a

GAO

United States General Accounting Office

Report to Congressional Committees

August 2003 MEDICARE HOME 

HEALTH PAYMENT

Nonroutine Medical 

Supply Data Needed to 

Assess Payment 

Adjustments

GAO-03-878
Although Medicare’s home health payment includes the average costs of 

nonroutine medical supplies, adjusted payments may not reflect variation in 

supply costs across types of patients. Further, home health agencies can be 

paid the same amount for treating patients with quite different supply costs. 

This means that under the PPS, patients who require costly supplies may 

have problems accessing home health care and the agencies that treat them 

may be financially disadvantaged. This is of particular concern for patients 

who have nonroutine medical supply needs that are easily identified prior to 

admission or who require supplies for which there are no lower-cost 

alternatives. 

Excluding certain nonroutine medical supplies from the home health 

payment and reimbursing them separately would help ensure that patients 

have access to these supplies and that agencies are protected financially for 

providing them. At the same time, this would weaken the cost-control 

incentives of the PPS as well as increase patient out-of-pocket costs. Such a 

policy might be warranted, however, for nonroutine medical supplies that 

are high-cost, relative to the total payment, and infrequently used because 

the payment adjustment to account for differences in patient needs may not 

be adequate to compensate a home health agency for providing these 

supplies. 

Patient care representatives suggest that an additional category of supplies 

should be excluded from the payment and reimbursed separately, namely 

those that a patient had been using prior to home health care to treat an ongoing condition. Clinical experts indicated that care has been disrupted for 

some patients who require these kinds of supplies because some home 

health agencies have required patients to switch supplies or limited the 

supplies provided to them. Although the Centers for Medicare & Medicaid 

Services (CMS) has asked home health agencies to report information on 

nonroutine medical supply use and cost, they have not done so. Without this 

patient-specific supply data, CMS does not have the ability to determine 

whether the PPS needs to be adjusted to account for nonroutine medical 

supply costs or whether certain supplies should be excluded from the 

payment. 

Under Medicare’s prospective 

payment system (PPS), home 

health agencies receive a single 

payment, adjusted to reflect the 

care needs of different types of 

patients, for providing up to 60 

days of home health care. Some 

home health industry 

representatives have suggested that 

certain nonroutine medical 

supplies (such as wound-care 

dressings) should be excluded from 

this payment and reimbursed 

separately because of their high 

cost. The Medicare, Medicaid, and 

SCHIP Benefits Improvement and 

Protection Act of 2000 required 

GAO to examine home health 

agency payments for nonroutine 

medical supplies and recommend 

whether payment for any such 

supplies should be excluded from 

the PPS. 

GAO recommends that CMS collect 

and analyze the data necessary to 

determine whether Medicare’s 

home health payments 

appropriately reflect the 

differences in nonroutine medical 

supply costs across types of 

patients. If any problems are 

identified, CMS should modify the 

PPS and, if necessary, seek 

statutory authority to exclude 

certain nonroutine medical 

supplies from the home health 

payment. CMS agreed with GAO’s 

first finding and stated that it was 

collecting the necessary data to 

evaluate Medicare payments. 

www.gao.gov/cgi-bin/getrpt?GAO-03-878.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Laura A. 

Dummit (202) 512-7119. 

Highlights of GAO-03-878, a report to 

congressional committees 

August 2003 

MEDICARE HOME HEALTH PAYMENT

Nonroutine Medical Supply Data Needed 

to Assess Payment Adjustments 
Page i GAO-03-878 Home Health Care Nonroutine Medical Supplies 

Letter 1

Results in Brief 3

Background 5

Episode Payments May Not Reflect Variation in Nonroutine 

Medical Supply Costs across Patients 9

Certain Nonroutine Medical Supplies May Warrant Exclusion from 

Episode Payment 11

Conclusions 13

Recommendations for Executive Action 14

Agency Comments 14

Appendix I Comments from the Centers for Medicare & 

Medicaid Services 17 

Abbreviations 

BBA Balanced Budget Act of 1997 

BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and 

 Protection Act of 2000 

CMS Centers for Medicare & Medicaid Services 

DME durable medical equipment 

HCFA Health Care Financing Administration 

HHA home health agency 

HHRG home health resource group 

PPS prospective payment system 

Contents 

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

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

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

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

reproduce this material separately. 
Page 1 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

August 15, 2003 

Congressional Committees 

The Balanced Budget Act of 1997 (BBA) mandated implementation of a 

prospective payment system (PPS) for home health agencies (HHA) that 

would provide a predetermined payment to cover the costs of all 

Medicare-covered home health visits and medical supplies delivered 

during home health care.1

 Under the PPS, HHAs receive a single payment, 

adjusted to reflect the care needs of the patient, for delivering up to 60 

days of care, called a home health “episode.” This episode payment is 

based on the historical national average cost of providing care, not on an 

HHA’s actual costs of treating any given patient. The episode payment is 

intended to cover the average costs of all home health visits and medical 

supplies provided during the episode—including routine and nonroutine 

medical supplies.2

 The all-inclusive payment provides HHAs with strong 

incentives to control their costs of care. Strategies that HHAs can use to 

control episode costs include reducing the number of visits, substituting 

lower paid or less skilled personnel, providing fewer or less costly 

supplies, purchasing supplies more efficiently, or treating a less expensive 

mix of patients. 

Under the PPS, each Medicare home health patient is assigned to a 

payment group based on certain clinical and service-use characteristics, 

and the episode payment is adjusted to account for differences in the 

average resource needs of the patients in each payment group. Even with 

these payment adjustments, the Centers for Medicare & Medicaid Services 

(CMS) and home health industry representatives have raised concerns 

about compensating for nonroutine medical supplies under the home 

health PPS.3

 Industry representatives have questioned whether the episode 

 1

Pub. L. No. 105-33, § 4603(a), 111 Stat. 251, 467-470 (codified at 42 U.S.C §1395fff (2000)). 

2

Routine medical supplies—such as swabs, cotton balls, and adhesive tape—are those used 

during the usual course of a large share of home health visits. Nonroutine medical supplies 

are used to treat a specific patient’s illness or injury and include items such as wound care 

dressings, catheters, intravenous supplies, and the supplies used to care for an ostomy (a 

surgically created opening in the body for the discharge of body wastes), such as drainage 

bags, pouches, and skin barriers. 

3

CMS, the agency responsible for administering the Medicare program, was known as the 

Health Care Financing Administration (HCFA) until July 1, 2001. This report refers to the 

agency as HCFA when referring to actions before the name change and as CMS when 

referring to actions taken since the name change. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

payments include all the costs of nonroutine medical supplies and whether 

episode payments for different types of patients are adjusted appropriately 

to reflect their nonroutine medical supply costs. CMS officials have 

acknowledged that payments may be too low for certain types of patients 

who require nonroutine medical supplies, such as those requiring woundcare supplies. 

Some home health industry representatives have suggested that certain 

nonroutine medical supplies, such as wound-care supplies’ be excluded 

from the episode payment and paid for separately by Medicare. This is 

because with the all-inclusive payment under the PPS, patients requiring 

costly nonroutine medical supplies or HHAs serving a disproportionate 

number of such patients could be disadvantaged. Paying for expensive 

supplies separately could diminish concerns about access to care for 

patients requiring these nonroutine medical supplies and protect HHAs 

that treat them. This may be particularly appropriate for high-cost, 

infrequently provided nonroutine medical supplies because Medicare’s 

payment is based on the average cost of treating all patients within a 

group. On the other hand, paying for specified supplies separately would 

dampen the incentives for HHAs to deliver services efficiently since HHAs 

would receive additional payments if they selected supplies that were 

excluded from the episode payment, even if lower-cost, clinically 

appropriate alternatives were available.4

 And, under Medicare payment 

rules, affected patients would pay more for supplies that were excluded 

from the episode payment.5

 CMS is currently assessing whether the home 

health PPS requires revisions. However, the agency has concluded it does 

not have the authority to exclude any supply costs from the episode 

payments. 

In this context, the Medicare, Medicaid, and SCHIP Benefits Improvement 

and Protection Act of 2000 (BIPA) required GAO to examine the provision 

of nonroutine medical supplies by home health agencies and recommend 

whether payment for such supplies should be excluded from the episode 

payment and paid for separately.6

 In consultation with the committees of 

jurisdiction, we have examined whether (1) total HHA episode payments 

 4

Furthermore, Medicare spending would increase unless the average episode payment was 

reduced by the cost of these supplies. 

5

Beneficiary spending would increase especially for those patients who require nonroutine 

medical supplies that are not otherwise covered under Medicare. 

6

Pub. L. No. 106-554, App. F § 505; 114 Stat. 2763, 2763A-531. 
Page 3 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

adequately account for nonroutine medical supply costs and (2) any 

nonroutine medical supplies should be excluded from the episode 

payment and paid for separately by Medicare. 

To conduct this work, we reviewed the provisions of BBA and the Health 

Care Financing Administration’s (HCFA) interim and final rules on the 

home health PPS to evaluate the design of the payment groups and 

adjustments. We conducted structured interviews with nine clinical 

experts about the use of nonroutine medical supplies by home health 

patients. The experts included home health nurses (including specialists in 

wound, ostomy, and continence care), physical therapists, universitybased researchers, and home health agency managers. We also conducted 

structured interviews with representatives from the National Association 

for Homecare, the Visiting Nurse Association of America, the American 

Home Care Association, the American Association for Homecare, the 

United Ostomy Association, and representatives from the Wound, Ostomy, 

and Continence Nurses Society. We did not directly determine if episode 

payments adequately accounted for the costs of these supplies because 

data were not available. We conducted our work from December 2000 

through August 2003 in accordance with generally accepted government 

auditing standards. During this period, CMS expected to receive patientspecific data on the cost and utilization of specific nonroutine medical 

supplies, but did not. 

Although the costs of all nonroutine medical supplies were used in 

establishing the average home health episode payment, adjusted payments 

may not reflect all the variation in the costs of nonroutine medical 

supplies for different types of patients. HCFA did not have data on the cost 

or use of specific nonroutine medical supplies to develop the payment 

groups or the payment adjustments. HCFA accounted for differences in 

supply costs across types of patients based on the average cost of staff 

time of the visits associated with the patient group. As a result, the episode 

payments appropriately reflect supply costs only when they vary with the 

cost of staff time. In addition, the payment groups may not adequately 

distinguish among types of patients based on their need for, and the costs 

of, nonroutine medical supplies. Because each payment group can include 

patients with widely varying clinical conditions, there may be some types 

of patients within a payment group who have above-average costs due to 

their needs for these supplies. 

Results in Brief 
Page 4 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

There are certain nonroutine medical supplies that should be considered 

for exclusion from the episode payment because of their high cost and 

infrequent use and others that should be considered because of continuity 

of care concerns. Payments based on average costs may not adequately 

account for high-cost, infrequently provided medical supplies. As a result, 

some HHAs may be unwilling to provide these supplies or will be 

financially disadvantaged if they treat patients with these needs. The 

clinical experts we consulted suggested that continuity of care would be 

another reason for excluding certain nonroutine medical supplies from the 

PPS episode payment. They noted that care had been disrupted for some 

patients who had been managing a chronic condition with supplies prior to 

receiving home health care. Industry representatives and wound-care 

nurses we interviewed stated that this disruption has occurred because 

some HHAs have required patients to switch supplies while receiving 

home health care or have limited the supplies provided to patients. 

However, CMS lacks data on the cost and frequency of use of individual 

supply items to modify the payment groups and adjustments and to 

determine whether certain nonroutine medical supply exclusions merit 

consideration. 

We are recommending that in evaluating refinements to the PPS, the 

Administrator of CMS should collect and analyze patient-specific data on 

the cost and utilization of individual nonroutine medical supplies to 

determine whether the payment groups and adjustments appropriately 

reflect the differences in supply costs. The Administrator should also 

gather and evaluate evidence on whether there have been systematic 

disruptions in the care for some patients under the PPS. If these analyses 

indicate problems with the current PPS, the Administrator of CMS should 

modify the payment groups and adjustments to better account for these 

supply costs or minimize care disruptions. If such refinements cannot 

resolve identified problems, the Administrator should seek the necessary 

legislative changes to exclude selected nonroutine medical supplies from 

the episode payment. 

CMS provided written comments on a draft of this report and concurred 

with the first finding. CMS stated that it was collecting the data needed to 

determine whether the home health payments reflect nonroutine medical 

supply cost differences across types of patients. The agency did not 

address our recommendation to evaluate whether there have been 

disruptions in care. 
Page 5 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

Medicare’s home health care benefit enables certain beneficiaries with 

post-acute-care needs (such as recovery from joint replacement) and 

chronic conditions (such as congestive heart failure) to receive care in 

their homes. To qualify for home health care, beneficiaries must be 

homebound;7

 require intermittent skilled nursing, or physical or speech 

therapy or occupational therapy on a continuing basis; be under the care 

of a physician; and have their home health care services furnished under a 

plan of care prescribed and periodically reviewed by a physician. If these 

conditions continue to be met, Medicare will pay for an unlimited number 

of episodes of care that can include skilled nursing care; physical, 

occupational, and speech therapy; medical social service; and home health 

aide visits.8

When a beneficiary begins receiving Medicare-covered home health care, 

all medical supplies except for durable medical equipment (DME) used by 

the patient are covered as part of the home health care.9

 Beneficiaries 

using home health care are not required to pay any deductibles or 

copayments for these services and supplies. 

For beneficiaries who are not receiving Medicare-covered home health 

care, Medicare part B (supplementary medical insurance) covers certain 

medical supplies for those not hospitalized or not in another inpatient 

setting.10 Beneficiaries are responsible for a 20-percent copayment for all 

supplies and services. Medical supplies covered under part B are limited to 

the devices used to replace bladder and bowel function (such as catheters, 

ostomy bags, and irrigation and flushing equipment); supplies required for 

 7

Beneficiaries are homebound when they have a condition that results in a normal inability 

to leave home except with considerable and taxing effort; absences from home must be 

infrequent or of relatively short duration or attributable to receiving medical treatment. 

8

Home health aide visits include personal care services, such as assistance with eating, 

bathing, and toileting; simple surgical dressing changes; assistance with certain 

medications; activities to support skilled therapy services; and routine care of prosthetic 

and orthotic devices. 

9

DME is equipment that can withstand repeated use, is generally used to serve a medical 

purpose, is not useful to a person without illness or injury, and can be used in the home 

(such as respirators, crutches, oxygen, and inhalators). 

10Participation in part B is voluntary (about 95 percent of beneficiaries participate) and part 

B is partly financed by monthly premiums paid by enrollees. 

Background 

Medicare Coverage of 

Medical Supplies 
Page 6 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

parenteral and enteral nutrition feeding11 (such as catheters, filters, and 

nutrient solutions) and tracheostomy12 care; and surgical wound dressings, 

if they are required for treatment of a wound caused by a surgical 

procedure or after the debridement13 of a wound. Such supplies must be 

ordered by a physician and be medically necessary. Medicare has coverage 

guidelines regarding the maximum number of each supply that is normally 

medically necessary per month (for example, the number of catheters or 

ostomy bags).14

On October 1, 2000, HCFA implemented the PPS for home health care. 

BBA stipulated that PPS payments cover all home health care services and 

supplies used to treat a beneficiary, including medical supplies, that were 

paid for on a reasonable cost basis at the time of enactment.15 Because 

DME was paid for on the basis of a fee schedule, it was not required to be 

included in the PPS and is paid for separately. The law also required HHAs 

to “consolidate” the billing and be paid for all Medicare-covered home 

health services and supplies provided to patients receiving home health 

care, even when they are furnished by an outside supplier under contract 

to the HHA.16 This all-inclusive payment gives HHAs an incentive to control 

the total costs of care provided during the episode, including the use of 

supplies. Under the home health PPS, HHAs that deliver care for less than 

the payment can profit. Conversely, HHAs will lose financially when their 

service costs are higher than the payment. 

Because patients who receive Medicare-covered home health care require 

differing amounts of care, a basic episode payment is adjusted based on 

the classification of each patient into one of 80 payment groups, called 

 11Parenteral nutrition is a method of delivering nutrition and other substances directly into 

a vein. Enteral nutrition includes oral feeding, sip feeding, and tube feeding. 

12A tracheostomy is a surgically created opening in the neck into the windpipe to provide 

an airway and to allow removal of secretions from the lungs. 

13Debridement is the removal of dead, infected, or foreign material from a wound. 

14The medical necessity for using more than the number of supplies indicated in the 

coverage policies has to be documented in the patient’s medical record. 

15BBA § 4603(a), 111 Stat. 467. 

16BBA § 4603(c)(2)(B), 111 Stat. 470-471. DME was excluded from the consolidated billing 

requirement by the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 

1999, Pub. L. No. 106-113, App. F, § 305; 113 Stat. 1501, 1501A-361, 62. 

Prospective Payment for 

HHAs 
Page 7 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

home health resource groups (HHRG).17 The classification is based on 

three dimensions of the patient—clinical condition, functional status, and 

expected use of services—that affect the total cost of the episode.18

Patients with similar total episode costs are grouped together: the use of 

nonroutine medical supplies contributes to, but does not determine, the 

payment group for any type of patient. The payment for each payment 

group is adjusted to reflect the average cost of providing services to 

patients in that group (as determined by the average time of the skilled 

nursing, home health aide, therapy, and other visits for the patients in the 

group) relative to the average cost of patients across all 80 payment 

groups.19 In fiscal year 2002, after adjusting for inflation, the basic episode 

payment was $2,274, with the payment adjusters resulting in payments for 

patients in the different HHRGs ranging from $1,197 to $6,393 per episode. 

The accuracy of the adjusted payments in reflecting the cost variation 

across patients depends on how well the payment groups distinguish 

among types of patients (and their episode costs) and how well the 

payment adjusters account for differences in total episode costs across the 

different payment groups. Shortcomings in either will result in some 

patients or payment groups being more financially attractive than others 

for HHAs to treat. We have reported that in the first 6 months of 2001 there 

was considerable variation in the relationship between payments and 

 17There are four clinical severity categories (ranging from minimal to high severity), five 

functional classifications (ranging from requiring little assistance with daily activities to 

requiring a high level of assistance) and four levels of service use (ranging from low to high 

expected resource use), for a total of 80 possible combinations. 

18The clinical condition is generally based on a primary orthopedic, neurologic, or diabetic 

diagnosis; the need for intravenous, parenteral, or enteral therapies; and the presence of 

vision impairment, pain, wounds or lesions (including pressure ulcers, stasis ulcers, and 

surgical wounds), dyspnea, urinary incontinence, bowel incontinence, bowel ostomy; and 

behavioral problems (such as significant memory loss, impaired decision making, physical 

aggression, disruptive or socially inappropriate behavior, and delusional or paranoid 

behavior). The use of nonroutine medical supplies will be reflected in the clinical 

dimension of a patient’s assessment. The functional status is based on the patient’s need 

for assistance with activities of daily living, including dressing, bathing, toileting, 

transferring (for example, moving from bed to chair), and locomotion. The expected use of 

services is based on the patient’s use of home health therapy services during the episode 

and the use of other health services (such as nursing home or rehabilitation hospital 

services) prior to receiving home health care. 

19For each visit, the minutes spent by each type of clinician (such as home health aides, 

nurses, and therapists) is multiplied by the average wage rate for the discipline of the 

clinician. These per-visit costs are totaled for all visits within an episode to obtain the cost 

for the episode. 
Page 8 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

costs across payment groups.20 For example, the episode payments for 10 

payment groups averaged about 1 percent above the average estimated 

episode cost, while for 10 other payment groups payments averaged 

almost twice the average episode cost. On average, episode payments 

were about 35 percent higher than the average estimated episode cost. 

Home health episode payments based on average costs may not be 

adequate for HHAs serving a disproportionate number of patients with 

high-cost nonroutine medical supply needs when a payment group 

includes few such patients. This is because if there are few high-cost 

patients in a payment group, their costs do not substantially increase the 

average cost for the group. In contrast, frequently provided high-cost 

services and supplies would boost average episode costs and, therefore, 

the payments based on them. 

HCFA’s efforts to refine the PPS, including a better accounting for 

nonroutine medical supply costs, began even before the PPS was 

implemented. For example, the agency considered excluding the costs of 

nonroutine medical supplies from the episode amount and paying for 

supplies covered under part B separately.21 HCFA concluded that it did not 

have the authority to exclude nonroutine medical supplies given the BBA 

requirement that all medical supplies be included in the episode payment. 

The agency also modified the HHRG patient classification system to better 

reflect the costs of high-cost patients with severe wounds, such as burns, 

after concerns were raised during the comment period on the proposed 

rule about the payments for these patients. Even with the revisions, HCFA 

officials acknowledged that the HHRGs may not adequately differentiate 

among home health patients, particularly those who need wound-care 

supplies, and that additional modifications might be needed. The agency 

plans to examine the payment groups and the payment adjusters using 

information on total episode costs, the visits provided during each 

episode, and patient diagnoses. CMS will use these analyses in 

 20U. S. General Accounting Office, Medicare Home Health Care: Payments to Home Health 

Agencies Are Considerably Higher Than Costs, GAO-02-663 (Washington, D.C.: May 6, 

2002). 

21This same reasoning was used to exclude from the PPS daily payment for skilled nursing 

facilities certain high-cost and infrequently provided services that could not be easily 

overprovided. See U. S. General Accounting Office, Skilled Nursing Facilities: Services 

Excluded From Medicare’s Daily Rate Need to be Reevaluated, GAO-01-816 (Washington, 

D.C.: Aug. 22, 2001). 

Refinements to the PPS 
Page 9 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

determining if there are inadequacies in the payment groups or 

adjustments that require modifications to the PPS. 

HCFA used the total costs associated with furnishing home health care, 

including the costs of nonroutine medical supplies, to establish the 

average episode payment. HCFA estimated average total episode costs 

based on 1997 audited costs of a representative sample of HHAs and 

updated these costs for inflation each year through 2000—the beginning of 

the home health PPS. HCFA added an amount (based on 1998 data) to the 

episode payment rate to account for the separate payments that had been 

made to external suppliers for nonroutine medical supplies furnished 

directly to patients receiving home health care. HCFA estimated that the 

costs of all nonroutine medical supplies averaged about 2 percent of 

episode costs (or about $50 per episode). 

The adjusted payment associated with each payment group may not reflect 

the variation in the cost of the supplies used across the payment groups. 

When HCFA determined the payment adjustments for the payment groups, 

it did not have data on the cost or use of specific nonroutine medical 

supplies for different types of home health patients. Instead of considering 

the costs of nonroutine medical supplies in varying the payments across 

each of the payment groups, the agency used the average cost of staff time 

associated with the average number of visits.22 For some types of patients, 

such as those needing wound-care supplies and dressing changes, 

increasing payments in proportion to the cost of staff time is likely to 

result in an appropriate adjustment to total payments if wound-care supply 

costs are proportionately higher for patients receiving more costly staff 

time. However, some types of patients who have above-average 

nonroutine medical supply costs may not require more costly staff time. 

For example, staff may not need to spend extra time with patients who, 

prior to receiving home health care, managed their own ostomy care and 

will continue to do so. As a result, payments could be too low for these 

types of patients. 

In addition, the payment groups may not adequately distinguish among 

types of patients and their need for, and costs of, nonroutine medical 

supplies. Each payment group can include patients with widely varying 

 22The time therapists, nurses, and aides spent with patients were used to calculate the 

payment adjustment. 

Episode Payments 

May Not Reflect 

Variation in 

Nonroutine Medical 

Supply Costs across 

Patients 
Page 10 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

clinical characteristics and nonroutine medical supply use. For example, 

the moderate clinical severity groups can include patients with diabetes 

and bowel ostomies, patients with stasis ulcers that are not healing, and 

patients with Parkinson’s disease—all of whom would be assigned to the 

same group even though their nonroutine medical supply costs could be 

quite different. These patients could be assigned to the same payment 

group, depending on their functional and service use characteristics. 

Although patients within a payment group have similar total episode costs, 

there could be subgroups of patients within a group who have aboveaverage episode costs because of their nonroutine medical supply needs. 

Thus, patients requiring costly nonroutine medical supplies could have 

more difficulty gaining access to care, particularly since these patients are 

easy to identify prior to admission. 

As part of CMS’s review of the current PPS, the agency says it will try to 

evaluate whether the payment groups and adjustments appropriately 

account for variation in nonroutine medical supply costs across types of 

patients. CMS has noted that if supply costs vary significantly for different 

types of patients, the agency may modify the payment groups to account 

for supply cost differences as well as staffing. 

However, CMS continues to lack patient-specific data on the use and cost 

of specific nonroutine medical supplies needed to assess the variation in 

nonroutine medical supply costs across patients. Although the agency 

asked HHAs to provide patient-specific information on the use of and 

charges for wound-care supplies, HHAs have not done so, which will 

hamper CMS’s ability to better account for these costs in the episode 

payments.23 Unless CMS renews its pursuit of these data and successfully 

obtains them, its refinements will continue to rely on aggregate nonroutine 

medical supply cost information to refine the payment groups even though 

these data are unlikely to be adequate to reflect the variation in supply 

costs across patients. 

 23When implementing the PPS, HCFA asked HHAs to include the number of wound-care 

supplies used and the associated charges on their claims so that future refinements could 

be made. HHA industry representatives said the HHA computer systems could not gather 

these data. 
Page 11 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

Patients requiring nonroutine medical supplies are classified into many 

different payment groups, so the payment for any given group, which is 

based on the group’s average cost, may not account for unusually high 

nonroutine medical supply costs. For example, patients with multiple 

pressure ulcers, who may need extensive supplies, could be grouped into 

any one of 40 payment groups, depending on the severity of the ulcers and 

the patients’ other clinical, functional, and service use characteristics. 

Similarly, the Wound, Ostomy, and Incontinence Nurses Society found that 

the few patients with ostomies were grouped into a wide range of payment 

groups.24 Due to this wide dispersion, there may not be enough patients 

requiring nonroutine medical supplies assigned to any given payment 

group to sufficiently increase the group’s average cost to reflect these 

patients’ above-average costs. 

Even patients with similar clinical characteristics who are classified into 

the same payment group may have widely varying nonroutine medical 

supply costs. The United Ostomy Association estimated that the supply 

costs for patients with ostomies vary fivefold.25 Likewise, using the 2002 

Medicare fee schedule as a proxy for supply costs, there is even more 

variation across the different types of surgical dressings.26 The costs of 

nonroutine medical supplies provided during an episode for wound-care 

patients could be considerably higher than the average, depending on the 

types of dressings provided, the price the HHA has to pay for them, and 

the number of dressing changes made during an episode. For example, an 

HHA providing 24 dressing changes during a patient’s episode, with each 

dressing costing $7, would incur $168 of nonroutine medical supply costs, 

 24Patients with bowel ostomies represented about 2 percent of all episodes. Of those, about 

42 percent of the episodes of patients with ostomies were grouped into the “low” clinical 

severity payment groups, 42 percent into the “medium” groups, and 15 percent were in the 

“high” groups. Each of the three groups includes 20 HHRGs. 

25The United Ostomy Association based its estimates on the episode data used to develop 

the PPS. 

26Under the 2002 Medicare fee schedule, payments for large dressings averaged over $9 per 

item for foam dressings and $174 for collagen dressings, and were between $16 and $39 per 

item for hydrogel and hydrocolloid dressings. 

Certain Nonroutine 

Medical Supplies May 

Warrant Exclusion 

from Episode 

Payment 
Page 12 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

or more than three times the average supply cost.27 If there are no lowercost alternatives or it is not possible to reduce the number of dressings, 

the HHA would be limited in its ability to provide a more cost-effective 

mix of visits and supplies to care for this patient. Therefore, some HHAs 

may be unwilling to provide costly supplies or will be financially 

disadvantaged if they do so. 

There is mixed evidence on whether there are any high-cost, infrequently 

provided nonroutine medical supplies. Some of clinical experts we 

consulted said there are no nonroutine medical supplies that are both 

high-cost and infrequently provided. 

Our review of the Medicare fee schedules for supplies indicated that most 

medical supplies are relatively low cost. For beneficiaries who are not 

receiving home health care, Medicare’s payment would be less than $20 for 

over 80 percent of all nonroutine medical supply items. But there are some 

high-priced items. For example, Medicare pays over $40 per item for 

certain tracheostomy, wound-care, and ostomy supplies when provided to 

patients not receiving home health care. 

The clinical experts suggested, however, that including nonroutine 

medical supplies in the payment has disrupted care for some patients, 

which could justify excluding these supplies from the episode payment. 

The experts noted that the use of nonroutine medical supplies for patients 

who were self-managing a chronic condition prior to their entering home 

health care could be disrupted by the cost containment strategies adopted 

by some HHAs. HHA representatives and wound-care nurses told us that 

under the PPS some HHAs have limited their inventories of particular 

types of nonroutine medical supplies or reduced the number of supplies 

they provide to patients. Such changes required some patients who had 

been self-managing chronic conditions to either change the type of supply 

 27The Medicare coverage guidelines indicate that hydrogel dressings with borders are 

typically changed up to three times per week. With 8 weeks in an episode, up to 24 dressing 

changes could be included in an episode without requiring additional documentation. The 

Medicare fee schedule amount for medium-sized (16 to 48 square inches) hydrogel 

dressings without borders is at least $10, but HHAs may be able to use their volume as 

leverage to obtain discounted prices. In this example, we have assumed that an HHA can 

purchase supplies at 30 percent less than the fee schedule amount. These supply costs 

would be higher if more expensive dressings (such as hydrogel dressings without borders 

or collagen dressings) are used, if the dressings are changed more frequently (for example, 

hydrogel dressings without borders are typically changed daily), or if the HHA purchases 

the supplies at a higher price than what we assumed. 
Page 13 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

(for example, the type of ostomy appliance) or number of supplies used 

while receiving home health care. Such actions are most likely to have 

affected patients with chronic medical conditions (such as bowel ostomies 

and tracheotomies) that they self-manage, where switching products may 

have impaired their sense of security and their ability to function as 

normally as possible. 

As part of its assessment of the effects of the home health PPS, CMS plans 

to examine changes in home health utilization, including the number, type, 

and duration of home health visits and the number of patients served. This 

could include an examination of whether certain types of patients, such as 

those requiring nonroutine medical supplies, have the same utilization 

now as they did prior to the PPS. But, due to the lack of information about 

individual supply items, these analyses cannot evaluate whether patterns 

of self-care have been disrupted. 

The adequacy of Medicare’s home health payment groups and adjustments 

to reflect the variation in episode costs across patients is critical to 

ensuring that patients and HHAs are not disadvantaged under the PPS. 

CMS is working on refinements that might include additional payment 

groups, different payment adjustments, or the exclusion of particular 

supplies from the episode payment. While there are sound reasons to 

retain most nonroutine medical supplies in the episode payment, 

excluding certain supplies may be warranted if the payment groups will 

not adequately account for their costs or if it has been demonstrated that 

patient access to care or continuity of care has been disrupted. 

Yet, CMS continues to lack patient-specific cost and utilization data on 

individual nonroutine medical supplies needed to evaluate if the payment 

groups could be improved or if certain supplies warrant consideration for 

exclusion from the PPS. Because CMS’s efforts to gather these data on a 

voluntary basis from HHAs have not been successful, the agency needs an 

alternative data collection method. One approach would be to gather data 

on the patients treated by a representative sample of HHAs, as CMS did in 

establishing the average episode payment. The agency also needs to gather 

systematic evidence on patterns of care to assess whether any supplies 

warrant consideration for exclusion because care has been disrupted. Yet 

even if these data confirm that there are high-cost and infrequently 

provided nonroutine medical supplies or that care has been disrupted, 

congressional authority is needed to make these exclusions. 

Conclusions 
Page 14 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

We are recommending that in evaluating refinements to the PPS, the 

Administrator of CMS collect and analyze patient-specific data on the cost 

and utilization of individual nonroutine medical supplies to determine 

whether the payment groups and adjustments appropriately reflect the 

differences in supply costs. The Administrator should also gather and 

evaluate evidence on whether there have been systematic disruptions in 

the care for some patients under the PPS. If these analyses indicate 

problems with the current PPS, the Administrator of CMS should modify 

the payment groups and adjustments to better account for these supply 

costs or minimize care disruptions. If such refinements cannot resolve 

identified problems, the Administrator should seek the necessary 

legislative changes to exclude selected nonroutine medical supplies from 

the episode payment. 

CMS provided written comments on a draft of this report. (See app. I.) 

CMS noted the importance of monitoring the impact of Medicare payment 

changes and improving payment systems over time. It referenced the 

research it is sponsoring with regard to the home health PPS. CMS agreed 

with the recommendation on the need to collect sufficient data to be able 

to evaluate the appropriateness of Medicare’s payments with regard to the 

provision of nonroutine medical supplies to home health patients. It stated 

that it was collecting such data and plans to fund analyses of these data, 

which will guide future policy decisions. CMS did not indicate whether it 

will consider changes to home health payment groups and adjustments if 

its research indicates problems nor did it mention if it will investigate 

whether particular types of patients are experiencing disruptions in care. 

Because HHAs could identify many of the patients with costly nonroutine 

medical supply needs prior to admitting them for home health care, we 

believe it is important to explicitly consider this group of patients in 

designing analyses of the impact of the home health PPS and to consider 

changes to the payment to ameliorate any identified problems. 

CMS also provided technical comments, which we incorporated as 

appropriate. 

Recommendations for 

Executive Action 

Agency Comments 
Page 15 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

We are sending copies of this report to the Administrator of the Centers 

for Medicare & Medicaid Services, appropriate congressional committees, 

and other interested parties. In addition, the report will be available at no 

charge on the GAO Web site at http://www.gao.gov. If you or your staffs 

have any questions, please call me at (202) 512-7119. This report was 

prepared under the direction of Carol Carter. 

Laura A. Dummit 

Director, Health Care—Medicare Payment Issues 
Page 16 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

List of Committees 

The Honorable Charles E. Grassley, Jr. 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable Bill Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

The Honorable W.J. “Billy” Tauzin 

Chairman 

The Honorable John D. Dingell 

Ranking Minority Member 

Committee on Energy and Commerce 

House of Representatives 
Appendix I: Comments from the Centers for Medicare & 

Medicaid Services 

Page 17 GAO-03-878 Home Health Care Nonroutine Medical Supplies 

Appendix I: Comments from the Centers for 

Medicare & Medicaid Services 

(290036) 
The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal 

government for the American people. GAO examines the use of public funds; 

evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good government 

is reflected in its core values of accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail 

this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail 

alerts” under the “Order GAO Products” heading. 

The first copy of each printed report is free. Additional copies are $2 each. A 

check or money order should be made out to the Superintendent of Documents. 

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a 

single address are discounted 25 percent. Orders should be sent to: 

U.S. General Accounting Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800 

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Public Affairs