Medicare Post-Acute Care: Cost Growth and Proposals to Manage It Through
Prospective Payment and Other Controls (Testimony, 04/09/97,
GAO/T-HEHS-97-106).

GAO discussed Medicare's skilled nursing facility (SNF), home health
care, and inpatient rehabilitation benefits and the administration's
forthcoming legislative proposals related to them.

GAO noted that: (1) Medicare's SNF costs have grown primarily because a
larger portion of beneficiaries use SNFs than in the past and because of
a large increase in the provision of ancillary services; (2) for home
health care costs, both the number of beneficiaries and the number of
services used by each beneficiary have more than doubled; (3) although
the average length of stay has decreased for inpatient rehabilitation
facilities, a larger portion of Medicare beneficiaries use them now,
which results in cost growth; (4) the administration's major proposals
for both SNFs and home health care are designed to to give the providers
of these services increased incentives to operate efficiently by moving
them from a cost reimbursement to a prospective payment system; (5) what
remains unclear about these proposals is whether an appropriate unit of
service can be defined for calculating prospective payments and whether
the Health Care Financing Administration's data bases are adequate for
it to set reasonable rates; (6) administration officials also have
discussed their intention to propose in the future a coordinated payment
system for post-acute care as methods to give providers efficiency
incentives; (7) these concepts have appeal, but GAO has concerns about
them similar to those it has for SNF and home health prospective
payments; (8) finally, the administration is proposing that SNFs be
required to bill for all services provided to their Medicare residents
rather than allowing outside suppliers to bill; and (9) this latter
proposal has merit because it would make control over the use of
ancillary services significantly easier.

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

 REPORTNUM:  T-HEHS-97-106
     TITLE:  Medicare Post-Acute Care: Cost Growth and Proposals to 
             Manage It Through Prospective Payment and Other
             Controls
      DATE:  04/09/97
   SUBJECT:  Health care programs
             Health insurance cost control
             Skilled nursing facilities
             Home health care services
             Health resources utilization
             Hospital care services
             Eligibility determinations
             Eligibility criteria
             Medical services rates
IDENTIFIER:  Medicare Program
             HHS Operation Restore Trust
             Medicare Prospective Payment System
             
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Cover
================================================================ COVER


Before the Committee on Finance, U.S.  Senate

For Release on Delivery
Expected at 10:00 a.m.
Wednesday, April 9, 1997

MEDICARE POST-ACUTE CARE - COST
GROWTH AND PROPOSALS TO MANAGE IT
THROUGH PROSPECTIVE PAYMENT AND
OTHER CONTROLS

Statement of William J.  Scanlon, Director
Health Financing and Systems Issues
Health, Education, and Human Services Division

GAO/T-HEHS-97-106

GAO/HEHS-97-106T


(101554)


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

  DRG - diagnosis related group
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  ORA - Omnibus Reconciliation Act of 1980
  PPS - prospective payment system
  PRO - peer review organization
  ProPAC - Prospective Payment Assessment Commission
  RUG-III - Resource Utilization Group, Version III
  SNF - Skilled Nursing Facility
  TEFRA - Tax Equity and Fiscal Responsibility Act of 1982

MEDICARE POST-ACUTE CARE:  COST
GROWTH AND PROPOSALS TO MANAGE IT
THROUGH PROSPECTIVE PAYMENT AND
OTHER CONTROLS
============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

We are pleased to be here today to discuss Medicare's skilled nursing
facility (SNF), home health care, and inpatient rehabilitation
benefits and the administration's forthcoming legislative proposals
related to them.  After relatively modest growth during the 1980s,
Medicare's expenditures for SNFs and home health care have grown
rapidly in the 1990s.  Expenditures for inpatient rehabilitation
facilities have grown rapidly since the mid-1980s.  SNF payments rose
from $2.8 billion in 1989 to $11.3 billion in 1996, while home health
care costs grew from $2.4 billion to $17.7 billion over the same
period.  Rehabilitation facility payments increased from $1.4 billion
in 1989 to $3.9 billion in 1994.\1 Over those periods, annual growth
averaged 22 percent for SNFs, 33 percent for home health care, and 23
percent for rehabilitation facilities. 

My comments today will focus on the reasons for cost growth and the
administration's announced legislative proposals for these three
Medicare benefits.  The information presented today is based on our
previous work and the most recent data on the benefits available from
the Health Care Financing Administration (HCFA), which manages
Medicare.  Because the legislative proposals were only recently
released by the administration, our analysis was primarily based on
summaries of them that were publicly released earlier in the year and
our discussions with HCFA officials about the proposals. 

In brief, Medicare's SNF costs have grown primarily because a larger
portion of beneficiaries use SNFs than in the past and because of a
large increase in the provision of ancillary services.  For home
health care costs, both the number of beneficiaries and the number of
services used by each beneficiary have more than doubled.  Although
the average length of stay has decreased for inpatient rehabilitation
facilities, a larger portion of Medicare beneficiaries use them now,
which results in cost growth.  A combination of factors led to the
increased use of these benefits: 

  -- legislation and coverage policy changes in response to court
     decisions liberalized coverage criteria for the SNF and home
     health benefits, enabling more beneficiaries to qualify for
     them;

  -- these changes also transformed the nature of home health care
     from primarily posthospital care to more long-term care for
     chronic conditions;

  -- earlier discharges from hospitals led to the substitution of
     days spent in SNFs for what in the past would have been the last
     few days of hospital care;

  -- use of ancillary services, such as physical therapy, in SNFs has
     increased, and specific controls for these services have not
     been implemented;

  -- rapid growth in the number of inpatient rehabilitation beds
     available and use of these beds by beneficiaries, as well as the
     likelihood of some substitution of rehabilitation days for
     general hospital days, led to higher expenditures for inpatient
     rehabilitation; and

  -- a diminution of administrative controls over the benefits,
     resulting at least in part from fewer resources being available
     for such controls, reduced the likelihood of inappropriately
     submitted claims being denied. 

The administration's major proposals for both SNFs and home health
care are designed to give the providers of these services increased
incentives to operate efficiently by moving them from a cost
reimbursement to a prospective payment system.  What remains unclear
about these proposals is whether an appropriate unit of service can
be defined for calculating prospective payments and whether HCFA's
databases are adequate for it to set reasonable rates. 

Administration officials also have discussed their intention to
propose in the future a coordinated payment system for all post-acute
care as a method to give providers efficiency incentives.  This
concept has appeal, but we have concerns about it similar to those we
have for SNF and home health prospective payments. 

Finally, the administration is proposing that SNFs be required to
bill for all services provided to their Medicare residents rather
than allowing outside suppliers to bill.  This latter proposal has
merit because it would make control over the use of ancillary
services significantly easier. 


--------------------
\1 Expenditure data for inpatient rehabilitation were obtained from
the Prospective Payment Assessment Commission. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Medicare covers up to 100 days of care in a SNF after a beneficiary
has been hospitalized for at least 3 days.  To qualify for the
benefit, the patient must need skilled nursing or therapy on a daily
basis.  For the first 20 days of SNF care, Medicare pays all the
costs, and for the 21st through the 100th day, the beneficiary is
responsible for daily coinsurance of $95 in 1997. 

To qualify for home health care, a beneficiary must be confined to
his or her residence ("homebound"); require part-time or intermittent
skilled nursing, physical therapy, or speech therapy; be under the
care of a physician; and have the services furnished under a plan of
care prescribed and periodically reviewed by a physician.  If these
conditions are met, Medicare will pay for skilled nursing; physical,
occupational, and speech therapy; medical social services; and home
health aide visits.  Beneficiaries are not liable for any coinsurance
or deductibles for these home health services, and there is no limit
on the number of visits for which Medicare will pay. 

Medicare covers care in rehabilitation hospitals that specialize in
such care and units within acute-care hospitals that also specialize. 
To qualify, beneficiaries must have one or more conditions requiring
intensive and multidisciplinary rehabilitation services on an
inpatient basis.  In addition, to qualify as a rehabilitation
facility, hospitals and units in acute-care hospitals must
demonstrate their status by such factors as furnishing primarily
intensive rehabilitation services to an inpatient population, at
least 75 percent of whom require treatment of 1 or more of 10
specified conditions (for example, stroke or hip fracture). 
Rehabilitation facilities must also use a treatment plan for each
patient that is established, reviewed, and revised as needed by a
physician in consultation with other professional personnel. 
Inpatient rehabilitation is treated like any other hospitalization
for beneficiary cost-sharing purposes.\2

Medicare pays SNFs and home health agencies on the basis of their
reasonable costs--those that are found to be necessary and related to
patient care--up to specified cost limits.  For SNFs, limits are
imposed on the amount of routine costs--those for general nursing,
room and board, and administrative overhead--that will be reimbursed. 
Separate limits are set for freestanding SNFs in urban and rural
areas at 112 percent of mean routine costs.  Hospital-based SNF
limits are set midway between the freestanding limits and 112 percent
of the mean routine costs of hospital-based SNFs in each area.  Home
health agency cost limits are established at 112 percent of the mean
costs of freestanding agencies in urban and rural areas. 
Hospital-based agencies have the same limits.  Separate limits are
set for each type of visit (skilled nursing, physical therapy, and so
on) but are applied in the aggregate; that is, an agency's costs over
the limit for one type of visit can be offset by costs below the
limit for another.  Both SNF and home health cost limits are adjusted
for differences in wage levels across geographic areas.  Also,
exemptions from the cost limits are available to newly opened SNFs
and home health agencies, and exceptions to the limits are available
to those that can show that their costs are above the limits for
reasons not under their control. 

Inpatient rehabilitation care, provided at both rehabilitation
hospitals and units of acute-care hospitals, is exempt from
Medicare's hospital prospective payment system (PPS), but is subject
to the payment limitations and incentives established by the Tax
Equity and Fiscal Responsibility Act of 1982 (TEFRA).  Under this
law, Medicare pays these facilities the lower of the facility's
average Medicare allowable inpatient operating costs per discharge or
its target amount.  The target amount is based on the provider's
allowable costs per discharge in a base year,\3 trended to the
current year through an annual update factor.  A TEFRA facility with
inpatient operating costs below its ceiling receives its costs plus
50 percent of the difference between these costs and the ceiling or 5
percent of the ceiling, whichever is less.  Rehabilitation facilities
receive cost-based payments without regard to the TEFRA limits until
they complete a full cost-reporting year, and that year is then used
as their base year. 

Long-term care hospitals are another category exempted from the
hospital PPS.  To qualify as long term, hospitals must have an
average length of stay of a least 25 days for their Medicare
patients.  Medicare pays these hospitals on the basis of their costs,
subject to TEFRA limits, just like rehabilitation hospitals.  The
number of long-term care hospitals has grown from 94 in 1986 to 146
in 1994, and Medicare payments to them have increased considerably
from about $200 million in 1989 to about $800 million in 1994. 
However, these hospitals remain a small part of the Medicare program,
representing less than 0.5 percent of expenditures, and little
research or analysis has been done on them.  As a result, little is
known about the reasons for the growth that has occurred in the
long-term care hospital area. 

While the cost-limit provisions of Medicare's cost reimbursement
system for SNFs, home health agencies, and rehabilitation facilities
give some incentives for providers to control the affected costs,
these incentives are considered by health financing experts to be
relatively weak, especially for providers with costs considerably
below their limit.  On the other hand, it is generally agreed that a
PPS gives providers increased cost-control incentives.  The
administration proposes establishing PPSs for SNF and home health
care and estimates that Medicare would save more than $10 billion
over the next 5 fiscal years.  PPS is also being designed for
rehabilitation facilities but is not included in the administration's
fiscal year 1998 budget proposals. 


--------------------
\2 The beneficiary is responsible for a deductible, $760 in 1997, and
coinsurance for each day over 60 days during a spell of illness.  A
spell of illness ends when the beneficiary has not been in a hospital
or SNF for 60 days.  A transfer from an acute-care hospital to a
rehabilitation hospital or unit does not result in a second
deductible because the patient is in the same spell of illness. 

\3 The base year depends on when the rehabilitation hospital or unit
began operating.  For those operating in 1987 or earlier, the base
year is usually the cost-reporting year begun during fiscal year
1987. 


   POST-ACUTE CARE COST GROWTH
---------------------------------------------------------- Chapter 0:2

The Medicare SNF, home health, and inpatient rehabilitation benefits
are three of the fastest growing components of Medicare spending. 
From 1989 to 1996, Medicare part A SNF expenditures increased over
300 percent, from $2.8 billion to $11.3 billion.  During the same
period, part A expenditures for home health increased from $2.4
billion to $17.7 billion--an increase of over 600 percent. 
Rehabilitation facility payments increased from $1.4 billion in 1989
to $3.9 billion in 1994, the latest year for which complete data were
available.  SNF payments currently represent 8.6 percent of part A
Medicare expenditures; home health, 13.5 percent; and rehabilitation
facilities, 3.4 percent. 

At Medicare's inception in 1966, the home health benefit under part A
provided limited posthospital care of up to 100 visits per year after
a hospitalization of at least 3 days.  In addition, the services
could only be provided within 1 year after the patient's discharge
and had to be for the same illness.  Part B coverage of home health
also was limited to 100 visits per year.  These restrictions under
part A and part B were eliminated by the Omnibus Reconciliation Act
of 1980 (ORA) (P.L.  96-499), but little immediate effect on Medicare
costs occurred. 

With the implementation of the Medicare inpatient PPS in 1983, use of
the SNF and home health benefits was expected to grow as patients
were discharged from the hospital earlier in their recovery periods. 
But HCFA's relatively stringent interpretation of coverage and
eligibility criteria held growth in check for the next few years.  As
a result of court decisions in the late 1980s, HCFA issued guideline
changes for the SNF and home health benefits that had the effect of
liberalizing coverage criteria, thereby making it easier for
beneficiaries to obtain SNF and home health coverage.  Additionally,
the changes prevent HCFA's claims processing contractors from denying
physician-ordered SNF or home health services unless the contractors
can supply specific clinical evidence that indicates which particular
services should not be covered. 

The combination of these legislative and coverage policy changes has
had a dramatic effect on utilization of these two benefits in the
1990s, both in terms of the number of beneficiaries receiving
services and in the extent these services are used.  (App.  I
contains figures that show growth in SNF and home health expenditures
in relation to the legislative and policy changes.) For example, ORA
1980 and HCFA's 1989 home health guideline changes have essentially
transformed the home health benefit from one focused on patients
needing short-term posthospital care to one that serves chronic,
long-term care patients as well.  The number of beneficiaries
receiving home health care more than doubled in the last few years,
from 1.7 million in 1989 to about 3.9 million in 1996.  During the
same period, the average number of visits to home health
beneficiaries also more than doubled, from 27 to 72.  In a recent
review of home health care,\4 we found that from 1989 to 1993, the
proportion of home health users receiving more than 30 visits
increased from 24 to 43 percent and those receiving more than 90
visits tripled, from 6 to 18 percent, indicating that the program is
serving a larger proportion of longer-term patients.  Moreover, about
a third of beneficiaries receiving home health care did not have a
prior hospitalization, another possible indication that care for
chronic conditions is being provided. 

Similarly, the number of people receiving care from SNFs has also
almost doubled, from 636,000 in 1989 to 1.1 million in 1996.  While
the average length of a Medicare-covered SNF stay has not changed
much during that time, the average Medicare payment per day has
almost tripled--from $98 in 1990 to $292 in 1996.  Use of ancillary
services, such as physical and occupational therapy, has increased
dramatically and accounts for most of the growth in per-day cost. 
For example, our analysis of 1992 through 1995 SNF cost reports shows
that reported ancillary costs per day have increased 67 percent, from
$75 per day to $125 per day, while reported routine costs per day
have increased only 20 percent, from $123 to $148.  Unlike routine
costs, which are subject to limits, ancillary services are only
subject to medical necessity criteria, and Medicare does relatively
little review of their use.  Moreover, SNFs can cite high ancillary
service use to justify an exception to routine service cost limits,
thereby increasing payments for routine services. 

Between 1990 and 1996, the number of hospital-based SNFs increased
over 80 percent, from 1,145 such units to 2,088.  Hospitals can
benefit from establishing a SNF unit in a number of ways.  Hospitals
receive a set fee for a patient's entire hospital stay, based on a
patient's diagnosis related group (DRG).\5 Therefore, the quicker
that hospitals discharge a patient into a SNF, the lower that
patient's inpatient hospital care costs are.  We found that in 1994,
patients with any of 12 DRGs commonly associated with posthospital
SNF use had 4- to 21-percent shorter stays in hospitals with SNF
units than patients with the same DRGs in hospitals without SNF
units.\6 Additionally, by owning a SNF, hospitals can increase their
Medicare revenues through receipt of the full DRG payment for
patients with shorter lengths of stay and a cost-based payment after
the patients are transferred to the SNF. 

The availability of inpatient rehabilitation beds has also increased
dramatically.  Between 1986 and 1994, the number of
Medicare-certified rehabilitation facilities grew from 545 to 1,019,
an 87-percent increase.  A major portion of this growth represents
the increase in rehabilitation units located in PPS hospitals, which
went from 470 to 824 over the same period.  Inpatient rehabilitation
admissions for Medicare beneficiaries increased from 2.9 per 1,000 in
1986 to 7.2 per 1,000 in 1993, or 148 percent.  Some of this increase
in beneficiary use was due to increases in the number of acute-care
admissions that often lead to use of rehabilitation facilities.  For
example, the DRG that includes hip replacement grew from 218,000
discharges during fiscal year 1989 to 344,000 in fiscal year 1995. 
For the same DRG, average length of stay in acute-care hospitals
decreased from 12 to 6.7 days over that period. 

As was the case with SNFs, beneficiaries admitted to rehabilitation
units in 1994 following a stay in an acute-care hospital had shorter
average lengths of stay than beneficiaries admitted to rehabilitation
hospitals.  They also had shorter stays in the acute-care hospital. 
Moreover, the same scenario that applies to hospital-based SNFs
applies to rehabilitation units.  The quicker that hospitals
discharge a patient to the rehabilitation unit, the lower that
patient's acute-care costs are.  By having a rehabilitation unit,
hospitals can increase their Medicare revenues through receipt of the
full DRG payment for patients with shorter lengths of stay and a
cost-based payment after the patients are admitted to rehabilitation. 

Rapid growth in SNF and home health expenditures has been accompanied
by decreased, rather than increased, funding for program safeguard
activities.  For example, our March 1996 report found that part A
contractor funding for medical review had decreased by almost 50
percent between 1989 and 1995.  As a result, while contractors had
reviewed over 60 percent of home health claims in fiscal year 1987,
their review target had been lowered by 1995 to 3.2 percent of all
claims (or sometimes, depending on available resources, to a required
minimum of 1 percent).  We found that a lack of adequate controls
over the home health program, such as little intermediary medical
review and limited physician involvement, makes it nearly impossible
to know whether the beneficiary receiving home health care qualifies
for the benefit, needs the care being delivered, or even receives the
services being billed to Medicare.  Also, because of the small
percentage of claims now selected for review, home health agencies
that bill for noncovered services are less likely to be identified
than they were 10 years ago.  Similarly, the low level of review of
SNF services makes it difficult to know whether the recent increase
in ancillary service use is legitimate (for example, because patient
mix has shifted toward those who need more services) or is simply a
way for SNFs to get more revenues. 

Medicare's peer review organization (PRO) contractors have
responsibility for oversight of Medicare inpatient rehabilitation
hospitals and units from both utilization and quality-of-care
perspectives.  However, the PROs' emphasis has changed in recent
years, with a greater focus on quality reviews and less emphasis on
case review.  In fact, the current range of work for PROs requires no
specific review for the appropriateness of inpatient rehabilitation
use. 

Finally, because relatively few resources have been available for
auditing end-of-year provider cost reports, HCFA has little ability
to identify whether home health agencies, SNFs, and rehabilitation
facilities are charging Medicare for costs unrelated to patient care
or other unallowable costs.  Because of the lack of adequate program
controls, it is quite possible that some of the recent increase in
home health, SNF, and rehabilitation facility expenditures stems from
abusive practices.  The Health Insurance Portability and
Accountability Act of 1996 (P.L.  104-191), also known as the
Kassebaum-Kennedy Act, has increased funding for program safeguards. 
However, per-claim expenditures will remain below the level they were
in 1989, after adjusting for inflation.  We project that, in 2003,
payment safeguard spending as authorized by Kassebaum-Kennedy will be
just over one-half of the 1989 per-claim level, after adjusting for
inflation. 


--------------------
\4 Medicare:  Home Health Utilization Expands While Program Controls
Deteriorate (GAO/HEHS-96-16, Mar.  27, 1996).  This report includes
an extensive discussion of the reasons for home health care cost
growth. 

\5 DRGs are sets of diagnoses that are expected to require about the
same level of hospital resources to treat beneficiaries suffering
from them. 

\6 Skilled Nursing Facilities:  Approval Process for Certain Services
May Result in Higher Medicare Costs (GAO/HEHS-97-18, Dec.  20, 1996). 
This report also includes information on cost growth for SNF services
and the characteristics of Medicare beneficiaries who receive SNF
care. 


   ADMINISTRATION'S PROPOSALS FOR
   PROSPECTIVE PAYMENT SYSTEMS
---------------------------------------------------------- Chapter 0:3

The goal in designing a PPS is to ensure that providers have
incentives to control costs and that, at the same time, payments are
adequate for efficient providers to furnish needed services and at
least recover their costs.  If payments are set too high, Medicare
will not save money and cost-control incentives can be weak.  If
payments are set too low, access to and quality of care can suffer. 

In designing a PPS, selection of the unit of service for payment
purposes is important because the unit used has a strong effect on
the incentives providers have for the quantity and quality of
services they provide.  Taking into account the varying needs of
patients for different types of services--routine, ancillary, or
all--is also important.  A third important factor is the reliability
of the cost and utilization data used to compute rates.  Good choices
for unit of service and cost coverage can be overwhelmed by bad data. 


      PROPOSAL FOR A SNF PPS
-------------------------------------------------------- Chapter 0:3.1

We understand that the administration will propose a SNF PPS that
would pay per diem rates covering all facility cost types and that
payments would be adjusted for differences in patient case mix.  Such
a system is expected to be similar to HCFA's ongoing SNF PPS
demonstration project that is testing the use of per diem rates
adjusted for resource need differences using the Resource Utilization
Group, version III (RUG-III) patient classification system.\7 This
project was recently expanded to include coverage of ancillary costs
in the prospective payment rates. 

An alternative to the proposal's choice of a day of care as the unit
of service is an episode of care--the entire period of SNF care
covered by Medicare.  While substantial variation exists in the
amount of resources needed to treat beneficiaries with the same
conditions when viewed from the day-of-care perspective, even more
variation exists at the episode-of-care level.  Resource needs are
less predictable for episodes of care.  Moreover, payment on an
episode basis may result in some SNFs inappropriately reducing the
number of covered days.  Both factors make a day of care the better
candidate for a PPS unit of service.  Furthermore, the likely patient
classification system, RUG-III, is designed for and being tested in a
per diem PPS.  On the other hand, a day-of-care unit gives few, if
any, incentives to control length of stay, so a review process for
this purpose would still be needed. 

The states and HCFA have a lot of experience with per diem payment
methods for nursing homes under the Medicaid program, primarily for
routine costs but also, in some cases, for total costs.  This
experience should prove useful in designing a per diem Medicare PPS. 

Regarding the types of costs covered by PPS rates, a major
contributor to Medicare's SNF cost growth has been the increased use
of ancillary services, particularly therapy services.  This, in turn,
means that it is important to give SNFs incentives to control
ancillary costs, and including them under PPS is a way to do so. 
However, adding ancillary costs does increase the variability of
costs across patients and places additional importance on the
case-mix adjuster to ensure reasonable and adequate rates. 

Turning to the adequacy of HCFA's databases for SNF PPS rate-setting
purposes, our work, and that of the Department of Health and Human
Services' (HHS) Inspector General, has found examples of questionable
costs in SNF cost reports.  For example, we found extremely high
charges for occupational and speech therapy with no assurance that
cost reports reflected only allowable costs.\8 Cost-report audits are
the primary means available to ensure that SNF cost reports reflect
only allowable costs.  However, the resources expended on auditing
cost reports have been declining in relation to the number of SNFs
and SNF costs for a number of years.  The percentage of SNFs
subjected to field audits has decreased as has the extent of auditing
done at the facilities that are audited.  Under these circumstances,
we think it would be prudent for HCFA to do thorough audits of a
projectable sample of SNF cost reports.  The results could then be
used to adjust cost-report databases to remove the influence of
unallowable costs, which would help ensure that inflated costs are
not used as the base for PPS rate setting. 


--------------------
\7 RUG-III is a method for classifying SNF residents according to
health characteristics and the amount and type of resources they
need. 

\8 Medicare:  Tighter Rules Needed to Curtail Overcharges for Therapy
in Nursing Homes (GAO/HEHS-95-23, Mar.  30, 1995). 


      PROPOSAL FOR A HOME HEALTH
      PPS
-------------------------------------------------------- Chapter 0:3.2

The summary of the administration's proposal for a home health PPS is
very general, saying only that a PPS for an appropriate unit of
service would be established in 1999 using budget neutral rates
calculated after reducing expenditures by 15 percent.  HCFA estimates
that this reduction will result in savings of $4.7 billion over
fiscal years 1999 through 2002. 

The choice of the unit of service is crucial, and there is limited
understanding of the need for and content of home health services to
guide that choice.  Choosing either a visit or an episode as the unit
of service would have implications for both cost control and quality
of care, depending on the response of home health agencies.  For
example, if the unit of service is a visit, agencies could profit by
shortening the length of visits.  At the same time, agencies could
attempt to increase the number of visits, with the net result being
higher total costs for Medicare, making the per-visit choice probably
not appropriate.  Using an episode of care over a period of time such
as 30 or 100 days as the unit of service has a greater potential for
controlling costs.  However, agencies could gain by reducing the
number of visits during that period, potentially lowering quality of
care.  If an episode of care is chosen as the unit of service, HCFA
would need a method to ensure that beneficiaries receive adequate
services and that any reduction in services that can be accounted for
by past overprovision of care does not result in windfall profits for
agencies.  In addition, HCFA would need to be vigilant to ensure that
patients meet coverage requirements, because agencies would be
rewarded for increasing their caseloads.  HCFA is currently testing
various PPS methods and patient classification systems for possible
use with home health care, and the results of these efforts may shed
light on how to best design a home health PPS. 

We have the same concerns about the quality of HCFA's home health
care cost-report databases for PPS rate-setting purposes that we do
for the SNF database.  Again, we believe that adjusting the home
health databases, using the results of thorough cost-report audits of
a projectable sample of agencies, would be wise. 

We are also concerned about the appropriateness of using current
Medicare data on visit rates to determine payments under a PPS for
episodes of care.  As we reported in March 1996, controls over the
use of home health care are virtually nonexistent.  Operation Restore
Trust, a joint effort by federal and state agencies in several states
to identify fraud and abuse in Medicare and Medicaid, found very high
rates of noncompliance with Medicare's coverage conditions in
targeted agencies.  For example, in a sample of 740 beneficiaries
drawn from 43 home health agencies in Texas and 31 in Louisiana that
were selected because of potential problems, some or all of the
services received by 39 percent of the beneficiaries were denied. 
About 70 percent of the denials were because the beneficiary did not
meet the homebound definition.  Although these are results from
agencies suspected of having problems, they illustrate that
substantial amounts of noncovered care are likely to be reflected in
HCFA's home health care utilization data.  For these reasons, it
would also be prudent for HCFA to conduct thorough on-site medical
reviews of a projectable sample of agencies to give it a basis to
adjust utilization rates for purposes of establishing a PPS. 


      REHABILITATION PPS ALSO IS
      BEING DEVELOPED
-------------------------------------------------------- Chapter 0:3.3

The administration has not proposed a PPS for rehabilitation
facilities, but HCFA has an ongoing research project to develop such
a system.  A report detailing a model for a PPS is currently
undergoing review.  The research was directed at designing a
per-episode payment system adjusted for case mix, using a measure of
patient functional status--for example, the patient's mobility--as
the adjuster.  In general, this and other research has shown that
patients in the rehabilitation facilities are more homogeneous than
those in SNFs or home health care.  Because the goals for the care
are also more homogeneous and defined, an episode may be a reasonable
choice for a unit of service.  Again, the per-episode payment should
be structured to reduce the incentives for premature discharge, and
adequate review mechanisms to prevent such discharges and other
quality problems would be needed. 

As with SNFs and home health care, we have concerns about the
reliability of HCFA's databases for rate-setting purposes for
rehabilitation hospitals because of the low levels of utilization
review and cost-report auditing.  As we stated earlier, HCFA should
do enough audits and medical review to enable it to adjust its
databases to remove the effects of any problems.  HCFA would also
need an adequate review system under a PPS because rehabilitation
facilities would probably have incentives to increase their
caseloads, cut corners on quality, or both. 


      LONG-TERM CARE HOSPITAL
      PROPOSAL
-------------------------------------------------------- Chapter 0:3.4

HCFA is not currently studying a PPS for long-term care hospitals. 
Rather, the administration is proposing that any hospitals that newly
qualify for long-term care status be paid under the regular inpatient
hospital PPS.  Also, HCFA officials told us that the agency plans to
recommend in the future a coordinated payment system for post-acute
care and that long-term care hospitals are being considered for
inclusion under such a payment system.  I will discuss the
coordinated payment concept later in this statement. 


   CONSOLIDATED BILLING FOR SNFS
---------------------------------------------------------- Chapter 0:4

The administration has also announced that it will propose requiring
SNFs to bill Medicare directly for all services provided to their
beneficiary residents except for physician and some practitioner
services.  We support this proposal as we did in a September 1995
letter to the House Ways and Means Committee.  We and the HHS
Inspector General have reported on problems, such as overutilization
of supplies, that can arise when suppliers bill separately for
services for SNF residents. 

A consolidated billing requirement would make it easier for Medicare
to identify all the services furnished to residents, which in turn
would make it easier to control payments for those services.  The
requirement would also help prevent duplicate billings for supplies
and services and billings for services not actually furnished by
suppliers.  In effect, outside suppliers would have to make
arrangements with SNFs under such a provision so that nursing homes
would bill for suppliers' services and would be financially liable
and medically responsible for the care. 


   "BUNDLING" POST-ACUTE CARE
   SERVICES
---------------------------------------------------------- Chapter 0:5

There can be considerable overlap in the types of services provided
and the types of beneficiaries that are treated in each of the three
post-acute care settings.  For example, physical therapy and other
rehabilitation services can be provided by a SNF, a home health
agency, or a rehabilitation facility.  Both HCFA and the prospective
payment assessment commission (ProPAC) have noted that the ability to
substitute care among post-acute settings may contribute to
inappropriate spending growth, even after payment policies are
improved for individual provider types.\9 Although prospective
payment encourages providers to deliver care more efficiently,
facility-specific payments may encourage them to lower their costs by
shifting services to other settings.  The administration has
therefore announced that it will in the future recommend a
coordinated payment system for post-acute care services.  Such a
system will be designed to help ensure that beneficiaries receive
quality care in the appropriate settings, and that any patient
transfers among settings occur only when medically appropriate rather
than in efforts to generate additional revenues.  While no details
are available about how a coordinated post-acute payment system would
operate, presumably it will entail consolidated (bundled) payments to
one entity for the different types of providers.  In fact, ProPAC has
suggested a system that bundles acute and post-acute payments. 

One of the most important design issues in a bundled payment approach
is deciding which provider would receive the payment.  Because this
provider would have to organize and oversee the continuum of services
for beneficiaries, it would bear the risk that payments would not
cover costs.  Options for this role include an acute-care hospital, a
post-acute care provider, or a provider service network. 

Another important design issue involves developing an appropriate
payment rate.  Under the current inpatient PPS, payment rates are
based on DRGs.  But research has shown that DRGs are poor predictors
of post-acute care use.  In extending PPS to include post-acute
services, future post-acute care utilization needs to be accurately
predicted to ensure that prospective rates are adequate to cover
costs but also give an incentive to provide cost-effective care. 

Bundling acute and post-acute care would have a number of potential
advantages and disadvantages.  Optimally, bundling of payments would
encourage continuity of care.  If, for example, the inpatient
hospital has a greater stake in the results, bundling could lead to
both better discharge planning as well as improved transfer of
information from the hospital to the post-acute provider.  Bundling
payments to the hospital could also eliminate a PPS hospital's
financial incentive to discharge Medicare patients before they are
ready, because patients discharged prematurely may require extensive
post-acute services for which the hospital is liable.  Furthermore,
bundling with an appropriate payment rate would give providers more
incentive to furnish the mix of inpatient and posthospital services
that yield the least costly treatment of an entire episode of care
and thus help control growth in the volume of post-acute services. 
Finally, to the extent that the bundling arrangement promotes joint
accountability, combining responsibility for hospital and post-acute
providers could lead to better outcomes. 

There are a number of potential disadvantages as well.  Because
bundled payments would represent some level of financial risk,
whoever received the bundled payment would need to have the resources
to accept the risk.  Moreover, bearing risk often gives incentive to
shift the risk to others and raises concerns about quality.  A key to
the success of any bundling system is coordinating care and
continuously monitoring a patient during the entire episode. 
However, some providers might not have the capabilities to do this. 
For example, if, as ProPAC has suggested, both acute- and post-acute
care were bundled and if hospitals received the bundled payment, some
hospitals might not have the resources, information, or expertise to
properly manage patients' post-acute care.  The same could be said
for SNFs and home health agencies.  An additional concern is that
whoever received the bundled payment could have dominance over the
other providers and make choices about acute- and post-acute care
settings that are driven primarily by concerns about cost.  For
example, hospitals might try to maximize their profit by limiting
post-acute services or be tempted to screen admissions to avoid
patients with high risks of heavy posthospital care. 

Another important issue involves how to deal with home health
patients who have had no prior hospitalization.  About a third of
home health visits fall into this category.  A bundled payment system
would not affect home health agency incentives for such patients. 
Finally, beneficiary advocacy groups have expressed concern about
potential harmful effects of this system on patients' freedom of
choice and how the quality and appropriateness of care could be
ensured. 

In conclusion, it is clear from the dramatic cost growth for SNF,
home health, and rehabilitation facility care that the current
Medicare payment mechanisms for the providers need to be revised.  As
more details concerning the administration's or others' proposals for
revising those systems become available, we would be glad to work
with the Committee and others to help sort out the potential
implications of suggested revisions. 


--------------------
\9 HCFA Administrator's statement on "Reforming the Medicare Home
Health Benefit," before the Subcommittee on Health and Environment,
House Committee on Commerce (Mar.  5, 1997), and Report and
Recommendations to the Congress (Washington, D.C.:  ProPAC, Mar.  1,
1997). 


-------------------------------------------------------- Chapter 0:5.1

This concludes my prepared remarks, and I will be happy to answer any
questions. 


   CONTRIBUTORS
---------------------------------------------------------- Chapter 0:6

For more information on this testimony, please call William Scanlon
on (202) 512-7114 or Thomas Dowdal, Senior Assistant Director, on
(202) 512-6588.  Other major contributors include Patricia Davis,
Roger Hultgren, and Sally Kaplan. 


MEDICARE SKILLED NURSING FACILITY
AND HOME HEALTH EXPENDITURES,
1980-96
=========================================================== Appendix I

   Figure I.1:  Medicare Skilled
   Nursing Facility Expenditures,
   1980-96

   (See figure in printed
   edition.)

Note:  ESRD = end-stage renal disease. 

Source:  HCFA's Office of the Actuary. 

   Figure I.2:  Medicare Home
   Health Expenditures, 1980-96

   (See figure in printed
   edition.)

Note:  ESRD = end-stage renal disease. 

Source:  HCFA's Office of the Actuary. 


*** End of document. ***