INTRODUCTION: A Medicare beneficiary's annual outpatient therapy expenditures that exceed Congressionally-established caps are subject to extra documentation and review requirements. In 2011, these caps were $1,870 for physical therapy (PT) and speech-language pathology (SLP) combined, and $1,870 for occupational therapy (OT) separately. This article considers the distributional effects of replacing current cap policy with equal caps by therapy discipline (PT, OT, and SLP) or a single combined cap, and risk-adjusting the PT cap using beneficiary characteristics and functional status. METHODS: Alternative therapy cap policies are simulated with 100 percent Medicare claims for 2011 therapy users (n=4.9 million). A risk-adjusted cap for annual PT expenditures is calculated from a quantile regression estimated on a sample of PT users with diagnoses and clinician assessments of functional ability merged to their claims (n = 4,210). RESULTS: Equal discipline-specific caps of $1,710 for each of PT, OT, and SLP result in the same aggregate Medicare expenditures above the caps as 2011 cap policy. A single combined-disciplines cap of $2,485 also results in the same aggregate expenditures above the cap. Risk adjustment varies the PT cap by as much as 5 to 1 across beneficiaries and equalizes the probability of exceeding the PT cap across diagnosis and functional status groups. DISCUSSION: Equal discipline-specific caps for PT, OT, and SLP are more equitable to high users of both PT and SLP than current cap policy. Separating the PT and SLP caps is a change that policymakers could consider. Risk adjustment of the therapy caps is a first step in incorporating beneficiary need for services into Medicare outpatient therapy payment policy
