Department  of Health  and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
MEDICAL  EQUIPMENT  SUPPLIERS 

Assuring  Legitimacy 
JUNE  GIBBS  BROWN 
Inspector  General 
DECEMBER  1997 
OEI-04-%00240  OFFICE OF INSPECTOR GENERAL 
The  mission  of  the  Office  of  Inspector  General  (OIG),  as  mandated  by  Public  Law  95 
452,  is to  protect  the  integrity  of  the  Department  of  Health  and  Human  Services 
programs  as well  as  the  health  and  welfare  of  beneficiaries  served  by  them.  This 
statutory  mission  is carried  out  through  a nationwide  program  of  audits,  investigations, 
inspections,  sanctions,  and  fraud  alerts.  The  Inspector  General  informs  the  Secretary 
of  program  and  management  problems  and  recommends  legislative,  regulatory,  and 
operational  approaches  to  correct  them. 
Office of Evaluationand Inspections 
The  Office  of  Evaluation  and  Inspections  (OEI)  is one  of  several  components  of  the 

Office  of  Inspector  General.  It  conducts  short-term  management  and  program 

evaluations  (called  inspections)  that  focus  on  issues  of  concern  to  the  Department,  the 

Congress,  and  the  public.  The  inspection  reports  provide  findings  and 

recommendations  on  the  efficiency,  vulnerability,  and  effectiveness  of  departmental 

programs. 

OEIs  Atlanta  Regional  Office  prepared  this  report  under  the  direction  of  Jesse  J. 

Flowers,  Regional  Inspector  General,  and  Chris  Koehler,  Deputy  Regional  Inspector 

General.  Principal  OEI  staff  included: 

REGION  HIZADQUARTERS 
Joe  Townsel,  Project  Leader  Stuart  Wright,  Program  Specialist 
Betty  Apt,  Team  Leader 

Paula  Bowker,  Program  Analyst 

Tammy  Hipple,  Statistician 

To  obtain  a copy  of  this  report,  call  the  Atlanta  Regional  Office  at  (404)  331-4108.  Department  of Health  and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
MEDICAL  EQUIPMENT  SUPPLIERS 

Assuring  Legitimacy 
sERV1 
JUNE GIBBS BROWN 
Inspector  General 
DECEMESER  1997 
OEI-O4-So0240  EXECUTIVE  SUMMARY 
PURPOSE 
To  determine  whether  persons  who  obtain  Medicare  durable  medical  equipment 
supplier  numbers  operate  bona  fide  businesses. 
BACKGROUND 
Before  businesses  can  bill  Medicare  for  sale  and  rental  of  durable  medical  equipment, 
they  must  apply  for  and  receive  a billing  number.  Applicants  are  approved  and  issued 
such  numbers  by  the  National  Supplier  Clearinghouse  in  Columbia,  South  Carolina. 
To  help  assure  that  applicants  are  bona  fide  businesses,  the  Health  Care  Financing 
Administration  (HCFA)  requires  that  each  supplier  meet  11 standards. 
Despite  such  safeguards,  however,  HCFA  reported  in  1996  that  out  of  a sample  of  36 
new  DME  applicants  in  the  Miami,  Florida  area,  32 were  not  bona  fide  businesses. 
Among  other  problems,  some  bogus  applicants  did  not  have  a physical  address,  or  an 
inventory  of  durable  medical  equipment.  According  to  HCFA  staff,  those  companies 
should  not  be  issued  a supplier  number  because  they  were  not  operational  entities. 
Further,  HCFA  staff  said  such  suppliers  are  typically  involved  in  fraudulent  activities. 
In  light  of  the  bogus  applicants  discovered  in  Miami,  HCFA  asked  us  to  ascertain 
whether  similar  problems  exist  elsewhere  in  the  country.  In  response,  we  conducted 
unannounced  on-site  inspections  of  420  suppliers  who  were  issued  billing  numbers 
between  January  and  June  1996.  We  also  inspected  35  applicants  who  had  not  yet 
been  approved.  Our  sampled  suppliers  were  located  in  12 large  metropolitan  areas  in 
New  York,  Florida,  Texas,  Illinois,  and  California. 
FINDINGS 
One  of  every  14 suppliers  and  1 of  every  9 new  applicants  did  not  have  a 
b 	
required  physical  address. 
Forty-one  percent  of  suppliers  and  40 percent  of  new  applicants  failed  to  meet 
b 	
at  least  one  supplier  standard,  such  as  those  related  to  warranties,  information 
for  customers,  and  inventories. 
Oversight  of  home-based  suppliers  is particularly  difficult,  e.g.,  typically,  they 
b 	
are  not  at  home  during  normal  business  hours  and  have  answering  machines 
that  do  not  identify  the  business. 
The  ease  and  low  expense  of  acquiring  a supplier  number  facilitates  entry  of 
b 	
abusers  into  the  program. 
i  CONCLUSION 
Presently,  HCFA  and  the  National  Supplier  Clearinghouse  are  approving  many 
inexperienced,  unqualified,  and  unethical  people  for  supplier  numbers.  The  desk 
verification  process  for  approving  suppliers  is unreliable  for  detecting  unethical  and 
improper  practices  of  bogus  suppliers.  On-site  verification  is needed,  but  not  for  all 
suppliers.  HCFA  and  the  National  Supplier  Clearinghouse  may  determine  that  some 
suppliers  such  as  large  corporations  need  no  or  only  occasional  site  verification. 
Further,  the  supplier  number  application  form  needs  to  be  revised.  Presently,  it is 
inadequate  for  judging  the  suitability  of  supplier  applicants. 
RECOMMENDATION 
HCFA  should take quick action to ensure the integrity of Medicare  suppliers of 
durable  medical equipment.  The following options would help accomplish that goal. 
Charge  all  applicants  an  application  fee. 
Require  all  suppliers  to  have  a surety  bond. 
Conduct  on-site  visits  at  applicants  physical  locations. 
Require  program  training  for  new  suppliers  by  the  Medicare  regional  carriers. 
Increase  the  review  of  inactive  numbers. 
Further  revise  the  application  form. 
Seek  authority  to  require  Social  Security  and  tax  identification  numbers  from 
applicants. 
Impose  on  denied  applicants  a 6-month  waiting  period  before  reapplication. 
Implementation  of  the  first  option  will  provide  financial  resources  to  implement  the 
others. 
AGENCY  COMMENT?3 
HCFA  concurred  with  our  recommendation.  Their  comments  are  in  Appendix  A. 
The  Balanced  Budget  Act  of  1997  authorized  Medicare  to  collect  Social  Security  and 
tax  identification  numbers  and  required  suppliers  to  have  a surety  bond. 
ii  TABLE  OF  CONTENTS 
PAGE 
ExlTmwESuMMARY 

INTRODUCTION..  ...............................................  1 

FINDINGS  ......................................................  5 

Physical  Addresses  ..............................................  5 

Other  Supplier  Standards  .........................................  6 

Oversight  of  Home-Based  Suppliers  ................................  7 

Ease  of  Getting  a Billing  Number  ..................................  10 

CONCLUSION  ..................................................  11 

RECOMMENDATION..  ..........................................  13 

AGENCYCOMMENTS  ...........................................  15 

APPENDIX  A:  HCFACOMMENTS  ................................  A-l  INTRODUCTION 
PURPOSE 
To  determine  whether  persons  who  obtain  Medicare  durable  medical  equipment 
supplier  numbers  operate  bona  fide  businesses. 
BACKGROUND 
Requirm  For DME SupplierNumbers 
Before  businesses  can  bill  Medicare  for  sales  or  rental  of  durable  medical  equipment 
(DME),  they  must  apply  for  and  receive  a billing  number.  In  1993,  the  Health  Care 
Financing  Administration  (HCFA)  authorized  establishment  of  the  National  Supplier 
Clearinghouse  (NSC),  a contractor  that  reviews  and  approves  applications.  Section 
1834  of  the  Social  Security  Act  requires  that  applicants  and  approved  DME  suppliers 
meet  11 standards.  They  are 
.  fill  orders  from  their  own  inventory  or  under  a contractual  arrangement, 

.  oversee  delivery  of  equipment, 

.  answer  questions  and  complaints  from  beneficiaries, 

.  maintain  and  repair  rental  equipment, 

.  maintain  a physical  address  at  the  business  site, 

.  comply  with  all  State  and  Federal  licensure  requirements, 

.  honor  warranties  on  equipment, 

.  accept  the  return  of  substandard  equipment, 

.  disclose  consumer  information  (a  list  of  the  standards)  to  beneficiaries, 

.  comply  with  the  ownership  disclosure  provisions  of  the  Social  Security  Act,  and 

.  have  proof  of  liability  insurance. 

HCFA  has  a notice  of  proposed  rulemaking  under  development  which  would  establish 
nine  new  standards  that  DME  suppliers  must  meet. 
lk  Problem 
Despite  the  existence  of  supplier  standards  and  NSC  reviews,  HCFA  reported  in  1996 
that  32  of  36 new  DME  supplier  applicants  in  the  Miami,  Florida  area  were  not  bona 
fide  businesses.  Among  other  problems,  some  bogus  DME  suppliers  did  not  have  a 
physical  address,  or  an  inventory  of  durable  medical  equipment.  For  example,  in  one 
location,  a small  subdivided  office  supposedly  housed  four  suppliers.  Though  their 
business  licenses  were  posted  in  the  office,  there  was  no  inventory  at  the  site  and  no 
business  was  being  conducted.  According  to  HCFA  staff,  those  companies  should  not 
be  issued  a supplier  number  because  they  were  not  operational  entities.  Further, 
HCFA  said  the  bogus  DME  suppliers  were  likely  established  to  abuse  or  defraud 
Medicare.  Other  reviewers  such  as the  NSC,  DME  Regional  Carrier  in  South 
1  Carolina,  and  Florida  Medicaid  staff  corroborated  HCFAs  findings  and  conclusions. 
Potentid Si@aificanceOf l%e hblem 
The  NSC  issued  over  300,000  supplier  applications,  and  over  100,000  billing  numbers 
nationwide  since  1993. 
It  is important  to  determine  the  extent  that  such  billing  numbers  were  approved  for 
bogus  companies  that  may  be  intent  on  defrauding  Medicare.  Preventing  the  issuance 
of  billing  numbers  to  such  companies  could  result  in  a substantial  savings  to  Medicare. 
Nationwide,  Medicare  approved  DME  claims  for  a total  of  $4.7  billion  in  1995.  In  the 
Miami  area  alone,  Medicare  paid  $406.3  million  for  DME  supplies  during  a 22-month 
period  ending  April  30,  1996. 
Some  staff  with  HCFA,  NSC,  and  the  DME  Regional  Carrier  suggested  that  problems 
like  those  observed  in  the  Miami  area  may  exist  in  other  urban  areas.  HCFA  asked 
us  to  determine  whether  problems  similar  to  those  encountered  in  the  Miami  area 
were  occurring  elsewhere  in  the  country.  We  conducted  this  inspection  in  response  to 
that  request. 
Il4ETHODoLoGY 
We  selected  12 metropolitan  areas  for  review  of  issuance  of  DME  supplier  numbers 

(see  chart  below).  Generally,  we  selected  the  largest  cities  in  California,  Florida, 

Illinois,  New  York,  and  Texas.  We  used  U.S.  census  population  data  to  identify  the  12 

largest  cities.  We  excluded  the  Miami,  Florida  area  because  of  ongoing  criminal 

investigations  of  DME  suppliers. 

II 
STATES  I  SELECTED  METROPOLlTAN  AREAS  /I 
California  Los  Angeles,  San  Diego,  San  Francisco 
II
Florida  Jacksonville,  Orlando,  Tampa  /I 
Illinois  Chicago 
II
New  York  New  York  City,  Buffalo  II 
Texas  Dallas,  Houston,  San  Antonio 
We  limited  our  review  of  DME  supplier  numbers  to  those  located  in  the  major 
metropolitan  areas  of  the  cities  selected.  We  used  U.S.  Postal  Service  information  to 
identify  zip  codes  that  represented  the  major  metropolitan  area  of  each  selected  city. 
For  example,  in  Chicago,  Illinois,  the  zip  codes  were  60000  through  60799.  In  many 
instances,  the  zip  codes  covered  the  selected  city  and  several  surrounding  cities  and 
towns. 
2  For  each  zip  code,  we  obtained  from  NSC  the  applications  of  all  DME  suppliers 
approved  during  January  through  June  1996.  During  that  6-month  period,  1,180 
suppliers  in  our  selected  cities  had  obtained  approved  billing  numbers.  We  selected  a 
purposive  sample  of  420  of  the  1,180  suppliers  for  inspection. 
For  each  zip  code,  we  also  obtained,  from  NSC,  all  applications  for  DME  supplier 
numbers  that  were  pending  approval  when  we  began  making  site  visits.  From  the  53 
pending  applications,  we  selected  a sample  of  35 for  inspection. 
We  selected  suppliers  and  applicants  without  prior  knowledge  of  the  legitimacy  of 
their  business  practices.  However,  we  designed  our  sample  of  suppliers  to  include  a 
variety  of  supplier  types,  including  physicians,  optical  stores,  therapists,  orthotists,  and 
pharmacies. 
Thereafter,  we  made  unannounced  visits  to  420  suppliers  and  35  applicants.  This  was 
as many  as possible  given  our  staff  resources  and  time  frame.  Generally,  we  used  two-
person  teams  for  each  visit.  In  some  instances,  an  OIG  investigator  accompanied  the 
teams.  Each  site  visit  lasted  no  more  than  20 minutes. 
Each  team  used  a standardized  checklist  designed  to  document  when  suppliers  clearly 
did  not  meet  1 or  more  of  the  11 Medicare  standards--or  worse,  did  not  appear  to  be 
a bona  fide  business.  The  prime  objective  of  our  site  visits  was  to  ascertain  whether 
or  not  suppliers  and  applicants  had  an  appropriate  physical  business  address.  Without 
such,  compliance  with  other  standards  was  assumed  unlikely.  For  example,  without  an 
identifiable  physical  address,  beyond  a mailbox  location,  on-site  business  and  oversight 
were  not  possible. 
In  instances  where  violations  of  standards  were  not  obvious,  we  did  no  further 
inspection  work  to  assure  that  standards  were  in  fact  met.  Such  a determination 
would  have  required  a long  evaluation  period  for  interviews  and  record  reviews. 
Operation  Restore  Trust 
This  inspection  was  part  of  the  Presidents  Operation  Restore  Trust  (ORT)  initiative. 
The  purpose  of  ORT  is to  identify  and  prevent  fraud,  waste,  and  abuse  in  the 
Medicare  and  Medicaid  programs.  ORT  is a joint  initiative  involving  the  Health  Care 
Financing  Administration,  Administration  on  Aging,  Office  of  Inspector  General,  and 
various  State  agencies.  In  1995,  ORT  began  targeting  home  health  agencies,  nursing 
homes,  hospices,  and  durable  medical  equipment  suppliers  in  five  States  for 
evaluations,  audits,  and  investigations.  The  five  States  are  Florida,  New  York,  Texas, 
Illinois,  and  California.  These  States  collectively  account  for  about  40 percent  of  the 
nations  Medicare  and  Medicaid  beneficiaries  and  program  expenditures. 
3  We  conducted  this  inspection  in  accordance  with  the  Quality  Standards  for  Inspections 
issued  by  the  Presidents  Council  on  Integrity  and  Efficiency. 
4 
 FINDINGS 

ONE  OUT  OF  14 DURABLE  MEDICAL  EQUIPMENT  SUPPLIIZRS  DID  NOT 
HAVE  REQUIRED  PHYSICAL  ADDRESSES 
Medicare  standards  for  DME  suppliers  require  that  suppliers  have  a physical  address. 

Such  an  address  is important  to  allow  beneficiaries  a place  where  they  can  reach 

suppliers  about  DME  needs  and  problems.  A  physical  address  also  provides  a place 

where  beneficiary  and  financial  records  should  be  kept  for  oversight  purposes.  Finally, 

the  physical  address  is usually  where  suppliers  keep  their  inventory.  The  application 

form  for  DME  supplier  numbers  elicits  a suppliers  physical,  mailing,  and  billing 

addresses.  These  may  be  three  separate  addresses.  However,  failure  to  accurately  list 

a physical  address  can  result  in  denial  of  a billing  number  to  an  applicant  or 

revocation  of  an  existing  suppliers  billing  number. 

One  out  of  each  14 DME  suppliers  we  inspected  (31  of  420)  did  not  have  the  required 

physical  address--or  their  presence  at  the  address  listed  on  the  application  form  was 

highly  questionable.  This  means  that  7 percent  of  the  DME  suppliers  we  inspected 

need  further  investigation  of  their  legitimacy.  Table  1 below  shows  reasons  why  the  31 

suppliers  did  not  have  physical  addresses.  Likewise,  4 of  the  35 new  applicants  for 

DME  supplier  numbers  did  not  have  required  physical  addresses.  An  additional 

applicant  had  an  inaccessible  address  in  a secured  apartment  complex. 

TABLE  1 
II 
STATUS  OF  ADDRESS  VISITED  I  SUPPLIERS  II 
I/
Business  had  closed  I  14  II 
Had  a questionable  presence  at  the  address  8 
Mail  drop  location  only  4 
Address  nonexistent  or  could  not  be  located  5 
II 
Total  I  31  II
As  shown  by  the  table,  14 suppliers  had  closed.  That  is, they  were  no  longer  operating 
at  the  sites  shown  on  their  applications  for  DME  numbers--though  their  applications 
had  just  been  approved  during  January  - June  1996.  Most  of  the  14 had  left  no 
information  behind  such  as  is typical  for  a business  merely  relocating.  For  example, 
according  to  their  landlord,  a pair  of  physicians  suddenly  closed  their  office  and 
vanished,  breaking  their  lease.  In  another  instance,  a neighboring  business  person  said 
the  supplier  had  closed  over  a weekend,  without  leaving  any  forwarding  information. 
5 
 Table  1 also  shows  that  eight  suppliers  had  no,  or  a highly  questionable  presence  at 
the  address  listed  on  the  DME  supplier  application  form.  Residents  at  or  near  the 
listed  addresses  were  unable  to  say whether  or  not  a supplier  had  ever  been  located 
there.  In  such  instances,  we  were  unable  to  ascertain  that  a supplier  was  ever  located 
at  the  address  given  on  the  application  form.  We  characterized  these  eight  suppliers 
as having  a questionable  presence. 
For  example,  in  Brooklyn,  New  York,  a suppliers  address  shown  on  the  application 
form  was  in  a building  that  consisted  of  four  apartments  over  a laundromat.  The 
DME  company  name  was  not  shown  on  mailboxes  or  other  parts  of  the  premises.  We 
interviewed  two  tenants  at  the  premises  who  said  they  had  not  heard  of  the  supplier. 
Since  the  numbers  had  been  issued  within  the  last  6 months,  we  expected  the  tenants 
to  recall  the  supplier  if one  existed.  One  of  the  tenants  said  the  laundromat  space  was 
formerly  used  as  a post  office  box  operation.  Further,  the  phone  number  shown  on 
the  DME  application  was  out  of  service.  Thus,  it was  impossible  to  determine 
whether  the  DME  business  had  ever  operated  at  the  address. 
FORTY-ONE  PERCENT  OF  SUPPLIERS  FAILED  TO  MEET  AT  LEA!3T  ONE 
DME  SUPPLIER  STANDARD 
Forty-one  percent  (173)  of  the  420  DME  suppliers  we  inspected  failed  to  meet  at  least 

1 standard.  Likewise,  40 percent  (14)  of  the  35 new  applicants  for  DME  supplier 

numbers  we  inspected  failed  to  meet  at  least  1 standard.  We  believe  that  these 

percentages  are  very  conservative,  however.  We  only  looked  for  prima  facie  and 

obvious  failures  to  meet  standards  during  our  brief  site  inspections.  Our  site 

inspections  were  designed  to  expeditiously  determine  when  suppliers  or  new  applicants 

clearly  did  not  meet  standards.  If we  did  not  readily  observe  a violation  of  the 

standards  during  our  20 minute  inspection,  we  did  no  detail  examination  to  find 

violations.  Logically,  a more  in-depth  inspection  would  have  revealed  a greater 

number  of violations. 

Further,  20 percent  of  the  420  existing  suppliers  were  absent  from  their  business 

addresses  at  the  time  of  our  inspection.  Therefore,  beyond  assessing  the  existence  of 

a physical  address,  we  could  not  determine  whether  or  not  they  met  the  standards. 

Typically,  those  businesses  were  closed  at  the  time  we  attempted  our  site  visits. 

However,  had  we  gotten  access  to  those  businesses  and  owners,  we  believe  we  would 

have  identified  more  instances  of  noncompliance. 

Table  2 lists  DME  standards  in  effect  at  the  time  of  our  inspection,  and  the 

percentage  of  existing  suppliers  we  inspected  that  failed  to  meet  each  standard.  With 

one  exception,  physical  address,  the  percentages  in  the  table  are  not  based  on  420 

suppliers.  The  percentages  are  based  on  the  number  of  sites  where  we  could  assess  a 

particular  standard.  For  example,  at  306  sites,  we  were  able  to  assess  whether  or  not 

suppliers  met  the  inventory  standard.  We  were  able  to  check  for  liability  insurance  at 

240  sites.  At  some  locations,  we  could  not  assess  any  standards  beyond  the  existence 

6 
 of  a physical  address.  Such  locations  were  where  no  supplier  spokesperson  was 
available  for  an  interview  and  where  we  could  not  gain  entrance  into  the  business. 
TABLE  2 
DME  SUPPLIER  STANDARD  PERCENTAGE/ 
NUMBERTHAT 
FAILED 
Consumer  information  (copy  of  suppliers  standards  to  45%  111 of  248 
beneficiaries) 
Allow  return  of  unsuitable  items  20%  19 of  95 
Warranty  repairs  17%  17 of  101 
Inventory  9%  27 of  306 
Liability  insurance  7%  17 of  240 
Physical  address  7%  31 of  420 
Maintenance  and  repair  (rented  items)  6%  8 of  132 
Questions/complaints  3%  7 of  206 
Business  license  3%  5 of  200 
Delivery  of  items  and  equipment  1%  2 of  207 
Disclosure  of  ownership  0%  0 of  269 
The  Medicare  standard  failed  by  the  most  suppliers  was  the  one  requiring  them  to 
provide  a copy  of  the  supplier  standards  to  each  beneficiary  receiving  DME.  Because 
this  is perhaps  the  easiest  standard  to  meet,  the  high  rate  of  noncompliance  was 
surprising.  Most  of  the  suppliers  that  failed  the  standard  said  they  were  unaware  of 
the  requirement. 
OVERSIGHT  OF  HOME-BASED  DME  SUPPLIERS  IS PARTICULARLY 
DIFFICULT 
Thirteen  percent  (57)  of  the  420  DME  suppliers  we  inspected  gave  their  residence  as 
a business  address.  Of  the  35 pending  DME  applicants,  4 were  located  in  residential 
locations.  This  means  that  about  one  out  of  seven  existing  DME  suppliers  claim  to 
conduct  business  out  of  residences  such  as  a single-family  house,  mobile  home, 
apartment,  or  condominium.  Similarly,  about  one  out  of  nine  of  the  new  applicants 
for  DME  supplier  numbers  listed  such  business  sites. 
7 
 Residential  DME  suppliers  create  a unique  oversight  problem  for  HCFA,  NSC,  and 
OIG.  First,  HCFAs  DME  application  form  does  not  distinguish  between  home-based 
suppliers  and  those  at  traditional  business  sites.  Second,  home-based  suppliers  often 
do  not  post  a sign  which  identifies  their  business  sites.  Third,  home-based  suppliers 
typically  are  not  at  home  during  normal  business  hours.  Fourth,  home-based  suppliers 
sometimes  restrict  public  access  to  their  residences.  Finally,  home-based  suppliers 
frequently  have  telephone  answering  machines  that  do  not  identify  their  business. 
ApplicationFom  For DME NumbersDots Not IdentifyHome-Based Suppliers 
HCFAs  DME  number  application  form  does  not  differentiate  between  home-based 
suppliers  and  those  at  traditional  business  sites.  Such  information  is important  for 
determining  which  types  of  suppliers  are  engaging  in  improper  or  fraudulent  activities, 
i.e.,  what  are  the  trends  relative  to  supplier  types  and  fraud.  Home-based  suppliers 
are  not  subjected  to  the  same  level  of  public  scrutiny  as  are  traditional  storefront  or 
corporate  suppliers.  Similarly,  home-based  suppliers  are  less  accessible  for  program 
oversight.  The  need  for  such  oversight  becomes  more  important  due  to  the  current 
trend  toward  home-based  businesses. 
At  the  time  we  completed  our  inspection,  HCFA  was  in  process  of  revising  the 
application  form.  However,  we  understand  that  the  revised  form  will  still  not  identify 
home-based  suppliers. 
Residenca Frequent&Not IdentijiedAs A Business 
The  physical  location  of  a DME  supplier  is typically  where  inventories  and  sales 
models  are  kept.  It  is also  the  place  where  beneficiaries  come  to  meet  suppliers  and 
obtain  needed  equipment.  However,  we  rarely  found  a business  sign  or  other 
identifier  information  that  a business  was  in  operation  at  addresses  given  by  home-
based  DME  suppliers  we  inspected. 
Without  identifiers  such  as  signs,  it is also  difficult  for  HCFA  and  NSC  to  locate 
home-based  DME  suppliers  for  oversight  purposes.  Residential  zoning  or  other 
similar  restrictions  may  account  for  the  absence  of  a sign,  but  the  fact  remains  that 
this  traditional  way  to  identify  a business  site  is simply  unavailable  with  many  home-
based  suppliers. 
Given  the  absence  of  such  identifiers,  our  inspection  teams  were  unable  to  readily 
locate  some  DME  suppliers  that  we  had  sampled  for  inspection.  Even  after  finding 
the  address  listed  on  the  application  form,  we  were  often  not  sure  that  we  had  located 
the  supplier.  As  a result,  we  were  unable  in  many  instances  to  ascertain  whether  or 
not  DME  supplier  standards  were  met.  More  basic  than  that,  site  inspections  to 
home-based  suppliers  typically  cannot  even  confirm  the  existence  of  a business  nor 
ascertain  the  types  of  items  purportedly  being  provided  to  beneficiaries. 
8  .
Busmess Opemtom ljpically Not At Home DuringNom1  Busines Hours 
Only  14 of  the  57  suppliers  purportedly  working  out  of  their  homes  were  present  at 
the  time  of  our  site  inspection,  although  we  conducted  our  inspections  during  normal 
business  hours.  We  ascertained  through  phone  calls  with  some  home-based  suppliers 
that  many  of  them  consider  their  DME  business  to  be  a secondary  venture.  They 
work  on  other  activities  during  regular  business  hours. 
This  problem  hampers  access  for  oversight  purposes,  and  it increases  the  cost  of 
oversight  for  HCFA  and  NSC.  To  illustrate,  monitoring  would  likely  require  repeated 
trips,  and  the  trips  would  likely  have  to  be  done  outside  of  normal  work  hours. 
Because  home-based  suppliers  are  typically  absence  from  their  residences,  it is 
generally  useless  to  conduct  on-site  monitoring  visits  during  normal  business  hours. 
This  is particularly  true  for  unannounced  visits. 
Such  difficulty  in  contacting  home-based  DME  suppliers  could  affect  their  ability  to 
serve  Medicare  beneficiaries. 
Access To Re.khcm  Is SometimesRedcted 
During  our  site  inspections,  some  neighborhoods  and  many  apartment  buildings  were 

secured  by  gates,  guards,  and  buzz-in  locking  systems.  While  we  were  able  to  use  our 

credentials  to  gain  access  to  locations  with  security  guards,  entrance  through  secured 

gates  and  into  locked  buildings  was  sometimes  not  possible. 

Persons  with  less  imposing  credentials  would  likely  get  little  or  no  cooperation  from 

security  guards  whose  job  is to  keep  out  persons  not  properly  cleared.  Gaining  access 

to  restricted  residences  could  be  particularly  difficult  for  Medicare  beneficiaries  who 

need  DME. 

We  identified  some  residences  where  individuals  were  inside,  but  they  refused  to 

answer  the  door.  In  some  cases,  the  individuals  peeked  through  the  blinds, 

disappeared  from  view,  and  ignored  further  attempts  to  speak  with  them.  Without 

gaining  entrance  and  locating  someone  to  inteniew,  oversight  is impossible.  Neither 

the  OIG,  HCFA,  NSC,  nor  other  oversight  officials  could,  for  example,  verify  inventory 

or  determine  that  beneficiaries  are  allowed  to  return  unsuitable  items. 

Conversely,  at  traditional  business  sites,  such  as  stores  or  office  buildings,  access  was 

not  a problem. 

Home-Based SuppliersAre D@icdt  To ContactBy Telephone 
In  most  instances,  home-based  DME  suppliers  used  personal  telephones  for  their 
business  activities.  In  such  instances,  telephone  calls  during  a suppliers  absence  are 
often  answered  by  personal  answering  machines.  However,  the  recorded  message 
9 
 does  not  always  identify  the  business.  In  some  instances,  a caller  cannot  be  sure  he  or 
she  reached  the  correct  number  for  the  DME  supplier. 
THE  EASE  AND  LOW  EXPENSE  OF  ACQUIRING  A  DME  SUPPLIER 
NUMBER  FACILITATES  ENTRY  OF  ABUSERS  INTO  THE  PROGRAM 
Despite  DME  supplier  standards  and  an  application  review  process,  acquisition  of  a 
Medicare  DME  supplier  number  is easy.  Further,  it requires  no  financial  investment. 
This,  combined  with  the  potential  high  revenue  resulting  from  having  a DME  billing 
number,  attracts  many  people--both  legitimate  and  nonlegitimate  suppliers. 
No FinancialInveshnentRequired 
Supplying  durable  medical  equipment  to  Medicare  beneficiaries  can  be  a profitable 
business--whether  a supplier  takes  a legitimate  or  illegitimate  approach.  Essentially,  a 
person  only  needs  a supplier  number  to  bill  the  Medicare  program.  That  number  can 
be  obtained  by  merely  answering  a few  questions  on  a simple  application  form,  and 
mailing  that  form  to  NSC.  No  investment  in  a business  location  nor  inventory  is 
required.  A  supplier  may  arrange  for  shipment  from  a manufacturer  or  distributor 
directly  to  Medicare  beneficiaries.  Thus,  the  supplier  does  not  have  to  bear  the  cost 
of  keeping  an  inventory  on-site. 
The  absence  of  an  investment  allows  unethical  persons  to  enroll  and  test  their 
fraudulent  schemes  at  no  cost  to  themselves.  During  our  inspection,  we  found  several 
individuals  who  applied  for  and  received  supplier  numbers  on  a whim.  They  did  not 
know  how  or  if they  would  use  the  numbers.  Some  persons  said  they  decided  not  to 
bill  Medicare  after  getting  the  number,  and  a few  asked  our  inspection  team  to  take 
their  DME  number  back  and  cancel  it. 
Lit&  VerificarionOfApplicationInform&m 
Applicants  for  DME  numbers  are  required  to  do  little  other  than  assert  that  the 
information  they  provide  on  an  application  form  is true.  The  NSC  verifies  only  a 
limited  amount  of  information  provided  on  DME  number  applications.  They  do  so by 
calling  the  applicant  or  some  third  party,  such  as  local  licensing  agencies  and  State 
offices  that  issue  articles  of  incorporation. 
No ExperienceWuh MedicalEquipmentRequired 
An  applicant  needs  no  credentials,  and  is not  required  to  have  any  experience  with 
medical  equipment  to  obtain  a DME  number.  Likewise,  one  does  not  have  to 
formulate  a business  plan  or  purpose  showing  intent  to  service  Medicare  beneficiaries. 
The  absence  of  such  experience  and  qualifications  seems  to  facilitate  entry  of  abusers 
into  the  program.  The  ease  in  getting  a number  unnecessarily  opens  an  opportunity 
for  fraud  or  abuse.  The  following  examples  illustrate  the  ease  of  getting  a DME 
billing  number,  and  potential  for  fraud  and  abuse. 
10 
 b 	 A woman  who  lives  in  an  upscale  house  on  a lake  applied  for  and  received  a 
DME  number.  She  purportedly  operates  a medical  supply  company  at  that 
address.  However,  her  husband  openly  told  us  his  wife  knew  nothing  about  the 
DME  business.  He  said,  on  the  other  hand,  he  did  know  about  the  business 
because  he  is a supplier.  Nevertheless,  the  applicant  herself  was  completely 
inexperienced--clearly  raising  questions  of why  she  applied  for  her  own  number. 
The  situation  showed  more  potential  for  impropriety  than  for  operation  of  a 
bona  fide  business. 
b 	 A  Florida  souvenir  dealer  whose  shop  is in  his  garage  applied  for  and  received 
a DME  number.  His  main  business  line  includes  stuffed  alligator  heads, 
alligator  skin  wallets,  and  stuffed  turtles.  But  because  his  brother-in-law  installs 
wheelchair  lifts  on  vehicles,  he  decided  to  add  wheelchairs,  lift  chairs,  and  beds 
to  his  line  of  business.  He  had  no  experience  or  credentials  for  supplying 
DME.  Further,  he  keeps  no  DME  inventory.  He  said  he  has  only  filed  one 
Medicare  claim. 
The  suppliers  described  above  were  only  two  of  many  that  raised  questions  on 
suitability  for  DME  numbers.  For  example,  we  found  dealers  in  fancy  spas,  golf  carts, 
home  modifications,  and  sports  shoes  to  have  DME  numbers.  We  did  not  establish 
that  suppliers  such  as  the  above  examples  abused  the  Medicare  program.  However, 
they  clearly  raise  questions  on  appropriateness  of  receiving  DME  billing  numbers. 
CONCLUSION 
It  is clear  that  NSC  is limited  in  preventing  issuance  of  improper  DME  numbers 

without  conducting  site  verifications  of  applicants.  HCFA  staff  advised  us  that  the 

specialization  of  one  national  clearinghouse  (NSC)  is advantageous  for  screening  and 

issuing  DME  numbers.  We  concur.  Nevertheless,  desk  verifications  done  in 

Columbia,  South  Carolina  cannot  be  as  thorough  and  effective  as  on-site  verifications. 

We  understand  the  resource  implications  of  site  verifications.  However,  the  cost 

should  be  easily  off-set  by  a reduction  of  fraudulent  suppliers  entering  the  Medicare 

program. 

Further,  on-site  verification  would  not  be  needed  for  all  applicants.  Some  low-risk 

applicants  may  quickly  be  relegated  to  desk  verification  as  is currently  done.  For 

example,  site  verification  of  corporate  suppliers  such  as  a major  chain  of  pharmacies 

in  Wal-Mart  or  Eckerd  Drug  stores  may  need  limited  verification,  or  none  at  all.  To 

the  extent  it is needed,  verification  would  likely  be  done  at  the  corporate 

headquarters.  Our  logic  here  is based  on  two  generalizations  from  out  site  visits: 

major  chains  have  a centralized  operation,  and--as  a result--staff  in  a local  store  know 

nothing  about  the  DME  number,  nor  Medicare  claims. 

Our  DME  on-site  inspections  indicate  that  many  unqualified,  inexperienced  people  are 

getting  into  the  DME  business.  Many  DME  suppliers  we  interviewed  had  little  or  no 

idea  how  the  Medicare  DME  business  worked.  Given  the  present  application  process, 

11 
 the  only  reliable  way  to  discover  unethical  and  improper  practices  by  suppliers  is to 
make  on-site  inspections. 
The  current  DME  application  form  is inadequate  to judge  the  ability  of  applicants  to 
meet  the  needs  of  the  Medicare  program  and  its beneficiaries.  Although  HCFA  has 
revised  the  form,  our  site  inspections  suggest  that  further  revisions  are  needed.  The 
current  application  (Form  HCFA4355S)  could  be  more  effective,  from  a program 
integrity  perspective.  For  example,  it would  be  beneficial  to  have  the  application 
identify  residential  business  locations,  and  when  suppliers  are  available  to  conduct 
business.  Similarly,  requiring  applicants  to  say whether  their  business  is full-time  or 
part-time  would  be  helpful. 
12 
 RECOMMENDATION 

HCFA  should take quick action to ensure integrity of Medicare  suppliers of DME. 
HCFA  and  the  National  Supplier  Clearinghouse  have  recognized  many  of  the 

problems  and  issues  raised  in  this  report.  Both,  in  fact,  supported  our  data  collection 

effort  during  this  inspection.  Their  positive  and  constructive  steps  should  help 

improve  operation  of  the  DME  program.  Further,  they  have  begun  to  implement 

some  of  the  options  listed  below.  Each  option  should  be  considered  independently,  on 

its  own  merit. 

b 	 Application  fee:  Charge  all  DME  applicants  an  application  fee.  The  fee 
should  cover  costs  of  processing  an  application  and  verifying,  through  on-site 
inspections,  legitimacy  of  the  business. 
b 	 Surety  bond:  Require  all  suppliers  to  have  a surety  bond.  The  bond  should  be 
indexed  to  the  volume  of  Medicare  business  transacted  by  a supplier  in  the 
previous  year.  Such  a requirement  would  help  indemnify  HCFA  against  fraud 
and  reduce  the  number  of  applicants  who  apply  for  a supplier  number  with  no 
clear  intent. 
We  understand  that  HCFAs  proposed  revision  of  supplier  standards  would 
require  annual  surety  bonding  for  all  existing  suppliers,  and  as  a condition  of 
enrollment  for  all  supplier  applicants. 
b 	 On-site verifications:  Conduct  on-site  verifications  at  physical  locations  of 
applicants.  Several  approaches  are  possible  for  selecting  applicants  to  be 
inspected.  Primarily,  HCFA  could  inspect  the  sites  of  all  new  applicants,  or 
develop  a profile  which  identifies  high  risk  ones.  The  OIG  would  be  willing  to 
assist  in  developing  such  a profile. 
HCFA  is presently  using  a contractor  to  conduct  site  visits  in  South  Florida. 

We  did  not  assess  that  methodology  during  our  inspection.  However,  HCFA 

reports  indicate  that  it is working  well.  HCFA  is currently  in  the  process  of 

implementing  similar  site  verification  visits  in  the  Brooklyn  and  Bronx  areas  of 

New  York  City.  We  endorse  this  action.  Such  site  verification  visits  would  be 

beneficial  if done  in  other  geographic  areas  as well. 

b 	 Training:  Require  DME  regional  carriers  to  conduct  training  for  all  new 
suppliers  on  program  requirements,  and  on  proper  billing  procedures. 
Suppliers  should  pay  a fee  for  such  training.  The  amount  of  the  fee  should  be 
sufficient  to  completely  pay  for  the  training. 
13 
 b 	 Inactive  numbers:  Increase  review  of  inactive  DME  supplier  numbers. 
Currently,  HCFA  inactivates  billing  numbers  after  four  consecutive  quarters  of 
inactivity.  In  view  of  the  inactive  suppliers  whom  we  found  got  a billing 
number  on  a whim,  HCFA  should  consider  initially  reviewing  a suppliers  billing 
activities  after  a reasonable  period--i.e.,  90  days  or  6 months.  Such  a review 
and  deactivation  of  inactive  numbers  could  help  reduce  the  number  of  supplier 
numbers  lying  fallow.  After  the  initial  review,  DME  numbers  found  to  be 
active  could  be  reviewed  annually. 
b 	 Application  form:  Further  revise  the  DME  application  form.  HCFA  has  been 
revising  the  supplier  application  form  over  the  last  year  in  an  attempt  to  better 
meet  the  needs  of  a changing  profile  of  suppliers.  HCFA  has  consulted  with 
their  regional  offices,  NSC,  DME  regional  carriers,  and  the  supplier  industry 
related  to  those  revisions.  The  new  application  (Form  HCFA-855s) 
encompasses  some  of  the  options  in  this  report.  However,  the  OIG  would  be 
willing  to  work  with  HCFA  in  further  revising  the  application  form  to  reflect 
program  integrity  concerns  raised  from  this  inspection. 
b 	 Social Security and tax identification numbers:  Seek  authority  to  require  Social 
Security  numbers  (SSNs)  and  employer  identification  numbers  from  all  DME 
applicants.  As  part  of  the  overall  effort  to  ensure  the  integrity  of  DME 
suppliers,  HCFA  should  seek  legislative  authority  for  the  Secretary  to  require 
DME  number  applicants--i.e.,  all  managing  employees  and  owners--to  provide 
their  SSNs  and  employer  identification  numbers.  Access  to  those  unique 
identifiers  will  enable  HCFA  and  its  contractors  to  more  effectively  screen 
applicants.  Those  identifiers  can  also  facilitate,  when  necessary,  corrective 
actions  related  to  billing  aberrancies,  fraud,  or  abuse.  For  example,  the  SSN 
could  be  useful  in  recovering  Medicare  funds  from  a fraudulent  DME  supplier. 
b 	 &month  delayed reapplication:  Impose  a 6-month  waiting  period  on  applicants 
who  are  denied  DME  billing  numbers  for  cause.  That  reapplication  waiting 
period  should  discourage  applicants  from  failing  to  provide  pertinent 
information  or  failing  to  cooperate  with  inquiries  by  NSC.  It  should  also  keep 
applicants  from  frivolously  overburdening  the  application  process  by  applying 
repeatedly.  Conversely,  applicants  who  apparently  pursue  their  applications  in 
good  faith,  but  are  denied  because  of  certain  minor  problems  could  be  exempt 
from  the  waiting  period. 
The  implementation  of  the  first  option  will  provide  financial  resources  to  implement 
the  others. 
14 
 AGENCY  COMMENTS 
HCFA  concurred  with  our  recommendation.  Their  comments  are  in Appendix  A. 
The  Balanced  Budget  Act  of  1997  authorized  Medicare  to  collect  Social  Security  and 
tax  identification  numbers  and  required  suppliers  to  have  a surety  bond. 
15 
 APPENDIX  A 

HCFA  COMMENTS 

A-l  * 
-
. 
. 
- .  418  786  9184  P.O3/85 
OIGdEI43CS  - B
NOU-04-1997  16:15 
. 
. . . 
. . 
. 
gJ&QJaas 
c  -
. 
.  Nou-04-1997  16:16  oIG/oEI@fXS  - B  410  786  9184  P.04/05 
OIG Outian 4 
Requireprogramfnin@ fir new suppliersby the Medicareregionalcarriers. 
HCFAconcurswithsbeintentoftbisrecomm~on  However,becueofllmitedsta@and 
fiinanciPIrtsources,HCFAisunableto~~trairliagforann~suppliers9tthistime.  The 
DMERCa periodically holdkining sessionsw&b k&de  t&kg  for newsupplks.  Each 
D~Chasitsowasuppliermanualfortbeuseof~mppliersinitsarea.  T&e 
supplier manuals are updated periodically.  The DMEKs  also publish quark&  bulletins 
withnews,newbillingrequirements, policies, and reminders. We will explore ways to 
illten@  these eferts.  . 
QIG Ontion 5 
Increase the review of inactive numbers. 
We concur. We have instituted procedures at the NSC whereby it will dkct&tc  supplier 
mmbcrs on a qurterly  basis for suppliers who have not billed for 4 quaxtcrs. The NSC 
will deactivate supplier numben every 3 months far non-billing instead of every year. 
QIG Ootion 6 
Fur&r  Tevisethe application form. 
)IcFA  Comment 
We cxmcur.  The form has been revised to collect kfkmatiw  on whether a supplier 
applicant is operating &cm a residence.  In fact; we ban  developed a new enrollment 
pnxess  that requires carriers to veri@ all data provided on the application, e.g., licensure 
informat;on, prior sanction or exchkon  i&rmation,  place of business, owner&& 
information, biilkg  contracts, tax idmtification data, etc. This information is verifkd 
w&bt&estate licerkg  board, OIG, and professional eons.  We would w&xx~ 
the OIGs input on W-m3revisions.  P.05/85 
410  786  9184 
Now-W-1997  16:16 
 
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TOTFIL P.05