Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
Medicare Reimbursement for 
Hospital Beds in the Home 
Prices 
JUNE GIBBS BROWN 
Inspector General 
NOVEMBER 1998 
OEI-07-96-00221  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 Evaluation and 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. 
OEI's Kansas City Regional Office prepared this report under the direction of James H. Wolf, 
Regional Inspector General.  Principal OEI staff included: 
REGION  HEADQUARTERS 
Perry A. Seaton, Team/Project Leader  Lisa A. Foley, Program Specialist 
Tim Dold, Team Leader  Stuart Wright, Associate Director 
Barbara Tedesco, Mathematical Statistician 
To obtain copies of this report, please call the Kansas City Regional Office at 816/426-3697. 
Reports are also available on the World Wide Web at our home page address: 
http://www.dhhs.gov/progorg/oei  E X E C U T I V E  S U M M A R Y

PURPOSE 
To determine the reasonableness of Medicare's reimbursement for rental of hospital beds in the 
home when compared to other Federal, State, private insurance companies, and managed care 
organizations. 
BACKGROUND 
Medicare authorizes beneficiaries to obtain hospital beds for use in their home.  This is done on 
the basis of a rental schedule with an option to purchase the bed.  Suppliers receive monthly 
reimbursement from the Medicare Durable Medical Equipment Regional Carriers based upon a 
fee schedule.  This schedule is limited by the Health Care Financing Administrations (HCFA) 
established national payment ceilings, and is adjusted annually for inflation based upon the 
Consumer Price Index.  The rental fee schedule caps the rental payments at 120 percent of the 
allowable charge for purchase.  In calendar year (CY) 1996, Medicare allowed charges of over 
$272 million for the four categories of hospital beds included in this study.  Semi-electric beds 
(code E0260) comprised 86 percent of this total while total electric beds accounted for less than 
one-half of one percent 
We surveyed sampled entities from Medicare risk managed care organizations, Medicaid State 
Agencies, the top 50 health insurance companies as ranked by policies in force, and a listing of 
companies providing national and local coverage in the Federal Employees Health Benefits 
program.  Overall, we achieved an 82 percent response rate. 
This is one of two reports examining Medicares policies and reimbursement for hospital bed 
equipment.  A companion report Medicare Reimbursement for Hospital Beds in the Home: 
Payment Methodology OEI-07-96-00222 compares Medicares rental reimbursement payment 
methodologies to those of other medical insurance payers. 
FINDING 
Medicare Rates for Rental of Hospital Beds for Home Use Are Substantially Higher than 
Rates Paid by Most Other Payers 
Comparison of Average Monthly Rental Payments for Semi-Electric Beds 
Ninety-seven percent of our respondents pay for rental of hospital beds (72 of 74 respondents). 
We analyzed the rates for each hospital bed to identify the entities that paid uniform rates for 
rental and those that paid variable rates which depend on locale and market competition. 
Of the 51 entities furnishing information on both the rental rates and the frequency of these 
payments for the four categories of hospital beds included in this inspection, 37 (72.6 percent) use 
a uniform monthly rate schedule, and 14 (27.4 percent) pay variable rates. 
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i  We found that on average, other payers uniform monthly rental rates were more than 14 percent 
lower than the corresponding Medicare monthly rate for semi-electric hospital beds.  For entities 
using a variable rate schedule, their highest rate ranged from 22 percent above to almost 
23 percent below the corresponding Medicare average rate for this bed.  We found similar results 
for manual, manual-adjustable, and total-electric hospital beds. 
Comparison of Actual Monthly Rental Rates for Semi-Electric Beds 
Since Medicare, unlike other entities, pays an enhanced rate for the first 3 months of rental, we 
also compared their actual rate for months 1 - 3 and months 4 - 15 to the rates of other entities. 
We found Medicares rates for months 1 - 3 were from 18 percent to 38 percent higher, and for 
months 4 - 15 were from 9 percent lower to 18 percent higher. 
Maximum Potential Rental Payments 
We compared Medicares rental payments for a semi-electric hospital bed during the maximum 
potential rental period of 15 months to other payers maximum rental payments.  We found 
entities paying a uniform rate were on average over 30 percent lower than Medicares maximum 
payments.  Also, entities who predominately reimburse from their highest variable rate schedule 
were on average 30 percent lower.  Those payers primarily paying from their lowest rate schedule 
were on average 43 percent lower.  Similar results were obtained for manual, manual-adjustable 
and total-electric hospital beds. 
RECOMMENDATION 
HCFA Should Take Immediate Steps to Reduce Medicare Payments for In-Home Hospital 
Beds 
Medicares monthly rates for the four types of hospital beds studied, when considered with total 
rental payments during the 15 month extended rental period, exceed the rates of other payers by 
more than 14 percent.  The Balanced Budget Act of 1997 provides HCFA with the necessary 
tools to immediately reduce rates if there is compelling evidence that their rates exceed those 
generally being paid in the marketplace.  We believe that this is the case here.  If this authority is 
exercised for the four types of hospital beds surveyed, we estimate that annual savings at a 
12 - 15 percent reduction would be approximately $32.7 to $40.9 million.  Projected over 
5 years, Medicare would save over $163 to $204 million. 
We also believe that the payment method used by Medicare inappropriately overcompensates for 
rental use during the first 3 months of each rental period.  We discuss this more thoroughly in our 
companion report, Medicare Reimbursement for Hospital Beds in the Home: Payment 
Methodology OEI-07-96-00222.  In that report we include a recommendation that HCFA seek 
legislation to correct that aspect of the problem.  Overall, we believe that a combination of both 
approaches would be best.  However, the savings would not be additive. 
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ii  AGENCY COMMENTS 
The HCFA concurs with the intent of our recommendation and is undertaking a comparison of 
hospital bed rates and a competitive bidding demonstration project as a prelude to making hospital 
bed rate changes.  Appendix F contains the complete text of these comments.  We remain 
available to provide technical assistance to HCFA on this matter. 
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iii  T A B L E  O F  C O N T E N T S

PAGE 
EXECUTIVE SUMMARY 
INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

FINDING  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Medicares Rates for Hospital Beds Exceed Most Other Payers  . . . . . . . . . . . . . . . . . . . 7

RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10

COMMENTS ON THE DRAFT REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

APPENDICES 
A: Entities Included In the Sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

B: Sample Response Rate  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1

C: Medicares Rental Rates to Reimbursement Compared to Other Payers . . . . . . . . . . . . . .  C-1

D: Duration of Hospital Bed Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .D-1

E: Calculation of Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  E-1

F: Agency Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  F-1
 I N T R O D U C T I O N

PURPOSE 
To determine the reasonableness of Medicare's reimbursement for rental of hospital beds in the 
home when compared to other Federal, State, private insurance companies, and managed care 
organizations. 
BACKGROUND 
The Medicare Supplemental Medical Insurance program pays for the rental or purchase of 
medically necessary Durable Medical Equipment (DME) used in a beneficiarys home when 
determined by a physician to be medically required.  Certain categories of DME, including 
hospital beds, are reimbursed as capped rental items. 
Medicare Reimbursement Methodology for Hospital Beds 
Under Medicare capped rental DME rules, a hospital bed is initially furnished to a beneficiary as a 
rental item.  At the 10th month, the beneficiary is offered the option of purchasing a new or used 
bed, which is effective with the 14th month.  If the beneficiary elects to continue to rent the bed, 
Medicare payments will end upon completion of the 15th month.  After rental payments end, 
Medicare will pay for necessary servicing and maintenance of capped rental equipment once every 
6 months (which cannot exceed the charge for a 1 month rental).  When the hospital bed is no 
longer needed by the beneficiary (due to death or medical improvement) the supplier is free to 
reclaim the used item for rental or sale to other clients. 
Suppliers receive monthly reimbursement from the Medicare Durable Medical Equipment 
Regional Carriers (DMERC) under a fee schedule.  This schedule is limited by the Health Care 
Financing Administrations (HCFA) established national payment ceilings, and is adjusted annually 
for inflation based upon the Consumer Price Index.  The fee schedules reimburse a supplier: 
C	 10 percent of the average of allowed purchase price on assigned claims for new 
equipment for each of the first 3 months of rental, and 
C  7.5 percent of the average of allowed price for new equipment, for each of the 
remaining months not to exceed 12 additional months of continuous use. 
Each month's rental applies toward the purchase price if the beneficiary elects this option, or 
applies to the 15 month maximum rental cap.  Table 1 is a summary of the Medicare fee schedule. 
Medicare allows 105 percent for a purchased item or 120 percent if rented through the 15th 
month. 
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1  Table 1 
Medicare Reimbursement Schedule for Hospital Beds 
Rental Month  Percent of Purchase Price Cumulative Percent 
1 10.0%  10.0% 
2 10.0%  20.0% 
3 10.0%  30.0% 
4 7.5%  37.5% 
5 7.5%  45.0% 
6 7.5%  52.5% 
7 7.5%  60.0% 
8 7.5%  67.5% 
9 7.5%  75.0% 
10 7.5%  82.5% 
11 7.5%  90.0% 
12 7.5%  97.5% 
  131  7.5%  105.0% 
14 7.5%  112.5% 
  15 2  7.5%  120.0% 
1  If elected, the purchase option is effective upon completion of the 13th rental month. 
2  Rental payments terminate upon completion of the 15th rental month. 
In calendar year (CY) 1996 the DMERCs allowed charges of over $272 million for the four 
categories of hospital beds included in this study.  Semi-electric beds (code E0260) comprised 
86 percent of this total while total electric beds accounted for less than one-half of one percent 
(refer to Table 2). 
Table 2

Allowed Charges for Hospital Beds

January 1, 1996 - December 31, 1996 1

Manual Hospital Bed (E0250)  $7,085,989 
Manual Adjustable Hospital Bed (E0255)  $30,720,446 
Semi-Electric Hospital Bed (E0260)  $233,607,390 
Total Electric Hospital Bed (E0265)  $1,084,068 
Total:  $272,497,893 
1 Source: Statistical Analysis DMERC (Palmetto Government Benefits Administrators) 
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2  Related Studies 
General Accounting Office 
A July 1992 General Accounting Office (GAO) Report, Medicare, Program, and Beneficiary 
Costs Under Durable Medical Equipment Fee Schedules, HRD-92-78, identified the greatest 
increase in program costs and beneficiary liability as capped rental items that were purchased 
under the reasonable charge system, but rented under the fee schedule.  The GAO noted that the 
Omnibus Budget Reconciliation Act (OBRA) 1990 made changes to OBRA 1987 which 
established national capped payment ceilings and floors for capped rental items, added a 
beneficiary purchase option in the 10th rental month (which is effective with the 14th month), and 
reduced the overall supplier reimbursement from 150 percent to 120 percent for equipment rented 
for the entire 15 month capped rental period. 
The GAO also concluded that OBRA 1990, when fully implemented, would offset the increased 
program costs that occurred under OBRA 1987, and would substantially reduce the variability in 
rates among the carriers for the same or similar items.  They estimated that Medicare program 
costs will be essentially the same under OBRA 1990 as they would have been under the 
reasonable charge system that the fee schedules replaced. 
HHS/Office of Inspector General (OIG) 
A May 1993 OIG report, Review of Medicare Part B Reimbursement of Hospital Beds, 
A-06-91-00080, found that Medicare reimbursement rates for capped rental  hospital beds were 
excessive because HCFA failed to take into account the useful life of the bed and how many times 
it can be rented.  The OIG estimated Medicare savings of $6.2 to $7.8 million in just one State. 
HCFA did not accept OIG's recommendations to change the way they reimburse for hospital beds 
in part because the study was limited to rentals in only one State. 
Health Care Financing Administration 
Public Law 103-432  135(c) [the 1994 Amendments to the Social Security Act] mandated that 
HCFA study variations in DME suppliers' product and service costs.  HCFA contracted with Jing 
Xing Health and Safety Resources of Annandale, VA to complete this project.  The report, 
Durable Medical Equipment Supplier Product and Service Cost Study, was released to 
Congress in February 1997.  The report stated that . . . the construction of a geographic payment 
index for DME will present a very difficult challenge to HCFA because of 1) the inability of DME 
suppliers to readily provide the kinds of item-specific cost data normally used by HCFA in 
developing geographic indices, 2) the lack of data and standardization on cost shares by product 
type, and 3) the likely objections that would be raised by any methodology that estimates cost 
shares and geographic variation using proxy data. 
In response to the report, HCFA stated its belief that Medicare frequently pays too much for 
durable medical equipment and believes that competitive bidding, which is used by the 
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3  Department of Veterans' Affairs (VA) and other Federal, State and private health care purchasers, 
would ensure that reliable market prices are paid for these items.  HCFA further cited its 
Competitive Bid Demonstration as a source for addressing congressional concerns.  This 
involves a demonstration to test whether competitive bid pricing can be used to purchase some 
DME and supplies for Medicare beneficiaries.  Hospital beds are included as one of the 
competitive bid items.  There will be a total of three metropolitan demonstration sites in the 
southeast and southwest United States.  The demonstration proposal, which is administered by 
Palmetto Government Benefits Administrators (a DMERC), is in clearance with the Office of 
Management and Budget.  HCFA initially estimated that one of the three demonstration sites 
would be operational by the Spring of 1998.  However, they now estimate that the study will not 
begin until later in the year. 
A second HCFA  project involves a study of the inherent reasonableness of Medicare payments 
for DME and supplies.  HCFA awarded this contract to AFYA, Inc. of Adelphi, MD in November 
1995, and specified analysis of 100 DME items, including hospital beds.  The AFYA report has 
been completed, and HCFA plans to release the report information to the DMERCs for 
comparison against the current reimbursement rate structure. 
Congressional Study 
Senator Harkin (D-IA) released a staff report, Medicare Payments for Medical Equipment and 
Supplies, July 1996, in which his staff analyzed 18 durable medical equipment items, including 
hospital beds.  They compared Medicare payments for purchase and rental of these items against 
the payments made by the Department of Veteran's Affairs (VA) Medical Center in Iowa City, IA. 
In addition, they compared Medicare's payments against wholesale and retail prices for these 
items advertised through medical equipment and supply catalogs.  They found Medicare rental 
payments for DME and supplies to be excessive when compared to VA and wholesale payments. 
They estimated that by adopting the advertised wholesale price as the maximum payment amount, 
the Medicare program would save 40 percent, or over $82 million annually.  If Medicare paid the 
VA price for the bed, they estimated the Medicare program would save 37 percent, or over $75 
million annually. 
Recent Legislation Impacting HCFAs Ability to Adjust Payments 
As part of the Balanced Budget Act of 1997, Public Law 105-33, [42 U.S.C.  1395u(b)], 
Congress enacted provisions which provide HCFA greater flexibility in determining the 
appropriate rate of reimbursement for items and services when rates are found to be grossly 
excessive, deficient, or not inherently reasonable.  This law allows HCFA to increase or decrease 
rates, without publishing Federal Register notices, up to 15 percent annually if the payment 
amount for an item or service under this part is substantially higher or lower than the payment 
made for the item or service by other purchasers. 
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4  If HCFA determines that rates need to be adjusted by more than 15 percent annually, then it must, 
through the rule making process, consult with suppliers or other individuals furnishing the 
services, and publish the proposed revised rates in the Federal Register.  Section 4316 (a) of the 
Balanced Budget Act amended  1842 (b)(8)(C) of the Social Security Act to require the 
Secretary to consider the following factors in making inherent reasonableness determinations: 
C	 Medicare and Medicaid are the sole or primary sources of payment for a category 
of items or services; 
C	 the payment amounts for a category of items or services do not reflect changing 
technology or changes in acquisition, production or supplier costs; 
C	 the payment amounts are grossly higher or lower than the payments made for the 
same category of items or services by other purchasers in the same locality; and 
C	 other factors as determined by the Secretary to be appropriate [these factors are 
defined in Code of Federal Regulations Title 42 CFR  405.502 (g)(1)]. 
On January 7, 1998, HCFA published an interim final rule in the Federal Register implementing 
the provisions of the Balanced Budget Act.  This rule specified additional factors the Secretary 
considers to be appropriate in making inherent reasonableness determinations.  The resulting 
factors include, but are not limited to, a determination that the Medicare program is paying 
excessive rates because: 
C  the marketplace is not competitive; 
C  the payment amounts in a particular locality grossly exceed amounts paid in other 
localities for the same category of items or services; 
C  the payment amounts grossly exceed acquisition or production costs for the 
category of items or services; and 
C  there have been increases in payment amounts that cannot be explained by inflation 
or technology. 
METHODOLOGY 
We researched the Federal laws, regulations and HCFA policies that cover the establishment, 
reimbursement, and purchase options for capped rental hospital beds.  We also reviewed various 
private and governmental entities reimbursement methodologies for these items. 
We obtained listings of Medicare risk managed care organizations (MCOs) with 450 or more 
members, Medicaid State agencies, the top 50 private health insurance companies in the United 
States as ranked by number of policies in force, and a listing of the companies providing national 
and local coverage through the Federal Employees Health Benefits Program (FEHB).  We 
selected a judgmental sample from each of these groups, and requested them to complete a mailed 
survey questionnaire.  For the sampled private insurance companies with multiple components, we 
surveyed their private, MCO, and government insurance divisions.  In total, we contacted 90 
entities. 
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5  As a means to obtain direct information and validate it, we selected a sub-sample from each of the 
above organizations for on-site visits.  The criteria for selection was based upon size, location, 
and proximity to other on-site contacts for economy of travel.  In addition, we sent surveys to the 
VA, the Indian Health Service, and the Department of Defense Tri-Care program, formerly the 
Office of Civilian Health and Medical Program of the Uniform Services (CHAMPUS).  As part of 
all surveys, we requested the entities' written policies for reimbursement methods, schedules, and 
rates for the following types of new and used hospital beds: 
C  Manual Hospital Bed  (HCPCS Code E0250) 
C  Manual Adjustable Hospital Bed  (HCPCS Code E0255) 
C  Semi-Electric Hospital Bed  (HCPCS Code E0260) 
C  Total Electric Hospital Bed  (HCPCS Code E0265) 
We inquired if these purchasers of hospital beds maintain ongoing data or have conducted studies 
to address supplier expenses for acquisition, delivery, setup, patient education, maintenance, tear 
down, pick up, sanitation, billing, or supplier profit.  We also asked if they are utilizing 
competitive bidding for either the rental or purchase of these items.  In addition, we asked them to 
provide both their lowest and highest payment rates for each of the beds included in this study and 
an estimate for the percentage of time these rates were paid.  Any unclear responses were clarified 
by telephone and follow up contacts made to non-responders.  Overall we achieved an 82 percent 
response rate.  Appendix A breaks out the various entities surveyed and identifies responders by 
sample category.  It should be noted that because not all responders provided answers to each 
question on the survey instrument, we reported our data based on the percentage of responders 
who answered the question.  Appendix B lists the response rates for each of the sample 
categories. 
These rates were then grouped by type of respondent and compared to the corresponding 
Medicare rental rates.  Since the Medicare program pays a higher rate during the first three 
months of rental, we performed three comparative analyses.  First, we totaled the Medicare rate 
for the entire 15 month maximum rental period and divided the result by 15 to determine 
Medicares monthly average rate.  This average was then compared to other entities rental rates. 
Second, we compared Medicares enhanced rental rate for months 1 - 3 and their lower rate paid 
for months 4 - 15 to the corresponding rates for other entities.  Lastly, we compared the 
maximum Medicare rates for a 15 month rental to the maximum rental payments of the other 
entities. 
This is a companion report to Medicare Reimbursement for Hospital Beds in the Home: 
Payment Methodology OEI-07-96-00222, which compares Medicare rental reimbursement 
methodology for hospital beds used in the home to policies utilized by other Federal, State, 
private insurance companies, and managed care organizations. 
We conducted our review in accordance with the Quality Standards for Inspections issued by 
the Presidents Council on Integrity and Efficiency. 
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6  F I N D I N G

MEDICARE RATES FOR RENTAL OF HOSPITAL BEDS FOR HOME 
USE ARE SUBSTANTIALLY HIGHER THAN RATES PAID BY MOST 
OTHER PAYERS 
We found that Medicares rate and method of payment differed from the other entities.  Medicare 
has a two tier rate structure, an enhanced rate which is paid in the first 3 months of rental, and a 
lower rate that is paid for months 4 - 15 of the rental period.  All other entities we surveyed paid a 
uniform rate.  Therefore, to obtain a clearer perspective of this difference, we compared 
Medicares average monthly payment to rates of other entities and then compared Medicares 
actual payment amounts for both the enhanced rate for the first 3 months of rental, and months 
4 - 15 to other entities rental rates. 
We found that semi-electric beds accounted for over 85 percent of the CY 1996 Medicare 
allowable charges for the four categories of beds included in this study (refer to Table 2).  The 
variance in semi-electric payment rates between Medicare and other payers is consistent with the 
other three hospital bed codes.  Therefore, for this report, we decided to focus on the comparison 
of only the semi-electric bed rates.  However, a complete comparison of four bed categories is 
contained in Appendix C. 
Comparison of Average Monthly Rental Payments for Semi-Electric Beds 
Ninety-seven percent of our respondents pay for rental of hospital beds (72 of 74 respondents). 
We analyzed the rates for each hospital bed by type of respondent to identify the entities that paid 
uniform rates for rental, and those that paid variable rates which depend on locale and market 
competition.  Of the 51 entities furnishing both the rental rates and the frequency of these 
payments, 37 (72.6 percent) use a uniform monthly rate schedule and 14 (27.4 percent) pay 
variable rates. 
We found on average, other payers uniform monthly rental rates were more than 14 percent 
lower than the corresponding Medicare monthly average rate for semi-electric beds.  For entities 
using a variable rate schedule, their highest rates ranged from 22 percent above to almost 
23 percent below the corresponding Medicare average rate for this bed (refer to Table 3 for 
information on the percent of respondents paying at the variable high and low rates). 
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7  Table 3 
Medicares Monthly Average Rental Rate
For Semi-Electric Hospital Beds Compared
to Rates of Other Payers 
Percent of  Percent Rate 
Respondents  is Above or Below 
Type of Rate Paid  Paying  Rate  Medicares Rate 
Uniform  72.6%  -14.1% 
Variable High  15.7%  22.0% 
Variable Low  5.9%  -22.7% 
Pay neither High or Low Variable rate  5.9%  Not Obtained 
Comparison of Medicares Monthly Rental Rates for Semi-Electric Beds to Other Payers 
Since Medicare, unlike other entities, pays an enhanced rate for the first 3 months of rental, we 
also compared their actual rate for months 1 - 3 and months 4 - 15 to other entities rates for the 
same periods.  We found Medicares rates for months 1 - 3 were from 18 percent to 38 percent 
higher and for months 4 - 15 were from 9 percent lower to 18 percent higher, the 9 percent 
representing the variable high rate paid by some entities (Table 4). 
Table 4 
Medicares Actual Rental Rates for 
Months 1 - 3 and Months 4-15 
Compared to Rates of Other Entities 
Mean  Mean  Mean 
Medicare  Mean  Percent  Medicare  Other  Percent 
Rental  Other  Difference  Rental  Entities  Difference 
Type of  Rate  Entities  Over /  Rate  Rental Rate  Over / 
Rental Rate  1 - 3  Rental Rate  Under  4 - 15  4 - 15  Under 
Compared  Months  1 - 3 Months  Medicare  Months  Months  Medicare 
Uniform  $153.74 1  $105.47  -31.3%  $115.31  $105.47  -8.4% 
Variable High  $153.42 2  $125.61  -18.2%  $115.07  $125.61  9.0% 
Variable Low  $153.42 2  $94.83  -38.1%  $115.07  $94.83  -17.5% 
1  This is the mean Medicare rental rate for the 37 providers who paid a uniform rate. 
2	 This is the mean Medicare rental rate for the 14 providers who pay either a high or 
low variable rate. 
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8  The difference in Medicare payment rates and those of other entities is significant, particularly 
since almost one-half (47 percent) of  hospital bed rentals are 3 months or less in duration  (Refer 
to Appendix D for Analysis of Duration of Hospital Bed Rental). 
Maximum Potential Rental Payments 
We reviewed the limits under which Medicare and the surveyed insurers paid for rentals, as this is 
an important factor in determining the total rental payment amount.  For Medicare, the maximum 
reimbursable continuous rental period is 15 months.  For entities paying a uniform rate, their 
maximum payments averaged over 30 percent lower than Medicares maximum payments.  Also, 
entities which predominately reimburse from their highest variable rate schedule also averaged 30 
percent lower.  Those payers primarily reimbursing from their lowest rate schedule were on 
average 43 percent lower (refer to Table 5). 
Table 5 
Medicares Maximum Rental Reimbursement 
For Semi-Electric Hospital Beds Compared to 
Maximum Reimbursement of Other Payers 
Percent Maximum 
Reimbursement 
Percent of
 is Above or Below 
Respondents
 Medicares Maximum 
Type of Rate Paid  Paying  Rate
 Reimbursement 
Uniform  72.6%  -30.9% 
Variable High  15.7%  -30.0% 
Variable Low  5.9%  -43.4% 
Predominately pay neither High or Low  5.9%  Not Obtained 
Variable rate 
Similar results were obtained for manual, manual-adjustable and total-electric hospital beds. 
Refer to Appendix C for detailed information. 
The great deviation in maximum potential payment amounts is due mainly to different payment 
policies between these entities and the Medicare program.  We found that 60 percent of other 
payers end reimbursement when the total rental payments equal the amount the company would 
pay for outright purchase of the item.  Conversely, the Medicare program allows aggregate rental 
payments to a maximum of 120 percent of the purchase price if the bed is rented for 15 months. 
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9  R E C O M M E N D A T I O N

HCFA Should Take Immediate Steps to Reduce Medicare Payments for 
In-Home Hospital Beds 
Federal law, regulations and Medicare policy provide that HCFA may adjust supplier 
reimbursement when found to be unreasonable and not comparable to rates paid in the 
marketplace.  We have demonstrated through the survey of private and governmental payers 
comparative rates that HCFA is paying too much for hospital beds.  We believe that HCFA can 
achieve significant program savings by modifying its reimbursement policies for capped rental 
hospital beds to be comparable to what other insurers are paying. 
Use the Newly Enacted Authority to Make an Immediate 12 to 15 Percent Reduction 
Medicares monthly rates for the four types of hospital beds studied, when considered with total 
rental payments during the 15 month extended rental period, exceed the rates of other payers by 
more than 14 percent.  The Balanced Budget Act of 1997 provides HCFA with the necessary 
tools to immediately reduce rates if there is compelling evidence that their rates exceed those 
generally being paid in the marketplace.  We believe that this is the case here.  If this authority is 
exercised for the four types of hospital beds surveyed, we estimate that annual savings at a 
12 - 15 percent reduction would be approximately $32.7 to $40.9 million.  Projected over 
5 years, Medicare would save over $163 to $204 million. 3  Our savings calculations are described 
in detail in Appendix E. 
We also believe that the payment method used by Medicare inappropriately overcompensates for 
rental use during the first 3 months of each rental period.  We discuss this more thoroughly in our 
companion report, Medicare Reimbursement for Hospital Beds in the Home: Payment 
Methodology OEI-07-96-00222.  In that report we include a recommendation that HCFA seek 
legislation to correct that aspect of the problem.  Overall, we believe that a combination of both 
approaches would be best.  However, the savings would not be additive. 
AGENCY COMMENTS 
The HCFA concurs with the intent of our recommendation and is undertaking a comparison of 
hospital bed rates and a competitive bidding demonstration project as a prelude to making hospital 
bed rate changes.  Appendix F contains the complete text of these comments.  We remain 
available to provide technical assistance to HCFA on this matter. 
3	 These savings estimates are based on calendar year 1996 payments and are not indexed 
for inflation. 
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10  APPENDIX A

ENTITIES INCLUDED IN THE SAMPLE

PRIVATE INDEMNITY COMPANIES

Name  State  Response Received 
Aetna Life and Casualty Co  CT  Y 
Blue Cross & Blue Shield of Florida  FL  Y 
Blue Cross & Blue Shield of Michigan  MI  Y 
Blue Cross & Blue Shield of Texas, Inc.  TX  Y 
Empire Blue Cross Blue Shield  NY  N 
Metropolitan Life Insurance Company  FL  Dropped (sold to United 
Health Care) 
Mutual of Omaha  NE  Y 
New York Life Insurance Company  NE  Y 
Prudential Insurance Company of America  PA  N 
United Health Care (formerly Travelers)  CT  Y 
Total Companies: 10  Total Responders: 7 
MEDICAID STATE AGENCIES 
Name  State  Response Received 
Arizona Health Care Cost Containment System 1  AZ  Y 2 
Department of Human Services 1
 HI  Y 
Department of Human Services
 ID  Y 
Department of Health & Mental Hygiene
 MD  Y 
Division of Medicaid
 MS  Y 
Department of Human Services
 ND  Y 
New Mexico Human Services Department
 NM  Y 
Department of Social Services
 NY  Y 
Department of Human Services 1
 OH  Y 
Department of Human Services
 WI  Y 
Total States: 10
 Total Responders: 10 
1  Medicaid  1115 Waiver State

2  The Arizona Health Care Cost Containment System (the Medicaid State Agency) has seven subcontractors 
who  provide Medicaid Coverage. Ventana Health Systems, provided the only response. This contractor 
furnishes  Medicaid health care to 7 of 15 Arizona Counties. 
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A - 1  FEDERAL EMPLOYEE HEALTH BENEFITS PROGRAM--LOCAL PLANS

Name  State  Response Received 
Foundation Health  CA  Y 
CIGNA Healthcare of Colorado  CO  N 
Health New England  CT  N 
Suburban Health Plan, Inc.  CT  Y 
Exclusive Health Care  IA  Y 
BCI HMO, Inc  IL  Y 
Personal Care Blue Shield HMO  IL  Y 
Advantage Care, Inc.  KY  Dropped--No longer 
participating in FEHB 
Plans. 
HMO Maine  ME  Y 
AETNA Health Plans of the Mid-Atlantic States  MD  Y 
Health Alliance  MI  N 
Prudential Health Care HMO  MO  N 
United Health Care Select  MO  Y 
Exclusive Health Care  NE  Y 
FHP New Mexico  NM  Y 
Presbyterian Health Plan  NM  N 
GHI Health Plan  NY  Y 
Healthsource HMO of New York  NY  Y 
Independent Health Association  NY  Y 
Personal Care Plan of North Carolina  NC  Y 
PHP, Inc.  NC  Y 
HMO Health Ohio  OH  Dropped--No longer 
participating in FEHB 
Plans. 
Prudential Northern Ohio  OH  Y 
Pacific Care of Oregon  OR  N 
United Health Plans of New England  RI  Y 
Harris Methodist  TX  Y 
HMO Blue  TX  Y 
Total Companies Contacted: 25 3  Total Responders: 19 
3 Total does not include the two companies that no longer participate in the Federal Employees Health 
Benefits Program. 
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A - 2  FEDERAL EMPLOYEE HEALTH BENEFITS PROGRAM--NATIONAL PLANS

Name  Response Received 
Alliance
 Y 
American Postal Workers Union (APWU)
 Y 
Blue Cross & Blue Shield
 Y 
Government Employees Hospital Association (GEHA)
 Y 
Mail Handlers
 Y 
National Association of Letter Carriers (NALC)
 Y 
Postmasters
 Y 
Association Benefit Plan
 Y 
BACE
 Y 
Foreign Service
 N 
Panama Canal Area
 Y 
Rural Carrier Benefit Plan
 Y 
Special Agents Mutual Benefit Association (SAMBA)
 Y 
Secret Service
 N 
Total Companies: 14  Total Responders: 12 
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A - 3  MEDICARE RISK HEALTH MAINTENANCE ORGANIZATIONS

Name  State  Response Received 
Health Partners of Alabama
 AL  Y 
Blue Cross of Arizona
 AZ  Y 
Blue Cross of California
 CA  N 
FHP, Inc.
 CA  N 
Foundation Health, A California Plan
 CA  Y 
Kaiser Foundation HP, Inc.
 CA  Y 
Kaiser Foundation HP of Colorado
 CO  Y 
Kaiser Foundation HP of NY
 CT  Y 
AV-Med Health Plan, Inc.
 FL  Y 
U.S. Healthcare Delaware
 DL  Y 
Health Alliance Plan of Michigan
 MI  N 
Partners National Health Plans of North Carolina, Inc.  NC  Y 
First Option Health Plan of New Jersey, Inc.
 NJ  Y 
CIGNA Healthcare of New York
 NY  Y 
Independent Health Plan, Inc
 NY  N 
NYLCARE Health Plans, Inc.
 NY  Y 
Family Health Plan, Inc.
 OH  Y 
Community Care HMO, Inc.
 OK  Y 
Kaiser Foundation of the Northwest
 OR  Y 
Geisinger Health Plan
 PA  Y 
Keystone Health Plan Central, Inc.
 PA  Y 
Qualmed Plans for Health, Inc.
 PA  Y 
U.S. Healthcare, Inc. - Delaware 
 PA  Y 
U.S. Healthcare Systems of Pennsylvania
 PA  Y 
IHC Care, Inc.
 UT  Y 
Total Companies: 25  Total Responders: 21 
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A - 4  OTHER FEDERAL GOVERNMENT HEALTH INSURANCE PROGRAMS 
Name  Response Received 
Indian Health Service (Department of Health & Human Services  Y 
Tri-Care (Department of Defense) 4  Y 
Railroad Retirement Board (RRB)  Dropped 5 
Department of Veterans Affairs (VA)  Y 
Total Government Programs in Sample: 6 4  Total Responders: 5 4 
4	 Tri-Care (formerly CHAMPUS) contracts with several insurance companies to administer the rate and 
method of reimbursement for claims filed under their program. Three of these contractors responded 
to our survey. Each was coded as a separate response, since payment rates are State specific. 
Comparisons were performed against Medicares rates for those States. 
5	 We dropped the Railroad Retirement Board (RRB) from the sample. Contact with them confirmed that 
retirees health claims are covered by Medicare and are processed by the DME Regional Carriers 
(DMERCS). Therefore, HCFA policies for payment are followed and the reimbursement rates are the 
same as for non RRB Medicare clients. 
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A - 5  A P P E N D I X  B

SAMPLE RESPONSE RATE

Number in  Number 
Type of Health Insurer  Sample  Responding  Response Rate 
Private Indemnity Insurance  10  7  70% 
Medicaid State Agencies  10  101  100%1 
Federal Employee Local 
Insurance Plans  25  19  76% 
Federal Employee National 
Insurance Plans  14  12  86% 
Medicare Risk Health 
Maintenance Plans  25  21  84% 
Other Government Health 
Insurers  6  5  83% 
Total:  90  74  82% 
1 The Arizona Health Care Cost Containment System (the Medicaid State Agency) has 
seven subcontractors who provide Medicaid Coverage.  Ventana Health Systems, 
provided the only response.  This contractor furnishes Medicaid health care to 
7 of 15 Arizona Counties. 
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B - 1  A P P E N D I X  C

MEDICARES 

MONTHLY AND MAXIMUM

RENTAL REIMBURSEMENT

FOR HOSPITAL BEDS 
COMPARED TO 
REIMBURSEMENT BY 
OTHER PAYERS 
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C - 1  MEDICARES MONTHLY AND MAXIMUM RENTAL REIMBURSEMENT FOR HOSPITAL BEDS

COMPARED TO REIMBURSEMENT BY OTHER PAYERS 
Manual Non-Adjustable Hospital Bed (HCPCS Code: E0250) 
Percent MONTHLY  Percent MAXIMUM 
Number of  Percent of  Rental Rate is  Rental Payments 
Respondents  Respondents  Above or Below  is Above or Below 
Type of Rate Paid  Paying Rate  Paying Rate  Medicares Rate  Medicares Rate
Uniform  36  73.47%  -9.9%  -34.4% 
Variable High  8  16.33%  15%  -26.0% 
Variable Low  3  6.12%  -31.8%  -46.7% 
Pay neither High or  2  4.08%  Not Obtained  Not Obtained 
Low Rate 
Total: (66.2% of total  49  100%  Not Obtained  Not Obtained 
respondents) 1 
1 There were a total of 74 responders to the survey questionnaire. However, 25 are not included in the calculations above because: 
15 (20.3% of total respondents) did not respond or could not provide either the rate or the frequency that the rate was paid 
10 (13.5% of total respondents) did not cover this item for rental reimbursement. 
Manual-Adjustable Hospital Bed (HCPCS Code: E0255) 
Percent MONTHLY  Percent MAXIMUM 
Number of Respondents  Percent of  Rental Rate is  Rental Payments 
Paying Rate  Respondents  Above or Below  is Above or Below 
Type of Rate Paid  Paying Rate  Medicares Rate  Medicares Rate
Uniform  38  73.08%  -10.8%  -30.6% 
Variable High  10  19.23%  -4.6%  -39.3% 
Variable Low  3  5.77%  -39.9%  -56.0% 
Pay neither High or  1  1.92%  Not Obtained  Not Obtained 
Low Rate 
Total: (70.2% of total  52  100%  Not Obtained  Not Obtained 
respondents) 2 
2 There were a total of 74 responders to the survey questionnaire. However, 22 are not included in the calculation above because: 
17 (23% of total respondents) did not respond or could not provide either the rate or the frequency that the rate was paid 
5 (6.8% of total respondents) did not cover this item for rental reimbursement. 
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C - 2  MEDICARES MONTHLY AND MAXIMUM RENTAL REIMBURSEMENT FOR HOSPITAL BEDS

COMPARED TO REIMBURSEMENT BY OTHER PAYERS

Semi-Electric Hospital Bed (HCPCS Code: E0260) 
Percent MONTHLY  Percent MAXIMUM

Number of Respondents  Percent of  Rental Rate is  Rental Payments

Paying Rate  Respondents  Above or Below  is Above or Below

Type of Rate Paid  Paying Rate  Medicares Rate  Medicares Rate

Uniform  37  72.55%  -14.1%  -30.9% 
Variable High  8  15.69%  22%  -30.0% 
Variable Low  3  5.88%  -22.7%  -43.4% 
Pay neither High or  3  5.88%  Not Obtained  Not Obtained 
Low Rate 
51  100%  Not Obtained  Not Obtained 
Total: (68.9% of total 
respondents) 3 
3 There were a total of 74 responders to the survey questionnaire. However, 23 are not included in the calculations above because: 
17 (23% of total respondents) did not respond or could not provide either the rate or the frequency that the rate was paid 
6 (8.1% of total respondents) did not cover this item for rental reimbursement. 
Total Electric Hospital Bed (HCPCS Code: E0265) 
Percent MONTHLY  Percent MAXIMUM 
Number of Respondents  Percent of  Rental Rate is  Rental Payments 
Paying Rate  Respondents  Above or Below  is Above or Below 
Type of Rate Paid  Paying Rate  Medicares Rate  Medicares Rate 
Uniform  36  70.59%  -16%  -30.9% 
Variable High  8  15.69%  7.6%  -27.7% 
Variable Low  4  7.84%  -27.8%  -46.0% 
Pay neither High or  3  5.88%  Not Obtained  Not Obtained 
Low Rate 
51  100%  Not Obtained  Not Obtained 
Total:  (68.9%  of  total 
respondents) 4 
3 There were a total of 74 responders to the survey questionnaire. However, 23 are not included in the calculations above because: 
16 (21.6% of total respondents) did not respond or could not provide either the rate or the frequency that the rate was paid 
7 (9.5% of total respondents) did not cover this item for rental reimbursement. 
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C - 3  A P P E N D I X  D

Duration of Hospital Bed Rental 
by Medicare Beneficiaries 1 
Percent  Percent Renting  Percent  Total Percentage 
Renting  Manual- Renting  Percent Renting  of Beneficiaries 
Rental  Semi Electric  Adjustable  Manual  Total-Electric  Renting 
Month  Hospital Beds  Hospital Beds  Hospital Beds  Hospital Beds  Hospital Beds 
1 77.28%  16.17%  4.20%  2.35%  100.00% 
2 50.51%  10.16%  2.75%  1.25%  64.67% 
3 41.16%  8.53%  2.26%  0.23%  52.18% 
4 35.07%  7.39%  1.93%  0.18%  44.57% 
5 30.83%  6.60%  1.68%  0.10%  39.21% 
6 27.48%  5.96%  1.49%  0.07%  35.00% 
7 24.81%  5.43%  1.34%  0.06%  31.64% 
8 22.65%  5.01%  1.21%  0.06%  28.93% 
9 20.76%  4.62%  1.10%  0.07%  26.55% 
10 18.79%  4.21%  0.99%  0.06%  24.05% 
11 16.93%  3.81%  0.86%  0.06%  21.66% 
12 15.25%  3.42%  0.77%  0.04%  19.48% 
13 13.65%  3.06%  0.68%  0.05%  17.44% 
14 10.52%  2.54%  0.53%  0.05%  13.64% 
15 9.16%  2.21%  0.46%  0.02%  11.85% 
1 Source: Statistical Analysis Durable Medical Equipment Regional Carrier (SADMERC) based on 1996
Payment data 
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D - 1
 A P P E N D I X  E

CALCULATION OF SAVINGS

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E - 1
 BREAKOUT OF DMERC 1996 ALLOWED CHARGES FOR THE HOSPITAL BED CODES SURVEYED 
DMERC  Total Allowed Charges  Total Allowed Charges  Total Allowed Charges  Total Allowed Charges 
Allowed Charges  for Rentals of only  for Rentals of Only  for Rentals of Only  for Rentals of 
Procedure Code  for 1996  1 Month Duration  2 Months Duration  3 Months Duration  4 - 15 Months Duration 
E0250  $7,085,989  $2,437,580  $836,147  $559,793  $3,252,469 
E0255  $30,720,446  $11,428,006  $3,102,765  $2,150,431  $14,039,244 
E0260  $233,607,390  $80,828,157  $28,266,494  $18,454,984  $106,057,755 
E0265  $1,084,068  $576,724  $106,239  $82,389  $318,716 
Total  $272,497,893  $95,270,467  $32,311,645  $21,247,597  $123,668,184 
Estimated Savings if Rental Rates are Reduced by 12 Percent 
DMERC  Allowed Charges  Annual Savings  Five Year Savings Projection 
Allowed Charges  If Reduced  in 1996 Dollars  in 1996 Dollars 
Procedure Code  for 1996  by 12 percent  (Not Indexed to Inflation)  (Not Indexed to Inflation) 
E0250  $7,085,989  $6,235,670  $850,319  $4,251,595 
E0255  $30,720,446  $27,033,992  $3,686,454  $18,432,270 
E0260  $233,607,390  $205,574,503  $28,032,887  $140,164,435 
E0265  $1,084,068  $953,980  $130,088  $650,440 
Total  $272,497,893  $239,798,145  $32,699,748  $163,498,740 
1 Savings estimates are based upon total DMERC Allowed Charges for January 1 - December 31, 1996 and are not indexed for inflation. 
Estimated Savings if Rental Rates are Reduced by 15 Percent 1 
DMERC  Allowed Charges  Annual Savings  Five Year Savings Projection 
Allowed Charges  If Reduced  in 1996 Dollars  in 1996 Dollars 
Procedure Code  for 1996  by 15 Percent  (Not Indexed to Inflation)  (Not Indexed to Inflation) 
E0250  $7,085,989  $6,023,091  $1,062,898  $5,314,490 
E0255  $30,720,446  $26,112,380  $4,608,066  $23,040,330 
E0260  $233,607,390  $198,566,280  $35,041,110  $175,205,550 
E0265  $1,084,068  $921,458  $162,610  $813,050 
Total  $272,497,893  $231,623,209  $40,874,684  $204,373,420 
1 Savings estimates are based upon total DMERC Allowed Charges for January 1 - December 31, 1996 and are not indexed for inflation. 
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E - 2  A P P E N D I X  F

AGENCY COMMENTS

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F - 1
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F - 2
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F - 3