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Statement for the Record on "Home Health Care: Can Small Agencies Survive New Regulations?"
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the Senate Small Business Committee
July 15, 1998


Chairman Bond and Members of the Committee, thank you for giving us the opportunity today to describe efforts to help small home health agencies under Balanced Budget Act of 1997 provisions requiring surety bonds and new payment systems for all home health providers.

Medicare's home health benefit is crucial to millions of beneficiaries, allowing them to recuperate in the comfort of their own homes. Congress stipulated that care provided under this benefit be related to the skilled treatment of a specific illness or injury. Beneficiaries must be under the care of a physician who certifies that medical care in the home is necessary and establishes a plan of care. They must be confined to the home and need intermittent skilled nursing care, physical therapy, speech language pathology services, or have a continuing need for occupational therapy. If these requirements are met, Medicare will pay for: skilled nursing care on a part-time or intermittent basis; physical and occupational therapy; speech language pathology services; medical social services; personal care related to treatment of an illness or injury on a part-time or intermittent basis; and medical supplies and durable medical equipment (beneficiaries must pay 20 percent of the cost of durable medical equipment).

Unfortunately, this important benefit has been subject to widespread waste, fraud and abuse and unsustainable growth. Congress and the Administration acted to address these problems in the Balanced Budget Act by calling for a prospective payment system, establishing an interim payment system, closing numerous loopholes, and requiring home health agencies to obtain surety bonds.

Surety bonds are intended to screen agencies who provide care to Medicare's homebound beneficiaries. They also help make sure the government can recoup taxpayer money from agencies that default from the program and fail to repay Medicare or Medicaid, which has been a significant problem with home health agencies. The interim payment system is intended to curtail unsustainable growth in home health spending while HCFA develops a prospective payment system for home health care.

The statute mandates in section 4312(b) that home health agencies, regardless of size, provide on a continuing basis a bond of not less than $50,000 in order to participate in Medicare and Medicaid. Surety bonds are an important weapon in the fight against fraud and abuse in home health care. Under the terms of the Balanced Budget Act, HCFA has no discretion to lower the $50,000 minimum amount set by Congress for all agencies, regardless of size. We have, however, used our discretion to allow small agencies with combined Medicare and Medicaid revenues of less than $334,000 to obtain just one bond for both Medicare and Medicaid. Because of concerns raised by Congress, we have placed the bond requirement on hold while the General Accounting Office studies its impact.

The Balanced Budget Act also established the specific structure of an interim payment system to be used while a prospective payment system is being developed. Again, under the terms of the Balanced Budget Act, we do not have discretion to adjust this system, and must implement it as the law requires. However, we understand concerns about the system's impact on providers, including smaller agencies, and are working with those in Congress seeking to make legislative changes that would be necessary to address these concerns.


Home health has been among the fastest growing expenditures in all of Medicare. Home health care accounted for just 2.9 percent of all Medicare benefit payments in 1990 but now accounts for nearly 9 percent. Total home health spending rose from $4.7 billion (in 1994 dollars) in 1990 to $17.2 billion in 1997. During the same time period, the number of beneficiaries receiving home health doubled from two million to four million, and average number of visits per beneficiary jumped from 36 to 80. The number of home health agencies providing services to Medicare beneficiaries has grown about 20 percent each year, from 5,700 in 1990 to more than 10,500 in 1997.

While some of this growth is due to changing demographics and medical advances, studies by the HHS Inspector General and the General Accounting Office document that a significant amount is due to waste, fraud and abuse.

In a July 1997 report, Results of the Operation Restore Trust Audit of Medicare Home Health Services in California, Illinois, New York and Texas, the Inspector General evaluated a sample of 3,745 services in 250 home health claims in four states and estimated that 40 percent of the services did not meet Medicare reimbursement requirements. Medicare claims processors had made appropriate payments based on the documentation submitted by the home health agencies. However, investigation beyond the documentation revealed that the services billed for should not have been paid for by Medicare because they were not medically necessary or not covered under the Medicare home health benefit.

In another July 1997 report, Home Health: Problem Providers and Their Impact on Medicare, the Inspector General recommended that all home health agencies be required to obtain surety bonds of 100 percent of the agency's expected annual Medicare billings, and that the cost of the bond not be reimbursed by Medicare.

Similarly, the General Accounting Office in a June 1997 report, Medicare: Need to Hold Home Health Agencies More Accountable for Inappropriate Billings, noted significant levels of inappropriate billings. A review of 80 high-dollar claims in one state revealed that 43 percent of the claims should have been partially or totally denied.


Congress and the Administration addressed widespread waste in home health care through changes in the home health payment system. One of the primary reasons for the unsustainable growth in home health spending was that the old cost-based payment system lacked incentives to provide care efficiently. Home health agencies were reimbursed based on the costs they incurred in providing care. Agencies had the incentive to maximize the number of visits per beneficiary. More visits meant more payments to the agency.

Congress, the Administration, and the home health industry all agree that Medicare should move to a prospective payment system to control home health costs. The Balanced Budget Act calls for such a system, which is now being developed. Prospective payment rewards efficient providers by paying a set amount based on patient needs rather than on whatever providers spend. Medicare has used prospective payment for inpatient hospital services for more than a decade. Until the home health prospective payment system is implemented, Congress prescribed an interim payment system, which is intended to transition home health agencies to a prospective system. The interim payment system took effect October 1, 1997.

The interim payment system also has incentives for efficiency. Federal statute provides that the interim payment system pays agencies the lower of: their actual costs; an aggregate cost limit per visit; or an aggregate cost limit per beneficiary. The aggregate per visit cost limit encourages agencies to provide services efficiently during each visit. There was only an aggregate per visit limit before the Balanced Budget Act, which the new law reduced from 112 percent of the mean per visit cost of care to 105 percent of the median cost. Congress implemented the aggregate per beneficiary limit to promote efficiency in planning and delivering care throughout a patient's entire home health stay. This limit also takes away the incentive to supply medically unnecessary visits to maximize Medicare payment.

There is no limit on how many visits an agency can provide to any one patient. Payment to agencies based on the aggregate per beneficiary cost limit is calculated by multiplying the agency's limit by the total number of the agency's Medicare patients. The limit for each agency is based on what that agency had been paid, on average, per patient in 1994, generally increased for inflation to 1998. The limit is further adjusted for average costs in an agency's census region. Patients whose care costs more than the agency is paid per patient are offset by other patients whose care costs less than what the agency is paid per patient.

New home health agencies -- any that did not submit a full cost report to Medicare during FY 1994 -- have an aggregate per beneficiary limit that is the national median of the limits for other agencies. Congress intended that this national median discourage further development of agencies in areas where utilization and costs are already high.

The interim payment system, like any payment reform, presents challenges for providers. These reforms are designed to change agencies' past behavior and eliminate unnecessary services. The incentive to supply virtually unlimited visits is gone. Instead, home health agencies must focus on finding the most efficient way to produce the best medical outcome.

Requiring agencies to operate within a global budget through the interim or prospective payment systems should not mean that care is compromised for any patient. Agencies are bound by their participation agreement with Medicare to provide the appropriate levels of care as prescribed by the physician. It is important to note that Medicare has always covered the teaching and training of the patient and his or her family to carry out services themselves, which can help agencies to make sure all services in a patient's plan of care are provided within the global budgets of the interim and prospective payment systems. During the past several years, these principles seem to have been eroded by the perverse incentives inherent in cost-based reimbursement.

While adjustments may be in order, agencies should be able to operate within the interim payment system by returning to the principles of: delivering only covered care in the fewest number of visits; teaching and training the patient and family; planning and furnishing care efficiently; and enrolling only truly eligible beneficiaries in home health.


In an effort to better screen home health agencies, Congress and the Administration also are requiring agencies to obtain surety bonds. This requirement uses market forces to protect beneficiaries and the Medicare and Medicaid programs by using sureties to judge the financial risk an agency might present to taxpayers. The bond requirement also helps us to recover taxpayer money from agencies that default from the program and fail to repay Medicare or Medicaid. Recovering defaulted overpayments from home health agencies has been particularly problematic. From 1993 to 1996, home health agencies left the Medicare program owing over $154 million back to the Medicare Trust Fund. The percentage of uncollected overpayments to home health agencies that have defaulted nearly tripled from 5 percent in 1993 to 14 percent in 1996. We do not intend to use the surety bond to collect routine overpayments that occur in the cost-based system or in the interim payment system where providers operate in good faith and reconcile with Medicare and Medicaid.

The statute calls for bonds of at least $50,000. Our regulation implementing the bond requirement was promulgated in full compliance with the Administrative Procedures Act. It calls for a bond in the amount of the $50,000 minimum set by Congress, or 15 percent of annual payments, whichever is greater. The 15 percent requirement evens the burden so that small agencies will be buying smaller bonds than larger agencies, and it helps ensure that we have a last resort for recoupment of funds in proportion to the amount of Medicare dollars at risk for each home health agency. However, the 15 percent requirement is significantly less than 100 percent of annual payments, which is what the HHS Inspector General recommended.

We also made technical revisions to the regulation so bonds will be more affordable for small agencies. The changes, published in the Federal Register on June 1, 1998 are in keeping with standard industry practice. They help smaller, reputable home health agencies obtain bonds without weakening the purpose of the bond, which is to keep unscrupulous and unstable agencies out of Medicare and Medicaid. These changes:

  • limit liability so bond companies are responsible only for determinations made during the year for which a bond is written, so that the actual risk to the bond company is easier to determine and they can offer them at more affordable prices;
  • place a limit on bond company liability by establishing that the bond company has liability for two years after an agency leaves Medicare and Medicaid;
  • give a bond company the right to appeal overpayment assessments if an agency has not appealed itself, and has failed to assign its right of appeal to the bond company.
To date, 40 percent of all home health agencies and 34 percent of small agencies, defined as those with annual Medicare revenues under $200,000, have obtained bonds.

While we believe our course in implementing the statue was reasonable, we have suspended the compliance date and are awaiting the findings of a General Accounting Office investigation into the issues surrounding the surety bond requirement. As a result, home health agencies no longer have a date by which they must obtain a surety bond. Once we review the GAO report, we will consult with Congress about the surety bond requirements. Only after these consultations will we issue a new regulation. Home health agencies will not have to obtain bonds until 60 days after that regulation is published, and not before February 15, 1999.


The Balanced Budget Act of 1997 makes much needed reforms to the Medicare home health benefit to curtail unsustainable growth and fight waste, fraud and abuse. But with change often comes challenges. Home health agencies must be better managers of taxpayer money. They must change past behavior, deliver care more efficiently, and bill only for services covered under law. Agencies also must demonstrate to surety companies that they do not pose an undue financial risk to the Medicare and Medicaid program. We will continue to work with Congress and home health providers to fine tune these changes so taxpayers and beneficiaries are protected from unscrupulous providers, so tax dollars are used wisely, and so reputable agencies can provide the care that is so important.

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