Medicare: Challenges Remain in Setting Payments for Medical Equipment and Supplies and Covered Drugs
Published: 2002-06-12T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: Medicare has paid higher than market rates for various medical equipment and supplies and often considerably higher than provider acquisition costs for Medicare-covered outpatient drugs. Congress has enacted a series of legislative changes affecting payment methods and payment adjustment authority for medical equipment and supplies and outpatient drugs since the late 1980s. However, progress in setting appropriate rates has been mixed, owing, in part, to various constraints faced by the agency responsible for administering Medicare--the Centers for Medicare and Medicaid Services (CMS). Because of the program's size, scope, and role as a public payer, Medicare has limited options to set and adjust payments for medical equipment, supplies and outpatient drugs. Medicare's method of paying for medical equipment and supplies is through fee schedules that remain tied to suppliers' historical charges to Medicare rather than market prices. Medicare's payment approaches lack flexibility to keep pace with market changes, and, as a result, Medicare often pays higher prices than other public payers. Previous efforts to lower Medicare's overly generous payments suggest several lessons. First, payment changes are most effectively implemented when the process used to set or adjust a rate is defensible. Second, the information on Medicare claims for medical equipment and supplies is not specific enough to enable CMS to determine which products Medicare is actually paying for. Also, for the foreseeable future, CMS will have to continue to rely on fee schedules based on historical charges in setting payment rates for medical equipment and supply items.

section_title: Letter
paragraphs: I am pleased to be here as you discuss Medicare payment methods related  to durable medical equipment, prosthetics, orthotics, and supplies— products referred to in this statement as medical equipment and  supplies—and covered outpatient drugs. Over the years, we and the  Department of Health and Human Services (HHS) Office of the Inspector  General (OIG) have periodically reported that Medicare has paid higher  than market rates for various medical equipment and supply items and  often considerably higher than provider acquisition costs for Medicare- covered outpatient drugs. Since the late 1980s, the Congress has enacted a  series of legislative changes affecting payment methods and payment  adjustment authority for medical equipment and supplies and outpatient  drugs. However, the progress made in setting appropriate rates has been  mixed, owing, in part, to various constraints faced by the agency  responsible for administering Medicare—the Centers for Medicare and  Medicaid Services (CMS), formerly called the Health Care Financing  Administration (HCFA).
In this regard, my remarks today will focus on (1) Medicare’s experience  in setting payment rates for medical equipment and supplies and  outpatient drugs; (2) certain changes designed to assist in setting  payments for medical equipment and supplies and outpatient drugs  incorporated in the Balanced Budget Act of 1997 (BBA); and (3) lessons  learned from efforts to improve the appropriateness of Medicare’s  payments. My comments are based primarily on our previously issued  work.
In summary, because of the program’s size, scope, and role as a public  payer, Medicare has limited options to set and adjust payments for medical  equipment and supplies and outpatient drugs. For example, in cases where  Medicare is the dominant payer for a service or product, the program’s  share of the payments can distort the market, making reliance on market  prices problematic. Medicare’s method of paying for medical equipment  and supplies is through fee schedules that remain tied to suppliers’  historical charges to Medicare rather than market prices. Similarly,  Medicare’s method of determining outpatient drug payments is based on  list prices, not prices that purchasers actually pay for the outpatient drugs.  Medicare’s payment approaches lack 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 and outpatient drugs.
Despite dramatic instances of wide disparities in market prices and  Medicare’s payment rates for medical equipment and supplies and  outpatient drugs, Medicare is not in a position to take prompt action. To  lower unreasonably high payment rates, it must follow a lengthy and  complicated regulatory process for making payment adjustments. The  BBA gave HCFA authority to use a streamlined process to adjust payment  rates for most medical equipment and supplies and outpatient drugs.  However, the agency’s attempt to use this authority drew intense industry  criticism, in part because the agency acted before it responded to public  comment on how it would implement the authority. The Congress then  prohibited use of either the original or streamlined processes until public  comments are addressed and a final rule issued. To date, a final rule has  not been published, effectively precluding the use of the original or  streamlined processes to adjust Medicare payment rates, where excessive.  Nevertheless, the BBA also provided HCFA the authority to test an  alternative to setting prices administratively. This authority permitted  HCFA to conduct demonstrations, for a limited number of items at a few  locations, using competition to determine an appropriate payment for  these items. In this process, suppliers competed for the right to supply  certain items on the basis of quality and price. Two such demonstrations  have reported savings without any measurable problems in beneficiary  access.
Past efforts to lower Medicare’s overly generous payments suggest several  lessons. First, payment changes are most effectively implemented when  the process used to set or adjust a rate is defensible. Medicare’s size and  impact on the nation’s health care economy means that its payment  methods and rate adjustments, no matter how reasonable, will face close  scrutiny. As a result, the need for CMS to collect sufficient information on  market prices and potential effects on suppliers and beneficiaries before  taking action is paramount. A second lesson, related to the first, is that the  information on Medicare claims for medical equipment and supplies is not  specific enough to enable CMS to determine which products Medicare is  actually paying for. Thus, the agency has difficulty trying to use market  prices to set appropriate rates. A third lesson is that for the foreseeable  future, CMS will have to continue to rely on fee schedules based on  historical charges in setting payment rates for medical equipment and  supply items. The recent demonstrations that set payments for items  through competitive bidding were instructive, but the positive results  achieved may be neither applicable nor practical on a wider scale for  many products.
subsections: section_title: Background
paragraphs: CMS, an agency within HHS, is responsible for much of the federal  government’s multi-billion-dollar payments for health care, primarily  through the Medicare and Medicaid programs. Medicare—the nation’s  largest health insurance program—covers about 40 million elderly and  disabled beneficiaries. Medicaid is a state-administered health insurance  program, jointly funded by the federal and state governments, that covers  eligible low-income individuals including children and their parents, and  aged, blind, and disabled individuals. Each state administers its own  program and determines—under broad federal guidelines—eligibility for,  coverage of, and reimbursement for, specific services and items.
Most Medicare beneficiaries purchase part B insurance, which helps pay  for certain physician, outpatient hospital, laboratory, and other services;  medical supplies and durable medical equipment (such as oxygen,  wheelchairs, hospital beds, and walkers); and certain outpatient drugs.  Medicare part B pays for most medical equipment and supplies using a  series of fee schedules. Medicare pays 80 percent, and the beneficiary pays  the balance, of either the actual charge submitted by the supplier or the  fee schedule amount, whichever is less. Generally, Medicare has a  separate fee schedule for each state for most categories of 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.
The fee schedules specify a Medicare-allowable payment amount for each  of about 1,900 groups of products. Each product group is identified by a  Healthcare Common Procedure Coding System (HCPCS) Level II code,  and all products grouped under a code are intended to be items that are  alike and serve a similar health care function. For example, one code  (E1130) describes a standard wheelchair with fixed arms. Many different  brands can be billed under this code, so long as they fit the basic  description.
Medicare part B also covers roughly 450 outpatient drugs—generally those  that cannot be self-administered and are related to physicians services,  such as cancer chemotherapy, or are provided in conjunction with covered  durable medical equipment, such as inhalation drugs used with a  nebulizer. In addition, Medicare part B covers selected immunizations and  certain outpatient drugs that can be self-administered, such as blood  clotting factors and some oral drugs used in association with cancer  treatment and immunosuppressive therapy.
To administer Medicare part B fee-for-service claims, CMS contracts with  insurance companies, referred to as carriers, who review and pay claims  that have been submitted by physicians and other outpatient providers and  suppliers. To ensure appropriate payment, carriers conduct claims reviews  that determine, for example, whether the services claimed are covered by  Medicare, are reasonable and necessary, and have been billed with the  proper codes.
section_title: Payment Approaches Lack Flexibility to Keep Pace with Market Changes
paragraphs: Medicare’s size and complexity make it extremely challenging to develop  payment methods that prudently reimburse providers while promoting  beneficiary access to items and services. As Medicare’s steward, CMS  cannot passively accept what providers want to charge the program.  However, because of its size, Medicare profoundly influences health care  markets. Medicare is often the dominant payer for services and products,  and in such cases, it cannot rely on market prices to determine  appropriate payment amounts because Medicare’s share of payments  distorts the market. In addition, Medicare has had difficulty relying on  competition to determine prices. Because of constraints on excluding any  qualified provider from participating in the program, Medicare  traditionally includes all such providers who want to participate. Finding  ways of encouraging competition without excluding some providers—a  normal leverage that purchasers use to make competition work—has been  problematic. As a result, Medicare has had to administratively set payment  amounts for thousands of services and items, trying to do so in ways that  encourage efficient delivery, while ensuring beneficiary access to them.
Adding to the complexity of setting payment amounts is Medicare’s status  as a highly visible public program with certain obligations that may not be  consistent with efficient business practices. For example, CMS is  constrained from acting swiftly to reprice services and supplies even when  prevailing market rates suggest that payments should be modified. When  making substantive changes, Medicare’s enabling legislation generally  requires public input. This minimizes the potential for actions to have  unintended consequences. However, seeking and responding to public  input from various provider and supplier groups can be a time-consuming  process that can sometimes thwart efficient program management.
Prior to 1987, Medicare payments for medical equipment and supplies  were based on supplier charges, subject to some limitations. As part of  their responsibilities to administer Medicare claims, individual Medicare  carriers raised or lowered payments to suppliers in their local areas to  align them with market prices. When carriers sought to adjust payments  on this basis, they employed a process that involved gathering relevant  pricing data from local area markets, determining new payment levels on  the basis of the price information obtained, and notifying area suppliers of  the changes. Although HCFA monitored carriers’ performance in carrying  out these steps, it did not evaluate the appropriateness of the new  payment levels established.
In 1987, the Congress and HCFA began the process of moving the  Medicare program from paying on the basis of individual providers’  charges for medical equipment and supplies and covered outpatient drugs,  to developing payment methods intended to pay more prudently through  use of program-determined amounts. Specifically, the Congress introduced  fee schedules for medical equipment and supplies in 1987. Statewide fees  were determined on the basis of average supplier charges on Medicare  claims allowed in each state in 1986 and 1987, and were updated for  inflation in some years. However, the agency lacked mechanisms to  otherwise adjust fees to reflect marketplace changes. As a result,  disparities between fee schedule amounts and market prices developed  over time, and Medicare significantly overpaid for some medical  equipment and supplies.
In recent years, we and the HHS OIG reported on instances where  Medicare payments for certain medical equipment and supplies and  outpatient drugs were excessive compared with retail and other prices.  One notable example of excessive Medicare payments is included in our  1995 report on surgical dressings. We estimated that Medicare could have  saved almost $20 million in 1995 if it had paid the lowest wholesale prices  available in a national catalog for 44 types of surgical dressings. Although  Medicare’s fee schedule for surgical dressings was based on medians of  retail prices found in supply catalogs when the schedule was set,  Medicare’s statute did not permit HCFA to lower the fee schedule when  retail prices for dressings decreased.
Another instance of excessive Medicare payment was for home oxygen  equipment and supplies provided to patients with pulmonary insufficiency.  Medicare fee schedule allowances for home oxygen were significantly  higher than the rates paid for almost identical services by the Department  of Veterans Affairs (VA), which in fiscal year 1995 paid for home oxygen  benefits for over 23,000 patients. In 1997, we estimated that Medicare  could have saved over $500 million in fiscal year 1996 if it had paid rates  for home oxygen comparable to those paid by VA.
Medicare’s payments for outpatient drugs have been similarly excessive,  although the methodology used to determine payment amounts is  somewhat different and attempts to tie Medicare’s payments to market  prices. In 1989, the Congress required that physician services be paid  based on fee schedules beginning in 1992. The fee schedules developed  by HCFA to comply with this requirement provided for all outpatient drugs  furnished to Medicare beneficiaries not paid on a cost or prospective  payment basis to be paid based on the lower of the estimated acquisition  cost or the national average wholesale price (AWP). Manufacturers  report AWPs to organizations that publish them in drug price compendia,  which are typically updated annually, and Medicare carriers base  providers’ payments on these published AWPs.
In concept, such a payment method has the potential to be market-based  and self-adjusting. The reality is, however, that AWP is neither an average  nor a price that wholesalers charge. Because the term AWP is not defined  in law or regulation, there are no requirements or conventions that AWP  reflect the price of any actual sale of drugs by a manufacturer. Given the  latitude manufacturers have in setting AWPs, Medicare’s payments are  often not related to market prices that physicians and suppliers actually  pay for the products.
A June 1997 House Budget Committee report accompanying the bill that  became the BBA, in explaining the reason for specifying a 5-percent  reduction from AWP, cited a report by the HHS OIG regarding Medicare  payments for outpatient drugs. Among the OIG findings were that  Medicare payments ranged from 20 percent to nearly 1,000 percent of  certain oncology drugs’ commercially available prices.
Our recent work found that Medicare payments in 2001 for part B-covered  outpatient drugs remained significantly higher than prices widely available  to physicians and pharmacy suppliers. For example, most physician- administered drugs had widely available discounts ranging from 13 to 34  percent below AWP. Two other physician-administered drugs had  discounts of 65 and 86 percent. Pharmacy suppliers—the predominant  billers for 10 of the high-expenditure and high-volume drugs we  analyzed—also purchased drugs at prices considerably lower than  Medicare payments. For example, two inhalation drugs accounting for  most of Medicare payments to pharmacy suppliers had widely available  discounts averaging 78 percent and 85 percent from AWP.
section_title: BBA Reforms Sought to Improve Medicare’s Ability to Set Appropriate Rates
paragraphs: Despite such dramatic illustrations of disparities between Medicare  payments and prices widely available to others acquiring medical  equipment and supplies and covered outpatient drugs, Medicare has not  had the tools to respond quickly in such instances. Carriers used to adjust  payment amounts as part of their responsibility to appropriately pay  Medicare claims, but in 1987, the Congress effectively prohibited use of  this process to lower Medicare payment rates until 1991. In 1988, the  Congress required use of a more formal “inherent reasonableness” process  that could be accomplished only by HCFA, not by the carriers. In other  reports, we have described this process as slow and cumbersome and have  noted that it is not available for some items, such as surgical supplies.  Since 1991, when HCFA was first permitted to use the inherent  reasonableness process to adjust payments for medical equipment and  supplies, it successfully did so only once—for blood glucose monitors— and in that instance took almost 3 years to adjust the maximum allowable  Medicare payment from $185.79 to $58.71.
In 1997, in response to concerns about HCFA’s difficulties in adjusting  payment rates determined to be excessive, the Congress included a  provision in the BBA that gave HCFA authority to use a streamlined  inherent reasonableness process to adjust payments for medical  equipment and supplies and covered outpatient drugs by up to 15 percent  a year. Subsequent legislation required that a final regulation taking into  account public comments be published before the agency could use any  inherent reasonableness authority. Because the agency has not issued the  final regulation, it cannot adjust Medicare’s fee schedules to respond to  market price information. The BBA also provided HCFA with  opportunities to test an alternative to setting rates administratively that  could be more responsive to market prices. This alternative is  competitive bidding—a process allowing suppliers to compete for the right  to supply their products on the basis of established criteria, such as quality  and price.
subsections: section_title: Streamlined Process to Adjust Fees Needs Further Regulatory Action to Be Implemented
paragraphs: The BBA gave HCFA authority to use a streamlined inherent  reasonableness process for part B services (excluding physician’s  services). Under this authority, HCFA can adjust payments by up to 15  percent per year using a streamlined process, or can use its original  process with formal notice and comment to make larger adjustments. In  January 1998, the agency published an “interim final rule with comment  period” for the streamlined inherent reasonableness process that became  effective 60 days after it was published. This was a departure from the  usual practice of first responding to public comments before issuing a final  regulation.
Under the interim final rule, HCFA delegated authority to use the  streamlined process to the Medicare carriers that process claims for  medical equipment and supplies, with final action on payment adjustments  to be approved by the agency. The carriers attempted to lower maximum  payment rates for eight groups of products, gathering information on retail  prices through surveys conducted in at least 16 states. In September 1998,  the carriers notified suppliers of proposed adjustments for eight groups of  products and solicited comments. Industry groups representing various  medical equipment and supply manufacturers and suppliers expressed  serious concerns about how the inherent reasonableness process was  implemented and whether the surveys were conducted properly. The  Congress requested that we review the appropriateness of implementing  the streamlined inherent reasonableness authority through an interim final  rule and the soundness of the carriers’ surveys. Pending the results of our  review, HCFA suspended the carrier-proposed payment reductions in  March 1999.
In November 1999, the Congress passed legislation prohibiting HCFA or  the carriers from using any inherent reasonableness authority until we  issued our report and the agency issued a final rule taking into account our  findings and public comment. In our July 2000 report, we concluded that,  while the carriers could have conducted their surveys more rigorously, the  surveys and other evidence sufficiently justified the carriers’ proposed  payment reductions for five of eight product groups. In our report, we  recommended that HCFA clarify criteria for using its inherent  reasonableness authority, strengthen agency or carrier survey  methodology in the future, collect additional data on prices for the other  three product groups before adjusting their payment amounts, and  monitor beneficiary access after any payment changes. Although our  report is almost 2 years old, CMS has not issued a final regulation that  would allow it to use either its streamlined or original inherent  reasonableness processes to adjust Medicare payment amounts for part B  supplier-billed services. Thus, the agency lacks a tool to adjust its fee  schedules, short of statutory changes.
section_title: BBA Provisions Authorized Competitive Bidding Demonstration Projects
paragraphs: In order to experiment with other ways of setting Medicare’s payments for  medical equipment and supplies and outpatient drugs, the BBA provided  authority for HCFA to conduct demonstration projects using competitive  bidding and to include home oxygen in at least one of the  demonstrations. Evidence from two competitive bidding projects  suggests that, for most of the items selected, competition might provide a  tool that facilitates setting more appropriate payment rates and result in  program savings.
In its first competitive bidding demonstration, conducted in Polk County,  Florida, HCFA set rates for oxygen, hospital beds, surgical dressings,  enteral nutrition and supplies, and urological supplies through competitive  bidding. HCFA reported that the new rates set by this competitive process  in the Florida demonstration saved Medicare an average of 17 percent on  the cost of these medical equipment and supply items without  compromising beneficiary access to these items.
In a second demonstration in San Antonio, Texas, the agency included  oxygen; hospital beds; manual wheelchairs; noncustomized orthotic  devices, including “off-the-shelf” items such as braces and splints; and  albuterol sulfate and other nebulizer drugs. Preliminary CMS information  on the San Antonio competitive bidding demonstration identified an  average savings of 20 percent, without any negative effects on beneficiary  access.
section_title: Past Efforts to Correct Inappropriate Payments Suggest Lessons for The Future
paragraphs: Whether attempting to adjust payments administratively or through  competitive bidding, CMS can only be effective if it has a defensible  process for doing so and accurate information upon which to base action.  Any change to Medicare’s payments, particularly a reduction in fees for  medical equipment and supplies or covered outpatient drugs, should be  accompanied by an ongoing assessment of whether the new payments  adequately support Medicare beneficiaries’ access to such items and  services and properly reimburse providers and suppliers. Such monitoring  needs to examine current experience so that prompt fee adjustments can  be made if access problems are found.
Efforts to lower excessive payment rates through the inherent  reasonableness process illustrate the difficulties CMS has in making even  minor adjustments, as the agency’s actions can have wide ramifications for  providers, suppliers, and beneficiaries. When HCFA tried to use its  streamlined inherent reasonableness authority in 1998 to reduce payment  rates for various medical equipment and supply items and outpatient  drugs, it attempted to take action before responding to public comment,  thereby leaving the effort open to criticism. In addition, we concluded that  the carriers’ survey methodology was not rigorous enough to provide a  basis to adjust fees nationally for all of the products under review.
What the agency lacked was sufficient information on market prices. Such  information, along with current local, as well as national, data on  beneficiaries’ use of services and program expenditures, is key to setting  rates administratively. Because HCFA did not have reliable acquisition  cost information, its carriers engaged in a very labor-intensive  information-gathering effort.
One major problem CMS has when going to the marketplace to collect  information is that it cannot determine the specific products Medicare is  paying for when carriers process claims for medical equipment and  supplies. Carriers pay claims on the basis of billing codes indicating that  the supplied items belong to a particular product group. These groups can  cover a broad range of product types, quality, and market prices. As a  result, products that differ widely in properties, use, performance, and  price are billed under the same code and the program pays the same  amount. For example, we reported in 1998 that catheters belonging to a  single product category varied in type and price, from about $1 to $18,  with Medicare’s maximum fee payments ranging across states from $9.95  to $11.70. However, HCFA had no information on which catheters were  being provided to beneficiaries.
To address the problem of insufficient specificity, we recommended in the  1998 report that suppliers be required to include universal product  numbers (UPN) as well as current billing codes on claims. UPNs and  associated bar codes are increasingly used to identify specific medical  equipment and supplies, similar to the way universal product codes are  used in supermarkets. Manufacturers can use bar codes for each product  to identify characteristics such as the manufacturer, product type, model,  size, and unit of packaging. Using UPNs—or some other mechanism— incorporated into claim forms to bring more specificity to what is provided  to beneficiaries could help CMS better determine appropriate payments.
Under provisions in the Health Insurance Portability and Accountability  Act of 1996 (HIPAA), HHS has adopted standards for coding medical  services, procedures, and equipment and supplies. These provisions were  aimed at simplifying data reporting and claims processing requirements  across all public and private payers. Under the standards, HCPCS Level II  was designated as the code set for medical equipment and supplies. Its  limitation in specificity argues for evaluating whether the current code set  can be adjusted to better distinguish between various products currently  grouped within a single HCPCS Level II code.
Lack of specificity has been a similar problem for the codes used to define  inpatient hospital procedures. The HIPAA standard code set for reporting  hospital inpatient procedures is the International Classification of Disease,  9th Edition, Clinical Modification, Volume 3 (ICD-9 CM Vol. 3). The  inadequacy of this code set is widely recognized, as it lacks both the  specificity to accurately identify many key aspects of medical procedures  as well as the capacity to expand in order to appropriately incorporate  codes in response to new technology. In fact, HHS recognized that in  adopting the ICD-9-CM Vol. 3 as a HIPAA standard, the agency would need  to replace it, given the code set’s limitations. As a consequence, CMS plans  to implement a new code set, the International Classification of Disease,  10th Edition, Procedural Coding System (10 PCS), which would provide  much greater specificity.
Our work on payments for covered outpatient drugs, which identified  strategies used by other payers to obtain prices closer to acquisition costs,  underscores the value of accurate information for determining appropriate  payments. For example, the VA uses the leverage of federal purchasers to  secure verifiable information on actual market transactions by private  purchasers—specifically, the prices that drug manufacturers charge their  “most-favored” private customers. To enable the VA to determine the  most-favored-customer price, by statute, manufacturers who wish to sell  their products to the federal agencies involved are required to provide  information on price discounts and rebates offered to domestic customers  and the terms and conditions involved, such as length of contract periods  and ordering and delivery practices. The manufacturers provide this  information and agree to offer the VA and other government purchasers  drugs at these prices, subject to VA audit of their records, in order to  have state Medicaid programs cover their drugs.
This type of information could be helpful in setting payment amounts for  certain Medicare drugs. It is already available to CMS, but for use only in  the Medicaid—not the Medicare—program. With congressional approval,  CMS could use the information provided to Medicaid to determine  appropriate prices for Medicare that would be based on actual prices  being paid in the market. One key step would be to determine the formula  to use to calculate payments based on the price data. Most likely, Medicare  would not set payments to match the prices paid by most favored  customers but would need to pay closer to average market prices to  ensure access for all beneficiaries and adequate payments to providers.
Results from the competitive bidding demonstrations suggest that  competition can also serve as a tool to obtain more appropriate prices for  medical equipment and supplies and outpatient drugs. By competing a  small number of products and limiting the geographic area of competition,  CMS took steps to manage the process, which included monitoring of  beneficiary access and product quality. In its fiscal year 2003 budget, the  Administration proposed expanding competitive bidding for medical  equipment and supplies nationally, which it estimates could save $240  million in fiscal year 2003 and $5 billion over 10 years.
The Administration’s expansion proposal to translate these limited  demonstrations into a competition involving a larger number of products  nationally would be a substantial undertaking and may not be practical or  appropriate for all products. CMS would require new authority to begin to  use competitive bidding outside of a demonstration. A key element to the  new authority would be the extent to which and the basis whereby  providers could be excluded from Medicare. While Medicare normally  allows any qualified provider to participate in the program, competitive  bidding may be most effective only by limiting the number of providers or  suppliers who could provide items or services. For example, in the Polk  County demonstration, only 16 out of the 30 bidders were selected to  participate. Limiting the number of participating suppliers obviously has  an effect on both beneficiaries and suppliers. While provider participation  is not an entitlement, the effects of exclusion—in terms of numbers of  providers and the volume of services affected—need to be identified and  assessed. Similarly, for some products, who the provider is may be of little  consequence for the beneficiary, but for others, maintaining greater  beneficiary choice and direct access to the provider could be important.
Whether payment rates are set or adjusted through competitive bidding or  administrative fee-setting, monitoring to ensure that beneficiaries continue  to have access to the items or services is a critical component of such  efforts. For example, when the Congress reduced Medicare home oxygen  payment rates by 25 percent effective January 1, 1998, and an additional 5  percent effective January 1, 1999, it wanted assurance that beneficiaries  could continue to receive satisfactory service. To evaluate the impact of  the home oxygen payment reduction on access and quality, the BBA  required studies conducted by us and HHS. Neither study found any  significant access problems with the payment reduction. In addition, home  oxygen was included in both competitive bidding demonstrations, and  through those demonstrations, prices were reduced further. HCFA  estimated that Medicare’s home oxygen payments were reduced by 16  percent in the Polk County demonstration, without beneficiary access  problems. Such monitoring is important, not just when required by statute  but as part of an ongoing effort to ensure the Medicare program is  effectively serving its beneficiaries.
Unfortunately, such studies to review the effects of payment reductions on  access are the exception. As we have reported before, CMS has not been  able to generate data that are timely, accurate, and useful on payment and  service trends essential to effective program monitoring. One of the  principal lessons to be drawn from the many BBA payment reforms is that  newly implemented policies need a thorough assessment of their effects.  Policy changes, particularly those that constrain payment, almost  inevitably spark calls for revisions. Considerations of such revisions need  to be based on sufficient information so that, at one extreme, policies are  not unduly affected by external pressures and premature conclusions as to  their impact, and at the other extreme, policies do not remain static when  change is clearly warranted. CMS has not been well-positioned to collect  and analyze data regarding beneficiaries’ use of services—information that  is essential to managing the program effectively. This year’s 5.4 percent  reduction of physicians’ fees from what was paid in 2001 raised concerns  about beneficiaries’ access. While prior information available on  physicians’ willingness to see Medicare beneficiaries did not indicate  access problems, this information is somewhat dated. Informed decisions  about appropriate payment rates and rate changes cannot be made unless  policymakers have detailed and recent data on beneficiaries’ access to  needed services.
Mr. Chairman, this concludes my prepared remarks. I will be happy to  answer any questions you or the Subcommittee Members may have.
section_title: Contact and Acknowledgments
paragraphs: For further information regarding this testimony, please contact me at  (312) 220-7600. Sheila Avruch, Hannah Fein, Sandra Gove, Joy Kraybill,  and Craig Winslow made contributions to this statement.