United States General Accounting Office

GAO Testimony

Before the Committee on Finance, U.S. Senate

For Release on Delivery

Expected at 10:00 a.m.

Wednesday, April 9, 1997

MEDICARE POST-ACUTE

CARE

Cost Growth and Proposals

to Manage It Through

Prospective Payment and

Other Controls

Statement of William J. Scanlon, Director

Health Financing and Systems Issues

Health, Education, and Human Services Division

GAO/T-HEHS-97-106

Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

Mr. Chairman and Members of the Committee:

We are pleased to be here today to discuss Medicare’s skilled nursing

facility (SNF), home health care, and inpatient rehabilitation benefits and

the administration’s forthcoming legislative proposals related to them.

After relatively modest growth during the 1980s, Medicare’s expenditures

for SNFs and home health care have grown rapidly in the 1990s.

Expenditures for inpatient rehabilitation facilities have grown rapidly

since the mid-1980s. SNF payments rose from $2.8 billion in 1989 to

$11.3 billion in 1996, while home health care costs grew from $2.4 billion

to $17.7 billion over the same period. Rehabilitation facility payments

increased from $1.4 billion in 1989 to $3.9 billion in 1994.1

 Over those

periods, annual growth averaged 22 percent for SNFs, 33 percent for home

health care, and 23 percent for rehabilitation facilities.

My comments today will focus on the reasons for cost growth and the

administration’s announced legislative proposals for these three Medicare

benefits. The information presented today is based on our previous work

and the most recent data on the benefits available from the Health Care

Financing Administration (HCFA), which manages Medicare. Because the

legislative proposals were only recently released by the administration,

our analysis was primarily based on summaries of them that were publicly

released earlier in the year and our discussions with HCFA officials about

the proposals.

In brief, Medicare’s SNF costs have grown primarily because a larger

portion of beneficiaries use SNFs than in the past and because of a large

increase in the provision of ancillary services. For home health care costs,

both the number of beneficiaries and the number of services used by each

beneficiary have more than doubled. Although the average length of stay

has decreased for inpatient rehabilitation facilities, a larger portion of

Medicare beneficiaries use them now, which results in cost growth. A

combination of factors led to the increased use of these benefits:

• legislation and coverage policy changes in response to court decisions

liberalized coverage criteria for the SNF and home health benefits, enabling

more beneficiaries to qualify for them;

• these changes also transformed the nature of home health care from

primarily posthospital care to more long-term care for chronic conditions;

1

Expenditure data for inpatient rehabilitation were obtained from the Prospective Payment

Assessment Commission.

Page 1 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

• earlier discharges from hospitals led to the substitution of days spent in

SNFs for what in the past would have been the last few days of hospital

care;

• use of ancillary services, such as physical therapy, in SNFs has increased,

and specific controls for these services have not been implemented;

• rapid growth in the number of inpatient rehabilitation beds available and

use of these beds by beneficiaries, as well as the likelihood of some

substitution of rehabilitation days for general hospital days, led to higher

expenditures for inpatient rehabilitation; and

• a diminution of administrative controls over the benefits, resulting at least

in part from fewer resources being available for such controls, reduced the

likelihood of inappropriately submitted claims being denied.

The administration’s major proposals for both SNFs and home health care

are designed to give the providers of these services increased incentives to

operate efficiently by moving them from a cost reimbursement to a

prospective payment system. What remains unclear about these proposals

is whether an appropriate unit of service can be defined for calculating

prospective payments and whether HCFA’s databases are adequate for it to

set reasonable rates.

Administration officials also have discussed their intention to propose in

the future a coordinated payment system for all post-acute care as a

method to give providers efficiency incentives. This concept has appeal,

but we have concerns about it similar to those we have for SNF and home

health prospective payments.

Finally, the administration is proposing that SNFs be required to bill for all

services provided to their Medicare residents rather than allowing outside

suppliers to bill. This latter proposal has merit because it would make

control over the use of ancillary services significantly easier.

Background Medicare covers up to 100 days of care in a SNF after a beneficiary has

been hospitalized for at least 3 days. To qualify for the benefit, the patient

must need skilled nursing or therapy on a daily basis. For the first 20 days

of SNF care, Medicare pays all the costs, and for the 21st through the 100th

day, the beneficiary is responsible for daily coinsurance of $95 in 1997.

To qualify for home health care, a beneficiary must be confined to his or

her residence (“homebound”); require part-time or intermittent skilled

nursing, physical therapy, or speech therapy; be under the care of a

Page 2 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

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 skilled nursing; physical, occupational, and speech

therapy; medical social services; and home health aide visits. Beneficiaries

are not liable for any coinsurance or deductibles for these home health

services, and there is no limit on the number of visits for which Medicare

will pay.

Medicare covers care in rehabilitation hospitals that specialize in such

care and units within acute-care hospitals that also specialize. To qualify,

beneficiaries must have one or more conditions requiring intensive and

multidisciplinary rehabilitation services on an inpatient basis. In addition,

to qualify as a rehabilitation facility, hospitals and units in acute-care

hospitals must demonstrate their status by such factors as furnishing

primarily intensive rehabilitation services to an inpatient population, at

least 75 percent of whom require treatment of 1 or more of 10 specified

conditions (for example, stroke or hip fracture). Rehabilitation facilities

must also use a treatment plan for each patient that is established,

reviewed, and revised as needed by a physician in consultation with other

professional personnel. Inpatient rehabilitation is treated like any other

hospitalization for beneficiary cost-sharing purposes.2

Medicare pays SNFs and home health agencies on the basis of their

reasonable costs—those that are found to be necessary and related to

patient care—up to specified cost limits. For SNFs, limits are imposed on

the amount of routine costs—those for general nursing, room and board,

and administrative overhead—that will be reimbursed. Separate limits are

set for freestanding SNFs in urban and rural areas at 112 percent of mean

routine costs. Hospital-based SNF limits are set midway between the

freestanding limits and 112 percent of the mean routine costs of

hospital-based SNFs in each area. Home health agency cost limits are

established at 112 percent of the mean costs of freestanding agencies in

urban and rural areas. Hospital-based agencies have the same limits.

Separate limits are set for each type of visit (skilled nursing, physical

therapy, and so on) but are applied in the aggregate; that is, an agency’s

costs over the limit for one type of visit can be offset by costs below the

limit for another. Both SNF and home health cost limits are adjusted for

differences in wage levels across geographic areas. Also, exemptions from

the cost limits are available to newly opened SNFs and home health

2

The beneficiary is responsible for a deductible, $760 in 1997, and coinsurance for each day over 60

days during a spell of illness. A spell of illness ends when the beneficiary has not been in a hospital or

SNF for 60 days. A transfer from an acute-care hospital to a rehabilitation hospital or unit does not

result in a second deductible because the patient is in the same spell of illness.

Page 3 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

agencies, and exceptions to the limits are available to those that can show

that their costs are above the limits for reasons not under their control.

Inpatient rehabilitation care, provided at both rehabilitation hospitals and

units of acute-care hospitals, is exempt from Medicare’s hospital

prospective payment system (PPS), but is subject to the payment

limitations and incentives established by the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA). Under this law, Medicare pays these

facilities the lower of the facility’s average Medicare allowable inpatient

operating costs per discharge or its target amount. The target amount is

based on the provider’s allowable costs per discharge in a base year,3

trended to the current year through an annual update factor. A TEFRA

facility with inpatient operating costs below its ceiling receives its costs

plus 50 percent of the difference between these costs and the ceiling or

5 percent of the ceiling, whichever is less. Rehabilitation facilities receive

cost-based payments without regard to the TEFRA limits until they complete

a full cost-reporting year, and that year is then used as their base year.

Long-term care hospitals are another category exempted from the hospital

PPS. To qualify as long term, hospitals must have an average length of stay

of a least 25 days for their Medicare patients. Medicare pays these

hospitals on the basis of their costs, subject to TEFRA limits, just like

rehabilitation hospitals. The number of long-term care hospitals has grown

from 94 in 1986 to 146 in 1994, and Medicare payments to them have

increased considerably from about $200 million in 1989 to about

$800 million in 1994. However, these hospitals remain a small part of the

Medicare program, representing less than 0.5 percent of expenditures, and

little research or analysis has been done on them. As a result, little is

known about the reasons for the growth that has occurred in the long-term

care hospital area.

While the cost-limit provisions of Medicare’s cost reimbursement system

for SNFs, home health agencies, and rehabilitation facilities give some

incentives for providers to control the affected costs, these incentives are

considered by health financing experts to be relatively weak, especially for

providers with costs considerably below their limit. On the other hand, it

is generally agreed that a PPS gives providers increased cost-control

incentives. The administration proposes establishing PPSs for SNF and

home health care and estimates that Medicare would save more than

$10 billion over the next 5 fiscal years. PPS is also being designed for

3

The base year depends on when the rehabilitation hospital or unit began operating. For those

operating in 1987 or earlier, the base year is usually the cost-reporting year begun during fiscal year

1987.

Page 4 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

rehabilitation facilities but is not included in the administration’s fiscal

year 1998 budget proposals.

Post-Acute Care Cost

Growth

The Medicare SNF, home health, and inpatient rehabilitation benefits are

three of the fastest growing components of Medicare spending. From 1989

to 1996, Medicare part A SNF expenditures increased over 300 percent,

from $2.8 billion to $11.3 billion. During the same period, part A

expenditures for home health increased from $2.4 billion to

$17.7 billion—an increase of over 600 percent. Rehabilitation facility

payments increased from $1.4 billion in 1989 to $3.9 billion in 1994, the

latest year for which complete data were available. SNF payments currently

represent 8.6 percent of part A Medicare expenditures; home health,

13.5 percent; and rehabilitation facilities, 3.4 percent.

At Medicare’s inception in 1966, the home health benefit under part A

provided limited posthospital care of up to 100 visits per year after a

hospitalization of at least 3 days. In addition, the services could only be

provided within 1 year after the patient’s discharge and had to be for the

same illness. Part B coverage of home health also was limited to 100 visits

per year. These restrictions under part A and part B were eliminated by

the Omnibus Reconciliation Act of 1980 (ORA) (P.L. 96-499), but little

immediate effect on Medicare costs occurred.

With the implementation of the Medicare inpatient PPS in 1983, use of the

SNF and home health benefits was expected to grow as patients were

discharged from the hospital earlier in their recovery periods. But HCFA’s

relatively stringent interpretation of coverage and eligibility criteria held

growth in check for the next few years. As a result of court decisions in

the late 1980s, HCFA issued guideline changes for the SNF and home health

benefits that had the effect of liberalizing coverage criteria, thereby

making it easier for beneficiaries to obtain SNF and home health coverage.

Additionally, the changes prevent HCFA’s claims processing contractors

from denying physician-ordered SNF or home health services unless the

contractors can supply specific clinical evidence that indicates which

particular services should not be covered.

The combination of these legislative and coverage policy changes has had

a dramatic effect on utilization of these two benefits in the 1990s, both in

terms of the number of beneficiaries receiving services and in the extent

these services are used. (App. I contains figures that show growth in SNF

and home health expenditures in relation to the legislative and policy

Page 5 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

changes.) For example, ORA 1980 and HCFA’s 1989 home health guideline

changes have essentially transformed the home health benefit from one

focused on patients needing short-term posthospital care to one that

serves chronic, long-term care patients as well. The number of

beneficiaries receiving home health care more than doubled in the last few

years, from 1.7 million in 1989 to about 3.9 million in 1996. During the

same period, the average number of visits to home health beneficiaries

also more than doubled, from 27 to 72. In a recent review of home health

care,4

 we found that from 1989 to 1993, the proportion of home health

users receiving more than 30 visits increased from 24 to 43 percent and

those receiving more than 90 visits tripled, from 6 to 18 percent, indicating

that the program is serving a larger proportion of longer-term patients.

Moreover, about a third of beneficiaries receiving home health care did

not have a prior hospitalization, another possible indication that care for

chronic conditions is being provided.

Similarly, the number of people receiving care from SNFs has also almost

doubled, from 636,000 in 1989 to 1.1 million in 1996. While the average

length of a Medicare-covered SNF stay has not changed much during that

time, the average Medicare payment per day has almost tripled—from $98

in 1990 to $292 in 1996. Use of ancillary services, such as physical and

occupational therapy, has increased dramatically and accounts for most of

the growth in per-day cost. For example, our analysis of 1992 through 1995

SNF cost reports shows that reported ancillary costs per day have

increased 67 percent, from $75 per day to $125 per day, while reported

routine costs per day have increased only 20 percent, from $123 to $148.

Unlike routine costs, which are subject to limits, ancillary services are

only subject to medical necessity criteria, and Medicare does relatively

little review of their use. Moreover, SNFs can cite high ancillary service use

to justify an exception to routine service cost limits, thereby increasing

payments for routine services.

Between 1990 and 1996, the number of hospital-based SNFs increased over

80 percent, from 1,145 such units to 2,088. Hospitals can benefit from

establishing a SNF unit in a number of ways. Hospitals receive a set fee for

a patient’s entire hospital stay, based on a patient’s diagnosis related group

(DRG).5

 Therefore, the quicker that hospitals discharge a patient into a SNF,

the lower that patient’s inpatient hospital care costs are. We found that in

4

Medicare: Home Health Utilization Expands While Program Controls Deteriorate (GAO/HEHS-96-16,

Mar. 27, 1996). This report includes an extensive discussion of the reasons for home health care cost

growth.

5

DRGs are sets of diagnoses that are expected to require about the same level of hospital resources to

treat beneficiaries suffering from them.

Page 6 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

1994, patients with any of 12 DRGs commonly associated with posthospital

SNF use had 4- to 21-percent shorter stays in hospitals with SNF units than

patients with the same DRGs in hospitals without SNF units.6

 Additionally,

by owning a SNF, hospitals can increase their Medicare revenues through

receipt of the full DRG payment for patients with shorter lengths of stay and

a cost-based payment after the patients are transferred to the SNF.

The availability of inpatient rehabilitation beds has also increased

dramatically. Between 1986 and 1994, the number of Medicare-certified

rehabilitation facilities grew from 545 to 1,019, an 87-percent increase. A

major portion of this growth represents the increase in rehabilitation units

located in PPS hospitals, which went from 470 to 824 over the same period.

Inpatient rehabilitation admissions for Medicare beneficiaries increased

from 2.9 per 1,000 in 1986 to 7.2 per 1,000 in 1993, or 148 percent. Some of

this increase in beneficiary use was due to increases in the number of

acute-care admissions that often lead to use of rehabilitation facilities. For

example, the DRG that includes hip replacement grew from 218,000

discharges during fiscal year 1989 to 344,000 in fiscal year 1995. For the

same DRG, average length of stay in acute-care hospitals decreased from 12

to 6.7 days over that period.

As was the case with SNFs, beneficiaries admitted to rehabilitation units in

1994 following a stay in an acute-care hospital had shorter average lengths

of stay than beneficiaries admitted to rehabilitation hospitals. They also

had shorter stays in the acute-care hospital. Moreover, the same scenario

that applies to hospital-based SNFs applies to rehabilitation units. The

quicker that hospitals discharge a patient to the rehabilitation unit, the

lower that patient’s acute-care costs are. By having a rehabilitation unit,

hospitals can increase their Medicare revenues through receipt of the full

DRG payment for patients with shorter lengths of stay and a cost-based

payment after the patients are admitted to rehabilitation.

Rapid growth in SNF and home health expenditures has been accompanied

by decreased, rather than increased, funding for program safeguard

activities. For example, our March 1996 report found that part A

contractor funding for medical review had decreased by almost 50 percent

between 1989 and 1995. As a result, while contractors had reviewed over

60 percent of home health claims in fiscal year 1987, their review target

had been lowered by 1995 to 3.2 percent of all claims (or sometimes,

depending on available resources, to a required minimum of 1 percent).

6

Skilled Nursing Facilities: Approval Process for Certain Services May Result in Higher Medicare Costs

(GAO/HEHS-97-18, Dec. 20, 1996). This report also includes information on cost growth for SNF

services and the characteristics of Medicare beneficiaries who receive SNF care.

Page 7 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

We found that a lack of adequate controls over the home health program,

such as little intermediary medical review and limited physician

involvement, makes it nearly impossible to know whether the beneficiary

receiving home health care qualifies for the benefit, needs the care being

delivered, or even receives the services being billed to Medicare. Also,

because of the small percentage of claims now selected for review, home

health agencies that bill for noncovered services are less likely to be

identified than they were 10 years ago. Similarly, the low level of review of

SNF services makes it difficult to know whether the recent increase in

ancillary service use is legitimate (for example, because patient mix has

shifted toward those who need more services) or is simply a way for SNFs

to get more revenues.

Medicare’s peer review organization (PRO) contractors have responsibility

for oversight of Medicare inpatient rehabilitation hospitals and units from

both utilization and quality-of-care perspectives. However, the PROs’

emphasis has changed in recent years, with a greater focus on quality

reviews and less emphasis on case review. In fact, the current range of

work for PROs requires no specific review for the appropriateness of

inpatient rehabilitation use.

Finally, because relatively few resources have been available for auditing

end-of-year provider cost reports, HCFA has little ability to identify whether

home health agencies, SNFs, and rehabilitation facilities are charging

Medicare for costs unrelated to patient care or other unallowable costs.

Because of the lack of adequate program controls, it is quite possible that

some of the recent increase in home health, SNF, and rehabilitation facility

expenditures stems from abusive practices. The Health Insurance

Portability and Accountability Act of 1996 (P.L. 104-191), also known as

the Kassebaum-Kennedy Act, has increased funding for program

safeguards. However, per-claim expenditures will remain below the level

they were in 1989, after adjusting for inflation. We project that, in 2003,

payment safeguard spending as authorized by Kassebaum-Kennedy will be

just over one-half of the 1989 per-claim level, after adjusting for inflation.

Administration’s

Proposals for

Prospective Payment

Systems

The goal in designing a PPS is to ensure that providers have incentives to

control costs and that, at the same time, payments are adequate for

efficient providers to furnish needed services and at least recover their

costs. If payments are set too high, Medicare will not save money and

cost-control incentives can be weak. If payments are set too low, access to

and quality of care can suffer.

Page 8 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

In designing a PPS, selection of the unit of service for payment purposes is

important because the unit used has a strong effect on the incentives

providers have for the quantity and quality of services they provide. Taking

into account the varying needs of patients for different types of

services—routine, ancillary, or all—is also important. A third important

factor is the reliability of the cost and utilization data used to compute

rates. Good choices for unit of service and cost coverage can be

overwhelmed by bad data.

Proposal for a SNF PPS We understand that the administration will propose a SNF PPS that would

pay per diem rates covering all facility cost types and that payments would

be adjusted for differences in patient case mix. Such a system is expected

to be similar to HCFA’s ongoing SNF PPS demonstration project that is testing

the use of per diem rates adjusted for resource need differences using the

Resource Utilization Group, version III (RUG-III) patient classification

system.7

 This project was recently expanded to include coverage of

ancillary costs in the prospective payment rates.

An alternative to the proposal’s choice of a day of care as the unit of

service is an episode of care—the entire period of SNF care covered by

Medicare. While substantial variation exists in the amount of resources

needed to treat beneficiaries with the same conditions when viewed from

the day-of-care perspective, even more variation exists at the

episode-of-care level. Resource needs are less predictable for episodes of

care. Moreover, payment on an episode basis may result in some SNFs

inappropriately reducing the number of covered days. Both factors make a

day of care the better candidate for a PPS unit of service. Furthermore, the

likely patient classification system, RUG-III, is designed for and being tested

in a per diem PPS. On the other hand, a day-of-care unit gives few, if any,

incentives to control length of stay, so a review process for this purpose

would still be needed.

The states and HCFA have a lot of experience with per diem payment

methods for nursing homes under the Medicaid program, primarily for

routine costs but also, in some cases, for total costs. This experience

should prove useful in designing a per diem Medicare PPS.

Regarding the types of costs covered by PPS rates, a major contributor to

Medicare’s SNF cost growth has been the increased use of ancillary

7

RUG-III is a method for classifying SNF residents according to health characteristics and the amount

and type of resources they need.

Page 9 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

services, particularly therapy services. This, in turn, means that it is

important to give SNFs incentives to control ancillary costs, and including

them under PPS is a way to do so. However, adding ancillary costs does

increase the variability of costs across patients and places additional

importance on the case-mix adjuster to ensure reasonable and adequate

rates.

Turning to the adequacy of HCFA’s databases for SNF PPS rate-setting

purposes, our work, and that of the Department of Health and Human

Services’ (HHS) Inspector General, has found examples of questionable

costs in SNF cost reports. For example, we found extremely high charges

for occupational and speech therapy with no assurance that cost reports

reflected only allowable costs.8

 Cost-report audits are the primary means

available to ensure that SNF cost reports reflect only allowable costs.

However, the resources expended on auditing cost reports have been

declining in relation to the number of SNFs and SNF costs for a number of

years. The percentage of SNFs subjected to field audits has decreased as

has the extent of auditing done at the facilities that are audited. Under

these circumstances, we think it would be prudent for HCFA to do thorough

audits of a projectable sample of SNF cost reports. The results could then

be used to adjust cost-report databases to remove the influence of

unallowable costs, which would help ensure that inflated costs are not

used as the base for PPS rate setting.

Proposal for a Home

Health PPS

The summary of the administration’s proposal for a home health PPS is

very general, saying only that a PPS for an appropriate unit of service

would be established in 1999 using budget neutral rates calculated after

reducing expenditures by 15 percent. HCFA estimates that this reduction

will result in savings of $4.7 billion over fiscal years 1999 through 2002.

The choice of the unit of service is crucial, and there is limited

understanding of the need for and content of home health services to

guide that choice. Choosing either a visit or an episode as the unit of

service would have implications for both cost control and quality of care,

depending on the response of home health agencies. For example, if the

unit of service is a visit, agencies could profit by shortening the length of

visits. At the same time, agencies could attempt to increase the number of

visits, with the net result being higher total costs for Medicare, making the

per-visit choice probably not appropriate. Using an episode of care over a

8

Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy in Nursing Homes

(GAO/HEHS-95-23, Mar. 30, 1995).

Page 10 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

period of time such as 30 or 100 days as the unit of service has a greater

potential for controlling costs. However, agencies could gain by reducing

the number of visits during that period, potentially lowering quality of

care. If an episode of care is chosen as the unit of service, HCFA would

need a method to ensure that beneficiaries receive adequate services and

that any reduction in services that can be accounted for by past

overprovision of care does not result in windfall profits for agencies. In

addition, HCFA would need to be vigilant to ensure that patients meet

coverage requirements, because agencies would be rewarded for

increasing their caseloads. HCFA is currently testing various PPS methods

and patient classification systems for possible use with home health care,

and the results of these efforts may shed light on how to best design a

home health PPS.

We have the same concerns about the quality of HCFA’s home health care

cost-report databases for PPS rate-setting purposes that we do for the SNF

database. Again, we believe that adjusting the home health databases,

using the results of thorough cost-report audits of a projectable sample of

agencies, would be wise.

We are also concerned about the appropriateness of using current

Medicare data on visit rates to determine payments under a PPS for

episodes of care. As we reported in March 1996, controls over the use of

home health care are virtually nonexistent. Operation Restore Trust, a

joint effort by federal and state agencies in several states to identify fraud

and abuse in Medicare and Medicaid, found very high rates of

noncompliance with Medicare’s coverage conditions in targeted agencies.

For example, in a sample of 740 beneficiaries drawn from 43 home health

agencies in Texas and 31 in Louisiana that were selected because of

potential problems, some or all of the services received by 39 percent of

the beneficiaries were denied. About 70 percent of the denials were

because the beneficiary did not meet the homebound definition. Although

these are results from agencies suspected of having problems, they

illustrate that substantial amounts of noncovered care are likely to be

reflected in HCFA’s home health care utilization data. For these reasons, it

would also be prudent for HCFA to conduct thorough on-site medical

reviews of a projectable sample of agencies to give it a basis to adjust

utilization rates for purposes of establishing a PPS.

Rehabilitation PPS Also Is

Being Developed

The administration has not proposed a PPS for rehabilitation facilities, but

HCFA has an ongoing research project to develop such a system. A report

Page 11 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

detailing a model for a PPS is currently undergoing review. The research

was directed at designing a per-episode payment system adjusted for case

mix, using a measure of patient functional status—for example, the

patient’s mobility—as the adjuster. In general, this and other research has

shown that patients in the rehabilitation facilities are more homogeneous

than those in SNFs or home health care. Because the goals for the care are

also more homogeneous and defined, an episode may be a reasonable

choice for a unit of service. Again, the per-episode payment should be

structured to reduce the incentives for premature discharge, and adequate

review mechanisms to prevent such discharges and other quality problems

would be needed.

As with SNFs and home health care, we have concerns about the reliability

of HCFA’s databases for rate-setting purposes for rehabilitation hospitals

because of the low levels of utilization review and cost-report auditing. As

we stated earlier, HCFA should do enough audits and medical review to

enable it to adjust its databases to remove the effects of any problems.

HCFA would also need an adequate review system under a PPS because

rehabilitation facilities would probably have incentives to increase their

caseloads, cut corners on quality, or both.

Long-Term Care Hospital

Proposal

HCFA is not currently studying a PPS for long-term care hospitals. Rather,

the administration is proposing that any hospitals that newly qualify for

long-term care status be paid under the regular inpatient hospital PPS. Also,

HCFA officials told us that the agency plans to recommend in the future a

coordinated payment system for post-acute care and that long-term care

hospitals are being considered for inclusion under such a payment system.

I will discuss the coordinated payment concept later in this statement.

Consolidated Billing

for SNFs

The administration has also announced that it will propose requiring SNFs

to bill Medicare directly for all services provided to their beneficiary

residents except for physician and some practitioner services. We support

this proposal as we did in a September 1995 letter to the House Ways and

Means Committee. We and the HHS Inspector General have reported on

problems, such as overutilization of supplies, that can arise when

suppliers bill separately for services for SNF residents.

A consolidated billing requirement would make it easier for Medicare to

identify all the services furnished to residents, which in turn would make it

easier to control payments for those services. The requirement would also

Page 12 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

help prevent duplicate billings for supplies and services and billings for

services not actually furnished by suppliers. In effect, outside suppliers

would have to make arrangements with SNFs under such a provision so

that nursing homes would bill for suppliers’ services and would be

financially liable and medically responsible for the care.

“Bundling” Post-Acute

Care Services

There can be considerable overlap in the types of services provided and

the types of beneficiaries that are treated in each of the three post-acute

care settings. For example, physical therapy and other rehabilitation

services can be provided by a SNF, a home health agency, or a

rehabilitation facility. Both HCFA and the prospective payment assessment

commission (ProPAC) have noted that the ability to substitute care among

post-acute settings may contribute to inappropriate spending growth, even

after payment policies are improved for individual provider types.9

Although prospective payment encourages providers to deliver care more

efficiently, facility-specific payments may encourage them to lower their

costs by shifting services to other settings. The administration has

therefore announced that it will in the future recommend a coordinated

payment system for post-acute care services. Such a system will be

designed to help ensure that beneficiaries receive quality care in the

appropriate settings, and that any patient transfers among settings occur

only when medically appropriate rather than in efforts to generate

additional revenues. While no details are available about how a

coordinated post-acute payment system would operate, presumably it will

entail consolidated (bundled) payments to one entity for the different

types of providers. In fact, ProPAC has suggested a system that bundles

acute and post-acute payments.

One of the most important design issues in a bundled payment approach is

deciding which provider would receive the payment. Because this provider

would have to organize and oversee the continuum of services for

beneficiaries, it would bear the risk that payments would not cover costs.

Options for this role include an acute-care hospital, a post-acute care

provider, or a provider service network.

Another important design issue involves developing an appropriate

payment rate. Under the current inpatient PPS, payment rates are based on

DRGs. But research has shown that DRGs are poor predictors of post-acute

care use. In extending PPS to include post-acute services, future post-acute

9

HCFA Administrator’s statement on “Reforming the Medicare Home Health Benefit,” before the

Subcommittee on Health and Environment, House Committee on Commerce (Mar. 5, 1997), and

Report and Recommendations to the Congress (Washington, D.C.: ProPAC, Mar. 1, 1997).

Page 13 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

care utilization needs to be accurately predicted to ensure that prospective

rates are adequate to cover costs but also give an incentive to provide

cost-effective care.

Bundling acute and post-acute care would have a number of potential

advantages and disadvantages. Optimally, bundling of payments would

encourage continuity of care. If, for example, the inpatient hospital has a

greater stake in the results, bundling could lead to both better discharge

planning as well as improved transfer of information from the hospital to

the post-acute provider. Bundling payments to the hospital could also

eliminate a PPS hospital’s financial incentive to discharge Medicare

patients before they are ready, because patients discharged prematurely

may require extensive post-acute services for which the hospital is liable.

Furthermore, bundling with an appropriate payment rate would give

providers more incentive to furnish the mix of inpatient and posthospital

services that yield the least costly treatment of an entire episode of care

and thus help control growth in the volume of post-acute services. Finally,

to the extent that the bundling arrangement promotes joint accountability,

combining responsibility for hospital and post-acute providers could lead

to better outcomes.

There are a number of potential disadvantages as well. Because bundled

payments would represent some level of financial risk, whoever received

the bundled payment would need to have the resources to accept the risk.

Moreover, bearing risk often gives incentive to shift the risk to others and

raises concerns about quality. A key to the success of any bundling system

is coordinating care and continuously monitoring a patient during the

entire episode. However, some providers might not have the capabilities to

do this. For example, if, as ProPAC has suggested, both acute- and

post-acute care were bundled and if hospitals received the bundled

payment, some hospitals might not have the resources, information, or

expertise to properly manage patients’ post-acute care. The same could be

said for SNFs and home health agencies. An additional concern is that

whoever received the bundled payment could have dominance over the

other providers and make choices about acute- and post-acute care

settings that are driven primarily by concerns about cost. For example,

hospitals might try to maximize their profit by limiting post-acute services

or be tempted to screen admissions to avoid patients with high risks of

heavy posthospital care.

Another important issue involves how to deal with home health patients

who have had no prior hospitalization. About a third of home health visits

Page 14 GAO/T-HEHS-97-106
Medicare Post-Acute Care: Cost Growth and

Proposals to Manage It Through Prospective

Payment and Other Controls

fall into this category. A bundled payment system would not affect home

health agency incentives for such patients. Finally, beneficiary advocacy

groups have expressed concern about potential harmful effects of this

system on patients’ freedom of choice and how the quality and

appropriateness of care could be ensured.

In conclusion, it is clear from the dramatic cost growth for SNF, home

health, and rehabilitation facility care that the current Medicare payment

mechanisms for the providers need to be revised. As more details

concerning the administration’s or others’ proposals for revising those

systems become available, we would be glad to work with the Committee

and others to help sort out the potential implications of suggested

revisions.

This concludes my prepared remarks, and I will be happy to answer any

questions.

Contributors For more information on this testimony, please call William Scanlon on

(202) 512-7114 or Thomas Dowdal, Senior Assistant Director, on

(202) 512-6588. Other major contributors include Patricia Davis, Roger

Hultgren, and Sally Kaplan.

Page 15 GAO/T-HEHS-97-106
Appendix I 

Medicare Skilled Nursing Facility and Home

Health Expenditures, 1980-96

Figure I.1: Medicare Skilled Nursing Facility Expenditures, 1980-96

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

0

2,000

4,000

6,000

8,000

10,000

12,000

Year

Dollars in Millions

Disabled and ESRD

Aged

Prospective

Payment

System

Issuance of

Revised

Guidelines

Medicare

Catastrophic

Coverage

Act

Note: ESRD = end-stage renal disease.

Source: HCFA’s Office of the Actuary.

Page 16 GAO/T-HEHS-97-106
Appendix I 

Medicare Skilled Nursing Facility and Home

Health Expenditures, 1980-96

Figure I.2: Medicare Home Health Expenditures, 1980-96

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

0

5,000

10,000

15,000

20,000

Year

Dollars in Millions

Disabled and ESRD

Aged

Issuance of

Revised

Guidelines

Prospective

Payment

System

Omnibus

Reconciliation

Act of 1980

Note: ESRD = end-stage renal disease.

Source: HCFA’s Office of the Actuary.

(101554) Page 17 GAO/T-HEHS-97-106
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100