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Testimony on Medicare Home Health Agencies: Still No Surety Against Fraud and Abuse by Penny Thompson
Director of Program Integrity
Health Car Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Government Reform and Oversight, Subcommittee on Human Resources
July 23. 1998


Chairman Shays, Committee members thank you for giving us the opportunity to describe our efforts to protect the integrity of the Medicare home health benefit and implement the Balanced Budget Act provision requiring home health agencies to obtain surety bonds.

The bond requirement is one of several steps to raise the bar for home health agencies. Until this year, home health agencies had to meet few standards to participate in Medicare. That contributed to unsustainable spending growth, widespread waste, fraud and abuse, and in some cases questionable quality of care for the vulnerable beneficiaries who rely on this benefit.

Because of problems documented by the HHS Inspector General and the General Accounting Office, we declared a moratorium on new home health agencies entering the program last fall, based on authority to take necessary steps to protect program integrity. The statute at section 1891(b) emphasizes that the duty of the Secretary is to assure that the requirements for home health agencies promote the effective and efficient use of public money. Section 1861(o)(7) similarly requires agencies to meet whatever requirements the Secretary finds necessary for the effective and efficient operation of the program. The moratorium was necessary because there was not an adequate system of requirements for home health agencies to ensure the kind of financial viability and accountability needed for the Medicare program.

The moratorium went into effect on September 15, 1997, and was lifted on January 13, 1998. It has had a marked impact on home health problems.

The moratorium helped turn the tide of unsustainable growth in the number of home health agencies entering the program and in home health care spending. Home health care spending dropped for the first time ever in 1997. And, since the moratorium was implemented, fewer than 40 agencies have entered the program, versus the nearly 800 that were let into the program in 1997 before the moratorium.

The moratorium provided time for us to develop the surety bond regulation and implement other new, higher standards that help ensure home health agencies are financially secure and providing quality care. It sent an unequivocal message to the industry that we are serious about stopping waste, fraud and abuse.

And, during the moratorium, we doubled the number of home health cost report audits and increased medical review of claims by 25 percent. Home health agencies are now held to higher financial and quality of care standards, both before and after they are allowed to enter the Medicare program.

We strongly believe surety bonds are a necessary protection for the Medicare home health benefit. However, we have put the bond requirement on hold while the General Accounting Office studies its impact. We will review the GAO findings and consult with Congress about the surety bond requirements before proceeding. Home health agencies will not have to obtain bonds until 60 days after a new regulation is published, and not before February 15, 1999.


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. 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 the 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 5,656 in 1990 to 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 found that one quarter of home health agencies in five states, accounting for 45 percent of home health spending in these states, were so-called problem providers. 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 acted to address these problems in the Balanced Budget Act by requiring home health agencies to obtain surety bonds, closing loopholes, and establishing incentives to provide care efficiently. The Administration also acted on its own to implement new entrance criteria and quality standards.

Surety Bonds

Surety bonds use a private sector mechanism to screen agencies that provide care to Medicare's homebound beneficiaries and ensure that they are financially responsible. They also help make sure the government can recoup taxpayer money from agencies that default on their obligations to the programs and fail to repay Medicare or Medicaid, which has been a problem with home health agencies. From 1993 to 1996, home health agencies left the Medicare program owing more than $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.

Surety bonds represent the last resort in recovering defaulted obligations, not a way to routinely collect overpayments that occur in the cost-based system from providers who operate in good faith and repay their debts with Medicare and Medicaid. HCFA will collect on surety bonds only as a last resort, after a home health agency defaults on its obligation to repay Medicare money owed. Without this ability to collect on otherwise uncollectible overpayments, money owed by these home health agencies will never be returned to the Medicare Trust Fund.

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. 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.

Our regulation implementing the bond requirement calls for a bond in the amount of the $50,000 minimum set by Congress, or 15 percent of annual payments, whichever is greater. An analysis of 89 home health agencies in 14 states that were terminated from the Medicare program in FY 1996 show that 68 percent had overpayments that were greater than 15 percent of their Medicare reimbursements. 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 recommended by the HHS Inspector General in her July 1997 report.

We believe we complied with Congressional intent with our bond regulations. The law specifically states bonds must be at least $50,000, indicating that requiring larger bonds is both authorized and appropriate for agencies with greater financial risk. The law includes the provision for home health surety bonds under a section entitled "Improvements in Protecting Program Integrity" (BBA Title IV, subtitle D, chapter 2), indicating that bonds could be used not just to prevent questionable agencies from entering the program, but also to protect the Medicare Trust Fund from agencies that default from the program and fail to repay Medicare or Medicaid. The regulations were promulgated in full compliance with the Congressional Review Act and the Administrative Procedures Act.

On June 1, 1998, we made technical revisions to the regulation to address concerns the surety industry had about the length of liability of the bonds. These changes are in keeping with standard industry practice, and make bonds more affordable 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 assig

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