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OF ICE OC!; ~;.' ~ GE:NiERAl
OFFICii' OF ANAL YSJS AND INSPECnONS
DECEMBER 1987
'" J
':t
Office of Inspector Generai
'TliS inss1on of tf Office Q.f nspe~:tor '6eneiai (OI.i)1 is ti piomote
th efficiency, effecti.enss ~~d int~ity of progr~ms in the
Uni~ed states Departmeat of Heai~a ~nd Humn Servicas (HaS). It
C;oes this by deveioping methods to detect a.id prevent frcm.. waste
an4 abuse. CDea~ed by statu~e in igVil the inSpector Generai
keeps both the Secretary and the CoagreS$ fulL.y aid curem1:i
~nformed abot p~ogra.s or mpagemet p~QSiems' and recommnds
cor~cti e ac~ion~ The OIS performs its mission by conducting
a!Uits, inve.stigaticns and Inispect'ions with apprQXimat,e~ii 1,200
~ta~t strateicall~ t~ated a~9upd the'co4n~ry.
\ ~,
Office of Aaal.ysi,S' and I'nsptct'ions
This report is prduced by the. Off.ice pf AQalY$is and Inspac'tions
(ClI'), one of the three ljor afices within the OIG. The otaer ..
t~o are tne Office of Andi t and the Office of Inv.estigations. The
O~ conducts inspeGtions which ar9 typicaiiy short-term studies
ae~~gned to deter_iee pro~ra~ e~fectiveness, efficiency and
vulnerabiii ty to fraud or abu.
.~
''r;Ls Re~..'f
Thi,s inpec.tion" entitl'ed "Meai.,care Beimllnirsellen't (for At-Home
O~y~en Car,e", WClIS conducted t:'G ~termine how Medicare .
relmbursement f~ at-home oxyge~ OG~res wi~ the ~9unt paid b1
on-Med~~are payers for the same at~home oxygen services 
This ins.pection was prepared by the R\ginai Inspe1ctor Genrai fcr
Ana~ysl, and I~spectios, aegion rv. Part~ci~ting in this
proj ec~ were the foi~wig s~aff:
Project Leader
J~dith A. Morgan, 
Peglg;y P aAie 1
Jo.slah T.owasei
R-egioa V Office Q~ Investi..ations
DOR Kuhi
He~~tn e~e Branch. - Head.uarters
Ka-rep Reynoids, PJroj ect Lia.i.SO
Ma~ ~an, Data Liaison MEDICAR REIMBURSEM FOR' AT-HOME OXYGEN CAR 
RICHARD P. KUSSEROW
  December 1987
 
INSPECTOR GENERAL
 
OAI-04-87-000i 7
  TABLE OF CONTENTS
 
PAGE 
i
 
EXECUTIVE SUMRY	 
i
 
INTRODUCTION 
i
 
.. Background 
Purpose . . . .'. . . . . . . . . . .  2
 
Methodoiogy  2
 
FINDINGS  4
 
Medicare's At-Home Oxygen Costs are High
 
and Continue to. Rise . . . . . . . . .  4
 
Medicare's Costs are Higher Than They Need
 
To Be. . . . . . . . . . . . .  5
 
.There are Severai Reasons Why Medicare Pays
 
More for At-Home Oxygen Care . . . .  9
 
The Time is Ripe to Fix This Probiem .  10
 
RECOMMENDATIONS  12
 
i5
 
AGENCY RESPONSE  . . . . . . 
ia
 
APPENDIX 
A. Medicai Necessity Certification Process 19
 
B. Prevaiiing Charges for HcPCS Code E1396 20
 
C. Potentiai Medicare Savings on Oxygen

Concentrators . . .. ..... 21
 
D.	  List of Prior Studies and Reports .  23
 
E.	  Medicare Carriers Manuai 5246.5
 
computatian Exampies . . . . . .  25
  MEDICAR REIMBURSEM FOR AT-HOME OXYGEN CAR
 
EXEcUTJ:VE SUMRY 
PUROSE: 
This nationai program inspection was conducted
 
to determine how Medicare reimbursement for
 
at-home oxygen compares with the amount paid
 
by non-Medicare payers for the same at-home
 
oxygen services. Information was obtained
 
from Medicare program staff, carriers, and
 
beneficiaries. Non-Medicare sources
 
contacted inciuded Veterans Administration
 
(VA) hospi tais, state Medicaid agencies,
 
heai th maintenance organizations, a nationai
 
iabor union, a nationai association
 
representing the durabie medicai equipment
 
(DME) industry, and severai indi viduai DME
 
suppiiers and manufacturers.
 
BACKGROUN :  In i985 (the iatest year for which nationai
 
data are avaiiabie) Medicare' spent $530
 
miiiion for at-home oxygen care.
 
FINDINGS: 
DECREASED  Since 1983, acquisition costs to suppiiers of
 
ACQUISJ:TJ:ON  concentrators have decreased by 33 percent
 
COSTS  whiie Medicare reimbursement 1eveis have
 
remained the same. consequentiy, Medicare is 
not taking advantage of the economies present
 
in the marketpiace.
 
COSTS TO
  Non-Medicare payers have deveioped cost-

NON-MEDICARE  effective reimbursement methods for at-home 
PAYERS  oxygen which resui t in monthiy payments as 
much as four times iower than those made by
Medicare. . 
POSSJ:BLE  Medicare continues to use the reasonabie
 
SUBSTANTJ:AL  charge method for reimbursement of at-home
 
MEDICARE  oxygen care, resui ting in payments that are
 
SAVJ:NGS  as much as $250 per month per beneficiary more
 
non-Medicare payers for the
 
than those made by 

same services.
 
The Heal th Care Financing Administration
 
(HcFA) recognized factors reiative to
 
carriers' caicuiation of reasonabie charges in
 
its March 1987 Transmittai ii80 guideiines.
 
i
  Fuii impiementation of Medicare Carrier Manuai
 
(McM) Section 5246.5 couid reduce Medicare
 
, expenditures by at ieast SlOO miiiion per
 
year. However, other changes in HCFA' s
 
. reimbursement poiicies couid resui t in even
 
more substantiai savings.
 
WEAKESSES IN  The current certification process for medicai
 
PHYSICIAN  necessi ty of at-home oxygen undermines HCFA' s

abiii ty to ensure payment for oniy those 
CERTIFICATION 
PROCESS  beneficiaries who medicaiiy need at-home
 
oxygen care. 
SHORTCOMINGS  The HCFA Common Procedure Coding System
 
IN CURRENT
  (HcPcS) was designed to coiiect uniform

DATA SYSTEMS
  nationai payment and utiiization data.
 
Current inconsistencies in the data on at-

home oxygen prevent its immediate use in
 
effecting change in the reimbursement

mechanisms. 
POSSIBLE  At ieast three Medicaid State agencies use
 
SUBSTANTIAL  competi tive bid procedures in order to obtain
 
MEDICAID  significantiy reduced costs for at-home oxygen
 
care. 
SAVINGS 
POTENTIAL  Beneficiaries are required to make a co
BENEFICIARY  payment equai to 20 percent of any
 
SAVINGS  Medicare aiiowed charges paid for their
 
reduction in Medicare
 
care. A 

reimbursement ieveis for at-home oxygen
 
wouid resui t in a comparabie reduction in
 
co-payments for those Medicare
 
beneficiaries using this therapy. This
 
reduction assumes a prohibition against
 
the DME' s passing the Medicare payment

reduction onto the beneficiary. 
RECOMMENATIONS:
 
SHORT TERM
 
IMPLEMENT  A precise strategy shouid be deveioped by
 
MCM 5246.5
  HcFA to ensure the timeiy and effective
 
GUIDELINES  implementation of the McM 5246.5 guideiines.
 
Then HcFA shouid cioseiy monitor carrier-

specific cost savings resui ting from
 
impiementation of the guideiines.
 
ii
  REQUIRE  The immediate issuance by HCFA of a
 
PHYSICIAN  uniform medicai necessity certification
 
ATTESTATION  form with a strong attestation statement wouid
 
be an effective front-end controi for abuse.
 
INFORM  The experiences of states currentiy using

the competi ti ve bid process shouid be 
MEDICAID 
STATE  distributed by HcFA to aii Medicaid state
 
AGENCIES OF
  agencies. In addition, HCFA shouid
 
POTENTIAL  encourage other states to immediately
 
SAVINGS  consider ai ternative reimbursement methods for
 
at-home oxygen.
 
MODIFY  This data system shouid be modified to
 
HCPCS  contain oniy one code for oxygen
 
OXYGEN  concentrators, since the cost of a
 
CODES  concentrator is independent of the amount of
 
oxygen consumed by the beneficiary. However,
 
HcFA shouid continue to use codes which
 
refiect consumption ieveis for iiquid and
 
gaseous oxygen systems. 
RECOMMATIONS: 
LONG TERM
 
REQUEST  A iegisiative proposai shouid be prepared
 
SPECIAL  and submitted by HCFA to request the
 
PAYMENT  authority to extend to at-home oxygen
 
LIMITATION  care a speciai payment iimi tationauthori ty
 
containing specific criteria for estabiishing

these iimi tations comparabie to those in P. L . 
99-509, Section 9333 (Omnibus Budget
 
Reconciiiation Act). This authority shouid
 
inciude a beneficiary safeguard which
 
prohibi ts the DME suppiier from passing
 
Medicare payment reductions on to the

beneficiary . 
TEST  The HCFA shouid consider a series of
 
ALTERNATIVE  demonstration proj ects (such as
competi ti ve bids and interagency agreements 
APPROACHES 
wi th Veterans Administration hospi tais) to

deveiop both ai ternati ve Medicare reimburse
ment mechanisms for at-home oxygen care, as
 
weii as innovative methods for ensuring
 
quaiity patient care.
 
iii
  INTODUCTION 
BACKGROUND 
In 1985, an estimated 83, 000 Medicare beneficiaries received at-

home oxygen care. This use of at-home oxygen is a means to
 
achieve Medicare's goai of maintaining beneficiaries in their
 
homes as iong as possibie. Physicians prescribe at-home' oxygen
 
for patients suffering both iong- and short-term aiiments.
 
Typicaiiy, the method for oxygen deiivery to individuai
 
beneficiaries is determined by the durabie medicai equipment (DME)
 
suppiier. The choice of method for at-home oxygen deiivery (which
 
may be in the form of gas, iiquid, or concentrator) ideaiiy is
 
based on the oxygen fiow rate, the concentration ievei, and the
 
need or abiii ty of the patient to be mobiie.
 
In i985, annuai Medicare costs for at-home oxygen exceeded $530
 
miiiion. Oxygen concentrators represented about $300 miiiion (57
 
percent) of that totai. This inspection focuses on oxygen
 
concentrator~, since they represent an increasing percentage of
 
Medicare's oxygen expenditures. This shift to the use of
 
concentrators has resui ted from the dramatic reduction in their
 
acquisition costs, their low maintenance requirements, as weii as
 
their convenience to both patients and suppiiers. In comparison
 
to the iiquid and gaseous systems, concentrators do not require
 
the transport, refiiiing, or overhead of buiky tanks.
 
HOW is AT-HOME OXYGEN CARE PROVIDED?
 
LIQUID SYSTEM	  This tank system is used by both ambuiatory
 
and bedridden patients. It delivers the
 
highest purity of oxygen, and is usuaiiy oniy
 
prescribed for patients requiring a high fiow
 
rate (4 ii ters per minute or more). This
 
system generaiiy proves to be the most
 
expensive method of providing at-home oxygen
 
care. Use of this system requires frequent
 
refiiis by the DME suppiier.
 
GASEOUS SYSTEM	  This tank system is the most economicai system
 
and is typicaiiy suppiied to patients not
 
requiring a continuous use of oxygen or who
 
require oniy a iow-flow rate (usuaiiy about 2

ii ters per minute). It aiso requires the 
transport and refiiiing of buiky tanks.
 
CONCENTRATOR	  This machine operates eiectricaiiy to generate 
oxygen from the atmosphere and is designed for 
patients requiring continuous oxygen with a 
fiow rate of up to 4 ii ters per minute and who
are house-bound or have minimai portabiii ty
needs. 
i  HOW is AT-HOME OXYGEN OBTAINED UNDER MEDICARE?
 
At-home oxygen care must be prescribed by a physician. The
 
determination of which system is to be provided to the patient is
 
aimost aiways made by the DME suppiier, who interprets the
 
physician's prescription. The supplier prepares a medicai
 
ncecaessir try iceertrif icfatoionr f oprm faor ythem physeicinan'st .si g.na ture. Then
 
the signed form is submitted by the DME suppiier to the Medicare

Three vuinerabiiities to the Medicare program, exist in this
 
system. First, there is a significant absence of physician and
 
Medicare oversight of the determinations made by DME suppiiers.
 
Secondiy, when signing the certification for medicai necessity,
 
most physicians do not compare the data contained on the form with
 
the patient's medicai record. Thirdiy, the Medicare carriers'
 
determinations of the ievei of reimbursement to the suppiiers vary
 
greatiy between carriers nationwide. A more compiete description
 
of the current certification process is contained in Appendix A.
 
PURPOSE 
OBJECTIVES OF THIS INSPECTION
 
This OIG Inspection was designed to: 
o document the current at-home oxygen reimbursement
 
practices of Medicare and non-Medicare payers;
 
o determine the per unit costs of at-home oxygen care
 
systems to Medicare and compare them with the costs to
 
various non-Medicare payers; and
 
o identify recommendations that wouid resui t in
 
significant program savings, savings to beneficiaries,
 
as weii as the deveiopment of mechanisms to ensure

quaii ty of patient care. 
METHODOLOGY 
This inspection inciuded the coiiection of quantifiabie and
 
anecdotai data from Medicare program staff, inciuding Medicare
 
carriers and Medicare beneficiaries. Data were aiso obtained from
 
non-Medicare sources, inciuding Veterans Administration (VA)

hospitais, state Medicaid agencies, Heaith Maintenance . 
Organizations (HMOs), a nationai iabor union, and severai
 
individuai DME suppiiers and manufacturers. These respondents
 
were asked to provide data on the number of at-home oxygen users,
 
types of systems used, costs of each system, method of payment,
 
and the q~aii ty of service provided. The data provided were
 
anaiyzed by source and compared with the Medicare data.
 
2  Nationai Medicare ~ata on the cost of at-home oxygen care were
 
examined on a carrier-specific basis. This information was
 
obtained from HCFA' s Part B Medicare Annuai Data System (BMAD).
 
The iatest data avaiiabie are from i985. Suppiementai information
 
pertaining to Medicare carrier-specific experiences was requested
 
from each of the carriers.
 
3
  CMRT A
 
OXYGEN CONCENTRATORS
 
OME Suppiie~s' Acqu1~ltlon Costs Oec~ease...
 
Oci :'111'1
 
,,..... 
..,... (
900 ~ 
100 t

i
 
~
 
-
700 
&00 r
 
SuO L
 
L 
4wu r
 
300 ~

i
 
~
 
200 i. 
. L
 
100 ~
 
~ 
0' 
1983  19117 . 
Vllr' 
ai&/cu: 191 
. . . While Medlca~e's P~opo~tlonate Costs Increase 
Monthly Piymenti II I i of ACQu111t1on Casts
 
100 r
 
90 .. 
~ 
10 :. 
,. . 
70 l-
I'
 
80 :.
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r 
50 .. 
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r 
-10r i 
 
o i  19 
191 
'(eir' 
OXI/W 11
  FINDINGS
 
MEDICARE'S AT-HOME OXYGEN COSTS ARE HIGH AND CONTINUE TO RISE
 
In recent years, the cost to Medicare of providing at-home oxygen
 
care has increased .substantiaiiy. This is especiaiiy true of the
 
cost reiated to oxygen concentrators. Payments aiiowed by
 
Medicare carriers for DME suppiiers' charges for at-home oxygen
 
care in 1984 and 1985 were:
 
TABLE 1 
i984  i985 
TYPE  OF  OXYGEN  SYSTEM 
LIQUID  $  99  M  $i37  M 
GASEOUS  $ 51 M  $ 87 M 
CONCENTRATOR  $181  M  $300  M 
TOTAL  $331  M  $524' M 
The above data are from HcFA' s BMAD system, which is the only
 
nationai database for Medicare Part B. The 1984 data refiect
 
reports from 44 Medicare carriers. The 1985 data are from 54
 
Medicare carriers.
 
the above tabie, oxygen concentrators, the focus
 
As refiected in 

of this inspection, constituted the major portion of Medicare's
 
reimbursement fpr at-home oxygen. Information obtained from
 
severai Medicare carriers regarding their 1986 reimbursements for
 
at-home oxygen systems substantiates both a continuing shift to
 
the predominant use of oxygen concentrators as weii as an increase
 
in their totai payments.
 
Medicare 's steadiiy increasing costs for
 
In sharp contrast to 

oxygen concentrators is the. concurrent decrease in DME suppiiers'
 
acquisi tion costs for this equipment. Chart A depicts the changes
 
in these costs from i983 to i987. Pubiished resui ts of a 1984
 
Medicare carrier survey showed that a DME suppiier couid lease an
 
oxygen concentrator from a manufacturer for $25.00 to $40.00 per

month. However, our discussions in 1987 with several 
manufacturers reveaied that the acquisition cost of a concentrator
 
through a 3-year iease purchase arrangement couid be as iow as
 
$4.00 per month for the ini tiai 6-month period, $24.00 per month
 
for the remaining 30-month period, and then a $i. 00 fee to own the
 
equipment outright. Whiie this appears to be the lowest iease
purchase rate avaiiabie, the more typicai price is about $35.00
 
per month.
 
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C MEDICARE'S COSTS ARE HIGHER THAN THEY NEED TO BE
 
Medicare typicaiiy reimburses a DME suppiier about $300 per month
 
for the rentai of an oxygen concentrator. However, non-Medicare
 
payers a1i pay significantiy iess for the same equipment. The
 
foiiowing tabie shows the typicai monthiy rentai for concentrators
 
by type of payer. Chart B shows the reiationship between each
 
payer's monthiy reimbursement ieve1 and the DME suppiiers' average
 
acquisi tion cost.
 
TABLE 2 
OXYGEN CONCENTRATORS:
 
TYPICAL MONTHLY RENTAL PAYMENTS
 
REIMBURSEMENT  TO 
PAYER  SUPPLIER ( Per  Uni t ) 
Medicare (23  Medicare Carriers)  $  270.00 
269.04
$ 
Medicacido (2m6 staptees wtitih  ti ve bid contracnot s) 
i50.00 
Medicaid (3 states with  $ 
competi ti ve bid contracts) 
82.14 
VA (93 competitive bid contracts)  $ 
i68.75 
VA (25 Hospi tais with no  $ 
competi ti ve bid contracts) 
HMOs (6 with competi ti ve contracts)  $  163 . 00 
180.00 
Nationai Labor Union (Rent-purchase)  $ 
COST AND REIMBURSEMENT POLICIES OF NON-MEDICARE PAYERS
 
Veterans Administration (VA)
 
During the past 4 years, most Veterans Administration hospi tais 
have provided at-home oxygen systems through the competitive bid

process. Of 127 hospi tais providing data, 93 (or 73 percent) are 
operating under a competitive bid contract .with a DME suppiier.
 
Many of the other VA hospitais now are studying or initiating
 
their own competi ti ve bid process.
 
A1i VA hospitais (whether or not they have a competitive bid
 
process) pay iess than Medicare for each at-home oxygen. system.
 
This is especiaiiy true in the case of oxygen concentrators.
 
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CJ  Through the competitive bid process, VA hospitais ~re paying an
 
average of $82.14 a month to rent an oxygen concentrator, which
 
usuaiiy inciudes portabie equipment, deiivery, and routine

maintenance. Medicare typicaiiy pays about $300 per month for the 
same equipment, inciuding deiivery and maintenance. Some VA

hospi tais own their oxygen concentrators and have negotiated 
contracts with DME suppiiers oniy for the deiivery, set-up, and
 
ongoing maintenance of the equipment. In such instances, the
 
contracts caii for monthiy fees which range from $15 to $35.
 
Tabie 3 beiow shows actuai DME suppiier charges to VA and Medicare
 
in two different geographic areas for at-home oxygen systems.
 
Since the DME suppiiers in both areas were operating under a VA

competi ti ve bid process, they were reimbursed the amount they 
charged to VA. However, the Medicare carriers for both areas
 
reimbursed aii DME suppiiers in their respective areas at their
 
estabiished prevaiiing rate. Chart C iiiustrates the

reimbursement differences between VA hospi tais and Medicare. 
TABLE 3 
DIFFERENCES IN CHARGES SUBMITTED TO VA AND
 
MEDICARE BY THE SAME DME SUPPLIER
 
AREA A
 
OXYGEN SYSTEM'  VA  MEDICARE 
LIQUID (PER POUND)  $ .82  . $1.00 
GASEOUS (PER 240 CUBIC FEET)  $io.oo  $25.00 
CONCENTRATOR  $78.00  $300.00 
(Rentai per month) 
AREA B 
OXYGEN SYSTEM  VA  MEDICARE 
LIQUID (PER POUND)  $ .75  $1.75 
GASEOUS (H CYLINDER)  $11.00  $35.00 
CONCENTRATOR  $90.00  $360.00 
(Rentai per month)
 
Medicare's payments for the rentai of oxygen equipment were
 
typicaiiy two to four times the amount paid by the VA hospitais

using competi ti ve bid contract procedures. . 
Aimost aii VA hospitais using competitive bid contracts for oxygen
 
services were compiimentary of the quaii ty of products and degr~e
 
6
  of maintenance and other services rendered by their contractors.
 
Not oniy does the VA receive these services more economicaiiy than
 
previousiy, but the VA hospi tais stated quaii ty has improved.
 
Many hospi tai staffs aiso stated that the same DME vendors have
 
submi tted bids in subsequent years, and that these bids frequentiy
 
continue to show reduced costs.'
 
Most VA hospi tais' competitive bid contracts inciude provisions
 
that ensure a high ievei of service to VA patients. For exampie,
 
they usuaiiy require that each patient be visited by the
 
contractor's respiratory therapist or respiratory technician once
 
a month. During this visit, the equipment is checked and an
 
assessment is made of the patient's condition. A written report
 
of these items goes to the VA hospi tai for its records. In
 
addition, many VA hospitais activeiy participate with their
 
contractors in the development of instructionai materiais to
 
acquaint the patient and famiiy members with the operation and
 
day-to-day maintenance of the machines. Moreover, many VA

hospi tais have estabiished monitoring procedures to ensure that 
their suppliers adhere to the contract quaii ty of care and service

provisions. 
Medicaid State Agencies
 
Information on at-home oxygen use and cost was requested from 54
 
state Medicaid agencies. Of the 29 who responded, most foiiow the
 
iead of Medicare and use reasonabie charge reimbursement
 
practices. However, based on the information provided, aii 29
 
Medicaid agencies pay iess for at-home oxygen than Medicare. Over
 
75 percent of the time, Medicaid pays iess than $250 per month per
 
recipient, regardiess of the oxygen system used.
 
Three Medicaid agencies are using the competi ti ve bid process for 
at-home oxygen, and aii three pay iess than $150 per month per
 
recipient for the fuii range of oxygen services, inciuding tanks
 
and concentrators.
 
The oniy indication from the Medicaid respondents regarding
 
quaii ty of care or quaii ty of service came from the three agencies
 
using the competitive bid mechanism. Their provisions primariiy
 
focus on minimum response times and 24-hour emergency services.
 
Health Maintenance Organizations (HMOs)
 
Data were obtained from eight HMOs regarding their methods for
 
providing their patients with at-home oxygen care through the use
 
of an oxygen concentrator. One HMO utiiizes a iist of discount
 
suppiiers, but couid provide no statisticai information. Another
 
has an arrangement with a singie DME suppiier and pays a fixed
 
amount regardiess of the number of users.
 
7
  The data for the remaining six H_MOs reveai that five have forrai
 
rentai contracts for oxygen concentrators and one has a forrai
 
rent-purchase contract. The average monthiy rentai cost per
 
patient for these six HMOs is $163. This cost. inciudes deiivery
 
of suppiies and maintenance and, in s9me instances, the services
 
of a respiratory therapist. The HMO with the rent-purchase
 
arrangement pays a monthiy rentai fee oniy untii a totai of $1,200
 
per patient has been paid. Thereafter, whiie service continues to
 
the patient, the ownership and equipment maintenance costs and
 
responsibiiities faii to the DME suppiier.
 
Five of the eight respondents stated that they have quaii ty of
 
care standards in place and that they undertake routine monitoring
 
efforts to ensure that they are met.
 
The eight HMOs providing data consisted of three nationai group
 
HMOs, two nationai Individuai Practice Associations (IPAs), one
 
iocai group, one iocai IPA, and one HMO demonstration proj ect.
 
Membership in the HMOs ranged from 1,000 to 50,000 peopie.
 
National Labor Union
 
This union serves the medicai needs of over i40,000 retirees, many
 
of whom suffer aiiments requiring at-home oxygen use. In 1985,
 
its Heai th and Retirement Funds unit estabiished a DME Cost
 
Management Program whose first phase sought to strengthen its
 
method for ensuring that the medicai equipment, oxygen, and
 
oxygen-reiated equipment it -provided was medicaiiy necessary and
 
appropriate for each beneficiary's needs.
 
The obj ecti ve of the second phase was to make its methods of 
payment for DME more cost-effective. The union estabiished a
 
"Cooperating Vendor Program," whose participants agreed to

specific terms concerning equipment quaii ty , specifications, 
maintenance and servicing, standard rental/purchase payment
 
amounts, and the appiication of rentai payments toward the

purchase price. 
The union purchases rather than rents DME whenever it is
 
determined more cost-effective to do so. Purchase/rentai
 
decisions are based on a cost-benefit anaiysis, comparing the
 
purchase price pius projected servicing costs to the projected
 
rentai payments for the probabie duration of that patient's usage.
 
Purchases are made oniy after a 6-month rentai period in order to
 
ensure that the DME which had been piaced was meeting the
 
beneficiary's needs. For new piacements, rentai payments are made
 
for the first 6 months. Then, if the DME is purchased, the 6
 
months of rentai payments are appiied to the purchase price.
 
Existing placements were purchased, with the iast 6 months of
 
rentai payments appiied towards the purchase price.
 
8
  As a resui t of these efforts, the union now pays a totai of $180
 
per month for an oxygen concentrator untii a maximum of $i, 800 has
 
been paid, at which time the union owns the equipment. The union
 
pays a $75 per month maintenance fee to the DME suppiier after the
 
$i,800 ievei has been reached, pius an addi tionai $i2 per month
 
for disposabie suppiies (tubing, face masks).
 
THERE ARE SEVERAL REASONS WHY MEDICARE PAYS MORE FOR AT-HOME
 
OXYGEN CARE
 
Weaknesses in the Physician Certification Process (MCM 4105)
 
Aii DME must be certified by a physician as medicaiiy necessary
 
for a patient's medicai condition. A weakness in this process for
 
at-home oxygen gives Medicare ii ttie controi over the transiation

of the physician's' prescription into the information that is 
provided on the certification form which is used by the Medicare
 
carrier to determine the amount to be reimbursed to the DME
 
suppiier. A patient who needs oxygen receives a prescription
 
which he/she takes to a DME suppiier. The DME suppiier generaiiy
 
determines what kind of oxygen system is to be provided to the
 
patient. The DME suppiier prepares a form, for signature by the
 
patient's physician, which contains information to be used by .th~
 
carrier to determine the reimbursement ievei. The DME suppiier
 
submi ts the signed form to the Medicare carrier for payment. In
 
the case of oxygen concentrators, the reimbursement ievei for each
 
ciaim is determined based on the oxygen fiow rate and number of
 
hours per day stipuiated on the certification form. converseiy,
 
the reimbursement ievei for iiquid or gaseous oxygen is based on
 
the actuai amount of oxygen consumed.
 
Shortcomings in the Use of HCPCS
 
The HcFA Common Procedures Coding System (HcPcS) was designed by
 
HcFA as a uniform system for data coiiection by the carriers. The
 
indi viduai HCPcS codes for iiquid and gaseous oxygen distinguish
 
between the capacity of the equipment and/or the amount of oxygen
 
suppiied to the beneficiary. However, in the case of oxygen
 
concentrators these codes oniy reflect the projected consumption
 
for each beneficiary, since ii ttie variance exists in the

equipment's abiii ty to produce uniimi ted amounts of oxygen. In 
the case of oxygen concentrators, HcPcS provides the carriers a
 
totai of 18 codes, pius the option for 10cai modifiers. These
 
codes represent reimbursements which range from a low of $50 per
 
month to the high of over $300 per month, depending on the
 
carrier. About 90 percent of the DME suppiiers' ciaims are for
 
the highest paid code (Ei396).
 
The i8 HcPCS codes for oxygen concentrators do not refiect the
 
actuai oxygen need of a patient nor the patient's actuai oxygen

consumption. Therefore, a singie HCPCS code for oxygen
concentrators
wouid ensure consistency and enhance data
coiiection. 
9
  Flaws in' the ~easonable Charge Method (MCM 5246.5)
 
The primary reason that Medicare pays more for at-home oxygen is
 
its use of the reasonable charge method of reimbursement.
 
Reasonabie charge criteria are based on the theory that suppiier
 
competi tion in the open marketpiace wiii resui t in charges at

their iowest competi ti ve ievei. However, the reasonabie charge 
reimbursement reguiations faii to recognize factors that resui t in
 
reductions in suppiier costs due to more efficient operations and
 
decreased acquisition cost. This fiaw perpetuates at ieast a
 
"status quo" in charges and can resuit in increased charges by
 
continuing to apply an infiation factor to an infiated base.
 
Furthermore, the reasonabie charge system couid enable a singie
 
high voiume provider to upwardiy distort the prevaiiing charge in
 
a given geographic area. The prevaiiing charge is caicuiated by
 
the carrier based on charges biiied by DME suppiiers for each
 
instance of service (See Appendix B.) However, even though the
 
amount aiiowed to a suppiier may be set at $300 per month, the
 
suppiier may continue to biii at a monthiy $500-per-concentrator
 
ievei. This biiied amount wiii then be used in the carrier's
 
iater caicuiation of the suppiiers' or marketpiace' s prevaiiing
 
charge, which ui timately impacts on future aiiowed charges to that

suppiier. 
Even though Medicare is the iargest purchaser of at-home oxygen

care, this inspection found that the current reimbursement . 
procedures do not ensure reimbursement at the iowest price
 
possibie. - Medicare is paying more for at-home oxygen care than
 
payers examined during the course of this

any of the other 

nationai inspection.' According to the 1985 BMA data, Medicare
 
.spent over $300 miiiion doiiars on oxygen concentrators aione.
 
Medicare couid save at ieast $100 miiiion per year by adopting new
 
reimbursement procequres (See Appendixc. ) Further, the current
 
procedures inhibit financiai competition by the industry and
 
foster "price-fixing" type actions.
 
Non-Medicare payers who, in every instance, pay significantly iess
 
than Medicare have used other more innovative reimbursement
 
methods. The two maj or methods are the competi ti ve bid process 
and the purchase of equipment. Individuai VA hospitais have been
 
highiy successful in containing at-home oxygen costs through the

use of both of these methods. Furthermore, at ieast three 
Medicaid state agencies have contained oxygen costs through the 
use of the competitive bid mechanism. These same cost-effective 
resul ts have been achieved by other non-Medicare payers. 
THE TIME is RIPE TO FIX THIS PROBLEM
 
The probiems with Medicare's reimbursement for at-home oxygen have
 
attracted the interest of the Congress, the Office of Inspector
 
Generai (OIG), and HcFA over the past 8 years. The OIG, HcFA and
 
others have conducted a number of studies regarding a variety of
 
oxygen reimbursement issues (see Appendix D). Data from these
 
10
  studies outiine the high costs to Medicare for at-home oxygen

care, .especiaiiy the amount paid for oxygen concentrators. Whiie 
these reports inciuded recommendations designed to contain. the
 
costs of oxygen reimbursement, changes in reimbursement procedures
 
have been siow in coming.
 
The HCFA has acknowiedged the probiems reiated to reimbursement
 
for at-home oxygen care. Its most recent effort to change the
 
reimbursement system for oxygen was in March 1987. At that time,
 
HCFA issued the MCM 5246.5 guideiines to assist its Medicare
 
carriers in determining inherent reasonabieness for reimbursement
 
of Medicare DME charges, particuiariy oxygen concentrators.
 
According to these non-compuisory guideiines, the customary and
 
prevaiiing charge data may be infiuenced by additionai factors,

such as: 
II i) the marketpiace is not competitive; 2) Medicare is 
the primary source for payment; 3) the charges invoi ve
 
the use of new technoiogy for which an extensive charge
 
history does not exist; 4) the charges do not refiect
 
changing technoiogy, increased faciii ty with that
 
technoiogy, or changes in a iocaii ty are grossiy in
 
excess of prevaiiing charges in other iocaiities; and 5)
 
charges are grossiy in excess of acquisition or

production costs. II 
Through the McM 5246.5 guideiines, HCFA provided the Medicare
 
carriers with the toois for reducing the cost of at-home oxygen.
 
Whiie the carriers are aware of the discrepancies between the
 
charges to Medicare and non-Medicare payers for at-home oxygen and
 
are eager to rid themsei ves of the compiex methods invoi ved in
 
caicuiating reasonabie charge, they are not eager to create
 
carrier-specific charge ieveis. They beiieve that equipment
 
issues such as these shouid be dealt with nationaiiy and invoive
 
an estabiished payment iimi tation, aiong with a uniform medicai
 
necessi ty certification form.
 
Fuii nationwide impiementation by carriers of the McM 5246.5
 
guideiines for at-home oxygen care couid resui t in Medicare
 
program savings of over $100 miiiion annuaiiy. The appiication of
 
these guideiines aiso wouid piace Medicare expenditures for at-

home oxygen more in line with non-Medicare payers (See Appendix
 
E. ) 
ii
  R E CO M MEN D A T ION S
 
SHORT TERM RECOMMENDATIONS
 
RECOMMENDATION #1 - IMPLEMENT MCM 5246.5 GUIDELINES
 
FINDING:  The issuance of the McM guideiines by HcFA in
 
March 1987 was a positive effort to reduce the
 
cost to Medicare for oxygen concentrators.
 
The use of reduced acquisition cost as HcFA' s
 
basis for a payment reduction for oxygen
 
concentrators under the inherent
 
reasonabieness authority is totaiiy compatibie
 
wi th this inspection's findings. Aggressi ve
 
action by HCFA and its carriers is necessary
 
in order to bring Medicare payments in iine
 
wi th those of non-Medicare payers.
 
RECOMMENDATION:  The HCFA shouid deveiop a precise strategy to
 
ensure the timeiy and effective impiementation
 
of the McM 5246.5 guideiines, and HCFA shouid
 
cioseiy monitor carrier-specific cost savings

resui ting from the impiementation of these
guideiines. 
IMPACT:  Nationai impiementation of the McM 5246.5
 
guideiines couid resui t in savings of over
 
S100 miiiion annuaiiy.
 
RECOMMENDATION #2 - REQUIRE PHYSICIAN ATTESTATION
 
FINDING:  The process currentiy used for compietion of
 
the medicai necessity certification forms
 
contains vuinerabiii ties to Medicare. It aiso
 
pays for at-home
 
faiis to ensure that Medicare 

oxygen care in oniy those instances in which
 
the beneficiary requires the care at the
 
leveis needed. This. absence of adequate

front-end controis fosters abuse. . 
RECOMMENDATION:  The HcFA shouid issue immediateiy a uniform
 
medicai necessity certification form.
 
Inciuded on this form shouid be a strong
 
physician attestation statement. This

attestation piaces the responsibiii ty with the 
physician for the accuracy of the information
 
contained on the certification form.
 
IMPACT:  Increased physician participation in the
 
medicai necessity certification process wiii
 
ensure that the at-home oxygen care and
 
equipment paid for by Medicare corresponds
 
wi th each beneficiary's needs.
 
12  RECOMMENDATION #3 - INFORM MEDICAID STATE AGENCIES OF POTENTIAL
 
SAVINGS 
FINDING:  At ieast three Medicaid State agencies use the
competi ti ve bid approach and have been 
successfui in achieving significant reductions 
in their cost for at-home oxygen care. Over 
25 other Medicaid state agencies use the
, Medicare reasonabie charge reimbursement 
method for at-home oxygen and reimburse at 
ieveis comparabie to those paid by Medicare
carriers. 
RECOMMENDATION:  The experiences of States currentiy using the 
competi tive bid process shouid be distributed 
by HcFA to aii state Medicaid agencies along 
wi th strong encouragement for immediate 
consideration of ai ternative reimbursement 
mechanisms. 
IMPACT:  Aierting Medicaid State agencies to potentiai 
cost-effective ai ternat~ve mechanisms couid 
resui t in substantiai savings for the Medicaid 
program. 
RECOMMENDATION #4 - MODIFY HCPCS OXYGEN CODES
 
FINDING:	  The HCFA Common Procedures Coding System 
(HcPCS) was designed to coiiect uniform
nationai payment and utiiization data. The
 
variety of codes for iiquid and gaseous
 
systems have been successfui in measuring the
 
amounts of oxygen consumed through these
 
systems. However, the numerous codes for
 
oxygen concentrators have been iess usefui.
 
RECOMMENDATION:	  Continued use of mui tipie codes to measure 
consumption ieveis for iiquid and gaseous 
systems is appropriate. The data system for 
oxygen concentrators shouid be changed to 
contain oniy one code for oxygen
concentrators. 
IMPACT:	  Carrier inconsistencies in the appiication of 
concentrator codes wouid be eiiminated. 
Moreover, the carrier administrative burden 
wouid be reduced substantiaiiy since the need 
to caicuiate equivaiency ieveis wouid be
eiiminated. 
13  LONG TERM RECOMMENDATIONS
 
RECOMMENDATION #5 - REQUEST SPECIAL PAYMENT LIMITATION
 
FINDING:  Medicare's reasonabie charge reimbursement
 
mechanism does not take advantage of the
 
reduced acquisition costs to DME suppiiers .for
 
oxygen concentrators. These iow acquisition
 
costs in conjunction with the iimited need for
 
suppiier maintenance do not substantiate the
 
significant variance in Medicare reimbursement
 
ievels among carriers.
 
RECOMMENDATION:  A iegisiative proposai shouid be prepared and
 
submi tted by HcFA to request the authority to
 
extend to at-home oxygen care a speciai
 
payment iimi tation authority containing
 
specific criteria for estabiishing these
 
iimitations comparabie to those in P.L. 99
509, Section 9333 (OBRA). This authority
 
shouid inciude a beneficiary safeguard which
 
prohibi ts the DME supplier from passing
 
Medicare payment reductions on to the

beneficiary . 
IMPACT:  Medicare couid achieve substantiai program
 
savings as weii as nationai consistency in
 
reimbursement ieveis among carriers. In

addi tion, Medicare beneficiaries wouid share 
in these savings through reduced co-payments.
 
RECOMMENDATION #6 - TEST ALTERNATIVE REIMBURSEMENT MECHAISMS
 
FINDING:  Aimost aii non-Medicare payers of at-home
 
oxygen care pay significantiy iess than
 
Medicare. These non-Medicare payers use a
 
variety of reimbursement mechanisms which have
 
been highiy successfui in achieving
 
significant savings for their programs.
 
RECOMMENDATION:  The HCFA immediateiy shouid commence a series
 
of demonstration projects, such as competitive
 
bids and interagency agreements with Veterans
 
Administration Hospi tais. These proj ects

should focus on deveioping ai ternative 
Medicare reimbursement mechanisms and

innovative methods for ensuring quaii ty of 
patient care.
 
IMPACT:  In the impiementation of its existing 
demonstration authority, HcFA shouid make 
maximum use of the experiences of non-Medicare 
payers to try a variety of experiments. Fuii 
Medicare impiementation of methods used by 
non-Medicare payers, such as competitive bid, 
couid achieve about $200 miiiion annuaiiy in
Medicare program savings. 
14  PG REPOE
 
Administration (HCFA) provided comments
 
The Heai th Care Financing 

on the draft report to the OIG on November i8, 1987. This
 
response inciuded comments on each specific recommendation
 
contained in the draft report as weii as a few technicai
 
suggestions. Aii of the technicai s~ggestions were incorporated
 
in the finai report. The comments reiated to the recommendations

are: 
Coimnts of Health Cae Finacing Adnistration
 
on the OlG Draft Report

Mecae Reimbuement for At-Hom Oxen Cae 
OAI-04-87-00017 
Reoondtion No. 1 
an effective 
HCFA should develop a precise strategy to ensure the timely 

implemntation of the MO 5246.5 guidelines an HCFA should closely
 
moni tor carrier-speific cost savings resulting from the implementation of
 
these guidelines.
 
Conts 
We agree with this recoindtion. Subsequent to issuace of these
 
instrutions, in order to promte national consistency a conferene call

wi th all HCFA regional offices wa conducted to discuss imlemntation of 
these guidelines.
 
Carier Maual guidelines instrut caiers to forw to HCFA copies of

notices alerting providers of chanes in reimbursemnt throug the use of 
other factors in detennining inherent reasonableness. We intend to
 
monitor carrier implementation, including cost savings, via these notices.
 
Reonuendation No. 2 
HCFA should issue immiately a unifonn mecal necessity certification
 
fonn. Included on this fonn should be a strong physician attestation
 
statement. This attestation places the responsibility with the physician
 
for the acury of the infonntion contained on the certification form.
 
Conts 
We are currently in the process of developing a mecal necess,i ty
certification fonn with an attestation statemnt as recornded by the 
OlG. 
15
  Reomendtion . No. 3 
The expriences of States currently using the competi ti ve bid proess 
should be distributed by HCFA to all State Mecaid agencies alOng with

strong encourement for inmate consideration of al teniti ve
reimbusemnt mehaism. 
Conts 
We agree tht there is a potential here to realize Meicaid progra

savings an will develop an appropriate notification for all Mecaid 
State agencies.
 
Reonndtion No. 4 
Continued use of multiple codes to measur consumption levels for liquid
 
an gaseous system is appropriate. The data system for oxygen
 
concentrators should be chaned to contain only one code for oxygen
 
concentrators . 
Ceimnts 
The use of HCFA Con Procedures Cong System (HCP) codes by cariers
 
wa recently revised by Carier Progra Meraum B-87-13, copy
 
attahed. This will create a consistent approah to data collection an
 
we believe it is a preferable altenitive to having a single code for all

concentrators. This is due to the fact tht oxyen concentrators va in 
their flow rates and percentae of oxygen delivered.
 
Reonndtion No. 5 
A legislative proposal should be prepared an subntted by HCFA to reqest
the authority to exten to at-hom oxygen cae a speial paymnt 
limitation authority containing speific criteria for establishing these
 
limitations comparable to those in P.L. 99-509, Section 9333 of the

Omibus Buet Reonciliation Act (OBR). 
Conts 
The provisions of section 9333 of OBR were so cumbersome tht they have

served to limit the Depatmnt's ability to issue speific paymt 
limitations for physician services. In fact, section 312 of the
 
Adinistration's drft Meicae Amendments of 1987 wa proposed to repe
 
and/or moify som of the OBRA chanes. In this instace, however, there
 
is no need for a legislative chane. Curent statute would allow inherent
 
reasonableness rules to be applied by HCFA to oxygen services. HCFA is
 
effecting implemntation by issuing carrier instrutions (MC 5246.5),

which were referred to in Reoimndtion No. 1. 
i6
  Reonndtion No. 6 
HCFA immediately should conce a series .of demnstration projects, such

as competi ti ve bids and interaency agreemnts with Vetera 
Adinistration hospitals. ntese projects should focus on developing

al ternti ve Meicare reimbusement mehanism an innovative method for 
ensurin quali ty of patient ca. 
Conts 
HCFA has recently comlete the design phase of a demnstration to test a

competi ti ve bidding approah to reimbusemnt for durable medica 
equipnnt. Oxygen is one of the aras which this demonstration will
 
include. nte Veteras Adinistration's method of selecting a single

lowest-biddng supplier is not sui table for our puses. We must offer a
choice of preferred providers in the Meica progr. 
17
  APPENDICES
 
18
  APPENDIX A
 
MEDICAL NECESSITY CERTIFICATION PROCESS
 
Based on data obtained during the course of this nationai
 program
point
inspection, a significant iack of controi exists from the
 
actuai 
where the physician's prescription for oxygen becomes the
 
basis for determining the amount to be paid by Medicare.
 For 
exampie: 
step 1
  The physician writes a prescription to the
 
patient for oxygen to be used at home. The

prescription contains the ii ter fiow rate but 
does not necessariiy stipuiate the length of
 
time each day that the patient is to use
 
oxygen or the specific equipment to be used.
 
The physician then gives the prescription to

the patient. 
step 2
  The patient, with advice or information from a
 
physician, hospi tai discharge staff,
 
respiratory therapist, a nurse, friends, or
 
teiephone book, locates a DME suppiier to fiii
 
the prescription.
 
step 3
  The DME suppiier then transiates the
 
prescription to a certification form which
 
specifies the actual ii ter fiow rate and the
 
iength of use per day. Aii eiements on the
 
certification form are factors in determining

the amount to be reimbursed by Medicare. . 
Therefore, a DME suppiier couid set the usage
 
per day at a rate equi vaient to the maximum
 
reimbursement from Medicare (12 to 14 hours
 
per day). The DME suppiier deiivers the
 
oxygen equipment to the patient whiie the
 
certification form is being processed.
 
step 4
  The DME suppiier sends the compieted
 
certification to the physician for his/her
 
signature which attests to the vaiidi ty of the
 
medicai necessity of the equipment and amounts
 
needed. Most physicians sign the certifi
cation without cioseiy scrutinizing its

contents. 
step 5
  The DME suppiier then transmits the
 
physician's signed certification form to the
 
Medicare carrier for processing and payment.
 
19
  APPENDIX. B
 
PREVAILING CHARGES FOR HcPCS CODE E1396
 
CARRIER  PREVAILING CHARGE  REASON( S) FOR VARIATION 
00520  $300 - $350  Speciai ty code 
00528  $265 - $274  Locaii ty, speciai ty code 
00542  $310 
00550  $265 - $275  Internai modifiers 
00630  $301 - $310  Locaii ty 
00640  $207 - $360  Locai i ty 
00650  $290 
00801  $295 - $370  Locaii ty 
00803  $364 
oi370 
$300 - $385  Locaii ty 
03070  $268 - $384  Locaii ty 
i3iiO 
$326 
13310  $350 - $375  Speciai ty code 
14330  $364 
i6360 
$225 - $420  Locaii ty 
16510  $275 - $336  Locaii ty 
THE i986 PREVAILING CHARGES SHOWN ABOVE ARE FROM HCFA' S PART B
 
MEDICARE ANNUAL DATA SYSTEM (BMAD). HcPCS CODE Ei396 REPRESENTS A
 
BENEFICIARY'S ESTIMATED CONSUMPTION OF 1952 CUBIC FEET OF OXYGEN
 
AS PROVIDED BY AN OXYGEN CONCENTRATOR. The 1985 MEDICARE
 
EXPENDITURES FOR HCPcS CODE E1396 WERE OVER $150 MILLION, WHICH
 
REPRESENTS MORE THAN 50 PERCENT OF ALL MEDICARE EXPENDITURES FOR
 
OXYGEN CONCENTRATORS. 
20
  APPENDIX C
 
POTENTIAL MEDICARE SAVINGS ON OXYGEN CONCENTRATORS
 
The 1985 BMAD data (the most recent avaiiabie) estabiished that
 
the Medicare carriers paid a totai of $300,355,215 in aiiowed
 
charges for oxygen concentrators. This amount reflects charges
 
for at ieast 83,432 beneficiaries which is based on an estimated
 
$300 per month concentrator rentai charge. Using the above data
 
aiong with other data contained in McM 5246.5, severai potentiai
 
options for Medicare savings were calcuiated. In each instance
 
the ai ternative proj ections were subtracted from the amount known
 
to be currentiy paio by Medicare to DME suppiiers ($300,355,215).
 
BASED ON OIG RECOMMENDATIONS -- SHORT TERM SAVINGS
 
1. Exampie 1a of McM 5246.5 uses an estimate of a'
 
suppiier's annuai direct and indirect costs associated

wi th renting a concentrator. That cost (estimating a 50 
percent mark~p by the suppiier) is an annuai rentai
 
aiiowance of $i, 655 or about $138 per month.
 
a. 83,432 beneficiaries X $i38 per month X 12 months =

$138,163,392 
POTENTIAL SAVINGS = $162,191,000
 
b. 100 percent markup or $2,206 annuaiiy or $i84

monthiy 
83,432 beneficiaries X $184 per month X i2 months =

$184,217,856 
POTENTIAL SAVINGS = $116,137,000
 
2. Exampie 2 of MCM 5246.5 estabiishes a reasonabie monthiy
 
charge for purchase by seiecting the median of whoiesaie
 
prices for concentrators (i. e., $840) and increasing it
 
by a markup of 66-2/3 percent for the suppiier.
 
. $840 per month X 167 percent = 
$ 1, 403 
$i,403 X 83, 4~2 beneficiaries=  $117,038,410 
Non-routine maintenance* 
12 months X $31 per month 
X 83,432 beneficiaries = 3i,036,704 
Repairs and overhaui (warranty  exciuded) * 
$360 X 3 divided by 5 
i8,021,3i2
X 83,432 beneficiaries = 
TOTAL  $166,096,426 
POTENTIAL SAVINGS = $134,258,000 during first year. Greater
 
savings accrue in later years, since the purchase price was
 
included in year one.
 
* See Appendix E
 
21  3. Exampie 3 of MCM 5246.5 estabiishes a monthiy rentai
 
rate by determining 10 percent of the purchase price of
 
a concentrator as being inherentiy reasonabie.
 
io percent of $i, 400 = $i40 per month pius maintenance and
 
repairs of $600 per year ($50 per month)
 
$190 per month X 12 months X 83,432 beneficiaries =

$190,224,960
 
POTENTIAL SAVINGS =  $110,130,000
 
BASED ON OIG RECOMMENDATIONS -- LONG TERM SAVINGS:
 
1. The average monthiy rentai for concentrators for VA
 
hospitais with competitive bid contracts is $82.14.
 
Adoption of a simiiar ievei for Medicare wouid resui t in
 
annuai costs of approximately:
 
$82. i4 per month X i2 months X 83,432 beneficiaries =

$82,237,254
 
POTENTIAL SAVINGS =  $218,117,000
 
2. The average monthiy rentai for concentrators for 
VA hospi tais with no competitive bid contract is $168.75.
Medicare's use of a simiiar ievei wouid resui t in annuai 
costs of approximateiy: 
$i68.75 per month X 12 months X 83,432 beneficiaries =

$168,949,800 
POTENTIAL SAVINGS =  $131,405, 000 
3. Medicaid state agencies with competitive bid contracts pay an 
average of iess than $150 per month for oxygen concentrators. 
A simiiar ievei for Medicare wouid resui t in annuai costs of 
approximateiy: 
$i50 per month X i2 months X 83,432 beneficiaries =

$150,177,600 
POTENTIAL SAVINGS =  $150,177, 000 
22
  APPENDIX D
 
LIST OF PRIOR. STUDIES AND REPORTS
 
i. "Oxygen Concentrator study" (1-04-9031-10), 9/30/8i,
 
HCFA Program Vaiidation Report.
 
2. Annuai Management Report, ii/13/84, The Equitabie Study
 
(Medicare Carrier for Tennessee).
 
3. "Review of Cost Containment through Expansion of the
 
Lowest Charge Levei Limitation", (1-02-005-19) 12/15/81,
 
HCFA/BQC. 
4. "Evaiuation of the Impact of the Lowest Charge Levei",
 
4/6/82, HCFA Bureau of Program poiicy.
 
5. "Extending the Lowest Charge Levei (LCL) to Addi tionai
 
Non-Physician Procedures", (01-320ii), OIG/Audi t.
 
6. "Priori ty Inspection Report (PIR) on Medicare Payments

for Oxygen Concentrators", 8 / 18 / 83, OIG/OHFI. 
7. "Priori ty Inspection Report--Liquid Oxygen and Portabie
 
Pressurized Gas Systems", 5/84, OIG/OHFI, Region II.
 
8. "Review of Oxygen Concentrators", 11/82, HCFA,

Region II. 
9. "Durabie Medicai Equipment--Competi tive Bidding
 
Demonstration-Market Case Studies", 8/21/86, HCFA
 
Contract to Abt Associates.
 
io. GAO studies numbered HRD 82-61 (7/23/82), HRD 83-73
 
(7/8/83), and HRD 84-40 (2/13/84).
 
11. "Home Oxygen Expenditures", (2R7-A02-111), 8/13/82,

Veterans Administration/Audit. 
, . 
12. Management Impiication Reports (MIR) prepared by OIG/OI which
 
address a fuii range of probiems and/or improprieties with
 
at-home oxygen care. The dates of these MIRs are from March
 
1984 thru Juiy 1986. Specific MIRs are: MIR 84-48, MIR 84
97, MIR 84-114, MIR 85-75, MIR 85-132, MIR 85-171, MIR 86-02,
 
and MIR 86-iO, OIG/OI.
 
23
  i3. "Determinants of Current and Future Expenditures on Durabie
 
Medicai Equipment by Medicare and Its Program Beneficiaries,"
 
4/83, Wiiiiams Coiiege, Wiiiiamstown, Massachusetts.
 
14. Uni ted states Congress, Deficit Reduction Act of 1984
 
(DEFRA), Section 1889. Consoiidated Budget Reconciiiation

Act of 1986 (COBRA), Section 9304. Omnibus Budget
 
Reconciiiation Act of 1986 (OBRA), Section 4530.
 
15. "Medicare Cataract Impiant Surgery" (OAI-09-85-09-046),
 
"Medicare Part B Ambuiance Services" (OAI-03-86-00012),
 
"Coronary Artery Bypass Graft (CABG)--Assuring Quaiity Whiie
 
Controiiing Medicare Costs" (OAI-09-86-00076), OIG/OAI.
 
24
  APPENDIX E
 
MEDICARE CARRIERS MAAL 5246.5 COMPUTATION EXAPLES
 
The exampies set forth beiow were provided to the carriers by HCFA
 
as iiiustrations on how inherent reasonableness might be appiied.
 
The carriers were advised to determine independentiy the method to
 
be used for deciding how inherent reasonabieness wiii be appiied
 
in their respective areas and to soiicit comments from appropriate
 
groups. The carriers were cautioned against mereiy issuing the
 
exampies as poiicy.
 
EXAMPLE 1 
Prevaiiing charge for rentai  $300 per month
Prevaiiing charge for purchase  $3,000
Acquisi tion costs  $1,000
5 years 
Estimated usefui iife 
Technicai maintenance  $3i per month
Average annuai repairs and  $360 
overhaui beyond warranty period
 
RENTAL ESTIMATE
 
Annual Depreciation $200
 
($1, 000 divided by 5 years)
 
Non-routine technicai maintenance  $372
 
($31.00 x 12 months)
 
Averageannuai repairs and overhaui  $216
 
for 5-year period - 2 years under

warranty 
($360 x 3 divided by 5)
 
TOTAL DIRECT COSTS  , $788
 
Indirect Costs - space, taxes,

insurance, inventory, 
financlng, etc. (40 percent)  $315 
TOTAL ANAL COST  $1103 
TOTAL MONTHLY COST  $91.92 
AT A MARK-UP OF 50 PERCENT AND 100 PERCENT THE ANAL. RENTAL
 
ALLOWANCES WOULD AMOUNT TO $1,655 ($138.00 MONTHLY) AND $2,206
 
($184.00) RESPECTIVELY
 
25  EXAMPLE 2 
REASONABLE CHARGE FOR PURCHASE
 
Reasonabie charge for purchase is estabiished by seiecting the
 
median of whoiesaie prices (i. e., $840) and ~ncreasing the
 
seiected price by the industry standard DME markup of 66-2/3
 
percent, and establishing that price as the reimbursement for a
 
purchased concentrator with non-routine maintenance and repair

charges addi tionai . 
$840 X 167 PERCENT. = $1,400
 
EXAPLE 3 
INHERENTLY REASONABLE MONTHLY RENTAL
 
Estabiish io percent of the purchase price as the inherentiy
 
reasonabie monthiy rentai aiiowance for DME. Add a factor to
 
cover maintenance and repair. Use $i, 400 as purchase price and
 
$600 for annuai maintenance and repairs. The reasonabierentai
 
aiiowance would be $190 per month.
 
10 PERCENT OF $1,400 = $140 + $600 DIVIDED BY 12 = $50.00
 
$140 + $50 = $190
 
26