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**RSC Policy Brief:**

**Durable Medical Equipment**

*June 16, 2008*

**The RSC has prepared the following policy brief providing background
information on the competitive bidding program for durable medical
equipment.**

**[Background]{.underline}**: In addition to providing coverage for
outpatient physician services, Medicare Part B also helps pay for
durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS)
needed by beneficiaries. Currently, Medicare reimburses beneficiaries
for supplies using a series of fee schedules, which are generally based
on historical prices subject to annual updates or other adjustments.
Medicare finances 80% of the actual costs or the fee schedule amount,
whichever less, with the beneficiary paying the difference. The Centers
for Medicare and Medicaid Services (CMS) estimates that about 10 million
individuals---or about one-quarter of all beneficiaries---receive
medical supplies under Part B in a given year, at a cost to Medicare of
approximately \$10 billion annually.[^1]

In recent years, some conservatives have raised concerns that the prices
on the Medicare fee schedule for DMEPOS were in excess of market prices.
In 2002, testimony by the Department of Health and Human Services
Inspector General revealed that the prices paid by Medicare for 16
selected items of durable medical equipment were higher than prices paid
by Medicaid, the Federal Employee Health Benefits (FEHB) plans, and
retail prices. The Inspector General projected that using the lower
prices by other payers for these 16 common items alone would have saved
Medicare more than \$100 million annually.[^2]

In response to the above findings, Congress in the Medicare
Modernization Act (MMA) of 2003 (P.L. 108-173) enacted cuts in the fee
schedule levels for the 16 specific items studied by the Inspector
General's testimony, while creating a new competitive bidding process
for DMEPOS suppliers in Section 302 of the law. This nationwide program
followed on the heels of three demonstration projects, authorized under
the Balanced Budget Act of 1997, established during the period 1999-2002
in Florida and Texas. The pilot programs demonstrated the ability of
competitive bidding to reduce the costs of DMEPOS by an average
19.1%---saving the federal government \$7.5 million, and \$1.9 million
in reduced beneficiary co-payments---while maintaining beneficiary
access to required items.[^3]

In addition to a program of competitive bidding for DMEPOS, the MMA also
established a new accreditation process for suppliers designed to review
suppliers' financial records and other related documentation to
establish their status as *bona fide* health equipment suppliers. A
November 2007 CMS estimate indicated that 10.3% of payments to medical
equipment suppliers were improper---a rate of questionable payments more
than double those of other Medicare providers.[^4] Coupled with the new
competitive bidding program, the accreditation mechanism was intended to
eliminate "fly-by-night" DMEPOS suppliers from operating within the
Medicare program, and thus was included in the anti-fraud title of MMA.

**[Implementation]{.underline}**: CMS previously announced that,
pursuant to the Section 302 requirements, Round 1 of the DMEPOS
competitive bidding process would begin on July 1, 2008 in ten
Metropolitan Statistical Areas (MSAs): Charlotte, Cincinnati, Cleveland,
Dallas, Kansas City, Miami, Orlando, Pittsburgh, Riverside, and San
Juan. A further 70 MSAs will be included in the program in 2009, with
more expected to be included in subsequent years.

The three-year bids for the first round of MSA sites were submitted in
September 2007; CMS notified winning bidders, and accepted contracts
from winning bidders, earlier this spring. Based on the Round 1 bids,
CMS has indicated that the Medicare program and beneficiaries will save
an average of 26% in the 10 categories of DMEPOS open to competitive
bidding---ranging from a 14% savings on negative pressure wound therapy
pumps and supplies to 43% savings on mail-order diabetic supplies. When
fully implemented, CMS estimates that competitive bidding will save the
Medicare program approximately \$1 billion per year.

**[Concerns Raised]{.underline}**: The introduction of DMEPOS
competitive bidding has not been without controversy, and concerns
raised by suppliers and other interested parties have generally fallen
into two categories. Some suppliers have raised specific concerns about
the way in which CMS' contractor conducted the Round 1 bidding process.
Many of these concerns have focused on a lack of communication from the
contractor to the suppliers, resulting in some suppliers' bids being
rejected for lack of proper financial documentation without the
suppliers having an opportunity to provide further information or
clarification. CMS has indicated that approximately 16% of all bids
submitted were rejected solely due to a failure to meet proper
qualification criteria; by contrast, 61% of all bids submitted were
priced outside the winning range.

In response to the concerns raised regarding qualification criteria, CMS
has utilized a twin-stage process of review for Round 1 suppliers who
raised protests about the way the contractor conducted the bid process.
Both the contractor and CMS have taken steps to re-examine the
documentation submitted during the review process, and in some cases,
CMS has allowed those suppliers with winning bids who failed to meet
accreditation or related requirements due to a lack of communication
from the contractor to participate in the Round 1 location areas. In
addition, CMS has extended the accreditation deadline for suppliers
participating in Round 2 bidding, and will also seek input from the
Program Oversight and Advisory Committee established under the MMA for
ways to refine and improve the DMEPOS competitive bidding process for
subsequent bidding rounds.

The second group of concerns are broader in scope, and go to the heart
of the competitive bidding program itself. Concerns in this line include
the potential impact on suppliers, particularly small businesses, who
were not successful on pricing grounds. Some policy-makers have also
questioned the lack of scrutiny given to subcontractors not subject to
the same accreditation requirements as DMEPOS contractors. Lastly, other
groups have questioned whether competitive bidding will lead to the sale
of lower quality supplies and equipment to beneficiaries, as well as
whether beneficiaries will be able to obtain access to DMEPOS equipment
in instances where the winning bidders in an MSA had not previously
serviced the area in question.

Some conservatives may question the need to delay the competitive
bidding process on these grounds. CMS provided specific opportunities
for small businesses to participate in the DMEPOS competitive bidding
process, resulting in approximately half of firms who accepted winning
bids having revenues of less than \$3.5 million. These small business
opportunities occurred in the context of a market-oriented bidding
mechanism that, when fully implemented, will save taxpayers
approximately \$1 billion annually---and will provide additional savings
to Medicare beneficiaries in the form of reduced co-payments. In
addition, the accreditation mechanism established by Section 302 of MMA
provide a quality check previously lacking for DMEPOS purchases and
suppliers.

While transitioning to a new system can create logistical difficulties,
the staged implementation process will ensure that beneficiaries in a
limited number of areas---only one-quarter of whom receive DMEPOS
supplies in a given year---will experience the transition to a
competitively bid environment this year. This phased-in approach stands
in contrast to the January 1, 2006 implementation of the Medicare Part D
prescription drug benefit, where tens of millions of beneficiaries
received new coverage at a single point in time---with logistical
obstacles, though significant, relatively minor on a percentage basis.

**[Legislative Status]{.underline}**: On June 12, 2008, House Ways and
Means Health Subcommittee Chairman Pete Stark (D-CA) and Ranking Member
Dave Camp (R-MI) introduced H.R. 6252, the Medicare DMEPOS Competitive
Acquisition Reform Act. The legislation would terminate all Round 1
contracts made pursuant to the round of competitive bidding completed
this spring, and would direct CMS to re-bid Round 1 at some point during
2009. Future rounds of competitive bidding would also be delayed, with
Round 2 (featuring an additional 70 MSAs) taking place during 2011, and
competitive bidding in rural areas and smaller MSAs being delayed until
2015. The estimated \$3 billion cost of the delay would be paid for by
an across-the-board reduction of 9.5% for all DMEPOS scheduled to be
subjected to competitive bidding. In addition, the bill would require
the CMS contractor to notify suppliers missing financial documentation
related to their bids, extend disclosure and accreditation requirements
to DMEPOS sub-contractors, and establish an ombudsman within CMS to
respond to complaints from suppliers and individuals about the DMEPOS
competitive bidding process.

While competitive bidding language was not included in the Medicare
legislative package (S. 3101) on which the Senate failed to achieve
cloture last week, Finance Committee Chairman Baucus and Ranking Member
Grassley have discussed incorporating language delaying the competitive
bidding process into their competing packages covering an adjustment to
Medicare physician reimbursement levels.

**[Implications of Delay]{.underline}**: Despite the contracting
problems that have led some contractors to raise legitimate process
concerns about the implementation of the first bidding round, some
conservatives may still be concerned about the implications of the
proposed legislative delay, particularly if coupled with a mandate that
CMS re-bid the first round of DMEPOS bidding. Re-opening the bidding
process could prejudice entities who won their bids earlier this year,
while potentially reducing savings to the federal government by allowing
suppliers to bid more strategically, having had experience with the
winning range of bids during the initial round.

In addition, some conservatives may be concerned that a delay of more
than a few months would result in a new Administration being charged
with implementation of competitive bidding, which could allow for
further opportunities to undermine the program through the regulatory
process. Chairman Stark has indicated his desire to abolish the
competitive bidding program altogether, paid for by the across-the-board
cut in DMEPOS reimbursement levels currently being contemplated---so it
is entirely possible that a new Administration and a future Congress
could decide to make the "temporary" delay permanent and abolish
competitive bidding outright.

**[Conclusion]{.underline}**: The debate surrounding DMEPOS competitive
bidding finds many medical suppliers---some with understandable concerns
about a lack of communication from the bidding contractor, others merely
disappointed in not achieving a winning price for their bid---seeking
redress from Congress for a bidding mechanism Congress established with
the intent of creating arm's-length transactions between the agency
purchasing goods (i.e. CMS) and private suppliers. Yet the alternative
to a competitive bidding system where markets set prices for DMEPOS
involves arbitrary reductions to inherently arbitrary fee schedules
enacted by policy-makers with little proficiency in the minutiae of the
myriad health care services for which the federal government acts as a
payer. As Senate Finance Committee Chairman Baucus conceded at a health
care summit: "How in the world am I supposed to know what the proper
reimbursement should be for a particular procedure?"[^5]

For this reason, some conservatives may object to Congress' frequent
attempts to litigate these types of disputes, and may view the
controversy surrounding DMEPOS competitive bidding as emblematic of
larger problems with the current entitlement system. In the myriad
debates which it is perpetually pressured to referee---from the
sustainable growth mechanism (SGR) to reimbursement levels for hospitals
and nursing homes to the levels of epogen provided to kidney dialysis
patients---Congress' firsthand expertise is as limited as its
jurisdiction is absolute. The end result has frequently been an
imbalance of attention paid to various reimbursement "crises," with only
secondary consideration given to the longer-term health and solvency of
the underlying entitlement programs (i.e. Medicare and Medicaid) in
question.

Some conservatives may believe that the lesson from these past and
current controversies is that Congress has a poor track record in
adjudicating provider-related disputes. Many may find a better solution
in a premium support mechanism that would convert Medicare into a system
similar to the Federal Employees Benefit Health Plan (FEHBP), in which
beneficiaries would receive a defined contribution from Medicare to
purchase a health plan of their choosing. In addition to ensuring
long-term fiscal stability by confining the growth of Medicare spending
to the annual statutory raise in the defined contribution limit, a
premium support mechanism would result in reimbursement decisions being
made by private insurance carriers, obviating the need for Congress to
micro-manage provider payment levels. Such a solution would provide a
meaningful reform to the underlying problems that have erupted most
recently in the DMEPOS competitive bidding controversy, by saving
providers from the whims of Congress---and saving Congress from itself.

For further information on this issue see:

-   [*CMS Website on DME Competitive Bidding
    Process*](http://www.dmecompetitivebid.com/)

-   [*May 2008 House Ways and Means Health Subcommittee Hearing on DME
    Competitive
    Bidding*](http://waysandmeans.house.gov/hearings.asp?formmode=detail&hearing=630)

-   [*Government Accountability Office Report on DME Competitive
    Bidding*](http://www.gao.gov/new.items/d08767t.pdf)

**[RSC Staff Contact]{.underline}**: Chris Jacobs,
<christopher.jacobs@mail.house.gov>, (202) 226-8585

\###

[^1]: Cited in Government Accountability Office, "Medicare: Competitive
    Bidding for Medical Equipment and Supplies Could Reduce Program
    Payments, but Adequate Oversight Is Critical," (Washington, Report
    GAO-08-767T), available online at
    <http://www.gao.gov/new.items/d08767t.pdf> (accessed June 9, 2008),
    p. 3.

[^2]: Testimony of Janet Rehnquist, Inspector General of the Department
    of Health and Human Services, before Senate Appropriations
    Subcommittee on Labor, HHS, and Education, June 12, 2002 hearing,
    available online at
    <http://www.oig.hhs.gov/testimony/docs/2002/020611fin.pdf> (accessed
    June 16, 2008).

[^3]: Testimony of Thomas Hoerger, Senior Fellow, Research Triangle
    Institute International, before House Ways and Means Subcommittee on
    Health, May 6, 2008 hearing on Durable Medical Equipment Competitive
    Bidding, available online at
    <http://waysandmeans.house.gov/hearings.asp?formmode=printfriendly&id=6906>
    (accessed June 9, 2008).

[^4]: Cited in Government Accountability Office, "Medicare Competitive
    Bidding," pp. 10-11.

[^5]: Quoted in Anna Edney, "Bernanke: Health Care Reform Will Require
    Higher Spending," *CongressDailyPM* June 16, 2008, available online
    at
    <http://www.nationaljournal.com/congressdaily/cdp_20080616_8602.php>
    (accessed June 16, 2008).