Challenges Remain in Setting Payments for Medical Equipment and Supplies and Covered Drugs

GAO-02-833T: Published: Jun 12, 2002. Publicly Released: Jun 12, 2002.

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Leslie G. Aronovitz
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Medicare has paid higher than market rates for various medical equipment and supplies and often considerably higher than provider acquisition costs for Medicare-covered outpatient drugs. Congress has enacted a series of legislative changes affecting payment methods and payment adjustment authority for medical equipment and supplies and outpatient drugs since the late 1980s. However, progress in setting appropriate rates has been mixed, owing, in part, to various constraints faced by the agency responsible for administering Medicare--the Centers for Medicare and Medicaid Services (CMS). Because of the program's size, scope, and role as a public payer, Medicare has limited options to set and adjust payments for medical equipment, supplies and outpatient drugs. Medicare's method of paying for medical equipment and supplies is through fee schedules that remain tied to suppliers' historical charges to Medicare rather than market prices. Medicare's payment approaches lack flexibility to keep pace with market changes, and, as a result, Medicare often pays higher prices than other public payers. Previous efforts to lower Medicare's overly generous payments suggest several lessons. First, payment changes are most effectively implemented when the process used to set or adjust a rate is defensible. Second, the information on Medicare claims for medical equipment and supplies is not specific enough to enable CMS to determine which products Medicare is actually paying for. Also, for the foreseeable future, CMS will have to continue to rely on fee schedules based on historical charges in setting payment rates for medical equipment and supply items.

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