Department of Health and Human Services 
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
 
M  EDICARE AND FEHB
 
 
PAYMENT RATES
 
 
FOR HO  ME OXYGEN EQUIPMENT
 
 
 
 
 
 
 
  
 
Inspector General 
 
March 2005 
OEI-09-03-00160 
(Revised)   
 
 
Office of Inspector General 
http://oig.hhs.gov
 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 
as amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs.  This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components. 
Office of Audit Services 
The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others.  
Audits examine the performance of HHS programs and/or its grantees and contractors 
in carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout the department. 
Office of Evaluation and Inspections 
The OIG's Office of Evaluation and Inspections (OEI) conducts management and 
program evaluations (called inspections) that focus on issues of concern to the 
department, the Congress, and the public.  The findings and recommendations contained 
in the inspections reports generate rapid, accurate, and up-to-date information on the 
efficiency, vulnerability, and effectiveness of departmental programs.  The OEI also 
oversees State Medicaid fraud control units, which investigate and prosecute fraud and 
patient abuse in the Medicaid program. 
Office of Investigations 
The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 
and of unjust enrichment by providers.  The investigative efforts of OI lead to criminal 
convictions, administrative sanctions, or civil monetary penalties. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support in OIG's internal operations.  The OCIG imposes program exclusions and 
civil monetary penalties on health care providers and litigates those actions within the 
department.  The OCIG also represents OIG in the global settlement of cases arising 
under the Civil False Claims Act, develops and monitors corporate integrity agreements, 
develops compliance program guidances, renders advisory opinions on OIG sanctions to 
the health care community, and issues fraud alerts and other industry guidance. 
   
   
 E X E C U T I V E   S U M M A R Y  
OBJECTIVE 
To compare Medicare fee schedule allowances and median Federal 
Employees Health Benefits (FEHB) plans payment rates for home 
oxygen equipment in 2002. 
BACKGROUND 
We released a report entitled Medicare Payment Rates for Home 
Oxygen Equipment (OEI-09-03-00160) in September 2004, which 
provided CMS with a comparison of Medicare payments with FEHB 
plan prices.  This report, which supersedes the September 2004 report, 
provides an updated comparison between Medicare fee schedule 
allowances and median FEHB payment rates for home oxygen 
equipment and contents.   
Medicare covers oxygen equipment and supplies under its durable 
medical equipment benefit (Part B).  Oxygen equipment includes oxygen 
concentrators (stationary equipment that concentrates the oxygen in 
room air), stationary liquid and gaseous oxygen systems, and portable 
liquid and gaseous systems.  These five items accounted for 99.9 percent 
of the $2.2 billion Medicare allowed for home oxygen equipment in 2002.   
To obtain and analyze FEHB payment rates, we requested information 
concerning home oxygen rates and utilization from the 198 plans that 
the Office of Personnel Management identified as providing FEHB 
coverage in 2002.  We received responses from 185 plans.  For our 
analysis, we grouped the plans by corporate ownership into  
91 consolidated plans.  Of the 91 plans, 56 plans provided sufficient 
information about at least 1 of the 5 home oxygen equipment items to be 
included in our analysis. 
FINDING 
FEHB plans median payment rates are lower than Medicare fee 
schedule allowances for home oxygen equipment and contents.  
FEHB plans median payment rates are 12.4 percent lower for 
stationary equipment and 10.8 percent lower for portable equipment.  
The greatest difference between the median FEHB payment rate and 
the median Medicare fee schedule allowance is for oxygen concentrators. 
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E X E C U T I V E   S U M M A R Y  
CONCLUSION 
Section 302(c)(2) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) requires reductions in payments for 
oxygen equipment in 2005 based on the Office of Inspector Generals 
(OIG) analysis of median FEHB prices.  Subsequent to the issuance of a 
report we released in September 2004, questions were raised about the 
inclusion of oxygen contents for stationary and portable equipment in 
our FEHB payment rates.  As a result, we conducted additional work to 
clarify the data in the September 2004 report.  This report provides an 
updated comparison between Medicare fee schedule allowances and 
median FEHB payment rates for home oxygen equipment.   
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 T A B L E   O F   C O N T E N T S  
EXECUTIVE SUMMARY ......................................... i 
 
INTRODUCTION ................................................ 1 
 
 
FINDING ......................................................... 8 
  FEHB rates compared to Medicare ............................ 8 
 
CONCLUSION .................................................. 10 
 
ACKNOWLEDGMENTS ......................................... 11 
   
 I N T R O D U C T I O N  
OBJECTIVE 
To compare Medicare fee schedule allowances and median Federal 
Employees Health Benefits (FEHB) plans payment rates for home 
oxygen equipment in 2002. 
BACKGROUND 
We released a report entitled Medicare Payment Rates for Home 
Oxygen Equipment (OEI-09-03-00160) in September 2004, which 
provided CMS with a comparison of Medicare payments with FEHB 
plan prices.  This report, which supersedes the September 2004 report, 
provides an updated comparison between Medicare fee schedule 
allowances and median FEHB payment rates for home oxygen 
equipment and contents.   
Medicare Coverage, Reimbursement Policy, and Payments 
Medicare Part B covers home oxygen equipment and supplies under its 
durable medical equipment (DME) benefit (Section 1832(a)(2)(G) of the 
Social Security Act).  DME is defined as equipment that can withstand 
repeated use, is primarily used to serve a medical purpose, and is 
appropriate for use in a patients home (42 CFR  414.202).  Oxygen 
therapy is covered for patients with significant hypoxemia, a shortage of 
oxygen in the blood, who meet specific medical criteria (CMS Coverage 
Issues Manual, DME:  Home Use of Oxygen, 60-4).   
Medicare covers three types of oxygen delivery systems, which are 
payable for rental only:  (1) oxygen concentrators, which are electrically 
powered, stationary machines that deliver high concentrations of 
oxygen by extracting it from room air; (2) stationary or portable liquid 
oxygen systems, which use oxygen stored as a very cold liquid in 
cylinders and tanks; and (3) stationary or portable gaseous oxygen 
systems, which administer compressed oxygen directly from cylinders 
(CMS Coverage Issues Manual, DME:  Home Use of Oxygen, 60-4). 
Medicare reimburses suppliers for oxygen equipment based on monthly 
fee schedule allowances that vary by State.  These monthly allowances 
cover the oxygen equipment, oxygen contents including all refills, 
equipment setup and maintenance, accessories, and patient education.   
Medicare includes the contents for both stationary and portable 
equipment in the fee schedule allowances for stationary equipment.  
Medicare fee schedules for home oxygen equipment are modality-
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I N T R O D U C T I O N  
neutral.  That is, in a given State, there is one rate for all stationary 
systems and one rate for all portable systems. 
As shown in Table 1 below, five home oxygen items accounted for  
99.9 percent of the $2.2 billion Medicare allowed for home oxygen 
equipment in 2002.  Oxygen concentrators represented the largest 
expenditure at $1.8 billion, or 83.2 percent of Medicare spending. 
 
  Table 1.  Five Oxygen Items/Codes as a Percentage of Total Medicare 
Part B Allowance for Oxygen Equipment and Supplies in Calendar 
 
  Year 2002 
 
  Allowed Amount  Percentage of 
Code  Description 
  in 2002  Oxygen Spending 
 
E1390  Oxygen concentrator  $1.8 billion  83.2% 
Portable gaseous oxygen 
E0431  $212 million  9.6% 
system 
Stationary liquid oxygen 
E0439  $128 million  5.8% 
system 
E0434  Portable liquid oxygen system  $26 million  1.2% 
E0424  Stationary gaseous system  $2 million  0.1% 
Total  $2.2 billion  99.9% 
  Source:  Medicare National Claims History 100 percent of DME claims, 2002 
Medicare Prescription Drug, Improvement, and Modernization Act (MMA) 
Section 302(c)(2) of MMA requires reductions in payments for oxygen 
equipment in 2005 based on the Office of Inspector Generals (OIG) 
analysis of median FEHB prices for this equipment.  The MMA also 
freezes payments for home oxygen equipment from 2005 through 2008 
and establishes competitive bidding programs for durable medical 
equipment beginning in 2007. 
Prior Inspector General Work 
Previous OIG studies have highlighted excessive Medicare spending for 
DME in general and oxygen equipment specifically.  In 2002, OIG 
compared Medicare payments for 16 DME items, excluding oxygen 
equipment, to reimbursement by other public and private payers.  OIG 
projected savings ranging from $84 million to $958 million for these  
16 items, depending on how much Medicare lowered reimbursement. 
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I N T R O D U C T I O N  
In 1991, OIG compared amounts allowed by Medicare for rental of 
oxygen concentrators to the amounts paid by the Department of 
Veterans Affairs.  OIG found that Medicare-allowed amounts were more 
than twice the amount that the Department of Veterans Affairs paid for 
concentrators. 
METHODOLOGY 
Subsequent to the issuance of the September report, questions were 
raised about the inclusion of oxygen contents for stationary and portable 
equipment in the FEHB rates.  To ascertain if plans had included 
contents in their rates, we conducted a followup survey with all of the 
plans that were included in our original analysis as well as some plans 
for which information had been unavailable or unusable for the 
September report.  The findings of this report reflect the results of that 
followup survey.  We relied on the home oxygen payment rates provided 
to us by the FEHB plans.   
To compare median FEHB rates to median Medicare fee schedule 
amounts for the September report, we (1) identified FEHB plans to use 
in our analysis and sent them a mail survey, (2) determined if we could 
use the information provided in each plans survey response for our 
median comparison, and (3) calculated the plan payment rates for each 
of the five home oxygen items (oxygen concentrators, stationary liquid 
systems, portable liquid systems, stationary gaseous systems, and 
portable gaseous systems).   
For the followup survey and analysis, we determined if each plans rate 
for stationary equipment included portable and stationary contents and 
adjusted the plan payment rates accordingly.  The following paragraphs 
describe the process we used for each step. 
Initial Identification and Survey of FEHB Plans 
The Office of Personnel Management (OPM), which oversees the FEHB 
program, provided us with a list of 198 health plans participating in the 
program in 2002.  We sent mail surveys to each of these 198 OPM-
identified health plans requesting the rates they paid for oxygen 
concentrators, stationary liquid systems, portable liquid systems, and 
portable gaseous systems.  Pursuant to a request from CMS, we 
subsequently collected information about stationary gaseous systems.   
On reviewing the responses, we discovered that a number of the plans 
listed separately by OPM were actually owned by common corporate 
entities.  While some of these corporate entities were able to provide 
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rate information for each of their components, others could provide 
information only for the corporate entity as a whole.  To maintain 
consistency in our analysis, we consolidated plans under their corporate 
ownership when they (1) did not have overlapping service areas and 
(2) either had the same company name and contact information or told 
us they were part of a larger corporation.  When we use the term plans 
in this report, we are referring to the consolidated plans described here, 
not the OPM-identified health plans. 
Determining Usability of Plan Responses 
In reviewing the original responses, we found that we had to exclude a 
number of plans from our analysis because they either could not provide 
rate information or we could not compare their rates with Medicare.  
Some, despite being listed by OPM, indicated they did not participate in 
FEHB in 2002.  Others participated, but did not offer a home oxygen 
benefit.  Several plans paid suppliers capitated rates that included 
home oxygen equipment and supplies.  Capitated rates cannot be 
compared to Medicares fee schedule because they are predetermined 
monthly amounts paid to suppliers for a range of equipment and 
supplies while Medicare pays suppliers on a per-claim basis.  A number 
of other plans had capped rental policies for their home oxygen benefit, 
which also are not comparable to Medicare.  Plans with capped rental 
policies cease monthly rental payments once the sum of these payments 
for a particular member reaches the purchase price of the item.  
Medicare, on the other hand, continues to make monthly rental 
payments as long as the item is medically necessary. 
Apart from the categorical exclusions described above, a number of 
other plans provided rate information that seemed comparable to 
Medicare, but that we could not use for a variety of reasons.  For 
example, some of these plans provided a range of rates they might pay, 
while others gave approximate or model rates.  We were able to 
include some of these in the followup survey by obtaining claims 
information that allowed us to calculate an average monthly payment 
for at least one item.  We did not ask for this information in the original 
survey.  In total, we received usable information for at least 1 home 
oxygen item from 13 plans that we had not included in the original 
analysis. 
A few plans in the original analysis provided additional information as 
part of the followup that invalidated the rates previously provided.  For 
example, two plans used in the original analysis told us during the 
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I N T R O D U C T I O N  
followup that they were not, in fact, providing benefits to FEHB 
members in 2002.  The rates they had originally provided came from 
another line of commercial business in one case, and from a Medicaid 
product in the other.  In total, eight plans included in the original study 
were excluded in the final analysis because of information they provided 
in the followup.  The following table compares the results of our 
consolidations and exclusions for the September report and this report. 
    Table 2.  Plans Used in Our Original and Followup Analyses 
Category  Original Analysis  Followup Analysis 
OPM-identified Plans Responding to Survey  184  185 
Consolidated Plans Responding to Survey  90  91 
   Capitated Payments  2  5 
   No Oxygen Benefit  1  1 
   Not 2002 FEHB Plan  1  3 
   Capped Rental  14  15 
   Other Unusable  21  11 
Plans Used for Analysis (for at least 1 item)  51  56 
  Source:  Office of Inspector General analysis of collected information, 2004 and 2005 
Calculation of Plan Payment Rates  
Having established which rates from which plans were usable, we then 
calculated the plan payment rate to use in our analysis for each plan 
and oxygen item.  If a plan provided a single rate for an item, we used 
that rate as the plan payment rate for that item.  If a plan provided two 
or more rates (for example, a different rate in each of three coverage 
areas), we used the median of distinct rates as the plan payment rate.  
As mentioned above, some plans could not provide distinct rates for 
some items, but could provide claims information.  In such cases, we 
used the data provided to calculate the average monthly rental 
allowance for that plan and item, which we used as the plan payment 
rate.  Specifically, we requested that such plans provide us the total 
number of rental months for the item in 2002 and the associated 
allowed amount.  We then divided the total allowed amount by the total 
rental months to arrive at the average monthly rental allowance. 
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Many plans had usable plan payment rates for some, but not all, of the 
oxygen items in the study.  Therefore, the number of plan payment 
rates we used to calculate the median FEHB rate for any particular 
item is always smaller than the total number of plans used in our 
analysis. 
Establishing if Contents Are Included and Adjusting Rates 
As part of the followup survey, we asked plans if they included oxygen 
contents in their payment rates for each of the five items.  For 
stationary equipment, we asked if the rates included contents for both 
the stationary system itself and any portable systems that were rented 
simultaneously.  If a plan indicated that the rates they provided did not 
include contents, we then asked for claims information for their 
stationary oxygen equipment and portable and stationary contents.   
For plans that paid separately for contents, we used the data that they 
provided to determine the average (mean) amount allowed for contents 
associated with each stationary item.  We divided the total contents 
allowance by the number of rental months for each stationary item.  We 
added this figure to the previously calculated rate to arrive at the total 
amount allowed for stationary systems plus the contents of the 
stationary system and any portable systems used concurrently.  If a 
plan did not pay separately for contents for a particular item (i.e., they 
used Medicares reimbursement methodology), we did not calculate a 
contents add-on for that plan and item. 
Some plans indicated that they paid separately for oxygen contents, but 
we were unable to obtain usable claims information from them.  In 
these cases, rather than exclude them from our analysis, we estimated a 
contents allowance for each item through a process known as 
imputation.  Imputation is a statistical method for reducing the effect of 
survey nonresponse by assigning estimated values to missing data 
points.  In general, these estimated values are based upon data from 
respondents with similar characteristics to the nonrespondents.  We 
used the median contents allowance for all plans that paid separately 
for contents for a particular item to fill in the missing values for those 
plans that paid separately for contents (for that particular item) but 
could not provide claims information.  We used at least one imputed 
value for 14 of the 32 plans that paid separately for contents for at least 
one stationary oxygen item, most commonly for the contents associated 
with stationary gaseous systems. 
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I N T R O D U C T I O N  
Median Calculation 
Once we established payment rates for the plans included in our 
analysis, we calculated the median FEHB payment rate for each oxygen 
item.  We then consolidated these into a single payment rate for 
stationary equipment and a single payment rate for portable equipment.  
This enabled us to compare the FEHB payment rates with Medicares 
modality-neutral fee schedule allowances.  To make the comparison, we 
calculated, for each modality, the weighted mean of the median FEHB 
payment rates, where the weights were the total Medicare 2002 
allowance per item.  We compared this with the median Medicare fee 
schedule allowance1 for each modality to determine the percentage 
difference between Medicare and FEHB payments for home oxygen 
equipment.  
This inspection was conducted in accordance with the Quality 
Standards for Inspections issued by the Presidents Council on Integrity 
and Efficiency. 
 
1 To calculate the 2002 median Medicare fee schedule allowance for each modality, we 
computed the median allowance for all 53 geographic locations (50 States, the District of 
Columbia, Puerto Rico, and the Virgin Islands). 
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 F I N D I N G  
FEHB plans median payment rates are lower than  Because Medicare 
Medicare fee schedule allowances for home oxygen  reimbursement for oxygen 
systems is modality neutral 
equipment and contents  
(i.e., one allowance for 
stationary systems and one allowance for portable systems), we 
calculated the difference between FEHB and Medicare payment rates 
for all stationary systems combined and, separately, the difference 
between FEHB and Medicare payment rates for the two portable 
systems combined.  Based on the weighted mean of median FEHB 
payment rates, we determined that Medicare allowances are  
12.4 percent higher for stationary systems and 10.8 percent higher for 
portable systems.  (See Table 3.)  The greatest individual difference 
between the median FEHB payment rate and the median Medicare fee 
schedule allowance is for oxygen concentrators.2    
Table 3.  Comparison of Median Medicare Allowances and Median FEHB Oxygen Payment Rates for  
                Five Oxygen Codes in 2002 
Percentage  Percentage 
 
Difference  Weighted  Difference 
Oxygen Code  Median   Median  
Between Median  Mean of  Between 
(N = Number of plans that  Medicare Fee  FEHB Oxygen 
Medicare and  Median FEHB  Medicare and 
responded)  Schedule  Price* 
Median FEHB  Prices   FEHB Weighted 
Allowance 
Price  Mean  
Stationary  Home  Oxygen  Equipment 
E1390 (N = 51) 
$230.17  $201.09  12.6% 
Oxygen concentrator 
E0439 (N = 46) 
$230.17  $208.92  9.2%  $201.60  12.4% 
Stationary liquid system 
E0424 (N = 38) 
$230.17  $203.14  11.7% 
Stationary gaseous system  
Portable  Home  Oxygen  Equipment 
E0434 (N = 52) 
$36.19  $32.70  9.6% 
Portable liquid system 
$32.27  10.8% 
E0431 (N = 52) 
$36.19  $32.22  11.0% 
Portable gaseous system  
Source:  Office of Inspector General analysis of 2002 median Medicare allowances and median FEHB oxygen payment rates 
* Throughout the report we use the terms price and payment rate interchangeably. 
 
2 The mean is weighted based on total 2002 Medicare Part B allowances for each code. 
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F I N D I N G  
Table 3 (on the previous page) provides the data that CMS needs to 
meet the mandate of the MMA to reduce Medicare fee schedule 
allowances in 2005 based on median FEHB prices.  The third column 
shows the median prices for the Healthcare Common Procedure Coding 
System (HCPCS) codes in accordance with the MMA.  The fifth and 
sixth columns show similar information on a modality neutral basis. 
 
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 C O N C L U S I O N  
 
Section 302(c)(2) of the MMA requires reductions in payments for 
oxygen equipment in 2005 based on the OIGs analysis of median FEHB 
prices.  Subsequent to the issuance of a report we released in September 
2004, questions were raised about the inclusion of oxygen contents for 
stationary and portable equipment in our FEHB payment rates.  
Accordingly, we conducted additional work to clarify the data in the 
September 2004 report.  This report provides an updated comparison 
between Medicare fee schedule allowances and median FEHB payment 
rates for home oxygen equipment.   
 
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  A C K N O W L E D G M E N T S  
This report was prepared under the direction of Paul Gottlober, 
Regional Inspector General for Evaluation and Inspections in the San 
Francisco Regional Office, and Deborah Harvey, Assistant Regional 
Inspector General.  Other principal Office of Evaluation and Inspections 
staff who contributed includes: 
Cindy Lemesh, Project Leader 
Camille Harper, Project Leader 
Robert Gibbons, Technical Project Leader  
China Eng, Program Analyst 
Scott Hutchison, Program Analyst  
Cheryl Dotts, Program Assistant 
Doris Jackson, Program Specialist 
Tricia Davis, Director, Medicare and Medicaid Branch  
 
Technical Assistance  
Barbara Tedesco, Statistician  
  OEI-09-03-00160  MEDICARE AND FEHB PAYMENT RATES FOR HOME OXYGEN EQUIPMENT    11