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Testimony on Home Health Issues by Michael Hash
Deputy Administrator
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Ways & Means , Subcommittee on Health
August 6, 1998

Chairman Thomas, Congressman Stark, distinguished committee members, thank you for inviting us here today to discuss the home health interim payment system that was mandated by the Balanced Budget Act of 1997. The Balanced Budget Act mandated a number of changes in the way Medicare pays for home health services. These changes include new protections against fraud and abuse, and the creation of a prospective payment system and an interim payment system.

These new payment systems create incentives to provide care efficiently and control spending growth. Changing the way Medicare pays for home health care is vitally important. Medicare spending on home health has more than tripled since 1990, while the number of beneficiaries receiving home health services has doubled.

We have worked diligently to implement the Balanced Budget Act provisions affecting home health care. On July 31, 1998, we released final regulations on how agencies will be paid under the interim payment system. And we are working to develop the prospective payment system. However, as we testified before this Subcommittee last month, implementation of the prospective payment system must be delayed while we address the Year 2000 computer problem.

We have also worked to close loopholes that have served to invite fraud in home health care. Earlier this week, together with the HHS Inspector General, we issued guidance to help home health agencies prevent problems by establishing voluntary compliance programs.

These compliance programs include written policies and procedures for all areas where fraud or abuse might occur, an ongoing training program, periodic independent audits, and voluntary disclosure of problems.

Like you, we have heard many concerns about the impact of the implementation of the Balanced Budget Act on home health care agencies and, potentially, beneficiaries. We have made changes to the system to ease the burden on agencies, but we have little discretion within the statute to go further.

We are ready and willing to work with Congress on options for changing the interim payment system, including any proposals this committee might consider. However, we believe changes must have broad bipartisan support, must be budget neutral, must protect vulnerable beneficiaries' access to care, and must not require systems changes that would conflict with our Year 2000 priority. We must examine proposals in their entirety to assess whether they meet these criteria.


The Medicare home health benefit is crucial to millions of beneficiaries who are confined to their homes. Congress stipulated that care provided under this benefit be related to the 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.

Unfortunately, this important benefit has been subject to widespread waste, fraud and abuse, as well as 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 1997 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 10 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.

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. We are also acting to set higher standards for home health agencies, and to monitor and improve the quality of care they provide.

The Balanced Budget Act established the specific structure of the 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 we have implemented it as the law requires. We have heard concerns about the system's impact on providers, including those that have provided care efficiently in the past.

These concerns have been heightened by the unfortunate fact that we will not be able to implement the prospective payment system as originally scheduled in October 1999 because it will require extensive computer systems changes that would conflict with our obligation to ensure that our computer systems are able to pay claims on January 1, 2000.

We are proceeding with work to develop the prospective payment system, and it is our intention to publish the regulation next fall so that we can implement it as soon as feasible after the Year 2000 hurdle is cleared. In the meantime, the law stipulates that payment limits under the interim payment system be cut by 15 percent if the prospective payment system is not implemented in October 1999.

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, subject to a per visit limit. This encouraged agencies to provide more visits and to increase costs up to their limit. More visits meant more payments to the agency, and visits per beneficiary more than doubled from 36 in 1990 to 80 in 1997.

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 we are now developing. 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 on October 1, 1997.

Like the prospective payment system, the interim payment system has incentives for efficiency. The interim payment system pays agencies the lower of: their reasonable 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. Before the Balanced Budget Act, there was only an aggregate per visit limit. The new law reduced the per visit limit from 112 percent of the mean per visit cost of care to 105 percent of the median cost.

Congress also instituted a new limit -- the aggregate per beneficiary limit -- to promote efficiency in planning and delivering care. This limit also takes away the incentive to supply medically unnecessary visits to increase 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 two factors. Seventy five percent is determined by what the agency had been paid, on average, per patient in FY 1994, increased to help account for inflation. Twenty five percent is determined by average costs in an agency's census region. Care of costly patients is offset by less costly patients. New home health agencies -- any that did not submit a full cost report to Medicare during FY 1994 -- have an aggregate per beneficiary limit equal to the national median of the limits for other agencies.

The interim payment system, like any payment reform, presents challenges for providers. These reforms are designed to change 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 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, where medically appropriate, Medicare has always covered the teaching and training of the patient and his or her family to carry out certain services themselves. This training can help agencies to make sure all services in a patient's plan of care are provided within the 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.

When Congress passed and the President signed the Balanced Budget Act, we all assumed that home health agencies would be able to operate within the interim payment system. We now recognize, however, that there are a number of concerns regarding the impact of the interim payment system on agencies that have provided care efficiently.

We are doing what we can within the law to ease the impact of the interim payment system. In our FY 1999 Interim Payment Notice that went on display July 31, 1998 at the Federal Register, we:

  • adjusted the aggregate cost limit per beneficiary for inflation;
  • updated the aggregate cost limit per visit so it is based on more recent cost reports;
  • allowed for flexibility in determining provider status for new vs old agencies. Those agencies which were designated as new agencies because of a change in their operational structure are now allowed to be designated as an old provider, as long as they have continued to operate under the same provider number that was filed for the 12-month cost reporting period in federal fiscal year 1994. This change would mean that those agencies would no longer be subject to the national median limit, but could have payment based on the agency/regional blend. Agencies who were affected by this policy can also remain designated as new providers if they so choose.

Recognizing the desire of Congress and the home health industry to adjust the interim payment system, we have been working with Congress to provide technical assistance and are happy to work with Congress on any proposal that has broad bipartisan support, is budget neutral, protects vulnerable beneficiaries, and does not involve systems changes that could not be implemented because they would conflict with our Year 2000 work priority. Developing a proposal that is budget neutral and that has broad bipartisan support may not be easy because such a proposal would require the reallocation of existing Medicare home health spending among home health agencies. However, we recognize that changes to the interim payment system could be costly, and we stand by our commitment to work with Congress on a solution to this issue.

The Year 2000 issue does limit the range of options that could be implemented at this time to address the immediate issues surrounding the interim payment system. We can make changes in the current cost limits using currently available data bases. We cannot make changes to the current claims system, create any new data bases, or do programming for a new system.

Some reform proposals include provisions that would require systems changes that could not be implemented because they would conflict with our Year 2000 work priority. For example, changing the base year from 1994, while seemingly simple, would require extensive data gathering and programming changes and cannot be done within the time frame to affect the interim payment system. We can, however, raise the aggregate per-visit limit. We also could change the blend of national, regional, or agency-specific rates based on FY 1994 data. The interim payment system's heavy reliance on agency-specific historical payments is a prime concern for agencies that have provided care efficiently in the past. However, reducing the agency-specific component would have both advantages and disadvantages. Agencies that have provided care efficiently, and their patients, would benefit. However, agencies serving special needs populations with legitimately high costs would potentially not be able to continue providing appropriate care to their particularly vulnerable patients.

An "outlier" system to increase payment to agencies with more costly patients is also problematic. A case mix adjustment system is being created as part of our efforts to develop the prospective payment system. It will adjust payment for the resources involved in providing care, accounting for both low and high cost cases. In the meantime, we are constrained by our systems in making outlier adjustments that would increase payment for high cost cases. We are not able to make outlier adjustments for patients based on patient characteristics or diagnoses or on how many services they receive, or on how long they receive services. We are actively looking at whether it is possible to develop an outlier payment system that would not require changing systems to track days of care per patient or other changes that would conflict with our Year 2000 work priority.


Mr. Chairman, I know you appreciate the challenge of crafting reforms to the home health interim payment system. Working together, we have made solid progress in identifying those changes that can and cannot be done at this time. Working together, we will continue to seek a solution that meets our goals. And I am happy to answer any questions you might have.

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