United States Government Accountability Office

GAO Report to Congressional Committees

MEDICARE

Little Progress Made 

in Targeting 

Outpatient Therapy 

Payments to 

Beneficiaries’ Needs 

November 2005 

 

GAO-06-59 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2005

MEDICARE

Little Progress Made in Targeting

Outpatient Therapy Payments to

Beneficiaries’ Needs 

Highlights of GAO-06-59, a report to

congressional committees

For years, Congress has wrestled

with rising Medicare costs and

improper payments for outpatient

therapy services—physical therapy, 

occupational therapy, and speechlanguage pathology. In 1997

Congress established per-person 

spending limits, or “therapy caps,” 

for nonhospital outpatient therapy

but, responding to concerns that

some beneficiaries need extensive 

services, has since placed

temporary moratoriums on the

caps. The current moratorium is set 

to expire at the end of 2005.

The Medicare Prescription Drug, 

Improvement, and Modernization 

Act of 2003 required GAO to report 

on whether available information 

justifies waiving the caps for 

particular conditions or diseases. 

As agreed with the committees of

jurisdiction, GAO also assessed the 

status of the Department of Health

and Human Services’ (HHS) efforts 

to develop a needs-based payment 

policy and whether circumstances 

leading to the caps have changed. 

What GAO Recommends

GAO suggests that Congress give 

HHS interim authority to allow,

under certain conditions, payments

exceeding the caps after the

moratorium expires. GAO 

recommends that HHS expedite

developing a means to assess 

beneficiaries’ therapy needs, and

HHS concurs. GAO also 

recommends that HHS improve its 

system for identifying improper

therapy claims beyond initiatives

already under way.

Data and research available are, for three reasons, insufficient to identify 

particular conditions or diseases to justify waiving Medicare’s outpatient 

therapy caps. First, Medicare claims data—the most comprehensive data for 

beneficiaries whose payments would exceed the caps—often do not capture 

the clinical diagnosis for which therapy is received. Nor do they show 

particular conditions or diseases as more likely than others to be associated

with payments exceeding the caps. Second, even for diagnoses clearly linked 

to a condition or disease, such as stroke, the length of treatment for patients 

with the same diagnosis varies widely. Third, because of the complexity of 

patient factors involved, most studies do not define the amount or mix of 

therapy services needed for Medicare beneficiaries with specific conditions 

or diseases. Provider groups remain concerned about adverse effects on

beneficiaries needing extensive therapy if the caps are enforced. HHS does

not, however, have the authority to provide exceptions to the therapy caps. 

Despite several related statutory requirements, HHS has made little progress

toward developing a payment system for outpatient therapy that considers

individual beneficiaries’ needs. In particular, HHS has not determined how to

standardize and collect information on the health and functioning of patients 

receiving outpatient therapy services—a key part of developing a system 

based on individual needs for therapy. 

The circumstances that led to the therapy caps remain a concern. Medicare 

payments for outpatient therapy are still rising significantly, and increases in

improper payments for outpatient therapy continue. HHS could reduce 

improper payments and Medicare costs by improving its system of 

automated processes for rejecting claims likely to be improper. 

Beneficiaries for Whom 2002 Medicare Payments for Outpatient Therapy Services Would 

Have Exceeded Therapy Caps, Had They Been in Place, and by How Much

Cap

Projected number

of beneficiaries 

whose payments 

would have 

exceeded caps

Projected

percentage of

beneficiaries 

whose payments 

would have 

exceeded caps 

Average 

amount

above cap 

(dollars)

Estimated

total above

cap (millions

of dollars)a

Occupational 

therapy 129,509 17.4 $1,237 $160.2

Physical therapy

and speechlanguage 

pathology 508,686 14.5 $1,263 $642.4

Source: Daniel E. Ciolek and W. Hwang, Final Project Report (Baltimore, Md.: Computer Sciences Corporation/AdvanceMed, 2004). 

Note: Because of a moratorium, therapy caps were not in effect in 2002; use of outpatient therapy services might have been different 

had the spending caps been in place. Because hospital outpatient departments are exempt from the caps, payments for services 

provided by hospital outpatient departments were excluded from this analysis. 

a

This study estimated that the totals above the caps represented 23.7 percent of all outpatient therapy expenditures for 2002. 

www.gao.gov/cgi-bin/getrpt?GAO-06-59.

To view the full product, including the scope 

and methodology, click on the link above.

For more information, contact A. Bruce 

Steinwald at (202) 512-7119 or 

steinwalda@gao.gov.
Contents 

Letter 1

Results in Brief 5

Background 8

Insufficient Information Exists to Justify Waiving Therapy Caps for 

Particular Conditions or Diseases 10 

HHS Has Made Little Progress toward a Payment System Based on 

Patients’ Needs 18 

Circumstances That Led to Therapy Caps Remain 22 

Conclusions 26

Matter for Congressional Consideration 27 

Recommendations for Executive Action 28 

Agency Comments 28 

Appendix I Comments from the Department of Health and 

Human Services 30 

Appendix II GAO Contact and Staff Acknowledgments 33 

Related GAO Products 34 

Tables 

Table 1: The Five Most Reported Diagnosis Codes Related to 

Outpatient Therapy, Ranked by Frequency under Each 

Therapy Type, 2002 12 

Table 2: Beneficiaries for Whom 2002 Medicare Payments for 

Outpatient Therapy Services Would Have Exceeded

Therapy Caps and by How Much 17 

Table 3: Legislation Affecting Medicare Spending on Outpatient 

Therapy Services, 1997–2003, and HHS Actions 19 

Table 4: CMS-Contracted Studies of Outpatient Therapy Services, 

2000–2004 21

Page i GAO-06-59 Medicare Outpatient Therapy Payments
Figures 

Figure 1: Top 99 Most Reported Diagnosis Codes and Associated 

Percentage of Medicare Beneficiaries for Whom Payments 

Would Have Exceeded the Combined Cap for Physical 

Therapy and Speech-Language Pathology, 2002 13 

Figure 2: Variation in Length of Treatment per Episode among 

Medicare Beneficiaries Diagnosed with Stroke, 2002 15 

Abbreviations 

BBA Balanced Budget Act of 1997 

BBRA Medicare, Medicaid, and SCHIP Balanced Budget 

 Refinement Act of 1999 

BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and 

 Protection Act of 2000 

CMS Centers for Medicare & Medicaid Services 

HHS Department of Health and Human Services 

MedPAC Medicare Payment Advisory Commission 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003 

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Page ii GAO-06-59 Medicare Outpatient Therapy Payments
United States Government Accountability Office

Washington, DC 20548 

November 10, 2005 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable Joe Barton 

Chairman 

The Honorable John D. Dingell 

Ranking Minority Member 

Committee on Energy and Commerce 

House of Representatives 

The Honorable Joe Barton 

Chairman 

The Honorable John D. Dingell 

Ranking Minority Member 

Committee on Energy and Commerce 

House of Representatives 

The Honorable William M. Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

The Honorable William M. Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

Medicare, the federal health program insuring more than 40 million 

beneficiaries aged 65 and older or disabled, covers three outpatient 

therapy services: physical therapy, occupational therapy, and speechlanguage pathology. Medicare covers these services only if they are 

needed to improve a patient’s condition (for example, to aid stroke 

recovery or combat the effects of Parkinson’s disease) and are reasonable

in amount, frequency, and duration. In 2002, the most recent year for 

which complete data are available, an estimated 3.7 million, or about 

9 percent, of Medicare beneficiaries received one or more of these types of 

outpatient therapy.1

 

Medicare, the federal health program insuring more than 40 million 

beneficiaries aged 65 and older or disabled, covers three outpatient 

therapy services: physical therapy, occupational therapy, and speechlanguage pathology. Medicare covers these services only if they are 

needed to improve a patient’s condition (for example, to aid stroke 

recovery or combat the effects of Parkinson’s disease) and are reasonable

in amount, frequency, and duration. In 2002, the most recent year for 

which complete data are available, an estimated 3.7 million, or about 

9 percent, of Medicare beneficiaries received one or more of these types of 

outpatient therapy.1

1

Unless otherwise specified, throughout this report the terms outpatient therapy and 

outpatient therapy services refer to all three therapy categories collectively: physical 

therapy, occupational therapy, and speech-language pathology. 

Page 1 GAO-06-59 Medicare Outpatient Therapy Payments
For many years, Congress has wrestled with rising Medicare costs of 

providing outpatient therapy services.2

 From 1990 through 1996, spending 

on these services grew at nearly double the rate of Medicare spending 

overall. Some of the growth was attributed to financial incentives in 

Medicare payment methods, which encouraged use of services, and to the 

lack of program oversight to prevent inappropriate payments. For 

example, in 1995 we reported widespread examples of overcharging 

Medicare for therapy services delivered to nursing home residents, 

including markups resulting from providers’ exploiting regulatory 

ambiguity and weaknesses in Medicare’s payment rules.3

 In 1997, as a 

means to control the spending growth, Congress established new caps on

the amount that Medicare would pay for outpatient therapy services for a 

beneficiary in any given year. These therapy caps raised concern, however, 

that patients with extensive need for outpatient therapy services would be 

adversely affected—particularly patients who lacked access to hospital 

outpatient departments, which are exempt from the caps.4

 Since 1997, the 

caps were actually in effect only in 1999 and part of 2003; in other years, 

Congress placed temporary moratoriums on them. The current 

moratorium on the therapy caps is due to expire at the end of December 

2005.

5

As part of the 1997 legislation that established the therapy caps, Congress 

also required the Department of Health and Human Services (HHS) to 

report by 2001 on its recommendations for an alternative, “needs-based” 

payment system for outpatient therapy services. We have reported that, in

contrast to less-targeted control over service use afforded by spending 

limits, such a payment system could help target payments to beneficiaries 

who genuinely require more services than could be paid for under the 

 2

For example, since 1973 therapy provided by one type of outpatient therapy provider, 

independent physical therapists in private practice, has been subject to annual, perbeneficiary spending limits. 

3

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

Homes, GAO/HEHS-95-23 (Washington D.C.: Mar. 30, 1995). A list of related GAO products

appears at the end of this report. 

4

Under the law, the caps on Medicare outpatient therapy payments do not apply to services

provided by a hospital outpatient department. 42 U.S.C. § 1395l(g). 

5

The legislation provides for two caps per beneficiary: one for occupational therapy and

one for physical therapy and speech-language pathology combined. The legislation set the 

caps at $1,500 each and provided that these limits be indexed by the Medicare Economic 

Index each year beginning in 2002. When last in place in 2003, the two caps were set at 

$1,590 each. 

Page 2 GAO-06-59 Medicare Outpatient Therapy Payments
therapy caps.

6

 A needs-based payment system could take into account the 

type and extent of therapy warranted by a beneficiary’s health and 

functional status (that is, the person’s ability to perform activities of daily 

living, such as bathing, dressing, eating, or moving from one location to 

another). In several laws enacted starting in 1997, Congress has directed 

HHS to take certain actions related to the development of such a system, 

including considering beneficiaries’ functional status in the design of a 

new outpatient therapy policy and reporting on the development of 

standard instruments for assessing the health and functional status of 

patients receiving Medicare services, including outpatient therapy.7

 Within 

HHS, the Centers for Medicare & Medicaid Services (CMS), which 

administers Medicare, has major responsibilities for this effort. 

The Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (MMA), which put in place the most recent moratorium on therapy 

caps, directed us to report on the conditions or diseases that may justify 

waiving application of the caps.8

 To provide a greater range of information 

about these issues, as agreed with the committees of jurisdiction, we also 

examined HHS’s efforts to date in developing a needs-based payment 

system. This report assesses (1) available information that could be used 

to justify waiving outpatient therapy caps for particular conditions or 

diseases, (2) the status of HHS’s efforts to base Medicare payment policy 

on outpatient therapy on beneficiaries’ needs, and (3) whether the 

circumstances initially leading to the caps have changed. 

To assess whether available information could be used to justify waiving 

outpatient therapy caps for particular conditions or diseases, we reviewed 

data and research including analyses of Medicare claims data by CMS 

contractors. We generally relied on the published results of CMS’s 

 6

GAO, Medicare: Outpatient Rehabilitation Therapy Caps Are Important Controls but 

Should Be Adjusted for Patient Need, GAO/HEHS-00-15R (Washington D.C.: Oct. 8, 1999). 

7

See, for example, the Balanced Budget Act of 1997 (BBA), Pub. L. No. 105-33, § 4541, 111

Stat. 251, 454. 

8

Pub. L. No. 108-173, § 624, 117 Stat. 2066, 2317. 

Page 3 GAO-06-59 Medicare Outpatient Therapy Payments
contracted analyses performed on Medicare 2002 claims data.9,10 The 

claims data used by CMS contractors and other health care researchers 

are the most comprehensive data available for assessing Medicare 

outpatient therapy and the conditions and diseases of Medicare 

beneficiaries for whom payments would have exceeded the therapy caps 

had a moratorium on the caps not been in place. We also reviewed the 

literature on therapy treatment protocols and on the efficacy of outpatient 

therapy for Medicare beneficiaries with selected conditions and diseases, 

and we reviewed a related report by the Medicare Payment Advisory 

Commission (MedPAC), an independent group of health care experts that 

advises Congress on Medicare payment issues. To assess HHS’s response 

to requirements for developing instruments to ensure that Medicare 

payments for outpatient therapy are targeted to beneficiaries’ needs, we 

 9

Studies based on 2002 claims data include Daniel E. Ciolek and Wenke Hwang, Feasibility

and Impact Analysis: Application of Various Outpatient Therapy Service Claim HCPCS 

Edits, prepared for CMS (Baltimore, Md.: Computer Sciences Corporation/AdvanceMed, 

2004); Daniel E. Ciolek and Wenke Hwang, Development of a Model Episode-Based

Payment System for Outpatient Therapy Services: Feasibility Analysis Using Existing 

CY 2002 Claims Data, prepared for CMS (Baltimore, Md.: Computer Sciences

Corporation/AdvanceMed, 2004); Daniel E. Ciolek and Wenke Hwang, Utilization

Analysis: Characteristics of High-Expenditure Users of Outpatient Therapy Services, CY 

2002 Final Report, prepared for CMS (Baltimore, Md.: Computer Sciences

Corporation/AdvanceMed, 2004); and Daniel E. Ciolek and Wenke Hwang, Final Project

Report, prepared for CMS (Baltimore, Md.: Computer Sciences Corporation/AdvanceMed, 

2004). Studies based on other years and data include Judith M. Olshin et al., Study and 

Report on Outpatient Therapy Utilization: Physical Therapy, Occupational Therapy, 

and Speech-Language Pathology Services Billed to Medicare Part B in All Settings in

1998, 1999, and 2000 (Columbia, Md.: DynCorp/AdvanceMed, 2002); Stephanie Maxwell 

and Cristina Baseggio, Outpatient Therapy Services under Medicare: Background and 

Policy Issues, prepared for CMS (Washington, D.C.: Urban Institute, 2000); and Stephanie 

Maxwell et al., Part B Therapy Services under Medicare in 1998–2000: Impact of 

Extending Fee Schedule Payments and Coverage Limits, prepared for CMS (Washington, 

D.C.: Urban Institute, 2001). 

10To check the reliability of the information we used from CMS-contracted studies, we

reviewed the analysis performed by the contractor; discussed the results with the CMS 

official overseeing the contract; obtained information about the methods and analysis from

the contractor, specifically, from the principal investigator of the contracted study; and 

reviewed the contractor’s summary of the study’s scope and methods. We also discussed 

the methods and results of the analyses with provider groups and other researchers

familiar with Medicare claims data, including representatives of the Medicare Payment 

Advisory Commission (MedPAC) and the Urban Institute. We determined that the data as

published were generally reliable for our purposes. For one analysis—assessing variation 

in the length of treatment received by Medicare beneficiaries according to their diagnosis 

codes—we used the results from an unpublished analysis performed by CMS’s contractor 

AdvanceMed. We verified the reliability of this analysis by obtaining information from the

principal investigator about the reliability checks incorporated in that analysis and 

determined that the analysis was sufficiently reliable for our needs. 

Page 4 GAO-06-59 Medicare Outpatient Therapy Payments
reviewed the legislative history of Medicare’s outpatient therapy caps, 

related requirements for HHS, and studies by CMS contractors. We 

examined HHS’s actions in response to the legislative requirements and 

studies’ proposals and reviewed administrative options for ensuring that 

medically necessary therapy is available to beneficiaries over the short and 

long terms under Medicare’s payment system. To determine whether the 

circumstances leading to therapy caps—specifically, significant growth in 

outpatient therapy payments and a high rate of improper payments—have 

changed, we reviewed preliminary CMS estimates of overall Medicare part 

B expenditures,11 which include spending on outpatient therapy services, 

and CMS reports on improper payments for outpatient therapy services. 

Finally, we obtained the opinions of four national organizations 

representing the views of key providers of outpatient therapy services.12

We conducted our work in accordance with generally accepted 

government auditing standards from January through October 2005. 

We found the data and research available to date insufficient for three 

reasons to identify particular conditions or diseases that would justify 

waiving Medicare’s outpatient therapy caps: 

Results in Brief 

• Medicare claims data are limited in the extent to which they identify the 

actual conditions or diseases for which beneficiaries receive therapy 

because the data often do not capture the clinical diagnosis for which 

therapy is received. Further, a CMS-contracted analysis of claims data for 

2002 does not show any particular conditions or diseases as more likely 

than others to be associated with payments exceeding the therapy caps. 

• Even for diagnoses that are clearly linked to a condition or disease, such 

as stroke, the CMS-contracted analysis of 2002 claims data shows that the 

length of treatment for patients with the same diagnosis varied widely. 

• Because of the complexity of patient factors involved, most studies we 

reviewed do not define the amount or mix of therapy services needed for 

Medicare beneficiaries with specific conditions or diseases. 

 11Medicare part B includes coverage for physician services and payments to other licensed 

practitioners, clinical laboratory and diagnostic services, surgical supplies and durable 

medical equipment, and ambulance services. Medicare part A covers inpatient hospital and 

certain other services. 

12We interviewed officials from the American Physical Therapy Association, the American 

Occupational Therapy Association, the American Speech-Language Hearing Association, 

and the National Association for the Support of Long-Term Care. 

Page 5 GAO-06-59 Medicare Outpatient Therapy Payments
It is uncertain how many beneficiaries would be adversely affected 

because they have medical needs for therapy costing more than the caps

and yet are unable to obtain needed care because they lack sufficient 

financial resources or access to a hospital outpatient therapy department. 

The CMS-contracted analysis of 2002 claims data shows that more than a 

half million Medicare beneficiaries in 2002 received therapy for which 

payments would have exceeded the caps had a moratorium not been in 

place. Provider groups also told us that a sizable number of beneficiaries 

would be adversely affected if the caps were enforced. 

Although congressional mandates starting in 1997 have required HHS to 

take certain actions toward developing an outpatient therapy payment 

system that considers patients’ individual needs for therapy, the 

department has made little progress toward such a system, except to 

contract for a series of studies of outpatient therapy use by Medicare 

beneficiaries. Two of these contracted studies have reported that 

functional assessments of patients—standard evaluations that would help 

determine a person’s ability to perform the functions of daily life and 

specific needs for therapy—would be required to develop a needs-based

payment system. CMS officials also said that developing a standard patient 

assessment instrument could take 3 years or longer. In response to a 2000

statutory requirement for HHS to report to Congress no later than 

January 1, 2005, on the development of standard patient assessment 

instruments for patients receiving a variety of services, including 

outpatient therapy, HHS and CMS have work in progress, but this work 

does not include outpatient therapy. Officials attribute this exclusion to 

the complexity of the project and to limited resources. 

Circumstances that led to therapy caps do not appear to have changed 

since the caps were established. CMS assessments of Medicare claims data 

show that Medicare payments for outpatient therapy are still rising rapidly 

and that the rate of improper payments has increased substantially in 

recent years. Over a 4-year period from 1999 through 2002, for example, 

Medicare spending for outpatient therapy more than doubled, from an 

estimated $1.5 billion to $3.4 billion. CMS’s assessment of the error rate for 

outpatient therapy claims found that improper payments—mainly due to

insufficient documentation to support the services claimed—grew from 

about 11 percent in 1998 to more than 20 percent in 2000. CMS could 

reduce improper payments and the costs to Medicare by implementing the 

proposal in its contracted study of Medicare outpatient therapy claims to 

strengthen the agency’s system for identifying and denying payment of 

improper outpatient therapy claims. Provider groups we spoke with 

agreed that such improvements in CMS’s automated payment system 

Page 6 GAO-06-59 Medicare Outpatient Therapy Payments
could help ensure that Medicare does not pay for unneeded services. 

Furthermore, an exception process based on a medical review could help

determine the appropriateness of payment for therapy services. At 

present, however, HHS does not have the authority to implement such a 

process or to conduct a demonstration or pilot project to provide 

exceptions to the therapy caps. 

To provide a means by which some Medicare beneficiaries could have

access to appropriate outpatient therapy services and to obtain better data

on the conditions and diseases of beneficiaries who have extensive 

outpatient therapy needs, we suggest that Congress consider giving HHS 

the authority to implement an interim process or demonstration project 

whereby individual beneficiaries could be granted an exception from the 

therapy caps under certain conditions determined by CMS. In addition, to

expedite development of a patient assessment instrument for outpatient 

therapy services, we recommend that the Secretary of HHS include these 

services in the effort already under way to standardize the terminology for 

existing patient assessment instruments. To reduce payment for improper 

claims, we recommend that the Secretary of HHS implement 

improvements to CMS’s system for identifying outpatient therapy claims 

that are likely to be improper. 

In commenting on a draft of this report, HHS did not address our 

suggestion that Congress give the department interim authority to allow, 

under certain circumstances, payments exceeding the caps. HHS agreed 

with our recommendation to include outpatient therapy services in its 

effort under way to standardize the terminology for patient assessment. 

With regard to our recommendation to implement improvements to CMS’s 

automated payment system, HHS referred to a current initiative to 

improve the coding on Medicare claims and noted that the department is 

exploring methods for improving the automated evaluation of claims. We 

believe, however, that HHS could improve the payment system beyond the 

initiative already under way. 

Page 7 GAO-06-59 Medicare Outpatient Therapy Payments
Outpatient therapy services—covered under part B of the Medicare 

program—comprise physical therapy, occupational therapy, and speechlanguage pathology to improve patients’ mobility and functioning.13

Medicare regulations and coverage rules require that beneficiaries be 

referred for outpatient therapy services by a physician or nonphysician 

practitioner and that a written plan of care be reviewed and certified by 

the providers at least once every 30 days. Beneficiaries receiving therapy

are expected to improve significantly in a reasonable time and to need 

therapy for rehabilitation rather than maintenance.14 Medicare-covered 

outpatient therapy services are provided in a variety of settings by 

institutional providers (such as hospital outpatient departments, skilled 

nursing facilities, comprehensive outpatient rehabilitation facilities, 

outpatient rehabilitation facilities, and home health agencies) and by 

noninstitutional providers (such as physicians, nonphysician practitioners, 

and physical and occupational therapists in private practice).

15 Both 

institutional and noninstitutional providers—with the exception of 

hospital outpatient departments—are subject to the therapy caps. 

For more than a decade, Medicare’s costs for outpatient therapy services 

have been rising, and widespread examples of inappropriate billing 

practices, resulting from regulatory ambiguity and weaknesses in 

Medicare’s payment rules, have been reported by us and others. In 1995 we

reported, for example, that while state averages for physical, occupational, 

and speech therapists’ salaries in hospitals and skilled nursing facilities 

ranged from about $12 to $25 per hour, Medicare had been charged 

Background 

 13Physical therapy services—such as whirlpool baths, ultrasound, and therapeutic 

exercises—are designed to improve mobility, strength, and physical functioning and to

limit the extent of disability resulting from injury or disease. Speech-language pathology, 

included in the Medicare definition of outpatient physical therapy services, is the diagnosis 

and treatment of speech, language, and swallowing disorders. Occupational therapy 

services help patients learn the skills they need to perform daily tasks such as bathing and 

dressing and to function independently. 

14Medicare does not cover maintenance therapy—that is, therapy services performed to 

maintain, rather than improve, a beneficiary’s level of functioning. Maintenance therapy 

includes cases where a patient’s restoration potential is insignificant relative to the therapy 

required to achieve such potential, where it has been determined that the treatment goals

will not materialize, or where the therapy is considered a general exercise program.

Medicare may, however, cover the development of a maintenance program established 

during the course of covered therapy.

15Unlike physical and occupational therapists, speech-language pathologists are not 

recognized as practitioners who can directly bill the Medicare program for outpatient 

therapy services. 

Page 8 GAO-06-59 Medicare Outpatient Therapy Payments
$600 per hour or more.16 HHS’s Office of Inspector General reported in 

1999 that Medicare reimbursed skilled nursing facilities almost $1 billion 

for physical and occupational therapy that was claimed improperly, 

because the therapy was not medically necessary or was provided by staff 

who did not have the appropriate skills for the patients’ medical 

conditions.17

To control rising costs and improper payments, Congress established 

therapy caps for all nonhospital providers in the Balanced Budget Act of

1997.

18 The Medicare, Medicaid, and SCHIP Balanced Budget Refinement 

Act of 1999 later imposed a moratorium on the caps for 2000 and 2001.19

The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection

Act of 2000 then extended the moratorium through 2002.20 Although no 

moratorium was in effect as of January 1, 2003, CMS delayed enforcing the 

therapy caps through August 31, 2003. In December 2003, the Medicare

Prescription Drug, Improvement, and Modernization Act of 200321 placed

the most recent moratorium on the caps, extending from December 8, 

2003, through December 31, 2005.

22 The legislation establishing the caps 

provided for two caps per beneficiary: one for occupational therapy and

one for physical therapy and speech-language pathology combined. The 

legislation set the caps at $1,500 each and provided that these limits be 

indexed by the Medicare Economic Index each year beginning in 2002. 

When last in place in 2003, the two caps were set at $1,590 each. 

 16See GAO/HEHS-95-23. 

17The improper claims were filed under Medicare part A and part B. See Office of Inspector 

General, Physical and Occupational Therapy in Nursing Homes: Cost of Improper 

Billings to Medicare, OEI-09-97-00122 (Washington, D.C.: Department of Health and 

Human Services, August 1999). 

18Pub. L. No. 105-33, § 4541, 111 Stat. 251, 454. 

19Pub. L. No. 106-113, app. F, § 221, 113 Stat. 1501A-321, 1501A-351. 

20Pub. L. No. 106-554, app. F, § 421, 114 Stat. 2763A-463, 2763A-516. 

21Pub. L. No. 108-173, § 624(a), 117 Stat. 2066, 2317. 

22Two bills were introduced in February 2005 to repeal the therapy caps: H.R. 916 and 

S. 438. As of October 2005, these bills had been referred to appropriate committees, and no 

further action had been taken. Another bill under consideration in the Senate as of 

October 31, 2005, would extend the moratorium on the therapy caps through 2006. See

S. 1932, Deficit Reduction Omnibus Budget Reconciliation Act of 2005.

Page 9 GAO-06-59 Medicare Outpatient Therapy Payments
To process and pay claims and to monitor health care providers’ 

compliance with Medicare program requirements, CMS relies on claims 

administration contractors, who use a variety of review mechanisms to 

ensure appropriate payments to providers. A system of automated checks 

(a process CMS terms “edits”) flags potential billing errors and 

questionable claims. The automated system can, for example, identify 

procedures that are unlikely to be performed on the same patient on the 

same day or pairs of procedure codes that should not be billed together 

because one service inherently includes the other or the services are 

clinically incompatible. 

In certain cases, automated checks performed by CMS claims 

administration contractors may lead to additional claim reviews or to 

educating providers about Medicare coverage or billing issues. The 

contractors’ clinically trained personnel may perform a medical review, 

examining the claim along with the patient’s medical record, submitted by 

the physician. Medical review is generally done before a claim is paid, 

although medical review may also be done after payment to determine if a 

claim was paid in error and funds may need to be returned to Medicare.

The data and research available to date are insufficient to determine 

whether any particular conditions or diseases may justify a waiver of 

Medicare’s outpatient therapy caps. Medicare claims data are limited in 

the extent to which they can be used to identify the actual conditions or 

diseases for which beneficiaries are receiving therapies because the claims

often lack specific diagnostic information. In addition, analyses of the 

claims data show no particular conditions or diseases as more likely than

others to be associated with payments exceeding the therapy caps. The 

data also show that treatment for a single condition or disease, such as 

stroke, may vary greatly from patient to patient. Finally, available research

on the amount and mix of outpatient therapy for people aged 65 and older

with specific conditions and diseases also appears insufficient to justify a 

waiver of the therapy caps for particular conditions or diseases. It is 

uncertain how many beneficiaries would have medical needs for therapy 

costing more than the caps and yet be unable to obtain the needed care 

because they have either insufficient financial resources or no access to a

hospital outpatient therapy department. 

Insufficient 

Information Exists to 

Justify Waiving 

Therapy Caps for 

Particular Conditions 

or Diseases 

Page 10 GAO-06-59 Medicare Outpatient Therapy Payments
Although Medicare claims data constitute the most comprehensive 

available information for Medicare beneficiaries who have received

outpatient therapy, they do not always capture the clinical diagnosis for 

which beneficiaries receive therapy. As such, they are insufficient for 

identifying particular diseases and conditions that should be exempted 

from the caps. Patients’ conditions or diseases are expressed in claims 

data through diagnosis codes, and the coding system allows providers to 

use nonspecific diagnosis codes that are unrelated to a specific clinical 

condition or disease.23 A CMS-contracted analysis of 2002 Medicare 

outpatient therapy claims data,24 for example, found generic codes, such as 

“other physical therapy,” to be among the most often used diagnosis codes 

on claim forms (see table 1). Moreover, current Medicare guidelines for 

processing claims permit institutional providers, such as outpatient 

rehabilitation facilities and skilled nursing facilities, to submit services 

from all three therapy types on the same claim form, with one principal 

diagnosis for the claim; a claim seeking payment for occupational therapy

and for speech-language pathology might therefore be filed under “other 

physical therapy.” 

Medicare Claims Data Do 

Not Always Capture 

Clinical Diagnoses or 

Show Consistent Patterns 

That Would Justify Waiving 

Therapy Caps 

 23Diagnosis codes from the World Health Organization’s ninth revision of its International 

Classification of Diseases (ICD-9 codes) are used on Medicare part B claim forms to 

identify a patient’s diagnosis. In addition to clinically specific codes, such as osteoarthritis, 

the ICD-9 system also includes generic codes, such as “other physical therapy,” 

“occupational therapy encounter,” and “speech therapy.” 

24Ciolek and Hwang, Final Project Report (2004). 

Page 11 GAO-06-59 Medicare Outpatient Therapy Payments
Table 1: The Five Most Reported Diagnosis Codes Related to Outpatient Therapy, 

Ranked by Frequency under Each Therapy Type, 2002 

Physical therapy Occupational therapy 

Speech-language 

pathologya

Other physical therapy Acute but ill-defined 

cerebrovascular disease 

Dysphagiab

LumbagocOther physical therapy Acute but ill-defined 

cerebrovascular disease 

Abnormality of gait Occupational therapy 

encounter 

Speech therapy

Pain in joint, shoulder 

region 

Abnormality of gait Abnormality of gait 

Cervicalgiad Other general symptoms Other physical therapy 

Source: Ciolek and Hwang, Final Project Report (2004). 

a

The majority of outpatient speech-language pathology services are furnished by hospital and skilled 

nursing facility providers, and the claim forms do not contain fields for identification of a therapyspecific diagnosis. Often, if a beneficiary receives multiple therapies simultaneously, the physical 

therapy diagnosis is reported first on the claim, which may explain why the fifth-most frequent 

diagnosis code for speech-language pathology is “other physical therapy.” 

b

Difficulty in swallowing. 

c

A painful condition of the lower back. 

d

A sharp pain or aching in the neck. 

Analysis of 2002 claims data does not show any particular conditions or 

diseases that are more likely than others to be associated with payments 

exceeding the therapy caps for physical therapy and speech-language 

pathology combined or for occupational therapy. Among the top 99 most 

reported diagnoses for physical therapy and speech-language pathology,

the analysis found no particular diagnoses associated with large numbers 

of beneficiaries for whom payments would have exceeded the combined 

physical therapy and speech-language pathology cap in 2002 had it been in

effect (see fig. 1). A similar pattern existed for occupational therapy. 

Page 12 GAO-06-59 Medicare Outpatient Therapy Payments
Figure 1: Top 99 Most Reported Diagnosis Codes and Associated Percentage of 

Medicare Beneficiaries for Whom Payments Would Have Exceeded the Combined

Cap for Physical Therapy and Speech-Language Pathology, 2002 

Note: Each dot represents the percentage of Medicare beneficiaries, reported under each of the 99 

most reported diagnosis codes (arrayed from 1 to 99 along the x-axis), for whom payments would 

have exceeded the combined cap for physical therapy and speech-language pathology had it been in 

effect in 2002. 

Medicare claims data do not provide information about patients’ therapy 

needs that could be used to justify waiving the therapy caps. Even in those 

cases where particular conditions or diseases, such as stroke or 

Alzheimer’s disease, are identified in the diagnosis codes, different 

individuals with the same diagnosis can need different intensities or types 

of therapy. For example, one patient with a stroke might be able to return

home from the hospital a day or two after admission, while another may 

suffer a severe loss of functioning and require extensive therapy of more 

than one type. The CMS-contracted analysis of 2002 claims found wide 

variation in the number of treatment days required to conclude an episode

0 10 20 30 40 50 60 70 80 90 100

0

10

20

30

40

50

60

70

80

90

100

Percentage of Medicare beneficiaries

Top 99 most reported diagnosis codes

Source: GAO from Ciolek and Hwang, Utilization Analysis (2004).

Claims Data Do Not 

Provide Information about 

Patients’ Therapy Needs 

Page 13 GAO-06-59 Medicare Outpatient Therapy Payments
of care25 for beneficiaries who had the same “diagnosis,” such as stroke. 

For example, the analysis found that while the median number of days per 

episode of physical therapy for stroke patients was 10, episode length

ranged from 1 to 80 days.

26 Similarly wide ranges in treatment length for 

stroke patients appeared for occupational therapy (1 to 68 days per 

episode, median 9) and speech-language pathology (1 to 66 days per 

episode, median 7). Figure 2 shows the range in length of treatment per 

episode for patients with a diagnosis of acute cerebrovascular disease 

(stroke) for the three types of therapy. 

 25An “episode” was defined in the CMS-contracted study as extending from the date of a

beneficiary’s first therapy encounter until the last encounter for the same type of therapy.

For example, if the first physical therapy encounter was on January 15 and the last was on

January 22, the physical therapy “episode” extended from January 15 through January 22. If 

the same beneficiary began speech-language pathology services on January 20 and ended 

on January 28, the speech-language pathology episode lasted from January 20 through 

January 28. If a 60-day break intervened between therapy services of the same or a 

different type, the new round of therapy was considered a new episode. 

26All analyses of ranges in treatment length reflect the ranges to the 99th percentile, to 

eliminate extreme outliers. 

Page 14 GAO-06-59 Medicare Outpatient Therapy Payments
Figure 2: Variation in Length of Treatment per Episode among Medicare 

Beneficiaries Diagnosed with Stroke, 2002

Note: Illustrated ranges extend only to the 99th percentile to eliminate extreme outliers. 

a

An “episode” in this study was defined as the date of a beneficiary’s first therapy encounter until the 

last encounter for the same type of therapy. If a 60-day break intervened between therapy services of 

the same or a different type, the new round of therapy was considered a new episode. 

Available research on the efficacy of outpatient therapy for people aged 65

and older with specific conditions and diseases also appears insufficient to

justify a waiver of particular conditions or diseases from the therapy caps. 

Although our literature review found several studies demonstrating the 

benefits of therapy for seniors and Medicare-eligible patients, this research 

generally did not define the amount or mix of therapy services needed for 

Medicare beneficiaries with specific conditions or diseases. One study, for 

example, examined the benefits of extensive therapy for stroke victims at

skilled nursing facilities. The study concluded that high-intensity therapy 

may have little effect on beneficiaries’ length of time spent in the facility 

when their short-term prognosis is good; beneficiaries with poorer 

prognoses, however, may benefit substantially from intensive therapy. 

Further, because of the complexity of patient factors involved, these 

Source: AdvanceMed.

Range to 99th percentile

Median

Episode treatment daysa

0 50 10 70 80 20 30 40 60

Physical

therapy

●

Occupational

therapy

●

Speechlanguage

pathology

●

●

Length of treatment per episode of physical therapy 

ranged from 1 to 80 days

Length of treatment per episode of occupational therapy 

ranged from 1 to 68 days

Length of treatment per episode of speech-language pathology 

ranged from 1 to 66 days

Available Research Does 

Not Define Amount or Mix 

of Outpatient Therapy 

Needed for Medicare 

Beneficiaries with Specific 

Diseases or Conditions 

Page 15 GAO-06-59 Medicare Outpatient Therapy Payments
studies cannot be generalized to all patients with similar diseases or 

conditions. In addition, MedPAC, the commission that advises Congress 

on Medicare issues, suggests that research should be undertaken on when 

and how much physical therapy benefits older patients and that evidence 

gathered from this research would assist in developing guidelines to 

determine when therapy is needed.27

Medicare claims data suggest that payments for more than a half million 

beneficiaries would have exceeded the caps had they been in place in

2002. It is uncertain, however, how many beneficiaries with payments 

exceeding the caps would be adversely affected because they have

medical needs for care and no means to obtain it through hospital 

outpatient departments. According to the CMS-contracted analysis of 2002 

claims data, Medicare paid an estimated $803 million in outpatient therapy 

benefits above what would have been permitted had the therapy caps been

enforced that year. Payments for about 17 percent of occupational therapy

users and 15 percent of physical therapy and speech-language pathology 

service users would have surpassed the caps in 2002; these beneficiaries 

numbered more than a half million (see table 2). 

Payments for More Than a 

Half Million Beneficiaries 

Would Have Exceeded 

Therapy Caps in 2002, but 

Adverse Effect Is 

Unknown 

 27This conclusion was part of a MedPAC letter to Congress on the advisability of allowing 

Medicare fee-for-service beneficiaries to have “direct access” to outpatient physical therapy

services and comprehensive rehabilitation facility services. MedPAC concluded that the

physician referral and review requirements are a necessary but not sufficient mechanism to 

help beneficiaries receive outpatient physical therapy services that are needed and 

appropriate for their clinical conditions. MedPAC also found that providers need to be 

made more aware of coverage rules for beneficiaries—for example, through increased 

educational initiatives by the professional associations, the claims contractors, and 

facilities in which physical therapists practice. Medicare Payment Advisory Commission, 

letter to Congress (Washington, D.C.: Dec. 30, 2004). 

Page 16 GAO-06-59 Medicare Outpatient Therapy Payments
Table 2: Beneficiaries for Whom 2002 Medicare Payments for Outpatient Therapy 

Services Would Have Exceeded Therapy Caps and by How Much

Cap 

Projected

number of 

beneficiaries 

whose payments 

would have 

exceeded caps

Projected

percentage of

beneficiaries 

whose payments 

would have 

exceeded caps 

Average 

amount 

above cap

(dollars)

Estimated 

total above 

cap (millions 

of dollars)a

Occupational 

therapy 129,509 17.4 $1,237 $160.2

Physical 

therapy and 

speechlanguage 

pathology 508,686 14.5 $1,263 $642.4

Source: Ciolek and Hwang, Final Project Report (2004). 

Note: Because of a moratorium, therapy caps were not in effect in 2002; use of outpatient therapy 

services might have been different had the spending caps been in place. Because hospital outpatient

departments are exempt from the caps, payments for services provided by hospital outpatient 

departments were excluded from this analysis. 

a

This study estimated that the totals above the caps represented 23.7 percent of all outpatient therapy 

expenditures for 2002. 

Although the claims data show that payments for more than a half million 

beneficiaries would have exceeded the caps in 2002, it is unknown 

whether beneficiaries would have been adversely affected had the caps 

been in place. The data do not show the extent to which these 

beneficiaries were receiving care consistent with Medicare requirements 

that therapy improve a beneficiary’s condition and be reasonable in 

amount, frequency, and duration. Also, it is not clear to what extent 

hospital outpatient departments would serve as a “safety valve” for 

Medicare beneficiaries needing extensive therapy and unable to pay for it

on their own. Past work by us and others has noted that the therapy caps 

were integral to the Balanced Budget Act’s spending control strategy and 

were unlikely to affect the majority of Medicare’s outpatient therapy users. 

We reported that the hospital outpatient department exemption from the 

cap was a mitigating factor in the mid-1990s, essentially removing the

coverage limits for those users who had access to hospital outpatient 

departments.28 CMS-contracted analyses of claims data for 2002, however, 

show that nearly all the Medicare beneficiaries whose payments would 

have exceeded the caps did not receive outpatient therapy in hospital 

 28GAO/HEHS-00-15R. 

Page 17 GAO-06-59 Medicare Outpatient Therapy Payments
outpatient departments. Specifically, an estimated 92 percent (469,850 

beneficiaries) of those whose payments would have exceeded the 

combined physical therapy and speech-language pathology cap—and 98

percent (126,488 beneficiaries) of those whose payments would have

exceeded the occupational therapy cap—did not receive therapy services

in a hospital outpatient department. These proportions, however, might 

have been different had the caps been in effect in 2002. 

Provider groups we spoke with were concerned that a sizable number of 

beneficiaries with legitimate medical needs whose payments would 

exceed the caps could be harmed. One group told us that a cap on 

outpatient therapy services would severely limit the opportunity for 

patients with the greatest need to receive appropriate care, and another 

group said that therapy caps could hurt beneficiaries with chronic 

illnesses. According to a third group, payments can quickly exceed the 

caps for beneficiaries who suffer from serious conditions such as stroke 

and Parkinson’s disease or who have multiple medical conditions. 

Statutory mandates since 1997 have required HHS to take certain actions 

toward developing a payment system for outpatient therapy that considers 

patients’ individual needs for care, but the agency has made little progress 

toward such a system. In particular, HHS has not determined how to 

standardize and collect information on the health and functioning of 

patients receiving outpatient therapy services—a key part of developing a 

system based on patients’ actual needs for therapy. 

To curb spending growth and ensure that outpatient therapy services are 

appropriately targeted to those beneficiaries who need them, Congress 

included provisions related to these services in several laws enacted 

starting in 1997 (see table 3). These provisions required HHS to report to 

Congress in 2001 on a revised coverage policy for outpatient therapy 

services that would consider patients’ needs. The provisions also required 

HHS to report to Congress in 2005 on steps toward developing a standard

instrument for assessing a patient’s need for outpatient therapy services 

and on a mechanism for applying such an instrument to the payment 

process. As of October 2005, HHS had not reported its specific 

recommendations on revising the coverage policy based on patients’ 

needs. HHS had, however, contracted with researchers to conduct several 

analyses of Medicare claims data as a means of responding to the 

mandates. 

HHS Has Made Little 

Progress toward a 

Payment System 

Based on Patients’ 

Needs 

Page 18 GAO-06-59 Medicare Outpatient Therapy Payments
Table 3: Legislation Affecting Medicare Spending on Outpatient Therapy Services, 1997–2003, and HHS Actions

Law Key provisions Response

Balanced Budget Act of 1997 (BBA), 

Pub. L. No. 105-33, § 4541, 111 Stat. 

251, 454. 

Required HHS to submit, no later than 

January 1, 2001, a report including specific 

recommendations on a revised coverage policy 

for outpatient therapy services under Medicare 

based on diagnostic category and prior use of 

services. 

HHS did not submit a report to Congress by 

January 1, 2001. HHS, through CMS, 

contracted with the Urban Institute for a 

series of reports that were meant to help 

meet BBA’s requirements.a,b

Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 

1999 (BBRA), Pub. L. No. 106-113, 

app. F, § 221, 113 Stat. 1501A-321, 

1501A-351. 

Required HHS to compare and report on by 

June 30, 2001, the utilization patterns 

(nationwide and by region, setting, and 

diagnosis) of outpatient therapy services in 1998 

and 1999 with those on or after January 1, 2000, 

including a review of a statistically significant

number of claims for these services. 

CMS contracted with the Urban Institute for 

a series of reports that were to meant help 

meet BBRA’s requirements, including the 

requirement to study utilization of outpatient 

therapy services.

b

CMS contracted with AdvanceMed to meet 

BBRA’s requirements for a study and report 

on utilization.c HHS did not submit a report 

to Congress by June 30, 2001, but 

AdvanceMed’s report was completed in 

September 2002. 

As an amendment to the BBA reporting

requirement, HHS was directed under BBRA to 

consider “functional status” and other criteria as 

the Secretary deemed appropriate in the design 

of a new outpatient therapy payment policy and 

to discuss methods to help ensure appropriate 

use of outpatient therapy. 

No outpatient therapy payment policy 

designed, therefore, no response to 

“functional status” language. 

Medicare, Medicaid, and SCHIP 

Benefits Improvement and Protection 

Act of 2000 (BIPA), Pub. L. No. 106-

554, app. F, § 545, 114 Stat. 2763A463, 2763A-551. 

Required HHS to report, no later than January 1, 

2005, on the development of standard 

instruments for assessing the health and 

functional status of patients receiving any one of 

a variety of services, including speech-language 

pathology, physical therapy, occupational 

therapy, and both inpatient and outpatient 

settings; this report is to include a 

recommendation on the use of such “standard 

instruments” for payment purposes. 

HHS did not submit a report to Congress by 

January 1, 2005. Officials told us in May 

2005 that a report related to BIPA’s 

requirement was in progress. An HHS 

official anticipated submitting this report to 

Congress by the end of 2005, but it will not 

include outpatient therapy. 

Medicare Prescription Drug, 

Improvement, and Modernization Act 

of 2003 (MMA), Pub. L. No. 108-173, 

§ 624, 117 Stat. 2066, 2317. 

Required HHS to submit, no later than March 31, 

2004, overdue reports on payment for and 

utilization of outpatient therapy services. 

In November 2004 HHS issued a report to 

Congress in response to the BBA, BBRA, 

and MMA requirements. This report 

included a review of medical claims and a 

discussion of a planned analysis of 

alternatives to current payment practices 

for outpatient therapy services. It did not 

specify a revised outpatient therapy 

payment policy.

d

 HHS appended to this 

report seven reports by its contractors, the 

Urban Institute and AdvanceMed.e

Source: GAO.

a

The HHS agency now known as CMS was called the Health Care Financing Administration (HCFA) 

before June 2001. 

Page 19 GAO-06-59 Medicare Outpatient Therapy Payments
b

Maxwell and Baseggio, Outpatient Therapy Services (2000), and Maxwell et al., Part B Therapy

Services (2001).

c

Olshin et al., Study and Report (2002). 

d

Centers for Medicare & Medicaid Services, Report to Congress, Medicare Financial Limitations on 

Outpatient Rehabilitation Services (Baltimore, Md.: November 2004). 

e

Maxwell and Baseggio, Outpatient Therapy Services (2000); Maxwell et al., Part B Therapy Services

(2001); Olshin et al., Study and Report (2002); Ciolek and Hwang, Feasibility and Impact Analysis

(2004); Ciolek and Hwang, Development of a Model (2004); Ciolek and Hwang, Utilization Analysis 

(2004); and Ciolek and Hwang, Final Project Report (2004). 

HHS’s response, implemented through CMS, to the principal legislative

provisions addressing outpatient therapy services has been to contract for 

a series of studies, first by the Urban Institute and then by AdvanceMed 

(see table 4). In general, these studies have found that information 

available from Medicare claims data is insufficient to develop an 

alternative payment system based on patients’ therapy needs, and a patient 

assessment instrument for outpatient therapy services that collected 

information on functional status and functional outcomes would be 

needed to develop such a system. They have also found that a needs-based 

payment system would be key to controlling costs while ensuring patient 

access to appropriate therapy. 

Page 20 GAO-06-59 Medicare Outpatient Therapy Payments
Table 4: CMS-Contracted Studies of Outpatient Therapy Services, 2000–2004 

Study Key findings or conclusions Selected recommendations

Urban Institute (2000)aInsufficient research available on outpatient 

therapy practice patterns to design and implement 

a payment system based on diagnosis and prior 

use of services.

Lack of functional status data on Medicare 

outpatient therapy patients impedes the 

development of such a system. 

Options were identified for managing outpatient 

therapy, including development of a database of 

functional status assessments made during 

beneficiaries’ use of outpatient therapy services. 

No recommendations. 

Urban Institute (2001)bApplication of Medicare’s physician fee schedule 

to skilled nursing facilities, rehabilitation agencies, 

and comprehensive outpatient rehabilitation 

facility outpatient therapy reduced spending on

services in 1999 and 2000. 

No recommendations. 

AdvanceMed (2002)cApplication of Medicare’s physician fee schedule 

to institutional outpatient therapy service providers 

reduced spending on these services before 2002. 

Diagnoses on claim forms do not accurately 

reflect the medical condition for which a patient 

received therapy and thus constrain CMS’s ability 

to develop an alternative payment system based 

on patient condition. 

No recommendations. 

AdvanceMed (2004)dClaims data show no pattern of diagnoses 

reflecting specific conditions that consistently

result in payments for outpatient therapy services 

exceeding the spending limits.

Claims data will not provide sufficient information 

to develop a needs-based payment system. 

The final project reportd

 discussed several options and 

recommended implementing a “global approach” 

comprising both short- and long-term strategies for 

managing outpatient therapy services, including 

developing a standardized outpatient therapy patient 

assessment instrument to collect clinical information 

needed to develop a classification scheme based on

patient condition. The final project report proposed 

eliminating the therapy caps, because they may 

adversely affect some patients, and restraining 

outpatient therapy spending through improved 

program integrity and limited use through, for example:

• targeted use limits or 

• improved administrative edits to better identify and 

deny payment of improper claims. 

Source: GAO.

a

Maxwell and Baseggio, Outpatient Therapy Services (2000). 

b

Maxwell et al., Part B Therapy Services (2001). 

c

Olshin et al., Study and Report (2002). 

d

Ciolek and Hwang, Feasibility and Impact Analysis (2004); Ciolek and Hwang, Development of a 

Model (2004); Ciolek and Hwang, Utilization Analysis (2004); and Ciolek and Hwang, Final Project 

Report (2004). 

Page 21 GAO-06-59 Medicare Outpatient Therapy Payments
As of October 2005, HHS had taken few steps toward developing a patient 

assessment instrument for assessing beneficiaries’ needs for outpatient 

therapy. Some health care settings, including inpatient rehabilitation 

facilities, home health agencies, and skilled nursing facilities, do have 

patient assessment instruments to collect functional status and other 

information on Medicare beneficiaries. Officials from HHS’s Office of the 

Assistant Secretary for Planning and Evaluation and CMS told us they 

were collaborating to examine the consistency of definitions and terms 

used in these settings. They expected to report to Congress by the end of

2005 (in response to the requirement in the Medicare, Medicaid, and 

SCHIP Benefits Improvement and Protection Act) on this effort to 

standardize patient assessment terminology, although they have no plans

to include outpatient therapy services in the effort. CMS officials and one 

of the provider groups we spoke with estimated that the development of a 

patient assessment instrument for outpatient therapy services would take 

at least 3 to 5 years. HHS officials said that the complexity of the task and 

resource constraints precluded them from including outpatient therapy 

services in their effort to standardize other patient assessment 

terminology. CMS has, however, funded a demonstration project with a 

private-sector firm that has developed a patient assessment instrument 

that collects functional status and functional outcomes for patients who 

receive outpatient therapy services, primarily physical therapy, in certain 

facilities.29 A report from the firm to CMS is expected in summer 2006. 

Recent assessments of Medicare claims data have shown that the 

circumstances that initially led to therapy caps—rising Medicare payments

for outpatient therapy and a high rate of improper payments—remain. 

CMS, however, has not implemented its contracted researchers’ proposal 

to strengthen its system of automated checks for denying payment of 

improper claims. Provider groups we spoke with agreed that Medicare was 

likely paying for some medically unnecessary therapy services and that 

improvements could be made to help strengthen the integrity of the 

payment system. 

Circumstances That 

Led to Therapy Caps 

Remain 

 29This demonstration project will analyze the feasibility of a pay-for-performance system in 

outpatient rehabilitation settings and also analyze the outcomes of therapy services for 

Medicare part B beneficiaries (who constitute about 15 percent of the 1.6 million patients 

in the firm’s database) on the basis of their condition and functional status. The project 

expects to identify appropriate care for particular therapy-related diagnoses, although the 

data have limited applicability to the entire Medicare population. 

Page 22 GAO-06-59 Medicare Outpatient Therapy Payments
According to recent CMS assessments of Medicare claims data, Medicare

payments for outpatient therapy services continue to rise. Over the 4-year

period from 1999 through 2002, Medicare spending for outpatient therapy 

more than doubled, from an estimated $1.5 billion to $3.4 billion, 

according to the CMS-contracted analysis of 2002 claims data released in 

2004.

30 Although outpatient therapy spending for 2003 and 2004 has not 

been fully estimated, overall Medicare part B expenditures—which include 

spending on outpatient therapy services—showed rapid growth (15 

percent) from 2003 to 2004, according to CMS estimates reported in 2005.31

CMS attributed this growth to five factors, one of which was increased use 

of minor procedures such as therapy performed by physicians and 

physical therapists.32 Payments for certain therapy services, for example, 

increased by 24 percent or more from 2003 to 2004. CMS officials told us 

that many valid reasons may exist for the significant growth in payments 

for outpatient therapy. For example, they said, some of the increase in 

therapy services could be due to the growth in recent years of elective 

services such as knee replacements.

CMS has also recently reported that improper payments made for 

outpatient therapy services have increased substantially in recent years. 

Specifically, in November 2004, CMS reported that the estimated error rate

for claims rose steadily from 10.9 percent in 1998 to 20.4 percent in 2000.33

CMS reported that most of the errors were due to insufficient 

documentation to support the services claimed, such as lack of evidence 

of physician review and certification of treatment plans. In January 2005, 

CMS reported error rates in a random sample of more than 160,000 fee-for-

 30Ciolek and Hwang, Final Project Report (2004). 

31Letter from the Director, Center for Medicare Management, Centers for Medicare &

Medicaid Services, to the Chair, Medicare Payment Advisory Commission, March 31, 2005,

and accompanying data. 

32The five factors were increased spending for office visits (29 percent of overall growth), 

increased use of minor procedures including therapy (26 percent), more frequent and

complex imaging services (18 percent), more laboratory and other tests (11 percent), and

more use of prescription drugs in doctors’ offices (11 percent). The greatest contributors to

the increase in minor procedures were the administration of drugs and physical therapy,

including procedures such as manual therapy and neuromuscular reeducation of 

movement. See Center for Medicare Management Director’s letter (Mar. 31, 2005). 

33Centers for Medicare & Medicaid Services, Medicare Financial Limitations on 

Outpatient Rehabilitation Services (Baltimore, Md.: November 2004). 

Page 23 GAO-06-59 Medicare Outpatient Therapy Payments
service claims, which included therapy services, from 2003.34 The agency

found that claims submitted for therapy services were among those with 

the highest rates of payments made in error because of insufficient 

documentation or medically unnecessary services.35 Such services 

included procedures frequently provided by therapists, such as therapeutic 

exercise,36 therapeutic activities,37 neuromuscular reeducation, electrical 

stimulation, manual therapy, and physical therapy evaluation. For 

example, 23.5 percent of claims for therapeutic activities lacked sufficient 

documentation, resulting in projected improper payments of more than 

$34 million.38 Claims for therapeutic exercises had a “medically

unnecessary” error rate of 3 percent, with projected improper payments of 

more than $18 million. 

Our past work found that CMS needed to do more medical reviews of 

beneficiaries receiving outpatient therapy services. We reported in 2004, 

for example, that in Florida, comprehensive outpatient rehabilitation 

facilities were the most expensive class of providers of outpatient therapy 

services in the Medicare program in 2002.

39 Per-beneficiary payments for 

outpatient therapy services to providers in these facilities were two to 

three times higher than payments to therapy providers in other facilities. 

We recommended that CMS direct the Florida claims administration 

 34Centers for Medicare & Medicaid Services, Improper Medicare Fee-for-Service Payments

Report, Fiscal Year 2004 (Baltimore, Md.: January 2005). 

35An “insufficient documentation” error means that the provider did not include pertinent

patient facts (e.g., the patient’s overall condition, diagnosis, or extent of services 

performed), or the physician’s orders or documentation were incomplete. “Medically 

unnecessary” errors included situations where the claim reviewers identified enough

documentation in the medical record to make an informed decision that the services billed 

to Medicare were not medically necessary. 

36Therapeutic exercises—such as treadmill use, stretching, and strengthening—develop 

strength, endurance, range of motion, or flexibility. 

37Therapeutic activities—such as bending, lifting, and carrying—improve functional 

performance. 

38CMS’s estimate of improper payments was projected because the data collected had not 

been adjusted to exclude beneficiary co-payments, deductibles, or reductions to recover

previous overpayments. 

39GAO, Comprehensive Outpatient Rehabilitation Facilities: High Medicare Payments in

Florida Raise Program Integrity Concerns, GAO-04-709 (Washington, D.C.: Aug. 12, 2004). 

Page 24 GAO-06-59 Medicare Outpatient Therapy Payments
contractor to medically review more claims from comprehensive 

outpatient rehabilitation facilities.40

CMS’s contracted researcher concluded that CMS could improve its claims

system by identifying and implementing modifications to the agency’s 

automated claims review system to better target payments to medically 

appropriate care.41 In doing their analysis of the 2002 claims, they 

identified three types of specific edits that they found to be feasible and

that would reject claims likely to be improper: 

• Edits to control multiple billings of codes that are meant to be billed only 

once per patient per visit. The contracted researchers estimated that in 

2002, the impact of this type of improper billing amounted to $36.7 million. 

• Edits to control the amount of time that can be billed per patient per visit 

under a single code, since most conditions do not warrant treatment times 

exceeding 1 hour. The contracted researchers estimated that in 2002, the 

impact of this type of improper billing amounted to $24–$100 million, 

depending on the amount of time per visit billed under a given code. 

• Edits of clinically illogical combinations of therapy procedure codes. In 

analyzing 2002 Medicare claims data, the contractor found limited system 

protections to prevent outpatient therapy providers from submitting 

claims for procedures that are illogical for a given diagnosis. One example, 

according to the contractor’s report, was claiming for manual therapy 

submitted with a diagnosis of an eye infection. The estimated impact of 

improper billings based on illogical combinations of diagnosis and 

procedure codes in 2002 amounted to $16.7 million. 

CMS officials agreed with the contracted researcher that such edits are 

worth considering, but the agency had not implemented them as of 

October 2005. A CMS official told us, however, that CMS is implementing 

the proposed edits to control multiple billings of codes meant to be billed 

only once per patient per visit; the agency expects these edits to be in 

place in early 2006. As of October 2005, CMS was still considering whether 

to implement the other two types of edits. In addition to the three types of 

edits identified by the contracted researcher, the researcher proposed 

routine data analysis of Medicare claims to identify other utilization limits 

 40According to a CMS official, this recommendation had not been implemented as of August

2005. 

41Ciolek and Hwang, Feasibility and Impact Analysis (2004); Ciolek and Hwang, Final 

Project Report (2004). 

Page 25 GAO-06-59 Medicare Outpatient Therapy Payments
that could be applied to better target Medicare payments. CMS is 

considering whether and how to implement this type of analysis. 

Provider groups we spoke with agreed that Medicare was likely paying for 

some medically unnecessary therapy services and that improved payment 

edits could help ensure that Medicare did not pay for such services. 

Nevertheless, representatives from these groups stressed the importance 

of mechanisms that would allow Medicare to cover payments for 

beneficiaries who need extensive care. The representatives noted that an

exception process, based on a medical review, could help determine the 

appropriateness of therapy services. Such an exception process could be 

invoked to review the medical records of beneficiaries whose providers 

seek permission for coverage of Medicare payments in excess of the caps. 

CMS officials agreed that an appeal process or waiver from the caps could 

be a short-term approach to focus resources on needy beneficiaries. They 

added that possible criteria for waiving the caps could include (1) having

multiple conditions; (2) having certain conditions, levels of severity, or 

multiple conditions suggested by research as having greater need for 

treatment; (3) having needs for more than one type of service, such as 

occupational therapy and speech-language pathology; or (4) having prior 

use of services or multiple episodes in the same year. HHS does not, 

however, currently have the authority to implement a process, or to 

conduct a demonstration or pilot project, to provide exceptions to the 

therapy caps. 

Medicare payments for outpatient therapy continue to rise rapidly, and 

20 percent or more of claims may be improper. To date, however, HHS has 

made little progress toward a payment system for outpatient therapy 

services that is based on patients’ needs. Furthermore, while CMS is 

considering ways to reduce improper payments, it has not implemented 

the contractor’s proposals for improving its claims-processing system. 

HHS has been required for years to take steps toward developing a 

payment system based on beneficiaries’ needs, which would require 

developing a process for collecting better assessment information. Studies

contracted by CMS to respond to requirements under three laws suggest 

that the department would need to develop a standard patient assessment 

instrument to define a patient’s diagnosis and functional status and 

thereby determine the patient’s medical need for therapy. In response to a 

statutory requirement to report on the standardization of patient 

assessment instruments in a variety of settings, HHS and CMS have an 

effort under way to study and report to Congress on the development of 

Conclusions 

Page 26 GAO-06-59 Medicare Outpatient Therapy Payments
standard terminology that Medicare providers could use to assess patients’ 

diagnosis and functional status. Although this provision requires that 

outpatient therapy services be included in this effort, HHS and CMS have 

not done so.

Concerns remain that when the current moratorium expires and the caps

are reinstated, some beneficiaries who have medical needs for therapy 

beyond what can be paid for under the caps may not be able to obtain the 

care they need. Some beneficiaries may not be able to afford to pay for 

care or may not have access to hospital outpatient departments, which are 

not subject to the caps. In the absence of patient assessment information, 

therefore, an interim process, demonstration, or pilot project may be 

warranted to allow HHS to grant exceptions to the caps. For example, 

such a project could allow beneficiaries, under circumstances that CMS 

determines, an exception to the cap on the basis of medical review 

supported by documentation from providers regarding their patients’ 

needs for extensive therapy. Such a project could also provide CMS with 

valuable information about the conditions, diseases, and functional status

of beneficiaries who have extensive medical needs for therapy. The 

information gathered through the project could also facilitate development 

of a standardized patient assessment process or instrument. HHS, 

however, would need legislative authority to conduct such a project. 

Although exceptions could increase Medicare payments for outpatient 

therapy, exceptions could provide one avenue for Medicare coverage

above the caps for some beneficiaries who need extensive therapy. 

Potentially, payment increases due to exceptions could be offset by 

implementation of the contractor-proposed improvements, such as edits. 

To provide a mechanism after the moratorium expires whereby certain

Medicare beneficiaries could have access to appropriate outpatient 

therapy services and to obtain better data needed to improve the Medicare

outpatient therapy payment policy, including data on the conditions and 

diseases of beneficiaries who have extensive outpatient therapy needs, 

Congress should consider giving HHS authority to implement an interim 

process or demonstration project whereby individual beneficiaries could 

be granted an exception from the therapy caps. 

Matter for 

Congressional 

Consideration 

Page 27 GAO-06-59 Medicare Outpatient Therapy Payments
To expedite development of a process for assessing patients’ needs for 

outpatient therapy services and to limit improper payments, we 

recommend that the Secretary of HHS take the following two actions: 

• ensure that outpatient therapy services are added to the effort already 

under way to develop standard terminology for existing patient 

assessment instruments, with a goal of developing a means by which to 

collect such information for outpatient therapy, and 

• implement improvements to CMS’s automated system for identifying 

outpatient therapy claims that are likely to be improper. 

We provided a draft of this report to HHS for comment and received a 

written response from the department (reproduced in app. I). HHS did not 

comment on the matter for congressional consideration, in which we said 

that Congress should give HHS authority to implement an interim process 

or demonstration project whereby individual beneficiaries could be 

granted an exception from the therapy caps. HHS concurred with our 

recommendation that it ensure that outpatient therapy services are added 

to the effort already under way to develop standard terminology for 

existing patient assessment instruments. The department stated that it is 

preparing to contract for a 5-month study to develop a policy and payment 

guidance report as it explores the feasibility of developing a post–acute 

care patient assessment instrument. 

In commenting on our recommendation to implement improvements to 

CMS’s automated system for identifying outpatient therapy claims that are 

likely to be improper, HHS discussed a national edit system to promote 

correct coding methods and eliminate improper coding. This national edit 

system has been applied to some therapy-related claims starting in 1996,

and HHS plans to apply it more broadly in 2006. While the national edit 

system is complementary to the edits proposed by CMS’s contracted 

study, CMS can do more by also implementing improvements to its 

payment system as suggested by the study’s specific findings. HHS also 

indicated that it was exploring other methods for automated evaluation of

claims but commented that its claims-processing system cannot always 

identify an improper claim from the information that is available on claim 

forms. We agree that the current system cannot always identify an 

improper claim, given the lack of information on the claim forms about a 

patient’s actual needs for therapy. It was this conclusion that led to our 

recommendation that HHS include outpatient therapy in its present efforts 

to improve the collection of patient assessment information. We believe 

that CMS can make improvements to its current automated system to 

Recommendations for 

Executive Action 

Agency Comments 

Page 28 GAO-06-59 Medicare Outpatient Therapy Payments
reduce improper claims, irrespective of its efforts to improve patient 

assessment information. As we noted in the draft report, CMS’s contracted

study found certain edits to be feasible using information already provided 

on claim forms, such as edits of clinically illogical combinations of therapy 

procedure codes. 

We are sending copies of this report to the Secretary of Health and Human 

Services, the Administrator of the Centers for Medicare & Medicaid 

Services, and other interested parties. We will also make copies available 

to others upon request. In addition, the report will be available at no 

charge on the GAO Web site at http://www.gao.gov. 

If you or your staff members have any questions about this report, please 

contact me at (202) 512-7119 or at steinwalda@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found on

the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix II. 

A. Bruce Steinwald 

Director, Health Care 

Page 29 GAO-06-59 Medicare Outpatient Therapy Payments
Appendix I: Comments from the Department of Health and Human Services Appendix I: Comments from the Department 

of Health and Human Services 

Page 30 GAO-06-59 Medicare Outpatient Therapy Payments
Appendix I: Comments from the Department of Health and Human Services 

Page 31 GAO-06-59 Medicare Outpatient Therapy Payments
Appendix I: Comments from the Department of Health and Human Services 

Page 32 GAO-06-59 Medicare Outpatient Therapy Payments
Appendix II: 

Ac

GAO Contact and Staff 

knowledgments 

Page 33 GAO-06-59 

Appendix II: GAO Contact and Staff 

Acknowledgments 

GAO Contact A. Bruce Steinwald, (202) 512-7119 or steinwalda@gao.gov 

In addition to the contact mentioned above, Katherine Iritani, Assistant 

Director; Ellen W. Chu; Adrienne Griffin; Lisa A. Lusk; and Jill M. Peterson 

made key contributions to this report. 

Acknowledgments 

Medicare Outpatient Therapy Payments
Related GAO Products Related GAO Products 

Medicare: More Specific Criteria Needed to Classify Inpatient

Rehabilitation Facilities. GAO-05-366. Washington, D.C.: April 22, 2005. 

Comprehensive Outpatient Rehabilitation Facilities: High Medicare

Payments in Florida Raise Program Integrity Concern. GAO-04-709. 

Washington, D.C.: August 12, 2004. 

Medicare: Recent CMS Reforms Address Carrier Scrutiny of Physicians’ 

Claims for Payment. GAO-02-693. Washington, D.C.: May 28, 2002. 

Medicare: Outpatient Rehabilitation Therapy Caps Are Important 

Controls but Should Be Adjusted for Patient Need. GAO/HEHS-00-15R. 

Washington D.C.: October 8, 1999. 

Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy in 

Nursing Homes. GAO/HEHS-95-23. Washington D.C.: March 30, 1995. 

(290341) Page 34 GAO-06-59 Medicare Outpatient Therapy Payments
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