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The new Medicare home health prospective payment system pays fixed, predetermined rates for services provided during episodes of home health care. This article details the construction and principal components of the new payment system and shows how episode payment rates and other amounts that Medicare now pays for home health care are calculated. Suggestions are made for steps that home health agencies can take to respond most effectively to the new system's operational requirements and align themselves with the plan's financial incentives.

On October 1, 2000, Medicare began paying providers of home health care at fixed, predetermined rates for services and supplies bundled into 60-day episodes of home health care. The episode payment rates vary, depending on the patient's clinical, functional, and services utilization characteristics. The new approach is expected to redistribute Medicare payments among home health agencies, extend the cost savings introduced by the home health interim payment system UPS), improve the coordination of services, and reduce the number of unnecessary home health visits.

Before October 1997, Medicare paid home health agencies at a rate reflecting either their reasonable costs or their per-visit cost limit applied in the aggregate, whichever was lower. Reasonable costs were based on the Medicare payment principles effective at the time. A home health agency's per-visit aggregate cost limit was established by multiplying a predetermined cost per visit by discipline (eg, skilled nursing, physical therapy) by the corresponding number of Medicare visits and summing the results.

The lower-rate test gave home health agencies financial incentives to continue furnishing care as long as a visit's marginal revenue exceeded its marginal cost, regardless of whether the benefits to patients were perceptible. Further, the absence of coinsurance on home health services (except for durable medical equipment) allowed Medicare beneficiaries unrestrained use of these services without financial penalty These inflationary underpinnings help to explain why Medicare payments for home health care soared about 800 percent between 1987 and 1997, while the number of users doubled and the number of visits per user tripled.

With the introduction of the IPS, a third component to the lower-rate test came into play: the beneficiary aggregate cost limit. This limit was obtained by multiplying a predetermined per-beneficiary payment amount by the unduplicated number of Medicare patients treated during the year. Like the visit cost limit, the beneficiary cost limit was applied in the aggregate. Beginning October 1, 1998, most home health agencies with a beneficiary cost limit below the national median limit were allowed to retain one-third of the difference. Overall, the beneficiary cost limit capped both the reimbursable cost per visit and the reimbursable average number of visits.

The IPS exerted further financial pressure on home health agencies by reducing the aggregate cost limit, Beginning October 1, 1997, the limit for all home health agencies was set at 105 percent of median costs in 1994, updated for inflation, for freestanding home health agencies. The previous ceiling had been 112 percent of the mean costs for freestanding home health agencies.

The IPS also introduced consolidated billing for covered home health services furnished to Medicare patients, regardless of whether the services or supplies were provided directly by the agency or under arrangements with outside entities. This requirement prevents home health agencies from shifting services encompassed by the beneficiary limit to outside suppliers that could bill Medicare separately Consolidated billing also minimizes instances of inadvertent duplicate billing for the same services.

THE NEW PPS SYSTEM

The new home health PPS replaces the cost-related IPS without a transition period, blended rates, or phasing into prospective payment based on the cost-reporting year. The new system pays prospective rates for services provided during 60-day episodes of care (see Exhibit 1). Episodes of care for Medicare patients began with the first billable visit after September 30, 2000, including patients with an open plan of care on that date.

The payment rates vary depending on the home health resource groups (HHRGs) to which Medicare patients are assigned. Reduced or additional amounts are paid when certain conditions exist. All payments are subject to medical review adjustments reflecting beneficiary eligibility decisions, medical-necessity determinations, and HHRG assignments.

Covered services. Episode-of-care payment rates apply to covered home health services that Medicare pays on a cost-related basis as of August 5, 1997. This includes:

* The six home health disciplines: home health aide services, medical social services, occupational therapy physical therapy, skilled nursing care, and speech language pathology; and

* Routine and nonroutine medical supplies provided under a plan of care, including nonroutine medical supplies that are unrelated to the plan of care but are covered as a Medicare home health service.

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