Medicare Post-Acute Care: Better Information Needed Before Modifying BBA
Reforms (Testimony, 09/15/1999, GAO/T-HEHS-99-192).

Pursuant to a congressional request, GAO discussed the effects of the
Balanced Budget Act of 1997 (BBA) on the Medicare fee-for-service
program.

GAO noted that: (1) providers of such post-acute care services as home
health care, skilled nursing facility (SNF) care, and rehabilitation
therapy may have to change their service delivery practices as a result
of the BBA payment reforms, which seek to make Medicare a more efficient
and prudent purchaser; (2) calls to amend or repeal these BBA changes
may be premature until information is available to identify and
distinguish between desirable and undesirable consequences; (3) at the
same time, imperfections in the design of BBA-mandated payment systems
require attention; (4) the design details of these systems are key to
ensuring that payments are not only adequate in the aggregate but are
also fairly targeted to protect individual beneficiaries and providers;
(5) GAO's prior work indicated that: (a) the reductions in the number of
home health agencies and changes in utilization were consistent with the
objectives of the interim payment system to control the rapid growth
that had preceded the BBA; and (b) appropriate access to Medicare's home
health benefit has not been impaired; (6) the prospective payment system
(PPS) is a more appropriate tool for the long term, however, because it
is intended to adjust payments for differences in beneficiary needs; (7)
as GAO examines the challenges of designing a PPS, GAO is finding that
the PPS will likely require further adjustments after it is implemented
as more information on home health costs, utilization, and users becomes
available; (8) PPS was implemented beginning in July 1998 with a 3-year
transition to fully prospective rates, giving providers time to adjust
to the new system; (9) GAO's ongoing work suggests that factors in
addition to the PPS have contributed to fiscal difficulties for some
SNFs; (10) nevertheless, certain modifications to the PPS may be
appropriate to ensure that payments are targeted to patients who require
costly care; (11) the potential access problems that may result if
Medicare underpays for high-cost cases could lead to beneficiaries'
staying in acute care hospitals longer, rather than foregoing care
altogether; (12) the Health Care Financing Administration is aware of
this potential targeting problem and is working to develop a solution;
(13) in 1999, BBA imposed an annual $1,500 per-beneficiary cap on
payments for outpatient physical and speech therapy combined and a
separate $1,500 cap on outpatient occupational therapy; (14) the caps
reflect a legitimate need to constrain service use; and (15) for the
vast majority of outpatient therapy users, the caps are unlikely to
curtail access to services.

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

 REPORTNUM:  T-HEHS-99-192
     TITLE:  Medicare Post-Acute Care: Better Information Needed Before
	     Modifying BBA Reforms
      DATE:  09/15/1999
   SUBJECT:  Medical information systems
	     Home health care services
	     Health care cost control
	     Health resources utilization
	     Patient care services
	     Health care programs
	     Health insurance
IDENTIFIER:  Medicare Fee-for-Service Program
	     Medicare Prospective Payment System

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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, September 15, 1999

MEDICARE POST-ACUTE CARE - BETTER
INFORMATION NEEDED BEFORE
MODIFYING BBA REFORMS

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

GAO/T-HEHS-99-192

GAO/HEHS-99-192T

(101893)

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
  HHA - home health agencies

SUMMARY
============================================================ Chapter 0

Providers of post-acute care services, such as home health care,
skilled nursing facility (SNF) care, and rehabilitation therapy, may
have to change their service delivery practices as a result of the
Balanced Budget Act of 1997 (BBA) payment reforms, which seek to make
Medicare a more efficient and prudent purchaser.  Calls to amend or
repeal these BBA changes may be premature until information is
available to identify and distinguish between desirable and
undesirable consequences.  At the same time, imperfections in the
design of BBA-mandated payment systems require attention.  The design
details of these systems are key to ensuring that payments are not
only adequate in the aggregate but are also fairly targeted to
protect individual beneficiaries and providers. 

Home health care:  Our prior work indicated that (1) the reductions
in the number of HHAs and changes in utilization were consistent with
the objectives of the interim payment system to control the rapid
growth that had preceded BBA and (2) appropriate access to Medicare's
home health benefit had not been impaired.  The prospective payment
system (PPS) is a more appropriate tool for the long term, however,
because it is intended to adjust payments for differences in
beneficiary needs.  As we examine the challenges of designing a PPS,
we are finding that the PPS will likely require further adjustments
after it is implemented as more information on home health costs,
utilization, and users becomes available. 

SNF care:  PPS was implemented beginning in July 1998 with a 3-year
transition to fully prospective rates, giving providers time to
adjust to the new system.  Our ongoing work suggests that factors in
addition to the PPS have contributed to fiscal difficulties for some
SNFs.  Nevertheless, certain modifications to the PPS may be
appropriate to ensure that payments are targeted to patients who
require costly care.  The potential access problems that may result
if Medicare underpays for high-cost cases could lead to
beneficiaries' staying in acute care hospitals longer, rather than
foregoing care altogether.  HCFA is aware of this potential targeting
problem and is working to develop a solution. 

Caps on coverage of outpatient rehabilitation therapy:  In 1999, BBA
imposed an annual $1,500 per-beneficiary cap on payments for
outpatient physical and speech therapy combined and a separate $1,500
cap on outpatient occupational therapy.  The caps reflect a
legitimate need to constrain service use.  For the vast majority of
outpatient therapy users, the caps are unlikely to curtail access to
services.  Only a small share of beneficiaries receiving therapy
services are high users.  Further, most of those users with greater
needs will likely have access to hospital outpatient departments,
which are not subject to the $1,500 caps.  In addition, owing to
HCFA's partial approach to enforcing the caps, noninstitutionalized
beneficiaries can avoid having the caps curtail service coverage by
switching providers.  Whether the caps restrict coverage for a small
share of nursing home residents is less straightforward.  A
need-based payment system could help better target payments toward
beneficiaries who genuinely require more services than allowed under
the current dollar limits. 

MEDICARE POST-ACUTE CARE:  BETTER
INFORMATION NEEDED BEFORE
MODIFYING BBA REFORMS
============================================================ Chapter 1

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today as you discuss the effects of the
Balanced Budget Act of 1997 (BBA) on the Medicare fee-for-service
program.  BBA set into motion significant program changes to both
modernize Medicare and rein in spending.  The act's constraints on
providers' fees, increases in beneficiary payments, and structural
reforms together were projected to lower Medicare spending by $386
billion over the next 10 years.  Because some BBA provisions have
only recently been implemented or have not yet been phased in, the
act's full effects on providers, beneficiaries, and taxpayers will
remain unknown for some time. 

BBA was enacted in response to continuing rapid growth in Medicare
spending that was neither sustainable nor readily linked to
demonstrated changes in beneficiary needs.  The act's payment reforms
represented bold steps to control Medicare spending by changing the
financial incentives inherent in payment methods that, prior to BBA,
did not reward providers for delivering care efficiently.  To date,
the Congress has remained steadfast in the face of intense pressure
to roll back certain BBA payment reforms while waiting for evidence
that demonstrates the need for modifications.  Calls for BBA changes
come at a time when federal budget surpluses and lower-than-expected
growth in Medicare outlays could make it easier to accommodate higher
Medicare payments.  However, as the Comptroller General cautioned in
July, the surpluses are merely projections and could fall short of
expectations; the imperative remains to find the reforms that will
make Medicare sustainable and affordable for the longer term.\1

My comments today focus on the reforms governing payments to three
providers of post-acute care services:  home health agencies (HHA),
skilled nursing facilities (SNF), and providers of outpatient
rehabilitation therapy.  Among BBA's changes affecting various
providers, these reforms are farthest along in their implementation. 
Furthermore, it is important to consider the payment policies for
these providers together because changes to payments for one of them
could affect the costs and utilization of another. 

In brief, providers of post-acute care services, such as home health
care, SNF care, and rehabilitation therapy, may have to change their
service delivery practices as a result of BBA payment reforms, which
seek to make Medicare a more efficient and prudent purchaser.  Calls
to amend or repeal these BBA changes may be premature until
information is available to identify and distinguish between
desirable and undesirable consequences.  At the same time,
imperfections in the design of BBA-mandated payment systems require
attention.  The design details of these systems are key to ensuring
that payments are not only adequate in the aggregate but are also
fairly targeted to protect individual beneficiaries and providers. 

With regard to home health care, the effect of the interim payment
system on HHAs has raised concerns.  Our May 1999 analysis indicated,
however, that the reductions in the number of HHAs and changes in
home health utilization were consistent with the incentives of the
interim payment system to control the rapid and unexplained growth
that had preceded BBA.\2 Furthermore, we found little evidence that
appropriate access to Medicare's home health benefit has been
impaired.  The interim payment system, however, is not an appropriate
payment method for the long term because it does not adjust payments
for differences in beneficiary needs.  Therefore, it is important to
implement the BBA-mandated prospective payment system (PPS),
scheduled for October 1, 2000.  In ongoing work, we are examining the
formidable challenges of designing a PPS with the appropriate unit of
payment, level of payment, case-mix adjustment method, and
risk-sharing mechanism.  Our work indicates that the PPS will likely
require further adjustments after it is implemented as more
information on home health costs, utilization, and users becomes
available. 

The SNF PPS was implemented beginning July 1998 with a 3-year
transition to fully prospective rates; thus, time for providers to
adjust to the payment change has been built into the implementation
schedule.  Our ongoing work examining whether the PPS is causing
financial problems for some SNFs suggests that factors in addition to
the PPS have contributed to fiscal difficulties.  Nevertheless,
certain modifications to the PPS may be appropriate, as there is
evidence that payments are not being adequately targeted to patients
who require costly care.  The potential access problems that may
result if Medicare underpays for high-cost cases could lead to
beneficiaries' staying in acute care hospitals longer, rather than
foregoing care altogether.  HCFA is aware of this potential targeting
problem and is working to develop a solution. 

Beginning this year, BBA imposed an annual $1,500 per-beneficiary cap
on payments for outpatient physical and speech therapy combined and a
separate $1,500 cap on outpatient occupational therapy, while
exempting hospital outpatient departments from these caps.  The act
also replaced reasonable cost reimbursement for these services with
payment under a fee schedule.  The caps reflect a legitimate need to
constrain service use.  While not calibrated to accommodate variation
in beneficiary needs, the per-beneficiary caps are unlikely to
curtail access to services for the vast majority of outpatient
therapy users.  Only a small share of beneficiaries receiving therapy
services use outpatient therapy extensively.  Further, most of those
users with greater needs will likely have access to hospital
outpatient departments, which are not subject to the $1,500 caps.  In
addition, owing to HCFA's partial approach to enforcing the caps
while year 2000 adjustments are made to Medicare's automated systems,
noninstitutionalized beneficiaries can avoid having the caps curtail
service coverage by switching providers.  However, the caps may
restrict coverage for some nursing home residents, resulting in their
having to pay out-of-pocket or seek payment from other sources, such
as Medicaid, for therapy services.  Studies are under way or planned
to better measure the effect of the caps and how they might be
adjusted.  BBA also required HCFA to recommend a need-based payment
system, which could help better target payments toward beneficiaries
who genuinely require more services than allowed under the current
dollar limits. 

--------------------
\1 Medicare Reform:  Observations on the President's July 1999
Proposal (GAO/T-AIMD/HEHS-99-236, July 22, 1999). 

\2 Medicare Home Health Agencies:  Closures Continue, With Little
Evidence Beneficiary Access Is Impaired (GAO/HEHS-99-120, May 26,
1999). 

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

The Medicare program consists of two parts:  ï¿½hospital insurance,ï¿½ or
part A, which covers inpatient hospital, skilled nursing facility,
hospice, and certain home health care services, and ï¿½supplementary
medical insurance,ï¿½ or part B, which covers physician and outpatient
hospital services, outpatient rehabilitation services, home health
services under certain conditions, diagnostic tests, and ambulance
and other medical services and supplies. 

Prior to BBA payment reforms, Medicare experienced rapid growth in
the services beneficiaries receive after a hospitalization (also
called post-acute-care services), primarily due to increased
utilization.  During much of the 1990s, home health care was one of
Medicare's fastest growing benefits; between 1990 and 1997, Medicare
spending for home health care rose at an annual rate of 25.2 percent. 
Several factors accounted for this spending growth, most notably the
relaxation of coverage guidelines.  In response to a 1988 court case,
a change in the coverage guidelines essentially transformed the
benefit from one that focused on patients needing short-term care
after hospitalization to one that serves chronic, long-term-care
patients as well.\3 The loosening of coverage and eligibility
criteria contributed to an increase in the number of beneficiaries
receiving services and the volume of services they received. 
Associated with this rise in utilization was an almost doubling in
the number of Medicare-certified HHAs to 10,524 by 1997. 

Also contributing to the historical rise in home health care spending
were a payment system that provided few incentives to control how
many visits beneficiaries received and lax Medicare oversight of
claims.  As we noted in a previous report, even when controlling for
diagnoses, substantial geographic variation existed in the provision
of home health care, with little evidence that the differences were
warranted by patient care needs.\4 Additional evidence indicates that
at least some of the high use and the large variation in practice
represented inappropriate billings and unnecessary care.\5

Medicare oversight declined at the same time that spending mounted,
contributing to the likelihood that inappropriate claims would be
paid.  To begin to control spending, BBA implemented an interim
payment system for HHAs beginning October 1, 1997.  A PPS is
scheduled to be implemented for all HHAs on October 1, 2000.\6

As required by BBA, on July 1, 1998, SNFs began a 3-year transition
to a PPS, under which providers are paid a prospective rate for each
day of care.  Previously, SNFs were paid the reasonable costs they
incurred in providing Medicare-covered services.  Although there were
limits on the payments for the routine portion of care (that is,
general nursing, room and board, and administrative overhead),
payments for ancillary services, such as rehabilitative therapy, were
virtually unlimited.  Because higher ancillary service costs
triggered higher payments, facilities had no incentive to provide
these services efficiently or only when necessary.  Thus, between
1992 and 1995, daily ancillary costs grew 18.5 percent a year,
compared to 6.4 percent for routine service costs.  Moreover, new
providers were exempt from the caps on routine care payments for up
to their first 4 years of operation, which encouraged greater
participation in Medicare. 

Rehabilitation therapy comprises a substantial portion of the
post-acute-care services provided by SNFs and other providers, such
as rehabilitation therapy agencies and comprehensive outpatient
rehabilitation facilities.  Under BBA, the prices of therapy services
provided in outpatient settings are controlled by a fee schedule.\7
Generally, when prices are fixed, providers can compensate by
increasing the volume of services delivered.  To control volume,
coverage for outpatient therapy is now limited to $1,500 per
beneficiary for physical and speech therapy, with a separate $1,500
per-beneficiary limit for occupational therapy.  Hospital outpatient
departments are exempt from these coverage limits. 

--------------------
\3 Duggan v.  Bowen, 691 F.  Supp.  1487 (D.D.C.  1988). 

\4 Medicare:  Home Health Utilization Expands While Program Controls
Deteriorate (GAO/HEHS-96-16, Mar.  27, 1996). 

\5 Medicare:  Improper Activities by Mid-Delta Home Health
(GAO/T-OSI-98-6) and Office of the Inspector General, Department of
Health and Human Services, Variation Among Home Health Agencies in
Medicare Payment for Home Health Services (July 1995).  Our 1997
analysis of a small sample of high-dollar claims found that over 40
percent of these claims should not have been paid by the program. 
See Medicare:  Need to Hold Home Health Agencies More Accountable for
Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997). 

\6 BBA required the HHA PPS to be in place in fiscal year 2000. 
Subsequent legislation delayed the implementation by 1 year and
required that there be no transition to the PPS. 

\7 Payments for inpatient rehabilitation therapy services, such as
those provided by SNFs, HHAs, and rehabilitation facilities, are not
subject to the fee schedule and are paid under other rules.  In
addition, outpatient therapy provided by critical access hospitals is
not subject to the fee schedule. 

   LITTLE EVIDENCE TO DATE OF
   IMPAIRED ACCESS TO HOME HEALTH
   SERVICES, BUT FUTURE PAYMENT
   SYSTEM WILL REQUIRE REFINEMENTS
---------------------------------------------------------- Chapter 1:2

By October 2000, HCFA is required to establish a new PPS for home
health careï¿½with a fixed, predetermined payment per unit of service,
adjusted for patient characteristics.  Until that time, HHAs are paid
under the BBA-mandated interim payment system.  Although concerns
have been raised about the effect of the interim system, our May 1999
analysis showed little evidence that appropriate access to Medicare's
home health benefit had been impaired under this payment method. 
Nevertheless, a home health PPS is a more appropriate payment tool
because it can align payments with patient needs.  Designing an
adequate home health care PPS, however, poses substantial challenges. 

The pre-BBA payment system had controls for payments per visit but
left volume unchecked.  Since enactment of the BBA, home health
agencies have been paid under the interim payment system, which
attempts to control the costs and amount of services provided to each
beneficiary.  Indeed, our work indicates that overall home health
utilization in the first 3 months of 1998 had declined since 1996,
but utilization was about the same for a comparable period in 1994. 
Moreover, the sizeable variation in utilization between counties with
high and low use has narrowed.  Although these changes occurred at
the time that about 14 percent of HHAs closed their doors to Medicare
business, we found little evidence that beneficiary access to
services was inappropriately curtailed. 

The PPS should be a substantial improvement over the interim payment
system because payments will reflect current beneficiaries and their
needs rather than historical spending patterns.  However, our ongoing
work on this subject shows that a number of design issues remains and
the payment system will likely require continued adjustments even
after implementation of the PPS next year.  HCFA will pay HHAs a
per-episode rate for up to the first 60 days of services to a
patient.  Such per-episode payments are designed to balance competing
goals of controlling service provision while giving HHAs flexibility
to vary the intensity or mix of services delivered during the
episode.  Evidence indicates that HHAs do lower their costs in
response to prospective payments for an episode of care.  Whether
they will inappropriately cut visits, which could reduce the quality
of care and cause Medicare to pay for services that were not
delivered, remains to be seen.  Under this prospective payment
approach, HHAs also have incentives to increase the number of
episodes of care provided, which could escalate, rather than
constrain, Medicare spending.  HCFA will need to adequately monitor
service provision to ensure that beneficiaries receive the care they
need and the number of episodes is not inappropriately increased. 

The design of the case-mix adjustment mechanism is critical to
adequately pay for patients with high services need, yet not overpay
for others with lower requirements.  Designing this mechanism
requires detailed information about services and beneficiary
characteristics, and such information is currently available only for
a sample of users.  Furthermore, the wide geographic and agency-level
variation in service use indicates that standards of care are not
well-defined, nor are the criteria for who should use the benefit. 
As a result, the factors that will be used under PPS for grouping
patients with similar resource needs may not adequately distinguish
among types of home health patients, and the PPS payment adjuster
that will be associated with each patient group may not reflect
appropriate cost differences.  Systematic errors could result in
overpayments for some beneficiaries and underpayments for others. 
Underpayments could lead to impaired access. 

Large variations in historic spending patterns mean that a PPS, which
will be based on average payment amounts, may cause payment levels to
rise for certain HHAs and fall for others.  Although the PPS may
incorporate an outlier policyï¿½that is, extra payments for extremely
costly casesï¿½additional mechanisms to moderate payment changes may be
appropriate.  For example, an ï¿½inlierï¿½ policy to reduce the payment
for a patient who receives few services may be warranted,
particularly given the fact that multiple episode payments may be
made for a single beneficiary.  Policies addressing both extremes of
service use could protect the access of beneficiaries with high needs
and protect Medicare from overpaying for low-cost cases.  A
risk-sharing method, to account for cost differences across agencies,
could provide further protection against underpayments or
overpayments.  Given the heterogeneous use of this benefit and the
unresolved PPS design issues, moderating payments through
risk-sharing might be warranted, even if such a mechanism would
reduce HHAs' incentives to curtail providing unneeded care. 

   AGGREGATE PAYMENTS TO SNFS ARE
   ADEQUATE, BUT REFINEMENTS
   NEEDED TO HELP MATCH PAYMENTS
   TO PATIENTS' SERVICE NEEDS
---------------------------------------------------------- Chapter 1:3

Despite industry charges to the contrary, SNF payment rates under BBA
are likely to provide sufficient, or even generous, compensation for
providers.  Nevertheless, the distribution of these payments may be
out of balance because the current case-mix adjustment method may not
adequately ensure that providers serving high-cost beneficiaries are
paid enough and that those serving low-cost beneficiaries are not
paid too much. 

Under the new PPS, SNFs receive a payment for each day of covered
care provided to a Medicare-eligible beneficiary.  By establishing
fixed payments and including all services provided to beneficiaries
under the per diem amount, the PPS attempts to provide incentives for
SNFs to deliver care more efficiently.  Under the PPS, SNFs that
previously boosted their Medicare ancillary paymentsï¿½either through
higher use rates or higher costsï¿½will need to modify their practices
more than others.  Scaling back the use of these services, however,
may not necessarily affect the quality of care.  There is little
evidence to indicate that the rapid growth in Medicare spending was
due to a commensurate increase in Medicare beneficiaries' need for
services. 

Recent industry reports have questioned the ability of some
organizations that operate SNF chains to adapt to the new PPS. 
Indeed, pending bankruptcies have been claimed to be the results of
the Medicare payment changes.  Our ongoing work suggests that PPS has
been only one of many factors contributing to the poor financial
performance of these corporations.  For one thing, Medicare patients
constitute a relatively small share of the business of most SNFs and
for these corporations, SNFs are only a portion of their overall
revenues.  Moreover, the PPS rates are being phased in to allow time
for facilities to adapt to the new payment system, and most of the
payments are still tied to each facility's historical costs.  The
reality is that some corporations invested heavily in the nursing
home and ancillary service businesses in the years immediately before
the enactment of the PPS, both expanding their acquisitions and
upgrading facilities to provide higher-intensity services.  Under
tighter payment constraints, these debt-laden enterprises are
particularly challenged.  Thus, while SNFs will have to adapt to the
PPS constraints, the performance of some large post-acute care
providers is a reflection of many Medicare payment policy changes and
strategic decisions made during a period when Medicare was exercising
too little control over its payments.  We are gathering additional
information and will report soon on the effect of the PPS on SNF
solvency and beneficiary access to care. 

We believe that overall payments to SNFs are adequate.  In fact, we
and the Department of Health and Human Services' (HHS) Inspector
General (IG) are concerned that the PPS rates Medicare pays may be
too generous.  Most of the data used to establish these ratesï¿½from
1995 cost reportsï¿½have not been audited and are likely to include
excessive ancillary costs due to the previous system's incentives and
the lack of appropriate program oversight.\8

We are concerned, however, that payments for individual beneficiaries
could be inappropriately high or low because of certain PPS design
problems.  The first of these problems involves the patient
classification system.  The classification system was based on a
small sample of patients and, because of the age of the data, may not
reflect current treatment patterns.  As a result, it may aggregate
patients with widely differing needs into too few payment groups that
do not distinguish adequately among patients' resource needs.  In
addition, the cost variation for non-therapy ancillary services may
not have been adequately accounted for in the payment rates, which
may inappropriately compress the range in payments.  Accordingly,
access problems or inadequate care could result for some high-cost
beneficiaries.  Hospitals have reported an increase in placement
problems due to the reluctance of some facilities to admit certain
beneficiaries with high expected treatment costs, which will increase
hospital lengths of stay for these patients.  HCFA is aware of the
limitations of the case-mix adjustment method and is working to
refine this system to more accurately reflect patient differences. 

Another design problem is that the current case-mix adjustment method
preserves the opportunity for SNFs to increase their compensation by
supplying unnecessary services.  A SNF can benefit by manipulating
the services provided to beneficiaries, rather than increasing
efficiency.  For example, by providing certain patients an extra
minute of therapy over a defined threshold, a facility could
substantially increase its Medicare payments without a commensurate
increase in its costs. 

--------------------
\8 HHS' IG recently reported on the inappropriateness of the base
year costs.  See Office of the Inspector General, Department of
Health and Human Services, Physical and Occupational Therapy in
Nursing Homes:  Cost of Improper Billings to Medicare
(OEI-09-97-00122, Aug.  1999). 

   ADVERSE EFFECT OF OUTPATIENT
   THERAPY CAPS DOUBTFUL, BUT
   NEED-ADJUSTED PAYMENT LIMITS
   WOULD BE BETTER
---------------------------------------------------------- Chapter 1:4

Questions have been raised about a BBA coverage restriction for a
third group of post-acute-care servicesï¿½outpatient rehabilitation
therapy.  Together with a fee schedule that replaces reasonable cost
reimbursement for these services, BBA imposed an annual $1,500
per-beneficiary cap on payments for outpatient physical and speech
therapy combined and a separate $1,500 per-beneficiary cap on
outpatient occupational therapy.\9 Services provided by hospital
outpatient departments are exempt from the per-beneficiary caps. 

Rehabilitation therapy providers have raised concerns that the $1,500
limits will arbitrarily curtail necessary treatments for Medicare
beneficiaries, particularly victims of stroke, hip injuries, or
multiple medical incidents within a single year.  These concerns have
led to several legislative proposals to include various exceptions to
the caps or eliminate them altogether. 

Our ongoing work on this topic for Members of this Subcommittee
suggests that eliminating the caps without substituting other
controls could undermine BBA's comprehensive strategy for restricting
payments for outpatient therapy services.  Controlling the price for
each unit of serviceï¿½as is done with the new requirement that
outpatient therapy providers bill Medicare according to the physician
fee scheduleï¿½may not necessarily control Medicare expenditures if
utilization rises.  This is particularly likely, given the price and
utilization controls imposed through PPS on other providers of
rehabilitation therapy.  Thus, the per-beneficiary caps serve to
limit the volume of services provided. 

For the vast majority of beneficiaries, the coverage caps are
unlikely to curtail access to needed services.  An analysis by the
Medicare Payment Advisory Commission shows that, in 1996, most users
(86 percent) did not exceed $1,500 in payments for physical and
speech therapy or for occupational therapy.\10 Moreover, if the fee
schedule constrains payments as expected, the proportion of
beneficiaries who are unaffected by the caps could be even higher in
1999, because beneficiaries could receive more services before
reaching the per-beneficiary caps than under the former cost-based
system. 

Even for beneficiaries exceeding $1,500 in payments under the fee
schedule, mitigating factors exist.  First, under the BBA exemption,
Medicare beneficiaries have no limits on coverage for rehabilitation
therapy provided by hospital outpatient departments, which are widely
available nationwide.  In addition, the caps will initially not be
applied as specified in BBA.  Implementing the caps involves many
programming changes to Medicare's automated information systems that
HCFA is unable to undertake concurrent with its year 2000 preparation
efforts.  As a result, HCFA's claims processing contractors will be
unable to track therapy payments on a per-beneficiary basis. 
Instead, effective January 1, 1999, HCFA employed a transitional
approach to implementing the caps.  Under this approach, each
provider of therapy services is responsible for tracking its billings
for each Medicare patient and stopping them at the $1,500 threshold. 
The consequence of this partial implementation is that
noninstitutionalized beneficiaries may switch to a new provider when
they have reached the $1,500 limit under the current provider. 

The effect of the per-beneficiary caps on nursing home residents is
less clear.  The ability of beneficiaries to switch outpatient
providers under HCFA's partial implementation approach is,
practically speaking, not available to nursing facility residents. 
Under new billing requirements, the nursing facility in which the
beneficiary resides is required to bill for outpatient therapy
provided to the resident, regardless of the entity that actually
delivered the service.  Therefore, unlike their noninstitutionalized
counterparts, nursing facility residents cannot switch providers to
restart the $1,500 coverage allowance.  Under these circumstances,
some nursing home residentsï¿½like those needing extensive
rehabilitation therapy resulting from conditions such as stroke or
hip fracturesï¿½could be vulnerable to out-of-pocket costs for therapy. 

Even the risk for these more vulnerable beneficiaries may be
moderated, however, because nursing home residents seeking therapy
for such conditions would likely receive a complement of
rehabilitation services as a SNF inpatientï¿½before the outpatient
therapy coverage limit begins to apply.  That is, individuals
suffering a stroke or undergoing hip replacement would likely spend
at least 3 days in an acute care hospital, which, combined with the
need for daily skilled nursing care or therapy, would make them
eligible for a Medicare-covered SNF stay of up to 100 days, during
which they would likely receive therapy services.  After their
Medicare coverage ends, a nursing facility resident can continue to
receive outpatient therapy services under Medicare part B, subject to
the coverage limits.  BBA mandates that HCFA develop a classification
system based on diagnosis to determine differences in patients'
therapy needs and propose possible alternatives to the caps in a
report due January 1, 2001.  This report will be significant in that
a need-based system could help ensure adequate coverage for those
beneficiaries requiring an extraordinary level of services and
prevent overprovision to those requiring only limited amounts. 

--------------------
\9 Physical therapy includes treatments such as whirlpool baths,
ultrasound, and therapeutic exercises to relieve pain, improve
mobility, maintain cardiopulmonary functioning, and limit the
disability from an injury or disease.  Speech therapy includes the
diagnosis and treatment of speech, language, and swallowing
disorders.  Occupational therapy helps patients learn the skills
necessary to perform daily tasks, diminish or correct pathology, and
promote health. 

\10 A July 1998 report sponsored by the National Association for the
Support of Long-Term Care and NovaCare, a rehabilitation services
company, projects that 87 percent of beneficiaries will not exceed
the per-beneficiary cap. 

   CONCLUSION
---------------------------------------------------------- Chapter 1:5

In conclusion, the BBA payment reforms affecting providers of home
health care, SNF care, and outpatient rehabilitation therapy are all
intended to make these providers more efficient.  As the reforms
begin to have their intended effects, pressure is building to return
to more generous payment policies.  Evidence to date shows that BBA
is moving Medicare in the right direction but that adjustments will
be needed along the way.  These adjustments should be based on
thorough, quantitative assessments so that misdiagnosed problems do
not lead to misguided solutions.  With the health care of seniors and
the tax dollars of all Americans at stake, policymakers must, in the
face of pressure for increased payment rates, preserve new payment
policies that exact efficiencies but make adaptations when
substantiated evidence supports the need to do so. 

-------------------------------------------------------- Chapter 1:5.1

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

GAO CONTACTS AND ACKNOWLEDGMENTS

For future contacts regarding this testimony, please call Laura A. 
Dummit at (202) 512-7119.  Individuals who made key contributions to
this statement include Carol L.  Carter, Assistant Director; Hannah
F.  Fein; James E.  Mathews; and Deborah Spielberg. 

*** End of document. ***