Medicare’s home health care expenditures rose from $3.7 billion in 1990 to $17.8 billion in 1997. Surety Bond Specifications Determine Cost and Availability

A surety bond is a three-party agreement. This scrutiny is one of the benefits of requiring a surety bond. Collateral, which ensures the compensation of the surety, is typically required when there is a greater risk of a loss because of the type of guarantee provided by the bond or the capacity of the firm to repay the surety. However, the effect of Florida Medicaid’s program integrity measures has few implications for Medicare’s imposition of a surety bond requirement. The state also targets the surety bond requirement to new and problem providers. HCFA Designed the Surety Bond Requirement to Recover Overpayments and Increase HHA Scrutiny

HCFA, concerned about increases in overpayments to HHAs, structured the bond as a financial guarantee that agencies’ Medicare overpayments would be repaid, and it raised the required amount of the bond for larger agencies above the $50,000 specified by the BBA. Unrecovered Overpayments Are Currently a Small Share of Medicare’s HHA Payments

HCFA specified a financial guarantee bond in its regulation and raised the value of the bond above the legislated minimum for larger agencies because of its concern about the recovery of overpayments to HHAs. Uncollected overpayments represented less than 1 percent of Medicare’s 1996 spending for home health care services. HCFA estimates that about 60 percent of HHAs had overpayments in 1996. One surety that underwrote about 13 percent of the HHA surety bonds sold before the postponement of the requirement told us that its fees ranged from 0.5 to 3 percent of the face value of the bonds. However, the value of this scrutiny would probably diminish with an HHA’s continued participation in Medicare. Similar Surety Bond Requirements for DME Suppliers, CORFs, and Rehabilitation Agencies Will Benefit Medicare but May Affect Small-Provider Participation

HCFA intends to propose surety bond requirements for DME suppliers, CORFs, and rehabilitation agencies that will parallel those for HHAs—a financial guarantee bond with a face value equal to the greater of $50,000 or 15 percent of Medicare payments. The scrutiny provided by sureties will offer a review of their business practices and financial qualifications. Specifying the terms of a bond as HCFA did will provide incentives for HHAs to return overpayments. Such screening is most useful for new agencies. Recommendations to the Administrator of HCFA

We recommend that to implement BBA’s surety bond requirement for HHAs, the HCFA Administrator revise the present regulation so that all HHAs obtain one financial guarantee surety bond in the amount of $50,000 for the guaranteed return of overpayments for both Medicare and Medicaid. Matters for Congressional Consideration

With respect to the surety bond requirements that we are recommending, the Congress may wish to consider exempting from a surety bond requirement HHAs that have demonstrated fiscal responsibility—for example, those that have maintained a bond for a specified period of time and have returned any overpayments—and eliminating the option for HHAs of substituting a Treasury note, U.S. bond, or other federal public debt obligation for a surety bond. One representative thought that the Florida Medicaid program’s experience with surety bonds may be more relevant to Medicare’s experience than we do. Scope and Methodology

To examine the surety bond issue, we reviewed our earlier extensive work on home health care and studied the regulation implementing the surety bond requirement in the Balanced Budget Act of 1997 (BBA) and related revisions and program memoranda, Department of Health and Human Services Office of Inspector General reports, and congressional hearing testimony. HCFA provided us with data on comprehensive outpatient rehabilitation facilities (CORF) and rehabilitation agencies.
Why GAO Did This Study

Pursuant to a congressional request, GAO evaluated the surety bond requirements for home health agencies (HHA) participating in Medicare, focusing on: (1) analyzing the key features of surety bonds that affect their costs and effect; (2) examining the Florida Medicaid program's experience with a surety bond requirements for HHAs and its relevance to the Medicare surety bond requirement; (3) reviewing the rationale for the surety bond requirements the Health Care Financing Administration (HCFA) selected, the cost and availability of bonds, the benefits for Medicare, and the implications of substituting a government note for a surety bond as set forth in a Department of the Treasury regulation; and (4) drawing implications from the implementation of the HHA surety bond requirement for implementing a similar surety bond provision for durable medical equipment (DME) suppliers, comprehensive outpatient rehabilitation facilities (CORF), and rehabilitation agencies.

What GAO Found

GAO noted that: (1) a surety bond is a three-party agreement in which a company, known as a surety, agrees to compensate the bondholder if the bond purchaser fails to keep a specified promise; (2) the terms of the bond determine the bond's cost and the amount of scrutiny the purchaser faces from the surety company; (3) when the terms of bonds increase the risk of default, more firms have difficulty purchasing them; (4) the likelihood that a firm will be unable to repay a surety increases fees charged and collateral requirements or the surety's unwillingness to sell it a bond; (5) Florida Medicaid's experience offers few insights into the potential effect of Medicare's surety bonds because the state implemented its surety bond requirement selectively, for new and problem HHAs, in combination with several other program integrity measures; (6) after implementation, Florida officials reported that about one-quarter of its Medicaid-participating HHAs had left the program, however, this exodus was not caused primarily by the surety bond requirement; (7) HCFA requires a surety bond guaranteeing HHAs repayment of Medicare overpayments, and it has set the minimum level of the bond as the greater of $50,000 or 15 percent of an agency's Medicare revenues out of concern that about 60 percent of HHAs had overpayments in 1996, amounting to about 6 percent of Medicare's HHA spending, and that, in their opinion, overpayments would increase in the future; (8) yet, HCFA's experience shows that most overpayments are returned, so that the net unrecovered overpayments were less than 1 percent of Medicare's home health care expenditures in 1996; (9) HCFA's implementing regulation requiring a bond guaranteeing the return of overpayments made for any reason rather than only those attributable to acts of fraud or dishonesty increases the risk of default; (10) sureties' scrutiny, which focuses primarily on an agency's business practices and financial status, is probably useful for screening new HHAs; (11) a Treasury regulation that allows the substitution of a government note for any federally required surety bond may undermine the purpose of the bond because HHAs could avoid surety scrutiny; (12) the Balanced Budget Act also requires the DME suppliers, CORFS, and rehabilitation agencies obtain a surety bond valued at a minimum of $50,000; and (13) Medicare will benefit from greater scrutiny of these organizations and their stronger incentives to avoid overpayments.