GAO

United States General Accounting Office

Report to Congressional Committees

April 2000 MEDICARE HOME

HEALTH CARE

Prospective Payment

System Will Need

Refinement as Data

Become Available

GAO/HEHS-00-9

Page 1 GAO/HEHS-00-9 Home Health Agency PPS

Contents

Letter 3

Appendixes Appendix I: Scope and Methodology 32

Appendix II: HCFA Projects to Develop a Prospective Payment

System for Home Health Agencies 33

Appendix III: Comments From the Health Care Financing

Administration 37

Tables Table 1: HCFA-Funded HHA Research Spending, 1988-99, by Project

Category 16

Abbreviations

BBA Balanced Budget Act of 1997

HCFA Health Care Financing Administration

HHA home health agency

HHRG home health resource group

HHS Department of Health and Human Services

IPS interim payment system

MedPAC Medicare Payment Advisory Commission

OASIS Outcome and Assessment Information Set

PPS prospective payment system

SCIC significant change in condition
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United States General Accounting Office

Washington, D.C. 20548

Health, Education. and

Human Services Division

B-282264 Letr

April 7, 2000

Congressional Committees

Medicare spending for home health care rose from $3.7 billion in 1990 to

$17.8 billion in 1997, making it one of the fastest growing components of

the program. Since then, spending has moderated. In 1998 Medicare outlays

were $17.3 billion, and expenditures in 1999 are projected to be around $15

billion. The historic rise in expenditures for home health care primarily was

due to more beneficiaries receiving services and more visits provided per

user. To control spending, the Congress enacted fundamental payment

reforms in the Balanced Budget Act of 1997 (BBA). Notably, the act

required the Secretary of Health and Human Services to develop a

prospective payment system (PPS) to replace cost-based payments for

home health agencies (HHA). The BBA outlined the general terms for the

HHA PPS, specifying that it pay a fixed, predetermined amount for a unit of

service, adjusted for patient characteristics that affect the costs of

providing care.

The Health Care Financing Administration (HCFA), within the Department

of Health and Human Services (HHS), has been conducting research on a

home health PPS for some time. This research is especially important

because designing an effective payment system is difficult, given

Medicare’s broad definition of who qualifies for home health coverage and

the lack of standards for what constitutes appropriate care. The challenges

lie in defining the service unit that will be used for payment purposes and

developing the case-mix adjustment method to vary payments for

differences in patient needs. These and other system design decisions, as

well as their implementation, will determine the extent to which the PPS

rewards HHAs that deliver care efficiently, protects beneficiaries from

inadequate care, and ensures that the Medicare program is only paying for

medically necessary care.

Concerned about HCFA’s ability to develop the PPS on time, the Congress,

in the Omnibus Consolidated and Emergency Supplemental Appropriations

Act of 1999 (P.L. 105-277), delayed the PPS implementation date by a year

to October 1, 2000. The legislation also mandated three reports on the PPS

for HHAs. First, the Secretary, HHS, was required to submit a report on

HCFA’s research relevant to the PPS for HHAs and the schedule for

implementing the PPS. Second, the Medicare Payment Advisory
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Commission (MedPAC) was required to analyze the Secretary’s report and

make recommendations regarding its contents. Finally, we were asked to

review and report to the Congress on the expenditures for HCFA’s research

on the home health PPS. (Addressees are listed at the end of this letter.)

After reviewing the other mandated reports and in consultation with your

staffs, we agreed to (1) document the objectives, findings, and costs of the

research and demonstration projects HCFA has funded that were related to

the design of the PPS and (2) assess how these projects contributed to the

proposed PPS design and determine which design decisions were based on

incomplete information. To address these objectives, we examined

materials and reports for projects listed in HCFA’s Active Projects Reports,

the Secretary’s report to the Congress, and MedPAC’s letter to the

Congress. In addition, we analyzed the proposed design for the PPS1 and

discussed the proposal with HCFA officials and their primary contractor,

Abt Associates, Inc. (App. I contains a complete description of our

methodology.) We performed our work between December 1998 and

February 2000 in accordance with generally accepted government auditing

standards.

Results in Brief Recognizing the need for home health payment reform, HCFA has

sponsored a number of research and demonstration projects on payment

design and home health care users and service delivery since 1987 at a cost

of almost $27 million. Despite these important efforts, key features of a PPS

were not evaluated in these projects, which limits the ability to evaluate the

effects of certain payment policies on home health care service delivery

and spending. HCFA’s major HHA payment demonstration project provided

evidence that HHAs would reduce their costs of providing home health

visits when paid under a PPS model that tightly limited both their profits

and their losses. The demonstration did not examine alternative levels of

payments. Furthermore, the demonstration did not develop a case-mix

adjustment method to alter payments for expected differences in resource

use across groups of patients. However, an ongoing research project has

constructed an initial case-mix adjustment method for the PPS and will

continue to refine this method as more data become available. Other

HCFA-sponsored research projects have documented the variation in home

health care service delivery. These projects have demonstrated that

1

“Medicare Program: Prospective Payment System for Home Health Agencies,” proposed

rule, Federal Register, Vol. 64, No. 208 (Oct. 28, 1999).
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methods for quality measurement and monitoring are not well developed,

which will impair the ability to evaluate the effect of payment changes.

Although HCFA’s research and demonstration projects have proven useful

in designing the PPS, information gaps remain. These gaps, coupled with

substantial variation in the way home health care services are delivered

and the lack of standards for what constitutes appropriate care, mean that

the PPS could cause unintended consequences for some beneficiaries,

some HHAs, or the level of Medicare spending. For example, the proposed

unit of payment, a 60-day episode, is likely to be too long for many

beneficiaries and could result in unnecessary expenditures if payments are

not adequately adjusted for patient needs. Also, the level of payments per

episode will be based on national average costs, which could result in

sharp revenue increases for some agencies and large declines for others.

Concerns remain about whether the case-mix adjustment method will

adequately group patients with like resource needs and then appropriately

adjust payments for beneficiaries in each group. Furthermore, how a

patient is classified and how much the agency is paid are very dependent

on whether, and how much, therapy services2 are provided—something

that is directly controlled by HHAs. Without adequate design features,

Medicare could overpay for unneeded services or underpay for required

care, resulting in beneficiaries facing access problems or receiving poor

quality of care.

Although the change from cost-based payments to prospective payments is

intended to help Medicare control its spending, how costs and service

provision will change under the new system is unknown. Therefore, HCFA

will need to have sufficient resources to monitor service delivery across

types of beneficiaries and across HHAs so that inadequate or medically

inappropriate care can be identified. We are recommending that HCFA

devote the resources necessary to perform these monitoring activities.

And, as more information becomes available about what services are

delivered within an episode and how long visits last, efforts should be

pursued to develop criteria for service adequacy and appropriateness and

to identify the outcomes for beneficiaries. In the interim, a risk-sharing

arrangement, in which aggregate Medicare payments are adjusted at yearend to reflect a provider’s actual costs, would mitigate any unintended

consequences of the payment change. Limiting an HHA’s losses or gains

would help protect the industry, the Medicare program, and beneficiaries

2

Therapy services include physical, speech, and occupational therapies.
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from possible negative effects of the PPS until more is known about how

best to design the PPS and the most appropriate home health treatment

patterns. We are also recommending that as new data are available and

experience is gained with the PPS, HCFA should study practice patterns

and provider responses to the PPS and make any needed modifications to

the PPS design and implementation.

Background Medicare’s home health care benefit enables certain beneficiaries with

post-acute-care needs (such as recovery from joint replacement) and

chronic conditions (such as congestive heart failure) to receive care in

their homes rather than in other settings. To qualify for home health care, a

beneficiary must be confined to his or her residence (“homebound”);3

require intermittent skilled nursing, physical therapy, or speech therapy; be

under the care of a physician; and have the services furnished under a plan

of care prescribed and periodically reviewed by a physician. If these

conditions are met, Medicare will pay for part-time or intermittent skilled

nursing; physical, occupational, and speech therapy; medical social

services; and home health aide visits.4 Beneficiaries are not liable for any

coinsurance or deductibles for these services and may receive an unlimited

number of visits, provided the coverage criteria are met.

Changes in the Home Health

Care Benefit Have

Expanded Spending and

Coverage

Between 1990 and 1997, Medicare home health payments rose an average

of 25.2 percent annually. This increase was due primarily to a steady rise

through 1997 of the proportion of beneficiaries receiving home health care

and in the number of visits per person served. The number of home health

users per 1,000 beneficiaries increased from 57 to 109, and the average

number of visits per user doubled from 36 to 73.5 This growth can be

attributed to many factors, including changes in patient demographics and

in the delivery of health care services, particularly following the

3

A beneficiary is homebound when he or she has a condition that results in a normal

inability to leave home except with considerable and taxing effort, and absences from home

are infrequent or of relatively short duration or are attributable to receiving medical

treatment.

4

“Part-time or intermittent” means skilled nursing and home health aide services furnished

any number of days per week as long as they are furnished fewer than 8 hours each day and

for 28 or fewer hours each week.

5

These data on service use include Medicare fee-for-service beneficiaries only.
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introduction of the inpatient hospital PPS in 1983, which encouraged

hospitals to discharge beneficiaries to alternative settings. Most notably,

the relaxation of coverage guidelines as a result of legislative changes and a

landmark court case resulted in more services being provided.

Originally, home health care coverage distinguished between services

provided under Medicare part A (hospital insurance) and part B

(supplemental medical insurance). Under part A, up to 100 visits a year

were provided to a beneficiary following a hospital or nursing home stay,

with no beneficiary cost-sharing. A beneficiary could also receive up to 100

visits under part B, with no institutional stay required, but had to pay 20

percent coinsurance. In 1980, legislation removed the institutional stay

requirement under part A, eliminated the coinsurance requirement under

part B, and lifted the visit limits under parts A and B. It also changed the

program financing, with part A covering all home health care received by

beneficiaries unless the beneficiary only had part B coverage, in which case

part B would pay for the services.

Following these changes, home health care spending nearly doubled from

1980 to 1985, which prompted a series of additional regulatory actions by

HCFA to tighten the benefit and coverage. This, in turn, triggered a class

action suit in 1987 (Duggan v. Bowen) in which a coalition of beneficiaries

and providers charged that Medicare’s interpretation of the statutory

phrase “part-time or intermittent” with regard to covered visits was too

narrow, leading to the denial of care for eligible beneficiaries. Under a

settlement agreement in 1989, the coverage guidelines for home health care

were broadened, allowing more beneficiaries to qualify for more visits. As a

result of these expansions, the benefit was transformed from one that

primarily covered patients receiving short-term care following an acute

event to one that covers chronic and long-term care patients as well.

At the same time this growth occurred, program controls were essentially

nonexistent. Few claims were subject to medical review and most were

paid without question. Previous work conducted by GAO and by the HHS

Office of Inspector General has documented that some of the care provided

was not medically necessary or lacked supporting documentation.6

6

A 1999 study found that 19 percent of the services in four states were improper or highly

questionable and did not meet Medicare reimbursement requirements. HHS Office of

Inspector General, Review of Medicare Home Health Services in California, Illinois, New

York and Texas, A-04-99-01194 (Washington, D.C.: HHS, Nov. 1999).
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Growth Encompasses a

Wide Range in Service Use

The majority of home health users receive few visits, but a small and

growing proportion make extensive use of the benefit. According to

MedPAC, 51 percent of recipients received fewer than 30 visits and

accounted for 9 percent of all home health visits in 1996. By contrast, 15

percent of users had 150 visits or more and accounted for 59 percent of all

Medicare home health visits that year. Approximately one-third of the

beneficiaries in this latter group received over 300 visits.7

Home health users also differ in the mix of services they receive. A small

proportion of Medicare users appears to need long-term care and gets a

significant amount of aide services,8 as opposed to skilled care, from the

program. In 1996, about 56 percent of the visits for beneficiaries who had

100 visits or more were for home health aide services. By contrast, only 6

percent of all visits to short-term users—beneficiaries who received nine or

fewer visits—were for aide services; skilled nursing care comprised over 75

percent of their total visits.

7

MedPAC, Report to the Congress: Context for a Changing Medicare Program (Washington,

D.C.: MedPAC, June 1998).

8

For Medicare coverage, aide services include personal care (such as help with dressing and

bathing), simple wound dressing changes and assistance with medications that do not

require the skills of a licensed nurse, routine exercises, and routine care of orthotic and

prosthetic devices.
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There also is marked variation in home health use across geographic areas

and types of agencies. For example, Medicare home health users in

Maryland received an average of 37 visits in 1997, with an average payment

per user of $3,088. In that same year, home health users in Louisiana

received an average of 161 visits per user, with an average Medicare

payment per user of $9,278. This wide variation in usage has been evident

even after controlling for patient diagnosis. Patterns of care also differed

across agency types.9 Proprietary agencies tended to deliver more visits per

beneficiary than other types of agencies and to provide more aide visits.

For example, in 1993, beneficiaries who received care from proprietary

agencies were given an average of 69 home health aide visits, compared

with 43 and 48 visits from voluntary and government agencies,

respectively.10 Such variation could be due to a variety of factors, including

provider responses to financial incentives, differences in patient needs,

regional practice patterns, states’ varying Medicaid coverage and eligibility

policies, and the use of home health care to substitute for services in other

clinical settings.

The variation in service provision may also reflect the lack of standards for

what constitutes necessary or appropriate home health care. As a result, it

is not clear when home health care is warranted or when services should

be stopped. Many home health users have chronic and multiple needs, so

the beginning and end of care for a particular problem may overlap with

care for another. Furthermore, even the most basic unit of service—the

visit—is not well defined. Only recently have HHAs been required to record

the time involved in a visit, and services and procedures provided are still

not documented on the payment record.

BBA Changed Medicare

Payment Method to Control

Spending

Before the BBA, agencies were paid on the basis of their costs, up to

preestablished per-visit limits equal to 112 percent of the national average

cost for each type of visit. Although there was a separate payment limit for

each type of visit (skilled nursing; physical, occupational, or speech

therapy; medical social service; or home health aide), the limits were

applied in the aggregate for the agency. That is, costs above the limit for

one type of visit would still be paid if costs were sufficiently below the limit

9

Agencies may be not-for-profit (or voluntary, including visiting nurse associations), forprofit (or proprietary), or government-owned.

10Medicare: Home Health Utilization Expands While Program Controls Deteriorate

(GAO/HEHS-96-16, Mar. 27, 1996).
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for other types of visits. There were no incentives to control the volume of

services delivered; as a result, agencies could enhance their revenues by

providing beneficiaries with more services.

The BBA changed the home health payment method beginning October 1,

1997, with the implementation of the interim payment system (IPS), a

temporary measure to bring Medicare spending under control until the PPS

is implemented. The per-visit limits are generally lower under the IPS, and

agencies are subject to a Medicare revenue cap that is based on an

aggregate per-beneficiary amount.11 Generally, the per-beneficiary amount

reflects each agency’s historical average payments for treating a Medicare

beneficiary and the regional or national average amount.12 An agency’s

revenue cap is the product of its per-beneficiary amount and the number of

patients it serves.

The IPS is designed to limit the Medicare per-visit payment and to give

agencies the financial incentives to limit the number of services each

provides to beneficiaries. It does not, however, limit the services an

individual beneficiary can receive, nor does it restrain the number of

beneficiaries an HHA can serve. Because the revenue cap applies to the

average payment for a beneficiary for a year of services at an HHA, the

services and costs associated with any particular beneficiary can vary. To

ensure that Medicare payments will cover its costs, an HHA will need to

keep the average cost of its visits below the per-visit limits and keep its

11Originally, the IPS per-visit limit was based on 105 percent of the national median per-visit

cost. Section 5101(b) of the Omnibus Consolidated and Emergency Supplemental

Appropriations Act, 1999 (P.L. 105-277) revised the IPS and increased the per-visit limit to

106 percent of the national median per-visit cost.

12For an agency that had been in operation for a full year before October 1, 1994, the perbeneficiary amount is calculated as 98 percent of a blend of 75 percent of the agency’s own

fiscal year 1994 average per-beneficiary payment and 25 percent of the comparable regional

average. The per-beneficiary amount for new agencies—those that had not participated in

Medicare for a full year by October 1994—equals 100 percent of the 1994 national median

per beneficiary payment. The Omnibus Consolidated and Emergency Supplemental

Appropriations Act, 1999 (P.L. 105-277, sec. 5105 (a)) made several changes to the revenue

cap. For HHAs with per-beneficiary amounts less than the national median, limits were

increased by one-third of the difference between their amount and the national median. The

cap for new HHAs (as defined by the BBA) was increased from 98 to 100 percent of the

national median. Further, HHAs that opened after October 1, 1998, have per-beneficiary

limits equal to 75 percent of the national median, reduced by 2 percent. The following year,

the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (P.L. 106-113,

sec. 302) increased the per-beneficiary limits by removing the 2 percent reduction for all

providers, thus increasing Medicare payments.
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average cost per Medicare beneficiary below its per-beneficiary amount. It

can do this by delivering visits more efficiently, changing the mix or

reducing the number of visits provided to each user, increasing the

proportion of lower-cost patients it treats, or some combination of these

strategies.

Adapting to the IPS involves greater challenges for some agencies than

others. HHAs that have provided more visits per beneficiary or that have

higher per-visit costs than the average will have to change the way they

deliver care. Agencies that treat few beneficiaries, agencies with few lowcost patients, or those with costly treatment patterns may find the

adjustments more extensive and difficult. For agencies that have changed

treatment patterns or their mix of patients since 1994, the limits, which are

based on historical agency-specific costs, may not reflect current service

provision. New agencies, particularly those located in high-cost regions,

may be disadvantaged compared with established agencies because their

aggregate revenue caps are based on the national median per-beneficiary

amount.

The IPS may not adequately protect beneficiaries from underservice or the

Medicare program from paying more than is warranted in the longer term.

The revenue caps are based on each HHA’s historical costs, which is

intended to account for the differences in the mix of patients across

agencies. An agency’s historical patient mix, however, may not reflect the

costs of the agency’s current patients. Furthermore, the IPS does not

mitigate the substantial cost differences across HHAs that may not have

any relationship to patient needs.13 In addition, a system of cost-based

payments subject to limits does not incorporate incentives for providers to

reduce costs below the limits, thus it may not curb Medicare spending on

lower-cost patients.

PPS Design Determines

Incentives for Service

Provision and Cost Controls

Under a PPS, payments are established in advance of service delivery.

Payments may vary with patient characteristics or other factors that affect

costs. The payment is divorced from an individual provider’s actual cost of

delivering care. Providers that on average deliver care for less than the

13The IPS is intended to account for historical differences in treatment patterns and patient

mix through the use of each HHA’s own historical costs. This may result in inefficient or

inappropriate service use being incorporated in the payments. In addition, the IPS’ use of

the national median for new agencies means that there is no adjustment for differences in

these agencies’ own treatment patterns or patient mix.
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payment amount profit; conversely, providers lose if their average service

costs are higher than the payment.

HHA efforts to control the cost of service delivery can result in

unacceptable reductions in the quantity or quality of care. Features of the

PPS—including the unit of payment, the level of payments, and the method

of adjusting payments for differences in patients’ needs—should therefore

be designed to minimize inappropriate provider responses to the financial

incentives of the payment system. Risk-sharing arrangements between the

payer and provider that limit providers’ profits and losses may be added to

the PPS to temper incentives to either over- or underserve. Other strategies

outside the payment mechanism, such as medical review and examination

of utilization patterns, could be used to monitor provider responses to the

payment system and to design modifications to the PPS to help ensure the

delivery of medically appropriate and necessary services.

The unit of payment defines the bundle of services covered by the

payment—for example, it could be a home health visit or all of the visits

during a course of treatment (an episode of care) that may span many days.

Selecting between smaller and larger units involves trade-offs between

control over the volume of services provided and beneficiary protections

against underservice. With individual services as the unit of payment,

providers have an incentive to deliver more services to increase their

revenues, and, as a result, concerns about underservice are minimized.

Defining an episode as the unit may encourage providers to focus on being

more efficient by changing the intensity and mix of services delivered to

patients during each episode, but it may also create incentives to stint on

care.

The level of payment for each unit can affect access and the adequacy of

services as well as overall program spending. The level is usually based on

a historical average cost of a unit, either nationally or regionally, or by

provider. Because information to identify the costs of efficiently delivering

only appropriate services is generally not available, an average amount is

assumed to be adequate to ensure that sufficient numbers of providers will

continue to supply services. More generous payments would tend to ensure

that more providers continue to serve Medicare beneficiaries if access

proves to be a problem. When the payment level equals a national or

regional average, providers with higher-than-average costs will need to

lower their costs by, for example, shortening the length of visits, changing

the mix of visits within an episode, or reducing the number of visits in an

episode. Such changes may improve efficiency but also could reduce the
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quality of care. However, the lack of standards for home health care means

that distinguishing between added efficiency and reduced quality will often

be difficult.

Under a PPS, adjusting payments to reflect expected resource needs for

individual patients is critical to maintaining appropriate access and

sufficient service provision while ensuring that payments and program

expenditures are not unnecessarily high. The proposed PPS design

incorporates a case-mix adjustment method to accomplish these

objectives. A case-mix adjustment method has two parts, both of which

must be reasonably precise to result in appropriate payment adjustments.

First, categories are developed to group patients with comparable levels of

expected resource use. Patients are usually assigned a category on the

basis of clinical, functional, and other characteristics that are predictive of

service costs. It is important that these categories not be subject to

manipulation, such that providers could inappropriately assign patients to

a particular group simply to boost payments.

Second, a relative weight is associated with each patient category. Each

relative weight reflects the average costliness of the patients in that casemix group compared with the costliness of all patients. To determine the

payment for a given patient, therefore, requires first assigning the patient to

the appropriate case-mix group and then multiplying the relative weight for

that group by the average payment amount. Thus, how well the case-mix

groups categorize patients with similar resource needs and how well the

relative weight adjusts the payment will determine the fairness and

adequacy of the payments under the PPS.

A PPS may be combined with a risk-sharing arrangement that limits the

losses and gains a provider can experience over a period of time. Risksharing involves considering the provider’s actual cost of delivering

services in determining the final payment.14 Although risk-sharing reduces

incentives to eliminate inefficient or inappropriate service use, it still may

be appropriate because of the protections it affords beneficiaries against

underservice and to the program against excessive payments, particularly

when other mechanisms do not provide these safeguards.

14One such method would compare a provider’s total Medicare payments with its actual

allowable Medicare costs. For example, if payments exceed actual costs by 10 percent or

more, these profits would be shared with Medicare. But if costs exceeded payments by 10

percent or more, a portion of these losses would be shouldered by Medicare.
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Proposed PPS Design HCFA published its proposed PPS design in a proposed rule in the Federal

Register on October 28, 1999. The basic unit of payment would be a 60-day

episode of care. An episode would begin with a beneficiary’s first visit and

end on the 60th day after that visit. For beneficiaries requiring additional

care, a second episode would begin on day 61 and end on day 120. There

would be no limits on the number of episodes for any beneficiary. The basic

60-day episode payment would cover all of a beneficiary’s home health care

during that period, regardless of the actual days of care or visits provided.

The basic 60-day episode payment would incorporate two adjustments—a

case-mix adjustment based on a clinical classification system and a wage

adjustment to reflect the variation in labor costs across geographic areas.

The case-mix adjustment method would assign patients to one of 80 home

health resource groups (HHRG) on the basis of patient assessment data

from the Outcome and Assessment Information Set (OASIS)15 and the

projected number of therapy visits in the patient’s plan of care. The wage

adjustment would be based on the geographic area in which the beneficiary

received services and would be applied to the labor portion of the episode

payment.

In cases in which the basic episode of care is interrupted, payments would

be prorated.16 Interruptions occur when a beneficiary elects to transfer to

another HHA, when a beneficiary is discharged when treatment goals are

attained but then returns to the same HHA, or when a significant change in

the beneficiary’s condition (SCIC) results in a new OASIS assessment. For

beneficiary-elected transfers or a discharge and return to the same agency

during a 60-day episode, the payment would be adjusted to reflect the

actual length of time the beneficiary remained under the agency’s care

before the intervening event. In the case of an SCIC, payments would have

two prorated components: one for the portion of care before the SCIC and

one for the care provided after a second OASIS assessment triggered a new

HHRG.

15OASIS contains patient-level data on medical condition; demographic characteristics;

supportive assistance; sensory, neurological, emotional, and behavioral status; activities of

daily living; and instrumental activities of daily living. All agencies were required to begin

using OASIS effective July 19, 1999.

16The proration calculations assume that costs are evenly distributed throughout an episode.
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The level of aggregate agency payments was established in the BBA. PPS

rates are to be set so that Medicare expenditures are equivalent to what

would have been spent under the IPS, with those limits reduced by 15

percent.17 The base episode payments are to be set at the national average

cost of providing the average number and mix of services within an

episode.

HCFA’s PPS design incorporates two additional features to adjust payments

for beneficiaries with unusual costs. For beneficiaries with exceptionally

high costs, an HHA would receive an “outlier” payment. The outlier

payment is not intended to cover the full cost of the case, but it raises the

payment above the standard episode amount. For beneficiaries with

extremely low service use within an episode (four or fewer visits), HHAs

would receive a low-utilization payment adjustment. Instead of the perepisode payment, payments would be on a per-visit basis, without a casemix adjustment, but adjusted for geographic differences in labor costs.

New HHA data reporting requirements, while not available in time to affect

the initial PPS design, may prove useful for subsequent refinements. As

part of an assessment requirement, agencies must report OASIS and

therapy service provision data on all patients, which will be used to assign

a patient to an HHRG. In addition, the BBA required agencies to report the

duration of visits in 15-minute increments. The OASIS, therapy, and visit

time information will help in understanding what services are provided and

what resources are needed during visits and episodes of care and in

developing patient outcome indicators.

PPS Design Questions

Remain, Despite HCFA

Research

HCFA has sponsored a number of research and demonstration projects, at

a total cost of $27 million over 12 years, to better understand the nature of

home health care, the characteristics of its users, and how these factors

should be reflected in the payment system (see table 1). (For more detail

on funded projects, see app. II.) The Home Health Agency Prospective

Payment Demonstration involved six different projects in two phases at a

cost of $14.9 million. In both demonstration phases, Medicare tested

17The Medicare, Medicaid and SCHIP Refinement Act of 1999 delays the 15 percent

reduction in the payments required under the PPS by the BBA until 12 months after

implementation of the PPS. It also requires the Secretary of Health and Human Services to

report to the Congress within 6 months of implementation of the PPS on the need for the 15

percent or other reduction.
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limited features of a PPS, paying agencies prospective rates for visits in

phase I and episodes of care in phase II and adjusting payments to limit the

profits and losses of an agency. Phase II yielded valuable information on

the effect of episode-based payments on costs and service use. The tested

models did not, however, yield information about the appropriate level of

payments. Furthermore, a case-mix adjustment method was not tested in

either phase. Eight other HHA payment projects were funded at a cost of

$12.1 million. An ongoing project developed the case-mix adjustment

method that will be used in the PPS and will continue to refine this method

as more data become available. Other projects investigated determinants of

and variation in home health utilization and expenditure growth to address

questions about quality of care and appropriate service delivery.

Table 1: HCFA-Funded HHA Research Spending, 1988-99, by Project Category

Source: GAO analysis of data from Active Projects Report: Research and Demonstrations in Health

Care Financing, eds. 1988-98.

HHA PPS Demonstration

Provides Limited Guidance

on PPS Design

The Omnibus Budget Reconciliation Act of 1987 directed HHS to conduct a

demonstration project on prospective payment methods for HHAs. The

demonstration tested only selected PPS features. In the two phases of the

demonstration, alternative units of payment were evaluated; however,

other key PPS design features were not. The PPS models tested in the

demonstration were shaped, in part, by the need to minimize the financial

risk placed on HHAs in order to secure their participation.

Phase I, conducted from 1990 to 1995, tested the effect of per-visit

prospective payments on agency costs and patterns of care. HHAs in the

test group were paid a fixed, prospective rate per visit based on each

agency’s historical costs. Payments were not subject to a case-mix

Project category Expenditure

Home Health Agency Prospective Payment Demonstration,

phase I $6.5 million

Home Health Agency Prospective Payment Demonstration,

phase II 8.3 million

Case-mix research 3.9 million

Related home health research 8.2 million

Total $26.9 million
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adjustment method to account for patient cost differences that were due to

variation in resource needs. Retrospective payment adjustments were

made so that gains and losses for each test agency were limited to 5 percent

of Medicare-allowable costs. The evaluation of this demonstration

concluded that prospective per-visit payments did not affect agency costs

or the provision of care when the HHA was at little financial risk.

Phase II of the demonstration is testing the effect of prospective episodebased payments on HHA costs and service delivery. Phase II started in 1995

and will continue until the PPS is implemented. Test agencies are paid a

single prospective rate for the first 120 days of services to a patient and a

prospective per-visit rate for any additional visits. As in phase I, payment

rates are based on each agency’s historical costs. Therefore, HHAs with

higher historical costs continue to receive higher payments. The rates may

be adjusted at year-end if the cost patterns of the agency’s current patient

mix do not match its historical costs. Agency losses are shouldered

primarily by HCFA and agency profits over 5 percent of Medicare-allowable

costs are shared with Medicare.18 Preliminary evaluation of phase II

suggests that HHAs respond to an episode-based PPS by controlling their

per-episode costs by reducing the number of visits provided.19 This is

notable, given the demonstration’s risk-sharing arrangement, which limited

an agency’s financial losses and gains and thus reduced the incentives to

change the way care was delivered. That is, HHAs controlled their costs

even though their financial losses or gains were restricted. The evaluation

will continue to monitor the demonstration’s effect on patient outcomes

and access and on the use of other health services.

Phase II of the demonstration showed that expanding the unit of payment

for home health care from a visit to a 120-day episode can change the way

HHAs provide services, resulting in lower per-episode spending. The risksharing arrangements incorporated into the demonstration mitigated any

large swings in payment to HHAs. Phase II did not continue to pay for longterm patients on a per-episode basis—instead it switched to per-visit

18HCFA reimburses each test agency for 99 percent of its losses in the first demonstration

year, 98 percent of its losses in the second year, and 97 percent in the third and subsequent

demonstration years, subject to total payments being no greater than Medicare-allowable

costs. HCFA retains 25 percent of an agency’s profit, if it is between 5 percent and 15 percent

of the HHA’s total allowable costs, and 100 percent thereafter.

19First-year results from phase II showed a 17 percent reduction in the number of visits

provided by study agencies, compared with agencies in the control group.
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payments after 120 days. Neither phase of the demonstration adjusted

payments for differences in expected beneficiary resource use, so they did

not yield a case-mix adjustment method for use in a PPS. Finally, neither

phase tested alternative levels of payment for services across agencies, as

payments were based on agency-specific historical payments.

HCFA also funded research to measure and monitor the quality of care

provided by HHAs participating in the demonstration. Both phase I and

phase II of the demonstration evaluated the effect of prospective payment

on the quality of care. Results indicate that a PPS may not negatively affect

the measured patient outcomes and that HHAs can reduce costs for home

health services without compromising quality or outcomes. Furthermore,

the effects of the payment approach tested in the demonstration on the

quality of care may be understated because outcome measures to evaluate

care, especially for chronically ill patients, are not fully developed.

Case-Mix Research is

Ongoing

HCFA has been researching a case-mix adjustment method for home health

services for some time, although the demonstration did not test one. An

early research project to develop patient categories was completed in 1991.

It entailed a significant primary data collection phase because available

claims data contained little of the patient-level information necessary to

adequately group patients to reflect their expected resource needs. The

study concluded that service-dependent descriptors such as nursing

treatments were more predictive of patient resource use than measures

like functional status or medical diagnosis. Service-dependent patient

descriptors, however, are vulnerable to provider manipulation (that is,

providers can add services to increase payments) and therefore are not

ideal for use in a payment system. Furthermore, the project’s data were

collected before the issuance of revised coverage guidelines in 1989, so

they do not reflect current treatment patterns for many patients.

In 1996, HCFA funded a major study to develop a case-mix adjustment

method to be used in the HHA PPS.20 The resulting preliminary method will

be based on 20 patient descriptors from the OASIS assessment instrument

and a measure of patients’ therapy use during the home health episode.

These data elements, measuring clinical severity, functional status, and

therapy service use, are used to assign a patient to one of 80 HHRGs. Each

HHRG is assigned a relative weight that reflects the costliness of the

20This study is scheduled to be completed by April 2000.
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beneficiaries in that category relative to the other case-mix groups. The

case-mix adjustment method will continue to be refined as the research

project is completed.

Related Research Projects

Contribute to

Understanding Home Health

Care

Six other HCFA-funded research projects, at a total cost of $8.2 million,

were initiated to contribute to the design of the PPS or to understand its

potential effect on service delivery. The majority of these studies addressed

the quality of home health care, which could be affected by PPS payment

incentives to reduce costs. HCFA funded efforts to develop home health

care quality measures and monitoring methods. The projects did not,

however, establish who should receive home health care or any

appropriate standards of care. Given the continued lack of agreement, the

quality measures and monitoring methods may not be adequate to assess

changes in home health care quality associated with new payment policies.

Other studies were designed to explain factors contributing to variation in

service mix and costs. Research on the regional variation in costs found

that only a portion of these differences in service use could be explained by

patient characteristics. Some of the differences appeared to be due to

variations in practice patterns unrelated to patient needs, indicating that

policies to reduce service use would not necessarily constrain needed care.

Another study examined the growth in home health expenditures. It found

that spending increases were fueled by rising utilization, not higher costs

per visit. This suggests that an episode-based payment method, rather than

a per-visit approach, would be more promising in controlling Medicare

home health outlays.

Additional Research

and Analysis Required

to Refine PPS

Although HCFA has used information from its research efforts to shape the

design of the PPS, the PPS is based on incomplete knowledge and will

likely require modifications as more data become available. Given the wide

variation in patients and service use, the 60-day episode unit of payment

will not reflect the service patterns of many beneficiaries. Because the

episode length does not closely match many beneficiaries’ service needs,

the PPS will rely heavily on the case-mix adjustment to calibrate payments

to different types of patients. In addition, payments based on national

average costs and service provision will redistribute payments across

providers and may result in over- or underpayments. Furthermore, because

of widely varying service patterns, it has been difficult to develop a casemix adjustment method that adequately describes resource use,

particularly for long-term users. The proposed method relies heavily on
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therapy treatments for its classification of patients into payment groups,

which may contribute to inappropriate care if providers change therapy

regimens for financial reasons. Therefore, although the PPS is intended to

affect provider behavior and thereby moderate Medicare spending, the

limited research evidence on the appropriate payment design, the broad

range of beneficiaries, and the lack of standards for care make it likely that

the HHA PPS will have unintended consequences for beneficiary access,

quality of care, and Medicare spending.

Proposed Unit of Payment

May Not Be Suitable for All

Patients

HCFA has proposed a 60-day episode of care as the unit of payment in the

PPS, rather than the per-visit payment or the 120-day episode tested in the

demonstration. HCFA believes that the 60-day episode has several

advantages because it conforms to Medicare physician certification

requirements for home health care and the OASIS reassessment schedule.

In addition, the majority of beneficiaries historically have received services

for fewer than 60 days and thus one episode payment would cover their

care.

While a 60-day episode is logical for administrative reasons, it may not be

appropriate for all beneficiaries, and the case-mix adjuster may not be

robust enough to adequately calibrate payments under these

circumstances. Although for the majority of beneficiaries care is completed

within 60 days, care for many patients is completed in a much shorter

period. Medicare’s home health benefit is broadly defined, and different

groups of home health users have unique care needs. For example, prior

research has demonstrated that the health status and patterns of care of

long-term users of home health care, as described by functional limitations,

differ substantially from those of short-term users. It is possible that a

single payment unit, combined with the limitations of the case-mix

adjuster, may not reflect the variation in these distinct groups of

beneficiaries.

The effect of HCFA’s designation of 60-day episodes as the unit of payment

attempts to balance competing concerns about level of service to Medicare

beneficiaries and Medicare outlays. The proposed unit of payment will

impose more discipline on HHAs to lower total costs of caring for shortterm users than a shorter unit such as a visit. It also may not be as easy for

providers to increase the number of units of service to augment revenues.

The 60-day episode payment, however, creates incentives to lower the

intensity or cost of services in the episodes—by shortening visit lengths or

by reducing the number of visits provided within the episode. This
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anticipated response to the episode payment may not negatively affect

patient care, given the questionable appropriateness of previous utilization.

However, because there is a lack of accepted standards of home health

care, it will be difficult to assess the effect of any changes in service

patterns. Furthermore, if HHAs merely delay services in order to extend

care over multiple episodes to increase provider payments, Medicare

expenditures will rise inappropriately.

HCFA has anticipated that the payments for patients who receive few visits

could be too high under a 60-day episode amount. Thus, as one refinement,

it has developed a specific payment policy for low-cost patients—the lowutilization payment adjustment. This policy would result in lower payments

for these beneficiaries than would be made under a case-mix adjusted

episode amount and is intended to partially counter the incentive to

generate additional low-cost episodes. Agencies, however, will have strong

financial incentives to ensure that all beneficiaries receive enough services

to qualify for the full episode payment. If agencies do increase the number

of episodes provided, Medicare expenditures will increase.

Payments Based on

Averages May

Inappropriately Raise or

Lower HHA Payments

HCFA used the most recent available cost data (fiscal year 1997) to develop

the HHA payment rates. The rates reflect the national average number of

visits in an episode and the national average cost per visit, by type of visit.

Because the prospective rates reflect national average service use and visit

costs, the PPS will result in considerable redistribution of payments across

providers.

The proposed rule includes HCFA’s estimates of the effect of the PPS on

HHAs. Payments to rural, freestanding, for-profit HHAs are expected to fall

17 percent when the PPS is implemented, but payments are expected to

increase 46 percent to rural, freestanding, government HHAs. Payments to

urban for-profit agencies would decrease 18 percent compared with a 20

percent increase to urban nonprofit agencies. The appropriateness of these

estimated changes in payment and resulting provider responses are not

known. Higher revenues may lead some HHAs to provide more services,

while others may not change their patterns of care, thus leaving little

justification for the higher Medicare payments. Conversely, lower

payments may encourage some providers to increase their efficiency or to

provide fewer services. Because there are no established treatment

guidelines or outcome measures for home health care, it will be difficult to

evaluate the effect of any service changes on quality of care.
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Case-Mix Adjustment

Method May Not Adequately

Account for Differences in

Patient Needs

A case-mix adjustment method for home health care must be robust to

adequately predict resource use for the wide range of types of patients who

receive care. Without a good measurement system, payments will be too

high for some types of patients and too low for others, creating provider

incentives to seek or to avoid certain types of patients for financial reasons.

The proposed case-mix adjustment method, based on HCFA-funded

research, predicts patient resource use about as well as methods used in

PPSs for other services, but it is heavily dependent on therapy services

delivered during the HHA episode for its ability to do so. Therefore,

providers have incentives to manipulate therapy treatments to maximize

their Medicare revenues.21 This could be a particular problem in home

health care because the patterns of care are so variable and the standards

of care are so ill-defined.

Given the diversity of patients receiving care, the large variation in

practices, and the lack of standards for appropriate care, the case-mix

adjustment method may not closely track resource use, resulting in large

over- and underpayments for certain types of patients. In particular, HCFA’s

analysis indicates that resource use of long-term users may not be

adequately accounted for by the case-mix adjustment method. This is

because the variable measuring therapy use is the major predictor of costs,

yet these patients generally use fewer of these services. As a result, the PPS

payments for long-term patients in subsequent episodes may be

consistently too high or too low, which could distort provider incentives

regarding beneficiary treatment.

Anticipating the occasional exceptionally costly patient, HCFA has

proposed outlier payments to cushion the losses an HHA would incur on a

particular beneficiary. Moreover, an outlier policy should counter the

incentive to avoid certain types of patients that can be identified prior to

treatment. Outlier payments, however, may not adequately protect

beneficiary access or address HHA concerns about losses if the basic casemix adjustment method, which affects payments for all beneficiaries, is not

robust.

21Balanced Budget Act: Implementation of Key Medicare Mandates Must Evolve to Fulfill

Congressional Objectives (GAO/T-HEHS-98-214, July 16, 1998) and Medicare Post-Acute

Care: Better Information Needed Before Modifying BBA Reforms (GAO/T-HEHS-99-192,

Sept. 15, 1999).
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Risk-Sharing Arrangements

Would Counter Large

Degree of Uncertainty

Substantial variation in patient service needs and costs of care, combined

with the 60-day episode unit of payment and the potential limitations of the

case-mix adjustment method, could result in inappropriately high or low

payments for particular beneficiaries or certain HHAs. Risk-sharing

arrangements that limit HHA losses or gains from Medicare could be

incorporated into the PPS design to adjust aggregate payments to account

for actual agency costs. Such arrangements could moderate the effects of

inadequate payments, the incentives to manipulate services to maximize

profits, and the uncertainties associated with payment rates that are based

on averages when so little is known about appropriate patterns of home

health care. On the other hand, risk-sharing dampens the incentive of the

PPS to provide care more efficiently.

A risk-sharing arrangement that limits the amount an HHA can lose or gain

would involve a year-end settlement that compares an HHA’s actual

Medicare-allowed costs with its total Medicare payments. Payments above

the costs would be constrained to a specific percentage, as would agency

losses. Both phases of the demonstration included this form of risk-sharing,

but HCFA’s proposed PPS does not.

Although the PPS is intended to provide incentives to HHAs to deliver care

more efficiently by allowing them to earn profits while risking losses on

treating Medicare beneficiaries, extreme gains or losses could have

unintended consequences. For example, the possibility of large gains might

encourage providers to underserve beneficiaries because the HHA could

retain all payments in excess of costs. Conversely, unlimited losses could

undermine the quality of care and could eventually lead to reduced access

for Medicare beneficiaries. These potential problems are compounded by

the lack of standards for appropriate home health care that preclude

effective monitoring of these HHA behaviors.

Conclusions Over the past 12 years, HCFA has sponsored several research projects

related to the use of home health care and payment policy for HHAs. These

projects have provided valuable insights into the appropriate design of the

PPS. Yet, questions about key PPS design components and their effect on

service delivery and costs remain. The research offered little to explain the

variation in service costs and patterns of care that is not tied to therapy

service use, which is valuable information to have to help evaluate the

effects of the PPS on beneficiary access and quality of care.
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The proposed HHA PPS would create strong financial incentives to

providers to change the way they deliver care that could compromise

quality of care and could result in unintended increases in Medicare home

health spending. It is likely that extensive monitoring of home health

service delivery will be required to ensure that HHAs do not respond to

these financial incentives either by inappropriately reducing care within an

episode or by providing care that is not medically necessary in order to gain

payments for additional episodes. Such monitoring is complicated by the

current lack of accepted standards for home health care against which

changes may be measured.

Uncertainties about the appropriate specification of key design features

and provider responses to the PPS suggest moderating the effect of a

largely untested PPS. Until data are available to refine the PPS to ensure

appropriate beneficiary access and payment levels, a risk-sharing approach

could moderate unintended changes. Although risk-sharing may dampen

the PPS incentive to provide care more efficiently, we believe such a tradeoff is appropriate to protect beneficiaries, HHAs, and the Medicare

program.

Finally, key PPS features may need to be modified as experience is gained

with the system and more data become available. While such revisions are

common when major changes are made to payment methods, the current

gaps in information mean that HCFA should be prepared to develop and

implement substantial improvements. OASIS, therapy service, and visit

length data should help define what services beneficiaries receive for

specific clinical conditions. These data should be analyzed to determine

whether the unit of payment, the level of payments, and the case-mix

adjustment method need refinement. These data could also be used to

assess the relationship between service use and appropriate patient

outcomes.

Recommendations In order to minimize unintended consequences on beneficiaries, HHAs, and

Medicare, and to narrow information gaps in the PPS design, the

Administrator of HCFA should take the following actions:

• Ensure that adequate resources are devoted to utilization monitoring

and medical review to ensure that Medicare does not make

inappropriate payments for home health services and that quality of

care is not compromised.
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• Incorporate a risk-sharing arrangement into the PPS design, consistent

with methods tested in the demonstration, until available analyses

indicate that it is no longer needed to protect beneficiaries, HHAs, or the

Medicare program.

• Modify the PPS design, as appropriate, on the basis of continued study

of the variations in service use and patient needs and the effects of the

change in payment method on service use.

Agency Comments In commenting on a draft of this report, HCFA agreed overall with our

exposition of Medicare’s home health care benefit; the research and

findings funded by HCFA; the difficulties inherent in changing Medicare’s

payment method; and that careful monitoring of HHA, beneficiary, and

program experience will be needed under the PPS. The agency agreed with

two of our recommendations but raised concerns about our

recommendation to incorporate a risk-sharing arrangement into the

payment system. It also commented about some of our concerns regarding

the overall design of the PPS. HCFA also made one technical comment,

which we have incorporated.

HCFA agreed with our first recommendation to ensure that adequate

resources are devoted to utilization monitoring and medical review. In its

comments, HCFA outlined its planned efforts to (1) ensure that patient

classification and billing data are accurate and payments are appropriate

and (2) provide quick feedback on beneficiary outcomes and impacts for

use in future PPS refinements. Its activities include using OASIS data to

check the accuracy of data reporting and payments and ensure that HHA

services properly address the identified needs of beneficiaries; conducting

medical reviews of claims; and creating an aggressive surveillance system

to assess the impact of the payment changes. It plans to compile claims

information on a real-time basis to improve its ability to identify significant

changes in provider behavior. Furthermore, it will target its investigative

efforts on areas identified as potential vulnerabilities to ensure that the

payment system is being implemented correctly and that agencies are

responding to it appropriately. We support HCFA’s efforts to ensure data

and payment accuracy; nevertheless, we urge HCFA to devote sufficient

resources to review efforts to detect unnecessary episodes and flag

underservice within episodes on an ongoing basis as well as at the start of

the PPS.

HCFA raised two major concerns with our second recommendation to

incorporate risk sharing into the PPS design. First, it believes that such a
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policy is not needed, given the adjustments included in the PPS that, in

combination with its monitoring activities, it believes will be sufficient to

protect agencies, beneficiaries, and the program. These adjustments

include a case-mix measurement system to calibrate payments on the basis

of patient needs, unlimited episode payments to account for long-term

patients, outlier payments for extraordinarily high-cost episodes, and

significant change in condition (SCIC) policies that vary payments when a

beneficiary’s condition changes substantially during the episode. HCFA’s

second concern was that implementing a risk-sharing arrangement would

be operationally difficult and could threaten meeting its deadline for the

PPS. HCFA stated that a risk-sharing arrangement would be more costly for

HHAs and HFCA to administer because it would require comparisons of

payments and provider-specific costs and require auditing of HHA costs to

determine allowable costs. Such an arrangement would also make it more

difficult to estimate payment levels to achieve budget neutrality.

While we agree with HCFA that the four payment adjustments included in

the proposal are all important to calibrate payments for individual

episodes, we believe that, given the incentives under a PPS and the

historically substantial variation in utilization of the benefit, they are

insufficient by themselves. These episode-level adjustments will help

ensure that payments for certain beneficiaries are not too extreme, but

they will not be sufficient to ensure that agencies with treatment patterns

that are very different from the average are protected from extraordinary

losses or do not gain inappropriately from extreme profits. This

moderation to agency-level losses or gains is needed until HCFA better

understands geographic and agency differences in treatment and agrees on

appropriate HHA service so that PPS payments can be calibrated

appropriately and underservice can be avoided. A risk-sharing mechanism

would temper the incentives of the proposed PPS, protect beneficiaries

from underservice, and shield HHAs from large losses that high-cost cases

may engender if not adequately addressed by the outlier policy. Coupled

with the inadequacies of the proposed case-mix adjustment method, we

believe this moderation is critical to protect beneficiaries from inadequate

care and safeguard the Medicare program from paying for services that

were not needed or were not provided. We are sympathetic to HCFA’s

concerns that a risk-sharing method adds complexity to the payment

calculations, and we do not believe that the implementation of the PPS

should be delayed in order to incorporate one. However, we believe that

the magnitude of potential overpayments to some HHAs and

underpayments to others warrants this added complexity. Furthermore, we

believe that the Medicare program already has experience in administering
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each component of a risk-sharing approach. For example, for many

providers, Medicare has estimated current-year costs to adjust current

payments. In addition, HCFA has used payment methods that blend

prospective rates with provider-specific costs, and it has implemented

complex budget neutrality requirements in other payment policies. Though

HCFA may need to proceed with its plans so that it can expedite replacing

the IPS, we believe it should consider incorporating a risk-sharing

arrangement in the future.

HCFA agreed with our third recommendation to modify the PPS design, as

appropriate, on the basis of experience under the PPS and continued

research on the variation in service use and patient needs. HCFA will

continue to refine its case-mix measurement system and will evaluate

whether the 15-minute billing data could be used in this refinement.

Likewise, examination of data on users with multiple episodes may suggest

different episode lengths or case-mix groupings for the population of longterm users.

HCFA also discussed some of our general concerns expressed in the report:

• We noted that the proposed case-mix adjustment method is heavily

dependent on the level of therapy services provided, which can be

manipulated by HHAs to boost payments. In its discussion of the casemix adjustment method, HCFA notes that therapy services are an

important component of home health care and that these home health

patients are likely to fall into two groups—those who need significant

amounts of therapy and those who do not. We agree that distinguishing

among patients on the basis of their service need is appropriate.

However, this case-mix adjustment method distinguishes between those

who use therapy services and those who do not. We caution against

relying on therapy service use to designate home health case-mix

categories because of the financial incentives this creates for

inappropriate service provision. We agree that the payment system

needs to appropriately account for therapy services; therefore, we urge

HCFA to refine the case-mix adjustment method so that it reflects

patient needs, not service provision. We also agree that it will be

important to monitor and assess how well the case-mix adjustment

method accounts for the costs of long-stay patients. These beneficiaries

make up a substantial share of all users, yet because they use fewer

therapy services than other patients and their experience was not used

in developing the case-mix adjustment method, refinements may be

needed.
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• We also raised concerns that using 60 days as the length of the episode

may not be appropriate for patients with shorter lengths of stay. HCFA

noted that many such stays are not predictable; that the 60-day length is

appealing from an administrative perspective; and that a shorter period

would undermine the notion of an “episode,” while a longer period

would result in overpayments for many patients. We agree that

beneficiary needs for services are not always predictable from the

outset and that longer episode lengths would be likely to result in

considerable overpayments for many cases. However, because the

majority of home health episodes last 60 days or less, and a considerable

share of stays are under 30 days, we believe that HCFA needs to evaluate

current service patterns and make refinements to the episode length if

necessary.

• We are also concerned that agencies will have an incentive to provide

enough visits to qualify for the full episode payment rather than the lowutilization payment adjustment. HCFA agrees that the low-utilization

payment adjustment policy is likely to increase service provision and

proposes a behavioral offset, not discussed in the proposed rule, that

would decrease payments for all cases to account for added spending

resulting from an increased number of episodes. HCFA also indicates

that this will be a payment area that will be closely monitored. We

concur that this is a vulnerability in the PPS and that this situation

warrants monitoring, but we are unsure whether reducing the average

payment through a behavioral offset adjustment is appropriate.

• Finally, HCFA said that the report did not adequately discuss that

historical utilization is not necessarily an appropriate basis for setting

PPS rates because of services that were not medically necessary or

lacked supporting documentation. We agree and have noted this in the

text. Moreover, because historical utilization was used as the basis for

the PPS, we believe this is further support for incorporating risk sharing

into its design.

HCFA’s comments appear in their entirety as appendix III.

We are sending copies of this report to the Honorable Nancy-Ann Min

DeParle, the Administrator of HCFA; interested congressional committees;

and other interested parties. We will also make copies available to others

upon request.
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If you have any questions about this report, please call me or Laura

Dummit, Associate Director, at (202) 512-7114. Major contributors to this

report included Carol Carter, Jean Chung, and James E. Mathews.

William J. Scanlon

Director, Health Financing and

Public Health Issues
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List of Addressees

The Honorable William V. Roth, Jr.

Chairman

The Honorable Daniel Patrick Moynihan

Ranking Minority Member

Committee on Finance

United States Senate

The Honorable Arlen Specter

Chairman

The Honorable Tom Harkin

Ranking Minority Member

Subcommittee on Labor, Health and

Human Services, and Education

Committee on Appropriations

United States Senate

The Honorable Tom Bliley

Chairman

The Honorable John D. Dingell

Ranking Minority Member

Committee on Commerce

House of Representatives

The Honorable Bill Archer

Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means

House of Representatives

The Honorable John Edward Porter

Chairman

The Honorable David R. Obey

Ranking Minority Member

Subcommittee on Labor, Health and

Human Services, Education and

Related Agencies

Committee on Appropriations

House of Representatives
Page 31 GAO/HEHS-00-9 Home Health Agency PPS
Page 32 GAO/HEHS-00-09 Home Health Agency PPS

Appendix I

Scope and Methodology ApApenednxidexiIs

To develop the information for this study, we examined contracts awarded

as described in HCFA’s Active Projects Reports from 1987 through 1998.1

We included research projects that were conducted as part of the Home

Health Agency Prospective Payment Demonstration and projects that

addressed issues related to home health payment, such as quality

assurance, case-mix measurement and adjustment, and the relationship

between service volume and patient outcome. We excluded home health

research projects that did not have direct implications for a payment

system (see app. II). We summarized the research and demonstration

findings and tabulated the costs of these projects but did not evaluate the

scope, methodology, or findings of the projects.

Our analysis of HCFA’s proposed PPS was based on the proposed rule2 and

briefings and discussions with HCFA officials. We also examined the

project reports prepared by Abt Associates, Inc., on the case-mix

measurement system and followed up on several methodological issues.

1

Active Projects Report: Research and Demonstrations in Health Care Financing is

produced annually and summarizes active intramural and extramural projects.

2

“Medicare Program: Prospective Payment System for Home Health Agencies,” Proposed

Rule, Federal Register, Vol. 64, No. 208 (Oct. 28, 1999).
Page 33 GAO/HEHS-00-09 Home Health Agency PPS

Appendix II

HCFA Projects to Develop a Prospective

Payment System for Home Health Agencies ApendxiI

Project Expenditures Description

Home Health Agency Prospective

Payment Demonstration

Implementation of the Home Health

Agency Prospective Payment

Demonstration.

Project No.: 500-90-0024

Contractor: Abt Associates, Inc.

Period: 1990-95

$1,608,319a This project implemented and monitored the design of phase I of the

demonstration. The demonstration tested prospectively set payments

per visit by type of discipline (that is, skilled nursing, home health aide,

physical therapy, occupational therapy, speech therapy, and medical

social services). HHAs that agreed to participate were randomly

assigned to either the per-visit prospective payment group or the

control group, which was paid according to existing Medicare payment

rules. HHAs paid on a per-visit basis shared the financial risks and

rewards with Medicare—agencies were reimbursed for any losses

greater than 5 percent of their Medicare-allowable costs and gave

back any profits greater than 5 percent of that amount. Forty-seven

agencies participated in the demonstration for 3 years.

Evaluation of the Home Health

Prospective Payment Demonstration

Project No.: 500-90-0047

Contractor: Mathematica Policy

Research, Inc.

Period: 1990-95

$3,406,668a This project evaluated the results of phase I of the demonstration. The

findings indicated that a per-visit PPS had no significant effect on

quality of care, selection and retention of patients, cost per visit, visit

volume, use of non-Medicare services, and use and reimbursement of

Medicare-covered services.

Quality Review for Phase I of the

Home Health Agency Prospective

Payment Demonstration

Project No.: 500-91-0096

Contractor: New England

Research Institute, Inc.

Period: 1991-94

$1,499,085a This project reviewed the quality of care provided by HHAs

participating in phase I of the demonstration. Nurses reviewed patient

records for a sample of Medicare beneficiaries. They found that

quality of care was unaffected by per-visit prospective payment.

Patient access to care was also unaffected by the payment method.

Patients treated by agencies paid on a per-visit basis were generally

similar to patients treated by control agencies.

Phase II Implementation of the Home

Health Agency Prospective Payment

Demonstration

Project No.: 500-95-0011

Contractor: Abt Associates, Inc.

Period: 1995-2000

$1,811,184b This project, implementing and monitoring phase II of the

demonstration, tests a per-episode prospective payment approach.

Agencies are paid a prospective amount for a patient’s first 120 days

of care and a per-visit amount for subsequent care during the episode.

Payment rates are based on each agency’s costs in a base year. Loss

protection and profit-sharing provisions mitigate the financial risks for

participating agencies. Ninety-one agencies from 5 states—CA, FL,

IL, MA, and TX—were randomly assigned to either the prospective

payment or the control group. At the participating agencies’ request,

phase II has been extended until the HHA PPS is implemented in

October 2000.

Continued
Appendix II

HCFA Projects to Develop a Prospective

Payment System for Home Health Agencies

Page 34 GAO/HEHS-00-09 Home Health Agency PPS

Evaluation of Phase II of the Home

Health Agency Prospective Payment

Demonstration

Project No.: 500-94-0062

Contractor: Mathematica Policy

Research, Inc.

Period: 1994-99

$3,732,642b This program evaluation addresses two key issues relating to a perepisode payment system: program impact and HHA decisions and

operations. The evaluation estimates the effect of the demonstration

PPS on cost, service use, access, and quality. Evaluation results to

date are based on first-year data from 51,000 home health episodes

from 85 demonstration agencies. On average, the cost per episode

was lower in PPS HHAs by $419, or 13 percent; however, the cost per

visit was higher than in the control HHAs. The number of visits in the

120-day period was 17 percent lower for patients in PPS agencies,

and there was little change in the proportion of visits across health

disciplines. The average length of episodes under the PPS decreased

by 15 percent. The evidence suggests that there were no increases in

the use of other health care services and that patient outcomes were

not compromised.

Quality Assurance for Phase II of the

Home Health Agency Prospective

Payment Demonstration

Project No.: 500-95-0028

Contractor: Center for

Health Policy Research

Period: 1995-2000

$2,799,265b This project provides for the development and implementation of a

quality review mechanism for use by HHAs participating in phase II of

the demonstration. All participating agencies are required to collect

patient status data at prescribed intervals. Data on patient outcomes

are provided to individual agencies that, in turn, may use this

information to make adjustments to treatment protocols. In addition,

the project will compare patient outcomes for PPS and control

agencies.

Subtotal $14,857,163

Related research projects

Develop and Demonstrate a Method

for Classifying Home Health Patients

to Predict Resource Requirements

and to Measure Outcomes

Project No.: 17-C-98983/3

Contractor: Georgetown

University School of Nursing

Period: 1987-91

$967,836a This project developed a method for classifying patients to predict

resource requirements and measure treatment outcomes of Medicare

patients in HHAs. Data on 73 variables were collected from the

medical records of about 9,000 recently discharged Medicare home

health patients. The analysis indicated that home health care was

primarily provided to a white, suburban, young-elderly population.

Less advantaged and higher-risk patients were more likely to receive

care in nursing homes. Findings on resource use suggested that

nursing diagnoses and nursing interventions were better predictors of

home health utilization than were functional status or medical

diagnosis.

Analysis of Home Health Costs and

Service Utilization Issues

Project No.: 99-C-99169/5

Contractor: University of Minnesota

Research Center

Period: 1991-92

$189,607c This project synthesized the research literature on prospective

payment and examined outlier cases and possible volume

adjustments using Medicare claims. Findings suggested that a 120-

day home health episode was appropriate for the demonstration. The

study also found significant regional variation in the average length of

episodes. This study helped shape phase II of the Home Health

Agency Prospective Payment Demonstration.

Development of Outcome-Based

Quality Measures for Home Health

Services

Project No.: 500-88-0054

Contractor: Center for

Health Policy Research

Period: 1988-94

$2,699,298a This project developed and tested outcome-based measures or

indicators of quality for Medicare home health services. Outcomes

were developed according to different types of patient care needs

defined by patient condition taxonomy termed Quality Indicator

Groups. Using longitudinal data collected on about 3,000 patients, the

investigators tested the reliability, validity, and utility of each outcome

measure.

Project Expenditures Description

Continued from Previous Page
Appendix II

HCFA Projects to Develop a Prospective

Payment System for Home Health Agencies

Page 35 GAO/HEHS-00-09 Home Health Agency PPS

Regional Variation in Home Health

Episode Length and Number of Visits

per Episode

Project No.: 500-89-0047/38

Contractor: Lewin/VHI, Inc.

Period: 1993-94

$168,600c This study addressed regional differences in the utilization of home

health services. The authors examined factors such as patient

characteristics, supply of home health agencies and staff, and

availability of alternatives to home health care across high-use

regions and low-use regions. In the highest-use regions, HHAs served

very frail patients who may not have access to alternative sources of

care and few resources to purchase those available. By contrast,

agencies in low-use regions served much less frail and less

chronically ill patients who may have better access to alternative

sources of care.

Sources of Medicare Home Health

Expenditure Growth: Implications for

Control Options

Project No.: 17-C-90107/1

Contractor: Brandeis University/Heller

Graduate School

Period: 1992-95

$385,764a The objective of this project was to develop and consider options for

controlling home health expenditures. The first phase of the project

used secondary data to examine the composition of the Medicare

home health expenditures from 1985 to 1989 and 1989 to 1991 (that

is, growth in number of people served, visits per person, mix of visits,

and visit charges; and attributing growth to types of agencies by

auspice and scale). The second phase examined data from the

Regional Home Health Intermediary database to measure variation in

types of patients served. Results indicated that the rise in home health

expenditures was primarily driven by an increase in the number of

home health visits received per patient.

Design and Implementation of

Medicare Home Health Quality

Assurance Demonstration

Project No.: 500-94-0054

Contractor: Center for

Health Policy Research

Period: 1994-99

$3,234,881b This demonstration is to develop outcome-oriented quality assurance

measures and promote continuous quality improvement in HHAs. It is

designed to serve two purposes: to increase HCFA’s capacity to

assess the quality of Medicare home health care services and to

improve HHAs’outcomes. The quality assurance approach would

complement existing home health certification and review programs

and could be used with current survey and certification approaches.

The study’s conceptual framework is based on home health outcome

measures developed under the HCFA-funded study entitled

“Development of Outcome-Based Quality Measures in Home Health

Services.”

Maximizing the Cost Effectiveness of

Home Health Care: The Influence of

Service Volume and Integration With

Other Care Settings on Patient

Outcomes

Project No.: 17-C-90435/8

Contractor: Center for

Health Policy Research

Period: 1994-99

$1,496,245b This study examines the relationship between the volume of home

health services provided by HHAs and patient outcomes. The study

will determine whether upper- and lower-volume thresholds exist that

can be used to define the range of services most beneficial to

patients. In addition, the study will test whether it is possible to

improve patient care and control costs by strengthening the role of the

physician and better integrating home health care with other services

during an episode of care. Interim findings have not been released.

Project Expenditures Description

Continued from Previous Page
Appendix II

HCFA Projects to Develop a Prospective

Payment System for Home Health Agencies

Page 36 GAO/HEHS-00-09 Home Health Agency PPS

a

Amount represents actual expenditures.

b

Amount represents amount allocated for an ongoing project.

c

Number represents amount allocated for project. HCFA could not provide actual expenditures for this

project.

Sources: Active Projects Report: Research and Demonstrations in Health Care Financing (1987-98);

Report to the Congress from the Secretary of Health and Human Services (Washington, D.C.: Jan. 4,

1999); and discussions with HCFA officials.

Case-Mix Adjustment for a National

Home Health Prospective Payment

System

Project No.: 500-96-0003/02

Contractor: Abt Associates, Inc.

Period: 1996-99

$2,966,524b This project will develop a case-mix classification system for the

national home health PPS. The resulting case-mix system will be

based on serial 60-day episodes. The Outcome and Assessment

Information Set (OASIS), which was developed for outcome-based

quality assurance and improvement for Medicare HHAs, will be

examined to determine whether the data elements can be used to

construct a case-mix classification system. Significant features of this

project include its measurement of resource use and emphasis on

easily understandable patient groupings.

Subtotal $12,108,755

Total $26,965,918

Project Expenditures Description

Continued from Previous Page
Page 37 GAO/HEHS-00-09 Home Health Agency PPS

Appendix III

Comments From the Health Care Financing

Administration ApendxiI
Appendix III

Comments From the Health Care Financing

Administration

Page 38 GAO/HEHS-00-09 Home Health Agency PPS
Appendix III

Comments From the Health Care Financing

Administration

Page 39 GAO/HEHS-00-09 Home Health Agency PPS
Appendix III

Comments From the Health Care Financing

Administration

Page 40 GAO/HEHS-00-09 Home Health Agency PPS
Appendix III

Comments From the Health Care Financing

Administration

Page 41 GAO/HEHS-00-09 Home Health Agency PPS
Appendix III

Comments From the Health Care Financing

Administration

Page 42 GAO/HEHS-00-09 Home Health Agency PPS
Appendix III

Comments From the Health Care Financing

Administration

Page 43 GAO/HEHS-00-09 Home Health Agency PPS
Appendix III

Comments From the Health Care Financing

Administration

Page 44 GAO/HEHS-00-09 Home Health Agency PPS
Appendix III

Comments From the Health Care Financing

Administration

Page 45 GAO/HEHS-00-09 Home Health Agency PPS
Appendix III

Comments From the Health Care Financing

Administration

Page 46 GAO/HEHS-00-09 Home Health Agency PPS
Appendix III

Comments From the Health Care Financing

Administration

Page 47 GAO/HEHS-00-09 Home Health Agency PPS
Appendix III

Comments From the Health Care Financing

Administration

(101792) Letr Page 48 GAO/HEHS-00-09 Home Health Agency PPS
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