United States General Accounting Office

GAO Testimony

Before the Subcommittee on Health and Environment,

Committee on Commerce, House of Representatives

For Release on

Delivery Expected at

10:00 a.m., Wednesday,

March 5, 1997

MEDICARE

Home Health Cost Growth

and Administration’s

Proposal for Prospective

Payment

Statement of William J. Scanlon, Director

Health Financing and Systems Issues

Health, Education, and Human Services Division

GAO/T-HEHS-97-92

Medicare: Home Health Cost Growth and

Administration’s Proposal for Prospective

Payment

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss Medicare’s home health care

benefit and the administration’s forthcoming legislative proposals related

to it. After relatively modest growth during the 1980s, Medicare’s

expenditures for home health care have grown rapidly in the 1990s. Home

health care costs grew from $2.4 billion in 1989 to $17.7 billion in 1996, an

average annual increase of 33 percent.

My comments will focus on the reasons for cost growth for home health

care and the administration’s announced legislative proposals for this

Medicare benefit. The information presented is based mainly on our

previous work. We also examined recent data on the benefit 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 home health care costs have grown because a larger

portion of beneficiaries use this benefit than in the past and the number of

services used by each beneficiary has more than doubled. A combination

of factors led to the increased use of the benefit:

• legislation and coverage policy changes in response to court decisions

liberalized coverage criteria for the benefit, 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;

and

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

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

likelihood that inappropriate claims would be detected.

The major proposals by the administration for home health care are

designed to give providers increased incentives to operate efficiently by

immediately tightening the limits on the amount of cost per visit that will

be paid and imposing a new cap on per-beneficiary costs. After these

changes, in 1999, the proposal would move home health payments from

cost reimbursement to a prospective payment system (PPS). Estimated

savings from these two proposals are $12.4 billion over the next 5 fiscal

years. What remains unclear about the reasonableness of the PPS proposal

is whether an appropriate unit of service for calculating prospective

Page 1 GAO/T-HEHS-97-92
Medicare: Home Health Cost Growth and

Administration’s Proposal for Prospective

Payment

payments can be defined and whether HCFA’s databases are adequate for it

to set reasonable rates.

Background 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 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. Home health agency cost limits are set

separately for agencies in rural and urban areas, at 112 percent of the

mean costs of freestanding agencies. 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, costs

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

another. 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 home health agencies that meet certain

conditions.

While the per-visit cost-limit provision of Medicare’s reimbursement

system for home health agencies gives some incentives for providers to

control their costs, these incentives are considered by health financing

experts to be relatively weak. For providers with per-visit costs

considerably below their limit, there is little incentive to control costs, and

for all providers, there is no incentive to control number of visits. It is

generally agreed that prospective payment systems give providers

increased cost-control incentives.

Home Health Cost

Growth

The Medicare home health benefit is one of the fastest growing

components of Medicare spending. From 1989 to 1996, part A

expenditures for home health increased from $2.4 billion to

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Medicare: Home Health Cost Growth and

Administration’s Proposal for Prospective

Payment

$17.7 billion—an increase of over 600 percent. Home health payments

currently represent 13.5 percent of Medicare part A expenditures.

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 hospital PPS in 1983, the

utilization of the home health benefit 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 for the

home health benefit that had the effect of liberalizing coverage criteria,

thereby making it easier for beneficiaries to obtain home health coverage.

Additionally, the changes prevent HCFA’s claims processing contractors

from denying physician-ordered 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 the home health benefit in the 1990s,

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

extent of these services. (App. I contains a figure that shows growth in

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

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.

Page 3 GAO/T-HEHS-97-92
Medicare: Home Health Cost Growth and

Administration’s Proposal for Prospective

Payment

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.

Rapid growth in 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, the contractors’ review target was

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

contractor 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.

Finally, because relatively few resources are available for auditing

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

home health agencies are charging Medicare for costs unrelated to patient

care or other unallowable costs. Because of the lack of adequate program

controls, it is possible that some of the recent increase in home health

costs stems from abusive practices. Recent legislation, 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

Proposal for a Home

Health Prospective

Payment System

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 at least recover their costs. If payments are set too

high, Medicare will not save money and cost control incentives will be

weak. If payments are set too low, access to and quality of care can suffer.

Page 4 GAO/T-HEHS-97-92
Medicare: Home Health Cost Growth and

Administration’s Proposal for Prospective

Payment

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.

Another important factor is the reliability of the cost and utilization data

used to compute rates. A good choice for unit of service can be

overwhelmed by bad data.

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 the 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 are concerned about the quality of HCFA’s home health care cost report

database for PPS rate-setting purposes. Our work and that of the

Department of Health and Human Services’ Inspector General has found

examples of questionable costs in home health agency cost reports. For

example, we reported in August 1995 on a number of problems with

Page 5 GAO/T-HEHS-97-92
Medicare: Home Health Cost Growth and

Administration’s Proposal for Prospective

Payment

contractor payments for medical supplies such as surgical dressings,

which indicate that excessive costs are being included and not removed

from home health agency cost reports.2

 Also, the Inspector General found

substantial amounts of unallowable costs in the cost reports of a large

home health agency chain, which was convicted of fraud on the basis of

these findings. We believe that it would be prudent for HCFA to audit

thoroughly a projectable sample of home health agency cost reports. The

results could then be used to adjust HCFA’s database to help ensure that

unallowable costs are not included in the base for setting prospective

rates.

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. Our report included a number

of examples of noncovered services that are billed to Medicare. For

example, a physician called a claims processing contractor to complain

that some of his patients were being told by a home health agency that

they were homebound merely because they did not own a car. In another

report, we found that some home health agency staff were directed to alter

or falsify medical records to ensure continued or prolonged visits,

including recording visits that were never made or noting that patients

were homebound even after they were no longer confined to their homes.3

Also, Operation Restore Trust, a joint effort by federal and several state

agencies to identify fraud and abuse in Medicare and Medicaid, found very

high rates of noncompliance with Medicare’s coverage conditions. For

example, in a sample of 740 patients 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

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.

2

Medicare: Excessive Payments for Medical Supplies Continue Despite Improvements

(GAO/HEHS-95-171, Aug. 8, 1995).

3

Medicare: Allegations Against ABC Home Health Care (GAO/OSI-95-17, July 19, 1995).

Page 6 GAO/T-HEHS-97-92
Medicare: Home Health Cost Growth and

Administration’s Proposal for Prospective

Payment

In conclusion, Medicare’s current payment mechanisms for home health

services need to be improved. As more details concerning the

administration’s or others’ proposals become available, we would be glad

to work with the Subcommittee 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 7 GAO/T-HEHS-97-92
Appendix I 

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.

(101549) Page 8 GAO/T-HEHS-97-92
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