Outpatient therapy services—covered under part B of the Medicare program—comprise physical therapy, occupational therapy, and speech- language pathology to improve patients’ mobility and functioning. Medicare regulations and coverage rules require that beneficiaries be referred for outpatient therapy services by a physician or nonphysician practitioner and that a written plan of care be reviewed and certified by the providers at least once every 30 days. Beneficiaries receiving therapy are expected to improve significantly in a reasonable time and to need therapy for rehabilitation rather than maintenance. Medicare-covered outpatient therapy services are provided in a variety of settings by institutional providers (such as hospital outpatient departments, skilled nursing facilities, comprehensive outpatient rehabilitation facilities, outpatient rehabilitation facilities, and home health agencies) and by noninstitutional providers (such as physicians, nonphysician practitioners, and physical and occupational therapists in private practice). Both institutional and noninstitutional providers—with the exception of hospital outpatient departments—are subject to the therapy caps. For more than a decade, Medicare’s costs for outpatient therapy services have been rising, and widespread examples of inappropriate billing practices, resulting from regulatory ambiguity and weaknesses in Medicare’s payment rules, have been reported by us and others. In 1995 we reported, for example, that while state averages for physical, occupational, and speech therapists’ salaries in hospitals and skilled nursing facilities ranged from about $12 to $25 per hour, Medicare had been charged $600 per hour or more. HHS’s Office of Inspector General reported in 1999 that Medicare reimbursed skilled nursing facilities almost $1 billion for physical and occupational therapy that was claimed improperly, because the therapy was not medically necessary or was provided by staff who did not have the appropriate skills for the patients’ medical conditions. To control rising costs and improper payments, Congress established therapy caps for all nonhospital providers in the Balanced Budget Act of 1997. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 later imposed a moratorium on the caps for 2000 and 2001. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 then extended the moratorium through 2002. Although no moratorium was in effect as of January 1, 2003, CMS delayed enforcing the therapy caps through August 31, 2003. In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 placed the most recent moratorium on the caps, extending from December 8, 2003, through December 31, 2005. The legislation establishing the caps provided for two caps per beneficiary: one for occupational therapy and one for physical therapy and speech-language pathology combined. The legislation set the caps at $1,500 each and provided that these limits be indexed by the Medicare Economic Index each year beginning in 2002. When last in place in 2003, the two caps were set at $1,590 each. To process and pay claims and to monitor health care providers’ compliance with Medicare program requirements, CMS relies on claims administration contractors, who use a variety of review mechanisms to ensure appropriate payments to providers. A system of automated checks (a process CMS terms “edits”) flags potential billing errors and questionable claims. The automated system can, for example, identify procedures that are unlikely to be performed on the same patient on the same day or pairs of procedure codes that should not be billed together because one service inherently includes the other or the services are clinically incompatible. In certain cases, automated checks performed by CMS claims administration contractors may lead to additional claim reviews or to educating providers about Medicare coverage or billing issues. The contractors’ clinically trained personnel may perform a medical review, examining the claim along with the patient’s medical record, submitted by the physician. Medical review is generally done before a claim is paid, although medical review may also be done after payment to determine if a claim was paid in error and funds may need to be returned to Medicare. The data and research available to date are insufficient to determine whether any particular conditions or diseases may justify a waiver of Medicare’s outpatient therapy caps. Medicare claims data are limited in the extent to which they can be used to identify the actual conditions or diseases for which beneficiaries are receiving therapies because the claims often lack specific diagnostic information. In addition, analyses of the claims data show no particular conditions or diseases as more likely than others to be associated with payments exceeding the therapy caps. The data also show that treatment for a single condition or disease, such as stroke, may vary greatly from patient to patient. Finally, available research on the amount and mix of outpatient therapy for people aged 65 and older with specific conditions and diseases also appears insufficient to justify a waiver of the therapy caps for particular conditions or diseases. It is uncertain how many beneficiaries would have medical needs for therapy costing more than the caps and yet be unable to obtain the needed care because they have either insufficient financial resources or no access to a hospital outpatient therapy department. Although Medicare claims data constitute the most comprehensive available information for Medicare beneficiaries who have received outpatient therapy, they do not always capture the clinical diagnosis for which beneficiaries receive therapy. As such, they are insufficient for identifying particular diseases and conditions that should be exempted from the caps. Patients’ conditions or diseases are expressed in claims data through diagnosis codes, and the coding system allows providers to use nonspecific diagnosis codes that are unrelated to a specific clinical condition or disease. A CMS-contracted analysis of 2002 Medicare outpatient therapy claims data, for example, found generic codes, such as “other physical therapy,” to be among the most often used diagnosis codes on claim forms (see table 1). Moreover, current Medicare guidelines for processing claims permit institutional providers, such as outpatient rehabilitation facilities and skilled nursing facilities, to submit services from all three therapy types on the same claim form, with one principal diagnosis for the claim; a claim seeking payment for occupational therapy and for speech-language pathology might therefore be filed under “other physical therapy.” Analysis of 2002 claims data does not show any particular conditions or diseases that are more likely than others to be associated with payments exceeding the therapy caps for physical therapy and speech-language pathology combined or for occupational therapy. Among the top 99 most reported diagnoses for physical therapy and speech-language pathology, the analysis found no particular diagnoses associated with large numbers of beneficiaries for whom payments would have exceeded the combined physical therapy and speech-language pathology cap in 2002 had it been in effect (see fig. 1). A similar pattern existed for occupational therapy. Medicare claims data do not provide information about patients’ therapy needs that could be used to justify waiving the therapy caps. Even in those cases where particular conditions or diseases, such as stroke or Alzheimer’s disease, are identified in the diagnosis codes, different individuals with the same diagnosis can need different intensities or types of therapy. For example, one patient with a stroke might be able to return home from the hospital a day or two after admission, while another may suffer a severe loss of functioning and require extensive therapy of more than one type. The CMS-contracted analysis of 2002 claims found wide variation in the number of treatment days required to conclude an episode of care for beneficiaries who had the same “diagnosis,” such as stroke. For example, the analysis found that while the median number of days per episode of physical therapy for stroke patients was 10, episode length ranged from 1 to 80 days. Similarly wide ranges in treatment length for stroke patients appeared for occupational therapy (1 to 68 days per episode, median 9) and speech-language pathology (1 to 66 days per episode, median 7). Figure 2 shows the range in length of treatment per episode for patients with a diagnosis of acute cerebrovascular disease (stroke) for the three types of therapy. Available research on the efficacy of outpatient therapy for people aged 65 and older with specific conditions and diseases also appears insufficient to justify a waiver of particular conditions or diseases from the therapy caps. Although our literature review found several studies demonstrating the benefits of therapy for seniors and Medicare-eligible patients, this research generally did not define the amount or mix of therapy services needed for Medicare beneficiaries with specific conditions or diseases. One study, for example, examined the benefits of extensive therapy for stroke victims at skilled nursing facilities. The study concluded that high-intensity therapy may have little effect on beneficiaries’ length of time spent in the facility when their short-term prognosis is good; beneficiaries with poorer prognoses, however, may benefit substantially from intensive therapy. Further, because of the complexity of patient factors involved, these studies cannot be generalized to all patients with similar diseases or conditions. In addition, MedPAC, the commission that advises Congress on Medicare issues, suggests that research should be undertaken on when and how much physical therapy benefits older patients and that evidence gathered from this research would assist in developing guidelines to determine when therapy is needed. Medicare claims data suggest that payments for more than a half million beneficiaries would have exceeded the caps had they been in place in 2002. It is uncertain, however, how many beneficiaries with payments exceeding the caps would be adversely affected because they have medical needs for care and no means to obtain it through hospital outpatient departments. According to the CMS-contracted analysis of 2002 claims data, Medicare paid an estimated $803 million in outpatient therapy benefits above what would have been permitted had the therapy caps been enforced that year. Payments for about 17 percent of occupational therapy users and 15 percent of physical therapy and speech-language pathology service users would have surpassed the caps in 2002; these beneficiaries numbered more than a half million (see table 2). Although the claims data show that payments for more than a half million beneficiaries would have exceeded the caps in 2002, it is unknown whether beneficiaries would have been adversely affected had the caps been in place. The data do not show the extent to which these beneficiaries were receiving care consistent with Medicare requirements that therapy improve a beneficiary’s condition and be reasonable in amount, frequency, and duration. Also, it is not clear to what extent hospital outpatient departments would serve as a “safety valve” for Medicare beneficiaries needing extensive therapy and unable to pay for it on their own.