Monday, 

May 1, 2006 

Part II 

Department of 

Health and Human 

Services 

Centers for Medicare & Medicaid Services 

42 CFR Parts 411, 414, and 424 

Medicare Program; Competitive 

Acquisition for Certain Durable Medical 

Equipment, Prosthetics, Orthotics, and 

Supplies (DMEPOS) and Other Issues; 

Proposed Rule 


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25654 Federal Register / Vol. 71, No. 83 / Monday, May 1, 2006 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 411, 414, and 424 

[CMS–1270–P] 

RIN 0938–AN14 

Medicare Program; Competitive 

Acquisition for Certain Durable 

Medical Equipment, Prosthetics, 

Orthotics, and Supplies (DMEPOS) and 

Other Issues 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

implement competitive bidding 

programs for certain covered items of 

durable medical equipment, prosthetics, 

orthotics, and supplies (DMEPOS) 

throughout the United States in 

accordance with sections 1847(a) and 

(b) of the Social Security Act (the Act). 

These programs would change the way 

that Medicare pays for these items 

under Part B of the Medicare program 

by utilizing bids submitted by DMEPOS 

suppliers to establish applicable 

payment amounts. We would phase in 

these programs over several years. 

This proposed rule would also detail 

requirements for CMS approved 

accreditation organizations that will be 

applying quality standards for all 

DMEPOS suppliers, including DMEPOS 

suppliers that participate in the 

DMEPOS competitive bidding program. 

In addition, this rule proposes a new fee 

schedule for home dialysis supplies and 

equipment still paid on a reasonable 

charge basis. This proposed rule would 

also clarify our policy on the scope of 

the statutory eyeglass coverage 

exclusion. We are proposing to specify 

in regulations that the eyeglass 

exclusion encompasses all devices that 

use lenses to aid vision or provide 

magnification of images for impaired 

vision. Further, this proposed rule 

would implement a revised 

methodology for calculating fee 

schedule amounts for new DMEPOS 

items. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on June 30, 2006. 

ADDRESSES: In commenting, please refer 

to file code CMS–1270–P. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (no duplicates, please): 

1. Electronically. You may submit 

electronic comments on specific issues 

in this regulation to http:// 

www.cms.hhs.gov/eRulemaking. 

(Attachments should be in Microsoft 

Word, WordPerfect, or Excel; however, 

we prefer Microsoft Word.) 

2. By regular mail. You may mail 

written comments (one original and two 

copies) to the following address only: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS–1270– 

P, P.O. Box 8013, Baltimore, MD 21244– 

8013. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments (one 

original and two copies) to the following 

address only: Centers for Medicare & 

Medicaid Services, Department of 

Health and Human Services, Attention: 

CMS–1270–P, Mail Stop C4–26–05, 

7500 Security Boulevard, Baltimore, MD 

21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments (one original 

and two copies) before the close of the 

comment period to one of the following 

addresses. If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

7195 in advance to schedule your 

arrival with one of our staff members. 

Room 445–G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201; or 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

(Because access to the interior of the 

HHH Building is not readily available to 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

Submission of comments on 

paperwork requirements. You may 

submit comments on this document’s 

paperwork requirements by mailing 

your comments to the addresses 

provided at the end of the ‘‘Collection 

of Information Requirements’’ section in 

this document. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: 

Lorrie Ballantine, (410) 786–7543— 

Overall implementation. 

Joel Kaiser, (410) 786–4499—Overall 

implementation. 

Michael Keane, (410) 786–4495— 

Overall implementation. 

Walter Rutemueller, (410) 786–5395— 

Overall implementation. 

Linda Smith, (410) 786–5650—Quality 

Standards and Accreditation. 

SUPPLEMENTARY INFORMATION:

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this rule to assist us in fully 

considering issues and developing 

policies. You can assist us by 

referencing the file code CMS–1270–P 

and the specific ‘‘issue identifier’’ that 

precedes the section on which you 

choose to comment. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. CMS posts all electronic 

comments received before the close of 

the comment period on its public Web 

site as soon as possible after they have 

been received. Hard copy comments 

received timely will be available for 

public inspection as they are received, 

generally beginning approximately 3 

weeks after publication of a document, 

at the headquarters of the Centers for 

Medicare & Medicaid Services, 7500 

Security Boulevard, Baltimore, 

Maryland 21244, Monday through 

Friday of each week from 8:30 a.m. to 

4 p.m. To schedule an appointment to 

view public comments, phone 1–800– 

743–3951. 

Table of Contents 

I. Background 

A. Payment Under Reasonable Charges 

B. Payment Under Fee Schedules 

C. Healthcare Common Procedural Coding 

System (HCPCS) 

D. Medicare Competitive Bidding 

Demonstrations 

E. Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 

F. Deficit Reduction Act (DRA) 

G. Program Advisory and Oversight 

Committee 

H. Quality Standards for Suppliers of 

(DMEPOS) 

I. Accreditation for Suppliers of DMEPOS 

and Other Items 

J. Low Vision Aid Exclusion 

K. Establishing Fee Schedule Amounts for 

New DMEPOS Items 

L. New Fee Schedules for Home Dialysis 

Supplies and Equipment 


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M. Covered Item Updates for Class III DME 

for CYs 2007 and 2008 

II. Provisions of the Proposed Regulations 

A. Purpose and Definitions (Proposed 

§ 414.400 and § 414.402) 

B. Implementation Contractor (Proposed 

§ 414.406) 

C. Payment Basis (Proposed § 414.408) 

1. Payment Basis (Proposed § 414.408(a)) 

2. General Payment Rules (Proposed 

§ 414.408(c)–(j)) 

3. Special Rules for Certain Rented Items 

of DME and Oxygen (Grandfathering of 

Suppliers) (Proposed § 414.408(k)) 

a. Process for Grandfathering Suppliers 

b. Payment Amounts to Grandfathered 

Suppliers 

(1) Grandfathering of Suppliers Furnishing 

Items Prior to the First Competitive 

Bidding Program in an Area (Proposed 

§ 414.408(k)) 

(2) Suppliers That Lose Their Contract 

Status in a Subsequent Competitive 

Bidding Program 

c. Payment for Accessories for Items 

Subject to Grandfathering 

4. Payment Adjustment to Account for 

Inflation (Proposed § 414.408(b)) 

5. Authority to Adjust Payments in Other 

Areas (Proposed § 414.408(e)) 

6. Requirement to Obtain Competitively 

Bid Items From a Contract Supplier 

(Proposed § 414.408(f)) 

7. Limitation on Beneficiary Liability for 

Items Furnished by Non Contract 

Suppliers (Proposed § 414.408(f)) 

D. Competitive Bidding Areas 

1. Proposed Methodology for MSA 

Selection for 2007 and 2009 Competitive 

Bidding Programs (Proposed § 414.410) 

a. MSAs for 2007 

b. MSAs for 2009 

2. Establishing Competitive Bidding Areas 

(Proposed § 414.410) 

a. Authority to Exempt Rural Areas and 

Areas With Low Population Density 

Within Urban Areas (Proposed 

§ 414.410(c)) 

b. Establishing the Competitive Bidding 

Areas for 2007 and 2009 (Proposed 

§ 414.410(b)) 

c. Nationwide or Regional Mail Order 

Competitive Bidding Program (Proposed 

§ 414.410(d)(2)) 

d. Additional Competitive Bidding Areas 

After 2009 (Proposed § 414.410(d)) 

E. Criteria for Item Selection 

F. Submission of Bids Under the 

Competitive Bidding Program (Proposed 

§ 414.412) 

1. Providers (Proposed § 414.404 and 

414.422) 

2. Physicians (Proposed § 414.422) 

3. Product Categories for Bidding Purposes 

(Proposed § 414.412) 

4. Bidding Requirements (Proposed 

§ 414.408) 

a. Inexpensive or Other Routinely 

Purchased DME Items 

b. DME Items Requiring Frequent and 

Substantial Servicing 

c. Oxygen and Oxygen Equipment 

d. Capped Rental Items 

e. Enteral Equipment and Supplies 

f. Maintenance and Servicing of Enteral 

Infusion Pumps 

g. Supplies Used in Conjunction With DME 

h. OTS Orthotics 

G. Conditions for Awarding Contracts 

(Proposed § 414.414) 

1. Quality Standards and Accreditation 

(Proposed § 414.414(c)) 

2. Eligibility (Proposed § 414.414(b)) 

3. Financial Standards (Proposed 

§ 414.414(d)) 

4. Evaluation of Bids (Proposed 

§ 414.414(e)) 

a. Market Demand and Supplier Capacity 

(Proposed § 414.414(e)) 

b. Composite Bids (Proposed § 414.414(e)) 

c. Determine the Pivotal Bid (Proposed 

§ 414.414(e)) 

d. Assurance of Savings (Proposed 

§ 414.414(f)) 

e. Assurance of Multiple Contractors 

(Proposed § 414.414(g)) 

f. Selection of New Suppliers After Bidding 

(Proposed § 414.414(h)) 

H. Determining Single Payment Amounts 

for Individual Items (Proposed § 414.416) 

1. Setting Single Payment Amounts for 

Individual Items (Proposed § 414.416(b)) 

2. Rebate Program (Proposed § 414.416(c)) 

I. Terms of Contracts (Proposed § 414.422) 

1. Terms and Conditions of Contracts 

2. Furnishing of Items (Proposed 

§ 414.422(c)) 

3. Repairs and Replacements of Patient 

Owned Items Subject to Competitive 

Bidding (Proposed § 414.422(c)) 

4. Furnishing Items to Beneficiaries Whose 

Permanent Residence Is Within a CBA 

5. Furnishing Items to Beneficiaries Whose 

Permanent Residence Is Outside a CBA 

6. Information Collection from the Supplier 

7. Change in Ownership (Proposed 

§ 414.422(d)) 

8. Suspension or Termination of a Contract 

(Proposed § 414.422(f)) 

J. Administrative or Judicial Review 

(Proposed § 414.424) 

K. Opportunity for Participation by Small 

Suppliers 

L. Opportunity for Networks (Proposed 

§ 414.418) 

M. Education and Outreach 

1. Supplier Education 

2. Beneficiary Education 

N. Monitoring and Complaint Services for 

the Competitive Bidding Program 

O. Physician Authorization/Treating 

Practitioner and Consideration of 

Clinical Efficiency and Value of Items in 

Determining Categories for Bids 

(Proposed § 414.420) 

P. Quality Standards and Accreditation for 

Suppliers of DMEPOS 

1. Special Payment Rules for Items 

Furnished by DMEPOS Suppliers and 

Issuance of DMEPOS Supplier Billing 

Privileges (Proposed § 424.57) 

2. Accreditation (Proposed § 424.58) 

3. Ongoing Responsibilities of CMS 

Approved Accreditation Organizations 

4. Continuing Federal Oversight of 

Approved Accreditation Organizations 

a. Equivalency Review 

b. Validation Review 

c. Notice of Intent To Withdraw Approval 

for Deeming Authority 

d. Withdrawal of Approval for Deeming 

Authority 

e. Reconsideration 

Q. Low Vision Aid Exclusion (Proposed 

§ 414.15) 

R. Establishing Payment Amounts for New 

DMEPOS (Gap-filling) (Proposed 

§ 414.210(g)) 

S. Fee Schedules for Home DialysIs 

Supplies and Equipment (Proposed 

§ 414.107) 

T. Fee Schedules for Therapeutic Shoes 

(Proposed § 414.228(c)) 

III. Collection of Information Requirements 

IV. Response to Comments 

V. Regulatory Impact AnalysIs 

A. Overall Impact 

B. Anticipated Affects 

C. Implementation Costs 

D. Program Savings 

E. Effect on Beneficiaries 

F. Effect on Suppliers 

1. Affected Suppliers 

2. Small Suppliers 

G. Accounting Statement 

Regulation Text 

I. Background 

A. Payment Under Reasonable Charges 

Payment for most DMEPOS items, 

including supplies and equipment, 

furnished under Part B of the Medicare 

program (Supplementary Medical 

Insurance) is made through contractors 

known as Medicare carriers. Before 

January 1, 1989, payment for most of 

these services was made on a reasonable 

charge basis by these carriers. The 

methodology for determining reasonable 

charges is set forth in section 1842(b) of 

the Social Security Act (Act) and 42 

CFR part 405, subpart E of the 

regulations. Reasonable charge 

determinations are generally based on 

customary and prevailing charges 

derived from historic charge data, with 

the ‘‘reasonable charge’’ for an item 

being the lowest of the following factors: 

• The supplier’s actual charge for the 

item. 

• The supplier’s customary charge for 

the item. 

• The prevailing charge in the locality 

for the item. The prevailing charge may 

not exceed the 75th percentile of the 

customary charges of suppliers in the 

locality. 

• The inflation indexed charge (IIC). 

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

lowest of the fee screens used to 

determine reasonable charges for 

services, including supplies, and 

equipment paid on a reasonable charge 

basis (excluding physicians’ services) 

that is in effect on December 31 of the 

previous fee screen year, updated by the 

inflation adjustment factor. The 

inflation adjustment factor is based on 

the current change in the consumer 

price index for all urban consumers 

(CPI-U), as compiled by the Bureau of 

Labor Statistics, for the 12-month period 

ending June 30 each year. 


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B. Payment Under Fee Schedules 

Section 4062 of the Omnibus Budget 

Reconciliation Act of 1987 (Pub. L. 100–

203) (OBRA ‘‘87) added section 1834 to 

the Act and implemented a fee schedule 

payment methodology for most durable 

medical equipment (DME), prosthetic 

devices, and orthotic devices furnished 

after January 1, 1989. Specifically, 

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

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

Medicare payment for these items is 

equal to 80 percent of the lesser of the 

actual charge for the item or the fee 

schedule amount for the item. We 

implemented this new payment 

methodology at 42 CFR part 414, 

subpart D of our regulations. Sections 

1834(a)(2) through (a)(5) and section 

1834(a)(7) of the Act, as well as 

§ 414.200 through § 414.232 (with the 

exception of § 414.228) of the 

regulations, set forth separate payment 

categories of DME and describe how the 

fee schedule for each of the following 

categories is established: 

• Inexpensive or other routinely 

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

the Act and § 414.220 of the 

regulations); 

• Items requiring frequent and 

substantial servicing (section 1834(a)(3) 

of the Act and § 414.222); 

• Customized items (section 

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

• Oxygen and oxygen equipment 

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

§ 414.226); 

• Other items of DME (section 

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

Each category has its own unique 

payment rules. With the exception of 

customized items, a fee schedule 

amount is calculated for each item or 

category of DME that is identified by a 

code in the Healthcare Common 

Procedure Coding System (HCPCS). The 

Medicare payment amount for a 

customized item of DME is based on the 

Medicare carrier’s individual 

consideration of that item. The fee 

schedule amounts for oxygen and 

oxygen equipment are monthly payment 

amounts. Payment under the DME 

benefit is made for supplies necessary 

for the effective use of DME (for 

example, lancets and test strips used 

with blood glucose monitors). These 

supplies are paid for using the same 

methodology that we use to pay for 

inexpensive or routinely purchased 

items. 

The fee schedule amounts for DME 

are generally adjusted annually by the 

change in the CPI–U for the 12-month 

period ending June 30 of the preceding 

year. The fee schedule amounts are also 

generally limited by a ceiling (upper 

limit) and floor (lower limit) equal to 

100 percent and 85 percent, 

respectively, of the median of the 

statewide fee schedule amounts. 

Since 1994, Medicare has paid for 

most surgical dressings in accordance 

with section 1834(i) of the Act and 

§ 414.220(g) of the regulations, using the 

same methodology as is used for 

payment of inexpensive or routinely 

purchased DME. 

Under section 1834(h) of the Act and 

§ 414.228 of the regulations, payment 

for prosthetic and orthotic devices is 

made on a lump sum basis and is equal 

to the lower of the fee schedule amount 

calculated for the item or the actual 

charge for the item, less any unmet 

deductible. The fee schedule amounts 

are calculated using a weighted average 

of Medicare payments made in the 

States in each of 10 CMS regions from 

July 1, 1986 through June 30, 1987, 

adjusted annually by the change in the 

CPI–U for the 12-month period ending 

June 30 of the preceding year. The 

regional fee schedule amounts are 

limited by a ceiling (upper limit) and 

floor (lower limit) equal to 120 percent 

and 90 percent, respectively, of the 

average of the regional fee schedule 

amounts for each State. 

As authorized under section 1842(s) 

of the Act and 42 CFR, part 414, subpart 

C of our regulations, Medicare pays for 

parenteral and enteral nutrition (PEN) 

nutrients, equipment and supplies on 

the basis of 80 percent of the lesser of 

the actual charge for the item, or the fee 

schedule amount for the item 

(§ 414.102(a)). The fee schedule 

amounts for PEN items are calculated on 

a nationwide basis and are the lesser of 

the reasonable charges for 1995, or the 

reasonable charges that would have 

been used in determining payment for 

these items in 2002 under the former 

reasonable charge payment 

methodology (§ 414.104(b)). The fee 

schedule amounts are generally adjusted 

annually by the percentage increase in 

the CPI–U for the 12-month period 

ending with June 30 of the preceding 

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

payment for PEN nutrients and supplies 

is made on a purchase basis, and 

payment for PEN equipment that is 

rented is made on a monthly basis. We 

are proposing to revise § 414.1 of our 

regulations to specify that fee schedules 

were established for PEN items in 

accordance with our authority under 

section 1842(s) of Act. 

Section 627 of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) (Pub. 

L. 108–173) amended section 1833(o)(2) 

of the Act to require implementation of 

fee schedule amounts, effective January 

1, 2005, for the purpose of determining 

payment for custom molded shoes, 

extra-depth shoes, and inserts 

(collectively, ‘‘therapeutic shoes’’). We 

believe that this section of the MMA is 

largely self-implementing because it 

mandates use of the methodology set 

forth in section 1834(h) of the Act for 

prosthetic and orthotic devices in 

determining the fee schedule amounts 

for therapeutic shoes. We implemented 

that methodology through regulations at 

part 414, subpart D, and section 627 of 

the MMA provides that the same 

methodology shall apply to therapeutic 

shoes. Section 627 of the MMA was 

implemented through program 

instructions, and on January 1, 2005, 

Medicare began paying for therapeutic 

shoes based on fee schedule amounts 

determined in accordance with section 

1834(h) of the Act and part 414, subpart 

D of our regulations. 

C. Healthcare Common Procedure 

Coding System (HCPCS) 

The Healthcare Common Procedure 

Coding System (HCPCS) is a 

standardized coding system used to 

process claims submitted to Medicare, 

Medicaid, and other health insurance 

programs by providers, physicians, and 

other suppliers. The HCPCS code set is 

divided into the following 2 principal 

subsystems, referred to as level I and 

level II of the HCPCS: 

• Level I of the HCPCS codes is 

comprised of Current Procedural 

Terminology (CPT) codes. CPT codes 

are a uniform coding system consisting 

of descriptive terms and identifying 

codes that are used primarily to identify 

medical services and procedures 

furnished by physicians and other 

health care professionals which are 

billed to public or private health 

insurance programs. CPT codes are 

developed, published, and maintained 

by the American Medical Association. 

CPT codes do not include codes needed 

to separately report medical items that 

are regularly billed by suppliers other 

than physicians. 

• Level II of the HCPCS codes is a 

standardized coding system used 

primarily to identify products and 

supplies that are not included in the 

CPT codes, such as DME, orthotics, 

prosthetics, and supplies when used 

outside a physician’s office. 

HCPCS Level II Codes classify like 

items by category for the purpose of 

efficient claims processing. Assignment 

of a HCPCS code is not a coverage 

determination, and does not imply that 

any payer will cover the items in the 

code category. For some DMEPOS items, 

such as wheelchairs and wheelchair 

cushions, minimum performance 


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standards must be met before an item 

can be classified under a HCPCS code. 

In October of 2003, the Secretary 

delegated authority under the Health 

Insurance Portability and 

Accountability Act of 1996 (HIPAA) to 

CMS to maintain and distribute the 

HCPCS Level II Codes. The HCPCS 

Level II Codes will be used to describe 

the DME, orthotic, and enteral nutrition 

items furnished under the competitive 

bidding programs being proposed in this 

proposed rule, both for the purpose of 

requesting bids and for establishing 

payment amounts. 

D. Medicare Competitive Bidding 

Demonstrations 

Section 4319 of the Balanced Budget 

Act of 1997 (BBA) authorized 

implementation of up to five 

demonstration projects of competitive 

bidding for Medicare Part B items, 

except physician services. In accordance 

with section 4319 of the BBA, we 

planned and implemented the DMEPOS 

Competitive Bidding Demonstration to 

test the feasibility and program impacts 

of using competitive bidding to set 

prices for DME and prosthetics, 

orthotics, and supplies. The 

demonstration was implemented at two 

sites: Polk County, Florida, and in the 

San Antonio, Texas, Metropolitan 

Statistical Area (MSA). The competitive 

bidding demonstrations, authorized 

under the BBA, were implemented 

successfully in both demonstration sites 

from 1999 to 2002, resulted in a 

substantial savings to the program and 

offered beneficiaries sufficient access 

and a quality product. 

At the first site, Polk County, Florida, 

we conducted the first of two rounds of 

bidding in 1999. Five categories of 

DMEPOS were put up for bidding: 

Oxygen equipment and supplies 

(required by statute), hospital beds and 

accessories, enteral nutrition formulas 

and equipment, urological supplies, and 

surgical dressings. A total of 16 contract 

suppliers began providing 

demonstration products in Polk County 

on October 1, 1999, and continued for 

2 years. The second and final round of 

bidding in Polk County was conducted 

in 2001 for the same product categories 

minus enteral nutrition. (Enteral 

nutrition was dropped to retain only 

product categories that are 

overwhelmingly used in private homes.) 

The second set of competitively bid 

payment amounts took effect in October 

2001. As in round one, 16 suppliers 

were selected, of whom half had 

participated as winners previously. The 

new fee schedules developed from the 

bids in each round replaced the 

statewide Medicare DMEPOS fees. The 

second round of the demonstration in 

Polk County ended in September 2002. 

Texas was the second site for the 

demonstration. In the San Antonio 

MSA’s Bexar, Comal, and Guadalupe 

counties we conducted bidding in 2000 

for five kinds of DMEPOS: Oxygen 

equipment and supplies, hospital beds 

and accessories, wheelchairs and 

accessories, general orthotics, and 

nebulizer drugs. Fifty-one suppliers 

were selected and began serving 

Medicare beneficiaries under the new 

fees in February 2001. The San Antonio 

site ended operations in December 2002, 

the statutorily required termination date 

in the BBA. 

In each area of evaluation, the data 

indicated mostly favorable results for 

the Medicare program. The 

demonstration led to lower Medicare 

fees for almost every item in almost 

every product category in each round of 

bidding. Fee reductions varied by 

product category and item, resulting in 

a nearly 20 percent overall savings at 

each site. Statistical and qualitative data 

indicate that beneficiary access and 

quality of services were essentially 

unchanged. 

The DMEPOS Competitive Bidding 

Demonstration offers valuable lessons 

for understanding the impacts of 

competitive bidding for Medicare 

services. These lessons are especially 

important now because the MMA 

mandates a larger role for competitive 

bidding within the Medicare program. 

Specifically, section 302(b) of the MMA 

requires the Secretary to establish and 

implement competitive bidding 

programs for the furnishing of certain 

DME and associated supplies, enteral 

nutrition and associated supplies, and 

off-the-shelf orthotics. In addition, 

section 303(d) of the MMA requires the 

Secretary to implement a competitive 

bidding program for certain Medicare 

Part B drugs not paid on a cost or 

prospective payment system basis, and 

section 302(b) of the MMA mandates 

competitive bidding demonstration 

projects for clinical laboratory services 

and managed care. 

E. Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (Pub. L. 108–173) 

Section 302(b)(1) of the MMA 

amended section 1847 of the Act to 

require the Secretary to establish and 

implement programs under which 

competitive bidding areas are 

established throughout the United 

States for contract award purposes for 

the furnishing of certain competitively 

priced items for which payment is made 

under Part B (the ‘‘Medicare DMEPOS 

Competitive Bidding Program’’). 

Competitive bidding provides a way to 

harness marketplace dynamics to create 

incentives for suppliers to provide 

quality items in an efficient manner and 

at a reasonable cost. In our view, the 

Medicare DMEPOS Competitive Bidding 

Program has five objectives, as follows: 

• To implement competitive bidding 

programs for certain DMEPOS items. 

• To assure beneficiary access to 

quality DMEPOS as a result of the 

program. 

• To reduce the amount Medicare 

pays for DMEPOS and create a payment 

structure under competitive bidding 

that is more reflective of a competitive 

market. 

• To limit the financial burden on 

beneficiaries by reducing their out-ofpocket expenses for DMEPOS they 

obtain through the program. 

• To contract with suppliers who 

conduct business in a manner that is 

beneficial for the program and for 

Medicare beneficiaries. 

F. Deficit Reduction Act of 2005 (Pub. L. 

109–171) 

Section 5101(a) of the Deficit 

Reduction Act of 2005 (DRA) amended 

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

change the way Medicare pays for 

capped rental items. This section 

revised the period of payment for 

capped rental from 15 to 13 months. 

After rental payments are made for a 13 

month period of continuous use, title to 

the capped rental items transfers from 

the supplier to the beneficiary. Once the 

title has transferred, amended section 

1834(a)(7)(A)(iv) provides that 

reasonable and necessary maintenance 

and servicing payments (for parts and 

labor not covered by the supplier’s or 

manufacturer’s warranty, as determined 

by the Secretary to be appropriate for 

the particular item) will be made. These 

statutory changes apply only to capped 

rental items whose first rental month 

occurs on or after January 1, 2006. 

Section 5101(b) of the DRA also 

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

limit monthly payments for oxygen 

equipment to a 36 month period of 

continuous use. Then ownership of the 

oxygen equipment will be transferred 

from the supplier to the beneficiary. 

Medicare will continue making monthly 

payments for oxygen contents when 

appropriate for beneficiary owned 

stationary and portable systems in the 

amounts recognized under section 

1834(a)(9) after title to the equipment 

transfers to the beneficiary. However, 

under new section 1834(a)(5)(F)(II)(bb), 

maintenance and servicing payments for 

beneficiary owned oxygen equipment 

(for parts and labor not covered by the 

supplier’s or manufacturer’s warranty) 


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will be made only if they are reasonable 

and necessary. These statutory changes 

went into effect on January 1, 2006. For 

beneficiaries receiving Medicare 

covered oxygen equipment as of 

December 31, 2005, the 36-month rental 

period begins January 1, 2006. In a 

future rulemaking, we will propose to 

revise regulations found in part 414, 

subpart D to incorporate these DRA 

provisions. 

G. Program Advisory and Oversight 

Committee 

Section 1847(c) of the Act requires the 

Secretary to establish a Program 

Advisory and Oversight Committee 

(PAOC) that will provide advice to the 

Secretary with respect to the following 

functions, including—

• The implementation of the 

Medicare DMEPOS Competitive Bidding 

Program; 

• The establishment of financial 

standards for entities seeking contracts 

under the Medicare DMEPOS 

Competitive Bidding Program, taking 

into account the needs of small 

providers; 

• The establishment of requirements 

for collection of data for the efficient 

management of the Medicare DMEPOS 

Competitive Bidding Program; 

• The development of proposals for 

efficient interaction among 

manufacturers, providers of services, 

suppliers (as defined in section 1861(d) 

of the Act) and individuals; and 

• The establishment of quality 

standards for DMEPOS suppliers under 

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

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

the Act authorizes the PAOC to perform 

additional functions to assist the 

Secretary in carrying out the Medicare 

DMEPOS Competitive Bidding Program 

as the Secretary may specify. 

As authorized under section 

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

members were appointed by the 

Secretary of Health and Human Services 

and represent a broad mix of relevant 

industry, consumer, and government 

parties. Specifically, the membership 

roster includes two beneficiary/ 

consumer representatives, four 

manufacturer representatives, five 

supplier representatives, three 

certification/standards representatives, 

six Federal and State program 

representatives, one physician and one 

pharmacist. The representatives have 

expertise in a variety of subject matter 

areas, including DMEPOS, competitive 

bidding methodologies and processes, 

and rural and urban marketplace 

dynamics. The first PAOC meeting was 

announced in a Federal Register notice 

(CMS–1279–N2, 69 FR 31125) and was 

held at CMS on October 6, 2004. 

We have held two additional PAOC 

meetings where we, along with our 

contractor RTI, presented material to 

both the PAOC and the public relating 

to the provisions that are outlined in 

this proposed rule. The topics that we 

presented include—

• Medicare’s timeline for 

implementation of the Medicare 

DMEPOS Competitive Bidding Program; 

• Results of the Medicare competitive 

bidding demonstration projects 

authorized by section 4319 of the BBA; 

• Structure of the Medicare DMEPOS 

Competitive Bidding Program being 

proposed in this proposed rule; 

• Existing non-Medicare competitive 

bidding programs for DMEPOS items; 

• Program design options for the 

Medicare DMEPOS Competitive Bidding 

Program being proposed in this 

proposed rule; 

• Criteria for selecting Metropolitan 

Statistical Areas (MSAs) in which 

competition under the Medicare 

DMEPOS Competitive Bidding Program 

will occur in both 2007 and 2009; 

• Criteria for selecting items for 

competitive bidding; 

• Bidding process overview; 

• Methodology for setting single 

payment amounts for competitively bid 

items; 

• Capacity of DMEPOS suppliers and 

beneficiary utilization of DMEPOS 

items; 

• Financial capabilities of bidding 

suppliers; 

• Exception authority under section 

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

areas with low population density 

within urban areas that are not 

competitive; and 

• Quality standards and accreditation 

procedures applicable to all DMEPOS 

suppliers. 

In addition to the PAOC meetings, we 

have designed and implemented a CMS 

Web site (http://cms.hhs.gov/suppliers/ 

dmepos/compbid/paoc.asp) specifically 

for the public to have access to all 

PAOC presentations, minutes, and 

updates for the Medicare DMEPOS 

Competitive Bidding Program. In 

accordance with section 1847(c)(5) of 

the Act, the PAOC will continue to 

operate until December 31, 2009. Future 

PAOC meeting dates, as well as other 

information pertinent to the Medicare 

DMEPOS Competitive Bidding Program, 

can be found on our Web site. 

H. Quality Standards for Suppliers of 

(DMEPOS) 

Section 302(a)(1) of the MMA added 

section 1834(a)(20) to the Act, which 

requires the Secretary to establish and 

implement quality standards for 

suppliers of certain items, including 

consumer service standards, to be 

applied by recognized independent 

accreditation organizations. Suppliers of 

DMEPOS must comply with the quality 

standards in order to furnish any item 

for which payment is made under Part 

B, and to receive and retain a provider 

or supplier billing number used to 

submit claims for reimbursement for 

any such item for which payment may 

be made under Medicare. Section 

1834(a)(20)(D) of the Act requires us to 

apply these quality standards to 

suppliers of the following items for 

which we deem the standards to be 

appropriate: 

• Covered items, as that term is 

defined in section 1834(a)(13), for 

which payment may be made under 

section 1834(a); 

• Prosthetic devices and orthotics and 

prosthetics described in section 

1834(h)(4); and 

• Items described in section 

1842(s)(2) of the Act, which include 

medical supplies, home dialysis 

supplies and equipment, therapeutic 

shoes, parenteral and enteral nutrients, 

equipment, and supplies, 

electromyogram devices, salivation 

devices, blood products, and transfusion 

medicine. 

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

explicitly authorizes the Secretary to 

establish the quality standards by 

program instruction or otherwise after 

consultation with representatives of 

relevant parties. We consulted with the 

PAOC and determined that it is in the 

best interest of the industry and 

beneficiaries to publish the quality 

standards through program instructions 

and select the accreditation 

organizations in order to ensure that 

suppliers that wish to participate in 

competitive bidding will know what 

standards they must meet in order to be 

awarded a contract. The standards will 

be applied prospectively and will be 

published on our website. All suppliers 

of DMEPOS and other items to which 

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

will be required to meet the quality 

standards established under that 

section. Finally, section 1847(b)(2)(A)(i) 

of the Act requires an entity (a DMEPOS 

supplier) to meet the quality standards 

specified by the Secretary under section 

1834(a)(20) of the Act before being 

awarded a contract under the Medicare 

DMEPOS Competitive Bidding Program. 

Since December 11, 2000, suppliers 

have been required to meet the 

Medicare enrollment standards at 

§ 424.57, satisfaction of which is 

required for these suppliers to 

participate in the Medicare program and 


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receive Medicare payments for DMEPOS 

and other items. Even with the 

implementation of the enrollment 

standards at § 424.57, we believe there 

has not been sufficient oversight of 

suppliers of DMEPOS and other items 

related to the quality and provision of 

their products. The Department of 

Health and Human Services, Office of 

Inspector General (OIG), has conducted 

several investigations of suppliers of 

DMEPOS and other items to determine 

the legitimacy of their businesses and 

has uncovered many examples of fraud 

and abuse. Examples of the types of 

fraud and abuse that were discovered 

include—

• Billing for services not performed; 

• Billing for a more expensive service 

than was rendered; 

• Billing separately for several 

services that should be combined into 

one billing; 

• Billing twice for the same service; 

• Billing for more expensive 

equipment or supplies than were used; 

• Offering or receiving kickbacks (that 

is, offering or accepting something in 

return for services); 

• Offering or accepting a bribe to use 

a particular service or company; 

• Providing unnecessary services; and 

• Submitting false cost reports. 

The OIG began publicizing fraud 

alerts as a vehicle to identify fraudulent 

and abusive practices being committed 

by DMEPOS suppliers within the health 

care industry. 

To enhance the quality of services 

provided by suppliers of DMEPOS and 

further reduce fraudulent practices, we 

are developing quality standards, as 

required by section 1834(a)(20) of the 

Act, to address suppliers’

accountability, business integrity, 

provision of quality products to 

beneficiaries, and performance 

management. These standards will 

measure the effect of suppliers’ services 

on beneficiaries. The supplier quality 

standards will include product specific 

requirements that will focus on a 

consumer-directed model of service 

delivery for suppliers to improve 

beneficiary access to information about 

DMEPOS. We believe these 

requirements will empower 

beneficiaries to make better-informed 

choices regarding equipment selection 

and the proper and safe use of DMEPOS, 

which we believe will lead to increased 

beneficiary satisfaction, safe and 

appropriate use of purchased 

equipment, and positive health 

outcomes. The supplier quality 

standards will provide more efficient 

processes and standardized materials for 

suppliers to increase consistency and 

continuity for supplier services to 

beneficiaries, beneficiary education, and 

responsiveness to beneficiary requests 

for equipment options. We are using 

contractor support and input from 

industry suppliers and national 

associations to develop the quality 

standards. Additionally, the contractors 

will meet with beneficiaries who use the 

specific products to solicit their input 

and assurance that their needs are being 

addressed by the quality standards 

requirements. 

The quality standards will include 

performance management requirements 

to ensure the development, 

implementation, monitoring, and 

evaluation of policies, procedures, and 

products so that suppliers can maintain 

compliance with regulatory 

requirements and our policy 

instructions. The quality standards will 

include language from current CMS 

standards and industry best practice 

standards for the following areas: 

Administration; financial management; 

human resource management; 

beneficiary services; performance 

management; environment and safety; 

beneficiary rights/ethics; and 

information management. Additionally, 

the supplier quality standards will 

include requirements for monitoring 

beneficiary satisfaction with products 

and suppliers’ responses to beneficiary 

complaints. As is authorized under 

section 1834(a)(20)(E), we will be 

establishing the supplier quality 

standards through program instructions 

and will publish them on our Web site. 

Additionally, in a future rule, we will 

propose to address DMEPOS supplier 

requirements for enrollment and 

enforcement procedures. 

I. Accreditation for Suppliers of 

DMEPOS and Other Items 

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

requires the Secretary, notwithstanding 

section 1865(b) of the Act, to designate 

and approve one or more independent 

accreditation organizations to apply the 

quality standards to suppliers of 

DMEPOS and other items. The Medicare 

program currently contracts with State 

Agencies to perform survey and review 

functions for providers and suppliers to 

approve their participation in or 

coverage under the Medicare program. 

Additionally, section 1865(b) of the Act 

sets forth the general procedures for 

CMS to designate national accreditation 

organizations to deem providers or 

suppliers to meet Medicare conditions 

of participation or coverage if they are 

accredited by a national accreditation 

organization approved by CMS. Many 

types of providers and suppliers have a 

choice between having the State Agency 

or the CMS approved accreditation 

organization survey them. If the 

provider or supplier selects the CMSapproved accreditation organization and 

is in compliance with the accreditation 

organization standards, it is generally 

deemed to meet the Medicare 

conditions of participation or coverage. 

CMS is responsible for the oversight and 

monitoring of the State Agencies and 

the approved accreditation 

organizations. The procedures, 

implemented by the Secretary, for 

designating private and national 

accreditation organizations and the 

Federal review process for accreditation 

organizations are located at 42 CFR 

parts 422 (for Medicare Advantage 

organizations) and 488 (for most 

providers and suppliers). Although, the 

statute itself does not require us to issue 

a rulemaking or provide notice in the 

Federal Register in order to designate 

and approve DMEPOS accreditation 

organizations, we believe that the 

Administrative Procedure Act does 

require us to give notice and an 

opportunity for comment before we 

institute our procedures for designating 

and supervising these organizations. To 

accommodate suppliers that wish to 

participate in the Medicare DMEPOS 

Competitive Bidding Program, we will 

phase-in the accreditation process and 

require accreditation organizations to 

prioritize their surveys to accredit 

suppliers in the selected MSAs and 

competitive bidding areas. We will 

provide further guidance in a Federal 

Register notice on the grandfathering-in 

of suppliers that have already been 

accredited, and the submission 

procedures for accreditation after this 

rule is finalized. 

J. Low Vision Aid Exclusion 

Section 1862(a)(7) of the Act excludes 

payment where ‘‘expenses are for * * * 

eyeglasses (other than eyewear 

described in section 1861(s)(8)) or eye 

examinations for the purpose of 

prescribing, fitting, or changing 

eyeglasses, procedures performed 

(during the course of any eye 

examination) to determine the refractive 

state of the eyes * * *.’’ The Medicare 

regulations at § 411.15(b) exclude from 

coverage eyeglasses and contact lenses, 

except for—

• Post-surgical prosthetic lenses 

customarily used during convalescence 

for eye surgery in which the lens of the 

eye was removed (for example, cataract 

surgery); 

• Prosthetic lenses for patients who 

lack the lens of the eye because of 

congenital absence or surgical removal; 

and 

• One pair of conventional eyeglasses 

or conventional contact lenses furnished 


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after each cataract surgery during which 

an intraocular lens is inserted. 

From as early as 1980, we have 

clarified that we viewed closed circuit 

visual aid systems and other low vision 

devices to be subject to the eyeglass 

coverage exclusion at section 1862(a)(7) 

of the Act. We have also concurred with 

carrier policies that have excluded 

payment for low vision aids because of 

the eyeglass exclusion. Moreover, the 

Medicare Appeals Council has 

recognized that video magnifiers, or 

closed circuit televisions (CCTVs), are 

excluded from coverage by section 

1862(a)(7) of the Act. However, we have 

never issued a regulation or national 

coverage decision that specifically states 

that the eyeglass exclusion at section 

1862(a)(7) of the Act applies to low 

vision aids. We are proposing to revise 

§ 411.15(b), with certain specific 

exceptions, to expressly state that the 

eyeglass exclusion applies to all devices 

that use one or more lens for the 

primary purpose of aiding vision. In 

proposing this revision, we are mindful 

that three United States district courts 

have found that section 1862(a)(7) of the 

Act does not prohibit payment for video 

magnifiers. (Collins v. Thompson, No 

2:03-cv-265-FtM–29SPC (M.D. Fla. June 

4, 2004); Davidson v. Thompson, No. 

Civ. 04–32 LFG (D.N.M. 2004); Currier 

v. Thompson, 369 F. Supp. 2d 65 (D. 

Me. 2005).) The Currier court, however, 

recognized that the statute was 

ambiguous. Moreover, the Supreme 

Court has recently recognized that a 

prior judicial construction of an 

ambiguous statute does not categorically 

control an agency’s contrary 

construction. (National Cable & 

Telecommunications Association v. 

Brand X Internet Services, 125 S. Ct. 

2688, 2701 (2005).) In section II.O. of 

this proposed rule, we explain the 

reasons for our interpretation of the 

statute that the eyeglass exclusion does 

apply to low vision aids. 

K. Establishing Fee Schedule Amounts 

for New DMEPOS Items 

Since 1989, CMS and its contractors 

have used an administrative process 

known as gap-filling to establish fee 

schedule amounts for DMEPOS items 

when fee schedule base data is not 

available, such as when a new code is 

added to Level II of the HCPCS to 

describe a new category of items. For 

example, section 1834(a)(2)(B) of the 

Act requires that the fee schedules for 

inexpensive or routinely purchased 

DME (for example, canes) be based on 

average reasonable charges for the item 

from July 1, 1986 through June 30, 1987. 

When a new code for an item (for 

example, a new category of canes) 

falling under this category is added to 

the HCPCS, reasonable charge data from 

1986/87 is not available and the gapfilling process is used to estimate 1986/ 

87 reasonable charges. Since 1989, fee 

schedule amounts have been gap-filled 

using either—

• Fee schedule amounts for 

comparable items; 

• Supplier or retail prices; or 

• Wholesale or manufacturer prices 

plus a reasonable mark-up. 

There is currently no methodology set 

forth in regulations for establishing fee 

schedule amounts for DMEPOS items in 

these situations. Therefore, in § 414.210, 

we are proposing a modified version of 

our existing gap-filling process to be 

used in establishing fee schedule 

amounts for DMEPOS items to which 

are assigned new HCPCS Level II Codes. 

This process will be used to set payment 

amounts for all new DMEPOS items, 

even if those items fall within a product 

category that is subject to competitive 

bidding, until bids for those items are 

available for establishing payments in 

accordance with section 1847(b)(5) of 

the Act. 

L. New Fee Schedules for Home Dialysis 

Supplies and Equipment 

Section 1842(s)(1) of the Act gives the 

Secretary the authority to implement fee 

schedules to be used for payment under 

Medicare of specific items (listed in 

section 1842(s)(2) of the Act) still paid 

using the reasonable charge payment 

methodology described in section I.A. of 

this proposed rule. In § 414.107, we are 

proposing to use this authority to 

implement a fee schedule payment 

methodology for home dialysis supplies 

and equipment, one of these specified 

items. 

M. Covered Item Updates for Class III 

DME for CYs 2007 and 2008 

Sections 1834(a)(14)(H) and (I) of the 

Act give the Secretary discretion in 

determining the appropriate fee 

schedule update percentages for CYs 

2007 and 2008, respectively, for DME 

which are ‘‘class III medical devices 

described in section 513(a)(1)(C) of the 

Federal Food, Drug, and Cosmetic Act 

(21 U.S.C. 360(c)(1)(C)).’’ In making 

these determinations, the Secretary 

must take into account 

recommendations contained in a report 

from the Government Accountability 

Office (GAO) regarding the appropriate 

update percentages for these devices. 

The GAO report is mandated by section 

302(c)(1)(B) of the MMA and must be 

submitted to the Congress and 

transmitted to the Secretary by no later 

than March 1, 2006. Class III devices 

paid in accordance with the DME fee 

schedule payment methodology include 

osteogenesis or bone growth stimulators, 

implantable infusion pumps, external 

defibrillators, and ultraviolet light 

therapy systems. We are soliciting 

comments on how to determine the 

appropriate fee schedule percentage 

change for these devices for 2007 and 

2008 and will consider these comments 

in conjunction with the 

recommendations in the GAO report in 

determining the appropriate update 

percentage for these devices for 2007 

and 2008. 

II. Provisions of the Proposed 

Regulation 

We are proposing to add a new 

subpart F to part 414 to specify the 

requirements for the Medicare DMEPOS 

Competitive Bidding Program. Subpart 

F would set forth policies and 

procedures relating to the program in 

§§ 414.400 through 414.446. 

A. Purpose and Definitions (Proposed 

§ 414.400 and § 414.402) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Use of terms’’ at the beginning of your 

comments.] 

We propose in § 414.400 to state that 

the purpose of proposed new subpart F 

would be to implement the Medicare 

DMEPOS Competitive Bidding Program 

for certain DMEPOS items as required 

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

As set forth in proposed § 414.402, we 

are proposing to define certain 

frequently occurring terms that will be 

used in competitive bidding. 

Specifically, we are proposing to define 

the following terms: 

Bid means an offer to furnish an item 

for a particular price and time period 

that includes, where appropriate, any 

services that are directly related to the 

furnishing of the item. 

Competitive bidding area (CBA) 

means an area established by the 

Secretary under this proposed rule. 

Composite bid means the sum of a 

bidding supplier’s weighted bids for all 

items within a product category for 

purposes of allowing a comparison 

across bidding suppliers. 

Competitive bidding program means a 

program established under this 

proposed rule. 

Contract supplier means an entity that 

is awarded a contract by CMS to furnish 

items under a competitive bidding 

program. 

DMEPOS stands for durable medical 

equipment, prosthetics, orthotics and 

supplies. 

Grandfathered item means any one of 

the following items for which payment 

is made on a rental basis prior to the 


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implementation of a competitive 

bidding program. 

(1) An inexpensive or routinely 

purchased item described in § 414.220; 

(2) An item requiring frequent and 

substantial servicing as described in 

§ 414.222; 

(3) Oxygen and oxygen equipment 

described in § 414.226; and 

(4) A capped rental item described in 

§ 414.229. 

Grandfathered supplier means a 

noncontract supplier that furnishes a 

grandfathered item. 

Item means one of the following 

products identified by a HCPCS code, 

other than class III devices under the 

Federal Food, Drug and Cosmetic Act 

and inhalation drugs, and includes the 

services directly related to the 

furnishing of that product to the 

beneficiary: 

(1) Durable medical equipment 

(DME), as defined in § 414.202 and 

further classified into the following 

categories: 

(a) Inexpensive or routinely 

purchased items, as specified in 

§ 414.220(a); 

(b) Items requiring frequent and 

substantial servicing, as specified in 

§ 414.222(a); 

(c) Oxygen and oxygen equipment, as 

specified in § 414.226(b); and 

(d) Other DME (capped rental items), 

as specified in § 414.229. 

(2) Supplies necessary for the 

effective use of DME. 

(3) Enteral nutrients, equipment, and 

supplies. 

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

orthotics described in section 1861(s)(9) 

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

not require expertise in trimming, 

bending, molding, assembling, or 

customizing to fit a beneficiary. 

Item weight is a number assigned to 

an item based on its beneficiary 

utilization rate in a competitive bidding 

area when compared to other items in 

the same product category. 

Metropolitan Statistical Area (MSA) 

has the same meaning as that given by 

the Office of Management and Budget. 

Nationwide competitive bidding area 

means a competitive bidding area that 

includes the United States and its 

territories. 

Noncontract supplier means a 

supplier that is located in a competitive 

bidding area or that furnishes items 

through the mail to beneficiaries in a 

competitive bidding area but that is not 

awarded a contract by CMS to furnish 

items included in the competitive 

bidding program for that area. 

Physician has the same meaning as in 

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

Pivotal bid means the highest 

composite bid based on bids submitted 

by suppliers for a product category that 

will include a sufficient number of 

suppliers to meet beneficiary demand 

for the items in that product category. 

Product category means a grouping of 

related items that are included in a 

competitive bidding program. 

Single payment amount means the 

allowed payment for an item furnished 

under a competitive bidding program. 

Supplier means an entity with a valid 

Medicare supplier number, including an 

entity that furnishes items through the 

mail. 

Treating practitioner means a 

physician assistant, nurse practitioner, 

or clinical nurse specialist, as those 

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

of the Act. 

Weighted bid means the item weight 

multiplied by the bid price submitted 

for that item. 

B. Implementation Contractor (Proposed 

§ 414.406) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Implementation Contractor’’ at the 

beginning of your comments.] 

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

that the Secretary may contract with 

appropriate entities to implement the 

Medicare DMEPOS Competitive Bidding 

Program. Therefore, in proposed 

§ 414.406(a), we would designate one or 

more competitive bidding 

implementation contractors (CBICs) for 

the purpose of implementing the 

Medicare Competitive Bidding Program. 

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

authorizes the Secretary to waive such 

provisions of the Federal Acquisition 

Regulation (FAR) as are necessary for 

the efficient implementation of this 

section, other than provisions relating to 

confidentiality of information and such 

other provisions as the Secretary 

determines appropriate. The Secretary is 

exercising this authority to waive all 

requirements of the FAR, other than 

provisions dealing with confidentiality, 

because of the need for expeditious 

implementation of a program of this 

significance and magnitude. However, 

this does not preclude us from 

voluntarily using or adapting certain 

provisions of the FAR for purposes of 

the competitive bidding contracts. 

We envision that the Medicare 

DMEPOS Competitive Bidding Program 

will have six primary functions, 

including overall oversight and decision 

making, operation design functions 

(including the design of both bidding 

and outreach material templates, as well 

as program processes), bidding and 

evaluation, access and quality 

monitoring, outreach and education, 

and claims processing. We considered 

the organizational structure and 

requirements necessary to conduct these 

functions, and have chosen to exercise 

our contracting authority under section 

1847(b)(9) of the Act and contract with 

one or more CBICs to assist us with 

many of these functions. 

We considered several options in 

designing the most appropriate 

framework for implementing the 

Medicare DMEPOS Competitive Bidding 

Program. Since the implementation of 

competitive bidding involves many 

functions that are time limited and 

require specialized skills, for example, 

setting up bidding areas, reviewing bids, 

and setting single payment amounts, we 

believe that it would be prudent to 

initially implement most aspects of the 

Medicare Competitive Bidding Program 

through one or more CBICs. Processing 

of Medicare claims for most DMEPOS is 

currently done by four DME regional 

carriers (DMERCs). These DMERCs 

would continue to process claims for 

DMEPOS items subject to competitive 

bidding and would continue to perform 

other existing DMERC functions. We 

have evaluated the anticipated 

feasibility and cost of using one or more 

implementation contractor(s) to assist us 

with implementing the Medicare 

DMEPOS Competitive Bidding Program, 

concentrating on the potential for 

capturing economies of scale and scope, 

program consistency, existing resources 

and infrastructure, and the viability of 

implementation under the timeframe 

mandated by section 1847(a)(1)(B) of the 

Act. 

We would contract with one or more 

CBICs to conduct some program 

functions at a national level and interact 

with the DMERC contractors. 

Specifically, we envision that the 

CBIC(s) would conduct certain 

functions related to competitive 

bidding, such as preparing the request 

for bids (RFB), performing bid 

evaluations, selecting qualified 

suppliers, and setting single payment 

amounts for all competitive bidding 

areas. Additionally, the CBIC(s) would 

be charged with educating the DMERCs 

on the bidding process and procedures. 

The CBIC(s) would also assist CMS and 

the DMERCs in monitoring program 

effectiveness, access, and quality. The 

DMERCs would continue to provide 

outreach and education to beneficiaries 

and suppliers in their regions, process 

claims, apply the single payment 

amounts set by the CBIC(s) for each 

competitive bidding area, and continue 

to be responsible for complaints related 

to claims processing. We would 

continue to be responsible for overall 


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oversight and decision making, as well 

as policy related outreach and education 

to the CBIC(s), DMERCs, suppliers, and 

beneficiaries. 

In our view, this approach would 

achieve economies of scale since the 

responsibility for producing program 

materials and evaluating bids would rest 

with the CBIC(s). As a result, we believe 

that this approach would both lower 

costs and ensure regional consistency in 

that the responsibility would not be 

divided between various entities. 

We considered two other alternatives 

for implementation of the Medicare 

DMEPOS Competitive Bidding Program. 

The first was to have each DMERC 

conduct competitive bidding in its 

respective area and be responsible for 

all activities related to competitive 

bidding. The second alternative was to 

have the CMS Consortium Contractor 

Management Officer (CCMO)/ Regional 

Offices (RO) and the DMERCs 

implement the program. However, we 

believe that by using one or more 

specialized CBICs, we can successfully 

implement and effectively manage this 

program. 

C. Payment Basis (Proposed § 414.408) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Payment Basis’’ at the beginning of 

your comments.] 

1. Payment Basis (§ 414.408(a)) 

Section 1847(b)(5) of the Act 

mandates that a single payment amount 

be established for each item in each 

competitive bidding area based on the 

bids submitted and accepted for that 

item. Medicare payment for the item is 

then made on an assignment-related 

basis equal to 80 percent of the 

applicable single payment amount, less 

any unmet Part B deductible described 

in section 1833(b) of the Act. Section 

1847(a)(6) of the Act requires that this 

payment basis be substituted for the 

payment basis otherwise applied under 

section 1834(a) of the Act for DME, 

section 1834(h) of the Act for Off-TheShelf (OTS) orthotics, or section 1842(s) 

of the Act for enteral nutrition, as 

appropriate. 

We are proposing in § 414.408 that 

payment to the contract supplier would 

be based on the single payment amount 

for the item in the competitive bidding 

area where the beneficiary maintains a 

permanent residence. If an item that is 

included in a competitive bidding 

program is furnished to a beneficiary 

who does not maintain a permanent 

residence in a competitive bidding area, 

the payment basis for the item would be 

80 percent of the lesser of the actual 

charge for the item, or the applicable fee 

schedule amount for the item. We are 

also proposing that implementation of a 

competitive bidding program would not 

preclude the use of an Advanced 

Beneficiary Notice (ABN) to allow 

beneficiaries to make informed 

consumer choices regarding whether to 

obtain items for which Medicare might 

not make payment. 

2. General Payment Rules (Proposed 

§ 414.408 (c–j)) 

Section 1834(a) of the Act and 

§ 414.200 through § 414.232 (with the 

exception of § 414.228) set forth the 

Medicare Part B payment methodology 

we use to pay for the rental or purchase 

of new and used DME. Each item of 

DME that is paid for under these 

sections is classified into a payment 

category, and each category has its own 

unique payment rules. Section 1842(s) 

of the Act provides authority for 

establishing a statewide or area wide fee 

schedule to be used for the payment of 

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

the Act. Under this authority, we 

implemented fee schedules for the 

payment of purchased and rented 

enteral nutrients, equipment, and 

supplies (see § 414.100 through 

§ 414.104). Section 1834(h) of the Act 

and § 414.228 of our regulations set 

forth the Medicare Part B payment 

methodology we use to pay for orthotics 

and prosthetics. 

Other than the rules governing 

calculation of the single payment 

amount and other proposed 

modifications to existing policies that 

are addressed in this regulation, we 

propose that the current requirements 

regarding the rental or purchase of 

DMEPOS items would continue to apply 

under the Medicare DMEPOS 

Competitive Bidding Program. While we 

believe that we have discretion under 

section 1847(a)(6) of the Act to adopt 

new rules that would govern these 

requirements, at this time we are 

proposing only to change the payment 

basis for these items. 

3. Special Rules for Certain Rented 

Items of DME and Oxygen 

(Grandfathering of Suppliers) (Proposed 

§ 414.408(k)) 

a. Process for Grandfathering Suppliers 

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

that in the case of covered DME items 

for which payment is made on a rental 

basis under section 1834(a) of the Act, 

and in the case of oxygen for which 

payment is made under section 

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

establish a ‘‘grandfathering’’ process by 

which rental agreements for those 

covered items and supply arrangements 

with oxygen suppliers entered into 

before the start of a competitive bidding 

program may be continued. DME paid 

on a rental basis under section 1834(a) 

of the Act includes inexpensive or 

routinely purchased items furnished on 

a rental basis, items requiring frequent 

and substantial servicing, and capped 

rental items. Section 1834(a)(5) of the 

Act mandates that payment be made for 

oxygen and oxygen equipment on the 

basis of monthly payment amounts for 

oxygen and oxygen equipment (other 

than portable oxygen equipment) with 

separate add-on payments for portable 

oxygen equipment. We are proposing 

the grandfathering process described 

below for rented DME and oxygen and 

oxygen equipment when these items are 

included under a competitive bidding 

program. This process would apply only 

to suppliers that began furnishing the 

items described above to beneficiaries 

who maintain a permanent residence in 

an area prior to the implementation of 

a competitive bidding program in that 

area that includes the same items. 

In the case of the specific items 

identified in this section, we are 

proposing in § 414.408 to give 

beneficiaries the choice of deciding 

whether they would like to continue 

renting the item from the grandfathered 

supplier or a contract supplier, unless 

the grandfathered supplier is not willing 

to continue furnishing the item under 

the terms we have specified below. If 

the grandfathered supplier is not willing 

to continue furnishing the item under 

these terms, then a contract supplier 

would assume responsibility for 

continuing to furnish the item and be 

paid based on the single payment 

amount determined for that item under 

the competitive bidding program. In 

addition, the beneficiary could elect, at 

any time, to transition to a contract 

supplier and the contract supplier 

would be required to accept the 

beneficiary as a customer. Suppliers 

who agree to be grandfathered suppliers 

for a specific item must agree to be a 

grandfathered supplier for all 

beneficiaries who request to continue to 

use their service for that item. 

b. Payment Amounts to Grandfathered 

Suppliers (§ 414.408(k)) 

(1) Grandfathering of Suppliers 

Furnishing Items Prior to the First 

Competitive Bidding Program in an 

Area 

For items requiring frequent and 

substantial servicing, as well as oxygen 

and oxygen equipment, we are 

proposing that a grandfathered supplier 

may continue furnishing these items to 

beneficiaries in accordance with 


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existing rental agreements or supply 

arrangements. However, we are also 

proposing that the grandfathered 

supplier be paid the single payment 

amounts determined for those items 

under the competitive bidding program 

since beneficiaries rent these items for 

extended time periods as long as the 

items remain medically necessary. We 

believe that this payment proposal is 

consistent with section 1847(a)(4), 

which requires us to establish a 

‘‘process’’ under which rental 

agreements and supply arrangements 

‘‘may be continued,’’ but is silent 

regarding the terms of that process. 

Since the rental payments are not 

calculated based on or limited to the 

purchase fee for that item as is the case 

for other rented DME items, we do not 

believe that it is not reasonable to 

continue paying the fee schedule 

amounts for these items and that 

payment at the competitively 

determined rates will comport with an 

overarching goal of competitive bidding 

to achieve savings for the Medicare 

program. 

Unlike items requiring frequent and 

substantial servicing, the duration of the 

rental payments for capped rental items 

and inexpensive or routinely purchased 

items are limited. In addition, unlike 

oxygen equipment, the payment 

amounts made for capped rental items 

and inexpensive or routinely purchased 

items are limited to the approximate 

purchase fee for the item. For items that 

are furnished on a rental basis under 

§ 414.220 or § 414.229, we are proposing 

in § 414.408 that the grandfathered 

supplier could continue furnishing the 

items in accordance with existing rental 

agreements and continue to be paid in 

accordance with section 1834(a) of the 

Act. We believe that continuing to pay 

for these grandfathered items at the fee 

schedule rates is authorized under 

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

allows the Secretary to specify ‘‘other 

circumstances’’ in which Medicare will 

make payment where the expenses for a 

competitively bid item furnished in a 

competitive bidding area were incurred 

by a supplier other than a contract 

supplier. In our view, the limited 

duration of the rental agreements for 

capped rental items and inexpensive or 

routinely purchased items furnished on 

a rental basis, in addition to the fact that 

payments for these items are based on 

or limited to the purchase fees for the 

items, constitute appropriate 

circumstances under which we would 

allow these rental agreements, including 

their payment terms, to continue until 

their conclusion. The rental fee 

schedule amounts that we would pay 

for grandfathered items in the capped 

rental or inexpensive or routinely 

purchased categories would be those fee 

schedule amounts established for the 

State in which the beneficiary maintains 

a permanent residence. 

(2) Suppliers That Lose Their Contract 

Status in a Subsequent Competitive 

Bidding Program 

There may be instances when a 

supplier that was awarded a contract to 

furnish rental items or oxygen and 

oxygen equipment under a competitive 

bidding program is not awarded a 

contract to furnish the same rental items 

under a subsequent competitive bidding 

program in the same area. We are 

concerned that if this occurs, 

beneficiaries will need to switch 

suppliers in the middle of the rental 

period and could experience a 

disruption of service as a result. In order 

to minimize this possibility, we are 

proposing to apply section 1847(a)(4) 

not only in an area where we implement 

a competitive bidding program for the 

first time, but also in the same area 

when we implement a subsequent 

competitive bidding program. We 

believe this proposal is consistent with 

section 1847(a)(4), which we interpret 

as applying to each competitive bidding 

‘‘program’’ that we implement in an 

area, since each program will be unique 

in terms of bidders, contract suppliers, 

items included in the program, and 

prices. Our proposed policy would 

allow beneficiaries to continue renting 

medically necessary items from their 

existing supplier, even if that supplier 

has lost its contract status under a 

subsequent competitive bidding 

program. 

However, where a supplier that is no 

longer a contract supplier continues to 

furnish a rental item or oxygen and 

oxygen equipment on a grandfathered 

basis, we are proposing that Medicare 

make payment for the item in the 

amount established for that item under 

the new competitive bidding program 

for that area. We believe that section 

1847(a)(4) gives us this discretion, since 

that section only requires us to establish 

a ‘‘process’’ under which these rental 

agreements or supply arrangements 

‘‘may continue’’ but does not specify a 

payment methodology that must be used 

under that process. In addition, we do 

not believe that the alternative, which 

would be to make payment for the item 

under the fee schedule, is reasonable 

since the rental agreement or supply 

arrangement began under a competitive 

bidding program. 

c. Payment for Accessories for Items 

Subject to Grandfathering 

We propose that accessories and 

supplies used in conjunction with an 

item which is furnished under a 

grandfathering process described above 

may also be furnished by the 

grandfathered supplier. Payment would 

be based on the single payment amount 

established for the accessories and 

supplies if the item is oxygen or oxygen 

equipment or one that requires frequent 

and substantial servicing. For 

accessories and supplies used in 

conjunction with capped rental and 

inexpensive or routinely purchased 

items, the payment amounts would be 

based on the fee schedule amounts for 

the accessories and supplies furnished 

prior to the implementation of the first 

competitive bidding program in an area, 

or on the newly established 

competitively bid single payment 

amounts if the items are furnished by a 

grandfathered supplier that was a 

contract supplier for a competitive 

bidding program, but is no longer a 

contract supplier for a subsequent 

competitive bidding program in the 

same area. 

Our proposal is similar to the 

grandfathering approach that was used 

in the DME competitive bidding 

demonstrations in that we paid 

grandfathered suppliers the 

competitively bid amount for certain 

items and the fee schedule amounts for 

other items. We specifically solicit 

comments on our grandfathering 

proposals. 

4. Payment Adjustment to Account for 

Inflation (proposed § 414.408(b)) 

The fee schedule payment amounts 

for DMEPOS items are updated by 

annual update factors described in part 

414, subparts C and D. In general, the 

update factors are established based on 

the percentage change in the CPI–U for 

the 12-month period ending June of 

each year and preceding the calendar 

year to which the update applies. In 

accordance with section 1847(b)(3)(B) of 

the Act, the term of a competitive 

bidding contract may not exceed three 

years. We propose applying an annual 

inflation update to the single payment 

amounts established for a competitive 

bidding program. Specifically, 

beginning with the second year of a 

contract entered into under a 

competitive bidding program, we would 

update the single payment amounts by 

the percentage increase in the CPI–U for 

the 12-month period ending with June 

of the preceding calendar year. Using 

the CPI–U index is consistent with 

Medicare using this index to update the 


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DME fee schedule. This will obviate the 

need for the supplier to consider 

inflation in the cost of business when 

submitting its bids for furnishing 

competitively bid items under a multiyear contract. 

5. Authority To Adjust Payments in 

Other Areas (§ 414.408(e)) 

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

provides authority, effective for covered 

items furnished on or after January 1, 

2009 that are included in a competitive 

bidding program, for us to use the 

payment information determined under 

that competitive bidding program to 

adjust the payment amounts otherwise 

recognized under section 

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

DMEPOS in areas not included in a 

competitive bidding program. Sections 

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

Act provide the same authority for 

orthotic and prosthetic devices, and 

enteral nutrition, respectively. We are 

proposing to use this authority but have 

not yet developed a detailed 

methodology for doing so. Therefore, we 

specifically invite comments and 

recommendations on this issue. We 

believe that our methodology will be 

informed by our experience and 

information gained from the competitive 

bidding programs in 2007 and 2009. 

When submitting recommendations on a 

methodology for using this authority, 

commenters should keep in mind the 

following factors that are likely to be 

incorporated in the methodology: 

• The threshold or amount or level of 

savings that the Medicare program must 

realize for an item or group of items 

before we would use payment 

information from a competitive bidding 

program to adjust payment amounts for 

those items in other areas. 

• Whether adjustments of payment 

amounts in other areas would be on a 

local, regional, or national basis, 

depending on the extent to which the 

single payment amounts and price 

indexes (for example, local prices used 

in calculating the CPI-U) for an item or 

group of items varied across different 

areas of the country. 

• Whether adjustments of payment 

amounts in other areas would be based 

on a certain percentage of the single 

payment amount(s) from the 

competitive bidding area(s). 

We will fully consider all comments 

and recommendations we receive on 

this subject. 

6. Requirement To Obtain Competitively 

Bid Items From a Contract Supplier 

(§ 414.408(f)) 

Beneficiaries often travel to visit 

family members or to reside in a State 

with a warmer climate during the winter 

months. So that these beneficiaries do 

not have to return home to obtain 

needed DMPEOS items, in 

§ 414.408(f)(2)(ii), we are proposing that 

beneficiaries on travel status be allowed 

to obtain items that they would 

ordinarily be required to obtain from a 

contract supplier for their competitive 

bidding area from a supplier that has 

not been awarded a contract to furnish 

items for that area. If the area that the 

beneficiary is visiting is also a 

competitive bidding area and the item is 

subject to the competitive bidding 

program in that area, he or she would 

be required to obtain the item from a 

contract supplier for that area. If the 

area that the beneficiary is visiting is not 

a competitive bidding area, or if the area 

is a competitive bidding area but the 

item needed by the beneficiary is not 

included in the competitive bidding 

program for that area, he or she would 

be required to obtain the item from a 

supplier that has a valid Medicare 

supplier number. In either case, 

payment to the supplier would be paid 

based on the single payment amount for 

the item in the competitive bidding area 

where the beneficiary maintains a 

permanent residence. We propose that if 

a beneficiary is not visiting another area, 

but is merely receiving competitively 

bid items from a supplier located 

outside but near the boundary of the 

competitive bidding area, the proposed 

travel status exemption would not 

apply. We plan to closely monitor the 

programs to ensure that this type of 

abuse or circumvention of the 

competitive bidding process and 

requirements to obtain items from a 

contract supplier does not occur. 

We are also proposing to base claims 

jurisdiction and the payment amount on 

the beneficiary’s permanent residence as 

we have done since the early 1990s with 

the current DMEPOS program under 

§ 421.210(e). Under this proposal, the 

DMERC responsible for the area where 

the beneficiary maintains a permanent 

residence would process all claims 

submitted for items furnished to that 

beneficiary, whether or not the 

beneficiary obtained the item in that 

area. If the beneficiary maintained a 

permanent residence in a competitive 

bidding area and obtained an item 

included in the competitive bidding 

program for that area, Medicare would 

pay the supplier the single payment 

amount for the item determined under 

the competitive bidding program for 

that area. If the beneficiary did not 

maintain a permanent residence in a 

competitive bidding area, Medicare 

would pay the supplier the fee schedule 

amount for the area in which the 

beneficiary maintains a permanent 

residence. We believe that this proposal 

is consistent with our current policy, 

under which suppliers across the 

country are paid the same amount for 

similar products obtained by 

beneficiaries who maintain their 

permanent residence within the same 

geographic area. 

We are proposing that Medicare 

beneficiaries who maintain their 

permanent residence in a competitive 

bidding area be required to obtain 

competitively bid items from a contract 

supplier for that area with the following 

two exceptions: 

• A beneficiary may obtain an item 

from a supplier or a noncontract 

supplier in accordance with the 

competitive bidding program 

grandfathering provisions described in 

section II.C.3. above. 

• A beneficiary who is outside of the 

competitive bidding area where he or 

she maintains a permanent residence 

may obtain an item from a contract 

supplier, if he or she is in another 

competitive bidding area and the same 

item is included under a competitive 

bidding program for that area, or from 

a supplier with a valid Medicare 

supplier number, if he or she is either 

in another competitive bidding area that 

does not include the item in its program 

or is in an area that is not a competitive 

bidding area. 

Unless one of the exceptions 

discussed above applies, Medicare 

would not pay for the item. 

7. Limitation on Beneficiary Liability for 

Items Furnished by Noncontract 

Suppliers (§ 414.408(f)) 

We are proposing that if a noncontract 

supplier located in a competitive 

bidding area furnishes an item included 

in the competitive bidding program for 

that area to a beneficiary who maintains 

a permanent residence in that area, the 

beneficiary would have no financial 

liability to the noncontract supplier 

unless the grandfathering exception 

discussed in section II.C.3. of this 

preamble applies. This rule would not 

apply if the noncontract supplier 

furnished items that are not included in 

the competitive bidding program for the 

area. We are proposing to specially 

designate the supplier numbers of all 

noncontract suppliers so that we will be 

able to easily identify whether a 

noncontract supplier has furnished a 

competitively bid item to a beneficiary 

who maintains a permanent residence 

in a CBA. 


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D. Competitive Bidding Areas 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Competitive Bidding Areas’’ at the 

beginning of your comments.] 

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

requires that competitive bidding 

programs be established and 

implemented in areas throughout the 

United States. We are interpreting the 

term ‘‘United States’’ to include all 

states, territories, and the District of 

Columbia. Section 1847(a)(1)(B) of the 

Act provides us with the authority to 

phase-in competitive bidding programs 

so that the competition under the 

programs occurs in—

• 10 of the largest MSAs in 2007; 

• 80 of the largest MSAs in 2009; and 

• Additional areas after 2009. 

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

authorizes us to phase-in competitive 

bidding programs first among the 

highest cost and volume items or those 

items that we determine have the largest 

savings potential. Our proposed 

methodologies for selecting the MSAs 

for 2007 and 2009 are described in 

section II.D.1. of this preamble. Once 

the MSAs are selected for 2007 and 

2009, we would define the competitive 

bidding areas for 2007 and 2009. The 

process we propose to use in 

establishing competitive bidding areas 

in future years is provided in section 

II.D.2. of this preamble. 

1. Proposed Methodology for MSA 

Selection for 2007 and 2009 

Competitive Bidding Programs 

(§ 414.410) 

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

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

to select from among the largest MSAs 

during the first two implementation 

phases in order to phase-in the 

programs in the most successful way, 

thereby achieving the greatest savings 

while maintaining quality and 

beneficiary access to care. In phasing in 

the competitive bidding programs, we 

would adopt a definition of the term 

‘‘metropolitan statistical area’’

consistent with that issued by the Office 

of Management and Budget (OMB) and 

applicable for the years 2007 and 2009. 

OMB is the Federal agency responsible 

for establishing the standards for 

defining MSAs for the purpose of 

providing nationally consistent 

definitions for collecting, tabulating, 

and publishing Federal statistics for a 

set of geographic areas. OMB most 

recently revised its standards for 

defining MSAs in 2000 (65 FR 82228–

82238). Under these standards, an MSA 

is defined as a core based statistical area 

(a statistical geographic area consisting 

of the county or counties associated 

with at least one core (urbanized area or 

urban cluster) of at least 10,000 

population, plus adjacent counties 

having a high degree of social and 

economic integration as measured 

through commuting ties with the 

counties containing the core) associated 

with at least one urbanized area that has 

a population of at least 50,000, and is 

comprised of the central county or 

counties containing the core, plus 

adjacent outlying counties having a high 

degree of social and economic 

integration with the central county as 

measured through commuting. The 

OMB issues periodic updates of the 

MSAs between decennial censuses 

based on United States Census Bureau 

estimates, but other than identifying 

certain MSAs having a population core 

of at least 2.5 million, does not rank 

MSAs based on population size. The 

U.S. Census Bureau, however, 

periodically publishes a Statistical 

Abstract of the United States, which 

contains a table listing large MSAs, or 

MSAs having a population of 250,000 

and over. For the purpose of this rule, 

we are proposing to use this data to 

identify the largest MSAs. 

In this section, we propose formula 

driven methodology for selecting the 

MSAs for competitive bidding in 2007 

and 2009. After we select the MSAs, we 

would define the competitive bidding 

areas. For the purpose of this section, 

DMEPOS allowed charges are the 

Medicare fee-for-service (FFS) allowed 

charge data for DMEPOS items that we 

have authority to include in a 

competitive bidding program. This data 

does not include Medicare expenditures 

for DMEPOS items under the Medicare 

Advantage Program. 

a. MSAs for 2007 

We propose to use a multiple step 

process in selecting the MSAs for 2007. 

First, we propose to identify the 50 

largest MSAs in terms of total 

population in 2005 using population 

estimates published by the U.S. Census 

Bureau in its table of large MSAs from 

the Statistical Abstract of the United 

States. Second, the 25 MSAs out of the 

50 MSAs identified in step one would 

be eliminated from consideration based 

on our determination that they have the 

lowest totals of DMEPOS allowed 

charges for items furnished in calendar 

year (CY) 2004. This step would allow 

us to focus on the 25 MSAs that have 

the highest totals of DMEPOS allowed 

charges which, we believe, would 

produce a greater chance of savings as 

a result of competitive bidding than 

MSAs with lower total DMEPOS 

allowed charges. For illustration 

purposes only, based on DMEPOS 

allowed charge data for items furnished 

in CY 2003 and Census Bureau 

population estimates as of July 1, 2003, 

the 25 MSAs that would be left for 

consideration after step two is 

completed are shown in Table 1. 

However, we would propose to select 

the actual MSAs for 2007 using U.S. 

Census Bureau population data 

published as of July 1, 2005, and 

DMEPOS allowed charge data for items 

furnished in CY 2004. We would 

propose using population data for 2005 

and DMEPOS allowed charge data for 

2004 since this data will be the most 

recently available data at the time that 

the MSAs are selected for 2007 

implementation. 

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

MSA Allowed charges 

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

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

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

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

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

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

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

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

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

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

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

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

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


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

MSA Allowed charges 

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

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

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

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

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

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

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

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

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

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

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

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

Third, we propose to score the MSAs 

based on combined rankings of 

DMEPOS allowed charges per FFS 

beneficiary (charges per beneficiary) and 

the number of DMEPOS suppliers per 

number of beneficiaries receiving 

DMEPOS items (suppliers per 

beneficiary) in CY 2004, with equal 

weight (50 percent) being given to each 

factor. The MSAs would be ranked from 

1 to 25 in terms of DMEPOS allowed 

charges per FFS beneficiary (for 

example, the MSA with the highest 

DMEPOS allowed charges per FFS 

beneficiary would be ranked number 1). 

Similarly, areas having more suppliers 

per beneficiary are more likely to be 

competitive and would be ranked higher 

than MSAs having fewer suppliers per 

beneficiary. Based on our experience 

from the DMEPOS competitive bidding 

demonstrations, the number of suppliers 

would be based on suppliers with at 

least $10,000 in allowed charges 

attributed to them for DMEPOS items 

furnished in the MSA in CY 2004. The 

number of beneficiaries would be based 

on the number of beneficiaries receiving 

DMEPOS items in the MSA in CY 2004. 

If more than one MSA receives the same 

score, we would propose to use total 

DMEPOS allowed charges for items that 

we have authority to include in a 

competitive bidding in each MSA as the 

tiebreaker since this would be an 

indicator of where more program funds 

would be spent on DMEPOS items 

subject to competitive bidding. Table 2 

illustrates how the 25 MSAs from Table 

1 above would be scored based on data 

for CY 2003. The MSA rankings for 

charges per beneficiary and suppliers 

per beneficiary are listed in parentheses. 

We propose that the final scoring be 

based on utilization data for CY 2004 

and population data for CY 2005. 

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

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

MSA Score Charges per 

beneficiary 

Suppliers per 

beneficiary Allowed charges 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For purposes of phasing-in the 

programs, we would propose to exclude 

from consideration for competitive 

bidding until 2009 the three largest 

MSAs in terms of population, as well as 

any MSA that is geographically located 

in an area served by two DMERCs. The 

three largest MSAs based on total 

population (based on 2003 data) are 

New York, Los Angeles, and Chicago. 

We believe that these MSAs should not 

be phased in until 2009 because of the 


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logistics associated with the start-up of 

this new and complex program. As of 

2000, these three MSAs all had total 

populations of over 9 million. By 

comparison, the largest area in which 

the demonstrations were conducted was 

San Antonio (total population of 1.7 

million in 2000). We want to gain 

experience with the competitive bidding 

process in MSAs larger than San 

Antonio before moving on to the three 

largest MSAs. After we have gained 

experience operating competitive 

bidding programs in CBAs that 

encompass smaller MSAs in 2007 and 

2008, we would propose to implement 

programs that include New York, Los 

Angeles and Chicago in 2009. 

However, we are considering an 

alternative under which we would 

establish CBAs that include portions of 

one or more of these MSAs (for 

example, by county). We believe that 

this alternative is authorized by section 

1847(a)(1)(B)(II), which states that 

competition under the programs shall 

occur in 80 of the largest MSAs in 2009 

but does not require the competition to 

occur in the entire MSA. In addition, 

section 1847 does not prohibit us from 

implementing a competitive bidding 

program in an area that is larger than a 

MSA. We welcome comments on these 

alternatives. 

We are proposing not to include 

competitive bidding areas that cross 

DMERC regions because this could 

complicate implementation by having 

two DMERCs processing claims from 

one competitive bidding area. 

The next step we propose would 

entail ensuring that there is at least one 

competitive bidding area in each 

DMERC region by first selecting the 

highest scoring MSA in each DMERC 

region (other than New York, Los 

Angeles, Chicago, or MSAs that cross 

DMERC boundaries). This would ensure 

that each DMERC gains some experience 

with competitive bidding prior to 2009, 

when competitive bidding would be 

implemented in CBAs that include 

eighty MSAs. We would also propose to 

select no more than two MSAs per State 

among the initial competitive bidding 

areas selected for 2007 in order to learn 

how competitive bidding works in more 

states and regions of the country. In 

summary, we are proposing to select the 

ten MSAs in which competition under 

the programs would occur in 2007 using 

the following steps: 

• Identify the top 50 MSAs in terms 

of general population. 

• Focus on the 25 MSAs from step 

one with the greatest total of DMEPOS 

allowed charges. 

• Score the MSAs from step two 

based on combined rankings of 

DMEPOS allowed charges per 

beneficiary and suppliers per 

beneficiary, with lower scores 

indicating a greater potential for savings 

if programs are implemented in those 

areas. 

• Exclude the 3 largest MSAs in terms 

of population (New York, Los Angeles, 

Chicago) and any MSA that crosses 

DMERC boundaries. 

• Select the lowest scoring MSA from 

each DMERC region. 

• Select the next 6 lowest scoring 

MSAs regardless of DMERC region, but 

not more than 2 MSAs from 1 State. 

• Break ties in scores using DMEPOS 

allowed charges, selecting MSAs with 

higher total DMEPOS allowed charges. 

There are a number of alternative 

methods for selecting the MSAs for 2007 

that we considered. The MSAs could 

have been selected based on a 

combination of one or more variables or 

measures including, but not limited to—

• General population; 

• Medicare FFS beneficiary 

population; Number of beneficiaries 

receiving DMEPOS items that we have 

authority to include in a competitive 

bidding; Total Medicare allowed 

charges for DMEPOS items subject to 

competitive bidding; and 

• Number of suppliers of DMEPOS 

items that we have authority to include 

in a competitive bidding program. 

In evaluating this alternative, we 

defined the general population as all 

individuals residing in an MSA, 

whether or not they were enrolled in 

Medicare. One advantage of this 

variable is that total population is a 

widely accepted measure of gauging 

MSA size and the data are readily 

accessible to the general public through 

the U.S. Census Bureau webpage. 

Another advantage of this option is that 

total population takes into account the 

demand for DMEPOS items and other 

supplies from population groups other 

than the Medicare population. DMEPOS 

demand from non-Medicare individuals 

might make it less likely that a supplier 

not selected for competitive bidding 

would exit the market. This could help 

increase the likelihood of competition 

in future rounds of competitive bidding 

within that MSA. However, we 

recognize that the MSAs with the largest 

total populations may not have the most 

Medicare beneficiaries or the greatest 

potential for savings. One reason is that 

the age distribution is not uniform 

across MSAs. MSAs located in states 

that have either large immigrant 

populations or have experienced rapid 

recent growth often have younger than 

average age profiles. Another reason is 

that DMEPOS utilization and potential 

profits are not uniform across MSAs. It 

is quite possible that some of the 

smaller population MSAs may have a 

greater potential for savings than MSAs 

with much larger populations. We 

believe that the disadvantages of 

selecting MSAs based on general 

population are greater than the 

advantages of using this method and, 

therefore, do not propose using general 

population as the sole variable in 

selecting the MSAs for 2007. 

An advantage of selecting MSAs 

based on the Medicare FFS population 

is that this population represents the 

number of individuals who could 

potentially be affected by competitive 

bidding. A disadvantage of selecting 

MSAs based solely on this variable is 

that it does not reflect actual DMEPOS 

utilization; therefore, we do not propose 

using FFS population as the sole 

variable in selecting the MSAs for 2007. 

Per capita DMEPOS utilization rates 

vary across MSAs. As a result, MSAs 

with fewer Medicare beneficiaries could 

have a greater potential for savings from 

competitive bidding. The advantage of 

using the number of Medicare 

beneficiaries receiving DMEPOS items 

to select the MSAs is that MSAs would 

be selected based on the number of 

individual beneficiaries that are most 

likely to be directly affected by 

competitive bidding because they 

already have a need for these items. A 

disadvantage of this option is that the 

number of specific beneficiaries 

receiving DMEPOS items is only a static 

measure. The number of beneficiaries 

who would be receiving DMEPOS 

products in the future could be 

substantially different from the current 

number. Treatment patterns within the 

MSA could change or the number of 

beneficiaries receiving DMEPOS items 

could fluctuate if beneficiaries switch 

from FFS to a Medicare Advantage plan. 

For these reasons, we do not propose 

using number of beneficiaries receiving 

DMEPOS items as the sole variable in 

selecting the MSAs for 2007. 

Selecting the MSAs using the steps 

we propose utilizes a variety of 

variables that we believe will help us 

predict which MSAs will offer the 

largest savings potential under a 

competitive bidding program. In step 2 

above, we would focus on a subset of 

large MSAs with higher allowed charges 

for DMEPOS items, which is consistent 

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

which would allow us to phase in the 

Medicare DMEPOS Competitive Bidding 

Program first for those items that have 

the highest cost and highest volume, or 

those items that have the largest savings 

potential. This step would directly 

address the question of which MSAs 

have the highest costs. In step 3 above, 


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we would use allowed DMEPOS charges 

per beneficiary and the number of 

suppliers per beneficiary to further 

measure the savings potential for each 

MSA. Allowed DMEPOS charges per 

beneficiary is a measure of per capita 

DMEPOS utilization in terms of the 

overall DMEPOS cost per beneficiary. 

We believe that areas with higher 

utilization rates and costs would have a 

greater potential for savings under the 

programs, which will rely on 

competition among suppliers to lower 

costs in the area. Competition among 

suppliers is necessary for competitive 

bidding to be successful. Without 

sufficient competition among suppliers, 

suppliers have little incentive to submit 

low bids in response to the request for 

bids for DMEPOS products. In addition, 

we believe that competition for market 

share among winning suppliers will act 

as a market force to maintain a high 

level of quality products. The number of 

suppliers per beneficiary is a direct 

measure of how many suppliers are 

competing for each beneficiary’s 

business. We expect that the higher the 

number of suppliers per beneficiary, the 

higher the degree of competition will be. 

We welcome comments about the 

selection method for the original ten 

MSAs in 2007. We welcome 

recommendations of other options and 

criteria for consideration. After further 

consideration of comments, in the final 

rule, we may adopt other criteria 

regarding issues described above or 

other criteria and options brought to our 

attention through the comment process. 

b. MSAs for 2009 

In selecting the 70 additional MSAs in 

which competition will occur in 2009, 

we propose using generally the same 

criteria used to select the MSAs for 

2007. Since the number of MSAs in 

which competition must occur in 2009 

is much higher than the number for 

2007, the steps in the selection process 

would change as follows: 

• We would score all of the MSAs 

included in the table of large MSAs in 

the most recent publication of the U.S. 

Census Bureau s Statistical Abstract of 

the United States. 

• We would propose using the same 

criteria to score the MSAs as we would 

use in selecting the MSAs for 2007, but 

use data from CY 2006. 

One option we are considering and on 

which we are requesting comments is 

whether we should modify the ranking 

of MSAs based on allowed DMEPOS 

charges per beneficiary so that it focuses 

on charges in each MSA for the items 

that experienced the largest payment 

reductions or savings under the initial 

round of competitive bidding in 2007. 

In selecting the MSAs for 2009, we do 

not propose excluding the 3 largest 

MSAs in terms of population size or 

MSAs that cross DMERC boundaries 

from the 80 largest MSAs to be included 

in the CBAs. In addition, we do not 

propose limiting the number of MSAs 

that can be selected from any one state. 

2. Establishing Competitive Bidding 

Areas (§ 414.410) 

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

that we phase in competitive bidding 

programs and establish competitive 

bidding areas throughout the United 

States over several years beginning in 

2007. Section 1847(a)(3) of the Act gives 

us the authority to ‘‘exempt rural areas 

and areas with low population density 

within urban areas that are not 

competitive, unless there is a significant 

national market through mail order for 

a particular item.’’ Our proposed 

methodology for establishing 

competitive bidding areas under the 

Medicare DMEPOS Competitive Bidding 

Program is presented below. 

a. Authority To Exempt Rural Areas and 

Areas With Low Population Density 

Within Urban Areas (§ 414.410(c)) 

Section 1847(a)(3) of the Act allows 

us to exempt from the Medicare 

DMEPOS Competitive Bidding Program 

rural areas and areas with low 

population density within urban areas 

that are not competitive, unless there is 

a significant national market through 

mail order for a particular item. We 

propose to use this authority to exempt 

areas from competitive bidding if data 

for the areas indicate that they are not 

competitive based on a combination of 

the following indicators: 

• Low utilization of items in terms of 

number of items and/or allowed charges 

for DMEPOS in the area relative to other 

similar geographic areas. 

• Low number of suppliers of 

DMEPOS items subject to competitive 

bidding serving the area relative to other 

similar geographic areas; and/or 

• Low number of Medicare FFS 

beneficiaries in the area relative to other 

similar geographic areas. 

We would propose to make decisions 

regarding what constitutes low (noncompetitive) levels of utilization, 

suppliers, and beneficiaries on the basis 

of our analysis of the data for allowed 

charges, allowed services for items that 

may be subject to competitive bidding, 

and the number of Medicare FFS 

beneficiaries and DMEPOS suppliers in 

specific geographic areas. In defining 

urban and rural areas, we propose to use 

the definitions currently in 

§ 412.64(b)(1)(ii) of the regulations. 

We invite comments on the 

methodologies we have proposed for 

determining whether an area within an 

urban area that has a low population 

density is not competitive. We will be 

reviewing the total allowed charges, 

number of beneficiaries, and number of 

suppliers to determine whether a rural 

area should be exempted from 

competitive bidding. In addition, we 

also are inviting comments on standards 

for exempting particular rural areas 

from competitive bidding. 

b. Establishing the Competitive Bidding 

Areas for 2007 and 2009 (§ 414.410(b)) 

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

requires that the competition ‘‘occurs 

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

in 80 of the largest MSAs in 2009, but 

does not require us to define the 

competition boundaries concurrently 

with the MSA boundaries, as long as 10 

MSAs are involved in 2007 and 80 

MSAs are involved in 2009. Therefore, 

we do not believe that section 

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

from extending individual competition 

areas beyond the MSA boundaries in 

2007 or 2009. We propose that an area 

(for example, a county, parish, zip code, 

etc.) outside the boundaries of an MSA 

be considered for inclusion in a 

competitive bidding area for 2007 and/ 

or 2009 if all of the following apply: 

• The area adjoins an MSA in which 

a competitive bidding program will be 

operating in 2007 or 2009. 

• The area is not part of an MSA in 

which a competitive bidding program 

will be operating in 2007 or 2009. 

• The area is competitive, as 

explained below. 

• The area is part of the normal 

service area or market for suppliers who 

also serve the MSA market or areas 

within the boundaries of an MSA in 

which a competitive bidding program 

will be operating in 2007 or 2009. 

As explained in section D.1. above, 

we are defining an MSA as a core based 

statistical area associated with at least 

one urbanized area that has a 

population of at least 50,000, and 

comprised of the central county or 

counties containing the core, plus 

adjacent outlying counties having a high 

degree of social and economic 

integration with the central county as 

measured through commuting. 

However, when using this definition to 

establish the boundaries of an MSA, the 

OMB would not consider whether an 

area or areas adjoining an MSA are 

served by the same DMEPOS suppliers 

that furnish items to beneficiaries 

residing in the MSA. If an area has a 

high level of utilization, significant 

expenditures, and/or a large number of 


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suppliers of DMEPOS items included in 

the competitive bidding program for the 

adjoining MSA, we believe that it would 

be practical and beneficial to include 

this area in the competitive bidding 

area. The savings to the program 

associated with adding the area to the 

competitive bidding area would likely 

offset any incremental administrative 

costs incurred by the implementation 

contractor associated with including the 

area in the competitive bidding program 

for the MSA. Finally, we are not 

proposing to consider counties that do 

not adjoin an MSA for inclusion in a 

competitive bidding area for 2007 or 

2009 because we believe that these 

outlying counties are too far removed 

from the areas that OMB has determined 

to be economically integrated. We are 

proposing that we have the discretion to 

define a CBA to be either concurrent 

with an MSA, larger than an MSA, or 

smaller than an MSA. We will detail in 

the request for bids the exact boundaries 

of each CBA. We invite comments on 

the criteria to be used in considering 

whether to include counties outside 

MSAs in a competitive bidding area in 

2007 or 2009. 

c. Nationwide or Regional Mail Order 

Competitive Bidding Program 

(§ 414.410(d)(2)) 

Our data shows that a significant 

percentage of certain items such as 

diabetic testing supplies (blood glucose 

test strips and lancets) are furnished to 

beneficiaries by national mail order 

suppliers. Therefore, we propose to 

establish a nationwide or regional 

competitive bidding program, effective 

for items furnished on or after January 

1, 2010, for the purpose of awarding 

contracts to suppliers to furnish these 

items across the nation or region to 

beneficiaries who elect to obtain them 

through the mail order outlet. The 

national or regional competitive bidding 

areas under this program would be 

phased in after 2009, and payment 

would be based on the bids submitted 

and accepted for the furnishing of items 

through mail order throughout the 

nation or region. Suppliers that furnish 

these items through mail order on either 

a national or regional basis would be 

required to submit bids to participate in 

any competitive bidding program 

implemented for the furnishing of mail 

order items. 

We propose that prior to the 

establishment of a nationwide or 

regional competitive bidding program in 

2010, mail order suppliers would be 

eligible to submit bids for furnishing 

items in one or more of the CBAs we 

establish for purposes of the 2007 and 

2009 implementation phases. In 

addition, beginning with programs 

implemented in 2010, mail order 

suppliers would be eligible to submit 

bids in one or more CBAs to furnish 

items that are not included in a 

nationwide or regional competitive 

bidding program. National or regional 

mail order suppliers would be required 

to submit bids and be selected as 

contract suppliers for each CBA in 

which they seek to furnish these items. 

They would, however, have the choice 

of either submitting the same bid 

amounts for each CBA or submitting 

separate bids. 

For items that are subject to a 

nationwide or regional mail order 

competitive bidding program, we 

propose that suppliers who furnish 

these same items in the local market and 

do not furnish them via mail order 

would not be required to participate in 

the national or regional mail order 

competitive bidding program. However, 

we would only allow these suppliers to 

continue furnishing the items in areas if 

they were selected as a contract 

supplier. 

We propose to allow these non-mail 

order suppliers to continue furnishing 

these items in areas subject to a 

competitive bidding program if the 

supplier has been selected as a contract 

supplier. When furnishing items to 

beneficiaries that do not maintain a 

permanent residence in a competitive 

bidding area, non-mail order suppliers 

would be paid based on the payment 

amount applicable to the area where the 

beneficiary maintains his or her 

permanent residence. 

In its September 2004 report (GAO–

04–765), the GAO recommended that 

we consider using mail delivery for 

items that can be provided directly to 

beneficiaries in the home as a way to 

implement a DMEPOS competitive 

bidding strategy. We are asking for 

comments on our proposal to 

implement this recommendation, as 

well as for comments on the types of 

items that would be suitable for a mail 

order competitive bidding program. In 

addition, we are requesting public 

comment on an alternative that would 

require replacement of all supplies such 

as test strips and lancets for Medicare 

beneficiaries to be furnished by mail 

order suppliers under a nationwide or 

regional mail order program. For 

example, there are services paid under 

the physician fee schedule that are 

associated with the furnishing of blood 

glucose testing equipment (for example, 

home blood glucose monitors) such as 

training, education, assistance with 

product selection, maintenance and 

servicing, that do not relate to the 

furnishing of replacement supplies used 

with the equipment. Once the brand of 

monitor has been selected by the 

patient, the services associated with 

furnishing the supplies must be 

provided on a timely basis and the 

patient must receive the brand of test 

strips needed for his or her monitor. We 

invite public comment on whether the 

service of furnishing replacement test 

strips, lancets or other supplies can 

easily, effectively, and conveniently be 

performed by national mail order 

suppliers. 

d. Additional Competitive Bidding 

Areas After 2009 (§ 414.410(d)) 

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

requires that competition under the 

Medicare DMEPOS Competitive Bidding 

Program occur in additional areas after 

2009. Beginning in 2010, we would 

designate through program instructions 

additional competitive bidding areas 

based on our determination that the 

implementation of a competitive 

bidding program in a particular area 

would be likely to result in significant 

savings to the Medicare program. 

E. Criteria for Item Selection 

If you choose to comment on issues in 

this section, please include the caption 

‘‘Criteria for Item Selection’’ at the 

beginning of your comments.≤ 

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

the items subject to competitive bidding 

as follows: 

• Durable Medical Equipment and 

Medical Supplies—Covered items (as 

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

Act) for which payment would 

otherwise be made under section 

1834(a) of the Act, including items used 

in infusion and drugs (other than 

inhalation drugs) and supplies used in 

conjunction with DME, but excluding 

class III devices under the Federal Food, 

Drug, and Cosmetic Act. 

• Other Equipment and Supplies 

(enteral nutrition, equipment and 

supplies)—items described in section 

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

parenteral nutrients, equipment, and 

supplies. 

• Off-The-Shelf (OTS) Orthotics—

orthotics described in section 1861(s)(9) 

of the Act for which payment would 

otherwise be made under section 

1834(h) of the Act, which require 

minimal self-adjustment for appropriate 

use and do not require expertise in 

trimming, bending, molding, 

assembling, or customizing to fit the 

individual. 

We are proposing that minimal selfadjustment would mean adjustments 

that the beneficiary, caretaker for the 

beneficiary, or supplier of the device 

can perform without the assistance of a 


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certified orthotist (that is, an individual 

certified by either the American Board 

for Certification in Orthotics and 

Prosthetics, Inc. or the Board for 

Orthotist/Prosthetist Certification). By 

contrast, we would consider any 

adjustments that can only be made by a 

certified orthotist to be adjustments that 

require an expertise in trimming, 

bending, molding, assembling, or 

customizing to fit the individual. We are 

proposing to consult with a variety of 

individuals including experts in 

orthotics to determine which items and/ 

or HCPCS codes would be classified as 

OTS orthotics. We welcome comments 

on a process for identifying OTS 

orthotics subject to competitive bidding. 

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

gives us the authority to phase in 

competitive bidding ‘‘first among the 

highest cost and highest volume items 

or those items that the Secretary 

determines have the largest savings 

potential.’’ In addition, section 

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

authority to exempt items for which the 

application of competitive bidding is 

not likely to result in significant 

savings. In exercising this authority, we 

propose to exempt items outright or on 

an area by area basis using area-specific 

utilization data. For example, if we 

found that utilization (that is, allowed 

services or allowed charges) for 

commode chairs was low (or the 

number of commode chair suppliers 

was low) in a given area compared to 

other areas, we might choose to exempt 

commode chairs from the competitive 

bidding program in the CBA where 

significant savings would not be likely 

while including commode chairs in the 

competitive bidding programs for other 

CBAs. This decision would be based on 

area-specific utilization data. 

We are proposing to use the authority 

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

the Act to phase in only those items that 

we determine are among the highest 

cost and highest volume items during 

each phase of the Medicare DMEPOS 

Competitive Bidding Program. In 

section II.F. of this preamble, we 

propose to conduct competitive bidding 

for product categories that would be 

described in each RFB. Suppliers will 

submit a separate bid for each item 

under a defined product category, 

unless specifically excluded in the RFB. 

We propose to include a ‘‘core’’ set of 

product categories in each competitive 

bidding area. We may elect to phase in 

some individual product categories in a 

limited number of competitive bidding 

areas in order to test and learn about 

their suitability for competitive bidding. 

Because we have not yet identified 

the product categories for competitive 

bidding, we are using policy groups 

developed by the statistical analysis 

durable medical equipment regional 

carrier (SADMERC) for purposes of 

illustration. The SADMERC has defined 

a set of 64 DMERC policy groups for 

analytical purposes in its role as the 

statistical analysis contractor for 

DMEPOS. A policy group is a set of 

HCPCS codes that describe related items 

that are addressed in a DMERC medical 

review policy. For example, the policy 

group, oxygen and supplies, consists of 

approximately 20 HCPCS codes. 

Although the product categories subject 

to competitive bidding will not 

necessarily correspond to these policy 

groups, we present data for these policy 

groups and items contained in these 

policy groups for the purpose of 

identifying the highest cost and highest 

volume DMEPOS items that may be 

subject to competitive bidding. In other 

words, we propose using SADMERC 

data for ‘‘policy groups’’ to identify 

groups of items we will consider 

phasing in first under the competitive 

bidding programs, but the actual 

‘‘product categories’’ for which we 

would request bids could be a subset of 

items from a ‘‘policy group’’ or a 

combination of items from different 

‘‘policy groups.’’ The highest volume 

items (HCPCS codes) fall into a 

relatively small number of policy groups 

as illustrated in Table 3. 

TABLE 3.—2003 HIGH VOLUME ITEMS

[HCPCS Codes] 

HCPCS Allowed charges Product description Product group 

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

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

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

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

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

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

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

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

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

E0601 .......................... 123,865,463 Continuous positive airway pressure device 

(CPAP).

CPAP Devices. 

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

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

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

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

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

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

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

K0538* ......................... 65,603,531 Negative pressure wound therapy electrical 

pump.

Negative Pressure Wound Therapy (NPWT) 

Devices. 

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

feature.

Respiratory Assist Devices. 

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

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

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

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

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

* Due to HCPCS coding changes made since 1993, the descriptions or code numbers for several codes above have been modified. We expect 

that power wheelchairs (K0011) will be billed under several new HCPCS codes in the near future. 


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Because we propose that we will 

conduct competitive bidding for items 

grouped into product categories, we will 

consider DMEPOS allowed charges and 

volume at the product category level for 

the purpose of selecting which items to 

phase in first under the competitive 

bidding programs. The table below 

provides data for the top 20 policy 

groups based on Medicare allowed 

charges for the items within each policy 

group that we may choose to include in 

a competitive bidding program. Data 

from the SADMERC for claims received 

in 2003 is used for all policy groups 

except those for nebulizers and OTS 

orthotics. For the nebulizer and OTS 

orthotics groups, data is included from 

the CMS BESS (Part B Extract and 

Summary System) database for items 

furnished in 2003. The percentage of 

total allowed Medicare charges for 

DMEPOS that each policy group makes 

up is included in Table 4. 

TABLE 4.—2003 DMEPOS ALLOWED CHARGES BY POLICY GROUP

Rank Policy group 2003 Percent of 

DMEPOS 

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

2 ............................. Wheelchairs/POVs** ............................................................................................... 1,926,210,675 16.9 

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

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

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

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

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

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

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

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

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

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

13 ........................... NPWT Devices ........................................................................................................ 88,530,828 0.8 

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

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

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

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

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

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

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

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

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

* Data is from BESS (Date of Service). Data for orthoses policy groups excludes data for custom fabricated orthotics, but may include data for 

other items that will not be considered OTS orthotics. 

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

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

provides that the items we phase in first 

under competitive bidding may include 

products having the greatest potential 

for savings. We are proposing to use a 

combination of the following variables 

when making determinations about an 

item’s potential savings as a result of the 

application of competitive bidding. 

• Annual Medicare DMEPOS 

Allowed Charges 

• Annual Growth in Expenditures 

• Number of Suppliers 

• Savings in the DMEPOS 

Demonstrations 

• Reports and Studies 

Items with high allowed charges or 

rapidly increasing allowed charges 

would be our highest priority in 

selecting items for competitive bidding. 

The number of suppliers furnishing a 

particular item or group of items would 

also be an important variable in 

identifying items with high savings 

potential. We believe that a relatively 

large number of suppliers for a 

particular group of items would likely 

increase the degree of competition 

among suppliers and increase the 

probability that suppliers would 

compete on quality for business and 

market share. We saw evidence in the 

competitive bidding demonstrations 

that products furnished by a large 

number of suppliers had large savings 

rates and fewer problems with quality. 

We understand that having a large 

number of suppliers is not always a 

necessary condition for competition. A 

competitive bidding area could be more 

concentrated and less competitive than 

the number of suppliers would predict 

if the market is dominated by only a few 

suppliers and the remaining suppliers 

have only minimal charges. 

The DMEPOS demonstration took 

place from 1999 to 2002 in two MSAs: 

Polk County, Florida and San Antonio, 

Texas. Five product categories 

containing items we might include in 

the Medicare DMEPOS Competitive 

Bidding Program were included in at 

least one round of the DMEPOS 

demonstration: Oxygen equipment and 

supplies; hospital beds and accessories; 

enteral nutrition; wheelchairs and 

accessories; and general orthotics. 

The demonstration results provide 

useful information because they are 

based on actual Medicare competitive 

bidding and the amounts suppliers 

actually were willing to accept as 

payment from Medicare. However, we 

recognize that these results should be 

used with caution. The demonstration 

occurred more than three years ago and 

the fee schedule has changed as a result 

of certain provisions in the MMA, such 

as, section 302(c)(2) (codified at 

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

that CMS adjust the fee schedules for 

certain items based on a comparison to 

other payers such as the Federal 

employee health plan (FEHP). 

The Office of Inspector General (OIG) 

and the GAO frequently conduct studies 

that analyze the extent to which 

Medicare overpays for specific items, 

and we believe that these studies could 

assist with determining the saving 

potential for an item(s) if it were 

included in competitive bidding. 

Examples of relevant studies from the 

OIG include the following: 


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• Medicare Allowed Charges for 

Orthotic Body Jackets, March 2000 

(OEI–04–97–00391); 

• Medicare Payments for Enteral 

Nutrition, February 2004 (OEI–03–02–

00700); and 

• A Comparison of Prices for Power 

Wheelchairs in the Medicare Program, 

April 2004 (OEI–03–03–00460). 

In addition, CMS and the DMERCs 

obtain retail pricing information for 

items in the course of establishing fee 

schedule amounts and considering 

whether payment adjustments are 

warranted for items using the inherent 

reasonableness authority in section 

1842(b)(8) of the Act. We could use 

these studies to identify products where 

CMS pays excessively and where we 

could potentially achieve savings. 

Excessive payments are only one 

factor to consider when evaluating 

whether savings will be realized by the 

application of competitive bidding to an 

item. However, these studies do offer us 

a guide regarding which items may have 

the greatest potential for savings. We 

also recognize that some studies are 

older than others and that recent MMA 

and FEHP reductions in fees may affect 

the results of these studies. 

F. Submission of Bids Under the 

Competitive Bidding Program (Proposed 

§ 414.412) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Submission of Bids Under the 

Competitive Bidding Program’’ at the 

beginning of your comments.] 

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

the Act state that payment will not be 

made for items furnished under a 

competitive bidding program unless the 

supplier has submitted a bid to furnish 

those items and has been selected as a 

contract supplier. Therefore, in order for 

a supplier that furnishes competitively 

bid items in a competitive bidding area 

to receive payment for those items, the 

supplier must have submitted a bid to 

furnish those particular items and must 

have been awarded a contract to do so 

by CMS. There are limited exceptions to 

this requirement for beneficiaries who 

reside in a competitive bidding area but 

are out of the area and need items. 

There is also an exception for suppliers 

that are grandfathered to continue to 

provide and service certain items, as 

discussed in section II.C.3. of this 

preamble. 

1. Providers (Proposed § 414.404, 

§ 414.422) 

We are proposing that providers that 

furnish Part B items and are located in 

a competitively bidding area and are 

also DMEPOS suppliers, must submit 

bids in order to furnish competitively 

bid items to Medicare beneficiaries. 

Providers that are not awarded contracts 

must use a contract supplier to furnish 

these items to the Medicare 

beneficiaries to whom they provide 

services. However, a skilled nursing 

facility (SNF) defined in section 1819(a) 

of the Act would not be required to 

furnish competitively bid items to 

beneficiaries outside of the SNF, if it 

elected not to function as a commercial 

supplier. This is consistent with the 

current practice of some SNFs to furnish 

Part B services only to their own 

residents. 

2. Physicians (Proposed § 414.404, 

§ 414.422) 

We are proposing that physicians that 

are also DMEPOS suppliers must submit 

bids and be awarded contracts in order 

to furnish items included in the 

competitive biding program for the area 

in which they provide medical services. 

Physicians that do not become contract 

suppliers must use a contract supplier 

to furnish competitively bid items to 

their Medicare patients. However, they 

will not be required to furnish these 

items to beneficiaries who are not their 

patients if they choose not to function 

as commercial suppliers. In proposing 

this policy for physicians who are also 

DMEPOS suppliers, we recognize that 

the physician self-referral law (section 

1877 of the Act) generally prohibits 

physicians from furnishing to their 

office patients a variety of common 

DMEPOS items. Physicians who choose 

to participate in the competitive bidding 

process must ensure that their 

arrangements for referring for and 

furnishing DMEPOS items under a 

competitive bidding program comply 

with the physician self-referral law as 

well as any other Federal or State law 

or regulation governing billing or claims 

submission. 

We have established a Web site where 

requests for bids (RFBs) and other 

pertinent program information will be 

posted, and we plan to alert the supplier 

community by e-mail of all postings on 

this site. In addition, we will be 

providing education and outreach to 

suppliers on requirements for 

submitting RFBs. Suppliers must fully 

complete the RFB in order to be 

considered for participation in a 

competitive bidding program. The RFBs 

will require suppliers to complete at a 

minimum such documents as an 

application, bidding sheet, bank and 

financial information and referral source 

references. We will establish an 

administrative process to ensure that all 

information that the supplier submitted 

is accurately captured and considered in 

the bid evaluation process. This process 

will ensure that all the information 

submitted by the supplier is included as 

part of the bid evaluation process. 

We considered requiring all suppliers 

to be physically located within a 

competitive bidding area in order to 

submit a bid to furnish items in that 

area. However, we feel that this 

requirement would be too proscriptive. 

We believe that suppliers that are 

located outside of a competitive bidding 

area, but do business in the competitive 

bidding area and are able to service 

beneficiaries residing within the CBA 

should be permitted to submit bids and 

participate in the competitive bidding 

program for that area. 

3. Product Categories for Bidding 

Purposes (Proposed § 414.412) 

We propose to conduct bidding for 

items that are grouped into product 

categories. Suppliers would be required 

to submit a separate bid for all items 

that we specify in a product category. 

The submitted bid must include all 

costs related to the furnishing of each 

item such as delivery, set-up, training, 

and proper maintenance for rental 

items. However, suppliers would only 

be required to submit bids for the 

product categories that they are seeking 

to furnish under the program. All items 

that would be included in a product 

category for bidding purposes would be 

detailed in the RFB. We propose to 

define the term ‘‘product category’’ as a 

group of similar items used in the 

treatment of a related medical condition 

(for example, hospital beds and 

accessories). We believe that the use of 

product categories will allow Medicare 

beneficiaries to receive all of their 

related products (for example, hospital 

beds and accessories) from one supplier, 

which will minimize disruption to the 

beneficiary. 

There were other design options that 

we considered but did not propose. One 

option was to require suppliers to 

submit a bid for all items in every 

defined product category. Another 

option was for suppliers to bid at the 

HCPCS level and submit a bid only for 

the individual items that they were 

seeking to furnish under the program. 

There are currently approximately 55 

separate policy groups already 

established by the DMERCs. However, 

these policy groups were not established 

for the purpose of competitive bidding. 

We are proposing to specifically 

develop product categories for the 

purpose of competitive bidding. We 

anticipate that the product categories 

will range from Breast Prosthesis, 

Dialysis Equipment and Supplies, to 

Oxygen and Power Wheelchairs. Each 


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group would be defined and comprised 

of individual HCPCS codes. 

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

us the authority to exempt items for 

which the application of competitive 

bidding is unlikely to result in 

significant savings. We would propose 

not to include items in a product 

category if they are rarely used or billed 

to the program. In addition, we would 

not include items within a product 

category if we believed that these were 

items for which we might not realize a 

savings. Therefore, under this approach, 

we propose to establish product 

categories to identify those items 

included in competitive bidding and 

may establish different product 

categories from one CBA to another, as 

well as in different rounds of 

competitive bidding in the same CBA. 

We chose to allow suppliers to submit 

bids only for the product categories they 

are seeking to furnish under a 

competitive bidding program because 

this option accommodates DMEPOS 

suppliers who want to specialize in one 

or a few product categories. For 

example, if a supplier wants to 

specialize in the treatment of respiratory 

conditions, the supplier can choose to 

bid on all items that fall within the 

Oxygen product category, the 

Continuous Positive Airway Pressure 

product category, or the Respiratory 

Assist Device product category. We 

believe that specialization at the 

product category level will make it 

easier for referral agents (entities that 

refer beneficiaries to health care 

practitioners or suppliers to obtain 

DMEPOS items) and other practitioners 

to order related products from the same 

supplier. 

Establishing a bidding process that 

promotes specialization would allow 

suppliers to realize economies of scope 

within a product category, which means 

that a supplier may be able to furnish 

a bundle of items at a lower cost than 

it can produce each individual item. 

This approach is also more favorable to 

small suppliers because they can choose 

to specialize in only one product 

category. It would be more difficult for 

a small supplier rather than a large 

supplier to furnish all product 

categories. This approach is also more 

convenient for Medicare beneficiaries, 

as they can choose to receive all their 

related supplies from one supplier and 

would not have to deal with multiple 

suppliers to obtain the proper items for 

their condition. We recognize the 

importance of the relationship between 

a DMEPOS supplier and the Medicare 

beneficiary. The supplier delivers the 

item to the beneficiary, sets up the 

equipment and also educates the 

beneficiary on the proper use of the 

equipment. The use of product 

categories will facilitate the transition 

for those beneficiaries who have to 

change suppliers. It is also our goal to 

establish a productive relationship 

between the supplier and the 

beneficiary, and we believe we can 

accomplish this goal by designing the 

competitive bidding program so the 

beneficiary has the option of selecting 

one supplier that would be responsible 

for the delivery of all medically 

necessary items that fall within a 

product category. 

4. Bidding Requirements (§ 414.408) 

In preparing a bid in response to the 

request for bids, we would propose that 

suppliers look to our existing 

regulations at part 414, subparts C and 

D to determine whether a rental or 

purchase payment would be made for 

the item and whether other 

requirements would apply to the 

furnishing of that item, as further 

explained below. 

a. Inexpensive or Other Routinely 

Purchased DME Items 

The current fee schedule amounts for 

these items are based on average 

reasonable charges for the purchase of 

new items, purchase of used items, and 

rental of items from July 1, 1986 through 

June 30, 1987. In those cases where 

reasonable charge data from 1986/87 is 

not available, the fee schedule amounts 

for the purchase of new items are 

generally based on retail purchase 

prices deflated to the 1986/1987 base 

period by the percentage change in the 

CPI–U, the fee schedule amounts for the 

purchase of used items are generally 

based on 75 percent of the fee schedule 

amounts for the purchase of new items, 

and the fee schedule amounts for the 

monthly rental of items are generally 

based on 10 percent of the fee schedule 

amounts for purchase of new items. 

This method of establishing fee 

schedule amounts in the absence of 

reasonable charge data has been in use 

since 1989. Under the Medicare 

DMEPOS Competitive Bidding Program, 

we propose that bids be submitted only 

for the furnishing of new items in this 

category that are included in a 

competitive bidding program. Based on 

the bids submitted and accepted for 

these new items, we would propose to 

also calculate a single payment amount 

for used items based on 75 percent of 

the single payment amount for new 

items. In addition, we would propose to 

calculate a single payment amount for 

the rental of these items based on 10 

percent of the single payment amount 

for new items. We believe that 

calculating single payment amounts for 

used items and items rented on a 

monthly basis based on bids submitted 

and accepted for new items will 

simplify the bidding process and will 

not create problems with access to used 

items or rented items in this category. 

b. DME Items Requiring Frequent and 

Substantial Servicing 

We propose that bids be submitted for 

the monthly rental of items in this 

payment category with the exception of 

continuous passive motion exercise 

devices. We propose that bids be 

submitted for the daily rental of 

continuous passive motion exercise 

devices. For items in this category other 

than continuous passive motion 

exercise devices, this is consistent with 

§ 414.222(b) our regulations. Coverage of 

continuous passive motion exercise 

devices is limited to 21 days of use in 

the home following knee replacement 

surgery; therefore, payment can only be 

made on a daily basis as opposed to a 

monthly basis for this item. 

Based on the bids submitted and 

accepted for these items, we would 

calculate single payment amounts for 

the furnishing of these items on a rental 

basis. 

c. Oxygen and Oxygen Equipment 

If included under a competitive 

bidding program, we would propose 

that the single payment amounts for 

oxygen and oxygen equipment be 

calculated based on separate bids 

submitted and accepted for furnishing 

on a monthly basis of each of the oxygen 

and oxygen equipment categories of 

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

through (b)(1)(iv). 

d. Capped Rental Items 

With the exception of power 

wheelchairs, payment for items that fall 

into this payment category is currently 

made on a rental basis only. The rental 

fee schedule payments for months 1 

through 3 are based on 10 percent of the 

purchase price for the item as 

determined under § 414.229(c). The 

rental fee schedule payments for months 

4 through 15 are based on 7.5 percent 

of the purchase price for the item as 

determined under § 414.229(c). Since 

the DRA change does not apply to 

beneficiaries using a capped rental item 

prior to January 1, 2006, these 

beneficiaries may still elect either to 

take ownership of the item after 13 

months of continuous use or to continue 

renting the item beyond 13 months of 

continuous use. In addition, the DRA 

leaves in tact the rule under which a 

supplier must offer the beneficiary the 

option to purchase a power wheelchair 


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at the time the supplier initially 

furnishes the item (in which case 

payment would be made for the item on 

a lump-sum basis). However, with 

regard to all other capped rental items 

for which the rental period begins after 

January 1, 2006, the DRA requires 

suppliers to transfer title to the item to 

the beneficiary after 13 months of 

continuous use. Under the Medicare 

DMEPOS Competitive Bidding Program, 

we propose that separate payment for 

reasonable and necessary maintenance 

and servicing only be made for 

beneficiary-owned DME. Payment for 

maintenance and servicing of rented 

equipment would be included in the 

single payment amount for rental of the 

item. We propose that the lump sum 

purchase option in § 414.229(d) for 

power wheelchairs be retained under 

the Medicare DMEPOS Competitive 

Bidding Program. 

Under the Medicare DMEPOS 

Competitive Bidding Program, we 

propose that ‘‘purchase’’ bids be 

submitted for the furnishing of new 

items in this category. Based on these 

bids, a single payment amount for 

purchase of a new item will be 

calculated for each item in this category 

for the purpose of determining both the 

single payment amount for the lump 

sum purchase of a new power 

wheelchair, and for calculating the 

single payment amounts for the rental of 

all items in this category. In cases where 

the beneficiary elects to purchase a used 

power wheelchair the single payment 

amount for the lump sum purchase of 

the used power wheelchair would be 

based on 75 percent of the single 

payment amount for a new power 

wheelchair. In the case of all items in 

this category that are furnished on a 

rental basis, the single payment amount 

for rental of the item for months 1 

through 3 would be based on 10 percent 

of the single payment amount for 

purchase of the item, and the single 

payment amount for rental of the item 

for months 4 through 13 would be based 

on 7.5 percent of the single payment 

amount for purchase of the item. We 

believe that calculating single payment 

amounts for used items and items 

rented on a monthly basis based on bids 

submitted and accepted for new items 

will simplify the bidding process and 

will not result in problems with access 

to used items or rented items in this 

category. 

e. Enteral Nutrition Equipment and 

Supplies 

Enteral nutrition equipment is 

currently paid on a purchase or rental 

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

Omnibus Budget Reconciliation Act of 

1989 (Pub. L. 101–239) (OBRA 89) 

limits the rental payments to 15 months. 

To be consistent with the bidding 

requirements proposed above for 

capped rental DME, we propose that 

bids be submitted for the purchase of 

new items in this category. Based on the 

bids submitted and accepted for new 

items, we would calculate a single 

payment amount for rented items for 

months 1 through 3 based on 10 percent 

of the single payment amount for new 

items. The single payment amount for 

rented items for months 4 through 15 

would be based on 7.5 percent of the 

single payment amount for new items. 

In cases where the beneficiary elects to 

purchase enteral nutrition equipment, 

the single payment amount for new 

enteral nutrition equipment would be 

based on the bids submitted and 

accepted for new enteral nutrition 

equipment, and the single payment 

amount for used enteral nutrition 

equipment would be based on 75 

percent of the single payment amount 

for the purchase of new enteral nutrition 

equipment. 

Based on the bids submitted and 

accepted for new items, we would 

calculate a single payment amount for 

purchase of enteral nutrients and 

supplies. 

f. Maintenance and Servicing of Enteral 

Nutrition Equipment 

Section 6112(b)(2)(B) of OBRA 89 

requires payment for maintenance and 

servicing of enteral nutrition equipment 

after monthly rental payments have 

been made for 15 months. The 

maintenance and servicing payments 

are to be made in amounts that we 

determine are reasonable and necessary 

to ensure the proper operation of the 

equipment. Since October 1, 1990, 

program instructions have specified 

when and how these payments are 

made. These program instructions are 

currently found at section 40.3 of 

chapter 20 of the Medicare Claims 

Processing Manual (pub. 100–04). These 

instructions provide that maintenance 

and servicing payments may be made 

beginning 6 months after the last rental 

payment for the equipment and no more 

often than once every 6 months for 

actual incidents of maintenance where 

the equipment requires repairs and/or 

extensive maintenance. Extensive 

maintenance involves the breaking 

down of sealed components or 

performance of tests that require 

specialized testing equipment not 

available to the beneficiary or nursing 

facility. The program instructions also 

state that the maintenance and servicing 

payments cannot exceed one-half of the 

rental payment amounts for the 

equipment. Under the Medicare 

DMEPOS Competitive Bidding Program, 

we propose that the monthly rental 

payments for enteral nutrition 

equipment for months 1 through 3 be 

equal to 10 percent of the single 

payment amounts for the purchase of 

the new enteral nutrition equipment. 

We propose that for months 4 through 

15, the monthly rental payment 

amounts would be equal to 7.5 percent 

of the single payment amounts for the 

purchase of new items. In addition, we 

propose to establish the maintenance 

and service payments for enteral 

nutrition equipment so that they are 

equal to 5 percent of the single payment 

amounts for the purchase of new enteral 

nutrition equipment. This would limit 

the payment rate for maintenance and 

service to one-half of the rental payment 

amount for the first month of rental, 

which is similar to the program 

instructions mentioned above. We are 

proposing that the contract supplier to 

which payment is made in month 15 for 

furnishing enteral nutrition equipment 

on a rental basis must continue to 

furnish, maintain and service the pump 

for as long as the equipment is 

medically necessary. This proposed 

policy is similar to current Medicare 

payment rules in Chapter 20 of the 

claims processing manual, section 40.3. 

g. Supplies Used in Conjunction With 

DME 

We propose that bids be submitted for 

the purchase of supplies necessary for 

the effective use of DME, including 

drugs (other than inhalation drugs). 

Based on the bids submitted and 

accepted for these items, we would 

calculate single payment amounts for 

the furnishing of these items on a 

purchase basis. 

h. OTS Orthotics 

We propose that bids be submitted for 

the purchase of OTS orthotics. Based on 

the bids submitted and accepted for 

these items, we would calculate single 

payment amounts for the furnishing of 

these items on a purchase basis. 

G. Conditions for Awarding Contracts 

(Proposed § 414.414) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Conditions for Awarding Contracts’’ at 

the beginning of your comments.] 

1. Quality Standards and Accreditation 

(Proposed § 414.414(c)) 

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

specifies that a contract may not be 

awarded to any entity unless the entity 

meets applicable quality standards 

specified by the Secretary under section 


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

1834(a)(20) instructs the Secretary to 

establish and implement quality 

standards for all DMEPOS suppliers in 

the Medicare program, not just for 

suppliers in the competitive bidding 

areas. All suppliers will have to meet 

these quality standards to be eligible to 

submit claims to the Medicare program, 

irrespective of the competitive bidding 

program. The quality standards are to be 

applied by recognized independent 

accreditation organizations designated 

by the Secretary under section 

1834(a)(20)(B) of the Act. A grace period 

may be granted for suppliers that have 

not had sufficient time to obtain 

accreditation before submitting a bid. If 

a supplier does not then successfully 

attain accreditation, we will suspend or 

terminate the supplier contract. The 

length of time for the grace period will 

be determined by the accrediting 

organizations’ ability to complete the 

accrediting process within each 

competitive bidding area. The length of 

time of the grace period will be 

specified in the RFB for each 

competitive bidding program. We solicit 

public comments on the length of time 

for the grace period. 

Suppliers that received a valid 

accreditation before CMS-approved 

accreditation organizations are 

designated will be considered to be 

grandfathered if the accreditation was 

granted by an organization that we 

designate through the process described 

in proposed § 424.58. These suppliers 

will not need to be re-accredited until 

their next regularly scheduled 

accreditation. 

2. Eligibility (Proposed § 414.414(b)) 

We propose that all bidders must 

meet eligibility rules to be considered 

for selection under the Medicare 

DMEPOS Competitive Bidding Program. 

The eligibility rules are included in the 

supplier standards regulation at 

§ 424.57. Also, each bidder must be 

enrolled with Medicare and be a current 

supplier, in good standing with the 

Medicare program, and not under any 

current Medicare sanctions. Each 

bidding supplier must certify in its bid 

that it, its high level employees, chief 

corporate officers, members of board of 

directors, affiliated companies and 

subcontractors are not now and have not 

been sanctioned by any governmental 

agency or accreditation or licensing 

organization. In the alternative, the 

bidding supplier must disclose 

information about any prior or current 

legal actions, sanctions, or debarments 

by any Federal, State or local program, 

including actions against any members 

of the board of directors, chief corporate 

officers, high-level employees, affiliated 

companies, and subcontractors. 

Sanctions would include, but are not 

limited to, debarment from any Federal 

program, sanctions issued by the Office 

of Inspector General, or sanctions issued 

at the State or local level. In addition, 

the bidder must have all State and local 

licenses required to furnish the items 

that are being bid. Finally, the supplier 

must agree to all of the terms in the 

contract outlined in the RFBs. We 

would suspend or terminate a contract 

if a supplier loses its good standing with 

us or any other government agency. 

3. Financial Standards (Proposed 

§ 414.414(d)) 

Section 1847(b)(2)(A)(ii) specifies that 

we may not award a contract to an 

entity unless the entity meets applicable 

financial standards specified by the 

Secretary. Evaluation of financial 

standards for suppliers assists us in 

assessing the expected quality of 

suppliers, estimating the total potential 

capacity of selected suppliers, and 

ensuring that selected suppliers are able 

to continue to serve market demand for 

the duration of their contracts. 

Ultimately, we believe that financial 

standards for suppliers will help 

maintain beneficiary access to quality 

services. 

Therefore, as part of the bid selection 

process, the RFBs will identify the 

specific information we will require to 

evaluate suppliers, which may include: 

a supplier’s bank reference that reports 

general financial condition, credit 

history, insurance documentation, 

business capacity and line of credit to 

successfully fulfill the contract, net 

worth, and solvency. We welcome 

comments on the financial standards, in 

particular the most appropriate 

documents that will support these 

standards. 

We found that in the demonstration, 

general financial condition, adequate 

financial ratios, positive credit history, 

adequate insurance documentation, 

adequate business capacity and line of 

credit, net worth, and solvency, were 

important considerations for evaluating 

financial stability. 

As we develop our methodology for 

financial standards, we will further 

consider which individual measures 

should be required so that we can obtain 

as much information as possible while 

minimizing the burden on bidding 

suppliers and the bid evaluation 

process. 

4. Evaluation of Bids (Proposed 

§ 414.414(e)) 

We are proposing to select the 

product categories that include 

individual items for which we will 

require competitive bidding. Individual 

products will be identified by the 

Healthcare Common Procedure Coding 

System (HCPCS Codes) and will be 

further described in the RFB. Suppliers 

will be required to submit bids for each 

individual item within each product 

category they are seeking to furnish 

under the program, but will not be 

required to bid for every product 

category. 

a. Market Demand and Supplier 

Capacity (Proposed § 414.414(e)) 

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

requires that in awarding competitive 

bidding contracts, the Secretary must 

select the number of contract suppliers 

necessary to furnish items to meet the 

projected demand in the geographic 

area. Therefore, the first step is for us to 

determine the expected demand for an 

item in a competitive bidding area. We 

propose to calculate expected demand 

in each competitive bidding area in a 

relatively straightforward way using 

existing Medicare claims. We will 

examine claims data to determine the 

number of units of each item supplied 

to Medicare beneficiaries during the 

past 2 years, and then determine the 

number of new beneficiaries that have 

entered the market during the last 2 

years. We feel that 2 years worth of data 

is sufficient to allow us to identify trend 

analyses and utilization measurements. 

We will also gather data on the number 

of new fee-for-service Medicare 

enrollees coming into a competitive 

bidding area and use this number to 

project the number of new enrollees. 

We propose to calculate two years 

worth of claims on a monthly basis to 

determine beneficiary demand. We will 

take into consideration the expected 

demand over the total duration of the 

contract and the seasonal effects (for 

example, an increase in beneficiary 

population in Florida during the 

winter), and propose to use 2 years of 

data to identify any time trends. If there 

are no seasonal effects or time trends, 

we propose to use the average monthly 

total and new patient figures as the 

market demand measures. If there are 

seasonal effects or changes identified 

only during certain months, the 

maximum monthly total and new 

patient figures would be used as the 

market demand measures. If trends 

show that there is noticeable growth or 

reduction in beneficiary demand for 

products in an area, we would take 

these factors into consideration when 

developing estimates of beneficiary 

demand for competitively bid items. 

We propose to adopt the following 

approach to estimate supplier capacity 


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to meet the projected demand in a CBA. 

First, we propose to analyze Medicare 

claims to determine how many items a 

supplier is currently providing in the 

competitive bidding area, as well as in 

total. Second, as part of the bid, we 

would ask suppliers to say how many 

units they are willing and capable of 

supplying at the bid price in the CBA. 

We would compare this information to 

what the supplier has dispensed to 

Medicare beneficiaries in the past and 

what it specified in its response to the 

RFB as its projected capacity. We would 

require evidence of financial resources 

to support market expansion, such as 

letters from investors or lending agents. 

We would use this information to 

evaluate the capacity of the bidder. 

Third, we would compare expected 

capacity and Medicare volume to 

determine how many suppliers we 

would need in an area. For new 

suppliers, we would ask them for their 

expected capacity, look at trend data for 

new suppliers in that area, and examine 

the capacity of other suppliers in that 

area. We would need to use this data to 

make estimates about capacity because 

suppliers may have more capacity 

potential than they are currently 

exhibiting. During the DMEPOS 

demonstration, demonstration suppliers 

were able to expand their output to meet 

market demand and replace market 

share previously provided by nondemonstration suppliers; indeed, some 

demonstration suppliers were 

disappointed that they did not gain 

more market share during the 

demonstration. We presented numerous 

issues to the PAOC where we requested 

advice on issues such as market 

capacity and demands. During the 

February 28, 2005 PAOC meeting, we 

asked the panel to discuss the issue of 

demand and capacity. Several members 

of the committee, based upon their 

expertise and knowledge of the 

industry, suggested that most DMEPOS 

suppliers would be able to easily 

increase their total capacity to furnish 

items by up to 20 percent and the 

increase could be even larger for 

products like diabetes supplies that 

require relatively little labor. 

We welcome comments on our 

proposed approach for calculating 

market demand and estimating supplier 

capacity. We are especially interested in 

any information that would help us 

compare current Medicare volume with 

potential capacity, including potential 

formulas we could apply to determine 

capacity. 

b. Composite Bids (Proposed 

§ 414.414(e)) 

When suppliers are bidding for 

multiple items in a product category, 

the lowest bid for each item will not 

always be submitted by the same 

supplier. In this case, looking at the bids 

for individual items would not tell us 

which supplier should be selected since 

different suppliers may submit the 

lowest bids for different items. 

Therefore, we propose to use a 

composite bid to compare all of the 

suppliers’ bids submitted for an entire 

product category in a CBA. Using a 

composite bid is a way to aggregate a 

supplier’s bids for individual items 

within a product category into a single 

bid for the whole product category. This 

will allow us to determine which 

suppliers can offer the lowest expected 

costs to Medicare for all items in a 

product category. To compute the 

composite bid for a product category, 

we would multiply a supplier’s bid for 

each item in a product category by the 

item’s weight and sum these numbers 

across items. The weight of an item 

would be based on the utilization of the 

individual item compared to other items 

within that product category based on 

historic Medicare claims. Item weights 

would be used to reflect the relative 

market importance of each item in the 

product category. We would select item 

weights that ensure that the composite 

bid is directly comparable to the costs 

that Medicare would pay if it bought the 

expected bundle of items in the product 

category from the supplier. The sum of 

each supplier’s weighted bids for every 

item in a product category would 

become the supplier’s composite bid for 

that product category. 

We seek comment on the best method 

of weighting individual items within a 

product category to determine the 

composite bid. One approach we are 

considering is to set the weight for each 

item based on the volume of the 

individual item’s share compared to the 

total utilization of the product category. 

Under this weighting system, the 

composite bid would be exactly 

proportional to the expected cost of 

furnishing the entire bundle of items. 

Therefore, if supplier 1 had a lower 

composite bid than supplier 2, it would 

also have a lower expected cost of 

furnishing the entire product bundle 

that makes up the product category. 

Another approach we are considering is 

to set the weight based on the payment 

amounts attributable to each DMEPOS 

fee schedule item relative to the overall 

payment amount for the total product 

category. This approach may better 

reflect the relative value of each item 

because it is based on how much we 

actually pay for an item. This is the 

approach that we used in the round 1 

bidding in Polk County under the 

competitive bidding demonstration 

program. However, we found that this 

approach could result in too much 

weight being placed on low volume and 

high-priced items. The first year 

evaluation report also found that using 

the allowed charges as the weights 

could result in a supplier who offered 

lower bids having a higher composite 

bid than a supplier who offered a higher 

bid for individual items. 

We use volume of items or units as 

the basis of the following examples but 

we are requesting comments on which 

weighting method should be used in 

calculating the composite. We also 

request comments on other methods of 

weighting that could be applied to 

individual items. 

TABLE 5.—ITEM WEIGHTS

Item A B C All 

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

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

The example above shows how a 

proposed weight setting methodology 

would work. The expected volume for 

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

respectively, for a total volume of 10 

units. The item weight for Item A is 0.5 

(5/10), the weight for Item B is 0.3 (3/ 

10), etc. 

As explained above, the composite 

bid for a supplier would equal the item 

weight times the item bid summed 

across all items in the product category. 

The item weights would be the same for 

bidders for the same product categories. 

In our example, supplier 1 bid $1.00 for 

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

item C. The composite bid for Supplier 

1 = (0.5 * $1.00) + (0.3 * $4.00) + (0.2 

* $1.00) = 1.90. The table shows the 

expected cost of the bundle based on 


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each supplier’s bids. The expected costs 

are directly proportional to the 

composite bids; the factor of 

proportionality is equal to the total 

number of units (10) in the product 

category. We used the composite bid to 

determine the expected costs for all of 

the items in the product category based 

upon expected volume. 

TABLE 6.—COMPOSITE BIDS

Item A B C Composite 

bid 

Expected 

cost of 

bundle 

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

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

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

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

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

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

Under this proposed methodology, 

bid selection would proceed by ranking 

the composite bids from lowest to 

highest (Table 6). In order to ensure that 

we would pay less under competitive 

bidding than we would under the 

current fee schedule, as is required 

under section 1847(b)(2)(A)(iii), we 

would compute the expected cost of the 

bundle of goods for comparison 

purposes. This would require us to 

calculate the bid amount times the 

expected number of units that we expect 

suppliers will furnish based on the most 

current Medicare claims data and sum 

across each item by supplier. For 

example, if supplier 1 bid $1.00 for item 

A and we expected to purchase 5 

units—$1.00 × 5 units = $5.00, item B—

$4.00 × 3 units = $12.00, item C—$1.00 

× 2 units = $2.00, the sum for these 3 

items would be $19.00. As previously 

noted, prior to bid selection we would 

first ensure that suppliers meet quality 

and financial standards prior to arraying 

the bids and selecting suppliers. 

c. Determine the Pivotal Bid (Proposed 

§ 414.414(e)) 

We propose that the pivotal bid 

would be the point where expected 

combined capacity of the bidders is 

sufficient to meet expected demands of 

beneficiaries for items in a product 

category. In the example below, the 

projected demand would be for 1000 

units, therefore supplier 10’s composite 

bid would represent the pivotal bid, 

since the cumulative capacity of 1100 

would exceed the projected demand of 

1000. The statute requires multiple 

winners, so in all cases where we award 

bids, we would need to accept at least 

two winning bidders. All bidders who 

are eligible for selection and whose 

composite bid for the product category 

is less than or equal to the pivotal bid 

would be selected as winning bidders. 

In the table below, for example, $135.00 

would be the pivotal bid. Suppliers 2, 

3, 1, and 10 would then be selected as 

winning bidders with supplier 10’s 

composite bid becoming the pivotal bid. 

We realize that this approach may leave 

out other suppliers with very close, but 

slightly higher bids. 

TABLE 7.—DETERMINE THE PIVOTAL BID

[Point where beneficiary demand is met by supplier capacity—for this example, beneficiary expected demand is 1000 units—supplier 10’s bid is 

the pivotal bid] 

Supplier number Eligible for selection Composite 

bid 

Supplier 

capacity 

Cumulative 

capacity 

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

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

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

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

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

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

No longer being considered: 

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

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

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

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

n.c. = not calculated. 

We also considered the use of a 

competitive range to determine the 

contract suppliers. In this approach we 

would determine a competitive range 

for the composite bid. We would array 

all suppliers by their bids and eliminate 

all suppliers whose composite bid is 

greater than the competitive range. We 

would then evaluate the quality and 

financial standards only for those 

remaining suppliers. 

During the demonstration, evaluating 

quality and financial standards was 

time-consuming for the bid evaluation 

panel and required bidders to provide 

extensive information on quality and 

finances. The last two rounds of the 

demonstration used a competitive range 

to reduce the burden on the bid 

evaluation panel and bidders. After 

evaluating basic eligibility 

requirements, the composite bids were 

calculated and arrayed, and a 

competitive range was selected with 

more than enough suppliers to serve the 

market. Suppliers whose composite bids 

were clearly outside of this range were 

not required to provide detailed 

financial information, and the bid panel 

was not required to evaluate the 

eligibility of these suppliers to 

participate. Suppliers within the 

competitive range provided detailed 

financial information and had their 

quality rigorously evaluated. The 


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remaining suppliers were only selected 

as contract suppliers if they met the 

quality and financial standards and 

their composite bids were at or below 

the pivotal bid. 

There are other options that we have 

considered to determine the pivotal bid. 

One of these options would be to make 

the pivotal bid depend on one of the 

summary statistics (for example, mean, 

median, 45th percentile) associated with 

the distribution of bids from eligible 

suppliers. For example, the pivotal bid 

could be set equal to the median bid 

from eligible suppliers. This option has 

the advantage that the pivotal bid could 

be set near the central distribution of 

bids. We considered including 

additional suppliers who are close to 

the central distribution as being eligible 

to become a contract supplier. Both 

options would likely affect the number 

of contract suppliers. Finally, the exact 

summary statistic or percentile can be 

increased or decreased to reflect our 

trade-off between the number of 

winners and program costs. One 

negative aspect of this approach would 

be that winners may have insufficient 

capacity. In addition, with a given 

percentile cutoff, the pivotal bid might 

include an excessive number of winning 

bidders. As the number of eligible 

bidders increases, so does the number of 

winners. If additional bidders have 

higher costs, and their bids fall into the 

upper half of the distribution, the 

pivotal bid will increase, resulting in 

greater payments by the Medicare 

program and a loss of savings. 

Another option would be to base the 

pivotal bid on a target number of 

winners. For example, we may decide to 

select 5 winners in each product 

category. Suppliers may respond to this 

approach by bidding aggressively, 

knowing that only a fixed number of 

winners are guaranteed to be selected. A 

negative aspect of this approach is that 

there is no assurance that a 

predetermined target number of winners 

would have sufficient capacity to meet 

projected market demand. In addition, 

the target number of winners must 

somehow be selected and this could 

result in selecting an arbitrary number. 

If too high, suppliers may have little 

incentive to bid aggressively. 

We also considered an option to base 

the pivotal bid on a target composite 

bid, for example, we would choose a 

target that was 20 percent below the 

DMEPOS fee schedule amount for that 

product category. A possible advantage 

of this approach is that the target 

composite bid can be set to ensure 

savings for the program. On the other 

hand, we believed that suppliers might 

perceive this approach to be 

anticompetitive. Rather than letting 

bidding and the market forces determine 

the pivotal bid and fee schedule we 

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

suppliers that bid below the target 

composite bid might have had 

insufficient capacity to meet projected 

market demand. 

We are proposing that the pivotal bid 

be at the point where we have a 

sufficient number of suppliers to ensure 

we have enough capacity to meet 

projected demand and that beneficiaries 

have adequate access to quality items. 

d. Assurance of Savings (Proposed 

§ 414.414(f)) 

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

prohibits awarding contracts to any 

entity for furnishing items unless the 

total amounts to be paid to contractors 

in a competitive bidding area are 

expected to be less than the total 

amounts that would otherwise be paid. 

We are proposing to interpret this 

requirement to mean that contracts will 

not be awarded to any entity unless the 

amounts to be paid to contract suppliers 

in a competitive bidding area are 

expected to be less for a competitively 

bid item than would have otherwise 

been paid. Therefore, we would not 

accept any bid for an item that is higher 

than the current fee schedule amount 

for that item. This approach would 

require that single payment amounts for 

each item in a product category be equal 

to or less than our current fee schedule 

amount for that item. 

An alternative interpretation of ‘‘less 

than the total amounts that would 

otherwise be paid’’ could mean 

contracts will not be awarded to an 

entity unless the amounts paid to 

contract suppliers in a CBA for the 

product category are expected to be less 

than that would have otherwise been 

paid. During the demonstration, several 

product categories received overall 

savings, whereas payment amounts 

increased for a few individual items 

within those product categories. This 

approach may not result in adequate 

savings, and we believe a reasonable 

interpretation of the Act would be one 

in which ‘‘the total amounts’’ mean 

payment at the item level. One concern 

with this approach is that there may be 

a greater potential for shifting of 

utilizations from one item to another 

higher priced item. 

We specifically request comments on 

the various methods for assuring savings 

under the Medicare DMEPOS 

Competitive Bidding Program. 

e. Assurance of Multiple Contractors 

(Proposed § 414.414(g)) 

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

specifies that the Secretary will award 

contracts to multiple entities submitting 

bids in each area for an item. In 

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

Act specifies that contracts may not be 

awarded unless access of individuals to 

a choice of multiple suppliers is 

maintained. As a result, we will have 

multiple contract suppliers in each 

competitive bidding area for each 

product category if at least two 

suppliers meet all requirements for 

participation, and the single payment 

amounts to be paid to those suppliers do 

not exceed the fee schedule amounts for 

the items that were bid. We know that 

offering choices to beneficiaries, referral 

agents, and treating practitioners that 

order DMEPOS for Medicare 

beneficiaries is important to maintain 

competition among suppliers based on 

quality of items. We have to weigh that 

advantage against the disincentive for a 

supplier to submit its best bid if we 

select too many suppliers to service a 

competitive bidding area. Therefore, we 

believe that having multiple suppliers 

servicing one product category in a 

competitive bidding area will allow us 

to accomplish these goals. 

f. Selection of New Suppliers After 

Bidding (Proposed § 414.414(h)) 

We are proposing to select only as 

many suppliers as necessary to ensure 

we have enough capacity to meet 

projected demand. However, we may 

have to suspend or terminate a contract 

supplier’s contract if that supplier falls 

out of compliance with any of the 

requirements identified in the 

regulation and in the bidding contract. 

Alternatively, we could determine that 

the number of contract suppliers we 

selected to furnish a product category 

under a competitive bidding program 

was insufficient to meet beneficiary 

demand for those items. In situations 

where CMS determines that there is an 

unmet demand for items, for example, if 

CMS terminates a contract supplier’s 

contract, we would propose to contact 

the remaining contract suppliers for that 

product category to determine if they 

could absorb the unmet demand. If the 

remaining contract suppliers could not 

absorb the unmet demand in a timely 

manner, we would propose to then refer 

to the list of suppliers that submitted 

bids for that product category in that 

round of competitive bidding in that 

competitive bidding area, use the list of 

composite bids that we arrayed from 

lowest to highest, and proceed to the 

next supplier on the list. We would 


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contact that supplier to determine if it 

would be interested in becoming a 

contract supplier. If the supplier was 

interested, we would require the 

supplier to provide updated information 

to ensure its continued eligibility for 

participation. A condition for 

acceptance of a contract would be that 

the supplier must agree to accept the 

already determined single payment 

amounts for the individual items within 

the product category in the competitive 

bidding area. We would continue to go 

down the list until we were satisfied 

that the expected demand would be met 

and beneficiary access to the items in 

the product category would not be a 

problem. After consultation with the 

DMEPOS industry and PAOC, CMS was 

told that additional capacity should not 

be a problem as suppliers would be 

willing and able to handle the expected 

demand. 

Another option that we considered, 

but are not proposing, was to conduct a 

new round of bidding to select 

additional suppliers. However, we did 

not choose this option because it would 

delay the resolution of an access 

problem and place an additional 

administrative burden on the program. 

H. Determining Single Payment 

Amounts for Individual Items (Proposed 

§ 414.416) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Determining Single Payment Amounts 

for Individual Items’’ at the beginning of 

your comments.] 

1. Setting Single Payment Amounts for 

Individual Items (Proposed § 414.416(b)) 

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

requires that the Secretary determine a 

single payment amount for each item in 

each competitive bidding area based on 

the bids submitted and accepted for that 

item. Once contract suppliers are 

selected for a product category based on 

their composite bid and the pivotal bid, 

single payment amounts for individual 

items in the product category must be 

determined. We are considering several 

different methodologies for determining 

the single payment amounts. Each of the 

options under consideration are 

discussed in detail in this section. After 

careful consideration of these options, 

we are proposing to adopt the following 

principles to determine the single 

payment amounts for individual items 

in a product category: 

Principle 1 

Bid amounts from all winning bids for 

an item in a CBA will be used to set the 

single payment amount for that item in 

the CBA. 

Principle 2 

We must expect to pay less for each 

individual item than we would have 

otherwise paid for that item under the 

current fee schedule. Single payment 

amounts cannot be higher than our 

current fee schedule amounts for 

individual items within a product 

category. 

To satisfy these principles, we 

evaluated several different approaches 

to setting payment amounts. As a result 

of our review, we have decided on a 

preferred approach that would 

determine the single payment amounts 

for individual items by using the 

median of the supplier bids that are at 

or below the pivotal bid for each 

individual item within each product 

category. The individual items would be 

identified by the appropriate HCPCS 

codes. The median of the bids submitted 

by the contract suppliers for a particular 

item would be the single payment 

amount that we would establish under 

the competitive bidding program for the 

HCPCS code that describes that item. In 

cases where there is an even number of 

winning bidders for an item, we would 

employ the average (mean) of the two 

bid prices in the middle of the array to 

set the single payment amount. 

We believe that setting the single 

payment amount based on the median 

of the contract suppliers’ bids satisfies 

the statutory requirement that single 

payment amounts are to be based on 

bids submitted and accepted. This will 

result in a single payment for an item 

under a competitive bidding program 

that is representative of the winning 

bids for that item. This methodology 

also has the advantage of being easily 

understood by suppliers and 

implemented by our contractors. It also 

results in what we consider to be a 

reasonable payment amount based on 

prices available in the marketplace. As 

illustrated in Table 8, this methodology 

would reduce the effect of excessively 

high or excessively low bids and would 

also help to ensure savings for the 

Medicare program. We believe it is also 

consistent with the intent of competitive 

bidding. 

TABLE 8.—MEDIAN OF THE WINNING BIDS

Item A B C 

Actual 

composite 

bid 

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

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

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

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

While this is our proposed approach, 

we are soliciting comments on other 

methodologies for setting the single 

payment amount, including using an 

adjustment factor as part of the 

methodology for setting the single 

payment amount. This was the 

methodology we used for the 

competitive bidding demonstrations, 

and it would require the following 

steps. The first step of this methodology 

would be to calculate the average of the 

winning bids per individual item. The 

second step would be to calculate the 

average of the composite bids by taking 

the sum of the composite bids for all 

contract suppliers in the applicable CBA 

and dividing that number by the 

number of contract suppliers. The third 

step would be to determine an 

adjustment factor, the purpose of which 

would be to bring every winner’s overall 

bids for a product category up to the 

pivotal bidder’s composite bid. Once we 

determined the adjustment factor, we 

would take the average of the winning 

bids per item and multiply that by the 

adjustment factor to adjust all bids up 

to the point of the pivotal bid, so that 

all winners would be paid by Medicare 

as much for the total product category 

as the pivotal bidder. This amount 

would become the single payment 

amount for the individual item. This is 

the price that all contract suppliers 

within a competitive bidding area 

would be paid for that product as 

illustrated in Table 9. 


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TABLE 9.—ADJUSTING THE AVERAGE WINNING BIDS

Item A B C 

Average 

composite 

bid 

Actual 

composite 

bid 

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

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

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

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

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

Adjustment factor = (Pivotal Composite Bid) / (Average Composite Bid) 1.11 1.11 1.11 .................... ....................

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

This approach would ensure that the 

overall payment amounts that contract 

suppliers received was at least as much 

as their bids. As a result, this may have 

guarded against suppliers leaving the 

Medicare program because the payment 

amounts are not sufficient. However, we 

do not favor this alternative because, in 

general, most payment amounts would 

be higher than the actual bids as a result 

of the adjustment factor being greater 

than zero. This is true because the 

purpose of the adjustment factor would 

have been to make the composite bid of 

all winning suppliers equivalent to the 

composite bid of the pivotal supplier. 

While this approach is still under 

consideration, we are considering 

whether this approach is reflective of 

the actual winning bids accepted. Also, 

we are concerned that this methodology 

may be confusing and overly 

complicated. 

We also considered taking the 

minimum winning bid for each item in 

a CBA and not applying an adjustment 

factor. We do not favor this alternative 

because we also do not consider it as 

being reflective of the actual bids 

accepted because it is only reflective of 

the lowest bid. The lowest bid would 

not be reflective of what suppliers 

would sell the item for since most of 

them bid higher. 

Finally, we considered taking the 

maximum winning bid for each item. 

However, this approach would have led 

to program payment amounts that were 

higher than necessary because some 

suppliers were willing to provide these 

items to beneficiaries at a lower cost. 

We are still in the process of 

determining the appropriate approach 

for setting payment amounts, as well as 

the alternatives considered and outlined 

above and invite comments on our 

proposed methodology. We will 

consider all comments in the final 

regulation. 

2. Rebate Program (Proposed 

§ 414.416(c)) 

We are proposing to allow contract 

suppliers that submitted bids for an 

individual item below the single 

payment amount to provide the 

beneficiary with a rebate. The rebate 

would be equal to the difference 

between their actual bid amount and the 

single payment amount. The following 

example illustrates how the rebates 

would be applied: 

If, based on the bids received and 

accepted for an item, we determined 

that the single payment amount for the 

item was $100, Medicare payment for 

the item would be 80 percent of that 

amount, or $80, and the co-insurance 

amount for the item would be 20 

percent, or $20. However, if a contract 

supplier submitted a bid of $90 for this 

item and chose to offer a rebate, the 

rebate amount would be equal to the 

difference between the single payment 

amount ($100) and the contract 

supplier’s actual bid ($90), or $10. 

Therefore, after the contract supplier 

received the Medicare payment of $80 

and the $20 co-insurance, the contract 

supplier would be responsible for 

providing the beneficiary with a $10 

rebate. We are soliciting comments on 

how to handle those cases in which the 

rebates would exceed the co-payment 

amount. 

Before deciding to propose this 

methodology, we considered whether to 

make the rebates mandatory or optional. 

We are proposing that the rebates be 

voluntary but that contract suppliers 

cannot implement them on a case by 

case basis. If a contract supplier submits 

a bid below the single payment amount 

and chooses to offer a rebate, it must 

offer the rebate to all Medicare 

beneficiaries receiving the competitively 

bid item to which the rebate applies. 

This commitment would be 

incorporated into the contract supplier’s 

contract. Stated another way, while the 

decision to offer rebates may be 

voluntary, once a contract supplier 

decides to provide rebates, the rebates 

become a binding contractual condition 

for payment during the term of the 

contract with CMS. Moreover, the 

contract supplier may not amend or 

otherwise alter the provision of rebates 

during the term of the contract. Contract 

suppliers would also be prohibited from 

directly or indirectly advertising these 

rebates to beneficiaries, referral sources, 

or prescribing health care professionals. 

However, this would not preclude CMS 

from providing to beneficiaries 

comparative information about contract 

suppliers that offer rebates. 

Only contract suppliers that 

submitted bids below the single 

payment amount for a competitively bid 

item would have the choice to offer 

rebates. Contract suppliers that 

submitted bids above the single 

payment amount would not be allowed 

to issue rebates because their actual bids 

for an individual item would be above 

this amount. 

Our reasons for allowing these 

contract suppliers to offer rebates is to 

allow beneficiaries the ability to realize 

additional savings and the full benefits 

of the Medicare DMEPOS Competitive 

Bidding Program. 

We are asking for comments 

concerning the rebate process outlined 

in this proposed rule. CMS will 

continue to evaluate the fraud and abuse 

risks of the proposed rebate program, 

and we are specifically soliciting 

comments on such risks. 

I. Terms of Contracts (Proposed 

§ 414.422) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Terms of Contract’’ at the beginning of 

your comments.] 

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

the Secretary the authority to specify the 

terms and conditions of the contracts 

used for competitive bidding. Section 

1847(b)(3)(B) requires the Secretary to 

recompete contracts under the Medicare 

DMEPOS Competitive Bidding Program 

at least every 3 years. The length of the 

contracts may be different for different 

product categories, and we propose to 

specify the length of each contract in the 

Request for Bids. 

1. Terms and Conditions of Contracts 

We propose that the competitive 

bidding contracts will contain, at a 


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minimum, provisions relating to the 

following: 

• Covered product categories and 

covered beneficiaries, operating 

policies. 

• Subcontracting rules. 

• Cooperation with us and our agents. 

• Potential onsite inspections. 

• Minimum length of participation. 

• Terms of contract suspension or 

termination. 

• Our discretion not to proceed if we 

find that the Medicare program will not 

realize significant savings as a result of 

the program. 

• Compliance with changes in 

Federal laws and regulations during the 

course of the agreement. 

• Non-discrimination against 

beneficiaries in a competitive bidding 

area (so that all beneficiaries inside and 

outside of a competitive bidding area 

receive the same products that the 

contract supplier would provide to 

other customers). 

• Supplier enrollment and quality 

standards. 

• The single payment amounts for 

covered items. 

• Other terms as we may specify. 

2. Furnishing of Items (Proposed 

§ 414.422(c)) 

A contract supplier must agree to 

furnish the items included in its 

contract to all beneficiaries who 

maintain a permanent residence or who 

visit the competitive bidding area and 

request those items from the contract 

supplier. However, as explained in 

sections II.F.1 and II.F.2 above, a skilled 

nursing facility defined in section 

1819(a) of the Act that is also a contract 

supplier must only agree to furnish the 

items included in its contract to patients 

to whom it would otherwise furnish 

Part B services. In addition, a physician 

that is also a contract supplier must 

only agree to furnish the items included 

in its contract to his or her patients. 

3. Repairs and Replacements of Patient 

Owned Items Subject to Competitive 

Bidding. (Proposed § 414.422(c)) 

Repair or replacement of patientowned DME, enteral nutrition 

equipment or off-the-shelf orthotics, that 

are subject to the competitive bidding 

program, must be furnished by a 

contract supplier because only winning 

suppliers can provide these items in a 

competitive bidding area. The contract 

supplier cannot refuse to repair or 

replace patient-owned items subject to 

competitive bidding. This proposed 

policy will help ensure that the 

beneficiaries will get the items from 

qualified suppliers, and it is consistent 

with the competitive bidding program 

in that it directs business to contract 

suppliers. 

Therefore, we propose that repair or 

replacement of patient-owned items 

subject to a competitive bidding 

program must be furnished by a contract 

supplier. This requirement does not 

apply to beneficiaries who are outside of 

a competitive bidding area. 

4. Furnishing Items to Beneficiaries 

Whose Permanent Residence Is Within 

a CBA 

We propose that a contract supplier 

cannot refuse to furnish items and 

services to a beneficiary residing in a 

CBA based on the beneficiary’s 

geographic location within the CBA. 

This policy will prohibit contract 

suppliers from refusing to furnish items 

to beneficiaries because they are not in 

close proximity to that supplier. In 

order to ensure beneficiary access to 

competitively bid items that are rented, 

we are proposing that the contract 

supplier must agree to accept as a 

customer a beneficiary who began 

renting the item from a different 

supplier regardless of how many 

months the item has already been 

rented. This is particularly important in 

those cases where a supplier or 

noncontract supplier does not elect to 

continue furnishing the item in 

accordance with the grandfathering 

provisions discussed in section II.C.3. 

above. Suppliers must factor the cost of 

furnishing items in these situations into 

their bid submissions. Also, in order to 

ensure beneficiary access to the 

competitively bid items in the 

inexpensive or routinely purchased 

DME payment category or to a 

competitively bid power wheelchair, the 

contract supplier must agree to give the 

beneficiary or his or her caregiver the 

choice of either renting or purchasing 

the item and must furnish the item on 

a rental or purchase basis as directed by 

the beneficiary or the beneficiary’s 

caregiver. Suppliers must factor the cost 

of furnishing these items on both a 

rental and purchase basis into their bid 

submissions. 

5. Furnishing Items to Beneficiaries 

Whose Permanent Residence Is Outside 

a CBA 

In order to obtain medically necessary 

DMEPOS or other equipment, a 

beneficiary whose permanent residence 

is located outside of a CBA must use a 

contract supplier to obtain all items 

subject to competitive bidding in the 

competitive bidding area that he or she 

visits. We considered allowing 

beneficiaries whose residence is outside 

of a competitive bidding area to obtain 

these items from noncontract suppliers 

when coming into a competitive bidding 

area. However, consistent with section 

1847(b)(6), we are proposing that they 

be required to use a contract supplier 

because we believe that new business 

for competitively bid items should be 

directed only to contract suppliers. 

Noncontract suppliers would be 

allowed to continue servicing current 

beneficiaries who maintain a permanent 

residence in a competitive bidding area 

if they qualified for the grandfathering 

program discussed in section II.C.3 

above. 

6. Information Collection From the 

Supplier 

The following is a list of some of the 

terms, conditions and information that 

we propose a supplier must agree to 

provide to CMS for purposes of 

assessment prior to becoming a contract 

supplier: 

• Information on product integrity. 

• Information on business integrity. 

• Organizational conflicts of interest. 

• Name. 

• Physical address. 

• Billing address. 

• Phone number. 

• NSC number. 

• Names of all owners. 

• NSC number of any affiliated 

company. 

• Address and phone number of any 

affiliated company. 

• Employee information. 

• Number of employees. 

• Training and qualifications. 

• Customer service protocol. 

• Information on any bankruptcy 

proceedings involving the bidding 

company or any affiliated company. 

We invite comments on what terms 

and conditions should be included in a 

contract for the competitive bidding 

program. We are interested both in 

terms and conditions that should be 

omitted as well as terms and conditions 

that should be added. 

7. Change in Ownership (Proposed 

§ 414.422(d)) 

We propose to evaluate a company’s 

ownership information, its compliance 

with appropriate quality standards, its 

financial status, and its compliance 

status with government programs before 

we determine that a supplier can qualify 

as a contract supplier if there is a 

change of ownership. For this reason, 

we are proposing that suppliers would 

not be granted winning status by merely 

merging with or acquiring a contract 

supplier’s business. We do not want to 

allow suppliers to adopt a strategy of 

circumventing the regular bidding 

process by gaining winning status 

through acquisitions of or mergers with 


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contract suppliers or to violate any anticompetition prohibitions. Therefore, 

contract suppliers must notify CMS in 

writing 60 days prior to any changes of 

ownership, mergers or acquisitions 

being finalized. 

We have the discretion to allow a 

successor entity after a merger with or 

acquisition of a contract supplier to 

function as contract supplier when—

• There is a need for the successor 

entity as a contractor to ensure Medicare 

s capacity to meet expected beneficiary 

demand for a competitively bid item; 

and 

• We determine that the successor 

entity meets all the requirements 

applicable to contract suppliers. 

• The successor entity must agree to 

assume the contract supplier s contract, 

including all contract obligations and 

liabilities that may have occurred after 

the awarding of the contract to the 

previous supplier. The successor entity 

is legally liable for the non-fulfillment 

of obligations of the original contract 

supplier. 

In addition, we would only allow the 

successor entity to function as a contract 

supplier if it executed a novation 

agreement. 

8. Suspension or Termination of a 

Contract (Proposed § 414.422(f)) 

Contract suppliers are held to all the 

terms of their contracts for the full 

length of the contract period. Any 

deviation from contract requirements, 

including a failure to comply with 

governmental agency or licensing 

organization requirements, would 

constitute a breach of contract. If we 

conclude that the contract supplier has 

breached its contract, the actions we 

might take include, but are not limited 

to, asking the contract supplier to 

correct the breach condition, 

suspending the contract, terminating the 

contract for default (that may include 

reprocurement costs), precluding the 

supplier from participating in the 

competitive bidding program, or 

availing ourselves of other remedies 

permitted by law. We would also have 

the right to terminate the contract for 

convenience. 

J. Administrative or Judicial Review 

(§ 414.424) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Administrative or Judicial Review’’ at 

the beginning of your comments.] 

Section 1847(b)(10) of the Act 

provides that there will be no 

administrative or judicial review under 

section 1869, section 1878, or any other 

section of the Act, for the: 

• Establishment of payment amounts 

under a competitive bidding program; 

• Awarding of contracts under a 

competitive bidding program; 

• Designation of competitive bidding 

areas for the Medicare DMEPOS 

Competitive Bidding Program; 

• Phased-in implementation of the 

Medicare DMEPOS Competitive Bidding 

Program; 

• Selection of items for a competitive 

bidding program. 

• Bidding structure and number of 

contract suppliers selected under a 

competitive bidding program. 

This proposed regulation has no 

impact on the current beneficiary or 

supplier right to appeal denied claims. 

However, neither the beneficiary nor the 

supplier would be able to bring such an 

appeal if a competitively bid item was 

furnished in a competitive bidding area 

in a manner not authorized by this rule. 

K. Opportunity for Participation by 

Small Suppliers 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Opportunity for Participation by Small 

Suppliers’’ at the beginning of your 

comments.] 

In developing bidding and contract 

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

of the Act requires us to take 

appropriate steps to ensure that small 

suppliers of items have an opportunity 

to be considered for participation in the 

Medicare DMEPOS Competitive Bidding 

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

the Act also states that the needs of 

small suppliers must be taken into 

account when evaluating whether an 

entity meets applicable financial 

standards. 

Size definitions for small businesses 

are, for some purposes, developed by 

the Small Business Administration 

(SBA) based on annual receipts or 

employees, using the North American 

Industry Classification System (NAICS). 

Based on the advice from the SBA, we 

expect that most DME suppliers will fall 

into either NAICS Code 532291, Home 

Health Equipment Rental, or NAICS 

Code 446110, Pharmacies, since the 

SBA defines these small businesses as 

businesses having less than $6 million 

in annual receipts. 

We propose using the SBA small 

business definition when evaluating 

whether a DMEPOS supplier is a small 

supplier. We are relying on the expertise 

of the SBA to determine what 

constitutes the appropriate definition of 

a small supplier. All contract suppliers 

are expected to service the whole 

competitive bidding area. However, we 

considered allowing a small supplier 

that has fewer than 10 full-time 

equivalent employees to designate a 

geographic service area that is smaller 

than the entire competitive bidding 

area. However, we are not proposing 

this approach because we want to 

ensure that beneficiaries have the choice 

of going to any contract supplier in their 

respective CBA. Carve out areas could 

lead to confusion for the beneficiary 

faced with multiple competitive bidding 

sub-areas. Further, we believe such an 

approach would allow selection of more 

favorable market areas by smaller 

businesses potentially leading to an 

unfair market advantage. We seek 

comments on this issue. 

Information available to us on the size 

distribution of businesses that provide 

DMEPOS indicates that the majority of 

suppliers in the DMEPOS industry 

qualify as small businesses according to 

the SBA definitions. Our analysis of 

DMEPOS claims data suggests that at 

least 90 percent of DMEPOS suppliers 

had Medicare allowed charges of less 

than $1 million in 2003. The figure of 

$1 million could be an underestimate of 

total receipts, since it does not include 

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

that most DMEPOS suppliers are small. 

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

Act focuses on ensuring participation in 

the bidding, and not on bidding 

outcomes, we believe that it is worth 

noting how small suppliers fared in the 

bidding in the demonstration. Both 

small and large suppliers were selected 

as demonstration suppliers. Some small 

suppliers that were selected as 

demonstration suppliers were able to 

increase their market share substantially 

during the demonstration. Others 

experienced little change in market 

share. 

We recognize the importance, benefits 

and convenience offered by the local 

presence of small suppliers. We propose 

to take the following steps to ensure that 

small suppliers have the opportunity to 

be considered for participation in the 

program. 

First, as required by section 

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

multiple winners in each CBA. If a 

single winner was selected in an area, 

a small supplier would have difficulty 

participating in the competition because 

the supplier would have to somehow 

demonstrate that it could rapidly 

expand to serve the entire projected 

demand in the area. Selecting multiple 

suppliers should make it easier for small 

suppliers to participate in the program. 

Second, we propose to conduct 

separate bidding competitions for 

product categories, allowing suppliers 

to decide how many product categories 


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for which they want to submit bids, 

rather than conduct a single bidding 

competition for all DMEPOS items and 

other equipment. We believe that 

separate competitions for product 

categories will encourage participation 

by small suppliers that specialize in one 

or a few product categories. If a single 

competition was held for all DMEPOS 

items and other equipment, small, 

specialized suppliers would have to 

either significantly expand their product 

and service offerings or submit bids for 

items they currently do not provide. 

We recognize the importance of small 

suppliers in the DMEPOS industry, and 

we welcome comments on any the 

options identified above. We are also 

interested in other ways to ensure that 

small suppliers have opportunities to be 

considered for participation in the 

program. 

To collect additional information on 

this issue, we contracted with RTI 

International to conduct focus groups 

with small suppliers. The purpose of the 

focus groups was to gather input on 

ways to facilitate participation by small 

suppliers in the program. The focus 

groups also discussed the impact of the 

requirement for the quality standards 

and accreditation, which will affect all 

small suppliers, regardless of whether 

they seek to participate in a competitive 

bidding program. We will review our 

efforts to ensure participation by small 

suppliers in the Medicare DMEPOS 

Competitive Bidding Program after we 

review comments to this proposed rule 

and the results of the focus groups. We 

will consider the findings of the focus 

groups along with additional options 

and comments presented on this 

proposed rule. 

L. Opportunity for Networks (Proposed 

§ 414.418) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Opportunity for Networks’’ at the 

beginning of your comments.] 

We propose allowing suppliers the 

option to form networks for bidding 

purposes. Networks are several 

companies joining together via some 

type of legal contractual relationship to 

submit bids for a product category 

under competitive bidding. This option 

will allow suppliers to band together to 

lower bidding costs, expand service 

options, or attain more favorable 

purchasing terms. We recognize that 

forming a network may be challenging 

for suppliers, and it also poses 

challenges for bid evaluation and 

program monitoring. Networking was 

included as an option in the 

demonstration project, but no networks 

submitted bids. Still, we believe that 

networking may be a useful option for 

suppliers in some cases, so we propose 

to offer it as an option. If suppliers do 

decide to form networks, we propose 

that the following rules must be met: 

• A legal entity must be formed for 

the purpose of competitive bidding, 

such as a joint venture, limited 

partnership, or contractor/subcontractor 

relationship which would act as the 

applicant and submit the bid. We are 

specifically requesting comments 

regarding other types of suitable 

arrangements that would not require 

suppliers to form a new legal entity but 

would allow them to form a network for 

purposes of submitting bids. For 

example, one supplier could be 

designated as a primary contractor and 

the other suppliers in the group would 

function as subcontractors. In this 

example, if the contract with the 

primary contractor was terminated, the 

contracts with the subcontractors would 

also be terminated, thus nullifying the 

entire contract. 

• All legal contracts must be in place 

and signed before the network entity 

can submit a bid for the Medicare 

DMEPOS Competitive Bidding Program. 

• Each member of the network must 

be independently eligible to bid. If a 

member of the network is determined to 

be ineligible to bid, the network will be 

notified and given 10 business days to 

resubmit its application. 

• Each member must meet any 

accreditation and quality standards that 

are required. Each member is equally 

responsible for the quality of care, 

service and items that it delivers to 

Medicare beneficiaries. If any member 

of the network falls out of compliance 

with this requirement, we would have 

the option of terminating the network 

contract. 

• The network cannot be anticompetitive. We propose that the 

network members’ market shares for 

competitive bid item(s) when added 

together, cannot exceed 20 percent of 

the Medicare market within a 

competitive bidding area. We believe 

that by setting the maximum size of the 

network’s market shares at 20 percent of 

the marketplace, firms will be able to 

gain the potential efficiencies of 

networking while at the same time 

ensure that there would continue to be 

competition in the area. If the 20 

percent rule were adopted and suppliers 

joined networks, there would still be at 

least 5 networks competing in a 

DMEPOS competitive bidding program, 

which we believe would allow for 

sufficient competition among suppliers. 

In particular, we are requesting 

comment about what percentage of the 

marketplace would be appropriate for 

networks for suppliers. 

• A supplier may only join one 

network and cannot submit individual 

bids if part of a network. The network 

must identify itself as a network and 

identify all members in the network. 

• The legal entity would be 

responsible for billing Medicare and 

receiving payment on behalf of the 

network suppliers. The legal entity 

would also be responsible for 

appropriately distributing 

reimbursements to the other network 

members. 

M. Education and Outreach 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Education and Outreach’’ at the 

beginning of your comments.] 

1. Supplier Education 

We would also propose to undertake 

a proactive education campaign to 

provide all suppliers with information 

about the Medicare DMEPOS 

Competitive Bidding Program, bidding 

timelines, and bidding and program 

requirements. The goal of this campaign 

would be to make it as easy as possible 

for suppliers to submit bids. 

To ensure that suppliers have timely 

access to accurate information on 

competitive bidding, we are proposing 

to instruct the CBIC and the DMERCs to 

provide early education and resources 

to all suppliers, referral agents, 

beneficiaries and other providers who 

service a competitive bidding area. 

Customer service support, ombudsmen 

networks, and the claims processing 

system would all be used to notify and 

educate all parties regarding 

competitive bidding. The CBIC(s) would 

be instructed to utilize data analysis in 

tailoring outreach to those that will be 

directly affected by competitive bidding. 

After the release of bidding 

instructions, we would also propose to 

hold bidders conferences that would 

provide an open forum for suppliers and 

allow us to disseminate additional 

information. More information on the 

bidders conferences and other 

competitive bidding activities will be 

available on our Web site at http:// 

cms.hhs.gov/suppliers/dmepos/ 

compbid/paoc.asp. 

We are also proposing that each 

DMERC include discussions and 

updates on competitive bidding as part 

of its existing outreach mechanisms. 

The fundamental goal of our supplier 

educational outreach is to ensure that 

those who supply DMEPOS products to 

Medicare beneficiaries receive 

information they need in a timely 


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manner so they have an understanding 

of the program and our expectations. 

2. Beneficiary Education 

The competitive bidding program will 

have an impact on the beneficiaries who 

receive DMEPOS items in a competitive 

bidding area. Competitive bidding 

represents a new way for Medicare 

beneficiaries to receive their DMEPOS 

products, so we believe that education 

is important to the success of the 

program. 

We propose to educate beneficiaries 

utilizing numerous approaches. For 

example, our press office may consider 

creating press releases and fact sheets 

for each CBA. Notices would provide 

summaries of competitive bidding, 

background information, and objectives 

of the competitive bidding program. 

Publications may also be available on 

CMS Web sites, and from local 

contractors and the DMERCS. 

We believe that it is important for 

beneficiaries to learn about the benefits 

of the Medicare DMEPOS Competitive 

Bidding Program, such as lower out-ofpocket expenses and increased quality 

of products, from suppliers that have 

completed the detailed selection process 

that CMS will require under the 

program. Enforcement of supplier 

standards and the threat of exclusion 

from the Medicare program will 

encourage suppliers to maintain a high 

level of service. These factors make an 

extensive outreach approach critical to 

the program’s success. 

Although we are not proposing at this 

time any additional education 

requirements, we are interested in 

seeking comments on other mechanisms 

that might be utilized to inform 

beneficiaries and suppliers about the 

competitive bidding program. 

N. Monitoring and Complaint Services 

for the Competitive Bidding Program 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Monitoring and Complaint Services for 

the Competitive Bidding Program’’ at 

the beginning of your comments.] 

Moving to a competitive bidding 

environment will not adversely affect 

CMS’’ program integrity efforts in 

reviewing claims and rooting out fraud, 

waste, or abuse. Claims will still be 

reviewed for medical necessity, 

coordination of benefits status, and 

benefits integrity. Any suspected 

instances of DMEPOS competitive 

bidding market manipulation and 

collusion will be referred to the 

appropriate federal agencies that are 

responsible for addressing these issues. 

We are proposing to establish a formal 

complaint monitoring system to address 

complaints in each competitive bidding 

area. Beneficiaries, referral agents, 

providers, and suppliers, including 

physicians, hospitals, nurses, and home 

health agencies, will be able to report 

problems or difficulties that they 

encounter regarding the ordering and 

furnishing of DMEPOS in a competitive 

bidding area. Some examples of 

problems that we would consider to be 

serious include: Contract suppliers 

refusing to furnish items to beneficiaries 

in the competitive bidding area for 

which they were awarded a contract; 

contract suppliers furnishing items of 

inferior quality than those that they bid 

to furnish; or contract suppliers 

violating assignment and billing 

requirements. 

We also propose to monitor Medicare 

claims data to ensure that competitive 

bidding does not negatively impact 

beneficiary access to medically 

necessary items. Claims data will be 

monitored to identify trends, spikes or 

decreases in utilization and changes in 

utilization patterns within a product 

category. 

O. Physician Authorization/Treating 

Practitioner and Consideration of 

Clinical Efficiency and Value of Items in 

Determining Categories for Bids 

(Proposed § 414.420) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Physician Authorization/Treating 

Practitioner’’ at the beginning of your 

comments.] 

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

provides authorization to the Secretary 

to establish a process for certain items 

under which a physician may prescribe 

a particular brand or mode of delivery 

of an item within a particular HCPCS 

code if the physician determines that 

use of the particular item would avoid 

an adverse medical outcome on the 

individual. We are proposing to 

implement this section in proposed 

§ 414.440, and to also apply it to certain 

treating practitioners, including 

physician assistants, nurse practitioners, 

and clinical nurse specialists, since 

these practitioners also order DMEPOS 

for which Medicare makes payment. 

Since a HCPCS code may contain many 

brand products made by a wide range of 

manufacturers, we expect that suppliers 

will choose to only offer certain brands 

of products within a HCPCS code. This 

is a common practice used by suppliers 

to reduce the amount of inventory they 

maintain. However, we are proposing 

that the physician or treating 

practitioner would be able to determine 

that a particular item would avoid an 

adverse medical outcome, and that the 

physician or treating practitioner would 

have discretion to specify a particular 

product brand or mode of delivery. 

When a physician or other treating 

practitioner requests a specific item, 

brand, or mode of delivery, contract 

suppliers would be required to furnish 

that item or mode of delivery, assist the 

beneficiary in finding another contract 

supplier in the CBA that can provide 

that item, or consult with the physician 

or treating practitioner to find a suitable 

alternative product or mode of delivery 

for the beneficiary. If, after consulting 

with the contract supplier, the 

physician or treating practitioner is 

willing to revise his or her order, that 

decision must be reflected in a revised 

written prescription. However, if the 

contract supplier decides to provide an 

item that does not match the written 

prescription from the physician or 

treating practitioner, the contract 

supplier should not bill Medicare as this 

would be considered a non-covered 

item. 

For the Medicare DMEPOS 

Competitive Bidding Program, we 

would not require a contract supplier to 

provide every brand of products 

included in a HCPCS code. However, 

regardless of what brands the contract 

supplier furnishes, the single payment 

amount for the HCPCS code would 

apply. This issue will be studied in 

more detail by the Office of the 

Inspector General in 2009. At that time, 

we will evaluate the need for a specific 

process for certain brand names or 

modes of delivery. 

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

Act provides authority to establish 

separate categories for items within 

HCPCS codes if the clinical efficiency 

and value of items within a given code 

warrants a separate category for bidding 

purposes. Currently, HCPCS codes are 

developed for items that are similar in 

function and purpose. For this reason, 

items within the same code are paid at 

the same rate. We believe that the 

HCPCS process has worked well in the 

past, and we believe that it adequately 

separates items based on their function. 

We welcome public comment on this 

issue. 

P. Quality Standards and Accreditation 

for Suppliers of DMEPOS 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Quality Standards and Accreditation 

for Supplies of DMEPOS’’ at the 

beginning of your comments.] 

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

specifies that a contract may not be 

awarded to any entity unless the entity 

meets applicable quality standards 

specified by the Secretary under section 


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1834(a)(20) of the Act. Any supplier 

seeking to participate in the Medicare 

DMEPOS Competitive Bidding Program 

will need to satisfy the quality standards 

issued under section 1834(a)(20) of the 

Act. Additionally, section 1834(a)(20) of 

the Act gives us the authority to 

establish through program instructions 

or otherwise quality standards for all 

suppliers of DMEPOS and other items, 

including those who do not participate 

in competitive bidding, and to designate 

one or more independent accreditation 

organizations to implement the quality 

standards. Therefore, to ensure the 

integrity of suppliers’ businesses, 

products, we are proposing to revise 

§ 424.57 and add a new § 424.58. 

1. Special Payment Rules for Items 

Furnished by DMEPOS Suppliers and 

Issuance of DMEPOS Supplier Billing 

Privileges (§ 424.57) 

In accordance with sections 

1834(a)(20) and 1834(j)(1)(B)(ii)(IV) of 

the Act, we propose to amend § 424.57 

as discussed in this section of the 

proposed rule. In paragraph (a), 

Definitions, we would propose to define 

the following terms: 

• CMS-approved accreditation 

organization is an independent 

accreditation organization selected by 

CMS to apply the supplier quality 

standards established by CMS; 

• Accredited DMEPOS supplier 

means a supplier that has been 

accredited by an independent 

accreditation organization meeting the 

requirements of and approved by CMS 

in accordance with § 424.58; and 

• Independent accreditation 

organization means an accreditation 

organization that accredits a supplier of 

DMEPOS and other items and services 

for a specific DMEPOS product category 

or a full line of DMEPOS product 

categories. 

Proposed new paragraph (c)(22) 

would specify that all suppliers of 

DMEPOS and other items be accredited 

by a CMS approved accreditation 

organization before receiving a supplier 

billing number. 

2. Accreditation (§ 424.58) 

Under section 1834(a)(20) of the Act, 

we would add a new section § 424.58 to 

address the requirements for CMS 

approved accreditation organizations in 

the application of the quality standards 

to suppliers of DMEPOS and other 

items. 

To promote consistency in accrediting 

providers and suppliers throughout the 

Medicare program, we would use 

existing procedures for the application, 

reapplication, selection, and oversight 

of accreditation organizations detailed 

at Part 488 and apply them to 

organizations accrediting suppliers of 

DMEPOS and other items. We would 

make modifications to the existing 

requirements for accreditation 

organizations to meet the specialized 

needs of the DMEPOS industry. These 

modifications may require an 

independent accreditation organization 

applying for approval or re-approval of 

deeming authority to—

• Identify the product-specific types 

of DMEPOS suppliers for which the 

organization is requesting approval or 

re-approval; 

• Provide CMS with a detailed 

comparison of the organization’s 

accreditation requirements and 

standards with the applicable Medicare 

quality standards (for example, a 

crosswalk); 

• Provide a detailed description of 

the organization’s survey processes 

including procedures for performing 

unannounced surveys, frequency of the 

surveys performed, copies of the 

organization’s survey forms, guidelines 

and instructions to surveyors, quality 

review processes for deficiencies 

identified with accreditation 

requirements; 

• Describe the decision-making 

processes; describe procedures used to 

notify suppliers of compliance or 

noncompliance with the accreditation 

requirements; 

• Describe procedures used to 

monitor the correction of deficiencies 

found during the survey; and 

• Describe procedures for 

coordinating surveys with another 

accrediting organization if the 

organization does not accredit all 

products the supplier provides. 

We also propose to use the 

application procedure currently 

specified in § 488.4(c) through (i) as the 

application process for DMEPOS 

accreditation organizations. 

We may request detailed information 

about the professional background of 

the individuals who perform surveys for 

the accreditation organization 

including: The size and composition of 

accreditation survey teams for each type 

of supplier accredited; the education 

and experience requirements surveyors 

must meet; the content and frequency of 

the continuing education training 

provided to survey personnel; the 

evaluation systems used to monitor the 

performance of individual surveyors 

and survey teams; and policies and 

procedures for a surveyor or 

institutional affiliate of an accrediting 

organization that participates in a 

survey or accreditation decision 

regarding a DMEPOS supplier with 

which this individual or institution is 

professionally or financially affiliated. 

We may request a description of the 

organization’s data management, 

analysis, and reporting system for its 

surveys and accreditation decisions, 

including the kinds of reports, tables, 

and other displays generated by that 

system. We may require a description of 

the organization’s procedures for 

responding to and investigating 

complaints against accredited facilities 

including policies and procedures 

regarding coordination of these 

activities with appropriate licensing 

bodies, ombudsmen programs, National 

Supplier Clearinghouse, and with CMS; 

a description of the organization’s 

policies and procedures for notifying 

CMS of facilities that fail to meet the 

requirements of the accrediting 

organization; a description of all types, 

categories, and duration of accreditation 

decisions offered by the organization; a 

list of all currently accredited DMEPOS 

suppliers; a list of the types and 

categories of accreditation currently 

held by each supplier; a list of the 

expiration date of each supplier’s 

current accreditation; and a list of the 

next survey cycles for all DMEPOS 

suppliers accreditation surveys 

scheduled to be performed by the 

organization. 

We may require the accreditation 

organization to submit the following 

supporting documentation: 

• A written presentation that would 

demonstrate the organization’s ability to 

furnish CMS with electronic data in 

ASCII-comparable code; 

• A resource analysis that would 

demonstrate that the organization’s 

staffing, funding and other resources are 

sufficient to perform the required 

surveys and related activities; and 

• An acknowledgement that the 

organization would permit its surveyors 

to serve as witnesses if CMS took an 

adverse action against the DMEPOS 

supplier based on the accreditation 

organization’s findings. 

We propose to survey accredited 

suppliers from time to time to validate 

the survey process of a DMEPOS 

accreditation organization (validation 

survey). These surveys would be 

conducted on a representative sample 

basis, or in response to allegations of 

supplier noncompliance with quality 

standards. When conducted on a 

representative sample basis, the survey 

would be comprehensive and address 

all Medicare supplier quality standards 

or would focus on a specific standard. 

When conducted in response to an 

allegation, the CMS survey team would 

survey for any standard that CMS 

determined was related to the 


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allegations. If the CMS survey team 

substantiated a deficiency and 

determined that the supplier was out of 

compliance with Medicare supplier 

quality standards, we would revoke the 

supplier’s billing number and reevaluate the accreditation organization’s 

approved status. A supplier selected for 

a validation survey would be required to 

authorize the validation survey to occur 

and authorize the CMS survey team to 

monitor the correction of any 

deficiencies found through the 

validation survey. If a supplier selected 

for a validation survey failed to comply 

with the requirements at § 424.58, it 

would no longer meet the Medicare 

supplier quality standards and its 

supplier billing number would be 

revoked. 

3. Ongoing Responsibilities of CMS 

Approved Accreditation Organizations 

A DMEPOS independent 

accreditation organization approved by 

CMS would be required to undertake 

the following activities on an ongoing 

basis: 

• Provide to CMS in written form and 

on a monthly basis all of the following: 

++ Copies of all accreditation surveys 

along with any survey-related 

information that CMS may require 

(including corrective action plans and 

summaries of CMS requirements that 

were not met). 

++ Notice of all accreditation 

decisions. 

++ Notice of all complaints related to 

suppliers of DMEPOS and other items. 

++ Information about any suppliers 

of DMEPOS and other items for which 

the accrediting organization has denied 

the supplier’s accreditation status. 

++ Notice of any proposed changes in 

its accreditation standards or 

requirements or survey process. If the 

organization implemented the changes 

before or without CMS approval, CMS 

could withdraw its approval of the 

accreditation organization. 

• Submit to CMS (within 30 days of 

a change in CMS requirements): 

++ An acknowledgment of CMS’s 

notification of the change; 

++ A revised cross-walk reflecting the 

new requirements; and 

++ An explanation of how the 

accreditation organization would alter 

its standards to conform to CMS’ new 

requirements, within the time frames 

specified by CMS in the notification of 

change it received. 

• Permit its surveyors to serve as 

witnesses if CMS takes an adverse 

action based on accreditation findings. 

• Provide CMS with written notice of 

any deficiencies and adverse actions 

implemented by the independent 

accreditation organization against an 

accredited DMEPOS supplier within 2 

days of identifying such deficiencies, if 

such deficiencies pose immediate 

jeopardy to a beneficiary or to the 

general public. 

• Provide written notice of the 

withdrawal to all accredited suppliers 

within 10 days of CMS’s notice to 

withdraw approval of the accreditation 

organization. 

• Provide, on an annual basis, 

summary data specified by CMS that 

related to the past year’s accreditation 

activities and trends. 

4. Continuing Federal Oversight of 

Approved Accreditation Organizations 

This paragraph would establish 

specific criteria and procedures for 

continuing oversight and for 

withdrawing approval of an 

accreditation organization. 

a. Equivalency Review 

We would compare the accreditation 

organization’s standards and its 

application and enforcement of those 

standards to the comparable CMS 

requirements and processes when: CMS 

imposed new requirements or changed 

its survey process; an accreditation 

organization proposed to adopt new 

standards or changes in its survey 

process; or the term of an accreditation 

organization’s approval expired. 

b. Validation Review 

A CMS survey team would conduct a 

survey of an accredited organization, 

examine the results of the accreditation 

organization’s own survey procedure 

onsite, or observe the accreditation 

organization’s survey, in order to 

validate the organization’s accreditation 

process. At the conclusion of the 

review, we would identify any 

accreditation programs for which 

validation survey results indicated: 

• A 10 percent rate of disparity 

between findings by the accreditation 

organization and findings by CMS on 

standards that did not constitute 

immediate jeopardy to patient health 

and safety if not met; 

• Any disparity between findings by 

the accreditation organization and 

findings by CMS on standards that 

constituted immediate jeopardy to 

patient health and safety if not met; or 

• There were widespread or systemic 

problems in the organization’s 

accreditation process such that the 

accreditation no longer provided 

assurance that suppliers met or 

exceeded the Medicare requirements, 

irrespective of the rate of disparity. 

c. Notice of Intent To Withdraw 

Approval for Deeming Authority 

If an equivalency review, validation 

review, onsite observation, or our 

concerns with the ethical conduct of the 

accreditation organization suggest that 

the accreditation organization is not 

meeting the requirements of proposed 

§ 424.58, we would provide the 

organization written notice of its intent 

to withdraw approval of the 

accreditation organization’s deeming 

authority. 

d. Withdrawal of Approval for Deeming 

Authority 

We could withdraw approval of an 

accreditation organization at any time if 

we determine that: Accreditation by the 

organization no longer guaranteed that 

the suppliers of DMEPOS and other 

items met the supplier quality standards 

and the failure to meet those 

requirements could pose an immediate 

jeopardy to the health or safety of 

Medicare beneficiaries or constitute a 

significant hazard to the public health; 

or the accreditation organization failed 

to meet its obligations for application 

and reapplication procedures. 

e. Reconsideration 

An accreditation organization 

dissatisfied with a determination that its 

accreditation requirements did not 

provide or do not continue to provide 

reasonable assurance that the entities 

accredited by the accreditation 

organization met the applicable supplier 

quality standards would be entitled to a 

reconsideration. We would reconsider 

any determination to deny, remove, or 

not renew the approval of deeming 

authority to accreditation organizations 

if the accreditation organization filed a 

written request for a reconsideration 

through its authorized officials or 

through its legal representative. 

The request would have to be filed 

within 30 days of the receipt of CMS 

notice of an adverse determination or 

nonrenewal. The request for 

reconsideration would be required to 

specify the findings or issues with 

which the accreditation organization 

disagreed and the reasons for the 

disagreement. A requestor could 

withdraw its request for reconsideration 

at any time before the issuance of a 

reconsideration determination. In 

response to a request for 

reconsideration, we would provide the 

accrediting organization the opportunity 

for an informal hearing that would be 

conducted by a hearing officer 

appointed by the Administrator of CMS 

and provide the accrediting organization 

the opportunity to present, in writing 


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and in person, evidence or 

documentation to refute the 

determination to deny approval, or to 

withdraw or not renew deeming 

authority. 

We would provide written notice of 

the time and place of the informal 

hearing at least 10 days before the 

scheduled date. The informal 

reconsideration hearing would be open 

to CMS and the organization requesting 

the reconsideration, including 

authorized representatives, technical 

advisors (individuals with knowledge of 

the facts of the case or presenting 

interpretation of the facts), and legal 

counsel. The hearing would be 

conducted by the hearing officer who 

would receive testimony and documents 

related to the proposed action. 

Testimony and other evidence could be 

accepted by the hearing officer. 

However, it would be inadmissible 

under the usual rules of court 

procedures. The hearing officer would 

not have the authority to compel by 

subpoena the production of witnesses, 

papers, or other evidence. Within 45 

days of the close of the hearing, the 

hearing officer would present the 

findings and recommendations to the 

accrediting organization that requested 

the reconsideration. The written report 

of the hearing officer would include 

separate numbered findings of fact and 

the legal conclusions of the hearing 

officer. The hearing officer’s decision 

would be final. 

Q. Low Vision Aid Exclusion (Proposed 

§ 414.15) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Low vision aid exclusion’’ at the 

beginning of your comments.] 

We are proposing to clarify that the 

scope of the eyeglass coverage exclusion 

encompasses all devices irrespective of 

their size, form, or technological 

features that use one or more lens to aid 

vision or provide magnification of 

images for impaired vision. This 

proposed regulatory provision clarifies 

that the statute does not support the 

interpretation that the term eyeglasses 

only applies to lenses supported by 

frames that pass around the nose and 

ears. The underlying technology and the 

function of eyeglasses are to use lenses 

to assist persons with impaired vision. 

Dorland’s Illustrated Medical Dictionary 

(28th Ed. 1994) defines ‘‘eyeglass’’

simply as a ‘‘lens for aiding sight.’’ We 

interpret the eyeglass exclusion at 

section 1862(a)(7) of the Act as 

encompassing all of the various types of 

devices that use lenses for the correction 

of vision unless there is a statutory 

provision that provides for coverage. For 

example, section 1861(s)(8) of the Act 

provides for intraocular lenses, 

conventional eyeglasses and contact 

lenses after each cataract surgery with 

insertion of an intraocular lens. We 

specifically invite public comment on 

this issue. 

We note that if the term ‘‘eyeglasses’’

as used at section 1862(a)(7) of the Act 

only refers to the exclusion of payment 

for lenses supported by frames that pass 

around the nose and ears, then the 

eyeglass exclusion would not apply to 

contact lenses and there would have 

been no reason for the Congress to make 

an exception to section 1862(a)(7) of the 

Act for contact lenses. However, the 

Congress did make such an exception to 

section 1862(a)(7) of the Act for 

conventional contact lenses after 

cataract surgery. 

A comparison of sections 1862(a) and 

1861(s) of the Act indicate that the 

eyeglass exclusion also applies to 

contact lenses except for one pair after 

cataract surgery. By applying the 

eyeglass exclusion to contact lenses, the 

statute reinforces the interpretation that 

the use of lenses to aid impaired vision 

is the scope of what is excluded by the 

eyeglass exclusion and not just lenses 

supported by frames that pass around 

the nose and ears. Also, when referring 

to ‘‘conventional eyeglasses,’’ section 

1861(s)(8) of the Act is affirming that the 

term ‘‘eyeglasses’’ has a wider 

application than ‘‘conventional 

eyeglasses’’ and the terms ‘‘conventional 

eyeglasses’’ and ‘‘eyeglasses’’ are not 

synonymous in the statute. 

This interpretation of the term 

eyeglasses is consistent with the 

regulatory language used for the 

optional benefit in the Medicaid 

program under § 440.120(d) for 

eyeglasses, which is ‘‘lenses, including 

frames, and other aids to vision * * *’’

This language gives States that cover 

eyeglasses the flexibility to adopt a 

reasonable definition that includes low 

vision aids that are determined 

medically necessary. The definition 

used by the Medicaid program 

demonstrates that the term eyeglasses 

can appropriately be defined to include 

low vision aids. Consistent with this 

framework, we consider the eyeglass 

exclusion for the Medicare program to 

apply to eyepieces, hand-held 

magnifying glasses, contact lenses and 

other instruments, such as closed-circuit 

televisions and video magnifiers that 

use lenses to aid vision. 

Although the technology of using 

lenses to aid low vision may be 

improved with new innovations, such 

as contact lenses, progressive lenses and 

low vision aids, this does not exempt 

the new technology from the eyeglass 

exclusion. The adaptation of the vision 

aid technology does not change the 

essential nature of the device: A video 

magnifier is still a device that utilizes a 

lens to enhance vision. We believe this 

interpretation is consistent with the 

decision in Warder v. Shalala, 149 F 

3d73 (1st Cir. 1998), in which the 

United States Court of Appeals for the 

First Circuit held, in part, that the 

Secretary’s classification of a 

technologically advanced seating system 

as DME, and not as an orthotic, was 

supported by the Medicare statute and 

regulations. In reaching this conclusion, 

the court stated that the Secretary could 

conclude that the seating system met the 

definition of DME, which 

‘‘unequivocally includes 

‘wheelchairs’, ’’ since the system served 

the same (as well as additional) 

functions as a wheelchair. We believe 

this case affirms the principle that the 

Secretary has the discretion to interpret 

the statute and to assign a product to a 

particular Medicare category even when 

this will result in non-coverage 

determinations by Medicare. 

R. Establishing Payment Amounts for 

New DMEPOS Items (Gap-Filling) 

(Proposed § 414.210(g)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Gap-filling’’ at the beginning of your 

comments.] 

There is no process set forth in the 

statute or regulations for calculating fee 

schedule amounts for new DMEPOS 

items (that is, new HCPCS codes 

representing categories of items for 

which there is no historic Medicare 

pricing information). Since 1989, CMS 

and its contractors have used a process 

referred to as ‘‘gap filling’’ to establish 

fee schedule amounts for items for 

which fee schedule base data is not 

available. In the past, the gap-filling 

process was described in the Medicare 

Carriers Manual. The process is now 

contained in the Medicare Claims 

Processing Manual and provides that fee 

schedule amounts are to be gap-filled 

using fee schedule amounts already 

established for comparable items; 

properly calculated fee schedule 

amounts from a neighboring carrier; or 

supplier price lists with prices in effect 

during the database year. 

If the only available price information 

is from a period other than the fee 

schedule base period (for example, 1992 

for surgical dressings), a deflation factor 

is applied to the price in order to 

approximate the base year price for gapfilling purposes. The deflation factors 

are based on the percentage change in 


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the CPI–U from the mid-point of the fee 

schedule base period (for example, June 

1992 for surgical dressings) to the midpoint (that is, June) of the calendar year 

that the gap-filling source price is in 

effect. When gap-filling base fees for 

capped rental items, it is necessary to 

first gap-fill the purchase fee and then 

compute the rental fee based on 10 

percent of the gap-filled purchase fee. 

For used equipment, base fees are gapfilled using 75 percent of the gap-filled 

fee for new equipment. 

The process of gap-filling essentially 

estimates what the average reasonable 

charges would be for an item if it was 

paid for under Medicare during the fee 

schedule base period. The gap-filled 

base fees are updated by the covered 

item updates and are subject to regional 

fees, and ceiling and floor limitations, if 

applicable. We have consistently used 

the gap-filling process as the method for 

replicating historical charge data. 

However, this method can lead to very 

high or very low fee schedule amounts 

without validation that these amounts 

are realistic and equitable relative to the 

cost of furnishing the item. Since the 

gap-filling process began in 1989, most 

base fees have been gap-filled using 

either supplier price lists or 

manufacturers’ suggested retail prices. 

Many manufacturers are aware of the 

process and realize that if a unique 

HCPCS code is added for their device, 

they can establish inflated suggested 

retail prices that would be used to 

establish the Medicare fee schedule 

payment amounts. We also view the 

continued use of deflation factors to 

replicate historic prices or charges to be 

an imperfect method of establishing 

base fee schedule amounts. Under the 

Medicare DMEPOS benefits, there is an 

inherent responsibility to pay enough 

for beneficial new technologies to 

ensure beneficiary access to care, while 

also being a prudent payer. To increase 

the Medicare program’s ability to ensure 

fair treatment across technologies, we 

have focused on developing strategies 

that recognize those technologies that 

provide a demonstrated clinical benefit 

and clearly identify the additional 

benefits over existing technologies. This 

initiative has been endorsed by the 

Council on Technology and Innovation 

(CTI), which was established under 

section 942 of the MMA to coordinate 

the activities of coverage, coding, and 

payment processes affecting new 

technologies and procedures and to 

coordinate the exchange of information 

on new technologies between CMS and 

other entities that make similar 

decisions. 

We procured two contractors to 

conduct a pilot study on the benefits, 

effectiveness, and costs of several 

products. These projects were very 

successful in compiling the technical 

information that is necessary to evaluate 

technologies for the purpose of making 

payment and HCPCS coding decisions 

for new items. The products studied 

were assessed in terms of three main 

areas as follows: 

• Functional Assessment—This step 

involved evaluating the device’s 

operations, safety, and user 

documentation relative to the Medicare 

population. Interviews were conducted 

with health care providers to determine 

how and under what circumstances they 

would prescribe the product for a 

Medicare beneficiary. 

• Price Comparison Analysis—A 

comparative cost analysis determined 

how the cost of this product compared 

to similar products on the market or 

alternative treatment modalities. 

• Medical Benefit Assessment—This 

step focused on the effectiveness of the 

product in doing what it claims to do. 

Scientific literature reviews and 

interviews with health care providers 

were conducted to determine if the 

product significantly improved clinical 

outcomes compared to other products 

and treatment modalities. 

Competitive bidding will allow 

market forces to determine the price 

Medicare pays for certain DMEPOS 

items. In order to ensure that only 

quality products are provided to our 

beneficiaries, we are proposing to use 

the three types of assessments described 

above to assist us in ensuring that the 

HCPCS codes for DMEPOS items reflect 

current technology and functional 

differences in items and that new 

products are included within the 

appropriate HCPCS code. The 

functional technology assessment will 

allow us to compare older, similar 

products already on the market and 

newer more expensive products. The 

functional assessment and medical 

benefit assessment of devices will 

greatly aid our decision-making process 

regarding the need to create unique 

HCPCS code categories. The price 

comparison analysis of devices will 

help us determine if manufacturers’

suggested retail prices are overly 

inflated, will provide a basis for 

establishing adequate payment amounts 

for new items, and will assist in 

establishing payment amounts for new 

items that are introduced after a bidding 

cycle has begun. 

Sections 1834(a), (h), (i) and 1833(o) 

of the Act require the establishment of 

fee schedule amounts to pay for DME, 

prosthetic devices, orthotics, 

prosthetics, surgical dressings, and 

therapeutic shoes. In addition, payment 

for PEN is also based on fee schedule 

amounts authorized by section 1842(s) 

of the Act. The fee schedule amounts 

are based on average payments made 

under the previous reasonable charge 

payment methodology as mandated by 

the statute. When a new HCPCS code is 

created for a category of items, the gapfilling process outlined in this section is 

used to establish the fee schedule 

amounts for the new code. We are 

proposing that this gap-filling process 

be revised as follows: 

• We would continue to make every 

effort to utilize existing fee schedule 

amounts or historic Medicare payment 

amounts, if applicable, in establishing 

payment amounts for new HCPCS 

codes. In addition, the method of using 

payment amounts for comparable items 

would be retained under the revised 

process for establishing payment 

amounts for new HCPCS codes. 

• We would discontinue the practice 

of deflating supplier prices and 

manufacturers suggested retail prices to 

the fee schedule base period. When fee 

schedule amounts are established based 

on pricing information, prices in effect 

at the time that the fee schedule 

amounts are established would be used. 

For subsequent years, the fee schedule 

amounts established using supplier or 

manufacturer pricing information would 

be updated as required by the statute as 

it is applicable to each category of items. 

In the past, when retail pricing 

information is not available, wholesale 

prices plus an appropriate mark-up are 

used to establish the fee schedule 

amounts. 

• We would use the functional 

technology assessment process, in part 

or in whole, as another method for 

establishing payment amounts for new 

items. Based on the results of the 

technology assessment, the fee schedule 

amounts would be established using fee 

schedule amounts for items determined 

to be comparable to the new item or an 

amount determined to be appropriate 

for the new item based on the cost 

comparison analysis. We can use the 

technology assessment process at any 

time to adjust prices on or after January 

1, 2007 that were previously established 

using the gap-filling methodology if it is 

determined that those pricing methods 

resulted in payment amounts that do 

not reflect the cost of furnishing the 

item. Fee schedule amounts established 

using this process would be updated as 

required by the statute as it is applicable 

to each category of items. 

In those cases where the addition of 

the HCPCS code for a new item occurs 

in the middle of a bidding cycle and a 

Medicare pricing history or profile does 

not exist for the item or is not applicable 


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for the new code category, we propose 

that the revised gap-filling process for 

establishing fee schedule payment 

amounts for new DMEPOS items would 

also be used in establishing payment 

amounts for new items until they are 

added to a product category subject to 

competitive bidding. Any qualified 

Medicare supplier will be allowed to 

supply one of these items until the next 

bidding cycle. The next bidding cycle 

will set a new single payment amounts 

for this item. 

We propose that other revisions to 

HCPCS codes for items under a 

competitive bidding program that occur 

in the middle of a bidding cycle will be 

handled as follows: 

• If a single HCPCS code for an item 

is divided into multiple codes for the 

components of that item, the sum of 

payments for these new codes will not 

be higher than the payment for the 

original item. Suppliers selected 

through competitive bidding to provide 

the item will also provide the 

components of the item. During the 

subsequent competitive bidding cycle, 

suppliers will bid on each new code for 

the components of the item, and we will 

determine new single payment amounts 

for these components. 

• If a single HCPCS code for two or 

more similar items is divided into two 

or more separate codes, the payment 

amount applied to these codes will 

continue to be the same payment 

amount applied to the single code until 

the next competitive bidding cycle. 

During the next cycle, suppliers will bid 

on the new separate and distinct codes. 

• If the HCPCS codes for several 

components of one item are merged into 

one new code for the single item, the 

payment amount of the new code will 

be equal to the total of the separate 

payment amounts for the components. 

Suppliers that were selected through 

competitive bidding to supply the 

various components of the item will 

continue to supply the item using the 

new code. During the subsequent 

bidding cycle, suppliers will bid on the 

new code for the single item to 

determine a new single payment 

amount for this new code. 

• If multiple codes for different, but 

related or similar items are placed into 

a single code, the payment amount for 

the new single code will be the average 

(arithmetic mean) weighted by 

frequency of payments for the formerly 

separate codes. Suppliers providing the 

items originally will also provide the 

item under the new single code. During 

the subsequent bidding cycle, suppliers 

will bid on the new single code and 

determine a new single payment 

amounts for this code. 

S. Fee Schedules for Home Dialysis 

Supplies and Equipment (Proposed 

§ 414.107) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Fee Schedules for Home Dialysis 

Supplies and Equipment’’ at the 

beginning of your comments.] 

Section 1842(s) of the Act provides 

authority for implementing statewide or 

other area wide fee schedules to be used 

for payment of home dialysis supplies 

and equipment. Section 1842(s)(1) of the 

Act provides that the fee schedules are 

to be updated on an annual basis by the 

percentage increase in the CPI–U 

(United States city average) for the 12- 

month period ending with June of the 

preceding year. Section 4315(d) of the 

BBA requires that the fee schedules that 

are established using this authority are 

set initially so that total payments under 

the fee schedules are approximately 

equal to the estimated total payments 

that would be made under the 

reasonable charge payment 

methodology. 

On July 27, 1999, we published a 

proposed rule, Replacement of 

Reasonable Charge Methodology by Fee 

Schedules (64 FR 40534), to establish 

fee schedules for these items. Fee 

schedules were established for PEN 

items and services in 2002 following the 

publication of the final rule, 

Replacement of Reasonable Charge 

Methodology by Fee Schedules for 

Parenteral and Enteral Nutrients, 

Equipment, and Supplies, on August 28, 

2001 (66 FR 45173). However, fee 

schedule amounts were not established 

for home dialysis supplies and 

equipment because the data needed to 

establish budget neutral fee schedule 

amounts was not available at the time 

that final rule was published. We are 

now proposing to establish fee schedule 

amounts for home dialysis supplies and 

equipment because the data needed to 

establish budget neutral fee schedule 

amounts are now available. 

Sections 1832(a)(1) and 1861(s)(2)(F) 

of the Act establish that home dialysis 

supplies and equipment are a covered 

benefit under Part B of the Medicare 

program. Home dialysis supplies and 

equipment are defined under section 

1881(b)(8) of the Act as ‘‘medically 

necessary supplies and equipment 

(including supportive equipment) 

required by an individual suffering from 

end stage renal disease in connection 

with renal dialysis carried out in his 

home (as defined in regulations), 

including obtaining, installing, and 

maintaining such equipment.’’ We 

implemented these provisions in title 

42, part 414 subpart E of the regulations. 

Total monthly payments to a supplier 

for home dialysis supplies and 

equipment may not exceed the limit for 

equipment and supplies established in 

§ 414.330(c)(2). We have determined 

that total monthly payments for these 

items per supplier were equal to the 

monthly limit 79 percent of the time for 

items furnished from January 1, 2004 

through November 30, 2004. This means 

that suppliers billed up to or in excess 

of the monthly payment limit in 79 

percent of the claims submitted during 

this 11-month period. We are proposing 

that nationwide fee schedule amounts 

be implemented for these items effective 

January 1, 2007. These amounts would 

be based on the average allowed charges 

calculated using data for allowed 

services furnished from January 1, 2005 

through December 31, 2005, increased 

by the percentage change in the CPI–U 

for the 24-month period ending June of 

2006. We expect that the total payments 

made under the fee schedule will be 

approximately equal to the total 

payments that would be made under the 

reasonable charge payment 

methodology because the overall 

payment limit for equipment and 

supplies established in § 414.330(c)(2) is 

not affected by implementation of the 

fee schedules for these items. By using 

the average, we do not anticipate a 

significant impact on utilization of 

home dialysis, supplies and equipment. 

Beginning with 2008, the fee schedule 

amounts for home dialysis supplies and 

equipment will be updated on an 

annual basis by the percentage increase 

in the CPI–U for the 12-month period 

ending with June of the preceding year 

under section 1842(s)(1) of the Act. 

T. Fee Schedules for Therapeutic Shoes 

(Proposed § 414.228(c)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Fee Schedules for Therapeutic Shoes’’

at the beginning of your comments.] 

We are proposing to add § 414.228(c) 

to part 414, subpart D of the regulations 

to specify that the Medicare fee 

schedule amounts for therapeutic shoes, 

inserts, and shoe modifications are 

established in accordance with the 

methodology specified in sections 

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

III. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 60- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 


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whether an information collection 

should be approved by OMB, section 

3506(c)(2)(A) of the Paperwork 

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this document that contain 

information collection requirements. 

Section 414.412 Submission of Bids 

Under the Competitive Bidding Program 

Section 414.412 establishes the 

requirements for the submission of bids 

under the competitive bidding process. 

The burden associated with these 

requirements is the time and effort 

necessary to prepare and submit a bid. 

The burden is estimated to be 70 hours 

per bid. In the competitive bidding 

demonstration, suppliers estimated that 

they spent between 40 and 100 hours to 

complete the bids. We therefore use the 

median of 70 hours per bid. In 

connection with the competitive 

bidding programs that we are proposing 

to begin implementing in 2006, we 

assume that 90 percent of suppliers of 

potentially eligible products in the 

designated competitive bidding areas 

will submit bids resulting in 16,545 

bids. Therefore, we estimate it would 

take 1,158,150 total annual hours to 

complete the bids in 2006. In later years, 

as additional CBAs are added, the 

number of bids will increase as will the 

estimated total annual number of hours 

to complete the bids. By 2008, if 90 

percent of suppliers of eligible products 

in the bidding CBAs submit bids there 

will be 72,865 bids. We estimate that the 

annual hours to complete the bids will 

rise to 5,100,550 total annual hours in 

connection with the competitive 

bidding round that we expect to occur 

in 2008, which will involve 70 of the 

largest MSAs. However, the number of 

hours necessary to complete the bids 

may fall over time as suppliers become 

more familiar with the forms and the 

competitive bidding process. The 

number of hours may also be lower if 

additional suppliers do not submit bids. 

As a result, it is possible that the above 

figures overestimate the number of 

hours required to fill out the bidding 

forms. 

The cost associated with the 

requirements pertaining to the 

accreditation program are not included 

as part of the cost or burden for the 

competitive bidding program. 

If you comment on these information 

collection and recordkeeping 

requirements, please mail copies 

directly to the following: 

Centers for Medicare & Medicaid 

Services, Office of Strategic 

Operations and Regulatory Affairs, 

Regulations Development and 

Issuances Group, Attn: William 

Parham, Room C4–26–05, 7500 

Security Boulevard, Baltimore, MD 

21244–1850; and 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 

20503, Attn: Carolyn Lovett, CMS 

Desk Officer, 

carolyn_lovett@omb.eop.gov. Fax 

(202) 395–6974. 

IV. Response to Comments 

Because of the large number of public 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments we receive by the date and 

time specified in the DATES section of 

this preamble, and, when we proceed 

with a subsequent document, we will 

respond to the comments in the 

preamble to that document. 

V. Regulatory Impact Analysis 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Regulatory Impact Analysis’’ at the 

beginning of your comments.] 

A. Overall Impact 

We have examined the impacts of this 

rule as required by Executive Order 

12866 (September 1993, Regulatory 

Planning and Review), the Regulatory 

Flexibility Act (RFA) (September 19, 

1980, Pub. L. 96–354), section 1102(b) of 

the Social Security Act, the Unfunded 

Mandates Reform Act of 1995 (Pub. L. 

104–4), and Executive Order 13132. 

Executive Order 12866 (as amended 

by Executive Order 13258, which 

merely reassigns responsibility of 

duties) directs agencies to assess all 

costs and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with economically significant effects 

(that is, a final rule that would have an 

annual effect on the economy of $100 

million or more in any 1 year, or would 

adversely affect in a material way the 

economy, a sector or the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

communities). 

Since this rule is considered to be a 

major rule because it is economically 

significant, we have prepared a 

regulatory impact analysis. We expect 

that this rule will have a significant 

impact on a substantial number of small 

suppliers. The RFA requires that we 

analyze regulatory options for small 

businesses and other entities. The 

analysis must include a justification 

concerning the reason action is being 

taken, the kinds and numbers of small 

entities the rule affects, and an 

explanation of any meaningful options 

that achieve the objectives with less 

significant adverse economic impact on 

the small entities. 

B. Anticipated Affects 

We can anticipate the probable effects 

of the regulation, but the actual effects 

will vary depending on which 

competitive bidding areas and product 

categories are ultimately selected for 

competitive bidding. The analysis 

which follows, taken together with the 

rest of this preamble, constitutes both a 

regulatory impact analysis (RIA) and an 

initial regulation flexibility analysis 

(IRFA). 

Therefore, for the purpose of this 

impact analysis, because of the 

uncertainty concerning the actual 

number of suppliers who will 

participate, the bid amounts and the 

specific items and areas for which 

competitive bidding will be conducted, 

it is necessary to make several 

assumptions. 

First, we assume that the first round 

of bidding will occur in 2006 with 

prices taking effect in October, 2007, 

and the second round of bidding will 

occur in 2008 with prices taking effect 

in January, 2009. We also assume 

rebidding will only occur every three 

years. 

Second, we assume that competitive 

bidding will occur in 10 of the largest 

MSAs in 2006, excluding New York, 

Chicago, and Los Angeles. We exclude 

the three largest MSAs in 2006 because 

we are proposing not to include them in 

the initial phase implementation. We 

are excluding the three largest MSAs 

because they are significantly larger 

than any of the areas in which we 

implemented the competitive bidding 

demonstrations and we would like to 

gain more experience in smaller markets 

before we enter into the largest markets. 


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Competitive bidding will take place in 

70 of the largest MSAs in 2008 and an 

additional 10 competitive bidding areas 

(CBAs) will be added in both 2009 and 

2010 for a total of 100 CBAs. For the 

initial competition, we assume that 

bidding will take place in fall 2006, bids 

will be evaluated in 2007, and prices 

will go into effect in October 2007. We 

also assume that the same timeframes 

will apply when bidding takes place in 

the initial 10 MSAs in fall 2009. In all 

other cases, we assume that competitive 

bidding will take place in the fall and 

prices will go into effect on January 1 

of the following year in the relevant 

CBAs. 

Third, we make some assumptions 

about which product categories would 

be selected for competitive bidding. We 

recognize that potential savings, 

implementation costs, the number of 

affected suppliers, and supplier bid 

costs all depend on which product 

groups are ultimately selected. The 

product categories have yet to be 

decided. We estimate that 

approximately 10 product categories 

will be selected for competitive bidding 

for 2006 and as many as 7 or 8 of the 

selected product categories will be 

among the 10 largest in terms of allowed 

charges. The remaining 2 or 3 product 

categories will come from the top 20 

product groups ranked by allowed 

charges. Table 10 shows the top 20 

eligible DMEPOS policy groups and 

their 2003 allowed charges. 

TABLE 10.—2003 ALLOWED CHARGES: TOP 20 ELIGIBLE DME POLICY GROUPS

Rank Policy group 2003 Percent of eligible 

DMEPOS charges 

1 ............................. Oxygen Supplies/Equipment ................................................................................... $2,433,713,269 29 

2 ............................. Wheelchairs/POVs .................................................................................................. 1,926,210,675 23 

3 ............................. Diabetic Supplies & Equipment .............................................................................. 1,110,934,736 13 

4 ............................. Enteral Nutrition ...................................................................................................... 676,122,703 8 

5 ............................. Hospital Beds/Accessories ...................................................................................... 373,973,207 4 

6 ............................. CPAP ....................................................................................................................... 204,774,837 2 

7 ............................. Support Surfaces .................................................................................................... 193,659,248 2 

8 ............................. Infusion Pumps & Related Drugs ........................................................................... 149,208,088 2 

9 ............................. Respiratory Assist Device ....................................................................................... 133,645,918 2 

10 ........................... Lower Limb Orthoses* ............................................................................................ 122,813,555 1 

11 ........................... Nebulizers ............................................................................................................... 98,951,212 1 

12 ........................... Walkers ................................................................................................................... 96,654,035 1 

13 ........................... Negative Pressure Wound Therapy ........................................................................ 88,530,828 1 

14 ........................... Commodes/Bed Pans/Urinals ................................................................................. 51,372,352 1 

15 ........................... Ventilators ............................................................................................................... 42,890,761 0 

16 ........................... Spinal Orthoses* ..................................................................................................... 40,731,646 0 

17 ........................... Upper Limb Orthoses* ............................................................................................ 29,069,027 0 

18 ........................... Patient Lift ............................................................................................................... 26,551,310 0 

19 ........................... Seat Lift Mechanism ............................................................................................... 15,318,552 0 

20 ........................... TENS ....................................................................................................................... 15,258,579 0 

Total for 20 Groups ............................................................................................... 7,830,384,538 92 

*Excludes Custom Fabricated Items; but does not exclude all items that might require more than minimal self-adjustment or expertise in trimming, bending, molding, assembling, or customizing to fit the individual. 

However, we reiterate that our 

selection for the impact analysis should 

in no way be interpreted as signifying 

which product categories will be 

selected for the actual competitive 

bidding program. Our product category 

selection for this impact analysis is only 

to assist us in estimating the potential 

savings, costs of implementation, and 

supplier impact. 

Fourth, we assume that the Medicare 

DMEPOS fee schedule will increase at 

the rate of inflation for those years in 

which a statutory freeze has not been 

put in place by the MMA, and that total 

charges will increase at the same rate as 

Part A and Part B Medicare 

expenditures. We exclude Part D 

expenditure growth because this data is 

not currently available. We base our 

estimates on the expected growth in Part 

A and Part B expenditures from the 

Trustees Reports. (Tables IV.F.2 and 

IV.F.3 of the 2004 Medicare Trustees 

Report). 

This proposed rule is expected to 

affect Medicare and its beneficiaries, 

certain CMS contractors including the 

four current DMERCs, the SADMERC, 

the NSC, one or more proposed CBICs, 

and DMEPOS suppliers. Although the 

work-load of referral agents, including 

hospital discharge planners and some 

healthcare providers, appeared to 

increase during implementation of the 

demonstration, we do not anticipate that 

competitive bidding will result in an 

appreciable, ongoing burden on referral 

agents. In addition, rural healthcare 

facilities should not be significantly 

impacted as the program is expected to 

operate primarily within relatively large 

MSAs. 

The DMEPOS supplier industry is 

expected to be significantly impacted by 

this rule when finalized. However, not 

all suppliers will be affected directly by 

the competitive bidding program. Only 

suppliers who furnish products in at 

least one product category eligible for 

competitive bidding and in areas 

selected for competitive bidding could 

potentially be affected. A customized 

orthotics supplier in Manhattan that 

does not supply off-the-shelf orthotics 

will not be affected. We estimate that 

approximately 30,000 suppliers offer at 

least one product eligible for 

competitive bidding and are located in 

one of the largest 100 MSAs and could 

therefore be impacted by the program. 

Some of these suppliers will be affected 

in multiple CBAs if they offer products 

in more than one CBA. 

Based on our analysis of 2003 claims 

data, we also estimate that 

approximately 90 percent of registered 

DMEPOS suppliers are considered small 

according to the SBA definition. 

According to the SBA, ‘‘A small 

business is a concern that is organized 

for profit, with a place of business in the 

United States, and which operates 

primarily within the United States or 

makes a significant contribution to the 

U.S. economy through payment of taxes 

or use of American products, materials 

or labor. Further, the concern cannot be 

dominant in its field, on a national 

basis. Finally, the concern must meet 

the numerical small business size 


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standard for its industry. SBA has 

established a size standard for most 

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

size standard for NAICS code, 532291, 

Home Health Equipment Rental is $6 

million. (see http://www.sba.gov/size/ 

sizetable2002.html, read May 9, 2005.) 

Many of these suppliers provide 

minimal amounts of DMEPOS, and thus 

the remaining larger suppliers control 

significant market share. We anticipate 

that the bidding process will be 

designed to neither reward nor penalize 

small suppliers, however the fixed costs 

required to undergo the bidding process 

may be a larger deterrent to small 

businesses than larger firms. We do not 

expect that the regulation will result in 

direct costs that exceed $120 million per 

year, and thus the Unfunded Mandates 

Reform Act (UMRA) would not apply. 

Since suppliers can choose whether to 

submit a bid for the competitive bid 

program, the regulation imposes no 

direct costs and therefore does not reach 

the $120 million direct cost threshold 

under UMRA. While not included in 

this regulation, it is expected that the 

separate MMA requirement for 

accreditation will result in added 

supplier costs beyond those included in 

this regulation. 

The proposed rule will also impact 

CMS and its contractors. There are four 

DMERCs currently contracted by CMS 

to process claims for the DMEPOS 

benefit. The Statistical Analysis DME 

Regional Carrier, (SADMERC), the 

existing contractor assigned to perform 

statistical support and the National 

Supplier Clearinghouse, (NSC), which 

maintains a registry of approved 

suppliers, will need to adapt to the 

competitive bidding environment. 

Finally, we will need to devote 

resources necessary for overseeing 

program operations. 

C. Implementation Costs 

We will incur administrative costs in 

connection with the implementation 

and operation of competitive bidding, 

which can affect the net savings that can 

be expected under the proposed rule. 

However, many of the variable costs 

associated with bid solicitation and 

evaluation will ultimately depend on 

how many suppliers choose to 

participate in competitive bidding. 

Because of this uncertainty, we do not 

estimate bid solicitation and evaluation 

costs at this time. 

We will incur initial start up costs. 

We estimate the costs to CMS and its 

contractors will include approximately 

$1 million in immediate fixed costs for 

contractor startup and system changes 

for the initial competitive bidding phase 

in 2006. In addition to the initial start 

up costs, we will also incur 

maintenance costs and bid solicitation 

and evaluation costs. We will need to 

pay maintenance costs every year for the 

running of the program; however, we 

will only need to pay bid costs in the 

years in which competitive bidding is 

conducted. Yearly maintenance costs 

will depend on the number of CBAs 

where the program has been 

implemented, while bid solicitation and 

evaluation costs will depend on the 

number of sites which have bidding that 

year. 

Our maintenance costs will include a 

small staff to oversee the program, office 

costs for the staff, as well as staff travel 

costs, and overhead. In addition, we 

propose that the CBIC(s) will be 

responsible for much of the program 

maintenance. The maintenance costs 

could also include the costs for an 

Ombudsman(s) per DMERC region to 

assist suppliers, beneficiaries, and 

referral agents with the competitive 

bidding process and questions. We also 

expect to incur costs for education and 

outreach expenses such as staff 

resources and material costs for 

producing education materials and 

supplier directories. 

We will incur bid costs in the years 

in which we conduct competitive 

bidding and when we evaluate bids. 

These costs will be a direct result of the 

bid solicitation and evaluation process. 

Bid solicitation costs include costs 

associated with mailing necessary 

information to beneficiaries, printing, 

and duplicating. The actual costs will 

vary by CBA and will depend on the 

number of potential suppliers. We will 

incur bid evaluation costs whenever 

bidding occurs in a CBA. We are 

proposing that the bid evaluation will 

be done by the CBIC(s). According to the 

DMEPOS evaluation report, it took 

about 9.4 hours to evaluate each bid 

during the demonstration. However, 

since the Medicare DMEPOS 

Competitive Bidding Program entails 

Quality Standards/Accreditation as a 

separate process, we expect that the 

time required to evaluate bids will be 

lower than in the demonstration. The 

total bid evaluation costs will ultimately 

depend on the number of suppliers that 

choose to submit bids. 

D. Program Savings 

We estimate large savings from the 

competitive bidding program. Our 

estimates of gross savings utilize as a 

starting point the savings results in the 

demonstration. Excluding surgical 

dressings that are not eligible for 

competitive bidding, the average 

product group savings rate in the 

demonstration ranged from 9 to 30 

percent in a CBA round with most 

product groups around a 20 percent 

savings. Table 11 shows the savings rate 

for selected product groups and CBAs 

by round during the DMEPOS 

demonstration. 

TABLE 11.—DMEPOS COMPETITIVE BIDDING DEMONSTRATION SAVINGS RATES

Product group Polk County 

round 1 

Polk County 

round 2 San Antonio 

Oxygen Equipment and Supplies ................................................................................................ $2,364,811 

(17%) 

$1,525,490 

(20%) 

$2,096,707 

(19%) 

Hospital Beds and Accessories ................................................................................................... $290,715 

(23%) 

$195,140 

(31%) 

$644,514 

(19%) 

Urological Supplies ...................................................................................................................... $36,169 

(18%) 

$12,585 

(9%) 

(1) 

Surgical Dressings ....................................................................................................................... ¥$30,321 

(¥12%) 

¥$637 

(¥1%) 

(1) 

Enteral Nutrition ........................................................................................................................... $342,251 

(17%) 

(1) (1) 

Wheelchairs and Accessories ..................................................................................................... (1) (1) $796,617 

(19%) 

General Orthotics ......................................................................................................................... (1) (1) $89,462 

(23%) 


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1Fiscal year 2007 will end September 30, 2007, 

and the Medicare DMEPOS Competitive Bidding 

Program will begin on October 1, 2007. 

2 In addition, most managed care plan rates are 

linked to FFS expenditures, so a decrease in FFS 

expenditures should translate into a decrease in 

Medicare Advantage plan payment rates. 

TABLE 11.—DMEPOS COMPETITIVE BIDDING DEMONSTRATION SAVINGS RATES—Continued 

Product group Polk County 

round 1 

Polk County 

round 2 San Antonio 

Nebulizer Drugs ........................................................................................................................... (1) (1) $1,020,072 

(26%) 

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

92. 1 Not included. 

In our estimates, we have taken into 

account that some DMEPOS prices have 

been adjusted downward since 2000. 

We assume that if prices for an 

individual item have already been 

reduced by 10 percent after the 

demonstrations were completed, then 

prices would most likely fall 10 percent 

rather than 20 percent. We, therefore, 

netted out any statutory reductions in 

prices that had already occurred such as 

the 2005 reductions in oxygen supplies. 

Table 12 shows the fee-for-service 

program impact for the 10 policy 

groups. In the table, savings are reported 

as negative values. The savings are 

attributable to the lower prices 

anticipated from competitive bidding. 

The table shows the reduction in 

Medicare allowed charges, without any 

impact on Medicare Advantage, 

associated with the program for the 

calendar year. The impact includes 

reductions in Medicare payments (80 

percent) and reductions in beneficiary 

co-insurance (20 percent). 

TABLE 12.—PROGRAM IMPACT FOR 10 POLICY GROUPS IN MILLIONS* 

Year 

2006 2007 2008 2009 2010 2011 

Allowed Charges .......................................................................... ¥$0 ¥$38 ¥$120 ¥$844 ¥$1000 ¥$1,199 

Medicare share of allowed charges (80% of allowed charges) .. ¥0 ¥30 ¥96 ¥675 ¥800 ¥959 

Beneficiary Costs (20% of allowed charges) ............................... 0 ¥8 ¥24 ¥169 ¥200 ¥240 

* Numbers may not add up due to rounding. 

Table 13 presents the impact 

differently than Table 12. In contrast to 

Table 12, which is on a Medicareallowed-charge-incurred basis and is 

without considering the Medicare 

Advantage impact, Table 13 considers 

fiscal year cash impact on the entire 

Medicare Program including Medicare 

Advantage for the fiscal year rather than 

calendar year. The fiscal year—calendar 

year distinction is an important one 

when comparing savings. For example, 

the prices for the Medicare DMEPOS 

Competitive Bidding program will be in 

effect for 0 months of fiscal year 2007, 

but for 3 months of calendar year 2007.1

Table 13 considers the impact on 

program expenditures, and does not 

include beneficiary coinsurance. 

Finally, the estimates in Table 13 

incorporate spillover effects from the 

competitive acquisition program onto 

the MA program. The expectation is that 

lower prices for DME products in FFS 

will lead to lower prices in the MA 

market.2

TABLE 13.—FISCAL YEAR COST ON

THE MEDICARE PROGRAM

[In millions] 

Year 10 products 

2006 ...................................... $0 

2007 ...................................... 0 

2008 ...................................... ¥110 

2009 ...................................... ¥620 

2010 ...................................... ¥990 

2011 ...................................... ¥1,230 

E. Effect on Beneficiaries 

Possible impacts on beneficiaries are 

a primary concern during the design 

and implementation of the program. 

While there may be some decrease in 

choice of suppliers, there will be a 

sufficient number of suppliers to ensure 

adequate access. We also expect there 

will be an improvement in quality 

because we will more closely scrutinize 

the suppliers before, during, and after 

implementation of the program. The 

analysis of the impact of the DMEPOS 

competitive bidding demonstration on 

patient access to care and quality 

showed minimal adverse results. 

Therefore, we assume that there will be 

no negative impacts on beneficiary 

access as a sufficient number of quality 

suppliers will be selected to serve the 

entire market. 

We acknowledge that implementation 

of competitive bidding may result in 

some beneficiaries needing to switch 

from their current supplier if their 

current supplier is not selected for 

competitive bidding. However, we 

anticipate that the necessity of 

switching suppliers will be minimal in 

many product categories because of the 

existence of grandfather policies for 

products such as capped rentals. 

We assume that beneficiary out of 

pocket expenses will decrease by 20 

percent of program gross savings for 

those products for which we do 

competitive bidding. 

TABLE 14.—BENEFICIARY CO-INSURANCE SAVINGS ESTIMATES FOR 10 

PRODUCTS

[In millions] 

Year 10 products 

2007 ...................................... $8 

2008 ...................................... 24 

2009 ...................................... 169 

2010 ...................................... 200 

2011 ...................................... 240 

F. Effect on Suppliers 

We expect DME suppliers to be 

significantly impacted by the 

implementation of the proposed rule. 

We assume that suppliers may be 

affected in one of 3 ways as follows: 


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• Suppliers that wish to participate in 

competitive bidding will have to incur 

the cost of submitting a bid. 

• Noncontract suppliers (including 

suppliers who do not submit bids) will 

see a decrease in revenues because they 

will no longer receive payment from 

Medicare for competitively bid items. 

• Contract suppliers will see a 

decrease in expected revenue per item 

as a result of lower allowed charges 

from lower bid prices. 

However, because there will be fewer 

suppliers, a supplier’s volume could 

increase. As a result, because we do not 

know which effect will dominate, the 

net effect on an individual contract 

supplier’s revenue is uncertain prior to 

bidding. The increase in the supplier’s 

volume could offset the decrease in 

revenue per item. 

1. Affected Suppliers 

Based on 2003 claims data, the 

average MSA in the top 25 MSAs, 

excluding New York, Los Angeles, and 

Chicago, has 2754 DMEPOS suppliers 

that furnish any DMEPOS product and 

1838 suppliers that furnish products 

subject to competitive bidding and 

could potentially be affected by 

competitive bidding. 

We estimate that 27,540 suppliers will 

provide DMEPOS items in the CBAs 

that we initially designate. If suppliers 

furnish products in more than one MSA, 

we counted them more than once 

because they are affected in more than 

one MSA. Not all products are subject 

to competitive bidding; we estimate that 

only 18,383 suppliers will furnish 

products subject to competitive bidding 

and will be affected by competitive 

bidding. This means in 2006, the 

remaining 9157 suppliers in the 10 

selected MSAs will not be affected by 

competitive bidding because they do not 

furnish products subject to competitive 

bidding. However, the actual number of 

affected suppliers may be smaller if we 

do not select all eligible product 

categories for competitive bidding. 

Deciding whether or not to submit a 

bid is a business decision that will be 

made by each DMEPOS supplier. We 

expect that most suppliers providing 

covered services will choose to 

participate in order to maintain and 

expand their businesses. For the 

calculations below, we assume that 90 

percent of suppliers will submit a bid. 

We assume the remaining 10 percent of 

suppliers will not have received the 

necessary accreditation to submit a bid. 

Based on this assumption, 16,545 

suppliers will submit a bid because they 

will want the opportunity to continue to 

provide these products to Medicare 

beneficiaries and to expand their 

business base. We also assume, based on 

the results of the demonstration, that 50 

percent of bidding suppliers will be 

selected as winners because 

approximately 50 percent of those who 

submitted bids during the 

demonstration were selected as contract 

suppliers. As a result, we expect that 

there will be 8272 contract suppliers 

and 10,111 non contract suppliers in the 

competitive bidding areas that we 

initially designate. The 10,111 suppliers 

that are not awarded a contract, either 

because they chose not to submit a bid 

or did not submit a winning bid would 

represent about 37 percent of the total 

DMEPOS suppliers in these CBAs. We 

expect that losing bidders will be 

distributed roughly proportionately 

across the selected CBAs, but the exact 

distribution will depend on the 

distribution of bids received and the 

number of winners selected in each 

CBA. It is important to note that there 

will be a revenue shift from the non 

contract suppliers to the contract 

suppliers, and that although some 

suppliers may be worse off, it is because 

they did not offer competitive prices or 

quality. We also note that if a supplier 

submitted a bid in multiple product 

categories, its probability of winning 

would increase, so that the total number 

of wining suppliers would be higher, 

and the number of non contract 

suppliers would be lower. 

It is difficult to estimate how much 

revenue a losing supplier will lose 

because of the DMEPOS competitive 

acquisition program. The amount will 

depend on how much revenue the 

supplier previously received from 

Medicare and whether the supplier 

continues to provide services to existing 

patients under transition policies. 

Estimates can be made by making 

assumptions about these factors. For 

example, if bidding occurred in 10 

product categories, losing suppliers 

previously provided 50 percent of 

allowed charges in these product 

categories, and losing suppliers did not 

continue to serve any existing patients, 

then the average lost Medicare allowed 

charges per losing supplier per CBA 

would be between $35,000 and $40,000. 

Under these assumptions, the total 

allowed charges lost by losing suppliers 

would be $275 million in 2008, the first 

full year after the prices take effect, and 

increase to almost $2 billion in 2011. 

These estimates reflect our best 

assumptions. As noted, because of the 

nature of competitive bidding, winning 

bidders will absorb much of the allowed 

charges lost by losing suppliers. 

Suppliers who submit bids will incur 

a cost of bidding. In the demonstration, 

bidders in Polk County, Florida reported 

spending 40 to 100 hours submitting 

bids. We therefore assume that suppliers 

will use the midpoint number of hours, 

70 hours, to complete their bids. 

According to 2003 Bureau of Labor 

Statistics (BLS) data, the average hourly 

wage for an accountant and auditor was 

$24.35. Accounting for inflation and 

overhead, we assume suppliers will 

incur $31.25 per hour in wage and 

overhead costs. Based on this 

information, we assume that a supplier 

that bids will spend $2,187.50 

($31.25*70) to prepare its bid. We 

calculate the total cost for all supplier 

bids, including those of both future 

winning and future losing suppliers. 

Therefore, we expect that 2006 total 

supplier bidding costs for 16,545 bids 

will be $36,192,187 ($2187.50*16545). 

This estimate is clearly dependent on 

our assumption that all eligible 

suppliers will bid. 

In 2008, we will conduct competitive 

bidding in 80 MSAs, which may include 

New York, Los Angeles, and Chicago; 

and in 2009 and 2010 we will add 

additional areas. This will increase the 

number of affected suppliers, contract 

suppliers, and non contract suppliers. 

For the purposes of the impact analysis, 

we assume that there will be at least 10 

additional large CBAs added in both 

2009 and 2010. We also assume bid 

cycles will be three years in length. 

Under our assumptions, we will 

conduct bidding for programs that 

involve the initial 10 MSAs in 2006 and 

2009, for programs that involve 70 

additional MSAs in 2008 and 2011, and 

for programs that involve additional 

areas in 2009 and 2010. It is interesting 

to note that the average number of 

suppliers per CBA decreases over time. 

This is because smaller CBAs with 

fewer beneficiaries and lower allowed 

charges have fewer suppliers. Table 15 

summarizes the effect on suppliers for 

2006 through 2011. 


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TABLE 15.—SUPPLIERS BIDDING YEARS: 2006–2011 

[10 product categories] 

Bidding year 

2006 2007 2008 2009 2010 2011 

Average number of suppliers per CBA .... 2754 2754 1863 1776 1687 1863 

Average number of affected suppliers 

per CBA ................................................ 1838 1838 1242 1183 1125 1242 

Total number of suppliers ........................ 27540 27540 149035 159864 168702 149035 

Total number of affected suppliers .......... 18383 18383 99344 106439 112471 99344 

Number of bidding suppliers .................... 16545 0 72865 22930 5429 72865 

Cost of bidding ......................................... $36,192,188 $0 $159,392,188 $50,159,375 $11,875,938 $159,392,188 

Number of contract suppliers ................... 8272 8272 44705 47898 50612 44705 

Number of non contract suppliers ........... 10111 10111 54639 58541 61859 54639 

Non contract suppliers as a percent of 

total suppliers ....................................... 37% 37% 37% 37% 37% 37% 

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

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

3 Numbers in the table are rounded. 

2. Small Suppliers 

We use the Small Business 

Administration definition of a small 

supplier. The SBA defines a small 

supplier in Home Health Equipment 

(NAICS Code 532291) as having less 

than $6 million in revenues. We do not 

have information on each supplier’s 

total revenue. We only have information 

on suppliers’ Medicare revenues. As a 

result, we had to make an assumption 

about what percent of a supplier’s 

revenues come from Medicare. We 

looked at filings by public DMEPOS 

companies and based on that 

information, we assume one-half of the 

average supplier’s revenues come from 

Medicare DEMPOS. We therefore 

classified a small supplier as any 

supplier with fewer than $3 million in 

Medicare allowed charges for all 

DMEPOS products whether or not they 

are eligible for competitive bidding. For 

example, an orthotics supplier’s allowed 

charges could include charges for both 

customized and off-the-shelf orthotics, 

but customized orthotics are not subject 

to competitive bidding. By this 

definition, the majority of DMEPOS 

suppliers are small. Table 16 shows our 

estimate of the number of affected small 

suppliers and total affected suppliers. 

Some suppliers are counted more than 

once if they are affected in more than 

one CBA. 

TABLE 16.—NUMBER OF SMALL SUPPLIERS 1

[$3 million or less in Medicare allowed charges] 

Bidding year 

Number of 

affected small 

suppliers 

Total 

number of 

affected 

suppliers 

Percent 

2006 ............................................................................................................................................. 16,741 18,383 91 

2007 ............................................................................................................................................. 16,741 18,383 91 

2008 ............................................................................................................................................. 88,912 99,344 90 

2009 ............................................................................................................................................. 94,969 106,439 89 

2010 ............................................................................................................................................. 100,083 112,471 89 

2011 ............................................................................................................................................. 100,083 112,471 89 

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

Small suppliers are likely to have 

similar costs for submitting bids as large 

suppliers. As discussed in the previous 

section, the average cost of submitting a 

bid in one CBA is $2187.50. The cost of 

bidding as a share of Medicare revenue 

will depend on the size of the small 

supplier’s Medicare revenue. The share 

for a supplier with $50,000 in Medicare 

revenue would be 4.4 percent; the totals 

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

and $3,000,000 would be 2.2 percent, 

0.2 percent, and less than 0.01 percent, 

respectively. 

We considered the following options 

for minimizing the burden of 

competitive bidding on small 

businesses: 

• Networking: As stated in section L 

of the preamble we discuss our proposal 

for allowing suppliers the option to 

form networks for bidding purposes. 

Networks are several companies joining 

together to submit bids for a product 

category under competitive bidding. 

This option will allow small suppliers 

to band together to lower bidding costs, 

expand service options, or attain more 

favorable purchasing terms. We 

recognize that forming a network may 

be challenging for suppliers, and it also 

poses challenges for bid evaluation and 

program monitoring. 

• Not requiring bids for every product 

category: As discussed previously in the 

preamble, we are proposing to conduct 

separate bidding for items grouped 

together in product categories rather 

than conduct a single bidding program 

for all items. Therefore, small suppliers 

will have the option of deciding how 

many product categories for which they 

want to submit bids. We believe this 

will help minimize the burden on small 

suppliers. 

• Another option we considered but 

did not accept would have allowed 

small suppliers to be exempted from the 

requirement that a contract supplier 

must service an entire CBA. This option 


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is also discussed in further detail in the 

preamble. 

• We also considered the option to 

allow a small supplier to not submit a 

bid and then decide after the bidding 

whether or not they would accept the 

new competitive bidding single 

payment amounts. We are not accepting 

this option because the statue is clear 

about the requirement that suppliers 

must have submitted a bid in order to 

be a contract supplier. We believe that 

to allow this option would be an 

inappropriate interpretation of the 

statute. 

G. Accounting Statement 

As required by OMB Circular A–4 

(available at http:// 

www.whitehouse.gov/omb/circulars/ 

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

below, we have prepared an accounting 

statement showing the classification of 

the expenditures associated with the 

provisions of this proposed rule. This 

table provides our best estimate of the 

decreased expenditures in Medicare 

payments under the Medicare DMEPOS 

Competitive Bidding Program as a result 

of the changes presented in this 

proposed rule. All expenditures are 

classified as transfers to the Federal 

Government from DMEPOS suppliers. 

TABLE 17.—ACCOUNTING STATEMENT—CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM FY 2007 TO FY 2011 

Category Transfers 

Annualized Monetized Transfers .............................................................. $570.3 (in Millions). 

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

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects 

42 CFR Part 411 

Kidney diseases, Medicare, Reporting 

and recordkeeping requirements. 

42 CFR Part 414 

Administrative practice and 

procedure, Health facilities, Health 

professions, Kidney diseases, Medicare, 

Reporting and recordkeeping 

requirements. 

42 CFR Part 424 

Emergency medical services, Health 

facilities, Health professions, Medicare, 

Reporting and recordkeeping 

requirements. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services proposes to amend 

42 CFR chapter IV as set forth below: 

PART 411—EXCLUSIONS FOR 

MEDICARE AND LIMITATIONS ON 

MEDICARE PAYMENT 

1. The authority for part 411 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

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

1395hh). 

Subpart A—General Exclusions and 

Exclusions of Particular Services 

2. Section 411.15 is amended by—

A. Revising paragraph (b). 

B. Adding new paragraph (s). 

The revision and addition read as 

follows: 

§ 411.15 Particular services excluded from 

coverage. 

* * * * * 

(b) Low vision aid exclusion. (1) 

Scope. The scope of the eyeglass 

exclusion encompasses all devices 

irrespective of their size, form, or 

technological features that use one or 

more lens to aid vision or provide 

magnification of images for impaired 

vision. 

(2) Exceptions. (i) Post-surgical 

prosthetic lenses customarily used 

during convalescence for eye surgery in 

which the lens of the eye was removed 

(for example, cataract surgery). 

(ii) Prosthetic intraocular lenses and 

one pair of conventional eyeglasses or 

contact lenses furnished subsequent to 

each cataract surgery with insertion of 

an intraocular lens. 

(iii) Prosthetic lenses used by 

Medicare beneficiaries who are lacking 

the natural lens of the eye and who were 

not furnished with an intraocular lens. 

* * * * * 

(s) Unless § 414.408(f)(2) of this 

chapter applies, Medicare does not 

make payment if an item or service that 

is included in a competitive bidding 

program (as described in part 414, 

subpart F of this chapter) is furnished 

by a supplier other than a contract 

supplier (as defined in § 414.402). 

PART 414—PAYMENT FOR PART B 

MEDICAL AND OTHER HEALTH 

SERVICES 

3. The authority citation for part 414 

continues to read as follows: 

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

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

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

Subpart A—General Provisions 

4. Section 414.1 is amended by 

adding in numerical order the statutory 

sections to read as follows: 

§ 414.1 Basis and scope. 

* * * * * 

1842(s)—Fee schedules for parenteral 

and enteral nutrition (PEN) nutrients, 

equipment, and supplies and home 

dialysis supplies and equipment. 

1847(a) and (b)—Competitive bidding 

for certain durable medical equipment, 

prosthetics, orthotics, and supplies 

(DMEPOS). 

* * * * * 

4a. The heading for subpart C is 

revised to read as follows: 

Subpart C—Fee Schedules for 

Parenteral and Enteral Nutrition (PEN) 

Nutrients, Equipment, and Supplies, 

and Home Dialysis Supplies and 

Equipment 

5. Section 414.100 is revised to read 

as follows: 

§ 414.100 Purpose. 

This subpart implements fee 

schedules for parenteral and enteral 

nutrition (PEN) items and services and 

home dialysis supplies and equipment 

as authorized by section 1842(s) of the 

Act. 

6. Section 414.102 is revised to read 

as follows: 

§ 414.102 General payment rules. 

(a) General rule. For PEN items and 

services specified under paragraph (b) of 

this section and furnished on or after 

January 1, 2002, and for home dialysis 

supplies and equipment specified under 

paragraph (b) of this section and 

furnished on or after January 1, 2007, 

Medicare pays for the items and services 

on the basis of 80 percent of the lesser 

of—

(1) The actual charge for the item or 

service; or 

(2) The fee schedule amount for the 

item or service, as determined in 

accordance with § 414.104 or § 414.107. 

(b) Payment classification. (1) CMS or 

the carrier determines fee schedules for 

PEN nutrients, equipment, and supplies 


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in accordance with § 414.104, and the 

fee schedules for home dialysis supplies 

and equipment in accordance with 

§ 414.107. 

(2) CMS designates the specific items 

and services in each category through 

program instructions. 

(c) Updating the fee schedule 

amounts. (1) For each calendar year 

subsequent to CY 2002, the fee schedule 

amounts of the preceding year for PEN 

items and services are updated by the 

percentage increase in the CPI–U for the 

12-month period ending with June of 

the preceding calendar year. 

(2) For each calendar year subsequent 

to CY 2007, the fee schedule amounts of 

the preceding year for home dialysis 

supplies and equipment are updated by 

the percentage increase in the CPI–U for 

the 12-month period ending with June 

of the preceding calendar year. 

(d) Establishing payment amounts for 

new items. (1) The DMERC or local 

carrier uses the process described in 

paragraph (d)(3) of this section to 

establish the fee schedule amounts for 

the items and services included in a 

new HCPCS code created for a category 

of items and services payable under this 

subpart, but only if reasonable charge 

data are not available to calculate a fee 

schedule amount. 

(2) The fee schedule amounts are 

updated in accordance with this 

subpart. 

(3) CMS calculates the Medicare fee 

schedule amounts for the items and 

services described in paragraph (d)(1) of 

this section taking into account one or 

more of the following: 

(i) The median retail price for items 

and services classified under the new 

HCPCS code. CMS determines the retail 

price for an individual item and service 

based on supplier price lists, 

manufacturer suggested retail prices, or 

wholesale prices plus an appropriate 

mark-up; 

(ii) Fee schedule amounts for 

comparable items; or 

(iii) A functional technology 

assessment of the items or services 

classified under the new HCPCS code 

that takes into account one or more of 

the following factors: 

(A) Functional assessment. 

(B) Price comparison analysis. 

(C) Medical benefit assessment. 

(4) A functional technology 

assessment described in paragraph 

(d)(2)(iii) of this section is also used to 

adjust fee schedule amounts calculated 

under paragraph (d)(2) of this section if 

CMS determines that these amounts do 

no reflect the costs of furnishing the 

item or service. 

7. A new § 414.107 is added to read 

as follows: 

§ 414.107 Home dialysis supplies and 

equipment. 

(a) Payment rules. Payment for home 

dialysis supplies and equipment 

defined in § 410.52(a)(1) and (a)(2) of 

this chapter is made in a lump sum for 

supplies and equipment that are 

purchased, and on a monthly basis for 

supplies and equipment that are rented. 

Total payments per month for supplies 

and equipment may not exceed the 

payment limits described in 

§ 414.330(c)(2) of this part. 

(b) Fee schedule amount. The fee 

schedule amount for payment of home 

dialysis supplies and equipment 

defined in § 410.52(a)(1) and (a)(2) of 

this chapter and furnished in CY 2007 

is the average reasonable charge for the 

supplies and equipment furnished from 

January 1, 2005 through December 31, 

2005, increased by the percentage 

change in the CPI–U for the 24-month 

period ending June 2006. 

Subpart D—Payment for Durable 

Medical Equipment and Prosthetic and 

Orthotic Devices 

8. Section 414.210 is amended by 

adding a new paragraph (g) to read as 

follows: 

§ 414.210 General payment rules. 

* * * * * 

(g) Establishing fee schedule amounts 

for new items and services. (1) The 

DMERC or local carrier uses the process 

described in paragraph (g)(2) of this 

section to establish the fee schedule 

amounts for the items and services 

included in a new HCPCS code created 

for a category of items and services 

payable under this subpart, but only if 

reasonable charge data are not available 

to calculate a fee schedule amount. 

(i) The fee schedule amounts are 

updated in accordance with this 

subpart. 

(ii) Items described in § 414.224 are 

not subject to paragraph (g)(1) of this 

section. 

(2) CMS calculates the Medicare fee 

schedule amounts for the items and 

services described in paragraph (g)(1) of 

this section taking into account one or 

more of the following: 

(i) The median retail price for items 

and services classified under the new 

HCPCS code (CMS determines the retail 

price for an individual item and service 

based on supplier price lists, 

manufacturer suggested retail prices, or 

wholesale prices plus an appropriate 

mark-up); 

(ii) Existing fee schedule amounts for 

comparable items; or 

(iii) A functional technology 

assessment of the items or services 

classified under the new HCPCS code 

that takes into account one or more of 

the following factors: 

(A) Functional assessment. 

(B) Price comparison analysis. 

(C) Medical benefit assessment. 

(3) A functional technology 

assessment described in paragraph 

(g)(2)(iii) of this section is also used to 

adjust fee schedule amounts calculated 

under paragraph (g)(2) of this section if 

CMS determines that these amounts do 

not reflect the costs of furnishing the 

item or service. 

9. Section 414.228 is amended by 

adding paragraph (c) to read as follows: 

§ 414.228 Prosthetic and orthotic devices. 

* * * * * 

(c) Payment for therapeutic shoes. 

The payment rules specified in 

paragraphs (a) and (b) of this section are 

applicable to custom molded and extra 

depth shoes, modifications, and inserts 

(therapeutic shoes) furnished after 

December 31, 2004. 

Subpart E—Determination of 

Reasonable Charges Under the ESRD 

Program 

10. Section 414.330 is amended by 

revising paragraph (a)(2) introductory 

text to read as follows: 

§ 414.330 Payment for home dialysis 

equipment, supplies, and support services. 

(a) * * * 

(2) Exception. If the conditions in 

paragraphs (a)(2)(i) through (a)(2)(iv) of 

this section are met, Medicare pays for 

home dialysis equipment and supplies 

on a fee schedule basis in accordance 

with § 414.102, but the amount of 

payment may not exceed the limit for 

equipment and supplies described in 

paragraph (c)(2) of this section. 

* * * * * 

11. A new subpart F is added to read 

as follows: 

Subpart F—Competitive Bidding for Certain 

Durable Medical Equipment, Prosthetics, 

Orthotics, and Supplies (DMEPOS) 

Sec. 

414.400 Purpose. 

414.402 Definitions. 

414.404 Basis, scope, and applicability. 

414.406 Implementation of programs. 

414.408 Payment rules. 

414.410 Phased-in implementation of 

competitive bidding programs. 

414.412 Submission of bids under a 

competitive bidding program. 

414.414 Conditions for awarding contracts. 

414.416 Determination of competitive 

bidding payment amounts. 

414.418 Opportunity for networks. 

414.420 Physician or treating practitioner 

authorization and consideration of 

clinical efficiency and value of items. 

414.422 Terms of contracts. 


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414.424 Administrative or judicial review. 

414.426 Adjustments to competitive 

bidding payment amounts to reflect 

changes in the HCPCS. 

Subpart F—Competitive Bidding for 

Certain Durable Medical Equipment, 

Prosthetics, Orthotics, and Supplies 

(DMEPOS) 

§ 414.400 Purpose. 

This subpart implements competitive 

bidding programs for certain DMEPOS 

items as required by sections 1847(a) 

and (b) of the Act. 

§ 414.402 Definitions. 

For purposes of this subpart, the 

following definitions apply: 

Bid means an offer to furnish an item 

for a particular price and time period 

that includes, where appropriate, any 

services that are directly related to the 

furnishing of the item. 

Competitive bidding area (CBA) 

means an area established by the 

Secretary under this subpart. 

Composite bid means the sum of a 

supplier’s weighted bids for all items 

within a product category for purposes 

of allowing a comparison across bidding 

suppliers. 

Competitive bidding program means a 

program established under this subpart. 

Contract supplier means an entity that 

is awarded a contract by CMS to furnish 

items under a competitive bidding 

program. 

DMEPOS stands for durable medical 

equipment, prosthetics, orthotics and 

supplies. 

Grandfathered item means any one of 

the following items for which payment 

is made on a rental basis prior to the 

implementation of a competitive 

bidding program under this subpart: 

(1) An inexpensive or routinely 

purchased item described in § 414.220. 

(2) An item requiring frequent and 

substantial servicing, as described in 

§ 414.222. 

(3) Oxygen and oxygen equipment 

described in § 414.226. 

(4) A capped rental item described in 

§ 414.229. 

Grandfathered supplier means a 

noncontract supplier that furnishes a 

grandfathered item. 

Item means one of the following 

products identified by a HCPCS code, 

other than class III devices under the 

Federal Food, Drug and Cosmetic Act 

and inhalation drugs, and includes the 

services directly related to the 

furnishing of that product to the 

beneficiary: 

(1) Durable medical equipment 

(DME), as defined in § 414.202 of this 

part and further classified into the 

following categories: 

(i) Inexpensive or routinely purchased 

items, as specified in § 414.220(a). 

(ii) Items requiring frequent and 

substantial servicing, as specified in 

§ 414.222(a). 

(iii) Oxygen and oxygen equipment, 

as specified in § 414.226(b). 

(iv) Other durable medical equipment 

(capped rental items), as specified in 

§ 414.229. 

(2) Supplies necessary for the 

effective use of DME. 

(3) Enteral nutrients, equipment, and 

supplies. 

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

orthotics described in section 1861(s)(9) 

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

not require expertise in trimming, 

bending, molding, assembling, or 

customizing to fit a beneficiary. 

Item weight is a number assigned to 

an item based on its beneficiary 

utilization rate in a competitive bidding 

area when compared to other items in 

the same product category. 

Metropolitan Statistical Area (MSA) 

has the same meaning as that given by 

the Office of Management and Budget. 

Nationwide competitive bidding area 

means a competitive bidding area that 

includes the United States and its 

territories. 

Noncontract supplier means a 

supplier that is located in a competitive 

bidding area or that furnishes items 

through the mail to beneficiaries in a 

competitive bidding area but that is not 

awarded a contract by CMS to furnish 

items included in a competitive bidding 

program for that area. 

Physician has the same meaning as in 

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

Pivotal bid means the highest 

composite bid based on bids submitted 

by a suppliers for a product category 

that will include a sufficient number of 

suppliers to meet beneficiary demand 

for the items in that product category. 

Product category means a grouping of 

related items that are included in a 

competitive bidding program. 

Single payment amount means the 

allowed payment for an item furnished 

under a competitive bidding program. 

Supplier means an entity with a valid 

Medicare supplier number, including an 

entity that furnishes an item through the 

mail. 

Treating practitioner means a 

physician assistant, nurse practitioner, 

or clinical nurse specialist, as those 

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

of the Act. 

Weighted bid means the item weight 

multiplied by the bid price submitted 

for that item. 

§ 414.404 Basis, scope, and applicability. 

This subpart applies to the following 

entities that furnish the items described 

in § 414.402 to beneficiaries under a 

competitive bidding program: 

(a) Suppliers. 

(b) Providers that furnish items under 

Medicare Part B as suppliers. 

(c) Physicians that furnish items 

under Medicare Part B as suppliers. 

§ 414.406 Implementation of programs. 

(a) Implementation contractor. CMS 

designates one or more implementation 

contractors for the purpose of 

implementing this subpart. 

(b) Competitive bidding areas. CMS 

designates through program instructions 

each competitive bidding area in which 

a competitive bidding program may be 

implemented under this subpart. 

(c) Revisions to competitive bid. CMS 

may revise the competitive bidding 

areas designated under paragraph (b) of 

this section. 

(d) Competitively bid items. CMS 

designates the items that are included in 

a competitive bidding program through 

program instructions. 

(e) Claims processing. The regional 

carrier designated under § 421.210 of 

this chapter to process DMEPOS claims 

for a particular geographic region also 

processes claims for items furnished 

under a competitive bidding program in 

the same geographic region. 

§ 414.408 Payment rules. 

(a) Payment basis. (1) The payment 

basis for an item furnished under a 

competitive bidding program is 80 

percent of the single payment amount 

calculated for the item under § 414.416 

for the competitive bidding area in 

which the beneficiary maintains a 

permanent residence. 

(2) If an item that is included in a 

competitive bidding program is 

furnished to a beneficiary who does not 

maintain a permanent residence in a 

competitive bidding area, the payment 

basis for the item is 80 percent of the 

lesser of the actual charge for the item, 

or the applicable fee schedule amount 

for the item, as determined under 

subparts C or D of this part. 

(b) Updating the single payment 

amounts. Beginning with the second 

year of a contract entered into under 

this subpart, the single payment 

amounts are updated by the percentage 

increase in the CPI–U for the 12-month 

period ending with June of the 

preceding calendar year. 

(c) Payment on an assignment-related 

basis. Payment for an item furnished 

under this subpart is made on an 

assignment-related basis. 

(d) Applicability of advanced 

beneficiary notice. Implementation of a 


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program in accordance with this subpart 

does not preclude the use of an 

advanced beneficiary notice. 

(e) Adjustment of payment amounts 

in other areas. For items furnished to 

Medicare beneficiaries on or after 

January 1, 2009 for which payment is 

made under this subpart, CMS may use 

the single payment amounts determined 

under § 414.416 of this subpart to adjust 

the amounts Medicare pays for the same 

items in areas that are not designated as 

competitive bidding areas. 

(f) Requirement to obtain 

competitively bid items from a contract 

supplier. (1) General rule. All items that 

are included in a competitive bidding 

program must be furnished by a contract 

supplier for that program. 

(2) Exceptions. (i) A grandfathered 

supplier may furnish a grandfathered 

item to a beneficiary in accordance with 

paragraph (k) of this section. 

(ii) If a beneficiary is outside of the 

competitive bidding area in which he or 

she maintains a permanent residence, 

he or she may obtain an item included 

in the competitive bidding program for 

that area from a—

(A) Contract supplier, if the 

beneficiary is in another competitive 

bidding area and the item is included in 

the competitive bidding program for 

that area; or 

(B) Supplier, if the beneficiary is not 

in another competitive bidding area. 

(iii) Unless paragraph (f)(2) of this 

section applies, a beneficiary who 

maintains a permanent residence in a 

competitive bidding area has no 

financial liability to a supplier that 

furnishes an item included in the 

competitive bidding program for that 

area in violation of paragraph (f)(1) of 

this section. 

(3) CMS separately designates the 

supplier numbers of all noncontract 

suppliers to monitor compliance with 

paragraph (f)(1) of this section. 

(g) Purchased equipment. (1) The 

single payment amounts for new 

purchased durable medical equipment, 

including power wheelchairs that are 

purchased when the equipment is 

initially furnished, and enteral nutrition 

equipment, if included under a 

competitive bidding program, are 

calculated based on the bids submitted 

and accepted for these items. (2) 

Payment for used purchased durable 

medical equipment and enteral 

nutrition equipment, if included under 

a competitive bidding program, is made 

in an amount equal to 75 percent of the 

single payment amounts calculated for 

new purchased equipment under 

paragraph (g)(1) of this section. 

(h) Purchased supplies and orthotics. 

The single payment amounts for the 

following purchased items, if included 

under a competitive bidding program, 

are calculated based on the bids 

submitted and accepted for the 

following items: 

(1) Supplies used in conjunction with 

durable medical equipment. 

(2) Enteral nutrients. 

(3) Enteral nutrition supplies. 

(4) Orthotics. 

(i) Rented equipment. (1) Payment for 

capped rental durable medical 

equipment, if included under a 

competitive bidding program, is made 

in an amount equal to 10 percent of the 

single payment amounts calculated for 

new durable medical equipment under 

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

of the first 3 months, and 7.5 percent of 

the single payment amounts calculated 

for these items for each of the remaining 

months 4 through 13. 

(2) Separate maintenance and 

servicing payments will not be made for 

any rented equipment. Payment for 

maintenance and servicing of rented 

equipment is included in the single 

payment amount for rental of the item. 

(3) Payment for enteral nutrition 

equipment, if included under a 

competitive bidding program, is made 

in an amount equal to 10 percent of the 

single payment amounts calculated for 

new enteral nutrition equipment under 

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

of the first 3 months, and 7.5 percent of 

the single payment amount calculated 

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

this section for each of the remaining 

months 4 through 15. The contract 

supplier to which payment is made in 

month 15 for furnishing enteral 

nutrition equipment on a rental basis 

must continue to furnish, maintain and 

service the equipment until a 

determination is made by the 

beneficiary’s physician or treating 

practitioner that the equipment is no 

longer medically necessary. 

(4) Payment for the maintenance and 

servicing of rented enteral nutrition 

equipment, if included under a 

competitive bidding program, is made 

in an amount equal to 5 percent of the 

single payment amounts calculated for 

these items under paragraph (g)(1) of 

this section. 

(5) Payment for inexpensive or 

routinely purchased durable medical 

equipment furnished on a rental basis, 

if included under a competitive bidding 

program, is made in an amount equal to 

10 percent of the single payment 

amount calculated for new purchased 

equipment. 

(6) The single payment amounts for 

rented durable medical equipment 

requiring frequent and substantial 

servicing, if included under a 

competitive bidding program, are 

calculated based on the bids submitted 

and accepted for these items. 

(j) Monthly payment amounts for 

oxygen and oxygen equipment. The 

single payment amounts for oxygen and 

oxygen equipment, if included under a 

competitive bidding program, are 

calculated based on the separate bids 

submitted and accepted for the 

furnishing on a monthly basis of each of 

the four categories of oxygen and 

oxygen equipment described in 

§ 414.226(b)(1)(i) through (b)(1)(iv). 

(k) Special rules for certain rented 

durable medical equipment and oxygen 

and oxygen equipment. (1) Supplier 

election. (i) A supplier that is furnishing 

DME on a rental basis or is furnishing 

oxygen and oxygen equipment on a 

monthly basis to a beneficiary prior to 

the implementation of a competitive 

bidding program in the area where the 

beneficiary maintains a permanent 

residence may elect to continue 

furnishing the item as a grandfathered 

supplier. 

(ii) A supplier that elects to be a 

grandfathered supplier must continue to 

furnish a grandfathered item to all 

beneficiaries who elect to continue 

receiving the grandfathered item from 

that supplier. 

(2) Payment for grandfathered items 

furnished during the first competitive 

bidding program implemented in an 

area. Medicare pays for grandfathered 

items furnished during the first 

competitive bidding program 

implemented in an area as follows: 

(i) For items described in § 414.220, 

payment is made in the amount 

determined under § 414.220(b). 

(ii) For items that meet the definition 

of a capped rental item in § 414.229, 

payment is made in the amount 

determined under § 414.229(b). 

(iii) For items described in § 414.222, 

payment is made in the amount 

determined under § 414.416. 

(iv) For items described in § 414.226, 

payment is made in the amount 

determined under § 414.416. 

(3) Payment for grandfathered items 

furnished during all subsequent 

competitive bidding programs in an 

area. Beginning with the second 

competitive bidding program 

implemented in an area, payment is 

made for grandfathered items in the 

amounts determined under § 414.416. 

(4) Choice of suppliers. (i) 

Beneficiaries described in paragraph 

(k)(1) of this section may elect to obtain 

a grandfathered item from a 

grandfathered supplier. 

(ii) A beneficiary who is otherwise 

entitled to obtain an item from a 

grandfathered supplier under paragraph 


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(k) of this section may elect to obtain the 

same item from a contract supplier at 

any time after a competitive bidding 

program is implemented. 

(iii) If a beneficiary elects to obtain 

the item from a contract supplier, 

payment is made for the item in the 

amount determined under § 414.416. 

§ 414.410 Phased-in implementation of 

competitive bidding programs. 

(a) Phase-in of MSA for CY 2007, CY 

2009, and subsequent calendar years. 

CMS phases in competitive bidding 

programs so that competition under the 

programs occurs in—

(1) Ten of the largest MSAs in CY 

2007; 

(2) Eighty of the largest MSAs in CY 

2009; 

(3) Additional areas after CY 2009. 

(b) Selection of MSAs for CY 2007 and 

CY 2009. CMS selects the MSAs for 

purposes of designating competitive 

bidding areas in CY 2007 and CY 2009 

by considering the following variables: 

(1) The total population of an MSA. 

(2) The Medicare allowed charges for 

DMEPOS items per fee-for-service (FFS) 

beneficiary in an MSA. 

(3) The total number of DMEPOS 

suppliers per FFS beneficiary that 

received DMEPOS items in an MSA. 

(4) An MSA’s geographic location. 

(c) Exclusions from a competitive 

bidding area. CMS may exclude from a 

competitive bidding area a rural area (as 

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

chapter), or an area with low population 

density based on the following factors—

(1) Low utilization of DMEPOS items 

by Medicare FFS beneficiaries relative 

to similar geographic areas; 

(2) Low number of DMEPOS suppliers 

relative to similar geographic areas; or 

(3) Low number of Medicare FFS 

beneficiaries relative to similar 

geographic areas. 

(d) Selection of additional areas after 

CY 2009. (1) Beginning in CY 2010, 

CMS designates additional competitive 

bidding areas based on CMS’

determination that the implementation 

of a competitive bidding program in an 

area is likely to result in significant 

savings to the Medicare program. 

(2) CMS may designate one or more 

regional or nationwide competitive 

bidding areas for purposes of 

implementing competitive bidding 

programs for items that are furnished 

through the mail. 

§ 414.412 Submission of bids under a 

competitive bidding program. 

(a) In order for a supplier to receive 

payment for items furnished to 

beneficiaries under a competitive 

bidding program, the supplier must 

submit a bid to furnish those items and 

be awarded a contract under this 

subpart. 

(b) Bids are submitted for items 

grouped into product categories. 

(c) Product categories include items 

that are used to treat a related medical 

condition. The list of product categories, 

and the items included in each product 

category that is included in a particular 

competitive bidding program, are 

identified in the request for bids for that 

competitive bidding program. 

(d) Suppliers must submit a separate 

bid for every item included in each 

product category that they are seeking to 

furnish under a competitive bidding 

program. 

(e) A bid must include all costs 

related to furnishing an item, including 

all services directly related to the 

furnishing of the item. 

(f) Mail order suppliers. (1) Suppliers 

that furnish items through the mail must 

submit a bid to furnish these items in 

any area in which a competitive bidding 

program is implemented which includes 

the items. 

(2) Suppliers that submit one or more 

bids under paragraph (f)(1) of this 

section may submit the same bid 

amount for each item under each 

competitive bidding program for which 

it submits a bid. 

(g) Applicability of the mail order 

program. Suppliers that do not furnish 

items through the mail are not required 

to participate in a national or regional 

mail order competitive bidding program 

that includes the same items. Suppliers 

may continue to furnish these items 

in—

(1) A competitive bidding area, if the 

supplier is awarded a contract under 

this subpart; or 

(2) An area not designated as a 

competitive bidding area. 

§ 414.414 Conditions for awarding 

contracts. 

(a) General rule. The rules set forth in 

this section govern the evaluation and 

selection of suppliers for contract award 

purposes under a competitive bidding 

program. 

(b) Basic supplier eligibility. (1) Each 

bidding supplier must meet the 

enrollment standards specified in 

§ 424.57 of this chapter. 

(2) Each bidding supplier must—

(i) Certify in its bid that it, its high 

level employees, chief corporate 

officers, members of its board of 

directors, its affiliated companies, and 

its subcontractors are not now and was 

not sanctioned by any governmental 

agency or accreditation or licensing 

organization, or 

(ii) Disclose information about any 

prior or current legal actions, sanctions, 

or debarments by any Federal, State or 

local program, including actions against 

any members of the board of directors, 

chief corporate officers, high-level 

employees, affiliated companies, and 

subcontractors. 

(3) Each bidding supplier must submit 

with its bid evidence of all State and 

local licenses required to perform the 

services identified in its response to the 

request for bids. 

(4) Each bidding supplier must agree 

to all the terms contained in the request 

for bids and the supplier contract. 

(c) Quality standards and 

accreditation. (1) Quality standards. All 

bidding suppliers must meet applicable 

quality standards developed by CMS in 

accordance with section 1834(a)(20) of 

the Act. 

(2) Accreditation. (i) All bidding 

suppliers must be accredited by a CMS 

approved accreditation organization, as 

defined under § 424.57(a) of this 

chapter. 

(ii) A supplier satisfies paragraph 

(c)(2)(i) of this section if it was 

accredited by an organization that CMS 

designates as a CMS-approved 

accreditation organization under 

§ 424.58 of this chapter. 

(d) Financial standards. All suppliers 

must meet the applicable financial 

standards specified in the request for 

bids. 

(e) Evaluation of bids. CMS evaluates 

bids submitted for a product category 

by—

(1) Calculating the expected 

beneficiary demand in a competitive 

bidding area for items in a product 

category; 

(2) Establishing a composite bid for 

each supplier that submitted a bid for 

the product category; 

(3) Arraying the composite bids from 

the lowest to the highest; 

(4) Calculating the pivotal bid for the 

product category; and 

(5) Selecting all bidding suppliers 

whose composite bids are less than or 

equal to the pivotal bid for that product 

category, and that meet the 

requirements in paragraphs (b) through 

(d) of this section. 

(f) Expected savings. CMS does not 

award a contract under this subpart 

unless CMS determines that the 

amounts to be paid to a contract 

supplier for an item under a competitive 

bidding program are expected to be less 

than the amounts that would otherwise 

be paid for the same item under 

subparts C or D of this part. 

(g) Sufficient number of suppliers. If 

the requirements in paragraphs (e)(5) 

and (f) of this section are satisfied by 

two or more suppliers for a product 

category under a competitive bidding 


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program, then CMS awards at least two 

contracts for the furnishing of that 

product category under a competitive 

bidding program. 

(h) Selection of new suppliers after 

bidding. (1) Subsequent to the awarding 

of contracts under this subpart, CMS 

may award additional contracts if it 

determines that additional contract 

suppliers are needed to meet beneficiary 

demand for items under a competitive 

bidding program. CMS selects 

additional contract suppliers by—

(i) Referring to the arrayed list of 

suppliers that submitted bids for the 

product category included in the 

competitive bidding program for which 

beneficiary demand is not being met; 

and 

(ii) Beginning with the supplier 

whose composite bid is the first 

composite bid above the pivotal bid for 

that product category, determining if 

that supplier is willing to become a 

contract supplier under the same terms 

and conditions that apply to other 

contract suppliers in the competitive 

bidding area. 

(2) Before CMS awards additional 

contracts under paragraph (h)(1) of this 

section, a supplier must submit updated 

eligibility information, and CMS must 

determine that the supplier continues to 

meet the requirements under paragraphs 

(b) through (d) of this section. 

§ 414.416 Determination of competitive 

bidding payment amounts. 

(a) General rule. CMS establishes a 

single payment amount for each item 

furnished under a competitive bidding 

program. 

(b) Methodology for setting payment 

amount. (1) The single payment amount 

for an item furnished under a 

competitive bidding program is equal to 

the median of the accepted bids for that 

item that are at or below the pivotal bid 

for the product category that includes 

the item. 

(2) The single payment amount for an 

item must be less than the amount that 

would otherwise be paid for the same 

item under subparts C or D of this part. 

(c) Rebate. (1) A contract supplier that 

submitted a bid for an item in an 

amount that is below the single payment 

amount calculated by CMS for that item 

may elect to issue a rebate. 

(2) A contract supplier that elects to 

offer a rebate under paragraph (c)(1) of 

this section must agree to issue the same 

rebate to all beneficiaries to whom it 

furnishes an item to which a rebate 

applies. 

(3) A contract supplier’s election to 

offer a rebate will be included as an 

express term in the contract supplier’s 

contract to furnish items under this 

subpart. 

(4) The rebate election cannot be 

amended or otherwise modified during 

the term of the contract. 

(5) A contract supplier may not 

advertise that it issues a rebate for any 

item furnished under this subpart. 

§ 414.418 Opportunity for networks. 

(a) For purposes of this section, a 

network is comprised of at least two 

suppliers that collectively submit a 

single bid to furnish the items included 

in a product category under a 

competitive bidding program. 

(b) The following rules apply to 

networks that seek contracts under this 

subpart: 

(1) Each network must form a single 

legal entity that acts as the bidder and 

submits the bid. Any agreement entered 

into for purposes of forming a network 

must be submitted to CMS. 

(2) Each member of the network must 

be independently eligible to bid. If CMS 

determines that a member of the 

network is ineligible to bid, CMS 

notifies the network, and the network 

has 10 business days to resubmit its bid. 

(3) Each network member must meet 

all accreditation and quality standards 

that are required. Each member is 

responsible for the quality of care, 

service, and items that it furnishes to 

Medicare beneficiaries. If any network 

member does not comply with this 

requirement, CMS may terminate its 

contract with the network. 

(4) The network cannot be 

anticompetitive. The network members’

market shares for a product category, 

when added together, cannot exceed 20 

percent of the Medicare market within 

a competitive bidding area. 

(5) A supplier may only join one 

network and cannot submit individual 

bids if part of a network. The network 

must identify itself as a network and 

identify all of its members. 

(6) The network must designate a 

primary contract supplier among its 

members. The primary contract supplier 

bills and receives payment on behalf of 

the network members. The primary 

contract supplier is responsible for 

appropriately distributing 

reimbursement to other network 

members. 

§ 414.420 Physician or treating practitioner 

authorization and consideration of clinical 

efficiency and value of items. 

(a) A physician or treating practitioner 

may prescribe in writing a particular 

brand of an item for which payment is 

made under a competitive bidding 

program, or a particular mode of 

delivery for an item, if he or she 

determines that the particular brand or 

mode of delivery would avoid an 

adverse medical outcome for the 

beneficiary. 

(b)(1) The contract supplier must 

make a reasonable effort to furnish the 

particular brand or mode of delivery of 

an item as prescribed by the physician 

or treating practitioner. 

(2) A contract supplier that, despite 

making a reasonable effort under 

paragraph (b)(1) of this section, cannot 

furnish an item as prescribed under 

paragraph (a) of this section, must 

consult with the physician or treating 

practitioner to find an appropriate item, 

or mode of delivery, for the beneficiary. 

(3) Any change to a prescription made 

in accordance with paragraph (b)(2) of 

this section must be memorialized in a 

revised written prescription. 

(c) Medicare does not make an 

additional payment to a contract 

supplier that furnishes a particular item 

or provides a particular mode of 

delivery for an item, as directed by a 

prescription written by the beneficiary’s 

physician or treating practitioner. 

(d) A contract supplier is prohibited 

from billing Medicare if it furnishes an 

item different from that specified in the 

written prescription received from the 

beneficiary’s physician or treating 

practitioner. 

§ 414.422 Terms of contracts. 

(a) A contract supplier must comply 

with all terms of its contract, including 

any option exercised by CMS, for the 

full duration of the contract period. 

(b) Recompeting competitive bidding 

contracts. CMS recompetes competitive 

bidding contracts at least once every 3 

years. 

(c) Repair and replacement of patient 

owned equipment. (1) Beneficiary 

owned items furnished under a 

competitive bidding program must be 

serviced by a contract supplier for that 

competitive bidding program, and a 

contract supplier must agree to service 

all items included in its contract and 

furnished to any beneficiary who 

maintains a permanent residence in that 

contract supplier’s competitive bidding 

area. 

(2) Paragraph (c)(1) of this section 

does not apply if the beneficiary is 

outside the competitive bidding area. 

(d) Change of ownership. (1) A 

contract supplier must notify CMS in 

writing 60 days prior to any change of 

ownership, mergers or acquisitions. 

(2) CMS may award a contract to an 

entity that merges with, or acquires, a 

contract supplier if—

(i) CMS determines that awarding a 

contract to the successor entity is 

necessary to ensure that beneficiary 


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demand for the items furnished by the 

contract supplier continues to be met; 

(ii) The successor entity meets all 

requirements applicable to contract 

suppliers for the applicable competitive 

bidding program; 

(iii) The successor entity agrees to 

assume all obligations and liabilities 

borne by the prior contract supplier 

under the contract; 

(iv) The successor entity executes a 

novation agreement. 

(e) Furnishing of items. (1) A contract 

supplier must agree to furnish items 

under a competitive bidding program to 

any beneficiary who maintains a 

permanent residence in, or who visits, 

the competitive bidding area and who 

requests those items from that contract 

supplier. 

(2) Exceptions. (i) A skilled nursing 

facility defined under section 1819(a) of 

the Act that is also a contract supplier 

must agree to furnish items under a 

competitive bidding program to patients 

to whom it would otherwise furnish 

Part B services. 

(ii) A physician that is also a contract 

supplier must agree to furnish items 

under the competitive bidding program 

to his or her patients. 

(f) Breach of contract. (1) Any 

deviation from contract requirements, 

including a failure to comply with 

governmental agency or licensing 

organization requirements, constitutes a 

breach of contract. 

(2) In the event a contract supplier 

breaches the contract, CMS may take 

one or more of the following actions: 

(i) Require the contract supplier to 

correct the breach condition; 

(ii) Suspend performance under the 

contract; 

(iii) Terminate the contract for default 

(which may include requiring the 

contract supplier to reimburse CMS’

reprocurement costs); 

(iv) Preclude the contract supplier 

from participating in the competitive 

bidding program; 

(v) Revoke the supplier number of the 

contract supplier; or 

(vi) Avail itself of other remedies 

allowed by law. 

(g) CMS has the right to terminate 

performance under the contract in 

whole or in part when termination 

would be in CMS’ interest. 

§ 414.424 Administrative or judicial review. 

(a) There is no administrative or 

judicial review under this subpart of the 

following: 

(1) Establishment of payment 

amounts. 

(2) Awarding of contracts. 

(3) Designation of competitive bidding 

areas. 

(4) Phase-in of the competitive 

bidding programs. 

(5) Selection of items for competitive 

bidding. 

(6) Bidding structure and number of 

contract suppliers selected for a 

competitive bidding program. 

(b) A denied claim is not appealable 

if CMS determines that a competitively 

bid item was furnished in a competitive 

bidding area in a manner not authorized 

by this subpart. 

§ 414.426 Adjustments to competitively 

bid payment amounts to reflect changes in 

the HCPCS. 

If a HCPCS code for a competitively 

bid item is revised during a competitive 

bidding program, CMS adjusts the single 

payment amount for that item as 

follows: 

(a) If a single HCPCS code for an item 

is divided into multiple codes for the 

components of that item, the sum of 

single payment amounts for the new 

codes equals the single payment amount 

for the original item, and contract 

suppliers must furnish the components 

of the item in accordance with the new 

codes. 

(b) If a single HCPCS code for two or 

more similar items is divided into two 

or more separate codes, the single 

payment amount applied to these codes 

is the same single payment amount 

applied to the single code, and contract 

suppliers must furnish the items in 

accordance with the new codes. 

(c) If the HCPCS codes for 

components of an item are merged into 

a single code for the item, the single 

payment amount for the new code is 

equal to the total of the separate single 

payment amounts for the components, 

and contract suppliers must furnish the 

item in accordance with the new code. 

(d) If multiple codes for similar items 

are merged into a single code, the single 

payment amount for the new single 

code is the average (arithmetic mean) 

weighted by the frequency of payments 

for the formerly separate codes, and 

contract suppliers must furnish the item 

under the new single code. 

PART 424—CONDITIONS FOR 

MEDICARE PAYMENT 

12. The authority citation for part 424 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

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

1395hh). 

Subpart A—General Provisions 

13. Section 424.1 is amended by 

adding in numerical order the statutory 

sections to read as follows: 

§ 424.1 Basis and scope. 

* * * * * 

1834(a)—Payment for durable medical 

equipment. 

1834(j)—Requirements for suppliers 

of medical equipment and supplies. 

* * * * * 

Subpart D—To Whom Payment is 

Ordinarily Made 

14. Section 424.57 is amended by—

A. Adding the definitions ‘‘Accredited 

DMEPOS supplier,’’ ‘‘CMS approved 

accreditation organization’’ and 

‘‘Independent accreditation 

organization’’ in alphabetical order in 

paragraph (a). 

B. Adding a new paragraph (c)(22). 

The additions read as follows: 

§ 424.57 Special payment rules for items 

furnished by DMEPOS suppliers and 

issuance of DMEPOS supplier billing 

privileges. 

(a) Definitions. * * * 

* * * * * 

Accredited DMEPOS supplier means a 

supplier that has been accredited by a 

recognized independent accreditation 

organization meeting the requirements 

of and approved by CMS in accordance 

with § 424.58. 

CMS approved accreditation 

organization means a recognized 

independent accreditation organization 

approved by CMS under § 424.58. 

* * * * * 

Independent accreditation 

organization means an accreditation 

organization that accredits a supplier of 

DMEPOS and other items and services 

for a specific DMEPOS product category 

or a full line of DMEPOS product 

categories. 

* * * * * 

(c) Application certification 

standards. * * * 

(22) All suppliers of DMEPOS and 

other items and services must be 

accredited by a CMS approved 

accreditation organization before 

receiving a supplier billing number. 

* * * * * 

15. A new § 424.58 is added to read 

as follows: 

§ 424.58 Accreditation. 

(a) Scope and purpose. This part 

implements section 1834(a)(20)(B) of the 

Act, which requires the Secretary to 

designate and approve one or more 

independent accreditation organizations 

for purposes of enforcing the quality 

standards for suppliers of DMEPOS and 

other items of service. Section 

1847(b)(2)(A)(i) of the Act requires a 

DMEPOS supplier to meet the quality 

standards under section 1834(a)(20) of 


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the Act before being awarded a contract 

under part 414, subpart F of this 

chapter. 

(b) Application and reapplication 

procedures for accreditation 

organizations. (1) An independent 

accreditation organization applying for 

approval or reapproval of authority to 

survey suppliers for compliance with 

Medicare DMEPOS supplier quality 

standards is required to furnish the 

following to CMS: 

(i) A list of the product-specific types 

of DMEPOS suppliers for which the 

organization is requesting approval. 

(ii) A detailed comparison of the 

organization’s accreditation 

requirements and standards with the 

applicable Medicare quality standards, 

such as a crosswalk. 

(iii) A detailed description of the 

organization’s survey process, including 

procedures for performing unannounced 

surveys, frequency of the surveys 

performed, copies of the organization’s 

survey forms, guidelines and 

instructions to surveyors, accreditation 

survey review process and the 

accreditation status decision-making 

process. 

(iv) Procedures used to notify 

suppliers of compliance or 

noncompliance with the accreditation 

requirements. 

(v) Procedures used to monitor the 

correction of deficiencies found during 

an accreditation survey. 

(vi) Procedures for coordinating 

surveys with another accrediting 

organization if the organization does not 

accredit all products the supplier 

provides. 

(vii) Detailed professional information 

about the individuals who perform 

surveys for the accreditation 

organization, including the size and 

composition of accreditation survey 

teams for each type of supplier 

accredited, and the education and 

experience requirements surveyors must 

meet. The information must include the 

following: 

(A) The content and frequency of the 

continuing education training provided 

to survey personnel. 

(B) The evaluation systems used to 

monitor the performance of individual 

surveyors and survey teams. 

(C) Policies and procedures for a 

surveyor or institutional affiliate of the 

independent accrediting organization 

that participates in a survey or 

accreditation decision regarding a 

DMEPOS supplier with which that 

individual or institution is 

professionally or financially affiliated. 

(viii) A description of the 

organization’s data management, 

analysis and reporting system for its 

surveys and accreditation decisions, 

including the kinds of reports, tables, 

and other displays generated by that 

system. 

(ix) Procedures for responding to, and 

investigating complaints against, 

accredited facilities, including policies 

and procedures regarding coordination 

of these activities with appropriate 

licensing bodies, ombudsmen programs, 

the National Supplier Clearinghouse, 

and CMS. 

(x) The organization’s policies and 

procedures for notifying CMS of 

facilities that fail to meet the 

accreditation organization’s 

requirements. 

(xi) A description of all types, 

categories, and durations of 

accreditations offered by the 

organization. 

(xii) A list of the following: 

(A) All currently accredited DMEPOS 

suppliers. 

(B) The types and categories of 

accreditation currently held by each 

supplier. 

(C) The expiration date of each 

supplier’s current accreditation. 

(D) The upcoming survey cycles for 

all DMEPOS suppliers’ accreditation 

surveys scheduled to be performed by 

the organization. (xiii) A written 

presentation that demonstrates the 

organization’s ability to furnish CMS 

with electronic data in ASCII 

comparable code. 

(xiv) A resource analysis that 

demonstrates that the organization’s 

staffing, funding and other resources are 

adequate to perform fully the required 

surveys and related activities. 

(xv) An agreement that makes 

surveyors available as witnesses if CMS 

takes an adverse action based on 

accreditation findings. 

(2) Validation survey. CMS surveys 

suppliers of DMEPOS and other items 

and services accredited under this 

section on a representative sample basis, 

or in response to substantial allegations 

of noncompliance, in order to validate 

the accreditation organization’s survey 

process. When conducted—

(i) On a representative sample basis, 

the CMS survey may be comprehensive 

or focus on a specific standard; 

(ii) In response to a substantial 

allegation, CMS surveys for any 

standard that CMS determines is related 

to the allegations. 

(3) Discovery of a deficiency. If CMS 

discovers a deficiency and determines 

that the DMEPOS supplier is out of 

compliance with Medicare supplier 

quality standards, CMS may revoke the 

suppliers’ billing number or require the 

accreditation organization to perform a 

subsequent full accreditation survey at 

the accreditation organization’s 

expense. 

(4) A supplier selected for a validation 

survey. A supplier selected for a 

validation survey must authorize the—

(i) Validation survey to take place; 

and 

(ii) CMS survey team to monitor the 

correction of any deficiencies found 

through the validation survey. 

(5) Refusal to cooperate with survey. 

If a supplier selected for a validation 

survey fails to comply with the 

requirements specified at paragraph 

(b)(4) of this section, it is deemed to no 

longer meet the Medicare supplier 

quality standards and may have its 

supplier billing number revoked. 

(6) Validation survey findings. If a 

validation survey results in a finding 

that the supplier is out of compliance 

with one or more Medicare supplier 

quality standards, the supplier no longer 

meets the Medicare standards and may 

have its supplier billing number 

revoked. 

(c) Ongoing responsibilities of a CMS 

approved accreditation organization. 

An accreditation organization approved 

by CMS must undertake the following 

activities on an ongoing basis: 

(1) Provide to CMS all of the 

following in written format and on a 

monthly basis all of the following: 

(i) Copies of all accreditation surveys, 

together with any survey-related 

information that CMS may require 

(including corrective action plans and 

summaries of unmet CMS 

requirements). 

(ii) Notice of all accreditation 

decisions. 

(iii) Notice of all complaints related to 

suppliers of DMEPOS and other items 

and services. 

(iv) Information about any suppliers 

of DMEPOS and other items and 

services against which the CMS 

approved accreditation organization has 

taken remedial or adverse action, 

including revocation, withdrawal, or 

revision of the supplier’s accreditation. 

(v) Notice of any proposed changes in 

its accreditation standards or 

requirements or survey process. If the 

organization implements the changes 

before or without CMS’ approval, CMS 

may withdraw its approval of the 

accreditation organization. 

(2) Within 30 days of a change in CMS 

requirements, submit to CMS: 

(i) An acknowledgment of CMS’

notification of the change. 

(ii) A revised cross-walk reflecting the 

new requirements. 

(iii) An explanation of how the 

accreditation organization plans to alter 

its standards to conform to CMS’s new 

requirements, within the timeframes 


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25704 Federal Register / Vol. 71, No. 83 / Monday, May 1, 2006 / Proposed Rules 

specified in the notification of change it 

receives from CMS. 

(3) Permit its surveyors to serve as 

witnesses if CMS takes an adverse 

action based on accreditation findings. 

(4) Within 2 calendar days of 

identifying a deficiency of an accredited 

DMEPOS supplier that poses immediate 

jeopardy to a beneficiary or to the 

general public, provide CMS with 

written notice of the deficiency and any 

adverse action implemented by the 

accreditation organization. 

(5) Within 10 days after CMS’s notice 

to a CMS approved accreditation 

organization that CMS intends to 

withdraw approval of the accreditation 

organization, provide written notice of 

the withdrawal to all the CMS approved 

accreditation organization’s accredited 

suppliers. 

(6) Provide, on an annual basis, 

summary data specified by CMS that 

relate to the past year’s accreditation 

activities and trends. 

(d) Continuing Federal oversight of 

approved accreditation organizations. 

This paragraph establishes specific 

criteria and procedures for continuing 

oversight and for withdrawing approval 

of a CMS approved accreditation 

organization. 

(1) Equivalency review. CMS 

compares the accreditation 

organization’s standards and its 

application and enforcement of those 

standards to the comparable CMS 

requirements and processes when—

(i) CMS imposes new requirements or 

changes its survey process; 

(ii) An accreditation organization 

proposes to adopt new standards or 

changes in its survey process; or 

(iii) The term of an accreditation 

organization’s approval expires. 

(2) Validation survey. CMS or its 

designated survey team may conduct a 

survey of an accredited DMEPOS 

supplier, examine the results of a CMS 

approved accreditation organization’s 

survey of a supplier, or observe a CMS 

approved accreditation organization’s 

onsite survey of a DMEPOS supplier, in 

order to validate the CMS approved 

accreditation organization’s 

accreditation process. At the conclusion 

of the review, CMS identifies any 

accreditation programs for which 

validation survey results indicate—

(i) A 10 percent rate of disparity 

between findings by the accreditation 

organization and findings by CMS or its 

designated survey team on standards 

that do not constitute immediate 

jeopardy to patient health and safety if 

unmet; 

(ii) Any disparity between findings by 

the accreditation organization and 

findings by CMS on standards that 

constitute immediate jeopardy to patient 

health and safety if unmet; or 

(iii) That, irrespective of the rate of 

disparity, there are widespread or 

systemic problems in an organization’s 

accreditation process such that 

accreditation by that accreditation 

organization no longer provides CMS 

with adequate assurance that suppliers 

meet or exceed the Medicare 

requirements. 

(3) Notice of intent to withdraw 

approval. CMS provides the 

organization written notice of its intent 

to withdraw approval if an equivalency 

review, validation review, onsite 

observation, or CMS’s daily experience 

with the accreditation organization 

suggests that the accreditation 

organization is not meeting the 

requirements of this section. 

(4) Withdrawal of approval. CMS may 

withdraw its approval of an 

accreditation organization at any time if 

CMS determines that—

(i) Accreditation by the organization 

no longer guarantees that the suppliers 

of DMEPOS and other items and 

services are meeting the supplier quality 

standards, and that failure to meet those 

requirements could jeopardize the 

health or safety of Medicare 

beneficiaries and could constitute a 

significant hazard to the public health; 

or 

(ii) The accreditation organization has 

failed to meet its obligations with 

respect to application or reapplication 

procedures. 

(e) Reconsideration. (1) An 

accreditation organization dissatisfied 

with a determination that its 

accreditation requirements do not 

provide or do not continue to provide 

reasonable assurance that the entities 

accredited by the accreditation 

organization meet the applicable 

supplier quality standards is entitled to 

a reconsideration. CMS reconsiders any 

determination to deny, remove, or not 

renew the approval of deeming 

authority to accreditation organizations 

if the accreditation organization files a 

written request for reconsideration by 

its authorized officials or through its 

legal representative. 

(2) The request must be filed within 

30 days of the receipt of CMS notice of 

an adverse determination or non 

renewal. 

(3) The request for reconsideration 

must specify the findings or issues with 

which the accreditation organization 

disagrees and the reasons for the 

disagreement. 

(4) A requestor may withdraw its 

request for reconsideration at any time 

before the issuance of a reconsideration 

determination. 

(5) In response to a request for 

reconsideration, CMS provides the 

accreditation organization the 

opportunity for an informal hearing to 

be conducted by a hearing officer 

appointed by the Administrator of CMS 

and provide the accreditation 

organization the opportunity to present, 

in writing and in person, evidence or 

documentation to refute the 

determination to deny approval, or to 

withdraw or not renew deeming 

authority. 

(6) CMS provides written notice of the 

time and place of the informal hearing 

at least 10 days before the scheduled 

date. 

(7) The informal reconsideration 

hearing is open to CMS and the 

organization requesting the 

reconsideration, including authorized 

representatives; technical advisors 

(individuals with knowledge of the facts 

of the case or presenting interpretation 

of the facts); and legal counsel. 

(i) The hearing is conducted by the 

hearing officer who receives testimony 

and documents related to the proposed 

action. 

(ii) Testimony and other evidence 

may be accepted by the hearing officer 

even though it is inadmissible under the 

rules of court procedures. 

(iii) The hearing officer does not have 

the authority to compel by subpoena the 

production of witnesses, papers, or 

other evidence. 

(8) Within 45 days of the close of the 

hearing, the hearing officer presents the 

findings and recommendations to the 

accreditation organization that 

requested the reconsideration. 

(9) The written report of the hearing 

officer includes separate numbered 

findings of fact and the legal 

conclusions of the hearing officer. The 

hearing officer’s decision is final. 

(Catalog of Federal Domestic Assistance 

Program No. 93.778, Medical Assistance 

Program; Catalog of Federal Domestic 

Assistance Program No. 93.773, Medicare—

Hospital Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 

Dated: August 15, 2005. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: April 3, 2006. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 06–3982 Filed 4–24–06; 4:00 pm] 

BILLING CODE 4120–01–P 


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