[Federal Register Volume 72, Number 68 (Tuesday, April 10, 2007)]
[Rules and Regulations]
[Pages 17992-18090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-1701]



[[Page 17991]]

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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 411 and 414



Medicare Program; Competitive Acquisition for Certain Durable Medical 
Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) and Other 
Issues; Final Rule

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

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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.

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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

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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[reg] 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 (Sec. Sec.  414.400 and 414.402)
    C. Competitive Bidding Implementation Contractors (CBICs) 
(Sec. Sec.  414.406(a) and (e))
    D. Payment Under the Medicare DMEPOS Competitive Bidding Program
    1. Payment Basis (Sec. Sec.  414.408(a), (c), and (d))
    2. General Payment Rules
    3. Special Rules for Certain Rented Items of DME and Oxygen 
(Grandfathering of Suppliers) (Sec.  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 (Sec.  414.408(b))
    b. Adjustments to Single Payment Amounts to Reflect Changes to 
the HCPCS (Sec.  414.426)
    5. Authority to Adjust Payments in Other Areas
    6. Requirement to Obtain Competitively Bid Items From a Contract 
Supplier (Sec.  414.408(e))
    7. Limitation on Beneficiary Liability for Items Furnished by 
Noncontract Suppliers (Sec. Sec.  414.408(e)(2)(iv) and (e)(3))
    8. Payment for Repair and Replacement of Beneficiary-Owned Items 
(Sec.  414.408(l))
    E. Competitive Bidding Areas (Sec. Sec.  414.406 and 414.410)
    1. Background
    2. Methodology for MSA Selection for CYs 2007 and 2009 
Competitive Bidding Programs (Sec. Sec.  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 
(Sec.  414.410(c))
    4. Establishing Competitive Bidding Areas for CYs 2007 and 2009 
(Sec. Sec.  414.406(b) and (c))
    5. Nationwide or Regional Mail Order Competitive Bidding Program 
(Sec. Sec.  414.410(d)(2) and 414.412(f) and (g))
    6. Additional Competitive Bidding Areas After CY 2009 (Sec.  
414.410(e))
    F. Criteria for Item Selection (Sec. Sec.  414.402 and 
414.406(d)(1))
    G. Submission of Bids for Competitively Bid DMEPOS (Sec. Sec.  
414.404, 414.408, 414.412. and 412.422)
    1. Furnishing of Items (Sec. Sec.  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 (Sec. Sec.  
414.404(a)(2) and 414.422(e)(2))
    3. Physicians and Certain Nonphysician Practitioners (Sec. Sec.  
414.404(a) and (b))
    4. Product Categories for Bidding Purposes (Sec. Sec.  414.402 
and 414.412(b) Through (e))
    5. Bidding for Specific Types of Items and Associated Payment 
Rules (Sec. Sec.  414.408(f) Through (j))
    a. Inexpensive or Other Routinely Purchased DME Items 
(Sec. Sec.  414.408(f) and (h)(6))
    b. DME Items Requiring Frequent and Substantial Servicing (Sec.  
414.408(h)(7))
    c. Oxygen and Oxygen Equipment (Sec. Sec.  414.408(i) and (j))
    d. Capped Rental Items (Sec.  414.408(h))
    e. Enteral Nutrients, Equipment, and Supplies (Sec. Sec.  
414.408(f), (g)(2), and (h))
    f. Maintenance and Servicing of Enteral Nutrition Equipment 
(Sec. Sec.  414.408(h)(5) and (i)(5))
    g. Supplies Used in Conjunction With DME (Sec.  414.408(g)(1))
    h. Off-the-Shelf Orthotics (Sec.  414.408(g)(4))
VII. Conditions for Awarding Contracts for Competitive Bids
    A. Quality Standards and Accreditation
    B. Eligibility (Sec.  414.414(b))
    C. Financial Standards (Sec.  414.414(d))
    D. Evaluation of Bids (Sec.  414.414(e))
    1. Market Demand and Supplier Capacity (Sec. Sec.  414.414(e)(1) 
and (e)(2))
    2. Composite Bids (Sec. Sec.  414.414(e)(3) and (e)(4))
    3. Determining the Pivotal Bid (Sec. Sec.  414.414(e)(5) and 
(e)(6))
    4. Assurance of Savings (Sec.  414.414(f))
    5. Assurance of Multiple Contractors (Sec.  414.414(h))
    6. Selection of New Suppliers After Bidding (Sec.  414.414(i))
VIII. Determining Single Payment Amounts for Individual Items
    A. Setting Single Payment Amounts for Individual Items 
(Sec. Sec.  414.416(a) and (b))
    B. Rebate Program
IX. Terms of Contracts
    A. Terms and Conditions of Contracts (Sec. Sec.  414.422(a) 
Through (c))
    B. Change in Ownership (Sec.  414.422(d))
    C. Suspension or Termination of a Contract (Sec. Sec.  
414.422(f) and (g))
X. Administrative or Judicial Review of Determinations Made Under 
the Medicare DMEPOS Competitive Bidding Program (Sec.  414.424)
XI. Opportunity for Participation by Small Suppliers (Sec.  
414.414(g))
XII. Opportunity for Networks (Sec.  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 (Sec.  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--
    <bullet> 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.
    <bullet> 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.'')
    <bullet> 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.)
    <bullet> 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.)
    <bullet> 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.)
    <bullet> 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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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:
    <bullet> The supplier's actual charge for the item.
    <bullet> The supplier's customary charge for the item.
    <bullet> 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.
    <bullet> The inflation indexed charge (IIC). The IIC is defined in 
Sec.  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 Sec.  
414.200 through Sec.  414.232 (with the exception of Sec.  414.228), 
set forth separate payment categories of DME and describe how the fee 
schedule for each of the following categories is established:
    <bullet> Inexpensive or other routinely purchased items (section 
1834(a)(2) of the Act and Sec.  414.220 of the regulations);
    <bullet> Items requiring frequent and substantial servicing 
(section 1834(a)(3) of the Act and Sec.  414.222 of the regulations);
    <bullet> Customized items (section 1834(a)(4) of the Act and Sec.  
414.224 of the regulations);
    <bullet> Oxygen and oxygen equipment (section 1834(a)(5) of the Act 
and Sec.  414.226 of the regulations);
    <bullet> Other items of DME (section 1834(a)(7) of the Act and 
Sec.  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 Sec.  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 Sec.  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,

[[Page 17995]]

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 (Sec.  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 (Sec.  
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 (Sec.  414.102(c)). Under Sec.  
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 Sec.  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 Medicare-covered 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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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,

[[Page 17996]]

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-the-shelf (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:
    <bullet> To implement competitive bidding programs for certain 
DMEPOS items.
    <bullet> To assure beneficiary access to quality DMEPOS as a result 
of the program.
    <bullet> To reduce the amount Medicare pays for DMEPOS and create a 
payment structure under competitive bidding that is more reflective of 
a competitive market.

[[Page 17997]]

    <bullet> To limit the financial burden on beneficiaries by reducing 
their out-of-pocket expenses for DMEPOS they obtain through the 
program.
    <bullet> 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:
    <bullet> The implementation of the Medicare DMEPOS Competitive 
Bidding Program.
    <bullet> The establishment of financial standards for entities 
seeking contracts under the Medicare DMEPOS Competitive Bidding 
Program, taking into account the needs of small providers.
    <bullet> The establishment of requirements for collection of data 
for the efficient management of the Medicare DMEPOS Competitive Bidding 
Program.
    <bullet> The development of proposals for efficient interaction 
among manufacturers, providers of services, suppliers (as defined in 
section 1861(d) of the Act), and individuals.
    <bullet> 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--
    <bullet> Medicare's timeline for implementation of the Medicare 
DMEPOS Competitive Bidding Program;
    <bullet> Results of the Medicare competitive bidding demonstration 
projects authorized by section 4319 of the BBA;
    <bullet> Structure of the Medicare DMEPOS Competitive Bidding 
Program;
    <bullet> Existing non-Medicare competitive bidding programs for 
DMEPOS;
    <bullet> Program design options for the Medicare DMEPOS Competitive 
Bidding Program;
    <bullet> 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;
    <bullet> Criteria for selecting items for competitive bidding;
    <bullet> Bidding process overview;
    <bullet> Methodology for setting single payment amounts for 
competitively bid items;
    <bullet> Capacity of DMEPOS suppliers and beneficiary utilization 
of DMEPOS;
    <bullet> Financial capabilities of bidding suppliers;
    <bullet> 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
    <bullet> 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 (Sec. Sec.  414.400 and 414.402)

    In the May 1, 2006 proposed rule, we proposed in Sec.  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 Sec.  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 Sec.  
414.220.
    (2) An item requiring frequent and substantial servicing as 
described in Sec.  414.222.
    (3) Oxygen and oxygen equipment described in Sec.  414.226.

[[Page 17998]]

    (4) A capped rental item described in Sec.  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 Sec.  414.202 
and further classified into the following categories:
    (i) Inexpensive or routinely purchased items, as specified in Sec.  
414.220(a);
    (ii) Items requiring frequent and substantial servicing, as 
specified in Sec.  414.222(a);
    (iii) Oxygen and oxygen equipment, as specified in Sec.  
414.226(b).
    (iv) Other DME (capped rental items), as specified in Sec.  
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 self-adjustment 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 Sec.  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 mail-order 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

[[Page 17999]]

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 Sec.  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 Sec.  414.402 
as discussed above. We are also revising the definitions of several 
other terms in Sec.  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:
    <bullet> Revising the regulatory reference to the oxygen payment 
classes in the definition of ``item'' so that the definition now 
references Sec.  414.226(c)(1) instead of Sec.  414.225(b). We discuss 
this revision in section VI.G.6 of this final rule.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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 
Sec.  414.402:
    <bullet> 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.''
    <bullet> 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 Sec.  
414.408(j).''
    <bullet> 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.''
    <bullet> 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 Sec.  
414.402 without modification.

C. Competitive Bidding Implementation Contractors (CBICs) (Sec. Sec.  
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 Sec.  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,

[[Page 18000]]

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 Sec.  414.406(a), which allows us to designate 
one or more CBICs for the purpose of implementing the program, and at 
Sec.  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 (Sec. Sec.  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 Sec.  
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 Sec.  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 Sec.  
414.408(d)). Finally, as required under section 1847(b)(5)(C) of the 
Act, we proposed in Sec.  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 Sec.  414.408(a) 
that governs the payment basis under the Medicare DMEPOS Competitive 
Bidding Program. We did not receive comments on proposed Sec. Sec.  
414.408(c) and (d) and are finalizing those sections. We have made an 
editorial revision to Sec.  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 
Sec.  414.200 through Sec.  414.232 (with the exception of Sec.  
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 (Sec.  414.100 through Sec.  414.104). Section 
1834(h) of the Act and Sec.  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) (Sec.  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

[[Page 18001]]

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 Sec.  414.220 of the regulations), items 
requiring frequent and substantial servicing (as described in Sec.  
414.222 of the regulations), and capped rental items (as described in 
Sec.  414.229 of the regulations). Section 1834(a)(5) of the Act and 
Sec.  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 Sec.  
414.408(k) (redesignated as Sec.  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 Sec.  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 Sec. Sec.  414.408(k)(2)(iii) and (iv)); redesignated as 
Sec. Sec.  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 
Sec.  414.220 or Sec.  414.229, we proposed in Sec. Sec.  
414.408(k)(2)(i) and (k)(2)(ii) (redesignated as Sec. Sec.  
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

[[Page 18002]]

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 Sec.  414.408(k)(1) 
(allowing a supplier to elect to be a grandfathered supplier) and 
proposed Sec.  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 Sec.  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 Sec.  
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

[[Page 18003]]

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 Sec.  414.408(k)(3); 
redesignated Sec.  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 Sec.  
414.416.
    We did not receive any specific comments on these proposals. 
Therefore, in this final rule, we are redesignating proposed Sec.  
414.408(k)(3) as Sec.  414.408(j)(3), making editorial revisions, and 
finalizing that section.
c. Payment for Accessories for Items Subject to Grandfathering (Sec.  
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

[[Page 18004]]

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 Sec.  414.408(k) 
(redesignated Sec.  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 fee-for-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 Sec.  414.408 (k) as Sec.  414.408 (j) and 
finalizing this section as discussed above and with additional 
technical modifications. We are also adding new Sec.  414.408(h)(2) and 
Sec.  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 (Sec.  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 Sec.  
414.408(b)). Specifically, beginning with the second year of a contract 
entered into under a competitive bidding program, we proposed to

[[Page 18005]]

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 multi-year 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 Sec.  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 (Sec.  414.426)
    We proposed under Sec.  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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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

[[Page 18006]]

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 Sec. Sec.  414.426(a) through (c) and revising Sec.  
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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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 
Sec.  414.408(e) until the subsequent rulemaking is completed.
6. Requirement to Obtain Competitively Bid Items From a Contract 
Supplier (Sec. Sec.  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 Sec.  414.408(f)(2)(ii) (redesignated Sec.  
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 Sec.  421.210(e). 
Under this proposal, the

[[Page 18007]]

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:
    <bullet> 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.
    <bullet> 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 Sec.  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 Sec.  
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,

[[Page 18008]]

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 (Sec.  
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 Sec.  414.408(f) as Sec.  414.408(e) and adding 
a new Sec.  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 Sec. Sec.  414.408(f)(1) 
and (f)(2)(i) and (f)(2)(ii) (redesignated as Sec. Sec.  
414.408(e)(2)(i) and (e)(2)(iii)) with only technical modifications. We 
are also finalizing Sec.  411.15(s).
7. Limitation on Medicare Payment and Beneficiary Liability for Items 
Furnished by Noncontract Suppliers (Sec. Sec.  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 Sec.  414.408(f)(2)(iii); redesignated Sec.  
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 Sec.  414.408(f)(3)) (redesignated in this 
final rule as Sec.  414.408(e)(4)).
    Comment: Several commenters suggested that proposed Sec.  
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 Sec.  
414.408(e)(3)(ii) and Sec.  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

[[Page 18009]]

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 Sec.  414.408(f)(2)(iii) 
(redesignated in this final rule as Sec.  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 Sec. Sec.  414.408(f)(2)(iii) and (f)(3) as 
final Sec. Sec.  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 (Sec.  
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 Sec.  
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 (Sec.  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 Sec.  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 Sec.  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 Sec.  414.210(e)(3).
    We note that we do not have authority under Sec.  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

[[Page 18010]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  414.422(c) as 
new Sec.  414.408(k) and revising this section as discussed above.

E. Competitive Bidding Areas (Sec. Sec.  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--
    <bullet> 10 of the largest MSAs in CY 2007;
    <bullet> 80 of the largest MSAs in CY 2009; and
    <bullet> Additional areas after CY 2009.
    We proposed to implement this statutory provision in Sec.  
414.406(b)-(c), and in Sec.  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 (Sec. Sec.  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 (Sec.  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

[[Page 18011]]

82228 through 82238). Under these standards, an MSA is defined as a 
core-based 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          $312,124,291
 (New York)...........................................
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                   97,487,063
 (Philadelphia).......................................
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          41,016,726
 Beach)...............................................
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

[[Page 18012]]

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]
----------------------------------------------------------------------------------------------------------------
                                                               Charges per      Suppliers per
                       MSA                          Score      beneficiary       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,

[[Page 18013]]

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:
    <bullet> Identify the top 50 MSAs in terms of general population.
    <bullet> Focus on the 25 MSAs from step one with the greatest total 
of DMEPOS allowed charges.
    <bullet> 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.
    <bullet> Exclude the three largest MSAs in terms of population (New 
York, Los Angeles, Chicago) and any MSA that crosses DME MAC 
boundaries.
    <bullet> Select the lowest scoring MSA from each DME MAC region.
    <bullet> Select the next six lowest scoring MSAs regardless of DME 
MAC region, but not more than two MSAs from one State.
    <bullet> 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--
    <bullet> General population;
    <bullet> Medicare FFS beneficiary population;
    <bullet> Number of beneficiaries receiving DMEPOS items that we 
have authority to include in a competitive bidding program;
    <bullet> Total Medicare allowed charges for DMEPOS items subject to 
competitive bidding; and
    <bullet> 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

[[Page 18014]]

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 Sec.  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:
    <bullet> 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.
    <bullet> 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

[[Page 18015]]

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 Sec. Sec.  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 (Sec.  
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:
    <bullet> 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.
    <bullet> Low number of suppliers of DMEPOS items subject to 
competitive bidding serving the area relative to other similar 
geographic areas.
    <bullet> 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 Sec.  
412.64(b)(1)(ii) of our regulations. We proposed to incorporate these 
provisions in proposed Sec.  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 Sec.  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 
(Sec. Sec.  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 Sec.  414.406(b) 
to designate through program instructions each CBA in which a 
competitive bidding program will take place, and we proposed in Sec.  
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:
    <bullet> The area adjoins an MSA in which a competitive bidding 
program will be operating in CY 2007 or CY 2009.
    <bullet> The area is not part of an MSA in which a competitive 
bidding program will be operating in CY 2007 or CY 2009.
    <bullet> The area is competitive, as explained below.
    <bullet> 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

[[Page 18016]]

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 Sec.  
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

[[Page 18017]]

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.

[[Page 18018]]

    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 
(Sec. Sec.  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 Sec.  414.410(d)(2) and Sec. Sec.  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 Sec.  
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

[[Page 18019]]

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/CompetitiveAcqforDMEPOS/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, mail-order 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 (Sec.  
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 
Sec.  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 Sec. Sec.  414.406(b)-
(c) and Sec.  414.410 as discussed above and with additional technical 
changes, which include specifying in Sec.  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 Sec.  414.402. Finally, we are finalizing Sec. Sec.  
414.412(f) and (g) as discussed above and with technical changes.

F. Criteria for Item Selection (Sec. Sec.  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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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 Sec.  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

[[Page 18020]]

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          Wheelchairs.
                                                          programmable features.
A4253................................       779,756,243  Blood glucose/reagent strips,  Diabetic Supplies &
                                                          box of 50.                     Equipment.
E0260................................       331,457,962  Semi-electric hospital bed...  Hospital Beds/
                                                                                         Accessories.
E0431................................       228,066,037  Portable gaseous oxygen        Oxygen.
                                                          equipment.
B4150 *..............................       206,396,813  Enteral formula, category I..  Enteral Nutrition.
B4035................................       197,057,150  Enteral feeding supply kit,    Enteral Nutrition.
                                                          pump fed, per day.
E0277................................       156,762,241  Powered air mattress.........  Support Surfaces.
E0439................................       141,268,474  Stationary liquid oxygen.....  Oxygen.
E0601................................       123,865,463  Continuous positive airway     CPAP Devices.
                                                          pressure device (CPAP).
K0001................................       103,217,209  Standard manual wheelchair...  Wheelchairs.
K0004................................        87,208,486  High strength lightweight      Wheelchairs.
                                                          manual wheelchair.
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     Walkers.
                                                          seat.
K0533 *..............................        75,136,517  Respiratory assist device      Respiratory Assist
                                                          with backup rate feature.      Devices.
K0538 *..............................        65,603,531  Negative pressure wound        Negative Pressure Wound
                                                          therapy electrical pump.       Therapy (NPWT) Devices.
K0532 *..............................        56,046,930  Respiratory assist device      Respiratory Assist
                                                          without backup rate feature.   Devices.
K0003................................        55,318,959  Lightweight manual wheelchair  Wheelchairs.
K0108................................        52,139,979  Miscellaneous wheelchair       Wheelchairs.
                                                          accessory.
E0192 *..............................        48,413,938  Wheelchair cushion...........  Support Surfaces.
E0163................................        48,216,855  Stationary commode chair with  Commodes.
                                                          fixed arms.
B4034................................        42,277,968  Enteral feeding supply kit     Enteral Nutrition.
                                                          syringe, per day.
----------------------------------------------------------------------------------------------------------------
* 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

[[Page 18021]]

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
----------------------------------------------------------------------------------------------------------------
                                                                                                   Percent of
                    Rank                               Policy group                CY 2003           DMEPOS
----------------------------------------------------------------------------------------------------------------
1...........................................  Oxygen Supplies/Equipment.....    $2,433,713,269              21.3
2...........................................  Wheelchairs/Power Operated         1,926,210,675              16.9
                                               Vehicle (POVs) **.
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               88,530,828               0.8
                                               therapy (NPWT) Devices.
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:
    <bullet> Annual Medicare DMEPOS allowed charges.
    <bullet> Annual growth in expenditures.
    <bullet> Number of suppliers.
    <bullet> Savings in the DMEPOS competitive bidding demonstrations.
    <bullet> 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:
    <bullet> Medicare Allowed Charges for Orthotic Body Jackets, March 
2000 (OEI-04-97-00391);

[[Page 18022]]

    <bullet> Medicare Payments for Enteral Nutrition, February 2004 
(OEI-03-02-00700); and
    <bullet> 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 self-adjustment' 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 semi-rigid 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 self-adjustment'' 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 self-adjustment. 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.

[[Page 18023]]

    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 well-understood 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

[[Page 18024]]

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 vision-
related 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

[[Page 18025]]

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 self-adjustment'' under Sec.  
414.402. We are also finalizing Sec.  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 (Sec. Sec.  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 
Sec.  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 Sec.  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 
(Sec.  414.408(f)(2)(i), as discussed in section VI.D.3. of this final 
rule.
1. Furnishing of Items (Sec. Sec.  414.412(c) and 414.422(e))
    In the May 1, 2006 proposed rule, under proposed Sec.  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 Sec.  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 
Sec.  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 Sec.  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

[[Page 18026]]

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 (Sec. Sec.  414.404(a) and 
414.422(e)(2))
    In the May 1, 2006 proposed rule (71 FR 25672), we proposed in 
Sec.  414.404(a) that the Medicare DMEPOS Competitive Bidding Program 
would apply to suppliers, and in proposed Sec.  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

[[Page 18027]]

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 Sec.  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 Sec.  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

[[Page 18028]]

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 Sec.  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 
Sec.  414.422(e)(2)(i) as Sec.  414.422(e)(2) and finalizing that 
section with the modifications discussed above. Finally, as we discuss 
below, we are deleting Sec.  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 Sec.  414.404(b).
3. Physicians and Certain Nonphysician Practitioners (Sec. Sec.  
414.404(a) and (b))
    In the May 1, 2006 proposed rule (71 FR 25672), we proposed in 
proposed Sec.  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 Sec.  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 self-
referral 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 self-referral (``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 Sec.  414.404(c) and revising Sec.  414.404(b) to 
give physicians (as defined at section 1861(r) of the Act, which 
includes podiatric physicians) and treating practitioners (defined in 
Sec.  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 Sec.  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 self-referral 
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 Sec.  414.404(b)(2) 
to give physical therapists in private practice and occupational 
therapists in private practice the option to furnish certain

[[Page 18029]]

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 Sec.  
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 self-referral provisions in section 1877 
of the Act. All provisions of the physician self-referral 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 
Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  414.404(b), we are not finalizing proposed Sec.  
414.422(e)(2)(ii).
4. Product Categories for Bidding Purposes (Sec. Sec.  414.402 and 
414.412(b)(1),(c) Through (e))
    In the May 1, 2006 proposed rule (71 FR 25672), we proposed in 
Sec. Sec.  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 Sec.  
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

[[Page 18030]]

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 Sec.  
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 Sec.  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 Sec.  414.402 to define 
a product category as a grouping of related items that are used to 
treat a similar medical

[[Page 18031]]

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 low-
volume 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

[[Page 18032]]

category in the same CBA. Therefore, we are requiring under revised 
Sec.  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 commonly-owned 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 Sec.  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 Sec.  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 
Sec.  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 
Sec.  414.402. We have combined proposed Sec.  414.412(e) and proposed 
Sec.  414.412(c) into a new Sec.  414.412(c), but deleted the first 
sentence of proposed Sec.  414.412(c) as redundant because we include 
the definition of ``product category'' in Sec.  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 Sec.  414.412(b) a final Sec.  
414.412(b)(1), and finalizing Sec.  414.412(d) with technical changes. 
Finally, we are finalizing Sec.  414.412(e), which set forth our 
ownership rules, as discussed above.
    We are redesignating proposed Sec.  414.412(e) as final Sec. Sec.  
414.412(d) and adding a new Sec.  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 
(Sec. Sec.  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 (Sec. Sec.  
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 (Sec.  
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 Sec.  414.222(b) of our existing 
regulations.

[[Page 18033]]

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 (Sec.  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 Sec.  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 Sec. Sec.  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 Sec.  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 (Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 18034]]

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 (Sec. Sec.  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 Sec.  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 (Sec.  
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 Sec.  414.408(i)(3) (redesignated as Sec.  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 Sec.  414.408(i)(4) 
(redesignated as Sec.  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

[[Page 18035]]

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 (Sec.  414.408(g)(1))
    We proposed under proposed Sec.  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 (Sec.  414.408(g)(4))
    We proposed under proposed Sec.  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 Sec. Sec.  414.408((g) 
through (j) as Sec. Sec.  414.408(f) through (i), respectively, and 
finalizing these sections (with the exception of Sec.  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 Sec.  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 Sec.  414.414(a) provides generally that the rules in Sec.  
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 Sec.  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 Sec.  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 Sec.  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 (Sec.  414.414(a) Through (c))

    In the May 1, 2006 proposed rule (71 FR 25675), we proposed in 
Sec.  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 Sec.  424.57. In addition, we proposed 
Sec.  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 Sec.  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 Sec.  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

[[Page 18036]]

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 Sec.  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 CMS-approved 
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 Sec.  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 high-level 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 Sec.  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

[[Page 18037]]

the supplier being in ``good standing'' with CMS), including enrollment 
requirements set forth at Sec. Sec.  424.500 et seq., during the 
contract term.
    We have added a cross-reference to final Sec.  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 
Sec.  414.418.
    After consideration of public comments, we are finalizing Sec.  
414.414(a) without modification. We are finalizing Sec. Sec.  
414.414(b)(1)-(3) with the changes discussed above and with additional 
technical changes.

C. Financial Standards (Sec.  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 Sec.  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 Sec.  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

[[Page 18038]]

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 Sec.  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 Sec.  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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.

[[Page 18039]]

    <bullet> For networks, the legal entity that submits the bid must 
submit financial statements on behalf of each network member in one 
complete package.
    <bullet> 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 (Sec.  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 (Sec. Sec.  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 Sec.  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

[[Page 18040]]

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 Sec.  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 Sec.  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 (Sec. Sec.  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 Sec. Sec.  414.414(e)(2) and (e)(3) 
(redesignated as Sec.  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

[[Page 18041]]

(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
----------------------------------------------------------------------------------------------------------------
                                                                                                   Expected cost
              Item                       A               B               C         Composite bid     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 x 5 
units = $5.00, item B--$4.00 x 3 units = $12.00, item C--$1.00 x 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 Sec.  414.414(e)(2) and (e)(3) as Sec.  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 Sec.  414.402.
3. Determining the Pivotal Bid (Sec. Sec.  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.

[[Page 18042]]



                                      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]
----------------------------------------------------------------------------------------------------------------
                                      Eligible for                                                 Cumulative
          Supplier No.                  selection          Composite bid    Supplier capacity       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 pre-ordaining 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

[[Page 18043]]

units, the cumulative capacity of those suppliers is 90 units.
    After consideration of the public comments we received, we are 
redesignating proposed Sec.  414.414(e)(4) as Sec.  414.414(e)(5), and 
finalizing newly redesignated Sec.  414.414(e)(5) with the changes 
discussed above. We also are redesignating proposed Sec.  414.414(e)(5) 
as Sec.  414.414(e)(6) and revising newly redesignated Sec.  
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 (Sec.  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 Sec.  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 Sec.  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 Sec.  
414.414(f) with only technical changes.
5. Assurance of Multiple Contractors (Sec.  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 Sec.  414.414(g) (redesignated as Sec.  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

[[Page 18044]]

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 Sec.  414.414(g) as Sec.  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 Sec. Sec.  414.414(b) through (f) are 
met by at least 5 suppliers. We are also adding a new Sec.  
414.414(h)(2), which provides that if the requirements in Sec. Sec.  
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 Sec.  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 (Sec.  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 Sec.  414.414(h) as Sec.  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 (Sec. Sec.  
414.416(a) and (b))

    Section 1847(b)(5)(A) of the Act requires that the Secretary 
determine a

[[Page 18045]]

single payment amount for each item in each CBA based on the bids 
submitted and accepted for that item, and we proposed in Sec.  
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
----------------------------------------------------------------------------------------------------------------
                                                                                                      Actual
                      Item                               A               B               C         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
----------------------------------------------------------------------------------------------------------------
                                                                                      Average         Actual
              Item                       A               B               C         composite bid   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                1.11            1.11            1.11  ..............  ..............
 Composite Bid)/(Average
 Composite Bid).................
Adjusted average bids-single                1.48            2.96            1.85  ..............  ..............
 payment amount per item........
----------------------------------------------------------------------------------------------------------------

    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

[[Page 18046]]

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 Sec.  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

[[Page 18047]]

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 Sec.  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 
Sec. Sec.  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 Sec.  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 Sec.  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-by-case 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

[[Page 18048]]

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 Sec.  
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

[[Page 18049]]

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 Sec.  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 Sec.  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 Sec.  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 (Sec. Sec.  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:
    <bullet> Covered product categories and covered beneficiaries 
operating policies.
    <bullet> Subcontracting rules.
    <bullet> Cooperation with us and our agents.
    <bullet> Potential onsite inspections.
    <bullet> Minimum length of participation.
    <bullet> Terms of contract suspension or termination.
    <bullet> Our discretion not to proceed if we find that the Medicare 
program will not realize significant savings as a result of the 
program.
    <bullet> Compliance with changes in Federal laws and regulations 
during the course of the agreement.
    <bullet> 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).
    <bullet> Supplier enrollment and quality standards.
    <bullet> The single payment amounts for covered items.
    <bullet> 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

[[Page 18050]]

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 Sec.  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 Sec.  414.422(a) of the proposed 
regulations so that it would require a contract supplier to comply with 
the accreditation requirements specified in Sec.  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 Sec.  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

[[Page 18051]]

supplier does not normally furnish. In this case, if the contract 
supplier could not furnish the item, the requirements at Sec.  
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 Sec.  
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

[[Page 18052]]

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 Sec.  414.422(a) which provides that we 
will specify the terms and conditions in the competitive bidding 
contacts, and finalizing the remainder of Sec.  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 Sec.  414.422(a) as final.
    We are adopting as final, without modifications, Sec.  414.422(b), 
which provides that we will recompete the competitive bidding contacts 
at least once every 3 years.
    We are finalizing Sec.  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 (Sec.  414.422(d))

    In the May 1, 2006 proposed rule, under proposed Sec.  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--
    <bullet> 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
    <bullet> 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 Sec.  414.422(d)(1) to clarify what a contract supplier's 
obligations are in the event of a change of ownership. Specifically, 
Sec.  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 Sec.  414.422(d)(2), if the supplier that acquires or 
merges with the

[[Page 18053]]

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 Sec.  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 Sec.  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 Sec.  414.422(d) as discussed above.

[[Page 18054]]

C. Suspension or Termination of a Contract (Sec. Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  
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 
Sec.  414.422(f). Specifically, at Sec.  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 Sec.  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 Sec.  414.426. However, 
even where Sec.  414.426 applies, the total single payment amounts for 
the sum of the item components, the newly

[[Page 18055]]

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 Sec. Sec.  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 (Sec.  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--
    <bullet> Establishment of payment amounts under a competitive 
bidding program;
    <bullet> Awarding of contracts under a competitive bidding program;
    <bullet> Designation of CBAs for the Medicare DMEPOS Competitive 
Bidding Program;
    <bullet> Phased-in implementation of the Medicare DMEPOS 
Competitive Bidding Program;
    <bullet> Selection of items for a competitive bidding program.
    <bullet> 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 Sec.  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,

[[Page 18056]]

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 
Sec.  414.424 as written does not make clear that these existing rights 
are unaffected. The commenters suggested the addition of language in 
Sec.  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 Sec.  
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 Sec.  414.424.

XI. Opportunity for Participation by Small Suppliers (Sec. Sec.  
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 non-DMEPOS 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

[[Page 18057]]

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 high-end 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/CompetitiveAcqforDMEPOS/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

[[Page 18058]]

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 ``set-aside'' 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 Sec.  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:
    <bullet> The definition of a ``small supplier'' is a supplier that 
generates gross revenue of $3.5 million or less in annual receipts.
    <bullet> 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 Sec.  
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 Sec.  414.402 
and finalizing Sec.  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 (Sec. Sec.  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 Sec.  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

[[Page 18059]]

networks, we proposed that the following rules must be met:
    <bullet> 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.
    <bullet> All legal contracts must be in place and signed before the 
network entity can submit a bid for the Medicare DMEPOS Competitive 
Bidding Program.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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 Sec.  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, anti-competitive 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 Sec.  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

[[Page 18060]]

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 anti-kickback 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,

[[Page 18061]]

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 Sec.  414.402 that 
provides that a network is an entity meeting the requirements of Sec.  
414.418. We are also finalizing Sec.  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

[[Page 18062]]

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 
ill-equipped 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 
non-Medicare 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

[[Page 18063]]

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 Sec.  
414.420 (in the proposed rule, the regulatory provision was erroneously 
cited in the preamble as Sec.  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

[[Page 18064]]

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 Sec. Sec.  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 Sec. Sec.  
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 Sec.  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

[[Page 18065]]

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 Sec.  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

[[Page 18066]]

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 (Sec.  
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 Sec.  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 Sec.  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

[[Page 18067]]

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/CompetitiveAcqforDMEPOS/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

[[Page 18068]]

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:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> 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 Web-based 
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 check-
box 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, 
Sec.  414.412(a) states that unless an exception applies, suppliers 
must submit a bid and be

[[Page 18069]]

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, Sec.  414.414(b)(1) 
states that each supplier must meet the enrollment standards specified 
in Sec.  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
----------------------------------------------------------------------------------------------------------------
                                                                                    Burden per     Total annual
         Requirement            OMB control No.     Respondents      Responses     response (in     burden (in
                                                                                      hours)          hours)
----------------------------------------------------------------------------------------------------------------
Sec.   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
Sec.   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: 
<a href="/cdn-cgi/l/email-protection#0e6d6f7c61627760516261786b7a7a4e61636c206b617e20696178"><span class="__cf_email__" data-cfemail="e48785968b889d8abb888b92819090a48b8986ca818b94ca838b92">[email protected]</span></a>, 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

[[Page 18070]]

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

[[Page 18071]]

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 high-end 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/CompetitiveAcqforDMEPOS/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 non-Medicare revenue (Sec.  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 ``set-aside'' 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 (Sec.  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 (Sec.  
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 (Sec.  
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 self-referral (``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

[[Page 18072]]

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 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 (Sec.  414.402 and Sec.  
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 (Sec.  
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 Sec.  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 (Sec.  
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

[[Page 18073]]

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 (Sec.  
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 (Sec.  
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:
    <bullet> This would help avoid collusion which could lead to less 
competition and higher bids.
    <bullet> It would ease administrative burden and reduce the overall 
cost of evaluating each network.
    <bullet> 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, self-referral 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 Sec.  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

[[Page 18074]]

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]
----------------------------------------------------------------------------------------------------------------
                                                                  Number of     Total number  of
                        Bidding year                           affected small       affected          Percent
                                                                  suppliers         suppliers
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
\1\ Some 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).

[[Page 18075]]

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:
    <bullet> Grandfathering of suppliers (see section VI.D.3.a of this 
final rule).
    <bullet> Requirement for physicians and certain nonphysician 
practitioners to submit bids (see section VI.G.3 of this final rule).
    <bullet> Product categories for bidding purposes (see section 
VI.G.4 of this final rule).
    <bullet> Financial standards (see section VII.C, of this final 
rule)
    <bullet> Selection of small suppliers (see section XI. of this 
final rule).
    <bullet> 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
----------------------------------------------------------------------------------------------------------------
                                                                                                   Percent of
                    Rank                               Policy group            Allowed charges   eligible DMEPOS
                                                                                    2005*            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              157,396,292               2.0
                                              Drugs**.
10.........................................  Respiratory Assist Device......       135,023,095               1.7

[[Page 18076]]

 
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

[[Page 18077]]

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

[[Page 18078]]

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           0        -86       -613       -901       -979      -1041
 of allowed charges)..........................
Beneficiary Costs (20 percent of allowed                0        -22       -153       -225       -245      -260
 charges).....................................
----------------------------------------------------------------------------------------------------------------
* 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\
---------------------------------------------------------------------------

    \1\ Fiscal 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 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 add-on increases the FFS 
savings by 24.9 percent in CY 2008. This is a dynamic number that 
increases over time.

[[Page 18079]]



           Table 14.--Fiscal Year Cost on the Medicare Program
                              [in millions]
------------------------------------------------------------------------
                                                            Beneficiary
               Fiscal year                Program impact       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-of-pocket 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:
    <bullet> 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.
    <bullet> 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.
    <bullet> Requiring that all commonly owned or controlled suppliers 
must submit a single bid on behalf of all locations

[[Page 18080]]

within the CBA, and additional locations that would furnish items in 
the CBA.
    <bullet> 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:
    <bullet> Suppliers that wish to participate in competitive bidding 
will have to incur the cost of submitting a bid.
    <bullet> 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.
    <bullet> 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

[[Page 18081]]

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

[[Page 18082]]

 
Noncontract suppliers as a percent of total suppliers..........           35%                35%           35%           35%           35%           35%
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Actual 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.
\2\ Some 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]
----------------------------------------------------------------------------------------------------------------
                                                                     Number of     Total number
                          Bidding year                            affected small    of affected       Percent
                                                                     suppliers       suppliers
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
\1\ Some 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.
    <bullet> 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

[[Page 18083]]

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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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 non-
physician 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.
    <bullet> 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

[[Page 18084]]

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.

0
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

0
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

0
2. Section 411.15 is amended by adding a new paragraph (s) to read as 
follows.


Sec.  411.15  Particular services excluded from coverage.

* * * * *
    (s) Unless Sec.  414.404(d) or Sec.  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 Sec.  414.402 of this 
subchapter).

PART 414--PAYMENT FOR PART B MEDICAL AND OTHER HEALTH SERVICES

0
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)

0
4. New Sec. Sec.  414.400, 414.402, and 414.404 are added to Subpart F 
to read as follows:


Sec.  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.


Sec.  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 Sec.  
414.408(j):
    (1) An inexpensive or routinely purchased item described in Sec.  
414.220.
    (2) An item requiring frequent and substantial servicing, as 
described in Sec.  414.222.
    (3) Oxygen and oxygen equipment described in Sec.  414.226.
    (4) Other DME described in Sec.  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 Sec.  
414.202 of this part and further classified into the following 
categories:
    (i) Inexpensive or routinely purchased items, as specified in Sec.  
414.220(a).
    (ii) Items requiring frequent and substantial servicing, as 
specified in Sec.  414.222(a).
    (iii) Oxygen and oxygen equipment, as specified in Sec.  
414.226(c)(1).
    (iv) Other DME (capped rental items), as specified in Sec.  
414.229.
    (2) Supplies necessary for the effective use of DME other than 
inhalation drugs.

[[Page 18085]]

    (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 self-adjustment 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.


Sec.  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 Sec.  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 Sec.  
410.60(c) of this chapter) or an occupational therapist in private 
practice (as defined in Sec.  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 Sec.  
414.408(a).

0
5. Section 414.406 is amended by adding paragraphs (b), (c), and (d) to 
read as follows:


Sec.  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
* * * * *

0
6. New Sec. Sec.  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:


Sec.  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 Sec.  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.

[[Page 18086]]

    (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 
Sec. Sec.  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 Sec.  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 Sec.  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

[[Page 18087]]

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 
Sec.  414.220(a), payment is made in the amount determined under Sec.  
414.220(b).
    (ii) For other durable medical equipment or capped rental items 
described in Sec.  414.229, payment is made in the amount determined 
under Sec.  414.229(b).
    (iii) For items requiring frequent and substantial servicing 
described in Sec.  414.222, payment is made in accordance with 
paragraph (a)(1) of this section.
    (iv) For oxygen and oxygen equipment described in Sec.  
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 Sec.  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 Sec.  
414.210(e)(1) of Subpart D.
    (ii) Payment for parts that are not items (as defined in Sec.  
414.402) is made in accordance with Sec.  414.210(e)(1) of Subpart D.
    (iii) Payment for parts that are items (as defined in Sec.  
414.402) is made in accordance with paragraph (a)(1) of this section.
    (2) Additional payments are made in accordance with Sec. Sec.  
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.


Sec.  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 Sec.  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 fee-for-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-for-service 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.


Sec.  414.412  Submission of bids under a competitive bidding program.

    (a) Requirement to submit a bid. Except as provided under Sec.  
414.404(b), in order for a supplier to receive payment for items 
furnished to beneficiaries under a competitive bidding program, the 
supplier must

[[Page 18088]]

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.


Sec.  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 Sec.  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, program-related 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 Sec.  
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 Sec.  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 Sec.  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

[[Page 18089]]

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 Sec.  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.


Sec.  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.


Sec.  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 
Sec.  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.


Sec.  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.


Sec.  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.

[[Page 18090]]

    (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 Sec.  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.


Sec.  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.


Sec.  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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