United States General Accounting Office

GAO Testimony

Before the Subcommittee on Health, Committee on Ways

and Means, House of Representatives

For Release on Delivery

Expected at 1:00 p.m.,

Tuesday, March 4, 1997

MEDICARE POST-ACUTE

CARE

Home Health and Skilled

Nursing Facility Cost

Growth and Proposals for

Prospective Payment

Statement of William J. Scanlon, Director

Health Financing and Systems Issues

Health, Education, and Human Services Division

GAO/T-HEHS-97-90

Medicare Post-Acute Care: Home Health and

Skilled Nursing Facility Cost Growth and

Proposals for Prospective Payment

Mr. Chairman and Members of the Subcommittee:

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

facility (SNF) and home health care 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. SNF payments increased 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. Over that

period, annual growth averaged 22 percent for SNFs and 33 percent for

home health care.

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

for SNFs and home health care and the administration’s announced

legislative proposals for these two Medicare benefits. The information

presented today is based mainly on our previous work. We also examined

recent data on the two benefits from the Health Care Financing

Administration (HCFA), which manages Medicare. The detailed legislative

proposals are not yet available from the administration, so we reviewed

the summaries of them that have been publicly released and talked with

HCFA officials about these summaries.

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. A combination of factors led to the

increased use of both benefits:

• legislation and coverage policy changes in response to court decisions

liberalized coverage criteria for the benefits, enabling more beneficiaries

to qualify for care;

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

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

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

SNFs; 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.

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Medicare Post-Acute Care: Home Health and

Skilled Nursing Facility Cost Growth and

Proposals for Prospective Payment

The major proposals by the administration 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. However, 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. The administration is

also 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

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 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 hospitalbased 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

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Medicare Post-Acute Care: Home Health and

Skilled Nursing Facility Cost Growth and

Proposals for Prospective Payment

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 and exceptions to the cost

limits are available to SNFs and home health agencies that meet certain

conditions.

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

for SNFs and home health agencies 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 prospective payment systems (PPS) give providers increased costcontrol incentives. The administration proposes establishing PPSs for SNF

and home health care and estimates that Medicare savings exceeding

$10 billion would result over the next 5 fiscal years.

SNF and Home Health

Cost Growth

The Medicare SNF and home health benefits are two 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. SNF and

home health payments currently represent 8.6 percent and 13.5 percent of

part A Medicare expenditures, respectively.

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 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, the

utilization of the SNF and home health benefits was expected to grow as

patients were discharged from the hospital earlier in their recovery

periods. However, 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

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Medicare Post-Acute Care: Home Health and

Skilled Nursing Facility Cost Growth and

Proposals for Prospective Payment

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 of

these services. (App. I contains figures that show growth in SNF and home

health expenditures in relation to the legislative and policy 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 care after hospitalization 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 report on home health,1

 we found that

from 1989 to 1993, the proportion of home health users receiving more

than 30 visits increased from 24 percent to 43 percent and those receiving

more than 90 visits tripled, from 6 percent 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 chronic

care 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 relatively little review of

1

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 cost

growth.

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Medicare Post-Acute Care: Home Health and

Skilled Nursing Facility Cost Growth and

Proposals for Prospective Payment

their use is done by Medicare. Moreover, SNFs can cite high ancillary

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

increasing routine service payments.

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

80 percent, from 1,145 such agencies 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).2

 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

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.3

 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.

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 even, depending

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

case 10 years ago. Similarly, the low level of review of SNF services makes

it difficult to know whether the recent increase in ancillary use is

medically necessary (for example, because patient mix has shifted toward

those who need more services) or simply a way for SNFs to get more

revenues.

2

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

treat beneficiaries suffering from them.

3

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.

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Medicare Post-Acute Care: Home Health and

Skilled Nursing Facility Cost Growth and

Proposals for Prospective Payment

Finally, because relatively few resources are available for auditing endof-year provider cost reports, HCFA has little ability to identify whether

home health agencies or SNFs 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 and SNF 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 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.

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

account of 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.4

 This project was recently expanded to include coverage of

ancillary costs in the prospective payment rates.

4

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

and type of resources they need.

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Medicare Post-Acute Care: Home Health and

Skilled Nursing Facility Cost Growth and

Proposals for Prospective Payment

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 episodeof-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

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 place 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.5

 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

5

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

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

Page 7 GAO/T-HEHS-97-90
Medicare Post-Acute Care: Home Health and

Skilled Nursing Facility Cost Growth and

Proposals for Prospective Payment

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 less attractive. If the unit of service is an episode of care

over a period of time such as 30 or 100 days, agencies could gain by

reducing the number of visits during that period, potentially lowering

quality of care. For these reasons, HCFA needs to devise methods to ensure

that whatever unit of service is chosen will not lead to increased costs or

lower 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 the unit-of-service

question.

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

cost report databases for PPS rate-setting purposes as 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.

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Medicare Post-Acute Care: Home Health and

Skilled Nursing Facility Cost Growth and

Proposals for Prospective Payment

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.

Consolidated Billing

for SNFs

The administration has also announced that it will propose requiring SNFs

to bill Medicare 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 you, Mr. Chairman. 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

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.

In conclusion, it is clear that the current payment systems for providers of

skilled nursing and home health services to Medicare beneficiaries need to

be revised. As more details concerning the administration’s or others’

proposals for revising those systems become available, we would be glad

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Medicare Post-Acute Care: Home Health and

Skilled Nursing Facility Cost Growth and

Proposals for Prospective Payment

to work with the Subcommittee 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. Patricia Davis also contributed to this statement.

Page 10 GAO/T-HEHS-97-90
Page 11 GAO/T-HEHS-97-90
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 12 GAO/T-HEHS-97-90
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.

(101546) Page 13 GAO/T-HEHS-97-90
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