Medicare Home Health Care: Payments to Home Health Agencies Are Considerably Higher than Costs
Published: 2002-05-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Balanced Budget Act of 1997 significantly changed Medicare's home health care payments to home health agencies (HHAs). Under a prospective payment system (PPS), HHAs are paid a fixed amount, adjusted for beneficiary care needs, for providing up to 60 days of care---termed a "home health episode." The act also imposed new interim payment limits to moderate spending until the PPS could be implemented.
section_title: What GAO Found
paragraphs: Although PPS was designed to lower Medicare spending below what it was under the interim system, GAO found that Medicare's payments for full home health care episodes were 35 percent higher than estimated in the first six months of 2001. These disparities indicate that Medicare's PPS overpays for services actually provided, although some HHAs facing extraordinary costs not accounted for by the payment system may be financially disadvantaged.

section_title: Letter
paragraphs: In response to rapidly rising home health spending from the late 1980s  through the mid-1990s, the Congress enacted major changes to Medicare’s  home health payments in the Balanced Budget Act of 1997 (BBA). These  and subsequent changes culminated in the implementation of a  prospective payment system (PPS) on October 1, 2000, which provides  incentives to home health agencies (HHAs) to operate efficiently. Under  the PPS, HHAs are paid a fixed amount, adjusted for a beneficiary’s care  needs, for providing up to 60 days of care, termed a home health episode.  The BBA also created an interim payment system (IPS) that imposed new  payment limits to moderate spending until the PPS could be implemented.  The PPS was designed to lower Medicare spending below what it was  under the IPS. This spending reduction was to be achieved by setting the  PPS episode payment amount so that total home health spending under  the PPS in fiscal year 2000 would equal what would have been spent had  the interim limits been reduced by 15 percent. Subsequent legislation  delayed implementation of the mandated reduction to the episode  payment amount until October 2002. The Centers for Medicare and  Medicaid Services (CMS) has determined that the fiscal year 2003 episode  payment rate would have to be reduced by about 7 percent to achieve the  mandated level of savings.
To help decide whether to implement, modify, or eliminate the reduction  to Medicare home health payments, the Congress directed us to evaluate  payments under the PPS. To do this, we estimated average home health  episode costs and calculated average episode payments for the first 6  months of 2001. We also interviewed industry representatives and officials  from CMS and reviewed regulations and studies of the home health PPS.  We performed our work from November 2001 through April 2002 in  accordance with generally accepted government auditing standards. (For a  discussion of our scope and methodology, see appendix I.)
subsections: section_title: Background
paragraphs: Medicare’s home health 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 confined to  their residence (“homebound”); require part-time or intermittent skilled  nursing, physical therapy, or speech therapy; be under the care of a  physician; and have the services furnished under a plan of care prescribed  and periodically reviewed by a physician. If these conditions are met,  Medicare will pay for the following types of visits: skilled nursing;  physical, occupational, and speech therapy; medical social service; and  home health aide. As long as beneficiaries continue to remain eligible for  home health services, they may receive an unlimited number of visits.  Beneficiaries are not liable for any out-of-pocket costs for this benefit.
subsections: section_title: Pre-BBA Spending and Service Use
paragraphs: Medicare home health payments grew at an average annual rate of 25  percent between 1990 and 1997, more than three times the rate of  spending growth for the entire Medicare program. The growth in spending  was attributable primarily to increases in the number of visits provided  and not in the payment per visit. The number of Medicare beneficiaries  receiving home health almost doubled during that period, from 57 to 109  beneficiaries per 1,000. At the same time, the average number of visits  provided per home health user grew from 36 to 73 visits. The rapid growth  in home health use was due, in part, to the cost-based payment method.  Under the cost-based system, HHAs were paid their costs up to a per-visit  limit for each visit provided. This method, at a time when there was little  program oversight, offered few incentives to provide visits efficiently or  only when needed.
By 1997, home health utilization—as measured by the number of home  health users per 1,000 Medicare beneficiaries and the number of visits  provided—varied widely across geographic regions. For example, 48  Medicare beneficiaries per 1,000 in Hawaii received home health care in  1997. In the same year, more than 157 beneficiaries per 1,000 received  home health care in Louisiana. Meanwhile, Medicare home health users in  Washington received an average of 32 visits, compared to an average of  161 visits per user in Louisiana. This wide variation in use persisted even  after controlling for patient diagnosis. This variability is partly due to the  lack of standards for necessary or appropriate care. Furthermore, even the  most basic unit of service—the visit—was not well defined in terms of  either the amount of time spent with a patient or the type of services  provided.
section_title: BBA Changes to Home Health Payment Policies
paragraphs: To constrain Medicare home health spending growth, BBA required HCFA  to replace Medicare’s cost-based, per-visit payment method with a PPS by  fiscal year 2000. Until PPS could be implemented, BBA imposed spending  controls under the IPS: For 3 years beginning October 1, 1997, the IPS  incorporated tighter per-visit cost limits than had previously been in place  and subjected each HHA to an annual Medicare revenue cap, which was  the product of an HHA-specific, per-beneficiary amount and the number of  beneficiaries that the HHA served.
Under the PPS, an HHA receives a single payment for all items and  services furnished during each 60-day episode of care. The payment rate  is based on the national average cost of providing care in 1997, not an  HHA’s actual costs. Because the payment is divorced from an HHA’s cost  of delivering care, an HHA that delivers care for less than the payment  amount can profit; conversely, an HHA will lose financially if its service  costs are higher than the payment. To account for differences in  beneficiary care needs, PPS episode payments are adjusted from a base  rate (which was $2,115 in fiscal year 2001). These adjustments are based  on a classification system that groups home health beneficiaries into 80  payment groups. The payment for a beneficiary in the most intensive  payment group is approximately five times greater than the payment for a  beneficiary in the least intensive group. In fiscal year 2001, episode  payments ranged from $1,114 to $5,947.
section_title: Financial Incentives of Episode-Based Payments
paragraphs: We have reported the strong financial incentives under the home health  PPS to reduce the costs of providing an episode of care. HHAs can do this  by reducing unnecessary or excessive visits, delivering care more  efficiently, or underserving beneficiaries. We expressed concern that it  may be hard to detect when the latter occurs. The lack of standards for  necessary or appropriate care makes it difficult to review care and take  steps to ensure that needed services are being delivered. We also said that  the PPS could lead to substantial overpayments to some HHAs relative to  the level of services being provided. Further, we noted industry concerns  about the ability of some HHAs to respond to PPS incentives to reduce  their costs and about inadequacies in the method used to adjust payments  to account for differences in beneficiary care needs.
As a result of these concerns, we recommended that risk sharing be  incorporated into the PPS design. Risk sharing would limit the total  losses and gains an HHA could experience over a period of time for  treating beneficiaries by establishing formulas to share losses or gains  with the Medicare program. This would involve a settlement process in  which an HHA’s actual costs of delivering care over the relevant period  would be compared to its actual payments. Such an approach would  simultaneously protect beneficiaries against underservice, the Medicare  program from overpaying for services, and HHAs serving beneficiaries  with greater than average needs when the costs are not accounted for in  the payment adjustments. HCFA did not agree with our recommendation,  stating that the PPS design and payment adjustments would address our  concerns and that risk sharing would be difficult to implement. We  subsequently suggested that the Congress consider requiring HCFA to  implement risk sharing with the PPS.
section_title: Home Health PPS Episode Payments Are Considerably Higher than Estimated Costs of Care Provided
paragraphs: The average episode payment HHAs received to provide an episode of care  in the first 6 months of 2001 was about 35 percent higher than the average  estimated cost of providing that care. The average episode payment,  accounting for the mix of beneficiaries treated in the first 6 months of  2001, was $2,691. (See table 1.) During this period, we estimated that the  cost of providing an episode of care was $1,997 after adjusting for the mix  of services provided by agencies and changes in the average time spent for  each type of visit since the introduction of the PPS.
This large difference between the average episode payment and estimated  cost is due to three factors. First, the PPS episode payment amount was  calculated on the assumption that about 32 visits would be provided  during an average episode, although immediately prior to PPS  implementation only about 29 visits per episode were provided. Second,  HHAs have further lowered their costs since PPS by providing, on average,  only about 22 visits per episode during the first half of 2001. Third, HHA  payments have increased because a larger proportion of home health  users have been categorized into higher payment groups.
While the PPS adjusts payment rates to account for expected variation in  costs due to patient care needs, the relationship between average  payments and average estimated costs masks wider differences between  payments and estimated costs across the 80 home health payment groups.  The relationship between payments and estimated costs for the 10  payment groups that account for almost half of home health episodes  ranged from 72 percent above the estimated cost to 4 percent below in the  first 6 months of 2001. (See table 2.) For the five payment groups with the  lowest payments relative to estimated costs, which accounted for 8  percent of all episodes, the payment ranged from about 9 percent below to  about equal the average estimated cost of services provided.  The payment  was greater than the average estimated cost for the remaining groups.
For any HHA, the relationship between Medicare payments and the costs  of providing care will likely vary from the averages we report here. The  PPS was designed to provide adequate payments to HHAs that operate  efficiently and to provide incentives for HHAs to become more efficient.  But certain HHAs may have costs higher than payments if they face  extraordinary costs not accounted for by the PPS payment groups.
section_title: Conclusions
paragraphs: The Medicare program is paying HHAs on average considerably more than  the estimated cost of care beneficiaries are receiving. Consequently,  implementation of the BBA-mandated 15 percent payment reduction,  which would lower fiscal year 2003 PPS payments by 7 percent, should not  affect HHAs’ ability to serve Medicare beneficiaries. This payment  reduction would move the Medicare program closer to becoming a  prudent purchaser of home health care, but the reduction by itself is not  sufficient. A single payment to cover all services provided during a 60-day  episode of care, combined with the lack of standards for what constitutes  necessary or appropriate home health care, leaves beneficiaries vulnerable  to underservice, Medicare vulnerable to future overpayments, and HHAs  with a disproportionate number of beneficiaries with extensive needs  vulnerable to underpayments. Implementing the 15 percent reduction  would not lessen these vulnerabilities. This is why we have previously  recommended that the PPS include risk sharing to simultaneously protect  beneficiaries, the Medicare program, and HHAs.
section_title: Matters for Congressional Consideration
paragraphs: The Congress should consider making no change in the requirement for a  reduction in Medicare home health payments. We continue to urge the  Congress to require CMS to incorporate risk sharing into the PPS design.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, CMS stated that our findings  are consistent with its preliminary analysis of data for the first year of the  PPS. It noted that cost report data, which are not yet available for the first  year of the PPS, would be required to determine the costs of home health  services under the PPS with certainty. CMS reiterated its concerns about  implementing risk sharing as a part of the PPS. It believes that risk sharing  would undermine the main benefit of PPS, which is payments that are  timely and predictable. Further, CMS stated its belief that the outlier  payment policy under the home health PPS and planned monitoring  activities should mitigate our concern that some HHAs may be vulnerable  to underpayments. Finally, CMS stated that risk sharing is administratively  difficult.
Although cost report data would more accurately reflect an HHA’s costs,  our episode cost estimates build on historic visit costs, adjusted for  inflation and changes in visit time, and reflect actual service use, a major  determinate of episode costs. We believe that the new evidence we present  on the wide disparity between payments and estimated costs on average  and across payment groups demonstrates the need for and the value of  risk sharing in conjunction with the home health PPS. Risk sharing would  not remove the incentives under the PPS for HHAs to provide care  efficiently, because they would continue to benefit financially when their  costs are below their payments and lose financially when their costs are  above their payments. Yet, risk sharing would mitigate extreme gains and  losses under the PPS. While the monitoring activities and refinements that  CMS discusses such as revisions to the payment groups could mitigate  extreme gains or losses, it could be some time until they are implemented.  Furthermore, outlier payments, which account for less than 3 percent of  payments, are not by themselves sufficient to protect vulnerable HHAs  that have higher than average costs across a number of patients, nor do  they protect the Medicare program from excessive spending.
We believe that CMS could overcome any administrative difficulties in  implementing risk sharing. CMS incorporated a risk-sharing arrangement  in its demonstration project on the home health PPS while ensuring  predictable and timely payments. We note that CMS has considerable  experience in adjusting prospective payments to providers based on  expectations for a provider’s costs in the coming year, most recently in  implementing the hospital outpatient PPS, which has a provision to  protect hospitals from losses.
CMS’ comments are included as appendix II.
We received oral comments on a draft of this report from representatives  of three home health care associations—American Association for  Homecare (AAHomecare), National Association for Home Care (NAHC),  and Visiting Nurse Associations of America (VNAA). These organizations  disagreed with our conclusions. All three associations expressed concern  about the effect of a potential payment reduction on the industry’s stability  and, in particular, its ability to care for medically complex patients. The  associations said it was too early in the experience of the PPS to  accurately measure home health care use, visit costs, episode costs, or  industry profit margins. VNAA stated that our cost estimates do not reflect  current fixed costs under the PPS. NAHC raised questions about the  timeliness of payments if risk sharing is a part of the home health PPS. The  associations said that more information was needed on how low- utilization episodes, partial episodes, and outlier payments would affect  the relationship between average episode costs and payments to HHAs.
Our results are consistent with CMS’ analysis of a full year of experience  under the PPS.  Our analysis of 1.48 million episodes did not consider the  payment reduction for partial episodes, payment enhancement for  outliers, or variable payment adjustments for a significant change in a  beneficiary’s condition. When calculating episode payments and estimated  costs we treated these as full episodes. The impact of these payment  adjustments on average episode payments is likely to be minimal because  they are partially offsetting and apply to less than 8 percent of episodes.  Whether the visit costs for these types of episodes is different from the  average visit costs is not known. We excluded low-utilization episodes  from our analysis because they are not paid an episode rate. HHA visits  per user have been dropping since 1997, allowing ample time for HHAs to  bring their fixed costs in line with current use patterns. The magnitude of  the difference between payments and estimated costs provides compelling  evidence that the legislated reduction would not destabilize the home  health industry. Further, risk sharing if implemented would moderate any  negative effects on the HHAs that may incur costs that are higher than  these estimates including when HHAs treat medically complex patients.
We are sending copies of this report to the Administrator of CMS. We will  also make copies available to others upon request.
If you or your staff have any questions, please call me at (202) 512-7114.  Other contacts and staff who contributed to this report are listed in  appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: We conducted our analyses using Medicare provider, claims, and  beneficiary files for calendar years 2000 and 2001. We included only those  providers that were listed as active in each year. For episodes ending on  January 1, 2001 through June 30, 2001, we used all final bills from the  home health Standard Analytic File (SAF) for 2001 that were available as  of January 24, 2002.  Our file of 1.48 million episodes, which excludes all  low-utilization episodes, does not include any claims for the first 6 months  of 2001 submitted after January 24, 2002. For 2000, we used all final bills  ending on January 1, 2000 through June 30, 2000.
To compute our estimate of average episode costs, we used HCFA’s per- visit cost estimates that were used to establish the PPS episode rates and  that were calculated from the sample of fiscal year 1997 audited costs  reports. The per-visit costs, which include all costs of home health  services covered and paid for on a reasonable cost basis, were inflated to  2001 cost levels using the market basket index for home health services.  Then we adjusted the per-visit costs to account for the change in the time  spent for each type of visit in 2001 compared to 2000. We estimated  episode costs by multiplying the adjusted per-visit cost for each type of  visit by the average mix of visits provided in each payment group in a 2001  episode. We also added an additional amount for the costs of other  services not included in the per-visit costs. Our methodology assumes that  the relationship between direct patient care costs and overhead costs has  remained the same over time and therefore that administrative costs have  not increased or decreased since the PPS.
We calculated the average payment as the payment amount for each of the  80 payment groups weighted by the proportion of all episodes in 2001  provided within each payment group.
We interviewed CMS officials and industry representatives from the  American Association for Homecare, National Association for Home Care,  Gentiva Health Services, Rocky Mountain Health Care, and the Visiting  Nurse Associations of America regarding the changes in provider practices  since the implementation of PPS.
section_title: Appendix II: Comments from the Centers for Medicare and Medicaid Services
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, Leslie V. Gordon, Dan Lee, Carolyn  Manuel-Barkin, Lynn Nonnemaker, and Paul M. Thomas made key  contributions to this report.