The Balanced Budget Act of 1997, as amended by the Omnibus Consolidated and Emergency Supplemental Appropriations Act (OCESAA) of 1999, called for the development and implementation of a prospective payment system (PPS) for Medicare home health services. The BBA put in place the interim payment system (IPS) until the PPS could be implemented. Effective October 1, 2000, the home health PPS (HH PPS) replaced the IPS for all home health agencies (HHAs).

The PPS proposed rule was published on October 28, 1999, with a 60-day public comment period, and the final rule was published on July 3, 2000. This section contains useful information for understanding and implementing the prospective payment system for home health agencies.

Under prospective payment, Medicare pays home health agencies (HHAs) a predetermined base payment. The payment is adjusted for the health condition and care needs of the beneficiary. The payment is also adjusted for the geographic differences in wages for HHAs across the country. The adjustment for the health condition, or clinical characteristics, and service needs of the beneficiary is referred to as the case-mix adjustment. The home health PPS will provide HHAs with payments for each 60-day episode of care for each beneficiary. If a beneficiary is still eligible for care after the end of the first episode, a second episode can begin; there are no limits to the number of episodes a beneficiary who remains eligible for the home health benefit can receive. While payment for each episode is adjusted to reflect the beneficiary’s health condition and needs, a special outlier provision exists to ensure appropriate payment for those beneficiaries that have the most expensive care needs. Adjusting payment to reflect the HHA’s cost in caring for each beneficiary including the sickest, should ensure that all beneficiaries have access to home health services for which they are eligible.

The home health PPS is composed of six main features:

1) Payment for the 60-day Episode

The unit of payment under HHA PPS will be for a 60-day episode of care. An agency will receive half of the estimated base payment for the full 60 days as soon as the fiscal intermediary receives the initial claim. This estimate is based upon the patient’s condition and care needs (case-mix assignment). The agency will receive the residual half of the payment at the close of the 60-day episode unless there is an applicable adjustment to that amount. The full payment is the sum of the initial and residual percentage payments, unless there is an applicable adjustment. This split percentage payment approach provides reasonable and balanced cash flow for HHAs. Another 60-day episode can be initiated for longer-stay patients.

2) Case-mix adjustment — Adjusting payment for a beneficiary’s condition and needs

After a physician prescribes a home health plan of care, the HHA assesses the patient’s condition and likely skilled nursing care, therapy, medical social services and home health aide service needs, at the beginning of the episode of care. The assessment must be done for each subsequent episode of care a patient receives. A nurse or therapist from the HHA uses the Outcome and Assessment Information Set (OASIS) instrument to assess the patient’s condition. (All HHAs have been using OASIS since July 19, 1999.) OASIS items describing the patient’s condition, as well as the expected therapy needs (physical, speech-language pathology, or occupational) are used to determine the case-mix adjustment to the standard payment rate. This adjustment is the case-mix adjustment. Eighty case-mix groups, or Home Health Resource Groups (HHRG), are available for patient classification. The Home Health Resource Grouping system in the proposed rule uses data from a large-scale case-mix research project conducted between 1997 and 1999.

3) Outlier payments – Paying more for the care of the costliest beneficiaries

Additional payments will be made to the 60-day case-mix adjusted episode payments for beneficiaries who incur unusually large costs. These outlier payments will be made for episodes whose imputed cost exceeds a threshold amount for each case-mix group. The amount of the outlier payment will be a proportion of the amount of imputed costs beyond the threshold. Outlier costs will be imputed for each episode by applying standard per-visit amounts to the number of visits by discipline (skilled nursing visits, or physical, speech-language pathology, occupational therapy, or home health aide services) reported on the claims. Total national outlier payments for home health services annually will be no more than 5 percent of estimated total payments under home health PPS.

4) Adjustments for beneficiaries who require only a few visits during the 60-day episode

The proposed home health PPS has a low-utilization payment adjustment for beneficiaries whose episodes consist of four or fewer visits. These episodes will be paid the standardized, service-specific per-visit amount multiplied by the number of visits actually provided during the episode. A savings from reduced episode payments would be redistributed to all episodes paid under the PPS.

5) Adjustments for beneficiaries who change HHAs.

The home health PPS will include a partial episode payment adjustment. A new episode clock will be triggered when a beneficiary elects to transfer to another HHA or when a beneficiary is discharged and readmitted to the same HHA during the 60-day episode. The partial episode payment (PEP) will provide a simplified approach to the episode definition that takes into account key intervening health events in a patient’s care. The partial episode payment allows the 60-day episode clock to end and a new clock to begin if a beneficiary transfers to another HHA or is discharged but returns because of a decline in their condition to the same HHA within the 60-day episode. When a new 60-day episode begins, a new plan of care and a new assessment are necessary. The original 60-day episode payment is proportionally adjusted to reflect the length of time the beneficiary remained under the agency’s care before the intervening event. The new episode is paid an initial episode payment of one half of the new case mix group, or HHRG, and the 60-day clock is restarted.

Budget neutrality

The BBA requires base year PPS outlays to be budget neutral relative to the payments under IPS limits less 15 percent. The Balance Budget Refinement Act of 1999 (BBRA) delayed this reduction in payment limits until one year following the implementation of the PPS. As PPS will begin on October 1, 2000, we will implement this reduction for fiscal year 2002 by reducing what would have been IPS rates, had IPS continued, by 15 percent before calculating the home health PPS rates for fiscal year 2002. Then, the total amounts payable under the PPS will be calculated in a budget neutral fashion relative to the IPS-reduced rates.

Consolidated billing

Under the PPS a HHA must bill for all home health services which includes nursing and therapy services, routine and non-routine medical supplies, home health aide and medical social services, except durable medical equipment (DME). DME was excluded from the BBA established consolidated billing requirement by the BBRA. The law requires that all home health services paid on a cost basis be included in the PPS rate. Therefore, the PPS rate will include all nursing and therapy services, routine and non-routine medical supplies, and home health aide and medical social services.

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