oversight

Skilled Nursing Facilities: Medicare Payment Changes Require Provider Adjustments But Maintain Access

Published by the Government Accountability Office on 1999-12-14.

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

                 United States General Accounting Office

GAO              Report to the Chairman and Ranking
                 Minority Member, Committee on
                 Finance, U.S. Senate and the Chairman,
                 Special Committee on Aging, U.S. Senate

December 1999
                 SKILLED NURSING
                 FACILITIES
                 Medicare Payment
                 Changes Require
                 Provider Adjustments
                 But Maintain Access




GAO/HEHS-00-23
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-283347

      December 14, 1999

      The Honorable William V. Roth, Jr.
      Chairman
      The Honorable Daniel Patrick Moynihan
      Ranking Minority Member
      Committee on Finance
      United States Senate

      The Honorable Charles E. Grassley
      Chairman
      Special Committee on Aging
      United States Senate

      Since the mid-1980s, Medicare spending for skilled nursing facility (SNF)
      services has risen dramatically. Between 1986 and 1998, spending
      increased, on average, 30 percent annually, climbing from $578 million to
      $13.6 billion. This spending growth is due to a number of factors. SNF care,
      which once comprised relatively low-intensity nursing care and therapy,
      has in recent years included a growing number of services that previously
      were provided only in hospital settings. Changes in the nature of the
      services delivered and in the facilities that furnish SNF care, as well as the
      incentives of Medicare’s payment method for acute hospital services, have
      expanded the range of services offered. At the same time, the former
      cost-based payment method for SNF services and a lack of appropriate
      program oversight encouraged SNFs to provide excessive ancillary services
      to SNF patients. As a result, the number of Medicare beneficiaries using SNF
      care and the number of services furnished to each patient have surged,
      making the Medicare SNF benefit one of the fastest growing components of
      Medicare spending.

      In an effort to control spending growth, the Congress directed the Health
      Care Financing Administration (HCFA) in the Balanced Budget Act of 1997
      (BBA) to develop a prospective payment system (PPS) for skilled nursing
      facility services provided to Medicare beneficiaries.1 In July 1998,
      Medicare began the transition to a PPS, paying fixed, predetermined rates
      for each day of care—a major change from the former system of
      cost-based reimbursement. Previously, facilities benefited from furnishing
      more ancillary services to Medicare patients, without regard for their
      services’ price or necessity. The PPS attempts to create incentives for
      providers to control their daily costs and deliver care more efficiently.

      1
       P.L. 105-33, section 4432(a).



      Page 1                           GAO/HEHS-00-23 SNF Access Under New Payment System
                   B-283347




                   Since implementation of the PPS began, concerns have been raised that
                   weaknesses in the payment system’s design may threaten access to SNF
                   care for some high-cost beneficiaries. At the same time, some nursing
                   home chains have claimed that their eroding financial performance is a
                   result of the PPS. These concerns have prompted Congressional debates on
                   modifications to the SNF PPS. You asked us to assess (1) the initial effect of
                   the SNF PPS on Medicare beneficiaries’ access to care, (2) the initial effect
                   of the SNF PPS on providers, and (3) the role the SNF PPS has played in the
                   poor financial performance of large nursing home chains. To do this, we
                   conducted a nationwide survey of hospital discharge planners, interviewed
                   industry analysts as well as representatives from several nursing home
                   chains, and reviewed financial information from two chains, Sun
                   Healthcare Group, Inc., and Vencor, Inc., which were experiencing large
                   losses and recently filed for bankruptcy. Our work was performed in
                   accordance with generally accepted government auditing standards
                   between June and October 1999. (For a detailed discussion of our scope
                   and methodology, see appendix I.)


                   Medicare beneficiaries’ ability to obtain needed care does not appear to
Results in Brief   have decreased since the implementation of the SNF PPS, although some
                   patients may stay longer in the hospital before being admitted to a nursing
                   home or may receive care from other post-acute-care providers. The PPS
                   does appear, however, to have affected the willingness or ability of some
                   nursing homes to accept certain types of Medicare patients. Hospital
                   discharge planners reported that facilities are reluctant to admit patients
                   requiring certain high-cost services, including some expensive drug
                   treatments and infusion therapy, indicating that the payments for some
                   types of SNF patients may be too low. We also found that Medicare patients
                   needing short-term rehabilitation are preferred by nursing homes, raising
                   concerns that payments for these patients may be too high. These findings
                   are confirmed in recent surveys of hospital discharge planners and nursing
                   home administrators by the Office of Inspector General of the Department
                   of Health and Human Services (OIG).

                   Although the new payment system results in major changes in financial
                   incentives, it is likely that aggregate SNF payments to providers are
                   adequate, given that inflated costs were used to establish the per diem
                   payment rates. However, the case-mix classification system used to adjust
                   payments to reflect the needs of patients may not appropriately allocate
                   payments across patients and providers. Payments, therefore, may be too
                   low for certain types of patients and too high for others. Congress’ recent



                   Page 2                       GAO/HEHS-00-23 SNF Access Under New Payment System
             B-283347




             modifications to the PPS will temporarily increase payments for certain
             types of patients and thus may alleviate any current disincentives to admit
             patients. But even without these modifications, the generally low
             proportion of patient-days covered by Medicare at most nursing homes
             dampens the initial effects of PPS on providers, and the transition to the full
             PPS rates was intended to give them time to adjust. Some facilities will
             have to make bigger changes in their treatment patterns, particularly
             facilities with a large proportion of patient-days covered by Medicare,
             those with inefficient practices, and those that historically furnished
             excessive services to patients to maximize revenues. Other facilities, such
             as those that care for patients with extensive resource needs and those
             that have changed their mix of patients since 1995 (the year upon which
             payments were based), may be more selective in their admission policies,
             at least in the short term, until refinements in the classification system
             fully account for differences across patients.

             The SNF PPS is only one of many factors contributing to the poor financial
             performance of Sun Healthcare Group, Inc., and Vencor, Inc., two
             corporations that operate a large number of nursing homes. The large total
             losses reported by the corporations stem from high capital-related costs
             that have shrunk SNF margins; reduced demand for ancillary services,
             related to several BBA provisions; and substantial nonrecurring expenses
             and write-offs, reflecting reductions in future anticipated earnings.


             The Medicare SNF benefit consists of inpatient skilled nursing and
Background   rehabilitative services furnished by a nursing home that is
             Medicare-certified.2 To qualify for SNF services, a Medicare beneficiary
             must need daily skilled nursing or rehabilitative therapy services, generally
             within 30 days of a hospital stay of at least 3 days in length, and must be
             admitted to the nursing home for a condition related to the hospitalization.
             When the beneficiary meets these conditions, Medicare covers all
             necessary services, including room and board; nursing care; and ancillary
             services such as drugs, laboratory tests, and physical therapy, for up to 100
             days of care per benefit period.3 Beginning on the 21st day of care, the
             beneficiary is responsible for a daily coinsurance payment, which equals
             $96 in 1999. Medicare beneficiaries residing in nursing homes who are not


             2
              Such facilities are referred to as SNFs.
             3
              A benefit period begins on the first day of an inpatient hospital stay and ends 60 days after the
             beneficiary is discharged from the hospital or from skilled care in a SNF or other inpatient facility
             providing skilled nursing or rehabilitative services. There is no limit to the number of benefit periods a
             beneficiary may have.



             Page 3                                  GAO/HEHS-00-23 SNF Access Under New Payment System
                            B-283347




                            eligible for part A coverage of the inpatient stay4 may continue to receive
                            coverage for some ancillary services, subject to limitations on the
                            coverage for rehabilitation therapy services under part B.5

                            Skilled nursing services are provided by both hospital-based and
                            freestanding facilities. In addition, rural hospitals designated as swing-bed
                            facilities can use acute-care beds to provide SNF services.6 The number of
                            Medicare-certified SNFs has grown, on average, about 6 percent per year
                            throughout the 1990s, reaching 14,860 in 1998. About three-quarters are
                            freestanding facilities. A majority (66 percent) of nursing homes are
                            for-profit entities, and about half are owned or operated by corporations
                            operating multiple facilities, known as chains. Most patients in nursing
                            homes have their care paid for through the Medicaid program.
                            Medicare-covered SNF days account for about 9 percent of total nursing
                            home days. Prior to implementation of the PPS, Medicare revenues
                            accounted for about 10 percent of nursing home revenues, on average.

                            The range of services furnished by nursing homes varies substantially.
                            Some facilities provide traditional, low-intensity nursing care and therapy.
                            Others furnish higher-intensity rehabilitative therapies and complex
                            medical services, such as parenteral feeding and ventilator care, that
                            previously were provided only in hospital settings.


Growth in Medicare          The Medicare SNF benefit has been one of the fastest-growing components
Spending for SNF Services   of Medicare spending. Since 1990, Medicare expenditures for SNF services
                            have increased, on average, 25 percent annually, reaching $13.6 billion in
                            1998. This growth is due primarily to a rise in the number of beneficiaries
                            using SNF services and an increase in the number and type of services
                            provided to SNF patients. Between 1990 and 1997, the number of
                            beneficiaries receiving SNF care more than doubled, rising from 638,000 to


                            4
                             Medicare part A (or hospital insurance) covers inpatient hospital, skilled nursing facility, hospice, and
                            certain home health care services. Medicare part B (or supplementary medical insurance) covers
                            physician and hospital outpatient services, outpatient rehabilitation services, home health services
                            under certain conditions, diagnostic tests, and ambulance and other medical services and supplies.
                            5
                             BBA required a $1,500 per-beneficiary cap on payments for part B-covered physical and speech
                            therapy services and a separate $1,500 cap on part B-covered occupational therapy. See 42 U.S.C.
                            § 1395l(g)(2). Recent changes in the law delay implementation of the spending caps until fiscal year
                            2002.
                            6
                             Hospitals participating in the Medicare swing-bed program may use their beds for either acute care or
                            post-acute care. To be certified as a swing-bed provider, a hospital must have 100 beds or fewer and be
                            located in a rural area. Payments for routine SNF services provided in swing-bed hospitals continue to
                            be based on Medicare’s average routine payment for freestanding SNFs within each region. Capital and
                            ancillary costs continue to be reimbursed on a facility-specific cost basis. Beginning in July 2001,
                            swing-bed hospitals will receive prospective payments comparable to those to other SNFs.


                            Page 4                                  GAO/HEHS-00-23 SNF Access Under New Payment System
B-283347




1.6 million; Medicare’s average payment per SNF day also more than
doubled, from $98 in 1990 to $262 in 1998. At the same time, the number of
days of care per SNF patient served dropped from 37 to 32. Much of the
growth in Medicare per diem expenditures was due to increases in
payments for ancillary services. Those payments increased 17 to
20 percent annually between 1992 and 1995, compared with 5 to 7 percent
for routine services.

Medicare’s cost-based reimbursement method, combined with a lack of
appropriate program oversight, provided few checks on the growth in
Medicare spending for SNF services. Ancillary cost growth, in particular, is
considered to have been excessive.7 Before implementation of the BBA,
nursing homes were paid the reasonable costs they incurred in providing
Medicare-covered services. Routine costs, which include general nursing,
room and board, and administrative overhead, were subject to cost limits,8
but payments for ancillary services and capital-related costs were virtually
unlimited. Indeed, as a facility’s costs of ancillary services rose, more of its
overhead costs could be assigned to the program.9 Because higher
ancillary service costs triggered higher payments, Medicare’s payment
method offered providers no financial incentive to furnish only clinically
necessary services or to deliver them efficiently. Indeed, high ancillary
costs could be used to justify a request for exceptions payments for
routine costs over and above the cost limits.10 As a result, a provider’s mix
of services did not necessarily reflect the complexity of its cases or the
true needs of its patients.




7
 See Medicare Post-Acute Care: Better Information Needed Before Modifying BBA Reforms
(GAO/T-HEHS-99-192, Sept. 15, 1999); Department of Health and Human Services, Office of Inspector
General, Office of Evaluation and Inspections, Physical and Occupational Therapy in Nursing Homes:
Cost of Improper Billings to Medicare (OEI-09-97-00122, Aug. 1999); Medicare: Tighter Rules Needed to
Curtail Overcharges for Therapy in Nursing Homes (GAO/HEHS-95-23, Mar. 1995).
8
 For cost reporting periods beginning on or after October 1, 1997, the cost limits (before applicable
wage index adjustments) were $110.82 for urban freestanding facilities, $108.28 for rural freestanding
facilities, $155.96 for urban hospital-based facilities, and $137.52 for rural hospital-based facilities.
9
 Contract arrangements with ancillary service providers were found to result in markups of
800 percent or more over the direct cost of the therapy service. See Medicare: Tighter Rules Needed to
Curtail Overcharges for Therapy in Nursing Homes (GAO/HEHS-95-23, Mar. 1995), p. 13.
10
  Under cost-based reimbursement, providers with reasonable costs that exceeded the routine cost
limits could be granted exceptions from the limits if they provided information indicating that they
served patients requiring more services than average. Those providers were paid an amount equal to
the applicable cost limit plus an adjustment to reflect their higher costs.



Page 5                                  GAO/HEHS-00-23 SNF Access Under New Payment System
                           B-283347




Balanced Budget Act        On July 1, 1998, HCFA began phasing in a Medicare PPS for SNF care, as
Provisions Aim to Better   required by the BBA. Under the new system, facilities receive a fixed
Control Costs              payment for each day of care provided to a Medicare-eligible beneficiary.11
                           During a 3-year transition period, each facility’s per diem payment is a
                           blend of a facility-specific (cost-based) rate and a federal per diem rate.12
                           The facility-specific rate is based on the facility’s 1995 average allowable
                           costs for SNF services, updated to the current year.13 The federal portion of
                           the rate is based on the average daily cost of providing all
                           Medicare-covered SNF services in fiscal year 1995. Total costs were
                           updated for inflation between the 1995 base year and 1999 by the SNF
                           market-basket index minus 1 percentage point, as required by the BBA.14
                           Because not all patients require the same amount of care, the federal per
                           diem rate paid for each patient is case-mix adjusted. Patients are classified
                           into 44 case-mix groups based on their clinical condition, functional
                           status, and expected use of certain services (particularly physical,
                           occupational, and speech therapy).15 Each case-mix group has an
                           associated relative weight that reflects the costliness of providing services
                           to patients in that group relative to the average costliness of patients
                           across all groups. The relative weight adjusts the per diem rate up or
                           down. A facility then receives the same daily payment for all its patients in
                           each group. By establishing fixed payments and including all services
                           under the per diem payment, the PPS attempts to provide incentives for
                           nursing homes to deliver care more efficiently. Facilities that can care for
                           beneficiaries for less than the case-mix adjusted per diem payment can
                           retain the difference as profit. Those with average costs higher than the
                           per diem payments they receive will suffer a loss.

                           In addition to calling for a SNF PPS, the BBA requires nursing homes to
                           submit to Medicare all bills for Medicare-covered services furnished to


                           11
                             The per diem payments are adjusted to account for differences in area wages.
                           12
                            In the first year of the transition, the blended rate is 75 percent facility-specific, dropping to
                           50 percent in the second year and 25 percent in the third year. Subsequently, payments will be based
                           on the federal rate only.
                           13
                             Base-year costs are updated to the current year by applying an annual update factor for each
                           intervening year equal to the increase in the SNF market-basket index minus 1 percentage point, as
                           required by the BBA. See 42 U.S.C. § 1395yy(e)(3)(B)(i). The 1-percentage-point reduction reflects
                           congressional concern that the base year included inappropriate costs.
                           14
                            The market-basket index measures the annual change in the prices of goods and services providers
                           use in producing SNF services.
                           15
                             The groups are defined by a classification system developed by HCFA contractors. The categories of
                           this system are known as Resource Utilization Groups, or RUGs. For the Medicare SNF PPS, version
                           III of the classification system is being used.



                           Page 6                                GAO/HEHS-00-23 SNF Access Under New Payment System
                   B-283347




                   their residents, regardless of who provides the services.16 Previously, when
                   facilities had agreements with external providers to furnish ancillary
                   services, Medicare allowed those external providers to bill directly for
                   services covered under part B, even for patients in a Medicare-covered
                   (part A) SNF stay. Requiring consolidated billing for all services furnished
                   during a Medicare-covered SNF stay in conjunction with the PPS was
                   necessary so that facilities could not reduce their costs simply by shifting
                   the provision of ancillary services to part B providers, thereby stymieing
                   Medicare’s efforts to control total expenditures.17

                   The BBA also includes a per-beneficiary payment cap of $1,500 for part
                   B-covered physical and speech therapy and a $1,500 cap for part
                   B-covered occupational therapy.18 These limits do not pertain to Medicare
                   beneficiaries during a Medicare-covered SNF stay, but can affect Medicare
                   beneficiaries if their nursing home stay is not covered by Medicare. The
                   provision likely will limit the revenues nursing homes and other providers
                   earn from furnishing therapy services to nursing home patients under part
                   B. Recent changes in the law delay implementation of the spending caps
                   until fiscal year 2002.


                   Our nationwide survey of 153 randomly selected hospital discharge
PPS May Slow SNF   planners suggests that nursing home behavior is changing with regard to
Placements for     admission practices. Nursing homes have become more cautious in
Certain Medicare   accepting patients, favoring some types of patients over others when
                   making admission determinations. Forty-three percent of our survey
Beneficiaries      respondents mentioned that facilities prefer to admit patients needing
                   short-term rehabilitation treatment, while nearly two-thirds reported a
                   recent increase in difficulty placing Medicare beneficiaries needing certain
                   types of treatment, including some costly nontherapy ancillary services.
                   Yet, despite slower placements for some Medicare beneficiaries, few
                   beneficiaries are experiencing barriers to appropriate care.

                   According to the discharge planners, facilities have become more
                   cautious. Before accepting any patient, most facilities now appear to be
                   assessing the beneficiary’s condition more closely, requesting medical
                   records, reviewing drug administration charts, and even sending staff to
                   the hospital for in-person assessments. This behavior is confirmed in a

                   16
                     See 42 U.S.C. § 1395y(a)(18).
                   17
                    Implementation of the consolidated billing requirement has been delayed for residents of SNFs who
                   are not covered by Medicare (that is, patients who have exhausted their part A SNF benefit or who
                   were not eligible for part A coverage).
                   18
                     The caps are not applicable to services furnished through hospital outpatient departments.


                   Page 7                                 GAO/HEHS-00-23 SNF Access Under New Payment System
B-283347




recent survey of nursing home administrators conducted by the OIG in
which most administrators stated that they now scrutinize patients’
medical status to a greater extent than they did prior to implementation of
the PPS.19 In so doing, the nursing home may delay the hospital discharge
process and extend the beneficiary’s hospital stay.

Hospital discharge planners indicated that nursing homes favor some
types of patients over others when making admission determinations.
About 43 percent of those surveyed indicated that, under the PPS, nursing
homes prefer to admit patients needing short-term rehabilitation for
conditions such as stroke and hip replacement. In fact, 31 percent of
respondents reported that facilities are actively recruiting such patients. A
recent survey of hospital discharge planners conducted by OIG also found
that patients with some conditions (including orthopedic and stroke
patients and those requiring physical, rehabilitative, speech, and
occupational therapies) are easier to place than before the payment
change.20 OIG’s survey of nursing home administrators supports this finding
as well: 46 percent of administrators in that survey reported that under PPS
they were more likely to admit patients requiring special rehabilitation
services, such as physical, occupational, or speech therapy.

By contrast, nearly two-thirds of the discharge planners we surveyed
reported a recent increase in difficulty placing certain Medicare
beneficiaries for a Medicare-covered SNF stay. Urban and rural hospitals
reported difficulty placing patients at nearly an identical rate. The most
frequently mentioned difficult placements were those patients requiring
expensive drug treatment or infusion therapy (see table 1). Intravenous
antibiotics, which fall into both of these categories, were cited most
frequently of all specific medical treatments. Other treatments mentioned
repeatedly included chemotherapy and total parenteral nutrition.21 A few
medical needs were cited as problems, not because of the treatments
themselves, but because of the transportation costs involved in providing




19
  Department of Health and Human Services, Office of Inspector General, Office of Evaluation and
Inspections, Early Effects of the Prospective Payment System on Access to Skilled Nursing Facilities:
Nursing Home Administrators’ Perspective (OEI-02-99-00401), Oct. 1999.
20
  Department of Health and Human Services, Office of Inspector General, Office of Evaluation and
Inspections, Early Effects of the Prospective Payment System on Access to Skilled Nursing Facilities
(OEI-02-99-00400, Aug. 1999).
21
 This form of intravenous feeding supplies all of a person’s nutritional requirements. It is a skilled
service, requiring an intravenous tube or catheter placed in a large vein to administer the feeding
solution.



Page 8                                  GAO/HEHS-00-23 SNF Access Under New Payment System
                                        B-283347




                                        the treatment.22 This appeared to be the problem for the respondents who
                                        cited difficulty placing dialysis patients. Our findings are consistent with
                                        those of OIG; 58 percent of the hospital discharge planners surveyed by OIG
                                        reported that Medicare patients requiring extensive services such as
                                        intravenous feedings, intravenous medications, or ventilator/respirator
                                        care have become more difficult to place in nursing homes in the past
                                        year. Similarly, 53 percent of the nursing home administrators surveyed by
                                        OIG reported that they were less likely under PPS to admit patients requiring
                                        expensive services and supplies.

Table 1: Discharge Planners Reporting
Slowed SNF Placements, by Type of                                                                                                    Percentage
Medical Need                            Medical needa                                                                                  reporting
                                        Expensive drugs                                                                                         48
                                        Infusion therapy                                                                                          4
                                        Ventilator care                                                                                         29
                                        Dialysis                                                                                                28
                                        Wound care                                                                                              26
                                        Care for decubitus ulcers                                                                               24
                                        Tube feeding                                                                                            22
                                        a
                                         Categories are not mutually exclusive.

                                        Source: GAO Survey of hospital discharge planners, Aug. 1999.



                                        While citing a recent increase in SNF placement delays among Medicare
                                        beneficiaries, several discharge planners noted that patients requiring
                                        certain types of complex services (such as ventilator care) have always
                                        been more difficult to place, particularly in areas not served by specialty
                                        facilities. Despite this, the reports of difficulty finding SNF beds for some
                                        patients needing certain costly nontherapy ancillary services are
                                        consistent with our previous work, suggesting that the case-mix
                                        classification system may not adequately account for some high-cost
                                        groups.23



                                        22
                                         Once a beneficiary has been admitted to a SNF, it may be necessary to transport the beneficiary to a
                                        hospital or other site for specialized care. In this instance, the specialized services are furnished under
                                        arrangements made by the SNF. Following the treatment, the beneficiary is returned to the SNF to
                                        complete the inpatient stay. This movement of the beneficiary, considered patient transportation, is
                                        covered as a SNF service under part A and is included in the per diem rate.
                                        23
                                          Nontherapy ancillary services include drugs, laboratory tests, radiology procedures, respiratory
                                        therapy, medical supplies, intravenous therapy, and other nonroutine services. See Skilled Nursing
                                        Facilities: Medicare Payments Need to Better Account for Nontherapy Ancillary Cost Variation
                                        (GAO/HEHS-99-185, Sept. 1999).



                                        Page 9                                  GAO/HEHS-00-23 SNF Access Under New Payment System
                      B-283347




                      At present, few Medicare beneficiaries are experiencing barriers to care.
                      Nearly all (98 percent) of the discharge planners in our survey indicated
                      that other arrangements are being made for patients who are difficult to
                      place. Eighty-five percent of respondents reported that difficulty in placing
                      patients results in longer hospital stays. Seventy-three percent reported
                      finding alternative types of post-acute care, such as home health care and
                      long-term care hospitals, for patients they could not place in nursing
                      homes.

                      Longer hospital stays are probably not detrimental to most patients
                      because they receive the care they need during their extended stay. Those
                      Medicare patients who do stay in the hospital longer may subsequently
                      require fewer days of care once they are admitted to a nursing home or
                      may no longer need SNF care at all. To the extent that additional days in the
                      hospital replace some SNF days, longer hospital stays generally reduce
                      Medicare spending for the entire episode of illness.24


                      In aggregate, PPS payments are probably adequate and may, in fact, be
Aggregate Payments    excessive given that insufficient oversight allowed base-year costs
to SNFs Are Likely    associated with inefficient service delivery, unnecessary care, and
Adequate, but Some    improper billings to be included in both the facility-specific and the federal
                      rates. But the rates established for individual patients may not
Providers Must Make   appropriately reflect differing resource needs, and hence payments may
Adjustments           not be adequate for certain types of patients, especially those with more
                      extensive needs. Some facilities will need to modify their treatment
                      patterns in response to the PPS. The adjustment to PPS may be eased,
                      however, by two factors. First, Medicare patients generally constitute a
                      small share of most nursing homes’ patients; and second, a transition
                      period, during which rates are based in part on each facility’s own
                      historical costs, is intended to give providers more time to make necessary
                      changes.

                      Facilities that furnished excessive ancillary services or purchased services
                      inefficiently will need to make the most modifications under PPS. Facilities
                      that changed their mix of patients since the base year may make
                      temporary adjustments, such as applying more selective admission
                      policies, during the transition period. In addition, chains that deliver
                      ancillary services to SNFs may need to make substantial changes in
                      response to other BBA requirements that limit the provision of therapy

                      24
                       This is because Medicare’s per-case payment to the hospital for a patient with a given condition is the
                      same, regardless of the length of stay. Longer hospital stays can increase hospital operating costs, but
                      not Medicare operating payments, unless the patient reaches the threshold for cost outlier payments.



                      Page 10                                GAO/HEHS-00-23 SNF Access Under New Payment System
                          B-283347




                          under part B and require SNFs to bill for all services provided to their
                          patients.


Aggregate Payments to     HCFA used 1995 reported SNF costs as the basis for the federal per diem
SNFs Adequate, but        rates under PPS. We believe these base-year costs are likely to be too high
Refinements Needed to     as a result of inefficient service provision, unnecessary care, and improper
                          billing for services, which went undetected due to minimal program
Help Match Payments to    oversight.25 From 1992 to 1995, payments for ancillary services grew at
Patients’ Service Needs   triple the rate of routine services, which despite cost limits still increased
                          20 percent over the period. The low level of utilization review makes it
                          difficult to know how much of the increase in ancillary service use was
                          legitimate (because patient needs had also grown), and how much was
                          due to excessive provision of services to generate additional revenues. GAO
                          and the OIG also identified inappropriate billing practices and inclusion of
                          unreasonable costs as contributors to the rise in SNF costs. For example, a
                          recent OIG report found that, during the 12-month period ending June 30,
                          1998, Medicare reimbursed nursing homes almost $1 billion for improperly
                          billed physical and occupational therapy.26 Limited audits of cost reports
                          meant that HCFA had little ability to identify whether facilities were paying
                          unreasonable amounts for services or were charging Medicare for costs
                          unrelated to patient care or other unallowable costs.

                          OIG  recently noted in its review of the SNF PPS that the rate-setting process
                          did not adequately exclude improper SNF payments or the costs for
                          medically unnecessary care.27 The level of overpayments is not known, but
                          it is likely that the PPS payment rates developed from the 1995 costs are
                          high enough to cover appropriate care.

                          Though the total dollars in the payment system are at least adequate, two
                          weaknesses in the case-mix classification system used in the PPS may
                          hamper the proper allocation of payments across patients and facilities.
                          First, the classification system does not directly account for variation in
                          the costs of nontherapy ancillary services across patients. To the extent
                          that payments do not adequately reflect nontherapy ancillary costs, some

                          25
                           Balanced Budget Act: Any Proposed Fee-for-Service Payment Modifications Need Thorough
                          Evaluation (GAO/T-HEHS-99-139, June 10, 1999).
                          26
                            Department of Health and Human Services, Office of Inspector General, Office of Evaluation and
                          Inspections, Physical and Occupational Therapy in Nursing Homes: Cost of Improper Billings to
                          Medicare (OEI-09-97-00122), Aug. 1999.
                          27
                           Department of Health and Human Services, Office of Inspector General, Review of the Health Care
                          Financing Administration’s Development of a Prospective Payment System for Skilled Nursing
                          Facilities, A-14-98-00350 (July 1998).



                          Page 11                              GAO/HEHS-00-23 SNF Access Under New Payment System
                          B-283347




                          SNFs could be overpaid, while others could be underpaid. Facilities treating
                          many patients with high nontherapy ancillary costs may be disadvantaged
                          and might respond by declining to admit certain types of patients.28
                          Second, the classification system may not adequately differentiate among
                          patients and may classify them into too few groups to accurately reflect
                          their expected resource variation. Because the same payment is made for
                          all patients in each case-mix group, patients assigned to a group should be
                          relatively homogeneous in terms of their resource use. There is some
                          concern, however, that this is not the case, particularly for patients
                          needing extensive medical ancillaries (including medication therapy and
                          other nontherapy ancillary services) and rehabilitative therapy.29 Again,
                          there may be significant overpayment or underpayment for patients within
                          the case-mix groups, benefiting some facilities and putting others at a
                          disadvantage. Recent changes in the law will temporarily increase
                          payments for certain types of patients, thereby alleviating this concern. In
                          addition, certain costly nontherapy ancillary services, such as ambulance
                          services for patients needing regular dialysis at a facility outside of the SNF,
                          will be excluded from the PPS and paid for separately.


Adjustments Required by   The BBA provides for a 3-year transition period to allow facilities time to
PPS Larger for Some       adjust to the new payment system. Under this transition plan, a majority of
Providers                 nursing homes currently receive per diem payments from Medicare that
                          are based largely on their own historical costs.30 For most facilities, the
                          adjustments required should be modest because Medicare payments
                          represent a small share of revenues (about 10 percent, on average). HCFA
                          estimates that Medicare payments under the fully implemented SNF PPS
                          would decline, on average, 17 percent, which would reduce total nursing
                          home revenues by an average of 1.7 percent.31 For individual facilities,
                          reductions in revenues under the PPS will be larger or smaller; for some
                          facilities, Medicare revenues will increase. Facilities that historically have
                          served a higher proportion of Medicare patients may experience bigger
                          changes in their revenues, either positive or negative, and may need to
                          modify their treatment patterns more than other facilities.

                          28
                           Skilled Nursing Facilities: Medicare Payments Need to Better Account for Non-Therapy Ancillary
                          Cost Variation (GAO/HEHS-99-185, Sept. 1999).
                          29
                           Research currently under way by HCFA indicates that potential refinements to the case-mix model
                          may include the division of the current 44 groups or the addition of new ones. See Medicare Program;
                          Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities, 64 Fed. Reg.
                          41,644, 41,648 (1999) (to be codified at 42 C.F.R. pts. 409, 411, 413, and 489).
                          30
                           There is no transition period for facilities that were not participating in the Medicare program in
                          1995. Those facilities began to receive the federal rate immediately.
                          31
                           See Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing
                          Facilities, 64 Fed. Reg. 41,644, 41,678 (1999) (to be codified at 42 C.F.R. pts. 409, 411, 413, and 489).


                          Page 12                                  GAO/HEHS-00-23 SNF Access Under New Payment System
                           B-283347




                           PPS requires larger adjustments for providers that were inefficient or that
                           furnished a large number of ancillary services. Facilities that overprovided
                           services in the past will have to permanently modify their treatment
                           patterns by furnishing fewer services. Those that were not cost-conscious
                           in purchasing ancillary services and supplies will now need to seek better
                           prices from ancillary providers. Neither of these changes should adversely
                           affect patient care.

                           For some facilities, the payment rates under the fully implemented PPS may
                           be higher than they are during the transition. Among these facilities are
                           those that, since the base year of 1995, have changed the mix of patients
                           served to include more with intensive needs. The facility-specific portion
                           of the rates reflects their costs of serving patients in 1995 who had fewer
                           needs. Only the federal portion of their rates will be adjusted to reflect the
                           needs of current patients. During the transition period, these facilities may
                           adjust to the payment system by declining to admit certain patients with
                           greater needs. Due to recent changes in the law, beginning on December
                           15, 1999, facilities may opt to make the transition to the federal rate
                           immediately for cost-reporting periods beginning on or after January 1,
                           2000.


                           The troubled financial positions of two corporations that operate a large
Financial Condition of     number of SNFs, Sun Healthcare Group, Inc., and Vencor, Inc., have
Sun and Vencor             received much public attention in recent months. Both corporations
Related to Factors         reported significant losses in fiscal year 1998—$700 million and
                           $573 million, respectively. Sun expects a similar loss for fiscal year 1999
Other Than SNF PPS         ($612 million), while Vencor’s estimated loss is much smaller ($90 million).
                           Industry reports have blamed Medicare payment policies for these losses
                           and for the companies’ recent filings for bankruptcy protection. Our
                           analysis, however, suggests that the financial difficulties of Sun and
                           Vencor are the result of several factors beyond the SNF PPS. In fact, the SNF
                           operations of Vencor have remained profitable after the implementation of
                           the PPS, and those of Sun would have as well, had that company’s capital
                           costs been in line with the industry average. The losses reported by the
                           companies stem in large part from high capital-related costs; the reduced
                           demand for ancillary services, related to several BBA provisions; and
                           substantial nonrecurring expenses and write-offs.


SNF Operations Not Major   In annual reports to the U.S. Securities and Exchange Commission and in
Contributor to Financial   public statements, both Sun and Vencor attribute their poor financial
Losses                     position primarily to Medicare’s new SNF reimbursement method. Sun’s SNF


                           Page 13                      GAO/HEHS-00-23 SNF Access Under New Payment System
B-283347




operating revenues are expected to drop 14 percent in FY 1999, while
Vencor’s SNF operating revenues will decline about 6 percent.
Nevertheless, Sun’s SNF operating shortfalls represent only 13 percent of
total losses in fiscal year 1998 and 37 percent of estimated total losses in
fiscal year 1999. Vencor posted gains in its SNF operations in fiscal year
1998 and expects positive SNF operating income in fiscal year 1999 as well.
Thus, factors other than PPS have affected their financial performance.

Sun’s focus on serving a patient population with higher service needs is
one factor affecting its performance. The corporation invested in the
equipment and staff needed to provide complex medical and rehabilitative
care during a time when doing so meant getting higher payments from
Medicare. Thus, it may be affected more than other facilities by any
shortcomings in the PPS case-mix classification system.

The losses experienced by the SNF business operations of Sun and Vencor
are primarily due to increasing capital-related costs rather than operating
shortfalls. In fact, both companies have cut their SNF operating expenses,
such as the costs of labor and supplies, consistent with their declines in
revenues, to improve their operating performance. Sun also indicates it
has modified its admission policies. As a result, although Sun estimates a
14 percent drop in operating revenue in fiscal year 1999, it projects that its
net SNF operating income (excluding capital) will decline only 9 percent.
Likewise, Vencor estimates its net SNF operating income (excluding
capital) will increase 5 percent in fiscal year 1999, despite a 6 percent
decrease in operating revenue.




Page 14                      GAO/HEHS-00-23 SNF Access Under New Payment System
                                       B-283347




Table 2: SNF Operating Revenues and
Expenses for Sun Healthcare Group,     Dollars in millions
Inc., and Vencor, Inc., Fiscal Years                                             FY 1997             FY 1998        FY 1999 (annualized)
1997-99
                                       Sun Healthcare Group, Inc.
                                       Net operating revenuesa                     $1,156                $1,913                      $1,652
                                                                b
                                       Operating expenses                            $950                $1,633                      $1,398
                                       Capital-related expenses                      $211                 $368                          $481
                                       Net operating income
                                       (loss)                                          ($5)                ($87)                       ($227)
                                       Vencor, Inc.
                                       Net operating revenuesa                     $1,721                $1,621                      $1,529
                                                                b
                                       Operating expenses                          $1,454                $1,370                      $1,267
                                       Capital-related expenses                      $121                 $193                          $218
                                       Net operating income
                                       (loss)                                        $147                  $57                              $45
                                       Note: Columns may not sum to total due to rounding.
                                       a
                                        Net operating revenues are gross charges minus contractual and other adjustments.
                                       b
                                           Operating expenses do not include capital-related expenses.

                                       Source: Sun and Vencor data provided to GAO.



                                       But capital-related costs for both Sun and Vencor have substantially
                                       increased. Sun’s capital costs, already a larger share of total costs than the
                                       industry average, are expected to grow 30 percent in FY 1999 as its interest
                                       expenses double32 (see fig. 1). Similarly, Vencor’s SNF capital-related costs
                                       are expected to rise nearly 80 percent between fiscal year 1997 and fiscal
                                       year 1999, driven by a four-fold increase in rental expenses (see fig. 2).
                                       During that period, Vencor reorganized into two separate, publicly held
                                       corporations, divesting the real property side of its business from the
                                       operating side. Ventas, a real estate investment trust, now leases formerly
                                       owned real estate holdings, including nursing homes, to the operating
                                       company, Vencor. Under the new structure, Vencor’s rental expenses rose
                                       from $42 million in fiscal year 1997 to nearly $170 million in FY 1999.

                                       SNFs operated by Sun and Vencor will likely be more affected by the SNF
                                       PPS than will typical facilities because a larger share of their revenues
                                       comes from Medicare. Although Medicare patients constitute about
                                       10 percent of total SNF patient days for both Sun and Vencor (similar to the


                                       32
                                        While capital costs for nursing homes average about 12 percent of total costs, Sun’s and Vencor’s
                                       capital costs are estimated to be 26 and 15 percent, respectively, for fiscal year 1999.



                                       Page 15                                GAO/HEHS-00-23 SNF Access Under New Payment System
                                     B-283347




                                     industry average), the corporations report that Medicare revenues are at
                                     least 25 percent of their SNF businesses.


Figure 1: SNF Capital-Related
Expenses for Sun Healthcare Group,   Dollars in Millions
Inc., Fiscal Years 1997-99           500




                                     400




                                     300




                                     200




                                     100




                                       0

                                               FY 1997     FY 1998    FY 1999
                                               Fiscal Year


                                                           Other Capital-Related Costs

                                                           Depreciation/Amortization

                                                           Interest (Including Intercompany)

                                                           Rent



                                     Source: Sun data provided to GAO.




                                     Page 16                                      GAO/HEHS-00-23 SNF Access Under New Payment System
                                          B-283347




Figure 2: SNF Capital-Related
Expenses for Vencor, Inc., Fiscal Years              250   Dollars in millions
1997-99


                                                     200




                                                     150




                                                     100




                                                      50




                                                       0

                                                             FY 1997    FY 1998   FY 1999
                                                             Fiscal Year


                                                                       Other Capital-Related Costs

                                                                       Depreciation/Amortization

                                                                       Interest (Including Intercompany)

                                                                       Rent




                                          Page 17                      GAO/HEHS-00-23 SNF Access Under New Payment System
                                       B-283347




Declining Ancillary                    Ancillary revenues from the sale of therapy and other services to their own
Revenues Reflect Multiple              nursing homes and to others have represented a substantial share of both
BBA Provisions                         Sun’s and Vencor’s total revenues. Prior to BBA (fiscal year 1997), Sun
                                       reported net income for its ancillary services business of $165 million
                                       while Vencor had net income of nearly $104 million.

                                       Several BBA provisions have affected the market for ancillary services.
                                       First, the SNF PPS has made SNFs more cost-conscious in purchasing
                                       contracted services—reducing both the demand for these services and the
                                       prices SNFs are willing to pay for them. Second, the BBA prohibits billing
                                       Medicare part B for services furnished to nursing home patients covered
                                       under part A. Third, it has revised the payments for therapy services under
                                       part B, establishing a fee schedule instead of cost-based reimbursement
                                       and thus limiting payments for many services. Finally, it has imposed a
                                       per-beneficiary cap of $1,500 for part B-covered physical and speech
                                       therapy services and a per-beneficiary cap of $1,500 for part B-covered
                                       occupational therapy services. These caps primarily affect therapy
                                       services for nursing home patients and are therefore likely to affect
                                       ancillary providers like Sun and Vencor that furnish services to nursing
                                       homes. Following implementation of these provisions, Vencor’s reported
                                       net operating income for its ancillary operations fell from $104 million to
                                       $59 million in fiscal year 1998 and is expected to decline further to
                                       $44 million in fiscal year 1999. Sun’s net operating income is expected to
                                       plummet from $230 million in fiscal year 1998 to $9 million in fiscal year
                                       1999.

Table 3: Net Operating Revenues From
Ancillary Businesses of Sun            Dollars in millions
Healthcare Group, Inc., and Vencor,                                                                                            FY 1999
Inc., Fiscal Years 1997-99                                                          FY 1997            FY 1998             (annualized)
                                       Sun Healthcare Group, Inc.
                                       Net operating revenuesa                          $775            $1,185                    $732
                                       Net expenses                                     $611              $995                    $724
                                       Net operating income (loss)                      $165              $230                      $7
                                       Vencor, Inc.
                                       Net operating revenuesa                          $641              $581                    $440
                                       Net expenses                                     $538              $522                    $396
                                       Net operating income (loss)                      $104                $59                    $44
                                       Note: Columns may not sum to total due to rounding.
                                       a
                                       Net operating revenues are gross charges minus contractual and other adjustments.

                                       Source: Sun and Vencor data provided to GAO.




                                       Page 18                             GAO/HEHS-00-23 SNF Access Under New Payment System
                       B-283347




Unusual Transactions   Most of the fiscal year 1998 and 1999 losses reported by Sun and Vencor
Account for Bulk of    relate to unusual transactions, or nonrecurring charges, such as asset
Corporate Losses       impairment losses and restructuring costs (see table 4). Vencor reported
                       unusual transactions of $439 million in fiscal year 1998 and estimates
                       another $35 million to be posted in fiscal year 1999. These entries account
                       for more than 75 percent of Vencor’s losses for fiscal year 1998 and almost
                       40 percent of those for fiscal year 1999. Similarly, nearly $394 million of
                       Sun’s total fiscal year 1998 losses and $425 million of its total fiscal year
                       1999 losses are unusual transactions.

                       The bulk of these unusual transactions for both companies are the result
                       of asset impairment losses. Accounting principles require corporations to
                       calculate and recognize asset impairment losses on their balance sheets
                       when it is determined that future expected revenue streams will be lower
                       than anticipated.33 This is necessary to inform investors of the
                       performance of the company. The loss appearing on the income statement
                       reflects the difference between an asset’s original value and its revised
                       value, based on the revenue the asset is expected to generate in the future.
                       These values do not reflect the patient-care costs that are recognized by
                       the Medicare program. The losses posted by Sun and Vencor may reflect a
                       combination of inflated purchase prices as well as reduced future
                       expected revenues from their assets. For example, approximately
                       $200 million of Vencor’s impairment loss is attributable to an anticipated
                       reduction in the value of its goodwill. Goodwill is an intangible
                       asset—such as name recognition, good customer relations, or high
                       employee morale—that represents the amount paid for an asset in excess
                       of fair market value. These unusual transactions reflect business and
                       accounting practices rather than losses from current operations. It is not
                       known what share of these companies’ lower projected value reflects
                       changes due to the implementation of the SNF PPS or other BBA provisions.




                       33
                        The American Institute of Certified Public Accountants’ Statement of Financial Accounting Standards
                       No. 121 (SFAS No. 121), entitled Accounting for the Impairment of Long-Lived Assets and for
                       Long-Lived Assets to be Disposed of, requires such impairment losses to be recognized.



                       Page 19                              GAO/HEHS-00-23 SNF Access Under New Payment System
                                         B-283347




Table 4: Net Operating Income,
Nonoperating Expenses, and Total         Dollars in millions
Income for Sun Healthcare Group, Inc.,                                             FY 1997             FY 1998 FY 1999 (annualized)
and Vencor, Inc., for FYs 1997, 1998,
                                         Sun Healthcare Group, Inc.
and 1999
                                         Net operating income (loss)                    $116                $29                       ($72)
                                         Nonoperating revenues                           $12                $22                       $16
                                         Nonoperating expenses:
                                           Unusual transactions                          $20               $394                      $425
                                           Other nonoperating expensesa                  $22               $302                      $125
                                         Nonoperating expenses                           $42               $696                      $550
                                         Net nonoperating income (loss)                 ($30)             ($674)                    ($534)
                                           Income tax                                    $43                $56                       $0.8
                                         Total post-tax income (loss)                    $43              ($701)                    ($606)
                                         Vencor, Inc.
                                         Net operating income (loss)                    $320               $116                       $82
                                         Nonoperating revenues                            $0                  $0                          $0
                                         Nonoperating expenses
                                           Unusual transactions                         ($14)              $439                       $35
                                           Corporate overhead                            $80               $123                      $113
                                         Nonoperating expenses                           $95               $613                      $172
                                         Net nonoperating income (loss)                 ($96)             ($613)                    ($171)
                                           Income tax                                    $89                $76                       $0.2
                                         Total post-tax income (loss)                   $135              ($573)                      ($90)
                                         Note: Columns may not sum to total due to rounding.
                                         a
                                          Sun’s other nonoperating expenses include bad debt/losses on accounts receivable, gain (loss)
                                         on sale of assets, dividends on convertible preferred securities.

                                         Source: Sun and Vencor data provided to GAO.




                                         The BBA mandated a Medicare PPS for SNF services to replace the
Conclusions                              cost-based reimbursement system, with the goal of fostering more efficient
                                         provision and use of services to lower spending growth rates. We found
                                         little evidence that this change in payment method has reduced access to
                                         appropriate care, although facilities are assessing patients’ conditions and
                                         projected costs of treatment more closely, even reportedly denying
                                         admission to patients needing certain types of services. As a result, some
                                         beneficiaries may stay longer in the hospital before being admitted to a
                                         nursing home for SNF care or may receive care from other post-acute-care
                                         providers. Monitoring of hospital and SNF lengths of stay and admissions is




                                         Page 20                             GAO/HEHS-00-23 SNF Access Under New Payment System
                   B-283347




                   required to ensure that Medicare beneficiaries continue to have access to
                   medically necessary services. The PPS represents a major change to the
                   previous incentives of cost-based reimbursement and, as a result, facilities
                   may need to modify treatment practices and business strategies that were
                   advantageous under the previous payment method if they are to operate
                   profitably.


                   In written comments on a draft of this report, HCFA emphasized its
Agency and Other   commitment to ensuring that Medicare beneficiaries retain access to
Comments           quality skilled nursing care. HCFA acknowledged concerns that the
                   payment system may not fully reflect the costs of treating certain types of
                   patients and stated its intent to continue monitoring access to care under
                   the SNF PPS and to refine and improve the payment system. HCFA also noted
                   that, in light of the recent reports of financial troubles in some nursing
                   home chains, it has taken steps to ensure that states develop contingency
                   plans for protecting nursing home patients. In addition, it has provided
                   guidance to help states monitor conditions in nursing homes that are
                   experiencing financial difficulties. HCFA also provided technical comments,
                   which we incorporated where appropriate. The agency letter is
                   reproduced in appendix II.

                   In their comments on portions of the draft related to them, both Sun and
                   Vencor agreed that their financial situations were accurately represented.
                   Both corporations acknowledged that their financial difficulties are the
                   result of many factors, not just of the PPS. Both expressed general
                   concerns that the effect of the BBA is only beginning to be felt and
                   predicted that there will be more bankruptcy filings among nursing home
                   chains and perhaps among independent nursing homes as well.

                   Vencor also submitted updated financial information, consistent with data
                   shown in the report, illustrating that their SNF operations remain profitable
                   and that a substantial portion of the corporation’s overall losses pertains
                   to other lines of business. (We did not include this updated information in
                   the report because it did not change our conclusions. In addition, its
                   format was different from that of the original data submitted and therefore
                   was difficult to compare with information from previous years.)

                   Sun pointed out that part of the company’s financial difficulties stems
                   from having higher-than-average costs. Sun noted that such costs were not
                   excessive under cost-based reimbursement. PPS, however, a system based
                   on national averages, will not fully cover these costs. Sun also said that we



                   Page 21                      GAO/HEHS-00-23 SNF Access Under New Payment System
B-283347




did not appropriately attribute the reductions in the demand and pricing
for ancillary services to the implementation of PPS. In fact, the report
clearly states that PPS is a factor in the reduced demand for ancillary
services. Finally, Sun noted that its impairment losses are an accounting
recognition of the economic reality that PPS has materially devalued Sun’s
nursing home assets. At the same time, Sun acknowledged that the
company may have paid too much for the assets it acquired.
Representatives of the corporation went on to express concern that any
reduction in the value of nursing home assets would discourage the
construction of new nursing facilities and thus adversely affect access to
care. At the present time, however, our evidence indicates that
beneficiaries continue to receive needed care.

Sun also expressed concern that their views about the PPS, obtained in
interviews with GAO staff, were not included in the portions of the report
Sun reviewed. Although not attributed directly to any individuals, the
views of representatives from Sun and Vencor, as well as from other
industry participants and analysts, were an important source of
information and were incorporated into the report.


We are sending copies of this report to Michael Hash, Acting Administrator
of HCFA, interested congressional committees, Sun Healthcare Group, Inc.,
Vencor, Inc., and other interested parties. We will also make copies
available to others upon request.

If you have any questions, please call me or Laura Dummit, Associate
Director, at (202) 512-7119. Major contributors to this report are listed in
appendix II.




William J. Scanlon, Director
Health Financing and Public Health Issues




Page 22                      GAO/HEHS-00-23 SNF Access Under New Payment System
Page 23   GAO/HEHS-00-23 SNF Access Under New Payment System
Contents



Letter                                                                                              1


Appendix I                                                                                         26

Scope and
Methodology
Appendix II                                                                                        28

Comments From the
Health Care Financing
Administration
Appendix III                                                                                       30

GAO Contacts and
Staff
Acknowledgments
Tables                  Table 1: Discharge Planners Reporting Slowed SNF Placements,                9
                          by Type of Medical Need
                        Table 2: SNF Operating Revenues and Expenses for Sun                       15
                          Healthcare Group, Inc., and Vencor, Inc., Fiscal Years 1997-99
                        Table 3: Net Operating Revenues from Ancillary Businesses of               18
                          Sun Healthcare Group, Inc., and Vencor, Inc., Fiscal Years
                          1997-99
                        Table 4: Net Operating Income, Nonoperating Expenses, and                  20
                          Total Income for Sun Healthcare Group, Inc., and Vencor, Inc.,
                          for FYs 1997, 1998, and 1999

Figures                 Figure 1: SNF Capital-Related Expenses for Sun Healthcare                  16
                          Group, Inc., Fiscal Years 1997-99
                        Figure 2: SNF Capital-Related Expenses for Vencor, Inc., Fiscal            17
                          Years 1997-99




                        Page 24                     GAO/HEHS-00-23 SNF Access Under New Payment System
Contents




Abbreviations

BBA        Budget Balance Act of 1997
HCFA       Health Care Financing Administration
OIG        Office of Inspector General
PPS        prospective payment system
SNF        skilled nursing facility


Page 25                    GAO/HEHS-00-23 SNF Access Under New Payment System
Appendix I

Scope and Methodology


             To assess the effect of the prospective payment system (PPS) on access to
             skilled nursing facility (SNF) care, we interviewed hospital discharge
             planners about their recent experiences placing Medicare beneficiaries
             needing SNF care in nursing homes. Because SNF reimbursement under
             Medicare is dependent on a minimum 3-day hospital stay, nearly all
             Medicare beneficiaries receiving SNF services are first evaluated by a
             member of the hospital discharge staff. Discharge planners offer valuable
             information because they are professionals who help Medicare patients
             leaving the hospital find nursing homes that will provide them with
             appropriate care. We used structured interviews to elicit their opinions on
             whether changes in reimbursement policies have affected beneficiary
             access to care.

             We identified and categorized hospitals using the Medicare Cost Reports
             for calendar year 1997. Only general short-term hospitals were included
             for study.34 Swing-bed hospitals and hospitals with an affiliated SNF were
             eliminated from the pool to focus the study on those hospitals where
             patients would be most at risk of experiencing access problems. A simple
             random sample was used to choose the hospitals from the remaining
             population. We contacted discharge planners by telephone in 200 of these
             hospitals and completed interviews with 153. Urban hospitals represented
             two-thirds of the respondents, although they make up only 55 percent of
             hospitals nationwide. All 50 states (and the District of Columbia) were
             eligible for participation in the study; 43 were represented by the
             completed surveys.

             We obtained testimony from Wall Street industry analysts to gain an
             understanding of the financial incentives driving the SNF industry before
             and after implementation of the Balanced Budget Act of 1997, as well as
             insight into the operational history of specific nursing home chains.

             In addition, we interviewed the presidents and, in some cases, other senior
             management representatives of Sun, Vencor, and Beverly Enterprises, Inc.
             (Beverly). Sun and Vencor were chosen for examination because of their
             highly publicized financial problems and the distinct possibility that they
             would petition for bankruptcy protection under Chapter 11 of the U.S.
             Bankruptcy Code. As a national nursing home chain not in danger of filing
             for bankruptcy, Beverly offered perspective on the circumstances of Sun
             and Vencor.


             34
               Psychiatric hospitals, rehabilitation hospitals, cancer hospitals, childrens’ hospitals, and
             long-term-care hospitals (those with an average length of stay exceeding 25 days) were excluded from
             the analysis.



             Page 26                               GAO/HEHS-00-23 SNF Access Under New Payment System
Appendix I
Scope and Methodology




Documentary evidence used in analyzing the effect of PPS included both
financial information provided by Sun and Vencor, and their corporate
filings from the United States Securities and Exchange Commission. The
filings are available under the 1934 Exchange Act and contain material
financial and business information on publicly traded companies. Under
the act, companies are obliged to keep such public information current by
filing periodic reports on Forms 10-Q and 10-K, and on current event Form
8-K, as applicable.




Page 27                    GAO/HEHS-00-23 SNF Access Under New Payment System
Appendix II

Comments From the Health Care Financing
Administration




              Page 28   GAO/HEHS-00-23 SNF Access Under New Payment System
Appendix II
Comments From the Health Care Financing
Administration




Page 29                        GAO/HEHS-00-23 SNF Access Under New Payment System
Appendix III

GAO Contacts and Staff Acknowledgments


                  Laura Dummit, (202) 512-7119
GAO Contact
                  Carol Carter, Dana Kelley, Erin Kuhls, and Carolyn Manuel-Barkin made
Staff             key contributions to this report.
Acknowledgments




(101854)          Page 30                    GAO/HEHS-00-23 SNF Access Under New Payment System
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested