Medicare Post-Acute Care: Home Health and Skilled Nursing Facility Cost
Growth and Proposals for Prospective Payment (Testimony, 03/04/97,
GAO/T-HEHS-97-90).
GAO discussed Medicare's skilled nursing facility (SNF) and home health
care 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) a
combination of factors led to the increased use of both benefits: (a)
legislation and coverage policy changes in response to court decisions
liberalized coverage criteria for the benefits, enabling more
beneficiaries to qualify for care; (b) these changes also transformed
the nature of home health care from primarily posthospital care to more
long-term care for chronic conditions; (c) 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, and increased
use of ancillary services, such as physical therapy, in SNFs; and (d) 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;
(4) the major proposals by the administration 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; (5) however, 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 databases are adequate for it to
set reasonable rates; (6) the administration is also proposing that SNFs
be required to bill for all services provided to their Medicare
residents rather than allowing outside suppliers to bill; and (7) this
latter proposal has merit, because it would make control over the use of
ancillary services significantly easier.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-HEHS-97-90
TITLE: Medicare Post-Acute Care: Home Health and Skilled Nursing
Facility Cost Growth and Proposals for Prospective
Payment
DATE: 03/04/97
SUBJECT: Health care programs
Claims processing
Skilled nursing facilities
Home health care services
Health insurance cost control
Medical services rates
Health care cost control
IDENTIFIER: Medicare Home Health Care Program
Medicare Program
Medicare Skilled Nursing Facilities Program
Medicare Prospective Payment System
Medicaid Program
HHS Operation Restore Trust
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Cover
================================================================ COVER
Before the Subcommittee on Health, Committee on Ways and Means, House
of Representatives
For Release on Delivery
Expected at 1:00 p.m.,
Tuesday, March 4, 1997
MEDICARE POST-ACUTE CARE - HOME
HEALTH AND SKILLED NURSING
FACILITY COST GROWTH AND PROPOSALS
FOR PROSPECTIVE PAYMENT
Statement of William J. Scanlon, Director
Health Financing and Systems Issues
Health, Education, and Human Services Division
GAO/T-HEHS-97-90
GAO/HEHS-97-90T
(101546)
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
RUG-III - Resource Utilization Group, version III
SNF - skilled nursing facility
MEDICARE POST-ACUTE CARE: HOME
HEALTH AND SKILLED NURSING
FACILITY COST GROWTH AND PROPOSALS
FOR PROSPECTIVE PAYMENT
============================================================ Chapter 0
Mr. Chairman and Members of the Subcommittee:
We are pleased to be here today to discuss Medicare's skilled nursing
facility (SNF) and home health care 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. SNF payments
increased 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. Over that period, annual growth averaged 22 percent
for SNFs and 33 percent for home health care.
My comments today will specifically focus on the reasons for cost
growth for SNFs and home health care and the administration's
announced legislative proposals for these two Medicare benefits. The
information presented today is based mainly on our previous work. We
also examined recent data on the two benefits from the Health Care
Financing Administration (HCFA), which manages Medicare. The
detailed legislative proposals are not yet available from the
administration, so we reviewed the summaries of them that have been
publicly released and talked with HCFA officials about these
summaries.
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. A
combination of factors led to the increased use of both benefits:
-- legislation and coverage policy changes in response to court
decisions liberalized coverage criteria for the benefits,
enabling more beneficiaries to qualify for care;
-- 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, and increased use of ancillary
services, such as physical therapy, in SNFs; 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 major proposals by the administration 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. However, 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.
The administration is also 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.
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 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 and exceptions
to the cost limits are available to SNFs and home health agencies
that meet certain conditions.
While the cost-limit provisions of Medicare's cost reimbursement
system for SNFs and home health agencies 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 prospective payment
systems (PPS) give providers increased cost-
control incentives. The administration proposes establishing PPSs
for SNF and home health care and estimates that Medicare savings
exceeding $10 billion would result over the next 5 fiscal years.
SNF AND HOME HEALTH COST GROWTH
---------------------------------------------------------- Chapter 0:2
The Medicare SNF and home health benefits are two 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. SNF and home health payments currently
represent 8.6 percent and 13.5 percent of part A Medicare
expenditures, respectively.
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
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, the
utilization of the SNF and home health benefits was expected to grow
as patients were discharged from the hospital earlier in their
recovery periods. However, 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 of these services. (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 care after hospitalization 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 report on home health,\1 we found that from 1989 to 1993, the
proportion of home health users receiving more than 30 visits
increased from 24 percent to 43 percent and those receiving more than
90 visits tripled, from 6 percent 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 chronic care 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 relatively little review
of their use is done by Medicare. Moreover, SNFs can cite high
ancillary service use to justify an exception to routine service cost
limits, thereby increasing routine service payments.
Between 1990 and 1996, the number of hospital-based SNFs increased
over 80 percent, from 1,145 such agencies 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).\2
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.\3 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.
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 even, 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 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 was the case 10 years ago. Similarly, the low level of review
of SNF services makes it difficult to know whether the recent
increase in ancillary use is medically necessary (for example,
because patient mix has shifted toward those who need more services)
or simply a way for SNFs to get more revenues.
Finally, because relatively few resources are available for auditing
end-
of-year provider cost reports, HCFA has little ability to identify
whether home health agencies or SNFs 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 and SNF 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 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.
--------------------
\1 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 cost growth.
\2 DRGs are sets of diagnoses that are expected to require about the
same level of hospital resources to treat beneficiaries suffering
from them.
\3 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 account of 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.\4 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 place 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.\5 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.
--------------------
\4 RUG-III is a method for classifying SNF residents according to
health characteristics and the amount and type of resources they
need.
\5 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 less
attractive. If the unit of service is an episode of care over a
period of time such as 30 or 100 days, agencies could gain by
reducing the number of visits during that period, potentially
lowering quality of care. For these reasons, HCFA needs to devise
methods to ensure that whatever unit of service is chosen will not
lead to increased costs or lower 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 the
unit-of-service question.
We have the same concerns about the quality of HCFA's home health
care cost report databases for PPS rate-setting purposes as 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.
CONSOLIDATED BILLING FOR SNFS
---------------------------------------------------------- Chapter 0:4
The administration has also announced that it will propose requiring
SNFs to bill Medicare 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 you,
Mr. Chairman. 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.
In conclusion, it is clear that the current payment systems for
providers of skilled nursing and home health services to Medicare
beneficiaries 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 Subcommittee and
others to help sort out the potential implications of suggested
revisions.
-------------------------------------------------------- Chapter 0:4.1
This concludes my prepared remarks, and I will be happy to answer any
questions.
CONTRIBUTORS
---------------------------------------------------------- Chapter 0:5
For more information on this testimony, please call William Scanlon
on (202) 512-7114 or Thomas Dowdal, Senior Assistant Director, on
(202) 512-6588. Patricia Davis also contributed to this statement.
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. ***