Medicare Post-Acute Care: Cost Growth and Proposals to Manage It Through Prospective Payment and Other Controls

Published by the Government Accountability Office on 1997-04-09.

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

                           United States General Accounting Office

GAO                        Testimony
                           Before the Committee on Finance, U.S. Senate

For Release on Delivery
Expected at 10:00 a.m.
Wednesday, April 9, 1997
                           MEDICARE POST-ACUTE

                           Cost Growth and Proposals
                           to Manage It Through
                           Prospective Payment and
                           Other Controls
                           Statement of William J. Scanlon, Director
                           Health Financing and Systems Issues
                           Health, Education, and Human Services Division

Medicare Post-Acute Care: Cost Growth and
Proposals to Manage It Through Prospective
Payment and Other Controls
                 Mr. Chairman and Members of the Committee:

                 We are pleased to be here today to discuss Medicare’s skilled nursing
                 facility (SNF), home health care, and inpatient rehabilitation benefits and
                 the administration’s forthcoming legislative proposals related to them.
                 After relatively modest growth during the 1980s, Medicare’s expenditures
                 for SNFs and home health care have grown rapidly in the 1990s.
                 Expenditures for inpatient rehabilitation facilities have grown rapidly
                 since the mid-1980s. SNF payments rose from $2.8 billion in 1989 to
                 $11.3 billion in 1996, while home health care costs grew from $2.4 billion
                 to $17.7 billion over the same period. Rehabilitation facility payments
                 increased from $1.4 billion in 1989 to $3.9 billion in 1994.1 Over those
                 periods, annual growth averaged 22 percent for SNFs, 33 percent for home
                 health care, and 23 percent for rehabilitation facilities.

                 My comments today will focus on the reasons for cost growth and the
                 administration’s announced legislative proposals for these three Medicare
                 benefits. The information presented today is based on our previous work
                 and the most recent data on the benefits available from the Health Care
                 Financing Administration (HCFA), which manages Medicare. Because the
                 legislative proposals were only recently released by the administration,
                 our analysis was primarily based on summaries of them that were publicly
                 released earlier in the year and our discussions with HCFA officials about
                 the proposals.

                 In brief, Medicare’s SNF costs have grown primarily because a larger
                 portion of beneficiaries use SNFs than in the past and because of a large
                 increase in the provision of ancillary services. For home health care costs,
                 both the number of beneficiaries and the number of services used by each
                 beneficiary have more than doubled. Although the average length of stay
                 has decreased for inpatient rehabilitation facilities, a larger portion of
                 Medicare beneficiaries use them now, which results in cost growth. A
                 combination of factors led to the increased use of these benefits:

             •   legislation and coverage policy changes in response to court decisions
                 liberalized coverage criteria for the SNF and home health benefits, enabling
                 more beneficiaries to qualify for them;
             •   these changes also transformed the nature of home health care from
                 primarily posthospital care to more long-term care for chronic conditions;

                 Expenditure data for inpatient rehabilitation were obtained from the Prospective Payment
                 Assessment Commission.

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             •   earlier discharges from hospitals led to the substitution of days spent in
                 SNFs for what in the past would have been the last few days of hospital
             •   use of ancillary services, such as physical therapy, in SNFs has increased,
                 and specific controls for these services have not been implemented;
             •   rapid growth in the number of inpatient rehabilitation beds available and
                 use of these beds by beneficiaries, as well as the likelihood of some
                 substitution of rehabilitation days for general hospital days, led to higher
                 expenditures for inpatient rehabilitation; and
             •   a diminution of administrative controls over the benefits, resulting at least
                 in part from fewer resources being available for such controls, reduced the
                 likelihood of inappropriately submitted claims being denied.

                 The administration’s major proposals for both SNFs and home health care
                 are designed to give the providers of these services increased incentives to
                 operate efficiently by moving them from a cost reimbursement to a
                 prospective payment system. What remains unclear about these proposals
                 is whether an appropriate unit of service can be defined for calculating
                 prospective payments and whether HCFA’s databases are adequate for it to
                 set reasonable rates.

                 Administration officials also have discussed their intention to propose in
                 the future a coordinated payment system for all post-acute care as a
                 method to give providers efficiency incentives. This concept has appeal,
                 but we have concerns about it similar to those we have for SNF and home
                 health prospective payments.

                 Finally, the administration is proposing that SNFs be required to bill for all
                 services provided to their Medicare residents rather than allowing outside
                 suppliers to bill. This latter proposal has merit because it would make
                 control over the use of ancillary services significantly easier.

                 Medicare covers up to 100 days of care in a SNF after a beneficiary has
Background       been hospitalized for at least 3 days. To qualify for the benefit, the patient
                 must need skilled nursing or therapy on a daily basis. For the first 20 days
                 of SNF care, Medicare pays all the costs, and for the 21st through the 100th
                 day, the beneficiary is responsible for daily coinsurance of $95 in 1997.

                 To qualify for home health care, a beneficiary must be confined to his or
                 her residence (“homebound”); require part-time or intermittent skilled
                 nursing, physical therapy, or speech therapy; be under the care of a

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physician; and have the services furnished under a plan of care prescribed
and periodically reviewed by a physician. If these conditions are met,
Medicare will pay for skilled nursing; physical, occupational, and speech
therapy; medical social services; and home health aide visits. Beneficiaries
are not liable for any coinsurance or deductibles for these home health
services, and there is no limit on the number of visits for which Medicare
will pay.

Medicare covers care in rehabilitation hospitals that specialize in such
care and units within acute-care hospitals that also specialize. To qualify,
beneficiaries must have one or more conditions requiring intensive and
multidisciplinary rehabilitation services on an inpatient basis. In addition,
to qualify as a rehabilitation facility, hospitals and units in acute-care
hospitals must demonstrate their status by such factors as furnishing
primarily intensive rehabilitation services to an inpatient population, at
least 75 percent of whom require treatment of 1 or more of 10 specified
conditions (for example, stroke or hip fracture). Rehabilitation facilities
must also use a treatment plan for each patient that is established,
reviewed, and revised as needed by a physician in consultation with other
professional personnel. Inpatient rehabilitation is treated like any other
hospitalization for beneficiary cost-sharing purposes.2

Medicare pays SNFs and home health agencies on the basis of their
reasonable costs—those that are found to be necessary and related to
patient care—up to specified cost limits. For SNFs, limits are imposed on
the amount of routine costs—those for general nursing, room and board,
and administrative overhead—that will be reimbursed. Separate limits are
set for freestanding SNFs in urban and rural areas at 112 percent of mean
routine costs. Hospital-based SNF limits are set midway between the
freestanding limits and 112 percent of the mean routine costs of
hospital-based SNFs in each area. Home health agency cost limits are
established at 112 percent of the mean costs of freestanding agencies in
urban and rural areas. Hospital-based agencies have the same limits.
Separate limits are set for each type of visit (skilled nursing, physical
therapy, and so on) but are applied in the aggregate; that is, an agency’s
costs over the limit for one type of visit can be offset by costs below the
limit for another. Both SNF and home health cost limits are adjusted for
differences in wage levels across geographic areas. Also, exemptions from
the cost limits are available to newly opened SNFs and home health

 The beneficiary is responsible for a deductible, $760 in 1997, and coinsurance for each day over 60
days during a spell of illness. A spell of illness ends when the beneficiary has not been in a hospital or
SNF for 60 days. A transfer from an acute-care hospital to a rehabilitation hospital or unit does not
result in a second deductible because the patient is in the same spell of illness.

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agencies, and exceptions to the limits are available to those that can show
that their costs are above the limits for reasons not under their control.

Inpatient rehabilitation care, provided at both rehabilitation hospitals and
units of acute-care hospitals, is exempt from Medicare’s hospital
prospective payment system (PPS), but is subject to the payment
limitations and incentives established by the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA). Under this law, Medicare pays these
facilities the lower of the facility’s average Medicare allowable inpatient
operating costs per discharge or its target amount. The target amount is
based on the provider’s allowable costs per discharge in a base year,3
trended to the current year through an annual update factor. A TEFRA
facility with inpatient operating costs below its ceiling receives its costs
plus 50 percent of the difference between these costs and the ceiling or
5 percent of the ceiling, whichever is less. Rehabilitation facilities receive
cost-based payments without regard to the TEFRA limits until they complete
a full cost-reporting year, and that year is then used as their base year.

Long-term care hospitals are another category exempted from the hospital
PPS. To qualify as long term, hospitals must have an average length of stay
of a least 25 days for their Medicare patients. Medicare pays these
hospitals on the basis of their costs, subject to TEFRA limits, just like
rehabilitation hospitals. The number of long-term care hospitals has grown
from 94 in 1986 to 146 in 1994, and Medicare payments to them have
increased considerably from about $200 million in 1989 to about
$800 million in 1994. However, these hospitals remain a small part of the
Medicare program, representing less than 0.5 percent of expenditures, and
little research or analysis has been done on them. As a result, little is
known about the reasons for the growth that has occurred in the long-term
care hospital area.

While the cost-limit provisions of Medicare’s cost reimbursement system
for SNFs, home health agencies, and rehabilitation facilities give some
incentives for providers to control the affected costs, these incentives are
considered by health financing experts to be relatively weak, especially for
providers with costs considerably below their limit. On the other hand, it
is generally agreed that a PPS gives providers increased cost-control
incentives. The administration proposes establishing PPSs for SNF and
home health care and estimates that Medicare would save more than
$10 billion over the next 5 fiscal years. PPS is also being designed for

 The base year depends on when the rehabilitation hospital or unit began operating. For those
operating in 1987 or earlier, the base year is usually the cost-reporting year begun during fiscal year

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                       rehabilitation facilities but is not included in the administration’s fiscal
                       year 1998 budget proposals.

                       The Medicare SNF, home health, and inpatient rehabilitation benefits are
Post-Acute Care Cost   three of the fastest growing components of Medicare spending. From 1989
Growth                 to 1996, Medicare part A SNF expenditures increased over 300 percent,
                       from $2.8 billion to $11.3 billion. During the same period, part A
                       expenditures for home health increased from $2.4 billion to
                       $17.7 billion—an increase of over 600 percent. Rehabilitation facility
                       payments increased from $1.4 billion in 1989 to $3.9 billion in 1994, the
                       latest year for which complete data were available. SNF payments currently
                       represent 8.6 percent of part A Medicare expenditures; home health,
                       13.5 percent; and rehabilitation facilities, 3.4 percent.

                       At Medicare’s inception in 1966, the home health benefit under part A
                       provided limited posthospital care of up to 100 visits per year after a
                       hospitalization of at least 3 days. In addition, the services could only be
                       provided within 1 year after the patient’s discharge and had to be for the
                       same illness. Part B coverage of home health also was limited to 100 visits
                       per year. These restrictions under part A and part B were eliminated by
                       the Omnibus Reconciliation Act of 1980 (ORA) (P.L. 96-499), but little
                       immediate effect on Medicare costs occurred.

                       With the implementation of the Medicare inpatient PPS in 1983, use of the
                       SNF and home health benefits was expected to grow as patients were
                       discharged from the hospital earlier in their recovery periods. But HCFA’s
                       relatively stringent interpretation of coverage and eligibility criteria held
                       growth in check for the next few years. As a result of court decisions in
                       the late 1980s, HCFA issued guideline changes for the SNF and home health
                       benefits that had the effect of liberalizing coverage criteria, thereby
                       making it easier for beneficiaries to obtain SNF and home health coverage.
                       Additionally, the changes prevent HCFA’s claims processing contractors
                       from denying physician-ordered SNF or home health services unless the
                       contractors can supply specific clinical evidence that indicates which
                       particular services should not be covered.

                       The combination of these legislative and coverage policy changes has had
                       a dramatic effect on utilization of these two benefits in the 1990s, both in
                       terms of the number of beneficiaries receiving services and in the extent
                       these services are used. (App. I contains figures that show growth in SNF
                       and home health expenditures in relation to the legislative and policy

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changes.) For example, ORA 1980 and HCFA’s 1989 home health guideline
changes have essentially transformed the home health benefit from one
focused on patients needing short-term posthospital care to one that
serves chronic, long-term care patients as well. The number of
beneficiaries receiving home health care more than doubled in the last few
years, from 1.7 million in 1989 to about 3.9 million in 1996. During the
same period, the average number of visits to home health beneficiaries
also more than doubled, from 27 to 72. In a recent review of home health
care,4 we found that from 1989 to 1993, the proportion of home health
users receiving more than 30 visits increased from 24 to 43 percent and
those receiving more than 90 visits tripled, from 6 to 18 percent, indicating
that the program is serving a larger proportion of longer-term patients.
Moreover, about a third of beneficiaries receiving home health care did
not have a prior hospitalization, another possible indication that care for
chronic conditions is being provided.

Similarly, the number of people receiving care from SNFs has also almost
doubled, from 636,000 in 1989 to 1.1 million in 1996. While the average
length of a Medicare-covered SNF stay has not changed much during that
time, the average Medicare payment per day has almost tripled—from $98
in 1990 to $292 in 1996. Use of ancillary services, such as physical and
occupational therapy, has increased dramatically and accounts for most of
the growth in per-day cost. For example, our analysis of 1992 through 1995
SNF cost reports shows that reported ancillary costs per day have
increased 67 percent, from $75 per day to $125 per day, while reported
routine costs per day have increased only 20 percent, from $123 to $148.
Unlike routine costs, which are subject to limits, ancillary services are
only subject to medical necessity criteria, and Medicare does relatively
little review of their use. Moreover, SNFs can cite high ancillary service use
to justify an exception to routine service cost limits, thereby increasing
payments for routine services.

Between 1990 and 1996, the number of hospital-based SNFs increased over
80 percent, from 1,145 such units to 2,088. Hospitals can benefit from
establishing a SNF unit in a number of ways. Hospitals receive a set fee for
a patient’s entire hospital stay, based on a patient’s diagnosis related group
(DRG).5 Therefore, the quicker that hospitals discharge a patient into a SNF,
the lower that patient’s inpatient hospital care costs are. We found that in

 Medicare: Home Health Utilization Expands While Program Controls Deteriorate (GAO/HEHS-96-16,
Mar. 27, 1996). This report includes an extensive discussion of the reasons for home health care cost
 DRGs are sets of diagnoses that are expected to require about the same level of hospital resources to
treat beneficiaries suffering from them.

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1994, patients with any of 12 DRGs commonly associated with posthospital
SNF use had 4- to 21-percent shorter stays in hospitals with SNF units than
patients with the same DRGs in hospitals without SNF units.6 Additionally,
by owning a SNF, hospitals can increase their Medicare revenues through
receipt of the full DRG payment for patients with shorter lengths of stay and
a cost-based payment after the patients are transferred to the SNF.

The availability of inpatient rehabilitation beds has also increased
dramatically. Between 1986 and 1994, the number of Medicare-certified
rehabilitation facilities grew from 545 to 1,019, an 87-percent increase. A
major portion of this growth represents the increase in rehabilitation units
located in PPS hospitals, which went from 470 to 824 over the same period.
Inpatient rehabilitation admissions for Medicare beneficiaries increased
from 2.9 per 1,000 in 1986 to 7.2 per 1,000 in 1993, or 148 percent. Some of
this increase in beneficiary use was due to increases in the number of
acute-care admissions that often lead to use of rehabilitation facilities. For
example, the DRG that includes hip replacement grew from 218,000
discharges during fiscal year 1989 to 344,000 in fiscal year 1995. For the
same DRG, average length of stay in acute-care hospitals decreased from 12
to 6.7 days over that period.

As was the case with SNFs, beneficiaries admitted to rehabilitation units in
1994 following a stay in an acute-care hospital had shorter average lengths
of stay than beneficiaries admitted to rehabilitation hospitals. They also
had shorter stays in the acute-care hospital. Moreover, the same scenario
that applies to hospital-based SNFs applies to rehabilitation units. The
quicker that hospitals discharge a patient to the rehabilitation unit, the
lower that patient’s acute-care costs are. By having a rehabilitation unit,
hospitals can increase their Medicare revenues through receipt of the full
DRG payment for patients with shorter lengths of stay and a cost-based
payment after the patients are admitted to rehabilitation.

Rapid growth in SNF and home health expenditures has been accompanied
by decreased, rather than increased, funding for program safeguard
activities. For example, our March 1996 report found that part A
contractor funding for medical review had decreased by almost 50 percent
between 1989 and 1995. As a result, while contractors had reviewed over
60 percent of home health claims in fiscal year 1987, their review target
had been lowered by 1995 to 3.2 percent of all claims (or sometimes,
depending on available resources, to a required minimum of 1 percent).

 Skilled Nursing Facilities: Approval Process for Certain Services May Result in Higher Medicare Costs
(GAO/HEHS-97-18, Dec. 20, 1996). This report also includes information on cost growth for SNF
services and the characteristics of Medicare beneficiaries who receive SNF care.

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                      We found that a lack of adequate controls over the home health program,
                      such as little intermediary medical review and limited physician
                      involvement, makes it nearly impossible to know whether the beneficiary
                      receiving home health care qualifies for the benefit, needs the care being
                      delivered, or even receives the services being billed to Medicare. Also,
                      because of the small percentage of claims now selected for review, home
                      health agencies that bill for noncovered services are less likely to be
                      identified than they were 10 years ago. Similarly, the low level of review of
                      SNF services makes it difficult to know whether the recent increase in
                      ancillary service use is legitimate (for example, because patient mix has
                      shifted toward those who need more services) or is simply a way for SNFs
                      to get more revenues.

                      Medicare’s peer review organization (PRO) contractors have responsibility
                      for oversight of Medicare inpatient rehabilitation hospitals and units from
                      both utilization and quality-of-care perspectives. However, the PROs’
                      emphasis has changed in recent years, with a greater focus on quality
                      reviews and less emphasis on case review. In fact, the current range of
                      work for PROs requires no specific review for the appropriateness of
                      inpatient rehabilitation use.

                      Finally, because relatively few resources have been available for auditing
                      end-of-year provider cost reports, HCFA has little ability to identify whether
                      home health agencies, SNFs, and rehabilitation facilities are charging
                      Medicare for costs unrelated to patient care or other unallowable costs.
                      Because of the lack of adequate program controls, it is quite possible that
                      some of the recent increase in home health, SNF, and rehabilitation facility
                      expenditures stems from abusive practices. The Health Insurance
                      Portability and Accountability Act of 1996 (P.L. 104-191), also known as
                      the Kassebaum-Kennedy Act, has increased funding for program
                      safeguards. However, per-claim expenditures will remain below the level
                      they were in 1989, after adjusting for inflation. We project that, in 2003,
                      payment safeguard spending as authorized by Kassebaum-Kennedy will be
                      just over one-half of the 1989 per-claim level, after adjusting for inflation.

                      The goal in designing a PPS is to ensure that providers have incentives to
Administration’s      control costs and that, at the same time, payments are adequate for
Proposals for         efficient providers to furnish needed services and at least recover their
Prospective Payment   costs. If payments are set too high, Medicare will not save money and
                      cost-control incentives can be weak. If payments are set too low, access to
Systems               and quality of care can suffer.

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                         In designing a PPS, selection of the unit of service for payment purposes is
                         important because the unit used has a strong effect on the incentives
                         providers have for the quantity and quality of services they provide. Taking
                         into account the varying needs of patients for different types of
                         services—routine, ancillary, or all—is also important. A third important
                         factor is the reliability of the cost and utilization data used to compute
                         rates. Good choices for unit of service and cost coverage can be
                         overwhelmed by bad data.

Proposal for a SNF PPS   We understand that the administration will propose a SNF PPS that would
                         pay per diem rates covering all facility cost types and that payments would
                         be adjusted for differences in patient case mix. Such a system is expected
                         to be similar to HCFA’s ongoing SNF PPS demonstration project that is testing
                         the use of per diem rates adjusted for resource need differences using the
                         Resource Utilization Group, version III (RUG-III) patient classification
                         system.7 This project was recently expanded to include coverage of
                         ancillary costs in the prospective payment rates.

                         An alternative to the proposal’s choice of a day of care as the unit of
                         service is an episode of care—the entire period of SNF care covered by
                         Medicare. While substantial variation exists in the amount of resources
                         needed to treat beneficiaries with the same conditions when viewed from
                         the day-of-care perspective, even more variation exists at the
                         episode-of-care level. Resource needs are less predictable for episodes of
                         care. Moreover, payment on an episode basis may result in some SNFs
                         inappropriately reducing the number of covered days. Both factors make a
                         day of care the better candidate for a PPS unit of service. Furthermore, the
                         likely patient classification system, RUG-III, is designed for and being tested
                         in a per diem PPS. On the other hand, a day-of-care unit gives few, if any,
                         incentives to control length of stay, so a review process for this purpose
                         would still be needed.

                         The states and HCFA have a lot of experience with per diem payment
                         methods for nursing homes under the Medicaid program, primarily for
                         routine costs but also, in some cases, for total costs. This experience
                         should prove useful in designing a per diem Medicare PPS.

                         Regarding the types of costs covered by PPS rates, a major contributor to
                         Medicare’s SNF cost growth has been the increased use of ancillary

                          RUG-III is a method for classifying SNF residents according to health characteristics and the amount
                         and type of resources they need.

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                      services, particularly therapy services. This, in turn, means that it is
                      important to give SNFs incentives to control ancillary costs, and including
                      them under PPS is a way to do so. However, adding ancillary costs does
                      increase the variability of costs across patients and places additional
                      importance on the case-mix adjuster to ensure reasonable and adequate

                      Turning to the adequacy of HCFA’s databases for SNF PPS rate-setting
                      purposes, our work, and that of the Department of Health and Human
                      Services’ (HHS) Inspector General, has found examples of questionable
                      costs in SNF cost reports. For example, we found extremely high charges
                      for occupational and speech therapy with no assurance that cost reports
                      reflected only allowable costs.8 Cost-report audits are the primary means
                      available to ensure that SNF cost reports reflect only allowable costs.
                      However, the resources expended on auditing cost reports have been
                      declining in relation to the number of SNFs and SNF costs for a number of
                      years. The percentage of SNFs subjected to field audits has decreased as
                      has the extent of auditing done at the facilities that are audited. Under
                      these circumstances, we think it would be prudent for HCFA to do thorough
                      audits of a projectable sample of SNF cost reports. The results could then
                      be used to adjust cost-report databases to remove the influence of
                      unallowable costs, which would help ensure that inflated costs are not
                      used as the base for PPS rate setting.

Proposal for a Home   The summary of the administration’s proposal for a home health PPS is
Health PPS            very general, saying only that a PPS for an appropriate unit of service
                      would be established in 1999 using budget neutral rates calculated after
                      reducing expenditures by 15 percent. HCFA estimates that this reduction
                      will result in savings of $4.7 billion over fiscal years 1999 through 2002.

                      The choice of the unit of service is crucial, and there is limited
                      understanding of the need for and content of home health services to
                      guide that choice. Choosing either a visit or an episode as the unit of
                      service would have implications for both cost control and quality of care,
                      depending on the response of home health agencies. For example, if the
                      unit of service is a visit, agencies could profit by shortening the length of
                      visits. At the same time, agencies could attempt to increase the number of
                      visits, with the net result being higher total costs for Medicare, making the
                      per-visit choice probably not appropriate. Using an episode of care over a

                       Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy in Nursing Homes
                      (GAO/HEHS-95-23, Mar. 30, 1995).

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                             period of time such as 30 or 100 days as the unit of service has a greater
                             potential for controlling costs. However, agencies could gain by reducing
                             the number of visits during that period, potentially lowering quality of
                             care. If an episode of care is chosen as the unit of service, HCFA would
                             need a method to ensure that beneficiaries receive adequate services and
                             that any reduction in services that can be accounted for by past
                             overprovision of care does not result in windfall profits for agencies. In
                             addition, HCFA would need to be vigilant to ensure that patients meet
                             coverage requirements, because agencies would be rewarded for
                             increasing their caseloads. HCFA is currently testing various PPS methods
                             and patient classification systems for possible use with home health care,
                             and the results of these efforts may shed light on how to best design a
                             home health PPS.

                             We have the same concerns about the quality of HCFA’s home health care
                             cost-report databases for PPS rate-setting purposes that we do for the SNF
                             database. Again, we believe that adjusting the home health databases,
                             using the results of thorough cost-report audits of a projectable sample of
                             agencies, would be wise.

                             We are also concerned about the appropriateness of using current
                             Medicare data on visit rates to determine payments under a PPS for
                             episodes of care. As we reported in March 1996, controls over the use of
                             home health care are virtually nonexistent. Operation Restore Trust, a
                             joint effort by federal and state agencies in several states to identify fraud
                             and abuse in Medicare and Medicaid, found very high rates of
                             noncompliance with Medicare’s coverage conditions in targeted agencies.
                             For example, in a sample of 740 beneficiaries drawn from 43 home health
                             agencies in Texas and 31 in Louisiana that were selected because of
                             potential problems, some or all of the services received by 39 percent of
                             the beneficiaries were denied. About 70 percent of the denials were
                             because the beneficiary did not meet the homebound definition. Although
                             these are results from agencies suspected of having problems, they
                             illustrate that substantial amounts of noncovered care are likely to be
                             reflected in HCFA’s home health care utilization data. For these reasons, it
                             would also be prudent for HCFA to conduct thorough on-site medical
                             reviews of a projectable sample of agencies to give it a basis to adjust
                             utilization rates for purposes of establishing a PPS.

Rehabilitation PPS Also Is   The administration has not proposed a PPS for rehabilitation facilities, but
Being Developed              HCFA has an ongoing research project to develop such a system. A report

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                          detailing a model for a PPS is currently undergoing review. The research
                          was directed at designing a per-episode payment system adjusted for case
                          mix, using a measure of patient functional status—for example, the
                          patient’s mobility—as the adjuster. In general, this and other research has
                          shown that patients in the rehabilitation facilities are more homogeneous
                          than those in SNFs or home health care. Because the goals for the care are
                          also more homogeneous and defined, an episode may be a reasonable
                          choice for a unit of service. Again, the per-episode payment should be
                          structured to reduce the incentives for premature discharge, and adequate
                          review mechanisms to prevent such discharges and other quality problems
                          would be needed.

                          As with SNFs and home health care, we have concerns about the reliability
                          of HCFA’s databases for rate-setting purposes for rehabilitation hospitals
                          because of the low levels of utilization review and cost-report auditing. As
                          we stated earlier, HCFA should do enough audits and medical review to
                          enable it to adjust its databases to remove the effects of any problems.
                          HCFA would also need an adequate review system under a PPS because
                          rehabilitation facilities would probably have incentives to increase their
                          caseloads, cut corners on quality, or both.

Long-Term Care Hospital   HCFA  is not currently studying a PPS for long-term care hospitals. Rather,
Proposal                  the administration is proposing that any hospitals that newly qualify for
                          long-term care status be paid under the regular inpatient hospital PPS. Also,
                          HCFA officials told us that the agency plans to recommend in the future a
                          coordinated payment system for post-acute care and that long-term care
                          hospitals are being considered for inclusion under such a payment system.
                          I will discuss the coordinated payment concept later in this statement.

                          The administration has also announced that it will propose requiring SNFs
Consolidated Billing      to bill Medicare directly for all services provided to their beneficiary
for SNFs                  residents except for physician and some practitioner services. We support
                          this proposal as we did in a September 1995 letter to the House Ways and
                          Means Committee. We and the HHS Inspector General have reported on
                          problems, such as overutilization of supplies, that can arise when
                          suppliers bill separately for services for SNF residents.

                          A consolidated billing requirement would make it easier for Medicare to
                          identify all the services furnished to residents, which in turn would make it
                          easier to control payments for those services. The requirement would also

                          Page 12                                                    GAO/T-HEHS-97-106
                        Medicare Post-Acute Care: Cost Growth and
                        Proposals to Manage It Through Prospective
                        Payment and Other Controls

                        help prevent duplicate billings for supplies and services and billings for
                        services not actually furnished by suppliers. In effect, outside suppliers
                        would have to make arrangements with SNFs under such a provision so
                        that nursing homes would bill for suppliers’ services and would be
                        financially liable and medically responsible for the care.

                        There can be considerable overlap in the types of services provided and
“Bundling” Post-Acute   the types of beneficiaries that are treated in each of the three post-acute
Care Services           care settings. For example, physical therapy and other rehabilitation
                        services can be provided by a SNF, a home health agency, or a
                        rehabilitation facility. Both HCFA and the prospective payment assessment
                        commission (ProPAC) have noted that the ability to substitute care among
                        post-acute settings may contribute to inappropriate spending growth, even
                        after payment policies are improved for individual provider types.9
                        Although prospective payment encourages providers to deliver care more
                        efficiently, facility-specific payments may encourage them to lower their
                        costs by shifting services to other settings. The administration has
                        therefore announced that it will in the future recommend a coordinated
                        payment system for post-acute care services. Such a system will be
                        designed to help ensure that beneficiaries receive quality care in the
                        appropriate settings, and that any patient transfers among settings occur
                        only when medically appropriate rather than in efforts to generate
                        additional revenues. While no details are available about how a
                        coordinated post-acute payment system would operate, presumably it will
                        entail consolidated (bundled) payments to one entity for the different
                        types of providers. In fact, ProPAC has suggested a system that bundles
                        acute and post-acute payments.

                        One of the most important design issues in a bundled payment approach is
                        deciding which provider would receive the payment. Because this provider
                        would have to organize and oversee the continuum of services for
                        beneficiaries, it would bear the risk that payments would not cover costs.
                        Options for this role include an acute-care hospital, a post-acute care
                        provider, or a provider service network.

                        Another important design issue involves developing an appropriate
                        payment rate. Under the current inpatient PPS, payment rates are based on
                        DRGs. But research has shown that DRGs are poor predictors of post-acute
                        care use. In extending PPS to include post-acute services, future post-acute

                         HCFA Administrator’s statement on “Reforming the Medicare Home Health Benefit,” before the
                        Subcommittee on Health and Environment, House Committee on Commerce (Mar. 5, 1997), and
                        Report and Recommendations to the Congress (Washington, D.C.: ProPAC, Mar. 1, 1997).

                        Page 13                                                                    GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and
Proposals to Manage It Through Prospective
Payment and Other Controls

care utilization needs to be accurately predicted to ensure that prospective
rates are adequate to cover costs but also give an incentive to provide
cost-effective care.

Bundling acute and post-acute care would have a number of potential
advantages and disadvantages. Optimally, bundling of payments would
encourage continuity of care. If, for example, the inpatient hospital has a
greater stake in the results, bundling could lead to both better discharge
planning as well as improved transfer of information from the hospital to
the post-acute provider. Bundling payments to the hospital could also
eliminate a PPS hospital’s financial incentive to discharge Medicare
patients before they are ready, because patients discharged prematurely
may require extensive post-acute services for which the hospital is liable.
Furthermore, bundling with an appropriate payment rate would give
providers more incentive to furnish the mix of inpatient and posthospital
services that yield the least costly treatment of an entire episode of care
and thus help control growth in the volume of post-acute services. Finally,
to the extent that the bundling arrangement promotes joint accountability,
combining responsibility for hospital and post-acute providers could lead
to better outcomes.

There are a number of potential disadvantages as well. Because bundled
payments would represent some level of financial risk, whoever received
the bundled payment would need to have the resources to accept the risk.
Moreover, bearing risk often gives incentive to shift the risk to others and
raises concerns about quality. A key to the success of any bundling system
is coordinating care and continuously monitoring a patient during the
entire episode. However, some providers might not have the capabilities to
do this. For example, if, as ProPAC has suggested, both acute- and
post-acute care were bundled and if hospitals received the bundled
payment, some hospitals might not have the resources, information, or
expertise to properly manage patients’ post-acute care. The same could be
said for SNFs and home health agencies. An additional concern is that
whoever received the bundled payment could have dominance over the
other providers and make choices about acute- and post-acute care
settings that are driven primarily by concerns about cost. For example,
hospitals might try to maximize their profit by limiting post-acute services
or be tempted to screen admissions to avoid patients with high risks of
heavy posthospital care.

Another important issue involves how to deal with home health patients
who have had no prior hospitalization. About a third of home health visits

Page 14                                                    GAO/T-HEHS-97-106
               Medicare Post-Acute Care: Cost Growth and
               Proposals to Manage It Through Prospective
               Payment and Other Controls

               fall into this category. A bundled payment system would not affect home
               health agency incentives for such patients. Finally, beneficiary advocacy
               groups have expressed concern about potential harmful effects of this
               system on patients’ freedom of choice and how the quality and
               appropriateness of care could be ensured.

               In conclusion, it is clear from the dramatic cost growth for SNF, home
               health, and rehabilitation facility care that the current Medicare payment
               mechanisms for the providers need to be revised. As more details
               concerning the administration’s or others’ proposals for revising those
               systems become available, we would be glad to work with the Committee
               and others to help sort out the potential implications of suggested

               This concludes my prepared remarks, and I will be happy to answer any

               For more information on this testimony, please call William Scanlon on
Contributors   (202) 512-7114 or Thomas Dowdal, Senior Assistant Director, on
               (202) 512-6588. Other major contributors include Patricia Davis, Roger
               Hultgren, and Sally Kaplan.

               Page 15                                                   GAO/T-HEHS-97-106
Appendix I

Medicare Skilled Nursing Facility and Home
Health Expenditures, 1980-96

Figure I.1: Medicare Skilled Nursing Facility Expenditures, 1980-96

Dollars in Millions


                                                       Issuance of


    1980    1981    1982   1983   1984   1985   1986   1987   1988   1989   1990   1991   1992   1993   1994   1995   1996

         Disabled and ESRD


                                                  Note: ESRD = end-stage renal disease.

                                                  Source: HCFA’s Office of the Actuary.

                                                  Page 16                                                                    GAO/T-HEHS-97-106
                                                      Appendix I
                                                      Medicare Skilled Nursing Facility and Home
                                                      Health Expenditures, 1980-96

Figure I.2: Medicare Home Health Expenditures, 1980-96

Dollars in Millions

                                Prospective                                Issuance of
                                Payment                                    Revised
                                System                                     Guidelines

           Act of 1980


      1980      1981   1982   1983   1984     1985   1986   1987   1988   1989   1990    1991   1992   1993   1994   1995   1996


            Disabled and ESRD

                                                      Note: ESRD = end-stage renal disease.

                                                      Source: HCFA’s Office of the Actuary.

(101554)                                              Page 17                                                                      GAO/T-HEHS-97-106
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