MEDICARE INTERMEDIARY

REIMBURSEMENT TO HOME

HEALTH AGENCIES FOR DURABLE

MEDICAL EQUIPMENT

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OFFICE OF ANALYSIS AND INSPECTIONS 
AUGUST 1988  '.~,,
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MEDICARE INTERMEDIARY

REIMBURSEMENT TO HOME

HEALTH AGENCIES FOR DURABLE

MEDICAL EQUIPMENT

Richard P. Kusserow 
INSPECTOR GENERAL 
OAI-02-87 -00016  AUGUST 1988  EXECUTIVE SUMMARY 
PURPOSE 
This inspection was undertaken to assess Medicare payment vulnerabilities associated with 
home health agency (H) bilings to Medicare intermediares for durable medical equipment 
liability for coinsurance of beneficiares receiving
(DME). It also examned the financial 

equipment when it is furnished as par of Medicare's home health benefit. 
--
BACKGROUND 
Reimbursement for durable medical equipment provided to Medicare beneficiares receiving 
home health services can be made either under the Par A Hospital Insurance home health 
benefit provision or the Par B Supplementar Medical Insurance DME benefit. Medicare 
rules allow HHs to choose whether or not to furnish equipment to their patients. Those that 
do can furnish DME to their patients either "directly" (H owns equipment) or "under aran
gement" with DME suppliers. The HHs then bil Medicare for this equipment to 1 of 10 
regional intermediares designated by the Health Care Financing Administration (HCFA) to 
process home health agency bils. When DME suppliers provide equipment directly to 
beneficiares, the clai is sent to the Par B carer in their ara. 
Presently, there are about 6,000 Medicare-certified HHAs. According to home health industr 
publications, an increasing number of HHs are furnishing equipment to an expanding home 
health patient population. In 1984, based on the most recent data available (from 3,100 
HHs), Medicare intermediar reimbursement to HHs for DME was $41 milion. Medicare 
Par B reimbursement in 1985 to DME suppliers was about $880 milion. Most of the Par B 
supplier reimbursement was for beneficiares who did not require home health services. 
In recent years, the General Accounting Office (GAO), the Offce of Inspector General (OIG), 
and HCFA have all identified several problems associated with HCFA's coverage and payment 
policies for DME under the Medicare Par B benefit. To address these concerns, HCFA in
strcted its Par B carers, but not its intermediares who process HHA claims, to implement 
three significant progr safeguards to prevent excessive or unnecessar payments. The first 
requires carers to determine, based on the prescribing physician's estimate of the duration of 
medical need, whether it would be less costly to purchase equipment rather than make exten
sive monthly rental payments. 
The second safeguard addrsses Medicare coverage of home oxygen equipment. Pror to 
1985, home oxygen was presumed by Par B carers to be medically necessar as long as it 
was prescribed by a physician. Now, initial home oxygen claims must be accompanied by a 
statement from the prescribing physician that other forms of treatment have been tred, have 
not been successful, and that oxygen therapy is required. Importantly, the initial claim must in
clude the results of a laboratory test evaluated by the prescribing physician and supporting the 
1  need for the equipment. In addition, HCFA has recently issued instrctions to carers on the

pricing of high-cost oxygen concentrators. A recent OIG inspection report on home oxygen 
cites escalating costs for concentrators and makes recommendations to resolve pricing issues. 
The third payment safeguard addresses cases where the quality of items of equipment does not 
var significantly from one supplier to another. Carer payment for these items may not ex

ceed the lowest charge level (LCL) at which the items are widely and consistently available. 
The LCL limits have applied to standard hospital beds and standard wheelchais for several 
years. Effective May 1987, Par B carer payment for an additional 80 DME items became 
subject to LCL limits. 
METHODOLOGY 
This study included interviews of officials from 5 of the 10 home health regional inter
mediares, analysis of financial and medical records obtained from 9 HHAs served by those 5 
intermediares, and a review of the Par B payment histories of a sample of beneficiares 
served by those HHs. Intermediares' bil review procedures and payment processes were

compared to those of Par B carers, for a sample of DME items. This sample, however, was 
not selected randomly and therefore its results are not generalizable. The purose was to deter
mine and evaluate diferences between carers and intermediares. Beneficiar coinsurace

liability for DME bils processed by intermediares was calculated and compared to ~hat their 
liability would have been if carers had instead processed those bils. 
FINDINGS 
Our review of billng documents for 133 items of equipment feund that both the Medicar 
program and itS beneficiares paid more for DME when bils are paid by fiscal intermediares 
as a home health benefit tllan they would have if the bils were processed by carers as a Par 
B benefit. This is due to differences in bil review and payment processes and inconsistencies 
between Medicare's home health benefit policies and its Par B policies. 
Intermediaries' Bil Review and Claims Payment Processes Are Ineffective in Con
Regional 
trollng Program Costs  for DME. 
.	 HHs do not provide specific medical information to intermediares to permit them to 
apply HCFA's DME coverage guidelines for special feature equipment such as electrc 
hospital beds. Bils for home oxygen do not contain results of laboratory tests, 
prescription information or the attending physician's statement regarding other forms of 
treament attempted.

11  .	 Fifteen percent of DME items reimbursed by intermediares did not have required 
documentation that the DME was prescribed by a physician as necessar in the medical 
the patient's condition. 
management of 

.	 Six of nine HHs did not describe on their bils the specific DME items provided;

instead, charges for several items were aggregated. The intermediares paid for these

limits for standard hospital beds and 
items without applying lowest charge level 

wheelchais, or HCFA coverage and pricing instrctions for oxygen equipment. 
Program Payment Safeguards to Avoid Excessive Costs are Compromised by HHA and Sup
plier Billng Arrangements and Inconsistencies in Program Payment Policy. 
.	 Intermediar reimbursement to the nine HHs may be as much as 88 percent greater 
than the amount Par B carers would have paid suppliers for the identical equipment. 
In the cases reviewed, total intermediar payments for 1 month's rent for 100 items 
were $15,400; had these claims been paid by carers instead, the program costs would 
have been only $8,200. 
.	 When patients stil require DME after discharge from home health services, DME 
suppliers can gain windfall profits by receiving rental payments initially from 
intermediares through HHAs, and then later from Par B carers for the same 
equipment as if it were being newly rented. In our sample, 26 of 100 DME items 
previously reimbursed by intermediares were still required by HH-discharged 
patients; suppliers stared biling Par B carers for these items. Twelve of the 26 DME 
items were needed long enough to reach the purchase price limitations ($7,062) imposed 
by carers under the DME rent/purchase guidelines after intermediares had aleady 
paid $6,600 for the 26 items (or 93 percent of purchase costs). Thus, Medicare 
payments were almost twice the amount the rent/purchase provisions of the law 
intended to pay. 
Beneficiary Liability to HHAsfor Coinsurance was Substantially More than it Would Be If 
DME Bils Had Instead Been Processed by Carrers Under Reasonable Charge Limits. 
.	 In one sample month, beneficiares were liable for $4,400 in coinsurance to HHs for 
DME. Coinsurance liability based upon carer limits would have been only $2,00. 
Medicare beneficiar liabilty fm coinsurance continues indefinitely when DME is 
provided as a home health benefit, whereas under Par B liability it is constrained by 
rent/purchase payment limits. 
.	 HH-discharged patients ar placed in continued financial jeopardy when they stil 
need DME and suppliers star billing carers for needed equipment. Twelve DME 
items in the sample were biled by suppliers after the home health benefit ended. Under 
11  Par B rules, bils for these 12 items reached carer purchase price limitations; 
beneficiar liability amounted to $1,800 to suppliers. Pror to this, beneficiares were 
liable to HHs for $2,400 for a total of $4,200. Had these items been biled to carrers 
at the sta, coinsurance liabilty would be only $1,800. 
RECOMMENDATIONS 
Short Range: The HCFA should recognize that DME "furnished under arangement" is mere
ly a biling mechanism and should take administrative action to have these claims biled to car
riers and made subject to uniform Par B coverage and payment policies. 
Long Range: The HCFA should seek legislation to eliminate DME as a home health benefit. 
Instead, al DME clais would be processed by carers under Par B. 
AGENCY COMMENTS 
The HCFA agrees with the need to tae action to eliminate the problems arsing from the di
ferences in payment methodology between intermediares and carers and the need to estab
lish uniformty in applying Medicare coverage and reimbursement guidelines. They are 
examning the best methodology to accomplish this goal. (See appendix 1.) 
iv  TABLE OF CONTENTS

PAGE

EXECUTIVE SUMMARY

INTRODUCTION

Background......... .'............................................................................................ 
1

Purpose............................................................................................................ .  2

Methodology..................... ........................... ..... ........ ............. .......... ................. 3

STUDY FINDINGS

Bil Review And Payment Processes Are

Ineffective In Controlling Costs.............................................................................  4

Program Payment Safeguards Compromised

By Billing Arrangements ........ ......... .............. .......... .............................................  6

Substantially Greater Beneficiar

Coinsurance Liability... .............. ....... ............... ....................... ....... ......................  7

Intermediares Give DME Low Prority. ...... .......................... .................... ............  8

RECOMMENDATIONS .... ............. .............................................. ......... ............ ......... 9

APPENDIX. ............ .............. ..... ..... ....... ... .............. ................ ....... ...... .... ................ ..10
 INTRODUCTION 
BACKGROUND 
Durable medical equipment (DME) is generaly defined as equipment which can withstand 
customarly used to serve a medical purpose, generally is not 
repeated use, is primarly and 

useful to a person in the absence of ilness or injury, and is appropriate for use in the home. 
This deffnition includes (but is not limited to) such equipment as hospital beds, wheelchairs, 
walers, and oxygen therapy equipment.

Insurance Program Part B DME Benefit - Most equipment for home use is obtained 
Medical 
from independent equipment suppliers. When these independent suppliers place the equip
ment in a beneficiar's home, claims are submitted to Medicare Par B carers, who pay 80 
percent of the reasonable charge; patients are responsible to the DME supplier for any unmet 
Par B deductible and the 20 percent coinsurance. Par B reimbursement to suppliers for DME 
was approximately $880 millon in 1985. The patients served by these independent suppliers 
mayor may not be home health agency (HHA) patients; most actually are not. 
Insurance Program Home Health DME Benefit - HHs electing to provide DME 
Hospital 
to their patients have the option to provide equipment either "directly" or "under arangement" 
with suppliers. In this context, "diectly" means that the HH actually owns the equipment 
and rents it to its patients. "Under arangement" is a term for those situations where the HHA 
pays a DME supplier to provide equipment to its patients. Regardless of how the HHA fur
nishes DME, diectly or under arangement, it receives reimbursement from its intermediar. 
Medicare Expenditures - The most current HCFA data for approximately 3,100 HHs, with 
fiscal years ending on or before December 1984, show $41.2 milion in DME costs. This rep
resents a 123 percent increase since mid-1982, when a GAO study of 2,385 HHAs' cost 
reports showed $18 millon. Current expenditures for DME biled by HHs are likely to be 
much higher since there are presently some 6,000 Medicare-certified home health agencies. 
Home health industr publications indicate that increasing numbers of HHAs are furnishing 
DME to a rapidly growing home health population. 
Part B Carrr Safeguards for DME Reimbursement - During 1985, HCFA implemented two

significant program payment safeguards to prevent excessive payment for DME. One pertains 
to savings to be derived from purchase rather than rental of equipment (Medicare Carriers 
Manual part 3, sect. 5101.2); the other establishes criteria for determning coverage of home 
60-4). Home oxygen equipment is ex
oxygen therapy (Medicare Coverage Issues Manual 
empt from rent/purchase rules. These payment safeguards apply to equipment under the Part 
B DME benefit; they do not apply to equipment covered under the home health benefit. Early 
in 1985, the Health Care Financing Administration (HCFA) instrcted carers to implement 
statutory provisions requirng payment of DME based upon a determination as to whether pur
chase of the equipment would be less costly than monthly rentals. The carer makes this 
1  determnation based upon physicians' estimates of the expected duration of the medical need 
for the DME. 
The second significant safeguard implemented by HCFA deals with home oxygen equipment 
and related consumable supplies of gaseous and liquid oxygen. According to HCFA data, in 
1985 oxygen costs represented 66 percent ($530 millon) of total DME payments. Under pre
1985 Medicare policy, oxygen therapy equipment in the patient's home was covered when it 
was prescribed by the patient's physician. With the 1985 policy change, a physician's 
prescription is no longer suffcient by itself to obtain coverage. Now, initial claims for oxygen 
services must also include a wrtten statement from a physician indicating that other forms of 
treatment have been tred, have not been suffciently successful, and oxygen therapy is re
quird. The initial claim must also be supported by a statement of the physician who recently 
examned the patient specifying: the diagnosis of the disease requirng home use of oxygen, 
oxygen flow rate, an estimate of the frequency and duration of use, and duration of need. Im
porttly, initial claims must include the results of a laboratory study ordered and evaluated by

the prescribing physician which supports the need for the equipment. 
The HCFA has also provided instrctions to Par B carers designed to avoid excessive pay
ment for oxygen equipment and supplies. Notable among these instrctions is the requirement 
to base reimbursement for costly oxygen concentrators on factors associated with oxygen 
usage; nine incremental usage levels of reimbursement have been established within the 
HCFA Common Procedures Codng System (HCPCS). The HCFA has also issued guidelines 
to Par B carers regarding the pricing of oxygen concentrators using the criteria of inherent 
reasonableness. A recent OIG report concluded that nationwide implementation of tliese pric
ing guidelines could result in savings of over $100 milion annually. The HCFA has also in
strcted carers to determine reimbursement for an oxygen system (concentrator, liquid or 
gaseous) so that payment does not result in greater reimbursement than an alternative system 
unless the medical needs of the patient require the more expensive system. 
A third payment safeguard which Par B carers apply to certin items of equipment is known 
as the "lowest charge level (LCL)." Under this reimbursement principle (section 1842(b )(3) 
of the Social Security Act), Medicare can limit the amount of payment for DME items which 
do not generally var significantly in quality from one supplier to another and can be readily 
obtained in a locality. In mid-1987, HCFA extended LCL payment limits to 80 newly desig
nated items; previously, only stadard hospital beds and standard wheelchais were subjected 
to these payment limts. However, intermediar reimbursement to HHs for DME continues 
to be made without application of LCL limits. 
PURPOSE 
This inspection was undertaken to assess Medicare payment vulnerabilities associated with 
HHs biling for DME to Medicare intermediares. More specifically, the inspection was 
designed to identify program weaknesses which result in inappropriate and excessive pay
ments for DME due to bifurcated coverage and payment policies under the home health 
benefit as handled by intennediares and under the Par B admistration of carers. Addition

2
 liabilties incured by beneficiares due to identified 
ally, the inspection examned the financial 

incongrities in coverage and payment policies. 
METHODOLOGY 
Ten regional intermediares have been designated by HCFA to process claims for approximate
ly 90 percent of HHs. (A recently published proposed rule wil assign the remaining 10 per
cent, which are mostly hospital-based HHs, to these regional intermediares within 9 months 
after the effective date of the final rule.) Based upon HCFA's most recent cost report data, it is 
estimated that 7 of the 10 intermediares wil make reimbursement for 96 percent of home 
health DME expenditures. Five of these seven intermediares (Blue Cross plans in Calfornia, 
New Mexico and Philadelphia and commercial plans in Florida and New Jersey) were selected 
for study.

Interviews were conducted with intermediar staff concerning interpretation of HCFA instrc
tions and intermediar application of instrctions in functional areas of prepayment review, 
reimbursement, post payment review and cost report settlement. 
Nine HHs in the service areas of the above five regional intermediares were selected to 
provide information on agency business practices in furnishing DME. Written contracts be
tween HHs and DME suppliers, price lists, and 1986 cost report worksheets were examed. 
These HHs also provided biling, reimbursement, and beneficiar coinsurance records on a 
sample of cases. The sample cases consisted of four equipment items commonly ordered for 
home health patients (hospital beds, wheelchais, walers, and oxygen equipment). 
Carers in the same nine States as the HHs provided prevailing charge data and beneficiar 
payment histories on the sample cases obtained from the HHs. The amount carers would 
have paid for sample items was determned and compared with intermediar rental payments. 
Beneficiar payment histories were reviewed to determine whether carers and intermediares 
were both paying for the same equipment at the same time. Payment histories were also util
ized to project the extent of excessive program payments and beneficiar coinsurance liability 
that can occur when the beneficiar is discharged from home health care but continues to re
quir the use of DME originally provided by the HHA. 
3
 FINDINGS

Intermediaries' Bill Review and Claims Payment Processes Are Ineffective in Con
Regional 
trolling Costs for DME. 
The Medicare Coverage Issues Manual provides both carers and intermediares with the

coverage status of a number of procedures and services. Analysis of several sections indicates 
that coverage determinations for items such as home oxygen and hospital beds apply only to 
items furnished under the Par B DME; intermediares processing bils for identical items fur
nished under the home health benefit, however, are not instrcted to apply these same 
coverage guidelines. 
For example, section 60-4 states: 
Medicare coverage of home oxygen and equipment 
under the durable medical equipment benefit 
(sectionl 861(s)(6)) ... wil be considered reasonable and necessary... 
... carriers are required to conduct periodic medical necessity reviews... 
... carriers ma also request documentation of repeat 
arterial blood gas or oximetry study... 
With regard to hospital beds, the manual states: 
A physician's prescription, and such additional 
documentation as the Part B contractors' medical 
staffs may consider necessary... 
... In well-documented cases, the Part B contractors' 
medical staffs may determine that a variable height 
feature of a hospital bed... is medically necessary... 
... Electric-powered adjustments to lower and raise head 
foot may be covered when Part B contractors' medical 
and 
stafs determine...

When DME suppliers bil Par B carers, they must submit a physician's prescription with the 
initial claim, which usually contains a HCPCS code specifically established to describe the 
item. Most carers require detailed information from the prescribing physician in order to 
make proper coverage decisions. For example, coverage of home oxygen is considered 
reasonable and necessar only for patients who meet medical documentation requirments (in
cluding laboratory evidence demonstrating oxygen insuffciency) and are diagnosed as having 
one of severa specified respiratory impairents. The attendig physician must indicate that 
4
 other fonns of treatment have been tred and there is no substitute for oxygen therapy. For a 
hospital bed, the physician's prescription must establish medical necessity; for special fea
tures, the physician must describe the patient's medical condition which requires a varable 
height feature or electrc-powered adjustment. 
In contrast, when HHs bil intermediares they submit a standardized form-- Home Health 
Certification and Plan of Treatment (HCFA-485)-- signed by the attending physician which 
contains a data element for "Medical supplies and DME ordered." It is common for HHs to 
simply use abbreviations or generic names to describe equipment ("HB" for hospital bed, "Oi' 
for oxygen, "WC" for wheelchai). In comparson to the detaled prescription information re
quired for carer coverage determinations under Par B, intermediares require only the

physician's signature on the HCFA-485 form. 
The intermediares' staffs do not apply HCFA's coverage criteria to HH bils for DME. As 
noted above, HCFA has not specifically instrcted them to apply DME coverage criteria to 
HH bils; in practice, the intermediares' nurse reviewers do not receive the necessar medi
cal information from HHs to determine coverage. Indicative of the lack of attention paid to 
DME is the fact that 20 of the 133 items reviewed and paid by intermediares (15 percent) 
were not documented as being ordered by the authorizing physician. Moreover, 20 bils in the 
sample cases were for oxygen therapy; none of the "prescriptions" contained information 
necessar to make a coverage determination. In seven cases, it was specifcally noted that 
beneficiar oxygen usage was "whenever needed" (PRN); application of Par B coverage 
criteria would have resulted in denial of these claims. 
To help to contain and control costs of DME under Par B, HCFA has had legislative authority 
to set reimbursement at the lowest charge level (LCL) for items which, in its judgment, do not 
var significantly in quality from one supplier to another and are widely available in a locality. 
For several years, only standard wheelchairs and standard hospital beds were subject to Par B 
lowest charge level reimbursement. In May 1987, an additional 80 items became subject to 
LCL limits. Reimbursement under Par B is also affected by rent/purchase payment 
guidelines designed to avoid excessive monthly rental costs associated with 
long-term rentals. 
A 1985 GAO report indicated that payment to purchase low cost ($120 or less) items such as 
walkers would save 54 percent of the costs associated with Par B monthly rentals. For items 
over $120, such as hospita beds and wheelchais, savings would amount to 34 percent. 
Biling forms submitted by HHs for individual items of equipment frequently provide as lit
tle information for payment as they do for coverage decisions. Examination of bils submitted 
by HH's showed that six of nine HHs (1) do not identify the type of equipment being 
biled; (2) aggregate tota charges for several items; and (3) describe the charge as "DME Rent
al." Hence, intermediares are paying for unspecified equipment without regard to prices. In
termediares processed claims for oxygen concentrators with customar monthly charges 
rangig from $620 to $926, an amount two to three times Par B carer reasonable charge al
lowances. 
5  Program Payment Safeguards to Avoid Excessive Costs are Compromised by HHA and 
Supplier Billing Arrangements and Inconsistencies in Program Payment Policies. 
Although most HHs do not provide or arange for DME under the home health benefit, an in
creasing number are electing to do so. Those that do usually have business aIangements with 
suppliers who place the equipment in patients' homes. Regardless whether the HH furnishes 
the DME itself or the equipment is furnished "under arangement," the HHA, not the supplier, 
submits bils to the intermediar. 
In order to paricipate in the Medicare program, an HH must meet a number of specific re- 
quirements and sign an agreement. Pror to July 1981, the Medicare Conditions ofParicipa
tion for HHs stipulated that only public and nonprofit home health agencies could arange 
for outside services with others; proprieta agencies had to provide all services directly. 
HCFA instrctions relating to furnishing services under arangement are in section 200.2 of 
the HH Manual. It appears that this provision is meant to assign responsibilty to the HH to 
assure the quality of patient care; its application to allow HHs to bil for DME, which is ac
tually furnished by suppliers, may not be appropriate. 
Of parcular note, this manual section states: 
In permtting home health agencies to furnish services under arangements it was not in
tended that the agency merely serve as a biling mechanismfor the other party. Accord
ingly, for services provided under arangements to be covered, the agency must exercise 
professional responsibilty over the aranged-for services. (Emphasis added.) 
The agency's professional supervision over aranged-for services requires application of 
many of the same quality controls as are applied to services furnished by salared 
employees. The agency must accept the patient for treatment in accordance with its ad
mission policies, maintain a complete and timely clinical record on the patient which in
cludes diagnosis, medical history, physician's orders, and progress notes relating to all 
services received; maitain liaison with the attending physician with regard to the 
progress of the patient and assure that the required plan of treatment is periodically 
reviewed by him; secure from the physician the required certifications and recertfica
tions; and see to it that the medical necessity of such services is reviewed on a sample 
basis by the agency's staf or an outside review group. 
In addition to the above provisions, if an HH's arangement is with an organization which is 
not a qualifed provider (as is the case with DME suppliers), then there must be a wrtten con
tract between the two paries. The contract must include, among other items: a description of 
how personnel wil be supervised by the HH; the contracting organization's standards for 
personnel (including qualifications, functions, supervision, and in-service training); and a 
method of determning reasonable costs for services provided by the contracting organization. 
Again, except for "reasonable costs," these contract-conditions do not appear as though they 
were meant to apply to equipment suppliers. 
6  Seven of the nine HHs reviewed in this inspection furish DME "under arangement"; the 
remaining two provide equipment diectly. Only three of the seven agencies had wrtten con
tracts with their suppliers. Review of these contracts provided little explanaHtiConF Aof's h coown ttrhaect 
HH-DME supplier business arangement met the conditions and intent of 

requirements. Indeed, while in these arangements, DME suppliers do not appear to provide 
any more or less service to beneficiares receiving DME under the home health benefit than to 
beneficiares with whom the DME suppliers deal with directly. These business arangements 
appear to serve merely as a biling mechanism for the DME suppliers involved to receive reim
bursement through home health agencies. 
When DME suppliers bil Par B carers for covered equipment, the monthly rental payment

is subject to an alowed charge computation; the payment is final assumig proper claim ad

judication. When HHs bil Par A intermediares, their reimbursement is based upon the

lesser of costs or charges for equipment. In addition to the amount charged by the supplier, al

lowable costs include allocation of agency overhead expenses.

The OIG constrcted the intermediar reimbursement for monthly rental of 100 items of

equipment in our sample. We applied the most recently reported ratio of DME costs to char

ges against biled charges for these 100 items in the sample month. Our calculations indicate

that intermediar reimbursement would have been $15,400. We then compard the amount

carers would have paid for these 100 items had the claims been submitted to them for pay
ment and deemed to have been covered. Carer monthly rental payments would have been

$8,000. Hence, intermediar reimbursement to the nine HHs was 88 percent greater tnan

the amount which carers would have made to suppliers.

When beneficiares no longer require home health services but still need equipment, the HH 
can continue to bil the intermediar as a Par B DME benefit. None of the seven HHs fur
nishing DME under arangement chose this option. Rather, the suppliers formerly paid by 
HHs under arangement stared biling the carer for the equipment. In our study, of 100 
items previously reimbursed by intermediares, 26 items were stil required by beneficiares.

after discharge from home health care. In applying HCFA's rent/purchase payment guidelines, 
carer purchase payment limits were reached on 12 of these 26 items, which DME suppliers 
continued to provide to the discharged patients. Carer payment limits amounted to $7,100 
for the full purchase price. Pror to this, intermediar Par A payments amounted to $6,600 (or 
purchase costs). Thus, in permtting DME to be biled "under arangement,"
93 percent of 

HCFA's payment safeguards are easily circumvented. 
Beneficiary Liability to HHAsfor Coinsurance Is Substantially More Than It Would Be If 
Bils Had Been Processed by Carrers Under Reasonable Charge Limits. 
Pror to July 1984, DME provided under the home health benefit was not subject to the 20 per
cent coinsurance which has always applied to equipment covered by the Par B benefit. The 
dollar amount which home health patients are responsible for is based on the HHs' sub
7
 mitted charges for the equipment. When suppliers bil carers, beneficiares' coinsurance 
liability is limited to 20 percent of the allowed charge, as determined by carers. 
The HHs in our sample submitted charges for $21,700 for 100 items of equipment in the 
sample month. Beneficiar coinsurance liability amounted to $4,340. Had the DME been 
biled instead to carers, allowed charges would have been $10,230; beneficiar liability 
would have been $2,046 (or 112 percent less). Many carers establish monthly rental  limits at 
approximately 10 percent of the purchase price. Under HCFA's Par B rent/purchase instrc
tions, many equipment items reach payment limits within 1 year. At that point, beneficiares 
are no longer liable for coinsurance. 
The Par B rent/purchase instrctions have not been applied to DME furnished under a home 
health plan of care. Beneficiares remain responsible for coinsurance for as long as the equip
ment is needed. An OIG analysis of home health billngs showed that 10 percent of 
beneficiares are under a plan of car for more than 1 year.

The inconsistencies in program policies between the home health DME benefit and Par B 
DME benefit place beneficiares in double jeopardy for coinsurance when HHs cease biling 
for DME and suppliers commence biling. Twelve DME items biled by suppliers after HHs 
discontinued billng reached carer purchase price limitations; beneficiar liability amounted 
to $1,300 to HHs and $2,400 to suppliers. The latter amount would have been the liabilty 
had the business transaction initially taken place between beneficiares and suppliers. 
Intermediaries Give Review of HHA Reimbursement for DME a Low Priority. 
Regional 
The HHs receive interim payments for DME from the intermediares thoughout the year, 
with final settlement made at the end of the agency's accounting year. Agencies must main
tain adequate cost data capable of being audited. The first cost report fied by a new agency al
most always has a field audit which provides a basis for evaluation of subsequent years' cost 
reports. Thereafter, intermediares make final settlement on the basis of desk review, limited-
scope audit, or full-scope audit. 
Accordig to the intermediares' audit directors, which type of audit they select is influenced 
by HCFA's budget allocations, which are trslated into an Audit Prority Matrx. Since fund

ing for HH audits has traditionally been given low priority, the great majority of HHA cost 
reports ar settled via desk review. Notwithstading the low priority afforded to HHA audits, 
a major consideration on the scope of audit to be performed is the cost benefit. The HCFA re
quirements that intermediar audit staff identify 5 dollars in savings for every dollar spent on 
an audit discourages the intermediares from auditing DME costs, which are relatively insig
nifican only when they are compared with the $2.3 bilion (1985) in tota Medicare inter
mediar reimbursement to HHs. 
8  RECOMMENDATIONS

Short Range: The,HCFA should recognize that DME furished by home health agencies 
"under arangement" with DME suppliers is merely a billng mechanism for Par A reimburse
ment. We recommend that HCFA take administrative action to have these claims submitted in
stead to carers and made subject to uniform Par B coverage and payment policies. 
Long Range: The HCFA should seek a legislative change to eliminate DME as a home 
health benefit. All claims for DME provided to Medicare beneficiares while under a home 
health agency plan of care should be processed by carers under the Par B DME benefit. 
We submitted our draft report to HCFA and obtained their comments, which are contained in 
the appendix.

9
 . .

Health Care .
DEPARTftiENT or HEALTH &. HUMAN SERVICES  Financing Administration 
""")

(, -,t

Memorandum 
"'.... ~ 
APR 2 6 l9 
Date 
William L. Roper, M.D. 
From 
Administrator 
Subject  OIG Draft Report: Medicare Intermediary Reimbursement to Home Health Agencies
for Durable Medical Equipment - OAI-02-87-00016 . 
To  The Inspetor General

Office of the Secretary 
We have reviewed the OIG draft report on fiscal intermediary reimbursement of 
cirable medical equipment (DME) provided by home health agencies OiHAs). The 
findings were extremely interesting, an we agree that HCF A needs to take action

to eliminate the problems arisin from the differences in payment methodology for 
intermediaries and carriers. 
We agree with the motivation bein the OIG recommendation that the carriers 
process th claims for DME provided through or by HHAs. We recognize tht the 
OIG short range recommendation ha the potential of curtailng inconsistencies In
program policies tht currently exist between the home health DME benefit and 
Part B DME benefit. We certainly agree with the need to establih uniformity in 
applying Medicare coverage and reimbursement guidelins and assure fair and

reasonable cost-sharing payment for its beneficiaries. 
We are, currently, examining the best methodology to accomplis the goal; either
through carrier processing or the establishment of consistent coverage an
reimbursement decisions by the carriers and intermediaries. In this regard, we need
to establih whether HCFA could implement the recommendation administratively
under current authorities (as the OIG proposes), or whether we would need a 
legislative change to do so. We are actively pursuing resolution of this question, an 
we wil keep you apprised of our progress. 
We believe the OIG proposal to eliminte DME as a home helth benefit Is
uruecessary and objecionale.. While th OIG ties this proposal to the policy of 
having carriers process the DME claims, we view the issue of administration of the
DME benefit as separable from the coveraRe issue. If we need legislation to
implement the OIG recommendation on cariers' processing, we would propose only
to amend the sttutory provisions on administration of the HHA DME benefit, 
without touching coverage issues. 
Thnk you for the opportuity to comment on this report. 
10