Medicare: Refinements Should Continue to Improve Appropriateness of
Provider Payments (Testimony, 07/19/2000, GAO/T-HEHS-00-160).

Pursuant to a congressional request, GAO discussed the effects of recent
Medicare payment reforms, focusing on the Balanced Budget Act of 1997's
(BBA) payment reforms affecting home health agencies, skilled nursing
facilities (SNF), and the health plans in Medicare's managed care
program, known as Medicare Choice.

GAO noted that: (1) the reactions by providers serving Medicare
beneficiaries to BBA and the Balanced Budget Refinement Act of 1999
payment reforms share a similar scenario; (2) tightened payment policies
have required many providers to adjust their operations; (3) the
adjustments have been particularly disruptive for providers that took
advantage of Medicare's previous payment policies to finance inefficient
and unnecessary care delivery; (4) industry representatives are
advocating the partial restoration of payment cuts; (5) there are recent
developments that have ensued since the BBA's implementation in the
areas of home health services, SNF services and the Medicare Choice
program; (6) home health utilization has dropped substantially, well
below what would have been required to remain within the BBA-imposed
payment limits; (7) GAO expects the new Medicare payment system for home
health services, scheduled for implementation in October, to generally
provide agencies a comfortable cushion to deliver necessary services;
(8) some corporate chains have declared bankruptcy; (9) the new Medicare
payment system for SNF services adequately covers the cost of
beneficiaries' services but no longer supports the extensive capital
expansions or the ancillary service business that corporate chains
relied on to boost revenues; (10) many plans are withdrawing from
Medicare; (11) the withdrawals are tied to a combination of Medicare
program changes and plans' business decisions; (12) in addition, GAO's
ongoing work shows that payments to plans for their Medicare enrollees
continue to exceed the expected fee-for-service costs of these
individuals; (13) the significance of this finding is that Medicare
managed care, although originally expected to achieve program savings,
continues instead to add to program cost; (14) the basis for potential
changes to BBA reforms should be how they affect beneficiaries' access
to necessary services and the long term outlook for this program; (15)
therefore, progress needs to continue to better align provider payments
with the expected costs of the beneficiaries served and to bring about
the fiscal discipline needed to contain Medicare spending in these areas
over the long term; and (16) GAO will continue to monitor the payment
reforms' effects to help Congress ensure that beneficiary access is
protected, providers are fairly compensated, and taxpayers do not
shoulder the burden of excessive program spending.

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

 REPORTNUM:  T-HEHS-00-160
     TITLE:  Medicare: Refinements Should Continue to Improve
	     Appropriateness of Provider Payments
      DATE:  07/19/2000
   SUBJECT:  Home health care services
	     Patient care services
	     Skilled nursing facilities
	     Health insurance cost control
	     Managed health care
	     Health care programs
	     Medical services rates
IDENTIFIER:  Medicare Choice Program
	     Medicare Program
	     Medicare Home Health Care Program
	     Medicare Skilled Nursing Facilities Program
	     Medicare Interim Home Health Payment System
	     Medicare Prospective Payment System

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GAO/T-HEHS-00-160

   * For Release on Delivery
     Expected at 10:00 a.m.

Wednesday, July 19, 2000

GAO/T-HEHS-00-160

MEDICARE

Refinements Should Continue to Improve Appropriateness of Provider Payments

        Statement of William J. Scanlon, Director

Health Financing and Public Health Issues

Health, Education, and Human Services Division

Testimony

Before the Subcommittee on Health and Environment, Committee on Commerce,
House of Representatives

United States General Accounting Office

GAO

Medicare: Refinements Should Continue to Improve Appropriateness of Provider
Payments

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today as you discuss the effects of recent Medicare
payment reforms and the potential need for additional refinements. The
Medicare payment provisions in the Balanced Budget Act of 1997 (BBA) were
enacted to control rapid spending growth in the traditional fee-for-service
program that was neither sustainable nor readily linked to demonstrated
changes in beneficiary needs. Essentially, these reforms changed the
financial incentives inherent in pre-BBA payment methods to more
appropriately reward providers for delivering care efficiently. The BBA also
created Medicare+Choice to expand beneficiaries' managed care options under
Medicare and bring payments more in line with the costs of providing covered
benefits in the traditional program.

Since the BBA's enactment, the Congress has faced pressure from providers to
undo the act's payment reforms. With changes so sweeping, achieving
perfection in all the details at the outset is unrealistic. Accordingly, the
Congress has monitored experience with these changes and made certain
modifications. To date, some of the act's provisions have taken effect, some
have been modified by the Balanced Budget Refinement Act of 1999 (BBRA), and
others have just recently begun to be phased in.

Calls for additional changes come at a time when federal budget surpluses
and lower Medicare outlays could make it easier to consider accommodating
enhanced Medicare payments. At the same time, however, the Congress is
considering the addition of an expensive prescription drug benefit to the
current program. In view of the coming upsurge in the Medicare-eligible
population, the Comptroller General has cautioned repeatedly that, even
before expanding benefits, projected Medicare spending threatens to absorb
ever-increasing shares of the nation's budgetary and economic resources.
Thus, without meaningful reform, demographic and cost trends will drive
Medicare spending to levels that will prove unsustainable for future
generations of taxpayers.

My comments today focus on the BBA's payment reforms affecting home health
agencies, skilled nursing facilities (SNF), and the health plans in
Medicare's managed care program, known as Medicare+Choice. My remarks are
based on our extensive published and ongoing work in each of these areas.

In brief, the reactions by providers serving Medicare beneficiaries to BBA
and BBRA payment reforms share a similar scenario. Tightened payment
policies have required many providers to adjust their operations. The
adjustments have been particularly disruptive for providers that took
advantage of Medicare's previous payment policies to finance inefficient and
unnecessary care delivery. Industry representatives are advocating the
partial restoration of payment cuts. Following are the recent developments
that have ensued since the BBA's implementation in the areas of home health
services, SNF services, and the Medicare+Choice program:

Home health services: Home health utilization has dropped substantially,
well below what would have been required to remain within the BBA-imposed
payment limits. We expect the new Medicare payment system for home health
services, scheduled for implementation in October, to generally provide
agencies a comfortable cushion to deliver necessary services.

SNF services: Some corporate chains have declared bankruptcy. The new
Medicare payment system for SNF services adequately covers the cost of
beneficiaries' services but no longer supports the extensive capital
expansions or the ancillary service business that corporate chains relied on
to boost revenues.

Medicare+Choice program: Many plans are withdrawing from Medicare. The
withdrawals are tied to a combination of Medicare program changes and plans'
business decisions In addition, our ongoing work shows that payments to
plans for their Medicare enrollees continue to exceed the expected
fee-for-service costs of these individuals. The significance of this finding
is that Medicare managed care, although originally expected to achieve
program savings, continues instead to add to program cost.

In our view, the basis for potential changes to BBA reforms should be how
they affect beneficiaries' access to necessary services and the long-term
outlook for this program. Therefore, progress needs to continue to better
align provider payments with the expected costs of the beneficiaries served
and to bring about the fiscal discipline needed to contain Medicare spending
in these areas over the longer term. We will continue to monitor the payment
reforms' effects to help the Congress ensure that beneficiary access is
protected, providers are fairly compensated, and taxpayers do not shoulder
the burden of excessive program spending.

Background

The Medicare SNF benefit provides up to 100 days of post-acute care per
spell of illness. To qualify for SNF services, a Medicare beneficiary must
need daily skilled nursing or rehabilitative therapy services, or both,
generally within 30 days of a hospital stay of at least 3 days in length,
and must be admitted to a Medicare-certified SNF for a condition related to
the hospitalization. When the beneficiary meets these conditions, Medicare
covers all necessary services, including room and board; nursing care; and
ancillary services such as drugs, laboratory tests, and physical therapy.
Beginning on the 21st day of care, the beneficiary is responsible for a
daily coinsurance payment, which equals $97 in 2000. Until 1998, Medicare
reimbursed skilled nursing facilities on a cost basis. Payments for routine
costs, such as room and board, were subject to cost limits, but payments for
capital and ancillary costs were virtually unlimited. Medicare is phasing in
a PPS for SNF services over a 3-year period that began in July 1998.

Medicare managed care plans have provided beneficiaries an attractive
alternative to the traditional fee-for-service program. In return for giving
up the freedom to seek care from any provider, beneficiaries who enroll in
plans typically receive coverage for benefits not offered by the traditional
program (such as routine physical examinations and prescription drugs) and
enjoy lower out-of-pocket expenses. Medicare pays the plans a fixed monthly
amount for each beneficiary, regardless of the actual costs of providing
care to that individual. Previously, plan payment rates were tightly linked
to average local spending in the traditional fee-for-service program and
only adjusted for certain beneficiary characteristics such as age and sex.
The BBA changed how plan payments were calculated beginning in 1998 by
weakening the linkage to fee-for-service spending and required that,
beginning in 2000, payment rates reflect differences in beneficiary health
status.

Pending Home Health PPS Rates Likely to Be Adequate, but Are Untested to
Date

To curb rampant spending growth, BBA overhauled the program's method of
paying for home health services. Between 1990 and 1997, Medicare
expenditures for home health services went up three times faster than
spending for the program as a whole. This rapid rise has been attributed to
many factors, including a loosened interpretation of the home health benefit
criteria and few controls to protect the program from abusive billing
practices at a time when Medicare paid for every home health visit with
almost no scrutiny. In combination, these factors made conditions ripe for
providers to deliver more services to more beneficiaries in order to
increase their revenues.

In response to these problems, the BBA required, by October 1, 1999, the
implementation of a new home health PPS, and until then, the implementation
of an interim payment system (IPS) to slow spending growth. The IPS made the
existing per visit cost limits more stringent and added an annual agency
revenue cap to control the number of services provided to beneficiaries.

Between 1997 and 1998, Medicare home health spending fell by nearly 15
percent, while total home health visits dropped an unprecedented 40 percent.
The Congressional Budget Office (CBO) attributes the decline to agencies'
tighter compliance with benefit eligibility criteria and their cautious
interpretation of IPS limits. Our ongoing work on home health spending shows
that these declines continued in 1999 and that the drop in utilization was
most pronounced in areas where, pre-BBA, use had grown the most and
beneficiary utilization was the highest.

These findings suggest that part of the contraction in service delivery
since the BBA may be a correction of the excessive use when Medicare did
little to control home health spending. However, it may also reflect an
inappropriate response to the IPS by home health agencies. While remaining
within IPS payment limits, all agencies could have served more beneficiaries
and many agencies could have increased the services provided each
beneficiary. Yet the number of beneficiaries receiving home health services
declined 14 percent between 1997 and 1998 and is continuing to fall. Because
the payment limits under the IPS are not adjusted to reflect the needs of
individual patients, agencies must maintain a balance high-cost and low-cost
patients in order to keep their costs below the IPS revenue caps. Agencies
that do not fully understand how these caps are applied may restrict their
admissions or reduce care to current patients further than necessary.

The home health PPS, which replaces the IPS on October 1 of this year, is a
more appropriate payment tool than the IPS because it is designed to align
payments with patient needs. Medicare will pay agencies a per-episode rate
based on historical, national average utilization for each 60-day period
during which a patient receives services. PPS rates are scheduled to be
tightened a year later by 15 percent. The per-episode payments are designed
to control service provision during the episode, while giving home health
agencies the flexibility to vary the intensity or mix of services delivered.
Home health industry advocates generally support the PPS, but argue that the
15-percent payment reduction is unnecessary.

In our view, the new home health PPS rates overall are likely to provide
agencies a comfortable cushion to deliver necessary services. These rates
are based on pre-BBA beneficiary use levels, which are widely regarded as
excessive. PPS rates will provide sufficient resources to restore a
considerable portion of the service reductions of the past 3 years. They
will not support, however, widely divergent levels of utilization where some
agencies supplied many more services than others for comparable patients.

Unfortunately, the new PPS has the potential to be advantageous to agencies
at the expense of beneficiaries and taxpayers. Under the per-episode method
of payment, agencies can increase profits by skimping on the number of
visits provided within the episode. Agencies can also inappropriately expand
the number of episodes provided by protracting the delivery of care over a
longer period. No standards exist for what the right amount of care is for
specific types of patients, particularly the right amount of home health
aide care, which composed almost half of all visits in 1997. Implementing
safeguards to ensure Medicare payments are used to deliver services to meet
beneficiaries' needs is a difficult task.

The home health PPS, while having a design superior to the IPS, is largely
untested. It is built on the concept of paying for episodes of care, yet
there is no consensus on what an episode should entail. In addition, similar
to other new PPSs, which vary payments according to patients' expected
needs, the potential exists for payments to be too low for some episodes
involving very sick patients and too high for others. To minimize the
potential for adverse effects for the program and individual agencies, we
recommended in April this year that HCFA implement a risk-sharing provision
whereby the government shares in any home health agency's losses under the
PPS but also protects the program from any agency's excessive gains.

SNF PPS Rates Cover Medicare-Related Costs

By establishing fixed per diem payments for all services provided to
beneficiaries, the PPS attempts to provide incentives for SNFs to deliver
care more efficiently. SNFs that previously boosted their Medicare
revenue-by using more or higher-priced ancillary services-will need to
modify their practices more than others.

Recent accounts of nursing home chain bankruptcies raise questions about the
adequacy of Medicare's SNF payments under the PPS. Our published and ongoing
work identifies several factors that contributed to the poor financial
performance of these corporations. Some corporations invested heavily in the
nursing home and ancillary service businesses in the years immediately
before the enactment of the PPS, both expanding their acquisitions and
upgrading facilities to provide higher-intensity services. Under tighter
payment constraints, these debt-laden enterprises are particularly
challenged. The PPS not only puts a premium on operating their SNFs
efficiently, it changes the market for their ancillary services business as
well. It makes other SNF operators sensitive to the costs of ancillary
services, so they are no longer willing to purchase them at high prices.
Thus, while SNFs have to adapt to the PPS constraints, these large
post-acute care providers may have greater adjustments to make as a result
of the strategic decisions they made during a period when Medicare was
exercising too little control over its payments.

There are indications that SNF payment rates under the BBA are likely to
provide sufficient-or, in some cases, even generous-compensation for
services provided to a facility's Medicare beneficiaries. Medicare's average
daily rate under the SNF PPS in fiscal year 1999 was higher than the average
daily SNF payment in fiscal year 1997. The significance of this comparison
is that 1997 payments were thought to be excessive because they reflected 7
years of cost increases of more than 14 percent per year. In fact, some
providers have been eager to adopt the PPS rates well ahead of schedule.
Currently, PPS rates are being phased in over a 3-year period, which began
in July 1998. This transition period was designed to allow facilities time
to adapt to the new payment system by continuing to tie a facility's payment
rates to its historical costs. The BBRA gives SNFs the option of forgoing
this transition period. Although a current tally is not available, HCFA
estimates that about half of Medicare-certified SNFs will opt to forgo the
transition period to receive fully prospective rates as soon as possible.

Beneficiary access to SNFs, moreover, does not appear compromised under the
new PPS. Utilization levels in 1999 were higher than those in 1997. Hospital
lengths of stay for admissions likely to lead to a SNF stay have continued
to decline, suggesting that hospitalized patients continue to find SNF care.

Nevertheless, the SNF PPS initially proposed by HCFA was not flawless. Last
year, we testified before the full Committee about PPS design problems. A
primary concern was the possibility that facilities treating a
disproportionate number of high-cost cases might not receive adequate
payments. HCFA is in the process of refining its method to account for
patient needs in its payments. The goal is to redistribute payments across
types of cases so that they more appropriately reflect each patient's
expected costs. HCFA recently proposed such refinements to the case-mix
adjustment system, which are scheduled to be implemented on October 1 of
this year.

In the meantime, BBRA included a provision that temporarily boosts payments
for certain cases by 20 percent, which will add an estimated $200 million to
Medicare SNF spending in fiscal year 2000. The provision is scheduled to
expire on October 1, 2000, or when HCFA implements a refined case-mix
adjustment system, whichever comes later. Industry advocates favor
prolonging the life of the BBRA provision and delaying the implementation of
HCFA's proposed payment modifications, which they assert are not
sufficiently refined. CBO estimates that if the 20 percent payment increase
remained in effect for 5 years, spending would increase by $1.4 billion. In
our view, the BBRA increase was helpful as a stopgap measure, but fiscal
prudence argues for implementing research-based improvements to the rates as
soon as practicable. Such improvements aim to distribute existing payments
more appropriately and thereby address the problem originally identified,
while avoiding the unwarranted expenditure of an additional hundreds of
millions of dollars each year.

Medicare+Choice Payments Remain Problematic

The BBA sought to improve Medicare's financial posture by changing the
methodology used to establish managed care payment rates. Accordingly, the
BBA slowed the growth in payment rates relative to the growth in per capita
fee-for-service spending for 5 years and required HCFA to improve its risk
adjustment of plan payments so that they more closely matched beneficiaries'
expected health care costs. The BBA also included payment changes and other
provisions to achieve a second goal: increase the availability of plans and
allow new types of plans to participate in Medicare.

The declining participation of health plans in the Medicare+Choice program
suggests that the BBA's cost containment and expansion goals may be
irreconcilable. Since the BBA's enactment, 168 plans have either left the
program or reduced the geographic areas they served. Recently, more plans
announced that they will terminate their contracts or reduce their service
areas effective January 1, 2001. Industry representatives have largely
attributed the withdrawals to the BBA's payment rate changes. The
representatives contend that Medicare is no longer a sufficiently profitable
line of business for some plans and that other plans have had to reduce the
benefits they offer and raise beneficiary premiums. They warn that the
Medicare+Choice program will continue to flounder unless payments are
increased.

Our published and ongoing work suggests that several factors influenced
plans' decisions about whether to participate in Medicare+Choice or to
participate only in certain areas. As we reported last year, the 1999
withdrawals represented plans that were recent market entrants, had enrolled
few beneficiaries, or faced competitors that had substantially larger market
shares, suggesting that plans made business decisions or used business
strategies that could be sustained only in an era of more generous Medicare
payments. We will issue a report soon on the withdrawals in 2000 and 2001.
While information on the 2001 withdrawals has only been available for a few
weeks, our analysis of the withdrawals in 2000 indicate a pattern similar to
that found for 1999.

Some health plans may find the payment rates established by the BBA to be
too low to warrant their future participation in Medicare+Choice. However,
in our ongoing work, when we compared plan payments for enrolled
beneficiaries in 1998 with the estimated Medicare fee-for-service costs for
these individuals, we found that plans received payments that substantially
exceeded what Medicare would have paid for the plans' enrollees had they
been covered under the fee-for-service program. This paradox stems from
differences in the intent of Medicare+Choice and its evolution. On the one
hand, Medicare+Choice plans are paid too much relative to the original
intent of Medicare managed care-to provide beneficiaries the package of
Medicare-covered services at less cost than the traditional fee-for-service
program. On the other, the plans may be paid too little for what they have
been offering to attract beneficiaries-a more comprehensive benefit package
beyond that authorized for fee-for-service beneficiaries for only modest or
no premiums.

Efforts to expand the Medicare+Choice program, particularly one in which
plans cover prescription drugs, have been important, because the traditional
Medicare program has not provided such coverage, and this program
alternative has provided an avenue for some beneficiaries to obtain drug
coverage. However, if the Congress adopts a prescription drug benefit for
the entire Medicare program, there may be less reason to have
Medicare+Choice payments exceed the costs of providing services in the
traditional program. The problem of excess payments can be addressed in part
by better adjusting payments for the actual health status of enrollees. Such
a step would also protect those plans that attract sicker-than-average
enrollees.

Conclusions

Needed refinements to the BBA's new payment policies for home health, SNF,
and managed care services are under development or are soon to be
implemented. In assessing the merit of these refinements, prudence suggests
that beneficiary needs and the program's prospects for long-term
sustainability, not provider profitability, should be paramount. We have
several studies under way to inform these decisions and we will continue to
work with you to provide this important information.

Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions you or other Members of the Subcommittee may have.

GAO Contacts and Acknowledgments

For future contacts regarding this testimony, please call William J. Scanlon
at (202) 512-7114 or Laura A. Dummit at (202) 512-7118. Individuals making
key contributions to this testimony included James C. Cosgrove, Hannah F.
Fein, Dana K. Kelley, Erin M. Kuhls, and James E. Mathews.

(201090)

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