Medicare
Past Experience Can Guide Future Competitive Bidding for Medical Equipment and Supplies
Gao ID: GAO-04-765 September 7, 2004
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) requires the Centers for Medicare & Medicaid Services (CMS) to conduct large-scale competitive bidding for durable medical equipment, supplies, off-the-shelf orthotics, and enteral nutrients and related equipment and supplies provided to beneficiaries. The Balanced Budget Act of 1997 mandated that GAO study an earlier Medicare competitive bidding demonstration. To address this mandate, GAO assessed this past experience in relation to four issues that CMS might consider as it implements large-scale competitive bidding: (1) items for competitive bidding, (2) how to streamline implementation, (3) ways to collect information on specific items provided to beneficiaries, and (4) steps to ensure quality items and services.
CMS's experience in the Medicare competitive bidding demonstration may prove instructive as the agency implements provisions in MMA to conduct large-scale competitive bidding for durable medical equipment, supplies, off-the-shelf orthotics, and enteral nutrients and related equipment and supplies. The experience gained during the demonstration provides insight as the agency considers four implementation issues. Items for competitive bidding: Items for competitive bidding could include those selected for the demonstration and others that account for high levels of Medicare spending. For example, nondemonstration items that CMS could choose for competitive bidding include power wheelchairs and lancets and test strips used by diabetics. In 2002, these three items accounted for about $1.7 billion in charges for the Medicare program and its beneficiaries. How to streamline implementation: Because of the large scale of future competitive bidding, it will be prudent for CMS to consider ways to streamline implementation. Two ways to streamline are developing a standardized competitive bidding approach that can be replicated in multiple geographic locations and using mail-order delivery for selected items, with uniform fees established through a nationwide competition. Ways to collect information on specific items provided to beneficiaries: Gathering specific information on competitively bid items provided to beneficiaries could help ensure that suppliers do not substitute lower-priced items to reduce their costs. Currently, CMS is not able, or does not routinely, collect specific information on the items that suppliers provide to beneficiaries. Steps to ensure quality items and services for beneficiaries: Routine monitoring could help ensure that beneficiaries continue to have access to suppliers that deliver quality items and services. The agency, when implementing significant Medicare changes in the past that affected payment methods, has lacked information on how the changes affected beneficiary access. As competitive bidding expands, small problems could be potentially magnified. Using quality measures to choose multiple suppliers and having suppliers meet more detailed standards than are currently required can also help ensure quality for beneficiaries.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director:
Team:
Phone:
GAO-04-765, Medicare: Past Experience Can Guide Future Competitive Bidding for Medical Equipment and Supplies
This is the accessible text file for GAO report number GAO-04-765
entitled 'Medicare: Past Experience Can Guide Future Competitive
Bidding for Medical Equipment and Supplies' which was released on
September 07, 2004.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Committees:
September 2004:
MEDICARE:
Past Experience Can Guide Future Competitive Bidding for Medical
Equipment and Supplies:
GAO-04-765:
GAO Highlights:
Highlights of GAO-04-765, a report to congressional committees.
Why GAO Did This Study:
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) requires the Centers for Medicare & Medicaid Services (CMS)
to conduct large-scale competitive bidding for durable medical
equipment, supplies, off-the-shelf orthotics, and enteral nutrients
and related equipment and supplies provided to beneficiaries. The
Balanced Budget Act of 1997 mandated that GAO study an earlier Medicare
competitive bidding demonstration. To address this mandate, GAO
assessed this past experience in relation to four issues that CMS
might consider as it implements large-scale competitive bidding: (1)
items for competitive bidding, (2) how to streamline implementation,
(3) ways to collect information on specific items provided to
beneficiaries, and (4) steps to ensure quality items and services.
What GAO Found:
CMS‘s experience in the Medicare competitive bidding demonstration may
prove instructive as the agency implements provisions in MMA to conduct
large-scale competitive bidding for durable medical equipment,
supplies, off-the-shelf orthotics, and enteral nutrients and related
equipment and supplies. The experience gained during the demonstration
provides insight as the agency considers four implementation issues:
*Items for competitive bidding. Items for competitive bidding could
include those selected for the demonstration and others that account
for high levels of Medicare spending. For example, nondemonstration
items that CMS could choose for competitive bidding include power
wheelchairs and lancets and test strips used by diabetics. In 2002,
these three items accounted for about $1.7 billion in charges for the
Medicare program and its beneficiaries.
*How to streamline implementation. Because of the large scale of
future competitive bidding, it will be prudent for CMS to consider
ways to streamline implementation. Two ways to streamline are
developing a standardized competitive bidding approach that can be
replicated in multiple geographic locations and using mail-order
delivery for selected items, with uniform fees established through a
nationwide competition.
*Ways to collect information on specific items provided to
beneficiaries. Gathering specific information on competitively bid
items provided to beneficiaries could help ensure that suppliers do
not substitute lower-priced items to reduce their costs. Currently,
CMS is not able, or does not routinely, collect specific information
on the items that suppliers provide to beneficiaries.
* Steps to ensure quality items and services for beneficiaries.
Routine monitoring could help ensure that beneficiaries continue to
have access to suppliers that deliver quality items and services. The
agency, when implementing significant Medicare changes in the past that
affected payment methods, has lacked information on how the changes
affected beneficiary access. As competitive bidding expands, small
problems could be potentially magnified. Using quality measures to
choose multiple suppliers and having suppliers meet more detailed
standards than are currently required can also help ensure quality for
beneficiaries.
What GAO Recommends:
GAO is making several recommendations to CMS concerning competitive
bidding, including recommendations on ways to increase potential
savings, streamline implementation, help ensure that Medicare is
paying appropriately for items, and promote beneficiary satisfaction.
CMS agreed with most of our recommendations and indicated that it
would give serious consideration to this report throughout development
and implementation of national competitive bidding.
www.gao.gov/cgi-bin/getrpt?GAO-04-765.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Leslie G. Aronovitz at
(312) 220-7600.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
CMS's Experience Can Guide Agency Efforts to Implement Competitive
Bidding:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Medicare's 21 Standards for Medicare Suppliers of DME,
Prosthetics, Orthotics, and Supplies:
Appendix III: Comments from the Centers for Medicare & Medicaid
Services:
Tables:
Table 1: Product Groups Included in the Demonstration's Two Locations:
Table 2: Product Groups Representing the Highest Medicare Spending in
2002 for DME, Prosthetics, Orthotics, and Supplies:
Table 3: Standards for Medicare Suppliers of DME, Prosthetics,
Orthotics, and Supplies:
Letter September 7, 2004:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
The Honorable Joe Barton:
Chairman:
The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:
The Honorable William M. Thomas:
Chairman:
The Honorable Charles B. Rangel:
Ranking Minority Member:
Committee on Ways and Means:
House of Representatives:
In 2002, the Medicare program and its beneficiaries paid almost $9.7
billion for durable medical equipment (DME), prosthetics, orthotics,
and supplies.[Footnote 1]For most of these items, Medicare payment
rates are not based on current market prices, but are primarily based
on historical charges from the mid-1980s, adjusted for inflation in
some years.[Footnote 2] The Centers for Medicare & Medicaid Services
(CMS)--formerly called the Health Care Financing Administration
(HCFA)[Footnote 3]--lacked mechanisms to readily adjust payment rates
to reflect marketplace changes. As a result, disparities arose between
Medicare payment rates and market prices. As we and the Department of
Health and Human Services' (HHS) Office of Inspector General (OIG) have
reported, the Medicare program and its beneficiaries have been paying
too much for some items of DME, prosthetics, orthotics, and supplies--
sometimes three or four times the amount paid by others.[Footnote 4] In
addition to increasing program costs, inflated payment rates increase
beneficiaries' costs because beneficiaries are responsible for 20
percent of the Medicare rate as coinsurance.
The Balanced Budget Act of 1997 (BBA)[Footnote 5] required CMS to test
competitive bidding as a new way for Medicare to set fees for part
B[Footnote 6] items and services specified by CMS.[Footnote
7],[Footnote 8] Competitive bidding provides incentives for suppliers
to lower their prices for items and services to retain their ability to
serve Medicare beneficiaries and potentially increase their market
share. Using its authority under BBA, CMS conducted a competitive
bidding demonstration to set Medicare part B payment rates for selected
DME, prosthetics, orthotics, and supply items. The demonstration and
CMS's authority to conduct competitive bidding ended on December 31,
2002. In December 2003, the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (MMA) required CMS to conduct competitive
bidding for DME, supplies, off-the-shelf orthotics, and enteral
nutrients and related equipment and supplies on a large scale.[Footnote
9]
BBA also mandated that GAO study the effectiveness of the Medicare
competitive bidding demonstration.[Footnote 10] To address this
mandate, as discussed with the committees of jurisdiction, we assessed
four issues that CMS might consider as it implements MMA provisions for
competitive bidding, given its prior demonstration experience. The four
issues are (1) items to be chosen for competitive bidding, (2) how to
streamline implementation, (3) ways to collect information on specific
items provided to beneficiaries, and (4) steps to ensure quality items
and services to beneficiaries.
In preparing this report, we reviewed documents related to the
competitive bidding demonstration for DME, prosthetics, orthotics, and
supplies provided under Medicare part B. These included evaluations of
the demonstration.[Footnote 11] Two evaluation reports on the
demonstration have been published,[Footnote 12] and a final report is
pending. We also conducted interviews with officials from CMS, the
contractor that administered the demonstration, and its evaluators. We
analyzed claims data on Medicare spending for DME, prosthetics,
orthotics, and supply items. To determine that these data were
accurate, timely, and complete, we interviewed the CMS contractor that
provided the data and reviewed CMS's internal control procedures. Where
appropriate, we tested data manually against published sources for
consistency. We determined that these data were sufficiently reliable
for addressing the issues in this report. We solicited feedback on item
selection and quality assurance steps from medical directors at the
four DME regional carriers.[Footnote 13] We also interviewed
representatives from advocacy groups and industry. Appendix I includes
a more detailed discussion of our scope and methodology. Our work was
conducted from February 2003 through August 2004 in accordance with
generally accepted government auditing standards.
Results in Brief:
As CMS moves forward with its new competitive bidding effort, the
experience it gained during the demonstration can provide insights as
the agency considers four implementation issues. First, items to be
chosen for competitive bidding could include those in the demonstration
and others that account for high levels of Medicare spending. By
selecting items with high overall Medicare spending for the competitive
bidding demonstration, the agency achieved estimated gross savings of
$8.5 million for the Medicare program and its beneficiaries. Second,
because of the large scale of future competitive bidding, it will be
prudent to consider ways to streamline implementation. Such
streamlining approaches could include developing a standardized
competitive bidding approach for multiple locations that builds on
practical experience from the demonstration and using mail-order
delivery for selected items included in a nationwide competition.
Third, identifying approaches to collect better information on the
specific items provided to beneficiaries would help ensure that
Medicare is paying appropriately for items. Fourth, once implementation
of competitive bidding begins on a large scale, routine monitoring
could help ensure that beneficiaries' access to quality items and
services is not compromised. To assist CMS in future efforts to conduct
competitive bidding for DME, off-the-shelf orthotics, supplies, and
enteral nutrients and related equipment and supplies, we are making
recommendations on selecting products, using mail-order delivery as a
mechanism to implement a national competitive bidding strategy,
obtaining more detailed information on products provided to
beneficiaries, and monitoring beneficiary satisfaction. CMS agreed with
most of our recommendations and stated that it would give serious
consideration to this report throughout the development and
implementation of national competitive bidding.
Background:
Medicare is a federal program that helps pay for a variety of health
care services and items on behalf of about 41 million elderly and
disabled beneficiaries. Medicare part B covers DME for the
beneficiary's use in the home, prosthetics, orthotics, and supplies if
they are medically necessary and prescribed by a physician. Part B also
covers certain outpatient prescription drugs that are used with DME or
that are not usually self-administered by the patient. Some of these
drugs are classified as supplies.
Medicare Payment for DME, Prosthetics, Orthotics, and Supplies:
In submitting claims for Medicare payment, suppliers use codes in the
Healthcare Common Procedure Coding System (HCPCS) to identify DME,
prosthetics, orthotics, and supplies that they are providing to
beneficiaries. These codes are used for health insurance billing
purposes to identify health care services, equipment, and supplies used
in beneficiaries' diagnoses and treatments. Individual HCPCS codes used
by suppliers can cover a broad range of items that serve the same
general purpose, but vary in price, characteristics, and quality. The
HCPCS National Panel, a group composed of CMS and other insurers,
maintains the HCPCS codes.
Medicare uses a variety of methodologies, which are specified in law,
for determining what it will pay for specific types of DME,
prosthetics, orthotics, and supplies. Medicare has established a fee
schedule for DME and supplies, which lists the fees paid for these
items in each state. Prosthetics and orthotics are paid according to 10
regional fee schedules. Prior to the passage of MMA, outpatient
prescription drugs covered by Medicare part B were paid on a fee
schedule based on 95 percent of the manufacturers' average wholesale
price (AWP), a price determined by manufacturers themselves.[Footnote
14] Except for these outpatient prescription drugs, the amounts paid
under the fee schedules are generally based on the amounts charged by
suppliers in 1986 and 1987 (or the amount set by Medicare if the item
was subsequently added to the fee schedule). Suppliers are reimbursed
according to the supplier's actual charge or the Medicare fee schedule
amount, whichever is lower.
Over the years, we have reported that Medicare fees for certain medical
equipment, supplies, and outpatient drugs were excessive compared with
retail and other prices. For example, in 2000, we reported that retail
price data collected by the four DME regional carriers showed that
Medicare payments were much higher than the median surveyed retail
prices for five commonly used medical products.[Footnote 15] While
Medicare paid 5 percent less than AWP for covered prescription drugs,
in 2001 we reported that prices widely available to physicians averaged
from 13 percent to 34 percent less than AWP for a sample of physician-
administered drugs.[Footnote 16] For two inhalation drugs[Footnote 17]
covered by Medicare--albuterol and ipratropium bromide--prices widely
available to pharmacy suppliers in 2001 reflected average discounts of
85 percent and 78 percent from AWP, respectively.[Footnote 18]
Medicare Competitive Bidding:
In 1997, BBA required CMS to establish up to five demonstration
projects to be operated over 3-year periods that used competitive
bidding to set fees for Medicare part B items and services. BBA
required that at least one demonstration project include oxygen and
oxygen equipment; all demonstration areas be metropolitan statistical
areas (MSA) or parts of MSAs;[Footnote 19] and criteria for selecting
demonstration areas include availability and accessibility of services
and probability of savings.[Footnote 20]
CMS contracted with one of the four DME regional carriers--Palmetto
Government Benefits Administrators (Palmetto)--to implement the
competitive bidding demonstration for DME, prosthetics, orthotics, and
supplies.[Footnote 21] The demonstration was implemented in two
locations--Polk County, Florida, and the San Antonio, Texas,
area.[Footnote 22] Two cycles of bidding took place in Polk County,
with competitively set fees effective from October 1, 1999, to
September 30, 2001, and from October 1, 2001, to September 30, 2002.
There was one cycle of bidding in San Antonio, and competitively set
fees were effective from February 1, 2001, to December 31, 2002.
Bidding and implementation processes were similar at both locations.
CMS set up competitive bidding for groups of related DME, prosthetics,
orthotics, and supplies and held a separate competition for each group.
Items included in the demonstration were identified by HCPCS codes.
Suppliers were required to bid on each HCPCS code included in the
product group in which they were competing. Table 1 shows the eight
product groups in CMS's competitive bidding demonstration at the two
locations.
Table 1: Product Groups Included in the Demonstration's Two Locations:
Product groups: Enteral nutrients, equipment, and supplies;
Polk County: Yes;
San Antonio location: No.
Product groups: Hospital beds and accessories;
Polk County: Yes;
San Antonio location: Yes.
Product groups: Nebulizer inhalation drugs;
Polk County: San Antonio location: Yes.
Product groups: Manual wheelchairs and accessories;
Polk County: San Antonio location: Yes.
Product groups: Noncustomized general orthotics;
Polk County: San Antonio location: Yes.
Product groups: Oxygen contents, equipment, and supplies;
Polk County: Yes;
San Antonio location: Yes.
Product groups: Surgical dressings;
Polk County: Yes;
San Antonio location: No.
Product groups: Urological supplies;
Polk County: Yes;
San Antonio location: No.
Source: GAO analysis of CMS data.
[End of table]
The competitive bidding process was used to determine the suppliers
included in the demonstration and the rates they would be paid. From
among the bidders, the agency and Palmetto selected multiple
demonstration suppliers to provide items in each group of related
products. These suppliers were not guaranteed that they would increase
their business or serve a specific number of Medicare beneficiaries.
Instead, the demonstration suppliers had to compete for beneficiaries'
business. With few exceptions, only demonstration suppliers were
reimbursed by Medicare for competitively bid items provided to
beneficiaries permanently residing in the demonstration area.[Footnote
23] However, beneficiaries already receiving certain items were allowed
to continue to use their existing nondemonstration suppliers.[Footnote
24] All demonstration suppliers were reimbursed for each competitively
bid item provided to beneficiaries at the demonstration fee schedule
amounts.[Footnote 25] The new fee schedules were based on the winning
suppliers' bids for items included in the demonstration. Any Medicare
supplier that served demonstration locations could provide items not
included in the demonstration to beneficiaries.
About 1 year after CMS's demonstration authority ended, MMA required
the agency to conduct competitive bidding for DME, supplies, off-the-
shelf orthotics, and enteral nutrients and related equipment and
supplies. Competition is to be implemented in 10 of the largest MSAs in
2007, 80 of the largest MSAs in 2009, and additional areas thereafter.
Items excluded from this authority are inhalation drugs; parenteral
nutrients, equipment, and supplies; Class III devices;[Footnote 26] and
customized orthotics that require expertise to fit individual
beneficiaries. CMS may phase in implementation of competitive bidding
first for the highest cost and highest volume items or those items with
the greatest savings potential. The law requires that a Program
Advisory and Oversight Committee be established to provide
recommendations to CMS on its implementation of competitive bidding.
MMA also gives CMS significant new authority to use competitive bidding
results as a basis for determining reasonable payment rates throughout
the country in 2009. CMS has the authority to apply the information
obtained from competitive bidding to adjust payments in parts of the
country outside of the competitive areas for DME, supplies, off-the-
shelf orthotics, and enteral nutrients and related equipment and
supplies. Thus, CMS will be able to more easily adjust its payment
rates nationally to reflect market prices within the largest MSAs by
using information gleaned through competitive bidding.
CMS's Experience Can Guide Agency Efforts to Implement Competitive
Bidding:
While MMA sets specific requirements for competitive bidding, it also
leaves certain implementation issues to CMS. As CMS implements
competitive bidding, its payment-setting experience in the
demonstration will prove useful as the agency considers items for
competitive bidding and approaches to streamline implementation,
collect information on specific items provided to beneficiaries, and
ensure that beneficiaries' access to quality items and services is not
compromised.
Many High-Cost Items Could Be Included in Large-Scale Competitive
Bidding:
Selecting items with high levels of Medicare spending may prove
fruitful in generating significant savings in the first years of large-
scale competitive bidding efforts. The demonstration provided CMS with
experience in item selection, and MMA provides direction and guidance
for future efforts. By including items that accounted for a large share
of Medicare spending, the demonstration generated estimated gross
savings that were substantially more than its implementation costs. In
addition to the items included in the demonstration, others are worth
considering for selection in future competitive bidding.
For the competitive bidding demonstration, Palmetto and CMS chose items
from six of the eight product groups that accounted for almost 78
percent of Medicare allowed charges in calendar year 2002, as table 2
shows.[Footnote 27] The demonstration also included items from two
other product groups with lower levels of Medicare spending--urological
supplies and surgical dressings. According to a CMS official, CMS did
not include glucose monitors and supplies in competitive bidding
because beneficiaries must frequently use brand-name supplies with
their monitors. Ensuring that specific brands of glucose test strips
were included would have complicated the first test of competitive
bidding in the demonstration. However, the CMS official noted that CMS
could consider including glucose supplies in future competitive
bidding. Similarly, lower and upper limb prosthetics were not included
because these items are generally custom made or fitted to
beneficiaries and, for simplicity, the demonstration focused on
noncustomized items.
Table 2: Product Groups Representing the Highest Medicare Spending in
2002 for DME, Prosthetics, Orthotics, and Supplies:
Product group: Oxygen contents, equipment, and supplies;
Total Medicare allowed charges (dollars in millions): $2,219;
Total Medicare allowed charges (percentage): 22.9%;
Some items from product group included in the demonstration: Yes.
Product group: Wheelchairs and accessories;
Total Medicare allowed charges (dollars in millions): $1,411;
Total Medicare allowed charges (percentage): 14.6%;
Some items from product group included in the demonstration: Yes.
Product group: Nebulizer and related drugs;
Total Medicare allowed charges (dollars in millions): $1,175;
Total Medicare allowed charges (percentage): 12.1%;
Some items from product group included in the demonstration: Yes.
Product group: Glucose monitors and supplies;
Total Medicare allowed charges (dollars in millions): $895;
Total Medicare allowed charges (percentage): 9.2%;
Some items from product group included in the demonstration: No.
Product group: Enteral nutrients, equipment, and supplies;
Total Medicare allowed charges (dollars in millions): $636;
Total Medicare allowed charges (percentage): 6.6%;
Some items from product group included in the demonstration: Yes.
Product group: Lower and upper limb prosthetics;
Total Medicare allowed charges (dollars in millions): $463;
Total Medicare allowed charges (percentage): 4.8%;
Some items from product group included in the demonstration: No.
Product group: Hospital beds and accessories;
Total Medicare allowed charges (dollars in millions): $359;
Total Medicare allowed charges (percentage): 3.7%;
Some items from product group included in the demonstration: Yes.
Product group: Lower and upper limb orthotics;
Total Medicare allowed charges (dollars in millions): $350;
Total Medicare allowed charges (percentage): 3.6%;
Some items from product group included in the demonstration: Yes.
Total;
Total Medicare allowed charges (dollars in millions): $7,508;
Total Medicare allowed charges (percentage): 77.5%.
Source: GAO analysis of CMS and statistical analysis durable medical
equipment regional carrier (SADMERC) data.
Notes: Total allowed charges and percentages are rounded. Total allowed
charges for each product group shown is the sum of allowed charges for
the items included in that group. The allowed charge for each item is
the payment for each item billed multiplied by the volume of the item
billed on behalf of beneficiaries. The data used for this analysis were
supplied by the SADMERC, a contractor that provides data analysis
support to CMS. The data analyzed represented claims with service dates
from January 1, 2002, through December 31, 2002, and were received by
the SADMERC through December 31, 2003.
[End of table]
Our analysis of national Medicare spending for DME, prosthetics,
orthotics, and supplies found that items included in the demonstration
accounted for about half of all Medicare allowed charges in 2002. This
was less than the total billing for all items in the product group
because not all the individual items identified by HCPCS codes within
product groups were included in the demonstration. For example, CMS
excluded power wheelchairs from the competition.
Estimated savings for competitively bid items in the demonstration
would total about 20 percent of the fee schedule amounts, according to
the demonstration evaluators. This equaled an estimated gross savings
of $8.5 million in allowed charges, which include Medicare payments and
beneficiary cost-sharing amounts.[Footnote 28] The estimated cost of
the demonstration was about $4.8 million--about 40 percent lower than
the estimated $8.5 million reduction in allowed charges associated with
the demonstration. The demonstration's $4.8 million cost included $1.2
million for planning and development from September 1, 1995, through
July 1, 1998, and $3.6 million for demonstration operating expenses
through December 2002.
For future efforts, MMA states that initial competitive bidding may
include items with the highest Medicare cost and volume or items
determined by the agency to have the largest savings potential. Working
within these parameters for competitive bidding, CMS could select some
items included in the demonstration as well as items with high Medicare
spending that were not included in the demonstration. For example,
nondemonstration items that CMS could choose include power wheelchairs
and lancets and test strips used by diabetics. These three items
accounted for about $1.7 billion, or about 17 percent, of Medicare
allowed charges for DME, prosthetics, orthotics, and supplies in
2002.[Footnote 29] A CMS official and DME regional carrier medical
directors told us that these items could be considered for inclusion in
future competitive bidding.
Two medical directors also suggested that continuous positive airway
pressure devices[Footnote 30] and accessories, with $137 million in
allowed charges--or 1.4 percent of Medicare allowed charges for DME,
prosthetics, orthotics, and supplies in 2002--could be considered for
inclusion in future competitive bidding. CMS officials suggested that
these devices and accessories could be included in early implementation
of competitive bidding. Furthermore, if CMS is able to lower operating
costs through efficiencies and streamlining, CMS could consider
selecting additional products for competitive bidding with
comparatively low levels of program spending for competitive bidding,
such as commodes, canes, and crutches.
Larger-Scale Competitive Bidding May Benefit from Streamlined
Implementation:
While the demonstration laid the groundwork for future competition,
given the expanded scale of future competitive bidding, CMS will have
to focus on a second issue--ways to streamline implementation. The
demonstration took place in just two MSAs and affected less than 1
percent of fee-for-service beneficiaries. In contrast, by 2009, MMA
requires CMS to implement competitive bidding in 80 of the largest MSAs
in the country. Our analysis showed that about half of Medicare's fee-
for-service beneficiaries live in the 80 largest MSAs.[Footnote 31] In
order to expand competitive bidding, CMS could potentially use two
streamlining approaches--developing standardized steps that are easily
replicated in different locations and using mail-order delivery for
selected items for which fees are determined through nationwide
competitive bidding.
In conducting the demonstration, CMS and Palmetto gained practical
experience in planning how competitive bidding could be conducted,
communicating with beneficiaries and suppliers, choosing demonstration
items, developing software to process demonstration claims,
establishing policies, and soliciting and evaluating supplier bids. In
expanding the scope of competitive bidding, CMS will be able to
leverage its experience to develop a standardized or "cookie-cutter"
approach that can be applied in multiple locations. This would include
a standard set of competitively bid items, procedures and policies, and
informational materials for suppliers and beneficiaries. Through
standardization, the costs of implementation in individual MSAs would
likely be reduced relative to program savings. In the demonstration,
adding a second location allowed CMS and Palmetto to spread much of the
implementation costs across two locations, rather than one.[Footnote
32] The incremental costs of adding the San Antonio location, once the
demonstration had been planned and begun in Polk County, were
relatively low. For the San Antonio location, the estimated annual
implementation costs ranged from $100,000 in a nonbidding year to
$310,000 when bidding occurred, according to the second evaluation
report.
Another potential streamlining approach would be to provide items by
mail-order delivery--a convenience for beneficiaries--with uniform
fees determined through nationwide competitive bidding. Because MMA
authorizes CMS to designate the geographic areas for competition for
different items, designating the entire country as the competitive area
for selected items is a possibility. In addition, MMA states that areas
within MSAs that have low population density should not be excluded
from competition if a significant national market exists through mail-
order for a particular item or service. In contrast to conducting
competitive bidding on a piecemeal basis in multiple geographic areas,
a consolidated nationwide approach would allow CMS to more quickly
implement competitive bidding on a large scale. This approach would
enable companies that provide, or demonstrate the ability to provide,
nationwide mail-order service to compete for Medicare beneficiaries'
business.
Items that lend themselves to mail delivery are light, easy to ship,
and used by beneficiaries on an ongoing basis. Precedents exist for
mail-order delivery of items that have been subject to competitive
bidding. Demonstration suppliers provided surgical dressings,
urological supplies, and inhalation drugs to beneficiaries by mail. In
San Antonio, 30 percent of beneficiaries reported receiving their
inhalation drugs through the mail, according to a demonstration
evaluator, and Medicare paid an estimated 25 percent less than the fee
schedule for Texas for these drugs.[Footnote 33] Glucose test strips
and lancets are two items currently mailed to Medicare beneficiaries'
homes that could be included in a future nationwide competition. In
2002, these items accounted for $831 million, or about 8.6 percent, of
Medicare allowed charges for DME, prosthetics, orthotics, and supplies.
Because glucose test strips generally must be used with the glucose
monitors made by the same manufacturer, CMS would need to ensure that
the most commonly used types of test strips were included.
Better Information on Specific Items Provided to Beneficiaries Could
Ensure More Appropriate Payment:
Finding ways to collect better information on the specific items
provided to beneficiaries is the third issue for CMS to consider as it
implements competitive bidding on a larger scale. Industry and advocacy
groups have raised concerns that competitive bidding may encourage some
suppliers to reduce their costs by substituting lower-quality or lower-
priced items. However, CMS lacks the capability to identify specific
items provided to beneficiaries because suppliers' claims use HCPCS
codes, which can cover items that differ considerably in
characteristics and price. Therefore, during the demonstration, CMS
would not have been able to determine if suppliers tended to provide
less costly items to beneficiaries. Furthermore, as CMS proceeds with
competitive bidding, it will be difficult for the agency to
appropriately monitor the type or price of specific items for which it
is paying.
A single HCPCS code can cover a broad range of items serving the same
general purpose but with differing characteristics and prices. For
example, in April 2004, the HHS OIG reported that prices available to
consumers on supplier Web sites it surveyed for different models of
power wheelchairs represented by a single HCPCS code ranged from $1,600
to almost $17,000.[Footnote 34] The 2003 Medicare fee schedule amount
for all of the power wheelchairs under this code was a median of
$5,297. Because Medicare pays the same amount for all of the items
billed under the same HCPCS code, suppliers have an incentive to
provide beneficiaries with the least costly item designated by that
code. Since the Medicare program does not routinely collect specific
information on items within a code for which it is paying, it is unable
to determine if suppliers are providing lower-priced items or higher-
priced items to beneficiaries. Using information from related work to
determine the specific power wheelchairs provided to beneficiaries, the
HHS OIG found that beneficiaries tend to receive lower-priced
wheelchairs.[Footnote 35] The OIG recommended that CMS create a new
coding system for the most commonly provided power wheelchairs to
account for the variety in models and prices. CMS is currently working
to develop a new set of codes to better describe the power wheelchairs
currently on the market and plans to develop payment ceilings for each
of the new codes.
Under competitive bidding, suppliers might have even greater incentive
to substitute less costly products listed under a code. For example,
one of the demonstration suppliers explained that while a specific
curved-tip catheter was superior for patients with scar tissue or
obstructions, competitive bidding would encourage suppliers to
substitute other, less-expensive catheters that can be paid under the
same code. Thus, even if competitive bidding reduces fees paid, when
suppliers substitute less costly items for more costly items, Medicare
can pay too much for the actual items provided to beneficiaries. CMS
officials pointed out that this is also true under the current fee
schedule.
CMS might better monitor the items being provided to beneficiaries if
it subdivided certain HCPCS codes or collected identifying information.
Subdividing HCPCS codes for items with significant variations in
characteristics and price into smaller groupings is a way to narrow the
differences among the items provided under a single code. The four DME
regional carriers or the advisory committee established under MMA might
be able to assist CMS in identifying those individual codes for items
with the most significant variations in characteristics and price. Once
these codes had been identified, CMS would be in a position to decide
whether to request the panel that makes decisions on HCPCS codes for
DME, orthotics, and supplies to consider whether to divide the codes
into better-defined item groupings. Another way to get better
information on the range of items provided under a code is to collect
specific, identifying information (such as manufacturer, make, and
model information) on selected, high-cost competitively bid items
provided to beneficiaries. The DME regional carriers require suppliers
to provide such information when it is requested for detailed reviews
of claims for power wheelchairs. If CMS requested these data from
suppliers for selected items provided under a HCPCS code for a
statistically representative sample of claims, it would be able to
analyze trends in the actual items provided to beneficiaries in
competitive bidding areas or monitor the provision of items under the
same code in competitive and noncompetitive areas.
Ensuring Quality and Service for Beneficiaries Is Critical:
Because of concerns that competitive bidding may prompt suppliers to
cut their costs by providing lower-quality items and curtailing
services, a fourth issue for CMS to consider is ensuring that quality
items and services are provided to beneficiaries. Quality assurance
steps could include monitoring beneficiary satisfaction, as well as
setting standards for suppliers, providing beneficiaries with a choice
of suppliers, and selecting winning bidders based on quality in
addition to amounts bid. During the demonstration, the agency and
Palmetto gained practical experience in implementing quality assurance
steps. This experience could prove instructive as CMS moves forward
with competitive bidding efforts.
As competitive bidding proceeds, routine monitoring of beneficiaries'
complaints, concerns, and satisfaction can be used as a tool to help
ensure that beneficiaries continue to have access to quality items.
During the demonstration, the agency and Palmetto used full-time, on-
site ombudsmen to respond to complaints, concerns, and questions from
beneficiaries, suppliers, and others. In addition, to gauge beneficiary
satisfaction, the evaluators of the demonstration fielded two
beneficiary surveys by mail--one for oxygen users and another for users
of other products included in the demonstration.[Footnote 36] These
surveys contained measures of beneficiaries' assessments of their
overall satisfaction, access to equipment, and quality of training and
service provided by suppliers. Evaluators reported that their survey
data indicated that beneficiaries generally remained satisfied with
both the products provided and with their suppliers.
As competitive bidding expands and affects larger numbers of
beneficiaries, small problems could be potentially magnified.
Therefore, continued monitoring of beneficiary satisfaction will be
critical to identifying problems with suppliers or with items provided
to beneficiaries. When such problems are identified in a timely manner,
CMS may develop steps to address them. In the past, when implementing
significant Medicare changes, such as new payment methods for skilled
nursing facilities and home health services, the agency has lacked
timely and accurate information about how the changes affected
beneficiary access.
Nevertheless, it may not be practical in a larger competitive bidding
effort to replicate the monitoring steps used in the demonstration.
Developing less staff-intensive approaches to monitoring would reduce
implementation costs. For example, a Palmetto official told us that
while having an on-site ombudsman function may prove useful in the
initial stages of competitive bidding, using a centralized ombudsman
available through a toll-free number staffed by a contractor could
provide some of the same benefits at a lower cost.
In addition, certain monitoring enhancements could prove useful. For
example, CMS did not use a formal mechanism for ombudsmen to summarize
or report information on complaints from beneficiaries or suppliers,
according to the demonstration ombudsmen. Collecting and analyzing
complaint information may provide a credible gauge of problems related
to beneficiary access to quality products.
Continued use of satisfaction surveys could help track beneficiaries'
satisfaction with items and services over time. However, advocacy group
representatives have cautioned that beneficiaries may not have the
technical knowledge to accurately assess the quality of the items or
services being provided. Supplemental information might be obtained
through standardized surveys of individuals who refer beneficiaries to
suppliers, physicians, and supplier representatives, who may be better
equipped to assess the technical quality of products and services.
Two MMA requirements--the selection of multiple suppliers to serve
beneficiaries and the establishment of supplier standards--help ensure
that beneficiaries are satisfied with suppliers and the items they
provide. The selection of multiple suppliers to serve beneficiaries was
part of the competitive bidding process used during the demonstration.
The establishment of supplier standards is broader than the competitive
bidding program in that it applies to all suppliers, regardless of
whether they choose to participate in competitive bidding.
MMA requires that CMS select multiple suppliers that meet quality and
financial standards to maintain choice in a competitive acquisition
area. According to a CMS official, choosing to include multiple
suppliers in the demonstration for each product group allowed
beneficiaries to switch suppliers if dissatisfied with the quality of
the services or items provided. CMS officials stated that selecting
multiple suppliers encouraged suppliers to compete on the basis of
quality and service to gain beneficiaries' business. After completing
the bid evaluation process, CMS generally selected about 50 percent of
the suppliers that bid in each group, with an average of 12 suppliers
selected across the product groups.[Footnote 37]
MMA also requires that CMS establish and implement quality standards
for all suppliers of DME, prosthetics, orthotics, and
supplies.[Footnote 38] These standards must be at least as stringent as
the 21 general standards that all suppliers of DME, prosthetics,
orthotics, and supplies are required to comply with in order to obtain
and retain their Medicare billing privileges.[Footnote 39] (See app.
II.) For the demonstration, suppliers were also required to meet
standards developed by Palmetto that were more stringent and explicit
than the current 21 general standards.[Footnote 40] For example, the
demonstration standards required that only qualified staff deliver, set
up, and pick up equipment and supplies and established time frames for
suppliers to pick up equipment after a beneficiary had requested its
removal. Palmetto monitored suppliers' adherence to the standards
through initial and annual site visits.
Applying quality measures as criteria to select winning suppliers is
another demonstration assurance step that can be used in future
efforts. During the demonstration bid evaluation process, Palmetto
solicited references from financial institutions and from at least five
individuals who had referred beneficiaries to each bidding supplier. In
reviewing referrals, Palmetto looked for evidence of quality and
service. This included evidence of financial stability and good credit
standing, a record of providing products that met beneficiaries' needs,
compliance with Medicare's rules and regulations, acceptable business
practices, ethical behavior, and maintenance of accurate records. The
bid evaluation process also included inspections of bidding suppliers'
facilities that focused on indicators of quality and service. These on-
site inspections were more comprehensive than those normally performed
for Medicare suppliers of DME, prosthetics, orthotics, and supplies.
For example, inspectors were tasked with determining if the supplier
had access to the full range of products for which it had bid,
documentation of infection control procedures, instructions on using
equipment, and patient files with required information. In some cases,
a demonstration supplier's selection was conditional on the supplier
making specified improvements. For example, according to a CMS
official, some suppliers were told to clarify instructions for
beneficiaries, properly store oxygen equipment, or improve procedures
for following up with patients after initial service was provided. CMS
and Palmetto officials told us that comprehensive inspections were
useful in ensuring the selection of quality suppliers.
Conclusions:
CMS can use its experience from the demonstration to make informed
decisions as it implements large-scale competitive bidding within the
framework established by MMA. The demonstration showed that competitive
bidding has the potential to garner significant savings for both the
Medicare program and its beneficiaries, especially on items with high
levels of Medicare spending. While the potential exists for significant
savings, moving from small-scale to large-scale competitive bidding
calls for streamlining implementation. Developing a cookie-cutter
approach to competitive bidding--for example, using the same policies
and processes in multiple locations--could help CMS roll out its
implementation in over 80 locations more easily, while employing mail-
order to deliver items with prices set through nationwide competitive
bidding could allow CMS to more quickly implement competitive bidding
on a large scale. To ensure that competitive bidding savings are not
achieved by the suppliers' substitution of lower-cost items, CMS can
consider ways to collect better information on the specific items that
suppliers are providing to beneficiaries. Finally, careful monitoring
of beneficiaries' experiences will be essential to ensure that problems
are quickly identified. This will allow CMS to adjust its
implementation and quality assurance steps as it manages competition on
a greater scale.
Recommendations for Executive Action:
To increase potential savings from competitive bidding, streamline
implementation, help ensure that Medicare is paying appropriately for
items, and promote beneficiary satisfaction, we recommend that the
Administrator of CMS take the following seven actions:
* consider conducting competitive bidding for demonstration items and
items that represent high Medicare spending that were not included in
the competitive bidding demonstration;
* develop a standardized approach for competitive bidding for use at
multiple locations;
* consider using mail delivery for items that can be provided directly
to beneficiaries in the home, as a way to implement a national
competitive bidding strategy;
* evaluate individual HCPCS codes to determine if codes need to be
subdivided because the range in characteristics and price of items
included under the individual codes is too broad;
* periodically obtain specific identifying information on selected
high-cost items to monitor the characteristics of items subject to
competitive bidding that are provided to beneficiaries, such as
manufacturer, make, and model number;
* monitor beneficiary satisfaction with items and services provided;
and:
* seek input from individuals with technical knowledge about the items
and services suppliers provide to beneficiaries.
Agency Comments and Our Evaluation:
In its written comments on a draft of this report, CMS agreed with most
of the recommendations and agreed to give serious consideration to the
report throughout the development and implementation of national
competitive bidding. CMS agreed to consider conducting competitive
bidding for demonstration items and items that represent high Medicare
spending that were not included in the demonstration. CMS indicated
that the agency was working to develop a list of items for the first
bidding cycle in 2007. CMS also agreed to develop a standardized
approach for competitive bidding that could be used in multiple
locations and indicated the agency's intention to outline such an
approach through regulation. CMS stated it would explore the
feasibility of our recommendation to consider using mail-order delivery
for items that could be provided directly to beneficiaries in the home,
as a way to implement a national competitive bidding strategy. Based on
CMS's comments, we clarified the discussion in the report to indicate
businesses that currently provide, or have the potential to provide,
national mail-order delivery would be appropriate to include as bidders
in nationwide competition. CMS also agreed with our recommendations to
periodically obtain specific identifying information on selected high-
cost items and to monitor beneficiary satisfaction with the items and
services provided and indicated that it would be establishing a process
to do so. CMS agreed with our recommendation to seek input from
individuals with technical knowledge about the items and services
suppliers provide to beneficiaries. The agency noted that pursuant to
MMA, CMS would be convening a panel of experts, the Program Advisory
and Oversight Committee, to assist with implementation of competitive
bidding.
CMS disagreed with one of our draft recommendations--to evaluate
individual HCPCS codes to determine if they needed to be subdivided
because the range in price of items included under the codes was too
broad. The agency stated that subdividing codes according to price
would lead to Medicare setting codes for particular brand names in
circumstances where a manufacturer has established higher prices for
products that do not have meaningful clinical differences or higher
quality. In response to the agency's comment, we modified our
discussion of HCPCS codes and revised our recommendation to state that
CMS, in reevaluating individual HCPCS codes, should consider both the
characteristics and prices of items.
We have reprinted CMS's letter in appendix III. CMS also provided us
with technical comments, which we have incorporated as appropriate.
We are sending copies of this report to the Administrator of CMS,
appropriate congressional committees, and other interested parties. We
will also make copies available to others upon request. This report is
also available at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please call
me at (312) 220-7600 or Sheila K. Avruch at (202) 512-7277. Other key
contributors to this report are Sandra D. Gove, Lisa S. Rogers, and
Kevin Milne.
Signed by:
Leslie G. Aronovitz:
Director, Health Care--Program Administration and Integrity Issues:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To assess issues that the Centers for Medicare & Medicaid Services
(CMS) might consider as it implements the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA) provisions concerning
competitive bidding, we reviewed the relevant provisions of MMA. We
also reviewed the first and second evaluation reports on the Medicare
competitive bidding demonstration and discussed methodology and
findings with the evaluators. We interviewed officials from CMS and
Palmetto Government Benefits Administrators (Palmetto) about
experience gained during the demonstration.
For the product selection issue, we analyzed calendar year 2002
Medicare durable medical equipment (DME), prosthetics, orthotics, and
supply claims data obtained from the statistical analysis durable
medical equipment regional carrier (SADMERC). Through this analysis, we
identified the product groups and items that represented the largest
Medicare allowed charges and the allowed charges for items included in
the demonstration. We also used these data to identify items that
accounted for higher Medicare spending but were excluded from the
demonstration. We determined that the data obtained from the SADMERC
were sufficiently reliable for addressing the issues in this report.
These data were extracted from a CMS file that includes all Medicare
claims payment data. CMS has a number of computerized edits to help
ensure that Medicare payment data are accurately recorded, and the
SADMERC has internal controls to ensure that data extracted from the
CMS file are timely and complete. Where appropriate, we tested data
manually against published sources for consistency. To identify items
that could be included in future competitive bidding, we interviewed
CMS and Palmetto officials and the medical directors at the four DME
regional carriers.
For the issue of streamlining implementation, we obtained information
on the cost of the demonstration from the second evaluation report. To
estimate the number of fee-for-service beneficiaries who will be
affected by future competitive bidding, we adjusted the Census 2000
population estimates for individuals age 65 and over to account for the
number of beneficiaries enrolled in Medicare's managed care program by
using data obtained from the Medicare Managed Care Market Penetration
State/County Data Files. We assessed the reliability of the Census 2000
data by reviewing relevant documentation and working with an official
from the U.S. Census Bureau. We assessed the reliability of the
Medicare Managed Care Market Penetration State/County Data Files by
reviewing relevant documentation. We determined these data sources to
be sufficiently reliable for the purposes of our report. We also
obtained information from CMS on the demonstration items that
beneficiaries obtained by mail and conducted research to identify items
delivered directly to customers' homes by private sector organizations.
We also solicited input from the medical directors at the four DME
regional carriers concerning items that could be delivered by mail-
order and included in a nationwide competition.
For the issue concerning information on specific items provided to
beneficiaries, we reviewed prior GAO reports and testimonies. In
addition, we interviewed the following representatives of industry and
advocacy groups: Abbott Laboratories; the Advanced Medical Technology
Association; the American Association for Homecare; the American
Occupational Therapy Association; the American Orthotic and Prosthetic
Association; the Consortium for Citizens with Disabilities; the
Diabetic Product Suppliers Coalition; LifeScan, Inc; Johnson & Johnson
Company; Kinetic Concepts, Inc; Tyco Healthcare Group; the National
Alliance for Infusion Therapy; Roche Diagnostics; and the United Ostomy
Association.
For the issue relating to ensuring quality items and services for
beneficiaries, we discussed quality assurance steps and approaches for
monitoring beneficiary satisfaction used during the demonstration with
CMS and Palmetto officials and the demonstration's evaluators. We also
interviewed the two demonstration ombudsmen to discuss beneficiaries'
concerns and experiences in obtaining items during the demonstration.
We discussed issues related to competitive bidding and beneficiaries'
access to quality products and services with suppliers of DME,
including three suppliers that participated in the demonstration; the
industry and advocacy groups listed above; and the DME regional carrier
medical directors. In addition, we compared quality standards for
demonstration suppliers with the 21 supplier standards that apply to
all Medicare suppliers of DME, prosthetics, orthotics, and supplies.
[End of section]
Appendix II: Medicare's 21 Standards for Medicare Suppliers of DME,
Prosthetics, Orthotics, and Supplies:
Suppliers of DME, prosthetics, orthotics, and supplies must meet 21
standards in order to obtain and retain their Medicare billing
privileges. An abbreviated version of these standards, which became
effective December 11, 2000, is presented in table 3. MMA requires CMS
to develop new standards that must be at least as stringent as current
standards for all Medicare suppliers of DME, prosthetics, orthotics,
and supplies. Supplier compliance will be determined by one or more
designated independent accreditation organizations.
Table 3: Standards for Medicare Suppliers of DME, Prosthetics,
Orthotics, and Supplies:
Standard number: 1;
Standard description: A supplier must be in compliance with all
applicable federal and state licensure and regulatory requirements.
Standard number: 2;
Standard description: A supplier must provide complete and accurate
information on the application for suppliers of DME, prosthetics,
orthotics, and supplies. Any changes to this information must be
reported to CMS within 30 days of the change.
Standard number: 3;
Standard description: An authorized individual (one whose signature is
binding) must sign the application for billing privileges.
Standard number: 4;
Standard description: A supplier must fill orders from its own
inventory, or must contract with other companies for the purchase of
items necessary to fill the order. A supplier may not contract with
any entity that is currently excluded from the Medicare program, from
any state health care programs, or from any other federal procurement
or nonprocurement program or activity.
Standard number: 5;
Standard description: A supplier must advise beneficiaries that they
may rent or purchase inexpensive or routinely purchased DME and of the
purchase option for capped rental DME.
Standard number: 6;
Standard description: A supplier must honor all warranties under
applicable state law and repair or replace free of charge Medicare-
covered items that are under warranty.
Standard number: 7;
Standard description: A supplier must maintain a physical facility on
an appropriate site.
Standard number: 8;
Standard description: A supplier must permit CMS or its agents to
conduct on-site inspections to ascertain the supplier's compliance with
these standards. The supplier location must be accessible to
beneficiaries during reasonable business hours and must maintain a
visible sign and posted hours of operation.
Standard number: 9;
Standard description: A supplier must maintain a primary business
telephone listed under the name of the business in a local directory or
a toll-free number available through directory assistance. The
exclusive use of a beeper, answering machine, or cell phone as the
primary business telephone number is prohibited.
Standard number: 10;
Standard description: A supplier must have comprehensive liability
insurance in the amount of at least $300,000 that covers both the
supplier's place of business and all customers and employees of the
supplier. If the supplier manufactures its own items, this insurance
must also cover product liability and completed operations.
Standard number: 11;
Standard description: A supplier must agree not to initiate telephone
contact with beneficiaries, with a few exceptions allowed. This
standard prohibits suppliers from calling beneficiaries in order to
solicit new business.
Standard number: 12;
Standard description: A supplier is responsible for delivery and must
document that it, or another qualified party, instructed beneficiaries
on the use of Medicare-covered items, and maintain proof of delivery.
Standard number: 13;
Standard description: A supplier must answer questions and respond to
complaints of beneficiaries, and maintain documentation of such
contacts.
Standard number: 14;
Standard description: A supplier must maintain and replace at no
charge or repair directly, or through a service contract with another
company, Medicare-covered items it has rented to beneficiaries.
Standard number: 15;
Standard description: A supplier must accept returns of substandard
(less than full quality for the particular item) or unsuitable items
(inappropriate for the beneficiary at the time it was fitted and rented
or sold) from beneficiaries.
Standard number: 16;
Standard description: A supplier must disclose these supplier
standards to each beneficiary to whom it supplies a Medicare-covered
item.
Standard number: 17;
Standard description: A supplier must disclose to the government any
person having ownership, financial, or controlling interest in the
supplier.
Standard number: 18;
Standard description: A supplier must not convey or reassign a supplier
number; that is, the supplier may not sell or allow another entity to
use its Medicare billing number.
Standard number: 19;
Standard description: A supplier must have a complaint resolution
protocol established to address beneficiary complaints that relate to
these standards. A record of these complaints must be maintained at the
physical facility.
Standard number: 20;
Standard description: Complaint records must include the name, address,
telephone number, and health insurance claim number of the beneficiary;
a summary of the complaint; and any actions taken to resolve it.
Standard number: 21;
Standard description: A supplier must agree to furnish CMS with any
information required by the Medicare statute and implementing
regulations.
Source: GAO analysis of 42 C.F.R. § 424.57(c) (2003).
[End of table]
[End of section]
Appendix III: Comments from the Centers for Medicare & Medicaid
Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Centers for Medicare & Medicaid Services:
Administrator:
Washington, DC 20201:
DATE: AUG 5 2004:
TO: Leslie G. Aronovitz:
Director,
Health Care - Program Administration and Integrity Issues:
Signed by:
FROM: Mark B. McClellan, M.D., Ph.D.
Administrator:
SUBJECT: General Accountability Office's Draft Report: MEDICARE: Past
Experience Can Guide Future Competitive Bidding for Medical Equipment
and Supplies (GAO-04-765):
Thank you for the opportunity to review and comment on the above
referenced General Accountability Office's (GAO) draft report. The
Centers for Medicare & Medicaid Services (CMS) recognizes the many
complexities of implementing national durable medical equipment (DME)
competitive bidding. The CMS is beginning to explore various approaches
and policy options for effectively implementing national DME
competitive bidding. The CMS has formed a cross-component internal
workgroup that has begun meeting to address the many facets of
implementation of DME competitive bidding. We have also contracted with
the Research Triangle Institute to provide technical and advisory
assistance to us throughout this process. Additionally, we are
establishing the Program Advisory and Oversight Committee, as provided
for in the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003. Our first meeting is tentatively scheduled for October
2004.
The CMS appreciates the GAO's efforts in preparing this report. The CMS
agrees with the majority of the recommendations and will give serious
consideration to the GAO report throughout the development and
implementation of national competitive bidding. We believe, based on
the evaluation of the competitive bidding demonstration and the GAO
report, that we will be able to increase the potential savings,
streamline implementation, ensure that Medicare is paying appropriately
for items, and to promote beneficiary satisfaction.
Attached are CMS' detailed comments to GAO's recommendations.
Attachment:
Centers for Medicare & Medicaid Services' Comments to the GAO Draft
Report: MEDICARE. Past Experience Can Guide Future Competitive Bidding
for Medical Equipment and Supplies (GAO-04-765):
GAO Recommendation:
Consider conducting competitive bidding for demonstration items and
items that represent high Medicare spending that were not included in
the competitive bidding demonstration;
CMS Response:
The CMS concurs with the recommendation. This recommendation is
consistent with the statute, which states that competitive bidding
"maybe phased in first among the highest cost and highest volume items
and services or those items and services that the Secretary determines
have the largest savings potential." Although a list of items has not
been decided, we concur that the list should include items that have
the largest savings potential. The CMS is currently working with the
Research Triangle Institute to develop a list of items to phase in
beginning in 2007.
GAO Recommendation:
Develop a standardized approach for competitive bidding for use at
multiple locations;
CMS Response:
We concur with the recommendation. It is CMS' intention to develop a
regulation that will outline the approach that we will take to
implement competitive bidding.
GAO Recommendation:
Use of mail delivery for items that can be provided directly to
beneficiaries in the home, as a way to implement a national competitive
bidding strategy;
CMS Response:
The CMS will explore the feasibility of this approach. On pages 13 and
14 of the draft, please clarify whether the GAO is recommending that
for items which have a significant national market through mail order
delivery that only those companies that have nationwide mail order
businesses would be allowed to bid. A similar clarification is needed
on page 22 to explain GAO's third recommendation.
GAO Recommendation:
Evaluate individual [Healthcare Common Procedure Coding System] HCPCS
codes to determine if codes need to be subdivided because the range in
prices of items included under the individual codes is too broad,':
Page 2 - Attachment:
CMS Response:
We do not concur with this recommendation. The current Healthcare
Common Procedure Coding System is designed to identify and group
similar and equivalent items based upon function and operation, rather
than price. We believe subdividing codes according to price ranges
would lead to Medicare setting codes for particular brand names in
circumstances where a manufacturer has established high prices for its
products but when these price differences do not reflect meaningful
clinical differences or higher quality.
GAO Recommendation:
Periodically obtain specific identifying information on selected high-
cost items to monitor the characteristics of competitively bid items
provided to beneficiaries, such as manufacturers, make, and model
number.
CMS Response:
We concur with the recommendation. The CMS is developing a regulation
that will outline the process that we will use to ensure the quality of
the products provided to beneficiaries.
GAO Recommendation:
Monitor beneficiary satisfaction with items and services provided,
CMS Response:
We concur with the recommendation. The CMS will develop a process to
monitor the beneficiary satisfaction with the quality and service being
provided under the competitive bidding process.
GAO Recommendation:
Seek input from individuals with technical knowledge about the items
and services suppliers provide to beneficiaries.
CMS Response:
We concur with the recommendation. Pursuant to the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA),
CMS will convene a panel of experts, the Program Advisory and Oversight
Committee, to assist us with implementation of the competitive bidding.
This panel will be charged with making recommendations on the quality
service standards that will be applied to items and services that are
provided to the beneficiaries under the competitive bidding process.
(290246):
FOOTNOTES
[1] Medicare guidance defines DME as equipment that serves a medical
purpose, can withstand repeated use, is generally not useful in the
absence of an illness or injury, and is appropriate for use in the
home. DME includes items such as wheelchairs, hospital beds, and
walkers. Medicare defines prosthetic devices (other than dental) as
devices that are needed to replace body parts or functions. Prosthetic
devices include artificial limbs and eyes, enteral nutrition, ostomy
bags, and cardiac pacemakers. Medicare defines orthotic devices to
include leg, arm, back, and neck braces that provide rigid or semirigid
support to weak or deformed body parts or restrict or eliminate motion
in a diseased or injured part of the body. Medicare-reimbursed supplies
are items that are used in conjunction with DME and are consumed during
the use of the equipment, such as drugs used for inhalation therapy, or
need to be replaced frequently (usually daily), such as surgical
dressings.
[2] Prior to 1998, these payment rates were adjusted each year using
formulas tied to the Consumer Price Index. Since 1998, payment rates
have been updated in some years, but not others.
[3] HCFA's name was changed to CMS as of July 1, 2001. We use the name
CMS throughout this report.
[4] Janet Rehnquist, Inspector General, Department of Health and Human
Services, Medicare Reimbursement for Medical Equipment and Supplies,
testimony before the Senate Committee on Appropriations, Subcommittee
on Labor, Health and Human Services, and Education, 107TH Cong., 2ND
sess., Washington, D.C., June 12, 2002; GAO, Medicare: Payments for
Covered Outpatient Drugs Exceed Providers' Cost, GAO-01-1118
(Washington, D.C.: Sept. 21, 2001); and GAO, Medicare: Home Oxygen
Program Warrants Continued HCFA Attention, GAO/HEHS-98-17 (Washington,
D.C.: Nov. 7, 1997).
[5] Pub. L. No. 105-33, § 4319(a), 111 Stat. 251, 392 (1997).
[6] Medicare part B helps pay for certain physician, outpatient
hospital, laboratory, and other services.
[7] While the statute required HHS to test competitive bidding, CMS
administers the Medicare program and was responsible for testing
competitive bidding.
[8] Physician services were not included in the authority to conduct
competitive bidding.
[9] Pub. L. No. 108-173, § 302(b), 117 Stat. 2066, 2224. While the
statute requires HHS to conduct the competitive bidding program, CMS
administers the Medicare program and is responsible for implementing
the program and establishing quality standards for suppliers of DME,
prosthetics, orthotics, and supplies.
[10] BBA, § 4319(c), 111 Stat. 394.
[11] BBA required that HHS evaluate the competitive bidding
demonstration for its impact on Medicare program payments, beneficiary
access to care, quality, and diversity of product selection. BBA, §
4319(a), 111 Stat. 393. In 1998, CMS contracted with the University of
Wisconsin-Madison to conduct an independent evaluation of the
demonstration. The evaluation team consisted of researchers from the
University of Wisconsin-Madison, the Research Triangle Institute, and
Northwestern University.
[12] University of Wisconsin-Madison, Center for Health Systems
Research and Analysis; Research Triangle Institute, Center for
Economics Research; and Northwestern University, Institute for Health
Services Research and Policy Studies, Evaluation of Medicare's
Competitive Bidding Demonstration for DMEPOS: First-Year Annual
Evaluation Report (Baltimore, Md.: Centers for Medicare & Medicaid
Services, September 2000, Revised January 2001), and University of
Wisconsin-Madison, Center for Health Systems Research and Analysis;
Research Triangle Institute--Health, Social, and Economics Research;
and Northwestern University, Institute for Health Services Research and
Policy Studies, Evaluation of Medicare's Competitive Bidding
Demonstration for DMEPOS: Second-Year Annual Evaluation Report
(Baltimore, Md.: Centers for Medicare & Medicaid Services, April 2002).
[13] Medicare pays contractors to administer its fee-for-service
claims. The contractors responsible for processing most part B claims
are called carriers. In October 1993, CMS began processing all Medicare
part B claims for DME, orthotics, prosthetics, and supplies through DME
regional carriers. Each of the four DME regional carriers serves a
separate region of the country.
[14] MMA changed Medicare's methodology for determining reimbursement
for outpatient drugs covered under part B. Most part B drugs furnished
on or after January 1, 2004, are reimbursed at 85 percent of the drugs'
AWPs determined as of April 1, 2003. Beginning in 2005, Medicare part B
drugs--with certain exceptions, such as some vaccines--will be paid
using either a competitive acquisition program or an average sales
price methodology.
[15] These products were lancets, eyeglass frames, a type of urinary
catheter, and two types of catheter insertion trays. See GAO, Medicare
Payments: Use of Revised "Inherent Reasonableness" Process Generally
Appropriate, GAO/HEHS-00-79 (Washington, D.C.: July 5, 2000).
[16] In 1999, drugs provided in physician office settings accounted for
over 75 percent of the almost $4 billion spent by Medicare for covered
prescription drugs.
[17] Inhalation drugs are used as therapy for respiratory ailments,
such as asthma or emphysema, and are delivered through a piece of
equipment called a nebulizer.
[18] GAO-01-1118.
[19] The Office of Management and Budget defines an MSA as a county or
group of counties containing a core of at least 50,000 people, together
with adjacent areas having a high degree of economic and social
integration with that core.
[20] BBA, § 4319(a), 111 Stat. 392.
[21] In this role, Palmetto was responsible for helping to plan the
demonstration; educating beneficiaries, suppliers, and other
stakeholders about the demonstration; soliciting and evaluating bids;
processing claims; and responding to inquiries and complaints about the
demonstration. CMS maintained oversight responsibility for the
demonstration, reviewed all documents and Palmetto decisions, and made
final design and policy decisions.
[22] The first demonstration location, Polk County, Florida, is an MSA
that includes the cities of Lakeland and Winter Haven. The second
demonstration location included three of the four counties (Bexar,
Comal, and Guadalupe) in the San Antonio, Texas, MSA.
[23] Medicare payments for DME, prosthetics, orthotics, and supply
items obtained in a demonstration location during the demonstration by
a visiting beneficiary who had a permanent address elsewhere were based
on the fee schedule in effect for the beneficiary's permanent address.
[24] Transition policies allowed beneficiaries to continue receiving
oxygen equipment and supplies and nebulizer drugs from their original
suppliers, regardless of whether the suppliers were included in the
demonstration. However, the supplier had to accept the new
demonstration fee schedules. Transition policies also allowed
beneficiaries to maintain preexisting rental agreements or purchase
contracts with their suppliers of enteral nutrition equipment, hospital
beds and accessories, and manual wheelchairs and accessories. These
suppliers were paid under the normal statewide Medicare fee schedule
for the duration of the rental period.
[25] The demonstration did not include beneficiaries enrolled in
Medicare's managed care component. Provision of DME, prosthetics,
orthotics, and supplies to these beneficiaries is included in the
managed care plans' services and not billed separately to Medicare.
[26] The Food and Drug Administration uses a three-part classification
system for devices, based on the device's level of risk and the extent
of control necessary to ensure the safety and effectiveness of the
device. Class III, or high-risk devices, usually sustain or support
life, are of substantial importance in preventing impairment of human
health, or present potential unreasonable risk of illness or injury.
[27] In 2003, Medicare placed related items into 62 product groups. For
example, the wheelchair product group included manual and power
wheelchairs and accessories, such as adjustable-height armrests and
antitipping devices. Within these product groups, items are identified
by HCPCS codes. A product group may consist of one HCPCS code or up to
several hundred HCPCS codes.
[28] The demonstration's evaluators estimated that gross savings were
$4.0 million in Polk County and $4.5 million in the San Antonio
location.
[29] Spending for power wheelchairs was about $857 million, for
diabetic test strips about $752 million, and for lancets about $79
million in 2002.
[30] Individuals who have obstructive sleep apnea use continuous
positive airway pressure devices while sleeping to provide constant
levels of air pressure from a flow generator via a nose mask.
[31] Population estimates for the 80 largest MSAs are from Census 2000
and include the District of Columbia and Puerto Rico.
[32] In economic theory, this is called having "economies of scale,"
where producing more services or products can be accomplished at lower
costs per unit because the overall costs are spread over a larger
number of units. However, at some point, according to the economies of
scale theory, the relative savings in implementation costs from
expanding competitive bidding to more locations would likely decrease
as fixed costs for additional locations stabilize. In addition, as CMS
expands competitive bidding by MSA, at some point the agency might
reach the maximum number of MSAs that it can administer without
increasing fixed implementation costs.
[33] MMA excludes inhalation drugs from competitive bidding. Other
specific provisions of MMA set payments for these drugs.
[34] The HHS OIG studied purchase prices available to consumers and
suppliers for power wheelchairs that Medicare reimburses when billed as
HCPCS code K0011, which is the code suppliers most commonly use to bill
Medicare for power wheelchairs. See U.S. Department of Health and Human
Services, Office of Inspector General, A Comparison of Prices for Power
Wheelchairs in the Medicare Program, OEI-03-03-00460 (Washington, D.C.:
April 2004).
[35] The HHS OIG reported that the median price to consumers was $3,888
for a random sample of power wheelchair claims paid in 2001, with
prices ranging from a low of $2,000 to a high of $5,995. Out of 247
prices the OIG reviewed for power wheelchairs actually provided to
Medicare beneficiaries, there were four instances where the cost
available to retail consumers on Internet Web sites was greater than
Medicare's reimbursement amount.
[36] For comparison purposes, evaluators sent beneficiary surveys to
beneficiaries in the two demonstration locations and to two groups of
Medicare beneficiaries from areas similar to Polk County and the San
Antonio location. Evaluators selected comparison sites outside of the
demonstration areas to identify changes in the demonstration locations
that were due to the demonstration and changes that may have resulted
from general trends. Brevard County, Florida, was chosen as the
comparison site for Polk County, and the Austin-San Marcos MSA, Texas,
was the comparison site for the San Antonio location. Evaluators
surveyed beneficiaries both before and after demonstration prices took
effect in these locations.
[37] The number of suppliers selected ranged from 3 suppliers of
surgical dressings in Polk County to 32 suppliers of oxygen equipment
and supplies in San Antonio.
[38] These quality standards are to be applied by one or more
designated, independent accreditation organizations selected within 1
year of implementing the quality standards. MMA, § 302(a), 117 Stat.
2223.
[39] Some of these 21 general standards promote quality services, while
others exist to ensure that the supplier is a legitimate business. For
example, the standards require that a supplier maintain a physical
facility on an appropriate site and have a primary business telephone
number listed under the name of the business. 42 C.F.R. § 424.57(c)(7),
(9) (2003).
[40] Demonstration suppliers also were required to participate in the
Medicare program; have active Medicare supplier numbers, which a
supplier must have to submit claims and receive payment for items and
services furnished under Medicare; and comply with all state and
federal licensure and regulatory requirements, Medicare and Medicaid
statutes and regulations, and Medicare billing guidelines.
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548: