Medicare Home Health Payment: Nonroutine Medical Supply Data Needed to Assess Payment Adjustments
Published: 2003-08-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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. 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. Industry representatives have questioned whether the episode  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 wound- care 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. And, under Medicare payment  rules, affected patients would pay more for supplies that were excluded  from the episode payment. 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. In consultation with the committees of  jurisdiction, we have examined whether (1) total HHA episode payments  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, university- based 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 patient- specific data on the cost and utilization of specific nonroutine medical  supplies, but did not.
subsections: section_title: Background
paragraphs: 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; 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.
subsections: section_title: Medicare Coverage of Medical Supplies
paragraphs: 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. 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. 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  parenteral and enteral nutrition feeding (such as catheters, filters, and  nutrient solutions) and tracheostomy care; and surgical wound dressings,  if they are required for treatment of a wound caused by a surgical  procedure or after the debridement 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).
section_title: Prospective Payment for HHAs
paragraphs: 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. 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. 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  home health resource groups (HHRG). 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.  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. 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  costs across payment groups. 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.
section_title: Refinements to the PPS
paragraphs: 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. 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  determining if there are inadequacies in the payment groups or  adjustments that require modifications to the PPS.
section_title: Episode Payments May Not Reflect Variation in Nonroutine Medical Supply Costs across Patients
paragraphs: 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. 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  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 above- average 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. 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.
section_title: Certain Nonroutine Medical Supplies May Warrant Exclusion from Episode Payment
paragraphs: 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. 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. 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. 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,  or more than three times the average supply cost. If there are no lower- cost 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  (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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Agency Comments
paragraphs: 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.
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.
section_title: Appendix I: Comments from the Centers for Medicare & Medicaid Services