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entitled 'Medicare: Past Experience Can Guide Future Competitive 
Bidding for Medical Equipment and Supplies' which was released on 
September 07, 2004.

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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.

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