All outpatient therapy providers are subject to Medicare part B payment and coverage rules. Payment amounts for each type of outpatient therapy service are based on the part B physician fee schedule. In 2000, Medicare paid approximately $2.1 billion for all outpatient therapy services, of which $87.1 million was paid to CORFs. To meet Medicare reimbursement requirements, outpatient therapy services must be: appropriate for the patient’s condition, expected to improve the patient’s condition, reasonable in amount, frequency, and duration, furnished by a skilled professional, provided with a physician available on call to furnish emergency medical part of a written treatment program that is reviewed periodically by a physician. CMS relies on its claims administration contractors to monitor provider compliance with program requirements. Contractors regularly examine claims data to identify billing patterns by specific providers or for particular services that are substantially different from the norm. Claims submitted by these groups of providers—or for specific services—are then selected for additional scrutiny. Whether such reviews occur prior to payment (prepayment reviews) or after claims have been paid (postpayment reviews), the provider is generally required to submit patient records to support the medical necessity of the services billed. This routine oversight may lead to additional claim reviews or provider education about Medicare coverage or billing issues. With 567 facilities nationwide at the end of 2002, the CORF industry is relatively small. Although CORFs operated in 41 states at the end of 2002, the industry is highly concentrated in Florida, where 191 (one-third) of all Medicare-certified CORFs are located. By contrast, the state with the second largest number of CORFs at the end of 2002 was Texas, with 53 CORFs. The number of CORF facilities in Florida grew about 30 percent during 2002 and the industry is now largely composed of relatively new, for-profit providers. The CORF industry in Florida continued to grow in 2003, reaching 220 facilities by year’s end, of which 96 percent were for profit. The growth in Florida CORFs came after a period of substantial turnover among CORF owners (many closures and new entrants). From 1999 to 2002, Medicare payments to Florida CORFs rose substantially and far outpaced growth in the number of beneficiaries that used CORFs. The number of Medicare beneficiaries receiving services from CORFs grew 13 percent, increasing from 33,653 in 1999 to 38,024 in 2002. However, during the same time period, Medicare expenditures for services billed by CORFs rose significantly, with total payments increasing 61 percent, from $48.1 million to $77.4 million. Half of all Florida CORFs received an annual payment of $91,693 or more from Medicare in 1999; by 2002, the median annual payment more than doubled to $187,680. Although CORFs were added to the Medicare program to offer beneficiaries a wide range of nontherapy services at the same location where they receive therapy, most Florida CORFs do not provide these types of services. For those that do, only a small proportion of Medicare payments are accounted for by these services. In 2002, 98 percent of Medicare payments to Florida CORFs went to furnish physical and occupational therapy or speech-language pathology services. The mix of services reimbursed by Medicare was very different in 1999, when such therapy accounted for 68 percent of all payments, and the remainder paid for nontherapy services, such as pulmonary treatments and psychiatric care. In recent years, payments to Florida CORFs have increasingly shifted toward those made for patients with back and musculoskeletal conditions. Most notably, patients who presented with back disorders accounted for 16 percent of all Medicare payments to Florida CORFs in 1999 and 29 percent of payments in 2002. In addition, payments for treating patients diagnosed with soft tissue injuries increased from 8 percent of Florida CORF payments in 1999 to 24 percent in 2002. One diagnosis group for which there was a notable decrease in the proportion of Medicare payments was pulmonary disorders, which fell from 30 percent of all payments in 1999 to 2 percent in 2002. In 2002, most of the 191 CORFs in Florida were small, with the median CORF in the state treating 150 beneficiaries. CORFs accounted for 15 percent of all Florida Medicare beneficiaries who received outpatient therapy from facility-based providers that year, and 30 percent of Medicare’s payments for outpatient therapy services to Florida facility- based providers. In a few areas, however, CORFs represented a substantial share of the outpatient therapy market, particularly in south Florida. For example, CORFs were the predominate providers of outpatient therapy services in Miami, with 53 percent of all facility-based outpatient therapy patients, and treated 29 percent of patients who received outpatient therapy from facility-based providers in nearby Fort Lauderdale. In 2002, Medicare’s therapy payments per patient to Florida CORFs were several times higher than therapy payments made to other facility-based outpatient therapy providers in the state. This billing pattern was evident in each of the eight Florida MSAs that accounted for the majority of Medicare CORF facilities and patients. Differences in prior hospitalization diagnoses and patient demographic information did not explain the disparities in per-patient therapy payments. Our analysis of claims payment data showed that per-patient therapy payments to Florida CORFs were about twice as high as therapy payments to rehabilitation agencies and SNF outpatient departments, and more than 3 times higher than therapy payments to hospital outpatient departments. (See table 1.) Specifically, at $2,327 per patient, therapy payments for CORF patients were 3.1 times higher than the per-patient payment of $756 for those treated by outpatient hospital-based therapists. Higher therapy payments for Medicare patients treated at CORFs were largely due to the greater number of services that CORF patients received. As shown in table 1, on average, CORF patients received 108 units of therapy compared with 37 to 59 units of outpatient therapy, on average, at the other types of outpatient providers. Typically, a unit of therapy service represents about 15 minutes of treatment with a physical therapist, occupational therapist, or speech-language pathologist. The pattern of relatively high payments to CORFs was evident in all of the localities where CORFs were concentrated. In 8 of the 14 MSAs in Florida that had CORFs in 2002, CORF payments per patient were higher than payments to all other types of facility-based outpatient therapy providers. These MSAs together accounted for 86 percent of all Florida CORF beneficiaries and 90 percent of the state’s CORF facilities. In these localities, per-patient payments to CORFs ranged from 1.2 to 7.4 times higher than payments to the provider type with the next highest payment amount. For example, in Fort Lauderdale, the 2002 average CORF therapy payment was $2,900—more than twice the average payment of $1,249 made for beneficiaries treated by rehabilitation agencies. (See table 2.) Some factors that could account for differences in therapy payment amounts—patient diagnosis and indicators of patient health care needs— did not explain the higher payments that some Florida CORFs received compared with other types of facility-based outpatient therapy providers. We found that CORFs received higher per-patient therapy payments than other facility-based providers for patients in each of the four leading diagnosis categories treated at CORFs. For patients with neurologic disorders, arthritis, soft tissue injuries, and back disorders, payments to CORFs were 66 percent to 159 percent higher than payments to rehabilitation agencies and SNF OPDs and higher yet than payments to hospital OPDs. (See table 3.) Patients treated for back disorders made up the largest share of Florida CORF patients, at 25 percent. For patients with this diagnosis, average payments to CORFs—at $1,734—were twice as high as the average payment of $867 made to rehabilitation agencies—the next highest paid provider type. The higher therapy payments to CORFs were driven by the higher volume of therapy services that CORFs provided to their Medicare patients, compared with the volume of services other facility-based outpatient therapy providers furnished to patients in the same diagnosis group. As shown in table 4, for all four leading diagnosis categories, CORF Medicare patients received far more units of therapy, on average, than Medicare patients treated by other outpatient therapy providers. Differences across provider types were particularly pronounced for Medicare patients with arthritis. CORFs furnished an average of 100 units of therapy to beneficiaries treated for arthritis. In contrast, non-CORF outpatient therapy providers delivered an average of 33 to 53 units of therapy to Medicare arthritis patients. Differences in patient demographic characteristics and prior-year hospital diagnoses—factors that could indicate variation in patient health care needs—did not explain most of the wide disparities in therapy payments per patient across settings. When we considered differences in patient age, sex, disability, Medicaid enrollment, and 2001 inpatient hospital diagnoses across provider types, the data showed that patients served by CORFs could be expected to use slightly more health care services than patients treated by other facility-based therapy providers. However, we found that, after controlling for these patient differences, average payments for CORF patients remained 2 to 3 times greater than for those treated by other provider types. Consistent with this finding, therapy industry representatives we spoke with—including those representing CORFs—reported that, in the aggregate, CORF patients were not more clinically complex or in need of more extensive care than patients treated by other outpatient therapy providers. They told us that patients are referred to different types of outpatient therapy providers based on availability and convenience rather than on their relative care needs. One private consultant to CORFs and other outpatient provider groups noted that there are no criteria to identify and direct patients to a particular setting for outpatient care, and that physicians generally refer patients to therapy providers with whom they have a relationship. Despite the Florida contractor’s increased scrutiny of CORF claims, our analysis of Florida CORFs’ 2002 billing patterns suggests that some providers received inappropriate payments that year. In late 2001, after finding widespread billing irregularities among CORF claims, the Florida claims administration contractor implemented new strategies for reviewing claims that were maintained throughout 2002. Although these strategies were successful at ensuring appropriate claims payments for a limited number of beneficiaries, our analysis of 2002 CORF claims found that many CORFs continued to receive very high per-patient payments. In 2001, the Medicare claims administration contractor for Florida reviewed about 2,500 claims submitted by CORFs and other facility-based outpatient therapy providers for services provided from January 1999 through February 2001. Among these claims, the contractor found widespread billing for medically unnecessary therapy services. These were therapy services related to maintaining rather than improving a patient’s functioning, as required by Medicare reimbursement requirements for covering outpatient therapy. Reviews also found claims for the same beneficiary, made by more than one CORF, sometimes on the same day. The unlikelihood that a patient would receive treatment from more than one CORF provider when each one was equipped to provide the patient’s full range of needed services caused the contractor to investigate further. After interviewing a sample of beneficiaries treated by multiple CORFs, the contractor found that some of the facilities treating these beneficiaries had common owners. It reported that the common ownership was significant, suggesting efforts by the owners to distribute billings for a patient’s services across several providers. The contractor stated that this would allow the CORFs’ owners to avoid the scrutiny of the Medicare contractor, which typically screens claims aggregated by facility rather than by beneficiary. After conducting additional reviews of a sample of paid claims from these CORFs, it found that 82 percent of payments made were inappropriate, largely due to questions about medical necessity. As a result, the contractor required these CORFs to repay Medicare approximately 1 million dollars and referred some of the CORFs to CMS and the HHS OIG for further investigation. In late 2001, the Florida claims administration contractor implemented additional claim review strategies targeting CORF claims. For any new CORF, the contractor began reviewing for medical necessity, prior to payment, about 30 of the first claims submitted. The contractor also began reviewing all therapy claims submitted on behalf of about 650 beneficiaries identified as having high levels of therapy use from multiple CORFs and other facility-based outpatient therapy providers during the 2001 investigation. CORFs and other providers submitting therapy claims for these beneficiaries had to supply documentation of medical necessity before claims were paid. The contractor also conducted prepayment reviews for specific therapy services determined to be at high risk for inappropriate payments, regardless of the beneficiary receiving services. The contractor maintained these intensified claim documentation and review requirements throughout 2002. The contractor indicated that the oversight measures put in place for specific beneficiaries were effective at improving the appropriateness of claims payments for therapy services made for those beneficiaries. Specifically, the contractor reported that Florida CORFs billed Medicare $12.1 million for this group in 2000, $10.2 million in 2001, and $7.3 million during 2002. In addition, the contractor denied an increasing percentage of the amount billed each year—46 percent in 2001, and 53 percent in 2002— based on its medical records reviews. While the contractor succeeded in ensuring that payments to CORFs for this limited group of beneficiaries met Medicare rules, our own analysis of CORF claims submitted in 2002 found several indications that billing irregularities continued. The indicators included a high rate of beneficiaries who received services from multiple CORFs, some CORFs that did not provide any therapy services, and many facilities with very high per-patient payments. Our analysis of 2002 Florida CORF claims by facility showed that the Florida claims administration contractor’s efforts to ensure appropriate CORF payments were not completely effective. We found that 11 percent of the beneficiaries who received CORF services in Florida were treated by more than one CORF facility during the year. While Medicare rules do not prohibit beneficiaries from receiving services from multiple providers in a single year, this occurs much more frequently among Florida CORFs than among CORFs in other states. Specifically, in the five other states with the greatest numbers of CORFs at the end of 2001 (Alabama, California, Kentucky, Pennsylvania, and Texas), fewer than 4 percent of beneficiaries received services from more than one CORF during 2002, and in most of these states, the rate was 1 percent or less. Although many CORFs treated a few patients who received services from multiple providers during 2002, a small group of Florida CORFs had very high rates of “shared” patients that year—suggesting that some CORFs may have continued to operate in the patterns first detected by the Florida contractor during its 2001 review. Of the CORFs operating in Florida in 2002, 32 facilities shared more than half of their patients with other CORF providers. At four CORFs, more than 75 percent of the beneficiaries were treated by multiple CORF providers during the year. Staff from the Florida contractor told us that these patterns of therapy use—receiving services from multiple providers during the same time period—complicate their ability to monitor appropriate use of therapy services. Contractor staff routinely analyze claims data to evaluate appropriate levels of service use and identify trends that may suggest excessive use. However, these analyses are normally conducted on claims data aggregated by CORF provider, not aggregated per beneficiary. When beneficiaries receive outpatient therapy services from multiple providers, traditional methods of oversight are less likely to detect high levels of service use and payments. Our review of 2002 Florida claims data also showed that some CORFs were not complying with Medicare program rules about furnishing required services. Although CORFs are permitted to provide nontherapy services, they must be delivered as part of a beneficiary’s overall therapy plan of care. However, three Florida CORFs received payments exclusively for nontherapy services—such as pulmonary treatment and oxygen saturation tests—in 2002. Four additional providers billed Medicare primarily for nontherapy services, with therapy care accounting for less than 10 percent of their annual Medicare payments. In addition, we found that a number of the CORFs identified during the Florida contractor’s 2001 investigation continued to have very high average payments for all services provided in 2002. As shown in table 5, several of these facilities were among 21 CORFs with per-patient payments that exceeded the statewide CORF average by more than 50 percent. Among this group of high-cost facilities, the per-patient payment in 2002 ranged from $3,099 to $6,080, substantially above the average payment of $2,036 across all Florida CORFs. These relatively high 2002 payments suggested that Florida CORFs responded to the contractor’s targeted medical reviews selectively by reducing the services provided to the small number of patients whose claims were under scrutiny. Other patients, outside the scope of the contractor’s criteria for medical review, continued to receive high levels of services. The contractor continues to rely on the medical review criteria originally established in late 2001. However, contractor staff reported ongoing concerns about the extent to which CORFs bill for services that may not meet the program’s requirements for payment. In particular, they cited the practice of delivering therapy services over relatively long periods of time that only maintain, rather than improve, a patient’s functional status. Sizeable disparities between Medicare therapy payments per patient to Florida CORFs and other facility-based outpatient therapy providers in 2002—with no clear indication of differences in patient needs—raise questions about the appropriateness of CORF billing practices. After finding high rates of medically unnecessary therapy services to CORFs, CMS’s claims administration contractor for Florida took steps to ensure appropriate claim payments for a small, targeted group of CORF patients. Despite its limited success, billing irregularities continued among some CORFS and many CORFs continued to receive relatively high payments the following year. This suggests that the contractor’s efforts were too limited in scope to be effective with all CORF providers. To ensure that Medicare only pays for medically necessary care as outlined in program rules, CMS should direct the Florida claims administration contractor to medically review a larger number of CORF claims. CMS officials reviewed a draft of this report and agreed with its findings. Specifically, the agency noted that “disproportionately high payments made to CORFs indicate a need for medical review of these providers.” The agency also pointed out that, given the high volume of claims submitted by providers, contractors must allocate their limited resources for medical review in such a way as to maximize returns. Furthermore, CMS stated that the Florida claims administration contractor is already taking appropriate steps to address concerns about CORF billing and is prepared to take additional steps if necessary. We recognize that contractors can achieve efficiencies by targeting their medical review activities at providers or services that place the Medicare trust funds at the greatest risk. However, the impact of medical review comes, in part, from the sentinel effect of consistently applying medical review to providers’ claims. Thus, while we support the contractor’s focus on new CORF providers, we continue to believe that enlarging the number of CORF claims reviewed would promote compliance with medical necessity requirements. Given that Florida CORFs continued to bill significantly more per beneficiary than other outpatient therapy providers even after the contractor took steps to examine some claims, compliance could be enhanced by aggressively addressing this vulnerability. CMS’s comments appear in appendix II. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from its issue date. At that time, we will send copies of this report to the Administrator of CMS and to other interested parties. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. We will also make copies available to others upon request. If you or your staff have any questions about this report, please call me at (312) 220-7600. Another contact and key contributors are listed in appendix III. In this report we (1) compared Medicare’s outpatient therapy payments to CORFs in 2002 with its payments that year to other facility-based outpatient therapy providers and (2) assessed the program’s effectiveness in ensuring that payments to CORFs complied with Medicare rules. As agreed with the requester’s staff, we limited the scope of our review to facility-based outpatient therapy providers and beneficiaries in Florida. Florida accounted for one-third of all CORF facilities at the end of 2002. Our primary data source was CMS’s National Claims History (NCH) 100% Nearline File. The NCH file contains all institutional and noninstitutional claims from the Common Working File (CWF)—the system that CMS uses to process and pay Medicare claims through its contractors across the country. We also reviewed data from CMS’s Medicare Provider of Service Files, which contain descriptive information on CORF facility characteristics, such as location, type of ownership, and the date of each provider’s initial program certification. Finally, we interviewed representatives of CMS’s central and regional offices, the Florida claims administration contractor, federal law enforcement agencies, and the therapy industry. To describe the Florida CORF industry and operations, we gathered Medicare claims data from CMS’s NCH File for the years 1999 through 2002. In addition to reviewing trends in total Medicare payments to CORFs, we examined changes in the patient case mix by identifying the primary diagnoses listed on claims for beneficiaries treated by CORFs. We also obtained descriptive information on CORFs’ characteristics from the Provider of Service Files for 1999 through 2003. This work was performed from May 2003 through July 2004 in accordance with generally accepted government auditing standards. In this analysis, we compared Medicare therapy payments to four types of facility-based outpatient therapy providers: CORFs, rehabilitation agencies, hospital OPDs, and SNF OPDs. Although CORFs are authorized to offer a wide range of services, we limited our comparison to a common set of therapy services: physical therapy services, occupational therapy services, and speech-language pathology services. To compare Medicare’s therapy payments to Florida CORFs with therapy payments to other types of facility-based outpatient rehabilitation therapy providers, we examined 2002 Medicare beneficiary claims data from the NCH File. We used the NCH file to identify all beneficiaries who resided in Florida and received outpatient therapy services from in-state providers during 2002. By limiting our review to beneficiaries who were enrolled in part B for all 12 months of the year, we excluded those in managed care and those with less than a full year of fee-for-service coverage. Using beneficiary identification numbers, we aggregated each beneficiary’s total outpatient therapy claims from all provider types. We summed the annual number of therapy units billed for each beneficiary as well as the annual line-item payment amounts. This allowed us to assign each beneficiary to a provider comparison group. To compare Medicare expenditures for similar patients, we assigned each beneficiary to a diagnosis category based on the primary diagnoses listed in their outpatient therapy claims for the year. Our diagnosis groups included stroke, spinal cord injury, neurologic disorders, hip fractures, back disorders, amputation, cardiovascular disorders—circulatory, cardiovascular disorders—pulmonary, rehabilitation for unspecified conditions, arthritis, soft tissue/musculoskeletal injuries, ortho-surgical, multiple diagnoses and other. To consider differences in payment by provider type at the substate level, we compared annual per-patient payments for CORFs and other outpatient facility providers in each of Florida’s 20 metropolitan statistical areas. Variation in treatment patterns and payments (for the same diagnosis category) across provider types may suggest that one type of provider treats a patient population with greater needs for service. To consider patient differences, we applied CMS’s Principal Inpatient Diagnostic Cost Group (PIP-DCG) model. By comparing patients’ use of hospital services and inpatient diagnoses (in the calendar year prior to the year they received therapy) and demographic information such as age, sex, disability, and Medicaid enrollment, the PIP-DCG model allowed a comparison of anticipated patient care needs across provider types. We used the PIP-DCG score developed for each beneficiary in combination with the 2002 therapy payment data to conduct an analysis of covariance. To review strategies used by the Florida claims administration contractor to ensure proper CORF payments, we interviewed representatives of CMS’s central and regional offices and representatives from the contractor. The contractor provided us with the results of its 2001 investigation of Florida CORFs and its subsequent reports on CORF billing patterns. In addition, we interviewed federal law enforcement agencies involved in investigations of Florida CORF facilities. To assess the effectiveness of the contractor’s oversight strategies, we reviewed information developed by the contractor on changes in CORF billing practices. We also analyzed 2002 claims data for CORF services to identify any CORFs with disproportionately high Medicare payments. This analysis included payment data for all claims—for both therapy and nontherapy services. In contrast to our comparison of per-patient payments by provider type, in this analysis we included all beneficiaries, regardless of their total annual therapy payments and duration of Medicare fee-for-service enrollment. We did not independently verify the reliability of CMS’s Medicare claims data. However, we determined that CMS’s Medicare claims data were sufficiently reliable for the purposes of this engagement. CMS operates a Quality Assurance System designed to ensure the accuracy of its Medicare NCH and CWF data files. Specifically, the agency has procedures in place to (1) ensure that files have been transmitted properly and completely, (2) check the functioning of contractor claims edits, and (3) sample claims from the files that exhibit unusual or inconsistent coding practices (indicating that data elements may be unreliable). In addition, we consulted with CMS’s technical staff as necessary to ensure the accuracy and relevance of the data elements used in our analysis. We also screened the files and excluded claims that were denied, claims superseded by an adjustment claim, and claims for services in other years. In addition to the contact named above, Jennifer Grover, Rich Lipinski, and Hannah Fein made key contributions to this report. 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Summary: Comprehensive Outpatient Rehabilitation Facilities (CORF) are highly concentrated in Florida. These facilities, which provide physical therapy, occupational therapy, speech-language pathology services, and other related services, have been promoted as lucrative business opportunities for investors. Aware of such promotions, the Chairman, Senate Committee on Finance, raised concerns about whether Medicare could be vulnerable to overbilling for CORF services. In this report, focusing our review on Florida, we (1) compared Medicare's outpatient therapy payments to CORFs in 2002 with its payments that year to other facility-based outpatient therapy providers and (2) assessed the program's effectiveness in ensuring that payments to CORFs complied with Medicare rules. In Florida, CORFs were by far the most expensive type of outpatient therapy provider in the Medicare program in 2002. Per-patient payments to CORFs for therapy services were 2 to 3 times higher than payments to other types of facility-based therapy providers. Higher therapy payments were largely due to the higher volume of services--more visits or more intensive therapy per visit--delivered to CORF patients. This pattern of relatively high CORF payments was evident in each of the eight metropolitan statistical areas (MSA) of the state where nearly all Florida CORFs operated and the vast majority of CORF patients were treated. A consistent pattern of high payments and service levels was also evident for patients in each of the diagnosis categories most commonly treated by CORFs. Differences in patient characteristics--age, sex, disability, and prior inpatient hospitalization--did not explain the higher payments that Florida CORFs received compared to other types of outpatient therapy providers. Steps taken by Medicare's claims administration contractor for Florida have not been sufficient to mitigate the risk of improper billing by CORFs. After examining state and national trends in payments to CORFs in 1999, the contractor increased its scrutiny of CORF claims to ensure that Medicare payments made to CORFs were appropriate. It found widespread billing irregularities in Florida CORF claims, including high rates of medically unnecessary therapy services. Since late 2001, the contractor has intensified its review of claims from new CORF providers and required medical documentation to support certain CORF services considered at high risk for billing errors. It has also required that supporting medical records documentation be submitted with all CORF claims for about 650 beneficiaries who had previously been identified as receiving medically unnecessary services. The contractor's analysis of 2002 claims data for this limited group of beneficiaries suggests that, as a result of these oversight efforts, Florida CORFs billed Medicare for substantially fewer therapy services than in previous years. However, our analysis of all CORF therapy claims for that year indicates that the contractor's program safeguards were not completely effective in controlling per-patient payments to CORFs statewide. With oversight focused on a small fraction of CORF patients, CORF facilities continued to provide high levels of services to beneficiaries whose claims were not targeted by the contractor's intensified reviews.