It looks like Halloween will be coming early for hospital outpatient therapy departments due to the Oct. 1 scheduled implementation of financial limitations on therapy services known as “therapy caps.” 

This comes on the heels of the Hospital Conditions of Participation having been revised, effective Feb. 17, with respect to which providers can order hospital outpatient therapy services. While the rest of the outpatient therapy world has been accustomed to the therapy caps since March 2006, hospitals, long the rehabilitation safety-net provider, now will join all outpatient therapy providers in limiting the amount of therapy Medicare beneficiaries can receive annually. Hospital providers are late to the game, and have a lot of catching up to do!

What are the Therapy Caps?

The financial limitation on outpatient therapy services was created by the Balanced Budget Act of 1997, which called for a cap of $1,500 of outpatient physical therapy and speech-language pathology combined, plus a second cap for $1,500 for occupational therapy. Industry and therapy associations aggressively lobbied to forestall the implementation of the therapy caps via Congressional action, renewed annually, of a moratorium on implementation. From 2000 to 2006 there were a few starts and stops of cap implementation, but only pending imminent legislation. By Dec. 31, 2005 the moratorium was lifted and the two therapy caps were implemented for Medicare beneficiaries’ outpatient therapy venues, including private practices, rehab agencies, comprehensive outpatient rehabilitation facilities, skilled nursing facilities (Part B), home health agencies (Part B) and physician offices providing therapy (directly or incident-to). Hospitals were exempted from the therapy caps in order to provide Medicare beneficiaries a safe haven to receive therapy without limits while still complying with rules of medical necessity. The annually published Medicare benefits book for beneficiaries identified the therapy cap and briefly explained how it worked. Therapy clinics were instructed to remind providers to review this with patients as they began physical, occupational and/or speech therapy.

The therapy cap for 2012 is $1,880 for physical therapy (including speech-language pathology), plus a second cap of $1,880 for occupational therapy. For 2012 a therapy cap exceptions process also is in place, which will allow providers to provide services beyond the therapy cap. After 10/1/2012 CMS will implement a manual review process for claims at $3700 for each therapy cap.  CMS has indicated to the therapy community that they intent to implement this similar to the 2006 manual review process noted below.  Final details have not been published.  The therapy caps exceptions process for the $1880 and $3700 level will expire on 12/31/2012 as well the caps being applied to hospitals unless Congress intervenes.

The Exceptions Process

By March 2006, CMS instituted a therapy caps exceptions process and held an open-door forum for the therapy industry to explain how beneficiaries could receive additional therapy beyond the caps (with qualification based on diagnosis codes, complexities and comorbidities). And of course, rules and guidelines for medically necessary therapy still had to be met. If a beneficiary qualified through diagnosis, complexity or comorbidities, the process of requesting additional therapy was considered “automatic” through the appending of the KC modifier to the claim lines of services exceeding the cap amount. If the beneficiary did not qualify in this fashion, a “manual” process was established, requiring FI/carrier medical review of the therapist’s request for additional therapy according to a specified process and timeline. This process was discontinued by 2007, and today all additional requests for therapy beyond the cap are considered to be automatic, accomplished by appending the KX modifier to the claim lines of therapy exceeding the cap. 

The KX modifier is an attestation that documentation to support the claim is in the record. This is a critical element in documentation, and through medical review activities, it often is shown that therapists do not have documentation to support medical necessity of therapy beyond the cap. This may be due in part to inadequate documentation, or the inability to document medical necessity using national and local coverage determinations.

Prior to Oct. 1, therapy providers also can elect to refer patients needing therapy beyond the cap to a local hospital. Many providers feel that documentation of medical necessity beyond the cap may not be evident, and in that instance they may offer patients a wellness program to continue their therapy programs under staff supervision (rather than direct one-to-one care that meets guidelines for billing).

Without an exceptions process in place, the Medicare beneficiary is not entitled to additional therapy, as therapy beyond the cap is not a Medicare benefit and therefor e is statutorily excluded. The exceptions process expires at the end of the year and will not be replaced unless specifically authorized by Congress and enacted by legislation. The application of the therapy caps to hospitals also is set to expire at the end of the year, however, industry experts predict that the 2013 therapy package will include hospitals as a way to stem the rising costs of therapy services.

A mandatory ABN can be issued to a patient prior to the threshold of the therapy cap if additional therapy would not be expected to be medically necessary. A voluntary ABN can be issued once the patient reaches the cap, but it is not necessary – however, it provides a level of customer service by mitigating the financial responsibilities the patient will accrue. 

The Learning Curve

Hospitals will have to ramp up efforts quickly on the therapy, coding and billing sides of the business. Therapists will need to develop a keener sense of medical necessity from a documentation viewpoint, and coders will have to understand the use of the KX modifier and the relationship of the therapy notes to the modifier. The KX modifier will have to be added to the CDM, and coders also will have to understand the relationship between documented complexities and comorbidities – and the effect it has on the medical necessity of additional therapy. This is in addition to CCI edits affecting therapy as well as local coverage determinations, providing targets ripe for RAC contractors’ semi-automated reviews. 

The private practice side of therapy has been subject to three national comparative billing reports ( in the last 15 months or so, and 10,000 therapists in private practice have been profiled (think data mining) for frequent usage of the KX modifier. The third report, issued July 20, profiled the original 5,000 therapists, presumably to see if usage had dropped. Keep in mind that SafeGuard Services is a Medicare program safeguard contractor! Two MACs actively are conducting probe reviews of billers that frequently use the KX modifier, and therapists in private practice have found themselves on prepayment review (not because they used the KX modifier, but because therapy with the KX modifier did not meet documentation or medical necessity requirements). The risk associated with therapy beyond the cap cannot be overstated, and again, hospitals are late to the game. One MAC announced that routinely appending the KX modifier potentially can be considered abusive (as in “fraud and abuse.”)


Critical-access hospitals still are paid on a reasonable cost basis for outpatient therapy services, so they will not be subject to the upcoming therapy caps. However, the risk posed to critical-access hospitals very well may be in the documentation of medical necessity, should claims be reviewed.

Who Can Order Therapy Services?

CMS recently revised the Hospital Conditions of Participation defining who can refer for hospital outpatient services, including physical therapy, occupational therapy and speech-language pathology.   Appendix A of the State Operations Manual provides interpretive guidelines for §482.56(b):

“Requirements for ordering hospital outpatient services: Outpatient services in hospitals may be ordered (and patients may be referred for hospital outpatient services) by a practitioner who is:

Responsible for the care of the patient;

Licensed in, or holds a license recognized in the jurisdiction where he/she sees the patient;

Acting within his/her scope of practice under State law; and

Authorized by the medical staff to order the applicable outpatient services under a written hospital policy that is approved by the governing body.”

This includes both practitioners who are on the hospital medical staff and who hold medical staff privileges that include ordering the services, as well as other practitioners who are not on the hospital medical staff, but who satisfy the hospital’s policies for ordering applicable outpatient services and for referring patients for hospital outpatient services.

Again, this has been in effect since February, and it confirms that physicians referring to outpatient therapy do not need to be on the medical staff. Still, to quote statute, medical staff bylaws/policy must indicate how the “hospital verifies that the referring practitioner who is responsible for the patient’s care is appropriately licensed and acting within his/her scope of practice.” The policy also “must make clear whether the policy applies to all hospital outpatient services, or whether there are specific services for which orders may only be accepted from practitioners.”

About the Author

Nancy J. Beckley, MS, MBA, CHC, is the president of Nancy Beckley & Associates LLC in Milwaukee, Wis., a rehabilitation compliance consulting firm. She has 15 years of hospital therapy and administrative experience and is a senior correspondent for Monitor Monday. Join Nancy’s webinar on Aug. 15 for detailed information on risks in hospital outpatient therapy, with a special focus the therapy caps and other late breaking information not covered in this article including claims based functional coding required after 1/1/2013.

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