Medicare: Home Health Cost Growth and Administration's Proposal for Prospective Payment

Published by the Government Accountability Office on 1997-03-05.

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 and Environment,
                         Committee on Commerce, House of Representatives

For Release on
Delivery Expected at
10:00 a.m., Wednesday,
March 5, 1997

                         Home Health Cost Growth
                         and Administration’s
                         Proposal for Prospective
                         Statement of William J. Scanlon, Director
                         Health Financing and Systems Issues
                         Health, Education, and Human Services Division

Medicare: Home Health Cost Growth and
Administration’s Proposal for Prospective
                  Mr. Chairman and Members of the Subcommittee:

                  We are pleased to be here today to discuss Medicare’s home health care
                  benefit and the administration’s forthcoming legislative proposals related
                  to it. After relatively modest growth during the 1980s, Medicare’s
                  expenditures for home health care have grown rapidly in the 1990s. Home
                  health care costs grew from $2.4 billion in 1989 to $17.7 billion in 1996, an
                  average annual increase of 33 percent.

                  My comments will focus on the reasons for cost growth for home health
                  care and the administration’s announced legislative proposals for this
                  Medicare benefit. The information presented is based mainly on our
                  previous work. We also examined recent data on the benefit 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 home health care costs have grown because a larger
                  portion of beneficiaries use this benefit than in the past and the number of
                  services used by each beneficiary has more than doubled. A combination
                  of factors led to the increased use of the benefit:

              •   legislation and coverage policy changes in response to court decisions
                  liberalized coverage criteria for the benefit, 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;
              •   a diminution of administrative controls over the benefit, resulting at least
                  in part from fewer resources being available for such controls, reduced the
                  likelihood that inappropriate claims would be detected.

                  The major proposals by the administration for home health care are
                  designed to give providers increased incentives to operate efficiently by
                  immediately tightening the limits on the amount of cost per visit that will
                  be paid and imposing a new cap on per-beneficiary costs. After these
                  changes, in 1999, the proposal would move home health payments from
                  cost reimbursement to a prospective payment system (PPS). Estimated
                  savings from these two proposals are $12.4 billion over the next 5 fiscal
                  years. What remains unclear about the reasonableness of the PPS proposal
                  is whether an appropriate unit of service for calculating prospective

                  Page 1                                                       GAO/T-HEHS-97-92
                   Medicare: Home Health Cost Growth and
                   Administration’s Proposal for Prospective

                   payments can be defined and whether HCFA’s databases are adequate for it
                   to set reasonable rates.

                   To qualify for home health care, a beneficiary must be confined to his or
Background         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 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. Home health agency cost limits are set
                   separately for agencies in rural and urban areas, at 112 percent of the
                   mean costs of freestanding agencies. 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, costs
                   over the limit for one type of visit can be offset by costs below the limit for
                   another. 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 home health agencies that meet certain

                   While the per-visit cost-limit provision of Medicare’s reimbursement
                   system for home health agencies gives some incentives for providers to
                   control their costs, these incentives are considered by health financing
                   experts to be relatively weak. For providers with per-visit costs
                   considerably below their limit, there is little incentive to control costs, and
                   for all providers, there is no incentive to control number of visits. It is
                   generally agreed that prospective payment systems give providers
                   increased cost-control incentives.

                   The Medicare home health benefit is one of the fastest growing
Home Health Cost   components of Medicare spending. From 1989 to 1996, part A
Growth             expenditures for home health increased from $2.4 billion to

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Medicare: Home Health Cost Growth and
Administration’s Proposal for Prospective

$17.7 billion—an increase of over 600 percent. Home health payments
currently represent 13.5 percent of Medicare part A expenditures.

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 hospital PPS in 1983, the
utilization of the home health benefit 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 for the
home health benefit that had the effect of liberalizing coverage criteria,
thereby making it easier for beneficiaries to obtain home health coverage.
Additionally, the changes prevent HCFA’s claims processing contractors
from denying physician-ordered 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 the home health benefit in the 1990s,
both in terms of the number of beneficiaries receiving services and in the
extent of these services. (App. I contains a figure that shows growth in
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

 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 3                                                                       GAO/T-HEHS-97-92
                      Medicare: Home Health Cost Growth and
                      Administration’s Proposal for Prospective

                      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.

                      Rapid growth in 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, the contractors’ review target was
                      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
                      contractor 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.

                      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 are charging Medicare for costs unrelated to patient
                      care or other unallowable costs. Because of the lack of adequate program
                      controls, it is possible that some of the recent increase in home health
                      costs stems from abusive practices. Recent legislation, 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
Proposal for a Home   efficient providers to at least recover their costs. If payments are set too
Health Prospective    high, Medicare will not save money and cost control incentives will be
                      weak. If payments are set too low, access to and quality of care can suffer.
Payment System

                      Page 4                                                        GAO/T-HEHS-97-92
Medicare: Home Health Cost Growth and
Administration’s Proposal for Prospective

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.
Another important factor is the reliability of the cost and utilization data
used to compute rates. A good choice for unit of service can be
overwhelmed by bad data.

The summary of the administration’s proposal for a home health PPS is
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 the 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 are concerned about the quality of HCFA’s home health care cost report
database for PPS rate-setting purposes. Our work and that of the
Department of Health and Human Services’ Inspector General has found
examples of questionable costs in home health agency cost reports. For
example, we reported in August 1995 on a number of problems with

Page 5                                                        GAO/T-HEHS-97-92
Medicare: Home Health Cost Growth and
Administration’s Proposal for Prospective

contractor payments for medical supplies such as surgical dressings,
which indicate that excessive costs are being included and not removed
from home health agency cost reports.2 Also, the Inspector General found
substantial amounts of unallowable costs in the cost reports of a large
home health agency chain, which was convicted of fraud on the basis of
these findings. We believe that it would be prudent for HCFA to audit
thoroughly a projectable sample of home health agency cost reports. The
results could then be used to adjust HCFA’s database to help ensure that
unallowable costs are not included in the base for setting prospective

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. Our report included a number
of examples of noncovered services that are billed to Medicare. For
example, a physician called a claims processing contractor to complain
that some of his patients were being told by a home health agency that
they were homebound merely because they did not own a car. In another
report, we found that some home health agency staff were directed to alter
or falsify medical records to ensure continued or prolonged visits,
including recording visits that were never made or noting that patients
were homebound even after they were no longer confined to their homes.3
Also, Operation Restore Trust, a joint effort by federal and several state
agencies to identify fraud and abuse in Medicare and Medicaid, found very
high rates of noncompliance with Medicare’s coverage conditions. For
example, in a sample of 740 patients 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
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.

 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).

Page 6                                                                        GAO/T-HEHS-97-92
               Medicare: Home Health Cost Growth and
               Administration’s Proposal for Prospective

               In conclusion, Medicare’s current payment mechanisms for home health
               services need to be improved. As more details concerning the
               administration’s or others’ proposals become available, we would be glad
               to work with the Subcommittee 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 7                                                    GAO/T-HEHS-97-92
Appendix I

Medicare Home Health Expenditures,

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.

(101549)                                              Page 8                                                                      GAO/T-HEHS-97-92
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