Skilled nursing facilities (SNF) provide care for people who no longer require a hospital level of care but need a higher level of medical services than what could be provided in the home. Medicare’s payments for SNF services have grown from $456 million in fiscal year 1983 to an estimated $10.8 billion in fiscal year 1996. During this same period, the number of SNFs requesting and being granted payments for routine services higher than those normally allowed has also grown. The main reason cited by the SNF industry for the requests for higher rates is that some SNFs are caring for more complex and costly patients and, therefore, higher payments are justified. Medicare, authorized by title XVIII of the Social Security Act, is a federal health insurance program that covers almost all citizens 65 years of age or older and certain disabled people. About 38 million individuals are covered. The program has two parts. Part A, financed by payroll taxes, covers inpatient services in hospitals and SNFs as well as home health and hospice care. Part B, a voluntary program financed by enrollee premiums and general revenues, covers physician services and a wide range of other services such as laboratory tests and medical equipment used in the home. Medicare is administered by the Health Care Financing Administration (HCFA) within the Department of Health and Human Services (HHS). To qualify for SNF services, a Medicare beneficiary must have been hospitalized for 3 or more days, be admitted to the SNF on a medical professional’s order for a condition related to the hospitalization, and need daily skilled nursing or therapy services. When the beneficiary meets these conditions, Medicare covers all necessary services, including room and board, nursing care, and ancillary services such as drugs, laboratory tests, and physical therapy. Medicare pays the full amount for the first 20 days. For the 21st through the 100th day of covered care, the beneficiary pays coinsurance of up to $92 per day (in 1996), and Medicare pays the remainder. Medicare coverage ends after the 100th day. To be eligible to receive payment under the Medicare program, SNFs must meet a set of 15 requirements, each of which consists of a number of elements. These requirements are designed to ensure that the SNF is capable of providing quality care to patients in a safe environment and cover such areas as fire safety, cleanliness, nursing staff, and medical records. HCFA contracts with state health agencies to survey nonstate-owned SNFs to determine whether they meet the requirements, a process known as survey and certification. A team of health and safety professionals annually inspects the facility and reviews the care furnished to patients. The state team recommends to HCFA whether to certify the facility for participation, and HCFA makes the final decision. Medicare pays SNFs on the basis of reasonable costs, which Medicare defines as those costs that are appropriate, necessary, and related to patient care. The program has a set of cost reimbursement principles that are used to determine whether claimed costs meet the definition of reasonable costs. SNFs submit cost reports to Medicare annually that are the basis for determining the facilities’ reasonable costs. HCFA contracts with insurance companies such as Blue Cross and Blue Shield plans and Mutual of Omaha to process part A claims. These contractors are called intermediaries, and their functions for SNFs include paying claims, reviewing the necessity of care, and auditing cost reports. The intermediaries pay SNFs during the year on the basis of interim rates, which are designed to closely approximate reasonable costs. After reviewing, and perhaps auditing, a SNF’s cost report, the intermediary makes a final settlement, either paying any underpayment or recovering any overpayment. Under authority granted by section 223 of the Social Security Amendments of 1972, HCFA has established a limit on the amount of costs for routine services (room, board, general nursing, and administration costs) Medicare will recognize as reasonable. This routine cost limit (RCL) is set separately for freestanding urban, freestanding rural, hospital-based urban, and hospital-based rural SNFs. For freestanding SNFs the RCL is set at 112 percent of mean routine costs. Cost limits for hospital-based SNFs are set at the limit for freestanding SNFs plus 50 percent of the difference between the freestanding limit and 112 percent of mean routine costs of hospital-based SNFs. In 1996, this resulted in the RCL for urban hospital-based SNFs being about $39 per day higher than that for urban freestanding SNFs and about $26 per day higher for rural hospital-based versus rural freestanding SNFs. The RCL is adjusted for differences in wage rates across geographic areas. During SNFs’ first 3 years of operation, they can receive new provider exemptions from RCLs. The exemptions can last as long as 3 years and 11 months depending on when during the SNF’s cost-reporting year the exemption becomes effective. The reason for the exemption is that new providers often have higher than usual costs as they hire staff and gradually increase their occupancy rates. During the exemption period, SNFs are paid their full reasonable costs whether or not those costs exceed their RCLs. Any SNF that is not exempt from the RCL can request an exception if its routine costs exceed its limit. While there are five circumstances for exceptions, about 98 percent of exception requests are for the atypical services criterion. As defined by regulation (42 C.F.R. 413.30), atypical services are items or services furnished because of the special needs of the Medicare patients treated and necessary in the efficient delivery of needed health care. For example, a common claim by SNFs seeking exceptions for atypical services is that they have high nursing care costs. Regulations governing exemptions and exceptions were in existence when RCLs were first established in 1979. In 1994, HCFA issued Transmittal 378, the agency’s first written guidelines on the exception process. Transmittal 378 established comparative data for the four groups of SNFs for which RCLs are established, required SNFs to submit patient-specific data such as patient diagnosis, and imposed time deadlines on the intermediary and HCFA to handle exception requests. To obtain an exception, a SNF must submit a written request to the intermediary responsible for paying the SNF’s claims. The intermediary reviews the request using Transmittal 378 guidelines and sends the exception request and its recommendation to HCFA. The intermediary’s recommendation can be to approve the requested rate, approve at a lower rate, or deny the request. HCFA reviews the request and the intermediary’s recommendation and makes the final decision. (See app. I for a detailed description of the exception process). The Ranking Minority Member of the Senate Special Committee on Aging asked us to describe how Medicare’s SNF costs and usage have grown in relation to hospital use and to assess whether Medicare’s process for deciding whether SNFs warrant higher rates discriminates between SNFs that treat more complex cases and those that have high costs but do not treat more complex cases. He also asked us to ascertain whether there were differences between the Medicare patients treated by facilities that received higher rates and those that did not. To respond to this request, we addressed the following questions: How have SNF costs and use grown in relation to hospital use? How do Medicare patients in SNFs granted exceptions compare with Medicare patients in SNFs that have not received exceptions, including whether patients in SNFs granted exceptions need more intense or complex care? How do services provided by SNFs granted exceptions compare with services provided by SNFs that have not received exceptions (for example, nurse staffing levels, physician coverage, and therapy services)? Do patients in SNFs granted exceptions receive appropriate care? What information does HCFA gather to assess RCL exception requests, and does its process ensure that SNFs are furnishing atypical services before granting RCL exceptions? To identify growth in SNF use and its relation to hospital use, we obtained and analyzed HCFA data on Medicare beneficiary use of services in both settings. We also reviewed a number of studies and reports related to this area. To assess whether hospital length of stay was different when hospitals have SNF units, we examined changes in length of stay between fiscal years 1991 and 1994 for all Medicare patients and for 12 diagnoses that are likely to result in posthospital care. (See app. II for a description of the 12 diagnosis-related groups.) To address whether HCFA’s RCL exception process ensures that SNFs granted exceptions actually furnish atypical services, we reviewed HCFA’s statutory authority and responsibilities for establishing and administering Medicare’s SNF RCL exception process and HCFA’s regulations and guidance to intermediaries for reviewing exception requests filed by SNFs. In particular, we reviewed the current SNF exception request review process that was set out in HCFA’s Transmittal 378 instructions issued in July 1994. We also discussed the SNF exception process with HCFA officials in the Bureau of Policy Development. We visited 10 intermediaries to determine the SNF exception request review process employed by each and verify that their reviews complied with the guidance laid out in Transmittal 378 and subsequent written correspondence. In November 1995, HCFA provided us with a database that contained information on 1,379 approved exception requests. The 10 intermediaries processed 789, or 57 percent, of these exceptions. The intermediaries we visited included five that processed more than 50 exception requests, two that processed fewer than 20 requests, and three participating in HCFA’s experiment giving final approval authority to intermediaries. Two of the five selected high volume intermediaries also participated in the pilot project. To answer the questions about SNF patient characteristics and facility services, we analyzed (1) a compilation of HCFA-required resident assessment data (known as the Minimum Data Set (MDS)) about each nursing home resident in Maine, Missouri, Ohio, and Washington for calendar year 1994 and (2) Medicare claims file data for 1992 and 1994. In addition, for Maine and Ohio, we applied a HCFA method for classifying nursing home patients into homogenous groups according to common health characteristics and the amount and type of resources they use. To provide additional information on patient and facility characteristics, we visited five SNFs that had received exceptions in the past and continue to apply for exceptions. We chose these SNFs, located in California, Illinois, Indiana, Massachusetts, and Washington, with input from state officials and local nursing home ombudsmen. To assess whether the care Medicare beneficiaries received in SNFs granted exceptions was appropriate, we asked officials in the SNFs we visited to identify a universe of their Medicare patients who they believed needed or likely needed more intense or complex care. We then randomly selected 20 of these patients’ records from each facility that were sent to the peer review organization (PRO) located in the SNF’s state, where they were reviewed by registered nurses and physicians using HCFA evaluation guidelines for quality and appropriateness of care. We also asked the reviewers to judge the intensity and complexity of care needed by the patients. We did not independently examine the internal and automated data processing controls for automated systems from which we obtained data used in our analyses. HCFA subjects its data to periodic reviews and examinations and relies on the data obtained from these systems as evidence of Medicare-covered services and expenditures and to support its management and budgetary decisions. We did however, assess the reliability of the data by testing multiple data elements to confirm their expected relationships to one another, and individual data elements for specific attributes. The state-specific data we analyzed and the information from the site visits cannot be projected to the nation as a whole. (See app. III for a more detailed discussion of the methodology for analyzing patient characteristics, services provided, and appropriateness of care.) With this exception, we conducted our review from July 1995 to September 1996 in accordance with generally accepted government auditing standards. The average length of hospital stay for Medicare patients has gone down since the prospective payment system (PPS) was introduced in 1983. At the same time, SNF use has gone up, indicating that some substitution of SNF care for hospital care has occurred under PPS. Average length of hospital stay has decreased more for those patients whose diagnoses are more likely to lead to a SNF admission. Moreover, for patients with these diagnoses, hospitals with a SNF unit saw even larger decreases in average length of stay than hospitals without a SNF unit. Before Medicare introduced its hospital PPS in fiscal year 1984, hospitals could maximize their Medicare revenues by keeping beneficiaries in the hospital as long as possible. Each additional day of hospital stay meant more reimbursement. PPS changed financial incentives for hospitals by paying them a fixed amount per discharge that differs on the basis of the patient’s diagnosis. This encouraged hospitals to be more efficient and to control costs. One way for hospitals to control costs is to reduce the average length of patient stay, and one way to reduce the length of stay is to transfer patients to SNFs as soon as medically appropriate. As a result, it was expected that SNF use would increase after PPS. Table 2.1 shows for fiscal years 1983 through 1995 the number of discharges from hospitals and admissions to SNFs along with the average length of stay in each setting. Hospital average length of stay decreased by about 29 percent, and discharges per 1,000 beneficiaries also decreased by about 24 percent. The reduction in discharges per 1,000 beneficiaries can be explained in large part by the substitution of ambulatory and outpatient surgery for inpatient surgery. For example, in 1981, the base year for PPS, about 332,000 Medicare discharges were for cataract surgery, accounting for over 1 million days of care. Today, almost all cataract surgery is done on an outpatient basis. Even though the complexity of hospital cases, as measured by the mean hospital case mix index, has increased on average by almost 28 percent since PPS began, average length of stay has gone down. Some of the decrease can probably be explained by the substitution of SNF care for what would in the past have been the last few days of hospital care. Beneficiary use of SNF services has increased from 10 admissions per 1,000 beneficiaries in 1983 to 42 per 1,000 based on preliminary data for 1995, and the percentage of hospital discharges resulting in SNF admissions has increased from 2.7 percent to 13.3 percent. PPS’ effect on SNF use was initially smaller than expected and sometimes contrary to expectations. Medicare SNF admissions increased from 309,000 in 1983 to 353,000 in 1985. During the same period, Medicare SNF payments increased 5 percent, from $456 million to $480 million. However, between 1985 and 1987, this trend reversed. Medicare SNF admissions fell to 327,000, a 7 percent decline. Any PPS effect on Medicare SNF utilization was offset by intensified utilization review by Medicare intermediaries. Several events occurred in the late 1980s that resulted in increased SNF usage. In 1988, HCFA implemented revised SNF coverage guidelines in response to a lawsuit (Fox v. Bowen, 1987). The intent of these new guidelines was to make it easier for beneficiaries to obtain SNF coverage and to increase the consistency of coverage determinations. Enactment of the Medicare Catastrophic Coverage Act in 1988 also had a major effect by increasing coverage and reducing beneficiary cost sharing. These changes provided a strong incentive for providers to become certified as Medicare SNFs. Over 1,600 new SNFs and nearly 75,000 new beds were certified between December 1988 and December 1990. The combined effects of increased coverage and increased provider resources produced rapid growth in the use of the Medicare SNF benefit during calendar year 1989, the only year the catastrophic coverage provisions were fully in effect. Covered days of care more than doubled over the previous year, from 11.8 million to 28.6 million, while program payments increased from about $1 billion to $2.8 billion. With the repeal of the Medicare Catastrophic Coverage Act in 1989, the SNF benefit structure returned to that in effect in 1988 after settlement of the lawsuit. This, as expected, produced a drop in utilization and payments for Medicare SNF services in 1990. However, SNF utilization and payments remained well above pre-1989 levels, and by 1992 had surpassed the 1989 level. In 1991 the average length of stay for Medicare patients in PPS hospitals was 7.9 days. It fell to 6.9 days in 1994, a decrease of 12.9 percent. However, we found that for 12 diagnosis-related groups (DRG) that are likely to require posthospital-care services, the declines in length of stay were larger. As shown in table 2.2, the change in length of stay between 1991 and 1994 for these 12 DRGs ranged from 16.7 percent to over 27 percent. As shown in table 2.3, the average length of stay in PPS hospitals with SNFs was shorter than the average length of stay in PPS hospitals that did not have a SNF unit for all but 1 of the 12 DRGs included in our analysis. Lengths of stay ranged from 4 percent to almost 14 percent shorter in hospitals with SNF units. For the 12 DRGs analyzed, about 248,000 Medicare beneficiaries were discharged to a SNF from a PPS hospital during fiscal year 1994. This represented about 23 percent of discharges from PPS hospitals for these DRGs. As shown in table 2.4, for beneficiaries discharged to a SNF, the average length of stay for hospitals with SNFs was less than that for hospitals without SNFs for each of the 12 DRGs. The differences ranged from 0.3 to 2.7 days. Because SNFs with exceptions are supposed to be furnishing atypical services, they might be expected to have a higher proportion of patients requiring more nursing assistance or more complex care than SNFs without exceptions. However, in the four states we studied, we found no substantive differences between the characteristics of, and services received by, Medicare patients residing in SNFs granted exceptions and those in SNFs that did not receive exceptions. For example, we found no substantive differences in patients’ ability to perform activities of daily living (ADL), the types of patient diagnoses, or the frequency with which certain types of treatments and therapies were administered. PRO reviewers found that patients in the five SNFs with exceptions that we visited generally received appropriate care—that is, the right care at the right time. They did find instances in which inappropriate care had been furnished in several of the SNFs granted exceptions. However, except for one case, no adverse outcomes resulted. Although HCFA intends that exceptions be granted only to SNFs that care for patients requiring atypical services, when comparing SNFs with exceptions and those without, we found little difference in either the Medicare patients themselves or the services they were provided. For example, we found no substantive difference between the two groups of SNFs in terms of (1) patients’ ability to perform activities of daily living, (2) patients’ diagnoses, (3) patients’ cognitive status, or (4) patients’ prior nursing home stays. When comparing data about the characteristics of residents in SNFs that received exceptions and SNFs that did not, we found that facilities in both groups care for some Medicare patients who required complex care. However, we found no substantive differences between these groups of facilities in a number of areas that may reflect the overall complexity of patient care needs. (See app. IV for the results of certain patient characteristics we analyzed.) Furthermore, during their review of medical records of a sample of patients in the five SNFs with exceptions we visited, PRO reviewers found that a majority of patients in three SNFs sampled did not need complex or intense care, while half of the patients sampled in the other two SNFs did require more complex or intense care. We analyzed ADLs because they are a measure of patient need and the facility resources required to meet those needs. Lower ADL scores indicate patients with relatively fewer needs for assistance compared with patients with higher ADL scores. In each of the states we studied, according to the MDS data, patients in SNFs with exceptions and those in SNFs without exceptions had, on average, similar abilities to perform ADLs. For example, as figure 3.1 shows, patients in both groups of SNFs in Missouri had ADL scores of about 12, on average. Missouri SNFs with exceptions’ individual facility ADL scores ranged from 8 to 12. Missouri SNFs without exceptions had a median ADL score of 12, with 10 percent of the SNFs with exceptions having ADL scores of 10 or lower and 10 percent having ADL scores of 14 and higher. (See app. IV for information about patient ADLs in the other three states we analyzed.) To obtain information about diagnoses, we analyzed 1992 and 1994 data from HCFA’s Medicare provider analysis and review (MEDPAR) database, classifying the SNF patients into DRGs using software developed for HCFA for hospital prospective payment. We found few differences between the two groups of SNFs. For example, in 1994 the most common DRG for patients in both groups of Ohio SNFs was fractures of the hip and pelvis. Table 3.1 shows, for each group of Ohio SNFs, the five most common DRGs. (DRG information for the other three states, and for the nation as a whole, is in app. IV.) Higher nursing costs as a result of providing atypical services are the foremost reason HCFA cites in granting exceptions. As a result, it might be expected that patients in SNFs granted an exception would need—and the SNF would provide—more nursing care. To obtain additional information about patients’ need for nursing care in SNFs with and without RCL exceptions in Maine and Ohio, we estimated the nursing resources patients require. We used HCFA’s Resource Utilization Group, version III (RUG-III) model, a model for sorting nursing home residents into like groups according to common health characteristics and the amount and type of resources they use, to evaluate each patient’s nursing resource need. RUG-III considers patient characteristics, such as whether the patient is in a coma or has pneumonia, as well as services provided to the patient, such as kidney dialysis or physical therapy, and assigns the patient to 1 of 44 categories depending on the nursing resources that patient requires. Each category has a number, or score, associated with it, providing a relative measure of resource use compared with other categories. For example, a patient who has complex health problems requiring more nursing care would be placed in a higher category, and given a higher score, signifying more resources required, than a patient who has simpler health problems and requires less nursing care. When we analyzed the results of the RUG-III estimates, we observed that in Ohio, the distribution of Medicare patients among the categories was similar in SNFs with exceptions and in SNFs without. And, unexpectedly, in Maine the SNFs with exceptions had patients requiring fewer nursing resources when compared with patients in SNFs without exceptions. (See app. IV for additional information regarding the results of the RUG-III analysis.) In addition to calculating RUG-III scores for each patient, we used the results of the RUG-III patient analysis to calculate each facility’s case-mix index score—the average amount of nursing resources required to care for the facility’s overall patient population. In both Maine and Ohio, we found the case-mix scores to be similar when comparing each state’s SNFs with exceptions with its SNFs without exceptions. For example, as figure 3.2 shows, the two groups of SNFs in Maine had case-mix scores of approximately 1.3, indicating that the SNFs’ patients had generally similar nursing resource needs. Similarly, figure 3.3 shows that the two groups of Ohio SNFs had case-mix scores of about 1.4, indicating similar nursing resource needs among their patients. Both the RUG-III individual patient analysis and case-mix index scores indicate that there were patients in both SNFs with exceptions and SNFs without exceptions that required intense or complex care. For example, in Ohio, 1.1 percent of patients in SNFs with exceptions and 1.4 percent of patients in SNFs without exceptions were determined to need the highest category of nursing resource use. And, also in Ohio, there were a few SNFs in both groups—one SNF with an exception and several SNFs without exceptions—with overall case-mix index scores of 1.6 and higher, indicating a relatively larger proportion of patients with high nursing resource needs in these SNFs. MDS data also showed no substantive differences in patients’ cognitive status, a measure of the patients’ ability to make decisions about the tasks or activities of daily living, such as choosing items of clothing or determining mealtimes. Nor did the data show any substantive difference between SNFs with and without exceptions in the number of patients with a prior stay in a nursing home or other residential facility, a measure that may indicate those patients with a history of poor health. In each of the four states we studied, patients in both groups of SNFs were similar when measured across both of these elements. (See app. IV for additional information regarding these and other patient characteristics we analyzed.) We asked the PROs, as part of their medical record review, to evaluate the health care needs of a sample of 20 patients identified as having or likely having complex care needs by SNF staff in each of the five SNFs with exceptions we visited. The PRO evaluations were based on a five-point scale, with one representing the needs of a typical skilled nursing facility patient and five being the needs of a typical acute-care hospital patient. In three SNFs, all or almost all of the patients reviewed were judged to have the health care needs of a typical SNF patient, and, in fact, several patients in two of these SNFs were judged not to require SNF care at all. In the two remaining SNFs, half the patients reviewed were judged to have needs greater than those of a typical SNF patient. SNFs with exceptions receive that status because they have documented to HCFA’s satisfaction that they furnish patients atypical services. However, in the four states we studied, we found that the percentage of patients receiving certain special treatments, such as ventilator care, and certain therapies, such as physical therapy, was generally similar in SNFs with exceptions and SNFs without. Furthermore, the typical amount of therapy given to the patients in each group of SNFs was generally similar. During our five site visits to SNFs with exceptions, we found that staffing of nursing and therapy services as well as physician coverage varied. We analyzed MDS data about special treatments and therapies, items that could be indicative of different levels of SNF resource use. Generally, we found no substantive differences in the type and intensity of these services in SNFs with exceptions and in those without. (See app. IV for the results of certain facility service characteristics we analyzed.) The percentage of patients receiving certain treatments and procedures, such as suctioning and ventilator care, appeared similar in both groups of facilities. For example, as figure 3.4 shows, generally less than 5 percent of patients in each group of Ohio SNFs received suctioning. (See app. IV for additional information regarding special treatments.) The percentage of patients receiving therapies, such as speech, occupational, and physical therapy, appeared similar in both groups of facilities in all four states. For example, as figure 3.5 shows, generally less than 20 percent of patients in each group of Maine SNFs received speech therapy. Likewise, the number of days of therapy patients received appeared similar. As shown in figure 3.6, patients in each group of Washington SNFs received about 10 days of therapy, on average. We also analyzed Maine and Ohio data regarding minutes of therapy provided and generally found no differences between the two groups. (See app. IV for additional information regarding therapies. Also, see app. IV for a listing of other variables analyzed.) MDS, MEDPAR, and other nationally available databases did not contain information about staffing, training, and other areas you were interested in, such as nursing care, therapy services, and physician coverage. Therefore, to provide information about these issues, we can only describe our observations during our site visits to five SNFs with exceptions. These observations cannot be assumed to be representative of SNFs in general. According to officials at the SNFs we visited, SNFs attempt to staff according to the complexity or intensity of the patients’ needs. For example, patients with more complex needs require more licensed nursing care; thus, a higher licensed-nurse-to-patient ratio is desirable. Patients with less complex needs might allow SNFs to staff with more certified nurse assistants and fewer licensed nurses. However, other factors, such as financial constraints or inability to recruit qualified personnel, may influence staffing ratios. Licensed-nurse-to-patient staffing ratios reported by SNF officials varied considerably among the five SNFs we visited. For example, daytime licensed-nurse-to-patient ratios ranged from 1:6 to 1:15; nighttime licensed nursing ratios ranged from 1:18 to 1:31. (See app. IV for information on nurse staffing levels.) The SNF with the lowest daytime licensed-nurse-to-patient staffing ratio, according to officials at the SNF, had adopted a system under which registered nurses performed most patient care tasks because the SNF had difficulty finding and retaining qualified nurse aides. Officials at most of the SNFs we visited said they preferred to have nurses with hospital experience on their staff to care for patients with complex medical needs. Hospital acute-care experience—as opposed to only long-term care experience—gives nurses the requisite skill and training to provide appropriate care to patients with complex needs, according to these officials. We did not determine the number of nurses with acute-care experience at each SNF we visited. However, many of the nursing staff at one SNF—which had a predominantly orthopedic patient population—had acute-care experience, and several of the nursing staff at this SNF were in the process of securing recognition as certified registered rehabilitation nurses. We also found that most of the SNFs had established on-the-job training programs for their nursing staffs to maintain and increase their skills. All the SNFs we visited provided physical, occupational, and speech therapies, and three of them also performed respiratory therapy. As estimated by SNF officials, the percentage of Medicare patients in each SNF receiving therapy varied widely, from a low of 40 percent in one SNF to almost 90 percent in another. SNFs attempt to provide the number and type of therapists—such as physical or occupational therapists—appropriate to their patients’ needs. The SNFs we visited predominantly contracted with outside vendors for therapists and therapy aides, with only one facility using mostly in-house staff. Following is an example of how one SNF uses therapy services to meet its patients’ needs. Therapy services in this SNF are available 7 days a week, but not all patients receive therapy on weekends. Most patients receive at least 1 hour of physical therapy and 1 hour of occupational therapy each day, as well as participate in an exercise group. On average, complex care patients receive about 2-1/2 hours of total therapy per day. All patients are screened for speech therapy. According to experts, aside from physicians acting in administrative capacities as medical directors, SNFs generally do not have physicians on staff. As in hospitals, SNF patients have their own attending physicians who direct their care. However, unlike hospital patients, most SNF patients’ conditions generally do not require a daily physician visit. As a result, physicians often rely on SNFs’ nursing staffs to keep them informed of the patients’ conditions. One SNF we visited arranged for more physician coverage through an agreement with nearby hospitals under which the hospitals provided physicians to follow up on SNF patients, seeing them two or three times a week. In three of the five SNFs we visited, some staff expressed concern that physicians did not visit their patients as frequently as they should, particularly the sicker patients. One SNF medical director expressed concern that physicians were relying on nurses to notify them of their patients’ conditions rather than visiting the patient, which she believed may be inappropriate for sicker patients. At another SNF we visited, a staff person indicated that some attending physicians failed to visit their SNF patients in person or oversee their care at the facility. PRO physician reviewers found that the services provided at the five SNFs with exceptions we visited were almost always appropriate to the patients’ needs for those cases reviewed. However, several problems with quality of care, such as errors in administering medication and delays in contacting physicians when problems arose, were identified during the review of medical records collected at the SNFs we visited. Except for one patient who required hospital outpatient treatment as a result of a quality problem the PROs identified, no other adverse outcomes resulted from the problems noted. In reviewing the medical records of 100 SNF patients (20 patients at each facility) identified by SNF staff as needing complex care, the PROs found the following quality problems:five instances of medication errors; three instances of delays in contacting a physician upon change in patient’s condition; two instances of not notifying a physician upon a change in a patient’s condition; two instances of falls, indicating a failure to develop a system to assess patients with an increased risk of falling and to implement preventive measures; and one instance of failure to provide necessary treatment. Furthermore, the PROs noted 55 instances in which documentation of the patient’s condition or progress was inadequate or inconsistent. Generally, reviewers assume that care not documented was not furnished. Following are some specific examples of problems identified by the PROs. For one SNF, failure to follow medically prescribed procedures resulted in a complication. Physician orders instructed SNF staff to irrigate on a weekly basis a patient’s central venous catheter. The PRO reviewers found that this procedure was not followed. As a result, problems with the catheter developed, and the patient was sent to the hospital for outpatient care. At another facility a patient was given twice the ordered dosage of medication for at least a week before the error was noticed and the physician notified. In yet another facility, the issue of physician notification was raised after abnormal laboratory test results were returned but the physician was not informed until 3 days later. The number of SNFs granted exceptions to routine cost limits (RCL) is growing rapidly, with exception approvals increasing from 184 to 552 from fiscal year 1993 to fiscal year 1995. The extra payments associated with these approvals also increased from $35 million in fiscal year 1993 to $98 million in fiscal year 1995. However, HCFA’s exception review process is not adequate for discerning SNFs that have higher costs because they furnish atypical services, and thereby qualify for an exception, from SNFs that have higher costs for other reasons, such as inefficiency. The primary reasons for this situation are that benchmarks used to screen for exception eligibility rely almost entirely on a SNF’s proportion of Medicare patients, and patient-specific information submitted by SNFs on Medicare patients is not used. In effect, if a nursing home can demonstrate it has a higher than average proportion of Medicare patients and high costs, it can receive an exception to the RCL, which in turn defeats the cost-control incentives of RCLs. From the time RCLs were first established in 1979 through fiscal year 1992, a total of only 80 exceptions were granted. More than twice as many were granted in fiscal year 1993 alone, and more than 550 were granted in fiscal year 1995 (see table 4.1). Moreover, HCFA and industry officials expect that the number of exception requests and approvals is likely to continue to grow, and data in table 4.1 covering part of fiscal year 1996 suggest this will happen. Although data for fiscal year 1996 are based on part of the year, these data indicate a continued increase in approvals. During approximately the first 10 months of fiscal year 1996, HCFA approved 417 exceptions, which would be worth about $70 million to the SNFs. In addition, the six intermediaries with final approval authority approved 190 exceptions during the first 9 months of fiscal year 1996, which were worth about $29 million to the SNFs. If these trends continue, approved exceptions by all intermediaries during fiscal year 1996 could total about 750 and cost the Medicare program about $120 million. Besides the fact that SNFs that receive exceptions in one year are likely to continue receiving exceptions, another factor that could continue the trend to more exceptions in the future is the number of exemptions to RCLs currently in effect. Historically, over 20 percent of SNFs with new provider exemptions received exceptions after their exemption period ended. As of September 30, 1995, 2,422 SNFs had obtained exemptions from RCLs since 1979. More than 80 percent of the 2,422 exemptions were approved after fiscal year 1989, with 35 percent of the exemptions (846) approved during fiscal years 1994 and 1995. Thus, over the next few years, a substantial number of SNFs will be completing their RCL exemption periods and likely will be requesting exceptions. The first step a SNF must take to gain an exception to the RCL is to demonstrate that it meets at least one of three benchmarks established by HCFA. The benchmarks are as follows: The SNF has a shorter length of stay than the average of its peer group. Shorter lengths of stay can indicate, for example, that services are furnished more intensively so patients can be released sooner. The SNF has higher average ancillary costs per day than its peer group. Higher ancillary costs can indicate, for example, that the SNF treats a higher proportion of patients needing rehabilitation services or drug infusion therapy. The SNF treats a higher proportion of Medicare patients than its peer group. As the ratio of Medicare to total patients rises, SNF costs can grow because Medicare patients generally have more acute conditions in need of more health services than other patients, who often need more long-term and custodial care. Benchmarks are set on the basis of the average value of four peer groups—rural and urban groups for both hospital-based and freestanding facilities. In establishing the peer group averages, HCFA officials told us they used data on all patients (in Medicare-certified units) in the SNFs, not just Medicare patients, because Medicare’s cost reimbursement method is designed to pay on the basis of average costs of all patients in a SNF for routine services, up to the RCL. However, Medicare patients are different from other nursing home patients. Medicare patients are admitted because they have been discharged from a hospital but need continued care because of the acute condition that resulted in the hospitalization. Other patients need long-term care for chronic conditions, which involves more custodial-type care. In effect, for most SNFs, the three benchmarks all depend on the same factor—the percentage of a SNF’s patients who are Medicare beneficiaries. Therefore, treating a higher proportion of Medicare patients will usually get a SNF past the benchmarks, but this does not mean the patients require atypical services. The next and final stage of the process as it operates only requires a SNF to demonstrate that its costs are higher than its peer group. The process does not require a SNF to demonstrate that its costs are high because atypical services are needed and furnished. Therefore, SNFs that are simply inefficient in their operations can gain RCL exceptions. Tables 4.2, 4.3, and 4.4 give the benchmarks and actual Medicare averages for length of stay, ancillary costs, and portion of Medicare-covered days, respectively. Table 4.2 contains the peer group benchmarks for average length of stay and the actual average for Medicare-covered SNF patients in fiscal year 1994. The average length of stay of Medicare patients is so much less than the benchmark that it is unlikely this benchmark can distinguish facilities that provide atypical services to Medicare beneficiaries from facilities that do not. Furthermore, each of the four peer group benchmark values exceed the maximum Medicare benefit of 100 days. Table 4.3 presents a similar comparison for ancillary costs. The actual peer group ancillary costs are so much larger than the benchmarks that ancillary costs also are unlikely to be a good indicator of whether a SNF provides atypical services to Medicare patients. The actual average costs range from 2.3 to 4.4 times the benchmarks. A primary reason for these differences in costs is that Medicare patients are different from most other patients in nursing homes. Medicare patients typically have been recently discharged from hospitals after treatment for acute conditions. The majority of non-Medicare patients in nursing homes are Medicaid patients with chronic conditions and long-term and custodial care needs. Thus, basing a benchmark on the ancillary costs for all patients produces a benchmark that does not adequately distinguish facilities that do provide atypical services to Medicare patients from those that do not. A comparison based on the third benchmark, proportion of Medicare patients, is shown in table 4.4. This benchmark is of little or no value in identifying facilities that provide atypical services. For example, in fiscal year 1994, Medicare patients made up about 36 percent of the patients in hospital-based urban nursing homes. If a nursing home had a Medicare population of, say, 60 percent (above the benchmark), this merely indicates that the nursing home had an atypical population mix, not that it was providing atypical services. A nursing home could have a low proportion of Medicare patients and provide atypical services to every one of its Medicare patients. Furthermore, the benchmarks are out of date. The benchmarks were computed from data spanning the periods October 31, 1988, through September 30, 1989, for hospital-based facilities and June 30, 1989, through May 31, 1990, for freestanding facilities. For each type of facility, the base data included substantial time under the Medicare Catastrophic Coverage Act of 1988 coverage criteria, which, as discussed, substantially liberalized Medicare coverage criteria for SNFs. The benchmarks, then, were computed on data representing an atypical year in the number and type of Medicare patients who were admitted to SNFs. Data describing patient characteristics submitted as part of an exception request generally are not used in the exception review process. Transmittal 378 requires SNFs to submit patient data, showing patients’ diagnoses and ability to perform ADLs, for a random sample of all patients treated at their facilities. Although Transmittal 378 requires a random sample, HCFA officials told us that they have verbally communicated to various intermediary and SNF officials that they expect the SNF to submit clinical data for all patients treated during the year for which an exception is requested. None of the intermediaries we visited knew of HCFA’s expectation. Transmittal 378 says the intermediary should use the patient-specific data to determine whether the nursing staff level of a SNF is excessive, and if so, the intermediary should adjust the SNF’s costs before comparing the costs to the peer group. A HCFA official told us that HCFA expects the intermediaries to follow the instructions in Transmittal 378 and evaluate whether the nursing staff level of a SNF is excessive. He told us that HCFA expected the intermediaries’ professional health staff to make decisions on excessive staffing levels, although HCFA has provided no specific criteria to judge whether nursing staff levels are excessive. Although 3 of the 10 intermediaries visited told us that they used patient-specific data in their review of exception requests, none of the 10 had ever referred a request to its professional health staff for an opinion on the appropriateness of nursing staff levels. Officials at two of the three intermediaries using patient-specific data told us that HCFA had verbally told them to verify that the ADL scores of the applicant’s patients are higher than the ADL scores presented in a 1985 national survey of nursing home populations. An intermediary official told us that higher ADL scores indicate a need for additional nursing personnel. An official at a third intermediary we visited told us that, although the intermediary received no guidance from HCFA, it requires a SNF applying for exception to clarify its ADL data by interpreting in writing how its ADL data demonstrate that the SNF is providing atypical services. HCFA’s Transmittal 378 also requires SNFs to submit a listing of the discharge destination for all patients. Officials for all 10 intermediaries we visited told us they verify that this information is submitted, but because HCFA has not provided any criteria to determine its significance, they do not use this information when reviewing an exception request. HCFA officials told us the discharge data should show a large number of patients going home if the SNF is atypical. However, they told us that there are no plans to establish a benchmark for discharge data because setting such a benchmark for the number or percentage of patients discharged to their homes would be difficult. The use of SNF services by Medicare beneficiaries and Medicare’s payments for these services have grown dramatically during the 1990s. One reason for this growth is that Medicare guidelines for when SNF services are covered were liberalized in 1988 in response to a court decision. Another reason is that some substitution of SNF care has occurred for what in the past would have been the last few days of hospital care. This was an expected result of Medicare’s hospital PPS. The number of SNFs requesting exceptions to the RCL has grown rapidly and is expected to continue to grow. Over 500 requests were processed and approved in 1995, and as many as 750 may be processed in 1996. Almost all exception requests claim that routine costs are higher than the RCL because the SNF provides atypical services. However, HCFA’s current screening benchmarks for exception requests are unlikely to differentiate between SNFs that provide atypical services and those that do not. Moreover, the patient-specific information submitted with exception requests is not used to evaluate them. Thus, if a SNF can show that its costs are higher than the RCL, it will receive an exception without demonstrating that it does, in fact, furnish atypical services. Our analysis of four states’ Medicare patients in SNFs with and without exceptions found virtually the same ADL scores for patients in both groups of SNFs; no substantive differences in the patients’ diagnoses; RUG-III scores that indicated a need for the same level of nursing resources to treat both groups of patients; and similar amounts of therapy and special treatments. Moreover, despite the fact that SNFs with exceptions were expected to have sicker patients, PRO review of 100 patients identified as requiring complex care by staff in the SNFs we visited showed that all or almost all patients in three of five SNFs were typical SNF patients. Only half of the selected patients in the other two SNFs needed complex care. PRO review did find that services furnished to the selected patients were almost always appropriate to patients’ needs. Weaknesses in HCFA’s exception request review process make it unlikely that it limits exception approvals to SNFs furnishing atypical routine services and likely that SNFs will receive approval for merely showing higher than normal costs. Our analyses of SNF patient characteristics also showed no significant difference between patients in SNFs with and without RCL exceptions, giving further evidence that HCFA’s review process is not working as intended. The Secretary of HHS should direct the Administrator of HCFA to revise the SNF exception to the RCL review process so that it can differentiate between SNFs that furnish atypical routine services to Medicare patients and SNFs that merely have higher than normal costs. Looking at factors that reflect Medicare patients rather than all SNF patients occupying Medicare-certified beds might be one way to do so. Using patient-specific data, some of which are currently submitted but not used, might be another way. In commenting on a draft of this report, HHS generally agreed with our recommendation to revise the exception review process to enable HCFA to better differentiate between SNFs that furnish atypical services and those that merely have higher costs. Specifically, HHS concurred with our suggestion to expand the use of patient-specific data in the review process. HHS said that HCFA’s ongoing SNF payment method demonstration project using the RUG-III classification system will provide the data necessary to cost-out atypical services and items and begin to integrate patient-specific data into the exception process. However, HHS disagreed with our suggestion that looking at factors that pertain to Medicare patients rather than all SNF patients might be one way to enhance the exception review process. HHS said this suggestion failed to take into account the fact that Medicare patients are often the most resource-intensive patients a SNF treats and that the proportion of Medicare patients in a SNF is a valid indicator of case mix. HHS added that the RCLs are based on the average cost of all patients and that use of data on only Medicare patients would be inappropriate. We discuss in the report the differences between Medicare and other SNF patients and the rationale for using data on all patients in establishing the benchmarks used in evaluating exception requests. We did not recommend that HCFA substitute data on only Medicare patients for the current benchmark. Rather, we recommended that HCFA look at such data as one way to revise the process and give exception request reviewers additional data upon which to base decisions. We envision that the data could be a useful supplement to the existing process to help differentiate between SNFs furnishing atypical services and those that merely have higher costs. For this reason, we do not believe that our suggestion would be inconsistent with Medicare’s principles of cost reimbursement. HHS also disagreed with our suggestion to look at data on only Medicare patients because the suggestion was derived from what HHS considers to be a methodological flaw in our analysis of SNF patients. HHS considers the methodology flawed because it compared only Medicare patients in SNFs with exceptions with Medicare patients in SNFs without exceptions, which does not consider HCFA’s proxy for case mix—the facility’s percentage of Medicare patients. First, our suggestion was based primarily on our review of HCFA’s exception process discussed in chapter 4. We found that in general the only factor that affected a determination of whether a facility met the atypical services criterion was its proportion of Medicare patients, but a higher than average proportion in itself does not mean a SNF furnishes atypical services. Thus, we recommended that the review process be revised and suggested several types of information that might be useful to differentiate SNFs that furnish atypical services from those that merely have higher than normal costs. Second, as stated in chapter 1’s scope and methodology section, our analysis of SNF patients was designed to answer questions about the characteristics of and services received by Medicare patients in facilities with and without RCL exceptions. The analysis is valid for these purposes. Moreover, we would expect that at least some differences between patients in the two SNF groups would be shown by such an analysis, and the fact that no differences emerged lends additional support to our suggestion to look at using Medicare-only data during the exception review process. HHS also noted that, in concert with the Congress, it is working on development of a PPS for SNFs that is expected to be sensitive to a facility’s case mix. HHS believes that such a payment method would eliminate the need for an exception process. A SNF PPS that is sensitive to case mix might lessen the need for an exception process, but we suspect that some exception-type process would remain either for individual cases or facilities. Prospective payment methods generally retain such features. For example, Medicare’s inpatient hospital PPS provides for paying sole community hospitals differently because of their special circumstances and provides a way for hospitals to receive additional payments for outlier cases that are extremely costly.

Summary: Pursuant to a congressional request, GAO reviewed: (1) the growth of skilled nursing facility (SNF) costs and SNF use in relation to hospital use; (2) the characteristics of Medicare SNF patients and the types of services they receive in SNFs being paid higher than normal amounts compared to other SNFs, as well as whether patients in such facilities receive appropriate care; and (3) whether the Health Care Financing Administration's (HCFA) process for assessing requests for higher payments ensures that only SNFs furnishing atypical services are granted exceptions. GAO found that: (1) SNF use has increased since 1983 when the Medicare hospital prospective payment system (PPS), which pays a predetermined amount per hospital discharge, was introduced and gave hospitals a financial incentive to shorten lengths of stay; (2) the average length of hospital stay for Medicare patients has decreased from 10 days in 1983 to 7.1 days in 1995, indicating that, as expected, some substitution of SNF care for hospital care has occurred; (3) the average length of hospital stay decreased more for those Medicare patients whose diagnoses were more likely to lead to a SNF admission, such as hip fractures, than for Medicare patients as a whole; (4) considering patients with these types of diagnoses, hospitals with SNF units saw larger decreases in the average patient length of stay than did hospitals without SNF units; (5) the increasing number of SNFs granted routine cost limit (RCL) exceptions and the resulting additional payments, almost $100 million in fiscal year 1995, has contributed to the growth in Medicare SNF costs; (6) contrary to expectation, GAO did not find that SNFs with exceptions had a higher proportion of patients requiring complex care than SNFs without exceptions; (7) patients identified as requiring complex care by the medical records GAO reviewed, and who reside in SNFs granted exceptions, were generally provided appropriate care; (8) HCFA's review process for RCL exception requests does not ensure that SNFs actually provide atypical services to their Medicare patients; (9) HCFA's exception screening benchmarks basically take into account only whether requesting SNFs treat a higher than average proportion of Medicare patients; and (10) the patient-specific information obtained from requesting SNFs is generally not used to assess whether the Medicare beneficiaries need or receive atypical services.