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entitled 'Medicare Hospice Care: Modifications to Payment Methodology 
May Be Warranted' which was released on October 15, 2004.

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Report to the Committee on Finance, U.S. Senate, and the Committee on 
Ways and Means, House of Representatives:

United States Government Accountability Office:

GAO:

October 2004:

Medicare Hospice Care:

Modifications to Payment Methodology May Be Warranted:

GAO-05-42:

GAO Highlights:

Highlights of GAO-05-42, a report to the Committee on Finance, U.S. 
Senate, and the Committee on Ways and Means, House of Representatives:

Why GAO Did This Study:

The Medicare hospice benefit provides care to patients with a terminal 
illness. For each patient, hospices are paid a per diem rate 
corresponding to one of four payment categories, which are based on 
service intensity and location of care. Since implementation in 1983, 
the payment methodology and rates have not been evaluated. The 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 
directed GAO to study the feasibility and advisability of updating 
Medicare’s payment rates for hospice care. In this report, GAO (1) 
compares freestanding hospices’ costs to Medicare payment rates and 
(2) evaluates the appropriateness of the per diem payment methodology. 
Because of Medicare data limitations, it was not possible to compare 
actual payments to costs or examine the services provided to each 
patient.

What GAO Found:

Using Medicare cost reports from freestanding hospices, GAO determined 
that the per diem payment rate for all hospice care was about 8 percent 
higher than the estimated average per diem cost of providing care in 
2000, and over 10 percent higher in 2001. However, the relationship 
between payment rates and costs varied across the payment categories 
and types of hospices. For all hospice care provided in the home, which 
accounted for about 97 percent of care in 2001, GAO estimates that the 
per diem payment rate was almost 10 percent higher than average per 
diem costs in 2000, and over 12 percent higher in 2001. Small hospices, 
however, had higher estimated average per diem costs than medium or 
large hospices overall and for each of the four per diem payment 
categories in 2001. 

GAO’s analysis indicates that the hospice payment methodology, with 
rates based on the historical mix and cost of services, a per diem 
amount that varies only by payment category, and a cap on total 
Medicare payments, may not reflect current patterns of care. For 
example, GAO determined that the relative costs of services, such as 
nursing care, provided during routine home care (RHC) have changed 
considerably since the rates were calculated. Using limited patient-
specific hospice visit data, GAO found that more visits were provided 
during the first, and especially last, week of a hospice stay than 
during other times in the stay. Finally, few hospices reached the 
payment cap, which was intended to limit Medicare hospice spending.

Costs of Services Provided During RHC as a Percentage of Total RHC 
Costs, 1983 and 2001: 

[See PDF for image]

[End of figure]

What GAO Recommends:

GAO recommends that the Administrator of the Centers for Medicare & 
Medicaid Services (CMS) collect comprehensive, patient-specific 
utilization and cost data on hospice visits and services, and using 
these data, determine whether modifications to the payment methodology 
are needed, including any adjustments needed for small providers. CMS 
stated that it agreed with GAO’s recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-05-42.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Laura A. Dummit at (202) 
512-7119.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Overall Medicare Hospice Payment Rate Higher Than Freestanding 
Hospices' Estimated Average Costs, but Relationship Varied by Payment 
Category and Hospice Characteristics:

Structure of Hospice Payment Methodology May Not Be Consistent with 
Current Service Delivery:

Conclusions:

Recommendations for Executive Action:

Agency and External Reviewer Comments and Our Evaluation:

Appendix I: Scope and Methodology:

Appendix II: Comments from the Centers for Medicare & Medicaid 
Services:

Tables:

Table 1: Utilization and Payment Rates for Each Hospice Payment 
Category:

Table 2: Estimated Average Per Diem Costs by Payment Category for 
Freestanding Hospices, by Size, 2001:

Figures:

Figure 1: Hospice Provider Types Participating in the 1980-1982 
Demonstration and in 2001 (Percentages):

Figure 2: Unadjusted Per Diem Payment Rate and Estimated Average Per 
Diem Costs for Freestanding Hospices, 2000 and 2001:

Figure 3: Costs of Services Provided during RHC as a Percentage of 
Total RHC Costs, 1983 and 2001:

Abbreviations:

BBRA: Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999: 
CHC: continuous home care: 
CMS: Centers for Medicare & Medicaid Services: 
DME: durable medical equipment: 
GIC: general inpatient care: 
HAA: Hospice Association of America: 
HCFA: Health Care Financing Administration:
IRC: inpatient respite care: 
NHPCO: National Hospice and Palliative Care Organization: 
RHC: routine home care: 
TEFRA: Tax Equity and Fiscal Responsibility Act of 1982:

United States Government Accountability Office:

Washington, DC 20548:

October 15, 2004:

The Honorable Charles E. Grassley: 
Chairman: 
The Honorable Max Baucus: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate:

The Honorable William M. Thomas: 
Chairman: 
The Honorable Charles B. Rangel: 
Ranking Minority Member: 
Committee on Ways and Means: 
House of Representatives:

Since the Medicare hospice benefit was implemented in 1983,[Footnote 1] 
neither the payment methodology nor the payment rates for hospices have 
been evaluated; however, there are indications that hospice services 
and patients have changed. The payment methodology and rates for the 
benefit were developed using cost data collected from 26 hospices 
providing care to Medicare patients with terminal cancer under a 1980 
to 1982 Health Care Financing Administration (HCFA)[Footnote 2] 
demonstration. Since then, advances in medical technology, such as new 
palliative drugs, chemotherapy, and radiation, have influenced the mix 
of hospice services provided. In addition, the mean length of a hospice 
stay has declined since 1983, and the number of patients with noncancer 
diagnoses has grown considerably, representing approximately one-half 
of all patients receiving hospice care in 2000.

In addition to changes in the delivery of hospice care, there has been 
substantial growth in the hospice program. From 1992 through 2002, 
Medicare payments for hospice care increased fivefold, to about $4.5 
billion, and the number of Medicare patients increased fourfold, to 
approximately 640,000. During the same period, the number of Medicare-
participating hospices grew by almost 90 percent to 2,275.

The Medicare hospice benefit was designed to provide patients who have 
a terminal illness with comfort and pain relief, as well as emotional 
and spiritual support, generally in a home setting. By law, Medicare 
hospice services include nursing care, counseling, and home health aide 
services, as well as drugs and medical supplies.[Footnote 3] Hospice 
services are delivered by providers that operate as freestanding 
entities or are based in hospitals, home health agencies, or skilled 
nursing facilities. Under the law, Medicare pays hospices a daily 
rate[Footnote 4] that covers all services provided to the patient, 
except for physician services.[Footnote 5] HCFA developed four payment 
categories, with corresponding per diem payment rates to reflect 
variation in service intensity and the location of service.[Footnote 6] 
These categories, as set out in Medicare regulations, are routine home 
care (RHC), a typical day of home care; continuous home care 
(CHC),[Footnote 7] home care that is provided during periods of patient 
crisis for at least 8 hours in a 24-hour period; inpatient respite care 
(IRC), care in an inpatient facility for a short period to provide 
respite for primary caregivers; and general inpatient care (GIC), 
inpatient care to treat symptoms that cannot be managed in other 
settings. In 1986, annual updates to the rates for the four payment 
categories were set in law.[Footnote 8] A hospice is paid for each day 
that a patient is under its care, regardless of whether the patient 
receives a visit or other service on that day. Medicare pays the RHC 
payment category rate for days when a patient does not receive CHC, 
IRC, or GIC. In 2001, RHC days accounted for 96 percent of all days 
provided to hospice patients. By law, each hospice is subject to an 
aggregate payment cap,[Footnote 9] which limits its total annual 
Medicare payments to a specified amount based on the number of Medicare 
patients it served.

The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA) directed us to study the feasibility and advisability of 
updating Medicare's payment rates for hospice care.[Footnote 10] 
Specifically, we (1) compared hospices' costs to the Medicare payment 
rates and (2) evaluated the appropriateness of the per diem payment 
methodology.

To compare hospices' costs to Medicare payment rates, we used 2000 and 
2001 Medicare hospice cost reports, the most recent data available at 
the time of our analysis. We confined our analysis to cost reports of 
freestanding hospices.[Footnote 11] Hospital-based and home health 
agency-based hospices must allocate overhead costs between the hospice 
and the hospital or home health agency, which may distort the costs of 
providing hospice services.[Footnote 12] For freestanding hospices, the 
only costs incurred are for delivering hospice care to patients. We 
verified the reliability of the cost report data by comparing 
descriptive statistics calculated using the cost reports with those 
calculated using the Medicare hospice claims for all hospices from the 
same years, and we verified the reliability of the claims data by 
comparing descriptive statistics we calculated using the claims with 
statistics published by the Centers for Medicare & Medicaid Services 
(CMS). We excluded certain cost reports; for example, those with fewer 
than 11 total patients or an average of less than 1 patient per day. We 
determined the remaining data were suitable for our purposes. For 
freestanding hospices, we estimated average per diem costs by summing 
the total costs for all hospices and dividing by the total number of 
days of care for all hospices. We compared the estimated average per 
diem cost for freestanding hospices to an unadjusted payment rate based 
on national payment rates for each category.[Footnote 13] We also 
determined average per diem costs for each payment category using the 
same methodology and compared each to the unadjusted payment rate 
calculated for that category. Because RHC and CHC costs are reported in 
aggregate on the hospice cost report, we could only report hospices' 
average combined RHC and CHC per diem costs.[Footnote 14] We refer to 
combined RHC and CHC hospice costs and payment rates as home care costs 
and payment rates. Because of data limitations in the Medicare hospice 
cost report and claims data, we could not compare actual payments to 
costs.[Footnote 15] We did not apply the wage adjustment, which 
generally adjusts payments up for urban areas and down for rural areas 
to account for geographic differences in wages, to the payment rates. 
We estimated per diem costs for all freestanding hospices; for 
freestanding hospices of different sizes, with size defined by the 
number of days of care a hospice provided during the year; and for 
rural and urban freestanding hospices.[Footnote 16]

To evaluate the appropriateness of the per diem payment methodology, we 
compared the proportion of total costs attributable to different 
services provided during RHC days when the payment rate was first 
determined, in 1983, to the proportion in 2001. We used the 2001 
freestanding hospice cost reports to calculate proportions of cost for 
2001. Our estimates of RHC costs in 2001 include CHC costs because RHC 
and CHC costs are reported in aggregate on the hospice cost 
report.[Footnote 17] Using 2002 proprietary data on patient visits 
collected by a large, for-profit hospice with multiple freestanding 
facilities, which we refer to as patient-specific visit data, we 
analyzed the types of visits provided to patients over the course of 
their hospice stays. We used these proprietary data because Medicare 
hospice cost reports and claims do not contain information on the 
visits hospices provide to Medicare patients each day. We confirmed 
that the distribution of visits in 2002 was consistent with the 
distribution in 1997 and 1999 for this hospice. We also calculated 
descriptive statistics for this hospice and compared them to statistics 
calculated using the Medicare hospice claims. We determined these data 
were suitable for our purposes. We interviewed officials at CMS, two 
national hospice associations, 18 hospices and several national 
independent and academic hospice researchers, and we conducted a site 
visit to a freestanding hospice with an inpatient unit. Our methodology 
is detailed in appendix I. We did our work from January 2003 through 
October 2004 in accordance with generally accepted government auditing 
standards.

Results in Brief:

We determined that for freestanding hospices, the unadjusted per diem 
payment rate across the four payment categories was about 8 percent 
higher than estimated average per diem costs in 2000, and over 10 
percent higher in 2001. We estimate that the home care (RHC and CHC) 
per diem payment rate was almost 10 percent higher than average home 
care per diem costs in 2000, and over 12 percent higher in 2001. The 
IRC payment rate was almost 53 percent lower than average IRC per diem 
costs in 2000, and 61 percent lower in 2001. In both years, the GIC 
payment rate was about 7 percent higher than average GIC per diem 
costs. We could not compare actual payments to costs because of 
limitations in the hospice cost report and claims data. In 2000, we 
estimate that average per diem costs for small freestanding hospices 
were over 13 percent higher than for medium freestanding hospices and 
almost 7 percent higher than for large freestanding hospices. In 2001, 
average per diem costs for small freestanding hospices were over 15 
percent higher than for medium freestanding hospices and almost 8 
percent higher than for large freestanding hospices. With the exception 
of average GIC per diem costs in 2000, small freestanding hospices had 
higher per diem costs for each payment category in both years. Small 
freestanding hospices are more likely than other hospices to be located 
in rural areas, and thus are more likely to receive lower Medicare 
payments because the wage index adjustment generally reduces the 
payments for providers in rural areas.

Several aspects of the hospice per diem payment methodology may not 
reflect how hospices currently deliver services. For freestanding 
hospices, the share of total costs accounted for by various services 
provided during RHC days was considerably different in 2001 than when 
the rates were developed in 1983. This suggests that the services 
delivered or the resources necessary for those services have changed. 
The proportions of RHC costs attributable to nursing, social services, 
drugs, and medical equipment have increased, while the proportions 
attributable to home health aide services, supplies, and outpatient 
services have decreased. In addition, our analysis of proprietary 2002 
patient-specific visit data showed that visit frequency varied during 
the hospice stay, yet the payment rates remain the same throughout the 
stay for each payment category. Also, the mean length of stay has 
decreased. Additionally, hospice officials told us that some CHC and 
IRC payment policy requirements limited their ability to deliver 
services, although data were not available to determine whether these 
requirements influenced the delivery of care to hospice patients. 
Finally, the annual aggregate cap was intended to help limit Medicare 
hospice spending, but the cap amount was not based on actual hospice 
costs, and for each year from 1999 through 2002, few hospices reached 
it.

We recommend that the Administrator of CMS collect comprehensive, 
patient-specific data on the utilization and cost of hospice visits and 
services. Using these data, the Administrator should determine whether 
the hospice payment methodology and payment categories need 
modifications, including any special adjustments for small providers. 
The Administrator should implement modifications that would not require 
a change in Medicare law, and submit a legislative proposal to the 
Congress for those that do. In commenting on a draft of this report, 
CMS stated that it agreed with our recommendations and intends to use 
our findings to supplement and reinforce preliminary evaluations the 
agency has made and future studies that are planned. In responding to 
our recommendation that it collect comprehensive, patient-specific data 
on hospice visits and services and the costs of these services and 
reevaluate the payment methodology, CMS stated that it recognized the 
need for these types of analyses but that its research funding is 
limited. In its comments, CMS also stated that it believed additional 
information is needed before modifying the payment methodology because 
of the higher average costs of small hospices. We have clarified our 
conclusion to indicate the need for comprehensive, patient-specific 
data on the visits and services delivered by hospices and the costs of 
these services to inform any changes to the payment methodology. 
Industry representatives who reviewed a copy of this draft generally 
agreed with our findings and recommendations.

Background:

Medicare hospice benefit services include nursing services, services 
provided by a physician to a hospice, drugs and medical supplies 
necessary for treating pain and other symptoms of a terminal illness, 
as well as dietary, spiritual, and bereavement counseling; medical 
social worker services; homemaker services; and short-term inpatient 
care both to provide respite for caregivers and to treat a patient's 
symptoms. Volunteers are an important resource in delivering hospice 
care; Medicare requires each hospice to have volunteers provide 
services equal to at least 5 percent of the total paid patient care 
hours.[Footnote 18] The specific services that a patient should receive 
are outlined in a plan of care, vary based on the type and intensity of 
the patient's symptoms and psychosocial needs and the needs of the 
patient's caregiver, and may vary throughout the hospice stay as the 
patient's condition changes.

Hospice Eligibility:

To be eligible for the Medicare hospice benefit, a patient must be 
certified by a physician as having a life expectancy of 6 months or 
less if his or her terminal illness runs its normal course. A Medicare 
patient who elects hospice care must waive Medicare coverage for all 
other services related to the terminal illness, although the patient 
retains coverage for services to treat other conditions. A patient may 
opt out of the hospice benefit and return to traditional Medicare at 
any time; a patient may also reelect hospice coverage at a later date. 
While there is no limit on the number of days an individual can receive 
hospice care, the prognosis of the patient's terminal illness must be 
reaffirmed after the first 90 days, the first 180 days, and then every 
60 days thereafter.

Medicare Hospice Payment:

Under the law, Medicare pays hospices a daily rate that covers all 
services provided to the patient. HCFA developed four hospice per diem 
payment categories, which reflect the intensity of the services and the 
location of service delivery. In 1986, annual updates to the rates for 
the four payment categories were set in law. A typical day of care 
provided in a patient's residence is paid as RHC, and in 2001, the vast 
majority of hospice care days, 96 percent, were billed as RHC (see 
table 1). Unless a hospice provides CHC, IRC, or GIC, it is paid the 
RHC rate for each day the patient is under its care. Hospice care 
delivered during periods of crisis can be paid as CHC if the care is 
provided in the home for at least 8 hours within a 24-hour period 
beginning at midnight and at least half the care hours are delivered by 
a nurse. To provide respite for primary caregivers, IRC can be provided 
for up to 5 consecutive days in an inpatient setting. Inpatient care 
for symptoms that cannot be treated in the patient's residence is paid 
as GIC. Hospices provide the care in their own inpatient units or 
arrange with hospitals, skilled nursing facilities, or other inpatient 
facilities to provide these services. The payment rate is adjusted by a 
wage index, which varies based on the patient's residence, to account 
for geographic differences in wage costs.

Table 1: Utilization and Payment Rates for Each Hospice Payment 
Category:

Payment category: RHC; 
Percentage of total hospice days, 2001: 96.0%; 
Payment rate, 2004: $118.08/day.

Payment category: CHC; 
Percentage of total hospice days, 2001: 1.2%; 
Payment rate, 2004: $28.72/hr, up to $689.18/day.

Payment category: IRC; 
Percentage of total hospice days, 2001: 0.2%; 
Payment rate, 2004: $122.15/day.

Payment category: GIC; 
Percentage of total hospice days, 2001: 2.6%; 
Payment rate, 2004: $525.28/day. 

Source: GAO analysis of CMS data and Medicare payment rates.

[End of table]

The hospice payment categories and their corresponding payment rates 
were developed from cost data from the 26 hospices that participated in 
the 1980 to 1982 Medicare demonstration. To calculate the payment 
rates, HCFA used cost data to identify the cost factors that 
contributed to providing hospice services and summed the mean cost per 
day of each cost factor for each of the four categories of hospice 
care. The costs of bereavement and volunteer services were not included 
in the rates.[Footnote 19]

By law, hospices are subject to an annual aggregate Medicare payment 
cap that was meant to ensure that payments for hospice care would not 
exceed what Medicare would have paid if patients had been treated in a 
traditional setting, such as a hospital.[Footnote 20] Total annual 
payments to a hospice may not exceed a per-patient amount multiplied by 
the number of Medicare patients who received care from that hospice 
during the year. The 2004 cap amount for the 12 months beginning 
November 1, 2003, is $19,635.67 per Medicare patient.[Footnote 21]

Changes in Hospice Care:

Hospice patients, services, and providers have changed since the 
demonstration. For example, the mean patient length of stay at hospices 
participating in the Medicare demonstration from 1980 to 1982, was 70 
days; in 2001, the mean length of stay was about 50 days. While 
demonstration costs were based only on Medicare patients with cancer 
diagnoses, patients with noncancer diagnoses, who may require a 
different mix of services, represented approximately half of all 
hospice patients in 2000. In addition, hospice providers have stated 
that advances in end-of-life care, notably new, more costly pain-
management drugs and palliative chemotherapy and radiation, have 
increased the costs of providing care to certain types of patients.

The mix of hospice providers today differs from the provider types in 
the demonstration. In the demonstration, the predominant type of 
hospice provider was hospital-based, whereas in 2001, the predominant 
type was freestanding (see fig. 1). More recently, the proportion of 
for-profit hospices increased from almost 13 percent of all hospices in 
1992 to almost 28 percent in 2001, and the percentage of hospices 
serving patients primarily living in rural areas rose from 32 in 1992 
to 38 in 2001. In addition, the number of hospices participating in 
Medicare grew from 1,208 in 1992 to 2,275 in 2002, the most recent data 
available.

Figure 1: Hospice Provider Types Participating in the 1980-1982 
Demonstration and in 2001 (Percentages):

[See PDF for image]

[End of figure]

Overall Medicare Hospice Payment Rate Higher Than Freestanding 
Hospices' Estimated Average Costs, but Relationship Varied by Payment 
Category and Hospice Characteristics:

We determined that for freestanding hospices, the unadjusted per diem 
payment rate across the four payment categories was about 8 percent 
higher than estimated average per diem costs in 2000, and over 10 
percent higher in 2001. For the payment categories, we estimate that 
the home care (RHC and CHC) per diem payment rate was almost 10 percent 
higher than average home care per diem costs in 2000, and over 12 
percent higher in 2001. We estimate that the IRC payment rate was 
almost 53 percent lower than average IRC per diem costs in 2000, and 61 
percent lower in 2001. In both years, the GIC payment rate was about 7 
percent higher than average GIC per diem costs. In 2000, we estimate 
that average per diem costs for small hospices were over 13 percent 
higher than for medium hospices and almost 7 percent higher than for 
large hospices. In 2001, average per diem costs for small hospices were 
over 15 percent higher than for medium hospices and almost 8 percent 
higher than for large hospices. With the exception of average GIC per 
diem costs in 2000, small hospices also had higher average per diem 
costs than medium or large hospices for each payment category.

Unadjusted Payment Rate Higher Than Freestanding Hospices' Estimated 
Average Costs:

Medicare's hospice payment rate, across the four payment categories and 
unadjusted for geographic differences in wages, was higher than 
freestanding hospices' estimated average per diem cost. The unadjusted 
payment rate was about 8 percent higher than average per diem costs in 
2000, and over 10 percent higher in 2001 (see fig. 2). The 25 percent 
of hospices with the lowest average per diem costs had costs that were 
at least 27 percent below the unadjusted payment rate in 2000, and at 
least 31 percent below the unadjusted payment rate in 2001. However, in 
2000, average per diem costs for almost 34 percent of freestanding 
hospices and, in 2001, almost 32 percent of freestanding hospices, were 
higher than the unadjusted per diem rate. The costs of individual 
hospices differ depending on the mix of services provided. In addition, 
the payments to individual hospices differ because of the wage 
adjustment and the mix of payment categories billed.

Figure 2: Unadjusted Per Diem Payment Rate and Estimated Average Per 
Diem Costs for Freestanding Hospices, 2000 and 2001:

[See PDF for image]

Note: The unadjusted payment rate equals the rates of the four payment 
categories weighted by their respective utilization as reported in 
freestanding hospice cost reports in each year, accounting for the 
annual October 1 update in the payment rates.

[End of figure]

We could not determine the relationship between payments and actual 
costs for individual hospices because of data limitations in the 
hospice cost reports and claims data. Unlike those for other providers, 
Medicare's hospice cost reports do not include Medicare payment 
information. In addition, Medicare hospice claims data contain only the 
total payment for all services provided during the billing period, 
including physician services, not the payment for each hospice payment 
category.

Relationship between Estimated Costs and Unadjusted Payment Rates 
Varied among Payment Categories:

The specific relationship between payment rates and costs for 
freestanding hospices varied among payment categories. For home care 
(RHC and CHC) days, we estimate that in 2000, the unadjusted per diem 
payment rate for freestanding hospices was almost 10 percent higher 
than the average per diem cost of over $92. In 2001, the per diem 
payment rate was over 12 percent higher than the average home care per 
diem cost of over $96. Nonetheless, about 35 percent of freestanding 
hospices in 2000, and over 32 percent in 2001, had average home care 
per diem costs that were higher than the home care per diem payment 
rate.

We estimate that in 2000, the unadjusted IRC per diem payment rate for 
freestanding hospices was almost 53 percent lower than the average IRC 
per diem cost of about $218. In 2001, the IRC per diem payment rate was 
over 61 percent lower than the average IRC per diem cost of over $279. 
However, the GIC per diem payment rate was higher than average GIC per 
diem costs for freestanding hospices; it was over 7 percent higher than 
costs in both years. In addition, average per diem costs for IRC and 
GIC varied widely among freestanding hospices. Our estimates of average 
IRC and GIC per diem costs may understate actual costs because of data 
limitations.

IRC costs may be much higher than the IRC payment rate because the 
hospice continues to provide services and visits to the patient in 
addition to paying the inpatient facility.[Footnote 22] Our analysis of 
the proprietary 2002 patient-specific visit data found that the number 
and type of visits provided per day to patients during IRC days were 
comparable to the number and type of visits per day to patients during 
RHC days. In 2001, IRC accounted for 0.2 percent of hospice days of 
care.

Small Hospices Had Higher Per Diem Costs and Likely Lower Payments:

We estimate that for 2000 and 2001, small freestanding hospices had 
higher average per diem costs than medium and large freestanding 
hospices.[Footnote 23] In 2000, average per diem costs for small 
hospices were more than 13 percent higher than for medium hospices and 
almost 7 percent higher than for large hospices. In 2001, average per 
diem costs for small hospices were more than 15 percent higher than for 
medium hospices and almost 8 percent higher than for large hospices 
(see table 2). With the exception of average GIC per diem costs in 
2000, small hospices' average per diem costs were higher than medium 
and large hospices' costs for each individual payment category for both 
years. Cost disparities across providers of different sizes were 
greatest for IRC and GIC.

Table 2: Estimated Average Per Diem Costs by Payment Category for 
Freestanding Hospices, by Size, 2001:

Hospice size: Small; 
Average costs: $116; 
Home care average costs[A]: $112; 
IRC average costs: $692; 
GIC average costs: $564.

Hospice size: Medium; 
Average costs: $101; 
Home care average costs[A]: $94; 
IRC average costs: $254; 
GIC average costs: $460.

Hospice size: Large; 
Average costs: $108; 
Home care average costs[A]: $96; 
IRC average costs: $264; 
GIC average costs: $420.

Source: GAO analysis of CMS data.

Notes: The size of the hospice is based on the number of days of care 
it provided during the year. Small hospices were those that reported 
total days of care less than the 25th percentile of all hospices' total 
days of care. Medium hospices were those that reported total days of 
care equal to or greater than the 25th percentile and less than or 
equal to the 75th percentile of all hospices' total days of care. Large 
hospices were those that reported total days of care greater than the 
75th percentile of all hospices' total days of care.

[A] Home care costs include RHC and CHC costs.

[End of table]

As small freestanding hospices are more likely than other hospices to 
be located in rural areas, they are more likely to receive lower 
Medicare payments because the wage index adjustment generally reduces 
the payment rates for providers in rural areas. In 2001, 60 percent of 
small freestanding hospices were located in rural areas, while 35 
percent of medium freestanding hospices and 10 percent of large 
freestanding hospices were located in rural areas.[Footnote 24]

Structure of Hospice Payment Methodology May Not Be Consistent with 
Current Service Delivery:

The structure of the hospice payment system may not reflect how 
hospices currently deliver services. For example, our analysis of the 
relative costs for freestanding hospices for different services 
provided during RHC days, the most common payment category, showed they 
have changed considerably since the payment rate was initially 
calculated, suggesting that the services delivered or the resources 
necessary for those services have changed over the years. In addition, 
our analysis of proprietary 2002 patient-specific visit data showed 
that visit frequency varied during the hospice stay, although the rate 
for each payment category does not. Also, the mean length of stay has 
decreased. Hospice officials raised concerns about some of the payment 
policy requirements for CHC and IRC, although our analysis of the 
limited available data could not confirm that the requirements restrict 
hospices' ability to provide care. Finally, the annual aggregate cap 
was intended to help limit Medicare spending for all hospices, but it 
was not based on actual hospice costs, and for each year from 1999 
through 2002, few hospices reached it.

Relative Costs of Services Provided during RHC Differ from When Payment 
Rate Was Developed:

The relative costs of services in 2001 have changed considerably since 
the payment rate was developed in 1983, suggesting that the services 
delivered or the resources necessary for those services have changed 
over time. Specifically, the proportions of RHC costs attributable to 
nursing, drugs, social services, and durable medical equipment 
(DME)[Footnote 25] have increased, while the proportions attributable 
to home health aide services, supplies, and outpatient services have 
decreased (see fig. 3).[Footnote 26] In our analysis, this pattern is 
present across freestanding hospices of all sizes and locations. The 
largest cost increase occurred for drugs, which rose from 3 to 15 
percent of RHC costs over this period. Hospice officials we spoke with 
stated that this increase was due in part to the introduction of new, 
more costly medications. Some stated that drugs have become one of 
their greatest cost pressures.

Figure 3: Costs of Services Provided during RHC as a Percentage of 
Total RHC Costs, 1983 and 2001:

[See PDF for image]

Notes: Percentages from 1983 are based on cost data collected in the 
1980 to 1982 hospice demonstration. RHC costs for 2001 are slightly 
overestimated, as they include CHC costs. CHC days accounted for just 
over 1 percent of total hospice days in 2001.

[End of figure]

Fewer Days of Lower Visit Frequency with Shorter Mean Length of Stay:

Hospice visits are particularly concentrated at the beginning and end 
of a hospice stay, yet the payment rate of each category does not vary 
throughout a hospice stay. Our analysis of the 2002 patient-specific 
visit data showed that patients have a higher mean number of visits per 
day during the first, and especially the last, week of a stay.[Footnote 
27] As a result, the costs of care are higher both at the beginning and 
end of a hospice stay. Officials from almost all hospices with whom we 
spoke also reported this pattern. They told us that at the beginning of 
a hospice stay they provide more visits because the patient's symptoms, 
including pain, must be stabilized and the family must be educated 
about the patient's care. Near the end of life, hospice officials 
indicated that the patient's symptoms and needs change, usually 
requiring more hospice management, and the family often needs 
additional psychosocial support. Our analysis of the 2002 patient-
specific visit data showed that patients with a length of stay of 2 
weeks or less had a higher mean number of visits per day than patients 
with a length of stay greater than 2 weeks.[Footnote 28] Hospice 
officials we spoke with stated that patients who are in hospice care a 
short time are relatively more costly on a per diem basis because there 
are fewer days of lower visit frequency to balance the higher costs of 
the days with more visits at the beginning and end of the stay.

In 1983, the Medicare hospice per diem payment amounts accounted for 
the variation in daily hospice costs because they were based on the 
mean daily costs incurred by the hospices in the demonstration over a 
mean hospice stay of 70 days. However, hospice stays are considerably 
shorter now; the mean length of stay was 50 days in 2001. Mean daily 
costs may now be very different because of the change in the length of 
stay. No data are available, however, to compare costs at different 
points during a stay or for stays of different lengths.

Providers Raised Concerns about Payment Category Requirements:

Hospice officials we spoke with raised concerns about some of the 
policy requirements for particular payment categories, although our 
analysis of the available data could not confirm their concerns. For 
example, to bill for CHC, Medicare requires that a nurse provide at 
least half of billed CHC hours. Hospice officials stated that this 
could restrict the hospice's ability to provide the most appropriate 
care when a social worker was a more appropriate caregiver than a 
nurse.

The officials were also concerned that the 8-hour minimum required for 
billing CHC payment, counted from midnight of one day until midnight of 
the next, could restrict their ability to bill for CHC. For example, if 
a patient dies in less than 8 hours or the hospice provides 8 hours of 
services over 2 calendar days, the hospice must bill for RHC. Our 
analysis of 2001 Medicare hospice claims indicated that the mean number 
of hours provided on a CHC day was 18 hours, considerably above the 8-
hour minimum. Similarly, our analysis of the 2002 patient-specific 
visit data from one large, freestanding hospice showed a mean of 20 
hours provided on each CHC day. Therefore, instances of continuous care 
hours that fall just short of 8 hours, for which a hospice cannot bill 
CHC hours, do not occur often based on the patient-specific visit and 
claims data.

Hospice officials we spoke with also stated that the statutory 
requirement that respite care be provided in an inpatient setting might 
hinder its use.[Footnote 29] Specifically, they stated that while 
primary caregiver respite is important, enabling patients to remain at 
home rather than moving them to an inpatient facility is also 
important; primary caregivers may not take respite in order to avoid 
moving the patient to an inpatient facility. Few hospices we spoke with 
currently provide home respite care for extended periods. They said 
this is largely because the costs are higher than the RHC payment rate, 
which is the payment category the hospices must bill for these 
services. Data related to home respite care are not available, although 
it is likely that the costs of providing 24 hours of home respite care 
would be higher than RHC costs.

Few Hospices Affected by Annual Aggregate Cap:

According to our analysis of data from the regional home health 
intermediaries, the contractors responsible for processing and paying 
Medicare hospice claims, less than 2 percent of all hospice providers 
reached the annual aggregate payment cap each year from 1999 through 
2002.[Footnote 30] In 1982, the Congress required HCFA to calculate a 
cap that limited a hospice's total payments to a specific per-patient 
amount based on the Medicare costs incurred for patients with cancer 
during the last 6 months of life.[Footnote 31] However, a subsequent 
law enacted before the hospice benefit was implemented set a per-
patient cap amount that was not based on the cost data;[Footnote 32] 
for the 12 months beginning November 1, 2003, the cap was $19,635.67 
per Medicare patient. The cap is intended to ensure that payments for 
hospice care do not exceed what Medicare would have spent if patients 
had been treated in a traditional setting, such as a hospital. However, 
it affects few hospices, and therefore may not represent a meaningful 
limit. Hospice officials we spoke with who discussed the cap said it 
did not affect them.

Conclusions:

CMS has not evaluated the hospice per diem payment rates and 
methodology since they were developed to determine the relationship 
between payments and costs and whether the per diem methodology is 
consistent with current patterns of care. There are several indications 
that hospice payments may not be appropriately distributed across days 
of care or types of providers. The type of care provided during a 
hospice stay appears to be different than when the hospice per diem 
payment rates and methodology were developed. Comprehensive data are 
not available, however, to evaluate the number of visits or costs of 
services provided during a Medicare hospice stay. While our analysis of 
the limited data available indicates that the overall Medicare payment 
rate across all payment categories was above estimated costs, IRC costs 
were considerably above the payment rate. Further, small freestanding 
hospices had substantially higher average per diem costs than other 
hospices. As a result, a comprehensive analysis of patient-specific 
data may show that modifications to the hospice payment methodology are 
warranted. Because the payment rates for the four hospice payment 
categories, the per diem methodology, and the cap are set by law, CMS's 
ability to make modifications to the payment approach is limited.

Recommendations for Executive Action:

We recommend the following three actions. First, we recommend that the 
Administrator of CMS collect comprehensive, patient-specific data on 
the visits and services being delivered by hospices and the costs of 
these services. Second, using these data, the Administrator should 
determine whether the hospice payment methodology and payment 
categories need to be modified, including any special adjustments for 
small providers. Third, the Administrator should implement those 
modifications that would not require a change in Medicare law and 
submit a legislative proposal to the Congress for those that do.

Agency and External Reviewer Comments and Our Evaluation:

We received written comments on a draft of this report from CMS (see 
app. II). We also received oral comments from two groups representing 
industry organizations, the Hospice Association of American (HAA) and 
the National Hospice and Palliative Care Organization (NHPCO), as well 
as from the large, for-profit hospice that provided the patient-
specific visit data.

CMS Comments and Our Evaluation:

In commenting on a draft of this report, CMS stated that it agreed with 
our recommendations and intends to use our findings to supplement and 
reinforce preliminary evaluations the agency has made and future 
studies that are planned. In responding to our recommendation that it 
collect comprehensive, patient-specific data on hospice visits and 
services and the costs of these services, CMS stated that it recognized 
the need for this type of analysis. It stated that collection of these 
data would require additional research funding, and it is uncertain 
when such funding would be available. CMS noted that it has initiated 
efforts to collect data on costs with the recent establishment of the 
hospice cost reports. CMS stated that it hoped the recommendations in 
our report could help the agency in developing a comprehensive research 
strategy for the hospice benefit.

In responding to our recommendation that CMS determine whether the 
hospice payment methodology and payment categories need to be modified, 
including any adjustments for small providers, CMS agreed that the 
methodology implemented in 1983 was based on a delivery model that may 
have changed since that time. It concurred that the methodology should 
be reevaluated to determine its current appropriateness. It again 
stated that research funding is limited. CMS agreed that the costs of 
drugs and other therapies, the number of hospice beneficiaries with 
noncancer diagnoses, and the mean length of stay have all changed since 
1983. CMS stated that we did not demonstrate in the draft report that 
the provision of these and other therapies have increased the cost of 
providing care beyond the present payment. In the draft report, we 
stated that there may be problems with the distribution of hospice 
payments, but that comprehensive data are not available to evaluate the 
number of visits or costs of services provided during a Medicare 
hospice stay. As noted in the draft report, the overall payment rate 
across all types of care is higher than our estimate of hospices' 
overall costs. In its comments, CMS also raised concerns that we 
implied that payment methodology changes be made for small hospices 
before CMS collects comprehensive data. We have clarified our 
conclusion to indicate the need for comprehensive, patient-specific 
data on the visits and services delivered by hospices and the costs of 
these services to inform any changes to the payment methodology.

In response to our recommendation that CMS should submit a legislative 
proposal to the Congress to implement those modifications that would 
require a change in Medicare law, CMS stated that should it determine 
changes are necessary, it would evaluate those changes as part of its 
overall legislative strategy.

CMS also made technical comments, which we incorporated where 
appropriate.

Industry Comments and Our Evaluation:

The external reviewers generally agreed with our findings and 
recommendations. Comments on specific portions of the draft report 
centered on two areas: our scope and methodology and the hospice 
payment methodology.

Regarding our scope and methodology, HAA and NHPCO were concerned that 
we based our findings on Medicare freestanding hospice cost reports 
that had not been audited. The large, for-profit hospice noted that the 
cost report is complex and that hospices' accounting systems are not 
generally compatible with its structure. Similarly, HAA and NHPCO 
stated that hospices may not have had sufficient experience with 
completing the cost reports at the time of our review. NHPCO stated 
that our exclusion of hospice cost reports with fewer than 11 total 
patients or an average of less than 1 patient per day might have 
excluded a substantial number of cost reports. In addition, HAA and 
NHPCO recommended that we include bereavement counseling costs in our 
per diem cost calculation. They stated that although Medicare is 
precluded from paying hospices for bereavement counseling, it is a 
required service, and excluding it from the per diem cost calculation 
may misrepresent the amount by which payment rates exceeded hospice 
costs.

Regarding reviewers' concerns about our use of unaudited cost reports, 
BBRA directed us to examine hospice cost factors. Information on these 
factors is available only from cost reports, which CMS has not audited. 
As stated in the draft report, we assessed the reliability of the cost 
reports by comparing descriptive statistics calculated using the cost 
reports with those calculated using the Medicare hospice claims, and 
found the data suitable for our purposes. Regarding reviewers' concerns 
about data we excluded from our analysis, we excluded 51 of 992, or 5 
percent, of freestanding hospice cost reports in 2000, and 48 of 975, 
or 5 percent, of freestanding hospice cost reports in 2001, because 
they had fewer than 11 total patients or an average of less than 1 
patient per day. We excluded these cost reports because we believe that 
these hospices either had too few patients to be representative of all 
hospices, or may have been reporting data incorrectly. We do not 
believe that these represent substantial numbers of cost reports and 
consider our exclusion criteria appropriate. Concerning the comments 
that we should include bereavement costs in our per diem cost 
calculation, as stated in the draft report, we included only Medicare-
reimbursable costs in our calculations. If Medicare cannot, by law, pay 
hospices for bereavement services, it is inappropriate to include them 
in a per diem cost that is compared to a payment rate that is not 
designed to cover these costs. In 2001, in comparison to total 
Medicare-reimburseable costs, bereavement costs were small; they were 
equal to less than 2 percent of total Medicare-reimburseable costs.

Reviewers also commented on the hospice payment methodology. NHPCO 
stated that costs on the cost report may not reflect the provision of 
all services that could potentially be provided because hospices may 
manage their costs to more closely approximate the per diem rate. 
Although the provision of additional services may be warranted, 
hospices cannot pay for them and therefore do not provide them. HAA and 
NHPCO stated that instances of CHC provision that fall close to 8 hours 
may not seem to occur often because hospices avoid providing CHC if 
they know they will not be able to provide at least 8 hours. However, 
HAA and NHPCO also stated that data to determine whether this is the 
case are not available.

Regarding industry comments on hospice costs and the hospice payment 
methodology, we acknowledge that hospices may manage their costs to 
closely approximate the per diem rate, and that hospices may not 
provide CHC if they know they will not be paid for that level of care. 
Data are not available to evaluate whether either of these situations 
occur.

Reviewers also made technical comments, which we incorporated where 
appropriate.

We are sending copies of this report to the Administrator of CMS and 
appropriate congressional committees. The report is available at no 
charge on GAO's Web site at http://www.gao.gov. We will also make 
copies available to others on request.

If you or your staffs have any questions, please call me at (202) 512-
7119 or Nancy A. Edwards at (202) 512-3340. Other major contributors to 
this report include Beth Cameron Feldpush, Joanna L. Hiatt, and Gordon 
W. Richmond.

Signed by: 

Laura A. Dummit: 
Director, Health Care--Medicare Payment Issues:

[End of section]

Appendix I: Scope and Methodology:

To examine hospice costs and Medicare payments, we used 2000 and 2001 
Medicare hospice cost reports, the financial documents that hospices 
submit annually to the Centers for Medicare & Medicaid Services (CMS), 
and 2000 and 2001 Medicare hospice claims data, bills submitted by 
hospices to receive Medicare payment. We also used proprietary 2002 
patient-specific visit data from a large for-profit hospice, which has 
been collecting these data for its internal use since 1994. We 
interviewed officials from CMS and one regional home health 
intermediary, a contractor responsible for processing and paying 
Medicare hospice claims, in addition to officials from AARP, the 
Hospice Association of America, the National Hospice and Palliative 
Care Organization, and the Visiting Nurse Associations of America. We 
also spoke with representatives from 18 hospices, several national 
independent and academic hospice researchers, and two physicians who 
provide hospice care. Finally, we conducted a site visit to a 
freestanding hospice with an inpatient unit.

To assess the reliability of the cost report data, we compared 
descriptive statistics calculated using the cost reports with those 
calculated using the Medicare hospice claims data. Because hospices 
began submitting cost reports in 1999, we also compared our 
calculations from the 2000 cost reports to those from the 2001 cost 
reports to ensure that hospices had provided consistent data. To assess 
the reliability of the claims data, we compared descriptive statistics 
calculated using the claims with statistics published by CMS. To assess 
the consistency of the 2002 patient-specific visit data, we verified 
that the distribution of visits in the 2002 data was similar to the 
distribution of visits in 1997 and 1999. In addition, before releasing 
these data to us, the hospice performed quality assurance edits, which 
consisted of confirming that the data provided to us were identical to 
the data in its database for more than 20 randomly selected patients. 
Finally, we calculated descriptive statistics and compared them with 
statistics for all hospices calculated using the Medicare hospice 
claims. We determined that the cost report, claims, and patient-
specific data were all suitable for our purposes.

The 2000 and 2001 hospice cost reports were the most recent data 
available at the time of our analysis. The Medicare payment methodology 
is the same for freestanding and facility-based hospices; however, we 
confined our analysis to cost reports of freestanding hospices. We 
excluded hospital-based and home health agency-based hospices because 
we found that their per diem costs were generally much lower than those 
of freestanding hospices, which may result from decisions made by these 
providers in allocating overhead costs between the hospital or home 
health agency and the hospice. For freestanding hospices, the only 
costs incurred are for delivering hospice care to patients. We excluded 
freestanding cost reports that reported no or low Medicare utilization, 
those that had cost reporting periods of fewer than 10 or greater than 
14 months, and those outside the 50 states or District of Columbia. We 
also excluded cost reports that had fewer than 11 total patients or an 
average of less than 1 patient per day, those with no costs, and those 
reporting costs outside three standard deviations of the mean. Our 
final sample included 82 percent of all freestanding hospice cost 
reports in 2000 and 80 percent in 2001.

We calculated freestanding hospices' total Medicare-reimburseable 
costs by subtracting nonreimburseable costs, such as bereavement and 
fund-raising, from total costs. To obtain average per diem costs, we 
summed total Medicare-reimburseable costs across all providers and 
divided by total hospice days across all providers. In addition, 
because of the cost report design, certain inpatient respite care 
(IRC), general inpatient care (GIC), and physician costs may be 
included in our estimate of combined routine home care (RHC) and 
continuous home care (CHC), or home care, costs. As a result, home care 
costs may be overestimated, which would result in our understating the 
amount by which the unadjusted home care payment rate exceeds average 
home care per diem costs. Because of the way cost centers are defined 
on the cost reports, the costs of IRC and GIC may be underestimated.

We based the size of a hospice in each year on the number of days of 
care it provided that year. Small hospices were those that reported 
total days of care less than the 25th percentile of all hospices' total 
days of care. Medium hospices were those that reported total days of 
care equal to or greater than the 25th percentile and less than or 
equal to the 75th percentile of all hospices' total days of care. Large 
hospices were those that reported total days of care greater than the 
75th percentile of all hospices' total days of care. We defined a 
hospice as urban if it was located in a county that was in a 
metropolitan statistical area and as rural if it was located in a 
county that was not in a metropolitan statistical area, as determined 
by the Office of Management and Budget as of June 30, 1999.

We could not compare the 2000 and 2001 per diem costs we calculated to 
actual payments because hospice cost reports do not report Medicare 
payment information. In addition, Medicare hospice claims contain only 
the total payment for all services provided during the billing period, 
including physician services, not the payment for each payment 
category. Therefore, we calculated a 2000 and 2001 unadjusted payment 
rate that encompassed all payment categories. We did so by weighting 
the individual rates of the four payment categories by their respective 
utilization in the freestanding hospice cost reports in our final 
sample in each year. The costs for home care, combined RHC and CHC, are 
reported in aggregate on the hospice cost report. Therefore, we 
calculated a 2000 and 2001 unadjusted payment rate that encompassed RHC 
and CHC. We did so by weighting the individual rates of these two 
categories by their respective utilization in the freestanding hospice 
cost reports in our final sample in each year. In addition, we weighted 
the overall unadjusted payment rate and the unadjusted payment rate for 
each payment category to account for the different payment rates in 
effect during the year. The majority of freestanding hospices report 
costs using a calendar year reporting period, while payment rates are 
updated on a fiscal year basis, that is, on October 1 of each year. 
Therefore, during a calendar year, one payment rate is in effect from 
January 1 through September 30 and another from October 1 through 
December 31. Our unadjusted payment rates do not account for the wage 
adjustment Medicare applies to payments.

To determine the proportion of total cost in 2001 accounted for by each 
service, such as nursing or home health aide services, that was 
included in the 1983 RHC rate, we grouped the services on the cost 
report into categories similar to the 1983 services, and divided by the 
total cost. Our estimates of the proportions of 2001 RHC costs include 
CHC costs because the costs of RHC and CHC are reported in aggregate on 
the hospice cost report. It is likely that CHC costs were a very small 
proportion of combined RHC and CHC costs, as CHC days accounted for 
just over 1 percent of total hospice days in 2001.

To determine the percentage of total hospice days accounted for by each 
payment category and the mean CHC hours per CHC day for all hospices, 
we used 2000 and 2001 Medicare hospice claims data, the years that 
matched most closely with the cost reports used for our analysis. We 
excluded from our analysis patients who were younger than 20 or older 
than 110 years of age, who lived outside of the 50 states or the 
District of Columbia, and who had total hospice payments that fell 
below 1 day of care at the lowest wage-adjusted RHC payment rate and 
above 1 year of care at the highest wage-adjusted RHC payment rate. Our 
final sample included over 98 percent of all claims in both 2000 and 
2001.

To analyze the frequency and types of visits to hospice patients, we 
used proprietary 2002 data on Medicare hospice patients collected by a 
large, for-profit hospice with multiple freestanding facilities. We 
determined the number of visits per day and the number of nurse, home 
health aide, counselor, and other caregiver visits per day for all days 
and for days within each of the four payment categories. We also 
analyzed whether there were differences in the number of visits per day 
provided by patient length of stay, patient residence, diagnosis, 
number of secondary conditions, and age and determined the number of 
visits in the first and last week of a stay and for the remaining days 
of a stay.

We conducted our work from January 2003 through October 2004 in 
accordance with generally accepted government auditing standards.

[End of section]

Appendix II: Comments from the Centers for Medicare & Medicaid 
Services:

DEPARTMENT OF HEALTH & HUMAN SERVICES: 
Centers for Medicare & Medicaid Services:
Administrator:
Washington. DC 20201:

DATE: SEP 15 2004:

TO: Laura A. Dummit:
Director, Health Care-Medicare Payment Issues: 
United States General Accountability Office:

Initialed by: 

FROM: Mark B. McClellan, M.D., Ph. D.: 
Administrator:

SUBJECT: General Accountability Office's (GAO) Draft Report: MEDICARE 
HOSPICE CARE: Modifications to Payment Methodology May Be Warranted 
(GAO-04-794):

Thank you for the opportunity to review and comment on the draft 
report. We appreciate the interest of the Congressional Committees and 
the efforts of the GAO in the methodology used to determine Medicare 
hospice payment rates.

The payment methodology and rates for the Medicare hospice benefit were 
developed utilizing cost data from 26 hospices that were part of a 
demonstration project run by the Centers for Medicare & Medicaid 
Services (CMS), formerly the Health Care Financing Administration, from 
1980 to 1982. At that time, patients receiving hospice care had a 
diagnosis of tenninal cancer and received the hospice benefit for an 
average length of stay of 70 days. This methodology has not been 
systematically evaluated since the inception of the hospice benefit in 
1983. The Balanced Budget Refinement Act of 1999 directed the GAO to 
study the hospice payment methodology and rates.

The CMS is committed in ensuring that Medicare beneficiaries receive 
current and appropriate hospice services and in providing the hospice 
agencies with remuneration for the services rendered while preserving 
the Medicare Trust Fund. We want to thoroughly evaluate what the cost 
for delivering these services are and to make the necessary 
modifications, if needed, to ensure that the triad of beneficiary/
hospice/Medicare is in a partnership. The CMS intends to utilize the 
findings in this report to supplement and reinforce the preliminary 
evaluations that have occurred and future studies that are planned.

The CMS thanks the GAO staff for their effort and recommendations. We 
have enjoyed working with them through this process and hope to have 
further opportunities as we venture forward.

Attached are specific CMS' comments to GAO's recommendations.

Attachment:

Centers for Medicare & Medicaid Services' Comments to the GAO Draft 
Report: MEDICARE HOSPICE CARE: Modifications to Payment Methodology May 
Be Warranted (GAO-04-794):

GAO Recommendation:

CMS should collect comprehensive, patient-specific data on the visits 
and services being delivered by hospices and the costs of these 
services.

CMS Response:

We concur with this recommendation and recognize the need for this type 
of analysis. The CMS recognizes the importance of monitoring the 
effects of payment changes and in improving and refining Medicare 
payment systems over time. An effort to collect comprehensive patient-
specific data on visits and on the cost of services would require 
additional research funding. We have initiated efforts in this regard 
by establishing a cost report that provides basic data costs. With the 
competing demands for research funding, we have been unable to analyze 
this data. An even more costly research effort would be needed to 
conduct primary data collection on resource use on a patient basis. 
With the high priority research efforts needed to implement other 
prospective payment systems, the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 provisions, including a new 
drug benefit, we are uncertain when we would be able to fund this 
effort. We are hopeful that the recent analyses conducted by MedPac and 
the recommendations contained in this report will help guide us in 
developing a comprehensive research strategy for the Medicare hospice 
benefit.

GAO Recommendation:

Using data collected, CMS should determine whether the hospice payment 
methodology and payment categories need to be modified, including any 
special adjustments for small providers.

CMS Response:

We agree that the methodology employed in 1983 to develop the payment 
rates was based upon a delivery model that may have changed, to some 
extent, since that time. We concur that this methodology should be 
reevaluated to determine its appropriateness at this time. The CMS 
recognizes the importance of monitoring the effects of changes in the 
cost for delivering services as well as improving and refining Medicare 
payment systems over time. Once again, funding restrictions are a 
limitation. We are hopeful that the information contained in this 
report will help support the development of a comprehensive research 
strategy for the hospice benefit when funding is allocated to this 
effort.

The draft report identified factors that have emerged due to the 
changing nature of delivering hospice care, which may need to be 
reexamined. These included the cost of drugs and other therapies, the 
increase in the number of hospice beneficiaries with non-cancer 
diagnoses, and the change in average length of stay. The CMS agrees 
that beneficiaries with non-cancer diagnoses are increasingly electing 
the hospice benefit. We agree that the cost of some drugs may be more 
costly today. We also acknowledge that chemotherapy and radiation are 
used as palliative therapies today. However, this draft report does 
not demonstrate that the provision of these and other therapies have 
increased the cost of providing care beyond the aggregate payment that 
hospice agencies receive for each beneficiary.

In terms of average length of stay, CMS does understand that hospice 
visits tend to be concentrated in the beginning as well as at the end 
of a hospice election. This concentration of care was factored into the 
initial computation of hospice payment rates. We concur with the GAO 
that the mean daily costs may be different today because of changes in 
length of stay (pp 21). However, we are not sure that this translates 
into insufficient payment to hospices. Payment rates have increased 
each year by the market basket value. The wage index has reflected the 
annual changes in wages by geographic location. While in the past, 
hospice staff provided a large portion of care, today families and 
friends are increasingly providing a larger portion of care, including 
skilled nursing care traditionally provided by hospice nurses. It would 
be useful to see if the number of visits and time spent by hospice 
staff has changed over the years.

In terms of small providers, the draft report states, "...small 
freestanding hospices had higher average per diem costs than other 
hospices, which could signal problems with the distribution of 
payments. As a result, modifications to the hospice payment methodology 
may be warranted." The CMS does adjust the wage index by applying a 
hospice specific wage index floor. Areas with a hospice wage index 
below 0.8 are adjusted by the greater of. (1) the hospice budget 
neutrality factor; or (2) the hospice wage index floor (a 15 percent 
increase) subject to a maximum wage index value of 0.8. However, before 
other payment methodology modifications are made, we believe additional 
information would need to be obtained to ensure that inefficient 
practices are not rewarded by additional payment. The CMS is not aware 
that small freestanding hospices are experiencing deleterious effects 
due to Medicare payment.

GAO Recommendation:

CMS should implement those modifications that would not require a 
change in Medicare law and submit a legislative proposal to the 
Congress for those that do.

CMS Response:

Should it be determined that legislative changes are required, CMS will 
evaluate those changes as part of its overall legislative strategy. 

[End of section]

FOOTNOTES

[1] Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 
No. 97-248, § 122, 96 Stat. 324, 356. 

[2] In July 2001, the name of the agency that administers Medicare, 
HCFA, was changed to the Centers for Medicare & Medicaid Services. In 
this report, we refer to the agency as HCFA when discussing actions it 
took under that name.

[3] 42 U.S.C. § 1395x(dd)(1) (2000).

[4] 42 U.S.C. § 1395f(i)(1)(B) (2000).

[5] Medicare pays physicians separately for services provided to 
hospice patients.

[6] 42 C.F.R. § 418.302(b)(1) - (4) (2003).

[7] Although a per diem rate for CHC is determined, Medicare pays 
hospices an hourly rate for CHC calculated from the per diem rate.

[8] Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 
99-272, § 9123, 100 Stat. 82, 168 (1986).

[9] 42 U.S.C. § 1395f(i)(2) (2000).

[10] Pub. L. No. 106-113, App. F, § 132, 113 Stat. 1501A-321, 1501A-
333.

[11] In 2001, over half of all Medicare hospice patients were served by 
freestanding hospices. 

[12] Estimated per diem costs for these hospices were generally much 
lower than those of freestanding hospices. 

[13] To calculate a single unadjusted hospice payment rate, we weighted 
the four rates by their respective utilization as reported on 
freestanding hospice cost reports in each year, accounting for the 
annual October 1 update in the payment rates. 

[14] To calculate an unadjusted payment rate that encompassed RHC and 
CHC, we weighted the individual rates of these two categories by their 
respective utilization as reported on freestanding hospice cost reports 
in each year. 

[15] Unlike for other providers, Medicare's hospice cost reports do not 
include Medicare payment information. In addition, Medicare hospice 
claims contain only the total payment for all services provided during 
the billing period, including physician services, not the payment for 
each hospice payment category.

[16] We define a hospice as urban if it was located in a county that 
was in a metropolitan statistical area and as rural if it was located 
in a county outside a metropolitan statistical area, as determined by 
the Office of Management and Budget as of June 30, 1999. 

[17] It is likely that CHC costs were a very small proportion of home 
care costs, as CHC days accounted for just over 1 percent of total 
hospice days in 2001. We refer to proportions of combined RHC and CHC 
costs as proportions of RHC costs.

[18] 42 C.F.R. § 418.70(e) (2003).

[19] By statute, hospices must provide bereavement counseling, although 
Medicare is prohibited from paying hospices for such services (42 
U.S.C. §§ 1395x(dd)(1)(H), 1395x(dd)(2)(A)(i), and 1395f(i)(1)(A) 
(2000)). The statute also specifies that hospices must use volunteers 
in the provision of care (42 U.S.C. § 1395x(dd)(2)(E)(i) (2000)). HCFA, 
however, did not include volunteer costs (such as volunteer training 
and program coordination costs) in setting the payment rates.

[20] 42 U.S.C. § 1395f(i)(2) (2000).

[21] Each year, the cap amount is updated by the annual percentage 
change in the medical care component of the Consumer Price Index for 
all urban consumers. 

[22] During GIC, hospices also provide services and visits to the 
patient in addition to paying the inpatient facility. 

[23] The size of the hospice in each year is based on the number of 
days of care it provided that year. Small hospices were those that 
reported total days of care less than the 25th percentile of all 
hospices' total days of care. Medium hospices were those that reported 
total days of care equal to or greater than the 25th percentile and 
less than or equal to the 75th percentile of all hospices' total days 
of care. Large hospices were those that reported total days of care 
greater than the 75th percentile of all hospices' total days of care. 

[24] While urban freestanding hospices also had higher estimated 
average per diem costs compared to rural freestanding hospices in our 
analysis, urban hospices generally receive higher payments than rural 
hospices to account for the higher wages they must pay.

[25] DME is equipment prescribed by a physician for the medical purpose 
of addressing a patient's illness or injury that can withstand repeated 
use, such as respirators, crutches, and oxygen equipment.

[26] RHC costs for 2001 are slightly overestimated, as they include CHC 
costs. CHC days accounted for just over 1 percent of total hospice days 
in 2001.

[27] We also analyzed patient visit frequency by certain patient 
characteristics. Using 2002 patient-specific visit data, we found no 
substantial differences in the mean number of visits per day among 
patients of different ages, diagnoses, numbers of secondary conditions, 
or residential locations. (The patient-specific visit data categorized 
patients as residing in their home, a nursing home, an assisted living 
facility, or a hospital. In this analysis, patients residing in a 
hospital had a slightly lower mean number of visits per day than 
patients residing in other locations.)

[28] We also found that patients with a length of stay of 2 weeks or 
less had a higher proportion of CHC days, representing the delivery of 
more intensive, and therefore more costly, services, compared to 
patients with longer stays. 

[29] 42 U.S.C. 1395x(dd)(1)(G) (2000).

[30] One regional home health intermediary had jurisdiction over at 
least 71 percent of the hospices that reached the cap each year from 
1999 through 2002. This intermediary had no additional information on 
why these hospices reached the cap.

[31] TEFRA, § 122(i)(1), 96 Stat. 358-359.

[32] 42 U.S.C. § 1395f(i)(2) (2000).

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