Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

AUGUST 2001 

OEI-09-99-00560 

Physical, Occupational, and Speech Therapy 

for Medicare Nursing Home Patients 

Medical Necessity, Cost, and Documentation 

Under the $1500 Caps 
OFFICE OF INSPECTOR GENERAL 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 

protect the integrity of the Department of Health and Human Services programs as well as the 

health and welfare of beneficiaries served by them. This statutory mission is carried out through a 

nationwide program of audits, investigations, inspections, sanctions, and fraud alerts. The 

Inspector General informs the Secretary of program and management problems and recommends 

legislative, regulatory, and operational approaches to correct them. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) is one of several components of the Office of 

Inspector General. It conducts short-term management and program evaluations (called 

inspections) that focus on issues of concern to the Department, the Congress, and the public. The 

inspection reports provide findings and recommendations on the efficiency, vulnerability, and 

effectiveness of departmental programs. 

OEI's San Francisco Regional Office prepared this report under the direction of Paul A. Gottlober, 

Regional Inspector General. Principal OEI staff included: 

REGION IX 

Deborah Harvey, Project Leader 

Christopher Tarbell, Lead Analyst 

Robert Gibbons, Program Analyst 

Camille Harper, Program Analyst 

Scott Hutchison, Program Analyst 

Steven Zerebecki, Program Analyst 

HEADQUARTERS 

Susan Burbach, Program Specialist 

Linda Moscoe, Technical Support Staff 

Brian Ritchie, Technical Support Staff 

Bambi Straw, Program Specialist 

Stuart Wright, Director, Medicare and 

Medicaid Branch 

To obtain copies of this report, please call the San Francico Regional Office at (415) 437-7900. 

Reports are also available on the World Wide Web at our home page address: 

http://www.dhhs.gov/progorg/oei 
EXECUTIVE SUMMARY 

PURPOSE 

This inspection analyzed the medical necessity, cost, and medical record documentation 

of physical, occupational, and speech therapy provided to nursing home patients in 

calendar year 1999 and billed to Medicare Part B by nursing homes, rehabilitation 

agencies, or hospital outpatient departments. 

BACKGROUND 

Medicare coverage guidelines state that all therapy must be reasonable, necessary, 

specific, and effective treatment for the patient’s condition. Therapy must be ordered by 

a physician or other qualified health care professional, require the skills of a qualified 

therapist, and be dictated by a written treatment plan. The plan must include specific and 

measurable goals and a reasonable estimate of when the patient will attain the goals. 

In 1997, Congress changed nursing home reimbursement for therapy by setting two 

annual caps. Occupational therapy was limited to $1500 annually, while physical and 

speech therapy shared the same $1500 annual cap. In November 1999, the caps were 

suspended for 2 years effective January 1, 2000. The moratorium on the therapy caps has 

subsequently been extended through calendar year 2002. The law that suspended the 

caps also requires the Centers for Medicare and Medicaid Services (formerly known as 

the Health Care Financing Administration) to (1) recommend a process to assure the 

appropriate utilization of Medicare outpatient therapy and (2) establish an alternative 

payment policy based on diagnostic categories, functional status, and prior use of 

therapy. To meet the requirements of the law, Agency staff requested our assistance. 

Our national random sample consisted of 320 Medicare patients. We conducted on-site 

medical and financial reviews at 132 nursing homes, rehabilitation agencies, and hospital 

outpatient departments. Several teams of physical and occupational therapists and 

speech-language pathologists reviewed the medical records for 318 of the sampled 

patients. 

FINDINGS 

The $1500 therapy caps did not prevent Medicare nursing home beneficiaries 

from receiving necessary and appropriate therapy 

Less than 2 percent of Medicare beneficiaries reached either of the $1500 therapy caps. 

While the caps were in place, beneficiaries required no additional therapy in 

Nursing Home Therapy Under the $1500 Caps 1 OEI-09-99-00560 
 approximately 82 percent of therapy episodes. Furthermore, although physical and 

speech therapy shared a cap, most beneficiaries received the physical and speech therapy 

they needed. 

Despite the therapy caps, 14 percent of all therapy was not medically necessary 

Although most therapy was deemed medically necessary, 14 percent was not. Medicare 

allowed more than $28 million during the first 6 month of 1999 for these medically 

unnecessary services. Therapy was medically unnecessary because (1) patients were not 

appropriate candidates; (2) treatment goals were met, but therapy continued; (3) therapy 

goals were not achieved, and a reevaluation was not conducted; or (4) skilled therapy was 

provided instead of routine maintenance. 

Approximately 10 percent of the therapy units were not supported by adequate 

documentation 

Medicare paid nursing homes approximately $12 million for undocumented units and an 

additional $8 million for inadequately documented units during the first 6 months of 

1999. 

Physician’s orders were not included in some medical records 

Medicare guidelines state that therapy must be ordered in advance by a physician or other 

health care professional and documented in writing in the medical record. We were 

unable to locate physician’s orders for approximately 5.6 percent of the total therapy 

units billed to Medicare in the first 6 months of 1999. Medicare paid nursing homes 

approximately $10.6 million for these units. Since the focus of our study was to 

determine the medical necessity, quality of care, and utilization of therapy, some of these 

units may have been included in the calculations for medically unnecessary, 

undocumented, and inadequately documented units. 

Medicare allowed in error approximately $48.5 million for Part B therapy for nursing 

home patients during the first 6 months of 1999. This includes $28.7 million for 

medically unnecessary therapy, $12.2 million for undocumented therapy units, and 

$7.6 million for inadequately documented therapy units. These three categories 

represent an overall error rate of 24.7 percent of the total allowed amount of 

approximately $196.5 million for Part B therapy during the first 6 months of 1999. 

Our sampling methodology does not allow us to make statistically valid projections 

for the entire year. However, if we assume that the second half of 1999 was the same 

as the first 6 months of 1999, we estimate that the amount Medicare allowed for 

unnecessary, undocumented, and inadequately documented therapy was $97 million. 

Nursing Home Therapy Under the $1500 Caps 2 OEI-09-99-00560 
RECOMMENDATIONS 

The Centers for Medicare and Medicaid Services (CMS) should: 

< encourage fiscal intermediaries to continue educating nursing homes on Part B billing 

and Medicare requirements for record documentation and retention, with an emphasis 

on the proper documentation of physician’s orders in patients records; 

< instruct fiscal intermediaries to conduct focused medical review in order to identify 

and collect Part B therapy overpayments; 

< continue working collaboratively with the national therapy associations to assure that 

they provide accurate and comprehensive information to their members on proper 

documentation of therapy in medical records; and 

< consider options when developing a new reimbursement system for Part B therapy, 

such as (1) reimbursement based on an episode of therapy and (2) prior authorization 

for therapy that exceeds a separate monetary cap for each type of therapy. 

AGENCY RESPONSE 

We received comments on the draft report from CMS. The Agency concurred with our 

recommendations. They will continue to educate nursing homes on Medicare Part B 

billing and medical record documentation and continue to recommend that fiscal 

intermediaries conduct focused medical review whenever their analysis suggests 

egregious overutilization of services. The CMS will consider options when developing a 

new reimbursement system for Medicare Part B therapy. Finally, CMS will continue its 

ongoing collaboration with the national therapy associations to provide information on 

proper documentation of therapy in medical records. The full text of the Agency’s 

comments appears in appendix B. 

Nursing Home Therapy Under the $1500 Caps 3 OEI-09-99-00560 
TABLE OF CONTENTS 

PAGE

EXECUTIVE SUMMARY ............................................... 1

INTRODUCTION ............................................................. 5

FINDINGS ................................................................. 13

The $1500 caps ........................................................ 13

Unnecessary therapy .................................................... 14

The shared therapy cap .................................................. 17

Undocumented or inadequately documented therapy ........................... 18

Physician’s orders ...................................................... 19

Retention of medical records .............................................. 20

RECOMMENDATIONS ..................................................... 21

APPENDICES .............................................................. 23

A: Confidence Intervals for Selected Statistics ............................... 23

B: Agency Comments .................................................. 26

Nursing Home Therapy Under the $1500 Caps 4 OEI-09-99-00560 
INTRODUCTION 

PURPOSE 

This inspection analyzed the medical necessity, cost, and medical record documentation 

of physical, occupational, and speech1 therapy provided to nursing home patients in 

calendar year 1999 and billed to Medicare Part B by nursing homes, rehabilitation 

agencies, or hospital outpatient departments. 

BACKGROUND 

Medicare Coverage for Skilled Nursing Facilities 

All skilled nursing facilities (SNFs) must meet the requirements of Section 1819 of the 

Medicare law. The SNFs must, for example, (1) provide 24-hour skilled nursing service 

under policies developed by physicians, registered nurses, or other professionals; 

(2) develop health plans for each patient, under the supervision of a physician; 

(3) maintain clinical records on all patients; and (4) meet a number of conditions to 

assure patients’ health and safety. 

All SNFs are required to assess each patient’s status and needs shortly after admission, 

including the need for physical, occupational, and speech therapy. The Nursing Home 

Reform Act (P.L. 100-203), which Congress passed as part of the Omnibus Budget 

Reconciliation Act of 1987, requires that SNFs assess all patients’ needs within 14 days 

of admission and reassess long-term patients annually. 

A physician must see the patient at least every 30 days.2 If a patient needs therapy over a 

period of time under the same treatment plan, the physician must recertify the continuing 

need for therapy every 30 days and estimate how long the patient will need therapy.3 

Fiscal intermediaries, the insurance companies that process and adjudicate Medicare 

claims for inpatient hospitals and SNFs, often develop local medical review policies to 

supplement Medicare guidelines for medical necessity and utilization. 

1

Throughout this report, we will refer to speech-language pathology as speech therapy. 

2

Health Care Financing Administration, Skilled Nursing Facility Manual, Sections 214, 230, 

230.3(C), and 271. 

3

Ibid., Section 271.1B. 

Nursing Home Therapy Under the $1500 Caps 5 OEI-09-99-00560 
Descriptions of Physical, Occupational, and Speech Therapy 

Physical therapy includes, but is not limited to, (1) examining patients with impairments, 

functional limitations, disabilities, or other health-related conditions to determine a 

diagnosis, prognosis, and intervention; (2) alleviating impairments and functional 

limitations by designing, implementing, and modifying therapeutic interventions; and 

(3) preventing injury, impairment, functional limitation, and disability, including the 

promotion and maintenance of fitness, health, and quality of life.4 Common treatments 

include therapeutic exercise, prescription and customization of prosthetic devices and 

equipment, and wound management. 

Occupational therapy is the use of purposeful activity or interventions designed to 

achieve constructive outcomes which promote health and/or prevent injury or disability, 

and which develop, improve, maintain, or restore the highest possible level of 

independence of any individual who has an injury, illness, cognitive impairment, psycho 

social dysfunction, mental illness, developmental or learning disability, physical 

disability, or other disorder or condition.5 Occupational therapy primarily focuses on 

compensatory techniques to improve a patient’s ability to complete independently the 

activities of daily living. An example includes teaching a stroke patient new techniques 

to eat and dress himself as independently as possible.6 

Speech therapy includes (1) services for patients with speech, hearing, and language 

disorders which result in communication disabilities and (2) the diagnosis and treatment 

of swallowing disorders, regardless of the presence of a communications disability. 

Communication disabilities most frequently affect patients with cerebrovascular disease 

(e.g., stroke), Parkinson disease, multiple sclerosis, and laryngeal carcinoma. Patient 

conditions may include (1) hearing sounds faintly, in a distorted way, or not at all; 

(2) substituting simple sounds; or (3) lacking the ability to use speech and language.7 

Therapy may include, but is not limited to, diagnostic, screening, preventive, or 

corrective services provided by or under the direction of a speech-language pathologist or 

4

American Physical Therapy Association, Model Definition of Physical Therapy for State 

Practice Acts, Board of Directors Policies, Positions and Guidelines, March 1998. 

5

The American Occupational Therapy Association, Inc. Definition of occupational therapy 

practice for State regulation. The American Occupational Therapy Association, Inc. Policy Manual 

(Association Policy 5.3.1), July 1994. 

6

Health Care Financing Administration, Skilled Nursing Facility Manual, Section 253.3. 

7

American Speech-Language-Hearing Association, Recognizing Communication Disorders, 

organization website, www.asha.org/consumers/brochures/comm_disorders.htm. 

Nursing Home Therapy Under the $1500 Caps 6 OEI-09-99-00560 
audiologist.8 An example of speech therapy is teaching a patient with swallowing 

disorders various ways to talk and chew without choking. 

Medicare Coverage and Cost of Physical, Occupational, and Speech Therapy 

Coverage guidelines for Part B therapy. Medicare guidelines state that all therapy 

must be reasonable, necessary, specific, and effective treatment for the patient’s 

condition. The Centers for Medicare and Medicaid Services (formerly known as the 

Health Care Financing Administration or HCFA), the federal agency that administers the 

Medicare program, requires that therapy (1) is ordered by a physician or other qualified 

health care professional, (2) requires the skills of a qualified therapist rather than 

nonskilled SNF staff, (3) is provided either by or under the direct supervision of a 

certified therapist (as defined in State law), and (4) is dictated by a written treatment 

plan. 

Nursing home charges for Part B therapy. Part B therapy increased from 1999 to 

2000. In the first 6 months of 1999, nursing homes charged the Medicare program 

$271 million for Part B therapy for 328,000 beneficiaries. In the first 6 months of 2000, 

the charges increased to $316 million for 348,000 beneficiaries. 

CHANGES IN THERAPY CHARGES9 

Therapy Type 

Physical 

Occupational 

Speech 

Total 

January-June 1999 January-June 2000 Percent 

Medicare Charges Medicare Charges Change10 

$138 million $186 million 34.8 percent 

$86 million $89 million 3.6 percent 

$47 million $41 million -12.9 percent 

$271 million $316 million 16.6 percent 

Source: Office of Evaluation and Inspections, 2001 

8

42CFR 440.110 (c). 

9

Statistics in this table were calculated from 100 percent of beneficiaries for 1999 and a 5 percent 

sample of beneficiaries for 2000. 

10The totals may not add up due to rounding. 

Nursing Home Therapy Under the $1500 Caps 7 OEI-09-99-00560 
Medicare Guidelines for Documentation and Retention of Medical Records 

Medical records should include documentation that describes all treatments and the 

patient’s progress throughout the episode of therapy. Documentation should include, but 

is not limited to: 

< written or telephone physician’s order for the therapy (telephone orders should be 

documented in the medical record by a nurse and then confirmed in writing by the 

physician or other health care professional as soon as possible); 

< initial examination and evaluation by the therapist describing the patient’s 

history, admitting and treatment diagnoses, initial functions, diagnosis, short and 

long-term treatment goals, and the treatment plan; 

< information for each therapy session, also called treatment logs or daily notes, 

describing the types and length of the types of therapy that the patient received 

and who provided the therapy (therapist, assistant, or aide); 

< progress notes explaining the patient’s progress or lack of progress on the 

treatment plan; 

< reexaminations and re-evaluations (at least monthly for the same episode of 

therapy) confirming the continued need for therapy; and 

< discharge summary which is required at the end of the episode of therapy.11 

The Centers for Medicare and Medicaid Services (CMS) requires that nursing homes 

retain medical records for 5 years after the patient is discharged.12 If the nursing home 

contracted with independent providers (such as a therapy provider) to render services, 

Medicare guidelines require that nursing homes retain all records for 3 years after final 

payment under the contract.13 

The Therapy Caps 

Section 4541(c) of the Balanced Budget Act of 1997 changed SNF reimbursement for 

physical, occupational, and speech therapy by setting two annual caps for Medicare 

Part B patients. Effective January 1, 1999, occupational therapy was limited to $1500 

annually, while physical and speech therapy shared the same $1500 annual cap. 

11American Physical Therapy Association, Guide to Physical Therapist Practice, appendix 7, 

1998. 

12Health Care Financing Administration, Skilled Nursing Facility Manual, Chapter V–Billing 

Procedures, Section 545.4. 

13Peer Review Organization Manual, Part 13--Management, Section 13140. 

Nursing Home Therapy Under the $1500 Caps 8 OEI-09-99-00560 
Section 221 of the Medicare, Medicaid, and SCHIP14 Balanced Budget Refinement Act 

of 1999, passed in November 1999, suspended the cap for 2 years effective 

January 1, 2000. Section 221(c)(2) of the Law requires CMS to (1) recommend a

mechanism to assure the appropriate utilization of Medicare outpatient therapy and 

(2) establish an alternative payment policy based on diagnostic categories, functional

status, and prior use of therapy.15

Focused Medical Review 

The 1999 law also mandated that the Secretary conduct focused medical reviews of 

Part B therapy claims, with an emphasis on SNF claims in calendar years 2000 and 2001. 

In October 2000, CMS launched a Program Safeguard Contract for therapy to (1) analyze

current national and local medical review policies; (2) conduct extensive literature

review, analysis, and abstraction; (3) interview fiscal intermediaries and therapy

providers; and (4) develop medical review protocol for the fiscal intermediaries. 

Section 421 of the Medicare, Medicaid, and SCHIP Benefits Improvement and

Protection Act of 2000, passed in November 2000, extended the moratorium on the

therapy caps for another year, through calendar year 2002. The law also extended the

requirement for focused review of SNF therapy claims until year 2003. 

Previous Office of Inspector General Work 

The Office of Inspector General released two reports in August 1999 concerning physical 

and occupational therapy rendered to Medicare patients in nursing homes. We found that 

most Medicare patients received appropriate therapy for their initial medical conditions 

and benefitted from therapy. However, almost 13 percent of physical and occupational 

therapy was billed improperly because it was not medically necessary and/or the therapy 

was provided by staff who did not have the appropriate skill. During the 12-month 

period before implementing the SNF prospective payment system, Medicare paid SNFs 

almost $1.3 billion for the unnecessary and improperly documented therapy.16 

In our report entitled Monitoring Part B Therapy for SNF Patients, we noted that there 

was a dramatic decrease in Part B therapy charges during 1999. The decrease may be 

explained by the requirement that, as of January 1999, reimbursement changed from 

“cost-based” to the Medicare Part B fee schedule. However, preliminary reports indicate 

that a rebound in SNF Part B therapy charges may occur because of the moratorium on 

14State Children’s Health Insurance Program. 

15The Social Security Act, Section 1833(g) as amended. 

16Office of Inspector General, Physical and Occupational Therapy in Nursing Homes: Quality of 

Care and Medical Necessity for Medicare Patients (OEI-09-97-00121), and Physical and Occupational 

Therapy in Nursing Homes: Cost of Improper Billings to Medicare (OEI-09-97-00122), August 1999. 

Nursing Home Therapy Under the $1500 Caps 9 OEI-09-99-00560 
the caps and the lack of adequate contractor oversight of billing practices and medical 

necessity. We recommended that CMS ensure that adequate medical reviews of Part B 

therapy in SNFs are conducted. We also recommended that CMS continue working with 

therapy providers to improve their understanding of Medicare billing procedures and the 

medical necessity guidelines for Part B therapy. 

METHODOLOGY 

Selection of Sampled SNF Part B Therapy Patients 

From the Medicare Common Working File, we extracted all Part B physical, 

occupational, and speech therapy claims for services provided to SNF patients.17 These 

claims were submitted to intermediaries by SNFs, rehabilitation agencies, and hospital 

outpatient departments for therapy initiated between January 1 and June 30, 1999. We 

limited the extract to the continental United States. 

We used a multi-stage stratified clustered sample. We clustered the Medicare Part B 

therapy patients into groups of similar size in the same geographical area. We then 

stratified the clusters into four quadrants of the United States. We randomly selected 

4 clusters per quadrant for a total of 16 clusters. 

We used the 75th percentile of each cluster’s estimated therapy reimbursement to group 

patients into two groups. Group 1 contained the 25 percent of patients with the highest 

therapy reimbursement. Group 2 contained the remaining 75 percent. For each cluster, 

we stratified patients within both groups and then selected 20 patients as follows: 

Stratum I--patients with the highest reimbursement in Group 1 8 

Stratum II--random selection of additional patients from Group 1 8 

Stratum III--random selection of patients from Group 2 4 

Total patients per cluster 20 

Our sample for all clusters totaled 320 patients. 

On-Site Medical and Financial Review 

Several teams of certified and/or licensed physical and occupational therapists and 

speech-language pathologists conducted on-site review of the medical records for the 

national random sample. Reviewers used medical review instruments to assess the 

medical necessity, underutilization, overutilization, and quality of care provided in 

17We identified beneficiaries as “SNF patients” if (1) the SNF submitted the claims, or (2) the 

beneficiaries were identified as SNF residents in CMS’ minimum dataset (MDS). 

Nursing Home Therapy Under the $1500 Caps 10 OEI-09-99-00560 
calendar year 1999. The reviewers also determined if the record documentation and the 

information on the Medicare claims accurately reflected the types of therapy and the 

appropriate length of treatment that the patients received. 

While on-site, in addition to the medical review, we: 

< reviewed therapy ledgers to determine how SNFs track each patient’s charges that 

were billed to Part B of Medicare; 

< gathered data to identify payment sources for patients’ in addition to Medicare 

reimbursement; 

< interviewed SNF administrators and key therapy staff about how they tracked the cap 

and their interactions with their fiscal intermediaries; and 

< observed physical, occupational, and speech therapy conducted with patients. 

We conducted interviews at 132 facilities--97 SNFs, 28 hospital outpatient departments, 

and 7 rehabilitation agencies located in 18 States. We obtained the medical records for 

318 of the 320 sampled patients. We were unable to review two patient records because 

the facility had closed before our review, and the corporate owner could not retrieve the 

records from storage. 

Claims Analysis 

We analyzed the Part B physical, occupational, and speech therapy claims submitted for 

the sampled patients. For each patient, we extracted only claims that were submitted for 

therapy initiated between January 1 and June 30, 1999. 

We analyzed the claims by individual therapy units and clusters of therapy units. An 

individual “unit” of physical, occupational, or speech therapy constitutes one 15-minute 

session of therapy. Clusters of units were grouped into an “episode of care.” An episode 

of care consists of a series of continuous therapy units tied to a specific diagnosis, 

treatment plan, and set of patient goals. An episode of care may last a few days or a few 

months. 

The Balanced Budget Act of 1997 mandated that nursing homes use the CMS Common 

Procedural Coding System to describe each type of therapy that patients receive. 

Medicare Part B therapy claims must include both the code and the number of 15-minute 

sessions, or “units,” for each type of therapy. To illustrate, an occupational therapist 

works with a patient on the activities of daily living, such as bathing and dressing, for 

45 minutes. The Medicare claim would include the appropriate code with three units for 

the length of the treatment. 

Cost projections were based on an analysis of the extracted Part B physical, occupational, 

and speech therapy claims. Information found on each claim was used to calculate the 

estimated amount that Medicare allowed for each therapy claim. Cost projections then 

Nursing Home Therapy Under the $1500 Caps 11 OEI-09-99-00560 
 were calculated using the lower of the calculated Medicare allowed amount or the fiscal 

year 1999 Medicare fee schedule amount. 

This report is one of two reports on physical, occupational, and speech therapy for 

Medicare SNF patients. The other report, Physical, Occupational, and Speech Therapy 

for Medicare Nursing Home Patients: Medical Necessity and Quality of Care based on 

Treatment Diagnosis (OEI-09-99-00563), focuses on the medical necessity and quality of 

care for different therapy diagnoses. 

Our review was conducted in accordance with the Quality Standards for Inspections 

issued by the President’s Council on Integrity and Efficiency. 

Nursing Home Therapy Under the $1500 Caps 12 OEI-09-99-00560 
 FINDINGS 

The $1500 therapy caps did not prevent Medicare SNF

beneficiaries from receiving necessary and appropriate

therapy 

Less than 2 percent of Medicare beneficiaries reached either of the $1500 therapy 

caps 

Nationally, 0.5 percent of Medicare Part B patients who began therapy between January 

and June 1999 reached or exceeded the $1500 occupational therapy cap within 6 months, 

and only 1.7 percent of patients reached or exceeded the shared $1500 physical and 

speech therapy cap. The average Medicare allowance for patients who received 

occupational therapy was $516, and the average Medicare allowance for physical and 

speech therapy patients was $503. 

In approximately 82 percent of therapy episodes, beneficiaries required no 

additional therapy 

In most of the episodes of care,18 patients needed no additional therapy by the time their 

treatment ended. To determine if additional therapy was needed, medical reviewers 

examined medical records, treatment logs, and physician orders for each episode of care. 

Reviewers discovered patients rarely needed additional therapy to reach their treatment 

goals or patients would not have benefitted from additional therapy. For example, one 

occupational therapy patient received treatment once a day for approximately 3 weeks. 

After reviewing his record, one medical reviewer suggested, “This is a well documented 

case showing appropriate improvement in a reasonable time. There was good rationale 

for discharging....” 

With regard to the remaining 18 percent, we found that in approximately 12 percent of 

the episodes patients actually needed additional therapy. For the rest, reviewers were 

unable to make a determination. 

Patients received therapy beyond the caps because SNFs ignored the caps or 

were unaware of them 

According to administrators, SNFs rarely discontinued therapy when patients reached the 

therapy caps. When they reached the $1500 cap, beneficiaries and their families were 

18An “episode of care” consisted of a series of continuous therapy units tied to a specific 

diagnosis, treatment plan, and patient goals. 

Nursing Home Therapy Under the $1500 Caps 13 OEI-09-99-00560 
presented with the option of switching to another type of insurance or paying for therapy 

costs out of their own pocket. Administrators indicated that, in some cases, they 

continued to provide therapy to patients and absorbed the extra costs themselves. 

A lack of education on Part B therapy also caused some SNFs to provide therapy to 

patients after they had reached or exceeded the $1500 caps. Staff in more than half of the 

facilities we interviewed reported not receiving training from fiscal intermediaries on 

Part B therapy. According to administrators, this often left them unclear on new billing 

requirements, including the therapy caps. Administrators in these facilities indicated 

that they were unaware of how to monitor the therapy caps, and, subsequently, costs were 

not tracked. 

Despite the therapy caps, 14 percent of all therapy was not

medically necessary 

Although most therapy was medically necessary, some was not. Medical reviewers 

deemed that 88 percent of physical therapy was medically necessary, 86 percent of 

occupational therapy was medically necessary, and 67 percent of speech therapy was 

medically necessary. This included therapy that was undocumented or inadequately 

documented, since reviewers were instructed to deem therapy medically necessary when 

documentation was absent or inadequate. 

MOST THERAPY WAS MEDICALLY NECESSARY 

Therapy 

All 

Therapy 

Therapy Type 

Physical Occupational Speech 

Medically Necessary 

Therapy 85.7 percent 87.7 percent 86.3 percent 66.7 percent 

Therapy Units Billed 

(approximate) 9,000,000 6,000,000 2,000,000 700,000 

Source: Office of Evaluations and Inspections, 2001 

Most SNF patients were diagnosed properly, and a necessary treatment plan was 

developed for each diagnosis. Therapists usually updated treatment plans when a 

patient’s progress or condition changed, and therapy usually was administered with the 

proper frequency and duration. Reviewers also found that most Medicare patients 

benefitted from these services, and medically necessary therapy helped them reach their 

treatment goals. 

Nursing Home Therapy Under the $1500 Caps 14 OEI-09-99-00560 
Medical reviewers also found that some Medicare SNF patients received medically

unnecessary therapy. Reviewers identified several reasons why 14 percent of therapy

was medically unnecessary including, but not limited to:

< patients were not appropriate candidates based on their condition;

< treatment goals were being met, but therapy continued; 

< therapy goals were not being achieved, and a reevaluation was not conducted; or

< skilled therapy was provided instead of the routine maintenance that was more

appropriate for the patients’s condition. 

Medical reviewers found that the medical condition of some SNF patients did not 

indicate the need for skilled therapy. The diagnosis of some patients indicated that 

therapy would not have benefitted the patient, or the therapist should have postponed 

therapy until the patient’s medical condition stabilized. For example, one occupational 

therapy patient with a questionable cognitive condition received unnecessary therapy 

three times a week for 3 weeks, without improvement. The patient’s lack of motivation 

to participate in a previous therapy episode should have alerted the provider that this 

patient was not an appropriate candidate for therapy.19 

Some therapy episodes continued 1 to 2 weeks beyond what was medically necessary. 

Medical reviewers noted that therapy continued because, among other reasons, a patient’s 

medical condition had plateaued or SNFs did not properly monitor patient progress. 

In one rural facility, four out of the five patients in our sample received physical therapy 

from 1 to 4 weeks longer than was medically necessary. Reviewers also questioned why 

therapists continued to provide care that was not supported by documentation. 

The SNFs continued to provide therapy, in some cases, to patients who were not meeting 

their treatment goals. Medical reviewers indicated that when a patient does not reach 

their treatment goals, therapy should be reevaluated and possibly discontinued. 

However, several facilities used a “cookie-cutter” treatment plan for all Medicare SNF 

patients. Therapy continued regardless of a patient’s medical status. For example, one 

beneficiary received occupational therapy for 3 months without reaching her treatment 

goals. As the medical reviewer suggested, “...this case did not meet the Medicare 

guidelines of significant practical improvement over a reasonable time period, and 

treatment should have been discontinued.” 

Medical reviewers found that some patients did not need skilled speech therapy. Nursing 

home staff should have provided maintenance instead of skilled speech-language 

pathologists providing maintenance. For example, it was standard practice in many SNFs 

19 The effects of medical condition, or diagnosis, on medical necessity and quality of care is 

discussed in our companion report, Physical, Occupational, and Speech Therapy for Medicare Part B 

Nursing Home Patients: An Analysis of Medical Necessity and Quality of Care based on Treatment 

Diagnosis, OEI-09-99-00563, July 2001. 

Nursing Home Therapy Under the $1500 Caps 15 OEI-09-99-00560 
to bill an evaluation and several units of treatment for “changing a patient’s diet” as 

skilled speech therapy. This therapy should have been delivered by the nursing home 

staff after the speech-language pathologist evaluated the patient and recommended the 

appropriate changes. 

Medicare allowed approximately $28 million for unnecessary therapy in the first 

6 months of 1999 

The Medicare program allowed almost $15 million for unnecessary physical therapy, 

$6.4 million for unnecessary occupational therapy, and $7.5 million for unnecessary 

speech therapy during the first 6 months of 1999, while the therapy caps were in effect. 

MEDICARE PAYS FOR UNNECESSARY THERAPY 

Reimbursement 

Type 

All 

Therapy 

(Millions) 

Therapy Type (Millions) 

Physical Occupational Speech 

Allowed amount for 

unnecessary units 

Total allowed amount 

$28.7 

$196.5 

$14.7 $6.4 $7.5 

$121.4 $49.0 $26.0 

Source: Office of Evaluations and Inspections, 2001 

The mean Medicare allowance for physical, occupational, and speech patients was higher 

with medically unnecessary therapy than without medically unnecessary therapy. We 

discovered that the mean allowance for physical therapy patients was at least $57 higher 

than it should have been, at least $54 higher for occupational therapy patients, and more 

than $76 higher for speech therapy patients. These higher payments were all a result of 

Medicare paying for medically unnecessary services. 

Our sampling methodology does not allow us to make statistically valid projections for 

the entire year. Nevertheless, if we assume that the rate of medically unnecessary 

therapy for the second half of the year was the same as it was for the first 6 months, 

Medicare allowed approximately $56 million dollars for unnecessary therapy during 

1999. 

Patients who reached or exceeded the caps received medically unnecessary 

therapy 

Eighty percent of the 2 percent of Medicare beneficiaries who reached either of the 

therapy caps received some unnecessary therapy. Medicare allowed between $1500 and 

$2800 for patients who reached the occupational therapy cap, with unnecessary therapy 

totaling anywhere from zero to $1500. Similarly, the amount allowed for Medicare SNF 

patients who reached or exceeded the shared physical and speech therapy cap was 

Nursing Home Therapy Under the $1500 Caps 16 OEI-09-99-00560 
between $1500 and $2700, with unnecessary therapy totaling anywhere from zero to 

$1900. 

Sixty-three percent of the 1.7 percent of patients who reached the shared therapy cap 

would not have done so if they had received medically necessary therapy only. 

Similarly, approximately 76 percent of the 0.5 percent of beneficiaries who reached or 

exceeded the occupational therapy cap would not have done so had they received 

medically necessary therapy only. For example, more than 50 percent of the units billed 

to Medicare for one patient who exceeded the occupational therapy cap were medically 

unnecessary. 

Although physical and speech therapy shared a cap, most

beneficiaries received the physical and speech therapy they

needed 

Less than 10 percent of SNF patients needed speech and/or physical therapy and 

did not receive them 

Medical reviewers confirmed that when most patients did not receive physical or speech 

therapy it was because therapy would not have benefitted their medical condition. For 

example, after confirming that one patient needed no speech therapy, a medical reviewer 

noted, “Patient previously received speech therapy from October 1998 to January 1999, 

was discharged due to a lack of progress.” 

Approximately 2 percent of beneficiaries reached the shared cap at any time 

during calendar year 1999 

Very few patients were prevented from receiving physical or speech therapy because they 

reached the $1500 shared cap. An analysis of the complete 1999 claims history showed 

that no more than 2 percent would have reached the shared cap. Approximately 1 percent 

of sampled beneficiaries would have reached the shared cap if Medicare had paid for 

medically necessary therapy only.20 

As mentioned earlier, possible explanations for why patients reached the cap include lack 

of training by fiscal intermediaries on Part B therapy, unnecessary therapy, or disregard 

for the therapy caps by providers. 

20We excluded all unnecessary services received by each patient during 1999. 

Nursing Home Therapy Under the $1500 Caps 17 OEI-09-99-00560 
Approximately 10 percent of the therapy units were not

supported by adequate documentation 

We used the decisions of medical reviewers to determine how we would quantify 

documentation errors within our sample. Some episodes of therapy lacked any 

supporting documentation. For these episodes, reviewers were unable to determine if 

therapy was medically necessary. We counted all the billed therapy units associated with 

these episodes as undocumented. In other instances, reviewers determined that the 

episode of therapy was medically necessary, although some individual units were 

undocumented or inadequately documented. We counted these units accordingly. 

Overall, Medicare paid almost $20 million for therapy units that were undocumented or 

not documented adequately in the first 6 months of 1999 

Medicare paid approximately $12 million for undocumented therapy units during 

the first 6 months of 1999 

Undocumented 

therapy Physical 

Percent of units 

Medicare payment 

8.0% 

$8.7 million 

Source: Office of Evaluation and Inspections, 2001 

Type of Therapy Total for All 

Undocumented 

Occupational Speech Units 

5.9% 3.3% 7.1% 

$ 2.8 million $730,000 $12.2 million 

Although reviewers found some documentation in medical records to support almost 

93 percent of therapy units, documentation was missing for approximately 7 percent of 

the units. The progress notes for some billed units did not describe all types of therapy 

provided in the session. For example, one patient’s Medicare claim included 45 minutes 

of therapy each day for 21 consecutive days. The reviewer noted that the medical record 

contained documentation for 30 minutes of therapy each day rather than 45 minutes. In 

other instances, Medicare claims included units for some therapy that patients did not 

receive. For example, one claim included one unit for 15 minutes of gait training on 

2 consecutive days. However, the therapist stated in the progress notes that the patient 

refused treatment on both days. 

Nursing Home Therapy Under the $1500 Caps 18 OEI-09-99-00560 
Medicare paid approximately $8 million for inadequately documented therapy 

units during the first 6 months of 1999 

Inadequately 

Documented 

Therapy 

Type of Therapy Total for All 

Inadequately 

Documented

Units Physical Occupational Speech 

Percent of units 

Medicare payment 

3.4% 0.7% 6.8% 2.9% 

$4.3 million $333,000 $2.9 million $7.6 million 

Source: Office of Evaluation and Inspections, 2001 

Because almost 3 percent of therapy units were not documented adequately, reviewers 

were unable to determine the full range of therapy that patients received. Progress notes, 

which are intended to document how patients were progressing for each type of therapy, 

were incomplete in some medical records. For example, one patient received three types 

of therapy in each session--exercises to build strength and endurance, neuromuscular 

reeducation, and direct therapeutic activity with the therapist. The same types of therapy 

continued for 12 days between January and March 1999. However, the medical reviewer 

found that the documentation was adequate for only two of the three types of treatment in 

each session, but was consistently inadequate for the third type. 

Physician’s orders were not included in some medical

records 

Medicare guidelines state that therapy must be ordered in advance by a physician or other 

health care professional and documented in writing in the medical record. We were 

unable to locate a telephone or written order for some of the therapy episodes in our 

sample. The lack of orders corresponds to approximately 5.6 percent of the total therapy 

units billed to Medicare in the first 6 months of 1999. However, medical reviewers still 

determined the medical necessity, quality of care, and utilization of therapy for these 

units. 

Several reasons for missing orders may include: 

< a separate log of all physician’s orders was missing from a patient’s medical 

record, 

< the medical record included a signed order for the first therapy episode but not for 

subsequent episodes, or 

< physicians did not countersign telephone orders as required by Medicare 

guidelines. 

Nursing Home Therapy Under the $1500 Caps 19 OEI-09-99-00560 
For example, one patient received physical therapy in two episodes. We found a 

physician’s order for the first episode in February 1999. Therapy lasted 1 month. The 

patient began another episode of therapy in May and received therapy for 3 months. 

However, we did not locate a physician’s order for the second episode of therapy. 

Medicare paid nursing homes approximately $10.6 million for these therapy units. Since 

the focus of our study was to determine the medical necessity, quality of care, and 

utilization of therapy, some of these units may have been included in the calculations for 

medically unnecessary, undocumented, and inadequately documented units. 

Some SNFs did not retain medical records according to

Medicare guidelines 

Medicare guidelines require that SNFs retain medical records for 5 years after the patient 

is discharged. We reviewed medical records for therapy provided 12 to 20 months before 

our review. Some SNFs were unaware that records were missing until our review. In 

some cases, records were missing because (1) therapy notes were purged from the 

records for long-term patients, sent to storage, and subsequently misplaced or (2) the 

SNF changed therapy providers during 1999, and the previous provider removed the 

therapy records from the facility. 

By removing records, therapy providers may have violated their contracts. Several 

contracts that we reviewed contained language such as, “All case records, case histories, 

personal and regular files concerning patients of the facility or facility patients consulted, 

interviewed, or treated and cared for by the provider shall belong to and remain the 

property of the facility.” In fact, contracts between SNFs and independent therapy 

providers often stated that therapy records should be retained in patients’ records and 

available for a minimum of 4 years after the contract expired. 

Medicare allowed in error approximately $48.5 million for Part B therapy during the 

first 6 months of 1999. This includes $28.7 million for medically unnecessary therapy, 

$12.2 million for undocumented therapy units, and $7.6 million for inadequately 

documented therapy units. These three categories represent an overall error rate of 

24.7 percent of the total allowed amount of approximately $196.5 million for Part B 

therapy during the first 6 months of 1999. 

Our sampling methodology does not allow us to make statistically valid projections for 

the entire year. However, if we assume that the second half of 1999 was the same as 

the first 6 months of 1999, we estimate that the amount Medicare allowed for 

unnecessary, undocumented, and inadequately documented therapy was $97 million. 

Nursing Home Therapy Under the $1500 Caps 20 OEI-09-99-00560 
RECOMMENDATIONS 

The CMS should: 

Encourage fiscal intermediaries to continue educating SNFs on Part B billing and 

medical record documentation 

More than half of all administrators told us that SNFs did not receive any training from 

the fiscal intermediary on billing for Part B therapy. Nursing home administrators and 

billing staff often remarked that they did not know how their facility billed therapy 

(charges or the fee schedule), and they were not aware that therapy reimbursement was 

based on the Part B fee schedule. 

Fiscal intermediaries should also educate SNFs and their staff on Medicare requirements 

for medical record documentation and retention, with an emphasis on the proper 

documentation of physician’s orders in patient records. 

Instruct fiscal intermediaries to conduct focused medical review in order to 

identify and collect Part B therapy overpayments 

Using focused medical review we identified approximately $28 million in overpayments 

for medically unnecessary Part B therapy services in the first 6 months of 1999. 

Instructing fiscal intermediaries to conduct similar focused medical review could result in 

significant cost savings for the Medicare program. 

Consider options when developing a new reimbursement system for Part B 

therapy 

As mentioned in the background, Section 221 of the Medicare, Medicaid and SCHIP 

Balanced Budget Refinement Act of 1999 requires that CMS establish an alternative 

payment policy for SNFs. Based on our inspection, we suggest that CMS consider: 

< basing reimbursement on an episode of therapy rather than an annual cap, and/or 

< requiring prior authorization for therapy that exceeds a separate monetary cap for 

each type of therapy. 

Continue working collaboratively with the national therapy associations 

We believe that poor documentation is a result of a lack of awareness and understanding 

of Medicare guidelines and requirements on the part of SNFs and therapists. By working 

with the national associations, CMS can assure that they provide accurate and 

Nursing Home Therapy Under the $1500 Caps 21 OEI-09-99-00560 
comprehensive information to their members on proper documentation of therapy in 

medical records. 

AGENCY RESPONSE 

We received comments on the draft report from CMS. The Agency concurred with our 

recommendations. They will continue to educate nursing homes on Medicare Part B 

billing and medical record documentation and continue to recommend that fiscal 

intermediaries conduct focused medical review whenever their analysis suggests 

egregious overutilization of services. The CMS will consider options when developing a 

new reimbursement system for Medicare Part B therapy. Finally, CMS will continue its 

ongoing collaboration with the national therapy associations to provide information on 

proper documentation of therapy in medical records. The full text of the Agency’s 

comments appears in appendix B. 

Nursing Home Therapy Under the $1500 Caps 22 OEI-09-99-00560 
APPENDIX A APPENDIX A 

Confidence Intervals for Selected Statistics

The following table shows the point estimates and 95 percent confidence intervals for 

selected statistics, in the order that they appear in the report. These calculations account 

for all levels of clustering and stratification as described in the methodology. 

Statistic Point 

Estimate 

95 Percent 

Confidence Interval 

Of Medicare SNF beneficiaries, percent who reached 

either of the $1500 therapy caps 1.7% 0.4% - 3.1% 

Of Medicare SNF beneficiaries, percent who reached 

the $1500 occupational therapy cap 0.5% 0% - 1.1% 

Of Medicare SNF beneficiaries, percent who reached 

the $1500 shared cap for physical and speech therapy 1.7% 0.3% - 3.0% 

Average allowed amount that Medicare reimbursed 

SNFs for occupational therapy beneficiaries $516 $309 - $723 

Average allowed amount that Medicare reimbursed 

SNFs for physical and speech therapy beneficiaries $503 $425 - $581 

Of Medicare nursing home beneficiaries, percent who 

did not need additional therapy 82.1% 75.1% - 89.1% 

Of January - June 1999 therapy units, percent that were 

medically necessary for all therapies 85.7% 79.7% - 91.7% 

Of January - June 1999 therapy units, percent that were 

medically necessary for physical therapy 87.7% 79.2% - 96.1% 

Of January - June 1999 therapy units, percent that were 

medically necessary for occupational therapy 86.3% 79.3% - 93.9% 

Of January - June 1999 therapy units, percent that were 

medically necessary for speech therapy 66.7% 48.6% - 84.9% 

Of January - June 1999 therapy units, percent that were 

medically unnecessary for all therapies 14.3% 8.3% - 20.3% 

Amount Medicare reimbursed SNFs for all therapy that 

was medically unnecessary $28.7 million $16.9 million - $40.5 million 

Nursing Home Therapy Under the $1500 Caps 23 OEI-09-99-00560 
APPENDIX A 

Statistic Point 

Estimate 

95 Percent 

Confidence Interval 

Amount Medicare reimbursed SNFs for physical 

therapy that was medically unnecessary $14.7 million $4.3 million - $25.2 million 

Amount Medicare reimbursed SNFs for occupational 

therapy that was medically unnecessary $6.4 million $2.4 million - $10.4 million 

Amount Medicare reimbursed SNFs for speech therapy 

that was medically unnecessary $7.5 million $1.5 million - $13.5 million 

Of Medicare nursing home beneficiaries, percent who 

needed physical and/or speech therapy but did not 

receive them 

9.3% 3.6% to 14.9% 

Of January - June 1999 therapy units, percent that 

were undocumented 7.1% 2.4% - 11.7% 

Of January - June 1999 therapy units, amount 

Medicare reimbursed nursing homes for units that 

were undocumented 

$12.2 million $5.0 million - $19.5 million 

Of January - June 1999 physical therapy units, 

amount Medicare reimbursed nursing homes for 

units that were undocumented 

$8.7 million $1.5 million - $15.8 million 

Of January - June 1999 occupational therapy units, 

amount Medicare reimbursed nursing homes for 

units that were undocumented 

$2.8 million $0.8 million - $4.8 million 

Of January - June 1999 therapy units, percent that 

were not documented adequately 2.9% 0.8% - 5.1% 

Of January - June 1999 therapy units, amount 

Medicare reimbursed nursing homes for units that 

were not documented adequately 

$7.6 million $2.1 million - $13.1 million 

Of January - June 1999 physical therapy units, 

amount Medicare reimbursed nursing homes for 

units that were not documented adequately 

$4.3 million $0.4 million - $8.2 million 

Of January - June 1999 occupational therapy units, 

amount Medicare reimbursed nursing homes for 

units that were not documented adequately 

$333,000 $50,000 - $616,000 

Nursing Home Therapy Under the $1500 Caps 24 OEI-09-99-00560 
APPENDIX A 

Statistic Point 

Estimate 

95 Percent 

Confidence Interval 

Of January - June 1999 speech therapy units, amount 

Medicare reimbursed nursing homes for units that were 

not documented adequately 

$2.9 million 0 - $6.0 million 

Of January - June 1999 therapy units, percent of units 

for which we were unable to find a physician’s order 5.6% 2.0% - 9.3% 

Of January - June 1999 units, amount Medicare 

reimbursed nursing homes for units that were medically 

unnecessary, undocumented, and inadequately 

documented 

$48.5 million $29.6 million - $67.4 million 

Of January - June 1999 therapy episodes, percent that 

did not have physician’s order 9.2% 3.5% - 14.9 % 

Nursing Home Therapy Under the $1500 Caps 25 OEI-09-99-00560 
APPENDIX B 

Agency Comments

Nursing Home Therapy Under the $1500 Caps 26 OEI-09-99-00560 
APPENDIX B 

Nursing Home Therapy Under the $1500 Caps 27 OEI-09-99-00560 
APPENDIX B 

Nursing Home Therapy Under the $1500 Caps 28 OEI-09-99-00560 
APPENDIX B 

Nursing Home Therapy Under the $1500 Caps 29 OEI-09-99-00560 
APPENDIX B 

Nursing Home Therapy Under the $1500 Caps 30 OEI-09-99-00560