<DOC>
Ways and Means Committee Print WMCP:106-14]
[2000 Green Book]
[From the U.S. Government Printing Office Online via GPO Access]


                 PART A SERVICES--COVERAGE AND PAYMENTS

                      Inpatient Hospital Services

    Medicare part A provides reimbursement for inpatient 
hospital care through the prospective payment system (PPS), 
established by Congress in the Social Security Amendments of 
1983 (Public Law 98-21). Before the enactment of PPS, Medicare 
paid hospitals retrospectively for the full costs they 
incurred, subject to certain limits and tests of 
reasonableness. Congress had previously acted to contain 
growing hospital costs by placing certain limits on routine 
inpatient care operating costs. However, medical costs 
continued to grow faster than the rate of inflation in the 
early 1980s, so PPS was enacted to constrain the growth of 
Medicare's inpatient hospital costs by providing incentives for 
hospitals to provide care more efficiently (see appendix D for 
further information about hospital services).
    Under PPS, fixed hospital payment amounts are established 
in advance of the provision of services on the basis of a 
patient's diagnosis. Hospitals that are able to provide 
services for less than the fixed PPS payment may keep the 
difference. Hospitals with costs that exceed the fixed PPS 
payment lose money on the case. The system's fixed prices are 
determined in advance on a cost-per-case basis, using a 
classification system of about 500 diagnosis-related groups 
(DRGs). Each Medicare case is assigned to one of the DRGs based 
on the patient's medical condition and treatment. DRGs are 
assigned relative weights to reflect the variation in the costs 
of treating a particular diagnosis. The DRG-based payment rate 
is designed to represent the national average cost per case for 
treating a patient with a particular diagnosis. Payments for a 
particular DRG will vary among different hospitals depending on 
the hospital's location and certain other characteristics. In a 
particular hospital, all cases assigned to the same DRG are 
reimbursed at the same predetermined rate.
    The PPS payment rates are updated each year using an update 
factor which is determined, in part, by the projected increase 
in the hospital market basket index (MBI). The hospital MBI 
measures the cost of goods and services that are purchased by 
hospitals, yielding one price inflator for all hospitals in a 
given year.
    In addition to the basic DRG payment for each case, PPS 
hospitals may also receive certain supplemental Medicare 
payments. Additional hospital payments include indirect medical 
education costs, disproportionate share hospital (DSH) 
payments, outlier payments, and payments for inpatient dialysis 
provided to end-stage renal disease (ESRD) beneficiaries. 
Certain categories of hospital expenses, including direct 
medical education costs, are not included in the PPS rates and 
are reimbursed in some other way. Certain facilities receive 
special treatment under PPS, particularly certain types of 
isolated or essential hospitals in rural areas, including 
regional referral centers, sole community hospitals, and 
Medicare-dependent small rural hospitals.
    Specialized facilities are excluded from PPS and are paid 
on the basis of reasonable costs subject to rate of increase 
limits. PPS-exempt facilities include psychiatric hospitals, 
rehabilitation hospitals, children's hospitals, cancer research 
centers, and long-term care hospitals. States are also allowed 
to apply for a waiver from PPS and establish a prospective 
system for setting hospital rates instead of what would be paid 
under PPS; Maryland is the only State that continues to operate 
under such a waiver.
    Table 2-13 provides calendar year 1998 data on the 
utilization of inpatient hospital services by type of enrollee 
and type of hospital.

TABLE 2-13.--USE OF INPATIENT HOSPITAL SERVICES BY MEDICARE ENROLLEES, BY TYPE OF ENROLLEE AND TYPE OF HOSPITAL,
                                             CALENDAR YEAR 1998 \1\
----------------------------------------------------------------------------------------------------------------
                                    Bills \2\            Covered days of care               Reimbursement
                             -----------------------------------------------------------------------------------
Type of enrollee and type of                                                         Amount
          hospital            Number in  Per 1,000  Number in  Per bill  Per 1,000     in     Per bill     Per
                              thousands  enrollees  thousands            enrollees  millions            enrollee
----------------------------------------------------------------------------------------------------------------
All enrollees:
  All hospitals.............     11,834        308     69,924       5.9      1,819   $74,153    $6,266    $1,929
    Short stay..............     11,335        295     64,454       5.7      1,677    70,813     6,247     1,843
    Long stay...............        499         13      5,470      11.0        142     3,340     6,693        87
      Psychiatric...........        205          5      1,837       9.0         48       712     3,473        19
      All other.............        294          8      3,633      12.4         95     2,628     8,939        68
Aged:
  All hospitals.............     10,021        300     58,849       5.9      1,761    63,372     6,324     1,897
    Short stay..............      9,249        277     55,133       6.0      1,650    60,868     6,581     1,822
    Long stay...............        772         23      3,716       4.8        111     2,504     3,244        75
      Psychiatric...........         52          2        563      10.8         17       242     4,654         7
      All other.............        720         22      2,295       3.2         69     2,262     3,142        68
Disabled:
  All hospitals.............      1,775        353     11,075       6.2      2,205    10,780     6,073     2,146
    Short stay..............      1,553        309      9,322       6.0      1,856     9,945     6,404     1,980
    Long stay...............        222         44      1,753       7.9        349       835     3,761       166
      Psychiatric...........        153         30      1,274       8.3        254       470     3,072        94
      All other.............         69         14        479       6.9         95       365     5,290        73
----------------------------------------------------------------------------------------------------------------
\1\ Preliminary data. Totals may not add due to rounding.
\2\ Discharges not available by type of hospital.

Note.--Only services rendered by inpatient hospitals are included.

Source: Health Care Financing Administration, Office of Information Services, unpublished data.


                   Skilled Nursing Facility Services

Coverage
    The Medicare Program covers extended care services provided 
in nursing homes for beneficiaries who require additional 
skilled nursing care and rehabilitation services following a 
hospitalization. These extended care services, commonly known 
as skilled nursing facility (SNF) benefits, are covered under 
part A of the program for up to 100 days per spell of illness 
and must be provided in an SNF certified to participate in 
Medicare. A spell of illness is that period which begins when a 
beneficiary is furnished inpatient hospital or SNF care and 
ends when the beneficiary has been neither an inpatient of a 
hospital nor an SNF for 60 consecutive days. A beneficiary may 
have more than one spell of illness per year.
    In order to be eligible for SNF care, the beneficiary must 
have been an inpatient of a hospital for at least 3 consecutive 
days and must be transferred to an SNF, usually within 30 days 
of discharge from the hospital. Furthermore, a physician must 
certify that the beneficiary is in need of skilled nursing care 
or other skilled rehabilitation services, which, as a practical 
matter, can only be provided on an inpatient basis and which 
are related to the condition for which the beneficiary was 
hospitalized.
    Covered SNF services include the following:
  --Nursing care provided by or under the supervision of a 
        registered nurse;
  --Room and board;
  --Physical or occupational therapy or speech-language 
        pathology;
  --Medical social services;
  --Drugs, biologicals, supplies, appliances, and equipment 
        ordinarily furnished by an SNF for the care of 
        patients;
  --Medical services of interns and residents in training under 
        an approved teaching program of a hospital with which 
        the SNF has a transfer agreement; and
  --Other services necessary to the health of patients that are 
        generally provided by SNFs.
Reimbursement
    Prior to the Balanced Budget Act (BBA) of 1997 Medicare 
reimbursed SNF care on a retrospective cost-based basis. This 
meant that SNFs were paid after services were delivered for the 
reasonable costs (as defined by program) they incurred for the 
care they provided. SNFs had few incentives to maximize 
efficiency and minimize their costs, and little inducement to 
control the amount or number of services they provided.
    Prospective payment system.--In BBA 1997, Congress required 
that a prospective payment system (PPS) for SNF care be phased 
in over 3 years, beginning with the SNF's first cost reporting 
period after July 1, 1998. Prospective payment involves 
grouping patients according to the type and intensity of 
services they require and setting a daily payment rate for each 
payment group before the services are provided. Like other PPSs 
that pay health care providers for care to Medicare 
beneficiaries on the basis of predetermined, fixed amounts, 
Medicare payments to SNFs are intended to pay the provider for 
its Medicare beneficiary costs on average. That is, although 
the payment is a fixed daily rate, a facility's actual costs 
may be above or below that amount for an individual patient. 
The goal for the facility is to incur costs that, on average, 
over time, do not exceed the PPS average amounts.
    Under BBA 1997 provisions, an SNF is paid a daily rate 
(``Federal per-diem rate''), prospectively determined, for all 
covered services provided to beneficiaries while they are 
eligible for SNF benefits. These include all routine, 
ancillary, and capital-related costs. An amount is added to 
this daily rate to cover part B services received by SNF-
eligible patients; some part B services are excluded from this 
``add on''--primarily the services of physicians and certain 
nonphysician practitioners such as physician assistants, nurse 
practitioners, and psychologists, who are paid separately under 
part B.
    The SNF PPS required by BBA 1997 reflects the resource 
utilization group (RUG) design developed by HCFA. It is a 
hierarchical classification system accounting for the type and 
level of care needed by SNF patients and the relative amount of 
resources needed to provide a patient's care. Under the 
original RUG system implemented in 1998, there were seven basic 
categories of care, including, in hierarchical order: (1) 
rehabilitation; (2) extensive services; (3) special care; (4) 
clinically complex; (5) impaired cognition; (6) behavior 
problems; and (7) reduced physical function. These seven 
categories were further broken down into 44 specific patient 
groupings. The system ascribed a per-diem payment amount for 
each of the 44 groupings. These amounts are adjusted by a wage 
index to account for geographic variations in wages among urban 
and rural areas. The rates are updated annually using an SNF 
MBI. HCFA issued a final rule implementing the PPS on July 30, 
1999 (64 Federal Register 41644-701).
    Transition period.--BBA 1997 provided that the Federal per-
diem rate would apply immediately to all SNFs that received 
their first Medicare payment on or after October 1, 1995. For 
those that received their first Medicare payment before that 
date, a 3-year transition period was established. During the 
transition period, the PPS has two components: a Federal PPS 
component under the RUG system and a ``facility-specific'' 
component. This latter is computed separately for each SNF to 
reflect the facility's own average costs under the pre-PPS 
system. Payments for the first cost reporting period beginning 
on or after July 1, 1998, are a blend of 75 percent facility-
specific rate and 25 percent Federal rate. For the second cost 
reporting period, the facility-specific percentage is 50 
percent and the Federal, 50 percent. For the third period, the 
facility-specific percentage is 25 percent and the Federal, 75 
percent. For all subsequent years, payments will be based 
entirely on the Federal per-diem rate.
    Consolidated billing.--Congress also included a 
consolidated billing provision in BBA 1997 to address the 
potential for fraud and duplicate billing for SNF services. 
Under this provision, the SNF is responsible for billing 
Medicare for all services (with certain exceptions) provided to 
its residents under both parts A and B. This provision applies 
to beneficiaries residing in an SNF or in any part of a nursing 
home which contains a Medicare-certified SNF portion. It 
applies both to patients who are in a part A covered stay and 
those who are not. Although the SNF might provide these 
services under arrangements with outside providers, the outside 
provider must get its payment through the SNF rather than by 
billing Medicare directly.
    BBA 1997 excluded some services from the SNF consolidated 
billing requirement, including those provided by physicians and 
certain nonphysician practitioners, and dialysis-related 
services and supplies. Regulations excluded hospice care 
related to a beneficiary's terminal illness and certain 
ambulance trips to and from SNFs. Providers of these services, 
which are covered under part B, bill Medicare directly.
    BBA 1997 established the PPS for SNFs with the purpose of 
slowing the rate of growth in SNF payments under Medicare. In 
January 1998, a few months after enactment of BBA 1997, CBO 
projected that Medicare spending on SNFs for 1998 would remain 
at 1997 levels. However, actual spending in 1998 was much lower 
than anticipated. In March 1999, CBO revised its 1998 estimate 
to indicate a decrease in SNF spending of $900 million. It has 
also revised downward its 5- and 10-year estimates for total 
SNF spending. A number of factors contributed to the reductions 
in Medicare spending for SNFs. These include lower inflation, 
which results in lower payments to providers; and HCFA's 
heightened efforts to combat fraud and abuse, resulting in a 
reduction in incorrect overpayments. However, SNF industry 
spokespersons said that these reductions indicate that changes 
made to Medicare's reimbursement policies were too drastic, 
causing financial problems for SNFs, and that they should be 
reexamined.
    In addition, industry representatives and others (including 
the Medicare Payment Advisory Commission) were concerned that 
the RUG system based on 44 payment categories might not 
adequately cover the costs of treating patients with clinically 
complex problems requiring skilled nursing care (high acuity 
patients), and those needing extensive ancillary nontherapy 
services, such as laboratory tests, drugs and biologicals, 
imaging services, and transportation.
    Balanced Budget Refinement Act (BBRA) of 1999.--In response 
to concerns about the adequacy of payments under the RUG 
system, Congress enacted, in BBRA, temporary increases for 
Medicare payments for 15 of the 44 RUGs. These 20-percent 
increases apply to SNF care furnished to patients categorized 
as needing extensive services, special care, clinically complex 
care, and certain high level and medium level rehabilitation 
services. The special payments are available beginning April 1, 
2000, and ending the later of October 1, 2000, or the date of 
implementation of a refined, revised RUG system.
    BBRA also provided for a 4-percent increase in the Federal 
per-diem rate for SNF services for fiscal year 2001 and fiscal 
year 2002. This increase is not to be considered in the base 
amount used to compute updates to the Federal per-diem rate.
    Other changes made by BBRA include the following items:
 1. SNFs may elect to receive Medicare payments based 100 
        percent on the Federal per-diem rate, rather than under 
        the phase-in schedule, if it would be more advantageous 
        for them to do so.
 2. Starting April 1, 2000, separate payments above the RUG 
        per-diem rate would be made for certain ambulance 
        services for dialysis patients, certain prostheses, and 
        certain chemotherapy drugs for SNF patients.
 3. If at least 60 percent of an SNF's patients are 
        immunocompromised, RUG payments will be based 50 
        percent on the facility specific rate and 50 percent on 
        the Federal per-diem rate (rather than moving to 100 
        percent of the Federal rate) until October 1, 2001.
    CBO estimates that the changes in payments to SNFs made by 
BBRA will increase spending for SNF care by $2.2 billion in the 
first 5 years.
SNF payments and utilization
    For a number of years, SNF care was one of Medicare's 
fastest growing benefits. Tables 2-14 and 2-15 show that SNF 
utilization and spending first began to increase substantially 
in 1988 and 1989. These increases can be traced to changes that 
occurred in the benefit at that time.

  TABLE 2-14.--ESTIMATED MEDICARE PAYMENTS FOR SKILLED NURSING FACILITY
                              CARE, 1983-99
------------------------------------------------------------------------
                                                  Payments
                                                    (in        Percent
                                                 billions)    change \1\
------------------------------------------------------------------------
Calendar year:
    1983......................................         $0.5           NA
    1984......................................          0.5          0.2
    1985......................................          0.5          0.7
    1986......................................          0.6          4.9
    1987......................................          0.6         10.4
    1988......................................          0.8         29.3
    1989......................................          2.8        242.5
    1990......................................          2.5        -11.5
    1991......................................          2.5         -0.3
    1992......................................          3.5         42.4
    1993......................................          5.0         41.0
    1994......................................          6.9         38.3
    1995......................................          9.2         34.1
    1996......................................         11.1         20.2
    1997......................................         13.0         17.1
    1998......................................         13.5          3.8
    1999......................................         11.8        -12.6
------------------------------------------------------------------------
\1\ Rounding in payments may not reflect actual change.

NA--Not applicable.

Note.--Payments reported here are incurred expenditures, net of
  beneficiary copayments.

Source: Health Care Financing Administration, Office of the Actuary.



       TABLE 2-15.--MEDICARE SKILLED NURSING FACILITY UTILIZATION AND PAYMENTS PER PERSON SERVED, 1983-99
----------------------------------------------------------------------------------------------------------------
                                                    People served             Days             Payment per day
                                               -----------------------------------------------------------------
                                                                        Number      Per
                                                  Number   Per 1,000     (in       person     Amount    Percent
                                                           enrollees  millions)    served                change
----------------------------------------------------------------------------------------------------------------
1983..........................................    265,000          9        9.3       35.1        $56         NA
1984..........................................    299,000         10        9.6       32.2         58        3.2
1985..........................................    314,000         10        8.9       28.4         65       11.1
1986..........................................    304,000         10        8.2       26.8         71        9.6
1987..........................................    293,000          9        7.4       25.4         84       19.3
1988..........................................    384,000         12       10.7       27.8         87        2.6
1989..........................................    636,000         19       29.8       46.8        117       34.6
1990..........................................    638,000         19       25.1       39.5         98      -16.1
1991..........................................    671,000         20       23.7       35.3        123       25.9
1992..........................................    785,000         22       29.0       36.9        157       27.1
1993..........................................    908,000         25       34.4       37.9        188       20.1
1994..........................................  1,068,000         29       37.1       39.7        226       20.1
1995..........................................  1,240,000         33       43.3       34.9        222        9.5
1996..........................................  1,384,000         37       47.7       34.4        240        8.5
1997..........................................  1,570,000         41       50.6       32.2        262        9.1
1998..........................................         NA         NA       48.6         NA        268        2.2
1999..........................................         NA         NA       50.1         NA        243       -9.3
----------------------------------------------------------------------------------------------------------------
NA--Not applicable.

Source: Health Care Financing Administration, Office of the Actuary.

    First, HCFA issued new coverage guidelines that became 
effective early in 1988. Prior to this time, studies had 
pointed to a lack of adequate written guidance on coverage 
criteria that led to inconsistencies in coverage decisions for 
a benefit that was intended to be uniform across the country. 
As a result, many SNFs were reluctant to accept Medicare 
beneficiaries because of the possibility that a submitted claim 
would be retroactively denied. The 1988 guidelines clarified 
coverage criteria by providing numerous examples of covered and 
noncovered care. Furthermore, the guidelines explained that 
even when a patient's full or partial recovery is not possible, 
care could be covered if it were needed to prevent 
deterioration or to maintain current capabilities. Previously, 
some care had been denied coverage because patients' health 
status was not expected to improve.
    The second major, though temporary, change in Medicare's 
SNF benefit came in 1988 with the enactment of the Medicare 
Catastrophic Coverage Act (MCCA). Effective beginning in 1989, 
this legislation eliminated the SNF benefit's prior 
hospitalization requirement; revised the coinsurance 
requirement to be equal to 20 percent of the national average 
estimated per-diem cost of SNF services for the first 8 days of 
care; and authorized coverage of up to 150 days of care per 
calendar year (rather than 100 days per spell of illness). 
These changes were repealed in 1989, and the SNF benefit's 
structure assumed its prior form.
    Studies have suggested that the coverage guidelines and 
MCCA changes together might have caused a long-run shift in the 
nursing home industry toward Medicare patients that would not 
end with repeal of MCCA. Table 2-14 shows that SNF spending in 
calendar year 1990 stood at $2.5 billion; by 1997 it had 
increased to $13.0 billion, for an average annual growth rate 
of 27 percent. With implementation of the RUG payment system in 
mid-1998, however, the rate of increase dropped precipitously: 
between 1997 and 1998 the increase was 3.8 percent, and 
payments decreased by 12.6 percent in 1999.
    Table 2-15 shows that between 1992 and 1997 the number of 
Medicare beneficiaries receiving SNF care doubled from 785,000 
to 1.57 million. The number of covered days grew from 29 
million to 50.6 million, or by 74 percent. Payments per day 
grew from $157 in 1992 to $262 in 1997, a 67-percent increase. 
However, in 1998 when the RUG system went into effect, these 
payments increased by only 2.2 percent to $268, and decreased 
to $243 per day in 1999, a 9.3 percent decrease. These 
decreases in payments led to the changes enacted in BBRA 
described above.

                          Home Health Services

Coverage and eligibility
    Medicare home health services are covered under part A of 
the program and, in certain circumstances, under part B. Prior 
to BBA 1997, home health care was paid under part A unless an 
individual was ineligible for part A but had purchased part B 
coverage. In BBA 1997, Congress transferred payment for some 
home health care from part A to part B. The transfer applies to 
home visits beyond the first 100 visits that follow a stay in a 
hospital or an SNF, beginning in 1998, phased in over 6 years. 
No beneficiary deductibles or coinsurance are required for home 
health care.
    To qualify for home health care under Medicare an 
individual must be homebound. A homebound individual is defined 
as one who cannot leave home without a considerable and taxing 
effort and only with the aid of devices such as a wheelchair, a 
walker, or through use of special transportation. Absences from 
home may occur infrequently for short periods of time for such 
purposes as to receive medical treatment.
    Homebound individuals qualify for coverage of home health 
care if they need intermittent skilled nursing care, physical 
therapy, or speech-language pathology services. Beneficiaries 
needing one or more of these ``qualifying services'' may also 
receive occupational therapy, the services of a medical social 
worker, or a home health aide. Occupational therapy can 
continue to be provided after the need for skilled nursing 
care, physical therapy, or speech therapy ends, but social work 
or aide services may not.
    Home health care is covered by Medicare as long as the care 
is medically reasonable and necessary for the treatment of 
illness or injury. Although the number of home health visits a 
beneficiary may receive is unlimited, services must be provided 
pursuant to a plan of care that is prescribed and periodically 
reviewed by a physician. In general, Medicare's home health 
benefit is intended to serve beneficiaries needing acute 
medical care requiring the services of skilled health care 
personnel. It was never envisioned as providing coverage for 
the nonmedical supportive care and personal care assistance 
needed by chronically impaired persons. It is not a long-term 
care program for the disabled or the frail elderly.
    For beneficiaries meeting the qualifying criteria, 
Medicare's home health benefit covers the following services:
 1. Part-time or intermittent nursing care provided by or under 
        the supervision of a registered nurse;
 2. Physical or occupational therapy or speech-language 
        pathology services;
 3. Medical social services;
 4. Part-time or intermittent services of a home health aide 
        who has successfully completed a training program 
        approved by the Secretary;
 5. Medical supplies (excluding drugs and biologicals) and 
        durable medical equipment (DME);
 6. Medical services provided by an intern or resident in 
        training under an approved training program with which 
        the agency may be affiliated; and
 7. Certain other outpatient services which involve the use of 
        equipment that cannot readily be made available in the 
        beneficiary's home.
    Home health services are provided by private or public home 
health agencies (HHAs) that specialize in provision of such 
services and that are certified to participate in Medicare by 
HCFA. HHAs may be public or government-sponsored entities, 
private nonprofit agencies, or proprietary for-profit agencies. 
Hospitals may own or sponsor an HHA. Home health care givers 
may be employees of the HHA or may work for an agency under 
contract. HCFA characterizes a typical HHA as having 486 
Medicare admissions and 30,000 visits per year and an 18 person 
staff. Often, Medicare beneficiaries constitute the great 
majority of an HHA's caseload, although other users include 
individuals covered by Medicaid and those with private 
insurance or who pay out of pocket.
    According to HCFA data, the overall average number of home 
health care visits received by Medicare home health patients in 
1997 was 82, up from 23 in 1987. On average, Medicare 
beneficiaries qualifying for home health care have one episode 
of covered care, and the average number of visits received in 
one episode of coverage is 36.
Background of the Medicare home health benefit
    In the early years of the program, Medicare part A covered 
up to 100 home health visits for beneficiaries who had an 
immediate prior hospitalization or care in an SNF. Home health 
care was also covered under part B, up to 100 visits, for 
beneficiaries who had no prior hospitalization, or who had 
exhausted their 100 part A visits, or who had part B coverage 
only. It was required that a physician determine that the 
individual could be discharged to his or her home but would 
require skilled nursing care on less than a full-time basis, or 
physical therapy, or speech therapy.
    The Omnibus Budget Reconciliation Act of 1980 (Public Law 
96-499) made several liberalizing changes in the rules 
governing Medicare's coverage of home health services, 
including elimination of the requirement for a prior 
hospitalization and removal of the limitation on the number of 
visits. It also allowed the need for occupational therapy to 
trigger coverage of home health services furnished after June 
1981, although less than a year later, as part of a larger 
strategy to meet budget targets for reductions in Medicare 
spending, Congress removed occupational therapy as a qualifying 
trigger for home health care (Public Law 97-35, the Omnibus 
Reconciliation Act of 1981).
    Growth in volume of services and payments.--During the 
first 10 years of the Medicare Program, home health care 
accounted for less than 2 percent of total Medicare spending. 
Between 1977 and about 1990 it accounted for 2-3 percent of 
total program spending. This small increase reflected the 1980 
liberalizations and, many say, the delayed response to 
implementation in 1983 of a PPS for hospital inpatient care 
under Medicare. Some analysts had predicted that the inpatient 
PPS would lead to large growth in home health care utilization 
by Medicare beneficiaries. However, home health care spending 
increases that might have occurred as a result of the inpatient 
PPS were offset by changes in the law and in certain 
administrative procedures. For instance, the 1984 Deficit 
Reduction Act required HCFA to reduce the number of ``fiscal 
intermediaries'' with which HCFA contracts to process Medicare 
home health care claims. These entities approve or deny 
beneficiary eligibility for home health care as well as HHA 
claims for payment. As HCFA reduced the number of fiscal 
intermediaries, eligibility and claims decisions became more 
standardized. HCFA also intensified educational programs for 
claims processors, required HHAs to submit increased 
documentation with each claim, and increased the number of 
claims subjected to indepth medical reviews. Some say these 
actions tempered the effect of early hospital discharges 
prompted by the hospital inpatient PPS, noting that the home 
health care claims denial rate rose from 3.4 percent in 1985 to 
7.9 percent in 1987.
    A significant event in the history of the Medicare home 
health benefit was settlement of a class action lawsuit filed 
in 1988 (Duggan v. Bowen) which sought to liberalize HCFA's 
interpretation of benefit coverage requirements. As a result of 
the suit, in 1989, HCFA revised the home health eligibility 
criteria to cover patients needing ``part-time or intermittent 
care'' instead of the previous requirement that patients need 
``part-time and intermittent care.'' This change allowed the 
number of visits to be increased because they no longer had to 
be ``intermittent'' but could be made on a daily basis. HCFA's 
revised guidelines also loosened the claims procedures that had 
been tightened between 1985 and 1987. The revised guidelines 
may have opened the door to eligibility for persons who have 
ongoing medical problems that require personal care assistance 
associated more with long-term care rather than acute care.
    Home health spending rose from $2.1 billion in 1988 to 
$18.1 billion in 1996, an average annual increase of over 31 
percent (table 2-16). Medicare payment increases were driven by 
the increase in the number of beneficiaries served and the 
average number of visits per beneficiary served. The number of 
beneficiaries served more than doubled during this time period, 
and the average number of visits per home care patient 
increased more than threefold, from 23 visits in 1987 and 1988 
to 82 in 1997 (table 2-17). The number of HHAs participating in 
Medicare also increased sharply, growing from 5,686 agencies in 
1989 to 10,492 in 1997. However, the average cost per home care 
visit rose relatively modestly, from $55 in 1988 to $71 in 
1999, an increase of only 16 percent.

         TABLE 2-16.--MEDICARE PAYMENTS FOR HOME HEALTH, 1983-99
------------------------------------------------------------------------
                                                  Payments
                 Calendar year                      (in        Percent
                                                 billions)      change
------------------------------------------------------------------------
1983..........................................         $1.6           NA
1984..........................................          1.8         15.4
1985..........................................          1.9          7.6
1986..........................................          2.0          1.6
1987..........................................          1.7        -12.6
1988..........................................          2.1         19.2
1989..........................................          2.5         20.4
1990..........................................          3.7         51.0
1991..........................................          5.3         40.8
1992..........................................          7.2         37.0
1993..........................................         10.3         42.6
1994..........................................         13.3         28.9
1995..........................................         16.6         25.2
1996..........................................         18.1          8.9
1997..........................................         17.9         -0.8
1998..........................................         12.0        -33.4
1999..........................................          9.3        -22.3
------------------------------------------------------------------------
NA--Not applicable.

Source: Health Care Financing Administration.


    Medicare payment policies for home health care.--Prior to 
the changes made by BBA 1997, Medicare reimbursed HHAs for the 
lesser of: (1) their reasonable costs; or (2) a limited amount 
per visit, applied in the aggregate. The per-visit limit was 
set at 112 percent of the national average cost, which was 
calculated separately for each type of service (nursing, 
therapy, etc.). It was based on costs for freestanding agencies 
(i.e., agencies not affiliated with hospitals) and varied 
according to whether an agency was located in an urban or rural 
area and according to wage level differentials from area to 
area. Per-visit cost limits were updated annually by applying 
an MBI to base-year data derived from HHA cost reports. These 
limits, however, were applied to aggregate agency payments and 
not to individual visits; that is, an aggregate cost limit was 
set for each agency equal to the sum of the agency's limit for 
each type of service multiplied by the number of visits of each 
type provided by the agency.
    This cost-based reimbursement system was criticized as 
providing few incentives for HHAs to maximize efficiency or 
control the volume of services they delivered because HHAs were 
paid for every visit their workers made.
Balanced Budget Act of 1997
    The Balanced Budget Act (BBA) of 1997 made several changes 
to home health eligibility, coverage, and payment rules. In 
general, through these changes, Congress sought to curtail the 
steep annual rates of increase in the volume of Medicare home 
health services and payments. In addition, BBA 1997 provided 
for the transfer of some home health spending from part A to 
part B; the purpose of this transfer was to reduce part A 
spending and thereby extend the solvency period of the part A 
trust fund.

               TABLE 2-17.--MEDICARE HOME HEALTH CARE UTILIZATION AND PAYMENTS PER VISIT, 1983-99
----------------------------------------------------------------------------------------------------------------
                                         People served                  Visits
                                    -------------------------------------------------------
      Calendar year of service                               Number                 Per      Payment    Percent
                                       Number   Per 1,000     (in     Per 1,000    person   per visit    change
                                                enrollees  millions)  enrollees    served
----------------------------------------------------------------------------------------------------------------
1983...............................  1,318,000         45       36.9      1,264         28        $43      (\1\)
1984...............................  1,498,000         50       40.4      1,378         27         46        7.2
1985...............................  1,549,000         51       39.4      1,327         25         49        6.4
1986...............................  1,571,000         51       38.0      1,263         24         50        3.4
1987...............................  1,544,000         49       35.6      1,163         23         53        5.2
1988...............................  1,582,000         49       37.1      1,193         23         55        3.8
1989...............................  1,685,000         51       46.3      1,459         27         55       -0.4
1990...............................  1,940,000         58       69.4      2,146         36         56        1.7
1991...............................  2,223,000         65       98.6      2,996         44         56        1.1
1992...............................  2,523,000         72      132.5      3,958         53         58        3.9
1993...............................  2,868,000         80      167.8      4,939         59         61        4.1
1994...............................  3,175,000         87      218.8      6,388         69         62        2.2
1995...............................  3,457,000         93      266.3      7,801         77         62        0.7
1996...............................  3,583,000         95      284.4      8,439         79         63        1.7
1997...............................  3,370,000         88      276.5      8,390         82         64        0.6
1998...............................         NA         NA      161.0      4,980         NA         67        5.1
1999...............................         NA         NA       97.0      3,027         NA         71        6.2
----------------------------------------------------------------------------------------------------------------
\1\ Not applicable.

NA--Not available.

Source: Health Care Financing Administration.


    Clarification of coverage rules.--BBA 1997 included several 
provisions that clarified coverage criteria for home health 
care, including:
 1. Clarification of the definition of ``part-time'' and 
        ``intermittent'' regarding skilled nursing care and 
        home health aide services for purposes of eligibility 
        for, and coverage of home health care. First, patients 
        needing skilled nursing care are eligible for 
        Medicare's home health benefit if the need is for 
        ``intermittent'' care, defined as skilled nursing care 
        that is either provided or needed on fewer than 7 days 
        each week, or less than 8 hours of each day for periods 
        of 21 days or less (with extensions in exceptional 
        circumstances when the need for additional care is 
        finite and predictable). Second, for beneficiaries who 
        qualify for home health care and who need both skilled 
        nursing and home health aide services, coverage is 
        provided only to the extent that these two services 
        combined is ``part-time or intermittent,'' defined as 
        skilled nursing and home health aide services furnished 
        any number of days per week as long as they are 
        furnished (in combination) less than 8 hours each day 
        and 28 or fewer hours each week (or, subject to review 
        on a case-by-care basis as to the need for care, less 
        than 8 hours each day and 35 or fewer hours per week);
 2. Elimination of eligibility based solely on needing a 
        skilled nurse to draw blood;
 3. A requirement that claims include a physician identifier;
 4. A requirement that home health workers report their 
        activities during a visit in 15-minute intervals (the 
        data are used in designing a home health PPS);
 5. Extension of savings from a July 1994-June 1996 freeze on 
        home health cost limit updates;
 6. A requirement for a study of the definition of 
        ``homebound'' and a study to establish guidelines to 
        standardize the frequency and duration of home health 
        services for patients with similar needs and 
        circumstances (``normative guidelines''). (The 
        Secretary determined that no change was needed for the 
        definition of homebound, and the first results from the 
        study of normative guidelines will be available in fall 
        2000);
 7. A requirement for ``consolidated billing'' for services to 
        home health patients, under which payment for any 
        Medicare-covered service or item provided for a 
        beneficiary during a spell of home health care coverage 
        is to be made to the HHA. The HHA would then pay the 
        provider of the service or item. (BBRA 1999 later 
        excluded the supply of DME from consolidated billing.)
    Transfer certain coverage from part A to part B.--BBA 1997 
transfers from part A to part B payments for home health visits 
that are not part of the first 100 visits following a 
hospitalization. Part A benefits are financed through the 
Hospital Insurance (HI) Trust Fund, whereas part B benefits are 
financed by beneficiary premiums and general revenues. Thus, 
the solvency of the HI Trust Fund is extended by removing from 
it some of the costs of home health benefits. The transfer is 
being phased in over 6 years, between 1998 and 2003, with the 
Secretary transferring one-sixth of the aggregate expenditures 
associated with transferred visits in 1998 and an additional 
one-sixth each year thereafter until fully implemented in 2003. 
Beginning January 1, 2003, part A coverage for home health care 
will apply only to postinstitutional home health services for 
up to 100 visits during a spell of illness, except for those 
persons with part A coverage only, who will be covered for 
services without regard to the postinstitutional limitation.
    Moving home health care costs to part B could increase 
beneficiary premiums for that component of Medicare. The 
increase in the part B premium attributable to transferred 
expenditures will be phased in over a period of 7 years, 
between 1998 and 2004. For 1998 the part B premium was 
increased by one-seventh of the extra costs due to the 
transfer; for 1999 it was increased by two-sevenths, etc., 
until 2004 when the total cost of the transfer will be included 
in the part B premium. The increases have been very small, only 
slightly over $1 a month in 1999.
    Postinstitutional home health services are defined for 
these purposes as services furnished to a Medicare beneficiary: 
(1) after an inpatient hospital or rural primary care hospital 
stay of at least 3 consecutive days, initiated within 14 days 
after discharge; or (2) after a stay in an SNF, initiated 
within 14 days after discharge. A home health spell of illness 
is defined as the period beginning when a patient first 
receives postinstitutional home health services and ending when 
the beneficiary has not received inpatient hospital, SNF, or 
home health services for 60 days.
    Claims administration for transferred visits will continue 
to be done by part A fiscal intermediaries.
    Requirement for a PPS.--BBA 1997 required that a PPS be 
implemented for home health care beginning in 1999 and required 
that the PPS be designed to reduce home health payments by 15 
percent. It specified that the 15-percent reduction was to go 
into effect even if the PPS was not ready for implementation in 
1999. In Public Law 105-277 (the Omnibus Consolidated and 
Emergency Supplemental Appropriations Act for fiscal year 1999) 
Congress delayed the implementation date for the PPS until 
October 1, 2000, and moved the 15-percent reduction to coincide 
with commencement of the PPS. BBRA 1999 subsequently postponed 
the 15-percent reduction to 12 months after implementation of 
the PPS.
    Implementation of an interim payment system.--Because of 
concern about the rapidly rising costs of Medicare's home 
health benefit, Congress included in BBA 1997 an ``interim 
payment system'' (IPS) for home health care in order to achieve 
immediate spending reductions prior to implementation of the 
PPS. This interim system was effective for HHA cost reporting 
periods starting on or after October 1, 1997, and will remain 
in effect until the PPS is implemented in October 2000.
    Table 2-16 shows the substantial reductions in Medicare 
payments for home health services that have coincided with 
implementation of the IPS. In 1999, total payments were almost 
half the 1996 level. The IPS achieves cost savings by 
establishing a new methodology for limiting aggregate annual 
Medicare payments to individual HHAs. Under this procedure, an 
agency receives payments totaling the least of three amounts 
(pre-IPS payments were the lesser of the first two of these 
amounts): (1) the agency's reasonable costs; or (2) payments 
determined under the per-visit limits, with the limit set at 
106 percent of the national median cost per visit by service 
type (pre-IPS limit was 112 percent of the national average 
cost per visit); \1\ or (3) aggregate payments under a new 
formula based on per-beneficiary limits.
---------------------------------------------------------------------------
    \1\ Public Law 105-277 increased the limit from 105 percent of the 
national median cost of a service (estimated at the time of BBA 1997 
enactment to be about 98 percent of the mean) to 106 percent of the 
median.
---------------------------------------------------------------------------
    HCFA estimates that 79 percent of HHAs are subject to the 
new per-beneficiary limit; the others receive less under the 
reasonable cost or per-visit limit. Determining an agency's 
aggregate Medicare payment limit under the new per-beneficiary 
formula includes four steps:
 1. Divide the total payments the agency received from Medicare 
        for cost reporting periods ending in fiscal year 1994 
        by the number of Medicare patients it served that year 
        to get an average amount per beneficiary (certain wage 
        adjustments and cost updates are applied to bring the 
        amount up to values in the year to which the limits are 
        being applied, e.g., in 2000). Per-beneficiary limits 
        for agencies that were not operational in 1994 are set 
        at the national median;
 2. Reduce that average amount per beneficiary to 75 percent of 
        the full amount;
 3. Add a sum that is 25 percent of the average Medicare per-
        beneficiary costs of all agencies in the same census 
        region to get a new average cost per beneficiary;
 4. Multiply the agency's average cost per beneficiary from 
        step three by the number of Medicare patients the 
        agency is serving in the current year or cost reporting 
        period. The result is an aggregate annual payment limit 
        that an agency is held to for serving all its Medicare 
        patients in a cost reporting period under the IPS.
    If an agency's average costs for its patients are lower 
than others in the region, it benefits from the sum that is 
added based on the average regional per-beneficiary limits 
(step 3, above); if an agency's costs are higher than others in 
the area, it loses money from the regional component of the 
formula. This regional component of the formula also decreases 
disparities that had existed among agencies in the same general 
area.
    The per-beneficiary aggregate limit does not restrict the 
amount an HHA can spend on any individual beneficiary. It is 
simply a technique for arriving at an aggregate budget amount 
for an agency's Medicare patients. However, many HHAs 
misunderstood how this limit works, and there are reports that 
some agencies ended a patient's care when spending for that 
individual reached the amount of the per-beneficiary payment 
(i.e., the amount arrived at by step three above). In reality, 
agencies have some patients whose costs are below the per-
beneficiary average and some whose costs are above it. The idea 
behind the new formula was that payments on behalf of patients 
whose costs were lower than average would ``subsidize'' more 
costly patients; the balance of low and high cost patients 
would determine whether an agency would exceed its aggregate 
per beneficiary cap.
    Congress based the per-beneficiary calculation on fiscal 
year 1994 levels of operation in order to discount the large 
volume growth that still appeared to be occurring after that 
year (program costs grew by nearly 25 percent from 1994 to 
1995). Using fiscal year 1994 as the base year caused agencies 
that had increased their costs per patient after that time 
(generally by increasing the number of visits per patient) to 
have a larger reduction in their Medicare revenues under the 
IPS than agencies that had maintained relatively constant 
average costs per beneficiary.
    Response to BBA 1997 and the IPS.--Table 2-16 shows the 
significant decrease in Medicare spending for home health care 
that occurred with implementation of the provisions in BBA 1997 
and the IPS. Table 2-17 shows the sharp drop after 1997 in the 
number of home health visits covered by Medicare. At the same 
time, the average payment per visit increased. Most analysts 
agree that the reduction in the number of home health visits is 
attributable largely to the IPS, but note also that the 
provision of BBA 1997 that eliminated venipuncture (the drawing 
of a blood specimen) as the sole home health service qualifying 
an individual for home care also contributed to the reduction 
in visits. Presumably, elimination of less costly visits (e.g., 
home health aide visits) resulted in an increase in the average 
payment per visit from $64 in 1997 to $71 in 1999. Moreover, 
the Health Insurance Portability and Accountability Act of 1996 
included civil money penalties for physicians who falsely 
certify that a beneficiary needs home health care, a provision 
some say has had a chilling effect on physician referrals.
    As the apparent effects of the IPS began to be evident, 
representatives of the home health industry claimed that (1) 
the IPS was limiting HHAs' ability to provide necessary care; 
(2) agencies with low average costs per beneficiary in the 
fiscal year 1994 base period were realizing the severest 
reductions; and (3) these older agencies were being paid 
inequitably in comparison with newer agencies because agencies 
that had not been in business long enough to have had a cost 
reporting period ending in fiscal year 1994 were assigned a 
per-beneficiary limit equal to the national median.
    Because the payment limits imposed by the IPS induce 
agencies to balance the number of expensive patients against 
the number of inexpensive patients they serve in order to stay 
within their total Medicare payment limit, questions arose 
about whether the IPS created incentives for HHAs to refuse to 
serve beneficiaries with the most serious medical needs and who 
require extensive home health visits. An HHA might refuse to 
accept certain expensive patients if it were concerned that the 
balance of patients in its caseload would be tipped too far 
toward costly cases and result in expenditures exceeding the 
agency's total funding limit.
    In January 1998, the Congressional Budget Office (CBO) 
projected 10-year BBA 1997 home health care savings of almost 
$75 billion. In March 1999, CBO reestimated the effects of BBA 
1997, and the new projections showed an additional $56 billion 
in savings. The original CBO estimate reflected an annual rate 
of growth in home health spending of 8.3 percent a year over 10 
years, but the revised estimate showed an annual increase of 
5.6 percent a year. (Under the old law, in the early 1990s, 
Medicare home health spending had been growing at rates of 
between 20 and 30 percent a year.) However, CBO's revised 
estimates included changes in their underlying economic 
assumptions as well as revised estimates of the effects of BBA 
1997. Additionally, HCFA officials cautioned that reduced 
Medicare payments for home health care since 1997 reflect an 
intensified case review process HCFA required claims processors 
to implement along with the IPS as well as stepped-up fraud and 
abuse detection activities.
    To address concerns about the impact of the IPS and the 
large decrease in estimates of program payments for home health 
care, in Public Law 105-277, Congress modified the IPS formula 
to increase per-visit limits for HHAs from 105 percent of the 
median to 106 percent and increased payments to agencies whose 
per-beneficiary limits under the IPS were less than the 
national median per-beneficiary limits. The per-beneficiary 
limits for older agencies (those in operation in fiscal year 
1994) were increased by one-third of the difference between the 
agency's per-beneficiary limit and the national median of per-
beneficiary limits; per-beneficiary limits for agencies 
starting operation after fiscal year 1994 but before fiscal 
year 1999 were set at the national median limit; new HHAs that 
began treating Medicare patients on or after October 1, 1998, 
were set at 75 percent of the national median, with a 2-percent 
reduction. These modifications to home health payments were 
estimated to increase Medicare payments to 65 percent of HHAs.
 Home health prospective payment system
    As noted above, BBA 1997 required a prospective payment 
system (PPS) to be implemented for Medicare payments for home 
health care. Final PPS rules were published in the Federal 
Register on July 3, 2000. Under those rules, beneficiaries are 
categorized into one of 80 home health resource groups, each of 
which carries a standard payment for a 60-day episode of care 
for a beneficiary. The standard payment is computed using the 
average national cost per visit (computed and weighted by visit 
type, that is, skilled nursing, physical therapy, etc.) 
multiplied by the national average number of visits (by type) 
in a 60-day period. Average costs for nonroutine medical 
supplies, certain therapy services, and administration of the 
outcome and assessment information set (OASIS) interview 
questionnaire are added.\2\ The payments include adjustments to 
reflect geographic wage levels among HHAs, to account for 
unusually costly patients (``outlier'' payments), and to 
achieve ``budget neutrality.'' The budget neutrality adjustment 
ensures that total home health payments under the PPS in fiscal 
year 2001 will be equal to the estimated total payments that 
would have been made by Medicare in that year had the IPS 
continued in effect in fiscal year 2001, including limits on 
the market basket index (MBI). Total fiscal year 2001 payments 
will equal the IPS projected to that year minus 1.1 percentage 
points.
---------------------------------------------------------------------------
    \2\ OASIS is a data collection instrument on which a home health 
worker records, for new or renewing patients, clinical and other data 
required to plan the individual's course of care. Data from OASIS are 
also used in the definition of the payment categories under the home 
health PPS.
---------------------------------------------------------------------------
    Special payment arrangements are made for beneficiaries 
receiving fewer than five visits, or who transfer from one HHA 
to another, or who have a significant change in their condition 
during an episode of illness.
    HHAs will be paid 60 percent of the PPS amount after 
completing an OASIS questionnaire for each new or renewing 
patient and receiving a physician's certification and plan of 
care. The remainder of the payment will be made when the 
episode is completed (or, if earlier, when care is completed). 
If, at the end of an initial 60-day episode, a physician orders 
care to be continued, payment for the subsequent episode (or 
episodes) is split to provide 50 percent of the payment at the 
start of the episode and 50 percent at the end of care or the 
episode.
Balanced Budget Refinement Act (BBRA) of 1999
    As a result of concern that many provisions of BBA 1997 had 
caused unanticipated reductions in Medicare payments across the 
spectrum of health care providers, Congress included 
modifications to Medicare in BBRA 1999. That act included the 
following provisions pertaining to Medicare home health care:
 1. Delays the 15-percent payment reduction required under the 
        PPS by BBA 1997 until 12 months after implementation of 
        the PPS and requires the Secretary to report within 6 
        months after implementation of the PPS on the need for 
        the 15 percent or some other reduction.
 2. Provides HHAs with a payment of $10 per beneficiary for 
        administration of the OASIS questionnaire to new home 
        health patients for services furnished during cost 
        reporting periods in fiscal year 2000. One-half of the 
        payment will be made in April 2000 and the remainder at 
        cost report settlement. It requires GAO to study the 
        costs of collecting these data and to report by April 
        2000.
 3. Requires that per-beneficiary limits under BBA 1997 IPS be 
        increased by 2 percent in cost reporting periods 
        starting in fiscal year 2000 for those HHAs for which 
        the per-beneficiary limit is below the national median; 
        the increase will not be included in the base for 
        determining the budget neutral PPS amounts.
 4. Establishes the surety bond requirement for HHAs as the 
        lesser of $50,000 or 10 percent of an HHA's Medicare 
        payments in the previous year and requires the bond to 
        be in effect for 4 years (or longer if ownership of the 
        HHA changes). Prior periods covered by a bond may be 
        counted and Medicare and Medicaid bond requirements are 
        to be coordinated.
 5. Excludes DME from the home health consolidated billing 
        requirement of BBA 1997.
 6. Clarifies that the increase in the home health PPS in 
        fiscal year 2002 and fiscal year 2003 will be the MBI 
        minus 1.1 percentage points.
 7. Requires the Medicare Payment Advisory Commission to study 
        and report within 2 years of enactment on the 
        feasibility and advisability of excluding rural HHAs 
        and beneficiaries living in rural areas from the home 
        health PPS.
    Because the new PPS will go into effect in fiscal year 
2001, the BBRA 1999 provisions pertaining to home health care 
under Medicare were not extensive. However, the provision that 
had caused substantial concern in the industry was the 
requirement that the PPS be designed to reduce total Medicare 
payments for home health care by 15 percent compared with pre-
PPS levels. Because of the sharp declines in payments to HHAs 
under the IPS, some said that a further 15-percent reduction 
would affect the availability of home health services and make 
care inaccessible to beneficiaries, particularly those with 
extensive and costly care needs. Congress addressed that issue 
in BBRA 1999 by delaying implementation of the 15-percent 
reduction until 12 months after implementation of the PPS and 
requiring the Secretary to evaluate and report, within 6 months 
of implementation of the PPS, on the need for payment 
reductions.

                            Hospice Services

Coverage and benefits
    Medicare covers hospice care, in lieu of most other 
Medicare benefits, for terminally ill beneficiaries. Hospice 
care emphasizes palliative medical care, that is, relief from 
pain, and supportive social and counseling services for the 
terminally ill and their families. Services are provided 
primarily in the patient's home. The Tax Equity and Fiscal 
Responsibility Act of 1982 (TEFRA), Public Law 97-248, first 
authorized Medicare part A coverage for hospice care (for the 
period November 1, 1983 to October 1, 1986); in 1986, Congress 
made the hospice benefit a permanent part of the Medicare 
Program, effective April 7, 1986.
    For a person to be considered terminally ill and eligible 
for Medicare's hospice benefit, the beneficiary's attending 
physician and the medical director of the hospice (or physician 
member of the hospice team) must certify that the individual 
has a life expectancy of 6 months or less. As a result of an 
amendment in BBA 1997, persons electing hospice are covered for 
two 90-day periods, followed by an unlimited number of 60-day 
periods. The medical director or physician member of the 
hospice team must recertify at the beginning of each new 
election period that the beneficiary is terminally ill. 
Services must be provided under a written plan of care 
established and periodically reviewed by the individual's 
attending physician and by the medical director of the hospice.
    Covered hospice services include the following: (1) nursing 
care provided by or under the supervision of a registered 
nurse; (2) physical or occupational therapy or speech-language 
pathology services; (3) medical social services; (4) services 
of a home health aide who has successfully completed a training 
program approved by the Secretary of the U.S. Department of 
Health and Human Services (DHHS); (5) homemaker services; (6) 
medical supplies (including drugs and biologicals) and the use 
of medical appliances; (7) physician services; (8) short-term 
inpatient care (including both respite care and procedures 
necessary for pain control and acute and chronic symptom 
management); (9) counseling, including dietary counseling, for 
care of the terminally ill beneficiary and for adjustment to 
the patient's death (bereavement counseling is not a 
reimbursable service); and (10) any other item or service which 
is specified in a patient's plan of care and which Medicare may 
pay for.
    Medicare's hospice benefit is intended to be principally an 
in-home benefit. For this reason, Medicare law prescribes that 
respite care, or relief for the primary care giver of the 
terminally ill patient, may be provided only on an 
intermittent, nonroutine, and occasional basis and may not be 
provided consecutively over longer than 5 days. In addition, 
the aggregate number of inpatient care days provided in any 12-
month period to Medicare beneficiaries electing hospice care 
can not exceed 20 percent of the total number of days of 
hospice coverage provided to these persons.
    Only two covered hospice services--outpatient drugs or 
biologicals and respite care--are subject to coinsurance. 
Outpatient drugs and biologicals are subject to a coinsurance 
amount that approximates 5 percent of the cost of the drug to 
the hospice program, except that the amount may not exceed $5 
per prescription. For respite care, coinsurance equals 5 
percent of program payments for respite, but may not exceed 
Medicare's inpatient hospital deductible during a hospice 
coinsurance period (defined as the period when hospice election 
is not broken by more than 14 days).
    Covered services must be provided by a Medicare-certified 
hospice. Certified hospices must be either public agencies or 
private organizations primarily engaged in providing covered 
hospice services and must make services available on a 24-hour 
basis, in individuals' homes, on an outpatient basis, and on a 
short-term inpatient basis. Hospices must routinely and 
directly provide substantially all of the following ``core'' 
services: nursing care, medical social services, and counseling 
services. The remaining hospice services may be provided either 
directly by the hospice or under arrangements with others. If 
services are provided through arrangements with other 
providers, the hospice must maintain professional management 
responsibility for all such services, regardless of the 
facility in which the services are furnished.
    The hospice program must also have an interdisciplinary 
group of personnel which includes at least one registered 
professional nurse and one social worker employed by the 
hospice; one physician employed by or under contract with the 
hospice; plus at least one pastoral or other counselor.
Reimbursement
    In implementing Medicare's hospice benefit, HCFA 
established a prospective payment methodology. Under this 
methodology, hospices are paid one of four prospectively 
determined rates, which correspond to four different levels of 
care, for each day a Medicare beneficiary is under the care of 
the hospice. Reimbursement will thus vary by the length of the 
patient's period in the hospice program as well as by the 
characteristics of the services (intensity and site) furnished 
to the beneficiary.
    The four rate categories for reimbursing hospices are:
 1. Routine home care day.--Routine home care day is a day on 
        which an individual is at home and is not receiving 
        continuous home care. The routine home care rate is 
        paid for every day a patient is at home and under the 
        care of the hospice regardless of the volume or 
        intensity of the services provided on any given day as 
        long as less than 8 hours of care are provided. This 
        rate is $98.96 for services provided between October 1, 
        1999 and September 30, 2000.
 2. Continuous home care day.--A continuous home care day is a 
        day on which an individual receives hospice care 
        consisting predominantly of nursing care on a 
        continuous basis at home. Home health aide or homemaker 
        services or both may also be provided on a continuous 
        basis. Continuous home care is furnished only during 
        brief periods of crisis and only as necessary to 
        maintain the terminally ill patient at home. Home care 
        must be provided for a period of at least 8 hours 
        before it would be considered to fall within the 
        category of continuous home care. Payment for 
        continuous home care will vary depending on the number 
        of hours of continuous services provided. Currently 
        this rate is $577.59 for 24 hours or $24.07 per hour.
 3. Inpatient respite care day.--An inpatient respite care day 
        is one on which the individual who has elected hospice 
        care receives care in an approved facility on a short-
        term (not more than 5 days at a time) basis for the 
        respite of his caretakers. Currently this rate is 
        $102.37.
 4. General inpatient care day.--A general inpatient care day 
        is one on which an individual receives general 
        inpatient care in an inpatient facility for pain 
        control or acute or chronic symptom management which 
        cannot be managed in other settings. Care may be 
        provided in a hospital, skilled nursing facility (SNF), 
        or inpatient unit of a freestanding hospice. Currently 
        this rate is $440.22.
    To reflect differences in wage levels from area to area, 
each of these four payment rates is adjusted by the hospital 
area wage index used by Medicare for adjusting payments to 
hospitals, SNFs, and HHAs. HCFA separates each of the national 
payment rates for hospice care into components which reflect 
the estimated proportion of the rate attributable to wage and 
nonwage costs. The wage component of each rate is then adjusted 
by the index applicable to the area in which the hospice is 
located.
    The Omnibus Budget Reconciliation Act (OBRA) of 1989 
required that the payment rates be increased by the hospital 
market basket percentage increase each fiscal year. OBRA 1993, 
however, reduced the updates for the prospective rates as 
follows: for fiscal year 1994, the hospital market basket 
percentage increase minus 2.0 percentage points; for fiscal 
years 1995 and 1996, the hospital market basket minus 1.5 
percentage points; and for fiscal year 1997, market basket 
minus 0.5 percentage points.
    BBA 1997 reduced the hospice payment update to market 
basket minus 1.0 percentage point for each of fiscal years 
1998-2002.
    Medicare law requires that payments to a hospice for care 
furnished over the period of a year be limited to a ``cap 
amount.'' The cap amount is applied on an aggregate rather than 
a case-by-case basis. Therefore, each individual hospice's cap 
amount is calculated by multiplying the yearly cap amount by 
the number of Medicare beneficiaries who received hospice care 
from the hospice during the cap period. Medicare defines a cap 
year as the period from November 1 through October 31 of the 
following year. The cap amount for the period November 1, 1999 
through October 31, 2000, is $15,313.
Updates to hospice payment amounts
    Hospice daily payment rates for routine home care, 
continuous home care, inpatient respite care, and general 
inpatient care are updated annually by the increase in the 
hospital MBI. BBA 1997 reduced these updates to the market 
basket increase minus 1.0 percentage point for fiscal years 
1998-2002. However, BBRA 1999 increased the rates otherwise in 
effect for fiscal year 2001 by 0.5 percentage points and for 
fiscal year 2002 by 0.75 percentage points.
    The hospice cap amount is adjusted annually by the 
percentage change in the medical care component of the Consumer 
Price Index for All Urban Consumers (CPI-U).
 Hospice program data
    Table 2-18 shows that the number of hospices participating 
in Medicare grew from 553 in fiscal year 1988 to 2,293 in 
fiscal year 1998.
    Total Medicare payments for hospice care in fiscal year 
1988, 2 years after it became a permanent part of the Medicare 
Program, totaled less than $120 million. Daily payment rates in 
effect in 1989 were increased by 20 percent in 1990, which led 
to more serv-


                                                TABLE 2-18.--NUMBER OF HOSPICES BY PROVIDER TYPE, 1988-98
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Month and year
                      Provider type                      -----------------------------------------------------------------------------------------------
                                                           7/88    7/89    5/90     9/91     1/92     5/93     8/94     6/95    10/96    12/97    12/98
--------------------------------------------------------------------------------------------------------------------------------------------------------
Freestanding............................................     191     220     260      394      404      499      608      656      762      875      897
Hospital based..........................................     138     182     221      282      291      341      401      447      507      559      567
Skilled nursing facility based..........................      11      13      12       10       10       10       12       18       21       23       22
Home health agency based................................     213     286     313      325      334      438      583      674      800      829      807
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................     553     701     806    1,011    1,039    1,288    1,604    1,795    2,090    2,286    2,293
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Program Operations.

ices becoming available. As shown in table 2-19, Medicare 
payments for hospice care increased to $445.4 million in fiscal 
year 1991 and subsequently to nearly $2.2 billion in fiscal 
year 1998.
    From fiscal year 1991 through fiscal year 1998 the number 
of beneficiaries using Medicare's hospice benefit increased 
nearly fourfold, from 108,413 to 401,140, although the average 
payment per beneficiary increased by less than one-third, from 
$4,108 to $5,412.
    The data show that the average number of days of hospice 
utilization increased sharply from fiscal year 1991 to fiscal 
year 1992, reflecting the 20-percent increase in payment rates 
and concomitant increase in availability and utilization of 
this care. However, after 1995 the average duration of coverage 
declined. The decline may be the result of: (1) continued 
reluctance of physicians to refer patients to hospice rather 
than continue treatment; (2) the availability of new treatment 
therapies; and (3) increased regulatory scrutiny and focused 
medical reviews.