Medicare: Little Progress Made in Targeting Outpatient Therapy Payments to Beneficiaries' Needs
Published: 2005-11-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: For years, Congress has wrestled with rising Medicare costs and improper payments for outpatient therapy services--physical therapy, occupational therapy, and speech-language pathology. In 1997 Congress established per-person spending limits, or "therapy caps," for nonhospital outpatient therapy but, responding to concerns that some beneficiaries need extensive services, has since placed temporary moratoriums on the caps. The current moratorium is set to expire at the end of 2005. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 required GAO to report on whether available information justifies waiving the caps for particular conditions or diseases. As agreed with the committees of jurisdiction, GAO also assessed the status of the Department of Health and Human Services' (HHS) efforts to develop a needs-based payment policy and whether circumstances leading to the caps have changed.
section_title: What GAO Found
paragraphs: Data and research available are, for three reasons, insufficient to identify particular conditions or diseases to justify waiving Medicare's outpatient therapy caps. First, Medicare claims data--the most comprehensive data for beneficiaries whose payments would exceed the caps--often do not capture the clinical diagnosis for which therapy is received. Nor do they show particular conditions or diseases as more likely than others to be associated with payments exceeding the caps. Second, even for diagnoses clearly linked to a condition or disease, such as stroke, the length of treatment for patients with the same diagnosis varies widely. Third, because of the complexity of patient factors involved, most studies do not define the amount or mix of therapy services needed for Medicare beneficiaries with specific conditions or diseases. Provider groups remain concerned about adverse effects on beneficiaries needing extensive therapy if the caps are enforced. HHS does not, however, have the authority to provide exceptions to the therapy caps. Despite several related statutory requirements, HHS has made little progress toward developing a payment system for outpatient therapy that considers individual beneficiaries' needs. In particular, HHS has not determined how to standardize and collect information on the health and functioning of patients receiving outpatient therapy services--a key part of developing a system based on individual needs for therapy. The circumstances that led to the therapy caps remain a concern. Medicare payments for outpatient therapy are still rising significantly, and increases in improper payments for outpatient therapy continue. HHS could reduce improper payments and Medicare costs by improving its system of automated processes for rejecting claims likely to be improper.

section_title: Letter
paragraphs: Medicare, the federal health program insuring more than 40 million  Medicare, the federal health program insuring more than 40 million  beneficiaries aged 65 and older or disabled, covers three outpatient  beneficiaries aged 65 and older or disabled, covers three outpatient  therapy services: physical therapy, occupational therapy, and speech- therapy services: physical therapy, occupational therapy, and speech- language pathology. Medicare covers these services only if they are  language pathology. Medicare covers these services only if they are  needed to improve a patient’s condition (for example, to aid stroke  needed to improve a patient’s condition (for example, to aid stroke  recovery or combat the effects of Parkinson’s disease) and are reasonable  recovery or combat the effects of Parkinson’s disease) and are reasonable  in amount, frequency, and duration. In 2002, the most recent year for  in amount, frequency, and duration. In 2002, the most recent year for  which complete data are available, an estimated 3.7 million, or about   which complete data are available, an estimated 3.7 million, or about   9 percent, of Medicare beneficiaries received one or more of these types of  9 percent, of Medicare beneficiaries received one or more of these types of  outpatient therapy.outpatient therapy.
Unless otherwise specified, throughout this report the terms outpatient therapy and  outpatient therapy services refer to all three therapy categories collectively: physical  therapy, occupational therapy, and speech-language pathology.
For many years, Congress has wrestled with rising Medicare costs of  providing outpatient therapy services. From 1990 through 1996, spending  on these services grew at nearly double the rate of Medicare spending  overall. Some of the growth was attributed to financial incentives in  Medicare payment methods, which encouraged use of services, and to the  lack of program oversight to prevent inappropriate payments. For  example, in 1995 we reported widespread examples of overcharging  Medicare for therapy services delivered to nursing home residents,  including markups resulting from providers’ exploiting regulatory  ambiguity and weaknesses in Medicare’s payment rules. In 1997, as a  means to control the spending growth, Congress established new caps on  the amount that Medicare would pay for outpatient therapy services for a  beneficiary in any given year. These therapy caps raised concern, however,  that patients with extensive need for outpatient therapy services would be  adversely affected—particularly patients who lacked access to hospital  outpatient departments, which are exempt from the caps. Since 1997, the  caps were actually in effect only in 1999 and part of 2003; in other years,  Congress placed temporary moratoriums on them. The current  moratorium on the therapy caps is due to expire at the end of December  2005.
As part of the 1997 legislation that established the therapy caps, Congress  also required the Department of Health and Human Services (HHS) to  report by 2001 on its recommendations for an alternative, “needs-based”  payment system for outpatient therapy services. We have reported that, in  contrast to less-targeted control over service use afforded by spending  limits, such a payment system could help target payments to beneficiaries  who genuinely require more services than could be paid for under the  therapy caps. A needs-based payment system could take into account the  type and extent of therapy warranted by a beneficiary’s health and  functional status (that is, the person’s ability to perform activities of daily  living, such as bathing, dressing, eating, or moving from one location to  another). In several laws enacted starting in 1997, Congress has directed  HHS to take certain actions related to the development of such a system,  including considering beneficiaries’ functional status in the design of a  new outpatient therapy policy and reporting on the development of  standard instruments for assessing the health and functional status of  patients receiving Medicare services, including outpatient therapy. Within  HHS, the Centers for Medicare & Medicaid Services (CMS), which  administers Medicare, has major responsibilities for this effort.
The Medicare Prescription Drug, Improvement, and Modernization Act of  2003 (MMA), which put in place the most recent moratorium on therapy  caps, directed us to report on the conditions or diseases that may justify  waiving application of the caps. To provide a greater range of information  about these issues, as agreed with the committees of jurisdiction, we also  examined HHS’s efforts to date in developing a needs-based payment  system. This report assesses (1) available information that could be used  to justify waiving outpatient therapy caps for particular conditions or  diseases, (2) the status of HHS’s efforts to base Medicare payment policy  on outpatient therapy on beneficiaries’ needs, and (3) whether the  circumstances initially leading to the caps have changed.
To assess whether available information could be used to justify waiving  outpatient therapy caps for particular conditions or diseases, we reviewed  data and research including analyses of Medicare claims data by CMS  contractors. We generally relied on the published results of CMS’s  contracted analyses performed on Medicare 2002 claims data. The  claims data used by CMS contractors and other health care researchers  are the most comprehensive data available for assessing Medicare  outpatient therapy and the conditions and diseases of Medicare  beneficiaries for whom payments would have exceeded the therapy caps  had a moratorium on the caps not been in place. We also reviewed the  literature on therapy treatment protocols and on the efficacy of outpatient  therapy for Medicare beneficiaries with selected conditions and diseases,  and we reviewed a related report by the Medicare Payment Advisory  Commission (MedPAC), an independent group of health care experts that  advises Congress on Medicare payment issues. To assess HHS’s response  to requirements for developing instruments to ensure that Medicare  payments for outpatient therapy are targeted to beneficiaries’ needs, we  reviewed the legislative history of Medicare’s outpatient therapy caps,  related requirements for HHS, and studies by CMS contractors. We  examined HHS’s actions in response to the legislative requirements and  studies’ proposals and reviewed administrative options for ensuring that  medically necessary therapy is available to beneficiaries over the short and  long terms under Medicare’s payment system. To determine whether the  circumstances leading to therapy caps—specifically, significant growth in  outpatient therapy payments and a high rate of improper payments—have  changed, we reviewed preliminary CMS estimates of overall Medicare part  B expenditures, which include spending on outpatient therapy services,  and CMS reports on improper payments for outpatient therapy services.  Finally, we obtained the opinions of four national organizations  representing the views of key providers of outpatient therapy services.  We conducted our work in accordance with generally accepted  government auditing standards from January through October 2005.
subsections: section_title: Background
paragraphs: Outpatient therapy services—covered under part B of the Medicare  program—comprise physical therapy, occupational therapy, and speech- language pathology to improve patients’ mobility and functioning.  Medicare regulations and coverage rules require that beneficiaries be  referred for outpatient therapy services by a physician or nonphysician  practitioner and that a written plan of care be reviewed and certified by  the providers at least once every 30 days. Beneficiaries receiving therapy  are expected to improve significantly in a reasonable time and to need  therapy for rehabilitation rather than maintenance. Medicare-covered  outpatient therapy services are provided in a variety of settings by  institutional providers (such as hospital outpatient departments, skilled  nursing facilities, comprehensive outpatient rehabilitation facilities,  outpatient rehabilitation facilities, and home health agencies) and by  noninstitutional providers (such as physicians, nonphysician practitioners,  and physical and occupational therapists in private practice). Both  institutional and noninstitutional providers—with the exception of  hospital outpatient departments—are subject to the therapy caps.
For more than a decade, Medicare’s costs for outpatient therapy services  have been rising, and widespread examples of inappropriate billing  practices, resulting from regulatory ambiguity and weaknesses in  Medicare’s payment rules, have been reported by us and others. In 1995 we  reported, for example, that while state averages for physical, occupational,  and speech therapists’ salaries in hospitals and skilled nursing facilities  ranged from about $12 to $25 per hour, Medicare had been charged   $600 per hour or more. HHS’s Office of Inspector General reported in  1999 that Medicare reimbursed skilled nursing facilities almost $1 billion  for physical and occupational therapy that was claimed improperly,  because the therapy was not medically necessary or was provided by staff  who did not have the appropriate skills for the patients’ medical  conditions.
To control rising costs and improper payments, Congress established  therapy caps for all nonhospital providers in the Balanced Budget Act of  1997. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement  Act of 1999 later imposed a moratorium on the caps for 2000 and 2001.  The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection  Act of 2000 then extended the moratorium through 2002. Although no  moratorium was in effect as of January 1, 2003, CMS delayed enforcing the  therapy caps through August 31, 2003. In December 2003, the Medicare  Prescription Drug, Improvement, and Modernization Act of 2003 placed  the most recent moratorium on the caps, extending from December 8,  2003, through December 31, 2005. The legislation establishing the caps  provided for two caps per beneficiary: one for occupational therapy and  one for physical therapy and speech-language pathology combined. The  legislation set the caps at $1,500 each and provided that these limits be  indexed by the Medicare Economic Index each year beginning in 2002.  When last in place in 2003, the two caps were set at $1,590 each.
To process and pay claims and to monitor health care providers’  compliance with Medicare program requirements, CMS relies on claims  administration contractors, who use a variety of review mechanisms to  ensure appropriate payments to providers. A system of automated checks  (a process CMS terms “edits”) flags potential billing errors and  questionable claims. The automated system can, for example, identify  procedures that are unlikely to be performed on the same patient on the  same day or pairs of procedure codes that should not be billed together  because one service inherently includes the other or the services are  clinically incompatible.
In certain cases, automated checks performed by CMS claims  administration contractors may lead to additional claim reviews or to  educating providers about Medicare coverage or billing issues. The  contractors’ clinically trained personnel may perform a medical review,  examining the claim along with the patient’s medical record, submitted by  the physician. Medical review is generally done before a claim is paid,  although medical review may also be done after payment to determine if a  claim was paid in error and funds may need to be returned to Medicare.
section_title: Insufficient Information Exists to Justify Waiving Therapy Caps for Particular Conditions or Diseases
paragraphs: The data and research available to date are insufficient to determine  whether any particular conditions or diseases may justify a waiver of  Medicare’s outpatient therapy caps. Medicare claims data are limited in  the extent to which they can be used to identify the actual conditions or  diseases for which beneficiaries are receiving therapies because the claims  often lack specific diagnostic information. In addition, analyses of the  claims data show no particular conditions or diseases as more likely than  others to be associated with payments exceeding the therapy caps. The  data also show that treatment for a single condition or disease, such as  stroke, may vary greatly from patient to patient. Finally, available research  on the amount and mix of outpatient therapy for people aged 65 and older  with specific conditions and diseases also appears insufficient to justify a  waiver of the therapy caps for particular conditions or diseases. It is  uncertain how many beneficiaries would have medical needs for therapy  costing more than the caps and yet be unable to obtain the needed care  because they have either insufficient financial resources or no access to a  hospital outpatient therapy department.
subsections: section_title: Medicare Claims Data Do Not Always Capture Clinical Diagnoses or Show Consistent Patterns That Would Justify Waiving Therapy Caps
paragraphs: Although Medicare claims data constitute the most comprehensive  available information for Medicare beneficiaries who have received  outpatient therapy, they do not always capture the clinical diagnosis for  which beneficiaries receive therapy. As such, they are insufficient for  identifying particular diseases and conditions that should be exempted  from the caps. Patients’ conditions or diseases are expressed in claims  data through diagnosis codes, and the coding system allows providers to  use nonspecific diagnosis codes that are unrelated to a specific clinical  condition or disease. A CMS-contracted analysis of 2002 Medicare  outpatient therapy claims data, for example, found generic codes, such as  “other physical therapy,” to be among the most often used diagnosis codes  on claim forms (see table 1). Moreover, current Medicare guidelines for  processing claims permit institutional providers, such as outpatient  rehabilitation facilities and skilled nursing facilities, to submit services  from all three therapy types on the same claim form, with one principal  diagnosis for the claim; a claim seeking payment for occupational therapy  and for speech-language pathology might therefore be filed under “other  physical therapy.”
Analysis of 2002 claims data does not show any particular conditions or  diseases that are more likely than others to be associated with payments  exceeding the therapy caps for physical therapy and speech-language  pathology combined or for occupational therapy. Among the top 99 most  reported diagnoses for physical therapy and speech-language pathology,  the analysis found no particular diagnoses associated with large numbers  of beneficiaries for whom payments would have exceeded the combined  physical therapy and speech-language pathology cap in 2002 had it been in  effect (see fig. 1). A similar pattern existed for occupational therapy.
section_title: Claims Data Do Not Provide Information about Patients’ Therapy Needs
paragraphs: Medicare claims data do not provide information about patients’ therapy  needs that could be used to justify waiving the therapy caps. Even in those  cases where particular conditions or diseases, such as stroke or  Alzheimer’s disease, are identified in the diagnosis codes, different  individuals with the same diagnosis can need different intensities or types  of therapy. For example, one patient with a stroke might be able to return  home from the hospital a day or two after admission, while another may  suffer a severe loss of functioning and require extensive therapy of more  than one type. The CMS-contracted analysis of 2002 claims found wide  variation in the number of treatment days required to conclude an episode  of care for beneficiaries who had the same “diagnosis,” such as stroke.  For example, the analysis found that while the median number of days per  episode of physical therapy for stroke patients was 10, episode length  ranged from 1 to 80 days. Similarly wide ranges in treatment length for  stroke patients appeared for occupational therapy (1 to 68 days per  episode, median 9) and speech-language pathology (1 to 66 days per  episode, median 7). Figure 2 shows the range in length of treatment per  episode for patients with a diagnosis of acute cerebrovascular disease  (stroke) for the three types of therapy.
section_title: Available Research Does Not Define Amount or Mix of Outpatient Therapy Needed for Medicare Beneficiaries with Specific Diseases or Conditions
paragraphs: Available research on the efficacy of outpatient therapy for people aged 65  and older with specific conditions and diseases also appears insufficient to  justify a waiver of particular conditions or diseases from the therapy caps.  Although our literature review found several studies demonstrating the  benefits of therapy for seniors and Medicare-eligible patients, this research  generally did not define the amount or mix of therapy services needed for  Medicare beneficiaries with specific conditions or diseases. One study, for  example, examined the benefits of extensive therapy for stroke victims at  skilled nursing facilities. The study concluded that high-intensity therapy  may have little effect on beneficiaries’ length of time spent in the facility  when their short-term prognosis is good; beneficiaries with poorer  prognoses, however, may benefit substantially from intensive therapy.  Further, because of the complexity of patient factors involved, these  studies cannot be generalized to all patients with similar diseases or  conditions. In addition, MedPAC, the commission that advises Congress  on Medicare issues, suggests that research should be undertaken on when  and how much physical therapy benefits older patients and that evidence  gathered from this research would assist in developing guidelines to  determine when therapy is needed.
section_title: Payments for More Than a Half Million Beneficiaries Would Have Exceeded Therapy Caps in 2002, but Adverse Effect Is Unknown
paragraphs: Medicare claims data suggest that payments for more than a half million  beneficiaries would have exceeded the caps had they been in place in  2002. It is uncertain, however, how many beneficiaries with payments  exceeding the caps would be adversely affected because they have  medical needs for care and no means to obtain it through hospital  outpatient departments. According to the CMS-contracted analysis of 2002  claims data, Medicare paid an estimated $803 million in outpatient therapy  benefits above what would have been permitted had the therapy caps been  enforced that year. Payments for about 17 percent of occupational therapy  users and 15 percent of physical therapy and speech-language pathology  service users would have surpassed the caps in 2002; these beneficiaries  numbered more than a half million (see table 2).
Although the claims data show that payments for more than a half million  beneficiaries would have exceeded the caps in 2002, it is unknown  whether beneficiaries would have been adversely affected had the caps  been in place. The data do not show the extent to which these  beneficiaries were receiving care consistent with Medicare requirements  that therapy improve a beneficiary’s condition and be reasonable in  amount, frequency, and duration. Also, it is not clear to what extent  hospital outpatient departments would serve as a “safety valve” for  Medicare beneficiaries needing extensive therapy and unable to pay for it  on their own. Past work by us and others has noted that the therapy caps  were integral to the Balanced Budget Act’s spending control strategy and  were unlikely to affect the majority of Medicare’s outpatient therapy users.  We reported that the hospital outpatient department exemption from the  cap was a mitigating factor in the mid-1990s, essentially removing the  coverage limits for those users who had access to hospital outpatient  departments. CMS-contracted analyses of claims data for 2002, however,  show that nearly all the Medicare beneficiaries whose payments would  have exceeded the caps did not receive outpatient therapy in hospital  outpatient departments. Specifically, an estimated 92 percent (469,850  beneficiaries) of those whose payments would have exceeded the  combined physical therapy and speech-language pathology cap—and 98  percent (126,488 beneficiaries) of those whose payments would have  exceeded the occupational therapy cap—did not receive therapy services  in a hospital outpatient department. These proportions, however, might  have been different had the caps been in effect in 2002.
Provider groups we spoke with were concerned that a sizable number of  beneficiaries with legitimate medical needs whose payments would  exceed the caps could be harmed. One group told us that a cap on  outpatient therapy services would severely limit the opportunity for  patients with the greatest need to receive appropriate care, and another  group said that therapy caps could hurt beneficiaries with chronic  illnesses. According to a third group, payments can quickly exceed the  caps for beneficiaries who suffer from serious conditions such as stroke  and Parkinson’s disease or who have multiple medical conditions.
section_title: HHS Has Made Little Progress toward a Payment System Based on Patients’ Needs
paragraphs: Statutory mandates since 1997 have required HHS to take certain actions  toward developing a payment system for outpatient therapy that considers  patients’ individual needs for care, but the agency has made little progress  toward such a system. In particular, HHS has not determined how to  standardize and collect information on the health and functioning of  patients receiving outpatient therapy services—a key part of developing a  system based on patients’ actual needs for therapy.
To curb spending growth and ensure that outpatient therapy services are  appropriately targeted to those beneficiaries who need them, Congress  included provisions related to these services in several laws enacted  starting in 1997 (see table 3). These provisions required HHS to report to  Congress in 2001 on a revised coverage policy for outpatient therapy  services that would consider patients’ needs. The provisions also required  HHS to report to Congress in 2005 on steps toward developing a standard  instrument for assessing a patient’s need for outpatient therapy services  and on a mechanism for applying such an instrument to the payment  process. As of October 2005, HHS had not reported its specific  recommendations on revising the coverage policy based on patients’  needs. HHS had, however, contracted with researchers to conduct several  analyses of Medicare claims data as a means of responding to the  mandates.
HHS’s response, implemented through CMS, to the principal legislative  provisions addressing outpatient therapy services has been to contract for  a series of studies, first by the Urban Institute and then by AdvanceMed  (see table 4). In general, these studies have found that information  available from Medicare claims data is insufficient to develop an  alternative payment system based on patients’ therapy needs, and a patient  assessment instrument for outpatient therapy services that collected  information on functional status and functional outcomes would be  needed to develop such a system. They have also found that a needs-based  payment system would be key to controlling costs while ensuring patient  access to appropriate therapy.
As of October 2005, HHS had taken few steps toward developing a patient  assessment instrument for assessing beneficiaries’ needs for outpatient  therapy. Some health care settings, including inpatient rehabilitation  facilities, home health agencies, and skilled nursing facilities, do have  patient assessment instruments to collect functional status and other  information on Medicare beneficiaries. Officials from HHS’s Office of the  Assistant Secretary for Planning and Evaluation and CMS told us they  were collaborating to examine the consistency of definitions and terms  used in these settings. They expected to report to Congress by the end of  2005 (in response to the requirement in the Medicare, Medicaid, and  SCHIP Benefits Improvement and Protection Act) on this effort to  standardize patient assessment terminology, although they have no plans  to include outpatient therapy services in the effort. CMS officials and one  of the provider groups we spoke with estimated that the development of a  patient assessment instrument for outpatient therapy services would take  at least 3 to 5 years. HHS officials said that the complexity of the task and  resource constraints precluded them from including outpatient therapy  services in their effort to standardize other patient assessment  terminology. CMS has, however, funded a demonstration project with a  private-sector firm that has developed a patient assessment instrument  that collects functional status and functional outcomes for patients who  receive outpatient therapy services, primarily physical therapy, in certain  facilities. A report from the firm to CMS is expected in summer 2006.
section_title: Circumstances That Led to Therapy Caps Remain
paragraphs: Recent assessments of Medicare claims data have shown that the  circumstances that initially led to therapy caps—rising Medicare payments  for outpatient therapy and a high rate of improper payments—remain.  CMS, however, has not implemented its contracted researchers’ proposal  to strengthen its system of automated checks for denying payment of  improper claims. Provider groups we spoke with agreed that Medicare was  likely paying for some medically unnecessary therapy services and that  improvements could be made to help strengthen the integrity of the  payment system.
According to recent CMS assessments of Medicare claims data, Medicare  payments for outpatient therapy services continue to rise. Over the 4-year  period from 1999 through 2002, Medicare spending for outpatient therapy  more than doubled, from an estimated $1.5 billion to $3.4 billion,  according to the CMS-contracted analysis of 2002 claims data released in  2004. Although outpatient therapy spending for 2003 and 2004 has not  been fully estimated, overall Medicare part B expenditures—which include  spending on outpatient therapy services—showed rapid growth (15  percent) from 2003 to 2004, according to CMS estimates reported in 2005.  CMS attributed this growth to five factors, one of which was increased use  of minor procedures such as therapy performed by physicians and  physical therapists. Payments for certain therapy services, for example,  increased by 24 percent or more from 2003 to 2004. CMS officials told us  that many valid reasons may exist for the significant growth in payments  for outpatient therapy. For example, they said, some of the increase in  therapy services could be due to the growth in recent years of elective  services such as knee replacements.
CMS has also recently reported that improper payments made for  outpatient therapy services have increased substantially in recent years.  Specifically, in November 2004, CMS reported that the estimated error rate  for claims rose steadily from 10.9 percent in 1998 to 20.4 percent in 2000.  CMS reported that most of the errors were due to insufficient  documentation to support the services claimed, such as lack of evidence  of physician review and certification of treatment plans. In January 2005,  CMS reported error rates in a random sample of more than 160,000 fee-for- service claims, which included therapy services, from 2003. The agency  found that claims submitted for therapy services were among those with  the highest rates of payments made in error because of insufficient  documentation or medically unnecessary services. Such services  included procedures frequently provided by therapists, such as therapeutic  exercise, therapeutic activities, neuromuscular reeducation, electrical  stimulation, manual therapy, and physical therapy evaluation. For  example, 23.5 percent of claims for therapeutic activities lacked sufficient  documentation, resulting in projected improper payments of more than  $34 million. Claims for therapeutic exercises had a “medically  unnecessary” error rate of 3 percent, with projected improper payments of  more than $18 million.
Our past work found that CMS needed to do more medical reviews of  beneficiaries receiving outpatient therapy services. We reported in 2004,  for example, that in Florida, comprehensive outpatient rehabilitation  facilities were the most expensive class of providers of outpatient therapy  services in the Medicare program in 2002. Per-beneficiary payments for  outpatient therapy services to providers in these facilities were two to  three times higher than payments to therapy providers in other facilities.  We recommended that CMS direct the Florida claims administration  contractor to medically review more claims from comprehensive  outpatient rehabilitation facilities.
CMS’s contracted researcher concluded that CMS could improve its claims  system by identifying and implementing modifications to the agency’s  automated claims review system to better target payments to medically  appropriate care. In doing their analysis of the 2002 claims, they  identified three types of specific edits that they found to be feasible and  that would reject claims likely to be improper:    Edits to control multiple billings of codes that are meant to be billed only  once per patient per visit. The contracted researchers estimated that in  2002, the impact of this type of improper billing amounted to $36.7 million.
Edits to control the amount of time that can be billed per patient per visit  under a single code, since most conditions do not warrant treatment times  exceeding 1 hour. The contracted researchers estimated that in 2002, the  impact of this type of improper billing amounted to $24–$100 million,  depending on the amount of time per visit billed under a given code.
Edits of clinically illogical combinations of therapy procedure codes. In  analyzing 2002 Medicare claims data, the contractor found limited system  protections to prevent outpatient therapy providers from submitting  claims for procedures that are illogical for a given diagnosis. One example,  according to the contractor’s report, was claiming for manual therapy  submitted with a diagnosis of an eye infection. The estimated impact of  improper billings based on illogical combinations of diagnosis and  procedure codes in 2002 amounted to $16.7 million.
CMS officials agreed with the contracted researcher that such edits are  worth considering, but the agency had not implemented them as of  October 2005. A CMS official told us, however, that CMS is implementing  the proposed edits to control multiple billings of codes meant to be billed  only once per patient per visit; the agency expects these edits to be in  place in early 2006. As of October 2005, CMS was still considering whether  to implement the other two types of edits. In addition to the three types of  edits identified by the contracted researcher, the researcher proposed  routine data analysis of Medicare claims to identify other utilization limits  that could be applied to better target Medicare payments. CMS is  considering whether and how to implement this type of analysis.
Provider groups we spoke with agreed that Medicare was likely paying for  some medically unnecessary therapy services and that improved payment  edits could help ensure that Medicare did not pay for such services.  Nevertheless, representatives from these groups stressed the importance  of mechanisms that would allow Medicare to cover payments for  beneficiaries who need extensive care. The representatives noted that an  exception process, based on a medical review, could help determine the  appropriateness of therapy services. Such an exception process could be  invoked to review the medical records of beneficiaries whose providers  seek permission for coverage of Medicare payments in excess of the caps.  CMS officials agreed that an appeal process or waiver from the caps could  be a short-term approach to focus resources on needy beneficiaries. They  added that possible criteria for waiving the caps could include (1) having  multiple conditions; (2) having certain conditions, levels of severity, or  multiple conditions suggested by research as having greater need for  treatment; (3) having needs for more than one type of service, such as  occupational therapy and speech-language pathology; or (4) having prior  use of services or multiple episodes in the same year. HHS does not,  however, currently have the authority to implement a process, or to  conduct a demonstration or pilot project, to provide exceptions to the  therapy caps.
section_title: Conclusions
paragraphs: Medicare payments for outpatient therapy continue to rise rapidly, and   20 percent or more of claims may be improper. To date, however, HHS has  made little progress toward a payment system for outpatient therapy  services that is based on patients’ needs. Furthermore, while CMS is  considering ways to reduce improper payments, it has not implemented  the contractor’s proposals for improving its claims-processing system.
HHS has been required for years to take steps toward developing a  payment system based on beneficiaries’ needs, which would require  developing a process for collecting better assessment information. Studies  contracted by CMS to respond to requirements under three laws suggest  that the department would need to develop a standard patient assessment  instrument to define a patient’s diagnosis and functional status and  thereby determine the patient’s medical need for therapy. In response to a  statutory requirement to report on the standardization of patient  assessment instruments in a variety of settings, HHS and CMS have an  effort under way to study and report to Congress on the development of  standard terminology that Medicare providers could use to assess patients’  diagnosis and functional status. Although this provision requires that  outpatient therapy services be included in this effort, HHS and CMS have  not done so.
Concerns remain that when the current moratorium expires and the caps  are reinstated, some beneficiaries who have medical needs for therapy  beyond what can be paid for under the caps may not be able to obtain the  care they need. Some beneficiaries may not be able to afford to pay for  care or may not have access to hospital outpatient departments, which are  not subject to the caps. In the absence of patient assessment information,  therefore, an interim process, demonstration, or pilot project may be  warranted to allow HHS to grant exceptions to the caps. For example,  such a project could allow beneficiaries, under circumstances that CMS  determines, an exception to the cap on the basis of medical review  supported by documentation from providers regarding their patients’  needs for extensive therapy. Such a project could also provide CMS with  valuable information about the conditions, diseases, and functional status  of beneficiaries who have extensive medical needs for therapy. The  information gathered through the project could also facilitate development  of a standardized patient assessment process or instrument. HHS,  however, would need legislative authority to conduct such a project.  Although exceptions could increase Medicare payments for outpatient  therapy, exceptions could provide one avenue for Medicare coverage  above the caps for some beneficiaries who need extensive therapy.  Potentially, payment increases due to exceptions could be offset by  implementation of the contractor-proposed improvements, such as edits.
section_title: Matter for Congressional Consideration
paragraphs: To provide a mechanism after the moratorium expires whereby certain  Medicare beneficiaries could have access to appropriate outpatient  therapy services and to obtain better data needed to improve the Medicare  outpatient therapy payment policy, including data on the conditions and  diseases of beneficiaries who have extensive outpatient therapy needs,  Congress should consider giving HHS authority to implement an interim  process or demonstration project whereby individual beneficiaries could  be granted an exception from the therapy caps.
section_title: Recommendations for Executive Action
paragraphs: To expedite development of a process for assessing patients’ needs for  outpatient therapy services and to limit improper payments, we  recommend that the Secretary of HHS take the following two actions:    ensure that outpatient therapy services are added to the effort already  under way to develop standard terminology for existing patient  assessment instruments, with a goal of developing a means by which to  collect such information for outpatient therapy, and  implement improvements to CMS’s automated system for identifying  outpatient therapy claims that are likely to be improper.
section_title: Agency Comments
paragraphs: We provided a draft of this report to HHS for comment and received a  written response from the department (reproduced in app. I). HHS did not  comment on the matter for congressional consideration, in which we said  that Congress should give HHS authority to implement an interim process  or demonstration project whereby individual beneficiaries could be  granted an exception from the therapy caps. HHS concurred with our  recommendation that it ensure that outpatient therapy services are added  to the effort already under way to develop standard terminology for  existing patient assessment instruments. The department stated that it is  preparing to contract for a 5-month study to develop a policy and payment  guidance report as it explores the feasibility of developing a post–acute  care patient assessment instrument.
In commenting on our recommendation to implement improvements to  CMS’s automated system for identifying outpatient therapy claims that are  likely to be improper, HHS discussed a national edit system to promote  correct coding methods and eliminate improper coding. This national edit  system has been applied to some therapy-related claims starting in 1996,  and HHS plans to apply it more broadly in 2006. While the national edit  system is complementary to the edits proposed by CMS’s contracted  study, CMS can do more by also implementing improvements to its  payment system as suggested by the study’s specific findings. HHS also  indicated that it was exploring other methods for automated evaluation of  claims but commented that its claims-processing system cannot always  identify an improper claim from the information that is available on claim  forms. We agree that the current system cannot always identify an  improper claim, given the lack of information on the claim forms about a  patient’s actual needs for therapy. It was this conclusion that led to our  recommendation that HHS include outpatient therapy in its present efforts  to improve the collection of patient assessment information. We believe  that CMS can make improvements to its current automated system to  reduce improper claims, irrespective of its efforts to improve patient  assessment information. As we noted in the draft report, CMS’s contracted  study found certain edits to be feasible using information already provided  on claim forms, such as edits of clinically illogical combinations of therapy  procedure codes.
We are sending copies of this report to the Secretary of Health and Human  Services, the Administrator of the Centers for Medicare & Medicaid  Services, and other interested parties. We will also make copies available  to others upon request. In addition, the report will be available at no  charge on the GAO Web site at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-7119 or at steinwalda@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix II.
section_title: Appendix I: Comments from the Department of Health and Human Services
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact mentioned above, Katherine Iritani, Assistant  Director; Ellen W. Chu; Adrienne Griffin; Lisa A. Lusk; and Jill M. Peterson  made key contributions to this report.
section_title: Related GAO Products
paragraphs: Medicare: More Specific Criteria Needed to Classify Inpatient  Rehabilitation Facilities. GAO-05-366. Washington, D.C.: April 22, 2005.
Comprehensive Outpatient Rehabilitation Facilities: High Medicare  Payments in Florida Raise Program Integrity Concern. GAO-04-709.  Washington, D.C.: August 12, 2004.
Medicare: Recent CMS Reforms Address Carrier Scrutiny of Physicians’  Claims for Payment. GAO-02-693. Washington, D.C.: May 28, 2002.
Medicare: Outpatient Rehabilitation Therapy Caps Are Important  Controls but Should Be Adjusted for Patient Need. GAO/HEHS-00-15R.  Washington D.C.: October 8, 1999.
Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy in  Nursing Homes. GAO/HEHS-95-23. Washington D.C.: March 30, 1995.