Medicare: Progress to Date in Implementing Certain Major Balanced Budget
Act Reforms (Testimony, 03/17/99, GAO/T-HEHS-99-87).

Pursuant to a congressional request, GAO discussed the implementation
and impact of the Medicare provisions in the Balanced Budget Act of 1997
(BBA), focusing on: (1) the Medicare Choice program, particularly the
payment method and consumer information efforts; and (2) prospective
payment systems (PPS) for skilled nursing facilities (SNF) and home
health agencies (HHA) in Medicare's traditional fee-for-service program.

GAO noted that: (1) changes of the magnitude of those in the BBA require
significant efforts to implement well and are subject to continual
scrutiny; (2) GAO recently reported that the efforts of the Health Care
Financing Administration (HCFA) to put the BBA provisions in place have
been extensive and noteworthy, and the agency has made substantial
progress in implementing the majority of the Medicare-related BBA
mandates; (3) at the same time, it has encountered obstacles; (4)
intense pressure to resolve year 2000 computer compliance issues has
slowed HCFA's efforts; (5) in undertaking certain major initiatives, the
agency has had to cope with inadequate experience and insufficient
information; (6) thus, achieving the objectives of the BBA will require
HCFA to refine and build on its initial efforts; (7) reforms of the
payment methods for Medicare Choice plans are under way; (8) the
withdrawal of some managed care plans has raised questions about how to
maintain desired access for beneficiaries while implementing needed
changes to plan payments and participation requirements; (9) HCFA has
also initiated an information campaign to provide beneficiaries with new
tools to make informed health plan choices and create stronger,
quality-based competition; (10) some aspects of the campaign have only
been piloted and certain problems did develop; refining these efforts to
make them more useful and effective for beneficiaries is now critical;
(11) the BBA's mandate to replace cost-based reimbursement methods with
PPS constitutes another major program reform; (12) the phase-in of the
PPS for SNFs began on schedule on July 1, 1998; (13) design flaws and
inadequate underlying data used to establish the payment rates may
compromise the system's ability to meet the twin objectives of slowing
spending growth while promoting appropriate beneficiary care; (14) GAO
has not found evidence that the closures or the interim payment system
has significantly affected beneficiary access to home health care; (15)
GAO's monitoring of potential access problems is continuing as more data
on any effects of the interim system become available; (16) the impact
of BBA's significant transformations of Medicare could generate pressure
to undo many of the act's provisions; (17) in this environment, Congress
will face difficult decisions that could pit particular interests
against a more global interest in preserving Medicare for the long term;
and (18) GAO believes that it would be a mistake to significantly modify
BBA's provisions without thorough analysis or giving them a fair trial
over a reasonable period of time.

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

 REPORTNUM:  T-HEHS-99-87
     TITLE:  Medicare: Progress to Date in Implementing Certain Major 
             Balanced Budget Act Reforms
      DATE:  03/17/99
   SUBJECT:  Home health care services
             Managed health care
             Statutory law
             Health insurance
             Health resources utilization
             Skilled nursing facilities
             Claims processing
IDENTIFIER:  Medicare Choice Program
             Medicare Prospective Payment System
             Medicare Program
             Medicare Home Health Care Program
             Federal Employees Health Benefits Program
             Medicare Fee-for-Service Program
             Medicare Hospital Insurance Trust Fund
             Y2K
             
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Cover
================================================================ COVER


Before the Committee on Finance, U.S.  Senate

For Release on Delivery
Expected at 10:00 a.m.
Wednesday, March 17, 1999

MEDICARE - PROGRESS TO DATE IN
IMPLEMENTING CERTAIN MAJOR
BALANCED BUDGET ACT REFORMS

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

GAO/T-HEHS-99-87

GAO/HEHS-99-87T


(101812)


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

  BBA - Balanced Budget Act of 1997
  FEHBP - Federal Employees Health Benefits Program
  HCFA - Health Care Financing Administration
  HHA - home health agencies
  HI - Hospital Insurance
  HMO - health maintenance organization
  PPS - prospective payment system
  SNF - skilled nursing facilities

MEDICARE:  PROGRESS TO DATE IN
IMPLEMENTING CERTAIN MAJOR
BALANCED BUDGET ACT REFORMS
============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

We are pleased to be here as you discuss the implementation and
impact of the Medicare provisions in the Balanced Budget Act of 1997
(BBA).  The BBA contains the most significant changes to Medicare
since its inception more than 30 years ago.  The act's combination of
constraints on provider fees, increases in beneficiary payments, and
structural reforms is expected to lower program spending by $386
billion over the next 10 years.  The importance of these changes
cannot be overemphasized given the immediacy of Medicare's financial
crisis and upcoming demographic changes.  The most fundamental BBA
reform was the creation of the Medicare+Choice program, designed to
modernize Medicare by offering beneficiaries a wider array of health
plan choices comparable to some of the options available in the
private insurance market.  The fee-for-service component of Medicare
underwent considerable transformation as well.  Most notably, this
legislation continued the movement away from paying for services on
the basis of providers' incurred costs and toward using prospective
rates wherein the program sets payment levels in advance and has more
control over its spending on services. 

The ramifications of these fundamental changes--affecting
beneficiaries, health care providers, and taxpayers--are substantial. 
Not surprisingly, some interest groups have expressed concerns about
the impact of these changes and made calls to alter some provisions. 
In some cases, adjustments may be wise; in others, premature or
imprudent.  That is why it is critical that there be a thorough
evaluation of these policies, singly and in their totality, to inform
ongoing policy discussions. 

My comments today will focus on the implementation of (1) the
Medicare+Choice program, particularly the payment method and consumer
information efforts, and (2) prospective payment systems for skilled
nursing facilities (SNF) and home health agencies (HHA) in Medicare's
traditional fee-for-service program.  Our work in these areas
illustrates the importance of the BBA reforms, the difficulties in
implementing reforms, and the pressures to dampen their impact.  My
remarks are based on previously issued products as well as our
ongoing work in these areas. 

In brief, changes of the magnitude of those in the BBA require
significant efforts to implement well and are subject to continual
scrutiny.  We recently reported that the efforts of the Health Care
Financing Administration (HCFA) to put the BBA provisions in place
have been extensive and noteworthy, and the agency has made
substantial progress in implementing the majority of the
Medicare-related BBA mandates.  At the same time, it has encountered
obstacles.  Intense pressure to resolve Year 2000 computer compliance
issues has slowed HCFA's efforts.  In addition, in undertaking
certain major initiatives, the agency has had to cope with inadequate
experience and insufficient information.  Thus, achieving the
objectives of the BBA will require HCFA to refine and build on its
initial efforts. 

Findings from our recent Medicare+Choice work focus on payments to
health plans and HCFA's consumer information initiatives.  Reforms of
the payment methods for Medicare+Choice plans are under way.  They
will address the methodological flaws that have led to billions of
dollars in excess payments and inappropriate payment disparities.  To
avoid sharp payment changes that could affect a plan's offerings and
diminish the attractiveness of the Medicare+Choice program to
beneficiaries, these changes are being phased in over several years. 
Nevertheless, the withdrawal of some managed care plans has raised
questions about how to maintain desired access for beneficiaries
while implementing needed changes to plan payments and participation
requirements.  HCFA has also initiated an information campaign to
provide beneficiaries with new tools to make informed health plan
choices and create stronger, quality-based competition.  Some aspects
of the campaign have only been piloted, and certain problems did
develop; refining these efforts to make them more useful and
effective for beneficiaries is now critical. 

On Medicare's fee-for-service side, the BBA's mandate to replace
cost-based reimbursement methods with prospective payment systems
(PPS) constitutes another major program reform.  The phase-in of the
PPS for SNFs began on schedule on July 1, 1998.  However, design
flaws and the inadequacy of the underlying data used to establish the
payment rates may compromise the system's ability to meet the twin
objectives of slowing spending growth while promoting appropriate
beneficiary care.  Insufficient oversight could compound these
shortcomings and further jeopardize potential cost savings. 
Improvements to the system design and better monitoring are feasible
but may require assistance from the Congress.  The interim payment
system for HHAs, with the similar objective of controlling rapid
expenditure growth for this benefit, is now in place.  Implementation
of the PPS for HHAs has been delayed until 2001 but remains a
considerable challenge given the benefit's broad eligibility
requirements.  Concerns have been raised about the impact of the
interim payment system as more than 1,400 HHAs have closed since
October 1997.  However, because the number of agencies had been
expanding dramatically, more than 9,000 HHAs still participate in
Medicarea larger number than did in October 1995.  We have not found
evidence that the interim payment system or the closures have
significantly affected beneficiary access to home health care. 
However, our monitoring of potential access problems is continuing as
more data on the effects of the interim system become available. 

The BBA's significant transformations of Medicare could generate
pressure to undo many of the act's provisions.  In this environment
the Congress will face difficult decisions that could pit particular
interests against a more global interest in preserving Medicare for
the long term.  We believe that it would be a mistake to
significantly modify the BBA's provisions without thorough analysis
or giving the provisions a fair trial over a reasonable period of
time. 


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

Medicare is the nation's largest health insurance program, covering
about 39 million elderly and disabled beneficiaries at a cost of more
than $193 billion.  Between 1990 and 1997, Medicare experienced
spending increases averaging 9.8 percent per year to make it one of
the fastest growing parts of the federal budget.  This growth has
slowed somewhat in the past 2 years.  The Congressional Budget Office
projects that Medicare's share of gross domestic product will rise
almost one-third by 2009. 

This substantial growth in Medicare spending will continue to be
fueled by demographic and technological changes.  Medicare's rolls
are expanding and are projected to increase rapidly with the
retirement of the baby boom generation.  For example, today's elderly
make up about 13 percent of the total population; by 2030, they will
comprise 20 percent as the baby boom generation ages.  Individuals
aged 85 and older make up the fastest growing group of beneficiaries. 
So, in addition to the increased demand for health care services due
to sheer numbers, the greater prevalence of chronic health conditions
associated with aging will further boost utilization. 

Congressional attention has recently focused on the impending
depletion of Medicare's Hospital Insurance (HI) trust fund.  Payroll
taxes credited to the HI trust fund finance the bulk of Medicare's
"hospital insurance," or part A, which covers inpatient hospital
services as well as SNF, hospice, and certain home health care
services.  Beneficiaries' premium contributions and general revenues
finance Medicare's "supplementary medical insurance," or part B,
which covers physician and outpatient hospital services, diagnostic
tests, ambulance services, and other services and supplies.  A BBA
provision that shifted the financing of some home health services
from part A to part B helped extend the HI trust fund's solvency. 

Other BBA reforms, designed to slow program spending, address both
Medicare's managed care and fee-for-service components.  Medicare's
managed care program covers the growing number of beneficiaries who
have chosen to enroll in prepaid health plans, where a single monthly
payment is made for all necessary covered services.  About 6.8
million people--about 17 percent of all Medicare beneficiaries--were
enrolled in more than 450 managed care plans as of December 1,
1998.\1 Most of Medicare's beneficiaries, however, receive health
care on a fee-for-service basis, whereby providers are reimbursed for
each covered service they deliver to beneficiaries. 


--------------------
\1 About 90 percent of the 6.8 million Medicare beneficiaries are
enrolled in managed care plans that receive fixed monthly capitation
payments.  The remainder are enrolled in plans that are reimbursed
for the costs they incur, less the estimated value of beneficiary
cost-sharing. 


   BBA'S CREATION OF
   MEDICARE+CHOICE
---------------------------------------------------------- Chapter 0:2

One way in which the BBA seeks to restructure Medicare is by
encouraging greater managed care participation.  Under the
Medicare+Choice program, a broader range of health plans, such as
preferred provider organizations and provider-sponsored
organizations, are permitted to participate in Medicare.  BBA's
emphasis on Medicare+Choice reflects the perspective that increased
managed care enrollment will help slow Medicare spending while
expanding beneficiaries' health plan options. 

Our recent work has examined two aspects of the Medicare+Choice
program--payments and consumer information initiatives.  BBA
provisions dealing with payments to Medicare+Choice plans acknowledge
that Medicare's prior managed care payment method for health
maintenance organizations (HMO) and other risk plans failed to save
the government money and created wide disparities in payment rates
across counties.  The BBA establishes a new rate-setting methodology
for 1998 and future years, incorporating adjustment rates for the
health and expected service use of managed care enrollees to avoid
overpayment.  It also guarantees health plans a minimum payment level
to encourage them to locate in areas that previously had lower rates
and few, if any, Medicare participating health plans.  Other
provisions addressing consumer information needs are designed to
raise beneficiary participation in Medicare+Choice and promote more
effective quality-based competition among plans. 


      MANAGED CARE PAYMENT REFORMS
-------------------------------------------------------- Chapter 0:2.1

Context for BBA's rate-setting provisions:  BBA modifications to
Medicare's health plan payment method acknowledge the problem of
flawed capitation rates that, historically, have been paid to HMOs. 
Our work has demonstrated that these rates have produced billions of
dollars in aggregate excess payments and inappropriate payment
disparities across counties.\2

The fundamental problem we found was that HMO payment rates were
based on health care spending for the average nonenrolled
beneficiary, while the plans' enrollees tended to be healthier than
average nonenrollees, a phenomenon known as favorable selection. 
Some analysts expected excess payments to diminish with increased
enrollment.  Instead, the excess continued to grow, since rates were
based on the rising concentrations of higher-cost beneficiaries
remaining in fee-for-service. 

Risk adjustment is a tool for setting capitation rates so that they
reflect enrollees' expected health costs as accurately as possible. 
This tool is particularly important given Medicare's growing use of
managed care and the potential for favorable selection, which, if not
taken into account, generates excess payments.  Medicare's current
risk adjuster--based only on demographic factors such as age and
sex\3 --cannot sufficiently lower rates to be consistent with the
expected costs of managed care's healthier population.  For example,
a senior who was relatively healthy and another who suffered from a
chronic condition--even if they were of the same age and sex--would
have very different expected health care needs; but the current risk
adjuster does not take those differences into account. 

To correct this problem, the BBA requires HCFA to devise a new risk
adjuster that incorporates patient health status factors.\4 HCFA had
to develop and report on the new risk adjuster by March 1 of this
year and is required to put the method in place by January 2000. 

Design, implementation, and impact issues:  HCFA's proposed interim
risk adjuster--to be implemented in 2000--relies exclusively on
hospital inpatient data to measure health status.  While not perfect,
the proposed risk adjuster does link the rates paid more closely to
projections of Medicare enrollees' medical costs.  Ideally, the risk
adjuster would measure health status with complete and reliable data
from other settings, such as physicians' offices, but these data are
not currently available.  Given the reliance on only hospital data,
HCFA has taken steps to avoid rewarding plans that hospitalize
patients unnecessarily or, conversely, penalizing efficient plans
that provide care in less costly settings.  A "next generation" of
risk adjustment based on the services beneficiaries receive in all
settings is scheduled for 2004. 

HCFA plans to phase in the use of the interim risk adjuster and, in
so doing, will avoid sharp payment changes that could adversely
affect beneficiaries and plans.  Such changes could be detrimental to
beneficiaries if plans, in response, substantially scaled back their
benefit packages or reconsidered their commitment to the
Medicare+Choice program. 

Currently, there is concern about a recent surge in plan drop-outs
from Medicare+Choice.  As of January 1999, 99 of the capitated plans
in operation during 1998 had withdrawn or reduced their Medicare
service areas.  Industry representatives have stated that plans may
have dropped out partially in anticipation of reduced payments, which
could result when the interim risk adjuster is implemented.  Plans
have also cited the administrative burden associated with some of the
new Medicare+Choice regulations as a significant reason for their
withdrawal decisions. 

The issue of plan drop-outs is complex, however, because the reasons
for plans' decisions are not clear cut.  As we have previously
reported, many nonpayment factorssuch as commercial managed care
enrollment levelsinfluence plans' Medicare participation
decisions.\5 Some areas of the country with relatively low payment
rates have many Medicare managed care plans and enrollees.  Moreover,
the extent to which new Medicare+Choice regulations could have
precipitated the withdrawals is unclear since few managed care
organizations withdrew from Medicare completely.  Most plans that
pulled out of certain geographic areas continue to serve
beneficiaries in other areas.  In response to plans' concerns,
however, HCFA recently revised a number of the Medicare+Choice
regulations to make them less burdensome.  Finally, while some plans
are dropping out of the program, others are interested in signing new
contracts.  In fact, 16 applications for new or expanded service
areas have recently been approved and 44 more are pending. 


--------------------
\2 Our 1997 study on payments to California HMOs, which enrolled more
than a third of Medicare's managed care population, found that
Medicare overpaid plans by about 16 percent in fiscal year
1995accounting for about $1 billion in excess payments.  The
proportion of excess payments varied across counties.  See Medicare
HMOs:  HCFA Can Promptly Eliminate Hundreds of Millions in Excess
Payments (GAO/HEHS-97-16, Apr.  25, 1997). 

\3 The demographic indicators are age, sex, eligibility for Medicaid,
employment status, and residence in an institution such as a SNF. 
Separate rates, using the same demographic traits, are calculated for
beneficiaries who qualify for Medicare because of a disability (under
age 65).  Separate rates are also set for beneficiaries with
end-stage renal disease (kidney failure). 

\4 Technically, the law requires the Secretary of Health and Human
Services to develop, report on, and implement the health-based risk
adjustment method. 

\5 See Medicare Managed Care:  HMO Rates, Other Factors Create Uneven
Availability of Benefits (GAO/T-HEHS-97-133, May 19, 1997). 


      MEDICARE+CHOICE INFORMATION
      CAMPAIGN
-------------------------------------------------------- Chapter 0:2.2

Context for BBA's information campaign provisions:  Capitalizing on
changes in the delivery of health care, BBA's introduction of new
health plan options is intended to create a market in which different
types of health plans compete to enroll and serve Medicare
beneficiaries.  The BBA reflects the idea that consumer information
is an essential component of a competitive market.  From the
beneficiary's viewpoint, information on available plans needs to be
accurate, comparable, accessible, and user-friendly.  Informed
choices are particularly important as the BBA phases out the
beneficiary's opportunity to disenroll from a plan on a monthly basis
and moves toward the private sector practice of annual
reconsideration of plan choice. 

The BBA mandated that, as part of a national information campaign,
HCFA undertake several activities that could help beneficiaries make
enrollment decisions regarding Medicare+Choice.  Each October, prior
to a mandated annual, coordinated enrollment period, HCFA must
distribute to beneficiaries an array of general information on, among
other things, enrollment procedures, rights, and the potential for
Medicare+Choice contract termination by a participating plan.  The
BBA also required HCFA to provide beneficiaries with a list of
available participating plans and a comparison of these plans'
benefits.  The agency must also maintain a toll-free telephone number
and an Internet site as general sources of information about plan
options, including traditional fee-for-service Medicare. 

Design, implementation, and impact issues:  The BBA-mandated
information campaign is a first-time and massive undertaking for
HCFA.  The effort is well under way, but relative to the ideala
market in which informed consumers prod competitors to offer the best
valuemany challenges lie ahead. 

We have reported that, unlike many enrollees in the private sector
and individuals covered by plans in the Federal Employees Health
Benefits Program (FEHBP), Medicare beneficiaries receive little
comparative information on their health plan options.  We have also
reported that, unlike FEHBP, HCFA does not require that plans'
marketing materials follow a consistent format or use common
terminology, thus making plan comparisons difficult for
beneficiaries.  Standardized language on benefit and coverage
definitions would facilitate (1) HCFA's oversight functions to ensure
accurate information, (2) plans' compliance with reporting
requirements, and (3) beneficiary decisionmaking.  HCFA intends to
require plans to begin using a standardized format for some
information in anticipation of the November 1999 enrollment period. 

HCFA is also in the process of making summary data available through
several sources.  In 1998, as part of a five-state pilot project,
HCFA provided beneficiaries with a handbook containing comparative
information on the Medicare+Choice plans available in their area and
access to a toll-free telephone line.  It also established an
Internet site with similar information about plans available
nationwide.  These efforts made important strides, but because of
plan pull-outs late in the year, some of the information
beneficiaries received was inaccurate. 

Critical now is a thorough evaluation of these efforts to ensure that
the information provided is clear, sufficient, and helpful to
beneficiaries' decisionmaking.  Assessing how to make these efforts
cost-effectivethat is, targeting the right amounts and types of
information to different groups of beneficiariesis also of vital
importance. 


   SELECTED BBA REFORMS OF
   MEDICARE FEE-FOR-SERVICE
---------------------------------------------------------- Chapter 0:3

The BBA also makes fundamental changes to Medicare's fee-for-service
component, which represents about 87 percent of program outlays and
covers about 33 million beneficiaries.  Mandated PPSs will alter how
reimbursements are made to SNFs, HHAs, hospital outpatient
departments, and rehabilitation facilities.  Instead of generally
paying whatever costs providers incur, HCFA's mandate is to establish
rates that give providers incentives to deliver care and services
more efficiently.  Our work on SNF and home health benefits shows the
importance of the design and implementation details of PPSs to
achieving expected BBA savings and ensuring that Medicare
beneficiaries have access to appropriate services. 


   SNF PPS
---------------------------------------------------------- Chapter 0:4

Context for SNF PPS provisions:  Medicare spending for SNF services
rose at an average annual rate of 23.2 percent from 1990 to 1996,
much faster than overall program spending growth.  Medicare's SNF
payment method has been cited as one reason for this growth.  Before
the changes mandated in the BBA, SNFs were paid the reasonable costs
they incurred in providing Medicare-allowed services.  There were
limits on payments for the routine portion of care--that is, general
nursing, room and board, and administrative overhead.  Payments for
ancillary services, such as physical, occupational, or speech
therapy, however, were virtually unlimited.  These unchecked
ancillary service payments have been a major contributor to
significant increases in daily reimbursements to SNFs.  Because
providing more of these services generally triggered higher payments,
facilities had no incentive to deliver services efficiently or only
when necessary.  The BBA called for phasing in a PPS for SNF care
beginning after July 1, 1998, to bring program spending under
control. 

Design, implementation, and impact issues:  Under the PPS, SNFs
receive a payment for each day of care provided to a Medicare
beneficiary.  The payment, called a per diem rate, is based on the
average daily cost of providing all Medicare-covered SNF services, as
reflected in facilities' 1995 costs.  Since not all patients require
the same amount of care, the per diem rate is "case-mix" adjusted to
take into account the nature of each patient's condition and expected
care needs.  Facilities that can care for beneficiaries for less than
this case-mix-adjusted per diem amount will benefit financially,
whereas SNFs with costs higher than the adjusted per diem rate will
be at risk for the difference between their costs and the payments. 
The SNF PPS is expected to control Medicare spending because the per
diem rate covers all services, so SNFs have an incentive to provide
services efficiently and judiciously.  Moreover, since payments vary
with patient needs, the PPS is intended to ensure access to these
services. 

We are concerned, however, that the design of the case-mix adjuster
preserves the opportunity for providers to increase their
compensation by supplying potentially unnecessary services.\6 As
stated, the SNF PPS divides beneficiaries into case-mix groups to
reflect differences in patient needs that affect the cost of care. 
Each group is intended to define clinically similar patients who are
expected to incur similar costs.  An adjustment is associated with
each group to account for these cost differences.  A facility then
receives a daily payment that is the same for each patient within a
group.  Since the payments do not vary with the actual costs
incurred, a SNF has an incentive to reduce the costs of caring for
the patients in each case-mix group. 

The design of the case-mix groups allows a SNF to reduce its costs
and increase its payments by manipulating the services provided,
rather than increasing efficiency.  Since the SNF groups are largely
defined by the services the patient is to receive, a facility can
provide only the minimum level of services required for placement in
a particular group.  This reduces the average cost for the SNF's
patients in that case-mix group but does not reduce the Medicare
payments for these patients.  Thus, expected Medicare savings may not
be achieved. 

We are also concerned that the data underlying the SNF rates
overstate the reasonable costs of providing services and may not
appropriately reflect costs for patients with different care needs. 
Most of the cost data used to set the SNF rates were not audited.  Of
particular concern are therapy costs, which are likely inflated
because there have been few limits on these payments.  Even if
additional audits were to uncover significant inappropriate costs,
HCFA maintains that it has no authority to adjust the base rates
after the implementation of the new system.  Furthermore, the
case-mix adjusters are based on cost information on about 4,000
patients.  This sample may simply be too small to reliably estimate
these adjusters, particularly given the substantial variation in
treatment patterns among SNFs.  As a result, the case-mix-adjusted
rates may not vary appropriately to account for the services
facilities are expected to providerates will be too high for some
types of patients and too low for others. 

Under the SNF PPS, whether a SNF patient is deemed eligible for
Medicare coverage and how much will be paid are based on a facility's
assessment of its patients and its judgment.  Monitoring these
assessments and determinations is key to realizing expected savings
from the system.  Texas, which implemented a similar reimbursement
system for Medicaid, conducts on-site reviews to monitor the accuracy
of patient assessments and finds a continuing error rate of about 20
percent.  HCFA has no plans to undertake as extensive a monitoring
effort.  However, without adequate vigilance, inaccurate,
inappropriate, and even fraudulent assessments could compromise the
benefits of the PPS. 


--------------------
\6 See Balanced Budget Act:  Implementation of Key Medicare Mandates
Must Evolve to Fulfill Congressional Objectives (GAO/T-HEHS-98-214,
July 16, 1998). 


      HOME HEALTH PPS AND RELATED
      REFORMS
-------------------------------------------------------- Chapter 0:4.1

Context for home health provisions:  Medicare spending for home
health care rose even more rapidly than spending for SNF services--at
an average annual rate of 27.9 percent between 1990 and 1996. 
Several factors accounted for this spending growth, particularly
relaxed coverage requirements that, over time, have made home health
care available to more beneficiaries, for less acute conditions, and
for longer periods of time.  Essentially, Medicare's home health
benefit gradually has been transformed from one that focused on
patients needing short-term care after hospitalization to one that
serves chronic, long-term-care patients as well. 

To control spending while ensuring the appropriate provision of
services, the BBA mandated important changes in the payment method
and provider requirements for home health services.  HCFA is required
to establish a PPS for HHAs by fiscal year 2001.\7 Designing an
appropriate system for HHAs will be particularly challenging because
of certain characteristics of the benefit.  Home health care is a
broad benefit that covers a wide variety of patients, many of whom
have multiple health conditions; and the standards for care are not
well defined.  Consequently, the case-mix adjuster and payment rates
must account for substantial variation in the number, type, and
duration of visits.  Further, the wide geographic variation in the
use of home health care makes it difficult to determine appropriate
treatment patterns that must be accounted for in the overall level of
payment.  A final concern has to do with the quality and adequacy of
services.  Since the services are delivered in beneficiaries' homes,
oversight is particularly critical when payment changes are
implemented to constrain program outlays. 

Recognizing the difficulty of developing and implementing a PPS, the
BBA required HCFA to pay HHAs under an interim system.  The interim
system builds on payment limits already in place by making them more
stringent and by providing incentives for HHAs to control the number
and mix of visits to each beneficiary. 

Design, implementation, and impact issues:  Under the interim payment
system, which took effect October 1, 1997, HHAs are paid their costs
subject to the lower of two limits.  The first limit builds on the
existing aggregate per-visit cost limits but makes them more
stringent.  The second limit caps total annual Medicare payments on
the basis of the number of beneficiaries served and an annual
per-beneficiary amount.  The annual per-beneficiary amount is based
on agency-specific and regional average, per-beneficiary payments,
and the limit aims to control the number of services provided to
users.  The blending of agency-specific and regional amounts is
intended to account for the significant differences in service use
across agencies and geographic areas. 

There has been widespread concern about the impact of the interim
payment system on HHAs and access to home health care.\8 Indeed,
between October 1, 1997, and January 1, 1999, over 1,400 HHAs closed. 
However, historic growth in the home health industry has been such
that there were still over 9,000 HHAs--more than there were in
October 1995--to provide services to Medicare beneficiaries. 
Further, half of the closures were in just four states--California,
Louisiana, Oklahoma, and Texas--three of which had experienced agency
growth well above the national average.  The closures could be a
market correction for overexpansion in light of the BBA's signal that
Medicare would not support the double-digit increases in spending of
the previous few years. 

The closures alone are not a measure of any impact on access for
Medicare beneficiaries to home health serviceswhich is the
predominant concern.  Since home health agencies require little
physical capital, other agencies may be able to quickly absorb the
staff and patients of closing agencies. 

We have attempted to monitor the impact of the interim payment system
on access for this Committee as well as for the House Committees on
Commerce and Ways and Means.  Last fall, we reported that interviews
with hospital discharge planners and local aging organization
representatives in seven states with high numbers of closures had not
indicated a change over the past year in the willingness or ability
of HHAs in their areas to serve Medicare beneficiaries.  We are
continuing this work, expanding the number of areas examined. 
Recently available claims information will allow us to extend this
monitoring further--pinpointing areas where there has been a decline
or leveling off of home health utilization.  We will provide the
Committee a report next month and another this summer on our ongoing
work to assess access to home health care. 


--------------------
\7 The BBA required the PPS to be implemented in fiscal year 2000. 
Subsequent legislation delayed this by 1 year. 

\8 See Medicare Home Health Benefit:  Impact of Interim Payment
System and Agency Closures on Access to Services (GAO/HEHS-98-238,
Sept.  9, 1998). 


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

The brief experience with some of the major Medicare provisions of
the BBA demonstrates the challenges to implementing meaningful
reform.  HCFA has fallen behind in instituting some changes and has
had difficulty implementing others because of constrained resources,
lack of experience, or inadequate data.  At the same time, various
provider groups have increasingly come to the Congress for relief. 
We believe that any significant alterations to key BBA provisions
should be based on thorough analysis or sufficient experience to
fully understand their effects. 


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

Mr.  Chairman, this concludes my statement.  I will be happy to
answer any questions you or the Committee Members may have. 


*** End of document. ***