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Under Medicare's home health prospective payment system (PPS), home health agencies (HHA) are paid a fixed amount, adjusted for differences in individual patients' expected care needs, for providing an episode (up to 60 days) of care. For this payment, HHAs provide therapy, skilled nursing, medical social service, and aide visits to patients in their homes. GAO previously reported that PPS payments to HHAs were significantly above Medicare costs. GAO recommended that the Centers for Medicare & Medicaid Services (CMS), the agency that administers Medicare, modify the PPS to mitigate extreme financial gains and losses. HHA representatives have raised concerns that Medicare's PPS financially disadvantages certain urban and rural HHAs. GAO was asked to examine (1) whether Medicare payments cover HHAs' costs and (2) what factors distinguished financially weak HHAs from financially strong performers under Medicare. To address these issues, GAO used Medicare cost reports and claims data for freestanding HHAs. GAO analyzed Medicare margins--the difference between Medicare payments and Medicare costs, divided by Medicare payments.

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