Medicare Home Health Agencies: Role of Surety Bonds in Increasing Scrutiny and Reducing Overpayments

Published by the Government Accountability Office on 1999-01-29.

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

January 1999
                 MEDICARE HOME
                 HEALTH AGENCIES
                 Role of Surety Bonds
                 in Increasing Scrutiny
                 and Reducing

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

      Health, Education, and
      Human Services Division


      January 29, 1999

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

      Home health care—skilled nursing, therapy, and related services provided
      to homebound beneficiaries—has been one of Medicare’s fastest growing
      benefits in recent years. Between 1990 and 1997, spending increased from
      $3.7 billion to $17.8 billion, an average annual increase of 26 percent. This
      growth occurred because more beneficiaries used the services and more
      users received more home health care visits. Concurrent with the rise in
      spending was an increase in the number of home health agencies (HHA),
      which almost doubled from 1989 to 1997, reaching 10,600 in 1997. Changes
      in practice patterns and the need for home health care have contributed to
      the greater use of this benefit, but inappropriate use and billing practices
      have added to Medicare’s HHA spending as well. Concern about growth in
      spending, fraud and abuse, and inadequate oversight led the Congress and
      the administration to implement a number of initiatives to better control
      Medicare’s home health care costs.

      Of particular importance, the Balanced Budget Act of 1997 (BBA) mandated
      major changes to the home health care benefit. To slow spending,
      Medicare’s payment method was altered and certain coverage criteria
      were clarified. The act also established new requirements for HHAs
      participating in Medicaid or in Medicare to shore up Medicare’s survey and
      certification process—the program’s approach to ensuring that only
      qualified providers bill for services. One of these new requirements is the
      posting of a surety bond of not less than $50,000. Applying for such a
      surety bond would subject an HHA’s activities to review by a surety
      company to determine its worthiness to purchase the bond.

      The Health Care Financing Administration (HCFA) issued the implementing
      regulation for BBA’s surety bond requirement on January 5, 1998. Under the
      regulation, HHAs are required to obtain a financial guarantee bond designed
      to allow HCFA to recover delinquent overpayments made for any reason
      rather than just those resulting from fraud and abuse. For larger agencies,
      it also set the bond amount at 15 percent of an HHA’s Medicare revenues,
      higher than the minimum $50,000 required by the BBA. Concern arose

      Page 1                           GAO/HEHS-99-23 Home Health Agency Surety Bonds

                   about the appropriateness of HCFA’s specification of the surety bond
                   requirement and its effect on home health care providers. Some HHAs
                   reported difficulty in obtaining bonds and asserted that the burden of
                   doing so was too onerous. In response, in June HCFA postponed the date
                   when HHAs must obtain surety bonds until February 15, 1999, at the

                   You asked us to evaluate the surety bond requirement for HHAs
                   participating in Medicare. Specifically, you requested that we (1) analyze
                   the key features of surety bonds that affect their costs and effect;
                   (2) examine the Florida Medicaid program’s experience with a surety bond
                   requirement for HHAs and its relevance to the Medicare surety bond
                   requirement; (3) review the rationale for the surety bond requirements
                   HCFA selected, the cost and availability of bonds, the benefits for Medicare,
                   and the implications of substituting a government note for a surety bond
                   as set forth in a Treasury Department regulation; and (4) draw
                   implications from the implementation of the HHA surety bond requirement
                   for implementing a similar surety bond provision for durable medical
                   equipment (DME) suppliers, comprehensive outpatient rehabilitation
                   facilities (CORF), and rehabilitation agencies. See appendix I for
                   information on our scope and methodology.

                   A surety bond is a three-party agreement in which a company, known as a
Results in Brief   surety, agrees to compensate the bondholder if the bond purchaser fails to
                   keep a specified promise. The terms of the bond—the promise, the
                   definition of default, and the penalty for default—determine the bond’s
                   cost and the amount of scrutiny the purchaser faces from the surety
                   company. Types of bonds that have been seen as potentially appropriate
                   for HHAs include financial guarantee bonds with a promise to fulfill
                   financial obligations to the bondholder, antifraud bonds that compensate
                   the bondholder for losses stemming from fraud or abuse, and compliance
                   bonds based on a promise to conform to specified sets of terms or
                   conditions. Purchasers pay a fee, usually a percentage of the bond’s face
                   value, and some must also provide collateral. Collateral is more likely to
                   be required when the risk of default is higher or when the purchasing firm
                   does not have sufficient assets to repay the surety in the event of a default.
                   The surety checks certain characteristics of the purchasing firm before
                   agreeing to issue a bond, such as its financial situation, business practices,
                   and its principals’ backgrounds. The relative emphasis that sureties place
                   on these factors varies, however, depending on the purpose of the bond.
                   When the terms of bonds increase the risk of default, more firms have

                   Page 2                            GAO/HEHS-99-23 Home Health Agency Surety Bonds

difficulty purchasing them. The likelihood that a firm will be unable to
repay a surety increases fees charged and collateral requirements or the
surety’s unwillingness to sell it a bond.

Although often cited as an important precursor to Medicare’s surety bond
requirement, Florida Medicaid’s experience offers few insights into the
potential effect of Medicare’s surety bonds because the state implemented
its surety bond requirement selectively, for new and problem HHAs, in
combination with several other program integrity measures. Bonds under
Florida Medicaid involve a promise that the HHA will comply with all
Florida Medicaid rules and regulations. After implementation, Florida
officials reported that about one-quarter of its Medicaid-participating HHAs
had left the program. However, this exodus was not caused primarily by
the surety bond requirement. Few of the terminating agencies would have
had to obtain a bond since they were not new to the program. Despite the
reduction in the number of Medicaid-participating HHAs, Florida’s governor
stated that there was no decline in beneficiaries’ access to home health

HCFA requires a surety bond guaranteeing HHAs’ repayment of Medicare
overpayments, and it has set the minimum level of the bond as the greater
of $50,000 or 15 percent of an agency’s Medicare revenues out of concern
that about 60 percent of HHAs had overpayments in 1996, amounting to
about 6 percent of Medicare’s HHA spending, and that, in their opinion,
overpayments would increase in the future. Yet, HCFA’s experience shows
that most overpayments are returned, so that the net unrecovered
overpayments were less than 1 percent of Medicare’s home health care
expenditures in 1996. Further, there was no evidence that larger agencies
would be expected to have more unreturned overpayments to justify the
requirement for a larger bond.

HCFA’s implementing regulation requiring a bond guaranteeing the return of
overpayments made for any reason rather than only those attributable to
acts of fraud or dishonesty increases the risk of default. Consequently,
sureties may require more HHAs to provide collateral to obtain a bond. The
regulation may also benefit the Medicare program in terms of surety
companies’ scrutiny of HHAs and their incentives to repay overpayments in
order to continue to qualify for a bond. Sureties’ scrutiny, which focuses
primarily on an agency’s business practices and financial status, is
probably most useful for screening new HHAs. Its value would probably
diminish with an HHA’s continued participation in Medicare. A Treasury
Department regulation that allows the substitution of a government note

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             for any federally required surety bond may undermine the purpose of the
             bond because HHAs could avoid surety scrutiny.

             The BBA also requires that DME suppliers, CORFs, and rehabilitation agencies
             obtain a surety bond valued at a minimum of $50,000. HCFA has stated its
             intent to implement this requirement in the same way it does for HHAs.
             Medicare will benefit from greater scrutiny of these organizations and
             their stronger incentives to avoid overpayments. Many of these providers
             receive very limited Medicare revenue. Some may cease to participate
             because of the cost of obtaining a bond. The effect on beneficiaries’ access
             to care may not be significant, however, because DME suppliers currently
             number more than 68,000 and alternative sources of therapy exist for
             beneficiaries who use CORFs and rehabilitation agencies.

             The Medicare home health care benefit covers skilled nursing, therapy,
Background   and related services provided in beneficiaries’ homes. To qualify, a
             beneficiary must be confined to his or her residence (that is, must be
             “homebound”); require intermittent skilled nursing, physical therapy, or
             speech therapy; be under the care of a physician; and be furnished
             services under a plan of care prescribed and periodically reviewed by a
             physician. If these coverage criteria are met, Medicare will pay for
             part-time or intermittent skilled nursing; physical, occupational, and
             speech therapy; medical social service; and home health aide visits. Only
             HHAs that have been certified are allowed to bill Medicare. Beneficiaries do
             not pay any coinsurance or deductibles for these services, and there are no
             limits on the number of home health care visits they receive as long as
             they meet the coverage criteria.

             HCFA, the agency within the Department of Health and Human Services
             responsible for administering Medicare, uses five regional contractors
             (which are insurance companies), called regional home health
             intermediaries (RHHI), to process and pay claims submitted by HHAs and to
             review or audit their annual cost reports. HHAs are paid their actual costs
             for delivering services up to statutorily defined limits. During each fiscal
             year, HHAs receive interim payments based on the projected per visit cost
             and, in some instances, the projected volume of services for Medicare
             beneficiaries. At the end of the year, each HHA submits a report on its costs
             and the services it has provided and the RHHI determines how much
             Medicare reimbursement the HHA has earned for the year. If the interim
             payments that the agency received exceed this amount, the HHA must
             return the overpayment to Medicare. Otherwise, Medicare makes a

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supplementary payment of the difference between the earned
reimbursement and the interim payments. HHAs are expected to minimize
overpayments and underpayments by notifying RHHIs of changes in
projected costs or volume during the year so that their interim payments
can be adjusted. Final cost report settlements generally do not occur until
2 years after an HHA’s fiscal year ends.

The home health care benefit has been one of the fastest growing
components of the Medicare program, increasing from 3.2 percent of total
Medicare spending in 1990 to 9 percent in 1997. Medicare’s home health
care expenditures rose from $3.7 billion in 1990 to $17.8 billion in 1997.
The rapid growth in home health care was primarily driven by legislative
and policy changes in coverage.1 These changes essentially transformed
the home health care benefit from one focused on patients needing
short-term posthospital care to one that also serves chronic, long-term
care patients. The growth in spending has slowed markedly in recent
years. Several factors probably contributed to the deceleration, including
HCFA’s recent antifraud measures.

While spending grew, HCFA’s oversight of HHAs declined. The proportion of
home health care claims that HCFA reviewed dropped sharply, from about
12 percent in 1989 to 2 percent in 1995, while the volume of claims about
tripled. Yet the need for such review to ensure that Medicare pays only for
services that meet its coverage rules has not diminished. In a study of a
sample of high-dollar claims that were paid without review, we found that
a large proportion of the services did not meet Medicare’s coverage
criteria.2 Operation Restore Trust (ORT), a joint effort by federal and
several state agencies to uncover program integrity violations, also found
high rates of noncompliance with Medicare’s coverage criteria among the
problematic HHAs they investigated. In addition, RHHIs audited cost reports
for only about 8 percent of HHAs each year from 1992 through 1996.

Until recently, the number of Medicare-certified HHAs increased along with
the rise in home health care spending—from 5,700 in 1989 to 10,600 at the
end of 1997.3 Last year, we reported that HHAs were granted Medicare
certification without adequate assurance that they provided quality care or

  Medicare: Home Health Utilization Expands While Program Controls Deteriorate (GAO/HEHS-96-16,
Mar. 27, 1996).
 Medicare: Need to Hold Home Health Agencies More Accountable for Inappropriate Billings
(GAO/HEHS-97-108, June 13, 1997).
 During fiscal year 1998, 1,155 agencies quit participating in Medicare.

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met Medicare’s conditions of participation.4 Moreover, once certified,
there was little likelihood that a provider would be terminated from the

Beginning in mid-1997, HHAs that request Medicare certification or change
ownership have had to go through an enrollment process designed to
screen out some problem providers. The process requires HHAs to identify
their principals—that is, anyone with a 5-percent or greater ownership
interest—and to indicate whether any of them have ever been excluded
from participating in Medicare. HCFA also has proposed requiring all HHAs
to reenroll every 3 years, which would entail an independent audit of
providers’ records and practices.

In the BBA, the Congress strengthened HCFA’s ability to keep potentially
problematic providers out of the Medicare program by codifying a $50,000
surety bond requirement and establishing other participation
requirements.5 The law also required HHAs participating in Medicaid to
obtain a $50,000 surety bond. The law expanded the enrollment process by
requiring HHA owners to furnish HCFA with their Social Security numbers
and information regarding the subcontractors of which they have direct or
indirect ownership of 5 percent or more. The BBA also provides that an HHA
may be excluded if its owner transfers ownership or a controlling interest
in the HHA to an immediate family member (or household member) in
anticipation of, or following, a conviction, assessment, or exclusion
against the owner.

Subsequently, HCFA implemented additional changes to further strengthen
requirements for HHAs entering the Medicare program and to prevent fraud
and abuse.6 For example, the surety bond regulation imposes a
capitalization requirement for home health care providers enrolling on or
after January 1, 1998. New HHAs are required to have enough operating
capital for their first 3 months in business, of which no more than half can

 Medicare Home Health Agencies: Certification Process Ineffective in Excluding Problem Agencies
(GAO/HEHS-98-29, Dec. 16, 1997, and GAO/T-HEHS-97-180, July 28, 1997).
 HCFA has always had implicit authority to institute a surety bond requirement for HHAs under its
statutory authority to protect the Medicare program and has had explicit authority to do so since the
enactment of the Omnibus Budget Reconciliation Act of 1980.
 From September 15, 1997, until January 13, 1998, the administration placed a moratorium on
admitting new HHAs into Medicare, except in underserved areas, while HCFA developed regulations to
implement the program integrity provisions of the BBA—including the surety bond requirement—and
to design other procedures to target home health care fraud and abuse.

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be borrowed funds.7 In another regulation, HCFA requires that an HHA serve
at least ten private-pay patients before seeking Medicare certification. This
contrasts with the previous requirement that only a single patient had to
have been served.

The BBA mandated surety bonds for Medicare suppliers of DME, CORFs, and
rehabilitation agencies as well. Like HHAs, Medicare spending for these
providers has grown rapidly in the past few years. Further, there is general
concern that providers are given inadequate oversight and that their bills
are insufficiently reviewed.

DME suppliers sell or rent covered DME (such as wheelchairs), prosthetics,
orthotics, and supplies to Medicare beneficiaries for use in their home. In
1996, there were more than 68,000 Medicare-participating DME suppliers.
From 1992 to 1996, spending for DME increased from $3.7 billion to
$5.7 billion, an average annual increase of 11 percent. Medicare bases its
payment of DME suppliers on a fee schedule. Consequently, how much
Medicare should pay for each item is known when it is delivered.
Overpayments that should be returned to Medicare arise almost entirely
from claims submitted and paid inappropriately.

CORFs  and rehabilitation agencies both provide rehabilitation services to
outpatients. CORFs offer a broad array of services under physician
supervision—such as skilled nursing, psychological services, drugs, and
medical devices—and must have a physician on staff. Conversely,
rehabilitation agencies provide physical therapy and speech pathology
services, primarily in nursing facilities, to individuals who are referred by
physicians. In 1996, there were 336 CORFs and 2,207 rehabilitation agencies.
From 1990 to 1996, Medicare’s spending for CORFs grew from $19 million to
$122 million, an average annual increase of 36 percent. Spending for
rehabilitation agencies increased from $151 million to $457 million, an
average growth of 25 percent per year during the same period. Like HHAs,
CORFs and rehabilitation agencies are paid on the basis of their costs.
Therefore, the actual payment for a service is not known until the cost
report is settled, after the end of the fiscal year. This increases the
likelihood that overpayments will be made because of unallowable costs
or cost-estimation problems during the year.

 The estimate of needed capital is based on the HHA’s projection of the home health care visits it will
provide during the first 3 months multiplied by the RHHI’s estimate of cost per visit.

Page 7                                       GAO/HEHS-99-23 Home Health Agency Surety Bonds

                     A surety bond is a three-party agreement. It is a written promise made by
Surety Bond          the bond issuer, usually an insurance company, called a surety, to back up
Specifications       the promise of the purchasing firm to a third party named in the bond.8 For
Determine Cost and   example, the surety may agree to compensate the third party if the
                     bondholder fails to deliver a product on time or without significant
Availability         defects. In issuing a bond, the surety signals its confidence that the
                     bondholder will be able to fulfill the promised obligations. In purchasing a
                     bond, the bondholder acknowledges its duty to indemnify—that is,
                     compensate—the surety when a bond is redeemed.

                     Surety bonds entail many different types of guarantees, depending on what
                     the third party requiring the bond wants to accomplish. Three types of
                     surety bonds have been seen as potentially appropriate for HHAs—a
                     financial guarantee bond, an antifraud bond, and a compliance bond.
                     However, while labels are often applied to different types of bonds, the
                     types have no strict definitions. The specific language in each bond
                     describes the guarantee, what constitutes default, how a default is
                     demonstrated, and what penalty or compensation ensues. The bond types
                     can be described in general terms. A financial guarantee bond promises
                     that the surety will pay the third party requiring the bond financial
                     obligations not paid by the bondholder up to the face value of the bond.
                     Antifraud bonds generally provide the third party protection in the event
                     that it incurs losses from the bondholder’s fraudulent or abusive actions.
                     The third party delineates what constitutes fraud or abuse for purposes of
                     bond default. A compliance bond generally guarantees that the bondholder
                     will conform to the terms of the contract with the third party requiring the
                     bond and that the surety will pay the third party if the bondholder does not
                     meet the contract’s terms. This bond also can be designed to guarantee
                     that the bondholder complies with specific standards, such as having a
                     required license or conforming to a set of regulations.

                     Just as surety bonds vary depending on what is being guaranteed, so do
                     the criteria that sureties use in assessing or underwriting a prospective
                     bond purchaser. There are, however, general underwriting rules. Sureties
                     traditionally examine what they call a firm’s “3 Cs”—character, capacity
                     (or proven ability to perform), and capital. The emphasis that the surety
                     places on each of these three elements varies with the guarantee
                     incorporated into the bond. For a bond that guarantees that the surety will
                     pay financial obligations, for example, sureties emphasize the financial

                      Surety bonds required by federal agencies must be obtained from sureties on a list of about 300
                     sureties approved by the Treasury Department. These sureties go through a review process in which
                     their solvency and other factors, such as their history and officers’ and directors’ experience, are

                     Page 8                                      GAO/HEHS-99-23 Home Health Agency Surety Bonds

resources of the bond purchaser and its principals. Sureties emphasize a
bond purchaser’s character or capacity in determining whether to provide
a bond that guarantees that the surety will pay when the bonded firm acts
dishonestly, although they are still interested in the purchaser’s financial

To underwrite or assess whether to provide a bond, sureties examine, at a
minimum, information about the firm—such as an organizational plan,
length of time in business, financial statements for the current year and
the previous 2 years, resumes of key individuals, current sales and
revenues, and a business plan. Sureties generally review the credit history
of a firm and, if it is privately held, of its principals. This scrutiny is one of
the benefits of requiring a surety bond.

The cost of obtaining a bond is the fee or premium charged plus having to
provide collateral—cash or assets that can be turned into cash. The
greater the surety’s risk of having to compensate the third party without
being able to recover that compensation from the bondholder, the higher
the cost. The fee is usually 1 percent to 2 percent of the face value for
most commercial bonds. Collateral, which ensures the compensation of
the surety, is typically required when there is a greater risk of a loss
because of the type of guarantee provided by the bond or the capacity of
the firm to repay the surety. For example, sureties may require collateral
of firms that do not have assets worth considerably more than the face
value of the bond.

The collateral that sureties accept may be a deed of trust on real property,
a Treasury bond, or an irrevocable letter of credit from a bank. The costs
to the bondholder of providing collateral vary inversely with the costs to
the surety for liquidating it. A property deed may be the least costly for the
bondholder to provide, followed by a Treasury bond, and then an
irrevocable letter of credit, which generally requires the payment of a fee
to the financial institution. The latter two options require obligating cash
from operating capital. These are the most secure options for the surety,
however, since they can be liquidated with minimal costs.

For certain firms seeking a bond, a firm’s principals may have to
personally guarantee that they will repay the bond issuer for any losses.
Such personal indemnity is generally required for smaller, privately held
firms but not for most nonprofit firms or those that are publicly held.
Surety industry representatives indicate that personal indemnity provides

Page 9                              GAO/HEHS-99-23 Home Health Agency Surety Bonds

                      a measure of the willingness of the principals who benefit from the firm to
                      stand behind their company.

                      The ability to obtain a surety bond varies with the bond’s terms and the
                      characteristics of the firm. The surety industry maintains that the
                      narrower the definition of what a bond guarantees, the easier it is for a
                      firm to obtain the bond. For example, obtaining an antifraud bond would
                      be easier if it required payment of the penalty only in cases involving
                      criminal fraud rather than any type of abuse. Large, financially healthy
                      firms that have been in business a long time generally have the least
                      difficulty obtaining any surety bond. Smaller privately held firms, new or
                      inexperienced businesses, firms that have filed for bankruptcy or have
                      credit problems, and those with little credit have more difficulty obtaining
                      a bond.9 Those that have defaulted on a prior bond are likely to face the
                      most severe scrutiny. One surety industry representative indicated that
                      firms that default on one bond are unlikely to be able to obtain another.

                      Anyone required by federal statute or regulation to furnish a surety bond
                      may substitute a U.S. bond, Treasury note, or other federal public debt
                      obligation of equal value.10 According to the surety industry, however, this
                      option is taken only by large, well-financed entities.

                      The Florida Medicaid surety bond requirement has often been cited as an
Florida’s Medicaid    important precursor to Medicare’s surety bond requirement. However, the
Surety Bond           effect of Florida Medicaid’s program integrity measures has few
Requirement Has Few   implications for Medicare’s imposition of a surety bond requirement.
                      Florida instituted more stringent program integrity measures than
Implications for      Medicare at the same time it required the surety bond, such as a criminal
Medicare              background check. The state also targets the surety bond requirement to
                      new and problem providers.

                      Florida introduced several new measures to combat fraud and abuse in its
                      Medicaid program in December 1995. As a result of these measures, HHAs
                      and other noninstitutional providers in Florida are now subject to closer
                      scrutiny before they can participate in Medicaid, and home health care

                       The Small Business Administration (SBA) has two surety bond guarantee programs that help
                      construction contractors that are small businesses obtain a bond. SBA assumes a predetermined
                      percentage of loss and reimburses the surety up to that amount if the contractor defaults. See
                      appendix II for a description of the SBA programs. A representative of SBA told us that HHAs would
                      not be able to participate in the surety bond guarantee programs unless the definition of eligible
                      entities were changed by law.
                          31 U.S.C. 9303.

                      Page 10                                    GAO/HEHS-99-23 Home Health Agency Surety Bonds

coverage criteria have been tightened. One of Florida’s new program
participation requirements is that certain agencies purchase a 1-year
surety bond.

The surety bond requirement applies to new HHAs, those in the program for
less than a year when they reenroll, and problem agencies.11 Each must
obtain a 1-year, $50,000 surety bond. Florida officials indicate that their
primary reason for the surety bond requirement is that in underwriting a
bond surety companies check the capacity and financial ability of
providers to operate their business. They consider such review to be an
effective and administratively efficient screening tool to keep unqualified
providers from participating in the Medicaid program. Florida officials told
us that the screening associated with obtaining a surety bond is so
important that they no longer allow providers to substitute a $50,000 letter
of credit for the surety bond.12

The required surety bond is a guarantee that the bondholder’s principals,
agents, and employees will comply with Florida’s Medicaid statutes,
regulations, and bulletins and will perform all obligations faithfully and
honestly. Since the surety bond requirement was implemented, no HHAs
have had claims made against their bonds.

In addition to the surety bond requirement, Florida’s Medicaid reforms
included several policy changes. A new agreement was implemented for
all noninstitutional providers. They are required to pay for a criminal
background check for each principal (owners of 5 percent or more,
officers, and directors) by the state Department of Law Enforcement.
Providers also must allow state auditors immediate access to their
premises and records. Other measures the Florida Medicaid program
implemented in its campaign against fraud and abuse include new
computerized claims edits and other types of claims review to identify
inappropriate billings. In addition, new constraints on the coverage of
home health care services were imposed, including prior approval
requirements for extended periods of service.

More than one-fourth of HHAs that participated in Florida’s Medicaid
program when the program integrity measures were implemented are

 Problem agencies are under investigation for fraudulent practices or have been found to have
committed fraud. The state says they are not many because most were excluded from the Medicaid
  The director of Florida Medicaid, in commenting on a draft of the report, said that the letter of credit
also is a more difficult instrument to administer than a surety bond because the institutions issuing the
letters of credit often need the original documents returned at the end of their term.

Page 11                                       GAO/HEHS-99-23 Home Health Agency Surety Bonds

                    reported to have left Medicaid. This estimate is based on an analysis of
                    Medicaid provider numbers. Agencies with no provider number after the
                    bond requirement effective date were counted as leaving the program.
                    However, HHAs may stop using their provider numbers for reasons other
                    than leaving the program or going out of business. Some, for example, use
                    a new number obtained because they merged with another agency or were
                    sold. We were able to locate seven of the nine largest HHAs that the state
                    reported as having left the Medicaid program in 1996. All seven agencies
                    were still providing Medicaid-covered home health care services.13 We did
                    not assess what proportion of smaller agencies reported as leaving
                    actually did so.

                    The departure of HHAs from Florida’s Medicaid program cannot be
                    attributed solely to the surety bond requirement. Bonds are required only
                    for new or problem providers, so the requirement does not apply to most
                    agencies that had been billing Medicaid. Most of the HHAs that left
                    Medicaid would not have needed to obtain a bond.

                    Florida’s governor maintains that the reduction in the number of
                    Medicaid-participating HHAs has not affected patients’ access to care.
                    Closures, in fact, are not a good measure of access because it is possible
                    for one agency to quickly absorb the staff and patients of a closing HHA. We
                    did not identify any systematic evaluations of the effect of the closures,

                    HCFA, concerned about increases in overpayments to HHAs, structured the
HCFA Designed the   bond as a financial guarantee that agencies’ Medicare overpayments would
Surety Bond         be repaid, and it raised the required amount of the bond for larger
Requirement to      agencies above the $50,000 specified by the BBA.14 Larger HHAs
                    participating in both Medicare and Medicaid were required to obtain two
Recover             separate surety bonds: one bond for Medicare valued at 15 percent of
Overpayments and    Medicare revenues and one for Medicaid valued at 15 percent of those
                    revenues.15 The specification of the bond requirements and the anticipated
Increase HHA        costs raised industry concern about their affordability and availability.
Scrutiny            Under HCFA’s requirements, bonds, however, do increase the likelihood

                      One HHA changed its corporate structure, which required a new provider number. Two were
                    acquired by another firm. Three continued to provide Medicaid services as part of a large chain. One
                    still provided services and claimed to have a Florida Medicaid provider number.
                      HCFA also structured the surety bond to cover unpaid civil monetary penalties and assessments.
                     HHAs with combined Medicare and Medicaid revenues of $334,000 or less were required to have only
                    one bond for both programs. This is because 15 percent of $334,000 equals $50,000, the minimum bond

                    Page 12                                     GAO/HEHS-99-23 Home Health Agency Surety Bonds

                             that they will be redeemed and, consequently, may increase the scrutiny of
                             HHAs by surety companies and the proportion of agencies having to
                             provide collateral. The requirements also provide an incentive for HHAs to
                             repay any overpayments so they can continue to purchase bonds.

Unrecovered                  HCFA  specified a financial guarantee bond in its regulation and raised the
Overpayments Are             value of the bond above the legislated minimum for larger agencies
Currently a Small Share of   because of its concern about the recovery of overpayments to HHAs. HCFA
                             believes that this type of bond will reduce Medicare’s risk of unrecovered
Medicare’s HHA Payments      overpayments. This risk, however, is currently small. Uncollected
                             overpayments represented less than 1 percent of Medicare’s 1996 spending
                             for home health care services. Although overpayments are expected to rise
                             in the near term, longer-term changes in Medicare policies will probably
                             reduce their likelihood in the future. The higher bond amount for larger
                             agencies may correspond to the level of payments they receive, but the
                             data HCFA used to establish the higher bond requirement were unrelated to
                             HHA size.

                             HHAs accounted for about one-fourth of all Medicare overpayments in 1996,
                             and overpayments as a percentage of total HHA payments have been rising.
                             In 1993, HHA overpayments were 4 percent of total program payments; by
                             1996, this had grown to 6 percent. HCFA estimates that about 60 percent of
                             HHAs had overpayments in 1996. Most overpayments are recovered,
                             however. HCFA data indicate that unrecovered overpayments in 1996 were
                             less than 1 percent of Medicare’s HHA payments, although even this lower
                             percentage overstates the problem. HCFA counts as unrecovered
                             overpayments some money that is not really overpayment.16 Further, some
                             of the actual overpayments may be collected in the future.

                             HCFA and RHHI officials with whom we spoke expect to find that
                             overpayments in 1998 were higher than in previous years because of the
                             new limits on payments introduced by the BBA.17 They estimate that as
                             many as 70 to 80 percent of HHAs may have overpayments for 1998. They
                             also expect a larger proportion of overpayments to be uncollectible

                               HCFA reported that $116 million of uncollected overpayments in 1996, or more than half, were the
                             result of 132 HHAs leaving the Medicare program and not filing a final cost report. HCFA categorizes
                             all Medicare payments to an HHA that has not filed a cost report as overpayments, even though that
                             HHA may have provided covered home health care services to beneficiaries. If the terminated agencies
                             had gone through the year-end settlement process, at least a portion of the payments to some of them
                             would likely have been appropriate.
                               Medicare Home Health Benefit: Impact of Interim Payment System and Agency Closures on Access
                             to Services (GAO/HEHS-98-238, Sept. 9, 1998).

                             Page 13                                    GAO/HEHS-99-23 Home Health Agency Surety Bonds

                            because more HHAs will leave Medicare still owing overpayments.
                            Overpayments are problematic when HHAs terminate because there is no
                            readily available way to collect them. HCFA reported that from October
                            1997 through September 1998, 1,155 HHAs quit serving Medicare
                            beneficiaries and terminated from the program. These HHAs represent a
                            larger proportion of terminated Medicare-certified agencies than in
                            previous years.

                            The recent spate of HHA closures and predicted increase in overpayments
                            stem primarily from changes in Medicare’s payment, participation, and
                            coverage policies. Once these policies are fully implemented, RHHIs and
                            agencies should be better able to estimate allowable costs, thus
                            minimizing overpayments. HCFA also has a BBA mandate to implement a
                            prospective payment system (PPS) for HHAs.18 Under PPS, HHAs will know
                            the payment at the time of service because they will receive a fixed,
                            predetermined amount per unit of service, further reducing the potential
                            for overpayment. Once PPS is in place, overpayments should occur only
                            when bills are submitted and paid for individuals who are not eligible for
                            Medicare’s benefits or for noncovered services.

                            HCFA’s requirement that large agencies provide a bond equal to 15 percent
                            of their Medicare revenues increases the cost of a bond considerably for
                            some HHAs. HCFA officials argue that when large agencies fail to return
                            overpayments, the potential loss to Medicare is greater than when smaller
                            agencies do so. HCFA has not undertaken any analysis to determine the
                            relationship between unrecovered overpayments and HHA size. In fact,
                            larger agencies might be more likely to return them because they have
                            more resources to manage the repayments and a greater incentive to
                            remain in the Medicare program.

Fees Are the Primary Cost   Some information on the cost of and access to surety bonds is available.
of Bonds for Large HHAs;    Many HHAs shopped for and obtained bonds before the regulation was
Collateral Is the Largest   postponed to February 15, 1999, but many others did not. In addition, HCFA
                            made a change to the required terms for the bonds on June 1, 1998, that
Burden for Small HHAs       affected surety companies’ potential liability and their willingness to
                            provide bonds to HHAs. The cost of obtaining a surety bond is the fee or
                            premium charged plus any collateral that must be supplied.19 For large

                             The PPS was originally supposed to be in place by fiscal year 2000, but the Congress delayed the
                            effective date until fiscal year 2001 in the Omnibus Consolidated and Emergency Supplemental
                            Appropriations Act for Fiscal Year 1999.
                              Current law prohibits Medicare’s reimbursement of HHA surety bond costs.

                            Page 14                                     GAO/HEHS-99-23 Home Health Agency Surety Bonds

HHAs, the major cost of a surety bond is the fee, because they are required
to have a bond equalling 15 percent of program revenues. They are less
likely to have to provide collateral and the fee they pay may be a lower
percentage of the bond’s face value than the fee for smaller HHAs. Small
HHAs are required to obtain the minimum $50,000 bond but are more likely
to have to put up collateral.

The range of fees for HHA bonds is comparable to other commercial surety
bonds. The surety underwriting association reports that fees for HHA
financial guarantee bonds generally range between 1 and 2 percent of their
face value. Rates may be higher or lower depending on the HHA’s financial
situation. Some nonprofit and privately held for-profit HHAs that we
interviewed had been quoted fees higher than those cited by the surety
industry—up to 6 percent. Some of these quotes, however, were made
before the changes in the regulation that reduced sureties’ risk.20

One surety that underwrote about 13 percent of the HHA surety bonds sold
before the postponement of the requirement told us that its fees ranged
from 0.5 to 3 percent of the face value of the bonds. It indicated that
having a written business plan describing how the agency would respond
to the new payment rates created by the BBA, audited financial statements,
positive cash management history, and rigorous record keeping policies
and practices reduced the HHAs’ fees. This surety charged its lowest fees to
nonprofit HHAs supported directly or indirectly by public or private
foundations. Its highest fees were for providers new to the home health
care business.

We found in looking at HCFA’s 1996 data that between 6,000 and 7,000 HHAs
would be required to obtain a bond of more than $50,000 to participate in
Medicare (see table 1). Assuming that sureties charge fees of 2 percent of a
bond’s face value, fees would begin at $1,000, and about 2,400 HHAs would
have to pay fees between $3,000 and $7,500 to obtain a bond. At that rate,
fees could exceed $60,000 for large agencies, although sureties might
charge them a lower rate. Larger agencies choosing to participate in
Medicaid would pay additional fees to obtain a second bond. HCFA

  On June 1, 1998, HCFA published technical changes to the surety bond regulation. Previously, a
surety issuing a bond covering a particular year was liable for any overpayments made to the HHA
during that year, regardless of when those overpayments were discovered. With the change, HCFA
limited a surety’s liability to overpayments discovered in the year when the bond was in effect.
However, for an HHA that terminates from the program, HCFA has a 2-year period in which to make a
claim against the bond. HCFA also stated that the surety bond would be used as a last resort in
recovering overpayments, gave sureties the right to appeal an overpayment finding if the HHA did not,
and provided for reimbursing the surety for any money paid that was subsequently collected from the

Page 15                                     GAO/HEHS-99-23 Home Health Agency Surety Bonds

                                        specifically exempted smaller agencies from this requirement, but the
                                        majority of HHAs will have to obtain bonds for both programs.

Table 1: Distribution of HHAs by 1996
Medicare Payments, Surety Bond          Range of 1996                     Number of Surety bond face                 Estimated annual fee
Values, and Estimated Premiums          Medicare payments                    HHAsa value                             (at 2 percent)
                                        Less than $50,000                         744 $50,000                        $1,000
                                        $50,000 to $100,000                       452 $50,000                        $1,000
                                        $100,001 to $200,000                      735 $50,000                        $1,000
                                        $200,001 to $334,000                      767 $50,000                        $1,000
                                        $334,001 to $1,000,000                  2,854 $50,001 to $150,000            $1,000 to $3,000
                                        $1,000,001 to $2,499,999                2,406 $150,000 to $375,000           $3,000 to $7,500
                                        $2,500,000 to $5,000,000                  939 $375,000 to $750,000           $7,500 to $15,000
                                        $5,000,001 to                             415 $750,000 to $1,500,000 $15,000 to $30,000
                                        $10,000,001 to                            103 $1,500,000 to                  $30,000 to $60,000
                                        $20,000,000                                   $3,000,000
                                        $20,000,001 or more                        29 $3,000,000 +                   $60,000 +
                                         About 1,400 government-operated HHAs that may not have been required to obtain a surety
                                        bond are included in these numbers.
                                            Surety industry representatives indicated fees would generally range from 1 to 2 percent.

                                        Source: GAO’s analysis of HCFA data.

                                        The surety bond fee is not the only cost of obtaining a bond. Having to
                                        provide collateral raises the cost to HHAs. Sureties report requiring
                                        collateral because HCFA’s requirement that bonds be a financial guarantee
                                        increases the likelihood of claims. They want collateral from HHAs that
                                        pose greater risks of not being able to repay a surety if the bond is
                                        redeemed. Requirements for collateral vary among sureties, but generally
                                        they require collateral of privately held HHAs, particularly small and
                                        medium-sized agencies. The surety cited above required collateral of new
                                        HHAs unless they were financially strong and personal indemnity of the
                                        principals of all privately held firms.21

                                        HCFA reported that about 40 percent of HHAs obtained Medicare surety
                                        bonds before the June 1998 delay in the implementation of the

                                         An initiative like the SBA program for construction contractors could offer some relief to certain
                                        small HHAs. The SBA program, however, reinsures bonds only for contractors that have been in
                                        business for at least 3 years.

                                        Page 16                                       GAO/HEHS-99-23 Home Health Agency Surety Bonds

                                     requirement (see table 2).22 Provider-based HHAs (those that are part of a
                                     hospital or skilled nursing facility) of any size were more likely to secure a
                                     surety bond than other types of HHAs; freestanding HHAs not part of a chain
                                     were least likely. It is impossible, however, to determine the proportion of
                                     HHAs that could have secured bonds. Surety and home health care industry
                                     representatives told us that some providers postponed the purchase of
                                     surety bonds, waiting for actual implementation of the requirement. They
                                     also said that some owners did not provide the collateral and personal
                                     indemnity that would have made it possible for them to obtain a bond. The
                                     timing of the surety bond requirement may have affected HHA proprietors
                                     who were particularly reluctant to use their personal assets as collateral
                                     and to provide personal indemnity because of the uncertainty created by
                                     the substantial changes in Medicare’s payment policy. It is not possible to
                                     determine whether they could have purchased bonds or ultimately will.

Table 2: Distribution of HHAs With
Surety Bonds by June 1998                                                                                 HHAs with
                                     Type of HHA                                               Total HHAs    bonds Percentage
                                     Small HHAs
                                     Provider-based                                                      502            305            60.8
                                     Free-standing (chain)                                               265            107            40.4
                                     Free-standing (nonchain)                                         2,199             575            26.1
                                     Total                                                            2,966             987            33.3
                                     Medium HHAs
                                     Provider-based                                                      638            445            69.7
                                     Free-standing (chain)                                               323            137            42.4
                                     Free-standing (nonchain)                                         1,699             390            23.0
                                     Total                                                            2,660             972            36.5
                                     Large HHAs
                                     Provider-based                                                   1,279             974            76.2
                                     Free-standing (chain)                                               619            312            50.4
                                     Free-standing (nonchain)                                         1,916             547            28.5
                                     Total                                                            3,814           1,833            48.1
                                     All HHAs                                                         9,440           3,792            40.2
                                     Note: For this table, small HHAs have annual Medicare revenues of $200,000 or less, medium
                                     HHAs have $200,001 to $1,000,000, and large HHAs have more than $1,000,000.

                                     Source: HCFA.

                                       Although almost 4,000 bonds were submitted to HCFA, the number purchased may have been higher.
                                     A representative of the surety company that sold about 13 percent of the bonds told us that he believes
                                     that in some cases bonds were purchased but not forwarded to HCFA.

                                     Page 17                                     GAO/HEHS-99-23 Home Health Agency Surety Bonds

Financial Guarantee Bond   A more narrowly defined antifraud bond, one triggered only by the failure
Ensures Greater Scrutiny   to return overpayments received fraudulently, would probably be easier
and Return of              and less costly to obtain than a financial guarantee bond. Because the
                           specified acts of fraud would not occur frequently, the risk of a claim
Overpayments Than Other    against a bond would be low and sureties would provide bonds more
Bond Types                 readily. HHAs would be unlikely to have to pledge collateral if they could
                           demonstrate good character and ties to the community, although personal
                           indemnity from principals would possibly still be required of privately held

                           HCFA’s  use of a financial guarantee bond for the return of overpayments
                           regardless of their source will ensure more scrutiny and benefits to
                           Medicare, however, than other types of bonds. In underwriting this type of
                           bond, a surety will be likely to pay particular attention to financial
                           statements, business practices, and overpayment history. This scrutiny
                           will provide the Medicare program with several benefits. Proprietors who
                           do not have relevant business experience will be deterred from incurring
                           entering the program. Existing Medicare-certified HHAs will be examined
                           as to business soundness. HHAs with overpayments that do not make an
                           effort to repay them will be unlikely to obtain a subsequent surety bond
                           and will be out of the Medicare business. And, generally, all providers will
                           be deterred from incurring overpayments and will have incentive to repay
                           any that are discovered.

                           Screening by a surety appears to be most useful for new agencies. The
                           rapid increase in the number of HHAs entering the Medicare program with
                           little scrutiny also makes requiring surety bonds a useful mechanism for
                           screening HHAs already in the program. However, the value of this scrutiny
                           would probably diminish with an HHA’s continued participation in
                           Medicare. Little may be gained from repetitive scrutiny of established,
                           mature HHAs.

                           The option to substitute a Treasury note or other federal public debt
                           obligation for a surety bond will allow well-financed firms to avoid
                           scrutiny. Whether this option is problematic depends on the purpose of
                           the surety bond. If its primary purpose is to guarantee payment, then this
                           causes no concern. If, however, the primary purpose is to increase
                           scrutiny, then the ability to substitute may undermine that objective.

                           Identifying the potential effect and cost of a compliance bond would be
                           difficult because the terms of such a bond can vary widely. A bond like
                           that required by Florida Medicaid, which requires compliance with all

                           Page 18                          GAO/HEHS-99-23 Home Health Agency Surety Bonds

                        program rules and regulations, could effectively create a monetary penalty
                        for violating Medicare’s conditions of participation. Now HHAs are required
                        to comply but have the opportunity to address and correct deficiencies
                        before losing their right to participate in the program. However, in
                        underwriting a compliance bond, sureties might choose to avoid agencies
                        that have been noted for violations in the past. Even if a bond were
                        restricted to more serious deficiencies, sureties might be more reluctant to
                        provide one. Sureties are less experienced in assessing compliance with
                        Medicare rules and regulations than financial capacity, so it would be
                        more difficult for them to predict which HHAs represent greater risk.

                        Representatives of the surety industry acknowledge that no surety bond
                        can screen out all people who want to take unfair advantage of the
                        Medicare program. Some individuals who want to delude the surety will
                        still be able to obtain surety bonds. In addition, individuals who have no
                        history of criminal action but who intend to defraud or abuse the program
                        once in could obtain bonds. Further, the substitution of a Treasury note,
                        U.S. bond, or other federal public debt obligation, as allowed by Treasury
                        regulation, eliminates any review of an HHA’s suitability or its history of

                        HCFA  intends to propose surety bond requirements for DME suppliers,
Similar Surety Bond     CORFs, and rehabilitation agencies that will parallel those for HHAs—a
Requirements for        financial guarantee bond with a face value equal to the greater of $50,000
DME Suppliers,          or 15 percent of Medicare payments.23 As with HHAs, Medicare will benefit
                        from sureties’ review of these providers and the incentive created to
CORFs, and              return overpayments. There are numerous small DME providers, making it
Rehabilitation          difficult for Medicare and other payers to monitor them. Historically, there
                        has been general concern about DME suppliers’ business and billing
Agencies Will Benefit   practices. ORT found that a substantial number of suppliers billed Medicare
Medicare but May        for DME either not furnished or not provided as billed. The scrutiny
Affect Small-Provider   provided by sureties will offer a review of their business practices and
                        financial qualifications. For CORFs and rehabilitation agencies, the
Participation           likelihood of overpayments is higher than for HHAs. HCFA estimates that in
                        1996, uncollected overpayments equaled 10.7 percent of the $122 million
                        total Medicare spending for CORFs and 6.2 percent of the $457 million for
                        rehabilitation agencies—significantly greater than the less than 1 percent
                        estimated for HHAs.

                         According to HCFA officials, physicians who supply DME incidentally to their providing professional
                        services will be exempt from obtaining surety bonds.

                        Page 19                                    GAO/HEHS-99-23 Home Health Agency Surety Bonds

                                       These providers’ access to and costs for surety bonds will also be
                                       comparable to those of HHAs. Larger firms or firms with more assets and
                                       other financial resources will probably have little difficulty obtaining a
                                       bond. Small firms and privately held ones with few resources will be more
                                       likely to have to provide collateral and personal indemnity to obtain one.
                                       Most of the smaller providers have limited revenues from Medicare; we
                                       estimate from HCFA data that between 74 and 97 percent would require a
                                       $50,000 surety bond (see table 3). Firms that own buildings or equipment
                                       will probably not have to pledge additional collateral if they have sufficient

Table 3: Distribution of Surety Bond
Face Value Required                    Surety
                                       bond           DME suppliers                     CORFs             Rehabilitation agencies
                                       required      Number         Percent        Number       Percent      Number      Percent
                                       $50,000         66,106             97           247           74        1,890           86
                                       15% of
                                       payments         2,205                 3          89          26          317           14
                                       Total           68,311           100            336          100        2,207         100
                                       Source: GAO’s analysis of HCFA data.

                                       Since many DME suppliers receive very limited Medicare revenue, they may
                                       be more likely to cease participation in the program if they view the surety
                                       bond requirement as too costly. The average DME supplier receives about
                                       one-twentieth of the Medicare revenue that the average HHA does. The
                                       effect on beneficiaries’ access may not be significant, however, given that
                                       DME suppliers currently number more than 68,000. While CORFs and
                                       rehabilitation agencies receive more Medicare revenue on average than
                                       DME suppliers, some may find the costs of obtaining a surety bond a barrier
                                       to Medicare participation. Access for beneficiaries may not be
                                       compromised significantly since other providers offer alternative sources
                                       of therapy.

                                       The Congress mandated surety bonds for HHAs because of concern about
Conclusions                            the growth in the home health care benefit and the lack of adequate
                                       oversight. HCFA implemented the requirement to ensure that it could
                                       recover Medicare overpayments made to HHAs. In underwriting the bonds,
                                       sureties will evaluate HHAs entering or continuing in the program by
                                       examining financial stability and business practices, which may raise the
                                       standard for Medicare participation by sureties. This scrutiny can help

                                       Page 20                                    GAO/HEHS-99-23 Home Health Agency Surety Bonds

address the congressional concern. Specifying the terms of a bond as HCFA
did will provide incentives for HHAs to return overpayments. Thus, the
surety bond requirement can also achieve HCFA’s objectives.

We believe that HCFA made a prudent choice in specifying the surety bond
as a financial guarantee. A financial guarantee surety bond will raise the
standard for HHAs entering the Medicare program and will help ensure that
Medicare is protected against unrecovered overpayments. However, we
believe that HCFA’s decision to require that larger agencies obtain bonds
equal to 15 percent of their Medicare revenues may be unnecessarily
burdensome for several reasons. First, this standard imposes a greater
burden on large HHAs without a demonstrated commensurately greater
benefit. Second, the home health care industry’s history of unrecovered
overpayments does not warrant this requirement, even in the face of
growing overpayments. Instead, we believe that a bond in the amount of
$50,000 balances the benefit to Medicare of increased scrutiny and
recovery of overpayments with the burden on participating agencies.

Requiring a surety bond may effectively screen HHAs to determine whether
they are reasonably organized entities, follow sound business practices,
and have some financial stability. Such screening is most useful for new
agencies. Given the considerable increase in recent years in the number of
HHAs and the lack of scrutiny as these organizations entered the program,
screening all existing HHAs is also useful. However, little may be gained
from continued screening of established mature agencies. For such HHAs,
the underwriting process is likely to be sensitive only to significant
changes in financial stability.

We also believe that requiring HHAs to obtain separate surety bonds for
Medicare and Medicaid may be excessive. Even though HCFA exempted
small agencies from obtaining two bonds, the majority of HHAs are required
to purchase two bonds. This entails two fees and, in many cases, pledging
collateral for two bonds. However, the level of scrutiny by the surety will
be similar regardless of whether one or two bonds are needed. Requiring
one bond for the two programs diminishes the financial protection but not
HHAs’ incentives to repay overpayments. This is because an HHA that
defaults on its bond to either Medicare or Medicaid is unlikely to obtain a
bond in the future.

Allowing HHAs to substitute a Treasury note for the surety bond makes
sense when the primary objective of the requirement is to increase HCFA’s
ability to recoup some unrecovered overpayments. However, this

Page 21                         GAO/HEHS-99-23 Home Health Agency Surety Bonds

                           substitution undermines the objectives of requiring Medicare providers to
                           submit to outside scrutiny and giving them strong incentives to return all
                           overpayments. If congressional intent is to screen HHAs, the option of
                           substituting a Treasury note does not afford that scrutiny.

                           We recommend that to implement BBA’s surety bond requirement for HHAs,
Recommendations to         the HCFA Administrator revise the present regulation so that all HHAs obtain
the Administrator of       one financial guarantee surety bond in the amount of $50,000 for the
HCFA                       guaranteed return of overpayments for both Medicare and Medicaid.

                           With respect to the surety bond requirements that we are recommending,
Matters for                the Congress may wish to consider
Consideration          •   exempting from a surety bond requirement HHAs that have demonstrated
                           fiscal responsibility—for example, those that have maintained a bond for a
                           specified period of time and have returned any overpayments—and
                       •   eliminating the option for HHAs of substituting a Treasury note, U.S. bond,
                           or other federal public debt obligation for a surety bond.

                           In written comments on a draft of this report, HCFA agreed with our
Agency and Industry        findings, conclusions, and recommendations. The agency also agreed that
Comments                   the Congress should consider eventually exempting from the surety bond
                           requirement HHAs that have demonstrated fiscal responsibility and
                           eliminating the option for HHAs to submit federal public debt obligations in
                           lieu of a surety bond. HCFA provided technical comments that we
                           incorporated into the final report.

                           We also obtained written comments from Florida Medicaid officials on the
                           section of the report pertaining to the state’s program integrity efforts.
                           They concurred with our findings and conclusions, and their technical
                           comment was incorporated into the final report.

                           Surety and home health care industry representatives reviewed a draft of
                           this report. Their technical comments are included in the final report. The
                           National Association of Surety Bond Producers and the Surety Association
                           of America represented the surety industry. They expressed concern about
                           the risk to the surety industry of writing $50,000 financial guarantee bonds
                           for HHAs and asserted that a fraud and abuse bond would be more
                           appropriate because it would provide the desired level of scrutiny of HHAs
                           and be available to more of them. They also thought that a $50,000 bond

                           Page 22                          GAO/HEHS-99-23 Home Health Agency Surety Bonds

would be too high for some HHAs. They suggested basing the amount of
bonds on a percentage of Medicare revenues with a dollar upper limit. The
surety industry representatives also believed that limiting the time during
which HHAs must have surety bonds after demonstrating fiscal
responsibility is not appropriate for several reasons. First, they maintained
that the screening process remains important over time because sureties
monitor changes in management and business practices, as well as in
financial status, that may indicate problems. Second, they believed that if
the requirement is limited, the cost of issuing bonds will go up as the
group of HHAs purchasing bonds gets smaller. They expressed general
concern about the attractiveness of this line of business to the surety
industry if our recommendations are adopted. We believe that a $50,000
financial guarantee bond appropriately balances the costs to HHAs in
obtaining a bond with protection for the Medicare program in the form of
scrutiny and incentives to repay overpayments. We also believe that a
financial guarantee bond will ensure more scrutiny and greater benefit to
Medicare than other types of bonds. Further, after an HHA has
demonstrated its commitment to repay or avoid overpayments, we believe
that the value of the bond to the Medicare program diminishes

The home health industry representatives who reviewed the report were
from the American Association of Services and Homes for the Aging, the
American Federation of HHAs, the American Hospital Association, the
Home Care Association of America, the Home Health Services and Staffing
Association, the National Association of Home Care, and the Visiting
Nurses Association of America. Most of these organizations supported
limiting the requirement to one $50,000 surety bond for both Medicare and
Medicaid. They were concerned, however, that small HHAs might find the
bond requirement burdensome and, given the payment changes
implemented in 1998, might have to leave the Medicare program. The
home health care industry representatives agreed that HHAs with “good
track records” should be exempt from any surety bond requirement but
thought that this exemption should be immediate. One representative
thought that the Florida Medicaid program’s experience with surety bonds
may be more relevant to Medicare’s experience than we do. It was also
suggested that other mechanisms within the Medicare program could
accomplish the screening function of a surety bond and that these options
should be explored. The home health care industry representatives
asserted that compliance bonds and antifraud bonds are more appropriate
for the home health care industry than a financial guarantee bond. As
noted earlier, we believe that a flat bond amount of $50,000 balances the

Page 23                          GAO/HEHS-99-23 Home Health Agency Surety Bonds

concern of the industry with needed additional protections for the
Medicare program. We believe that it is appropriate to require all HHAs to
obtain a bond initially because this would ensure a level of scrutiny across
all HHAs and because developing criteria to determine who should be
exempt would be challenging. While other options could be pursued to
screen HHAs, we believe that a financial guarantee bond will ensure more
scrutiny and greater benefit to Medicare than other types of bonds.

The surety industry and one home health care representative expressed
concern about the timing of the surety bond requirement. Since the
regulation was suspended, it is not clear when HHAs will have to obtain a
surety bond or the amount of time it will need to cover. We agree that
these details could affect future bond terms and the availability and cost of

As agreed with your offices, unless you release the report’s contents
earlier, we plan no further distribution for 30 days. We will then make
copies available to other congressional committees and Members of the
Congress with an interest in these matters, the Secretary of Health and
Human Services, the Administrator of HCFA, and others upon request.

If you or your staff have any questions, please call me on (202) 512-6806 or
William J. Scanlon, Director, Health Financing and Systems Issues, at
(202) 512-7114. Major contributors to this report are Sally Kaplan and
Shari Sitron.

Richard L. Hembra
Assistant Comptroller General

Page 24                          GAO/HEHS-99-23 Home Health Agency Surety Bonds
Page 25   GAO/HEHS-99-23 Home Health Agency Surety Bonds

Letter                                                                                            1

Appendix I                                                                                       28
Scope and
Appendix II                                                                                      29
SBA Surety Bond
Guarantee Programs
for Construction
Related GAO Products                                                                             32

Tables                 Table 1: Distribution of HHAs by 1996 Medicare Payments, Surety           16
                         Bond Values, and Estimated Premiums
                       Table 2: Distribution of HHAs With Surety Bonds by June 1998              17
                       Table 3: Distribution of Surety Bond Face Value Required                  20


                       BBA       Balanced Budget Act of 1997
                       CORF      comprehensive outpatient rehabilitation facility
                       DME       durable medical equipment
                       HCFA      Health Care Financing Administration
                       HHA       home health agency
                       ORT       Operation Restore Trust
                       PPS       prospective payment system
                       PSB       Preferred Surety Bond
                       RHHI      regional home health intermediary
                       SBA       Small Business Administration

                       Page 26                        GAO/HEHS-99-23 Home Health Agency Surety Bonds
Page 27   GAO/HEHS-99-23 Home Health Agency Surety Bonds
Appendix I

Scope and Methodology

             To examine the surety bond issue, we reviewed our earlier extensive work
             on home health care and studied the regulation implementing the surety
             bond requirement in the Balanced Budget Act of 1997 (BBA) and related
             revisions and program memoranda, Department of Health and Human
             Services Office of Inspector General reports, and congressional hearing
             testimony. We conducted interviews with Health Care Financing
             Administration (HCFA) staff to determine the history and decision making
             process that resulted in the surety bond regulation. We also interviewed
             staff from the Florida Medicaid program and from three regional home
             health intermediaries (RHHI) who have responsibility for claims processing
             and medical review and cost report review and audit for almost 80 percent
             of the Medicare home health agencies (HHA).

             We interviewed officials with the Small Business Administration (SBA) and
             representatives of both the home health care and surety bond industries,
             including representatives of the trade associations for surety underwriters
             and surety producers, 4 sureties, 4 national home health care trade
             associations, 5 state home health care trade associations, and owners or
             operators of 44 HHAs from 13 states.

             HCFA  provided us with data on comprehensive outpatient rehabilitation
             facilities (CORF) and rehabilitation agencies. These data came from systems
             HCFA uses to manage the Medicare program. Florida Medicaid provided us
             with a list of HHAs that had been in the program for 18 months or longer
             and dropped out of the program in 1996, taken from data systems used to
             manage the program. We conducted our work from April 1998 to
             November 1998 in accordance with generally accepted government
             auditing standards.

             Page 28                         GAO/HEHS-99-23 Home Health Agency Surety Bonds
Appendix II

SBA Surety Bond Guarantee Programs for
Construction Firms

              SBA can guarantee surety bonds for construction contracts worth up to
              $1.25 million for small and emerging contractors who cannot obtain surety
              bonds through regular commercial channels. For surety bonds issued
              under two separate programs, SBA assumes a predetermined percentage of
              loss and reimburses the surety up to that amount if a contractor defaults.
              To be eligible for the SBA programs, a contractor must qualify as a small
              business (for example, have annual receipts for the previous 3 fiscal years
              of no more than $5 million) and meet the surety’s bonding qualification
              criteria. The information generally required by sureties includes an
              organization chart, current financial statements prepared by an
              accountant, financial statements for the previous 2 years, resumes of key
              people, a record of contract performance, the status of work in progress,
              and a business plan. The contractor pays the surety company’s fee for the
              bond, which cannot exceed the level approved by the appropriate state
              regulatory body. Both the contractor and the surety pay SBA a fee for each
              bond: The contractor pays $6 per $1,000 of the contract amount and the
              surety pays 20 percent of the amount paid for the bond. These fees go into
              a fund used to pay claims on defaulted bonds.

              In the Prior Approval program, SBA evaluates each bond application
              package to determine that the applicant is qualified and that the risk the
              agency will assume is reasonable before issuing a guarantee to the surety.
              SBA guarantees sureties 90 percent of losses on bonds up to $100,000 and
              on bonds to socially and economically disadvantaged contractors and
              guarantees 80 percent of losses on all other bonds under this program.
              Generally, contractors bonded under the SBA Prior Approval program are
              less experienced than contractors bonded under the Preferred Surety
              Bond (PSB) program.

              The PSB program is currently restricted to 14 sureties that are not
              permitted to participate in the Prior Approval program. The PSB program
              does not require SBA’s individual approval of bond applications but
              guarantees that SBA will pay 70 percent of surety losses if the contractor
              defaults. This program is for more experienced contractors that
              demonstrate growth potential and that are expected to be able to obtain
              surety bonds without an SBA guarantee in about 3 years. The firms in this
              program are usually larger than those in the Prior Approval program.

              A representative of SBA told us that HHAs would not be able to participate in
              its surety bond guarantee programs unless the definition of eligible entities
              were changed by law.

              Page 29                          GAO/HEHS-99-23 Home Health Agency Surety Bonds
Page 30   GAO/HEHS-99-23 Home Health Agency Surety Bonds
Page 31   GAO/HEHS-99-23 Home Health Agency Surety Bonds
Related GAO Products

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

              Medicare: Interim Payment System for Home Health Agencies
              (GAO/T-HEHS-98-234, Aug. 6, 1998).

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

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

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

              Medicare Home Health Agencies: Certification Process Ineffective in
              Excluding Problem Agencies (GAO/HEHS-98-29, Dec. 16, 1997, and
              GAO/T-HEHS-97-180, July 28, 1997).

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

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

              Medicare Post Acute Care: Home Health and Skilled Nursing Facility Cost
              Growth and Proposals for Prospective Payment (GAO/T-HEHS-97-90, Mar. 4,

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

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

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

(101761)      Page 32                         GAO/HEHS-99-23 Home Health Agency Surety Bonds
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