Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

 

 

Inspector General 

March 2005 

OEI-09-03-00160 

(Revised) 

 

MEDICARE AND FEHB 

FOR HOME OXYGEN EQUIPMENT 

PAYMENT RATES 
Office of Inspector General 

http://oig.hhs.gov

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452,

as amended, is to protect the integrity of the Department of Health and Human Services 

(HHS) programs, as well as the health and welfare of beneficiaries served by those 

programs. This statutory mission is carried out through a nationwide network of audits, 

investigations, and inspections conducted by the following operating components.

Office of Audit Services 

The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by

conducting audits with its own audit resources or by overseeing audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors

in carrying out their respective responsibilities and are intended to provide independent

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the department.

Office of Evaluation and Inspections 

The OIG's Office of Evaluation and Inspections (OEI) conducts management and 

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

department, the Congress, and the public. The findings and recommendations contained 

in the inspections reports generate rapid, accurate, and up-to-date information on the

efficiency, vulnerability, and effectiveness of departmental programs. The OEI also

oversees State Medicaid fraud control units, which investigate and prosecute fraud and 

patient abuse in the Medicaid program. 

Office of Investigations 

The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries

and of unjust enrichment by providers. The investigative efforts of OI lead to criminal

convictions, administrative sanctions, or civil monetary penalties.

Office of Counsel to the Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to

OIG, rendering advice and opinions on HHS programs and operations and providing all

legal support in OIG's internal operations. The OCIG imposes program exclusions and 

civil monetary penalties on health care providers and litigates those actions within the 

department. The OCIG also represents OIG in the global settlement of cases arising 

under the Civil False Claims Act, develops and monitors corporate integrity agreements,

develops compliance program guidances, renders advisory opinions on OIG sanctions to 

the health care community, and issues fraud alerts and other industry guidance. 

 
 

∆ EXECUTIVE SUMMAR Y 

OBJECTIVE 

To compare Medicare fee schedule allowances and median Federal 

Employees Health Benefits (FEHB) plans’ payment rates for home

oxygen equipment in 2002. 

BACKGROUND 

We released a report entitled Medicare Payment Rates for H me 

Oxygen Equipment (OEI-09-03-00160) in September 2004, which 

provided CMS with a comparison of Medicare payments with FEHB 

plan prices. This report, which supersedes the September 2004 report, 

provides an updated comparison between Medicare fee schedule 

allowances and median FEHB payment rates for home oxygen 

equipment and contents. 

o

Medicare covers oxygen equipment and supplies under its durable 

medical equipment benefit (Part B). Oxygen equipment includes oxygen

concentrators (stationary equipment that concentrates the oxygen in 

room air), stationary liquid and gaseous oxygen systems, and portable 

liquid and gaseous systems. These five items accounted for 99.9 percent

of the $2.2 billion Medicare allowed for home oxygen equipment in 2002. 

To obtain and analyze FEHB payment rates, we requested information 

concerning home oxygen rates and utilization from the 198 plans that 

the Office of Personnel Management identified as providing FEHB

coverage in 2002. We received responses from 185 plans. For our 

analysis, we grouped the plans by corporate ownership into 

91 consolidated plans. Of the 91 plans, 56 plans provided sufficient 

information about at least 1 of the 5 home oxygen equipment items to be

included in our analysis. 

FINDING 

FEHB plans’ median payment rates are lower than Medicare fee 

schedule allowances for home oxygen equipment and contents. 

FEHB plans’ median payment rates are 12.4 percent lower for 

stationary equipment and 10.8 percent lower for portable equipment. 

The greatest difference between the median FEHB payment rate and

the median Medicare fee schedule allowance is for oxygen concentrators. 

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EXE CUTIVE S U MMAR Y

CONCLUSION 

Section 302(c)(2) of the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) requires reductions in payments for 

oxygen equipment in 2005 based on the Office of Inspector General’s

(OIG) analysis of median FEHB prices. Subsequent to the issuance of a 

report we released in September 2004, questions were raised about the 

inclusion of oxygen contents for stationary and portable equipment in 

our FEHB payment rates. As a result, we conducted additional work to

clarify the data in the September 2004 report. This report provides an 

updated comparison between Medicare fee schedule allowances and 

median FEHB payment rates for home oxygen equipment. 

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∆ T ABLE OF CONTENTS 

EXECUTI VE SUMMARY ......................................... i 

INTRODUCTI O N ................................................ 1 

FINDI N G ......................................................... 8 

FEHB rates compared to Medicare ............................ 8 

CONCLUSION .................................................. 10 

ACKN O W LEDGMENTS ......................................... 11
∆ INTRODU C TION 

OBJECTIVE 

To compare Medicare fee schedule allowances and median Federal 

Employees Health Benefits (FEHB) plans’ payment rates for home

oxygen equipment in 2002. 

BACKGROUND 

We released a report entitled Medicare Payment Rates for H me 

Oxygen Equipment (OEI-09-03-00160) in September 2004, which 

provided CMS with a comparison of Medicare payments with FEHB 

plan prices. This report, which supersedes the September 2004 report, 

provides an updated comparison between Medicare fee schedule 

allowances and median FEHB payment rates for home oxygen 

equipment and contents. 

o

Medicare Coverage, Reimbursement Policy, and Payments 

Medicare Part B covers home oxygen equipment and supplies under its 

durable medical equipment (DME) benefit (Section 1832(a)(2)(G) of the 

Social Security Act). DME is defined as equipment that can withstand 

repeated use, is primarily used to serve a medical purpose, and is 

appropriate for use in a patient’s home (42 CFR § 414.202). Oxygen 

therapy is covered for patients with significant hypoxemia, a shortage of 

oxygen in the blood, who meet specific medical criteria (CMS Coverage 

Issues Manual, DME: Home Use of Oxygen, 60-4). 

Medicare covers three types of oxygen delivery systems, which are 

payable for rental only: (1) oxygen concentrators, which are electrically 

powered, stationary machines that deliver high concentrations of 

oxygen by extracting it from room air; (2) stationary or portable liquid 

oxygen systems, which use oxygen stored as a very cold liquid in 

cylinders and tanks; and (3) stationary or portable gaseous oxygen 

systems, which administer compressed oxygen directly from cylinders 

(CMS Coverage Issues Manual, DME: Home Use of Oxygen, 60-4). 

Medicare reimburses suppliers for oxygen equipment based on monthly 

fee schedule allowances that vary by State. These monthly allowances 

cover the oxygen equipment, oxygen contents including all refills, 

equipment setup and maintenance, accessories, and patient education. 

Medicare includes the contents for both stationary and portable 

equipment in the fee schedule allowances for stationary equipment. 

Medicare fee schedules for home oxygen equipment are modality-

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neutral. That is, in a given State, there is one rate for all stationary 

systems and one rate for all portable systems.

As shown in Table 1 below, five home oxygen items accounted for 

99.9 percent of the $2.2 billion Medicare allowed for home oxygen 

equipment in 2002. Oxygen concentrators represented the largest 

expenditure at $1.8 billion, or 83.2 percent of Medicare spending. 

Table 1. Five Oxygen Items/Codes as a Percentage of Total Medicare 

Part B Allowance for Oxygen Equipment and Supplies in Calendar 

Year 2002 

Code Description Allowed Amount

in 2002 

Percentage of

Oxygen Spending

E1390 Oxygen concentrator $1.8 billion 83.2% 

E0431 Portable gaseous oxygen

system $212 million 9.6% 

E0439 Stationary liquid oxygen 

system $128 million 5.8% 

E0434 Portable liquid oxygen system $26 million 1.2% 

E0424 Stationary gaseous system $2 million 0.1% 

Total $2.2 billion 99.9%

Source: Medicare National Claims History 100 percent of DME claims, 2002

Medicare Prescription Drug, Improvement, and Modernization Act (MMA) 

Section 302(c)(2) of MMA requires reductions in payments for oxygen 

equipment in 2005 based on the Office of Inspector General’s (OIG) 

analysis of median FEHB prices for this equipment. The MMA also 

freezes payments for home oxygen equipment from 2005 through 2008 

and establishes competitive bidding programs for durable medical 

equipment beginning in 2007. 

Prior Inspector General Work 

Previous OIG studies have highlighted excessive Medicare spending for 

DME in general and oxygen equipment specifically. In 2002, OIG 

compared Medicare payments for 16 DME items, excluding oxygen 

equipment, to reimbursement by other public and private payers. OIG 

projected savings ranging from $84 million to $958 million for these 

16 items, depending on how much Medicare lowered reimbursement. 

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In 1991, OIG compared amounts allowed by Medicare for rental of 

oxygen concentrators to the amounts paid by the Department of 

Veterans Affairs. OIG found that Medicare-allowed amounts were more 

than twice the amount that the Department of Veterans Affairs paid for 

concentrators. 

METHODOLOGY 

Subsequent to the issuance of the September report, questions were

raised about the inclusion of oxygen contents for stationary and portable 

equipment in the FEHB rates. To ascertain if plans had included 

contents in their rates, we conducted a followup survey with all of the 

plans that were included in our original analysis as well as some plans 

for which information had been unavailable or unusable for the 

September report. The findings of this report reflect the results of that 

followup survey. We relied on the home oxygen payment rates provided 

to us by the FEHB plans. 

To compare median FEHB rates to median Medicare fee schedule

amounts for the September report, we (1) identified FEHB plans to use

in our analysis and sent them a mail survey, (2) determined if we could 

use the information provided in each plan’s survey response for our

median comparison, and (3) calculated the plan payment rates for each 

of the five home oxygen items (oxygen concentrators, stationary liquid 

systems, portable liquid systems, stationary gaseous systems, and 

portable gaseous systems). 

For the followup survey and analysis, we determined if each plan’s rate 

for stationary equipment included portable and stationary contents and 

adjusted the plan payment rates accordingly. The following paragraphs

describe the process we used for each step. 

Initial Identification and Survey of FEHB Plans 

The Office of Personnel Management (OPM), which oversees the FEHB

program, provided us with a list of 198 health plans participating in the 

program in 2002. We sent mail surveys to each of these 198 OPMidentified health plans requesting the rates they paid for oxygen 

concentrators, stationary liquid systems, portable liquid systems, and 

portable gaseous systems. Pursuant to a request from CMS, we 

subsequently collected information about stationary gaseous systems. 

On reviewing the responses, we discovered that a number of the plans 

listed separately by OPM were actually owned by common corporate

entities. While some of these corporate entities were able to provide 

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rate information for each of their components, others could provide 

information only for the corporate entity as a whole. To maintain 

consistency in our analysis, we consolidated plans under their corporate 

ownership when they (1) did not have overlapping service areas and 

(2) either had the same company name and contact information or told 

us they were part of a larger corporation. When we use the term “plans” 

in this report, we are referring to the consolidated plans described here, 

not the OPM-identified health plans. 

Determining Usability of Plan Responses 

In reviewing the original responses, we found that we had to exclude a 

number of plans from our analysis because they either could not provide

rate information or we could not compare their rates with Medicare. 

Some, despite being listed by OPM, indicated they did not participate in 

FEHB in 2002. Others participated, but did not offer a home oxygen 

benefit. Several plans paid suppliers capitated rates that included

home oxygen equipment and supplies. Capitated rates cannot be

compared to Medicare’s fee schedule because they are predetermined

monthly amounts paid to suppliers for a range of equipment and 

supplies while Medicare pays suppliers on a per-claim basis. A number 

of other plans had capped rental policies for their home oxygen benefit, 

which also are not comparable to Medicare. Plans with capped rental 

policies cease monthly rental payments once the sum of these payments 

for a particular member reaches the purchase price of the item. 

Medicare, on the other hand, continues to make monthly rental 

payments as long as the item is medically necessary. 

Apart from the categorical exclusions described above, a number of 

other plans provided rate information that seemed comparable to 

Medicare, but that we could not use for a variety of reasons. For 

example, some of these plans provided a range of rates they might pay, 

while others gave “approximate” or “model” rates. We were able to 

include some of these in the followup survey by obtaining claims 

information that allowed us to calculate an average monthly payment 

for at least one item. We did not ask for this information in the original 

survey. In total, we received usable information for at least 1 home 

oxygen item from 13 plans that we had not included in the original 

analysis. 

A few plans in the original analysis provided additional information as 

part of the followup that invalidated the rates previously provided. For 

example, two plans used in the original analysis told us during the 

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followup that they were not, in fact, providing benefits to FEHB 

members in 2002. The rates they had originally provided came from 

another line of commercial business in one case, and from a Medicaid

product in the other. In total, eight plans included in the original study 

were excluded in the final analysis because of information they provided

in the followup. The following table compares the results of our 

consolidations and exclusions for the September report and this report. 

Table 2. Plans Used in Our Original and Followup Analyses 

Category Original Analysis Followup Analysis

OPM-identified Plans Responding to Survey 184 185 

Consolidated Plans Responding to Survey 90 91 

 Capitated Payments 2 5 

 No Oxygen Benefit 1 1 

 Not 2002 FEHB Plan 1 3 

 Capped Rental 14 15 

 Other Unusable 21 11 

 

Plans Used for Analysis (for at least 1 item) 51 56 

Source: Office of Inspector General analysis of collected information, 2004 and 2005

Calculation of Plan Payment Rates 

Having established which rates from which plans were usable, we then 

calculated the plan payment rate to use in our analysis for each plan 

and oxygen item. If a plan provided a single rate for an item, we used 

that rate as the plan payment rate for that item. If a plan provided two 

or more rates (for example, a different rate in each of three coverage 

areas), we used the median of distinct rates as the plan payment rate. 

As mentioned above, some plans could not provide distinct rates for 

some items, but could provide claims information. In such cases, we

used the data provided to calculate the average monthly rental 

allowance for that plan and item, which we used as the plan payment 

rate. Specifically, we requested that such plans provide us the total 

number of rental months for the item in 2002 and the associated 

allowed amount. We then divided the total allowed amount by the total 

rental months to arrive at the average monthly rental allowance. 

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Many plans had usable plan payment rates for some, but not all, of the 

oxygen items in the study. Therefore, the number of plan payment 

rates we used to calculate the median FEHB rate for any particular 

item is always smaller than the total number of plans used in our 

analysis. 

Establishing if Contents Are Included and Adjusting Rates 

As part of the followup survey, we asked plans if they included oxygen 

contents in their payment rates for each of the five items. For 

stationary equipment, we asked if the rates included contents for both 

the stationary system itself and any portable systems that were rented 

simultaneously. If a plan indicated that the rates they provided did not 

include contents, we then asked for claims information for their

stationary oxygen equipment and portable and stationary contents. 

For plans that paid separately for contents, we used the data that they 

provided to determine the average (mean) amount allowed for contents 

associated with each stationary item. We divided the total contents 

allowance by the number of rental months for each stationary item. We 

added this figure to the previously calculated rate to arrive at the total 

amount allowed for stationary systems plus the contents of the 

stationary system and any portable systems used concurrently. If a 

plan did not pay separately for contents for a particular item (i.e., they

used Medicare’s reimbursement methodology), we did not calculate a 

contents add-on for that plan and item. 

Some plans indicated that they paid separately for oxygen contents, but 

we were unable to obtain usable claims information from them. In 

these cases, rather than exclude them from our analysis, we estimated a

contents allowance for each item through a process known as 

imputation. Imputation is a statistical method for reducing the effect of 

survey nonresponse by assigning estimated values to missing data 

points. In general, these estimated values are based upon data from 

respondents with similar characteristics to the nonrespondents. We 

used the median contents allowance for all plans that paid separately 

for contents for a particular item to fill in the missing values for those 

plans that paid separately for contents (for that particular item) but 

could not provide claims information. We used at least one imputed

value for 14 of the 32 plans that paid separately for contents for at least 

one stationary oxygen item, most commonly for the contents associated

with stationary gaseous systems. 

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Median Calculation 

Once we established payment rates for the plans included in our 

analysis, we calculated the median FEHB payment rate for each oxygen 

item. We then consolidated these into a single payment rate for 

stationary equipment and a single payment rate for portable equipment. 

This enabled us to compare the FEHB payment rates with Medicare’s 

modality-neutral fee schedule allowances. To make the comparison, we

calculated, for each modality, the weighted mean of the median FEHB

payment rates, where the weights were the total Medicare 2002 

allowance per item. We compared this with the median Medicare fee 

schedule allowance1 for each modality to determine the percentage 

difference between Medicare and FEHB payments for home oxygen 

equipment. 

This inspection was conducted in accordance with the Quality 

Standards for Inspections issued by the President’s Council on Integrity 

and Efficiency. 

7 

1 To calculate the 2002 median Medicare fee schedule allowance for each modality, we 

computed the median allowance for all 53 geographic locations (50 States, the District of

Columbia, Puerto Rico, and the Virgin Islands).

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Because Medicare 

reimbursement for oxygen 

systems is modality neutral 

(i.e., one allowance for

stationary systems and one allowance for portable systems), we 

calculated the difference between FEHB and Medicare payment rates 

for all stationary systems combined and, separately, the difference 

between FEHB and Medicare payment rates for the two portable 

systems combined. Based on the weighted mean of median FEHB 

payment rates, we determined that Medicare allowances are 

12.4 percent higher for stationary systems and 10.8 percent higher for 

portable systems. (See Table 3.) The greatest individual difference 

between the median FEHB payment rate and the median Medicare fee

schedule allowance is for oxygen concentrators.2 

Table 3. Comparison of Median Medicare Allowances and Median FEHB Oxygen Payment Rates for 

 Five Oxygen Codes in 2002 

Oxygen Code 

(N = Number of plans that

responded) 

Median 

Medicare Fee 

Schedule 

Allowance

Median 

FEHB Oxygen 

Price* 

Percentage 

Difference 

Between Median 

Medicare and 

Median FEHB 

Price 

Weighted

Mean of

Median FEHB 

Prices 

Percentage 

Difference 

Between 

Medicare and 

FEHB Weighted

Mean 

Stationary Home Oxygen Equipment 

E1390 (N = 51) 

Oxygen concentrator $230.17 $201.09 12.6%

E0439 (N = 46) 

Stationary liquid system $230.17 $208.92 9.2%

E0424 (N = 38) 

Stationary gaseous system $230.17 $203.14 11.7%

$201.60 12.4%

Portable Home Oxygen Equipment 

E0434 (N = 52) 

Portable liquid system $36.19 $32.70 9.6%

E0431 (N = 52) 

Portable gaseous system $36.19 $32.22 11.0%

$32.27 10.8%

Source: Office of Inspector General analysis of 2002 median Medicare allowances and median FEHB oxygen payment rates 

* Throughout the report we use the terms “price” and “payment rate” interchangeably. 

FEHB plans’ median payment rates are lower than 

Medicare fee schedule allowances for home oxygen 

equipment and contents 

∆ FINDING 

8 

2 The mean is weighted based on total 2002 Medicare Part B allowances for each code. 

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F I NDING

Table 3 (on the previous page) provides the data that CMS needs to 

meet the mandate of the MMA to reduce Medicare fee schedule 

allowances in 2005 based on median FEHB prices. The third column 

shows the median prices for the Healthcare Common Procedure Coding 

System (HCPCS) codes in accordance with the MMA. The fifth and 

sixth columns show similar information on a modality neutral basis. 

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∆ CONCLUSION 

Section 302(c)(2) of the MMA requires reductions in payments for 

oxygen equipment in 2005 based on the OIG’s analysis of median FEHB 

prices. Subsequent to the issuance of a report we released in September

2004, questions were raised about the inclusion of oxygen contents for 

stationary and portable equipment in our FEHB payment rates. 

Accordingly, we conducted additional work to clarify the data in the 

September 2004 report. This report provides an updated comparison 

between Medicare fee schedule allowances and median FEHB payment 

rates for home oxygen equipment. 

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∆ ACKNOWLEDGMENTS 

This report was prepared under the direction of Paul Gottlober, 

Regional Inspector General for Evaluation and Inspections in the San 

Francisco Regional Office, and Deborah Harvey, Assistant Regional 

Inspector General. Other principal Office of Evaluation and Inspections 

staff who contributed includes: 

Cindy Lemesh, Project Leader

Camille Harper, Project Leader

Robert Gibbons, Technical Project Leader 

China Eng, Program Analyst

Scott Hutchison, Program Analyst 

Cheryl Dotts, Program Assistant

Doris Jackson, Program Specialist

Tricia Davis, Director, Medicare and Medicaid Branch 

Technical Assistance 

Barbara Tedesco, Statistician 

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