.
Access for beneficiaries may not be compromised significantly since
other providers offer alternative sources of therapy.
--------------------
\23 According to HCFA officials, physicians who supply DME
incidentally to their providing professional services will be exempt
from obtaining surety bonds.
CONCLUSIONS
------------------------------------------------------------ Letter :7
The Congress mandated surety bonds for HHAs because of concern about
the growth in the home health care benefit and the lack of adequate
oversight. HCFA implemented the requirement to ensure that it could
recover Medicare overpayments made to HHAs. In underwriting the
bonds, sureties will evaluate HHAs entering or continuing in the
program by examining financial stability and business practices,
which may raise the standard for Medicare participation by sureties.
This scrutiny can help address the congressional concern. Specifying
the terms of a bond as HCFA did will provide incentives for HHAs to
return overpayments. Thus, the surety bond requirement can also
achieve HCFA's objectives.
We believe that HCFA made a prudent choice in specifying the surety
bond as a financial guarantee. A financial guarantee surety bond
will raise the standard for HHAs entering the Medicare program and
will help ensure that Medicare is protected against unrecovered
overpayments. However, we believe that HCFA's decision to require
that larger agencies obtain bonds equal to 15 percent of their
Medicare revenues may be unnecessarily burdensome for several
reasons. First, this standard imposes a greater burden on large HHAs
without a demonstrated commensurately greater benefit. Second, the
home health care industry's history of unrecovered overpayments does
not warrant this requirement, even in the face of growing
overpayments. Instead, we believe that a bond in the amount of
$50,000 balances the benefit to Medicare of increased scrutiny and
recovery of overpayments with the burden on participating agencies.
Requiring a surety bond may effectively screen HHAs to determine
whether they are reasonably organized entities, follow sound business
practices, and have some financial stability. Such screening is most
useful for new agencies. Given the considerable increase in recent
years in the number of HHAs and the lack of scrutiny as these
organizations entered the program, screening all existing HHAs is
also useful. However, little may be gained from continued screening
of established mature agencies. For such HHAs, the underwriting
process is likely to be sensitive only to significant changes in
financial stability.
We also believe that requiring HHAs to obtain separate surety bonds
for Medicare and Medicaid may be excessive. Even though HCFA
exempted small agencies from obtaining two bonds, the majority of
HHAs are required to purchase two bonds. This entails two fees and,
in many cases, pledging collateral for two bonds. However, the level
of scrutiny by the surety will be similar regardless of whether one
or two bonds are needed. Requiring one bond for the two programs
diminishes the financial protection but not HHAs' incentives to repay
overpayments. This is because an HHA that defaults on its bond to
either Medicare or Medicaid is unlikely to obtain a bond in the
future.
Allowing HHAs to substitute a Treasury note for the surety bond makes
sense when the primary objective of the requirement is to increase
HCFA's ability to recoup some unrecovered overpayments. However,
this substitution undermines the objectives of requiring Medicare
providers to submit to outside scrutiny and giving them strong
incentives to return all overpayments. If congressional intent is to
screen HHAs, the option of substituting a Treasury note does not
afford that scrutiny.
RECOMMENDATIONS TO THE
ADMINISTRATOR OF HCFA
------------------------------------------------------------ Letter :8
We recommend that to implement BBA's surety bond requirement for
HHAs, the HCFA Administrator revise the present regulation so that
all HHAs obtain one financial guarantee surety bond in the amount of
$50,000 for the guaranteed return of overpayments for both Medicare
and Medicaid.
MATTERS FOR CONGRESSIONAL
CONSIDERATION
------------------------------------------------------------ Letter :9
With respect to the surety bond requirements that we are
recommending, the Congress may wish to consider
-- exempting from a surety bond requirement HHAs that have
demonstrated fiscal responsibility--for example, those that have
maintained a bond for a specified period of time and have
returned any overpayments--and
-- eliminating the option for HHAs of substituting a Treasury note,
U.S. bond, or other federal public debt obligation for a surety
bond.
AGENCY AND INDUSTRY COMMENTS
----------------------------------------------------------- Letter :10
In written comments on a draft of this report, HCFA agreed with our
findings, conclusions, and recommendations. The agency also agreed
that the Congress should consider eventually exempting from the
surety bond requirement HHAs that have demonstrated fiscal
responsibility and eliminating the option for HHAs to submit federal
public debt obligations in lieu of a surety bond. HCFA provided
technical comments that we incorporated into the final report.
We also obtained written comments from Florida Medicaid officials on
the section of the report pertaining to the state's program integrity
efforts. They concurred with our findings and conclusions, and their
technical comment was incorporated into the final report.
Surety and home health care industry representatives reviewed a draft
of this report. Their technical comments are included in the final
report. The National Association of Surety Bond Producers and the
Surety Association of America represented the surety industry. They
expressed concern about the risk to the surety industry of writing
$50,000 financial guarantee bonds for HHAs and asserted that a fraud
and abuse bond would be more appropriate because it would provide the
desired level of scrutiny of HHAs and be available to more of them.
They also thought that a $50,000 bond would be too high for some
HHAs. They suggested basing the amount of bonds on a percentage of
Medicare revenues with a dollar upper limit. The surety industry
representatives also believed that limiting the time during which
HHAs must have surety bonds after demonstrating fiscal responsibility
is not appropriate for several reasons. First, they maintained that
the screening process remains important over time because sureties
monitor changes in management and business practices, as well as in
financial status, that may indicate problems. Second, they believed
that if the requirement is limited, the cost of issuing bonds will go
up as the group of HHAs purchasing bonds gets smaller. They
expressed general concern about the attractiveness of this line of
business to the surety industry if our recommendations are adopted.
We believe that a $50,000 financial guarantee bond appropriately
balances the costs to HHAs in obtaining a bond with protection for
the Medicare program in the form of scrutiny and incentives to repay
overpayments. We also believe that a financial guarantee bond will
ensure more scrutiny and greater benefit to Medicare than other types
of bonds. Further, after an HHA has demonstrated its commitment to
repay or avoid overpayments, we believe that the value of the bond to
the Medicare program diminishes substantially.
The home health industry representatives who reviewed the report were
from the American Association of Services and Homes for the Aging,
the American Federation of HHAs, the American Hospital Association,
the Home Care Association of America, the Home Health Services and
Staffing Association, the National Association of Home Care, and the
Visiting Nurses Association of America. Most of these organizations
supported limiting the requirement to one $50,000 surety bond for
both Medicare and Medicaid. They were concerned, however, that small
HHAs might find the bond requirement burdensome and, given the
payment changes implemented in 1998, might have to leave the Medicare
program. The home health care industry representatives agreed that
HHAs with "good track records" should be exempt from any surety bond
requirement but thought that this exemption should be immediate. One
representative thought that the Florida Medicaid program's experience
with surety bonds may be more relevant to Medicare's experience than
we do. It was also suggested that other mechanisms within the
Medicare program could accomplish the screening function of a surety
bond and that these options should be explored. The home health care
industry representatives asserted that compliance bonds and antifraud
bonds are more appropriate for the home health care industry than a
financial guarantee bond. As noted earlier, we believe that a flat
bond amount of $50,000 balances the concern of the industry with
needed additional protections for the Medicare program. We believe
that it is appropriate to require all HHAs to obtain a bond initially
because this would ensure a level of scrutiny across all HHAs and
because developing criteria to determine who should be exempt would
be challenging. While other options could be pursued to screen HHAs,
we believe that a financial guarantee bond will ensure more scrutiny
and greater benefit to Medicare than other types of bonds.
The surety industry and one home health care representative expressed
concern about the timing of the surety bond requirement. Since the
regulation was suspended, it is not clear when HHAs will have to
obtain a surety bond or the amount of time it will need to cover. We
agree that these details could affect future bond terms and the
availability and cost of bonds.
--------------------------------------------------------- Letter :10.1
As agreed with your offices, unless you release the report's contents
earlier, we plan no further distribution for 30 days. We will then
make copies available to other congressional committees and Members
of the Congress with an interest in these matters, the Secretary of
Health and Human Services, the Administrator of HCFA, and others upon
request.
If you or your staff have any questions, please call me on (202)
512-6806 or William J. Scanlon, Director, Health Financing and
Systems Issues, at (202) 512-7114. Major contributors to this report
are Sally Kaplan and Shari Sitron.
Richard L. Hembra
Assistant Comptroller General
SCOPE AND METHODOLOGY
=========================================================== Appendix I
To examine the surety bond issue, we reviewed our earlier extensive
work on home health care and studied the regulation implementing the
surety bond requirement in the Balanced Budget Act of 1997 (BBA) and
related revisions and program memoranda, Department of Health and
Human Services Office of Inspector General reports, and congressional
hearing testimony. We conducted interviews with Health Care
Financing Administration (HCFA) staff to determine the history and
decision making process that resulted in the surety bond regulation.
We also interviewed staff from the Florida Medicaid program and from
three regional home health intermediaries (RHHI) who have
responsibility for claims processing and medical review and cost
report review and audit for almost 80 percent of the Medicare home
health agencies (HHA).
We interviewed officials with the Small Business Administration (SBA)
and representatives of both the home health care and surety bond
industries, including representatives of the trade associations for
surety underwriters and surety producers, 4 sureties, 4 national home
health care trade associations, 5 state home health care trade
associations, and owners or operators of 44 HHAs from 13 states.
HCFA provided us with data on comprehensive outpatient rehabilitation
facilities (CORF) and rehabilitation agencies. These data came from
systems HCFA uses to manage the Medicare program. Florida Medicaid
provided us with a list of HHAs that had been in the program for 18
months or longer and dropped out of the program in 1996, taken from
data systems used to manage the program. We conducted our work from
April 1998 to November 1998 in accordance with generally accepted
government auditing standards.
SBA SURETY BOND GUARANTEE PROGRAMS
FOR CONSTRUCTION FIRMS
========================================================== Appendix II
SBA can guarantee surety bonds for construction contracts worth up to
$1.25 million for small and emerging contractors who cannot obtain
surety bonds through regular commercial channels. For surety bonds
issued under two separate programs, SBA assumes a predetermined
percentage of loss and reimburses the surety up to that amount if a
contractor defaults. To be eligible for the SBA programs, a
contractor must qualify as a small business (for example, have annual
receipts for the previous 3 fiscal years of no more than $5 million)
and meet the surety's bonding qualification criteria. The
information generally required by sureties includes an organization
chart, current financial statements prepared by an accountant,
financial statements for the previous 2 years, resumes of key people,
a record of contract performance, the status of work in progress, and
a business plan. The contractor pays the surety company's fee for
the bond, which cannot exceed the level approved by the appropriate
state regulatory body. Both the contractor and the surety pay SBA a
fee for each bond: The contractor pays $6 per $1,000 of the contract
amount and the surety pays 20 percent of the amount paid for the
bond. These fees go into a fund used to pay claims on defaulted
bonds.
In the Prior Approval program, SBA evaluates each bond application
package to determine that the applicant is qualified and that the
risk the agency will assume is reasonable before issuing a guarantee
to the surety. SBA guarantees sureties 90 percent of losses on bonds
up to $100,000 and on bonds to socially and economically
disadvantaged contractors and guarantees 80 percent of losses on all
other bonds under this program. Generally, contractors bonded under
the SBA Prior Approval program are less experienced than contractors
bonded under the Preferred Surety Bond (PSB) program.
The PSB program is currently restricted to 14 sureties that are not
permitted to participate in the Prior Approval program. The PSB
program does not require SBA's individual approval of bond
applications but guarantees that SBA will pay 70 percent of surety
losses if the contractor defaults. This program is for more
experienced contractors that demonstrate growth potential and that
are expected to be able to obtain surety bonds without an SBA
guarantee in about 3 years. The firms in this program are usually
larger than those in the Prior Approval program.
A representative of SBA told us that HHAs would not be able to
participate in its surety bond guarantee programs unless the
definition of eligible entities were changed by law.
RELATED GAO PRODUCTS
Medicare Home Health Benefit: Impact of Interim Payment System and
Agency Closures on Access to Services (GAO/HEHS-98-238, Sept. 9,
1998).
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, and GAO/OSI-98-5, Mar. 12, 1998).
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 Home Health Agencies: Certification Process Ineffective in
Excluding Problem Agencies (GAO/HEHS-98-29, Dec. 16, 1997, and
GAO/T-HEHS-97-180, July 28, 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 Post Acute Care: Home Health and Skilled Nursing Facility
Cost Growth and Proposals for Prospective Payment (GAO/T-HEHS-97-90,
Mar. 4, 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. ***