Medicare hospice benefit services include nursing services, services provided by a physician to a hospice, drugs and medical supplies necessary for treating pain and other symptoms of a terminal illness, as well as dietary, spiritual, and bereavement counseling; medical social worker services; homemaker services; and short-term inpatient care both to provide respite for caregivers and to treat a patient’s symptoms. Volunteers are an important resource in delivering hospice care; Medicare requires each hospice to have volunteers provide services equal to at least 5 percent of the total paid patient care hours. The specific services that a patient should receive are outlined in a plan of care, vary based on the type and intensity of the patient’s symptoms and psychosocial needs and the needs of the patient’s caregiver, and may vary throughout the hospice stay as the patient’s condition changes. To be eligible for the Medicare hospice benefit, a patient must be certified by a physician as having a life expectancy of 6 months or less if his or her terminal illness runs its normal course. A Medicare patient who elects hospice care must waive Medicare coverage for all other services related to the terminal illness, although the patient retains coverage for services to treat other conditions. A patient may opt out of the hospice benefit and return to traditional Medicare at any time; a patient may also reelect hospice coverage at a later date. While there is no limit on the number of days an individual can receive hospice care, the prognosis of the patient’s terminal illness must be reaffirmed after the first 90 days, the first 180 days, and then every 60 days thereafter. Under the law, Medicare pays hospices a daily rate that covers all services provided to the patient. HCFA developed four hospice per diem payment categories, which reflect the intensity of the services and the location of service delivery. In 1986, annual updates to the rates for the four payment categories were set in law. A typical day of care provided in a patient’s residence is paid as RHC, and in 2001, the vast majority of hospice care days, 96 percent, were billed as RHC (see table 1). Unless a hospice provides CHC, IRC, or GIC, it is paid the RHC rate for each day the patient is under its care. Hospice care delivered during periods of crisis can be paid as CHC if the care is provided in the home for at least 8 hours within a 24-hour period beginning at midnight and at least half the care hours are delivered by a nurse. To provide respite for primary caregivers, IRC can be provided for up to 5 consecutive days in an inpatient setting. Inpatient care for symptoms that cannot be treated in the patient’s residence is paid as GIC. Hospices provide the care in their own inpatient units or arrange with hospitals, skilled nursing facilities, or other inpatient facilities to provide these services. The payment rate is adjusted by a wage index, which varies based on the patient’s residence, to account for geographic differences in wage costs. The hospice payment categories and their corresponding payment rates were developed from cost data from the 26 hospices that participated in the 1980 to 1982 Medicare demonstration. To calculate the payment rates, HCFA used cost data to identify the cost factors that contributed to providing hospice services and summed the mean cost per day of each cost factor for each of the four categories of hospice care. The costs of bereavement and volunteer services were not included in the rates. By law, hospices are subject to an annual aggregate Medicare payment cap that was meant to ensure that payments for hospice care would not exceed what Medicare would have paid if patients had been treated in a traditional setting, such as a hospital. Total annual payments to a hospice may not exceed a per-patient amount multiplied by the number of Medicare patients who received care from that hospice during the year. The 2004 cap amount for the 12 months beginning November 1, 2003, is $19,635.67 per Medicare patient. Hospice patients, services, and providers have changed since the demonstration. For example, the mean patient length of stay at hospices participating in the Medicare demonstration from 1980 to 1982, was 70 days; in 2001, the mean length of stay was about 50 days. While demonstration costs were based only on Medicare patients with cancer diagnoses, patients with noncancer diagnoses, who may require a different mix of services, represented approximately half of all hospice patients in 2000. In addition, hospice providers have stated that advances in end-of- life care, notably new, more costly pain-management drugs and palliative chemotherapy and radiation, have increased the costs of providing care to certain types of patients. The mix of hospice providers today differs from the provider types in the demonstration. In the demonstration, the predominant type of hospice provider was hospital-based, whereas in 2001, the predominant type was freestanding (see fig. 1). More recently, the proportion of for-profit hospices increased from almost 13 percent of all hospices in 1992 to almost 28 percent in 2001, and the percentage of hospices serving patients primarily living in rural areas rose from 32 in 1992 to 38 in 2001. In addition, the number of hospices participating in Medicare grew from 1,208 in 1992 to 2,275 in 2002, the most recent data available. We determined that for freestanding hospices, the unadjusted per diem payment rate across the four payment categories was about 8 percent higher than estimated average per diem costs in 2000, and over 10 percent higher in 2001. For the payment categories, we estimate that the home care (RHC and CHC) per diem payment rate was almost 10 percent higher than average home care per diem costs in 2000, and over 12 percent higher in 2001. We estimate that the IRC payment rate was almost 53 percent lower than average IRC per diem costs in 2000, and 61 percent lower in 2001. In both years, the GIC payment rate was about 7 percent higher than average GIC per diem costs. In 2000, we estimate that average per diem costs for small hospices were over 13 percent higher than for medium hospices and almost 7 percent higher than for large hospices. In 2001, average per diem costs for small hospices were over 15 percent higher than for medium hospices and almost 8 percent higher than for large hospices. With the exception of average GIC per diem costs in 2000, small hospices also had higher average per diem costs than medium or large hospices for each payment category. Medicare’s hospice payment rate, across the four payment categories and unadjusted for geographic differences in wages, was higher than freestanding hospices’ estimated average per diem cost. The unadjusted payment rate was about 8 percent higher than average per diem costs in 2000, and over 10 percent higher in 2001 (see fig. 2). The 25 percent of hospices with the lowest average per diem costs had costs that were at least 27 percent below the unadjusted payment rate in 2000, and at least 31 percent below the unadjusted payment rate in 2001. However, in 2000, average per diem costs for almost 34 percent of freestanding hospices and, in 2001, almost 32 percent of freestanding hospices, were higher than the unadjusted per diem rate. The costs of individual hospices differ depending on the mix of services provided. In addition, the payments to individual hospices differ because of the wage adjustment and the mix of payment categories billed. We could not determine the relationship between payments and actual costs for individual hospices because of data limitations in the hospice cost reports and claims data. Unlike those for other providers, Medicare’s hospice cost reports do not include Medicare payment information. In addition, Medicare hospice claims data contain only the total payment for all services provided during the billing period, including physician services, not the payment for each hospice payment category. The specific relationship between payment rates and costs for freestanding hospices varied among payment categories. For home care (RHC and CHC) days, we estimate that in 2000, the unadjusted per diem payment rate for freestanding hospices was almost 10 percent higher than the average per diem cost of over $92. In 2001, the per diem payment rate was over 12 percent higher than the average home care per diem cost of over $96. Nonetheless, about 35 percent of freestanding hospices in 2000, and over 32 percent in 2001, had average home care per diem costs that were higher than the home care per diem payment rate. We estimate that in 2000, the unadjusted IRC per diem payment rate for freestanding hospices was almost 53 percent lower than the average IRC per diem cost of about $218. In 2001, the IRC per diem payment rate was over 61 percent lower than the average IRC per diem cost of over $279. However, the GIC per diem payment rate was higher than average GIC per diem costs for freestanding hospices; it was over 7 percent higher than costs in both years. In addition, average per diem costs for IRC and GIC varied widely among freestanding hospices. Our estimates of average IRC and GIC per diem costs may understate actual costs because of data limitations. IRC costs may be much higher than the IRC payment rate because the hospice continues to provide services and visits to the patient in addition to paying the inpatient facility. Our analysis of the proprietary 2002 patient-specific visit data found that the number and type of visits provided per day to patients during IRC days were comparable to the number and type of visits per day to patients during RHC days. In 2001, IRC accounted for 0.2 percent of hospice days of care.