Do preset per visit payment rates affect home health agency behavior? - Issues in Reforming Home Health Care

Health Care Financing Review, Fall, 1994 by Barbara R. Phillips, Randall S. Brown, Christine E. Bishop, Amy C. Klein, Grant A. Ritter, Jennifer L. Schore, Kathleen C. Skwara, Craig V. Thornton

INTRODUCTION

In recent years, home health care has been the fastest growing Medicare benefit. Medicare home health spending was estimated at $10.2 billion in fiscal year (FY) 1993-a 42-percent increase over FY 1992 and a 298-percent increase over FY 1989 (U.S. House of Representatives, 1993).

As one of its many initiatives to make provision of Medicare services more cost effective, HCFA has implemented a demonstration program of prospective payment for home health care. The major goal of introducing prospective payment to home health care is to minimize public expenditures by providing care more efficiently while ensuring that access to care and the quality of care are adequate.

During the first phase of this demonstration, participating agencies were paid a prospectively determined rate for each home health visit rendered to Medicare beneficiaries. Under the second phase of the demonstration, agencies will be paid a prospectively determined rate for each episode of home health care they render. In both phases of the demonstration, agencies retain most of any reasonable surplus of payments over costs and are at risk for shortfalls, giving them a financial incentive to provide home care in a more cost-efficient manner than they might under the current method of cost reimbursement. HHAs are currently reimbursed for reasonable costs incurred. Costs are judged to be reasonable if they do not exceed specified limits. During the per visit demonstration, the limits in effect for freestanding agencies were set at 112 percent of the mean cost per visit incurred by all agencies in the same geographic area. The limits for hospital-based agencies were 13 to 16 percent higher than those for freestanding agencies. The limits are applied in the aggregate; costs that are above the limit for one type of visit may be offset by lower costs for another type of visit.

This article reports on our early estimates of the impacts of per visit prospective payment, estimated on data from the first year of the per visit home health prospective payment demonstration. We examine impacts on per visit costs, use of home health services, agency financial performance, selection and retention of patients, and quality of care. These preliminary findings are not necessarily indicative of program impacts during the life of the demonstration.

THE PER VISIT DEMONSTRATION

According to the terms of the per visit demonstration, the prospectively set rates that an agency received for the six types of home health visits covered by Medicare (skilled nursing, physical therapy, occupational therapy, speech therapy, medical social services, and home health aide) were based on the agency's own costs during a base year (the year immediately preceding its entry into the demonstration), adjusted annually for local increases in the prices of inputs required to produce health services.

In recognition of the inverse relationship between volume and average per visit costs for home health services, the demonstration also included provisions to adjust the payment rate downward (from base-year costs) for agencies that grew appreciably and upward for those that shrank. Rates were decreased 1 percent for every 10-percentage-point increase in the number of Medicare visits rendered (relative to the base year) and increased 1 percent for every 10-percentage-point decrease in the number of such visits. Although research indicates that average cost per visit varies inversely with the volume of home health visits rendered and average cost per visit for home health care, there is considerable uncertainty about their exact relationship. Cross-sectional analyses (which investigate the differences in average cost per visit for agencies that render different volumes of output during a given period and which assume that the underlying cost structure of the home health industry is in economic equilibrium) have generally concluded that smaller agencies experience economies of scale as they grow. However, the results of these studies differ with respect to the magnitude of these economies and the range over which they apply (Hay and Mandes, 1984; Kass, 1987; Nyman and Svetlik, 1989; Schmitz, 1990; Chu, Brown, and Phillips, 1993). Longitudinal analyses investigating the relationship between the year-to-year change in the average cost per visit and the change in the volume of output (Schmitz, 1989; Chu, Brown, and Phillips, 1993) suggest much larger changes in average cost per visit as volume changes than do the cross-sectional analyses.

The demonstration included provisions for HCFA to share profits and absorb losses that exceeded certain levels. At the end of each year, HCFA shared in any profits greater than 5 percent of an agency's Medicare-allowable cost of providing the prospectively paid services. HCFA also reimbursed agencies for any losses greater than 5 percent of these costs, provided the payment did not exceed the cost limits.

The demonstration also included procedures to ensure that the number of visits rendered was appropriate and that the quality of care was adequate. The number of visits was monitored through a medical review process identical to that under cost reimbursement, and an independent organization reviewed a sample of cases from each prospectively paid agency to assess the quality of care rendered. Forty-seven agencies in the five demonstration States (California, Florida, Illinois, Massachusetts, and Texas) participated in the per visit demonstration for at least 1 year, entering between October 1990 and October 1991, as their FY's began. (Two other agencies dropped out before the end of their first year.) Each agency operates under the demonstration for a total of 3 years; thus, demonstration operations will be completed at the end of September 1994.