GAO

United States General Accounting Office

Report to Congressional Committees

August 2001 SKILLED NURSING 

FACILITIES

Services Excluded 

From Medicare’s Daily 

Rate Need to be 

Reevaluated

GAO-01-816

Page i GAO-01-816 Excluded Skilled Nursing Facility Services

Letter 1

Results in Brief 2

Background 3

Certain Services Appropriately Excluded from SNF PPS, but

Revisions to the Exclusions May Be Needed 8

Current Exclusion Policies May Have Unintended Consequences 11

Conclusions 14

Matter for Congressional Consideration 15

Recommendations for Executive Action 15

Agency Comments 15

Appendix I Comments From Centers for Medicare and Medicaid

Services 19

Tables

Table 1: Services Excluded from the SNF PPS Rate, Regulatory or

Legislative Source, and Effective Dates 7

Table 2. Examples of Services Considered for Exclusion from the

SNF PPS and HCFA’s Reasons for Not Excluding Them 10

Abbreviations

BBA Balanced Budget Act of 1997

BBRA Balanced Budget Refinement Act of 1999

CT Computerized axial tomography

CMS Centers for Medicare and Medicaid Services

HCFA Health Care Financing Administration

MRI Magnetic resonance imaging

PPS Prospective payment system

RUG Resource utilization group

SNF Skilled nursing facility

Contents
Page ii GAO-01-816 Excluded Skilled Nursing Facility Services
Page 1 GAO-01-816 Excluded Skilled Nursing Facility Services

August 22, 2001

Congressional Committees

The Health Care Financing Administration (HCFA) replaced its cost-based

reimbursement method for skilled nursing facility (SNF) services with a

prospective payment system (PPS) in 1998.1

 Mandated in the Balanced

Budget Act of 1997 (BBA),2

 the PPS was intended to slow Medicare SNF

spending growth by paying a daily amount based on the historical national

average costs of care. This rate covers all health care services provided to

a beneficiary during each day of a Medicare-covered SNF stay. Under this

new payment approach, SNFs have strong financial incentives to control

the cost of providing a day of care. They can do this by reducing the

number of services delivered, changing to a less costly mix of services, or

minimizing the cost of each service. However, facilities could also keep

their costs down by stinting on needed services, especially expensive

ones, or avoiding patients who are likely to need particular types of care.

Facilities that cannot keep their average daily costs below their payments

will be financially disadvantaged.

To counter the possible undesirable consequences of the PPS, certain

services provided to Medicare beneficiaries during a SNF stay were

excluded from the SNF daily rate. Some of the exclusions were identified

in statute and HCFA exercised its administrative rule-making authority to

exclude others. Excluded from the rates are expensive services that

generally are not provided in SNFs—such as cardiac catheterization,

magnetic resonance imaging (MRI), radiation therapy, and selected

chemotherapy services. Separate payments are made for these excluded

services so that SNFs are not financially disadvantaged by making these

services available. This is intended to protect beneficiary access to these

services and the SNFs that care for these beneficiaries. However, if too

many services are excluded from the daily rate, the cost-control potential

of the PPS could be undermined.

 1

On June 14, 2001, the Secretary of Health and Human Services (HHS) changed the name of

the Health Care Financing Administration to the Centers for Medicare and Medicaid

Services (CMS). We continue to refer to HCFA where our findings apply to the

organizational decisions and operations associated with that name.

2

P.L. 105-33, sec. 4432(a), 111 Stat. 251, 414 (codified at 42 U.S.C. 1395yy(e)).

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-816 Excluded Skilled Nursing Facility Services

Because of concerns about beneficiary access to SNF care under the PPS

and the financial condition of facilities that provide high-cost services, the

conference report accompanying the Balanced Budget Refinement Act of

1999 (BBRA) directed us to examine the services excluded from the PPS.3

We were directed to: (1) analyze the appropriateness of the services

excluded from the PPS and the process for determining the exclusions,

and (2) identify any potential problems with the exclusions as

implemented. To do so, we examined HCFA program memoranda, the

BBA, and the BBRA, and interviewed agency officials. Service cost and

volume data on all services provided to SNF residents were not available

so we could not systematically evaluate the excluded services and the

services that remained in the daily rate. Therefore, we conducted

structured interviews with 10 nationally recognized clinical experts on

nursing home care about the criteria and the excluded services. They

included university-based health services researchers, clinical department

chairs at nationally recognized health care facilities, the medical directors

of nursing homes in health care systems, and board members of national

medical organizations. We performed our work from July 2000 through

August 2001 in accordance with generally accepted government auditing

standards.

Although the service-exclusion criteria and the services removed from the

daily payment rate appear reasonable, questions remain about whether

certain other services should also be excluded and how to modify the

exclusions over time. HCFA generally relied on three criteria in choosing

services to exclude. Excluded services must be high cost, infrequently

provided during a SNF stay, and not likely to be overprovided. Because

SNFs have an incentive under the PPS to minimize costs that are covered

under the daily payment, these criteria are intended to identify services

that may be inappropriately foregone, while maintaining the PPS

incentives to control service use and cost. However, raising concerns

about beneficiary access to services that remain in the daily rate, many of

the clinical experts we interviewed questioned whether additional services

should have been excluded from the PPS. Because information on the

frequency and cost of all services provided to beneficiaries is not

available, it is difficult to confirm that the criteria have been applied

consistently and that all of the services that meet these criteria were

excluded from the PPS. CMS does not intend to collect data on all services

 3

H.R. Conf. Rep. No. 106-479, at 854 (1999).

Results in Brief
Page 3 GAO-01-816 Excluded Skilled Nursing Facility Services

provided to beneficiaries receiving SNF care, or to develop a process for

systematically reviewing the services included and excluded from the PPS

rate.

Current exclusion policies have three unintended consequences. First,

because of the way HCFA defined coverage for excluded facility services,

beneficiary liability is increased and beneficiaries may lose coverage for

certain services if they are excluded from the PPS. Second, some services

are excluded only if they are provided in a hospital outpatient department,

creating incentives for SNFs to refer patients to this setting, even though

there may be alternative medically appropriate sites of care that would be

less expensive for beneficiaries and the program. Finally, to ensure

prompt medical attention in emergency situations, HCFA excluded

emergency room services from the PPS rate, but the broad definition of

emergency services may result in SNFs classifying care as “emergency” to

gain separate payments.

Congress may wish to clarify Medicare’s coverage for facility services

excluded from the SNF PPS. We are also recommending that the

Administrator of CMS exclude any service that meets the criteria,

regardless of where it is provided. To refine the SNF PPS and ensure

adequate beneficiary access to appropriate medical services, we are also

recommending that CMS develop a strategy to collect and analyze cost and

utilization data on all services provided to beneficiaries during SNF stays.

In commenting on a draft of this report, CMS stated that it can not

disregard the site of service delivery in excluding certain services because

it believes it does not have the administrative authority to do so and

because these services can not be provided safely in nonhospital settings.

It acknowledged the need for service-level data, but noted that collecting

these data could meet with considerable industry opposition.

Medicare covers skilled nursing and rehabilitative therapy for

beneficiaries being treated in SNFs for conditions related to a hospital

stay. The hospital stay must have been for at least 3 days and have

occurred within 30 days before admission to the SNF. For beneficiaries

who qualify, Medicare will pay for all necessary services, including room

and board, nursing care, and ancillary services such as drugs, laboratory

tests, and physical therapy, for up to 100 days under Medicare part A, the

hospital insurance portion of Medicare. In 2001, beneficiaries are

responsible for a $99 daily copayment after the 20th day of SNF care,

regardless of the cost of services received. If the beneficiary stay is not

covered under part A, Medicare will pay for covered services, provided the

Background
Page 4 GAO-01-816 Excluded Skilled Nursing Facility Services

beneficiary has purchased part-B supplemental insurance. Part-B covered

services include physician, hospital outpatient, and ancillary services

(such as laboratory tests and physical therapy). For most part-B services,

coinsurance is 20 percent of Medicare payments, but for services and

procedures provided in hospital outpatient departments the coinsurance is

higher.

For over a decade beginning in 1986, Medicare part-A SNF spending rose

dramatically—averaging 30 percent annually. This high growth was due to

a number of factors. Implementation of a PPS for inpatient hospital care in

1983 created an incentive to discharge patients from the hospital sooner,

which may have resulted in more beneficiaries needing SNF care. Indeed,

the number of Medicare beneficiaries receiving SNF services more than

doubled between 1983 and 1990. Technological advances also contributed

to a change in the mix of services provided by some SNFs, allowing some

SNFs to offer more complex services that had previously been delivered

only in hospitals. For example, SNFs now admit beneficiaries who require

ventilator support, specialized wound care, or intravenous medications

following their hospital stay.

Medicare’s cost-based reimbursement method for SNFs, which provided

few checks on spending, combined with minimal program oversight,

contributed to SNF expenditure growth. Medicare’s payment method

controlled spending for routine costs, such as room and board, but

spending for ancillary services and capital costs was not constrained. In

most cases, ancillary services such as therapies were provided by outside

suppliers that billed the SNFs.4

 The outside suppliers’ charges, in turn,

became the SNFs’ costs to provide these services. These costs were

reimbursed by Medicare, so that the more SNFs spent, the more they were

paid. Under this payment approach, SNFs had no financial incentive to

furnish only clinically necessary ancillary services or to control their costs.

As a result, SNFs provided more services and higher cost services to

Medicare beneficiaries, making the SNF benefit one of the fastest growing

components of Medicare.

 4

In some cases, outside suppliers billed Medicare part B directly for ancillary services, with

no direct involvement by the SNF. Under this arrangement, beneficiaries were responsible

for the 20 percent coinsurance.
Page 5 GAO-01-816 Excluded Skilled Nursing Facility Services

In response to rising SNF spending, the BBA required a PPS for SNF

services, which HCFA began to phase-in on July 1, 1998. SNFs now receive

a fixed daily payment to cover the cost of most services provided to

beneficiaries during a part-A covered stay. Because not all patients require

the same amount of care, per diem rates are adjusted to reflect differences

in patient characteristics that affect the cost of care, as measured by the

Resource Utilization Group (RUG) system. The RUG system uses clinical

and other factors to assign each patient to 1 of 44 different RUG

categories. These categories group patients who receive similar services

and therefore have similar costs. The daily payment rate is based on the

national average cost of treating beneficiaries in that RUG category.

The PPS creates the incentive for SNFs to control their costs because they

financially benefit if their costs are below their payments, but are liable if

their costs exceed their payments. SNFs can control their costs by

reducing the number of services delivered, changing to a less costly mix of

services, or controlling the cost of each service. However, the PPS may

encourage undesirable provider responses. SNFs may lower their costs by

withholding medically necessary services, substituting lower quality

services, or avoiding higher cost beneficiaries.

In conjunction with the PPS, the BBA made each SNF financially

responsible for almost all services provided during a part-A stay, including

services rendered by an outside supplier.5

 This “consolidated billing”

provision minimizes the potential for duplicate billing and prevents

facilities from reducing their costs by having outside providers furnish

ancillary services for additional Medicare payment. Consolidated billing

results in these services being covered under part A.

Providers have been concerned that SNF payments are too low, but our

previous work on the SNF PPS indicated that in aggregate, SNF payments

are likely to cover the costs of care needed by beneficiaries. However, we

have noted that refinements to the payment system are needed to better

 5

P.L. 105-33, Sec. 4432(b), 111 Stat. 251, 420 (codified at 42 U.S.C. 1395u(b)(6),

1395y(a)(18), and 1395yy(e)(9)).

Prospective Payment for

SNFs
Page 6 GAO-01-816 Excluded Skilled Nursing Facility Services

match payments with patient needs.6 These refinements would be similar

to those routinely implemented in Medicare’s inpatient hospital PPS.7

The costs of certain services provided during a SNF stay were excluded

from the calculation of the daily PPS payment and separate payments are

made for these services under part B. Because additional payments are

made for these services, SNFs do not have to cover the costs of these

services under the daily payment rate. This removes any financial

disincentive to the SNF for providing these services or admitting

beneficiaries who require these services.

Services were excluded from the PPS at three different junctures (see

table 1). In mandating the implementation of a PPS, the BBA was explicit

that payments to practitioners (such as physicians) not be included under

the PPS, continuing the distinct payments Medicare generally makes for

facility and for professional services.8

 Next, in a 1998 interim final rule to

implement the PPS, HCFA identified a set of facility services to exclude

from the PPS rate. HCFA characterized these services—such as cardiac

catheterization, magnetic resonance imaging (MRI), ambulatory surgery

performed in an operating room, and emergency services—as beyond the

scope of SNF care if they were provided in a hospital outpatient

department.9

 6

Nursing Homes: Aggregate Medicare payments are Adequate Despite Bankruptcies

(GAO/T-HEHS-00-192, Sept. 12, 2000); Skilled Nursing Facilities: Medicare Payment

Changes Require Provider Adjustments But Maintain Access (GAO/HEHS-00-23, Dec. 14,

1999); and Skilled Nursing Facilities: Medicare Payments Need to Better Account for

Nontherapy Ancillary Cost Variation (GAO/HEHS-99-185, Sept. 30, 1999).

7

The Secretary of HHS is required to adjust the patient classifications for the inpatient

hospital PPS at least annually. See Sec 1886 (d)(4)(C) of the Social Security Act. Since

1983, over 40 patient categories have been added to the original 467 groupings. Detailed

data on service use and patient characteristics are used to improve this patient

classification system.

8

See 42 U.S.C. § 1395yy(e)(2)(A)(ii).

9

If these services are provided in a critical access hospital (a special designation of small,

rural hospitals defined by Medicare), they would also be excluded from the PPS rate.

Services Excluded From

the PPS Rate
Page 7 GAO-01-816 Excluded Skilled Nursing Facility Services

Table 1: Services Excluded from the SNF PPS Rate, Regulatory or Legislative

Source, and Effective Dates

Excluded services

Exclusion source

(effective date)

Services provided by physicians, midwives,

psychologists, nurse anesthetists

Certain dialysis-related services and drugs

BBA

(July 1998)

Certain outpatient services when provided in a

hospital (including associated medically indicated

ambulance transport):

Cardiac catheterization

Computerized axial tomography (CT) scans and

MRI

Ambulatory surgery performed in operating rooms

Emergency services

Radiation therapya

Angiographya

Lymphatic and venous proceduresa

HCFA Interim Final Rule

(July 1998) and

HCFA Program

Memorandum

(November 1998)

Specified chemotherapy items and services

Radioisotope services

Customized prosthetic devices

Ambulance transportation for dialysis

BBRA

(April 2000)

a

The Interim Final Rule identified broad service categories of services to exclude. The subsequent

Program Memorandum issued by HCFA identified specific billing codes within these broad

categories.

Source: GAO analysis.

Because HCFA lacked statutory authority to exclude services provided

during a part-A stay from the PPS, it used its administrative rule-making

authority to redefine “residency status” so that beneficiaries are

temporarily not SNF residents while they receive certain services in

hospital outpatient departments.10 This site-of-service distinction enabled

HCFA to exclude these services if they were provided in a hospital

outpatient department. These facility services are then covered by

 1063 Fed. Reg. 26,252, 26,308 (1998) (codified at 42 C.F.R. 411.15(p) (3) (iii)). HCFA defined

SNF resident in such a way as to exclude those who are receiving “a small number of

exceptionally intensive services that lie well beyond the scope of care that SNFs would

ordinarily furnish.” HCFA Program Memorandum, Transmittal No. A-98-37 (Nov. 1998).

HCFA subsequently finalized and amended this regulation. 64 Fed. Reg. 41, 644 (1999) and

65 Fed. Reg. 46,769 (2000).
Page 8 GAO-01-816 Excluded Skilled Nursing Facility Services

Medicare under part B, even though they are being provided during a partA eligible stay.11 Following the implementation of the PPS, HCFA added

radiation therapy, angiography, and lymphatic and venous procedures to

the list of services that are excluded when provided in a hospital

outpatient department. All of these facility services are excluded from the

SNF rate and are paid for separately under part B.

Based on HCFA recommendations, in the BBRA Congress excluded

another set of services from the daily rate.12 The BBRA excluded specific

services within three broad categories (chemotherapy, radioisotopes, and

customized prosthetic devices) and it excluded ambulance transportation

for dialysis.13 The BBRA also granted the Secretary of HHS the authority to

modify the list of excluded services within these three broad categories

and specified that Medicare payments for these services would be

determined in the same way as when these services are paid for under part

B.

HCFA generally relied on three criteria to guide the selection of services to

be excluded from the PPS rate. To be excluded, services had to be high

cost, infrequently needed by SNF beneficiaries, and not likely to be

overprovided. The first two criteria identify services that a SNF might

inappropriately avoid delivering or that could financially compromise a

facility that did provide them. The third criterion minimizes the

opportunities for facilities to boost Medicare revenues by providing

services for separate payment. Almost all of the clinical experts we

consulted agreed with the criteria and with the specific services excluded

from the PPS. The majority raised concerns, however, about the adequacy

of beneficiary access to certain services that were not excluded from the

PPS. Without systematic review of cost and use data for all services

provided to SNF residents, it is not possible to determine if all services

that meet the criteria were excluded. The agency does not have, nor does

 11However, if the listed service is delivered in another setting (such as an ambulatory

surgery center or imaging center) or if another (not excluded) service is provided in a

hospital outpatient department (such as an x-ray), the beneficiary is still considered a SNF

resident—and the service, and payment for it, is included in the part-A stay.

12P.L. 106-113, div. B, sec. 1000(a)(6) [H.R. 3426, title I, sec. 103(a)], 113 Stat. 1501, 1536 and

1501A-325 (codified at 42 U.S.C. 1395yy(e)(2)(A)(iii)).

13Ambulance transportation for dialysis is excluded only when provided in conjunction

with part-B covered dialysis, which is generally limited to beneficiaries with end-stage renal

disease (ESRD).

Certain Services

Appropriately

Excluded from SNF

PPS, but Revisions to

the Exclusions May

Be Needed
Page 9 GAO-01-816 Excluded Skilled Nursing Facility Services

it plan to develop, the data necessary to conduct a systematic evaluation,

nor is it developing a strategy to periodically review the excluded services

to ensure that services that meet the exclusion criteria are excluded and

paid for separately from the PPS rate.

In establishing its three criteria, HCFA excluded services that cost

substantially more than the daily SNF payment rate because the SNF

would have strong financial incentives to avoid providing them or

admitting the beneficiaries who would be likely to need them. If the highcost services were provided infrequently, the daily payment rate, which is

based on average costs of care for a typical patient in a payment category,

could be much lower than the actual costs of treating a patient needing

some of these high-cost services. Facilities treating a disproportionate

number of beneficiaries requiring these services could be disadvantaged

compared to facilities that did not. Frequently provided high-cost services

would boost average daily costs, so they would be reflected in the PPS

rate.

The third criterion, that the service not be easily overprovided, helps

ensure that the PPS minimizes overall costs by reducing the opportunity

for providers to seek additional reimbursements outside of the PPS rate.

Facilities have an incentive to ensure that they provide only medically

needed care for services that are included in the PPS rate. However, they

may be less concerned about evaluating the need for a service when the

service is paid for separately.

Clinical consultants we interviewed generally agreed that the three criteria

used to select services for exclusion are reasonable.

When deciding on the service exclusions, HCFA lacked detailed service

cost and use data to examine which services met the criteria. Instead,

HCFA relied on its staff’s clinical and institutional expertise to identify

services that appeared to meet the exclusion criteria. It also consulted

with the medical directors of the contractors responsible for processing

SNF claims and with providers.14 To elicit public input in developing its

recommendations to Congress for services to exclude in the BBRA, HCFA

held a public meeting to receive comments on the proposed rules and to

 14The agency contracts with fiscal intermediaries (part A) and carriers (part B) to review

submitted claims and to make payments to providers.

Criteria Help Ensure

Access and Protect SNFs,

Without Encouraging

Unnecessary Service Use

Concerns Remain About

Additional Services To

Exclude From PPS
Page 10 GAO-01-816 Excluded Skilled Nursing Facility Services

gather suggestions for service exclusions. HCFA considered these

suggestions and some—for example, related to ambulance transport for

beneficiaries with ESRD—were adopted. But several services that were

proposed for exclusion were kept in the rate because, according to agency

officials, they did not appear to meet all three criteria (see table 2.)

Table 2: Examples of Services Considered for Exclusion from the SNF PPS and

HCFA’s Reasons for Not Excluding Them

Selected services considered for exclusion Exclusion criterion not meta

Ambulance transport not already excluded Cost

Clinical social work services Frequency

Doppler flow studiesbCost; frequency

Hyperbaric oxygen therapyc Possible overprovision

Modified barium swallow studiesdFrequency

Nuclear medicine services Cost; possible overprovision

Orthotics Frequency; possible overprovision

Stress tests Frequency

a

To be considered for exclusion from the PPS, a service must be high cost, infrequently provided, and

not likely to be overprovided.

b

A doppler flow study is an ultrasound procedure measuring blood flow through veins and arteries

performed to detect blockages, injury, or blood clots.

c

Hyperbaric oxygen therapy is a medical treatment in which oxygen is administered at greater than

normal pressure to a patient to treat conditions such as burns and peripheral vascular disease.

d

A modified barium swallow is a procedure done to evaluate the swallowing process for people who

are having problems speaking or swallowing food without aspirating it into the windpipe.

Source: Interviews with HCFA officials.

The clinical experts we consulted told us additional services should have

been excluded from the PPS, though they agreed the current exclusions

were reasonable. For example, all of the clinical experts we interviewed

disagreed with the agency’s policy regarding ambulance transportation.15

They argued that without additional payment for ambulance transport

associated with excluded services beneficiary access to certain services

 15Medicare pays for ambulance transport only in those circumstances where other means,

such as taxicab service, would be medically contraindicated. Medically necessary

ambulance transport is excluded from the PPS and paid for separately when associated

with dialysis and the following services if provided in a hospital—cardiac catheterization,

MRI, CT scan, certain ambulatory surgery procedures, emergency services, radiation

therapy, angiography, and lymphatic and venous procedures.
Page 11 GAO-01-816 Excluded Skilled Nursing Facility Services

could be impaired. Most experts we interviewed also thought that

ambulatory surgery for many beneficiaries, CT scans, and MRIs performed

in nonhospital settings should be excluded from the PPS regardless of

where they are provided. These services are excluded, however, only if

they are provided in a hospital outpatient setting.

There was less agreement about whether other services currently included

in the daily rate should be excluded. Some thought that excluding services

would lead to overprovision of certain services, such as modified barium

swallows, orthotics, and hyperbaric oxygen therapy. However, more often

we were told that beneficiaries who are likely to need services included in

the daily rate may face barriers to SNF admission, or as residents, may not

receive the care that they need. One expert noted that the current

exclusions may encourage the substitution of a more expensive service for

a less expensive alternative that remained in the daily rate.

With medical advances and as providers respond to payment incentives,

the services meeting the exclusion criteria are likely to shift. Certain

services that are currently excluded may not warrant exemption in the

future and, conversely, services that have not been excluded may at some

time meet the exclusion criteria. Agency officials stated that they consider

modifying which services are excluded in response to public comments

they receive on proposed PPS regulations. However, objective and

systematic evaluation of the excluded services is not possible without data

on all services provided to beneficiaries in a SNF and the costs of these

services. HCFA did not have these data available in developing the PPS

and agency officials told us they do not plan to require SNFs to include on

billing records the specific services provided during a part-A stay. These

officials told us that complete data on all services would require

considerable changes to provider billing requirements and to the computer

systems that process the claims.

CMS’s current exclusion policies have three unintended consequences.

First, coverage has been shifted from part A to part B for excluded facility

services that otherwise would have been covered in the daily rate, thereby

increasing beneficiary liability. As a result of this shift in coverage and

because certain services (primarily self-administered prescription drugs)

are not covered under part B, beneficiaries would lose their coverage

under Medicare if these services were excluded from the PPS. Therefore,

HCFA did not consider excluding these services from the PPS. Second,

excluding services based on where they are provided may encourage SNFs

to refer beneficiaries to hospital outpatient departments, when other,

Current Exclusion

Policies May Have

Unintended

Consequences
Page 12 GAO-01-816 Excluded Skilled Nursing Facility Services

often less costly ambulatory settings could be appropriate. This site-ofservice incentive is likely to increase beneficiary liability and program

spending. Finally, SNFs may have an incentive to classify certain services

as emergencies so that they are excluded from the PPS and can be paid for

separately.

The BBRA provided that the amounts paid for excluded services are to be

determined in the same way as when the services are paid for under part-B

payment rules and that the funds for the services are to come from the

part-A program.16 The law is silent on whether coverage for these services

is to be determined under part A or part B. In its interpretation of the

BBRA language, HCFA applied part-B coverage rules to the excluded

services delivered during a part-A covered stay. In shifting coverage from

part A to part B, excluded services are subject to part-B cost-sharing

requirements. As a result, beneficiaries are responsible for the coinsurance

for the excluded services, even though they would have had no additional

cost-sharing obligations had the services remained in the PPS rate.17

The application of part-B coverage rules also restricts the services that

HCFA considered excluding from the PPS to those covered under part B.

Since the agency has no authority to pay for non-covered services,

excluding them from the PPS and shifting their coverage to part B would

eliminate any reimbursement for them. For example, no expensive

medications were excluded from the rate because most self-administered

prescription drugs are not covered under part B. Agency officials have

noted that by keeping these services in the PPS rate, providers at least

receive a higher daily payment rate than if these services were excluded.

Yet the higher daily rate is unlikely to cover the costs of these services for

any given patient, so that SNFs would have a financial incentive to avoid

admitting anyone who is on expensive drug regimens.

 16P.L. 106-113, div. B, sec. 1000(a)(6) [H.R. 3426, title I, sec. 103(a)(3))], 113 Stat. 1501, 1536

and 1501A-325 (codified at 42 U.S.C. 1395yy(e)(9)).

17Most beneficiaries have supplemental coverage, which usually pays for part-B

coinsurance. Those without supplemental coverage would be responsible for these

liabilities.

HCFA’s Interpretation of

BBRA Exclusion Language

Increases Beneficiary

Liability and Limits

Coverage
Page 13 GAO-01-816 Excluded Skilled Nursing Facility Services

CMS’s policy of excluding certain services only when provided in hospital

settings creates an incentive for SNFs to send beneficiaries to hospitals

rather than other ambulatory settings to receive those services.18 The siteof-service policy raises concerns that SNFs will make decisions about

where services will be provided based solely on financial considerations,

even though other settings may be clinically appropriate. Almost all of the

clinical experts we consulted disagreed with current policy to exclude

ambulatory surgery procedures and imaging services (CT scans and MRIs)

only when provided in hospital outpatient departments. The majority

argued that nonhospital settings provide similar services and therefore

should be treated the same as hospital outpatient departments, though

several cautioned that hospitals may be a more appropriate treatment site

for certain services provided to high-risk beneficiaries. Some of the

clinicians commented that many nonhospital settings are much better than

hospitals at handling frail elderly patients, for example, in terms of

facilitating their transportation, admission, and discharge.

This site-of-service policy also has important cost implications. Because

Medicare’s payments are often higher for services provided in hospital

outpatient settings compared with other ambulatory settings, Medicare

expenditures may be higher as well. For example, in 2001, Medicare pays

about $50 more for a CT scan of the head when furnished in an outpatient

department of a hospital compared to one furnished in a freestanding

imaging center in the same area. Likewise, beneficiary cost sharing is

likely to be substantially higher when services are provided in hospital

settings compared with other ambulatory settings.

Furthermore, ambulance transport is paid for separately only in

conjunction with the provision of the services excluded when provided in

a hospital outpatient department.19 Most of the clinical experts we

consulted disagreed with CMS’s current policy, saying that patients

receiving some of the other excluded services, such as chemotherapy, are

equally likely to need ambulance transport.

 18Services excluded only when provided in hospital outpatient departments include cardiac

catheterization, CT scans, MRIs, ambulatory surgery procedures performed in an operating

room, emergency services, radiation therapy, angiography, and lymphatic and venous

procedures.

19Ambulance transport is also paid for separately in conjunction with dialysis.

Exclusions Based on Site

of Service May Raise Costs

to Beneficiaries and

Program
Page 14 GAO-01-816 Excluded Skilled Nursing Facility Services

Payments for medical emergencies are made outside of the PPS rate to

help ensure appropriate treatment and protect SNFs that arrange for

prompt medical care. Medicare’s definition of what services constitute

“emergency” care is broad to provide important protection for

beneficiaries.20 However, the exclusion for emergency services, combined

with the broad definition of emergency, could invite abuse and increase

Medicare expenditures.21 SNFs have a financial incentive to send

beneficiaries to emergency departments for nonemergent care to receive

separate payments for services that otherwise would be included in the

PPS rate. The clinical experts we consulted uniformly agreed that the

provision was open to overuse by SNFs. They gave examples of patients

sent by SNFs to emergency rooms because they needed expensive drugs

or time-consuming nursing services. While CMS is reviewing claims to

make sure it is not paying twice for the same service, it is not analyzing

whether the services should have been provided in the emergency room,

nor is it identifying if particular providers appear to be overusing the

emergency room exclusion.

Congress and HCFA recognized that certain services needed to be

excluded from the SNF PPS rate to help ensure beneficiary access to

appropriate care and to financially protect the SNFs that take care of highcost patients. The criteria used to identify services— high cost,

infrequently provided during a SNF stay, and not likely to be

overprovided—and the services currently excluded appear reasonable.

Although the criteria and current exclusions appear reasonable, questions

remain about whether beneficiaries have appropriate access to services

that are covered in the rate or whether additional services should have

been excluded. A second concern is that Medicare coverage for excluded

facility services has been shifted from part A to part B, which will increase

beneficiary liability and limit the services considered for exclusion. In

addition, beneficiary liability and program spending may increase because

 20In HCFA’s Program Memorandum A-98-37, HCFA defines emergency services as “those

necessary to prevent death or serious impairment of health and, because of the danger to

life or health, require use of the most accessible hospital available and equipped to furnish

those services” (as defined under regulation at 42 C.F.R. sec. 424.101).

21One study examining transfers to emergency rooms and hospitals in California found that

over a third of SNF transfers to emergency rooms were inappropriate and could have been

treated in a lower level of care. See Debra Saliba, et al, “Appropriateness of the Decision to

Transfer Nursing Facility Residents to the Hospital,” Journal of the American Geriatrics

Society 48: pp. 154-163, 2000.

Incentive Exists to Classify

Certain Hospital

Outpatient Services as

Emergencies To Gain

Separate Payments

Conclusions
Page 15 GAO-01-816 Excluded Skilled Nursing Facility Services

certain services are excluded only when provided in hospital settings, thus

discouraging the use of less expensive, clinically appropriate sites of

service. Finally, though providing important broad protection for

beneficiaries, excluding services from the PPS rate when they are

provided in emergency rooms may lead to overuse of this setting and

could unnecessarily increase Medicare spending.

CMS does not plan to collect data on all services provided to beneficiaries

during their SNF stays. Without these data, CMS will be hampered in its

efforts to update the exclusions over time. The lack of information about

services provided to beneficiaries during their SNF stays will also severely

limit efforts to refine the payment system. An analysis of which settings

(for example, SNF, hospital outpatient department, ambulatory care, and

emergency department) are used to deliver services to SNF patients is also

important to ensure that services are provided at the most efficient and

appropriate site.

Because coverage under part B increases beneficiary liability and limits

the services that are considered for exclusion from the SNF PPS, Congress

may wish to clarify whether Medicare coverage of facility services

excluded from the SNF PPS rate should be provided under part B or under

part A.

To help ensure that services are provided in the most appropriate setting,

we recommend that the Administrator of CMS exclude services from the

PPS if they meet the exclusion criteria, regardless of where they are

provided.

To refine and adjust the SNF PPS and to ensure adequate beneficiary

access to appropriate medical services, we recommend that the

Administrator of CMS develop a strategy to collect and analyze cost and

utilization data on all services provided to Medicare beneficiaries during a

SNF stay.

In its comments on a draft of this report (see app. I), CMS stated that in

excluding services from the SNF PPS, it was concerned about maintaining

the integrity of the PPS and the intent of the consolidated billing

requirement that SNFs be responsible for essentially all residents’ services

Matter for

Congressional

Consideration

Recommendations for

Executive Action

Agency Comments
Page 16 GAO-01-816 Excluded Skilled Nursing Facility Services

provided during a Medicare part-A covered stay. It disagreed with our

recommendation to eliminate the site-of-service restriction on certain

excluded services, stating that it has used its administrative authority to

modify the BBRA provisions to the fullest extent possible and noted in its

technical comments that this recommendation needed to be directed to

Congress. It stated that these services require the intensity of hospital

outpatient settings to be provided safely and effectively but added that it

would consider reincorporating these services back into the SNF PPS rate

once they could be provided safely elsewhere. In addition, CMS agreed

with our analysis that excluding services from the PPS increases

beneficiary liability. Further, CMS acknowledged the need for cost and

utilization data but indicated that its previous efforts to collect such

information met with intense industry opposition. Finally, in its technical

comments it acknowledged that monitoring the use of emergency room

services is important and may be a focus for program safeguard contractor

activities.

We agree with CMS that additional service exclusions must balance the

need to protect SNFs and beneficiaries with the need to maintain the costcontrol potential of the PPS and be mindful of the effect exclusions have

on beneficiary liability. However, we disagree with CMS’s rationale

regarding the site-of-service exclusions. Medicare currently covers these

services in other settings for other beneficiaries. Although CMS used its

broad administrative authority to redefine SNF residency status to exclude

patients receiving certain services in hospital outpatient departments, it

gave no reason as to why it could not use this same authority to redefine

the residency status of beneficiaries receiving the same services in other

settings. We believe that services should be provided in the most

appropriate setting and that this site-of-service distinction will effectively

limit the choice of where services are provided for beneficiaries in SNFs.

Except to acknowledge that shifts in coverage increase beneficiary

liability for these services, CMS did not address the shift in coverage from

part A to part B that results from its policies. We believe part-B payment

rules could be applied to excluded services while maintaining part-A

coverage. In our Matters for Congressional Consideration, we state that

Congress should clarify if coverage for facility services excluded from the

PPS should be provided under part A or part B. Finally, while recognizing

the importance of cost and utilization data, CMS raised concerns about the

administrative burden this collection might impose. We believe that CMS

should explore less burdensome ways to collect adequate data to evaluate

the current service exclusions or additional exclusions proposed by the

industry. Without a data collection strategy, it will be difficult to make

informed decisions about refinements to the PPS over time.
Page 17 GAO-01-816 Excluded Skilled Nursing Facility Services

We are sending copies of this report to the Administrator of CMS and

interested congressional committees. We will also make copies available

to others upon request.

If you have any other questions about this report, please call me at (202)

512-7119 or Carol Carter, Assistant Director, at (312) 220-7711. Cristina

Boccuti and Dan Lee also contributed to this report.

Laura A. Dummit

Director, Health Care—Medicare Payment Issues
Page 18 GAO-01-816 Excluded Skilled Nursing Facility Services

List of Committees

The Honorable Max Baucus

Chairman

The Honorable Charles E. Grassley, Jr.

Ranking Minority Member

Committee on Finance

United States Senate

The Honorable Bill Thomas

Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means

House of Representatives

The Honorable W.J. “Billy” Tauzin

Chairman

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce

House of Representatives
Appendix I: Comments From the Centers for

Medicare and Medicaid Services

Page 19 GAO-01-816 Excluded Skilled Nursing Facility Services

Appendix I: Comments From the Centers for

Medicare and Medicaid Services
Appendix I: Comments From the Centers for

Medicare and Medicaid Services

Page 20 GAO-01-816 Excluded Skilled Nursing Facility Services
Appendix I: Comments From the Centers for

Medicare and Medicaid Services

Page 21 GAO-01-816 Excluded Skilled Nursing Facility Services (201087)

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