a

GAO

United States Government Accountability Office

Report to the Committee on Finance, U.S. 

Senate, and the Committee on Ways and 

Means, House of Representatives

October 2004 MEDICARE HOSPICE 

CARE

Modifications to 

Payment Methodology 

May Be Warranted

GAO-05-42
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-42.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Laura A. 

Dummit at (202) 512-7119. 

Highlights of GAO-05-42, a report to the 

Committee on Finance, U.S. Senate, and 

the Committee on Ways and Means, 

House of Representatives 

October 2004

MEDICARE HOSPICE CARE 

Modifications to Payment Methodology 

May Be Warranted 

Using Medicare cost reports from freestanding hospices, GAO determined 

that the per diem payment rate for all hospice care was about 8 percent 

higher than the estimated average per diem cost of providing care in 2000, 

and over 10 percent higher in 2001. However, the relationship between 

payment rates and costs varied across the payment categories and types of 

hospices. For all hospice care provided in the home, which accounted for 

about 97 percent of care in 2001, GAO estimates that the per diem payment 

rate was almost 10 percent higher than average per diem costs in 2000, and 

over 12 percent higher in 2001. Small hospices, however, had higher 

estimated average per diem costs than medium or large hospices overall and 

for each of the four per diem payment categories in 2001. 

GAO’s analysis indicates that the hospice payment methodology, with rates 

based on the historical mix and cost of services, a per diem amount that 

varies only by payment category, and a cap on total Medicare payments, may 

not reflect current patterns of care. For example, GAO determined that the 

relative costs of services, such as nursing care, provided during routine 

home care (RHC) have changed considerably since the rates were 

calculated. Using limited patient-specific hospice visit data, GAO found that 

more visits were provided during the first, and especially last, week of a 

hospice stay than during other times in the stay. Finally, few hospices 

reached the payment cap, which was intended to limit Medicare hospice 

spending. 

Costs of Services Provided During RHC as a Percentage of Total RHC Costs, 1983 and 2001 

0

5

10

15

20

25

30

35

40

45

Nursing

Drugs

Social services

Home health aide

Durable medical 

equipment

Supplies

Outpatient services

Service

Percentage

1983

2001

Sources: GAO analysis of CMS data and 1983 hospice final rule (48 Fed. Reg. 56,008 (1983)).

35

43

3

15

7

13

28

11

2

8 10

3

6

1

The Medicare hospice benefit 

provides care to patients with a 

terminal illness. For each patient, 

hospices are paid a per diem rate 

corresponding to one of four 

payment categories, which are 

based on service intensity and 

location of care. Since 

implementation in 1983, the 

payment methodology and rates 

have not been evaluated. The 

Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of

1999 directed GAO to study the 

feasibility and advisability of 

updating Medicare’s payment rates 

for hospice care. In this report, 

GAO (1) compares freestanding 

hospices’ costs to Medicare 

payment rates and (2) evaluates the 

appropriateness of the per diem 

payment methodology. Because of 

Medicare data limitations, it was 

not possible to compare actual 

payments to costs or examine the 

services provided to each patient. 

What GAO Recommends

GAO recommends that the 

Administrator of the Centers for 

Medicare & Medicaid Services 

(CMS) collect comprehensive, 

patient-specific utilization and cost 

data on hospice visits and services, 

and using these data, determine 

whether modifications to the 

payment methodology are needed, 

including any adjustments needed 

for small providers. CMS stated 

that it agreed with GAO’s 

recommendations. 
Page i GAO-05-42 Medicare Payment for Hospice Care 

Letter 1

Results in Brief 5 

Background 6 

Overall Medicare Hospice Payment Rate Higher Than Freestanding 

Hospices’ Estimated Average Costs, but Relationship Varied by 

Payment Category and Hospice Characteristics 11 

Structure of Hospice Payment Methodology May Not Be Consistent 

with Current Service Delivery 15 

Conclusions 19 

Recommendations for Executive Action 20 

Agency and External Reviewer Comments and Our Evaluation 20 

Appendix I Scope and Methodology 24 

Appendix II Comments from the Centers for Medicare & Medicaid 

Services 28 

Tables 

Table 1: Utilization and Payment Rates for Each Hospice Payment 

Category 8 

Table 2: Estimated Average Per Diem Costs by Payment Category 

for Freestanding Hospices, by Size, 2001 14 

Figures 

Figure 1: Hospice Provider Types Participating in the 1980-1982 

Demonstration and in 2001 (Percentages) 10 

Figure 2: Unadjusted Per Diem Payment Rate and Estimated 

Average Per Diem Costs for Freestanding Hospices, 2000 

and 2001 12 

Figure 3: Costs of Services Provided during RHC as a Percentage of 

Total RHC Costs, 1983 and 2001 16 

Contents 
Page ii GAO-05-42 Medicare Payment for Hospice Care 

Abbreviations 

BBRA Medicare, Medicaid, and SCHIP Balanced Budget 

 Refinement Act of 1999 

CHC continuous home care 

CMS Centers for Medicare & Medicaid Services 

DME durable medical equipment 

GIC general inpatient care 

HAA Hospice Association of America 

HCFA Health Care Financing Administration 

IRC inpatient respite care 

NHPCO National Hospice and Palliative Care Organization 

RHC routine home care 

TEFRA Tax Equity and Fiscal Responsibility Act of 1982 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
Page 1 GAO-05-42 Medicare Payment for Hospice Care 

October 15, 2004 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable William M. Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

Since the Medicare hospice benefit was implemented in 1983,1

 neither the 

payment methodology nor the payment rates for hospices have been 

evaluated; however, there are indications that hospice services and 

patients have changed. The payment methodology and rates for the benefit 

were developed using cost data collected from 26 hospices providing care 

to Medicare patients with terminal cancer under a 1980 to 1982 Health 

Care Financing Administration (HCFA)2

 demonstration. Since then, 

advances in medical technology, such as new palliative drugs, 

chemotherapy, and radiation, have influenced the mix of hospice services 

provided. In addition, the mean length of a hospice stay has declined since 

1983, and the number of patients with noncancer diagnoses has grown 

considerably, representing approximately one-half of all patients receiving 

hospice care in 2000. 

In addition to changes in the delivery of hospice care, there has been 

substantial growth in the hospice program. From 1992 through 2002, 

Medicare payments for hospice care increased fivefold, to about 

 1

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, § 122, 96 

Stat. 324, 356. 

2

In July 2001, the name of the agency that administers Medicare, HCFA, was changed to the 

Centers for Medicare & Medicaid Services. In this report, we refer to the agency as HCFA 

when discussing actions it took under that name. 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-05-42 Medicare Payment for Hospice Care 

$4.5 billion, and the number of Medicare patients increased fourfold, to 

approximately 640,000. During the same period, the number of Medicareparticipating hospices grew by almost 90 percent to 2,275. 

The Medicare hospice benefit was designed to provide patients who have a 

terminal illness with comfort and pain relief, as well as emotional and 

spiritual support, generally in a home setting. By law, Medicare hospice 

services include nursing care, counseling, and home health aide services, 

as well as drugs and medical supplies.3

 Hospice services are delivered by 

providers that operate as freestanding entities or are based in hospitals, 

home health agencies, or skilled nursing facilities. Under the law, 

Medicare pays hospices a daily rate4

 that covers all services provided to 

the patient, except for physician services.5

 HCFA developed four payment 

categories, with corresponding per diem payment rates to reflect variation 

in service intensity and the location of service.6

 These categories, as set 

out in Medicare regulations, are routine home care (RHC), a typical day of 

home care; continuous home care (CHC),7

 home care that is provided 

during periods of patient crisis for at least 8 hours in a 24-hour period; 

inpatient respite care (IRC), care in an inpatient facility for a short period 

to provide respite for primary caregivers; and general inpatient care (GIC), 

inpatient care to treat symptoms that cannot be managed in other settings. 

In 1986, annual updates to the rates for the four payment categories were 

set in law.8

 A hospice is paid for each day that a patient is under its care, 

regardless of whether the patient receives a visit or other service on that 

day. Medicare pays the RHC payment category rate for days when a 

patient does not receive CHC, IRC, or GIC. In 2001, RHC days accounted 

for 96 percent of all days provided to hospice patients. By law, each 

hospice is subject to an aggregate payment cap,9

 which limits its total 

 3

42 U.S.C. § 1395x(dd)(1) (2000). 

4

42 U.S.C. § 1395f(i)(1)(B) (2000). 

5

Medicare pays physicians separately for services provided to hospice patients. 

6

42 C.F.R. § 418.302(b)(1) – (4) (2003). 

7

Although a per diem rate for CHC is determined, Medicare pays hospices an hourly rate for 

CHC calculated from the per diem rate. 

8

Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272, § 9123, 100 

Stat. 82, 168 (1986). 

9

42 U.S.C. § 1395f(i)(2) (2000). 
Page 3 GAO-05-42 Medicare Payment for Hospice Care 

annual Medicare payments to a specified amount based on the number of 

Medicare patients it served. 

The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 

1999 (BBRA) directed us to study the feasibility and advisability of 

updating Medicare’s payment rates for hospice care.10 Specifically, we 

(1) compared hospices’ costs to the Medicare payment rates and 

(2) evaluated the appropriateness of the per diem payment methodology. 

To compare hospices’ costs to Medicare payment rates, we used 2000 and 

2001 Medicare hospice cost reports, the most recent data available at the 

time of our analysis. We confined our analysis to cost reports of 

freestanding hospices.11 Hospital-based and home health agency-based 

hospices must allocate overhead costs between the hospice and the 

hospital or home health agency, which may distort the costs of providing 

hospice services.12 For freestanding hospices, the only costs incurred are 

for delivering hospice care to patients. We verified the reliability of the 

cost report data by comparing descriptive statistics calculated using the 

cost reports with those calculated using the Medicare hospice claims for 

all hospices from the same years, and we verified the reliability of the 

claims data by comparing descriptive statistics we calculated using the 

claims with statistics published by the Centers for Medicare & Medicaid 

Services (CMS). We excluded certain cost reports; for example, those with 

fewer than 11 total patients or an average of less than 1 patient per day. 

We determined the remaining data were suitable for our purposes. For 

freestanding hospices, we estimated average per diem costs by summing 

the total costs for all hospices and dividing by the total number of days of 

care for all hospices. We compared the estimated average per diem cost 

for freestanding hospices to an unadjusted payment rate based on national 

payment rates for each category.13 We also determined average per diem 

costs for each payment category using the same methodology and 

compared each to the unadjusted payment rate calculated for that 

 10Pub. L. No. 106-113, App. F, § 132, 113 Stat. 1501A-321, 1501A-333. 

11In 2001, over half of all Medicare hospice patients were served by freestanding hospices. 

12Estimated per diem costs for these hospices were generally much lower than those of 

freestanding hospices. 

13To calculate a single unadjusted hospice payment rate, we weighted the four rates by 

their respective utilization as reported on freestanding hospice cost reports in each year, 

accounting for the annual October 1 update in the payment rates. 
Page 4 GAO-05-42 Medicare Payment for Hospice Care 

category. Because RHC and CHC costs are reported in aggregate on the 

hospice cost report, we could only report hospices’ average combined 

RHC and CHC per diem costs.14 We refer to combined RHC and CHC 

hospice costs and payment rates as home care costs and payment rates. 

Because of data limitations in the Medicare hospice cost report and claims 

data, we could not compare actual payments to costs.15 We did not apply 

the wage adjustment, which generally adjusts payments up for urban areas 

and down for rural areas to account for geographic differences in wages, 

to the payment rates. We estimated per diem costs for all freestanding 

hospices; for freestanding hospices of different sizes, with size defined by 

the number of days of care a hospice provided during the year; and for 

rural and urban freestanding hospices.16

To evaluate the appropriateness of the per diem payment methodology, we 

compared the proportion of total costs attributable to different services 

provided during RHC days when the payment rate was first determined, in 

1983, to the proportion in 2001. We used the 2001 freestanding hospice 

cost reports to calculate proportions of cost for 2001. Our estimates of 

RHC costs in 2001 include CHC costs because RHC and CHC costs are 

reported in aggregate on the hospice cost report.17 Using 2002 proprietary 

data on patient visits collected by a large, for-profit hospice with multiple 

freestanding facilities, which we refer to as patient-specific visit data, we 

analyzed the types of visits provided to patients over the course of their 

hospice stays. We used these proprietary data because Medicare hospice 

cost reports and claims do not contain information on the visits hospices 

provide to Medicare patients each day. We confirmed that the distribution 

of visits in 2002 was consistent with the distribution in 1997 and 1999 for 

this hospice. We also calculated descriptive statistics for this hospice and 

 14To calculate an unadjusted payment rate that encompassed RHC and CHC, we weighted 

the individual rates of these two categories by their respective utilization as reported on 

freestanding hospice cost reports in each year. 

15Unlike for other providers, Medicare’s hospice cost reports do not include Medicare 

payment information. In addition, Medicare hospice claims contain only the total payment 

for all services provided during the billing period, including physician services, not the 

payment for each hospice payment category. 

16We define a hospice as urban if it was located in a county that was in a metropolitan 

statistical area and as rural if it was located in a county outside a metropolitan statistical 

area, as determined by the Office of Management and Budget as of June 30, 1999. 

17It is likely that CHC costs were a very small proportion of home care costs, as CHC days 

accounted for just over 1 percent of total hospice days in 2001. We refer to proportions of 

combined RHC and CHC costs as proportions of RHC costs. 
Page 5 GAO-05-42 Medicare Payment for Hospice Care 

compared them to statistics calculated using the Medicare hospice claims. 

We determined these data were suitable for our purposes. We interviewed 

officials at CMS, two national hospice associations, 18 hospices and 

several national independent and academic hospice researchers, and we 

conducted a site visit to a freestanding hospice with an inpatient unit. Our 

methodology is detailed in appendix I. We did our work from January 2003 

through October 2004 in accordance with generally accepted government 

auditing standards. 

We determined that for freestanding hospices, the unadjusted per diem 

payment rate across the four payment categories was about 8 percent 

higher than estimated average per diem costs in 2000, and over 

10 percent higher in 2001. We estimate that the home care (RHC and CHC) 

per diem payment rate was almost 10 percent higher than average home 

care per diem costs in 2000, and over 12 percent higher in 2001. The IRC 

payment rate was almost 53 percent lower than average IRC per diem 

costs in 2000, and 61 percent lower in 2001. In both years, the GIC 

payment rate was about 7 percent higher than average GIC per diem costs. 

We could not compare actual payments to costs because of limitations in 

the hospice cost report and claims data. In 2000, we estimate that average 

per diem costs for small freestanding hospices were over 13 percent 

higher than for medium freestanding hospices and almost 7 percent higher 

than for large freestanding hospices. In 2001, average per diem costs for 

small freestanding hospices were over 15 percent higher than for medium 

freestanding hospices and almost 8 percent higher than for large 

freestanding hospices. With the exception of average GIC per diem costs 

in 2000, small freestanding hospices had higher per diem costs for each 

payment category in both years. Small freestanding hospices are more 

likely than other hospices to be located in rural areas, and thus are more 

likely to receive lower Medicare payments because the wage index 

adjustment generally reduces the payments for providers in rural areas. 

Several aspects of the hospice per diem payment methodology may not 

reflect how hospices currently deliver services. For freestanding hospices, 

the share of total costs accounted for by various services provided during 

RHC days was considerably different in 2001 than when the rates were 

developed in 1983. This suggests that the services delivered or the 

resources necessary for those services have changed. The proportions of 

RHC costs attributable to nursing, social services, drugs, and medical 

equipment have increased, while the proportions attributable to home 

health aide services, supplies, and outpatient services have decreased. In 

addition, our analysis of proprietary 2002 patient-specific visit data 

Results in Brief 
Page 6 GAO-05-42 Medicare Payment for Hospice Care 

showed that visit frequency varied during the hospice stay, yet the 

payment rates remain the same throughout the stay for each payment 

category. Also, the mean length of stay has decreased. Additionally, 

hospice officials told us that some CHC and IRC payment policy 

requirements limited their ability to deliver services, although data were 

not available to determine whether these requirements influenced the 

delivery of care to hospice patients. Finally, the annual aggregate cap was 

intended to help limit Medicare hospice spending, but the cap amount was 

not based on actual hospice costs, and for each year from 1999 through 

2002, few hospices reached it. 

We recommend that the Administrator of CMS collect comprehensive, 

patient-specific data on the utilization and cost of hospice visits and 

services. Using these data, the Administrator should determine whether 

the hospice payment methodology and payment categories need 

modifications, including any special adjustments for small providers. The 

Administrator should implement modifications that would not require a 

change in Medicare law, and submit a legislative proposal to the Congress 

for those that do. In commenting on a draft of this report, CMS stated that 

it agreed with our recommendations and intends to use our findings to 

supplement and reinforce preliminary evaluations the agency has made 

and future studies that are planned. In responding to our recommendation 

that it collect comprehensive, patient-specific data on hospice visits and 

services and the costs of these services and reevaluate the payment 

methodology, CMS stated that it recognized the need for these types of 

analyses but that its research funding is limited. In its comments, CMS also 

stated that it believed additional information is needed before modifying 

the payment methodology because of the higher average costs of small 

hospices. We have clarified our conclusion to indicate the need for 

comprehensive, patient-specific data on the visits and services delivered 

by hospices and the costs of these services to inform any changes to the 

payment methodology. Industry representatives who reviewed a copy of 

this draft generally agreed with our findings and recommendations. 

Medicare hospice benefit services include nursing services, services 

provided by a physician to a hospice, drugs and medical supplies 

necessary for treating pain and other symptoms of a terminal illness, as 

well as dietary, spiritual, and bereavement counseling; medical social 

worker services; homemaker services; and short-term inpatient care both 

to provide respite for caregivers and to treat a patient’s symptoms. 

Volunteers are an important resource in delivering hospice care; Medicare 

requires each hospice to have volunteers provide services equal to at least 

Background 
Page 7 GAO-05-42 Medicare Payment for Hospice Care 

5 percent of the total paid patient care hours.18 The specific services that a 

patient should receive are outlined in a plan of care, vary based on the 

type and intensity of the patient’s symptoms and psychosocial needs and 

the needs of the patient’s caregiver, and may vary throughout the hospice 

stay as the patient’s condition changes. 

To be eligible for the Medicare hospice benefit, a patient must be certified 

by a physician as having a life expectancy of 6 months or less if his or her 

terminal illness runs its normal course. A Medicare patient who elects 

hospice care must waive Medicare coverage for all other services related 

to the terminal illness, although the patient retains coverage for services to 

treat other conditions. A patient may opt out of the hospice benefit and 

return to traditional Medicare at any time; a patient may also reelect 

hospice coverage at a later date. While there is no limit on the number of 

days an individual can receive hospice care, the prognosis of the patient’s 

terminal illness must be reaffirmed after the first 90 days, the first 180 

days, and then every 60 days thereafter. 

Under the law, Medicare pays hospices a daily rate that covers all services 

provided to the patient. HCFA developed four hospice per diem payment 

categories, which reflect the intensity of the services and the location of 

service delivery. In 1986, annual updates to the rates for the four payment 

categories were set in law. A typical day of care provided in a patient’s 

residence is paid as RHC, and in 2001, the vast majority of hospice care 

days, 96 percent, were billed as RHC (see table 1). Unless a hospice 

provides CHC, IRC, or GIC, it is paid the RHC rate for each day the patient 

is under its care. Hospice care delivered during periods of crisis can be 

paid as CHC if the care is provided in the home for at least 8 hours within 

a 24-hour period beginning at midnight and at least half the care hours are 

delivered by a nurse. To provide respite for primary caregivers, IRC can be 

provided for up to 5 consecutive days in an inpatient setting. Inpatient care 

for symptoms that cannot be treated in the patient’s residence is paid as 

GIC. Hospices provide the care in their own inpatient units or arrange with 

hospitals, skilled nursing facilities, or other inpatient facilities to provide 

these services. The payment rate is adjusted by a wage index, which varies 

based on the patient’s residence, to account for geographic differences in 

wage costs. 

 1842 C.F.R. § 418.70(e) (2003). 

Hospice Eligibility 

Medicare Hospice 

Payment 
Page 8 GAO-05-42 Medicare Payment for Hospice Care 

Table 1: Utilization and Payment Rates for Each Hospice Payment Category 

Payment category 

Percentage of total 

hospice days, 2001 Payment rate, 2004

RHC 96.0 $118.08/day

CHC 1.2 $28.72/hr, up to $689.18/day

IRC 0.2 $122.15/day

GIC 2.6 $525.28/day

Source: GAO analysis of CMS data and Medicare payment rates. 

The hospice payment categories and their corresponding payment rates 

were developed from cost data from the 26 hospices that participated in 

the 1980 to 1982 Medicare demonstration. To calculate the payment rates, 

HCFA used cost data to identify the cost factors that contributed to 

providing hospice services and summed the mean cost per day of each 

cost factor for each of the four categories of hospice care. The costs of 

bereavement and volunteer services were not included in the rates.19

By law, hospices are subject to an annual aggregate Medicare payment cap 

that was meant to ensure that payments for hospice care would not 

exceed what Medicare would have paid if patients had been treated in a 

traditional setting, such as a hospital.20 Total annual payments to a hospice 

may not exceed a per-patient amount multiplied by the number of 

Medicare patients who received care from that hospice during the year. 

The 2004 cap amount for the 12 months beginning November 1, 2003, is 

$19,635.67 per Medicare patient.21

 19By statute, hospices must provide bereavement counseling, although Medicare is 

prohibited from paying hospices for such services (42 U.S.C. §§ 1395x(dd)(1)(H), 

1395x(dd)(2)(A)(i), and 1395f(i)(1)(A) (2000)). The statute also specifies that hospices 

must use volunteers in the provision of care (42 U.S.C. § 1395x(dd)(2)(E)(i) (2000)). HCFA, 

however, did not include volunteer costs (such as volunteer training and program 

coordination costs) in setting the payment rates. 

2042 U.S.C. § 1395f(i)(2) (2000). 

21Each year, the cap amount is updated by the annual percentage change in the medical 

care component of the Consumer Price Index for all urban consumers. 
Page 9 GAO-05-42 Medicare Payment for Hospice Care 

Hospice patients, services, and providers have changed since the 

demonstration. For example, the mean patient length of stay at hospices 

participating in the Medicare demonstration from 1980 to 1982, was 70 

days; in 2001, the mean length of stay was about 50 days. While 

demonstration costs were based only on Medicare patients with cancer 

diagnoses, patients with noncancer diagnoses, who may require a different 

mix of services, represented approximately half of all hospice patients in 

2000. In addition, hospice providers have stated that advances in end-oflife care, notably new, more costly pain-management drugs and palliative 

chemotherapy and radiation, have increased the costs of providing care to 

certain types of patients. 

The mix of hospice providers today differs from the provider types in the 

demonstration. In the demonstration, the predominant type of hospice 

provider was hospital-based, whereas in 2001, the predominant type was 

freestanding (see fig. 1). More recently, the proportion of for-profit 

hospices increased from almost 13 percent of all hospices in 1992 to 

almost 28 percent in 2001, and the percentage of hospices serving patients 

primarily living in rural areas rose from 32 in 1992 to 38 in 2001. In 

addition, the number of hospices participating in Medicare grew from 

1,208 in 1992 to 2,275 in 2002, the most recent data available. 

Changes in Hospice Care 
Page 10 GAO-05-42 Medicare Payment for Hospice Care 

Figure 1: Hospice Provider Types Participating in the 1980-1982 Demonstration and 

in 2001 (Percentages) 

42

25

1

0

5

10

15

20

25

30

35

40

45

Freestanding

Type of hospice

Percentages

1980-1982

2001

Skilled nursing 

facility

Home health 

agency

Hospital

Sources: 66 Fed. Reg. 49,454 (2001) and Vincent Mor, David S. Greer, and Robert Kastenbaum, The Hospice Experiment

(Baltimore: The Johns Hopkins University Press, 1988), 33-34.

31

42

27

32

0
Page 11 GAO-05-42 Medicare Payment for Hospice Care 

We determined that for freestanding hospices, the unadjusted per diem 

payment rate across the four payment categories was about 8 percent 

higher than estimated average per diem costs in 2000, and over 10 percent 

higher in 2001. For the payment categories, we estimate that the home 

care (RHC and CHC) per diem payment rate was almost 10 percent higher 

than average home care per diem costs in 2000, and over 12 percent higher 

in 2001. We estimate that the IRC payment rate was almost 53 percent 

lower than average IRC per diem costs in 2000, and 61 percent lower in 

2001. In both years, the GIC payment rate was about 7 percent higher than 

average GIC per diem costs. In 2000, we estimate that average per diem 

costs for small hospices were over 13 percent higher than for medium 

hospices and almost 7 percent higher than for large hospices. In 2001, 

average per diem costs for small hospices were over 

15 percent higher than for medium hospices and almost 8 percent higher 

than for large hospices. With the exception of average GIC per diem costs 

in 2000, small hospices also had higher average per diem costs than 

medium or large hospices for each payment category. 

Medicare’s hospice payment rate, across the four payment categories and 

unadjusted for geographic differences in wages, was higher than 

freestanding hospices’ estimated average per diem cost. The unadjusted 

payment rate was about 8 percent higher than average per diem costs in 

2000, and over 10 percent higher in 2001 (see fig. 2). The 25 percent of 

hospices with the lowest average per diem costs had costs that were at 

least 27 percent below the unadjusted payment rate in 2000, and at least 

31 percent below the unadjusted payment rate in 2001. However, in 2000, 

average per diem costs for almost 34 percent of freestanding hospices and, 

in 2001, almost 32 percent of freestanding hospices, were higher than the 

unadjusted per diem rate. The costs of individual hospices differ 

depending on the mix of services provided. In addition, the payments to 

individual hospices differ because of the wage adjustment and the mix of 

payment categories billed. 

Overall Medicare 

Hospice Payment 

Rate Higher Than 

Freestanding 

Hospices’ Estimated 

Average Costs, but 

Relationship Varied 

by Payment Category 

and Hospice 

Characteristics 

Unadjusted Payment Rate 

Higher Than Freestanding 

Hospices’ Estimated 

Average Costs 
Page 12 GAO-05-42 Medicare Payment for Hospice Care 

Figure 2: Unadjusted Per Diem Payment Rate and Estimated Average Per Diem 

Costs for Freestanding Hospices, 2000 and 2001 

Note: The unadjusted payment rate equals the rates of the four payment categories weighted by their 

respective utilization as reported in freestanding hospice cost reports in each year, accounting for the 

annual October 1 update in the payment rates. 

We could not determine the relationship between payments and actual 

costs for individual hospices because of data limitations in the hospice 

cost reports and claims data. Unlike those for other providers, Medicare’s 

hospice cost reports do not include Medicare payment information. In 

addition, Medicare hospice claims data contain only the total payment for 

all services provided during the billing period, including physician 

services, not the payment for each hospice payment category. 

116

110

105 102

0

20

40

60

80

100

120

2000 2001

Year

Dollars

Unadjusted per diem payment rate

Estimated average per diem cost

Sources: GAO analysis of CMS data and Medicare hospice payment rates.
Page 13 GAO-05-42 Medicare Payment for Hospice Care 

The specific relationship between payment rates and costs for 

freestanding hospices varied among payment categories. For home care 

(RHC and CHC) days, we estimate that in 2000, the unadjusted per diem 

payment rate for freestanding hospices was almost 10 percent higher than 

the average per diem cost of over $92. In 2001, the per diem payment rate 

was over 12 percent higher than the average home care per diem cost of 

over $96. Nonetheless, about 35 percent of freestanding hospices in 2000, 

and over 32 percent in 2001, had average home care per diem costs that 

were higher than the home care per diem payment rate. 

We estimate that in 2000, the unadjusted IRC per diem payment rate for 

freestanding hospices was almost 53 percent lower than the average IRC 

per diem cost of about $218. In 2001, the IRC per diem payment rate was 

over 61 percent lower than the average IRC per diem cost of over $279. 

However, the GIC per diem payment rate was higher than average GIC per 

diem costs for freestanding hospices; it was over 7 percent higher than 

costs in both years. In addition, average per diem costs for IRC and GIC 

varied widely among freestanding hospices. Our estimates of average IRC 

and GIC per diem costs may understate actual costs because of data 

limitations. 

IRC costs may be much higher than the IRC payment rate because the 

hospice continues to provide services and visits to the patient in addition 

to paying the inpatient facility.22 Our analysis of the proprietary 2002 

patient-specific visit data found that the number and type of visits 

provided per day to patients during IRC days were comparable to the 

number and type of visits per day to patients during RHC days. In 2001, 

IRC accounted for 0.2 percent of hospice days of care. 

 22During GIC, hospices also provide services and visits to the patient in addition to paying 

the inpatient facility. 

Relationship between 

Estimated Costs and 

Unadjusted Payment Rates 

Varied among Payment 

Categories 
Page 14 GAO-05-42 Medicare Payment for Hospice Care 

We estimate that for 2000 and 2001, small freestanding hospices had higher 

average per diem costs than medium and large freestanding hospices.23 In 

2000, average per diem costs for small hospices were more than 13 percent 

higher than for medium hospices and almost 7 percent higher than for 

large hospices. In 2001, average per diem costs for small hospices were 

more than 15 percent higher than for medium hospices and almost 

8 percent higher than for large hospices (see table 2). With the exception 

of average GIC per diem costs in 2000, small hospices’ average per diem 

costs were higher than medium and large hospices’ costs for each 

individual payment category for both years. Cost disparities across 

providers of different sizes were greatest for IRC and GIC. 

Table 2: Estimated Average Per Diem Costs by Payment Category for Freestanding 

Hospices, by Size, 2001 

Hospice size Average costs

Home care 

average costsa

IRC average 

costs

GIC average 

costs

Small $116 $112 $692 $564

Medium 101 94 254 460

Large 108 96 264 420

Source: GAO analysis of CMS data. 

Notes: The size of the hospice is based on the number of days of care it provided during the year. 

Small hospices were those that reported total days of care less than the 25th percentile of all 

hospices’ total days of care. Medium hospices were those that reported total days of care equal to or 

greater than the 25th percentile and less than or equal to the 75th percentile of all hospices’ total 

days of care. Large hospices were those that reported total days of care greater than the 75th 

percentile of all hospices’ total days of care. 

a

Home care costs include RHC and CHC costs. 

As small freestanding hospices are more likely than other hospices to be 

located in rural areas, they are more likely to receive lower Medicare 

payments because the wage index adjustment generally reduces the 

payment rates for providers in rural areas. In 2001, 60 percent of small 

freestanding hospices were located in rural areas, while 35 percent of 

 23The size of the hospice in each year is based on the number of days of care it provided 

that year. Small hospices were those that reported total days of care less than the 25th 

percentile of all hospices’ total days of care. Medium hospices were those that reported 

total days of care equal to or greater than the 25th percentile and less than or equal to the 

75th percentile of all hospices’ total days of care. Large hospices were those that reported 

total days of care greater than the 75th percentile of all hospices’ total days of care. 

Small Hospices Had Higher 

Per Diem Costs and Likely 

Lower Payments 
Page 15 GAO-05-42 Medicare Payment for Hospice Care 

medium freestanding hospices and 10 percent of large freestanding 

hospices were located in rural areas.24

The structure of the hospice payment system may not reflect how 

hospices currently deliver services. For example, our analysis of the 

relative costs for freestanding hospices for different services provided 

during RHC days, the most common payment category, showed they have 

changed considerably since the payment rate was initially calculated, 

suggesting that the services delivered or the resources necessary for those 

services have changed over the years. In addition, our analysis of 

proprietary 2002 patient-specific visit data showed that visit frequency 

varied during the hospice stay, although the rate for each payment 

category does not. Also, the mean length of stay has decreased. Hospice 

officials raised concerns about some of the payment policy requirements 

for CHC and IRC, although our analysis of the limited available data could 

not confirm that the requirements restrict hospices’ ability to provide care. 

Finally, the annual aggregate cap was intended to help limit Medicare 

spending for all hospices, but it was not based on actual hospice costs, and 

for each year from 1999 through 2002, few hospices reached it. 

The relative costs of services in 2001 have changed considerably since the 

payment rate was developed in 1983, suggesting that the services delivered 

or the resources necessary for those services have changed over time. 

Specifically, the proportions of RHC costs attributable to nursing, drugs, 

social services, and durable medical equipment (DME)25 have increased, 

while the proportions attributable to home health aide services, supplies, 

and outpatient services have decreased (see fig. 3).26 In our analysis, this 

pattern is present across freestanding hospices of all sizes and locations. 

The largest cost increase occurred for drugs, which rose from 3 to 

15 percent of RHC costs over this period. Hospice officials we spoke with 

 24While urban freestanding hospices also had higher estimated average per diem costs 

compared to rural freestanding hospices in our analysis, urban hospices generally receive 

higher payments than rural hospices to account for the higher wages they must pay. 

25DME is equipment prescribed by a physician for the medical purpose of addressing a 

patient’s illness or injury that can withstand repeated use, such as respirators, crutches, 

and oxygen equipment. 

26RHC costs for 2001 are slightly overestimated, as they include CHC costs. CHC days 

accounted for just over 1 percent of total hospice days in 2001. 

Structure of Hospice 

Payment Methodology 

May Not Be 

Consistent with 

Current Service 

Delivery 

Relative Costs of Services 

Provided during RHC 

Differ from When Payment 

Rate Was Developed 
Page 16 GAO-05-42 Medicare Payment for Hospice Care 

stated that this increase was due in part to the introduction of new, more 

costly medications. Some stated that drugs have become one of their 

greatest cost pressures. 

Figure 3: Costs of Services Provided during RHC as a Percentage of Total RHC Costs, 1983 and 2001 

Notes: Percentages from 1983 are based on cost data collected in the 1980 to 1982 hospice 

demonstration. RHC costs for 2001 are slightly overestimated, as they include CHC costs. CHC days 

accounted for just over 1 percent of total hospice days in 2001. 

Hospice visits are particularly concentrated at the beginning and end of a 

hospice stay, yet the payment rate of each category does not vary 

throughout a hospice stay. Our analysis of the 2002 patient-specific visit 

data showed that patients have a higher mean number of visits per day 

Fewer Days of Lower Visit 

Frequency with Shorter 

Mean Length of Stay 

0

5

10

15

20

25

30

35

40

45

Nursing

Drugs

Social services

Home health aide

DME

Supplies

Outpatient services

Service

Percentage

1983

2001

Sources: GAO analysis of CMS data and 1983 hospice final rule (48 Fed. Reg. 56,008 (1983)).

35

43

3

15

7

13

28

11

2

8

10

3

6

1
Page 17 GAO-05-42 Medicare Payment for Hospice Care 

during the first, and especially the last, week of a stay.27 As a result, the 

costs of care are higher both at the beginning and end of a hospice stay. 

Officials from almost all hospices with whom we spoke also reported this 

pattern. They told us that at the beginning of a hospice stay they provide 

more visits because the patient’s symptoms, including pain, must be 

stabilized and the family must be educated about the patient’s care. Near 

the end of life, hospice officials indicated that the patient’s symptoms and 

needs change, usually requiring more hospice management, and the family 

often needs additional psychosocial support. Our analysis of the 2002 

patient-specific visit data showed that patients with a length of stay of 2 

weeks or less had a higher mean number of visits per day than patients 

with a length of stay greater than 2 weeks.28 Hospice officials we spoke 

with stated that patients who are in hospice care a short time are relatively 

more costly on a per diem basis because there are fewer days of lower 

visit frequency to balance the higher costs of the days with more visits at 

the beginning and end of the stay. 

In 1983, the Medicare hospice per diem payment amounts accounted for 

the variation in daily hospice costs because they were based on the mean 

daily costs incurred by the hospices in the demonstration over a mean 

hospice stay of 70 days. However, hospice stays are considerably shorter 

now; the mean length of stay was 50 days in 2001. Mean daily costs may 

now be very different because of the change in the length of stay. No data 

are available, however, to compare costs at different points during a stay 

or for stays of different lengths. 

Hospice officials we spoke with raised concerns about some of the policy 

requirements for particular payment categories, although our analysis of 

the available data could not confirm their concerns. For example, to bill 

for CHC, Medicare requires that a nurse provide at least half of billed CHC 

 27We also analyzed patient visit frequency by certain patient characteristics. Using 2002 

patient-specific visit data, we found no substantial differences in the mean number of visits 

per day among patients of different ages, diagnoses, numbers of secondary conditions, or 

residential locations. (The patient-specific visit data categorized patients as residing in 

their home, a nursing home, an assisted living facility, or a hospital. In this analysis, 

patients residing in a hospital had a slightly lower mean number of visits per day than 

patients residing in other locations.) 

28We also found that patients with a length of stay of 2 weeks or less had a higher 

proportion of CHC days, representing the delivery of more intensive, and therefore more 

costly, services, compared to patients with longer stays. 

Providers Raised Concerns 

about Payment Category 

Requirements 
Page 18 GAO-05-42 Medicare Payment for Hospice Care 

hours. Hospice officials stated that this could restrict the hospice’s ability 

to provide the most appropriate care when a social worker was a more 

appropriate caregiver than a nurse. 

The officials were also concerned that the 8-hour minimum required for 

billing CHC payment, counted from midnight of one day until midnight of 

the next, could restrict their ability to bill for CHC. For example, if a 

patient dies in less than 8 hours or the hospice provides 8 hours of 

services over 2 calendar days, the hospice must bill for RHC. Our analysis 

of 2001 Medicare hospice claims indicated that the mean number of hours 

provided on a CHC day was 18 hours, considerably above the 8-hour 

minimum. Similarly, our analysis of the 2002 patient-specific visit data 

from one large, freestanding hospice showed a mean of 20 hours provided 

on each CHC day. Therefore, instances of continuous care hours that fall 

just short of 8 hours, for which a hospice cannot bill CHC hours, do not 

occur often based on the patient-specific visit and claims data. 

Hospice officials we spoke with also stated that the statutory requirement 

that respite care be provided in an inpatient setting might hinder its use.29

Specifically, they stated that while primary caregiver respite is important, 

enabling patients to remain at home rather than moving them to an 

inpatient facility is also important; primary caregivers may not take respite 

in order to avoid moving the patient to an inpatient facility. Few hospices 

we spoke with currently provide home respite care for extended periods. 

They said this is largely because the costs are higher than the RHC 

payment rate, which is the payment category the hospices must bill for 

these services. Data related to home respite care are not available, 

although it is likely that the costs of providing 24 hours of home respite 

care would be higher than RHC costs. 

According to our analysis of data from the regional home health 

intermediaries, the contractors responsible for processing and paying 

Medicare hospice claims, less than 2 percent of all hospice providers 

reached the annual aggregate payment cap each year from 1999 through 

2002.30 In 1982, the Congress required HCFA to calculate a cap that limited 

 2942 U.S.C. 1395x(dd)(1)(G) (2000). 

30One regional home health intermediary had jurisdiction over at least 71 percent of the 

hospices that reached the cap each year from 1999 through 2002. This intermediary had no 

additional information on why these hospices reached the cap. 

Few Hospices Affected by 

Annual Aggregate Cap 
Page 19 GAO-05-42 Medicare Payment for Hospice Care 

a hospice’s total payments to a specific per-patient amount based on the 

Medicare costs incurred for patients with cancer during the last 6 months 

of life.31 However, a subsequent law enacted before the hospice benefit 

was implemented set a per-patient cap amount that was not based on the 

cost data;32 for the 12 months beginning November 1, 2003, the cap was 

$19,635.67 per Medicare patient. The cap is intended to ensure that 

payments for hospice care do not exceed what Medicare would have spent 

if patients had been treated in a traditional setting, such as a hospital. 

However, it affects few hospices, and therefore may not represent a 

meaningful limit. Hospice officials we spoke with who discussed the cap 

said it did not affect them. 

CMS has not evaluated the hospice per diem payment rates and 

methodology since they were developed to determine the relationship 

between payments and costs and whether the per diem methodology is 

consistent with current patterns of care. There are several indications that 

hospice payments may not be appropriately distributed across days of care 

or types of providers. The type of care provided during a hospice stay 

appears to be different than when the hospice per diem payment rates and 

methodology were developed. Comprehensive data are not available, 

however, to evaluate the number of visits or costs of services provided 

during a Medicare hospice stay. While our analysis of the limited data 

available indicates that the overall Medicare payment rate across all 

payment categories was above estimated costs, IRC costs were 

considerably above the payment rate. Further, small freestanding hospices 

had substantially higher average per diem costs than other hospices. As a 

result, a comprehensive analysis of patient-specific data may show that 

modifications to the hospice payment methodology are warranted. 

Because the payment rates for the four hospice payment categories, the 

per diem methodology, and the cap are set by law, CMS’s ability to make 

modifications to the payment approach is limited. 

 31TEFRA, § 122(i)(1), 96 Stat. 358-359. 

3242 U.S.C. § 1395f(i)(2) (2000). 

Conclusions 
Page 20 GAO-05-42 Medicare Payment for Hospice Care 

We recommend the following three actions. First, we recommend that the 

Administrator of CMS collect comprehensive, patient-specific data on the 

visits and services being delivered by hospices and the costs of these 

services. Second, using these data, the Administrator should determine 

whether the hospice payment methodology and payment categories need 

to be modified, including any special adjustments for small providers. 

Third, the Administrator should implement those modifications that would 

not require a change in Medicare law and submit a legislative proposal to 

the Congress for those that do. 

We received written comments on a draft of this report from CMS (see 

app. II). We also received oral comments from two groups representing 

industry organizations, the Hospice Association of American (HAA) and 

the National Hospice and Palliative Care Organization (NHPCO), as well as 

from the large, for-profit hospice that provided the patient-specific visit 

data. 

In commenting on a draft of this report, CMS stated that it agreed with our 

recommendations and intends to use our findings to supplement and 

reinforce preliminary evaluations the agency has made and future studies 

that are planned. In responding to our recommendation that it collect 

comprehensive, patient-specific data on hospice visits and services and the 

costs of these services, CMS stated that it recognized the need for this type 

of analysis. It stated that collection of these data would require additional 

research funding, and it is uncertain when such funding would be 

available. CMS noted that it has initiated efforts to collect data on costs 

with the recent establishment of the hospice cost reports. CMS stated that 

it hoped the recommendations in our report could help the agency in 

developing a comprehensive research strategy for the hospice benefit. 

In responding to our recommendation that CMS determine whether the 

hospice payment methodology and payment categories need to be 

modified, including any adjustments for small providers, CMS agreed that 

the methodology implemented in 1983 was based on a delivery model that 

may have changed since that time. It concurred that the methodology 

should be reevaluated to determine its current appropriateness. It again 

stated that research funding is limited. CMS agreed that the costs of drugs 

and other therapies, the number of hospice beneficiaries with noncancer 

diagnoses, and the mean length of stay have all changed since 1983. CMS 

stated that we did not demonstrate in the draft report that the provision of 

these and other therapies have increased the cost of providing care 

beyond the present payment. In the draft report, we stated that there may 

Recommendations for 

Executive Action 

Agency and External 

Reviewer Comments 

and Our Evaluation 

CMS Comments and Our 

Evaluation 
Page 21 GAO-05-42 Medicare Payment for Hospice Care 

be problems with the distribution of hospice payments, but that 

comprehensive data are not available to evaluate the number of visits or 

costs of services provided during a Medicare hospice stay. As noted in the 

draft report, the overall payment rate across all types of care is higher than 

our estimate of hospices’ overall costs. In its comments, CMS also raised 

concerns that we implied that payment methodology changes be made for 

small hospices before CMS collects comprehensive data. We have clarified 

our conclusion to indicate the need for comprehensive, patient-specific 

data on the visits and services delivered by hospices and the costs of these 

services to inform any changes to the payment methodology. 

In response to our recommendation that CMS should submit a legislative 

proposal to the Congress to implement those modifications that would 

require a change in Medicare law, CMS stated that should it determine 

changes are necessary, it would evaluate those changes as part of its 

overall legislative strategy. 

CMS also made technical comments, which we incorporated where 

appropriate. 

The external reviewers generally agreed with our findings and 

recommendations. Comments on specific portions of the draft report 

centered on two areas: our scope and methodology and the hospice 

payment methodology. 

Regarding our scope and methodology, HAA and NHPCO were concerned 

that we based our findings on Medicare freestanding hospice cost reports 

that had not been audited. The large, for-profit hospice noted that the cost 

report is complex and that hospices’ accounting systems are not generally 

compatible with its structure. Similarly, HAA and NHPCO stated that 

hospices may not have had sufficient experience with completing the cost 

reports at the time of our review. NHPCO stated that our exclusion of 

hospice cost reports with fewer than 11 total patients or an average of less 

than 1 patient per day might have excluded a substantial number of cost 

reports. In addition, HAA and NHPCO recommended that we include 

bereavement counseling costs in our per diem cost calculation. They 

stated that although Medicare is precluded from paying hospices for 

bereavement counseling, it is a required service, and excluding it from the 

per diem cost calculation may misrepresent the amount by which payment 

rates exceeded hospice costs. 

Industry Comments and 

Our Evaluation 
Page 22 GAO-05-42 Medicare Payment for Hospice Care 

Regarding reviewers’ concerns about our use of unaudited cost reports, 

BBRA directed us to examine hospice cost factors. Information on these 

factors is available only from cost reports, which CMS has not audited. As 

stated in the draft report, we assessed the reliability of the cost reports by 

comparing descriptive statistics calculated using the cost reports with 

those calculated using the Medicare hospice claims, and found the data 

suitable for our purposes. Regarding reviewers’ concerns about data we 

excluded from our analysis, we excluded 51 of 992, or 5 percent, of 

freestanding hospice cost reports in 2000, and 48 of 975, or 5 percent, of 

freestanding hospice cost reports in 2001, because they had fewer than 

11 total patients or an average of less than 1 patient per day. We excluded 

these cost reports because we believe that these hospices either had too 

few patients to be representative of all hospices, or may have been 

reporting data incorrectly. We do not believe that these represent 

substantial numbers of cost reports and consider our exclusion criteria 

appropriate. Concerning the comments that we should include 

bereavement costs in our per diem cost calculation, as stated in the draft 

report, we included only Medicare-reimbursable costs in our calculations. 

If Medicare cannot, by law, pay hospices for bereavement services, it is 

inappropriate to include them in a per diem cost that is compared to a 

payment rate that is not designed to cover these costs. In 2001, in 

comparison to total Medicare-reimburseable costs, bereavement costs 

were small; they were equal to less than 2 percent of total Medicarereimburseable costs. 

Reviewers also commented on the hospice payment methodology. NHPCO 

stated that costs on the cost report may not reflect the provision of all 

services that could potentially be provided because hospices may manage 

their costs to more closely approximate the per diem rate. Although the 

provision of additional services may be warranted, hospices cannot pay 

for them and therefore do not provide them. HAA and NHPCO stated that 

instances of CHC provision that fall close to 8 hours may not seem to 

occur often because hospices avoid providing CHC if they know they will 

not be able to provide at least 8 hours. However, HAA and NHPCO also 

stated that data to determine whether this is the case are not available. 

Regarding industry comments on hospice costs and the hospice payment 

methodology, we acknowledge that hospices may manage their costs to 

closely approximate the per diem rate, and that hospices may not provide 

CHC if they know they will not be paid for that level of care. Data are not 

available to evaluate whether either of these situations occur. 
Page 23 GAO-05-42 Medicare Payment for Hospice Care 

Reviewers also made technical comments, which we incorporated where 

appropriate. 

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

appropriate congressional committees. The report is available at no charge 

on GAO’s Web site at http://www.gao.gov. We will also make copies 

available to others on request. 

If you or your staffs have any questions, please call me at (202) 512-7119 or 

Nancy A. Edwards at (202) 512-3340. Other major contributors to this 

report include Beth Cameron Feldpush, Joanna L. Hiatt, and Gordon W. 

Richmond. 

Laura A. Dummit 

Director, Health Care—Medicare Payment Issues 
Appendix I: Scope and Methodology 

Page 24 GAO-05-42 Medicare Payment for Hospice Care 

To examine hospice costs and Medicare payments, we used 2000 and 2001 

Medicare hospice cost reports, the financial documents that hospices 

submit annually to the Centers for Medicare & Medicaid Services (CMS), 

and 2000 and 2001 Medicare hospice claims data, bills submitted by 

hospices to receive Medicare payment. We also used proprietary 2002 

patient-specific visit data from a large for-profit hospice, which has been 

collecting these data for its internal use since 1994. We interviewed 

officials from CMS and one regional home health intermediary, a 

contractor responsible for processing and paying Medicare hospice claims, 

in addition to officials from AARP, the Hospice Association of America, 

the National Hospice and Palliative Care Organization, and the Visiting 

Nurse Associations of America. We also spoke with representatives from 

18 hospices, several national independent and academic hospice 

researchers, and two physicians who provide hospice care. Finally, we 

conducted a site visit to a freestanding hospice with an inpatient unit. 

To assess the reliability of the cost report data, we compared descriptive 

statistics calculated using the cost reports with those calculated using the 

Medicare hospice claims data. Because hospices began submitting cost 

reports in 1999, we also compared our calculations from the 2000 cost 

reports to those from the 2001 cost reports to ensure that hospices had 

provided consistent data. To assess the reliability of the claims data, we 

compared descriptive statistics calculated using the claims with statistics 

published by CMS. To assess the consistency of the 2002 patient-specific 

visit data, we verified that the distribution of visits in the 2002 data was 

similar to the distribution of visits in 1997 and 1999. In addition, before 

releasing these data to us, the hospice performed quality assurance edits, 

which consisted of confirming that the data provided to us were identical 

to the data in its database for more than 20 randomly selected patients. 

Finally, we calculated descriptive statistics and compared them with 

statistics for all hospices calculated using the Medicare hospice claims. We 

determined that the cost report, claims, and patient-specific data were all 

suitable for our purposes. 

The 2000 and 2001 hospice cost reports were the most recent data 

available at the time of our analysis. The Medicare payment methodology 

is the same for freestanding and facility-based hospices; however, we 

confined our analysis to cost reports of freestanding hospices. We 

excluded hospital- based and home health agency-based hospices because 

we found that their per diem costs were generally much lower than those 

of freestanding hospices, which may result from decisions made by these 

providers in allocating overhead costs between the hospital or home 

health agency and the hospice. For freestanding hospices, the only costs 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 25 GAO-05-42 Medicare Payment for Hospice Care 

incurred are for delivering hospice care to patients. We excluded 

freestanding cost reports that reported no or low Medicare utilization, 

those that had cost reporting periods of fewer than 10 or greater than 

14 months, and those outside the 50 states or District of Columbia. We also 

excluded cost reports that had fewer than 11 total patients or an average 

of less than 1 patient per day, those with no costs, and those reporting 

costs outside three standard deviations of the mean. Our final sample 

included 82 percent of all freestanding hospice cost reports in 2000 and 

80 percent in 2001. 

We calculated freestanding hospices’ total Medicare-reimburseable costs 

by subtracting nonreimburseable costs, such as bereavement and fundraising, from total costs. To obtain average per diem costs, we summed 

total Medicare-reimburseable costs across all providers and divided by 

total hospice days across all providers. In addition, because of the cost 

report design, certain inpatient respite care (IRC), general inpatient care 

(GIC), and physician costs may be included in our estimate of combined 

routine home care (RHC) and continuous home care (CHC), or home care, 

costs. As a result, home care costs may be overestimated, which would 

result in our understating the amount by which the unadjusted home care 

payment rate exceeds average home care per diem costs. Because of the 

way cost centers are defined on the cost reports, the costs of IRC and GIC 

may be underestimated. 

We based the size of a hospice in each year on the number of days of care 

it provided that year. Small hospices were those that reported total days of 

care less than the 25th percentile of all hospices’ total days of care. 

Medium hospices were those that reported total days of care equal to or 

greater than the 25th percentile and less than or equal to the 75th 

percentile of all hospices’ total days of care. Large hospices were those 

that reported total days of care greater than the 75th percentile of all 

hospices’ total days of care. We defined a hospice as urban if it was 

located in a county that was in a metropolitan statistical area and as rural 

if it was located in a county that was not in a metropolitan statistical area, 

as determined by the Office of Management and Budget as of June 30, 

1999. 

We could not compare the 2000 and 2001 per diem costs we calculated to 

actual payments because hospice cost reports do not report Medicare 

payment information. In addition, Medicare hospice claims contain only 

the total payment for all services provided during the billing period, 

including physician services, not the payment for each payment category. 

Therefore, we calculated a 2000 and 2001 unadjusted payment rate that 
Appendix I: Scope and Methodology 

Page 26 GAO-05-42 Medicare Payment for Hospice Care 

encompassed all payment categories. We did so by weighting the 

individual rates of the four payment categories by their respective 

utilization in the freestanding hospice cost reports in our final sample in 

each year. The costs for home care, combined RHC and CHC, are reported 

in aggregate on the hospice cost report. Therefore, we calculated a 2000 

and 2001 unadjusted payment rate that encompassed RHC and CHC. We 

did so by weighting the individual rates of these two categories by their 

respective utilization in the freestanding hospice cost reports in our final 

sample in each year. In addition, we weighted the overall unadjusted 

payment rate and the unadjusted payment rate for each payment category 

to account for the different payment rates in effect during the year. The 

majority of freestanding hospices report costs using a calendar year 

reporting period, while payment rates are updated on a fiscal year basis, 

that is, on October 1 of each year. Therefore, during a calendar year, one 

payment rate is in effect from January 1 through September 30 and 

another from October 1 through December 31. Our unadjusted payment 

rates do not account for the wage adjustment Medicare applies to 

payments. 

To determine the proportion of total cost in 2001 accounted for by each 

service, such as nursing or home health aide services, that was included in 

the 1983 RHC rate, we grouped the services on the cost report into 

categories similar to the 1983 services, and divided by the total cost. Our 

estimates of the proportions of 2001 RHC costs include CHC costs because 

the costs of RHC and CHC are reported in aggregate on the hospice cost 

report. It is likely that CHC costs were a very small proportion of 

combined RHC and CHC costs, as CHC days accounted for just over 1 

percent of total hospice days in 2001. 

To determine the percentage of total hospice days accounted for by each 

payment category and the mean CHC hours per CHC day for all hospices, 

we used 2000 and 2001 Medicare hospice claims data, the years that 

matched most closely with the cost reports used for our analysis. We 

excluded from our analysis patients who were younger than 20 or older 

than 110 years of age, who lived outside of the 50 states or the District of 

Columbia, and who had total hospice payments that fell below 1 day of 

care at the lowest wage-adjusted RHC payment rate and above 1 year of 

care at the highest wage-adjusted RHC payment rate. Our final sample 

included over 98 percent of all claims in both 2000 and 2001. 

To analyze the frequency and types of visits to hospice patients, we used 

proprietary 2002 data on Medicare hospice patients collected by a large, 

for-profit hospice with multiple freestanding facilities. We determined the 
Appendix I: Scope and Methodology 

Page 27 GAO-05-42 Medicare Payment for Hospice Care 

number of visits per day and the number of nurse, home health aide, 

counselor, and other caregiver visits per day for all days and for days 

within each of the four payment categories. We also analyzed whether 

there were differences in the number of visits per day provided by patient 

length of stay, patient residence, diagnosis, number of secondary 

conditions, and age and determined the number of visits in the first and 

last week of a stay and for the remaining days of a stay. 

We conducted our work from January 2003 through October 2004 in 

accordance with generally accepted government auditing standards. 
Appendix II: Comments from the Centers for 

Medicare & Medicaid Services 

Page 28 GAO-05-42 Medicare Payment for Hospice Care 

Appendix II: Comments from the Centers for 

Medicare & Medicaid Services 
Appendix II: Comments from the Centers for 

Medicare & Medicaid Services 

Page 29 GAO-05-42 Medicare Payment for Hospice Care 
Appendix II: Comments from the Centers for 

Medicare & Medicaid Services 

Page 30 GAO-05-42 Medicare Payment for Hospice Care (290208) 
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