Medicare Post-Acute Care: Home Health and Skilled Nursing Facility Cost Growth and Proposals for Prospective Payment

Published by the Government Accountability Office on 1997-03-04.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Health, Committee on Ways
                          and Means, House of Representatives

For Release on Delivery
Expected at 1:00 p.m.,
Tuesday, March 4, 1997
                          MEDICARE POST-ACUTE

                          Home Health and Skilled
                          Nursing Facility Cost
                          Growth and Proposals for
                          Prospective Payment
                          Statement of William J. Scanlon, Director
                          Health Financing and Systems Issues
                          Health, Education, and Human Services Division

Medicare Post-Acute Care: Home Health and
Skilled Nursing Facility Cost Growth and
Proposals for Prospective Payment
                 Mr. Chairman and Members of the Subcommittee:

                 We are pleased to be here today to discuss Medicare’s skilled nursing
                 facility (SNF) and home health care 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. SNF payments increased 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. Over that
                 period, annual growth averaged 22 percent for SNFs and 33 percent for
                 home health care.

                 My comments today will specifically focus on the reasons for cost growth
                 for SNFs and home health care and the administration’s announced
                 legislative proposals for these two Medicare benefits. The information
                 presented today is based mainly on our previous work. We also examined
                 recent data on the two benefits from the Health Care Financing
                 Administration (HCFA), which manages Medicare. The detailed legislative
                 proposals are not yet available from the administration, so we reviewed
                 the summaries of them that have been publicly released and talked with
                 HCFA officials about these summaries.

                 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. A combination of factors led to the
                 increased use of both benefits:

             •   legislation and coverage policy changes in response to court decisions
                 liberalized coverage criteria for the benefits, enabling more beneficiaries
                 to qualify for care;
             •   these changes also transformed the nature of home health care from
                 primarily posthospital care to more long-term care for chronic conditions;
             •   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
                 care, and increased use of ancillary services, such as physical therapy, in
                 SNFs; 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.

                 Page 1                                                      GAO/T-HEHS-97-90
             Medicare Post-Acute Care: Home Health and
             Skilled Nursing Facility Cost Growth and
             Proposals for Prospective Payment

             The major proposals by the administration 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. However, 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. The administration is
             also 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
             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 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

             Page 2                                                        GAO/T-HEHS-97-90
                      Medicare Post-Acute Care: Home Health and
                      Skilled Nursing Facility Cost Growth and
                      Proposals for Prospective Payment

                      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 and exceptions to the cost
                      limits are available to SNFs and home health agencies that meet certain

                      While the cost-limit provisions of Medicare’s cost reimbursement system
                      for SNFs and home health agencies 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 prospective payment systems (PPS) give providers increased cost-
                      control incentives. The administration proposes establishing PPSs for SNF
                      and home health care and estimates that Medicare savings exceeding
                      $10 billion would result over the next 5 fiscal years.

                      The Medicare SNF and home health benefits are two of the fastest growing
SNF and Home Health   components of Medicare spending. From 1989 to 1996, Medicare part A SNF
Cost Growth           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. SNF and
                      home health payments currently represent 8.6 percent and 13.5 percent of
                      part A Medicare expenditures, respectively.

                      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 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, the
                      utilization of the SNF and home health benefits was expected to grow as
                      patients were discharged from the hospital earlier in their recovery
                      periods. However, 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

                      Page 3                                                      GAO/T-HEHS-97-90
Medicare Post-Acute Care: Home Health and
Skilled Nursing Facility Cost Growth and
Proposals for Prospective Payment

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 of
these services. (App. I contains figures that show growth in SNF and home
health expenditures in relation to the legislative and policy 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 care after hospitalization 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 report on home health,1 we found that
from 1989 to 1993, the proportion of home health users receiving more
than 30 visits increased from 24 percent to 43 percent and those receiving
more than 90 visits tripled, from 6 percent 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 chronic
care 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 relatively little review of

 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 cost

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

their use is done by Medicare. Moreover, SNFs can cite high ancillary
service use to justify an exception to routine service cost limits, thereby
increasing routine service payments.

Between 1990 and 1996, the number of hospital-based SNFs increased over
80 percent, from 1,145 such agencies 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).2 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
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.3 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.

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 even, depending
on available resources, to a required minimum of 1 percent). 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 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 was the
case 10 years ago. Similarly, the low level of review of SNF services makes
it difficult to know whether the recent increase in ancillary use is
medically necessary (for example, because patient mix has shifted toward
those who need more services) or simply a way for SNFs to get more

 DRGs are sets of diagnoses that are expected to require about the same level of hospital resources to
treat beneficiaries suffering from them.
 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.

Page 5                                                                           GAO/T-HEHS-97-90
                         Medicare Post-Acute Care: Home Health and
                         Skilled Nursing Facility Cost Growth and
                         Proposals for Prospective Payment

                         Finally, because relatively few resources are available for auditing end-
                         of-year provider cost reports, HCFA has little ability to identify whether
                         home health agencies or SNFs 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 and SNF 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 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.

                         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
                         account of 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

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.4 This project was recently expanded to include coverage of
                         ancillary costs in the prospective payment rates.

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

                         Page 6                                                                            GAO/T-HEHS-97-90
Medicare Post-Acute Care: Home Health and
Skilled Nursing Facility Cost Growth and
Proposals for Prospective Payment

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
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 place 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.5 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

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

Page 7                                                                       GAO/T-HEHS-97-90
                      Medicare Post-Acute Care: Home Health and
                      Skilled Nursing Facility Cost Growth and
                      Proposals for Prospective Payment

                      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 less attractive. If the unit of service is an episode of care
                      over a period of time such as 30 or 100 days, agencies could gain by
                      reducing the number of visits during that period, potentially lowering
                      quality of care. For these reasons, HCFA needs to devise methods to ensure
                      that whatever unit of service is chosen will not lead to increased costs or
                      lower 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 the unit-of-service

                      We have the same concerns about the quality of HCFA’s home health care
                      cost report databases for PPS rate-setting purposes as 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.

                      Page 8                                                        GAO/T-HEHS-97-90
                       Medicare Post-Acute Care: Home Health and
                       Skilled Nursing Facility Cost Growth and
                       Proposals for Prospective Payment

                       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.

                       The administration has also announced that it will propose requiring SNFs
Consolidated Billing   to bill Medicare for all services provided to their beneficiary residents
for SNFs               except for physician and some practitioner services. We support this
                       proposal as we did in a September 1995 letter to you, Mr. Chairman. 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
                       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.

                       In conclusion, it is clear that the current payment systems for providers of
                       skilled nursing and home health services to Medicare beneficiaries need to
                       be revised. As more details concerning the administration’s or others’
                       proposals for revising those systems become available, we would be glad

                       Page 9                                                        GAO/T-HEHS-97-90
               Medicare Post-Acute Care: Home Health and
               Skilled Nursing Facility Cost Growth and
               Proposals for Prospective Payment

               to work with the Subcommittee and others to help sort out the potential
               implications of suggested revisions.

               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. Patricia Davis also contributed to this statement.

               Page 10                                                   GAO/T-HEHS-97-90
Page 11   GAO/T-HEHS-97-90
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 12                                                                      GAO/T-HEHS-97-90
                                                      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.

(101546)                                              Page 13                                                                     GAO/T-HEHS-97-90
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