Under the cost-based system, HHAs were paid their costs up to a per-visit  limit for each visit provided. For example, 48  Medicare beneficiaries per 1,000 in Hawaii received home health care in  1997. BBA Changes to Home Health Payment Policies

To constrain Medicare home health spending growth, BBA required HCFA  to replace Medicare’s cost-based, per-visit payment method with a PPS by  fiscal year 2000. We also said that  the PPS could lead to substantial overpayments to some HHAs relative to  the level of services being provided. Home Health PPS Episode Payments Are Considerably Higher than Estimated Costs of Care Provided

The average episode payment HHAs received to provide an episode of care  in the first 6 months of 2001 was about 35 percent higher than the average  estimated cost of providing that care. But certain HHAs may have costs higher than payments if they face  extraordinary costs not accounted for by the PPS payment groups.
Why GAO Did This Study

The Balanced Budget Act of 1997 significantly changed Medicare's home health care payments to home health agencies (HHAs). Under a prospective payment system (PPS), HHAs are paid a fixed amount, adjusted for beneficiary care needs, for providing up to 60 days of care---termed a "home health episode." The act also imposed new interim payment limits to moderate spending until the PPS could be implemented.

What GAO Found

Although PPS was designed to lower Medicare spending below what it was under the interim system, GAO found that Medicare's payments for full home health care episodes were 35 percent higher than estimated in the first six months of 2001. These disparities indicate that Medicare's PPS overpays for services actually provided, although some HHAs facing extraordinary costs not accounted for by the payment system may be financially disadvantaged.