United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Health, 

Committee on Ways and Means, House of 

Representatives

MEDICARE

Competitive Bidding for 

Medical Equipment and 

Supplies Could Reduce 

Program Payments, but 

Adequate Oversight Is 

Critical 

Statement of Kathleen M. King 

Director, Health Care 

For Release on Delivery

Expected at 1:00 p.m. EDT

Tuesday, May 6, 2008 

 

GAO-08-767T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

May 6, 2008

MEDICARE

Competitive Bidding for Medical Equipment and 

Supplies Could Reduce Program Payments, but 

Highlights of GAO-08-767T, a testimony Adequate Oversight Is Critical 

before the Subcommittee on Health, 

Committee on Ways and Means, House of 

Representatives 

For more than a decade, GAO has 

reported that Medicare has paid 

higher than market rates for 

medical equipment and supplies 

provided to beneficiaries under

Medicare Part B. Since 1989, 

Medicare has used fee schedules 

primarily based on historical 

charges to set payment amounts. 

But this approach lacks flexibility

to keep pace with market changes 

and increases costs to the federal 

government and Medicare’s 

44 million elderly and disabled

beneficiaries. The Balanced Budget

Act of 1997 required the Centers for 

Medicare & Medicaid Services 

(CMS)—the agency that 

administers Medicare—to test 

competitive bidding as a new way 

to set payments. CMS did this 

through a demonstration in two 

locations in which suppliers could 

compete on the basis of price and 

other factors for the right to 

provide their products. The 

Medicare Prescription Drug, 

Improvement, and Modernization 

Act of 2003 (MMA) required CMS to 

conduct competitive bidding on a

large scale and suppliers to obtain

accreditation.

GAO was asked to describe the

effects that competitive bidding 

could have on Medicare program 

payments and suppliers and the 

need for adequate oversight to

ensure quality and access for 

beneficiaries in a competitive

bidding environment. This 

testimony is based primarily on 

GAO work conducted from May 

1994 to January 2007, which GAO

updated by interviewing CMS 

officials and reviewing agency

documents. 

Competitive bidding could reduce Medicare program payments by providing 

an incentive for suppliers to accept lower payments for items and services to

retain their ability to serve beneficiaries and potentially increase their market 

share. Fundamentally different from fee schedules based on historical charges 

to Medicare, competitive bidding allows the market to help CMS determine 

payment amounts. In the demonstration, the new fee schedule amounts were 

based on the winning suppliers’ bids for items included and 50 percent to 

55 percent of the bids from suppliers were selected. Evidence from CMS’s 

competitive bidding demonstration suggests that competition saved Medicare 

$7.5 million and saved beneficiaries $1.9 million—without significantly 

affecting beneficiary access. For the competitive bidding program, CMS 

required suppliers to obtain accreditation based on quality standards and 

provide financial documents to participate. This added scrutiny gives CMS the 

chance to screen out suppliers that may not be stable, legitimate businesses, 

which could contribute to lower rates of improper payment. CMS also 

evaluated the bids based on demand, capacity, and price and chose suppliers

whose bids were at or under a certain amount. CMS estimates that the first 

round of its competitive bidding program will result in payment amounts that 

average 26 percent less than the current fee schedule amounts. Competitive 

bidding also changes Medicare’s relationship with suppliers and departs from 

Medicare’s practice of doing business with any qualified provider, because it is 

designed to limit the number of suppliers to those whose bids are at or under 

a certain amount. 

Because of concerns that competitive bidding may prompt suppliers to cut 

their costs by providing lower-quality items and curtailing services, ensuring

quality and access through adequate oversight is critical for the success of the 

competitive bidding program. In September 2004, GAO indicated that quality 

assurance steps could include monitoring beneficiary satisfaction, setting 

standards for suppliers, giving beneficiaries a choice of suppliers, and 

selecting winning bidders based on quality and the dollar amount of the bids. 

As competitive bidding expands, problems that beneficiaries might experience 

could be magnified. Therefore, continued monitoring of beneficiary 

satisfaction will be critical to identify problems with suppliers or with items 

provided to beneficiaries. As required in the MMA, GAO will review and report 

on the competitive bidding program’s impact on suppliers and manufacturers 

and its effect on quality and access for beneficiaries. 

To view the full product, including the scope 

and methodology, click on GAO-08-767T. 

For more information, contact Kathleen M. 

King at (202) 512-7114 or kingk@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here as you discuss the Medicare competitive bidding

program for durable medical equipment (DME), prosthetics, orthotics, and

supplies—products referred to in this statement as medical equipment and 

supplies.1 For more than a decade, we and the Department of Health and 

Human Services (HHS) Office of Inspector General (OIG) have 

periodically reported that Medicare, administered by the Centers for 

Medicare & Medicaid Services (CMS), has paid higher than market rates 

for various medical equipment and supply items.2

 These overpayments 

increase costs to the program and to Medicare’s 44 million elderly and 

disabled beneficiaries. CMS reported in 2007 that total Medicare 

expenditures for medical equipment and supplies were about $10 billion.3

 

Since 1989, Medicare has paid for medical equipment and supplies through 

fee schedules that list a maximum and minimum payment amount. The 

schedules are based on average supplier charges on Medicare claims in 

1986 and 1987 and have been updated in some years to reflect inflation.4

However, this payment approach lacks flexibility to keep pace with 

market changes, and as a result, Medicare often pays higher prices than 

other public payers for medical equipment and supplies. The Balanced 

Budget Act of 1997 (BBA)5

 required CMS to test competitive bidding as a 

new way for Medicare to set fees for Part B items and services specified by

CMS, which the agency did through a demonstration focused on medical 

 1

Medicare guidance defines DME as equipment that serves a medical purpose, can

withstand repeated use, is generally not useful in the absence of an illness or injury, and is 

appropriate for use in the home. DME includes items such as wheelchairs, hospital beds, 

and walkers. Medicare defines prosthetic devices (other than dental) as devices that are

needed to replace body parts or functions. Prosthetic devices include artificial limbs and 

eyes, enteral nutrients, ostomy bags, and cardiac pacemakers. Medicare defines orthotic 

devices to include leg, arm, back, and neck braces that provide rigid or semirigid support to 

weak or deformed body parts or restrict or eliminate motion in a diseased or injured part of 

the body. Medicare-reimbursed supplies are items that are used in conjunction with DME 

and are consumed during the use of the equipment, such as drugs used for inhalation 

therapy, or need to be replaced frequently (usually daily), such as surgical dressings.

2

A list of related GAO products is included at the end of this statement. 

3

These expenditures reflect claims submitted April 1, 2006, through March 31, 2007. 

4

CMS has established a process to price new items that are added to the fee schedule. 

5

Pub. L. No. 105-33, § 4319(a), 111 Stat. 251, 392 (1997). 

Page 1 GAO-08-767T
equipment and supplies.6

 Competitive bidding is a process in which 

suppliers of medical equipment and supplies compete for the right to 

provide their products on the basis of established criteria, such as quality 

and price. About a year after the demonstration concluded, the Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 

required CMS to conduct a competitive bidding program for DME, 

supplies, off-the-shelf orthotics, and enteral nutrients and related 

equipment and supplies on a large scale.7

In my testimony today, I will discuss (1) the effects that competitive 

bidding could have on Medicare program payments and suppliers and 

(2) the need for adequate oversight to ensure quality and access for 

beneficiaries in a competitive bidding environment. My testimony is based 

primarily on our previously issued work, conducted from May 1994 to 

January 2007, which we updated with information on the competitive 

bidding process by interviewing CMS officials and reviewing agency

documents. We shared a statement of facts regarding this testimony with 

CMS and incorporated the agency’s comments as appropriate. We 

conducted this performance audit from April 2008 through May 2008 in

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

In summary, competitive bidding could reduce Medicare program 

payments by providing an incentive for suppliers to accept lower 

payments for items and services to retain their ability to serve 

beneficiaries and potentially increase their market share. Fundamentally

different from fee schedules based on historical charges to Medicare, 

competitive bidding allows the market to help CMS determine payment 

amounts. In the demonstration, the new fee schedule amounts were based 

 6

Medicare Part B helps pay for certain physician, outpatient hospital, laboratory, and other

services, and medical equipment and supplies. Beneficiaries are required to pay a monthly

premium for their Part B coverage. 

7

The competitive bidding program changes the way that Medicare determines the payment 

amounts for medical equipment and supplies by replacing the current fee schedule 

payment amounts for selected items in certain areas with payment amounts based on

competitive bids submitted by Medicare suppliers. Pub. L. No. 108-173, § 302(b), 117 

Stat. 2066, 2224. 

Page 2 GAO-08-767T
on the winning suppliers’ bids for items included and 50 percent to 

55 percent of the bids from suppliers were selected. Evidence from CMS’s 

competitive bidding demonstration suggests that competition saved 

Medicare $7.5 million and saved beneficiaries $1.9 million—without 

significantly affecting beneficiary access. For the competitive bidding 

program, CMS required suppliers to obtain accreditation based on quality 

standards8

 and provide financial documents to participate. This added 

scrutiny gives CMS the chance to screen out suppliers that may not be

stable, legitimate businesses, which could contribute to lower rates of 

improper payment. CMS also evaluated the bids based on demand, 

capacity, and price and chose suppliers whose bids were at or under a 

certain amount. CMS estimates that the first round of its competitive 

bidding program will result in payment amounts that average 26 percent 

less than the current fee schedule amounts. Competitive bidding also 

changes Medicare’s relationship with suppliers and departs from 

Medicare’s practice of doing business with any qualified provider, because

it is designed to limit the number of suppliers to those whose bids are at or 

under a certain amount. 

Because of concerns that competitive bidding may prompt suppliers to cut 

their costs by providing lower-quality items and curtailing services, 

ensuring quality and access through adequate oversight is critical for the 

success of the competitive bidding program. In September 2004, GAO 

indicated that quality assurance steps could include monitoring 

beneficiary satisfaction, setting standards for suppliers, giving

beneficiaries a choice of suppliers, and selecting winning bidders based on

quality and the dollar amount of the bids. As competitive bidding expands, 

problems that beneficiaries might experience could be magnified. 

Therefore, continued monitoring of beneficiary satisfaction will be critical 

to identify problems with suppliers or with items provided to beneficiaries. 

As required in the MMA, GAO will review and report on the competitive 

bidding program’s impact on suppliers and manufacturers and its effect on

quality and access for beneficiaries. 

 8

The quality standards are to be applied by one or more independent accreditation 

organizations designated by the agency. Accreditation is a process of certifying that health 

care organizations comply with specific standards and requirements. 

Page 3 GAO-08-767T
Medicare is the federal program that helps pay for a variety of health care 

services for about 44 million elderly and disabled beneficiaries. Most 

Medicare beneficiaries participate in Medicare Part B, which helps pay for 

certain physician, outpatient hospital, laboratory, and other services; 

medical equipment and supplies, such as oxygen, wheelchairs, hospital 

beds, walkers, orthotics, prosthetics, and surgical dressings; and certain 

outpatient drugs.9

 Medicare Part B pays for most medical equipment and 

supplies using a series of fee schedules. Generally, Medicare has a 

separate fee schedule for each state that includes most items, and there 

are upper and lower limits on the allowable amounts that can be paid in

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

in different parts of the country. Medicare pays 80 percent of the lesser of

the actual charge for the item or fee schedule amount for the item, and the 

beneficiary pays the balance. Beneficiaries typically obtain medical 

equipment and supplies from suppliers, who submit claims to Medicare on 

beneficiaries’ behalf. Suppliers include medical equipment retail 

establishments and outpatient providers, such as physicians, home health

agencies, and physical therapists. To handle claims processing for medical 

equipment and supplies, CMS contracts with durable medical equipment 

Medicare administrative contractors. 

Background 

The Competitive Bidding 

Demonstration 

Using its authority under the BBA, CMS conducted a competitive bidding 

demonstration to set Medicare Part B payment rates for groups of selected 

medical equipment and supplies.10 CMS contracted with Palmetto 

Government Benefits Administrators (Palmetto) to administer the 

competitive bidding demonstration,11 which was implemented in two 

 9

Outpatient drugs covered under Part B include self-administered drugs, such as certain

immunosuppressive and oral anticancer drugs, or drugs administered in conjunction with 

DME, such as inhalation drugs used with a nebulizer. A nebulizer is a device driven by a 

compressed air machine that allows the patient to take medicine in the form of a mist or

wet aerosol. 

10These groups were enteral nutrients, equipment and supplies, hospital beds and

accessories, nebulizer inhalation drugs, manual wheelchairs and accessories, 

noncustomized general orthotics, oxygen contents, equipment and supplies, surgical 

dressings, and urological supplies. 

11In this role, Palmetto was responsible for helping to plan the demonstration; educating 

beneficiaries, suppliers, and other stakeholders about the demonstration; soliciting and 

evaluating bids; processing claims; and responding to inquiries and complaints about the

demonstration. CMS maintained oversight responsibility for the demonstration, reviewed 

all documents and Palmetto decisions, and made final design and policy decisions. 

Page 4 GAO-08-767T
locations—the Polk County, Florida, metropolitan statistical area and

parts of the San Antonio, Texas, metropolitan statistical area.

Two cycles of bidding took place in Polk County, with competitively set 

fees effective from October 1, 1999, to September 30, 2001, and from 

October 1, 2001, to September 30, 2002. One cycle of bidding took place in

San Antonio, and competitively set fees were effective from February 1, 

2001, to December 31, 2002. Bidding and implementation processes were 

similar at both locations. The demonstration ended on December 31, 2002. 

The Competitive Bidding 

Program 

In December 2003, the MMA required CMS to conduct competitive bidding 

for DME, supplies, off-the-shelf orthotics, and enteral nutrients and related 

equipment and supplies on a large scale.12 The MMA required that 

competition under the program begin in 10 of the largest metropolitan 

statistical areas in 2007, in 80 of the largest metropolitan statistical areas 

in 2009, and in other areas after 2009. The law established a new 

accreditation requirement for all Medicare suppliers of medical equipment 

and supplies and required CMS to develop financial and quality standards 

to use in selecting suppliers for the competitive bidding program. The law 

required CMS to take appropriate steps to ensure that small suppliers have 

an opportunity to be considered for participation in the competitive 

bidding program. CMS was required to establish a methodology for 

selecting bids from suppliers so that enough suppliers were selected to 

meet demand for competitively bid items within a given area. The law 

specified that at least two suppliers would be selected in each competitive 

area. The law also precluded judicial or administrative review of CMS’s 

decisions to establish payment amounts, award contracts, designate areas 

for competition, select items and services, phase in implementation, and 

determine the bidding structure and number of suppliers selected under 

the competitive bidding program. The MMA required that an advisory 

committee be established to assist in carrying out the program. 

To help implement the competitive bidding program, CMS published its 

notice of proposed rulemaking on May 1, 2006, and its final rule on 

April 10, 2007. CMS’s final rule provided more detail on the agency’s 

implementation steps. For example, the law specified that the agency 

could not award a contract to an entity unless it met applicable financial

standards specified by the Secretary of HHS. In its regulation, CMS 

 12Pub. L. No. 108-173, § 302(b), 117 Stat. 2066, 2224. 

Page 5 GAO-08-767T
specified the financial documents that had to be submitted by suppliers to 

be considered as potential bidders. Similarly, while the law indicated that 

the agency needed to ensure that small suppliers had an opportunity to 

participate, the regulation sets out a process to include a certain number 

of small suppliers based on the percentage of those who bid and met all 

applicable requirements. 

CMS established the initial round of bidding in 10 metropolitan statistical

areas that included Charlotte, N.C.; Cincinnati, Ohio; Cleveland, Ohio; 

Dallas, Tex.; Kansas City, Mo.; Miami, Fla.; Orlando, Fla.; Pittsburgh, Pa.; 

Riverside, Calif.; and San Juan, P.R. On April 9, 2007, CMS opened the

initial registration of suppliers for the first round of bidding and the bid 

period opened on May 15, 2007. As part of its program implementation for 

the first round, CMS conducted a supplier-education campaign, which 

included meetings, listserve announcements, a dedicated Web site, and a 

toll-free help desk. The bid period closed on September 25, 2007. CMS 

concluded bid evaluations and began the contracting process in March 

2008, and the agency plans to announce the first round of winning 

suppliers in May 2008. Suppliers whose bids were disqualified because 

their bid did not meet program and bidding requirements will receive a 

letter informing them of the reason or reasons for their disqualification. 

After the program begins, suppliers whose bids were not chosen generally 

cannot receive Medicare payment for the competitively bid items in the 

metropolitan statistical areas included in the competitive bidding program. 

However, suppliers of certain rental items or oxygen that did not become 

suppliers in the competitive bidding program could continue to serve their 

existing Medicare customers. Suppliers that did not have bids chosen in 

the first round of the program may bid in the future rounds of competition. 

CMS said it plans to conduct a beneficiary-education campaign before the 

program goes into effect on July 1, 2008. 

Competitive bidding could reduce Medicare program payments by 

providing an incentive for suppliers to accept lower payment amounts for 

items and services to retain their ability to serve beneficiaries and 

potentially increase their market share. Using competition to obtain 

market prices in order to set payments for medical equipment and supplies 

is a new approach for Medicare that is fundamentally different than relying 

on fee schedules based on suppliers’ historical charges to Medicare. 

Competitive bidding allows the market to provide information to CMS on 

what amounts suppliers will accept as payment to serve beneficiaries. 

Competitive Bidding 

Could Reduce 

Program Payments by 

Creating an Incentive 

for Suppliers to 

Accept Lower 

Payment Amounts 

Page 6 GAO-08-767T
In its demonstration, CMS used a competitive bidding process to 

determine which suppliers would be included and the competitively set 

fees that they would be paid. From among the bidders, the agency and 

Palmetto selected multiple demonstration suppliers to provide items in 

each group of related products. Suppliers could submit bids and have 

winning bids for one or more groups of items. These suppliers were not 

guaranteed that they would increase their business or serve a specific 

number of Medicare beneficiaries. Instead, the demonstration suppliers 

had to compete for beneficiaries’ business. All demonstration suppliers 

were reimbursed for each competitively bid item provided to beneficiaries 

at the demonstration fee schedule amounts. The new fee schedules were 

based on the winning suppliers’ bids for items included in the 

demonstration. Any Medicare supplier that served demonstration 

locations could provide items not included in the demonstration to 

beneficiaries. 

Evidence from the demonstration suggests that, for the items selected, 

competition helped set lower payment amounts and resulted in estimated 

program savings of $7.5 million. The demonstration’s independent 

evaluators also estimated that beneficiaries saved $1.9 million. The 

demonstration provided evidence to health policy experts, including us 

and the Medicare Payment Advisory Commission, that competitive bidding

for medical equipment and supplies could be a viable way for the program 

to use market forces to set lower payments without significantly affecting 

beneficiary access.13 

About a year after the demonstration ended, the MMA required CMS to 

implement competitive bidding on a large scale and added requirements 

that suppliers would have to meet to participate in the competitive bidding

program. The MMA also required the agency to develop quality standards 

and for suppliers to be assessed on those standards by accreditation 

organizations. In addition, the agency had to include a financial and quality 

assessment of suppliers as part of competitive bidding. 

The competitive bidding program was structured to operate much like the 

demonstration. Suppliers submitted bids, along with other materials 

specified by CMS. The application required suppliers to submit 3 years of 

 13The Medicare Payment Advisory Commission is an independent federal body established 

by the BBA to advise the U.S. Congress on issues affecting the Medicare program. Medicare 

Payment Advisory Commission, Report to the Congress: Variation and Innovation in

Medicare, (Washington, D.C., 2003). 

Page 7 GAO-08-767T
financial documents, including income statements, credit reports, and 

balance sheets. The review of the financial documents was used as part of

the criteria for determining which bids to consider. The bidders had to 

have a valid Medicare supplier billing number and be accredited. Suppliers

had to submit bids for one or more groups of items. CMS then evaluated 

the bids based on demand, capacity, and price and chose bids that were at 

or under a certain amount. 

CMS estimates that the first round of its competitive bidding program will 

result in payment amounts that overall average 26 percent less than the 

current fee schedule amounts for the groups of items included, leading to

savings for the Medicare program and its beneficiaries. CMS based its 

estimate on the price points suppliers submitted with their bids, weighted

by market area and past utilization of items in each group. The estimated 

savings differed by groups of items, with the largest savings of 43 percent 

estimated for mail-order diabetic supplies. 

Competitive bidding changes Medicare’s relationship with suppliers. 

Competitive bidding is designed to reduce payments by allowing CMS to 

choose suppliers based on their bids—a change from the long-standing 

policy that any qualified provider can participate in the program. The 

competitive bidding process was designed to limit the number of suppliers 

to those whose bids were at or under a certain amount while ensuring that 

enough suppliers were included to meet beneficiary demand. In the 

demonstration, 50 percent to 55 percent of the suppliers’ bids were 

selected. With few exceptions, only the suppliers whose bids were chosen 

could be reimbursed by Medicare for competitively bid items provided to 

beneficiaries residing in the demonstration area.14 

Furthermore, competitive bidding could help reduce improper payments 

because it provides CMS with the authority to select suppliers, based in 

part on new scrutiny of their financial documents and other application 

materials. In November 2007, CMS estimated that 10.3 percent of Medicare

payments made to suppliers of medical equipment and supplies were 

 14Transition policies allowed beneficiaries to continue receiving oxygen equipment and 

supplies and nebulizer drugs from their original suppliers, regardless of whether the 

suppliers were included in the demonstration. However, the supplier had to accept the new

fees set by the demonstration. Transition policies also allowed beneficiaries to maintain 

pre-existing rental agreements or purchase contracts with their suppliers of enteral 

nutrition equipment, hospital beds and accessories, and manual wheelchairs and 

accessories. These suppliers were paid under the normal statewide Medicare fee schedule 

for the duration of the rental period. 

Page 8 GAO-08-767T
improper—more than double the percentage of improper payments to 

other Medicare providers. Providing additional scrutiny of suppliers gives

CMS the opportunity to screen out those whose finances do not indicate 

that they are stable, legitimate businesses. 

Because of concerns that competitive bidding may prompt suppliers to cut 

their costs by providing lower-quality items and curtailing services, 

ensuring quality and access through adequate oversight is critical. Limiting

the number of suppliers could potentially affect beneficiaries’ access to 

quality items and services if there are an insufficient number to meet their 

needs. For some beneficiaries, having a choice of suppliers for some items 

and services could be important. 

Adequate Oversight Is 

Critical to Ensure 

Quality and Access 

In our September 2004 report, we evaluated CMS’s competitive bidding 

demonstration and recommended implementation actions for CMS to 

consider, including how to ensure access to quality items and services for 

beneficiaries. We indicated that quality assurance steps could include 

monitoring beneficiary satisfaction, setting standards for suppliers, 

providing beneficiaries with a choice of suppliers, and selecting winning 

bidders based on quality, in addition to the dollar amounts of bids. 

The demonstration projects used several approaches for ensuring quality

and services for beneficiaries, including monitoring beneficiary 

satisfaction and applying quality measures as criteria to select winning 

suppliers. During the demonstration, CMS and Palmetto used full-time, 

onsite ombudsmen to respond to complaints, concerns, and questions 

from beneficiaries, suppliers, and others. In addition, to gauge beneficiary 

satisfaction, independent evaluators of the demonstration fielded two 

beneficiary surveys by mail—one for oxygen users and another for users 

of other products in the demonstration. These surveys contained measures 

of beneficiaries’ assessments of their overall satisfaction, access to 

equipment, and quality of training and service provided by suppliers. 

Evaluators reported survey results indicating that beneficiaries generally 

remained satisfied with both the products provided and with their 

suppliers. The independent evaluators identified some areas for concern, 

including a decline in the use of portable oxygen among users and the 

possible shift away from suppliers making home deliveries, which may 

have indicated that suppliers were visiting new medical equipment users 

less frequently to provide routine maintenance visits. 

Page 9 GAO-08-767T
Because we considered careful monitoring of beneficiaries’ experiences 

essential to ensure that any quality or access problems were identified 

quickly, we recommended that CMS monitor beneficiary satisfaction with 

the items and services provided under the new competitive bidding 

program. As competitive bidding expands and affects larger numbers of 

beneficiaries, problems such as those identified in the evaluations of the 

demonstration projects could become magnified. Therefore, continued

monitoring of beneficiary satisfaction will be critical to identifying 

problems with suppliers or with items provided to beneficiaries. When 

such problems are identified in a timely manner, CMS may develop steps 

to address them. Such monitoring is important, not just when required by

statute, but as part of an ongoing effort to ensure that the Medicare 

program is serving its beneficiaries effectively. 

CMS agreed with our recommendation and stated that the agency would 

monitor the beneficiary satisfaction with the quality and services provided

under the competitive bidding process. CMS also stated in the preamble of 

its final rule on accreditation of suppliers published August 18, 2006, that it 

expects that implementing medical equipment and supplies quality 

standards and accreditation will lead to increased quality of items and 

services throughout the industry. Furthermore, CMS stated that it plans to

provide education to Medicare beneficiaries on the competitive bidding

process using approaches such as press releases, fact sheets, and notices.

We will be assessing CMS’s implementation of the competitive bidding 

program. As part of the MMA, we are required to review and report on the 

program’s impact on suppliers and manufacturers and on quality and

access of items and services provided to beneficiaries. As part of this 

review, we have been specifically requested to assess CMS’s 

implementation of the program. 

We believe that competitive bidding could reduce payments for both the 

Medicare program and beneficiaries. The independent evaluators 

estimated savings achieved in the demonstration, and CMS has projected

reductions in payment amounts in its competitive bidding program for 

both Medicare and its beneficiaries. In addition, the new financial 

standards and accreditation process being implemented in conjunction 

with the competitive bidding program should help improve the financial

viability and quality of medical suppliers providing services to Medicare 

beneficiaries. But competitive bidding also provides incentives that could 

affect access to services and lower quality of items and services provided

to beneficiaries, which need to be monitored carefully. 

Concluding 

Observations 

Page 10 GAO-08-767T
Mr. Chairman, this concludes my prepared statement. I will be happy to 

answer any questions that you or members of the Subcommittee may have. 

For further information regarding this testimony, please contact me at 

(202) 512-7114 or kingk@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this testimony. Sheila Avruch, Assistant Director; Catina Bradley; 

Kelli Jones; Kevin Milne; Lisa Rogers; and Timothy Walker made 

contributions to this statement. 

Contacts and 

Acknowledgments 

Page 11 GAO-08-767T
Page 12 GAO-08-767T

Related GAO Products 

Medicare: Improvements Needed to Address Improper Payments for 

Medical Equipment and Supplies. GAO-07-59. Washington, D.C.: 

January 31, 2007. 

Medicare Durable Medical Equipment: Class III Devices Do Not Warrant

a Distinct Annual Payment Update. GAO-06-62. Washington, D.C.: 

March 1, 2006. 

Medicare: More Effective Screening and Stronger Enrollment Standards 

Needed for Medical Equipment Suppliers. GAO-05-656. Washington, D.C.: 

September 22, 2005. 

Medicare: CMS’s Program Safeguards Did Not Deter Growth in Spending 

for Power Wheelchairs. GAO-05-43. Washington, D.C.: November 17, 2004. 

Medicare: Past Experience Can Guide Future Competitive Bidding for 

Medical Equipment and Supplies. GAO-04-765. Washington, D.C.: 

September 7, 2004. 

Medicare: CMS Did Not Control Rising Power Wheelchair Spending. 

GAO-04-716T. Washington, D.C.: April 28, 2004. 

Medicare: Challenges Remain in Setting Payments for Medical 

Equipment and Supplies and Covered Drugs. GAO-02-833T. Washington,

D.C.: June 12, 2002. 

Medicare Payments: Use of Revised “Inherent Reasonableness” Process 

Generally Appropriate. GAO/HEHS-00-79. Washington, D.C.: July 5, 2000.

Medicare: Access to Home Oxygen Largely Unchanged; Closer HCFA 

Monitoring Needed. GAO/HEHS-99-56. Washington, D.C.: April 5, 1999. 

Medicare: Need to Overhaul Costly Payment System for Medical 

Equipment and Supplies. GAO/HEHS-98-102. Washington, D.C.: 

May 12, 1998. 

Medicare: Home Oxygen Program Warrants Continued HCFA Attention. 

GAO/HEHS-98-17. Washington, D.C.: November 7, 1997. 

Medicare: Excessive Payments for Medical Supplies Continue Despite 

Improvements. GAO/HEHS-95-171. Washington, D.C.: August 8, 1995. 

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Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Ralph Dawn, Managing Director, dawnr@gao.gov, (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, DC 20548 

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

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