Effect of Durable Medical Equipment Fee Schedules on Six Suppliers' Profits

HRD-92-22: Published: Nov 6, 1991. Publicly Released: Nov 6, 1991.

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Pursuant to a legislative requirement, GAO studied the appropriateness of the payment amounts in the recently implemented Medicare fee schedule payment system for durable medical equipment (DME) used in beneficiaries homes, focusing on: (1) DME suppliers' revenues and profits from their Medicare business and other lines of business; (2) the effect of fee schedule reimbursement on suppliers' Medicare revenues; and (3) major components of suppliers' costs.

GAO found that: (1) in 1988, the average profit margin for the Medicare business of the 6 suppliers reviewed was 19 percent, compared to a non-Medicare profit margin of -24 percent; (2) using the same volume of services and constant 1989 dollars, the six suppliers' aggregate profit margin on their Medicare business would be higher under both the original fee schedules and those as revised by the Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) than under the reasonable charge payment method the fee schedules replace; (3) for the items reviewed, the suppliers' estimated 1989 fee schedule revenues were about 24 percent greater than the GAO estimate of their revenues under the reasonable charge system for the same year; (4) the largest portion of each suppliers' costs was for administrative expenses; and (5) changes to the fee schedule enacted in OBRA 1990 removed some of the revenue gains, but the suppliers reviewed will experience an aggregate increase of 4 percent over the reasonable charge reimbursement rates when the OBRA 1990 changes are fully implemented in 1993.