In 1990, legislation took effect that required SNFs and other nursing facilities to assess and provide for their residents’ needs for therapy services. Subsequently, the number of rehabilitation agencies providing physical, occupational, and speech therapy increased dramatically—as did Medicare spending on therapy services delivered in nursing homes. Most nursing home residents receive their therapy services from outpatient rehabilitation therapy companies (OPT) that send their employees to the nursing home. Once approved to participate in Medicare, either a SNF or an OPT can bill Medicare. Both are regarded by Medicare as institutional providers and, as billing providers, are reimbursed on a cost basis. SNFs and OPTs must file annual reports detailing the actual costs of services that were delivered to Medicare beneficiaries and billed to the program throughout the preceding year. HCFA claims-processing contractors reconcile these actual reported costs with the interim payments made to providers throughout the year, either by making additional payments to providers or by collecting overpayments from them. In the reconciliation process, the contractor determines whether the claimed costs are “reasonable.” Medicare has a number of principles to ensure that only reasonable costs are used in determining its final payment, such as a prudent purchaser principle. Under this principle, Medicare compares claimed costs with the “going rate” for the item or service. For example, if a SNF contracts with an OPT at $500 for 1 hour of therapy services and the going rate is $100 per hour, only $100 would be approved for inclusion in the cost report during the year-end settlement; the $400 would be disallowed. Two problems occur in applying the prudent purchaser and other principles. First, to ensure that these rules are followed, Medicare’s claims-processing contractors must audit cost reports. But because auditing is resource intensive and funds for auditing are limited, therapy costs are rarely audited. Second, establishing a “going rate” may involve conducting a survey of current practice and pricing among comparable providers in the same geographic area, which may also be resource intensive. For these reasons, if the SNF in the example above included the full $500 per hour contract cost in its cost report, there is little assurance that this amount would be adjusted downward. Under certain billing conditions, salary guidelines have helped Medicare limit the amount it will pay for certain services. For example, reimbursements for OPT-provided physical therapy services that are billed by SNFs and subject to salary equivalency guidelines (and, hence, are referred to as capped) increased 646 percent between 1989 and 1995. Speech therapy and occupational therapy reimbursements, for which similar guidelines have not been imposed (referred to as uncapped), have grown at about two and three times this rate, respectively, as shown in figure 1. The absence of information on the amount of time spent providing a service also makes it difficult to determine whether a claim is reasonable prior to payment. Under current HCFA regulations, OPTs and SNFs are not required to specify on their claims how much therapy time they are billing for or what specific service was provided. Instead, OPTs can choose one of at least six methods to bill Medicare. Although each of these methods requires costs to be associated with a “unit,” claims generally do not specify what the unit denotes. In these cases, the Medicare claims-processing contractor does not know the amount of time involved in delivering the therapy services or what the services included, making it all the more difficult to detect inflated charges and identify unreasonable costs. SNFs and OPTs are continuing to charge excessively high rates for therapy services, particularly occupational and speech therapy, when services are provided under arrangement. Charges for claims paid during January 1996 by one contractor showed extreme variations similar to those found in our March 1995 study. Because salary guidelines and units of service have not been established, Medicare has no easy way to determine whether any of these charges were excessive or whether they resulted in excessive payments, but that is most likely the case. Since 1990, HCFA has taken a number of interim and long-term actions to curb inappropriate charges for SNF therapy services. HCFA has focused its efforts on implementing salary equivalency guidelines for those providing occupational and speech therapy services under arrangement. Between 1990 and 1992, HCFA received numerous complaints about inappropriate charges for therapy services. In 1993, it established a task force to address the problem. As a result of this task force, HCFA sent a series of memorandums in 1993 and 1994 to its claims-processing contractors, advising them of the nature of existing problems—such as inflated therapy service charges—and providing guidance on how to focus review activities. HCFA outlined a number of steps that contractors could take to ensure that services were medically necessary and to help determine whether costs were reasonable and allowable. For example, HCFA suggested that contractors audit any provider with therapy costs exceeding $95 per hour. However, this measure was probably ineffective: “Per hour” rates cannot be determined without intensive auditing because units of service are not defined in units of time. Moreover, some providers that had been billing significantly less than $95 per hour reacted by simply raising their charges close to that level. In 1995, HCFA developed draft salary guidelines for those providing occupational and speech therapy, and revised guidelines for other therapies, reviewing for this purpose 22 separate data sources. The recommended levels were based on the 75th percentile of hospital salaries for therapists (as surveyed by BLS) plus a 5-percent differential to adjust for likely differences between hospital and SNF salaries. In August 1995, a clearance package containing a notice of proposed rulemaking was sent to the Secretary of the Department of Health and Human Services (HHS). Forwarding this package was a significant step, given the complex and lengthy process that HCFA must go through to lower payment rates. At this point, however, officials of the rehabilitation industry complained that the HCFA guidelines were inappropriate and out of date because they were based on 1991 hospital salaries for therapists. Industry representatives offered to commission their own survey of SNFs that employ therapists. HCFA agreed and put implementation of salary guidelines on hold pending completion of the survey. HCFA officials told us that, in their judgment, this would increase the prospects for developing fair and effective guidelines and reduce the chance of a time-consuming and expensive legal challenge. HCFA reviewed the design for this survey, which ultimately encompassed both hospitals and SNFs. The raw survey data and an industry analysis were delivered to HCFA in April 1996. However, the survey response rate was low (10 percent for hospitals and 30 percent for SNFs), which raises questions about how representative the data are. HCFA is conducting its own analysis of the results to determine if they are meaningful. According to HCFA, a proposed regulation should be published shortly after its analysis is complete. The final regulation is then likely to be issued sometime in 1997. Claims for therapy services are required to specify the number of service units provided; claims-processing contractors’ databases store this information in terms of “units” or “services.” These units, however, are not defined. In our March 1995 report, we recommended that HCFA define units on the basis of time, such as 15-minute intervals. In commenting on that report, HCFA said it did not agree with using time as the basis and believed it would be better to have therapy units defined by the procedures actually performed. HCFA has not yet defined billable therapy units for SNFs in terms of either the exact procedure furnished or the amount of time actually spent with the patient. Therefore, Medicare does not know how much service it is buying at the time it pays the claim. Neither HCFA nor the industry observe any standard usage for “unit” or “service,” as illustrated by the wide variation in “per unit” charges. While some interpret “unit” as 15 minutes, there is no consensus. We analyzed data from five HCFA claims-processing contractors for 1988 through 1993 and found extreme variations in “per unit” charges. For each therapy type, per unit charges for the highest quartile of providers were more than double those of the lowest quartile, and differences among individual providers were even more extreme. Results were similar for our more recent data set. For this follow-on, we also reviewed a range of hourly rates identified in contracts between OPTs and SNFs under the jurisdiction of one HCFA contractor. In those contracts that specified hourly rates for occupational therapy, the rates varied considerably, from $54 to $210 per hour. As we reported in 1995, Medicare has paid substantially more than market rates for some services, which not only increases Medicare costs but also can encourage providers to supply excessive services. We also reported that HCFA has generally been slow in addressing overpricing problems. Delay in drafting and implementing regulatory changes such as price corrections and salary guidelines is inherent in the rulemaking process established by the Administrative Procedures Act as well as in the complexities of intra- and interagency coordination (see fig. 2). For it to fully satisfy formal rulemaking requirements, HCFA has projected that it could take 7 years or longer from the time it learned of the problem, and almost 3 years from the time it started assembling salary data, to establish salary equivalency guidelines for professionals providing therapy services. HCFA, therefore, has drafted proposed legislative language under which salary equivalency guidelines for occupational and speech therapists would be established directly by statute, negating the need for formal rulemaking. The proposal was included in the December 1995 summary of the President’s Medicare proposal. In our September 1995 report, we suggested a similar approach to the effect that the Congress consider allowing the Secretary of HHS to set maximum prices on the basis of market surveys or, if the formal rulemaking process is preserved, allowing the Secretary to make an interim adjustment in fees while the studies and rulemaking take place. HCFA officials consider the establishment of salary guidelines the most urgent step in solving the problem of inappropriate therapy charges. They do not believe it is absolutely necessary to achieve a standard definition of a therapy unit, such as a 15-minute interval, especially since this process would take another 2 or 3 years. Their reasoning is that salary guidelines would provide the necessary link (through the cost report settlement process) between hours of therapy time and costs claimed. Auditors could then confirm that Medicare payments did not exceed salary limits. However, as discussed earlier, such an approach is vulnerable to abuse because few cost reports are audited in sufficient detail to permit such judgments to be made and any audit may be delayed a year or more even when one is performed. Moreover, as long as units are not defined on a time basis as we suggested or on the basis of the exact procedures performed as HCFA believes would be better, Medicare’s claims reviewers—even after salary guidelines are implemented—will not be sure of the amount of services being provided. This in turn makes it more difficult to assess the medical necessity for therapy services. For a long-term solution to the problem of therapy overcharges, HCFA officials emphasized the importance of more systematic legislative approaches, such as requiring unified billing. We presented this option in a report released earlier this year: Unified (or consolidated) billing would require nursing facilities to bill Medicare for all services they are authorized to furnish to patients. OPTs rendering these services would be prohibited from directly billing Medicare; financial liability and medical responsibility would reside with the nursing facility. This would make it easier for Medicare to identify all the services furnished to residents, which in turn would facilitate controlling payments for these services. Despite HCFA’s efforts to deal with the problem, SNFs and OPTs continue to bill Medicare high charges for occupational and speech therapy. To correct this problem without expending large amounts of administrative resources, HCFA needs to implement salary equivalency guidelines for occupational and speech therapists as soon as possible. Given HCFA’s experience with payments for physical therapy, such guidelines should help moderate payment growth rates. Legislation to limit reimbursement, as we suggested last September, is the most practical way to enable Medicare to avoid continuing excessive payments for overpriced services. In a letter dated June 19, 1996, HCFA generally agreed with our concerns about inappropriate billing and delivery of therapy services. It also agreed with the first recommendation in our March 1995 report that HCFA should develop salary guidelines to establish explicit cost limits on occupational and speech therapy services, though not necessarily with our assessment of the current status of these guidelines. HCFA officials did not entirely agree with our second recommendation, that bills for these services specify the time spent with patients. In its comments on a draft of this report, HCFA claimed that “the emphasis on excessive charges obscures the fact that Medicare is not actually paying the reported charges,” and asked that our report “specifically state that GAO has not identified any specific instances in which excessive charges are actually paid.” As discussed on pages 3 and 4 of this report, the amount Medicare actually pays is not known until long after the service is rendered and the claim processed. Although aggregate payments are eventually determinable, existing databases do not provide actual payment data for any individual claim—hence, our focus on charges. In any case, we found HCFA’s own estimate of a potential $1.4 billion in savings over 7 years as a result of implementing salary guidelines (and revising those already in place) to be persuasive evidence that excessive payments are being made. With regard to the uniform definition of time units, we concur with HCFA that “Ideally, we would prefer reporting that would identify the exact procedure furnished, not just on the basis of time units.” Either way of defining the unit of service for therapy would be better than leaving the unit undefined. More specific claims would make it easier to determine whether charges are appropriate for the actual services provided and whether the patients needed those services. We also concur with HCFA on the importance of systematic approaches, such as unified billing, to resolving concerns over payment for therapy services. As we stated in correspondence last September, unified billing would make it easier for Medicare to identify all the services furnished to a facility’s residents, which in turn would make it easier to control payments for those services. Other HCFA comments were incorporated in the report where appropriate. See the appendix for a copy of HCFA’s comments. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Secretary of HHS, the Administrator of HCFA, interested congressional committees, and other interested parties. We will also make copies available to others on request. 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Summary: Pursuant to a congressional request, GAO reviewed the Health Care Financing Administration's (HCFA) progress in curbing overbilling for occupational speech and physical therapy services. GAO found that: (1) therapy charges billed to Medicare by skilled nursing facilities (SNF) and rehabilitation agencies have more than doubled since 1990; (2) some providers are exploiting weaknesses in Medicare's payment system, since HCFA places no absolute dollar limit on Medicare reimbursements for occupational and speech therapy; (3) HCFA is unable to determine whether a claim is reasonable prior to payment, since SNF are not required to specify how much therapy time they are billing for specific services; (4) HCFA has taken a number of interim actions to curb inappropriate charges, such as implementing salary equivalency guidelines for those SNF providing occupational and speech therapy services; and (5) HCFA officials have emphasized the importance of more systematic legislative approaches, such as unified billing, to solve the problem of therapy overcharges.