GAO 

United States Government Accountability Office

Report to Congressional Requesters

MEDICARE

CMS Working to 

Address Problems 

from Round 1 of the 

Durable Medical 

Equipment 

Competitive Bidding 

Program 

November 2009 

GAO-10-27 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2009

MEDICARE

CMS Working to Address Problems from Round 1 of 

the Durable Medical Equipment Competitive Bidding

Highlights of GAO-10-27, a report to Program 

congressional requesters 

In 2007, Medicare spent $8.3 billion 

for durable medical equipment 

(DME) and related supplies. To 

reduce spending, the Medicare 

Prescription Drug, Improvement, 

and Modernization Act of 2003 

(MMA) required that the Centers 

for Medicare & Medicaid Services 

(CMS) phase in, with several 

rounds of bidding, a large-scale 

competitive bidding program 

(CBP) for certain DME and other 

items. DME suppliers began 

bidding in round 1 of the CBP on 

May 15, 2007. After contracts were 

awarded, the Medicare 

Improvements for Patients and 

Providers Act of 2008 (MIPPA), 

was enacted on July 15, 2008. 

Because of numerous concerns 

MIPPA delayed the program, 

terminated supplier contracts, and 

required CMS to begin the CBP 

round 1 rebid in 2009. GAO was 

asked to report on (1) the results of 

CBP round 1, (2) the major 

challenges CMS had in conducting 

CBP round 1, and (3) the steps 

CMS has taken to improve future 

CBP rounds. GAO reviewed CMS 

data and relevant laws and 

regulations, and interviewed 

officials from CMS and its 

contractors, and DME suppliers 

and professional associations. 

What GAO Recommends

GAO recommends that if CMS 

decides to conduct reviews of 

disqualified bids, CMS should 

notify all suppliers of this process, 

giving suppliers equal opportunity 

for such reviews and clearly 

indicate how to request them. CMS 

agreed with GAO’s 

recommendation. 

About a quarter of the bids submitted during CBP round 1 resulted in awarded 

contracts. The contracts were in effect until terminated by MIPPA on July 15, 

2008. Of the 6,374 bids submitted by 1,010 suppliers, half were disqualified 

before competing on price. Bids were most often disqualified for missing 

financial documentation or noncompliance with accreditation requirements. 

In nearly two-thirds of CBP round 1’s price competitions—in which suppliers 

submitted bids to deliver items for a specific product category within a 

specific competitive bidding area (CBA)—the number of suppliers decreased 

by at least half. The largest decreases in suppliers were in the Miami CBA. 

CMS estimated that the reduction in Medicare payments for items acquired as 

a result of CBP round 1 would have averaged 26 percent when compared to 

payments under the Medicare fee schedule. 

CBP’s round 1 presented several challenges to suppliers, including poor 

timing and lack of clarity in bid submission information, a failure to inform all 

suppliers that losing bids could be reviewed, and an inadequate electronic bid 

submission system. CMS provided some clarifying information about bidding 

after the bid window opened, repeatedly extended the bid window deadlines, 

and provided updated guidance to bidders throughout the bid window. The 

information CMS provided to suppliers about bidding requirements was 

sometimes unclear and inconsistent, particularly regarding financial 

documentation. CMS did not effectively notify suppliers of its postbidding 

review process. Because some suppliers were not aware of the review 

process, they missed the opportunity to have their disqualified bids reviewed. 

CMS found that some bids had been incorrectly disqualified. Finally, several 

problems with the electronic bid submission system, including data losses 

from automated logouts and unscheduled downtimes, made it difficult for 

some suppliers to submit bids. 

CMS has taken several steps to improve the bidding process for the round 1 

rebid and subsequent rounds of the CBP. CMS is implementing MIPPA 

provisions to notify suppliers of missing financial documentation and create a 

CBP ombudsman. It has reduced financial documentation requirements and 

revised the request for bid instructions to make it clearer and more 

understandable. It is also developing a new electronic bidding submission 

system, the Durable Medical Equipment, Prosthetics, Orthotics, and Supplies 

bidding system (DBidS), which the agency claims will address the deficiencies 

of the system used for round 1. Bidding for the round 1 rebid began in late 

October 2009. 

The CBP has the potential to produce considerable benefits, including 

reducing overall Medicare spending for DME and limiting potential fraud 

through increased scrutiny of suppliers. Although challenges may be expected 

for any new program, problems occurred in round 1 because of poor 

communication by CMS and an inadequate bid submission system. View GAO-10-27 or key components.

For more information, contact Kathleen M. 

King at (202) 512-7114 or kingk@gao.gov. 
Page i GAO-10-27 

Contents 

Letter 1

Background 5 

About One-Quarter of Bids Resulted in Contracts Generating 

Significant Potential Savings 16 

CMS Had Difficulty Providing Bidders with Clear, Timely 

Information, and Its Electronic Bid Submission System Was 

Problematic 20 

CMS Has Taken Several Steps to Improve Future Rounds of the 

CBP, Including Implementing MIPPA Provisions and Addressing 

IT Operational Problems 33 

Conclusions 40 

Recommendation for Executive Action 41 

Agency Comments and Our Evaluation 42 

Appendix I Scope and Methodology 44 

Appendix II Change in Numbers of Suppliers by CBP Product 

Category and CBA: 2006-2008 47 

Appendix III Percentage Differences between 2008 

Medicare Fee Schedule and CBP Round 1 Single 

Payment Amounts 50 

Appendix IV Omitted and Conflicting Information in Written 

Instructions on Submitting a Bid for CBP Round 1 52 

Appendix V Comments from the Department of Health and 

Human Services 55 

Appendix VI GAO Contact and Staff Acknowledgments 58 

 

 DME Competitive Bidding 
Related GAO Products 59 

Tables 

Table 1: Required Financial Documents for CBP Round 1 12 

Table 2: Ten Financial Measures Used to Determine a Supplier’s 

Financial Score, CBP Round 1 13 

Table 3: Bid Composite Price Calculation for a Product Category 

with Three Items 14 

Table 4: Determining the Pivotal Bid 15 

Table 5: CBP Round 1 Bid Counts by Process Step 17 

Table 6: Number and Percentage of CBP Disqualified Bids by 

Reason for Disqualification 18 

Table 7: CBP Round 1 Contract Awards by Supplier Size 19 

Table 8: CMS’s CBP Bid Disqualification Reason Codes and 

Descriptions, CBP Round 1 26 

Table 9: Text of One Disqualified Bid Letter’s Attachment 

Information 27 

Table 10: Examples of Conflicting and Omitted Information, CBP 

Round 1 53 

Figures 

Figure 1: CBP Round 1 Process 10 

Figure 2: CBP Round 1 Timeline, 2007-2008 22 

Page ii GAO-10-27 DME Competitive Bidding
Abbreviations 

BBA Balanced Budget Act of 1997 

CBA competitive bidding area 

CBES Competitive Bidding Evaluation System 

CBP competitive bidding program 

CBSS Competitive Bid Submission System 

CMS Centers for Medicare & Medicaid Services 

CY calendar year 

DBidS Durable Medical Equipment, Prosthetics, Orthotics, and 

 Supplies bidding system 

DME durable medical equipment 

HHS Department of Health and Human Services 

IT information technology 

MIPPA Medicare Improvements for Patients and Providers Act 

 of 2008 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003 

PAOC Program Advisory and Oversight Committee 

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Page iii GAO-10-27 DME Competitive Bidding
Page 1 GAO-10-27 

 

United States Government Accountability Office

Washington, DC 20548 

 

November 6, 2009 

The Honorable Max Baucus 

Chairman 

Committee on Finance 

United States Senate 

The Honorable Henry A. Waxman 

Chairman 

The Honorable John D. Dingell 

Chair Emeritus 

Committee on Energy and Commerce 

House of Representatives 

The Honorable Charles B. Rangel 

Chairman 

Committee on Ways and Means 

House of Representatives 

In 2007, Medicare—the federal health insurance program that currently 

serves about 45 million elderly and disabled individuals—spent $8.3 billion 

on durable medical equipment (DME), prosthetics, orthotics, and related 

supplies.1

 Both we and the Department of Health and Human Services’s 

(HHS) Office of Inspector General have reported that Medicare and its 

beneficiaries have sometimes paid higher than market rates for various 

1

DME is 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. Prosthetic devices 

(other than dental) are defined as devices needed to replace body parts or functions such 

as artificial limbs, enteral nutrition, and cardiac pacemakers. Orthotic devices are defined 

as providing rigid or semirigid support to weak or deformed body parts or restricting or 

eliminating motion in a diseased or injured part of the body, such as leg, arm, back, and 

neck braces. Medicare-reimbursed supplies are items that are used and consumed with 

DME, such as drugs used for inhalation therapy, or that need to be replaced frequently 

(usually daily), such as surgical dressings. 

 DME Competitive Bidding 
 

medical equipment and supply items.2 In 1997, Congress required the 

Centers for Medicare & Medicaid Services (CMS)—the agency that 

administers the Medicare program—to test competitive bidding for 

selected DME and other items and services through demonstration 

projects.3

 The demonstrations were conducted from 1999 to 2002 and 

showed that competitive bidding would save Medicare money. 

Competitive bidding can reduce Medicare payments for DME and close 

the disparity with prices paid by others for the same items. The Medicare 

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

required that CMS implement a competitive acquisition program for DME 

and certain other items.4

 CMS was required to phase in the competitive 

bidding program (CBP) in 2007 in 10 competitive bidding areas (CBA).5

The CBP would be expanded in future rounds. CBP round 1 began when 

the bid window opened May 15, 2007. In May 2008, CMS announced the 

final winning suppliers, and contracts with winning suppliers took effect 

July 1, 2008. 

 

2

GAO, Medicare: Competitive Bidding for Medical Equipment and Supplies Could 

Reduce Program Payments, but Adequate Oversight Is Critical, GAO-08-767T 

(Washington, D.C.: May 6, 2008); GAO, Medicare: Past Experience Can Guide Future 

Competitive Bidding for Medical Equipment and Supplies, GAO-04-765 (Washington, 

D.C.: Sept. 7, 2004); Office of Inspector General, Department of Health and Human 

Services, A Comparison of Prices for Power Wheelchairs in the Medicare Program, OEI03-03-00460 (April 2004); and Janet Rehnquist, Inspector General, Department of Health 

and Human Services, Medicare Reimbursement for Medical Equipment and Supplies, 

testimony before the Senate Committee on Appropriations, Subcommittee on Labor, Health 

and Human Services, and Education, 107th Cong., 2nd sess., June 12, 2002. 

3

Balanced Budget Act of 1997 (BBA), Pub. L. No. 105-33, § 4319(a), 111 Stat. 251, 392 

(1997). This competitive bidding was designed to provide a new way to set fees for 

Medicare Part B items and services specified by CMS. 

4

Pub. L. No. 108-173 § 302(b), 117 Stat. 2066, 2224 (2003) (codified, as amended, at 42 U.S.C. 

§ 1395w-3). Items and services covered by the competition were DME and related supplies, 

off-the-shelf orthotics, and enteral nutrients and related equipment and supplies. In this 

report, we refer to the competitive acquisition program as the competitive bidding 

program. 

5

The 10 CBAs had to be selected from the largest metropolitan statistical areas. The 10 

CBAs were: Charlotte (Charlotte-Gastonia-Concord, North Carolina and South Carolina); 

Cincinnati (Cincinnati-Middletown, Ohio, Kentucky, and Indiana); Cleveland (ClevelandElyria-Mentor, Ohio); Dallas (Dallas–Fort Worth–Arlington, Texas); Kansas City (Kansas 

City, Missouri and Kansas); Miami (Miami–Fort Lauderdale–Miami Beach, Florida); 

Orlando (Orlando-Kissimmee, Florida); Pittsburgh (Pittsburgh, Pennsylvania); Riverside 

(Riverside–San Bernardino–Ontario, California); and San Juan (San Juan–Caguas–

Guaynabo, Puerto Rico). 

Page 2 GAO-10-27 DME Competitive Bidding
 

Some DME suppliers and trade associations raised concerns about the 

CBP round 1, questioning several aspects of CMS’s bid submission and 

contract award processes. They also questioned whether some winning 

suppliers could provide the volume of items and services their contracts 

required and whether contracts should have been awarded to suppliers 

that had no prior business presence in a CBA. Two congressional hearings 

addressed these concerns in May 2008.6

On July 15, 2008, the CBP round 1 was stopped when the Medicare 

Improvements for Patients and Providers Act (MIPPA) of 2008 was 

enacted.7

 MIPPA delayed the CBP, terminated the contracts already 

awarded by CMS to suppliers in round 1, and required CMS to repeat the 

competition for round 1 CBP in 2009—the CBP round 1 rebid. To ensure 

budget neutrality, that is to compensate for the loss of the projected 

savings from the CBP, beginning January 1, 2009, MIPPA reduced national 

Medicare reimbursement payments by 9.5 percent nationally for items and 

services that had been included in the CBP round 1.8

 MIPPA also imposed 

additional criteria for how CMS should conduct later CBP rounds, 

including the round 1 rebid and subsequent rounds that will expand the 

CBP to additional areas.9

As CMS prepares to implement the CBP round 1 rebid, you asked us to 

report on (1) the results of the CBP round 1, (2) the major challenges CMS 

had in conducting the CBP round 1, and (3) the steps CMS has taken to 

improve future CBP rounds. 

To determine the results of the CBP round 1, we reviewed data from CMS 

and Palmetto GBA—the contractor CMS selected to implement the CBP 

bidding and contract award process—about the number of suppliers 

participating in round 1 of the CBP process, the number of submitted bids, 

 

6

Hearings on CBP were held by the House of Representatives’s Committee on Ways and 

Means, Subcommittee on Health, on May 6, 2008, and the Committee on Small Business, 

Subcommittee on Rural and Urban Entrepreneurship, on May 21, 2008. 

7

Pub. L. No. 110-275, § 154, 122 Stat. 2494, 2560 (2008) (codified, as amended, at 42 U.S.C. 

§ 1395w-3). 

8

House of Representatives’s Committee on Ways and Means, Subcommittee on Health, 

hearing on Medicare’s DMEPOS Competitive Bidding Program (May 6, 2008). 

9

MIPPA also changed the CBP phase-in dates to 2009 for the round 1 rebid in 9 CBAs, to 

2011 for round 2 in 70 additional CBAs, and after 2011 for additional CBAs (or after 2010 

for national mail order items and services). 

Page 3 GAO-10-27 DME Competitive Bidding
 

and the bids’ outcomes. We interviewed and obtained information from 

CMS and Palmetto GBA officials about the Competitive Bid Submission 

System (CBSS), an electronic database used by suppliers to submit part of 

their bid application, including information about covered system testing 

and data processing procedures. We also reviewed the instructions 

provided to bidding suppliers about entering data into the CBSS. We 

interviewed Palmetto GBA officials about the Competitive Bidding 

Evaluation System (CBES), a repository of bid data including financial 

data entered by Palmetto GBA personnel and documentation of Palmetto 

GBA actions, as well as about the system’s data transfer and data entry 

protocols. We compared data published by CMS with the data provided to 

us and followed up with the appropriate officials to resolve any 

discrepancies. We assessed the reliability of round 1 data by interviewing 

or reviewing information from CMS and Palmetto GBA officials and 

determined that the data were sufficiently reliable for the purposes of this 

report. We did not independently evaluate CMS’s estimates of beneficiary 

demand, which relied on 2005 and 2006 DME claims data, the most recent 

data available to it at the time, nor did we evaluate CMS’s estimates of 

projected savings as the result of the CBP round 1. 

To determine the major challenges CMS had conducting the CBP round 1, 

we reviewed relevant federal laws, regulations, and policies concerning 

the bidding and contract award processes. We interviewed CMS and 

Palmetto GBA officials about the bid submission process, including the 

CBSS, the bid evaluation and contract award processes, and the CMS and 

Palmetto GBA postbidding review. We reviewed CMS and Palmetto GBA 

bid submission instructions and related materials, communications to 

suppliers during the bid window, and information on how CMS and 

Palmetto GBA evaluated bids and awarded contracts. We also reviewed 

information related to the Program Advisory and Oversight Committee 

(PAOC), whose members are appointed by the HHS Secretary to advise 

CMS on implementing the CBP. We reviewed PAOC meeting materials, 

interviewed members about their role and input into the development of 

round 1, and attended a committee meeting on June 16, 2008. We also 

interviewed national and state DME trade associations and a small number 

of randomly selected suppliers about the CBP bidding and contract award 

processes. 

To determine the steps that CMS has taken to improve the bidding process 

for future CBP rounds, we reviewed applicable CBP provisions in relevant 

MIPPA sections and implementing regulations, PAOC Federal Register 

notices, and interviewed CMS and Palmetto GBA officials. We also 

interviewed Maricom officials and reviewed available documentation 

Page 4 GAO-10-27 DME Competitive Bidding
 

related to the development, testing, and proposed implementation of the 

new electronic bid submission system—the Durable Medical Equipment, 

Prosthetics, Orthotics, and Supplies bidding system (DBidS)—to be used 

for the round 1 rebid. We attended a June 4, 2009, meeting at which CMS 

updated the current PAOC about the process changes that have been 

implemented or proposed for the CBP round 1 rebid. We did not assess the 

reliability or functionality of DBidS, but we reviewed the processes 

established by CMS and its contractors for testing and accepting such 

systems. (See app. I for more detailed information on our methodology.) 

We conducted this performance audit from June 2008 to September 2009 

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. 

Most Medicare beneficiaries participate in Medicare Part B, which helps 

pay for certain DME and other equipment and supplies.10 This includes, for 

example, wheelchairs, walkers, oxygen, and hospital beds. In 2007, 

Medicare spent a total of $430.3 billion. Of that, $8.3 billion was spent on 

DME and other medical equipment and supplies covered under Part B.11

Background 

Medicare DME Payments Since 1989, Medicare has paid for DME through fee schedules. These fee 

schedules are based on the average amount that suppliers charged on 

Medicare claims in 1986 and 1987 for individual DME items adjusted for 

inflation.12 Medicare uses a fee schedule for each state to reflect 

 

10In addition to DME, Medicare Part B covers certain physician services, outpatient 

hospital, laboratory, and other services. Beneficiaries who enroll in Part B pay a monthly 

premium and have an annual deductible—$135 in 2009. Under Part B, Medicare generally 

pays the supplier 80 percent of the lesser of the actual charge or fee schedule amount for 

a covered item or service and the Medicare beneficiary pays the supplier the remaining 

20 percent, once the beneficiary’s annual deductible has been met. 

11This Medicare Part B total does not include the amount of coinsurance or deductibles 

paid by Medicare beneficiaries or administrative expenses. Medicare Part C also helps pays 

for DME covered under Medicare Advantage health plans, which are operated by private 

companies. 

12In general, DME fee schedule rates are subject to national floor and ceiling limits, and 

updated annually by the consumer price index for all urban consumers. 

Page 5 GAO-10-27 DME Competitive Bidding
 

geographical price differences. The applicable state fee schedule is 

determined by the beneficiary’s residence, not the DME supplier’s 

location. 

Medicare generally pays the lesser of either the supplier’s actual charge or 

the Medicare fee schedule amount for the item or service. For suppliers, 

Medicare assignment—accepting Medicare’s reimbursement amount for 

an item as payment in full and limiting the amount the beneficiary can be 

billed for that item—is optional. If a supplier agrees to assignment, then 

Medicare generally pays 80 percent of the amount to the supplier and the 

Medicare beneficiary is responsible for paying the supplier the remaining 

20 percent (referred to as the coinsurance payment), once the 

beneficiary’s annual deductible has been met. If the supplier does not 

accept assignment, the supplier is not limited to charging the beneficiary 

20 percent of the Medicare reimbursement for that item or service and the 

beneficiary can be billed for whatever balance is due. 

History of DME 

Competitive Bidding 

Payment Reform 

The Balanced Budget Act of 1997 required CMS to test competitive bidding 

as a new way to set payment rates for Part B services and supplies 

selected by CMS.13 CMS conducted three CBP demonstration projects, two 

in Florida (1999–2002) and one in Texas (2000–2002). Evaluations of the 

demonstration projects estimated that they saved nearly $9.4 million.14

About a year after the demonstrations ended, the MMA was enacted, 

requiring CMS to implement a broader CBP in 2007.15 Changing the longstanding policy that any qualified provider be allowed to participate in 

Medicare, the MMA provided that generally only suppliers who were 

 

13The BBA authorized CMS to implement up to five competitive bidding demonstration 

projects in no more than three metropolitan statistical areas over a 3-year period. Pub. L. 

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

14Medicare expenditures for medical equipment and supplies provided by demonstration 

participants decreased by about $7.5 million, and corresponding beneficiary cost sharing 

for the medical equipment and supplies decreased by about $1.9 million.

15Pub. L. No. 108-173, § 302(b), 117 Stat. 2066, 2224 (2003) (codified, as amended, at 

42 U.S.C. § 1395w-3). Under the MMA, CMS could include DME and medical supplies, offthe-shelf orthotics, and enteral nutrients and related equipment and supplies. CMS was 

required to establish competitive acquisition areas, phasing in the CBP program beginning 

with 10 of the largest metropolitan statistical areas in 2007, and more in later years. CMS 

also could phase in the CBP beginning with the highest cost and volume items and services 

or those that had the largest savings potential. 

Page 6 GAO-10-27 DME Competitive Bidding
 

awarded contracts could be reimbursed by Medicare for providing covered 

Part B items and services in the selected areas. The MMA imposed certain 

criteria that CMS was required to follow—for example, eligible suppliers 

had to meet quality and financial standards, the total amount to be paid to 

contractors was expected to be less than would be paid otherwise, access 

of beneficiaries to multiple suppliers in their area must be maintained, and 

CMS must consider the ability of suppliers to meet the anticipated needs 

of beneficiaries in the covered geographic area. CMS was also required to 

ensure that small suppliers would be considered. The MMA required the 

establishment of the PAOC to advise CMS on various aspects of the CBP, 

including financial and quality standards.16 The MMA also prohibited any 

administrative or judicial review of the designation of CBP’s CBAs, the 

selection of items and services, the establishment of payment amounts, the 

bidding structure and number of contract suppliers selected, the awarding 

of contracts, and the phase-in of the CBP. CMS published a final rule, 

effective on June 11, 2007, governing implementation of the CBP.17

CMS contracted with Palmetto GBA to implement the CBP bidding and 

contract award process and with Maricom to develop the Web-based 

CBSS. CMS established the bidding process and approved policies and 

procedures developed by Palmetto GBA. CMS implemented the CBP in 10 

CBAs which were among the largest statistical metropolitan areas.18 CMS 

chose the items and services to include in round 1 by focusing on the 

highest cost and highest volume items and services with the largest 

 

16PAOC members included representatives of: beneficiaries and consumers, physicians and 

providers, DME manufacturers, suppliers, certification and quality standards, and federal 

and state programs. 

17CMS, Medicare Program; Competitive Acquisition for Certain Durable Medical 

Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) and Other Issues; Final 

Rule, 72 Fed. Reg. 17,992, 18,055-56 (Apr. 10, 2007). In this report, we refer to this rule as 

“the CBP final rule.” CMS officials informed us that the agency determined that the Federal 

Acquisition Regulation (FAR) did not apply to contracts awarded by CMS to suppliers 

because these contracts did not contemplate the acquisition of goods for the federal 

government. 

18The CBP does not apply to items and supplies covered by Medicare Advantage health 

plans. 

Page 7 GAO-10-27 DME Competitive Bidding
 

potential for savings. It selected 10 product categories,19 with 371 unique 

items and services; spending for those product categories in the 10 CBP 

CBAs accounted for about 9 percent of total Medicare spending on those 

product categories in 2006. Within the 10 CBAs, the product categories 

chosen accounted for 48 percent of Medicare's spending for DME, 

prosthetics, orthotics, and related supplies that year. 

On July 15, 2008, MIPPA was enacted, which terminated the CBP contracts 

awarded during round 1. MIPPA reinstated Medicare reimbursement based 

on the Medicare fee schedule for all items and services included in CBP 

round 1, subject to a 9.5 percent reduction nationally for 2009.20 MIPPA 

also required that CMS implement the CBP round 1 rebid in 2009, and 

imposed additional criteria for this rebid and later rounds.21 CMS issued an 

interim final rule implementing these MIPPA provisions.22

The CBP Round 1 

Competitive Bidding 

Process 

The competitive bidding process had several steps: bidder registration, bid 

submission, bid review, winner selection, setting Medicare payment 

amounts, and contract offers (see fig. 1). To participate in CBP round 1, 

DME suppliers must have met enrollment, quality, and financial standards, 

obtained all the state and local licenses required to provide the relevant 

services, and been accredited by a CMS-approved accrediting 

 

19The 10 product categories were oxygen supplies and equipment; standard power 

wheelchairs, scooters, and related accessories; complex rehabilitative power wheelchairs 

and related accessories; mail-order diabetic supplies; enteral nutrients, equipment, and 

supplies; continuous positive airway pressure devices, and respiratory assist devices, and 

related supplies and accessories; hospital beds and related accessories; negative pressure 

wound therapy pumps and related supplies and accessories; walkers and related 

accessories; and support surfaces (limited to group 2 mattresses and overlays—pressure 

reducing support surfaces for persons with or at high risk for pressure ulcers—in the 

Miami and San Juan CBAs only). 

20Pub. L. No. 110-275, § 154, 122 Stat. 2494, 2560 (2008) (codified, as amended, at 42 U.S.C. 

§ 1395w-3). 

21For example, MIPPA required that CMS notify bidding suppliers of missing financial 

documentation. 

22CMS, Medicare Program: Changes to the Competitive Acquisition of Certain DMEPOS 

by Certain Provisions of MIPPA, 74 Fed. Reg. 2873 (Jan. 16, 2009). CMS clarified that, with 

the exception of the new provisions in this rule, the CBP final rule published in April of 

2007 would continue to govern the CBP. In this report, we refer to this rule as the “interim 

final rule.” 

Page 8 GAO-10-27 DME Competitive Bidding
 

organization.23 In addition, bids for each item had to be bona fide—that is, 

not higher than the Medicare fee schedule but not lower than the 

supplier’s cost. 

 

23For a list of Medicare enrollment standards applying to all DME suppliers, see 42 C.F.R. 

§ 424.57(c). For a list of quality standards applying to all DME suppliers, see 

http://www.cms.hhs.gov/MedicareProviderSupEnroll/Downloads/DMEPOSAccreditationSt

andards.pdf (downloaded on March 19, 2009). 

Page 9 GAO-10-27 DME Competitive Bidding
 

Figure 1: CBP Round 1 Process 

Source: GAO based on information provided by CMS.

Suppliers register to bid.

Suppliers submit bids.

Palmetto GBA reviews bids.

Bid is qualified.

Bid wins on price.

Using bids that won on price, Palmetto GBA determines

Medicare payment amounts for each item.

Palmetto GBA notifies losing suppliers of round 1 results

and CMS extends contract offers to winning suppliers.

Bid is

disqualified.

Palmetto GBA determines if bid is qualified 

based on completeness, compliance with 

bidding requirements, and financial score.

If necessary to meet small supplier target, Palmetto GBA selects

additional bids submitted by small suppliers for contract offers.

Qualified bids compete on price.

Bid loses

on price.

Palmetto GBA 

selects winning 

bids.

Bidder registration

and submission

Bid review

Price competition 

and setting 

Medicare 

payment 

amounts

Contract

offers

Bidder registration. The first step in the CBP bidding process was 

bidder registration. Suppliers had to register with a CMS identity 

management and authentication system to gain access to the CBSS. 

Suppliers registered in the CBSS as one of three types of bidding entities: a 

Page 10 GAO-10-27 DME Competitive Bidding
 

supplier with a single location, multiple suppliers sharing common 

ownership or control, or 2-20 small suppliers forming a network.24

Bid submission. For purposes of the CBP, a bid was an offer by a supplier 

to furnish all items within a product category throughout the entire CBA. 

The bid had to include a proposed price for each item in the product 

category. The number of items in a product category ranged from 3 to 

142.25 A bid package consisted of two electronic forms, A and B, and 

documents specified in the request-for-bid instructions and in other 

communication with suppliers. Hard copies of the documents had to be 

submitted to Palmetto GBA. Form A requested information about 

suppliers, including Medicare billing numbers, addresses, ownership, 

current or prior sanctions, and accreditation status.26 Each Form B 

required suppliers to disclose annual revenues for the product category in 

each CBA; estimates of the number of item units currently provided and 

that could be provided in the future for that product category in that CBA; 

expansion plans; and item prices, models, and manufacturers. Each Form 

B constituted one bid—that is, suppliers had to submit a separate form for 

each product category in each CBA. Suppliers could submit a Form B for 

any product category up for bid in any CBA.27 Hard-copy documents 

required to complete the bid package included financial documents, proof 

of accreditation status, letters of intent to enter into agreements with 

subcontractors, network agreements, and statements certifying the 

accuracy of the submissions. Financial documentation requirements 

included 3 years of annual financial statements, selected forms from the 

 

24The CBSS registration process allowed only one supplier to register per bidding entity. A 

bidding entity could be one or more suppliers associated with one or more bids. 

25For example, in the walker and related accessories category, there were 17 items, 

including a folding wheeled walker with adjustable or fixed height, a walker seat 

attachment, and a replacement handgrip. 

26A bidding entity completed one Form A, regardless of how many suppliers made up the 

bidding entity or how many bids were associated with the bidding entity. 

27Commonly owned or controlled suppliers were required to submit a single bid to furnish a 

product category in a CBA. Two or more suppliers are commonly owned if one or more of 

them has an ownership interest totaling at least 5 percent of the other supplier. A supplier 

controls another supplier if one or more of its owners is an officer, director, or partner in 

the other. 

Page 11 GAO-10-27 DME Competitive Bidding
 

last three annual tax returns, and credit reports and credit scores for a 90-

day period ending close to the date of the bid’s submission.28 (See table 1.) 

Table 1: Required Financial Documents for CBP Round 1 

Financial document as described in requestfor-bid instructions Request-for-bid instructions’ term definitions 

Compiled balance sheet 

(Statement of Financial Position) 

The balance sheet and statement of financial position terms were defined as: 

Balance sheet: The position statement, that is, it presents the cumulative financial 

position of a firm at a specific date. The balance sheets reports financial position in 

terms of the basic economic model of the enterprise: Assets = Creditors’ Equity + 

Owners’ Equity. 

Statement of financial position: An alternative term for the term “balance sheet.” The 

financial position of an enterprise at a particular time comprises its assets, liabilities, 

and owners’ equity and the relationship among them, plus contingencies, 

commitments, and other financial matters that pertain to the enterprise at the time. 

Statement of Cash Flow 

(Statement of Changes in Financial Position) 

Term was not defined. 

Statement of Operations 

(Income Statement) 

Income statement: Reports on the results of an entity’s operations for a given period 

of time as opposed to a specific point in time. 

Schedule C from 1040 Tax Return 

(Profit and loss statement) 

No further description provided. 

Schedule L from 1065, U.S. Return of 

Partnership Income 

(limited partnerships and partnerships) 

No further description provided. 

Schedule L (balance sheet) from corporate tax 

return (corporations) 

No further description provided. 

10-K filing reports with Securities and 

Exchange Commission 

(publicly traded companies) 

No further description provided. 

Current credit report and credit score Terms were not defined. 

Source: CMS. 

Note: Data are from CMS’s Instructions for Completing Bid Forms for Medicare DMEPOS 

Competitive Bidding Program (May 2007). 

Bid review. After the bid window closed, Palmetto GBA began to review 

the bids. It determined whether each bid package was complete, 

compliant with bidding requirements, and whether the submitting 

supplier’s financial score satisfied a minimum threshold to qualify to 

 

28New suppliers were required to submit projected financial documents to substitute for 

any year for which they did not have past financial information because they were not 

suppliers of DME and other items. 

Page 12 GAO-10-27 DME Competitive Bidding
 

compete on price.29 The financial score was determined using criteria 

developed by CMS for this purpose including suppliers’ credit scores and 

10 financial measures—described by CMS as standard accounting 

measures. (See table 2.) If the bid package was complete, compliant with 

bidding requirements, and the submitting supplier had a financial score 

that was equal to or greater than the minimum threshold, the bid qualified 

to compete on price. But before comparing prices, Palmetto GBA also 

reviewed each qualified bid’s capacity projections—the supplier’s ability 

to provide the volume of items claimed in the bid in light of the supplier’s 

historical capacity, expansion plans, and financial score. It adjusted some 

bids’ capacity projections according to certain guidelines.30

Table 2: Ten Financial Measures Used to Determine a Supplier’s Financial Score, 

CBP Round 1 

Financial measure Description provided to suppliers 

Current ratio Current assets / current liabilities 

Collection period Accounts receivable / sales x 360 

Working capital Current assets – current liabilities 

Accounts payable to sales Accounts payable / net sales 

Quick ratio (Cash + accounts receivable) / current liabilities 

Current liabilities to net worth Current liabilities / net worth 

Quality of earnings Cash flow from operations / (net income + depreciation) 

Operating cash flow to sales Cash flow from operations / (revenue – adjustment to 

revenue) 

Return on sales Net income / sales 

Sales to inventory Net sales / inventory 

Source: CMS. 

 

29If the bidding entity was other than a single supplier, the financial scores of each supplier 

making up the bidding entity were combined into a score for the bidding entity. 

30If the supplier had a low financial score, the supplier’s projected capacity was limited to 

historical capacity. If the supplier did not have a low score but reported projected capacity 

as less than historical capacity, projected capacity was adjusted upward to historical 

capacity. If the supplier’s projected capacity for the product category was 20 percent or 

more of expected beneficiary demand, projected capacity was limited to 20 percent of 

expected beneficiary demand for purposes of the bid review process only. 

Page 13 GAO-10-27 DME Competitive Bidding
 

Winner Selection. Palmetto GBA used several steps to identify the 

winning bids based on price. Item prices submitted by competing suppliers 

were compared using a composite pricing methodology. A bid’s composite 

price was calculated as each item’s price multiplied by an item weight 

summed across all items in the product category. Table 3 illustrates the 

calculation for three hypothetical bids’ composite prices in a product 

category containing three items. Each weight is based on the item’s share 

of units billed to Medicare in 2006 as a percentage of all of the units for the 

product category billed to Medicare nationwide that same year. 

Table 3: Bid Composite Price Calculation for a Product Category with Three Items 

Item A Item B Item C Composite price

Item weight 0.5 0.3 0.2 

Supplier 1 bid $1.00 x 0.5 + $4.00 x 0.3 + $1.00 x 0.2 = $1.90

Supplier 2 bid 3.00 x 0.5 + 3.00 x 0.3 + 2.00 x 0.2 = $2.80

Supplier 3 bid 2.00 x 0.5 + 3.00 x 0.3 + 2.00 x 0.2 = $2.30

Source: GAO. 

For each auction—a competition by qualified suppliers to deliver all items 

within a single product category in a single CBA—Palmetto GBA ordered 

the bids by composite price from lowest to highest.31 Starting with the bid 

with the lowest composite price, Palmetto GBA calculated the cumulative 

projected capacity of the competing bids. Palmetto GBA identified the bid 

where cumulative projected capacity met or exceeded CMS’s estimated 

beneficiary demand as the pivotal bid (see table 4). In table 4, the pivotal 

bid was submitted by Supplier 9 with a composite price of $7.64, since 

cumulative supply (1,765 units) reached CMS’s estimated demand (1,500 

units) at that bid. If projected beneficiary demand could not be met by 

qualified suppliers, a pivotal bid could not be established and the auction 

was considered nonviable.32 Otherwise, bids with composite prices equal 

to or less than the pivotal bid were winners on the basis of price. 

 

31CBP round 1 consisted of 92 auctions. Though there were 10 CBAs and 10 product 

categories in round 1, support surfaces (group 2 mattresses and overlays) were only bid in 

Miami and San Juan. 

32When an auction was declared nonviable, the DME items in the product category in that 

CBA would continue to be paid according to the Medicare DME fee schedule and all 

Medicare enrolled DME suppliers would continue to be allowed to submit DME claims for 

these items in that CBA. In CBP round 1, seven auctions were declared nonviable. 

Page 14 GAO-10-27 DME Competitive Bidding
 

Table 4: Determining the Pivotal Bid 

Bids 

Composite 

price 

(ordered)

Each bid’s 

projected 

capacity

Cumulative 

projected 

capacity 

Estimated 

beneficiary 

demand: 1,500

Pivotal 

bid 

Supplier 15 bid $4.00 400 400 Does not meet 

Supplier 6 bid $5.70 320 720 Does not meet 

Supplier 1 bid $5.76 200 920 Does not meet 

Supplier 7 bid $5.87 100 1,020 Does not meet 

Supplier 12 bid $6.20 245 1,265 Does not meet 

Supplier 10 bid $6.21 200 1,465 Does not meet 

Supplier 9 Bid $7.64 300 1,765 Meets 3

Supplier 3 bid $9.75 400 2,165 

Supplier 2 bid $9.89 100 2,265 

Source: GAO. 

Setting Medicare single payment amounts. Bids that won on price 

were used to establish Medicare’s single payment amounts for each item in 

the auction.33 For each item, Palmetto GBA ordered these winning bids’ 

price offers for each item from lowest to highest. The median price offered 

for that item would be Medicare’s payment for that auction item in that 

CBA. The use of the median in setting the item’s single payment amount 

meant that Medicare’s payment amount could be less than or more than a 

particular winning supplier’s actual bid for an item. Because CBP 

payments may only be paid on assignment, Medicare would pay the 

supplier 80 percent of the single payment amount for an item and the 

beneficiary would be responsible for the remaining 20 percent. 

Contract offers. In addition to winning on price, small suppliers’ bids 

could also win if there were an insufficient number of small suppliers that 

won on price alone.34 Before the initial set of contract offers, Palmetto 

GBA determined whether CMS’s target—that 30 percent of the qualified 

suppliers be small suppliers—had been met by small suppliers winning on 

price. In the auctions where the goal had not been met, Palmetto GBA 

moved up the composite pricing order, above the pivotal bid, for small 

suppliers only as a means to include additional small suppliers. These 

 

33The same DME items could have different single payment amounts in different CBAs. 

34CMS defined small suppliers as those that generate gross revenue of $3.5 million or less in 

annual receipts including Medicare and non-Medicare revenue. 

Page 15 GAO-10-27 DME Competitive Bidding
 

additional small suppliers would then be offered contracts, in addition to 

those suppliers whose bids won on price alone. In March 2008, CMS and 

Palmetto GBA notified suppliers of the auction results and CMS extended 

contract offers to winning suppliers. In May 2008, CMS announced the 

suppliers that had accepted contracts for the 3-year CBP contract period 

from July 1, 2008, through June 30, 2011.35 However, MIPPA, which was 

enacted on July 15, 2008, terminated the CBP round 1 contracts. 

About one-quarter of the bids submitted during CBP round 1 resulted in 

awarded contracts. Of the 6,374 bids submitted by 1,010 suppliers, half 

were disqualified before competing on price—most often for missing 

financial documentation or noncompliance with accreditation 

requirements. Nearly two-thirds of the 85 auctions saw the number of 

suppliers decrease by 50 percent or more compared to the number of 

suppliers billing Medicare for the product category in 2006. CMS estimated 

that the volume-weighted reduction in Medicare’s payment amounts for 

round 1 would have averaged 26 percent. 

About One-Quarter of 

Bids Resulted in 

Contracts Generating 

Significant Potential 

Savings 

About One-Quarter of the 

Submitted Bids Resulted in 

Contracts, but Almost Half 

Were Disqualified for 

Missing Financial 

Documentation 

Once the contract award process was completed, 22 percent of the bids 

submitted (1,372 of 6,374) resulted in contracts between CMS and 

suppliers to provide DME and other items to Medicare beneficiaries.36 (See 

table 5 for step-by-step results.) CMS initially extended contract offers for 

1,335 bids.37 Contracts were offered to additional suppliers when some 

winners rejected the contract offers associated with 86 bids, as well as 

after CMS reversed Palmetto GBA’s determinations to disqualify 27 bids. 

Winning suppliers may have rejected contracts because the CBP single 

payment amounts were less than the item prices the supplier had bid. 

 

35The contract period for diabetes mail-order supplies was July 1, 2008, through March 31, 

2010. 

36Three percent of the bids competed in seven nonviable auctions. Of the 178 bids 

submitted for the nonviable auctions, 81 were qualified. 

37CMS entered into these contracts with suppliers, which, among other things, required 

suppliers to deliver all items in a product category throughout a CBA. 

Page 16 GAO-10-27 DME Competitive Bidding
 

Table 5: CBP Round 1 Bid Counts by Process Step 

Process step 

Number of 

round 1 bids

Percentage 

of total bids 

reviewed

1. Bid review 

Bids reviewed 6,374 100

Bids disqualified on first review (3,143) 49

Bids qualified but rejected because auction deemed 

nonviable 

(65) 1

2. Winner selection 

Qualified bids used to determine pivotal bids 3,166 50

Bids that lost on price (1,831) 29

Bids that won on price or were contracts with small 

suppliers added to meet 30 percent target, or both 

1,335 21

3. Contract offers 

Initial round of contract offers 1,335 21

Additional offers extended 137 2

4. Contract outcomes 

Total contract offers made 1,472 23

Contract offers rejected (86) 1

Acceptances in nonviable auctions that were withdrawn (14) <1

Final contracts 1,372 22

Source: Palmetto GBA. 

Note: Numbers in parentheses are decreases. 

By the end of initial bid review, almost half of the bids submitted were 

disqualified (3,143 of 6,374 submitted). A bid could be disqualified for 

more than one reason. (See table 6.) Nearly 9 of every 10 disqualified bids 

(86 percent of the 3,143) did not submit complete financial documentation. 

Twenty-two percent of the bids were disqualified for noncompliance with 

accreditation requirements; that is, they failed to receive accreditation by 

the deadline established by CMS. Two percent of the bids were 

disqualified because the bidding suppliers did not meet supplier financial 

standards; that is, in CMS’s judgment, they were unlikely for financial 

reasons to be able to fulfill their contract obligations. Disqualified bids 

were ineligible to compete on price and were not considered for a contract 

award. 

Page 17 GAO-10-27 DME Competitive Bidding
 

Table 6: Number and Percentage of CBP Disqualified Bids by Reason for Disqualification 

Reason for bid disqualification 

Bids disqualified 

for this reason 

Percentage of 

bids disqualified 

One or more suppliers lacked required financial documentation 2,698 86

No suppliers were accredited by a CMS-approved accreditation organization for the 

product category 681 22

A bid price for one or more items was deemed not bona fide 230 7

One or more suppliers did not meet enrollment standards for supplier billing privileges 120 4

Suppliers sharing common ownership or management were competing in the same auction 104 3

One or more suppliers did not meet financial standards 48 2

Bid submitted by a network did not meet all network requirements 3 <1

Source: GAO based on information provided by CMS. 

Note: Percentages add to more than 100 because bids could be disqualified for more than one 

reason. 

In the preamble to the CBP final rule, CMS acknowledged that the number 

of suppliers would decrease as the result of competitive bidding.38 In 2006, 

the median number of suppliers per CBA for a product category was 31.39

For the 2 weeks the CBP contracts were effective, the median number of 

suppliers fell to 14, or 55 percent less than the number in 2006.40 Nearly 

two-thirds of the auctions conducted during CBP round 1 had decreases in 

the number of suppliers of 50 percent or more. (See app. II for auctionspecific detail.) Mail-order diabetic suppliers had the largest decrease 

(88 percent) while walkers and related accessories had the smallest 

decrease. One of the 10 product categories, negative pressure wound 

therapy pumps, had an increase in the number of suppliers as the result of 

CBP. Compared to the other nine CBAs, the Miami CBA had the largest 

number of suppliers in eight of nine product categories in 2006 and had the 

greatest decreases in suppliers after CBP round 1.41 The median number of 

 

3872 Fed. Reg. at 18077. 

39This number includes only those suppliers submitting at least $10,000 worth of claims to 

Medicare for the product category within the CBA for dates of service between January 1, 

2006, and December 31, 2006. 

40Only those suppliers that had entered into CBP contracts with CMS as of June 11, 2008, 

are included. 

41Miami was the only CBA with CBP contracts for group 2 support surfaces in 2008, so it 

was not possible to compare changes in the number of suppliers between Miami and the 

other CBAs. 

Page 18 GAO-10-27 DME Competitive Bidding
 

suppliers across the 10 product categories decreased 87 percent in the 

Miami CBA. 

CMS Generally Met the 

Small Supplier 

Representation Goal 

In 76 of the 85 auctions, at least 30 percent or more of the suppliers that 

were awarded contracts were small. Small suppliers represented at least 

57 percent of all suppliers registered on CBSS and 63 percent of the 

winning suppliers (see table 7).42 Because small suppliers submitted fewer 

bids on average, slightly less than half (48 percent) of all bids resulting in 

contracts were from small suppliers. 

Table 7: CBP Round 1 Contract Awards by Supplier Size 

Size of 

suppliers 

Number of 

registered 

suppliers

Percentage of 

registered 

suppliers 

Number of 

registered 

suppliers 

awarded 

contracts

Percentage of 

registered 

suppliers 

awarded 

contracts

Small supplier 574 57 208 63

Large supplier 300 30 121 37

Unknowna136 13 NA NA

Total 1,010 100 329 100

Source: GAO based on information provided by CMS. 

Notes: NA means not applicable. These suppliers did not submit sufficient financial information to 

determine their gross revenues and were disqualified. These suppliers were not eligible for contract 

awards. 

a

Palmetto GBA was unable to classify the size for 136 registered suppliers and 746 of their bids 

because the suppliers did not include income statements or revenue information with their bid 

package. 

 

42If the suppliers of unknown size were excluded from calculating the percentage of total 

suppliers, small suppliers would have represented 66 percent of the total instead of 

57 percent. 

Page 19 GAO-10-27 DME Competitive Bidding
 

CMS estimated that, compared to the 2008 Medicare fee schedule, the 

volume-weighted reduction in Medicare’s payment amounts for items 

acquired under CBP round 1 would have averaged 26 percent.43 (See 

app. III for specifics by CBA and product category.) The items in the mailorder diabetic supply category had the largest reductions, with differences 

between the CBP single payment amounts and the Medicare fee schedule 

averaging 43 percent. CBP single payment amounts were reduced the least 

for items in the complex rehabilitative power mobility devices and 

negative pressure wound therapy pumps categories—on average, 15 and 

16 percent lower than the 2008 Medicare fee schedule. 

CMS’s implementation of CBP round 1 presented several challenges to 

suppliers. Some bid submission information was poorly timed and unclear, 

confusing suppliers about bidding requirements and compelling some to 

revise and resubmit their bids. In addition, the CBSS experienced several 

problems that made submitting bids difficult. CMS did not notify all 

suppliers of its postbidding review process, which reinstated some bids 

that CMS found to have been incorrectly disqualified. While the PAOC 

alerted CMS to potential challenges for round 1, some were not resolved 

before the bid window opened. 

CMS Estimated a 26 

Percent Reduction in CBP 

Single Payment Amounts 

Compared to the Medicare 

Fee Schedule 

CMS Had Difficulty 

Providing Bidders 

with Clear, Timely 

Information, and Its 

Electronic Bid 

Submission System 

Was Problematic 

 

43According to CMS officials, the savings estimate for each combination of CBA and 

product category was derived by multiplying the difference between the 2008 Medicare fee 

schedule for each item in the product category and the CBP-derived single payment 

amounts by the item’s percentage share of the total number of units represented by all 

items in the product category provided by Medicare in 2006, the same weights used in 

estimating composite prices in 2007. 

Page 20 GAO-10-27 DME Competitive Bidding
 

CMS clarified CBP bidding information after the bid window opened and 

extended the bid window deadlines three times—actions making it more 

difficult for suppliers to submit correct bids. (See fig. 2.) While the CBP 

request-for-bid instructions, posted the day that the bid window opened, 

were only revised once,44 CMS and Palmetto GBA provided additional 

information explaining the instructions throughout the bid window.45

Although suppliers could revise their submissions throughout the bid 

window, when additional information was provided those that believed 

they had submitted completed bids had to review them to ensure they 

were still correct. For example, if a supplier revised any of its financial 

documentation, it had to resubmit the entire financial documentation 

package and certification statement in hard copy.46

CMS Provided Bidding 

Information to Suppliers 

after the Bid Window 

Opened and Extended the 

Window Deadlines Three 

Times 

 

44CMS revised the request-for-bid instructions on September 13, 2007—about 2 weeks 

before the CBP bid window closed on September 25, 2007—and posted the revision on 

Palmetto GBA’s Web site. The revised instruction informed suppliers that it was their 

responsibility to ensure that they had submitted a complete package of all required 

hardcopy documents to Palmetto GBA, and that their CBSS homepage would indicate 

whether the package had been received, but “this does not mean that the package is 

necessarily accurate, completeness [sic] or meets CMS criteria.” The original instructions 

had stated that suppliers’ bid submissions would be reviewed by Palmetto GBA for 

completeness beginning 10 business days before the bid window closed. Suppliers also 

received a listserv message—a message sent to multiple e-mail addresses on a subscriber 

mailing list—from CMS that stated Palmetto GBA “will not be able to notify bidders of any 

specific missing documentation or otherwise provide confirmation of the accuracy or 

completeness of the hard-copy documentation.” The message did not indicate that it was a 

revision of the request-for-bid instructions. (In its agency comments to this report, CMS 

told us that it also notified suppliers by individual e-mails.) 

45Throughout the bid window, CMS continued to provide additional information about the 

bidding process; for example, on May 25, 2007—10 days after the bid window opened—

CMS announced the 10 financial measures that would be used to evaluate the financial 

viability of bidding suppliers. During the original 60-day bid window, Palmetto GBA 

conducted six bidder conference calls—three within the first 30 days—to provide more 

information about the bidding process. The calls were conducted to help suppliers 

understand the request-for-bid instructions that were released the day the bid window 

opened. The first three calls—conducted about 3 weeks after the bid window opened and 

within 5 days of each other—focused on how suppliers should submit a bid, understanding 

bidding rules, and the product categories. The next two calls—conducted on consecutive 

days—focused on the bidding provisions specific to small suppliers, and an open call to 

allow suppliers to ask CBP questions—were held less than a month before the first bid 

window deadline of July 13, 2007. The sixth and last call—to address bidding process 

issues—was held 4 days before the July 13 deadline. 

46The supplier’s signed certification statement applied to all bid information submitted 

electronically or in hard copy. The request-for-bid instructions explained that the statement 

certified that the financial documents included—which were not prepared as part of a tax 

return—were accurate and had been prepared on an accrual or cash basis of accounting. 

Page 21 GAO-10-27 DME Competitive Bidding
 

Figure 2: CBP Round 1 Timeline, 2007-2008 

a

CMS conducted bidder conference calls to inform potential bidders about the bidding process. 

b

Medicare Improvements for Patients and Providers Act of 2008. 

CMS’s bid window extensions resulted in a 4-month bid window, open 

May 15, 2007, through September 25, 2007—about 2-1⁄2 months longer than 

originally planned. A first 1-week extension was announced on June 29, 

2007—about a week after the open bidder conference call to respond to 

suppliers’ questions. Palmetto GBA and CMS then conducted a special 

30-minute bidder conference call on July 9, 2007, to address suppliers’ 

Page 22 GAO-10-27 DME Competitive Bidding
 

concerns about CBSS data losses from an automated logout security 

feature that caused suppliers to lose unsaved information. CMS 

announced the second 1-week extension from July 20, 2007, to July 27, 

2007. On July 27, 2007, CMS announced a third, 2-month deadline 

extension to September 25, 2007, and explained there would be a targeted 

period to address suppliers’ remaining questions and requested that 

suppliers e-mail their questions to Palmetto GBA by August 10, 2007. 

CMS allowed suppliers to submit CBP bids while their DME accreditation 

was pending, and when the final bid window extension was made, the 

accreditation deadline was also extended. Although CMS had encouraged 

suppliers to begin the accreditation process before the bid window 

opened, some suppliers were submitting bids while completing their 

accreditation process. A CMS official told us that some suppliers did not 

appreciate or understand the amount of information needed before the 

accrediting organizations could conduct an accreditation site visit. 

Whether suppliers had the required DME state licenses was to be 

determined as part of the accreditation process. However, CMS 

acknowledged that it checked supplier licenses after contract offers were 

made and Palmetto GBA officials acknowledged that some suppliers were 

awarded CBP contracts even though they did not have the necessary state 

licenses at the time contracts were awarded.47

CMS’s Competitive Bidding 

Submission Information 

Was Sometimes Unclear, 

Particularly for Financial 

Documentation 

CMS and Palmetto GBA acknowledged that suppliers did not always 

understand the request-for-bid instructions.48 CMS provided guidance to 

suppliers through the CBP final rule and the request-for-bid instructions, 

and CMS and Palmetto GBA provided additional information throughout 

the bid window through multiple sources. These sources included the 

Palmetto GBA Web site and its frequently asked questions section,49 bidder 

conference calls, CMS and Palmetto GBA listservs, and the Palmetto GBA 

 

47After contract awards were announced, two state DME associations told us that they 

found some winning suppliers did not have the necessary state licenses. 

48CMS and Maricom developed the request-for-bid instructions; Palmetto GBA provided 

comments and recommendations. 

49CMS officials told us that more than 90 percent of the frequently asked questions were 

posted on the Palmetto GBA Web site during the bid window. The CMS Web site had links 

to the Palmetto GBA Web site and to medicare.gov, the official Web site for Medicare 

beneficiaries. 

Page 23 GAO-10-27 DME Competitive Bidding
 

customer service center.50 We found that these sources sometimes had 

unclear or inconsistent information about the bidding instructions, 

including the specialty supplier definition, how to estimate supplier 

capacity, and how to complete bid application Forms A and B. (See app. IV 

for examples.) Some suppliers told us that Palmetto GBA service center 

employees could not answer their questions and one supplier told us it 

was uncomfortable using the center because it was unsure the information 

provided was correct. 

CMS also acknowledged that many suppliers had particular difficulty 

complying with the financial documentation requirement. A supplier told 

us, for example, that it was a wholly owned subsidiary of a parent 

company and did not understand which financial documentation 

requirements in the request-for-bid instructions applied to it. A CMS 

official told us that some suppliers did not understand that they had to 

provide all of the required financial documents, and that the statement of 

cash flow—described as a statement of changes in financial position—was 

the document most often missing. We also found that CMS’s financial 

documentation instructions did not clearly address differences among 

supplier business types—for example, a sole proprietorship business 

versus a publicly traded national corporation—and among the financial 

documents needed to submit a bid for each supplier type.51 Because 

business types did not easily link to the request-for-bid instructions, 

suppliers were at risk of submitting incomplete or inaccurate financial 

documentation. 

We found that CMS’s request-for-bid instructions had inconsistent 

information about the requirements for a credit report and credit score. 

The Form A bid instructions for financial information discussed different 

 

50CMS also had fact sheets available on its Web site concerning post-CBP bidding issues 

such as the grandfathering of certain suppliers who may continue to provide items and 

services even if they had not been awarded a contract under CBP and how items would be 

repaired or replaced. 

51On the bid submission Form A, suppliers self-identified themselves as one of eight 

supplier types— business corporation, professional organization, sole proprietorship, 

franchise, general partnership, publicly traded company, joint venture, or other. Different 

categories were used in the request-for-bid instructions. There suppliers were described for 

financial documentation purposes as suppliers that submitted individual tax returns that 

include business taxes, limited partnerships and partnerships, suppliers that submit 

corporate tax returns, suppliers that are publicly traded companies, new suppliers, and 

suppliers submitting an individual bid and also being part of a network. Only the publicly 

traded company term was used in both. 

Page 24 GAO-10-27 DME Competitive Bidding
 

types of suppliers and their financial documents in six paragraphs. In two 

paragraphs—for suppliers that submit individual tax returns that include 

business taxes and for suppliers that submit corporate tax returns—the 

instructions stated that those supplier types had to submit a current credit 

report but stated nothing about a credit score. In the remaining four 

paragraphs—for limited partnerships, publicly traded suppliers, new 

suppliers, and networks—nothing was stated about either a credit report 

or a credit score. The bid submission Form A stated that a credit rating 

and score—rather than using the term credit report—had to be submitted. 

Near the end of the bid window on September 13, 2007, Palmetto GBA 

issued a “required document reminder” that stated that all bidders, 

regardless of their business structure, had to submit both a credit report 

and a credit score. 

CMS Feedback to 

Suppliers on Bid 

Disqualification Reasons 

Were Vague and 

Incomplete 

The feedback that CMS provided to suppliers that had bids disqualified 

because of bid submission deficiencies was vague.52 CMS provided 

suppliers that had bids disqualified with seven general reason codes to 

explain the grounds for the disqualifications. (See table 8.) The suppliers 

with disqualified bids received letters dated March 20, 2008, from Palmetto 

GBA with attachments that indicated which reason code or codes applied 

for each CBA and each product category for which the supplier submitted 

a bid.53

 

52CMS had stated in the preamble to the CBP final rule, that given the expected bid volume, 

logistics, and time constraints, it would not be administratively feasible to provide losing 

suppliers individual bid debriefing meetings to discuss the inadequacies of their bid. 

53Suppliers that had bids that failed on price and suppliers that were offered contracts for 

their winning bids also received notification letters dated March 20, 2008. 

Page 25 GAO-10-27 DME Competitive Bidding
 

Table 8: CMS’s CBP Bid Disqualification Reason Codes and Descriptions, CBP 

Round 1 

Reason code Reason code description 

BSE-1 Bidder did not meet enrollment standards specified in 42 C.F.R. 

424.57(c). 

BSE-2 Bidder did not submit a bona fide bid that complies with all the terms 

and conditions contained in the request for bids (RFB). 

BSE-3 Bidder did not meet applicable quality standards developed by CMS in 

accordance with § 1834(a) (20) of the Social Security Act / was not 

accredited by a CMS-approved accreditation organization. 

BSE-4 Bidder did not submit along with its bid the applicable financial 

documentation specified in the request for bids (RFB). 

NR-1 Bidder did not meet network requirements. 

CO-1 Bidder did not submit a single bid for commonly-owned or controlled 

suppliers. 

FS-1 Bidder did not meet financial standards. 

Source: CMS and Palmetto GBA. 

The reason codes provided as feedback may not help a supplier 

understand how to resolve its bid issues for future CBP rounds. For 

example, if a supplier’s bid did not provide all required financial 

documentation, it was disqualified under the BSE-4 reason code. (See 

table 9.) The BSE-4 reason code does not inform the supplier which 

financial document or documents were not submitted. Likewise, if the 

supplier did not meet the financial standards, the bid was disqualified 

under the FS-1 reason, and the supplier would not know the standard or 

standards it had not met. In addition, CMS did not always provide a 

supplier with all reasons why a bid was disqualified. Palmetto GBA 

officials told us that suppliers were informed of an accreditation 

disqualification reason (BSE-3) if it was the bid’s only disqualifying reason. 

If a supplier was disqualified both for a reason code other than BSE-3 and 

for not being accredited, the supplier would not have been informed about 

the accreditation reason. 

Page 26 GAO-10-27 DME Competitive Bidding
 

Table 9: Text of One Disqualified Bid Letter’s Attachment Information 

Competitive bidding area Product category 

Oxygen Equipment and Supplies 

Charlotte-Gastonia-Concord, NC-SC BSE-4 

Source: CMS and Palmetto GBA. 

CMS Postbidding Review 

Process Was Not 

Effectively Communicated 

to Suppliers and Was 

Inconsistent with CMS’s 

Earlier Interpretation of Its 

Authority to Conduct Such 

Reviews 

CMS conducted a postbidding review process through which the agency 

reversed Palmetto GBA’s decision to disqualify the bids of certain 

suppliers. Specifically, Palmetto GBA and CMS reviewed a total of 1,935 

bids from 357 suppliers from March 21, 2008, through July 9, 2008.54 They 

only reviewed the disqualified bids of suppliers who contacted them with 

questions or requested a review.55 As a result of this review, CMS 

determined that 10 suppliers had 58 bids incorrectly disqualified; the 

agency subsequently offered CBP contracts to 7 of these suppliers for 27 

bids.56

CMS did not effectively communicate to suppliers that they had an 

opportunity to have disqualified round 1 bids reviewed. CMS officials 

informed us that the agency made a decision on or about March 5, 2008, as 

part of a quality assurance process, to permit Palmetto GBA to review 

disqualified bids after suppliers received their March 20, 2008, letters 

notifying them of their disqualifications.57 After the letters were sent to 

suppliers on March 20, 2008, CMS officials told us that suppliers learned 

 

54CMS officials confirmed that bid reviews took an average of 34 days to complete and 

suppliers were notified of the results of their bid reviews from April 21 through August 28, 

2008. Palmetto GBA acknowledged that because of the volume of challenges, the time 

required for review and the fact that no time frame was specified, the reviews continued 

after July 1, 2008, the implementation date of the CBP program. 

55CMS informed us that the 290 suppliers with disqualified bids who did not call Palmetto 

GBA or CMS with questions or request a review did not receive one. 

56These 10 suppliers had been disqualified for (1) failing to submit required financial 

documentation, (2) failing to be appropriately accredited, (3) having a bid price for one or 

more items that was not bona fide, or (4) sharing common ownership or management when 

competing in the same auction. The incorrectly disqualified suppliers were offered 

contracts if they had bids equal to or less than the pivotal bid or were needed to meet the 

small-supplier participation goal. 

57CMS officials stated that Palmetto GBA reviewed disqualified bids and made 

recommendations as to whether the disqualification determination should be overturned; 

those recommendations were subsequently reviewed and acted upon by CMS. 

Page 27 GAO-10-27 DME Competitive Bidding
 

about the bid review opportunity if they contacted Palmetto GBA with 

questions about their bids,58 participated in an April 2008 CMS Open Door 

Forum59 about the CBP program, or attended the June 16, 2008 PAOC 

meeting.60 CMS and Palmetto GBA, however, did not provide any written 

notification explaining this review process to suppliers prior to or after 

they were informed of their bid disqualifications, and some suppliers were 

not aware of this opportunity for review. For example, two suppliers 

informed us that they were unaware that a postbidding review was an 

option. Another supplier informed us that the company’s bids were 

disqualified and when he called Palmetto GBA to follow up, he was 

informed that there would be a review and response in 30 days, but he had 

not received a response as of March 25, 2009. An additional supplier 

informed us that in response to his inquiries, CMS stated that there was no 

formal appeal process. 

Moreover, the postbidding review was inconsistent with CMS’s earlier 

interpretation of its authority to conduct such reviews. Before soliciting 

bids for round 1, the agency determined that it would not have the 

authority to review the results of bid evaluations. The MMA prohibited 

administrative and judicial review of certain round 1 determinations, 

including the awarding of contracts, the bidding structure, and number of 

contractors selected.61 Neither the MMA nor its legislative history defined 

the phrase “administrative review.” In the preamble to the CBP final rule, 

however, CMS interpreted this provision as prohibiting review of the 

 

58The March 20, 2008, letters to suppliers stated that “If you have any questions, please 

contact the customer service center at 877-577-5331.” 

59CMS periodically conducts open door forums for DME suppliers using telephone 

conference calls. The forums offer suppliers an opportunity for live dialogue with CMS 

officials about policy and program-related issues. Participants may call in without having to 

register. Once posted on the CMS Web site, forum replays are available for 30 days. 

60A CMS official stated at the PAOC meeting on June 16, 2008, that suppliers had been 

informed there was a bid review process and that they could contact Palmetto GBA to 

request their bids be reviewed. A meeting summary was not posted to the CMS Web site 

until August 2009, but it did not make any references to the postbid review process. As of 

September 10, 2009, no transcript of the June 16, 2008, meeting had been posted. 

61The MMA stated, “there shall be no administrative or judicial review under [42 U.S.C. 

§ 1395ff, § 1395oo], or otherwise, of ... the awarding of contracts ... or the bidding 

structure and number of contractors selected...”. Pub. L. No. 108-173, § 302, 117 Stat. 2066, 

2224 (2003) (codified, as amended, at 42 U.S.C. § 1395w-3(b)(10)). CMS subsequently 

incorporated this prohibition in its regulations implementing the CBP. 42 C.F.R. § 414.424. 

Page 28 GAO-10-27 DME Competitive Bidding
 

results of bid evaluations.62 CMS did not explicitly address such a review 

or any reversals of bid disqualifications elsewhere in its regulations or 

other policy guidance. In the preamble, CMS also recounted that 

commenters requested that it establish a grievance and review process for 

suppliers.63 Among other things, commenters also expressed concern 

about the potential for errors in disqualifying suppliers and requested that 

CMS provide an opportunity for review to confirm the accuracy of these 

disqualifications.64 In response to these comments, CMS indicated that it 

did not have the authority to review the outcome of bid evaluations. 

Specifically, it cited the prohibition on administrative or judicial review, 

explaining that Congress enacted this prohibition to avoid any delay or 

disruption in the implementation of the program as a result of challenges 

brought by bidders. 

In response to our inquiries during this evaluation, CMS officials informed 

us that the postbidding review process was not an administrative review 

prohibited by statute, but rather a quality assurance measure. In our view, 

CMS’s characterization of the postbidding review process as a quality 

assurance measure does not fully address the inconsistency with the 

agency’s earlier position that it did not have the authority to conduct such 

a review. In the preamble to the CBP final rule, CMS advised that it would 

notify losing bidders but would not provide debriefings due to logistics, 

volume of bidders, and time constraints. As an alternative, CMS explained 

that the agency would conduct an extensive education and outreach 

program for suppliers and was developing a quality assurance program. 

But the postbidding review process was distinct from the specific quality 

assurance steps that CMS described it would take in the preamble to the 

 

6272 Fed. Reg. at 18055-56. In the CBP final rule, CMS did provide for one situation in which 

contracts could be awarded to losing suppliers. Specifically, subsequent to the awarding of 

contracts, CMS may award additional contracts when there is a need for additional 

contract suppliers to meet beneficiary demand for a particular product category. 42 C.F.R. 

§ 414.414(i). During round 1, CMS awarded contracts to some suppliers who were deemed 

qualified but who lost their bids on price; these actions were separate and distinct from the 

postbidding review process described above. 

63For example, while acknowledging the statutory prohibition on administrative review, 

two commenters asserted that it did not preclude the establishment of a process that 

would give suppliers an opportunity to communicate with CMS regarding grievances and 

seek redress. 

64For example, numerous commenters recommended that CMS implement a procedure for 

debriefing suppliers that were not selected 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 was not selected. 

Page 29 GAO-10-27 DME Competitive Bidding
 

CBP final rule.65 In addition to its own quality assurance system, CMS 

indicated that Palmetto GBA would implement a quality assurance 

program, but did not elaborate on the form this program would take.66

However, the agency’s response to commenters rejected any suggestion of 

a postbidding review citing prohibitions under federal law. CMS officials 

have since informed us that the language in the CBP final rule was 

ambiguous, thereby not precluding it from conducting the postbidding 

review to be considered a quality assurance measure. Even if that were the 

case, CMS did not provide any clarifying guidance to suppliers that 

explicitly informed disqualified suppliers of the opportunity for a 

postbidding review. Instead CMS made its March 5, 2008, decision to 

conduct these reviews about 2 weeks before suppliers were mailed notice 

of their bid disqualifications. The notification simply stated that suppliers 

could call customer service with questions, and CMS and Palmetto GBA 

conducted these reviews only for suppliers who contacted them or 

requested a review. 

CMS’s CBP Electronic Bid 

Submission System Had 

Information Technology 

Operational Problems 

After the CBP round 1 bid window closed, CMS acknowledged that the 

CBSS had information technology (IT) operational problems that affected 

suppliers’ ability to submit their bids.67 CMS also acknowledged that loss 

of bid submission data was a major problem for suppliers. During the early 

part of the bid window, a CBSS security feature automatically logged a 

supplier out of the system after 2 hours, which caused some suppliers to 

lose data.68 Another security feature timed suppliers out of CBSS if there 

was no activity for 30 minutes. To address suppliers’ concerns with the 

CBSS’s bid submission data losses, CMS and Palmetto GBA conducted a 

special bidder conference call July 9, 2007. 

 

65CMS specifically defined these quality assurance steps as allowing bidders to submit 

electronic bids and providing suppliers with a 60-day open bidding period during which 

they could change, update, or correct their bid packages before certifying their final 

submissions. 

66In the preamble, CMS noted that Palmetto GBA would implement an auditing system and 

quality assurance program to monitor and ensure that it accurately recorded and calculated 

information provided by suppliers. 

67CMS presented this information at the PAOC meeting held October 11, 2007. 

68Later in the bid window, the CBSS time-out period was extended to 12 hours. 

Page 30 GAO-10-27 DME Competitive Bidding
 

Some suppliers stated that the CBSS was difficult to use, which impeded 

their ability to submit a bid. CMS officials acknowledged that the CBSS 

user guide was not very detailed or user friendly. Some error messages 

also used technical language that suppliers did not understand. In 

addition, CBSS required data to be manually reentered for the same 

product category in multiple CBAs because the CBSS did not have a “cut 

and paste” function. The data reentry was time-consuming and increased 

the risk of suppliers’ inputting incorrect data that could disqualify a bid. 

CMS officials stated that there were cases when the CBSS was unavailable 

to suppliers to submit their bids. CMS explained that CBSS had 

unscheduled downtimes that inconvenienced the suppliers, particularly 

those working in CBSS at the time. According to CMS, privacy and 

security rules required that each user ID and password allow only one user 

to access the CBSS at a time. However, the system did not have the 

controls to prevent multiple users from attempting to do so. When this 

scenario did occur, the system became inaccessible for all user IDs and 

passwords. A supplier told us that it had to wait until nonworkday hours 

to access the CBSS to submit its bids. On the last day of the bid window, 

CBSS was unavailable for several hours. 

Page 31 GAO-10-27 DME Competitive Bidding
 

Although a CMS official said that the original PAOC was generally helpful 

to CMS in developing and implementing CBP round 1 and that it provided 

CMS with assistance in the overall design of the program, two members of 

the original PAOC and three DME trade association representatives told us 

that CMS did not always use the PAOC effectively. Though the PAOC 

provided input to CMS to address potential supplier challenges during the 

development and implementation of CBP round 1, some issues raised were 

not fully resolved,69 such as concerns about missing or lost financial 

documentation, the absence of a formal CMS bid review process, the 

concern that small suppliers would be disadvantaged, and that the supplier 

quality standards were not finalized before the CBP round 1 bid window 

opened. One PAOC member stated that although the PAOC’s role was to 

advise and to oversee the CBP, members were not provided enough 

information and opportunities to provide feedback to fulfill these 

responsibilities. One PAOC member also reported having insufficient time 

to discuss and react to the CMS and Palmetto GBA presentations and 

expressed dissatisfaction at not being able to formulate or vote on 

recommendations. A CMS official stated that the PAOC had cochairs—one 

CMS official and one industry representative—to encourage mutual 

collaboration. However, the two PAOC members said this approach was 

not effective because the CMS cochair had a greater role on the committee 

than the industry cochair. 

CMS’s Program Advisory 

and Oversight Committee 

Provided Input to Address 

Supplier Challenges, but 

Not All Challenges Were 

Addressed 

 

69During its 4 years, the PAOC met seven times beginning in 2004 through 2008. The PAOC 

held four meetings in 2004 and 2005 where CMS presented CBP options being considered—

for example, for selecting the items for competitive bidding, organizing the items into 

product category groups, establishing supplier capacity and beneficiary demand estimates, 

calculating single payment amounts, and ensuring the participation of small suppliers. After 

CMS published a proposed rule for implementing CBP round 1 in May 2006, 71 Fed. 

Reg. 25,654, the PAOC met for the fifth time, May 22–23, 2006, to provide feedback on the 

proposed implementation process. About a year and a half later, the PAOC met for the 

sixth time on October 11, 2007—16 days after the CBP bid window closed. At this meeting, 

CMS updated the PAOC on the CBP round 1 bidding. The PAOC’s seventh meeting, June 16, 

2008, was held 2 weeks before the contracts awarded to suppliers in CBP round 1 took 

effect. PAOC members were briefed by CMS and Palmetto GBA on the CBP process and 

CMS’s CBP round 1 education and monitoring activities, and were asked for their feedback 

for improving the next CBP round. CMS provided meeting summaries, agendas, and 

presentation materials for the first five meetings on the CMS Web site. The summaries for 

the last two PAOC meetings—held on October 11, 2007, and June 16, 2008—were not 

available on CMS’s Web site until August 2009. A Palmetto GBA official stated that 

Palmetto GBA was responsible for preparing the meeting summaries of the last three PAOC 

meetings. Meeting transcripts, though available for all of the meetings held through 2008, 

have not been posted on the CMS Web site. 

Page 32 GAO-10-27 DME Competitive Bidding
 

CMS has taken several steps to improve future rounds of the CBP. It 

issued an interim final rule in 2009 to implement certain provisions of 

MIPPA that affect the round 1 rebid. It has taken several additional actions 

to make the round 1 rebid bidding process easier for suppliers to navigate 

and the bidding information easier to understand. CMS’s new bid 

submission system, DBidS, may address the IT operational deficiencies 

that occurred during round 1. Finally, though MIPPA extended the 

termination date of the PAOC, CMS disbanded the original PAOC and 

appointed new members to the current PAOC to provide new expertise 

and input for the round 1 rebid. 

CMS Has Taken 

Several Steps to 

Improve Future 

Rounds of the CBP, 

Including 

Implementing MIPPA 

Provisions and 

Addressing IT 

Operational Problems 

CMS Has Implemented 

Certain MIPPA Provisions 

CMS’s interim final rule, effective April 18, 2009,70 implemented certain 

MIPPA provisions, including changes that CMS is required to make for the 

CBP round 1 rebid and future rounds.71

• Notification of missing financial documentation. CMS will notify and 

provide feedback about any missing financial documentation to bidding 

suppliers that submit their required financial documentation within a time 

period known as the covered document review date.72 Once notified, 

suppliers will have 10 business days to submit the missing 

documentation.73

 

70The original effective date of CMS’s interim final rule was February 17, 2009, but CMS 

issued a Federal Register notice on February 19, 2009, that delayed the effective date until 

April 18, 2009. 74 Fed. Reg. 7653 (Feb. 19, 2009). 

7174 Fed. Reg. 2873. 

72Financial documentation means a financial, tax, or other document required to be 

submitted in order to meet CMS’s financial standards for the CBP. MIPPA and 

implementing regulations define the covered document review date as the later of: 

(1) 30 days before the final date for the close of the bid window; or (2) 30 days after the bid 

window opens. During the round 1 rebid, CMS is required to notify eligible suppliers of 

missing financial documentation within 45 days after the end of the covered document 

review date. For future rounds, CMS must notify eligible suppliers of missing financial 

documentation within 90 days after the end of the covered document review date. 

7342 C.F.R. §§ 414.402, 414.414. MIPPA provided, however, that this process only applies to 

the timely submission of financial documentation and does not apply to any determination 

by CMS as to the accuracy or completeness of the documentation submitted or whether the 

documents meet applicable financial requirements. 

Page 33 GAO-10-27 DME Competitive Bidding
 

• Subcontractor information. Suppliers that enter into CBP contracts 

with CMS must disclose (1) each subcontracting arrangement the supplier 

enters into to provide items and services covered under its CBP contract 

and (2) whether the subcontractor meets accreditation requirements, if 

applicable.74 The supplier must provide this information to CMS within 

10 days of entering into a CBP contract and within 10 days of entering any 

subcontracting arrangement subsequent to the award of the contract.75

In addition to the changes specifically required under the interim final 

rule, MIPPA also included other changes to the CBP.76

• Accreditation deadline. Suppliers, including subcontractors, providing 

items or services on or after October 1, 2009, must have submitted 

evidence of accreditation prior to this date.77

• CBP ombudsman. A competitive acquisition ombudsman, within CMS, 

must be appointed by the HHS Secretary to respond to CBP questions and 

complaints made by suppliers and individuals. The ombudsman must 

submit an annual report detailing CBP-related activities to Congress.78

• PAOC extension. The termination date for the PAOC is extended from 

December 31, 2009, to December 31, 2011.79

Additional CMS Actions to 

Improve the Round 1 

Rebid 

CMS has made several additional changes for the CBP round 1 rebid in 

response to problems that occurred during CBP round 1. First, to reduce 

the burden on bidding suppliers providing financial documentation, CMS, 

as stated in the preamble to the interim final rule, will require suppliers to 

submit 1 year of documentation instead of 3 years, which CMS now 

 

74See 42 U.S.C. § 1395m(a)(20)(F)(i) for accreditation requirements. 

7542 C.F.R. § 414.422. 

76Pub. L. No. 110-275, § 154, 122 Stat. 2494, 2560 (2008). 

7742 U.S.C. § 1395m(a)(20)(F)(i). This requirement is not limited to suppliers and 

subcontractors participating in the CBP and instead applies to any supplier and 

subcontractor providing items and services to Medicare beneficiaries on or after October 1, 

2009. According to CMS, suppliers that are not accredited by September 30, 2009, will be 

barred from participating in Medicare. 

7842 U.S.C. § 1395w-3(b)(3)(f). 

7942 U.S.C. § 1395w-3(c)(2). 

Page 34 GAO-10-27 DME Competitive Bidding
 

believes is adequate to determine a supplier’s financial soundness. The 

request-for-bid instructions now provides a chart that lists the required 

financial documents by supplier type. For example, the chart distinguishes 

the financial documentation required for a sole proprietorship versus a 

corporation. In addition to the chart, the rebid’s request-for-bid 

instructions also include a sample of a completed income statement, 

balance sheet, statement of cash flow, and corporate tax return. 

Second, CMS announced the timeline for the round 1 rebid bid window in 

advance, and to improve the quality and availability of information to 

bidding suppliers, CMS launched an intensive bidder education campaign 

to provide suppliers with all the information necessary to submit a 

complete bid during the round 1 rebid bid window. According to CMS, the 

request-for-bid instructions has been made clearer and more 

understandable. A Palmetto GBA official said that, if necessary, the 

request-for-bid instructions will be updated until the bid window closes, 

although CMS will notify suppliers if the bidding instructions are revised 

or clarified during the bid window.80 Furthermore, to ensure that suppliers 

can easily locate the most current CBP information, CMS will date every 

page, article, and frequently asked question so that suppliers know when 

new information has been posted. 

As in CBP round 1, suppliers may enter into subcontracting arrangements 

with other suppliers to provide items and services covered under their 

CBP contract to eligible Medicare beneficiaries. However, CMS clarified 

that subcontractors may be used only to purchase inventory, deliver and 

instruct on the use of Medicare-covered items, and repair rental 

equipment. Contract suppliers are responsible for furnishing items and 

services in compliance with physicians’ orders and Medicare rules and 

guidelines. These services include coordination of care with physicians, 

submitting claims on behalf of beneficiaries, assuming ownership and 

responsibility for equipment furnished to beneficiaries, and ensuring 

product safety. 

In addition, the original PAOC was concerned that suppliers new to a 

product category were given the same consideration as experienced 

suppliers during CBP round 1. For this reason, a CMS official announced 

 

80Any revision regarding financial documentation could cause challenges for suppliers 

seeking to meet the covered document review date because suppliers have a limited time 

period within the bid window to submit financial documentation to meet this date and CMS 

has a specified time period to provide notification to suppliers on missing documentation. 

Page 35 GAO-10-27 DME Competitive Bidding
 

at the June 4, 2009, PAOC meeting that the agency is now considering 

whether to apply a different standard to evaluate the capacity of suppliers 

new to a DME product category. CMS later explained the new proposal to 

us. For the CBP, all suppliers, both new and experienced, estimate the 

number of items they can provide to meet the projected demand of 

beneficiaries for a product category in a CBA. Currently, a supplier must 

meet a minimum threshold based on CMS’s determination of its financial 

strength in order for CMS to continue to evaluate its bid. If a supplier 

meets that threshold, it is then evaluated against a second threshold to 

determine whether CMS will accept the supplier’s estimate of its ability to 

expand its current capacity. CMS is proposing that the second threshold 

be higher for suppliers new to a product category than for experienced 

suppliers. According to a CMS official, new suppliers that did not meet the 

second higher threshold could still be offered a contract, although the 

proposal would generally result in awarding more contracts to suppliers 

with experience. 

Suppliers participating in the round 1 rebid must have all local and state 

licenses for a product category in a CBA at the time of bid submission in 

order to be considered for a CBP contract. According to CMS, this is not a 

change from CBP round 1. However, there were issues during the first 

round that complicated licensure verification. CMS and Palmetto GBA 

acknowledged and some trade association representatives told us that 

some suppliers were offered CBP contracts during CBP round 1 for 

product categories for which they were not properly licensed. Therefore, 

for the round 1 rebid, CMS has further clarified the licensure requirement, 

stating that suppliers must be licensed for the product category in the CBA 

in which they are bidding and if a CBA covers more than one state, the 

supplier needs to obtain applicable licensure in all states. To ensure that 

the licensure requirement is met, CMS is improving quality assurance 

checks to confirm that suppliers are properly licensed prior to accepting 

suppliers’ bids in the CBP round 1 rebid. 

On January 2, 2009, CMS published a final rule, effective March 3, 2009, to 

implement a statutory requirement that certain DME suppliers post a 

$50,000 surety bond.81 In responding to comments on the rule, CMS stated 

that the surety bond is designed to reduce the amount of money that is lost 

 

81CMS, Medicare Program: Surety Bond Requirement for Suppliers of DMEPOS, 74 Fed. 

Reg. 166 (Jan. 2, 2009). The BBA had required the Secretary to impose a surety bond for at 

least $50,000 as a condition of suppliers becoming eligible to bill Medicare for the provision 

of DME and other items to beneficiaries. 

Page 36 GAO-10-27 DME Competitive Bidding
 

due to fraudulent or abusive billing schemes by suppliers. Existing 

Medicare suppliers had until October 2, 2009, to comply, and as of May 4, 

2009, new suppliers were required to post the bond as a condition of their 

enrollment in Medicare.82 Suppliers that participate in the rebid will have 

to comply with the surety bond requirement. 

To Address CBSS 

Operational Deficiencies, 

CMS Is Developing a New 

Bid Submission System 

According to CMS system and Palmetto GBA personnel, the agency 

developed a new IT system to replace the CBSS and correct the 

operational problems that were identified. This system, DBidS, was 

developed in accordance with the agency’s defined system development 

process and was designed to address the operational deficiencies 

identified with CBSS. DBidS software testing, including user testing, was 

completed in August 2009 and CMS management has accepted and 

approved the system for operation. 

CMS system development is guided by its Integrated IT Investment and 

System Life Cycle Framework, which prescribes steps, activities, and 

documents required to develop CMS IT systems. For example, the 

framework describes processes to be followed in developing, validating, 

and agreeing on requirements for system features and capabilities. It also 

describes required testing, including user acceptance testing, which 

validates that business requirements are met, as well as performance and 

stress testing, in which large volumes of input data or simulated 

concurrent users are introduced to determine levels beyond which the 

system will fail. Finally, it describes the operational review that the agency 

must perform to determine whether to accept and approve the system for 

operation.83 According to experts in the software development field,84

 

82Under limited circumstances, CMS may exempt from the surety bond requirement 

(1) government-operated suppliers, (2) state-licensed orthotic and prosthetic personnel, 

(3) physicians and nonphysician practitioners in private practice, and (4) physical and 

occupational therapists in private practice. 

83In addition, CMS policy includes a requirement that contracts for system development 

efforts be performed by an IT contractor that meets or exceeds a specific maturity level as 

measured using the Software Engineering Institute Capability Maturity Model Integration®. 

According to CMS, IT contractor compliance with such maturity standards and 

methodologies signifies a greater capability to perform software development and 

integration activities in a repeatable and consistently high-quality manner. According to a 

published assessment reported by the institute, the DBidS development contractor meets 

the minimum level of maturity established by CMS policy. 

84Software Engineering Institute, Understanding and Leveraging a Supplier’s CMMI®

Efforts: A Guidebook for Acquirers, CMU/SEI-2007-TR-004 (Pittsburgh PA: March 2007). 

Page 37 GAO-10-27 DME Competitive Bidding
 

having a defined process increases the likelihood of a successful system 

development, although it does not guarantee it. 

In accordance with the framework, CMS officials assessed CBSS business 

requirements and reviewed these with the contractors to establish a new 

set of baseline requirements for DBidS. The agency used these 

requirements to develop a design for the system, which was reviewed by 

CMS in 2008. Based on this design, the system was developed and testing 

began. 

On May 29, 2009, CMS began advising all DME suppliers to update their 

National Supplier Clearinghouse files to ensure that they contained correct 

and current information. CMS stated that this was especially important for 

suppliers planning to bid in the round 1 rebid because it would enable 

them to avoid the registration issues that occurred during CBP round 1 

because some of the information in the suppliers’ National Supplier 

Clearinghouse files did not match the information that was submitted into 

the Individuals Authorized Access to CMS Computer Systems.85 In May 

2009, a CMS official stated that DBidS was designed to address specific 

deficiencies identified in CBSS; it is designed to be more user friendly and 

easier for suppliers to navigate, and it is to provide a logical flow of the 

data that are requested, as well as detailed bidding instructions in userfriendly language. It is to have status indicators to indicate whether the 

bidding forms are “complete,” “incomplete,” or “pending approval,” and 

links in the system to direct suppliers to the incomplete data. In addition, 

CMS said that DBidS will have a “copy and paste” function for the transfer 

of certain data and many data-saving points to minimize loss of data. 

DBidS is expected to also allow a supplier to have more than one 

employee access DBidS at the same time, but to control data input the 

 

85The Individuals Authorized Access to CMS Computer Systems is an application that 

provides authentication of authorized users for the supplier and support communities of 

DBidS. 

Page 38 GAO-10-27 DME Competitive Bidding
 

system will not allow more than one employee to input the same data at 

the same time.86

In addition to the DBidS changes to address specific deficiencies identified 

in CBSS, CMS also recognized that more thorough testing of CBSS might 

have prevented certain systems deficiencies. As of August 2009, CMS has 

completed testing DBidS, including two changes to correct a critical 

defect87 and addressed the policy requirement that all suppliers be 

accredited. As of September 2009, CMS has accepted DBidS for operation 

and agency officials indicated that previous deficiencies have been 

satisfactorily addressed. However, until DBidS is put into operation its 

effectiveness in correcting these deficiencies is unknown. 

CMS Changed PAOC 

Membership to Solicit New 

Expertise and Input 

On October 2, 2008, CMS formally announced that because of the length of 

the MIPPA extension, and because the PAOC was to perform additional 

duties, the agency had ended the terms of service for the original PAOC 

members, and was soliciting nominations for new individuals to serve on 

the PAOC.88 On January 15, 2009, CMS announced the 17 new members of 

the current PAOC who were chosen because of their expertise in a broad 

range of issues, including quality standards, accreditation, and Medicare 

beneficiary issues.89 Although CMS stated that this PAOC was to review 

the bidding process for the round 1 rebid and consider all of the MIPPA 

 

86CMS said that the authorized official who registers in the Individuals Authorized Access 

to CMS Computer Systems and DBidS should authorize a backup and an end user to ensure 

that an official in the organization will be able to access DBidS. The authorized official 

must be listed on the supplier’s Medicare enrollment form and must register through the 

Individuals Authorized Access to CMS Computer Systems and DBidS. Once CMS verifies 

the supplier organization and personal information entered, CMS will mail the authorized 

official a temporary password and identification number. The official can then authorize a 

backup. They are authorized to input data, approve Form A, and certify Form B. They can 

also authorize an end user, an employee of the supplier, to input data. 

87According to CMS, a critical defect renders the whole system nonoperational, corrupts 

critical system data or information, or makes it impossible to continue with testing because 

of the severity of the error. 

88CMS, Medicare Program: Request for Nominations for the Program Advisory and 

Oversight Committee for the Competitive Acquisition of Durable Medical Equipment and 

Other Items, 73 Fed. Reg. 57363 (Oct. 2, 2008). 

89The current PAOC membership includes representatives of Medicare beneficiaries and 

consumers, physicians and other practitioners, suppliers, organizations that help to 

establish professional standards, financial standards experts, DME industry associations, 

and manufacturers. 

Page 39 GAO-10-27 DME Competitive Bidding
 

changes, CMS did not schedule the first meeting until June 4, 2009, 

4-1⁄2 months after CMS had issued its interim final rule for public comment 

to implement the MIPPA provisions on January 16, 2009. Like the original 

PAOC, the current PAOC is cochaired by a CMS official and a DME 

industry representative.90

Similar to the meetings of the original PAOC, the June 4, 2009, PAOC 

meeting included several presentations by CMS officials with limited time 

allowed at the end of each for PAOC member discussion. The 

presentations included information concerning DBidS; CBP requirements 

and bidder responsibilities; suppliers’ financial documentation, licensure, 

accreditation, and subcontracting requirements; new supplier issues; mailorder diabetic supplies; and the tentative timeline for the CBP round 1 

rebid implementation. Although a CMS official told PAOC members that 

they were encouraged to continue to provide individual feedback, advice, 

and suggestions during the meeting and additionally by e-mail for CMS’s 

consideration, as with the original PAOC meetings, CMS did not ask the 

PAOC to provide recommendations that would reflect input from the 

committee as a whole. Although CMS had not conducted PAOC meetings 

by teleconference previously, the agency held a three-hour teleconference 

on July 21, 2009, to solicit the current PAOC members’ feedback and 

suggestions on (1) determining beneficiary demand, (2) assessing bidding 

suppliers’ ability to meet the demand, and (3) reviewing regulations for 

change of ownership and the sale of contracts. A four-page meeting 

summary was posted on CMS’s Web site in August 2009, but a transcript 

has not been posted. We cannot determine at this time the degree to which 

the PAOC members’ input will be reflected in CMS’s implementation of the 

round 1 rebid. 

If wholly adopted, competitive bidding could reduce Medicare payments 

for DME, help close the disparity with prices paid by others for the same 

items and services, and also help reduce improper payments. It also 

represents a change from Medicare’s long-standing policy that any 

qualified provider can participate in Medicare because it authorizes CMS 

to select suppliers to participate in Medicare, based in part on CMS’s 

scrutiny of their financial documents and other bid submission materials. 

Conclusions 

 

90The CMS cochairs on each of the PAOCs, the Director of CMS’s Center for Medicare 

Management, were not listed on either PAOC’s membership roster. 

Page 40 GAO-10-27 DME Competitive Bidding
 

CBP round 1 was the first time that both CMS and DME suppliers 

participated in a large-scale DME competitive bidding process. Some 

challenges may be expected for a new program, but problems occurred, in 

part because of poor communication by CMS and an inadequate electronic 

bid submission system. CMS was aware of these problems as the bidding 

unfolded and extended the original bid window as it attempted to correct 

them. The agency worked to address these problems before the round 1 

rebid began. 

DBidS, the new electronic bid submission system developed by CMS and 

Maricom, could be an improvement if it successfully addresses the 

deficiencies identified in the system used for round 1 as CMS claims it will. 

CMS’s implementation of the MIPPA requirement that the agency provide 

feedback on the status of suppliers’ financial documentation may help 

reduce the number of bids disqualified for inadequate financial 

documentation. And the agency’s implementation of the statutory 

requirements that all suppliers, including subcontractors, provide evidence 

of accreditation by October 1, 2009, and that suppliers generally must post 

surety bonds may help ensure that only legitimate suppliers are enrolled in 

Medicare and therefore are eligible to bid. To address the concerns that 

suppliers have the experience to provide the DME items they win 

contracts for, before they can submit bids, suppliers will also have to be 

accredited and licensed for each DME product category and CBA in which 

they bid. In addition, CMS’s early announcement of the timeline for the 

rebid and the revised request-for-bid instructions gave suppliers more time 

to decide whether to participate in the rebid and to begin preparing their 

bids before the window opens. 

Despite CMS’s actions to improve the program, difficulties may still arise 

in the round 1 rebid and future rounds. Because CMS did not effectively 

notify suppliers of the postbidding review conducted in round 1, some 

suppliers missed the opportunity to have their disqualified bids reviewed. 

Unless CMS commits to effectively notifying all bidders of any review of 

disqualified bids, if it decides to allow such a process in future rounds of 

the CBP, CMS will not be able to ensure that all bidding suppliers have an 

equal opportunity to request a postbid review. 

To improve future rounds of the competitive bidding program for DME, 

we recommend that the Administrator of CMS take the following action: Recommendation for 

Executive Action 

Page 41 GAO-10-27 DME Competitive Bidding
 

• If CMS decides to conduct a review of disqualification decisions during the 

round 1 rebid and future rounds, CMS should notify all suppliers of any 

such process, give suppliers equal opportunity for such reviews, and 

clearly indicate how they can request a review. 

In written comments on a draft of this report, HHS agreed with our 

recommendation that it effectively notify all suppliers of all aspects of the 

CBP. This would include any process to review bid disqualifications. CMS 

said it believes that suppliers should have the opportunity to raise 

questions or concerns about the competitive bidding process, including 

disqualification decisions. We found that CMS did not effectively notify 

suppliers about its postbid review of disqualified bids which resulted in 

some bid disqualifications being overturned in round 1 of the CBP. HHS 

also commented that we had not identified concerns with the overall 

structure and design of the CBP. However, such an analysis was beyond 

the scope of this report. 

Agency Comments 

and Our Evaluation 

HHS noted that it had a different perspective on some aspects of our 

report. The agency commented that the number of suppliers with CBP 

contracts did not account for the number of locations where DME items 

and services might be available in the CBAs. Our work focused on the 

number of suppliers participating in the CBP process, the number that 

were disqualified, and the number that were awarded contracts. We used 

the same contract supplier definition as CMS, which did not include the 

number of locations. We did not analyze whether there were enough 

locations to provide adequate Medicare beneficiary access during the 

CBP’s 2-week operation. 

HHS suggested that our statement that about half of the submitted bids 

were disqualified before competing on price creates the impression that 

additional suppliers would have won if they submitted bids that complied 

with the terms and conditions of the request-for-bid instructions. However, 

we believe our characterization is accurate because bids were first 

reviewed for completeness, compliance with bidding requirements, and 

financial score. The agency also argued that it relied heavily on the PAOC 

for the design and implementation of the CBP. But as we stated in the 

report, two original PAOC members and three trade association 

representatives told us that CMS did not always use the PAOC effectively. 

Our review of PAOC meeting transcripts also found members who were 

dissatisfied with how the PAOC was used. 

Page 42 GAO-10-27 DME Competitive Bidding
 

Finally, we revised the report according to HHS’s comment that a 

reduction in the number of suppliers was an expected result of the CBP, 

but not a goal of the program. As we noted in the report draft, the CBP 

was structured to allow only suppliers with winning bids that accepted 

contracts to provide DME items and services, in contrast to Medicare’s 

long-standing policy that any qualified provider can participate in 

Medicare. 

HHS provided additional technical comments which we incorporated as 

appropriate. HHS’s written comments are reprinted in appendix V. 

As we agreed with your offices, unless you publicly announce the contents 

of this report earlier, we plan no further distribution of it until 30 days 

from its date. We are sending copies of this report to the Secretary of 

Health and Human Services. The report will also be available at no charge 

on our Web site at http://www.gao.gov. 

If you or your staffs have any questions about this report, 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 report. GAO staff who made major contributions to this report are 

Kathleen M. King 

listed in appendix VI. 

Director, Health Care 

Page 43 GAO-10-27 DME Competitive Bidding
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To assess the Centers for Medicare & Medicaid Services’s (CMS) 

implementation of round 1 of the competitive bidding program (CBP), we 

reviewed federal laws and regulations. We also interviewed officials from 

CMS and Palmetto GBA—the contractor CMS selected to implement the 

CBP bidding and contract award process—about the results of the bid 

submission and review processes, CMS’s major challenges in 

implementing CBP round 1, and the actions taken to improve future CBP 

rounds. 

To determine the results of the CBP round 1, we reviewed data from CMS 

and Palmetto GBA about the number and characteristics of suppliers 

participating in the CBP process, number and characteristics of bids 

submitted, and the bids’ outcomes. We reviewed the Competitive Bid 

Submission System (CBSS) User Guide, and instructions for entering data. 

We interviewed and obtained information from officials from CMS and 

Palmetto GBA about the CBSS, including system testing and data 

processing. We asked Palmetto GBA officials about data transfers from the 

CBSS to the Competitive Bidding Evaluation System (CBES), an 

application designed by Palmetto GBA to automate specific portions of the 

bid evaluation process that contained bid data, financial data entered by 

Palmetto GBA personnel, and documentation of Palmetto GBA actions. 

We asked them about CBES data checks, quality control, data entry 

procedures, and security. We interviewed CMS officials about the criteria 

and procedures for disqualifying bids, identifying winning bids, and 

calculating single payment amounts. We reviewed information CMS 

provided to the Program Advisory and Oversight Committee (PAOC) about 

this process and its results. We compared data published by CMS with the 

data provided to us and followed up with the appropriate officials to 

resolve discrepancies. We assessed the reliability of round 1 data by 

reviewing information from or interviewing CMS and Palmetto GBA 

officials and determined that the data were sufficiently reliable for the 

purposes of this report. We did not evaluate the reliability of CMS 

estimates of beneficiary demand for durable medical equipment (DME) 

which relied on 2005 and 2006 DME claims data, the most recent data 

available to them at the time, nor did we evaluate CMS’s estimates of 

projected savings as the result of round 1. 

To determine the major challenges CMS had in conducting CBP round 1, 

we interviewed CMS and Palmetto GBA officials and reviewed information 

provided to suppliers, including CBP bid submission instructions and 

related materials, bidder conference call transcripts, and CMS’s and 

Palmetto GBA’s CBP Web sites. We reviewed these materials for 

inconsistencies. We also reviewed an internal document provided by 

Page 44 GAO-10-27 DME Competitive Bidding 
Appendix I: Scope and Methodology 

Palmetto GBA about its implementation of the CBP round 1. We 

interviewed two PAOC members concerning whether CMS used the PAOC 

effectively and to gain insight about the committee’s role in advising CMS 

about the implementation of the CBP and establishing standards for 

suppliers that bid in round 1. We reviewed transcripts and meeting 

summaries of the seven PAOC meetings to assess the concerns and 

feedback that the members provided about potential supplier issues and 

challenges. We also interviewed CMS and Palmetto GBA officials and 

reviewed documentation about CBSS’s operational problems. 

We interviewed 12 suppliers about their experiences with CBP. We 

interviewed 4 suppliers that were not offered a contract, 4 suppliers that 

accepted a CBP contract, and 4 suppliers that rejected their CBP contract 

offer. The suppliers were randomly selected from CMS’s list of suppliers 

that bid in CBP round 1. Because we interviewed a small number of 

suppliers, our findings from these interviews are not generalizable to all 

suppliers. In addition, we interviewed representatives from national and 

state industry trade associations representing DME suppliers—the 

American Association for Homecare, the National Association of 

Independent Medical Equipment Suppliers, the Florida Association of 

Medical Equipment Services, and the Ohio Association of Medical 

Equipment Services. We also reviewed testimony from three congressional 

hearings including two 2008 hearings about the CBP implementation1

 and 

a 2009 congressional hearing on the CBP’s impact on small business,2

 in 

which a CMS official discussed the results of CBP round 1, and six 

representatives of various DME associations and interest groups discussed 

the effect that the CBP had on their businesses and professions. 

To analyze the postbidding review authorized by CMS and conducted by 

Palmetto GBA, we interviewed CMS and Palmetto GBA officials about the 

development and implementation of the review process and reviewed its 

results. We also reviewed relevant federal laws and regulations and 

 

1

House of Representatives, Committee on Ways and Means, Subcommittee on Health, 

Hearing on “Medicare’s Durable Medical Equipment, Prosthetics, Orthotics, and Supplies 

Competitive Bidding Program,” May 6, 2008, and House of Representatives, Committee on 

Small Business, Subcommittee on Rural and Urban Entrepreneurship, Hearing on 

“Competitive Bidding for Durable Medical Equipment,” May 21, 2008. 

2

House of Representatives, Committee on Small Business, Subcommittee on Rural 

Development, Entrepreneurship, and Trade, Hearing on “The Impact of Competitive 

Bidding on Small Businesses in the Durable Medical Equipment Community,” February 11, 

2009. 

Page 45 GAO-10-27 DME Competitive Bidding
Appendix I: Scope and Methodology 

interviewed CMS officials and attorneys representing the Department of 

Health and Human Services (HHS), CMS division. 

To determine the steps that CMS has taken to improve the bidding process 

for future CBP rounds, we reviewed relevant federal laws and regulations, 

PAOC Federal Register notices, and CMS press releases related to the 

PAOC. We interviewed CMS and Palmetto GBA officials about the actions 

they have taken and intend to take to improve the CBP bidding process 

during the CBP round 1 rebid. We also attended the June 4, 2009, PAOC 

meeting at which CMS provided updates of the process changes and 

modifications that it made for the round 1 rebid. 

In addition, we interviewed Maricom officials and reviewed available 

documentation related to the development, testing, and proposed 

implementation of the new electronic bid submission system—Durable 

Medical Equipment, Prosthetics, Orthotics, and Supplies bidding system 

(DBidS)—that will be used during the CBP round 1 rebid. We did not 

assess the reliability or functionality of DBidS, but we reviewed the 

processes established by CMS and its contractors for testing and accepting 

such systems. 

We conducted this performance audit from June 2008 to September 2009 

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. 

Page 46 GAO-10-27 DME Competitive Bidding
Appendix II: Change in Numbers of Suppliers 

by CBP Product Category and CBA: 2006-2008 

Competitive bidding area (CBA) 

Product 

category Charlotte Cincinnati Cleveland Dallas

Kansas 

City Miami Orlando Pittsburgh Riverside

San 

Juan Median

Oxygen Supplies and Equipment 

Calendar year 

(CY) 2006 

suppliersa 39 45 38 133 41 488 71 47 53 NA 47

Competitive 

bidding program 

(CBP) contract 

suppliers 18 18 22 36 17 43 34 22 18 INS 22

Percent change 

in number of 

suppliers -54 -60 -42 -73 -59 -91 -52 -53 -66 NA -53

Standard Power Wheelchairs, Scooters and Related Accessories 

CY 2006 

suppliers 30 19 18 92 18 91 27 12 72 34 29

CBP contract 

suppliers 11 13 12 24 14 18 13 11 19 6 13

Percent change 

in number of 

suppliers -63 -32 -33 -74 -22 -80 -52 -8 -74 -82 -54

Complex Rehabilitative Power Wheelchairs and Related Accessories 

CY 2006 

suppliers 27 21 20 74 19 101 21 11 49 NA 21

CBP contract 

suppliers 10 7 6 11 4 6 6 5 8 INS 6

Percent change 

in number of 

suppliers -63 -67 -70 -85 -79 -94 -71 -55 -84 NA -71

Mail-Order Diabetic Supplies 

CY 2006 

suppliers 118 101 93 150 96 294 87 79 68 129 99

CBP contract 

suppliers 10 15 12 15 10 18 12 12 7 13 12

Percent change 

in number of 

suppliers -92 -85 -87 -90 -90 -94 -86 -85 -90 -90 -88

Appendix II: Change in Numbers of Suppliers 

by CBP Product Category and CBA: 2006-

2008 

Page 47 GAO-10-27 DME Competitive Bidding 
Appendix II: Change in Numbers of Suppliers 

by CBP Product Category and CBA: 2006-2008 

Competitive bidding area (CBA) 

Product 

category Charlotte Cincinnati Cleveland Dallas

Kansas 

City Miami Orlando Pittsburgh Riverside

San 

Juan Median

Enteral Nutrients, Equipment and Suppliesb

CY 2006 

suppliers 48 47 67 100 34 338 47 50 67 NA 50

CBP contract 

suppliers 12 11 14 13 13 29 21 10 19 INS 13

Percent change 

in number of 

suppliers -75 -77 -79 -87 -62 -91 -55 -80 -72 NA -74

Continuous Positive Airway Pressure Devices, Respiratory Assist Devices and Related Supplies and Accessories 

CY 2006 

suppliers 34 28 32 72 24 172 46 29 32 13 32

CBP contract 

suppliers 18 13 17 26 15 33 23 15 17 15 17

Percent change 

in number of 

suppliers -47 -54 -47 -64 -38 -81 -50 -48 -47 15 -47

Hospital Beds and Related Accessories 

CY 06 suppliers 33 29 33 103 21 160 30 35 45 NA 33

CBP contract 

suppliers 13 12 12 51 15 43 29 15 32 INS 15

Percent change 

in number of 

suppliers -61 -59 -64 -50 -29 -73 -3 -57 -29 NA -55

Negative Pressure Wound Therapy Pumps and Related Supplies and Accessories 

CY 06 suppliers 1 2 1 3 NA 242 4 2 2 NA 2

CBP contract 

suppliers 10 8 9 16 INS 15 14 6 5 INS 10

Percent change 

in number of 

suppliers 900 300 800 433 NA -94 250 200 150 NA 375

Walkers and Related Accessories 

CY 06 suppliers 15 18 21 34 8 42 18 18 12 9 18

CBP contract 

suppliers 8 10 10 20 14 25 16 14 12 17 14

Percent change 

in number of 

suppliers -47 -44 -52 -41 75 -40 -11 -22 0 89 -22

Page 48 GAO-10-27 DME Competitive Bidding
Appendix II: Change in Numbers of Suppliers 

by CBP Product Category and CBA: 2006-2008 

Competitive bidding area (CBA) 

Product 

category Charlotte Cincinnati Cleveland Dallas

Kansas 

City Miami Orlando Pittsburgh Riverside

San 

Juan Median

Support Surfaces (group 2 mattresses and overlays)c

CY 06 suppliers NA NA NA NA NA 417 NA NA NA NA 417

CBP contract 

suppliers NA NA NA NA NA 37 NA NA NA INS 37

Percent change 

in number of 

suppliers NA NA NA NA NA -91 NA NA NA NA -91

Change in median number of suppliers 

Median CY 06 

suppliers 33 28 32 92 23 207 30 29 49 24 31

Median CBP 

contract 

suppliers as of 

6/11/08 11 12 12 20 14 27 16 12 17 14 14

Percent change 

in median 

number of 

suppliers -67 -57 -63 -78 -38 -87 -47 -59 -65 -40 -55

Source: Centers for Medicare & Medicaid Services (CMS). 

Notes: The source for CY 2006 data was the Statistical Analysis Durable Medical Equipment 

Regional Carrier claims data based on the 6-byte base supplier number, for dates of service from 

January 1, 2006, to December 31, 2006. GAO calculated the medians and percent changes in 

median numbers of suppliers. INS means that the estimated capacity of suppliers submitting qualified 

bids or accepting contracts was insufficient to meet projected demand. NA means not applicable. 

a

This table identifies the total number of suppliers that provided services in each competitive bidding 

area (CBA) for each product category in CY 2006 with allowed charges for items in the product 

category greater than $10,000 and the number of suppliers awarded CBP contracts in round 1 as of 

June 11, 2008. 

b

Enteral nutrients, equipment, and supplies are used to provide food through a tube placed in the 

nose, the stomach, or the small intestine. 

c

Group 2 mattresses and overlays of the support surfaces product category are pressure-reducing 

support surfaces for persons with large or multiple pressure ulcers. 

Page 49 GAO-10-27 DME Competitive Bidding
Appendix III: Percentage Differences between 

2008 Medicare Fee Schedule and CBP Round 1 

Single Payment Amounts 

Competitive bidding area (CBA)a

Product 

category Charlotte Cincinnati Cleveland Dallas Kansas City Miami Orlando Pittsburgh Riverside

San 

Juan

Product 

category 

average

Oxygen 

Supplies and 

Equipment 30 30 27 23 25 29 32 28 22 INS 27

Standard 

Power 

Wheelchairs, 

Scooters and 

Related 

Accessories 20 15 18 21 12 30 25 17 27 25 21

Complex 

Rehabilitative 

Power 

Wheelchairs 

and Related 

Accessories 10 19 17 19 10 18 20 10 11 INS 15

Mail-Order 

Diabetic 

Supplies 43 43 43 37 42 41 42 48 57 36 43

Enteral 

Nutrients, 

Equipment 

and 

Suppliesb

25 29 28 26 20 30 25 29 22 INS 26

Continuous 

Positive 

Airway 

Pressure 

Devices, 

Respiratory 

Assist 

Devices and 

Related 

Supplies and 

Accessories 31 33 33 25 30 30 31 31 24 20 29

Hospital 

Beds and 

Related 

Accessories 31 36 32 25 25 29 31 30 20 INS 29

Appendix III: Percentage Differences 

between 2008 Medicare Fee Schedule and 

CBP Round 1 Single Payment Amounts 

Page 50 GAO-10-27 DME Competitive Bidding 
Appendix III: Percentage Differences between 

2008 Medicare Fee Schedule and CBP Round 1 

Single Payment Amounts 

Competitive bidding area (CBA)a

Product 

category Charlotte Cincinnati Cleveland Dallas Kansas City Miami Orlando Pittsburgh Riverside

San 

Juan

Product 

category 

average

Negative 

Pressure 

Wound 

Therapy 

Pumps and 

Related 

Supplies and 

Accessories 9 15 18 20 INS 20 23 18 7 INS 16

Walkers and 

Related 

Accessories 25 34 24 30 24 31 29 32 30 10 27

Support 

Surfaces 

(group 2 

mattresses 

and 

overlays)c

NA NA NA NA NA 36 NA NA NA INS 36

Average of 

all auctions 26

Source: Centers for Medicare & Medicaid Services (CMS). 

Notes: GAO reformatted a CMS table distributed at the June 16, 2008 Program Advisory and 

Oversight Committee meeting. 

INS means that the estimated capacity of suppliers submitting qualified bids or accepting contracts 

was insufficient to meet projected demand. NA means not applicable. No auctions were conducted for 

these product category and CBA combinations. 

a

Except for the last column, the data reflect volume-weighted average savings within an auction. 

According to the CMS, the savings rate was derived by multiplying the difference between the 2008 

Medicare fee schedule for each item in a product category in a CBA and the item’s CBP-derived 

single payment amount by the same weights used to calculate composite prices for the product 

category. CMS projected the overall savings for round 1 at approximately 26 percent annually to the 

Medicare program and Medicare beneficiaries. The averages in the last column are unweighted. GAO 

did not make a determination as to whether or not this methodology is an accurate measure of true 

savings to the Medicare program. 

b

Enteral nutrients, equipment, and supplies are used to provide food through a tube placed in the 

nose, the stomach, or the small intestine. 

c

Group 2 mattresses and overlays of the support surfaces product category are pressure-reducing 

support surfaces for persons with large or multiple pressure ulcers. 

Page 51 GAO-10-27 DME Competitive Bidding
Appendix IV: Omitted and Conflicting 

Information in Written Instructions on Appendix IV: Omitted and Conflicting Submitting a Bid for CBP Round 1 

Information in Written Instructions on 

Submitting a Bid for CBP Round 1 

The examples below are taken from two competitive bidding program 

(CBP) documents that provided written information for suppliers about 

how to submit a bid and information on bidding requirements. The 

documents are from a Web-based seminar, or webinar, posted on the 

Palmetto GBA Web site on April 30, 2007, and the request-for-bid 

instructions posted on the same Web site on May 15, 2007. 

Page 52 GAO-10-27 DME Competitive Bidding 
Appendix IV: Omitted and Conflicting 

Information in Written Instructions on 

Submitting a Bid for CBP Round 1 

Table 10: Examples of Conflicting and Omitted Information, CBP Round 1 

Topic Source 

Summary of what was 

stated in the instruction GAO comments Implications 

Number of Form A’s 

required to complete a 

bid submission 

Webinar and requestfor-bid instructions Told suppliers to complete 

one Form A per 

competitive bidding area 

(CBA) per bidding entity. 

Inconsistent with a bidder 

conference call on June 

4, 2007. The correct 

answer is that a bidding 

entity had to only 

complete one Form A 

regardless of the number 

of CBAs or product 

categories being bid. 

Suppliers had only limited 

opportunities to obtain the 

correct information from 

Palmetto GBA: (1) to join 

the bidder conference call 

on June 4, 2007; (2) read 

the call’s transcript posted 

on the Palmetto GBA 

website; or (3) call the 

Palmetto GBA customer 

service center. The 

webinar and request- forbid instructions, posted on 

the Palmetto GBA Web site 

throughout the bid window, 

were not corrected. 

On how to estimate 

capacity 

Webinar Referred suppliers to 

column D of the printed 

version of Form B as well 

as to a separate 

document called the 

Product Category chart to 

determine the type of 

units to use in reporting 

total estimated capacity. 

column D contained the 

definition of a unit for 

purposes of pricing an 

item. 

Conflicting and 

incomplete information. 

Column D did not 

describe the units to use 

in reporting total 

estimated capacity while 

the Product Category 

chart did. 

If winning suppliers 

estimated capacity on units 

other than the type of unit 

specified in the Product 

Category chart, the 

cumulative capacity for the 

auction’s winning suppliers 

would have been 

incorrect.a

Request-for-bid 

instructions 

Told suppliers to estimate 

the number of units of 

each item that the bidding 

entity currently furnishes 

to Medicare beneficiaries 

plus any additional 

capacity the bidding entity 

would be capable of 

providing per item. 

Incomplete. Information 

needed for correctly 

reporting expanded 

capacity, for example, 

time period to use in 

reporting, payer source 

of units to include in 

reporting, and 

geographic area to use, 

were omitted. Source 

also did not identify the 

type of units to use for 

each item or direct the 

supplier to a source for 

the correct unit to use in 

reporting current or 

expanded capacity.b

If winning suppliers did not 

similarly report expanded 

capacity for the same item 

in a product category, the 

cumulative capacity for the 

auction’s winning suppliers 

would have been 

incorrect.a

Page 53 GAO-10-27 DME Competitive Bidding
Appendix IV: Omitted and Conflicting 

Information in Written Instructions on 

Submitting a Bid for CBP Round 1 

Topic Source 

Summary of what was 

stated in the instruction GAO comments Implications 

On finding each item’s 

price limit 

Webinar and requestfor-bid Instructions Omitted. Incomplete. While both 

documents indicated that 

an item’s bid cannot 

exceed the Medicare fee 

schedule, neither 

document directed 

suppliers to a source of 

information for the bid 

limit. 

Submission of one or more 

item prices in excess of the 

Medicare fee schedule 

would have resulted in the 

exclusion of the bid from 

competing for the product 

category.c

 

Source: GAO analysis of information provided by Centers for Medicare & Medicaid Services (CMS) and Palmetto GBA. 

a

Cumulative capacity, combined with CMS estimates of beneficiary demand, determine the pivotal 

bid, the number of winning suppliers based on price, and, indirectly, single payment amounts. Also, 

because bidding suppliers did not report the unit used to report expanded capacity, Palmetto GBA 

would have been unable to detect these types of errors. 

b

Out of 371 items subject to competitive bidding, 275 may be furnished and paid for as new or used 

equipment or on a rental basis. 

c

This information was also omitted from the data entry screen of the electronic bid submission system. 

Page 54 GAO-10-27 DME Competitive Bidding
Appendix V: Comments from the Department Appendix V: Comments from the Department of Health and Human Services 

of Health and Human Services 

Page 55 GAO-10-27 DME Competitive Bidding 
Appendix V: Comments from the Department 

of Health and Human Services 

Page 56 GAO-10-27 DME Competitive Bidding
Appendix V: Comments from the Department 

of Health and Human Services 

Page 57 GAO-10-27 DME Competitive Bidding
Appendix VI: 

A

GAO Contact and Staff 

cknowledgments 

Page 58 GAO-10-27 

Appendix VI: GAO Contact and Staff 

Acknowledgments 

GAO Contact Kathleen M. King, (202) 512-7114 or kingk@gao.gov 

In addition to the contact named above, key contributors to this report 

were Martin T. Gahart, Assistant Director; Carrie Davidson; Neil Doherty; 

JoAnn Martinez; Christie Motley; Michelle Paluga; Hemi Tewarson; Keo 

Vongvanith; Timothy Walker; Opal Winebrenner; Suzanne Worth; and 

Charles Youman. 

Acknowledgments 

 DME Competitive Bidding 
Related GAO Products Related GAO Products 

Medicare: Covert Testing Exposes Weaknesses in the Durable Medical 

Equipment Supplier Screening Process. GAO-08-955. Washington, D.C.: 

July 3, 2008. 

Medicare: Competitive Bidding for Medical Equipment and Supplies 

Could Reduce Program Payments, but Adequate Oversight Is Critical. 

GAO-08-767T. Washington, D.C.: May 6, 2008. 

Medicare: Improvements Needed to Address Improper Payments for 

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

January 31, 2007. 

Medicare Payment: CMS Methodology Adequate to Estimate National 

Error Rate. GAO-06-300. Washington, D.C.: March 24, 2006. 

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. 

(290698) Page 59 GAO-10-27 DME Competitive Bidding
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