Medicare: Competitive Bidding for Medical Equipment and Supplies Could Reduce Program Payments, but Adequate Oversight Is Critical
Published: 2008-05-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: For more than a decade, GAO has reported that Medicare has paid higher than market rates for medical equipment and supplies provided to beneficiaries under Medicare Part B. Since 1989, Medicare has used fee schedules primarily based on historical charges to set payment amounts. But this approach lacks flexibility to keep pace with market changes and increases costs to the federal government and Medicare's 44 million elderly and disabled beneficiaries. The Balanced Budget Act of 1997 required the Centers for Medicare & Medicaid Services (CMS)--the agency that administers Medicare--to test competitive bidding as a new way to set payments. CMS did this through a demonstration in two locations in which suppliers could compete on the basis of price and other factors for the right to provide their products. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required CMS to conduct competitive bidding on a large scale and suppliers to obtain accreditation. GAO was asked to describe the effects that competitive bidding could have on Medicare program payments and suppliers and the need for adequate oversight to ensure quality and access for beneficiaries in a competitive bidding environment. This testimony is based primarily on GAO work conducted from May 1994 to January 2007, which GAO updated by interviewing CMS officials and reviewing agency documents.
section_title: What GAO Found
paragraphs: Competitive bidding could reduce Medicare program payments by providing an incentive for suppliers to accept lower payments for items and services to retain their ability to serve beneficiaries and potentially increase their market share. Fundamentally different from fee schedules based on historical charges to Medicare, competitive bidding allows the market to help CMS determine payment amounts. In the demonstration, the new fee schedule amounts were based on the winning suppliers' bids for items included and 50 percent to 55 percent of the bids from suppliers were selected. Evidence from CMS's competitive bidding demonstration suggests that competition saved Medicare $7.5 million and saved beneficiaries $1.9 million--without significantly affecting beneficiary access. For the competitive bidding program, CMS required suppliers to obtain accreditation based on quality standards and provide financial documents to participate. This added scrutiny gives CMS the chance to screen out suppliers that may not be stable, legitimate businesses, which could contribute to lower rates of improper payment. CMS also evaluated the bids based on demand, capacity, and price and chose suppliers whose bids were at or under a certain amount. CMS estimates that the first round of its competitive bidding program will result in payment amounts that average 26 percent less than the current fee schedule amounts. Competitive bidding also changes Medicare's relationship with suppliers and departs from Medicare's practice of doing business with any qualified provider, because it is designed to limit the number of suppliers to those whose bids are at or under a certain amount. Because of concerns that competitive bidding may prompt suppliers to cut their costs by providing lower-quality items and curtailing services, ensuring quality and access through adequate oversight is critical for the success of the competitive bidding program. In September 2004, GAO indicated that quality assurance steps could include monitoring beneficiary satisfaction, setting standards for suppliers, giving beneficiaries a choice of suppliers, and selecting winning bidders based on quality and the dollar amount of the bids. As competitive bidding expands, problems that beneficiaries might experience could be magnified. Therefore, continued monitoring of beneficiary satisfaction will be critical to identify problems with suppliers or with items provided to beneficiaries. As required in the MMA, GAO will review and report on the competitive bidding program's impact on suppliers and manufacturers and its effect on quality and access for beneficiaries.

section_title: Letter
paragraphs: I am pleased to be here as you discuss the Medicare competitive bidding  program for durable medical equipment (DME), prosthetics, orthotics, and  supplies—products referred to in this statement as medical equipment and  supplies. For more than a decade, we and the Department of Health and  Human Services (HHS) Office of Inspector General (OIG) have  periodically reported that Medicare, administered by the Centers for  Medicare & Medicaid Services (CMS), has paid higher than market rates  for various medical equipment and supply items. These overpayments  increase costs to the program and to Medicare’s 44 million elderly and  disabled beneficiaries. CMS reported in 2007 that total Medicare  expenditures for medical equipment and supplies were about $10 billion.
Since 1989, Medicare has paid for medical equipment and supplies through  fee schedules that list a maximum and minimum payment amount. The  schedules are based on average supplier charges on Medicare claims in  1986 and 1987 and have been updated in some years to reflect inflation.  However, this payment approach lacks flexibility to keep pace with  market changes, and as a result, Medicare often pays higher prices than  other public payers for medical equipment and supplies. The Balanced  Budget Act of 1997 (BBA) required CMS to test competitive bidding as a  new way for Medicare to set fees for Part B items and services specified by  CMS, which the agency did through a demonstration focused on medical  equipment and supplies. Competitive bidding is a process in which  suppliers of medical equipment and supplies compete for the right to  provide their products on the basis of established criteria, such as quality  and price. About a year after the demonstration concluded, the Medicare  Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)  required CMS to conduct a competitive bidding program for DME,  supplies, off-the-shelf orthotics, and enteral nutrients and related  equipment and supplies on a large scale.
In my testimony today, I will discuss (1) the effects that competitive  bidding could have on Medicare program payments and suppliers and   (2) the need for adequate oversight to ensure quality and access for  beneficiaries in a competitive bidding environment. My testimony is based  primarily on our previously issued work, conducted from May 1994 to  January 2007, which we updated with information on the competitive  bidding process by interviewing CMS officials and reviewing agency  documents. We shared a statement of facts regarding this testimony with  CMS and incorporated the agency’s comments as appropriate. We  conducted this performance audit from April 2008 through May 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
In summary, competitive bidding could reduce Medicare program  payments by providing an incentive for suppliers to accept lower  payments for items and services to retain their ability to serve  beneficiaries and potentially increase their market share. Fundamentally  different from fee schedules based on historical charges to Medicare,  competitive bidding allows the market to help CMS determine payment  amounts. In the demonstration, the new fee schedule amounts were based  on the winning suppliers’ bids for items included and 50 percent to   55 percent of the bids from suppliers were selected. Evidence from CMS’s  competitive bidding demonstration suggests that competition saved  Medicare $7.5 million and saved beneficiaries $1.9 million—without  significantly affecting beneficiary access. For the competitive bidding  program, CMS required suppliers to obtain accreditation based on quality  standards and provide financial documents to participate. This added  scrutiny gives CMS the chance to screen out suppliers that may not be  stable, legitimate businesses, which could contribute to lower rates of  improper payment. CMS also evaluated the bids based on demand,  capacity, and price and chose suppliers whose bids were at or under a  certain amount. CMS estimates that the first round of its competitive  bidding program will result in payment amounts that average 26 percent  less than the current fee schedule amounts. Competitive bidding also  changes Medicare’s relationship with suppliers and departs from  Medicare’s practice of doing business with any qualified provider, because  it is designed to limit the number of suppliers to those whose bids are at or  under a certain amount.
Because of concerns that competitive bidding may prompt suppliers to cut  their costs by providing lower-quality items and curtailing services,  ensuring quality and access through adequate oversight is critical for the  success of the competitive bidding program. In September 2004, GAO  indicated that quality assurance steps could include monitoring  beneficiary satisfaction, setting standards for suppliers, giving  beneficiaries a choice of suppliers, and selecting winning bidders based on  quality and the dollar amount of the bids. As competitive bidding expands,  problems that beneficiaries might experience could be magnified.  Therefore, continued monitoring of beneficiary satisfaction will be critical  to identify problems with suppliers or with items provided to beneficiaries.  As required in the MMA, GAO will review and report on the competitive  bidding program’s impact on suppliers and manufacturers and its effect on  quality and access for beneficiaries.
subsections: section_title: Background
paragraphs: Medicare is the federal program that helps pay for a variety of health care  services for about 44 million elderly and disabled beneficiaries. Most  Medicare beneficiaries participate in Medicare Part B, which helps pay for  certain physician, outpatient hospital, laboratory, and other services;  medical equipment and supplies, such as oxygen, wheelchairs, hospital  beds, walkers, orthotics, prosthetics, and surgical dressings; and certain  outpatient drugs. Medicare Part B pays for most medical equipment and  supplies using a series of fee schedules. Generally, Medicare has a  separate fee schedule for each state that includes most items, and there  are upper and lower limits on the allowable amounts that can be paid in  different states to reduce variation in what Medicare pays for similar items  in different parts of the country. Medicare pays 80 percent of the lesser of  the actual charge for the item or fee schedule amount for the item, and the  beneficiary pays the balance. Beneficiaries typically obtain medical  equipment and supplies from suppliers, who submit claims to Medicare on  beneficiaries’ behalf. Suppliers include medical equipment retail  establishments and outpatient providers, such as physicians, home health  agencies, and physical therapists. To handle claims processing for medical  equipment and supplies, CMS contracts with durable medical equipment  Medicare administrative contractors.
subsections: section_title: The Competitive Bidding Demonstration
paragraphs: Using its authority under the BBA, CMS conducted a competitive bidding  demonstration to set Medicare Part B payment rates for groups of selected  medical equipment and supplies. CMS contracted with Palmetto  Government Benefits Administrators (Palmetto) to administer the  competitive bidding demonstration, which was implemented in two  locations—the Polk County, Florida, metropolitan statistical area and  parts of the San Antonio, Texas, metropolitan statistical area.
Two cycles of bidding took place in Polk County, with competitively set  fees effective from October 1, 1999, to September 30, 2001, and from  October 1, 2001, to September 30, 2002. One cycle of bidding took place in  San Antonio, and competitively set fees were effective from February 1,  2001, to December 31, 2002. Bidding and implementation processes were  similar at both locations. The demonstration ended on December 31, 2002.
section_title: The Competitive Bidding Program
paragraphs: In December 2003, the MMA required CMS to conduct competitive bidding  for DME, supplies, off-the-shelf orthotics, and enteral nutrients and related  equipment and supplies on a large scale. The MMA required that  competition under the program begin in 10 of the largest metropolitan  statistical areas in 2007, in 80 of the largest metropolitan statistical areas  in 2009, and in other areas after 2009. The law established a new  accreditation requirement for all Medicare suppliers of medical equipment  and supplies and required CMS to develop financial and quality standards  to use in selecting suppliers for the competitive bidding program. The law  required CMS to take appropriate steps to ensure that small suppliers have  an opportunity to be considered for participation in the competitive  bidding program. CMS was required to establish a methodology for  selecting bids from suppliers so that enough suppliers were selected to  meet demand for competitively bid items within a given area. The law  specified that at least two suppliers would be selected in each competitive  area. The law also precluded judicial or administrative review of CMS’s  decisions to establish payment amounts, award contracts, designate areas  for competition, select items and services, phase in implementation, and  determine the bidding structure and number of suppliers selected under  the competitive bidding program. The MMA required that an advisory  committee be established to assist in carrying out the program.
To help implement the competitive bidding program, CMS published its  notice of proposed rulemaking on May 1, 2006, and its final rule on   April 10, 2007. CMS’s final rule provided more detail on the agency’s  implementation steps. For example, the law specified that the agency  could not award a contract to an entity unless it met applicable financial  standards specified by the Secretary of HHS. In its regulation, CMS  specified the financial documents that had to be submitted by suppliers to  be considered as potential bidders. Similarly, while the law indicated that  the agency needed to ensure that small suppliers had an opportunity to  participate, the regulation sets out a process to include a certain number  of small suppliers based on the percentage of those who bid and met all  applicable requirements.
CMS established the initial round of bidding in 10 metropolitan statistical  areas that included Charlotte, N.C.; Cincinnati, Ohio; Cleveland, Ohio;  Dallas, Tex.; Kansas City, Mo.; Miami, Fla.; Orlando, Fla.; Pittsburgh, Pa.;  Riverside, Calif.; and San Juan, P.R. On April 9, 2007, CMS opened the  initial registration of suppliers for the first round of bidding and the bid  period opened on May 15, 2007. As part of its program implementation for  the first round, CMS conducted a supplier-education campaign, which  included meetings, listserve announcements, a dedicated Web site, and a  toll-free help desk. The bid period closed on September 25, 2007. CMS  concluded bid evaluations and began the contracting process in March  2008, and the agency plans to announce the first round of winning  suppliers in May 2008. Suppliers whose bids were disqualified because  their bid did not meet program and bidding requirements will receive a  letter informing them of the reason or reasons for their disqualification.  After the program begins, suppliers whose bids were not chosen generally  cannot receive Medicare payment for the competitively bid items in the  metropolitan statistical areas included in the competitive bidding program.  However, suppliers of certain rental items or oxygen that did not become  suppliers in the competitive bidding program could continue to serve their  existing Medicare customers. Suppliers that did not have bids chosen in  the first round of the program may bid in the future rounds of competition.  CMS said it plans to conduct a beneficiary-education campaign before the  program goes into effect on July 1, 2008.
section_title: Competitive Bidding Could Reduce Program Payments by Creating an Incentive for Suppliers to Accept Lower Payment Amounts
paragraphs: Competitive bidding could reduce Medicare program payments by  providing an incentive for suppliers to accept lower payment amounts for  items and services to retain their ability to serve beneficiaries and  potentially increase their market share. Using competition to obtain  market prices in order to set payments for medical equipment and supplies  is a new approach for Medicare that is fundamentally different than relying  on fee schedules based on suppliers’ historical charges to Medicare.  Competitive bidding allows the market to provide information to CMS on  what amounts suppliers will accept as payment to serve beneficiaries.
In its demonstration, CMS used a competitive bidding process to  determine which suppliers would be included and the competitively set  fees that they would be paid. From among the bidders, the agency and  Palmetto selected multiple demonstration suppliers to provide items in  each group of related products. Suppliers could submit bids and have  winning bids for one or more groups of items. These suppliers were not  guaranteed that they would increase their business or serve a specific  number of Medicare beneficiaries. Instead, the demonstration suppliers  had to compete for beneficiaries’ business. All demonstration suppliers  were reimbursed for each competitively bid item provided to beneficiaries  at the demonstration fee schedule amounts. The new fee schedules were  based on the winning suppliers’ bids for items included in the  demonstration. Any Medicare supplier that served demonstration  locations could provide items not included in the demonstration to  beneficiaries.
Evidence from the demonstration suggests that, for the items selected,  competition helped set lower payment amounts and resulted in estimated  program savings of $7.5 million. The demonstration’s independent  evaluators also estimated that beneficiaries saved $1.9 million. The  demonstration provided evidence to health policy experts, including us  and the Medicare Payment Advisory Commission, that competitive bidding  for medical equipment and supplies could be a viable way for the program  to use market forces to set lower payments without significantly affecting  beneficiary access.
About a year after the demonstration ended, the MMA required CMS to  implement competitive bidding on a large scale and added requirements  that suppliers would have to meet to participate in the competitive bidding  program. The MMA also required the agency to develop quality standards  and for suppliers to be assessed on those standards by accreditation  organizations. In addition, the agency had to include a financial and quality  assessment of suppliers as part of competitive bidding.
The competitive bidding program was structured to operate much like the  demonstration. Suppliers submitted bids, along with other materials  specified by CMS. The application required suppliers to submit 3 years of  financial documents, including income statements, credit reports, and  balance sheets. The review of the financial documents was used as part of  the criteria for determining which bids to consider. The bidders had to  have a valid Medicare supplier billing number and be accredited. Suppliers  had to submit bids for one or more groups of items. CMS then evaluated  the bids based on demand, capacity, and price and chose bids that were at  or under a certain amount.
CMS estimates that the first round of its competitive bidding program will  result in payment amounts that overall average 26 percent less than the  current fee schedule amounts for the groups of items included, leading to  savings for the Medicare program and its beneficiaries. CMS based its  estimate on the price points suppliers submitted with their bids, weighted  by market area and past utilization of items in each group. The estimated  savings differed by groups of items, with the largest savings of 43 percent  estimated for mail-order diabetic supplies.
Competitive bidding changes Medicare’s relationship with suppliers.  Competitive bidding is designed to reduce payments by allowing CMS to  choose suppliers based on their bids—a change from the long-standing  policy that any qualified provider can participate in the program. The  competitive bidding process was designed to limit the number of suppliers  to those whose bids were at or under a certain amount while ensuring that  enough suppliers were included to meet beneficiary demand. In the  demonstration, 50 percent to 55 percent of the suppliers’ bids were  selected. With few exceptions, only the suppliers whose bids were chosen  could be reimbursed by Medicare for competitively bid items provided to  beneficiaries residing in the demonstration area.
Furthermore, competitive bidding could help reduce improper payments  because it provides CMS with the authority to select suppliers, based in  part on new scrutiny of their financial documents and other application  materials. In November 2007, CMS estimated that 10.3 percent of Medicare  payments made to suppliers of medical equipment and supplies were  improper—more than double the percentage of improper payments to  other Medicare providers. Providing additional scrutiny of suppliers gives  CMS the opportunity to screen out those whose finances do not indicate  that they are stable, legitimate businesses.
section_title: Adequate Oversight Is Critical to Ensure Quality and Access
paragraphs: Because of concerns that competitive bidding may prompt suppliers to cut  their costs by providing lower-quality items and curtailing services,  ensuring quality and access through adequate oversight is critical. Limiting  the number of suppliers could potentially affect beneficiaries’ access to  quality items and services if there are an insufficient number to meet their  needs. For some beneficiaries, having a choice of suppliers for some items  and services could be important.
In our September 2004 report, we evaluated CMS’s competitive bidding  demonstration and recommended implementation actions for CMS to  consider, including how to ensure access to quality items and services for  beneficiaries. We indicated that quality assurance steps could include  monitoring beneficiary satisfaction, setting standards for suppliers,  providing beneficiaries with a choice of suppliers, and selecting winning  bidders based on quality, in addition to the dollar amounts of bids.
The demonstration projects used several approaches for ensuring quality  and services for beneficiaries, including monitoring beneficiary  satisfaction and applying quality measures as criteria to select winning  suppliers. During the demonstration, CMS and Palmetto used full-time,  onsite ombudsmen to respond to complaints, concerns, and questions  from beneficiaries, suppliers, and others. In addition, to gauge beneficiary  satisfaction, independent evaluators of the demonstration fielded two  beneficiary surveys by mail—one for oxygen users and another for users  of other products in the demonstration. These surveys contained measures  of beneficiaries’ assessments of their overall satisfaction, access to  equipment, and quality of training and service provided by suppliers.  Evaluators reported survey results indicating that beneficiaries generally  remained satisfied with both the products provided and with their  suppliers. The independent evaluators identified some areas for concern,  including a decline in the use of portable oxygen among users and the  possible shift away from suppliers making home deliveries, which may  have indicated that suppliers were visiting new medical equipment users  less frequently to provide routine maintenance visits.
Because we considered careful monitoring of beneficiaries’ experiences  essential to ensure that any quality or access problems were identified  quickly, we recommended that CMS monitor beneficiary satisfaction with  the items and services provided under the new competitive bidding  program. As competitive bidding expands and affects larger numbers of  beneficiaries, problems such as those identified in the evaluations of the  demonstration projects could become magnified. Therefore, continued  monitoring of beneficiary satisfaction will be critical to identifying  problems with suppliers or with items provided to beneficiaries. When  such problems are identified in a timely manner, CMS may develop steps  to address them. Such monitoring is important, not just when required by  statute, but as part of an ongoing effort to ensure that the Medicare  program is serving its beneficiaries effectively.
CMS agreed with our recommendation and stated that the agency would  monitor the beneficiary satisfaction with the quality and services provided  under the competitive bidding process. CMS also stated in the preamble of  its final rule on accreditation of suppliers published August 18, 2006, that it  expects that implementing medical equipment and supplies quality  standards and accreditation will lead to increased quality of items and  services throughout the industry. Furthermore, CMS stated that it plans to  provide education to Medicare beneficiaries on the competitive bidding  process using approaches such as press releases, fact sheets, and notices.
We will be assessing CMS’s implementation of the competitive bidding  program. As part of the MMA, we are required to review and report on the  program’s impact on suppliers and manufacturers and on quality and  access of items and services provided to beneficiaries. As part of this  review, we have been specifically requested to assess CMS’s  implementation of the program.
section_title: Concluding Observations
paragraphs: We believe that competitive bidding could reduce payments for both the  Medicare program and beneficiaries. The independent evaluators  estimated savings achieved in the demonstration, and CMS has projected  reductions in payment amounts in its competitive bidding program for  both Medicare and its beneficiaries. In addition, the new financial  standards and accreditation process being implemented in conjunction  with the competitive bidding program should help improve the financial  viability and quality of medical suppliers providing services to Medicare  beneficiaries. But competitive bidding also provides incentives that could  affect access to services and lower quality of items and services provided  to beneficiaries, which need to be monitored carefully.
Mr. Chairman, this concludes my prepared statement. I will be happy to  answer any questions that you or members of the Subcommittee may have.
section_title: Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact me at  (202) 512-7114 or kingk@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this testimony. Sheila Avruch, Assistant Director; Catina Bradley;   Kelli Jones; Kevin Milne; Lisa Rogers; and Timothy Walker made  contributions to this statement.
section_title: Related GAO Products
paragraphs: Medicare: Improvements Needed to Address Improper Payments for  Medical Equipment and Supplies. GAO-07-59. Washington, D.C.:   January 31, 2007.
Medicare Durable Medical Equipment: Class III Devices Do Not Warrant  a Distinct Annual Payment Update. GAO-06-62. Washington, D.C.:   March 1, 2006.
Medicare: More Effective Screening and Stronger Enrollment Standards  Needed for Medical Equipment Suppliers. GAO-05-656. Washington, D.C.:  September 22, 2005.
Medicare: CMS’s Program Safeguards Did Not Deter Growth in Spending  for Power Wheelchairs. GAO-05-43. Washington, D.C.: November 17, 2004.
Medicare: Past Experience Can Guide Future Competitive Bidding for  Medical Equipment and Supplies. GAO-04-765. Washington, D.C.:  September 7, 2004.
Medicare: CMS Did Not Control Rising Power Wheelchair Spending.   GAO-04-716T. Washington, D.C.: April 28, 2004.
Medicare: Challenges Remain in Setting Payments for Medical  Equipment and Supplies and Covered Drugs. GAO-02-833T. Washington,  D.C.: June 12, 2002.
Medicare Payments: Use of Revised “Inherent Reasonableness” Process  Generally Appropriate. GAO/HEHS-00-79. Washington, D.C.: July 5, 2000.
Medicare: Access to Home Oxygen Largely Unchanged; Closer HCFA  Monitoring Needed. GAO/HEHS-99-56. Washington, D.C.: April 5, 1999.
Medicare: Need to Overhaul Costly Payment System for Medical  Equipment and Supplies. GAO/HEHS-98-102. Washington, D.C.:   May 12, 1998.
Medicare: Home Oxygen Program Warrants Continued HCFA Attention.  GAO/HEHS-98-17. Washington, D.C.: November 7, 1997.
Medicare: Excessive Payments for Medical Supplies Continue Despite  Improvements. GAO/HEHS-95-171. Washington, D.C.: August 8, 1995.
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