DEPARTMENT OF HEALTH & HUMAN SERVICES 	 Office of Inspector General 

Washington, D.C. 20201 

SEP 1 2,2011 

TO: 	 Donald M. Berwick, M.D. 

Administrator 

Centers for Medicare & Medicaid Services 

FROM: S""tuart Wrigh~ 

Deputy Inspector General 

for Evaluation and Inspections 

SUBJECT: 	 Early Alert Memorandum Report: Use ofSurety Bonds to Recover 

Overpayments Made to Suppliers ofDurable Medical Equipment, 

Prosthetics, Orthotics, and Supplies: Early Findings, OEI-03-11-003S1 

This memorandum report provides early findings from our study evaluating the extent to 

which the Centers for Medicare & Medicaid Services (CMS) uses surety bonds to recover 

overpayments made to durable medical equipment, prosthetics, orthotics, and supplies 

(DMEPOS) suppliers. 

SUMMARY 

We found that CMS does not have finalized procedures for recovering DMEPOS 

overpayments through surety bonds. In addition, as of July 2011, no overpayments had 

been recovered through surety bonds since October 2,2009, the date the surety bond 

requirement became effective for all suppliers. A full report, to be issued at a later date, 

will provide additional information on the number ofDMEPOS suppliers that received 

overpayments, the amount ofunrecovered overpayments, and the extent to which 

DMEPOS overpayments could have been recovered if CMS had sought collection 

through surety bonds. 

BACKGROUND 

Historically, Medicare Part B payments for DMEPOS have been highly vulnerable to 

fraud and abuse. The ease and low expense of acquiring a supplier number coupled with 

the potential for high revenue have, for yearS, attracted unscrupulous DMEPOS suppliers 

(hereinafter suppliers) to Medicare. l From April 2006 through March 2007, CMS 

I Office ofinspector General (OIG), Medical Equipment Suppliers: Assuring Legitimacy, 


OEI-04-96-00240, December 1997. 


OEI-03-11-00351 Usc of Surety Bonds to Recover Overpayments Made to DMEPOS Suppliers 

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OEI-03-11-00351 Use of Surety Bonds to Recover Overpayments Made to DMEPOS Suppliers

estimated that $1 billion of the $10 billion in Medicare payments for DMEPOS supplies 

were improper, due in part to fraud.2 

A 2005 GAO report concluded that Medicare’s standards were too weak to be used 

effectively for screening DMEPOS suppliers wanting to enroll in the program.3

 In 2006, 

OIG conducted unannounced site visits in South Florida and provided further evidence of 

this insufficiency by finding that nearly half of the 1,581 suppliers visited were not in 

compliance with basic supplier standards.4

 

Surety Bonds for DMEPOS Suppliers 

In recent years, steps have been taken to improve the supplier enrollment process. New 

accreditation and supplier enrollment standards were implemented and certain suppliers 

are now required to obtain surety bonds.5 A DMEPOS surety bond is an agreement 

between the supplier and the surety guaranteeing that the surety will fulfill financial

obligations to Medicare, up to the surety bond amount, in the event that the supplier does 

not fulfill these obligations. Generally, a surety bond enables CMS to recover 

overpayments when other methods of collection are unsuccessful. 

In section 4312(a) of the Balanced Budget Act of 1997, P.L. 105-33, Congress amended 

Social Security Act § 1834(a) to require as a condition of enrollment that DME suppliers 

“provide the Secretary on a continuing basis with a surety bond ... in an amount that is 

not less than $50,000.” CMS ultimately promulgated a final rule on January 2, 2009, 

requiring certain Medicare suppliers to obtain a surety bond.6 The final rule became 

effective on March 3, 2009. New suppliers were required to obtain a bond by May 4, 

2009, whereas existing suppliers had until October 2, 2009, to obtain a surety bond.7

 

According to the final rule, the purpose of the surety bond requirement is to (1) limit 

Medicare’s risk from fraudulent suppliers; (2) enhance the enrollment process to ensure 

that only legitimate suppliers are enrolled or remain enrolled; (3) ensure recovery of 

erroneous payments that result from fraudulent or abusive billing practices; and 

(4) ensure that beneficiaries receive products and services that are reasonable and 

necessary from legitimate suppliers.

8

 

2 Government Accountability Office (GAO), Covert Testing Exposes Weaknesses in the Durable Medical 

Equipment Supplier Screening Process, GAO-08-955, July 2008.

 

3 GAO, More Effective Screening and Stronger Enrollment Standards Needed for Medical Equipment 

Suppliers, GAO-05-656, September 2005. 4 OIG, South Florida Suppliers’ Compliance with Medicare Standards: Results from Unannounced Visits, 

OEI-03-07-00150, March 2007. 5 CMS, Provider Enrollment Regulation. Accessed at 

http://www.cms.gov/medicareprovidersupenroll/09_providerenrollmentregulation.asp on July 14, 2011; 

CMS, DMEPOS Accreditation. Accessed at 

http://www.cms.gov/medicareprovidersupenroll/07_dmeposaccreditation.asp on August 24, 2011. 6 42 CFR 424.57(d); 74 Fed. Reg. 166 (Jan. 2, 2009).

7 42 CFR § 424.57(d)(1).

8 74 Fed. Reg. 166, 167 (Jan. 2, 2009).
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OEI-03-11-00351 Use of Surety Bonds to Recover Overpayments Made to DMEPOS Suppliers

All nonexempt suppliers are required to obtain a surety bond from an authorized 

surety.

9, 10 The surety bond must be in the amount of at least $50,000 for each practice 

location.

11 However, suppliers against which final adverse actions have been taken are 

considered to pose a higher than average risk to the program and must obtain an elevated 

surety bond, at a rate of an additional $50,000 for each final adverse action imposed 

against them.

12 For example, if a supplier’s billing privileges had been revoked or 

suspended in the preceding 10 years, the supplier would need to secure an elevated surety 

bond in the amount of $100,000 (i.e., the base amount of $50,000 plus an additional 

$50,000 because of the final adverse action). Provisions in the Patient Protection and 

Affordable Care Act of 2010 also give the Secretary of Health and Human Services the 

authority to increase surety bond requirements for suppliers based on the company’s 

billing volume.13 

The surety bond requirement was added (as standard number 26) to the list of supplier 

standards that DMEPOS suppliers must meet for enrollment in Medicare.14 All

nonexempt suppliers are required to provide a copy of their surety bond as part of the 

Medicare enrollment application (Form CMS-855S). 

Related Study by OIG

In May 2010, OIG reported on the collection status as of June 2008 for overpayments 

identified by Program Safeguard Contractors that had been made to South Florida 

suppliers and that had been referred for collection in 2007. OIG found that the collection 

rate for those overpayments was 1 percent, lower than the national DMEPOS collection 

rate of 3 percent. Additionally, the report found that Medicare would have recovered an 

additional $15 million, or 6 percent, of South Florida DMEPOS overpayment dollars if 

the surety bond had been in place at the time of the study.15

 

9 42 CFR § 424.57(d)(15)(i) provides exceptions from the surety bond requirement, under certain specified 

conditions, for the following types of DMEPOS suppliers: Government-operated DMEPOS suppliers, 

State-licensed orthotic and prosthetic personnel in private practice, physicians and nonphysician 

practitioners providing items to their own patients, and physical and occupational therapists in private 

practice. 

10 42 CFR § 424.57(d)(2). 11 42 CFR § 424.57(d)(2)(iii); CMS, Medicare Program Integrity Manual, Pub. 100-08, ch. 10, 

§ 21.7(A)(3). Suppliers generally pay a fee of approximately $1,500 (or 3 percent of the value of a $50,000 

bond) to obtain the bond.

12 42 CFR § 424.57(d)(3); 42 CFR § 424.57(a); CMS, Medicare Program Integrity Manual, Pub. 100-08, 

ch. 10, § 21.7. Final adverse actions include Medicare-imposed revocation of any Medicare billing 

number; revocation or suspension of a license to provide health care by any State licensing authority; 

revocation or suspension by an accreditation organization; conviction of a Federal or State felony offense 

within the 10 years preceding enrollment, revalidation, or reenrollment; or exclusion or debarment from 

participation in a Federal or State health care program.

13 Patient Protection and Affordable Care Act, P.L. 111-148, § 6402(g) (amending Social Security Act, 

§ 1834(a)(16)(B)).

14 CMS, DMEPOS Supplier Standards. Accessed at 

https://www.cms.gov/medicareprovidersupenroll/10_DMEPOSsupplierstandards.asp on August 24, 2011. 15 OIG, Collection Rate for Overpayments Made to Medicare Suppliers in South Florida, 

OEI-03-09-00570, May 2010.
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OEI-03-11-00351 Use of Surety Bonds to Recover Overpayments Made to DMEPOS Suppliers

METHODOLOGY

From CMS, we requested written procedures outlining how overpayments made to 

suppliers are recovered through surety bonds. CMS stated that these procedures were 

still in draft form, but they did provide documentation showing that the draft procedures 

were sent to Medicare contractors for review and comment. We also interviewed CMS 

staff regarding the draft procedures. In addition, we asked CMS to provide us with the 

total amount of DMEPOS overpayments recovered from the surety bonds as of 

July 2011. 

This study was conducted in accordance with the Quality Standards for Inspection and 

Evaluation issued by the Council of the Inspectors General on Integrity and Efficiency. 

RESULTS

CMS Has Not Finalized Procedures for Recovering DMEPOS Overpayments 

Through Surety Bonds

In late August 2010 and early June 2011, CMS sent draft procedures to the National 

Supplier Clearinghouse (the contractor responsible for accrediting and enrolling 

DMEPOS suppliers) and the durable medical equipment Medicare administrative 

contractors (the contractors responsible for processing DMEPOS claims) for comment. 

However, CMS reported that significant personnel changes within CMS have delayed the 

finalization of these procedures. Therefore, CMS currently does not have finalized 

procedures for recovering DMEPOS overpayments through surety bonds. 

CMS Has Not Recovered Any DMEPOS Overpayments Through Surety Bonds 

Since the Surety Bond Requirement Was Implemented 

Since October 2009, all nonexempt suppliers have been required to maintain a surety 

bond as a term of their enrollment in Medicare. However, as of July 2011, CMS had not 

sought payment from holders of surety bonds, and as a result, it had not recovered any

overpayments through surety bonds. 

CONCLUSION

This memorandum report provides early findings from our study to review CMS’s 

procedures for using surety bonds to recover overpayments made to suppliers and 

determine the extent to which overpayments have been recovered through surety bonds. 

We determined that CMS has not finalized procedures for contractors to recover

overpayments through surety bonds. As of July 2011, CMS had not collected any 

overpayments through surety bonds in the nearly 2 years that suppliers had been required 

to obtain them. 

Requiring surety bonds is an important program integrity tool that not only limits 

fraudulent suppliers’ access to the program, but also serves as a means for Medicare to 
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OEI-03-11-00351 Use of Surety Bonds to Recover Overpayments Made to DMEPOS Suppliers

guarantee recoupment of some overpayments. Not using this program integrity tool 

leaves Medicare vulnerable to losses from fraudulent suppliers. 

We are currently conducting another study (OEI-03-11-00350) to determine the number 

of suppliers with outstanding unrecovered overpayments since October 2, 2009, and the 

amount of these overpayments. We will also determine the amount that could have been 

recovered if CMS had sought recovery of these overpayments through surety bonds. 

Further, we will provide information on the number of these suppliers whose billing 

privileges have been revoked or have become inactive since October 2, 2009. 

This report is being issued directly in final form because it contains no recommendations. 

If you have comments or questions about this report, please provide them within 60 days. 

Please refer to report number OEI-03-11-00351 in all correspondence.