Medicare: Outpatient Rehabilitation Therapy Caps Are Important Controls But Should Be Adjusted for Patient Need

Published by the Government Accountability Office on 1999-10-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division


       October 8,1999

       The Honorable Richard Burr
       The Honorable Peter Deutsch
       The Honorable James C. Greenwood
       House of Representatives

       Subject:         Medicare: Outpatient Rehabilitation Therabv Caps Are
                        Imnortant Controls But Should Be Adiusted for Patient Need

       To curb rapid spending growth, the Balanced Budget Act of 1997 (BBA)
       imposed payment controls for several types of Medicare providers that had
       previously been reimbursed on a cost basis. For outpatient rehabilitation
       therapy in particular,  BBA required Medicare to pay providers on the basis
       of a fee schedule; it also limited coverage beginning in 1999.’ Specificahy,
       the law provided for an annual $1,500 per-beneficiary cap on payments for
       outpatient physical therapy and speecManguage pathology services
       combined and a separate $1,500 cap on outpatient occupational therapy?
       Services provided by hospital outpatient departments (OPD) are exempt
       from the $1,500 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 numerous exceptions to the caps or
       eliminate them altogether. However, little evidence other than anecdotes
       has been presented to identify access problems resulting from these caps.
       In July 1999, you asked us to provide information on the (1) rationale for
       imposing per-beneficiary limits on Medicare’s coverage of rehabilitation
       therapy services and (2) effect of the therapy caps on Medicare
       beneficiaries’ access to needed care. To address these questions, we

       ‘P.L. 10533, sec. 4541.
       ‘Physical therapy indudes trea,tments%uch       as whirlpool baths, ultrasound, and
       therapeutic exert &es-to relieve pain, improve mobili@, maintain cardiopulmonary
       functioning, and limit the disability from an injury or disease. SpeechAan,qe      patholos
       services include the diagnosis and treatment of disorders of communication,      swallowing,
       oral motor and related cognitive functions. Occupational     therapy helps patients learn the
       ski& necessaryto perform daily tasks, diminish or correct pathology, and promote

                                    GAOIHEHS-00-15R         Medicare Outpatient Therapy Caps
analyzed Medicare provider-of-services  data; reviewed analyses by the
Medicare Payment Advisory Con-miss ion @ledPAC) of Medicare payment
data and prior GAO reports on this subject; and interviewed officials of
MedPAC and the Health Care Financing Administration (HCFA), the
agency responsible for administering Medicare. This work was performed
between July and September 1999 in accordance with generally accepted
government auditing standards.

In brief, the per-beneficiary caps on coverage of outpatient rehabilitation
therapy services are part of a larger effort by the Congress to curb
Medicare spending for post-acute care services. In particular, Medicare
spending for outpatient rehabilitation therapy services, between 1990 and
 1996, grew at nearly double the rate of Medicare spending overall. At the
same time, inadequate program controls failed to ensure that this spending
growth was warranted. Under the fee schedule and coverage caps
imposed by BBA, Medicare can moderate the price and utilization of these

The per-beneficiary caps are unlikely to affect the vast majority of
Medicare’s outpatient therapy users. Only a small share of beneficiaries
uses outpatient therapy extensively. Furthermore, most of the users with
greater needs will likely have access to hospitalOPDs, which are not
subject to the $1,500 caps. In addition, owing toHCFA’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 facility residents. Studies are
under way or planned to better assess the effect of the caps and evaluate
alternative utilization controls. BBA required HCFA to recommend a need-
based payment system by 2001, which could help target payments to
beneficiaries who genuinely require more services than are covered under
the current dollar limits. Such a system would raise the dollar limits for
therapy users with extensive needs and lower them for users with modest


Rehabilitation therapy for beneficiaries is provided under the Medicare
program’s two benefit parts: “hospital insurance,” or part A, which covers
inpatient hospital, skilled nursing facility, hospice, and certain home health
care services; and “supplementary medical insurance,” 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.

A variety of providers offers outpatient rehabilitation services to Medicare
beneficiaries. The major providers of outpatient therapy are hospital

                         GAOiHfWS-00-15R     Medicare   Outpatient   Therapy   Caps
OPDs, rehabilitation agencies, comprehensive outpatient rehabilitation
facilities (CORFS),~ and nursing facilities. While hospital OPDs served
most of the users in 1996, other providers accounted for most of the
payments (see table l).”

       Table 1: Medicare Outoatient Theraw Users and Pavments,
       bv Site of Service, 1996

       Site of service                     Users (percent)            Payments (percent)
       Hospital OPD                         58                         24
       Rehabilitation agency                25                         39
       Nursing facility’                    13                         29
     . CORF                                 4                          8
     ?ayments to nursing facilities reflect services provided by outside
                                                                       _ contractors as
well as
     by nursing facilities themselves.

    Source: MedPAC, 1999.

F?rior to  BBA payment reforms, Medicare experienced rapid growth in the
services beneficiaries receive following hospitalization (also called post-
acute care services), which had been subject to few spending controls.
Rehabilitation therapy services-for both inpatients and outpatients-
constituted a substantial share of post-acute care spending. BBA required
that skilled nursing facilities @NT’s) and home health agencies--major
post-acute care providers under part A-be paid a prospective rate per unit
of care, rather than a fee for each service deliveredm5The expectation was
that prospective payment systems would curb Medicare spending by
controlling payment rates and utilization. BBA also included changes to
part B payment and coverage policies designed to control Medicare
spending. The controls over these part B services-those applicable to
outpatient rehabilitation therapy services-are the subject of the following

“CORFs offer a broad array of services under physician supervisiorr-such        as skilled
nursing, psychological    services, drugs, and medical devices-and must have a physician
on staff.
“If these individuals  qualify for therapy services under Medicare’s home health benefit,
payment and coverage rules governing the home health benefit-not          the outpatient
therapy benefit-would        apply. If they do not qualify for the home health benefit, the
therapy services provided by home health agencies would be subject to the caps.
MedF’AC estimates that the share of therapy services provided under the latter condition
‘A prospective   rate is a tied,   predet ermined   lump-sum   payment     for each unit of care.
Since not all patients require the same amount of care, the rate paid for each patient is
‘case-mix” adjusted to take into accountthe natureof the patient’scondition and
expected care needs.

3                                  GAOMEHS-OO-15R          Medicare      Outpatient   Therapy       Caps

The $1,500 caps on outpatient physical therapy and speecManguage
pathology services combined and occupational therapy represent part of a
larger BBA strategy to control rapid growth in payments for rehabilitation
therapy services. Between 1990 and 1996, overall spending for Medicare
grew at an average annual rate of 9.7 percent. In contrast, payments for
outpatient rehabilitation therapy during the same period rose at an average
rate of 18 percent a year, from $353 million to $962 million.6 By provider,
payments to CORFs rose annually an average of 35 percent; rehabilitation
agencies, 23 percent; and hospital OPDs, 10 percent.’ Analyses are not
available to indicate, in the aggregate or by provider type, the shares of this
spending growth attributable to the number of outpatient therapy users,
services per user, or payment per service.

Some of the increase in Medicare spending for outpatient therapy since
1990 was expected because of then-new Medicare requirements for
nursing home care. However, some of the spending prior to BBA was also
attributable to the financial incentives of the previous payment methods,
which encouraged service use, and to the lack of program oversight to
prevent inappropriate payments. In response, BBA imposed various
payment controls, several of which govern payments for outpatient
therapy services.

Pre-BBA Medicare Lacked
Suf6cient   Pavxnent Controls
for Ouimatient   Theram

As we reported in 1995: the nursing home reforms contained in the
Omnibus Budget Reconciliation Act of 1987 required nursing facilities for
the first time to conduct a medical assessment of all patients, determine
what services (including rehabilitation therapy) they needed to improve
their condition, and make those services available. These requirements,
which became effective in 1990, increased demand for therapy services.
To meet this demand, many nursing facilities contracted with
rehabilitation agencies to provide therapy services to their residents. A
sharp rise in numbers of rehabilitation agencies occurred after 1992;the
year that independent therapists, who were already subject to per-
beneficiary cost limits, were placed on a fee schedule.MedPAC notes that

‘these fieques, which are from Health Care ,SDendinz and the Medicare Prozram     : A Data
I&& (MedPAC, July 1998), do not include payments for part B therapy services      provided
by nursing facilities, independent therapists, or physicians.
‘Health Car Swndina and the Medicare F?xzram : A Data Book (MedPAC, July          1998).
%I&icare:   hater     Rules Needed to Curtail Overcharees for Theraw in Nursing   Homes
(GAOEIEHS-9523,       Mar. 30,1995).

4                           GAO/HEHS-00-15R        Medicare Outpatient Therapy Caps
in subsequent years, some independent therapists f0rrne.d rehabilitation
agencies, which were not subject to per-beneficiary coverage limits
applied to independent therapists or to a fee schedule, and continued to be
reimbursed their reasonable costs.’

Prior to BBA, Medicare paid institutional providers”’ based on their
“reasonable costs,“a payment method that was not effective in curbing
Medicare spending. Moreover, providers of part B therapy services to
nursing facility residents had the option of billing Medicare directly,
instead of through the nursing facility, without the facility or attending
physician &firming whether the services were necessary or provided as
claimed. At the same time, scrutiny of these bills by Medicare’s claims
processors was not sufticient to spot improbably high costs or levels of
services claimed. As we reported in 1996:’ these circumstan ces made
nursing homes an attractive target for opportunists who’ could bill
Medicare for unnecessary services or services not provided.

BBA Pament Reforms Designed To
Reward Efficient Provision of Care

Several reforms in BBA are designed to curtail unnecessary senrice use
and slow expenditure growth a fee schedule limits the prices Medicare
pays for services; per-beneficiary coverage caps seek to limit service use;
and a requirement that nursing facilities bill for all services furnished to
their residents, including, those delivered by outside providers, increases
these facilities’ accountability and Medicare’s ability to monitor service
use. Specifically, BBA provisions include the following.

l   All providers of part B-covered therapy services are paid under the
    Medicare fee schedule for physicians’ services, effective January 1,
    1999. (Previously, only therapy services furnished in physicians’
    offices and by independent physical and occupational therapists were
    paid under the fee schedule.) The fee schedule sets the price Medicare
    will pay for a given service.

l   Beneficiaries receiving outpatient rehabilitation therapy from any
    provider except a hospital OPD are subject to limits of $1,500 for
    physical therapy and speech/language pathology services combined,

Medicare Payment Advisory Commission, Reoort t Con, ess Co text for a Ghan, *e 3
Mv                   (Washington, D-C.: Medicare Pasent     T&ox-y Commission, June
 1998, p. 81).
‘bstitutional  providers include hospitals, skilled nursing and nursing facilities,
rehabilitation agencies, and home health agencies. Excluded are private physicians and
independently practicing therapists.
“Fraud and Abuse: Providers Taxzet Medicare Patients in Nursing Facilities (GAOIHEHS
9618, Jan. 24, 1996).

5                          GAOiHEHS-OO-1SR        Medicare   Outpatient   Therapy   Caps
    and $1,500 for occupational therapy.” Whereas the fee schedule
    controls per-service prices, these caps are coverage limits to control
    volume. This provision takes effect this year. Beginning in 2002, the
    $1,500 cap will be increased by the rate of health care inflation.

l   All bills for part B rehabilitation therapy provided to nursing facility
    residents must be submitted by the nursing facility; providers other
    than the nursing facility may no longer bill Medicare directly. This
    requirement makes nursing facilities accountable for the services
    provided to their residents and enables Medicare to monitor the
    services these residents receive.

l   By January 1,2001, HCFA is required to develop recommendations for
    a revised payment policy for rehabilitation therapy services based on a
    classification of individuals, in both inpatient and outpatient settings,
    by diagnostic category and prior use of services. A diagnosis-based
    system can better account for differences in patients’ therapy needs, in
    contrast to the less targeted utilization control afforded by the caps.


The per-beneficiary caps will likely affect only a small proportion of
therapy users. A MedPAC analysis shows that, in 1996, most users (86
percent) did not exceed $1,500 in payments for physical therapy and
speech/language pathology services combined or for occupational
therapy.13 Furthermore, the proportion of beneficiaries whose use of
outpatient therapy services will not exceed $1,500 in payments could be
even higher in 1999. That is, the 1996 data reflect Medicare payments
based on provider-reported costs, whereas the fee schedule, which became
effective January 1,1999, likely pays many providers at lower prices for
therapy services. Thus, beneficiaries today could receive more services
before reaching $1,500 in payments than under the former cost-based

Mitiatine    Factors Essentiallv  Remove
Coverape    Limits for Most Users

Even for beneficiaries who exceed $1,500 in Medicare-covered services,
mitigating factors exist. First, under the BBA exemption, Medicare
beneficiaries have no limits on coverage for rehabilitation therapy

“Lndependent therapists had been under a $900 annual limit before BBA
*A July 1998report sponsoredby the National Associationfor 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.

6                         GAO/HEHS-00-15R       Medicare   Outpatient   Therapy   Caps
provided by hospital OPDs, which are widely available nationwide. A
MedPAC analysis indicates that, in 1996, almost 60 percent of Medicare
users of rehabilitation services received care from hospitalOPDs.
Moreover, our analysis of data from a combination of sources indicates
that, in 1998, I4

    l    95 percent of all beneficiaries lived in a county in which there was a
         hospital OPD that could provide outpatient therapy service$
    l    98 percent of beneficiaries in urban counties had access to one of
         these hospital OPDs, and
l       86 percent of beneficiaries in rural counties had access to one ofthese
        hospital OPDs.

A second mitigating factor is that the caps will initially not be applied as
specified in BBA HCFA’s implementation of the caps x%l involve many
programming changes to multiple automated information systems-
changes that HCFA is unable to undertake now because of 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 across
providers. Instead, since January 1,1999, HCFA has 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 thatnoninstitutionalized
beneficiaries may switch to a new provider when they have reached the
$1,500 limit in order to continue receiving Medicare coverage for
outpatient therapy services.

Nursing Facilitv  Residents at Greater
Risk of Exceeding   Coverage Limitations
Than Other Beneficiaries

The effect of the per-beneficiary caps on nursing facility residents is less
clear. On the one hand, the hospital OPD safety valve is not available to
these beneficiaries. HCFA policy explicitly states that the hospital OPD
exemption does not apply to therapy services mhed          to nursing facility
residents. Moreover, under new billing requirements, only the nursing
facility in which a benefkiary resides is permitted to bill Medicare for
outpatient therapy services provided to the resident, regardless of the
entity that actually delivered the services. Therefore, unlike their

“We analyzed data from HCFA’s December 1998 Provider of Services File, December 1998
Medicare Managed Care Penetration File, and hospitals’ fiscal year 1996 Medicare cost
%tionwide      in 1996, facilities that provided outpatient rehabilitation therapy included
4,428 hospital OPDq 195 rehabilitation hospitals, 2,957 rehabilitation agencies ; and 585

7                             GAO/HEHS-OO-15R Medicare Outpatient Therapy Caps
noninstitutionalized  counterparts, nursing facility residents cannot switch
providers to restart the $1,500 coverage allowance.

 On the other hand, nursing home residents who could be vulnerable to
exceeding the $1,500 coverage limitations-like    those needing
rehabilitation therapy for such conditions as stroke or hip fractures--may
have other sources of covered care. In such cases these beneficiaries
would likely have received rehabilitation services before the outpatient
therapy coverage limits begin to apply. For example, 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 Medicare coverage
of a SNF stay. Under Medicare’s SNF benefit, beneficiaries can receive up
to 100 days of care, during which time the SNF is required to provide all
necessary therapy services. When Medicare’s SNF coverage ends, a
nursing facility resident can continue to receive outpatient therapy
services under Medicare part B, subject to the outpatient coverage limits.
Under these circumstances, the caps are likely to affect only a portion of
therapy users who are nursing facility residents. And of these, some
beneficiaries may be eligible for alternative forms of coverage for these
services, such as Medicaid or private insurance.

Efforts   Underway   To
Monitor    and Refine Cam

Several government entities plan, or have work under way, to analyze
Medicare’s outpatient rehabilitation therapy payments. These studies will
assess the potential and actual effect of the caps and fee schedule.
MedPAC is planning to update its outpatient rehabilitation therapy
payment analysis using 1998 Medicare claims data It also plans to monitor
and evaluate changes in therapy use across providers and in beneficiaries’
utibzation of services. The Department of Health and Human Services’
Office of the Inspector General has two studies under way regarding
outpatient rehabilitation therapy in nursing facilities. The fir& which is
scheduled to be available this fall, will analyze payments for nursing
facility residents in 1998 to determine how the caps would have aEected
them had they been in place at the time. The second study will examine
selected payment data and conduct on-site medical reviews from the fust
quarter of 1999 when the caps and fee schedule were first in effect.

BBA requires that HCFA report on a patient classification system based on
beneficiary therapy needs as a possible alternative to the uniform caps.
This report, due January 1,2001, could be significant because such a
system would account for differences in patients’ therapy needs and help
ensure adequate coverage for those beneficiaries who require an
extraordinary level of services. It is likely that such a system would also
result in coverage limits that are lower than current levels for beneficiaries

                         GAOIHEHS-00-15R    Medicare   Outpatient   Therapy   Caps
with modest outpatient therapy service requirements. The fact thatmost
users in 1996 would not have been affected by the caps suggests that a
need-based approach could have more stringent limits on most users. A
need-based method of payment would discourage providers from
delivering more services than a patient’s health status warrants in order to
maximize revenues. Such a system could result in program savings.


 Given various mitigating factors, we believe that most beneficiaries-with
the exception of certain nursing facility residents-would   not face
 coverage gaps because of per-beneficiary caps on therapy services.
However, detailed information on who will be affected and the extent of
the impact are currently unavailable because the caps have not been in
effect for a full year. Therefore, modifkations of the caps to exclude
certain beneficiaries may be premature.

The expectation that few beneficiaries are likely to exceed $1,500 in
services each for combined physical and speecManguage therapy services
and for occupational therapy services could raise questions about the need
for coverage limits at aLl. However, experience suggests that a fee
schedule alone may not control spending if use of services increases, thus
undermining BBA’s comprehensive strategy for constrainingMedicare’s
outpatient therapy spending. The per-beneficiary caps, as a volume
restraint, are integral to the BBA spending control strategy.

Nevertheless, coverage limits should reflect differences in patients’ needs.
HCFA is required to recommend a patient classification system that could
lead to need-adjusted limits. Such adjustments would raise the dollar
limits for the categories of patients with extensive service needs and lower
them for those with only modest service requirements. If such a system is
put in place, the safety valve of the hospital OPD exemption may no longer
be needed.


In written comments on a draft of this correspondence, HCFA agreed with
our assessment that nursing home residents would be the beneficiaries
most likely to feel the effect of the caps. HCF’A also expressed concern
that the caps are insufficient for a “significant” number of beneficiaries.
HCFA’s concern is consistent with our contention that a patient
classification system is needed to allow Medicare payments for outpatient
therapy to reflect patient needs. HCFA stressed the agency’s intention to
continue to monitor the situation and stated that it would examine
possible alternatives to the caps. Such proposals, accordingto HCFA,
would likely require changes in leg&&on.        HCFA also provided technical

9                      GAOIHEHS-00-15R     Medicare   Outpatient   Therapy   Caps
    comments that we incorporated    into the final correspondence as

    We are sending copies of this correspondence to The Honorable Nancy-
    Ann Min DeParle, HCFA Administ;rator, and other interested parties, and
    we will make copies available to others on request. If you or your staff
    have questions, please callme at (202) 512-7119 or Carol Carter, Assistant
    Director, at (312) 220-7711. Deborah Spielberg, James E-Mathews, and
    Hannah F. Fein also made key contributions to this correspondence.

               , .I’I
: _. ALi%fxA
   Laura A. Dummit
   Associate Director
   Health Financing and Public Health Issues


    10                     GAOIHEHS-OO-15R     Medicare   Outpatient   Therapy   Caps
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