Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JUNE GIBBS BROWN 

Inspector General 

NOVEMBER 1998 

OEI-07-96-00221 

Medicare Reimbursement for 

Hospital Beds in the Home 

Prices 
OFFICE OF INSPECTOR GENERAL 

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

protect the integrity of the Department of Health and Human Services programs as well as the 

health and welfare of beneficiaries served by them. This statutory mission is carried out through a 

nationwide program of audits, investigations, inspections, sanctions, and fraud alerts. The 

Inspector General informs the Secretary of program and management problems and recommends 

legislative, regulatory, and operational approaches to correct them. 

Office of Evaluation and Inspections 

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

Inspector General. It conducts short-term management and program evaluations (called 

inspections) that focus on issues of concern to the Department, the Congress, and the public. The 

inspection reports provide findings and recommendations on the efficiency, vulnerability, and 

effectiveness of departmental programs. 

OEI's Kansas City Regional Office prepared this report under the direction of James H. Wolf, 

Regional Inspector General. Principal OEI staff included: 

REGION HEADQUARTERS 

Perry A. Seaton, Team/Project Leader Lisa A. Foley, Program Specialist 

Tim Dold, Team Leader Stuart Wright, Associate Director 

Barbara Tedesco, Mathematical Statistician 

To obtain copies of this report, please call the Kansas City Regional Office at 816/426-3697. 

Reports are also available on the World Wide Web at our home page address: 

http://www.dhhs.gov/progorg/oei 
EXECUTIVE SUMMARY

PURPOSE 

To determine the reasonableness of Medicare's reimbursement for rental of hospital beds in the 

home when compared to other Federal, State, private insurance companies, and managed care 

organizations. 

BACKGROUND 

Medicare authorizes beneficiaries to obtain hospital beds for use in their home. This is done on 

the basis of a rental schedule with an option to purchase the bed. Suppliers receive monthly 

reimbursement from the Medicare Durable Medical Equipment Regional Carriers based upon a 

fee schedule. This schedule is limited by the Health Care Financing Administration’s (HCFA) 

established national payment ceilings, and is adjusted annually for inflation based upon the 

Consumer Price Index. The rental fee schedule caps the rental payments at 120 percent of the 

allowable charge for purchase. In calendar year (CY) 1996, Medicare allowed charges of over 

$272 million for the four categories of hospital beds included in this study. Semi-electric beds 

(code E0260) comprised 86 percent of this total while total electric beds accounted for less than 

one-half of one percent 

We surveyed sampled entities from Medicare risk managed care organizations, Medicaid State 

Agencies, the top 50 health insurance companies as ranked by policies in force, and a listing of 

companies providing national and local coverage in the Federal Employees Health Benefits 

program. Overall, we achieved an 82 percent response rate. 

This is one of two reports examining Medicare’s policies and reimbursement for hospital bed 

equipment. A companion report “Medicare Reimbursement for Hospital Beds in the Home: 

Payment Methodology” OEI-07-96-00222 compares Medicare’s rental reimbursement payment 

methodologies to those of other medical insurance payers. 

FINDING 

Medicare Rates for Rental of Hospital Beds for Home Use Are Substantially Higher than 

Rates Paid by Most Other Payers 

Comparison of Average Monthly Rental Payments for Semi-Electric Beds 

Ninety-seven percent of our respondents pay for rental of hospital beds (72 of 74 respondents). 

We analyzed the rates for each hospital bed to identify the entities that paid uniform rates for 

rental and those that paid variable rates which depend on locale and market competition. 

Of the 51 entities furnishing information on both the rental rates and the frequency of these 

payments for the four categories of hospital beds included in this inspection, 37 (72.6 percent) use 

a uniform monthly rate schedule, and 14 (27.4 percent) pay variable rates. 

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We found that on average, other payers’ uniform monthly rental rates were more than 14 percent 

lower than the corresponding Medicare monthly rate for semi-electric hospital beds. For entities 

using a variable rate schedule, their highest rate ranged from 22 percent above to almost 

23 percent below the corresponding Medicare average rate for this bed. We found similar results 

for manual, manual-adjustable, and total-electric hospital beds. 

Comparison of Actual Monthly Rental Rates for Semi-Electric Beds 

Since Medicare, unlike other entities, pays an enhanced rate for the first 3 months of rental, we 

also compared their actual rate for months 1 - 3 and months 4 - 15 to the rates of other entities. 

We found Medicare’s rates for months 1 - 3 were from 18 percent to 38 percent higher, and for 

months 4 - 15 were from 9 percent lower to 18 percent higher. 

Maximum Potential Rental Payments 

We compared Medicare’s rental payments for a semi-electric hospital bed during the maximum 

potential rental period of 15 months to other payers’ maximum rental payments. We found 

entities paying a uniform rate were on average over 30 percent lower than Medicare’s maximum 

payments. Also, entities who predominately reimburse from their highest variable rate schedule 

were on average 30 percent lower. Those payers primarily paying from their lowest rate schedule 

were on average 43 percent lower. Similar results were obtained for manual, manual-adjustable 

and total-electric hospital beds. 

RECOMMENDATION 

HCFA Should Take Immediate Steps to Reduce Medicare Payments for In-Home Hospital 

Beds 

Medicare’s monthly rates for the four types of hospital beds studied, when considered with total 

rental payments during the 15 month extended rental period, exceed the rates of other payers by 

more than 14 percent. The Balanced Budget Act of 1997 provides HCFA with the necessary 

tools to immediately reduce rates if there is compelling evidence that their rates exceed those 

generally being paid in the marketplace. We believe that this is the case here. If this authority is 

exercised for the four types of hospital beds surveyed, we estimate that annual savings at a 

12 - 15 percent reduction would be approximately $32.7 to $40.9 million. Projected over 

5 years, Medicare would save over $163 to $204 million. 

We also believe that the payment method used by Medicare inappropriately overcompensates for 

rental use during the first 3 months of each rental period. We discuss this more thoroughly in our 

companion report, “Medicare Reimbursement for Hospital Beds in the Home: Payment 

Methodology” OEI-07-96-00222. In that report we include a recommendation that HCFA seek 

legislation to correct that aspect of the problem. Overall, we believe that a combination of both 

approaches would be best. However, the savings would not be additive. 

))))))))))) ii 
AGENCY COMMENTS 

The HCFA concurs with the intent of our recommendation and is undertaking a comparison of 

hospital bed rates and a competitive bidding demonstration project as a prelude to making hospital 

bed rate changes. Appendix F contains the complete text of these comments. We remain 

available to provide technical assistance to HCFA on this matter. 

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TABLE OF CONTENTS

PAGE 

EXECUTIVE SUMMARY 

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

FINDING ................................................................. 7

Medicare’s Rates for Hospital Beds Exceed Most Other Payers ................... 7

RECOMMENDATION ...................................................... 10

COMMENTS ON THE DRAFT REPORT ....................................... 10

APPENDICES 

A: Entities Included In the Sample ............................................ A-1

B: Sample Response Rate .................................................. B-1

C: Medicare’s Rental Rates to Reimbursement Compared to Other Payers .............. C-1

D: Duration of Hospital Bed Rental ........................................... D-1

E: Calculation of Savings ................................................... E-1

F: Agency Comments ..................................................... F-1
INTRODUCTION

PURPOSE 

To determine the reasonableness of Medicare's reimbursement for rental of hospital beds in the 

home when compared to other Federal, State, private insurance companies, and managed care 

organizations. 

BACKGROUND 

The Medicare Supplemental Medical Insurance program pays for the rental or purchase of 

medically necessary Durable Medical Equipment (DME) used in a beneficiary’s home when 

determined by a physician to be medically required. Certain categories of DME, including 

hospital beds, are reimbursed as “capped rental” items. 

Medicare Reimbursement Methodology for Hospital Beds 

Under Medicare capped rental DME rules, a hospital bed is initially furnished to a beneficiary as a 

rental item. At the 10th month, the beneficiary is offered the option of purchasing a new or used 

bed, which is effective with the 14th month. If the beneficiary elects to continue to rent the bed, 

Medicare payments will end upon completion of the 15th month. After rental payments end, 

Medicare will pay for necessary servicing and maintenance of capped rental equipment once every 

6 months (which cannot exceed the charge for a 1 month rental). When the hospital bed is no 

longer needed by the beneficiary (due to death or medical improvement) the supplier is free to 

reclaim the used item for rental or sale to other clients. 

Suppliers receive monthly reimbursement from the Medicare Durable Medical Equipment 

Regional Carriers (DMERC) under a fee schedule. This schedule is limited by the Health Care 

Financing Administration’s (HCFA) established national payment ceilings, and is adjusted annually 

for inflation based upon the Consumer Price Index. The fee schedules reimburse a supplier: 

C 10 percent of the average of allowed purchase price on assigned claims for new 

equipment for each of the first 3 months of rental, and 

C 7.5 percent of the average of allowed price for new equipment, for each of the 

remaining months not to exceed 12 additional months of continuous use. 

Each month's rental applies toward the purchase price if the beneficiary elects this option, or 

applies to the 15 month maximum rental cap. Table 1 is a summary of the Medicare fee schedule. 

Medicare allows 105 percent for a purchased item or 120 percent if rented through the 15th 

month. 

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1

2

3

4

5

6

7

8

9

10

11

12

 13

14

 15 

Table 1 

Medicare Reimbursement Schedule for Hospital Beds 

Rental Month Percent of Purchase Price Cumulative Percent 

10.0% 10.0% 

10.0% 20.0% 

10.0% 30.0% 

7.5% 37.5% 

7.5% 45.0% 

7.5% 52.5% 

7.5% 60.0% 

7.5% 67.5% 

7.5% 75.0% 

7.5% 82.5% 

7.5% 90.0% 

7.5% 97.5% 

1 7.5% 105.0% 

7.5% 112.5% 

2 7.5% 120.0% 

1 If elected, the purchase option is effective upon completion of the 13th rental month. 

2 Rental payments terminate upon completion of the 15th rental month. 

In calendar year (CY) 1996 the DMERCs allowed charges of over $272 million for the four 

categories of hospital beds included in this study. Semi-electric beds (code E0260) comprised 

86 percent of this total while total electric beds accounted for less than one-half of one percent 

(refer to Table 2). 

Table 2

Allowed Charges for Hospital Beds

January 1, 1996 - December 31, 1996 1

Manual Hospital Bed (E0250) 

Manual Adjustable Hospital Bed (E0255) 

Semi-Electric Hospital Bed (E0260) 

Total Electric Hospital Bed (E0265) 

Total: 

$7,085,989 

$30,720,446 

$233,607,390 

$1,084,068 

$272,497,893 

1 Source: Statistical Analysis DMERC (Palmetto Government Benefits Administrators) 

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Related Studies 

General Accounting Office 

A July 1992 General Accounting Office (GAO) Report, “Medicare, Program, and Beneficiary 

Costs Under Durable Medical Equipment Fee Schedules,” HRD-92-78, identified the greatest 

increase in program costs and beneficiary liability as “capped rental” items that were purchased 

under the reasonable charge system, but rented under the fee schedule. The GAO noted that the 

Omnibus Budget Reconciliation Act (OBRA) 1990 made changes to OBRA 1987 which 

established national capped payment ceilings and floors for “capped rental” items, added a 

beneficiary purchase option in the 10th rental month (which is effective with the 14th month), and 

reduced the overall supplier reimbursement from 150 percent to 120 percent for equipment rented 

for the entire 15 month “capped rental” period. 

The GAO also concluded that OBRA 1990, when fully implemented, would offset the increased 

program costs that occurred under OBRA 1987, and would substantially reduce the variability in 

rates among the carriers for the same or similar items. They estimated that Medicare program 

costs will be essentially the same under OBRA 1990 as they would have been under the 

reasonable charge system that the fee schedules replaced. 

HHS/Office of Inspector General (OIG) 

A May 1993 OIG report, “Review of Medicare Part B Reimbursement of Hospital Beds,” 

A-06-91-00080, found that Medicare reimbursement rates for “capped rental” hospital beds were 

excessive because HCFA failed to take into account the useful life of the bed and how many times 

it can be rented. The OIG estimated Medicare savings of $6.2 to $7.8 million in just one State. 

HCFA did not accept OIG's recommendations to change the way they reimburse for hospital beds 

in part because the study was limited to rentals in only one State. 

Health Care Financing Administration 

Public Law 103-432 § 135(c) [the 1994 Amendments to the Social Security Act] mandated that 

HCFA study variations in DME suppliers' product and service costs. HCFA contracted with Jing 

Xing Health and Safety Resources of Annandale, VA to complete this project. The report, 

“Durable Medical Equipment Supplier Product and Service Cost Study,” was released to 

Congress in February 1997. The report stated that “. . . the construction of a geographic payment 

index for DME will present a very difficult challenge to HCFA because of 1) the inability of DME 

suppliers to readily provide the kinds of item-specific cost data normally used by HCFA in 

developing geographic indices, 2) the lack of data and standardization on cost shares by product 

type, and 3) the likely objections that would be raised by any methodology that estimates cost 

shares and geographic variation using proxy data.” 

In response to the report, HCFA stated its belief that Medicare frequently pays too much for 

durable medical equipment and believes that competitive bidding, which is used by the 

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Department of Veterans' Affairs (VA) and other Federal, State and private health care purchasers, 

would ensure that reliable market prices are paid for these items. HCFA further cited its 

“Competitive Bid Demonstration” as a source for addressing congressional concerns. This 

involves a demonstration to test whether competitive bid pricing can be used to purchase some 

DME and supplies for Medicare beneficiaries. Hospital beds are included as one of the 

competitive bid items. There will be a total of three metropolitan demonstration sites in the 

southeast and southwest United States. The demonstration proposal, which is administered by 

Palmetto Government Benefits Administrators (a DMERC), is in clearance with the Office of 

Management and Budget. HCFA initially estimated that one of the three demonstration sites 

would be operational by the Spring of 1998. However, they now estimate that the study will not 

begin until later in the year. 

A second HCFA project involves a study of the “inherent reasonableness” of Medicare payments 

for DME and supplies. HCFA awarded this contract to AFYA, Inc. of Adelphi, MD in November 

1995, and specified analysis of 100 DME items, including hospital beds. The AFYA report has 

been completed, and HCFA plans to release the report information to the DMERCs for 

comparison against the current reimbursement rate structure. 

Congressional Study 

Senator Harkin (D-IA) released a staff report, “Medicare Payments for Medical Equipment and 

Supplies,” July 1996, in which his staff analyzed 18 durable medical equipment items, including 

hospital beds. They compared Medicare payments for purchase and rental of these items against 

the payments made by the Department of Veteran's Affairs (VA) Medical Center in Iowa City, IA. 

In addition, they compared Medicare's payments against wholesale and retail prices for these 

items advertised through medical equipment and supply catalogs. They found Medicare rental 

payments for DME and supplies to be excessive when compared to VA and wholesale payments. 

They estimated that by adopting the advertised wholesale price as the maximum payment amount, 

the Medicare program would save 40 percent, or over $82 million annually. If Medicare paid the 

VA price for the bed, they estimated the Medicare program would save 37 percent, or over $75 

million annually. 

Recent Legislation Impacting HCFA’s Ability to Adjust Payments 

As part of the Balanced Budget Act of 1997, Public Law 105-33, [42 U.S.C. § 1395u(b)], 

Congress enacted provisions which provide HCFA greater flexibility in determining the 

appropriate rate of reimbursement for items and services when rates are found to be grossly 

excessive, deficient, or not inherently reasonable. This law allows HCFA to increase or decrease 

rates, without publishing Federal Register notices, up to 15 percent annually if “the payment 

amount for an item or service under this part is substantially higher or lower than the payment 

made for the item or service by other purchasers.” 

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If HCFA determines that rates need to be adjusted by more than 15 percent annually, then it must, 

through the rule making process, consult with suppliers or other individuals furnishing the 

services, and publish the proposed revised rates in the Federal Register. Section 4316 (a) of the 

Balanced Budget Act amended § 1842 (b)(8)(C) of the Social Security Act to require the 

Secretary to consider the following factors in making “inherent reasonableness” determinations: 

C Medicare and Medicaid are the sole or primary sources of payment for a category 

of items or services; 

C the payment amounts for a category of items or services do not reflect changing 

technology or changes in acquisition, production or supplier costs; 

C 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; and 

C other factors as determined by the Secretary to be appropriate [these factors are 

defined in Code of Federal Regulations Title 42 CFR § 405.502 (g)(1)]. 

On January 7, 1998, HCFA published an interim final rule in the Federal Register implementing 

the provisions of the Balanced Budget Act. This rule specified additional factors the Secretary 

considers to be appropriate in making “inherent reasonableness” determinations. The resulting 

factors include, but are not limited to, a determination that the Medicare program is paying 

excessive rates because: 

C  the marketplace is not competitive; 

C  the payment amounts in a particular locality grossly exceed amounts paid in other 

localities for the same category of items or services; 

C  the payment amounts grossly exceed acquisition or production costs for the 

category of items or services; and 

C  there have been increases in payment amounts that cannot be explained by inflation 

or technology. 

METHODOLOGY 

We researched the Federal laws, regulations and HCFA policies that cover the establishment, 

reimbursement, and purchase options for capped rental hospital beds. We also reviewed various 

private and governmental entities’ reimbursement methodologies for these items. 

We obtained listings of Medicare risk managed care organizations (MCOs) with 450 or more 

members, Medicaid State agencies, the top 50 private health insurance companies in the United 

States as ranked by number of policies in force, and a listing of the companies providing national 

and local coverage through the Federal Employees Health Benefits Program (FEHB). We 

selected a judgmental sample from each of these groups, and requested them to complete a mailed 

survey questionnaire. For the sampled private insurance companies with multiple components, we 

surveyed their private, MCO, and government insurance divisions. In total, we contacted 90 

entities. 

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As a means to obtain direct information and validate it, we selected a sub-sample from each of the 

above organizations for on-site visits. The criteria for selection was based upon size, location, 

and proximity to other on-site contacts for economy of travel. In addition, we sent surveys to the 

VA, the Indian Health Service, and the Department of Defense Tri-Care program, formerly the 

Office of Civilian Health and Medical Program of the Uniform Services (CHAMPUS). As part of 

all surveys, we requested the entities' written policies for reimbursement methods, schedules, and 

rates for the following types of new and used hospital beds: 

C  Manual Hospital Bed (HCPCS Code E0250) 

C  Manual Adjustable Hospital Bed (HCPCS Code E0255) 

C  Semi-Electric Hospital Bed (HCPCS Code E0260) 

C  Total Electric Hospital Bed (HCPCS Code E0265) 

We inquired if these purchasers of hospital beds maintain ongoing data or have conducted studies 

to address supplier expenses for acquisition, delivery, setup, patient education, maintenance, tear 

down, pick up, sanitation, billing, or supplier profit. We also asked if they are utilizing 

competitive bidding for either the rental or purchase of these items. In addition, we asked them to 

provide both their lowest and highest payment rates for each of the beds included in this study and 

an estimate for the percentage of time these rates were paid. Any unclear responses were clarified 

by telephone and follow up contacts made to non-responders. Overall we achieved an 82 percent 

response rate. Appendix A breaks out the various entities surveyed and identifies responders by 

sample category. It should be noted that because not all responders provided answers to each 

question on the survey instrument, we reported our data based on the percentage of responders 

who answered the question. Appendix B lists the response rates for each of the sample 

categories. 

These rates were then grouped by type of respondent and compared to the corresponding 

Medicare rental rates. Since the Medicare program pays a higher rate during the first three 

months of rental, we performed three comparative analyses. First, we totaled the Medicare rate 

for the entire 15 month maximum rental period and divided the result by 15 to determine 

Medicare’s monthly average rate. This average was then compared to other entities’ rental rates. 

Second, we compared Medicare’s enhanced rental rate for months 1 - 3 and their lower rate paid 

for months 4 - 15 to the corresponding rates for other entities. Lastly, we compared the 

maximum Medicare rates for a 15 month rental to the maximum rental payments of the other 

entities. 

This is a companion report to “Medicare Reimbursement for Hospital Beds in the Home: 

Payment Methodology” OEI-07-96-00222, which compares Medicare rental reimbursement 

methodology for hospital beds used in the home to policies utilized by other Federal, State, 

private insurance companies, and managed care organizations. 

We conducted our review in accordance with the Quality Standards for Inspections issued by 

the President’s Council on Integrity and Efficiency. 

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6 
FINDING

MEDICARE RATES FOR RENTAL OF HOSPITAL BEDS FOR HOME 

USE ARE SUBSTANTIALLY HIGHER THAN RATES PAID BY MOST 

OTHER PAYERS 

We found that Medicare’s rate and method of payment differed from the other entities. Medicare 

has a two tier rate structure, an enhanced rate which is paid in the first 3 months of rental, and a 

lower rate that is paid for months 4 - 15 of the rental period. All other entities we surveyed paid a 

uniform rate. Therefore, to obtain a clearer perspective of this difference, we compared 

Medicare’s average monthly payment to rates of other entities and then compared Medicare’s 

actual payment amounts for both the enhanced rate for the first 3 months of rental, and months 

4 - 15 to other entities rental rates. 

We found that semi-electric beds accounted for over 85 percent of the CY 1996 Medicare 

allowable charges for the four categories of beds included in this study (refer to Table 2). The 

variance in semi-electric payment rates between Medicare and other payers is consistent with the 

other three hospital bed codes. Therefore, for this report, we decided to focus on the comparison 

of only the semi-electric bed rates. However, a complete comparison of four bed categories is 

contained in Appendix C. 

Comparison of Average Monthly Rental Payments for Semi-Electric Beds 

Ninety-seven percent of our respondents pay for rental of hospital beds (72 of 74 respondents). 

We analyzed the rates for each hospital bed by type of respondent to identify the entities that paid 

uniform rates for rental, and those that paid variable rates which depend on locale and market 

competition. Of the 51 entities furnishing both the rental rates and the frequency of these 

payments, 37 (72.6 percent) use a uniform monthly rate schedule and 14 (27.4 percent) pay 

variable rates. 

We found on average, other payers’ uniform monthly rental rates were more than 14 percent 

lower than the corresponding Medicare monthly average rate for semi-electric beds. For entities 

using a variable rate schedule, their highest rates ranged from 22 percent above to almost 

23 percent below the corresponding Medicare average rate for this bed (refer to Table 3 for 

information on the percent of respondents paying at the variable “high” and “low” rates). 

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7 
Table 3 

Medicare’s Monthly Average Rental Rate

For Semi-Electric Hospital Beds Compared

to Rates of Other Payers 

Type of Rate Paid 

Uniform 

Variable “High” 

Variable “Low” 

Percent of Percent Rate 

Respondents is Above or Below 

Paying Rate Medicare’s Rate 

72.6% -14.1% 

15.7% 22.0% 

5.9% -22.7% 

Pay neither “High” or “Low” Variable rate 5.9% Not Obtained 

Comparison of Medicare’s Monthly Rental Rates for Semi-Electric Beds to Other Payers 

Since Medicare, unlike other entities, pays an enhanced rate for the first 3 months of rental, we 

also compared their actual rate for months 1 - 3 and months 4 - 15 to other entities’ rates for the 

same periods. We found Medicare’s rates for months 1 - 3 were from 18 percent to 38 percent 

higher and for months 4 - 15 were from 9 percent lower to 18 percent higher, the 9 percent 

representing the variable “high” rate paid by some entities (Table 4). 

Table 4 

Medicare’s Actual Rental Rates for 

Months 1 - 3 and Months 4-15 

Compared to Rates of Other Entities 

Mean Mean Mean 

Medicare Mean Percent Medicare Other Percent 

Rental Other Difference Rental Entities’ Difference 

Type of Rate Entities’ Over / Rate Rental Rate Over / 

Rental Rate 1 - 3 Rental Rate Under 4 - 15 4 - 15 Under 

Compared Months 1 - 3 Months Medicare Months Months Medicare 

Uniform $153.74 1 $105.47 -31.3% $115.31 $105.47 -8.4% 

Variable High $153.42 2 $125.61 -18.2% $115.07 $125.61 9.0% 

Variable Low $153.42 2 $94.83 -38.1% $115.07 $94.83 -17.5% 

1 This is the mean Medicare rental rate for the 37 providers who paid a uniform rate. 

2 This is the mean Medicare rental rate for the 14 providers who pay either a high or 

low variable rate. 

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The difference in Medicare payment rates and those of other entities is significant, particularly 

since almost one-half (47 percent) of hospital bed rentals are 3 months or less in duration (Refer 

to Appendix D for Analysis of Duration of Hospital Bed Rental). 

Maximum Potential Rental Payments 

We reviewed the limits under which Medicare and the surveyed insurers paid for rentals, as this is 

an important factor in determining the total rental payment amount. For Medicare, the maximum 

reimbursable continuous rental period is 15 months. For entities paying a uniform rate, their 

maximum payments averaged over 30 percent lower than Medicare’s maximum payments. Also, 

entities which predominately reimburse from their highest variable rate schedule also averaged 30 

percent lower. Those payers primarily reimbursing from their lowest rate schedule were on 

average 43 percent lower (refer to Table 5). 

Table 5 

Medicare’s Maximum Rental Reimbursement 

For Semi-Electric Hospital Beds Compared to 

Maximum Reimbursement of Other Payers 

Percent of

Respondents

Type of Rate Paid Paying Rate

Uniform 72.6% 

Variable “High” 15.7% 

Variable “Low” 5.9% 

Predominately pay neither “High” or “Low” 5.9% 

Variable rate 

Percent Maximum 

Reimbursement 

is Above or Below 

Medicare’s Maximum 

Reimbursement 

-30.9% 

-30.0% 

-43.4% 

Not Obtained 

Similar results were obtained for manual, manual-adjustable and total-electric hospital beds. 

Refer to Appendix C for detailed information. 

The great deviation in maximum potential payment amounts is due mainly to different payment 

policies between these entities and the Medicare program. We found that 60 percent of other 

payers end reimbursement when the total rental payments equal the amount the company would 

pay for outright purchase of the item. Conversely, the Medicare program allows aggregate rental 

payments to a maximum of 120 percent of the purchase price if the bed is rented for 15 months. 

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RECOMMENDATION

HCFA Should Take Immediate Steps to Reduce Medicare Payments for 

In-Home Hospital Beds 

Federal law, regulations and Medicare policy provide that HCFA may adjust supplier 

reimbursement when found to be unreasonable and not comparable to rates paid in the 

marketplace. We have demonstrated through the survey of private and governmental payers’ 

comparative rates that HCFA is paying too much for hospital beds. We believe that HCFA can 

achieve significant program savings by modifying its reimbursement policies for capped rental 

hospital beds to be comparable to what other insurers are paying. 

Use the Newly Enacted Authority to Make an Immediate 12 to 15 Percent Reduction 

Medicare’s monthly rates for the four types of hospital beds studied, when considered with total 

rental payments during the 15 month extended rental period, exceed the rates of other payers by 

more than 14 percent. The Balanced Budget Act of 1997 provides HCFA with the necessary 

tools to immediately reduce rates if there is compelling evidence that their rates exceed those 

generally being paid in the marketplace. We believe that this is the case here. If this authority is 

exercised for the four types of hospital beds surveyed, we estimate that annual savings at a 

12 - 15 percent reduction would be approximately $32.7 to $40.9 million. Projected over 

5 years, Medicare would save over $163 to $204 million. 3 Our savings calculations are described 

in detail in Appendix E. 

We also believe that the payment method used by Medicare inappropriately overcompensates for 

rental use during the first 3 months of each rental period. We discuss this more thoroughly in our 

companion report, “Medicare Reimbursement for Hospital Beds in the Home: Payment 

Methodology” OEI-07-96-00222. In that report we include a recommendation that HCFA seek 

legislation to correct that aspect of the problem. Overall, we believe that a combination of both 

approaches would be best. However, the savings would not be additive. 

AGENCY COMMENTS 

The HCFA concurs with the intent of our recommendation and is undertaking a comparison of 

hospital bed rates and a competitive bidding demonstration project as a prelude to making hospital 

bed rate changes. Appendix F contains the complete text of these comments. We remain 

available to provide technical assistance to HCFA on this matter. 

3 These savings estimates are based on calendar year 1996 payments and are not indexed 

for inflation. 

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APPENDIX A

ENTITIES INCLUDED IN THE SAMPLE

PRIVATE INDEMNITY COMPANIES

Name State Response Received 

Aetna Life and Casualty Co CT Y 

Blue Cross & Blue Shield of Florida FL Y 

Blue Cross & Blue Shield of Michigan MI Y 

Blue Cross & Blue Shield of Texas, Inc. TX Y 

Empire Blue Cross Blue Shield NY N 

Metropolitan Life Insurance Company FL Dropped (sold to United 

Health Care) 

Mutual of Omaha NE Y 

New York Life Insurance Company NE Y 

Prudential Insurance Company of America PA N 

United Health Care (formerly Travelers) CT Y 

Total Companies: 10 Total Responders: 7 

MEDICAID STATE AGENCIES 

Name State Response Received 

Arizona Health Care Cost Containment System 1 AZ Y 2 

Department of Human Services 1

Department of Human Services

Department of Health & Mental Hygiene

Division of Medicaid

Department of Human Services

New Mexico Human Services Department

Department of Social Services

Department of Human Services 1

Department of Human Services

Total States: 10

1 Medicaid § 1115 Waiver State

HI Y 

ID Y 

MD Y 

MS Y 

ND Y 

NM Y 

NY Y 

OH Y 

WI Y 

Total Responders: 10 

2 The Arizona Health Care Cost Containment System (the Medicaid State Agency) has seven subcontractors 

who provide Medicaid Coverage. Ventana Health Systems, provided the only response. This contractor 

furnishes Medicaid health care to 7 of 15 Arizona Counties. 

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FEDERAL EMPLOYEE HEALTH BENEFITS PROGRAM--LOCAL PLANS

Name State Response Received 

Foundation Health CA Y 

CIGNA Healthcare of Colorado CO N 

Health New England CT N 

Suburban Health Plan, Inc. CT Y 

Exclusive Health Care IA Y 

BCI HMO, Inc IL Y 

Personal Care Blue Shield HMO IL Y 

Advantage Care, Inc. KY Dropped--No longer 

participating in FEHB 

Plans. 

HMO Maine ME Y 

AETNA Health Plans of the Mid-Atlantic States MD Y 

Health Alliance MI N 

Prudential Health Care HMO MO N 

United Health Care Select MO Y 

Exclusive Health Care NE Y 

FHP New Mexico NM Y 

Presbyterian Health Plan NM N 

GHI Health Plan NY Y 

Healthsource HMO of New York NY Y 

Independent Health Association NY Y 

Personal Care Plan of North Carolina NC Y 

PHP, Inc. NC Y 

HMO Health Ohio OH Dropped--No longer 

participating in FEHB 

Plans. 

Prudential Northern Ohio OH Y 

Pacific Care of Oregon OR N 

United Health Plans of New England RI Y 

Harris Methodist TX Y 

HMO Blue TX Y 

Total Companies Contacted: 25 3 Total Responders: 19 

3 Total does not include the two companies that no longer participate in the Federal Employees Health 

Benefits Program. 

))))))))))) A - 2 
FEDERAL EMPLOYEE HEALTH BENEFITS PROGRAM--NATIONAL PLANS

Name 

Alliance

American Postal Workers Union (APWU)

Blue Cross & Blue Shield

Government Employees Hospital Association (GEHA)

Mail Handlers

National Association of Letter Carriers (NALC)

Postmasters

Association Benefit Plan

BACE

Foreign Service

Panama Canal Area

Rural Carrier Benefit Plan

Special Agents’ Mutual Benefit Association (SAMBA)

Secret Service

Total Companies: 14 

Response Received 

Y 

Y 

Y 

Y 

Y 

Y 

Y 

Y 

Y 

N 

Y 

Y 

Y 

N 

Total Responders: 12 

))))))))))) A - 3 
MEDICARE RISK HEALTH MAINTENANCE ORGANIZATIONS

Name 

Health Partners of Alabama

Blue Cross of Arizona

Blue Cross of California

FHP, Inc.

Foundation Health, A California Plan

Kaiser Foundation HP, Inc.

Kaiser Foundation HP of Colorado

Kaiser Foundation HP of NY

AV-Med Health Plan, Inc.

U.S. Healthcare Delaware

Health Alliance Plan of Michigan

State Response Received 

AL Y 

AZ Y 

CA N 

CA N 

CA Y 

CA Y 

CO Y 

CT Y 

FL Y 

DL Y 

MI N 

Partners National Health Plans of North Carolina, Inc. NC Y 

First Option Health Plan of New Jersey, Inc.

CIGNA Healthcare of New York

Independent Health Plan, Inc

NYLCARE Health Plans, Inc.

Family Health Plan, Inc.

Community Care HMO, Inc.

Kaiser Foundation of the Northwest

Geisinger Health Plan

Keystone Health Plan Central, Inc.

Qualmed Plans for Health, Inc.

U.S. Healthcare, Inc. - Delaware 

U.S. Healthcare Systems of Pennsylvania

IHC Care, Inc.

Total Companies: 25 

NJ Y 

NY Y 

NY N 

NY Y 

OH Y 

OK Y 

OR Y 

PA Y 

PA Y 

PA Y 

PA Y 

PA Y 

UT Y 

Total Responders: 21 

))))))))))) A - 4 
OTHER FEDERAL GOVERNMENT HEALTH INSURANCE PROGRAMS 

Name Response Received 

Indian Health Service (Department of Health & Human Services Y 

Tri-Care (Department of Defense) 4 Y 

Railroad Retirement Board (RRB) Dropped 5 

Department of Veteran’s Affairs (VA) Y 

Total Government Programs in Sample: 6 4 Total Responders: 5 4 

4 Tri-Care (formerly CHAMPUS) contracts with several insurance companies to administer the rate and 

method of reimbursement for claims filed under their program. Three of these contractors responded 

to our survey. Each was coded as a separate response, since payment rates are State specific. 

Comparisons were performed against Medicare’s rates for those States. 

5 We dropped the Railroad Retirement Board (RRB) from the sample. Contact with them confirmed that 

retirees’ health claims are covered by Medicare and are processed by the DME Regional Carriers 

(DMERCS). Therefore, HCFA policies for payment are followed and the reimbursement rates are the 

same as for non RRB Medicare clients. 

))))))))))) A - 5 
APPENDIX B

SAMPLE RESPONSE RATE

Number in Number 

Type of Health Insurer Sample Responding Response Rate 

Private Indemnity Insurance 

Medicaid State Agencies 

Federal Employee Local 

Insurance Plans 

Federal Employee National 

Insurance Plans 

Medicare Risk Health 

Maintenance Plans 

Other Government Health 

Insurers 

Total: 

10 7 70% 

10 101 100%1 

25 19 76% 

14 12 86% 

25 21 84% 

6 5 83% 

90 74 82% 

1 The Arizona Health Care Cost Containment System (the Medicaid State Agency) has 

seven subcontractors who provide Medicaid Coverage. Ventana Health Systems, 

provided the only response. This contractor furnishes Medicaid health care to 

7 of 15 Arizona Counties. 

))))))))))) B - 1 
APPENDIX C

MEDICARE’S 

MONTHLY AND MAXIMUM

RENTAL REIMBURSEMENT

FOR HOSPITAL BEDS 

COMPARED TO 

REIMBURSEMENT BY 

OTHER PAYERS 

))))))))))) C - 1 
MEDICARE’S MONTHLY AND MAXIMUM RENTAL REIMBURSEMENT FOR HOSPITAL BEDS

COMPARED TO REIMBURSEMENT BY OTHER PAYERS 

Manual Non-Adjustable Hospital Bed (HCPCS Code: E0250) 

Percent MONTHLY Percent MAXIMUM 

Number of Percent of Rental Rate is Rental Payments 

Respondents Respondents Above or Below is Above or Below 

Type of Rate Paid Paying Rate Paying Rate Medicare’s Rate Medicare’s Rate

Uniform 

Variable “High” 

Variable “Low” 

Pay neither “High” or 

“Low” Rate 

Total: (66.2% of total 

respondents) 1 

36 73.47% -9.9% -34.4% 

8 16.33% 15% -26.0% 

3 6.12% -31.8% -46.7% 

2 4.08% Not Obtained Not Obtained 

49 100% Not Obtained Not Obtained 

1 There were a total of 74 responders to the survey questionnaire. However, 25 are not included in the calculations above because: 

15 (20.3% of total respondents) did not respond or could not provide either the rate or the frequency that the rate was paid 

10 (13.5% of total respondents) did not cover this item for rental reimbursement. 

Manual-Adjustable Hospital Bed (HCPCS Code: E0255) 

Percent MONTHLY 

Number of Respondents Percent of Rental Rate is 

Paying Rate Respondents Above or Below 

Paying Rate Medicare’s Rate 

Percent MAXIMUM 

Rental Payments 

is Above or Below 

Type of Rate Paid Medicare’s Rate

Uniform 38 73.08% -10.8% -30.6% 

Variable “High” 10 19.23% -4.6% -39.3% 

Variable “Low” 3 5.77% -39.9% -56.0% 

Pay neither “High” or 1 1.92% Not Obtained Not Obtained 

“Low” Rate 

Total: (70.2% of total 52 100% Not Obtained Not Obtained 

respondents) 2 

2 There were a total of 74 responders to the survey questionnaire. However, 22 are not included in the calculation above because: 

17 (23% of total respondents) did not respond or could not provide either the rate or the frequency that the rate was paid 

5 (6.8% of total respondents) did not cover this item for rental reimbursement. 

))))))))))) 

C - 2 
MEDICARE’S MONTHLY AND MAXIMUM RENTAL REIMBURSEMENT FOR HOSPITAL BEDS

COMPARED TO REIMBURSEMENT BY OTHER PAYERS

Number of Respondents 

Paying Rate 

Type of Rate Paid 

Semi-Electric Hospital Bed (HCPCS Code: E0260) 

Percent MONTHLY Percent MAXIMUM

Percent of Rental Rate is Rental Payments

Respondents Above or Below is Above or Below

Paying Rate Medicare’s Rate Medicare’s Rate

Uniform 37 72.55% -14.1% -30.9% 

Variable “High” 8 15.69% 22% -30.0% 

Variable “Low” 3 5.88% -22.7% -43.4% 

Pay neither “High” or 3 5.88% Not Obtained Not Obtained 

“Low” Rate 

51 100% Not Obtained Not Obtained 

Total: (68.9% of total 

respondents) 3 

3 There were a total of 74 responders to the survey questionnaire. However, 23 are not included in the calculations above because: 

17 (23% of total respondents) did not respond or could not provide either the rate or the frequency that the rate was paid 

6 (8.1% of total respondents) did not cover this item for rental reimbursement. 

Total Electric Hospital Bed (HCPCS Code: E0265) 

Percent MONTHLY 

Number of Respondents Percent of Rental Rate is 

Paying Rate Respondents Above or Below 

Type of Rate Paid Paying Rate Medicare’s Rate 

Percent MAXIMUM 

Rental Payments 

is Above or Below 

Medicare’s Rate 

Uniform 

Variable “High” 

Variable “Low” 

Pay neither “High” or 

“Low” Rate 

Total: (68.9% of total 

respondents) 4 

36 70.59% -16% -30.9% 

8 15.69% 7.6% -27.7% 

4 7.84% -27.8% -46.0% 

3 5.88% Not Obtained Not Obtained 

51 100% Not Obtained Not Obtained 

3 There were a total of 74 responders to the survey questionnaire. However, 23 are not included in the calculations above because: 

16 (21.6% of total respondents) did not respond or could not provide either the rate or the frequency that the rate was paid 

7 (9.5% of total respondents) did not cover this item for rental reimbursement. 

))))))))))) 

C - 3 
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

APPENDIX D

Duration of Hospital Bed Rental 

by Medicare Beneficiaries 1 

Rental 

Month 

Semi Electric 

Hospital Beds 

Percent 

Renting 

Adjustable 

Hospital Beds 

Percent Renting 

ManualManual 

Hospital Beds 

Percent 

Renting 

Total-Electric 

Hospital Beds 

Percent Renting 

Renting 

Hospital Beds 

Total Percentage 

of Beneficiaries 

77.28% 16.17% 4.20% 2.35% 100.00% 

50.51% 10.16% 2.75% 1.25% 64.67% 

41.16% 8.53% 2.26% 0.23% 52.18% 

35.07% 7.39% 1.93% 0.18% 44.57% 

30.83% 6.60% 1.68% 0.10% 39.21% 

27.48% 5.96% 1.49% 0.07% 35.00% 

24.81% 5.43% 1.34% 0.06% 31.64% 

22.65% 5.01% 1.21% 0.06% 28.93% 

20.76% 4.62% 1.10% 0.07% 26.55% 

18.79% 4.21% 0.99% 0.06% 24.05% 

16.93% 3.81% 0.86% 0.06% 21.66% 

15.25% 3.42% 0.77% 0.04% 19.48% 

13.65% 3.06% 0.68% 0.05% 17.44% 

10.52% 2.54% 0.53% 0.05% 13.64% 

9.16% 2.21% 0.46% 0.02% 11.85% 

Source: Statistical Analysis Durable Medical Equipment Regional Carrier (SADMERC) based on 1996 1 

Payment data 

))))))))))) D - 1
APPENDIX E

CALCULATION OF SAVINGS

))))))))))) E - 1
BREAKOUT OF DMERC 1996 ALLOWED CHARGES FOR THE HOSPITAL BED CODES SURVEYED 

DMERC Total Allowed Charges Total Allowed Charges Total Allowed Charges Total Allowed Charges 

Allowed Charges for Rentals of only for Rentals of Only for Rentals of Only for Rentals of 

Procedure Code for 1996 1 Month Duration 2 Months Duration 3 Months Duration 4 - 15 Months Duration 

E0250 $7,085,989 

E0255 $30,720,446 

E0260 $233,607,390 

E0265 $1,084,068 

Total $272,497,893 

DMERC 

Allowed Charges 

Procedure Code for 1996 

$2,437,580 $836,147 $559,793 $3,252,469 

$11,428,006 $3,102,765 $2,150,431 $14,039,244 

$80,828,157 $28,266,494 $18,454,984 $106,057,755 

$576,724 $106,239 $82,389 $318,716 

$95,270,467 $32,311,645 $21,247,597 $123,668,184 

Estimated Savings if Rental Rates are Reduced by 12 Percent 

Allowed Charges Annual Savings Five Year Savings Projection 

If Reduced in 1996 Dollars in 1996 Dollars 

by 12 percent (Not Indexed to Inflation) (Not Indexed to Inflation) 

E0250 $7,085,989 

E0255 $30,720,446 

E0260 $233,607,390 

E0265 $1,084,068 

Total $272,497,893 

$6,235,670 $850,319 $4,251,595 

$27,033,992 $3,686,454 $18,432,270 

$205,574,503 $28,032,887 $140,164,435 

$953,980 $130,088 $650,440 

$239,798,145 $32,699,748 $163,498,740 

1 Savings estimates are based upon total DMERC Allowed Charges for January 1 - December 31, 1996 and are not indexed for inflation. 

Estimated Savings if Rental Rates are Reduced by 15 Percent 1 

DMERC Allowed Charges Annual Savings Five Year Savings Projection 

Allowed Charges If Reduced in 1996 Dollars in 1996 Dollars 

Procedure Code for 1996 by 15 Percent (Not Indexed to Inflation) (Not Indexed to Inflation) 

E0250 $7,085,989 $6,023,091 $1,062,898 $5,314,490 

E0255 $30,720,446 $26,112,380 $4,608,066 $23,040,330 

E0260 $233,607,390 $198,566,280 $35,041,110 $175,205,550 

E0265 $1,084,068 $921,458 $162,610 $813,050 

Total $272,497,893 $231,623,209 $40,874,684 $204,373,420 

1 Savings estimates are based upon total DMERC Allowed Charges for January 1 - December 31, 1996 and are not indexed for inflation. 

))))))))))) E - 2 
APPENDIX F

AGENCY COMMENTS

))))))))))) F - 1
))))))))))) F - 2
))))))))))) F - 3