Medicare Program; Prospective Payment System for Home Health Agencies

SUMMARY: This proposed rule would establish requirements for the new

prospective payment system for home health agencies as required by

section 4603 of the Balanced Budget Act of 1997, as amended by section

5101 of the Omnibus Consolidated and Emergency Supplemental

Appropriations Act for Fiscal Year 1999. These include the

implementation of a prospective payment system for home health

agencies, consolidated billing requirements, and a number of other

related changes. The prospective payment system described in this rule

would replace the retrospective reasonable-cost-based system currently

used by Medicare for the payment of home health services under Part A

and Part B.

DATES: Comments will be considered if we receive them at the

appropriate address, as provided below, no later than 5 p.m. on

December 27, 1999.

ADDRESSES: Mail written comments (1 original and 3 copies) to the

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: HCFA-1059-P, P.O. Box 8010,

Baltimore, MD 21244-8010.

If you prefer, you may deliver your written comments (1 original

and 3 copies) to one of the following addresses: Room 443-G Hubert H.

Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201,

or Room C5-14-03, 7500 Security Boulevard, Baltimore, MD 21244-1850.

FOR FURTHER INFORMATION CONTACT:

Bob Wardwell (Project Manager), (410) 786-4607.

Susan Levy (Payment Policy), (410) 786-9364.

Debbie Chaney (Data), (410) 786-8164.

Randy Throndset (Data), (410) 786-0131.

SUPPLEMENTARY INFORMATION: Because of staffing and resource

limitations, we cannot accept comments by facsimile (FAX) transmission.

In commenting, please refer to file code HCFA-1059-P. Comments received

timely will be available for public inspection as they are received,

generally beginning approximately 3 weeks after publication of a

document, in Room 443-G of the Department's offices at 200 Independence

Avenue, SW., Washington, DC, on Monday through Friday of each week from

8:30 a.m. to 5 p.m. (phone: (202) 690-7890).

Copies: To order copies of the Federal Register containing this

document, send your request to: New Orders, Superintendent of

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calling the order desk at (202) 512-1800 or by faxing to (202) 512-

2250. The cost for each copy is $8. As an alternative, you can view and

photocopy the Federal Register document at most libraries designated as

Federal Depository Libraries and at many other public and academic

libraries throughout the country that receive the Federal Register.

To assist readers in referencing sections contained in this

document, we are providing the following table of contents.

Table of Contents

Preamble

I. Background

A. Current System for Payment of Home Health Agencies

B. Requirements of the Balanced Budget Act of 1997 and the

Omnibus Consolidated and Emergency Supplemental Appropriations Act

for Fiscal Year 1999 for the Development of a Prospective Payment

System for Home Health Agencies

C. Summary of the Research

D. Home Health Agency Prospective Payment--Overview

1. Payment Provisions--National Episode Payment Rate

a. Episode Definition

b. National Episode Payment Rate

2. Payment Provisions--Split Payment

3. Payment Provisions--Outlier Payments

4. Payment Provisions--Transition Period

5. Consolidated Billing for Home Health Agencies

6. Medical Review Under the Prospective Payment System

7. Continued Access to Quality Home Health Services Under the

Prospective Payment System

8. Implementation of the Prospective Payment System

II. Prospective Payment System for Home Health Agencies

A. National 60-Day Episode Payment

1. Costs and Services Covered by the 60-Day Episode Payment

2. Data Sources Used for the Development of the 60-Day Episode

Payment

a. Audited Cost Report Data

b. Home Health Agency Market Basket Index

c. Claims Data

d. Hospital Wage Index

e. Abt Associates Case-Mix Research Project Data

3. Methodology Used for the Calculation of the 60-Day Episode

Payment Amount

a. Cost Data--60-Day Episode Payment

b. Utilization Data--60-Day Episode Payment

c. Updating the Data

d. Standardization Factor

e. Budget-Neutrality Factor

4. Methodology Used for Low-Utilization Payments

5. Methodology Used for Outlier Payments

B. Examples of National Standardized 60-Day Episode Payment

Amounts and Low-Utilization Payment Adjustments

C. Design and Methodology for Case-Mix Adjustment of 60-Day

Episode Payments

1. Background on Clinical Model Patient Classification System

2. The Clinical Model--Home Health Resource Group Classification

System

3. Determining the Case-Mix Indices

4. Application of the Clinical Model Patient Classification

System

5. Background on the Case-Mix Research Project for a National

Home Health PPS

III. Audited Cost Report Data Sample Methodology

IV. HHA PPS Framework--How the System Works

A. Start of Care

B. End of Episode

C. Recertification of 60-day Episode Period

D. Determining Whether a Beneficiary Is Under an Established

Plan of Care

E. Medical Review

F. Overpayments and Adjustments

G. Implementation Effective Date for PPS

H. Claims Processing Transition

I. Quality System

J. Illustrative Examples

1. 60-day Episode--No Recertification

2. 60-day Episode with Recertification

3. Partial Episode Payment Adjustment Examples

4. Significant Change in Condition Payment Adjustment Examples

K. Required Schedule for Completing OASIS Supplemented by One

Additional Case-Mix Item

L. Relationship Between Payment and OASIS

M. Transition of Assessment and Certification Dates for

Beneficiaries Under an Established Home Health Plan of Care

1. Use of Current OASIS Assessment for Purposes of Case-Mix

Classification

2. Physician Certification Dates for Beneficiaries Under an

Established Home Health Plan of Care

V. Consolidated Billing

A. Background

B. HHA Consolidated Billing Legislation

C. Types of Services That Are Subject to the Provision

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D. Effects of This Provision

E. Effective Date for Consolidated Billing

VI. Provisions of the Proposed Rule

VII. Response to Comments

VIII. Collection of Information Requirements

IX. Regulatory Impact Statement

A. Background

1. General

2. 60-Day Episode Definition and Payment Rate

3. Case Mix

B. Alternatives Considered

1. Unit of Payment

a. 60-Day National Episode Payment

b. Low-Utilization Payment Adjustment

c. Partial Episode Payment Adjustment

d. Significant Change in Condition Adjustment

2. Outlier Payments

3. Transition

4. Operational Options

5. Consolidated Billing

C. Effects of this Proposed Rule

D. Rural Hospital Impact Statement

Regulations Text

In addition, because of the many terms to which we refer by

abbreviation in this rule, we are listing these abbreviations and

their corresponding terms in alphabetical order below:

ADL--Activities of Daily Living

BBA--Balanced Budget Act of 1997

COPs--Conditions of participation

DME--Durable medical equipment

FIs--Fiscal intermediaries

FFY--Federal fiscal year

FMR--Focused medical review

FY--Fiscal year

HHA--Home health agency

HIC--Health insurance claim

HHRGs--Home Health Resource Groups

IADL--Instrumental Activities of Daily Living

IPS--Interim payment system

LUPA--Low-utilization payment adjustment

MS--Medical social services

MSA--Metropolitan Statistical Area

NCSB--Neurological, cognitive, sensory, and behavioral variables

OASIS--Outcome and Assessment Information Set

OBQI--Outcome based quality improvement

OCESAA--Omnibus Consolidated and Emergency Supplemental

Appropriations Act for Fiscal Year 1999

OES--[U.S. Bureau of Labor Statistics] Occupational Employment

Survey

OSCAR--On-line Survey and Certification System

OT--Occupational therapy

PEP--Partial episode payment

PPS--Prospective payment system

PT--Physical therapy

RHHI--Regional Home Health Intermediary

RUGs--Resource Utilization Groups

SCIC--Significant Change in Condition

SN--Skilled nursing service

SP--Speech-language pathology

I. Background

A. Current System for Payment of Home Health Agencies

The Balanced Budget Act of 1997 (Public Law 105-33) (BBA), enacted

on August 5, 1997, significantly changed the way we pay for Medicare

home health services. Until the implementation of a home health

prospective payment system (PPS), home health agencies (HHAs) receive

payment under a cost-based reimbursement system, referred to as the

interim payment system and generally established by section 4602 of the

BBA. The interim payment system imposes two sets of cost limits for

HHAs. Section 4206(a) of the BBA reduced the home health per-visit cost

limits from 112 percent of the mean labor-related and nonlabor per-

visit costs for freestanding agencies to 105 percent of the median. In

addition, HHA costs are subjected to an aggregate per-beneficiary cost

limitation. For those providers with a 12-month cost reporting period

ending in Federal fiscal year (FFY) 1994, the per-beneficiary cost

limitation is based on a blend of costs (75 percent on 98 percent of

the agency-specific costs and 25 percent on 98 percent of the

standardized regional average of the costs for the agency's census

region). For new providers and those providers without a 12-month cost-

reporting period ending in FFY 1994, the per-beneficiary limitation is

the national median of the per-beneficiary limits for HHAs. Under the

interim payment system, HHAs are paid the lesser of (1) actual costs;

(2) the per-visit limits; or (3) the per-beneficiary limits. Effective

October 1, 1997, the interim payment system exists until prospective

payment for HHAs is implemented.

On October 21, 1998, the Omnibus Consolidated and Emergency

Supplemental Appropriations Act (OCESAA), 1999 (Public Law 105-277) was

signed into law. Section 5101 of OCESAA amended section 1861(v)(1)(L)

of the Social Security Act (the Act) by providing for adjustments to

the per-beneficiary and per-visit limitations for cost-reporting

periods beginning on or after October 1, 1998. We had published a

notice with comment period establishing the cost limitations for cost

reporting periods beginning on or after October 1, 1998 in the Federal

Register that was entitled ``Medicare Program; Schedules of Per-Visit

and Per-Beneficiary Limitations on Home Health Agency Costs for Cost

Reporting Periods Beginning On or After October 1, 1998'' (HCFA-1035-

NC) on August 11, 1998 (63 FR 42912). OCESAA made the following

adjustments to these limitations:

Providers with a 12-month cost reporting period ending during FY

1994, whose per-beneficiary limitations were less than the national

median, which is to be set at 100 percent for comparison purposes, will

get their current per-beneficiary limitation plus \1/3\ of the

difference between their rate and the adjusted national median per-

beneficiary limitation. New providers and providers without a 12-month

cost-reporting period ending in FFR 1994 whose first cost-reporting

period begins before October 1, 1998 will receive 100 percent of the

national median per-beneficiary limitation.

New providers whose first cost-reporting periods begin during FFY

1999 will receive 75 percent of the national median per-beneficiary

limitation as published in the August 11, 1998 notice. In the case of a

new provider or a provider that did not have a 12-month cost-reporting

period beginning during FFY 1994 that filed an application for HHA

provider status before October 15, 1998 or that was approved as a

branch of its parent agency before that date and becomes a subunit of

the parent agency or a separate freestanding agency on or after that

date, the per-beneficiary limitation will be set at 100 percent of the

median. The per-visit limitation effective for cost-reporting periods

beginning on or after October 1, 1998 is set at 106 percent of the

median instead of 105 percent of the median, as previously required in

the BBA.

There is contingency language for the home health PPS provided in

the BBA that was also amended by section 5101 of OCESAA. If the

Secretary for any reason does not establish and implement the PPS for

home health services, the Secretary will provide for a reduction by 15

percent to the per-visit cost limits and per-beneficiary limits, as

those limits would otherwise be in effect on September 30, 2000.

B. Requirements of the Balanced Budget Act of 1997 and the Omnibus

Consolidated and Emergency Supplemental Appropriations Act for Fiscal

Year 1999 for the Development of a Prospective Payment System for Home

Health Agencies

Section 4603(a) of the BBA provides the authority for the

development of a PPS for all Medicare-covered home health services paid

on a reasonable cost basis that will ultimately be based on units of

payment by adding section 1895 to the Act entitled ``Prospective

Payment For Home Health Services.''

Section 5101(c) of OCESAA amends section 1895(a) of the Act by

removing the transition into the PPS by cost-reporting periods and

requiring all HHAs to be paid under PPS effective upon the

implementation date of the system. Section 1895(a) of the Act now

states ``Notwithstanding section 1861(v),

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the Secretary shall provide for portions of cost-reporting periods

occurring on or after October 1, 2000, for payments for home health

services in accordance with a prospective payment system established by

the Secretary under this section.''

Section 1895(b)(1) of the Act requires the Secretary to establish a

PPS for all costs of home health services. Under this system all

services covered and paid for on a reasonable-cost basis under the

Medicare home health benefit as of the date of enactment of the BBA,

including medical supplies, will be paid on the basis of a prospective

payment amount. The Secretary may provide for a transition of not

longer than 4 years during which a portion of the prospective payment

may be agency-specific as long as the blend does not exceed budget-

neutrality targets.

Section 1895(b)(2) of the Act requires the Secretary in defining a

prospective payment amount to consider an appropriate unit of service

and the number, type, and duration of visits furnished within that

unit, potential changes in the mix of services provided within that

unit and their cost, and a general system design that provides for

continued access to quality services.

Section 1895(b)(3)(A)(i) of the Act requires that (1) the

computation of a standard prospective payment amount include all costs

of home health services covered and paid for on a reasonable cost basis

and be initially based on the most recent audited cost report data

available to the Secretary, and (2) the prospective payment amounts be

standardized to eliminate the effects of case mix and wage levels among

HHAs.

Section 5101(c) of OCESAA modifies the effective date of the

budget-neutrality targets for HHA PPS by amending section

1895(b)(3)(A)(ii) of the Act. Section 1895(b)(3)(A)(ii) of the Act, as

amended, requires that the standard prospective payment limitation

amounts be budget neutral to what would be expended under the current

interim payment system with the limits reduced by 15 percent at the

inception of the PPS on October 1, 2000.

Section 5101(d)(2) of OCESAA also modifies the statutory provisions

dealing with the home health market basket percentage increase. For

fiscal years 2002 or 2003, sections 1895(b)(3)(B)(i) and (b)(3)(B)(ii)

of the Act, as so modified, require that the standard prospective

payment amounts be increased by a factor equal to the home health

market basket minus 1.1 percentage points. In addition, for any

subsequent fiscal years, the statute requires the rates to be increased

by the applicable home health market basket index change.

Section 1895(b)(3)(C) of the Act requires the Secretary to reduce

the prospective payment amounts if the Secretary accounts for an

addition or adjustment to the payment amount made in the case of

outlier payments. The reduction must be in a proportion such that the

aggregate reduction in the prospective payment amounts for the given

period equals the aggregate increase in payments resulting from the

application of outlier payments.

Section 1895(b)(4) of the Act governs the payment computation.

Sections 1895(b)(4)(A)(i) and (b)(4)(A)(ii) of the Act require the

standard prospective payment amount to be adjusted for case mix and

geographic differences in wage levels. Section 1895(b)(4)(B) of the Act

requires the establishment of an appropriate case-mix adjustment factor

that explains a significant amount of the variation in cost among

different units of services. Similarly, section 1895(b)(4)(C) of the

Act requires the establishment of wage adjustment factors that reflect

the relative level of wages and wage-related costs applicable to the

furnishing of home health services in a geographic area compared to the

national average applicable level. These wage-adjustment factors may be

the factors used by the Secretary for purposes of section 1886(d)(3)(E)

of the Act.

Section 1895(b)(5) of the Act gives the Secretary the option to

grant additions or adjustments to the payment amount otherwise made in

the case of outliers because of unusual variations in the type or

amount of medically necessary care. Total outlier payments in a given

fiscal year cannot exceed 5 percent of total payments projected or

estimated.

Section 1895(b)(6) of the Act provides for the proration of

prospective payment amounts between the HHAs involved in the case of a

patient electing to transfer or receive services from another HHA

within the period covered by the prospective payment amount.

Section 1895(d) of the Act limits review of certain aspects of the

HHA PPS. Specifically, there is no administrative or judicial review

under sections 1869 or 1878 of the Act, or otherwise, of the following:

the establishment of the transition period under 1895(b)(1) of the Act,

the definition and application of payment units under section

1895(b)(2) of the Act, the computation of initial standard prospective

amounts under 1895(b)(3)(A) of the Act (including the reduction

described in section 1895(b)(3)(A)(ii) of the Act), the establishment

of the adjustment for outliers under 1895(b)(3)(C) of the Act, the

establishment of case-mix and area wage adjustments under 1895(b)(4) of

the Act, and the establishment of any adjustments for outliers under

1895(b)(5) of the Act.

Section 4603(b) of the BBA amends section 1815(e)(2) of the Act by

eliminating periodic interim payments for HHAs effective October 1,

2000.

Section 4603(c) of the BBA sets forth the following conforming

amendments: Section 1814(b)(1) of the Act is amended to indicate that

payments under Part A will also be made under section 1895 of the Act;

section 1833(a)(2)(A) of the Act is amended to require that home health

services, other than a covered osteoporosis drug, are paid under HHA

PPS, and section 1833(a)(2) is amended by adding a new subparagraph (G)

regarding payment of Part B services at section 1861(s)(10)(A) of the

Act; and section 1842(b)(6)(F) is added to the Act and section

1832(a)(1) of the Act is amended to include a reference to section

1842(b)(6)(F), both governing the consolidated billing requirements.

Section 4603(d) of the BBA was amended by section 5101(c)(2) of

OCESAA by changing the effective date language for the HHA PPS and the

other changes made by section 4603 of the BBA. Section 4603(d) provided

that: ``Except as otherwise provided, the amendments made by this

section shall apply to portions of cost reporting periods occurring on

or after October 1, 2000.'' This change requires all HHAs to be paid

under HHA PPS effective October 1, 2000 regardless of the current cost-

reporting period. This change is discussed in detail in section IV.H.

of this regulation.

Section 4603(e) of the BBA sets forth the contingency language for

HHA PPS. If the Secretary for any reason does not establish and

implement HHA PPS on October 1, 2000, the per-visit cost limits and

per-beneficiary limits under the interim payment system will be reduced

by 15 percent.

C. Summary of the Research

The PPS described in the following sections is a culmination of

substantial research efforts focusing on the areas of HHA payment and

quality.

The Per-Visit Prospective Payment Demonstration

Description of the Demonstration

Under the per-visit demonstration, administered under a contract to

Abt Associates, Inc., 47 agencies in California, Florida, Illinois,

Massachusetts, and Texas were phased

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into the project at the beginning of their fiscal years starting in

October 1990 and continuing for 3 years. Of the 47 agencies, 26 were

randomly assigned to be paid prospectively, and the remaining 21 were

paid retrospectively, subject to the statutory limitations. The

participating agencies were representative nationally in terms of their

average costs per visit for each visit type and their patients'

characteristics.

For the first year, prospective per-visit rates by type of visit

(for example, skilled nursing or occupational therapy) were set for

each demonstration agency based on the agency's cost for the year

preceding its entry into the project and adjusted for inflation. If the

base year cost used to set the rates exceeded the statutory cost

limits, it was reduced to satisfy the limits. For the second and third

years, the agency-specific rates were updated for inflation. The

demonstration payment rates were adjusted annually for changes in

agencies' volume. Payments were adjusted to share losses and profits

with us.

The opportunity to earn a profit on visits was expected to motivate

demonstration agencies to hold increases in cost per visit below the

rate of increase in their payment per visit. It was expected that

agencies would make a variety of changes to enhance efficiency and hold

down both service-related and administrative costs. However, it was

recognized that costs to the Medicare program could potentially

increase under prospective rate setting, if agencies furnished more

visits than they would have under cost reimbursement, or if agencies'

efforts to lower costs also lowered quality of care and led to

increased use of other Medicare services. It was the role of the

evaluation contractor to study these and other potential consequences.

Evaluation of the Demonstration

We contracted with Mathematica Policy Research, Inc. to perform an

independent evaluation of the demonstration. The objectives of the

evaluation were to describe and assess the impacts on the Medicare

program and its beneficiaries and to understand possible changes in

agency decision making and operations as a result of the incentives of

the new payment method.

Major data resources for the evaluation included Medicare claims,

enrollment files, case studies, and site visits with participating

providers, an annual mail survey of demonstration agencies, interviews

with organizations involved in the demonstration (for example, fiscal

intermediaries), provider cost reports, patient surveys, patient intake

data collected by the providers, home health certification and plan of

treatment forms (Form 485), and records of quality assurance reviews

from the New England Research Institute, the demonstration's quality

assurance contractor.

Several types of multivariate regression models were used to

estimate treatment-control differences. For example, analysis of costs

per visit and visit volume involved a comparison of cost reports during

the 3 years of the demonstration and the 3 prior years. Using a

regression procedure, the treatment group's change in average visit

cost and average number of visits was compared to the control group's

change. Impacts on visits per episode were estimated using episode-

level data from claims, with separate analyses conducted for each

demonstration year. Patient survey data and quality assurance reviews

were among the sources for analyses of quality impacts, which

controlled for potential confounding factors such as patient and agency

characteristics.

Qualitative research to understand agency responses used case study

methods. Twenty-two cases for study (11 treatment and 11 control

agencies) were drawn from across the five States to represent the

variation in a range of provider characteristics, such as auspices,

size, and urban or rural location. The agencies were followed over most

of the 3 years of the demonstration. Data were collected through site

visit and telephone interviews, as well as from cost reports and a mail

survey of agencies. The case studies focused on several key aspects of

demonstration operations, such as strategic planning, clinical costs,

administrative costs, relations between the agencies and administrative

organizations, and perceptions about a national program of prospective

payment.

Evaluation Results

Cost

The per-visit PPS did not result in more cost control, nor did it

induce excessive volume. There were no statistically significant

differences between treatment and control agencies in the change in

average cost per visit, regardless of type of visit. For example, the

cost per skilled nursing visit for treatment agencies increased from an

average of about $81 to about $92 between the predemonstration and

demonstration periods. Control agencies' average costs grew by a

similar amount. A related analysis found that a subgroup of agencies--

freestanding agencies with a large proportion of Medicare visits--

exhibited treatment-control differences in profits and ability to

control cost increases. Their greater success in generating profits and

in holding down Medicare cost increases suggested that HHAs can be

induced to control costs. Nonetheless, this possible demonstration

effect was too small to produce a difference in impacts for the sample

as a whole.

Utilization

The analysis of volume suggested no impact from prospective rate

setting. Average total visits for the two groups grew at similar rates

between the base year and the end of the demonstration--21.3 percent

per year for the treatment group and 23.6 percent per year for the

control group. Visit growth for three specific types of visits (skilled

nursing, aide, and physical therapy) was statistically equal for the

two groups as well. Small sample sizes prevented reliable estimation

for the remaining three visit types.

Treatment group agencies did not differentially increase the number

of visits per episode. They provided slightly fewer physical therapy

visits per episode, a result that is inconsistent with the incentives

to increase visits under visit-based rate setting and may not have been

a result of the demonstration. The duration of episodes did not differ

between treatment and control agencies, although the length of aide

visits was significantly shorter for treatment agencies. However, the

evaluators concluded this was probably not due to the prospective

payment, and this finding was not supported by data from other

evaluation sources. The demonstration had no effects on patients' use

of other Medicare-covered services, such as hospital care or

physicians' visits. Finally, per-visit PPS did not appear to affect

patients' use of non-Medicare services or on the amount of informal

care received.

Quality and Access

The evidence suggested that quality of care was unaffected by per-

visit prospective payment. Analyses of quality assurance data uncovered

no impacts. Access-related provider behavior--such as agencies becoming

more selective about the patients they accepted--was unaffected. For

example, treatment and control group patients differed significantly in

all 3 years on only two of the many patient characteristics at

admission--clinical stability and pre-admission location. There were no

significant differences in the proportion of admissions with

[[Page 58138]]

characteristics suggesting a need for long visits.

Qualitative Findings

The first year of the demonstration was a time of transition,

during which participants were adjusting to demonstration operations,

which included collection of special patient-intake data and use of a

single fiscal intermediary. Agencies reported that these adjustments

imposed costs that limited their ability to reduce overall costs. The

environment of the first year was one of change and competition, which

continually compelled providers to assess their services and service

areas, payment sources, and marketing activities. For many providers,

it was also a time of large volume growth and an increasing proportion

of more acutely ill patients. Agencies were continuing to seek

efficiency measures, as they had before the demonstration. The

evaluators did not observe any effect of the demonstration itself on

such clinical activities as referral procedures, intake procedures,

assessment and care planning, and quality assurance procedures.

Relations with the fiscal intermediary were generally smooth, although

some problems needed resolution, particularly during the early months.

By the third year of the demonstration, it was clear that the

incentives introduced by the switch to visit-based prospective payment

did not dramatically alter the overall environment of treatment

agencies relative to controls. This outcome seemed attributable to

background conditions deriving from Medicare program cost limits and

allowable cost determinations. In addition, the combined effects of

competition in the industry and cost control policies in other health

sectors created a climate in which agencies, both treatment and

control, felt pressures to produce services efficiently. Yet most

identified little that could be done to reduce their costs. The

evaluators concluded that the prospective payment incentive may have

been responsible for some slight additional attention to cost cutting.

Specific examples included more attention to efficiency and

profitability in the strategic plans of treatment as compared to

control agencies, more branch offices opened by treatment than control

agencies, more use of computers by treatment than control agencies, and

higher productivity expectations for staff of treatment compared to

control agencies.

Summary of Results

The evaluation findings overall suggested that prospective per-

visit rates are unlikely to generate sizable cost savings for the

Medicare program. Agencies appeared to respond modestly to this

incentive to be more efficient. Due to the limited size of the project,

the evaluators had little opportunity to assess whether prospective

rate setting worked better for certain types of agencies. Nevertheless,

the demonstration suggested that agencies can make some changes to slow

the rate of increase in costs per visit.

The Per-Episode Prospective Payment Demonstration Description of

the Demonstration

The per-episode PPS demonstration, administered under a contract to

Abt Associates, Inc., began in June 1995. The demonstration was

scheduled to terminate by December 1998. At the participating agencies'

request, the demonstration has been extended pending the implementation

of a national, episode-based PPS. However, as originally planned, the

collection of evaluation data terminated at year-end 1998.

Ninety-one agencies from five sites--California, Florida, Illinois,

Massachusetts, and Texas--were randomly assigned to either the

treatment group (PPS payment, 48 agencies) or the control group

(conventional cost-based reimbursement, 43 agencies). The agencies

phased into the demonstration at the beginning of their 1996 fiscal

year.

The payments received by the treatment group agencies for the first

120 days of an episode are based on each agency's own costs in the

fiscal year immediately preceding its entry into the demonstration,

updated for inflation and adjusted for changes in its case mix. While

each agency is ``at risk'' during the first 120 days after admission

for all home health visits the patient needs, we reimburse treatment

agencies for up to 99 percent of fiscal-year losses, up to the

statutory payment limits. Profits in excess of the specified statutory

limits are shared with us. For visits occurring after the initial 120

days, agencies are reimbursed using prospective per-visit rates.

Episodes are defined by gaps of at least 45 days in the receipt of

Medicare home health care. Only after the 120-day payment period and a

45-day gap in services could an agency receive a new episode-based

payment for a given Medicare beneficiary.

Treatment agencies can reduce the cost of care they furnish during

the 120-day payment period by reducing visits, changing the mix of

visits to make less costly visits a larger proportion of visits,

reducing per-visit costs, or some combination of all three. The cost-

reducing activities raise the possibility that quality of care might

deteriorate under episode-based payment. Quality reduction could occur

through several cost-saving mechanisms, such as inadequate provision of

expensive therapeutic services, excessive reductions in visit

frequency, or excessive shortening of visits.

Evaluation of the Demonstration

We contracted with Mathematica Policy Research, Inc. to evaluate

the episode-based demonstration. As with the visit-based demonstration

evaluation, this project sought to answer policy questions on two main

issues: program impacts and agency decisions and operations. The

program evaluation addresses impacts on home health utilization, other

Medicare services utilization, non-Medicare services utilization,

quality and access, and cost. The analysis of agency decisions and

operations seeks to provide useful insights for the implementation of a

national program of episode-based prospective payment.

We also contracted with the Center for Health Policy Research at

the University of Colorado to perform quality assurance monitoring. All

agencies participating in the demonstration are required to collect

patient status data at the start of care, at discharge, at 120 days

after admission if the patient is still on service, at admission to an

inpatient facility for 48 hours or more, and upon resumption of care

after an inpatient stay. Outcomes are reported at the agency level.

Based on outcome report findings, agencies are requested to engage in

follow-up activities to investigate processes of care, and specific

agencies are selected for an additional process of care review. In

addition to outcome monitoring for individual agencies, the quality

assurance project reports on patterns of outcomes for treatment and

control agencies.

The evaluation results to date are based largely on data from the

first year of the demonstration. Most of the analyses are based on

approximately 51,000 home health episodes from 85 of the demonstration

agencies (6 dropped out or had inadequate data). All admissions

occurring between an agency's start date (beginning of its 1996 fiscal

year) and August 1996 are included. Medicare claims files provided data

on the outcomes variables describing the use of services. Claims

[[Page 58139]]

data were supplemented with data from the quality assurance contractor

for the analyses of quality impacts. Claims data and cost report data

were used to research the impact of the demonstration on agency costs.

Data from a survey of patients conducted during the second and third

demonstration years were the basis for a study of utilization of non-

Medicare services and selected quality outcomes.

For most statistical analyses, regression models were used to

estimate treatment-control differences. Use of regression analysis

permits the isolation of PPS effects from other potential causes of

treatment-control differences, such as a difference in the proportion

of agencies affiliated with a hospital. Data collected at admission for

case-mix adjustment and from prior Medicare claims histories provided

measures of pre-admission patient characteristics that were used to

account for potential pre-existing treatment-control differences in

patient populations. Other control variables were obtained from agency

cost reports and the demonstration contractor.

A qualitative research component of the evaluation is based on case

study methods. For a judgmental sample of 67 demonstration agencies,

primary data were collected during site visits early in the

demonstration and supplemented by agency documents. Freestanding

agencies (56) predominated in the sample. About half of the

freestanding agencies were for-profit, and half were voluntary or

private nonprofit organizations (primarily visiting nurse

associations). Administrative data on these agencies came from our

provider files. The researchers also conducted telephone interviews

with representatives of the demonstration contractor and fiscal

intermediaries.

Interim Evaluation Results

Cost

On average, episode prospective payment reduced the cost per

episode by $419, or 13 percent. This appears to have resulted from the

combined effects of fewer visits and higher average cost per visit,

compared to agencies not paid prospectively. For treatment agencies,

the rising cost per visit would have increased the cost per episode by

$377, whereas decreases in visits per episode would have reduced the

cost per episode by $656, for a net decline of $280. For control

agencies, a relatively small increase in cost per episode ($139, or

about 4 percent) was due almost entirely to increases in costs per

visit. Because treatment agencies' costs declined by $280 per episode

instead of rising by $139, the overall effect of prospective payment

was $419.

The impact on cost per episode was similar across different types

of agencies, except that small agencies (less than 30,000 visits in the

base year) exhibited a significantly smaller effect than large

agencies. Small agencies failed to decrease their cost per episode in

the first demonstration year, evidently because they added to their

cost per visit more, and lowered their number of visits less, than

larger treatment agencies. This response may be due in part to more

pronounced economies of scale among small agencies, with the result

that they incur relatively high cost increases as volume declines.

Utilization

Based on first-year findings, per-episode PPS appears to have a

substantial impact on the amount of services delivered during the 120-

day payment period. Few other impacts on the pattern of service

delivery were observed. The number of visits in a 120-day risk period

was 17 percent lower for patients in treatment agencies compared to

controls. Treatment agencies delivered an average of 37 visits,

compared to an average of 45 for control agencies. This difference was

primarily due to fewer skilled nurse visits, home health aide visits,

and medical social worker visits. Episode prospective payment reduced

the average length of episodes (within the first 120 days) by about 15

percent. About 25 percent of stays exceeded 120 days under prospective

payment, compared to about 35 percent without prospective payment.

Except for occupational therapy, the proportion of patients

receiving care in each home health discipline changed little under

episode payment. The one-third reduction in the user rate for

occupational therapy (to about 8 percent of patients) may be due to

fewer patients receiving assessment visits from occupational

therapists. Prospective payment appeared to have no effect on the

proportion of visits per episode accounted for by any particular home

health discipline.

These findings generally applied to agencies regardless of size,

nonprofit status, affiliation status (hospital or freestanding), or use

pattern (that is, whether the agency provided more or less than the

average number of visits during a base year, given its case mix). One

exception to this rule was that the reduction in total visits was

significantly greater for agencies with a high-use practice pattern

than for agencies with a low-use practice pattern.

The reduction in visits does not lead to compensating utilization

in other parts of the health care system. The analysis of utilization

and reimbursement for other Medicare-covered services during the 120-

day payment period found that prospective payment did not affect the

use of reimbursement for these services. This suggests that a reduction

in home health utilization at the level observed under the

demonstration does not adversely affect care quality or shift costs to

services in other settings (acute care hospitals, emergency rooms,

skilled nursing facilities, other HHAs, and outpatient hospital

departments). Questions on the patient survey addressed ``spillover

effects'' on certain non-Medicare services. Prospective payment was

associated with a lower likelihood of admission to an assisted living

facility. It may have reduced the likelihood of admission to a nursing

home. It did not affect the likelihood of receipt of nonresidential

services, such as personal care aide and adult day care. Nor did it

affect the likelihood of receipt of care from relatives or friends.

Quality

The interim analysis of quality impacts found few differences in

patient outcomes between treatment and control agencies, and when

differences were found they were small. The three basic sources of

quality evaluation data to date are claims, the patient survey, and

patient assessment data.

Analysis of claims data indicated that episode PPS patients have

significantly lower emergency room use. There were no significant

differences due to episode PPS in any other outcomes studied from the

claims data, including institutional admissions for a diagnosis related

to the home health diagnosis, and mortality.

Results from the patient survey on client satisfaction suggested

that both treatment and control group clients were generally satisfied.

On three specific components of satisfaction with agency staff,

treatment-group clients were found to be somewhat less satisfied than

control group clients, although satisfaction levels were quite high in

both groups. Measures of health and functional outcomes from the survey

offered equivocal evidence for small negative effects of prospective

payment in a few of the functional outcomes. Those results are

preliminary and will require further study.

Measures constructed from the patient status assessments at the

start of care and at discharge or follow-up consist of indicators of

improvement or

[[Page 58140]]

stabilization for 17 outcomes, such as improvement in pain or

ambulation. Results from these data source are provisional, in part

because differences in the timing of quality outcome data collection

between the treatment and control groups could cause unreliable

comparisons. As noted earlier, treatment agency patients tend to be

discharged sooner. Their outcome measurements may reflect less

improvement because of the earlier average observation point.

The comparisons demonstrated one significant difference suggesting

improvement in measures of confusion was more likely among treatment

agencies. There were also two differences in the stabilization

indicators, one favoring the treatment group and one the control group;

however, both differences were small. Analysis of the assessment data

by the quality assurance contractor using different methods suggested

no consistent evidence that per-episode payment under the demonstration

improves or harms patient outcomes. Several separate analyses conducted

by the contractor revealed a mix of small impacts, some favoring the

treatment group and others favoring the control group. A recent

analysis of the second year of the demonstration did not show any

statistically significant differences between treatment and control

agencies. See Center for Health Policy Research, Executive Summary of

Quality Assurance Activities and Findings to Date, December 1998.

Qualitative Findings

The qualitative evaluation results to date come from the case study

activities conducted early in the demonstration. Almost all of the case

study agencies, which included both PPS agencies and controls, had

taken steps to reduce their per-visit costs in the 3 years before the

site visits. They had done so primarily to make themselves more

attractive to managed care organizations from whom they were seeking

contracts. Strategies to cut costs varied. About half of the agencies

sought to reduce administrative costs (for example, through

consolidating functions or positions) or to stabilize them while

growing their volume. About one agency in five reduced per-visit costs

by making technology investments, such as portable computers for home

health workers. In addition, about one in six took an approach such as

using lower-cost staff for intake, scheduling and record keeping;

introduction of productivity standards and controls on overtime hours;

moving away from hourly or salary payment of staff to per-visit

payment; reducing travel costs by restructuring staffing of geographic

areas or improving scheduling programs to reduce mileage; and reducing

supply costs, through, for example, centralized purchasing.

Half of the visited treatment agencies reported plans for specific

initiatives to reduce per-episode costs spurred by their participation

in the demonstration project. These initiatives included closer

supervision of utilization through such measures as better review of

the initial plan of treatment and requiring special justification for

any visits beyond those originally approved; use of care protocols for

patients with selected diagnoses; greater reliance on community

services or informal caregivers; replacement of some visits by

telephone contacts; speeding up patient education in self-care;

eliminating multiple visits in a day; making greater use of specialists

such as dietitians and wound healing experts; focusing on patient

rehabilitation or environmental modifications to reduce patient need

for personal care; and use of multidosing pumps for intravenous therapy

patients, so that patients and caregivers can administer a larger

proportion of therapy treatments without assistance.

From their case studies conducted early in the demonstration, the

evaluators concluded that treatment agencies did not change their

behavior in ways that threatened access or quality of care. They did

not change referral and patient admission practices to avoid costly

patients or recruit lower-care ones. Many agencies were struggling to

maintain a stream of referrals. They were not in a position to shun

referral sources, and they did not do so. Some of the strategies being

planned seemed likely to improve care quality, such as strategies to

achieve quicker patient independence. For certain other strategies, the

long-term consequences might be variable. For example, the success of

greater reliance on informal caregivers and community resources would

depend on the adequacy of these auxiliary resources.

Remaining Evaluation Activities

The evaluation of the second year of the demonstration is expected

to be completed by fall 1999. A draft report that includes analysis of

utilization effects beyond the first 120 days has been received and is

under review. The findings are consistent with the initial results

reported earlier: Episode prospective payment reduced the average

number of visits to a patient in the year following admission to home

health care by 24 percent compared to the levels under cost-based

reimbursement. Reductions in services occurred both during and after

the 120-day period covered by the episode payment, and they were of a

similar proportion for each service type. Prospectively paid agencies

achieved these reductions by shortening the overall length of service

and by lowering the frequency of visits provided. Reductions occurred

among all subgroups of agencies and patients investigated, and they

were stable between the first and second years of the demonstration.

Subsequent reports will evaluate the consequences of these service

reductions on patient health and access, non-home health expenditures,

and other outcomes. These reports will include results from a follow-up

patient survey at 8 months from admission that will address impacts on

quality of care and use of non-Medicare health services over a longer

term than did the first survey. There will be further case study

results on agency response to the demonstration and an extension of

previous work on cost impacts to include an analysis of agencies'

financial performance. Finally, supplementary analyses will consider

the representativeness of the demonstration sample and the patient

selection behavior of agencies.

Case-Mix Research

Case-mix adjustment is a prerequisite for an effective national

home health PPS. With a prospectively set payment unit, providers have

an incentive to seek profits by economizing on patient care during the

covered period. For example, providers can try to economize by

admitting patients with lower care needs, or by furnishing fewer and

lower-quality services. Case-mix adjustment seeks to counteract this

incentive by modifying the prospective payments according to patient

need for services. To administer the case-mix adjustment system,

patients are evaluated and then classified into groups with differing

expected need. Varying payments for the groups will reduce provider

incentives to economize inappropriately. Case-mix adjusted payments are

intended to produce appropriate compensation for providers while

retaining opportunities to manage care efficiently.

Background of the Case-Mix Project

In the late 1980s, the Secretary funded several empirical studies

that sought to increase understanding of the major issues facing PPS

designers, particularly the factors that define case mix. As reported

in the 1989 Report to Congress, studies investigating case-mix issues

[[Page 58141]]

were necessary because methodologies at that time were insufficiently

tested on a large scale with Medicare patients. A sizable,

comprehensive Medicare database was considered necessary to test

existing methodologies and possibly develop new ones.

We assembled this data resource under a cooperative agreement with

the Georgetown University School of Nursing (Virginia K. Saba,

``Develop and Demonstrate a Method for Classifying Home Health Patients

to Predict Resource Requirements and to Measure Outcomes, Georgetown

University School of Nursing, February 1991). Subsequent attempts to

test existing case-mix methodologies using the Georgetown data

suggested that indicators of home health treatments could play a

substantial role in case-mix adjusters of acceptable predictive

accuracy. Examples of treatment measures include indicators for

specific skilled nursing activities, such as teaching diabetic care and

infusion care, and physical, occupational, and speech therapy. Two

basic case-mix adjustment methodologies tested with these data

demonstrated comparable accuracy for the purposes of paying providers

prospectively (Brown, Randall S., Barbara R. Phillips, and Valarie E.

Cheh, et al. ``Case Mix Analysis Using Georgetown Data: Home Health

Prospective Payment Demonstration.'' Princeton, NJ: Mathematica Policy

Research, Inc., November 25, 1991). These two approaches were a

regression-based approach and a classification-method approach that

uses computer algorithms to find groups of similar patients.

Although case-mix research on the Georgetown data and other

smaller-scale data sets demonstrated progress in testing and developing

case-mix methodologies, a significant concern lingered. Research had

demonstrated the explanatory power of treatment information, but

treatments are not necessarily a suitable basis for payment. Treatment

planning and execution is subject to some discretion on the part of the

provider. This means a case-mix system predicated on treatments planned

or delivered may be vulnerable to manipulation for profit maximization.

In the early 1990s, the per-visit prospective payment demonstration

provided another relatively large source of data to continue case-mix

adjuster development. The database was not as varied as the Georgetown

database, but it was sizable, containing 11,000 cases. The

expendability of possibly manipulable treatment variables was

specifically addressed in the Georgetown research. This demonstration

tested the impact of using less treatment information with the best

methodologies. When measures of treatments considered highly or

moderately vulnerable to provider manipulation were dropped from the

study's case-mix adjuster, the predictive accuracy of the adjuster was

poor. The researchers recommended that in future research we study

additional patient characteristics data needed to make up for the loss

of explanatory power from the treatments (Phillips, Barbara R., Randall

S. Brown, Jennifer L. Schore, Amy C. Klein, Peter Z. Schochet, Jerrold

W. Hill, and Dexter Chu. ``Case-Mix Analysis Using Demonstration Data:

Home Health Prospective Payment Demonstration.'' Princeton, NJ:

Mathematica Policy Research, Inc., December 21, 1992; and Phillips,

Barbara R. ``Improving the Accuracy of Case-Mix Adjusters for Per-

episode Home Health Prospective Payment: Measures of Alternative

Sources of Care and Patient and Caregiver Characteristics.'' Draft

Report. Princeton, NJ: Mathematica Policy Research, Inc., April 27,

1995).

By 1994, we had launched a comprehensive review of home health care

policies called the Medicare Home Health Initiative. One result was a

recommendation to revise the HHA conditions of participation (COP). The

revision would require a standard assessment instrument to be used in a

program of continuous quality improvement. We subsequently adopted a

comprehensive list of specific patient assessment elements to implement

this quality improvement system (final regulations were published

January 25, 1999 (64 FR 3747 and 64 FR 3764)). Known as the Outcome and

Assessment Information Set (OASIS), these elements cover patient

demographics and health history, living arrangements, supportive

assistance, sensory status, integumentary status, respiratory status,

elimination status, neuro/emotional/behavioral status, Activities of

Daily Living (ADLs) and Instrumental Activities of Daily Living

(IADLs), medications, equipment management, emergent care use, and

discharge disposition. OASIS offers a fairly detailed examination of

the patient's condition. Importantly, if OASIS elements could be the

basis for a case-mix adjuster as well as continuous quality

improvement, we could implement home health payment and quality reforms

while minimizing data burdens on providers.

Case-Mix Research Project for a National Home Health PPS

In 1996, in anticipation of the Medicare program's eventual

adoption of OASIS assessment data, we began research with a sample of

90 HHAs to develop a case-mix adjustment system for use under a future

national prospective payment for home health care. The project was

conducted under contract to Abt Associates, Inc., of Cambridge, Mass.

(Contract Number 500-96-0003/TO2). The purpose of this project was to

develop a case-mix adjuster based on OASIS assessment elements and,

potentially, on additional assessment items that could enhance the

case-mix adjuster's predictive accuracy. To assure its relevancy to

Medicare's needs, the project collected data on a large cohort of

Medicare patients admitted to a broad sample of Medicare-certified HHAs

in late 1997 and early 1998. An important feature of the Abt Associates

research is the use of improved measurement methods compared to

previous studies. Improvements in measurement for the dependent

variable, resource costs, and for the explanatory variables of patient

characteristics allow the system's developers to reach a clearer

understanding of the contribution of individual items to case-mix

measurement. This leads to improved predictive accuracy for the case-

mix groups.

Another important feature of the Abt Associates project is its

objective of developing easily understandable patient case-mix

groupings. We sought a system of groups that uses recognizable clinical

categories and adheres to clinicians' logic as they assess a patient's

care needs.

The case-mix system resulting from the Abt Associates project was

developed from statistical analysis, review of the literature, and

consultation with home health clinicians. Government policy and

research experts helped with the development process to ensure the

administrative feasibility and policy relevance of the final product.

The system is a straightforward method of combining 20 data

elements to measure case mix. The data elements measure three basic

dimensions of case mix: clinical severity factors, functional status

factors, and service utilization factors. Each possible value for each

data element used in a dimension is given a score. Scores were

developed through statistical analysis of the agencies' data. Within

each dimension, scores on assessment items are summed, and the

resulting summation is used to

[[Page 58142]]

assign a patient to a severity level on the given dimension. The case-

mix system defines a set of 80 groups from all possible combinations of

severity levels across the three dimensions.

The process of defining a structure for the case-mix system, and of

selecting items for the dimensions, is described in detail in Abt

Associates, Second Interim Report, August 1999. The process of

selecting items for the three case-mix dimensions employed not only

statistical criteria for predictive accuracy, but also qualitative

criteria relating to policy objectives, incentives to provide good

care, susceptibility to gaming, apparent item subjectivity, and

administrative feasibility. Further discussion of the item selection

process is provided below in section II.C.

The first case-mix system dimension is the clinical severity

dimension. It is measured by OASIS items pertaining to the following

clinical conditions and risk factors: diagnoses involving orthopedic,

neurological, or diabetic conditions; therapies used at home (that is,

intravenous therapy or infusion therapy, parenteral and enteral

nutrition); vision status; pain frequency; status of pressure ulcers,

stasis ulcers, and surgical wounds; dyspnea; urinary and bowel

incontinence; bowel ostomy; and cognitive/behavioral problems such as

impaired decisionmaking and hallucinations. This dimension captures

significant indicators of clinical need from several OASIS subdomains,

including patient history, sensory status, integumentary status,

respiratory status, elimination status, and neuro/emotional/behavioral

status.

The second case-mix dimension is the functional status dimension,

comprised of six Activities of Daily Living: upper and lower body

dressing, bathing, toileting, transferring, and locomotion. These items

come from the ADL/IADL subdomain of the OASIS assessment instrument.

The third case-mix dimension is the services utilization dimension.

This dimension is measured via two basic kinds of data elements. The

first describes the patient's pre-admission location in the 14 days

preceding admission to home care. The pre-admission location is

recognized among clinicians and in the literature as an indicator for

the amount and type of care likely to be needed by a patient. It comes

from the patient history subdomain of OASIS. The second is a

utilization variable from the period of the home health episode itself.

This variable is receipt of home health therapies totaling at least 8

hours. The data for this variable will come from the HHA's billing

records. Ideally, the case-mix system should rely on data elements that

do not depend on treatments planned or received; however, the case-mix

research project found that a measure of therapy received is extremely

powerful in explaining resource use, even after all other predictive

patient characteristics are used in the system. Consequently, we

decided to incorporate a measure of therapy. It is adopted under a

definition designed to minimize its vulnerability to provider

manipulation. A patient must need and use at least 8 hours of home

health therapies to be assigned to a therapy case-mix group. In the Abt

Associates sample, a minority of therapy users receive at least 8 hours

of therapy. It is probable that many of the remaining therapy users

received relatively little therapy beyond services from therapists for

evaluation purposes. The therapy receipt definition in the case-mix

system is intended to preserve access to therapy for patients with

significant therapy needs. Patients receiving relatively little therapy

or those with therapy use limited to evaluation services with or

without a small amount of therapy are included in nontherapy groups.

Their relative resource cost is accounted for in those groups.

For each dimension, additional measures of patient characteristics

or utilization were considered and tested before arriving at the final

set of data elements in the recommended model. The proposed set of data

elements is our best recommendation after an intensive process of

subjecting the items to statistical analysis, policy criteria, criteria

pertaining to clinical care incentives and gaming vulnerability that

might be introduced, reliability-related criteria, and administrative

feasibility considerations.

The recommended case-mix system performs well in terms of overall

predictive accuracy. It explains 32 percent of the variation in

resource use over a 60-day episode. The 60-day episodes available for

case-mix system development from the Abt Associates research sample

pertained to the first 60 days from admission. However, a sizable

number of observations was assembled from the study sample to evaluate

the explanatory power for the subsequent 60-day period of care. From

data available to the case-mix project to date, we find that the

explanatory power of the groups is similar regardless of whether the

episode is the patient's first 60 days or the subsequent 60 days

following the start of care. The presence of certain data elements in

the case-mix adjustment model may help explain the statistical finding

suggesting that the case-mix model is inherently self-adjusting to

changes in patient characteristics that drive resource use over a

sequence of 60-day episodes. Examples comprise the preadmission

location variable, the functional status elements, the therapy receipt

variable, and the ulcers/wound status variables. As the accumulating

data permit, we will continue to test the model's explanatory power on

later 60-day units.

The data and methods of the case-mix development project are

described in further detail in sections II.A.2 and II.C below and in

Abt Associates, Inc., Second Interim Report, August 1999. Comments on

specific issues of model design and implementation are being solicited

as noted in section II.C.

D. Home Health Agency Prospective Payment--Overview

1. Payment Provisions--National Episode Payment Rate

a. Episode Definition

The PPS will apply to all home health services furnished by all

HHAs participating in the Medicare program. Section 4603(a) of the BBA

adds section 1895(b)(1) to the Act. Section 1895(b)(1) requires all

services covered and paid on a reasonable cost basis under the Medicare

home health benefit as of the date of the enactment of the BBA,

including medical supplies, to be paid on the basis of a prospective

payment amount under HHA PPS. Durable medical equipment (DME) is a

covered home health service that is not currently paid on a reasonable

cost basis, but paid on a fee schedule basis when covered as a home

health service under the Medicare home health benefit. Under HHA PPS,

DME covered as a home health service as part of the Medicare home

health benefit will continue to be paid under the DME fee schedule.

Thus, a separate additional payment amount based on the DME fee

schedule in addition to the prospective payment amount for home health

services will be made for DME covered as a home health service under

PPS.

In compliance with section 1895(b)(2) of the Act, requiring the

Secretary to determine the unit of payment under PPS, we have analyzed

the number, type, duration, and costs of visits furnished within the

proposed episode payment. In addition, we will discuss the general

system design that provides for continued access to quality services in

section IV.J. of this regulation.

Preliminary results from the Phase II per-episode HHA PPS

demonstration have provided information regarding how length of

episodes are affected by prospective payments and how analysis

[[Page 58143]]

from the National Claims History File can show the existing use and

length of service. Preliminary results from the Phase II per-episode

PPS demonstration indicate that about 60 percent of episodes paid under

PPS were completed within 60 days and 73 percent within 120 days. These

episode completion rates are about 5 to 10 percentage points higher

than rates for the control group under the demonstration. These

findings indicate that PPS should result in shorter average length of

episodes.

We also conducted analysis on an episode database created from the

1997 National Claims History File using 60-day episodes. Data from the

1997 national claims history suggest that the proportions completing

their episodes in the first and second month are slightly lower than

the proportions for the PPS demonstration control group. We interpret

the demonstration findings to indicate that national PPS should use

shorter average episodes. From the 1997 national claims history, we

find at the end of a full year, 20 percent of home health beneficiaries

have not yet completed their episodes. This indicates the need to

provide continuing episode payments to capture the long-stay home

health patient under PPS since the volume of long-stay cases exceeds

the capacity of an outlier policy.

60-Day National Episode Payment

Recognizing that OASIS data will be captured on a 60-day cycle and

current Medicare plan of care certification requirements govern a

bimonthly period of time, we are proposing a 60-day episode as the

basic unit of payment for the HHA PPS. We are proposing that a new 60-

day episode begins with the first Medicare billable visit as day 1 and

ends on and includes the 60th day from the start-of-care date. The next

continuous episode recertification period would begin on day 61 and end

on and include day 120. We are proposing the requirement that the 60-

day episode payment covers one individual for 60 days of care

regardless of the number of days of care actually furnished during the

60-day period unless there is one of the following intervening events

during the 60-day episode: (1) A beneficiary elected transfer; (2) a

discharge resulting from the beneficiary reaching the treatment goals

in the original plan of care (not defined as a significant change in

condition during an existing plan of care) and return to the same HHA;

or (3) a significant change in condition resulting in a new case-mix

assignment. The significant change in condition is a change not

anticipated in the original plan of care or as part of the expected

course of the patient's response to treatment. The significant change

in condition must be sufficient to require a new OASIS assessment and

thus, resulting in a change in the case-mix assignment.

The intervening event defined above as (1) a beneficiary elected

transfer or (2) a discharge and return to the same HHA during a 60-day

episode, starts a new 60-day episode for purposes of payment, OASIS

assessment, and physician certification of the plan of care. The

original 60-day episode payment is proportionally adjusted to reflect

the actual length of time the beneficiary remained under the agency's

care prior to the intervening event of the beneficiary elected transfer

or the discharge and return to the same HHA during the 60-day episode.

The proportional payment adjustment that closes the original 60-day

episode payment is called the partial episode payment adjustment or PEP

adjustment. We are proposing the PEP adjustment to the original 60-day

episode payment in order to equitably recognize the intervening events

of a beneficiary elected transfer or a discharge and return to the same

HHA over the course of a 60-day episode of home health care.

Since we are proposing to close out the initial episode payment

with a PEP adjustment and restart the 60-day episode clock under an

existing episode due to a beneficiary elected transfer, we are

concerned that these transfer situations could be subject to

manipulation. Therefore, we are proposing not to apply the PEP

adjustment in the situation of transfers between organizations of

common ownership. A determination of whether an individual (or

individuals) or organization possesses significant ownership or equity

in the provider organization and the supplying organization, in order

to consider if the organizations related by common ownership, will be

made on the basis of the facts and circumstances in each case. This

rule applies whether the provider organization or supplying

organization is a sole proprietorship, partnership, corporation, trust

or estate, or any other form of business organization, proprietary or

nonprofit. In the case of a nonprofit organization, ownership or equity

of interest will be determined by reference to the interest in the

assets of the organization. In the situation of a transfer among

organizations of common ownership, we are proposing that the HHAs under

common ownership look to the initial HHA for payment. Therefore, PEP

adjustment would not apply in situations of transfers among HHAs under

common ownership.

The discharge and return to the same HHA during the 60-day episode

period is only recognized when a beneficiary has reached all treatment

goals in the original plan of care for the 60-day episode. The original

plan of care must be terminated with no anticipated need for additional

home health services for the balance of the 60-day period. The

discharge cannot be a result of a significant change in condition. In

order for the situation to be defined as a PEP adjustment due to

discharge and return to the same HHA during the 60-day episode, the

discharge must be a termination of the complete course of treatment in

the original plan of care. We would not recognize any PEP adjustment in

an attempt to circumvent the more conservative payment made under the

significant change in condition payment adjustment discussed below.

If a patient experiences an intervening hospital stay during an

existing 60-day episode under an open plan of care, then the patient

would not have met all of the treatment goals in the plan of care.

Therefore, the intervening hospital admission during an existing 60-day

episode could result in a SCIC adjustment, but could not be considered

a discharge and return to the same HHA PEP adjustment.

The PEP adjustment is based on the span of days including the start

of care date (first billable service date through and including the

last billable service date) under the original plan of care prior to

the intervening event. The PEP adjustment is calculated using the span

of days (first billable service date through and including the last

billable service date) under the original plan of care as a proportion

of 60. The proportion is multiplied by the original case mix and wage

adjusted 60-day episode payment. For example, a patient is assigned to

a 60-day episode payment of $3000. Day 1 through Day 30 the patient is

served by HHA-1. Day 1 is the first billable service date and Day 30 is

the last billable service provided by HHA-1 under the original plan of

care. The beneficiary elects to transfer to HHA-2 on Day 35. The first

ordered service for the beneficiary under the new plan of care is Day

38. Day 38 starts a new 60-day episode clock for purposes of payment,

OASIS assessment, and physician certification of the plan of care. Day

38 becomes Day 1 of the new 60-day episode. The final payment to HHA-1

is proportionally adjusted to reflect the length of time the

beneficiary remained under its care. HHA-1 would receive a PEP

adjustment equal to 30/60

[[Page 58144]]

* $3000 = $1500. The initial percentage payment will be adjusted

accordingly to reflect the PEP adjustment. Several illustrative PEP

adjustment examples are provided in section IV. of this regulation. An

HHA may also receive a low-utilization payment adjustment instead of

the PEP adjustment described in this section of the regulation or an

outlier payment in addition to the PEP adjustment described in section

IV. of this regulation.

We are proposing the requirement that the 60-day episode payment

covers the individual for 60 days of care unless one of three

intervening events occurs. The PEP adjustment described above

encompasses the two intervening events defined as a beneficiary elected

transfer or a discharge and return to the same HHA over the course of a

60-day episode of home health care. We are proposing that the third

intervening during a 60-day episode of home health care that could

trigger a change in payment level would be a significant change in the

patient's condition. We are proposing the significant change in

condition payment adjustment (SCIC adjustment) to be the proportional

payment adjustment reflecting the time both prior and after the patient

experienced a significant change in condition during the 60-day

episode. The proposed SCIC adjustment occurs when a beneficiary

experiences a significant change in condition during a 60-day episode

that was not envisioned in the original plan of care. In order to

receive a new case mix assignment for purposes of SCIC payment during

the 60-day episode, the HHA must complete an OASIS assessment and

obtain the necessary physician change orders reflecting the significant

change in treatment approach in the patient's plan of care.

The SCIC adjustment is calculated in two parts. The first part of

the SCIC adjustment reflects the adjustment to the level of payment

prior to the significant change in the patient's condition during the

60-day episode. The second part of the SCIC adjustment reflects the

adjustment to the level of payment after the significant change in the

patient's condition occurs during the 60-day episode. The first part of

the SCIC adjustment is determined by taking the span of days (first

billable service date through the last billable service date) before

the patient's significant change in condition (defined below) as a

proportion of 60 multiplied by the original episode payment amount. The

original episode payment level is proportionally adjusted using the

span of time the patient was under the care of the HHA prior to the

significant change in condition that warranted an OASIS assessment,

physician change orders indicating the need for a significant change in

the course of the treatment plan, and the new case mix assignment for

payment at the end of the 60-day episode.

The second part of the SCIC adjustment reflects the time the

patient is under the care of the HHA after the patient experienced the

significant change in condition during the 60-day episode that

warranted the new case mix assignment for payment purposes. The second

part of the SCIC adjustment is a proportional payment adjustment

reflecting the time the patient will be under the care of the HHA after

the significant change in condition and continuing until the end of the

60-day episode. Once the HHA completes the OASIS, obtains the necessary

physician change orders reflecting the need for a new course of

treatment in the plan of care, and assigns a new case mix level for

payment, the second part of the SCIC adjustment begins. The second part

of the SCIC adjustment is determined by taking the span of days (first

billable service date through the last billable service date) after the

patient experiences the significant change in condition through the

balance of the 60-day episode as a proportion of 60 multiplied by the

new episode payment level resulting from the significant change. The

initial percentage payment provided at the start of the 60-day episode

will be adjusted at the end of the episode to reflect the first and

second parts of the SCIC adjustment (or any applicable medical review

or (LUPA) discussed below) determined at the final billing for the 60-

day episode. Illustrative examples are provided in section IV.J.4. of

this proposed rule.

As discussed above, we are concentrating additional monitoring

resources on the events that would trigger the PEP adjustment and SCIC

adjustment. We are also planning to analyze the data from the

demonstration sites to determine the frequency of a (1) beneficiary

elected transfer, (2) discharge and return to the same HHA during the

60-day episode, or (3) significant change in condition, in order to

establish a baseline of information to determine how frequently these

events occur prior to PPS. Based on this information we will establish

a baseline, identify agencies which differ significantly from it, and

concentrate monitoring resources on those agencies.

In order to address the needs of longer stay patients, at this time

we are proposing not to limit the number of 60-day episode

recertifications in a given fiscal year. There is the potential for

unlimited consecutive episodes. Recertification of and payment for

consecutive 60-day episodes is, of course, dependent on OASIS

assessment and the patient's eligibility for continued medically

necessary Medicare home health services. We believe the consecutive 60-

day episode recertification and payment will ensure continued access to

the Medicare home health benefit without exceeding the statutory

budget-neutrality targets.

We believe the 60-day episode provides an appropriate time frame

for purposes of prospective payment for many reasons. The 60-day

episode period is the basic time frame under which HHAs have

historically been required to manage and project home health care needs

of beneficiaries in order to comply with current plan of care

certification requirements for Medicare home health plans of care. The

60-day episode period also basically matches the reassessment schedule

for OASIS, and this parallel time frame will permit case-mix adjustment

of each episode. Further, the 60-day episode captures the majority of

stays experienced in the Phase II per-episode HHA PPS demonstration.

As discussed above, about 60 percent of the Phase II per-episode

HHA/PPS demonstration patients completed their episodes within 60 days.

If capturing a majority of the patients is one criterion for the

episode length, we now have evidence from the Phase II per-episode PPS

demonstration that a 60-day episode will do so. A 120-day episode, as

tested in the Phase II per-episode HHA/PPS demonstration, also meets

this criterion, but we do not gain a significantly larger completion

percentage by lengthening the episode to 120 days. A 120-day episode

may result in more inequity in payments because of the larger risk of a

change in a patient's condition over the span of the longer episode. We

are specifically soliciting comments on the utility of a 60-day episode

period for purposes of prospective payment and the efficacy of

unlimited consecutive episode recertifications for eligible

beneficiaries in a given fiscal year.

Low-Utilization Payment Adjustment

As discussed above, the statute requires that the definition of the

unit of payment must take into consideration the number, type,

duration, mix , and cost of visits furnished within the unit of

payment. We are concerned with the financial incentive to provide

minimal services within an episode. We are also challenged by the

possible motivation to obtain an additional full 60-day episode payment

beyond a current episode by

[[Page 58145]]

furnishing the absolute minimum of additional services. Utilization

incentives potentially change from overutilization under the cost based

payment system to underutilization under a prospective payment system.

We want to ensure that HHAs do not have an incentive to provide less

care than is necessary. Under such an approach, an HHA that provided

the minimum threshold number of visits or less during the 60-day

episode would receive a low utilization payment adjustment reflecting a

national average per-visit payment by discipline for the visits

actually provided during the episode. We believe this policy reduces

incentives to provide only one or two visits to beneficiaries to

trigger a full prospective payment and, in addition, makes it harder to

obtain either an initial or a second prospective payment by providing a

minimal number of additional services. As a result of our analysis, we

determined the need to recognize a low utilization payment adjustment

under HHA PPS.

Our next decision required us to determine the number of visits

that must be provided before a full 60 day prospective payment is made.

Increasing the number of visits required, decreases the potential for

agency gaming by providing a few additional services to obtain a full

prospective payment. Based on analysis of our episode database, we

concluded approximately 12 percent of current episodes constitute four

or fewer visits. We explored the option of a six or fewer visit

threshold for the low utilization payment adjustment and found

approximately 20 percent of episodes in our database contain six or

fewer visits. However, we recognize that these numbers may change under

a fully implemented PPS.

A potential advantage of the six or fewer visit threshold would be

to further reduce the number of episodes with only six or fewer visits

during a 60-day episode; that is, agencies will have incentives to

provide enough services to reach the threshold by increasing the number

of services delivered to individuals who currently receive only a few.

It would also make it harder to provide enough additional services to

game or trigger full prospective episode payments inappropriately.

However, the six visit threshold based on current data would result in

20 percent of all episodes under national HHA PPS being paid at the

lower per-visit amount. We are soliciting comments and supporting data

on the most appropriate threshold for the low utilization payment

adjustment. We also plan to focus our medical review resources on the

fourth or sixth visit, whichever is chosen in the final rule, to assure

the medical appropriateness of the visits which actually triggers a

full prospective episode payment.

We have developed our approach in the regulation to reflect the

four or fewer visit threshold for the low-utilization payment

adjustment. The methodology for the low-utilization payment adjustment

and all other payment calculations in this rule reflect the four or

fewer visit threshold. Under this proposed provision, a 60-day episode,

a PEP adjustment, or a SCIC adjustment with four or fewer visits would

be paid the national standardized per-visit amount by discipline for

each visit type furnished during the 60-day episode. However, we are

seeking comments and supporting data on the utility of the six or fewer

visit threshold for the low-utilization payment adjustment. We are

soliciting comments on the operational and financial impact of the low

utilization payment adjustment. We are also specifically seeking

comments on the potential financial impact on rural HHAs to comply with

this requirement.

We are concerned with the potential manipulation of the LUPA under

a pattern of certification of continuous home health episodes. Our

interest is focused on patterns of behavior involving two continuous

60-day episodes. We are concerned that the possibility of a 60-day

period may be too long for a second episode if the intensity of

services is greater in the earlier part of that second episode. We are

also concerned that agencies may have greater incentives to provide

five additional visits beyond the first 60-day episode so as to trigger

a second 60-day payment than they do at the beginning of the first

episode. We are analyzing data on the second and subsequent 60-day

episode and the distribution of the intensity of services within these

episodes. Based on this analysis, we are considering the following

possible alternative policies: (1) modify the proposed episode

definition; (2) extend the LUPA for the second and subsequent episodes

from four to six visits. We invite comment on these alternatives to the

policies presented in this proposed regulation.

b. National Episode Payment Rate

We propose that the HHA PPS use a 60-day national episode payment

rate. Section 1895(b)(3)(A)(i) of the Act requires--(1) the computation

of a standard prospective payment amount to include all costs of home

health services covered and paid for on a reasonable cost basis and to

be initially based on the most current audited cost report data

available to the Secretary, and (2) the prospective payment amounts to

be standardized to eliminate the effects of case mix and wage levels

among HHAs. Section 5101(c) of OCESAA amends section 1895(b)(3)(A)(ii)

of the Act, to require that the standard prospective payment amounts be

budget neutral to the amounts expended under the current interim

payment system as of the inception of the PPS on October 1, 2000, with

the limits reduced by 15 percent. The data used to develop the HHA PPS

rates were adjusted using the latest available market basket increases

occurring between the cost-reporting periods contained in our database

and September 30, 2001. Sections 1895(b)(3)(B)(i) and (b)(3)(B)(ii) of

the Act, as amended by section 5101(d)(2) of OCESAA, require the

standard prospective payment amounts for fiscal year 2002 or 2003 to be

increased by a factor equal to the home health market basket minus 1.1

percentage points. For any subsequent fiscal years, the statute

requires the rates to be increased by the applicable home health market

basket index change.

The national 60-day episode payment incorporates adjustments to

account for provider case mix using a clinical classification system

that accounts for the relative resource utilization of different

patient types. The classification system, The Clinical Model from Abt,

uses patient assessment data (from the Outcome and Assessment

Information Set (OASIS)) supplemented by one additional patient-

specific item regarding number of therapy hours received in the 60-day

episode period that is completed by HHAs to assign patients into one of

80 Home Health Resource Groups (HHRGs). The OASIS items and the

supplemental therapy item are discussed in detail in section II.C.2. of

this regulation. HHAs complete the OASIS assessment according to an

assessment schedule specifically designed for Medicare payment (see

section IV.L. of this regulation). The total case-mix-adjusted 60-day

episode payment is based on the initial OASIS assessment and the

supplemental item indicating projected therapy hours received in a 60-

day episode submitted at the start of the 60-day episode. The projected

number of therapy hours received (physical, speech-language pathology,

and occupational therapy in any combination) in a 60-day episode

reported at the start of the 60-day episode is confirmed by the actual

receipt of therapy via the line-item date visits submitted on the final

claim at the

[[Page 58146]]

end of the 60-day episode. The reconciliation of projected therapy use

with actual therapy services furnished during the 60-day episode has

the potential to decrease the final payment if actual therapy use

reported at the end of the episode does not correspond to the projected

therapy use provided at the start of the episode. We are proposing to

use visit utilization data as a proxy for time. The proxy approach is

discussed in detail in the case-mix methodology in section II.C.2. of

this regulation.

For Medicare billing purposes, there are codes associated with each

of the 80 HHRGs. The patient will be grouped into the appropriate case-

mix category from the OASIS assessment at the HHA. The case-mix

methodology consists of 19 OASIS items plus one supplemental non-OASIS

item. We are exploring the approach that the ``grouper'' software will

be provided to HHAs via the HAVEN software used for State transmission

of OASIS quality data. The OASIS assessment is fed into the grouper

logic at the HHA. The grouper logic selects the OASIS elements

supplemented by one additional non-OASIS item indicating projected

therapy hours (as translated into therapy visits) in a 60-day episode

needed to establish the case-mix group and determines the appropriate

case-mix category for the patient. The visit projection must be based

on the physician's orders in the plan of care certified by the

physician. The grouper logic generates a code. The code corresponds to

the appropriate case-mix category and would be placed on the claim at

the provider. The initial claim is submitted for an initial percentage

payment at the start of care (see section I.D.2. of this regulation on

percentage payments). As mentioned above, as applicable, the

confirmation of the projected number of therapy hours received during

the 60-day episode from the line-item date visit information submitted

at the end of the 60-day episode is used for pricing the final case-mix

adjusted payment. The pricer logic at the Regional Home Health

Intermediary (RHHI) will compute the final episode payment based on the

reconciliation of the projected therapy use received during the 60-day

episode with the actual therapy visits reported on the final claim

submitted at the end of the 60-day episode.

The confirmation of projected therapy services has the potential to

decrease the final payment if the actual therapy use reported at the

end of the episode does not correspond with the projected therapy use

furnished at the start of the episode. The 60-day case-mix adjusted

episode payment is intended to provide full payment for the patient for

the 60-day period except in the case of a partial episode payment

adjustment, low-utilization payment adjustment, outlier payment

adjustment, or a finding that the episode was not medically necessary

or covered due to medical review. We are seeking comments on our

approach to the case-mix assignment during the 60-day episode. We are

specifically seeking comments on potential effects on cash flow for

HHAs. Operational aspects of the system design are discussed in more

detail in section IV. of this regulation.

2. Payment Provisions--Split Payment

We are proposing a split percentage payment during the 60-day

episode period. We propose that there be two percentage payments

(initial and final) and two corresponding claims (initial and final)

per 60-day episode. First, the initial percentage payment will equal 50

percent of the estimated case-mix adjusted episode payment. Each

initial claim submitted for the initial percentage payment must be

based on a current OASIS-based case mix and supplemented, as

applicable, by one item indicating proposed therapy use in a 60-day

episode. Second, the final payment will equal 50 percent of the actual

case-mix adjusted episode payment. A new initial and final bill must be

submitted for each recertified 60-day episode period. For example,

patient is assessed via OASIS supplemented by the therapy variable, if

applicable, and is categorized by the grouper logic into HHRG group Y.

Included in HHRG group Y is a projected therapy use of 8 hours or more

in a 60-day period. The HHRG group case-mix adjusted payment for the

60-day episode is $2,000. The HHA submits the claim with the

corresponding code to HHRG group Y. The pricer at the RHHI computes 50

percent of the payment for HHRG group. The HHA receives an initial

payment of $1,000. At the end of the 60-day episode, the HHA bills for

the residual 50 percent final payment. The line-item date information

confirms the receipt of at least 10 therapy visits as a proxy for time.

The final claim is submitted for payment. The pricer at the RHHI

confirms the line-item date information. No increase or decrease

adjustment is necessary for therapy use. The pricer computes the 50

percent residual final payment. The HHA receives a final payment of

$1,000. The initial percentage payment will be adjusted to reflect a

LUPA, PEP adjustment, SCIC adjustment, or medical review determination

as applicable.

Operational aspects of the split payment relationship to the system

design are discussed in detail in section III. of this regulation. We

are specifically soliciting comments on the impact on HHAs to

financially and operationally comply with the split percentage payment

approach. We are proposing a 50/50 percentage split for purposes of

this proposed rule; however, more complete data may result in future

refinements to the percentage payment approach.

3. Payment Provisions--Outlier Payments

Section 1895(b)(5) of the Act notes that we may provide for

additions or adjustments to the payments due to unusual variations in

the type or amount of medically necessary home health care. The total

amount for addition or adjustment payments during a fiscal year may not

exceed 5 percent of total payments projected or estimated to be made

based on the HHA PPS in that year. Because successive episode payments

will be made for a beneficiary as long as the beneficiary continues to

be recertified and otherwise eligible for additional home care, there

will be no need for long-stay outlier cases under the HHA PPS. However,

we believe outlier payments for 60-day episodes in which the HHA incurs

extraordinary costs beyond the regular episode payment amount may be

desirable. Outlier payments would provide some protection for

beneficiaries whose care needs cost more than the amount of the episode

payment. They would also provide HHAs with some financial protection

against possible losses on individual beneficiaries.

The methodology proposed for outlier payments is modeled on the

outlier payment methodology of the Medicare inpatient hospital PPS.

There are two basic principles underlying the approach: First, before

outlier payments are made for a case or episode, cost should exceed the

payment for the case. The amount by which cost exceeds payment should

be the same for cases in all case-mix groups because a dollar lost is a

dollar lost whether the case belongs in a low cost or a high cost case-

mix group. Use of a uniform fixed dollar loss for all case-mix groups

avoids creating differential incentives to accept patients in different

case-mix groups. The second principle is that outlier payments should

cover less than the full amount of the additional costs above the

outlier threshold to preserve the incentive to contain costs once a

case qualifies for outlier payments. (See Emmett B. Keeler, Grace M.

Carter, and Sally Trude, ``Insurance Aspects of DRG

[[Page 58147]]

Outlier Payments,'' The Rand Corporation, N-2762-HHS, October 1988.) We

discuss the outlier payments in greater detail in section II.A.5. of

this regulation.

We are seeking comments on our approach to outlier payments.

4. Payment Provisions--Transition Period

Section 4603(b)(1) of the BBA provides discretion on the transition

from payment under the current reasonable cost-based interim payment

system to the full prospective payment amount by blending a portion of

the PPS amount with agency-specific costs for a period of time. The

statute provides for the blend of agency-specific costs for up to 4

years in a budget-neutral manner.

Blending options provides significant practical obstacles. We could

in theory blend what would have been paid under the current reasonable

cost reimbursement system and PPS. A percentage of the payment would be

based on costs of the agency building on the current interim payment

system and a percentage would be based on the national PPS amount.

While other prospective payment systems have used a blended agency

and national payment amount, the complexities of blending dissimilar

payment methodologies for home health are so great that we believe it

is not a viable option. Moreover, OCESAA amended the statute to require

that we implement PPS on the same date for all providers, regardless of

their cost reporting period. This break in the cost reporting period

further discourages continued use of the cost-based system. The

legislation also reflects Congressional interest in expediting the

transition from the interim payment system to PPS. We believe

proceeding with a highly complicated percentage payment system based on

historical data from the cost-based interim payment system would not be

in the best interest of the industry based on historical reaction to

the interim payment system.

We believe full transition to the PPS system on October 1, 2000 is

the most viable option.

5. Consolidated Billing for Home Health Agencies

Both sections 4603(c)(2)(B) and (c)(2)(C) of the BBA require a new

consolidated billing and bundling of all home health services while a

beneficiary is under the plan of care. The BBA requires payment for all

covered home health items and services to be made to an HHA. However,

in accordance with section 1895(b)(1) of the Act, PPS payments are to

include only those home health services paid on a reasonable cost

basis, and DME is currently paid under the DME fee schedule.

Furthermore, payment for Medicare covered home health services can only

be made to the HHA that establishes the individual's home health plan

of care. The result is that the HHA must bill when the plan of care

specifies DME and even if an outside supplier provides it. HHAs will no

longer be able to ``unbundle'' services to an outside supplier that can

then submit a separate bill directly to the Part B carrier. Instead,

the HHA itself will have to furnish the home health services either

directly or under an arrangement with an outside supplier in which the

HHA itself, rather than the supplier, bills Medicare. The outside

supplier must look to the HHA rather than to Medicare Part B for

payment. The HHA consolidated billing requirement is discussed in

detail in section V. of this regulation.

6. Medical Review Under the Prospective Payment System

The financial incentives available to HHAs change from

overutilization to underutilization under an episode-based PPS. The

initial claim for each 60-day episode may contain visit information and

will only include the code corresponding to the appropriate case-mix

category. The final claim for the 60-day episode will include all of

the line-item visit information for the previous 60 days. Given the

limited information on the initial claim, prepayment review of the

initial claim would be limited to overall medical necessity of care and

technical eligibility issues, such as whether the homebound requirement

was met. Medical review will be conducted on a random and targeted

basis. Targeting may include claim-specific and patterns of case-mix

upcoding as well as general issues of the medical need for the episode

of care and technical eligibility. There must be the capacity, for both

prepayment and postpayment, to deny claims in total or to adjust

payment to correct case mix. Medical review will validate OASIS case-

mix category information used for payment against medical records and

the OASIS information separately submitted for quality. Medical review

will also be conducted to verify individual beneficiary therapy

information and patterns of therapy information for larger groups. The

information reported on claims will be an essential part of this effort

due to the significant impact of therapy use in the case-mix

designation.

7. Continued Access to Quality Home Health Services Under the

Prospective Payment System

The quality component of PPS is critical to ensure that HHAs do not

furnish less care than is necessary to beneficiaries in an attempt to

increase profit. The advantage of using similar elements to measure

quality through outcomes of care and case mix for payment purposes is

that an agency that provides less care than needed to a patient in an

episode will be likely to reflect poor outcomes of care in terms of

quality. The quality component of the HHA PPS is crucial to ensuring

that beneficiaries receive needed services. The continued access to

quality services under PPS is discussed further in section IV.J. of

this regulation.

8. Implementation of the Prospective Payment System

Section 5101(c)(1) of OCESAA removed the effective date of the PPS

by cost reporting period previously prescribed in the BBA and instead

requires all Medicare participating HHAs to be paid under PPS effective

on the same date of implementation-- October 1, 2000. The

implementation approach is discussed in section IV.H. of this

regulation.

II. Prospective Payment System for Home Health Agencies

A. National 60-Day Episode Payment

This proposed rule sets forth the methodology for the national PPS

applicable to all Medicare home health services covered under both Part

A and Part B. This proposed rule incorporates a national 60-day episode

payment for all of the reasonable costs of services furnished to an

eligible beneficiary under a Medicare home health plan of care. This

section describes the components of the national 60-day episode payment

and the methodology and data used in computation.

1. Costs and Services Covered by the 60-Day Episode Payment

The 60-day episode prospective payment applies to all home health

services set forth in section 1861(m) of the Act that are covered and

paid on a reasonable cost basis under the Medicare home health benefit

as of the date of the enactment of the BBA, including medical supplies.

DME is a covered home health service that is not currently paid on a

reasonable cost basis, but is paid on a fee schedule basis when covered

as a home health service under the Medicare home health benefit. Under

the HHA PPS, DME covered as a home health service as part

[[Page 58148]]

of the Medicare home health benefit will continue to be paid under the

DME fee schedule. Thus, we believe a separate payment amount in

addition to the prospective payment amount for home health services

will be made for DME currently covered as a home health service under

the PPS. All DME must be billed by the HHA during the 60-day episode

when it is furnished directly, under arrangement, or otherwise as

discussed in section V.C. of this regulation. Although the covered

osteoporosis drug under the home health benefit is currently paid on a

reasonable cost basis, section 4603(c) of the BBA of '97 amended

section 1833(a)(2)(A) of the Act to specifically exclude it from the

prospective payment rate. In addition, like DME, the osteoporosis drug

is included in the consolidated billing requirements.

2. Data Sources Used for the Development of the 60-Day Episode Payment

The methodology we used in developing the 60-day episode payment

combines a number of data sources. These data sources include audited

cost report data, claims data, a wage index, a market basket inflation

index, and Abt Associates Case-Mix Research Project Data. This section

describes each of these data sources while the following section

describes the methodology that combines them to produce the 60-day

episode payment.

a. Audited Cost Report Data

Section 1895(b)(1) of the Act requires the prospective payment

amount to include all services covered and paid on a reasonable cost

basis under the Medicare home health benefit, including medical

supplies. Section 1895(b)(3)(A)(i) of the Act requires the computation

of a standard prospective payment amount to be initially based on the

most recent audited cost report data available to the Secretary. Under

section 1895(b)(3)(A)(i) of the Act, the primary data source in

developing the cost basis for the 60-day episode payments was the

audited cost report sample of HHAs whose cost reporting periods ended

in fiscal year 1997 (that is, ended on or after October 1, 1996 through

September 30, 1997).

In February 1998, we directed our fiscal intermediaries (FIs) to

conduct comprehensive audits of the cost reports submitted by a sample

of HHAs whose cost reporting periods ended in FFY 1997. Each FI

received a list of agencies to audit and instructions on how to conduct

the audits and report the data obtained.

The sample was designed to be representative of the home health

industry in several respects: type of provider (for example, provider-

based), census region, urban versus rural location, and large versus

small agencies. We anticipated that many agencies in the sample would

not be audited because their records were unavailable for a variety of

reasons or their cost reporting periods were less than 12 months long.

Consequently, the sample size was adjusted upward by 15 to 20 percent

to allow for attrition.

To create national HHA PPS rates, each observation in the final

data set is weighted so that in the aggregate the entire sample

reflects the national Medicare home health payment experience. For

example, the estimates will reflect differences across census regions

and urban versus rural areas.

Audit Sample Methodology

The sample frame was intended to include all home health agencies

except very small ones and agencies without a full year of cost

reporting for the audit period. The sample selection design was a

stratified sample. With this design, agencies are selected as samples

within each stratum, where a stratum is defined for each provider type.

There were four strata: freestanding not-for-profit, freestanding for-

profit, freestanding governmental, and provider-based agencies. The

stratified design of the sample takes into account the number of

providers and the variation in cost and beneficiaries associated with

each provider type. The sample was designed to produce estimates from

key elements of the audit data with a reasonable level of precision.

One issue arose as auditing activities unfolded. Although

ordinarily each sampling unit should appear once and only once in the

frame, after the sample was drawn and fieldwork begun, it was found

that this assumption was not strictly true for the governmental units.

In some cases, multiple providers' numbers corresponding to a single

cost report appear on the frame, while in other cases a provider number

is a parent possibly with multiple subunits. In the former case, we

considered the subunits associated with a single cost report as the

appropriate sampling unit, and assigned weights to those observations

to compensate for their higher probability of inclusion in the sample.

This weighting procedure ensures that correct totals are obtained from

the analysis.

The original sample design anticipated that the weights would need

further adjustment so that audits expected but ultimately missing from

the sample are represented and the sample in total will produce the

known totals from the frame for key subgroups or cells. The process

assigns a larger weight to audited units in the sample similar (in the

same cell) to those missed. In the case of the HHA, the cells were

defined by cross-classification of three characteristics: urban or

rural location; the four census regions of Northeast, Midwest, South,

and West; and provider type. Therefore, the weights were adjusted for

the missed sample units to ensure that the units obtained most closely

represent the missed units cell by cell. (The adjustment gives more

weight to the audited HHA in a cell to account for the missing audits

within the cell.) The adjustment was a minor one, because examination

of counts from the realized sample, intended sample, and sample frame

showed that the sample actually obtained generally was within range or

close to the specifications.

After completing the weight adjustments, a file was created with

the resulting weights, the provider number, provider type, Census4

(four census regions), and Metropolitan Statistical Area (MSA) code.

This file can be merged with the data from the cost reports for the

audited providers to compute weighted values for costs and visits in

order to compute the average cost-per-visit ratios by discipline. As a

check on the computations, the following table is the result of a

summary by provider type that agrees with the frame totals.

Type Sample Frame #

FS/F 142 3290

FS/G 159 458

FS/N 171 955

PROV 95 2458

The final audit sample contained 567 audited cost reports which

were the basis of the home health PPS rate calculations. See Section

III. below for a more detailed description of the sampling and

estimation procedures.

Updating to September 30, 2001

Before computing the average cost per visit for each discipline

that would be used to calculate the prospective payment rate, we

adjusted the costs from the audit sample by the latest available market

basket factors to reflect expected cost increases occurring between the

cost reporting periods ending in FY 1997 to September 30, 2001.

Multiplying nominal dollars for a given FY end by their respective

inflation adjustment factor will express those dollars in the dollar

level for the FY end September 30, 2001. Therefore,

[[Page 58149]]

we multiplied the total costs for each provider by the appropriate

inflation factor shown in the table below. See section II.A.2.b. of

this regulation for a detailed description of the market basket.

Nonroutine Medical Supplies Paid on a Reasonable Cost Basis Under a

Home Health Plan of Care

Before computing the average cost per episode for nonroutine

medical supplies paid on a reasonable cost basis under a home health

plan of care, we also adjusted the audited cost report data for

nonroutine medical supplies using the latest available market basket

factors to reflect expected cost increases occurring between the cost

reporting periods ending in FY 1997 to September 30, 2001.

Adjusting Costs for Providers Impacted by the Visit Limits

For cost reporting periods ending in FY 1997, Medicare recognized

reasonable costs as the lower of the provider's actual costs or the

per-visit limit applied in the aggregate for the six disciplines.

Because some providers' costs were higher than the per-visit limits

applied in the aggregate for the six disciplines, it was necessary to

adjust their costs in order to reflect only those costs for which the

provider's payment was based. The adjustment factor was calculated by

dividing a provider's total visit limit by the total Medicare costs,

but only if the total visit limit was less than total Medicare costs.

For those providers not impacted by the visit limit, no adjustment was

necessary, and the adjustment factor was set equal to one. The

adjustment factor was applied to each provider's total costs for each

discipline. Summing each provider's updated, weighted, and adjusted

total costs by the sum of visits for each discipline results in the

nonstandardized, updated, weighted, and visit limit adjusted average

cost per visit by discipline. The Office of Inspector General (OIG) has

raised concerns that the payment rates may be inflated because improper

costs were included in the base year data. These concerns are based on

prior OIG reviews which have found improper payments have been made to

HHAs in the past. Depending on the results of these past reviews and

additional OIG reviews currently underway, HCFA may consider adjusting

the payment rates to account for improper costs that were included in

these rate calculations.

b. Home Health Agency Market Basket Index

The data used to develop the HHA PPS payments (60-day episode and

LUPA) were adjusted using the latest available market basket factors to

reflect expected cost increases occurring between the cost reporting

periods contained in our database and September 30, 2001. The following

inflation factors were used in calculating the HHA PPS:

Factors for Inflating Database Dollars to September 30, 2001

------------------------------------------------------------------------

FY end 1996 1997

------------------------------------------------------------------------

October 31........................................ 1.15486 .........

November 30....................................... 1.15222 .........

December 31....................................... 1.14961 .........

January 31........................................ ......... 1.14705

February 28....................................... ......... 1.14453

March 31.......................................... ......... 1.14202

April 30.......................................... ......... 1.13952

May 31............................................ ......... 1.13703

June 30........................................... ......... 1.13444

July 31........................................... ......... 1.13175

August 31......................................... ......... 1.12896

September 30...................................... ......... 1.12615

------------------------------------------------------------------------

For fiscal year 2002 or 2003, sections 1895(b)(3)(B)(i) and

(b)(3)(B)(ii) of the Act require the standard prospective payment

amounts to be increased by a factor equal to the home health market

basket minus 1.1 percentage points. In addition, for any subsequent

fiscal years, the statute requires the rates be increased by the

applicable home health market basket index change.

c. Claims Data

We also conducted analysis on an episode database created from the

1997 National Claims History File using 60-day episodes to define

episode lengths. These data were based on use of home health services

under the current system.

The 1997 60-day episode file used to establish the PPS rates was

created in two parts. The first part matched all home health claim

records for each beneficiary together to create a complete episode

history. We combined monthly records of home health services using a

60-day gap of service as the break for when an episode would begin and

end (that is, a 60-day consecutive gap in home health services would

trigger a new episode). The second part of the episode file creation

was to create exact 60-day episodes from the monthly episode file.

Using the first day of the episode, we counted exactly 60 days to find

the end of the 60-day episode. If the beneficiary was still receiving

home health services, we then started another 60-day episode on day 61

and continued the process until the end of the episode.

In order to create the first part of the 1997 60-day episode file,

we used the 100 percent National Claims History of 1997 HHA records. A

list of Health Insurance Claim (HIC) numbers was created for all

beneficiaries who received home health services in calendar year 1997.

Using the HIC number for each of those beneficiaries, we compared it

against the 1997 Master Beneficiary Denominator File. The comparison

was done to eliminate (1) Railroad Board beneficiaries, (2) invalid

beneficiary HIC numbers, and (3) beneficiaries enrolled in an HMO for

any part of 1997.

The valid matches on the 1997 Master Beneficiary Denominator File

were then matched against the initial 100 percent of 1997 HHA records.

The records that resulted from this step were compared to a program

table consisting of the dates that encompassed the universe of complete

episodes created (January 1996 through June 1998). The HHA records were

reformatted with Units and Reimbursement allocated to 1 of 7 Revenue

Center Code groupings:

550-559 skilled nursing

420-429 physical therapy

430-439 occupational therapy

440-449 speech pathology

560-569 medical social services

570-579 home health aide

270-279 medical supplies

This output was then sorted by the ``From and Thru Dates'' on each

claim to see if the From Date was within the first 2 months of 1997 and

the Thru Date was within the last 2 months of 1997. If the From Date

was within the first 2 months of 1997, a HIC list was created and

matched to the 1996 HHA records. If the Thru Date was within the last 2

months of 1997, a HIC list was created and matched to the 1998 HHA

records. At the time these files were created, 1998 HHA records were

complete only through June 1998. The HIC lists were processed through a

cross-reference procedure that ensures that any changes in HIC numbers

are related to the original HIC and to ensure all utilization for a

beneficiary was reflected under one current HIC number. These files

were matched against the 1996 HHA and 1998 HHA files, respectively. The

outputs of these matches were reformatted with Units and Reimbursement

allocated to 1 of 7 Revenue Center Code groupings (listed above). The

same process was performed on the 1997 HHA records.

The resulting three files for 1996, 1997, and 1998 were sorted by

From Date within each HIC number. The sorted file was read and a

complete

[[Page 58150]]

home health history was created for each beneficiary HIC. This was

accomplished by sorting the HHA records for each HIC in chronological

order from January 1996 through June 1998. During this process, Number

of Days, Total Charges, and Total Reimbursement were allocated to a

monthly table. For any records that spanned 2 calendar months, charges,

visits, and reimbursement were apportioned based on the distribution of

those days in each respective month. Whenever a beneficiary HIC's

history was read and tabled, the data were analyzed in order to

determine whether any prospective episodes would have ended in 1996 or

started in 1998. If either was true, that historical utilization was

discarded. The final valid data included 1996 data that were contiguous

or ended within 2 months (60 days) of 1997 data and 1998 data that

began within 2 months of 1997 data.

Once the valid table was completed, a single episode or multiple

episodes were determined by a 60-day break. The final episode(s) for

each home health beneficiary with combined monthly records was written

to an output file referred to as the 1997 Home Health Monthly Interval

File.

The 1997 HHA 60-Day Episode file was then derived from the 1997

Home Health Monthly Interval File by analyzing monthly records by

episode number and sequential month number. A full episode from the

Home Health Monthly Interval File is made up of two consecutive monthly

intervals in which the beneficiary received services (no 60-day gap in

services furnished to that beneficiary for a given episode of care).

Each monthly record within the common episode number was assigned a

sequential month number to indicate where, in the sequence of monthly

records for that given episode number, a particular monthly record

exists.

The first episode-begin-date for a 60-day episode was derived from

the first from-date for a given previously established episode (a group

of related monthly records) as read from the home health interval file.

An episode-end-date for that first 60-day episode was calculated by

adding 59 days to the episode-begin-date. Visits, charges, lengths of

stay, and reimbursement dollars were then accumulated across the six

disciplines (skilled nursing services, home health aide services,

physical therapy (PT) services, occupational therapy (OT) services,

speech-language pathology services, and medical social services) for

the 60-day episode by adding in subsequent monthly interval records (if

appropriate) for a given episode. If an episode-end-date occurs within

a monthly record, accumulating variables were prorated between the 60-

day episode record that was closed out and the subsequent 60-day

episode to be created. Consequently, the subsequent 60-day episode was

assigned an episode-begin-date equal to that of the previous episode's

episode-end-date plus 1. For episodes that did not begin and end within

a monthly record, the episode-begin-dates were established from the

from-date and episode-end-dates were calculated from the episode-begin-

date.

The end result was a 1997 HHA episode file of 60-day episode

records. In addition to the accumulating variables mentioned above, the

episode record also contained up to three provider numbers of HHAs

involved in furnishing care for that patient during the 60-day episode.

For identifiable purposes, the episode record contained variables

depicting--(1) the episode number (the episode number relates 60-day

episode records for which no 60-day gap in services existed), (2) the

total number of related 60-day episodes for that episode number, and

(3) a sequential number for that 60-day episode within the episode

number.

Using the 60-day episode file, we were able to analyze the number,

type, and duration of visits for each 60-day period as well as across

multiple 60-day episodes. Since the full 100 percent episode file was

created to determine actual episodes that could span more than 1 year,

episodes were defined by actual start and end dates even if they were

outside the calendar year period, as long as the beneficiary received

home health services in calendar year 1997. This provided a true

representation of the length of home health episodes and showed that 10

percent of the beneficiaries were receiving services that spanned more

than a full calendar year. This file also showed that 46 percent of the

beneficiaries completed home health services in the first 60 days and

over 60 percent actually completed their episodes in less than 120

days.

To complete the second part of the 1997 60-day episode file needed

to calculate prospective payment rates and to develop impacts, we

needed to convert the full episode file to a file containing only those

60-day episodes that fell into the calendar year 1997 period. This

meant that if a beneficiary started receiving home health services in

July 1996 and continued for multiple 60-day episodes through June 1997,

we only included their 4th, 5th, and 6th 60-day episodes that fell in

calendar year 1997. Calculating the distribution of beneficiaries

across the total number of episodes as we did for the full episode

file, we determined that the total percentage of beneficiaries with

only one episode increased to 51 percent. The table below shows the

distribution across total number of 60-day episodes for both the full

episode file and the calendar year 1997 file.

Table 1.--Distribution of the Number of Consecutive 60-Day Episodes

------------------------------------------------------------------------

Distribution

Distribution based on

based on all only 60-day

60-day episodes

Total number of consecutive 60-day episodes--even that

episodes those outside occurred in

the CY 1997 the CY 1997

period period

(percent) (percent)

------------------------------------------------------------------------

1......................................... 46 51

2......................................... 16 18

3......................................... 8 8

4......................................... 5 5

5......................................... 3 4

6......................................... 3 3

7......................................... 3 10

8......................................... 3 ............

9......................................... 2 ............

10........................................ 2 ............

11........................................ 1 ............

12........................................ 2 ............

13........................................ 2 ............

14........................................ 3 ............

15........................................ 0 ............

------------------------------------------------------------------------

Next, we calculated the average number of visits by discipline for

all 60-day episodes and compared that to only those episodes that fell

into the calendar year 1997. We discovered that there was a slight

decrease in the average number of visits for home health aide and

skilled nursing services when using only the episodes that fell in

calendar year 1997. This was expected due to the fact that the

utilization in 1997 declined because of the incentives under Operation

Restore Trust and because the distribution of beneficiaries having

fewer number of total episodes increased as shown in Table 1 above.

Beneficiaries with fewer total episodes had on average a lower total

average number of visits.

For purposes of rate setting, we believed it was more appropriate

to use the average number of visits for only those episodes that

occurred in calendar year 1997, as these reflect the reduced visit

utilization experienced since 1997 and thus represented more closely

the actual episodes that we would be paying for under PPS. Because we

are paying episodes with four or fewer visits on a per-visit basis,

under the LUPA methodology mentioned previously, it is necessary to

exclude them for the calculation of the average number of

[[Page 58151]]

episodes. Taking the low-visit episodes out of the calculation resulted

in an overall higher average for each discipline as would be expected.

Table 2.--Comparison of the Average Number of Visits Per Episode for Each Discipline for the Full Episode File,

Episodes in CY 1997 and Episodes in CY 1999 With Five or More Visits

----------------------------------------------------------------------------------------------------------------

Average based Average based

on all 60-day Average based on only 60-day

episodes--even on only 60-day episodes that

Average number of visits by discipline those outside episodes that fell into the

the CY 1997 fell into the CY 1997 period

period CY 1997 period with visits

----------------------------------------------------------------------------------------------------------------

Skilled Nursing Services..................................... 13.14 12.55 14.69

Physical Therapy Services.................................... 2.08 2.35 2.74

Occupational Therapy Services................................ .36 0.41 0.48

Speech Pathology Services.................................... .14 0.15 0.18

Medical Social Services...................................... .30 0.31 0.36

Home Health Aide Services.................................... 16.78 14.59 17.59

Total for all disciplines.................................... 32.8 30.36 36.04

----------------------------------------------------------------------------------------------------------------

Analysis of each 60-day episode that occurred within calendar year

1997 showed that the distribution of visits across each discipline

changed the longer the home health patient received home health

services. For beneficiaries who had only one episode, the proportion of

skilled nursing visits to home health aide visits was about 2 to 1. But

for beneficiaries who are in their 6th consecutive episode, the

relationship is reversed. The longer a beneficiary receives home health

services, the lower their skilled nursing needs and the more they

become dependent only on home health aide services. It is also

noticeable and expected that physical therapy services decline over

time. This finding suggests that future PPS research should be directed

at whether the episode payment should vary with each consecutive

episode.

Table 3.--Distribution of Disciplines Across Series of 60-Day Episodes

--------------------------------------------------------------------------------------------------------------------------------------------------------

Episode No.

within Percent of Percent of Percent of Percent of Percent of Percent of

Total number of 60-day episodes series of skilled home health occupational speech medical physical

60-day nursing aide therapy pathology social therapy

episodes services services services services services services

--------------------------------------------------------------------------------------------------------------------------------------------------------

1........................................................... 1 50 26 3 1 2 19

2........................................................... 1 46 34 3 1 1 15

2........................................................... 2 44 40 2 1 1 12

3........................................................... 1 46 38 2 1 1 11

3........................................................... 2 43 44 2 1 1 9

3........................................................... 3 43 46 1 1 1 8

4........................................................... 1 45 42 2 1 1 9

4........................................................... 2 42 48 1 1 1 7

4........................................................... 3 42 49 1 1 1 6

4........................................................... 4 42 50 1 0 1 6

5........................................................... 1 44 45 2 1 1 8

5........................................................... 2 41 50 1 1 1 6

5........................................................... 3 40 52 1 0 1 5

5........................................................... 4 40 53 1 0 1 5

5........................................................... 5 40 53 1 0 1 5

6........................................................... 1 42 48 1 1 1 7

6........................................................... 2 39 53 1 0 1 5

6........................................................... 3 38 55 1 0 1 4

6........................................................... 4 38 57 1 0 1 4

6........................................................... 5 37 57 1 0 1 4

6........................................................... 6 38 56 1 0 1 4

7........................................................... 1 36 59 1 0 1 4

7........................................................... 2 35 60 1 0 1 3

7........................................................... 3 35 61 0 0 1 3

7........................................................... 4 34 62 0 0 1 3

7........................................................... 5 34 62 0 0 1 3

7........................................................... 6 34 62 0 0 1 2

7........................................................... 7 35 61 0 0 1 3

--------------------------------------------------------------------------------------------------------------------------------------------------------

National Part B Claims History File

Nonroutine medical supplies are also a covered home health service

listed in section 1861(m) of the Act. As discussed above, the home

health prospective payment rate includes those items that are currently

covered and paid on a reasonable-cost basis. DME covered as a home

health service (see section 1861(m) of the Act) will continue to be

paid the fee schedule amount. As discussed previously, there is a new

consolidated billing provision that requires HHAs to bill for all home

health services listed in section 1861(m)

[[Page 58152]]

of the Act that are ordered under a home health plan of care.

Before PPS implementation, HHAs were not required to bundle all

home health services. Specifically, nonroutine medical supplies that

are covered and paid under Part B could have been furnished by a

supplier rather than the HHA. Under the current interim payment system,

nonroutine medical supply costs were subjected to the aggregate per-

beneficiary limits, but not the per-visit limits. Some HHAs may have

chosen to unbundle those nonroutine medical supplies that had a

corresponding Part B payment. In order to determine the scope of the

unbundled nonroutine medical supplies under the current system, we

identified 199 HCPCS codes, representing those items that would fall

into the possible ``unbundled nonroutine medical supply'' category. We

pulled all claims with the corresponding HCPCS codes from the Part B

national claims history file. In order to determine whether the HCPCS

codes were related to a beneficiary receiving home health services

under a home health plan of care, we linked every Part B claim with one

or more of the 199 HCPCS codes to home health episodes from our episode

database, by beneficiary and dates of service. If a beneficiary

received home health services during a 60-day episode and there was a

corresponding Part B claim with one of the 199 HCPCS codes that was

billed during the same 60-day episode, we identified the item as

related to the home health stay.

Since the nonroutine medical supply costs are bundled into the

prospective payment rate and subjected to consolidated billing under

prospective payment, we are proposing an additional payment amount in

the 60-day episode base rate for those nonroutine medical supplies with

corresponding Part B codes that may have been unbundled under the

interim payment system. The methodology amount is set forth in section

II.B. of this regulation.

d. Hospital Wage Index

As discussed in section I. of this regulation, sections

1895(b)(4)(A)(ii) and (b)(4)(C) of the Act, require the Secretary to

establish area wage adjustment factors that reflect the relative level

of wages and wage-related costs applicable to the furnishing of home

health services and to provide appropriate adjustments to the episode

payment amounts under the PPS to account for area wage differences. The

wage adjustment factors may be the factors used by the Secretary for

purposes of section 1886(d)(3)(E) of the Act. The statute allows the

Secretary to use the area where the services are furnished or such area

as the Secretary may specify for the wage index adjustment. To be

consistent with the application of the wage index adjustment under the

current interim payment system for HHAs, we propose that the wage index

value applied to the labor portion of the 60-day episode payment under

HHA/PPS be adjusted by the appropriate wage index for the geographic

area in which the beneficiary received home health services.

In addition, section 1895(b)(3)(A)(i) of the Act requires the

Secretary to standardize the cost data used in developing the HHA/PPS

payment amount for wage levels among different HHAs in a budget-neutral

manner. The wage-index adjustments to the 60-day episode payments must

be made in a manner that does not result in aggregate payments that are

greater or less than those that would otherwise be made if the 60-day

episode payments were not adjusted by the wage index.

Each HHA's labor market area is determined based on definitions of

Metropolitan Statistical Areas (MSAs) issued by the Office of

Management and Budget (OMB). In establishing the 60-day episode

payments, we used the most recently published hospital wage index (that

is, the FY 1999 hospital wage index published in the Federal Register

on February 25, 1999 (64 FR 9378), which is based on 1995 hospital wage

data) without regard to whether these hospitals have been reclassified

to a new geographic area. Therefore, the prospective payments reflect

the MSA definitions that are currently in effect under the hospital

PPS.

We believe the use of the hospital wage data results in an

appropriate adjustment to the labor portion of costs based on an

appropriate wage index as required under sections 1895(b)(3)(A)(i),

(b)(4)(A)(ii), and (b)(4)(C) of the Act.

Table 4A.--FY 1999 WAGE INDEX FOR RURAL AREAS--Pre-floor and Pre-

reclassified

------------------------------------------------------------------------

Wage

Rural Area Index

------------------------------------------------------------------------

Alabama...................................................... 0.7294

Alaska....................................................... 1.2430

Arizona...................................................... 0.7989

Arkansas..................................................... 0.7250

California................................................... 0.9979

Colorado..................................................... 0.8436

Connecticut.................................................. 1.2074

Delaware..................................................... 0.8807

Florida...................................................... 0.8877

Georgia...................................................... 0.7888

Guam......................................................... 0.6516

Hawaii....................................................... 1.0910

Idaho........................................................ 0.8477

Illinois..................................................... 0.7916

Indiana...................................................... 0.8380

Iowa......................................................... 0.7777

Kansas....................................................... 0.7319

Kentucky..................................................... 0.7844

Louisiana.................................................... 0.7454

Maine........................................................ 0.8467

Maryland..................................................... 0.8555

Massachusetts................................................ 1.0834

Michigan..................................................... 0.8875

Minnesota.................................................... 0.8595

Mississippi.................................................. 0.7312

Missouri..................................................... 0.7452

Montana...................................................... 0.8398

Nebraska..................................................... 0.7674

Nevada....................................................... 0.9256

New Hampshire................................................ 1.0240

New Jersey \1\............................................... .........

New Mexico................................................... 0.8269

New York..................................................... 0.8588

North Carolina............................................... 0.8112

North Dakota................................................. 0.7497

Ohio......................................................... 0.8519

Oklahoma..................................................... 0.7124

Oregon....................................................... 0.9910

Pennsylvania................................................. 0.8664

Puerto Rico.................................................. 0.4080

Rhode Island \1\............................................. .........

South Carolina............................................... 0.8046

South Dakota................................................. 0.7508

Tennessee.................................................... 0.7492

Texas........................................................ 0.7565

Utah......................................................... 0.8859

Vermont...................................................... 0.9416

Virgin Islands............................................... 0.4588

Virginia..................................................... 0.7857

Washington................................................... 1.0489

West Virginia................................................ 0.7875

Wisconsin.................................................... 0.8711

Wyoming...................................................... 0.8768

------------------------------------------------------------------------

\1\ All counties within the State are classified as urban.

Table 4B--Wage Index for Urban Areas--Pre-floor and Pre-reclassified

------------------------------------------------------------------------

Wage

MSA Urban Area (Constituent counties) Index

------------------------------------------------------------------------

0040 Abilene, TX 0.7981

Taylor, TX

0060 Aguadilla, PR 0.4727

Aguada, PR

Aguadilla, PR

Moca, PR

0080 Akron, OH 0.9900

Portage, OH

Summit, OH

0120 Albany, GA 0.7975

Dougherty, GA

Lee, GA

0160 Albany-Schenectady-Troy, NY 0.8610

Albany, NY

Montgomery, NY

[[Page 58153]]

Rensselaer, NY

Saratoga, NY

Schenectady, NY

Schoharie, NY

0200 Albuquerque, NM 0.8613

Bernalillo, NM

Sandoval, NM

Valencia, NM

0220 Alexandria, LA 0.8526

Rapides, LA

0240 Allentown-Bethlehem-Easton, PA 1.0204

Carbon, PA

Lehigh, PA

Northampton, PA

0280 Altoona, PA 0.9335

Blair, PA

0320 Amarillo, TX 0.8474

Potter, TX

Randall, TX

0380 Anchorage, AK 1.2818

Anchorage, AK

0440 Ann Arbor, MI 1.1033

Lenawee, MI

Livingston, MI

Washtenaw, MI

0450 Anniston, AL 0.8658

Calhoun, AL

0460 Appleton-Oshkosh-Neenah, WI 0.8825

Calumet, WI

Outagamie, WI

Winnebago, WI

0470 Arecibo, PR 0.4867

Arecibo, PR

Camuy, PR

Hatillo, PR

0480 Asheville, NC 0.8940

Buncombe, NC

Madison, NC

0500 Athens, GA 0.8673

Clarke, GA

Madison, GA

Oconee, GA

0520 Atlanta, GA 0.9915

Barrow, GA

Bartow, GA

Carroll, GA

Cherokee, GA

Clayton, GA

Cobb, GA

Coweta, GA

DeKalb, GA

Douglas, GA

Fayette, GA

Forsyth, GA

Fulton, GA

Gwinnett, GA

Henry, GA

Newton, GA

Paulding, GA

Pickens, GA

Rockdale, GA

Spalding, GA

Walton, GA

0560 Atlantic-Cape May, NJ 1.1536

Atlantic, NJ

Cape May, NJ

0600 Augusta-Aiken, GA-SC 0.9233

Columbia, GA

McDuffie, GA

Richmond, GA

Aiken, SC

Edgefield, SC

0640 Austin-San Marcos, TX 0.8782

Bastrop, TX

Caldwell, TX

Hays, TX

Travis, TX

Williamson, TX

0680 Bakersfield, CA 0.9531

Kern, CA

0720 Baltimore, MD 0.9642

Anne Arundel, MD

Baltimore, MD

Baltimore City, MD

Carroll, MD

Harford, MD

Howard, MD

Queen Anne's, MD

0733 Bangor, ME 0.9474

Penobscot, ME

0743 Barnstable-Yarmouth, MA 1.5382

Barnstable, MA

0760 Baton Rouge, LA 0.8872

Ascension, LA

East Baton Rouge, LA

Livingston, LA

West Baton Rouge, LA

0840 Beaumont-Port Arthur, TX 0.8659

Hardin, TX

Jefferson, TX

Orange, TX

0860 Bellingham, WA 1.1434

Whatcom, WA

0870 Benton Harbor, MI 0.8531

Berrien, MI

0875 Bergen-Passaic, NJ 1.2186

Bergen, NJ

Passaic, NJ

0880 Billings, MT 0.9143

Yellowstone, MT

0920 Biloxi-Gulfport-Pascagoula, MS 0.8276

Hancock, MS

Harrison, MS

Jackson, MS

0960 Binghamton, NY 0.9059

Broome, NY

Tioga, NY

1000 Birmingham, AL 0.9073

Blount, AL

Jefferson, AL

St. Clair, AL

Shelby, AL

1010 Bismarck, ND 0.8025

Burleigh, ND

Morton, ND

1020 Bloomington, IN 0.8965

Monroe, IN

1040 Bloomington-Normal, IL 0.8851

McLean, IL

1080 Boise City, ID 0.9160

Ada, ID

Canyon, ID

1123 Boston-Worcester-Lawrence-Lowell-Brockton, MA-NH 1.1269

Bristol, MA

Essex, MA

Middlesex, MA

Norfolk, MA

Plymouth, MA

Suffolk, MA

Worcester, MA

Hillsborough, NH

Merrimack, NH

Rockingham, NH

Strafford, NH

1125 Boulder-Longmont, CO 1.0038

Boulder, CO

1145 Brazoria, TX 0.8906

Brazoria, TX

1150 Bremerton, WA 1.1055

Kitsap, WA

1240 Brownsville-Harlingen-San Benito, TX 0.8237

Cameron, TX

1260 Bryan-College Station, TX 0.7820

Brazos, TX

1280 Buffalo-Niagara Falls, NY 0.9587

Erie, NY

Niagara, NY

1303 Burlington, VT 0.9577

Chittenden, VT

Franklin, VT

Grand Isle, VT

1310 Caguas, PR 0.4400

Caguas, PR

Cayey, PR

Cidra, PR

Gurabo, PR

San Lorenzo, PR

1320 Canton-Massillon, OH 0.8813

Carroll, OH

Stark, OH

1350 Casper, WY 0.870

Natrona, WY

1360 Cedar Rapids, IA 0.8814

Linn, IA

1400 Champaign-Urbana, IL 0.8723

Champaign, IL

1440 Charleston-North Charleston, SC 0.9114

Berkeley, SC

Charleston, SC

Dorchester, SC

1480 Charleston, WV 0.8990

Kanawha, WV

Putnam, WV

1520 Charlotte-Gastonia-Rock Hill, NC-SC 0.9686

Cabarrus, NC

Gaston, NC

Lincoln, NC

Mecklenburg, NC

Rowan, NC

Stanly, NC

Union, NC

York, SC

1540 Charlottesville, VA 1.0272

Albemarle, VA

Charlottesville City, VA

Fluvanna, VA

Greene, VA

1560 Chattanooga, TN-GA 0.9074

Catoosa, GA

Dade, GA

[[Page 58154]]

Walker, GA

Hamilton, TN

Marion, TN

1580 Cheyenne, WY 0.8149

Laramie, WY

1600 Chicago, IL 1.0461

Cook, IL

DeKalb, IL

DuPage, IL

Grundy, IL

Kane, IL

Kendall, IL

Lake, IL

McHenry, IL

Will, IL

1620 Chico-Paradise, CA 1.0145

Butte, CA

1640 Cincinnati, OH-KY-IN 0.9595

Dearborn, IN

Ohio, IN

Boone, KY

Campbell, KY

Gallatin, KY

Grant, KY

Kenton, KY

Pendleton, KY

Brown, OH

Clermont, OH

Hamilton, OH

Warren, OH

1660 Clarksville-Hopkinsville, TN-KY 0.8040

Christian, KY

Montgomery, TN

1680 Cleveland-Lorain-Elyria, OH 0.9886

Ashtabula, OH

Cuyahoga, OH

Geauga, OH

Lake, OH

Lorain, OH

Medina, OH

1720 Colorado Springs, CO 0.9390

El Paso, CO

1740 Columbia, MO 0.8942

Boone, MO

1760 Columbia, SC 0.9290

Lexington, SC

Richland, SC

1800 Columbus, GA-AL 0.8511

Russell, AL

Chattahoochee, GA

Harris, GA

Muscogee, GA

1840 Columbus, OH 0.9781

Delaware, OH

Fairfield, OH

Franklin, OH

Licking, OH

Madison, OH

Pickaway, OH

1880 Corpus Christi, TX 0.8513

Nueces, TX

San Patricio, TX

1900 Cumberland, MD-WV 0.8242

Allegany, MD

Mineral, WV

1920 Dallas, TX 0.9369

Collin, TX

Dallas, TX

Denton, TX

Ellis, TX

Henderson, TX

Hunt, TX

Kaufman, TX

Rockwall, TX

1950 Danville, VA 0.9045

Danville City, VA

Pittsylvania, VA

1960 Davenport-Moline-Rock Island, IA-IL 0.8413

Scott, IA

Henry, IL

Rock Island, IL

2000 Dayton-Springfield, OH 0.9605

Clark, OH

Greene, OH

Miami, OH

Montgomery, OH

2020 Daytona Beach, FL 0.9134

Flagler, FL

Volusia, FL

2030 Decatur, AL 0.8233

Lawrence, AL

Morgan, AL

2040 Decatur, IL 0.8035

Macon, IL

2080 Denver, CO 1.0331

Adams, CO

Arapahoe, CO

Denver, CO

Douglas, CO

Jefferson, CO

2120 Des Moines, IA 0.8448

Dallas, IA

Polk, IA

Warren, IA

2160 Detroit, MI 1.0544

Lapeer, MI

Macomb, MI

Monroe, MI

Oakland, MI

St. Clair, MI

Wayne, MI

2180 Dothan, AL 0.7892

Dale, AL

Houston, AL

2190 Dover, DE 0.9363

Kent, DE

2200 Dubuque, IA 0.8222

Dubuque, IA

2240 Duluth-Superior, MN-WI 0.9962

St. Louis, MN

Douglas, WI

2281 Dutchess County, NY 1.0530

Dutchess, NY

2290 Eau Claire, WI 0.8573

Chippewa, WI

Eau Claire, WI

2320 El Paso, TX 0.9215

El Paso, TX

2330 Elkhart-Goshen, IN 0.9305

Elkhart, IN

2335 Elmira, NY 0.8440

Chemung, NY

2340 Enid, OK 0.7983

Garfield, OK

2360 Erie, PA 0.9271

Erie, PA

2400 Eugene-Springfield, OR 1.1193

Lane, OR

2440 Evansville-Henderson, IN-KY 0.8528

Posey, IN

Vanderburgh, IN

Warrick, IN

Henderson, KY

2520 Fargo-Moorhead, ND-MN 0.9520

Clay, MN

Cass, ND

2560 Fayetteville, NC 0.8389

Cumberland, NC

2580 Fayetteville-Springdale-Rogers, AR 0.8614

Benton, AR

Washington, AR

2620 Flagstaff, AZ-UT 0.9483

Coconino, AZ

Kane, UT

2640 Flint, MI 1.1031

Genesee, MI

2650 Florence, AL 0.7676

Colbert, AL

Lauderdale, AL

2655 Florence, SC 0.8501

Florence, SC

2670 Fort Collins-Loveland, CO 1.0770

Larimer, CO

2680 Ft. Lauderdale, FL 0.9807

Broward, FL

2700 Fort Myers-Cape Coral, FL 0.8942

Lee, FL

2710 Fort Pierce-Port St. Lucie, FL 1.0241

Martin, FL

St. Lucie, FL

2720 Fort Smith, AR-OK 0.7623

Crawford, AR

Sebastian, AR

Sequoyah, OK

2750 Fort Walton Beach, FL 0.8615

Okaloosa, FL

2760 Fort Wayne, IN 0.9047

Adams, IN

Allen, IN

De Kalb, IN

Huntington, IN

Wells, IN

Whitley, IN

2800 Forth Worth-Arlington, TX 0.9719

Hood, TX

Johnson, TX

Parker, TX

Tarrant, TX

2840 Fresno, CA 1.0700

Fresno, CA

Madera, CA

2880 Gadsden, AL 0.8779

Etowah, AL

2900 Gainesville, FL 0.9453

Alachua, FL

2920 Galveston-Texas City, TX 1.0894

Galveston, TX

2960 Gary, IN 0.9435

Lake, IN

Porter, IN

2975 Glens Falls, NY 0.8490

Warren, NY

Washington, NY

[[Page 58155]]

2980 Goldsboro, NC 0.8530

Wayne, NC

2985 Grand Forks, ND-MN 0.8836

Polk, MN

Grand Forks, ND

2995 Grand Junction, CO 0.8279

Mesa, CO

3000 Grand Rapids-Muskegon-Holland, MI 0.9971

Allegan, MI

Kent, MI

Muskegon, MI

Ottawa, MI

3040 Great Falls, MT 0.8872

Cascade, MT

3060 Greeley, CO 0.9457

Weld, CO

3080 Green Bay, WI 0.9156

Brown, WI

3120 Greensboro-Winston-Salem-High Point, NC 0.9547

Alamance, NC

Davidson, NC

Davie, NC

Forsyth, NC Guilford, NC

Randolph, NC

Stokes, NC

Yadkin, NC

3150 Greenville, NC 0.9434

Pitt, NC

3160 Greenville-Spartanburg-Anderson, SC 0.9222

Anderson, SC

Cherokee, SC

Greenville, SC

Pickens, SC

Spartanburg, SC

3180 Hagerstown, MD

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