Medicare: Progress to Date in Implementing Certain Major Balanced Budget Act Reforms

Published by the Government Accountability Office on 1999-03-17.

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, March 17, 1999

                            Progress to Date in
                            Implementing Certain Major
                            Balanced Budget Act
                            Statement of William J. Scanlon, Director
                            Health Financing and Public Health Issues
                            Health, Education, and Human Services Division

Medicare: Progress to Date in Implementing
Certain Major Balanced Budget Act Reforms

              Mr. Chairman and Members of the Committee:

              We are pleased to be here as you discuss the implementation and impact
              of the Medicare provisions in the Balanced Budget Act of 1997 (BBA). The
              BBA contains the most significant changes to Medicare since its inception
              more than 30 years ago. The act’s combination of constraints on provider
              fees, increases in beneficiary payments, and structural reforms is expected
              to lower program spending by $386 billion over the next 10 years. The
              importance of these changes cannot be overemphasized given the
              immediacy of Medicare’s financial crisis and upcoming demographic
              changes. The most fundamental BBA reform was the creation of the
              Medicare+Choice program, designed to modernize Medicare by offering
              beneficiaries a wider array of health plan choices comparable to some of
              the options available in the private insurance market. The fee-for-service
              component of Medicare underwent considerable transformation as well.
              Most notably, this legislation continued the movement away from paying
              for services on the basis of providers’ incurred costs and toward using
              prospective rates wherein the program sets payment levels in advance and
              has more control over its spending on services.

              The ramifications of these fundamental changes—affecting beneficiaries,
              health care providers, and taxpayers—are substantial. Not surprisingly,
              some interest groups have expressed concerns about the impact of these
              changes and made calls to alter some provisions. In some cases,
              adjustments may be wise; in others, premature or imprudent. That is why
              it is critical that there be a thorough evaluation of these policies, singly
              and in their totality, to inform ongoing policy discussions.

              My comments today will focus on the implementation of (1) the
              Medicare+Choice program, particularly the payment method and
              consumer information efforts, and (2) prospective payment systems for
              skilled nursing facilities (SNF) and home health agencies (HHA) in
              Medicare’s traditional fee-for-service program. Our work in these areas
              illustrates the importance of the BBA reforms, the difficulties in
              implementing reforms, and the pressures to dampen their impact. My
              remarks are based on previously issued products as well as our ongoing
              work in these areas.

              In brief, changes of the magnitude of those in the BBA require significant
              efforts to implement well and are subject to continual scrutiny. We
              recently reported that the efforts of the Health Care Financing
              Administration (HCFA) to put the BBA provisions in place have been

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Medicare: Progress to Date in Implementing
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extensive and noteworthy, and the agency has made substantial progress
in implementing the majority of the Medicare-related BBA mandates. At the
same time, it has encountered obstacles. Intense pressure to resolve Year
2000 computer compliance issues has slowed HCFA’s efforts. In addition, in
undertaking certain major initiatives, the agency has had to cope with
inadequate experience and insufficient information. Thus, achieving the
objectives of the BBA will require HCFA to refine and build on its initial

Findings from our recent Medicare+Choice work focus on payments to
health plans and HCFA’s consumer information initiatives. Reforms of the
payment methods for Medicare+Choice plans are under way. They will
address the methodological flaws that have led to billions of dollars in
excess payments and inappropriate payment disparities. To avoid sharp
payment changes that could affect a plan’s offerings and diminish the
attractiveness of the Medicare+Choice program to beneficiaries, these
changes are being phased in over several years. Nevertheless, the
withdrawal of some managed care plans has raised questions about how to
maintain desired access for beneficiaries while implementing needed
changes to plan payments and participation requirements. HCFA has also
initiated an information campaign to provide beneficiaries with new tools
to make informed health plan choices and create stronger, quality-based
competition. Some aspects of the campaign have only been piloted, and
certain problems did develop; refining these efforts to make them more
useful and effective for beneficiaries is now critical.

On Medicare’s fee-for-service side, the BBA’s mandate to replace cost-based
reimbursement methods with prospective payment systems (PPS)
constitutes another major program reform. The phase-in of the PPS for SNFs
began on schedule on July 1, 1998. However, design flaws and the
inadequacy of the underlying data used to establish the payment rates may
compromise the system’s ability to meet the twin objectives of slowing
spending growth while promoting appropriate beneficiary care.
Insufficient oversight could compound these shortcomings and further
jeopardize potential cost savings. Improvements to the system design and
better monitoring are feasible but may require assistance from the
Congress. The interim payment system for HHAs, with the similar objective
of controlling rapid expenditure growth for this benefit, is now in place.
Implementation of the PPS for HHAs has been delayed until 2001 but
remains a considerable challenge given the benefit’s broad eligibility
requirements. Concerns have been raised about the impact of the interim
payment system as more than 1,400 HHAs have closed since October 1997.

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             However, because the number of agencies had been expanding
             dramatically, more than 9,000 HHAs still participate in Medicare—a larger
             number than did in October 1995. We have not found evidence that the
             interim payment system or the closures have significantly affected
             beneficiary access to home health care. However, our monitoring of
             potential access problems is continuing as more data on the effects of the
             interim system become available.

             The BBA’s significant transformations of Medicare could generate pressure
             to undo many of the act’s provisions. In this environment the Congress will
             face difficult decisions that could pit particular interests against a more
             global interest in preserving Medicare for the long term. We believe that it
             would be a mistake to significantly modify the BBA’s provisions without
             thorough analysis or giving the provisions a fair trial over a reasonable
             period of time.

             Medicare is the nation’s largest health insurance program, covering about
Background   39 million elderly and disabled beneficiaries at a cost of more than
             $193 billion. Between 1990 and 1997, Medicare experienced spending
             increases averaging 9.8 percent per year to make it one of the fastest
             growing parts of the federal budget. This growth has slowed somewhat in
             the past 2 years. The Congressional Budget Office projects that Medicare’s
             share of gross domestic product will rise almost one-third by 2009.

             This substantial growth in Medicare spending will continue to be fueled by
             demographic and technological changes. Medicare’s rolls are expanding
             and are projected to increase rapidly with the retirement of the baby boom
             generation. For example, today’s elderly make up about 13 percent of the
             total population; by 2030, they will comprise 20 percent as the baby boom
             generation ages. Individuals aged 85 and older make up the fastest
             growing group of beneficiaries. So, in addition to the increased demand for
             health care services due to sheer numbers, the greater prevalence of
             chronic health conditions associated with aging will further boost

             Congressional attention has recently focused on the impending depletion
             of Medicare’s Hospital Insurance (HI) trust fund. Payroll taxes credited to
             the HI trust fund finance the bulk of Medicare’s “hospital insurance,” or
             part A, which covers inpatient hospital services as well as SNF, hospice,
             and certain home health care services. Beneficiaries’ premium
             contributions and general revenues finance Medicare’s “supplementary

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                    medical insurance,” or part B, which covers physician and outpatient
                    hospital services, diagnostic tests, ambulance services, and other services
                    and supplies. A BBA provision that shifted the financing of some home
                    health services from part A to part B helped extend the HI trust fund’s

                    Other BBA reforms, designed to slow program spending, address both
                    Medicare’s managed care and fee-for-service components. Medicare’s
                    managed care program covers the growing number of beneficiaries who
                    have chosen to enroll in prepaid health plans, where a single monthly
                    payment is made for all necessary covered services. About 6.8 million
                    people—about 17 percent of all Medicare beneficiaries—were enrolled in
                    more than 450 managed care plans as of December 1, 1998.1 Most of
                    Medicare’s beneficiaries, however, receive health care on a fee-for-service
                    basis, whereby providers are reimbursed for each covered service they
                    deliver to beneficiaries.

                    One way in which the BBA seeks to restructure Medicare is by encouraging
BBA’s Creation of   greater managed care participation. Under the Medicare+Choice program,
Medicare+Choice     a broader range of health plans, such as preferred provider organizations
                    and provider-sponsored organizations, are permitted to participate in
                    Medicare. BBA’s emphasis on Medicare+Choice reflects the perspective
                    that increased managed care enrollment will help slow Medicare spending
                    while expanding beneficiaries’ health plan options.

                    Our recent work has examined two aspects of the Medicare+Choice
                    program—payments and consumer information initiatives. BBA provisions
                    dealing with payments to Medicare+Choice plans acknowledge that
                    Medicare’s prior managed care payment method for health maintenance
                    organizations (HMO) and other risk plans failed to save the government
                    money and created wide disparities in payment rates across counties. The
                    BBA establishes a new rate-setting methodology for 1998 and future years,
                    incorporating adjustment rates for the health and expected service use of
                    managed care enrollees to avoid overpayment. It also guarantees health
                    plans a minimum payment level to encourage them to locate in areas that
                    previously had lower rates and few, if any, Medicare participating health
                    plans. Other provisions addressing consumer information needs are
                    designed to raise beneficiary participation in Medicare+Choice and
                    promote more effective quality-based competition among plans.

                     About 90 percent of the 6.8 million Medicare beneficiaries are enrolled in managed care plans that
                    receive fixed monthly capitation payments. The remainder are enrolled in plans that are reimbursed
                    for the costs they incur, less the estimated value of beneficiary cost-sharing.

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Managed Care Payment   Context for BBA’s rate-setting provisions: BBA modifications to
Reforms                Medicare’s health plan payment method acknowledge the problem of
                       flawed capitation rates that, historically, have been paid to HMOs. Our work
                       has demonstrated that these rates have produced billions of dollars in
                       aggregate excess payments and inappropriate payment disparities across

                       The fundamental problem we found was that HMO payment rates were
                       based on health care spending for the average nonenrolled beneficiary,
                       while the plans’ enrollees tended to be healthier than average
                       nonenrollees, a phenomenon known as favorable selection. Some analysts
                       expected excess payments to diminish with increased enrollment. Instead,
                       the excess continued to grow, since rates were based on the rising
                       concentrations of higher-cost beneficiaries remaining in fee-for-service.

                       Risk adjustment is a tool for setting capitation rates so that they reflect
                       enrollees’ expected health costs as accurately as possible. This tool is
                       particularly important given Medicare’s growing use of managed care and
                       the potential for favorable selection, which, if not taken into account,
                       generates excess payments. Medicare’s current risk adjuster—based only
                       on demographic factors such as age and sex3—cannot sufficiently lower
                       rates to be consistent with the expected costs of managed care’s healthier
                       population. For example, a senior who was relatively healthy and another
                       who suffered from a chronic condition—even if they were of the same age
                       and sex—would have very different expected health care needs; but the
                       current risk adjuster does not take those differences into account.

                       To correct this problem, the BBA requires HCFA to devise a new risk
                       adjuster that incorporates patient health status factors.4 HCFA had to
                       develop and report on the new risk adjuster by March 1 of this year and is
                       required to put the method in place by January 2000.

                        Our 1997 study on payments to California HMOs, which enrolled more than a third of Medicare’s
                       managed care population, found that Medicare overpaid plans by about 16 percent in fiscal year
                       1995—accounting for about $1 billion in excess payments. The proportion of excess payments varied
                       across counties. See Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in Excess
                       Payments (GAO/HEHS-97-16, Apr. 25, 1997).
                        The demographic indicators are age, sex, eligibility for Medicaid, employment status, and residence in
                       an institution such as a SNF. Separate rates, using the same demographic traits, are calculated for
                       beneficiaries who qualify for Medicare because of a disability (under age 65). Separate rates are also
                       set for beneficiaries with end-stage renal disease (kidney failure).
                        Technically, the law requires the Secretary of Health and Human Services to develop, report on, and
                       implement the health-based risk adjustment method.

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Design, implementation, and impact issues: HCFA’s proposed interim
risk adjuster—to be implemented in 2000—relies exclusively on hospital
inpatient data to measure health status. While not perfect, the proposed
risk adjuster does link the rates paid more closely to projections of
Medicare enrollees’ medical costs. Ideally, the risk adjuster would
measure health status with complete and reliable data from other settings,
such as physicians’ offices, but these data are not currently available.
Given the reliance on only hospital data, HCFA has taken steps to avoid
rewarding plans that hospitalize patients unnecessarily or, conversely,
penalizing efficient plans that provide care in less costly settings. A “next
generation” of risk adjustment based on the services beneficiaries receive
in all settings is scheduled for 2004.

HCFA  plans to phase in the use of the interim risk adjuster and, in so doing,
will avoid sharp payment changes that could adversely affect beneficiaries
and plans. Such changes could be detrimental to beneficiaries if plans, in
response, substantially scaled back their benefit packages or reconsidered
their commitment to the Medicare+Choice program.

Currently, there is concern about a recent surge in plan drop-outs from
Medicare+Choice. As of January 1999, 99 of the capitated plans in
operation during 1998 had withdrawn or reduced their Medicare service
areas. Industry representatives have stated that plans may have dropped
out partially in anticipation of reduced payments, which could result when
the interim risk adjuster is implemented. Plans have also cited the
administrative burden associated with some of the new Medicare+Choice
regulations as a significant reason for their withdrawal decisions.

The issue of plan drop-outs is complex, however, because the reasons for
plans’ decisions are not clear cut. As we have previously reported, many
nonpayment factors—such as commercial managed care enrollment
levels—influence plans’ Medicare participation decisions.5 Some areas of
the country with relatively low payment rates have many Medicare
managed care plans and enrollees. Moreover, the extent to which new
Medicare+Choice regulations could have precipitated the withdrawals is
unclear since few managed care organizations withdrew from Medicare
completely. Most plans that pulled out of certain geographic areas
continue to serve beneficiaries in other areas. In response to plans’
concerns, however, HCFA recently revised a number of the
Medicare+Choice regulations to make them less burdensome. Finally,

 See Medicare Managed Care: HMO Rates, Other Factors Create Uneven Availability of Benefits
(GAO/T-HEHS-97-133, May 19, 1997).

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                       while some plans are dropping out of the program, others are interested in
                       signing new contracts. In fact, 16 applications for new or expanded service
                       areas have recently been approved and 44 more are pending.

Medicare+Choice        Context for BBA’s information campaign provisions: Capitalizing on
Information Campaign   changes in the delivery of health care, BBA’s introduction of new health
                       plan options is intended to create a market in which different types of
                       health plans compete to enroll and serve Medicare beneficiaries. The BBA
                       reflects the idea that consumer information is an essential component of a
                       competitive market. From the beneficiary’s viewpoint, information on
                       available plans needs to be accurate, comparable, accessible, and
                       user-friendly. Informed choices are particularly important as the BBA
                       phases out the beneficiary’s opportunity to disenroll from a plan on a
                       monthly basis and moves toward the private sector practice of annual
                       reconsideration of plan choice.

                       The BBA mandated that, as part of a national information campaign, HCFA
                       undertake several activities that could help beneficiaries make enrollment
                       decisions regarding Medicare+Choice. Each October, prior to a mandated
                       annual, coordinated enrollment period, HCFA must distribute to
                       beneficiaries an array of general information on, among other things,
                       enrollment procedures, rights, and the potential for Medicare+Choice
                       contract termination by a participating plan. The BBA also required HCFA to
                       provide beneficiaries with a list of available participating plans and a
                       comparison of these plans’ benefits. The agency must also maintain a
                       toll-free telephone number and an Internet site as general sources of
                       information about plan options, including traditional fee-for-service

                       Design, implementation, and impact issues: The BBA-mandated
                       information campaign is a first-time and massive undertaking for HCFA. The
                       effort is well under way, but relative to the ideal—a market in which
                       informed consumers prod competitors to offer the best value—many
                       challenges lie ahead.

                       We have reported that, unlike many enrollees in the private sector and
                       individuals covered by plans in the Federal Employees Health Benefits
                       Program (FEHBP), Medicare beneficiaries receive little comparative
                       information on their health plan options. We have also reported that,
                       unlike FEHBP, HCFA does not require that plans’ marketing materials follow
                       a consistent format or use common terminology, thus making plan

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                      comparisons difficult for beneficiaries. Standardized language on benefit
                      and coverage definitions would facilitate (1) HCFA’s oversight functions to
                      ensure accurate information, (2) plans’ compliance with reporting
                      requirements, and (3) beneficiary decisionmaking. HCFA intends to require
                      plans to begin using a standardized format for some information in
                      anticipation of the November 1999 enrollment period.

                      HCFA is also in the process of making summary data available through
                      several sources. In 1998, as part of a five-state pilot project, HCFA provided
                      beneficiaries with a handbook containing comparative information on the
                      Medicare+Choice plans available in their area and access to a toll-free
                      telephone line. It also established an Internet site with similar information
                      about plans available nationwide. These efforts made important strides,
                      but because of plan pull-outs late in the year, some of the information
                      beneficiaries received was inaccurate.

                      Critical now is a thorough evaluation of these efforts to ensure that the
                      information provided is clear, sufficient, and helpful to beneficiaries’
                      decisionmaking. Assessing how to make these efforts cost-effective—that
                      is, targeting the right amounts and types of information to different groups
                      of beneficiaries—is also of vital importance.

                      The BBA also makes fundamental changes to Medicare’s fee-for-service
Selected BBA          component, which represents about 87 percent of program outlays and
Reforms of Medicare   covers about 33 million beneficiaries. Mandated PPSs will alter how
Fee-for-Service       reimbursements are made to SNFs, HHAs, hospital outpatient departments,
                      and rehabilitation facilities. Instead of generally paying whatever costs
                      providers incur, HCFA’s mandate is to establish rates that give providers
                      incentives to deliver care and services more efficiently. Our work on SNF
                      and home health benefits shows the importance of the design and
                      implementation details of PPSs to achieving expected BBA savings and
                      ensuring that Medicare beneficiaries have access to appropriate services.

                      Context for SNF PPS provisions: Medicare spending for SNF services rose
SNF PPS               at an average annual rate of 23.2 percent from 1990 to 1996, much faster
                      than overall program spending growth. Medicare’s SNF payment method
                      has been cited as one reason for this growth. Before the changes
                      mandated in the BBA, SNFs were paid the reasonable costs they incurred in
                      providing Medicare-allowed services. There were limits on payments for
                      the routine portion of care—that is, general nursing, room and board, and

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administrative overhead. Payments for ancillary services, such as physical,
occupational, or speech therapy, however, were virtually unlimited. These
unchecked ancillary service payments have been a major contributor to
significant increases in daily reimbursements to SNFs. Because providing
more of these services generally triggered higher payments, facilities had
no incentive to deliver services efficiently or only when necessary. The BBA
called for phasing in a PPS for SNF care beginning after July 1, 1998, to bring
program spending under control.

Design, implementation, and impact issues: Under the PPS, SNFs
receive a payment for each day of care provided to a Medicare beneficiary.
The payment, called a per diem rate, is based on the average daily cost of
providing all Medicare-covered SNF services, as reflected in facilities’ 1995
costs. Since not all patients require the same amount of care, the per diem
rate is “case-mix” adjusted to take into account the nature of each patient’s
condition and expected care needs. Facilities that can care for
beneficiaries for less than this case-mix-adjusted per diem amount will
benefit financially, whereas SNFs with costs higher than the adjusted per
diem rate will be at risk for the difference between their costs and the
payments. The SNF PPS is expected to control Medicare spending because
the per diem rate covers all services, so SNFs have an incentive to provide
services efficiently and judiciously. Moreover, since payments vary with
patient needs, the PPS is intended to ensure access to these services.

We are concerned, however, that the design of the case-mix adjuster
preserves the opportunity for providers to increase their compensation by
supplying potentially unnecessary services.6 As stated, the SNF PPS divides
beneficiaries into case-mix groups to reflect differences in patient needs
that affect the cost of care. Each group is intended to define clinically
similar patients who are expected to incur similar costs. An adjustment is
associated with each group to account for these cost differences. A facility
then receives a daily payment that is the same for each patient within a
group. Since the payments do not vary with the actual costs incurred, a SNF
has an incentive to reduce the costs of caring for the patients in each
case-mix group.

The design of the case-mix groups allows a SNF to reduce its costs and
increase its payments by manipulating the services provided, rather than
increasing efficiency. Since the SNF groups are largely defined by the
services the patient is to receive, a facility can provide only the minimum

See Balanced Budget Act: Implementation of Key Medicare Mandates Must Evolve to Fulfill
Congressional Objectives (GAO/T-HEHS-98-214, July 16, 1998).

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                      level of services required for placement in a particular group. This reduces
                      the average cost for the SNF’s patients in that case-mix group but does not
                      reduce the Medicare payments for these patients. Thus, expected
                      Medicare savings may not be achieved.

                      We are also concerned that the data underlying the SNF rates overstate the
                      reasonable costs of providing services and may not appropriately reflect
                      costs for patients with different care needs. Most of the cost data used to
                      set the SNF rates were not audited. Of particular concern are therapy costs,
                      which are likely inflated because there have been few limits on these
                      payments. Even if additional audits were to uncover significant
                      inappropriate costs, HCFA maintains that it has no authority to adjust the
                      base rates after the implementation of the new system. Furthermore, the
                      case-mix adjusters are based on cost information on about 4,000 patients.
                      This sample may simply be too small to reliably estimate these adjusters,
                      particularly given the substantial variation in treatment patterns among
                      SNFs. As a result, the case-mix-adjusted rates may not vary appropriately to
                      account for the services facilities are expected to provide—rates will be
                      too high for some types of patients and too low for others.

                      Under the SNF PPS, whether a SNF patient is deemed eligible for Medicare
                      coverage and how much will be paid are based on a facility’s assessment
                      of its patients and its judgment. Monitoring these assessments and
                      determinations is key to realizing expected savings from the system.
                      Texas, which implemented a similar reimbursement system for Medicaid,
                      conducts on-site reviews to monitor the accuracy of patient assessments
                      and finds a continuing error rate of about 20 percent. HCFA has no plans to
                      undertake as extensive a monitoring effort. However, without adequate
                      vigilance, inaccurate, inappropriate, and even fraudulent assessments
                      could compromise the benefits of the PPS.

Home Health PPS and   Context for home health provisions: Medicare spending for home
Related Reforms       health care rose even more rapidly than spending for SNF services—at an
                      average annual rate of 27.9 percent between 1990 and 1996. Several factors
                      accounted for this spending growth, particularly relaxed coverage
                      requirements that, over time, have made home health care available to
                      more beneficiaries, for less acute conditions, and for longer periods of
                      time. Essentially, Medicare’s home health benefit gradually has been
                      transformed from one that focused on patients needing short-term care
                      after hospitalization to one that serves chronic, long-term-care patients as

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To control spending while ensuring the appropriate provision of services,
the BBA mandated important changes in the payment method and provider
requirements for home health services. HCFA is required to establish a PPS
for HHAs by fiscal year 2001.7 Designing an appropriate system for HHAs will
be particularly challenging because of certain characteristics of the
benefit. Home health care is a broad benefit that covers a wide variety of
patients, many of whom have multiple health conditions; and the
standards for care are not well defined. Consequently, the case-mix
adjuster and payment rates must account for substantial variation in the
number, type, and duration of visits. Further, the wide geographic
variation in the use of home health care makes it difficult to determine
appropriate treatment patterns that must be accounted for in the overall
level of payment. A final concern has to do with the quality and adequacy
of services. Since the services are delivered in beneficiaries’ homes,
oversight is particularly critical when payment changes are implemented
to constrain program outlays.

Recognizing the difficulty of developing and implementing a PPS, the BBA
required HCFA to pay HHAs under an interim system. The interim system
builds on payment limits already in place by making them more stringent
and by providing incentives for HHAs to control the number and mix of
visits to each beneficiary.

Design, implementation, and impact issues: Under the interim
payment system, which took effect October 1, 1997, HHAs are paid their
costs subject to the lower of two limits. The first limit builds on the
existing aggregate per-visit cost limits but makes them more stringent. The
second limit caps total annual Medicare payments on the basis of the
number of beneficiaries served and an annual per-beneficiary amount. The
annual per-beneficiary amount is based on agency-specific and regional
average, per-beneficiary payments, and the limit aims to control the
number of services provided to users. The blending of agency-specific and
regional amounts is intended to account for the significant differences in
service use across agencies and geographic areas.

There has been widespread concern about the impact of the interim
payment system on HHAs and access to home health care.8 Indeed, between
October 1, 1997, and January 1, 1999, over 1,400 HHAs closed. However,

 The BBA required the PPS to be implemented in fiscal year 2000. Subsequent legislation delayed this
by 1 year.
See Medicare Home Health Benefit: Impact of Interim Payment System and Agency Closures on
Access to Services (GAO/HEHS-98-238, Sept. 9, 1998).

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              historic growth in the home health industry has been such that there were
              still over 9,000 HHAs—more than there were in October 1995—to provide
              services to Medicare beneficiaries. Further, half of the closures were in
              just four states—California, Louisiana, Oklahoma, and Texas—three of
              which had experienced agency growth well above the national average.
              The closures could be a market correction for overexpansion in light of
              the BBA’s signal that Medicare would not support the double-digit increases
              in spending of the previous few years.

              The closures alone are not a measure of any impact on access for
              Medicare beneficiaries to home health services—which is the predominant
              concern. Since home health agencies require little physical capital, other
              agencies may be able to quickly absorb the staff and patients of closing

              We have attempted to monitor the impact of the interim payment system
              on access for this Committee as well as for the House Committees on
              Commerce and Ways and Means. Last fall, we reported that interviews
              with hospital discharge planners and local aging organization
              representatives in seven states with high numbers of closures had not
              indicated a change over the past year in the willingness or ability of HHAs
              in their areas to serve Medicare beneficiaries. We are continuing this work,
              expanding the number of areas examined. Recently available claims
              information will allow us to extend this monitoring further—pinpointing
              areas where there has been a decline or leveling off of home health
              utilization. We will provide the Committee a report next month and
              another this summer on our ongoing work to assess access to home health

              The brief experience with some of the major Medicare provisions of the
Conclusions   BBA demonstrates the challenges to implementing meaningful reform. HCFA
              has fallen behind in instituting some changes and has had difficulty
              implementing others because of constrained resources, lack of
              experience, or inadequate data. At the same time, various provider groups
              have increasingly come to the Congress for relief. We believe that any
              significant alterations to key BBA provisions should be based on thorough
              analysis or sufficient experience to fully understand their effects.

              Mr. Chairman, this concludes my statement. I will be happy to answer any
              questions you or the Committee Members may have.

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