Skilled Nursing Facilities:

Medicare Payments Need to Better Account for Nontherapy Ancillary Cost Variation

HEHS-99-185: Published: Sep 30, 1999. Publicly Released: Sep 30, 1999.

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William J. Scanlon
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Pursuant to a congressional request, GAO provided information on the Medicare payments for skilled nursing facilities' (SNF) services under the new prospective payment system (PPS), focusing on: (1) whether the SNF payment rates incorporate the costs of nontherapy ancillary services; and (2) an analysis of the PPS design and nontherapy ancillary cost variation to assess whether payments are distributed appropriately.

GAO noted that: (1) SNF PPS rates were calculated using the full historical costs of nontherapy ancillary services, updated for inflation; (2) costs associated with unnecessary care and improperly billed services may have boosted these historical costs above what was warranted, resulting in generous PPS payment rates; (3) however, the Balanced Budget Act of 1997 explicitly reduced payments by not accounting for total cost increases, raising concerns about whether the adjustment process adequately accounts for cost increases that occurred between the base-year and the first PPS payment year; (4) although the case-mix adjustments to payments for each patient under PPS is intended to account for changes in costs due to shifts in the mix of treatments, evidence indicates that for some types of patients, these adjustments may not be adequate; (5) a full audit of SNF base-year and current costs and medical reviews of service provision would be needed to establish the actual relationship between the costs of medically appropriate care and payments; (6) nontherapy ancillary costs were not used to develop the payment adjusters that raise or lower the average payment to account for resource need differences across patients; (7) as a result, per diem payments may not be adequate for types of patients who are likely to incur high nontherapy ancillary costs or may be excessive for those groups of patients with low expected nontherapy ancillary costs; (8) in 1995, nontherapy ancillary service costs comprised 16 percent of total daily SNF costs, indicating that failure to adequately account for nontherapy ancillary cost variation could result in substantial under- or overpayments; (9) this potential misallocation could contribute to beneficiary access problems if certain patients are identified prior to SNF admission as requiring nontherapy ancillary costs higher than the PPS rate; (10) the Health Care Financing Administration is investigating possible refinements to PPS that could address these problems; and (11) in the meantime, increasing SNF payments will not improve the allocation of the payments but will only increase program outlays and possible overpayments to certain facilities.

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