Medicare: Home Health Cost Growth and Administration's Proposal for
Prospective Payment (Testimony, 03/05/97, GAO/T-HEHS-97-92).

GAO discussed Medicare's home health care benefit and the
administration's forthcoming legislative proposals related to this
Medicare benefit.

GAO noted that: (1) Medicare's home health care costs have grown because
a larger portion of beneficiaries use this benefit than in the past and
the number of services used by each beneficiary has more than doubled;
(2) a combination of factors led to the increased use of the benefit:
(a) legislation and coverage policy changes in response to court
decisions liberalized coverage criteria for the benefit, 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; and (c) a diminution of
administrative controls over the benefit, resulting at least in part
from fewer resources being available for such controls, reduced the
likelihood that inappropriate claims would be detected; (3) the major
proposals by the administration for home health care are designed to
give providers increased incentives to operate efficiently by
immediately tightening the limits on the amount of cost per visit that
will be paid and imposing a new cap on per-beneficiary costs; (4) after
these changes, in 1999, the proposal would move home health payments
from cost reimbursement to a prospective payment system (PPS); (5)
estimated savings from these two proposals are $12.4 billion over the
next 5 fiscal years; (6) what remains unclear about the reasonableness
of the PPS proposal is whether an appropriate unit of service for
calculating prospective payments can be defined and whether the Health
Care Financing Administration's databases are adequate for it to set
reasonable rates.

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

 REPORTNUM:  T-HEHS-97-92
     TITLE:  Medicare: Home Health Cost Growth and Administration's 
             Proposal for Prospective Payment
      DATE:  03/05/97
   SUBJECT:  Health care programs
             Home health care services
             Medical services rates
             Claims processing
             Health insurance cost control
             Health care cost control
             Medical expense claims
             Medical economic analysis
             Eligibility criteria
             Long-term care
IDENTIFIER:  Medicare Home Health Care Program
             Medicare Program
             Medicare Prospective Payment System
             HHS Operation Restore Trust
             Medicaid Program
             
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Cover
================================================================ COVER


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

For Release on
Delivery Expected at
10:00 a.m., Wednesday,
March 5, 1997

MEDICARE - HOME HEALTH COST GROWTH
AND ADMINISTRATION'S PROPOSAL FOR
PROSPECTIVE PAYMENT

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

GAO/T-HEHS-97-92

GAO/HEHS-97-92T


(101549)


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

  HCFA - Health Care Financing Administration
  ORA - Omnibus Reconciliation Act of 1980
  PPS - prospective payment system

MEDICARE:  HOME HEALTH COST GROWTH
AND ADMINISTRATION'S PROPOSAL FOR
PROSPECTIVE PAYMENT
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss Medicare's home health
care benefit and the administration's forthcoming legislative
proposals related to it.  After relatively modest growth during the
1980s, Medicare's expenditures for home health care have grown
rapidly in the 1990s.  Home health care costs grew from $2.4 billion
in 1989 to $17.7 billion in 1996, an average annual increase of 33
percent. 

My comments will focus on the reasons for cost growth for home health
care and the administration's announced legislative proposals for
this Medicare benefit.  The information presented is based mainly on
our previous work.  We also examined recent data on the benefit 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 home health care costs have grown because a
larger portion of beneficiaries use this benefit than in the past and
the number of services used by each beneficiary has more than
doubled.  A combination of factors led to the increased use of the
benefit: 

  -- legislation and coverage policy changes in response to court
     decisions liberalized coverage criteria for the benefit,
     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; and

  -- a diminution of administrative controls over the benefit,
     resulting at least in part from fewer resources being available
     for such controls, reduced the likelihood that inappropriate
     claims would be detected. 

The major proposals by the administration for home health care are
designed to give providers increased incentives to operate
efficiently by immediately tightening the limits on the amount of
cost per visit that will be paid and imposing a new cap on
per-beneficiary costs.  After these changes, in 1999, the proposal
would move home health payments from cost reimbursement to a
prospective payment system (PPS).  Estimated savings from these two
proposals are $12.4 billion over the next 5 fiscal years.  What
remains unclear about the reasonableness of the PPS proposal is
whether an appropriate unit of service for calculating prospective
payments can be defined and whether HCFA's databases are adequate for
it to set reasonable rates. 


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

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 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.  Home health agency cost limits
are set separately for agencies in rural and urban areas, at 112
percent of the mean costs of freestanding agencies.  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, costs over the limit for one type
of visit can be offset by costs below the limit for another.  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 home health agencies that meet certain
conditions. 

While the per-visit cost-limit provision of Medicare's reimbursement
system for home health agencies gives some incentives for providers
to control their costs, these incentives are considered by health
financing experts to be relatively weak.  For providers with
per-visit costs considerably below their limit, there is little
incentive to control costs, and for all providers, there is no
incentive to control number of visits.  It is generally agreed that
prospective payment systems give providers increased cost-control
incentives. 


   HOME HEALTH COST GROWTH
---------------------------------------------------------- Chapter 0:2

The Medicare home health benefit is one of the fastest growing
components of Medicare spending.  From 1989 to 1996, part A
expenditures for home health increased from $2.4 billion to $17.7
billion--an increase of over 600 percent.  Home health payments
currently represent 13.5 percent of Medicare part A expenditures. 

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 hospital PPS in
1983, the utilization of the home health benefit 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 home health benefit
that had the effect of liberalizing coverage criteria, thereby making
it easier for beneficiaries to obtain home health coverage. 
Additionally, the changes prevent HCFA's claims processing
contractors from denying physician-ordered 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 the home health benefit in
the 1990s, both in terms of the number of beneficiaries receiving
services and in the extent of these services.  (App.  I contains a
figure that shows growth in 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. 

Rapid growth in 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,
the contractors' review target was 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 contractor 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. 

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 are charging Medicare for costs
unrelated to patient care or other unallowable costs.  Because of the
lack of adequate program controls, it is possible that some of the
recent increase in home health costs stems from abusive practices. 
Recent legislation, 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. 


   ADMINISTRATION'S PROPOSAL FOR A
   HOME HEALTH PROSPECTIVE PAYMENT
   SYSTEM
---------------------------------------------------------- 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 at least recover their costs.  If
payments are set too high, Medicare will not save money and cost
control incentives will 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.  Another important factor is the reliability
of the cost and utilization data used to compute rates.  A good
choice for unit of service can be overwhelmed by bad data. 

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 the 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 are concerned about the quality of HCFA's home health care cost
report database for PPS rate-setting purposes.  Our work and that of
the Department of Health and Human Services' Inspector General has
found examples of questionable costs in home health agency cost
reports.  For example, we reported in August 1995 on a number of
problems with contractor payments for medical supplies such as
surgical dressings, which indicate that excessive costs are being
included and not removed from home health agency cost reports.\2
Also, the Inspector General found substantial amounts of unallowable
costs in the cost reports of a large home health agency chain, which
was convicted of fraud on the basis of these findings.  We believe
that it would be prudent for HCFA to audit thoroughly a projectable
sample of home health agency cost reports.  The results could then be
used to adjust HCFA's database to help ensure that unallowable costs
are not included in the base for setting prospective rates. 

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.  Our report
included a number of examples of noncovered services that are billed
to Medicare.  For example, a physician called a claims processing
contractor to complain that some of his patients were being told by a
home health agency that they were homebound merely because they did
not own a car.  In another report, we found that some home health
agency staff were directed to alter or falsify medical records to
ensure continued or prolonged visits, including recording visits that
were never made or noting that patients were homebound even after
they were no longer confined to their homes.\3 Also, Operation
Restore Trust, a joint effort by federal and several state agencies
to identify fraud and abuse in Medicare and Medicaid, found very high
rates of noncompliance with Medicare's coverage conditions.  For
example, in a sample of 740 patients 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 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. 

In conclusion, Medicare's current payment mechanisms for home health
services need to be improved.  As more details concerning the
administration's or others' proposals become available, we would be
glad to work with the Subcommittee to help sort out the potential
implications of suggested revisions. 


--------------------
\2 Medicare:  Excessive Payments for Medical Supplies Continue
Despite Improvements (GAO/HEHS-95-171, Aug.  8, 1995). 

\3 Medicare:  Allegations Against ABC Home Health Care
(GAO/OSI-95-17, July 19, 1995). 


-------------------------------------------------------- Chapter 0:3.1

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


   CONTRIBUTORS
---------------------------------------------------------- Chapter 0:4

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 HOME HEALTH EXPENDITURES,
1980-96
=========================================================== Appendix I



   (See figure in printed
   edition.)

Note:  ESRD = end-stage renal disease. 

Source:  HCFA's Office of the Actuary. 


*** End of document. ***