Medicare
Challenges Remain in Setting Payments for Medical Equipment and Supplies and Covered Drugs Gao ID: GAO-02-833T June 12, 2002Medicare has paid higher than market rates for various medical equipment and supplies and often considerably higher than provider acquisition costs for Medicare-covered outpatient drugs. Congress has enacted a series of legislative changes affecting payment methods and payment adjustment authority for medical equipment and supplies and outpatient drugs since the late 1980s. However, progress in setting appropriate rates has been mixed, owing, in part, to various constraints faced by the agency responsible for administering Medicare--the Centers for Medicare and Medicaid Services (CMS). Because of the program's size, scope, and role as a public payer, Medicare has limited options to set and adjust payments for medical equipment, supplies and outpatient drugs. Medicare's method of paying for medical equipment and supplies is through fee schedules that remain tied to suppliers' historical charges to Medicare rather than market prices. Medicare's payment approaches lack flexibility to keep pace with market changes, and, as a result, Medicare often pays higher prices than other public payers. Previous efforts to lower Medicare's overly generous payments suggest several lessons. First, payment changes are most effectively implemented when the process used to set or adjust a rate is defensible. Second, the information on Medicare claims for medical equipment and supplies is not specific enough to enable CMS to determine which products Medicare is actually paying for. Also, for the foreseeable future, CMS will have to continue to rely on fee schedules based on historical charges in setting payment rates for medical equipment and supply items.
GAO-02-833T, Medicare: Challenges Remain in Setting Payments for Medical Equipment and Supplies and Covered Drugs
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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Labor, Health and Human Services, Education
and Related Agencies, Committee on Appropriations, U.S. Senate:
For Release on Delivery:
Expected at 9:30 a.m.
Wednesday, June 12, 2002:
Medicare:
Challenges Remain in Setting Payments for Medical Equipment and
Supplies and Covered Drugs:
Statement of Leslie G. Aronovitz:
Director, Health Care”Program Administration and Integrity Issues:
GAO-02-833T:
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here as you discuss Medicare payment methods
related to durable medical equipment, prosthetics, orthotics, and
supplies”products referred to in this statement as medical equipment
and supplies”and covered outpatient drugs. Over the years, we and the
Department of Health and Human Services (BHS) Office of the Inspector
General (OIG) have periodically reported that Medicare has paid higher
than market rates for various medical equipment and supply items and
often considerably higher than provider acquisition costs for Medicare-
covered outpatient drugs.[Footnote 1] Since the late 1980s, the
Congress has enacted a series of legislative changes affecting payment
methods and payment adjustment authority for medical equipment and
supplies and outpatient drugs. However, the progress made in setting
appropriate rates has been mixed, owing, in part, to various
constraints faced by the agency responsible for administering Medicare”
the Centers for Medicare and Medicaid Services (CMS), formerly called
the Health Care Financing Administration (HCFA).[Footnote 2]
In this regard, my remarks today will focus on (1) Medicare's
experience in setting payment rates for medical equipment and supplies
and outpatient drugs; (2) certain changes designed to assist in
setting payments for medical equipment and supplies and outpatient
drugs incorporated in the Balanced Budget Act of 1997 (BBA);[Footnote
3] and (3) lessons learned from efforts to improve the appropriateness
of Medicare's payments. My comments are based primarily on our
previously issued work.
In summary, because of the program's size, scope, and role as a public
payer, Medicare has limited options to set and adjust payments for
medical equipment and supplies and outpatient drugs. For example, in
cases where Medicare is the dominant payer for a service or product,
the program's share of the payments can distort the market, making
reliance on market prices problematic. Medicare's method of paying for
medical equipment and supplies is through fee schedules that remain
tied to suppliers' historical charges to Medicare rather than market
prices. Similarly, Medicare's method of determining outpatient drug
payments is based on list prices, not prices that purchasers actually
pay for the outpatient drugs. Medicare's payment approaches lack
flexibility to keep pace with market changes, and as a result,
Medicare often pays higher prices than other public payers for medical
equipment and supplies and outpatient drugs.
Despite dramatic instances of wide disparities in market prices and
Medicare's payment rates for medical equipment and supplies and
outpatient drugs, Medicare is not in a position to take prompt action.
To lower unreasonably high payment rates, it must follow a lengthy and
complicated regulatory process for making payment adjustments. The BBA
gave HCFA authority to use a streamlined process to adjust payment
rates for most medical equipment and supplies and outpatient drugs.
[Footnote 4] However, the agency's attempt to use this authority drew
intense industry criticism, in part because the agency acted before it
responded to public comment on how it would implement the authority.
The Congress then prohibited use of either the original or streamlined
processes until public comments are addressed and a final rule
issued.[Footnote 5] To date, a final rule has not been published,
effectively precluding the use of the original or streamlined
processes to adjust Medicare payment rates, where excessive.
Nevertheless, the BBA also provided HCFA the authority to test an
alternative to setting prices administratively.[Footnote 6] This
authority permitted HCFA to conduct demonstrations, for a limited
number of items at a few locations, using competition to determine an
appropriate payment for these items. In this process, suppliers
competed for the right to supply certain items on the basis of quality
and price. Two such demonstrations have reported savings without any
measurable problems in beneficiary access.
Past efforts to lower Medicare's overly generous payments suggest
several lessons. First, payment changes are most effectively
implemented when the process used to set or adjust a rate is
defensible. Medicare's size and impact on the nation's health care
economy means that its payment methods and rate adjustments, no matter
how reasonable, will face close scrutiny. As a result, the need for
CMS to collect sufficient information on market prices and potential
effects on suppliers and beneficiaries before taking action is
paramount. A second lesson, related to the first, is that the
information on Medicare claims for medical equipment and supplies is
not specific enough to enable CMS to determine which products Medicare
is actually paying for. Thus, the agency has difficulty trying to use
market prices to set appropriate rates. A third lesson is that for the
foreseeable future, CMS will have to continue to rely on fee schedules
based on historical charges in setting payment rates for medical
equipment and supply items. The recent demonstrations that set
payments for items through competitive bidding were instructive, but
the positive results achieved may be neither applicable nor practical
on a wider scale for many products.
Background:
CMS, an agency within BHS, is responsible for much of the federal
government's multi-billion-dollar payments for health care, primarily
through the Medicare and Medicaid programs. Medicare”the nation's
largest health insurance program”covers about 40 million elderly and
disabled beneficiaries. Medicaid is a state-administered health
insurance program, jointly funded by the federal and state
governments, that covers eligible low-income individuals including
children and their parents, and aged, blind, and disabled individuals.
Each state administers its own program and determines”under broad
federal guidelines”eligibility for, coverage of, and reimbursement
for, specific services and items.
Most Medicare beneficiaries purchase part B insurance, which helps pay
for certain physician, outpatient hospital, laboratory, and other
services; medical supplies and durable medical equipment (such as
oxygen, wheelchairs, hospital beds, and walkers); and certain
outpatient drugs. Medicare part B pays for most medical equipment and
supplies using a series of fee schedules. Medicare pays 80 percent,
and the beneficiary pays the balance, of either the actual charge
submitted by the supplier or the fee schedule amount, whichever is
less. Generally, Medicare has a separate fee schedule for each state
for most categories of items, and there are upper and lower limits on
the allowable amounts that can be paid in different states to reduce
variation in what Medicare pays for similar items in different parts
of the country.
The fee schedules specify a Medicare-allowable payment amount for each
of about 1,900 groups of products. Each product group is identified by
a Healthcare Common Procedure Coding System (HCPCS) Level II code, and
all products grouped under a code are intended to be items that are
alike and serve a similar health care function. For example, one code
(E1130) describes a standard wheelchair with fixed arms. Many
different brands can be billed under this code, so long as they fit
the basic description.
Medicare part B also covers roughly 450 outpatient drugs”generally
those that cannot be self-administered and are related to physicians
services, such as cancer chemotherapy, or are provided in conjunction
with covered durable medical equipment, such as inhalation drugs used
with a nebulizer.[Footnote 7] In addition, Medicare part B covers
selected immunizations and certain outpatient drugs that can be self-
administered, such as blood clotting factors and some oral drugs used
in association with cancer treatment and immunosuppressive therapy.
To administer Medicare part B fee-for-service claims, CMS contracts
with insurance companies, referred to as carriers, who review and pay
claims that have been submitted by physicians and other outpatient
providers and suppliers. To ensure appropriate payment, carriers
conduct claims reviews that determine, for example, whether the
services claimed are covered by Medicare, are reasonable and
necessary, and have been billed with the proper codes.
Payment Approaches Lack Flexibility to Keep Pace with Market Changes:
Medicare's size and complexity make it extremely challenging to
develop payment methods that prudently reimburse providers while
promoting beneficiary access to items and services. As Medicare's
steward, CMS cannot passively accept what providers want to charge the
program. However, because of its size, Medicare profoundly influences
health care markets. Medicare is often the dominant payer for services
and products, and in such cases, it cannot rely on market prices to
determine appropriate payment amounts because Medicare's share of
payments distorts the market. In addition, Medicare has had difficulty
relying on competition to determine prices. Because of constraints on
excluding any qualified provider from participating in the program,
Medicare traditionally includes all such providers who want to
participate. Finding ways of encouraging competition without excluding
some providers”a normal leverage that purchasers use to make
competition work”has been problematic. As a result, Medicare has had
to administratively set payment amounts for thousands of services and
items, trying to do so in ways that encourage efficient delivery,
while ensuring beneficiary access to them.
Adding to the complexity of setting payment amounts is Medicare's
status as a highly visible public program with certain obligations
that may not be consistent with efficient business practices. For
example, CMS is constrained from acting swiftly to reprice services
and supplies even when prevailing market rates suggest that payments
should be modified. When making substantive changes, Medicare's
enabling legislation generally requires public input. This minimizes
the potential for actions to have unintended consequences. However,
seeking and responding to public input from various provider and
supplier groups can be a time-consuming process that can sometimes
thwart efficient program management.
Prior to 1987, Medicare payments for medical equipment and supplies
were based on supplier charges, subject to some limitations. As part
of their responsibilities to administer Medicare claims, individual
Medicare carriers raised or lowered payments to suppliers in their
local areas to align them with market prices. When carriers sought to
adjust payments on this basis, they employed a process that involved
gathering relevant pricing data from local area markets, determining
new payment levels on the basis of the price information obtained, and
notifying area suppliers of the changes. Although HCFA monitored
carriers' performance in carrying out these steps, it did not evaluate
the appropriateness of the new payment levels established.
In 1987, the Congress and HCFA began the process of moving the
Medicare program from paying on the basis of individual providers'
charges for medical equipment and supplies and covered outpatient
drugs, to developing payment methods intended to pay more prudently
through use of program-determined amounts. Specifically, the Congress
introduced fee schedules for medical equipment and supplies in 1987.
[Footnote 8] Statewide fees were determined on the basis of average
supplier charges on Medicare claims allowed in each state in 1986 and
1987, and were updated for inflation in some years.[Footnote 9]
However, the agency lacked mechanisms to otherwise adjust fees to
reflect marketplace changes. As a result, disparities between fee
schedule amounts and market prices developed over time, and Medicare
significantly overpaid for some medical equipment and supplies.
In recent years, we and the BHS OIG reported on instances where
Medicare payments for certain medical equipment and supplies and
outpatient drugs were excessive compared with retail and other prices.
One notable example of excessive Medicare payments is included in our
1995 report on surgical dressings.[Footnote 10] We estimated that
Medicare could have saved almost $20 million in 1995 if it had paid
the lowest wholesale prices available in a national catalog for 44
types of surgical dressings. Although Medicare's fee schedule for
surgical dressings was based on medians of retail prices found in
supply catalogs when the schedule was set, Medicare's statute did not
permit HCFA to lower the fee schedule when retail prices for dressings
decreased.[Footnote 11]
Another instance of excessive Medicare payment was for home oxygen
equipment and supplies provided to patients with pulmonary
insufficiency. Medicare fee schedule allowances for home oxygen were
significantly higher than the rates paid for almost identical services
by the Department of Veterans Affairs (VA), which in fiscal year 1995
paid for home oxygen benefits for over 23,000 patients. In 1997, we
estimated that Medicare could have saved over $500 million in fiscal
year 1996 if it had paid rates for home oxygen comparable to those
paid by VA.[Footnote 12]
Medicare's payments for outpatient drugs have been similarly
excessive, although the methodology used to determine payment amounts
is somewhat different and attempts to tie Medicare's payments to
market prices. In 1989, the Congress required that physician services
be paid based on fee schedules beginning in 1992.[Footnote 13] The fee
schedules developed by HCFA to comply with this requirement provided
for all outpatient drugs furnished to Medicare beneficiaries not paid
on a cost or prospective payment basis to be paid based on the lower
of the estimated acquisition cost or the national average wholesale
price (AWP).[Footnote 14] Manufacturers report AWPs to organizations
that publish them in drug price compendia, which are typically updated
annually, and Medicare carriers base providers' payments on these
published AWPs.
In concept, such a payment method has the potential to be market-based
and self-adjusting. The reality is, however, that AWP is neither an
average nor a price that wholesalers charge. Because the term AWP is
not defined in law or regulation, there are no requirements or
conventions that AWP reflect the price of any actual sale of drugs by
a manufacturer. Given the latitude manufacturers have in setting AWPs,
Medicare's payments are often not related to market prices that
physicians and suppliers actually pay for the products.
A June 1997 House Budget Committee report accompanying the bill that
became the BBA, in explaining the reason for specifying a 5-percent
reduction from AWP, cited a report by the BHS OIG regarding Medicare
payments for outpatient drugs.[Footnote 15] Among the OIG findings
were that Medicare payments ranged from 20 percent to nearly 1,000
percent of certain oncology drugs' commercially available prices.
Our recent work found that Medicare payments in 2001 for part B-
covered outpatient drugs remained significantly higher than prices
widely available to physicians and pharmacy suppliers.[Footnote 16]
For example, most physician-administered drugs had widely available
discounts ranging from 13 to 34 percent below AWP. Two other physician-
administered drugs had discounts of 65 and 86 percent. Pharmacy
suppliers”the predominant billers for 10 of the high-expenditure and
high-volume drugs we analyzed”also purchased drugs at prices
considerably lower than Medicare payments. For example, two inhalation
drugs accounting for most of Medicare payments to pharmacy suppliers
had widely available discounts averaging 78 percent and 85 percent
from AWP.
BBA Reforms Sought to Improve Medicare's Ability to Set Appropriate
Rates:
Despite such dramatic illustrations of disparities between Medicare
payments and prices widely available to others acquiring medical
equipment and supplies and covered outpatient drugs, Medicare has not
had the tools to respond quickly in such instances. Carriers used to
adjust payment amounts as part of their responsibility to
appropriately pay Medicare claims, but in 1987, the Congress
effectively prohibited use of this process to lower Medicare payment
rates until 1991.[Footnote 17] In 1988, the Congress required use of a
more formal "inherent reasonableness" process that could be
accomplished only by HCFA, not by the carriers.[Footnote 18] In other
reports, we have described this process as slow and cumbersome and
have noted that it is not available for some items, such as surgical
supplies.[Footnote 19] Since 1991, when HCFA was first permitted to
use the inherent reasonableness process to adjust payments for medical
equipment and supplies, it successfully did so only once”-for blood
glucose monitors--and in that instance took almost 3 years to adjust
the maximum allowable Medicare payment from $185.79 to $58.71.
In 1997, in response to concerns about HCFA's difficulties in
adjusting payment rates determined to be excessive, the Congress
included a provision in the BBA that gave HCFA authority to use a
streamlined inherent reasonableness process to adjust payments for
medical equipment and supplies and covered outpatient drugs by up to
15 percent a year.[Footnote 20] Subsequent legislation required that a
final regulation taking into account public comments be published
before the agency could use any inherent reasonableness authority.
Because the agency has not issued the final regulation, it cannot
adjust Medicare's fee schedules to respond to market price
information. The BBA also provided HCFA with opportunities to test an
alternative to setting rates administratively that could be more
responsive to market prices.[Footnote 21] This alternative is
competitive bidding”a process allowing suppliers to compete for the
right to supply their products on the basis of established criteria,
such as quality and price.[Footnote 22]
Streamlined Process to Adjust Fees Needs Further Regulatory Action to
Be Implemented:
The BBA gave HCFA authority to use a streamlined inherent
reasonableness process for part B services (excluding physician's
services). Under this authority, HCFA can adjust payments by up to 15
percent per year using a streamlined process, or can use its original
process with formal notice and comment to make larger adjustments. In
January 1998, the agency published an "interim final rule with comment
period" for the streamlined inherent reasonableness process that
became effective 60 days after it was published.[Footnote 23] This was
a departure from the usual practice of first responding to public
comments before issuing a final regulation.
Under the interim final rule, HCFA delegated authority to use the
streamlined process to the Medicare carriers that process claims for
medical equipment and supplies, with final action on payment
adjustments to be approved by the agency. The carriers attempted to
lower maximum payment rates for eight groups of products, gathering
information on retail prices through surveys conducted in at least 16
states. In September 1998, the carriers notified suppliers of proposed
adjustments for eight groups of products and solicited comments.
Industry groups representing various medical equipment and supply
manufacturers and suppliers expressed serious concerns about how the
inherent reasonableness process was implemented and whether the
surveys were conducted properly. The Congress requested that we review
the appropriateness of implementing the streamlined inherent
reasonableness authority through an interim final rule and the
soundness of the carriers' surveys. Pending the results of our review,
HCFA suspended the carrier-proposed payment reductions in March 1999.
In November 1999, the Congress passed legislation prohibiting HCFA or
the carriers from using any inherent reasonableness authority until we
issued our report and the agency issued a final rule taking into
account our findings and public comment.[Footnote 24] In our July 2000
report, we concluded that, while the carriers could have conducted
their surveys more rigorously, the surveys and other evidence
sufficiently justified the carriers' proposed payment reductions for
five of eight product groups.[Footnote 25] In our report, we
recommended that HCFA clarify criteria for using its inherent
reasonableness authority, strengthen agency or carrier survey
methodology in the future, collect additional data on prices for the
other three product groups before adjusting their payment amounts, and
monitor beneficiary access after any payment changes. Although our
report is almost 2 years old, CMS has not issued a final regulation
that would allow it to use either its streamlined or original inherent
reasonableness processes to adjust Medicare payment amounts for part B
supplier-billed services. Thus, the agency lacks a tool to adjust its
fee schedules, short of statutory changes.
BBA Provisions Authorized Competitive Bidding Demonstration Projects:
In order to experiment with other ways of setting Medicare's payments
for medical equipment and supplies and outpatient drugs, the BBA
provided authority for HCFA to conduct demonstration projects using
competitive bidding and to include home oxygen in at least one of the
demonstrations.[Footnote 26] Evidence from two competitive bidding
projects suggests that, for most of the items selected, competition
might provide a tool that facilitates setting more appropriate payment
rates and result in program savings.
In its first competitive bidding demonstration, conducted in Polk
County, Florida, HCFA set rates for oxygen, hospital beds, surgical
dressings, enteral nutrition and supplies, and urological supplies
through competitive bidding. HCFA reported that the new rates set by
this competitive process in the Florida demonstration saved Medicare
an average of 17 percent on the cost of these medical equipment and
supply items without compromising beneficiary access to these items.
[Footnote 27]
In a second demonstration in San Antonio, Texas, the agency included
oxygen; hospital beds; manual wheelchairs; noncustomized orthotic
devices, including "off-the-shelf" items such as braces and splints;
and albuterol sulfate and other nebulizer drugs. Preliminary CMS
information on the San Antonio competitive bidding demonstration
identified an average savings of 20 percent, without any negative
effects on beneficiary access.
Past Efforts to Correct Inappropriate Payments Suggest Lessons for The
Future:
Whether attempting to adjust payments administratively or through
competitive bidding, CMS can only be effective if it has a defensible
process for doing so and accurate information upon which to base
action. Any change to Medicare's payments, particularly a reduction in
fees for medical equipment and supplies or covered outpatient drugs,
should be accompanied by an ongoing assessment of whether the new
payments adequately support Medicare beneficiaries' access to such
items and services and properly reimburse providers and suppliers.
Such monitoring needs to examine current experience so that prompt fee
adjustments can be made if access problems are found.
Efforts to lower excessive payment rates through the inherent
reasonableness process illustrate the difficulties CMS has in making
even minor adjustments, as the agency's actions can have wide
ramifications for providers, suppliers, and beneficiaries. When HCFA
tried to use its streamlined inherent reasonableness authority in 1998
to reduce payment rates for various medical equipment and supply items
and outpatient drugs, it attempted to take action before responding to
public comment, thereby leaving the effort open to criticism. In
addition, we concluded that the carriers' survey methodology was not
rigorous enough to provide a basis to adjust fees nationally for all
of the products under review.
What the agency lacked was sufficient information on market prices.
Such information, along with current local, as well as national, data
on beneficiaries' use of services and program expenditures, is key to
setting rates administratively. Because HCFA did not have reliable
acquisition cost information, its carriers engaged in a very labor-
intensive information-gathering effort.
One major problem CMS has when going to the marketplace to collect
information is that it cannot determine the specific products Medicare
is paying for when carriers process claims for medical equipment and
supplies. Carriers pay claims on the basis of billing codes indicating
that the supplied items belong to a particular product group. These
groups can cover a broad range of product types, quality, and market
prices. As a result, products that differ widely in properties, use,
performance, and price are billed under the same code and the program
pays the same amount. For example, we reported in 1998 that catheters
belonging to a single product category varied in type and price, from
about $1 to $18, with Medicare's maximum fee payments ranging across
states from $9.95 to $11.70.[Footnote 28] However, HCFA had no
information on which catheters were being provided to beneficiaries.
To address the problem of insufficient specificity, we recommended in
the 1998 report that suppliers be required to include universal
product numbers (UPN) as well as current billing codes on claims. UPNs
and associated bar codes are increasingly used to identify specific
medical equipment and supplies, similar to the way universal product
codes are used in supermarkets. Manufacturers can use bar codes for
each product to identify characteristics such as the manufacturer,
product type, model, size, and unit of packaging. Using UPNs”or some
other mechanism”incorporated into claim forms to bring more
specificity to what is provided to beneficiaries could help CMS better
determine appropriate payments.
Under provisions in the Health Insurance Portability and
Accountability Act of 1996 (BIPAA), BHS has adopted standards for
coding medical services, procedures, and equipment and supplies.
[Footnote 29] These provisions were aimed at simplifying data
reporting and claims processing requirements across all public and
private payers. Under the standards, HCPCS Level II was designated as
the code set for medical equipment and supplies. Its limitation in
specificity argues for evaluating whether the current code set can be
adjusted to better distinguish between various products currently
grouped within a single HCPCS Level II code.
Lack of specificity has been a similar problem for the codes used to
define inpatient hospital procedures. The BIPAA standard code set for
reporting hospital inpatient procedures is the International
Classification of Disease, 9th Edition, Clinical Modification, Volume
3 (ICD-9 CM Vol. 3). The inadequacy of this code set is widely
recognized, as it lacks both the specificity to accurately identify
many key aspects of medical procedures as well as the capacity to
expand in order to appropriately incorporate codes in response to new
technology. In fact, BHS recognized that in adopting the ICD-9-CM Vol.
3 as a BIPAA standard, the agency would need to replace it, given the
code set's limitations. As a consequence, CMS plans to implement a new
code set, the International Classification of Disease, 10th Edition,
Procedural Coding System (10 PCS), which would provide much greater
specificity.
Our work on payments for covered outpatient drugs, which identified
strategies used by other payers to obtain prices closer to acquisition
costs, underscores the value of accurate information for determining
appropriate payments. For example, the VA uses the leverage of federal
purchasers to secure verifiable information on actual market
transactions by private purchasers”specifically, the prices that drug
manufacturers charge their "most-favored" private customers. To enable
the VA to determine the most-favored-customer price, by statute,
manufacturers who wish to sell their products to the federal agencies
involved are required to provide information on price discounts and
rebates offered to domestic customers and the terms and conditions
involved, such as length of contract periods and ordering and delivery
practices.[Footnote 30] The manufacturers provide this information and
agree to offer the VA and other government purchasers drugs at these
prices, subject to VA audit of their records,[Footnote 31] in order to
have state Medicaid programs cover their drugs.
This type of information could be helpful in setting payment amounts
for certain Medicare drugs. It is already available to CMS, but for
use only in the Medicaid”-not the Medicare-”program.[Footnote 32] With
congressional approval, CMS could use the information provided to
Medicaid to determine appropriate prices for Medicare that would be
based on actual prices being paid in the market. One key step would be
to determine the formula to use to calculate payments based on the
price data. Most likely, Medicare would not set payments to match the
prices paid by most favored customers but would need to pay closer to
average market prices to ensure access for all beneficiaries and
adequate payments to providers.
Results from the competitive bidding demonstrations suggest that
competition can also serve as a tool to obtain more appropriate prices
for medical equipment and supplies and outpatient drugs. By competing
a small number of products and limiting the geographic area of
competition, CMS took steps to manage the process, which included
monitoring of beneficiary access and product quality. In its fiscal
year 2003 budget, the Administration proposed expanding competitive
bidding for medical equipment and supplies nationally, which it
estimates could save $240 million in fiscal year 2003 and $5 billion
over 10 years.
The Administration's expansion proposal to translate these limited
demonstrations into a competition involving a larger number of
products nationally would be a substantial undertaking and may not be
practical or appropriate for all products. CMS would require new
authority to begin to use competitive bidding outside of a
demonstration. A key element to the new authority would be the extent
to which and the basis whereby providers could be excluded from
Medicare. While Medicare normally allows any qualified provider to
participate in the program, competitive bidding may be most effective
only by limiting the number of providers or suppliers who could
provide items or services. For example, in the Polk County
demonstration, only 16 out of the 30 bidders were selected to
participate. Limiting the number of participating suppliers obviously
has an effect on both beneficiaries and suppliers. While provider
participation is not an entitlement, the effects of exclusion”in terms
of numbers of providers and the volume of services affected”need to be
identified and assessed. Similarly, for some products, who the
provider is may be of little consequence for the beneficiary, but for
others, maintaining greater beneficiary choice and direct access to
the provider could be important.
Whether payment rates are set or adjusted through competitive bidding
or administrative fee-setting, monitoring to ensure that beneficiaries
continue to have access to the items or services is a critical
component of such efforts. For example, when the Congress reduced
Medicare home oxygen payment rates by 25 percent effective January 1,
1998, and an additional 5 percent effective January 1, 1999, it wanted
assurance that beneficiaries could continue to receive satisfactory
service.[Footnote 33] To evaluate the impact of the home oxygen
payment reduction on access and quality, the BBA required studies
conducted by us and REIS.[Footnote 34] Neither study found any
significant access problems with the payment reduction. In addition,
home oxygen was included in both competitive bidding demonstrations,
and through those demonstrations, prices were reduced further. HCFA
estimated that Medicare's home oxygen payments were reduced by 16
percent in the Polk County demonstration, without beneficiary access
problems. Such monitoring is important, not just when required by
statute but as part of an ongoing effort to ensure the Medicare
program is effectively serving its beneficiaries.
Unfortunately, such studies to review the effects of payment
reductions on access are the exception. As we have reported before,
CMS has not been able to generate data that are timely, accurate, and
useful on payment and service trends essential to effective program
monitoring.[Footnote 35] One of the principal lessons to be drawn from
the many BBA payment reforms is that newly implemented policies need a
thorough assessment of their effects. Policy changes, particularly
those that constrain payment, almost inevitably spark calls for
revisions. Considerations of such revisions need to be based on
sufficient information so that, at one extreme, policies are not
unduly affected by external pressures and premature conclusions as to
their impact, and at the other extreme, policies do not remain static
when change is clearly warranted.[Footnote 36] CMS has not been well-
positioned to collect and analyze data regarding beneficiaries' use of
services”information that is essential to managing the program
effectively.[Footnote 37] This year's 5.4 percent reduction of
physicians' fees from what was paid in 2001 raised concerns about
beneficiaries' access. While prior information available on
physicians' willingness to see Medicare beneficiaries did not indicate
access problems, this information is somewhat dated.[Footnote 38]
Informed decisions about appropriate payment rates and rate changes
cannot be made unless policymakers have detailed and recent data on
beneficiaries' access to needed services.
Mr. Chairman, this concludes my prepared remarks. I will be happy to
answer any questions you or the Subcommittee Members may have.
Contact and Acknowledgments:
For further information regarding this testimony, please contact me at
(312) 220-7600. Sheila Avruch, Hannah Fein, Sandra Gove, Joy Kraybill,
and Craig Winslow made contributions to this statement.
[End of section]
Related GAO Products:
Medicare Outpatient Drugs: Program Payments Should Better Reflect
Market Prices. [hyperlink, http://www.gao.gov/products/GAO-02-531T].
Washington, D.C.: March 14, 2002.
Medicare Physician Payments: Spending Targets Encourage Fiscal
Discipline, Modifications Could Stabilize Fees. [hyperlink,
http://www.gao.gov/products/GAO-02-441T].
Washington, D.C.: February 14, 2002.
Medicare: Payments for Covered Outpatient Drugs Exceed Providers'
Cost. [hyperlink, http://www.gao.gov/products/GAO-01-1118].
Washington, D.C.: September 21, 2001.
Medicare Part B Drugs: Program Payments Should Reflect Market Prices.
[hyperlink, http://www.gao.gov/products/GAO-01-1142T]. Washington,
D.C.: September 21, 2001.
Medicare Management: CMS Faces Challenges to Sustain Progress and
Address Weaknesses. [hyperlink,
http://www.gao.gov/products/GAO-01-817]. Washington, D.C.: July 31,
2001.
DOD and VA Pharmacy: Progress and Remaining Challenges in Jointly
Buying and Mailing Out Drugs. [hyperlink,
http://www.gao.gov/products/GAO-01-588]. Washington, D.C.: May 25,
2001.
Medicare Payments: Use of Revised "Inherent Reasonableness" Process
Generally Appropriate. [hyperlink,
http://www.gao.gov/products/GAO/HEHS-00-79]. Washington, D.C.: July 5,
2000.
Balanced Budget Act: Any Proposed Fee-for-Service Payment
Modifications Need Thorough Evaluation. [hyperlink,
http://www.gao.gov/products/GAO/T-HEHS-99-139]. Washington, D.C.: June
10, 1999.
Medicare: Need to Overhaul Costly Payment System for Medical Equipment
and Supplies. [hyperlink,
http://www.gao.gov/products/GAO/HEHS-98-102]. Washington, D.C.: May
12, 1998.
Medicare: Access to Home Oxygen Largely Unchanged; Closer HCFA
Monitoring Needed. [hyperlink,
http://www.gao.gov/products/GAO/HEHS-99-56]. Washington, D.C.: April
5, 1999.
Medicare: Comparative Information on Medicare and VA Patients,
Services, and Payment Rates for Home Oxygen. [hyperlink,
http://www.gao.gov/products/GAO/HEHS-97-151R]. Washington, D.C.: June
6, 1997.
Medicare: Excessive Payments for Medical Supplies Continue Despite
Improvements. [hyperlink,
http://www.gao.gov/products/GAO/HEHS-95-171]. Washington, D.C.: August
8, 1995.
[End of section]
Footnotes:
[1] A list of related GAO products is included at the end of this
statement.
[2] This statement will refer to HCFA in discussing actions taken
before the agency's name was officially changed on July 1, 2001.
[3] Pub. L. No. 105-33, 111 Stat. 251.
[4] BBA at § 4316, 111 Stat. 390 (codified at 42 U.S.C. § 1395u(b)(8)
and (9) (Supp. III 1997)).
[5] Medicare, Medicaid, and SCRIP Balanced Budget Refinement Act of
1999, Pub. L. No. 106113, App. F, § 223, 113 Stat. 1501, 1501 A-352
(to be codified at 42 U.S.C. 1395u(b)(8) (Supp. V 1999)).
[6] BBA at § 4318, 111 Stat. 392 (codified at 42 U.S.C. § 1395w-3
(Supp. III 1997)).
[7] A nebulizer is a device driven by a compressed air machine that
allows the patient to take medicine in the form of a mist or wet
aerosol.
[8] 0mnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, §
4062, 101 Stat. 1330, 1330-101 (codified at 42 U.S.C. § 1395m (1988)).
Certain medical equipment and supply items not originally on a fee
schedule were added later”for example, surgical dressings, were added
by the Omnibus Budget Reconciliation Act of 1993 Pub. L. No. 103-66, §
13544(b), 107 Stat. 312, 589 (codified at 42 U.S.C. § 1395m(i) (1994)).
[9] Prior to 1998, these fees were adjusted each year using formulas
tied to the Consumer Price Index. No update was provided from 1998
through 2000 or in 2002, although updates were provided in 2001. 42
U.S.C. § 1395m(a)(14) (Supp. IV 1998); Medicare, Medicaid and SCRIP
Balanced Budget Refinement Act of 1999, Pub. L. No. 106-113, App. F, §
228, 113 Stat. 1501, 1501A-356; and Medicare, Medicaid, and SCRIP
Benefits Improvement and Protection Act of 2000, Pub. L. No. 106-554,
App. F, § 425, 114 Stat. 2763, 2763A-519 (to be codified at 42 U.S.C.
§ 1395m(a)(14)).
[10] U.S. General Accounting Office, Medicare: Excessive Payments for
Medical Supplies Continue Despite Improvements, [hyperlink,
http://www.gao.gov/products/GAO/HEHS-95-171] (Washington, D.C.: Aug.
8, 1995).
[11] Authority to adjust payment rates that were excessive did not
extend to surgical dressings and certain other medical supplies at
that time. The BBA extended the authority to adjust rates for any
payments under part B that are excessive. BBA at § 4316, sec.
1842(b)(8)(A)(i)(I), 111 Stat. 390 (changing "application of this
subsection" to "application of this part)." Clarifying this broadened
scope, "application of this part" was later changed to "application of
this title to payment under this part." Medicare, Medicaid, and SCRIP
Balanced Budget Refinement Act of 1999, Pub. L. No. 106-113, App. F, §
223(c), 113 Stat. 1501, 1501A-353.
[12] The savings estimate includes adding a 30-percent adjustment to
VA payment rates to account for differences between the Medicare and
VA programs. See U.S. General Accounting Office, Medicare: Comparative
Information on Medicare and VA Patients, Services, and Payment Rates
for Home Oxygen, [hyperlink,
http://www.gao.gov/products/GAO/HEHS-97-151R] (Washington, D.C.: June
6, 1997).
[13] 0mnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, §
6102, 103 Stat. 2106, 2169 (codified at 42 U.S.C. § 1395w-4 (Supp. I
1989)).
[14] 56 Fed. Reg. 59,502, 59,507 (Nov. 25, 1991).
[15] 11.R. Rep. No. 105-149, at 1354 (1997).
[16] U.S. General Accounting Office, Medicare: Payments for Covered
Outpatient Drugs Exceed Providers' Cost, [hyperlink,
http://www.gao.gov/products/GAO-01-1118] (Washington, D.C.: Sept. 21,
2001).
[17] Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, §
4062(b), 101 Stat. 1330, 1330-100.
[18] Medicare Catastrophic Coverage Act of 1988, Pub. L. No. 100-360,
§ 411(g)(1)(B)(xiii), 102 Stat. 683, 782. These procedures were
previously applicable only to any inherent reasonableness review with
respect to physician services. 42 U.S.C. 1395m(a)(10)(B) (1988).
[19] Changing an unreasonable payment level required, among other
things, a formal notice-and-comment rulemaking process that involved
the HCFA Administrator, the Secretary of Health and Human Services,
and the Director of the Office of Management and Budget (OMB). U.S.
General Accounting Office, Medicare Payments: Use of Revised "Inherent
Reasonableness" Process Generally Appropriate, [hyperlink,
http://www.gao.gov/products/GAO/HEHS-00-79] (Washington, D.C.: July 5,
2000) and [hyperlink, http://www.gao.gov/products/GAO/HEHS-95-171].
[20] BBA at § 4316, 111 Stat. 251, 390.
[21] BBA at § 4319, 111 Stat. 251, 392. (Codified at 42 U.S.C. § 1395w-
4 (Supp. III 1997).
[22] In the competitive bidding demonstration projects authorized
under BBA, Medicare part B items and services (other than physician
services) were furnished under competitively awarded contracts. For
each demonstration product or service, the prices bid by winning
suppliers were used to determine the competitively bid fee schedule
price.
[23] 63 Fed. Reg. 687 (Jan. 7, 1998). In this interim final rule, HCFA
committed to having a notice and comment period for any payment
adjustments, even through the streamlined process.
[24] Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of
1999, Pub. L. No. 106113, App. F, § 223, 113 Stat. 1501, 1501A-352
(signed into law January 29, 1999).
[25] [hyperlink, http://www.gao.gov/products/GAO/HEHS-00-79].
[26] BBA at § 4219, 111 Stat. 392. The BBA at 4552(a), 111 Stat. 459,
also reduced home oxygen payment amounts by 25 percent effective
January 1, 1998, and an additional 5 percent effective January 1, 1999.
[27] Medicare program savings did not occur in all product categories;
there were higher prices for surgical dressings, one of five product
categories in the demonstration.
[28] U.S. General Accounting Office, Medicare: Need to Overhaul Costly
Payment System for Medical Equipment and Supplies, [hyperlink,
http://www.gao.gov/products/GAO/HEHS-98-102] (Washington, D.C.: May
12, 1998).
[29] Pub. L. No. 104-191, § 262(a), § 1173(c), 110 Stat. 1936, 2025.
[30] 38 U.S.C. § 8126 (1994).
[31] The VA negotiates prices for and purchases medical equipment,
supplies, and drugs through the Federal Supply Schedule. Federal
Supply Schedule prices are available to any federal agency that
directly procures pharmaceuticals or medical equipment and supplies,
including VA medical centers, the Department of Defense, the Bureau of
Prisons, the Public Health Service, and other designated entities such
as the District of Columbia, U.S. territorial governments, the Indian
Health Service, and some state veterans homes.
[32] Under a provision of the Omnibus Budget Reconciliation Act of
1990 (OBRA), state Medicaid programs receive rebates from
manufacturers based on either the manufacturer's "best price" to a
private purchaser or the average price (including cash discounts and
other price reductions) paid to drug manufacturers by U.S. wholesalers
for certain drugs. In order to have their drugs covered by Medicaid,
manufacturers must be willing to provide the rebate and price
information to calculate it. § 1927 of the Social Security Act, added
by OBRA 1990, Pub. L. No.101-508, § 4401, 104 Stat. 1388, 1388-143
(1990) (classified to 42 U.S.C. Sec. 1396r-8).
[33] For beneficiaries who receive oxygen at home, Medicare part B
pays suppliers a fixed monthly fee per beneficiary that covers a
stationary, home-based oxygen unit and all related services and
supplies, such as tank refills. There is a separate fixed monthly fee
for a portable unit, if one is prescribed. Medicare's oxygen payment
method is called "modality neutral" because the payment rate is the
same regardless of the type of oxygen delivery system prescribed, i.e.
compressed gas, liquid oxygen, or oxygen concentrator.
[34] U.S. General Accounting Office, Medicare: Access to Home Oxygen
Largely Unchanged; Closer HCFA Monitoring Needed, [hyperlink,
http://www.gao.gov/products/GAO/HEHS-99-56] (Washington, D.C.: Apr. 5,
1999) and Rebecca Olson, Carolyn Harper, Stephanie Lui, and others.
Report on Peer Review Evaluation of Home Oxygen Equipment. California
Medical Review, Inc. (San Francisco, Calif.: Sept. 30, 2000). This BHS
study analyzed 1996 and 1998 claims data to calculate the number of
Medicare oxygen prescriptions, and also conducted 1999 surveys of
physicians, suppliers, and beneficiaries.
[35] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Health and Human Services, [hyperlink,
http://www.gao.gov/products/GAO-01-247] (Washington, D.C.: Jan. 2001).
[36] U.S. General Accounting Office, Balanced Budget Act: Any Proposed
Fee-for-Service Payment Modifications Need Thorough Evaluation,
[hyperlink, http://www.gao.gov/products/GAO/T-HEHS-99-139]
(Washington, D.C.: June 10, 1999).
[37] U.S.General Accounting Office, Medicare: HCFA Faces Challenges to
Control Improper Payments, [hyperlink,
http://www.gao.gov/products/GAO/T-HEHS-00-74], (Washington, D.C.: Mar.
9, 2000).
[38] U.S. General Accounting Office, Medicare Physician Payments:
Spending Targets Encourage Fiscal Discipline, Modifications Could
Stabilize Fees, [hyperlink, http://www.gao.gov/products/GAO-02-441T],
(Washington, D.C.: Feb. 14, 2002).
[End of section]
