17992 Federal Register / Vol. 72, No. 68 / Tuesday, April 10, 2007 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 411 and 414 

[CMS–1270–F] 

RIN 0938–AN14 

Medicare Program; Competitive 

Acquisition for Certain Durable 

Medical Equipment, Prosthetics, 

Orthotics, and Supplies (DMEPOS) and 

Other Issues 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Final rule. 

SUMMARY: This final rule establishes 

competitive bidding programs for 

certain Medicare Part B covered items of 

durable medical equipment, prosthetics, 

orthotics, and supplies (DMEPOS) 

throughout the United States in 

accordance with sections 1847(a) and 

(b) of the Social Security Act. These 

competitive bidding programs, which 

will be phased in over several years, 

utilize bids submitted by DMEPOS 

suppliers to establish applicable 

payment amounts under Medicare Part 

B. 

DATES: Effective Date: This final rule is 

effective on June 11, 2007. 

FOR FURTHER INFORMATION, CONTACT: 

Lorrie Ballantine, (410) 786–7543, Ralph 

Goldberg, (410) 786–4870, Karen Jacobs, 

(410) 786–2173, Michael Keane, (410) 

786–4495, Alexis Meholic, (410) 786– 

5395, Linda Smith, (410) 786–5650. 

SUPPLEMENTARY INFORMATION: 

Electronic Access 

This Federal Register document is 

also available from the Federal Register 

online database through GPO Access, a 

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Office. Free public access is available on 

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login as guest (no password required). 

Dial-in users should use 

communications software and modem 

to call (202) 512–1661; type swais, then 

login as guest (no password required). 

Alphabetical Listing of Acronyms 

Appearing in This Final Rule 

ABN Advance Beneficiary Notice 

BBA Balanced Budget Act of 1997, Pub. L. 

105–33 

BESS [Medicare] Part B Extract and 

Summary System 

CBA Competitive bidding area 

CBIC Competitive bidding implementation 

contractor 

CBSA Core-based statistical area 

CMS Centers for Medicare & Medicaid 

Services 

CPI–U Consumer Price Index—All Urban 

Consumers 

CPT [Physician] Current Procedural 

Terminology, Fourth Edition, 2007, 

copyrighted by the American Medical 

Association. CPT is a trademark of the 

American Medical Association 

CY Calendar year 

DME Durable medical equipment 

DME MAC Durable Medical Equipment 

Medicare Administrative Contractor 

DMEPOS Durable medical equipment, 

prosthetics, orthotics, and supplies 

DMERC Durable medical equipment 

regional carrier 

DRA Deficit Reduction Act of 2005, Pub. L. 

109–171 

FAR Federal Acquisition Regulation 

FEHB Federal Employees Health Benefits 

Program 

FFS Fee-for-service 

FTE Full-time equivalent 

GAO Government Accountability Office 

HCPCS Healthcare Common Procedure 

Coding System 

HHA Home health agency 

HHS Department of Health and Human 

Services 

HIPAA Health Insurance Portability and 

Accountability Act of 1996, Pub. L. 104– 

191 

IIC Inflation indexed charge 

IRF Inpatient rehabilitation facility 

MMA Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003, Pub. L. 108–173 

MSA Metropolitan Statistical Area 

NAICS North American Industry 

Classification System 

NF Nursing facility 

NPWT Negative pressure wound therapy 

NSC National Supplier Clearinghouse 

OBRA ’87 Omnibus Budget Reconciliation 

Act of 1987, Pub. L. 100–203 

OIG Office of the Inspector General, HHS 

OTS Off-the-shelf 

PAOC Program Advisory and Oversight 

Committee 

PEN Parenteral and enteral nutrition 

POV Power-operated vehicle 

RFB Request for bids 

SADMERC Statistical Analysis Durable 

Medical Equipment Regional Carrier 

SBA Small Business Administration 

SGD Speech generating device 

SNF Skilled nursing facility 

TENS Transcutaneous electrical nerve 

stimulator 

To assist readers in referencing 

sections contained in this document, we 

are providing the following table of 

contents: 

Table of Contents 

I. Provisions of the May 1, 2006 Proposed 

Rule 

A. Summary of the Proposed Rule 

B. Public Comments Received 

II. Issuance of Final Rules 

A. Issuance of the FY 2007 IRF Final Rule 

Which Finalized Certain Provisions 

Relating to Competitive Acquisition for 

DMEPOS and the Accreditation of 

DMEPOS Suppliers 

B. Future Issuance of a Final Rule on 

Certain Other Provisions Addressed in 

the May 1, 2006 Proposed Rule 

III. Payment for DMEPOS Under Medicare 

Part B: Background 

A. Payment for DMEPOS on the Basis of 

Reasonable Charges 

B. Payment for DMEPOS Under Fee 

Schedules 

C. Use of the Healthcare Common 

Procedure Coding System (HCPCS) 

IV. Medicare Competitive Bidding 

Demonstrations 

V. Discussion of the Provisions of This Final 

Rule 

VI. Medicare DMEPOS Competitive Bidding 

Program 

A. Legislative Authority and Program 

Advisory and Oversight Committee 

l. Legislative Authority 

2. Program Advisory and Oversight 

Committee 

B. Purpose and Definitions (§§ 414.400 and 

414.402) 

C. Competitive Bidding Implementation 

Contractors (CBICs) (§§ 414.406(a) and 

(e)) 

D. Payment Under the Medicare DMEPOS 

Competitive Bidding Program 

1. Payment Basis (§§ 414.408(a), (c), and 

(d)) 

2. General Payment Rules 

3. Special Rules for Certain Rented Items 

of DME and Oxygen (Grandfathering of 

Suppliers) (§ 414.408(j)) 

a. Process for Grandfathering Suppliers 

b. Payment Amounts to Grandfathered 

Suppliers 

(1) Grandfathering of Suppliers Furnishing 

Items Prior to the First Competitive 

Bidding Program in a CBA 

(2) Suppliers That Lose Their Contract 

Status in a Subsequent Competitive 

Bidding Program 

c. Payment for Accessories for Items 

Subject to Grandfathering 

4. Payment Adjustments 

a. Adjustment to Account for Inflation 

(§ 414.408(b)) 

b. Adjustments to Single Payment 

Amounts to Reflect Changes to the 

HCPCS (§ 414.426) 

5. Authority to Adjust Payments in Other 

Areas 

6. Requirement to Obtain Competitively 

Bid Items From a Contract Supplier 

(§ 414.408(e)) 

7. Limitation on Beneficiary Liability for 

Items Furnished by Noncontract 

Suppliers (§§ 414.408(e)(2)(iv) and (e)(3)) 

8. Payment for Repair and Replacement of 

Beneficiary-Owned Items (§ 414.408(l)) 

E. Competitive Bidding Areas (§§ 414.406 

and 414.410) 

1. Background 

2. Methodology for MSA Selection for CYs 

2007 and 2009 Competitive Bidding 

Programs (§§ 414.410(a) and (b)) 


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a. MSAs for CY 2007 

b. MSAs for CY 2009 

3. Establishing Competitive Bidding Areas 

and Exemption of Rural Areas and Areas 

With Low Population Density Within 

Urban Areas (§ 414.410(c)) 

4. Establishing Competitive Bidding Areas 

for CYs 2007 and 2009 (§§ 414.406(b) 

and (c)) 

5. Nationwide or Regional Mail Order 

Competitive Bidding Program 

(§§ 414.410(d)(2) and 414.412(f) and (g)) 

6. Additional Competitive Bidding Areas 

After CY 2009 (§ 414.410(e)) 

F. Criteria for Item Selection (§§ 414.402 

and 414.406(d)(1)) 

G. Submission of Bids for Competitively 

Bid DMEPOS (§§ 414.404, 414.408, 

414.412. and 412.422) 

1. Furnishing of Items (§§ 414.412(c) and 

414.422(e)) 

a. Furnishing of Items to Medicare 

Beneficiaries Who Maintain a Permanent 

Residence in a CBA 

b. Furnishing of Items to Medicare 

Beneficiaries Whose Permanent 

Residence Is Outside a CBA 

2. Requirement for Providers to Submit 

Bids (§§ 414.404(a)(2) and 414.422(e)(2)) 

3. Physicians and Certain Nonphysician 

Practitioners (§§ 414.404(a) and (b)) 

4. Product Categories for Bidding Purposes 

(§§ 414.402 and 414.412(b) Through (e)) 

5. Bidding for Specific Types of Items and 

Associated Payment Rules (§§ 414.408(f) 

Through (j)) 

a. Inexpensive or Other Routinely 

Purchased DME Items (§§ 414.408(f) and 

(h)(6)) 

b. DME Items Requiring Frequent and 

Substantial Servicing (§ 414.408(h)(7)) 

c. Oxygen and Oxygen Equipment 

(§§ 414.408(i) and (j)) 

d. Capped Rental Items (§ 414.408(h)) 

e. Enteral Nutrients, Equipment, and 

Supplies (§§ 414.408(f), (g)(2), and (h)) 

f. Maintenance and Servicing of Enteral 

Nutrition Equipment (§§ 414.408(h)(5) 

and (i)(5)) 

g. Supplies Used in Conjunction With DME 

(§ 414.408(g)(1)) 

h. Off-the-Shelf Orthotics (§ 414.408(g)(4)) 

VII. Conditions for Awarding Contracts for 

Competitive Bids 

A. Quality Standards and Accreditation 

B. Eligibility (§ 414.414(b)) 

C. Financial Standards (§ 414.414(d)) 

D. Evaluation of Bids (§ 414.414(e)) 

1. Market Demand and Supplier Capacity 

(§§ 414.414(e)(1) and (e)(2)) 

2. Composite Bids (§§ 414.414(e)(3) and 

(e)(4)) 

3. Determining the Pivotal Bid 

(§§ 414.414(e)(5) and (e)(6)) 

4. Assurance of Savings (§ 414.414(f)) 

5. Assurance of Multiple Contractors 

(§ 414.414(h)) 

6. Selection of New Suppliers After 

Bidding (§ 414.414(i)) 

VIII. Determining Single Payment Amounts 

for Individual Items 

A. Setting Single Payment Amounts for 

Individual Items (§§ 414.416(a) and (b)) 

B. Rebate Program 

IX. Terms of Contracts 

A. Terms and Conditions of Contracts 

(§§ 414.422(a) Through (c)) 

B. Change in Ownership (§ 414.422(d)) 

C. Suspension or Termination of a Contract 

(§§ 414.422(f) and (g)) 

X. Administrative or Judicial Review of 

Determinations Made Under the 

Medicare DMEPOS Competitive Bidding 

Program (§ 414.424) 

XI. Opportunity for Participation by Small 

Suppliers (§ 414.414(g)) 

XII. Opportunity for Networks (§ 414.418) 

XIII. Education and Outreach for Suppliers 

and Beneficiaries 

XIV. Monitoring and Complaint Services for 

the Medicare DMEPOS Competitive 

Bidding Program 

XV. Physician or Treating Practitioner 

Authorization and Consideration of 

Clinical Efficiency and Value of Items in 

Determining Categories for Bids 

(§ 414.420) 

XVI. Other Public Comments Received on the 

May 1, 2006 Proposed Rule 

XVII. Collection of Information Requirements 

XVIII. Regulatory Impact Analysis 

A. Overall Impact 

1. Executive Order 12866 

2. Regulatory Flexibility Act (RFA) 

3. Small Rural Hospitals 

4. Unfunded Mandates 

5. Federalism 

B. Regulatory Flexibility Analysis 

1. Summary 

2. The Need for and Objective of the Final 

Rule 

3. Comments Regarding Small Suppliers 

a. Comments on Small Supplier Focus 

Groups 

b. Comments on the Definition of Small 

Supplier 

c. Comments on the Protections for Small 

Suppliers 

d. Comments on Bidding Requirements for 

Physician and Other Providers 

e. Comments on Bidding by Product 

Category 

f. Comments on Financial Standards 

g. Comments on Supplier Networks 

4. Description and Estimate of the Number 

of Small Entities 

5. Projected Reporting, Recordkeeping, and 

Other Compliance Requirements 

6. Agency Efforts to Minimize the 

Significant Impact on Small Entities 

C. Anticipated Effects 

D. Implementation Costs 

E. Program Savings 

F. Effect on Beneficiaries 

G. Effect on Suppliers 

1. Affected Suppliers 

2. Small Suppliers 

H. Accounting Statement 

I. Executive Order 12866 

Regulation Text 

I. Provisions of the May 1, 2006 

Proposed Rule 

A. Summary of the Proposed Rule 

On May 1, 2006, we published in the 

Federal Register (71 FR 25654) a 

proposed rule to—

• Establish and implement 

competitive bidding programs for 

certain covered items of durable 

medical equipment, prosthetics, 

orthotics, and supplies (DMEPOS) 

under sections 1847(a) and (b) of the 

Social Security Act (the Act), as 

amended by section 302(b)(1) of the 

Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (MMA), Pub. L. 108–173. 

• Implement requirements for 

independent accreditation organizations 

that will be applying quality standards 

to all DMEPOS suppliers as required by 

section 1834(a)(20) of the Act. (We note 

that, as explained later under section 

VII. of this final rule, we have finalized 

certain provisions of the May 1, 2006 

proposed rule relating to accreditation 

in the DMEPOS provisions of a final 

rule entitled ‘‘Inpatient Rehabilitation 

Facility Prospective Payment System for 

Federal FY 2007; Provisions Concerning 

Competitive Acquisition for Durable 

Medical Equipment, Prosthetics, 

Orthotics, and Supplies (DMEPOS); 

Accreditation of DMEPOS Suppliers,’’

which appeared in the Federal Register 

on August 18, 2006 (71 FR 48354) and 

is referred to throughout this final rule 

as the ‘‘FY 2007 IRF final rule.’’) 

• Establish a new fee schedule for 

home dialysis supplies and equipment 

that continue to be paid on a reasonable 

charge basis. (We note that we will 

respond to comments on this proposal 

in a future final rule.) 

• Establish a revised methodology for 

calculating fee schedule amounts for 

new DMEPOS items. (We note that we 

will respond to comments on this 

proposal in a future final rule.) 

• Codify in our regulations that the 

statutorily imposed eyeglass coverage 

exclusion under Medicare Part B 

encompasses all devices that use lenses 

to aid vision or provide magnification of 

images for impaired vision. (We note 

that we will respond to comments on 

this proposal in a future final rule.) 

• Codify in regulations that the 

Medicare fee schedule amount for 

therapeutic shoes, inserts, and shoe 

modifications are established in 

accordance with the methodology 

specified in sections 1833(o) and 

1834(h) of the Act. (We note that we 

will respond to comments on this 

proposal in a future final rule.) 

B. Public Comments Received 

We received approximately 2,129 

timely pieces of correspondence in 

response to the May 1, 2006 proposed 

rule. Except where indicated in section 

II.B. of this final rule, this final rule 

discusses the provisions of the May 1, 

2006 proposed rule, summarizes the 

public comments received on each 

subject area, sets out our responses to 

those comments, and sets forth our final 

rules. 


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17994 Federal Register / Vol. 72, No. 68 / Tuesday, April 10, 2007 / Rules and Regulations 

II. Issuance of Final Rules 

A. Issuance of the FY 2007 IRF Final 

Rule Which Finalized Certain Provisions 

Relating to Competitive Acquisition for 

DMEPOS and the Accreditation of 

DMEPOS Suppliers 

To ensure timely implementation of 

the Medicare DMEPOS Competitive 

Bidding Program, we responded to 

comments submitted on certain 

provisions of the May 1, 2006 proposed 

rule and finalized our proposals 

concerning the designation of 

competitive bidding implementation 

contractors (CBICs), competitive bidding 

education and outreach, and the 

accreditation of DMEPOS suppliers in 

the DMEPOS provisions of the FY 2007 

IRF final rule (71 FR 48354). We also 

discussed in that final rule certain 

issues relating to the establishment of 

quality standards for DMEPOS suppliers 

that will be applied by independent 

accreditation organizations. 

B. Future Issuance of a Final Rule on 

Certain Other Provisions Addressed in 

the May 1, 2006 Proposed Rule 

We will respond to comments 

submitted on certain provisions of the 

May 1, 2006 proposed rule and finalize 

our proposals concerning the following 

provisions in a separate final rule that 

will be published at a later date in the 

Federal Register: (1) Establishment of a 

new fee schedule for home dialysis 

supplies and equipment that continue to 

be paid on a reasonable charge basis; (2) 

establishment of a revised methodology 

for calculating fee schedule amounts for 

new DMEPOS items; (3) codification in 

our regulations that the scope of the 

eyeglass coverage exclusion under 

Medicare Part B encompasses all 

devices that use lenses to aid vision or 

provide magnification of images for 

impaired vision; and (4) codification in 

our regulations that the Medicare fee 

schedule amounts for therapeutic shoes, 

inserts, and shoe modifications are 

established in accordance with the 

methodology specified in sections 

1833(o) and 1834(h) of the Act. 

III. Payment for DMEPOS Under 

Medicare Part B: Background 

A. Payment for DMEPOS on the Basis of 

Reasonable Charges 

Payment for most DMEPOS items, 

including supplies and equipment, 

furnished under Medicare Part B is 

made through contractors known as 

Durable Medical Equipment Medicare 

Administrative Contractors (DME 

MACs) (previously Durable Medical 

Equipment Regional Carriers (DMERCs), 

also known as Medicare carriers). Before 

January 1, 1989, payment for most of 

these items was made on a reasonable 

charge basis by Medicare carriers. 

Section 1842(b) of the Act sets forth the 

methodology for determining reasonable 

charges. Implementing regulations for 

section 1842(b) of the Act are located at 

42 CFR Part 405, Subpart E. 

Reasonable charge determinations are 

generally based on customary and 

prevailing charges derived from historic 

charge data, with the ‘‘reasonable 

charge’’ for an item being the lowest of 

the following factors: 

• The supplier’s actual charge for the 

item. 

• The supplier’s customary charge for 

the item. 

• The prevailing charge in the locality 

for the item. The prevailing charge may 

not exceed the 75th percentile of the 

customary charges of suppliers in the 

locality. 

• The inflation indexed charge (IIC). 

The IIC is defined in § 405.509(a) of the 

Medicare regulations as the lowest of 

the fee screens used to determine 

reasonable charges for services, 

including supplies, and equipment paid 

on a reasonable charge basis (excluding 

physicians’ services), that is in effect on 

December 31 of the previous fee screen 

year, updated by the inflation 

adjustment factor. The inflation 

adjustment factor is based on the 

current change in the Consumer Price 

Index for All Urban Consumers (CPI–U), 

as compiled by the Bureau of Labor 

Statistics, for the 12-month period 

ending June 30 each year. 

B. Payment for DMEPOS Under Fee 

Schedules 

Section 1834 of the Act, as added by 

section 4062 of the Omnibus Budget 

Reconciliation Act of 1987 (OBRA ‘87), 

Public Law 100–203, provides for 

implementation of a fee schedule 

payment methodology for most durable 

medical equipment (DME), prosthetic 

devices, and orthotic devices furnished 

after January 1, 1989. Specifically, 

sections 1834(a)(1)(A) and (B) and 

1834(h)(1)(A) of the Act provide that 

Medicare payment for these items is 

equal to 80 percent of the lesser of the 

actual charge for the item or the fee 

schedule amount for the item. We 

implemented this payment methodology 

at 42 CFR Part 414, Subpart D of our 

regulations. Sections 1834(a)(2) through 

(a)(5) and section 1834(a)(7) of the Act, 

and implementing regulations at 

§ 414.200 through § 414.232 (with the 

exception of § 414.228), set forth 

separate payment categories of DME and 

describe how the fee schedule for each 

of the following categories is 

established: 

• Inexpensive or other routinely 

purchased items (section 1834(a)(2) of 

the Act and § 414.220 of the 

regulations); 

• Items requiring frequent and 

substantial servicing (section 1834(a)(3) 

of the Act and § 414.222 of the 

regulations); 

• Customized items (section 

1834(a)(4) of the Act and § 414.224 of 

the regulations); 

• Oxygen and oxygen equipment 

(section 1834(a)(5) of the Act and 

§ 414.226 of the regulations); 

• Other items of DME (section 

1834(a)(7) of the Act and § 414.229 of 

the regulations). 

Each category has its own unique 

payment rules. With the exception of 

customized items, a fee schedule 

amount is calculated for each item or 

category of DME that is identified by a 

code in the Healthcare Common 

Procedure Coding System (HCPCS). The 

HCPCS is discussed in section III.C. of 

this final rule. The Medicare payment 

amount for a customized item of DME 

is based on the Medicare carrier’s 

individual consideration of that item. 

The fee schedule amounts for oxygen 

and oxygen equipment are monthly 

payment amounts. Payment under the 

DME benefit is made for supplies 

necessary for the effective use of DME 

(for example, lancets used with blood 

glucose monitors). These supplies are 

paid for using the same methodology 

that we use to pay for the purchase of 

inexpensive or routinely purchased 

items. 

The fee schedule amounts for DME 

are generally adjusted annually by the 

change in the CPI–U for the 12-month 

period ending June 30 of the preceding 

year. The fee schedule amounts are also 

generally limited by a ceiling (upper 

limit) and floor (lower limit) equal to 

100 percent and 85 percent, 

respectively, of the median of the 

Statewide fee schedule amounts. 

Since 1994, Medicare has paid for 

most surgical dressings in accordance 

with section 1834(i) of the Act and 

§ 414.220(g) of the regulations, using the 

same methodology as is used for 

payment of purchased inexpensive or 

routinely purchased DME. 

Under section 1834(h) of the Act and 

§ 414.228 of the regulations, payment 

for prosthetic and orthotic devices is 

made on a lump sum basis and is equal 

to the lower of the fee schedule amount 

calculated for the item or the actual 

charge for the item, less any unmet 

deductible amount. The fee schedule 

amounts are calculated using a weighted 

average of Medicare payments made in 

the States in each of 10 CMS regions 

from July 1, 1986, through June 30, 


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1987, adjusted annually by the change 

in the CPI–U for the 12-month period 

ending June 30 of the preceding year. 

The regional fee schedule amounts are 

limited by a ceiling (upper limit) and 

floor (lower limit) equal to 120 percent 

and 90 percent, respectively, of the 

average of the regional fee schedule 

amounts for each State. 

As authorized under section 1842(s) 

of the Act and 42 CFR Part 414, Subpart 

C of our regulations, Medicare pays for 

parenteral and enteral nutrition (PEN) 

nutrients, equipment, and supplies on 

the basis of 80 percent of the lesser of 

the actual charge for the item or the fee 

schedule amount for the item 

(§ 414.102(a)). The fee schedule 

amounts for PEN items are calculated on 

a nationwide basis and are the lesser of 

the reasonable charges for CY 1995 or 

the reasonable charges that would have 

been used in determining payment for 

these items in CY 2002 under the former 

reasonable charge payment 

methodology (§ 414.104(b)). The fee 

schedule amounts are generally adjusted 

annually by the percentage increase in 

the CPI–U for the 12-month period 

ending with June 30 of the preceding 

year (§ 414.102(c)). Under § 414.104(a), 

payment for PEN nutrients and supplies 

is made on a purchase basis, and 

payment for PEN equipment that is 

rented is made on a monthly basis. (We 

note that we proposed to revise § 414.1 

in the May 1, 2006 proposed rule to 

specify that fee schedules were 

established for PEN items in accordance 

with our authority under section 1842(s) 

of Act. We will address this proposal in 

a final rule that will be published later 

in the Federal Register.) 

Section 1833(o)(2) of the Act, as 

amended by section 627 of the MMA, 

requires implementation of fee schedule 

amounts, effective January 1, 2005, for 

the purpose of determining payment for 

custom molded shoes, extra-depth 

shoes, and inserts (collectively, 

‘‘therapeutic shoes’’). We stated in the 

May 1, 2006 proposed rule that we 

believe this section of the MMA is 

largely self-implementing because it 

mandates use of the methodology set 

forth in section 1834(h) of the Act for 

prosthetic and orthotic devices in 

determining the fee schedule amounts 

for therapeutic shoes. We implemented 

the methodology for payment for 

prosthetic and orthotic devices in 

regulations at 42 CFR Part 414, Subpart 

D, and section 627 of the MMA provides 

that the same methodology shall apply 

to therapeutic shoes. We implemented 

section 627 of the MMA through 

program instructions, and on January 1, 

2005, Medicare began paying for 

therapeutic shoes based on fee schedule 

amounts determined in accordance with 

section 1834(h) of the Act and Part 414, 

Subpart D of our regulations. 

Section 5101(a) of the Deficit 

Reduction Act of 2005 (DRA), Public 

Law 109–171, amended section 

1834(a)(7)(A) of the Act to change the 

way Medicare pays for capped rental 

items. As a result, section 

1834(a)(7)(A)(i)(I) of the Act now states 

that payment for a capped rental item 

may not extend over a period of 

continuous use (as determined by the 

Secretary) of longer than 13 months, and 

section 1834(a)(7)(A)(i)(II) of the Act 

sets forth how the 13 monthly rental 

payment amounts are to be determined. 

In addition, section 1834(a)(7)(A)(ii) of 

the Act now provides that on the first 

day that begins after the 13th 

continuous month during which 

payment is made for a capped rental 

item, the supplier of the capped rental 

item must transfer title to the item to the 

Medicare beneficiary. Once the title has 

transferred, or once a purchase 

agreement for a power wheelchair has 

been entered into in accordance with 

section 1834(a)(7)(A)(iii) of the Act as 

amended, section 1834(a)(7)(A)(iv) of 

the Act provides that reasonable and 

necessary maintenance and servicing 

payments (for parts and labor not 

covered by the supplier’s or the 

manufacturer’s warranty, as determined 

by the Secretary to be appropriate for 

the particular item) will be made. These 

statutory changes apply only to capped 

rental items whose first rental month 

occurs on or after January 1, 2006. We 

implemented section 5101(a) of the DRA 

in a final rule, CMS–1304–F: Home 

Health Prospective Payment System 

Rate Update for Calendar Year 2007 and 

Deficit Reduction Act of 2005; Changes 

to Medicare Payment for Oxygen 

Equipment and Capped Rental Durable 

Medical Equipment, that was published 

in the Federal Register on November 9, 

2006 (71 FR 65884). 

Section 5101(b) of the DRA amended 

section 1834(a)(5) of the Act to limit 

monthly rental payments for oxygen 

equipment to a 36-month period of 

continuous use (as determined by the 

Secretary). On the first day that begins 

after the 36th continuous month during 

which payment is made for the oxygen 

equipment, new section 

1834(a)(5)(F)(ii)(I) of the Act provides 

that the supplier must transfer title to 

the equipment to the Medicare 

beneficiary. Section 

1834(a)(5)(F)(ii)(II)(aa) of the Act 

provides that Medicare will continue to 

make monthly payments for oxygen 

contents for beneficiary-owned oxygen 

equipment in the amounts recognized 

under section 1834(a)(9) of the Act for 

the period of medical need. However, 

under section 1834(a)(5)(F)(ii)(II)(bb) of 

the Act, maintenance and servicing 

payments for beneficiary-owned oxygen 

equipment (for parts and labor not 

covered by the supplier’s or 

manufacturer’s warranty) will be made 

only if they are reasonable and 

necessary. These statutory changes went 

into effect on January 1, 2006. For 

beneficiaries receiving Medicarecovered oxygen equipment as of 

December 31, 2005, the 36-month rental 

period began on January 1, 2006. We 

implemented section 5101(b) of the 

DRA in a final rule, entitled CMS–1304–

F Home Health Prospective Payment 

System Rate Update for Calendar Year 

2007 and Deficit Reduction Act of 2005; 

Changes to Medicare Payment for 

Oxygen Equipment and Capped Rental 

Durable Medical Equipment, that was 

published in the Federal Register on 

November 9, 2006 (71 FR 65884). 

C. Use of the Healthcare Common 

Procedure Coding System (HCPCS) 

The Healthcare Common Procedure 

Coding System (HCPCS) is a 

standardized coding system used to 

process claims submitted to Medicare, 

Medicaid, and other health insurance 

programs by providers, physicians, and 

other suppliers. The HCPCS code set is 

divided into the following two principal 

subsystems, referred to as Level I and 

Level II of the HCPCS: 

• Level I of the HCPCS codes is 

comprised of Current Procedural 

Terminology (CPT) codes, which are 

copyrighted by the American Medical 

Association. CPT codes are a uniform 

coding system consisting of descriptive 

terms and identifying codes that are 

used primarily to identify medical 

services and procedures furnished by 

physicians and other health care 

professionals which are billed to public 

or private health insurance programs. 

CPT codes are developed, published, 

and maintained by the American 

Medical Association. CPT codes do not 

include codes needed to separately 

report medical items that are regularly 

billed by suppliers other than 

physicians. 

• Level II of the HCPCS codes is a 

standardized coding system used 

primarily to identify products and 

supplies that are not included in the 

CPT codes, such as DMEPOS when used 

outside a physician’s office. 

• HCPCS Level II codes classify like 

items by category for the purpose of 

efficient claims processing. Assignment 

of a HCPCS code is not a coverage 

determination, and does not imply that 

any payer will cover the items in the 

code category. For some DMEPOS items, 


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such as wheelchairs and wheelchair 

cushions, minimum performance 

standards must be met before an item 

can be classified under a HCPCS code. 

In October 2003, the Secretary delegated 

authority under the Health Insurance 

Portability and Accountability Act of 

1996 (HIPAA) to CMS to maintain and 

distribute the HCPCS Level II codes. In 

the May 1, 2006 proposed rule, we 

proposed that the HCPCS Level II codes 

would be used to describe the DME, 

orthotic, and enteral nutrients, 

equipment, and supplies furnished 

under the Medicare DMEPOS 

Competitive Bidding Program, both for 

the purpose of requesting bids and for 

establishing payment amounts. 

IV. Medicare Competitive Bidding 

Demonstrations 

Prior to enactment of the MMA, 

section 4319 of the Balanced Budget Act 

of 1997 (BBA), Pub. L. 105–33, 

authorized implementation of up to five 

demonstration projects of competitive 

bidding for Medicare Part B items, 

except physician services. In accordance 

with section 4319 of the BBA, we 

planned and implemented the DMEPOS 

Competitive Bidding Demonstration to 

test the feasibility and program impacts 

of using competitive bidding to set 

prices for DMEPOS. The demonstration 

was implemented at two sites: Polk 

County, Florida, and in the San 

Antonio, Texas, Metropolitan Statistical 

Area (MSA). The competitive bidding 

demonstrations, authorized under the 

BBA, were implemented successfully in 

both demonstration sites from 1999 to 

2002, resulted in a substantial savings to 

the program, and offered beneficiaries 

sufficient access and quality products. 

At the first site, Polk County, Florida, 

we conducted the first of two rounds of 

bidding in 1999. Five categories of 

DMEPOS were put up for bidding: 

oxygen equipment and supplies 

(required by statute); hospital beds and 

accessories; enteral nutrition formulas 

and equipment; urological supplies; and 

surgical dressings. A total of 16 contract 

suppliers began providing 

demonstration products in Polk County 

on October 1, 1999, and continued for 

2 years. The second and final round of 

bidding in Polk County was conducted 

in 2001 for the same product categories 

minus enteral nutrition. (Enteral 

nutrition was dropped to retain only 

product categories that are 

overwhelmingly used in private homes.) 

The second set of competitively bid 

payment amounts took effect in October 

2001. As in round one, 16 suppliers 

were selected, of whom half had 

participated as winners previously. The 

new fee schedules developed from the 

bids in each round replaced the 

Statewide Medicare DMEPOS fees. The 

second round of the demonstration in 

Polk County ended in September 2002. 

Texas was the second site for the 

demonstration. In Bexar, Comal, and 

Guadalupe counties in the San Antonio 

MSA, we conducted bidding in 2000 for 

five kinds of DMEPOS: oxygen 

equipment and supplies; hospital beds 

and accessories; wheelchairs and 

accessories; general orthotics; and 

nebulizer drugs. Fifty-one suppliers 

were selected and began serving 

Medicare beneficiaries under the new 

fees in February 2001. The San Antonio 

site ended operations in December 2002, 

the statutorily required termination date 

in the BBA. 

In each area of evaluation, the data 

indicated mostly favorable results for 

the Medicare program. The 

demonstration led to lower Medicare 

fees for almost every item in almost 

every product category in each round of 

bidding. Fee reductions varied by 

product category and item, resulting in 

a nearly 20 percent overall savings at 

each site. Statistical and qualitative data 

indicate that beneficiary access and 

quality of services were essentially 

unchanged. 

The DMEPOS Competitive Bidding 

Demonstration offered valuable 

information for understanding the 

impacts of competitive bidding for 

Medicare services. This information is 

especially important now because 

section 302(b) of the MMA mandates a 

larger role for competitive bidding 

within the Medicare program by 

requiring the Secretary to implement 

competitive bidding programs for the 

furnishing of certain DME and 

associated supplies, enteral nutrition 

and associated supplies, and off-theshelf (OTS) orthotics. In addition, 

section 303(d) of the MMA required the 

Secretary to implement a competitive 

bidding program for certain Medicare 

Part B drugs not paid on a cost or 

prospective payment system basis, and 

section 302(b) of the MMA requires that 

competitive bidding demonstration 

projects be implemented for clinical 

laboratory services and managed care. 

V. Discussion of the Provisions of This 

Final Rule 

In this final rule we are adding new 

sections to 42 CFR Part 414, Subpart F 

that implement rules relating to the 

Medicare DMEPOS Competitive Bidding 

Program. A discussion of the specific 

provisions of the proposed rule, a 

summary of the public comments we 

received and our responses to those 

comments are presented in sections VI. 

through XVII. of this final rule. We 

present a regulatory impact analysis of 

the provisions of this final rule in 

section XVIII. of this final rule. The 

regulation text appears at the end of this 

final rule. 

VI. Medicare DMEPOS Competitive 

Bidding Program 

A. Legislative Authority and Program 

Advisory and Oversight Committee 

1. Legislative Authority 

Section 302(b)(1) of the MMA (Pub. L. 

108–173) amended section 1847 of the 

Act to require the Secretary to establish 

and implement programs under which 

competitive bidding areas (CBAs) are 

established throughout the United 

States for contract award purposes for 

the furnishing of certain competitively 

priced items for which payment is made 

under Medicare Part B (the ‘‘Medicare 

DMEPOS Competitive Bidding 

Program’’). Section 1847(a)(2) of the Act 

provides that the items and services to 

which competitive bidding applies are 

certain durable medical equipment 

(DME) and medical supplies, which are 

covered items (as defined in section 

1834(a)(13) of the Act) for which 

payment would otherwise be made 

under section 1834(a) of the Act, 

including items used in infusion and 

drugs, (other than inhalation drugs) and 

supplies used in conjunction with DME, 

but excluding class III devices under the 

Federal Food, Drug and Cosmetic Act; 

enteral nutrients, equipment and 

supplies (as described in section 

1842(s)(2)(D) of the Act); and OTS 

orthotics (as described in section 

1861(s)(9) of the Act) for which payment 

would otherwise be made under section 

1834(h) of the Act and which require 

minimal self-adjustment. In addition, 

sections 1847(a) and (b) of the Act 

specify certain requirements and 

conditions for implementation of the 

Medicare DMEPOS Competitive Bidding 

Program. 

Competitive bidding provides a way 

to harness marketplace dynamics to 

create incentives for suppliers to 

provide quality items in an efficient 

manner and at a reasonable cost to the 

program. In our view, the Medicare 

DMEPOS Competitive Bidding Program 

has five main objectives: 

• To implement competitive bidding 

programs for certain DMEPOS items. 

• To assure beneficiary access to 

quality DMEPOS as a result of the 

program. 

• To reduce the amount Medicare 

pays for DMEPOS and create a payment 

structure under competitive bidding 

that is more reflective of a competitive 

market. 


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• To limit the financial burden on 

beneficiaries by reducing their out-ofpocket expenses for DMEPOS they 

obtain through the program. 

• To contract with suppliers that 

conduct business in a manner that is 

beneficial for the program and for 

Medicare beneficiaries. 

As discussed in section IV. of this 

final rule, the Medicare DMEPOS 

competitive bidding demonstration 

projects that were conducted prior to 

the enactment of the MMA offered 

valuable information for understanding 

the impacts of competitive bidding for 

Medicare services. This information, in 

part, led to the adoption of section 

302(b) of the MMA, which requires that 

the Secretary implement competitive 

bidding programs for the furnishing of 

certain DMEPOS under the Medicare 

program. 

2. Program Advisory and Oversight 

Committee 

Section 1847(c) of the Act, as 

amended by section 302(b)(1) of the 

MMA, required the Secretary to 

establish a Program Advisory and 

Oversight Committee (PAOC) to provide 

advice to the Secretary with respect to 

the following functions: 

• The implementation of the 

Medicare DMEPOS Competitive Bidding 

Program. 

• The establishment of financial 

standards for entities seeking contracts 

under the Medicare DMEPOS 

Competitive Bidding Program, taking 

into account the needs of small 

providers. 

• The establishment of requirements 

for collection of data for the efficient 

management of the Medicare DMEPOS 

Competitive Bidding Program. 

• The development of proposals for 

efficient interaction among 

manufacturers, providers of services, 

suppliers (as defined in section 1861(d) 

of the Act), and individuals. 

• The establishment of quality 

standards for DMEPOS suppliers under 

section 1834(a)(20) of the Act. 

In addition, section 1847(c)(3)(B) of 

the Act authorizes the PAOC to perform 

such additional functions to assist the 

Secretary in carrying out the Medicare 

DMEPOS Competitive Bidding Program 

as the Secretary may specify. 

As authorized under section 

1847(c)(2) of the Act, the PAOC 

members were appointed by the 

Secretary and represent a broad mix of 

relevant industry, consumer, and 

government parties. Specifically, the 

membership roster includes two 

beneficiary/consumer representatives, 

four manufacturer representatives, five 

supplier representatives, three 

certification/standards representatives, 

six Federal and State program 

representatives, one physician, and one 

pharmacist. The representatives have 

expertise in a variety of subject matter 

areas, including DMEPOS, competitive 

bidding methodologies and processes, 

and rural and urban marketplace 

dynamics. 

We held the first PAOC meeting, 

which was announced in a Federal 

Register notice (69 FR 31125), at the 

CMS Headquarters on October 6, 2004. 

We held the second meeting on 

December 6 and 7, 2004. We have held 

two additional PAOC meetings in 2005 

and 2006 during which we, along with 

our contractor, RTI International, 

presented material to both the PAOC 

and the public relating to the provisions 

that are outlined in the proposed rule 

and in this final rule. The topics that we 

presented included—

• Medicare’s timeline for 

implementation of the Medicare 

DMEPOS Competitive Bidding Program; 

• Results of the Medicare competitive 

bidding demonstration projects 

authorized by section 4319 of the BBA; 

• Structure of the Medicare DMEPOS 

Competitive Bidding Program; 

• Existing non-Medicare competitive 

bidding programs for DMEPOS; 

• Program design options for the 

Medicare DMEPOS Competitive Bidding 

Program; 

• Criteria for selecting Metropolitan 

Statistical Areas (MSAs) in which 

competition under the Medicare 

DMEPOS Competitive Bidding Program 

will occur in both CYs 2007 and 2009; 

• Criteria for selecting items for 

competitive bidding; 

• Bidding process overview; 

• Methodology for setting single 

payment amounts for competitively bid 

items; 

• Capacity of DMEPOS suppliers and 

beneficiary utilization of DMEPOS; 

• Financial capabilities of bidding 

suppliers; 

• Exception authority under section 

1847(a)(3) of the Act for rural areas and 

areas with low population density 

within urban areas that are not 

competitive; and 

• Quality standards and accreditation 

procedures applicable to DMEPOS 

suppliers. 

In addition to the PAOC meetings, we 

have designed and implemented a CMS 

Web site at http://cms.hhs.gov/ 

CompetitiveAcqforDMEPOS/PAOCMI/ 

list.asp specifically for the public to 

have access to all PAOC presentations, 

minutes, and updates for the Medicare 

DMEPOS Competitive Bidding Program. 

In accordance with section 1847(c)(5) of 

the Act, the PAOC will continue to 

operate until December 31, 2009. Future 

PAOC meeting dates, as well as other 

information pertinent to the Medicare 

DMEPOS Competitive Bidding Program, 

can be found on the CMS Web site. 

B. Purpose and Definitions (§§ 414.400 

and 414.402) 

In the May 1, 2006 proposed rule, we 

proposed in § 414.400 to state that the 

purpose of 42 CFR Part 414, Subpart F 

would be to implement the Medicare 

DMEPOS Competitive Bidding Program 

for certain DMEPOS items as required 

by sections 1847(a) and (b) of the Act. 

As set forth in proposed § 414.402, we 

proposed to define certain frequently 

occurring terms that would be used in 

competitive bidding. Specifically, we 

proposed to define the following terms: 

Bid means an offer to furnish an item 

for a particular price and time period 

that includes, where appropriate, any 

services that are directly related to the 

furnishing of the item. 

Competitive bidding area (CBA) 

means an area established by the 

Secretary under this subpart [42 CFR 

Part 414, Subpart F]. (We note that the 

definition language included in the 

preamble of the proposed rule was 

inconsistent with the definition 

language in the proposed regulation 

text, which was correct.) 

Composite bid means the sum of a 

bidding supplier’s weighted bids for all 

items within a product category for 

purposes of allowing a comparison 

across bidding suppliers. 

Competitive bidding program means a 

program established under this subpart 

[42 CFR Part 414, Subpart F]. (We note 

that the definition language included in 

the preamble of the proposed rule was 

inconsistent with the definition 

language in the proposed regulation 

text, which was correct.) 

Contract supplier means an entity that 

is awarded a contract by CMS to furnish 

items under a competitive bidding 

program. 

DMEPOS stands for durable medical 

equipment, prosthetics, orthotics and 

supplies. 

Grandfathered item means any one of 

the following items for which payment 

is made on a rental basis prior to the 

implementation of a competitive 

bidding program under this subpart [42 

CFR Part 414, Subpart F]: 

(1) An inexpensive or routinely 

purchased item described in § 414.220. 

(2) An item requiring frequent and 

substantial servicing as described in 

§ 414.222. 

(3) Oxygen and oxygen equipment 

described in § 414.226. 


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(4) A capped rental item described in 

§ 414.229. 

Grandfathered supplier means a 

noncontract supplier that furnishes a 

grandfathered item. 

Item means one of the following 

products identified by a HCPCS code, 

other than class III devices under the 

Federal Food, Drug and Cosmetic Act 

and inhalation drugs, and includes the 

services directly related to the 

furnishing of that product to the 

beneficiary: 

(1) Durable medical equipment 

(DME), as defined in § 414.202 and 

further classified into the following 

categories: 

(i) Inexpensive or routinely purchased 

items, as specified in § 414.220(a); 

(ii) Items requiring frequent and 

substantial servicing, as specified in 

§ 414.222(a); 

(iii) Oxygen and oxygen equipment, 

as specified in § 414.226(b). 

(iv) Other DME (capped rental items), 

as specified in § 414.229. 

(2) Supplies necessary for the 

effective use of DME. 

(3) Enteral nutrients, equipment, and 

supplies. 

(4) Off-the-shelf orthotics, which are 

orthotics described in section 1861(s)(9) 

of the Act that require minimal selfadjustment for appropriate use and do 

not require expertise in trimming, 

bending, molding, assembling, or 

customizing to fit a beneficiary. 

Item weight is a number assigned to 

an item based on its beneficiary 

utilization rate in a competitive bidding 

area when compared to other items in 

the same product category. 

Metropolitan Statistical Area (MSA) 

has the same meaning as that given by 

the Office of Management and Budget. 

Nationwide competitive bidding area 

means a competitive bidding area that 

includes the United States and its 

territories. 

Noncontract supplier means a 

supplier that is located in a competitive 

bidding area or that furnishes items 

through the mail to beneficiaries in a 

competitive bidding area but that is not 

awarded a contract by CMS to furnish 

items included in a competitive bidding 

program for that area. 

Physician has the same meaning as in 

section 1861(r)(1) of the Act. 

Pivotal bid means the highest 

composite bid based on bids submitted 

by a suppliers for a product category 

that will include a sufficient number of 

suppliers to meet beneficiary demand 

for the items in that product category. 

Product category means a grouping of 

related items that are included in a 

competitive bidding program. 

Single payment amount means the 

allowed payment for an item furnished 

under a competitive bidding program. 

Supplier means an entity with a valid 

Medicare supplier number, including an 

entity that furnishes an item through the 

mail. 

Treating practitioner means a 

physician assistant, nurse practitioner, 

or clinical nurse specialist, as those 

terms are defined in section 1861(aa)(5) 

of the Act. 

Weighted bid means the item weight 

multiplied by the bid price submitted 

for that item. 

Comment: Several commenters 

supported the definitions of ‘‘bid’’ and 

‘‘item’’ because these definitions 

acknowledge that services are involved 

in the delivery of products to Medicare 

beneficiaries. One commenter suggested 

that Medicare competitively bid class III 

devices, which appear to be excluded 

under the proposed definition of 

‘‘item.’’

Response: We appreciate the 

commenters’ support. Section 

1847(a)(2)(A) of the Act specifically 

excludes class III devices under the 

Federal Food, Drug, and Cosmetic Act 

from the Medicare DMEPOS 

Competitive Bidding Program. 

Therefore, we do not have the authority 

to conduct competitive bidding for these 

items. We are clarifying in the definition 

of ‘‘item’’ that the DME excludes class 

III devices under the Federal Food, Drug 

and Cosmetic Act as defined in 

§ 414.402 and that inhalation drugs are 

not included in the term ‘‘supplies 

necessary for the effective use of DME.’’

We are also revising the regulatory 

cross-reference for ‘‘oxygen and oxygen 

equipment.’’

We agree with the commenters that 

the definition of an item should 

acknowledge what is included in an 

item for which bids are being submitted. 

Therefore, in this final rule, we are 

revising the definition of ‘‘item’’ to 

indicate that although we will always 

identify the product by its HCPCS code, 

we may combine several codes to form 

one competitively bid item or specify a 

particular method by which the item is 

furnished. For example, if we were to 

include diabetic test strips in a mailorder competitive bidding program, we 

would identify the item by its HCPCS 

code and indicate that the product is to 

be furnished only by mail. We are 

making this change because we need to 

be able to modify HCPCS codes or 

combine HCPCS codes to identify the 

items for which we will be conducting 

competitive bidding because HCPCS 

codes, by themselves, do not always 

fully define the items for which we wish 

to solicit competitive bids. We further 

discuss this revision in section VI.B. of 

this final rule. Therefore, in this final 

rule, we have revised the definition of 

‘‘item’’ to specify that an item for 

purposes of competitive bidding may be 

comprised of two or more products 

identified by different HCPCS codes 

and/or modifiers and that these codes 

may be defined based on how a product 

is furnished (for example, by mail). 

Comment: One commenter stated that 

the definitions for the ‘‘composite bid’’

and the ‘‘single payment amount’’ for 

the individual items should include all 

the costs associated with training the 

beneficiary and properly putting 

equipment in place to ensure the safe 

administration of a piece of DMEPOS in 

a beneficiary’s home. 

Response: We are not changing the 

definitions of ‘‘composite bid’’ and 

‘‘single payment amount’’ because these 

definitions are based upon the bids, 

which, by definition, include any 

services that are directly related to the 

furnishing of the item to the beneficiary. 

In addition, to the extent that the service 

component is included in the 

definitions of ‘‘bid’’ and ‘‘item,’’ the 

‘‘composite bid’’ and the ‘‘single 

payment amount’’ calculated for each 

item would reflect the costs of services 

associated with furnishing that item to 

a beneficiary. 

Comment: Several commenters 

suggested that the proposed definition 

of ‘‘noncontract supplier’’ does not 

address suppliers that are physically 

located outside of a CBA, yet provide 

services to beneficiaries whose 

permanent address is inside a CBA. One 

commenter suggested that the definition 

read: ‘‘A supplier that furnishes items to 

beneficiaries in a competitive bidding 

area, but that is not awarded a contract 

by Medicare to furnish items included 

in the competitive bidding program for 

that area.’’

Response: Our proposed definition of 

the term ‘‘noncontract supplier’’ only 

included suppliers located in a CBA or 

that mailed items to beneficiaries in a 

CBA. However, we recognize the 

commenter’s concerns that this 

definition would not capture suppliers 

that are located outside the CBA but that 

furnish items to beneficiaries who 

maintain a permanent residence in a 

CBA. Therefore, we are revising the 

definition of the term ‘‘noncontract 

supplier’’ in this final rule to mean: ‘‘a 

supplier that is not awarded a contract 

by CMS to furnish items included in a 

competitive bidding program.’’

Comment: Many commenters 

suggested that the definition of 

‘‘physician’’ be expanded to allow 

podiatrists, optometrists and dentists to 

prescribe a particular brand or mode of 


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delivery of DMEPOS, along with 

physician assistants, nurse practitioners, 

and clinical nurse specialists. The 

commenters asserted that this expansion 

would allow a variety of qualified 

practitioners, in addition to physicians, 

to prescribe particular brands or modes 

of delivery where appropriate. The 

commenters requested that the 

definition of physician be changed from 

that specified in section 1861(r)(1) of the 

Act to that specified in section 1861(r) 

of the Act. 

Response: We agree with the 

commenters and are revising the 

definition of ‘‘physician’’ applicable in 

this final rule to have the same meaning 

as in section 1861(r) of the Act. We 

believe that this revision is consistent 

with the intent of the 1847(a)(5)(A) as it 

reflects which professionals would be 

ordering Medicare-covered items under 

the Medicare DMEPOS Competitive 

Bidding Program. In addition, we are 

finalizing the definition that we had 

proposed that a treating practitioner 

means a physician assistant, nurse 

practitioner, or clinical nurse specialist, 

as defined in section 1861(aa)(5) of the 

Act. In ordering DMEPOS under the 

Medicare program, these treating 

practitioners can specify a particular 

brand or mode of delivery for an item, 

which would be paid at the single 

payment amount. 

After consideration of the public 

comments received, we are finalizing 

proposed § 414.400 with only a 

technical change to the heading of the 

section (changing the heading from 

‘‘Basis’’ to ‘‘Purpose and Basis’’). In 

addition, we are revising the definitions 

of ‘‘item,’’ ‘‘noncontract supplier,’’ and 

‘‘physician’’ in § 414.402 as discussed 

above. We are also revising the 

definitions of several other terms in 

§ 414.402, as well as adding new 

definitions. Below we state the revised 

and new definitions and indicate where 

a full discussion of each change can be 

found in this final rule: 

• Revising the regulatory reference to 

the oxygen payment classes in the 

definition of ‘‘item’’ so that the 

definition now references 

§ 414.226(c)(1) instead of § 414.225(b). 

We discuss this revision in section 

VI.G.6 of this final rule. 

• Revising the definition of ‘‘item 

weight’’ by removing the phrase ‘‘in a 

competitive bidding area’’ and adding 

the phrase ‘‘using national data’’ in 

referencing the beneficiary utilization 

rate. We discuss this revision in section 

VI.D.2. (Evaluation of Bids) of this final 

rule. 

• Adding a definition of ‘‘mail order 

contract supplier’’ to mean a contract 

supplier that furnishes items through 

the mail to beneficiaries who maintain 

a permanent residence in a competitive 

bidding area.’’ This new definition is 

discussed in section V.I.E.5. of this final 

rule. 

• Adding a definition of ‘‘minimal 

self-adjustment’’ to mean ‘‘an 

adjustment that the beneficiary, 

caretaker for the beneficiary, or supplier 

of the device can perform and does not 

require the services of a certified 

orthotist (that is, an individual certified 

by either the American Board for 

Certification in Orthotics and 

Prosthetics, Inc., or the Board for 

Orthotist/Prosthetist Certification) or an 

individual who has specialized training. 

This new definition is discussed in 

section VI.F. of this final rule. 

• Adding a definition of ‘‘nationwide 

mail order contract supplier’’ to mean a 

mail order contract supplier that 

furnishes items in a nationwide 

competitive bidding area, and a 

definition of ‘‘regional mail order 

contract supplier’’ to mean a mail order 

contract supplier that furnishes items to 

any Medicare beneficiary residing 

within a certain region(s) that are 

designated as CBAs and are located 

within the United States, its Territories, 

or the District of Columbia, as discussed 

in section VI.E.5. of this final rule. 

• Adding a definition of ‘‘network’’ to 

mean a group of small suppliers that 

form a legal entity that submits a bid to 

furnish competitively bid items in a 

CBA, and that meets additional 

requirements. This change is discussed 

in section XII. of this final rule. 

• Revising the definition of ‘‘pivotal 

bid’’ to mean the ‘‘lowest composite bid 

based on bids submitted by suppliers for 

a product category that includes a 

sufficient number of suppliers to meet 

beneficiary demand for the items in that 

product category.’’ We consider this 

revision to be a clarification that the 

pivotal bid is the lowest composite bid 

in terms of the bid amounts submitted 

by the suppliers rather than the highest 

composite bid that includes sufficient 

number of suppliers to meet demand, as 

discussed in section VII.D.3. of this final 

rule. 

• Revising the definition of ‘‘product 

category’’ to mean ‘‘a grouping of related 

items that are used to treat a similar 

medical condition’’, as discussed in 

section VI.G.5. of this final rule. 

• Adding a definition of ‘‘regional 

competitive bidding area ‘‘to mean’’ a 

CBA that consists of a region of the 

United States, its Territories, and/or the 

District of Columbia’’as discussed in 

section VI.E.5. of this final rule. 

• Adding a definition of ‘‘small 

supplier’’ to mean the ‘‘a supplier that 

generates gross revenue of $3.5 million 

or less in annual receipts including 

Medicare and non-Medicare revenue,’’

as discussed in section XII. of this final 

rule. 

We are also making the following 

technical changes to proposed 

§ 414.402: 

• Revising the definition of 

‘‘competitive bidding program’’ to 

clarify that such a program established 

under 42 CFR Part 414, Subpart F 

occurs ‘‘within a designated CBA.’’

• Clarifying the introductory language 

of the definition of ‘‘grandfathered 

item’’ to read: ‘‘any one of the following 

items for which payment is made on a 

rental basis prior to the implementation 

of a competitive bidding program and 

for which payment is made after 

implementation of a competitive 

bidding program to a grandfathered 

supplier that continues to furnish items 

in accordance with § 414.408(j).’’

• Revising the definition of 

‘‘grandfathered supplier’’ to mean a 

noncontract supplier ‘‘that chooses to 

continue to furnish grandfathered items 

to a beneficiary in a CBA.’’

• Revising the definition of a 

‘‘nationwide competitive bidding area’’

to mean a CBA that includes the United 

States, its Territories, and the District of 

Columbia.’’

We are finalizing all of the other 

definitions in proposed § 414.402 

without modification. 

C. Competitive Bidding Implementation 

Contractors (CBICs) (§§ 414.406(a) and 

(e)) 

Section 1847(b)(9) of the Act provides 

that the Secretary may contract with 

appropriate entities to implement the 

Medicare DMEPOS Competitive Bidding 

Program. Section 1847(a)(1)(C) of the 

Act also authorizes the Secretary to 

waive such provisions of the Federal 

Acquisition Regulation (FAR) as are 

necessary for the efficient 

implementation of this section, other 

than provisions relating to 

confidentiality of information and such 

other provisions as the Secretary 

determines appropriate. 

In the May 1, 2006 proposed rule (71 

FR 25661), we proposed to designate 

one or more competitive bidding 

implementation contractors (CBICs) for 

the purpose of implementing the 

Medicare DMEPOS Competitive Bidding 

Program (proposed § 414.406(a)). We 

also stated that we envisioned the 

program would have six primary 

functions, including overall oversight 

and decision making, operation design 

functions (including the design of both 

bidding and outreach material 

templates, as well as program 

processes), bidding and evaluation, 


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access and quality monitoring, outreach 

and education, and claims processing. 

As we stated earlier, under the 

DMEPOS provisions of the FY 2007 IRF 

final rule (71 FR 48354), we addressed 

the public comments we received on the 

proposed provisions relating to 

implementation contractors under the 

Medicare DMEPOS Competitive Bidding 

Program and finalized regulations at 

§ 414.406(a), which allows us to 

designate one or more CBICs for the 

purpose of implementing the program, 

and at § 414.406(e), which codifies our 

proposal to have the regional carrier 

(now referred to as a Durable Medical 

Equipment Medicare Administrative 

Contractor, or DME MAC) that would 

otherwise be processing claims for a 

particular geographic region also 

process claims for items furnished 

under a competitive bidding program in 

the same geographic region. In the same 

final rule, we also finalized our policy 

regarding the elements of performance 

that will be included in a contract we 

enter into with a CBIC. 

D. Payment under the Medicare 

DMEPOS Competitive Bidding Program 

1. Payment Basis (§§ 414.408(a), (c), and 

(d)) 

Section 1847(b)(5) of the Act 

mandates that a single payment amount 

be established for each item in each 

CBA based on the bids submitted and 

accepted for that item. Medicare 

payment for the item is then made on 

an assignment-related basis equal to 80 

percent of the applicable single payment 

amount, less any unmet Part B 

deductible described in section 1833(b) 

of the Act. Section 1847(a)(6) of the Act 

requires that this payment basis be 

substituted for the payment basis 

otherwise applied under section 1834(a) 

of the Act for DME, section 1834(h) of 

the Act for OTS orthotics, or section 

1842(s) of the Act for enteral nutrients, 

equipment, and supplies, as 

appropriate. 

As discussed in detail in section II.C. 

of the May 1, 2006 proposed rule (71 FR 

25662), we proposed that payment to 

the contract supplier would be based on 

the single payment amount for the item 

in the CBA where the beneficiary 

maintains a permanent residence 

(proposed § 414.408(a)(1)). If an item 

that is included in a competitive 

bidding program is furnished to a 

beneficiary who does not maintain a 

permanent residence in a CBA, the 

payment basis for the item would be 80 

percent of the lesser of the actual charge 

for the item, or the applicable fee 

schedule amount for the item (proposed 

§ 414.408(a)(2)). We also proposed that 

implementation of a competitive 

bidding program would not preclude 

the use of an advanced beneficiary 

notice (ABN) to allow beneficiaries to 

make informed consumer choices 

regarding whether to obtain items for 

which Medicare might not make 

payment (proposed § 414.408(d)). 

Finally, as required under section 

1847(b)(5)(C) of the Act, we proposed in 

§ 414.408(c) that payment for an item 

furnished under a competitive bidding 

program would be made on an 

assignment-related basis. 

Comment: Several commenters stated 

that basing payment amounts on the 

CBA where the beneficiary maintains a 

permanent residence, and not on the 

location where the item is furnished, 

may cause suppliers to be paid less than 

the single payment amount in their area. 

They recommended that CMS allow 

payment to be made at the payment 

amount for the area where the item is 

furnished. The commenters pointed out 

that it will also be difficult for contract 

suppliers to determine what the single 

payment amount is for beneficiaries 

who reside outside their CBA. 

Response: Medicare currently pays for 

all DMEPOS items based on the 

payment amount applicable for the 

primary residence of the beneficiary, 

regardless of where the item is 

furnished. The Medicare payment 

system is set up to base payment 

amounts on the beneficiary’s primary 

residence. We proposed to adopt this 

longstanding rule for the Medicare 

DMEPOS Competitive Bidding Program 

because it is an effective way to ensure 

that suppliers do not organize their 

businesses to obtain higher payment 

amounts that apply to certain 

geographic areas of the country. We do 

not believe it will be difficult for 

contract suppliers to determine how 

much they will be paid for an item 

furnished to a beneficiary who does not 

reside in the contract supplier’s CBA 

because we will make the single 

payment amounts for each item in each 

CBA, along with the fee schedule 

amounts that will continue to be paid in 

areas that are not CBAs, publicly 

available to all suppliers. 

Comment: Several commenters 

suggested that CMS not conduct 

competitive bidding, but simply lower 

the payment amounts for DMEPOS until 

the only suppliers left to provide these 

items are the minimum number 

necessary to furnish items needed by 

Medicare beneficiaries. 

Response: Section 302(b) of the MMA 

mandated that the Secretary establish 

and implement competitive bidding 

programs for certain items of DMEPOS, 

and we have a legal obligation to 

comply with this legislative mandate. 

After consideration of the public 

comments we received, we are 

finalizing, without substantive 

revisions, proposed § 414.408(a) that 

governs the payment basis under the 

Medicare DMEPOS Competitive Bidding 

Program. We did not receive comments 

on proposed §§ 414.408(c) and (d) and 

are finalizing those sections. We have 

made an editorial revision to § 414.408, 

using the acronym CBA instead of the 

terms ‘‘area’’ or ‘‘competitive bidding 

area.’’

2. General Payment Rules 

Section 1834(a) of the Act and 

implementing regulations at 42 CFR 

§ 414.200 through § 414.232 (with the 

exception of § 414.228) set forth the 

Medicare Part B payment methodology 

we currently use to pay for the rental or 

purchase of new and used DME. Each 

item of DME that is paid for under these 

sections is classified into a payment 

category, and each category has its own 

unique payment rules. Section 1842(s) 

of the Act provides authority for 

establishing a statewide or areawide fee 

schedule to be used for the payment of 

items described in section 1842(s)(2) of 

the Act. Under this authority, we 

implemented fee schedules for payment 

for the purchase and rental of enteral 

nutrients, equipment, and supplies 

(§ 414.100 through § 414.104). Section 

1834(h) of the Act and § 414.228 of our 

regulations set forth the Medicare Part B 

payment methodology we currently use 

to pay for orthotics and prosthetics. 

Other than the rules governing 

calculation of the single payment 

amount and other modifications to 

existing rules that are addressed in this 

final rule, we proposed that the current 

requirements regarding the rental or 

purchase of DMEPOS items would 

continue to apply under the Medicare 

DMEPOS Competitive Bidding Program. 

While we believe that we have 

discretion under section 1847(a)(6) of 

the Act to adopt new rules that would 

govern these requirements, we proposed 

only to change the payment basis for 

these items and to make a few 

modifications to existing rules. 

3. Special Rules for Certain Rented 

Items of DME and Oxygen 

(Grandfathering of Suppliers) 

(§ 414.408(j)) 

a. Process for Grandfathering Suppliers 

Section 1847(a)(4) of the Act requires 

that in the case of covered DME items 

for which payment is made on a rental 

basis under section 1834(a) of the Act, 

and in the case of oxygen for which 


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payment is made under section 

1834(a)(5) of the Act, the Secretary shall 

establish a ‘‘grandfathering’’ process by 

which rental agreements for those 

covered items and supply arrangements 

with oxygen suppliers entered into 

before the start of a competitive bidding 

program may be continued. DME paid 

on a rental basis under section 1834(a) 

of the Act includes inexpensive or 

routinely purchased items furnished on 

a rental basis (as described in § 414.220 

of the regulations), items requiring 

frequent and substantial servicing (as 

described in § 414.222 of the 

regulations), and capped rental items (as 

described in § 414.229 of the 

regulations). Section 1834(a)(5) of the 

Act and § 414.226 of our regulations 

provide that payment be made on the 

basis of monthly payment amounts for 

oxygen and oxygen equipment (other 

than portable oxygen equipment) with 

separate add-on payments for portable 

oxygen equipment. In cases where the 

beneficiary owns stationary and/or 

portable gaseous or liquid oxygen 

equipment, payment is made on the 

basis of monthly payment amounts for 

oxygen contents. 

In the May 1, 2006 proposed rule (71 

FR 25662), in proposed § 414.408(k) 

(redesignated as § 414.408(j) in this final 

rule), we proposed to establish the 

grandfathering process described below 

for rented DME and oxygen and oxygen 

equipment when these items are 

included under the Medicare DMEPOS 

Competitive Bidding Program. We 

proposed that this process would apply 

only to suppliers that began furnishing 

the items described above to Medicare 

beneficiaries who maintain a permanent 

residence in an area prior to the 

implementation of the competitive 

bidding program in that area that 

includes the same items. 

In the case of the specific items 

identified in this section, we proposed 

in § 414.408(k)(4) to give Medicare 

beneficiaries the choice of deciding 

whether they would like to continue 

receiving the item from the 

grandfathered supplier or a contract 

supplier, unless the grandfathered 

supplier is not willing to continue 

furnishing the item under the terms we 

have specified below. If the 

grandfathered supplier is not willing to 

continue furnishing the item under 

these terms, a contract supplier would 

assume responsibility for continuing to 

furnish the item and be paid based on 

the single payment amount determined 

for that item under the Medicare 

DMEPOS Competitive Bidding Program. 

In addition, the beneficiary could elect, 

at any time, to transition to a contract 

supplier and the contract supplier 

would be required to accept the 

beneficiary as a customer. Suppliers that 

agree to be grandfathered suppliers for 

a specific item must agree to be a 

grandfathered supplier for all 

beneficiaries who request to continue to 

use their service for that item. 

Comment: One commenter supported 

our grandfathering proposal. The 

commenter stated that our proposal 

would allow some beneficiaries to 

maintain an established relationship 

with a current supplier and that this 

was important to minimize disruption 

for beneficiaries. 

Response: We appreciate the 

comment and agree that minimizing 

disruption of service for beneficiaries is 

an important principle that underlies 

our grandfathering rules. 

b. Payment Amounts to Grandfathered 

Suppliers 

(1) Grandfathering of Suppliers 

Furnishing Items Prior to the First 

Competitive Bidding Program in a CBA 

For items requiring frequent and 

substantial servicing, as well as oxygen 

and oxygen equipment, we proposed 

that a grandfathered supplier may 

continue furnishing these items to 

beneficiaries in accordance with 

existing rental agreements or supply 

arrangements. However, we proposed 

that, as long as the items remain 

medically necessary, the grandfathered 

supplier would be paid the single 

payment amounts determined for those 

items under the competitive bidding 

program because beneficiaries rent these 

items for extended time periods 

(proposed §§ 414.408(k)(2)(iii) and (iv)); 

redesignated as §§ 414.408(j)(2)(iii) and 

(iv) in this final rule). We believe that 

this payment proposal is consistent with 

section 1847(a)(4) of the Act, which 

requires us to establish a ‘‘process’’

under which rental agreements and 

supply arrangements ‘‘may be 

continued,’’ but is silent regarding the 

terms of that process. Because the rental 

payments for these items are not 

calculated based on, or limited to, the 

purchase fee for that item as is the case 

for other rented DME items, we do not 

believe that it is reasonable to continue 

paying the fee schedule amounts for 

these items and believe that payment at 

the competitively determined rates (that 

is, the single payment amounts) will 

comport with an overarching goal of 

competitive bidding to achieve savings 

for the Medicare program. 

Unlike other items requiring frequent 

and substantial servicing, the duration 

of the rental payments for capped rental 

items and inexpensive or routinely 

purchased items is limited. In addition, 

unlike oxygen equipment, the payment 

amounts made for capped rental items 

and inexpensive or routinely purchased 

items are limited to the approximate 

purchase fee for the item. 

Therefore, for items that are furnished 

on a rental basis under § 414.220 or 

§ 414.229, we proposed in 

§§ 414.408(k)(2)(i) and (k)(2)(ii) 

(redesignated as §§ 414.408(j)(2)(i) and 

(ii) in this final rule) that the 

grandfathered supplier could continue 

furnishing the items in accordance with 

existing rental agreements and continue 

to be paid in accordance with section 

1834(a) of the Act. We believe that 

continuing to pay for these 

grandfathered items at the fee schedule 

rates is authorized under section 

1862(a)(17) of the Act, which allows the 

Secretary to specify ‘‘other 

circumstances’’ in which Medicare will 

make payment where the expenses for a 

competitively bid item furnished in a 

CBA were incurred by a supplier other 

than a contract supplier. In our view, 

the limited duration of the rental 

agreements for capped rental items and 

inexpensive or routinely purchased 

items furnished on a rental basis, in 

addition to the fact that payments for 

these items are based on or limited to 

the purchase fees for the items, 

constitute appropriate circumstances 

under which we would allow these 

rental agreements, including their 

payment terms, to continue until their 

conclusion. The rental fee schedule 

amounts that we would pay for 

grandfathered items in the capped rental 

or inexpensive or routinely purchased 

categories would be those fee schedule 

amounts established for the State in 

which the beneficiary maintains a 

permanent residence. 

Comment: Some commenters stated 

that the grandfathering and transition 

policies are both unworkable and unfair 

to contract suppliers that will be 

required to continue to furnish capped 

rental or oxygen equipment to 

beneficiaries in the CBA regardless of 

the number of rental payments that have 

already been made to other suppliers for 

the equipment. They added that a 

contract supplier could inherit an 

unknown number of beneficiaries who 

have been renting oxygen equipment for 

20 to 30 months of continuous use. In 

these cases, the contract supplier would 

receive a minimal number of rental 

payments that would be insufficient to 

cover the cost of oxygen equipment for 

which title will transfer to the 

beneficiary after 36 months of 

continuous use. The commenters stated 

that if a contract supplier has to supply 

a capped rental item for the last 6 

months of the rental cycle, the supplier 


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would only receive 45 percent of the 

single payment amount, which is not 

enough to cover costs. They 

recommended that Medicare initiate a 

new period of continuous use if a 

beneficiary decides to switch from a 

grandfathered supplier to a contract 

supplier. 

One commenter suggested that CMS 

establish a defined timeframe within 

which a beneficiary can transfer to a 

new contract supplier. The commenter 

also suggested that CMS not require 

contract suppliers to accept, as 

customers, beneficiaries who are already 

currently using capped rental 

equipment furnished by another 

supplier. Another commenter stated that 

CMS should mandate grandfathering by 

requiring the supplier that furnished 

oxygen or a capped rental item to a 

beneficiary before the implementation 

of a competitive bidding program to 

continue to furnish that item to the 

beneficiary for the remainder of the 

rental period. Some commenters also 

questioned how section 5101 of the 

DRA, which imposes new requirements 

regarding the rental of oxygen, oxygen 

equipment, and capped rental items, 

will affect competitive bidding. Several 

commenters suggested that the 

information in the proposed rule is 

inadequate to serve as a basis for public 

comments, especially with respect to 

the impact that the implementation of 

the DRA will have on competitive 

bidding. Several commenters noted that 

until CMS establishes the scope of the 

DRA provisions and how they dovetail 

with competitive bidding, they cannot 

provide meaningful comments or make 

recommendations. For example, the 

commenters questioned how CMS 

intended to apply the DRA oxygen 

provisions to grandfathered suppliers 

and beneficiaries and whether the 

grandfathered relationship would 

terminate at the conclusion of 36 

months. 

Response: Section 5101 of the DRA 

(discussed in detail in section III.B. of 

this final rule) caps the number of rental 

payments that may be made for oxygen 

equipment and capped rental DME 

items and requires that title to these 

items transfer to the beneficiary at the 

conclusion of the rental period. We 

proposed in the May 1, 2006 proposed 

rule (71 FR 25662) that current 

requirements regarding the rental or 

purchase of DMEPOS items would 

continue to apply under the Medicare 

DMEPOS Competitive Bidding Program. 

These requirements include the changes 

we recently made to 42 CFR Part 414, 

Subpart D of our regulations that 

implemented section 5101 of the DRA, 

new supplier requirements that protect 

beneficiary access to oxygen, oxygen 

equipment and capped rental items, and 

new payment classes for oxygen and 

oxygen equipment (see 71 FR 65884 for 

a full discussion of these provisions). 

We recognize that the title transfer 

provisions that are part of these new 

requirements, when read together with 

proposed § 414.408(k)(1) (allowing a 

supplier to elect to be a grandfathered 

supplier) and proposed § 414.408(k)(4) 

(allowing a beneficiary the choice of 

receiving a grandfathered item from a 

grandfathered supplier or a contract 

supplier), might place a contract 

supplier in the position of being 

required to furnish oxygen equipment or 

a capped rental item to a beneficiary 

who previously rented the item from 

another supplier (either a supplier that 

does not elect to become a 

grandfathered supplier or a 

grandfathered supplier) and then 

transfer title to that item without being 

paid a sufficient amount to cover its 

costs. We also recognize that contract 

suppliers will not be able to predict how 

many beneficiaries will obtain capped 

rental items or oxygen equipment from 

them, rather than from a supplier that 

does not elect to become a 

grandfathered supplier. 

In response to the commenters’

concerns, we are implementing two new 

payment rules to ensure that contract 

suppliers that must begin furnishing 

oxygen equipment and/or capped rental 

items to which the grandfathering 

process would otherwise apply receive 

a sufficient number of monthly rental 

payments to recover their costs. We 

believe that these changes are consistent 

with our statutory mandate under 

sections 1847(a) and (b) of the Act, 

which give us broad authority regarding 

how to structure the Medicare DMEPOS 

Competitive Bidding Program, and more 

specifically with section 1847(b)(3)(A) 

of the Act, which allows us to specify 

the terms and conditions of contracts we 

enter into with contract suppliers. 

Capped Rental: For capped rental 

items furnished on a rental basis, we are 

providing in a new § 414.408(h)(2) that 

a contract supplier that must begin 

furnishing a capped rental item during 

the rental period to a beneficiary who is 

no longer renting the item from his or 

her previous supplier (because the 

previous supplier elected not to become 

a grandfathered supplier or the 

beneficiary elected to change suppliers) 

will receive 13 monthly rental payments 

for the item, regardless of how many 

monthly rental payments Medicare 

previously made to the prior supplier, 

assuming the item remains medically 

necessary. This will ensure that the 

contract supplier can recover its costs 

because, as discussed in section VI.G.5. 

of this final rule, the 13 monthly rental 

payments for the capped rental item 

will be based on a single payment 

amount that reflects the purchase price 

for that item. At the end of this new 13 

month rental period, the contract 

supplier will transfer title to the capped 

rental item to the beneficiary. This rule 

does not apply when a beneficiary who 

is renting a capped rental item from a 

contract supplier elects to obtain the 

same item from another contract 

supplier, because the grandfathering 

provisions, as described in section 

1847(a)(4) of the Act, only apply to 

those situations in which a beneficiary 

had been previously receiving the item 

from a noncontract supplier. In this 

case, the new contract supplier would 

be paid the single payment amount for 

the duration of the rental period. 

Oxygen Equipment: For oxygen 

equipment, we provide in a new 

§ 414.408(i)(2) that a contract supplier 

that must begin furnishing oxygen 

equipment after the rental period has 

already begun to a beneficiary who is no 

longer renting the item from his or her 

previous supplier (because the previous 

supplier elected not to become a 

grandfathered supplier or the 

beneficiary elected to change suppliers) 

will receive at least 10 rental payments 

for furnishing the equipment. For 

example, if a contract supplier begins 

furnishing oxygen equipment to a 

beneficiary in months 2 through 26, we 

would make payment for the remaining 

number of rental months in the 36- 

month rental period, because the 

number of payments to the contract 

supplier would be at least 10 payments. 

In other words, a contract supplier that 

begins furnishing oxygen equipment 

beginning with the 20th month of rental 

will receive 17 payments (17 for the 

remaining number of rental months in 

the 36 month rental period). However, 

if a contract supplier begins furnishing 

oxygen equipment to a beneficiary in 

month 27 or later, we would make 10 

rental payments assuming the 

equipment remains medically 

necessary. We believe this is a 

reasonable solution because our data 

from the GAO and the OIG and data 

available through the Internet show that 

most oxygen equipment can be 

purchased for $1,000 or less, and data 

from the competitive bidding 

demonstrations indicate that suppliers 

received more than $1,000 over 10 

months for furnishing oxygen 

equipment. Based on these data, we 

believe that 10 months is sufficient to 

cover the contract supplier’s cost to 

furnish the equipment, irrespective of 


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the modality that is used to administer 

the oxygen. This rule regarding the 

minimum number of rental payments 

does not apply when a beneficiary 

switches from a contract supplier to 

another contract supplier to receive his 

or her oxygen equipment. In this case, 

the new contract supplier would be paid 

the single payment amount for the 

remaining number of months in the 

rental period. 

We note that the DRA does not apply 

to inexpensive or routinely purchased 

items when they are furnished on a 

rental basis. Therefore, we do not see a 

need to make these special payment 

provisions applicable to those items. 

Comment: Several commenters 

suggested that CMS establish a 

transition period that would allow 

beneficiaries who reside in a CBA to 

continue to receive items from a 

noncontract supplier. They indicated 

that suppliers should be paid the 

current fee schedule amounts for these 

items during this transition period. 

They further suggested that CMS could 

use this period of time to educate 

beneficiaries and suppliers about the 

Medicare DMEPOS Competitive Bidding 

Program. Other commenters stated that 

the payment amount to grandfathered 

suppliers should always be the fee 

schedule amount (not just during a 

transition period) and never be the 

single payment amount. 

Response: We proposed to establish a 

grandfathering process that would allow 

existing rental agreements for certain 

rented items to continue because we 

want to minimize the potential that 

these arrangements will be disruptive to 

the beneficiary due to the 

implementation of competitive bidding. 

We do not believe it is necessary to 

establish a transition process, however, 

as discussed in the proposed rule, we 

are requiring that a supplier that elects 

to be a grandfathered supplier for a 

specific item must serve as a 

grandfathered supplier to all 

beneficiaries who elect to receive that 

item from them. We plan to start 

educating suppliers, beneficiaries, and 

referral agents about competitive 

bidding as soon as this final rule is 

published and expect that these efforts 

will make the transition to this new 

program go as smoothly as possible. We 

do not, however, have authority to 

establish a grandfathering process that 

would allow beneficiaries to continue 

receiving from their current supplier 

items other than those specified in 

section 1847(a)(4) of the Act. 

We proposed to pay grandfathered 

suppliers the single payment amount for 

items requiring frequent and substantial 

servicing and oxygen and oxygen 

equipment because the rental payments 

for these items are not calculated based 

on, or limited to, the purchase fees for 

these items. Therefore, we believe that 

it is reasonable to require suppliers that 

want to continue furnishing these items 

as grandfathered suppliers to accept the 

same payment that will be made for 

these items to contract suppliers. This 

achieves the goal of the program to 

achieve savings for the Medicare 

program. 

However, the payment amounts made 

to grandfathered suppliers for 

furnishing capped rental and 

inexpensive or routinely purchased 

items will continue to be based on the 

fee schedule amounts that are paid for 

these items. Unlike items requiring 

frequent and substantial servicing and 

oxygen and oxygen equipment, the 

monthly rental payments for these items 

are made for a more limited period of 

time. In addition, the payment amounts 

for these items are based on the 

purchase fees for these items. Therefore, 

we believe that it is reasonable to 

continue paying for these items in 

accordance with existing rental 

agreements. 

(2) Suppliers That Lose Their Contract 

Status in a Subsequent Competitive 

Bidding Program 

There may be instances when a 

supplier that was awarded a contract to 

furnish rental items or oxygen and 

oxygen equipment under a competitive 

bidding program is not awarded a 

contract to furnish the same items under 

a subsequent competitive bidding 

program in the same area. We are 

concerned that if this occurs, 

beneficiaries will need to switch 

suppliers in the middle of the rental 

period and could experience a 

disruption of service as a result. In order 

to minimize this possibility, we 

proposed to apply section 1847(a)(4) of 

the Act not only in a CBA where we 

implement a competitive bidding 

program for the first time, but also in the 

same area when we implement a 

subsequent competitive bidding 

program (proposed § 414.408(k)(3); 

redesignated § 414.408(j)(3) in this final 

rule). We believe our proposal is 

consistent with section 1847(a)(4) of the 

Act, which we interpret as applying to 

each competitive bidding ‘‘program’’

that we implement in an area because 

each program will be unique in terms of 

bidders, contract suppliers, items 

included in the program, and prices. 

Under the proposed rule, Medicare 

beneficiaries would be allowed to 

continue renting medically necessary 

items from their existing supplier, even 

if that supplier has lost its contract 

status under a subsequent competitive 

bidding program. 

However, where a supplier that is no 

longer a contract supplier continues to 

furnish a rental item or oxygen and 

oxygen equipment on a grandfathered 

basis, we proposed that Medicare make 

payment for the item in the amount 

established for that item under the new 

competitive bidding program for that 

area. We believe that section 1847(a)(4) 

of the Act gives us this discretion, since 

that section only requires us to establish 

a ‘‘process’’ under which these rental 

agreements or supply arrangements 

‘‘may continue’’ but does not specify a 

payment methodology that must be used 

under that process. In addition, we do 

not believe that the alternative, which 

would be to make payment for the item 

under the fee schedule, is reasonable 

since the rental agreement or supply 

arrangement began under a competitive 

bidding program. 

All rules that applied to grandfathered 

suppliers will apply in this situation 

when a supplier is a contact supplier in 

under one competitive bidding program 

e.g. in round one but is not a contract 

supplier in a subsequent competitive 

bidding program in the same CBA, e.g. 

in round two. However, the payment 

amounts will not revert back to the 

current fee schedule but rather the 

payment amounts will be the new 

competitive bid single payment 

amounts as determined under § 414.416. 

We did not receive any specific 

comments on these proposals. 

Therefore, in this final rule, we are 

redesignating proposed § 414.408(k)(3) 

as § 414.408(j)(3), making editorial 

revisions, and finalizing that section. 

c. Payment for Accessories for Items 

Subject to Grandfathering 

(§ 414.408(j)(5)) 

We proposed that accessories and 

supplies used in conjunction with an 

item which is furnished under a 

grandfathering process described above 

may also be furnished by the 

grandfathered supplier. Payment would 

be based on the single payment amount 

established for the accessories and 

supplies if the item is oxygen or oxygen 

equipment or one that requires frequent 

and substantial servicing. For 

accessories and supplies used in 

conjunction with capped rental and 

inexpensive or routinely purchased 

items, we proposed that the payment 

amounts would be based on the fee 

schedule amounts for the accessories 

and supplies furnished prior to the 

implementation of the first competitive 

bidding program in an area, or on the 

newly established competitively bid 

single payment amounts if the items are 


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furnished by a grandfathered supplier 

that was a contract supplier for a 

competitive bidding program, but is no 

longer a contract supplier for a 

subsequent competitive bidding 

program in the same area. 

Our proposal is similar to the 

grandfathering approach that was used 

in the DMEPOS competitive bidding 

demonstrations under which we paid 

grandfathered suppliers the 

competitively bid amount for certain 

items and the fee schedule amounts for 

other items. We specifically solicited 

comments on our grandfathering 

proposals. 

Comment: Several commenters 

supported our proposal to require that 

accessories and supplies used in 

conjunction with an item furnished 

under the grandfathering process be 

furnished by a grandfathered supplier. 

Response: We appreciate the 

commenters’ support and continue to 

believe that this approach is reasonable. 

To clarify the situations in which this 

may occur, we are revising proposed 

§ 414.408(k) (redesignated § 414.408(j) 

in this final rule) by adding a new 

paragraph (j)(5) to specify that 

accessories and supplies that are 

necessary for the effective use of DME 

may also be furnished by the same 

grandfathered supplier that furnishes 

the grandfathered item. This approach 

will provide the beneficiary with 

continuity of service by requiring one 

supplier to provide all related items the 

beneficiary may need for the proper use 

of their equipment. This rule will not 

apply to accessories that are not an 

integral part of the base equipment. For 

example, a standard mattress is an 

essential accessory for a hospital bed 

and may be furnished by a 

grandfathered supplier of a hospital bed, 

if the supplier has elected to be a 

grandfathered supplier for the hospital 

bed. However, a special, powered 

alternating pressure mattress furnished 

to prevent decubitus ulcers is not an 

essential part of the base equipment and 

is furnished in addition to the general 

service of furnishing the hospital bed. 

Assuming the grandfathered supplier 

for the base equipment is willing to also 

furnish accessories or supplies for the 

base equipment, beneficiaries will be 

able to choose to obtain any 

competitively bid accessories or 

supplies from either the grandfathered 

supplier or a contract supplier. We 

believe that the amount to be paid under 

the Medicare DMEPOS Competitive 

Bidding Program should be the single 

payment amount, regardless of which 

supplier furnishes the accessories or 

supplies. Payment for most accessories 

or supplies for DME is made on a 

purchase basis, and in those cases 

where a single payment amount has 

been established for the accessories or 

supplies, we believe it is reasonable to 

pay the single payment amount for the 

accessories or supplies to the 

grandfathered supplier for the base 

equipment. We believe this is 

reasonable, regardless of what payment 

category the base equipment falls under 

because the single payment amount 

reflects a reasonable payment amount 

determined by a competitive market. If 

the grandfathered supplier chooses not 

to furnish the accessories or supplies for 

the grandfathered base equipment, a 

contract supplier would be responsible 

for furnishing the accessories or 

supplies. 

Comment: One commenter suggested 

that CMS needs to establish a transition 

plan for Medicare Advantage 

beneficiaries who disenroll from their 

MA plan and enroll in traditional feefor-service Medicare Part B. The 

commenter pointed out that these 

beneficiaries may currently be using a 

noncontract supplier and should be 

given the option to remain with their 

existing supplier under the 

grandfathering provisions. 

Response: All beneficiaries to whom 

the grandfathering process applies can 

elect to continue receiving certain 

rented items from a supplier that elects 

to become a grandfathered supplier. 

Therefore, if a supplier from whom a 

Medicare Advantage beneficiary 

previously rented one of these items is 

eligible, and elects, to become a 

grandfathered supplier, then the 

beneficiary could continue to receive 

the item from that supplier. 

Comment: One commenter stated that 

the rule should apply grandfathering 

provisions to enteral equipment, 

nutrition, and supplies. The commenter 

stated that beneficiaries on enteral 

nutrition develop an ongoing 

relationship with their suppliers. The 

commenter pointed out that suppliers 

that furnish enteral equipment, 

nutrition, and supplies frequently 

service and maintain the enteral pumps. 

The commenter added that, under the 

proposed rule, contract suppliers would 

be responsible for servicing and 

maintaining enteral pumps that they did 

not provide to beneficiaries. The 

commenter recommended that the 

previous enteral supplier be able to 

continue to provide enteral equipment, 

nutrition, and supplies to the 

beneficiary until the 15-month rental 

period ends. 

Another commenter stated that our 

grandfathering proposal did not include 

a process for grandfathering glucose 

testing supplies. The commenter 

indicated that competitive bidding 

could force many beneficiaries to switch 

their glucose monitoring system if the 

contract supplier does not offer the 

testing supplies for the monitor they 

currently use. 

Another commenter suggested that 

Medicare allow grandfathering for all 

DMEPOS items. Another commenter 

suggested that Medicare only allow 

grandfathering for oxygen equipment 

because otherwise, competitive bidding 

for capped rental items, oxygen, and 

oxygen equipment will only affect 

beneficiaries who need to obtain these 

items after a competitive bidding 

program has been implemented in their 

area, which undermines a program goal 

to harness market place dynamics. 

Response: Section 1847(a)(4) of the 

Act requires that we establish a process 

by which rental agreements for DME 

and supply arrangements for suppliers 

of oxygen and oxygen equipment 

entered into before the implementation 

of a competitive bidding program may 

be continued. We do not believe we 

have authority to allow grandfathering 

for other DMEPOS, such as glucose 

testing supplies and enteral nutrition, 

equipment, and supplies. 

After consideration of the public 

comments received, we are 

redesignating proposed § 414.408 (k) as 

§ 414.408 (j) and finalizing this section 

as discussed above and with additional 

technical modifications. We are also 

adding new § 414.408(h)(2) and 

§ 414.408(i)(2), which provide for 

special payments to certain contract 

suppliers that furnish certain rented 

items. 

4. Payment Adjustments 

a. Adjustment to Account for Inflation 

(§ 414.408(b)) 

The fee schedule payment amounts 

for DMEPOS items are updated by 

annual update factors described in 42 

CFR Part 414, Subparts C and D. In 

general, the update factors are 

established based on the percentage 

change in the CPI–U for the 12-month 

period ending June 30 of each year and 

preceding the calendar year to which 

the update applies. In accordance with 

section 1847(b)(3)(B) of the Act, the 

term of a competitive bidding contract 

may not exceed 3 years. 

In the May 1, 2006 proposed rule (71 

FR 25663), we proposed to apply an 

annual inflation update to the single 

payment amounts established for a 

competitive bidding program (proposed 

§ 414.408(b)). Specifically, beginning 

with the second year of a contract 

entered into under a competitive 

bidding program, we proposed to 


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update the single payment amounts by 

the percentage increase in the CPI–U for 

the 12-month period ending with June 

30 of the preceding calendar year. We 

stated that using the CPI–U index would 

be consistent with Medicare using this 

index to update the DME fee schedule. 

This would account for inflation in the 

cost of business for suppliers submitting 

bids for furnishing items under a multiyear contract. 

Comment: One commenter suggested 

that CMS not finalize its proposal to 

make an annual inflation update to the 

single payment amounts. The 

commenter believed that this payment 

adjustment may make it possible for 

single payment amounts to rise faster 

than current fee schedule payment 

amounts, particularly in the event of a 

payment freeze or a payment reduction. 

The commenter recommended that CMS 

determine a single payment amount that 

will apply for the full term of the 

contract or allow each bidder to specify 

an annual adjustment in its bid. 

Response: We agree with the 

commenter and will not finalize our 

proposal to make an annual inflation 

update to the single payment amounts. 

The single payment amounts will 

remain in effect for the duration of the 

contract. We believe it is more 

appropriate for suppliers to address the 

possible effects of inflation or price 

increases when they formulate their 

bids because automatic payment 

adjustments to competitively bid items 

may result in higher payment amounts 

than would occurred under the 

DMEPOS fee schedule payment 

amounts if these amounts are subject to 

Congressional freezes or payment 

reductions. 

Comment: Several commenters stated 

that the proposal did not address 

situations where the manufacturers or 

distributors raise their prices, thereby 

requiring suppliers to pay more money 

to purchase their products. They believe 

that suppliers may be required to 

continue to furnish these items at the 

single payment amounts 

notwithstanding the fact that their costs 

have increased. 

Response: While we recognize that 

increases in suppliers’ costs for 

equipment and other costs can occur at 

any time, suppliers should be generally 

aware of how often these changes occur 

and how these changes affect their 

businesses. We expect suppliers to 

consider this factor when developing 

their bids, which represent bids for 

furnishing items during the entire 

period that the contract will be in effect. 

Comment: Several commenters 

recommended that CMS continue to use 

the CPI–U to adjust fee schedule 

amounts for class III devices. The 

commenters indicated that the March 

2006 GAO report was flawed because it 

did not provide a full assessment of 

changes over time in the costs of 

producing, supplying and servicing 

class III devices. The commenters also 

noted that the report does not specify a 

specific percentage update for CY 2007 

or CY 2008. Another commenter stated 

that the GAO report examines class III 

devices in relation to only a very limited 

number of higher-technology class III 

items that may not be reflective of the 

general class III items. One commenter 

unfavorably compared the GAO report 

to the Medicare Payment Advisory 

Commission (MedPAC) reports which 

assess the adequacy of Medicare 

payments for hospital inpatient and 

outpatient services, physician services, 

outpatient dialysis services, skilled 

nursing facility services, home health 

services, long-term care hospital 

services and inpatient rehabilitation 

facility services. (Following each 

detailed assessment, MedPAC then 

recommends an update policy for each 

provider category for the coming year.) 

The commenter noted that the GAO 

report does not justify its alternative 

assessment methodology or its failure to 

take into account changes over time in 

manufacturer costs for class III devices. 

Another commenter recommended that 

the class III proposal be included in a 

separate rulemaking procedure because 

it is not related to competitive bidding. 

Response: Pursuant to section 

1834(a)(14)(H)(i) of the Act, in 

determining the appropriate fee 

schedule update percentages for class III 

medical devices prescribed in section 

513(a)(1)(C) of the Federal Food, Drug 

and Cosmetic Act (21 U.S.C. 

360(c)(1)(C)) for CY 2007, we must take 

into account recommendations 

contained in the report of the 

Comptroller General of the United 

States under section 302(c)(1)(B) of the 

MMA. We have not yet made a 

determination regarding the appropriate 

percentage change for CY 2007 in the 

fee schedule amounts for class III DME 

and, therefore, are not making that 

determination as part of this final rule. 

We will address this issue in a future 

rulemaking. 

After consideration of the public 

comments received, in this final rule, 

we are revising proposed § 414.408(b) to 

specify that the single payment amount 

for each item that is determined under 

each competition will be in effect for the 

duration of the contract and will not be 

adjusted by an annual inflation update. 

b. Adjustments to Single Payment 

Amounts to Reflect Changes in the 

HCPCS (§ 414.426) 

We proposed under § 414.426 that 

revisions to HCPCS codes for items 

under a competitive bidding program 

that occur in the middle of a bidding 

cycle would be handled as follows: 

• If a single HCPCS code for an item 

is divided into multiple codes for the 

components of that item, the sum of 

payments for these new codes would be 

equal to the payment for the original 

item. Suppliers selected through 

competitive bidding to provide the item 

would also provide the components of 

the item. During the subsequent 

competitive bidding cycle, suppliers 

would bid on each new code for the 

components of the item, and we would 

determine new single payment amounts 

for these components. 

• If a single HCPCS code for two or 

more similar items is divided into two 

or more separate codes, the payment 

amount applied to these codes would 

continue to be the same payment 

amount applied to the single code until 

the next competitive bidding cycle. 

During the next cycle, suppliers would 

bid on the new separate and distinct 

codes. 

• If the HCPCS codes for several 

components of one item are merged into 

one new code for the single item, the 

payment amount of the new code would 

be equal to the total of the separate 

payment amounts for the components. 

Suppliers that were selected through 

competitive bidding to supply the 

various components of the item would 

continue to supply the item using the 

new code. During the subsequent 

bidding cycle, suppliers would bid on 

the new code for the single item to 

determine a new single payment 

amount for this new code. 

• If multiple codes for different, but 

related or similar items are placed into 

a single code, the payment amount for 

the new single code would be the 

average (arithmetic mean) weighted by 

frequency of payments for the formerly 

separate codes. Suppliers would also 

provide the item under the new single 

code. During the subsequent bidding 

cycle, suppliers would bid on the new 

single code and determine a new single 

payment amount for this code. 

Comment: Several commenters stated 

that when multiple codes for similar 

items are merged to a new code, CMS 

should continue to use the former codes 

and single payment amounts for the 

remainder of the contract period. One 

commenter stated that the proposal that 

the payment amounts for new HCPCS 

codes continue to be the same payment 


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amounts until the next competitive 

bidding cycle is not an equitable 

proposal and a more appropriate 

procedure must be developed. Another 

commenter stated that CMS’ only 

authority to adjust payment amounts for 

an item is through the inherent 

reasonableness authority under the 

Medicare statute. The commenter 

disagreed with the proposal for paying 

for new HCPCS codes that are 

established during a competitive 

bidding cycle. The commenter stated 

that CMS should rebid these items, 

assuming they are appropriate for 

inclusion in the program. 

Response: After further consideration, 

we are clarifying that when multiple 

codes for different items are 

discontinued and the items are placed 

into a new single code, the payment for 

the new code will be based on the fee 

schedule methodology, even if we had 

previously established a single payment 

through competitive bidding for the 

items included in the new code. The old 

codes will be considered invalid and 

therefore will no longer be included in 

the competitive bidding program for the 

remainder of the contract term. During 

a subsequent competitive bidding 

program, suppliers would bid on the 

new single code and we will determine 

a new single payment amounts for this 

code based on the bids submitted and 

accepted. We are not finalizing this part 

of the proposed methodology because 

we do not believe the single payment 

amount in this case would be reflective 

of the bids submitted and accepted for 

these multiple items. However, unlike 

this proposal, our other three proposals 

will be finalized because they are 

reflective of the bids submitted and 

accepted for the items described by the 

new codes. 

We note that we do not believe we 

have authority to use the inherent 

reasonableness authority to adjust the 

single payment amounts set through 

competitive bidding. We believe that the 

prices set by competitive bidding will 

be reasonable because they will be 

reflective of the market. When we split 

or merge HCPCS codes, we will ensure 

that the new payment amounts are 

reflective of the previously established 

payment amounts, and this does not 

require the use of the inherent 

reasonableness authority or the need to 

rebid the items. 

After consideration of the public 

comments we received, we are 

finalizing §§ 414.426(a) through (c) and 

revising § 414.426(d) as discussed above 

and with additional technical changes. 

5. Authority to Adjust Payments in 

Other Areas 

Section 1834(a)(1)(F)(ii) of the Act 

provides authority, effective for covered 

items furnished on or after January 1, 

2009, that are included in a competitive 

bidding program, for us to use the 

payment information determined under 

that competitive bidding program to 

adjust the payment amounts otherwise 

recognized under section 

1834(a)(1)(B)(ii) of the Act for the same 

DME items in areas not included in a 

competitive bidding program. Sections 

1834(h)(1)(H)(ii) and 1842(s)(3)(B) of the 

Act provide the same authority for 

orthotic and prosthetic devices, and 

enteral nutrition, respectively. 

In the May 1, 2006 proposed rule (71 

FR 25664), we proposed to use this 

authority but stated that we had not yet 

developed a detailed methodology for 

doing so. Therefore, we specifically 

invited comments and 

recommendations on this issue. We 

stated that we believed that our 

methodology would be influenced by 

our experience and information gained 

from the competitive bidding programs 

in CYs 2007 and 2009. When submitting 

recommendations on a methodology for 

using this authority, we asked 

commenters to keep in mind the 

following factors that are likely to be 

incorporated in the methodology: 

• The threshold or amount or level of 

savings that the Medicare program must 

realize for an item or group of items 

before we would use payment 

information from a competitive bidding 

program to adjust payment amounts for 

those items in other areas. 

• Whether adjustments of payment 

amounts in other areas would be on a 

local, regional, or national basis, 

depending on the extent to which the 

single payment amounts and price 

indexes (for example, local prices used 

in calculating the CPI–U) for an item or 

group of items varied across different 

areas of the country. 

• Whether adjustments of payment 

amounts in other areas would be based 

on a certain percentage of the single 

payment amount(s) from the CBA(s). 

Comment: Some commenters stated 

that CMS must issue a final rule to spell 

out a detailed plan for using the 

authority provided by sections 

1834(a)(1)(F)(ii), 1834(h)(1)(H)(ii), and 

1842(s)(3)(B) of the Act before it can 

implement these provisions. 

Response: We agree with the 

commenters that a more detailed plan 

must be developed for using the 

authorities provided by sections 

1834(a)(1)(F)(ii), 1834(h)(1)(H)(ii), and 

1842(s)(3)(B) of the Act, and we plan to 

conduct subsequent rulemaking prior to 

implementing these provisions. 

Subsequent rulemaking would provide a 

more detailed plan for using these 

authorities. Therefore, we are not 

finalizing proposed § 414.408(e) until 

the subsequent rulemaking is 

completed. 

6. Requirement to Obtain Competitively 

Bid Items From a Contract Supplier 

(§§ 411.15(s), 414.408(e)) 

Beneficiaries often travel, for 

example, to visit family members or to 

reside in a State with a warmer climate 

during the winter months. To prevent 

these beneficiaries from having to return 

home to obtain needed DMEPOS, in 

proposed § 414.408(f)(2)(ii) 

(redesignated § 414.408(e)(2)(iii) in this 

final rule), we proposed to allow 

beneficiaries who are traveling outside 

the CBA where they permanently reside 

to obtain items that they would 

ordinarily be required to obtain from a 

contract supplier for their CBA from a 

supplier that has not been awarded a 

contract to furnish items for that area. If 

the area that the beneficiary is visiting 

is also a CBA and the item is subject to 

the competitive bidding program in that 

area, the beneficiary would be required 

to obtain the item from a contract 

supplier for that area. If the area that the 

beneficiary is visiting is not a CBA, or 

if the area is a CBA but the item needed 

by the beneficiary is not included in the 

competitive bidding program for that 

area, the beneficiary would be required 

to obtain the item from a supplier that 

has a valid Medicare supplier number. 

In either case, payment to the supplier 

would be made based on the single 

payment amount for the item in the 

CBA where the beneficiary maintains a 

permanent residence. 

In the May 1, 2006 proposed rule, we 

proposed that if a beneficiary is not 

visiting another area, but is merely 

receiving competitively bid items from 

a supplier located outside but near the 

boundary of the CBA, the proposed 

exemption to the general rule that 

beneficiaries who reside in a CBA must 

obtain DMEPOS covered by competitive 

bidding from contract suppliers in that 

area would not apply. We stated that we 

plan to monitor the programs closely to 

ensure that this type of abuse or 

circumvention of the competitive 

bidding process and requirements to 

obtain items from a contract supplier 

does not occur. 

We also proposed to base claims 

jurisdiction and the payment amount on 

the beneficiary’s permanent residence as 

we have done since the early 1990s with 

the current DMEPOS program under 

§ 421.210(e). Under this proposal, the 


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DME MAC responsible for the area 

where the beneficiary maintains a 

permanent residence would process all 

claims submitted for items furnished to 

that beneficiary, whether or not the 

beneficiary obtained the item in that 

area. If the beneficiary maintained a 

permanent residence in a CBA and 

obtained an item included in the 

competitive bidding program for that 

area, Medicare would pay the supplier 

the single payment amount for the item 

determined under the competitive 

bidding program for that area. If the 

beneficiary did not maintain a 

permanent residence in a CBA, 

Medicare would pay the supplier the fee 

schedule amount for the area in which 

the beneficiary maintains a permanent 

residence. We believe that this proposal 

is consistent with our current policy, 

under which suppliers across the 

country are paid the same amount for 

similar products obtained by 

beneficiaries who maintain their 

permanent residence within the same 

geographic area. 

We proposed that Medicare 

beneficiaries who maintain their 

permanent residence in a CBA be 

required to obtain competitively bid 

items from a contract supplier for that 

area with the following two exceptions: 

• A beneficiary may obtain an item 

from a supplier or a noncontract 

supplier in accordance with the 

competitive bidding program 

grandfathering provisions described in 

section VI.C.3. of this final rule. 

• A beneficiary who is outside of the 

CBA where he or she maintains a 

permanent residence may obtain an 

item from a contract supplier, if he or 

she is in another CBA and the same item 

is included under a competitive bidding 

program for that area, or from a supplier 

with a valid Medicare supplier number, 

if he or she is either in another CBA that 

does not include the item in its program 

or is in an area that is not a CBA. 

We proposed that unless one of the 

exceptions discussed above applies, 

Medicare would not pay for the item. 

We also proposed to add a new 

§ 411.15(s) that would prohibit 

Medicare from making payment for an 

item that is included in a competitive 

bidding program if that item is 

furnished by a supplier other than a 

contract supplier, unless an exception 

applies. 

Comment: Several commenters 

suggested that CMS exclude from 

competitive bidding beneficiaries who 

have Medicare as their secondary 

insurance. The commenters stated that 

claims for beneficiaries with Medicare 

as a secondary payer should be 

processed and paid under the standard 

fee schedule. 

Response: We believe that the 

commenters’ intent was to request that 

Medicare pay for an item that was 

furnished by a supplier that the 

beneficiary is required to use under his 

or her primary insurance policy even if 

that item is furnished by a supplier that 

is not a contract supplier. We agree with 

the commenters that an exception under 

the Medicare DMEPOS Competitive 

Bidding Program needs to be made for 

beneficiaries with Medicare as their 

secondary insurance. Section 

1862(a)(17) of the Act allows the 

Secretary to specify circumstances 

under which it would be appropriate to 

pay for an item that is furnished by an 

entity other than a contract supplier. To 

address secondary payer concerns, we 

are adding an exception at 

§ 414.408(e)(2)(ii) of the list of 

circumstances when Medicare will 

make payment where the expenses for a 

competitively bid DMEPOS item 

furnished in a CBA were incurred by a 

supplier other than a contract supplier. 

Under this exception Medicare may 

make a secondary payment for a 

DMEPOS item that is furnished by a 

noncontract supplier if the beneficiary, 

in order to comply with his or her 

primary insurance plan, does not have 

the option to use a contract supplier. In 

addition, Medicare will only make a 

secondary payment to a supplier that 

the beneficiary is required to use under 

his or her insurance plan if the supplier 

is eligible to submit claims to Medicare. 

These suppliers will need to have a 

valid Medicare billing number to be 

eligible to submit claims to Medicare. 

This regulation does not supersede the 

established Medicare secondary payer 

statutory and regulatory requirements, 

including the Medicare secondary 

payment rules found at 42 CFR 411.32 

and 411.33, and payment will be 

calculated in accordance with those 

rules. 

Comment: One commenter stated that 

the requirement to obtain competitively 

bid items from a contract supplier will 

be extremely confusing to the traveling 

beneficiary and will limit beneficiary 

access to DMEPOS while the beneficiary 

is away from his or her permanent 

residence. The commenter also 

proposed that the supplier outside of 

the beneficiary’s CBA be reimbursed 

either (a) the regular fee schedule 

amount for the product if the area 

traveled to is not a CBA or (b) the higher 

single payment amount for the two 

CBAs, if the area where the beneficiary 

has traveled is in a CBA. 

Some commenters were concerned 

that the difference between the fee 

schedule amount and the single 

payment amount may be substantial, 

thereby hindering beneficiary access to 

needed equipment. They recommended 

that CMS continue to pay for an item 

based on the fee schedule amount that 

corresponds with the beneficiary’s 

permanent residence if the beneficiary 

obtains the item while visiting another 

area. The commenters were concerned 

about the impact that the requirement to 

obtain competitively bid items from a 

contract supplier would have on both 

suppliers and beneficiaries who travel 

to ‘‘snowbird’’ areas. 

Response: The approach set out in the 

proposed rule is consistent with our 

long-standing rule under which 

Medicare payment for DMEPOS is based 

on the beneficiary’s primary residence. 

If a beneficiary maintains a permanent 

residence in a CBA, payment for an item 

that the beneficiary obtains while 

visiting another area will be based on 

the payment amount for the item in the 

beneficiary’s CBA. We note that, under 

our current rule, there are instances 

when a supplier is paid more or less 

than the fee schedule amount that the 

supplier would otherwise receive for an 

item because the payment amount has 

been determined based on where the 

beneficiary resides. The same will be 

true under the Medicare DMEPOS 

Competitive Bidding Program. For 

example, when a beneficiary who 

resides in an area that is not a CBA 

travels into a CBA and needs to obtain 

an item, the supplier that furnishes the 

item will be paid the current fee 

schedule amount for the item based on 

the beneficiary’s residence, even if the 

fee schedule amount is greater than the 

single payment amount that the supplier 

would otherwise receive for furnishing 

the item. We believe that it is 

appropriate to adopt our current claims 

jurisdiction policy for the Medicare 

DMEPOS Competitive Bidding Program 

because it minimizes the possibility that 

suppliers will set up locations in certain 

geographic areas for the purpose of 

obtaining higher payment amounts. 

We plan to conduct an extensive 

education campaign to minimize 

confusion on the part of both 

beneficiaries and suppliers regarding 

this provision and all other provisions 

of the Medicare DMEPOS Competitive 

Bidding Program. 

Comment: Several commenters stated 

that suppliers need access to a 

beneficiary database that identifies the 

county in which a beneficiary resides at 

the zip code level, so they can 

determine if the beneficiary resides in a 

CBA. 

Response: We do not believe that this 

is necessary for suppliers. Currently, 


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payment is based on beneficiary 

residence, and suppliers do not have 

access to beneficiary zip code 

information to bill for items. We will 

post all counties and zip codes where 

competitive bidding is conducted on 

our Web site. The Medicare claims form 

requires a beneficiary address. 

Therefore, the supplier will be able to 

ascertain if the beneficiary resides in a 

CBA. We currently post fee schedules 

on our Web site and the single payment 

amounts for each item in each CBA will 

also be posted. Therefore, suppliers can 

look to the postings to determine 

payment amounts in other areas. In 

addition, our claims processing systems 

are equipped to identify the appropriate 

payment amount so no calculations are 

necessary to determine the payment 

amount for an item. 

Comment: Several commenters stated 

that beneficiaries will not have access to 

newer technology for competitively bid 

products. 

Response: One of the main objectives 

of the Medicare DMEPOS Competitive 

Bidding Program is to ensure that 

beneficiaries have access to quality 

DMEPOS. Therefore, we have built 

safeguards into the competitive bidding 

program to ensure there is continued 

access to quality medical equipment 

and supplies, as well as to services 

necessary to maintain the equipment. 

As we discuss more fully in response to 

comments in section XV. Physician or 

Treating Practitioner Authorization and 

Consideration of Clinical Efficiency and 

Value of Items in Determining 

Categories for Bids of this final rule 

(§ 414.422(c)), we have proposed to 

include a nondiscrimination clause in 

each contract awarded under this 

program. We believe that the inclusion 

of this contract provision will ensure 

that beneficiaries who obtain items 

under a competitive bidding program 

have access to the same products as 

other Medicare customers and private 

pay individuals. In addition, we are 

taking other steps to ensure that high 

quality items are furnished to 

beneficiaries under this program. We 

plan to implement a complaint system 

so that beneficiaries, referral agents, 

providers, and suppliers can report 

problems and difficulties they 

encounter with the ordering and 

furnishing of DMEPOS in CBAs. In 

addition, we will not award a contract 

to a supplier unless that supplier meets 

our eligibility standards, is accredited, 

and meets our financial standards. 

In addition, items that represent new 

technology and that receive a new 

HCPCS code to separately designate 

them, rather than updates to current 

technology will not be added to a 

contract supplier’s contract. Instead, 

beneficiaries will be able to obtain these 

items from any supplier for the 

remainder of the contract period, and 

the supplier will be paid the fee 

schedule amount for those items. 

Comment: One commenter stated that 

competitive bidding will limit full-time 

access to supplies that are crucial to 

beneficiaries with diabetes. The 

commenter stated that beneficiaries may 

find that they can no longer purchase 

their supplies from their current 

supplier and may be inconvenienced. 

The commenter recommended that CMS 

implement an aggressive education 

outreach program. 

Response: We do not believe that 

competitive bidding will limit 

beneficiary access to any competitively 

bid items, including diabetic supplies. 

Although it is true that some 

beneficiaries will have to find a contract 

supplier to purchase their supplies, we 

do not believe this will result in an 

inconvenience to beneficiaries, because 

there will be a sufficient number of 

contract suppliers that furnish these 

items for each CBA. The process we 

have proposed for awarding contracts 

under the Medicare DMEPOS 

Competitive Bidding Program will 

ensure that there are a sufficient number 

of contract suppliers to furnish items to 

all beneficiaries located in a CBA. We 

plan to conduct an aggressive outreach 

program for all beneficiaries, suppliers, 

and referral agents. (We refer readers to 

the DMEPOS provisions of the FY 2007 

IRF final rule (71 FR 48354) for a 

complete discussion of our planned 

education and outreach policy.) 

Comment: One commenter expressed 

concern that in a State with multiple 

MSAs, there could be a different 

payment rate for the same item in each 

MSA. The commenter believed this 

would add confusion and would 

increase billing time and expenses, 

which will, in turn, increase the price 

of products. 

Response: We agree that if we 

conducted competitive bidding in 

multiple CBAs within a State, there 

could be different prices in each CBA 

for the same item. However, we do not 

believe that this would be a problem for 

contract suppliers. Under the current 

program, suppliers may have a customer 

base that comes from areas with 

different fee schedule amounts because 

the fee schedules vary by State. 

Therefore, we believe that many 

suppliers are already equipped to 

handle price variations for an item. In 

addition, the fee schedule for each item 

in each State is published on our Web 

site, and we plan to also publish the 

single payment amounts for each item 

in each CBA on our Web site. 

After consideration of the public 

comments we received, we are 

redesignating proposed § 414.408(f) as 

§ 414.408(e) and adding a new 

§ 414.408(e)(2)(ii) that specifies that 

Medicare may make a secondary 

payment for a DMEPOS item that is 

furnished by a supplier that is not 

awarded a contract under a competitive 

bidding program. We are also finalizing 

the remainder of proposed 

§§ 414.408(f)(1) and (f)(2)(i) and (f)(2)(ii) 

(redesignated as §§ 414.408(e)(2)(i) and 

(e)(2)(iii)) with only technical 

modifications. We are also finalizing 

§ 411.15(s). 

7. Limitation on Medicare Payment and 

Beneficiary Liability for Items 

Furnished by Noncontract Suppliers 

(§§ 414.408(e)(3) and (e)(4) 

In the May 1, 2006 proposed rule (71 

FR 25664), we proposed that if a 

noncontract supplier located in a CBA 

furnishes an item included in the 

competitive bidding program for that 

area to a beneficiary who maintains a 

permanent residence in that area, the 

beneficiary would have no financial 

liability to the noncontract supplier 

unless the grandfathering exception 

discussed in section VI.D.3. of this final 

rule applies (proposed 

§ 414.408(f)(2)(iii); redesignated 

§ 414.408(e)(3) in this final rule). 

We proposed that this rule would not 

apply if the noncontract supplier 

furnished items that are not included in 

the competitive bidding program for the 

area. We proposed to specially designate 

the supplier numbers of all noncontract 

suppliers so that we will easily be able 

to identify whether a noncontract 

supplier has furnished a competitively 

bid item to a beneficiary who maintains 

a permanent residence in a CBA 

(proposed § 414.408(f)(3)) (redesignated 

in this final rule as § 414.408(e)(4)). 

Comment: Several commenters 

suggested that proposed 

§ 414.408(f)(2)(ii) be clarified to include 

a limitation on beneficiary liability 

unless the noncontract supplier has 

obtained a signed ABN, which indicates 

that the beneficiary was informed prior 

to receiving service that there would be 

no coverage due to the supplier’s 

noncontract status and that the 

beneficiary still desired to receive the 

service from the noncontract supplier. 

Response: We are revising the 

regulation to add § 414.408(e)(3)(ii) and 

§ 414.408(c) to reflect that there is a 

limitation on beneficiary liability unless 

the noncontract supplier has obtained a 

signed ABN because, if the beneficiary 

desires to receive this item from a 


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supplier that is not a contract supplier, 

the ABN indicates the beneficiary’s 

knowledge and understanding that 

Medicare will not pay for that item. In 

this circumstance, a noncontract 

supplier cannot bill the Medicare 

program and receive payment for a 

competitively bid item provided to a 

beneficiary whose primary residence is 

in a CBA unless an exception discussed 

in this rule applies. 

We are also revising proposed 

§ 414.408(f)(2)(iii) (redesignated in this 

final rule as § 414.408(e)(3)(ii) to delete 

the phrase ‘‘who maintains a permanent 

residence in a CBA.’’ We believe this 

change clarifies our final policy that 

beneficiaries will not be financially 

responsible for making payment to a 

noncontract supplier that furnishes a 

competitively bid item in violation of 

the Medicare DMEPOS competitive 

bidding program. 

After consideration of the public 

comments we received, we are 

redesignating proposed 

§§ 414.408(f)(2)(iii) and (f)(3) as final 

§§ 414.408(e)(3)(ii) and (e)(4), 

respectively, and finalizing these 

sections as discussed above and with 

additional technical changes. 

8. Payment for Repair and Replacement 

of Beneficiary-Owned Items 

(§ 414.408(k)) 

In the proposed rule (71 FR 25681), 

we proposed that repair or replacement 

of beneficiary-owned DME, enteral 

nutrition equipment, or OTS orthotics 

that are subject to the Medicare 

DMEPOS Competitive Bidding Program 

must be furnished by a contract supplier 

because only winning suppliers can 

provide these items in a CBA (proposed 

§ 414.422(c)). The contract supplier 

could not refuse to repair or replace 

beneficiary-owned items subject to 

competitive bidding. We indicated that 

this proposed provision would help 

ensure that the beneficiaries will get the 

items from qualified suppliers, and is 

consistent with the competitive bidding 

program in that it directs business to 

contract suppliers. 

Therefore, we proposed that repair or 

replacement of beneficiary-owned items 

subject to a competitive bidding 

program must be furnished by a contract 

supplier. We indicated that this 

proposed requirement would not apply 

to Medicare beneficiaries who are 

outside of a CBA. 

Comment: Some commenters objected 

to the requirements that repair of 

beneficiary-owned equipment that is 

subject to a competitive bidding 

program must be furnished by a contract 

supplier and that a contract supplier 

must agree to service all items included 

in its contract. The commenters 

remarked that a limited number of 

suppliers have repair facilities. In 

addition, the commenters noted that 

contract suppliers may not have access 

to the parts necessary to repair 

equipment sold by another contract 

supplier, and this provision would 

allow manufacturers to inflate the price 

for parts that must be obtained by 

contract suppliers that do not regularly 

furnish their products. The commenters 

also suggested that, in cases where the 

manufacturer is the sole distributor of 

an item, the repair parts and accessories 

for the item might not be 

interchangeable and the use of parts that 

are not provided by the manufacturer 

may void the manufacturer’s warranty. 

The commenters also suggested that if 

there are warranties that must be 

honored on previously rented or 

purchased equipment, the cost of 

service should be borne by the contract 

supplier that received reimbursement 

for the malfunctioning item. Several 

commenters expressed concern about 

assuming the liability for modifying a 

splint if they were not the contract 

supplier that originally furnished it. In 

addition, the commenters suggested that 

this proposal could restrict Medicare 

beneficiary access to a choice of 

suppliers that can repair their 

equipment. Several commenters noted 

that contract suppliers may not have the 

training and expertise required for 

repairs. One commenter asked how the 

repair proposal might be affected by the 

DRA provisions that impose new 

requirements regarding capped rental 

items, oxygen, and oxygen equipment. 

Another commenter recommended 

that repairs should be treated as a 

separate bid on the RFB, rather than as 

a cost of furnishing an item in an overall 

product category. 

Response: After consideration of the 

commenters’ concerns, we are revising 

our proposal on payment for repairs and 

replacement of beneficiary-owned 

items. We will not require that repairs 

of beneficiary-owned competitively bid 

items be performed by contract 

suppliers because we recognize that 

contract suppliers may not have the 

training and expertise to repair every 

make and model of equipment that 

could be provided to a Medicare 

beneficiary. This policy will also apply 

to maintenance services required by the 

DRA. We will pay for maintenance and 

servicing of competitively bid items, 

including replacement parts that may be 

needed, that are performed by any 

supplier as long as those repairs are 

made by suppliers that have a valid 

Medicare billing number that enables 

them to receive payment for covered 

Medicare services (§ 414.408(k)). 

Payment will generally be made for 

parts and labor consistent with the 

methodology we currently use to make 

these payments, which can be found in 

42 CFR 414.210(e)(1) of our regulations 

for durable medical equipment, and 

prosthetic and orthotic devices. 

However, if the part needed to repair the 

item is itself a competitively bid item 

for the CBA in which the beneficiary 

maintains a permanent residence, we 

will pay the supplier the single payment 

amount for the part because we do not 

believe that the payment amount for the 

part should be different from what it 

would otherwise be in the CBA solely 

because the part is furnished by a 

supplier that is not a contract supplier. 

For example, if a beneficiary needs to 

obtain a new battery for his or her 

wheelchair, and the battery is itself a 

competitively bid item for the 

applicable CBA, we will pay the 

supplier that performs the repair the 

reasonable and necessary charges for the 

labor needed to service the wheelchair 

and the single payment amount for the 

battery. We believe that allowing any 

supplier to furnish a part when 

performing a repair, even though the 

part is itself a competitively bid item, is 

a reasonable accommodation that will 

enable the supplier to complete the 

repair properly, and an appropriate 

circumstance under which we can make 

payment to the supplier under our 

authority in section 1862(a)(17) of the 

Act. 

In addition, under final 

§ 414.408(k)(2) to be consistent with our 

current maintenance and servicing rules 

for oxygen equipment, we will make 

general maintenance and servicing 

payments to suppliers that service 

oxygen equipment (other than liquid 

and gaseous equipment) in accordance 

with § 414.210(e)(2) and an additional 

payment to a supplier that picks up and 

stores or disposes of beneficiary-owned 

oxygen tanks or cylinders that are no 

longer medically necessary, as provided 

under § 414.210(e)(3). 

We note that we do not have authority 

under § 1847(a)(2) to include splints in 

the Medicare DMEPOS Competitive 

Bidding Program. 

Comment: Numerous commenters 

raised concerns regarding the 

requirement that replacement of 

beneficiary-owned equipment that is 

subject to the Medicare DMEPOS 

Competitive Bidding Program must be 

furnished by a contract supplier. The 

commenters suggested that CMS allow 

contract suppliers to replace items even 

if they do not ordinarily furnish these 

items. The commenters believed that 

implementing the replacement 


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provision may be difficult as a 

replacement may relate to a warranty 

claim or require that the same product 

be furnished to ensure continuity of 

care. The commenters also noted that, 

under the proposed provision, contract 

suppliers would be required to replace 

products that have been damaged 

despite the fact that they did not sell the 

item initially. The commenters asserted 

that if a beneficiary purchased a product 

from a noncontract supplier prior to 

competitive bidding, the noncontract 

supplier should be responsible for 

repairs or replacement and be paid 

accordingly. The commenters also 

stressed that payment rates should be 

generous enough to ensure that 

beneficiaries receive an appropriate 

level of response or service, and 

contract suppliers should be reimbursed 

for the service and replacement items 

they provide. The commenters remarked 

that the proposed rule assumes that 

replacement equipment will be 

provided and paid for in an amount 

equal to the single payment amount. 

Several commenters suggested that CMS 

eliminate the requirement that 

beneficiary-owned equipment subject to 

competitive bidding must be replaced 

by a contract supplier. Other 

commenters requested that CMS revise 

proposed § 414.422(c) to limit the scope 

of this requirement so that contract 

suppliers that are FDA-approved 

manufacturers and that only furnish 

their own products to beneficiaries in 

the CBA are exempt and would only be 

required to replace their own products. 

One commenter asked how the 

replacement proposal might be affected 

by DRA provisions that imposed new 

requirements regarding capped rental 

items, oxygen, and oxygen equipment. 

Response: As we stated above, we 

have decided to modify our proposal 

regarding the maintenance and servicing 

of beneficiary-owned items to allow any 

supplier to perform this service, 

provided that the supplier has a valid 

Medicare billing number. However, we 

do not believe that this modification 

should extend to situations where an 

item must be replaced in its entirety 

because the concern expressed by the 

commenters, namely that suppliers 

cannot be expected to have the expertise 

to repair every make and model of 

equipment, would not be a factor in the 

event that an item must be replaced. 

Accordingly, we continue to believe that 

beneficiaries should be required to 

obtain a replacement of an entire item, 

as apposed to replacement of a part for 

repair purposes, from a contract 

supplier. As we stated in the May 1, 

2006 proposed rule (71 FR 25681), this 

rule will help ensure that beneficiaries 

obtain replacement items from qualified 

suppliers, and it is consistent with one 

of the competitive bidding program’s 

goals, that is, to direct business to 

contract suppliers that conduct business 

in a manner that is beneficial for the 

Medicare program and for beneficiaries. 

Therefore, in final § 414.408(k)(3) we 

have retained this requirement. 

Medicare regulations at 42 CFR 

414.210(f) provide that if an item of 

DME or a prosthetic or orthotic device 

paid for by Medicare has been in 

continuous use by the patient for the 

equipment’s reasonable useful lifetime 

or if the carrier determines that the item 

is lost, stolen, or irreparably damaged, 

the patient may elect to obtain a new 

piece of equipment. If these 

requirements are met, the Medicare 

beneficiary would be required to go to 

a contract supplier to obtain a complete 

replacement of beneficiary-owned 

equipment. However, as we stated 

above, if a beneficiary needs to obtain a 

replacement part for his or her 

beneficiary-owned equipment, or needs 

to obtain maintenance or servicing of 

the equipment, the beneficiary may 

obtain the part or service from any 

supplier that has a valid Medicare 

billing number. If the replacement part 

is itself a competitively bid item in the 

CBA where the beneficiary maintains a 

permanent residence, the supplier that 

performs the repair would generally be 

paid for the labor associated with the 

repair in accordance with the 

methodology described in 

§ 414.210(e)(1), and the single payment 

amount for the part. 

We do not agree with the commenters 

that our replacement rules would 

generally require a contract supplier 

replace an entire competitively bid item 

with the same make or model to ensure 

continuity of care. Rather, as we discuss 

in § 414.420 of this final rule, this 

would only be required if a physician or 

treating practitioner prescribed a 

particular brand or mode of delivery for 

an item. If a beneficiary needs a 

replacement item, a manufacturer that 

only furnishes its own brand would 

generally be able to furnish that brand 

to the beneficiary. In addition, we 

expect that a manufacturer’s warranty 

would be honored by the manufacturer, 

regardless of which supplier from which 

the Medicare beneficiary obtains the 

replacement. 

In summary, after consideration of the 

public comments we received, in this 

final rule, we are redesignating 

proposed § 414.422(c) as new 

§ 414.408(k) and revising this section as 

discussed above. 

E. Competitive Bidding Areas 

(§§ 414.402, 414.406(b)–(c), 414.410, 

414.412(f) and (g) 

1. Background 

Section 1847(a)(1)(A) of the Act 

requires that competitive bidding 

programs be established and 

implemented in areas throughout the 

United States. We are interpreting the 

term ‘‘United States’’ to include all 

States, Territories, and, as discussed in 

section VI.B. of this final rule, the 

District of Columbia. Section 

1847(a)(1)(B) of the Act provides us 

with the authority to phase in 

competitive bidding programs so that 

the competition under the programs 

occurs in—

• 10 of the largest MSAs in CY 2007; 

• 80 of the largest MSAs in CY 2009; 

and 

• Additional areas after CY 2009. 

We proposed to implement this 

statutory provision in § 414.406(b)–(c), 

and in § 414.410. 

Section 1847(a)(1)(B) of the Act also 

authorizes us to phase in competitive 

bidding programs first among the 

highest cost and volume items or those 

items that we determine have the largest 

savings potential. As we proposed, we 

describe our methodologies for selecting 

the MSAs for CYs 2007 and 2009 below. 

Once the MSAs have been selected for 

CYs 2007 and 2009, we proposed to 

define the CBAs for CYs 2007 and 2009. 

The process we proposed for 

establishing CBAs in future years, 

which we are finalizing in this final 

rule, is also discussed below. 

2. Methodology for MSA Selection for 

CYs 2007 and 2009 Competitive Bidding 

Programs (§§ 414.410(a) and (b)) 

Based on sections 1847(a)(1)(B)(i)(I) 

and (II) of the Act, we have the authority 

to select from among the largest MSAs 

during the first two implementation 

phases in order to phase in the programs 

in the most successful way, thereby 

achieving the greatest savings while 

maintaining quality and beneficiary 

access to care. In phasing in the 

competitive bidding programs, we 

proposed to adopt a definition of the 

term ‘‘Metropolitan Statistical Area’’

(MSA) consistent with that issued by 

the Office of Management and Budget 

(OMB) and applicable for CYs 2007 and 

2009 (§ 414.402). OMB is the Federal 

agency responsible for establishing the 

standards for defining MSAs for the 

purpose of providing nationally 

consistent definitions for collecting, 

tabulating, and publishing Federal 

statistics for a set of geographic areas. 

OMB most recently revised its standards 

for defining MSAs in CY 2000 (65 FR 


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82228 through 82238). Under these 

standards, an MSA is defined as a corebased statistical area (CBSA) (a 

statistical geographic area consisting of 

the county or counties associated with 

at least one core (urbanized area or 

urban cluster) of at least 10,000 

population, plus adjacent counties 

having a high degree of social and 

economic integration as measured 

through commuting ties with the 

counties containing the core) associated 

with at least one urbanized area that has 

a population of at least 50,000, and is 

comprised of the central county or 

counties containing the core, plus 

adjacent outlying counties having a high 

degree of social and economic 

integration with the central county as 

measured through commuting. OMB 

issues periodic updates of the MSAs 

between decennial censuses based on 

United States Census Bureau estimates, 

but other than identifying certain MSAs 

having a population core of at least 2.5 

million, does not rank MSAs based on 

population size. However, the U.S. 

Census Bureau periodically publishes a 

Statistical Abstract of the United States, 

which contains a table listing large 

MSAs, or MSAs having a population of 

250,000 and over. For the purpose of 

this rule, we proposed to use these data 

to identify the largest MSAs. 

In the May 1, 2006 proposed rule (71 

FR 25665), we proposed a formula 

driven methodology for selecting the 

MSAs for competitive bidding in CYs 

2007 and 2009. After we select the 

MSAs, we would define the CBAs. For 

the purpose of our proposal, DMEPOS 

allowed charges would be the Medicare 

fee-for-service (FFS) allowed charge 

data for DMEPOS items that we have 

authority to include in a competitive 

bidding program. These data do not 

include Medicare expenditures for 

DMEPOS items under the Medicare 

Advantage Program. 

a. MSAs for CY 2007 

We proposed to use a multiple step 

process in selecting the MSAs for CY 

2007. First, we proposed to identify the 

50 largest MSAs in terms of total 

population in CY 2005 using population 

estimates published by the U.S. Census 

Bureau in its table of large MSAs from 

the Statistical Abstract of the United 

States. Second, 25 MSAs out of the 50 

MSAs identified in step one would be 

eliminated from consideration based on 

our determination that they have the 

lowest totals of DMEPOS allowed 

charges for items furnished in CY 2004. 

This step would allow us to focus on the 

25 MSAs that have the highest totals of 

DMEPOS allowed charges which, we 

believe, would produce a greater chance 

of savings as a result of competitive 

bidding than MSAs with lower total 

DMEPOS allowed charges. Table 1 of 

the proposed rule (71 FR 25665 and 

25666), which is republished below, 

illustrated the DMEPOS allowed charge 

data for items furnished in CY 2003 and 

Census Bureau population estimates as 

of July 1, 2003. 

TABLE 1.—TOP 25 MSAS BASED ON TOTAL DMEPOS MEDICARE ALLOWED CHARGES FOR CY 2003 

MSA Allowed charges 

New York-Northern New Jersey-Long Island, NY-NJ-PA (New York) ............................................................................................ $312,124,291 

Los Angeles-Long Beach-Santa Ana, CA (Los Angeles) ............................................................................................................... 253,382,483 

Miami-Fort Lauderdale-Miami Beach, FL (Miami) ........................................................................................................................... 221,660,443 

Chicago-Naperville-Joliet, IL-IN-WI (Chicago) ................................................................................................................................. 173,922,952 

Houston-Baytown-Sugar Land, TX (Houston) ................................................................................................................................. 149,060,607 

Dallas-Fort Worth-Arlington, TX (Dallas) ......................................................................................................................................... 139,910,862 

Detroit-Warren-Livonia, MI (Detroit) ................................................................................................................................................ 121,444,298 

San Juan, PR .................................................................................................................................................................................. 108,478,208 

Philadelphia-Camden-Wilmington, PA-NJ-DE-MD (Philadelphia) ................................................................................................... 97,487,063 

Atlanta-Sandy Springs-Marietta, GA (Atlanta) ................................................................................................................................. 75,860,276 

Tampa-St. Petersburg-Clearwater, FL (Tampa) .............................................................................................................................. 71,309,635 

Boston-Cambridge-Quincy, MA-NH (Boston) .................................................................................................................................. 62,467,094 

Washington-Arlington-Alexandria, DC-VA-MD-WV (DC) ................................................................................................................ 61,416,109 

Baltimore-Towson, MD (Baltimore) ................................................................................................................................................. 59,714,310 

Pittsburgh, PA .................................................................................................................................................................................. 56,612,095 

St. Louis, MO-IL ............................................................................................................................................................................... 55,931,373 

Riverside-San Bernardino-Ontario, CA (Riverside) ......................................................................................................................... 52,910,209 

Cleveland-Elyria-Mentor, OH (Cleveland) ....................................................................................................................................... 52,237,312 

Orlando, FL ...................................................................................................................................................................................... 51,982,164 

San Francisco-Oakland-Fremont, CA (San Francisco) ................................................................................................................... 45,565,320 

San Antonio, TX .............................................................................................................................................................................. 44,113,886 

Cincinnati-Middletown, OH-KY-IN (Cincinnati) ................................................................................................................................ 41,582,961 

Kansas City, MO-KS ........................................................................................................................................................................ 41,310,326 

Virginia Beach-Norfolk-Newport News, VA-NC (Virginia Beach) .................................................................................................... 41,016,726 

Charlotte-Gastonia-Concord, NC-SC (Charlotte) ............................................................................................................................ 37,874,144 

Table 1 showed the 25 MSAs that 

would be left for consideration after step 

two is completed. However, we 

proposed to select the actual MSAs for 

CY 2007 using U.S. Census Bureau 

population data published as of July 1, 

2005, and DMEPOS allowed charge data 

for items furnished in CY 2004. We 

proposed using population data for CY 

2005 and DMEPOS allowed charge data 

for CY 2004 because we believed these 

data would be the most recently 

available data at the time that the MSAs 

are selected for CY 2007 

implementation. We now have more 

current utilization data (that is, from CY 

2005); we will use these data in 

selecting the MSAs for the first round of 

competitive bidding. 

Third, we proposed to score the MSAs 

based on combined rankings of 

DMEPOS allowed charges per FFS 

beneficiary (charges per beneficiary) and 

the number of DMEPOS suppliers per 

number of beneficiaries receiving 

DMEPOS items (suppliers per 

beneficiary) in CY 2004, with equal 

weight (50 percent) being given to each 

factor. The MSAs would be ranked from 

1 to 25 in terms of DMEPOS allowed 

charges per FFS beneficiary (for 

example, the MSA with the highest 

DMEPOS allowed charges per FFS 

beneficiary would be ranked number 1). 

Similarly, areas having more suppliers 

per beneficiary are more likely to be 


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competitive and would be ranked higher 

than MSAs having fewer suppliers per 

beneficiary. Based on our experience 

from the DMEPOS competitive bidding 

demonstrations, the number of suppliers 

would be based on suppliers with at 

least $10,000 in allowed charges 

attributed to them for DMEPOS items 

furnished in the MSA in CY 2004. The 

number of beneficiaries would be based 

on the number of beneficiaries receiving 

DMEPOS items in the MSA in CY 2004. 

If more than one MSA receives the same 

score, we proposed to use total 

DMEPOS allowed charges for items that 

we have authority to include in a 

competitive bidding program in each 

MSA as the tiebreaker because this 

would be an indicator of where more 

program funds would be spent on 

DMEPOS items subject to competitive 

bidding. Table 2 in the proposed rule 

(71 FR 25666), which is republished 

below, illustrated how the 25 MSAs 

from Table 1 in the proposed rule would 

be scored, based on data for CY 2003. 

TABLE 2.—SCORING OF TOP 25 MSAS BASED ON DATA FOR CY 2003 

[Scoring based on combined rank from columns 3 and 4] 

MSA Score Charges per 

beneficiary 

Suppliers per 

beneficiary Allowed charges 

Miami ............................................................................................................... 3 $428.44 (1) 0.01121 (2) $221,660,443 

Houston ............................................................................................................ 6 348.83 (2) 0.00864 (4) 149,060,607 

Dallas ............................................................................................................... 8 297.33 (3) 0.00749 (5) 139,910,862 

Riverside .......................................................................................................... 9 220.93 (8) 0.01144 (1) 52,910,209 

San Antonio ..................................................................................................... 9 243.03 (6) 0.00897 (3) 44,113,886 

Los Angeles ..................................................................................................... 11 277.16 (5) 0.00692 (6) 253,382,483 

Charlotte .......................................................................................................... 14 226.09 (7) 0.00661 (7) 37,874,144 

Orlando ............................................................................................................ 18 212.57 (9) 0.00569 (9) 51,982,164 

San Juan .......................................................................................................... 25 291.97 (4) 0.00388 (21) 108,478,208 

Atlanta .............................................................................................................. 25 185.80 (15) 0.00569 (10) 75,860,276 

Tampa .............................................................................................................. 25 190.30 (13) 0.00529 (12) 71,309,635 

Kansas City ...................................................................................................... 25 186.39 (14) 0.00555 (11) 41,310,326 

Pittsburgh ......................................................................................................... 26 197.95 (11) 0.00484 (15) 56,612,095 

Virginia Beach .................................................................................................. 26 207.28 (10) 0.00477 (16) 41,016,726 

St. Louis ........................................................................................................... 32 169.81 (18) 0.00488 (14) 55,931,373 

San Francisco .................................................................................................. 32 127.56 (24) 0.00632 (8) 45,565,320 

Cincinnati ......................................................................................................... 32 167.06 (19) 0.00528 (13) 41,582,961 

Cleveland ......................................................................................................... 33 182.01 (16) 0.00470 (17) 52,237,312 

Detroit .............................................................................................................. 37 195.99 (12) 0.00290 (25) 121,444,298 

Baltimore .......................................................................................................... 37 174.38 (17) 0.00396 (20) 59,714,310 

Philadelphia ..................................................................................................... 40 152.38 (21) 0.00443 (19) 97,487,063 

DC .................................................................................................................... 41 128.97 (23) 0.00449 (18) 61,416,109 

Chicago ............................................................................................................ 44 160.26 (20) 0.00327 (24) 173,922,952 

New York ......................................................................................................... 45 139.81 (22) 0.00342 (23) 312,124,291 

Boston .............................................................................................................. 47 113.99 (25) 0.00371 (22) 62,467,094 

We proposed that the final scoring be 

based on utilization data for CY 2004 

and population data for CY 2005 

because we believed these data would 

be the most recently available data at 

the time that the MSAs are selected for 

CY 2007 implementation. However, we 

will use utilization data for CY 2005 

when we perform the final scoring for 

the third step because this is the most 

current utilization data that we have. 

For purposes of phasing in the 

programs, we proposed to exclude from 

consideration for competitive bidding 

until CY 2009 the three largest MSAs in 

terms of population, as well as any MSA 

that is geographically located in an area 

served by two DME MACs. The three 

largest MSAs based on total population 

(based on CY 2003 data) are New York, 

Los Angeles, and Chicago. We believe 

that these MSAs should not be phased 

in until CY 2009 because of the logistics 

associated with the start-up of this new 

and complex program. As of 2000, each 

of these three MSAs had a total 

population of over 9 million. By 

comparison, the largest area in which 

the demonstrations were conducted was 

San Antonio (total population of 1.7 

million in 2000). We want to gain 

experience with the competitive bidding 

process in MSAs larger than San 

Antonio before moving onto the three 

largest MSAs. After we have gained 

experience operating competitive 

bidding programs in CBAs that 

encompass smaller MSAs in CYs 2007 

and 2008, we plan to implement 

programs that include New York, Los 

Angeles, and Chicago in CY 2009. 

In the May 1, 2006 proposed rule, we 

indicated that we were considering an 

alternative under which we would 

establish CBAs that include portions of 

one or more of these MSAs (for 

example, by county). We believe that 

this alternative is authorized by section 

1847(a)(1)(B)(II) of the Act, which states 

that competition under the programs 

shall occur in 80 of the largest MSAs in 

CY 2009 but does not require the 

competition to occur in the entire MSA. 

In addition, section 1847 of the Act does 

not prohibit us from implementing a 

competitive bidding program in an area 

that is larger than a MSA. In the 

proposed rule, we solicited specific 

comments on these alternatives. 

Comment: Several commenters stated 

that CMS does not have the authority to 

extend or decrease the size of the MSA 

boundaries and that this proposal is 

inconsistent with the statute. They 

noted that section 1847(a)(1)(B) of the 

Act requires that competitive 

acquisition occur in MSAs in CY 2007 

and CY 2009, and only authorizes 

competitive acquisition in ‘‘other areas’’

after CY 2009. 

Response: Section 1847(a)(1)(B) of the 

Act requires that competition under the 

programs occur in CY 2007 and CY 2009 

in a minimum number of MSAs. We did 

not propose to extend or decrease any 

MSA boundaries. Rather, we stated that 

section 1847(a)(1)(B) of the Act does not 

require us to define the boundaries of a 

CBA congruently with the boundaries of 

an MSA, as long as 10 MSAs are 

involved in CY 2007 and 80 MSAs are 

involved in CY 2009. We also proposed 

to consider an area for inclusion in a 

CBA in CY 2007 or CY 2009, or both, 


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if (1) The area is not part of the MSA 

but adjoins an MSA in which a 

competitive bidding program will be 

operating; (2) the area is competitive 

(meaning that it has high DMEPOS 

utilization, significant expenditures, 

and/or a large number of suppliers that 

furnish items that will be included in 

the competitive bidding program for the 

adjoining MSA); and (3) the area is part 

of the normal service area or market for 

suppliers that also serve the MSA 

market or areas within the boundaries 

for an MSA in which a competitive 

bidding program will be operating. We 

continue to believe this approach is 

reasonable because if an area meets 

these criteria, we believe that we could 

properly characterize the area as being 

integrated with the MSA in terms of the 

DMEPOS market. 

Comment: One commenter 

recommended that, when picking the 

first 10 MSAs, CMS should pick the 

smallest of the 10 largest MSAs. 

Response: Section 1847(a)(1)(B) of the 

Act requires us to phase-in the 

competitive bidding programs so that 

the competition occurs in 10 of the 

largest MSAs in 2007. The process that 

we proposed and are finalizing in this 

final rule is a formula driven approach 

that bases the decision on the total 

population of an MSA, the Medicare 

allowed charges for DMEPOS items per 

FFS beneficiary in an MSA, the total 

number of DMEPOS suppliers per FFS 

beneficiary who received DMEPOS 

items in an MSA, and the MSA’s 

geographic location, for example, in the 

first round, to ensure that there is at 

least one CBA in each DME MAC 

region. We believe that this approach 

will result in the selection of MSAs that 

have more potential to produce savings 

for the Medicare program than we might 

otherwise achieve if we selected MSAs 

based on their size alone. However, we 

also recognize that implementing the 

Medicare DMEPOS Competitive Bidding 

Program will involve many challenges, 

and we want to gain sufficient 

experience in administering the 

program before we implement 

competitive bidding programs in the 

three largest MSAs in terms of 

population size. Therefore, we proposed 

to exclude the MSAs that include New 

York City, Los Angeles, and Chicago 

from the competition that will occur in 

CY 2007. 

Comment: One commenter 

recommended excluding Miami from 

the first round of bidding. The 

commenter noted that Miami has the 

largest MSA market based charges per 

beneficiary, suppliers per beneficiary, 

and total DMEPOS allowed charges. The 

commenter stated that there is a big 

difference between the Medicare 

DMEPOS market in an MSA and the 

total population of an MSA. The 

commenter also recommended that CMS 

exclude, until CY 2009, or once further 

experience has been accumulated and 

cultural competency has been 

accounted for, culturally diverse MSAs 

such as Miami and those located in 

Puerto Rico from competitive bidding. A 

number of other commenters also 

recommended excluding MSAs located 

in Puerto Rico. 

Response: We believe our 

methodology results in the selection of 

top priority areas in terms of potential 

savings for the program. Cultural 

diversity is not one of the factors we 

considered when developing a formula 

driven approach because our goal in 

implementing the program is to select 

areas that provide the greatest 

opportunity for savings. 

We proposed not to include CBAs that 

cross DME MAC regions because this 

could complicate implementation by 

having two DME MACs processing 

claims from one CBA. 

The next step that we proposed 

entails ensuring that there is at least one 

CBA in each DME MAC region by first 

selecting the highest scoring MSA in 

each DME MAC region (other than New 

York, Los Angeles, Chicago, or MSAs 

that cross DME MAC boundaries). This 

would ensure that each DME MAC gains 

some experience with competitive 

bidding prior to CY 2009, when 

competitive bidding would be 

implemented in CBAs that include 80 

MSAs. 

Comment: One commenter 

recommended that one MSA be selected 

from each DME MAC region for CY 

2007. 

Response: Section 1847(a)(1)(B) 

requires us to implement competitive 

bidding in 10 of the largest MSAs in CY 

2007. We are adopting as final the 

approach outlined in our proposed rule 

(71 FR 25667) which ensures that there 

is a least one CBA in each DME MAC 

region. This would ensure that each 

DME MAC region gains experience with 

the competitive bidding program prior 

to CY 2009 when we phase in 70 

additional CBAs. 

We also proposed to select no more 

than two MSAs per State among the 

initial CBAs selected for CY 2007 in 

order to learn how competitive bidding 

works in more States and regions of the 

country. In summary, we proposed to 

select the 10 MSAs in which 

competition under the programs would 

occur in CY 2007 using the following 

steps: 

• Identify the top 50 MSAs in terms 

of general population. 

• Focus on the 25 MSAs from step 

one with the greatest total of DMEPOS 

allowed charges. 

• Score the MSAs from step two 

based on combined rankings of 

DMEPOS allowed charges per 

beneficiary and suppliers per 

beneficiary, with lower scores 

indicating a greater potential for savings 

if programs are implemented in those 

areas. 

• Exclude the three largest MSAs in 

terms of population (New York, Los 

Angeles, Chicago) and any MSA that 

crosses DME MAC boundaries. 

• Select the lowest scoring MSA from 

each DME MAC region. 

• Select the next six lowest scoring 

MSAs regardless of DME MAC region, 

but not more than two MSAs from one 

State. 

• Break ties in scores using DMEPOS 

allowed charges, selecting MSAs with 

higher total DMEPOS allowed charges. 

In the proposed rule, we indicated 

that we considered a number of 

alternative methods for selecting the 

MSAs for CY 2007. We indicated that 

the MSAs could be selected based on a 

combination of one or more variables or 

measures including, but not limited to—

• General population; 

• Medicare FFS beneficiary 

population; 

• Number of beneficiaries receiving 

DMEPOS items that we have authority 

to include in a competitive bidding 

program; 

• Total Medicare allowed charges for 

DMEPOS items subject to competitive 

bidding; and 

• Number of suppliers of DMEPOS 

items that we have authority to include 

in a competitive bidding program. 

In evaluating these alternatives, we 

defined the general population as all 

individuals residing in an MSA, 

whether or not they were enrolled in 

Medicare. One advantage of this 

variable would have been that total 

population is a widely accepted 

measure of gauging MSA size and the 

data are readily accessible to the general 

public through the U.S. Census Bureau 

Web site. Another advantage of using 

this variable would be that total 

population takes into account the 

demand for DMEPOS items and other 

supplies from population groups other 

than the Medicare population. DMEPOS 

demand from non-Medicare individuals 

might make it less likely that a supplier 

not selected as a contract supplier 

would exit the market. This could help 

increase the likelihood of competition 

in future rounds of competitive bidding 

within that MSA. However, we 

recognize that the MSAs with the largest 

total populations might not have the 


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most Medicare beneficiaries or the 

greatest potential for savings. One 

reason is that the age distribution is not 

uniform across MSAs. MSAs located in 

States that have either large immigrant 

populations or have experienced rapid 

recent growth often have younger than 

average age profiles. Another reason is 

that DMEPOS utilization and potential 

profits are not uniform across MSAs. It 

is quite possible that some of the 

smaller population MSAs may have a 

greater potential for savings than MSAs 

with much larger populations. We 

believe that the disadvantages of 

selecting MSAs based on general 

population are greater than the 

advantages of using this method and, 

therefore, did not propose using general 

population as the sole variable in 

selecting the MSAs for CY 2007. 

An advantage of selecting MSAs 

based on the Medicare FFS population 

would have been that this population 

represents the number of individuals 

who could potentially be affected by 

competitive bidding. A disadvantage of 

selecting MSAs based solely on this 

variable is that it does not reflect actual 

DMEPOS utilization. Therefore, we did 

not propose using the FFS population as 

the sole variable in selecting the MSAs 

for CY 2007. Per capita DMEPOS 

utilization rates vary across MSAs. As a 

result, MSAs with fewer Medicare 

beneficiaries could have a greater 

potential for savings from competitive 

bidding. The advantage of using the 

number of Medicare beneficiaries 

receiving DMEPOS items to select the 

MSAs is that MSAs would be selected 

based on the number of individual 

beneficiaries who are most likely to be 

directly affected by competitive bidding 

because they already have a need for 

these items. A disadvantage of this 

variable is that the number of specific 

beneficiaries receiving DMEPOS items 

is only a static measure. The number of 

beneficiaries who would be receiving 

DMEPOS products in the future could 

be substantially different from the 

current number. Treatment patterns 

within the MSA could change or the 

number of beneficiaries receiving 

DMEPOS items could fluctuate if 

beneficiaries switch from FFS benefits 

to a Medicare Advantage plan. For these 

reasons, we did not propose using the 

number of beneficiaries receiving 

DMEPOS items as the sole variable in 

selecting the MSAs for CY 2007. 

Selecting the MSAs using the steps 

we proposed utilizes a variety of 

variables that we believe would help us 

predict which MSAs will offer the 

largest savings potential under a 

competitive bidding program. In step 2 

above, we would focus on a subset of 

large MSAs with higher allowed charges 

for DMEPOS items, which is consistent 

with section 1847(a)(1)(B)(ii) of the Act 

and which would allow us to phase in 

the Medicare DMEPOS Competitive 

Bidding Program first for those items 

that have the highest cost and highest 

volume, or those items that have the 

largest savings potential. This step 

would directly address the question of 

which MSAs have the highest costs. In 

step 3 above, we proposed to use 

allowed DMEPOS charges per 

beneficiary and the number of suppliers 

per beneficiary to further measure the 

savings potential for each MSA. 

Allowed DMEPOS charges per 

beneficiary is a measure of per capita 

DMEPOS utilization in terms of the 

overall DMEPOS cost per beneficiary. 

We believe that areas with higher 

utilization rates and costs would have a 

greater potential for savings under the 

programs, which will rely on 

competition among suppliers to lower 

costs in the area. Competition among 

suppliers is necessary for competitive 

bidding to be successful. Without 

sufficient competition among suppliers, 

suppliers have little incentive to submit 

low bids in response to the RFBs for 

DMEPOS products. In addition, we 

believe that competition for market 

share among winning suppliers will act 

as a market force to maintain a high 

level of quality products. The number of 

suppliers per beneficiary is a direct 

measure of how many suppliers are 

competing for each beneficiary’s 

business. We expect that the higher the 

number of suppliers per beneficiary, the 

higher the degree of competition will be. 

In the proposed rule, we invited 

specific comments about the selection 

method for the original 10 MSAs in CY 

2007. We welcomed recommendations 

of other options and criteria for 

consideration. We indicated that, after 

further consideration of comments 

received, in the final rule, we may adopt 

other criteria regarding issues described 

above or other criteria and options 

brought to our attention through the 

comment process. 

Comment: Several commenters 

recommended that CMS identify the 

initial 10 MSAs in the final regulation. 

Response: We plan to announce the 

first 10 MSAs, which will be based on 

10 of the largest MSAs, at the same time 

we publish this final rule. 

Comment: Several commenters 

recommended that CMS stagger the 

implementation of the initial 10 MSAs 

to identify and correct problems 

encountered early in the 

implementation process. 

Response: Section 1847(a)(1)(B)(i)(I) 

of the Act requires that the competition 

take place in 10 of the largest MSAs in 

CY 2007. In implementing competitive 

bidding programs in 10 CBAs that 

include these MSAs, we do not believe 

it is necessary or practical to use the 

staggered approach recommended by 

the commenters, as we believe that this 

would likely result in confusion for 

beneficiaries and suppliers and make 

the phase-in process too 

administratively complicated. 

Comment: Several commenters 

suggested that CMS use an area 

selection methodology that initially 

results in a limited number of small 

CBAs. The commenters also stated that 

this is an experimental program. They 

noted that there is little geographic 

diversity in the CBAs identified in Table 

2 of the proposed rule (republished as 

Table 2 in this final rule), and that based 

on this table, the CBAs would be 

disproportionately concentrated in DME 

MAC Region C. The commenters 

suggested that the geographic diversity 

should be expanded to provide more 

useful information that CMS can 

consider when implementing the 

program in more areas in the future. 

Response: We believe that our 

proposed methodology for selecting 

MSAs will result in the selection of the 

most appropriate MSAs (and therefore 

CBAs) in terms of achieving one of the 

most critical goals of the program to 

reduce Medicare expenditures for 

DMEPOS. As we explained above, 

several aspects of our methodology, 

including in the first round of 

competitive bidding selecting at least 

one MSA in each DME MAC region, and 

selecting not more than two MSAs per 

State, allow for geographic diversity. 

b. MSAs for CY 2009 

In selecting the 70 additional MSAs in 

which competition will occur in CY 

2009, we proposed using generally the 

same criteria used to select the MSAs 

for CY 2007 (proposed § 414.410(b)). 

Because the number of MSAs in which 

competition must occur in CY 2009 is 

much higher than the number for CY 

2007, we proposed that the steps in the 

selection process would change as 

follows: 

• We would score all of the MSAs 

included in the table of large MSAs in 

the most recent publication of the U.S. 

Census Bureau’s Statistical Abstract of 

the United States. 

• We would use the same criteria to 

score the MSAs as we would use in 

selecting the MSAs for CY 2007, but use 

data from CY 2006. 

In the proposed rule, we indicated 

that one option we were considering 

and on which we requested comments 

is whether we should modify the 


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ranking of MSAs based on allowed 

DMEPOS charges per beneficiary so that 

it focuses on charges in each MSA for 

the items that experienced the largest 

payment reductions or savings under 

the initial round of competitive bidding 

in CY 2007. 

In selecting the MSAs for CY 2009, we 

did not propose excluding the 3 largest 

MSAs in terms of population size or 

MSAs that cross DME MAC boundaries 

from the 80 largest MSAs to be included 

in the CBAs. In addition, we did not 

propose limiting the number of MSAs 

that could be selected from any one 

State. 

Comment: One commenter suggested 

that New York, Los Angeles, and 

Chicago be top priorities in the CY 2009 

phase of implementation due to the 

potential for significant cost savings to 

the Medicare program. 

Response: These MSAs are only being 

excluded from consideration during the 

first phase of competitive bidding and 

will be included in the selection 

methodology for the second phase. 

After consideration of the public 

comments we received, we are 

finalizing our rules under proposed 

§§ 414.410(a) and (b) regarding the 

methodology for MSA selection with 

only technical changes. 

3. Establishing Competitive Bidding 

Areas and Exemption of Rural Areas 

and Areas With Low Population Density 

Within Urban Areas (§ 414.410(c)) 

Section 1847(a)(1) of the Act requires 

that we phase in competitive bidding 

programs and establish CBAs 

throughout the United States over 

several years beginning in CY 2007. 

Section 1847(a)(3)(A) of the Act gives us 

the authority to exempt ‘‘rural areas and 

areas with low population density 

within urban areas that are not 

competitive, unless there is a significant 

national market through mail order for 

a particular item or service.’’

In the May 1, 2006 proposed rule, we 

proposed to use the authority in section 

1847(a)(3) of the Act to exempt areas 

from competitive bidding if data for the 

areas indicate that they are not 

competitive based on one or more of the 

following indicators: 

• Low utilization of items in terms of 

the number of items and/or allowed 

charges for DMEPOS in the area relative 

to other similar geographic areas. 

• Low number of suppliers of 

DMEPOS items subject to competitive 

bidding serving the area relative to other 

similar geographic areas. 

• Low number of Medicare 

beneficiaries receiving FFS benefits in 

the area relative to other similar 

geographic areas. 

We proposed to make decisions 

regarding what constitutes low 

(noncompetitive) levels of utilization, 

suppliers, and beneficiaries on the basis 

of our analysis of the data for allowed 

charges, allowed services for items that 

may be subject to competitive bidding, 

and the number of Medicare 

beneficiaries receiving FFS benefits and 

DMEPOS suppliers in specific 

geographic areas. In defining urban and 

rural areas, we proposed to use the 

definitions currently in § 412.64(b)(1)(ii) 

of our regulations. We proposed to 

incorporate these provisions in 

proposed § 414.410(c). 

We invited comments on the 

methodologies we proposed for 

determining whether an area within an 

urban area that has a low population 

density is not competitive. We indicated 

that we would be reviewing the total 

allowed charges, the number of 

beneficiaries, and the number of 

suppliers to determine whether a rural 

area should be exempted from 

competitive bidding. In addition, we 

invited comments on standards for 

exempting particular rural areas from 

competitive bidding. 

Comment: Several commenters 

believed that competitive bidding 

should not be implemented in MSAs 

with less than 500,000 people. They 

indicated that this will help keep small 

business owners in rural communities 

open and, therefore, beneficiary access 

in these areas will not be compromised. 

Response: Section 1847(a)(1) of the 

Act requires that we establish 

competitive bidding programs 

throughout the United States. We have 

the authority under section 1847(a)(3) of 

the Act to exempt rural areas and areas 

with low population density within 

urban areas that are not competitive 

unless there is a significant mail order 

market for a particular item. When we 

implement the program, we will only 

include areas in CBAs that are 

competitive and that we believe will 

produce savings for the program. In 

addition, we have revised our rules 

regarding small suppliers in response to 

public comments and believe that the 

revised rules will help to ensure that 

small suppliers have an opportunity to 

participate in the Medicare DMEPOS 

Competitive Bidding Program. A full 

discussion of these modifications can be 

found in section XI. of this final rule. 

After consideration of the public 

comments we received, we are 

finalizing, with only technical changes, 

proposed § 414.410(c) regarding the 

exclusion of rural areas or areas with 

low population density from a CBA. 

4. Establishing Competitive Bidding 

Areas for CYs 2007 and 2009 

(§§ 414.406(b) and (c)) 

Section 1847(a)(1)(B) of the Act 

requires that the competition ‘‘occurs 

in’’ 10 of the largest MSAs in CY 2007, 

and in 80 of the largest MSAs in CY 

2009, but does not require us to define 

the competition boundaries 

concurrently with the MSA boundaries, 

as long as 10 MSAs are involved in CY 

2007 and 80 MSAs are involved in CY 

2009. Therefore, we do not believe that 

section 1847(a)(1)(B) of the Act 

prohibits us from extending individual 

competition areas beyond the MSA 

boundaries in CYs 2007 or 2009. 

In the May 1, 2006 proposed rule, we 

proposed in § 414.406(b) to designate 

through program instructions each CBA 

in which a competitive bidding program 

will take place, and we proposed in 

§ 414.406(c) that we could revise the 

CBAs if necessary. We also proposed (71 

FR 25668) that an area (for example, a 

county, parish, or zip code) outside the 

boundaries of an MSA be considered for 

inclusion in a CBA for CY 2007 or CY 

2009, or both if all of the following 

apply: 

• The area adjoins an MSA in which 

a competitive bidding program will be 

operating in CY 2007 or CY 2009. 

• The area is not part of an MSA in 

which a competitive bidding program 

will be operating in CY 2007 or CY 

2009. 

• The area is competitive, as 

explained below. 

• The area is part of the normal 

service area or market for suppliers that 

also serve the MSA market or areas 

within the boundaries of an MSA in 

which a competitive bidding program 

will be operating in CY 2007 or CY 

2009. 

As explained in section VI.E.2. of this 

final rule, we proposed to define an 

MSA as a Core Based Statistical Area 

associated with at least one urbanized 

area that has a population of at least 

50,000, and comprised of the central 

county or counties containing the core, 

plus adjacent outlying counties having a 

high degree of social and economic 

integration with the central county as 

measured through commuting. 

However, when using this definition to 

establish the boundaries of an MSA, 

OMB would not consider whether an 

area or areas adjoining an MSA are 

served by the same DMEPOS suppliers 

that furnish items to beneficiaries 

residing in the MSA. If an area has a 

high level of utilization, significant 

expenditures, and/or a large number of 

suppliers of DMEPOS items included in 

the competitive bidding program for the 


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adjoining MSA, we stated that we 

believe that it would be practical and 

beneficial to include this area in the 

CBA. The savings to the program 

associated with adding the area to the 

CBA would likely offset any 

incremental administrative costs 

incurred by the CBIC associated with 

including the area in the competitive 

bidding program for the MSA. 

Finally, we did not propose to 

consider counties that do not adjoin an 

MSA for inclusion in a CBA for CY 2007 

or CY 2009 because we believe that 

these outlying counties are too far 

removed from the areas that OMB has 

determined to be economically 

integrated. We stated that we have the 

discretion to define a CBA to be either 

concurrent with an MSA, larger than an 

MSA, or smaller than an MSA. We also 

stated that we would detail in the RFBs 

the exact boundaries of each CBA. We 

invited comments on the criteria to be 

used in considering whether to include 

counties outside MSAs in a CBA in CY 

2007 or CY 2009. 

Comment: Several commenters 

recommended that the maximum 

number of CBAs in a State should be 

one instead of two. They stated that the 

methodology should be changed to 

distribute the CBAs so that there are 

three areas in each of two of the DME 

MAC regions, and two in each of the 

remaining two DME MAC regions to 

ensure geographic distribution. 

Response: We believe that our 

proposed methodology for selecting 

MSAs and designating CBAs will not 

only produce large savings for the 

Medicare program, but that it will also 

ensure that the work involved with 

administering the program and 

processing claims is evenly distributed 

among our contractors. We also note 

that one of the factors we proposed to 

consider when selecting MSAs is their 

geographic location. 

Comment: Several commenters urged 

CMS to adopt CBAs that are somewhat 

smaller than the MSAs to help minimize 

the risk of a CBA crossing a state line 

or areas shared by more than one 

DMERC and to ensure adequate 

geographic distribution of suppliers 

within a CBA in order to maintain 

beneficiary access to competitively bid 

items. 

Response: We proposed to designate 

CBAs whose boundaries are concurrent 

with, larger than, or smaller than the 

associated MSA because we believe that 

it is practical and beneficial to 

implement competitive bidding 

programs in areas that are integrated in 

terms of DMEPOS utilization, 

expenditures, and suppliers. We believe 

that these factors, as well as the other 

factors that we proposed to consider 

when designating CBAs, will help 

ensure that the CBAs are geographically 

distributed in a way that does not limit 

beneficiary access to competitively bid 

items. We also note that, as specified in 

§ 414.412 of this final rule, each contract 

supplier will be required to furnish 

items to every beneficiary who 

maintains a permanent residence in the 

contract supplier’s CBA. We believe that 

this requirement will further ensure that 

beneficiary access to competitively bid 

items is maintained. 

Comment: Several commenters 

suggested that CMS not rely heavily on 

DMEPOS allowed charges per 

beneficiary and suppliers per 

beneficiary. 

Response: We disagree. We believe 

that our methodology properly 

identifies large MSAs with a significant 

savings potential by considering 

DMEPOS allowed charges per FFS 

beneficiary and suppliers per FFS 

beneficiary, as these data would 

indicate that these MSAs have the 

largest number of suppliers available for 

competition and the most expenditures/ 

utilization per Medicare beneficiary. 

Comment: One commenter suggested 

that CMS divide the MSAs by some 

easily recognized boundaries as 

proposed as an alternative proposal in 

the proposed rule. 

Response: We will establish the CBAs 

based on the most current data and use 

our authority to adjust the areas to 

exclude rural areas and areas with low 

population density within urban areas 

that are not competitive. We will set 

easily recognizable boundaries by using 

county lines and zip codes to identify 

the CBAs we select. 

Comment: One commenter supported 

the criteria for MSA selection that 

would consider MSAs based on their 

total population, total DMEPOS charges, 

charges per beneficiary, and the number 

of DMEPOS suppliers per DMEPOS 

users. The commenter also suggested 

considering the numbers of suppliers of 

constituent categories of DMEPOS, for 

example, oxygen and supplies or 

hospital beds. The commenter believed 

that, if there are enough suppliers to 

conduct a competition for each of the 

constituent categories within a CBA, the 

constituent categories should be 

included in the competitive bidding 

program. 

Response: We believe our 

methodology, which concentrates on 

allowed charges per beneficiary and 

suppliers per beneficiary, will result in 

the selection of areas with the most 

potential for savings under the 

programs. This methodology relies on 

average expenditures per beneficiary 

and the availability of competing 

suppliers. We believe that the criteria 

that we will be using are sufficiently 

representative to select the appropriate 

MSAs for competitive bidding because 

they will identify those MSAs that have 

high beneficiary allowed charges and a 

high number of DMEPOS suppliers per 

DMEPOS users. We acknowledge the 

value of more specific item data for the 

purposes of selecting items for 

competitive bidding. Therefore, we will 

be looking at utilization of items when 

we select the items for competitive 

bidding. 

Comment: One commenter suggested 

that we identify the top 80 MSAs for 

competitive bidding using the 

methodology as proposed. However, for 

the initial competitive bidding program, 

the commenter proposed that the agency 

use only the allowed DMEPOS charges 

per beneficiary metric when selecting 

the 10 MSAs from the set of 80. The 

commenter believed that this selection 

methodology will provide us with a 

range of valuable data regarding areas 

that have many suppliers per 

beneficiary and areas that have fewer 

suppliers per beneficiary. 

Response: We believe that selecting 

the initial 10 MSAs based on combined 

rankings of both DMEPOS allowed 

charges per FFS beneficiary and the 

number of DMEPOS suppliers per 

number of beneficiaries receiving 

DMEPOS items, as well as based on the 

MSA’s total population and geographic 

area, is important and necessary for 

designating CBAs that will produce 

savings for the Medicare program. In 

addition, we believe that these factors 

are appropriate indicators of how robust 

competition is likely to be in an area 

which will ultimately result in lower 

prices and increased savings for the 

program. 

Comment: One commenter questioned 

CMS’ decision to exclude the top three 

MSAs from consideration for 

competition prior to CY 2009. The 

commenter stated that the decision was 

arbitrary and discriminatory. 

Response: As stated in the proposed 

rule, because of the logistics associated 

with the startup of this new and 

complex program, we would like to gain 

experience in the first phase of 

competitive bidding prior to 

implementing programs in CBAs that 

include the three largest MSAs (New 

York, Los Angeles, and Chicago). 

However, we will include these MSAs 

when we consider which MSAs to select 

for the CY 2009 competition. 

Comment: One commenter requested 

that implementation of competitive 

bidding be delayed indefinitely to 


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permit thoughtful review and revisions 

to the program. 

Response: Section 1847(a)(1) of the 

Act requires that competition under the 

competitive bidding program occurs in 

10 of the largest MSAs in CY 2007. 

Therefore, the Act does not permit us to 

delay indefinitely implementation of the 

program. 

Comment: One commenter 

recommended that CMS count all 

suppliers that have submitted Medicare 

DMEPOS claims in the past year in 

determining the number of suppliers per 

beneficiary. The commenter asked if 

CMS will only calculate suppliers with 

physical locations inside of the CBA or 

if it will base its number of suppliers on 

those that have submitted Medicare 

claims for DMEPOS for a specific time 

period. Another commenter believed 

that the proposed dollar amount, 

$10,000, for suppliers with allowed 

charges attributed to them for DMEPOS 

items furnished in the MSA in CY 2004 

is too low. In addition, the commenter 

added that the $10,000 threshold may 

be too small for some items of DME. The 

commenter further stated that for higher 

cost items, $10,000 in allowed charges 

would not indicate that the supplier has 

an adequate level of experience with a 

product to appropriately meet the needs 

of Medicare beneficiaries. The 

commenter suggested that CMS look at 

total allowed charges and allowed 

charges for the items being bid. In 

addition, the commenter recommended 

that the supplier set an appropriate 

dollar threshold for each product 

category that would demonstrate that 

the supplier has adequate experience 

with the product category before 

counting that supplier for MSA 

selection purposes. 

Response: We believe that the $10,000 

threshold will give us an assurance that 

there will be a sufficient number of 

suppliers that have the capability to 

serve the area regardless of the 

experience with the particular product 

category. For suppliers with less than 

$10,000 in allowed charges, we do not 

have the assurance that the majority of 

them because of the cost of participating 

in the competitive bidding program and 

accreditation will be interested in 

participating in the competitive bidding 

program. By including in our 

calculations only those suppliers with 

allowed charges of at least $10,000, we 

are ensuring that we select MSAs that 

have a large number of suppliers that 

are interested and able to participate in 

the competitive bidding program 

considering those suppliers. 

Comment: One commenter 

recommended that CMS adjust data on 

DMEPOS allowed charges and on the 

number of beneficiaries and suppliers in 

‘‘snowbird’’ locations before selecting 

CBAs. 

Response: We believe that our 

methodology provides us with the most 

appropriate CBA selection and greatest 

savings for the program. As part of our 

evaluation of Medicare allowed charges 

for items per fee-for-service beneficiary 

and the total number of suppliers per 

fee-for-service beneficiary, we will 

consider how these data might be 

affected in areas where beneficiaries 

reside for only part of the year. 

Comment: One commenter 

recommended that CMS exclude areas 

that have a high probability of 

experiencing a natural disaster until CY 

2009 and consult with both the Federal 

Emergency Management Agency 

(FEMA) and the Department of 

Homeland Security before 

implementing competitive bidding in 

these areas. 

Response: The statute provides us 

with a geographic exception authority 

only for rural areas and areas with low 

population density within urban areas 

that are not competitive, unless there is 

a significant nationwide market through 

mail order for a particular item or 

service. We do not have authority to 

exclude areas that might experience a 

natural disaster. 

Comment: One commenter 

recommended that CMS initially 

implement competitive bidding 

programs in three CBAs in October 

2007; in three CBAs in February 2008, 

and in four CBAs in June 2008. The 

commenter also recommended 

excluding St. Louis, Kansas City, 

Baltimore, and Washington, D.C. from 

the MSA selection process because 

these MSAs overlap with multiple DME 

MAC regions or recent transition to a 

new DME MAC. In addition, the 

commenter recommended excluding 

Orlando and San Antonio from the MSA 

selection process because these areas 

were part of the demonstration projects. 

Response: We believe that our 

approach to conduct the competition in 

all 10 CBAs at once is appropriate and 

will ensure that the CBAs are 

geographically dispersed. In addition, as 

stated above, we believe that this 

approach will alleviate the confusion 

that could otherwise result if we 

conducted the competition in the 

manner suggested by the commenter. 

The statute provides us with a 

geographic exception authority only for 

rural areas and areas with low 

population density within urban areas 

that are not competitive, unless there is 

a significant nationwide market through 

mail order for a particular item or 

service. 

Comment: One commenter 

recommended initially implementing 

competitive bidding programs in 3 

MSAs, Miami, Houston, and Dallas, 

then 120 days later, implementing 

programs in the next 3 MSAs in 

February, and finally implementing 

programs in the last 4 MSAs. The 

commenter indicated that this will 

allow CMS to monitor and proactively 

make changes before it fully implements 

programs in the 10 MSAs. 

Response: The statute requires that 

the competition occur in 10 of the 

largest MSAs in CY 2007. As we 

explained above, we believe that our 

methodology provides us with the most 

appropriate CBA selection methodology 

and greatest savings potential for the 

program and that initially implementing 

programs in all 10 CBAs at once will 

reduce the potential for confusion that 

could otherwise result if we conducted 

the competition in the sequence 

suggested by the commenter. 

Comment: One commenter requested 

that CMS define ‘‘combined rankings.’’

The commenter asked whether this term 

means the allowed charges that 

suppliers have submitted to Medicare or 

the allowed payments. 

Response: ‘‘Combined rankings’’

means a combined score for the 

DMEPOS allowed charges per 

beneficiary in an MSA and the number 

of DMEPOS suppliers per beneficiary in 

the same MSA with equal weight given 

to each. The term ‘‘allowed charges’’

includes both Medicare’s approved 

payment amount and the beneficiary’s 

coinsurance amount. 

Comment: One commenter 

recommended that, in the situation 

where more than one MSA receives the 

same score, instead of using the total 

DMEPOS allowed charges for items that 

CMS has the authority to include in 

competitive bidding in each MSA as the 

tiebreaker, CMS use the FFS charges for 

the items proposed for bidding in each 

MSA and the total number of accredited 

suppliers in each MSA to break ties. 

Response: We chose to use the total 

DMEPOS allowed charges because this 

number indicates the size of the overall 

business that is conducted in an MSA 

for items subjected to the competitive 

bidding program. We believe that using 

total DMEPOS allowed charges is a 

better indication of savings than the 

total number of suppliers in an area for 

the purpose of having a tie breaker 

because this measure indicates how 

many items are actually being furnished 

in an area. 

Comment: One commenter agreed 

with our proposal to exclude the three 

largest MSAs from inclusion in 

competitive bidding until CY 2009. 


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Response: The three largest MSAs 

will be included in the list of potential 

MSA candidates for the CY 2009 

competitive bidding program. 

5. Nationwide or Regional Mail Order 

Competitive Bidding Program 

(§§ 414.410(d)(2) and 414.412(f) and (g)) 

Our data show that a significant 

percentage of certain items such as 

diabetic testing supplies (blood glucose 

test strips and lancets) are furnished to 

beneficiaries by nationwide mail order 

suppliers. Therefore, in the May 1, 2006 

proposed rule (71 FR 25669), we 

proposed in § 414.410(d)(2) and 

§§ 414.412(f) and (g) to establish a 

nationwide or regional competitive 

bidding program, effective for items 

furnished on or after January 1, 2010, for 

the purpose of awarding contracts to 

suppliers to furnish these items across 

the nation or region to beneficiaries who 

elect to obtain them through the mail. 

We proposed that the national or 

regional CBAs under the Medicare 

DMEPOS Competitive Bidding Program 

would be phased in after CY 2009, and 

payment would be based on the bids 

submitted and accepted for the 

furnishing of items through mail order 

throughout the nation or region. 

Suppliers that furnish these items 

through mail order on either a national 

or regional basis would be required to 

submit bids to participate in any 

competitive bidding program 

implemented for the furnishing of mail 

order items. 

We proposed that, prior to the 

establishment of a nationwide or 

regional competitive bidding program in 

CY 2010, mail order suppliers would be 

eligible to submit bids for furnishing 

items in one or more of the CBAs we 

establish for purposes of the CYs 2007 

and 2009 implementation phases. In 

addition, beginning with programs 

implemented in CY 2010, we proposed 

that mail order suppliers would be 

eligible to submit bids in one or more 

CBAs to furnish items that are not 

included in a nationwide or regional 

competitive bidding program. 

Nationwide or regional mail order 

suppliers would be required to submit 

bids and be selected as contract 

suppliers for each CBA in which they 

seek to furnish these items. However, 

we proposed that they would have the 

choice of either submitting the same bid 

amounts for each CBA or submitting 

separate bids. 

For items that are subject to a 

nationwide or regional mail order 

competitive bidding program, we 

proposed that suppliers that furnish 

these same items in the local market and 

do not furnish them via mail order 

would not be required to participate in 

the nationwide or regional mail order 

competitive bidding program. However, 

we would only allow these suppliers to 

continue furnishing the items in CBAs 

if they were selected as contract 

suppliers. 

We proposed to allow these nonmail 

order suppliers to continue furnishing 

these items in areas subject to a 

competitive bidding program if the 

supplier has been selected as a contract 

supplier. When furnishing items to 

beneficiaries who do not maintain a 

permanent residence in a CBA, nonmail 

order suppliers would be paid based on 

the payment amount applicable to the 

area where the beneficiary maintains his 

or her permanent residence. 

In a September 2004 report (GAO–04–

765), GAO recommended that we 

consider using mail delivery for items 

that can be provided directly to 

beneficiaries in the home as a way to 

implement a DMEPOS competitive 

bidding strategy. In the proposed rule, 

we solicited comments on our proposal 

to implement this recommendation and 

on the types of items that would be 

suitable for a mail order competitive 

bidding program. 

In addition, we requested public 

comment on an alternative that would 

require that replacement of all supplies 

such as test strips and lancets for 

Medicare beneficiaries be furnished by 

mail order suppliers under a nationwide 

or regional mail order program. For 

example, there are services paid under 

the Medicare Physician Fee Schedule 

(MPFS) that are associated with the 

furnishing of blood glucose testing 

equipment (for example, home blood 

glucose monitors) such as training, 

education, assistance with product 

selection, maintenance, and servicing, 

that do not relate to the furnishing of 

replacement supplies used with the 

equipment. Once the brand of monitor 

has been selected by the beneficiary, the 

services associated with furnishing the 

supplies must be provided on a timely 

basis and the beneficiary must receive 

the brand of test strips needed for his or 

her monitor. We invited public 

comment on whether the service of 

furnishing replacement test strips, 

lancets or other supplies can easily, 

effectively, and conveniently be 

performed by nationwide mail order 

suppliers. 

Comment: Several commenters 

suggested that a separate program for 

mail order is unnecessary for CY 2010. 

They also noted that mail order supplies 

are not excluded for CYs 2007 and 2009. 

Response: Our data indicate that over 

60 percent of Medicare expenditures for 

diabetic supplies are for items furnished 

by nationwide mail order suppliers. We 

believe that the implementation of a 

separate mail order competitive bidding 

program would result in significant 

savings because it would focus on 

suppliers that can obtain discounts from 

manufacturers because they furnish a 

large volume of items to beneficiaries 

through the mail. Therefore, we 

envision that large savings for the 

Medicare program would result from the 

implementation of a separate mail order 

program. 

Comment: Several commenters noted 

that there is no definition of a ‘‘mail 

order supplier’’ or description of a 

nationwide or regional mail order 

company in the proposed rule. 

Response: In the proposed rule, we 

provided a definition of a ‘‘supplier’’

that includes an entity that furnishes 

items through the mail. However, to 

further prevent confusion, as discussed 

in section VI.A. we have added 

definitions of ‘‘mail order contract 

suppler,’’ ‘‘nationwide mail order 

contract supplier,’’ ‘‘regional 

competitive bidding area,’’ and 

‘‘regional mail order contract supplier’’

in § 414.402. For purposes of 

competitive bidding a ‘‘mail order 

contract supplier’’ will be a contract 

supplier that furnishes items through 

the mail to beneficiaries who maintain 

a permanent residence in a competitive 

bidding area. 

Comment: One commenter asked 

whether a supplier would qualify to 

participate in a mail order competitive 

bidding program if the supplier 

furnishes items both through the mail 

and through a storefront location to 

beneficiaries. 

Response: Any national or regional 

mail order competitive bidding program 

that we might choose to implement 

starting in CY 2010 would be limited to 

the furnishing of items through the mail. 

Therefore, if a supplier wants to 

participate in a mail order program, it 

will have to submit a separate mail 

order program bid. Only a designated 

mail order contract supplier may 

furnish items under a mail order 

competitive bidding program. To 

participate in a program for providing 

items from a local storefront, a separate 

bid would have to be submitted. 

Comment: One commenter noted that 

mail order is an appropriate and cost 

effective vehicle for delivery of some 

replacement supplies (test strips and 

lancets). Several commenters opposed 

the requirement for beneficiaries to use 

the mail order suppliers and suggested 

that the mail order program be 

voluntary for beneficiaries. Several 

commenters noted that beneficiaries 


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must have the option to get the supplies 

from their local suppliers. 

Response: We continue to believe that 

a national or regional mail order 

program will be cost effective for the 

Medicare program, and did not propose 

that it would be mandatory for 

beneficiaries. Such a mail order program 

will be voluntary and beneficiaries will 

have the option to receive their items 

through the mail or from a local contract 

supplier. 

Comment: One commenter suggested 

that CMS specifically ensure that all 

suppliers in a mail order competitive 

bidding program are in compliance with 

the DMEPOS quality standard that 

requires that ‘‘mail services are not used 

for the initial delivery, set-up, and 

beneficiary education/training’’ for DME 

equipment and supplies. 

Response: The DMEPOS quality 

standard that the commenter is referring 

to was included in the draft quality 

standards that were released for public 

comments on September 25, 2005. 

Although the final quality standards do 

not preclude suppliers from furnishing 

certain DMEPOS through the mail, they 

also require suppliers to verify that a 

beneficiary has received an item and to 

provide clear instructions to the 

beneficiary related to the use, 

maintenance, and potential hazards of 

the item. A supplier cannot be 

accredited unless a CMS-approved 

accreditation organization has 

determined that the supplier is 

complying with the quality standards, 

and accreditation is a prerequisite to a 

supplier being eligible to participate in 

the Medicare DMEPOS Competitive 

Bidding Program. Therefore, our goal is 

to award contracts only to suppliers that 

conduct business in a manner that is 

beneficial to beneficiaries under the 

program. The final Quality Standards 

document can be found under the basic 

standards and the consumer services 

section at the Medicare DMEPOS 

Competitive Bidding Program Web site: 

http://www.cms.hhs.gov/Competitive

AcqforDMEPOS/04_New_Quality

_Standards.asp#TopofPage. 

Comment: One commenter suggested 

that CMS not implement a mail order 

competitive bidding program for 

diabetes testing supplies until the 

effects of such a program on 

beneficiaries with diabetes have been 

carefully studied, perhaps through a 

pilot program. 

Response: We do not believe a pilot 

program is necessary. Our data show 

that 60 percent of beneficiaries currently 

receive supplies from mail order 

suppliers. Under the competitive 

bidding programs, beneficiaries will 

continue to have the option of receiving 

their supplies through the mail or from 

a local supplier. 

Comment: One commenter suggested 

that CMS create a national supplier 

designation for which suppliers, mailorder or retail, can apply. 

Response: As we discussed above, we 

will separately designate the supplier 

numbers of all noncontract suppliers to 

monitor whether they are complying 

with the rules regarding the limited 

circumstances under which they can 

furnish a competitively bid item. To 

address the commenter’s concern, in 

addition to differentiating between 

contract suppliers and noncontract 

suppliers, we will also differentiate 

between mail order contract suppliers 

and mail order noncontract suppliers. 

We will be making those designations 

with the award of contracts. 

Comment: One commenter 

recommended that, if CMS decides to 

create a nationwide or regional mail 

order competitive bidding program, 

CMS include a program oversight 

provision related to refilling of supplies. 

The commenter suggested that CMS 

prohibit contract suppliers from 

automatically refilling and sending 

replacement supplies without receiving 

a refill request from the beneficiary. 

Response: Section 200, Chapter 20 of 

the Medicare Claims Processing Manual 

(Publication 100–4), prohibits suppliers/ 

manufacturers from automatically 

delivering replacement supplies to 

beneficiaries unless the beneficiary, or 

their caregiver has requested them. The 

reason for this prohibition is to ensure 

that the beneficiary actually needs the 

replacement supplies. This requirement 

will apply to the Medicare DMEPOS 

Competitive Bidding Program. 

Comment: One commenter opposed 

mail order/drop shipping for oxygen 

and related equipment because this 

might actually encourage contract 

suppliers to ship oxygen cylinders or 

other similar devices than deliver 

directly to the beneficiary. 

Response: Pursuant to our DMEPOS 

supplier standards at 42 CFR 424.57(c), 

a supplier must operate its business and 

furnish Medicare covered items in 

compliance with all applicable Federal 

and State licensure and regulatory 

requirements. Therefore, suppliers are 

required to furnish oxygen cylinders 

and other similar devices in accordance 

with these requirements. 

6. Additional Competitive Bidding 

Areas After CY 2009 (§ 414.410(d)(1)) 

Section 1847(a)(1)(B)(III) of the Act 

requires that competition under the 

Medicare DMEPOS Competitive Bidding 

Program occur in additional areas after 

CY 2009. Beginning in CY 2010, we 

proposed in § 414.410(d)(1) to designate 

through program instructions additional 

CBAs based on our determination that 

the implementation of a competitive 

bidding program in a particular area 

would be likely to result in significant 

savings to the Medicare program. 

We did not receive any comments on 

this specific. 

Therefore, after considering the 

comments we received on Section II. D. 

of the proposed rule, we are finalizing 

§§ 414.406(b)–(c) and § 414.410 as 

discussed above and with additional 

technical changes, which include 

specifying in § 414.406(b) that we may 

designate CBAs through program 

instructions or by other means. We are 

also adding a several definitions, 

including a of ‘‘mail order contract 

supplier’’ under § 414.402. Finally, we 

are finalizing §§ 414.412(f) and (g) as 

discussed above and with technical 

changes. 

F. Criteria for Item Selection (§§ 414.402 

and 414.406(d)) 

Section 1847(a)(2) of the Act describes 

the DMEPOS items that are subject to 

competitive bidding. They include: 

• Durable medical equipment and 

medical supplies: Covered items (as 

defined in section 1834(a)(13) of the 

Act) for which payment would 

otherwise be made under section 

1834(a) of the Act, including items used 

in infusion and drugs (other than 

inhalation drugs) and supplies used in 

conjunction with DME, but excluding 

class III devices under the Federal Food, 

Drug, and Cosmetic Act. 

• Other equipment and supplies 

(enteral nutrition, equipment, and 

supplies)—Items described in section 

1842(s)(2)(D) of the Act, other than 

parenteral nutrients, equipment, and 

supplies. 

• OTS orthotics: Orthotics described 

in section 1861(s)(9) of the Act for 

which payment would otherwise be 

made under section 1834(h) of the Act, 

which require minimal self-adjustment 

for appropriate use and do not require 

expertise in trimming, bending, 

molding, assembling, or customizing to 

fit the individual. 

In the May 1, 2006 proposed rule, we 

proposed in § 414.406(d) to designate 

the items that would be included in 

each competitive bidding program 

through program instructions. We also 

proposed (71 FR 25669) to define 

‘‘minimal self-adjustment’’ to mean an 

adjustment that the beneficiary, 

caretaker for the beneficiary, or supplier 

of the device can perform without the 

assistance of a certified orthotist (that is, 

an individual certified by either the 

American Board for Certification in 


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Orthotics and Prosthetics, Inc., or the 

Board for Orthotist/Prosthetist 

Certification). We also proposed to 

consider any adjustments that can only 

be made by a certified orthotist to be 

adjustments that require expertise in 

trimming, bending, molding, 

assembling, or customizing to fit the 

individual. We proposed to consult with 

a variety of individuals, including 

experts in orthotics, to determine which 

items and/or HCPCS codes would be 

classified as OTS orthotics. We invited 

comments on a process for identifying 

OTS orthotics subject to competitive 

bidding. 

Section 1847(a)(1)(B)(ii) of the Act 

gives us the authority to phase in 

competitive bidding ‘‘first among the 

highest cost and highest volume items 

or those items that the Secretary 

determines have the largest savings 

potential.’’ In addition, section 

1847(a)(3)(B) of the Act grants us the 

authority to exempt items for which the 

application of competitive bidding is 

not likely to result in significant 

savings. In exercising this authority, we 

proposed to exempt items outright or on 

an area-by-area basis using area-specific 

utilization data. For example, if we 

found that utilization (that is, allowed 

services or allowed charges) for 

commode chairs was low (or the 

number of commode chair suppliers 

was low) in a given area compared to 

other areas, we might choose to exempt 

commode chairs from the competitive 

bidding programs in the CBA where 

significant savings would not be likely 

while including commode chairs in the 

competitive bidding programs for other 

CBAs. This decision would be based on 

area-specific utilization data. 

We proposed to use the authority 

provided by section 1847(a)(1)(B)(ii) of 

the Act to phase in only those items that 

we determine are among the highest 

cost and highest volume items during 

each phase of the Medicare DMEPOS 

Competitive Bidding Programs. In 

section II.F. of the proposed rule, we 

proposed to conduct competitive 

bidding for product categories that 

would be described in each RFB. 

Suppliers would submit a separate bid 

for each item under a defined product 

category, unless specifically excluded in 

the RFB. We proposed to include a 

‘‘core’’ set of product categories in each 

CBA. We indicated that we might elect 

to phase in some individual product 

categories in a limited number of CBAs 

in order to test and learn about their 

suitability for competitive bidding. 

Because we had not yet identified the 

product categories for competitive 

bidding at the time we issued the 

proposed rule, we used policy groups 

developed by the statistical analysis 

durable medical equipment regional 

carrier (SADMERC) for purposes of 

illustration. The SADMERC has defined 

a set of 64 DMERC [DME MAC] policy 

groups for analytical purposes in its role 

as the statistical analysis contractor for 

DMEPOS. A policy group is a set of 

HCPCS codes that describe related items 

that are addressed in a DME MAC 

medical review policy. For example, the 

policy group ‘‘oxygen and supplies’’

consists of approximately 20 HCPCS 

codes. Although the product categories 

subject to competitive bidding will not 

necessarily correspond to these policy 

groups, we presented data for these 

policy groups and items contained in 

these policy groups for the purpose of 

identifying the highest cost and highest 

volume DMEPOS items that may be 

subject to competitive bidding. In other 

words, we proposed using SADMERC 

data for ‘‘policy groups’’ to identify 

groups of items we will consider 

phasing in first under the competitive 

bidding programs, but the actual 

‘‘product categories’’ for which we 

would request bids could be a subset of 

items from a ‘‘policy group’’ or a 

combination of items from different 

‘‘policy groups.’’ The highest volume 

items (HCPCS codes) fall into a 

relatively small number of policy groups 

as illustrated in Table 3. 

TABLE 3.—CY 2003 HIGH VOLUME ITEMS (HCPCS CODES) 

HCPCS code Allowed charges Product description Policy group 

E1390 .................. $2,033,123,147 Oxygen concentrator ........................................................................... Oxygen. 

K0011 * ................ 1,176,277,899 Power wheelchair with programmable features ................................. Wheelchairs. 

A4253 .................. 779,756,243 Blood glucose/reagent strips, box of 50 ............................................. Diabetic Supplies & Equipment. 

E0260 .................. 331,457,962 Semi-electric hospital bed ................................................................... Hospital Beds/Accessories. 

E0431 .................. 228,066,037 Portable gaseous oxygen equipment ................................................. Oxygen. 

B4150 * ................ 206,396,813 Enteral formula, category I ................................................................. Enteral Nutrition. 

B4035 .................. 197,057,150 Enteral feeding supply kit, pump fed, per day .................................... Enteral Nutrition. 

E0277 .................. 156,762,241 Powered air mattress .......................................................................... Support Surfaces. 

E0439 .................. 141,268,474 Stationary liquid oxygen ...................................................................... Oxygen. 

E0601 .................. 123,865,463 Continuous positive airway pressure device (CPAP) ......................... CPAP Devices. 

K0001 .................. 103,217,209 Standard manual wheelchair .............................................................. Wheelchairs. 

K0004 .................. 87,208,486 High strength lightweight manual wheelchair ..................................... Wheelchairs. 

A4259 .................. 79,575,166 Lancets, box of 100 ............................................................................ Diabetic Supplies & Equipment. 

E0570 .................. 76,588,088 Nebulizer with compressor ................................................................. Nebulizers. 

B4154 * ................ 76,326,903 Enteral formula, category IV ............................................................... Enteral Nutrition. 

E0143 .................. 75,950,410 Folding wheeled walker w/o seat ....................................................... Walkers. 

K0533 * ................ 75,136,517 Respiratory assist device with backup rate feature ............................ Respiratory Assist Devices. 

K0538 * ................ 65,603,531 Negative pressure wound therapy electrical pump ............................ Negative Pressure Wound Therapy (NPWT) Devices. 

K0532 * ................ 56,046,930 Respiratory assist device without backup rate feature ....................... Respiratory Assist Devices. 

K0003 .................. 55,318,959 Lightweight manual wheelchair ........................................................... Wheelchairs. 

K0108 .................. 52,139,979 Miscellaneous wheelchair accessory .................................................. Wheelchairs. 

E0192 * ................ 48,413,938 Wheelchair cushion ............................................................................. Support Surfaces. 

E0163 .................. 48,216,855 Stationary commode chair with fixed arms ........................................ Commodes. 

B4034 .................. 42,277,968 Enteral feeding supply kit syringe, per day ........................................ Enteral Nutrition. 

* Due to HCPCS coding changes made since 1993, the descriptions or code numbers for these codes have been modified. The power wheelchair codes became effective November 15, 2006 and will be billed under several new HCPCS codes. 

Because we proposed that we would 

conduct competitive bidding for items 

grouped into product categories, we 

indicated that we would consider 

DMEPOS allowed charges and volume 

at the product category level for the 


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purpose of selecting which items to 

phase in first under the competitive 

bidding programs. The table below 

provides data for the top 20 policy 

groups based on Medicare allowed 

charges for the items within each policy 

group that we may choose to include in 

the competitive bidding programs. Data 

from the SADMERC for claims received 

in CY 2003 are used for all policy 

groups except those for nebulizers and 

OTS orthotics. For the nebulizer and 

OTS orthotics groups, data are included 

from the CMS BESS (Part B Extract and 

Summary System) database for items 

furnished in CY 2003. The percentage of 

total allowed Medicare charges for 

DMEPOS that each policy group makes 

up is included in Table 4. 

TABLE 4.—CY 2003 DMEPOS ALLOWED CHARGES BY POLICY GROUP

Rank Policy group CY 2003 Percent of 

DMEPOS 

1 .................................................... Oxygen Supplies/Equipment ................................................................ $2,433,713,269 21.3 

2 .................................................... Wheelchairs/Power Operated Vehicle (POVs) ** ................................. 1,926,210,675 16.9 

3 .................................................... Diabetic Supplies & Equipment ........................................................... 1,110,934,736 9.7 

4 .................................................... Enteral Nutrition ................................................................................... 676,122,703 5.9 

5 .................................................... Hospital Beds/Accessories .................................................................. 373,973,207 3.3 

6 .................................................... CPAP Devices ..................................................................................... 204,774,837 1.8 

7 .................................................... Support Surfaces ................................................................................. 193,659,248 1.7 

8 .................................................... Infusion Pumps & Related Drugs ........................................................ 149,208,088 1.3 

9 .................................................... Respiratory Assist Devices .................................................................. 133,645,918 1.2 

10 .................................................. Lower Limb Orthoses * ......................................................................... 122,813,555 1.1 

11 .................................................. Nebulizers * .......................................................................................... 98,951,212 0.9 

12 .................................................. Walkers ................................................................................................ 96,654,035 0.8 

13 .................................................. Negative Pressure wound therapy (NPWT) Devices .......................... 88,530,828 0.8 

14 .................................................. Commodes/Bed Pans/Urinals .............................................................. 51,372,352 0.5 

15 .................................................. Ventilators ............................................................................................ 42,890,761 0.4 

16 .................................................. Spinal Orthoses * ................................................................................. 40,731,646 0.4 

17 .................................................. Upper Limb Orthoses * ......................................................................... 29,069,027 0.3 

18 .................................................. Patient Lifts .......................................................................................... 26,551,310 0.2 

19 .................................................. Seat Lift Mechanisms .......................................................................... 15,318,552 0.1 

20 .................................................. TENS Devices ** .................................................................................. 15,258,579 0.1 

Total for 20 Groups .................................................................................................................................. 7,830,384,538 68.6 

Total for DMEPOS .................................................................................................................................... 11,410,019,351 ............................

* Data are from the CMS BESS (Date of Service). Data for orthoses policy groups exclude data for custom fabricated orthotics, but may include data for other items that will not be considered OTS orthotics. 

** POVs are power-operated vehicles (scooters), and TENS devices are transcutaneous electrical nerve stimulation devices. 

Section 1847(a)(1)(B)(ii) of the Act 

provides that the items we phase in first 

under competitive bidding may include 

products having the greatest potential 

for savings. In the May 1, 2006 proposed 

rule, we proposed to use a combination 

of the following variables when making 

determinations about an item’s potential 

savings as a result of the application of 

competitive bidding: 

• Annual Medicare DMEPOS allowed 

charges. 

• Annual growth in expenditures. 

• Number of suppliers. 

• Savings in the DMEPOS 

competitive bidding demonstrations. 

• Reports and studies. 

We proposed that items with high 

allowed charges or rapidly increasing 

allowed charges would be our highest 

priority in selecting items for 

competitive bidding. 

The number of suppliers furnishing a 

particular item or group of items would 

also be an important variable in 

identifying items with high savings 

potential. We believe that a relatively 

large number of suppliers for a 

particular group of items would likely 

increase the degree of competition 

among suppliers and increase the 

probability that suppliers would 

compete on quality for business and 

market share. We saw evidence in the 

competitive bidding demonstrations 

that products furnished by a large 

number of suppliers had large savings 

rates and fewer problems with quality. 

We understand that having a large 

number of suppliers is not always a 

necessary condition for competition. A 

CBA could be more concentrated and 

less competitive than the number of 

suppliers would predict if the market is 

dominated by only a few suppliers and 

the remaining suppliers have only 

minimal charges. 

The DMEPOS competitive bidding 

demonstrations took place from 1999 to 

2002 in two MSAs: Polk County, Florida 

and San Antonio, Texas. Five product 

categories containing items we might 

include in the Medicare DMEPOS 

Competitive Bidding Programs were 

included in at least one round of these 

demonstrations: oxygen equipment and 

supplies; hospital beds and accessories; 

enteral nutrition; wheelchairs and 

accessories; and general orthotics. 

The results of the demonstrations 

provide useful information because they 

are based on actual Medicare 

competitive bidding and the amounts 

suppliers actually were willing to accept 

as payment from Medicare. However, 

we recognize that these results should 

be used with caution. The 

demonstrations occurred more than 3 

years ago and the fee schedule has 

changed as a result of certain provisions 

in the MMA (for example, section 

302(c)(2) of the MMA (codified at 

section 1834(a)(21) of the Act), which 

requires that CMS adjust the fee 

schedules for certain items based on a 

comparison to other payers such as the 

Federal Employees Health Plan (FEHP)). 

The HHS Office of the Inspector 

General (OIG) and GAO frequently 

conduct studies that analyze the extent 

to which Medicare overpays for specific 

items, and we believe that these studies 

could assist with determining the saving 

potential for an item if it were included 

in competitive bidding. Examples of 

relevant OIG studies include the 

following: 

• Medicare Allowed Charges for 

Orthotic Body Jackets, March 2000 

(OEI–04–97–00391); 


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• Medicare Payments for Enteral 

Nutrition, February 2004 (OEI–03–02–

00700); and 

• A Comparison of Prices for Power 

Wheelchairs in the Medicare Program, 

April 2004 (OEI–03–03–00460). 

In addition, CMS and the DME MACs 

obtain retail pricing information for 

items in the course of establishing fee 

schedule amounts and considering 

whether payment adjustments are 

warranted for items using the inherent 

reasonableness authority in section 

1842(b)(8) of the Act. In the proposed 

rule, we indicated that we could use 

these studies to identify products where 

CMS pays excessively and where we 

could potentially achieve savings. 

Excessive payments are only one 

factor to consider when evaluating 

whether savings will be realized by the 

application of competitive bidding to an 

item. However, these studies offer us a 

guide regarding which items may have 

the greatest potential for savings. We 

also recognize that some studies are 

older than others and that recent MMA 

and FEHP reductions in fees may affect 

whether the results of these studies are 

still relevant. 

Comment: Many commenters objected 

to the proposed definition for OTS 

orthotics that would be subject to 

competitive bidding in accordance with 

section 1847(a)(2)(C) of the Act. They 

specifically objected to the discussion in 

the proposed rule that states that the 

expertise required to trim, bend, 

assemble, mold, or custom fit an 

orthotic device for an individual would 

be that of a certified orthotist. They 

pointed out that occupational therapists, 

physical therapists, and physicians are 

licensed and trained to trim, bend, 

mold, assemble, and customize some 

orthotics to fit a beneficiary. They 

indicated that under the Act, 

occupational and physical therapists are 

recognized as Medicare practitioners 

who furnish orthotics to Medicare 

beneficiaries pursuant to a written plan 

of care. The commenters added that the 

Act recognizes orthotists as suppliers of 

DMEPOS only and not as practitioners. 

They recommended revising the 

language to read: ‘‘ ‘Minimal selfadjustment’ means an adjustment that 

the beneficiary, caretaker for the 

beneficiary, or supplier of the device 

can perform without the assistance of a 

physician, physical therapist, 

occupational therapist, orthotist, or 

other professional designated by the 

Secretary.’’

In addition, many commenters stated 

that there is no Federal definition of 

orthotists or their scope of practice and 

that a limited number of States have 

licensure or certification laws for 

orthotists. They added that, for those 

States that have such laws, the scope of 

practice varies considerably. The 

commenters recommended including 

the statutory definition of ‘‘qualified 

practitioner’’ located in section 

1834(h)(1)(F)(iii) of the Act to identify 

those individuals with expertise in 

custom fitting orthotics. They believed 

that linking OTS orthotics to the work 

of a certified orthotist would 

dramatically expand the list of products 

that are considered OTS orthotics that 

would be subject to competitive 

bidding. They further noted that the list 

of OTS orthotics has yet to be 

published. 

Response: We appreciate the 

comments. Section 1847(a)(2) of the Act 

describes OTS orthotics as those 

orthotics described in section 1861(s)(9) 

of the Act for which payment would 

otherwise be made under section 

1834(h) of the Act, which require 

minimal self-adjustment for appropriate 

use and do not require expertise in 

trimming, bending, molding, 

assembling, or customizing to fit to the 

individual. Orthotics that are currently 

paid under section 1834(h) of the Act 

and are described in section 1861(s)(9) 

of the Act are leg, arm, back, and neck 

braces. The Medicare Benefit Policy 

Manual, Chapter 15, Section 130 

provides the longstanding Medicare 

definition of ‘‘braces.’’ Braces are 

defined in this section as ‘‘rigid or semirigid devices which are used for the 

purpose of supporting a weak or 

deformed body member or restricting or 

eliminating motion in a diseased or 

injured part of the body.’’ To clarify the 

definition of OTS orthotics for purposes 

of competitive bidding, in this final rule 

we are defining the term ‘‘minimal selfadjustment’’ to mean an adjustment that 

the beneficiary, caretaker for the 

beneficiary, or supplier of the device 

can perform and that does not require 

the services of a certified orthotist (that 

is, an individual who is certified by the 

American Board for Certification in 

Orthotics and Prosthetics, Inc., or by the 

Board for Orthotist/Prosthetist 

Certification) or an individual who 

possesses specialized training. These 

individuals possess specialized skills 

and knowledge used to custom fit braces 

for individual beneficiaries so that they 

function appropriately. Therefore, if an 

adjustment to an OTS orthotic that 

requires expertise in trimming, bending, 

molding, assembling, or customizing to 

fit the individual such that it must be 

performed by a certified orthotist (that 

is, an individual who is certified by the 

American Board for Certification in 

Orthotics and Prosthetics, Inc. or by the 

Board for Orthotist/Prosthetist 

Certification) or someone who possesses 

specialized training, it would not be an 

OTS orthotic that is eligible to be 

included in a competitive bidding 

program. 

As we proposed, we will identify 

specific OTS orthotics that will be 

included in specific competitive 

bidding programs through program 

instructions. 

Comment: Several commenters 

requested exemption of OTS orthotics 

that have the HCPCS codes L3908–

L3954 (wrist, hand, and finger orthoses) 

and L3980–L3985 (upper extremity 

fracture orthoses). They believed that 

these codes should be exempted 

because clinicians and practitioners use 

them for short-term protection and 

stabilization of a joint or limb. They 

further indicated that practitioners do 

not dispense these items as a product or 

supply item but rather as part of the 

evaluation and treatment of 

beneficiaries. 

Response: Section 1847(a)(2) of the 

Act provides that OTS orthotics 

described in section 1861(s)(9) of the 

Act, for which payment would 

otherwise be made under section 

1834(h) of the Act, are to be included in 

the Medicare DMEPOS Competitive 

Bidding Program if they require 

minimal self-adjustment for appropriate 

use and do not require expertise in 

trimming, bending, molding, 

assembling, or customizing to fit the 

individual. Although the items 

identified by the commenters are 

orthotics as described in section 

1861(s)(9) of the Act for which payment 

is made under section 1834(h) of the 

Act, we have not yet determined 

whether they require minimal selfadjustment. We have also not yet 

determined whether one or more of 

these items might not be appropriate for 

inclusion in the Medicare DMEPOS 

Competitive Bidding Program because it 

is not likely to produce significant 

savings. We will consider the 

commenters’ suggestions and designate 

the items that will be included in each 

competitive bidding program through 

program instructions or by other means, 

such as the RFB or our Web site. 

Comment: Several commenters 

believed that the selection of items for 

competitive bidding is being driven by 

allowed charges and utilization only. 

They believed that this poses a risk and 

allows competitive bidding to become a 

substitute for appropriate coverage 

policies as a way of controlling 

expenditures. The commenters believed 

that consideration of clinical and 

service factors specific to the product 

should be part of the selection criteria. 


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Response: We do not have data on 

which we could evaluate clinical and 

service factors specific to individual 

items nor were any data submitted 

through the public comment process. In 

addition to allowed charges and 

utilization, we identified in the 

proposed rule the following variables 

that we will use to select items for 

competitive bidding: Annual growth in 

expenditures; number of suppliers; 

savings in the DMEPOS competitive 

bidding demonstrations; and reports 

and studies. We stated that we would 

use all of these variables to make 

determinations about an item’s potential 

to reduce costs for the Medicare 

program. We note that the Medicare 

DMEPOS Competitive Bidding Program 

is not a coverage program, and that this 

final rule does not supersede in any way 

Medicare coverage laws, regulations, or 

policies. 

Comment: Several commenters 

believed that ostomy products and 

supplies do not meet the definition of 

DME and, therefore, are not part of the 

items and services subject to the 

competitive bidding programs described 

in section 1847(a)(2)(A) of the Act. 

Response: We believe that section 

1847(a)(2)(A) of the Act is ambiguous 

regarding whether ostomy products and 

supplies are to be included in the 

Medicare DMEPOS Competitive Bidding 

Program because the term ‘‘medical 

supplies’’ in the section heading could 

be interpreted either to modify the term 

‘‘durable medical equipment’’ (meaning 

that the medical supplies would have to 

be associated with the DME to be 

included), or to be a separate category 

of items that are not associated with 

DME. In addition, although the 

definition of ‘‘covered item’’ in section 

1834(a)(13) of the Act means ‘‘durable 

medical equipment (as defined in 

section 1861(n) [of the Act]), including 

such equipment described in section 

1861(m)(5) [of the Act] * * *,’’ the term 

‘‘such equipment’’ in section 1861(m)(5) 

of the Act could be interpreted to refer 

either to the term ‘‘durable medical 

equipment’’ or to the term ‘‘medical 

supplies’’ (which would include ostomy 

supplies) in that section. In light of 

these ambiguities, we believe we have 

discretion to interpret section 

1847(a)(2)(A) of the Act to include or 

exclude ostomy products and supplies 

in the competitive bidding programs. 

We are not planning to exercise our 

authority to include these items at this 

time and will continue to review this 

issue. 

Comment: Many commenters believed 

that the following items that are integral 

to beneficiary care should be exempted 

from competitive bidding: diabetic 

supplies; diabetic shoes; diabetic inlays; 

prosthetics for the foot; crutches; 

walkers; fracture ankle-foot orthoses; 

braces; splints; and surgical dressings. A 

few commenters requested exemption of 

products commonly provided directly 

by manufacturers. They believed that 

the products are available from 

relatively few suppliers and would not 

produce Medicare savings. 

A few commenters requested the 

exemption of oxygen, continuous 

positive airway pressure devices, and 

invasive and noninvasive ventilation 

devices. They believed that these items 

are technologically complex devices. 

Several commenters recommended 

exempting negative pressure wound 

therapy (NPWT) devices from the first 

round of competitive bidding. They 

reported that in October 2000, a new 

HCPCS code (E2402) was established for 

NPWT. Since 2003, more than 3,000 

physicians have ordered NPWT devices 

more than 36,000 times. They reported 

that new products have been added to 

HCPCS code E2402 despite the fact that 

these new products are clinically 

different from the original NPWT 

product. The commenters believed that 

the newer items are not yet wellunderstood or well-established and 

physician choice in selecting an item 

must be respected. 

Many commenters requested 

exemption of power wheelchairs, 

including complex rehabilitative and 

assistive technology devices, for the first 

round of competitive bidding. They 

believed that competitively bidding 

these devices would result in a negative 

impact on the clinical outcome for the 

beneficiary. They described these items 

as being uniquely prescribed for the 

beneficiary. The commenters 

recommended exempting wheelchair 

cushions, adaptive seating, and 

positioning products. They indicated 

beneficiaries who require complex 

rehabilitative or assistive technology 

require a complete system to meet their 

functional and medical needs. The 

commenters pointed out that a complete 

system requires several pieces of 

equipment, each meeting a specific 

medical or functional need and 

determined to be compatible 

technologies. They believe that the 

recent changes in HCPCS codes for 

power mobility devices, a new local 

coverage determination policy, and new 

fee schedules will significantly impact 

the utilization and allowed charges for 

these items. They believe that, in light 

of these changes, there will be a lack of 

allowed charges and volume data that 

will make it difficult to determine 

which codes have the highest allowed 

charges and highest volume or potential 

for savings. 

Many commenters requested the 

exemption of manual wheelchairs 

because as early as CY 2007, the HCPCS 

codes will be subjected to a recoding 

process that is similar to the recoding 

process that CMS recently undertook for 

power mobility devices. Under the 

proposed rule, a supplier that bids on 

the category of manual wheelchairs 

must be prepared to provide all types of 

manual wheelchairs including standard, 

ultra lightweight, bariatric, or manual 

tilt-in-space. They believed that the 

current HCPCS codes are too broad, 

encompassing items that represent 

vastly different technologies. 

Several commenters requested the 

exemption of speech generating devices 

(SGDs). They stated the functional, 

physical, operational, and support 

characteristics of a specific SGD model 

are selected based on the individual 

needs of the beneficiary. The 

commenters reported that Medicare has 

purchased fewer than 5,000 SGDs since 

2001. They indicated that, on average, 

1,211 SGDs are purchased per year, and 

that in 2004, Medicare spent only 

$4,562 on SGDs (code E2511), less than 

$220,000 on mounting systems (code 

E2512), and less than $280,000 on all 

SGD accessories. 

Some commenters requested that 

CMS not create a product category that 

consists of ‘‘infusion pumps and related 

drugs.’’ They pointed out that infusion 

drugs are covered under the DMEPOS 

benefit because they go through the 

pump, which is DME. They added that 

managed care plans include home 

infusion therapy coverage under either 

their major medical benefit or their 

prescription drug benefit and that 

Medicare Part D covers hundreds of 

home intravenous drugs. The 

commenters believed that there is 

confusion among beneficiaries who 

require Medicare Part B and Part D 

drugs, and that adding infusion pumps 

that are used for drug administration to 

competitive bidding will confuse both 

beneficiaries and referral agents further. 

They also indicated that these devices 

vary in drug therapy, technology, length 

of treatment, and site of care, and that 

the devices range from critical acute 

care to chronic infusion. 

Some commenters requested the 

exemption of enteral nutrition 

equipment and supplies. They believed 

that the use of competitive bidding to 

set prices under Medicare has not been 

tested sufficiently or successfully. The 

commenters indicated that Medicare 

allowed charges for enteral nutrition 

decreased by approximately 5 percent 

from CY 2003 to CY 2004. They 


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reported that there is confusion among 

beneficiaries who require Medicare Part 

B and Part D drugs, and believed that 

adding competitive bidding will only 

confuse beneficiaries and referral agents 

further. 

A few commenters requested the 

exemption of transcutaneous electrical 

nerve stimulator (TENS) devices from 

competitive bidding. They believed that 

these devices constitute a miniscule 

percentage of Medicare charges, and 

that including these devices in one 

product category will induce 

beneficiaries to purchase inferior 

services. They reported that some 

manufacturers include a post-sale 

periodic monitoring service, whereas 

others do not. 

Some commenters requested the 

exemption of support surfaces until the 

completion of the Support Surface 

Standards Initiative. They indicated that 

data from the Agency for Healthcare 

Research and Quality showed an 

increase in hospitalizations for 

beneficiaries with pressure ulcers up to 

63 percent during the period 1993 

through 2003. The commenters 

recommended that if support surfaces 

are selected for competitive bidding, 

CMS subdivide the codes and evaluate 

separate bids for each subcategory. They 

also recommended that stakeholders be 

consulted regarding the subcategories. 

Several commenters stated that 

Medicare should not subject visionrelated DMEPOS commonly dispensed 

by optometrists to competitive bidding. 

They believed that optometrists should 

not be required to submit a bid. 

Many commenters recommended the 

following sources for gathering 

information about various homecare 

services and allowed charges: American 

Society for Parenteral and Enteral 

Nutrition (ASPEN), American 

Association for Respiratory Care 

(AARC), American Nurses Association 

(ANA), American Dietetic Association 

(ADA), National Home Oxygen Patients 

Association (NHOPA), American Lung 

Association (ALA), American Diabetes 

Association (ADA), Joint Commission 

on the Accreditation of Healthcare 

Organizations (JCAHO), and other 

accrediting organizations. 

Response: Section 1847(a)(3)(B) of the 

Act grants us the authority to exempt 

items and services for which the 

application of competitive bidding is 

not likely to result in significant 

savings. Section 1847(a)(1)(B)(ii) of the 

Act gives us the authority to phase in 

competitive bidding ‘‘first among the 

highest cost and highest volume items 

and services or those items and services 

that the Secretary determines have the 

largest savings potential.’’ As we stated 

in the May 1, 2006 proposed rule, we 

will consider annual Medicare allowed 

charges, annual growth in expenditures, 

the number of suppliers furnishing the 

item, reports and studies, and data 

showing whether we realized savings by 

including the item in the competitive 

bidding demonstrations to determine 

whether including an item(s) under the 

competitive bidding programs is likely 

to result in significant savings. As we 

evaluate specific items for inclusion in 

competitive bidding programs, we will 

also consider the recommendations 

offered by these commenters. We note 

that diabetic shoes and inserts, 

prosthetics for the foot, splints and 

casts, prosthetic devices that aid vision, 

and surgical dressings are not among the 

items and services described in section 

1847(a)(2) of the Act and, therefore, 

cannot be included in the competitive 

bidding programs. 

Comment: Some commenters 

recommended that CMS publish the 

items that will be included in the initial 

competitive bidding programs in an 

interim final rule. They also believed 

that a meeting should be scheduled with 

the PAOC to solicit additional public 

comment after product selections are 

announced. 

Response: We intend to announce the 

product categories for competitive 

bidding on or shortly after the date of 

issuance of this final rule, and we will 

designate the items to be included in 

each competitive bidding program 

through program instructions or by 

other means, such as the RFB, and post 

them on our Web site. We do not believe 

that we need to publish the list of items 

in the form of an interim final rule in 

the Federal Register. We also note that 

the PAOC provided feedback on the 

criteria for item selection that we 

proposed in the May 1, 2006 proposed 

rule. Further, the public had the 

opportunity to comment on our 

proposed methodology for item 

selection through the public notice and 

comment rulemaking process, and the 

opportunity to participate in PAOC 

meetings that dealt with this subject. We 

will take under consideration the 

commenters’ suggestion to hold future 

PAOC meetings on item selection. 

Comment: Several commenters 

requested an explanation of the specific 

measure that will be used to identify an 

item’s true potential savings after 

accounting for any recent policy 

changes and rate cuts. They asked if any 

thresholds would be used to measure 

the actual savings. They reported that 

changes in payment policy significantly 

decreased CY 2003 allowed charges for 

oxygen equipment, nebulizers, and 

inhalation drugs. The commenters also 

reported that payment for glucose 

meters, test strips, and lancets were 

previously frozen in CYs 1998, 1999, 

and 2000 and again in CY 2002. They 

indicated that these payment freezes 

call into question the feasibility of 

achieving significant additional 

Medicare savings through competitive 

acquisition. The commenters believed 

that the annual growth in expenditures 

for the above items could be attributed 

to other factors such as an increase in 

the number of new beneficiaries or the 

elimination of Medicare Advantage 

Plans in various markets. Many 

commenters recommended establishing 

a savings threshold that would use 

ongoing administrative allowed charges 

to assess the appropriateness of 

competitive bidding for each product 

category. They recommended using a 

threshold of a 10-percent margin to 

determine the net savings after 

excluding administrative costs 

associated with the ongoing support of 

the competitive bidding programs from 

the total savings incurred. 

Response: We will determine which 

items offer the best savings potential. 

We disagree that an exact dollar 

threshold is appropriate for determining 

if significant savings will be achieved 

for an item under a competitive bidding 

program because it would be logistically 

difficult to set an exact number for what 

the savings will be for a particular item 

until we receive the bids. Once we 

receive the bids, we can estimate the 

dollar savings amount to determine 

whether that represents an appropriate 

savings. In addition to allowed charges 

and utilization, we identified in the 

proposed rule the following variables 

that we will use to select items for 

competitive bidding: annual growth in 

expenditures; number of suppliers; 

savings in the DMEPOS competitive 

bidding demonstrations; and reports 

and studies. We stated that we would 

use all of these variables to make 

determinations about an item’s potential 

to reduce costs for the Medicare 

program. We will also assure savings 

because we will not accept a bid to 

furnish an item unless the submitted bid 

price is at or below the fee schedule 

amount for the item. 

Comment: Some commenters 

suggested that the greatest potential for 

savings to the Medicare program could 

be achieved by eliminating coverage of 

specific DME items or entire product 

categories. 

Response: We appreciate the 

comment. However, competitive 

bidding is a program for determining 

Medicare payment for covered items 

and services and does not supersede any 


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Medicare rules, policies, or procedures 

relating to coverage. 

Comment: Some commenters reported 

that the proposed rule indicates 

Medicare expenditures for DME 

infusion pumps and related drugs in CY 

2003 were approximately $149 million. 

They indicated that this number appears 

to include expenditures made for 

insulin and insulin pumps for 

beneficiaries with diabetes, which are 

not provided by infusion pharmacies 

and largely serve a different beneficiary 

market than infusion pumps and related 

drugs used by beneficiaries for other 

medical conditions. They believe that 

the more accurate amount of Medicare 

expenditures for CY 2003 for DME 

infusion pumps and related drugs was 

approximately $87 million. 

Response: Insulin pumps are a type of 

infusion pump used by beneficiaries 

with diabetes and currently are 

included in the SADMERC policy group 

for external infusion pumps and related 

drugs. Although we will be using the 

SADMERC policy groups to identify 

groups of items that we will consider 

including in one or more competitive 

bidding programs, the actual product 

categories that we develop might be a 

subset of items from a SADMERC policy 

group or a combination of items from 

different SADMERC policy groups. In 

determining which items are 

appropriate to include in a product 

category, we will also evaluate its 

savings potential, as discussed above. 

Comment: Many commenters believed 

that the OIG and GAO reports and 

studies focus largely on a narrow issue 

or a small subset of issues, and as a 

result, the reports often reflect a skewed 

perspective of the particular problem 

and the suggested solution to that 

problem. They believed that none of the 

historical OIG studies reflects the cost of 

accreditation or complying with the 

quality standards that are the bases of 

accreditation. They believed that the 

OIG studies do not focus on the services 

and functions required of suppliers, the 

allowed charges associated with these 

services and functions, or whether 

payment rates are limited to the allowed 

charges of items and equipment. In 

addition, they indicated that the OIG 

reports generally collect information 

from across the United States, while 

competitive bidding is market-specific. 

In light of these discrepancies, they 

recommended that our decisions should 

not rely heavily on OIG reports when 

we select items for inclusion in the 

competitive bidding programs. 

Response: We believe that the OIG 

and GAO reports and studies provide 

useful information for identifying items 

with high expenditures. However, we 

will not rely solely on these reports. As 

we indicated in the proposed rule, we 

would rely on several variables in 

determining the savings potential for 

specific items or categories of items. 

Those variables include annual allowed 

charges, annual growth in expenditures, 

number of suppliers, savings under the 

demonstrations, and various reports and 

studies conducted by CMS and other 

Federal agencies. 

After consideration of the public 

comments we received, we are adding a 

definition of the term ‘‘minimal selfadjustment’’ under § 414.402. We are 

also finalizing § 414.406(d), with a 

technical change. We are specifying that 

when we designate the items that will 

be included in each competitive bidding 

program, we will do so by program 

instructions or by other means, such as 

the RFB or our Web site. 

G. Submission of Bids for Competitively 

Bid DMEPOS (§§ 414.404, 414.408, 

414.412, and 414.422) 

Sections 1847(b)(6)(A)(i) and 

(b)(6)(A)(ii) of the Act provide that 

payment will not be made under 

Medicare Part B for items furnished 

under a competitive bidding program 

unless the supplier has submitted a bid 

to furnish those items and has been 

selected as a contract supplier. 

Therefore, in order for a supplier that 

furnishes competitively bid items in a 

CBA to receive payment for those items, 

the supplier must have submitted a bid 

to furnish those particular items and 

must have been awarded a contract to 

do so by CMS (proposed § 414.412). In 

section II.C.6. of the May 1, 2006 

proposed rule (71 FR 25664), we 

proposed that there would be limited 

exceptions to this requirement for items 

required by beneficiaries who reside in 

a CBA but are out of the area and need 

items (proposed § 414.408(f(2)(ii))). We 

also proposed that there would be an 

exception for suppliers that are 

grandfathered to continue to provide 

and service certain items 

(§ 414.408(f)(2)(i), as discussed in 

section VI.D.3. of this final rule. 

1. Furnishing of Items (§§ 414.412(c) 

and 414.422(e)) 

In the May 1, 2006 proposed rule, 

under proposed § 414.422(e) we 

proposed that a contract supplier must 

agree to furnish the items included in its 

contract to all beneficiaries who 

maintain a permanent residence in, or 

who visit, the CBA and who request 

these items from the contract supplier. 

However, as we explained in the 

proposed rule (71 FR 25672 and 25681), 

we proposed that a skilled nursing 

facility (SNF) as defined in section 1819 

of the Act that is also a contract supplier 

must only agree to furnish the items 

included in the contract to patients to 

whom it would otherwise provide 

Medicare Part B services (proposed 

§ 414.422(e)(2)(i)). In addition, we 

proposed that a physician who is also a 

contract supplier must only agree to 

furnish the items included in the 

contract to his or her patients (proposed 

§ 414.422(e)(2)(ii)). Because suppliers 

will have to factor this requirement into 

their responses to the RFBs, we have 

chosen to discuss this requirement in 

this section of the final rule. 

a. Furnishing of Items to Medicare 

Beneficiaries Who Maintain a 

Permanent Residence in a CBA 

In the May 1, 2006 proposed rule (71 

FR 25681), we proposed that a contract 

supplier cannot refuse to furnish items 

and services to a beneficiary residing in 

a CBA based on the beneficiary’s 

geographic location within the CBA 

(proposed § 414.422(e)(1)). We indicated 

that this rule would prohibit a contract 

supplier from refusing to furnish items 

to beneficiaries because they are not in 

close proximity to that supplier. In 

order to ensure beneficiary access to 

competitively bid items that are rented, 

we proposed that the contract supplier 

must agree to accept as a customer a 

beneficiary who began renting the item 

from a different supplier regardless of 

how many months the item has already 

been rented. This is particularly 

important in those cases where a 

supplier or noncontract supplier does 

not elect to continue furnishing the item 

in accordance with the grandfathering 

provisions discussed in section VI.D.3. 

of this final rule. Suppliers must factor 

the cost of furnishing items in these 

situations into their bid submissions. 

In addition, in order to ensure 

beneficiary access to the competitively 

bid items in the inexpensive or 

routinely purchased DME payment 

category, or to a competitively bid 

power wheelchair, we proposed that the 

contract supplier must agree to give the 

beneficiary or his or her caregiver the 

choice of either renting or purchasing 

the item and must furnish the item on 

a rental or purchase basis as directed by 

the beneficiary or the beneficiary’s 

caregiver. Suppliers must factor the cost 

of furnishing these items on both a 

rental and purchase basis into their bid 

submissions. 

Comment: One commenter requested 

that CMS clarify that a contract supplier 

can limit the number of items it 

provides in each category to its 

contracted capacity. 

Response: As part of a supplier’s 

response to the RFB, a supplier will be 


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expected to state its projected capacity 

to furnish the items in each product 

category for which it is submitting a bid. 

The projected capacity submitted by a 

supplier would not become a binding 

term of the contract because contract 

suppliers will be required to furnish the 

items in their contract to all 

beneficiaries who maintain a permanent 

residence in the CBA, or who visit the 

CBA, and who request the items from 

them unless one of the exceptions 

discussed in this final rule applies. 

b. Furnishing of Items to Medicare 

Beneficiaries Whose Permanent 

Residence Is Outside a CBA 

In the May 1, 2006 proposed rule (71 

FR 25681), we proposed that in order to 

obtain medically necessary DMEPOS 

items, a Medicare beneficiary whose 

permanent residence is located outside 

of a CBA must use a contract supplier 

to obtain all items subject to competitive 

bidding in the CBA that he or she visits. 

We considered allowing beneficiaries 

whose residence is outside of a CBA to 

obtain these items from noncontract 

suppliers when coming into a CBA. 

However, consistent with section 

1847(b)(6) of the Act, we proposed that 

beneficiaries would be required to use a 

contract supplier because we believe 

that new business for competitively bid 

items should be directed only to 

contract suppliers. Noncontract 

suppliers would be allowed to continue 

servicing current beneficiaries who 

maintain a permanent residence in a 

CBA if they qualified for the 

grandfathering program discussed in 

section VI.D.3. of this final rule. 

Comment: One commenter stated that 

CMS should indicate how the provision 

to furnish competitively bid items to 

Medicare beneficiaries whose 

permanent residence is outside a CBA 

will be communicated to beneficiaries 

who are visiting a CBA. 

Response: Noncontract suppliers 

located in a CBA will be informed that 

they are not eligible to furnish 

competitively bid items to beneficiaries 

visiting the CBA and as we discussed 

earlier in this final rule, beneficiaries 

will not be held liable to make a 

payment for an item furnished in 

contravention of this rule, unless the 

beneficiary signs an ABN indicating the 

beneficiary’s knowledge and 

understanding that Medicare will not 

pay for that item. Noncontract suppliers 

will be educated to refer beneficiaries to 

contract suppliers in these situations. 

We are also planning an extensive 

educational campaign to inform the 

public of the requirement that an item 

must be obtained from a contract 

supplier when a beneficiary is visiting 

a CBA, if the item that the beneficiary 

needs is included in the competitive 

bidding program for the CBA that the 

beneficiary is visiting. A list of all 

contract suppliers along with other 

competitive bidding information will be 

on the CMS and CBIC Web sites. This 

information will also be available to 

beneficiaries through the toll-free 

telephone number 1–800 Medicare. 

Comment: One commenter stated that 

it was confused as to whether certain 

products might be drop-shipped into the 

area where the beneficiary is visiting. 

The commenter requested clarification 

on this because the commenter believed 

there are many types of equipment such 

as oxygen equipment that should not be 

drop-shipped. Another commenter 

stated that a beneficiary visiting in the 

CBA should not be required to use a 

contract supplier because such a 

requirement would confuse 

beneficiaries. The commenter 

recommended that CMS not adopt the 

proposed rule or modify it so that it 

only applies to beneficiaries who have 

resided in the CBA for 3 or more 

months. Two commenters stated that 

there will be an undue impact on 

‘‘snowbirds’’ as a result of the 

requirement that contract suppliers 

furnish items to Medicare beneficiaries 

whose permanent address is outside the 

CBA and that this provision should not 

be adopted. 

Response: The proposed requirement 

would establish a process whereby 

beneficiaries visiting a CBA must get a 

competitively bid item for that CBA 

from a contract supplier that furnishes 

the item in the CBA. If, however, the 

beneficiary needs an item that is 

included in the competitive bidding 

program for the CBA that the beneficiary 

is visiting (even if the item is not 

included in the competitive bidding 

program for the CBA where the 

beneficiary maintains a permanent 

residence), the beneficiary would be 

required to obtain the item from a 

contract supplier in the CBA where the 

beneficiary is visiting. Therefore, if a 

beneficiary is visiting a CBA, he or she 

may obtain the item from a contract 

supplier, and there would be no reason 

to drop-ship a product. As we explained 

in our response to the previous 

comment, we plan to implement a 

process by which beneficiaries will be 

able to locate contract suppliers in a 

CBA where they are visiting. We believe 

that a beneficiary who visits a CBA 

should be required to obtain 

competitively bid items for that CBA 

only from contract suppliers for that 

CBA because we believe that new 

business for these items should only be 

directed to contract suppliers. The 

purpose of competitive bidding is to 

award contracts to certain suppliers 

based upon their winning bids and to 

ensure the beneficiaries receive items 

from these suppliers. 

Comment: One commenter suggested 

that CMS establish a system to ensure 

that all beneficiaries will continue to 

have access to their DMEPOS supplies, 

even while visiting an area that is not 

the beneficiary’s CBA. The commenter 

stated that CMS should require that 

suppliers aggressively educate 

beneficiaries on the proper procedures 

for obtaining their supplies while away 

from home, and should allow 

beneficiaries to purchase extra supplies 

for extended vacations or temporary 

changes of residence. The commenter 

also urged CMS to allow beneficiaries to 

purchase their supplies from 

noncontract suppliers in the event of an 

emergency. 

Response: As we discussed above, we 

will conduct an extensive education 

campaign to educate beneficiaries, 

suppliers, and referral agents on how 

beneficiaries who are away from home 

can obtain medically necessary items. 

As we proposed, our contract supplier 

selection methodology will ensure there 

are enough contract suppliers in each 

CBA to ensure beneficiary access to 

needed items and services. In addition, 

beneficiaries on vacation or who have 

temporary changes of residence will be 

able to obtain competitively bid items 

that are included in the competitive 

bidding program for the CBA that they 

are visiting from contract suppliers for 

that CBA. Contract suppliers will be 

listed on the Internet in order for 

beneficiaries to determine who the 

contract suppliers are in the CBA they 

are visiting. As we explained above, we 

will require that contract suppliers 

assist Medicare beneficiaries in locating 

contract suppliers while visiting other 

CBAs. We do not believe an exception 

is needed in the event of an emergency 

because we will ensure that there will 

be a sufficient number of contract 

suppliers in a CBA to meet the access 

needs of beneficiaries. 

2. Requirements for Providers to Submit 

Bids (§§ 414.404(a) and 414.422(e)(2)) 

In the May 1, 2006 proposed rule (71 

FR 25672), we proposed in § 414.404(a) 

that the Medicare DMEPOS Competitive 

Bidding Program would apply to 

suppliers, and in proposed § 414.404(b) 

that the program would apply to 

providers that furnish items under 

Medicare Part B as suppliers. 

Accordingly, providers that furnish 

Medicare Part B items are located in a 

competitive bidding area, and that are 

also DMEPOS suppliers would be 


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required to submit bids in order to 

furnish competitively bid items to 

Medicare beneficiaries. We also 

proposed that providers that are not 

awarded contracts must use a contract 

supplier to furnish these items to 

Medicare beneficiaries to whom they 

provide services. However, we proposed 

in new proposed § 414.422(e)(2)(i) that a 

SNF, as defined in section 1819(a) of the 

Act, would not be required to furnish 

competitively bid items to beneficiaries 

outside of the SNF if it elected not to 

function as a commercial supplier. We 

stated that this rule is consistent with 

the current practice of some SNFs to 

furnish Medicare Part B services only to 

their own residents. 

Comment: Several commenters 

recommended that CMS exclude 

institutional providers, such as SNFs 

and other long-term care facilities, from 

competitive bidding or exempt products 

that are primarily used in institutional 

settings from competitive bidding. They 

stated that because the residents of these 

institutions are often among the most 

frail and critically ill the level of care 

required for these patients should not be 

threatened or compromised by rules 

whose impact, although well-intended, 

are not conducive to the long-term care 

environment. The commenters believed 

that competitive bidding may distort 

current institutional purchasing patterns 

and result in higher prices. Several 

commenters also suggested that CMS 

postpone bidding in long-term care 

settings until CMS convenes a working 

group of key stakeholders to examine 

how the requirements for competitive 

bidding impact these facilities. They 

further stated that CMS should phase in 

the program over at least 4 years. Others 

suggested delaying implementation of 

the program. 

Response: Congress specifically 

provided that certain categories of items 

and services, specifically certain DME, 

medical supplies, enteral nutrients, 

equipment, and supplies, and OTS 

orthotics are subject to the Medicare 

DMEPOS Competitive Bidding Program 

and established phase-in 

implementation rules. Items and 

services may only be excepted from the 

program if we determine that they are 

not likely to result in significant savings 

if they are included. A large volume of 

enteral nutrients, equipment, and 

supplies are furnished to patients in 

SNFs and nursing facilities (NFs along 

with some OTS orthotics. Currently, we 

allow SNFs and nursing facilities (NFs) 

to choose whether to provide these 

services directly or under contract with 

an outside supplier. To avoid disruption 

of this practice, we will continue to 

provide SNFs and NFs with this choice. 

We continue to believe that Medicare 

DMEPOS Competitive Bidding Program 

should apply to institutional providers 

to the extent they furnish items under 

Part B because section 1847 of the Act 

does not distinguish these providers 

from other types of Part B suppliers. 

However, we believe that SNFs and NFs 

should be treated differently from other 

providers in terms of who they must 

furnish items to because they generally 

do not use a commercial model of 

providing services throughout the 

community. Instead, they generally 

provide items only to patients that 

reside in their facility. We do not 

believe it would be in the best interest 

of the program to exempt institutional 

providers from participating or delay 

implementation in these settings 

because these providers furnish items 

subject to competitive bidding to their 

residents, and the category of enteral 

nutrition, as a whole, is made up of 

high-cost, high-volume items. 

Therefore, we are finalizing our 

proposal under § 414.422(e)(2) to permit 

SNFs as defined in section 1819(a) of 

the Act, to furnish competitively bid 

items only to their own residents. We 

are extending this provision to NFs, as 

defined in section 1919(a) of the Act, 

because we believe the services they 

furnish, the customers they serve, and 

their business model are parallel to 

SNFs. A SNF or NF will still be required 

to submit a bid and have a bid in the 

winning range and the SNF or NF must 

indicate in its response to the RFB it 

intends to elect this option. If the SNF 

or NF is not selected as a contract 

supplier, it will have to use a contract 

supplier within the CBA to furnish 

competitively bid items to its residents. 

In addition, should a SNF or NF 

indicate in its response to the RFB that 

it plans to furnish items to beneficiaries 

who are not residents of its facility, this 

special rule will not apply and the SNF 

or NF will be required to furnish items 

to all beneficiaries who maintain a 

permanent residence in, or who visit, 

the CBA where the SNF or NF is 

located. 

Comment: One commenter stated that 

section 1847 of the Act was never 

intended to apply to institutional 

providers and that the phrase ‘‘items 

and services’’ means those that are 

purchased directly by individuals and 

not by institutions on behalf of 

individuals. The commenter further 

stated that section 1847(b)(4)(A) of the 

Act requires that CMS ‘‘take into 

account the ability of bidding entities to 

furnish items and services in sufficient 

quantities to meet the anticipated needs 

* * * in the geographical area covered 

under the contract on a timely basis.’’

The commenter believed that this 

sentence could be interpreted to mean 

that institutional providers are outside 

the scope of the competitive bidding 

program. The commenter indicated that 

institutions already purchase items for 

their patients through arrangements 

made in a variety of ways and that 

requiring them to participate in the 

Medicare DMEPOS Competitive Bidding 

Program could result in actually raising 

prices of items purchased by 

institutions. 

Response: We do not agree that 

sections 1847(a) and (b) of the Act only 

apply to items and services directly 

purchased by Medicare beneficiaries 

and does not apply to institutions that 

purchase on behalf of beneficiaries. 

Indeed, these sections identify the items 

and services subject to competitive 

bidding and provide that the program 

applies when these items are furnished 

under Medicare Part B. Therefore, to the 

extent that institutional providers are 

furnishing items as Part B suppliers, we 

believe that the Medicare DMEPOS 

Competitive Bidding Program should 

apply to them. However, as we 

explained above, we are allowing SNFs 

and NFs to elect to only furnish 

competitively bid items to residents in 

their facilities if they are selected as 

contract suppliers. 

Comment: Several commenters stated 

that hospital-based suppliers should not 

have to bid, as hospital-based suppliers 

are not structured to compete for all 

beneficiaries in the region. Some 

commenters stated that hospital-based 

suppliers should be eligible to 

participate in the competitive bidding 

program, if they are willing to accept the 

single payment amount. Other 

commenters stated that CMS should 

exclude hospital-based suppliers from 

having to serve all beneficiaries in a 

CBA. 

Response: Hospital-based suppliers 

provide the same ranges of items and 

services as other commercial suppliers. 

We believe hospital-based suppliers are 

different than SNFs and NFs because 

they do use a commercial model and do 

provide items to patients who do not 

reside in a hospital. Therefore, the 

hospital-based suppliers are competing 

with other commercial suppliers in the 

same area and should be considered as 

part of the same competitive bidding 

program for this reason. 

Comment: One commenter stated that 

CMS should not combine SNFs and 

physicians in the same competition 

with commercial DMEPOS suppliers. 

The commenter believed that including 

all of these provider/supplier types in 

the same bidding will distort the bid 

evaluation and selection because SNFs 


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and physicians will have significantly 

lower operating costs arising from the 

fact that because they do not have to 

serve all beneficiaries and they do not 

have to accept beneficiaries from 

noncontract suppliers, regardless of 

rental month. 

Response: We are establishing 

provisions that treat SNFs, NFs, 

physicians, and certain other 

nonphysician practitioners differently 

from other suppliers. As we discussed 

above, we are allowing SNFs and NFs 

that are selected as contract suppliers to 

furnish items only to their own patients. 

In addition, as we discuss more fully 

below, we will permit physicians and 

certain nonphysician practitioners to 

furnish certain competitively bid items 

to their own patients without submitting 

a bid and being selected as a contract 

supplier. We believe that it is 

appropriate to allow SNFs (and, as 

discussed above, NFs) to compete to 

serve their own patients, but we believe 

it is appropriate to include them in the 

same bidding process as other suppliers 

because the statute requires us to 

conduct bidding for items in which we 

expect savings. 

Comment: One commenter stated that 

the requirement that suppliers that are 

not awarded contracts must use a 

contract supplier to furnish 

competitively bid items to Medicare 

beneficiaries to whom they do provide 

services conflicts with current Medicare 

policies. The commenter asked how 

such a supplier would be able to 

subcontract to use a contract supplier to 

furnish supplies without violating 

current policies. 

Response: We do not believe that this 

requirement conflicts with current 

policy. Specifically, SNFs are currently 

allowed to have arrangements under 

which outside suppliers come to their 

facilities to provide enteral nutrients, 

equipment, and supplies. SNFs 

routinely engage in this practice. Under 

competitive bidding, SNFs that are not 

winning contractors must make 

arrangements to use a contract supplier 

in the community to furnish 

competitively bid items to residents of 

the facility. 

Accordingly, we are revising 

§ 414.404(a) to specify that the Medicare 

DMEPOS Competitive Bidding Program 

applies to providers that furnish items 

under Part B. In addition, we are 

redesignating proposed 

§ 414.422(e)(2)(i) as § 414.422(e)(2) and 

finalizing that section with the 

modifications discussed above. Finally, 

as we discuss below, we are deleting 

§ 414.422(e)(2)(ii) because we have 

modified our proposal regarding the 

applicability of the Medicare DMEPOS 

Competitive Bidding Program to 

physicians, and, as discussed below, 

placing the new provisions in 

§ 414.404(b). 

3. Physicians and Certain Nonphysician 

Practitioners (§§ 414.404(a) and (b)) 

In the May 1, 2006 proposed rule (71 

FR 25672), we proposed in proposed 

§ 414.404(c) that the Medicare DMEPOS 

Competitive Bidding Program would 

apply to physicians who furnish items 

under Medicare Part B as suppliers. 

Accordingly, physicians who are also 

DMEPOS suppliers would be required 

to submit bids and be awarded contracts 

in order to furnish items included in the 

competitive biding program for the area 

in which they provide medical services. 

We proposed that physicians who do 

not become contract suppliers must use 

a contract supplier to furnish 

competitively bid items to Medicare 

beneficiaries. However, in proposed 

§ 414.422(e)(2)(ii), we proposed that 

these physicians would not be required 

to furnish these items to Medicare 

beneficiaries who are not their patients. 

In proposing this policy for physicians 

who are also DMEPOS suppliers, we 

recognized that the physician selfreferral law (section 1877 of the Act, 

also known as the Stark law) generally 

prohibits physicians from furnishing to 

their office patients a variety of common 

DMEPOS items. Therefore, we proposed 

that physicians who choose to 

participate in the competitive bidding 

process must ensure that their 

arrangements for referring for and 

furnishing DMEPOS items under a 

competitive bidding program comply 

with the physician self-referral law as 

well as any other Federal or State law 

or regulation governing billing or claims 

submission. 

Comment: Several commenters 

suggested that CMS not require 

physicians, including podiatric 

physicians, to participate in the 

competitive acquisition program for 

certain DMEPOS. The commenters 

noted that under the physician selfreferral (‘‘Stark’’) provisions under 

section 1877 of the Act, a physician in 

a group practice may not refer Medicare 

beneficiaries to the group practice, and 

the group practice may not bill for any 

DME except crutches, canes, walkers, 

folding manual wheelchairs, and blood 

glucose monitors. The commenters also 

requested that CMS not require 

physician assistants, physical therapists, 

or occupational therapists to participate 

in the Medicare DMEPOS Competitive 

Bidding Program because those health 

care professionals are licensed by State 

boards. According to the commenters, if 

a physician or non-physician 

practitioner does not participate in the 

competitive bidding program, he or she 

should be reimbursed at the single 

payment amount for any DME items that 

are furnished to his or her own patients. 

In addition, the commenters requested 

that CMS clarify how the requirement 

for physicians to submit bids and 

provide all items within a product 

category does not violate the physician 

self-referral law. 

Response: After considering the 

comments, in this final rule, we are 

deleting proposed § 414.404(c) and 

revising § 414.404(b) to give physicians 

(as defined at section 1861(r) of the Act, 

which includes podiatric physicians) 

and treating practitioners (defined in 

§ 414.404 as physician assistants, 

clinical nurse specialists, and nurse 

practitioners) the option to furnish 

certain types of competitively bid items 

without participating in the Medicare 

DMEPOS Competitive Bidding Program, 

provided that certain conditions are 

satisfied. First, the items that may be 

furnished are limited to crutches, canes, 

walkers, folding manual wheelchairs, 

blood glucose monitors, and infusion 

pumps that are DME. Second, the items 

must be furnished by the physician or 

treating practitioner to his or her own 

patients as part of his or her 

professional service. Third, the items 

must be billed using a billing number 

assigned to the physician, the treating 

practitioner (if possible), or a group 

practice to which the physician or 

treating practitioner has reassigned the 

right to receive Medicare payment. We 

are adding a new § 414.404(b)(3) 

providing that the items furnished and 

billed in this manner will be paid at the 

single payment amount, which is the 

rate at which these items would 

otherwise be paid if this exception did 

not apply. We believe that physicians 

engaged in the practice of medicine (and 

their medical practices) should have the 

option not to participate in the 

competitive bidding program because, 

to comply with the physician selfreferral prohibition, they generally 

provide to their own patients only the 

DMEPOS items noted above. Because 

physician assistants, clinical nurse 

specialists, and certified nurse 

practitioners furnish services under the 

supervision of, or in collaboration with, 

a physician, we believe they (and the 

group practices that may bill for their 

services) should similarly have the 

option to not become a contract 

supplier. 

We are also modifying the regulation 

by adding § 414.404(b)(2) to give 

physical therapists in private practice 

and occupational therapists in private 

practice the option to furnish certain 


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types of competitively bid items without 

participating in the Medicare DMEPOS 

Competitive Bidding Program, provided 

that certain conditions are satisfied. 

First, the items that they may furnish 

without becoming a contract supplier 

are limited to OTS orthotics. Second, 

the items must be furnished only to 

their own patients as part of their 

professional service. OTS orthotics 

furnished in accordance with 

§ 414.404(b) by physical and 

occupational therapists who are not 

contract suppliers will be paid at the 

single payment amount. We are limiting 

this exception to the bidding 

requirement to OTS orthotics because 

we have determined that these are the 

items that would ordinarily be 

furnished as an integral part of 

occupational therapy or physical 

therapy services. 

We note that if a physician, treating 

practitioner, physical therapist in 

private practice, or occupational 

therapist in private practice wishes to 

furnish in a CBA a competitively bid 

item not specifically authorized by this 

rule, and can otherwise legally do so, 

the physician, treating practitioner, 

physical therapist in private practice, or 

occupational therapist in private 

practice would have to submit a bid and 

be awarded a contract to do so. 

The Medicare DMEPOS Competitive 

Bidding Program does not affect the 

applicability of the physician selfreferral provisions in section 1877 of the 

Act. All provisions of the physician selfreferral law remain fully in effect. In 

other words, notwithstanding the 

requirement that a contract supplier 

must furnish all items in a product 

category, a contract supplier cannot 

furnish an item as a result of a referral 

prohibited under section 1877 of the 

Act. We are revising proposed 

§ 414.422(e) to provide that a contract 

supplier must furnish all items in each 

product category to which the contract 

applies, ‘‘except as otherwise prohibited 

under section 1877 of the Act or any 

other applicable law or regulation.’’

Comment: Several commenters stated 

that there is no reason to treat 

occupational therapists and physical 

therapists differently from physicians. 

They stated that occupational therapists 

are not like ‘‘commercial suppliers’’ and 

should only have to furnish 

competitively bid items to their own 

patients. Several commenters requested 

that CMS exempt physical therapists in 

private practice from competitive 

bidding or give them special 

consideration under the competitive 

bidding program. They stated that 

physical therapists should be exempt 

from having to provide every item in a 

product category and CMS should allow 

them to participate even if they do not 

submit exactly the same type of bid 

required of large suppliers. Several 

commenters suggested that CMS 

exclude all occupational and physical 

therapists and hand therapists that 

provide pre-fabricated splints to 

Medicare beneficiaries from the 

competitive bidding program. They 

stated that CMS should ensure that 

occupational and physical therapists 

can continue to furnish orthotics to their 

patients. The commenters added that if 

they cannot dispense OTS orthotics to 

patients during visits, beneficiaries will 

need to make other arrangements to 

obtain the items. 

Response: As we stated above, we are 

revising § 414.404(b) to give 

occupational therapists in private 

practice and physical therapists in 

private practice the option to furnish 

OTS orthotics to their own patients as 

part of their professional practice 

without participating in the Medicare 

DMEPOS Competitive Bidding Program. 

We agree with these comments, but only 

as they relate to furnishing of OTS 

orthotics by occupational and physical 

therapists that provide these items in 

the course of therapy. There is a specific 

statutory benefit to pay for the services 

of occupational therapists and physical 

therapists. However, there is no 

comparable benefit that only pertains to 

hand therapists. We are limiting this 

exception to the bidding requirement to 

OTS orthotics because we have 

determined that these are the items that 

would ordinarily be furnished as part of 

occupational therapy or physical 

therapy professional services. In 

addition, physical and occupational 

therapists in private practice who elect 

to operate under this special exception 

may not furnish these items and 

services to beneficiaries outside of their 

normal practice without submitting a 

bid and being awarded a contract to do 

so. 

After consideration of the public 

comments, we are revising § 414.404(a) 

to specify that the Medicare DMEPOS 

Competitive Bidding Program generally 

applies to physicians, treating 

practitioners, physical therapists, and 

occupational therapists that furnish 

items under Part B. However, we are 

revising proposed § 414.404(b) to 

specify the terms and conditions under 

which physicians, treating practitioners, 

physical therapists, and occupational 

therapists do not have to participate in 

the program. Finally, to be consistent 

with our changes to § 414.404(b), we are 

not finalizing proposed 

§ 414.422(e)(2)(ii). 

4. Product Categories for Bidding 

Purposes (§§ 414.402 and 

414.412(b)(1),(c) Through (e)) 

In the May 1, 2006 proposed rule (71 

FR 25672), we proposed in 

§§ 414.412(b) through (d) to conduct 

bidding for items that are grouped into 

product categories. We proposed to 

require suppliers to submit a separate 

bid for all items that we specify in a 

product category. The submitted bid 

must include all costs related to the 

furnishing of each item such as delivery, 

set-up, training, and proper 

maintenance for rental items. However, 

we proposed to require suppliers to only 

submit bids for the product categories 

that they are seeking to furnish under 

the program. All items that would be 

included in a product category for 

bidding purposes would be detailed in 

the RFBs. We proposed to define the 

term ‘‘product category’’ (proposed 

§ 414.402) as a group of similar items 

used in the treatment of a related 

medical condition (for example, 

hospital beds and accessories). We 

explained that we believe the use of 

product categories will allow Medicare 

beneficiaries to receive all of their 

related products (for example, hospital 

beds and accessories) from one supplier, 

which will minimize disruption to the 

beneficiary. 

We also discussed in the proposed 

rule other design options that we 

considered but did not propose. One 

option was to require suppliers to 

submit a bid for all items in every 

defined product category. Another 

option was for suppliers to bid at the 

HCPCS level and submit a bid only for 

the individual items that they were 

seeking to furnish under the program. 

There are currently approximately 55 

separate policy groups already 

established by the DME MACs. 

However, these policy groups were not 

established for the purpose of 

competitive bidding. We proposed to 

specifically develop product categories 

for the purpose of competitive bidding. 

Each group would be defined and 

comprised of individual HCPCS codes. 

Section 1847(a)(3)(B) of the Act gives 

us the authority to exempt items for 

which the application of competitive 

bidding is unlikely to result in 

significant savings. We proposed not to 

include items in a product category if 

they are rarely used or billed to the 

program. In addition, we did not 

propose to include items within a 

product category if we believed that 

these were items for which we might 

not realize savings. Therefore, under 

this approach, we proposed to establish 

product categories to identify those 


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items included in competitive bidding 

and stated that we might choose to 

establish different product categories 

from one CBA to another, as well as in 

different rounds of competitive bidding 

in the same CBA. 

We proposed to allow suppliers to 

submit bids only for the product 

categories they are seeking to furnish 

under a competitive bidding program 

because this option accommodates 

DMEPOS suppliers that want to 

specialize in one or a few product 

categories. For example, if a supplier 

wanted to specialize in the treatment of 

respiratory conditions, the supplier 

could choose to bid on all items that fall 

within the oxygen product category, the 

continuous positive airway pressure 

product category, or the respiratory 

assist device product category. We 

believe that specialization at the 

product category level will make it 

easier for referral agents (entities that 

refer beneficiaries to health care 

practitioners or suppliers to obtain 

DMEPOS items) and other practitioners 

to order related products from the same 

supplier. 

Establishing a bidding process that 

promotes specialization would allow 

suppliers to realize economies of scope 

within a product category, which means 

that a supplier may be able to furnish 

a bundle of items at a lower cost than 

it can produce each individual item. In 

our view, this approach would also be 

more favorable to small suppliers 

because they could choose to specialize 

in only one product category. It would 

be more difficult for a small supplier, as 

opposed to a large supplier, to furnish 

all product categories. This approach 

would also be more convenient for 

Medicare beneficiaries, as they could 

choose to receive all their related 

supplies from one supplier and would 

not have to deal with multiple suppliers 

to obtain the proper items for a single 

condition. We recognized the 

importance of the relationship between 

a DMEPOS supplier and the Medicare 

beneficiary. The supplier delivers the 

item to the beneficiary, sets up the 

equipment, and also educates the 

beneficiary on the proper use of the 

equipment. The use of product 

categories would facilitate the transition 

for those beneficiaries who have to 

change suppliers. We stated in the 

proposed rule that it was our goal to 

establish a productive relationship 

between the supplier and the 

beneficiary, and we believe we can 

accomplish this goal by designing the 

Medicare DMEPOS Competitive Bidding 

Program in a manner that would give 

the beneficiary the option of selecting 

one supplier that would be responsible 

for the delivery of all medically 

necessary items that fall within a 

product category. 

Comment: Some commenters 

recommended revising proposed 

§ 414.412(c) to read, ‘‘Product categories 

include items that are used to treat a 

related medical condition. The list of 

product categories, and the items 

included in each product category are 

identified in the RFBs document. The 

product categories should be consistent 

with the policy groups of the 

SADMERC, unless there is good cause to 

align items differently for a particular 

competitive bidding program.’’ The 

commenters also recommended revising 

§ 414.412(d) to read, ‘‘Suppliers must 

submit a separate bid for every item 

included in each product category that 

they are seeking to furnish under a 

competitive bidding program unless a 

bid is determined for a sub-category for 

bidding purposes.’’ Many commenters 

believed it will cause confusion if new 

product categories are developed. They 

reported that the CMS Web site is 

organized by policy groups and 

accessed by suppliers frequently for 

information. The commenters believed 

that keeping track of old categories and 

new categories in a single market or 

State would be next to impossible. 

Many commenters believed combining 

medical policies may affect beneficiary 

access or quality of services. They 

believed the only providers and 

suppliers that are eligible to bid are 

those that carry the broadest product 

offerings, and sometimes these are not 

the providers or suppliers with the 

strongest expertise in a specific product 

or HCPCS code. One commenter 

suggested that CMS include 

subcategories within a product category. 

Response: We have revised our 

proposed definition of ‘‘product 

category’’ to provide that product 

category is a grouping of related items 

that are used to treat a similar medical 

condition. The list of product categories 

and the items included in each product 

category that is included in each 

competitive bidding program will be 

identified in the request for bids 

document for that competitive bidding 

program and by other means. The DME 

MACs establish policy groups for the 

purposes of developing Medical review 

policies and for data analysis, and these 

policy groups will serve as the starting 

point for establishing product 

categories. Product categories will 

generally be consistent with these 

policy groups unless CMS determines 

that a policy group should be redefined 

for the purposes of competitive bidding 

because there may be items in the policy 

group that are either not subject to 

competitive bidding or that we would 

want to exempt from competitive 

bidding using our authority to exempt 

items. For this reason, the product 

categories for which we would request 

bids could also be a subset of items from 

a DME MAC policy group or a 

combination of items from different 

policy groups. 

In response to the suggestion that we 

create subcategories within a product 

category, we do not believe this 

approach is necessary because if we 

believed that we needed to separate 

items in a policy group, we would 

create a new product category for each 

set of items instead of a product 

category with subcategories. 

Comment: A few commenters 

believed that a product category such as 

‘‘oxygen equipment and related 

supplies’’ is likely to contain different 

oxygen delivery modalities such as 

stationary oxygen concentrators and 

liquid oxygen systems. They indicated 

that, while this may appear logical on 

the surface, the groupings are, in fact, 

incompatible with accurate bidding. 

The commenters added that the costs of 

acquisition, beneficiary support, and 

equipment maintenance and servicing 

are different for modalities. 

Response: We appreciate the 

comments and recognize that there are 

different costs associated with the 

different type of equipment that are 

used to furnish oxygen therapy. The 

standard payment methodology and 

monthly payment amount for oxygen 

and oxygen equipment have been 

modality neutral since 1989. It is our 

intention at this time to maintain the 

policy of modality neutral payments 

under the competitive bidding programs 

because this guards against suppliers 

attempting to furnish only the most 

expensive modalities that result in 

higher profits. For example, suppliers 

that submit bids for stationary oxygen 

and oxygen equipment will need to 

factor in the costs of furnishing all of the 

different modalities or delivering 

stationary oxygen to beneficiaries in the 

CBA because physicians may specify a 

specific oxygen modality when ordering 

the equipment. 

Comment: One commenter stated that 

the majority of its clients do not 

purchase items from just one policy 

group but rather from several groups. 

The commenter believed that bidding 

per product category sends clients from 

one supplier to another as their needs 

change and is not favorable to 

beneficiaries. 

Response: As stated above, we are 

revising § 414.402 to define a product 

category as a grouping of related items 

that are used to treat a similar medical 


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condition, for example, hospital beds 

and accessories. It is our goal to give 

beneficiaries an opportunity to receive 

all competitively bid items used to treat 

an individual medical condition from 

the same contract supplier, which will 

make the program convenient for them. 

This will be accomplished by requiring 

a supplier that chooses to bid on a 

particular product category to bid on 

every item within that category and to 

furnish every item within a product 

category for which it is awarded a 

contract. Suppliers currently specialize 

in particular products, and we do not 

see this process being interrupted by 

competitive bidding. In addition, 

suppliers will be able to choose which 

product categories for which they want 

to submit a bid. 

Comment: Several commenters raised 

concerns regarding the development of 

product categories. The commenters 

believed that product categories should 

be defined narrowly, to make sure they 

are consistent and representative of the 

products that a supplier might actually 

furnish. One commenter suggested, for 

example, a broad category for 

wheelchairs or power wheelchairs could 

be problematic. The commenter added 

that suppliers that do not specialize in 

rehabilitation may not carry every brand 

name of power wheelchairs that fall 

under a particular code. The 

commenters stated that CMS should not 

combine products from multiple 

medical review policies into one 

product category because it adds 

complexity and risks to the beneficiary 

because it may not allow suppliers to 

specialize in certain products. The 

commenters further stated that bidding 

by specific medical policies ensures that 

suppliers that specialize can address the 

needs of individuals with specific 

disease states/conditions. Several 

commenters requested that CMS not 

establish broad product categories. They 

further stated that many suppliers 

structure their business around specific 

disease states and conditions. The 

commenters noted that CMS should 

identify the quantities of each item 

within the product category that CMS 

expects will be required by Medicare in 

the respective CBA. Several commenters 

indicated that the core product 

categories should have codes that 

include sufficiently similar items in 

terms of capability, function, and other 

relevant characteristics. Some 

commenters believed that having broad 

product categories will restrict a 

specialty practitioner’s ability to submit 

a bid. 

Response: As we stated above, we will 

generally make the product categories 

consistent with the policy groups that 

have been defined by our contractors 

and, in the future, will be established by 

our contractors. We do not plan to make 

product categories overly broad, and we 

do not intend to combine products from 

various policy groups into a single 

product category unless the product 

already falls in several policy groups. 

However, the use of product categories 

instead of policy groups will allow us to 

exclude from a product category lowvolume items or items that we believe 

will not result in significant savings, 

and to add items that we believe are 

appropriate for inclusion because we 

believe that they are related items used 

to treat a similar medical condition. As 

we explain below, we will identify in 

the RFB and by other means such as our 

Web site or program instruction, the 

product categories for each competitive 

bidding programs, the items within each 

product category, the historic 

beneficiary demand for each item in the 

applicable CBA, and the item weight for 

each item within each product category. 

Comment: One commenter noted that 

the requirement to bid on all HCPCS 

codes in a product category would be a 

major problem for manufacturers that 

also serve as suppliers. The commenter 

also recommended that CMS adopt 

special rules for manufacturers wishing 

to bid, permitting them to only bid on 

products they manufacture. 

Response: The goal of product 

categories is to minimize the disruption 

to beneficiaries by allowing them to 

receive all related competitively bid 

items for a similar medical condition 

from one contract supplier. Therefore, 

we believe it would be in the best 

interest of beneficiaries if we require a 

contract supplier that is also a 

manufacturer to furnish all items within 

a product category. We also believe it 

would not be equitable to adopt special 

rules for manufacturers while requiring 

all other suppliers that are not 

physicians or certain nonphysician 

practitioners to furnish all items in a 

product category as defined for 

purposes of competitive bidding. 

Comment: Several commenters were 

concerned that a supplier that wins a 

bid in the wheelchair category may lose 

the bid for the associated cushions that 

are necessary for wheelchairs. They 

believed this would cause the patient to 

need to deal with two or more suppliers 

for a single rehabilitation wheelchair. 

Response: As explained above, 

product categories will be comprised of 

related items used to treat a similar 

medical condition. Our goal is to 

minimize beneficiary disruption. 

Therefore, product categories will 

generally be established so that 

beneficiaries can receive related items 

from the same contract supplier. 

Comment: Some commenters stated 

that complex rehabilitation products 

such as wheelchairs should not be 

competitively bid. They indicated that 

the accessory codes are the same for the 

accessories whether they are provided 

for a standard wheelchair or a complex 

mobility system. Therefore, they 

believed that the same HCPCS code may 

fall into several categories. 

Response: We recognize that certain 

accessories that can be used on manual 

wheelchairs can also be used with 

complex mobility systems. Under our 

revised definition of ‘‘item’’ a product 

might be identified by a HCPCS code 

that has been specified for competitive 

bidding (such as when the product is 

furnished through the mail). One way 

that we might choose to specify a 

product identified by a HCPCS code for 

competitive bidding is when an 

accessory such as the one identified by 

the commenters is needed for use with 

a particular item. When we announce 

the product categories and the items 

included in each product category, we 

will identify any items specified for 

purposes of competitive bidding, such 

as accessories used with certain base 

equipment in a specific product 

category. In this way, we will be able to 

ensure that each product category 

properly includes all the related items 

that are used to treat a similar medical 

condition. 

Comment: One commenter argued 

that CMS should limit bids to one bid 

per supplier. The commenter expressed 

concerns regarding national chains with 

multiple supplier numbers and 

indicated that these chains could 

potentially submit multiple bids in a 

CBA and compromise competition. The 

commenter suggested that CMS require 

that a single entity that has multiple 

supplier numbers only be allowed to 

submit one bid in each CBA. Under the 

commenter’s suggestion, affiliated 

entities that do not have their own 

Medicare supplier number, but that are 

part of a national supplier and operate 

under the national supplier’s 6-digit 

supplier number, would not be allowed 

to bid separately in a CBA. The 

commenter further suggested that CMS 

include a requirement in the regulations 

that suppliers with common ownership 

of 5 percent may only submit a single 

bid for each product category in a given 

CBA. 

Response: We agree with the 

commenter that commonly-owned 

suppliers or a supplier that has a 

controlling interest in another supplier 

should not be allowed to submit 

different bids for the same product 


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category in the same CBA. Therefore, we 

are requiring under revised § 414.412(e) 

that all bidding suppliers must disclose 

as part of their bid whether they have 

an ownership or controlling interest in 

one or more other suppliers or if one or 

more other suppliers has an ownership 

or controlling interest in it, CMS will 

reject multiple bids submitted by 

commonly-owned or controlled 

suppliers for the same product category 

in the same CBA because we believe 

that allowing these suppliers to bid 

against themselves will undermine the 

integrity of the bidding process. For 

purposes of this disclosure requirement, 

two or more suppliers are commonlyowned if one or more of them has an 

ownership interest totaling at least 5 

percent in the other(s). We are defining 

the term ‘‘ownership interest’’ as ‘‘the 

possession of equity in the capital, the 

stock, or the profits of another 

supplier.’’ This is consistent with how 

the term ‘‘ownership interest’’ is defined 

in 42 CFR § 420.201 of our regulations, 

which contains terms relevant to what 

certain entities, including DMEPOS 

suppliers, must currently disclose 

regarding ownership and control 

information. We believe it is a logical 

and appropriate approach to adapt 

definitions that apply to disclosure 

requirements in other parts of the 

Medicare program. In addition, the 5 

percent requirement is consistent with 

what constitutes a ‘‘person with an 

ownership or control interest’’ in 

§ 420.201. Finally , a supplier controls 

another supplier for purposes of these 

disclosure requirements if one or more 

of its owners is an officer, director, or 

partner in the other. This is also 

consistent with the definition of a 

‘‘person with an ownership or control 

interest’’ in § 420.201. 

Commonly-owned or controlled 

suppliers with multiple locations in the 

same CBA will be required to submit a 

single bid on behalf of all the locations 

and must indicate the combined 

capacity for all those locations. The bid 

must also include any locations outside 

the CBA that would be furnishing items 

in the CBA if a contract is awarded. 

Therefore, if we award a contract based 

on the single bid submitted by the 

commonly-owned or controlled 

suppliers, all of these suppliers would 

become contract suppliers. As stated 

above, we believe that these rules are 

necessary to prevent commonly-owned 

or controlled suppliers from bidding 

against themselves and undermining the 

integrity of the bidding process. In 

addition, contracting with all or none of 

the suppliers that are commonly-owned 

or controlled as described above will 

make it easier for beneficiaries to be 

informed regarding who is or who is not 

a contract supplier for their CBA. 

We are also revising our definition of 

‘‘product category’’ in § 414.402. We 

have combined proposed § 414.412(e) 

and proposed § 414.412(c) into a new 

§ 414.412(c), but deleted the first 

sentence of proposed § 414.412(c) as 

redundant because we include the 

definition of ‘‘product category’’ in 

§ 414.402, specified that the bid must 

include all costs related to furnishing an 

item to any beneficiary who maintains 

a permanent residence in, or who visits, 

the CBA where those items will be 

furnished and made additional 

technical changes. We are renumbering 

proposed § 414.412(b) a final 

§ 414.412(b)(1), and finalizing 

§ 414.412(d) with technical changes. 

Finally, we are finalizing § 414.412(e), 

which set forth our ownership rules, as 

discussed above. 

We are redesignating proposed 

§ 414.412(e) as final §§ 414.412(d) and 

adding a new § 414.412(e) to require 

that all bidding suppliers must disclose 

as part of their bid whether they have 

an ownership interest in one or more 

other suppliers that would be 

considered as contract supplier for the 

same CBA. 

5. Bidding for Specific Types of Items 

and Associated Payment Rules 

(§§ 414.408(f) Through (j)) 

In the May 1, 2006 proposed rule (71 

FR 25673 and 25674), we proposed that, 

in preparing a bid in response to the 

RFBs, suppliers would use our existing 

regulations at 42 CFR Part 414, Subparts 

C and Subpart D to determine whether 

a rental or purchase payment would be 

made for the item and whether other 

requirements would apply to the 

furnishing of that item, as further 

explained below. 

a. Inexpensive or Other Routinely 

Purchased DME Items (§§ 414.408(f) and 

(h)(6)) 

The current fee schedule amounts for 

inexpensive or other routinely 

purchased DME items are based on 

average reasonable charges for the 

purchase of new items, purchase of used 

items, and rental of items from July 1, 

1986, through June 30, 1987. In those 

cases where reasonable charge data from 

1986/1987 are not available, the fee 

schedule amounts for the purchase of 

new items are currently based on retail 

purchase prices deflated to the 1986/ 

1987 base period by the percentage 

change in the CPI-U, the fee schedule 

amounts for the purchase of used items 

are generally based on 75 percent of the 

fee schedule amounts for the purchase 

of new items, and the fee schedule 

amounts for the monthly rental of items 

are generally based on 10 percent of the 

fee schedule amounts for purchase of 

new items. This method of establishing 

fee schedule amounts in the absence of 

reasonable charge data has been in use 

since 1989. Under the Medicare 

DMEPOS Competitive Bidding Program, 

we proposed that bids be submitted 

only for the furnishing of new items in 

this category that are included in a 

competitive bidding program. Based on 

the bids submitted and accepted for 

these new items, we proposed to also 

calculate a single payment amount for 

used items based on 75 percent of the 

single payment amount for new items. 

In addition, we proposed to calculate a 

single payment amount for the rental of 

these items based on 10 percent of the 

single payment amount for new items. 

We stated our belief that calculating 

single payment amounts for used items 

and items rented on a monthly basis 

based on bids submitted and accepted 

for new items will simplify the bidding 

process and will not create problems 

with access to used items or rented 

items in this category. 

Comment: One commenter stated that 

inexpensive and routinely purchased 

DME items included in competitive 

bidding should be purchased items 

only. The commenter believed that the 

additional expense for contract 

suppliers to bill for rental items is 

prohibitive. The commenter added that, 

for inexpensive and routinely purchased 

items, the cost of billing and collection 

must be done numerous times at a 

substantial cost to the supplier. 

Response: There are certain items, 

such as pneumatic compression devices, 

that are routinely purchased but very 

expensive and may only be needed on 

a short-term basis. We believe that the 

option for renting these items is 

necessary in order to enable 

beneficiaries to save money, and we will 

allow beneficiaries to continue to do so 

under the competitive bidding 

programs. 

b. DME Items Requiring Frequent and 

Substantial Servicing (§ 414.408(h)(7)) 

In the May 1, 2006 proposed rule (71 

FR 25673), we proposed that bids be 

submitted for the monthly rental of 

items in this payment category with the 

exception of continuous passive motion 

exercise devices. We proposed that bids 

be submitted for the daily rental of 

continuous passive motion exercise 

devices. For items in this category other 

than continuous passive motion 

exercise devices, we stated that this 

proposal would be consistent with 

§ 414.222(b) of our existing regulations. 


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Coverage of continuous passive motion 

exercise devices is limited to 21 days of 

use in the home following knee 

replacement surgery. Therefore, 

payment can only be made on a daily 

basis as opposed to a monthly basis for 

this item. 

Based on the bids submitted and 

accepted for these items, we would 

calculate single payment amounts for 

the furnishing of these items on a rental 

basis. 

c. Oxygen and Oxygen Equipment 

(§ 414.408(i)) 

If included under a competitive 

bidding program, we proposed that the 

single payment amounts for oxygen and 

oxygen equipment would be calculated 

based on separate bids submitted and 

accepted for furnishing on a monthly 

basis of each of the oxygen and oxygen 

equipment categories of services 

described in § 414.226(b)(1)(i) through 

(b)(1)(iv). 

Subsequent to the publication of the 

May 1, 2006 proposed rule, we issued 

a final rule that implemented new 

payment classes for oxygen and oxygen 

equipment furnished for years after 

2006 (CMS–1304–F: Home Health 

Prospective Payment System Rate 

Update for Calendar Year 2007 and 

Deficit Reduction Act of 2005; Changes 

to Medicare Payment for Oxygen 

Equipment and Capped Rental Durable 

Medical equipment (71 FR 65884)). In 

accordance with these new rules, we 

will now calculate the single payment 

amounts for oxygen and oxygen 

equipment based on the separate bids 

submitted and accepted for the 

furnishing on a monthly basis of each of 

the oxygen and oxygen equipment 

payment classes described in 

§§ 414.226(c)(1)(i)–(v). 

We refer the reader to section VI.D.1. 

of this final rule where we discuss a 

new provision at § 414.408(i)(2) relating 

to additional payments to contract 

suppliers that must begin furnishing 

oxygen equipment after the rental 

period has already begun to a 

beneficiary who is no longer renting the 

item from his or her previous supplier 

because the previous supplier elected 

not to become a grandfathered supplier 

or the beneficiary elected to change 

suppliers. 

d. Capped Rental Items (§ 414.408(h)) 

With the exception of power 

wheelchairs, payment for items that fall 

into this payment category is currently 

made on a rental basis only. The rental 

fee schedule payments for months 1 

through 3 are based on 10 percent of the 

purchase price for the item as 

determined under § 414.229(c) of our 

existing regulations. The rental fee 

schedule payments for months 4 

through 15 are based on 7.5 percent of 

the purchase price for the item as 

determined under § 414.229(c) of our 

existing regulations. Section 5101(a) of 

the DRA of 2005 amended section 

1834(a) of the Act to require that on the 

first day that begins after the 13th 

continuous month during which 

payment is made for a capped rental 

item, the supplier of the item must 

transfer title to the item to the 

individual. Since this change does not 

apply to beneficiaries using a capped 

rental item prior to January 1, 2006, 

these beneficiaries may still elect either 

to take ownership of the item after 13 

months of continuous use or to continue 

renting the item beyond 13 months of 

continuous use. In addition, the DRA 

leaves intact the rule under which a 

supplier must offer the beneficiary the 

option to purchase a power wheelchair 

at the time the supplier initially 

furnishes the item (in which case 

payment would be made for the item on 

a lump-sum basis). However, with 

regard to all other capped rental items 

for which the rental period begins after 

January 1, 2006, the DRA requires the 

supplier to transfer title to the item to 

the beneficiary after 13 months of 

continuous use. 

We proposed that the lump sum 

purchase option for power wheelchairs 

be retained under the Medicare 

DMEPOS Competitive Bidding Program. 

At the time we issued the May 1, 2006 

proposed rule, this purchase option 

could be found in § 414.229(d) of our 

regulations. In accordance with a final 

rule that we subsequently published in 

the Federal Register on November 9, 

2006 (71 FR 65884), the purchase option 

for power wheelchairs furnished 

beginning on or after January 1, 2006, 

can be found in § 414.229(h). We also 

proposed that separate payment for 

reasonable and necessary maintenance 

and servicing only be made for 

beneficiary-owned DME and that 

payment for maintenance and servicing 

of rented items would be included in 

the single payment amount for rental of 

the item. 

We also proposed in the May 1, 2006 

proposed rule that ‘‘purchase’’ bids be 

submitted for the furnishing of new 

items in the capped rental category. 

Based on these bids, a single payment 

amount for purchase of a new item will 

be calculated for each item in this 

category for the purpose of determining 

both the single payment amount for the 

lump sum purchase of a new power 

wheelchair, and for calculating the 

single payment amounts for the rental of 

all items in this category. In cases where 

the beneficiary elects to purchase a used 

power wheelchair, the single payment 

amount for the lump sum purchase of 

the used power wheelchair would be 

based on 75 percent of the single 

payment amount for a new power 

wheelchair. In the case of all items in 

this category that are furnished on a 

rental basis, the single payment amount 

for rental of the item for months 1 

through 3 would be based on 10 percent 

of the single payment amount for 

purchase of the item, and the single 

payment amount for rental of the item 

for months 4 through 13 would be based 

on 7.5 percent of the single payment 

amount for purchase of the item. We 

stated our belief that calculating single 

payment amounts for used items and 

items rented on a monthly basis based 

on bids submitted and accepted for new 

items will simplify the bidding process 

and will not result in problems with 

access to used items or rented items in 

this category. 

Comment: One commenter believed 

that the rule does not address situations 

when a supplier has to rent an item to 

a beneficiary and the item is defined by 

the manufacturer as ‘‘single patient use 

only.’’ The commenter also believed 

that the rule does not address what 

happens to those products should the 

patient die. The commenter also 

questioned how CMS will handle the 

rental of products that have limited 

manufacturer warranties. 

Response: If a beneficiary dies during 

the period in which he or she is renting 

an item, the contract supplier would 

retain ownership of the item. As is the 

case today, if the item is designated by 

the manufacturer for a ‘‘single patient 

use only,’’ meaning that it cannot be 

used by other beneficiaries, the contract 

supplier may not furnish it to a new 

beneficiary. Medicare currently does not 

pay for costs that are covered by 

manufacturers’ warranties and this 

policy will not change under 

competitive bidding. 

Comment: One commenter suggested 

that CMS limit to discrete situations a 

requirement that contract suppliers of 

power wheelchairs offer rental items. 

The commenter was concerned that this 

rule would require suppliers to float a 

large volume of loans to subsidize 

rentals. The commenter further believed 

that most beneficiaries requiring power 

mobility have chronic progressive 

conditions that require them to keep the 

equipment for a long period of time. 

Response: We disagree with the 

commenter. Power wheelchairs are very 

expensive and may only be needed on 

a short-term basis. The option for 

renting these items is necessary to 

enable beneficiaries to save money, and 


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for this reason, we will allow them to be 

rented under the competitive bidding 

programs. 

We refer readers to section VI.D.1. of 

this final rule where we discuss 

additional payments to contract 

suppliers for capped rental DME when 

a contract supplier must begin 

furnishing a capped rental item during 

the rental period to a beneficiary who is 

no longer renting the item from his or 

her previous supplier because the 

previous supplier elected not to become 

a grandfathered supplier or the 

beneficiary elected to change suppliers. 

e. Enteral Nutrients, Equipment, and 

Supplies (§§ 414.408(f), (g)(2)–(3), and 

(h)(4)) 

Enteral nutrients, equipment, and 

supplies are currently paid under 

Medicare Part B on a purchase or rental 

basis. Section 6112(b)(2)(A) of the 

OBRA ’89 limits the rental payments to 

15 months. To be generally consistent 

with the bidding requirements 

discussed above for capped rental DME, 

in the May 1, 2006 proposed rule (71 FR 

25674), we proposed that bids be 

submitted for the purchase of new items 

in this category. Based on the bids 

submitted and accepted for new items, 

we would calculate a single payment 

amount for rented items for months 1 

through 3 based on 10 percent of the 

single payment amount for new items. 

The single payment amount for rented 

items for months 4 through 15 would be 

based on 7.5 percent of the single 

payment amount for new items. In cases 

where the beneficiary elects to purchase 

enteral nutrients, equipment, and 

supplies the single payment amount for 

new enteral nutrients, equipment, and 

supplies would be based on the bids 

submitted and accepted for new enteral 

nutrients, equipment, and supplies, and 

the single payment amount for used 

enteral equipment would be based on 75 

percent of the single payment amount 

for the purchase of new enteral 

equipment. 

Based on the bids submitted and 

accepted for new items, we would 

calculate a single payment amount for 

purchase of enteral nutrients, 

equipment, and supplies. 

Comment: One commenter noted that 

intravenous medication and enteral 

nutrients, equipment, and supplies 

should not be included in competitive 

bidding. The commenter did not believe 

it is appropriate to revise the payment 

methodology in this rule. The 

commenter suggested that CMS should 

not revise the enteral nutrients, 

equipment, and supplies fee schedule 

without formal comments from the 

industry. 

The commenter stated that because 

parenteral nutrients, equipment, and 

supplies were never intended to be 

included in competitive bidding, it is 

unclear why CMS proposed to revise 

this payment methodology at this time 

when some beneficiaries are attempting 

to coordinate their intravenous therapy 

needs between Medicare Part B and Part 

D. 

Several commenters stated that, under 

the proposed rule, payment for enteral 

pumps would be determined as if 

enteral pumps were a capped rental 

item. They stated that enteral pumps fall 

under the prosthetic device benefit and 

are paid under a specific fee schedule. 

These commenters added that there is 

no basis for the change in payment 

methodology for enteral nutrients, 

equipment, and supplies. Another 

commenter noted that CMS should 

modify the proposed payment structure 

for enteral pumps consistent with 

current fee schedule policy. 

Response: In accordance with section 

1847(a)(2)(B) of the Act, parenteral 

nutrients, equipment, and supplies 

cannot be part of the Medicare DMEPOS 

Competitive Bidding Program. However, 

the same section directs that enteral 

nutrients, equipment, and supplies be 

included in the program. In accordance 

with section 1847(a)(6) of the Act, the 

payment basis determined under the 

Medicare DMEPOS Competitive Bidding 

Program for enteral nutrients, 

equipment, and supplies replaces the 

payment basis that would otherwise 

apply under section 1842(s)(1) of the 

Act and 42 CFR Part 414, Subpart C of 

our regulations. Therefore, the payment 

methodology we establish for enteral 

nutrients, equipment, and supplies 

furnished under this program will 

replace the fee schedule methodology 

for those items. We proposed to retain 

many of the same rules that currently 

govern the rental or purchase of enteral 

nutrients, equipment, and supplies to 

make the transition to competitive 

bidding easier for both suppliers and 

beneficiaries. However, under 

§ 414.408(f), we are establishing a 

process for a supplier to bid on the 

purchase price for a new enteral pump. 

However, payments will be made on a 

rental basis if the beneficiary chooses to 

obtain the item on a rental basis or a 

purchase basis if the beneficiary chooses 

to obtain the item on a purchase basis. 

We also note that this rule does not 

supersede any laws for rules that govern 

whether a particular drug is covered 

under Medicare Part B or Part D. 

f. Maintenance and Servicing of Enteral 

Nutrition Equipment (§ 414.408(h)(5)) 

Section 6112(b)(2)(B) of OBRA ’89 

requires that we pay for maintenance 

and servicing of enteral nutrition 

equipment after monthly rental 

payments have been made for 15 

months. The maintenance and servicing 

payments are to be made in amounts 

that we determine are reasonable and 

necessary to ensure the proper operation 

of the equipment. Since October 1, 

1990, program instructions have 

specified when and how these payments 

are made. These program instructions 

are currently found at section 40.3 of 

Chapter 20 of the Medicare Claims 

Processing Manual (Pub. 100–04). These 

instructions provide that maintenance 

and servicing payments may be made 

beginning 6 months after the last rental 

payment for the equipment and no more 

often than once every 6 months for 

actual incidents of maintenance where 

the equipment requires repairs and/or 

extensive maintenance. Extensive 

maintenance involves the breaking 

down of sealed components or 

performance of tests that requires 

specialized testing equipment not 

available to the beneficiary or nursing 

facility. The program instructions also 

state that the maintenance and servicing 

payments cannot exceed one-half of the 

rental payment amounts for the 

equipment. 

Under the Medicare DMEPOS 

Competitive Bidding Program, we 

proposed at § 414.408(i)(3) (redesignated 

as § 414.408(h)(4) in this final rule) that 

the monthly rental payments for enteral 

nutrition equipment for months 1 

through 3 be equal to 10 percent of the 

single payment amounts for the 

purchase of the new enteral nutrition 

equipment. We proposed that for 

months 4 through 15, the monthly rental 

payment amounts would be equal to 7.5 

percent of the single payment amounts 

for the purchase of new items. We 

proposed that the contract supplier to 

which payment is made in month 15 for 

furnishing enteral nutrition equipment 

on a rental basis must continue to 

furnish, maintain, and service the pump 

for as long as the equipment is 

medically necessary. In addition, we 

proposed to establish the maintenance 

and service payments under proposed 

§ 414.408(i)(4) (redesignated as 

§ 414.408(h)(5) in this final rule) for 

enteral nutrition equipment so that they 

are equal to 5 percent of the single 

payment amounts for the purchase of 

new enteral nutrition equipment. This 

would limit the payment rate for 

maintenance and service to one-half of 

the rental payment amount for the first 


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month of rental, which is similar to the 

program instructions mentioned above. 

The provisions of the proposed rule are 

similar to current Medicare payment 

rules in section 40.3 of Chapter 20 of the 

Claims Processing Manual. 

g. Supplies Used in Conjunction With 

DME (§ 414.408(g)(1)) 

We proposed under proposed 

§ 414.408(h)(1) that bids be submitted 

for the purchase of supplies necessary 

for the effective use of DME, including 

drugs (other than inhalation drugs). 

Based on the bids submitted and 

accepted for these items, we would 

calculate single payment amounts for 

the furnishing of these items on a 

purchase basis. 

h. Off-the-Shelf (OTS) Orthotics 

(§ 414.408(g)(4)) 

We proposed under proposed 

§ 414.408(h)(4) that bids be submitted 

for the purchase of OTS orthotics. Based 

on the bids submitted and accepted for 

these items, we would calculate single 

payment amounts for the furnishing of 

these items on a purchase basis. 

Comment: One commenter agreed 

with the proposed distinction for 

prosthetics and orthotics. 

Response: We agree with the 

commenter because the statute 

distinguishes between prosthetics and 

orthotics. 

In summary, after consideration of all 

of the public comments received on the 

bidding requirements and associate 

payment rules described above, we are 

renumbering proposed §§ 414.408((g) 

through (j) as §§ 414.408(f) through (i), 

respectively, and finalizing these 

sections (with the exception of 

§ 414.408(h)(2) and (i)(2)), which have 

been added and finalized as described 

above, and with additional changes. 

VII. Conditions for Awarding Contracts 

for Competitive Bids 

In proposed § 414.414, we set forth a 

series of proposals regarding how we 

would evaluate and select suppliers for 

contract award purposes under the 

Medicare DMEPOS Competitive Bidding 

Program. Proposed § 414.414(a) 

provides generally that the rules in 

§ 414.414 govern the evaluation and 

selection of suppliers under the 

program. The specifics of our other 

proposals are discussed below: 

A. Quality Standards and Accreditation 

Section 1847(b)(2)(A)(i) of the Act 

specifies that a contract may not be 

awarded to any entity unless the entity 

meets applicable quality standards 

specified by the Secretary under section 

1834(a)(20) of the Act. Section 

1834(a)(20) of the Act instructs the 

Secretary to establish and implement 

quality standards for all DMEPOS 

suppliers in the Medicare program, not 

just for suppliers subject to competitive 

bidding or in CBAs. All suppliers must 

meet these quality standards to be 

eligible to submit claims to the 

Medicare program, irrespective of the 

Medicare DMEPOS Competitive Bidding 

Program. The quality standards are to be 

applied by recognized independent 

accreditation organizations that have 

been designated by the Secretary under 

section 1834(a)(20)(B) of the Act. 

Section 1834(a)(20)(E) of the Act 

explicitly authorizes the Secretary to 

establish the quality standards by 

program instruction or otherwise after 

consultation with representatives of 

relevant parties. We proposed that a 

grace period may be granted for 

suppliers that have not had sufficient 

time to obtain accreditation before 

submitting a bid. If a supplier does not 

then successfully attain accreditation, 

we will suspend or terminate the 

supplier contract. The length of time for 

the grace period will be determined by 

the accrediting organizations’ ability to 

complete the accrediting process within 

each competitive bidding area. The 

length of time of the grace period will 

be specified in the RFB for each 

competitive bidding program. 

In the May 1, 2006 proposed rule, we 

indicated that we had consulted with 

the PAOC and determined that it is in 

the best interest of the industry and 

beneficiaries to select the accreditation 

organizations and publish the quality 

standards through program instructions 

in order to ensure that suppliers that 

wish to participate in competitive 

bidding will know what standards they 

must meet in order to be awarded a 

contract. We proposed in § 414.414(c)(1) 

that all bidding suppliers must satisfy 

the quality standards in order to be 

eligible to participate in the Medicare 

DMEPOS Competitive Bidding Program. 

In proposed § 414.414(c)(2), we 

proposed that all bidding suppliers 

must be accredited by a CMS-approved 

accreditation organization, as defined 

under 42 CFR 424.57(a), but stated that 

a supplier would be considered to be 

grandfathered if it had received a valid 

accreditation before the CMS-approved 

accreditation organizations were 

designated and the accreditation was 

granted by an organization that CMS 

designates as a CMS-approved 

accreditation organization under 42 CFR 

424.58. 

To expedite the accreditation process 

for contract suppliers under the 

Medicare DMEPOS Competitive Bidding 

Program, we finalized the requirements 

for accreditation organizations as a new 

§ 424.58 as part of the DMEPOS 

provisions in the FY 2007 IRF final rule 

(71 FR 48354). We published the list of 

the selected accreditation organizations 

and the final quality standards through 

program instructions and posted the 

response to comments document on the 

quality standards. The names of the 

accreditation organizations and the final 

quality standards and our responses to 

public comments on the quality 

standards and on the portion of the 

proposed rule pertaining to the quality 

standards are posted on the CMS Web 

site at: http://www.cms.hhs.gov/ 

competitiveAcqforDMEPOS. 

B. Eligibility (§ 414.414(a) Through (c)) 

In the May 1, 2006 proposed rule (71 

FR 25675), we proposed in 

§ 414.414(b)(1) that all bidders must 

meet enrollment standards to be 

considered for selection as a contract 

supplier under the Medicare DMEPOS 

Competitive Bidding Program. These 

standards are included in the supplier 

standards regulation at § 424.57. In 

addition, we proposed § 414.414(b)(2), 

that each bidder must certify in its bid 

that its high level employees, chief 

corporate officers, members of board of 

directors, affiliated companies and 

subcontractors are not now and have not 

been sanctioned by any governmental 

agency or accreditation or licensing 

organization. In the alternative, the 

bidding supplier must disclose 

information about any prior or current 

legal actions, sanctions, or debarments 

by any Federal, State or local program, 

including actions against any members 

of the board of directors, chief corporate 

officers, high-level employees, affiliated 

companies, and subcontractors. 

In the preamble to the May 1, 2006 

proposed rule (71 FR 25675) we stated 

that sanctions would include, but are 

not limited to, debarment from any 

Federal program, OIG sanctions, or 

sanctions issued at the State or local 

level. In addition, we proposed that the 

bidder must have all State and local 

licenses required to furnish the items 

that are being bid (proposed 

§ 414.414(b)(3)). Finally, we proposed 

that the supplier must agree to all of the 

terms in the contract outlined in the 

RFBs (proposed § 414.414(b)(4)). We 

stated in the preamble to the May 1, 

2006 proposed rule (71 FR 25675) that 

we would suspend or terminate a 

contract if a supplier loses its good 

standing with us or any other 

government agency. 

Comment: Several commenters 

suggested that CMS require all contract 

suppliers to be physically located in the 

CBA for which they were awarded a 


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contract. Other commenters believed 

that relying on physical location would 

prevent participation of many suppliers, 

including several suppliers with 

capacity to operate on a national scale. 

The commenters believed that relying 

on physical location could cause 

product supply issues. Other 

commenters requested that CMS clarify 

whether a supplier can submit a bid if 

the supplier is not physically located in 

the CBA, but can show that it has a 

presence within the CBA. They asked 

whether CMS would quantify this for 

evaluation purposes. 

Response: We continue to believe that 

it is appropriate to allow suppliers that 

do not maintain a physical location in 

a CBA to submit a bid to furnish items 

in that CBA. One of the purposes of the 

program is to create a competitive 

bidding payment structure that is more 

reflective of a competitive market. By 

accepting bids from all suppliers that 

can meet the requirements of the 

program, regardless of their physical 

location, we believe that we will 

encourage a more robust competition 

that will result in the best possible 

prices for beneficiaries without 

compromising their access to DMEPOS. 

It is our intent to review each bidder to 

determine whether it can meet the 

requirements of the competitive bidding 

program for which they submit a bid. 

One of these requirements will be that 

the supplier must be able to 

demonstrate that it maintains a presence 

in the CBA. In other words, the supplier 

must be able to furnish items to all 

beneficiaries who maintain a permanent 

residence in the CBA, regardless of 

where that beneficiary is located, 

including delivering items and 

providing necessary training and 

ensuring that items are appropriately 

set-up in the beneficiary’s home. Thus, 

a supplier’s ability to furnish items to 

all beneficiaries in the CBA, and not its 

physical location, will be evaluated to 

determine whether the supplier meets 

this requirement. We would reject a bid 

if we determined that the bidding 

supplier did not meet this bidding 

requirement, or any other bidding 

requirement. 

Comment: Several commenters stated 

that CMS should apply an appropriate 

screening process to determine which 

bidder qualifies for consideration. They 

recommended that the bidding process 

include a 3-step elimination process in 

this order: Accreditation; financial 

standards; capacity assessment. The 

commenter suggested that only after this 

3-step screening is applied should CMS 

accept a bid. 

One commenter asserted that a 

supplier’s financial stability and 

accreditation must take place before bid 

prices are arrayed and the pivotal bid 

selected. Otherwise, the commenter 

believed the bidding pool will be 

tainted by bids from suppliers that are 

not qualified. The commenter suggested 

that bids from suppliers that have not 

satisfied the quality standards, are not 

accredited, and/or that do not meet 

CMS’ financial and eligibility standards 

should not be considered in selecting 

winning bids and setting payment 

amounts. The commenter also suggested 

that the rule should clarify that the 

establishment of a composite bid should 

only be completed for suppliers that 

meet the bidding requirements. 

Response: We will not award a 

contract to any supplier that does not 

meet our bidding requirements. Those 

requirements include complying with 

our eligibility standards, including 

compliance with the enrollment 

standards in § 424.57(c) of our 

regulations and disclosure of certain 

compliance-related issues, financial 

standards, quality standards, and 

accreditation standards unless a grace 

period for obtaining accreditation 

applies. We may allow a grace period 

for suppliers that have not yet been 

accredited at the time they submit their 

bid. To qualify for this grace period, a 

supplier must have submitted its 

application for accreditation to a CMSapproved accreditation organization and 

be waiting for the accreditation process 

to be completed by that organization. 

We expect that suppliers will have 

obtained their accreditation before they 

are awarded a contract under the 

Medicare DMEPOS Competitive Bidding 

Program. We will evaluate a supplier’s 

compliance with our bidding 

requirements before we finalize the 

pivotal bids as well as the single 

payment amounts. We will reject a bid 

that does not demonstrate that the 

supplier has met our bidding 

requirements. As a result, only bids 

from eligible, qualified, and financially 

sound suppliers will be used to 

determine the single payment amounts 

and select contract suppliers. 

We note that although we will be 

considering each supplier’s projected 

capacity as part of our determination of 

where to set the pivotal bid. 

Comment: One commenter stated that 

the proposed rule indicated that 

suppliers would have to disclose 

information on debarments, sanctions, 

or other legal actions affecting them. 

However, Form A, the application 

section of the RFB, requires suppliers to 

disclose information about pending or 

prior investigations. The commenter 

noted that investigations are merely 

fact-finding tools that do not presume 

guilt and should not be used to 

negatively impact a supplier’s bid 

evaluation. Another commenter stated 

that the term ‘‘sanctioned’’ is subject to 

being interpreted differently by each 

supplier. The commenter suggested that 

CMS detail what specific types of 

‘‘sanctions’’ should be included in the 

disclosure. In addition, the commenter 

suggested that CMS more clearly define 

what it meant when it stated that 

bidding suppliers would have to 

‘‘certify’’ in their bids that they, their 

high-level employees, chief corporate 

officers, members of the board of 

directors, affiliated companies, and 

subcontractors are not, and have not 

been, sanctioned by any governmental 

agency or accreditation or licensing 

organization. The commenter also 

wanted to know if CMS intends for the 

certification to take the form of a simple 

attestation or whether CMS would 

require suppliers to sign a prescribed 

legal statement testifying to the veracity 

of the disclosures or lack of disclosures. 

Response: We agree with this 

comment that investigations are not in 

themselves evidence of guilt. We did 

not propose in the May 1, 2006 

proposed rule to require a bidding 

supplier to disclose information in its 

bid about pending and prior 

investigations, and this final rule 

likewise does not require such 

disclosures. The RFB will conform to 

this final rule. We are revising proposed 

§ 414.414(b)(2)(ii) so that it clarifies 

what disclosures a supplier must make 

in its response to the RFB. Specifically, 

we will require that each bidding 

supplier must disclose information 

regarding—(1) Any revocations of a 

supplier number; and (2) sanctions, 

program-related convictions as defined 

in section 1128(a)(1) through (a)(4) of 

the Act, exclusions, or debarments 

imposed against the supplier, its highlevel employees, chief corporate 

officers, members of the board of 

directors, affiliated companies, and 

subcontractors by any Federal, State, or 

local agency. We are finalizing proposed 

§ 414.414(b)(2)(i) to require a supplier to 

certify in its bid that this information is 

complete and accurate. We might reject 

a bid based on these disclosures. As 

discussed more fully below, we might 

conclude that a contract supplier has 

breached its contract if we discover that 

the contract supplier did not fully 

comply with these disclosure 

requirements, or if it is sanctioned or 

debarred, has legal action taken against 

it, or falls out of compliance with the 

Medicare program requirements 

(compliance with which we 

characterized in the proposed rule as 


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the supplier being in ‘‘good standing’’

with CMS), including enrollment 

requirements set forth at §§ 424.500 et 

seq., during the contract term. 

We have added a cross-reference to 

final § 414.414(b) to indicate that 

networks (discussed more fully in 

section XII. of this final rule) must also 

meet the network requirements found in 

final § 414.418. 

After consideration of public 

comments, we are finalizing 

§ 414.414(a) without modification. We 

are finalizing §§ 414.414(b)(1)–(3) with 

the changes discussed above and with 

additional technical changes. 

C. Financial Standards (§ 414.414(d)) 

Section 1847(b)(2)(A)(ii) of the Act 

specifies that we may not award a 

contract to an entity unless the entity 

meets applicable financial standards 

specified by the Secretary, taking into 

account the needs of small providers. 

Applying financial standards to 

suppliers assists us in assessing the 

expected quality of suppliers, estimating 

the total potential capacity of selected 

suppliers, and ensuring that selected 

suppliers are able to continue to serve 

market demand for the duration of their 

contracts. Ultimately, we believe that 

financial standards for suppliers will 

help maintain beneficiary access to 

quality services. 

Therefore, as part of the bid selection 

process, we proposed that the RFBs 

would identify the specific information 

we will require to evaluate suppliers 

(proposed § 414.414(d)). We noted that 

this information may include: a 

supplier’s bank reference that reports 

general financial condition, credit 

history, insurance documentation, 

business capacity and line of credit to 

fulfill the contract successfully, net 

worth, and solvency. We welcomed 

comments on the financial standards, in 

particular the most appropriate 

documents that would support these 

standards. We found that, in the 

demonstration, general financial 

condition, adequate financial ratios, 

positive credit history, adequate 

insurance documentation, adequate 

business capacity and line of credit, net 

worth, and solvency were important 

considerations for evaluating financial 

stability. 

Comment: Several comments argued 

that the financial standards were too 

strict for certain suppliers and should be 

flexible enough to regulate mail order 

suppliers, small local suppliers, SNFs, 

departments of hospitals, retail 

pharmacies, and publicly-traded and 

privately-held family firms. The 

commenters stated that if financial 

standards are too restrictive, qualified 

suppliers might not be able to 

participate in the Medicare DMEPOS 

Competitive Bidding Program. They 

added that, conversely, if financial 

standards are too lax, suppliers may be 

financially unable to meet the 

challenges of a competitive market. 

Response: We have revised proposed 

§ 414.414(d) to indicate that the RFB 

form will specify the documents 

required as part of the bid application 

and that each supplier must submit this 

documentation along with its bid. We 

agree with the commenters that it is 

important to have financial standards 

that ensure suppliers are able to meet 

the challenges of competitive bidding 

and can fulfill their contract obligations. 

However, we also agree that our 

financial standards should not be so 

burdensome that suppliers, and 

especially small suppliers, cannot 

satisfy them. After further consideration 

and in response to comments, we 

believe that the proposed financial 

documentation discussed in the 

preamble to the proposed rule (71 FR 

25675) would be too burdensome, 

particularly for small suppliers. 

Therefore, in order to obtain a sufficient 

amount of information about each 

supplier while minimizing the burden 

on both bidding suppliers and the bid 

evaluation process, we will require that 

for the initial round of competition, 

suppliers must submit certain schedules 

from their tax returns, a copy of the 10K 

filing report from the immediate 3 years 

immediately prior to the date on which 

the bid is submitted (if the supplier is 

publicly traded) certain specified 

financial statement reports, such as cash 

flow statements, and a copy of their 

current credit report, which must have 

been completed within 90 days prior to 

the date in which the supplier submits 

its bid and must have been prepared by 

one of the following: Experian; Equifax; 

or TransUnion. All documents that are 

not prepared as part of a tax return must 

be certified as accurate by the supplier 

and must be prepared on an accrual or 

cash basis of accounting. This financial 

information will allow us to determine 

financial ratios, such as a supplier’s 

debt-to-equity ratio, and credit 

worthiness, which will allow us to 

assess a supplier’s financial viability. 

We will generally require that 

suppliers submit the same types of 

information for subsequent 

competitions, but we might choose to 

add or delete specific document 

requests as we gather experience on 

what financial information most 

accurately predicts whether a suppler is 

financially stable enough to participate 

in the Medicare DMEPOS Competitive 

Bidding Program. 

Comment: One commenter suggested 

that CMS also publish the criteria it will 

use to assess supplier’s financial 

stability and how it will rank suppliers 

based on these criteria. The commenter 

stated that bank statements should only 

be requested when we need to resolve 

doubts about the supplier’s other 

submissions. The commenter believed 

that if we maintain the requirement for 

bank statements, the statements need to 

be defined for the period for which we 

are requesting the financial information. 

Response: As we explained above, we 

recognize that our collection of financial 

information must be comprehensive 

enough to allow us to assess a supplier’s 

financial soundness, but not so 

burdensome as to encumber the bidding 

process (especially for small suppliers) 

and the bid evaluation process. 

Therefore, as stated above, we will 

require that for the initial round of 

competition, suppliers must submit 

certain schedules from their tax returns, 

a copy of their 10K filing report from the 

3 years immediately prior to the date on 

which the bid is submitted (if the 

supplier is publicly traded), certain 

specified financial statement reports, 

such as cash flow statements, and a 

copy of their current credit report, 

which must have been completed 

within 90 days prior to the date in 

which the supplier submits its bid and 

must have been prepared by one of the 

following: Experian; Equifax; or 

TransUnion. 

We will generally require that 

suppliers submit the same types of 

information for subsequent 

competitions, but we might choose to 

add or delete specific document 

requests as we gather experience on 

what financial information most 

accurately predicts whether a suppler is 

financially stable enough to participate 

in the Medicare DMEPOS Competitive 

Bidding Program. 

Comment: Several commenters stated 

that CMS should consider the supplier’s 

debt-to-equity ratio (long-term debt 

divided by shareholders’ equity). They 

indicated that this is a measurement of 

a supplier’s capacity to borrow and 

expand. One commenter indicated, 

however, that this measurement will be 

problematic when applied to private 

firms. The commenters suggested that 

an alternative would be to require the 

EBITDA (earnings before interest, taxes, 

depreciation and amortization)-to-debt 

ratio because this is more difficult to 

manipulate. The commenter suggested 

that CMS could also use the quick ratio 

(current assets minus inventory divided 

by current liabilities) because this 

measurement is favored by lending 

institutions. Some commenters 


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indicated that CMS should also define 

the accounts receivable as the quick 

ratio (less than 180 days sales 

outstanding). They indicated that this 

ratio shows how long it takes the 

supplier to collect money owed and 

measures a supplier’s liquidity and 

ability to meet short-term operating 

needs. Some commenters also suggested 

that CMS inquire as to how long a 

supplier has been in business. 

Commenters also suggested that the 

information that CMS collects should 

include 2 years of financial statements 

prepared in accordance with generally 

accepted accounting principles. Some 

commenters recommended the financial 

statements be accompanied by a 

compilation, review, or audit report 

from an independent certified public 

accountant, a certificate of insurance 

verifying a minimum of $1 million of 

liability coverage, and a letter from a 

primary institutional lender verifying 

current lending relationship and the 

potential borrowing capacity of the 

supplier. Commenters also 

recommended that CMS receive a credit 

report from a recognized credit rating 

organization. One commenter wanted 

CMS to define a set ratio, for example, 

asset ratio should be not be higher than 

(X percent) and the asset to liability 

ratio should be no lower than (X 

percent). 

Response: We will use appropriate 

financial ratios to evaluate suppliers. If 

suppliers do not meet certain ratios, 

they could be disqualified from the 

competition. Examples of ratios we 

might consider include a supplier’s 

debt-to-equity ratio and a financial 

credit worthiness score from a reputable 

financial services company. The 

supplier standards in § 424.57(c)(10) 

require that the supplier carry a 

$300,000 comprehensive liability 

policy. We believe that imposing an 

additional cost for maintaining $1 

million in liability coverage is not 

necessary. We will be reviewing all 

financial information in the aggregate 

and will not be basing our decision on 

one ratio but rather overall financial 

soundness. 

As we noted above, we will require 

for CY 2007 competition that suppliers 

submit a credit report from one of three 

credit bureaus identified above to assist 

in determining a supplier’s financial 

soundness. For all competition rounds, 

we will specify in the RFB what 

financial information must be 

submitted. 

Comment: Several commenters 

recommended that CMS consider using 

Dunn and Bradstreet accounts payable 

ratings (paydex score) which measures 

how quickly a company pays its 

accounts payable. The commenters 

indicated that this information provides 

an additional measure of whether the 

supplier is, in fact, able to meet its 

current obligations. 

Response: We will require suppliers 

to provide us with information which is 

included on a supplier’s credit report 

when they submit their bids to assist us 

in determining their financial 

soundness. 

Comment: One commenter argued 

that CMS must recognize that publicly 

traded companies are different from 

privately held community pharmacies, 

as they have fiduciary obligations to 

shareholders. Other commenters argued 

that the financial standards proposed 

are too burdensome and discourage 

small suppliers from participating. They 

recommended that CMS define different 

standards for small suppliers and 

pharmacies. The commenters suggested 

that the standards be limited to credit 

report, lien searches, credit references 

and 3 years’ worth of tax returns. 

Response: We are committed to 

ensuring the financial soundness of 

contract suppliers in the competitive 

bidding program. In previous responses, 

we have described the financial 

documentation that will generally be 

required for the competitions. We have 

determined that we can obtain the 

necessary information through 

collection of a limited number of 

financial documents and believe that 

the submission of this information will 

be less burdensome for all suppliers, 

including small suppliers. We believe 

we have balanced the needs of small 

suppliers and the needs of the 

beneficiaries in requesting 

documentation that will provide us with 

sufficient information to determine the 

financial soundness of a supplier. 

After consideration of the public 

comments received, we are revising 

discussed proposed § 414.414(d) so that 

it now specifies that a supplier must 

submit the financial information 

specified in the RFB. For purposes of 

the CY 2007 competition, the financial 

documents discussed in this section 

will be those that the RFB will require. 

These requirements are as follows: 

• Suppliers that file individual tax 

returns that include business taxes are 

required to submit the Schedule C (the 

Profit and Loss Statement) from their 

1040 Tax Return for the 3 years 

immediately prior to the date on which 

the bid is submitted. In addition to the 

tax return information, these suppliers 

are also required to submit a Compiled 

Balance Sheet (Statement of Financial 

Position), a Statement of Cash Flow 

(Statement of changes in Financial 

Position) and a Statement of Operations 

(Income Statement) for the three years 

immediately prior to the date on which 

the bid is submitted. Suppliers are also 

required to submit a copy of their 

current credit report, which must have 

been completed within 90 days prior to 

the date on which the bid is submitted. 

The credit report must be prepared by 

one of the following: Experian; Equifax; 

or TransUnion. 

• Limited partnerships and 

partnerships must submit their 

Schedule L from their 1065, U.S. Return 

of Partnership Income for the 3 years 

immediately prior to the date on which 

the bid is submitted, along with all 

other financial documentation that must 

be submitted by a supplier that files an 

individual tax return. 

• Suppliers that file corporate tax 

returns are required to submit the 

Schedule L (Balance Sheet) from their 

tax return for the 3 years immediately 

prior to the date on which the bid is 

submitted. In addition to the tax return 

information, these suppliers are also 

required to submit a Statement of Cash 

Flow (Statement of Changes in Financial 

Position), and a Statement of Operations 

(Income Statement) for the 3 years 

immediately prior to the date on which 

the bid is submitted. Suppliers are also 

required to submit a copy of their 

current credit report, which must have 

been completed within 90 days prior to 

the date on which the supplier submits 

its bid. The credit report must be 

prepared by one of the following: 

Experian; Equifax; or TransUnion. 

• All documents that are not prepared 

as part of a tax return must be certified 

as accurate by the supplier and must be 

prepared on an accrual or cash basis of 

accounting. 

• Suppliers that are publicly traded 

companies must additionally submit a 

copy of their 10–K Filing Reports filed 

with the Securities Exchange 

Commission for the 3 years immediately 

prior to the date on which the bid is 

submitted. If a supplier is a wholly 

owned subsidiary of a publicly traded 

company, it must submit the parent 

company’s 10-K reports. 

• If a supplier does not have financial 

documentation for one or more of the 3 

years immediately prior to the date on 

which the bid is submitted, then in 

addition to submitting the financial 

documentation for the years in which it 

is available, the supplier must also 

submit projected financial statements. 

The projected financial statements must 

show what is likely to occur in the 

future based on key financial and 

business assumptions of the present, 

and must include a description of the 

financial and business assumptions. 


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• For networks, the legal entity that 

submits the bid must submit financial 

statements on behalf of each network 

member in one complete package. 

• If a supplier is submitting an 

individual bid and is also part of a 

network, the supplier must submit 

financial statements along with both the 

individual bid and the network bid. 

D. Evaluation of Bids (§ 414.414(e)) 

In the May 1, 2006 proposed rule (71 

FR 25675), we proposed to select the 

product categories that include 

individual items for which we will 

require competitive bidding. We stated 

that individual products would be 

identified by the HCPCS codes and 

would be further described in the RFBs. 

We proposed that suppliers would be 

required to submit bids for each 

individual item within each product 

category they are seeking to furnish 

under the program, but would not be 

required to bid for every product 

category. 

1. Market Demand and Supplier 

Capacity (§§ 414.414(e)(1) and (e)(2)) 

Section 1847(b)(4)(A) of the Act 

requires that in awarding competitive 

bidding contracts, the Secretary may 

limit the number of contract suppliers 

in a CBA to the number necessary to 

furnish items to meet the projected 

demand for items covered under the 

contract for the CBA. Therefore, we 

proposed in proposed § 414.414(e)(1) to 

calculate expected beneficiary demand 

in a CBA for items in a product 

category. We stated that in order to 

fulfill this statutory mandate, the first 

step would be to determine the expected 

demand for an item in a CBA. We 

proposed to calculate expected demand 

in each CBA in a relatively 

straightforward way using existing 

Medicare claims. We proposed to 

examine claims data to determine the 

number of units of each item supplied 

to Medicare beneficiaries during the 

past 2 years, and then to determine the 

number of new beneficiaries who have 

entered the market during the last 2 

years. We believed that 2 years’ worth 

of data would be sufficient to allow us 

to identify trend analyses and 

utilization measurements. We also 

indicated that we would gather data on 

the number of new FFS Medicare 

enrollees coming into a CBA and use 

this number to project the number of 

new enrollees. 

We discussed in the preamble to the 

May 1, 2006 proposed rule (71 FR 

25675) how we proposed to calculate 2 

years of claims on a monthly basis to 

determine beneficiary demand. We 

stated that we would take into 

consideration the expected demand over 

the total duration of the contract and the 

seasonal effects (for example, an 

increase in beneficiary population in 

Florida during the winter), and 

proposed to use 2 years of data to 

identify any time trends. If there were 

no seasonal effects or time trends, we 

proposed to use the average monthly 

total and new patient figures as the 

market demand measures. However, if 

there were seasonal effects or changes 

identified only during certain months, 

we proposed that the maximum 

monthly total and new patient figures 

would be used as the market demand 

measures. If trends showed that there 

was noticeable growth or reduction in 

beneficiary demand for products in an 

area, we proposed to take these factors 

into consideration when developing 

estimates of beneficiary demand for 

competitively bid items. 

We proposed to adopt the following 

approach to estimate supplier capacity 

to meet the projected demand in a CBA. 

First, we proposed to analyze Medicare 

claims to determine how many items a 

supplier was currently providing in the 

CBA, as well as in total. Second, as part 

of the bid, we would ask suppliers to 

indicate how many units they were 

willing and capable of supplying at the 

bid price in the CBA. We would 

compare this information to what the 

supplier has dispensed to Medicare 

beneficiaries in the past and what it 

specified in its response to the RFB as 

its projected capacity. We proposed to 

require evidence of financial resources 

to support market expansion, such as 

letters from investors or lending agents. 

We would use this information to 

evaluate the capacity of the bidder. 

Third, we proposed to compare 

expected capacity and Medicare volume 

to determine how many suppliers we 

would need in an area. For new 

suppliers, we would ask them for their 

expected capacity, look at trend data for 

new suppliers in that area, and examine 

the capacity of other suppliers in that 

area. We would need to use these data 

to make estimates about capacity 

because we believe that suppliers might 

have more capacity potential than they 

are currently exhibiting. 

During the DMEPOS competitive 

bidding demonstrations, demonstration 

suppliers were able to expand their 

output to meet market demand and 

replace market share previously 

provided by nondemonstration 

suppliers; indeed, some demonstration 

suppliers were disappointed that they 

did not gain more market share during 

the demonstration. We presented 

numerous issues to the PAOC where we 

requested advice on issues such as 

market capacity and demands. During 

the February 28, 2005 PAOC meeting, 

we asked the panel to discuss the issue 

of demand and capacity. Several 

members of the committee, based upon 

their expertise and knowledge of the 

industry, suggested that most DMEPOS 

suppliers would be able to easily 

increase their total capacity to furnish 

items by up to 20 percent and the 

increase could be even larger for 

products like diabetes supplies that 

require relatively little labor. 

We welcomed comments on our 

proposed approach for calculating 

market demand and estimating supplier 

capacity. We were especially interested 

in any information that would help us 

compare current Medicare volume with 

potential capacity, including potential 

formulas we could apply to determine 

capacity. 

Comment: Several commenters argued 

that there was insufficient information 

given as to how CMS will determine a 

supplier’s capacity. The commenters 

wanted to know if the projected 

capacity that suppliers must identify in 

their responses to the RFB form was a 

bid commitment or estimation. The 

commenters also noted that CMS did 

not describe what criteria it will use to 

compare bidders (aside from bid price) 

and how these criteria will be applied. 

They further suggested that CMS look at 

a supplier’s history and allow a 20- 

percent growth rate to determine the 

supplier’s capacity. 

Response: We proposed that suppliers 

would have to estimate in their response 

to the RFB how many items they would 

be able to furnish in the CBA for the bid 

price. We also proposed that suppliers 

would be required to submit 

documentation evidencing any planned 

business expansion, such as letters from 

investors or lending agents. We will 

look at this documentation, as well as 

the supplier’s other financial 

documentation to determine the ability 

of that supplier to furnish its projected 

capacity. The capacity identified in the 

supplier’s response to the RFB form 

should represent the supplier’s best 

estimation of the number of items it can 

provide to Medicare beneficiaries in a 

given CBA. We might, however, make 

two types of adjustments to a supplier’s 

projected capacity for purposes of 

finalizing the pivotal bid. First, if a 

supplier estimates that it can furnish 

more than 20 percent of what we 

determine to be the expected beneficiary 

demand for the product category in the 

CBA, we will lower that supplier’s 

capacity estimate to 20 percent. We 

believe that this capacity adjustment is 

necessary to ensure that at least 5 

suppliers have composite bids at or 


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below the pivotal bid for the product 

category, which will then enable us to 

award contracts to at least those 5 

suppliers. By awarding contracts to at 

least 5 suppliers per product category, 

we expect that there will be sufficient 

contract suppliers in the CBA to provide 

beneficiaries with more variety and 

choice. However, we are confident that, 

due to the nature of supplies that can be 

furnished via mail order (for example, 

diabetic supplies) national or regional 

mail order suppliers will easily be able 

to expand to meet very large demands. 

Therefore, we do not believe it is 

necessary to ensure that there are at 

least five national or regional mail order 

suppliers. If we were to require at least 

five such suppliers, we believe it would 

dilute our savings. 

Second, we might further adjust a 

supplier’s capacity if, after making the 

initial adjustment discussed above, we 

conclude that the supplier’s financial 

and business expansion documentation 

do not support the projected capacity 

stated in its bid. In determining whether 

this further adjustment is necessary, we 

will give consideration to the suggestion 

of the PAOC that a supplier’s capacity 

could easily be increased by up to 20 

percent. We believe, however, that this 

further adjustment may be necessary to 

limit the potential that we would award 

contracts to an inadequate number of 

suppliers based on inflated capacity 

projections that the suppliers would not 

be able to actually meet. If we believe 

that this further adjustment is necessary, 

we will lower the supplier’s projected 

capacity to its historical capacity, as 

evidenced by its financial 

documentation and past claims data. 

We note that after making these 

adjustments, if we are still unable to 

award five contracts in a CBA because 

there are not enough qualified suppliers, 

we will award at least 2 contracts to 

qualified suppliers for the furnishing of 

that product category under a 

competitive bidding program. 

We also note that the adjustments we 

might make to a supplier’s projected 

capacity would not impact the 

supplier’s ability to actually furnish 

items if it is awarded a contract. In other 

words, a contract supplier will be able 

to furnish items to all beneficiaries who 

wish to receive them from it. 

Comment: Some commenters stated 

that CMS must consider how changes in 

coding, utilization, and documentation 

may affect the utilization data for the 

last 2 years. They cited, for example, 

that changes in wheelchair cushions 

and respiratory coding may affect the 

utilization data. 

Response: We proposed that we 

would calculate the expected 

beneficiary demand for a product 

category in a CBA by using two years of 

existing Medicare claims data, which 

we believe is sufficient to allow us to 

identify changing trends in utilization. 

In calculating the expected beneficiary 

demand for a product category in a 

CBA, we might also evaluate data 

showing beneficiary demand for key 

high volume items in the product 

category. 

After consideration of the comments 

received, we are adopting as final 

§ 414.414(e)(1), which provides that we 

will calculate the expected beneficiary 

demand for items within a product 

category in each CBA as part of the bid 

evaluation process. In addition, we are 

adding a new § 414.414(e)(2) to finalize 

our proposal to evaluate the total 

supplier capacity that would be 

sufficient to meet beneficiary demand 

for items in the CBA for the items in a 

product category. 

2. Composite Bids (§§ 414.402, 

414.414(e)(3) and (4)) 

Because suppliers will be bidding for 

multiple items in a product category, 

the lowest bid for each item will not 

always be submitted by the same 

supplier. In this case, looking at the bids 

for individual items would not tell us 

which suppliers should be selected 

since different suppliers may submit the 

lowest bids for different items. 

Therefore, in proposed §§ 414.414(e)(2) 

and (e)(3) (redesignated as 

§ 414.414(e)(3) and (e)(4) in this final 

rule), we proposed to use a composite 

bid to compare all of the suppliers’ bids 

submitted for an entire product category 

in a CBA. We stated that using a 

composite bid would be a way to 

aggregate a supplier’s bids for 

individual items within a product 

category into a single bid for the whole 

product category. This would allow us 

to determine which suppliers can offer 

the lowest expected costs to Medicare 

for all items in a product category. To 

compute the composite bid for a 

product category, we would multiply a 

supplier’s bid for each item in a product 

category by the item’s weight and sum 

these numbers across items. The weight 

of an item would be based on the 

utilization of the individual item 

compared to other items within that 

product category based on historic 

Medicare claims. Item weights would be 

used to reflect the relative market 

importance of each item in the product 

category. We would select item weights 

that ensure that the composite bid is 

directly comparable to the costs that 

Medicare would pay if it bought the 

expected bundle of items in the product 

category from the supplier. The sum of 

each supplier’s weighted bids for every 

item in a product category would 

become the supplier’s composite bid for 

that product category. 

We sought comment on the best 

method of weighting individual items 

within a product category to determine 

the composite bid. We indicated that 

one approach we were considering 

would be to set the weight for each item 

based on the volume of the individual 

item’s share compared to the total 

utilization of the product category. 

Under this weighting system, the 

composite bid would be exactly 

proportional to the expected cost of 

furnishing the entire bundle of items. 

Therefore, if supplier 1 had a lower 

composite bid than supplier 2, it would 

also have a lower expected cost of 

furnishing the entire product bundle 

that makes up the product category. 

Another approach we considered was to 

set the weight based on the payment 

amounts attributable to each DMEPOS 

fee schedule item relative to the overall 

payment amount for the total product 

category. We stated that this approach 

might better reflect the relative value of 

each item because it is based on how 

much we actually pay for an item, and 

that this was the approach that we used 

in the first round of bidding in Polk 

County under the competitive bidding 

demonstration program. However, we 

stated that we also found that this 

approach could result in too much 

weight being placed on low-volume and 

high-priced items. The first year 

evaluation report also found that using 

the allowed charges as the weights 

could result in a supplier that offered 

lower bids having a higher composite 

bid than a supplier that offered a higher 

bid for individual items. 

In the May 1, 2006 proposed rule, we 

used the volume of items or units 

displayed in Table 5 of that rule (and as 

republished below) as the basis of our 

examples, but we requested comments 

on which weighting method should be 

used in calculating the composite. We 

also requested comments on other 

methods of weighting that could be 

applied to individual items. 

TABLE 5.—ITEM WEIGHTS

Item A B C All 

Units ............ 5 3 2 10 

Item Weight 0 .5 0 .3 0 .2 1 

The example above shows how our 

proposed weight-setting methodology 

would work. The expected volume for 

Items A, B, and C are 5, 3, and 2 units, 

respectively, for a total volume of 10 

units. The item weight for Item A is 0.5 


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(5/10), the weight for Item B is 0.3 

(3/10), etc. 

As explained above, the composite 

bid for a supplier would equal the item 

weight times the item bid amount 

summed across all items in the product 

category. The item weights would be the 

same for bidders for the same product 

categories. In our example, supplier 1 

bid $1.00 for item A, $4.00 for item B, 

and $1.00 for item C. The composite bid 

for Supplier 1 = (0.5 * $1.00) + (0.3 * 

$4.00) + (0.2 * $1.00) = $1.90. Table 6 

shows the expected cost of the bundle 

based on each supplier’s bids. The 

expected costs are directly proportional 

to the composite bids; the factor of 

proportionality is equal to the total 

number of units (10) in the product 

category. We used the composite bid to 

determine the expected costs for all of 

the items in the product category based 

upon expected volume. 

TABLE 6.—COMPOSITE BIDS

Item A B C Composite bid Expected cost 

of bundle 

Units ............................................................................... 5 3 2 ........................ ........................

Item weight ..................................................................... 0 .5 0 .3 0 .2 ........................ ........................

Supplier 1 bid ................................................................. $1 .00 $4 .00 $1 .00 $1.90 $19.00 

Supplier 2 bid ................................................................. $3 .00 $3 .00 $2 .00 $2.80 $28.00 

Supplier 3 bid ................................................................. $2 .00 $2 .00 $2 .00 $2.00 $20.00 

Supplier 4 bid ................................................................. $1 .00 $2 .00 $2 .00 $1.50 $15.00 

Under the proposed methodology, bid 

selection would proceed by ranking the 

composite bids from lowest to highest 

(Table 6). In order to ensure that we 

would pay less under competitive 

bidding than we would under the 

current fee schedule, as is required 

under section 1847(b)(2)(A)(iii) of the 

Act, we would compute the expected 

cost of the bundle of goods for 

comparison purposes. This would 

require us to calculate the bid amount 

times the expected number of units that 

we expect suppliers will furnish based 

on the most current Medicare claims 

data and sum across each item by 

supplier. For example, if supplier 1 bid 

$1.00 for item A and we expected to 

purchase 5 units—$1.00 × 5 units = 

$5.00, item B—$4.00 × 3 units = $12.00, 

item C—$1.00 × 2 units = $2.00, the sum 

for these 3 items would be $19.00. As 

previously noted, prior to selecting a 

supplier for a contract, we would ensure 

that suppliers meet quality and financial 

standards. 

Comment: One commenter stated that 

the bidding should not be so complex. 

The commenter stated that the use of a 

weighted composite bid is confusing 

and cumbersome. The commenter also 

stated that the weights should be 

provided to each supplier prior to 

bidding. Other commenters indicated 

that if the median methodology is used, 

bids should be weighted by proposed 

capacity so that payment rates more 

accurately represent the market of 

successful bidders. 

Response: We understand the 

commenters’ concern and believe we 

have simplified the methodology as 

much as possible. We plan to provide 

the weights for each item prior to 

bidding, so that bidders will be aware of 

the weight given to each item. We stated 

in the proposed rule that using a 

composite bid would be a way to 

aggregate a supplier’s bids for 

individual items within a product 

category into a single bid for the whole 

product category. This would allow us 

to determine which suppliers can offer 

the lowest expected costs to Medicare 

for all items in a product category. To 

compute the composite bid for a 

product category, we would multiply a 

supplier’s bid for each item in a product 

category by the item’s weight and sum 

these numbers across items. In the 

proposed rule, we defined the term 

‘‘item weight’’ as a number assigned to 

an item based on its beneficiary 

utilization rate in a competitive bidding 

area when compared to other items in 

the same product category.’’ We are 

revising this definition to indicate that 

we will use national beneficiary 

utilization data to determine the item 

weights for the CBA because we believe 

that it results in a more representative 

number that reflects the utilization rate 

for the item. We believe that this 

weighting methodology will best reflect 

the relative market importance of each 

item in the product category. 

After consideration of the comments 

received, we are redesignating proposed 

§ 414.414(e)(2) and (e)(3) as 

§ 414.414(e)(3) and (e)(4) and adopting 

them as final with a technical change to 

paragraph (e)(4) to clarify that we will 

array the composite bids from the 

lowest ‘‘composite bid price’’ to the 

highest ‘‘composite bid price.’’ We are 

also revising the definition of ‘‘item 

weight’’ in § 414.402. 

3. Determining the Pivotal Bid 

(§§ 414.414(e)(5) and (e)(6)) 

We proposed that the pivotal bid 

would be the point where expected 

combined capacity of the bidders would 

be sufficient to meet expected demands 

of beneficiaries for items in a product 

category. In the example below, the 

projected demand would be for 1,000 

units. Therefore, the supplier 10’s 

composite bid would represent the 

pivotal bid, because that supplier’s 

cumulative capacity of 1,100 would 

exceed the projected demand of 1,000. 

The statute requires multiple winners, 

so in all cases where we award 

contracts, we stated that we would need 

to accept at least two winning bidders. 

All bidders that were eligible for 

selection and whose composite bid for 

the product category was less than or 

equal to the pivotal bid would be 

selected as winning bidders. In the 

Table 7 below, for example, $135.00 

would be the pivotal bid. Suppliers 2, 

3, 1, and 10 would then be selected as 

winning bidders with supplier 10’s 

composite bid becoming the pivotal bid. 

We acknowledged that this approach 

may leave out other suppliers with very 

close, but slightly higher bids. 


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TABLE 7.—DETERMINING THE PIVOTAL BID

[Point where beneficiary demand is met by supplier capacity—For this example, beneficiary expected demand is 1,000 units—Supplier 10’s bid is 

the pivotal bid] 

Supplier No. Eligible for 

selection Composite bid Supplier capacity Cumulative capacity 

2 .................................................................................................. Yes ................... $100 100 100 

3 .................................................................................................. Yes ................... 115 300 400 

1 .................................................................................................. Yes ................... 120 400 800 

10 ................................................................................................ Yes ................... 135 300 1100 

4 .................................................................................................. Yes ................... 140 500 1600 

7 .................................................................................................. Yes ................... 150 100 1700 

No longer being considered 

5 .................................................................................................. No ..................... 120 n.c. n.c. 

6 .................................................................................................. No ..................... 130 n.c. n.c. 

8 .................................................................................................. No ..................... 175 n.c. n.c. 

9 .................................................................................................. No ..................... 200 n.c. n.c. 

n.c. = not calculated. 

We also noted that we had considered 

the use of a competitive range to 

determine the contract suppliers. In this 

approach, we would determine a 

competitive range for the composite bid. 

We would array all suppliers by their 

bids and eliminate all suppliers whose 

composite bid is greater than the 

competitive range. We would then 

evaluate the quality and financial 

standards only for those remaining 

suppliers. 

During the demonstration, evaluating 

quality and financial standards was 

time-consuming for the bid evaluation 

panel and required bidders to provide 

extensive information on quality and 

finances. The last two rounds of the 

demonstration used a competitive range 

to reduce the burden on the bid 

evaluation panel and bidders. After 

evaluating basic eligibility 

requirements, the composite bids were 

calculated and arrayed, and a 

competitive range was selected with 

more than enough suppliers to serve the 

market. Suppliers whose composite bids 

were clearly outside of this range were 

not required to provide detailed 

financial information, and the bid panel 

was not required to evaluate the 

eligibility of these suppliers to 

participate. Suppliers within the 

competitive range provided detailed 

financial information and had their 

quality rigorously evaluated. The 

remaining suppliers were only selected 

as contract suppliers if they met the 

quality and financial standards and 

their composite bids were at or below 

the pivotal bid. 

We also discussed in the proposed 

rule other options that we considered to 

determine the pivotal bid. One of these 

options would have been to make the 

pivotal bid depend on one of the 

summary statistics (for example, mean, 

median, 45th percentile) associated with 

the distribution of bids from eligible 

suppliers. For example, the pivotal bid 

could have been set equal to the median 

bid submitted by eligible suppliers. We 

stated that the advantage of this option 

would have been that the pivotal bid 

could be set near the central distribution 

of bids. We also considered including 

additional suppliers whose bids were 

close to the central distribution as being 

eligible to become a contract supplier. 

Both options would likely have affected 

the number of contract suppliers. 

Finally, we noted that the exact 

summary statistic or percentile could 

have been increased or decreased to 

reflect the trade-off between the number 

of winners and program costs. One 

negative aspect of this approach would 

have been that winners might have 

insufficient capacity. In addition, with a 

given percentile cutoff, the pivotal bid 

might have included an excessive 

number of winning bidders. As the 

number of eligible bidders increased, so 

would the number of winners. If 

additional bidders had higher costs, and 

their bids fell into the upper half of the 

distribution, the pivotal bid would 

increase, resulting in greater payments 

by the Medicare program and a loss of 

savings. 

Another option we discussed would 

have been to base the pivotal bid on a 

target number of winners. For example, 

we might have decided to select five 

winners in each product category. 

Suppliers might have responded to this 

approach by bidding aggressively, 

knowing that only a fixed number of 

winners would be guaranteed to be 

selected. A negative aspect of this 

approach would have been that there is 

no assurance that a predetermined target 

number of winners would have had 

sufficient capacity to meet projected 

market demand. In addition, the target 

number of winners must somehow be 

selected and this could have resulted in 

selecting an arbitrary number. If too 

high, suppliers might have had little 

incentive to bid aggressively. 

We also considered an option to base 

the pivotal bid on a target composite 

bid; for example, we could have chosen 

a target that was 20 percent below the 

DMEPOS fee schedule amount for that 

product category. A possible advantage 

of this approach would have been that 

the target composite bid could be set to 

ensure savings for the program. On the 

other hand, we believed that suppliers 

might perceive this approach to be 

anticompetitive. Rather than letting 

bidding and the market forces determine 

the pivotal bid and fee schedule, we 

might have been viewed as preordaining the outcome. In addition, 

suppliers that bid below the target 

composite bid might have had 

insufficient capacity to meet projected 

market demand. 

Comment: One commenter requested 

additional explanation as to what 

cumulative capacity is and how it is 

calculated in the competitive bidding 

program. 

Response: The cumulative capacity is 

determined by arraying the composite 

bids from the lowest to the highest, then 

calculating the pivotal bid for the 

product category by ensuring that the 

number of suppliers selected to furnish 

items for that product category in a CBA 

have sufficient cumulative capacity to 

do so. We will determine the 

cumulative capacity of bidding 

suppliers for the product category by 

adding each supplier’s projected or 

adjusted capacity. For example, if 

supplier 1 states it can provide 15 units, 

supplier 2 states it can provide 40 units, 

and supplier 3 states it can provide 35 


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units, the cumulative capacity of those 

suppliers is 90 units. 

After consideration of the public 

comments we received, we are 

redesignating proposed § 414.414(e)(4) 

as § 414.414(e)(5), and finalizing newly 

redesignated § 414.414(e)(5) with the 

changes discussed above. We also are 

redesignating proposed § 414.414(e)(5) 

as § 414.414(e)(6) and revising newly 

redesignated § 414.414(e)(6) so that it 

now provides that the only suppliers we 

will select for contract award purposes 

will be those suppliers that have 

satisfied our eligibility, quality, 

accreditation (unless a grace period 

applies), and financial requirements. 

4. Assurance of Savings (§ 414.414(b)(2), 

414.414(f)) 

Section 1847(b)(2)(A)(iii) of the Act 

prohibits awarding contracts to any 

entity for furnishing items unless the 

total amounts to be paid to contractors 

in a CBA are expected to be less than 

the total amounts that would otherwise 

be paid. Under proposed § 414.414(f), 

we proposed to interpret this 

requirement to mean that contracts will 

not be awarded to any entity unless the 

amounts to be paid to contract suppliers 

in a CBA are expected to be less for a 

competitively bid item than would have 

otherwise been paid. Therefore, we 

stated that we would not accept any bid 

for an item that is higher than the 

current fee schedule amount for that 

item. This approach would ensure that 

the single payment amount for each 

item in a product category is equal to or 

less than our current fee schedule 

amount for that item. 

We acknowledged that an alternative 

interpretation of ‘‘less than the total 

amounts that would otherwise be paid’’

could mean contracts would not be 

awarded to an entity unless the amounts 

paid to contract suppliers in a CBA for 

the product category are expected to be 

less than what would have otherwise 

been paid for the entire product 

category. During the demonstration, 

several product categories received 

overall savings, whereas payment 

amounts increased for a few individual 

items within those product categories. 

One concern we had with this approach 

was that there might be a greater 

potential for shifting of utilizations from 

one item to another higher priced item. 

We stated that this approach might not 

result in adequate savings, and that we 

believed a reasonable interpretation of 

the Act would be one in which ‘‘the 

total amounts’’ mean payment at the 

item level. 

We specifically requested comments 

on the various methods for assuring 

savings under the Medicare DMEPOS 

Competitive Bidding Program. 

Comment: Numerous commenters 

disagreed with the proposed 

requirement that bids must be at or 

below the current fee schedule for an 

item. The commenters believed that this 

places artificial constraints on a process 

that is designed to harness market 

forces. They indicated that, if bids are 

submitted higher than the current fee 

schedule, CMS should choose not to 

include that particular item in the 

bidding product category. 

Response: Section 1847(b)(2)(A)(iii) of 

the Act prohibits CMS from awarding a 

contract to a supplier under a 

competitive bidding program unless the 

total amounts to be paid to contractors 

in a CBA are expected to be less than 

the total amounts that would otherwise 

be paid. In order to ensure that the 

requirement is met and to guarantee 

savings for the Medicare program, we 

must require the bids for each item to 

be at or below the current fee schedule 

amount for the item in order to preclude 

increases that may occur due to shifting 

to items priced above the fee schedule. 

Without this safeguard, we are 

concerned that suppliers might simply 

start furnishing the items priced above 

the fee schedule rather than those that 

would normally be furnished because of 

the potential for higher profits. In 

addition to increased expenditures, 

because of a shift to items with higher 

payment amounts, we might exceed the 

total amounts that we had been paying 

for particular products as a group within 

a product category. This could also 

result in less appropriate products being 

furnished to Medicare beneficiaries. We 

believe that this requirement is 

necessary to structure a competitive 

bidding program that reflects the 

requirements of the statute. 

Accordingly, we are adding a new 

§ 414.412(b)(2), which provides that the 

bid for an item cannot exceed the 

payment amount that would otherwise 

apply if the item was not included in 

the competitive bidding program. In 

addition, we are finalizing proposed 

§ 414.414(f) with only technical 

changes. 

5. Assurance of Multiple Contractors 

(§ 414.414(h)) 

Section 1847(b)(4)(B) of the Act 

specifies that the Secretary will award 

contracts to multiple entities submitting 

bids in each area for an item. In 

addition, section 1847(b)(2)(A)(iv) of the 

Act specifies that contracts may not be 

awarded unless access of individuals to 

a choice of multiple suppliers is 

maintained. As a result, we proposed 

under proposed § 414.414(g) 

(redesignated as § 414.414(h) in this 

final rule) that we would have multiple 

contract suppliers in each CBA for each 

product category if at least two 

suppliers met all requirements for 

participation, and the single payment 

amounts to be paid to those suppliers 

did not exceed the fee schedule 

amounts for the items that were bid. We 

acknowledged that offering choices to 

beneficiaries, referral agents, and 

treating practitioners that order 

DMEPOS for Medicare beneficiaries is 

important to maintain competition 

among suppliers based on the quality of 

items. We stated that we had to weigh 

that advantage against the disincentive 

for a supplier to submit its best bid if 

we select too many suppliers to service 

a CBA. We believe we will be able to 

have multiple suppliers servicing one 

product category in a CBA and still 

accomplish the goals of competitive 

bidding. 

Comment: Several commenters 

recommended that CMS select more 

suppliers than necessary to meet 

minimum demand. The commenters 

believed that this will ensure a 

sufficient number of suppliers to 

address contingency or emergency 

situations, such as a natural disaster. 

Several commenters recommended that 

CMS use 130 percent of anticipated 

capacity. A few commenters requested 

that CMS cap estimated capacity per 

supplier when selecting winning 

bidders to preserve competition and 

beneficiary choice. Some commenters 

recommended that CMS cap each 

supplier’s capacity at 20 percent, or 25 

percent, of anticipated demand to 

ensure that a small number of very large 

suppliers do not become the only 

winning bidders. 

Response: We anticipate that we will 

select a sufficient number of suppliers 

to ensure beneficiary access. As we have 

explained above, we may make 

adjustments to a supplier’s projected 

capacity in order to ensure that we 

award contracts to a sufficient number 

of suppliers. As explained below, we are 

also modifying our proposed rule for 

participation by small suppliers to set a 

small supplier target which will be 

calculated by multiplying 30 percent 

times the number of winning suppliers 

at or below the pivotal bid for each 

product category. As a result, we will be 

able to ensure that small suppliers have 

an opportunity to participate in the 

programs. 

Comment: Several commenters 

observed that the proposed rule does 

not mention whether CMS will consider 

the geographic distribution of suppliers 

when determining the number of 

contract suppliers for each product 


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category in each CBA. They believed 

that geographic distribution is important 

to maintain local presence and for 

beneficiary convenience. They 

suggested that CMS analyze capacity at 

the zip code level to ensure that each 

zip code is served by several contract 

suppliers. They also stated that there is 

precedent for determining geographic 

distribution, citing that the TRICARE 

standard and the Medicare Part D 

program have established guidelines for 

the required number of retail 

pharmacies, depending on the type of 

area. One commenter also suggested that 

any competitive bidding program for 

diabetic testing supplies include a 

requirement that a minimum number of 

community-based suppliers be included 

and those suppliers be geographically 

dispersed within the CBA to provide 

convenient access for Medicare 

beneficiaries. 

Response: We believe that we have 

created a contract supplier selection 

methodology that will ensure that 

beneficiaries have convenient access to 

competitively bid items. Contract 

suppliers will also be required to 

furnish all items to all beneficiaries who 

maintain a permanent residence in a 

CBA (or who visit a CBA) unless an 

exception set forth in this final rule 

applies. If a beneficiary is unable to 

come to the storefront of the contract 

supplier, we would expect that the 

contract supplier would deliver the item 

to the beneficiary and, if necessary, set 

up the item in the beneficiary’s 

residence and train the beneficiary how 

to use the item. This will ensure 

beneficiary convenience and access to 

competitively bid items. We reviewed 

the TRICARE access standards and 

believe the standards are not 

appropriate for meeting the purposes of 

the Medicare DMEPOS Competitive 

Bidding Program. The retail pharmacy 

industry is different from the DMEPOS 

supplier industry. The retail pharmacy 

industry provides access through 

storefront presence where they provide 

a variety of consumer products. In 

contrast, most DMEPOS suppliers 

deliver medical products to the 

beneficiaries’ homes. 

After consideration of the public 

comments we received, we are 

redesignating proposed § 414.414(g) as 

§ 414.414(h)(1) and revising it to 

provide that CMS will award at least 

five contracts for the furnishing of a 

product category under a competitive 

bidding program if the requirements in 

§§ 414.414(b) through (f) are met by at 

least 5 suppliers. We are also adding a 

new § 414.414(h)(2), which provides 

that if the requirements in §§ 414.414(b) 

through (f) are not by at least 5 

suppliers, we will award contracts to at 

least 2 qualified suppliers. Finally, we 

are adding a new § 414.414(h)(3), which 

provides an exception for mail order 

suppliers to the requirement that if there 

are at least 5 qualified suppliers, we will 

award contracts to at least 5 qualified 

suppliers. 

6. Selection of New Suppliers After 

Bidding (§ 414.414(i)) 

In the May 1, 2006 proposed rule (71 

FR 25678), we proposed to select only 

as many suppliers as necessary to 

ensure we have enough capacity to meet 

projected demand. However, we noted 

that we might have to suspend or 

terminate a contract supplier’s contract 

if that supplier falls out of compliance 

with any of the requirements identified 

in the regulation and in the bidding 

contract. Alternatively, we recognized 

that we could later determine that the 

number of contract suppliers we 

selected to furnish a product category 

under a competitive bidding program 

was insufficient to meet beneficiary 

demand for those items. In situations 

where CMS determines that there is an 

unmet demand for items, for example, if 

CMS terminates a contract supplier’s 

contract, we proposed to contact the 

remaining contract suppliers for that 

product category to determine if they 

could absorb the unmet demand. If the 

remaining contract suppliers could not 

absorb the unmet demand in a timely 

manner, we proposed to refer to the list 

of suppliers that submitted bids for that 

product category in that round of 

competitive bidding in that CBA, use 

the list of composite bids that we 

arrayed from lowest to highest, and 

proceed to the next supplier on the list. 

We would contact that supplier to 

determine if it would be interested in 

becoming a contract supplier. If the 

supplier was interested, we proposed to 

require the supplier to provide updated 

information to ensure its continued 

eligibility for participation. A condition 

for acceptance of a contract would be 

that the supplier must agree to accept 

the already determined single payment 

amounts for the individual items within 

the product category in the CBA. We 

would continue to go down the list until 

we were satisfied that the expected 

demand would be met and beneficiary 

access to the items in the product 

category would not be a problem. After 

consultation with the DMEPOS industry 

and PAOC, we were informed that 

additional capacity should not be a 

problem as suppliers would be willing 

and able to handle the expected 

demand. 

Another option that we considered, 

but did not propose, was to conduct a 

new round of bidding to select 

additional suppliers. However, we did 

not choose this option because it would 

delay the resolution of an access 

problem and place an additional 

administrative burden on the program. 

Comment: One commenter argued 

that it would be a violation of the statute 

to award contracts to a new supplier 

after contracts have been awarded 

without conducting a new competition. 

The commenter stated that the law 

requires that CMS conduct a 

competition for the award of any 

contracts for a competitively bid item. 

Therefore, the commenter believed an 

award to the bidder next-in-line when a 

contract supplier leaves the program or 

CMS find that it needs additional 

suppliers would not constitute a 

competitive acquisition. 

Response: We agree that contracts 

cannot be awarded to a supplier that did 

not compete. We disagree that this 

regulation requirement results in 

awarding a contract to a supplier that 

did not submit a bid. These suppliers 

have competed and met all applicable 

eligibility, quality, financial, and 

accreditation requirements to be 

awarded a contract. We intend to only 

use this methodology when we find that 

there is a need for additional contract 

suppliers because a contract supplier’s 

contract is suspended or terminated or 

when CMS finds it needs additional 

contract suppliers to meet beneficiary 

demand for a particular product 

category in a CBA. It would not be in 

the best interest of beneficiaries to delay 

awarding the additional contracts when 

we need to ensure sufficient capacity 

because a contract supplier’s contract 

has been suspended or terminated or 

there is greater need in an area than we 

anticipated. 

Comment: One commenter stated that 

CMS should have a process identified if 

there are no suppliers located in a CBA 

willing to accept the single payment 

amount and enter into a competitive 

bidding contract. 

Response: We would not be able to 

have competitive bid pricing in a CBA 

in which no suppliers could accept the 

single payment amount. 

In summary, after consideration of the 

public comments received, we are 

redesignating proposed § 414.414(h) as 

§ 414.414(i) and adopting it as final with 

only technical changes. 

VIII. Determining Single Payment 

Amounts for Individual Items 

A. Setting Single Payment Amounts for 

Individual Items (§§ 414.416(a) and (b)) 

Section 1847(b)(5)(A) of the Act 

requires that the Secretary determine a 


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single payment amount for each item in 

each CBA based on the bids submitted 

and accepted for that item, and we 

proposed in § 414.416(a) and (b) to 

implement this statutory requirement. 

Once contract suppliers are selected for 

a product category based on their 

composite bid and the pivotal bid, 

single payment amounts for individual 

items in the product category must be 

determined. We considered several 

different methodologies for determining 

the single payment amounts. Each of the 

options we considered is discussed in 

detail in this section. After careful 

consideration of these options, we 

proposed to adopt the following 

principles to determine the single 

payment amounts for individual items 

in a product category: 

Principle 1 

Bid amounts from all winning bids for 

an item in a CBA will be used to set the 

single payment amount for that item in 

the CBA. 

Principle 2 

We must expect to pay less for each 

individual item than we would have 

otherwise paid for that item under the 

current fee schedule. Single payment 

amounts cannot be higher than our 

current fee schedule amounts for 

individual items within a product 

category. 

To satisfy these principles, we 

evaluated several different approaches 

to setting payment amounts. As a result 

of our review, we decided on a preferred 

approach that would determine the 

single payment amounts for individual 

items by using the median of the 

supplier bids that are at or below the 

pivotal bid for each individual item 

within each product category. The 

individual items would be identified by 

the appropriate HCPCS codes. The 

median of the bids submitted by the 

contract suppliers for a particular item 

would be the single payment amount 

that we would establish under the 

competitive bidding program for the 

HCPCS code that describes that item. In 

cases where there is an even number of 

winning bidders for an item, we would 

employ the average (mean) of the two 

bid prices in the middle of the array to 

set the single payment amount. In 

addition, we proposed that the single 

payment amount for each item must be 

less than the current fee schedule 

amount for that item. 

We believe that setting the single 

payment amount based on the median 

of the contract suppliers’ bids satisfies 

the statutory requirement that single 

payment amounts are to be based on 

bids submitted and accepted. This will 

result in a single payment for an item 

under a competitive bidding program 

that is representative of all acceptable 

bids, not just the highest or the lowest 

of the winning bids for that item. 

TABLE 8.—MEDIAN OF THE WINNING BIDS

Item A B C Actual composite bid 

Supplier 4 bid ................................................................................................... $1.00 $2.00 $2.00 $1.50 

Supplier 1 bid ................................................................................................... 1.00 4.00 1.00 1.90 

Supplier 3 bid ................................................................................................... 2.00 2.00 2.00 2.00 

Median of winning bids—Single payment amount .......................................... 1.00 2.00 2.00 

While this was our proposed 

approach, we solicited comments on 

other methodologies for setting the 

single payment amount, including using 

an adjustment factor as part of the 

methodology for setting the single 

payment amount. This was the 

methodology we used for the 

competitive bidding demonstrations, 

and it would have required the 

following steps. The first step of this 

methodology would have been to 

calculate the average of the winning 

bids per individual item. The second 

step would have been to calculate the 

average of the composite bids by taking 

the sum of the composite bids for all 

contract suppliers in the applicable CBA 

and dividing that number by the 

number of contract suppliers. The third 

step would have been to determine an 

adjustment factor, the purpose of which 

would be to bring every winner’s overall 

bids for a product category up to the 

pivotal bidder’s composite bid. Once we 

determined the adjustment factor, we 

would have taken the average of the 

winning bids per item and multiplied 

that by the adjustment factor to adjust 

all bids up to the point of the pivotal 

bid, so that all winners would be paid 

by Medicare as much for the total 

product category as the pivotal bidder. 

This amount would have become the 

single payment amount for the 

individual item. This is the price that all 

contract suppliers within a CBA would 

have been paid for that product as 

illustrated in Table 9. ?≤ 

TABLE 9.—ADJUSTING THE AVERAGE WINNING BIDS

Item A B C Average composite bid 

Actual composite bid 

Supplier 4 bid ....................................................................... $1.00 $2.00 $2.00 ........................ $1.50 

Supplier 1 bid ....................................................................... 1.00 4.00 1.00 ........................ 1.90 

Supplier 3 bid ....................................................................... 2.00 2.00 2.00 ........................ 2.00 

Supplier 2 bid ....................................................................... N/A N/A N/A ........................ N/A 

Average of winning bids ...................................................... 1.33 2.67 1.67 1.80 ........................

Adjustment factor = (Pivotal Composite Bid)/(Average 

Composite Bid) ................................................................. 1.11 1.11 1.11 ........................ ........................

Adjusted average bids-single payment amount per item .... 1.48 2.96 1.85 ........................ ........................

This approach would have ensured 

that the overall payment amounts that 

contract suppliers received were at least 

as much as their bids. As a result, this 

may have guarded against suppliers 

leaving the Medicare program because 

the payment amounts are not sufficient. 

However, we did not favor this 

alternative because, in general, most 

payment amounts would have been 

higher than the actual bids as a result of 

the adjustment factor being greater than 


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zero. This would have been true because 

the purpose of the adjustment factor 

would have been to make the composite 

bid of all winning suppliers equivalent 

to the composite bid of the pivotal 

supplier. We chose not to propose this 

approach because we believe that this 

approach is not reflective of all of the 

winning bids accepted. In addition, we 

stated that we were concerned that this 

methodology might be confusing and 

overly complicated. 

We also considered taking the 

minimum winning bid for each item in 

a CBA and not applying an adjustment 

factor. We did not favor this alternative 

because we also did not consider it as 

being reflective of the actual bids 

accepted because it is only reflective of 

the lowest bid. The lowest bid would 

not be reflective of what suppliers 

would sell the item for as most of them 

bid higher. 

Finally, we considered taking the 

maximum winning bid for each item. 

However, this approach would have led 

to program payment amounts that were 

higher than necessary because some 

suppliers were willing to provide these 

items to beneficiaries at a lower cost. 

In the proposed rule, we indicated 

that we were still in the process of 

determining the appropriate approach 

for setting payment amounts, as well as 

the alternatives considered and outlined 

above, and invited comments on our 

proposed methodology. 

Comment: Several commenters 

expressed concerns that the proposed 

method to determine the single payment 

amount would result in suppliers 

submitting low bids and only offering 

the lowest cost devices. They believed 

that quality and access would be 

impacted by the use of the median bid. 

They further indicated that requiring 

savings on each item rather than in the 

aggregate encourages suppliers to bid on 

the oldest, lowest priced product within 

each HCPCS code. The commenters 

suggested that CMS base savings at the 

product category level and not for each 

individual code. 

Response: We disagree with these 

commenters. We recognize the necessity 

for a process to identify and eliminate 

irrational, infeasible bids. As required in 

§ 414.414(b)(4), each supplier must 

submit a bona fide bid that is complies 

with all the terms and conditions 

contained in the RFB. Also, as discussed 

in section XIV of this final rule, we will 

establish a formal complaint and 

monitoring system for each CBA. 

Specifically, we will direct the CBIC to 

establish a monitoring program that 

includes beneficiary satisfaction 

indicators and supplier performance 

indicators. 

The Medicare DMEPOS Competitive 

Bidding Program is designed to ensure 

that the Medicare payment amounts are 

appropriate and reasonable. In addition, 

competitive bidding will harness market 

forces and create competition among 

suppliers. We believe that this 

competition will prevent suppliers from 

offering the lowest cost devices, as 

suppliers will be interested in 

increasing their market share by offering 

appropriate services and high quality 

products to maintain and increase their 

customer base. 

In addition, and as discussed more 

fully in section IX. of this final rule, we 

will include a nondiscrimination clause 

in the contracts we enter into with 

contract suppliers. Under that 

provision, contract suppliers will be 

obligated to make the same items 

available to beneficiaries under the 

Medicare DMEPOS Competitive Bidding 

Program that they make available to 

other customers. We believe that the 

inclusion of this clause will help to 

ensure that Medicare beneficiaries have 

access to the highest quality DMEPOS 

items. Section 1847(b)(2)(A)(iii) of the 

Act states that the total amounts to be 

paid to contractors in a competitive 

acquisition area are expected to be less 

that the total amounts that would 

otherwise be paid. In order to guarantee 

that we implement this section to 

ensure that we achieve savings for the 

Medicare program, we must require bids 

to be at or below the current fee 

schedule for the item. This will 

preclude our setting single payment 

amounts for certain items above the fee 

schedule and causing contract suppliers 

to attempt to shift utilization to these 

items because of the higher payment 

amounts. Without this safeguard, we are 

concerned that suppliers might simply 

start furnishing an alternative item, 

because the physician’s order may not 

be item specific, within the same 

product category because the item may 

have a greater potential for higher 

profits. In addition to increased 

expenditures, this could also result in 

less appropriate items being furnished 

to Medicare beneficiaries. 

In addition, we believe that basing 

product savings at the item level will 

guarantee assurance of savings for the 

Medicare DMEPOS Competitive Bidding 

Program because accepting bids above 

the fee schedule for certain products 

may result in these items being 

furnished as an alternative to other 

items within the product category, 

which would increase their utilization 

and expenditures compared to the 

current levels. 

Comment: Several commenters argued 

that the use of the median bid to set the 

single payment amount is flawed 

because the median bid could be 

vulnerable to a variety of gaming 

strategies. They noted that, when using 

the median, 50 percent of winning 

bidders would have to accept less than 

their bids to participate. They indicated 

that if a contract supplier is not able to 

provide the items at the median, 

demand would not be met and access 

would be impaired. The commenters 

raised concerns that all bids would have 

the same weight, and bids from small 

suppliers, which only serve a few Part 

B beneficiaries, would have the same 

impact on the calculation as bids from 

suppliers responsible for a large number 

of beneficiaries, which would give too 

much weight to small suppliers. Other 

commenters suggested that the use of 

the median bid favors large chain 

suppliers that deliver large volume of 

items. Other commenters suggested that 

CMS include a mechanism to 

‘‘rationalize’’ bids to ensure there are no 

unreasonably low bids. They added that 

CMS should have a mechanism to 

eliminate outlier bids. One commenter 

suggested that CMS calculate the single 

payment amount only from among those 

bids that are ‘‘reasonable.’’ Numerous 

commenters suggested that CMS use the 

Adjustment Factor Method (AFM) that 

was used during the demonstration. 

Because suppliers were paid at least as 

much as they bid in aggregate, 

commenters believed that the AFM 

would provide sufficient protections to 

encourage small suppliers to bid. One 

commenter suggested setting the 

payment amount at the 90th percentile 

of winning bids or not lower than 5 

percent below the highest winning bid. 

Another commenter recommended 

calculation of the single payment 

amount only from those bids that lie 

within one standard deviation of the 

mean of the bids. One commenter 

supported the use of a median 

calculation as a statistically valid 

method for determining the single 

payment amount. Lastly, some 

commenters recommended that CMS 

pay contract suppliers their bid amounts 

or the single payment amount, 

whichever is lower. These commenters 

believed that this would be consistent 

with the statutory payment basis of the 

fee schedule or the actual charge, 

whichever is less. 

Response: We disagree with the 

concerns raised by commenters 

regarding the use of median bid to set 

the single payment amount. We believe 

that the use of the median takes into 

consideration all bids submitted and 

accepted and not just the high and low 

bids. We further believe that the median 


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is not influenced by outliers at the 

extremes of the data set. For this reason, 

the median is often used when there are 

a few extreme values that could greatly 

influence the mean and distort what 

might be considered typical. We believe 

the median of the accepted bids would 

represent a reasonable payment amount 

and does not favor large or small 

suppliers, and we believe this approach 

is more equitable than other approaches 

suggested in the comments. Regarding 

access, if a winning supplier does not 

enter into a contract because it is not 

able to furnish the items at the median, 

we believe that access will not be 

adversely affected because we will be 

selecting a sufficient number of contract 

suppliers to ensure that demand is met 

in the CBA. In addition, we believe that 

most, if not all, of the winning suppliers 

will be willing to furnish items in the 

product category at the single payment 

amounts. 

In addition, section 1847(b)(5)(A) of 

the Act states that payment shall be 

based on bids submitted and accepted. 

The single payment amount will be 

determined from only those bids that 

are considered ‘‘acceptable,’’ meaning 

that the supplier meets all quality, 

financial, and eligibility standards and 

that the bid is in the wining range. For 

this reason, we believe that the single 

payment amount should be 

representative of all of the accepted bids 

and not just the highest or the lowest 

bids. We further believe that using the 

adjustment factor is not reflective of the 

actual bids accepted because it is only 

reflective of the pivotal bid. We do not 

believe that the adjustment factor is 

necessary to ensure that small suppliers 

have the opportunity to be considered 

for participation in the competitive 

bidding program because the median 

represents a reasonable payment based 

on accepted bids from suppliers that are 

at or below the pivotal bid. We note that 

we discuss special provisions for small 

suppliers in section XI. of this final rule. 

We will only be entering into contracts 

with those suppliers that agree to accept 

the single payment amount. Moreover, 

as we explain above, we believe that 

using the median bid would not result 

in an insufficient payment, and we also 

believe that our contract supplier 

selection methodology will ensure that 

we have a sufficient number of contract 

suppliers to meet the demand for 

competitively bid items in each product 

category in each CBA. 

Further, we disagree with the 

commenters’ suggestion that we would 

have the authority under the Act to pay 

suppliers the lower of their bid amounts 

or the single payment amount. Section 

1847(b)(5)(A) of the Act requires the 

Secretary to determine a single payment 

amount for each item in each CBA based 

on the bids submitted and accepted for 

that item. A ‘‘single payment amount’’

is one amount, and does not lend itself 

to an interpretation that would allow us 

to pay the lesser of the two amounts. 

We recognize the necessity for a 

process to identify and eliminate 

irrational, infeasible bids. Accordingly, 

we will be evaluating bids to ensure that 

they are bona fide, and we may request 

that a supplier submit additional 

financial information, such as 

manufacturer invoices, so that we can 

verify that the supplier can provide the 

product to the beneficiary for the bid 

amount. If we conclude that a bid is not 

bona fide, we will eliminate the bid 

from consideration. 

Comment: Several commenters 

suggested that a flaw in using the 

median methodology is that it is highly 

dependent on whether there are an even 

or odd number of suppliers in the final 

array. 

Response: As included in our 

discussion in the preamble of the 

proposed rule regarding the use of the 

median, in cases where there is an even 

number of winning bidders for an item, 

we would employ the average (mean) 

for the two bid prices in the middle of 

the array to set the single payment 

amount. We are adding this rule to the 

final regulations at § 414.416(b)(1). As 

noted in the response to the previous 

comment, we believe that the use of the 

median is not a flawed methodology. 

Comment: One commenter suggested 

that CMS follow defined procedural 

rules to select winning suppliers and 

determine the single payment amount, 

similar to the process that it has 

developed for the National Coverage 

Determination (NCD) process. For 

example, the commenter suggested that 

CMS ensures that the public is informed 

at the time it initiates the process, 

provides for public input, and arranges 

for all of these processes to occur during 

a defined time period. 

Response: This final rule outlines a 

defined process that we will follow to 

select contract suppliers and determine 

the single payment amounts for each 

item in each product category in each 

CBA. In addition, we are developing an 

extensive educational program that will 

educate and inform the public about the 

processes that will be used to conduct 

the bidding and to determine the 

winning suppliers. Our plans for 

education are described in more detail 

in the DMEPOS section of the FY 2007 

IRF final rule (71 FR 48354). 

After consideration of the public 

comments we received, we are 

finalizing our methodology for setting 

the single payment amount in 

§§ 414.416(a) and (b), by adopting 

paragraph (a) in final (with technical 

revisions), revising paragraph (b)(1) to 

address how the single payment will be 

computed when there is an even 

number of winning bids. We are also 

adding new § 414.414(b)(4), which 

provides that each supplier must submit 

a bona fide bid that complies with all of 

the terms and conditions in the RFB. 

B. Rebate Program 

In the May 1, 2006 proposed rule (71 

FR 25680), we proposed to allow 

contract suppliers that submitted bids 

for an individual item below the single 

payment amount to provide the 

beneficiary with a rebate (proposed 

§ 414.416(c)). We stated in the preamble 

of the proposed rule that the rebate 

would be equal to the difference 

between their actual bid amount and the 

single payment amount. The following 

example illustrates how the rebates 

would be applied under this proposed 

approach: 

If, based on the bids received and 

accepted for an item, we determined 

that the single payment amount for the 

item was $100, Medicare payment for 

the item would be 80 percent of that 

amount, or $80, and the coinsurance 

amount for the item would be 20 

percent, or $20. However, if a contract 

supplier submitted a bid of $90 for this 

item and chose to offer a rebate, the 

rebate amount would be equal to the 

difference between the single payment 

amount ($100) and the contract 

supplier’s actual bid ($90), or $10. 

Therefore, after the contract supplier 

received the Medicare payment of $80 

and the $20 coinsurance, the contract 

supplier would be responsible for 

providing the beneficiary with a $10 

rebate. We solicited comments on how 

to handle those cases in which the 

rebates would exceed the copayment 

amount. 

Before deciding to propose this 

methodology, we considered whether to 

make the rebates mandatory or 

voluntary. We proposed that the rebates 

be voluntary but that contract suppliers 

could not implement them on a case-bycase basis. If a contract supplier 

submitted a bid below the single 

payment amount and chooses to offer a 

rebate, it must offer the rebate to all 

Medicare beneficiaries receiving the 

competitively bid item to which the 

rebate applies. This commitment would 

be incorporated into the contract 

supplier’s contract. Stated another way, 

while the decision to offer rebates might 

be voluntary, once a contract supplier 

decides to provide rebates, the rebates 

would become a binding contractual 


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condition for payment during the term 

of the contract with CMS. Moreover, the 

contract supplier could not amend or 

otherwise alter the provision of rebates 

during the term of the contract. Contract 

suppliers would also be prohibited from 

directly or indirectly advertising these 

rebates to beneficiaries, referral sources, 

or prescribing health care professionals. 

However, this would not preclude CMS 

from providing to beneficiaries 

comparative information about contract 

suppliers that offer rebates. 

We proposed that only contract 

suppliers that submitted bids below the 

single payment amount for a 

competitively bid item would have the 

choice to offer rebates. Contract 

suppliers that submitted bids above the 

single payment amount would not be 

allowed to issue rebates because their 

actual bids for an individual item would 

be above this amount. 

Our reason for proposing to allow 

these contract suppliers to offer rebates 

was to allow beneficiaries the ability to 

realize additional savings and the full 

benefits of the Medicare DMEPOS 

Competitive Bidding Program. 

We solicited comments concerning 

the rebate process outlined in the 

proposed rule. We indicated that we 

would continue to evaluate the fraud 

and abuse risks of the proposed rebate 

program, and we specifically solicited 

comments on such risks. 

Following is a summary of the public 

comments received. 

Comments: Several commenters 

expressed concern over the proposed 

rebate program. They argued that the 

rebate program would be illegal and 

violate the antikickback statute, the 

beneficiary inducement statute, and the 

Medicare provisions of the Social 

Security Act governing the waiver of 

copayments. They argued that the rebate 

program would promote fraud and 

abuse by encouraging beneficiaries to 

purchase unnecessary supplies and the 

program will entice suppliers to ‘‘game’’

the program. They further stated that the 

OIG has issued numerous opinions that 

emphasize ‘‘that providing things of 

value to beneficiaries in exchange for 

referrals is unlawful.’’ The commenters 

believed that rebates also create tension 

with the Federal Anti-Kickback safe 

harbor statute. They pointed out that, to 

qualify for a safe harbor, a rebate must 

be disclosed in writing prior to the 

initial purchase. They added that the 

proposed rule expressly prohibits a 

supplier from advertising either directly 

or indirectly to beneficiaries. One 

commenter supported the inclusion of 

the rebate provision in the program as 

an innovative means to control 

beneficiary’s out-of-pocket expenses and 

to reward bidders that submit good 

faith, competitive bids. 

Several commenters suggested that 

rebates encourage suppliers to offer 

lower cost, less innovative products, 

particularly from large manufacturers. 

Several commenters suggested that the 

use of rebates leads to beneficiaries 

selecting suppliers based solely on 

availability of rebates, rather than 

quality of care. The commenters 

indicated that this could lead to poorer 

patient outcomes. They added that large 

manufacturers can spread the cost of 

discounts across many products, but 

small manufacturers may have only one 

or two products that would not support 

rebates. The commenters asserted that 

OIG states that the use of giveaways also 

favors large providers with greater 

financial resources for such activities, 

disadvantaging smaller providers and 

businesses. They further added that the 

rebate program may provide an 

incentive to large suppliers to ‘‘lowball’’

their bids, resulting in reduced 

marketplace competition by small 

suppliers. 

One commenter suggested that if CMS 

offers a rebate, it should not be 

voluntary. Requiring suppliers to supply 

a rebate would assure that the suppliers 

are not bidding low just to be selected 

and then have their payments raised to 

the median level automatically. The 

commenter believed that this would 

prevent deliberate low-ball bidding. 

Several commenters questioned 

whether rebates should become a 

binding contractual commitment when 

an express contractual provision would 

not exist. 

Several commenters suggested that a 

rebate would be logistically impossible 

for a supplier to implement in its 

information system, branch operation, 

and accounts receivable processes. They 

added that physicians would have no 

way of keeping the rebate logistics 

straight. The commenters believed that 

CMS would also experience difficulties 

in monitoring the program. Another 

commenter inquired in what form CMS 

would require the rebate to be 

distributed, that is, gift certificate to 

family store, a money order, check, 

cash, among others. The commenter also 

asked if claims are denied and a rebate 

already paid, who would be responsible 

for collecting from the patient. 

Several commenters suggested that 

suppliers that pay rebates are less likely 

to provide service in those areas where 

the supplier has bid above the contract 

price and will focus on those items 

where the payment amount is greater 

than the supplier’s bid amount. 

Several commenters suggested that 

logistical challenges would exist with 

implementation of rebates. The 

commenters stated that one supplier 

serving beneficiaries within the CBA 

and outside the CBA would have two 

different sets of rules because only CMS 

may inform the beneficiaries which 

suppliers offer a rebate. They asked how 

a supplier should answer a direct 

question about rebates when posed by a 

referral source or patient. They added 

that often the cost to issue a rebate 

check exceeds the value of the check 

issued and asked how suppliers will 

integrate a rebate with the patient’s Part 

B supplemental insurance plan where 

the plan pays 100 percent of the 

copayment or when the copayment is 

waived because of financial hardship. 

One commenter suggested that the 

rebate provision violates the single 

payment amount provision of the Act by 

permitting different payment amounts 

for different contract suppliers. 

One commenter suggested that the 

rebate proposal may also have the effect 

of allowing retail store DMEPOS 

suppliers to ‘‘cherry pick’’ that portion 

of the DMEPOS business that is least 

costly to provide, driving up the costs 

of providing full-line services without 

any comparable savings to the program. 

Several commenters suggested that 

rebates should not exceed the 

copayment amount in order to reduce 

risks of overutilization. They believed 

that the current proposal could 

eliminate all copayments in some cases 

and lower the copayment below the 

amount that would otherwise typically 

apply in every case. Several commenters 

suggested that the rebate runs counter to 

a fundamental principle of the Medicare 

program that requires beneficiary 

coinsurance. They pointed out that the 

purpose behind the 20-percent 

copayment is to discourage excessive or 

unnecessary utilization and stated that 

CMS is not authorized to change the 

Medicare Part B plan design by using 

rebates that would reduce or eliminate 

copayments. 

Although we proposed that the rebate 

program be voluntary, one commenter 

suggested that our proposal to 

disseminate information about suppliers 

that participate in the rebate program 

would create an unfair marketing 

advantage to those suppliers. 

Response: After considering the 

comments we received, we have 

decided that rebates will not be 

authorized under the Medicare 

DMEPOS Competitive Bidding Program 

and the provisions of proposed 

§ 414.416(c) are not included in this 

final rule. We believe that competition 

will drive suppliers to compete for 

beneficiaries based on value and 

quality. We also recognize that requiring 


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rebates might raise fraud and abuse 

concerns. In addition, we have concerns 

that rebates may provide incentives to 

beneficiaries to obtain unnecessary 

items. 

In summary, we are not adopting in 

this final rule the provisions of 

proposed § 414.416(c). 

IX. Terms of Contracts 

Section 1847(b)(3)(A) of the Act gives 

the Secretary the authority to specify the 

terms and conditions of the contracts 

used for competitive bidding and we 

proposed in § 414.422(a) to implement 

this provision. Section 1847(b)(3)(B) of 

the Act requires the Secretary to 

recompete contracts under the Medicare 

DMEPOS Competitive Bidding Program 

at least every 3 years and we proposed 

in § 414.422(b) to implement this 

provision. The length of the contracts 

may be different for different product 

categories, and we proposed to specify 

the length of each contract in the RFBs. 

A. Terms and Conditions of Contracts 

(§§ 414.422(a) Through (c)) 

In the May 1, 2006 proposed rule (71 

FR 25680), we proposed that the 

competitive bidding contracts will 

contain, at a minimum, provisions 

relating to the following: 

• Covered product categories and 

covered beneficiaries operating policies. 

• Subcontracting rules. 

• Cooperation with us and our agents. 

• Potential onsite inspections. 

• Minimum length of participation. 

• Terms of contract suspension or 

termination. 

• Our discretion not to proceed if we 

find that the Medicare program will not 

realize significant savings as a result of 

the program. 

• Compliance with changes in 

Federal laws and regulations during the 

course of the agreement. 

• Nondiscrimination against 

beneficiaries in a CBA (so that all 

Medicare beneficiaries inside and 

outside of a CBA area receive the same 

products that the contract supplier 

would provide to other customers). 

• Supplier enrollment and quality 

standards. 

• The single payment amounts for 

covered items. 

• Other terms as CMS may specify. 

Comment: One commenter asked if a 

supplier that is a subcontractor to 

another supplier can submit a bid to 

furnish items in one product category in 

a CBA and also be a subcontractor to 

another supplier that submits a bid to 

furnish items under another product 

category. Another commenter also asked 

if a losing bidder can become a 

subcontractor to a contract supplier. 

One commenter asked about the 

ramifications to a subcontractor if the 

contract supplier violates its contract 

with CMS. One commenter stated that 

the requirements for subcontractors 

need to be clearly defined. The 

commenter asked if subcontractors 

would need to satisfy the same 

accreditation and financial standards 

required of contract suppliers and, if so, 

how CMS would enforce this. 

Response: Our rules would not 

preclude a supplier from submitting an 

individual bid for a product category in 

a CBA and also becoming a 

subcontractor to another supplier that 

submits a bid in the same CBA for the 

same product category. As an example, 

a supplier can bid to become an oxygen 

contract supplier and be awarded a 

contract and still be a subcontractor for 

another oxygen contract supplier. In 

addition, a supplier that submits a bid 

and loses can become a subcontractor to 

a contract supplier. We will not evaluate 

subcontractors to determine if they meet 

the accreditation, quality, financial, and 

eligibility standards because a 

subcontractor to a contract supplier 

cannot itself be a contract supplier and 

cannot submit claims under the 

Medicare DMEPOS Competitive Bidding 

Program. However, a supplier may not 

subcontract with any supplier that has 

been excluded from the Medicare 

program, any State health program or 

any other government executive branch 

procurement or nonprocurement 

activity. In addition, the subcontractor 

will not have to submit a bid to be a 

subcontractor. However, the contract 

supplier will be responsible for 

fulfilling all of the terms of its contract, 

even if it uses one or more 

subcontractors. In other words, if a 

contract supplier breaches its contract 

due to its subcontractor’s failure to 

perform, the contract supplier will be 

held liable for the breach. Therefore, the 

contract supplier needs to ensure that 

the subcontractor is performing its 

duties appropriately. In their response 

to the RFB, bidders must submit any 

plans for subcontracting. 

Comment: One commenter stated that 

a number of different proposed contract 

terms were not listed in the proposed 

rule. The commenter presumed that the 

actual contract provisions will be 

subject to a separate notice of proposed 

rulemaking in order to permit suppliers 

to offer more productive comments. One 

commenter suggested that CMS clearly 

define contract requirements so that 

suppliers can ensure that they meet 

Medicare guidelines. 

Response: In the proposed rule, we 

discussed the details of the Medicare 

DMEPOS Competitive Bidding Program 

and identified a number of provisions 

that will be included in the contract. We 

also stated that we might specify other 

terms in the contracts themselves. We 

do not believe that an additional 

rulemaking is required in order to 

specify other terms and conditions that 

might be included in the contracts. In 

addition, we believe that our discretion 

to specify the contract terms and 

conditions would allow us to specify 

the terms and conditions for each new 

competition. 

Comment: One commenter stated that 

some bidders are likely to be large 

nationwide or regional entities that are 

publicly traded companies. The 

commenter encouraged CMS to limit 

information concerning ownership to 

those owners required to be disclosed in 

regular filings with the Securities and 

Exchange Commission. 

Response: Our purpose for requesting 

information about key personnel is not 

the same as that for the Securities and 

Exchange Commission. We need to 

obtain information about key personnel, 

both corporate and local, in order to 

determine the appropriateness of the bid 

submission and to ensure no key 

personnel have been the subject of legal 

actions, or have been sanctioned or 

convicted of a crime. This information 

will also be useful in determining 

common ownership to ensure that 

companies are not bidding against 

themselves to furnish the same product 

categories in the same CBA by 

submitting different bids for commonly 

owned separate locations. 

Comment: Numerous commenters 

urged that the contract length be the 

same for all products in a CBA to 

minimize confusion among 

beneficiaries, referring physicians, and 

suppliers. The commenters stated that, 

because there are many variables that 

stakeholders will have to understand 

(such as which products are part of 

competitive bidding, boundaries of 

CBAs, among others), contracts of 

different lengths of time within a CBA 

will be time consuming, costly, and 

confusing for all involved. One 

commenter stated that the length of each 

contract should be specified in the RFB. 

Another commenter recommended that 

CMS recompete the contracts more 

frequently in the early stages of the 

competitive bidding program, in order 

to capitalize on what it learns during 

this initial period. 

Response: We agree that it is 

important that we capitalize on what we 

learn during the early stages of 

competitive bidding. However, we want 

to retain the option for staggering the 

contract period for different product 

categories to allow for any changes in 


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coding or in technology and to facilitate 

use of the authority to phase in items 

under the programs. We would not have 

different contract lengths for items 

within the same product category 

within the same CBA. The length of 

each contract will be specified in the 

RFB; however, no contract will be 

longer than 3 years because section 

1847(b)(3)(B) of the Act requires us to 

recompete the competitive bid contracts 

no less often than every 3 years. 

Comment: One commenter proposed 

that CMS require all suppliers in a 

single CBA to be accredited in the same 

year and then to place the contracts for 

all product categories in that CBA on 

the same 3-year cycle as the 

accreditation requirement. 

Response: We believe that this 

commenter’s suggestion would be too 

difficult to implement from a logistical 

standpoint and too regimented an 

approach to adopt. Suppliers have the 

option of pursuing accreditation at any 

time. However, they must be accredited 

before we can award contracts under the 

Medicare DMEPOS Competitive Bidding 

Program, unless a grace period applies. 

As we explained above, in the first 

round of bidding, a supplier’s 

accreditation must at least be pending 

before a bid can be submitted. In 

addition, a contract supplier that 

obtains its accreditation must maintain 

that accreditation for the remainder of 

the contract period. 

Comment: One commenter 

recommended that no new products 

should be added during a contract term. 

The commenter stated that suppliers 

may or may not have access to the new 

products and, as a result, may not be 

able to furnish them. 

Response: We agree with this 

comment. If a new product does not fit 

under a code for which we have 

conducted competitive bidding a single 

payment amount will not be applied 

until we conduct another round of 

bidding A further discussion of our 

rules regarding HCPCS codes changes 

can be found in section VI.D.4 of this 

final rule Under section 1847(b)(3)(B) of 

the Act, we are required to recompete 

the contracts no less often than every 3 

years. For purposes of competitive 

bidding, we cannot add additional 

codes for items for which we have not 

done bidding because we need to 

conduct bidding before we can 

determine the single payment amount 

for these items. We would pay for these 

codes under the DMEPOS fee schedule. 

Comment: Several commenters stated 

that our proposal to include in each 

contract a nondiscrimination provision, 

which would require that the 

competitively bid items furnished by a 

contract supplier to Medicare 

beneficiaries be the same items that the 

contract supplier furnishes to other 

customers is unrealistic. The 

commenters argued that this provision 

would impair beneficiary access to 

DMEPOS and would limit the savings 

that otherwise would be achieved 

through competitive bidding. Another 

commenter stated that the proposed rule 

provided very little detail about what 

would be expected or how CMS would 

ensure that the nondiscrimination 

contract provision is being met and 

urged CMS to discuss the 

nondiscrimination clause in more detail 

so that suppliers and beneficiaries will 

be able to understand what CMS has in 

mind, and know what protections are 

being afforded to beneficiaries by this 

provision. 

Response: We believe that Medicare 

beneficiaries should receive the same 

items that the contract supplier would 

furnish to other customers and, 

therefore, we proposed to include a 

nondiscrimination provision in the 

contracts. One of the main objectives of 

the Medicare DMEPOS Competitive 

Bidding Program is to ensure that 

beneficiaries have access to quality 

DMEPOS. Therefore, we have built 

safeguards into the competitive bidding 

program to ensure there is continued 

access to quality medical equipment 

and supplies. We believe the 

nondiscrimination clause will ensure 

that Medicare beneficiaries have access 

to the same items as other individuals. 

One mechanism that we would use to 

enforce the nondiscrimination clause is 

the complaint and monitoring system 

that we plan to implement. Under this 

system, which is discussed more fully 

in section XIV. of this final rule, 

beneficiaries, referral agents, providers, 

and suppliers can assure us that the 

supplier conducts business in a manner 

that is beneficial to Medicare and 

beneficiaries. We have added this 

proposed requirement to the final 

regulation at § 414.422(c). 

Comment: One commenter noted that 

CMS should consider nonprice 

variables, such as a supplier’s 

compliance with Medicare program 

requirements when awarding contracts 

for certain DMEPOS. The commenter 

also recommended that CMS revise 

§ 414.422(a) of the proposed regulations 

so that it would require a contract 

supplier to comply with the 

accreditation requirements specified in 

§ 414.414(c) for the duration of the 

contract period. One commenter 

suggested that CMS retain the discretion 

to determine the likely value a 

particular supplier’s compliance 

program brings Medicare and consider 

its value as an individual variable in 

determining whether the supplier is 

eligible to receive a contract award. 

Response: As proposed in 

§ 414.422(a), contract suppliers must 

comply with all the terms of their 

contracts, including any option 

exercised by CMS, for the full duration 

of the contract period. Once accredited, 

contract suppliers will be required to 

retain that accreditation throughout the 

duration of the contract. Accreditation 

requirements are mandatory and an 

important step forward to make sure we 

have quality suppliers. Compliance 

plans may be helpful to suppliers in 

meeting Medicare requirements; 

nevertheless, all suppliers have to meet 

our applicable standards and 

accreditation requirements. Therefore, 

we do not consider it appropriate to give 

extra weight in the selection process to 

suppliers with compliance programs. 

Comment: One commenter suggested 

that CMS require contractors to 

subcontract portions of contracts to 

minority or female-owned businesses to 

comply with Federal contracting 

requirements. 

Response: Due to size, complexity and 

nature of this program, we do not 

believe it would be feasible to require 

subcontracting with minority or female 

owned businesses and still meet our 

other goals. We also note that these 

contracts are not procurement contracts 

and, therefore, are not subject to the 

SBA or FAR requirements. Pursuant to 

section 1847(b)(6)(D) of the Act, we are 

only required to give small suppliers 

certain considerations. 

Comment: One commenter urged 

CMS not to prohibit contract suppliers 

from turning away beneficiaries, since 

there will be more than one contract 

supplier per CBA. The commenter 

stated that there may be circumstances 

in which a contract supplier is already 

operating beyond capacity and would 

not be able to furnish items to 

additional beneficiaries. In addition, the 

commenter noted that a contract 

supplier may not believe that a 

requested item is appropriate for the 

beneficiary. 

Response: We continue to believe that 

contract suppliers should not be able to 

turn away beneficiaries because we do 

not want to create an opportunity for 

contract suppliers to turn away 

beneficiaries who have the most 

difficult medical conditions or are 

otherwise difficult to serve. We note 

that we proposed that there would be a 

limited exception to this requirement if 

there is a particular item that a 

physician or treating practitioner has 

ordered to avoid an adverse medical 

outcome, but is an item that the contract 


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supplier does not normally furnish. In 

this case, if the contract supplier could 

not furnish the item, the requirements at 

§ 414.420(b) of this final rule would 

apply. 

Comment: One commenter suggested 

there be some mechanism in place to 

prevent the awarding of contracts to 

suppliers that do not provide at least 

some percentage of the services 

themselves. The commenter believed 

that quality will be lost if winning 

bidders are allowed to subcontract the 

entire or a large portion of the product 

category, and that beneficiaries will 

receive lower quality items because the 

winning bidder will make a profit on 

items that it does not actually furnish. 

Another commenter suggested that in 

order to prevent abuse of the bidding 

process, the competitive bidding 

contracts should allow a winning 

supplier to subcontract a portion of its 

services only if the subcontractor 

entities satisfy the same quality and 

accreditation standards that must be 

satisfied by the winning suppliers. 

Response: As explained above, we 

will request information on the RFBs 

about the use of subcontractors. We 

believe that the eligibility standards, 

applicable accreditation standards and 

financial standards will ensure that 

contract suppliers are reputable, viable 

businesses and not just companies that 

subcontract their work. In addition, we 

will hold the contract supplier 

responsible for meeting all the terms 

and conditions of its contract, whether 

or not one of those terms is actually 

performed by a subcontractor. 

Comment: One commenter stated that 

lack of timely DMEPOS access would be 

harmful for beneficiaries who are 

clinically ready to return to home or to 

the community from the hospital. The 

commenter also noted that delaying the 

discharge of Medicare beneficiaries due 

to restricted and untimely availability of 

specific DMEPOS would produce 

serious problems for beneficiaries’

continuity of care and also for the 

hospital. The commenter stated that, 

from a hospital perspective, it is 

essential for CMS to ensure that 

DMEPOS be available on a timely basis 

and to sanction providers for untimely 

service. The commenter recommended 

that CMS take additional steps to 

prevent these problems, including 

imposing specific sanctions on contract 

suppliers that fail to timely furnish 

DMEPOS to these hospital patients, 

because such delays would delay 

discharge and jeopardize a patient’s 

clinical progress. Another commenter 

stated that beneficiaries should be 

guaranteed prompt receipt of items, if in 

stock, within a specified period of time 

after the order is received. The 

commenter stated that delays could lead 

to adverse events for beneficiaries. 

Response: We do not believe it is 

appropriate to establish a general 

timeframe within which all 

competitively bid items must be 

delivered to beneficiaries. Due to the 

individual characteristics of the 

products and beneficiary circumstances, 

the items will vary widely in terms of 

whether they are in stock and must be 

customized. However, a contract 

supplier should furnish items to 

beneficiaries in accordance with 

timeframes that meet the ordering 

physician’s, or treating practitioner’s, 

prescription. We also note that under 

the final quality standards (under 

Consumer Services) that we issued, in 

August 2006, and with which suppliers 

must comply in order to participate in 

the Medicare DMEPOS Competitive 

Bidding Program, the supplier must 

ensure it provides beneficiaries with 

information regarding expected 

timeframes for receipt of delivered items 

and the supplier must verify that 

beneficiaries have received the items. In 

addition, under § 424.57(c)(12) of our 

regulations, which suppliers must also 

satisfy in order to participate in the 

program, suppliers are responsible for 

the delivery of Medicare-covered items 

to beneficiaries and must maintain proof 

of delivery. The quality standards also 

require the supplier to ensure that it 

provides beneficiaries with the 

necessary information and instructions 

on how to use Medicare-covered items 

safely and effectively. 

Comment: One commenter stated that 

FDA regulations require manufacturers, 

not suppliers, to evaluate product 

complaints and inform the FDA if the 

problems are considered to be 

reportable events. The commenter noted 

that CMS should require suppliers to 

inform the relevant DMEPOS 

manufacturer of any problem with 

equipment or supplies, including any 

adverse effects involving Medicare 

beneficiaries, so that the manufacturers 

will be in a position to address the 

problem, report to the FDA, or take 

other corrective action if needed. The 

commenter also noted that CMS should 

in no way imply that a product warranty 

is the supplier’s legal obligation, as 

opposed to that of the product 

manufacturer. 

Response: The Medicare Claims 

Processing Manual, Chapter 20-Section 

40.1 provides that suppliers are 

prohibited from submitting a claim for 

a payment for items and services that 

are covered by manufacturer or supplier 

warranties. The supplier on record is 

responsible for ensuring that a claim is 

not submitted for items covered under 

a manufacturer’s product warranty. To 

be eligible to submit a bid, DMEPOS 

suppliers must meet the supplier 

standard found in 42 CFR 424.57(c)(1), 

which require them to comply with 

applicable Federal and State licensure 

and regulatory requirements. FDA 

regulations and requirements are 

applicable to items paid for under the 

competitive bidding program just as 

they currently apply to items paid for 

under the fee schedule methodology. 

Comment: One commenter noted that 

the proposed rule would require 

suppliers to provide information as 

requested regarding the integrity of each 

product sold and billed under the 

Medicare DMEPOS Competitive Bidding 

Program, as well as information on the 

integrity of the suppliers’ businesses as 

a whole. The commenter believed that 

suppliers should not be required to 

provide information on product 

integrity as long as there is a SADMERC 

coding verification that the product has 

been approved for billing under a 

particular HCPCS code. The commenter 

also believed that a rule that would 

require suppliers to provide information 

on their business integrity was 

inappropriate because it would 

duplicate information provided during 

certification and accreditation. 

Several commenters requested that 

CMS clarify whether it intends for all 

suppliers to have a corporate 

compliance program, a mission 

statement and operating principles, and/ 

or other ethical aspects of their 

business; or clearly defined 

organizational conflicts of interest. One 

commenter recommended that the 

definition of ‘‘affiliate’’ be simplified for 

public companies with multiple 

locations tied to a single tax 

identification number so that suppliers 

do not have to provide the names or 

supplier numbers of all locations on an 

application for a single CBA. The 

commenters requested that CMS 

provide additional detail regarding the 

level of employee information it expects 

to be specified, for example, the highest 

ranking local manager and title or the 

chief executive officer or chief operating 

officer of a public company; and that 

CMS define the term ‘‘customer service 

protocol’’ because different companies 

define the customer service process 

differently. 

Several commenters recommended 

that CMS also require each supplier to 

provide: a description of its corporate 

compliance program; its procedure for 

ensuring that it does not knowingly 

employ any individuals who have been 

debarred from participating in 

government programs; its procedure for 


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conducting background checks on 

employees who will have direct contact 

with beneficiaries; awards, honors, or 

other distinctions issued to the 

company; a description of its 

credentialing program if a subcontractor 

will be used to furnish items to 

beneficiaries; a description of its 

emergency preparedness plan; and a 

description of its process for selecting 

products. These commenters also 

recommended that CMS independently 

verify each supplier’s disclosure by 

using objective measures. Two 

commenters suggested that CMS explain 

and define the requirements and terms 

that would be included in the RFBs, 

including the conflicts of interest and 

affiliated companies of the supplier. 

One commenter suggested that CMS 

consider requesting complete disclosure 

on corporate integrity agreements, 

entered into by the supplier as well as 

OIG convictions against the supplier, 

and that CMS conduct criminal 

background checks. 

Response: We appreciate these 

comments. After consideration of the 

comments, we believe that the most 

appropriate place to list the specific 

information that we will need from each 

supplier is in the RFB. Our purpose in 

collecting such information is to 

evaluate suppliers’ bids, and we have 

attempted to minimize the burden on 

bidders as much as possible. Therefore, 

the specific information to be collected 

will be detailed in the RFB. We will be 

requesting information such as: the 

supplier’s identifying information; 

information regarding the items that the 

supplier would furnish if awarded a 

contract; financial information; and 

corporate integrity information 

We believe that many of these items 

are best addressed in the quality 

standards and accreditation standards. 

We are using the RFB notice and 

comment period to finalize the list of 

items that we are going to require. 

We are adding a clause to § 414.422(a) 

which provides that we will specify the 

terms and conditions in the competitive 

bidding contacts, and finalizing the 

remainder of § 414.422(a) which 

provides that a contract supplier must 

comply with all terms of its contract, 

including any option exercised by CMS 

for the full duration of the contract 

period and adopting revised 

§ 414.422(a) as final. 

We are adopting as final, without 

modifications, § 414.422(b), which 

provides that we will recompete the 

competitive bidding contacts at least 

once every 3 years. 

We are finalizing § 414.422(c) which 

provides that a nondiscrimination 

provision will be included in each 

contract we enter into with a supplier 

under the Medicare DMEPOS 

competitive bidding program. 

B. Change in Ownership (§ 414.422(d)) 

In the May 1, 2006 proposed rule, 

under proposed § 414.422(d), we 

proposed to evaluate a supplier’s 

ownership information, its compliance 

with appropriate quality standards, its 

financial status, and its compliance 

status with government programs before 

we determine that a supplier can qualify 

as a contract supplier if there is a 

change of ownership. For this reason, 

we proposed that suppliers would not 

be granted winning status by merely 

merging with or acquiring a contract 

supplier’s business. We do not want to 

allow suppliers to adopt a strategy of 

circumventing the regular bidding 

process by gaining winning status 

through acquisitions of or mergers with 

contract suppliers or to violate any 

anticompetition prohibitions. Therefore, 

we proposed that contract suppliers 

must notify CMS in writing 60 days 

prior to any changes of ownership, 

mergers, or acquisitions being finalized. 

We proposed that we would have the 

discretion to allow a successor entity, 

after a merger with or acquisition of a 

contract supplier, to function as contract 

supplier when—

• There is a need for the successor 

entity as a contractor to ensure 

Medicare’s capacity to meet expected 

beneficiary demand for a competitively 

bid item; and 

• We determine that the successor 

entity meets all the requirements 

applicable to contract suppliers. 

We proposed that the successor entity 

must agree to assume the contract 

supplier’s contract, including all 

contract obligations and liabilities that 

may have occurred after the awarding of 

the contract to the previous supplier. 

The successor entity is legally liable for 

the nonfulfillment of obligations of the 

original contract supplier. 

In addition, we proposed to only 

allow the successor entity to function as 

a contract supplier if it executed a 

novation agreement with CMS. 

Comment: Numerous commenters 

objected to the proposed provision that 

would require contract suppliers to 

notify CMS in writing 60 days prior to 

any changes of ownership, mergers, or 

acquisitions being finalized and 

recommended that the 60-day prior 

notice provision be modified to a notice 

period of no more than 30 days. The 

commenters also recommended that if 

the transaction is set to close within less 

than 30 days, the parties should have an 

obligation to provide notice as soon as 

the parties sign a letter of intent to 

change ownership. One commenter 

suggested that notification regarding 

change of ownership be required within 

30 days after change has occurred. The 

commenters believed that the proposed 

rule fails to take into consideration the 

short time period in which acquisitions/ 

mergers occur. The commenters added 

that the 60-day requirement is a 

burdensome restraint on legitimate 

corporate transactions, and that 

acquisitions and mergers frequently 

occur in a much more compressed 

timeframe. They believed that our 

proposed timeframes are unrealistic, 

and as a result, CMS could be notified 

of numerous acquisitions that are not 

consummated. They emphasized that it 

is important that the prior notice 

requirement be optional and that notice 

promptly after transaction would be 

appropriate to protect the Medicare 

program and beneficiaries. 

The commenters pointed out that 

there generally is no advance notice 

requirement prior to completing an 

acquisition and/or merger. They 

requested clarification that any such 

notices furnished to Medicare will 

remain confidential until the successor 

entity notifies CMS that the transaction 

has been completed. To the extent 

notice is required they recommended 

that the final rule should make it clear 

that notice will be confidential and 

exempt from disclosure under 

Exemption 4 of the Freedom of 

Information Act (FOIA) and 

implementing HHS regulations as trade 

secrets. The commenters also 

recommended that commercial or 

financial information obtained from a 

person should be privileged or 

confidential and that this is necessary so 

that public companies can appropriately 

maintain sensitive nonpublic 

information and at the same time ensure 

that disclosure is made appropriately 

when that disclosure is timely under 

applicable securities regulations that 

protect shareholders. 

Response: We continue to believe that 

sufficient advance notice is necessary to 

allow us to evaluate whether a new 

owner will meet all of the requirements 

to be a contract supplier under the 

Medicare DMEPOS Competitive Bidding 

Program. However, we are revising the 

language under § 414.422(d)(1) to clarify 

what a contract supplier’s obligations 

are in the event of a change of 

ownership. Specifically, § 414.422(d)(1) 

now provides that if a contract supplier 

is considering or negotiating a change in 

ownership, the contract supplier must 

notify CMS 60 days before the 

anticipated effective date of the change. 

Under § 414.422(d)(2), if the supplier 

that acquires or merges with the 


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contract supplier wishes to itself 

become a contract supplier, it must meet 

all of our requirements, including 

compliance with applicable quality 

standards, accreditation, eligibility 

standards, and financial standards, and 

must submit the documentation 

required in § 414.414. The new supplier 

that seeks to become a contract supplier 

must also submit a novation agreement 

to CMS 30 days prior to the anticipated 

effective change of ownership, 

indicating that it will assume all duties 

and obligations of the previous contract 

supplier. We have clarified in 

§ 414.422(d) that if a new entity will be 

formed as a result of the merger or 

acquisition, the existing contract 

supplier submits to CMS, at least 30 

days before the anticipated effective 

date of the change of ownership, its 

final draft of a novation agreement for 

CMS review. The successor entity shall 

submit to CMS within 30 days after the 

effective date of the change of 

ownership an executed novation 

agreement acceptable to CMS. We 

understand that the change of 

ownership information is highly 

confidential, and will make every effort 

to protect it as required by law. 

Comment: Numerous commenters 

recommended that CMS retain the 

authority to disallow a successor entity 

to participate as a contract supplier only 

if CMS determines that allowing the 

successor entity to participate as a 

contract supplier would have significant 

anticompetitive effects. The commenters 

indicated that CMS should not 

unreasonably withhold its approval of a 

change of ownership and that CMS does 

not have the authority to, and, in any 

event, should not deny winning 

supplier status to a new owner on the 

basis that its capacity is not necessary 

within the CBA. They added that 

contract suppliers in CBAs will most 

likely experience an increase in the 

value of their business and, therefore, 

should be able to take advantage of the 

marketplace without interference from 

government agencies if they wish to 

lawfully transfer ownership. 

Several commenters agreed that CMS 

should not allow a supplier to 

circumvent the bidding process through 

mergers or acquisitions, but suggested 

that the proposed rule creates a restraint 

of trade situation and/or devalues the 

business of a supplier that decides to 

sell the company. 

In addition, several commenters 

recommended that CMS revise the 

proposed change in ownership rules so 

that they are consistent with existing 

requirements for DMEPOS suppliers. 

Other commenters suggested that CMS 

apply the change of ownership rules 

found in 42 CFR 489.18(a), which 

provides that a change of ownership for 

a corporation occurs when the merger or 

provider corporation merges into 

another corporation or the consolidation 

of two or more corporations, results in 

the creation of a new corporation, and 

states that the transfer of corporate stock 

or the merger of another corporation 

into the provider corporation does not 

constitute change of ownership. 

Response: We want to evaluate 

whether a supplier that acquires or 

merges with a contract supplier and that 

wants to become a contract supplier 

itself meets our standards for being a 

contract supplier under the Medicare 

DMEPOS Competitive Bidding Program. 

These requirements serve the needs of 

the program because we do not want to 

encourage suppliers to adopt a strategy 

of circumventing the regular bidding 

process by gaining winning status 

through acquisitions of or mergers with 

contract suppliers not to violate any 

anticompetitive prohibitions. 

We disagree with the commenter that 

suggested that we apply the change of 

ownership rules found in 42 CFR 

489.18(a) because this section of our 

regulation applies only to Medicare Part 

A providers, such as hospitals, SNFs, 

and HHAs, but competitive bidding 

applies to Medicare Part B suppliers. 

Comment: One commenter stated that 

the change of ownership provision 

should not apply when a contract 

supplier, as opposed to a noncontract 

supplier, purchases or acquires another 

supplier. The commenter noted that if a 

supplier that purchases or acquires a 

contract supplier does not intend to be 

a contract supplier, there is no reason 

for this requirement to apply, and if the 

acquiring supplier is already a contract 

supplier, there is no reason to require an 

additional review as to its 

qualifications. The commenter stated 

that while it understands the need to 

conduct oversight and diligence if the 

acquiring supplier is not a contract 

supplier, it requested that CMS clearly 

specify requirements for approval of the 

acquisition if the acquiring party is a 

contract supplier but does not intend for 

the supplier it acquires to be a contract 

supplier. 

The commenter also urged that the 

final rule clarify that the requirements 

for an acquirer would be no more 

burdensome than the requirements to be 

a contract supplier because such 

requirements could result in an unequal 

burden on entities that acquire contract 

suppliers. The commenter stated that, if 

additional requirements are to be 

imposed, CMS should state what they 

are explicitly so that the public 

understands and can comply with them 

in advance of incurring substantial 

transaction costs. 

Response: As stated in response to the 

previous set of comments, we plan to 

evaluate the same information required 

to be submitted by a bidding supplier if 

a contract supplier purchases a 

noncontract supplier or if a noncontract 

supplier purchases a contract supplier. 

However, if a contract supplier 

purchases another contract supplier, we 

will not ask the contract supplier to 

duplicate information we already have 

on file. 

Comment: One commenter stated that 

CMS should be able to assure itself that 

the acquired supplier continues to meet 

all obligations and requirements for 

contract suppliers, and its review 

should be limited to a consideration of 

whether, post acquisition, the acquired 

supplier: (1) Meets all the requirements 

of a contract supplier; (2) is willing to 

assume all obligations under the 

contract; and (3) has executed a 

novation agreement. The commenter 

stressed that if CMS desires to 

encourage all suppliers to bid, the 

contract supplier’s status as the winning 

bidder should be preserved as a 

valuable asset for consideration in any 

commercial transaction. 

Other commenters were concerned 

about the following issues: the 

successor’s liability for potentially 

fraudulent activities that could have 

occurred on the previous company’s 

watch; instances where the new contract 

supplier determines a revised Certificate 

of Medical Necessity (CMN) is needed 

and the physician or treating 

practitioner is no longer in practice or 

refuses to execute a new CMN; and the 

tax implications of restricting change of 

ownership transactions to only stock 

transactions. The commenter observed 

that there may be instances where the 

sale of a supplier because of the death 

of the owner would be prohibitively 

expensive if executed as a stock 

transaction, leaving the widow with 

little money and no recourse to dispose 

of the business. 

Response: As we stated earlier, our 

requirements regarding change of 

ownership are intended to provide us 

with assurance that the successor entity 

meets all of our requirements before we 

can consider it to be eligible to assume 

the previous contract supplier’s 

contract. A new contract supplier will 

be responsible for meeting all CMS 

program requirements. 

After consideration of the public 

comments received, in this final rule we 

are finalizing § 414.422(d) as discussed 

above. 


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C. Suspension or Termination of a 

Contract (§§ 414.422(f) and (g)) 

In the May 1, 2006, proposed rule (71 

FR 25682), we specified that contract 

suppliers would be held to all the terms 

of their contracts for the full length of 

the contract period (proposed 

§ 414.422(f)). Any deviation from 

contract requirements, including a 

failure to comply with governmental 

agency or licensing organization 

requirements, would constitute a breach 

of contract. We indicated that, if we 

conclude that the contract supplier has 

breached its contract, the actions we 

might take include, but are not limited 

to, asking the contract supplier to 

correct the breach condition, 

suspending the contract, terminating the 

contract for default (which might 

include reprocurement costs), 

precluding the supplier from 

participating in the competitive bidding 

program, or availing ourselves of other 

remedies permitted by law. We 

indicated that we also would have the 

right to terminate the contract for 

convenience (proposed § 414.422(g)). 

Comment: Several commenters 

believed that CMS must include 

additional procedural safeguards for 

contract suppliers before terminating 

their contracts. The commenters 

suggested that CMS give a contract 

supplier notice that it believes the 

supplier has breached its contract, an 

opportunity and adequate timeframe for 

the contract supplier to cure the breach, 

and a review or appeal mechanism if the 

contract supplier’s contract is 

terminated. One commenter stated that 

contract suppliers should only be 

terminated for ‘‘material breach’’ of their 

contracts. 

Another commenter noted that the 

proposed rule grants CMS the unilateral 

right to terminate a contract without 

cause which eliminates a principal 

advantage for contract suppliers. The 

commenter stressed that without 

modification of the proposed rule, 

suppliers would be dissuaded from 

submitting the lowest bid possible 

because they would have to calculate 

the financial risk of termination and 

compensate for this uncertainty in their 

bid prices. 

Another commenter stated that it is 

reasonable for CMS to expect that 

contract suppliers will be held to all the 

terms of their contracts for the full 

length of the contract period. Two 

commenters objected to the provision 

stating that CMS may include 

reprocurement costs if a contract 

supplier’s contract is terminated 

because the contract supplier cannot 

know Medicare’s reprocurement cost 

structure. One commenter asked 

whether the provision stating that CMS 

could preclude a contract supplier that 

breached its contract from participating 

in the competitive bidding program 

referred only to the program in the 

supplier’s CBA or the entire Medicare 

DMEPOS Competitive Bidding Program. 

Response: We believe that defining a 

breach of contract as any deviation from 

contract requirements, including a 

failure to comply with governmental 

agency or licensing organization 

requirements, will help ensure that 

contract suppliers do not breach their 

contract requirements. We have set out 

a variety of potential actions of varying 

levels of severity that we could take in 

the event of a breach of contract, such 

as requiring that contract supplier 

submit a plan to correct the deficiency 

that created the breach of contract, 

suspending the contract, precluding the 

contract supplier from participating in 

the competitive bidding program in the 

future, revoking the supplier number of 

the contract supplier, and/or availing 

ourselves of other remedies allowed by 

law. In deciding which course of action 

to take, we will consider the nature of 

the breach, including whether the 

breach is indicative of a substantial 

failure to comply with the terms of the 

supplier’s contract, and the extent to 

which the efficient and effective 

administration of the Medicare program 

has been compromised by the breach. 

We are making several changes to the 

proposed rule. In response to the 

comments which addressed the 

potential problems that might stem from 

our proposal to permit CMS to require 

terminated suppliers to reimburse CMS 

for reprocurement costs, proposed at 

§ 414.422(f)(2)(iii), we are deleting that 

proposal. We are also making several 

revisions to our proposal to permit CMS 

to terminate a contract with a contract 

supplier in the event of a breach of 

contract or to take other action against 

a supplier after a breach of contract has 

occurred. We have eliminated the 

phrase ‘‘for default’’ from 

§ 414.422(f)(iii). We have revised the 

wording to state that CMS may 

‘‘[t]erminate the contract.’’ We believe 

that this is consistent with CMS’

approach to contracts and agreements 

with providers, suppliers and other 

contracted entities in other areas of the 

Medicare program. CMS will have the 

authority to terminate a contract with a 

contract supplier where a breach of 

contract has occurred. 

CMS is making several other minor 

clarifications to the language at 

§ 414.422(f). Specifically, at 

§ 414.422(f)(2)(i), we proposed that CMS 

could require a contract supplier to 

‘‘correct the breach condition’’ where a 

breach of contract had occurred. We are 

revising this language to state that CMS 

may ‘‘[r]equire the contract supplier to 

submit a corrective action plan.’’ Also, 

at § 414.422(f)(2)(ii), we proposed that 

in the event of a breach of contract, CMS 

could ‘‘[s]uspend performance under 

the contract.’’ We are revising this 

language to state that in the event of a 

breach of contract, CMS can ‘‘suspend 

the contract supplier’s contract.’’

CMS agrees with the need for 

procedural safeguards where CMS is 

taking action to terminate a contract 

supplier’s contract. CMS will provide 

further guidance regarding the appeal 

procedures available to contract 

suppliers for termination actions, as 

well as other enforcement actions 

involving contract supplier contracts, at 

a future date. 

Comment: One commenter requested 

greater clarification of the phrase ‘‘for 

convenience’’ used in the preamble to 

the proposed rule (71 FR 25682) to 

describe a basis for CMS to terminate a 

contract. The commenter stated that at 

a minimum there should be an explicit 

notice period required prior to 

termination. Another commenter 

recommended deleting this provision. 

Response: In response to comments, 

CMS has decided to delete this 

provision. 

Comment: One commenter stated that 

the proposed rule does not explicitly 

prohibit the Secretary from unilaterally 

changing the price of an item in a CBA 

during the term of the competitive 

bidding contract. Several commenters 

also stated that there should be a 

provision that allows suppliers to 

terminate, without being in breach of 

contract, in cases of hardship or 

material change in circumstances that 

are not the fault of or within the control 

of the supplier if unexpected 

circumstances arise that hinder its 

ability to render performance. Another 

commenter stated that the lack of parity 

in the ability of the contracting parties 

to terminate may serve as an 

impediment to many potential bidders’

submission of the lowest possible bid. 

Response: Each supplier contract 

under each competitive bidding 

program will identify the product 

categories, items, and single payment 

amounts for items furnished under that 

program. The single payment amount 

for each item in each contract will not 

change for the duration of the contract, 

with the only exception being in limited 

cases where a HCPCS code is divided or 

merged as provided in § 414.426. 

However, even where § 414.426 applies, 

the total single payment amounts for the 

sum of the item components, the newly 


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separated item(s), or the newly 

combined item will be equal to the 

single payment amounts that were 

originally listed in the contract. Contract 

suppliers will be held to all of the terms 

of their contracts for the length of the 

contract period and we will not allow 

them to suspend their performance 

under their contracts without 

consequences because of the potential 

hardship that the Medicare program and 

beneficiaries could suffer if there were 

no longer enough contract suppliers to 

furnish one or more product categories 

in a CBA. If a supplier breaches its 

contract with CMS, we have the right to 

ask the contract supplier to correct the 

breach, suspend the contract, terminate 

the contract, or preclude the supplier 

from participating in the Medicare 

Competitive Bidding Program. We do, 

however, recognize the hardships may 

arise for contract suppliers and we will 

take this into consideration as we 

decide what appropriate actions should 

be taken in the event of a breach. 

Comment: One commenter suggested 

that contract suppliers should have the 

ability to exit the program with a 90-day 

notice. The commenter stated that this 

will allow the bidders that may have 

failed to meet quality standards and 

reach their market expectations to exit 

in a business-like manner. 

Response: As we explained above, we 

are selecting a sufficient number of 

contract suppliers to furnish each 

product category in each CBA, and 

allowing contract suppliers to terminate 

their contracts may impede beneficiary 

access to competitively bid items and 

otherwise result in a hardship for the 

Medicare program. Contract suppliers 

are expected to comply with their 

contracts for their entire duration. 

After consideration of the public 

comments received, in this final rule, 

we are finalizing the breach of contract 

and termination provisions in 

§§ 414.422(f) and (g) with the changes 

described above. 

X. Administrative or Judicial Review of 

Determinations Made Under the 

Medicare DMEPOS Competitive 

Bidding Program (§ 414.424) 

Section 1847(b)(10) of the Act 

provides that there will be no 

administrative or judicial review of 

determinations made under section 

1869, section 1878, or any other section 

of the Act, for the—

• Establishment of payment amounts 

under a competitive bidding program; 

• Awarding of contracts under a 

competitive bidding program; 

• Designation of CBAs for the 

Medicare DMEPOS Competitive Bidding 

Program; 

• Phased-in implementation of the 

Medicare DMEPOS Competitive Bidding 

Program; 

• Selection of items for a competitive 

bidding program. 

• Bidding structure and number of 

contract suppliers selected under a 

competitive bidding program. 

In the May 1, 2006, proposed rule (71 

FR 25682), we proposed to incorporate 

in a new proposed § 414.424 the 

provisions for no administrative or 

judicial review of the determinations 

specified in section 1847(b)(10) of the 

Act listed above. We indicated that the 

proposed regulation would have no 

impact on the current beneficiary or 

supplier right to appeal denied claims. 

However, neither the beneficiary nor the 

supplier would be able to bring such an 

appeal if a competitively bid item was 

furnished in a CBA in a manner not 

authorized by this rule. 

Comment: A number of commenters 

agreed that the proposed rule tracked 

the provisions of the Act, which does 

not provide for administrative or 

judicial review under the Medicare 

DMEPOS Competitive Bidding Program. 

However, many of the commenters 

believed that CMS should establish 

some type of grievance and review 

process to provide contract suppliers an 

opportunity to review the competitive 

bidding process and to challenge the 

outcome of the bid evaluation process 

and the selection of contract suppliers. 

One commenter added that because 

Medicare is required to make available 

to the public the final process 

documentation under the Freedom of 

Information Act requirements, it is only 

fair that CMS also provide an 

opportunity for suppliers to challenge 

any decisions in this documentation. 

Two commenters asserted that the 

statutory limitations on administrative 

and judicial review do not preclude the 

establishment of a process that would 

give suppliers an opportunity to 

communicate with CMS regarding 

grievances and seek redress. They 

asserted that the implementation of 

such a process would be consistent with 

Constitutional due process rights. One 

commenter recommended that CMS 

establish some type of expedited review 

process specific to contract award 

decisions and urged full transparency of 

factors influencing contract award 

decisions in order to support the highest 

level of integrity in the process. One 

commenter recommended that CMS 

keep in place all current mechanisms to 

defend the supplier’s rights, including 

the Administrative Law Judge review. 

One commenter believed that the 

nonavailability of administrative review 

violates not only the Administrative 

Procedure Act but also individual and 

corporate rights to due process and to 

redress grievances. The commenter 

recommended that appeal rights be 

restored as these rights exist elsewhere 

in the Medicare program. 

Response: We understand the 

commenters’ concerns. However, we 

believe that Congress enacted section 

1847(b)(10) of the Act to avoid any 

delay or disruption in the 

implementation of the program caused 

by challenges and appeals regarding 

specified aspects of the Medicare 

DMEPOS Competitive Bidding Program. 

We intend to conduct an extensive 

education and outreach program to 

ensure that the suppliers are educated 

about the rules and provisions of the 

program and understand the contract 

selection process and what is required 

of bidding suppliers. In addition, we 

will be providing the suppliers with a 

60-day open bidding period during 

which they can change, update, or 

correct their bid packages before 

certifying their final submissions. 

Comment: Numerous commenters 

recommended that CMS include a 

procedure for debriefing suppliers that 

were not selected as contract suppliers 

and provide an opportunity for a review 

to determine, at a minimum, whether an 

error on the part of CMS or its 

contractors was the reason that the 

supplier lost the bid. 

Several commenters recommended 

that CMS put appropriate procedures in 

place for bidders to ensure that 

calculations related to their bids are 

reviewed for accuracy and that these 

procedures provide suppliers an 

opportunity to redress issues such as 

simple calculation errors. One 

commenter pointed out that because the 

review and award of contracts under the 

competitive bidding program will be 

labor intensive, it is likely that there 

will be many inadvertent human and 

computer errors and/or indisputably 

arbitrary decisions. The commenter 

pointed out that while the statute grants 

CMS discretion in making 

determinations under the competitive 

bidding program, Congress has not 

granted CMS the authority to render 

moot the authority of published 

regulations by using known improper or 

erroneous information to implement 

those regulations. Therefore, the 

commenter recommended a 

‘‘reconsideration process’’ with regard 

to the award of contracts only, and 

delegation of authority to the Provider 

Reimbursement Review Board or some 

similar body within the Medicare 

program to hear such requests for 

reconsideration. The commenter 

acknowledged that under this process, 


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the agency’s decisions would not be 

administratively or judicially appealed. 

However, the commenter pointed out 

that the establishment of a 

reconsideration process would, at least, 

enable errors to be corrected. 

Response: In accordance with section 

1847(b)(10) of the Act, we proposed that 

there will be no administrative or 

judicial review for the awarding of 

contracts or the establishment of 

payment amounts under a competitive 

bidding program. We believe that 

Congress enacted section 1847(b)(10) of 

the Act to avoid any delay or disruption 

in the implementation of the program 

that could arise if we had to defend 

numerous challenges and appeals 

brought by losing bidders. We intend to 

conduct an extensive education and 

outreach program to ensure that 

suppliers are educated about the rules 

and provisions for the program. In 

addition, we are developing a quality 

assurance system to ensure that bids 

submitted to us are correctly identified 

and recorded. We intend to allow 

bidders to submit electronic bids. 

Bidders will have an opportunity to 

review their bids and certify their 

accuracy prior to submission. Bidders 

will be able to modify or change their 

bids at any time during the bidding 

window. In addition, the CBIC will have 

in place an auditing system and quality 

assurance program to monitor and 

ensure that it accurately records and 

calculates the information furnished by 

suppliers. We will also be notifying all 

losing bidders, but believe it would not 

be administratively feasible to provide 

debriefings for all losing bidders, due to 

logistics, volume of bidders, and time 

constraints. 

Comment: One commenter strongly 

objected to the lack of administrative or 

judicial oversight of the process. The 

commenter stated that the Medicare 

DMEPOS Competitive Bidding Program 

is a procurement program by which 

CMS seeks to acquire the same types of 

commercial items that it acquires for 

itself in accordance with the FAR. The 

commenter firmly believed that 

considering the number of 

procurements that are set aside each 

year by GAO and the United States 

Court of Federal Claims based on 

government error, CMS should allow 

administrative or judicial review. The 

commenter believed that the proposal 

could lead to arbitrary and erroneous 

awards, if not fraud. The commenter 

suggested that CMS clarify that all 

contract awards and invitations to 

participate will be subject to the 

traditional review of procurements 

conducted by the Government. The 

commenter added that regardless of 

whether CMS possesses the right to 

waive the FAR and avoid judicial or 

administrative oversight, prudence and 

the obligation to maintain integrity in 

the procurement process that it is 

developing require that CMS open the 

process up to protect review. 

Response: We disagree with these 

comments. The Medicare DMEPOS 

Competitive Bidding Program is a 

unique program that differs in many 

ways from traditional government 

procurement. We are bound to 

implement this program in accordance 

with the statute, which as noted earlier 

in this section, provides that there will 

be no administrative or judicial review 

of certain functions. In the proposed 

rule we provided notice to the public of 

how we intend to implement the 

Medicare DMEPOS Competitive Bidding 

Program, and this final rule responds to 

the public’s comments. 

Comment: A number of commenters 

pointed out that even though CMS 

acknowledged in the preamble of the 

proposed rule that the existing rights of 

beneficiaries and suppliers to appeal 

denied claims are undisturbed by 

competitive bidding, the proposed 

regulatory language of § 414.424 as 

written does not make clear that these 

existing rights are unaffected. The 

commenters suggested the addition of 

language in § 414.424 to clarify that 

these rights would be preserved. Three 

commenters also indicated that the 

statement in the regulation that ‘‘[a] 

denied claim is not appealable if CMS 

determines that a competitively bid item 

was furnished in a CBA in a manner not 

authorized by this subpart’’ is vague as 

written and suggested that the statement 

be rewritten for clarification or 

removed. One commenter suggested that 

CMS add language to state that ‘‘A claim 

is not appealable if the denial is based 

on a determination by CMS that a 

competitively bid item was furnished in 

a CBA in a manner not authorized by 

this subpart.’’

Response: In this final rule, we have 

revised the language in § 414.424(b) to 

clarify that there are no appeal rights for 

claim denials if the denial is based on 

our determination that a competitively 

bid item was furnished in a CBA in a 

manner not authorized by 42 CFR Part 

414 Subpart F. 

After consideration of the public 

comments we received, we are adopting 

as final, with technical clarifications, 

the provisions of proposed § 414.424. 

XI. Opportunity for Participation by 

Small Suppliers (§§ 414.402, 414.414(g)) 

Section 1847(b)(6)(D) of the Act 

requires us, in developing bidding and 

contract award procedures, to take 

appropriate steps to ensure that small 

suppliers of items have an opportunity 

to be considered for participation in the 

Medicare DMEPOS Competitive Bidding 

Program. Section 1847(b)(2)(A)(ii) of the 

Act also states that the needs of small 

suppliers must be taken into account 

when evaluating whether an entity 

meets applicable financial standards. 

Size definitions for small businesses 

are, for some purposes, developed by 

the Small Business Administration 

(SBA) based on annual receipts or 

employees, using the North American 

Industry Classification System (NAICS). 

Based on the advice from the SBA, we 

expect that most DME suppliers will fall 

either into NAICS Code 532291, Home 

Health Equipment Rental, or NAICS 

Code 446110, Pharmacies, since the 

SBA defines these small businesses as 

businesses having less than $6.5 million 

in annual receipts. 

In the May 1, 2006 proposed rule (71 

FR 25682), we proposed using the SBA’s 

small business definition when 

evaluating whether a DMEPOS supplier 

is a small supplier. We relied on the 

expertise of the SBA to determine what 

constitutes the appropriate definition of 

a small supplier. We proposed that all 

contract suppliers would be expected to 

service the whole CBA. However, we 

considered allowing a small supplier 

that has fewer than 10 full-time 

equivalent (FTE) employees to designate 

a geographic service area that is smaller 

than the entire CBA. We did not 

propose this approach because we want 

to ensure that beneficiaries have the 

choice of going to any contract supplier 

in their respective CBA. Carved-out 

areas could lead to confusion for 

beneficiaries faced with multiple 

competitive bidding subareas. Further, 

we believe such an approach would 

allow selection of more favorable market 

areas by smaller businesses potentially 

leading to an unfair market advantage. 

We sought comments on this issue. 

Information available to us on the size 

distribution of businesses that provide 

DMEPOS indicates that the majority of 

suppliers in the DMEPOS industry 

qualify as small businesses according to 

the SBA definitions. Our analysis of 

DMEPOS claims data suggests that at 

least 90 percent of DMEPOS suppliers 

had Medicare allowed charges of less 

than $1 million in CY 2003. The figure 

of $1 million could be an underestimate 

of total receipts because it does not 

include non-Medicare receipts and nonDMEPOS receipts, but it does suggest 

that most DMEPOS suppliers are small. 

Although section 1847(b)(6)(D) of the 

Act focuses on ensuring participation in 

the bidding, and not on bidding 

outcomes, we believe that it is worth 


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noting how small suppliers fared in the 

bidding in the Medicare competitive 

bidding demonstration projects. Both 

small and large suppliers were selected 

as demonstration suppliers. Some small 

suppliers that were selected as 

demonstration suppliers were able to 

increase their market share substantially 

during the demonstration. Others 

experienced little change in market 

share. 

We recognize the importance, 

benefits, and convenience offered by the 

local presence of small suppliers. In the 

May 1, 2006 proposed rule, we 

proposed to take the following steps to 

ensure that small suppliers have the 

opportunity to be considered for 

participation in the program. 

First, as required by section 

1847(b)(4)(B) of the Act, we will select 

multiple winners in each CBA. If a 

single winner was selected in an area, 

a small supplier would have difficulty 

participating in the competition because 

the supplier, as a minimum, would have 

to demonstrate that it could rapidly 

expand to serve the entire projected 

demand in the area. Selecting multiple 

suppliers should make it easier for small 

suppliers to participate in the program. 

Second, we proposed to conduct 

separate bidding competitions for 

product categories, allowing suppliers 

to decide how many product categories 

for which they want to submit bids, 

rather than conduct a single bidding 

competition for all DMEPOS items and 

other equipment. We believe that 

separate competitions for product 

categories will encourage participation 

by small suppliers that specialize in one 

or a few product categories. If a single 

competition was held for all DMEPOS 

items and other equipment, small, 

specialized suppliers would have to 

either significantly expand their product 

and service offerings or submit bids for 

items they currently do not provide. 

We stated that we recognize the 

importance of small suppliers in the 

DMEPOS industry, and we welcomed 

comments on the options identified in 

the proposed rule. We also expressed 

interest in other ways to ensure that 

small suppliers have opportunities to be 

considered for participation in the 

program. 

To collect additional information on 

this issue, we contracted with RTI 

International to conduct focus groups 

with small suppliers. The purpose of the 

focus groups was to gather input on 

ways to facilitate participation by small 

suppliers in the program. The focus 

groups also discussed the impact of the 

requirement for the quality standards 

and accreditation, which will affect all 

small suppliers, regardless of whether 

they seek to participate in a competitive 

bidding program. As we indicated in the 

proposed rule, we reviewed our efforts 

to ensure participation by small 

suppliers in the Medicare DMEPOS 

Competitive Bidding Program after we 

reviewed public comments on the 

proposed rule and the results of the 

focus groups. We also considered the 

findings of the focus groups, along with 

the additional options and comments 

presented on the proposed rule, in 

developing this final rule. 

Comment: Several commenters 

requested that CMS share the findings of 

the focus groups. 

Response: Nine focus groups were 

conducted, during April and May 2005, 

with DMEPOS suppliers that had less 

than $3 million in gross revenue and 

employed up to 10 FTE employees. The 

purpose of the focus groups was to 

explore small DMEPOS suppliers’

thoughts and opinions on the potential 

impact of quality standards, 

accreditation, competitive bidding, and 

financial standards requirements on 

their businesses. We presented an 

overview and results of the focus groups 

related to quality standards and 

accreditation to the PAOC on September 

26, 2005. This PowerPoint Presentation 

can be accessed at http://www.cms.

hhs.gov/CompetitiveAcqforDMEPOS/

PAOCMI/list.asp#TopOfPage. 

The results of the focus groups related 

to competitive bidding and financial 

standards were presented to the PAOC 

on May 23, 2006. Several focus group 

participants remarked that the 

competitive bidding process would 

force many small suppliers out of 

business. The participants suggested 

alternatives to competitive bidding, 

including: (1) CMS should determine 

product prices and allow all willing 

suppliers to provide products at the set 

price; and (2) CMS should reserve a 

percentage of winning bids for small 

suppliers. Many participants believed 

that lower payment rates for suppliers 

would inevitably lead to lower quality 

goods and services. Participants were 

particularly emphatic in their belief that 

CMS continues to neglect the valuable 

service component that small suppliers 

provide to their customers. They 

believed that it is their commitment to 

service that sets them apart from the 

national companies. A number of 

participants were concerned about the 

possibility of requiring small supplier 

bid winners to furnish items in the 

entire MSA, given the fact that some 

MSAs cross State boundaries. There was 

also a consensus among these small 

suppliers that the impact of competitive 

bidding would differ by product line. 

They believed that items involving highend technology equipment, respiratory 

equipment, and customized products 

are more service intensive than other 

products, such as standard wheelchairs, 

that involve fewer repairs, set-up time, 

and patient education. 

Inclusion of mail order businesses in 

competitive bidding was also a 

controversial issue for many 

participants. Because mail order 

businesses often do not have a physical 

storefront and do not provide patient 

education, small suppliers argued that 

such businesses are in violation of the 

21 Medicare supplier standards. 

Finally, many participants in the 

focus groups believed that tax returns, 

quarterly standard financial statements, 

and Dun & Bradstreet were helpful 

sources of information about a 

business’s credit history and cash flow. 

The participants noted that suppliers 

that grossed over $3 million in revenue 

used audited financial statements, 

whereas suppliers that grossed less than 

$3 million in revenue used cash basis 

accounting principles. A summary of 

the PAOC discussion related to the 

focus group results can be accessed at 

http://www.cms.hhs.gov/Competitive

AcqforDMEPOS/downloads/

PAOC_summary.pdf. We have used the 

comments from the focus groups and 

the public comment process in 

developing our final policies for the 

Medicare DMEPOS Competitive Bidding 

Program. 

Comment: Several commenters noted 

that section 1847(b)(6)(D) of the Act is 

entitled ‘‘protection’’ of small suppliers 

and not the mere identification of small 

suppliers. They reported that there are 

currently 40,000 practitioners, providers 

and suppliers enrolled as Medicare 

suppliers, including approximately 

1,078 physical therapists. They agreed 

with the option to define small supplier 

as fewer than 10 FTE employees. The 

commenters stated that health care 

practitioners who provide DMEPOS as 

an integral part of their professional 

services specialize in providing items 

for specific conditions. They added that 

these suppliers offer considerable 

expertise in evaluating both the patient 

and the item in order to provide the 

patient with the best possible outcome. 

They also believe that small suppliers 

serve rural and underserved urban 

communities where larger suppliers 

may not operate. 

The commenters proposed the 

following alternative policies: (1) At 

least 50 percent of suppliers that receive 

a contract should be small suppliers 

(based on $3 million or less in revenue 

or less than 10 FTE employees); (2) CMS 

should allow suppliers with less than 10 

FTE employees to furnish items to less 


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than the entire CBA; (3) CMS should 

award contracts to small suppliers with 

the lowest bids that exceed the pivotal 

bid; (4) CMS should allow truly small 

suppliers to promise to accept the single 

payment amount; and (5) CMS should 

establish a certain volume of items in 

each geographic area that will be ‘‘setaside’’ for small suppliers. 

Response: We agree that section 

1847(b)(6)(D) of the Act is entitled 

‘‘Protection of Small Suppliers.’’ We 

recognize the concerns raised by the 

commenters and have considered the 

suggested alternatives provided during 

the small supplier focus groups and 

through the public comment process. 

We also recognize the importance of 

maintaining storefront capabilities to 

meet the needs of beneficiaries. In this 

final rule, we are revising our proposed 

policies to ensure that small suppliers 

have an opportunity to be considered 

for participation in the Medicare 

DMEPOS Competitive Bidding Program. 

As of January 2006, the SBA defines a 

small business as generating less than 

$6.5 million in annual receipts. The 

SBA definition refers to small 

businesses rather than ‘‘small 

suppliers.’’ We believe that $6.5 million 

is not representative of small suppliers 

that provide DMEPOS items to Medicare 

beneficiaries, as it would encompass too 

many suppliers. In coordination with 

the SBA, we are defining a small 

supplier as a supplier that generates 

gross revenue of $3.5 million or less in 

annual receipts and we are revising 

§ 414.402 to include this definition. We 

would accept relevant documentation 

from a supplier that shows its sales 

volume, including information that 

would qualify as a ‘‘receipt’’ under 13 

CFR 121.104 to determine if the 

supplier meets this definition. Before 

we receive supplier bids, we would not 

have information on each supplier’s 

total revenue. We only have information 

on suppliers’ Medicare revenues. As a 

result, we had to make an assumption 

about what percent of a supplier’s 

revenues come from Medicare. We 

looked at filings by public DMEPOS 

companies and, based on that 

information, we assume one-half of the 

average supplier’s revenues come from 

Medicare DMEPOS. 

To ensure the participation of 

multiple suppliers and storefront 

locations, beneficiary access, and 

increased participation by small 

suppliers, we have revised our rules as 

noted below: 

• The definition of a ‘‘small supplier’’

is a supplier that generates gross 

revenue of $3.5 million or less in annual 

receipts. 

• To help small suppliers to have an 

opportunity to participate in the 

Medicare DMEPOS Competitive Bidding 

Program and to generally support HHS’

goals for contracting with small 

businesses, we have also established a 

target number for DMEPOS small 

supplier participation in each 

competitive bidding program. Our target 

number for small supplier participation 

will be determined by multiplying 30 

percent times the number of suppliers 

that have met our bidding requirements 

and whose composite bids are at or 

lower than the pivotal bid for each 

product category in each CBA. The 

number resulting from this 

multiplication represents our goal for 

small supplier participation for that 

product category. We will then count to 

see if the number of suppliers whose 

composite bids are at or below the 

pivotal bid is equal or greater than the 

target number we have computed for 

that product category. If the number of 

suppliers is lower than the target 

number, we will give the small supplier 

whose composite bid is above the 

pivotal bid, but closest to it of all the 

small suppliers whose composite bids 

are above the pivotal bid for the product 

category, the option of accepting a 

contract to furnish the product category 

at the single payment amounts. If the 

target number is still not met, we will 

offer a contract to the small supplier 

whose composite bid is the next closest 

to, but above, the pivotal bid, and will 

use this methodology until we reach the 

target number or there are no additional 

small suppliers that submitted a bid for 

the product category. We are codifying 

this methodology in final 

§ 414.414(g)(1). 

Comment: Many commenters 

disagreed with using the definition of 

the SBA for a ‘‘small business’’ (less 

than $6 million in annual receipts) 

because the CY 2003 Medicare data 

showed that at least 90 percent of 

suppliers had less than $1 million in 

allowed charges. They recommended 

defining a small supplier as a supplier 

that generates less than $3 million in 

annual receipts. The commenters 

believed that a lack of small supplier 

participation would negatively impact 

patient care. They added that small 

businesses would have to endure large 

expenses in order to participate in the 

Medicare DMEPOS Competitive Bidding 

Program. 

Response: We agree with the 

commenters and, as we explained 

above, we have modified our definition 

of a small supplier so that it now means 

a supplier that generates gross revenue 

$3.5 million or less in annual receipts. 

Comment: A few commenters 

indicated that conducting separate 

bidding processes for individual 

product categories is administratively 

burdensome. They stated that CMS’

assumption that large suppliers could 

expand their products by offering 

supplies and equipment easier or more 

quickly than small suppliers is a false 

view of a company’s ability to expand. 

They also reported that large 

organizations must seek approval from 

their boards or other stakeholders before 

they can undertake certain business 

expansion activities. 

Response: We appreciate the 

comment but believe that conducting 

separate bidding processes for 

individual product categories will 

encourage the participation of small 

suppliers that specialize in one or a few 

product categories. It is our goal to 

allow Medicare beneficiaries an 

opportunity to receive all related 

equipment from the same supplier, 

thereby minimizing disruption to the 

beneficiary. Suppliers currently 

specialize in particular products, and 

we do not see this process being 

interrupted by competitive bidding. 

After consideration of the public 

comments received, in this final rule, 

we are adding a definition of ‘‘small 

supplier’’ at § 414.402 and finalizing 

§ 414.414(g), with revisions sets forth 

our methodology for ensuring that a 

sufficient number of small suppliers 

have an opportunity to participate in the 

Medicare DMEPOS Competitive Bidding 

Program. 

XII. Opportunity for Networks 

(§§ 414.402, 414.418) 

In the May 1, 2006 proposed rule (71 

FR 25683), we proposed to allow 

suppliers the option to form networks 

for bidding purposes (proposed 

§ 414.418). In the proposed rule, we 

refer to networks as several companies 

joined together through some type of 

legal contractual relationship to submit 

bids for a product category under 

competitive bidding. This option would 

allow suppliers to band together to 

lower bidding costs, expand service 

options, or attain more favorable 

purchasing terms. We recognize that 

forming a network may be challenging 

for suppliers, and it also poses 

challenges for bid evaluation and 

program monitoring. Networking was 

included as an option in the Medicare 

competitive bidding demonstration 

project, but no networks submitted bids. 

Still, we believe that networking may be 

a useful option for suppliers in some 

cases. Therefore, we proposed to offer it 

as an option. If suppliers decide to form 


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networks, we proposed that the 

following rules must be met: 

• A legal entity must be formed for 

the purpose of competitive bidding, 

such as a joint venture, limited 

partnership, or contractor/subcontractor 

relationship, which would act as the 

applicant and submit the bid. We 

specifically requested comments 

regarding other types of suitable 

arrangements that would not require 

suppliers to form a new legal entity but 

would allow them to form a network for 

purposes of submitting bids. For 

example, one supplier could be 

designated as a primary contractor and 

the other suppliers in the group would 

function as subcontractors. In this 

example, if the contract with the 

primary contractor was terminated, the 

contracts with the subcontractors would 

also be terminated, thus nullifying the 

entire contract. 

• All legal contracts must be in place 

and signed before the network entity 

can submit a bid for the Medicare 

DMEPOS Competitive Bidding Program. 

• Each member of the network must 

be independently eligible to bid. If a 

member of the network is determined to 

be ineligible to bid, the network would 

be notified and given 10 business days 

to resubmit its application. 

• Each member must meet any 

accreditation and quality standards that 

are required. Each member is equally 

responsible for the quality of care, 

service, and items that it delivers to 

Medicare beneficiaries. If any member 

of the network falls out of compliance 

with this requirement, CMS would have 

the option of terminating the network 

contract. 

• The network cannot be 

anticompetitive. We proposed that the 

network members’ market shares for 

competitively bid item(s), when added 

together, cannot exceed 20 percent of 

the Medicare market within a CBA. We 

believe that, by setting the maximum 

size of the network’s market shares at 20 

percent of the marketplace, firms will be 

able to gain the potential efficiencies of 

networking while at the same time 

ensure that there would continue to be 

competition in the area. If the 20- 

percent rule were adopted and suppliers 

joined networks, there would still be at 

least 5 networks competing in a 

DMEPOS competitive bidding program, 

which we believe would allow for 

sufficient competition among suppliers. 

In particular, we requested comments 

about what percentage of the 

marketplace would be appropriate for 

networks for suppliers. 

• A supplier may only join one 

network and cannot submit individual 

bids if it is part of a network. The 

network must identify itself as a 

network and identify all members in the 

network. 

• The legal entity would be 

responsible for billing Medicare and 

receiving payment on behalf of the 

network suppliers. The legal entity 

would also be responsible for 

appropriately distributing payments to 

the other network members. 

Comment: Many commenters 

expressed concern about potential 

violations of Federal antitrust laws that 

could arise under the proposed network 

provisions. For example, they expressed 

concern that forming a network could 

violate the Federal antitrust laws 

because those laws do not permit 

suppliers to reach a mutual consensus 

on pricing. They also stated that the 

proposed rule would require suppliers 

to agree on proposed prices for all items 

within a competitive bidding product 

category. A commenter expressed 

concern that networks consisting of a 

large number of suppliers would not be 

legitimate under the antitrust laws. The 

commenter also expressed concern that 

the proposed network policy could be 

falsely interpreted as providing a safe 

harbor from the antitrust laws. 

Many commenters believed that the 

option to form a network is not a 

realistic solution for ensuring that small 

suppliers participate in the competitive 

bidding program. They further believed 

the proposed rule is complex, and that 

suppliers would not have sufficient time 

to form a network and comply with all 

the requirements to meet the 

competitive bidding implementation 

timelines. A commenter indicated that 

the network option would reduce 

potential burdens on small suppliers 

and specifically recommended limiting 

the network option to small suppliers. 

Response: We strongly agree that 

networks must not violate antitrust laws 

and that networks must take steps to 

ensure that they are not in violation of 

Federal antitrust laws. We emphasize 

that suppliers that pursue the network 

option must comply with all applicable 

Federal antitrust laws, and we will 

reject a network bid if we believe it has 

been prepared in violation of those 

laws. We will also refer any suspected 

cases of Federal antitrust violations to 

the Department of Justice for further 

review. In response to comments 

voicing concern that the network 

formation process could implicate the 

Federal antitrust laws, we will now 

require that each network member sign 

a statement in the bid submitted by the 

network certifying that the supplier 

joined the network because it is unable 

to furnish all of the items in the product 

category for which the network is 

submitting a bid to beneficiaries 

throughout the entire geographic area of 

the CBA. The inclusion of this 

certification from all network members 

will help assure us that each network 

member joined the network for a 

legitimate, legal purpose (that is, it 

cannot otherwise compete because it is 

unable to furnish the product category 

throughout the entire geographic area of 

the CBA). 

The network option is a key piece of 

our efforts to ensure that small suppliers 

have an opportunity to be considered 

for participation in the Medicare 

DMEPOS Competitive Bidding Program. 

In response to comments requesting that 

networks be limited to small suppliers, 

we will limit network participation to 

small suppliers which, as we explained 

previously, will now be defined as 

suppliers that generate gross revenue of 

$3.5 million or less in annual receipts. 

We have revised § 414.418 to add this 

provision. We believe that this 

modification to our proposal will help 

ensure that the competition in each CBA 

is actually a competition between 

suppliers of all sizes and that it is not 

dominated by a limited number of 

networks comprised only of large 

suppliers that, in our estimation, should 

be able to compete independently. In 

addition, in response to concerns that 

networks would be anti-competitive if 

they had excessively large number of 

members, the size of each network will 

be limited to 20 suppliers because with 

20 suppliers, each network member 

would generally be responsible for 

furnishing items to no more than 5 

percent of the geographic area of the 

CBA. We believe that this limit would 

protect against excessively large, anticompetitive networks while allowing 

small suppliers to have an opportunity 

to be considered for participation under 

the Medicare DMEPOS Competitive 

Bidding Program. 

Finally, to further implement 

networking rules that promote a robust 

competition and protect the Medicare 

DMEPOS Competitive Bidding Program 

against anticompetitive behavior, we are 

deleting the provision at proposed 

§ 414.418(b)(2) that would have allowed 

networks 10 business days to resubmit 

bids that CMS rejected because we 

determined that a network member was 

ineligible to bid. In order not to allow 

networks with an unnecessary 

advantage over other suppliers, we are 

deleting this provision because we do 

not allow other suppliers not in a 

network this opportunity. Also, we are 

finalizing our proposal that at the time 

of bidding, the network’s total market 

share for each product category that is 

the subject of the network’s bid cannot 


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exceed 20 percent of the Medicare 

demand for that product category in that 

CBA. 

Once again, we stress that these rules 

are intended to assist us in evaluating 

network bids and to protect the 

Medicare program against 

anticompetitive behavior, and they 

should not be interpreted as 

superseding any Federal laws or 

regulations that protect against 

anticompetitive behavior. 

We acknowledge that forming a 

network may pose some challenges. 

However, we believe that networks are 

a realistic solution for small suppliers 

because we recognize that it may be 

difficult for small suppliers to service 

the entire CBA independently. We 

continue to believe that networks are an 

appropriate option for small suppliers 

that cannot independently service the 

entire CBA to be able to participate in 

the Medicare DMEPOS Competitive 

Bidding Program and to promote 

competition and efficiencies that could 

improve services to beneficiaries. The 

proposed rule was published May 1, 

2006. We believe sufficient notice has 

been given for these suppliers to 

consider network options and plan 

accordingly. Forming a network is a 

business decision, and we believe that 

our network policy is constructed in a 

way that will help ensure that small 

suppliers have an opportunity to be 

considered for participation in the 

Medicare DMEPOS Competitive Bidding 

Program. 

Comment: A few commenters agreed 

with our proposal to require that 

suppliers participating in a network 

form a discrete legal entity and stated 

that this would prevent the 

commingling of Medicare funds, as well 

as violations of the Federal antikickback statute, self-referral rules and 

regulations, and allegations of unfair 

business practices among the 

participating network suppliers. Other 

commenters believed that requiring 

each network to bid independently 

defeats the entire purpose of 

networking. They disagreed with the 

primary legal entity being responsible 

for billing Medicare and receiving the 

payments. They believed that each 

supplier should be responsible for its 

own finances. 

Response: We appreciate the support 

for our proposal that each network must 

form a legal entity. Each member of the 

network must meet all the applicable 

eligibility, financial, and accreditation 

requirements in order to be awarded a 

contract and this information must be 

included with the network bid. The 

legal entity that submit a bid on behalf 

of the network must provide all the 

information required for each member 

of the network. We agree that a primary 

supplier should not be responsible for 

submitting claims to Medicare and 

receiving payment on behalf of all 

network member suppliers and are 

deleting that requirement. We will now 

require each network member to submit 

its own Medicare claims and receive 

payment for those claims. 

Comment: A few commenters 

believed that networks that submit bids 

to furnish more than one product 

category could create access problems 

for beneficiaries because not all the 

network members will furnish all the 

product categories. They recommended 

that CMS add requirements to ensure 

that network bids are scrutinized to 

ensure that each network has 

appropriate mechanisms to service the 

entire CBA. 

Response: All the members of a 

network must be able to jointly service 

an entire CBA. While networks can 

choose the product categories for which 

they will submit a bid, once a contract 

is awarded to a network, each member 

of the network must furnish all of the 

items within the product categories for 

which the network is awarded a 

contract. Also, we will consider each 

product category separately and ensure 

there is sufficient supplier capacity 

within a CBA to meet beneficiary 

demand for items within all product 

categories. 

Comment: A few commenters 

requested that CMS disclose the 

methodology that will be used to 

calculate the market share and monitor 

changes over the course of the contract. 

A few commenters questioned why a 

limit of 20 percent of the market share 

was assigned to the network, leaving 80 

percent of the Medicare market for a 

large company. They suggested allowing 

network members to obtain market 

share not to exceed 35 percent, as 

specified in the Department of Justice 

monopoly guidelines. 

Response: We believe that by setting 

the maximum size of a network’s shares 

at 20 percent of the marketplace at the 

time of bidding, we will be able to 

ensure that there will continue to be 

competition in the area because if all of 

the winning suppliers are networks, 

there would still be at least 5 networks. 

However, once a supplier/network 

receives a contract, there is no limit on 

what percentage of the demand in the 

CBA that the supplier/network can 

furnish. After winning suppliers are 

selected, we will not exclude networks 

or suppliers from expanding and 

exceeding the 20 percent capacity. We 

believe that this will ensure sufficient 

suppliers, provide beneficiaries with 

more variety and choice, and will 

ensure that we select a sufficient 

number of contract suppliers for each 

product category in each CBA. 

Comment: Some commenters 

suggested that CMS allow suppliers to 

join up to two networks, stating that 

many suppliers currently participate in 

several networks. They believed that 

this would ensure that the participating 

supplier is not disadvantaged by a 

requirement to commit to a single 

network bid. 

Response: We agree with the 

commenters. We will allow small 

suppliers to join more than one 

network, but a small supplier cannot 

join more than one network that submits 

a bid to furnish items in the same 

product category in the same CBA. We 

believe that this rule is necessary 

because, without it, the competitive 

bidding process would be undermined 

if small suppliers were allowed to bid 

against themselves to furnish the same 

product category in the same CBA. In 

addition, a small supplier would not be 

able to submit an individual bid to 

furnish the same product category in the 

same CBA for which the network in 

which it is a member is also submitting 

a bid. However, a small supplier that 

wishes to furnish two different product 

categories in a single CBA would be able 

to join one network that submits a bid 

to furnish one of the product categories, 

and another network that submits a bid 

to furnish the other product category. 

Provided the small supplier did not join 

a network to furnish the same product 

category in the same CBA, the small 

supplier would also be able to submit an 

individual bid to furnish the product 

category. 

Comment: A few commenters asked 

how networks would obtain a supplier 

billing number. 

Response: The Medicare competitive 

bidding implementation contractor will 

assign each network a bidder number 

that will be used to monitor the 

network. As stated earlier, each member 

of the network will be allowed to submit 

its own claims and receive Medicare 

payments directly. 

Comment: A few commenters 

requested that CMS clarify whether each 

supplier that is a member of a network 

would be required to furnish all of the 

items for the product category for which 

the network submits a bid. 

Response: Each member of the 

network would be required to furnish 

all the items within the product 

category for which the network submits 

a bid. This is consistent with our 

requirement that all contract suppliers 

must furnish all items in a product 

category. However, as explained above, 


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network members would not be 

required to furnish the items in the 

product category throughout the entire 

geographic area of the CBA, provided 

that the network as a whole can fulfill 

this requirement. 

After consideration of the public 

comments we received, we are adding a 

definition of the term ‘‘network’’ to 

§ 414.402 that provides that a network is 

an entity meeting the requirements of 

§ 414.418. We are also finalizing 

§ 414.418 as discussed above and with 

additional technical changes. 

XIII. Education and Outreach for 

Suppliers and Beneficiaries 

In the May 1, 2006 proposed rule (71 

FR 25683 through 25684), we proposed 

to undertake a proactive education 

campaign to provide suppliers and 

beneficiaries with information about the 

Medicare DMEPOS Competitive Bidding 

Program. In the DMEPOS provisions of 

the FY 2007 IRF final rule (71 FR 

48354), we responded to public 

comments we received on the May 1, 

2006 proposed rule on our education 

and outreach services proposal and 

finalized our rule. We refer readers to 

the FY 2007 IRF final rule for a full 

discussion of these provisions. 

As we indicated in the proposed rule, 

we have established the following Web 

site; https://www.cms.hhs.gov/ 

competitiveacqfordmepos/ 

01_overview.asp where RFBs and other 

pertinent program information will be 

posted and we plan to alert the supplier 

community by email of all postings on 

this Web site. In addition, we will be 

providing education and outreach to 

suppliers on requirements for 

submitting RFBs. Suppliers must fully 

complete the RFB in order to be 

considered for participation in a 

competitive bidding program. The RFBs 

will require suppliers to complete, at a 

minimum, such documents as an 

application, bidding sheet, bank and 

financial information, and referral 

source references. We stated that we 

will establish an administrative process 

to ensure that all information that the 

supplier submitted is accurately 

captured and considered in the bid 

evaluation process. This process will 

ensure that all the information 

submitted by each supplier is included 

as part of the bid evaluation process. 

XIV. Monitoring and Complaint 

Services for the Medicare DMEPOS 

Competitive Bidding Program 

In the May 1, 2006 proposed rule (71 

FR 25684), we stated that moving to a 

competitive bidding environment would 

not adversely affect CMS’ program 

integrity efforts in reviewing claims and 

rooting out fraud, waste, or abuse. 

Claims would still be reviewed for 

medical necessity, coordination of 

benefits status, and benefits integrity. 

Any suspected instances of DMEPOS 

competitive bidding market 

manipulation and collusion would be 

referred to the appropriate Federal 

agencies that are responsible for 

addressing these issues. 

We also proposed to establish a 

formal complaint monitoring system to 

address complaints in each CBA. 

Beneficiaries, referral agents, providers, 

and suppliers, including physicians, 

hospitals, nurses, and HHAs, would be 

able to report problems or difficulties 

that they encounter regarding the 

ordering and furnishing of DMEPOS in 

a CBA. Some examples of problems that 

we would consider serious include: 

contract suppliers refusing to furnish 

items to beneficiaries in the CBA for 

which they were awarded a contract; 

contract suppliers furnishing items that 

are inferior in quality to those that they 

bid to furnish; and contract suppliers 

violating assignment and billing 

requirements. 

In addition, we proposed to monitor 

Medicare claims data to ensure that 

competitive bidding does not negatively 

affect beneficiary access to medically 

necessary items. Claims data would be 

monitored to identify trends, spikes, or 

decreases in utilization and changes in 

utilization patterns within a product 

category. 

Comment: One commenter strongly 

supported CMS’ efforts to detect any 

abuse that may occur under competitive 

bidding and urged CMS to be especially 

aggressive and timely in its oversight for 

monitoring equipment safety. The 

commenter believed that there is a 

potential for one supplier to harm 

thousands of beneficiaries and 

recommended that CMS notify affected 

beneficiaries if a breach of quality has 

been identified. 

Response: Equipment safety is 

addressed in the DMEPOS quality 

standards under the heading ‘‘Product 

Safety.’’ The CMS-approved 

accreditation organizations will monitor 

supplier compliance with these 

requirements as part of the accreditation 

process. In addition, as we proposed, 

the CBIC will develop and implement a 

complaint monitoring system for 

competitively bid items and services. 

This system will be outlined in more 

detail through sub-regulatory guidance 

and enable beneficiaries, referral agents, 

providers, and suppliers to report 

problems or difficulties they experience 

with respect to the furnishing of items 

under the competitive bidding 

programs. Additional details will be 

posted on our Web site, or made 

publicly available by other means. 

Comment: Two commenters believed 

that beneficiary avoidance of certain 

contract suppliers would provide a 

strong indication that the Medicare 

DMEPOS Competitive Bidding Program 

is not meeting physician and beneficiary 

needs in the area. The commenters 

stated that this activity should be 

monitored as a measure of whether 

contract suppliers are providing 

beneficiaries with a suitable level of 

quality and access. 

Response: We appreciate this 

comment and will consider it as we 

develop our monitoring program. The 

CBIC will be monitoring items furnished 

by contract suppliers to ensure they are 

the same quality as the items for which 

the contract supplier submitted a bid 

and was awarded a contract. The RFB 

will require suppliers to indicate the 

manufacturer, make and model numbers 

for each type of item the supplier would 

furnish if awarded a contract. In 

addition, we will require under the 

contracts that each contract supplier 

submit a quarterly report that indicates 

the items that were actually furnished to 

beneficiaries. We also note that we will 

be conducting a comprehensive 

education campaign to ensure that 

suppliers, beneficiaries, providers, and 

referral agents understand that Medicare 

will only pay for competitively bid 

DMEPOS items and services if they are 

furnished by contract suppliers, unless 

an exception outlined in this final rule 

applies. For more information about our 

plans for education on the Medicare 

DMEPOS Competitive Bidding Program, 

we refer readers to the DMEPOS 

provisions of the FY 2007 IRF final rule 

(71 FR 48354). 

Comment: One commenter 

encouraged CMS to specify clearly in 

the final rule or require CBICs to 

identify the necessary telephone and 

Internet resources that beneficiaries may 

use to raise questions and concerns 

related to the Medicare DMEPOS 

Competitive Bidding Program. The 

commenter stated that it is extremely 

important that beneficiaries have readily 

available access to information during 

their transition from their former 

suppliers to their new contract 

suppliers. The commenter 

recommended that CMS establish a 

survey mechanism so that beneficiaries 

will be able to rate their satisfaction 

with contract suppliers they have 

chosen, as recommended in the 

September 2004 GAO report entitled 

‘‘Past Experience Can Guide Future 

Competitive Bidding for Medical 

Equipment and Supplies.’’ The 

commenter also stated the proposed rule 


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fails to provide a method to obtain 

feedback from beneficiaries concerning 

their satisfaction level with contract 

suppliers and disseminate this valuable 

information to other beneficiaries. The 

commenter noted that, without such an 

evaluation system, CBICs would be illequipped to judge and, thus, monitor 

either the quality of products that 

contract suppliers are furnishing or the 

accessibility of needed supplies for 

beneficiaries. 

Response: We are establishing an 

ombudsman program that will require 

ombudsmen to identify, investigate, and 

resolve complaints made by, or on 

behalf of beneficiaries. The telephone 

numbers and resources will be 

published through program instructions 

or by other means, including postings 

on our Web site. We agree that 

beneficiaries must have readily 

available access to information during 

their transition from their former 

suppliers to new contract suppliers. We 

plan to implement an extensive 

education campaign for beneficiaries as 

well as for suppliers and referral agents. 

Our plans for education are described in 

more detail in the DMEPOS provisions 

of the FY 2007 IRF final rule (71 FR 

48354). We note that the CBIC would 

administer beneficiary surveys 

throughout the program to regularly 

monitor beneficiary experiences with 

the program. We also expect to have two 

ombudsmen assigned to each DME MAC 

region. The CBIC will be providing 

oversight of this program. We are in the 

process of assessing the appropriate 

vehicles to disseminate the information 

that we collect through the beneficiary 

survey. 

Comment: One commenter supported 

CMS’s plans to establish a formal 

complaint monitoring system and 

believed that the information collected 

will be particularly helpful as CMS 

prepares to expand competitive bidding. 

The commenter recommended that CMS 

include in its complaint monitoring 

system a collection of brand-specific 

information on medical complications 

related to competitively bid items, 

especially for blood glucose monitoring 

products and enteral products (if 

included in competitive bidding) 

because of the potential for 

complications to arise with these items. 

The commenter also recommended that 

CMS collect data on contract suppliers 

that do not furnish particular brands of 

equipment specified by physicians. The 

commenter further recommended that 

CMS release timely reports on the 

results of its complaint monitoring 

system to encourage public dialogue 

and analysis regarding the competitive 

bidding program, and ensure that 

adequate data are available to guide 

development of subsequent phases of 

the program. 

Response: We appreciate the 

suggestions of the commenters and will 

consider them as we operationalize the 

monitoring program. As we stated 

above, we will direct the CBIC to 

establish a monitoring program that 

includes beneficiary satisfaction 

indicators and supplier performance 

indicators. All parties affected by 

competitive bidding (for example, 

beneficiaries, referral agencies, 

suppliers, and providers) will be able to 

report problems or difficulties that they 

encounter regarding the ordering and 

furnishing of DMEPOS in CBAs. 

However, in the event we receive 

complaints regarding medical 

complications with products, we will 

convey that information to the FDA. 

Comment: One commenter urged 

CMS to monitor contract suppliers 

aggressively to ensure that they are not 

providing a different item than 

prescribed by the physician or treating 

practitioner, pressuring the physician to 

revise his or her order, or delaying 

delivery of the item. The commenter 

stated that such actions could result in 

delays in patient care and increase the 

risk that the patient will be injured. 

Another commenter urged CMS to 

monitor aggressively the impact of the 

Medicare DMEPOS Competitive Bidding 

Program on patient access to care. The 

commenter stated that this is an entirely 

new and complex program that will 

significantly change the market 

dynamics for furnishing certain 

DMEPOS to beneficiaries, and CMS 

must ensure that these market changes 

do not unintentionally limit the current 

variety of DMEPOS available, thereby 

adversely affecting beneficiary access to 

these important Medicare items. 

Response: If the contract supplier 

provides an item that does not match 

the written prescription from the 

physician or treating practitioner, the 

contract supplier should not bill 

Medicare, as this is considered a 

noncovered item. Our complaint and 

monitoring system will ensure that 

contract suppliers either furnish the 

items prescribed by a physician or 

treating practitioner, or assist the 

beneficiary in finding another contract 

supplier to furnish the item under the 

circumstances. We expect that contract 

suppliers will advise beneficiaries 

regarding the expected time frames for 

delivery of items, as required under the 

‘‘Consumer Services’’ section of the 

quality standards, and that beneficiaries 

will receive competitively bid items in 

a timely fashion. In addition, we will, as 

part of our monitoring system, be 

evaluating beneficiary access to 

competitively bid items, for example, 

through beneficiary surveys and 

quarterly reports that will require 

contract suppliers to disclose exactly 

what items they have furnished to 

beneficiaries. 

Comment: One commenter asked 

CMS to clarify how it will monitor the 

quality of items based on the bid 

submissions. Another commenter 

suggested that CMS monitor complaints 

to ensure there are no problems with 

inferior products being furnished to 

beneficiaries. The commenter stated that 

if the HCPCS codes were too vague, 

CMS would have problems with 

monitoring the quality of items. Another 

commenter acknowledged that although 

it agrees that it would be a serious 

problem if a contract supplier furnished 

items inferior in quality to those for 

which it bid but urged CMS to monitor 

this or address complaints if the HCPCS 

codes are too vague or include multiple 

technologies. The commenter suggested 

that, in order for the monitoring policy 

to be effective, the HCPCS codes that are 

associated with competitively bid items 

must include the necessary level of 

detail and specificity. 

Response: As part of the RFB 

requirements for submission of bids, we 

are asking suppliers to list the items 

they will furnish by manufacturer, 

make, and model number. Under the 

contracts, we are requiring contract 

suppliers to submit a quarterly report in 

which they are required to indicate the 

items they have supplied under the 

Medicare DMEPOS Competitive Bidding 

Program. We note that the MMA 

requires the Secretary to submit a report 

to Congress evaluating this program. 

This report will be finalized in July 

2009 and, based on beneficiary surveys, 

will include information on access to 

and quality of items and services, and 

satisfaction of individuals. As discussed 

in section IX.A. of this final rule, 

suppliers will be required to allow 

beneficiaries to select items from the 

same range of items furnished to nonMedicare beneficiaries. 

Comment: One commenter stated that, 

while claims monitoring may be 

effective for some purposes, using it to 

suggest that a spike in certain items’

utilization may be attributable to 

competitive bidding is narrow-minded. 

The commenter stated that product 

utilization may have nothing to do with 

competitive bidding for various reasons, 

such as baby boomers entering the 

Medicare program in disproportionately 

high numbers, the higher incidence of 

certain diseases in specific areas of the 

United States, and the development of 

new products and technologies that 


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enable a larger number of patients to 

remain independent at home. 

Response: We continue to believe that 

it is useful to conduct claims 

monitoring, and we would expect to 

monitor claims for each CBA. If we 

identify a utilization spike in a 

particular item, we can further 

investigate the cause of the spike, to 

identify whether the spike happened 

because of competitive bidding. Our 

claims monitoring system will allow us 

to review claims data for each item 

within a CBA. 

Comment: One commenter stated that 

in a September 2004 report entitled 

‘‘Past Experience Can Guide Future 

Competitive Bidding for Medical 

Equipment and Supplies,’’ the GAO 

emphasized the importance of ensuring 

continued quality, especially given that 

the implementation of competitive 

bidding will create an added incentive 

for suppliers to cut costs. The 

commenter noted that, in GAO’s view, 

the central focus of these efforts should 

be ‘‘continued monitoring of beneficiary 

satisfaction,’’ perhaps through a toll-free 

complaint hotline and through 

beneficiary surveys. The commenter 

stated that it would be unrealistic to 

expect beneficiaries to monitor and 

provide feedback on the quality of the 

enteral formula they receive, through a 

hotline, through surveys, or otherwise. 

The commenter further noted that, given 

the importance of assuring continued 

quality during a transition to a 

significantly revised pricing system, it 

would be prudent for CMS initially to 

focus on those items and supplies for 

which quality can be readily assessed 

and assured through monitoring efforts. 

Response: As part of the monitoring 

system, we will collect data to evaluate 

changes in beneficiary satisfaction, 

service, quality, access and cost-sharing 

as a result of the new program. Several 

questions will be customized to suit the 

particular product line surveyed. These 

data will also be used to prepare the 

congressionally mandated study and 

report due in July 2009, under section 

1847(d) of the Act. 

Comment: Two commenters urged 

CMS to ensure that suppliers are 

distributed throughout the CBAs to 

ensure beneficiary access. The 

commenters stated that patients 

(especially when injured) or the 

caretaker should not have to travel long 

distances to obtain needed DMEPOS, as 

this could put patients at risk and 

increase Medicare costs. 

Response: We are requiring contract 

suppliers to service the entire CBA, 

which means that if a beneficiary cannot 

travel to his or her chosen contract 

supplier, the contract supplier will still 

be required to furnish the item to the 

beneficiary, whether by delivery or 

mail. Suppliers must include in their 

bids the cost of providing the item and 

any requisite services directly 

associated with the item, such as 

delivery, set-up, and retrieval. 

Therefore, we do not believe it is 

necessary to create special provisions 

regarding geographic distribution of 

contract suppliers. 

Comment: One commenter agreed that 

an effective complaint monitoring 

system is needed as part of the 

competitive bidding program. The 

commenter noted that this should be a 

simple process that incorporates 

existing mechanisms that allow 

Medicare beneficiaries to voice 

complaints, such as an ombudsman 

program, and should not attempt either 

to recreate what exists in another 

section of the program or 

overcomplicate the process. The 

commenter noted that the current 

supplier standards require that 

suppliers show the NSC the complaint 

resolution process through onsite 

inspection prior to the issuance of a 

supplier number. The commenter also 

suggested that patients be directed to 

call their suppliers first regarding any 

alleged service issues before calling the 

ombudsman or other contractor. 

In addition, the commenter asked that 

CMS define ‘‘items of inferior quality.’’

The commenter believed that, in 

determining whether a supplier is 

experiencing a high level of complaints, 

CMS must view complaints not in an 

isolated, numerical manner but 

expressed as a percentage of the total 

number of in-home deliveries made to 

Medicare patients in a given month. 

Another commenter stated that the 

proposed rule provides no specifics 

about the proposed monitoring system. 

The commenter asked that the final rule 

provide more information about this 

system. The commenter urged CMS to 

assure that ombudsmen are designated 

for each CBA because they play an 

important role in addressing and 

resolving beneficiary complaints. 

Response: We agree that an effective 

complaint monitoring system is needed 

as part of the Medicare DMEPOS 

Competitive Bidding Program. As we 

currently do, we plan to use competitive 

bidding ombudsmen who will be 

geographically distributed in each of the 

DME MAC regions to assist with 

monitoring activities. The CBIC is 

responsible for the monitoring program 

and will be issuing additional 

information. We plan to have a 

complaint process in place so that 

everyone affected by the Medicare 

DMEPOS Competitive Bidding Program, 

including beneficiaries, referral agents, 

suppliers, and providers, will be able to 

report problems or difficulties that they 

encounter regarding the ordering and 

furnishing of DMEPOS in a CBA. The 

monitoring system will also include a 

complaint resolution process, as well as 

a process by which we can track claims 

data to ensure that items are being 

properly furnished under the program. 

CMS or the CBIC will issue additional 

details regarding this process through 

program instruction or by other means, 

such as the RFB, and post them on our 

Web site. When we referred in the 

proposed rule to an item being of 

‘‘inferior quality,’’ we meant items that 

beneficiaries or referral agents 

complained were of inferior quality, 

which would include any product that 

the contract supplier furnishes to the 

beneficiary that does not meet the 

medical needs of the patient. 

After consideration of the public 

comments received, we are finalizing 

our proposal to implement a monitoring 

and complaint system under the 

Medicare DMEPOS Competitive Bidding 

Program. 

XV. Physician or Treating Practitioner 

Authorization and Consideration of 

Clinical Efficiency and Value of Items 

in Determining Categories for Bids 

Section 1847(a)(5)(A) of the Act 

provides authorization to the Secretary 

to establish a process for certain items 

under which a physician may prescribe 

a particular brand or mode of delivery 

of an item within a particular HCPCS 

code if the physician determines that 

use of the particular item would avoid 

an adverse medical outcome on the 

individual. In the May 1, 2006 proposed 

rule (71 FR 25684), we proposed to 

implement this statutory provision in 

proposed § 414.420 (in the proposed 

rule, the regulatory provision was 

erroneously cited in the preamble as 

§ 414.440), and to also apply it to certain 

treating practitioners, including 

physician assistants, nurse practitioners, 

and clinical nurse specialists, because 

these practitioners also order DMEPOS 

for which Medicare makes payment. 

Because a HCPCS code may contain 

many brand products made by a wide 

range of manufacturers, we expect that 

suppliers will choose to offer only 

certain brands of products within a 

HCPCS code. This is a common practice 

used by suppliers to reduce the amount 

of inventory they maintain. However, 

we proposed that the physician or 

treating practitioner would be able to 

determine that a particular item would 

avoid an adverse medical outcome, and 

that the physician or treating 

practitioner would have discretion to 


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specify a particular product brand or 

mode of delivery. 

We proposed that when a physician 

or other treating practitioner requests a 

particular brand, or mode of delivery of 

an item, contract suppliers would be 

required to furnish that particular brand 

or mode of delivery, assist the 

beneficiary in finding another contract 

supplier in the CBA that can provide 

that brand item or mode of delivery, or 

consult with the physician or treating 

practitioner to find a suitable alternative 

product or mode of delivery for the 

beneficiary. If, after consulting with the 

contract supplier, the physician or 

treating practitioner is willing to revise 

his or her order, that decision must be 

reflected in a revised written 

prescription. However, if the contract 

supplier decides to provide an item that 

does not match the written prescription 

from the physician or treating 

practitioner, the contract supplier 

should not bill Medicare, as this would 

be considered a non-covered item under 

Medicare. 

For the Medicare DMEPOS 

Competitive Bidding Program, we did 

not propose to require a contract 

supplier to provide every brand of 

products included in a HCPCS code. 

However, regardless of what brands the 

contract supplier furnishes, the single 

payment amount for the HCPCS code 

would apply. Nonetheless, we noted 

that this issue will be studied in more 

detail by the OIG in 2009. At that time, 

we will evaluate the need for a specific 

process for certain brand names or 

modes of delivery. 

In addition, section 1847(b)(7) of the 

Act provides authority to establish 

separate categories for items within 

HCPCS codes if the clinical efficiency 

and value of items within a given code 

warrants a separate category for bidding 

purposes. Currently, HCPCS codes are 

developed for items that are similar in 

function and purpose. For this reason, 

items within the same code are paid at 

the same rate. We believe that the 

HCPCS process has worked well in the 

past, and we believe that it adequately 

separates items based on their function. 

Comment: One commenter stated that 

CMS should address the quite-common 

situations in which a supplier does not 

carry a particular item, or does not 

know how it works or how it must be 

maintained. The commenter noted that 

mandating a contract supplier to furnish 

an item it does not routinely supply 

could raise concerns about patient and 

employee safety and other liability 

concerns. The commenter further stated 

that as long as some contract suppliers 

in the CBA can supply that particular 

item, this situation should be acceptable 

to CMS. 

Response: We recognize the 

commenter’s concerns, and we note that 

we did not propose that a contract 

supplier would be required, no matter 

what the circumstance, to furnish a 

brand name item or specific mode of 

delivery to a beneficiary. We also 

recognize that the wording of proposed 

§§ 414.420(b)(1) and (b)(2) and the 

preamble to the proposed rule may not 

have been sufficiently clear regarding 

whether a contract supplier must 

furnish an item that it does not 

routinely carry to a beneficiary. 

Therefore, we are clarifying, in final 

§§ 414.420(b)(1) through (b)(3) the 

process that contract suppliers must 

follow to address the situation where a 

physician or treating practitioner orders 

a specific brand or mode of delivery to 

avoid an adverse medical outcome. If a 

physician or treating practitioner 

prescribes a brand name item or specific 

mode of delivery to avoid an adverse 

medical outcome, the contract supplier 

must make a reasonable effort to furnish 

that brand name item or mode of 

delivery. If the contract supplier cannot 

furnish that brand name item or mode 

of delivery, it must contact the 

physician or treating practitioner to 

determine if a substitution can be made 

(and if so, the contract supplier must 

obtain a revised written prescription). If 

a substitution cannot be made, the 

contract supplier must assist the 

beneficiary in finding another contract 

supplier that can furnish the brand 

name item or mode of delivery 

prescribed by the physician or treating 

practitioner. 

Comment: One commenter stated that 

the proposed rule does not establish an 

appeal or dispute resolution system for 

cases when the contract supplier in a 

CBA fails to provide the specific 

equipment selected by the physician. 

Response: As we state in this final 

rule in § 414.420(d), a contract supplier 

would be prohibited from billing 

Medicare if it furnishes an item different 

from that specified in the written 

prescription from the beneficiary’s 

physician or treating practitioner. 

Comment: One commenter stated that 

CMS should exercise its discretion 

under section 1847(a)(5) of the Act, and 

not permit such brand-specific 

prescriptions for items within a CBA. As 

an alternative, the commenter suggested 

that CMS consider making a finding 

that, under such circumstances, the 

competitive bidding is not likely to 

result in significant savings and, 

accordingly, exempt these items from 

the competitive bidding process under 

section 1847(a)(5) of the Act. The 

commenter indicated that there is 

concern that if CMS implements section 

1847(a)(5) of the Act, the demand for 

brand-specific items, will increase even 

though the ‘‘brand name’’ may have the 

same clinical benefits of other products. 

Several commenters opposed the 

manner in which CMS interpreted the 

authority of the treating practitioner to 

order brand-specific items and 

equipment. They believed that the 

proposed rule mandates serious 

financial consequences for the supplier 

and creates unnecessary uncertainty in 

the bids to be submitted. They added 

that forcing suppliers to carry all 

possible items and equipment will be 

burdensome and costly for suppliers. 

The commenters stated that contract 

suppliers may be financially responsible 

to provide items outside their normal 

product line. However, they added that, 

if a contract supplier does not carry that 

product, the contract supplier may refer 

the beneficiary to another contract 

supplier. The commenters asked that 

CMS consider an exception process to 

compensate contract suppliers for 

provisions of items that are very 

expensive compared to other products 

within the same HCPCS code. They also 

suggested that CMS define ‘‘what is a 

reasonable effort to locate an alternative 

supplier.’’

Response: We disagree with the 

commenters. Section 1847(a)(5) of the 

Act provides the Secretary with the 

authority to establish a process for 

certain items and services under which 

a physician may prescribe a particular 

brand or mode of delivery of an item or 

service to the beneficiary to avoid an 

adverse medical outcome. We proposed 

that this process would also apply to 

certain treating practitioners, including 

physician assistants, nurse practitioners, 

and clinical nurse specialists, because 

these practitioners also order DMEPOS 

for which Medicare makes payment. We 

stress that this process can only be used 

when a physician or treating 

practitioner determines that there is a 

need for the use of a particular item or 

mode of delivery to avoid an adverse 

medical outcome. Because bids will be 

submitted for HCPCS codes, which are 

carefully written to include items that 

perform the same therapeutic function, 

we do not believe there will be many 

instances in which a particular brand or 

mode of delivery is necessary to avoid 

an adverse medical outcome. 

Nevertheless, because it is possible such 

a prescription may be necessary in a few 

cases, we believe it is important for 

patient safety to retain this provision. 

Therefore, we are clarifying that a 

physician or treating practitioner must 

document in the beneficiary’s medical 


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records the medical necessity of a 

particular brand or mode of delivery of 

an item or service to avoid an adverse 

medical outcome, if a particular brand 

or mode of delivery is prescribed. We 

note that section 1847(a)(5)(B) of the Act 

provides that a prescription written for 

a particular brand of item or mode of 

delivery will not affect the amount of 

payment otherwise applicable for the 

item under the HCPCS code involved, 

and that we do not currently pay a 

supplier an additional amount for 

furnishing a particular brand of item or 

mode of delivery. We also note that a 

contract supplier would not be required 

to furnish every brand of item. It would 

be able to work with the physician or 

treating practitioner to find a suitable 

alternative and, if that effort is 

unsuccessful, to help the beneficiary 

find another contract supplier that can 

furnish the item. 

We agree that the use of the term 

‘‘reasonable effort’’ is nebulous and may 

be subject to misinterpretation. We are 

deleting the term ‘‘reasonable effort’’. 

Because of the importance for 

beneficiaries to receive medically 

appropriate items, we are now requiring 

that a supplier follow the process set out 

in final § 414.420(b)(1) though (b)(3). 

Comment: Several commenters argued 

that physician choice for determining 

appropriate wound care products is of 

paramount importance. They were 

concerned that physician choice and 

access to certain wound care products 

could be restricted as a result of 

competitive bidding, specifically 

Negative Pressure Wound Therapy 

(NPWT), code E2402. In recent months, 

new products have been added to code 

E2402 despite the fact that these new 

products are clinically different from 

the original NPWT product. The 

commenters stated that because of the 

newer items, it is conceivable that 

wound healing would be compromised. 

Response: A physician or treating 

practitioner may prescribe a particular 

brand or mode of delivery to avoid an 

adverse medical outcome for the 

beneficiary. We note that HCPCS codes 

are carefully defined to ensure that only 

items that have the same therapeutic 

function fall within particular codes. 

Therefore, we believe it is unlikely that 

there would be many instances in which 

a particular brand within a HCPCS code 

would be necessary to avoid an adverse 

medical outcome. 

Comment: Several commenters 

requested that CMS add language to the 

rule acknowledging that physical 

therapists and occupational therapists 

play a key role in specifying the need 

for a particular brand. 

Response: Although we recognize that 

physical therapists and occupational 

therapists may furnish certain DMEPOS 

as part of their professional practice, 

current Medicare rules only allow 

physicians, nurse practitioners, clinical 

nurse specialists, and physician 

assistants to prescribe DMEPOS items. 

Comment: Several commenters 

asserted that it is not fair that contract 

suppliers be required to furnish any 

item within a HCPCS code if their bid 

was accepted based on an item that they 

carry in their stock. The commenters 

stated that if no additional payments 

would be made for more specific 

expensive products that are ordered by 

physicians or treating practitioners, this 

may result in significant financial losses 

for the contract supplier if the contract 

supplier is required to furnish the 

particular brand or mode of delivery at 

the single payment amount. Several 

commenters supported the physician/ 

treating practitioner authorization 

proposal because it provides a safety net 

for the beneficiary. Another commenter 

argued that when a physician or treating 

practitioner specifies a product for his 

or her patient, the physician or treating 

practitioner should have continuous 

access to the latest innovative 

technologies. 

Response: As stated earlier in this 

section, we believe that it will rarely be 

necessary for a physician or treating 

practitioner to prescribe a particular 

brand or mode of delivery to avoid an 

adverse medical outcome. Furthermore, 

in this final rule, we are specifically 

providing the contract supplier with a 

specific process to follow when a 

physician or treating practitioner 

requests a specific brand item or mode 

of delivery to avoid an adverse medical 

outcome. Under this process, the 

supplier is required to furnish the item 

or mode of delivery as prescribed, and 

if it cannot furnish the item or mode of 

delivery as prescribed consult with the 

physician or treating practitioner to find 

a suitable alternative and have the 

physician or treating practitioner revise 

his or her order, and if the physician or 

treating practitioner does not revise the 

order, assist the beneficiary in finding 

another contract supplier. We do not 

believe these requirements will place an 

undue financial burden on a contract 

supplier because there are provisions in 

this process that give the contract 

supplier the opportunity to substitute 

the item or arrange to have another 

contract supplier furnish the item. We 

agree that physicians and treating 

practitioners should have continuous 

access to the latest innovative 

technologies and be able to order them 

for their patients. 

Comment: Several commenters stated 

that the physician/treating practitioner 

authorization proposal does not provide 

sufficient details. They pointed out that 

the term ‘‘adverse medical outcome’’

has not been defined. The commenters 

urged CMS to develop a streamlined 

and quick process to facilitate the role 

of a physician or treating practitioner as 

a key decision maker for each patient. 

Several commenters argued that it is 

crucial for the Medicare DMEPOS 

Competitive Bidding Program to allow 

health care providers to prescribe 

specific items with special features 

when medically necessary. They stated 

that the proposed rule does not 

adequately ensure that beneficiaries 

with diabetes will have access to the 

products for which their health 

professionals find are most appropriate 

and medically necessary for their 

individualized needs. The commenters 

remained concerned that contract 

suppliers will limit products to a 

narrow range that do not account for a 

wide spectrum of diabetes-related 

medical needs, and they will not receive 

additional payment for providing such 

items. 

The commenters recommended that 

CMS modify the rule to allow for an 

adequate variety of diabetes supplies to 

suit a range of individualized needs of 

beneficiaries with diabetes. They stated 

that CMS must create a less burdensome 

process to ensure that these supplies are 

rapidly available upon documentation 

of medical need. The commenters added 

that it is possible that adjusting the 

payment rate for these special items 

upward will encourage contract 

suppliers to provide them in all cases. 

Response: We believe that it is 

appropriate for physicians and treating 

practitioners to have the discretion to 

determine when it is medically 

necessary to prescribe a particular brand 

or mode of delivery of an item to avoid 

an adverse medical outcome. We 

consider the adverse medical outcome 

determination to be part of the more 

general medical necessity requirement 

that must be met in order for Medicare 

to pay for an item under section 

1862(a)(1)(A) of the Act. As with all 

medical necessity determinations, there 

must be documentation in the 

beneficiary’s medical record to support 

the need for the particular brand or 

mode of delivery. Therefore, the 

physician or treating practitioner must 

note in the beneficiary’s medical record 

the reason why the specific brand or 

mode of delivery is necessary to avoid 

an adverse medical outcome so that 

contract suppliers can make a 

reasonable effort to furnish the item, 

then consult with the physician or 


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treating practitioner to find a suitable 

alternative, and then make a reasonable 

effort to assist the beneficiary in locating 

a contract supplier that can furnish the 

item. We believe that these 

requirements, along with other 

requirements that we have previously 

discussed in this final rule, will ensure 

that beneficiaries have access to the 

most appropriate items for their medical 

condition under the Medicare DMEPOS 

Competitive Bidding Program. 

Comment: One commenter objected to 

the statement in the proposed rule that 

suppliers should not discriminate 

against beneficiaries in a CBA and that 

contract suppliers must furnish the 

same items to beneficiaries that they do 

to other individuals. The commenter 

argued that this appears to conflict with 

the requirement that a supplier must 

provide product-specific items, if 

ordered by the physician or treating 

practitioner. 

Response: The nondiscrimination 

provision in this final rule (§ 414.422(c)) 

specifies that discrimination against 

beneficiaries is prohibited under the 

Medicare DMEPOS Competitive Bidding 

Program. All Medicare beneficiaries to 

whom a contract supplier furnishes 

competitively bid items must have the 

same choice of items that the contract 

supplier provides to other customers. 

We proposed to implement this 

provision to protect beneficiaries from 

receiving sub-standard or inferior items 

in terms of quality. However, we do not 

believe that this provision conflicts with 

the physician/treating practitioner 

authorization rules being implemented 

in this final rule. Under these rules, a 

physician or treating practitioner can 

prescribe a brand name item or mode of 

delivery to avoid an adverse medical 

outcome for the beneficiary, and the 

contract supplier must follow the 

process outlined in § 414.420(b) upon 

receiving the prescription. Nothing in 

these rules would prevent a contract 

supplier that furnishes a particular 

brand or mode of delivery from making 

that brand or mode of delivery available 

to other beneficiaries or customers. 

Comment: One commenter noted that 

the rule requires a contract supplier get 

a revised written prescription if the 

physician treating practitioner allows 

for a modification of a brand-specific 

product. The commenter stated that 

verbal orders are acceptable in most 

States, and this imposes a significant 

administrative burden on contract 

suppliers and physicians/treating 

practitioners. 

Response: The requirement of a 

written order is consistent with current 

Medicare rules. The item provided must 

match the written order in order for the 

contract supplier to bill Medicare. 

After consideration of the public 

comments we received, we are revising 

and finalizing proposed § 414.420 as 

discussed above. 

XVI. Other Public Comments Received 

on the May 1, 2006 Proposed Rule 

Comment: Several commenters 

suggested issuing an interim final rule, 

with a full 60-day notice and comment 

period to allow for a more detailed 

proposal for public comment. In 

addition, several commenters suggested 

publishing initial responses to the 

public comments as a new proposed 

rule. The commenters believed that this 

suggestion is consistent with section 

1871(a)(4) of the Act that states that a 

final rule will be treated as a proposed 

rule if it includes provisions that are not 

logical outgrowths of a previously 

published notice of proposed 

rulemaking. The commenters indicated 

that another proposed regulation would 

allow the public to consider and 

comment on CMS’ responses to issues 

on which CMS requested comment in 

the May 1, 2006 proposed rule. Other 

commenters requested that the comment 

period on the proposed rule be extended 

until at least 90 days following the 

publication of the final DMEPOS quality 

standards. 

Several commenters were concerned 

about Administrative Procedure Act 

compliance, which states that 

administrative rulemaking must be 

sufficiently descriptive of subjects and 

issues involved so that interested parties 

may offer informed criticism and 

comments. The commenters also gave 

other cites: Agency notices must 

describe the range of alternatives being 

considered with reasonable specificity; 

otherwise, interested parties will not 

know what to comment on, and notice 

will not lead to better-informed agency 

decision making. Finally, the 

commenters noted that an agency 

commits a serious procedural error 

when it fails to reveal portions of 

technical basis for a proposed rule in 

time to allow for meaningful 

commentary. 

Response: The proposed rule 

presented for public comment our 

proposed rules that will govern the 

Medicare DMEPOS Competitive Bidding 

Program. This final rule does not 

include any provisions that are not 

logical outgrowths of our proposals in 

the May 1, 2006 proposed rule. In 

addition, we believe that our proposed 

rules were sufficiently detailed to 

enable the public to provide meaningful 

comments on them. Indeed, we received 

over 2,000 comments on the proposed 

rule, and we have both considered and 

responded to those comments in this 

final rule. Therefore, we believe that 

issuance of an interim final rule is not 

necessary. We also note that this rule 

does not finalize the DMEPOS quality 

standards and that section 

1834(a)(20)(E) of the Act explicitly 

permits us to establish the DMEPOS 

quality standards by program 

instruction or otherwise. The quality 

standards were published on August 15, 

2006, and are available on the following 

Web site: http://www.cms.hhs.gov/ 

CompetitiveAcqforDMEPOS/ 

04_New_Quality_Standards.asp. We 

note that the draft quality standards 

were published on September 26, 2005, 

which was more than 7 months prior to 

the publication of the proposed rule. We 

also note that the quality standards 

apply to all suppliers, not just suppliers 

that wish to participate in the Medicare 

DMEPOS Competitive Bidding Program, 

and that we provided a 60-day period 

for the public to comment on them. 

Comment: Several commenters 

suggested that CMS schedule a meeting 

of the PAOC (1) After we publish an 

interim final rule; (2) when we publish 

the MSAs and the DMEPOS items 

subject to competitive bidding; and (3) 

when the final regulation is issued. The 

commenters noted that scheduling a 

PAOC meeting following publication of 

an interim final rule would allow CMS 

to obtain industry input before 

publishing a final rule and initiating 

program implementation. Further, 

several commenters suggested that CMS 

include the PAOC in the review of the 

public comments received during the 

comment period on the proposed rule 

and in the development of the final rule. 

They stated that excluding the 

important counsel and advice of the 

PAOC in a critical process would not be 

consistent with the purpose for which 

the PAOC was established. 

Response: The PAOC meets 

periodically to review policy 

considerations and to provide advice on 

the development and implementation of 

the Medicare DMEPOS Competitive 

Bidding Program. Since its 

establishment, the PAOC has met on 

five occasions and will continue to be 

available to provide us with advice until 

the end of 2009. Section 302 of the 

MMA gives CMS discretion on when to 

schedule PAOC meetings. We also 

discussed with the PAOC the full range 

of competitive bidding issues, and we 

continued to consider its advice and 

counsel as we reviewed the comments 

and developed this final rule. 

Comment: Several commenters noted 

that the Web site address for the PAOC 


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that was in the proposed rule was 

incorrect. 

Response: We recognize the 

importance of having a Web site 

available to distribute information in a 

timely manner and regret the error. Our 

PAOC Meeting Information Web site can 

be found at the following link: http:// 

www.cms.hhs.gov/CompetitiveAcqfor

DMEPOS/PAOCMI/list.asp. Included on 

the Web site are materials relating to 

each PAOC meeting such as agendas, 

meeting summaries, and presentations. 

Comment: One commenter suggested 

that the PAOC be subject to the Federal 

Advisory Committee Act (FACA), which 

requires public access to meetings and 

proceedings. The commenter believed 

that the PAOC has great power within 

the DMEPOS industry and that other 

affected members of the industry have 

not had an opportunity to review or 

respond to PAOC assertions or 

recommendations. 

Response: Section 1847(c)(4) of the 

Act provides that the provisions of the 

FACA do not apply to the PAOC. 

However, the PAOC meetings have been 

open to the public, and we have 

published summaries of the meetings on 

our PAOC Web site http://www.cms.

hhs.gov/CompetitiveAcqforDMEPOS/ 

PAOCMI/list.asp. Information about the 

Medicare DMEPOS Competitive Bidding 

Program has also been made available 

through other methods, such as 

electronic supplier listserv messages 

and open door forums. CMS offers an 

electronic mailing list service for those 

interested in receiving news from CMS. 

From the following link, individuals can 

subscribe to the ‘‘Homehealth_Hospice 

DMEODF–L’’ listserv to receive notices 

of upcoming open door forums: http:// 

www.cms.hhs.gov/apps/mailinglists/. 

Comment: Numerous commenters 

requested that CMS publish an updated 

implementation timeline with expected 

completion dates. The commenters 

expect that the publication of such a 

timeline will highlight the significant 

problems that lie ahead based on an 

overly aggressive implementation plan. 

The commenters suggested that the 

timeline should identify and provide 

expected completion dates for items 

such as the publication of the quality 

standards, approval of the accrediting 

organizations, and issuance of final 

regulations. The commenters further 

suggested that CMS push back the 

implementation date of October 1, 2007, 

to a more reasonable timeframe. The 

commenters believed that a delay in 

implementation will allow adequate 

time for small suppliers to create 

networks and to prepare their 

organizations for accreditation. 

Response: Section 1847(a)(1)(B)(i)(I) 

of the Act requires that the Medicare 

DMEPOS Competitive Bidding Program 

be phased in such that competition 

under the programs occurs in 10 of the 

largest MSAs in CY 2007. We are 

committed to meeting this statutory 

mandate. We are mindful of the many 

key tasks that must be completed to 

ensure the success of this program and 

are moving forward to complete these 

tasks expeditiously. We note that the 

final DMEPOS quality standards were 

issued on August 15, 2006, and that 

applications for participation in the 

DMEPOS accreditation program were 

solicited from independent accrediting 

organizations in a Federal Register 

notice published on August 16, 2006 (71 

FR 47230). Therefore, we do not believe 

it is necessary to publish a specific 

timetable of expected completion dates 

for other activities. However, we will 

provide the public with sufficient notice 

as we proceed with implementation 

activities. 

Comment: One commenter suggested 

that CMS allow all beneficiaries to opt 

out of the Medicare DMEPOS 

Competitive Bidding Program, select the 

supplier of their choice, and receive 

DMEPOS items for which payment is 

made based on the current fee schedule 

amounts. 

Response: Under section 1847(a) of 

the Act, we are required to establish and 

implement competitive bidding 

programs throughout the United States 

for the furnishing of certain items for 

which payment is made under Part B of 

the Medicare program. To the extent 

that we implement a competitive 

bidding program in a particular CBA, 

we do not believe that we have 

authority to allow any beneficiary who 

need items in that CBA to ‘‘opt out’’ of 

receiving those items from contract 

suppliers and receive Medicare 

payment. We also note that section 

1847(a)(6) of the Act provides that, for 

each CBA in which a competitive 

bidding program is implemented, the 

payment basis established under the 

competitive bidding program shall be 

substituted for the payment basis that 

would otherwise apply (which, in most 

cases, would be based on a fee 

schedule). In accordance with section 

1847(b)(5)(A) of the Act, we are required 

to establish a new payment amount for 

each item in each CBA. This new 

payment amount is what we would pay 

to contract suppliers. Under the 

Medicare DMEPOS Competitive Bidding 

Program, beneficiaries will be able to 

select among the winning suppliers. 

However, we believe that permitting 

beneficiaries to opt out of the program 

would create an exception that would 

significantly undermine the goal of the 

program to achieve savings. 

Comment: One commenter stated that 

one aspect of the DMEPOS competitive 

bidding demonstration projects that was 

never studied was Medicare patient 

rehospitalization and/or emergency 

room visit rates. The commenter stated 

that this is a key outcome measure that 

CMS should have evaluated to 

determine if savings created through 

Medicare Part B were actually resulting 

in expenditures under Medicare Part A. 

The commenter believed that it is 

possible that a price-oriented DMEPOS 

model might actually lead to higher 

levels of institutional care. The 

commenter indicated that it would be 

prudent for CMS to study this aspect in 

the CY 2007 round of bidding. 

Response: We do not agree that 

competitive bidding savings will result 

in higher expenditures under Medicare 

Part A. Under the Medicare DMEPOS 

Competitive Bidding Program, 

beneficiaries will receive items from 

contract suppliers that have satisfied 

our quality, accreditation, financial, and 

eligibility standards. In addition, 

contract suppliers will be required to 

furnish to beneficiaries in a CBA the 

same level of services and quality items 

that they furnish to other customers. 

Through our physician and treating 

practitioner authorization rules, 

beneficiaries who maintain a permanent 

residence in a CBA will continue to 

receive items that meet their medical 

needs. Because we are enacting 

safeguards to ensure the quality of items 

that are furnished under the competitive 

bidding programs by contract suppliers, 

as well as rules that we expect will 

ensure that beneficiaries have access to 

new technology, we do not believe that 

expenditures under Medicare Part A 

will rise or that it is necessary to 

undertake a study. Moreover, we will 

monitor the entire program to make sure 

that complaints are addressed and 

resolved. We also believe that it would 

be difficult to develop a study 

evaluating increases in Medicare Part A 

costs as a result of adverse competitive 

bidding outcomes because there are too 

many intervening variables, such as 

physician and treating practitioner 

quality, that affect final patient 

outcome. 

XVII. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995 (PRA), we are required to 

provide 30-day notice in the Federal 

Register and solicit public comment 

before a collection of information 

requirement is submitted to the Office of 

Management and Budget (OMB) for 


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review and approval. In order to fairly 

evaluate whether an information 

collection should be approved by OMB, 

section 3506(c)(2)(A) of the PRA 

requires that we solicit comment on the 

following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

In response to the May 1, 2006 

proposed rule (71 FR 25654), we 

received several public comments that 

were submitted on the proposed rule 

that more appropriately pertain to 

provisions on the PRA process. We note 

that specific information requested from 

suppliers as part of the bid submission 

and many of the terms and conditions 

that will be included in the contracts 

under the Medicare DMEPOS 

Competitive Bidding Program are 

discussed in detail in sections VI.G., 

VII.C., and IX.A. of this final rule. In 

these sections, we summarize the public 

comments we received on these specific 

information requirements and respond 

to those comments. Other comments 

and responses on the general paperwork 

burden that we outlined in the proposed 

rule follow: 

Comment: Two commenters 

submitted general comments on the 

specific paperwork burden outlined in 

the proposed rule. The commenters 

believed that, due to the lack of 

specificity in the proposed rule, it is 

impossible for commenters, or CMS, to 

estimate accurately the amount of 

incremental time that will be required of 

suppliers to complete the bid process to 

participate in the program. The 

commenters indicated that only two 

demonstration projects were performed, 

and they did not include many of the 

requirements that we have proposed. 

The commenters also indicated that, 

overall, competitive bidding is an 

administratively burdensome program 

for suppliers, Medicare, and its 

contractors, and represents an 

incremental administrative process that 

is layered on top of an already complex 

Medicare Part B system. The 

commenters urged CMS to adopt 

existing accreditation standards, 

existing patient satisfaction tools, 

existing patient complaints and 

resolution processes, and existing 

financial reports, rather than attempt to 

‘‘reinvent the wheel,’’ in order to reduce 

both the paperwork and administrative 

burden. The commenters believed that 

competitive bidding will increase costs 

for both suppliers and CMS in the form 

of increased staff and reporting 

procedures. 

Two commenters stated that they 

assumed CMS arrived at its estimate of 

70 hours per bid for each supplier to 

furnish information by using the median 

of the hours that suppliers estimated 

were required during the two less 

complicated demonstration projects, 

and that this estimate was per location. 

The commenters pointed out that it is 

unclear as to whether this 70-hour 

estimate includes time spent attending 

bidders conferences and preparing 

internal analyses or whether it is simply 

an estimate of the amount of time 

needed to complete the application 

bidding process. The commenters 

indicated that if they considered in the 

estimate the time that executive and 

mid-level management spent reviewing, 

analyzing, and responding to the 

proposed rule, plus an estimated 70 

hours per their 25 branches for the 

application process and the first round 

of competitive bidding for CY 2007, the 

companies would invest 1,750 hours in 

preparing competitive bids. 

In regard to the total number of hours 

that suppliers would invest in regard to 

the CY 2007 programs, one commenter 

pointed out that CMS’ own estimate is 

that 1,158,150 hours would be needed 

by the industry (16,545 bids). The 

commenters pointed out that if a 

conservative $35 per hour average salary 

rate is used, this amounts to an 

incremental $41 million attributable to 

the first 10 CBAs alone. The commenter 

added that, in CY 2008, this escalates 

dramatically to an incremental 

5,100,550 hours needed to prepare 

72,865 bids, which in turn computes to 

$178.5 million in supplier labor, and 

that these costs have to be accounted for 

in the bid that suppliers submit to CMS. 

Two commenters stated that the 

proposed bid process and certain other 

provisions of the proposed rule are too 

paper-intensive and gave 

recommendations for ways in which 

CMS could save a significant amount of 

paperwork for itself and suppliers: (1) 

Automating the supplier bid process 

and accreditation organization 

application process by making it Webbased and allowing an attachment 

feature; (2) allowing the bid review team 

to start reviewing those bids that meet 

the quality and financial standards first 

before proceeding to review the bid 

prices; (3) allowing any multi-site 

supplier that is owned by the same 

corporate parent or tied to the same tax 

number to provide certain standard 

information only one time; (4) adopting 

a standardized Medicare patient 

satisfaction questionnaire for DMEPOS; 

(5) keeping the beneficiary and supplier 

education simple and low cost; (6) 

eliminating the brand-specific 

requirement and associated paperwork; 

(7) rather than requiring a separate bid 

for every competitively bid product 

category in a given MSA, consolidating 

the application form itself into a checkbox format; and (8) rather than creating 

an all-new government infrastructure 

that essentially duplicates what exists in 

the private sector, subcontracting with 

several large managed care 

organizations to administer the program 

for Medicare beneficiaries nationwide. 

Response: We need detailed 

information on suppliers with whom we 

may enter into a contract. This 

information will be used to evaluate the 

suppliers. This is important because 

both Medicare and the beneficiaries will 

be dependent on the contract suppliers. 

We need to evaluate capacity issues in 

order to ensure that suppliers’ capacity 

meets beneficiary demand; we need to 

evaluate financial stability in order to 

ensure that contract suppliers are 

solvent and will be in business during 

the contract period; and we need to 

obtain identification information in 

order to ensure management is 

dependable and that the bidding 

supplier is not excluded from 

participating as a Medicare supplier. 

Our estimate of the time burden 

required for filling out the forms is 

based on reports from suppliers that 

participated in the DMEPOS 

competitive bidding demonstrations, 

which implemented competitive 

bidding in two MSAs. The 

demonstrations included RFB forms 

similar to those that will be included in 

this program and both small and large 

suppliers filled out the forms. Estimates 

of the required time ranged from 40 to 

100 hours, and we used the midpoint 

for our estimates. The estimates include 

internal decision-making processes but 

do not include the time spent attending 

bidders’ conferences. Based on our 

consideration of the public comments 

received, we have eliminated the 

requirement to submit reviewed and/or 

audited financials, as well as 

information regarding investigations. 

We believe this will lessen the burden 

on suppliers. 

Section 414.412 Submission of Bids 

Under a Competitive Bidding Program 

Section 414.412 outlines the 

requirements associated with submitting 

bids under the competitive bidding 

process. Specifically, § 414.412(a) states 

that unless an exception applies, 

suppliers must submit a bid and be 


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awarded a contract under a competitive 

bidding program in order to receive 

payment from Medicare for furnishing 

the items. 

The burden associated with this 

requirement is the time and effort 

associated with drafting, completing, 

and submitting a bid. We estimate that, 

on average, it will take a supplier 68 

hours to complete and submit a bid. We 

believe that we will receive 15,973 bids 

for a total annual burden of 1,086,164 

hours. 

In addition, as part of the Medicare 

DMEPOS Competitive Bidding Program, 

beneficiaries will be surveyed to gather 

information pertaining to their 

experiences with suppliers. We estimate 

that the burden associated with 

completing the survey is 15 minutes per 

beneficiary. We estimate that the total 

annual burden associated with this 

information collection requirement is 

2,000 hours. 

Section 414.414 Conditions for 

Awarding Contracts 

Section 414.414 contains the rules 

pertaining to the evaluation and 

selection of suppliers for contract award 

purposes under the Medicare DMEPOS 

Competitive Bidding Program. 

Specifically, § 414.414(b)(1) states that 

each supplier must meet the enrollment 

standards specified in § 424.57. The 

burden associated with this requirement 

is subject to the PRA. This requirement 

is currently approved under OMB 

control number 0938–0717, with an 

expiration date of November 30, 2007. 

Section 414.420 Physician or Treating 

Practitioner Authorization and 

Consideration of Clinical Efficiency and 

Value of Items 

Section 414.420(a) states that a 

physician or treating practitioner may 

prescribe, in writing, a particular brand 

of an item for which payment is made 

under competitive bidding or a 

particular mode of delivery for an item, 

if he or she determines that the 

particular brand or mode of delivery 

would avoid an adverse medical 

outcome for the beneficiary and 

documents this determination in the 

beneficiary’s medical record. The 

burden associated with this requirement 

is the time and effort associated with 

evaluating the beneficiary and, if 

necessary, determining the best brand 

item or mode of delivery to avoid an 

adverse medical outcome. In addition, 

there is burden associated with the time 

and effort involved in writing the 

prescription for the brand item or the 

mode of delivery and documenting the 

medical record. The burden associated 

with this requirement is not subject to 

the PRA as stated under 5 CFR 

1320.3(b)(2) and (h)(5). 

Section 414.422 Terms of Contracts 

Section 414.422(d) requires contract 

suppliers to notify CMS if they are 

considering or negotiating a change of 

ownership. The notification must be 

made 60 days prior to the anticipated 

effective date of the change. In addition, 

a supplier must submit a novation 

agreement to CMS 30 days before the 

anticipated change of ownership takes 

effect, stating that it will assume 

responsibility for meeting all of the 

terms and conditions of the competitive 

bidding contract. The new supplier 

must submit the same documentation 

required of the original contract 

supplier unless it has already submitted 

such documentation during the bidding 

process and that documentation is still 

current. 

The burden associated with this 

requirement is the time and effort 

associated with drafting and submitting 

the required notification to CMS. While 

this burden is subject to the PRA, we 

currently have no way to quantify the 

number of potential respondents. We 

will continue to monitor the program 

requirement and seek OMB approval 

should the number of respondents 

surpass the threshold of 10 individuals 

or entities as specified in 5 CFR 

1320.3(c)(4). 

TABLE 10.—ESTIMATED ANNUAL REPORTING AND RECORDKEEPING BURDEN

Requirement OMB control 

No. Respondents Responses 

Burden per 

response 

(in hours) 

Total annual 

burden 

(in hours) 

§ 414.412(a) ............................................................................ 0938—New 15,973 15,973 68 1,086,164 

0938—New 8000 8000 .25 2,000 

0938—New 15,973 15,973 .166667 2662 

§ 414.414(b)(1) ....................................................................... 0938—0717 35,000 35,000 8 280,000 

Total ................................................................................ ..................... ........................ ........................ ........................ 1,370,826 

As required by section 3504(h) of the 

PRA, we have submitted this final rule 

to OMB for its review and approval of 

the information collection requirements. 

If you comment on these information 

collection requirements, please mail 

copies directly to the following: 

Centers for Medicare & Medicaid 

Services, Office of Strategic 

Operations and Regulatory Affairs, 

Regulations Development and 

Issuance Group, Attn.: William N. 

Parham, III, CMS–1270–F, Room C5–

14–03, 7500 Security Boulevard, 

Baltimore, MD 21244–1850; and 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 

20503, Attn.: Carolyn Lovett, CMS 

Desk Officer, CMS–1270–F, E-mail: 

carolyn_lovett@omb.eop.gov, Fax: 

(202) 395–6974. 

XVIII. Regulatory Impact Analysis 

A. Overall Impact 

We have examined the impacts of this 

final rule as required by Executive 

Order 12866 (September 1993, 

Regulatory Planning and Review), the 

Regulatory Flexibility Act (RFA) 

(September 19, 1980, Pub. L. 96–354), 

section 1102(b) of the Social Security 

Act, the Unfunded Mandates Reform 

Act of 1995 (Pub. L. 104–4), and 

Executive Order 13132. 

1. Executive Order 12866 

Executive Order 12866 (as amended 

by Executive Order 13258, which 

merely reassigns responsibility of 

duties) directs agencies to assess all 

costs and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with economically significant effects 

(that is, a final rule that would have an 

annual effect on the economy of $100 

million or more in any 1 year, or would 


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adversely affect in a material way the 

economy, a sector or the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

communities). We have determined that 

this final rule is an economically 

significant major rule and thus have 

prepared a regulatory impact analysis. 

2. Regulatory Flexibility Act (RFA) 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses. For purposes of section 604 

of the RFA, small entities include small 

businesses, nonprofit organizations, and 

small governmental jurisdictions. 

Approximately 85 percent of DMEPOS 

suppliers are considered small 

businesses according to the Small 

Business Administration’s size 

standards, with total revenues of $6.5 

million or less in any 1 year. Individuals 

and States are not included in the 

definition of a small entity. We expect 

that this final rule will have a 

significant impact on a substantial 

number of small suppliers. The RFA 

requires that we analyze regulatory 

options for small businesses and other 

entities. The analysis must include a 

justification concerning the reason 

action is being taken, the kinds and 

numbers of small entities the rule 

affects, and an explanation of any 

meaningful options that achieve the 

objectives with less significant adverse 

economic impact on the small entities. 

We have provided this analysis in 

section XVIII.B. of the preamble to this 

final rule. 

3. Small Rural Hospitals 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 

impact analysis if a rule may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. For purposes of section 

1102(b) of the Act, we define a small 

rural hospital as a hospital that is 

located outside of an MSA and has 

fewer than 100 beds. We have 

determined that this rule will not have 

a significant effect on small rural 

hospitals. Rural health care facilities 

should not be significantly impacted as 

the program is expected to operate 

primarily within relatively large MSAs. 

4. Unfunded Mandates 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

also requires that agencies assess 

anticipated costs and benefits before 

issuing any rule whose mandates 

require spending in any 1 year of $100 

million in 1995 dollars, updated 

annually for inflation. That threshold 

level is currently approximately $120 

million. We do not expect this final rule 

will result in direct costs that exceed 

$120 million per year on State, local, or 

tribal governments in the aggregate or 

the private sector, and thus the UMRA 

would not apply. 

5. Federalism 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

We have determined that this final rule 

will not have substantial direct effects 

on the rights, roles, and responsibilities 

of States. 

B. Regulatory Flexibility Analysis 

1. Summary 

The May 1, 2006 proposed rule did 

not include a separate initial Regulatory 

Flexibility Analysis. However, 

information concerning small suppliers 

was included throughout the proposed 

rule preamble and regulatory impact 

analysis. This document consolidates 

and summarizes components of the 

regulation concerning small businesses 

into a single RFA. Its contents are 

included in more detail in various parts 

of the regulatory impact analysis and 

the regulation preamble. 

2. The Need for and Objectives of the 

Final Rule 

Payment for DMEPOS is currently 

based generally on fee schedule 

amounts. Section 302(b)(1) of the 

Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (MMA) (Pub. L. 108–173), requires 

the Secretary of Health and Human 

Services to replace the current fee 

schedule methodology for certain items 

with a competitive acquisition 

contracting program that will result in 

an improved Medicare methodology for 

setting payment amounts for certain 

durable medical equipment and 

supplies, enteral nutrition equipment, 

nutrients and supplies, and off-the-shelf 

orthotics. This new bidding process will 

result in CMS awarding contracts with 

to winning suppliers. Contracts will 

stipulate the terms, conditions, and 

payment rates for items and services for 

under the program. Generally, only 

suppliers that submit winning bids and 

are awarded contracts will be permitted 

to furnish items under the program and 

reimbursement for those items from 

Medicare. 

In developing bidding and contract 

award procedures, section 1847(b)(6)(D) 

of the Act requires us to take 

appropriate steps to ensure that small 

suppliers of items and services have an 

opportunity to be considered for 

participation in the Medicare DMEPOS 

Competitive Bidding Program. Section 

1847(b)(2)(A)(ii) of the Act also states 

that the needs of small providers must 

be taken into account when evaluating 

whether an entity meets applicable 

financial standards. 

Set out below is a summary of the 

significant issues raised by the public 

comments in response to the initial 

regulatory flexibility analysis, a 

summary of the assessment of the 

agency of such issues, and a statement 

of any changes made in the proposed 

rule as a result of such comments. 

3. Comments Regarding Small Suppliers 

The May 1, 2006 proposed rule did 

not include a separate initial regulatory 

flexibility analysis, but all information 

required for an RFA was contained 

elsewhere in the regulatory impact 

analysis or the regulation preamble. 

Below we list major comments on 

aspects of the proposed rule which 

directly concern small suppliers that are 

included in the final rule. 

a. Comments on Small Supplier Focus 

Groups 

Several commenters requested that 

CMS share the findings from the 9 small 

supplier focus group meetings that were 

conducted during April and May 2005. 

Representatives of DMEPOS suppliers 

that had less than $3 million in gross 

revenue and employed up to 10 FTE 

employees met with CMS’ contractor 

staff and were invited to share thoughts 

and opinions on the potential impact of 

quality standards, accreditation, 

competitive bidding, and financial 

standards requirements on their 

businesses. We presented an overview 

and results of the focus groups related 

to quality standards and accreditation to 

the PAOC on September 26, 2005 

(access at http://www.cms.hhs.gov/ 

CompetitiveAcqforDMEPOS/PAOCMI/ 

list.asp#TopOfPage). 

The results of the focus groups related 

to competitive bidding and financial 

standards were presented to the PAOC 

on May 23, 2006. Several focus group 

participants remarked that the 

competitive bidding process would 

force many small suppliers out of 

business. The participants suggested 

alternatives to competitive bidding, 

including: (1) CMS should determine 

product prices and allow all willing 

suppliers to provide products at the set 

price; and (2) CMS should reserve a 

percentage of winning bids for small 

suppliers. Many participants believed 


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that lower payment rates for suppliers 

would inevitably lead to lower quality 

goods and services. Participants were 

particularly emphatic in their belief that 

CMS continues to neglect the valuable 

service component that small suppliers 

provide to their customers. They 

believed that it is their commitment to 

service that sets them apart from the 

national companies. A number of 

participants were concerned about the 

possibility of requiring small winning 

supplier to furnish items in the entire 

MSA, given the fact that some MSAs 

cross State boundaries. There was also 

a consensus among these small 

suppliers that the impact of competitive 

bidding would differ by product line. 

They believed that items involving highend technology equipment, respiratory 

equipment, and customized products 

are more service intensive than other 

products, such as standard wheelchairs, 

that involve fewer repairs, set-up time, 

and patient education. 

Finally, many participants in the 

focus groups believed that tax returns, 

quarterly standard financial statements, 

and Dun & Bradstreet were helpful 

sources of information about a 

business’s credit history and cash flow. 

The participants noted that suppliers 

that grossed over $3 million in revenue 

used audited financial statements, 

whereas suppliers that grossed less than 

$3 million in revenue used cash basis 

accounting principles. A summary of 

the PAOC discussion related to the 

focus group results can be accessed at: 

http://www.cms.hhs.gov/Competitive

AcqforDMEPOS/downloads/ 

PAOC_summary.pdf. 

We have used the comments from the 

focus groups as well as public comment 

process in developing our final policies 

for the Medicare DMEPOS Competitive 

Bidding Program. 

b. Comments on the Definition of Small 

Suppliers 

Some comments concerned the 

definition of small suppliers. Some 

commented on practitioner and 

providers, reporting that there are 

currently 40,000 practitioners and 

providers enrolled as suppliers, 

including approximately 1,078 physical 

therapists. The commenters stated that 

health care practitioners who provide 

DMEPOS as an integral part of their 

professional services specialize in 

providing items for specific conditions. 

They added that these suppliers offer 

considerable expertise in evaluating 

both the patient and the item in order 

to provide the patient with the best 

possible outcome. 

Many commenters disagreed with 

using the definition of the SBA (less 

than $6 million in annual receipts) 

because the CY 2003 Medicare data 

showed that at least 90 percent of 

suppliers had less than $1 million in 

allowed charges. They recommended 

defining a small supplier as a supplier 

that generates less than $3 million in 

annual receipts. The commenters 

believed that a lack of small supplier 

participation would negatively impact 

patient care. They added that small 

businesses would have to endure large 

expenses in order to participate in the 

Medicare DMEPOS Competitive Bidding 

Program. Most suggested that we define 

a small supplier as a supplier having 

fewer than 10 FTE employees. They also 

believe that small suppliers serve rural 

and underserved urban communities 

where larger suppliers may not operate. 

We agree with the commenters and 

recognize the importance of small 

supplier participation and understand 

that there are upfront costs associated 

with submitting a bid under the 

program. In the final rule, we revised 

our policies to ensure that small 

suppliers have an opportunity to be 

considered for participation in the 

Medicare DMEPOS Competitive Bidding 

Program. To assure multiple suppliers, 

storefront locations, beneficiary access, 

and increased participation by small 

suppliers, we have in cooperation with 

the SBA, revised the final rule such that 

the definition of a ‘‘small supplier’’ is a 

small supplier that generates gross 

revenue of $3.5 million or less in annual 

receipts, including Medicare and nonMedicare revenue (§ 414.402). 

c. Comments on the Protections for 

Small Suppliers 

Several commenters noted that 

section 1847(b)(6)(D) of the Act is 

entitled ‘‘protection’’ of small suppliers 

and not the mere identification of small 

suppliers. The commenters proposed 

the following policies: (1) At least 50 

percent of suppliers that receive a 

contract should be small suppliers 

(based on $3 million or less in revenue 

or less than 10 FTE employees); (2) CMS 

should allow suppliers with less than 10 

FTE employees to furnish items to less 

than the entire CBA; (3) CMS should 

award contracts to small suppliers with 

the lowest bids that exceed the pivotal 

bid; (4) CMS should allow truly small 

suppliers to promise to accept the single 

payment amount; and (5) CMS should 

establish a certain volume of items in 

each geographic area that will be ‘‘setaside’’ for small suppliers. 

The statute at section 1847(b)(6)(D) of 

the Act requires that the Secretary shall 

take appropriate steps to ensure that 

small supplies of items and services 

have an opportunity to be considered 

for participation in the program under 

this section. We recognize the concerns 

raised by the commenters and have 

considered the suggested alternatives 

provided during the small supplier 

focus groups and through the public 

comment process. We also recognize the 

importance of maintaining storefront 

capabilities to meet the needs of 

beneficiaries. To help small suppliers 

have an opportunity to participate in the 

Medicare DMEPOS Competitive Bidding 

Program and to support our 

Departmental goals for contracting with 

small suppliers, we have established a 

target for small suppliers’ participation 

in the final rule. Our target for small 

supplier’s participation in each product 

category will be determined by 

multiplying 30 percent times the 

number of suppliers that meet our 

bidding requirements and whose 

composite bids are at or lower than the 

pivotal bid. The number resulting from 

this multiplication represents our goal 

for small supplier participation for the 

product category (§ 414.414(g)(1)(i)). If 

this 30-percent target is not achieved as 

a result of this process, we will offer 

contracts to small suppliers with 

submitted bids that are above, but 

closest to, the pivotal bid until we reach 

the target number or there are no 

additional small supplier bidders 

(§ 414.414(g)(1)(iii)). In addition, we are 

requiring that all contract suppliers 

must service the entire CBA, and we 

have clarified that this can be done 

where appropriate either through home 

delivery, mail order, or storefront. 

However, small suppliers that cannot 

service the entire area independently 

can join together and bid as a network 

(§ 414.418). The network, rather than 

each individual supplier, would be 

required to service the entire CBA. 

d. Comments on Bidding Requirements 

for Physicians and Other Providers 

Several commenters suggested that 

CMS not require physicians, including 

podiatric physicians, to participate in 

the competitive acquisition program for 

certain DMEPOS. The commenters 

noted that under the physician selfreferral (‘‘Stark’’) provisions under 

section 1877 of the Act, a physician in 

a group practice may not refer Medicare 

beneficiaries to the group practice, and 

the group practice may not bill for any 

DME except crutches, canes, walkers, 

folding manual wheelchairs, and blood 

glucose monitors. The commenters also 

requested that CMS not require 

physician assistants, physical therapists, 

and occupational therapists to 

participate in the Medicare DMEPOS 

Competitive Bidding Program because 

those health care professionals are 


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licensed by State boards. According to 

the commenters, if a physician or nonphysician practitioner does not 

participate in the competitive bidding 

program, he or she should be 

reimbursed at the competitive bid rate 

for any DME items that are furnished to 

his or her own patients. In addition, the 

commenters requested that CMS clarify 

how the requirement for physicians to 

submit bids and provide all items 

within a product category does not 

violate the physician self-referral law. 

Other commenters stated that there is no 

reason to treat occupational therapists 

and physical therapists differently from 

physicians. 

Based on these comments, we 

modified the proposed rule by 

expanding the definition of the term 

‘‘physicians’’ and by exempting 

physicians and other treating 

practitioners from bidding requirements 

to provide limited DMEPOS to their 

own patients (§ 414.402 and 

§ 414.404(b)(1)). We are also modifying 

the regulation to give physical therapists 

in private practice and occupational 

therapists in private practice the option 

to furnish certain types of competitively 

bid items without participating in the 

competitive bidding program 

(§ 414.404(b)(2)). 

e. Comments on Bidding by Product 

Category 

We received numerous comments 

concerning the definition and use of 

product categories. We believe that 

conducting separate bidding processes 

for individual product categories will 

encourage the participation of small 

suppliers that specialize in one or a few 

product categories. It is our goal to 

allow Medicare beneficiaries the 

opportunity to receive all related 

equipment from the same supplier, 

thereby minimizing disruption to the 

beneficiary. Suppliers currently 

specialize in particular products, and 

we do not see this process being 

interrupted by competitive bidding. The 

use of product categories is intended as 

a compromise that will maximize 

beneficiary convenience while still 

permitting suppliers, particularly small 

suppliers, to specialize in a certain 

product category. 

A few commenters indicated that 

conducting separate bidding processes 

for individual product categories is 

administratively burdensome. They 

stated that CMS’ assumption that large 

suppliers could expand their products 

by offering supplies and equipment 

easier or more quickly than small 

suppliers is an erroneous view of a 

company’s ability to expand. They also 

reported that large organizations must 

seek approval from their boards or other 

stakeholders before they can undertake 

certain business expansion activities. 

We received comments arguing that 

product categories should be defined 

narrowly or broadly. Others stated that 

the product categories should not differ 

from the SADMERC policy groups, 

believing that combining medical 

policies may affect beneficiary access or 

quality of services. Suppliers also noted 

that suppliers are already familiar with 

the policy groups as that is how the 

CMS Web site is organized and this is 

accessed by suppliers frequently for 

information. Some commenters 

suggested that product categories should 

be uniform and as stable as possible 

because keeping track of differently 

defined categories would be very 

difficult. Some commenters also called 

for subcategories within product groups. 

Based on public comments, we have 

revised the proposed definition of the 

term ‘‘product category’’ in § 414.402 to 

mean, ‘‘a grouping of related items that 

are used to treat a similar medical 

condition’’. The list of product 

categories and the items included in 

each product category that is included 

in each competitive bidding program 

will be identified in the request for bids 

document for that competitive bidding 

program or by other means. The policy 

groups will serve as the starting point 

for establishing product categories. 

Product categories may generally be 

consistent with the policy groups that 

are established by the SADMERC, 

unless CMS determines that a policy 

group should be redefined for the 

purposes of competitive bidding. The 

SADMERC established policy groups for 

the purposes of developing Medical 

review policies and for data analysis. 

However, the product categories for 

which we would request bids could be 

a subset of items from a SADMERC 

policy group or a combination of items 

from different policy groups. There may 

be items in a policy group that are not 

subject to competitive bidding or that 

we would want to exempt from 

competitive bidding using our authority 

to exempt items. In response to the 

suggestion that we include 

subcategories within a product category, 

we do not believe this approach would 

be consistent with the purpose and 

definition of product categories because 

a product category is a group of related 

items used to treat a medical condition 

and it would be designed to be 

appropriate for Medicare competitive 

bidding purposes. In addition, we do 

not believe that there is a need for 

subcategories because we would create 

a new product category instead of a 

subcategory. 

f. Comments on Financial Standards 

Several comments argued that the 

financial standards were too strict for 

certain suppliers and should be flexible 

enough to regulate mail order 

companies, small local suppliers, SNFs, 

outpatient departments of hospitals, 

retail pharmacies, and publicly-traded 

and privately-held family firms. Other 

commenters argued that the reporting 

requirements of the proposed financial 

standards are too burdensome and 

discourage small suppliers from 

participating. They recommended that 

CMS define different standards for small 

suppliers and pharmacies. The 

commenters stated that if financial 

standards are too restrictive, qualified 

suppliers may be eliminated from the 

Medicare Part B program. They added 

that, conversely, if financial standards 

are too lax, suppliers may be financially 

unable to meet the challenges of a 

competitive market. 

We agree with the commenters that it 

is important to have financial standards 

that ensure suppliers are able to meet 

the challenges of competitive bidding 

and can fulfill their contract obligations. 

After further consideration and in 

response to comments, we believe that 

the financial documentation discussed 

in the proposed rule is too burdensome, 

particularly for small suppliers. We 

have determined that we could obtain 

the necessary information through 

collection of a limited number of 

financial documents and believe that 

the submission of this information will 

be less burdensome for all suppliers, 

including small suppliers. We are 

clarifying in the final rule that the RFB 

will specify what financial documents 

will be required (§ 414.414(d)) so that 

we can obtain a sufficient amount of 

information about each supplier while 

minimizing the burden on both bidding 

suppliers and the bid evaluation 

process. This financial information will 

provide enough information to allow us 

to determine financial ratios, such as a 

supplier’s debt-to-equity ratio, and 

credit worthiness, which will allow us 

to assess a supplier’s financial viability. 

We believe we have balanced the needs 

of small suppliers and the needs of the 

beneficiaries in requesting 

documentation that will provide us with 

sufficient information to determine the 

financial soundness of a supplier. 

g. Comments on Supplier Networks 

The May 1, 2006 proposed rule 

included a proposal to permit small 

suppliers to form a legally binding 

network with other small suppliers for 

the purpose of submitting a bid. Many 

commenters believed that the option to 


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form a network is not a realistic solution 

for ensuring that small suppliers 

participate in the competitive bidding 

program. They expressed concern that 

forming a network could violate the 

Federal antitrust laws because those 

laws do not permit suppliers to reach a 

mutual consensus on pricing. They also 

stated that the proposed rule would 

require suppliers to agree on proposed 

prices for all items within a competitive 

bidding product category. They further 

believed the proposed rule is complex, 

and that suppliers would not have 

sufficient time to form a network and 

comply with all the requirements to 

meet the competitive bidding 

implementation timelines. 

We agree that forming a network may 

pose a challenge for some suppliers. 

However, forming a network is a 

business decision and we continue to 

believe that networks should be an 

option for small suppliers to promote 

competition and efficiencies that could 

improve services to beneficiaries. The 

proposed rule was published May 1, 

2006. We believe sufficient notice has 

been given for suppliers to consider 

network options and plan accordingly. 

We believe that our network policy is 

constructed in a way that maximizes 

participation of suppliers. 

Suppliers that pursue the network 

option must comply with all applicable 

Federal antitrust laws. We have taken 

steps to ensure that each network is not 

in violation of Federal antitrust laws or 

exhibits otherwise anticompetitive 

behavior by including the following 

requirements: 

Network participation will be limited 

to small suppliers that cannot compete 

in competitive bidding because they 

cannot independently service the entire 

CBA. A written certification will be 

required from each network supplier 

that it is unable to compete (that is, 

cannot service the entire CBA on its 

own) without joining a network 

(§ 414.418(b)(6)). We believe this 

provision will help ensure that a small 

supplier has a legitimate need to 

participate in a network. This will 

minimize the potential for 

anticompetitive behavior and will assist 

small suppliers by expanding their 

opportunity to participate. Network 

members’ Medicare market share at the 

time of bidding when added together 

cannot exceed 20 percent of the 

Medicare market (§ 414.418(b)(7)). This 

would guard against excessive network 

market share. Network membership in 

any one network will be limited to 20 

small suppliers to help promote 

competition among suppliers. Our 

rationale for limiting the number of 

small suppliers to no more than 20 is 

the following: 

• This would help avoid collusion 

which could lead to less competition 

and higher bids. 

• It would ease administrative burden 

and reduce the overall cost of evaluating 

each network. 

• A 20-supplier network would be 

able to serve an entire CBA even if each 

of its members is small. Networks are 

required to form a legal entity that 

functions as the bidder. We do not 

believe that a network should include 

more members than is necessary to 

service an entire CBA because other 

suppliers who are not in networks have 

to service an entire CBA. 

The network provisions do not 

establish a safe harbor or a safety-zone 

or in any way protect anticompetitive 

behavior. All of the Federal laws and 

regulations that govern anticompetitive 

behavior, including the Federal antitrust 

laws, will fully apply. 

A few commenters agreed with our 

proposal to require that suppliers 

participating in a network form a 

discrete legal entity and stated that this 

would prevent the commingling of 

Medicare funds, as well as violations of 

the Federal anti-kickback statute, selfreferral rules and regulations, and 

allegations of unfair business practices 

among the participating network 

suppliers. Other commenters believed 

that requiring each network to 

independently bid defeats the entire 

purpose of networking. They disagreed 

with the primary legal entity being 

responsible for billing Medicare and 

receiving the payments. They believed 

that each supplier should be responsible 

for its own finances. 

We appreciate the support for our 

proposal that each network must form a 

legal entity. We agree that the primary 

legal entity should not be responsible 

for billing Medicare and receiving the 

payments and have revised 

§ 414.418(b)(4) to reflect this rule. We 

are requiring each member of the 

network to submit its own Medicare 

claims and are specifying that each 

member will be paid directly for 

Medicare products and services 

furnished as part of its individual 

business. This is consistent with our 

current Medicare policies for each 

supplier to submit claims to receive 

Medicare payments. 

A few commenters believed that 

networks that provide multiple product 

categories pose a risk because not all the 

network members will furnish all the 

product categories; therefore, 

beneficiaries may not have access to 

services. They recommended that CMS 

add requirements to ensure that 

networks bids are scrutinized to ensure 

that each network has appropriate 

mechanisms to service the entire CBA. 

The commenters recommended that 

each beneficiary have a single point of 

contact for the network to ensure 

satisfactory resolution of performance 

problems or other issues across the 

CBA. They also asked if subcontractors 

needed to meet the same requirements 

as a contract supplier. Based on these 

concerns we are requiring that networks 

form a legal entity, such as a joint 

venture or limited partnership. Each 

network member will also be required to 

satisfy all applicable bidding 

requirements. Each network member is 

equally responsible for the quality of 

care, service, and items that it delivers 

to Medicare beneficiaries. If any 

member of the network falls out of 

compliance with this requirement, we 

have the option of terminating the 

network contract. 

A few commenters questioned why a 

limit of 20 percent of the market share 

was assigned to the network, leaving 80 

percent of the Medicare market for a 

large company. They suggested allowing 

network members to obtain market 

share not to exceed 35 percent, as 

specified in the Department of Justice 

monopoly guidelines. A few 

commenters requested that CMS 

disclose the methodology that will be 

used to calculate the market share and 

monitor changes over the course of the 

contract. 

In this final rule, we have decided to 

finalize the proposed 20-percent market 

share limitation on the capacity of 

networks. However, once a network 

receives a contract, there is no limit on 

what percentage of the demand in the 

CBA that the network can furnish. We 

believe that this will ensure a sufficient 

number of contract suppliers and 

provide beneficiaries with more variety 

and choice. 

Some commenters suggested that 

CMS allow suppliers to join up to two 

networks, recognizing that many 

suppliers currently participate in 

several networks. They believed that 

this would ensure that the participating 

supplier is not disadvantaged by a 

requirement to commit to a single 

network bid. We agree with the 

commenters. We will allow suppliers to 

join more than one network, but a 

supplier cannot join more than one 

network for purposes of furnishing 

items in the same product category in 

the same CBA. We believe that this 

policy is necessary because, without it, 

the competitive bidding process would 

be undermined by allowing suppliers to 

bid against themselves for the same 

product category. In other words, if a 


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supplier wants to independently furnish 

items for a product category, it would 

not be able to join another network that 

furnishes the same product category in 

the same CBA. However, a supplier that 

wishes to furnish products that are in 

two different product categories would 

be able to join a different network for 

each product category or submit a bid as 

an individual supplier for one product 

category while joining a network for the 

other product category. 

A few commenters asked how 

networks would obtain a supplier 

billing number. The Medicare 

competitive bidding implementation 

contractor will assign each network a 

bidder number that will be used to 

monitor the network. As stated earlier, 

each member of the network will be 

allowed to submit its own claims and 

receive Medicare payments directly. 

A few commenters requested that 

CMS clarify whether each supplier that 

is a member of a network would be 

required to provide all of the items for 

the product category for which the 

network submits a bid. The member of 

the networks would be required to 

provide all the items within the product 

category for which the network submits 

a bid. This is consistent with our 

requirement that all winning suppliers 

must furnish all items in a product 

category. Therefore, each member of the 

network must be able to provide all 

items within the product categories for 

which the network has submitted bids. 

Although the network must provide 

items to any beneficiary throughout a 

CBA, each member of the network is not 

responsible for providing an item 

throughout the entire CBA. 

4. Description and Estimate of the 

Number of Small Entities 

As of January 2006, the SBA defines 

a small business as generating less than 

$6.5 million in annual receipts. We 

worked with the SBA to define small 

supplier for the Medicare DMEPOS 

Competitive Bidding Program. In this 

final rule, we are defining a small 

supplier as a supplier that generates 

gross revenue of $3.5 million or less in 

annual receipts. Before we receive 

supplier bids, we do not have 

information on each supplier’s total 

revenue. We only have information on 

suppliers’ Medicare revenues. As a 

result, we had to make an assumption 

about what percent of a supplier’s 

revenues come from Medicare. We 

looked at filings by public DMEPOS 

companies and, based on that 

information, we assume one-half of the 

average supplier’s revenues come from 

Medicare DMEPOS. 

Suppliers that furnish products in a 

CBA in at least one product category 

selected for competitive bidding will be 

affected by this program. A supplier that 

does not furnish competitively bid items 

and services to beneficiaries in a CBA 

will not be affected. Based on analysis 

of CY 2005 Medicare DMEPOS claims, 

we estimate the number of suppliers 

affected in the Regulatory Impact 

Analysis as described below. This 

analysis preceded finalization of the 

product categories and selection of 

bidding areas and is thus based on a 

number of assumptions, as detailed in 

the Regulatory Impact Analysis. Based 

on CY 2005 claims data, the average 

MSA in the top 25 MSAs, excluding 

New York, Los Angeles, and Chicago, 

has 2,896 DMEPOS suppliers that 

furnish any DMEPOS product and 1,972 

suppliers that furnish products subject 

to competitive bidding and could 

potentially be affected by competitive 

bidding. We estimate that 28,960 

suppliers will provide competitive bid 

items in the CBAs that we initially 

designate. If suppliers furnish products 

in more than one MSA, we counted 

them more than once because they are 

affected in more than one MSA. Not all 

products are subject to competitive 

bidding; therefore, we estimate that 68 

percent of suppliers will furnish 

products subject to competitive bidding 

and will be affected by competitive 

bidding during the initial round of 

competitive bidding. This means in CY 

2007, the remaining 32 percent of 

suppliers in the 10 selected CBAs will 

not be affected by competitive bidding 

because they do not furnish products 

subject to competitive bidding. 

However, the actual percentage of 

affected suppliers may be smaller if we 

do not select all eligible product 

categories for competitive bidding. 

NUMBER OF SMALL SUPPLIERS 1

[$3.5 million or less in Medicare allowed charges] 

Bidding year 

Number of 

affected small 

suppliers 

Total number 

of affected 

suppliers 

Percent 

2007 ..................................................................................................................................... 16,762 19,720 85 

2008 ..................................................................................................................................... 90,500 106,470 85 

2009 ..................................................................................................................................... 97,031 114,154 85 

2010 ..................................................................................................................................... 103,562 121,838 85 

2011 ..................................................................................................................................... 103,562 121,838 85 

2012 ..................................................................................................................................... 103,562 121,838 85 

1Some suppliers furnish products in more than one selected MSA. Consequently, some suppliers may be counted more than once. 

5. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

The primary compliance cost of the 

proposed rule will be the cost of bid 

submission. As part of a separate rule, 

all DMEPOS suppliers will be required 

to gain and maintain accreditation 

which may lead to significant 

compliance costs. However these costs 

are not considered under the 

competitive acquisition program, and 

thus we concentrate on the costs of 

bidding which includes time devoted to 

supplier education efforts, completing 

forms, and providing documentation. 

Bidders must decide whether to bid, 

request or download an RFB, attend a 

bidders conference (optional) and read 

outreach materials, decide how much to 

bid for each item, and prepare and 

submit a bid. In the demonstration, 

bidders in Polk County, Florida reported 

spending a total of 40 to 100 hours 

submitting bids. In the proposed rule we 

assumed that suppliers would use the 

midpoint number of hours, 70 hours. 

We have reduced our estimate of the 

required hours to 68, due to changes we 

made to condense the bidding forms 

requirements, based on comments we 

received on the proposed rule. 

According to 2005 Bureau of Labor 

Statistics (BLS) data, the average hourly 

wage for an accountant and auditor was 

$25.54 (National Compensation Survey: 

Occupational Wages in the United 

States, June 2005, U.S. Department of 

Labor, Bureau of Labor Statistics, 

Bulletin 2568, August 2006. http:// 

www.bls.gov/ncs/ocs/sp/ncbl0832.pdf). 


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Accounting for inflation and overhead, 

we assume suppliers will incur $33.87 

per hour in wage and overhead costs. 

Based on this information, we assume 

that a supplier that bids will spend 

$2,303.16 ($33.87 * 68) to prepare its 

bid, taking into consideration that the 

number of product categories included 

in a bid, on average, will vary by 

supplier. We calculate the total cost for 

all supplier bids, including those of 

both future winning and future losing 

suppliers. Therefore, we expect that CY 

2007 total supplier bidding costs for 

15,973 bids will be $36,788,375 

($2,303.16 * 15,973). This estimate is 

clearly dependent on our assumption 

that 81 percent of eligible suppliers will 

bid. Our estimates incorporate the fact 

that a single organization may submit 

bids in more than one CBA in each 

round. For example, a supplier that has 

15 offices in the country and currently 

serves all 10 of the CBAs to be included 

in the initial round of bidding is 

counted 10 times in our estimates. Our 

estimate of the time required for bidding 

assumes that suppliers in the 

competitive bidding program will bid 

on about the same number of individual 

product categories as suppliers bid on 

during the demonstration project. We 

expect that supplier bidding costs will 

rise with the number of product 

categories bid upon; however, because 

there are fixed costs associated with 

deciding whether to participate in the 

competitive bidding program and some 

of the bidding forms are only filled out 

once, the increase in costs associated 

with each additional product category 

may be relatively small. Therefore, our 

estimate of the time required per bid 

should be reasonably accurate unless 

suppliers bid on significantly more or 

fewer product categories than they bid 

on during the demonstration. 

6. Agency Efforts to Minimize the 

Significant Economic Impact on Small 

Entities 

Small suppliers constitute the large 

majority of DMEPOS firms, and we 

anticipate they will form the majority of 

contract suppliers. Therefore, 

consideration of small suppliers 

influenced virtually all aspects of the 

final rule. We detailed the aspects of the 

final rule that, in particular, are 

intended to minimize the impact on 

small entities. These aspects and the 

respective section of the preamble of 

this final rule are as follows: 

• Grandfathering of suppliers (see 

section VI.D.3.a of this final rule). 

• Requirement for physicians and 

certain nonphysician practitioners to 

submit bids (see section VI.G.3 of this 

final rule). 

• Product categories for bidding 

purposes (see section VI.G.4 of this final 

rule). 

• Financial standards (see section 

VII.C, of this final rule) 

• Selection of small suppliers (see 

section XI. of this final rule). 

• Opportunity for networks (see 

section XII. of this final rule) 

C. Anticipated Effects 

We can anticipate the probable effects 

of this final rule, but the actual effects 

will vary depending on which CBAs 

and product categories are ultimately 

selected for competitive bidding under 

the Medicare DMEPOS Competitive 

Bidding Program. The analysis that 

follows, taken together with the rest of 

this preamble, constitutes the final 

regulatory impact analysis. 

As a result, for the purpose of this 

impact analysis, it is necessary to make 

several assumptions. These assumptions 

are due to the uncertainty concerning 

the actual number of suppliers that will 

participate, the associated bid amounts, 

and the specific items and areas for 

which competitive bidding will be 

conducted. 

First, we assume that the first round 

of bidding will occur in CY 2007, with 

prices taking effect in April 2008, and 

the second round of bidding will occur 

in CY 2008, with prices taking effect in 

April 2009. We also assume rebidding 

will only occur every 3 years. 

Second, we assume that competitive 

bidding will occur in 10 of the largest 

MSAs in CY 2007, excluding New York, 

Chicago, and Los Angeles. We exclude 

the three largest MSAs in CY 2007 

because we are not including them in 

the initial phase of implementation. We 

are excluding the three largest MSAs 

because we would like to gain more 

experience in smaller markets before we 

enter into the largest markets. For the 

initial competition, we assume that 

bidding will take place in CY 2007, bids 

will be evaluated in CY 2007, and prices 

will go into effect on April 1, 2008. The 

second round of bidding will take place 

in 70 of the largest MSAs in CY 2008, 

and the prices will go into effect on 

April 1, 2009. The next round of 

bidding will take place in 10 additional 

MSAs and will occur in CY 2009, with 

bid prices going into effect on January 

1, 2010. An additional round of bidding 

will include 10 MSAs and will occur in 

CY 2010, with bid prices going into 

effect on January 1, 2011. 

Third, we made some assumptions 

about which product categories would 

be selected for competitive bidding. We 

recognize that potential savings, 

implementation costs, the number of 

affected suppliers, and supplier bid 

costs all depend on which product 

groups are ultimately selected. The 

product categories have yet to be 

decided. We expect that approximately 

10 product categories will be selected 

for competitive bidding for CY 2007 and 

as many as 7 or 8 of the selected product 

categories will be among the 10 largest 

in terms of allowed charges. The 

remaining 2 or 3 product categories will 

come from the top 20 policy groups 

ranked by allowed charges. Table 11 

shows the top 20 eligible DMEPOS 

policy groups and their CY 2005 

allowed charges. 

TABLE 11.—CY 2005 ALLOWED CHARGES: TOP 20 ELIGIBLE DME POLICY GROUPS

Rank Policy group Allowed charges 

2005* 

Percent of 

eligible 

DMEPOS 

charges 

1 .............................. Oxygen Supplies/Equipment ...................................................................................... $2,669,015,203 34 

2 .............................. Wheelchairs/POVs ..................................................................................................... 1,512,581,843 19 

3 .............................. Diabetic Supplies & Equipment .................................................................................. 1,176,121,037 15 

4 .............................. Enteral Nutrition .......................................................................................................... 582,085,753 7.5 

5 .............................. CPAP .......................................................................................................................... 378,084,371 4.9 

6 .............................. Hospital Beds/Accessories ......................................................................................... 320,372,566 4.1 

7 .............................. Support Surfaces ........................................................................................................ 184,266,860 2.4 

8 .............................. Negative Pressure Wound Therapy ........................................................................... 169,012,105 2.2 

9 .............................. Infusion Pumps & Related Drugs** ............................................................................ 157,396,292 2.0 

10 ............................ Respiratory Assist Device .......................................................................................... 135,023,095 1.7 


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TABLE 11.—CY 2005 ALLOWED CHARGES: TOP 20 ELIGIBLE DME POLICY GROUPS—Continued 

Rank Policy group Allowed charges 

2005* 

Percent of 

eligible 

DMEPOS 

charges 

11 ................................................ Walkers ................................................................................................... 106,661,034 1.4 

12 ................................................ Nebulizers ............................................................................................... 97,574,696 1.3 

13 ................................................ Ventilators ............................................................................................... 70,625,578 0.9 

14 ................................................ Commodes/Bed Pans/Urinals ................................................................ 47,861,299 0.6 

15 ................................................ Patient Lift .............................................................................................. 27,768,236 0.4 

16 ................................................ TENS ...................................................................................................... 23,536,834 0.3 

17 ................................................ Seat Lift Mechanism ............................................................................... 17,159,455 0.2 

18 ................................................ CPM Device ........................................................................................... 17,023,378 0.2 

19 ................................................ Suction Pump ......................................................................................... 14,096,633 0.2 

20 ................................................ Off-the-shelf Orthotics ............................................................................ 13,807,205 0.2 

Total for 20 Groups ............. ................................................................................................................. 7,719,487,197 99 

* 2005 allowed charges projected based on 98 percent claims processed through March 2006. 

** Includes $50 million in allowed charges for drugs. 

However, we reiterate that the 

discussion in this impact analysis 

should in no way be interpreted as 

signifying which product categories will 

be selected for the actual competitive 

bidding program. Our product category 

selection for this impact analysis is only 

to assist us in estimating the potential 

savings, costs of implementation, and 

supplier and beneficiary impacts. 

Fourth, we assume that the Medicare 

DMEPOS fee schedule will increase at 

the rate of inflation for those years in 

which a statutory freeze has not been 

put in place by the Act. We base our 

estimates on the expected growth in 

Medicare Part B expenditures from the 

Trustees Reports. (Tables IV.F.2 and 

IV.F.3 of the 2004 Medicare Trustees 

Report.). 

This final rule is expected to affect the 

Medicare program and its beneficiaries, 

certain CMS contractors, and DMEPOS 

suppliers. Although the workload of 

referral agents, including hospital 

discharge planners and some health care 

practitioners, appeared to increase 

during implementation of the 

demonstration, we do not anticipate that 

competitive bidding will result in a 

large, ongoing burden on referral agents. 

For many DMEPOS product categories, 

referral agents play an important role in 

helping beneficiaries select DMEPOS 

suppliers that can meet the 

beneficiaries’ needs. During the 

demonstration, those referral agents 

who previously referred beneficiaries to 

non-demonstration suppliers had to 

change their referral patterns. It is 

difficult to quantify this burden because 

we have no data on the number of 

referral agents who will be affected, nor 

do we have information on the effort 

associated with identifying a new 

supplier. We note that we plan to take 

steps to mitigate any burden that might 

arise for referral agents. For example, we 

are planning an extensive educational 

campaign for suppliers, referral agents, 

and beneficiaries. Educational materials, 

including an on-line supplier directory, 

will expedite the process for identifying 

and locating contract suppliers and 

therefore minimizing any burden. In 

addition, we will post on the internet 

the list of brands that each contract 

supplier furnishes. This brand 

information should be extremely useful 

for referral agents and may even reduce 

burden under the program. 

The DMEPOS supplier industry is 

expected to be significantly impacted by 

this final rule. However, not all 

suppliers will be affected directly by the 

competitive bidding program. Suppliers 

that furnish products in a CBA in at 

least one product category selected for 

competitive bidding will be affected. A 

supplier that does not furnish 

competitively bid items and services to 

beneficiaries in a CBA will not be 

affected. Based on analysis of CY 2005 

Medicare DMEPOS claims, we estimate 

that approximately 30,000 suppliers 

offer at least one product eligible for 

competitive bidding and are located in 

one of the largest 100 MSAs and, 

therefore, could be impacted by the 

program. Some of these suppliers will 

be affected in multiple CBAs if they 

offer products in more than one CBA. 

Based on our analysis of CY 2005 

claims data, we also estimate that 

approximately 85 percent of registered 

DMEPOS suppliers are considered small 

according to the SBA definition. 

According to the SBA, ‘‘A small 

business is a concern that is organized 

for profit, with a place of business in the 

United States, and which operates 

primarily within the United States or 

makes a significant contribution to the 

U.S. economy through payment of taxes 

or use of American products, materials 

or labor. Further, the concern cannot be 

dominant in its field, on a national 

basis. Finally, the concern must meet 

the numerical small business size 

standard for its industry. SBA has 

established a size standard for most 

industries in the U.S. economy.’’ The 

size standard for NAICS code 532291, 

Home Health Equipment Rental, is $6.5 

million. (See the Web site: http:// 

www.sba.gov/size/sizetable2002.html, 

read November 30, 2006.) 

Many of these suppliers provide 

minimal amounts of DMEPOS, and thus 

the remaining larger suppliers control 

significant market share. We anticipate 

that the fixed costs required to undergo 

the bidding process may be a larger 

deterrent to small businesses than larger 

firms. Because suppliers can choose 

whether to submit a bid for the 

Medicare DMEPOS Competitive Bidding 

Program, this final rule imposes no 

direct costs and, therefore, does not 

reach the $120 million direct cost 

threshold under the UMRA. While not 

included in this final rule, we expect 

that the separate MMA requirement for 

accreditation of suppliers will result in 

added supplier costs beyond those 

included in this final rule. 

Comment: One commenter stated that 

the RFA analysis of the impact of the 

proposed regulation was incomplete 

and inadequate because it did not 

consider the impact of the proposed 

regulation on long-term care hospitals 

and Medicare beneficiaries who reside 

in these facilities. Other commenters 

suggested that long-term care facilities 

would incur increased costs and the 

quality of treatment received by their 

patients would be diminished if they are 

included in the Medicare DMEPOS 

Competitive Bidding Program and 

offered alternatives to competitive 


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bidding that they believed would 

achieve cost savings. 

Response: We considered the impact 

of the Medicare DMEPOS Competitive 

Bidding Program on all suppliers. We 

believe our estimates reflect the costs on 

average that will be incurred by the 

suppliers that participate in the 

program. If a long-term care hospital 

decides to submit a bid to furnish items 

and services under the program, its bid 

should reflect its costs to furnish those 

items and services. In addition, the 

quality standards for DMEPOS suppliers 

require that suppliers furnish quality 

items and services. 

Comment: One commenter disagreed 

with CMS’ assumption that the 

DMEPOS fee schedule will increase at 

the rate of inflation for those years in 

which a statutory freeze is not in effect 

and that total charges will increase at 

the same rate as Medicare Part A and 

Medicare Part B expenditures (71 FR 

25691). The commenter suggested that 

non-DME, non-home health care costs 

are the driving forces causing increases 

in these programs. Other commenters 

suggested that home care expenditures 

are not increasing and that rising 

hospital, nursing home, physician, and 

medication costs were the causes of 

rising overall Medicare expenditures. 

Response: Based on the public 

comments we received, we have 

clarified in this final revised impact 

analysis that our estimates on expected 

growth will be based on Medicare Part 

B expenditures. DMEPOS expenditures 

have been growing at varying rates in 

recent years (expenditures for 26 

product categories rose 5 percent 

between 2004 and 2005 and 21 percent 

between 2002 and 2005), and the rate of 

growth has varied widely between 

product categories, making precise 

estimates of growth for DMEPOS 

difficult. We believe that the overall 

growth rate for Medicare Part Be 

expenditures provides a reasonable 

estimate of the growth rate for DMEPOS 

because both growth rates are driven by 

changes in Part B enrollment and 

overall growth in medical care use. To 

address inflation, we will be asking the 

suppliers to submit bids that include all 

costs associated with furnishing each 

item for all 3 years of the contract. 

Comment: A number of commenters 

objected to the data in Table 11 of the 

proposed rule (71 FR 25691) indicating 

that 2003 allowed charges for infusion 

pumps and related devices were 

approximately $149 million. These 

commenters believed that the correct 

amount was approximately $87 million. 

The commenters believed that the $149 

million amount inappropriately 

includes charges for insulin and insulin 

pumps which are not provided by 

infusion pharmacies. 

Response: The data in the proposed 

analysis include allowed charges for 

insulin and infusion pumps. Although 

these items may not be furnished by 

infusion pharmacies, they are included 

because they are subject to competitive 

bidding under the Act. 

Comment: Several commenters 

disagreed with the statement in the 

preamble of the proposed rule (71 FR 

25692) that the UMRA does not apply 

to this rule. One commenter suggested 

that virtually all affected suppliers 

would submit bids (and thus would 

incur costs) and even using CMS 

estimates (that the commenter believed 

to be too low), the costs for the CY 2008 

round of bidding would be $178 

million, an amount that the commenter 

believed exceeded the UMRA’s 

threshold of $120 million. 

Response: We have updated our 

estimates in this final rule using CY 

2005 data. Based upon the estimated 

number of suppliers that will submit 

bids, the costs of submitting bids, and 

the fact that the average number of 

suppliers per CBA will decrease in 

future rounds of competitive bidding, 

we do not expect that costs will exceed 

the UMRA’s $120 million threshold. 

D. Implementation Costs 

CMS will incur administrative costs 

in connection with the implementation 

and operation of the Medicare DMEPOS 

Competitive Bidding Program, which 

can affect the net savings that can be 

expected under this final rule. However, 

many of the variable costs associated 

with bid solicitation and evaluation will 

ultimately depend on how many 

suppliers choose to participate in 

competitive bidding. Because of this 

uncertainty, we are not able to estimate 

bid solicitation and evaluation costs at 

this time. 

We will incur initial startup costs. 

CMS estimates internal costs and costs 

to its contractors to be approximately $1 

million in immediate fixed calendar 

year costs for contractor startup and 

system changes for the initial 

competitive bidding phase in CY 2007. 

In addition to the initial startup costs, 

we will also incur maintenance costs 

and bid solicitation and evaluation 

costs. We will need to pay maintenance 

costs every year for the running of the 

program. However, we will only need to 

pay bid costs in the years in which 

competitive bidding is conducted. 

Yearly maintenance costs will depend 

on the number of CBAs in which the 

program has been implemented, while 

bid solicitation and evaluation costs 

will depend on the number of sites that 

have bidding that year. 

Our maintenance costs will include a 

small staff to oversee the program, office 

costs for the staff, as well as staff travel 

costs, and overhead. In addition, the 

CBIC(s) will be responsible for most of 

the program maintenance. The 

maintenance costs could also include 

the costs for an ombudsman(s) to assist 

suppliers, beneficiaries, and referral 

agents with the competitive bidding 

process and questions. We also expect 

to incur costs for education and 

outreach expenses such as staff 

resources and material costs for 

producing education materials and 

supplier directories. 

We will incur bid costs in the years 

in which we conduct competitive 

bidding and when we evaluate bids. 

These costs will be a direct result of the 

bid solicitation and evaluation process. 

Bid solicitation costs include costs 

associated with mailing necessary 

information to suppliers, printing, 

duplicating, and the cost of 

administering an electronic bidding 

program. The actual costs will vary by 

CBA and will depend on the number of 

potential suppliers. We will incur bid 

evaluation costs whenever bidding 

occurs in a CBA. According to the 

DMEPOS evaluation report, it took 

about 9.4 hours during the 

demonstration to evaluate each bid and 

the supplier to ensure that only quality 

suppliers were selected. However, 

because the Medicare DMEPOS 

Competitive Bidding Program uses 

quality standards and accreditation as a 

separate process, we expect that the 

time required to evaluate bids will be 

less than in the demonstration. The total 

bid evaluation costs will ultimately 

depend on the number of suppliers that 

choose to submit bids. 

Comment: Several commenters 

believed that the regulatory analysis in 

the proposed rule significantly 

underestimated the administrative costs 

associated with implementing the 

competitive bidding program, further 

reducing any net savings. One 

commenter referred to a study that 

estimated that CMS would need 1,600 

new staff to implement the proposed 

regulation. 

Response: As explained in the 

proposed rule, we are making the best 

estimates based on the experience in the 

demonstrations. Even though these 

estimates will be affected by the number 

of suppliers and items for which we do 

competitive bidding, nevertheless they 

represent our best estimates. After 

careful review of the study referenced 

by the commenter, we disagree with the 

estimate of the number of extra staff 


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1Fiscal year 2008 will begin October 1, 2007, and 

the Medicare DMEPOS Competitive Bidding 

Program payments become effective on April 1, 

2008. 

2 In addition, most managed care plan rates are 

linked to FFS expenditures. Therefore, a decrease 

in FFS expenditures should translate into a 

needed to implement the proposed 

regulation. We believe our original 

estimates better reflect the resource 

needs for the competitive bidding 

program. 

E. Program Savings 

We estimate significant savings from 

the Medicare DMEPOS Competitive 

Bidding Program. Our estimates of gross 

savings utilize as a starting point the 

results in the demonstration. Excluding 

surgical dressings, which are not 

eligible for competitive bidding, the 

average product group savings rate in 

the demonstration ranged from 9 to 30 

percent per round, with most product 

groups having about a 20-percent 

savings. Table 12 shows the savings rate 

for selected product groups and CBAs 

by round during the DMEPOS 

demonstration. 

TABLE 12.—DMEPOS COMPETITIVE BIDDING DEMONSTRATION SAVINGS RATES

Product group Polk County Round 1 Polk County Round 2 San Antonio 

Oxygen Equipment and Supplies .. $2,364,811 (17%) ......................... $1,525,490 (20%) ......................... $2,096,707 (19%) 

Hospital Beds and Accessories ..... $290,715 (23%) ............................ $195,140 (31%) ............................ $644,514 (19%) 

Urological Supplies ........................ $36,169 (18%) .............................. $12,585 (9%) ................................ Not included 

Surgical Dressings ......................... ¥$30,321 (¥12%) ....................... ¥$637 (¥1%) .............................. Not included 

Enteral Nutrition ............................. $342,251 (17%) ............................ Not Included ................................. Not included 

Wheelchairs and Accessories ........ Not included .................................. Not included .................................. $796,617 (19%) 

General Orthotics ........................... Not included .................................. Not included .................................. $89,462 (23%) 

Nebulizer Drugs ............................. Not included .................................. Not included .................................. $1,020,072 (26%) 

Source: Evaluation of Medicare’s Competitive Bidding Demonstration for DMEPOS, Final Evaluation Report (November 2003), pages 90 and 

92. 

Under this final rule, we will set 

prices for individual items equal to the 

median winning bid for that item. In 

contrast, the demonstration used a more 

complicated pricing rule that adjusted 

fees for each item to ensure that each 

suppliers overall payment was equal to 

the pivotal bid. In our estimates, we 

have taken into account that some 

DMEPOS prices have been adjusted 

downward since CY 2000. We assume 

that if prices for an individual item have 

already been reduced by 10 percent after 

the demonstrations were completed, 

prices would most likely fall 10 percent 

rather than 20 percent. Therefore, we 

found that the median pricing rule 

would have produced fees that were 

approximately 5 percentage points 

lower than those produced by the 

demonstration method, assuming that 

the median pricing rule would not have 

affected the number of winning bidders 

who signed contracts or the suppliers’

bidding strategies. We have 

incorporated the effects of the median 

pricing rule into our estimates of 

savings from the program. We assumed 

a 25 percent savings in the estimate 

because of the median pricing 

methodology. We netted out any 

statutory reductions in prices that have 

already occurred, such as the CY 2005 

reductions in oxygen supplies and 

equipment. These numbers also reflect 

the reductions in Medicare payments 

that resulted from the DRA provisions 

on capped rental DME and oxygen 

payment, as well as the wheelchair 

recoding initiative recently undertaken 

by CMS. 

Table 13 shows the impact on the FFS 

program for the 10 policy groups. In the 

table, savings are reported as negative 

values. The savings are attributable to 

the lower payment amounts anticipated 

from competitive bidding. The table 

shows the reduction in Medicare 

allowed charges, without any impact on 

the Medicare Advantage program, 

associated with the program for the 

calendar year. The impact includes 

reductions in Medicare payments (80 

percent) and reductions in beneficiary 

coinsurance (20 percent). 

TABLE 13.—PROGRAM IMPACT FOR 10 POLICY GROUPS

[in millions] * 

Calendar Year 

2007 2008 2009 2010 2011 2012 

Allowed Charges ...................................................................................... $0 ¥$108 ¥$766 ¥$1126 ¥$1224 ¥$1301 

Medicare Share of Allowed Charges (80 percent of allowed charges) .. 0 ¥86 ¥613 ¥901 ¥979 ¥1041 

Beneficiary Costs (20 percent of allowed charges) ................................. 0 ¥22 ¥153 ¥225 ¥245 ¥260 

* Numbers may not add up due to rounding. 

Table 14 presents the impact 

differently than Table 13. In contrast to 

Table 13, which is on a Medicare 

allowed charge-incurred basis and does 

not consider the Medicare Advantage 

program impact, Table 14 considers 

fiscal year cash impact on the entire 

Medicare program, including Medicare 

Advantage for the fiscal year rather than 

calendar year. The fiscal year–calendar 

year distinction is an important one 

when comparing savings. For example, 

the prices for the Medicare DMEPOS 

Competitive Bidding Program will be in 

effect for 6 months of fiscal year 2008, 

but for 9 months of calendar year 2008.1

Table 14 considers the impact on 

program expenditures, and does not 

include beneficiary coinsurance. 

Finally, the estimates in Table 14 

incorporate spillover effects from the 

competitive acquisition program onto 

the Medicare Advantage program. The 

expectation is that lower prices for DME 

products in FFS will lead to lower 

prices in the Medicare Advantage 

market.2


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decrease in Medicare Advantage plan payment 

rates. The rate calculations for the Medicare 

Advantage program reflect all the FFS adjustments, 

including the Medicare DMEPOS Competitive 

Bidding Program savings. The Managed Care addon increases the FFS savings by 24.9 percent in CY 

2008. This is a dynamic number that increases over 

time. 

TABLE 14.—FISCAL YEAR COST ON

THE MEDICARE PROGRAM

[in millions] 

Fiscal year Program 

impact 

Beneficiary 

costs 

2007 .......... $0 $0 

2008 .......... ¥70 ¥20 

2009 .......... ¥530 ¥130 

2010 .......... ¥1,000 ¥250 

2011 .......... ¥1,240 ¥310 

2012 .......... ¥1,370 ¥340 

Comment: Several commenters 

believed that the regulatory analysis 

overstated the potential savings of the 

proposed rule because many of the 

savings in the earlier demonstrations 

can no longer be achieved in other areas 

of the country due to changes in 

payment policies for major categories of 

DMEPOS such as oxygen, subsequent 

CPI freezes, and increases in supplier 

costs in areas such as fuel and labor. 

Another commenter suggested that 

potential savings would be reduced if 

suppliers submit higher bids in order to 

account for costs related to quality 

standards and accreditation costs. One 

commenter recommended that CMS 

recalculate these estimates. Another 

commenter stated that some of these 

factors also resulted in understating the 

adverse impact of the proposed 

regulations on suppliers. 

Response: We have updated the tables 

in the impact analysis of this final rule 

to reflect all of the recent changes in 

policy related to items subject to 

competitive bidding, including any 

payment reductions. The impact 

analysis builds in the statutory 

reimbursement cuts into the baseline 

DME spending. For instance, the DRA 

section 5101 is estimated to yield $880 

million savings over 5 years (2008 

through 2012). The FEHBP reductions 

are built into the baseline DME 

spending and yielded a 5 year savings 

(2008 through 2012) of $2,180 million. 

We believe that the demonstrations are 

an appropriate gauge for estimating 

projected savings. We also believe that 

the competitive bidding financial 

standards and the DMEPOS quality 

standards we have issued will result in 

more efficiently operating DMEPOS 

suppliers. 

F. Effect on Beneficiaries 

Possible impacts on beneficiaries are 

a primary concern during the design 

and implementation of the Medicare 

DMEPOS Competitive Bidding Program. 

While there may be some decrease in 

choice of suppliers, there will be a 

sufficient number of suppliers to ensure 

adequate access. We also expect there 

will be an improvement in quality 

because we will more closely scrutinize 

the suppliers before, during, and after 

implementation of the program. The 

evaluation of the impact of the DMEPOS 

competitive bidding demonstration on 

patient access to care and quality 

showed minimal adverse results (Final 

Report to Congress: Evaluation of 

Medicare’s Competitive Bidding 

Demonstration For Durable Medical 

Equipment, Prosthetics, Orthotics, and 

Supplies; http://www.cms.hhs.gov/ 

DemoProjectsEvalRpts/downloads/ 

CMS_rtc.pdf). Moreover, because of the 

quality standards and the provisions in 

this final rule to ensure access to and 

the furnishing of quality products, we 

assume that there will be few negative 

impacts on beneficiary access, as a 

sufficient number of quality suppliers 

will be selected to serve the entire 

market. 

We acknowledge that implementation 

of competitive bidding may result in 

some beneficiaries needing to switch 

from their current supplier if their 

current supplier is not selected for 

competitive bidding. However, we 

anticipate that the necessity of 

switching suppliers will be minimized 

because of the existence of 

grandfathering policies for rental 

products such as capped rentals. For 

purchased items that are not 

grandfathered, some beneficiaries 

currently using DMEPOS will have to 

switch from noncontract to contract 

suppliers. This switch will not be very 

burdensome, because the beneficiaries 

will already be making new purchases. 

We note that, if a beneficiary owns an 

item subject to competitive bidding, the 

beneficiary has the choice of having the 

item serviced by either a noncontract or 

contract supplier. Beneficiaries who 

maintain a permanent residence in a 

CBA who are traveling and need to rent 

or purchase DMEPOS during their 

travels will have to make arrangements 

to receive their equipment either from a 

contract supplier in their CBA, from a 

contract supplier in the visited area if 

that area is in a CBA and the item is 

included in the competitive bidding for 

that CBA, or—if the visited area is not 

in a CBA—from a noncontract supplier 

who must accept the reimbursement 

rate from the beneficiaries home CBAs. 

It is not clear whether this will have a 

large impact on beneficiaries. There is 

little evidence on how frequently 

beneficiaries receiving DMEPOS travel 

outside their CBA. Under current 

policy, a traveling beneficiary must 

already make arrangements for receipt 

of his or her DMEPOS during travel and 

payment is already based on the fee 

schedule for the beneficiary’s residence. 

We do not believe that our policy will 

have a large impact on beneficiaries 

because we will ensure that we have a 

sufficient number of contract suppliers 

to meet beneficiary demand. 

Because beneficiaries face a 20 

percent coinsurance rate for DMEPOS, 

we assume that beneficiary out-ofpocket expenses will decrease by 20 

percent of program gross savings for 

those products for which we do 

competitive bidding (Table 15). 

TABLE 15.—BENEFICIARY COINSURANCE ANNUAL SAVINGS ESTIMATES

FOR 10 PRODUCTS

[in millions] 

Calendar year 10 products 

2007 ...................................... $0 

2008 ...................................... 22 

2009 ...................................... 153 

2010 ...................................... 225 

2011 ...................................... 245 

2012 ...................................... 260 

Comment: One commenter argued 

that since the analysis projects that 37 

percent of suppliers will not become 

contract suppliers, the impact on 

beneficiaries, especially those requiring 

diabetic supplies and equipment, will 

be greater than the analysis indicates. 

Response: Our methodology will 

ensure that beneficiaries requiring 

diabetic supplies and equipment will 

have access to a sufficient number of 

suppliers to meet their needs. As 

explained in various sections of the 

preamble to this final rule, we will be 

taking several steps to ensure that there 

will be a sufficient number of suppliers 

to meet beneficiary demand. These steps 

include the following: 

• Evaluating the bidding suppliers’

capacity to ensure that there is enough 

supplier capacity to meet the Medicare 

demand for each product category in 

each CBA. 

• Implementing a small supplier 

target under which we will attempt to 

offer a sufficient number of small 

suppliers the opportunity to participate 

in the Medicare DMEPOS Competitive 

Bidding Program. 

• Requiring that all commonly owned 

or controlled suppliers must submit a 

single bid on behalf of all locations 


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within the CBA, and additional 

locations that would furnish items in 

the CBA. 

• Establishing a capacity calculation 

methodology that caps the estimated 

capacity of each bidding supplier 

capacity at 20 percent for purposes of 

determining the pivotal bid for the 

product category. 

In addition, our estimates indicate 

that beneficiaries will save money on 

their diabetic supplies and equipment 

under the program. 

G. Effect on Suppliers 

We expect DMEPOS suppliers to be 

significantly impacted by the 

implementation of this final rule. We 

assume that suppliers may be affected in 

one of three ways as follows: 

• Suppliers that wish to participate in 

competitive bidding will have to incur 

the cost of submitting a bid. 

• Noncontract suppliers that 

furnished competitively bid items 

before the Medicare DMEPOS 

Competitive Bidding Program took 

effect (including suppliers that do not 

submit bids) will see a decrease in 

revenues because they will no longer 

receive payment from Medicare for 

competitively bid items. 

• Contract suppliers will see a 

decrease in expected revenue per item 

as a result of lower allowed charges 

from lower bid prices. However, 

because there will be fewer suppliers, a 

contract supplier’s volume could 

increase. As a result, because we do not 

know which effect will dominate, the 

net effect on an individual contract 

supplier’s revenue is uncertain prior to 

bidding. The increase in the supplier’s 

volume could help offset the decrease in 

revenue per item. 

1. Affected Suppliers 

Based on CY 2005 claims data, the 

average MSA in the top 25 MSAs, 

excluding New York, Los Angeles, and 

Chicago, has 2,896 DMEPOS suppliers 

that furnish any DMEPOS product and 

1,972 suppliers that furnish products 

subject to competitive bidding and 

could potentially be affected by 

competitive bidding. 

We estimate that 28,960 suppliers will 

provide DMEPOS items in the CBAs 

that we initially designate. If suppliers 

furnish products in more than one MSA, 

we counted them more than once 

because they are affected in more than 

one MSA. Not all products are subject 

to competitive bidding; we estimate that 

68 percent of suppliers will furnish 

products subject to competitive bidding 

and will be affected by competitive 

bidding during the initial round of 

competitive bidding. This means in CY 

2007, the remaining 32 percent of 

suppliers in the 10 selected CBAs will 

not be affected by competitive bidding 

because they do not furnish products 

subject to competitive bidding. 

However, the actual percentage of 

affected suppliers may be smaller if we 

do not select all eligible product 

categories for competitive bidding. 

Deciding whether or not to submit a 

bid is a business decision that will be 

made by each DMEPOS supplier. We 

expect that most suppliers providing 

competitively bid items will choose to 

participate in order to maintain and 

expand their businesses. For the 

calculations in the proposed rule, we 

assumed that 90 percent of suppliers 

that furnish items that we choose to 

include in the program would submit a 

bid. We assumed the remaining 10 

percent of suppliers would not bid 

based on the low level of the Medicare 

revenue received for the items subject to 

competitive bidding or because they had 

not received the necessary accreditation. 

Based on comments we received on the 

May 1, 2006 proposed rule, we will 

permit physicians and certain 

nonphysician practitioners to furnish 

certain limited items as part of their 

professional practice without submitting 

a bid and being awarded a contract, 

provided certain conditions are met. 

These physicians and non-physician 

practitioners would be required to 

submit bids and be awarded contracts if 

they wish to furnish other types of 

competitively bid items. These 

physicians and non-physician 

practitioners account for about 10 

percent of all DMEPOS suppliers, 

according to the NSC. Therefore, we 

now assume that 81 percent (= 0.9 *0.9) 

of affected suppliers will submit bids. 

Based on this assumption, 15,973 

suppliers will submit a bid because they 

will want the opportunity to continue to 

provide these products to Medicare 

beneficiaries and to expand their 

business base. We also assume, based on 

the results of the demonstration, that at 

least 60 percent of bidding suppliers 

will be selected as winners in at least 

one product category. This assumption 

is slightly different than our assumption 

in the proposed rule, where we stated, 

‘‘We also assume, based on the results 

of the demonstration, that 50 percent of 

bidding suppliers will be selected as 

winners because approximately 50 

percent of those who submitted bids 

during the demonstration were selected 

as contract suppliers.’’ The 50 percent 

in the proposed rule was based on the 

demonstration experience within 

individual product categories; 

approximately 50 percent of the bidders 

who submitted a bid in a product 

category were selected as a winner in 

that product category. Overall during 

the demonstration, about 60 percent of 

suppliers who submitted bids in any 

categories were selected as winners in at 

least one product category. We believe 

the 60 percent figure represents a more 

accurate assessment of the probability 

that a bidding supplier will be selected 

as a winning bidder in at least one 

product category. The bidding DMEPOS 

suppliers that are not awarded a 

contract because they did not submit a 

winning bid would represent about 22 

percent of the total DMEPOS suppliers 

in these CBAs. We expect that losing 

bidders will be distributed roughly 

proportionately across the selected 

CBAs, but the exact distribution will 

depend on the distribution of bids 

received and the number of winners 

selected in each CBA. We also note that 

if a supplier submitted a bid in multiple 

product categories, its probability of 

becoming a contract supplier would 

increase. 

It is difficult to estimate the impact 

the Medicare DMEPOS Competitive 

Bidding Program will have on 

noncontract suppliers. The effect will 

depend on how much revenue the 

supplier previously received from 

Medicare and whether the supplier 

continues to provide services to existing 

beneficiaries under the grandfathering 

policies. Estimates can be made by 

making assumptions about these factors. 

For example, if bidding occurred in 10 

product categories, losing suppliers 

previously provided 50 percent of 

allowed charges in these product 

categories, and losing suppliers did not 

continue to serve any existing 

beneficiaries, the average lost Medicare 

allowed charges per losing supplier per 

CBA would be between $35,000 and 

$40,000. Under these assumptions, the 

total allowed charges lost by losing 

suppliers would be $275 million in CY 

2008, the first full year after the prices 

take effect, and increase to almost $2 

billion in CY 2011. These estimates 

reflect our best assumptions. As noted, 

because of the nature of competitive 

bidding, winning bidders will absorb 

much of the allowed charges lost by 

losing suppliers. 

Suppliers that submit bids will incur 

a cost of bidding. Bidders must decide 

whether to bid, request or download an 

RFB, read the RFB, attend a bidders 

conference (optional) and read outreach 

materials, decide how much to bid for 

each item, and prepare and submit a 

bid. In the demonstration, bidders in 

Polk County, Florida reported spending 

a total of 40 to 100 hours submitting 

bids. In the proposed rule we assumed 


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that suppliers would use the midpoint 

number of hours, 70 hours. We have 

reduced our estimate of the required 

hours to 68, due to changes we made to 

condense the bidding forms 

requirements, based on comments we 

received on the proposed rule. 

According to 2005 Bureau of Labor 

Statistics (BLS) data, the average hourly 

wage for an accountant and auditor was 

$25.54 (National Compensation Survey: 

Occupational Wages in the United 

States, June 2005, U.S. Department of 

Labor, Bureau of Labor Statistics, 

Bulletin 2568, August 2006. http:// 

www.bls.gov/ncs/ocs/sp/ncbl0832.pdf). 

Accounting for inflation and overhead, 

we assume suppliers will incur $33.87 

per hour in wage and overhead costs. 

Based on this information, we assume 

that a supplier that bids will spend 

$2,303.16 ($33.87*68) to prepare its bid, 

taking into consideration that the 

number of product categories included 

in a bid, on average, will vary by 

supplier. We calculate the total cost for 

all supplier bids, including those of 

both future winning and future losing 

suppliers. Therefore, we expect that CY 

2007 total supplier bidding costs for 

15,973 bids will be $36,788,375 

($2,303.16*15,973). This estimate is 

clearly dependent on our assumption 

that 81 percent of eligible suppliers will 

bid. Our estimates incorporate the fact 

that a single organization may submit 

bids in more than one CBA in each 

round. For example, a supplier that has 

15 offices in the country and currently 

serves all 10 of the CBAs to be included 

in the initial round of bidding is 

counted 10 times in our estimates. Our 

estimate of the time required for bidding 

assumes that suppliers in the 

competitive bidding program will bid 

on about the same number of individual 

product categories as suppliers bid on 

during the demonstration project. We 

expect that supplier bidding costs will 

rise with the number of product 

categories bid upon; however, because 

there are fixed costs associated with 

deciding whether to participate in the 

competitive bidding program and some 

of the bidding forms are only filled out 

once, the increase in costs associated 

with each additional product category 

may be relatively small. Therefore, our 

estimate of the time required per bid 

should be reasonably accurate unless 

contract bidders bid on significantly 

more or fewer product categories than 

they bid on during the demonstration. 

Comment: One commenter believed 

that the statement in the impact section 

of the proposed rule that not all 

suppliers will be affected directly by the 

competitive bidding process (71 FR 

25691) is not accurate because the 

commenter believed that costs for 

mandatory accreditation alone will force 

small suppliers out of business. The 

commenter asked questions relating to 

the basis for determining that an 

accountant would prepare the bid and 

that the cost per hour of $31.25 is 

appropriate. The commenter believed 

that it would cost small suppliers more 

to prepare and submit bids because 

large suppliers have more experience 

with managed care contracts and may be 

bidding in multiple MSAs. 

Response: The accreditation program 

is mandatory and affects all DMEPOS 

suppliers; therefore, it is not a cost 

attributable to the Medicare DMEPOS 

Competitive Bidding Program. As we 

explained in the proposed rule (71 FR 

25694), we used 2003 BLS data, 

adjusted for inflation and overhead, to 

arrive at our estimate of $31.25 per hour 

in wage and overhead costs for an 

accountant and auditor to prepare a 

supplier’s bid. In our current estimates, 

we have used 2005 BLS data on wages, 

and adjusted this number to account for 

inflation through 2007. We took the 

midpoint of the reported number of 

hours to prepare bids for the 

demonstration projects to develop our 

estimate of the number of hours needed 

to prepare a bid. We believe that these 

average estimated costs would be the 

same for large or small suppliers. We are 

not requiring that suppliers use 

accountants or auditors to prepare the 

bid submission form. However, to 

calculate cost estimates for completing 

the form, we used the wages for 

accountants or auditors as a benchmark 

to determine the estimated costs to the 

supplier. 

In CY 2008, we will conduct 

competitive bidding in 70 MSAs, which 

may include New York, Los Angeles, 

and Chicago; and in CYs 2009 and 2010, 

we will add additional areas. This will 

increase the number of affected 

suppliers, contract suppliers, and 

noncontract suppliers. For the purposes 

of the impact analysis, we assume that 

there will be at least 10 additional large 

CBAs added in both CYs 2009 and 2010. 

We also assume bid cycles will be 3 

years in length. Under our assumptions, 

we will conduct bidding for the initial 

10 CBAs in CY 2007, for 70 additional 

CBAs in CY 2008, and for additional 

areas in CYs 2009 and 2010. We note 

that the estimated average number of 

suppliers per CBA decreases over time. 

This is because smaller CBAs with 

fewer beneficiaries and/or lower 

allowed charges have fewer suppliers. 

Table 16 summarizes the effect on 

suppliers for CYs 2007 through 2012. 

The table includes the costs of rebidding 

for the first 10 CBAs in 2010, for 70 

CBAs in 2011, and for 10 CBAs in 2012. 

We assume that rebidding will require 

the same resources as the initial bids. 

However, it is possible that suppliers 

will need less time for bidding after 

gaining experience during their initial 

round of bidding. Table 16 differs from 

the corresponding table in the proposed 

rule because—(1) The number of 

suppliers is now based on 2005 claims 

data; (2) the cost per hour to prepare a 

bid has been increased from $31.25 to 

$33.87 to reflect wage increases through 

2007; (3) the number of hours required 

to submit bids has been reduced from 70 

to 68; and (4) we now estimate that 81 

percent (rather than 90 percent) of 

suppliers will submit bids. 

TABLE 16.—SUPPLIERS BIDDING YEARS: CYS 2007–2012 

[10 product categories] 

Bidding year 

CY 2007 CY 2008 CY 2009 CY 2010 CY 2011 CY 2012 

Average number of suppliers per CBA ........ 2,896 1,960 1,866 1,791 1,791 1,791 

Average number of affected suppliers per 

CBA .......................................................... 1,972 1,331 1,268 1,218 1,218 1,218 

Total number of suppliers ............................ 28,960 156,767 167,921 179,075 179,075 179,075 

Total number of affected suppliers .............. 19,720 106,470 114,154 121,838 121,838 121,838 

Number of bidding suppliers ........................ 15,973 70,268 6,224 22,197 70,268 6,224 

Cost of bidding ............................................. $36,788,375 *$161,838,447 $14,334,868 $51,123,243 $161,838,447 $14,334,868 

Number of contract suppliers ....................... 9,584 51,744 55,479 59,213 59,213 59,213 

Number of noncontract suppliers ................. 10,136 54,726 58,675 62,625 62,625 62,625 


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TABLE 16.—SUPPLIERS BIDDING YEARS: CYS 2007–2012—Continued 

[10 product categories] 

Bidding year 

CY 2007 CY 2008 CY 2009 CY 2010 CY 2011 CY 2012 

Noncontract suppliers as a percent of total 

suppliers ................................................... 35% 35% 35% 35% 35% 35% 

1Actual numbers will depend on CBAs selected, product groups selected, number of suppliers that choose to submit a bid, the prices bid, and 

the number of contract suppliers selected. 2Some suppliers furnish products in more than one selected CBA. Consequently, some suppliers may be counted more than once. 

3 Numbers in the table are rounded. 

* The spike in the private sector costs in CY 2008 is due to the addition of 70 additional CBAs that will be included in competitive bidding, 

which would include the costs to suppliers submitting bids. 

As noted in the start of this section, 

affected suppliers will be impacted by 

any reduction in Medicare allowed 

charges that results from the 

competitive bidding program. The 

estimated overall reduction in allowed 

charges is shown in the first row of 

Table 13. 

As previously noted, noncontract 

suppliers that furnished competitively 

bid items before the program took effect 

(including suppliers that do not submit 

bids) will see a decrease in revenues 

because they will no longer receive 

payment from Medicare for 

competitively bid items. Contract 

suppliers will see a decrease in 

expected revenue per item as a result of 

lower allowed charges from lower bid 

prices, but this decrease may be offset 

by an increase in volume. As a result, 

because we do not know which effect 

will dominate, the net effect on an 

individual contract supplier’s revenue is 

uncertain prior to bidding. 

2. Small Suppliers 

As of January 2006, the SBA defines 

a small business as generating less than 

$6.5 million in annual receipts. The 

SBA definition refers to small 

businesses rather than ‘‘small 

suppliers.’’ We worked with the SBA to 

define small supplier for the Medicare 

DMEPOS Competitive Bidding Program. 

In cooperation with the SBA, we are 

defining a small supplier as a small 

business that generates gross revenue of 

$3.5 million or less in annual receipts 

in accordance with 13 CFR 121.104. We 

are using this new small supplier 

definition to focus on the smallest of the 

DMEPOS suppliers in each CBA. Before 

we receive supplier bids, we do not 

have information on each supplier’s 

total revenue. We only have information 

on suppliers’ Medicare revenues. As a 

result, we had to make an assumption 

about what percent of a supplier’s 

revenues come from Medicare. We 

looked at filings by public DMEPOS 

companies and, based on that 

information, we assume one-half of the 

average supplier’s revenues come from 

Medicare DMEPOS. Table 17 shows our 

estimate of the number of affected small 

suppliers and total affected suppliers. 

Some suppliers are counted more than 

once if they are affected in more than 

one CBA. These estimates are based on 

10-digit National Supplier 

Clearinghouse (NSC) identification 

numbers. Some organizations have 

multiple NSC codes representing 

multiple locations; however, these 

organizations tend to be larger 

suppliers. For the purpose of 

designating small suppliers for program 

purposes on the basis of revenue, 

revenue will be calculated based on an 

organization’s tax identification 

number. 

TABLE 17.—NUMBER OF SMALL SUPPLIERS 1

[$3.5 million or less in Medicare allowed charges] 

Bidding year 

Number of 

affected small 

suppliers 

Total number 

of affected 

suppliers 

Percent 

2007 ............................................................................................................................................. 16,762 19,720 85 

2008 ............................................................................................................................................. 90,500 106,470 85 

2009 ............................................................................................................................................. 97,031 114,154 85 

2010 ............................................................................................................................................. 103,562 121,838 85 

2011 ............................................................................................................................................. 103,562 121,838 85 

2012 ............................................................................................................................................. 103,562 121,838 85 

1Some suppliers furnish products in more than one selected CBA. Consequently, some suppliers may be counted more than once. 

Small suppliers are likely to have 

similar costs for submitting bids as large 

suppliers. As discussed in the previous 

section, the average cost of submitting a 

bid in one CBA is $2,125. The cost of 

bidding as a share of Medicare revenue 

will depend on the size of the small 

supplier’s Medicare revenue. The share 

for a supplier with $50,000 in Medicare 

revenue would be 4.4 percent; the totals 

for suppliers with $100,000, $1 million, 

and $3 million would be 2.2 percent, 0.2 

percent, and less than 0.01 percent, 

respectively. 

We considered the following options 

for minimizing the burden of 

competitive bidding on small 

businesses. The first two options were 

included in the demonstration project. 

Some of the new options may increase 

Medicare potential savings, while others 

may lower or have no effect on potential 

savings. 

• Networks: As stated in section XII. 

of this final rule, we discuss the option 

for suppliers to form networks for 

bidding purposes. Networks are several 

small suppliers joining together to 

submit bids for a product category 

under competitive bidding. This option 

will allow small suppliers to band 

together to lower bidding costs, expand 

service options, or attain more favorable 

purchasing terms. We recognize that 

forming a network may be challenging 


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for suppliers but believe it is still a 

viable and worthwhile option. 

Networking was allowed in the 

demonstration project, but no networks 

submitted bids. If suppliers can form 

networks efficiently, they may be able to 

submit lower bids than the individual 

suppliers could submit, possibly 

increasing Medicare savings. 

• Not requiring bids for every product 

category: As discussed in section VII. of 

this final rule, we will conduct separate 

bidding for items grouped together in 

product categories rather than conduct a 

single bidding program for all items. 

Therefore, small suppliers will have the 

option of deciding how many product 

categories for which they want to 

submit bids. We believe this will help 

minimize the burden on small 

suppliers. This option was available 

during the demonstration projects, and 

most suppliers did not bid in every 

product category. We believe these 

provisions will allow suppliers to bid 

on the product category that they can 

most efficiently supply, and therefore 

contributes to Medicare savings. 

• Small supplier target: Our goal for 

small supplier participation in each 

product category will be determined by 

multiplying 30 percent times the 

number of suppliers whose composite 

bids are at or lower than the pivotal bid 

for the product category. This target was 

not included in the demonstration 

project. However, small suppliers were 

selected in most product categories. We 

expect that this provision will not affect 

potential Medicare savings because (1) 

The target may be met through the 

normal selection process; and (2) if the 

target is not met, the additional small 

suppliers that are selected will have to 

agree to accept the single payment 

amount. 

• Capacity limit: The capacity limit 

was not included in the demonstration 

project. It is possible that the limit will 

increase the pivotal bid because it may 

take more suppliers to reach the 

estimated need for capacity. The higher 

pivotal bid will reduce potential 

Medicare savings. We have established 

a capacity limit for purposes of 

calculating the pivotal bid such that no 

supplier’s or network’s estimated 

capacity can be considered to meet more 

than 20 percent of the total need for 

capacity. Once winning suppliers are 

selected, we will not exclude networks 

or suppliers from expanding and 

exceeding the 20-percent capacity. This 

will increase the opportunity for small 

suppliers to be considered and 

participate in the program. It will also 

help ensure that we meet the 

requirement at section 1847(b)(4) of the 

Act that the Secretary shall award 

contracts to multiple entities and ensure 

that we have sufficient contract 

suppliers to meet the anticipated needs 

of beneficiaries for competitive bid 

items on a timely basis. 

• Streamlined financial standards: 

We have streamlined the financial 

standards to require submission of 

certain tax information and other basic 

financial information such as a 

compiled balance sheet. This provision, 

which was not included in the 

demonstration, should make it easier for 

small suppliers to bid. This has the 

potential to increase Medicare savings, 

but it is not clear by how much. 

• Permitting physicians and certain 

non-physician practitioners to furnish 

certain limited items. We will permit 

physicians and certain practitioners to 

furnish certain limited items that are 

provided to beneficiaries as part of their 

professional practice without submitting 

a bid and being awarded a contract, 

provided that certain conditions are 

met. These physicians and nonphysician practitioners would be 

required to submit bids if they wished 

to furnish any other competitively bid 

items. This provision was not included 

in the demonstration projects. We do 

not believe it will have a significant 

effect on Medicare savings, because 

relatively few items will be covered. 

• Another option we considered but 

did not adopt would have allowed small 

suppliers to be exempted from the 

requirement that a contract supplier 

must service an entire CBA. However, 

we note that if a small supplier joined 

a network, an exception to this rule 

would apply. This option is also 

discussed in further detail in section XI. 

of the preamble of this final rule. 

Comment: Several commenters 

believed that the analysis in the 

proposed rule suggests potential 

capacity issues for successful bidders. 

These commenters argued that if 37 

percent of existing suppliers will 

become noncontract suppliers as a 

result of not bidding or not submitting 

successful bids as projected in Table 15 

of the proposed rule (71 FR 25695), and 

the current ratio of beneficiaries to 

suppliers is roughly the same for 

contract and noncontract suppliers, 

each contract supplier will experience, 

on average, a 59 percent increase in the 

number of beneficiaries that it must 

serve. The commenters stated that CMS 

indicated in the preamble to the 

proposed rule that the PAOC, during its 

February 28, 2006 meeting, suggested 

‘‘that most DMEPOS suppliers would be 

able to easily increase their total 

capacity to furnish items by up to 20 

percent and the increase could be even 

larger for products like diabetes 

supplies that require relatively little 

labor’’ (71 FR 25676). The commenters 

argued that the proposal creates the 

possibility that contract suppliers may, 

therefore, need to expand capacity 

beyond the 20-percent PAOC estimate. 

Two commenters noted that such 

expansions could raise accreditation 

and licensure issues. 

Response: Our methodology will 

ensure that we select a sufficient 

number of suppliers to meet the needs 

of Medicare beneficiaries for 

competitively bid items. We also note 

that, as we stated in the preamble to the 

proposed rule (71 FR 25676), the PAOC 

indicated that suppliers of products 

such as diabetes supplies that require 

relatively little labor may be able to 

expand capacity even more. We will be 

selecting multiple contract suppliers, 

and we will be asking suppliers that 

plan to increase their capacity to submit 

plans on how they will achieve this 

increased capacity. However, no 

contract supplier will be required to 

increase its capacity. In addition, as a 

general rule, for a selection tool, we 

would not assign more than 20 percent 

of the total Medicare demand for a 

product category to any one supplier in 

estimating how many suppliers we need 

in a given CBA. Based on these factors, 

we do not believe that contract 

suppliers will experience capacity 

problems. 

Comment: A number of commenters 

believed that the regulatory analysis in 

the proposed rule minimized the impact 

of the proposed rule on small businesses 

because CMS estimates that half of the 

bidding suppliers will not be selected as 

contract suppliers. The commenters 

believed that this group would be 

disproportionately comprised of small 

businesses that are now providing 

DMEPOS and that many, faced with the 

loss of Medicare business for 

competitively bid items, would go out of 

business. 

Response: Our current estimates 

indicate that, of all the DMEPOS 

suppliers in a CBA, only 22 percent 

would be noncontract suppliers because 

they submitted a losing bid. Many 

DMEPOS items are not subject to 

competitive bidding. Therefore, many 

small suppliers such as suppliers of 

specialty items, for example, are not 

likely to be affected by competitive 

bidding. For those suppliers that 

currently furnish competitively bid 

items, we are taking specific steps to 

ensure that they have the opportunity to 

participate in the competitive bidding 

program. These steps include offering 

suppliers the opportunity to form 

networks, small supplier targets, and 


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not requiring suppliers to submit bids 

for all product categories. 

H. Accounting Statement 

As required by OMB Circular A–4 

(available at http:// 

www.whitehouse.gov/omb/circulars/ 

a004/a-4.pdf), in the following table 

below, we have prepared an accounting 

statement showing the classification of 

the expenditures associated with the 

provisions of this final rule. This table 

provides our best estimate of the 

decreased expenditures in Medicare 

payments under the Medicare DMEPOS 

Competitive Bidding Program as a result 

of the changes presented in this final 

rule. All expenditures are classified as 

transfers to the Federal Government 

from DMEPOS suppliers. 

TABLE 18.—ACCOUNTING STATEMENT—CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM FY 2007 TO FY 2012 

Category Transfers 

Annualized Monetized Transfers .............................................. 547.9 (in Millions). 

From Whom To Whom? ........................................................... To Federal Government from Medicare DMEPOS Suppliers. 

Annualized Monetized Transfers .............................................. 137.0. 

From Whom To Whom? ........................................................... To Beneficiaries from Medicare DMEPOS Suppliers. 

I. Executive Order 12866 

In accordance with the provisions of 

Executive Order 12866, this final rule 

was reviewed by the OMB. 

List of Subjects 

42 CFR Part 411 

Kidney diseases, Medicare, Reporting 

and recordkeeping requirements. 

42 CFR Part 414 

Administrative practice and 

procedure, Health facilities, Health 

professions, Kidney diseases, Medicare, 

Reporting and recordkeeping 

requirements. 

■ For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services is amending 42 CFR 

Chapter IV as set forth below: 

PART 411—EXCLUSIONS FOR 

MEDICARE AND LIMITATIONS ON 

MEDICARE PAYMENT 

■ 1. The authority for part 411 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh). 

Subpart A—General Exclusions and 

Exclusions of Particular Services 

■ 2. Section 411.15 is amended by 

adding a new paragraph (s) to read as 

follows. 

§ 411.15 Particular services excluded from 

coverage. 

* * * * * 

(s) Unless § 414.404(d) or 

§ 414.408(e)(2) of this subchapter 

applies, Medicare does not make 

payment if an item or service that is 

included in a competitive bidding 

program (as described in Part 414, 

Subpart F of this subchapter) is 

furnished by a supplier other than a 

contract supplier (as defined in 

§ 414.402 of this subchapter). 

PART 414—PAYMENT FOR PART B 

MEDICAL AND OTHER HEALTH 

SERVICES 

■ 3. The authority citation for part 414 

continues to read as follows: 

Authority: Secs. 1102, 1871, and 1881(b)(1) 

of the Social Security Act (42 U.S.C. 1302, 

1395hh, and 1395rr(b)(1)). 

Subpart F—Competitive Bidding for 

Certain Durable Medical Equipment, 

Prosthetics, Orthotics, and Supplies 

(DMEPOS) 

■ 4. New §§ 414.400, 414.402, and 

414.404 are added to Subpart F to read 

as follows: 

§ 414.400 Purpose and basis. 

This subpart implements competitive 

bidding programs for certain DMEPOS 

items as required by sections 1847(a) 

and (b) of the Act. 

§ 414.402 Definitions. 

For purposes of this subpart, the 

following definitions apply: 

Bid means an offer to furnish an item 

for a particular price and time period 

that includes, where appropriate, any 

services that are directly related to the 

furnishing of the item. 

Competitive bidding area (CBA) 

means an area established by the 

Secretary under this subpart. 

Competitive bidding program means a 

program established under this subpart 

within a designated CBA. 

Composite bid means the sum of a 

supplier’s weighted bids for all items 

within a product category for purposes 

of allowing a comparison across bidding 

suppliers. 

Contract supplier means an entity that 

is awarded a contract by CMS to furnish 

items under a competitive bidding 

program. 

DMEPOS stands for durable medical 

equipment, prosthetics, orthotics, and 

supplies. 

Grandfathered item means any one of 

the following items for which payment 

is made on a rental basis prior to the 

implementation of a competitive 

bidding program and for which payment 

is made after implementation of a 

competitive bidding program to a 

grandfathered supplier that continues to 

furnish the items in accordance with 

§ 414.408(j): 

(1) An inexpensive or routinely 

purchased item described in § 414.220. 

(2) An item requiring frequent and 

substantial servicing, as described in 

§ 414.222. 

(3) Oxygen and oxygen equipment 

described in § 414.226. 

(4) Other DME described in § 414.229. 

Grandfathered supplier means a 

noncontract supplier that chooses to 

continue to furnish grandfathered items 

to a beneficiary in a CBA. 

Item means a product included in a 

competitive bidding program that is 

identified by a HCPCS code, which may 

be specified for competitive bidding (for 

example, a product when it is furnished 

through mail order), or a combination of 

codes and/or modifiers, and includes 

the services directly related to the 

furnishing of that product to the 

beneficiary. Items that may be included 

in a competitive bidding program are: 

(1) Durable medical equipment (DME) 

other than class III devices under the 

Federal Food, Drug, and Cosmetic Act, 

as defined in § 414.202 of this part and 

further classified into the following 

categories: 

(i) Inexpensive or routinely purchased 

items, as specified in § 414.220(a). 

(ii) Items requiring frequent and 

substantial servicing, as specified in 

§ 414.222(a). 

(iii) Oxygen and oxygen equipment, 

as specified in § 414.226(c)(1). 

(iv) Other DME (capped rental items), 

as specified in § 414.229. 

(2) Supplies necessary for the 

effective use of DME other than 

inhalation drugs. 


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(3) Enteral nutrients, equipment, and 

supplies. 

(4) Off-the-shelf orthotics, which are 

orthotics described in section 1861(s)(9) 

of the Act that require minimal selfadjustment for appropriate use and do 

not require expertise in trimming, 

bending, molding, assembling or 

customizing to fit a beneficiary. 

Item weight is a number assigned to 

an item based on its beneficiary 

utilization rate using national data when 

compared to other items in the same 

product category. 

Mail order contract supplier is a 

contract supplier that furnishes items 

through the mail to beneficiaries who 

maintain a permanent residence in a 

competitive bidding area. 

Metropolitan Statistical Area (MSA) 

has the same meaning as that given by 

the Office of Management and Budget. 

Minimal self-adjustment means an 

adjustment that the beneficiary, 

caretaker for the beneficiary, or supplier 

of the device can perform and does not 

require the services of a certified 

orthotist (that is, an individual certified 

by either the American Board for 

Certification in Orthotics and 

Prosthetics, Inc., or the Board for 

Orthotist/Prosthetist Certification) or an 

individual who has specialized training. 

Nationwide competitive bidding area 

means a CBA that includes the United 

States, its Territories, and the District of 

Columbia. 

Nationwide mail order contract 

supplier means a mail order contract 

supplier that furnishes items in a 

nationwide competitive bidding area. 

Network means a group of small 

suppliers that form a legal entity to 

provide competitively bid items 

throughout the entire CBA. 

Noncontract supplier means a 

supplier that is not awarded a contract 

by CMS to furnish items included in a 

competitive bidding program. 

Physician has the same meaning as in 

section 1861(r) of the Act. 

Pivotal bid means the lowest 

composite bid based on bids submitted 

by suppliers for a product category that 

includes a sufficient number of 

suppliers to meet beneficiary demand 

for the items in that product category. 

Product category means a grouping of 

related items that are used to treat a 

similar medical condition. 

Regional competitive bidding area 

means a CBA that consists of a region 

of the United States, its Territories, and 

the District of Columbia. 

Regional mail order contract supplier 

means a mail order contract supplier 

that furnishes items in a regional 

competitive bidding area. 

Single payment amount means the 

allowed payment for an item furnished 

under a competitive bidding program. 

Small supplier means, a supplier that 

generates gross revenue of $3.5 million 

or less in annual receipts including 

Medicare and non-Medicare revenue. 

Supplier means an entity with a valid 

Medicare supplier number, including an 

entity that furnishes an item through the 

mail. 

Treating practitioner means a 

physician assistant, nurse practitioner, 

or clinical nurse specialist, as those 

terms are defined in section 1861(aa)(5) 

of the Act. 

Weighted bid means the item weight 

multiplied by the bid price submitted 

for that item. 

§ 414.404 Scope and applicability. 

(a) Applicability. Except as specified 

in paragraph (b) of this section, this 

subpart applies to all suppliers that 

furnish the items defined in § 414.402 to 

beneficiaries, including providers, 

physicians, treating practitioners, 

physical therapists, and occupational 

therapists that furnish such items under 

Medicare Part B. 

(b) Exceptions. (1) Physicians and 

treating practitioners may furnish 

certain types of competitively bid items 

without submitting a bid and being 

awarded a contract under this subpart, 

provided that all of the following 

conditions are satisfied: 

(i) The items furnished are limited to 

crutches, canes, walkers, folding manual 

wheelchairs, blood glucose monitors, 

and infusion pumps that are DME. 

(ii) The items are furnished by the 

physician or treating practitioner to his 

or her own patients as part of his or her 

professional service. 

(iii) The items are billed under a 

billing number assigned to the 

physician, the treating practitioner (if 

possible), or a group practice to which 

the physician or treating practitioner 

has reassigned the right to receive 

Medicare payment. 

(2) A physical therapist in private 

practice (as defined in § 410.60(c) of this 

chapter) or an occupational therapist in 

private practice (as defined in 

§ 410.59(c) of this chapter) may furnish 

competitively bid off-the-shelf orthotics 

without submitting a bid and being 

awarded a contract under this subpart, 

provided that the items are furnished 

only to the therapist’s own patients as 

part of the physical or occupational 

therapy service. 

(3) Payment for items furnished in 

accordance with paragraphs (b)(1) and 

(b)(2) of this section will be paid in 

accordance with § 414.408(a). 

■ 5. Section 414.406 is amended by 

adding paragraphs (b), (c), and (d) to 

read as follows: 

§ 414.406 Implementation of programs. 

* * * * * 

(b) Competitive bidding areas. CMS 

designates through program instructions 

or by other means, such as the request 

for bids, each CBA in which a 

competitive bidding program may be 

implemented under this subpart. 

(c) Revisions to competitive bidding 

areas. CMS may revise the CBAs 

designated under paragraph (b) of this 

section. 

(d) Competitively bid items. CMS 

designates the items that are included in 

a competitive bidding program through 

program instructions or by other means 

* * * * * 

■ 6. New §§ 414.408, 414.410, 414.412, 

414.414, 414.416, 414.418, 414.420, 

414.422, 414.424, and 414.426 are 

added to Subpart F to read as follows: 

§ 414.408 Payment rules. 

(a) Payment basis. (1) The payment 

basis for an item furnished under a 

competitive bidding program is 80 

percent of the single payment amount 

calculated for the item under § 414.416 

for the CBA in which the beneficiary 

maintains a permanent residence. 

(2) If an item that is included in a 

competitive bidding program is 

furnished to a beneficiary who does not 

maintain a permanent residence in a 

CBA, the payment basis for the item is 

80 percent of the lesser of the actual 

charge for the item, or the applicable fee 

schedule amount for the item, as 

determined under Subpart C or Subpart 

D. 

(b) No changes to the single payment 

amount. The single payment amount 

calculated for each item under each 

competitive bidding program is paid for 

the duration of the competitive bidding 

program and will not be adjusted by any 

update factor. 

(c) Payment on an assignment-related 

basis. Payment for an item furnished 

under this subpart is made on an 

assignment-related basis. 

(d) Applicability of advanced 

beneficiary notice. Implementation of a 

program in accordance with this subpart 

does not preclude the use of an 

advanced beneficiary notice. 

(e) Requirement to obtain 

competitively bid items from a contract 

supplier. (1) General rule. Except as 

provided in paragraph (e)(2) of this 

section, all items that are included in a 

competitive bidding program must be 

furnished by a contract supplier for that 

program. 


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(2) Exceptions. (i) A grandfathered 

supplier may furnish a grandfathered 

item to a beneficiary in accordance with 

paragraph (j) of this section. 

(ii) Medicare may make a secondary 

payment for an item furnished by a 

noncontract supplier that the 

beneficiary is required to use under his 

or her primary insurance policy. The 

provisions of this paragraph do not 

supersede Medicare secondary payer 

statutory and regulatory provisions, 

including the Medicare secondary 

payment rules located in §§ 411.32 and 

411.33 of this subchapter, and payment 

will be calculated in accordance with 

those rules. 

(iii) If a beneficiary is outside of the 

CBA in which he or she maintains a 

permanent residence, he or she may 

obtain an item from a—

(A) Contract supplier, if the 

beneficiary obtains the item in another 

CBA and the item is included in the 

competitive bidding program for that 

CBA; or 

(B) Supplier with a valid Medicare 

billing number, if the beneficiary 

obtains the item in an area that is not 

a CBA, or if the beneficiary obtains the 

item in another CBA but the item is not 

included in the competitive bidding 

program for that CBA. 

(iv) A physician, treating practitioner, 

physical therapist in private practice, or 

occupational therapist in private 

practice may furnish an item in 

accordance with § 414.404(b) of this 

subpart. 

(3) Unless paragraph (e)(2) of this 

section applies: 

(i) Medicare will not make payment 

for an item furnished in violation of 

paragraph (e)(1) of this section, and 

(ii) A beneficiary has no financial 

liability to a noncontract supplier that 

furnishes an item included in the 

competitive bidding program for a CBA 

in violation of paragraph (e)(1) of this 

section, unless the beneficiary has 

signed an advanced beneficiary notice. 

(4) CMS separately designates the 

Medicare billing number of all 

noncontract suppliers to monitor 

compliance with paragraphs (e)(1) and 

(e)(2) of this section. 

(f) Purchased equipment. (1) The 

single payment amounts for new 

purchased durable medical equipment, 

including power wheelchairs that are 

purchased when the equipment is 

initially furnished, and enteral nutrition 

equipment are calculated based on the 

bids submitted and accepted for these 

items. 

(2) Payment for used purchased 

durable medical equipment and enteral 

nutrition equipment is made in an 

amount equal to 75 percent of the single 

payment amounts calculated for new 

purchased equipment under paragraph 

(f)(1) of this section. 

(g) Purchased supplies and orthotics. 

The single payment amounts for the 

following purchased items are 

calculated based on the bids submitted 

and accepted for the following items: 

(1) Supplies used in conjunction with 

durable medical equipment. 

(2) Enteral nutrients. 

(3) Enteral nutrition supplies. 

(4) OTS orthotics. 

(h) Rented equipment. (1) Capped 

rental DME. Subject to the provisions of 

paragraph (h)(2) of this section, payment 

for capped rental durable medical 

equipment is made in an amount equal 

to 10 percent of the single payment 

amounts calculated for new durable 

medical equipment under paragraph 

(f)(1) of this section for each of the first 

3 months, and 7.5 percent of the single 

payment amounts calculated for these 

items for each of the remaining months 

4 through 13. 

(2) Additional payment to certain 

contract suppliers for capped rental 

DME. (i) Except as specified in 

paragraph (h)(2)(ii) of this section, 

Medicare makes 13 monthly payments 

to a contract supplier that furnishes 

capped rental durable medical 

equipment to a beneficiary who would 

otherwise be entitled to obtain the item 

from a grandfathered supplier under 

paragraph (j) of this section. Payment is 

made using the methodology described 

in paragraph (h)(1) of this section. The 

contract supplier must transfer title to 

the item to the beneficiary on the first 

day that begins after the 13th 

continuous month in which payments 

are made in accordance with this 

paragraph. 

(ii) Medicare does not make payment 

to a contract supplier under paragraph 

(h)(2)(i) of this section if the contract 

supplier furnishes capped rental 

durable medical equipment to a 

beneficiary who previously rented the 

equipment from another contract 

supplier. 

(3) Maintenance and servicing of 

rented DME. Separate maintenance and 

servicing payments are not made for any 

rented durable medical equipment. 

(4) Payment for rented enteral 

nutrition equipment. Payment for rented 

enteral nutrition equipment is made in 

an amount equal to 10 percent of the 

single payment amounts calculated for 

new enteral nutrition equipment under 

paragraph (f)(1) of this section for each 

of the first 3 months, and 7.5 percent of 

the single payment amount calculated 

for these items under paragraph (f)(1) of 

this section for each of the remaining 

months 4 through 15. The contract 

supplier to which payment is made in 

month 15 for furnishing enteral 

nutrition equipment on a rental basis 

must continue to furnish, maintain and 

service the equipment until a 

determination is made by the 

beneficiary’s physician or treating 

practitioner that the equipment is no 

longer medically necessary. 

(5) Maintenance and servicing of 

rented enteral nutrition equipment. 

Payment for the maintenance and 

servicing of rented enteral nutrition 

equipment beginning 6 months after 15 

months of rental payments is made in 

an amount equal to 5 percent of the 

single payment amounts calculated for 

these items under paragraph (f)(1) of 

this section. 

(6) Payment for inexpensive or 

routinely purchased durable medical 

equipment. Payment for inexpensive or 

routinely purchased durable medical 

equipment furnished on a rental basis is 

made in an amount equal to 10 percent 

of the single payment amount calculated 

for new purchased equipment. 

(7) Payment amounts for rented DME 

requiring frequent and substantial 

servicing. (i) General rule. Except as 

provided in paragraph (h)(7)(ii) of this 

section, the single payment amounts for 

rented durable medical equipment 

requiring frequent and substantial 

servicing are calculated based on the 

rental bids submitted and accepted for 

the furnishing of these items on a 

monthly basis. 

(ii) Exception. The single payment 

amounts for continuous passive motion 

exercise devices are calculated based on 

the bids submitted and accepted for the 

furnishing of these items on a daily 

basis. 

(i) Monthly payment amounts for 

oxygen and oxygen equipment. (1) Basic 

payment amount. Subject to the 

provisions of paragraph (i)(2) of this 

section, the single payment amounts for 

oxygen and oxygen equipment are 

calculated based on the bids submitted 

and accepted for the furnishing on a 

monthly basis of each of the five classes 

of oxygen and oxygen equipment 

described in § 414.226(c)(1). 

(2) Additional payment to certain 

contract suppliers. (i) Except as 

specified in paragraph (i)(2)(iii) of this 

section, Medicare makes monthly 

payments to a contract supplier that 

furnishes oxygen equipment to a 

beneficiary who would otherwise be 

entitled to obtain the item from a 

grandfathered supplier under paragraph 

(j) of this section as follows: 

(A) If Medicare made 26 or less 

monthly payments to the former 

supplier, Medicare makes a monthly 

payment to the contract supplier for up 


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to the number of months equal to the 

difference between 36 and the number 

of months for which payment was made 

to the former supplier. 

(B) If Medicare made 27 or more 

monthly payments to the former 

supplier, Medicare makes 10 monthly 

payments to the contract supplier. 

(ii) Payment is made using the 

methodology described in paragraph 

(i)(1) of this section. On the first day 

after the month in which the final rental 

payment is made under paragraph 

(i)(2)(i) of this section, the contract 

supplier must transfer title of the 

oxygen equipment to the beneficiary. 

(iii) Medicare does not make payment 

to a contract supplier under paragraph 

(i)(2) of this section if the contract 

supplier furnishes oxygen equipment to 

a beneficiary who previously rented the 

equipment from another contract 

supplier. 

(j) Special rules for certain rented 

durable medical equipment and oxygen 

and oxygen equipment. (1) Supplier 

election. (i) A supplier that is furnishing 

durable medical equipment or is 

furnishing oxygen or oxygen equipment 

on a rental basis to a beneficiary prior 

to the implementation of a competitive 

bidding program in the CBA where the 

beneficiary maintains a permanent 

residence may elect to continue 

furnishing the item as a grandfathered 

supplier. 

(ii) A supplier that elects to be a 

grandfathered supplier must continue to 

furnish the grandfathered items to all 

beneficiaries who elect to continue 

receiving the grandfathered items from 

that supplier for the remainder of the 

rental period for that item. 

(2) Payment for grandfathered items 

furnished during the first competitive 

bidding program implemented in a 

CBA. Payment for grandfathered items 

furnished during the first competitive 

bidding program implemented in a CBA 

is made as follows: 

(i) For inexpensive and routinely 

purchased items described in 

§ 414.220(a), payment is made in the 

amount determined under § 414.220(b). 

(ii) For other durable medical 

equipment or capped rental items 

described in § 414.229, payment is made 

in the amount determined under 

§ 414.229(b). 

(iii) For items requiring frequent and 

substantial servicing described in 

§ 414.222, payment is made in 

accordance with paragraph (a)(1) of this 

section. 

(iv) For oxygen and oxygen 

equipment described in § 414.226(c)(1), 

payment is made in accordance with 

paragraph (a)(1) of this section. 

(3) Payment for grandfathered items 

furnished during all subsequent 

competitive bidding programs in a CBA. 

Beginning with the second competitive 

bidding program implemented in a 

CBA, payment is made for 

grandfathered items in accordance with 

paragraph (a)(1) of this section. 

(4) Choice of suppliers. (i) 

Beneficiaries who are renting an item 

that meets the definition of a 

grandfathered item in § 414.402 of this 

subpart may elect to obtain the item 

from a grandfathered supplier. 

(ii) A beneficiary who is otherwise 

entitled to obtain a grandfathered item 

from a grandfathered supplier under 

paragraph (j) of this section may elect to 

obtain the same item from a contract 

supplier at any time after a competitive 

bidding program is implemented. 

(iii) If a beneficiary elects to obtain 

the same item from a contract supplier, 

payment is made for the item 

accordance with paragraph (a)(1) of this 

section. 

(5) Payment for accessories and 

supplies for grandfathered items. 

Accessories and supplies that are used 

in conjunction with and are necessary 

for the effective use of a grandfathered 

item may be furnished by the same 

grandfathered supplier that furnishes 

the grandfathered item. Payment is 

made in accordance with paragraph 

(a)(1) of this section. 

(k) Payment for maintenance, 

servicing and replacement of 

beneficiary-owned items. 

(1) Payment is made for the 

maintenance and servicing of 

beneficiary-owned items, provided the 

maintenance and servicing is performed 

by a contract supplier or a noncontract 

supplier having a valid Medicare billing 

number, as follows: 

(i) Payment for labor is made in 

accordance with § 414.210(e)(1) of 

Subpart D. 

(ii) Payment for parts that are not 

items (as defined in § 414.402) is made 

in accordance with § 414.210(e)(1) of 

Subpart D. 

(iii) Payment for parts that are items 

(as defined in § 414.402) is made in 

accordance with paragraph (a)(1) of this 

section. 

(2) Additional payments are made in 

accordance with §§ 414.210(e)(2) and 

(e)(3) of subpart D for the maintenance 

and servicing of oxygen equipment if 

performed by a contract supplier or a 

noncontract supplier having a valid 

Medicare billing number. 

(3) Beneficiaries must obtain a 

replacement of a beneficiary-owned 

item, other than parts needed for the 

repair of beneficiary-owned equipment 

from a contract supplier. Payment is 

made for the replacement item in 

accordance with paragraph (a)(1) of this 

section. 

§ 414.410 Phased-in implementation of 

competitive bidding programs. 

(a) Phase-in of competitive bidding 

programs. CMS phases in competitive 

bidding programs so that competition 

under the programs occurs in—

(1) 10 of the largest MSAs in CY 2007; 

(2) 80 of the largest MSAs in CY 2009; 

(3) Additional CBAs after CY 2009. 

(b) Selection of MSAs for CY 2007 and 

CY 2009. CMS selects the MSAs for 

purposes of designating CBAs in CY 

2007 and CY 2009 by considering the 

following variables: 

(1) The total population of an MSA. 

(2) The Medicare allowed charges for 

DMEPOS items per fee-for-service 

beneficiary in an MSA. 

(3) The total number of DMEPOS 

suppliers per fee-for-service beneficiary 

who received DMEPOS items in an 

MSA. 

(4) An MSA’s geographic location. 

(c) Exclusions from a CBA. CMS may 

exclude from a CBA a rural area (as 

defined in § 412.64(b)(1)(ii)(C) of this 

subchapter), or an area with low 

population density based on one or 

more of the following factors—

(1) Low utilization of DMEPOS items 

by Medicare beneficiaries receiving feefor-service benefits relative to similar 

geographic areas; 

(2) Low number of DMEPOS suppliers 

relative to similar geographic areas; or 

(3) Low number of Medicare fee-forservice beneficiaries relative to similar 

geographic areas. 

(d) Selection of additional CBAs after 

CY 2009. (1) Beginning after CY 2009, 

CMS designates through program 

instructions or by other means 

additional CBAs based on CMS’

determination that the implementation 

of a competitive bidding program in a 

particular area would be likely to result 

in significant savings to the Medicare 

program. 

(2) Beginning after CY 2009, CMS may 

designate through program instructions 

or by other means a nationwide CBA or 

one or more regional CBAs for purposes 

of implementing competitive bidding 

programs for items that are furnished 

through the mail by nationwide or 

regional mail order contract suppliers. 

§ 414.412 Submission of bids under a 

competitive bidding program. 

(a) Requirement to submit a bid. 

Except as provided under § 414.404(b), 

in order for a supplier to receive 

payment for items furnished to 

beneficiaries under a competitive 

bidding program, the supplier must 


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submit a bid to furnish those items and 

be awarded a contract under this 

subpart. 

(b) Grouping of items into product 

categories. (1) Bids are submitted for 

items grouped into product categories. 

(2) The bids submitted for each item 

in a product category cannot exceed the 

payment amount that would otherwise 

apply to the item under Subpart C or 

Subpart D of this part. 

(c) Furnishing of items. A bid must 

include all costs related to furnishing an 

item, including all services directly 

related to the furnishing of the item. 

(d) Separate bids. For each product 

category that a supplier is seeking to 

furnish under a competitive bidding 

program, the supplier must submit a 

separate bid for each item in that 

product category. 

(e) Commonly-owned or controlled 

suppliers. (1) For purposes of this 

paragraph—

(i) An ownership interest is the 

possession of equity in the capital, stock 

or profits of another supplier; 

(ii) A controlling interest exists if one 

or more of owners of a supplier is an 

officer, director or partner in another 

supplier; and 

(iii) Two or more suppliers are 

commonly-owned if one or more of 

them has an ownership interest totaling 

at least 5 percent in the other(s). 

(2) A supplier must disclose in its bid 

each supplier in which it has an 

ownership or controlling interest and 

each supplier which has an ownership 

or controlling interest in it. 

(3) Commonly-owned or controlled 

suppliers must submit a single bid to 

furnish a product category in a CBA. 

Each commonly-owned or controlled 

supplier that is located in the CBA for 

which the bid is being submitted must 

be included in the bid. The bid must 

also include any commonly-owned or 

controlled supplier that is located 

outside of the CBA but would furnish 

the product category to the beneficiaries 

who maintain a permanent residence in 

the CBA. 

(f) Mail order suppliers. (1) Suppliers 

that furnish items through the mail must 

submit a bid to furnish these items in a 

CBA in which a mail order competitive 

bidding program that includes the items 

is implemented. 

(2) Suppliers that submit one or more 

bids under paragraph (f)(1) of this 

section may submit the same bid 

amount for each item under each 

competitive bidding program for which 

it submits a bid. 

(g) Applicability of the mail order 

competitive bidding program. Suppliers 

that do not furnish items through the 

mail are not required to participate in a 

nationwide or regional mail order 

competitive bidding program that 

includes the same items. Suppliers may 

continue to furnish these items in—

(1) A CBA, if the supplier is awarded 

a contract under this subpart; or 

(2) An area not designated as a CBA. 

§ 414.414 Conditions for awarding 

contracts. 

(a) General rule. The rules set forth in 

this section govern the evaluation and 

selection of suppliers for contract award 

purposes under a competitive bidding 

program. 

(b) Basic supplier eligibility. (1) Each 

supplier must meet the enrollment 

standards specified in § 424.57(c) of this 

chapter. 

(2) Each supplier must disclose 

information about any prior or current 

legal actions, sanctions, revocations 

from the Medicare program, programrelated convictions as defined in section 

1128(a)(1) through (a)(4) of the Act, 

exclusions or debarments imposed 

against it, or against any members of the 

board of directors, chief corporate 

officers, high-level employees, affiliated 

companies, or subcontractors, by any 

Federal, State, or local agency. The 

supplier must certify in its bid that this 

information is completed and accurate. 

(3) Each supplier must have all State 

and local licenses required to perform 

the services identified in the request for 

bids. 

(4) Each supplier must submit a bona 

fide bid that complies with all the terms 

and conditions contained in the request 

for bids. 

(5) Each network must meet the 

requirements specified in § 414.418. 

(c) Quality standards and 

accreditation. Each supplier must meet 

applicable quality standards developed 

by CMS in accordance with section 

1834(a)(20) of the Act and be accredited 

by a CMS-approved accreditation 

organization that meets the 

requirements of § 424.58 of this 

subchapter, unless a grace period is 

specified by CMS. 

(d) Financial standards. Each supplier 

must submit along with its bid the 

applicable financial documentation 

specified in the request for bids. 

(e) Evaluation of bids. CMS evaluates 

bids submitted for items within a 

product category by—

(1) Calculating the expected 

beneficiary demand in the CBA for the 

items in the product category; 

(2) Calculating the total supplier 

capacity that would be sufficient to 

meet the expected beneficiary demand 

in the CBA for the items in the product 

category; 

(3) Establishing a composite bid for 

each supplier and network that 

submitted a bid for the product 

category. 

(4) Arraying the composite bids from 

the lowest composite bid price to the 

highest composite bid price; 

(5) Calculating the pivotal bid for the 

product category; 

(6) Selecting all suppliers and 

networks whose composite bids are less 

than or equal to the pivotal bid for that 

product category, and that meet the 

requirements in paragraphs (b) through 

(d) of this section. 

(f) Expected savings. A contract is not 

awarded under this subpart unless CMS 

determines that the amounts to be paid 

to contract suppliers for an item under 

a competitive bidding program are 

expected to be less than the amounts 

that would otherwise be paid for the 

same item under Subpart C or Subpart 

D. 

(g) Special rules for small suppliers. 

(1) Target for small supplier 

participation. CMS ensures that small 

suppliers have the opportunity to 

participate in a competitive bidding 

program by taking the following steps: 

(i) Setting a target number for small 

supplier participation by multiplying 30 

percent by the number of suppliers that 

meet the requirements in paragraphs (b) 

through (d) of this section and whose 

composite bids are equal to or lower 

than the pivotal bid calculated for the 

product category; 

(ii) Identifying the number of 

qualified small suppliers whose 

composite bids are at or below the 

pivotal bid for the product category; 

(iii) Selecting additional small 

suppliers whose composite bids are 

above the pivotal bid for the product 

category in ascending order based on 

the proximity of each small supplier’s 

composite bid to the pivotal bid, until 

the number calculated in paragraph 

(g)(1)(i) of this section is reached or 

there are no more composite bids 

submitted by small suppliers for the 

product category. 

(2) The bids by small suppliers that 

are selected under paragraph (g)(1)(iii) 

of this section are not used to calculate 

the single payment amounts for any 

items under § 414.416 of this subpart. 

(h) Sufficient number of suppliers. 

(1) Except as provided in paragraph 

(h)(3) of this section. CMS will award at 

least five contracts, if there are five 

suppliers satisfying the requirements in 

paragraphs (b) through (f) of this 

section; or 

(2) CMS will award at least two 

contracts, if there are less than five 

suppliers meeting these requirements 

and the suppliers satisfying these 

requirements have sufficient capacity to 

satisfy beneficiary demand for the 


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product category calculated under 

paragraph (e)(1) of this section. 

(3) The provisions of paragraph (h)(1) 

of this section do not apply to regional 

or nationwide mail order CBAs under 

§ 414.410(d)(2) of this subpart. 

(i) Selection of new suppliers after 

bidding. (1) Subsequent to the awarding 

of contracts under this subpart, CMS 

may award additional contracts if it 

determines that additional contract 

suppliers are needed to meet beneficiary 

demand for items under a competitive 

bidding program. CMS selects 

additional contract suppliers by—

(i) Referring to the arrayed list of 

suppliers that submitted bids for the 

product category included in the 

competitive bidding program for which 

beneficiary demand is not being met; 

and 

(ii) Beginning with the supplier 

whose composite bid is the first 

composite bid above the pivotal bid for 

that product category, determining if 

that supplier is willing to become a 

contract supplier under the same terms 

and conditions that apply to other 

contract suppliers in the CBA. 

(2) Before CMS awards additional 

contracts under paragraph (i)(1) of this 

section, a supplier must submit updated 

information demonstrating that the 

supplier meets the requirements under 

paragraphs (b) through (d) of this 

section. 

§ 414.416 Determination of competitive 

bidding payment amounts. 

(a) General rule. CMS establishes a 

single payment amount for each item 

furnished under a competitive bidding 

program. 

(b) Methodology for setting payment 

amount. (1) The single payment amount 

for an item furnished under a 

competitive bidding program is equal to 

the median of the bids submitted for 

that item by suppliers whose composite 

bids for the product category that 

includes the item are equal to or below 

the pivotal bid for that product category. 

If there is an even number of bids, the 

single payment amount for the item is 

equal to the average of the two middle 

bids. 

(2) The single payment amount for an 

item must be less than or equal to the 

amount that would otherwise be paid 

for the same item under Subpart C or 

Subpart D. 

§ 414.418 Opportunity for networks. 

(a) A network may be comprised of at 

least 2 but not more than 20 small 

suppliers. 

(b) The following rules apply to 

networks that seek contracts under this 

subpart: 

(1) Each network must form a single 

legal entity that acts as the bidder and 

submits the bid. Any agreement entered 

into for purposes of forming a network 

must be submitted to CMS. The network 

must identify itself as a network and 

identify all of its members. 

(2) Each member of the network must 

satisfy the requirements in § 414.414(b) 

through (d). 

(3) A small supplier may join one or 

more networks but cannot submit an 

individual bid to furnish the same 

product category in the same CBA as 

any network in which it is a member. 

A small supplier may not be a member 

of more than one network if those 

networks submit bids to furnish the 

same product category in the same CBA. 

(4) The network cannot be 

anticompetitive, and this section does 

not supersede any Federal law or 

regulation that regulates anticompetitive 

behavior. 

(5) A bid submitted by a network 

must include a statement from each 

network member certifying that the 

network member joined the network 

because it is unable independently to 

furnish all of the items in the product 

category for which the network is 

submitting a bid to beneficiaries 

throughout the entire geographic area of 

the CBA. 

(6) At the time that a network submits 

a bid, the network’s total market share 

for each product category that is the 

subject of the network’s bid cannot 

exceed 20 percent of the Medicare 

demand for that product category in the 

CBA. 

(c) If the network is awarded a 

contract, each supplier must submit its 

own claims and will receive payment 

directly from Medicare for the items that 

it furnishes under the competitive 

bidding program. 

§ 414.420 Physician or treating practitioner 

authorization and consideration of clinical 

efficiency and value of items. 

(a) Prescription for a particular brand 

item or mode of delivery. (1) A 

physician or treating practitioner may 

prescribe, in writing, a particular brand 

of an item for which payment is made 

under a competitive bidding program, or 

a particular mode of delivery for an 

item, if he or she determines that the 

particular brand or mode of delivery 

would avoid an adverse medical 

outcome for the beneficiary. 

(2) When a physician or treating 

practitioner prescribes a particular 

brand or mode of delivery of an item 

under paragraph (a)(1) of this section, 

the physician or treating practitioner 

must document the reason in the 

beneficiary’s medical record why the 

particular brand or mode of delivery is 

medically necessary to avoid an adverse 

medical outcome. 

(b) Furnishing of a prescribed 

particular brand item or mode of 

delivery. If a physician or treating 

practitioner prescribes a particular 

brand of an item or mode of delivery, 

the contract supplier must—

(1) Furnish the particular brand or 

mode of delivery as prescribed by the 

physician or treating practitioner; 

(2) Consult with the physician or 

treating practitioner to find an 

appropriate alternative brand of item or 

mode of delivery for the beneficiary and 

obtain a revised written prescription 

from the physician or treating 

practitioner; or 

(3) Assist the beneficiary in locating a 

contract supplier that can furnish the 

particular brand of item or mode of 

delivery prescribed by the physician or 

treating practitioner. 

(c) Payment for a particular brand of 

item or mode of delivery. Medicare does 

not make an additional payment to a 

contract supplier that furnishes a 

particular brand or mode of delivery for 

an item, as directed by a prescription 

written by the beneficiary’s physician or 

treating practitioner. 

(d) Prohibition on billing for an item 

different from the particular brand of 

item or mode of delivery prescribed. A 

contract supplier is prohibited from 

submitting a claim to Medicare if it 

furnishes an item different from that 

specified in the written prescription 

received from the beneficiary’s 

physician or treating practitioner. 

Payment will not be made to a contract 

supplier that submits a claim prohibited 

by this paragraph. 

§ 414.422 Terms of contracts. 

(a) Basic rule. CMS specifies the terms 

and conditions of the contracts entered 

into with contract suppliers under this 

subpart. A contract supplier must 

comply with all terms of its contract, 

including any option exercised by CMS, 

for the full duration of the contract 

period. 

(b) Recompeting competitive bidding 

contracts. CMS recompetes competitive 

bidding contracts at least once every 3 

years. 

(c) Nondiscrimination. The items 

furnished by a contract supplier under 

this subpart must be the same items that 

the contract supplier makes available to 

other customers. 

(d) Change of ownership. (1) A 

contract supplier must notify CMS if it 

is negotiating a change in ownership 60 

days before the anticipated date of the 

change. 


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(2) CMS may award a contract to an 

entity that merges with, or acquires, a 

contract supplier if—

(i) The successor entity meets all 

requirements applicable to contract 

suppliers for the applicable competitive 

bidding program; 

(ii) The successor entity submits to 

CMS the documentation described 

under § 414.414(b) through (d) if that 

documentation has not previously been 

submitted by the successor entity or the 

contract supplier that is being acquired, 

or is no longer current. This 

documentation must be submitted 

within 30 days prior to the anticipated 

effective date of the change of 

ownership. A successor entity is not 

required to duplicate previously 

submitted information if the previously 

submitted information is still current; 

(iii) The successor entity is acquiring 

the assets of the existing contract 

supplier, it submits to CMS, at least 30 

days before the anticipated effective 

date of the change of ownership, a 

signed novation agreement acceptable to 

CMS stating that it will assume all 

obligations under the contract; or 

(iv) A new entity will be formed as a 

result of the merger or acquisition, the 

existing contract supplier submits to 

CMS, at least 30 days before the 

anticipated effective date of the change 

of ownership, its final draft of a 

novation agreement as described in 

paragraph (d)(2)(iii) of this section for 

CMS review. The successor entity must 

submit to CMS, within 30 days after the 

effective date of the change of 

ownernship and executed novation 

agreement acceptable to CMS. 

(e) Furnishing of items. Except as 

otherwise prohibited under section 1877 

of the Act, or any other applicable law 

or regulation: 

(1) A contract supplier must agree to 

furnish items under its contract to any 

beneficiary who maintains a permanent 

residence in, or who visits, the CBA and 

who requests those items from that 

contract supplier. 

(2) A skilled nursing facility defined 

under section 1819(a) of the Act or a 

nursing facility defined under section 

1919(a) of the Act that has elected to 

furnish items only to its own residents 

and that is also a contract supplier may 

furnish items under a competitive 

bidding program to its own patients to 

whom it would otherwise furnish Part B 

services. 

(f) Breach of contract. (1) Any 

deviation from contract requirements, 

including a failure to comply with 

governmental agency or licensing 

organization requirements, constitutes a 

breach of contract. 

(2) In the event a contract supplier 

breaches its contract, CMS may take one 

or more of the following actions: 

(i) Require the contract supplier to 

submit a corrective action plan; 

(ii) Suspend the contract supplier’s 

contract; 

(iii) Terminate the contract; 

(iv) Preclude the contract supplier 

from participating in the competitive 

bidding program; 

(v) Revoke the supplier number of the 

contract supplier; or 

(vi) Avail itself of other remedies 

allowed by law. 

§ 414.424 Administrative or judicial review. 

(a) There is no administrative or 

judicial review under this subpart of the 

following: 

(1) Establishment of payment 

amounts. 

(2) Awarding of contracts. 

(3) Designation of CBAs. 

(4) Phase-in of the competitive 

bidding programs. 

(5) Selection of items for competitive 

bidding. 

(6) Bidding structure and number of 

contract suppliers selected for a 

competitive bidding program. 

(b) A denied claim is not appealable 

if the denial is based on a determination 

by CMS that a competitively bid item 

was furnished in a CBA in a manner not 

authorized by this subpart. 

§ 414.426 Adjustments to competitively 

bid payment amounts to reflect changes in 

the HCPCS. 

If a HCPCS code for a competitively 

bid item is revised after the contract 

period for a competitive bidding 

program begins, CMS adjusts the single 

payment amount for that item as 

follows: 

(a) If a single HCPCS code for an item 

is divided into two or more HCPCS 

codes for the components of that item, 

the sum of single payment amounts for 

the new HCPCS codes equals the single 

payment amount for the original item. 

Contract suppliers must furnish the 

components of the item and submit 

claims using the new HCPCS codes. 

(b) If a single HCPCS code is divided 

into two or more separate HCPCS codes, 

the single payment amount for each of 

the new separate HCPCS codes is equal 

to the single payment amount applied to 

the single HCPCS code. Contract 

suppliers must furnish the items and 

submit claims using the new separate 

HCPCS codes. 

(c) If the HCPCS codes for 

components of an item are merged into 

a single HCPCS code for the item, the 

single payment amount for the new 

HCPCS code is equal to the total of the 

separate single payment amounts for the 

components. Contract suppliers must 

furnish the item and submit claims 

using the new HCPCS code. 

(d) If multiple HCPCS codes for 

similar items are merged into a single 

HCPCS code, the items to which the 

new HCPCS codes apply may be 

furnished by any supplier that has a 

valid Medicare billing number. Payment 

for these items will be made in 

accordance with Subpart C or Subpart 

D. 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 

Dated: December 14, 2006. 

Leslie Norwalk, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: March 13, 2007. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 07–1701 Filed 4–2–07; 4:15 pm] 

BILLING CODE 4120–01–P 


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