GAO-06-59, Medicare: Little Progress Made in Targeting Outpatient Therapy Payments to Beneficiaries' Needs


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entitled 'Medicare: Little Progress Made in Targeting Outpatient 
Therapy Payments to Beneficiaries' Needs' which was released on 
November 10, 2005. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

November 2005: 

Medicare: 

Little Progress Made in Targeting Outpatient Therapy Payments to 
Beneficiaries' Needs: 

GAO-06-59: 

GAO Highlights: 

Highlights of GAO-06-59, a report to congressional committees: 

Why GAO Did This Study: 

For years, Congress has wrestled with rising Medicare costs and 
improper payments for outpatient therapy services—physical therapy, 
occupational therapy, and speech-language pathology. In 1997 Congress 
established per-person spending limits, or “therapy caps,” for 
nonhospital outpatient therapy but, responding to concerns that some 
beneficiaries need extensive services, has since placed temporary 
moratoriums on the caps. The current moratorium is set to expire at the 
end of 2005. 

The Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 required GAO to report on whether available information justifies 
waiving the caps for particular conditions or diseases. As agreed with 
the committees of jurisdiction, GAO also assessed the status of the 
Department of Health and Human Services’ (HHS) efforts to develop a 
needs-based payment policy and whether circumstances leading to the 
caps have changed. 

What GAO Found: 

Data and research available are, for three reasons, insufficient to 
identify particular conditions or diseases to justify waiving 
Medicare’s outpatient therapy caps. First, Medicare claims data—the 
most comprehensive data for beneficiaries whose payments would exceed 
the caps—often do not capture the clinical diagnosis for which therapy 
is received. Nor do they show particular conditions or diseases as more 
likely than others to be associated with payments exceeding the caps. 
Second, even for diagnoses clearly linked to a condition or disease, 
such as stroke, the length of treatment for patients with the same 
diagnosis varies widely. Third, because of the complexity of patient 
factors involved, most studies do not define the amount or mix of 
therapy services needed for Medicare beneficiaries with specific 
conditions or diseases. Provider groups remain concerned about adverse 
effects on beneficiaries needing extensive therapy if the caps are 
enforced. HHS does not, however, have the authority to provide 
exceptions to the therapy caps. 

Despite several related statutory requirements, HHS has made little 
progress toward developing a payment system for outpatient therapy that 
considers individual beneficiaries’ needs. In particular, HHS has not 
determined how to standardize and collect information on the health and 
functioning of patients receiving outpatient therapy services—a key 
part of developing a system based on individual needs for therapy. 

The circumstances that led to the therapy caps remain a concern. 
Medicare payments for outpatient therapy are still rising 
significantly, and increases in improper payments for outpatient 
therapy continue. HHS could reduce improper payments and Medicare costs 
by improving its system of automated processes for rejecting claims 
likely to be improper. 

Beneficiaries for Whom 2002 Medicare Payments for Outpatient Therapy 
Services Would Have Exceeded Therapy Caps, Had They Been in Place, and 
by How Much: 

[See Table 2] 

What GAO Recommends: 

GAO suggests that Congress give HHS interim authority to allow, under 
certain conditions, payments exceeding the caps after the moratorium 
expires. GAO recommends that HHS expedite developing a means to assess 
beneficiaries’ therapy needs, and HHS concurs. GAO also recommends that 
HHS improve its system for identifying improper therapy claims beyond 
initiatives already under way. 

www.gao.gov/cgi-bin/getrpt?GAO-06-59. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact A. Bruce Steinwald at 
(202) 512-7119 or steinwalda@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Insufficient Information Exists to Justify Waiving Therapy Caps for 
Particular Conditions or Diseases: 

HHS Has Made Little Progress toward a Payment System Based on Patients' 
Needs: 

Circumstances That Led to Therapy Caps Remain: 

Conclusions: 

Matter for Congressional Consideration: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Comments from the Department of Health and Human Services: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: The Five Most Reported Diagnosis Codes Related to Outpatient 
Therapy, Ranked by Frequency under Each Therapy Type, 2002: 

Table 2: Beneficiaries for Whom 2002 Medicare Payments for Outpatient 
Therapy Services Would Have Exceeded Therapy Caps and by How Much: 

Table 3: Legislation Affecting Medicare Spending on Outpatient Therapy 
Services, 1997-2003, and HHS Actions: 

Table 4: CMS-Contracted Studies of Outpatient Therapy Services, 2000- 
2004: 

Figures: 

Figure 1: Top 99 Most Reported Diagnosis Codes and Associated 
Percentage of Medicare Beneficiaries for Whom Payments Would Have 
Exceeded the Combined Cap for Physical Therapy and Speech-Language 
Pathology, 2002: 

Figure 2: Variation in Length of Treatment per Episode among Medicare 
Beneficiaries Diagnosed with Stroke, 2002: 

Abbreviations: 

BBA: Balanced Budget Act of 1997: 

BBRA: Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999: 
BIPA: Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000: 
CMS: Centers for Medicare & Medicaid Services: 
HHS: Department of Health and Human Services: 
MedPAC: Medicare Payment Advisory Commission: 
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of 
2003: 

United States Government Accountability Office: 

Washington, DC 20548: 

November 10, 2005: 

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

The Honorable Joe Barton: 
Chairman: 
The Honorable John D. Dingell: 
Ranking Minority Member: 
Committee on Energy and Commerce: 
House of Representatives: 

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

Medicare, the federal health program insuring more than 40 million 
beneficiaries aged 65 and older or disabled, covers three outpatient 
therapy services: physical therapy, occupational therapy, and speech- 
language pathology. Medicare covers these services only if they are 
needed to improve a patient's condition (for example, to aid stroke 
recovery or combat the effects of Parkinson's disease) and are 
reasonable in amount, frequency, and duration. In 2002, the most recent 
year for which complete data are available, an estimated 3.7 million, 
or about 9 percent, of Medicare beneficiaries received one or more of 
these types of outpatient therapy.[Footnote 1] 

For many years, Congress has wrestled with rising Medicare costs of 
providing outpatient therapy services.[Footnote 2] From 1990 through 
1996, spending on these services grew at nearly double the rate of 
Medicare spending overall. Some of the growth was attributed to 
financial incentives in Medicare payment methods, which encouraged use 
of services, and to the lack of program oversight to prevent 
inappropriate payments. For example, in 1995 we reported widespread 
examples of overcharging Medicare for therapy services delivered to 
nursing home residents, including markups resulting from providers' 
exploiting regulatory ambiguity and weaknesses in Medicare's payment 
rules.[Footnote 3] In 1997, as a means to control the spending growth, 
Congress established new caps on the amount that Medicare would pay for 
outpatient therapy services for a beneficiary in any given year. These 
therapy caps raised concern, however, that patients with extensive need 
for outpatient therapy services would be adversely affected-- 
particularly patients who lacked access to hospital outpatient 
departments, which are exempt from the caps.[Footnote 4] Since 1997, 
the caps were actually in effect only in 1999 and part of 2003; in 
other years, Congress placed temporary moratoriums on them. The current 
moratorium on the therapy caps is due to expire at the end of December 
2005.[Footnote 5] 

As part of the 1997 legislation that established the therapy caps, 
Congress also required the Department of Health and Human Services 
(HHS) to report by 2001 on its recommendations for an alternative, 
"needs-based" payment system for outpatient therapy services. We have 
reported that, in contrast to less-targeted control over service use 
afforded by spending limits, such a payment system could help target 
payments to beneficiaries who genuinely require more services than 
could be paid for under the therapy caps.[Footnote 6] A needs-based 
payment system could take into account the type and extent of therapy 
warranted by a beneficiary's health and functional status (that is, the 
person's ability to perform activities of daily living, such as 
bathing, dressing, eating, or moving from one location to another). In 
several laws enacted starting in 1997, Congress has directed HHS to 
take certain actions related to the development of such a system, 
including considering beneficiaries' functional status in the design of 
a new outpatient therapy policy and reporting on the development of 
standard instruments for assessing the health and functional status of 
patients receiving Medicare services, including outpatient 
therapy.[Footnote 7] Within HHS, the Centers for Medicare & Medicaid 
Services (CMS), which administers Medicare, has major responsibilities 
for this effort. 

The Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA), which put in place the most recent moratorium on therapy 
caps, directed us to report on the conditions or diseases that may 
justify waiving application of the caps.[Footnote 8] To provide a 
greater range of information about these issues, as agreed with the 
committees of jurisdiction, we also examined HHS's efforts to date in 
developing a needs-based payment system. This report assesses (1) 
available information that could be used to justify waiving outpatient 
therapy caps for particular conditions or diseases, (2) the status of 
HHS's efforts to base Medicare payment policy on outpatient therapy on 
beneficiaries' needs, and (3) whether the circumstances initially 
leading to the caps have changed. 

To assess whether available information could be used to justify 
waiving outpatient therapy caps for particular conditions or diseases, 
we reviewed data and research including analyses of Medicare claims 
data by CMS contractors. We generally relied on the published results 
of CMS's contracted analyses performed on Medicare 2002 claims 
data.[Footnote 9],[Footnote 10] The claims data used by CMS contractors 
and other health care researchers are the most comprehensive data 
available for assessing Medicare outpatient therapy and the conditions 
and diseases of Medicare beneficiaries for whom payments would have 
exceeded the therapy caps had a moratorium on the caps not been in 
place. We also reviewed the literature on therapy treatment protocols 
and on the efficacy of outpatient therapy for Medicare beneficiaries 
with selected conditions and diseases, and we reviewed a related report 
by the Medicare Payment Advisory Commission (MedPAC), an independent 
group of health care experts that advises Congress on Medicare payment 
issues. To assess HHS's response to requirements for developing 
instruments to ensure that Medicare payments for outpatient therapy are 
targeted to beneficiaries' needs, we reviewed the legislative history 
of Medicare's outpatient therapy caps, related requirements for HHS, 
and studies by CMS contractors. We examined HHS's actions in response 
to the legislative requirements and studies' proposals and reviewed 
administrative options for ensuring that medically necessary therapy is 
available to beneficiaries over the short and long terms under 
Medicare's payment system. To determine whether the circumstances 
leading to therapy caps--specifically, significant growth in outpatient 
therapy payments and a high rate of improper payments--have changed, we 
reviewed preliminary CMS estimates of overall Medicare part B 
expenditures,[Footnote 11] which include spending on outpatient therapy 
services, and CMS reports on improper payments for outpatient therapy 
services. Finally, we obtained the opinions of four national 
organizations representing the views of key providers of outpatient 
therapy services.[Footnote 12] We conducted our work in accordance with 
generally accepted government auditing standards from January through 
October 2005. 

Results in Brief: 

We found the data and research available to date insufficient for three 
reasons to identify particular conditions or diseases that would 
justify waiving Medicare's outpatient therapy caps: 

* Medicare claims data are limited in the extent to which they identify 
the actual conditions or diseases for which beneficiaries receive 
therapy because the data often do not capture the clinical diagnosis 
for which therapy is received. Further, a CMS-contracted analysis of 
claims data for 2002 does not show any particular conditions or 
diseases as more likely than others to be associated with payments 
exceeding the therapy caps. 

* Even for diagnoses that are clearly linked to a condition or disease, 
such as stroke, the CMS-contracted analysis of 2002 claims data shows 
that the length of treatment for patients with the same diagnosis 
varied widely. 

* Because of the complexity of patient factors involved, most studies 
we reviewed do not define the amount or mix of therapy services needed 
for Medicare beneficiaries with specific conditions or diseases. 

It is uncertain how many beneficiaries would be adversely affected 
because they have medical needs for therapy costing more than the caps 
and yet are unable to obtain needed care because they lack sufficient 
financial resources or access to a hospital outpatient therapy 
department. The CMS-contracted analysis of 2002 claims data shows that 
more than a half million Medicare beneficiaries in 2002 received 
therapy for which payments would have exceeded the caps had a 
moratorium not been in place. Provider groups also told us that a 
sizable number of beneficiaries would be adversely affected if the caps 
were enforced. 

Although congressional mandates starting in 1997 have required HHS to 
take certain actions toward developing an outpatient therapy payment 
system that considers patients' individual needs for therapy, the 
department has made little progress toward such a system, except to 
contract for a series of studies of outpatient therapy use by Medicare 
beneficiaries. Two of these contracted studies have reported that 
functional assessments of patients--standard evaluations that would 
help determine a person's ability to perform the functions of daily 
life and specific needs for therapy--would be required to develop a 
needs-based payment system. CMS officials also said that developing a 
standard patient assessment instrument could take 3 years or longer. In 
response to a 2000 statutory requirement for HHS to report to Congress 
no later than January 1, 2005, on the development of standard patient 
assessment instruments for patients receiving a variety of services, 
including outpatient therapy, HHS and CMS have work in progress, but 
this work does not include outpatient therapy. Officials attribute this 
exclusion to the complexity of the project and to limited resources. 

Circumstances that led to therapy caps do not appear to have changed 
since the caps were established. CMS assessments of Medicare claims 
data show that Medicare payments for outpatient therapy are still 
rising rapidly and that the rate of improper payments has increased 
substantially in recent years. Over a 4-year period from 1999 through 
2002, for example, Medicare spending for outpatient therapy more than 
doubled, from an estimated $1.5 billion to $3.4 billion. CMS's 
assessment of the error rate for outpatient therapy claims found that 
improper payments--mainly due to insufficient documentation to support 
the services claimed--grew from about 11 percent in 1998 to more than 
20 percent in 2000. CMS could reduce improper payments and the costs to 
Medicare by implementing the proposal in its contracted study of 
Medicare outpatient therapy claims to strengthen the agency's system 
for identifying and denying payment of improper outpatient therapy 
claims. Provider groups we spoke with agreed that such improvements in 
CMS's automated payment system could help ensure that Medicare does not 
pay for unneeded services. Furthermore, an exception process based on a 
medical review could help determine the appropriateness of payment for 
therapy services. At present, however, HHS does not have the authority 
to implement such a process or to conduct a demonstration or pilot 
project to provide exceptions to the therapy caps. 

To provide a means by which some Medicare beneficiaries could have 
access to appropriate outpatient therapy services and to obtain better 
data on the conditions and diseases of beneficiaries who have extensive 
outpatient therapy needs, we suggest that Congress consider giving HHS 
the authority to implement an interim process or demonstration project 
whereby individual beneficiaries could be granted an exception from the 
therapy caps under certain conditions determined by CMS. In addition, 
to expedite development of a patient assessment instrument for 
outpatient therapy services, we recommend that the Secretary of HHS 
include these services in the effort already under way to standardize 
the terminology for existing patient assessment instruments. To reduce 
payment for improper claims, we recommend that the Secretary of HHS 
implement improvements to CMS's system for identifying outpatient 
therapy claims that are likely to be improper. 

In commenting on a draft of this report, HHS did not address our 
suggestion that Congress give the department interim authority to 
allow, under certain circumstances, payments exceeding the caps. HHS 
agreed with our recommendation to include outpatient therapy services 
in its effort under way to standardize the terminology for patient 
assessment. With regard to our recommendation to implement improvements 
to CMS's automated payment system, HHS referred to a current initiative 
to improve the coding on Medicare claims and noted that the department 
is exploring methods for improving the automated evaluation of claims. 
We believe, however, that HHS could improve the payment system beyond 
the initiative already under way. 

Background: 

Outpatient therapy services--covered under part B of the Medicare 
program--comprise physical therapy, occupational therapy, and speech- 
language pathology to improve patients' mobility and 
functioning.[Footnote 13] Medicare regulations and coverage rules 
require that beneficiaries be referred for outpatient therapy services 
by a physician or nonphysician practitioner and that a written plan of 
care be reviewed and certified by the providers at least once every 30 
days. Beneficiaries receiving therapy are expected to improve 
significantly in a reasonable time and to need therapy for 
rehabilitation rather than maintenance.[Footnote 14] Medicare-covered 
outpatient therapy services are provided in a variety of settings by 
institutional providers (such as hospital outpatient departments, 
skilled nursing facilities, comprehensive outpatient rehabilitation 
facilities, outpatient rehabilitation facilities, and home health 
agencies) and by noninstitutional providers (such as physicians, 
nonphysician practitioners, and physical and occupational therapists in 
private practice).[Footnote 15] Both institutional and noninstitutional 
providers--with the exception of hospital outpatient departments--are 
subject to the therapy caps. 

For more than a decade, Medicare's costs for outpatient therapy 
services have been rising, and widespread examples of inappropriate 
billing practices, resulting from regulatory ambiguity and weaknesses 
in Medicare's payment rules, have been reported by us and others. In 
1995 we reported, for example, that while state averages for physical, 
occupational, and speech therapists' salaries in hospitals and skilled 
nursing facilities ranged from about $12 to $25 per hour, Medicare had 
been charged $600 per hour or more.[Footnote 16] HHS's Office of 
Inspector General reported in 1999 that Medicare reimbursed skilled 
nursing facilities almost $1 billion for physical and occupational 
therapy that was claimed improperly, because the therapy was not 
medically necessary or was provided by staff who did not have the 
appropriate skills for the patients' medical conditions.[Footnote 17] 

To control rising costs and improper payments, Congress established 
therapy caps for all nonhospital providers in the Balanced Budget Act 
of 1997.[Footnote 18] The Medicare, Medicaid, and SCHIP Balanced Budget 
Refinement Act of 1999 later imposed a moratorium on the caps for 2000 
and 2001.[Footnote 19] The Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 then extended the moratorium 
through 2002.[Footnote 20] Although no moratorium was in effect as of 
January 1, 2003, CMS delayed enforcing the therapy caps through August 
31, 2003. In December 2003, the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003[Footnote 21] placed the most 
recent moratorium on the caps, extending from December 8, 2003, through 
December 31, 2005.[Footnote 22] The legislation establishing the caps 
provided for two caps per beneficiary: one for occupational therapy and 
one for physical therapy and speech-language pathology combined. The 
legislation set the caps at $1,500 each and provided that these limits 
be indexed by the Medicare Economic Index each year beginning in 2002. 
When last in place in 2003, the two caps were set at $1,590 each. 

To process and pay claims and to monitor health care providers' 
compliance with Medicare program requirements, CMS relies on claims 
administration contractors, who use a variety of review mechanisms to 
ensure appropriate payments to providers. A system of automated checks 
(a process CMS terms "edits") flags potential billing errors and 
questionable claims. The automated system can, for example, identify 
procedures that are unlikely to be performed on the same patient on the 
same day or pairs of procedure codes that should not be billed together 
because one service inherently includes the other or the services are 
clinically incompatible. 

In certain cases, automated checks performed by CMS claims 
administration contractors may lead to additional claim reviews or to 
educating providers about Medicare coverage or billing issues. The 
contractors' clinically trained personnel may perform a medical review, 
examining the claim along with the patient's medical record, submitted 
by the physician. Medical review is generally done before a claim is 
paid, although medical review may also be done after payment to 
determine if a claim was paid in error and funds may need to be 
returned to Medicare. 

Insufficient Information Exists to Justify Waiving Therapy Caps for 
Particular Conditions or Diseases: 

The data and research available to date are insufficient to determine 
whether any particular conditions or diseases may justify a waiver of 
Medicare's outpatient therapy caps. Medicare claims data are limited in 
the extent to which they can be used to identify the actual conditions 
or diseases for which beneficiaries are receiving therapies because the 
claims often lack specific diagnostic information. In addition, 
analyses of the claims data show no particular conditions or diseases 
as more likely than others to be associated with payments exceeding the 
therapy caps. The data also show that treatment for a single condition 
or disease, such as stroke, may vary greatly from patient to patient. 
Finally, available research on the amount and mix of outpatient therapy 
for people aged 65 and older with specific conditions and diseases also 
appears insufficient to justify a waiver of the therapy caps for 
particular conditions or diseases. It is uncertain how many 
beneficiaries would have medical needs for therapy costing more than 
the caps and yet be unable to obtain the needed care because they have 
either insufficient financial resources or no access to a hospital 
outpatient therapy department. 

Medicare Claims Data Do Not Always Capture Clinical Diagnoses or Show 
Consistent Patterns That Would Justify Waiving Therapy Caps: 

Although Medicare claims data constitute the most comprehensive 
available information for Medicare beneficiaries who have received 
outpatient therapy, they do not always capture the clinical diagnosis 
for which beneficiaries receive therapy. As such, they are insufficient 
for identifying particular diseases and conditions that should be 
exempted from the caps. Patients' conditions or diseases are expressed 
in claims data through diagnosis codes, and the coding system allows 
providers to use nonspecific diagnosis codes that are unrelated to a 
specific clinical condition or disease.[Footnote 23] A CMS-contracted 
analysis of 2002 Medicare outpatient therapy claims data,[Footnote 24] 
for example, found generic codes, such as "other physical therapy," to 
be among the most often used diagnosis codes on claim forms (see table 
1). Moreover, current Medicare guidelines for processing claims permit 
institutional providers, such as outpatient rehabilitation facilities 
and skilled nursing facilities, to submit services from all three 
therapy types on the same claim form, with one principal diagnosis for 
the claim; a claim seeking payment for occupational therapy and for 
speech-language pathology might therefore be filed under "other 
physical therapy." 

Table 1: The Five Most Reported Diagnosis Codes Related to Outpatient 
Therapy, Ranked by Frequency under Each Therapy Type, 2002: 

Physical therapy: Other physical therapy; 
Occupational therapy: Acute but ill-defined cerebrovascular disease; 
Speech-language pathology[A]: Dysphagia[B]. 

Physical therapy: Lumbago[C]; 
Occupational therapy: Other physical therapy; 
Speech-language pathology[A]: Acute but ill- defined cerebrovascular 
disease. 

Physical therapy: Abnormality of gait; 
Occupational therapy: Occupational therapy encounter; 
Speech-language pathology[A]: Speech therapy. 

Physical therapy: Pain in joint, shoulder region; 
Occupational therapy: Abnormality of gait; 
Speech-language pathology[A]: Abnormality of gait. 

Physical therapy: Cervicalgia[D]; 
Occupational therapy: Other general symptoms; 
Speech-language pathology[A]: Other physical therapy. 

Source: Ciolek and Hwang, Final Project Report (2004). 

[A] The majority of outpatient speech-language pathology services are 
furnished by hospital and skilled nursing facility providers, and the 
claim forms do not contain fields for identification of a therapy- 
specific diagnosis. Often, if a beneficiary receives multiple therapies 
simultaneously, the physical therapy diagnosis is reported first on the 
claim, which may explain why the fifth-most frequent diagnosis code for 
speech-language pathology is "other physical therapy." 

[B] Difficulty in swallowing. 

[C] A painful condition of the lower back. 

[D] A sharp pain or aching in the neck. 

[End of table] 

Analysis of 2002 claims data does not show any particular conditions or 
diseases that are more likely than others to be associated with 
payments exceeding the therapy caps for physical therapy and speech- 
language pathology combined or for occupational therapy. Among the top 
99 most reported diagnoses for physical therapy and speech-language 
pathology, the analysis found no particular diagnoses associated with 
large numbers of beneficiaries for whom payments would have exceeded 
the combined physical therapy and speech-language pathology cap in 2002 
had it been in effect (see fig. 1). A similar pattern existed for 
occupational therapy. 

Figure 1: Top 99 Most Reported Diagnosis Codes and Associated 
Percentage of Medicare Beneficiaries for Whom Payments Would Have 
Exceeded the Combined Cap for Physical Therapy and Speech-Language 
Pathology, 2002: 

[See PDF for image] 

Note: Each dot represents the percentage of Medicare beneficiaries, 
reported under each of the 99 most reported diagnosis codes (arrayed 
from 1 to 99 along the x-axis), for whom payments would have exceeded 
the combined cap for physical therapy and speech-language pathology had 
it been in effect in 2002. 

[End of figure] 

Claims Data Do Not Provide Information about Patients' Therapy Needs: 

Medicare claims data do not provide information about patients' therapy 
needs that could be used to justify waiving the therapy caps. Even in 
those cases where particular conditions or diseases, such as stroke or 
Alzheimer's disease, are identified in the diagnosis codes, different 
individuals with the same diagnosis can need different intensities or 
types of therapy. For example, one patient with a stroke might be able 
to return home from the hospital a day or two after admission, while 
another may suffer a severe loss of functioning and require extensive 
therapy of more than one type. The CMS-contracted analysis of 2002 
claims found wide variation in the number of treatment days required to 
conclude an episode of care[Footnote 25] for beneficiaries who had the 
same "diagnosis," such as stroke. For example, the analysis found that 
while the median number of days per episode of physical therapy for 
stroke patients was 10, episode length ranged from 1 to 80 
days.[Footnote 26] Similarly wide ranges in treatment length for stroke 
patients appeared for occupational therapy (1 to 68 days per episode, 
median 9) and speech-language pathology (1 to 66 days per episode, 
median 7). Figure 2 shows the range in length of treatment per episode 
for patients with a diagnosis of acute cerebrovascular disease (stroke) 
for the three types of therapy. 

Figure 2: Variation in Length of Treatment per Episode among Medicare 
Beneficiaries Diagnosed with Stroke, 2002: 

[See PDF for image] 

Note: Illustrated ranges extend only to the 99th percentile to 
eliminate extreme outliers. 

[A] An "episode" in this study was defined as the date of a 
beneficiary's first therapy encounter until the last encounter for the 
same type of therapy. If a 60-day break intervened between therapy 
services of the same or a different type, the new round of therapy was 
considered a new episode. 

[End of figure] 

Available Research Does Not Define Amount or Mix of Outpatient Therapy 
Needed for Medicare Beneficiaries with Specific Diseases or Conditions: 

Available research on the efficacy of outpatient therapy for people 
aged 65 and older with specific conditions and diseases also appears 
insufficient to justify a waiver of particular conditions or diseases 
from the therapy caps. Although our literature review found several 
studies demonstrating the benefits of therapy for seniors and Medicare- 
eligible patients, this research generally did not define the amount or 
mix of therapy services needed for Medicare beneficiaries with specific 
conditions or diseases. One study, for example, examined the benefits 
of extensive therapy for stroke victims at skilled nursing facilities. 
The study concluded that high-intensity therapy may have little effect 
on beneficiaries' length of time spent in the facility when their short-
term prognosis is good; beneficiaries with poorer prognoses, however, 
may benefit substantially from intensive therapy. Further, because of 
the complexity of patient factors involved, these studies cannot be 
generalized to all patients with similar diseases or conditions. In 
addition, MedPAC, the commission that advises Congress on Medicare 
issues, suggests that research should be undertaken on when and how 
much physical therapy benefits older patients and that evidence 
gathered from this research would assist in developing guidelines to 
determine when therapy is needed.[Footnote 27] 

Payments for More Than a Half Million Beneficiaries Would Have Exceeded 
Therapy Caps in 2002, but Adverse Effect Is Unknown: 

Medicare claims data suggest that payments for more than a half million 
beneficiaries would have exceeded the caps had they been in place in 
2002. It is uncertain, however, how many beneficiaries with payments 
exceeding the caps would be adversely affected because they have 
medical needs for care and no means to obtain it through hospital 
outpatient departments. According to the CMS-contracted analysis of 
2002 claims data, Medicare paid an estimated $803 million in outpatient 
therapy benefits above what would have been permitted had the therapy 
caps been enforced that year. Payments for about 17 percent of 
occupational therapy users and 15 percent of physical therapy and 
speech-language pathology service users would have surpassed the caps 
in 2002; these beneficiaries numbered more than a half million (see 
table 2). 

Table 2: Beneficiaries for Whom 2002 Medicare Payments for Outpatient 
Therapy Services Would Have Exceeded Therapy Caps and by How Much: 

Cap: Occupational therapy; 
Projected number of beneficiaries whose payments would have exceeded 
caps: 129,509; 
Projected percentage of beneficiaries whose payments would have 
exceeded caps: 17.4%; 
Average amount above cap (dollars): $1,237; 
Estimated total above cap (millions of dollars)[A]: $160.2. 

Cap: Physical therapy and speech-language pathology; 
Projected number of beneficiaries whose payments would have exceeded 
caps: 508,686; 
Projected percentage of beneficiaries whose payments would have 
exceeded caps: 14.5%; 
Average amount above cap (dollars): $1,263; 
Estimated total above cap (millions of dollars)[A]: $642.4. 

Source: Ciolek and Hwang, Final Project Report (2004). 

Note: Because of a moratorium, therapy caps were not in effect in 2002; 
use of outpatient therapy services might have been different had the 
spending caps been in place. Because hospital outpatient departments 
are exempt from the caps, payments for services provided by hospital 
outpatient departments were excluded from this analysis. 

[A] This study estimated that the totals above the caps represented 
23.7 percent of all outpatient therapy expenditures for 2002. 

[End of table] 

Although the claims data show that payments for more than a half 
million beneficiaries would have exceeded the caps in 2002, it is 
unknown whether beneficiaries would have been adversely affected had 
the caps been in place. The data do not show the extent to which these 
beneficiaries were receiving care consistent with Medicare requirements 
that therapy improve a beneficiary's condition and be reasonable in 
amount, frequency, and duration. Also, it is not clear to what extent 
hospital outpatient departments would serve as a "safety valve" for 
Medicare beneficiaries needing extensive therapy and unable to pay for 
it on their own. Past work by us and others has noted that the therapy 
caps were integral to the Balanced Budget Act's spending control 
strategy and were unlikely to affect the majority of Medicare's 
outpatient therapy users. We reported that the hospital outpatient 
department exemption from the cap was a mitigating factor in the mid- 
1990s, essentially removing the coverage limits for those users who had 
access to hospital outpatient departments.[Footnote 28] CMS-contracted 
analyses of claims data for 2002, however, show that nearly all the 
Medicare beneficiaries whose payments would have exceeded the caps did 
not receive outpatient therapy in hospital outpatient departments. 
Specifically, an estimated 92 percent (469,850 beneficiaries) of those 
whose payments would have exceeded the combined physical therapy and 
speech-language pathology cap--and 98 percent (126,488 beneficiaries) 
of those whose payments would have exceeded the occupational therapy 
cap--did not receive therapy services in a hospital outpatient 
department. These proportions, however, might have been different had 
the caps been in effect in 2002. 

Provider groups we spoke with were concerned that a sizable number of 
beneficiaries with legitimate medical needs whose payments would exceed 
the caps could be harmed. One group told us that a cap on outpatient 
therapy services would severely limit the opportunity for patients with 
the greatest need to receive appropriate care, and another group said 
that therapy caps could hurt beneficiaries with chronic illnesses. 
According to a third group, payments can quickly exceed the caps for 
beneficiaries who suffer from serious conditions such as stroke and 
Parkinson's disease or who have multiple medical conditions. 

HHS Has Made Little Progress toward a Payment System Based on Patients' 
Needs: 

Statutory mandates since 1997 have required HHS to take certain actions 
toward developing a payment system for outpatient therapy that 
considers patients' individual needs for care, but the agency has made 
little progress toward such a system. In particular, HHS has not 
determined how to standardize and collect information on the health and 
functioning of patients receiving outpatient therapy services--a key 
part of developing a system based on patients' actual needs for 
therapy. 

To curb spending growth and ensure that outpatient therapy services are 
appropriately targeted to those beneficiaries who need them, Congress 
included provisions related to these services in several laws enacted 
starting in 1997 (see table 3). These provisions required HHS to report 
to Congress in 2001 on a revised coverage policy for outpatient therapy 
services that would consider patients' needs. The provisions also 
required HHS to report to Congress in 2005 on steps toward developing a 
standard instrument for assessing a patient's need for outpatient 
therapy services and on a mechanism for applying such an instrument to 
the payment process. As of October 2005, HHS had not reported its 
specific recommendations on revising the coverage policy based on 
patients' needs. HHS had, however, contracted with researchers to 
conduct several analyses of Medicare claims data as a means of 
responding to the mandates. 

Table 3: Legislation Affecting Medicare Spending on Outpatient Therapy 
Services, 1997-2003, and HHS Actions: 

Law: Balanced Budget Act of 1997 (BBA), Pub. L. No. 105-33, § 4541, 111 
Stat. 251, 454; 
Key provisions: Required HHS to submit, no later than January 1, 2001, 
a report including specific recommendations on a revised coverage 
policy for outpatient therapy services under Medicare based on 
diagnostic category and prior use of services; 
Response: HHS did not submit a report to Congress by January 1, 2001. 
HHS, through CMS, contracted with the Urban Institute for a series of 
reports that were meant to help meet BBA's requirements[A,B]. 

Law: Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA), Pub. L. No. 106-113, app. F, § 221, 113 Stat. 1501A-321, 
1501A-351; 
Key provisions: Required HHS to compare and report on by June 30, 2001, 
the utilization patterns (nationwide and by region, setting, and 
diagnosis) of outpatient therapy services in 1998 and 1999 with those 
on or after January 1, 2000, including a review of a statistically 
significant number of claims for these services; As an amendment to the 
BBA reporting requirement, HHS was directed under BBRA to consider 
"functional status" and other criteria as the Secretary deemed 
appropriate in the design of a new outpatient therapy payment policy 
and to discuss methods to help ensure appropriate use of outpatient 
therapy; 
Response: CMS contracted with the Urban Institute for a series of 
reports that were to meant help meet BBRA's requirements, including the 
requirement to study utilization of outpatient therapy services[B]; CMS 
contracted with AdvanceMed to meet BBRA's requirements for a study and 
report on utilization.[C] HHS did not submit a report to Congress by 
June 30, 2001, but AdvanceMed's report was completed in September 2002. 
No outpatient therapy payment policy designed, therefore, no response 
to "functional status" language. 

Law: Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000 (BIPA), Pub. L. No. 106-554, app. F, § 545, 114 Stat. 2763A-
463, 2763A-551; 
Key provisions: Required HHS to report, no later than January 1, 2005, 
on the development of standard instruments for assessing the health and 
functional status of patients receiving any one of a variety of 
services, including speech-language pathology, physical therapy, 
occupational therapy, and both inpatient and outpatient settings; this 
report is to include a recommendation on the use of such "standard 
instruments" for payment purposes; 
Response: HHS did not submit a report to Congress by January 1, 2005. 
Officials told us in May 2005 that a report related to BIPA's 
requirement was in progress. An HHS official anticipated submitting 
this report to Congress by the end of 2005, but it will not include 
outpatient therapy. 

Law: Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA), Pub. L. No. 108-173, § 624, 117 Stat. 2066, 2317; 
Key provisions: Required HHS to submit, no later than March 31, 2004, 
overdue reports on payment for and utilization of outpatient therapy 
services; 
Response: In November 2004 HHS issued a report to Congress in response 
to the BBA, BBRA, and MMA requirements. This report included a review 
of medical claims and a discussion of a planned analysis of 
alternatives to current payment practices for outpatient therapy 
services. It did not specify a revised outpatient therapy payment 
policy.[D] HHS appended to this report seven reports by its 
contractors, the Urban Institute and AdvanceMed[E]. 

Source: GAO. 

[A] The HHS agency now known as CMS was called the Health Care 
Financing Administration (HCFA) before June 2001. 

[B] Maxwell and Baseggio, Outpatient Therapy Services (2000), and 
Maxwell et al., Part B Therapy Services (2001). 

[C] Olshin et al., Study and Report (2002). 

[D] Centers for Medicare & Medicaid Services, Report to Congress, 
Medicare Financial Limitations on Outpatient Rehabilitation Services 
(Baltimore, Md.: November 2004). 

[E] Maxwell and Baseggio, Outpatient Therapy Services (2000); Maxwell 
et al., Part B Therapy Services (2001); Olshin et al., Study and Report 
(2002); Ciolek and Hwang, Feasibility and Impact Analysis (2004); 
Ciolek and Hwang, Development of a Model (2004); Ciolek and Hwang, 
Utilization Analysis (2004); and Ciolek and Hwang, Final Project Report 
(2004). 

[End of table] 

HHS's response, implemented through CMS, to the principal legislative 
provisions addressing outpatient therapy services has been to contract 
for a series of studies, first by the Urban Institute and then by 
AdvanceMed (see table 4). In general, these studies have found that 
information available from Medicare claims data is insufficient to 
develop an alternative payment system based on patients' therapy needs, 
and a patient assessment instrument for outpatient therapy services 
that collected information on functional status and functional outcomes 
would be needed to develop such a system. They have also found that a 
needs-based payment system would be key to controlling costs while 
ensuring patient access to appropriate therapy. 

Table 4: CMS-Contracted Studies of Outpatient Therapy Services, 2000- 
2004: 

Study: Urban Institute (2000)[A]; 
Key findings or conclusions: Insufficient research available on 
outpatient therapy practice patterns to design and implement a payment 
system based on diagnosis and prior use of services; Lack of functional 
status data on Medicare outpatient therapy patients impedes the 
development of such a system; Options were identified for managing 
outpatient therapy, including development of a database of functional 
status assessments made during beneficiaries' use of outpatient therapy 
services; Selected recommendations: No recommendations. 

Study: Urban Institute (2001)[B]; 
Key findings or conclusions: Application of Medicare's physician fee 
schedule to skilled nursing facilities, rehabilitation agencies, and 
comprehensive outpatient rehabilitation facility outpatient therapy 
reduced spending on services in 1999 and 2000; Selected 
recommendations: No recommendations. 

Study: AdvanceMed (2002)[C]; 
Key findings or conclusions: Application of Medicare's physician fee 
schedule to institutional outpatient therapy service providers reduced 
spending on these services before 2002; Diagnoses on claim forms do not 
accurately reflect the medical condition for which a patient received 
therapy and thus constrain CMS's ability to develop an alternative 
payment system based on patient condition; Selected recommendations: No 
recommendations. 

Study: AdvanceMed (2004)[D]; 
Key findings or conclusions: Claims data show no pattern of diagnoses 
reflecting specific conditions that consistently result in payments for 
outpatient therapy services exceeding the spending limits; Claims data 
will not provide sufficient information to develop a needs-based 
payment system; Selected recommendations: The final project report[D] 
discussed several options and recommended implementing a "global 
approach" comprising both short- and long-term strategies for managing 
outpatient therapy services, including developing a standardized 
outpatient therapy patient assessment instrument to collect clinical 
information needed to develop a classification scheme based on patient 
condition. The final project report proposed eliminating the therapy 
caps, because they may adversely affect some patients, and restraining 
outpatient therapy spending through improved program integrity and 
limited use through, for example: 
* targeted use limits or; 
* improved administrative edits to better identify and deny payment of 
improper claims. 

Source: GAO. 

[A] Maxwell and Baseggio, Outpatient Therapy Services (2000). 

[B] Maxwell et al., Part B Therapy Services (2001). 

[C] Olshin et al., Study and Report (2002). 

[D] Ciolek and Hwang, Feasibility and Impact Analysis (2004); Ciolek 
and Hwang, Development of a Model (2004); Ciolek and Hwang, Utilization 
Analysis (2004); and Ciolek and Hwang, Final Project Report (2004). 

[End of table] 

As of October 2005, HHS had taken few steps toward developing a patient 
assessment instrument for assessing beneficiaries' needs for outpatient 
therapy. Some health care settings, including inpatient rehabilitation 
facilities, home health agencies, and skilled nursing facilities, do 
have patient assessment instruments to collect functional status and 
other information on Medicare beneficiaries. Officials from HHS's 
Office of the Assistant Secretary for Planning and Evaluation and CMS 
told us they were collaborating to examine the consistency of 
definitions and terms used in these settings. They expected to report 
to Congress by the end of 2005 (in response to the requirement in the 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act) 
on this effort to standardize patient assessment terminology, although 
they have no plans to include outpatient therapy services in the 
effort. CMS officials and one of the provider groups we spoke with 
estimated that the development of a patient assessment instrument for 
outpatient therapy services would take at least 3 to 5 years. HHS 
officials said that the complexity of the task and resource constraints 
precluded them from including outpatient therapy services in their 
effort to standardize other patient assessment terminology. CMS has, 
however, funded a demonstration project with a private-sector firm that 
has developed a patient assessment instrument that collects functional 
status and functional outcomes for patients who receive outpatient 
therapy services, primarily physical therapy, in certain 
facilities.[Footnote 29] A report from the firm to CMS is expected in 
summer 2006. 

Circumstances That Led to Therapy Caps Remain: 

Recent assessments of Medicare claims data have shown that the 
circumstances that initially led to therapy caps--rising Medicare 
payments for outpatient therapy and a high rate of improper payments-- 
remain. CMS, however, has not implemented its contracted researchers' 
proposal to strengthen its system of automated checks for denying 
payment of improper claims. Provider groups we spoke with agreed that 
Medicare was likely paying for some medically unnecessary therapy 
services and that improvements could be made to help strengthen the 
integrity of the payment system. 

According to recent CMS assessments of Medicare claims data, Medicare 
payments for outpatient therapy services continue to rise. Over the 4- 
year period from 1999 through 2002, Medicare spending for outpatient 
therapy more than doubled, from an estimated $1.5 billion to $3.4 
billion, according to the CMS-contracted analysis of 2002 claims data 
released in 2004.[Footnote 30] Although outpatient therapy spending for 
2003 and 2004 has not been fully estimated, overall Medicare part B 
expenditures--which include spending on outpatient therapy services-- 
showed rapid growth (15 percent) from 2003 to 2004, according to CMS 
estimates reported in 2005.[Footnote 31] CMS attributed this growth to 
five factors, one of which was increased use of minor procedures such 
as therapy performed by physicians and physical therapists.[Footnote 
32] Payments for certain therapy services, for example, increased by 24 
percent or more from 2003 to 2004. CMS officials told us that many 
valid reasons may exist for the significant growth in payments for 
outpatient therapy. For example, they said, some of the increase in 
therapy services could be due to the growth in recent years of elective 
services such as knee replacements. 

CMS has also recently reported that improper payments made for 
outpatient therapy services have increased substantially in recent 
years. Specifically, in November 2004, CMS reported that the estimated 
error rate for claims rose steadily from 10.9 percent in 1998 to 20.4 
percent in 2000.[Footnote 33] CMS reported that most of the errors were 
due to insufficient documentation to support the services claimed, such 
as lack of evidence of physician review and certification of treatment 
plans. In January 2005, CMS reported error rates in a random sample of 
more than 160,000 fee-for-service claims, which included therapy 
services, from 2003.[Footnote 34] The agency found that claims 
submitted for therapy services were among those with the highest rates 
of payments made in error because of insufficient documentation or 
medically unnecessary services.[Footnote 35] Such services included 
procedures frequently provided by therapists, such as therapeutic 
exercise,[Footnote 36] therapeutic activities,[Footnote 37] 
neuromuscular reeducation, electrical stimulation, manual therapy, and 
physical therapy evaluation. For example, 23.5 percent of claims for 
therapeutic activities lacked sufficient documentation, resulting in 
projected improper payments of more than $34 million.[Footnote 38] 
Claims for therapeutic exercises had a "medically unnecessary" error 
rate of 3 percent, with projected improper payments of more than $18 
million. 

Our past work found that CMS needed to do more medical reviews of 
beneficiaries receiving outpatient therapy services. We reported in 
2004, for example, that in Florida, comprehensive outpatient 
rehabilitation facilities were the most expensive class of providers of 
outpatient therapy services in the Medicare program in 2002.[Footnote 
39] Per-beneficiary payments for outpatient therapy services to 
providers in these facilities were two to three times higher than 
payments to therapy providers in other facilities. We recommended that 
CMS direct the Florida claims administration contractor to medically 
review more claims from comprehensive outpatient rehabilitation 
facilities.[Footnote 40] 

CMS's contracted researcher concluded that CMS could improve its claims 
system by identifying and implementing modifications to the agency's 
automated claims review system to better target payments to medically 
appropriate care.[Footnote 41] In doing their analysis of the 2002 
claims, they identified three types of specific edits that they found 
to be feasible and that would reject claims likely to be improper: 

* Edits to control multiple billings of codes that are meant to be 
billed only once per patient per visit. The contracted researchers 
estimated that in 2002, the impact of this type of improper billing 
amounted to $36.7 million. 

* Edits to control the amount of time that can be billed per patient 
per visit under a single code, since most conditions do not warrant 
treatment times exceeding 1 hour. The contracted researchers estimated 
that in 2002, the impact of this type of improper billing amounted to 
$24-$100 million, depending on the amount of time per visit billed 
under a given code. 

* Edits of clinically illogical combinations of therapy procedure 
codes. In analyzing 2002 Medicare claims data, the contractor found 
limited system protections to prevent outpatient therapy providers from 
submitting claims for procedures that are illogical for a given 
diagnosis. One example, according to the contractor's report, was 
claiming for manual therapy submitted with a diagnosis of an eye 
infection. The estimated impact of improper billings based on illogical 
combinations of diagnosis and procedure codes in 2002 amounted to $16.7 
million. 

CMS officials agreed with the contracted researcher that such edits are 
worth considering, but the agency had not implemented them as of 
October 2005. A CMS official told us, however, that CMS is implementing 
the proposed edits to control multiple billings of codes meant to be 
billed only once per patient per visit; the agency expects these edits 
to be in place in early 2006. As of October 2005, CMS was still 
considering whether to implement the other two types of edits. In 
addition to the three types of edits identified by the contracted 
researcher, the researcher proposed routine data analysis of Medicare 
claims to identify other utilization limits that could be applied to 
better target Medicare payments. CMS is considering whether and how to 
implement this type of analysis. 

Provider groups we spoke with agreed that Medicare was likely paying 
for some medically unnecessary therapy services and that improved 
payment edits could help ensure that Medicare did not pay for such 
services. Nevertheless, representatives from these groups stressed the 
importance of mechanisms that would allow Medicare to cover payments 
for beneficiaries who need extensive care. The representatives noted 
that an exception process, based on a medical review, could help 
determine the appropriateness of therapy services. Such an exception 
process could be invoked to review the medical records of beneficiaries 
whose providers seek permission for coverage of Medicare payments in 
excess of the caps. CMS officials agreed that an appeal process or 
waiver from the caps could be a short-term approach to focus resources 
on needy beneficiaries. They added that possible criteria for waiving 
the caps could include (1) having multiple conditions; (2) having 
certain conditions, levels of severity, or multiple conditions 
suggested by research as having greater need for treatment; (3) having 
needs for more than one type of service, such as occupational therapy 
and speech-language pathology; or (4) having prior use of services or 
multiple episodes in the same year. HHS does not, however, currently 
have the authority to implement a process, or to conduct a 
demonstration or pilot project, to provide exceptions to the therapy 
caps. 

Conclusions: 

Medicare payments for outpatient therapy continue to rise rapidly, and 
20 percent or more of claims may be improper. To date, however, HHS has 
made little progress toward a payment system for outpatient therapy 
services that is based on patients' needs. Furthermore, while CMS is 
considering ways to reduce improper payments, it has not implemented 
the contractor's proposals for improving its claims-processing system. 

HHS has been required for years to take steps toward developing a 
payment system based on beneficiaries' needs, which would require 
developing a process for collecting better assessment information. 
Studies contracted by CMS to respond to requirements under three laws 
suggest that the department would need to develop a standard patient 
assessment instrument to define a patient's diagnosis and functional 
status and thereby determine the patient's medical need for therapy. In 
response to a statutory requirement to report on the standardization of 
patient assessment instruments in a variety of settings, HHS and CMS 
have an effort under way to study and report to Congress on the 
development of standard terminology that Medicare providers could use 
to assess patients' diagnosis and functional status. Although this 
provision requires that outpatient therapy services be included in this 
effort, HHS and CMS have not done so. 

Concerns remain that when the current moratorium expires and the caps 
are reinstated, some beneficiaries who have medical needs for therapy 
beyond what can be paid for under the caps may not be able to obtain 
the care they need. Some beneficiaries may not be able to afford to pay 
for care or may not have access to hospital outpatient departments, 
which are not subject to the caps. In the absence of patient assessment 
information, therefore, an interim process, demonstration, or pilot 
project may be warranted to allow HHS to grant exceptions to the caps. 
For example, such a project could allow beneficiaries, under 
circumstances that CMS determines, an exception to the cap on the basis 
of medical review supported by documentation from providers regarding 
their patients' needs for extensive therapy. Such a project could also 
provide CMS with valuable information about the conditions, diseases, 
and functional status of beneficiaries who have extensive medical needs 
for therapy. The information gathered through the project could also 
facilitate development of a standardized patient assessment process or 
instrument. HHS, however, would need legislative authority to conduct 
such a project. Although exceptions could increase Medicare payments 
for outpatient therapy, exceptions could provide one avenue for 
Medicare coverage above the caps for some beneficiaries who need 
extensive therapy. Potentially, payment increases due to exceptions 
could be offset by implementation of the contractor-proposed 
improvements, such as edits. 

Matter for Congressional Consideration: 

To provide a mechanism after the moratorium expires whereby certain 
Medicare beneficiaries could have access to appropriate outpatient 
therapy services and to obtain better data needed to improve the 
Medicare outpatient therapy payment policy, including data on the 
conditions and diseases of beneficiaries who have extensive outpatient 
therapy needs, Congress should consider giving HHS authority to 
implement an interim process or demonstration project whereby 
individual beneficiaries could be granted an exception from the therapy 
caps. 

Recommendations for Executive Action: 

To expedite development of a process for assessing patients' needs for 
outpatient therapy services and to limit improper payments, we 
recommend that the Secretary of HHS take the following two actions: 

* ensure that outpatient therapy services are added to the effort 
already under way to develop standard terminology for existing patient 
assessment instruments, with a goal of developing a means by which to 
collect such information for outpatient therapy, and: 

* implement improvements to CMS's automated system for identifying 
outpatient therapy claims that are likely to be improper. 

Agency Comments: 

We provided a draft of this report to HHS for comment and received a 
written response from the department (reproduced in app. I). HHS did 
not comment on the matter for congressional consideration, in which we 
said that Congress should give HHS authority to implement an interim 
process or demonstration project whereby individual beneficiaries could 
be granted an exception from the therapy caps. HHS concurred with our 
recommendation that it ensure that outpatient therapy services are 
added to the effort already under way to develop standard terminology 
for existing patient assessment instruments. The department stated that 
it is preparing to contract for a 5-month study to develop a policy and 
payment guidance report as it explores the feasibility of developing a 
post-acute care patient assessment instrument. 

In commenting on our recommendation to implement improvements to CMS's 
automated system for identifying outpatient therapy claims that are 
likely to be improper, HHS discussed a national edit system to promote 
correct coding methods and eliminate improper coding. This national 
edit system has been applied to some therapy-related claims starting in 
1996, and HHS plans to apply it more broadly in 2006. While the 
national edit system is complementary to the edits proposed by CMS's 
contracted study, CMS can do more by also implementing improvements to 
its payment system as suggested by the study's specific findings. HHS 
also indicated that it was exploring other methods for automated 
evaluation of claims but commented that its claims-processing system 
cannot always identify an improper claim from the information that is 
available on claim forms. We agree that the current system cannot 
always identify an improper claim, given the lack of information on the 
claim forms about a patient's actual needs for therapy. It was this 
conclusion that led to our recommendation that HHS include outpatient 
therapy in its present efforts to improve the collection of patient 
assessment information. We believe that CMS can make improvements to 
its current automated system to reduce improper claims, irrespective of 
its efforts to improve patient assessment information. As we noted in 
the draft report, CMS's contracted study found certain edits to be 
feasible using information already provided on claim forms, such as 
edits of clinically illogical combinations of therapy procedure codes. 

We are sending copies of this report to the Secretary of Health and 
Human Services, the Administrator of the Centers for Medicare & 
Medicaid Services, and other interested parties. We will also make 
copies available to others upon request. In addition, the report will 
be available at no charge on the GAO Web site at http://www.gao.gov. 

If you or your staff members have any questions about this report, 
please contact me at (202) 512-7119 or at steinwalda@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix II. 

Signed by: 

A. Bruce Steinwald: 
Director, Health Care: 

[End of section] 

Appendix I: Comments from the Department of Health and Human Services: 

DEPARTMENT OF HEALTH & HUMAN SERVICES: 
Office of Inspector General: 
Washington, D.C. 20201: 

OCT 20 2005: 

Mr. A. Bruce Steinwald: 
Director, Health Care: 
U.S. Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Steinwald: 

The Department appreciates the opportunity to comment on this draft 
report before its publication. Enclosed are the Department's comments 
on the U.S. Government Accountability Office's (GAO's) draft report 
entitled, "MEDICARE: Little Progress Made in Targeting Outpatient 
Therapy Payments to Beneficiaries' Needs" (GAO-05-990). These comments 
represent the tentative position of the Department and are subject to 
reevaluation when the final version of this report is received. 

The Department appreciates the opportunity to comment on this draft 
report before its publication. 

Sincerely, 

Signed for: 

Daniel R. Levinson: 
Inspector General: 

Enclosure: 

The Office of Inspector General (OIG) is transmitting the Department's 
response to this draft report in our capacity as the Department's 
designated focal point and coordinator for U.S. Government 
Accountability Office reports. OIG has not conducted an independent 
assessment of these comments and therefore expresses no opinion on 
them. 

HHS COMMENTS ON THE U.S. GOVERNMENT ACCOUNTABILITY OFFICE'S DRAFT 
REPORT ENTITLED, "MEDICARE: LITTLE PROGRESS MADE IN TARGETING 
OUTPATIENT THERAPY PAYMENTS TO BENEFICIARIES' NEEDS" (GAO-05-990): 

The Department of Health and Human Services (HHS) appreciates the 
opportunity to comment on the U.S. Government Accountability Office's 
(GAO) draft report. 

GAO Recommendation #1: 

Ensure that outpatient therapy services are added to the effort already 
under way to develop standard terminology for existing patient 
assessment instruments, with a goal of developing a means by which to 
collect such information for outpatient therapy. 

HHS Comment: 

HHS concurs with the recommendations to ensure that outpatient therapy 
services are added to the current effort to develop standard 
terminology for existing patient assessment instruments with a goal of 
developing a means of collecting outpatient therapy information. HHS is 
preparing to contract a 5-month study to develop a policy and payment 
guidance report as HHS explores the feasibility of developing a 
postacute care patient assessment instrument. The study will facilitate 
HHS's plan of a phased approach to the development of this instrument. 
The development approach would begin with a tool that can be used as 
part of the hospital discharge planning process to assess patients' 
status and ensure placement in the appropriate postacute care setting, 
with the eventual goal of enhancing the tool to assess and monitor 
patients' health and functional status across settings. 

GAO Recommendation #2: 

Implement improvements to CMS's automated system for identifying 
outpatient therapy claims that are likely to be improper. 

HHS Comment: 

This recommendation stems primarily from a study under contract with 
the Centers for Medicare & Medicaid Services (CMS) that identified 
improper payments for outpatient therapy based on claims analysis. 

Medicare's National Correct Coding Initiative (NCCI) is an edit system 
that was developed to promote national correct coding methodologies and 
eliminate improper coding. These edits are developed based on coding 
conventions defined in the American Medical Association's Current 
Procedural Terminology manual, current standards of medical and 
surgical coding practice, input from specialty societies, and analysis 
of current coding practices. 

The NCCI edits were initially applied to carrier claims from physicians 
and privately practicing physical therapists and occupational 
therapists in 1996. In 2000, the Outpatient Code Editor (OCE) version 
of the NCCI edits (including rehabilitative therapy services) was 
applied by fiscal intermediaries for services provided in an outpatient 
hospital setting. Beginning January 1, 2006, the OCE NCCI version will 
be applied to all claims from institutional therapy providers submitted 
to intermediaries, including skilled nursing facilities, home health 
agencies, comprehensive outpatient rehabilitation facilities, and 
rehabilitation agencies. 

HHS is developing methods for automated evaluation of claims' technical 
compliance with national coverage and claims processing policies. Also, 
we are exploring limits to variables such as multiple units of service 
and/or visits, consistent with reasonable clinical guidelines. 
Ultimately, however, CMS's claims processing system cannot identify an 
improper claim unless the claim has information on it that permits it 
to be identified as improper. For example, Medicare currently validates 
the patient's needs only through medical review-a time intensive and 
expensive method of personal assessment by a reviewer. A current 
contract explores the potential of identifying variables that may be 
submitted with claim data and used to limit services consistent with 
beneficiaries' needs. The results of this study should be available for 
use in a demonstration in 2007. 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

A. Bruce Steinwald, (202) 512-7119 or steinwalda@gao.gov: 

Acknowledgments: 

In addition to the contact mentioned above, Katherine Iritani, 
Assistant Director; Ellen W. Chu; Adrienne Griffin; Lisa A. Lusk; and 
Jill M. Peterson made key contributions to this report. 

[End of section] 

Related GAO Products: 

Medicare: More Specific Criteria Needed to Classify Inpatient 
Rehabilitation Facilities. GAO-05-366. Washington, D.C.: April 22, 
2005. 

Comprehensive Outpatient Rehabilitation Facilities: High Medicare 
Payments in Florida Raise Program Integrity Concern. GAO-04-709. 
Washington, D.C.: August 12, 2004. 

Medicare: Recent CMS Reforms Address Carrier Scrutiny of Physicians' 
Claims for Payment. GAO-02-693. Washington, D.C.: May 28, 2002. 

Medicare: Outpatient Rehabilitation Therapy Caps Are Important Controls 
but Should Be Adjusted for Patient Need. GAO/HEHS-00-15R. Washington 
D.C.: October 8, 1999. 

Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy in 
Nursing Homes. GAO/HEHS-95-23. Washington D.C.: March 30, 1995. 

FOOTNOTES: 

[1] Unless otherwise specified, throughout this report the terms 
outpatient therapy and outpatient therapy services refer to all three 
therapy categories collectively: physical therapy, occupational 
therapy, and speech-language pathology. 

[2] For example, since 1973 therapy provided by one type of outpatient 
therapy provider, independent physical therapists in private practice, 
has been subject to annual, per-beneficiary spending limits. 

[3] GAO, Medicare: Tighter Rules Needed to Curtail Overcharges for 
Therapy in Nursing Homes, GAO/HEHS-95-23 (Washington D.C.: Mar. 30, 
1995). A list of related GAO products appears at the end of this 
report. 

[4] Under the law, the caps on Medicare outpatient therapy payments do 
not apply to services provided by a hospital outpatient department. 42 
U.S.C. § 1395l(g). 

[5] The legislation provides for two caps per beneficiary: one for 
occupational therapy and one for physical therapy and speech-language 
pathology combined. The legislation set the caps at $1,500 each and 
provided that these limits be indexed by the Medicare Economic Index 
each year beginning in 2002. When last in place in 2003, the two caps 
were set at $1,590 each. 

[6] GAO, Medicare: Outpatient Rehabilitation Therapy Caps Are Important 
Controls but Should Be Adjusted for Patient Need, GAO/HEHS-00-15R 
(Washington D.C.: Oct. 8, 1999). 

[7] See, for example, the Balanced Budget Act of 1997 (BBA), Pub. L. 
No. 105-33, § 4541, 111 Stat. 251, 454. 

[8] Pub. L. No. 108-173, § 624, 117 Stat. 2066, 2317. 

[9] Studies based on 2002 claims data include Daniel E. Ciolek and 
Wenke Hwang, Feasibility and Impact Analysis: Application of Various 
Outpatient Therapy Service Claim HCPCS Edits, prepared for CMS 
(Baltimore, Md.: Computer Sciences Corporation/AdvanceMed, 2004); 
Daniel E. Ciolek and Wenke Hwang, Development of a Model Episode-Based 
Payment System for Outpatient Therapy Services: Feasibility Analysis 
Using Existing CY 2002 Claims Data, prepared for CMS (Baltimore, Md.: 
Computer Sciences Corporation/AdvanceMed, 2004); Daniel E. Ciolek and 
Wenke Hwang, Utilization Analysis: Characteristics of High-Expenditure 
Users of Outpatient Therapy Services, CY 2002 Final Report, prepared 
for CMS (Baltimore, Md.: Computer Sciences Corporation/AdvanceMed, 
2004); and Daniel E. Ciolek and Wenke Hwang, Final Project Report, 
prepared for CMS (Baltimore, Md.: Computer Sciences 
Corporation/AdvanceMed, 2004). Studies based on other years and data 
include Judith M. Olshin et al., Study and Report on Outpatient Therapy 
Utilization: Physical Therapy, Occupational Therapy, and Speech-
Language Pathology Services Billed to Medicare Part B in All Settings 
in 1998, 1999, and 2000 (Columbia, Md.: DynCorp/AdvanceMed, 2002); 
Stephanie Maxwell and Cristina Baseggio, Outpatient Therapy Services 
under Medicare: Background and Policy Issues, prepared for CMS 
(Washington, D.C.: Urban Institute, 2000); and Stephanie Maxwell et 
al., Part B Therapy Services under Medicare in 1998-2000: Impact of 
Extending Fee Schedule Payments and Coverage Limits, prepared for CMS 
(Washington, D.C.: Urban Institute, 2001). 

[10] To check the reliability of the information we used from CMS- 
contracted studies, we reviewed the analysis performed by the 
contractor; discussed the results with the CMS official overseeing the 
contract; obtained information about the methods and analysis from the 
contractor, specifically, from the principal investigator of the 
contracted study; and reviewed the contractor's summary of the study's 
scope and methods. We also discussed the methods and results of the 
analyses with provider groups and other researchers familiar with 
Medicare claims data, including representatives of the Medicare Payment 
Advisory Commission (MedPAC) and the Urban Institute. We determined 
that the data as published were generally reliable for our purposes. 
For one analysis--assessing variation in the length of treatment 
received by Medicare beneficiaries according to their diagnosis codes-
-we used the results from an unpublished analysis performed by CMS's 
contractor AdvanceMed. We verified the reliability of this analysis by 
obtaining information from the principal investigator about the 
reliability checks incorporated in that analysis and determined that 
the analysis was sufficiently reliable for our needs. 

[11] Medicare part B includes coverage for physician services and 
payments to other licensed practitioners, clinical laboratory and 
diagnostic services, surgical supplies and durable medical equipment, 
and ambulance services. Medicare part A covers inpatient hospital and 
certain other services. 

[12] We interviewed officials from the American Physical Therapy 
Association, the American Occupational Therapy Association, the 
American Speech-Language Hearing Association, and the National 
Association for the Support of Long-Term Care. 

[13] Physical therapy services--such as whirlpool baths, ultrasound, 
and therapeutic exercises--are designed to improve mobility, strength, 
and physical functioning and to limit the extent of disability 
resulting from injury or disease. Speech-language pathology, included 
in the Medicare definition of outpatient physical therapy services, is 
the diagnosis and treatment of speech, language, and swallowing 
disorders. Occupational therapy services help patients learn the skills 
they need to perform daily tasks such as bathing and dressing and to 
function independently. 

[14] Medicare does not cover maintenance therapy--that is, therapy 
services performed to maintain, rather than improve, a beneficiary's 
level of functioning. Maintenance therapy includes cases where a 
patient's restoration potential is insignificant relative to the 
therapy required to achieve such potential, where it has been 
determined that the treatment goals will not materialize, or where the 
therapy is considered a general exercise program. Medicare may, 
however, cover the development of a maintenance program established 
during the course of covered therapy. 

[15] Unlike physical and occupational therapists, speech-language 
pathologists are not recognized as practitioners who can directly bill 
the Medicare program for outpatient therapy services. 

[16] See GAO/HEHS-95-23. 

[17] The improper claims were filed under Medicare part A and part B. 
See Office of Inspector General, Physical and Occupational Therapy in 
Nursing Homes: Cost of Improper Billings to Medicare, OEI-09-97-00122 
(Washington, D.C.: Department of Health and Human Services, August 
1999). 

[18] Pub. L. No. 105-33, § 4541, 111 Stat. 251, 454. 

[19] Pub. L. No. 106-113, app. F, § 221, 113 Stat. 1501A-321, 1501A- 
351. 

[20] Pub. L. No. 106-554, app. F, § 421, 114 Stat. 2763A-463, 2763A- 
516. 

[21] Pub. L. No. 108-173, § 624(a), 117 Stat. 2066, 2317. 

[22] Two bills were introduced in February 2005 to repeal the therapy 
caps: H.R. 916 and S. 438. As of October 2005, these bills had been 
referred to appropriate committees, and no further action had been 
taken. Another bill under consideration in the Senate as of October 31, 
2005, would extend the moratorium on the therapy caps through 2006. See 
S. 1932, Deficit Reduction Omnibus Budget Reconciliation Act of 2005. 

[23] Diagnosis codes from the World Health Organization's ninth 
revision of its International Classification of Diseases (ICD-9 codes) 
are used on Medicare part B claim forms to identify a patient's 
diagnosis. In addition to clinically specific codes, such as 
osteoarthritis, the ICD-9 system also includes generic codes, such as 
"other physical therapy," "occupational therapy encounter," and "speech 
therapy." 

[24] Ciolek and Hwang, Final Project Report (2004). 

[25] An "episode" was defined in the CMS-contracted study as extending 
from the date of a beneficiary's first therapy encounter until the last 
encounter for the same type of therapy. For example, if the first 
physical therapy encounter was on January 15 and the last was on 
January 22, the physical therapy "episode" extended from January 15 
through January 22. If the same beneficiary began speech-language 
pathology services on January 20 and ended on January 28, the speech- 
language pathology episode lasted from January 20 through January 28. 
If a 60-day break intervened between therapy services of the same or a 
different type, the new round of therapy was considered a new episode. 

[26] All analyses of ranges in treatment length reflect the ranges to 
the 99th percentile, to eliminate extreme outliers. 

[27] This conclusion was part of a MedPAC letter to Congress on the 
advisability of allowing Medicare fee-for-service beneficiaries to have 
"direct access" to outpatient physical therapy services and 
comprehensive rehabilitation facility services. MedPAC concluded that 
the physician referral and review requirements are a necessary but not 
sufficient mechanism to help beneficiaries receive outpatient physical 
therapy services that are needed and appropriate for their clinical 
conditions. MedPAC also found that providers need to be made more aware 
of coverage rules for beneficiaries--for example, through increased 
educational initiatives by the professional associations, the claims 
contractors, and facilities in which physical therapists practice. 
Medicare Payment Advisory Commission, letter to Congress (Washington, 
D.C.: Dec. 30, 2004). 

[28] GAO/HEHS-00-15R. 

[29] This demonstration project will analyze the feasibility of a pay- 
for-performance system in outpatient rehabilitation settings and also 
analyze the outcomes of therapy services for Medicare part B 
beneficiaries (who constitute about 15 percent of the 1.6 million 
patients in the firm's database) on the basis of their condition and 
functional status. The project expects to identify appropriate care for 
particular therapy-related diagnoses, although the data have limited 
applicability to the entire Medicare population. 

[30] Ciolek and Hwang, Final Project Report (2004). 

[31] Letter from the Director, Center for Medicare Management, Centers 
for Medicare & Medicaid Services, to the Chair, Medicare Payment 
Advisory Commission, March 31, 2005, and accompanying data. 

[32] The five factors were increased spending for office visits (29 
percent of overall growth), increased use of minor procedures including 
therapy (26 percent), more frequent and complex imaging services (18 
percent), more laboratory and other tests (11 percent), and more use of 
prescription drugs in doctors' offices (11 percent). The greatest 
contributors to the increase in minor procedures were the 
administration of drugs and physical therapy, including procedures such 
as manual therapy and neuromuscular reeducation of movement. See Center 
for Medicare Management Director's letter (Mar. 31, 2005). 

[33] Centers for Medicare & Medicaid Services, Medicare Financial 
Limitations on Outpatient Rehabilitation Services (Baltimore, Md.: 
November 2004). 

[34] Centers for Medicare & Medicaid Services, Improper Medicare Fee- 
for-Service Payments Report, Fiscal Year 2004 (Baltimore, Md.: January 
2005). 

[35] An "insufficient documentation" error means that the provider did 
not include pertinent patient facts (e.g., the patient's overall 
condition, diagnosis, or extent of services performed), or the 
physician's orders or documentation were incomplete. "Medically 
unnecessary" errors included situations where the claim reviewers 
identified enough documentation in the medical record to make an 
informed decision that the services billed to Medicare were not 
medically necessary. 

[36] Therapeutic exercises--such as treadmill use, stretching, and 
strengthening--develop strength, endurance, range of motion, or 
flexibility. 

[37] Therapeutic activities--such as bending, lifting, and carrying-- 
improve functional performance. 

[38] CMS's estimate of improper payments was projected because the data 
collected had not been adjusted to exclude beneficiary co-payments, 
deductibles, or reductions to recover previous overpayments. 

[39] GAO, Comprehensive Outpatient Rehabilitation Facilities: High 
Medicare Payments in Florida Raise Program Integrity Concerns, GAO-04-
709 (Washington, D.C.: Aug. 12, 2004). 

[40] According to a CMS official, this recommendation had not been 
implemented as of August 2005. 

[41] Ciolek and Hwang, Feasibility and Impact Analysis (2004); Ciolek 
and Hwang, Final Project Report (2004). 

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