Medicare
CMS Working to Address Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program Gao ID: GAO-10-27 November 6, 2009In 2007, Medicare spent $8.3 billion for durable medical equipment (DME) and related supplies. To reduce spending, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required that the Centers for Medicare & Medicaid Services (CMS) phase in, with several rounds of bidding, a large-scale competitive bidding program (CBP) for certain DME and other items. DME suppliers began bidding in round 1 of the CBP on May 15, 2007. After contracts were awarded, the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), was enacted on July 15, 2008. Because of numerous concerns MIPPA delayed the program, terminated supplier contracts, and required CMS to begin the CBP round 1 rebid in 2009. GAO was asked to report on (1) the results of CBP round 1, (2) the major challenges CMS had in conducting CBP round 1, and (3) the steps CMS has taken to improve future CBP rounds. GAO reviewed CMS data and relevant laws and regulations, and interviewed officials from CMS and its contractors, and DME suppliers and professional associations.
About a quarter of the bids submitted during CBP round 1 resulted in awarded contracts. The contracts were in effect until terminated by MIPPA on July 15, 2008. Of the 6,374 bids submitted by 1,010 suppliers, half were disqualified before competing on price. Bids were most often disqualified for missing financial documentation or noncompliance with accreditation requirements. In nearly two-thirds of CBP round 1's price competitions--in which suppliers submitted bids to deliver items for a specific product category within a specific competitive bidding area (CBA)--the number of suppliers decreased by at least half. The largest decreases in suppliers were in the Miami CBA. CMS estimated that the reduction in Medicare payments for items acquired as a result of CBP round 1 would have averaged 26 percent when compared to payments under the Medicare fee schedule. CBP's round 1 presented several challenges to suppliers, including poor timing and lack of clarity in bid submission information, a failure to inform all suppliers that losing bids could be reviewed, and an inadequate electronic bid submission system. CMS provided some clarifying information about bidding after the bid window opened, repeatedly extended the bid window deadlines, and provided updated guidance to bidders throughout the bid window. The information CMS provided to suppliers about bidding requirements was sometimes unclear and inconsistent, particularly regarding financial documentation. CMS did not effectively notify suppliers of its postbidding review process. Because some suppliers were not aware of the review process, they missed the opportunity to have their disqualified bids reviewed. CMS found that some bids had been incorrectly disqualified. Finally, several problems with the electronic bid submission system, including data losses from automated logouts and unscheduled downtimes, made it difficult for some suppliers to submit bids. CMS has taken several steps to improve the bidding process for the round 1 rebid and subsequent rounds of the CBP. CMS is implementing MIPPA provisions to notify suppliers of missing financial documentation and create a CBP ombudsman. It has reduced financial documentation requirements and revised the request for bid instructions to make it clearer and more understandable. It is also developing a new electronic bidding submission system, the Durable Medical Equipment, Prosthetics, Orthotics, and Supplies bidding system (DBidS), which the agency claims will address the deficiencies of the system used for round 1. Bidding for the round 1 rebid began in late October 2009. The CBP has the potential to produce considerable benefits, including reducing overall Medicare spending for DME and limiting potential fraud through increased scrutiny of suppliers. Although challenges may be expected for any new program, problems occurred in round 1 because of poor communication by CMS and an inadequate bid submission system.
RecommendationsOur 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-10-27, Medicare: CMS Working to Address Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
November 2009:
Medicare:
CMS Working to Address Problems from Round 1 of the Durable Medical
Equipment Competitive Bidding Program:
GAO-10-27:
GAO Highlights:
Highlights of GAO-10-27, a report to congressional requesters.
Why GAO Did This Study:
In 2007, Medicare spent $8.3 billion for durable medical equipment
(DME) and related supplies. To reduce spending, the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
required that the Centers for Medicare & Medicaid Services (CMS) phase
in, with several rounds of bidding, a large-scale competitive bidding
program (CBP) for certain DME and other items. DME suppliers began
bidding in round 1 of the CBP on May 15, 2007. After contracts were
awarded, the Medicare Improvements for Patients and Providers Act of
2008 (MIPPA), was enacted on July 15, 2008. Because of numerous
concerns MIPPA delayed the program, terminated supplier contracts, and
required CMS to begin the CBP round 1 rebid in 2009. GAO was asked to
report on (1) the results of CBP round 1, (2) the major challenges CMS
had in conducting CBP round 1, and (3) the steps CMS has taken to
improve future CBP rounds. GAO reviewed CMS data and relevant laws and
regulations, and interviewed officials from CMS and its contractors,
and DME suppliers and professional associations.
What GAO Found:
About a quarter of the bids submitted during CBP round 1 resulted in
awarded contracts. The contracts were in effect until terminated by
MIPPA on July 15, 2008. Of the 6,374 bids submitted by 1,010 suppliers,
half were disqualified before competing on price. Bids were most often
disqualified for missing financial documentation or noncompliance with
accreditation requirements. In nearly two-thirds of CBP round 1‘s price
competitions”in which suppliers submitted bids to deliver items for a
specific product category within a specific competitive bidding area
(CBA)”the number of suppliers decreased by at least half. The largest
decreases in suppliers were in the Miami CBA. CMS estimated that the
reduction in Medicare payments for items acquired as a result of CBP
round 1 would have averaged 26 percent when compared to payments under
the Medicare fee schedule.
CBP‘s round 1 presented several challenges to suppliers, including poor
timing and lack of clarity in bid submission information, a failure to
inform all suppliers that losing bids could be reviewed, and an
inadequate electronic bid submission system. CMS provided some
clarifying information about bidding after the bid window opened,
repeatedly extended the bid window deadlines, and provided updated
guidance to bidders throughout the bid window. The information CMS
provided to suppliers about bidding requirements was sometimes unclear
and inconsistent, particularly regarding financial documentation. CMS
did not effectively notify suppliers of its post-bidding review
process. Because some suppliers were not aware of the review process,
they missed the opportunity to have their disqualified bids reviewed.
CMS found that some bids had been incorrectly disqualified. Finally,
several problems with the electronic bid submission system, including
data losses from automated logouts and unscheduled downtimes, made it
difficult for some suppliers to submit bids.
CMS has taken several steps to improve the bidding process for the
round 1 rebid and subsequent rounds of the CBP. CMS is implementing
MIPPA provisions to notify suppliers of missing financial documentation
and create a CBP ombudsman. It has reduced financial documentation
requirements and revised the request for bid instructions to make it
clearer and more understandable. It is also developing a new electronic
bidding submission system, the Durable Medical Equipment, Prosthetics,
Orthotics, and Supplies bidding system (DBidS), which the agency claims
will address the deficiencies of the system used for round 1. Bidding
for the round 1 rebid began in late October 2009.
The CBP has the potential to produce considerable benefits, including
reducing overall Medicare spending for DME and limiting potential fraud
through increased scrutiny of suppliers. Although challenges may be
expected for any new program, problems occurred in round 1 because of
poor communication by CMS and an inadequate bid submission system.
What GAO Recommends:
GAO recommends that if CMS decides to conduct reviews of disqualified
bids, CMS should notify all suppliers of this process, giving suppliers
equal opportunity for such reviews and clearly indicate how to request
them. CMS agreed with GAO‘s recommendation.
View [hyperlink, http://www.gao.gov/products/GAO-10-27] or key
components. For more information, contact Kathleen M. King at (202) 512-
7114 or kingk@gao.gov.
[End of section]
Contents:
Letter:
Background:
About One-Quarter of Bids Resulted in Contracts Generating Significant
Potential Savings:
CMS Had Difficulty Providing Bidders with Clear, Timely Information,
and Its Electronic Bid Submission System Was Problematic:
CMS Has Taken Several Steps to Improve Future Rounds of the CBP,
Including Implementing MIPPA Provisions and Addressing IT Operational
Problems:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Change in Numbers of Suppliers by CBP Product Category and
CBA: 2006-2008:
Appendix III: Percentage Differences between 2008 Medicare Fee Schedule
and CBP Round 1 Single Payment Amounts:
Appendix IV: Omitted and Conflicting Information in Written
Instructions on Submitting a Bid for CBP Round 1:
Appendix V: Comments from the Department of Health and Human Services:
Appendix VI: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Required Financial Documents for CBP Round 1:
Table 2: Ten Financial Measures Used to Determine a Supplier's
Financial Score, CBP Round 1:
Table 3: Bid Composite Price Calculation for a Product Category with
Three Items:
Table 4: Determining the Pivotal Bid:
Table 5: CBP Round 1 Bid Counts by Process Step:
Table 6: Number and Percentage of CBP Disqualified Bids by Reason for
Disqualification:
Table 7: CBP Round 1 Contract Awards by Supplier Size:
Table 8: CMS's CBP Bid Disqualification Reason Codes and Descriptions,
CBP Round 1:
Table 9: Text of One Disqualified Bid Letter's Attachment Information:
Table 10: Examples of Conflicting and Omitted Information, CBP Round 1:
Figures:
Figure 1: CBP Round 1 Process:
Figure 2: CBP Round 1 Timeline, 2007-2008:
Abbreviations:
BBA: Balanced Budget Act of 1997:
CBA: competitive bidding area:
CBES: Competitive Bidding Evaluation System:
CBP: competitive bidding program:
CBSS: Competitive Bid Submission System:
CMS: Centers for Medicare & Medicaid Services:
CY: calendar year:
DBidS: Durable Medical Equipment, Prosthetics, Orthotics, and Supplies
bidding system:
DME: durable medical equipment:
HHS: Department of Health and Human Services:
IT: information technology:
MIPPA: Medicare Improvements for Patients and Providers Act of 2008:
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of
2003:
PAOC: Program Advisory and Oversight Committee:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 6, 2009:
The Honorable Max Baucus:
Chairman:
Committee on Finance:
United States Senate:
The Honorable Henry A. Waxman:
Chairman:
The Honorable John D. Dingell:
Chair Emeritus:
Committee on Energy and Commerce:
House of Representatives:
The Honorable Charles B. Rangel:
Chairman:
Committee on Ways and Means:
House of Representatives:
In 2007, Medicare--the federal health insurance program that currently
serves about 45 million elderly and disabled individuals--spent $8.3
billion on durable medical equipment (DME), prosthetics, orthotics, and
related supplies.[Footnote 1] Both we and the Department of Health and
Human Services's (HHS) Office of Inspector General have reported that
Medicare and its beneficiaries have sometimes paid higher than market
rates for various medical equipment and supply items.[Footnote 2] In
1997, Congress required the Centers for Medicare & Medicaid Services
(CMS)--the agency that administers the Medicare program--to test
competitive bidding for selected DME and other items and services
through demonstration projects.[Footnote 3] The demonstrations were
conducted from 1999 to 2002 and showed that competitive bidding would
save Medicare money.
Competitive bidding can reduce Medicare payments for DME and close the
disparity with prices paid by others for the same items. The Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
required that CMS implement a competitive acquisition program for DME
and certain other items.[Footnote 4] CMS was required to phase in the
competitive bidding program (CBP) in 2007 in 10 competitive bidding
areas (CBA).[Footnote 5] The CBP would be expanded in future rounds.
CBP round 1 began when the bid window opened May 15, 2007. In May 2008,
CMS announced the final winning suppliers, and contracts with winning
suppliers took effect July 1, 2008.
Some DME suppliers and trade associations raised concerns about the CBP
round 1, questioning several aspects of CMS's bid submission and
contract award processes. They also questioned whether some winning
suppliers could provide the volume of items and services their
contracts required and whether contracts should have been awarded to
suppliers that had no prior business presence in a CBA. Two
congressional hearings addressed these concerns in May 2008.[Footnote
6]
On July 15, 2008, the CBP round 1 was stopped when the Medicare
Improvements for Patients and Providers Act (MIPPA) of 2008 was
enacted.[Footnote 7] MIPPA delayed the CBP, terminated the contracts
already awarded by CMS to suppliers in round 1, and required CMS to
repeat the competition for round 1 CBP in 2009--the CBP round 1 rebid.
To ensure budget neutrality, that is to compensate for the loss of the
projected savings from the CBP, beginning January 1, 2009, MIPPA
reduced national Medicare reimbursement payments by 9.5 percent
nationally for items and services that had been included in the CBP
round 1.[Footnote 8] MIPPA also imposed additional criteria for how CMS
should conduct later CBP rounds, including the round 1 rebid and
subsequent rounds that will expand the CBP to additional areas.
[Footnote 9]
As CMS prepares to implement the CBP round 1 rebid, you asked us to
report on (1) the results of the CBP round 1, (2) the major challenges
CMS had in conducting the CBP round 1, and (3) the steps CMS has taken
to improve future CBP rounds.
To determine the results of the CBP round 1, we reviewed data from CMS
and Palmetto GBA--the contractor CMS selected to implement the CBP
bidding and contract award process--about the number of suppliers
participating in round 1 of the CBP process, the number of submitted
bids, and the bids' outcomes. We interviewed and obtained information
from CMS and Palmetto GBA officials about the Competitive Bid
Submission System (CBSS), an electronic database used by suppliers to
submit part of their bid application, including information about
covered system testing and data processing procedures. We also reviewed
the instructions provided to bidding suppliers about entering data into
the CBSS. We interviewed Palmetto GBA officials about the Competitive
Bidding Evaluation System (CBES), a repository of bid data including
financial data entered by Palmetto GBA personnel and documentation of
Palmetto GBA actions, as well as about the system's data transfer and
data entry protocols. We compared data published by CMS with the data
provided to us and followed up with the appropriate officials to
resolve any discrepancies. We assessed the reliability of round 1 data
by interviewing or reviewing information from CMS and Palmetto GBA
officials and determined that the data were sufficiently reliable for
the purposes of this report. We did not independently evaluate CMS's
estimates of beneficiary demand, which relied on 2005 and 2006 DME
claims data, the most recent data available to it at the time, nor did
we evaluate CMS's estimates of projected savings as the result of the
CBP round 1.
To determine the major challenges CMS had conducting the CBP round 1,
we reviewed relevant federal laws, regulations, and policies concerning
the bidding and contract award processes. We interviewed CMS and
Palmetto GBA officials about the bid submission process, including the
CBSS, the bid evaluation and contract award processes, and the CMS and
Palmetto GBA post-bidding review. We reviewed CMS and Palmetto GBA bid
submission instructions and related materials, communications to
suppliers during the bid window, and information on how CMS and
Palmetto GBA evaluated bids and awarded contracts. We also reviewed
information related to the Program Advisory and Oversight Committee
(PAOC), whose members are appointed by the HHS Secretary to advise CMS
on implementing the CBP. We reviewed PAOC meeting materials,
interviewed members about their role and input into the development of
round 1, and attended a committee meeting on June 16, 2008. We also
interviewed national and state DME trade associations and a small
number of randomly selected suppliers about the CBP bidding and
contract award processes.
To determine the steps that CMS has taken to improve the bidding
process for future CBP rounds, we reviewed applicable CBP provisions in
relevant MIPPA sections and implementing regulations, PAOC Federal
Register notices, and interviewed CMS and Palmetto GBA officials. We
also interviewed Maricom officials and reviewed available documentation
related to the development, testing, and proposed implementation of the
new electronic bid submission system--the Durable Medical Equipment,
Prosthetics, Orthotics, and Supplies bidding system (DBidS)--to be used
for the round 1 rebid. We attended a June 4, 2009, meeting at which CMS
updated the current PAOC about the process changes that have been
implemented or proposed for the CBP round 1 rebid. We did not assess
the reliability or functionality of DBidS, but we reviewed the
processes established by CMS and its contractors for testing and
accepting such systems. (See appendix I for more detailed information
on our methodology.)
We conducted this performance audit from June 2008 to September 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Background:
Most Medicare beneficiaries participate in Medicare Part B, which helps
pay for certain DME and other equipment and supplies.[Footnote 10] This
includes, for example, wheelchairs, walkers, oxygen, and hospital beds.
In 2007, Medicare spent a total of $430.3 billion. Of that, $8.3
billion was spent on DME and other medical equipment and supplies
covered under Part B.[Footnote 11]
Medicare DME Payments:
Since 1989, Medicare has paid for DME through fee schedules. These fee
schedules are based on the average amount that suppliers charged on
Medicare claims in 1986 and 1987 for individual DME items adjusted for
inflation.[Footnote 12] Medicare uses a fee schedule for each state to
reflect geographical price differences. The applicable state fee
schedule is determined by the beneficiary's residence, not the DME
supplier's location.
Medicare generally pays the lesser of either the supplier's actual
charge or the Medicare fee schedule amount for the item or service. For
suppliers, Medicare assignment--accepting Medicare's reimbursement
amount for an item as payment in full and limiting the amount the
beneficiary can be billed for that item--is optional. If a supplier
agrees to assignment, then Medicare generally pays 80 percent of the
amount to the supplier and the Medicare beneficiary is responsible for
paying the supplier the remaining 20 percent (referred to as the
coinsurance payment), once the beneficiary's annual deductible has been
met. If the supplier does not accept assignment, the supplier is not
limited to charging the beneficiary 20 percent of the Medicare
reimbursement for that item or service and the beneficiary can be
billed for whatever balance is due.
History of DME Competitive Bidding Payment Reform:
The Balanced Budget Act of 1997 required CMS to test competitive
bidding as a new way to set payment rates for Part B services and
supplies selected by CMS.[Footnote 13] CMS conducted three CBP
demonstration projects, two in Florida (1999-2002) and one in Texas
(2000-2002). Evaluations of the demonstration projects estimated that
they saved nearly $9.4 million.[Footnote 14]
About a year after the demonstrations ended, the MMA was enacted,
requiring CMS to implement a broader CBP in 2007.[Footnote 15] Changing
the long-standing policy that any qualified provider be allowed to
participate in Medicare, the MMA provided that generally only suppliers
who were awarded contracts could be reimbursed by Medicare for
providing covered Part B items and services in the selected areas. The
MMA imposed certain criteria that CMS was required to follow--for
example, eligible suppliers had to meet quality and financial
standards, the total amount to be paid to contractors was expected to
be less than would be paid otherwise, access of beneficiaries to
multiple suppliers in their area must be maintained, and CMS must
consider the ability of suppliers to meet the anticipated needs of
beneficiaries in the covered geographic area. CMS was also required to
ensure that small suppliers would be considered. The MMA required the
establishment of the PAOC to advise CMS on various aspects of the CBP,
including financial and quality standards.[Footnote 16] The MMA also
prohibited any administrative or judicial review of the designation of
CBP's CBAs, the selection of items and services, the establishment of
payment amounts, the bidding structure and number of contract suppliers
selected, the awarding of contracts, and the phase-in of the CBP. CMS
published a final rule, effective on June 11, 2007, governing
implementation of the CBP.[Footnote 17]
CMS contracted with Palmetto GBA to implement the CBP bidding and
contract award process and with Maricom to develop the Web-based CBSS.
CMS established the bidding process and approved policies and
procedures developed by Palmetto GBA. CMS implemented the CBP in 10
CBAs which were among the largest statistical metropolitan areas.
[Footnote 18] CMS chose the items and services to include in round 1 by
focusing on the highest cost and highest volume items and services with
the largest potential for savings. It selected 10 product
categories,[Footnote 19] with 371 unique items and services; spending
for those product categories in the 10 CBP CBAs accounted for about 9
percent of total Medicare spending on those product categories in 2006.
Within the 10 CBAs, the product categories chosen accounted for 48
percent of Medicare's spending for DME, prosthetics, orthotics, and
related supplies that year.
On July 15, 2008, MIPPA was enacted, which terminated the CBP contracts
awarded during round 1. MIPPA reinstated Medicare reimbursement based
on the Medicare fee schedule for all items and services included in CBP
round 1, subject to a 9.5 percent reduction nationally for
2009.[Footnote 20] MIPPA also required that CMS implement the CBP round
1 rebid in 2009, and imposed additional criteria for this rebid and
later rounds.[Footnote 21] CMS issued an interim final rule
implementing these MIPPA provisions.[Footnote 22]
The CBP Round 1 Competitive Bidding Process:
The competitive bidding process had several steps: bidder registration,
bid submission, bid review, winner selection, setting Medicare payment
amounts, and contract offers (see figure 1). To participate in CBP
round 1, DME suppliers must have met enrollment, quality, and financial
standards, obtained all the state and local licenses required to
provide the relevant services, and been accredited by a CMS-approved
accrediting organization.[Footnote 23] In addition, bids for each item
had to be bona fide--that is, not higher than the Medicare fee schedule
but not lower than the supplier's cost.
Figure 1: CBP Round 1 Process:
[Refer to PDF for image: illustration]
Bidder registration and submission:
* Suppliers register to bid;
* Suppliers submit bids.
Bid review:
* Palmetto GBA reviews bids;
* Palmetto GBA determines if bid is qualified based on completeness,
compliance with bidding requirements, and financial score;
* Bid is disqualified; or: Bid is qualified.
Price competition and setting Medicare payment amounts:
* Qualified bids compete on price;
* Palmetto GBA selects winning bids;
* Bid loses on price; or: Bid wins on price;
* Using bids that won on price, Palmetto GBA determines Medicare
payment amounts for each item.
Contract offers:
* If necessary to meet small supplier target, Palmetto GBA selects
additional bids submitted by small suppliers for contract offers;
* Palmetto GBA notifies losing suppliers of round 1 results and CMS
extends contract offers to winning suppliers.
Source: GAO based on information provided by CMS.
[End of figure]
Bidder registration. The first step in the CBP bidding process was
bidder registration. Suppliers had to register with a CMS identity
management and authentication system to gain access to the CBSS.
Suppliers registered in the CBSS as one of three types of bidding
entities: a supplier with a single location, multiple suppliers sharing
common ownership or control, or 2-20 small suppliers forming a network.
[Footnote 24]
Bid submission. For purposes of the CBP, a bid was an offer by a
supplier to furnish all items within a product category throughout the
entire CBA. The bid had to include a proposed price for each item in
the product category. The number of items in a product category ranged
from 3 to 142.[Footnote 25] A bid package consisted of two electronic
forms, A and B, and documents specified in the request-for-bid
instructions and in other communication with suppliers. Hard copies of
the documents had to be submitted to Palmetto GBA. Form A requested
information about suppliers, including Medicare billing numbers,
addresses, ownership, current or prior sanctions, and accreditation
status.[Footnote 26] Each Form B required suppliers to disclose annual
revenues for the product category in each CBA; estimates of the number
of item units currently provided and that could be provided in the
future for that product category in that CBA; expansion plans; and item
prices, models, and manufacturers. Each Form B constituted one bid--
that is, suppliers had to submit a separate form for each product
category in each CBA. Suppliers could submit a Form B for any product
category up for bid in any CBA.[Footnote 27] Hard-copy documents
required to complete the bid package included financial documents,
proof of accreditation status, letters of intent to enter into
agreements with subcontractors, network agreements, and statements
certifying the accuracy of the submissions. Financial documentation
requirements included 3 years of annual financial statements, selected
forms from the last three annual tax returns, and credit reports and
credit scores for a 90-day period ending close to the date of the bid's
submission.[Footnote 28] (See table 1.)
Table 1: Required Financial Documents for CBP Round 1:
Financial document as described in request-for-bid instructions:
Compiled balance sheet (Statement of Financial Position);
Request-for-bid instructions' term definitions: The balance sheet and
statement of financial position terms were defined as:
Balance sheet: The position statement, that is, it presents the
cumulative financial position of a firm at a specific date. The balance
sheets reports financial position in terms of the basic economic model
of the enterprise: Assets = Creditors' Equity + Owners' Equity;
Statement of financial position: An alternative term for the term
"balance sheet." The financial position of an enterprise at a
particular time comprises its assets, liabilities, and owners' equity
and the relationship among them, plus contingencies, commitments, and
other financial matters that pertain to the enterprise at the time.
Financial document as described in request-for-bid instructions:
Statement of Cash Flow (Statement of Changes in Financial Position);
Request-for-bid instructions' term definitions: Term was not defined.
Financial document as described in request-for-bid instructions:
Statement of Operations (Income Statement);
Request-for-bid instructions' term definitions: Income statement:
Reports on the results of an entity's operations for a given period of
time as opposed to a specific point in time.
Financial document as described in request-for-bid instructions:
Schedule C from 1040 Tax Return (Profit and loss statement);
Request-for-bid instructions' term definitions: No further description
provided.
Financial document as described in request-for-bid instructions:
Schedule L from 1065, U.S. Return of Partnership Income (limited
partnerships and partnerships);
Request-for-bid instructions' term definitions: No further description
provided.
Financial document as described in request-for-bid instructions:
Schedule L (balance sheet) from corporate tax return (corporations);
Request-for-bid instructions' term definitions: No further description
provided.
Financial document as described in request-for-bid instructions: 10-K
filing reports with Securities and Exchange Commission (publicly traded
companies);
Request-for-bid instructions' term definitions: No further description
provided.
Financial document as described in request-for-bid instructions:
Current credit report and credit score;
Request-for-bid instructions' term definitions: Terms were not defined.
Source: CMS.
Note: Data are from CMS's Instructions for Completing Bid Forms for
Medicare DMEPOS Competitive Bidding Program (May 2007).
[End of table]
Bid review. After the bid window closed, Palmetto GBA began to review
the bids. It determined whether each bid package was complete,
compliant with bidding requirements, and whether the submitting
supplier's financial score satisfied a minimum threshold to qualify to
compete on price.[Footnote 29] The financial score was determined using
criteria developed by CMS for this purpose including suppliers' credit
scores and 10 financial measures--described by CMS as standard
accounting measures. (See table 2.) If the bid package was complete,
compliant with bidding requirements, and the submitting supplier had a
financial score that was equal to or greater than the minimum
threshold, the bid qualified to compete on price. But before comparing
prices, Palmetto GBA also reviewed each qualified bid's capacity
projections--the supplier's ability to provide the volume of items
claimed in the bid in light of the supplier's historical capacity,
expansion plans, and financial score. It adjusted some bids' capacity
projections according to certain guidelines.[Footnote 30]
Table 2: Ten Financial Measures Used to Determine a Supplier's
Financial Score, CBP Round 1:
Financial measure: Current ratio;
Description provided to suppliers: Current assets/current liabilities.
Financial measure: Collection period;
Description provided to suppliers: Accounts receivable/sales x 360.
Financial measure: Working capital;
Description provided to suppliers: Current assets - current
liabilities.
Financial measure: Accounts payable to sales;
Description provided to suppliers: Accounts payable/net sales.
Financial measure: Quick ratio;
Description provided to suppliers: (Cash + accounts receivable)/current
liabilities.
Financial measure: Current liabilities to net worth;
Description provided to suppliers: Current liabilities/net worth.
Financial measure: Quality of earnings;
Description provided to suppliers: Cash flow from operations/(net
income + depreciation).
Financial measure: Operating cash flow to sales;
Description provided to suppliers: Cash flow from operations/(revenue -
adjustment to revenue).
Financial measure: Return on sales;
Description provided to suppliers: Net income/sales.
Financial measure: Sales to inventory;
Description provided to suppliers: Net sales/inventory.
Source: CMS.
[End of table]
Winner Selection. Palmetto GBA used several steps to identify the
winning bids based on price. Item prices submitted by competing
suppliers were compared using a composite pricing methodology. A bid's
composite price was calculated as each item's price multiplied by an
item weight summed across all items in the product category. Table 3
illustrates the calculation for three hypothetical bids' composite
prices in a product category containing three items. Each weight is
based on the item's share of units billed to Medicare in 2006 as a
percentage of all of the units for the product category billed to
Medicare nationwide that same year.
Table 3: Bid Composite Price Calculation for a Product Category with
Three Items:
Item weight;
Item A: 0.5;
Item B: 0.3;
Item C: 0.2.
Supplier 1 bid;
Item A: $1.00 x 0.5; + Item B: $4.00 x 0.3; + Item C: $1.00 x 0.2;
= Composite price: $1.90.
Supplier 2 bid;
Item A: $3.00 x 0.5; + Item B: $3.00 x 0.3; + Item C: $2.00 x 0.2;
= Composite price: $2.80.
Supplier 3 bid;
Item A: $2.00 x 0.5; + Item B: $3.00 x 0.3; + Item C: $2.00 x 0.2;
= Composite price: $2.30.
Source: GAO.
[End of table]
For each auction--a competition by qualified suppliers to deliver all
items within a single product category in a single CBA--Palmetto GBA
ordered the bids by composite price from lowest to highest.[Footnote
31] Starting with the bid with the lowest composite price, Palmetto GBA
calculated the cumulative projected capacity of the competing bids.
Palmetto GBA identified the bid where cumulative projected capacity met
or exceeded CMS's estimated beneficiary demand as the pivotal bid (see
table 4). In table 4, the pivotal bid was submitted by Supplier 9 with
a composite price of $7.64, since cumulative supply (1,765 units)
reached CMS's estimated demand (1,500 units) at that bid. If projected
beneficiary demand could not be met by qualified suppliers, a pivotal
bid could not be established and the auction was considered nonviable.
[Footnote 32] Otherwise, bids with composite prices equal to or less
than the pivotal bid were winners on the basis of price.
Table 4: Determining the Pivotal Bid:
Bids: Supplier 15 bid;
Composite price (ordered): $4.00;
Each bid's projected capacity: 400;
Cumulative projected capacity: 400;
Estimated beneficiary demand: 1,500: Does not meet;
Pivotal bid: [Empty].
Bids: Supplier 6 bid;
Composite price (ordered): $5.70;
Each bid's projected capacity: 320;
Cumulative projected capacity: 720;
Estimated beneficiary demand: 1,500: Does not meet;
Pivotal bid: [Empty].
Bids: Supplier 1 bid;
Composite price (ordered): $5.76;
Each bid's projected capacity: 200;
Cumulative projected capacity: 920;
Estimated beneficiary demand: 1,500: Does not meet;
Pivotal bid: [Empty].
Bids: Supplier 7 bid;
Composite price (ordered): $5.87;
Each bid's projected capacity: 100;
Cumulative projected capacity: 1,020;
Estimated beneficiary demand: 1,500: Does not meet;
Pivotal bid: [Empty].
Bids: Supplier 12 bid;
Composite price (ordered): $6.20;
Each bid's projected capacity: 245;
Cumulative projected capacity: 1,265;
Estimated beneficiary demand: 1,500: Does not meet;
Pivotal bid: [Empty].
Bids: Supplier 10 bid;
Composite price (ordered): $6.21;
Each bid's projected capacity: 200;
Cumulative projected capacity: 1,465;
Estimated beneficiary demand: 1,500: Does not meet;
Pivotal bid: [Empty].
Bids: Supplier 9 Bid;
Composite price (ordered): $7.64;
Each bid's projected capacity: 300;
Cumulative projected capacity: 1,765;
Estimated beneficiary demand: 1,500: Meets;
Pivotal bid: [Check].
Bids: Supplier 3 bid;
Composite price (ordered): $9.75;
Each bid's projected capacity: 400;
Cumulative projected capacity: 2,165;
Estimated beneficiary demand: 1,500: [Empty];
Pivotal bid: [Empty].
Bids: Supplier 2 bid;
Composite price (ordered): $9.89;
Each bid's projected capacity: 100;
Cumulative projected capacity: 2,265;
Estimated beneficiary demand: 1,500: [Empty];
Pivotal bid: [Empty].
Source: GAO.
[End of table]
Setting Medicare single payment amounts. Bids that won on price were
used to establish Medicare's single payment amounts for each item in
the auction.[Footnote 33] For each item, Palmetto GBA ordered these
winning bids' price offers for each item from lowest to highest. The
median price offered for that item would be Medicare's payment for that
auction item in that CBA. The use of the median in setting the item's
single payment amount meant that Medicare's payment amount could be
less than or more than a particular winning supplier's actual bid for
an item. Because CBP payments may only be paid on assignment, Medicare
would pay the supplier 80 percent of the single payment amount for an
item and the beneficiary would be responsible for the remaining 20
percent.
Contract offers. In addition to winning on price, small suppliers' bids
could also win if there were an insufficient number of small suppliers
that won on price alone.[Footnote 34] Before the initial set of
contract offers, Palmetto GBA determined whether CMS's target--that 30
percent of the qualified suppliers be small suppliers--had been met by
small suppliers winning on price. In the auctions where the goal had
not been met, Palmetto GBA moved up the composite pricing order, above
the pivotal bid, for small suppliers only as a means to include
additional small suppliers. These additional small suppliers would then
be offered contracts, in addition to those suppliers whose bids won on
price alone. In March 2008, CMS and Palmetto GBA notified suppliers of
the auction results and CMS extended contract offers to winning
suppliers. In May 2008, CMS announced the suppliers that had accepted
contracts for the 3-year CBP contract period from July 1, 2008, through
June 30, 2011.[Footnote 35] However, MIPPA, which was enacted on July
15, 2008, terminated the CBP round 1 contracts.
About One-Quarter of Bids Resulted in Contracts Generating Significant
Potential Savings:
About one-quarter of the bids submitted during CBP round 1 resulted in
awarded contracts. Of the 6,374 bids submitted by 1,010 suppliers, half
were disqualified before competing on price--most often for missing
financial documentation or noncompliance with accreditation
requirements. Nearly two-thirds of the 85 auctions saw the number of
suppliers decrease by 50 percent or more compared to the number of
suppliers billing Medicare for the product category in 2006. CMS
estimated that the volume-weighted reduction in Medicare's payment
amounts for round 1 would have averaged 26 percent.
About One-Quarter of the Submitted Bids Resulted in Contracts, but
Almost Half Were Disqualified for Missing Financial Documentation:
Once the contract award process was completed, 22 percent of the bids
submitted (1,372 of 6,374) resulted in contracts between CMS and
suppliers to provide DME and other items to Medicare
beneficiaries.[Footnote 36] (See table 5 for step-by-step results.) CMS
initially extended contract offers for 1,335 bids.[Footnote 37]
Contracts were offered to additional suppliers when some winners
rejected the contract offers associated with 86 bids, as well as after
CMS reversed Palmetto GBA's determinations to disqualify 27 bids.
Winning suppliers may have rejected contracts because the CBP single
payment amounts were less than the item prices the supplier had bid.
Table 5: CBP Round 1 Bid Counts by Process Step:
Process step: 1. Bid review;
Bids reviewed;
Number of round 1 bids: 6,374;
Percentage of total bids reviewed: 100.
Bids disqualified on first review;
Number of round 1 bids: (3,143);
Percentage of total bids reviewed: 49.
Bids qualified but rejected because auction deemed nonviable;
Number of round 1 bids: (65);
Percentage of total bids reviewed: 1.
Process step: 2. Winner selection;
Qualified bids used to determine pivotal bids;
Number of round 1 bids: 3,166;
Percentage of total bids reviewed: 50.
Bids that lost on price;
Number of round 1 bids: (1,831);
Percentage of total bids reviewed: 29.
Bids that won on price or were contracts with small suppliers added to
meet 30 percent target, or both;
Number of round 1 bids: 1,335;
Percentage of total bids reviewed: 21.
Process step: 3. Contract offers;
Initial round of contract offers;
Number of round 1 bids: 1,335;
Percentage of total bids reviewed: 21.
Additional offers extended;
Number of round 1 bids: 137;
Percentage of total bids reviewed: 2.
Process step: 4. Contract outcomes;
Total contract offers made;
Number of round 1 bids: 1,472;
Percentage of total bids reviewed: 23.
Contract offers rejected;
Number of round 1 bids: (86);
Percentage of total bids reviewed: 1.
Acceptances in nonviable auctions that were withdrawn;
Number of round 1 bids: (14);
Percentage of total bids reviewed:
