Medicare Payments:

Use of Revised 'Inherent Reasonableness' Process Generally Appropriate

HEHS-00-79: Published: Jul 5, 2000. Publicly Released: Jul 5, 2000.

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Pursuant to a congressional request, GAO reviewed the Health Care Financing Administration's (HCFA) and the Durable Medical Equipment Regional Carriers' (DMERC) actions to implement a final rule for processing Medicare payments, focusing on whether: (1) it was proper for HCFA to issue its inherent reasonableness regulations as an interim final rule, and whether HCFA is authorized to delegate responsibility for making payment adjustments to the DMERCs; (2) the DMERCs' survey methods were adequate to support the proposed payment reductions; and (3) the proposed payment reductions will reduce patient access to the affected medical products.

GAO noted that: (1) HCFA acted properly in issuing an interim final rule to implement the inherent reasonableness provision of the Balanced Budget Act (BBA) because these regulations did not substantially change the factors to be considered in making inherent reasonableness determinations, and thus the criteria were met for bypassing the general requirement for issuing a notice of proposed rulemaking; (2) under the revised regulations, HCFA and the DMERCs would conduct payment reviews under the same circumstances and consider essentially the same information as in the past; (3) as provided by the BBA, they would be able to adjust payment amounts by up to 15 percent a year without using lengthier public notice and comment procedures; (4) GAO feels it is clearly within HCFA's authority to delegate partial responsibility for adjusting payment rates to the DMERCs; (5) HCFA has long delegated similar types of responsibilities to the DMERCs and other claims processing contractors, and the BBA, which amended Medicare law to enable use of the revised process, did not preclude such delegation; (6) survey data clearly showed that Medicare payments are much higher than the median surveyed retail prices for five of the products the DMERCs reviewed--lancets, eyeglass frames, urinary catheters, and two types of catheter insertion trays; (7) as a result, sufficient information supports proposed payment reductions of up to 15 percent for these items; (8) however, the DMERCs did not follow a rigorous survey process, and this led GAO to question the proposed smaller payment reductions for glucose test strips and albuterol sulfate; (9) for the eighth surveyed product--enteral formulas--more pricing information is needed before the payment amount can be adjusted because the DMERCs did not price products specifically packaged and used for tube feeding and instead priced products that are generally used as oral supplements; (10) retail surveys may not be the best strategy for setting payment amounts for items not generally sold at retail prices, such as enteral formulas; (11) for such products, using wholesale prices plus a reasonable markup may represent a better payment-setting mechanism; (12) it is difficult to predict whether the proposed payment reductions will limit patient access because Medicare has implemented few comparable reductions in recent years; and (13) because retail prices--which include retailers' costs for both acquisition and service--were used to establish the proposed reductions, GAO believes that access to these products is not likely to be significantly affected.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: An interim final rule on Inherent Reasonableness was published on December 13, 2002, which became effective on February 11, 2003, and responded to this recommendation. In that rule, CMS indicated that when CMS or the carriers are using the inherent reasonableness process, they will (1) develop written guidelines for data collection and analysis, (2) ensure consistency in any survey used to collect and analyze pricing data, (3) develop a consistent set of survey questions to use when requesting retail prices, (4) ensure that sampled prices fully represent the range of prices nationally, (5) consider the geographic distribution of Medicare beneficiaries, (6) consider the relative prices in various localities to ensure that an appropriate mix of areas with high, medium, and low consumer prices was included, (7) consider criteria to define populous State, less populous State, urban area, and rural area, (8) consider a consistent approach in selecting retail outlets within selected cities, (9) consider whether the distribution of sampled prices from localities surveyed is fully representative of the distribution of the U.S. population, (10) consider the products generally used by beneficiaries and collect prices for these products, and (11) when using wholesale costs, consider the cost of the services necessary to furnish a product to beneficiaries. In addition, if CMS or a carrier makes a payment adjustment of more than 15 percent spread over multiple years, CMS or the carrier will review market prices in the years subsequent to the year of the initial reduction, to ensure that further reductions continue to be appropriate.

    Recommendation: For future inherent reasonableness reviews based on survey data, HCFA or the DMERCs should develop and implement a more structured survey design, including sample selection, survey instrumentation, and data collection methods, and ensure that the design is consistently used by all entities conducting the survey.

    Agency Affected: Durable Medical Equipment Regional Carriers

  2. Status: Closed - Implemented

    Comments: CMS published an interim final rule on inherent reasonableness on December 13, 2002, to set forth its process and respond to GAO's report and other comments on its previous rulemaking effort. In the December 2002 rule, which became effective on February 11, 2003, CMS indicated that the information used to estimate payment reductions for products discussed in GAO's report had not been collected following the revised regulatory criteria recommended by GAO. As a result, the agency's carriers would not finalize the 1998 proposed adjustments for glucose test strips, albuterol sulfate, enteral formulas, lancets, eyeglass frames, latex Foley catheters, and catheter insertion trays without drainage bags, using the information they had collected. For future reviews, they indicated that they would collect information using a structured approach, as recommended by GAO.

    Recommendation: HCFA and the DMERCs should collect and analyze additional information to more precisely estimate any payment reductions for glucose test strips, albuterol sulfate, and enteral formulas, as well as for additional payment reductions in subsequent years for lancets, eyeglass frames, latex Foley catheters, and catheter insertion trays without drainage bags.

    Agency Affected: Department of Health and Human Services: Health Care Financing Administration

  3. Status: Closed - Implemented

    Comments: This recommendation was addressed in the interim final rule on Inherent Reasonableness that was published December 13, 2002, effective February 11, 2003.

    Recommendation: In promulgating the final rule on the inherent reasonableness process, HCFA should define with sufficient clarity the terms "grossly excessive" and "grossly deficient."

    Agency Affected: Department of Health and Human Services: Health Care Financing Administration

  4. Status: Closed - Implemented

    Comments: In an interim final rule on Inherent Reasonableness, published on December 13, 2002, and effective February 11, 2003, CMS indicated that it will monitor patient access to items for which payment amounts had been adjusted by periodically checking the rate at which suppliers are accepting assignment for these items (which is accepting the Medicare payment amount as payment in full), and by monitoring any beneficiary complaints regarding these items.

    Recommendation: HCFA should monitor indicators that could signal potential problems with patient access to the product groups for which it is reducing maximum payments, and act quickly to rectify any problems that arise.

    Agency Affected: Department of Health and Human Services: Health Care Financing Administration


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