Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

MEDICAL EQUIPMENT SUPPLIERS 

Assuring Legitimacy 

JUNE GIBBS BROWN 

Inspector General 

DECEMBER 1997 

OEI-04-%00240 
OFFICE OF INSPECTOR GENERAL 

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

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

programs as well as the health and welfare of beneficiaries served by them. This 

statutory mission is carried out through a nationwide program of audits, investigations, 

inspections, sanctions, and fraud alerts. The Inspector General informs the Secretary 

of program and management problems and recommends legislative, regulatory, and 

operational approaches to correct them. 

Office of Evaluationand Inspections 

The Office of Evaluation and Inspections (OEI) is one of several components of the 

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

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

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

recommendations on the efficiency, vulnerability, and effectiveness of departmental 

programs. 

OEI’s Atlanta Regional Office prepared this report under the direction of Jesse J. 

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

General. Principal OEI staff included: 

REGION HIZADQUARTERS 

Joe Townsel, Project Leader Stuart Wright, Program Specialist 

Betty Apt, Team Leader 

Paula Bowker, Program Analyst 

Tammy Hipple, Statistician 

To obtain a copy of this report, call the Atlanta Regional Office at (404) 331-4108. 
Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

MEDICAL EQUIPMENT SUPPLIERS 

Assuring Legitimacy 

sERV1 

JUNE GIBBS BROWN 

Inspector General 

DECEMESER 1997 

OEI-O4-So0240 
EXECUTIVE SUMMARY 

PURPOSE 

To determine whether persons who obtain Medicare durable medical equipment 

supplier numbers operate bona fide businesses. 

BACKGROUND 

Before businesses can bill Medicare for sale and rental of durable medical equipment, 

they must apply for and receive a billing number. Applicants are approved and issued 

such numbers by the National Supplier Clearinghouse in Columbia, South Carolina. 

To help assure that applicants are bona fide businesses, the Health Care Financing 

Administration (HCFA) requires that each supplier meet 11 standards. 

Despite such safeguards, however, HCFA reported in 1996 that out of a sample of 36 

new DME applicants in the Miami, Florida area, 32 were not bona fide businesses. 

Among other problems, some bogus applicants did not have a physical address, or an 

inventory of durable medical equipment. According to HCFA staff, those companies 

should not be issued a supplier number because they were not operational entities. 

Further, HCFA staff said such suppliers are typically involved in fraudulent activities. 

In light of the bogus applicants discovered in Miami, HCFA asked us to ascertain 

whether similar problems exist elsewhere in the country. In response, we conducted 

unannounced on-site inspections of 420 suppliers who were issued billing numbers 

between January and June 1996. We also inspected 35 applicants who had not yet 

been approved. Our sampled suppliers were located in 12 large metropolitan areas in 

New York, Florida, Texas, Illinois, and California. 

FINDINGS 

b One of every 14 suppliers and 1 of every 9 new applicants did not have a 

required physical address. 

b Forty-one percent of suppliers and 40 percent of new applicants failed to meet 

at least one supplier standard, such as those related to warranties, information 

for customers, and inventories. 

b Oversight of home-based suppliers is particularly difficult, e.g., typically, they 

are not at home during normal business hours and have answering machines 

that do not identify the business. 

b The ease and low expense of acquiring a supplier number facilitates entry of 

abusers into the program. 

i 
CONCLUSION 

Presently, HCFA and the National Supplier Clearinghouse are approving many 

inexperienced, unqualified, and unethical people for supplier numbers. The desk 

verification process for approving suppliers is unreliable for detecting unethical and 

improper practices of bogus suppliers. On-site verification is needed, but not for all 

suppliers. HCFA and the National Supplier Clearinghouse may determine that some 

suppliers such as large corporations need no or only occasional site verification. 

Further, the supplier number application form needs to be revised. Presently, it is 

inadequate for judging the suitability of supplier applicants. 

RECOMMENDATION 

HCFA should take quick action to ensure the integrity of Medicare suppliers of 

durable medical equipment. The following options would help accomplish that goal. 

Charge all applicants an application fee. 

Require all suppliers to have a surety bond. 

Conduct on-site visits at applicants’ physical locations. 

Require program training for new suppliers by the Medicare regional carriers. 

Increase the review of inactive numbers. 

Further revise the application form. 

Seek authority to require Social Security and tax identification numbers from 

applicants. 

Impose on denied applicants a 6-month waiting period before reapplication. 

Implementation of the first option will provide financial resources to implement the 

others. 

AGENCY COMMENT?3 

HCFA concurred with our recommendation. Their comments are in Appendix A. 

The Balanced Budget Act of 1997 authorized Medicare to collect Social Security and 

tax identification numbers and required suppliers to have a surety bond. 

ii 
TABLE OF CONTENTS 

PAGE 

ExlTmwESuMMARY 

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

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

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

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

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

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

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

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

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

APPENDIX A: HCFACOMMENTS ................................ A-l 
INTRODUCTION 

PURPOSE 

To determine whether persons who obtain Medicare durable medical equipment 

supplier numbers operate bona fide businesses. 

BACKGROUND 

Requirm For DME SupplierNumbers 

Before businesses can bill Medicare for sales or rental of durable medical equipment 

(DME), they must apply for and receive a billing number. In 1993, the Health Care 

Financing Administration (HCFA) authorized establishment of the National Supplier 

Clearinghouse (NSC), a contractor that reviews and approves applications. Section 

1834 of the Social Security Act requires that applicants and approved DME suppliers 

meet 11 standards. They are 

. fill orders from their own inventory or under a contractual arrangement, 

. oversee delivery of equipment, 

. answer questions and complaints from beneficiaries, 

. maintain and repair rental equipment, 

. maintain a physical address at the business site, 

. comply with all State and Federal licensure requirements, 

. honor warranties on equipment, 

. accept the return of substandard equipment, 

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

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

. have proof of liability insurance. 

HCFA has a notice of proposed rulemaking under development which would establish 

nine new standards that DME suppliers must meet. 

lk Problem 

Despite the existence of supplier standards and NSC reviews, HCFA reported in 1996 

that 32 of 36 new DME supplier applicants in the Miami, Florida area were not bona 

fide businesses. Among other problems, some bogus DME suppliers did not have a 

physical address, or an inventory of durable medical equipment. For example, in one 

location, a small subdivided office supposedly housed four suppliers. Though their 

business licenses were posted in the office, there was no inventory at the site and no 

business was being conducted. According to HCFA staff, those companies should not 

be issued a supplier number because they were not operational entities. Further, 

HCFA said the bogus DME suppliers were likely established to abuse or defraud 

Medicare. Other reviewers such as the NSC, DME Regional Carrier in South 

1 
Carolina, and Florida Medicaid staff corroborated HCFA’s findings and conclusions. 

Potentid Si@aificanceOf l%e hblem 

The NSC issued over 300,000 supplier applications, and over 100,000 billing numbers 

nationwide since 1993. 

It is important to determine the extent that such billing numbers were approved for 

bogus companies that may be intent on defrauding Medicare. Preventing the issuance 

of billing numbers to such companies could result in a substantial savings to Medicare. 

Nationwide, Medicare approved DME claims for a total of $4.7 billion in 1995. In the 

Miami area alone, Medicare paid $406.3 million for DME supplies during a 22-month 

period ending April 30, 1996. 

Some staff with HCFA, NSC, and the DME Regional Carrier suggested that problems 

like those observed in the Miami area may exist in other urban areas. HCFA asked 

us to determine whether problems similar to those encountered in the Miami area 

were occurring elsewhere in the country. We conducted this inspection in response to 

that request. 

Il4ETHODoLoGY 

We selected 12 metropolitan areas for review of issuance of DME supplier numbers 

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

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

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

investigations of DME suppliers. 

II STATES I SELECTED METROPOLlTAN AREAS /I 

California Los Angeles, San Diego, San Francisco 

IIFlorida Jacksonville, Orlando, Tampa /I 

Illinois Chicago 

IINew York New York City, Buffalo II 

Texas Dallas, Houston, San Antonio 

We limited our review of DME supplier numbers to those located in the major 

metropolitan areas of the cities selected. We used U.S. Postal Service information to 

identify zip codes that represented the major metropolitan area of each selected city. 

For example, in Chicago, Illinois, the zip codes were 60000 through 60799. In many 

instances, the zip codes covered the selected city and several surrounding cities and 

towns. 

2 
For each zip code, we obtained from NSC the applications of all DME suppliers 

approved during January through June 1996. During that 6-month period, 1,180 

suppliers in our selected cities had obtained approved billing numbers. We selected a 

purposive sample of 420 of the 1,180 suppliers for inspection. 

For each zip code, we also obtained, from NSC, all applications for DME supplier 

numbers that were pending approval when we began making site visits. From the 53 

pending applications, we selected a sample of 35 for inspection. 

We selected suppliers and applicants without prior knowledge of the legitimacy of 

their business practices. However, we designed our sample of suppliers to include a 

variety of supplier types, including physicians, optical stores, therapists, orthotists, and 

pharmacies. 

Thereafter, we made unannounced visits to 420 suppliers and 35 applicants. This was 

as many as possible given our staff resources and time frame. Generally, we used twoperson teams for each visit. In some instances, an OIG investigator accompanied the 

teams. Each site visit lasted no more than 20 minutes. 

Each team used a standardized checklist designed to document when suppliers clearly 

did not meet 1 or more of the 11 Medicare standards--or worse, did not appear to be 

a bona fide business. The prime objective of our site visits was to ascertain whether 

or not suppliers and applicants had an appropriate physical business address. Without 

such, compliance with other standards was assumed unlikely. For example, without an 

identifiable physical address, beyond a mailbox location, on-site business and oversight 

were not possible. 

In instances where violations of standards were not obvious, we did no further 

inspection work to assure that standards were in fact met. Such a determination 

would have required a long evaluation period for interviews and record reviews. 

Operation Restore Trust 

This inspection was part of the President’s Operation Restore Trust (ORT) initiative. 

The purpose of ORT is to identify and prevent fraud, waste, and abuse in the 

Medicare and Medicaid programs. ORT is a joint initiative involving the Health Care 

Financing Administration, Administration on Aging, Office of Inspector General, and 

various State agencies. In 1995, ORT began targeting home health agencies, nursing 

homes, hospices, and durable medical equipment suppliers in five States for 

evaluations, audits, and investigations. The five States are Florida, New York, Texas, 

Illinois, and California. These States collectively account for about 40 percent of the 

nation’s Medicare and Medicaid beneficiaries and program expenditures. 

3 
We conducted this inspection in accordance with the Quality Standards for Inspections 

issued by the President’s Council on Integrity and Efficiency. 

4 
FINDINGS 

ONE OUT OF 14 DURABLE MEDICAL EQUIPMENT SUPPLIIZRS DID NOT 

HAVE REQUIRED PHYSICAL ADDRESSES 

Medicare standards for DME suppliers require that suppliers have a physical address. 

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

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

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

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

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

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

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

revocation of an existing supplier’s billing number. 

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

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

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

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

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

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

applicant had an inaccessible address in a secured apartment complex. 

TABLE 1 

II STATUS OF ADDRESS VISITED I SUPPLIERS II 

I/Business had closed I 14 II 

Had a questionable presence at the address 8 

Mail drop location only 4 

Address nonexistent or could not be located 5 

Total I 31 II II

As shown by the table, 14 suppliers had closed. That is, they were no longer operating 

at the sites shown on their applications for DME numbers--though their applications 

had just been approved during January - June 1996. Most of the 14 had left no 

information behind such as is typical for a business merely relocating. For example, 

according to their landlord, a pair of physicians suddenly closed their office and 

vanished, breaking their lease. In another instance, a neighboring business person said 

the supplier had closed over a weekend, without leaving any forwarding information. 

5 
Table 1 also shows that eight suppliers had no, or a highly questionable presence at 

the address listed on the DME supplier application form. Residents at or near the 

listed addresses were unable to say whether or not a supplier had ever been located 

there. In such instances, we were unable to ascertain that a supplier was ever located 

at the address given on the application form. We characterized these eight suppliers 

as having a “questionable presence.” 

For example, in Brooklyn, New York, a supplier’s address shown on the application 

form was in a building that consisted of four apartments over a laundromat. The 

DME company name was not shown on mailboxes or other parts of the premises. We 

interviewed two tenants at the premises who said they had not heard of the supplier. 

Since the numbers had been issued within the last 6 months, we expected the tenants 

to recall the supplier if one existed. One of the tenants said the laundromat space was 

formerly used as a “post office box operation.” Further, the phone number shown on 

the DME application was out of service. Thus, it was impossible to determine 

whether the DME business had ever operated at the address. 

FORTY-ONE PERCENT OF SUPPLIERS FAILED TO MEET AT LEA!3T ONE 

DME SUPPLIER STANDARD 

Forty-one percent (173) of the 420 DME suppliers we inspected failed to meet at least 

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

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

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

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

inspections were designed to expeditiously determine when suppliers or new applicants 

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

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

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

number of violations. 

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

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

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

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

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

have identified more instances of noncompliance. 

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

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

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

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

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

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

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

6 
of a physical address. Such locations were where no supplier spokesperson was 

available for an interview and where we could not gain entrance into the business. 

TABLE 2 

DME SUPPLIER STANDARD PERCENTAGE/ 

NUMBERTHAT 

FAILED 

Consumer information (copy of suppliers standards to 45% 111 of 248 

beneficiaries) 

Allow return of unsuitable items 20% 19 of 95 

Warranty repairs 17% 17 of 101 

Inventory 9% 27 of 306 

Liability insurance 7% 17 of 240 

Physical address 7% 31 of 420 

Maintenance and repair (rented items) 6% 8 of 132 

Questions/complaints 3% 7 of 206 

Business license 3% 5 of 200 

Delivery of items and equipment 1% 2 of 207 

Disclosure of ownership 0% 0 of 269 

The Medicare standard failed by the most suppliers was the one requiring them to 

provide a copy of the supplier standards to each beneficiary receiving DME. Because 

this is perhaps the easiest standard to meet, the high rate of noncompliance was 

surprising. Most of the suppliers that failed the standard said they were unaware of 

the requirement. 

OVERSIGHT OF HOME-BASED DME SUPPLIERS IS PARTICULARLY 

DIFFICULT 

Thirteen percent (57) of the 420 DME suppliers we inspected gave their residence as 

a business address. Of the 35 pending DME applicants, 4 were located in residential 

locations. This means that about one out of seven existing DME suppliers claim to 

conduct business out of residences such as a single-family house, mobile home, 

apartment, or condominium. Similarly, about one out of nine of the new applicants 

for DME supplier numbers listed such business sites. 

7 
Residential DME suppliers create a unique oversight problem for HCFA, NSC, and 

OIG. First, HCFA’s DME application form does not distinguish between home-based 

suppliers and those at traditional business sites. Second, home-based suppliers often 

do not post a sign which identifies their business sites. Third, home-based suppliers 

typically are not at home during normal business hours. Fourth, home-based suppliers 

sometimes restrict public access to their residences. Finally, home-based suppliers 

frequently have telephone answering machines that do not identify their business. 

ApplicationFom For DME NumbersDots Not IdentifyHome-Based Suppliers 

HCFA’s DME number application form does not differentiate between home-based 

suppliers and those at traditional business sites. Such information is important for 

determining which types of suppliers are engaging in improper or fraudulent activities, 

i.e., what are the trends relative to supplier types and fraud. Home-based suppliers 

are not subjected to the same level of public scrutiny as are traditional storefront or 

corporate suppliers. Similarly, home-based suppliers are less accessible for program 

oversight. The need for such oversight becomes more important due to the current 

trend toward home-based businesses. 

At the time we completed our inspection, HCFA was in process of revising the 

application form. However, we understand that the revised form will still not identify 

home-based suppliers. 

Residenca Frequent&Not IdentijiedAs A Business 

The physical location of a DME supplier is typically where inventories and sales 

models are kept. It is also the place where beneficiaries come to meet suppliers and 

obtain needed equipment. However, we rarely found a business sign or other 

identifier information that a business was in operation at addresses given by homebased DME suppliers we inspected. 

Without identifiers such as signs, it is also difficult for HCFA and NSC to locate 

home-based DME suppliers for oversight purposes. Residential zoning or other 

similar restrictions may account for the absence of a sign, but the fact remains that 

this traditional way to identify a business site is simply unavailable with many homebased suppliers. 

Given the absence of such identifiers, our inspection teams were unable to readily 

locate some DME suppliers that we had sampled for inspection. Even after finding 

the address listed on the application form, we were often not sure that we had located 

the supplier. As a result, we were unable in many instances to ascertain whether or 

not DME supplier standards were met. More basic than that, site inspections to 

home-based suppliers typically cannot even confirm the existence of a business nor 

ascertain the types of items purportedly being provided to beneficiaries. 

8 
. Busmess Opemtom ljpically Not At Home DuringNom1 Busines Hours 

Only 14 of the 57 suppliers purportedly working out of their homes were present at 

the time of our site inspection, although we conducted our inspections during normal 

business hours. We ascertained through phone calls with some home-based suppliers 

that many of them consider their DME business to be a secondary venture. They 

work on other activities during regular business hours. 

This problem hampers access for oversight purposes, and it increases the cost of 

oversight for HCFA and NSC. To illustrate, monitoring would likely require repeated 

trips, and the trips would likely have to be done outside of normal work hours. 

Because home-based suppliers are typically absence from their residences, it is 

generally useless to conduct on-site monitoring visits during normal business hours. 

This is particularly true for unannounced visits. 

Such difficulty in contacting home-based DME suppliers could affect their ability to 

serve Medicare beneficiaries. 

Access To Re.khcm Is SometimesRedcted 

During our site inspections, some neighborhoods and many apartment buildings were 

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

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

gates and into locked buildings was sometimes not possible. 

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

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

to restricted residences could be particularly difficult for Medicare beneficiaries who 

need DME. 

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

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

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

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

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

or determine that beneficiaries are allowed to return unsuitable items. 

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

not a problem. 

Home-Based SuppliersAre D@icdt To ContactBy Telephone 

In most instances, home-based DME suppliers used personal telephones for their 

business activities. In such instances, telephone calls during a supplier’s absence are 

often answered by personal answering machines. However, the recorded message 

9 
does not always identify the business. In some instances, a caller cannot be sure he or 

she reached the correct number for the DME supplier. 

THE EASE AND LOW EXPENSE OF ACQUIRING A DME SUPPLIER 

NUMBER FACILITATES ENTRY OF ABUSERS INTO THE PROGRAM 

Despite DME supplier standards and an application review process, acquisition of a 

Medicare DME supplier number is easy. Further, it requires no financial investment. 

This, combined with the potential high revenue resulting from having a DME billing 

number, attracts many people--both legitimate and nonlegitimate suppliers. 

No FinancialInveshnentRequired 

Supplying durable medical equipment to Medicare beneficiaries can be a profitable 

business--whether a supplier takes a legitimate or illegitimate approach. Essentially, a 

person only needs a supplier number to bill the Medicare program. That number can 

be obtained by merely answering a few questions on a simple application form, and 

mailing that form to NSC. No investment in a business location nor inventory is 

required. A supplier may arrange for shipment from a manufacturer or distributor 

directly to Medicare beneficiaries. Thus, the supplier does not have to bear the cost 

of keeping an inventory on-site. 

The absence of an investment allows unethical persons to enroll and test their 

fraudulent schemes at no cost to themselves. During our inspection, we found several 

individuals who applied for and received supplier numbers on a whim. They did not 

know how or if they would use the numbers. Some persons said they decided not to 

bill Medicare after getting the number, and a few asked our inspection team to “take 

their DME number back and cancel it.” 

Lit& VerificarionOfApplicationInform&m 

Applicants for DME numbers are required to do little other than assert that the 

information they provide on an application form is true. The NSC verifies only a 

limited amount of information provided on DME number applications. They do so by 

calling the applicant or some third party, such as local licensing agencies and State 

offices that issue articles of incorporation. 

No ExperienceWuh MedicalEquipmentRequired 

An applicant needs no credentials, and is not required to have any experience with 

medical equipment to obtain a DME number. Likewise, one does not have to 

formulate a business plan or purpose showing intent to service Medicare beneficiaries. 

The absence of such experience and qualifications seems to facilitate entry of abusers 

into the program. The ease in getting a number unnecessarily opens an opportunity 

for fraud or abuse. The following examples illustrate the ease of getting a DME 

billing number, and potential for fraud and abuse. 

10 
b A woman who lives in an upscale house on a lake applied for and received a 

DME number. She purportedly operates a medical supply company at that 

address. However, her husband openly told us his wife knew nothing about the 

DME business. He said, on the other hand, he did know about the business 

because he is a supplier. Nevertheless, the applicant herself was completely 

inexperienced--clearly raising questions of why she applied for her own number. 

The situation showed more potential for impropriety than for operation of a 

bona fide business. 

b A Florida souvenir dealer whose shop is in his garage applied for and received 

a DME number. His main business line includes stuffed alligator heads, 

alligator skin wallets, and stuffed turtles. But because his brother-in-law installs 

wheelchair lifts on vehicles, he decided to add wheelchairs, lift chairs, and beds 

to his line of business. He had no experience or credentials for supplying 

DME. Further, he keeps no DME inventory. He said he has only filed one 

Medicare claim. 

The suppliers described above were only two of many that raised questions on 

suitability for DME numbers. For example, we found dealers in fancy spas, golf carts, 

home modifications, and sports shoes to have DME numbers. We did not establish 

that suppliers such as the above examples abused the Medicare program. However, 

they clearly raise questions on appropriateness of receiving DME billing numbers. 

CONCLUSION 

It is clear that NSC is limited in preventing issuance of improper DME numbers 

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

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

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

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

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

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

program. 

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

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

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

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

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

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

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

nothing about the DME number, nor Medicare claims. 

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

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

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

11 
the only reliable way to discover unethical and improper practices by suppliers is to 

make on-site inspections. 

The current DME application form is inadequate to judge the ability of applicants to 

meet the needs of the Medicare program and its beneficiaries. Although HCFA has 

revised the form, our site inspections suggest that further revisions are needed. The 

current application (Form HCFA4355S) could be more effective, from a program 

integrity perspective. For example, it would be beneficial to have the application 

identify residential business locations, and when suppliers are available to conduct 

business. Similarly, requiring applicants to say whether their business is full-time or 

part-time would be helpful. 

12 
RECOMMENDATION 

HCFA should take quick action to ensure integrity of Medicare suppliers of DME. 

HCFA and the National Supplier Clearinghouse have recognized many of the 

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

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

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

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

its own merit. 

b Application fee: Charge all DME applicants an application fee. The fee 

should cover costs of processing an application and verifying, through on-site 

inspections, legitimacy of the business. 

b Surety bond: Require all suppliers to have a surety bond. The bond should be 

indexed to the volume of Medicare business transacted by a supplier in the 

previous year. Such a requirement would help indemnify HCFA against fraud 

and reduce the number of applicants who apply for a supplier number with no 

clear intent. 

We understand that HCFA’s proposed revision of supplier standards would 

require annual surety bonding for all existing suppliers, and as a condition of 

enrollment for all supplier applicants. 

b On-site verifications: Conduct on-site verifications at physical locations of 

applicants. Several approaches are possible for selecting applicants to be 

inspected. Primarily, HCFA could inspect the sites of all new applicants, or 

develop a profile which identifies high risk ones. The OIG would be willing to 

assist in developing such a profile. 

HCFA is presently using a contractor to conduct site visits in South Florida. 

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

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

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

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

beneficial if done in other geographic areas as well. 

b Training: Require DME regional carriers to conduct training for all new 

suppliers on program requirements, and on proper billing procedures. 

Suppliers should pay a fee for such training. The amount of the fee should be 

sufficient to completely pay for the training. 

13 
b Inactive numbers: Increase review of inactive DME supplier numbers. 

Currently, HCFA inactivates billing numbers after four consecutive quarters of 

inactivity. In view of the inactive suppliers whom we found got a billing 

number on a whim, HCFA should consider initially reviewing a supplier’s billing 

activities after a reasonable period--i.e., 90 days or 6 months. Such a review 

and deactivation of inactive numbers could help reduce the number of supplier 

numbers lying fallow. After the initial review, DME numbers found to be 

active could be reviewed annually. 

b Application form: Further revise the DME application form. HCFA has been 

revising the supplier application form over the last year in an attempt to better 

meet the needs of a changing profile of suppliers. HCFA has consulted with 

their regional offices, NSC, DME regional carriers, and the supplier industry 

related to those revisions. The new application (Form HCFA-855s) 

encompasses some of the options in this report. However, the OIG would be 

willing to work with HCFA in further revising the application form to reflect 

program integrity concerns raised from this inspection. 

b Social Security and tax identification numbers: Seek authority to require Social 

Security numbers (SSNs) and employer identification numbers from all DME 

applicants. As part of the overall effort to ensure the integrity of DME 

suppliers, HCFA should seek legislative authority for the Secretary to require 

DME number applicants--i.e., all managing employees and owners--to provide 

their SSNs and employer identification numbers. Access to those unique 

identifiers will enable HCFA and its contractors to more effectively screen 

applicants. Those identifiers can also facilitate, when necessary, corrective 

actions related to billing aberrancies, fraud, or abuse. For example, the SSN 

could be useful in recovering Medicare funds from a fraudulent DME supplier. 

b &month delayed reapplication: Impose a 6-month waiting period on applicants 

who are denied DME billing numbers for cause. That reapplication waiting 

period should discourage applicants from failing to provide pertinent 

information or failing to cooperate with inquiries by NSC. It should also keep 

applicants from frivolously overburdening the application process by applying 

repeatedly. Conversely, applicants who apparently pursue their applications in 

good faith, but are denied because of certain minor problems could be exempt 

from the waiting period. 

The implementation of the first option will provide financial resources to implement 

the others. 

14 
AGENCY COMMENTS 

HCFA concurred with our recommendation. Their comments are in Appendix A. 

The Balanced Budget Act of 1997 authorized Medicare to collect Social Security and 

tax identification numbers and required suppliers to have a surety bond. 

15 
APPENDIX A 

HCFA COMMENTS 

A-l 
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Nou-04-1997 16:16 oIG/oEI@fXS - B 410 786 9184 P.04/05 

OIG Outian 4 

Requireprogramfnin@ fir new suppliersby the Medicareregionalcarriers. 

HCFAconcurswithsbeintentoftbisrecomm~on However,becueofllmitedsta@and 

fiinanciPIrtsources,HCFAisunableto~~trairliagforann~suppliers9tthistime. The 

DMERCa periodically holdkining sessionsw&b k&de t&kg for newsupplks. Each 

D~Chasitsowasuppliermanualfortbeuseof~mppliersinitsarea. T&e 

supplier manuals are updated periodically. The DMEKs also publish quark& bulletins 

withnews,newbillingrequirements, policies, and reminders. We will explore ways to 

illten@ these eferts. . 

QIG Ontion 5 

Increase the review of inactive numbers. 

We concur. We have instituted procedures at the NSC whereby it will dkct&tc supplier 

mmbcrs on a qurterly basis for suppliers who have not billed for 4 quaxtcrs. The NSC 

will deactivate supplier numben every 3 months far non-billing instead of every year. 

QIG Ootion 6 

Fur&r Tevisethe application form. 

)IcFA Comment 

We cxmcur. The form has been revised to collect kfkmatiw on whether a supplier 

applicant is operating &cm a residence. In fact; we ban developed a new enrollment 

pnxess that requires carriers to veri@ all data provided on the application, e.g., licensure 

informat;on, prior sanction or exchkon i&rmation, place of business, owner&& 

information, biilkg contracts, tax idmtification data, etc. This information is verifkd 

w&bt&estate licerkg board, OIG, and professional eons. We would w&xx~ 

the OIG’s input on W-m3revisions. 
� 

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