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[Senate Hearing 107-720]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-720
 
                 MEDICARE PAYMENTS FOR MEDICAL SUPPLIES
=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                     JUNE 12, 2002--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

                                 ______

                          U.S. GOVERNMENT PRINTING OFFICE
82-251                            WASHINGTON : 2002
_____________________________________________________________________________
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                      COMMITTEE ON APPROPRIATIONS

                ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             TED STEVENS, Alaska
ERNEST F. HOLLINGS, South Carolina   THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont            ARLEN SPECTER, Pennsylvania
TOM HARKIN, Iowa                     PETE V. DOMENICI, New Mexico
BARBARA A. MIKULSKI, Maryland        CHRISTOPHER S. BOND, Missouri
HARRY REID, Nevada                   MITCH McCONNELL, Kentucky
HERB KOHL, Wisconsin                 CONRAD BURNS, Montana
PATTY MURRAY, Washington             RICHARD C. SHELBY, Alabama
BYRON L. DORGAN, North Dakota        JUDD GREGG, New Hampshire
DIANNE FEINSTEIN, California         ROBERT F. BENNETT, Utah
RICHARD J. DURBIN, Illinois          BEN NIGHTHORSE CAMPBELL, Colorado
TIM JOHNSON, South Dakota            LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana          KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island              MIKE DeWINE, Ohio
                  Terrence E. Sauvain, Staff Director
                 Charles Kieffer, Deputy Staff Director
               Steven J. Cortese, Minority Staff Director
            Lisa Sutherland, Minority Deputy Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                       TOM HARKIN, Iowa, Chairman
ERNEST F. HOLLINGS, South Carolina   ARLEN SPECTER, Pennsylvania
DANIEL K. INOUYE, Hawaii             THAD COCHRAN, Mississippi
HARRY REID, Nevada                   JUDD GREGG, New Hampshire
HERB KOHL, Wisconsin                 LARRY CRAIG, Idaho
PATTY MURRAY, Washington             KAY BAILEY HUTCHISON, Texas
MARY L. LANDRIEU, Louisiana          TED STEVENS, Alaska
ROBERT C. BYRD, West Virginia        MIKE DeWINE, Ohio
                           Professional Staff
                              Ellen Murray
                              Jim Sourwine
                              Mark Laisch
                            Adrienne Hallett
                              Erik Fatemi
                       Bettilou Taylor (Minority)
                        Mary Dietrich (Minority)
                    Sudip Shrikant Parikh (Minority)
                       Candice Rogers (Minority)

                         Administrative Support
                             Carole Geagley

                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening statement of Senator Tom Harkin..........................     1
    Prepared statement...........................................     3
Opening statement of Senator Arlen Specter.......................     4
Statement of Janet Rehnquist, Inspector General, Department of 
  Health and Human Services......................................     5
    Prepared statement...........................................     9
Statement of Leslie G. Aronovitz, Director, Health Care, Program 
  Administration and Integrity Issues, United States General 
  Accounting Office..............................................    16
    Prepared statement...........................................    18
Statement of Thomas A. Scully, Administrator, Centers for 
  Medicare and Medicaid Services, Department of Health and Human 
  Services.......................................................    27
    Prepared statement...........................................    29
Opening statement of Senator Patty Murray........................    36
Statement of David T. Williams, director, Government Relations, 
  Invacare Corporation...........................................    51
    Prepared statement...........................................    55
Prepared statement of the American Association for Homecare......    59
Prepared statement of Advanced Medical Technology Association....    63

                 MEDICARE PAYMENTS FOR MEDICAL SUPPLIES

                              ----------                              

                        WEDNESDAY, JUNE 12, 2002

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:34 a.m., in room SD-124, Dirksen 
Senate Office Building, Hon. Tom Harkin (chairman) presiding.
    Present: Senators Harkin, Murray, and Specter.

                opening statement of senator tom harkin

    Senator Harkin. The Subcommittee on Labor, Health and Human 
Services, and Education will come to order.
    This morning the subcommittee will once again examine the 
appropriateness of Medicare payments for medical supplies. Over 
the past 12 years, this subcommittee has taken a leadership 
role in trying to reduce the losses to the American taxpayer 
and to millions of Medicare beneficiaries due to waste in the 
Medicare program.
    The good news is we have made some progress. 5 years ago, 
the Inspector General found that about $23 billion, or about 14 
percent of Medicare funds, were lost to mispayments. Through 
the bipartisan efforts of this subcommittee and others here 
today, that has been cut in half. In addition, we have reduced 
waste in payments for oxygen equipment by over $1 billion. And 
we have demonstrated that real savings can be achieved through 
competitive bidding.
    But it is not even close to time to be taking a victory 
lap. Today we are releasing the results of a new investigation 
by the Inspector General of Health and Human Services. At my 
request, they analyzed Medicare's payments for 16 commonly used 
medical supply items. The results are indeed staggering. The 
report makes it clear that American taxpayers and Medicare 
beneficiaries are still being taken to the cleaners. The IG 
report found that Medicare is paying up to eight times more 
than another Federal Government agency, the Veterans 
Administration. In fact, the IG's analysis shows that Medicare 
is paying more than double the VA rate for 11 of the 16 items. 
They found that for just the 16 items they reviewed, if 
Medicare simply paid the same rate as the Department of 
Veterans Affairs, taxpayers and Medicare beneficiaries who pay 
20 percent of the cost of supplies they use would save nearly 
$1 billion a year. That is a savings of over half the current 
$1.7 billion cost.
    Now, I know there are some real differences in the Medicare 
and VA systems, but because Medicare is by far the largest 
purchaser of these items, it should be able to drive an even 
better bargain than the VA. Despite this, the Inspector General 
found that Medicare is paying even more than if you or I walked 
off the street to the corner drugstore. In fact, we would save 
over $80 million a year on these items if Medicare just went 
down to the local drugstore and paid the average retail rate.
    It is even more disturbing that Medicare has the authority 
it needs to immediately put a halt to this fleecing of 
taxpayers and our seniors. Yet, it has not acted.
    In 1997, based on evidence gathered at our hearings, this 
subcommittee, then under the guidance and direction of Senator 
Specter, gave Medicare new streamlined authority to reduce 
Medicare payments that are grossly excessive.
    In 1999, HCFA, now CMS, proposed very modest reductions 
that would save $487 million over 5 years. They were 
temporarily stopped from proceeding by actions taken in the 
other body. But that prohibition ended nearly 2 years ago when 
the GAO issued their report supporting Medicare's proposed 
actions.
    I am very concerned that Medicare has failed to use its 
authority to protect the taxpayers and our seniors, and I am 
hopeful to learn today of their plans to move ahead without 
further delay.
    I also intend to continue to push to get Medicare the same 
authority that the VA has used so effectively: good, old-
fashioned, free enterprise, competitive bidding. I am very, 
very happy and pleased that the Bush administration in their 
budget request is backing this long overdue reform, and I look 
forward to working with them to make sure that competitive 
bidding, with appropriate safeguards, as we all know, for rural 
areas and highly customized items--I hear that all the time--is 
made a part of any Medicare package that passes this year. In 
other words, it is my intention to make sure that if any 
Medicare thing passes this year, we are going to work with the 
administration to get competitive bidding in there.
    In closing, again I just want to say that this is really 
important. First, there are few other Government programs so 
important in the daily lives of so many Americans as Medicare. 
Secondly, it is especially grating on me as a Senator from Iowa 
that while Medicare is overpaying for these medical supplies, 
it is underfunding services in my State. Iowa is on the bottom, 
number 50, in terms of reimbursements. The money we are wasting 
on medical supplies could be much better spent bringing greater 
fairness to States like mine, let alone trying to get a decent 
prescription drug benefit. That is why we have got to move 
ahead aggressively on this.
    We have a great panel of witnesses today, and I look 
forward to the important contributions each of them will make 
to our hearing today.
    I thought I might, again for the benefit of some of those 
who are here, point out some of the items we are talking about. 
The Inspector General I know will also and so will the 
Administrator of CMS.
    But again, just to set the stage for what we are talking 
about, first, consider blood glucose test strips. Medicare paid 
$38.32 for 50. The VA pays $19.50 for 50. So, I had Jim here go 
down to the drugstore. He actually went to Costco. I am not 
here plugging Costco, but anyway he went to Costco. Now, I said 
that Medicare paid $38.32 for 50. We went to Costco and got 100 
for $70; plus, they threw in free lancets, and Medicare also 
pays for the lancets. So, maybe we can go to Costco and have 
some savings.
    The next thing is saline solution. This is the one that 
really gets me. Medicare is paying $8.68 a liter. Now, saline 
solution is saltwater for any of you who do not know what that 
means. It is sterile saltwater. VA is paying $1.02 a liter. I 
would like to know what it costs to make it. If it costs over 
15 or 20 cents, I would be surprised.
    We have a TENS unit. Actually this is mine. I had some 
muscle problems one time and I got one of these. Medicare is 
paying $365. This is a TENS unit. It takes a couple of AA 
batteries, and you put them on if you have a muscle spasm or 
something like that in your back. Actually it is a pretty good 
device. It does work. Medicare pays $365. The VA is paying $165 
for these.
    Here I have a blood glucose monitor that takes those test 
strips. Actually this is one of the success stories that CMS 
has done. They were paying $211 for this, and we found you 
could get it locally for $57 and that is what Medicare pays for 
it now. They are paying $57 for this. That is just one of the 
items that was a great success. That alone--just this one 
item--has saved $25 million in the last 5 years.

                           prepared statement

    Another example is the commode chair that you see all the 
time in hospitals. A simple commode chair. Medicare is paying 
$109.74. The VA is paying $32.30 for them.
    That just gives you some idea of the discrepancies that 
were found in the IG's investigation of this. That is just a 
few of 16 items.
    [The statement follows:]
                Prepared Statement of Senator Tom Harkin
    Good Morning. The Subcommittee will come to order. This morning the 
Subcommittee will once again examine the appropriateness of Medicare 
payments for medical supplies. Over the last 12 years, this 
Subcommittee has taken a leadership role in trying to reduce the losses 
to the American taxpayer and millions of Medicare beneficiaries due to 
waste in the Medicare program.
    The good news is we've made some real progress. Five years ago, the 
Inspector General found that $23 billion or about 14 percent of 
Medicare funds were lost to mispayments. Through the bipartisan efforts 
of this Subcommittee and others here today, that has been cut in half. 
In addition, we've reduced waste in payments for oxygen equipment by 
over $1 billion. And we have demonstrated that real savings can be 
achieved through competitive bidding.
    But it is not even close to being time to take a victory lap. 
Today, I am releasing the results of a new investigation by the Health 
and Human Services Inspector General. At my request, they analyzed 
Medicare's payments for 16 commonly used medical supply items. The 
results are staggering. The report makes it clear that American 
taxpayers and Medicare beneficiaries are still being taken to the 
cleaners. I'll make analogy to another example of government waste. 
Remember a number of years ago we found that the Pentagon was paying 
$500 for a toilet seat?
    Well, the good news is, the Pentagon's no longer paying that price. 
The bad news is, Medicare is.
    The IG report found that Medicare is paying up to 8 times more than 
another federal government agency, the Veterans Administration. In 
fact, the IG's analysis shows that Medicare is paying more than double 
the V.A. rate for 11 of the 16 items studied. They found that for just 
the 16 items they reviewed, if Medicare simply paid the same rate as 
the V.A. taxpayers and Medicare beneficiaries--who pay 20 percent of 
the cost of supplies they use--would save nearly $1 billion a year. 
That's a savings of over half the current $1.7 billion cost.
    Now there are some real differences in the Medicare and V.A. 
systems. But because Medicare is by far the largest purchaser of these 
items, it should be able to drive even an better bargain than the V.A. 
Despite this, the IG found that Medicare is paying even more than if 
you or I walked off the street to the corner drug store. In fact, we 
would save over $80 million a year if Medicare just paid the average 
retail rate.
    It is even more disturbing that Medicare has the authority it needs 
to immediately put a halt to this fleecing of taxpayers and our 
seniors, yet is refusing to act. In 1997, based on evidence gathered at 
our hearings, we gave Medicare new streamlined authority to reduce 
Medicare payments that are ``grossly excessive.'' In 1999, HCFA (now 
CMS) proposed very modest reductions that would save $487 million over 
5 years. They were temporarily stopped from proceeding by Congress.
    But that prohibition ended nearly 2 years ago when the GAO issued 
their report supporting Medicare's proposed action.
    I am very concerned that Medicare has failed to use it's authority 
to protect the taxpayer and our seniors. I'm hopeful we'll learn today 
their plans to move ahead without further delay. I also intend to 
continue my push to give Medicare the same authority the V.A. has used 
so effectively--good old-fashioned free enterprise competitive bidding. 
Im pleased to learn that the Bush Administration is now backing this 
long overdue reform and look forward to working with them to make sure 
competitive bidding--with appropriate safeguards for rural areas and 
highly customized items--is made part of any Medicare package this 
year. That is the real long-term solution.
    In closing, I want to say why this is all so important. First, 
there are few other government programs so important in the daily lives 
of so many Americans as Medicare. Second, it is especially galling to 
me as Senator from Iowa that while Medicare is overpaying for these 
medical supplies, it is woefully under funding services in my state. 
Our state is dead last by some measures in Medicare payments per 
beneficiary, receiving less than half that of some other states. The 
money we are wasting in medical supplies could be much better spent 
bringing greater fairness to states like mine. Let along the need for a 
decent prescription drug benefit. That is why we can't fail to act.
    We have a great panel of witnesses today and I look forward to the 
important contributions each of them will make to our hearing today.

    Senator Harkin. So now we will turn to our Government 
witnesses. First we have the Inspector General of the 
Department of Health and Human Services.
    Senator Specter. Well, first, you have your ranking member.
    Senator Harkin. I am sorry.
    Why do I not introduce them. Then I will turn to you.
    Senator Specter. You give up the chairmanship, look what 
happens.
    Senator Harkin. Both of us have chaired this subcommittee, 
going back more than 12 years. Senator Specter picked it up 
during his chairmanship, and now we are back again. It has been 
truly a bipartisan effort to try to get a handle on this.
    Senator Specter. I never bypassed you for a commode chair, 
not in all those years.

               OPENING STATEMENT OF SENATOR ARLEN SPECTER

    Thank you very much, Mr. Chairman. Just a comment or two.
    I commend you, Senator Harkin, for this hearing. As Senator 
Harkin has commented, he and I have changed the gavel and it 
has been a seamless exchange, which is the way Congress ought 
to function. We both subscribe to the basic principle that if 
you want to get something done in Washington, you have to be 
willing to cross party lines, and I think this subcommittee for 
the last 12 years has been exhibit A.
    Today's hearing is a very important hearing using as an 
example 16 items on the agenda where the total savings would 
have been $958 million, almost $1 billion for 1 year. But the 
question on my mind is, what more is there there? Perhaps Ms. 
Aronovitz from GAO can answer that question for us further, or 
perhaps Mr. Scully or Ms. Rehnquist.
    I welcome Tom Scully and Janet Rehnquist here for this 
hearing. I believe this is the first time that they have 
appeared before the committee, since taking over the new job. 
We are very pleased with your credentials and your obvious 
competency.
    But this is a big, big subject, and right now we are 
struggling in the conference to add things to Medicare on quite 
a number of lines. People come forward very frequently and want 
to add something to Medicare. Customarily they are very good 
ideas, and at the top of the agenda is the prescription drug 
issue. Last year when we had a $5.6 trillion surplus, we were 
talking about $400 billion for Medicare, though that number has 
since been pared to $190 billion, and we really do not know 
what it will end up at. We are long past due in providing 
prescription drugs. But if you pick up $958 million here--as 
Everett Dirksen said, you pick up a billion here, you pick up a 
billion there, pretty soon you have got enough money for 
Medicare prescription drugs.
    The business about what the VA is doing is really very, 
very obvious. We have been through that on the Veterans Affairs 
Committee, which I chaired for 6\1/2\ years. Now Senator 
Rockefeller has picked it up, again on a bipartisan basis. HHS 
bought a lot of drugs in response to the terrorist attack, and 
there is a real question in my mind as to whether that might 
have been done a lot cheaper through the VA. VA has such 
enormous purchasing power, that they can get things cheaper.
    I regret that I am not going to be able to stay, but I 
would hope that the witnesses would address the question as to 
why Medicare does not take advantage of the buying power of 
your brother organization.
    But this is a big hearing. There are big items involved 
here. We would prefer not to get involved in the publicity on 
the expensive hammer, the expensive toilet seat, or the rest of 
it, which has plagued DOD for years, but get right down to what 
can be done to save this money and apply it elsewhere where it 
is needed.
    Again, Mr. Chairman, I thank you for the introduction.
STATEMENT OF JANET REHNQUIST, INSPECTOR GENERAL, 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES
    Senator Harkin. Thank you, Senator Specter.
    First, I would like to introduce Janet Rehnquist who was 
sworn in as Inspector General of the U.S. Department of Health 
and Human Services on August 8, 2001. Prior to joining HHS, Ms. 
Rehnquist served for several years as an Assistant United 
States Attorney for the Eastern District of Virginia. Ms. 
Rehnquist also served in the White House as associate counsel 
to the President. She also served as counsel to the permanent 
Subcommittee on Investigation for the United States Senate. Ms. 
Rehnquist received her bachelor of arts degree with honors from 
the University of Virginia and her juris doctorate from the 
University of Virginia Law School.
    It would be my intention to hear from you, Ms. Rehnquist, 
and then Ms. Aronovitz, and then Mr. Scully. Then we will just 
open it up for discussion. But welcome to the committee. All of 
your statements will be made a part of the record in their 
entirety, and Ms. Rehnquist, please proceed as you so desire.

       INSPECTOR GENERAL REPORT ON MEDICAL EQUIPMENT AND SUPPLIES

    Ms. Rehnquist. Thank you, Mr. Chairman. Good morning. I am 
Janet Rehnquist, Inspector General of the Department of Health 
and Human Services, and I appreciate this opportunity to appear 
before you today regarding the important issue of Medicare 
reimbursement for medical equipment and supplies.
    Mr. Chairman, the results of our work have shown 
consistently that Medicare and its beneficiaries pay too much 
for medical equipment and supplies. This continuing problem 
needs a solution to reduce the amount of Medicare overpayment. 
The taxpayers deserve it, and as you have stated before, the 
beneficiaries should settle for nothing less.
    As you have stated, the problems we are discussing today 
are not new. The OIG has performed numerous other reviews which 
consistently found that Medicare pays too much for certain 
items of medical equipment and supplies because Medicare 
reimbursement rates are based on charges submitted to the 
program in 1987. As a result, Medicare payments can bear little 
resemblance to prices available in the marketplace or to the 
actual cost of manufacturing and distributing the equipment.
    Although Congress and the administration have done much to 
improve Medicare's reimbursement for medical equipment and 
supplies, we believe that even more needs to be done. 
Mechanisms such as inherent reasonableness authority and 
competitive bidding demonstrations are promising approaches to 
reduce excessive reimbursement.
    Medicare Part B expenditures for all medical equipment and 
supplies totaled more than $6.8 billion in the year 2000, and I 
think it is important to note that beneficiaries paid more than 
$1.3 billion out of their own pockets in that year alone.

                        CAPPED RENTAL EQUIPMENT

    On a related issue, a report we are releasing today, 
entitled Medicare Maintenance Payments for Capped Rental 
Equipment, in which we reviewed Medicare maintenance payments 
made in the capped rental payment category, we found that 
Medicare could save approximately $100 million per year by 
eliminating maintenance payments and paying only for equipment 
repairs when needed. CMS concurred with our recommendation to 
eliminate maintenance payments and will seek legislation to 
eliminate the purchase option for equipment in the capped 
rental category.

       COMPARISON OF PRICES PAID BY MEDICARE AND OTHER CONSUMERS

    Mr. Chairman, you asked my office to compare the prices 
Medicare pays for medical equipment and supplies with the 
prices paid by other health care consumers. At your request, we 
compared median 2002 Medicare prices for 16 DME and supply 
items to the median prices of the Department of Veterans 
Affairs, Medicaid, the Federal Employee Health Benefit Plan, 
and retail suppliers. This work, in addition to the report we 
are releasing today, illustrates again that Medicare pays too 
much for DME and supply items compared to their consumers. In 
our comparison, we found the Medicare's reimbursement was 
greater than the VA median price for 15 of the 16 items. 
Potential savings would be $958 million per year if Medicare 
were to adopt these prices.
    Now, as you know, there are distinctions between Medicare 
and the VA which some say make this comparison like apples and 
oranges. However, even with a 67 percent markup to account for 
the distinction between Medicare as a payor and VA as a larger 
purchaser, Medicare's potential savings would be approximately 
$440 million a year.
    We also found that Medicare reimbursement was more than 
Medicaid reimbursement for 15 of the 16 items. If Medicare used 
the median Medicaid prices for reimbursement on these items, 
the program could have saved $193 million per year.
    Medicare reimbursement was more than the FEHB plan's median 
price for 15 of the 16 items also. If Medicare were to 
reimburse based on the FEHB plans, the program could save $118 
million.

            INHERENT REASONABLENESS AND COMPETETIVE BIDDING

    Medicare prices were more then the median retail price for 
10 of the 16 items. Potential Medicare savings would reach $84 
million if Medicare used median retail prices. In your 
demonstration, that would be the Costco or the drugstore down 
the street prices.
    There is obviously a huge range of prices and Medicare's 
overpayment for DME adversely affects the trust fund and the 
beneficiaries. However, in terms of solutions, we believe the 
Government has at least two options designed to begin solving 
the problem of excessive DME reimbursement: the inherent 
reasonableness authority and the competitive bidding process.
    Inherent reasonableness authority is a vital tool for CMS 
to adjust unreasonably high or low reimbursement rates for 
medical equipment and supplies. The inherent reasonableness 
process, created by the Social Security Act and related 
Medicare regulations, permitted CMS to use other pricing 
methods to make unreasonable DME payments analogous to current 
market prices. CMS has attempted to use this tool in reducing 
Medicare payments. However, congressional concerns resulted in 
the suspension of the process until a GAO report on the subject 
was issued and a final rule published.
    The GAO report, issued in July 2000, found that CMS' 
authority was reasonable and justified. The remaining task is 
to promulgate a final rule so CMS can exercise its authority.
    A second tool that shows promise for reducing excessive 
payments is the competitive bidding demonstration project 
undertaken by CMS. Competitive bidding is where suppliers are 
required to submit bids to Medicare if they wish to provide 
beneficiaries with certain types of DME equipment. As you know, 
Medicare payments for medical equipment and supplies are based 
on fee schedules, but studies show that under these fee 
schedules, suppliers have been able to charge Medicare 
beneficiaries higher prices than those charged in many retail 
outlets for some medical equipment and supplies.
    CMS has conducted competitive bidding demonstrations with 
promising results. Through competitive bidding, CMS estimates 
17 percent, or $1.3 million, annual savings for Medicare 
beneficiaries in Polk County, Florida alone. Additionally, 
Medicare implemented a competitive bidding demonstration in San 
Antonio, Texas where CMS estimates a 22 percent savings for the 
23-month demonstration period. Competitive bidding used in 
conjunction with other mechanisms like inherent reasonableness 
adjustments will go a long way to help alleviate Medicare 
excessive payments.

                             INVESTIGATIONS

    In addition to CMS' tools to reduce excessive payments, the 
OIG has aggressively investigated individuals and entities that 
have defrauded our programs in this area. Between 1996 and 
2001, our investigations led to 88 successful criminal 
prosecutions of DME suppliers and 82 civil settlements or 
judgments. Together, these investigations resulted in more than 
$277 million in restitutions, fines, and penalties being 
ordered by the courts. And the OIG imposed 166 exclusions on 
DME companies, their owners or employees.
    Mr. Chairman, I see my time has expired and I would be 
happy to answer any questions.
    Senator Harkin. No, go right ahead. Finish.
    Ms. Rehnquist. Just a couple more points. I guess in 
conclusion I would like to just say that all of our work and I 
know that the work of your staff too leads us to the same 
conclusion, and that is that Medicare does pay too much for 
some items of equipment and supplies. We believe that 
fundamental reform is needed to ensure that Medicare and its 
beneficiaries pay a fair price. But fortunately, through 
inherent reasonableness authority and competitive bidding, 
these valuable tools I think will be very effective in reducing 
these excessive payments.

                           prepared statement

    The administration and Congress are working together to 
expand the bidding demonstrations, and as you mentioned, I 
think this will go a long way towards making sure that Medicare 
pays a fair and not an excessive price. The taxpayers and the 
beneficiaries deserve nothing less.
    Thank you for the opportunity to discuss these important 
issues and I will be happy to answer any questions.
    [The statement follows:]
                 Prepared Statement of Janet Rehnquist
    Good morning, Mr. Chairman and Members of the Subcommittee. I am 
Janet Rehnquist, Inspector General of the Department of Health and 
Human Services. I appreciate this opportunity to appear before you 
today to discuss some of the issues we have encountered with fraud, 
waste and abuse related to Medicare reimbursement for medical equipment 
and supplies.
    We continue to find that Medicare and its beneficiaries pay too 
much for medical equipment and supplies. You have specifically asked us 
to compare the price Medicare pays for certain medical equipment and 
supplies with that of other payers, including the Department of 
Veterans Affairs (VA), Medicaid, Federal Employee Health Benefit (FEHB) 
plans, and retail suppliers. Our price comparison demonstrates that 
Medicare overpays for some medical equipment and supplies.
    The problems that we are discussing today are not new. We have done 
numerous reviews over the years documenting excessive reimbursement for 
medical equipment and supplies. The Centers for Medicare & Medicaid 
Services (CMS), the General Accounting Office (GAO) and Members of 
Congress such as yourself, Mr. Chairman, have done much to improve 
Medicare's reimbursement for medical equipment and supplies. 
Improvements include creating supplier standards, centralizing claims 
processing into four regional carriers, and reducing oxygen 
reimbursement by 30 percent. In addition, inherent reasonableness 
authority and competitive bidding demonstrations have been promising 
approaches to reduce excessive reimbursement. We believe that even more 
has to be done, and my testimony today will outline some specific steps 
to reduce or eliminate problems that continue today.
                               background
    Medicare Part B expenditures for all medical equipment and supplies 
totaled more than $6.8 billion in 2000, of which beneficiaries paid 
more than $1.3 billion out of their own pockets. Medicare covers 
certain medical equipment and supplies, which include several 
categories of items. Durable medical equipment (DME) are items that can 
withstand repeated use and include oxygen equipment, hospital beds, 
wheelchairs, and other equipment that physicians prescribe for home 
use. Medicare Part B also covers certain drugs necessary for the 
effective use of DME, including albuterol for use with a nebulizer. 
Prosthetic devices replace all or part of a body organ. Medicare covers 
enteral and parenteral nutrition therapy under this benefit. Medical 
supplies include catheter, ostomy, incontinence, and wound care 
supplies. Medicare also covers braces and artificial limbs.
                            recent oig work
    We have conducted numerous studies in recent years, all showing 
that Medicare pays too much for certain medical equipment and supplies.
    Maintenance Payments for Capped Rental Equipment.--In a report we 
are releasing today entitled Medicare Maintenance Payments for Capped 
Rental Equipment, we reviewed Medicare's maintenance payments that are 
made under the capped rental payment category. We found that Medicare 
paid substantially more for maintenance on rented equipment than 
repairs on purchased equipment. Medicare pays for maintenance even if 
the supplier does not service the equipment. Furthermore, our 
additional analysis of supplier documentation found only 9 percent of 
the capped rental equipment actually received any maintenance and 
servicing. We estimated that Medicare could save approximately $100 
million per year by eliminating maintenance payments and, instead, pay 
only for repairs when needed. CMS concurred with our recommendation to 
eliminate maintenance payments and will seek legislation to eliminate 
the purchase option under the capped rental category.
    Respiratory Assist Devices.--In June 2001, we issued a report 
entitledRespiratory Assist Devices With Back-up Rate. We concluded that 
the current Medicare payment method used for bi-level respiratory 
assist devices with back-up rate is inappropriate. Medicare could save 
$11.5 million annually if this item were classified as a ``capped 
rental'' item rather than an item needing ``frequent and substantial 
service''. CMS is currently in the process of making this change.
    Prescription Drugs Used with Medical Equipment.--In March 2002, we 
released a report entitled Excessive Medicare Reimbursement for 
Albuterol. We found that Medicare and its beneficiaries would save $264 
million a year if albuterol were reimbursed at the median VA price and 
between $226 million and $245 million if reimbursed at prices available 
to suppliers. A separate March 2002 report entitled Excessive Medicare 
Reimbursement for Ipratropium Bromide found that Medicare and its 
beneficiaries would save $279 million a year if ipratropium bromide 
were reimbursed at the median VA prices and between $223 million and 
$262 million a year if reimbursed at prices available to suppliers.
    Blood Glucose Test Strips.--In a June 2000 report entitled Blood 
Glucose Test Strips: Inappropriate Medicare Payments, OEI-03-98-00230, 
we found that Medicare allowed $79 million for blood glucose test strip 
claims with missing or flawed documentation. Orders for 25 percent of 
the sampled claims failed to establish beneficiaries' eligibility for 
the supplies. Another 21 percent of claims had incomplete orders. We 
found that suppliers submit claims for test strips at irregular 
intervals, making it difficult to identify overlapping claims, claims 
without correct supporting documentation, and claims for excessive 
numbers of test strips. We recommended that CMS take several steps to 
promote compliance with Medicare guidelines for blood glucose test 
strips.
    We have performed numerous other reviews which consistently found 
that Medicare pays too much for certain items of medical equipment and 
supplies because Medicare reimbursement rates are based on charges 
submitted to the program in 1987. As a result, Medicare payments can 
bear little resemblance to prices available in the marketplace or to 
the actual cost of manufacturing and distributing the equipment.
      price comparisons for 16 medical equipment and supply items
    The price comparisons that you requested confirm once again that 
Medicare pays more than other payers for certain medical equipment and 
supplies. We compared Medicare payment rates for medical equipment and 
supplies to the rates of other payers, and provided an estimate of 
potential savings if the Medicare program were to adopt the rates of 
these payers.
    Our analysis shows that health care consumers, Federal health 
insurance plans, State Medicaid agencies, and the VA pay less than 
Medicare for some of the medical equipment and supplies we reviewed. 
However, this analysis was not designed to follow the same process for 
rate setting purposes that CMS will need to employ using the inherent 
reasonableness authority authorized in Section 4316 of the Balanced 
Budget Act of 1997. In order for CMS to affect a payment reduction for 
items in our analysis, they would have to conduct a separate inherent 
reasonableness determination in accordance with procedures set forth in 
regulations. As discussed later in my testimony, revised standards have 
to be promulgated before this authority can be utilized.
    Also, unlike Medicare, which is a payer of services and not a 
provider of services, the VA generally obtains medical equipment and 
supplies by direct acquisition from manufacturers and wholesalers. The 
prices that the VA pays for medical equipment and supplies provide a 
rough estimate of the wholesale prices available to large purchasers. 
These prices do not take into account the Medicare supplier costs 
associated with getting an item to a Medicare beneficiary.
    For our analysis, we compared the median Medicare price for 16 
medical equipment and supply items with the median prices from the VA, 
State Medicaid agencies, fee-for-service FEHB plans, and retail 
suppliers. Twelve of these items were researched by the Chairman's 
staff in 1996. The remaining four items had very large total Medicare 
payments in 2000. The 16 items we reviewed represent more than $1.7 
billion (26 percent) of $6.8 billion in total allowed charges for 
medical equipment and supplies in 2000.
    The table below provides a description for each of the 16 codes 
reviewed. The methodology is provided as an appendix to this testimony.

------------------------------------------------------------------------
           Medicare Code                         Description
------------------------------------------------------------------------
A4253.............................  Blood glucose test or reagent strips
                                     for home blood glucose monitor, per
                                     50 strips
A4259.............................  Lancets, per box of 100
A4323.............................  Sterile saline irrigation solution,
                                     1000 ml
B4035.............................  Enteral feeding supply kit; pump
                                     fed, per day
E0135.............................  Walker, folding (pickup), adjustable
                                     or fixed height
E0163.............................  Commode chair, stationary, with
                                     fixed arms
E0178.............................  Gel or gel-like pressure pad or
                                     cushion, nonpositioning
E0180.............................  Pressure pad, alternating with pump
E0181.............................  Pressure pad, alternating with pump,
                                     heavy duty
E0260.............................  Hospital bed, semi-electric (head
                                     and foot adjustment), with any type
                                     side rails, with mattress
E0277.............................  Powered pressure-reducing air
                                     mattress
E0570.............................  Nebulizer, with compressor
E0730.............................  TENS (transcutaneous and/or
                                     neuromuscular electrical nerve
                                     stimulators), four lead, larger
                                     area/multiple nerve stimulation
E0776.............................  IV pole
K0001.............................  Standard wheelchair
K0011.............................  Standard-weight frame motorized/
                                     power wheelchair with programmable
                                     control parameters for speed
                                     adjustment, tremor dampening,
                                     acceleration control and braking
------------------------------------------------------------------------

    The results of our review are presented in the following table:

                                                    SUMMARY OF MEDICARE PRICES COMPARED TO VA, MEDICAID, RETAIL, AND FEHP PRICES FOR 16 ITEMS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Percentage
                                                                                          Percentage             difference             Percentage
                                                                               Median VA  difference  Median VA    between              difference             Percentage             Percentage
                                                                      Median     price      between     price     Medicare     Median     between     Median   difference    Median   difference
                           Medicare code                             Medicare   without    Medicare    with 67     and VA     Medicaid   Medicare     retail     between      FEHP      between
                                                                      price      markup     and VA     percent     with 67     price        and       price     Medicare     price     Medicare
                                                                                            without     markup     percent               Medicaid              and retail              and FEHP
                                                                                            markup                 markup
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
A4253.............................................................     $38.32     $19.50       49.11     $32.57       15.01     $35.81        6.55     $42.42      -10.70     $36.75        4.10
A4259.............................................................      12.68       8.69       31.47      14.51      -14.43      10.95       13.64       7.40       41.64      12.00        5.36
A4323.............................................................       8.68       1.02       88.25       1.70       80.41       7.33       15.55       6.25       28.00       7.95        8.41
B4035.............................................................      10.67       2.40       77.51       4.01       62.42      10.67  ..........       9.05       15.18      11.30       -5.90
E0135.............................................................      83.43      39.36       52.82      65.73       21.22      69.57       16.61      95.60      -14.59      73.42       12.00
E0163.............................................................     109.74      32.30       70.57      53.94       50.85      89.16       18.75     112.50       -2.52     100.00        8.88
E0178.............................................................     120.74        N/A         N/A        N/A         N/A     101.87       15.63     118.31        2.01     111.90        7.32
E0180.............................................................     227.01      94.20       58.50     157.31       30.70     222.17        2.13     287.50      -26.65     210.20        7.40
E0181.............................................................     251.58      71.00       71.78     118.57       52.87     230.40        8.42     242.05        3.79     231.65        7.92
E0260.............................................................   1,754.55     762.10       56.56   1,272.71       27.46   1,359.10       22.54   1,608.91        8.30   1,397.65       20.34
E0277.............................................................   7,933.91   5,297.50       33.23   8,846.83      -11.51   6,341.10       20.08   3,912.50       50.69   7,000.00       11.77
E0570.............................................................      206.2      32.24       84.37      53.84       73.89     158.51       23.14      182.0       11.74     160.29       22.27
E0730.............................................................     365.76     165.00       54.89     275.55       24.66     353.45        3.37     645.00      -76.35     334.39        8.58
E0776.............................................................     142.45      50.25       64.72      83.92       41.09     108.62       23.75      39.10       72.55     116.71       18.07
K0001.............................................................     570.68     127.72       77.62     213.29       62.63     456.12       20.07     533.50        6.52     530.00        7.13
K0011.............................................................   5,270.30   2,767.64       47.49   4,621.96       12.30   4,912.16        6.80   5,347.83       -1.47   5,097.40        3.28
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Centers for Medicare & Medicaid Services, Medicare Fee Schedules, January 2002; Department of Veterans Affairs (VA), Pharmacy Benefit Management, Drug & Pharmaceutical Prices, March
  25, 2002; VA, National Acquisition Center, Federal Supply Schedule Contracts, March 2002; Office of Inspector General (OIG), Survey of State Medicaid Agencies, March 2002; OIG Survey of
  Medical Equipment Suppliers, March 2002; OIG Survey of Federal Employee Health Plans (FEHPs), March 2002.

Findings
    For some of the items in our analysis, Medicare consistently paid 
more than the other payers we reviewed. For example, median prices from 
all four sources (VA, Medicaid agencies, FEHB Plans, and retail 
suppliers) were more than 10 percent lower than Medicare rates for 3 of 
the 16 items. These items were powered pressure-reducing air mattress, 
nebulizer with compressor, and IV pole. Additionally, three of the four 
sources had prices that were at least 10 percent less than Medicare for 
another four items. These items were lancets, sterile saline irrigation 
solution, walker, and semi-electric hospital bed. A more detailed 
discussion of the price comparisons follows:
            Department of Veterans Affairs
    Medicare's reimbursement amount was greater than the VA median 
price for 15 of the 16 items reviewed. We could not find a VA price for 
the remaining item. The VA median prices ranged from 31 to 88 percent 
less than the Medicare prices. Maximum potential total savings would be 
$958 million per year if Medicare were to adopt these median VA prices. 
In addition to comparing the Medicare price to the median VA price 
without a markup, we have compared it to the median VA price with a 67 
percent markup. In the August 13, 1999 Federal Register, when CMS 
compared Medicare prices to median VA prices, they added a 67 percent 
markup to the VA prices. We used CMS' 67 percent figure since it was 
the only available data concerning a potential markup percentage. We 
did not verify or update the CMS markup percentage, nor do we advocate 
this as the appropriate markup to VA prices. We have presented the 67 
percent markup price comparison solely to provide an example of 
possible savings, which take into account the distinction between 
Medicare as a payer and the VA as a purchaser of medical equipment and 
supplies. A mark up of 67 percent would result in potential savings of 
$440 million.
            Medicaid Prices
    The Medicare reimbursement was more than the Medicaid reimbursement 
for 15 of the16 items reviewed. Medicare reimbursed the same as 
Medicaid for the remaining item. Median Medicaid prices ranged from 0-
24 percent less than Medicare prices. If Medicare had used the median 
Medicaid prices for reimbursement on these items, the program could 
have saved $193 million.
            Federal Employee Health Plan Prices
    Medicare reimbursed more than the FEHB Plans median price for all 
but one of the items reviewed. The FEHB Plans prices ranged from 3 to 
22 percent lower for the 15 items with reimbursement rates lower than 
Medicare. If Medicare were to reimburse based on FEHB Plan median 
prices, the program could save $118 million.
            Retail Prices
    Medicare prices were more than the median retail price for 10 of 
the 16 items. These median prices ranged from to 2 to 73 percent less 
than the Medicare price for the item. Potential Medicare savings would 
reach $84 million if Medicare used median retail prices for 
reimbursement on these 16 items.
            Competitive Bidding Demonstration Prices
    I would also like to note that four of the items in our analysis 
(saline solution, enteral feeding supply kits, semi-electric hospital 
beds, and standard wheelchairs) have been, or are currently, in 
Medicare's competitive bidding demonstrations for DME, prosthetics, 
orthotics, and supplies. Competitive bid prices were 8 to 33 percent 
less than Medicare reimbursement rates for these four items.
                        inherent reasonableness
    CMS has certain authorities to control unreasonably high or low 
payment levels for medical equipment and supplies. Using the inherent 
reasonableness process, CMS is permitted to use other payment 
methodologies to align payment amounts with current market prices. 
Congress gave CMS added flexibility in making inherent reasonableness 
adjustments in the Balanced Budget Act of 1997. The law allows CMS to 
make inherent reasonableness adjustments, without formal rulemaking, as 
long as the annual adjustments are 15 percent or less. For these 
adjustments, CMS is required to describe in regulation the factors to 
be used in determining when payment amounts are not inherently 
reasonable and those factors to be considered when establishing 
reasonable payment amounts.
    In 1998, CMS published an interim final rule revising the inherent 
reasonableness regulations. The DMERCs then surveyed retail prices for 
products they believed might have excessive Medicare payment rates. The 
DMERCs notified suppliers that they proposed to adjust Medicare 
payments for eight products and solicited public comments. The medical 
equipment and supplies industry raised concerns about the proposed 
reductions, and CMS suspended them.
    The CMS also attempted to use the inherent reasonableness process 
in August 1999 by issuing a proposed notice to replace current fee 
schedules and implement special payment limits for five items of DME 
and one prosthetic device. The CMS determined that Medicare 
reimbursement for the six items was grossly excessive relative to the 
amount paid by the VA, and therefore not inherently reasonable. The CMS 
increased the median VA wholesale prices by a mark up of 67 percent to 
make a valid comparison between Medicare and VA prices.
    Because of concerns associated with the inherent reasonableness 
process, the Congress passed legislation in November 1999 prohibiting 
CMS from using its inherent reasonableness authority until a GAO report 
on the subject was issued, and a final rule has been published that 
responded to the GAO report and to public comments. The GAO report, 
issued in July 2000, found that there was sufficient evidence to 
indicate that Medicare overpays for most of the items identified by the 
DMERCs in 1998, and that the use of the inherent reasonableness process 
for some items was justified. For other items, GAO questioned the rigor 
that carriers used in their collection of pricing data. The GAO 
recommended that CMS define what grossly excessive or deficient prices 
were in the final rule on the inherent reasonableness process. It also 
recommended that CMS develop and implement a more structured and 
consistent data collection sampling and survey methodology for inherent 
reasonableness reviews. In addition, GAO recommended that CMS monitor 
patient access to products with reduced payments. To date, the final 
rule for inherent reasonableness has not been promulgated.
                          competitive bidding
    The Balanced Budget Act of 1997 authorizes CMS to enter into 
competitive bidding demonstrations for some categories of DME, 
prosthetics, orthotics and supplies. Using this authority, CMS has 
conducted multiple competitive bidding demonstrations with promising 
results.
    In the first demonstration, CMS selected five categories of DME, 
prosthetics, orthotics and supplies for competitive bidding in Polk 
County, Florida. Payments under the first demonstration began on 
October 1, 1999 and were in effect through September 30, 2001. Medicare 
implemented a second round of competitive bidding in Polk County in 
October 2001 for four product categories. Payments under this 
demonstration will remain in effect through September 30, 2002. The CMS 
estimates savings for Medicare and Polk County beneficiaries of 17 
percent ($1.3 million) annually as compared to payments that would have 
been incurred under the year 2000 Medicare fee schedules.
    Medicare implemented an additional competitive bidding 
demonstration in San Antonio, Texas from February 1, 2001 through 
December 31, 2002 for five product categories. The CMS estimates 22 
percent savings with this round of competitive bidding.
                          investigative cases
    In addition to our audits and evaluations, the OIG has aggressively 
investigated individuals and entities that have defrauded our programs 
in this area. Between 1996 and 2001, our investigations led to 88 
successful criminal prosecutions of DME suppliers. During this same 
period, there were 82 civil settlements or judgments imposed. Together, 
these criminal convictions and civil adjudications resulted in more 
than $277 million in restitution, fines and penalties being ordered by 
the courts. Also, during this time period, 166 exclusions were imposed 
on DME companies or their owners and employees.
    I would like to highlight two of these cases for you today. The 
first case involved the misbranding of a SureStep glucose meter. The 
company submitted documents to the Food and Drug Administration (FDA) 
and marketed the SureStep glucose meter without disclosing two defects 
that led some users to become medically compromised. In this case, the 
equipment manufacturer was willing to risk the death of beneficiaries 
from the use of defective equipment because it could make so much money 
selling glucose monitoring strips for use with the meter. This company 
plead guilty to the misbranding allegation and paid a $30 million 
criminal fine in addition to a $30 million civil penalty. The second 
case involved one of the nation's largest suppliers of respiratory 
services. Allegations included submission of forged and falsified 
documents, self-qualifying of oxygen tests, double billing, claims for 
undelivered items, claims for deceased patients and inflated claims. A 
random sample of filed from one of the company's subsidiaries revealed 
a 95 percent error rate. The company agreed to pay the government $17 
million to resolve its liability under the False Claims Act for these 
allegations.
                               conclusion
    Mr. Chairman, over the years you have expressed concern that 
Medicare payments for many medical supplies remain excessive when 
compared to those of other payers. I know that you have worked 
diligently to safeguard taxpayer dollars and protect the Medicare 
program and its beneficiaries from fraud and abuse. We greatly 
appreciate your efforts. CMS also has made significant improvements 
over the years to this important benefit including consolidating claims 
processing, establishing supplier standards and requiring supplier 
applications. Competitive bidding also has shown promising initial 
results.
    Our work on the 16 items, as well as our prior work, documents that 
Medicare pays too much for some medical equipment and supplies. We 
believe that fundamental reform is needed to ensure that Medicare and 
its beneficiaries pay a fair price. Fortunately, two promising reforms 
which we have long supported are already available for use. In fact, it 
is noteworthy that for nine items in our review, CMS has proposed 
reducing prices through the inherent reasonableness process or has used 
competitive bidding to actually lower prices. However, CMS needs to 
complete its inherent reasonableness regulation, and the Administration 
and the Congress need to work together to expand the competitive 
bidding provision beyond the demonstration phase.
    Thank you for the opportunity to discuss these important issues. I 
will be happy to answer your questions.
  Appendix A.--Price Comparisons for 16 Medical Equipment and Supply 
                           Items Methodology
    For the items reviewed, we calculated the median price from each 
source (VA, Medicaid agencies, FEHB Plans, and retailers) and compared 
it to Medicare's median price. We then calculated the percentage 
difference between the Medicare price and the median prices of each of 
the four sources (i.e., we found the difference between the Medicare 
price and the other source's lower price, and divided the difference by 
the Medicare price). For those items where the Medicare price was 
higher than the source's price, we multiplied this percentage by the 
total Medicare payments for the item in 2000 to get an estimated annual 
dollar savings. We used the January 2002 Medicare fee schedules to 
determine the Medicare purchase prices for the 16 Medicare codes in our 
sample. Since fee schedule rates for the same codes differ among 
States, we calculated the median rate from the fee schedule rates for 
all 50 States, Puerto Rico, and the Virgin Islands.
    For the seven codes in the capped rental payment category, we used 
the Medicare formula to calculate how much these items would cost if 
beneficiaries chose to own them. For all but one of the items, the 
least expensive purchase price is equal to 13 months of rental, and for 
the remaining item (motorized wheelchair) it is equal to 10 months of 
rental. Six codes in our sample are items that may be purchased new or 
used. In these cases, we used the fee schedule purchase price for new 
items. The remaining three codes in our sample are supplies that cannot 
be re-used and there is only one possible purchase price for these 
items in the fee schedule.
    We also gathered information from past and current CMS competitive 
bidding demonstration projects in Polk County, Florida and San Antonio, 
Texas. We reviewed the list of items included in the demonstrations to 
determine if any of the 16 items we reviewed had competitive bid 
prices.
    We sent a request to the VA's National Acquisition Center to 
provide us with current Federal Supply Schedule prices for equipment 
and supplies that matched the description of our 16 Medicare codes. The 
National Acquisition Center handles the largest combined contracting 
activity within the VA. The National Acquisition Center determined 
which vendor contracts might contain products that matched the 
descriptions for 14 of the codes, and sent us the contract containing 
prices. For the two remaining codes (A4253--blood glucose test strips 
and A4259--lancets), we obtained Federal Supply Schedule prices from 
the VA's Pharmacy Benefit Management website. From the available VA 
data, we identified items that we believed matched the descriptions of 
our Medicare codes.
    We sent requests to 52 State Medicaid agencies and 58 fee-for-
service FEHB Plans to provide current reimbursement prices for items 
matching the description of the 16 Medicare codes. We received 
responses from 40 Medicaid agencies and 30 FEHB Plans. Not all of the 
respondents could provide rates for every item.
    Finally, for each of the 16 codes, we identified Medicare suppliers 
that received the highest payments for that particular code in 2000. 
For each code we obtained retail prices from 10 suppliers. We asked 
suppliers how much it would cost to buy the item, in cash, including 
tax and delivery charges. For three of the 16 items--blood glucose test 
strips for home blood glucose monitors, lancets, and enteral feeding 
supply kits for use with pumps--we requested more than one price. 
Generally, blood glucose test strips are made to fit specific brands of 
equipment. Therefore, prior to calling suppliers, we identified two 
commonly-used brands of test strips. We then requested the prices of 
these two brands of test strips from suppliers. Blood glucose test 
strips and lancets are often sold through mail order which may result 
in different prices than retail prices. Therefore, we asked for the 
mail order as well as the retail price. For enteral feeding supply 
kits, we identified two supply kits billed under code B4035, and then 
we asked suppliers for the prices of both supply kits. In addition, the 
enteral feeding supply kits are covered by Medicare on a per day basis, 
while the prices we were quoted were per unit. In our analysis, we 
compared the per-unit price to Medicare's per-day price.

    Senator Harkin. Ms. Rehnquist, thank you very much. I did 
not know that timing clock was on. I wanted to give you plenty 
of time, but we will get into a discussion.
    Again, let me just thank you and your whole office for 
really being diligent on this and doing it in a good time frame 
and not dragging it out for a long time.
    Ms. Rehnquist. Well, thank you.
    Senator Harkin. We really appreciate that very much. I went 
over the whole report. I just thought you did everything 
exemplary in terms of the investigation and bringing to light 
what we were paying on these items. So, again, I thank you and, 
through you, the staff that works for you.
    Ms. Rehnquist. They deserve a lot of the credit.
    Senator Harkin. Thank you.
STATEMENT OF LESLIE G. ARONOVITZ, DIRECTOR, HEALTH 
            CARE, PROGRAM ADMINISTRATION AND INTEGRITY 
            ISSUES, UNITED STATES GENERAL ACCOUNTING 
            OFFICE
    Senator Harkin. Now we will turn to Ms. Aronovitz. Leslie 
Aronovitz is a Director of the Health Care Team for the GAO, 
the General Accounting Office. She received her bachelor's 
degree from the University of Georgia and her M.B.A. from the 
Boston University. Again, Ms. Aronovitz, your testimony will be 
made a part of the record in its entirety, but please proceed 
as you desire.
    Ms. Aronovitz. Thank you, Mr. Chairman. I am pleased to be 
here today to discuss Medicare payment methods for medical 
equipment, supplies, and covered outpatient drugs.
    You have heard from the Inspector General about the wide 
disparities between Medicare's payment rates and the prices 
paid by others such as the VA or even retail customers. In a 
similar vein, we reported last year on Medicare's policy of 
paying list price for covered outpatient drugs, while 
physicians and pharmacy suppliers could purchase them at 
substantial discounts--in one case as high as 86 percent off 
the list price.
    To best understand how to begin fixing this problem, I 
would like to take a minute to review the context in which 
Medicare operates as a payer of health care services and 
products. This will help explain in part why effective 
solutions have been so elusive.

 MEDICARE PAYMENT APPROACHES LACK FLEXIBILITY TO KEEP PACE WITH MARKET 
                                CHANGES

    Medicare is a highly visible public program with certain 
obligations that may not be consistent with efficient business 
practices. For example, CMS is constrained from acting swiftly 
to reprice services and products even when prevailing market 
rates suggest that payments should be modified. When making 
substantive changes, Medicare is generally required to obtain 
public input. While this minimizes the potential for actions to 
have unintended consequences, seeking and responding to public 
input from various provider and supplier groups has been a 
cumbersome and time consuming process which often takes years 
to make needed changes.
    In addition, Medicare faces constraints on excluding 
qualified providers which is the leverage that purchasers 
typically use to make competition effective. Currently 
Medicare's method of paying for medical equipment and supplies 
is through fee schedules that remain tied to suppliers' 
historical charges rather than market prices. Similarly, 
Medicare's method of determining outpatient drug payments is 
based on list prices, not prices that other purchasers actually 
pay for the drugs.
    Thus, neither method links Medicare payments to the 
marketplace, and that is one of our suggestions--that Medicare 
needs to have current price information, and information on 
actual transactions that occur in the marketplace. Add to this 
a process for revising rates that lacks the flexibility to make 
adjustments quickly, and you can see why Medicare has 
difficulty keeping pace with market changes.

  BBA REFORMS SOUGHT TO IMPROVE MEDICARE'S ABILITY TO SET APPROPRIATE 
                                 RATES

    Even though the Balanced Budget Act of 1997 gave CMS--then 
HCFA--the authority to use a streamlined process to adjust 
payment rates for most medical equipment and supplies, CMS 
remains effectively precluded by the Congress from using this 
authority because of certain procedural steps that the Agency 
has not fulfilled. This authority is expected to be restored 
when CMS publishes final regulations establishing a streamlined 
process that includes sufficient steps for public notice and 
comment.
    Under the BBA of 1997, Medicare does have the authority to 
conduct competitive bidding demonstrations for a limited number 
of items at a few locations. Two demonstrations thus far have 
involved suppliers competing for the right to supply certain 
items on the basis of quality and price. These demonstrations 
have reported savings without measurable problems in regards to 
beneficiary access.

PAST EFFORTS TO CORRECT INAPPROPRIATE PAYMENTS SUGGEST LESSONS FOR THE 
                                 FUTURE

    What we have learned from past efforts to lower Medicare's 
overly generous payments is that changes are most effectively 
implemented when the process used is rigorously defensible. 
Thus, lesson one is that payment changes need to be based on 
data-driven analyses of their potential impact on provider 
behavior and beneficiary access. This helps avoid one extreme 
of taking premature action based on external pressures and the 
other extreme of taking no action when it is clearly warranted.
    Lesson two--which relates to the first lesson--is that CMS 
has not been well-positioned to collect and analyze data 
regarding current market prices and the potential effects that 
price adjustments could have on suppliers and beneficiaries 
before the agency takes action. For example, information on 
Medicare claims from medical equipment and supplies is not 
specific enough to enable CMS to determine which products 
Medicare is actually paying for.

                           prepared statement

    Lesson three is that the positive results achieved from the 
two competitive bidding demonstrations may be difficult to 
expand on a national scale. This is due to the labor-intensive 
outreach efforts in each of the two communities and the ongoing 
monitoring required in regards to beneficiary access and 
product quality. Despite this, the early success of competitive 
bidding demonstrations in Florida and Texas clearly shows that 
CMS can and should continue along this route.
    Mr. Chairman, this concludes my prepared statement, and I 
will be happy to answer any questions that you have.
    [The statement follows:]
               Prepared Statement of Leslie G. Aronovitz
 medicare--challenges remain in setting payments for medical equipment 
                     and supplies and covered drugs
    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here as you discuss Medicare payment methods related to durable medical 
equipment, prosthetics, orthotics, and supplies--products referred to 
in this statement as medical equipment and supplies--and covered 
outpatient drugs. Over the years, we and the Department of Health and 
Human Services (HHS) Office of the Inspector General (OIG) have 
periodically reported that Medicare has paid higher than market rates 
for various medical equipment and supply items and often considerably 
higher than provider acquisition costs for Medicare-covered outpatient 
drugs.\1\ Since the late 1980s, the Congress has enacted a series of 
legislative changes affecting payment methods and payment adjustment 
authority for medical equipment and supplies and outpatient drugs. 
However, the progress made in setting appropriate rates has been mixed, 
owing, in part, to various constraints faced by the agency responsible 
for administering Medicare--the Centers for Medicare and Medicaid 
Services (CMS), formerly called the Health Care Financing 
Administration (HCFA).\2\
---------------------------------------------------------------------------
    \1\ A list of related GAO products is included at the end of this 
statement.
    \2\ This statement will refer to HCFA in discussing actions taken 
before the agency's name was officially changed on July 1, 2001.
---------------------------------------------------------------------------
    In this regard, my remarks today will focus on: (1) Medicare's 
experience in setting payment rates for medical equipment and supplies 
and outpatient drugs; (2) certain changes designed to assist in setting 
payments for medical equipment and supplies and outpatient drugs 
incorporated in the Balanced Budget Act of 1997 (BBA); \3\ and (3) 
lessons learned from efforts to improve the appropriateness of 
Medicare's payments. My comments are based primarily on our previously 
issued work.
---------------------------------------------------------------------------
    \3\ Pub. L. No. 105-33, 111 Stat. 251.
---------------------------------------------------------------------------
    In summary, because of the program's size, scope, and role as a 
public payer, Medicare has limited options to set and adjust payments 
for medical equipment and supplies and outpatient drugs. For example, 
in cases where Medicare is the dominant payer for a service or product, 
the program's share of the payments can distort the market, making 
reliance on market prices problematic. Medicare's method of paying for 
medical equipment and supplies is through fee schedules that remain 
tied to suppliers' historical charges to Medicare rather than market 
prices. Similarly, Medicare's method of determining outpatient drug 
payments is based on list prices, not prices that purchasers actually 
pay for the outpatient drugs. Medicare's payment approaches lack 
flexibility to keep pace with market changes, and as a result, Medicare 
often pays higher prices than other public payers for medical equipment 
and supplies and outpatient drugs.
    Despite dramatic instances of wide disparities in market prices and 
Medicare's payment rates for medical equipment and supplies and 
outpatient drugs, Medicare is not in a position to take prompt action. 
To lower unreasonably high payment rates, it must follow a lengthy and 
complicated regulatory process for making payment adjustments. The BBA 
gave HCFA authority to use a streamlined process to adjust payment 
rates for most medical equipment and supplies and outpatient drugs.\4\ 
However, the agency's attempt to use this authority drew intense 
industry criticism, in part because the agency acted before it 
responded to public comment on how it would implement the authority. 
The Congress then prohibited use of either the original or streamlined 
processes until public comments are addressed and a final rule 
issued.\5\ To date, a final rule has not been published, effectively 
precluding the use of the original or streamlined processes to adjust 
Medicare payment rates, where excessive. Nevertheless, the BBA also 
provided HCFA the authority to test an alternative to setting prices 
administratively.\6\ This authority permitted HCFA to conduct 
demonstrations, for a limited number of items at a few locations, using 
competition to determine an appropriate payment for these items. In 
this process, suppliers competed for the right to supply certain items 
on the basis of quality and price. Two such demonstrations have 
reported savings without any measurable problems in beneficiary access.
---------------------------------------------------------------------------
    \4\ BBA at Sec.  4316, 111 Stat. 390 (codified at 42 U.S.C. Sec.  
1395u(b)(8) and (9) (Supp. III 1997)).
    \5\ Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Pub. L. No. 106-113, App. F, Sec.  223, 113 Stat. 1501, 1501 A-
352 (to be codified at 42 U.S.C. 1395u(b)(8) (Supp. V 1999)).
    \6\ BBA at Sec.  4318, 111 Stat. 392 (codified at 42 U.S.C. Sec.  
1395w-3 (Supp. III 1997)).
---------------------------------------------------------------------------
    Past efforts to lower Medicare's overly generous payments suggest 
several lessons. First, payment changes are most effectively 
implemented when the process used to set or adjust a rate is 
defensible. Medicare's size and impact on the nation's health care 
economy means that its payment methods and rate adjustments, no matter 
how reasonable, will face close scrutiny. As a result, the need for CMS 
to collect sufficient information on market prices and potential 
effects on suppliers and beneficiaries before taking action is 
paramount. A second lesson, related to the first, is that the 
information on Medicare claims for medical equipment and supplies is 
not specific enough to enable CMS to determine which products Medicare 
is actually paying for. Thus, the agency has difficulty trying to use 
market prices to set appropriate rates. A third lesson is that for the 
foreseeable future, CMS will have to continue to rely on fee schedules 
based on historical charges in setting payment rates for medical 
equipment and supply items. The recent demonstrations that set payments 
for items through competitive bidding were instructive, but the 
positive results achieved may be neither applicable nor practical on a 
wider scale for many products.
                               background
    CMS, an agency within HHS, is responsible for much of the federal 
government's multi-billion-dollar payments for health care, primarily 
through the Medicare and Medicaid programs. Medicare--the nation's 
largest health insurance program--covers about 40 million elderly and 
disabled beneficiaries. Medicaid is a state-administered health 
insurance program, jointly funded by the federal and state governments, 
that covers eligible low-income individuals including children and 
their parents, and aged, blind, and disabled individuals. Each state 
administers its own program and determines--under broad federal 
guidelines--eligibility for, coverage of, and reimbursement for, 
specific services and items.
    Most Medicare beneficiaries purchase part B insurance, which helps 
pay for certain physician, outpatient hospital, laboratory, and other 
services; medical supplies and durable medical equipment (such as 
oxygen, wheelchairs, hospital beds, and walkers); and certain 
outpatient drugs. Medicare part B pays for most medical equipment and 
supplies using a series of fee schedules. Medicare pays 80 percent, and 
the beneficiary pays the balance, of either the actual charge submitted 
by the supplier or the fee schedule amount, whichever is less. 
Generally, Medicare has a separate fee schedule for each state for most 
categories of items, and there are upper and lower limits on the 
allowable amounts that can be paid in different states to reduce 
variation in what Medicare pays for similar items in different parts of 
the country.
    The fee schedules specify a Medicare-allowable payment amount for 
each of about 1,900 groups of products. Each product group is 
identified by a Healthcare Common Procedure Coding System (HCPCS) Level 
II code, and all products grouped under a code are intended to be items 
that are alike and serve a similar health care function. For example, 
one code (E1130) describes a standard wheelchair with fixed arms. Many 
different brands can be billed under this code, so long as they fit the 
basic description.
    Medicare part B also covers roughly 450 outpatient drugs--generally 
those that cannot be self-administered and are related to physicians 
services, such as cancer chemotherapy, or are provided in conjunction 
with covered durable medical equipment, such as inhalation drugs used 
with a nebulizer.\7\ In addition, Medicare part B covers selected 
immunizations and certain outpatient drugs that can be self-
administered, such as blood clotting factors and some oral drugs used 
in association with cancer treatment and immunosuppressive therapy.
---------------------------------------------------------------------------
    \7\ A nebulizer is a device driven by a compressed air machine that 
allows the patient to take medicine in the form of a mist or wet 
aerosol.
---------------------------------------------------------------------------
    To administer Medicare part B fee-for-service claims, CMS contracts 
with insurance companies, referred to as carriers, who review and pay 
claims that have been submitted by physicians and other outpatient 
providers and suppliers. To ensure appropriate payment, carriers 
conduct claims reviews that determine, for example, whether the 
services claimed are covered by Medicare, are reasonable and necessary, 
and have been billed with the proper codes.
  payment approaches lack flexibility to keep pace with market changes
    Medicare's size and complexity make it extremely challenging to 
develop payment methods that prudently reimburse providers while 
promoting beneficiary access to items and services. As Medicare's 
steward, CMS cannot passively accept what providers want to charge the 
program. However, because of its size, Medicare profoundly influences 
health care markets. Medicare is often the dominant payer for services 
and products, and in such cases, it cannot rely on market prices to 
determine appropriate payment amounts because Medicare's share of 
payments distorts the market. In addition, Medicare has had difficulty 
relying on competition to determine prices. Because of constraints on 
excluding any qualified provider from participating in the program, 
Medicare traditionally includes all such providers who want to 
participate. Finding ways of encouraging competition without excluding 
some providers--a normal leverage that purchasers use to make 
competition work--has been problematic. As a result, Medicare has had 
to administratively set payment amounts for thousands of services and 
items, trying to do so in ways that encourage efficient delivery, while 
ensuring beneficiary access to them.
    Adding to the complexity of setting payment amounts is Medicare's 
status as a highly visible public program with certain obligations that 
may not be consistent with efficient business practices. For example, 
CMS is constrained from acting swiftly to reprice services and supplies 
even when prevailing market rates suggest that payments should be 
modified. When making substantive changes, Medicare's enabling 
legislation generally requires public input. This minimizes the 
potential for actions to have unintended consequences. However, seeking 
and responding to public input from various provider and supplier 
groups can be a time-consuming process that can sometimes thwart 
efficient program management.
    Prior to 1987, Medicare payments for medical equipment and supplies 
were based on supplier charges, subject to some limitations. As part of 
their responsibilities to administer Medicare claims, individual 
Medicare carriers raised or lowered payments to suppliers in their 
local areas to align them with market prices. When carriers sought to 
adjust payments on this basis, they employed a process that involved 
gathering relevant pricing data from local area markets, determining 
new payment levels on the basis of the price information obtained, and 
notifying area suppliers of the changes. Although HCFA monitored 
carriers' performance in carrying out these steps, it did not evaluate 
the appropriateness of the new payment levels established.
    In 1987, the Congress and HCFA began the process of moving the 
Medicare program from paying on the basis of individual providers' 
charges for medical equipment and supplies and covered outpatient 
drugs, to developing payment methods intended to pay more prudently 
through use of program-determined amounts. Specifically, the Congress 
introduced fee schedules for medical equipment and supplies in 1987.\8\ 
Statewide fees were determined on the basis of average supplier charges 
on Medicare claims allowed in each state in 1986 and 1987, and were 
updated for inflation in some years.\9\ However, the agency lacked 
mechanisms to otherwise adjust fees to reflect marketplace changes. As 
a result, disparities between fee schedule amounts and market prices 
developed over time, and Medicare significantly overpaid for some 
medical equipment and supplies.
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    \8\ Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, 
Sec.  4062, 101 Stat. 1330, 1330-101 (codified at 42 U.S.C. Sec.  1395m 
(1988)). Certain medical equipment and supply items not originally on a 
fee schedule were added later--for example, surgical dressings, were 
added by the Omnibus Budget Reconciliation Act of 1993 Pub. L. No. 103-
66, Sec.  13544(b), 107 Stat. 312, 589 (codified at 42 U.S.C. Sec.  
1395m(i) (1994)).
    \9\ Prior to 1998, these fees were adjusted each year using 
formulas tied to the Consumer Price Index. No update was provided from 
1998 through 2000 or in 2002, although updates were provided in 2001. 
42 U.S.C. Sec.  1395m(a)(14) (Supp. IV 1998); Medicare, Medicaid and 
SCHIP Balanced Budget Refinement Act of 1999, Pub. L. No. 106-113, App. 
F, Sec.  228, 113 Stat. 1501, 1501A-356; and Medicare, Medicaid, and 
SCHIP Benefits Improvement and Protection Act of 2000, Pub. L. No. 106-
554, App. F, Sec.  425, 114 Stat. 2763, 2763A-519 (to be codified at 42 
U.S.C. Sec.  1395m(a)(14)).
---------------------------------------------------------------------------
    In recent years, we and the HHS OIG reported on instances where 
Medicare payments for certain medical equipment and supplies and 
outpatient drugs were excessive compared with retail and other prices. 
One notable example of excessive Medicare payments is included in our 
1995 report on surgical dressings.\10\ We estimated that Medicare could 
have saved almost $20 million in 1995 if it had paid the lowest 
wholesale prices available in a national catalog for 44 types of 
surgical dressings. Although Medicare's fee schedule for surgical 
dressings was based on medians of retail prices found in supply 
catalogs when the schedule was set, Medicare's statute did not permit 
HCFA to lower the fee schedule when retail prices for dressings 
decreased.\11\
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    \10\ U.S. General Accounting Office, Medicare: Excessive Payments 
for Medical Supplies Continue Despite Improvements, GAO/HEHS-95-171 
(Washington, D.C.: Aug. 8, 1995).
    \11\ Authority to adjust payment rates that were excessive did not 
extend to surgical dressings and certain other medical supplies at that 
time. The BBA extended the authority to adjust rates for any payments 
under part B that are excessive. BBA at Sec.  4316, sec. 
1842(b)(8)(A)(i)(I), 111 Stat. 390 (changing ``application of this 
subsection'' to ``application of this part).'' Clarifying this 
broadened scope, ``application of this part'' was later changed to 
``application of this title to payment under this part.'' Medicare, 
Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. No. 
106-113, App. F, Sec.  223(c), 113 Stat. 1501, 1501A-353.
---------------------------------------------------------------------------
    Another instance of excessive Medicare payment was for home oxygen 
equipment and supplies provided to patients with pulmonary 
insufficiency. Medicare fee schedule allowances for home oxygen were 
significantly higher than the rates paid for almost identical services 
by the Department of Veterans Affairs (VA), which in fiscal year 1995 
paid for home oxygen benefits for over 23,000 patients. In 1997, we 
estimated that Medicare could have saved over $500 million in fiscal 
year 1996 if it had paid rates for home oxygen comparable to those paid 
by VA.\12\
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    \12\ The savings estimate includes adding a 30-percent adjustment 
to VA payment rates to account for differences between the Medicare and 
VA programs. See U.S. General Accounting Office, Medicare: Comparative 
Information on Medicare and VA Patients, Services, and Payment Rates 
for Home Oxygen, GAO/HEHS-97-151R (Washington, D.C.: June 6, 1997).
---------------------------------------------------------------------------
    Medicare's payments for outpatient drugs have been similarly 
excessive, although the methodology used to determine payment amounts 
is somewhat different and attempts to tie Medicare's payments to market 
prices. In 1989, the Congress required that physician services be paid 
based on fee schedules beginning in 1992.\13\ The fee schedules 
developed by HCFA to comply with this requirement provided for all 
outpatient drugs furnished to Medicare beneficiaries not paid on a cost 
or prospective payment basis to be paid based on the lower of the 
estimated acquisition cost or the national average wholesale price 
(AWP).\14\ Manufacturers report AWPs to organizations that publish them 
in drug price compendia, which are typically updated annually, and 
Medicare carriers base providers' payments on these published AWPs.
---------------------------------------------------------------------------
    \13\ Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-
239, Sec.  6102, 103 Stat. 2106, 2169 (codified at 42 U.S.C. Sec.  
1395w-4 (Supp. I 1989)).
    \14\ 56 Fed. Reg. 59,502, 59,507 (Nov. 25, 1991).
---------------------------------------------------------------------------
    In concept, such a payment method has the potential to be market-
based and self-adjusting. The reality is, however, that AWP is neither 
an average nor a price that wholesalers charge. Because the term AWP is 
not defined in law or regulation, there are no requirements or 
conventions that AWP reflect the price of any actual sale of drugs by a 
manufacturer. Given the latitude manufacturers have in setting AWPs, 
Medicare's payments are often not related to market prices that 
physicians and suppliers actually pay for the products.
    A June 1997 House Budget Committee report accompanying the bill 
that became the BBA, in explaining the reason for specifying a 5-
percent reduction from AWP, cited a report by the HHS OIG regarding 
Medicare payments for outpatient drugs.\15\ Among the OIG findings were 
that Medicare payments ranged from 20 percent to nearly 1,000 percent 
of certain oncology drugs' commercially available prices.
---------------------------------------------------------------------------
    \15\ H.R. Rep. No. 105-149, at 1354 (1997).
---------------------------------------------------------------------------
    Our recent work found that Medicare payments in 2001 for part B-
covered outpatient drugs remained significantly higher than prices 
widely available to physicians and pharmacy suppliers.\16\ For example, 
most physician-administered drugs had widely available discounts 
ranging from 13 to 34 percent below AWP. Two other physician-
administered drugs had discounts of 65 and 86 percent. Pharmacy 
suppliers--the predominant billers for 10 of the high-expenditure and 
high-volume drugs we analyzed--also purchased drugs at prices 
considerably lower than Medicare payments. For example, two inhalation 
drugs accounting for most of Medicare payments to pharmacy suppliers 
had widely available discounts averaging 78 percent and 85 percent from 
AWP.
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    \16\ U.S. General Accounting Office, Medicare: Payments for Covered 
Outpatient Drugs Exceed Providers' Cost, GAO-01-1118 (Washington, D.C.: 
Sept. 21, 2001).
---------------------------------------------------------------------------
  bba reforms sought to improve medicare's ability to set appropriate 
                                 rates
    Despite such dramatic illustrations of disparities between Medicare 
payments and prices widely available to others acquiring medical 
equipment and supplies and covered outpatient drugs, Medicare has not 
had the tools to respond quickly in such instances. Carriers used to 
adjust payment amounts as part of their responsibility to appropriately 
pay Medicare claims, but in 1987, the Congress effectively prohibited 
use of this process to lower Medicare payment rates until 1991.\17\ In 
1988, the Congress required use of a more formal ``inherent 
reasonableness'' process that could be accomplished only by HCFA, not 
by the carriers.\18\ In other reports, we have described this process 
as slow and cumbersome and have noted that it is not available for some 
items, such as surgical supplies.\19\ Since 1991, when HCFA was first 
permitted to use the inherent reasonableness process to adjust payments 
for medical equipment and supplies, it successfully did so only once--
for blood glucose monitors--and in that instance took almost 3 years to 
adjust the maximum allowable Medicare payment from $185.79 to $58.71.
---------------------------------------------------------------------------
    \17\ Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-
203, Sec.  4062(b), 101 Stat. 1330, 1330-100.
    \18\ Medicare Catastrophic Coverage Act of 1988, Pub. L. No. 100-
360, Sec.  411(g)(1)(B)(xiii), 102 Stat. 683, 782. These procedures 
were previously applicable only to any inherent reasonableness review 
with respect to physician services. 42 U.S.C. 1395m(a)(10)(B) (1988).
    \19\ Changing an unreasonable payment level required, among other 
things, a formal notice-and-comment rulemaking process that involved 
the HCFA Administrator, the Secretary of Health and Human Services, and 
the Director of the Office of Management and Budget (OMB). U.S. General 
Accounting Office, Medicare Payments: Use of Revised ``Inherent 
Reasonableness'' Process Generally Appropriate, GAO/HEHS-00-79 
(Washington, D.C.: July 5, 2000) and GAO/HEHS-95-171.
---------------------------------------------------------------------------
    In 1997, in response to concerns about HCFA's difficulties in 
adjusting payment rates determined to be excessive, the Congress 
included a provision in the BBA that gave HCFA authority to use a 
streamlined inherent reasonableness process to adjust payments for 
medical equipment and supplies and covered outpatient drugs by up to 15 
percent a year.\20\ Subsequent legislation required that a final 
regulation taking into account public comments be published before the 
agency could use any inherent reasonableness authority. Because the 
agency has not issued the final regulation, it cannot adjust Medicare's 
fee schedules to respond to market price information. The BBA also 
provided HCFA with opportunities to test an alternative to setting 
rates administratively that could be more responsive to market 
prices.\21\ This alternative is competitive bidding--a process allowing 
suppliers to compete for the right to supply their products on the 
basis of established criteria, such as quality and price.\22\
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    \20\ BBA at Sec.  4316, 111 Stat. 251, 390.
    \21\ BBA at Sec.  4319, 111 Stat. 251, 392. (Codified at 42 U.S.C. 
Sec.  1395w-4 (Supp. III 1997).
    \22\ In the competitive bidding demonstration projects authorized 
under BBA, Medicare part B items and services (other than physician 
services) were furnished under competitively awarded contracts. For 
each demonstration product or service, the prices bid by winning 
suppliers were used to determine the competitively bid fee schedule 
price.
---------------------------------------------------------------------------
 streamlined process to adjust fees needs further regulatory action to 
                             be implemented
    The BBA gave HCFA authority to use a streamlined inherent 
reasonableness process for part B services (excluding physician's 
services). Under this authority, HCFA can adjust payments by up to 15 
percent per year using a streamlined process, or can use its original 
process with formal notice and comment to make larger adjustments. In 
January 1998, the agency published an ``interim final rule with comment 
period'' for the streamlined inherent reasonableness process that 
became effective 60 days after it was published.\23\ This was a 
departure from the usual practice of first responding to public 
comments before issuing a final regulation.
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    \23\ 63 Fed. Reg. 687 (Jan. 7, 1998). In this interim final rule, 
HCFA committed to having a notice and comment period for any payment 
adjustments, even through the streamlined process.
---------------------------------------------------------------------------
    Under the interim final rule, HCFA delegated authority to use the 
streamlined process to the Medicare carriers that process claims for 
medical equipment and supplies, with final action on payment 
adjustments to be approved by the agency. The carriers attempted to 
lower maximum payment rates for eight groups of products, gathering 
information on retail prices through surveys conducted in at least 16 
states. In September 1998, the carriers notified suppliers of proposed 
adjustments for eight groups of products and solicited comments. 
Industry groups representing various medical equipment and supply 
manufacturers and suppliers expressed serious concerns about how the 
inherent reasonableness process was implemented and whether the surveys 
were conducted properly. The Congress requested that we review the 
appropriateness of implementing the streamlined inherent reasonableness 
authority through an interim final rule and the soundness of the 
carriers' surveys. Pending the results of our review, HCFA suspended 
the carrier-proposed payment reductions in March 1999.
    In November 1999, the Congress passed legislation prohibiting HCFA 
or the carriers from using any inherent reasonableness authority until 
we issued our report and the agency issued a final rule taking into 
account our findings and public comment.\24\ In our July 2000 report, 
we concluded that, while the carriers could have conducted their 
surveys more rigorously, the surveys and other evidence sufficiently 
justified the carriers' proposed payment reductions for five of eight 
product groups.\25\ In our report, we recommended that HCFA clarify 
criteria for using its inherent reasonableness authority, strengthen 
agency or carrier survey methodology in the future, collect additional 
data on prices for the other three product groups before adjusting 
their payment amounts, and monitor beneficiary access after any payment 
changes. Although our report is almost 2 years old, CMS has not issued 
a final regulation that would allow it to use either its streamlined or 
original inherent reasonableness processes to adjust Medicare payment 
amounts for part B supplier-billed services. Thus, the agency lacks a 
tool to adjust its fee schedules, short of statutory changes.
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    \24\ Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act 
of 1999, Pub. L. No. 106-113, App. F, Sec.  223, 113 Stat. 1501, 1501A-
352 (signed into law January 29, 1999).
    \25\ GAO/HEHS-00-79.
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  bba provisions authorized competitive bidding demonstration projects
    In order to experiment with other ways of setting Medicare's 
payments for medical equipment and supplies and outpatient drugs, the 
BBA provided authority for HCFA to conduct demonstration projects using 
competitive bidding and to include home oxygen in at least one of the 
demonstrations.\26\ Evidence from two competitive bidding projects 
suggests that, for most of the items selected, competition might 
provide a tool that facilitates setting more appropriate payment rates 
and result in program savings.
---------------------------------------------------------------------------
    \26\ BBA at Sec.  4219, 111 Stat. 392. The BBA at 4552(a), 111 
Stat. 459, also reduced home oxygen payment amounts by 25 percent 
effective January 1, 1998, and an additional 5 percent effective 
January 1, 1999.
---------------------------------------------------------------------------
    In its first competitive bidding demonstration, conducted in Polk 
County, Florida, HCFA set rates for oxygen, hospital beds, surgical 
dressings, enteral nutrition and supplies, and urological supplies 
through competitive bidding. HCFA reported that the new rates set by 
this competitive process in the Florida demonstration saved Medicare an 
average of 17 percent on the cost of these medical equipment and supply 
items without compromising beneficiary access to these items.\27\
---------------------------------------------------------------------------
    \27\ Medicare program savings did not occur in all product 
categories; there were higher prices for surgical dressings, one of 
five product categories in the demonstration.
---------------------------------------------------------------------------
    In a second demonstration in San Antonio, Texas, the agency 
included oxygen; hospital beds; manual wheelchairs; noncustomized 
orthotic devices, including ``off-the-shelf'' items such as braces and 
splints; and albuterol sulfate and other nebulizer drugs. Preliminary 
CMS information on the San Antonio competitive bidding demonstration 
identified an average savings of 20 percent, without any negative 
effects on beneficiary access.
past efforts to correct inappropriate payments suggest lessons for the 
                                 future
    Whether attempting to adjust payments administratively or through 
competitive bidding, CMS can only be effective if it has a defensible 
process for doing so and accurate information upon which to base 
action. Any change to Medicare's payments, particularly a reduction in 
fees for medical equipment and supplies or covered outpatient drugs, 
should be accompanied by an ongoing assessment of whether the new 
payments adequately support Medicare beneficiaries' access to such 
items and services and properly reimburse providers and suppliers. Such 
monitoring needs to examine current experience so that prompt fee 
adjustments can be made if access problems are found.
    Efforts to lower excessive payment rates through the inherent 
reasonableness process illustrate the difficulties CMS has in making 
even minor adjustments, as the agency's actions can have wide 
ramifications for providers, suppliers, and beneficiaries. When HCFA 
tried to use its streamlined inherent reasonableness authority in 1998 
to reduce payment rates for various medical equipment and supply items 
and outpatient drugs, it attempted to take action before responding to 
public comment, thereby leaving the effort open to criticism. In 
addition, we concluded that the carriers' survey methodology was not 
rigorous enough to provide a basis to adjust fees nationally for all of 
the products under review.
    What the agency lacked was sufficient information on market prices. 
Such information, along with current local, as well as national, data 
on beneficiaries' use of services and program expenditures, is key to 
setting rates administratively. Because HCFA did not have reliable 
acquisition cost information, its carriers engaged in a very labor-
intensive information-gathering effort.
    One major problem CMS has when going to the marketplace to collect 
information is that it cannot determine the specific products Medicare 
is paying for when carriers process claims for medical equipment and 
supplies. Carriers pay claims on the basis of billing codes indicating 
that the supplied items belong to a particular product group. These 
groups can cover a broad range of product types, quality, and market 
prices. As a result, products that differ widely in properties, use, 
performance, and price are billed under the same code and the program 
pays the same amount. For example, we reported in 1998 that catheters 
belonging to a single product category varied in type and price, from 
about $1 to $18, with Medicare's maximum fee payments ranging across 
states from $9.95 to $11.70.\28\ However, HCFA had no information on 
which catheters were being provided to beneficiaries.
---------------------------------------------------------------------------
    \28\ U.S. General Accounting Office, Medicare: Need to Overhaul 
Costly Payment System for Medical Equipment and Supplies, GAO/HEHS-98-
102 (Washington, D.C.: May 12, 1998).
---------------------------------------------------------------------------
    To address the problem of insufficient specificity, we recommended 
in the 1998 report that suppliers be required to include universal 
product numbers (UPN) as well as current billing codes on claims. UPNs 
and associated bar codes are increasingly used to identify specific 
medical equipment and supplies, similar to the way universal product 
codes are used in supermarkets. Manufacturers can use bar codes for 
each product to identify characteristics such as the manufacturer, 
product type, model, size, and unit of packaging. Using UPNs--or some 
other mechanism--incorporated into claim forms to bring more 
specificity to what is provided to beneficiaries could help CMS better 
determine appropriate payments.
    Under provisions in the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA), HHS has adopted standards for 
coding medical services, procedures, and equipment and supplies.\29\ 
These provisions were aimed at simplifying data reporting and claims 
processing requirements across all public and private payers. Under the 
standards, HCPCS Level II was designated as the code set for medical 
equipment and supplies. Its limitation in specificity argues for 
evaluating whether the current code set can be adjusted to better 
distinguish between various products currently grouped within a single 
HCPCS Level II code.
---------------------------------------------------------------------------
    \29\ Pub. L. No. 104-191, Sec.  262(a), Sec.  1173(c), 110 Stat. 
1936, 2025.
---------------------------------------------------------------------------
    Lack of specificity has been a similar problem for the codes used 
to define inpatient hospital procedures. The HIPAA standard code set 
for reporting hospital inpatient procedures is the International 
Classification of Disease, 9th Edition, Clinical Modification, Volume 3 
(ICD-9 CM Vol. 3). The inadequacy of this code set is widely 
recognized, as it lacks both the specificity to accurately identify 
many key aspects of medical procedures as well as the capacity to 
expand in order to appropriately incorporate codes in response to new 
technology. In fact, HHS recognized that in adopting the ICD-9-CM Vol. 
3 as a HIPAA standard, the agency would need to replace it, given the 
code set's limitations. As a consequence, CMS plans to implement a new 
code set, the International Classification of Disease, 10th Edition, 
Procedural Coding System (10 PCS), which would provide much greater 
specificity.
    Our work on payments for covered outpatient drugs, which identified 
strategies used by other payers to obtain prices closer to acquisition 
costs, underscores the value of accurate information for determining 
appropriate payments. For example, the VA uses the leverage of federal 
purchasers to secure verifiable information on actual market 
transactions by private purchasers--specifically, the prices that drug 
manufacturers charge their ``most-favored'' private customers. To 
enable the VA to determine the most-favored-customer price, by statute, 
manufacturers who wish to sell their products to the federal agencies 
involved are required to provide information on price discounts and 
rebates offered to domestic customers and the terms and conditions 
involved, such as length of contract periods and ordering and delivery 
practices.\30\ The manufacturers provide this information and agree to 
offer the VA and other government purchasers drugs at these prices, 
subject to VA audit of their records,\31\ in order to have state 
Medicaid programs cover their drugs.
---------------------------------------------------------------------------
    \30\ 38 U.S.C. Sec.  8126 (1994).
    \31\ The VA negotiates prices for and purchases medical equipment, 
supplies, and drugs through the Federal Supply Schedule. Federal Supply 
Schedule prices are available to any federal agency that directly 
procures pharmaceuticals or medical equipment and supplies, including 
VA medical centers, the Department of Defense, the Bureau of Prisons, 
the Public Health Service, and other designated entities such as the 
District of Columbia, U.S. territorial governments, the Indian Health 
Service, and some state veterans homes.
---------------------------------------------------------------------------
    This type of information could be helpful in setting payment 
amounts for certain Medicare drugs. It is already available to CMS, but 
for use only in the Medicaid--not the Medicare--program.\32\ With 
congressional approval, CMS could use the information provided to 
Medicaid to determine appropriate prices for Medicare that would be 
based on actual prices being paid in the market. One key step would be 
to determine the formula to use to calculate payments based on the 
price data. Most likely, Medicare would not set payments to match the 
prices paid by most favored customers but would need to pay closer to 
average market prices to ensure access for all beneficiaries and 
adequate payments to providers.
---------------------------------------------------------------------------
    \32\ Under a provision of the Omnibus Budget Reconciliation Act of 
1990 (OBRA), state Medicaid programs receive rebates from manufacturers 
based on either the manufacturer's ``best price'' to a private 
purchaser or the average price (including cash discounts and other 
price reductions) paid to drug manufacturers by U.S. wholesalers for 
certain drugs. In order to have their drugs covered by Medicaid, 
manufacturers must be willing to provide the rebate and price 
information to calculate it. Sec.  1927 of the Social Security Act, 
added by OBRA 1990, Public Law 101-508, Sec.  4401, 104 Stat. 1388, 
1388-143 (1990) (classified to 42 U.S.C. Sec. 1396r-8).
---------------------------------------------------------------------------
    Results from the competitive bidding demonstrations suggest that 
competition can also serve as a tool to obtain more appropriate prices 
for medical equipment and supplies and outpatient drugs. By competing a 
small number of products and limiting the geographic area of 
competition, CMS took steps to manage the process, which included 
monitoring of beneficiary access and product quality. In its fiscal 
year 2003 budget, the Administration proposed expanding competitive 
bidding for medical equipment and supplies nationally, which it 
estimates could save $240 million in fiscal year 2003 and $5 billion 
over 10 years.
    The Administration's expansion proposal to translate these limited 
demonstrations into a competition involving a larger number of products 
nationally would be a substantial undertaking and may not be practical 
or appropriate for all products. CMS would require new authority to 
begin to use competitive bidding outside of a demonstration. A key 
element to the new authority would be the extent to which and the basis 
whereby providers could be excluded from Medicare. While Medicare 
normally allows any qualified provider to participate in the program, 
competitive bidding may be most effective only by limiting the number 
of providers or suppliers who could provide items or services. For 
example, in the Polk County demonstration, only 16 out of the 30 
bidders were selected to participate. Limiting the number of 
participating suppliers obviously has an effect on both beneficiaries 
and suppliers. While provider participation is not an entitlement, the 
effects of exclusion--in terms of numbers of providers and the volume 
of services affected--need to be identified and assessed. Similarly, 
for some products, who the provider is may be of little consequence for 
the beneficiary, but for others, maintaining greater beneficiary choice 
and direct access to the provider could be important.
    Whether payment rates are set or adjusted through competitive 
bidding or administrative fee-setting, monitoring to ensure that 
beneficiaries continue to have access to the items or services is a 
critical component of such efforts. For example, when the Congress 
reduced Medicare home oxygen payment rates by 25 percent effective 
January 1, 1998, and an additional 5 percent effective January 1, 1999, 
it wanted assurance that beneficiaries could continue to receive 
satisfactory service.\33\ To evaluate the impact of the home oxygen 
payment reduction on access and quality, the BBA required studies 
conducted by us and HHS.\34\ Neither study found any significant access 
problems with the payment reduction. In addition, home oxygen was 
included in both competitive bidding demonstrations, and through those 
demonstrations, prices were reduced further. HCFA estimated that 
Medicare's home oxygen payments were reduced by 16 percent in the Polk 
County demonstration, without beneficiary access problems. Such 
monitoring is important, not just when required by statute but as part 
of an ongoing effort to ensure the Medicare program is effectively 
serving its beneficiaries.
---------------------------------------------------------------------------
    \33\ For beneficiaries who receive oxygen at home, Medicare part B 
pays suppliers a fixed monthly fee per beneficiary that covers a 
stationary, home-based oxygen unit and all related services and 
supplies, such as tank refills. There is a separate fixed monthly fee 
for a portable unit, if one is prescribed. Medicare's oxygen payment 
method is called ``modality neutral'' because the payment rate is the 
same regardless of the type of oxygen delivery system prescribed, i.e. 
compressed gas, liquid oxygen, or oxygen concentrator.
    \34\ U.S. General Accounting Office, Medicare: Access to Home 
Oxygen Largely Unchanged; Closer HCFA Monitoring Needed, GAO/HEHS-99-56 
(Washington, D.C.: Apr. 5, 1999) and Rebecca Olson, Carolyn Harper, 
Stephanie Lui, and others. Report on Peer Review Evaluation of Home 
Oxygen Equipment. California Medical Review, Inc. (San Francisco, 
Calif.: Sept. 30, 2000). This HHS study analyzed 1996 and 1998 claims 
data to calculate the number of Medicare oxygen prescriptions, and also 
conducted 1999 surveys of physicians, suppliers, and beneficiaries.
---------------------------------------------------------------------------
    Unfortunately, such studies to review the effects of payment 
reductions on access are the exception. As we have reported before, CMS 
has not been able to generate data that are timely, accurate, and 
useful on payment and service trends essential to effective program 
monitoring.\35\ One of the principal lessons to be drawn from the many 
BBA payment reforms is that newly implemented policies need a thorough 
assessment of their effects. Policy changes, particularly those that 
constrain payment, almost inevitably spark calls for revisions. 
Considerations of such revisions need to be based on sufficient 
information so that, at one extreme, policies are not unduly affected 
by external pressures and premature conclusions as to their impact, and 
at the other extreme, policies do not remain static when change is 
clearly warranted.\36\ CMS has not been well-positioned to collect and 
analyze data regarding beneficiaries' use of services--information that 
is essential to managing the program effectively.\37\ This year's 5.4 
percent reduction of physicians' fees from what was paid in 2001 raised 
concerns about beneficiaries' access. While prior information available 
on physicians' willingness to see Medicare beneficiaries did not 
indicate access problems, this information is somewhat dated.\38\ 
Informed decisions about appropriate payment rates and rate changes 
cannot be made unless policymakers have detailed and recent data on 
beneficiaries' access to needed services.
---------------------------------------------------------------------------
    \35\ U.S. General Accounting Office, Major Management Challenges 
and Program Risks: Department of Health and Human Services, GAO-01-247 
(Washington, D.C.: Jan. 2001).
    \36\ U.S. General Accounting Office, Balanced Budget Act: Any 
Proposed Fee-for-Service Payment Modifications Need Thorough 
Evaluation, GAO/T-HEHS-99-139 (Washington, D.C.: June 10, 1999).
    \37\ U.S.General Accounting Office, Medicare: HCFA Faces Challenges 
to Control Improper Payments, GAO/T-HEHS-00-74, (Washington, D.C.: Mar. 
9, 2000).
    \38\ 9U.S. General Accounting Office, Medicare Physician Payments: 
Spending Targets Encourage Fiscal Discipline, Modifications Could 
Stabilize Fees, GAO-02-441T, (Washington, D.C.: Feb. 14, 2002).
---------------------------------------------------------------------------
    Mr. Chairman, this concludes my prepared remarks. I will be happy 
to answer any questions you or the Subcommittee Members may have.
    Contact and Acknowledgments For further information regarding this 
testimony, please contact me at (312) 220-7600. Sheila Avruch, Hannah 
Fein, Sandra Gove, Joy Kraybill, and Craig Winslow made contributions 
to this statement.
                          related gao products
    Medicare Outpatient Drugs: Program Payments Should Better Reflect 
Market Prices. GAO-02-531T. Washington, D.C.: March 14, 2002.
    Medicare Physician Payments: Spending Targets Encourage Fiscal 
Discipline, Modifications Could Stabilize Fees. GAO-02-441T. 
Washington, D.C.: February 14, 2002.
    Medicare: Payments for Covered Outpatient Drugs Exceed Providers' 
Cost. GAO-01-1118. Washington, D.C.: September 21, 2001.
    Medicare Part B Drugs: Program Payments Should Reflect Market 
Prices. GAO-01-1142T. Washington, D.C.: September 21, 2001.
    Medicare Management: CMS Faces Challenges to Sustain Progress and 
Address Weaknesses. GAO-01-817. Washington, D.C.: July 31, 2001.
    DOD and VA Pharmacy: Progress and Remaining Challenges in Jointly 
Buying and Mailing Out Drugs. GAO-01-588. Washington, D.C.: May 25, 
2001.
    Medicare Payments: Use of Revised ``Inherent Reasonableness'' 
Process Generally Appropriate. GAO/HEHS-00-79. Washington, D.C.: July 
5, 2000.
    Balanced Budget Act: Any Proposed Fee-for-Service Payment 
Modifications Need Thorough Evaluation. GAO/T-HEHS-99-139. Washington, 
D.C.: June 10, 1999.
    Medicare: Need to Overhaul Costly Payment System for Medical 
Equipment and Supplies. GAO/HEHS-98-102. Washington, D.C.: May 12, 
1998.
    Medicare: Access to Home Oxygen Largely Unchanged; Closer HCFA 
Monitoring Needed. GAO/HEHS-99-56. Washington, D.C.: April 5, 1999.
    Medicare: Comparative Information on Medicare and VA Patients, 
Services, and Payment Rates for Home Oxygen. GAO/HEHS-97-151R. 
Washington, D.C.: June 6, 1997.
    Medicare: Excessive Payments for Medical Supplies Continue Despite 
Improvements. GAO/HEHS-95-171. Washington, D.C.: August 8, 1995.
STATEMENT OF THOMAS A. SCULLY, ADMINISTRATOR, CENTERS 
            FOR MEDICARE AND MEDICAID SERVICES, 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES
    Senator Harkin. Thank you, Ms. Aronovitz. I do have some 
questions about this.
    Next we turn to Mr. Tom Scully, the Administrator for the 
Centers for Medicare and Medicaid Services, formerly known as 
HCFA. Prior to this assignment, Mr. Scully was President of the 
Federation of American Health Systems representing for-profit 
hospital systems. Mr. Scully is also a former senior official 
with the OMB in the first Bush administration.
    Welcome to the committee, Mr. Scully. Your statement will 
be made a part of the record in its entirety, and again please 
proceed as you so desire.
    Mr. Scully. Chairman Harkin and Senator Murray, thank you 
for inviting me to discuss Part B payments for medical supplies 
today.
    Mr. Chairman, I want to thank you in particular for pushing 
us aggressively to move forward on the inherent reasonableness 
regulation. This is a high priority of mine. I can assure you 
we have been working for months to get this regulation out, and 
as I have said repeatedly in the last couple of days in the 
press, you are totally right on this issue and we completely 
agree with you.
    Senator Harkin. I appreciate that.
    Mr. Scully. I also want to thank Janet Rehnquist, the 
Inspector General, a far more distinguished member of the 
University of Virginia 1979 graduating class than I am, by the 
way.

                            MEDICARE PROGRAM

    Senator Harkin. You were both in the same class?
    Mr. Scully. Same class. Hard to believe. She tries not to 
admit that for the most part.
    I want to thank her for the IG's assistance in helping us 
to identify areas where we can improve our payment process and 
clearly save seniors money. Saving the Medicare program money 
is important, but what a lot of people forget, I think, is that 
not only does part of this money go in the premiums for 
seniors, but also co-payments. So, every dollar we ever pay for 
these supplies is more money coming out of seniors' pockets.
    I would also note that not only for this issue--and I know 
Leslie's testimony talked a little about AWP for drugs, which 
is a very similar parallel issue--we are also overpaying--and 
that we propose to fix.
    But all across the board, since I have come to CMS, one of 
my general approaches has been to try to find places where we 
either overpay or underpay for services. One of the first 
things I did is I hired two Wall Street analysts to put out 
reports on the basic industry sectors. Basically we deal with a 
lot of people, hospitals, nursing homes, managed care plans, 
DME providers. They're all giant Government contractors, and I 
think it is the Government's role to figure out what their 
appropriate margins are. We believe people should make 
appropriate margins when they are Government contractors, but 
they should not make too much, they should not make too little.
    I would note that we put out fairly detailed reports on 
managed care about 4 months ago, on nursing facilities about 2 
months ago, on hospitals last month. We are actually going to 
have one out on home health payments which a lot of these 
issues revolve around, hopefully by the end of this week. The 
goal here is to identify when industries are overpaid, 
underpaid, whether their margins are too low or too high what 
is essentially Government contract business.
    Switching back to the issue at hand today, we have a number 
of potential tools available to make sure the beneficiaries get 
the care they deserve and are not overpaying for these types of 
supplies. It is hard for me to see how anybody can argue with 
the concept that Medicare should be paying inherently 
reasonable prices for these supplies. So, we are determined to 
get this out.
    Are there places where we not only--clearly the attention 
is where we overpay. There are some where arguably we underpay, 
and I have gotten hundreds of e-mails, for instance, on ostomy 
supplies in the last few weeks. We are looking into that. I 
think there are probably far more places where we overpay than 
underpay, but I think inherent reasonableness can clearly be 
used in both directions if there are places where we are 
underpaying for historical reasons.
    The process in the past has been incredibly cumbersome. It 
has also been, obviously, very difficult politically. It was so 
cumbersome that in the BBA in 1997, Congress tried to 
streamline the inherent reasonableness process. In January of 
1998, HCFA, now CMS, published an interim final rule 
implementing the inherent reasonableness process in the BBA in 
which we compared a lot of the payments that we are making to 
the VA and other public payors and found that we were paying 
too much. And we proposed lowering the payments for many items. 
Our durable medical equipment carriers similarly proposed 
lowering payments for additional items, which again lowers co-
payments and premiums for seniors.
    The medical equipment industry reacted pretty strongly to 
these proposals, and in response, the Clinton administration 
pulled those proposals back. Subsequent to that, Congress in 
1999 passed limitations on our ability to use our inherent 
reasonableness authority and put a number of requirements in 
requiring us to come back and look at additional regulatory 
guidelines before we used it.
    We, in fact, as Leslie mentioned, have done a number of 
demonstration projects for DME that I think have worked 
reasonably well, and I think the results do hold some promise. 
We averaged about 20 percent savings in both Florida and Texas, 
and of those savings, about $1.3 billion we project in our 
budget savings. It could be lower savings for co-payments and 
premiums to beneficiaries, as well as the $5 billion in the 
President's budget over 10 years that we think we would save 
the program.
    I do think you have to be careful when you do this, and I 
do think there are differences in the way VA operates and the 
way Medicare operates. When I was at OMB, I had the VA's budget 
for 4 years. The VA can, in fact, use its market power like a 
private entity because they usually have 2, 4 percent market 
power to go out and buy the next piece of equipment on marginal 
rates, and people are usually willing to sell the extra 
hospital bed or whatever at a marginally lower rate.
    We have to be careful in Medicare in the fact that in many 
cases we are the market. For some of these supplies, we are 95 
percent of the market. So, how we use our market power and how 
we throw it around, while we are clearly overpaying, we need to 
be careful. And I think we tried to do this in the 
demonstrations to make sure that we do not wipe out local small 
businesses that rely on this and to make sure that when we do 
competitive bidding, we do it in a way that makes sure we do 
not use our dominant market power.
    However, clearly we need to use this in a much more 
aggressive way. The demonstration program expires December 31, 
2002. We certainly hope it is continued.
    The President has proposed competitive bidding in a much 
broader way in his budget. I believe in the House bill that is 
likely to come out of the Ways and Means and Commerce 
Committees in the next 2 weeks, it is pretty clear that durable 
medical equipment competitive bidding is a major proposal in 
that. I am happy to hear that you support that, Senator. We 
would love to work with you and the Senate to get that done. 
But I think our goal across the board is to find out whether it 
is durable medical equipment, whether it is other suppliers, 
whether it is AWP for drugs. The Medicare program has the 
responsibility to the taxpayers to make sure that we are not 
overpaying.

                           prepared statement

    On this issue, you have been incredibly aggressive, and we 
appreciate it. We hope to get a reg out soon, and I do not want 
to overcommit, but I think in the next month is a reasonable 
target. It is already out of my Agency and is basically going 
through the rest of the administration for clearance.
    So, thank you very much, Mr. Chairman. I appreciate your 
having me here today.
    [The statement follows:]
              Prepared Statement of Hon. Thomas A. Scully
    Chairman Harkin, Senator Specter, distinguished Subcommittee 
members, thank you for inviting me to discuss the appropriateness of 
Medicare Part B payments for medical supplies. As you know, at the 
Centers for Medicare & Medicaid Services (CMS), we have the 
responsibility of ensuring that some of America's most vulnerable 
citizens, the elderly and disabled, have access to the health care they 
need, and that Medicare payment is set at levels appropriate for 
ensuring that beneficiary access to care is not compromised. At the 
same time, we must ensure that taxpayer dollars are spent appropriately 
and safeguard the Medicare Trust Funds from unnecessary waste. 
Additionally, when Medicare pays appropriately for care, beneficiaries 
are protected because cost sharing amounts are appropriate as well.
    We have a number of potential tools available to help us meet these 
goals, including the flexibility to adjust payments when statutory 
payment formulas, based on historic charges, result in payment levels 
that are either unreasonably high or low. This ``inherent 
reasonableness'' authority, which currently is suspended by law, would 
give us the ability to raise payment levels when they are so low that 
they threaten to reduce beneficiary access to care; and it allows us to 
lower payment levels when we are confronted with grossly excessive 
charges. We also are wrapping up a demonstration project to find better 
ways to obtain market-based prices for certain part B items, such as 
durable medical equipment (DME). The results so far hold some promise. 
The demonstration has shown to that competitive bidding can produce 
significant savings for Medicare and beneficiaries. This market-based 
approach is another tool we are using to ensure Medicare pays 
appropriately for these items, and we support making competitive 
bidding for durable medical equipment a permanent part of Medicare.
    I appreciate this Subcommittee's longstanding interest in and 
support of our efforts. I want to thank you, Chairman Harkin, for 
pushing us to move forward on the inherent reasonableness regulation. 
It is a priority of mine, and I can assure you we have been working for 
months to finalize the regulation. The regulation is complicated, and 
as you know, we have a number of competing regulatory priorities at 
CMS. Nevertheless, we intend to publish it soon. I also want to thank 
Inspector General Rehnquist and the GAO for their valuable assistance 
in helping us to identify areas where we can improve our payment 
processes. We have worked cooperatively on many issues--and this 
cooperation can only work to better serve the nation's 40 million 
Medicare beneficiaries who depend on us.
                   inherent reasonableness authority
    The Secretary has always had inherent authority to determine what 
charges are not reasonable; and in the mid-1980's, Congress made 
explicit this authority to correct ``unreasonable'' Medicare payment 
amounts for specific items or services paid for under Medicare Part B, 
including drugs, laboratory services, and DME. This authority now 
excludes physician services. The goal is to allow us to ensure our 
payments are appropriate when statutory formulas call for payment 
levels that are grossly deficient or excessive. This sort of situation 
could arise when:
  --The marketplace is not competitive, for instance, when a limited 
        number of suppliers furnish the item or service;
  --Medicare and Medicaid are the sole or primary sources of payment 
        for a category of items or services;
  --The payment amounts for a category of items or services do not 
        reflect changing technology, or changes in acquisition, 
        production, or supplier costs;
  --Payment amounts are grossly higher or lower than acquisition or 
        production costs;
  --There have been increases in payment amounts for a category of 
        items or services that cannot be explained by inflation or 
        technology;
  --The payment amounts in a particular locality are grossly higher or 
        lower than payment amounts in other comparable localities, 
        taking into account the relative costs of furnishing the 
        category of items or services in the different localities; and,
  --The payment amounts are grossly higher or lower than the payments 
        made for the same category of items or services by other 
        purchasers in the same locality.
    In situations like these, Medicare might not be paying enough for 
suppliers to continue providing the items or services, and, as a 
consequence, Medicare may risk forcing them out of the market, leaving 
Medicare beneficiaries without access to needed care. Conversely, 
Medicare might be vastly overpaying for an item and we need to ensure 
that we are managing the taxpayers' money appropriately. So we might 
determine that Medicare payment levels ought to be raised or lowered. 
In theory, inherent reasonableness gave us the authority to make common 
sense changes to payment levels in order to protect beneficiary access, 
and beneficiary and Trust Fund dollars. Unfortunately, the process for 
actually using this authority was quite cumbersome, and so the 
authority has seldom been used successfully.
    Because the process was so cumbersome, in the Balanced Budget Act 
of 1997 (BBA) Congress tried to streamline inherent reasonableness. The 
BBA simplified the process for making Medicare payment level 
adjustments of 15 percent or less, up or down, in any year. It also 
gave Medicare Carriers, the local private sector contractors that 
process and pay Part B claims, the authority under CMS's supervision to 
adjust payments based on inherent reasonableness. And it gave CMS some 
additional authority to streamline the inherent reasonableness process.
    In January 1998, CMS, then the Health Care Financing 
Administration, published an interim final rule implementing the 
inherent reasonableness provision of the BBA. Later that year, the 
Agency compared Medicare's payment levels for a number of items with 
the amounts paid by the Veterans Administration, and we found some 
disturbing instances where Medicare, and therefore beneficiaries, were 
paying far too much. So the Agency proposed reducing unreasonable 
payment levels for:
  --Two types of walkers, up to 37 percent;
  --Commode chairs, up to 40 percent;
  --Two types of transcutaneous electronic nerve stimulators, up to 57 
        percent; and
  --Vacuum erection devices, up to 46 percent.
    Likewise, Medicare's Durable Medical Equipment Regional Carriers 
also found circumstances where they were grossly overpaying for certain 
products, and they proposed to reduce Medicare's payment for those 
items, including:
  --Glucose test strips, up to 3.38 percent;
  --Lancets, up to 35.72 percent;
  --Catheters, up to 24.02 percent;
  --Enteral products, by 16.39 percent overall;
  --Albuterol, by 10.64 percent overall; and
  --Eyeglass frames, up to 21.04 percent.
    The medical equipment industry expressed strong concerns about 
these proposed reductions and, consequently, Congress took action to 
ensure that we were adjusting payment levels appropriately. In the 
Balanced Budget Refinement Act of 1999 (BBRA), Congress requested that 
the General Accounting Office (GAO) examine our proposed regulation and 
the Carriers' use of the inherent reasonableness authority. The BBRA 
also suspended Medicare's inherent reasonableness authority until the 
following conditions were met:
  --The GAO released its report regarding the interim final regulation 
        and Carriers' use of inherent reasonableness;
  --CMS publishes a notice of final rulemaking on inherent 
        reasonableness that responds to the GAO report and to comments 
        received in response to the 1998 interim final regulation;
  --CMS issues a final regulation that reevaluates the criteria 
        included in the interim final regulation for identifying 
        payments that are excessive or deficient; and,
  --CMS takes appropriate steps to ensure the use of valid and reliable 
        data when exercising inherent reasonableness authority.
    I know that you, Mr. Chairman, were disappointed to see CMS's 
ability to use inherent reasonableness authority restricted. 
Additionally, I want to note that inherent reasonableness is a two-way 
street. For every concern we hear that we are overpaying, we receive 
other comments that we are not paying enough for items like ostomy 
supplies or catheters. Giving Medicare the flexibility to make common 
sense changes that protect beneficiaries and the Trust Fund simply is 
the right thing to do, and the Agency is committed to moving forward in 
that direction.
    The GAO issued its report in July 2000, and was generally 
supportive of CMS's previous implementation of inherent reasonableness 
authority. Since then, CMS has been working hard to develop a final 
rule that addresses all of the GAO's recommendations as well as the 
numerous comments that we received on our 1998 Interim Final Rule. I 
agree with you, Mr. Chairman, that inherent reasonableness represents a 
potentially potent tool for protecting beneficiary access to needed 
care, reducing beneficiary cost sharing, and safeguarding the Medicare 
Trust Funds from waste. And to ensure our adjustments are fair to the 
industry, before we make a payment adjustment we intend to first 
publish a proposed notice informing affected parties and soliciting 
comments. We would then respond to the comments received and publish 
our response in a final notice. Similarly, under CMS supervision, 
Carriers would notify affected parties within their areas and allow 60 
days for comments. The final rule, which would reestablish inherent 
reasonableness authority, is a priority for me, and I have been doing 
everything in my power to ensure that it will be published 
expeditiously, taking into account the important recommendations from 
GAO and the comments we received on our 1998 interim final rule.
                          competitive bidding
    While we have worked hard to finalize the inherent reasonableness 
rule, we are exploring other ways to ensure that we are paying 
appropriately for items and services. With the authority provided in 
BBA, we are conducting a demonstration project where private sector 
businesses competitively bid to supply DME and prosthetics, orthotics, 
and supplies for Medicare beneficiaries. Although the demonstration and 
our evaluation of it are still ongoing, the results appear to be 
promising. When suppliers bid prices in competition with one another, 
it allows the market price to become the Medicare allowable price. The 
Administration supports expanding the effective use of competition to 
save money and improve the quality of DME services for Medicare 
beneficiaries. This is one element of the President's proposals to 
modernize the Medicare program by using market forces to help us avoid 
setting prices that do not respond to improvements and efficiency and 
obtain savings for the program and its beneficiaries. As long as the 
federal government does not allow any one company to obtain an overly 
dominant market share for a particular product, competitive bidding can 
replace inflexible fee schedules set by law and can be a fair, 
effective way to ensure that Medicare pays competitive, fair market 
prices for DME.
    The demonstration currently is ongoing in Polk County, FL, and San 
Antonio, TX. In these two areas we requested bids for:
  --Oxygen;
  --Hospital beds;
  --Surgical dressings;
  --Urological supplies;
  --Enteral nutrition;
  --Manual wheelchairs;
  --Nebulizer drugs; and,
  --Simple orthotics.
    To date, we have been successful in reducing Medicare costs for 
most of these supplies. Savings vary by site and product, but averaged 
20 percent in the latest bids in both Florida and Texas. This saves 
money for our beneficiaries, by way of their cost sharing, and the 
Medicare Trust Fund. It will save around $5 billion over ten years, of 
which nearly $1.3 billion is through lower premiums for beneficiaries, 
by paying more appropriately for medical equipment.
    Moreover, one of our fundamental goals in the demonstration is to 
maintain high quality service for our beneficiaries. For example, we 
chose multiple suppliers in each category, so competition gives 
suppliers an incentive to provide high quality products and services. 
We also developed specific quality standards for the demonstration that 
the suppliers must meet. Moreover, winners of the bidding competition 
must pass site inspections and reviews by an expert panel before they 
can supply items and services to our beneficiaries. Additionally, we 
hired an ombudsman for each site to solve any beneficiary difficulties, 
including quality concerns.
    We also have paid close attention to the providers in this project. 
A large part of the DME industry is made up of small businesses, and we 
were very careful to ensure that small businesses could compete for the 
Medicare DME business on a level playing field with the large 
suppliers. For instance, by choosing multiple winners for each product 
category, we were able to choose many small suppliers rather than only 
the largest suppliers. Additionally, for our San Antonio demonstration, 
the suppliers were not required to serve the entire area, but could 
choose to bid for just one county, giving small businesses an even 
better opportunity compete. As a result, more than three-fourths of the 
suppliers we selected are small businesses.
    This demonstration will end on December 31, 2002, according to the 
authorizing legislation. The President has asked Congress to make 
competitive bidding a permanent part of Medicare, and it appears likely 
to be included in the draft bill emerging in the U.S. House of 
Representatives. By encouraging suppliers of durable medical equipment 
to compete on quality and price, and by making sure that beneficiaries 
have choices about how to get their equipment, we can both save money 
and improve the DME services that beneficiaries receive. Like inherent 
reasonableness, it makes sense for beneficiaries and taxpayers--it is 
the right thing to do. I look forward to working with this Subcommittee 
and your colleagues in Congress enact legislation this year to ensure 
that we continue and improve upon this important initiative.
                               conclusion
    We know that Medicare, in some instances, pays much more for 
equipment and services than other health care purchasers. Additionally, 
sometimes we may not pay enough. Although this payment disparity often 
can be attributed to Medicare payment formulas required by law, it is 
nonetheless an important concern and we are working hard to address it. 
The competitive bidding demonstration embraces market forces to ensure 
Medicare pays a fair price for the items and services it covers, and by 
all accounts an effective competitive bidding program may achieve more 
appropriate Medicare payments for DME. Likewise, our inherent 
reasonableness authority gives us common sense flexibility to correct 
grossly excessive or inadequate payment levels when statutory payment 
formulas produce them. We are in the last stages of finalizing our 
inherent reasonableness regulation, and we hope to publish it soon. 
Thank you again for inviting me to be a part of this discussion today, 
as well as for your continuing support for Medicare, and your 
commitment to protecting beneficiaries and the Trust Fund. I am happy 
to answer any questions.

              INHERENT REASONABLENESS AUTHORITY SUSPENSION

    Senator Harkin. Thank you, Mr. Scully. I thank you for your 
paying attention to this and being aggressive on this issue. I 
would like to explore with each of you where we are, where we 
have been and what the situation is right now.
    Mr. Scully, in your written statement--and it may have been 
just a mistake in writing or something--in your first page, you 
say, ``This inherent reasonableness authority, which currently 
is suspended by law.''
    Mr. Scully. I was afraid you would notice that, Mr. 
Chairman. I saw that on the way over this morning.
    Senator Harkin. Okay, it was a misprint. All right, thank 
you.
    Mr. Scully. You are right. It is suspended by law because 
of us. As soon as we put out our regulation, it is no longer 
suspended by law, and you are correct. The thing holding it up 
is us, and we hope to remedy that soon.
    Senator Harkin. When the GAO issued its report in July 2000 
under the law that was passed--it has been nearly 2 years--some 
on your watch, some not on your watch--you could have issued 
regulations on this. Having been at this for 12 years now, I 
keep hearing, well, something is going to happen, something is 
going to happen, and something is going to happen.
    Now, I went through that whole process in the 1990's when 
Senator Specter was Chair here, and I can tell you exactly what 
happened. We passed it here, and then it was changed in the 
conference with the House. Then we came back again with the 
competitive bidding which we passed here. The Senate passed it. 
Then it went into the House and again was put into a 
demonstration. Then we had the two demonstrations. Then we had 
the study that had to be done by GAO before you could go ahead 
with inherent reasonableness. But it was said that as soon as 
the GAO report was filed, then you automatically could use the 
inherent reasonableness clause again.
    So, we have been waiting for these regulations. You just 
mentioned next month. Can we pretty much count on that?
    Mr. Scully. Well, I apologize if there was a holdup on my 
part. I have been on the job exactly 1 year last week, and I 
think, to be honest, the first time this came up with me as an 
issue--as you know, Nancy Ann had spent some time on it, and 
there was a gap between administrations, obviously, where there 
was not a political appointee running the agency.
    The first time it came up to me probably was last, I think, 
October from Tom Hoyer, who I think both these agencies know 
basically is the person who has done home health and DME for 
years in the agency. As soon as they brought it up and said, 
should we do an inherent reasonableness regulation, I said yes. 
I think we have pretty aggressively pushed forward since then.
    It has been out of CMS for not that long, but the fact is 
it has to go through the administration for clearance and OMB. 
And the Small Business Administration, appropriately, has had a 
lot of concerns over the years because a lot of these providers 
are small businesses, and I think we're hopeful. Your interest 
certainly helps, but CMS clearly would like to do this. I 
believe the Secretary would like to do it, but your strong 
interest certainly helps.
    But there is a lot of concern in the equipment business. 
There is a lot of concern from small providers. A lot of them 
are small businesses. We certainly want to make sure we take 
the right safeguards to protect small business. But it is a 
controversial issue.
    Senator Harkin. But give me a date on that. Give me a 
timetable on the regulations.
    Mr. Scully. Well, to some degree, Mr. Chairman, to be 
honest, it is out of my control once I send it into the 
administration process. I certainly hope it is going to be 
done--I would like to have it done certainly if not before the 
July 4 recess, certainly right after that.
    Senator Harkin. The regulations are out of your shop.
    Mr. Scully. It has been out of my shop for a while. I hope 
to have it through the Department and the administration within 
a month. I think that is certainly a reasonable goal.

                          COMPETITIVE BIDDING

    Senator Harkin. I also wanted to ask about competitive 
bidding. That is in the President's proposal and I am hopeful 
that we can move ahead very aggressively on that. Can you see 
working together with the Congress, if there is some Medicare 
bill that goes through this year, of starting that process this 
year, building on the two projects that we had in Texas and 
Florida?
    I do have a question for Ms. Aronovitz, which I am going to 
follow up on, in terms of making this nationwide. You said 
there may be some problems with that.
    Would it be the administration's intention to move ahead on 
this, since it was in the President's proposed 10-year budget 
plan, this year?
    Mr. Scully. Absolutely, and we have been encouraging the 
Ways and Means Committee and the Commerce Committee in the 
House and the Finance Committee over here to put it in their 
bills. We think it is a good proposal. I will say that 
everybody is looking for savings, for offsets this time of 
year.
    My major concern, having been a formerly bad antitrust 
lawyer, is that the Government needs to use its market power 
just like private payers do, and I think we need to be 
careful--in many cases, we are 95 percent of the market--that 
we do this in a reasonable, balanced way and that we make sure 
that we do not--you know, we do have a much different market 
leverage than the VA does or even some of the other Government 
programs.
    So, I clearly think this is the right way to go. I hope we 
do it in a sound, reasonable, and balanced way so that we do 
not set expectations too high so that we have to be too 
aggressive because I think this program has great potential. 
But I hope it does not blow up the first time we try it.
    Senator Harkin. Well, we just had these demonstrations.
    You mentioned the impact on small business. This has come 
up repeatedly time and time again over the last 12 years. But 
it has been my understanding--and maybe you can talk about this 
or Ms. Aronovitz--that in the two demonstrations, that in Texas 
a significant number of the winning bidders were small 
businesses. Is that true?
    Mr. Scully. 77 percent, I think, were small businesses, and 
we made a big effort. I think 16 of the 40 bidders actually got 
a contract. But I think that is the kind of thing that you do 
to make sure--when the Government comes in and has 95 percent 
market power, whoever does not get a bid is out of business. 
So, I just think we need to make sure we are conscious of that.
    Senator Harkin. What is the thrust of what you just said?
    Mr. Scully. I think we have done it appropriately in San 
Antonio and I think we have done it appropriately in Polk 
County in Florida.
    Senator Harkin. But obviously, if some people are losers on 
the bid, they do not get it.
    Mr. Scully. Sure. Well, they may get it in another county. 
And I think that is the nature of competitive bidding.
    I think the way we have done our demonstrations is exactly 
fine. I just think we need to focus on--some of the proposals I 
have seen in Congress--I guess my concern is the budget 
assumptions. If they get too high on how much we are going to 
save from this, it will drive policy that limits our ability to 
protect the small business interests.
    So, I am certain we can do it. I think the demonstrations 
are well balanced, and if we do it based on those 
demonstrations, I think we will be fine. I also think there are 
some places like in Iowa and in rural areas that we have to be 
more sensitive and probably may not be able to do competitive 
bidding.
    Senator Harkin. What have we learned about rural areas from 
these two sites, Texas and Florida? Did we learn anything about 
it? Were there some rural areas involved?
    Mr. Scully. No. They are basically urban. Polk County in 
Florida is mostly urban, and San Antonio, Texas obviously is 
urban. So, I think there may be some different challenges in 
rural areas. I think clearly if you are trying to provide 
motorized wheelchairs, for instance, in a rural area of Iowa, 
there may only be one person doing it. So, having a competitive 
bid--it can probably well be done, but I think you just have to 
be a little bit more cautious.
    Senator Harkin. Although even in rural areas, there are 
urban places close by where they have this, whether it is Des 
Moines or Omaha or the Quad Cities or someplace where you will 
find plenty of interest in this.
    Mr. Scully. Well, even there I think some combination of 
inherent reasonableness where clearly there is one provider 
where you can go in and say we are overpaying and lower the 
prices, that combined in markets where maybe there were not 
multiple bidders, certainly we can look at the prices and lower 
them. We are clearly overpaying in a lot of cases.
    Senator Harkin. It is my assumption and what we have 
intended all along is if we have competitive bidding, we do not 
do away with inherent reasonableness. Let me see if I can 
explain how I envision it.
    In the past it has been those who are selling these items 
start at the top level. They get the highest prices. CMS could 
use its inherent reasonableness to try to get it down. What I 
envision is competitive bidding where the Government and the 
beneficiaries get the best price. If there are reasons why it 
needs to be higher than that for a rural area or for whatever 
reason, then you can use inherent reasonableness to get the 
price up. That is the difference. I think the taxpayers and the 
beneficiaries will get a better deal if you use your inherent 
reasonableness to answer those few cases where, for whatever 
particular reason it might be, that a competitive bid simply 
won't work and we have to have a different device. That is how 
I envision it working, and if you have any comments, that would 
be fine.
    Mr. Scully. No. I agree totally.
    Senator Harkin. Ms. Aronovitz, I did have a question. But I 
have been taking enough time here, but I would yield to Senator 
Murray from Washington both for an opening statement and for 
any questions you might have. Then I will pick it up after you.

               OPENING STATEMENT OF SENATOR PATTY MURRAY

    Senator Murray. Great. Well, thank you very much, Mr. 
Chairman. First of all, let me thank you for having this really 
important hearing that you are having today. Washington State 
has 750,000 seniors and disabled who rely on Medicare, and 
there are a lot of problems within the Medicare program that 
need to be addressed and one of them really is making sure that 
Medicare payments for medical supplies are adequate and 
accurate. So, I appreciate your statement today and our 
witnesses who are here today to talk about this issue.
    I am going to take the advantage of the fact that Mr. 
Scully is here to bring to his attention an issue that I think 
is critical regarding Medicare because I am concerned about any 
issue that prevents those on Medicare from getting the care 
they need. That is why I am especially troubled by one of the 
underlying issues that is limiting access to seniors and 
disabled in my State.
    The recent 5.4 percent reduction in physician payments, the 
deep reductions imposed by CMS as a result of the Balanced 
Budget Act have really created major problems in my home State 
of Washington. These cuts have been forced on providers who are 
already in my State receiving less than adequate reimbursement 
rates and payments from Medicare. Because of a flawed, outdated 
formula, health care providers in my State of Washington 
receive significantly less reimbursements than providers in 
other States for providing the same service. My State ranks 
42nd in the Nation for beneficiary payment.
    I know the chairman is 50th on that list, the lowest in 
reimbursement. I know he shares my passion on this issue and I 
really want to bring this issue to this committee's attention, 
to Mr. Scully's attention to try to recognize how critical it 
is.
    The results of these less payments are really devastating 
on seniors and the disabled in my State. We have providers that 
are refusing to take new Medicare beneficiaries. We have 
doctors who are leaving our State and hospitals that are 
operating at less than 2 percent margins. Hospitals in my home 
State are competing for a shrinking pool of nurses, as we all 
are, and health care professionals nationwide. When the 
reimbursement levels are less in our State, they go to where 
they are much higher. And I love Florida and California, but I 
do not want all the doctors and nurses and health care 
professionals in my State moving to those States because they 
can get better reimbursement, but that is what is happening.
    Again, I know Chairman Harkin is well aware of this and is 
working with me as we try to address this.
    But, Mr. Scully, I wanted to bring this up with you because 
you were out in my State recently. And I appreciate your coming 
out there, but I was, frankly, fairly surprised at some of your 
comments that I read in the press. I was not there, so I am 
assuming they are accurate, but you can change them if you 
want. But the East Side Journal quoted you as saying: ``I don't 
think it's a significant problem for seniors,'' and you said 
that you believed that doctors were not fleeing, despite 
legitimate concerns.
    I have to tell you seniors in my State were really outraged 
by those comments. I had a doctor from Olympia who wrote to me 
after that and said: ``Unfortunately, when Tom Scully was 
recently in our State, he denied the reality of access 
problems. His agency will never fix this problem until seniors, 
physicians, and leaders like those in our own congressional 
delegation hammer home the message that the system is broken 
and we need to demand a fix.''
    Mr. Chairman, I am here to hammer home the message. It is 
broken. It is a problem. It is impacting access.
    I have to say I was also very concerned because you were 
quoted as saying: ``The answer is not to give Seattle more, but 
to give the rest of the country less.'' Well, first of all, 
this is not just a Seattle problem. Every rural community in my 
State is affected by this. But the reality is that giving the 
rest of the country less is not a solution to this.
    I recognize we have a flawed formula, but I think denying 
there is a problem is not going to allow us to get to a 
solution. To say that our providers are not being paid too 
little, but others are being paid too much, just really offers 
very little hope this is going to be addressed.
    So, Mr. Chairman, I apologize for bringing this issue up 
when your hearing is on another very critical issue, but I 
wanted to take advantage of Mr. Scully's first opportunity to 
come before our committee this year to bring this up and to 
really press you and to see if you recognize that this is an 
access to health care problem issue in my State that we have to 
work together to address.
    Mr. Scully. Senator, I do. I seem to have a rare talent to 
both be misquoted and outrage people at the same time.
    There are a number of questions. I clearly think we have an 
access problem. By the way, the comment I made about Seattle, 
which was a misquote, more rather than less, I was 
complimenting--I was in Iowa for 2 days last week as well, as 
the chairman knows. What I said basically was that Louisiana--I 
think the national average per senior in spending is about 
$7,700 per senior. I believe in Washington State it is about 
$6,000.
    Senator Murray. Less than.

                          COMPETITIVE BIDDING

    Mr. Scully. Some of the numbers from the State were a 
little lower because they are a couple of years old. I think 
this year it is about $6,000. In Louisiana, for instance, it is 
more like $9,000. In the District of Columbia, I think it is 
$10,500.
    What I was saying was I was complimenting, because I used 
to work in the Washington State delegation, as you may know, 
that there is a good health care culture in Puget Sound and in 
the Seattle area, and that certainly there are inequities in 
the system, but to some degree we ought to get some of the 
other States to operate more like Iowa and Washington State. 
That way we would not necessarily bring everybody up to $10,500 
a year, but to encourage the inefficient States to be more 
efficient. I was not saying in Seattle, everybody should come 
down to where Washington State was.
    What I was trying to say was that there are some models in 
Iowa, which happens to have an extremely good health care 
culture as well, and a lot of this is utilization per patient. 
And Puget Sound and Washington State does too, and it is 
inequitable, but to some degree the health care traditions and 
practices of both Iowa and Washington State are great and 
should be a model for other parts of the country. So, some of 
it is redistributing the money more fairly. Some of it is 
trying to get the health care and medical practices in some of 
these lower cost areas distributed around the country.
    In that case I believe I was misquoted. It was a long town 
hall meeting, about 3 hours, and we had a pretty lengthy 
discussion of that. I was not trying to claim that everybody 
should go down to $6,000 per year. I was saying that some of it 
is inequitable historical distribution and some of it is that 
the culture of health care in Seattle, in particular, and Puget 
Sound, but in the whole State is very positive, and the 
utilization in Iowa, for instance, has always been much lower 
than the rest of the country. Iowa, I believe, has the oldest 
population, close to Pennsylvania, as far as the highest 
percentage of seniors in the country as well. So, I think that 
was a little misquote.
    On the access issue, I spent a lot of time with physicians, 
a number in my family. The negative 5.4 percent cut we said 
repeatedly has to be fixed. The administration supported a fix. 
I believe again the House bill will at least fix it for 3 
years. There is no question the formula is broken.
    I have also said repeatedly the RBRVS formula, which I was 
one of the two people--I think one of my first jobs in the 
first Bush administration in 1989 was pushing that through.
    I believe if you look at nursing home payments, which have 
been a roller coaster for years, hospital payments, which have 
been a roller coaster, home health, most of the Medicare 
payment formulas have been very inconsistent. The RBRVS system 
has worked exceptionally well since 1989, and I think it is a 
good system.
    It is broken largely because my agency made a mistake, 
which a lot of physicians do not understand. The physician 
payment growth--I might be slightly off on the numbers--in the 
year 2000 was supposed to be under the targets in the law, 
about 6 percent, and in 2001, it was supposed to be 6 percent 
as well.
    We added a bunch of new codes. There are about 6,500 
physician codes. We added a number of new codes in 2000 and 
2001, and believe it or not, we forgot to count them. So, we 
overpaid in bulk. We pay about $66 billion a year out for 
physician services and physician related services. And by 
accident in those 2 years, we overpaid by about $3.7 billion 
one year and $2.5 billion the next year. So, in bulk, under the 
formula--and it is a very rigid formula--we overpaid 2 years in 
a row without knowing it by $6 billion and the law, which is 
inflexible, recaptures that.
    I think the law is broken. I think the fundamental formula 
for physicians is fair and works and has been by far the most 
stable payment system in Medicare for the last 14 years. It is 
broken. It needs to be fixed, and it is not fair. And trying to 
explain to physicians that they were overpaid in bulk for a 
couple of years does not go very well. But I do think it is 
important to explain to them what happened. There was a 
mistake.
    I think the fundamental RBRVS system is solid and works 
well. I think it has a major glitch in it. The system has a 
short-term flaw and it needs to be fixed and the administration 
supports fixing it this year. I certainly hope--and everybody I 
have talked to in the House and Senate, Senator Baucus and 
Senator Grassley and others have supported fixing it this year. 
So, we strongly support doing something to fix it before it 
goes out.
    On the issue of access, many doctors are outraged, as they 
should be. It is a negative 5.7 percent reduction in their base 
conversion factor fee this year. If it is not fixed, it is a 
negative 4.4 percent next year. I do think, and I have said 
repeatedly, if we do not fix it, we are going to have an access 
problem. It is inevitable. Doctors are angry. They read a lot 
of things in their journals and AMA reports about how their 
fees are getting cut, so they are angry and they are saying 
they are not taking new Medicare patients. So far, we have not 
seen, as a matter of access, a major drop-off in access.

                            ACCESS PROBLEMS

    Senator Murray. Well, let me just interrupt you. In my 
State we do have doctors who are now refusing to treat Medicare 
patients. We have numbers of them. I am happy to get you the 
statistics on this. This is not a ``if we don't fix it, it will 
happen.'' It is a ``happening right now'' issue.
    Mr. Scully. Senator, I agree. I spent 2\1/2\ hours in 
Seattle meeting with the Washington State Medical Association 
and I am very sensitive to the issue. I think there is clearly 
a problem. We still have about 90 percent of physicians taking 
mandatory assignment, and there is an issue of them taking new 
Medicare patients. And it probably has been more acute and I 
have heard more about it in Puget Sound than some other areas.
    But I spent a lot of time also with patient groups and AARP 
and others, and I think if we do not fix it, we are going to 
have an enormous problem. As of right now, I think a lot of it 
is angry physicians, and they have a right to be angry. But I 
think we have not yet seen from the AARP or other patient 
groups a major systemic access problem.
    Senator Murray. Well, I will just tell you it is an access 
problem in my State. I want to work with you on this. I will 
work with the chairman. I will work with anybody else, but I am 
going to keep talking about this.
    I will just end with a story, Mr. Chairman. I was up in 
Sequim, Washington. It is about 3 hours from Seattle in the 
northwest section, a small, retired community, probably the 
highest number of seniors. And they are livid because a number 
of doctors are refusing to take Medicare patients. A woman came 
up to me in a parking lot with a cast on her arm, told me she 
had broken her arm about a month before that. The doctor put a 
cast on it. She went back and he is now not taking Medicare 
patients, and she wanted to know how she was supposed to get 
the cast off. This is an access problem.
    Thank you, Mr. Chairman.
    Senator Harkin. Thank you, Senator Murray. I appreciate 
your bringing this up because it is a big issue in Iowa too. 
Well, it is a big issue in a lot of States where they are way 
below the national average. Some States are way above it. We 
have seniors in our State that many times will go down to Texas 
or places like that for the winter, and they come back and they 
say, Medicare down there, you can get eye glasses. You can get 
all kinds of things, but you cannot get them in Iowa. And they 
pay the same amount per month there as they do in Iowa. So, it 
really is a fairness issue.
    But we could go on with that for some time here. I wanted 
to bring it back to the focus on this issue. As Senator Murray 
said, it is a big issue. It is one that cannot be put off any 
longer. We have got to make some changes this year in that 
reimbursement formula.
    I also believe that we cannot afford to wait any longer on 
this issue either, about cutting down on some of the waste, 
fraud, and abuse. I guess those are the words that are used, 
but just the wasteful payments that are being made in Medicare. 
We know they are going out, and we are close to getting our 
hands on this.
    Ms. Aronovitz, I wanted to ask you about the part of your 
statement wherein you said that the positive results achieved 
from the two competitive demonstrations may be difficult to 
expand on a national scale. This is due to the need for a labor 
intensive outreach effort in each community and an ongoing 
monitoring of beneficiary access and product quality. Some of 
that I think I understand. Some of it I do not understand. 
Could you elaborate on that please?
    Ms. Aronovitz. Yes. I would also like to address Senator 
Murray's comment for a moment. Although she apologized for 
getting off the topic, I think her comments related directly to 
the topic. What Senator Murray is referring to is the 
fundamental question of how CMS knows what it is paying for and 
whether the Agency can defend what it is paying for.
    There were a lot of changes in the BBA of 1997 that 
affected many different industry groups. CMS will always have 
to deal with industry groups and others who are upset or 
concerned about any changes in price.
    We think that with DME or with any other payment system, 
CMS has to have the information technology infrastructure to 
collect data so that the Agency can defend its prices and knows 
internally what the correct price should be. Some of the 
previous BBA give-backs to providers have occurred because CMS 
could not explain beneficiary access issues or outcomes issues, 
and it could not defend its decisions to move in a certain 
direction.
    This is another situation where, with better information, 
we could probably know exactly how much higher the physician 
fee schedule rates should be. Clearly it is a legal formula, so 
it does not allow a lot of flexibility, but obviously, CMS 
needs to have much better information about what it is paying 
for and how much it should be paying. I just want to make that 
clear.
    We think that the early success in competitive bidding 
shows that it could be a very important tool for CMS. 
Unfortunately, we do not think it is the complete answer and it 
is clear that you agree with that.
    Senator Harkin. I just want to interrupt you right there. 
Since we started on this years ago, the GAO has repeatedly 
testified before this subcommittee in support of giving 
Medicare competitive bidding authority and that is still your 
position.
    Ms. Aronovitz. Absolutely. That is 100 percent correct.
    Senator Harkin. I did not want to misinterpret that.
    Ms. Aronovitz. You did not misinterpret it. Not only do we 
think it is important to have CMS use competitive bidding 
authority in these types of demonstrations, but we have also 
talked more broadly about giving CMS wider contracting 
authority in other aspects of its operations.
    In terms of competitive bidding, there are some important 
lessons that CMS and we are learning about how implementation 
should occur. One of the early and important issues that made 
these bidding demonstrations successful is the fact that there 
was an on-site ombudsman who could understand the environment 
and could settle issues that arose. You need to have ongoing 
monitoring to ensure that providers receive a fair price and 
will be able to stay in the market, and that beneficiaries have 
access to the items.
    Also, there is a lot of outreach and education that must 
occur in order to help the community understand what the 
changes will be. Therefore, there are costs associated with 
making a demonstration effective, and we want to be certain 
that you understand and accept the fact there is a lot of hard 
work, money, and resources required to make these successful. 
This fact needs to be considered as the demonstrations are 
expanded.

                          COMPETITIVE BIDDING

    Senator Harkin. In reading through the testimonies last 
night, I made a note on my paper on this, and then Senator 
Specter brought it up too. Why do you not just buy from the VA? 
Mr. Scully or Ms. Aronovitz.
    Mr. Scully. Well, I think the issue there is really market 
clout, the same issue with drugs.
    Senator Harkin. It is what?
    Mr. Scully. Is market power.
    Senator Harkin. No. I am just saying why does Medicare not 
just say, okay, VA, you are now our purchasing authority. You 
buy all these things. We are going to buy them from you at 
cost. Obviously, VA is not in the business of making a profit.
    Mr. Scully. Well, the VA would probably hate that for one 
reason. They would end up paying higher prices. We went through 
the same thing on Medicaid. Medicaid drug rebates, for 
instance, which I was involved----
    Senator Harkin. Why would VA hate it?
    Mr. Scully. Well, I will give you just one example, 
Medicaid drug rebates, which were passed in 1990, which I was 
involved in again in the first Bush administration, where the 
States went out and got roughly--the drug prices are a moving 
target, but roughly 15 percent discounts off of whatever market 
prices theoretically were. VA was getting a lot less than that. 
We had to exclude VA. The subcommittee, in fact, went out--
actually it was the HUD, VA subcommittee. They excluded VA from 
that because VA was getting lower prices. If VA became the best 
price in the Federal Government, the drug companies were not 
willing to sell it to everybody for what--you know, VA was able 
to go out and use their 4 or 5 percent market clout to get 
really lower prices. Once that became the best price, their 
price was going to go up.
    For example, let us say with 4 percent market clout, you 
can go out and get tremendous discounts because somebody is 
willing to sell you the next marginal commode chair or whatever 
else for the lowest possible price. Once the Government is 
buying every commode chair at that price, they are not going to 
give the VA that good a price. The price is going to go up. 
Once you throw Medicare in there, Medicare plus VA is the 
entire market.
    Senator Harkin. Let me interrupt you. VA goes out with 
competitive bids.
    Mr. Scully. VA gets competitive bids for 4 percent. I am 
just saying hypothetically, if you went out and said that a 
commode chair--I cannot remember the price--but let us say that 
we are paying $200 and maybe the VA is paying $110.
    Senator Harkin. Let us see. What was it? VA is paying $32 
and Medicare is paying $109.
    Mr. Scully. Okay. Let us say that the commode chair--I am 
not an expert, thank God, in commode chairs. If you are a 
commode chair manufacturer and you are making the commode 
chairs and your actual cost is $30, you are probably willing to 
sell them to the VA in bulk for $32, but you are probably not 
willing to sell them to the entire Government for $32. $100 and 
some is probably way overpriced, but if you went out and said 
VA and Medicare together are going to go out and competitively 
bid for commode chairs, you are probably not going to get that 
price.
    Senator Harkin. You know, I do not understand that, Mr. 
Scully. There are always cost reductions in mass manufacturing. 
So, obviously, if a company is making commode chairs and they 
can make a profit of $2 each for selling 100 chairs, they could 
make a lot more profit selling 1,000 chairs because the cost of 
production will come down as they mass produce it seems to me.
    Mr. Scully. Well, I will give you the example from the 
hospital business. This is the same issue when you get into 
centers of excellence in hospitals. Let us say Medicare went 
out and said we wanted to have competitive bidding for hip 
replacements in northern Virginia. We do all the hip 
replacements. Probably 90 percent of the hip replacements are 
Medicare. So, if you went out and did that, an insurance 
company could come along and get a lower price if they have 2 
percent market share because a hospital--let us say you are at 
Alexandria Hospital and an HMO comes to you with 2 or 3 percent 
market share. You may get a significant discount. If a hip 
replacement costs $10,000, they may be willing to tell Blue 
Cross of Northern Virginia, we will give you one for $8,000 
because we are already doing a lot, and on the next marginal 
hip replacement to fill an empty bed, we will do for a little 
less. But you cannot do every one of them for $8,000.
    That's exactly the problem, for instance, with centers of 
excellence that I have with that for Medicare. If we went out 
with Medicare and said we want to take competitive bids for hip 
replacements in northern Virginia, INOVA, who is the dominant 
player out there, would do the lowest bidder. Everybody else 
would have to get out of the hip replacement business and there 
would not be any competition left, and they would marginally 
raise their prices over the future years.
    Senator Harkin. But you could go out of State for that. Why 
would you just limit it to northern Virginia for the bids?
    Mr. Scully. Well, most patients, unfortunately, on Medicare 
want to go to a local facility, a local hospital.
    Senator Harkin. You are talking about the procedure.
    Mr. Scully. Yes, procedure.
    Senator Harkin. We are not talking about competitive bids 
for procedures, are we?
    Mr. Scully. I am just using that as an example.
    Senator Harkin. I thought you were talking just about the 
replaced hip.
    Mr. Scully. Let us say motorized wheelchairs.
    Senator Harkin. We are not talking about procedures, Mr. 
Scully. We are talking about equipment and supplies, medicine, 
that type of thing.
    Mr. Scully. I agree. But let us say hypothetically that we 
went out--if the Veterans Hospital up on North Capitol Street 
went out and did competitive bidding for wheelchairs, they 
would probably get the wheelchair suppliers to sell at their 
lowest marginal cost because they are making the wheelchairs 
anyway and they will sell it for the lowest marginal cost. If 
Medicare went out and tracked onto the VA's price list, we 
would have combined 95 percent of the mobilized wheelchair 
markets and the entire cost for the entire sector would go up 
because they are not going to sell them all for that lowest 
marginal price. I think that is just pure economics.
    Senator Harkin. I do not understand. That flies in the face 
of WalMart's success.
    Mr. Scully. We have far more market clout than WalMart does 
in the Medicare program. As a percentage of buying these 
devices, in some cases we are the entire market. WalMart never 
has more than, say, probably 10, 12 percent market share.
    Senator Harkin. Well, it has been my experience in my 
lifetime, Mr. Scully, that if you had that much clout in the 
marketplace, as demand goes up--and that is what we are talking 
about. This is more demand from one buyer--that if the seller 
is increasing the prices exorbitantly, you will find other 
sellers come in. You will find other people saying, wait a 
minute. I can make that cheaper than that.
    Mr. Scully. It is basically an antitrust issue and I 
believe the Government needs to operate just like a private 
company does in antitrust. Let us say hypothetically we went 
out and did wheelchair bids, competitive bidding nationally. My 
guess is the biggest mobile wheelchair maker, which is probably 
Invacare, would come in, give us the lowest price. They would 
run everybody else out of the business. We would have one big 
supplier left over the years and then they would jack their 
prices back up. It is just a pure antitrust model. It is the 
same issue that Microsoft has. I mean, we have so much market 
clout. I totally agree with you we need to use it, but we just 
need to use it in a way that we do not blow up the market 
because the VA is a relatively small purchaser, both on drugs, 
wheelchairs, devices. They have 2, 3, 4 percent market clout. 
Medicaid, generally in most States, has 12, 13 percent. 
Medicare in some of these devices has 85, 90 percent. We are 
the market. And if we went out and just found one----
    Senator Harkin. But we just found, Mr. Scully, in the GAO 
study that I believe--correct me if I am wrong--in I do not 
know how many instances Medicaid is paying less than Medicare.
    Mr. Scully. In some instances, but the Medicaid prices are 
much closer to Medicare, and Medicaid has some of the same 
issues, which is their bigger purchasing power. But still 
Medicaid in most places has probably a third the clout of 
Medicare. I think actually in their testimony GAO, in probably 
a more cogent way, made exactly this argument. They basically 
made this argument in their testimony.
    Ms. Aronovitz. Maybe I could shed some light on this. We 
definitely think that CMS needs to use current prices. The 
Federal Supply Schedule, which is the VA schedule of prices, is 
a great index to use.
    We do say, however, that to assure access for beneficiaries 
across the country and to be certain that providers get a fair 
price and remain in the market, there would need to be some 
markup from the VA Federal Supply Schedule. A lot of it depends 
on the relationship between the beneficiary and his or her 
provider. The provider who delivers the wheelchair, who 
maintains it, who fixes it if it breaks--this provider has a 
relationship with the beneficiary. If a Medicare beneficiary 
takes a nebulizer drug and something happens which requires the 
nebulizer machine to be repaired, there can be service costs 
associated with some DME.
    We think that CMS is currently paying prices that are much 
too high. Some prices are higher than market prices. We think 
that if CMS used the Federal Supply Schedule prices and could 
build from those, it could save a tremendous amount of money. 
It would be paying somewhere in between----
    Senator Harkin. Why can they not know that?
    Mr. Scully. I think we agree on that. I think if you look 
at the savings, for instance----
    Senator Harkin. My question is--you said they do not know. 
Why can they not know it?
    Mr. Scully. In fact, the original regulation that HCFA came 
out with in 1998 was largely based--and I think that was so 
controversial--on a hybrid of the VA supply schedule. So, I 
think we can look at that.
    I think in the GAO testimony, they point out that the 
savings versus--or maybe it was the IG's. Excuse me. The 
savings that they said versus VA was $958 million versus 
Medicaid was $193 million and versus FEHBP was $118 million. I 
think the reality is we probably cannot save as much as VA. We 
are probably somewhere between what FEHBP and VA is, and I 
think that is where our estimates and our competitive bidding 
demo show probably somewhere around $300 million or $400 
million a year.
    I think we clearly can save a lot of money. I just do not 
want to raise the bar so high that we just are not in the same 
situation as VA, and I am not sure we can ever get the same 
exact discounts VA----
    Senator Harkin. Just a second, Mr. Scully. I want to 
understand if I heard you correctly. We are talking about 16 
items that the Inspector General's Office looked at, and if you 
use the median VA price compared to what Medicare is paying for 
those 16 items, the potential savings per year, $958 million. 
Then you pointed out that using Medicaid, which was $193 
million, and you said you probably would fall somewhere in 
between there, $200 million or $300 million a year. I saw Ms. 
Aronovitz nodding at that.
    I am saying to myself, wait a minute. We are talking about 
16 items, Ms. Aronovitz and Mr. Scully. And as I look at these, 
walkers, commode chairs, pressure pads, nebulizers, TENS units, 
and all of the things we talked about here, I find it hard to 
believe that you cannot get the same price for these items as 
VA. I am talking about just these items. Now, there may be some 
others, I will grant you, that are highly technical, that are 
different where Medicare may have to pay different than VA. But 
I am talking about just these 16 items. You are telling me you 
cannot get an IV pole savings for the same thing or a standard 
wheelchair? I mean, these are standard items. When you look at 
these, I just find it hard to believe that on those 16 items 
that CMS cannot get the same price as the VA and maybe even 
better.
    Mr. Scully. Well, Senator, the easy thing for me to do 
would be to agree with you.
    Senator Harkin. I understand what you are saying is that in 
some cases you may not be able to get the same savings as VA. I 
understand that. I am just talking about these 16 items.
    Mr. Scully. Well, I will just try to pick out one of these 
16. For example, just say the hospital beds. The median 
Medicare price--I am just looking at the IG's list--we are 
paying $1,754.55. VA is paying $762. If you look over to the 
FEHBP, they are paying $1,397. Clearly we are paying way too 
much, but the VA can go to all the bed manufacturers, pick one 
with their 3 or 4 percent market share and say we want the 
lowest bid. Well, they are already making beds anyway. This may 
be very close to their costs, and they may be selling them for 
absolute cost to the VA. We are not going to be able to get 
that from a broad range of suppliers. The VA probably picks one 
nationally and buys all their beds from them. So, I just do not 
want to raise expectations to think that Medicare--we could go 
out and say we are going to buy all hospital beds for Medicare 
from one supplier. We would wipe out all the rest of them.
    Senator Harkin. Now, first of all, Mr. Scully, I will take 
issue with you there. I will lay you 10 to 1 odds--more than 
that--that whoever is selling that bed for $762.10 is not 
selling it at cost. They are making money on it. They are not 
going to sell it at cost. They are making money on it.
    I will buttress that by pointing out that when Congress 
enacted a 30 percent cut on oxygen, I heard the same story 
about, oh, it is going to put people of business. Then we went 
out for competitive bids and we got people actually bidding 
lower than that. And they are not losing money.
    Mr. Scully. I agree. Oxygen is a good example. In fact, the 
report you are going to see us come out with next week on home 
health is going to----
    Senator Harkin. So, I am just saying I heard this story 
before that, oh, gosh, it is going to be very bad. But even 
when we cut it 30 percent, competitive bidders came in and bid 
actually--I forget--16 percent below that and they are making 
money.
    Mr. Scully. And I hope that is the case. I think in fact 
when you look at our competitive bidding----
    Senator Harkin. We ought to get the IG's Office a little 
bit more involved here. I would like to know how many bed 
manufacturers are there out there that would make a bed like 
that, a hospital bed, semi-electric, head and foot adjustments. 
That is the typical hospital that I see when you go in and you 
punch the button and they go up and down. How many 
manufacturers are there out there? I do not know. Are there 
more than enough and what is the cost of manufacturing one of 
those? I have no idea.
    Ms. Rehnquist. Well, I certainly do not know, Senator, but 
one distinction on a bed, it seems to me, is that Medicare is 
not simply a supplier. It is an insurer, so it is reimbursing a 
DME company to provide the bed to a beneficiary and to service 
that bed, at least up until now--and that brings up the whole 
capped rental category too--and provide repairs to that bed. VA 
would never do that. VA is simply a purchaser and a supplier.
    Mr. Scully. VA is generally buying beds for hospitals and 
nursing homes. In this case, it is usually us buying it at home 
to be delivered at home, serviced at home.
    Ms. Rehnquist. Exactly. The same thing I know would apply 
to oxygen where they have to come out monthly and service the 
equipment, and take the oximetry test to see if it is the right 
level of oxygen.
    Mr. Scully. Mr. Chairman, I think you are pushing us 
exactly in the right direction. I am totally supportive. I am 
just trying to make sure that expectations where we can save 
are reasonable, so when I come back in a year and talk about 
it, we are----
    Senator Harkin. Well, that is true.
    Ms. Aronovitz. Yes, I think that Medicare could use its 
purchasing leverage by developing reasonable and defensible 
prices. Right now, a lot of Medicare's payment rates are not 
reasonable or defensible. If prices are reasonable and 
defensible, they could be pushed lower in order to maintain the 
competition needed in order to continue to sustain low prices. 
We are trying to explain that this is important for Medicare.
    Senator Harkin. I understand that. I would still like to 
get a better handle on the costs of these items and what the 
markup is. I mentioned that saline solution, for example. That 
has got to be a huge markup. That is just unreasonable. But 
that is just one item.
    Ms. Rehnquist, I think it was in your testimony. We were 
talking about the----
    Mr. Scully. Mr. Chairman, can I ask you a question just 
because I appreciate your intense interest in this?
    Senator Harkin. Yes.

                          MEDICARE DRUG PRICES

    Mr. Scully. There is a very parallel interest, which is in 
the GAO testimony, on average wholesale prices for drugs, 
which, if you got into it, would probably shock you 100 times 
more. So, I hope we can get you just as interested in that 
issue because what we are paying for on Medicare drug prices 
for outpatient drugs is so much beyond this it is frightening. 
I appreciate your interest. I think you are pushing us to do 
exactly the right thing.
    Senator Harkin. I really believe that is another thing that 
we have got to look at. Absolutely. Perhaps we will get into 
that at some point later on. In fact, I think you are right. We 
have to look at that.
    Do not get me started on advertising and stuff like that 
for prescription drugs.

                  RENTAL EQUIPMENT AND SERVICE OPTIONS

    I was looking at something here that had to do with the 
rental equipment and service options. I believe you got into 
that, right, Ms. Rehnquist?
    Ms. Rehnquist. Yes, we have.
    Senator Harkin. And you were pointing out that in many 
cases Medicare was paying for these service options and the 
purchase options that they had and that they could save a lot 
of money by eliminating the purchase option under the capped 
rental category of equipment.
    Ms. Rehnquist. I think what we were pointing out was the 
service contracts, like in retail, if you go to Circuit City 
and buy an extended warranty on a piece of equipment.
    Senator Harkin. Right.
    Ms. Rehnquist. What we found was that the Medicare program 
would save I think it is like $100 million a year if it would 
simply perform repairs when needed on equipment and not buy 
these extended warranties, if you will.
    Senator Harkin. Right.
    Ms. Rehnquist. Because then it is like an insurance company 
buying insurance. It just does not make any sense. We found 
that they would just save money making repairs on equipment as 
necessary because in these extended warranty options----
    Senator Harkin. Do you need legislation to do that, Mr. 
Scully, or can you do that?
    Ms. Rehnquist. Yes, and CMS concurred with our report. But 
yes, it does require legislation.
    Senator Harkin. It cannot be done regulatory-wise.
    Mr. Scully. I think we tried to drop the lease extension 
option a few years back and were prohibited from doing it. So, 
I think we do need legislation. This is basically the issue. 
Basically after 13 months, I believe the patient has an option 
to buy and if they do not, there is a lease and there is a 20 
percent of the lease cost maintenance payment after that in 
perpetuity. And we tried to end that a number of times without 
success. And I think that is very good policy.
    Senator Harkin. Well, again, I hope to work with you to 
craft legislation. I am open for suggestions that you might 
have for this. I think the Inspector General said that there 
were four different reforms to payments that they could save 
about $550 million a year. I assume all of those require 
legislative changes. So, my question then is for both of you. 
To the Inspector General, will you work with us and work with 
Mr. Scully to craft this legislative language to achieve these 
savings?
    Ms. Rehnquist. My office would be happy to do whatever we 
can do to help bring that along.
    Senator Harkin. Mr. Scully?
    Mr. Scully. Absolutely. We have had tremendous cooperation 
with the Inspector General's Office in the year I have been 
there. We would be happy to do that.
    Senator Harkin. Well, that would be good. I think we ought 
to get that language ready to go this year. There is most 
likely going to be some bill on Medicare this year.
    Mr. Scully. I certainly hope so.
    Senator Harkin. Something.
    Mr. Scully. As do the doctors in the Puget Sound area.

                            THE FOUR REFORMS

    Senator Harkin. Something is going to be moving on Medicare 
and these are some of the minimal things that we have got to 
get included.
    These four reforms. Was one of those competitive bidding? 
Was that one of the four reforms you were talking about?
    Ms. Rehnquist. I do not think so.
    Senator Harkin. That is right. The four reforms you were 
talking about were the maintenance payments for capped rental 
equipment we talked about, respiratory assist devices, 
prescription drugs used with medical equipment, albuterol and 
the other one was ipratropium bromide. Those were four.
    Mr. Scully. I think all of those are involved in the 
competitive bidding demo. I know the nebulizer, albuterol--that 
is in the demo I think.
    Senator Harkin. Well, those four items and some of those 
are in competitive bidding, some may not be. We need to work 
with you to get language ready for the bill this year on those, 
and I would appreciate working with you on that.
    Mr. Scully, what steps have you taken to respond to GAO's 
recommendation on using the UPN's, the universal product 
numbers, on Medicare claims to get better information about the 
specific products that Medicare is paying for?
    That was another thing that goes back a long time, getting 
specific information on products. Everything has a UPN, I 
think, in the world. I do not know, but when we tried to find 
out how many, there just was not that information.
    Mr. Scully. Well, the codes we pay under, which GAO pointed 
out are pretty broad--we basically have a wheelchair code and 
we pay for----
    Senator Harkin. Why not use a UPN code for every item? That 
way you have got all the data you need. Is that what you were 
getting at, Ms. Aronovitz?
    Ms. Aronovitz. Yes. It would be quite an undertaking to 
look at all of 1,900 groups of products, but CMS could start 
with ones that they know are overpaid and obtain UPN 
information on the products within those categories. CMS should 
start small and focus inherent reasonableness activities on 
product groupings where it is known that overpayments likely 
occur. The first and fundamental issue is for CMS to know what 
products it is paying for, and what products are actually being 
delivered to beneficiaries. The second thing is to know what 
the price of those items should be. After obtaining those 
pieces of information, it is a matter of having the courage and 
the foresight to move forward, use inherent reasonableness, be 
able to defend the prices that the Agency would like to pay, 
and then execute these rates.
    Mr. Scully. Mr. Chairman, can I just raise--since you are 
our appropriator, the number one barrier to us doing this well, 
to be honest with you, is that when we save money from the 
trust funds like the demo in Polk County or the other demo in 
San Antonio, we save money to the trust funds on the 
entitlement side, which goes to the Finance Committee, the Ways 
and Means Committee. The money to run the demos comes out of 
our domestic discretionary appropriations account, and that 
cost us about $17 million, $20 million last year. The committee 
said, do these demos, and we had to come up with the money to 
do them. And not to complain, because I am a cheap former OMB 
guy, but as we----
    Senator Harkin. I was going to say, can you help us with 
OMB, Mr. Scully?
    Mr. Scully. Well, it is not just OMB. Again, I am not 
complaining about our budget, but I am saying the fact is we 
run a $260 billion Medicare program on a $2.5 billion 
administrative budget. About a $1.5 billion of that--most of 
this is done by the contractors. The contractors are largely 
the Blue Cross plans--run a huge program, $260 billion on $1.5 
billion in domestic spending, and we go out and tell them--you 
know, a lot of this is really the DME carriers and the DME 
contractors. And we just do not have the bodies or the money to 
do a lot of this.
    For example, if we go out to do competitive bidding 
nationwide, I mean, the tradition would be the committees will 
tell us, do competitive bidding, save all this money in DME, 
and there will not be any appropriated money for us to have the 
staff to do it. The reality is it is going to be extremely 
expensive to do.
    I think fundamentally we have a lot of demands to save 
money for the trust funds.

                          COMPETITIVE BIDDING

    Senator Harkin. I think OMB ought to account those savings 
to this side of the ledger. It has been one of our frustrations 
in the past, that we get these savings, but it is never really 
counted as savings to us. It would be very helpful. I have made 
that argument to OMB for years, probably back when you were 
there. For me it does not make sense. It should be counted that 
way, but we have never been able to get OMB to do that under 
any administration, whether Democrat or Republican or whatever. 
We have never been able to get that done. But any help you can 
give us on that----
    Mr. Scully. I will be happy to work with you on it. For 
example, when the Justice Department makes collections on 
recoupment in Medicare cases, a certain part of that goes back 
in the Justice Department. I think you can make an argument in 
some of these cases that if you want us to do more things on 
competitive bidding to save money for the trust funds, we just 
do not have the capability to do it right now.
    There is a lot of push from the committees about putting in 
the BIPA reforms. If you have a Medicare appeal, it takes 2 
years now, and there is a very rational reform policy that has 
been out there for 2 years, but we have not funded it because I 
do not have the money to do it. It is ridiculous that Medicare 
beneficiaries have to wait 2 years for their claims to be 
appealed, but we do not have the financing to reform the 
system. It is just a reality. The authorizing committees 
authorize things and then the money to make them happen is not 
appropriated, and there is a disconnect. I am just making that 
commentary.
    Senator Harkin. If we get OMB to score us the savings, we 
could probably do a lot more.
    Mr. Scully. I will be happy to work with you on it. Thank 
you.
    Senator Harkin. All right. Well, listen, thank you all very 
much.
    What I got out of this hearing is, first, the proposed 
regulations on inherent reasonableness are out of your shop and 
they are being reviewed now at the OMB level. And we are going 
to push as hard as we can to get those done. I cannot see any 
reason why they could not have them done in a month if they 
have been out of your shop for some time. I did not get exactly 
when they came out of your shop, but it is about time we get 
those.
    Second, the administration will continue to press ahead 
this year on any Medicare legislation to start the competitive 
bidding process going and enact that.
    Third, you are going to work with the IG's Office and 
hopefully with us to draft some proposed language in any 
legislation we might get up this year--and it might be soon. It 
might be happening this summer, so time is of the essence 
here--to address a couple of the problems that the IG came up 
with on some of the things like the service contracts and 
things like that.
    Did I miss anything? I think that is it.
    Well, I am encouraged. I am more encouraged now perhaps 
than I have been at any time in the past because, A, the 
administration is now supporting competitive bidding. That sure 
does help. Second, we have jumped through every hoop, the 
demonstration programs, the GAO investigation. Hopefully, there 
is not going to be another roadblock thrown up again this year 
to say that we have got to do another study. We have done 
enough studies. We have got to go ahead on this.
    Thank you all very much for being here. Again, I thank you, 
Inspector General, for your great work. Thanks, Mr. Scully.
    Next we will turn to the supplier side of this equation, 
and we will hear from Mr. David Williams, who is Director of 
Government Operations for Invacare Corporation, which was 
mentioned earlier, the largest manufacturer of home medical 
equipment in the country. Prior to joining Invacare, he served 
as a senior policy advisor to the Governor of Ohio on health 
and disability policy. Mr. Williams is also a member of the 
board of directors of the American Association for Home Care.
    Mr. Williams, I did not get a chance to read your 
statement, but please go ahead. It will be made a part of the 
record in its entirety. Please proceed as you so desire.
STATEMENT OF DAVID T. WILLIAMS, DIRECTOR, GOVERNMENT 
            RELATIONS, INVACARE CORPORATION
    Mr. Williams. Well, trusting that you will read it, I will 
not read it to you and bore you with it, but I will summarize 
it if I can.
    Mr. Chairman, I am honored to have the opportunity to 
testify before you and present what nominally could be the 
other side of the funding issue. You will note in my written 
statement that I did not--before I go on, I do want to 
acknowledge that two representatives of the industry, Tom 
Connaughton, who is the President and CEO of the American 
Association for Home Care, and Kimberlie Rogers-Bowers, who is 
on the Regulatory Affairs committee of our trade association, 
are here with me today. If you have some tough questions, I 
will punt, if you do not mind.
    Senator Harkin. All right.
    Mr. Williams. You will note in my written testimony that I 
did not mention the data the OIG included regarding Medicaid 
retail sales and FEHB comparisons. I would be happy to do that, 
but I kind of focused on the VA. But I would like to get into 
the other in Q&A, if you do not mind.
    I really want to make three points to the subcommittee to 
illuminate what I consider to be the inaccuracies in the 
report, but before I do, I want to make sure that you, Mr. 
Chairman, and all the members of the subcommittee know that the 
home medical equipment--you call it durable, we call it home 
medical equipment--services industry--we acknowledge that there 
must be a fair and accurate mechanism in place to ensure that 
the Medicare program is not being overcharged for the goods and 
services we provide. In other words, we do not oppose a 
reasonable IR rule that is reasonably implemented.
    The problem in the past is that the inherent reasonableness 
rule was either applied unreasonably or used unreasonable data, 
and both the GAO and the Inspector General have supported the 
industry in that in the past. And that was the reason it was 
suspended while they worked at refining the rule to make sure 
that the data used in inherent reasonableness was fair and 
accurate, in other words, apples-to-apples comparisons.
    While we accept inherent reasonableness, I also want to 
point out that inherently reasonableness does not necessarily 
equate to the price that Medicare pays, inherently reasonable 
only if it equals what the VA pays or even what Medicaid pays 
or that FEHB pays because again there is a difference there.
    It is important to remember that when we talk about DME in 
the Medicare program, that we are not talking about a 
commodity. You showed a picture of a commode. That commode 
comes with the provider delivering it to the Medicare 
beneficiary, setting it up--believe it or not, if you look at 
that picture closely, you will see the legs are adjustable, and 
there are parameters for those legs to be adjusted--and showing 
the patient both how to maintain it and to use it. There is a 
safe way to get on that commode and an unsafe way. So, they 
actually train the patient to do it. So, we have got delivery, 
we have got set up, we have got training. Then we have got the 
Medicare costs of billing associated with that commode.
    So, there is a whole lot more that goes with that commode 
than just the product in the picture, and it makes no 
difference whether we are talking about that commode or 
nebulizers, respiratory therapy using nebulizer drugs, or 
motorized power wheelchairs. They all have a huge, huge service 
component.
    The respiratory drugs, for example, with a nebulizer. I 
told you what happened with the commode. With the nebulizer, 
under Medicare rules, the provider goes out and again delivers 
the nebulizer to the patient with a respiratory therapist to 
instruct them how to use it and then has to follow up on a 
regular basis with the patient with a trained respiratory care 
specialist to make sure that the patient, A, is complying and, 
B, still needs to machine. We are required to do that under 
Medicare.
    Rehab technology is something that is pretty close to me, 
as you will note. The Rehab Council, the professional 
organization representing the rehab, did a study recently and 
found that just before the wheelchair is delivered, like the 
power wheelchair I am sitting in today, before it could be 
delivered to me, there are 35 hours of professional service 
time involved in evaluating me to make sure I have the right 
equipment, getting the right equipment, adjusting the right 
equipment, programming the equipment, training me how to use 
the equipment, then reevaluating me to make sure it works 
right.
    To do a power wheelchair right, we have to send somebody 
out to the beneficiary's home to evaluate the home to make sure 
that the product we provide will work in their home. And then 
in the first year afterward, we find that on average we spend 
about 5 to 6 hours reprogramming the product, just going back 
and reassuring the beneficiary. I know it looks pretty smooth 
when you see somebody like me who has been in a chair for 25 
years, but the first year in a power wheelchair is hell. I can 
take you to my home and show you the damaged woodwork to prove 
that fact.
    So, again, none of these examples include what Medicare has 
acknowledged time and time again, which is the cost of doing 
business with Medicare which is both the cost of the billing 
process which is hugely expensive because of the amount of 
paperwork and documentation involved and the cost of money, if 
you will. The provider has to buy this power wheelchair from 
Invacare at a price of about $7,000 and wait in most cases 5 to 
6 months to get their money back. There is a cost associated 
with that money. They are paying interest on it either to us or 
to a bank or to a credit card or something.
    The next point I want to make is the fundamental difference 
between the VA health system and the Medicare program. As has 
been said, Medicare is an insurance plan. It is just like Blue 
Cross Blue Shield and everything. It purchases goods and 
services through private providers on a patient-by-patient 
basis. The Medicare fees for DME include the costs of all the 
services that I mentioned, as well as those associated with the 
actual price.
    Again, it is important to note that 70 percent of the home 
medical equipment service providers who service Medicare 
beneficiaries are small businesses. And in Iowa, just to make a 
point for you, that number is 85 percent. The vast majority are 
small business, and they purchase supplies and equipment on an 
as-needed basis. They do not keep a ton of product in a 
warehouse that they can ship off and buy in huge quantities to 
get the kind of discounts that, for example, the VA does.
    On the other hand, the VA medical program is conducted by a 
fully integrated, Government-owned and operated health system. 
As a manufacturer, we sell our products directly to the VA on a 
national contract. I know we have talked about competitive 
bidding. They have a fee schedule that comes out, the national 
contract that comes out. Under Federal law, we have to as a 
manufacturer--for example, if a large national provider comes 
to us and negotiates a lower price, automatically our price to 
the VA goes down under Federal law. So, we have to make a 
decision, are we going to continue to provide, say, K0011 power 
wheelchairs to the VA at the price that it went down to because 
a contract changed with a national provider. And there are a 
lot of business decisions in there, but you have to understand 
that that is the lowest possible price.
    And it disregards volume. We could have a national 
provider--there is national chain, for example, that would buy 
more product than the VA in that category, K0011 power chairs, 
but even though they buy more, the VA would get the lower price 
than they get even though they buy less. So, there is a 
fundamental difference in the way it happens.
    More importantly for the VA is the fact that--like 
Kimberlie's company, they provide the respiratory therapist 
that goes out and makes the visits. They provide the delivery 
truck and driver who delivers the commode. They provide the 
physical and occupational therapist who do the evaluations and 
fittings and all the follow-up on the power chair. The VA does 
that with existing staff and existing infrastructure. So they 
pay the price for the product. They pay our wholesale price. It 
is a fundamental difference.
    And another big difference with the VA is that there is no 
billing cost associated with it. The cost of doing business 
with the VA is waiting to get your check from the Government 
which is relatively quick.
    In order to come up with the true cost of what the VA pays 
for DME, you would have to amortize the costs of that entire 
infrastructure, the employees, all the physical infrastructure, 
determine what percent of it is associated with the DME benefit 
to veterans and then add that percentage to what you are paying 
for the actual product. Then you begin to understand what the 
true costs are. To compare the VA to Medicare is really, as has 
been said earlier by the GAO, an apples and oranges comparison. 
So, that is very important.
    Again, I want to say that we do not object to having 
mechanisms in place to set Medicare fees at reasonable levels. 
However, we do strongly feel that the only way to determine 
what is inherently reasonable is to make inherently reasonable 
comparisons. It is inherently unreasonable to state that 
Medicare fees for DME are too high just because of what the VA 
pays is less.
    I believe that the OIG has done a disservice to this 
subcommittee and, more importantly, to Medicare providers and 
beneficiaries by publishing a report that is both inaccurate 
and invalid because of the comparisons it makes. With all due 
respect to the IG, she has reached these conclusions because of 
the comparisons made and the validity of the data. Some of the 
data showed up in earlier reports.
    For example, in the 1999 information that came up that was 
a result of the suspension of the IR rule, on enteral nutrients 
they compared what Medicare was paying for prescription enteral 
nutrition, what you put in through a feeding tube, to Ensure, 
which they bought off a drugstore shelf, maybe at Costco. Now, 
there is an apples and oranges. On catheters, they went to a 
wholesaler and just sent in and looked at a box of catheters 
and said, what does this box of catheters cost, and then 
compared it to the Medicare price. It turned out that the 
product that they compared was out of date and could not be 
sold in this country because it was not considered to be 
sterile. So, we need to make sure that there always is valid 
data.
    I respectfully ask and our industry asks that you reject 
the OIG's report but instruct the Centers for Medicare and 
Medicaid Services to use its IR authority judiciously and to 
base all decisions on accurate and appropriate data and 
comparisons.
    It is important to remember that the model used to deliver 
services to Medicare beneficiaries is the same model, Mr. 
Chairman, that you would receive DME, should you need it, 
through the Federal Employee Health Plan. Many of them are 
managed care plans and so forth, but they contract with private 
providers and they include in the price the services. So, it is 
important that you realize that that one fee is paid for a 
combination of quality products and the associated services 
needed to achieve the clinical outcome you expect and your 
doctor expects when they write the prescription. Under 
Medicare, DME is not a commodity. It is a combination of goods 
and services. I cannot express that strongly enough.
    You asked us to answer your question in the beginning why 
HHS does not take advantage of VA type buying power and why it 
will not work. I just jotted down a few things that I would 
point out to you that are different between the HME providers 
serving Medicare beneficiaries and the VA system.
    The HME provider is a small business that must comply with 
21 supplier standards. They must be accredited in order to 
operate their business, which requires having a strong 
compliance plan and a strong training and education plan within 
their business, and they must pay the cost of staff licensure 
and credentialing. For example, that occupational therapist 
that is involved in fitting and measuring for the power 
wheelchair has to have continuing education every year and they 
must pay that cost. The VA absorbs that cost if they used a 
licensed occupational therapist. That respiratory therapist has 
to be licensed in the State that they work in and so forth. So, 
there are some fundamental differences in the model.
    The second point is that one of the things that has not 
been brought up here--it was touched on, but not brought up and 
you mentioned when you mentioned the UPN, universal product 
numbers. One of the reasons Medicare is in this conundrum right 
now is the gross inadequacy of the HCPC coding system as it is 
used for the DME benefit. In one product used in your 
comparison, for example, the K0011 motorized power wheelchair, 
there are products in that category that Invacare manufactures 
that the manufacturer's suggested retail price is $4,200, and 
there are products in that category, because of their 
complexity, the technological advancement, and their 
application, cost nearly $8,000. They are all in the same 
category. So, how do you come in and say Medicare is paying too 
much when what you are comparing to has such a breadth? The 
coding system is grossly inadequate and I submit you cannot 
really even begin to make comparisons until you have the coding 
system fixed.
    Finally, I just want to close. You have talked about 
competitive bidding a lot, and I want you to know that our 
industry welcomes true competition. We really do welcome true 
competition. But I want to point out the difference between 
competitive bidding and the competitive bidding demonstration.
    In competitive bidding, which our customers engage in with 
health plans all the time, they know how many covered lives 
that they are going to get, the approximate utilization so they 
can make a business decision in their bid. They know the 
volume, they know the potential volume, the up side, the down 
side, the demands, and all the parameters.
    The competitive bidding demonstration in Polk County and 
San Antonio, bidders came in and then they took the lowest bid. 
And then they said, okay, anybody who bid, even if you were 
higher, if you are willing to do it for this lowest bid, you 
are in. That is not competitive bidding. That is Government-
sponsored price setting by any stretch of the imagination.
    And despite all of the flowers that have been laid at the 
foot of those two demonstrations, as the GAO pointed out, they 
still do not know the cost of it. We do not know the associated 
costs because you do not look at how many people have been 
readmitted to the hospital because they did not get the 
appropriate follow-up by a respiratory therapist in Polk 
County, Florida. It has happened, Mr. Chairman. What has 
happened in Polk County, despite the suggestion that it did 
not, is by the end of the second round, 73 percent of the 
respiratory care in Polk County, Florida is provided by one 
company. Lots of small businesses went out of business, and the 
level of service is diminished, and when the level of service 
is diminished on respiratory care, people get sick and are 
readmitted to the hospital. That never shows up on your score 
sheets.

                           prepared statement

    So, my statement is probably more lucid than my oral 
comments.
    Senator Harkin. No, it is very good, a good statement.
    Mr. Williams. I would be pleased to answer any questions 
that you have.
    [The statement follows:]
                Prepared Statement of David T. Williams
    Mr. Chairman, Members of the Subcommittee; my name is David T. 
Williams and I am the Director of Government Relations for Invacare 
Corporation. Invacare is the world's leading manufacturer and 
distributor of medical equipment and supplies for use in post acute 
care. Most of the products in our various catalogues are covered under 
the Medicare DME benefit.
    I am honored to have the opportunity to testify before you today to 
present the ``other side'' of the issue of Medicare payments for 
durable medical equipment (DME). My statement today will be brief and I 
respectfully ask that it be entered into the record of today's 
proceedings.
    I want to make three points to this Subcommittee that illuminate 
the inaccuracies in the information contained in the report from the 
Inspector General. Before I do, I want to make sure that everyone on 
this Subcommittee knows that the home medical equipment services 
industry acknowledges that there must be a fair and accurate mechanism 
in place to insure that the Medicare program is not being overcharged 
for the goods and services that we provide. However, I also want to 
point out that ``inherently reasonable pricing'' under Medicare does 
not equate to fees that are equal to what the Department of Veterans 
Affairs pays, for what appears to be the same products.
    The first point I want to make today is that DME is not a 
commodity. It is a combination of a product and the services necessary 
to get the desired clinical outcome for the patient. It does not matter 
if you are talking about a walker, home respiratory therapy using a 
nebulizer or a motorized/power wheelchair--there is a significant 
service component included in the Medicare payment for each of these 
products.
    An HME provider must deliver, measure, adjust and train the 
beneficiary in the proper use and care of a walker under Medicare. The 
same goes for a nebulizer with the additional responsibility of having 
a trained respiratory care specialist visit the patient on a regular 
basis to check their progress and document compliance with the 
physician's orders. The Rehab and Assistive Technology Council of the 
American Association for Homecare conducted a survey that shows that on 
average, proper evaluation, fitting, adjustment, training and delivery 
of a motorized wheelchair takes 35 hours of trained professional 
service time before the power wheelchair is delivered. During the first 
year, the rehab provider can expect to spend another 5 to 6 hours in 
making additional adjustments in the programming and seating of the 
unit. Note that none of these examples include the significant amount 
of effort and time required to submit a claim for home medical 
equipment services under Medicare.
    The next point I want to make is the difference between Medicare 
and the VA Health System when it comes to the DME benefit.
    Medicare is an insurance program just like any private health 
insurance company. It purchases goods and services through private 
providers on a patient-by-patient basis. Medicare fees for DME include 
the costs of all the services associated with the actual product. 
Seventy percent (70 percent) of the home medical equipment service 
providers who serve Medicare beneficiaries are small businesses that 
purchase supplies and equipment on an as-needed basis.
    The VA medical program is conducted by a fully integrated, 
government-owned and operated health system. Manufacturers sell their 
products directly to the VA on a national contract. Under federal law, 
the VA receives the lowest contract price the manufacturer sells it 
products for to any of its customers, regardless of comparative volume.
    More importantly, the VA Health System provides the services 
required for successful outcomes using its existing infrastructure and 
staff. The VA costs sited in the OIG's report reflect the cost of the 
product only and that amount is the lowest price available. Employees 
of the VA do product delivery. Therapists and technicians employed by 
the VA do all evaluations, fittings, patient training and adjustments. 
Respiratory therapists employed by the VA visit veterans requiring 
respiratory medications delivered by nebulizers. Finally, there are no 
billing costs associated with providing DME through the VA Health 
System.
    In order to come up with the true costs of items of DME provided 
through the VA, this Subcommittee would have to amortize all the costs 
of the federal employees working for the agency as well as the costs of 
its vast physical infrastructure. It would then have to determine and 
assign a percentage of these amortized costs to the price paid for each 
item of DME it dispenses. These would be the true costs of DME provided 
through the VA Health System.
    Mr. Chairman, Members of this Subcommittee; let me say again that 
the HME services industry does not object to having a mechanism in 
place to set Medicare fees at inherently reasonable levels. However, we 
do feel strongly that the only way to determine what is inherently 
reasonable is to make reasonable comparisons. It is inherently 
unreasonable to state that Medicare fees for DME are too high based on 
a comparison with what the VA pays for the same products. I believe 
that the OIG has done a disservice to this Subcommittee and, more 
importantly, Medicare providers and beneficiaries by publishing a 
report that is both inaccurate and invalid.
    With all due respect, the OIG report has reached invalid 
conclusions because it has based its findings on an ``apples to 
oranges'' comparison. On behalf of Invacare Corporation and the entire 
HME services industry, I respectfully ask that you reject the report 
the OIG presented today and instruct the Centers for Medicare and 
Medicaid Services to use its inherent reasonableness authority 
judiciously and base all decisions on accurate and appropriate data and 
comparisons.
    Finally, I want to remind each of you that the way Medicare 
administers the DME benefit is the same way DME would be provided to 
each of you, should you need it, under the Federal Employees Benefits 
Program. One fee is paid for quality products AND the associated 
services necessary to achieve the clinical outcome that you and your 
physician would expect. Under Medicare, DME is not a commodity. It is a 
combination of goods and services for which providers have a right to 
be adequately and fairly compensated.
    Thank you for giving me the opportunity to testify this morning and 
I would be happy to answer any questions you may have for me.

    Senator Harkin. Well, thank you. That was a good 
presentation. I listened intently.
    I think my history and my record will show that I take a 
back seat to no one in support of quality of care for people 
with disabilities, but I want you to know I have been down that 
road a lot of times. Again, I would just point out one example, 
and that is oxygen. I cannot tell you how many times I met with 
oxygen suppliers back in the 1990's when we were working on 
this. It is an item that requires services. It requires visits. 
It requires all kinds of things that you just mentioned. And 
they protested loudly that it just could not be cut because of 
all these services that were required for oxygen. We cut it by 
30 percent. We just cut it by 30 percent. Then we put out for 
bids, and they came in and bid 16 percent lower than that for 
oxygen with the services.
    So, again, that example informs me a lot about what might 
be out there. Oxygen is the largest category of medical 
supplies paid for by Medicare. And again, it requires a lot of 
services also.
    Mr. Williams. Mr. Chairman, I believe if you do check in 
Polk County, you will find that there is a reduction in service 
and that the level of professional care is greatly diminished.
    Senator Harkin. If you want to have some input on that, I 
would be glad to take it.
    Mr. Williams. We will provide you with it.
    Senator Harkin. According to GAO, that is not the case. So, 
we have a disagreement there.
    Now, again, I would say, Mr. Williams--and I mentioned this 
earlier--that there are going to be devices, equipment, 
different things that because of a specialized need and 
specialized types of settings are going to require a different 
level of reimbursement. That is why I start at the bottom. We 
do the competitive bidding, and if it requires something 
special, then you have inherent reasonableness to pick it up. I 
understand that there are going to be those kinds of items.
    But you just cannot tell me that it requires some special 
kind of services to teach people how to use a saline solution. 
I am sorry. On these blood glucose monitor strips that they 
bought from Costco, right now they threw in 25 lancets free. 
Medicare is paying for those. They are paying through the nose 
for the strips too.
    You may come and say that there are certain pieces of 
equipment, whether it is motorized wheelchairs and other kinds 
of things that require something different. I will grant you 
that. But you cannot convince me that is true of blood glucose 
test strips, lancets, saline irrigation solution, a walker.
    Mr. Williams. I would disagree with you having had the 
experience of having to use a walker.
    Senator Harkin. Well, I will disagree with you too. I just 
had a brother that had to use a walker, and his services and 
his instruction on how to use it did not come from the people 
who made it. It came from the therapist associated with Mercy 
Hospital in Des Moines who taught him how to use it. It did not 
come from the company. I was there. It was the therapist who 
adjusted it, got it. Medicare paid for the walker. There is no 
doubt about that. I do not know who made the walker.
    Mr. Williams. Medicaid?
    Senator Harkin. Medicare paid for it. But there was not 
anyone from the company coming out doing anything.
    And then pressure pads. There may be some things that are 
associated with services, but I do not think it warrants paying 
three times more than what the VA is paying. Plus, I am also 
informed that in some of these cases where VA is paying for 
these, they are also getting the services. VA pays for them. 
You have a veteran living at home. The services go to that 
veteran. They paid this. They get the same services that a 
Medicare person gets.
    Mr. Williams. They get paid additional. Mr. Chairman, for 
example, if the VA had a--let us take the bed in Iowa and 
because they did not have a distribution center there, they may 
go to a local provider and say, would you deliver a bed to 
Veteran Jones in a small town because he is not close by. They 
will pay the VA price for the bed. They will also pay a 
delivery fee and they will pay a setup fee. They will provide 
additional amounts plus the price of the bed from the fee 
schedule.
    Senator Harkin. We found out that the Department of 
Veterans Affairs, in providing the oxygen, required the same 
services as provided by Medicare, exactly the same. This was 
not some additional add-on. The Veterans Administration said 
here is what we pay for the oxygen, and included in that must 
be all these services. It was not an add-on. And we got a 30 
percent cut in that.
    So, I do not know. Maybe there are some add-ons. I will 
look at it. Maybe the VA says, okay, we will pay for this, but 
then we will pay additional services. But the one that I am 
most familiar with, oxygen, it was the same services.
    Ms. Rogers-Bowers. [Inaudible.]
    Senator Harkin. I am sorry. Would you identify yourself for 
the record please?
    Ms. Rogers-Bowers. My name is Kimberlie Rogers-Bowers and I 
sit on the American Association for Home Care's Regulatory 
Committee. I was also very much part of the review of the GAO 
report when the oxygen was analyzed. Actually with the VA 
study, I understand that there were additional add-ons for the 
portable system and for the portable refills and also a 
delivery charge in some cases.
    Senator Harkin. That may have been just for the portable 
one, maybe. But for the ones in the home, I do not think so.
    Ms. Rogers-Bowers. For the additional portable system, if a 
patient was portable, as well as any refills that the patient 
was receiving, there was an additional add-on for that, as well 
as in some cases delivery charges, which we can pull that 
information and send it to you.
    Senator harkin. Why do you not get that information to me. 
I will be glad to take a look at it.
    [The information follows:]
      Prepared Statement of the American Association for Homecare
    The American Association for Homecare (AAHomecare) submits the 
following testimony to the Senate Subcommittee on Labor, Health and 
Human Services, Education and Related Agencies in response to the 
updated comparison of Medicare payment rates to other payers for 
certain items of durable medical equipment, prosthetics, orthotics and 
supplies (DMEPOS). AAHomecare represents all segments of the homecare 
industry, including providers and suppliers of home health services, 
durable medical equipment (DME) services and supplies, infusion and 
respiratory care services and rehabilitative and assistive 
technologies. Many of the individuals our members serve are Medicare 
beneficiaries.
    In its most recent examination of Medicare payments, the Inspector 
General of the Department of Health and Human Services (HHS) compares 
the Medicare payment rate for sixteen items of DMEPOS with the rates 
paid by the Department of Veterans Affairs (VA), state Medicaid 
programs, retail establishments and the Federal Employee Health Plans 
(FEHPs). The OIG review is a rehash of its previous studies, 
essentially reaching the same conclusions without addressing any of the 
systemic differences between the programs it compares. The OIG contends 
that its conclusions support its previous findings that CMS could 
achieve significant savings by adopting any of the alternative payment 
systems of the four programs listed above. However, in this recent 
comparison--as in the OIG's previous studies--it fails to account for 
the structural differences in the programs and the additional 
administrative costs of providing DMEPOS to Medicare beneficiaries, 
which are described in greater detail below.
  the oig's comparison of medicare to other programs is fundamentally 
                                 flawed
    Comparing the VA to Medicare is like comparing apples to oranges. 
The fundamental differences between the methods used by the VA, 
Medicaid, the FEHP or retail suppliers and Medicare suppliers to 
purchase, deliver and get paid for items of DME and supplies render it 
inappropriate to compare payment rates between them. The industry has 
higher administrative costs when servicing Medicare beneficiaries than 
it does other patient groups. Medicare providers spend a significant 
amount of time and money filing claims for Medicare reimbursement and 
obtaining documentation to support the claim. The differences between 
the Medicare program and the VA have, for example, been recognized by 
the GAO \1\ and the OIG, and the OIG has held that the higher costs of 
servicing Medicare beneficiaries can justify higher charges to Medicare 
by suppliers.\2\ Suppliers must document the medical necessity of each 
claim, obtain a prescription from physicians, often must request 
portions of the beneficiary's medical record to document medical 
necessity and must document proof of delivery. Providers also incur the 
expense of billing and collecting Medicare co-pays and deductibles and 
bear the risk of bad debt.
---------------------------------------------------------------------------
    \1\ Comparison of Medicare and VA Payment Rates for Home Oxygen, 
Letter dated May 15, 1997 from William Scanlon, Director, Health 
Financing and Systems Issues, GAO to William Roth, Chairman of Finance, 
United States Senate.
    \2\ See OIG Advisory Opinion, No. 98-8.
---------------------------------------------------------------------------
    Moreover, VA payment amounts do not reflect the costs for delivery 
of the items because they are absorbed under other parts of the VA 
budget. The VA purchases items directly from manufacturers and 
distributes them to beneficiaries through the VA facility network. 
Unlike most homecare suppliers, the VA can purchase directly from 
manufacturers in large quantities. There are many small homecare 
suppliers that may serve only two or three hundred beneficiaries each 
year. The VA, in contrast, can commit a large volume purchase to a 
manufacturer.
    In contrast, Medicare suppliers provide beneficiaries with services 
and delivery of the items that are not directly reimbursed by the 
Medicare program. Transaction costs for servicing Medicare 
beneficiaries are higher than they are for VA patients because of the 
significant cost of complying with Medicare program rules. Medicare 
suppliers must meet twenty-one supplier standards which include 
maintaining a physical facility, delivering items to the beneficiary, 
providing education to the beneficiary and maintaining a complaint 
resolution procedure.\3\
---------------------------------------------------------------------------
    \3\ See 65 Fed. Reg. 60366 (October 11, 2000).
---------------------------------------------------------------------------
    The OIG attempts to address the disparities between the VA and the 
Medicare program by incorporating a 67 percent mark-up from VA payment 
rates into its analysis. However, this mark-up amount derived by CMS 
bears no relationship to a provider's costs of furnishing DMEPOS items. 
CMS calculated the percentage based on the suggested retail price for 
items in the manufacturers' requests for HCPCS codes spanning over ten 
years. Not only did CMS use stale data, it did not undertake any 
analysis of the costs to providers of participating in the Medicare 
program. The 67 percent figure is arbitrary and should not be given any 
weight as a benchmark for Medicare payment amounts.
 the medicare program can not be directly compared to other public or 
          private insurance programs or retail establishments
    The OIG also compares Medicare payment rates to state Medicaid 
programs, the Federal Employee Health Plans and retail operations. 
These comparisons are equally flawed because they compare Medicare to 
drastically different health care delivery models.
  --Medicaid programs vary widely by state and it is therefore 
        imprecise to compare Medicare reimbursement rates to an 
        amalgamation of Medicaid rates. For instance, some Medicaid 
        programs have large participation by managed care companies. In 
        addition, many Medicaid programs offer a simpler, more 
        predictable administrative framework which include mechanisms 
        like prior approval which streamlines the reimbursement process 
        and guarantees that the supplier will be paid for the items it 
        provides.
  --Many Medicaid programs have regional concerns that affect the 
        payment for DMEPOS in that state. For instance, the Wisconsin 
        Department of Health and Family Services recently responded to 
        an investigation by the Office of Inspector General (OIG) for 
        the Department of Health and Human Services (HHS) that found 
        that the Wisconsin Medicaid program could save money by 
        reducing its reimbursement rates for oxygen to the Medicare 
        rate. In refusing to accept the OIG's recommendations, the 
        Department stated: ``while we agree with your conclusion that 
        Wisconsin Medicaid pays more than the Medicare rate, we 
        disagree with the recommendation that we reduce our payment 
        level to match Medicare. It remains our belief that such a 
        reduction would result in the refusal of providers to serve 
        Medicaid clients. It should be noted that many of the fiscal 
        disparities that resulted from the 1997 Balanced Budget Act 
        have been identified as causing a loss of providers, and that 
        many of those limitations have since been rescinded. Therefore, 
        we intend to maintain the level of reimbursement that we 
        believe is appropriate for our state.'' \4\
---------------------------------------------------------------------------
    \4\ Department of Health and Human Services Office of Inspector 
General, Review of Medicaid Payment Amounts for Oxygen Related Durable 
Medical Equipment And Supplies, Wisconsin Department of Health and 
Family Services, Madison Wisconsin, October 2001; A-05-01-00031, (OIG 
Study).
---------------------------------------------------------------------------
  --Retail prices do not account for the services associated with 
        delivering DMEPOS items to Medicare beneficiaries. The service 
        levels for retail or internet suppliers are extremely low or 
        nonexistent when compared to those of Medicare suppliers. 
        Medicare suppliers provide many additional services as part of 
        delivering items to a beneficiary including patient education, 
        clinical monitoring and care management. Medicare suppliers are 
        required to meet twenty-one supplier standards, which include 
        requiring a supplier to deliver items to a Medicare 
        beneficiary, while retail customers must pick-up their items. 
        These additional costs are not accounted for in the OIG report. 
        Importantly, however, even considering the disparity in 
        services levels between Medicare DMEPOS suppliers and retail 
        establishments, the OIG found that the Medicare median is 
        actually lower than the retail median for six of the sixteen 
        items examined, with an additional four items having only a 
        nominal price discrepancy.
  --The OIG's comparison of Medicare payment to the Federal Employees 
        Health Benefits Plan (FEHB) is flawed because it compares two 
        drastically different health care delivery models. FEHB is a 
        health insurance program that includes many managed care 
        companies. Managed care entities typically contract with 
        suppliers for negotiated rates and guarantee a certain number 
        of enrollees in return for the contracted rate. The 
        administrative burden of servicing managed care enrollees is 
        lower than dealing with the Medicare program. Generally, 
        enrollees in these kinds of plans have more limited choices of 
        suppliers than do Medicare beneficiaries. Managed care 
        companies offer streamlined processes like prior approval which 
        reduces the days sales outstanding, and the burdens of 
        certifying medical necessity and collecting reimbursement.
  neither competitive bidding nor inherent reasonableness are viable 
             payment methodologies for the medicare program
    The OIG has advocated the use of competitive bidding or inherent 
reasonableness as a method for reducing the prices that Medicare pays 
for certain DMEPOS items. Neither of these methodologies, however, 
accurately account for the full range of services associated with 
delivering the items to Medicare beneficiaries. In addition, both 
payment methodologies have serious structural and procedural flaws 
which would need to be addressed prior to CMS implementation.
    The competitive bidding demonstration prices are a result of an 
artificially manipulated marketplace and therefore do not accurately 
reflect DMEPOS payment amounts that will sustain the level of services 
currently given Medicare beneficiaries. Although the four items 
analyzed by the OIG that were subject to the competitive bidding 
demonstrations achieved savings, it is too soon to fully understand the 
effect that these reductions will have on beneficiary access to 
critical services and choice of products. Competitive bidding may 
significantly reduce the services available to Medicare beneficiaries 
in the demonstration area. In fact, even CMS' in its January 2001 
report ``Evaluation of Medicare's Competitive Bidding Demonstration for 
DMEPOS, First Year Annual Evaluation Report'' acknowledged that 
``[a]lthough we have learned a number of lessons from the evaluation so 
far, we caution that it is premature to make final conclusions about 
the long-term impact of the demonstration on many of the evaluation 
issues.''
    It is premature to make any economic assumptions based on the 
minimal amount of data coming out of the limited demonstration project. 
The costs of administering a national competitive bidding program are 
likely to offset any savings to the program. In addition to the 
reduction in services, competitive bidding would result in the 
elimination of small DMEPOS providers. This will result in a dearth of 
bidders when it is time to update or renew the bidding process. As a 
result, bid prices are likely to rise and patient choice is likely to 
diminish as more suppliers are eliminated.
    CMS' use of IR authority is equally ill-advised given the serious 
procedural missteps in implementing the authority. CMS published an 
interim final rule with comment period in January 1998 implementing the 
authority granted in the Balanced Budget Act of 1997 (BBA 97). CMS did 
not respond to any of the comments submitted. Later that year, CMS 
issued a proposal to cut payments for eight groups of products. CMS 
issued another proposal for an additional round of cuts in August of 
1999. Congress subsequently suspended CMS' IR authority pending a GAO 
study on the issue and the publication of a final rule.
    The GAO report raised serious shortcomings regarding CMS' use of 
its inherent reasonableness authority including that CMS' data 
collection was not consistent and did not set out sufficient criteria. 
Because of the considerable amount of time that has passed since the 
initial rule was released and CMS' failure to respond to the comments 
submitted pursuant to the interim final rule, CMS should release a new 
inherent reasonableness rule for comment to allow a fair and full 
administrative process. In addition, prior to using inherent 
reasonableness, CMS needs to develop a process to ensure that any data 
used is statistically valid market data, develop a sound methodology 
and ensure an appeal mechanism for review.
                               conclusion
    In conclusion, Medicare payments should not and cannot be compared 
to the payments of the Department of Veterans Affairs, retail 
establishments or other private or public insurance programs because of 
the disparities inherent in the different health care delivery models. 
CMS should not use competitive bidding or inherent reasonableness to 
adjust payments until the procedural flaws in those methodologies are 
addressed.

    Senator Harkin. Well, I hear you and I understand that 
suppliers have an intense interest in this. I understand that. 
And I want to make sure we get quality products too. But the 
fact is we went from $23 billion where the GAO estimates that 
we were spending down to about $12 billion in cutting a lot of 
these things out. Quite frankly, I have not heard any hew and 
cry from Medicare beneficiaries anywhere in this country that 
they are getting less services or less quality than what they 
got before.
    I just think we need to tighten down on it a little bit 
more, and the administration agrees with competitive bidding. 
But I believe there ought to be inherent reasonableness to 
address the specific kinds of concerns that you have to make 
sure that those anomalies that might be out there or specific 
things that might require some special additional types of 
things are addressed. That is why I wanted to make it clear 
this morning in my questioning of the administration people, 
especially GAO, that they were not saying that with competitive 
bidding they could do without inherent reasonableness. I do not 
believe so. I believe it has got to be there.
    But I am sure you saw my example earlier where I said you 
can take inherent reasonableness from the top down or from the 
bottom up. I think it ought to be from the bottom up. That is 
just my opinion after working on this for 12 years.
    Mr. Williams. Mr. Chairman, I do not disagree with what you 
are saying. As long as IR is based on validated and valid 
comparisons, and as an industry, we do not even disagree on the 
issue of competitive bidding, so long as it is true competitive 
bidding where you can make reasonable business decisions and 
accurate business projections.
    Senator Harkin. Do you also agree we ought to have UPN's on 
every item?
    Mr. Williams. Mr. Chairman, I do. We as a company do 
because you can get more information.
    Senator Harkin. You and I agree on that.
    Mr. Williams. For example, that K0011 code, I mean, golly, 
geez, within that product alone, you are getting information on 
a code. For example, you were giving comparative information. 
We do not know whether they were comparing it for all the high-
end products or what.
    Senator Harkin. That is right.
    Mr. Williams. So, with the UPN's you are going to get that.
    Senator Harkin. That is right.
    Mr. Williams. I really do believe that, and as a company we 
put it on everything anyhow because we have to. The VA requires 
it.
    Senator Harkin. I have to get from CMS what the cost would 
be associated with that. They indicated some costs. He did not 
know. But I believe that is something else that we are going to 
have to enact in legislation, that is a requirement of a UPN 
code on every single device. The technology is there. They can 
keep data storage systems for information like that. It is 
easy. So, I do not see why they cannot do it. That way we would 
have a better handle and better knowledge in comparisons of 
what we are talking about. I think that would better enable 
them to use inherent reasonableness also to address some of the 
issues you brought up.
    Mr. Williams. I agree.
    Senator Harkin. Thank you very much. I appreciate it, Mr. 
Williams.
    Mr. Williams. Thank you for your time, Mr. Chairman.
    Senator Harkin. Thank you for being here.

                        STATEMENT FOR THE RECORD

    We have received the statement of the Advanced Medical 
Technology Association that will be made part of the hearing 
record.
    [The statement follow:]
     Prepared Statement of Advanced Medical Technology Association
    The Advanced Medical Technology Association (AdvaMed) is the 
largest medical technology trade association in the world, representing 
more than 800 medical device, diagnostic products, and health 
information systems manufacturers of all sizes. AdvaMed member firms 
provide nearly 90 percent of the $68 billion of health care technology 
products purchased annually in the United States and nearly 50 percent 
of the $159 billion purchased annually around the world.
    AdvaMed is pleased to present this written testimony on behalf of 
our member companies and the patients they serve. We understand 
Congress' and the Inspector General's concern regarding the differences 
in purchase prices between various government and private programs. 
However, we are troubled that the Office of the Inspector General (OIG) 
failed to use a rigorous study methodology that would adequately assess 
Medicare payment levels for the 16 products it reviewed. In fact, the 
OIG report stated: ``This limited study was not designed to meet the 
rigorous inherent reasonableness standards for revising Medicare 
payment rates as defined by Section 4316 of the Balanced Budget Act of 
1997.''
    AdvaMed supports the goal of seeking greater economy and efficiency 
in Medicare payment programs. We believe this is in the best interest 
of patients, the medical device industry, and the U.S. economy as a 
whole. However, we believe that there are important distinctions 
between Medicare, the Veterans Administration (VA), private insurers, 
and retail sales that Congress must recognize in assessing the various 
pricing structures. These differences deserve careful consideration 
before new mandates are imposed on Medicare.
    To address any overpayments for medical supplies, we recommend that 
the Centers for Medicare and Medicaid Services (CMS) issue a new notice 
of proposed rulemaking with a comment period to describe the 
implementation of its inherent reasonableness (IR) authority, including 
provisions for conducting valid market surveys. With an open, 
collaborative, transparent, and responsive IR process, experimental 
approaches to cut payments, such as competitive bidding, would be 
unnecessary.
           comparing medicare to the veterans administration
    The OIG's June 2002 report ``Price Comparisons for 16 Medical 
Equipment and Supply Items'' reviews the difference in payment levels 
between Medicare and the VA for medical supplies. In comparing the 
payment values, we must also consider the significant differences 
between the two programs. The Medicare program is a health insurance 
payment program that is structured to pay for services provided by 
physicians, hospitals, suppliers, and other facilities, practitioners, 
and providers. Medicare does not directly provide any health-related 
services. The VA, however, is a direct provider of services through its 
hospitals and clinics. That difference is critical; and it directly 
affects the prices that suppliers can offer in at least five separate 
ways.
    First, the VA itself provides some of the services that would 
otherwise be the responsibility of the supplier. As a direct provider, 
the VA offers storage, delivery, training, and other product-related 
services directly to veterans. As a result, since the suppliers do not 
need to offer these services, these costs are not factored into the 
prices of the products that the VA purchases. On the other hand, 
products reimbursed under Medicare must include the costs for these 
additional services so that beneficiaries can receive and appropriately 
utilize the products.
    Second, there are billing efficiencies in supplying a program that 
is a direct central purchaser, rather than a reimbursement program. As 
you know, the VA includes a relatively fixed number of dedicated 
hospitals, clinics and patients, compared to the Medicare program. As a 
result, the VA can manage the contracting process centrally, and enter 
into exclusive contracts with suppliers. Even though the program is 
smaller than Medicare, the VA is large enough that its central 
contracts provide high volume, predictable purchase agreements, and 
one-step billing. That reduces the supplier's cost of administering the 
account. In contrast to the VA, Medicare cannot contract centrally for 
direct purchases because it is fundamentally set up to reimburse. Even 
the competitive bidding proposals we have seen in Congress to date, 
while they attempt to arrive at one price, do not change the program to 
a direct provider approach and therefore do nothing to make the 
paperwork associated with a reimbursement system more efficient. Thus, 
even competitive bidding would not change the economics of serving the 
Medicare market, and in fact could make it more expensive.
    Third, compliance costs are less with the VA. Medicare must pay 
providers to document the receipt and delivery of the product to the 
patient, the physician's order, the patient's diagnosis, treatment plan 
and anticipated course of the patient's disease.
    Fourth, carrying costs are greater for Medicare. Medicare claims 
are paid months after the product is delivered to a patient, making 
Medicare transactions significantly more costly than those with the VA. 
For example, enteral nutrition is typically ordered for a patient 
during one month, and provided to the patient during the subsequent 
month. In the third month, documentation and claims paperwork for the 
preceding month is filed with the DMERC. Receipt of payment may be four 
months or more after the product is first purchased by the supplier.
    Lastly, the OIG's study does not directly compare the same products 
in its analysis because the VA tends to buy different, less expensive 
products. Also, where products differ widely but share the same code, 
the VA can choose to contract for bulk supplies of the product that 
offers fewer features in the range of products available--yielding 
lower prices.
                comparing medicare to other care systems
    The Medicare program is not comparable to Medicaid or private 
insurers. One of the differences is the scope of the programs. Medicaid 
and private insurers have a much smaller population, with different 
characteristics from Medicare beneficiaries, a limited area, and the 
ability to develop purchasing relationships with local facilities, 
practitioners, providers, and suppliers.
    The OIG study's methodology provides anecdotal, not statistically 
valid information comparing Medicare reimbursement to other payers, and 
likely overestimates the actual savings. In establishing the ``median 
retail price,'' the OIG surveys only ten suppliers, but then simply 
extrapolates the results to apply to over a hundred thousand suppliers. 
For example, even if all ten suppliers surveyed provide blood glucose 
equipment and supplies, this would not be a statistically significant 
sample to predict nationwide for the nearly 20,000 blood glucose 
suppliers. We are concerned that these unscientific approaches can lead 
to inappropriate policy and a chilling effect on Medicare 
beneficiaries' access to medical technology.
           comparing apples to oranges--the oig's use of data
    The OIG's study references CMS's mark-up of 67 percent over the 
wholesale price, presented in CMS's August, 1999 proposed inherent 
reasonableness notice for selected products. The OIG reports that CMS 
developed this 67 percent mark-up by comparing wholesale prices to 
suggested retail prices, provided in coding applications. However, 
CMS's methodology for developing that mark-up amount did not account 
for many costs unique to Medicare, not the least of which is the cost 
of billing under the Medicare program.
    Also, market wholesale prices are significantly different from the 
wholesale prices paid by the VA. To do business with the VA, its 
regulations require manufacturers to discount their wholesale prices 
(if they provide wholesale pricing) or substantially discount their 
list prices, below any other customer. The 67 percent amount 
significantly underestimates the difference in costs between providing 
products to the VA and to other purchasers, including Medicare 
providers and suppliers.
   achieving appropriate payments--inherent reasonableness authority
    AdvaMed supports the goal of seeking greater economy and efficiency 
in Medicare payment programs, and believes CMS has the authority 
necessary to make appropriate payment changes. The Balanced Budget Act 
(BBA) of 1997 included provisions to streamline the procedures that the 
CMS and its carriers must follow in using the inherent reasonableness 
process to adjust Medicare payment levels.
    This authority, however, must be used in a predictable and valid 
way and many concerns have been raised about CMS' implementation of it. 
The lack of a valid approach to assessing the inherent reasonableness 
and in proposing new reimbursement rates for certain durable medical 
equipment (DME) products, led the General Accounting Office (GAO), in 
2000, to recommend that CMS: ``develop and implement a more structured 
survey design, including sample selection, survey instrumentation, and 
data collection methods, and ensure that the design is consistently 
used by all entities conducting the survey.'' GAO also recommended that 
CMS:
  --in its final rule implementing the inherent reasonableness process, 
        ``define with sufficient clarity the terms grossly excessive, 
        and grossly deficient''
  --``collect and analyze additional information to more precisely 
        estimate any payment reductions for glucose test strips, 
        albuterol sulfate, and enteral formulas, as well as for 
        additional payment reductions in subsequent years for lancets, 
        eyeglass frames, latex Foley catheters, and catheter insertion 
        trays without drainage bags''
  --monitor indicators that could signal potential problems with 
        patient access to the product groups for which it is reducing 
        maximum payments, and act quickly to rectify any problems that 
        arise.
    Under the Balanced Budget Refinement Act (BBRA) of 1999, Congress 
not only mandated the GAO study, but also prohibited IR implementation 
until final regulations were published. The House and Senate Conference 
Agreement specifically stated that IR authority ``should be 
administered judiciously and applied only after public concerns and 
suggestions about proposed administrative criteria have been openly 
addressed.'' Since more than three years have passed, we believe that 
the best way to accomplish this is through a new notice of proposed 
rulemaking.
    AdvaMed has been working with Congress and the Administration for 
many years to assure the appropriate implementation of CMS's inherent 
reasonableness authority. A new notice of proposed rulemaking on the 
use of inherent reasonableness authority should permit a meaningful 
exchange of comments on CMS's position, and address the following 
concerns:
  --CMS should base its IR determination on an analysis of the 
        marketplace for the items and services under review using 
        statistically valid market data and sound methodology.
  --CMS should use the higher due process procedures specified in 
        existing regulations if payment levels are proposed to be 
        changed by more than 15 percent in any period less than five 
        years.
  --CMS should use national-level due process procedures when two or 
        more local carriers acting in concert or any regional carrier 
        make a determination that a reduction is necessary.
  --CMS should improve the process for making changes of less than 15 
        percent in any period less than five years. * CMS should 
        provide an appeals mechanism for review.
    The Small Business Administration (SBA) had similar concerns 
regarding CMS's implementation of the BBA 1997 IR authority, especially 
its impact on small business. In a 1998 letter to the CMS 
Administrator, the SBA said: ``If Congress intended for HCFA [CMS] to 
skirt the notice and comment requirements when the reduction exceeds 15 
percent, Congress probably would not have bothered to put in any notice 
and comment requirements in the first place.'' Further, the SBA 
asserted that CMS should use notice and comment even in reductions of 
less than 15 percent, arguing that BBA 1997 is silent on the matter: 
``Since the language in the BBA did not specify or require that HCFA 
[CMS] should bypass notice and comment when the fee reduction falls 
below 15 percent, the office of Advocacy believes that HCFA [CMS] 
should subject such reductions to notice and comment as a matter of 
good administrative policy.''
    AdvaMed seeks to work with Congress and the Administration to 
ensure that CMS's processes for implementing pricing programs must be 
open, transparent, collaborative, and responsive.
                      competitive bidding concerns
    In an effort to address payments for medical supplies, the BBA of 
1997 also included a demonstration project to test out the feasibility 
of using competitive bidding methodologies. In reviewing the short 
duration of the competitive bidding demonstrations, the IG report 
quotes an estimated savings from price cuts of 17 percent under the 
Polk County, Florida competitive bidding demonstration projects. We 
believe that this amount overstates the actual savings to Medicare, and 
that there are many procedural problems raised by this demonstration 
project.
    The projects in Florida and Texas have not yet generated a working 
model that can be replicated for other geographic areas and for other 
products. It is not known how competitive bidding will impact patient 
access to the latest life-saving and life-enhancing medical 
technologies. Nor have the full costs of the effort been determined, 
including those associated with the significant administrative 
infrastructure, system changes, and physician, beneficiary and provider 
education activities that are required in a venture of this sort. These 
costs are likely to cut deeply into the savings derived from the 
bidding process. And, according to CBO testimony before the Senate 
Finance Committee in 1999, ``potential savings will erode over time.''
    The IG study methodology oversimplified and combined price 
reductions under IR and competitive bidding. AdvaMed believes that it 
is inappropriate and unnecessary to combine these approaches. With 
appropriate implementation of IR authority, competitive bidding is 
unnecessary.
                               conclusion
    AdvaMed looks forward to working with Congress and the 
Administration on ways to achieve greater economy and efficiency in 
Medicare payment programs. Unfortunately, the OIG's study does not 
provide helpful information for achieving this goal. The purchasing and 
pricing of certain DME products by the Veterans Administration for the 
provision of services to veterans is not applicable to Medicare in its 
role as a payer of services. And, the data used by the OIG are 
inadequate to support the study's broad conclusions.
    AdvaMed supports the use of IR authority in a predictable, open and 
transparent fashion to correct any Medicare overpayments or 
underpayments. AdvaMed remains concerned about the effectiveness of 
competitive bidding models in general and believe it is premature to 
apply competitive bidding nationwide. We recommend that CMS issue a new 
notice of proposed rulemaking with comment period to fully describe its 
inherent reasonableness authority, including conducting valid market 
surveys, and instituting due process procedures.

                         CONCLUSION OF HEARING

    Senator Harkin. Thank you all very much for being here, 
that concludes our hearing.
    [Whereupon, at 11:32 a.m., Wednesday, June 12, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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