GAO

United States General Accounting Office

Report to the Chairman, Subcommittee

on Health, Committee on Ways and

Means, House of Representatives

July 2000 MEDICARE

PAYMENTS

Use of Revised

“Inherent

Reasonableness”

Process Generally

Appropriate

GAO/HEHS-00-79

Page 1 GAO/HEHS-00-79 Inherent Reasonableness

Contents

Letter 3

Appendixes Appendix I: Scope and Methodology 36

Appendix II: Comparison of the Inherent Reasonableness

Procedures for HCFA and the DMERCs 39

Appendix III: 1998 Fee Payments and the Total Proposed Payment

Reductions for the Surveyed Product Groups,

by State 40

Appendix IV: GAO Analysis of DMERC Sampling Methods 52

Appendix V: Comments From the Health Care Financing

Administration 54

Tables Table 1: 1998 Medicare Maximum Payment Allowance, Median

Retail Price, and Percentage Reduction for Six Product

Groups Under Inherent Reasonableness Review 18

Table 2: 1998 Medicare Expenditures, Medicare Maximum Payment

Allowance, VA Median Price, and Percentage Markup, by

Product Group 28

Table 3: 1998 State Fees and the Total Proposed Percentage

Reductions for Glucose Testing Strips 40

Table 4: 1998 State Fees and Total Proposed Percentage

Reductions for Lancets 42

Table 5: 1998 State Fees and Total Proposed Percentage

Reductions for Latex Foley Catheters 44

Table 6: 1998 State Fees and Total Proposed Percentage

Reductions for Catheter Insertion Trays Without Drainage

Bags 46

Table 7: 1998 State Fees and Total Percentage Payment Reductions

for Catheter Insertion Trays With Drainage Bags 48

Table 8: 1998 Fees and Total Proposed Percentage Reductions for

Eyeglass Frames, by State 50

Table 9: Percentage of Surveyed Prices, by Population Level,

Compared With U.S. Population 52

Table 10: Median Surveyed Price by Product Group and Population

Level 53
Contents

Page 2 GAO/HEHS-00-79 Inherent Reasonableness

Abbreviations

APA Administrative Procedure Act

BBA Balanced Budget Act of 1997

DMERC Durable Medical Equipment Regional Carrier

HCFA Health Care Financing Administration

HCPCS HCFA Common Procedure Coding System

HHS Department of Health and Human Services

MSA metropolitan statistical area

OMB Office of Management and Budget

VA Department of Veterans Affairs
Page 3 GAO/HEHS-00-79 Inherent Reasonableness

United States General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-282467 Letr

July 5, 2000

The Honorable William M. Thomas

Chairman, Subcommittee on Health

Committee on Ways and Means

House of Representatives

Dear Mr. Chairman:

In 1998, Medicare paid at least $5.9 billion for medical equipment and

supplies on behalf of beneficiaries who live at home or in long-term-care

facilities such as nursing homes.1 Generally, Medicare uses a fee schedule

to determine the amount it will pay for most medical equipment and

supplies. Even when Medicare paid more than market prices for certain

medical equipment and supplies, the Health Care Financing Administration

(HCFA)—the agency that administers the Medicare program—had almost

never adjusted payment amounts. This was because the process imposed

by statute for changing unreasonably high or low Medicare payments,

called the “inherent reasonableness” process, was slow and cumbersome

and not even available for some items, such as surgical supplies.2

In response to the problems with excessive payments for some items that

we and others identified, the Congress authorized HCFA in section 4316 of

the Balanced Budget Act of 1997 (BBA) to use a revised inherent

reasonableness process to adjust Medicare payments by up to 15 percent a

1

This amount represents payments made by the Medicare program and its beneficiaries,

who pay a copayment of 20 percent for durable medical equipment and other types of

medical products, such as medical supplies, prosthetic and orthotic devices, enteral

nutrition products, and certain outpatient drugs (hereafter collectively referred to as

“medical equipment and supplies”).

2

See Medicare: Excessive Payments for Medical Supplies Continue Despite Improvements

(GAO/HEHS-95-171, Aug. 8, 1995); Medicare: Need to Overhaul Costly Payment System for

Medical Equipment and Supplies (GAO/HEHS-98-102, May 12, 1998); Department of Health

and Human Services (HHS) Office of Inspector General, Are Medicare Allowances for

Albuterol Sulfate Reasonable? OEI-03-97-00292 (Washington, D.C.: HHS, Aug. 1998); HHS

Office of Inspector General, Payments for Enteral Nutrition: Medicare and Other Payers,

OEI-03-94-00021 (Washington, D.C.: HHS, May 1996).
B-282467

Page 4 GAO/HEHS-00-79 Inherent Reasonableness

year for items such as medical equipment and supplies.3 This revised

process was expected to streamline the implementation of payment

adjustments. HCFA published an interim final rule with comment period on

January 7, 1998, to implement the process.4 Most regulations are published

first in a proposed form and become effective only when published as a

final rule, which gives an agency time to respond to public comments

solicited through the notice of proposed rulemaking. In this case, the

interim final rule became effective 60 days after it was first published.

Because the interim final rule was not preceded by a notice of proposed

rulemaking, HCFA solicited comments through the interim final rule but

did not respond to them before the regulation became effective.

Under the interim final rule, the four contractors that process Medicare

claims for medical equipment and supplies—the Durable Medical

Equipment Regional Carriers (DMERC)—may adjust payment rates

determined to be excessive or deficient by up to 15 percent after reporting

their plans to HCFA. In 1998, the DMERCs surveyed retail prices for groups

of products that they suspected had excessive Medicare payment rates. In

September 1998, the DMERCs notified suppliers that they proposed to

adjust Medicare payments for eight groups of products, including glucose

testing supplies, a type of urinary catheter, and standard dietary formulas

for tube feeding (enteral formulas). The DMERCs solicited comments on

this proposal. Following an outpouring of concern from industry groups

representing different manufacturers and providers of medical equipment

and supplies and your request that we review these actions, HCFA

suspended the proposed payment reductions. In November 1999, the

Congress passed legislation prohibiting HCFA from using its inherent

reasonableness authority until this report is issued and a final rule has been

published that responds to this report and to public comments.

You requested that we examine HCFA’s and the DMERCs’ actions to

implement this authority and answer the following questions: (1) Was it

proper for HCFA to issue its inherent reasonableness regulations as an

interim final rule, and is HCFA authorized to delegate responsibility for

making payment adjustments to the DMERCs? (2) Were the DMERCs’

3

P.L. 105-33, 4316, 111 Stat. 251, 390-392.

4

63 Fed. Reg. 687 (hereafter referred to as the “interim final rule”). HCFA officials indicated

to us that they were unable to issue these regulations as soon as they would have liked

because the BBA included many other Medicare changes requiring regulatory action that

had to be given priority over the inherent reasonableness regulations.
B-282467

Page 5 GAO/HEHS-00-79 Inherent Reasonableness

survey methods adequate to support the proposed payment reductions? (3)

Will the proposed payment reductions reduce patient access to the affected

medical products?

To address these questions, we reviewed relevant laws and regulations and

interviewed HCFA officials and staff from the DMERCs. We also met with

various representatives from the industry groups involved. We analyzed the

DMERCs’ survey methodology, procedures, and data and obtained limited

data on prices for some medical equipment and supplies. We performed our

work from April 1999 to May 2000 in accordance with generally accepted

government auditing standards. Appendix I provides a more detailed

discussion of our scope and methodology.

Results in Brief HCFA acted properly in issuing an interim final rule to implement the

inherent reasonableness provision of the BBA because these regulations

did not substantially change the factors to be considered in making

inherent reasonableness determinations, and thus the criteria were met for

bypassing the general requirement for issuing a notice of proposed

rulemaking. Specifically, under the revised regulations, HCFA and the

DMERCs would conduct payment reviews under the same circumstances

and consider essentially the same information as in the past. As provided

by the BBA, they would be able to adjust payment amounts by up to 15

percent a year without using lengthier public notice and comment

procedures. Furthermore, in our opinion, it is clearly within HCFA’s

authority to delegate partial responsibility for adjusting payment rates to

the DMERCs. HCFA has long delegated similar types of responsibilities to

the DMERCs and other claims processing contractors, and the BBA, which

amended Medicare law to enable use of the revised process, did not

preclude such delegation.

Using retail surveys as a basis for adjusting Medicare payments represents

a sound concept for pricing products that can be purchased in retail

outlets. The survey data clearly showed that Medicare payments are much

higher than the median surveyed retail prices for five of the products the

DMERCs reviewed: lancets, eyeglass frames, urinary catheters, and two

types of catheter insertion trays. As a result, sufficient information

supports proposed payment reductions of up to 15 percent for these items.

However, the DMERCs did not follow a rigorous survey process, and this

led us to question the proposed smaller payment reductions for glucose

test strips and albuterol sulfate. For the eighth surveyed product—enteral

formulas—more pricing information is needed before the payment amount
B-282467

Page 6 GAO/HEHS-00-79 Inherent Reasonableness

can be adjusted because the DMERCs did not price products specifically

packaged and used for tube feeding and instead priced products that are

generally used as oral supplements. Retail surveys may not be the best

strategy for setting payment amounts for items not generally sold at retail

prices, such as enteral formulas. For such products, using wholesale prices

plus a reasonable markup may represent a better payment-setting

mechanism.

It is difficult to predict whether the proposed payment reductions will limit

patient access because Medicare has implemented few comparable

reductions in recent years. Fewer suppliers may be willing to provide these

items to beneficiaries at the reduced payment rates, thus limiting

beneficiary access to these items. Because retail prices—which include

retailers’ costs for both acquisition and service—were used to establish the

proposed reductions, we believe that access to these products is not likely

to be significantly affected. However, HCFA should monitor indicators of

potential access problems when payments are reduced so that action can

be taken before beneficiaries experience difficulties obtaining medically

necessary items or have to pay significantly higher out-of-pocket expenses.

We are making several recommendations to the HCFA Administrator to

improve HCFA’s final rule on and use of its inherent reasonableness

authority. In commenting on our report, HCFA agreed with the

recommendations and said it will implement them.

Background Medicare is a health insurance program that covers almost all people aged

65 and older and certain disabled people. Through its supplemental

medical insurance program (part B), Medicare covers medically necessary

durable medical equipment such as hospital beds and walkers. Medicare

also covers other types of medical items, including certain prescription

drugs used with durable medical equipment for elderly and disabled people

who live at home or in long-term-care facilities. Medicare pays 80 percent

of the amount on its fee schedule or the allowed amount for medical

equipment and supplies, or 80 percent of the amount claimed, whichever is

lower. Beneficiaries are responsible for the remaining 20 percent. Claims

for Medicare-covered services and supplies are processed and paid by

insurance companies that contract with HCFA. Four specialized

contractors—the DMERCs—administer claims for medical equipment and

supplies.
B-282467

Page 7 GAO/HEHS-00-79 Inherent Reasonableness

Medicare Payment

Allowances for Medical

Equipment

and Supplies Established for

Product Groups

Medicare groups medical products into categories and pays a specified

amount for each category. Each category is identified by a unique code

under the HCFA Common Procedure Coding System (HCPCS).5 There are

about 1,900 product groups in total. All of the items categorized under a

particular product group have the same payment allowance and are

considered to be similar items. When suppliers or beneficiaries submit a

claim to Medicare, they use the product group they believe best describes

the specific item that was provided.

Medicare part B has different methodologies, specified in law, for

determining payment amounts for different categories of medical

equipment and supplies. For most of the products the DMERCs surveyed—

such as diabetic supplies, catheters, and catheter insertion trays—a fee

schedule is used to determine the amount Medicare pays. Medicare has a

separate fee schedule for each state for most categories of items. These fee

schedules are based on average supplier charges on Medicare claims

allowed in each state in 1986 and 1987. In 1990, the Congress amended the

fee schedule provisions to impose upper and lower limits on fees paid in

different states to reduce variation in what Medicare paid for similar items

in different parts of the country.6 The upper limit is the median of all state

fees, and the lower limit is 85 percent of the median of all state fees. Before

the BBA was enacted, the state fees were adjusted for inflation each year

using a formula usually based on the consumer price index. Section

4551(a)(1) of the BBA amended Medicare law by freezing the fee schedules

for these categories of medical equipment and supplies for 5 years,

beginning in 1998.

For orthotic and prosthetic devices, including off-the-shelf items such as

eyeglass frames, Medicare uses 10 regional fee schedules, which are also

based on historical supplier charges and are subject to upper and lower

limits. The upper limit is 120 percent of the average of all regional fees, and

the lower limit is 90 percent of the average of all regional fees. Section

4551(a)(2) of the BBA limited the increase in these regional fee schedules

to 1 percent per year for 5 years, beginning in 1998.

5

Hereafter, the HCPCS codes are referred to as “product groups.”

6

Omnibus Budget Reconciliation Act of 1990, P.L. 101-508, 5152(b), 104 Stat. 1388, 1388—74

and 1388-75 (Supp. II 1990).
B-282467

Page 8 GAO/HEHS-00-79 Inherent Reasonableness

Medicare uses other methodologies to determine the payment amounts for

enteral formulas and prescription drugs. Medicare covers enteral nutrition

formulas for beneficiaries who are unable to take sufficient food by mouth

and must be fed through a tube. Medicare payment for enteral formulas is

based on supplier charges, using a reasonable charge methodology. A

maximum payment limit has been established for these items, but

individual suppliers may receive less than the maximum payment if their

actual or customary charge, or the prevailing charge in the locality, is lower

than the maximum payment. Section 4315 of the BBA permitted HCFA to

replace the reasonable charge methodology for enteral formulas (and other

items) with a fee schedule, while section 4551(b) limited payments for

these items to their 1995 levels for 5 years, beginning in 1998.

For prescription outpatient drugs that generally are covered if they must be

used in conjunction with durable medical equipment, such as albuterol

sulfate, Medicare payments are based on 95 percent of the average

wholesale price of the drug.7 If a drug has multiple brand name and generic

sources, the DMERCs calculate 95 percent of the median of the average

wholesale prices for generic and comparable brand name products.

Medicare Payment Amounts

Adjusted Through

Inherent Reasonableness

Process

Because most Medicare payments for medical equipment and supplies are

based on historical charges, they may become out of line with market

prices over time. The Social Security Act and the corresponding Medicare

regulations have long allowed HCFA to determine whether the standard

methods of determining payments result in amounts that are unreasonably

high or low.8 In these cases, HCFA may use other pricing methods to align

payment amounts with current market prices. HCFA does this by using the

inherent reasonableness process.

7

42 U.S.C. 1395u(o)(1) (Supp. III 1997). Under certain circumstances, Medicare covers

medically necessary outpatient drugs that must be administered in a physician’s office or

used with durable medical equipment, such as albuterol sulfate, which is used with a

nebulizer. Certain other specific types of drugs are also covered, including antirejection

drugs used after organ transplants and oral cancer drugs.

8

In 1975, language was added to the regulations governing the determination by carriers of

reasonable charges, specifically providing for the use of “[o]ther factors that may be found

necessary and appropriate with respect to a specific item or service to use in judging

whether the charge is inherently reasonable.” 20 C.F.R. 405.502(a)(4) (1976). This provision,

as amended, is now at 42 C.F.R. 405.502(a)(7) (1999).
B-282467

Page 9 GAO/HEHS-00-79 Inherent Reasonableness

Prior to 1987, when Medicare payments for medical equipment and

supplies were based on supplier charges, Medicare contractors

independently conducted inherent reasonableness reviews to adjust

Medicare payment levels. They gathered relevant data and set new

payments on the basis of their analysis after notifying suppliers. While

HCFA generally evaluated the procedure followed and functions performed

by the contractor, contractor determinations of payment levels were not

reviewed on a case-by-case basis. In 1986, HCFA was required by law to

establish regulations describing the factors to be used in an inherent

reasonableness review.9 In 1987, a new Medicare payment methodology for

medical equipment and supplies, primarily based on fee schedules, was

enacted.10 That law was amended in 1988 to require that the inherent

reasonableness process for medical equipment and supplies include

detailed notice and comment rulemaking procedures that could be

accomplished only by HCFA—not by the DMERCs.11 As stated previously,

this requirement made the inherent reasonableness process long and

cumbersome. Changing an unreasonable payment amount for any product

group required, among other things, a formal rulemaking process that

involved the Administrator of HCFA, the Secretary of Health and Human

Services, and the Director of the Office of Management and Budget (OMB).

HCFA has successfully used the inherent reasonableness process in only

one instance: it took almost 3 years to adjust the Medicare fee schedule for

blood glucose monitors.

9

The Consolidated Omnibus Budget Reconciliation Act of 1985, P.L. 99-272, 9304(a), 100 Stat.

82, 190 (1986), required regulations describing the factors to be used in determining cases in

which charges are unreasonable and the factors to be considered in establishing charges

that are realistic and equitable. HCFA promptly promulgated these regulations. 51 Fed. Reg.

28,710 (Aug. 11, 1986). The Omnibus Budget Reconciliation Act of 1986, P.L. 99-509, 9333,

100 Stat. 1874, 2025, added detailed procedures to be followed for any inherent

reasonableness review with respect to physician services, including publication of the

proposed adjustment in the Federal Register. 42 U.S.C. 1395u(b)(8)(B) − (C) and (9) (Supp.

IV 1986).

10In addition, the legislation, which was effective Jan. 1, 1989, imposed a moratorium on

inherent reasonableness review for medical equipment and supplies until Jan. 1, 1991.

Omnibus Budget Reconciliation Act of 1987, P.L. 100-203, 4062(b) and (e), 101 Stat. 1330,

1330-100—1330-107 and 1330-109. 42 U.S.C. 1395m (Supp. V 1987).

11Medicare Catastrophic Coverage Act of 1988, P.L. 100-360, 411(g)(1)(B)(xiii), 102 Stat. 683,

782. These procedures were previously applicable only to any inherent reasonableness

review with respect to physician services. 42 U.S.C. 1395m(a)(10)(B) (1988).
B-282467

Page 10 GAO/HEHS-00-79 Inherent Reasonableness

Following several reports that Medicare was overpaying for medical

equipment and supplies and needed more flexibility to adjust payment

amounts, the Congress, in the Balanced Budget Act of 1997, expanded

HCFA’s options for making inherent reasonableness adjustments. The law

no longer requires HCFA to use the formal rulemaking process to make

inherent reasonableness adjustments as long as the annual adjustments are

15 percent or less. The only requirement remaining is that HCFA describe

in regulation the factors to be used in determining when payment amounts

are not inherently reasonable as well as those to be considered in

establishing reasonable payment amounts.12 These are factors to be

considered in any future inherent reasonableness review and are not

specific to any particular product or service.

In revising the existing inherent reasonableness regulations, HCFA set up

three different procedures for conducting the inherent reasonableness

process and adjusting payment amounts:

• HCFA adjusts payment amounts by more than 15 percent in a year,

• HCFA adjusts payment amounts by up to 15 percent in a year, and

• the DMERCs adjust payment amounts by up to 15 percent in a year. (See

app. II for an illustration of the three inherent reasonableness

procedures.)

The original inherent reasonableness process—which required the notice

of proposed rulemaking—now applies only to payment adjustments of

more than 15 percent in a year. However, the regulations do not articulate

under what circumstances HCFA and the DMERCs will use the three

inherent reasonableness procedures.

HCFA and the DMERCs follow different procedures to adjust Medicare

payments by up to 15 percent a year. In adjusting payments for medical

equipment and supplies, HCFA employs public notice and comment

procedures.13 The DMERCs, on the other hand, can bypass the requirement

for public notice and comment. Instead, through local bulletins, the

DMERCs inform the affected suppliers of the factors considered in

1242 U.S.C. 1395u(b)(8)(A)(i) (Supp. III 1997). This is essentially the same requirement in

effect since 1986.

13However, if HCFA uses the inherent reasonableness process for adjustments of 15 percent

a year or less, it can bypass some statutorily imposed procedural requirements, including

the specific requirement for consultation with suppliers and supplier representatives.
B-282467

Page 11 GAO/HEHS-00-79 Inherent Reasonableness

adjusting a payment amount and provide direct notice of the proposed

inherent reasonableness adjustments. They also solicit supplier comments.

The DMERCs must evaluate the comments and notify HCFA regarding the

proposed payment amounts. Once HCFA acknowledges in writing that it

has received this notification, the DMERCs’ proposed payment amount

may be applied 30 days after their notification to HCFA. The DMERC

procedure is expected to reduce the time needed to implement the inherent

reasonableness process and hereafter is called “streamlined” inherent

reasonableness authority.

HCFA Acted Properly

and Within Its

Authority in

Establishing the

Revised Inherent

Reasonableness

Process

Industry groups expressed concern that HCFA did not publish a notice of

proposed rulemaking before issuing its regulations on the use of the

revised inherent reasonableness process. However, we believe that HCFA

acted properly in issuing the regulations in this fashion because the criteria

were met for bypassing the general requirement for issuing a notice of

proposed rulemaking. HCFA also acted within its authority in delegating

the revised inherent reasonableness process to the DMERCs. The BBA was

important in removing the barriers that prevented the DMERCs from

conducting inherent reasonableness reviews; however, HCFA did not

materially change the factors to be considered under the inherent

reasonableness process in the revised regulations. HCFA and the DMERCs

will conduct inherent reasonableness reviews under the same

circumstances and may consider almost all of the same factors they did

when conducting inherent reasonableness reviews in the past. Moreover,

delegation is proper because pricing Medicare goods and services is

already a responsibility of the DMERCs and the statute does not

specifically preclude delegation of this authority to the DMERCs.

HCFA Acted Properly in

Publishing the Revised

Inherent Reasonableness

Regulations as an Interim

Final Rule

Section 4316 of the BBA enabled HCFA to use a more flexible, simplified

process to adjust unreasonably high or low Medicare payment amounts by

up to 15 percent per year. On January 7, 1998, HCFA revised its inherent

reasonableness regulations in the form of an interim final rule with

comment period, which became effective on March 9, 1998.14 The DMERCs

were delegated authority under the rule to make inherent reasonableness

adjustments of up to 15 percent a year. By issuing the rule in this fashion,

1463 Fed. Reg. 687. In general, an agency will publish a final rule on an “interim” basis to give

it the force of law either immediately or soon after publication.
B-282467

Page 12 GAO/HEHS-00-79 Inherent Reasonableness

HCFA was able to finalize the regulation on an expedited basis, allowing

the DMERCs to quickly begin their inherent reasonableness reviews.

Various industry groups likely to be affected by future inherent

reasonableness adjustments believed that HCFA deprived them of the

opportunity to comment on the revised inherent reasonableness

regulations because HCFA did not issue a notice of proposed rulemaking.

The Small Business Administration also contended that by not publishing a

proposed rule HCFA was able to avoid analyzing the potential effect that

the regulation would have on small businesses. Proposed rules are not

legally binding until after a public comment period and the issuance of a

final rule, a process that can sometimes take years to complete.

When federal agencies take official action, they are generally required to

publish a proposed rule in the Federal Register and provide interested

parties the opportunity to participate by submitting written comments and

other material for the agency to consider before such rules become

effective. Whenever a proposed rule is published, an agency also must

publish an initial regulatory flexibility analysis describing the effect on

small businesses.15 Unless otherwise required by statute, however, an

agency may bypass proposed rulemaking when it determines for good

cause that it is impracticable, unnecessary, or contrary to the public

155 U.S.C. 603(a).
B-282467

Page 13 GAO/HEHS-00-79 Inherent Reasonableness

interest.16 This also permits an agency to bypass the requirement to publish

an initial regulatory impact statement.

HCFA concluded that publishing a proposed rule in this case was both

unnecessary and contrary to the public interest. HCFA asserted that it was

unnecessary because the revised inherent reasonableness regulations did

not significantly change the underlying inherent reasonableness

methodology. The inherent reasonableness methodology already in place

when the interim final rule was issued called for replacement of the

standard payment amount when application of the statutory payment

methodology resulted in a Medicare payment amount that was “grossly

excessive” or “grossly deficient” and thus not inherently reasonable. These

existing inherent reasonableness regulations described the factors to be

used in determining when a Medicare payment amount is grossly excessive

or deficient and in establishing a realistic and equitable payment amount.

The revised regulations did not materially change these existing

regulations.

16This is the “good cause” exception to the Administrative Procedure Act (APA) requirement

for a notice of proposed rulemaking. 5 U.S.C. 553(b)(B). The APA was enacted, in part, so

that federally regulated parties would receive the due process protections guaranteed by the

Constitution. The Constitution guarantees due process whenever the government seeks to

deprive a person of life, liberty, or property. The process that is due depends in large

measure on the life, liberty, or property interest at stake, but the most basic element of due

process is notice and an opportunity to be heard. When establishing or changing substantive

legal standards, HCFA generally must follow APA rulemaking procedures. 42 U.S.C.

1395hh(a)(2) and (b) (1994). However, establishing Medicare payment rates generally does

not raise due process issues because no protected life, liberty, or property interests are at

stake. Participation in Medicare does not give rise to a constitutional right to a certain level

of payment. Provider participation in Medicare was discussed by the 6th Circuit Court of

Appeals in a case involving the application of the inherent reasonableness process to a

durable medical equipment provider prior to the 1987 amendments:

“Before analyzing the determination of the 1987 I[nherently] R[easonable] A[llowance]

amount, we pause to note that participation in the Medicare program is voluntary. If a

supplier is not satisfied with the IRA a carrier has chosen to apply, that supplier may choose

not to act as a Medicare supplier. ... [T]his court has held ... ‘[that p]roviders of health care

who choose to participate in the federally sponsored program for the aged and disabled do

so with no guarantee of solvency. Just as those who choose to serve individuals not covered

by Medicare assume the risks of the private market, those who opt to participate in

Medicare are not assured of revenues.’”

Queen City Home Health Care Co. v. Sullivan, 978 F.2d 236, 247 (6th Cir. 1992), quoting

Livingston Care Center, Inc. v. U.S., 934 F.2d 719, 720-21 (6th Cir. 1991), cert. denied, 502 U.S.

1003 (1991).
B-282467

Page 14 GAO/HEHS-00-79 Inherent Reasonableness

Additionally, HCFA allowed for a 60-day comment period before the interim

final rule became effective and has indicated that before finalizing its

regulations on the inherent reasonableness process it will consider any

comments received. HCFA also stated that it is contrary to the public

interest to delay savings to the Medicare program and to beneficiaries—in

the form of lower copayments—that could be achieved through the revised

inherent reasonableness process.

HCFA’s reliance on the good cause exception to bypass formal notice and

comment rulemaking procedures seems reasonable. The revised inherent

reasonableness regulations change neither the factors that may be

considered in determining whether a payment amount is grossly excessive

or deficient nor the sources of information that can be used to establish

realistic and equitable payment amounts. For example, Medicare payment

amounts can be determined to be excessive if they are much higher than

production and supplier acquisition costs for products covered under the

reviewed product group.17 These costs also can be considered in

establishing a realistic and equitable payment amount.18 This methodology

for applying the inherent reasonableness process has existed in regulation

since 1986 and has already been through a formal notice and comment

rulemaking process.19 We believe it is a reasonable interpretation of the

statute. HCFA should respond to industry concerns regarding this

methodology in the final rule on the inherent reasonableness process.

1742 C.F.R. 405.502(g)(1)(vii)(E) (1999). Compare with 42 C.F.R. sec. 405.502(g)(1)(vi)

(1997).

1842 C.F.R. 405.502(g)(2)(iii) (1999). Compare with 42 C.F.R. sec. 405.502(g)(2)(iii) (1997).

19HCFA solicited and obtained public comments on the inherent reasonableness

methodology when the agency published a notice of proposed rulemaking, that is, a

proposed rule, on Feb. 18, 1986, 51 Fed. Reg. 5,726, and again when a final rule with

comment period was published on Aug. 11, 1986, 51 Fed. Reg. 28,710. Public comments on

the proposed rule were discussed in the Aug. 1986 rulemaking. Further comments were

discussed when the rules were finalized on July 11, 1988, 53 Fed. Reg. 26,067.
B-282467

Page 15 GAO/HEHS-00-79 Inherent Reasonableness

The legislative history of the good cause exception provides that notice and

comment are unnecessary in cases in which “minor or merely technical”

amendments to regulations are issued.20 The leading precedent for this line

of argument is National Helium Corp. v. FEA, in which the court considered

notice and comment unnecessary because a change in a pricing regulation

was largely technical and did not substantively alter the existing regulatory

framework or application of the rules to the parties involved in the case.21

Similarly, the only significant change to the inherent reasonableness

regulations is permitting the use of a less cumbersome process when

adjusting Medicare payments by up to 15 percent per year and allowing

once again the DMERCs to make inherent reasonableness adjustments.

The inherent reasonableness framework and its application to suppliers

remain essentially intact.

Likewise, we accept HCFA’s finding that good cause exists to bypass the

formal notice and comment procedures because it would be contrary to the

public interest to delay the savings to the Medicare program and its

beneficiaries. Numerous GAO and HHS Office of Inspector General reports

have documented that Medicare overpays for certain medical equipment

and supplies.22 HCFA has a fiduciary responsibility to safeguard Medicare

funds. The BBA gave HCFA the flexibility to act expeditiously in adjusting

unreasonable Medicare payments for medical products. The imposition of

the notice and comment procedures associated with proposed rulemaking

would hinder HCFA’s ability to bring Medicare payments in line with

market prices in a timely manner. In short, we find that going through the

notice of proposed rulemaking to issue the inherent reasonableness

regulations would have serious financial implications for Medicare and its

beneficiaries.

20S. Doc. No. 248, 79th Cong., 2d Sess. at 200, 258 (1946). See also Ellen R. Jordan, The

Administrative Procedure Act’s “Good Cause” Exemption, 36 Admin. L. Rev. 113, 129 (1984)

and Juan J. Lavilla, The Good Cause Exemption to Notice and Comment Rulemaking

Requirements Under the Administrative Procedure Act, 3 Admin. L. J. 317, 334 (1989).

21569 F.2d 1137, 1146 (Temp.Emer.Ct.App. 1977).

22See GAO/HEHS-98-102, May 12, 1998; and HHS Office of Inspector General, Are Medicare

Allowances for Albuterol Sulfate Reasonable? and Payments for Enteral Nutrition: Medicare

and Other Payers.
B-282467

Page 16 GAO/HEHS-00-79 Inherent Reasonableness

HCFA Has Authority to

Delegate

Responsibility to the

DMERCs

HCFA acted within its authority when it delegated certain responsibilities

under the revised inherent reasonableness process to the DMERCs. The

DMERCs have the authority under the regulations to make inherent

reasonableness adjustments of up to 15 percent a year. Some supplier

groups commented that it was improper for HCFA to bypass its complex

set of regulatory procedures for adjusting Medicare payments and allow

the DMERCs to conduct inherent reasonableness reviews. These groups

said that if the DMERCs jointly act to adjust Medicare payment rates, this

action would set payment rates at the national level, and the inherent

reasonableness process applicable to HCFA should be followed.

Neither section 4316 of the BBA, which amended the inherent

reasonableness provision of the Social Security Act, nor the Social Security

Act itself specifically precludes HCFA from delegating responsibility under

the revised inherent reasonableness process to the DMERCs. Moreover,

section 4316 of the BBA removed the legal barriers that had prevented the

DMERCs from making use of the inherent reasonableness process over

durable medical equipment, prosthetics, orthotics, and supplies. This

provision is included in Medicare law under the section regarding the use

of Medicare contractors in administering benefits. Although the BBA is

silent on the issue of DMERC delegation, we believe that HCFA made a

reasonable interpretation of the statute to permit delegation of the

“streamlined” inherent reasonableness authority to its contractors.

HCFA has long relied on its Medicare contractors and their expertise to

handle pricing and payment issues. The DMERCs have staff who conduct

payment reviews by collecting historical and current catalog prices. These

pricing staff review information to establish initial payment amounts for

products covered under newly created product groups. An individual

DMERC can also adjust states’ base fees when information indicates that

they are inappropriate. For example, a DMERC may determine that

problems with supplier charge data have led to inaccurate and

unreasonable state base fees. Because these adjustments can affect

suppliers, the regulations require the DMERCs to inform the affected

suppliers and give them 30 days to comment. These DMERC pricing

activities preceded the revised inherent reasonableness process under the

BBA. Given that inherent reasonableness determinations are well within

the expertise of DMERC staff and that HCFA has a responsibility to adjust

unreasonable Medicare payments in a timely manner, HCFA’s delegation of

inherent reasonableness authority to the DMERCs is reasonable.
B-282467

Page 17 GAO/HEHS-00-79 Inherent Reasonableness

DMERCs’ Reviews

Adequate for Reducing

Medicare Payments for

Five of Eight Product

Groups

The DMERCs exercised their streamlined inherent reasonableness

authority by surveying retail prices for certain commonly used medical

products. They found that Medicare pays more than the median surveyed

retail prices for these product groups. While the DMERCs collected a large

number of retail prices from different locations, they did not conduct the

retail surveys as rigorously as they could have. Despite problems in the

survey process, we believe the results can be used as a basis for

adjustments of up to 15 percent for the product groups for which Medicare

payments clearly exceed median retail prices by more than 15 percent—

lancets, eyeglass frames, a type of urinary catheter, and two types of

catheter insertion trays (because their price adjustments were based on the

adjustment for catheters). However, the surveys are not sufficient, without

additional information and analysis, to serve as a basis to adjust payments

for glucose test strips, albuterol sulfate, and enteral formulas because the

DMERCs did not follow a rigorous methodology to ensure that the payment

amounts set for these items were appropriate.

Retail Prices Used to

Propose Payment

Reductions

for High-Volume Products

The DMERCs began their use of the streamlined inherent reasonableness

authority by reviewing prices for products that were frequently used by

Medicare beneficiaries, that could be purchased in retail stores, and for

which Medicare appeared to overpay. They chose items that were also

purchased by retail customers who were not Medicare beneficiaries so that

the current Medicare payment amount would have less influence on the

price set in the retail market. The DMERCs surveyed prices for six of the

eight reviewed product groups: glucose test strips, lancets, standard

eyeglass frames, latex Foley catheters, category 1 enteral tube-feeding

formulas, and albuterol sulfate (an inhalation drug used with a nebulizer).

For the other two product groups, they planned to use prices collected on

catheters to propose payment adjustments for two types of catheter

insertion trays, because catheters are the main component in the trays.

Several of the product groups—albuterol sulfate, enteral formulas, and

catheters—were ones that the HHS Office of Inspector General and we had

identified as being overpriced.

The four DMERCs surveyed retail stores in at least 16 states and used the

median retail price for each item as the benchmark for a reasonable

maximum payment amount. Using the median price is similar to the

statutory method for establishing Medicare payment limits for most
B-282467

Page 18 GAO/HEHS-00-79 Inherent Reasonableness

medical products based on the median of state fees.23 The DMERCs also

used the median or average catalog price, whichever is lower, as the basis

for the maximum payment amounts for new product groups.

Through the retail survey, the DMERCs found that the median retail prices

were less than Medicare’s maximum payment amounts for the six product

groups surveyed. As a result, the DMERCs proposed new maximum

payment allowances based on the median retail prices for these product

groups (see table 1). For the other two product groups reviewed—two

types of catheter insertion trays—the DMERCs proposed to reduce state

fees, but they did not collect retail prices for these items because the trays

are not generally purchased in retail settings. Instead, for these two

product groups the DMERCs proposed adjusting state fees on the basis of

the payment reductions for latex Foley catheters, which, according to

HCFA officials, are the most expensive items included in the insertion

trays. For these two product groups, the highest payment reductions the

DMERCs proposed were about 23 percent for catheter insertion trays

without drainage bags (with 15 percent applied in the first year) and 14

percent for trays with drainage bags.

Table 1: 1998 Medicare Maximum Payment Allowance, Median Retail Price, and

Percentage Reduction for Six Product Groups Under Inherent Reasonableness

Review

23See, for example, 42 U.S.C. 1395m(a)(2) (1994).

Product group

1998 Medicare

maximum

payment

allowancea

Median retail

priceb Percentage reduction

Glucose test strips (50

per box) $36.73 $35.49 3.4

Lancets (100 per box) 12.15 7.81 35.7

Eyeglass frames 62.06 49.00 21.0

Coated latex Foley

catheters 11.70 8.89 24.0

Category 1 enteral

formulas (per 100

calories) 0.61 0.51 16.4

Albuterol sulfate (.83

percent per 3 ml. vial) 0.47 0.42 10.6
B-282467

Page 19 GAO/HEHS-00-79 Inherent Reasonableness

a

These allowances represent the upper payment limit of the fee schedule for glucose test strips,

lancets, eyeglass frames, and catheters. For these product groups, the maximum payment allowances

are also the median of state fees. These allowances also represent the maximum reasonable charge

for category 1 enteral formula and the payment amount for albuterol sulfate. Medicare pays 80 percent

of these allowances, and the beneficiary pays the remaining 20 percent.

b

The median retail price would replace the maximum payment allowance for these product groups.

Source: HCFA.

As table 1 shows, four product groups that the DMERCs surveyed had

differences between the Medicare maximum payment allowance and the

median retail price of more than 15 percent. Because the DMERC inherent

reasonableness process can be used only to adjust prices by up to 15

percent a year, for these product groups the DMERCs proposed a 15-

percent reduction for the first year and additional adjustments in future

years until the difference is eliminated. For example, imposing the 35.7-

percent payment reduction for lancets would involve adjustments of 15

percent for 2 years, and a partial adjustment of 5.7 percent in the third year.

For products paid under the fee schedule, the proposed payment

reductions would vary by state. In some states, there would be little or no

reduction in fees paid for certain product groups. For example, 8 states that

previously had the lowest fees for eyeglass frames and 21 states with the

lowest fees for glucose test strips would experience no payment change

because the fees paid in those states were below the new proposed fees.24

Other states would experience less than the maximum change. (See app. III

for state fees and proposed payment reductions by reviewed product

group.)

Industry groups raised two major concerns about the DMERCs’ proposals

to reduce Medicare payments for the eight reviewed product groups. They

believed that using the revised inherent reasonableness process when the

total percentage reductions in Medicare payments exceeded 15 percent

would violate congressional intent. They also stated that the proposed 3.4-

percent reduction in the upper payment limit for glucose test strips does

not indicate that Medicare’s fee schedule is grossly excessive. Therefore,

they did not believe a payment reduction is warranted.

24The industry contended that these state fees that fell below the median surveyed retail

price should be increased. According to HCFA, none of the state fees were adjusted upward,

including those that were lower than the proposed amounts, because there are no apparent

access problems under the current payment levels, which agency officials said is the

criterion that is generally used in determining whether payment amounts should be raised.
B-282467

Page 20 GAO/HEHS-00-79 Inherent Reasonableness

According to the statute, if the revised process is used, inherent

reasonableness payment adjustments cannot exceed 15 percent in a single

year.25 HCFA has asserted that if it or the DMERCs determine that Medicare

payments should be reduced by more than 15 percent in total, they may use

the revised process to implement these reductions incrementally over

several years until the full reduction is achieved. In our opinion, the law

does not preclude HCFA or the DMERCs from using the revised inherent

reasonableness process as long as the adjustments do not exceed 15

percent in a single year.26 However, HCFA and the DMERCs should have

firm evidence to justify subsequent payment reductions. To develop that

evidence, HCFA or the DMERCs should confirm market prices in the

subsequent years to ensure that the proposed reductions continue to be

appropriate.

In addition, the inherent reasonableness process can be used only when

Medicare payments are “grossly excessive or deficient.” The law does not

define when a payment amount is “grossly excessive,” although clearly an

adjustment of under 15 percent could qualify, because the inherent

reasonableness authority extends to situations in which the difference

between a current and proposed payment amount is under 15 percent. The

revised inherent reasonableness regulations also do not define when a

payment amount is “grossly excessive.” HCFA pointed out that because of

the very high number of some items paid for by Medicare, even a relatively

small excess payment per product group can lead to high overpayments. As

a result, HCFA believes that overpaying for a single product group by even

a small amount can be characterized under the statute as grossly excessive.

2542 U.S.C. 1395u(b)(8)(A)(ii) (Supp. III 1997). HCFA may make a determination that “would

result” in an increase or decrease of more than 15 percent over the previous year’s payment

amount only if the agency follows certain additional procedures, which include supplier

consultation and a beneficiary liability impact analysis. 42 U.S.C. 1395u(b)(8)(B) − (D) and

1395u(b)(9). Because Medicare contractors cannot carry out all of these procedures, their

authority to impose inherent reasonableness payment adjustments of more than 15 percent

per year is thereby precluded.

26As of November 1999, there have been two notices of proposed inherent reasonableness

adjustments under the revised process. The September 1998 notice by the DMERCs is the

subject of this report. See, for example, http://www.medicare-link.com/DMERC/news/

dme40.pdf, p. 6, as of Feb. 11, 2000. HCFA also issued a proposed notice in 64 Fed. Reg.

44,227 (Aug. 13, 1999). HCFA must still abide by the clearance process for its proposed

inherent reasonableness reductions, but since it invoked its option to incrementally reduce

the payment amounts by no more than 15 percent a year, it did not have to comply with

certain provisions of the statute, such as supplier consultation and a beneficiary liability

impact analysis.
B-282467

Page 21 GAO/HEHS-00-79 Inherent Reasonableness

Issuing a final rule will give HCFA an opportunity to better explain the

terms “grossly excessive or deficient” payment—and not just give

examples of factors that may result in grossly excessive or deficient

payments—so that suppliers are aware of the different criteria for

conducting inherent reasonableness reviews.

DMERC Survey Process Has

Shortcomings,

Suggesting Certain Results

Should Be Used With

Caution

The DMERCs’ surveys of retail prices had deficiencies, which limits our

confidence in the use of the results to estimate reasonable payment

reductions for three of the eight product groups. In general, we believe the

survey results clearly indicated that Medicare overpaid for five of the eight

product groups. The DMERCs sampled prices in different states and

collected a large number of retail prices to develop their payment

proposals. However, they did not choose their sample in a consistent way,

nor did they set sufficient criteria so that we could be assured that the

locations sampled represented retail prices nationally. The DMERCs also

did not follow a consistent methodology, leading to differences in how they

collected and analyzed retail prices, such as not properly calculating state

sales taxes for all items. In addition, the DMERCs did not survey the types

of enteral formulas and the packaging systems considered most

appropriate and generally used for tube feeding. Instead, they obtained

prices for cans of oral nutritional supplements.

Despite these deficiencies, we believe that the surveys provide a sufficient

basis to adjust payments by up to 15 percent for the product groups for

which Medicare pays substantially more than 15 percent above the median

retail price. However, for glucose test strips and albuterol sulfate, the

difference between the current maximum Medicare payment amount and

the DMERCs’ median surveyed price was less than 15 percent, and thus the

precision of the survey results becomes more critical to setting the new

payment amounts. Similarly, the survey results are questionable for enteral

formulas, because the DMERCs did not survey the types of enteral

formulas and the packaging systems considered most appropriate and

generally used for tube feeding. As a result, we do not believe the surveys

of glucose test strips, albuterol sulfate, and enteral formulas provide a

sufficient basis, without gathering more information, to adjust the payment

amounts.

DMERC Sample of Prices Was

Large but Might Not Fully

Represent the Range of Retail

Prices

The DMERCs collected about 2,800 prices for the six product groups. They

used a judgmental sample, meaning that they chose certain locations to

obtain retail prices that they believed represented a good mix of localities

across the country. However, they did not choose a sample of states and
B-282467

Page 22 GAO/HEHS-00-79 Inherent Reasonableness

localities for their surveys of retail stores or samples of stores in those

locations in a consistent way. Setting criteria would have ensured that the

prices sampled fully represented the range of retail prices nationally.

To establish a median retail price, the DMERCs decided that each would

select three populous states and one less populous state, and within each

state, sample three urban areas and two rural areas. Then, within each

urban area the DMERCs agreed to select four large stores and one small

store, while within each rural area they were to select one store.

A weakness in the DMERCs’ sampling plan is that it was developed without

fully considering the geographic distribution of Medicare beneficiaries.

Also, the DMERCs did not consider relative prices in the localities from

which they sampled, which would have helped ensure that an appropriate

mix of areas with high, medium, and low consumer prices was included.

Furthermore, the DMERCs did not establish criteria to define populous

state, less populous state, urban area, and rural area, and consequently

each DMERC used different criteria in selecting locations. The DMERCs

were also not consistent in how they chose retail outlets within the

selected cities.

Because of the sampling methodology used, we cannot be certain that the

full range of retail prices that Medicare beneficiaries might pay was

reflected in the DMERCs’ sample. As a result, it is not clear how close the

median of sampled prices may be to the median of national prices for each

product group. In our opinion, this weakness is less important when the

current Medicare payments are significantly higher than the proposed

payment amounts. This is because the precision of the median price does

not matter as much when a payment adjustment of up to 15 percent in the

first year would still leave the Medicare payment higher than the median.

However, the quality of the sample becomes a more significant issue when

the difference between the current maximum payment and the median is

small—such as the estimated 3.4-percent proposed reduction for glucose

test strips.

Industry groups contended that large urban areas were underrepresented

in the DMERCs’ surveys of retail prices. These groups claimed that median

retail prices in large urban areas are higher than in other population areas

and therefore underrepresenting these areas resulted in a downward bias

in the surveyed median price. We found that the distribution of sampled

prices from localities surveyed was not fully representative of the

distribution of the U.S. population (see table 9 in app. IV). However, this did
B-282467

Page 23 GAO/HEHS-00-79 Inherent Reasonableness

not appear to give a downward bias to the survey results, because the

DMERCs sampled retail prices in many large urban areas, and the larger

urban areas in the survey did not always have the higher median retail

prices (see table 10 in app. IV).

Survey Methods Were Not

Consistent Among the DMERCs

The DMERCs did not use consistent methods to collect and analyze the

pricing data. HCFA provided guidance on survey methodologies because

the DMERCs were conducting a retail survey for the first time under the

revised inherent reasonableness process. The DMERCs also discussed with

HCFA the methods to be used in their surveys. But the DMERCs did not

develop written guidelines for data collection and analysis. As a result, we

found differences among the DMERCs’ practices in requesting pricing data

and in calculating the proposed reductions. The DMERCs did not develop a

consistent set of survey questions to use when they requested prices from

retail stores. This made their survey less rigorous, and it was impossible to

determine, after the fact, whether they collected price information in a

consistent way.

Various industry groups were concerned that the DMERCs consistently

sampled less expensive products that beneficiaries rarely use and that the

survey results included prices for products that were temporarily “on sale.”

They were also concerned that the DMERCs conducted primarily

telephone surveys, which, compared with site visits, may have missed

pricing information on higher priced items available in a store. However,

these are not valid criticisms of the survey because, as a general principle,

the Medicare program covers products to the extent that they are medically

necessary but does not cover deluxe products, such as designer eyeglass

frames, or products with features that are designed only for personal

convenience and comfort. HCFA’s guidance to the DMERCs was based on

this principle. Generally, the DMERCs were to survey retail stores for the

most reasonably priced item that a consumer could buy within the

surveyed product groups. The exceptions were glucose test strips and

lancets. Since specific brands of diabetic supplies must be used in

conjunction with specific blood glucose monitors, the DMERCs were asked

to survey different brands of test strips and lancets so that prices reflected

testing supplies used with different blood glucose monitor models

currently on the market.

We found that for glucose test strips and lancets, the DMERCs collected

prices for a range of brands to ensure that they had information on a variety

of testing supplies used with different monitor models. For other product

groups, the DMERCs did not collect as many prices. When they obtained
B-282467

Page 24 GAO/HEHS-00-79 Inherent Reasonableness

prices for different-sized packages for the same brand of testing supplies or

for various items within a product group from the same store on the same

day, they generally used the packaging size with the lowest unit price or the

lowest-priced sample to calculate the median price.

In addition to inconsistencies in collecting data, the DMERCs were not

always consistent in calculating the state sales tax to be added to the

purchase price for some of the items.27 The tax treatment of medical

equipment and supplies varies among states. For example, many states

exempt eyeglasses from state sales tax, whereas other states do not. Our

preliminary analysis showed that the DMERCs correctly calculated the

sales tax in many of the surveyed states, but for other states, they either

overstated or understated the sales tax. Because the DMERCs erred in both

directions, the net effect is considerably lessened.

While these errors in calculating sales tax had a negligible effect on the

proposed payment amounts for most items, they did affect the proposed

payment limit for glucose test strips and albuterol sulfate because the

proposed reductions are small. For example, our preliminary analysis

indicated that the DMERCs incorrectly applied sales taxes to prices of

glucose test strips sampled in seven states. Once we applied what we

believe are the appropriate sales taxes, the median retail price rose to

$35.99—a 2.0-percent, rather than a 3.4-percent, reduction from the current

payment limit for this item. In the case of albuterol sulfate, we found that

prescription drugs are exempt from sales tax in the states where prices

were sampled. One DMERC added sales taxes even though taxes may not

have been applicable in those states. Correcting this appeared to reduce

the median surveyed price to $.41—which represents a 12.7-percent, rather

than a 10.6-percent, reduction in the payment amount.

We believe that the DMERCs could have avoided some of their inconsistent

survey practices and been less open to criticism if they had used a written

survey guide to help collect and prepare the pricing data. It is standard

practice when collecting survey data to use a written survey instrument to

help ensure that all respondents are asked the same questions in the same

manner so that the data collected are consistent and comparable.

27We did not review the state sales taxes applicable to enteral formulas because we had

other concerns about the survey of that product group.
B-282467

Page 25 GAO/HEHS-00-79 Inherent Reasonableness

DMERCs Did Not Survey Enteral

Products Used in Tube Feeding

In our 1998 report on Medicare payments for medical equipment and

supplies, we found that different types of items can be billed under the

same product group and that HCFA does not know the specific items

supplied to a beneficiary under its billed product groups.28 To set a

maximum payment amount for enteral formulas, the DMERCs surveyed

prices on some types of items covered under the product group for tubefeeding formulas. However, our review of the survey results indicated that

the DMERCs did not sample the most appropriate enteral formulas for tube

feeding. They also did not collect pricing data on sterile prefilled formula

bags, which are commonly used for enteral feeding in nursing homes to

reduce the risk of patient infection. As a result, we do not believe that the

survey results support the proposed payment reduction without additional

information and analysis.

To price enteral formulas, the DMERCs primarily sampled over-the-counter

items sold in retail stores as oral nutritional supplements. Medicare covers

enteral formulas intended for beneficiaries who must be fed through a tube

but not when the formulas are used as oral supplements. HCFA’s rationale

for pricing oral supplements was that they could be used in feeding tubes.

However, several pharmacists and enteral nutritionists told us that while

over-the-counter formulas can be used for a small subset of tube-fed

patients, such formulas are generally not the most appropriate products for

tube feeding. They also said that although over-the-counter formulas were

used for this purpose in the past, new formulas have been developed

specifically for tube-fed patients that are better tolerated and are more

widely provided to Medicare beneficiaries.

Moreover, when we reviewed enteral products approved by several

hospitals, medical centers, and VA hospitals for standard tube feeding, we

found that these facilities did not generally include as approved formulas

the over-the-counter formulas that the DMERCs surveyed. In addition, we

reviewed billing data from two large Medicare medical suppliers and found

that specialized tube-feeding formulas—not the products the DMERCs

surveyed—were the most common items provided to beneficiaries under

the enteral formula product group. By not surveying the prefilled bags, the

DMERCs did not develop any price information on this type of packaging,

even though this type of packaging represented about half of the products

these two suppliers billed to Medicare under the product group.

28See GAO/HEHS-98-102, May 12,1998.
B-282467

Page 26 GAO/HEHS-00-79 Inherent Reasonableness

As the industry contended, the specialized formulas for tube-fed patients

packaged in cans or prefilled formula bags were generally not available

over-the-counter. As a result, a retail survey was not the best way to

establish the payment amount for category 1 enteral formulas. Because we

do not know whether prices for oral supplements are similar to the tubefeeding formulas generally used, in cans or prefilled bags, we do not know

whether the proposed reduction in Medicare’s payment amount for this

product group is reasonable. To set an appropriate payment amount, the

DMERCs or HCFA needs to determine the products generally used by

beneficiaries, and the distribution channels for those products, and then

collect additional price information on those products.

Other Data Suggest

Medicare Payments for

Enteral Formulas and Other

Product Groups May Be Too

High

Despite our concerns about the methods used to conduct the survey of

retail prices and the results for glucose test strips, albuterol sulfate, and

enteral formulas, Medicare fees may be excessive for these product groups.

Surveying retail prices is not the only method of reasonably establishing

what Medicare should pay. In fact, using retail prices may lead Medicare to

continue to overpay suppliers for some product groups that are not

typically or often purchased by beneficiaries in a retail setting.

Retail surveys may be appropriate for determining a reasonable

reimbursement rate for beneficiaries who typically purchase items off the

shelf. Retail prices reflect the costs of getting the items to the consumer—

both the costs for the store to acquire the items and the costs to deliver

them in a retail setting—plus a profit margin. According to HCFA, retail

prices can also include some service costs, such as credit card billing and

pharmacy services.29 Certain product groups, such as eyeglass frames, are

usually consumer goods for which retail prices represent the prices

generally charged to the public for these goods. Some product groups, such

as glucose test strips and lancets, have both a consumer and an

institutional market. For these product groups, beneficiaries and suppliers

purchase the same items and bill Medicare for reimbursement. Other

product groups frequently billed to Medicare, such as catheters and related

products, are generally purchased only by suppliers such as nursing home

suppliers and home medical equipment and supply companies. These

29Industry groups commented that retail prices do not take into account the suppliers’

administrative costs of submitting Medicare claims for medical equipment and supplies.

HCFA asserts that retail prices more than adequately reimburse suppliers for their

administrative costs of doing business with Medicare.
B-282467

Page 27 GAO/HEHS-00-79 Inherent Reasonableness

entities provide medical equipment and supplies to nursing home and

home-bound beneficiaries and bill Medicare on their behalf.

Suppliers generally pay wholesale prices that reflect volume discounts for

purchasing items in bulk and have different costs to deliver items to

beneficiaries than do retail outlets. Yet Medicare pays the same amount for

an item that beneficiaries purchase at retail and suppliers purchase at

volume discount.

A strategy other than using retail prices may be more appropriate for

estimating reasonable Medicare payments for products generally provided

by suppliers, such as enteral formulas. A better estimate may be based on

wholesale prices or suppliers’ acquisition costs with a reasonable markup

for service costs. HCFA and the DMERCs may be able to get information on

suppliers’ costs to acquire the item, such as a wholesale price. Medicare

payments should also cover any services necessary to furnish a product to

beneficiaries. These services can include beneficiary education and

training, delivery, and the cost of billing Medicare for the product. It may be

more difficult to determine a reasonable markup for the costs of providing

services associated with the product to the beneficiary. Nonetheless,

identifying these services, estimating their costs, and adding this markup to

the wholesale price may be one way to set new and reasonable maximum

payment amounts.

The prices that the Department of Veterans Affairs (VA) pays for medical

equipment and supplies provide a rough estimate of the wholesale prices

that large suppliers pay because VA is a large purchaser. As table 2 shows,

median VA prices for five of the six surveyed product groups were

considerably lower than current Medicare payment amounts. However, VA

prices do not include all the service costs associated with getting the

product to the beneficiary. How much markup would be necessary to

account for these costs is not certain. However, as table 2 also shows,

sizable markups could be added to VA prices and the results would still be

less than Medicare’s maximum payment allowances. For example, adding a

100-percent markup to the VA price for category 1 enteral formulas would

result in Medicare paying $.34 instead of $.61 per 100 calories.
B-282467

Page 28 GAO/HEHS-00-79 Inherent Reasonableness

Table 2: 1998 Medicare Expenditures, Medicare Maximum Payment Allowance, VA

Median Price, and Percentage Markup, by Product Group

a

These allowances represent the upper payment limit of the fee schedule for glucose test strips,

lancets, eyeglass frames, and catheters. For these product groups, the maximum payment allowances

are also the median of state fees. These allowances also represent the maximum reasonable charge

for category 1 enteral formulas and the payment amount for albuterol sulfate. Medicare pays 80

percent of these allowances, and the beneficiary pays the remaining 20 percent.

b

The median VA price represents the standard tube-feeding formula, which is purchased in cans. VA

uses other tube-feeding formulas in cans for a subset of patients who have special dietary needs. VA

prices for these products range from $.12 to $.19 per 100 calories. VA does not have a contract for

prepackaged delivery systems.

c

Not applicable.

Sources: 1998 Medicare expenditures are from the Statistical Analysis Durable Medical Equipment

Regional Carrier; 1998 Medicare maximum payment allowances and the 1998 VA median prices are

from HCFA; and the percentage markup is a GAO calculation.

Product group

1998 Medicare

expenditures

1998 Medicare

maximum

payment

allowancea

1998 VA

median price

Percentage

markup added

to VA price

Glucose test strips

(50 per box) $291,906,224 $36.73 $21.29 72.5

Albuterol sulfate

(.83 percent per 3

ml. vial) 207,317,969 0.47 0.11 327.3

Category 1 enteral

formulas (per 100

calories) 189,683,827 0.61 0.17b 258.8

Lancets (100 per

box) 32,989,146 12.15 4.03 201.5

Eyeglass frames 22,599,790 62.69 32.95 90.3

Coated latex Foley

catheters 1,580,344 11.70 c c
B-282467

Page 29 GAO/HEHS-00-79 Inherent Reasonableness

For items that are not generally purchased in a retail setting, such as

enteral formulas for tube feeding, setting new payment amounts by using

the median VA price plus an appropriate markup may represent a better

way to set the amount. HCFA is currently using VA prices with a markup for

service delivery in its inherent reasonableness review of six other items.30

On August 13, 1999, HCFA issued a proposed notice to reduce Medicare

payments for five items of durable medical equipment and one prosthetic

device using VA contract prices as a base and adjusting those prices

upward by 67 percent to account for supplier costs. HCFA developed its 67-

percent markup using the median of the differences between wholesale

and suggested retail prices for over 200 types of medical equipment and

devices submitted to HCFA for product category coding by manufacturers

between 1989 and 1998. These coding requests generally involved new

products and technology, and HCFA reasonably assumed the markup

would be higher on such items than on items that had been on the market a

number of years. This inherent reasonableness adjustment is on hold

pending issuance of this report and the final rule.

Access Problems

Unlikely to Occur,

but Monitoring Needed

While it is impossible to forecast with certainty whether any access

problems may result from the proposed payment reductions, we believe

that it is likely that sufficient numbers of suppliers will still be willing to

provide these product groups to beneficiaries after payment reductions of

up to 15 percent for eyeglass frames, lancets, catheters, and catheter

insertion trays. As a result, beneficiaries are unlikely to experience access

problems. After such reductions, Medicare payments will still be higher

than the median retail prices for these items, and because the payment

reductions are based on retail prices, suppliers will likely continue to have

the financial incentive to provide these products to beneficiaries. However,

HCFA should monitor the situation to determine whether significant

problems with access to medical equipment and supplies arise because

payments have become too low. If so, HCFA could then use its inherent

reasonableness authority to adjust payments so that Medicare continues to

pay prudently while beneficiaries continue to have adequate access to

needed medical equipment and supplies.

30See 64 Fed. Reg. 44,227. These six items are folding pickup walker, folding wheeled walker

without seat, stationary fixed-arm commode chair, two types of transcutaneous electrical

nerve stimulators, and vacuum erection system.
B-282467

Page 30 GAO/HEHS-00-79 Inherent Reasonableness

Proposed Payment

Reductions

Are Unlikely to Affect

Patient Access

The effect of the proposed payment reductions on beneficiary access

depends on whether Medicare payment amounts fall below the point at

which sufficient numbers of suppliers are willing to provide the items. If

the payment amount drops so far that it no longer covers suppliers’

legitimate costs—including the cost of doing business with Medicare—then

suppliers may be unwilling to provide the item for the Medicare payment

amount and beneficiaries may experience access problems.

We believe it is unlikely that reducing Medicare payments by up to 15

percent for lancets, eyeglass frames, catheters, and catheter insertion trays

will affect patient access because the current Medicare payment exceeds

the median retail price by more than 15 percent. The DMERCs’ intention in

using retail prices was to eliminate excessive payments while ensuring that

beneficiaries could continue to obtain these products over-the-counter. As

we observed earlier in this report, retail prices (1) represent the prices

generally available to individual beneficiaries, (2) include a share of the

costs of maintaining retail space as well as other services, and (3) are

generally higher than what a prudent large-volume purchaser would pay.

Under these circumstances, basing inherent reasonableness reductions on

retail prices is conservative and not likely to affect the availability of these

items.

To determine whether access is affected by payment reductions, HCFA

could monitor various indicators of potential access problems. These

indicators could include the percentage of suppliers willing to accept the

Medicare-allowed payment amounts for the surveyed items and the number

of beneficiary complaints. Monitoring access is particularly important in

higher cost geographic areas. Similarly, monitoring access may be more

critical for product groups for which the national median retail prices are

closer to the current Medicare maximum payment amounts. Should access

problems occur, HCFA could adjust payment amounts as necessary.

HCFA has reduced prices in the past for items it believed were overpriced

with no significant effect on patient access to the item in question. For

example, section 4552 of the BBA reduced Medicare’s fees for home

oxygen by 30 percent after we reported that Medicare’s fees were excessive

compared with those paid by VA. Subsequently, we reported that, according

to preliminary indications, access to home oxygen equipment remained
B-282467

Page 31 GAO/HEHS-00-79 Inherent Reasonableness

substantially unchanged.31 We found that despite the reduction, the number

of Medicare beneficiaries using home oxygen equipment continued to

increase, as did the percentage of home oxygen suppliers willing to accept

the Medicare fee as full payment. In Polk County, Florida, a competitive

bidding demonstration allowed HCFA to achieve an additional 16-percent

reduction in price (beyond the 30-percent BBA reduction) for home

oxygen. This competitive bidding experiment is being closely monitored

through an independent evaluation, and a number of beneficiary

protections are in place, including a full-time ombudsman and the right for

beneficiaries to continue using their home oxygen provider as long as that

provider accepts the new payment amount.

Conclusions HCFA acted properly when it issued the revised inherent reasonableness

regulations as an interim final rule and has the authority to delegate

responsibility to the DMERCs to make inherent reasonableness payment

adjustments in certain circumstances. As required by the Congress, HCFA

must finalize the inherent reasonableness regulations and respond to

industry concerns, particularly regarding the agency’s policies and

procedures in applying the revised inherent reasonableness process. This

will give HCFA the opportunity to better explain its understanding of the

term “grossly excessive or deficient” so that the criteria for conducting

inherent reasonableness reviews are clear to all parties.

The DMERCs’ use of retail surveys to determine an appropriate price for

items that have a wide retail market is sound. In general, there is sufficient

evidence to indicate that Medicare overpays for most of the reviewed

product groups. Consequently, we believe that the median prices from the

DMERCs’ retail surveys can serve as an adequate basis for making up to 15-

percent payment reductions for eyeglass frames, lancets, catheters, and

catheter insertion trays—items with a considerable difference between the

median retail price and Medicare’s maximum payment allowance.

However, problems with the survey lead us to question whether further

payment reductions for these products should be made in subsequent years

without some additional data-gathering and analysis. In addition, while

relying on retail surveys when pricing products generally purchased by

beneficiaries in retail settings is sound, using this method for other product

31Medicare: Access to Home Oxygen Largely Unchanged; Closer HCFA Monitoring Needed

(GAO/HEHS-99-56, Apr. 5, 1999).
B-282467

Page 32 GAO/HEHS-00-79 Inherent Reasonableness

groups may complicate pricing efforts and lead to higher Medicare

payment amounts than are warranted.

Because the DMERCs did not follow a rigorous survey process, their

estimates of retail prices are less precise than they could be. This matters

more when the difference between the current Medicare payment amount

and the estimated median retail price is smaller. As a result, the DMERCs

should supplement their data with additional information and analysis

before reducing Medicare payments for glucose test strips and albuterol

sulfate. In addition, because the DMERCs did not collect information on

specific enteral formulas that are considered most appropriate by clinical

experts and are most commonly used for tube feeding, the DMERCs should

also gather more data to assess whether the proposed payment reduction

for this product group may be too high or too low.

The results of the DMERCs’ inherent reasonableness surveys for eyeglass

frames, lancets, catheters, and catheter insertion trays will not result in

payment allowances that are set artificially low. Therefore, we believe that

beneficiary access to these items is likely to be unaffected by the payment

reductions. The payment reductions should have the positive effect of

preventing overpayment by Medicare and saving taxpayers money without

harming beneficiaries. However, we believe it is important for HCFA to

monitor indications of problems with beneficiary access to medical

equipment and supplies, particularly in high-cost geographic areas or after

multiple payment reductions have been made, and be ready to respond if

access appears to become limited.

Recommendations We recommend that

• in promulgating the final rule on the inherent reasonableness process,

HCFA define with sufficient clarity the terms “grossly excessive” and

“grossly deficient;”

• HCFA and the DMERCs collect and analyze additional information to

more precisely estimate any payment reductions for glucose test strips,

albuterol sulfate, and enteral formulas, as well as for additional payment

reductions in subsequent years for lancets, eyeglass frames, latex Foley

catheters, and catheter insertion trays without drainage bags;

• for future inherent reasonableness reviews based on survey data, HCFA

or the DMERCs develop and implement a more structured survey

design, including sample selection, survey instrumentation, and data
B-282467

Page 33 GAO/HEHS-00-79 Inherent Reasonableness

collection methods, and ensure that the design is consistently used by

all entities conducting the survey; and

• HCFA monitor indicators that could signal potential problems with

patient access to the product groups for which it is reducing maximum

payments, and act quickly to rectify any problems that arise.

Agency Comments and

Our Evaluation

HCFA commented on a draft of this report and generally agreed with its

findings and conclusions. (HCFA’s letter is printed in app. V.) HCFA also

stated that it intended to incorporate all of our recommendations as it

moved forward with its promulgation of the final rule and use of the

inherent reasonableness process.

In its comments, HCFA emphasized the efforts it has made to be a more

prudent purchaser of health care services and items by using new authority

granted by the BBA to conduct competitive bidding demonstrations and to

exercise streamlined authority in using inherent reasonableness principles.

Following the issuance of this report, HCFA plans to publish as quickly as

possible a final regulation that incorporates our recommendations and to

proceed with the price adjustments we found appropriate—which will save

an estimated $8 million annually in grossly excessive payments.

HCFA expressed concerns that our report could have the unintended effect

of hindering HCFA’s ability to effect needed adjustments using its inherent

reasonableness authority. It stated that the DMERCs’ efforts to gather data

to support planned price reductions were far more extensive than any data

collection that had been done in the past, and met or surpassed earlier

recommendations that urged HCFA to use a streamlined inherent

reasonableness process. Nothing in this report is intended to hinder HCFA’s

efforts to use the inherent reasonableness process to achieve appropriate

payment amounts.

We will send copies of this report to the Honorable Donna E. Shalala,

Secretary of Health and Human Services; the Honorable Nancy-Ann Min

DeParle, Administrator of HCFA; appropriate congressional committees;

and others who are interested.
B-282467

Page 34 GAO/HEHS-00-79 Inherent Reasonableness

If you or your staff have any questions, please call me at (312) 220-7600 or

Sheila Avruch at (202) 512-7277. Other major contributors to this report

include Teruni Rosengren, Victoria Smith, Michelle St. Pierre, and Craig

Winslow.

Sincerely yours,

Leslie G. Aronovitz

Associate Director, Health Financing and

Public Health Issues
Page 35 GAO/HEHS-00-79 Inherent Reasonableness
Page 36 GAO/HEHS-00-79 Inherent Reasonableness

Appendix I

Scope and Methodology ApApenednxidexiIs

We conducted our study between April 1999 and May 2000 in accordance

with generally accepted government auditing standards. To determine

whether HCFA (1) acted properly in issuing its inherent reasonableness

regulations as an interim final rule and (2) has the authority to delegate the

inherent reasonableness process to the DMERCs, we reviewed the laws

and regulations, relevant case law, and legislative history of the inherent

reasonableness process under the Medicare Act. We also reviewed the

notice and comment requirements of the Administrative Procedure Act and

relevant case law. Additionally, we reviewed industry comments and

HCFA’s pre-BBA legislative initiative to improve the inherent

reasonableness process.

We evaluated the DMERCs’ surveys of retail prices used to develop the

payment proposals for the following eight product groups:

• blood glucose test or reagent strips for home blood glucose monitor, per

50 strips (A4253);

• lancets, per box of 100 (A4259);

• insertion tray without drainage bag with indwelling catheter, Foley type,

two-way latex with coating (A4311);

• insertion tray with drainage bag with indwelling catheter, Foley type,

two-way latex with coating (A4314);

• indwelling catheter, Foley type, two-way latex with coating—Teflon,

silicone, silicone elastomer, or hydrophilic (A4338);

• enteral formulas—category 1, semisynthetic intact protein/protein

isolates, 100 calories = 1 unit (B4150);

• albuterol, inhalation solution administered through durable medical

equipment, unit dose form, per mg (K0505); and

• frames, purchase (standard) (V2020).

We met with industry groups representing manufacturers, distributors,

medical equipment and supply companies, enteral formula providers, and

long-term care providers to discuss their concerns regarding the survey and

how HCFA implemented the inherent reasonableness process. We

reviewed their written comments on HCFA’s interim final rule and the

DMERCs’ inherent reasonableness notices and industry-sponsored studies.

We also met with an organization that lobbies for people who have had

ostomy surgery. In addition, we reviewed GAO and HHS Office of Inspector

General reports on the adequacy of Medicare payments for medical

equipment and supplies.
Appendix I

Scope and Methodology

Page 37 GAO/HEHS-00-79 Inherent Reasonableness

We met with HCFA officials and contacted the pricing staff from the four

DMERCs to discuss the revised inherent reasonableness process and

methods for implementing it. The individual DMERCs provided us with

data on the retail surveys. They also gave us information on the survey

process including the survey questions they asked and the state sales tax

they applied to the purchase price of the items surveyed. The primary

states from which survey data were obtained were California, Florida,

Idaho, Indiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, New

York, North Dakota, Pennsylvania, South Carolina, Tennessee, Texas, and

West Virginia. (The DMERCs surveyed other states to collect supplemental

data.) We also discussed Medicare payment policies for the surveyed items

with HCFA officials and obtained the final inherent reasonableness survey

results from them.

Because the DMERCs provided us with more detailed survey data, we

validated those data against the final inherent reasonableness survey

results. We compared each price as reported by the individual DMERCs

with the prices included by HCFA in the final results and reconciled any

discrepancies identified. In addition, we verified whether state sales tax

was appropriately applied for each surveyed item for each surveyed state.

We reviewed state sales tax statutes, regulations, administrative opinions,

and publicly available guidance. We also discussed these matters with state

Department of Revenue officials. In cases in which state sales tax appeared

to be inappropriately applied, we recalculated the median retail price using

our best estimate of the applicable state sales tax at the time the prices

were surveyed.

To assess the DMERC survey process and results, we reviewed the survey

design and methodology with our senior methodologists and statisticians.

We also conducted several analyses to determine whether any systematic

biases existed in the data collection. For example, for each surveyed item,

we estimated the percentage of the sample prices that were obtained from

phone calls versus site visits. To assess the representativeness of survey

results, we used 1996 census estimates and the metropolitan statistical area

(MSA) population classification of the locations of stores from which

prices were gathered to compare the distribution of surveyed prices with

the general distribution of the U.S. population. We conducted a similar

analysis to determine whether the sample prices were obtained from stores

with an urban/rural distribution similar to that of the U.S. population. For

this comparison, we excluded the populations of Alaska, Hawaii, and the

U.S. territories since the inherent reasonableness limits were not applied to

these locations. For each surveyed item, we also calculated median survey
Appendix I

Scope and Methodology

Page 38 GAO/HEHS-00-79 Inherent Reasonableness

prices for each MSA population classification to determine whether a

systematic downward bias existed in the overall median prices estimated

by the survey.

To determine whether the DMERCs surveyed appropriate products, we

obtained product utilization data on enteral formulas from two large

Medicare suppliers. We also discussed the types of enteral formulas used

for tube feeding and oral supplementation with clinicians and pharmacists

at VA hospitals and other hospitals, enteral formula providers, and

manufacturers. To identify VA prices for tube-feeding formulas, VA

provided us with its 1998 national contract for enteral products. HCFA also

provided us with its survey results on prices that VA medical centers paid

for certain items of medical equipment and supplies.
Page 39 GAO/HEHS-00-79 Inherent Reasonableness

Appendix II

Comparison of the Inherent Reasonableness

Procedures for HCFA and the DMERCs ApendxiI
Page 40 GAO/HEHS-00-79 Inherent Reasonableness

Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed Product

Groups, by State ApendxiI

Table 3: 1998 State Fees and the Total Proposed Percentage Reductions for Glucose

Testing Strips

State 1998 state feea

Total percentage payment

reduction

AL $36.73 3.4

AR 36.73 3.4

CA 36.73 3.4

CT 36.73 3.4

DC 36.73 3.4

FL 36.73 3.4

IA 36.73 3.4

IL 36.73 3.4

LA 36.73 3.4

MA 36.73 3.4

MD 36.73 3.4

ME 36.73 3.4

MI 36.73 3.4

MS 36.73 3.4

NH 36.73 3.4

NJ 36.73 3.4

NY 36.73 3.4

OR 36.73 3.4

PA 36.73 3.4

SC 36.73 3.4

TN 36.73 3.4

UT 36.73 3.4

VA 36.73 3.4

VT 36.73 3.4

WV 36.73 3.4

OH 36.54 2.9

WY 35.71 0.6

KY 35.65 0.5

AZ 34.50 0.0

MN 34.35 0.0

MT 34.21 0.0

RI 34.21 0.0

DE 34.20 0.0

WI 33.92 0.0
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 41 GAO/HEHS-00-79 Inherent Reasonableness

Note: The table does not include Alaska and Hawaii because they are exempt from the national fee

schedule and therefore are not subject to the proposed payment reductions.

a

The 1998 state fee represented the amount Medicare allowed in each state at the time of the

DMERCs’ inherent reasonableness survey. Medicare pays 80 percent of the allowed state fee and the

beneficiary pays the remaining 20 percent.

GA 33.86 0.0

SD 33.76 0.0

WA 33.19 0.0

ID 33.10 0.0

ND 33.09 0.0

TX 32.95 0.0

IN 32.48 0.0

NV 32.20 0.0

NC 31.69 0.0

NM 31.61 0.0

NE 31.53 0.0

KS 31.37 0.0

CO 31.22 0.0

MO 31.22 0.0

OK 31.22 0.0

(Continued From Previous Page)

State 1998 state feea

Total percentage payment

reduction
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 42 GAO/HEHS-00-79 Inherent Reasonableness

Table 4: 1998 State Fees and Total Proposed Percentage Reductions for Lancets

State 1998 state feea

Total percentage payment

reduction

AR $12.15 35.7

AZ 12.15 35.7

CO 12.15 35.7

CT 12.15 35.7

FL 12.15 35.7

GA 12.15 35.7

IA 12.15 35.7

IL 12.15 35.7

KY 12.15 35.7

LA 12.15 35.7

MI 12.15 35.7

MN 12.15 35.7

MO 12.15 35.7

MO 12.15 35.7

MT 12.15 35.7

NC 12.15 35.7

ND 12.15 35.7

NJ 12.15 35.7

NM 12.15 35.7

NV 12.15 35.7

NY 12.15 35.7

OR 12.15 35.7

TX 12.15 35.7

UT 12.15 35.7

WA 12.15 35.7

WY 12.15 35.7

CA 11.81 33.9

NE 11.70 33.3

SC 11.62 32.8

VA 11.54 32.3

KS 11.42 31.6

TN 11.16 30.0

SD 11.01 29.0

WV 10.95 28.7
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 43 GAO/HEHS-00-79 Inherent Reasonableness

Note: Table does not include Alaska and Hawaii because they are exempt from the national fee

schedule and therefore are not subject to the proposed payment reductions.

a

The 1998 state fee represented the amount Medicare allowed in each state at the time of the

DMERCs’ inherent reasonableness survey. Medicare pays 80 percent of the allowed state fee and the

beneficiary pays the remaining 20 percent.

IN 10.54 25.9

OK 10.44 25.2

WI 10.44 25.2

ID 10.38 24.8

AL 10.33 24.4

DC 10.33 24.4

DE 10.33 24.4

MA 10.33 24.4

MD 10.33 24.4

ME 10.33 24.4

MS 10.33 24.4

NH 10.33 24.4

OH 10.33 24.4

PA 10.33 24.4

RI 10.33 24.4

VT 10.33 24.4

(Continued From Previous Page)

State 1998 state feea

Total percentage payment

reduction
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 44 GAO/HEHS-00-79 Inherent Reasonableness

Table 5: 1998 State Fees and Total Proposed Percentage Reductions for Latex Foley

Catheters

State 1998 state feea

Total percentage payment

reduction

AL $11.70 24.02

AR 11.70 24.02

AZ 11.70 24.02

CA 11.70 24.02

CO 11.70 24.02

DC 11.70 24.02

FL 11.70 24.02

IA 11.70 24.02

ID 11.70 24.02

IL 11.70 24.02

IN 11.70 24.02

KS 11.70 24.02

KY 11.70 24.02

LA 11.70 24.02

MA 11.70 24.02

ME 11.70 24.02

MI 11.70 24.02

MN 11.70 24.02

MO 11.70 24.02

MS 11.70 24.02

MT 11.70 24.02

ND 11.70 24.02

NE 11.70 24.02

NH 11.70 24.02

NV 11.70 24.02

OH 11.70 24.02

OR 11.70 24.02

SC 11.70 24.02

SD 11.70 24.02

TX 11.70 24.02

UT 11.70 24.02

VA 11.70 24.02

VT 11.70 24.02

WA 11.70 24.02
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 45 GAO/HEHS-00-79 Inherent Reasonableness

Note: Table does not include Alaska and Hawaii because they are exempt from the national fee

schedule and therefore are not subject to the proposed payment reductions.

a

The 1998 state fee represented the amount Medicare allowed in each state at the time of the

DMERCs’ inherent reasonableness survey. Medicare pays 80 percent of the allowed state fee and the

beneficiary pays the remaining 20 percent.

WI 11.70 24.02

WV 11.70 24.02

WY 11.70 24.02

CT 11.26 21.05

RI 11.10 19.91

NC 10.37 14.27

TN 10.31 13.77

DE 10.08 11.81

MD 10.08 11.81

NJ 10.08 11.81

PA 10.08 11.81

GA 9.95 10.65

NM 9.95 10.65

NY 9.95 10.65

OK 9.95 10.65

(Continued From Previous Page)

State 1998 state feea

Total percentage payment

reduction
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 46 GAO/HEHS-00-79 Inherent Reasonableness

Table 6: 1998 State Fees and Total Proposed Percentage Reductions for Catheter

Insertion Trays Without Drainage Bags

State 1998 state feea

Total percentage payment

reduction

DC $12.04 23.34

IA 12.04 23.34

ID 12.04 23.34

KS 12.04 23.34

MO 12.04 23.34

OR 12.04 23.34

VA 12.04 23.34

NE 12.26 22.92

NH 12.69 22.14

VT 13.18 21.32

MA 13.33 21.08

ME 13.33 21.08

AZ 14.00 20.07

CA 14.16 19.84

IL 14.16 19.84

IN 14.16 19.84

MI 14.16 19.84

MN 14.16 19.84

MT 14.16 19.84

ND 14.16 19.84

NV 14.16 19.84

OH 14.16 19.84

SD 14.16 19.84

UT 14.16 19.84

WA 14.16 19.84

WI 14.16 19.84

WV 14.16 19.84

WY 14.16 19.84

RI 12.04 18.36

CT 13.26 17.87

FL 12.04 14.58

TX 12.29 14.28

CO 12.52 14.02

AL 14.16 12.39
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 47 GAO/HEHS-00-79 Inherent Reasonableness

Note: Table does not include Alaska and Hawaii because they are exempt from the national fee

schedule and therefore are not subject to the proposed payment reductions.

a

The 1998 state fee represented the amount Medicare allowed in each state at the time of the

DMERCs’ inherent reasonableness survey. Medicare pays 80 percent of the allowed state fee and the

beneficiary pays the remaining 20 percent.

AR 14.16 12.39

KY 14.16 12.39

LA 14.16 12.39

MS 14.16 12.39

SC 14.16 12.39

NC 14.16 10.45

TN 13.61 10.43

DE 12.04 9.88

MD 12.04 9.88

NJ 12.04 9.88

PA 12.04 9.88

NY 12.90 8.22

GA 14.16 7.49

NM 14.16 7.49

OK 14.16 7.49

(Continued From Previous Page)

State 1998 state feea

Total percentage payment

reduction
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 48 GAO/HEHS-00-79 Inherent Reasonableness

Table 7: 1998 State Fees and Total Percentage Payment Reductions for Catheter

Insertion Trays With Drainage Bags

State 1998 state feea

Total percentage payment

reduction

AZ $20.50 13.71

ID 20.50 13.71

MA 20.50 13.71

ME 20.50 13.71

NH 20.50 13.71

NV 20.50 13.71

OR 20.50 13.71

VA 20.50 13.71

VT 20.50 13.71

MT 21.96 12.80

DC 22.90 12.27

CA 24.12 11.65

IA 24.12 11.65

IL 24.12 11.65

IN 24.12 11.65

KS 24.12 11.65

MI 24.12 11.65

MN 24.12 11.65

MO 24.12 11.65

ND 24.12 11.65

NE 24.12 11.65

OH 24.12 11.65

SD 24.12 11.65

UT 24.12 11.65

WA 24.12 11.65

WI 24.12 11.65

WV 24.12 11.65

WY 24.12 11.65

RI 20.50 10.78

CT 24.12 9.83

FL 20.50 8.56

MS 20.50 8.56

AL 20.78 8.45

AR 24.12 7.28
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 49 GAO/HEHS-00-79 Inherent Reasonableness

Note: Table does not include Alaska and Hawaii because they are exempt from the national fee

schedule and therefore are not subject to the proposed payment reductions.

a

The 1998 state fee represented the amount Medicare allowed in each state at the time of the

DMERCs’ inherent reasonableness survey. Medicare pays 80 percent of the allowed state fee and the

beneficiary pays the remaining 20 percent.

CO 24.12 7.28

KY 24.12 7.28

LA 24.12 7.28

SC 24.12 7.28

TX 24.12 7.28

NC 24.12 6.14

TN 23.18 6.13

MD 20.50 5.80

DE 22.90 5.20

NJ 22.90 5.20

PA 22.90 5.20

GA 22.26 4.76

NM 22.42 4.73

NY 23.27 4.56

OK 23.37 4.54

(Continued From Previous Page)

State 1998 state feea

Total percentage payment

reduction
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 50 GAO/HEHS-00-79 Inherent Reasonableness

Table 8: 1998 Fees and Total Proposed Percentage Reductions for Eyeglass Frames,

by State

State 1998 feea

Total percentage payment

reduction

AZ $62.06 21.04

CA 62.06 21.04

NV 62.06 21.04

AL 59.85 18.13

FL 59.85 18.13

GA 59.85 18.13

KY 59.85 18.13

MS 59.85 18.13

NC 59.85 18.13

SC 59.85 18.13

TN 59.85 18.13

IL 55.85 12.27

IN 55.85 12.27

MI 55.85 12.27

MN 55.85 12.27

OH 55.85 12.27

WI 55.85 12.27

CO 54.54 10.16

MT 54.54 10.16

ND 54.54 10.16

SD 54.54 10.16

UT 54.54 10.16

WY 54.54 10.16

ID 52.63 6.90

OR 52.63 6.90

WA 52.63 6.90

CT 52.61 6.86

MA 52.61 6.86

ME 52.61 6.86

NH 52.61 6.86

RI 52.61 6.86

VT 52.61 6.86

AR 49.98 1.96

LA 49.98 1.96
Appendix III

1998 Fee Payments and the Total Proposed

Payment Reductions for the Surveyed

Product Groups, by State

Page 51 GAO/HEHS-00-79 Inherent Reasonableness

Note: Table does not include Alaska and Hawaii because they are exempt from the national fee

schedule and therefore are not subject to the proposed payment reductions.

a

The 1998 fee represented the amount Medicare allowed at the time of the DMERCs’ inherent

reasonableness survey. Medicare pays 80 percent of the allowed fee and the beneficiary pays the

remaining 20 percent.

NM 49.98 1.96

OK 49.98 1.96

TX 49.98 1.96

IA 49.03 0.06

KS 49.03 0.06

MO 49.03 0.06

NE 49.03 0.06

DC 46.55 0.0

DE 46.55 0.0

MD 46.55 0.0

NJ 46.55 0.0

NY 46.55 0.0

PA 46.55 0.0

VA 46.55 0.0

WV 46.55 0.0

(Continued From Previous Page)

State 1998 feea

Total percentage payment

reduction
Page 52 GAO/HEHS-00-79 Inherent Reasonableness

Appendix IV

GAO Analysis of DMERC Sampling Methods ApendxiIV

We compared the distribution of population areas where the DMERCs

conducted their retail price surveys with the distribution of population

areas for the United States to assess whether the median surveyed price

represented a national median price. For each product group surveyed, we

categorized each price sample according to the population level of the area

from which the price was surveyed. The population areas ranged from

metropolitan statistical areas (MSA) with 1 million or more people to nonMSAs.1 Table 9 shows the percentage of prices the DMERCs collected by

population compared with the distribution of population areas for the

United States. The DMERCs collected more prices in MSAs with 1 million

or more people than they collected in MSAs of fewer than 100,000 people;

however, the survey results were not fully representative of the general

distribution of the U.S. population.

Table 9: Percentage of Surveyed Prices, by Population Level, Compared With U.S. Population

Note: Numbers in bold indicate areas with highest median surveyed price for that product group.

a

Based on 1996 Bureau of the Census estimates. Excludes Alaska and Hawaii.

Our review of the survey results showed that areas with the largest

populations did not necessarily have higher prices. For each product group

surveyed, we analyzed the median surveyed price for each population level

and found no consistent relationship between median price and area

population level. As shown in table 10, the highest median surveyed price

1

According to the Bureau of the Census, the general concept of an MSA is that of a core area

containing a large population nucleus, together with adjacent communities having a high

degree of economic and social integration with that core.

Population level

Glucose test

strips Lancets Catheters

Enteral

formulas

Albuterol

sulfate

Eyeglass

frames U.S. populationa

MSA of 1 million or

more 49.5 45.9 46.8 34.8 41.0 47.4 52.2

MSA of 250,000-

999,999 22.2 24.5 18.4 32.1 29.8 24.3 19.5

MSA of 100,000-

249,999 13.5 14.1 9.0 15.8 13.1 14.2 7.6

MSA of fewer

than100,000 5.2 4.0 5.5 3.9 3.9 2.3 0.6

Non-MSA 9.6 11.5 20.4 13.5 12.1 11.9 20.1

Total 100 100 100 100 100 100 100
Appendix IV

GAO Analysis of DMERC Sampling Methods

Page 53 GAO/HEHS-00-79 Inherent Reasonableness

that the DMERCs surveyed for each product group is associated with

different population levels. For four of the six product groups surveyed, the

highest median price the DMERCs surveyed was associated with

population levels that were overrepresented, compared with the U.S.

population. For example, the highest median price for lancets was found in

MSAs with fewer than 100,000 people. As shown in table 9, less than 1

percent of the U.S. population lives in MSAs of this size, while 4 percent of

the DMERCs’ surveyed prices for lancets came from MSAs of this size. This

means that there are more samples of this highest price than one would

expect in the overall population. These results do not provide evidence that

the samples chosen by the DMERCs resulted in a systematic downward

bias in the median price. The data, in fact, suggest more of an upward bias

than a downward bias.

Table 10: Median Surveyed Price by Product Group and Population Level

Note: Numbers in bold indicate areas with highest median price for the product group.

Population level

Glucose test

strips Lancets Catheters

Category 1

enteral

formulas

Albuterol

sulfate Eyeglass frames

MSA of 1 million or more $35.99 $7.87 $10.00 $.51 $.41 $40.65

MSA of 250,000-999,999 34.87 7.23 7.25 .51 .45 51.70

MSA of 100,000-249,999 35.39 8.22 8.66 .52 .36 51.07

MSA of less than100,000 35.98 8.56 3.45 .56 .36 54.48

Non-MSA 34.99 7.42 7.98 .50 .39 52.00
Page 54 GAO/HEHS-00-79 Inherent Reasonableness

Appendix V

Comments From the Health Care Financing

Administration ApendxiV
Appendix V

Comments From the Health Care Financing

Administration

Page 55 GAO/HEHS-00-79 Inherent Reasonableness
Appendix V

Comments From the Health Care Financing

Administration

Page 56 GAO/HEHS-00-79 Inherent Reasonableness
Appendix V

Comments From the Health Care Financing

Administration

(101819) Letr Page 57 GAO/HEHS-00-79 Inherent Reasonableness
Ordering Information The first copy of each GAO report is free. Additional copies of

reports are $2 each. A check or money order should be made out to

the Superintendent of Documents. VISA and MasterCard credit

cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any list

from the past 30 days, please call (202) 512-6000 using a touchtone

phone. A recorded menu will provide information on how to obtain

these lists.

Orders by Internet:

For information on how to access GAO reports on the Internet,

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web home page at:

http://www.gao.gov

To Report Fraud,

Waste, or Abuse in

Federal Programs

Contact one:

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

• e-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

Letr

United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. GI00