Medicare: Interim Payment System for Home Health Agencies (Testimony,
08/06/98, GAO/T-HEHS-98-234).

GAO discussed: (1) the rise in Medicare spending for home health
services and the reasons for this growth; (2) the objectives of the home
health interim payment system enacted by the Balanced Budget Act of
1997; and (3) concerns about the level and distribution of home health
payments.

GAO noted that: (1) a well-designed prospective payment system will
provide the Medicare program with the best means to rationally control
home health spending; (2) until such a system is implemented, the
interim payment system will help constrain the growth in outlays; (3)
however, concerns have been raised about the interim payment system; (4)
specifically, the industry has expressed doubts about whether payments
will be adequate and whether the payment limits will appropriately
account for differences in patient mix and treatment patterns across
agencies; (5) another concern is that inefficient providers will have
unduly high limits because the limits are based on historic payments
that reflect inappropriate practices; (6) previous analyses by GAO and
the Department of Health and Human Services' Office of the Inspector
General have demonstrated that Medicare has been billed for home health
visits that may not have been needed, were not consistent with Medicare
policies, or were not even delivered; (7) concerns about the overall
adequacy of payments under the interim system may be unwarranted, since
the limits were based on historic costs, a portion of which were
inappropriate; (8) whether the payments to individual agencies will
reflect legitimate differences across agencies is more difficult to
determine; (9) costs vary widely across agencies, which reflects
differences in patient mix and levels of efficiency; (10) in protecting
legitimate cost differences across agencies, the interim system may also
be too restrictive for agencies with costs that legitimately increase
more rapidly over time; and (11) because the interim system will be used
for a longer period than originally intended, GAO believes it is even
more important to better take account of appropriate variation in agency
costs.

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

 REPORTNUM:  T-HEHS-98-234
     TITLE:  Medicare: Interim Payment System for Home Health Agencies
      DATE:  08/06/98
   SUBJECT:  Home health care services
             Medical economic analysis
             Claims processing
             Health care programs
             Medical expense claims
             Medical services rates
             Health care cost control
IDENTIFIER:  Medicare Home Health Care Program
             HHS Operation Restore Trust
             Medicare Program
             Medicare Prospective Payment System
             
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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 10:00 a.m.
Thursday, August 6, 1998

MEDICARE - INTERIM PAYMENT SYSTEM
FOR HOME HEALTH AGENCIES

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

GAO/T-HEHS-98-234

GAO/HEHS-98-234T


(101766)


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

  BBA - Balanced Budget Act of 1997
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  PPS - prospective payment system
  SNF - skilled nursing facility

MEDICARE:  INTERIM PAYMENT SYSTEM
FOR HOME HEALTH AGENCIES
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss the recent changes in
Medicare's payment policies for home health agencies and the need to
ensure that the level of payments and their distribution are
appropriate.  Medicare spending for home health care has risen
dramatically in recent years.  By 1996, this benefit consumed 9.3
percent of Medicare expenditures, up from 2.5 percent in 1989. 
Changes in the law and program guidelines have contributed to the
rapid growth in the number of beneficiaries using home health care
and in the average number of visits per user.  These changes have not
only resulted in accelerating costs but also a marked shift from an
acute-care, short-term benefit toward a more chronic-care,
longer-term benefit as a result of changes in patient mix and
treatment patterns.  The increased use of home health care has not
been matched by a commensurate rise in spending for claims review and
program monitoring.  As a result, some of the visits provided and
people served may not meet Medicare's coverage criteria. 

In response to this rapid cost growth and concerns about program
abuses, the Balanced Budget Act of 1997 (BBA) included a number of
provisions on home health payment and provider requirements. 
Specifically, the law requires implementation of a prospective
payment system (PPS) for home health agencies in fiscal year 2000. 
Until then, an interim payment system that incorporates limits, based
on historical spending levels, that are applied to cost-based
payments will be used to constrain program outlays.  The interim
limits will differ for each provider to reflect the substantial
variation in home health spending across agencies and geographic
areas.  BBA also prohibits certain billing practices determined to be
abusive, strengthens participation requirements for agencies, and
authorizes the Secretary of Health and Human Services to develop
guidelines on the frequency and duration of home health services to
use in determining whether visits should be covered. 

My comments today focus on the rise in Medicare spending for home
health services and the reasons for this growth, the objectives of
the home health interim payment system enacted by BBA, and concerns
about the level and distribution of home health payments.  The
information presented is based primarily on our analysis of BBA and
on our previous work on Medicare's home health benefit.  (A list of
related GAO products is at the end of this statement.)

In summary, a well-designed PPS will provide the Medicare program
with the best means to rationally control home health spending. 
Until such a system is implemented, the interim payment system will
help constrain the growth in outlays.  However, concerns have been
raised about the interim payment system.  Specifically, the industry
has expressed doubts about whether payments will be adequate and
whether the payment limits will appropriately account for differences
in patient mix and treatment patterns across agencies.  Another
concern is that inefficient providers will have unduly high limits
because the limits are based on historic payments that reflect
inappropriate practices. 

Previous analyses by us and the Department of Health and Human
Services' (HHS) Office of Inspector General have demonstrated that
Medicare has been billed for home health visits that may not have
been needed, were not consistent with Medicare policies, or were not
even delivered.  Thus, concerns about the overall adequacy of
payments under the interim system may be unwarranted, since the
limits were based on historic costs, a portion of which were
inappropriate.  Whether the payments to individual agencies will
reflect legitimate differences across agencies is more difficult to
determine.  Costs vary widely across agencies, which reflects
differences in patient mix and levels of efficiency.  In protecting
legitimate cost differences across agencies, the interim system may
unavoidably reward some inefficient agencies.  Furthermore, the
interim system may also be too restrictive for agencies with costs
that legitimately increase more rapidly over time.  Because the
interim payment system will be used for a longer period than
originally intended, we believe it is even more important to better
take account of appropriate variation in agency costs. 


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

To qualify for Medicare home health care, a beneficiary must be
confined to his or her residence (that is, "homebound"); require
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 part-time or
intermittent skilled nursing; physical, occupational, and speech
therapy; medical social service; and home health aide visits. 
Beneficiaries do not pay any coinsurance or deductibles for these
services. 

The Health Care Financing Administration (HCFA), the agency within
HHS responsible for administering Medicare, uses six regional claims
processing contractors (which are insurance companies) to process and
pay home health claims.  These contractors pay the claims submitted
by home health agencies on the basis of the costs they incur, subject
to predetermined payment limits.  They are also responsible for
ensuring that Medicare does not pay claims when beneficiaries do not
meet Medicare's coverage criteria, when services claimed are not
reasonable or necessary, or when the volume of services exceeds the
level called for in an approved plan of treatment.  They carry out
these responsibilities through medical reviews of claims, performed
either before or after a claim is paid, and occasionally through site
visits to the agencies. 


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

Congressional changes to home health payment policies, enacted in
BBA, were made in response to dramatic growth in the cost and use of
the benefit.  From 1989 to 1996, expenditures for home health care
increased from $2.5 billion to $18.1 billion--an average annual
increase of 33 percent.  Home health payments in 1996 represented 9.3
percent of Medicare outlays. 

The growth in spending was due primarily to an increase in users and
in visits per user, rather than rising payments per visit.  The
payment per visit has been held in check by existing Medicare payment
limits.  In 1989, 50 Medicare beneficiaries per 1,000 enrollees
received home health care.  The average user in that year received 27
visits.  By 1996, 99 beneficiaries per 1,000 used home health care
and received an average of 76 visits.  The payment per visit went
from $54 to $62 over this period. 

Changes in Medicare eligibility and coverage rules played an
important role in the increased use of this benefit.  At Medicare's
inception in 1965, home health care was primarily a
posthospitalization benefit, and there was an annual limit on the
visits covered for each beneficiary.  These restrictions were
eliminated by the Omnibus Reconciliation Act of 1980 (P.L.  96-499). 
This did not lead to a surge in spending growth, however, because the
manner in which HCFA interpreted coverage and eligibility criteria
limited the number of home health users and covered visits.  In the
late 1980s, however, HCFA's coverage criteria were struck down by a
U.S.  district court.  As a result, it became easier for
beneficiaries to receive these services.  In addition, other court
decisions made it more difficult for HCFA's claims processing
contractors to deny certain services. 

The combination of these changes essentially transformed the home
health benefit from one focused on patients needing short-term care
after a hospitalization to one that serves chronic, long-term-care
patients as well.  We found that from 1989 to 1993, the proportion of
home health users receiving more than 30 visits a year increased from
24 percent to 43 percent and those receiving more than 90 visits
tripled, from 6 percent to 18 percent.  Moreover, about a third of
beneficiaries receiving home health care in 1992 did not have a
recent prior hospitalization. 

The importance of long-term users to Medicare home health spending
has continued to increase.  The majority of visits in 1996 (59
percent) were for the 15 percent of users who received 150 visits or
more.  Almost one-third of this high-user group received over 300
visits in the year.  About half of home health users received fewer
than 30 visits, which accounted for 9 percent of total home health
visits in that year. 

Concurrent with this dramatic growth in service use has been a rapid
rise in the number of home health agencies.  By 1994 there were
almost 8,000 home health agencies, about 40 percent more than in
1989.  And by 1996, there were almost 10,000 Medicare-certified
agencies.  For-profit providers contributed disproportionately to
this growth so that by 1994 they represented 48.5 percent of the
total, up from 35.3 percent in 1989. 

Recent evidence demonstrates that some home health services have been
provided to beneficiaries who did not meet Medicare's coverage
criteria, and in some instances the services were not provided at
all.  We have reported on a number of examples of noncovered services
that were billed to Medicare.  Of particular concern is whether
beneficiaries actually are homebound when they receive these
services.  Operation Restore Trust, a joint effort by federal and
several state agencies, found very high rates of noncompliance with
Medicare's coverage conditions.  It documented abuses of the
homebound criteria, instances in which services were billed for but
never provided, visits that were not authorized by a physician, and
visits to beneficiaries who otherwise did not qualify. 

Home health spending growth has slowed markedly in recent years. 
Between 1995 and 1996, outlays rose 8 percent, compared with the
average annual growth rate in the early 1990s of 33 percent. 
Preliminary estimates indicate that expenditures actually declined
from 1996 to 1997.  This was due to an overall reduction in visits
provided.  The number of beneficiaries receiving home health care
fell enough to more than offset a slight increase in the number of
visits per user. 

There is no definitive explanation for this downturn.  Some speculate
that the sentinel effect of Operation Restore Trust and pending
payment constraints may have changed agency behavior.  Other
possibilities include increased use of managed care and the
maturation of the home health industry.  Without a better
understanding of the contributing factors and, more importantly,
without additional experience, it is not clear whether the reduced
use is a trend that will continue or merely a temporary aberration. 


   OBJECTIVES OF THE INTERIM
   PAYMENT SYSTEM
---------------------------------------------------------- Chapter 0:3

BBA mandated a prospective payment system for home health services
beginning in fiscal year 2000.  The PPS would establish a fixed,
predetermined payment per unit of service, adjusted for patient
characteristics that affect the cost of care (termed "case mix"). 
The Congress supports a PPS for home health agencies, as well as for
other facilities, because it has the potential to improve provider
incentives to control costs while delivering appropriate services. 
Under a well-designed system, efficient providers would be
financially rewarded.  Conversely, inefficient ones would need to
better control their costs to remain viable.  If a PPS is not
properly implemented, Medicare will not save money, cost-control
incentives will at best be weak, and access to and quality of care
could suffer. 

Recognizing the difficulty of designing such a system, coupled with
the need to immediately control spending, BBA imposed an interim
payment system on home health agencies until a PPS could be
developed.  The interim system builds on the cost limits already in
place by making them more stringent.  Previously, agencies were paid
the lower of their actual costs or a limit based on 112 percent of
the average cost per visit, adjusted for the number and mix of visits
they provided.  BBA changed the calculation of this per-visit limit
so that it is based on 105 percent of the median per-visit cost.  A
new annual per-beneficiary limit was added as well.  It is the
average payment for all home health services for each beneficiary who
received care.  The limit is calculated as a blend of 75 percent of
the agency's updated, per-beneficiary payment and 25 percent of the
comparable average regional amount.  The base year for these
calculations is the facility's cost reporting year that ended in
federal fiscal year 1994. 

This interim payment method provides incentives to control per-visit
costs and the number and mix of visits for each user.  For agencies
with per-visit costs considerably below the limits, however, there is
no incentive to provide visits more efficiently.  The objective of
the per-beneficiary limit was to rein in the growth in the number of
visits provided to each user.  However, most of this rapid growth
would be reflected in the data used to establish the limits, so the
limits may be inappropriately generous.  Moreover, per-beneficiary
limits give home health agencies an incentive to increase their
caseloads, particularly with less expensive patients.  Given lax home
health claims review, this may even occur by adding beneficiaries who
do not meet Medicare coverage criteria. 

It is important to keep in mind that the existing per-visit limits as
well as the new per-beneficiary limits are applied to aggregate
agency costs.  Thus, an agency does not need to keep the cost of each
visit below the limit or to restrict the visits provided to each
beneficiary to base-year levels.  Rather, agencies can balance
high-cost visits with low-cost ones to stay below the limits. 
Similarly, an agency could treat a mix of more intensive and less
intensive beneficiaries and still not bump up against the
per-beneficiary limits. 


   ACHIEVING THE APPROPRIATE LEVEL
   AND DISTRIBUTION OF PAYMENTS
---------------------------------------------------------- Chapter 0:4

Even with this ability to average costs across visits and
beneficiaries, the industry has voiced concerns that the
per-beneficiary limits in the interim system are too stringent and
that reliance on agency-specific and regional costs to establish the
limits rewards providers who are inefficient and thus have
historically high payments.  For efficient providers, the limits may
be too low if changes in their patient mix or other external factors
have significantly increased their costs above the base-year amounts. 
Concern about the overall stringency of the limits may be unwarranted
because of the lack of historical payment controls.  Assessing
whether the per-beneficiary limits are appropriate for each agency,
however, is a more difficult undertaking. 

The lack of sufficient program controls over the past decade may have
made it likely that a portion of the recent increase in home health
spending stemmed from inappropriate use of the benefit or abusive
practices.  For this reason, in aggregate, payments under the interim
system may be adequate.  The rapid growth in spending since 1989 has
been accompanied by decreased, rather than increased, funding for
program safeguard activities.  By 1995, fewer than 3.2 percent of all
claims were reviewed to determine whether the beneficiary actually
qualified for the services, needed them, or even received what was
being billed to Medicare.  In a study last year, we selected a sample
of high-dollar claims that had been paid without any review.  After
they were examined by an intermediary at our request, it turned out
that a large proportion of them should not have been paid.  More
recently, the Office of Inspector General in its annual audit of HCFA
estimated that 12.5 percent of Medicare home health spending in
fiscal year 1997 was inappropriate because the services were not
medically necessary or lacked supporting documentation. 

Each agency's per-beneficiary limit should reflect the types and
number of services needed by its patients.  Because service needs
vary, the use of agency-specific and regional average payments in the
calculation of the per-beneficiary limit is intended to account for
differences in resource needs of patients across agencies.  Though
historic average payments are a readily available measure, they are
admittedly a crude case-mix adjuster because they will reflect
differences from multiple causes.  Agencies with higher costs as a
result of inefficient practices will have higher per-beneficiary
limits than efficient ones.  Conversely, if an agency had a history
of managing its costs and controlling its visits to each patient, its
per-beneficiary limit will be constrained.  Unfortunately, examining
costs alone cannot reveal whether an agency serves more needy
patients or operates inefficiently.  Practically, therefore,
inefficient agencies may be unintentionally rewarded in order to
protect those serving a more complex mix of patients. 

The marked variations in home health use across geographic areas and
agency types raise questions about differences in efficiency, which
would inappropriately boost per-beneficiary limits in some areas.  In
1995, users received an average of 132 visits in the West South
Central region, in contrast with 52 visits in the Middle Atlantic
region.  These extremes are more likely due to differences in
practice styles and efficiency among agencies rather than patient
mix.  We demonstrated in an earlier study that even when controlling
for patient diagnosis, substantial variation in the number of visits
per beneficiary remained.  For example, we found that beneficiaries
with a primary diagnosis of diabetes received an average of 67 home
health visits in Utah compared with 22 visits in South Dakota.  This
three-fold variation in service use is unlikely to be due to case-mix
differences that were not reflected in the beneficiaries' primary
diagnosis. 

Despite taking account of agencies' case mix by using historical
costs, per-beneficiary limits can prove problematic for some agencies
if external factors cause them to begin serving a more expensive mix
of patients.  New agencies entering or some existing agencies leaving
a local market could have such an effect on other agencies.  An even
more widespread impact could accompany a state's adoption of a
so-called "Medicare maximization policy." Through these policies,
states attempt to ensure that Medicare is billed instead of Medicaid,
when appropriate, for home health services for patients who are
eligible for both programs.  If such a policy is implemented after
the base year, the per-beneficiary limits would not reflect the fact
that some services formerly paid by Medicaid are now being billed to
Medicare.  As an example, Minnesota's implementation of a Medicare
maximization policy in 1996 likely contributed to its agencies having
much faster growth in visits per user since 1994 than occurred
elsewhere. 

Attempting to calibrate the per-beneficiary limits to reflect
legitimate differences among agencies without data on the causes of
those differences inevitably leads to potential underpayments and
overpayments.  The mandated PPS to be implemented in fiscal year 2000
would resolve this by basing payments on each patient's needs so that
total payments reflect each agency's current patient mix.  However,
HCFA has announced that the PPS's implementation will be delayed to
make its computer systems Year 2000 compliant.  It should also be
acknowledged that the development of a PPS for home health will be a
much greater challenge than prior efforts to create one for hospitals
and skilled nursing facilities (SNF).  In the case of SNFs, for
example, a number of Medicaid programs had years of experience with
case-mix-adjusted PPSs.  Comparable in-depth experience for home
health is lacking.  Furthermore, in the case of hospitals and SNFs,
the task of defining the unit of service (an admission and a day,
respectively) was relatively easy.  For home health, defining what
should comprise the unit of service--an episode of care--may prove
very difficult.  At present, no consensus exists on what constitutes
a needed Medicare covered visit or what a visit would entail--basic
information essential to establishing an appropriate PPS. 

There is the potential that the Year 2000 problem and difficulties in
completing a satisfactory design could delay further PPS's
implementation.  Since the per-beneficiary limits are to remain in
place longer than expected, a mechanism for agency-specific
adjustments to them to better account for appropriate variations in
current costs will take on added importance.  Potential adjustors
that could be developed with available information include, for
example, the proportion of Medicare patients who are also eligible
for Medicaid, patient length of stay, and proportion of beneficiaries
with a recent hospitalization.  Research HCFA currently has under way
to develop the PPS might guide this effort.  Without adjustment of
the per-beneficiary limits, the extent of underpayments and
overpayments would likely increase with time. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 0:5

The Congress has taken very positive steps in positioning HCFA to
rein in unsustainable growth in Medicare spending for home health
care.  Because this benefit has been largely unchecked in recent
years, it is likely that these efforts will be met with opposition. 
The unanticipated extension of the interim payment system creates a
need for HCFA to examine whether refinements to the per-beneficiary
limits to distribute payments more equitably are needed while working
to develop an appropriate case-mix-adjusted PPS.  The goal should be
to move as quickly as possible to adjust the interim payment system
so that it ensures that agencies are paid appropriately for the mix
of beneficiaries they serve. 


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

This concludes my prepared remarks.  I would be happy to respond to
questions from the Subcommittee at this time. 

RELATED GAO PRODUCTS

Medicare Home Health Benefit:  Congressional and HCFA Actions Begin
to Address Chronic Oversight Weaknesses (GAO/T-HEHS-98-117, Mar.  19,
1998). 

Medicare:  Improper Activities by Mid-Delta Home Health
(GAO/T-OSI-98-6, Mar.  19, 1998, and GAO/OSI-98-5, Mar.  12, 1998). 

Long-Term Care:  Baby Boom Generation Presents Financing Challenges
(GAO/T-HEHS-98-107, Mar.  9, 1998). 

Medicare Home Health Agencies:  Certification Process Ineffective in
Excluding Problem Agencies (GAO/HEHS-98-29, Dec.  16, 1997). 

Medicare Home Health:  Success of Balanced Budget Act Cost Controls
Depends on Effective and Timely Implementation (GAO/T-HEHS-98-41,
Oct.  29, 1997). 

Medicare Fraud and Abuse:  Summary and Analysis of Reforms in the
Health Insurance Portability and Accountability Act of 1996 and the
Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct.  9, 1997). 

Medicare:  Need to Hold Home Health Agencies More Accountable for
Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997). 

Medicare:  Home Health Cost Growth and Administration's Proposal for
Prospective Payment (GAO/T-HEHS-97-92, Mar.  5, 1997). 

Medicare:  Home Health Utilization Expands While Program Controls
Deteriorate (GAO/HEHS-96-16, Mar.  27, 1996). 

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

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


*** End of document. ***