a

GAO

United States Government Accountability Office

Report to Congressional Committees

September 2004 MEDICARE

Past Experience Can 

Guide Future 

Competitive Bidding 

for Medical Equipment 

and Supplies 

GAO-04-765
www.gao.gov/cgi-bin/getrpt?GAO-04-765.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Leslie G. 

Aronovitz at (312) 220-7600. 

Highlights of GAO-04-765, a report to 

congressional committees. 

September 2004

MEDICARE

Past Experience Can Guide Future 

Competitive Bidding for Medical 

Equipment and Supplies 

The Medicare Prescription Drug, 

Improvement, and Modernization 

Act of 2003 (MMA) requires the 

Centers for Medicare & Medicaid 

Services (CMS) to conduct largescale competitive bidding for 

durable medical equipment, 

supplies, off-the-shelf orthotics, 

and enteral nutrients and related 

equipment and supplies provided to 

beneficiaries. The Balanced Budget 

Act of 1997 mandated that GAO 

study an earlier Medicare 

competitive bidding demonstration. 

To address this mandate, GAO 

assessed this past experience in 

relation to four issues that CMS 

might consider as it implements 

large-scale competitive bidding: 

(1) items for competitive bidding, 

(2) how to streamline 

implementation, (3) ways to collect 

information on specific items 

provided to beneficiaries, and 

(4) steps to ensure quality items 

and services. 

GAO is making several 

recommendations to CMS 

concerning competitive bidding, 

including recommendations on 

ways to increase potential savings, 

streamline implementation, help 

ensure that Medicare is paying 

appropriately for items, and 

promote beneficiary satisfaction. 

CMS agreed with most of our 

recommendations and indicated 

that it would give serious 

consideration to this report 

throughout development and 

implementation of national 

competitive bidding. 

CMS’s experience in the Medicare competitive bidding demonstration may 

prove instructive as the agency implements provisions in MMA to conduct 

large-scale competitive bidding for durable medical equipment, supplies, offthe-shelf orthotics, and enteral nutrients and related equipment and supplies. 

The experience gained during the demonstration provides insight as the 

agency considers four implementation issues: 

• Items for competitive bidding. Items for competitive bidding could 

include those selected for the demonstration and others that account for 

high levels of Medicare spending. For example, nondemonstration items 

that CMS could choose for competitive bidding include power 

wheelchairs and lancets and test strips used by diabetics. In 2002, these 

three items accounted for about $1.7 billion in charges for the Medicare 

program and its beneficiaries. 

• How to streamline implementation. Because of the large scale of 

future competitive bidding, it will be prudent for CMS to consider ways 

to streamline implementation. Two ways to streamline are developing a 

standardized competitive bidding approach that can be replicated in 

multiple geographic locations and using mail-order delivery for selected 

items, with uniform fees established through a nationwide competition. 

• Ways to collect information on specific items provided to 

beneficiaries. Gathering specific information on competitively bid 

items provided to beneficiaries could help ensure that suppliers do not 

substitute lower-priced items to reduce their costs. Currently, CMS is 

not able, or does not routinely, collect specific information on the items 

that suppliers provide to beneficiaries. 

• Steps to ensure quality items and services for beneficiaries.

Routine monitoring could help ensure that beneficiaries continue to have

access to suppliers that deliver quality items and services. The agency, 

when implementing significant Medicare changes in the past that 

affected payment methods, has lacked information on how the changes 

affected beneficiary access. As competitive bidding expands, small 

problems could be potentially magnified. Using quality measures to 

choose multiple suppliers and having suppliers meet more detailed 

standards than are currently required can also help ensure quality for 

beneficiaries. 
Page i GAO-04-765 Medicare Competitive Bidding

Contents

Letter 1

Results in Brief 4

Background 5

CMS’s Experience Can Guide Agency Efforts to Implement 

Competitive Bidding 10

Conclusions 20

Recommendations for Executive Action 21

Agency Comments and Our Evaluation 21

Appendixes

Appendix I: Scope and Methodology 24

Appendix II: Medicare’s 21 Standards for Medicare Suppliers of DME, 

Prosthetics, Orthotics, and Supplies 26

Appendix III: Comments from the Centers for Medicare & Medicaid 

Services 28

Tables Table 1: Product Groups Included in the Demonstration’s Two 

Locations 8

Table 2: Product Groups Representing the Highest Medicare 

Spending in 2002 for DME, Prosthetics, Orthotics, and 

Supplies 11

Table 3: Standards for Medicare Suppliers of DME, Prosthetics, 

Orthotics, and Supplies 26
Contents

Page ii GAO-04-765 Medicare Competitive Bidding

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.

Abbreviations

AWP average wholesale price

BBA Balanced Budget Act of 1997

CMS Centers for Medicare & Medicaid Services

DME durable medical equipment 

HCFA Health Care Financing Administration 

HCPCS Healthcare Common Procedure Coding System 

HHS Department of Health and Human Services 

MMA Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 

MSA metropolitan statistical area 

OIG Office of Inspector General 

SADMERC statistical analysis durable medical equipment regional carrier 
Page 1 GAO-04-765 Medicare Competitive Bidding

United States Government Accountability Office

Washington, D.C. 20548

A

September 7, 2004 Letr

The Honorable Charles E. Grassley 

Chairman

The Honorable Max Baucus

Ranking Minority Member

Committee on Finance

United States Senate

The Honorable Joe Barton

Chairman

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce

House of Representatives

The Honorable William M. Thomas

Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means

House of Representatives

In 2002, the Medicare program and its beneficiaries paid almost $9.7 billion 

for durable medical equipment (DME), prosthetics, orthotics, and 

supplies.1 For most of these items, Medicare payment rates are not based 

on current market prices, but are primarily based on historical charges 

from the mid-1980s, adjusted for inflation in some years.2

 The Centers for 

1

 Medicare guidance defines DME as equipment that serves a medical purpose, can 

withstand repeated use, is generally not useful in the absence of an illness or injury, and is 

appropriate for use in the home. DME includes items such as wheelchairs, hospital beds, 

and walkers. Medicare defines prosthetic devices (other than dental) as devices that are 

needed to replace body parts or functions. Prosthetic devices include artificial limbs and 

eyes, enteral nutrition, ostomy bags, and cardiac pacemakers. Medicare defines orthotic 

devices to include leg, arm, back, and neck braces that provide rigid or semirigid support to 

weak or deformed body parts or restrict or eliminate motion in a diseased or injured part of 

the body. Medicare-reimbursed supplies are items that are used in conjunction with DME 

and are consumed during the use of the equipment, such as drugs used for inhalation 

therapy, or need to be replaced frequently (usually daily), such as surgical dressings. 

2

 Prior to 1998, these payment rates were adjusted each year using formulas tied to the 

Consumer Price Index. Since 1998, payment rates have been updated in some years, but not 

others. 
Page 2 GAO-04-765 Medicare Competitive Bidding

Medicare & Medicaid Services (CMS)—formerly called the Health Care 

Financing Administration (HCFA)3

—lacked mechanisms to readily adjust 

payment rates to reflect marketplace changes. As a result, disparities arose 

between Medicare payment rates and market prices. As we and the 

Department of Health and Human Services’ (HHS) Office of Inspector 

General (OIG) have reported, the Medicare program and its beneficiaries 

have been paying too much for some items of DME, prosthetics, orthotics, 

and supplies—sometimes three or four times the amount paid by others.4

 

In addition to increasing program costs, inflated payment rates increase 

beneficiaries’ costs because beneficiaries are responsible for 20 percent of 

the Medicare rate as coinsurance.

The Balanced Budget Act of 1997 (BBA)5 required CMS to test competitive 

bidding as a new way for Medicare to set fees for part B6 items and services 

specified by CMS.7,8 Competitive bidding provides incentives for suppliers 

to lower their prices for items and services to retain their ability to serve 

Medicare beneficiaries and potentially increase their market share. Using 

its authority under BBA, CMS conducted a competitive bidding 

demonstration to set Medicare part B payment rates for selected DME, 

prosthetics, orthotics, and supply items. The demonstration and CMS’s 

authority to conduct competitive bidding ended on December 31, 2002. In 

December 2003, the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) required CMS to conduct competitive 

3

 HCFA’s name was changed to CMS as of July 1, 2001. We use the name CMS throughout 

this report.

4

 Janet Rehnquist, Inspector General, Department of Health and Human Services, Medicare 

Reimbursement for Medical Equipment and Supplies, testimony before the Senate 

Committee on Appropriations, Subcommittee on Labor, Health and Human Services, and 

Education, 107th Cong., 2nd sess., Washington, D.C., June 12, 2002; GAO, Medicare: 

Payments for Covered Outpatient Drugs Exceed Providers’ Cost, GAO-01-1118

(Washington, D.C.: Sept. 21, 2001); and GAO, Medicare: Home Oxygen Program Warrants 

Continued HCFA Attention, GAO/HEHS-98-17 (Washington, D.C.: Nov. 7, 1997).

5

 Pub. L. No. 105-33, § 4319(a), 111 Stat. 251, 392 (1997). 

6

 Medicare part B helps pay for certain physician, outpatient hospital, laboratory, and other 

services.

7

 While the statute required HHS to test competitive bidding, CMS administers the Medicare 

program and was responsible for testing competitive bidding. 

8

 Physician services were not included in the authority to conduct competitive bidding. 
Page 3 GAO-04-765 Medicare Competitive Bidding

bidding for DME, supplies, off-the-shelf orthotics, and enteral nutrients and 

related equipment and supplies on a large scale.9

 

BBA also mandated that GAO study the effectiveness of the Medicare 

competitive bidding demonstration.10 To address this mandate, as 

discussed with the committees of jurisdiction, we assessed four issues that 

CMS might consider as it implements MMA provisions for competitive 

bidding, given its prior demonstration experience. The four issues are 

(1) items to be chosen for competitive bidding, (2) how to streamline 

implementation, (3) ways to collect information on specific items provided 

to beneficiaries, and (4) steps to ensure quality items and services to 

beneficiaries. 

In preparing this report, we reviewed documents related to the competitive 

bidding demonstration for DME, prosthetics, orthotics, and supplies 

provided under Medicare part B. These included evaluations of the 

demonstration.11 Two evaluation reports on the demonstration have been 

published,12 and a final report is pending. We also conducted interviews 

with officials from CMS, the contractor that administered the 

demonstration, and its evaluators. We analyzed claims data on Medicare 

9

 Pub. L. No. 108-173, § 302(b), 117 Stat. 2066, 2224. While the statute requires HHS to 

conduct the competitive bidding program, CMS administers the Medicare program and is 

responsible for implementing the program and establishing quality standards for suppliers 

of DME, prosthetics, orthotics, and supplies.

10 BBA, § 4319(c), 111 Stat. 394. 

11 BBA required that HHS evaluate the competitive bidding demonstration for its impact on 

Medicare program payments, beneficiary access to care, quality, and diversity of product 

selection. BBA, § 4319(a), 111 Stat. 393. In 1998, CMS contracted with the University of 

Wisconsin-Madison to conduct an independent evaluation of the demonstration. The 

evaluation team consisted of researchers from the University of Wisconsin-Madison, the 

Research Triangle Institute, and Northwestern University.

12 University of Wisconsin-Madison, Center for Health Systems Research and Analysis; 

Research Triangle Institute, Center for Economics Research; and Northwestern University, 

Institute for Health Services Research and Policy Studies, Evaluation of Medicare’s 

Competitive Bidding Demonstration for DMEPOS: First-Year Annual Evaluation Report 

(Baltimore, Md.: Centers for Medicare & Medicaid Services, September 2000, Revised 

January 2001), and University of Wisconsin-Madison, Center for Health Systems Research 

and Analysis; Research Triangle Institute—Health, Social, and Economics Research; and 

Northwestern University, Institute for Health Services Research and Policy Studies, 

Evaluation of Medicare’s Competitive Bidding Demonstration for DMEPOS: Second-Year 

Annual Evaluation Report (Baltimore, Md.: Centers for Medicare & Medicaid Services, 

April 2002). 
Page 4 GAO-04-765 Medicare Competitive Bidding

spending for DME, prosthetics, orthotics, and supply items. To determine 

that these data were accurate, timely, and complete, we interviewed the 

CMS contractor that provided the data and reviewed CMS’s internal control 

procedures. Where appropriate, we tested data manually against published 

sources for consistency. We determined that these data were sufficiently 

reliable for addressing the issues in this report. We solicited feedback on 

item selection and quality assurance steps from medical directors at the 

four DME regional carriers.13 We also interviewed representatives from 

advocacy groups and industry. Appendix I includes a more detailed 

discussion of our scope and methodology. Our work was conducted from 

February 2003 through August 2004 in accordance with generally accepted 

government auditing standards. 

Results in Brief As CMS moves forward with its new competitive bidding effort, the 

experience it gained during the demonstration can provide insights as the 

agency considers four implementation issues. First, items to be chosen for 

competitive bidding could include those in the demonstration and others 

that account for high levels of Medicare spending. By selecting items with 

high overall Medicare spending for the competitive bidding demonstration, 

the agency achieved estimated gross savings of $8.5 million for the 

Medicare program and its beneficiaries. Second, because of the large scale 

of future competitive bidding, it will be prudent to consider ways to 

streamline implementation. Such streamlining approaches could include 

developing a standardized competitive bidding approach for multiple 

locations that builds on practical experience from the demonstration and 

using mail-order delivery for selected items included in a nationwide 

competition. Third, identifying approaches to collect better information on 

the specific items provided to beneficiaries would help ensure that 

Medicare is paying appropriately for items. Fourth, once implementation of 

competitive bidding begins on a large scale, routine monitoring could help 

ensure that beneficiaries’ access to quality items and services is not 

compromised. To assist CMS in future efforts to conduct competitive 

bidding for DME, off-the-shelf orthotics, supplies, and enteral nutrients and 

related equipment and supplies, we are making recommendations on 

13 Medicare pays contractors to administer its fee-for-service claims. The contractors 

responsible for processing most part B claims are called carriers. In October 1993, CMS 

began processing all Medicare part B claims for DME, orthotics, prosthetics, and supplies 

through DME regional carriers. Each of the four DME regional carriers serves a separate 

region of the country. 
Page 5 GAO-04-765 Medicare Competitive Bidding

selecting products, using mail-order delivery as a mechanism to implement 

a national competitive bidding strategy, obtaining more detailed 

information on products provided to beneficiaries, and monitoring 

beneficiary satisfaction. CMS agreed with most of our recommendations 

and stated that it would give serious consideration to this report 

throughout the development and implementation of national competitive 

bidding.

Background Medicare is a federal program that helps pay for a variety of health care 

services and items on behalf of about 41 million elderly and disabled 

beneficiaries. Medicare part B covers DME for the beneficiary’s use in the 

home, prosthetics, orthotics, and supplies if they are medically necessary 

and prescribed by a physician. Part B also covers certain outpatient 

prescription drugs that are used with DME or that are not usually selfadministered by the patient. Some of these drugs are classified as supplies. 

Medicare Payment for DME, 

Prosthetics, Orthotics, and 

Supplies

In submitting claims for Medicare payment, suppliers use codes in the 

Healthcare Common Procedure Coding System (HCPCS) to identify DME, 

prosthetics, orthotics, and supplies that they are providing to beneficiaries. 

These codes are used for health insurance billing purposes to identify 

health care services, equipment, and supplies used in beneficiaries’ 

diagnoses and treatments. Individual HCPCS codes used by suppliers can 

cover a broad range of items that serve the same general purpose, but vary 

in price, characteristics, and quality. The HCPCS National Panel, a group 

composed of CMS and other insurers, maintains the HCPCS codes. 

Medicare uses a variety of methodologies, which are specified in law, for 

determining what it will pay for specific types of DME, prosthetics, 

orthotics, and supplies. Medicare has established a fee schedule for DME 

and supplies, which lists the fees paid for these items in each state. 

Prosthetics and orthotics are paid according to 10 regional fee schedules. 

Prior to the passage of MMA, outpatient prescription drugs covered by 

Medicare part B were paid on a fee schedule based on 95 percent of the 

manufacturers’ average wholesale price (AWP), a price determined by 
Page 6 GAO-04-765 Medicare Competitive Bidding

manufacturers themselves.14 Except for these outpatient prescription 

drugs, the amounts paid under the fee schedules are generally based on the 

amounts charged by suppliers in 1986 and 1987 (or the amount set by 

Medicare if the item was subsequently added to the fee schedule). 

Suppliers are reimbursed according to the supplier’s actual charge or the 

Medicare fee schedule amount, whichever is lower. 

Over the years, we have reported that Medicare fees for certain medical 

equipment, supplies, and outpatient drugs were excessive compared with 

retail and other prices. For example, in 2000, we reported that retail price 

data collected by the four DME regional carriers showed that Medicare 

payments were much higher than the median surveyed retail prices for five 

commonly used medical products.15 While Medicare paid 5 percent less 

than AWP for covered prescription drugs, in 2001 we reported that prices 

widely available to physicians averaged from 13 percent to 34 percent less 

than AWP for a sample of physician-administered drugs.16 For two 

inhalation drugs17 covered by Medicare—albuterol and ipratropium 

bromide—prices widely available to pharmacy suppliers in 2001 reflected 

average discounts of 85 percent and 78 percent from AWP, respectively.18 

Medicare Competitive 

Bidding 

In 1997, BBA required CMS to establish up to five demonstration projects 

to be operated over 3-year periods that used competitive bidding to set fees 

for Medicare part B items and services. BBA required that at least one 

demonstration project include oxygen and oxygen equipment; all 

14 MMA changed Medicare’s methodology for determining reimbursement for outpatient 

drugs covered under part B. Most part B drugs furnished on or after January 1, 2004, are 

reimbursed at 85 percent of the drugs’ AWPs determined as of April 1, 2003. Beginning in 

2005, Medicare part B drugs—with certain exceptions, such as some vaccines—will be paid 

using either a competitive acquisition program or an average sales price methodology.

15 These products were lancets, eyeglass frames, a type of urinary catheter, and two types of 

catheter insertion trays. See GAO, Medicare Payments: Use of Revised “Inherent 

Reasonableness” Process Generally Appropriate, GAO/HEHS-00-79 (Washington, D.C.: July 

5, 2000).

16 In 1999, drugs provided in physician office settings accounted for over 75 percent of the 

almost $4 billion spent by Medicare for covered prescription drugs. 

17 Inhalation drugs are used as therapy for respiratory ailments, such as asthma or 

emphysema, and are delivered through a piece of equipment called a nebulizer. 

18 GAO-01-1118.
Page 7 GAO-04-765 Medicare Competitive Bidding

demonstration areas be metropolitan statistical areas (MSA) or parts of 

MSAs;19 and criteria for selecting demonstration areas include availability 

and accessibility of services and probability of savings.20 

CMS contracted with one of the four DME regional carriers—Palmetto 

Government Benefits Administrators (Palmetto)—to implement the 

competitive bidding demonstration for DME, prosthetics, orthotics, and 

supplies. 21 The demonstration was implemented in two locations—Polk 

County, Florida, and the San Antonio, Texas, area.22 Two cycles of bidding 

took place in Polk County, with competitively set fees effective from 

October 1, 1999, to September 30, 2001, and from October 1, 2001, to 

September 30, 2002. There was one cycle of bidding in San Antonio, and 

competitively set fees were effective from February 1, 2001, to December 

31, 2002. Bidding and implementation processes were similar at both 

locations. 

CMS set up competitive bidding for groups of related DME, prosthetics, 

orthotics, and supplies and held a separate competition for each group. 

Items included in the demonstration were identified by HCPCS codes. 

Suppliers were required to bid on each HCPCS code included in the 

product group in which they were competing. Table 1 shows the eight 

product groups in CMS’s competitive bidding demonstration at the two 

locations. 

19 The Office of Management and Budget defines an MSA as a county or group of counties 

containing a core of at least 50,000 people, together with adjacent areas having a high degree 

of economic and social integration with that core.

20 BBA, § 4319(a), 111 Stat. 392.

21 In this role, Palmetto was responsible for helping to plan the demonstration; educating 

beneficiaries, suppliers, and other stakeholders about the demonstration; soliciting and 

evaluating bids; processing claims; and responding to inquiries and complaints about the 

demonstration. CMS maintained oversight responsibility for the demonstration, reviewed 

all documents and Palmetto decisions, and made final design and policy decisions.

22 The first demonstration location, Polk County, Florida, is an MSA that includes the cities 

of Lakeland and Winter Haven. The second demonstration location included three of the 

four counties (Bexar, Comal, and Guadalupe) in the San Antonio, Texas, MSA.
Page 8 GAO-04-765 Medicare Competitive Bidding

Table 1: Product Groups Included in the Demonstration’s Two Locations

 Source: GAO analysis of CMS data.

The competitive bidding process was used to determine the suppliers 

included in the demonstration and the rates they would be paid. From 

among the bidders, the agency and Palmetto selected multiple 

demonstration suppliers to provide items in each group of related 

products. These suppliers were not guaranteed that they would increase 

their business or serve a specific number of Medicare beneficiaries. 

Instead, the demonstration suppliers had to compete for beneficiaries’ 

business. With few exceptions, only demonstration suppliers were 

reimbursed by Medicare for competitively bid items provided to 

beneficiaries permanently residing in the demonstration area.23 However, 

beneficiaries already receiving certain items were allowed to continue to 

use their existing nondemonstration suppliers.24 All demonstration 

suppliers were reimbursed for each competitively bid item provided to 

Product groups Polk County San Antonio location

Enteral nutrients, equipment, and supplies •

Hospital beds and accessories • •

Nebulizer inhalation drugs •

Manual wheelchairs and accessories •

Noncustomized general orthotics •

Oxygen contents, equipment, and supplies • •

Surgical dressings •

Urological supplies •

23 Medicare payments for DME, prosthetics, orthotics, and supply items obtained in a 

demonstration location during the demonstration by a visiting beneficiary who had a 

permanent address elsewhere were based on the fee schedule in effect for the beneficiary’s 

permanent address. 

24 Transition policies allowed beneficiaries to continue receiving oxygen equipment and 

supplies and nebulizer drugs from their original suppliers, regardless of whether the 

suppliers were included in the demonstration. However, the supplier had to accept the new 

demonstration fee schedules. Transition policies also allowed beneficiaries to maintain 

preexisting rental agreements or purchase contracts with their suppliers of enteral nutrition 

equipment, hospital beds and accessories, and manual wheelchairs and accessories. These 

suppliers were paid under the normal statewide Medicare fee schedule for the duration of 

the rental period. 
Page 9 GAO-04-765 Medicare Competitive Bidding

beneficiaries at the demonstration fee schedule amounts.25 The new fee 

schedules were based on the winning suppliers’ bids for items included in 

the demonstration. Any Medicare supplier that served demonstration 

locations could provide items not included in the demonstration to 

beneficiaries. 

About 1 year after CMS’s demonstration authority ended, MMA required the 

agency to conduct competitive bidding for DME, supplies, off-the-shelf 

orthotics, and enteral nutrients and related equipment and supplies. 

Competition is to be implemented in 10 of the largest MSAs in 2007, 80 of 

the largest MSAs in 2009, and additional areas thereafter. Items excluded 

from this authority are inhalation drugs; parenteral nutrients, equipment, 

and supplies; Class III devices;26 and customized orthotics that require 

expertise to fit individual beneficiaries. CMS may phase in implementation 

of competitive bidding first for the highest cost and highest volume items 

or those items with the greatest savings potential. The law requires that a 

Program Advisory and Oversight Committee be established to provide 

recommendations to CMS on its implementation of competitive bidding.

MMA also gives CMS significant new authority to use competitive bidding 

results as a basis for determining reasonable payment rates throughout the 

country in 2009. CMS has the authority to apply the information obtained 

from competitive bidding to adjust payments in parts of the country outside 

of the competitive areas for DME, supplies, off-the-shelf orthotics, and 

enteral nutrients and related equipment and supplies. Thus, CMS will be 

able to more easily adjust its payment rates nationally to reflect market 

prices within the largest MSAs by using information gleaned through 

competitive bidding.

25 The demonstration did not include beneficiaries enrolled in Medicare’s managed care 

component. Provision of DME, prosthetics, orthotics, and supplies to these beneficiaries is 

included in the managed care plans’ services and not billed separately to Medicare.

26 The Food and Drug Administration uses a three-part classification system for devices, 

based on the device’s level of risk and the extent of control necessary to ensure the safety 

and effectiveness of the device. Class III, or high-risk devices, usually sustain or support 

life, are of substantial importance in preventing impairment of human health, or present 

potential unreasonable risk of illness or injury.
Page 10 GAO-04-765 Medicare Competitive Bidding

CMS’s Experience Can 

Guide Agency Efforts 

to Implement 

Competitive Bidding 

While MMA sets specific requirements for competitive bidding, it also 

leaves certain implementation issues to CMS. As CMS implements 

competitive bidding, its payment- setting experience in the demonstration 

will prove useful as the agency considers items for competitive bidding and 

approaches to streamline implementation, collect information on specific 

items provided to beneficiaries, and ensure that beneficiaries’ access to 

quality items and services is not compromised. 

Many High-Cost Items 

Could Be Included in LargeScale Competitive Bidding

Selecting items with high levels of Medicare spending may prove fruitful in 

generating significant savings in the first years of large-scale competitive 

bidding efforts. The demonstration provided CMS with experience in item 

selection, and MMA provides direction and guidance for future efforts. By 

including items that accounted for a large share of Medicare spending, the 

demonstration generated estimated gross savings that were substantially 

more than its implementation costs. In addition to the items included in 

the demonstration, others are worth considering for selection in future 

competitive bidding. 

For the competitive bidding demonstration, Palmetto and CMS chose items 

from six of the eight product groups that accounted for almost 78 percent 

of Medicare allowed charges in calendar year 2002, as table 2 shows.27 The 

demonstration also included items from two other product groups with 

lower levels of Medicare spending—urological supplies and surgical 

dressings. According to a CMS official, CMS did not include glucose 

monitors and supplies in competitive bidding because beneficiaries must 

frequently use brand-name supplies with their monitors. Ensuring that 

specific brands of glucose test strips were included would have 

complicated the first test of competitive bidding in the demonstration. 

However, the CMS official noted that CMS could consider including 

glucose supplies in future competitive bidding. Similarly, lower and upper 

limb prosthetics were not included because these items are generally 

custom made or fitted to beneficiaries and, for simplicity, the 

demonstration focused on noncustomized items. 

27 In 2003, Medicare placed related items into 62 product groups. For example, the 

wheelchair product group included manual and power wheelchairs and accessories, such as 

adjustable-height armrests and antitipping devices. Within these product groups, items are 

identified by HCPCS codes. A product group may consist of one HCPCS code or up to 

several hundred HCPCS codes.
Page 11 GAO-04-765 Medicare Competitive Bidding

Table 2: Product Groups Representing the Highest Medicare Spending in 2002 for 

DME, Prosthetics, Orthotics, and Supplies 

Source: GAO analysis of CMS and statistical analysis durable medical equipment regional carrier (SADMERC) data.

Notes: Total allowed charges and percentages are rounded. Total allowed charges for each product 

group shown is the sum of allowed charges for the items included in that group. The allowed charge 

for each item is the payment for each item billed multiplied by the volume of the item billed on behalf of 

beneficiaries. The data used for this analysis were supplied by the SADMERC, a contractor that 

provides data analysis support to CMS. The data analyzed represented claims with service dates from 

January 1, 2002, through December 31, 2002, and were received by the SADMERC through 

December 31, 2003. 

Our analysis of national Medicare spending for DME, prosthetics, orthotics, 

and supplies found that items included in the demonstration accounted for 

about half of all Medicare allowed charges in 2002. This was less than the 

total billing for all items in the product group because not all the individual 

items identified by HCPCS codes within product groups were included in 

the demonstration. For example, CMS excluded power wheelchairs from 

the competition. 

Estimated savings for competitively bid items in the demonstration would 

total about 20 percent of the fee schedule amounts, according to the 

Product group

Total Medicare 

allowed charges 

(dollars in millions)

Total Medicare 

allowed charges 

(percentage)

Some items from 

product group 

included in the 

demonstration

Oxygen contents, 

equipment, and 

supplies

$2,219 22.9 Yes

Wheelchairs and 

accessories

1,411 14.6 Yes

Nebulizer and related 

drugs

1,175 12.1 Yes

Glucose monitors and 

supplies

895 9.2 No

Enteral nutrients, 

equipment, and 

supplies

636 6.6 Yes

Lower and upper limb 

prosthetics

463 4.8 No

Hospital beds and 

accessories

359 3.7 Yes

Lower and upper limb 

orthotics

350 3.6 Yes

Total $7,508 77.5
Page 12 GAO-04-765 Medicare Competitive Bidding

demonstration evaluators. This equaled an estimated gross savings of 

$8.5 million in allowed charges, which include Medicare payments and 

beneficiary cost-sharing amounts.28 The estimated cost of the 

demonstration was about $4.8 million—about 40 percent lower than the 

estimated $8.5 million reduction in allowed charges associated with the 

demonstration. The demonstration’s $4.8 million cost included $1.2 million 

for planning and development from September 1, 1995, through July 1, 

1998, and $3.6 million for demonstration operating expenses through 

December 2002. 

For future efforts, MMA states that initial competitive bidding may include 

items with the highest Medicare cost and volume or items determined by 

the agency to have the largest savings potential. Working within these 

parameters for competitive bidding, CMS could select some items included 

in the demonstration as well as items with high Medicare spending that 

were not included in the demonstration. For example, nondemonstration 

items that CMS could choose include power wheelchairs and lancets and 

test strips used by diabetics. These three items accounted for about 

$1.7 billion, or about 17 percent, of Medicare allowed charges for DME, 

prosthetics, orthotics, and supplies in 2002.29 A CMS official and DME 

regional carrier medical directors told us that these items could be 

considered for inclusion in future competitive bidding. 

Two medical directors also suggested that continuous positive airway 

pressure devices30 and accessories, with $137 million in allowed charges—

or 1.4 percent of Medicare allowed charges for DME, prosthetics, orthotics, 

and supplies in 2002—could be considered for inclusion in future 

competitive bidding. CMS officials suggested that these devices and 

accessories could be included in early implementation of competitive 

bidding. Furthermore, if CMS is able to lower operating costs through 

efficiencies and streamlining, CMS could consider selecting additional 

products for competitive bidding with comparatively low levels of program 

spending for competitive bidding, such as commodes, canes, and crutches. 

28 The demonstration’s evaluators estimated that gross savings were $4.0 million in Polk 

County and $4.5 million in the San Antonio location. 

29 Spending for power wheelchairs was about $857 million, for diabetic test strips about $752 

million, and for lancets about $79 million in 2002. 

30 Individuals who have obstructive sleep apnea use continuous positive airway pressure 

devices while sleeping to provide constant levels of air pressure from a flow generator via a 

nose mask. 
Page 13 GAO-04-765 Medicare Competitive Bidding

Larger-Scale Competitive 

Bidding May Benefit from 

Streamlined 

Implementation

While the demonstration laid the groundwork for future competition, given 

the expanded scale of future competitive bidding, CMS will have to focus 

on a second issue—ways to streamline implementation. The 

demonstration took place in just two MSAs and affected less than 1 percent 

of fee-for-service beneficiaries. In contrast, by 2009, MMA requires CMS to 

implement competitive bidding in 80 of the largest MSAs in the country. 

Our analysis showed that about half of Medicare’s fee-for-service 

beneficiaries live in the 80 largest MSAs.31 In order to expand competitive 

bidding, CMS could potentially use two streamlining approaches—

developing standardized steps that are easily replicated in different 

locations and using mail-order delivery for selected items for which fees 

are determined through nationwide competitive bidding. 

In conducting the demonstration, CMS and Palmetto gained practical 

experience in planning how competitive bidding could be conducted, 

communicating with beneficiaries and suppliers, choosing demonstration 

items, developing software to process demonstration claims, establishing 

policies, and soliciting and evaluating supplier bids. In expanding the 

scope of competitive bidding, CMS will be able to leverage its experience to 

develop a standardized or “cookie-cutter” approach that can be applied in 

multiple locations. This would include a standard set of competitively bid 

items, procedures and policies, and informational materials for suppliers 

and beneficiaries. Through standardization, the costs of implementation in 

individual MSAs would likely be reduced relative to program savings. In 

the demonstration, adding a second location allowed CMS and Palmetto to 

spread much of the implementation costs across two locations, rather than 

one.32 The incremental costs of adding the San Antonio location, once the 

demonstration had been planned and begun in Polk County, were relatively 

low. For the San Antonio location, the estimated annual implementation 

31 Population estimates for the 80 largest MSAs are from Census 2000 and include the 

District of Columbia and Puerto Rico.

32 In economic theory, this is called having “economies of scale,” where producing more 

services or products can be accomplished at lower costs per unit because the overall costs 

are spread over a larger number of units. However, at some point, according to the 

economies of scale theory, the relative savings in implementation costs from expanding 

competitive bidding to more locations would likely decrease as fixed costs for additional 

locations stabilize. In addition, as CMS expands competitive bidding by MSA, at some point 

the agency might reach the maximum number of MSAs that it can administer without 

increasing fixed implementation costs.
Page 14 GAO-04-765 Medicare Competitive Bidding

costs ranged from $100,000 in a nonbidding year to $310,000 when bidding 

occurred, according to the second evaluation report. 

Another potential streamlining approach would be to provide items by 

mail-order delivery—a convenience for beneficiaries—with uniform fees 

determined through nationwide competitive bidding. Because MMA 

authorizes CMS to designate the geographic areas for competition for 

different items, designating the entire country as the competitive area for 

selected items is a possibility. In addition, MMA states that areas within 

MSAs that have low population density should not be excluded from 

competition if a significant national market exists through mail-order for a 

particular item or service. In contrast to conducting competitive bidding 

on a piecemeal basis in multiple geographic areas, a consolidated 

nationwide approach would allow CMS to more quickly implement 

competitive bidding on a large scale. This approach would enable 

companies that provide, or demonstrate the ability to provide, nationwide 

mail-order service to compete for Medicare beneficiaries’ business. 

Items that lend themselves to mail delivery are light, easy to ship, and used 

by beneficiaries on an ongoing basis. Precedents exist for mail-order 

delivery of items that have been subject to competitive bidding. 

Demonstration suppliers provided surgical dressings, urological supplies, 

and inhalation drugs to beneficiaries by mail. In San Antonio, 30 percent of 

beneficiaries reported receiving their inhalation drugs through the mail, 

according to a demonstration evaluator, and Medicare paid an estimated 25 

percent less than the fee schedule for Texas for these drugs.33 Glucose test 

strips and lancets are two items currently mailed to Medicare beneficiaries’ 

homes that could be included in a future nationwide competition. In 2002, 

these items accounted for $831 million, or about 8.6 percent, of Medicare 

allowed charges for DME, prosthetics, orthotics, and supplies. Because 

glucose test strips generally must be used with the glucose monitors made 

by the same manufacturer, CMS would need to ensure that the most 

commonly used types of test strips were included. 

33 MMA excludes inhalation drugs from competitive bidding. Other specific provisions of 

MMA set payments for these drugs. 
Page 15 GAO-04-765 Medicare Competitive Bidding

Better Information on 

Specific Items Provided to 

Beneficiaries Could Ensure 

More Appropriate Payment

Finding ways to collect better information on the specific items provided to 

beneficiaries is the third issue for CMS to consider as it implements 

competitive bidding on a larger scale. Industry and advocacy groups have 

raised concerns that competitive bidding may encourage some suppliers to 

reduce their costs by substituting lower-quality or lower-priced items. 

However, CMS lacks the capability to identify specific items provided to 

beneficiaries because suppliers’ claims use HCPCS codes, which can cover 

items that differ considerably in characteristics and price. Therefore, 

during the demonstration, CMS would not have been able to determine if 

suppliers tended to provide less costly items to beneficiaries. Furthermore, 

as CMS proceeds with competitive bidding, it will be difficult for the 

agency to appropriately monitor the type or price of specific items for 

which it is paying. 

A single HCPCS code can cover a broad range of items serving the same 

general purpose but with differing characteristics and prices. For example, 

in April 2004, the HHS OIG reported that prices available to consumers on 

supplier Web sites it surveyed for different models of power wheelchairs 

represented by a single HCPCS code ranged from $1,600 to almost 

$17,000.34 The 2003 Medicare fee schedule amount for all of the power 

wheelchairs under this code was a median of $5,297. Because Medicare 

pays the same amount for all of the items billed under the same HCPCS 

code, suppliers have an incentive to provide beneficiaries with the least 

costly item designated by that code. Since the Medicare program does not 

routinely collect specific information on items within a code for which it is 

paying, it is unable to determine if suppliers are providing lower-priced 

items or higher-priced items to beneficiaries. Using information from 

related work to determine the specific power wheelchairs provided to 

beneficiaries, the HHS OIG found that beneficiaries tend to receive lowerpriced wheelchairs.35 The OIG recommended that CMS create a new 

34 The HHS OIG studied purchase prices available to consumers and suppliers for power 

wheelchairs that Medicare reimburses when billed as HCPCS code K0011, which is the code 

suppliers most commonly use to bill Medicare for power wheelchairs. See U.S. Department 

of Health and Human Services, Office of Inspector General, A Comparison of Prices for 

Power Wheelchairs in the Medicare Program, OEI-03-03-00460 (Washington, D.C.: April 

2004).

35 The HHS OIG reported that the median price to consumers was $3,888 for a random 

sample of power wheelchair claims paid in 2001, with prices ranging from a low of $2,000 to 

a high of $5,995. Out of 247 prices the OIG reviewed for power wheelchairs actually 

provided to Medicare beneficiaries, there were four instances where the cost available to 

retail consumers on Internet Web sites was greater than Medicare’s reimbursement amount. 
Page 16 GAO-04-765 Medicare Competitive Bidding

coding system for the most commonly provided power wheelchairs to 

account for the variety in models and prices. CMS is currently working to 

develop a new set of codes to better describe the power wheelchairs 

currently on the market and plans to develop payment ceilings for each of 

the new codes. 

Under competitive bidding, suppliers might have even greater incentive to 

substitute less costly products listed under a code. For example, one of the 

demonstration suppliers explained that while a specific curved-tip catheter 

was superior for patients with scar tissue or obstructions, competitive 

bidding would encourage suppliers to substitute other, less-expensive 

catheters that can be paid under the same code. Thus, even if competitive 

bidding reduces fees paid, when suppliers substitute less costly items for 

more costly items, Medicare can pay too much for the actual items 

provided to beneficiaries. CMS officials pointed out that this is also true 

under the current fee schedule. 

CMS might better monitor the items being provided to beneficiaries if it 

subdivided certain HCPCS codes or collected identifying information. 

Subdividing HCPCS codes for items with significant variations in 

characteristics and price into smaller groupings is a way to narrow the 

differences among the items provided under a single code. The four DME 

regional carriers or the advisory committee established under MMA might 

be able to assist CMS in identifying those individual codes for items with 

the most significant variations in characteristics and price. Once these 

codes had been identified, CMS would be in a position to decide whether to 

request the panel that makes decisions on HCPCS codes for DME, 

orthotics, and supplies to consider whether to divide the codes into betterdefined item groupings. Another way to get better information on the 

range of items provided under a code is to collect specific, identifying 

information (such as manufacturer, make, and model information) on 

selected, high-cost competitively bid items provided to beneficiaries. The 

DME regional carriers require suppliers to provide such information when 

it is requested for detailed reviews of claims for power wheelchairs. If CMS 

requested these data from suppliers for selected items provided under a 

HCPCS code for a statistically representative sample of claims, it would be 

able to analyze trends in the actual items provided to beneficiaries in 

competitive bidding areas or monitor the provision of items under the same 

code in competitive and noncompetitive areas.
Page 17 GAO-04-765 Medicare Competitive Bidding

Ensuring Quality and 

Service for Beneficiaries Is 

Critical

Because of concerns that competitive bidding may prompt suppliers to cut 

their costs by providing lower-quality items and curtailing services, a fourth 

issue for CMS to consider is ensuring that quality items and services are 

provided to beneficiaries. Quality assurance steps could include 

monitoring beneficiary satisfaction, as well as setting standards for 

suppliers, providing beneficiaries with a choice of suppliers, and selecting 

winning bidders based on quality in addition to amounts bid. During the 

demonstration, the agency and Palmetto gained practical experience in 

implementing quality assurance steps. This experience could prove 

instructive as CMS moves forward with competitive bidding efforts.

As competitive bidding proceeds, routine monitoring of beneficiaries’ 

complaints, concerns, and satisfaction can be used as a tool to help ensure 

that beneficiaries continue to have access to quality items. During the 

demonstration, the agency and Palmetto used full-time, on-site ombudsmen 

to respond to complaints, concerns, and questions from beneficiaries, 

suppliers, and others. In addition, to gauge beneficiary satisfaction, the 

evaluators of the demonstration fielded two beneficiary surveys by mail—

one for oxygen users and another for users of other products included in 

the demonstration.36 These surveys contained measures of beneficiaries’ 

assessments of their overall satisfaction, access to equipment, and quality 

of training and service provided by suppliers. Evaluators reported that 

their survey data indicated that beneficiaries generally remained satisfied 

with both the products provided and with their suppliers. 

As competitive bidding expands and affects larger numbers of 

beneficiaries, small problems could be potentially magnified. Therefore, 

continued monitoring of beneficiary satisfaction will be critical to 

identifying problems with suppliers or with items provided to beneficiaries. 

When such problems are identified in a timely manner, CMS may develop 

steps to address them. In the past, when implementing significant 

Medicare changes, such as new payment methods for skilled nursing 

36 For comparison purposes, evaluators sent beneficiary surveys to beneficiaries in the two 

demonstration locations and to two groups of Medicare beneficiaries from areas similar to 

Polk County and the San Antonio location. Evaluators selected comparison sites outside of 

the demonstration areas to identify changes in the demonstration locations that were due to 

the demonstration and changes that may have resulted from general trends. Brevard 

County, Florida, was chosen as the comparison site for Polk County, and the Austin-San 

Marcos MSA, Texas, was the comparison site for the San Antonio location. Evaluators 

surveyed beneficiaries both before and after demonstration prices took effect in these 

locations.
Page 18 GAO-04-765 Medicare Competitive Bidding

facilities and home health services, the agency has lacked timely and 

accurate information about how the changes affected beneficiary access. 

Nevertheless, it may not be practical in a larger competitive bidding effort 

to replicate the monitoring steps used in the demonstration. Developing 

less staff-intensive approaches to monitoring would reduce 

implementation costs. For example, a Palmetto official told us that while 

having an on-site ombudsman function may prove useful in the initial 

stages of competitive bidding, using a centralized ombudsman available 

through a toll-free number staffed by a contractor could provide some of 

the same benefits at a lower cost. 

In addition, certain monitoring enhancements could prove useful. For 

example, CMS did not use a formal mechanism for ombudsmen to 

summarize or report information on complaints from beneficiaries or 

suppliers, according to the demonstration ombudsmen. Collecting and 

analyzing complaint information may provide a credible gauge of problems 

related to beneficiary access to quality products. 

Continued use of satisfaction surveys could help track beneficiaries’ 

satisfaction with items and services over time. However, advocacy group 

representatives have cautioned that beneficiaries may not have the 

technical knowledge to accurately assess the quality of the items or 

services being provided. Supplemental information might be obtained 

through standardized surveys of individuals who refer beneficiaries to 

suppliers, physicians, and supplier representatives, who may be better 

equipped to assess the technical quality of products and services. 

Two MMA requirements—the selection of multiple suppliers to serve 

beneficiaries and the establishment of supplier standards—help ensure 

that beneficiaries are satisfied with suppliers and the items they provide. 

The selection of multiple suppliers to serve beneficiaries was part of the 

competitive bidding process used during the demonstration. The 

establishment of supplier standards is broader than the competitive 

bidding program in that it applies to all suppliers, regardless of whether 

they choose to participate in competitive bidding.

MMA requires that CMS select multiple suppliers that meet quality and 

financial standards to maintain choice in a competitive acquisition area. 

According to a CMS official, choosing to include multiple suppliers in the 

demonstration for each product group allowed beneficiaries to switch 

suppliers if dissatisfied with the quality of the services or items provided. 
Page 19 GAO-04-765 Medicare Competitive Bidding

CMS officials stated that selecting multiple suppliers encouraged suppliers 

to compete on the basis of quality and service to gain beneficiaries’ 

business. After completing the bid evaluation process, CMS generally 

selected about 50 percent of the suppliers that bid in each group, with an 

average of 12 suppliers selected across the product groups.37 

MMA also requires that CMS establish and implement quality standards for 

all suppliers of DME, prosthetics, orthotics, and supplies.38 These 

standards must be at least as stringent as the 21 general standards that all 

suppliers of DME, prosthetics, orthotics, and supplies are required to 

comply with in order to obtain and retain their Medicare billing privileges.39 

(See app. II.) For the demonstration, suppliers were also required to meet 

standards developed by Palmetto that were more stringent and explicit 

than the current 21 general standards.40 For example, the demonstration 

standards required that only qualified staff deliver, set up, and pick up 

equipment and supplies and established time frames for suppliers to pick 

up equipment after a beneficiary had requested its removal. Palmetto 

monitored suppliers’ adherence to the standards through initial and annual 

site visits.

Applying quality measures as criteria to select winning suppliers is another 

demonstration assurance step that can be used in future efforts. During the 

demonstration bid evaluation process, Palmetto solicited references from 

financial institutions and from at least five individuals who had referred 

beneficiaries to each bidding supplier. In reviewing referrals, Palmetto 

looked for evidence of quality and service. This included evidence of 

37 The number of suppliers selected ranged from 3 suppliers of surgical dressings in Polk 

County to 32 suppliers of oxygen equipment and supplies in San Antonio.

38 These quality standards are to be applied by one or more designated, independent 

accreditation organizations selected within 1 year of implementing the quality standards. 

MMA, § 302(a), 117 Stat. 2223.

39 Some of these 21 general standards promote quality services, while others exist to ensure 

that the supplier is a legitimate business. For example, the standards require that a supplier 

maintain a physical facility on an appropriate site and have a primary business telephone 

number listed under the name of the business. 42 C.F.R. § 424.57(c)(7), (9) (2003).

40 Demonstration suppliers also were required to participate in the Medicare program; have 

active Medicare supplier numbers, which a supplier must have to submit claims and receive 

payment for items and services furnished under Medicare; and comply with all state and 

federal licensure and regulatory requirements, Medicare and Medicaid statutes and 

regulations, and Medicare billing guidelines.
Page 20 GAO-04-765 Medicare Competitive Bidding

financial stability and good credit standing, a record of providing products 

that met beneficiaries’ needs, compliance with Medicare’s rules and 

regulations, acceptable business practices, ethical behavior, and 

maintenance of accurate records. The bid evaluation process also included 

inspections of bidding suppliers’ facilities that focused on indicators of 

quality and service. These on-site inspections were more comprehensive 

than those normally performed for Medicare suppliers of DME, prosthetics, 

orthotics, and supplies. For example, inspectors were tasked with 

determining if the supplier had access to the full range of products for 

which it had bid, documentation of infection control procedures, 

instructions on using equipment, and patient files with required 

information. In some cases, a demonstration supplier’s selection was 

conditional on the supplier making specified improvements. For example, 

according to a CMS official, some suppliers were told to clarify instructions 

for beneficiaries, properly store oxygen equipment, or improve procedures 

for following up with patients after initial service was provided. CMS and 

Palmetto officials told us that comprehensive inspections were useful in 

ensuring the selection of quality suppliers.

Conclusions CMS can use its experience from the demonstration to make informed 

decisions as it implements large-scale competitive bidding within the 

framework established by MMA. The demonstration showed that 

competitive bidding has the potential to garner significant savings for both 

the Medicare program and its beneficiaries, especially on items with high 

levels of Medicare spending. While the potential exists for significant 

savings, moving from small-scale to large-scale competitive bidding calls 

for streamlining implementation. Developing a cookie-cutter approach to 

competitive bidding—for example, using the same policies and processes 

in multiple locations—could help CMS roll out its implementation in over 

80 locations more easily, while employing mail-order to deliver items with 

prices set through nationwide competitive bidding could allow CMS to 

more quickly implement competitive bidding on a large scale. To ensure 

that competitive bidding savings are not achieved by the suppliers’ 

substitution of lower-cost items, CMS can consider ways to collect better 

information on the specific items that suppliers are providing to 

beneficiaries. Finally, careful monitoring of beneficiaries’ experiences will 

be essential to ensure that problems are quickly identified. This will allow 

CMS to adjust its implementation and quality assurance steps as it manages 

competition on a greater scale. 
Page 21 GAO-04-765 Medicare Competitive Bidding

Recommendations for 

Executive Action

To increase potential savings from competitive bidding, streamline 

implementation, help ensure that Medicare is paying appropriately for 

items, and promote beneficiary satisfaction, we recommend that the 

Administrator of CMS take the following seven actions:

• consider conducting competitive bidding for demonstration items and 

items that represent high Medicare spending that were not included in 

the competitive bidding demonstration;

• develop a standardized approach for competitive bidding for use at 

multiple locations;

• consider using mail delivery for items that can be provided directly to 

beneficiaries in the home, as a way to implement a national competitive 

bidding strategy;

• evaluate individual HCPCS codes to determine if codes need to be 

subdivided because the range in characteristics and price of items 

included under the individual codes is too broad;

• periodically obtain specific identifying information on selected highcost items to monitor the characteristics of items subject to competitive 

bidding that are provided to beneficiaries, such as manufacturer, make, 

and model number; 

• monitor beneficiary satisfaction with items and services provided; and

• seek input from individuals with technical knowledge about the items 

and services suppliers provide to beneficiaries. 

Agency Comments and 

Our Evaluation

In its written comments on a draft of this report, CMS agreed with most of 

the recommendations and agreed to give serious consideration to the 

report throughout the development and implementation of national 

competitive bidding. CMS agreed to consider conducting competitive 

bidding for demonstration items and items that represent high Medicare 

spending that were not included in the demonstration. CMS indicated that 

the agency was working to develop a list of items for the first bidding cycle 

in 2007. CMS also agreed to develop a standardized approach for 

competitive bidding that could be used in multiple locations and indicated 

the agency’s intention to outline such an approach through regulation. 
Page 22 GAO-04-765 Medicare Competitive Bidding

CMS stated it would explore the feasibility of our recommendation to 

consider using mail-order delivery for items that could be provided directly 

to beneficiaries in the home, as a way to implement a national competitive 

bidding strategy. Based on CMS’s comments, we clarified the discussion in 

the report to indicate businesses that currently provide, or have the 

potential to provide, national mail-order delivery would be appropriate to 

include as bidders in nationwide competition. CMS also agreed with our 

recommendations to periodically obtain specific identifying information on 

selected high-cost items and to monitor beneficiary satisfaction with the 

items and services provided and indicated that it would be establishing a 

process to do so. CMS agreed with our recommendation to seek input from 

individuals with technical knowledge about the items and services 

suppliers provide to beneficiaries. The agency noted that pursuant to 

MMA, CMS would be convening a panel of experts, the Program Advisory 

and Oversight Committee, to assist with implementation of competitive 

bidding. 

CMS disagreed with one of our draft recommendations—to evaluate 

individual HCPCS codes to determine if they needed to be subdivided 

because the range in price of items included under the codes was too 

broad. The agency stated that subdividing codes according to price would 

lead to Medicare setting codes for particular brand names in circumstances 

where a manufacturer has established higher prices for products that do 

not have meaningful clinical differences or higher quality. In response to 

the agency’s comment, we modified our discussion of HCPCS codes and 

revised our recommendation to state that CMS, in reevaluating individual 

HCPCS codes, should consider both the characteristics and prices of items. 

We have reprinted CMS’s letter in appendix III. CMS also provided us with 

technical comments, which we have incorporated as appropriate. 

We are sending copies of this report to the Administrator of CMS, 

appropriate congressional committees, and other interested parties. We 

will also make copies available to others upon request. This report is also 

available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please call me at 

(312) 220-7600 or Sheila K. Avruch at (202) 512-7277. Other key 
Page 23 GAO-04-765 Medicare Competitive Bidding

contributors to this report are Sandra D. Gove, Lisa S. Rogers, and Kevin 

Milne.

Leslie G. Aronovitz

Director, Health Care—Program

Administration and Integrity Issues
Page 24 GAO-04-765 Medicare Competitive Bidding

Appendix I

Scope and Methodology ApApenednxidexiIs

To assess issues that the Centers for Medicare & Medicaid Services (CMS) 

might consider as it implements the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 (MMA) provisions 

concerning competitive bidding, we reviewed the relevant provisions of 

MMA. We also reviewed the first and second evaluation reports on the 

Medicare competitive bidding demonstration and discussed methodology 

and findings with the evaluators. We interviewed officials from CMS and 

Palmetto Government Benefits Administrators (Palmetto) about 

experience gained during the demonstration. 

For the product selection issue, we analyzed calendar year 2002 Medicare 

durable medical equipment (DME), prosthetics, orthotics, and supply 

claims data obtained from the statistical analysis durable medical 

equipment regional carrier (SADMERC). Through this analysis, we 

identified the product groups and items that represented the largest 

Medicare allowed charges and the allowed charges for items included in 

the demonstration. We also used these data to identify items that 

accounted for higher Medicare spending but were excluded from the 

demonstration. We determined that the data obtained from the SADMERC 

were sufficiently reliable for addressing the issues in this report. These 

data were extracted from a CMS file that includes all Medicare claims 

payment data. CMS has a number of computerized edits to help ensure that 

Medicare payment data are accurately recorded, and the SADMERC has 

internal controls to ensure that data extracted from the CMS file are timely 

and complete. Where appropriate, we tested data manually against 

published sources for consistency. To identify items that could be included 

in future competitive bidding, we interviewed CMS and Palmetto officials 

and the medical directors at the four DME regional carriers.

For the issue of streamlining implementation, we obtained information on 

the cost of the demonstration from the second evaluation report. To 

estimate the number of fee-for-service beneficiaries who will be affected by 

future competitive bidding, we adjusted the Census 2000 population 

estimates for individuals age 65 and over to account for the number of 

beneficiaries enrolled in Medicare’s managed care program by using data 

obtained from the Medicare Managed Care Market Penetration 

State/County Data Files. We assessed the reliability of the Census 2000 data 

by reviewing relevant documentation and working with an official from the 

U.S. Census Bureau. We assessed the reliability of the Medicare Managed 

Care Market Penetration State/County Data Files by reviewing relevant 

documentation. We determined these data sources to be sufficiently 

reliable for the purposes of our report. We also obtained information from 
Appendix I

Scope and Methodology

Page 25 GAO-04-765 Medicare Competitive Bidding

CMS on the demonstration items that beneficiaries obtained by mail and 

conducted research to identify items delivered directly to customers’ 

homes by private sector organizations. We also solicited input from the 

medical directors at the four DME regional carriers concerning items that 

could be delivered by mail-order and included in a nationwide competition.

For the issue concerning information on specific items provided to 

beneficiaries, we reviewed prior GAO reports and testimonies. In addition, 

we interviewed the following representatives of industry and advocacy 

groups: Abbott Laboratories; the Advanced Medical Technology 

Association; the American Association for Homecare; the American 

Occupational Therapy Association; the American Orthotic and Prosthetic 

Association; the Consortium for Citizens with Disabilities; the Diabetic 

Product Suppliers Coalition; LifeScan, Inc.; Johnson & Johnson Company; 

Kinetic Concepts, Inc.; Tyco Healthcare Group; the National Alliance for 

Infusion Therapy; Roche Diagnostics; and the United Ostomy Association. 

For the issue relating to ensuring quality items and services for 

beneficiaries, we discussed quality assurance steps and approaches for 

monitoring beneficiary satisfaction used during the demonstration with 

CMS and Palmetto officials and the demonstration’s evaluators. We also 

interviewed the two demonstration ombudsmen to discuss beneficiaries’ 

concerns and experiences in obtaining items during the demonstration. We 

discussed issues related to competitive bidding and beneficiaries’ access to 

quality products and services with suppliers of DME, including three 

suppliers that participated in the demonstration; the industry and advocacy 

groups listed above; and the DME regional carrier medical directors. In 

addition, we compared quality standards for demonstration suppliers with 

the 21 supplier standards that apply to all Medicare suppliers of DME, 

prosthetics, orthotics, and supplies. 
Page 26 GAO-04-765 Medicare Competitive Bidding

Appendix II

Medicare’s 21 Standards for Medicare 

Suppliers of DME, Prosthetics, Orthotics, and 

Supplies ApendxiI

Suppliers of DME, prosthetics, orthotics, and supplies must meet 21 

standards in order to obtain and retain their Medicare billing privileges. An 

abbreviated version of these standards, which became effective December 

11, 2000, is presented in table 3. MMA requires CMS to develop new 

standards that must be at least as stringent as current standards for all 

Medicare suppliers of DME, prosthetics, orthotics, and supplies. Supplier 

compliance will be determined by one or more designated independent 

accreditation organizations.

Table 3: Standards for Medicare Suppliers of DME, Prosthetics, Orthotics, and Supplies 

Standard 

number Standard description

1 A supplier must be in compliance with all applicable federal and state licensure and regulatory requirements.

2 A supplier must provide complete and accurate information on the application for suppliers of DME, prosthetics, orthotics, 

and supplies. Any changes to this information must be reported to CMS within 30 days of the change.

3 An authorized individual (one whose signature is binding) must sign the application for billing privileges.

4 A supplier must fill orders from its own inventory, or must contract with other companies for the purchase of items necessary 

to fill the order. A supplier may not contract with any entity that is currently excluded from the Medicare program, from any 

state health care programs, or from any other federal procurement or nonprocurement program or activity.

5 A supplier must advise beneficiaries that they may rent or purchase inexpensive or routinely purchased DME and of the 

purchase option for capped rental DME.

6 A supplier must honor all warranties under applicable state law and repair or replace free of charge Medicare-covered items 

that are under warranty.

7 A supplier must maintain a physical facility on an appropriate site.

8 A supplier must permit CMS or its agents to conduct on-site inspections to ascertain the supplier's compliance with these 

standards. The supplier location must be accessible to beneficiaries during reasonable business hours and must maintain a 

visible sign and posted hours of operation.

9 A supplier must maintain a primary business telephone listed under the name of the business in a local directory or a tollfree number available through directory assistance. The exclusive use of a beeper, answering machine, or cell phone as the 

primary business telephone number is prohibited.

10 A supplier must have comprehensive liability insurance in the amount of at least $300,000 that covers both the supplier's 

place of business and all customers and employees of the supplier. If the supplier manufactures its own items, this 

insurance must also cover product liability and completed operations.

11 A supplier must agree not to initiate telephone contact with beneficiaries, with a few exceptions allowed. This standard 

prohibits suppliers from calling beneficiaries in order to solicit new business.

12 A supplier is responsible for delivery and must document that it, or another qualified party, instructed beneficiaries on the use 

of Medicare-covered items, and maintain proof of delivery.

13 A supplier must answer questions and respond to complaints of beneficiaries, and maintain documentation of such contacts.

14 A supplier must maintain and replace at no charge or repair directly, or through a service contract with another company, 

Medicare-covered items it has rented to beneficiaries.

15 A supplier must accept returns of substandard (less than full quality for the particular item) or unsuitable items (inappropriate 

for the beneficiary at the time it was fitted and rented or sold) from beneficiaries.
Appendix II

Medicare’s 21 Standards for Medicare 

Suppliers of DME, Prosthetics, Orthotics, and 

Supplies

Page 27 GAO-04-765 Medicare Competitive Bidding

Source: GAO analysis of 42 C.F.R. § 424.57(c) (2003).

16 A supplier must disclose these supplier standards to each beneficiary to whom it supplies a Medicare-covered item.

17 A supplier must disclose to the government any person having ownership, financial, or controlling interest in the supplier.

18 A supplier must not convey or reassign a supplier number; that is, the supplier may not sell or allow another entity to use its

Medicare billing number.

19 A supplier must have a complaint resolution protocol established to address beneficiary complaints that relate to these 

standards. A record of these complaints must be maintained at the physical facility.

20 Complaint records must include the name, address, telephone number, and health insurance claim number of the 

beneficiary; a summary of the complaint; and any actions taken to resolve it.

21 A supplier must agree to furnish CMS with any information required by the Medicare statute and implementing regulations.

(Continued From Previous Page)

Standard 

number Standard description
Page 28 GAO-04-765 Medicare Competitive Bidding

Appendix III

Comments from the Centers for Medicare & 

Medicaid Services ApendxiI
Appendix III

Comments from the Centers for Medicare & 

Medicaid Services

Page 29 GAO-04-765 Medicare Competitive Bidding
Appendix III

Comments from the Centers for Medicare & 

Medicaid Services

(290246) Page 30 GAO-04-765 Medicare Competitive Bidding
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

Obtaining Copies of 

GAO Reports and 

Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To 

have GAO e-mail you a list of newly posted products every afternoon, go to 

www.gao.gov and select “Subscribe to Updates.”

Order by Mail or Phone The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to:

U.S. Government Accountability Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional 

Relations

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548

Public Affairs Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548
United States

Government Accountability Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Service Requested

Presorted Standard

Postage & Fees Paid

GAO

Permit No. GI00