Medicare hospice benefit services include nursing services, services provided by a physician to a hospice, drugs and medical supplies necessary for treating pain and other symptoms of a terminal illness, as well as dietary, spiritual, and bereavement counseling; medical social worker services; homemaker services; and short-term inpatient care both to provide respite for caregivers and to treat a patient’s symptoms. Volunteers are an important resource in delivering hospice care; Medicare requires each hospice to have volunteers provide services equal to at least 5 percent of the total paid patient care hours. The specific services that a patient should receive are outlined in a plan of care, vary based on the type and intensity of the patient’s symptoms and psychosocial needs and the needs of the patient’s caregiver, and may vary throughout the hospice stay as the patient’s condition changes. To be eligible for the Medicare hospice benefit, a patient must be certified by a physician as having a life expectancy of 6 months or less if his or her terminal illness runs its normal course. A Medicare patient who elects hospice care must waive Medicare coverage for all other services related to the terminal illness, although the patient retains coverage for services to treat other conditions. A patient may opt out of the hospice benefit and return to traditional Medicare at any time; a patient may also reelect hospice coverage at a later date. While there is no limit on the number of days an individual can receive hospice care, the prognosis of the patient’s terminal illness must be reaffirmed after the first 90 days, the first 180 days, and then every 60 days thereafter. Under the law, Medicare pays hospices a daily rate that covers all services provided to the patient. HCFA developed four hospice per diem payment categories, which reflect the intensity of the services and the location of service delivery. In 1986, annual updates to the rates for the four payment categories were set in law. A typical day of care provided in a patient’s residence is paid as RHC, and in 2001, the vast majority of hospice care days, 96 percent, were billed as RHC (see table 1). Unless a hospice provides CHC, IRC, or GIC, it is paid the RHC rate for each day the patient is under its care. Hospice care delivered during periods of crisis can be paid as CHC if the care is provided in the home for at least 8 hours within a 24-hour period beginning at midnight and at least half the care hours are delivered by a nurse. To provide respite for primary caregivers, IRC can be provided for up to 5 consecutive days in an inpatient setting. Inpatient care for symptoms that cannot be treated in the patient’s residence is paid as GIC. Hospices provide the care in their own inpatient units or arrange with hospitals, skilled nursing facilities, or other inpatient facilities to provide these services. The payment rate is adjusted by a wage index, which varies based on the patient’s residence, to account for geographic differences in wage costs. The hospice payment categories and their corresponding payment rates were developed from cost data from the 26 hospices that participated in the 1980 to 1982 Medicare demonstration. To calculate the payment rates, HCFA used cost data to identify the cost factors that contributed to providing hospice services and summed the mean cost per day of each cost factor for each of the four categories of hospice care. The costs of bereavement and volunteer services were not included in the rates. By law, hospices are subject to an annual aggregate Medicare payment cap that was meant to ensure that payments for hospice care would not exceed what Medicare would have paid if patients had been treated in a traditional setting, such as a hospital. Total annual payments to a hospice may not exceed a per-patient amount multiplied by the number of Medicare patients who received care from that hospice during the year. The 2004 cap amount for the 12 months beginning November 1, 2003, is $19,635.67 per Medicare patient. Hospice patients, services, and providers have changed since the demonstration. For example, the mean patient length of stay at hospices participating in the Medicare demonstration from 1980 to 1982, was 70 days; in 2001, the mean length of stay was about 50 days. While demonstration costs were based only on Medicare patients with cancer diagnoses, patients with noncancer diagnoses, who may require a different mix of services, represented approximately half of all hospice patients in 2000. In addition, hospice providers have stated that advances in end-of- life care, notably new, more costly pain-management drugs and palliative chemotherapy and radiation, have increased the costs of providing care to certain types of patients. The mix of hospice providers today differs from the provider types in the demonstration. In the demonstration, the predominant type of hospice provider was hospital-based, whereas in 2001, the predominant type was freestanding (see fig. 1). More recently, the proportion of for-profit hospices increased from almost 13 percent of all hospices in 1992 to almost 28 percent in 2001, and the percentage of hospices serving patients primarily living in rural areas rose from 32 in 1992 to 38 in 2001. In addition, the number of hospices participating in Medicare grew from 1,208 in 1992 to 2,275 in 2002, the most recent data available. We determined that for freestanding hospices, the unadjusted per diem payment rate across the four payment categories was about 8 percent higher than estimated average per diem costs in 2000, and over 10 percent higher in 2001. For the payment categories, we estimate that the home care (RHC and CHC) per diem payment rate was almost 10 percent higher than average home care per diem costs in 2000, and over 12 percent higher in 2001. We estimate that the IRC payment rate was almost 53 percent lower than average IRC per diem costs in 2000, and 61 percent lower in 2001. In both years, the GIC payment rate was about 7 percent higher than average GIC per diem costs. In 2000, we estimate that average per diem costs for small hospices were over 13 percent higher than for medium hospices and almost 7 percent higher than for large hospices. In 2001, average per diem costs for small hospices were over 15 percent higher than for medium hospices and almost 8 percent higher than for large hospices. With the exception of average GIC per diem costs in 2000, small hospices also had higher average per diem costs than medium or large hospices for each payment category. Medicare’s hospice payment rate, across the four payment categories and unadjusted for geographic differences in wages, was higher than freestanding hospices’ estimated average per diem cost. The unadjusted payment rate was about 8 percent higher than average per diem costs in 2000, and over 10 percent higher in 2001 (see fig. 2). The 25 percent of hospices with the lowest average per diem costs had costs that were at least 27 percent below the unadjusted payment rate in 2000, and at least 31 percent below the unadjusted payment rate in 2001. However, in 2000, average per diem costs for almost 34 percent of freestanding hospices and, in 2001, almost 32 percent of freestanding hospices, were higher than the unadjusted per diem rate. The costs of individual hospices differ depending on the mix of services provided. In addition, the payments to individual hospices differ because of the wage adjustment and the mix of payment categories billed. We could not determine the relationship between payments and actual costs for individual hospices because of data limitations in the hospice cost reports and claims data. Unlike those for other providers, Medicare’s hospice cost reports do not include Medicare payment information. In addition, Medicare hospice claims data contain only the total payment for all services provided during the billing period, including physician services, not the payment for each hospice payment category. The specific relationship between payment rates and costs for freestanding hospices varied among payment categories. For home care (RHC and CHC) days, we estimate that in 2000, the unadjusted per diem payment rate for freestanding hospices was almost 10 percent higher than the average per diem cost of over $92. In 2001, the per diem payment rate was over 12 percent higher than the average home care per diem cost of over $96. Nonetheless, about 35 percent of freestanding hospices in 2000, and over 32 percent in 2001, had average home care per diem costs that were higher than the home care per diem payment rate. We estimate that in 2000, the unadjusted IRC per diem payment rate for freestanding hospices was almost 53 percent lower than the average IRC per diem cost of about $218. In 2001, the IRC per diem payment rate was over 61 percent lower than the average IRC per diem cost of over $279. However, the GIC per diem payment rate was higher than average GIC per diem costs for freestanding hospices; it was over 7 percent higher than costs in both years. In addition, average per diem costs for IRC and GIC varied widely among freestanding hospices. Our estimates of average IRC and GIC per diem costs may understate actual costs because of data limitations. IRC costs may be much higher than the IRC payment rate because the hospice continues to provide services and visits to the patient in addition to paying the inpatient facility. Our analysis of the proprietary 2002 patient-specific visit data found that the number and type of visits provided per day to patients during IRC days were comparable to the number and type of visits per day to patients during RHC days. In 2001, IRC accounted for 0.2 percent of hospice days of care. We estimate that for 2000 and 2001, small freestanding hospices had higher average per diem costs than medium and large freestanding hospices. In 2000, average per diem costs for small hospices were more than 13 percent higher than for medium hospices and almost 7 percent higher than for large hospices. In 2001, average per diem costs for small hospices were more than 15 percent higher than for medium hospices and almost 8 percent higher than for large hospices (see table 2). With the exception of average GIC per diem costs in 2000, small hospices’ average per diem costs were higher than medium and large hospices’ costs for each individual payment category for both years. Cost disparities across providers of different sizes were greatest for IRC and GIC. As small freestanding hospices are more likely than other hospices to be located in rural areas, they are more likely to receive lower Medicare payments because the wage index adjustment generally reduces the payment rates for providers in rural areas. In 2001, 60 percent of small freestanding hospices were located in rural areas, while 35 percent of medium freestanding hospices and 10 percent of large freestanding hospices were located in rural areas. The structure of the hospice payment system may not reflect how hospices currently deliver services. For example, our analysis of the relative costs for freestanding hospices for different services provided during RHC days, the most common payment category, showed they have changed considerably since the payment rate was initially calculated, suggesting that the services delivered or the resources necessary for those services have changed over the years. In addition, our analysis of proprietary 2002 patient-specific visit data showed that visit frequency varied during the hospice stay, although the rate for each payment category does not. Also, the mean length of stay has decreased. Hospice officials raised concerns about some of the payment policy requirements for CHC and IRC, although our analysis of the limited available data could not confirm that the requirements restrict hospices’ ability to provide care. Finally, the annual aggregate cap was intended to help limit Medicare spending for all hospices, but it was not based on actual hospice costs, and for each year from 1999 through 2002, few hospices reached it. The relative costs of services in 2001 have changed considerably since the payment rate was developed in 1983, suggesting that the services delivered or the resources necessary for those services have changed over time. Specifically, the proportions of RHC costs attributable to nursing, drugs, social services, and durable medical equipment (DME) have increased, while the proportions attributable to home health aide services, supplies, and outpatient services have decreased (see fig. 3). In our analysis, this pattern is present across freestanding hospices of all sizes and locations. The largest cost increase occurred for drugs, which rose from 3 to 15 percent of RHC costs over this period. Hospice officials we spoke with stated that this increase was due in part to the introduction of new, more costly medications. Some stated that drugs have become one of their greatest cost pressures. Hospice visits are particularly concentrated at the beginning and end of a hospice stay, yet the payment rate of each category does not vary throughout a hospice stay. Our analysis of the 2002 patient-specific visit data showed that patients have a higher mean number of visits per day during the first, and especially the last, week of a stay. As a result, the costs of care are higher both at the beginning and end of a hospice stay. Officials from almost all hospices with whom we spoke also reported this pattern. They told us that at the beginning of a hospice stay they provide more visits because the patient’s symptoms, including pain, must be stabilized and the family must be educated about the patient’s care. Near the end of life, hospice officials indicated that the patient’s symptoms and needs change, usually requiring more hospice management, and the family often needs additional psychosocial support. Our analysis of the 2002 patient-specific visit data showed that patients with a length of stay of 2 weeks or less had a higher mean number of visits per day than patients with a length of stay greater than 2 weeks. Hospice officials we spoke with stated that patients who are in hospice care a short time are relatively more costly on a per diem basis because there are fewer days of lower visit frequency to balance the higher costs of the days with more visits at the beginning and end of the stay. In 1983, the Medicare hospice per diem payment amounts accounted for the variation in daily hospice costs because they were based on the mean daily costs incurred by the hospices in the demonstration over a mean hospice stay of 70 days. However, hospice stays are considerably shorter now; the mean length of stay was 50 days in 2001. Mean daily costs may now be very different because of the change in the length of stay. No data are available, however, to compare costs at different points during a stay or for stays of different lengths. Hospice officials we spoke with raised concerns about some of the policy requirements for particular payment categories, although our analysis of the available data could not confirm their concerns. For example, to bill for CHC, Medicare requires that a nurse provide at least half of billed CHC hours. Hospice officials stated that this could restrict the hospice’s ability to provide the most appropriate care when a social worker was a more appropriate caregiver than a nurse. The officials were also concerned that the 8-hour minimum required for billing CHC payment, counted from midnight of one day until midnight of the next, could restrict their ability to bill for CHC. For example, if a patient dies in less than 8 hours or the hospice provides 8 hours of services over 2 calendar days, the hospice must bill for RHC. Our analysis of 2001 Medicare hospice claims indicated that the mean number of hours provided on a CHC day was 18 hours, considerably above the 8-hour minimum. Similarly, our analysis of the 2002 patient-specific visit data from one large, freestanding hospice showed a mean of 20 hours provided on each CHC day. Therefore, instances of continuous care hours that fall just short of 8 hours, for which a hospice cannot bill CHC hours, do not occur often based on the patient-specific visit and claims data. Hospice officials we spoke with also stated that the statutory requirement that respite care be provided in an inpatient setting might hinder its use. Specifically, they stated that while primary caregiver respite is important, enabling patients to remain at home rather than moving them to an inpatient facility is also important; primary caregivers may not take respite in order to avoid moving the patient to an inpatient facility. Few hospices we spoke with currently provide home respite care for extended periods. They said this is largely because the costs are higher than the RHC payment rate, which is the payment category the hospices must bill for these services. Data related to home respite care are not available, although it is likely that the costs of providing 24 hours of home respite care would be higher than RHC costs. According to our analysis of data from the regional home health intermediaries, the contractors responsible for processing and paying Medicare hospice claims, less than 2 percent of all hospice providers reached the annual aggregate payment cap each year from 1999 through 2002. In 1982, the Congress required HCFA to calculate a cap that limited a hospice’s total payments to a specific per-patient amount based on the Medicare costs incurred for patients with cancer during the last 6 months of life. However, a subsequent law enacted before the hospice benefit was implemented set a per-patient cap amount that was not based on the cost data; for the 12 months beginning November 1, 2003, the cap was $19,635.67 per Medicare patient. The cap is intended to ensure that payments for hospice care do not exceed what Medicare would have spent if patients had been treated in a traditional setting, such as a hospital. However, it affects few hospices, and therefore may not represent a meaningful limit. Hospice officials we spoke with who discussed the cap said it did not affect them. CMS has not evaluated the hospice per diem payment rates and methodology since they were developed to determine the relationship between payments and costs and whether the per diem methodology is consistent with current patterns of care. There are several indications that hospice payments may not be appropriately distributed across days of care or types of providers. The type of care provided during a hospice stay appears to be different than when the hospice per diem payment rates and methodology were developed. Comprehensive data are not available, however, to evaluate the number of visits or costs of services provided during a Medicare hospice stay. While our analysis of the limited data available indicates that the overall Medicare payment rate across all payment categories was above estimated costs, IRC costs were considerably above the payment rate. Further, small freestanding hospices had substantially higher average per diem costs than other hospices. As a result, a comprehensive analysis of patient-specific data may show that modifications to the hospice payment methodology are warranted. Because the payment rates for the four hospice payment categories, the per diem methodology, and the cap are set by law, CMS’s ability to make modifications to the payment approach is limited. We recommend the following three actions. First, we recommend that the Administrator of CMS collect comprehensive, patient-specific data on the visits and services being delivered by hospices and the costs of these services. Second, using these data, the Administrator should determine whether the hospice payment methodology and payment categories need to be modified, including any special adjustments for small providers. Third, the Administrator should implement those modifications that would not require a change in Medicare law and submit a legislative proposal to the Congress for those that do. We received written comments on a draft of this report from CMS (see app. II). We also received oral comments from two groups representing industry organizations, the Hospice Association of American (HAA) and the National Hospice and Palliative Care Organization (NHPCO), as well as from the large, for-profit hospice that provided the patient-specific visit data. In commenting on a draft of this report, CMS stated that it agreed with our recommendations and intends to use our findings to supplement and reinforce preliminary evaluations the agency has made and future studies that are planned. In responding to our recommendation that it collect comprehensive, patient-specific data on hospice visits and services and the costs of these services, CMS stated that it recognized the need for this type of analysis. It stated that collection of these data would require additional research funding, and it is uncertain when such funding would be available. CMS noted that it has initiated efforts to collect data on costs with the recent establishment of the hospice cost reports. CMS stated that it hoped the recommendations in our report could help the agency in developing a comprehensive research strategy for the hospice benefit. In responding to our recommendation that CMS determine whether the hospice payment methodology and payment categories need to be modified, including any adjustments for small providers, CMS agreed that the methodology implemented in 1983 was based on a delivery model that may have changed since that time. It concurred that the methodology should be reevaluated to determine its current appropriateness. It again stated that research funding is limited. CMS agreed that the costs of drugs and other therapies, the number of hospice beneficiaries with noncancer diagnoses, and the mean length of stay have all changed since 1983. CMS stated that we did not demonstrate in the draft report that the provision of these and other therapies have increased the cost of providing care beyond the present payment. In the draft report, we stated that there may be problems with the distribution of hospice payments, but that comprehensive data are not available to evaluate the number of visits or costs of services provided during a Medicare hospice stay. As noted in the draft report, the overall payment rate across all types of care is higher than our estimate of hospices’ overall costs. In its comments, CMS also raised concerns that we implied that payment methodology changes be made for small hospices before CMS collects comprehensive data. We have clarified our conclusion to indicate the need for comprehensive, patient-specific data on the visits and services delivered by hospices and the costs of these services to inform any changes to the payment methodology. In response to our recommendation that CMS should submit a legislative proposal to the Congress to implement those modifications that would require a change in Medicare law, CMS stated that should it determine changes are necessary, it would evaluate those changes as part of its overall legislative strategy. CMS also made technical comments, which we incorporated where appropriate. The external reviewers generally agreed with our findings and recommendations. Comments on specific portions of the draft report centered on two areas: our scope and methodology and the hospice payment methodology. Regarding our scope and methodology, HAA and NHPCO were concerned that we based our findings on Medicare freestanding hospice cost reports that had not been audited. The large, for-profit hospice noted that the cost report is complex and that hospices’ accounting systems are not generally compatible with its structure. Similarly, HAA and NHPCO stated that hospices may not have had sufficient experience with completing the cost reports at the time of our review. NHPCO stated that our exclusion of hospice cost reports with fewer than 11 total patients or an average of less than 1 patient per day might have excluded a substantial number of cost reports. In addition, HAA and NHPCO recommended that we include bereavement counseling costs in our per diem cost calculation. They stated that although Medicare is precluded from paying hospices for bereavement counseling, it is a required service, and excluding it from the per diem cost calculation may misrepresent the amount by which payment rates exceeded hospice costs. Regarding reviewers’ concerns about our use of unaudited cost reports, BBRA directed us to examine hospice cost factors. Information on these factors is available only from cost reports, which CMS has not audited. As stated in the draft report, we assessed the reliability of the cost reports by comparing descriptive statistics calculated using the cost reports with those calculated using the Medicare hospice claims, and found the data suitable for our purposes. Regarding reviewers’ concerns about data we excluded from our analysis, we excluded 51 of 992, or 5 percent, of freestanding hospice cost reports in 2000, and 48 of 975, or 5 percent, of freestanding hospice cost reports in 2001, because they had fewer than 11 total patients or an average of less than 1 patient per day. We excluded these cost reports because we believe that these hospices either had too few patients to be representative of all hospices, or may have been reporting data incorrectly. We do not believe that these represent substantial numbers of cost reports and consider our exclusion criteria appropriate. Concerning the comments that we should include bereavement costs in our per diem cost calculation, as stated in the draft report, we included only Medicare-reimbursable costs in our calculations. If Medicare cannot, by law, pay hospices for bereavement services, it is inappropriate to include them in a per diem cost that is compared to a payment rate that is not designed to cover these costs. In 2001, in comparison to total Medicare-reimburseable costs, bereavement costs were small; they were equal to less than 2 percent of total Medicare- reimburseable costs. Reviewers also commented on the hospice payment methodology. NHPCO stated that costs on the cost report may not reflect the provision of all services that could potentially be provided because hospices may manage their costs to more closely approximate the per diem rate. Although the provision of additional services may be warranted, hospices cannot pay for them and therefore do not provide them. HAA and NHPCO stated that instances of CHC provision that fall close to 8 hours may not seem to occur often because hospices avoid providing CHC if they know they will not be able to provide at least 8 hours. However, HAA and NHPCO also stated that data to determine whether this is the case are not available. Regarding industry comments on hospice costs and the hospice payment methodology, we acknowledge that hospices may manage their costs to closely approximate the per diem rate, and that hospices may not provide CHC if they know they will not be paid for that level of care. Data are not available to evaluate whether either of these situations occur. Reviewers also made technical comments, which we incorporated where appropriate. We are sending copies of this report to the Administrator of CMS and appropriate congressional committees. The report is available at no charge on GAO’s Web site at http://www.gao.gov. We will also make copies available to others on request. If you or your staffs have any questions, please call me at (202) 512-7119 or Nancy A. Edwards at (202) 512-3340. Other major contributors to this report include Beth Cameron Feldpush, Joanna L. Hiatt, and Gordon W. Richmond. To examine hospice costs and Medicare payments, we used 2000 and 2001 Medicare hospice cost reports, the financial documents that hospices submit annually to the Centers for Medicare & Medicaid Services (CMS), and 2000 and 2001 Medicare hospice claims data, bills submitted by hospices to receive Medicare payment. We also used proprietary 2002 patient-specific visit data from a large for-profit hospice, which has been collecting these data for its internal use since 1994. We interviewed officials from CMS and one regional home health intermediary, a contractor responsible for processing and paying Medicare hospice claims, in addition to officials from AARP, the Hospice Association of America, the National Hospice and Palliative Care Organization, and the Visiting Nurse Associations of America. We also spoke with representatives from 18 hospices, several national independent and academic hospice researchers, and two physicians who provide hospice care. Finally, we conducted a site visit to a freestanding hospice with an inpatient unit. To assess the reliability of the cost report data, we compared descriptive statistics calculated using the cost reports with those calculated using the Medicare hospice claims data. Because hospices began submitting cost reports in 1999, we also compared our calculations from the 2000 cost reports to those from the 2001 cost reports to ensure that hospices had provided consistent data. To assess the reliability of the claims data, we compared descriptive statistics calculated using the claims with statistics published by CMS. To assess the consistency of the 2002 patient-specific visit data, we verified that the distribution of visits in the 2002 data was similar to the distribution of visits in 1997 and 1999. In addition, before releasing these data to us, the hospice performed quality assurance edits, which consisted of confirming that the data provided to us were identical to the data in its database for more than 20 randomly selected patients. Finally, we calculated descriptive statistics and compared them with statistics for all hospices calculated using the Medicare hospice claims. We determined that the cost report, claims, and patient-specific data were all suitable for our purposes. The 2000 and 2001 hospice cost reports were the most recent data available at the time of our analysis. The Medicare payment methodology is the same for freestanding and facility-based hospices; however, we confined our analysis to cost reports of freestanding hospices. We excluded hospital- based and home health agency-based hospices because we found that their per diem costs were generally much lower than those of freestanding hospices, which may result from decisions made by these providers in allocating overhead costs between the hospital or home health agency and the hospice. For freestanding hospices, the only costs incurred are for delivering hospice care to patients. We excluded freestanding cost reports that reported no or low Medicare utilization, those that had cost reporting periods of fewer than 10 or greater than 14 months, and those outside the 50 states or District of Columbia. We also excluded cost reports that had fewer than 11 total patients or an average of less than 1 patient per day, those with no costs, and those reporting costs outside three standard deviations of the mean. Our final sample included 82 percent of all freestanding hospice cost reports in 2000 and 80 percent in 2001. We calculated freestanding hospices’ total Medicare-reimburseable costs by subtracting nonreimburseable costs, such as bereavement and fund- raising, from total costs. To obtain average per diem costs, we summed total Medicare-reimburseable costs across all providers and divided by total hospice days across all providers. In addition, because of the cost report design, certain inpatient respite care (IRC), general inpatient care (GIC), and physician costs may be included in our estimate of combined routine home care (RHC) and continuous home care (CHC), or home care, costs. As a result, home care costs may be overestimated, which would result in our understating the amount by which the unadjusted home care payment rate exceeds average home care per diem costs. Because of the way cost centers are defined on the cost reports, the costs of IRC and GIC may be underestimated. We based the size of a hospice in each year on the number of days of care it provided that year. Small hospices were those that reported total days of care less than the 25th percentile of all hospices’ total days of care. Medium hospices were those that reported total days of care equal to or greater than the 25th percentile and less than or equal to the 75th percentile of all hospices’ total days of care. Large hospices were those that reported total days of care greater than the 75th percentile of all hospices’ total days of care. We defined a hospice as urban if it was located in a county that was in a metropolitan statistical area and as rural if it was located in a county that was not in a metropolitan statistical area, as determined by the Office of Management and Budget as of June 30, 1999. We could not compare the 2000 and 2001 per diem costs we calculated to actual payments because hospice cost reports do not report Medicare payment information. In addition, Medicare hospice claims contain only the total payment for all services provided during the billing period, including physician services, not the payment for each payment category. Therefore, we calculated a 2000 and 2001 unadjusted payment rate that encompassed all payment categories. We did so by weighting the individual rates of the four payment categories by their respective utilization in the freestanding hospice cost reports in our final sample in each year. The costs for home care, combined RHC and CHC, are reported in aggregate on the hospice cost report. Therefore, we calculated a 2000 and 2001 unadjusted payment rate that encompassed RHC and CHC. We did so by weighting the individual rates of these two categories by their respective utilization in the freestanding hospice cost reports in our final sample in each year. In addition, we weighted the overall unadjusted payment rate and the unadjusted payment rate for each payment category to account for the different payment rates in effect during the year. The majority of freestanding hospices report costs using a calendar year reporting period, while payment rates are updated on a fiscal year basis, that is, on October 1 of each year. Therefore, during a calendar year, one payment rate is in effect from January 1 through September 30 and another from October 1 through December 31. Our unadjusted payment rates do not account for the wage adjustment Medicare applies to payments. To determine the proportion of total cost in 2001 accounted for by each service, such as nursing or home health aide services, that was included in the 1983 RHC rate, we grouped the services on the cost report into categories similar to the 1983 services, and divided by the total cost. Our estimates of the proportions of 2001 RHC costs include CHC costs because the costs of RHC and CHC are reported in aggregate on the hospice cost report. It is likely that CHC costs were a very small proportion of combined RHC and CHC costs, as CHC days accounted for just over 1 percent of total hospice days in 2001. To determine the percentage of total hospice days accounted for by each payment category and the mean CHC hours per CHC day for all hospices, we used 2000 and 2001 Medicare hospice claims data, the years that matched most closely with the cost reports used for our analysis. We excluded from our analysis patients who were younger than 20 or older than 110 years of age, who lived outside of the 50 states or the District of Columbia, and who had total hospice payments that fell below 1 day of care at the lowest wage-adjusted RHC payment rate and above 1 year of care at the highest wage-adjusted RHC payment rate. Our final sample included over 98 percent of all claims in both 2000 and 2001. To analyze the frequency and types of visits to hospice patients, we used proprietary 2002 data on Medicare hospice patients collected by a large, for-profit hospice with multiple freestanding facilities. We determined the number of visits per day and the number of nurse, home health aide, counselor, and other caregiver visits per day for all days and for days within each of the four payment categories. We also analyzed whether there were differences in the number of visits per day provided by patient length of stay, patient residence, diagnosis, number of secondary conditions, and age and determined the number of visits in the first and last week of a stay and for the remaining days of a stay. We conducted our work from January 2003 through October 2004 in accordance with generally accepted government auditing standards. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. 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Summary: The Medicare hospice benefit provides care to patients with a terminal illness. For each patient, hospices are paid a per diem rate corresponding to one of four payment categories, which are based on service intensity and location of care. Since implementation in 1983, the payment methodology and rates have not been evaluated. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 directed GAO to study the feasibility and advisability of updating Medicare's payment rates for hospice care. In this report, GAO (1) compares freestanding hospices' costs to Medicare payment rates and (2) evaluates the appropriateness of the per diem payment methodology. Because of Medicare data limitations, it was not possible to compare actual payments to costs or examine the services provided to each patient. Using Medicare cost reports from freestanding hospices, GAO determined that the per diem payment rate for all hospice care was about 8 percent higher than the estimated average per diem cost of providing care in 2000, and over 10 percent higher in 2001. However, the relationship between payment rates and costs varied across the payment categories and types of hospices. For all hospice care provided in the home, which accounted for about 97 percent of care in 2001, GAO estimates that the per diem payment rate was almost 10 percent higher than average per diem costs in 2000, and over 12 percent higher in 2001. Small hospices, however, had higher estimated average per diem costs than medium or large hospices overall and for each of the four per diem payment categories in 2001. GAO's analysis indicates that the hospice payment methodology, with rates based on the historical mix and cost of services, a per diem amount that varies only by payment category, and a cap on total Medicare payments, may not reflect current patterns of care. For example, GAO determined that the relative costs of services, such as nursing care, provided during routine home care (RHC) have changed considerably since the rates were calculated. Using limited patient-specific hospice visit data, GAO found that more visits were provided during the first, and especially last, week of a hospice stay than during other times in the stay. Finally, few hospices reached the payment cap, which was intended to limit Medicare hospice spending.