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 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.
GROWTH AND WASTE, FRAUD AND ABUSE
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
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
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
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.
INTERIM PAYMENT SYSTEM
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:
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.
- 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.
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.