Medicare: Past Experience Can Guide Future Competitive Bidding for Medical Equipment and Supplies
Published: 2004-09-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) requires the Centers for Medicare & Medicaid Services (CMS) to conduct large-scale competitive bidding for durable medical equipment, supplies, off-the-shelf orthotics, and enteral nutrients and related equipment and supplies provided to beneficiaries. The Balanced Budget Act of 1997 mandated that GAO study an earlier Medicare competitive bidding demonstration. To address this mandate, GAO assessed this past experience in relation to four issues that CMS might consider as it implements large-scale competitive bidding: (1) items for competitive bidding, (2) how to streamline implementation, (3) ways to collect information on specific items provided to beneficiaries, and (4) steps to ensure quality items and services.
section_title: What GAO Found
paragraphs: CMS's experience in the Medicare competitive bidding demonstration may prove instructive as the agency implements provisions in MMA to conduct large-scale competitive bidding for durable medical equipment, supplies, off-the-shelf orthotics, and enteral nutrients and related equipment and supplies. The experience gained during the demonstration provides insight as the agency considers four implementation issues. Items for competitive bidding: Items for competitive bidding could include those selected for the demonstration and others that account for high levels of Medicare spending. For example, nondemonstration items that CMS could choose for competitive bidding include power wheelchairs and lancets and test strips used by diabetics. In 2002, these three items accounted for about $1.7 billion in charges for the Medicare program and its beneficiaries. How to streamline implementation: Because of the large scale of future competitive bidding, it will be prudent for CMS to consider ways to streamline implementation. Two ways to streamline are developing a standardized competitive bidding approach that can be replicated in multiple geographic locations and using mail-order delivery for selected items, with uniform fees established through a nationwide competition. Ways to collect information on specific items provided to beneficiaries: Gathering specific information on competitively bid items provided to beneficiaries could help ensure that suppliers do not substitute lower-priced items to reduce their costs. Currently, CMS is not able, or does not routinely, collect specific information on the items that suppliers provide to beneficiaries. Steps to ensure quality items and services for beneficiaries: Routine monitoring could help ensure that beneficiaries continue to have access to suppliers that deliver quality items and services. The agency, when implementing significant Medicare changes in the past that affected payment methods, has lacked information on how the changes affected beneficiary access. As competitive bidding expands, small problems could be potentially magnified. Using quality measures to choose multiple suppliers and having suppliers meet more detailed standards than are currently required can also help ensure quality for beneficiaries.

section_title: Letter
paragraphs: In 2002, the Medicare program and its beneficiaries paid almost $9.7 billion  for durable medical equipment (DME), prosthetics, orthotics, and  supplies.For most of these items, Medicare payment rates are not based  on current market prices, but are primarily based on historical charges  from the mid-1980s, adjusted for inflation in some years.  The Centers for  Medicare & Medicaid Services (CMS)—formerly called the Health Care  Financing Administration (HCFA)—lacked mechanisms to readily adjust  payment rates to reflect marketplace changes.  As a result, disparities arose  between Medicare payment rates and market prices.  As we and the  Department of Health and Human Services’ (HHS) Office of Inspector  General (OIG) have reported, the Medicare program and its beneficiaries  have been paying too much for some items of DME, prosthetics, orthotics,  and supplies—sometimes three or four times the amount paid by others.   In addition to increasing program costs, inflated payment rates increase  beneficiaries’ costs because beneficiaries are responsible for 20 percent of  the Medicare rate as coinsurance.
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. Competitive bidding provides incentives for suppliers  to lower their prices for items and services to retain their ability to serve  Medicare beneficiaries and potentially increase their market share.  Using  its authority under BBA, CMS conducted a competitive bidding  demonstration to set Medicare part B payment rates for selected DME,  prosthetics, orthotics, and supply items. The demonstration and CMS’s  authority to conduct competitive bidding ended on December 31, 2002. In  December 2003, the Medicare Prescription Drug, Improvement, and  Modernization Act of 2003 (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.
BBA also mandated that GAO study the effectiveness of the Medicare  competitive bidding demonstration.  To address this mandate, as  discussed with the committees of jurisdiction, we assessed four issues that  CMS might consider as it implements MMA provisions for competitive  bidding, given its prior demonstration experience.  The four issues are   (1) items to be chosen for competitive bidding, (2) how to streamline  implementation, (3) ways to collect information on specific items provided  to beneficiaries, and (4) steps to ensure quality items and services to  beneficiaries.
In preparing this report, we reviewed documents related to the competitive  bidding demonstration for DME, prosthetics, orthotics, and supplies  provided under Medicare part B.  These included evaluations of the  demonstration.  Two evaluation reports on the demonstration have been  published, and a final report is pending.  We also conducted interviews  with officials from CMS, the contractor that administered the  demonstration, and its evaluators.  We analyzed claims data on Medicare  spending for DME, prosthetics, orthotics, and supply items.  To determine  that these data were accurate, timely, and complete, we interviewed the  CMS contractor that provided the data and reviewed CMS’s internal control  procedures.  Where appropriate, we tested data manually against published  sources for consistency. We determined that these data were sufficiently  reliable for addressing the issues in this report.  We solicited feedback on  item selection and quality assurance steps from medical directors at the  four DME regional carriers.  We also interviewed representatives from  advocacy groups and industry.  Appendix I includes a more detailed  discussion of our scope and methodology.  Our work was conducted from  February 2003 through August 2004 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: Medicare is a federal program that helps pay for a variety of health care  services and items on behalf of about 41 million elderly and disabled  beneficiaries.  Medicare part B covers DME for the beneficiary’s use in the  home, prosthetics, orthotics, and supplies if they are medically necessary  and prescribed by a physician.  Part B also covers certain outpatient  prescription drugs that are used with DME or that are not usually self- administered by the patient.  Some of these drugs are classified as supplies.
subsections: section_title: Medicare Payment for DME, Prosthetics, Orthotics, and Supplies
paragraphs: In submitting claims for Medicare payment, suppliers use codes in the  Healthcare Common Procedure Coding System (HCPCS) to identify DME,  prosthetics, orthotics, and supplies that they are providing to beneficiaries.   These codes are used for health insurance billing purposes to identify  health care services, equipment, and supplies used in beneficiaries’  diagnoses and treatments. Individual HCPCS codes used by suppliers can  cover a broad range of items that serve the same general purpose, but vary  in price, characteristics, and quality. The HCPCS National Panel, a group  composed of CMS and other insurers, maintains the HCPCS codes.
Medicare uses a variety of methodologies, which are specified in law, for  determining what it will pay for specific types of DME, prosthetics,  orthotics, and supplies. Medicare has established a fee schedule for DME  and supplies, which lists the fees paid for these items in each state.    Prosthetics and orthotics are paid according to 10 regional fee schedules.   Prior to the passage of MMA, outpatient prescription drugs covered by  Medicare part B were paid on a fee schedule based on 95 percent of the  manufacturers’ average wholesale price (AWP), a price determined by  manufacturers themselves.   Except for these outpatient prescription  drugs, the amounts paid under the fee schedules are generally based on the  amounts charged by suppliers in 1986 and 1987 (or the amount set by  Medicare if the item was subsequently added to the fee schedule).     Suppliers are reimbursed according to the supplier’s actual charge or the  Medicare fee schedule amount, whichever is lower.
Over the years, we have reported that Medicare fees for certain medical  equipment, supplies, and outpatient drugs were excessive compared with  retail and other prices. For example, in 2000, we reported that retail price  data collected by the four DME regional carriers showed that Medicare  payments were much higher than the median surveyed retail prices for five  commonly used medical products.  While Medicare paid 5 percent less  than AWP for covered prescription drugs, in 2001 we reported that prices  widely available to physicians averaged from 13 percent to 34 percent less  than AWP for a sample of physician-administered drugs.  For two  inhalation drugs covered by Medicare—albuterol and ipratropium  bromide—prices widely available to pharmacy suppliers in 2001 reflected  average discounts of 85 percent and 78 percent from AWP, respectively.
section_title: Medicare Competitive Bidding
paragraphs: In 1997, BBA required CMS to establish up to five demonstration projects  to be operated over 3-year periods that used competitive bidding to set fees  for Medicare part B items and services.  BBA required that at least one  demonstration project include oxygen and oxygen equipment; all  demonstration areas be metropolitan statistical areas (MSA) or parts of  MSAs; and criteria for selecting demonstration areas include availability  and accessibility of services and probability of savings.
CMS contracted with one of the four DME regional carriers—Palmetto  Government Benefits Administrators (Palmetto)—to implement the  competitive bidding demonstration for DME, prosthetics, orthotics, and  supplies.  The demonstration was implemented in two locations—Polk  County, Florida, and the San Antonio, Texas, 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.  There was one cycle of bidding 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.
CMS set up competitive bidding for groups of related DME, prosthetics,  orthotics, and supplies and held a separate competition for each group.   Items included in the demonstration were identified by HCPCS codes.   Suppliers were required to bid on each HCPCS code included in the  product group in which they were competing.  Table 1 shows the eight  product groups in CMS’s competitive bidding demonstration at the two  locations.
The competitive bidding process was used to determine the suppliers  included in the demonstration and the rates 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.  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.  With few exceptions, only demonstration suppliers were  reimbursed by Medicare for competitively bid items provided to  beneficiaries permanently residing in the demonstration area.  However,  beneficiaries already receiving certain items were allowed to continue to  use their existing nondemonstration suppliers.  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.
About 1 year after CMS’s demonstration authority ended, MMA required the  agency to conduct competitive bidding for DME, supplies, off-the-shelf  orthotics, and enteral nutrients and related equipment and supplies.  Competition is to be implemented in 10 of the largest MSAs in 2007, 80 of  the largest MSAs in 2009, and additional areas thereafter.  Items excluded  from this authority are inhalation drugs; parenteral nutrients, equipment,  and supplies; Class III devices; and customized orthotics that require  expertise to fit individual beneficiaries. CMS may phase in implementation  of competitive bidding first for the highest cost and highest volume items  or those items with the greatest savings potential.  The law requires that a  Program Advisory and Oversight Committee be established to provide  recommendations to CMS on its implementation of competitive bidding.
MMA also gives CMS significant new authority to use competitive bidding  results as a basis for determining reasonable payment rates throughout the  country in 2009.  CMS has the authority to apply the information obtained  from competitive bidding to adjust payments in parts of the country outside  of the competitive areas for DME, supplies, off-the-shelf orthotics, and  enteral nutrients and related equipment and supplies. Thus, CMS will be  able to more easily adjust its payment rates nationally to reflect market  prices within the largest MSAs by using information gleaned through  competitive bidding.
section_title: CMS’s Experience Can Guide Agency Efforts to Implement Competitive Bidding
paragraphs: While MMA sets specific requirements for competitive bidding, it also  leaves certain implementation issues to CMS.  As CMS implements  competitive bidding, its payment- setting experience in the demonstration  will prove useful as the agency considers items for competitive bidding and  approaches to streamline implementation, collect information on specific  items provided to beneficiaries, and ensure that beneficiaries’ access to  quality items and services is not compromised.
subsections: section_title: Many High-Cost Items Could Be Included in Large- Scale Competitive Bidding
paragraphs: Selecting items with high levels of Medicare spending may prove fruitful in  generating significant savings in the first years of large-scale competitive  bidding efforts.  The demonstration provided CMS with experience in item  selection, and MMA provides direction and guidance for future efforts.  By  including items that accounted for a large share of Medicare spending, the  demonstration generated estimated gross savings that were substantially  more than its implementation costs.  In addition to the items included in  the demonstration, others are worth considering for selection in future  competitive bidding.
For the competitive bidding demonstration, Palmetto and CMS chose items  from six of the eight product groups that accounted for almost 78 percent  of Medicare allowed charges in calendar year 2002, as table 2 shows.  The  demonstration also included items from two other product groups with  lower levels of Medicare spending—urological supplies and surgical  dressings.  According to a CMS official, CMS did not include glucose  monitors and supplies in competitive bidding because beneficiaries must  frequently use brand-name supplies with their monitors.  Ensuring that  specific brands of glucose test strips were included would have  complicated the first test of competitive bidding in the demonstration.   However, the CMS official noted that CMS could consider including  glucose supplies in future competitive bidding.  Similarly, lower and upper  limb prosthetics were not included because these items are generally  custom made or fitted to beneficiaries and, for simplicity, the  demonstration focused on noncustomized items.
Our analysis of national Medicare spending for DME, prosthetics, orthotics,  and supplies found that items included in the demonstration accounted for  about half of all Medicare allowed charges in 2002.  This was less than the  total billing for all items in the product group because not all the individual  items identified by HCPCS codes within product groups were included in  the demonstration.  For example, CMS excluded power wheelchairs from  the competition.
Estimated savings for competitively bid items in the demonstration would  total about 20 percent of the fee schedule amounts, according to the  demonstration evaluators.  This equaled an estimated gross savings of   $8.5 million in allowed charges, which include Medicare payments and  beneficiary cost-sharing amounts.  The estimated cost of the  demonstration was about $4.8 million—about 40 percent lower than the  estimated $8.5 million reduction in allowed charges associated with the  demonstration. The demonstration’s $4.8 million cost included $1.2 million  for planning and development from September 1, 1995, through July 1,  1998, and $3.6 million for demonstration operating expenses through  December 2002.
For future efforts, MMA states that initial competitive bidding may include  items with the highest Medicare cost and volume or items determined by  the agency to have the largest savings potential.  Working within these  parameters for competitive bidding, CMS could select some items included  in the demonstration as well as items with high Medicare spending that  were not included in the demonstration.  For example, nondemonstration  items that CMS could choose include power wheelchairs and lancets and  test strips used by diabetics.  These three items accounted for about   $1.7 billion, or about 17 percent, of Medicare allowed charges for DME,  prosthetics, orthotics, and supplies in 2002. A CMS official and DME  regional carrier medical directors told us that these items could be  considered for inclusion in future competitive bidding.
Two medical directors also suggested that continuous positive airway  pressure devices and accessories, with $137 million in allowed charges— or 1.4 percent of Medicare allowed charges for DME, prosthetics, orthotics,  and supplies in 2002—could be considered for inclusion in future  competitive bidding.  CMS officials suggested that these devices and  accessories could be included in early implementation of competitive  bidding.  Furthermore, if CMS is able to lower operating costs through  efficiencies and streamlining, CMS could consider selecting additional  products for competitive bidding with comparatively low levels of program  spending for competitive bidding, such as commodes, canes, and crutches.
section_title: Larger-Scale Competitive Bidding May Benefit from Streamlined Implementation
paragraphs: While the demonstration laid the groundwork for future competition, given  the expanded scale of future competitive bidding, CMS will have to focus  on a second issue—ways to streamline implementation.  The  demonstration took place in just two MSAs and affected less than 1 percent  of fee-for-service beneficiaries.  In contrast, by 2009, MMA requires CMS to  implement competitive bidding in 80 of the largest MSAs in the country.   Our analysis showed that about half of Medicare’s fee-for-service  beneficiaries live in the 80 largest MSAs.  In order to expand competitive  bidding, CMS could potentially use two streamlining approaches— developing standardized steps that are easily replicated in different  locations and using mail-order delivery for selected items for which fees  are determined through nationwide competitive bidding.
In conducting the demonstration, CMS and Palmetto gained practical  experience in planning how competitive bidding could be conducted,  communicating with beneficiaries and suppliers, choosing demonstration  items, developing software to process demonstration claims, establishing  policies, and soliciting and evaluating supplier bids.  In expanding the  scope of competitive bidding, CMS will be able to leverage its experience to  develop a standardized or “cookie-cutter” approach that can be applied in  multiple locations. This would include a standard set of competitively bid  items, procedures and policies, and informational materials for suppliers  and beneficiaries.  Through standardization, the costs of implementation in  individual MSAs would likely be reduced relative to program savings.  In  the demonstration, adding a second location allowed CMS and Palmetto to  spread much of the implementation costs across two locations, rather than  one.  The incremental costs of adding the San Antonio location, once the  demonstration had been planned and begun in Polk County, were relatively  low.  For the San Antonio location, the estimated annual implementation  costs ranged from $100,000 in a nonbidding year to $310,000 when bidding  occurred, according to the second evaluation report.
Another potential streamlining approach would be to provide items by  mail-order delivery—a convenience for beneficiaries—with uniform fees  determined through nationwide competitive bidding.  Because MMA  authorizes CMS to designate the geographic areas for competition for  different items, designating the entire country as the competitive area for  selected items is a possibility.  In addition, MMA states that areas within  MSAs that have low population density should not be excluded from  competition if a significant national market exists through mail-order for a  particular item or service.  In contrast to conducting competitive bidding  on a piecemeal basis in multiple geographic areas, a consolidated  nationwide approach would allow CMS to more quickly implement  competitive bidding on a large scale.  This approach would enable  companies that provide, or demonstrate the ability to provide, nationwide  mail-order service to compete for Medicare beneficiaries’ business.
Items that lend themselves to mail delivery are light, easy to ship, and used  by beneficiaries on an ongoing basis.  Precedents exist for mail-order  delivery of items that have been subject to competitive bidding.   Demonstration suppliers provided surgical dressings, urological supplies,  and inhalation drugs to beneficiaries by mail.  In San Antonio, 30 percent of  beneficiaries reported receiving their inhalation drugs through the mail,  according to a demonstration evaluator, and Medicare paid an estimated 25  percent less than the fee schedule for Texas for these drugs.  Glucose test  strips and lancets are two items currently mailed to Medicare beneficiaries’  homes that could be included in a future nationwide competition.  In 2002,  these items accounted for $831 million, or about 8.6 percent, of Medicare  allowed charges for DME, prosthetics, orthotics, and supplies.  Because  glucose test strips generally must be used with the glucose monitors made  by the same manufacturer, CMS would need to ensure that the most  commonly used types of test strips were included.
section_title: Better Information on Specific Items Provided to Beneficiaries Could Ensure More Appropriate Payment
paragraphs: Finding ways to collect better information on the specific items provided to  beneficiaries is the third issue for CMS to consider as it implements  competitive bidding on a larger scale.  Industry and advocacy groups have  raised concerns that competitive bidding may encourage some suppliers to  reduce their costs by substituting lower-quality or lower-priced items.   However, CMS lacks the capability to identify specific items provided to  beneficiaries because suppliers’ claims use HCPCS codes, which can cover  items that differ considerably in characteristics and price.  Therefore,  during the demonstration, CMS would not have been able to determine if  suppliers tended to provide less costly items to beneficiaries.  Furthermore,  as CMS proceeds with competitive bidding, it will be difficult for the  agency to appropriately monitor the type or price of specific items for  which it is paying.
A single HCPCS code can cover a broad range of items serving the same  general purpose but with differing characteristics and prices.  For example,  in April 2004, the HHS OIG reported that prices available to consumers on  supplier Web sites it surveyed for different models of power wheelchairs  represented by a single HCPCS code ranged from $1,600 to almost  $17,000.  The 2003 Medicare fee schedule amount for all of the power  wheelchairs under this code was a median of $5,297.  Because Medicare  pays the same amount for all of the items billed under the same HCPCS  code, suppliers have an incentive to provide beneficiaries with the least  costly item designated by that code.  Since the Medicare program does not  routinely collect specific information on items within a code for which it is  paying, it is unable to determine if suppliers are providing lower-priced  items or higher-priced items to beneficiaries.  Using information from  related work to determine the specific power wheelchairs provided to  beneficiaries, the HHS OIG found that beneficiaries tend to receive lower- priced wheelchairs.  The OIG recommended that CMS create a new  coding system for the most commonly provided power wheelchairs to  account for the variety in models and prices.  CMS is currently working to  develop a new set of codes to better describe the power wheelchairs  currently on the market and plans to develop payment ceilings for each of  the new codes.
Under competitive bidding, suppliers might have even greater incentive to  substitute less costly products listed under a code.  For example, one of the  demonstration suppliers explained that while a specific curved-tip catheter  was superior for patients with scar tissue or obstructions, competitive  bidding would encourage suppliers to substitute other, less-expensive  catheters that can be paid under the same code.  Thus, even if competitive  bidding reduces fees paid, when suppliers substitute less costly items for  more costly items, Medicare can pay too much for the actual items  provided to beneficiaries.  CMS officials pointed out that this is also true  under the current fee schedule.
CMS might better monitor the items being provided to beneficiaries if it  subdivided certain HCPCS codes or collected identifying information.   Subdividing HCPCS codes for items with significant variations in  characteristics and price into smaller groupings is a way to narrow the  differences among the items provided under a single code.  The four DME  regional carriers or the advisory committee established under MMA might  be able to assist CMS in identifying those individual codes for items with  the most significant variations in characteristics and price.  Once these  codes had been identified, CMS would be in a position to decide whether to  request the panel that makes decisions on HCPCS codes for DME,  orthotics, and supplies to consider whether to divide the codes into better- defined item groupings.  Another way to get better information on the  range of items provided under a code is to collect specific, identifying  information (such as manufacturer, make, and model information) on  selected, high-cost competitively bid items provided to beneficiaries.  The  DME regional carriers require suppliers to provide such information when  it is requested for detailed reviews of claims for power wheelchairs.  If CMS  requested these data from suppliers for selected items provided under a  HCPCS code for a statistically representative sample of claims, it would be  able to analyze trends in the actual items provided to beneficiaries in  competitive bidding areas or monitor the provision of items under the same  code in competitive and noncompetitive areas.
section_title: Ensuring Quality and Service for Beneficiaries Is Critical
paragraphs: Because of concerns that competitive bidding may prompt suppliers to cut  their costs by providing lower-quality items and curtailing services, a fourth  issue for CMS to consider is ensuring that quality items and services are  provided to beneficiaries.  Quality assurance steps could include  monitoring beneficiary satisfaction, as well as setting standards for  suppliers, providing beneficiaries with a choice of suppliers, and selecting  winning bidders based on quality in addition to amounts bid. During the  demonstration, the agency and Palmetto gained practical experience in  implementing quality assurance steps.  This experience could prove  instructive as CMS moves forward with competitive bidding efforts.
As competitive bidding proceeds, routine monitoring of beneficiaries’  complaints, concerns, and satisfaction can be used as a tool to help ensure  that beneficiaries continue to have access to quality items.  During the  demonstration, the agency and Palmetto used full-time, on-site ombudsmen  to respond to complaints, concerns, and questions from beneficiaries,  suppliers, and others.  In addition, to gauge beneficiary satisfaction, the  evaluators of the demonstration fielded two beneficiary surveys by mail— one for oxygen users and another for users of other products included 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 that  their survey data indicated that beneficiaries generally remained satisfied  with both the products provided and with their suppliers.
As competitive bidding expands and affects larger numbers of  beneficiaries, small problems could be potentially 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.  In the past, when implementing significant  Medicare changes, such as new payment methods for skilled nursing  facilities and home health services, the agency has lacked timely and  accurate information about how the changes affected beneficiary access.
Nevertheless, it may not be practical in a larger competitive bidding effort  to replicate the monitoring steps used in the demonstration.  Developing  less staff-intensive approaches to monitoring would reduce  implementation costs.  For example, a Palmetto official told us that while  having an on-site ombudsman function may prove useful in the initial  stages of competitive bidding, using a centralized ombudsman available  through a toll-free number staffed by a contractor could provide some of  the same benefits at a lower cost.
In addition, certain monitoring enhancements could prove useful. For  example, CMS did not use a formal mechanism for ombudsmen to  summarize or report information on complaints from beneficiaries or  suppliers, according to the demonstration ombudsmen. Collecting and  analyzing complaint information may provide a credible gauge of problems  related to beneficiary access to quality products.
Continued use of satisfaction surveys could help track beneficiaries’  satisfaction with items and services over time.  However, advocacy group  representatives have cautioned that beneficiaries may not have the  technical knowledge to accurately assess the quality of the items or  services being provided.  Supplemental information might be obtained  through standardized surveys of individuals who refer beneficiaries to  suppliers, physicians, and supplier representatives, who may be better  equipped to assess the technical quality of products and services.
Two MMA requirements—the selection of multiple suppliers to serve  beneficiaries and the establishment of supplier standards—help ensure  that beneficiaries are satisfied with suppliers and the items they provide.   The selection of multiple suppliers to serve beneficiaries was part of the  competitive bidding process used during the demonstration.  The  establishment of supplier standards is broader than the competitive  bidding program in that it applies to all suppliers, regardless of whether  they choose to participate in competitive bidding.
MMA requires that CMS select multiple suppliers that meet quality and  financial standards to maintain choice in a competitive acquisition area.   According to a CMS official, choosing to include multiple suppliers in the  demonstration for each product group allowed beneficiaries to switch  suppliers if dissatisfied with the quality of the services or items provided.
CMS officials stated that selecting multiple suppliers encouraged suppliers  to compete on the basis of quality and service to gain beneficiaries’  business.  After completing the bid evaluation process, CMS generally  selected about 50 percent of the suppliers that bid in each group, with an  average of 12 suppliers selected across the product groups.
MMA also requires that CMS establish and implement quality standards for  all suppliers of DME, prosthetics, orthotics, and supplies.  These  standards must be at least as stringent as the 21 general standards that all  suppliers of DME, prosthetics, orthotics, and supplies are required to  comply with in order to obtain and retain their Medicare billing privileges.   (See app. II.)  For the demonstration, suppliers were also required to meet  standards developed by Palmetto that were more stringent and explicit  than the current 21 general standards.  For example, the demonstration  standards required that only qualified staff deliver, set up, and pick up  equipment and supplies and established time frames for suppliers to pick  up equipment after a beneficiary had requested its removal.  Palmetto  monitored suppliers’ adherence to the standards through initial and annual  site visits.
Applying quality measures as criteria to select winning suppliers is another  demonstration assurance step that can be used in future efforts.  During the  demonstration bid evaluation process, Palmetto solicited references from  financial institutions and from at least five individuals who had referred  beneficiaries to each bidding supplier.  In reviewing referrals, Palmetto  looked for evidence of quality and service.  This included evidence of  financial stability and good credit standing, a record of providing products  that met beneficiaries’ needs, compliance with Medicare’s rules and  regulations, acceptable business practices, ethical behavior, and  maintenance of accurate records.  The bid evaluation process also included  inspections of bidding suppliers’ facilities that focused on indicators of  quality and service.  These on-site inspections were more comprehensive  than those normally performed for Medicare suppliers of DME, prosthetics,  orthotics, and supplies.  For example, inspectors were tasked with  determining if the supplier had access to the full range of products for  which it had bid, documentation of infection control procedures,  instructions on using equipment, and patient files with required  information.  In some cases, a demonstration supplier’s selection was  conditional on the supplier making specified improvements.  For example,  according to a CMS official, some suppliers were told to clarify instructions  for beneficiaries, properly store oxygen equipment, or improve procedures  for following up with patients after initial service was provided.  CMS and  Palmetto officials told us that comprehensive inspections were useful in  ensuring the selection of quality suppliers.
section_title: Conclusions
paragraphs: CMS can use its experience from the demonstration to make informed  decisions as it implements large-scale competitive bidding within the  framework established by MMA. The demonstration showed that  competitive bidding has the potential to garner significant savings for both  the Medicare program and its beneficiaries, especially on items with high  levels of Medicare spending.  While the potential exists for significant  savings, moving from small-scale to large-scale competitive bidding calls  for streamlining implementation.  Developing a cookie-cutter approach to  competitive bidding—for example, using the same policies and processes  in multiple locations—could help CMS roll out its implementation in over  80 locations more easily, while employing mail-order to deliver items with  prices set through nationwide competitive bidding could allow CMS to  more quickly implement competitive bidding on a large scale.  To ensure  that competitive bidding savings are not achieved by the suppliers’  substitution of lower-cost items, CMS can consider ways to collect better  information on the specific items that suppliers are providing to  beneficiaries.  Finally, careful monitoring of beneficiaries’ experiences will  be essential to ensure that problems are quickly identified.  This will allow  CMS to adjust its implementation and quality assurance steps as it manages  competition on a greater scale.
section_title: Recommendations for Executive Action
paragraphs: To increase potential savings from competitive bidding, streamline  implementation, help ensure that Medicare is paying appropriately for  items, and promote beneficiary satisfaction, we recommend that the  Administrator of CMS take the following seven actions:  consider conducting competitive bidding for demonstration items and  items that represent high Medicare spending that were not included in  the competitive bidding demonstration;  develop a standardized approach for competitive bidding for use at   consider using mail delivery for items that can be provided directly to  beneficiaries in the home, as a way to implement a national competitive  bidding strategy;  evaluate individual HCPCS codes to determine if codes need to be  subdivided because the range in characteristics and price of items  included under the individual codes is too broad;  periodically obtain specific identifying information on selected high- cost items to  monitor the characteristics of items subject to competitive  bidding that are provided to beneficiaries, such as manufacturer, make,  and model number;   monitor beneficiary satisfaction with items and services provided; and  seek input from individuals with technical knowledge about the items  and services suppliers provide to beneficiaries.
section_title: Agency Comments and Our Evaluation
paragraphs: In its written comments on a draft of this report, CMS agreed with most of  the recommendations and agreed to give serious consideration to the  report throughout the development and implementation of national  competitive bidding.  CMS agreed to consider conducting competitive  bidding for demonstration items and items that represent high Medicare  spending that were not included in the demonstration. CMS indicated that  the agency was working to develop a list of items for the first bidding cycle  in 2007.  CMS also agreed to develop a standardized approach for  competitive bidding that could be used in multiple locations and indicated  the agency’s intention to outline such an approach through regulation.
CMS stated it would explore the feasibility of our recommendation to  consider using mail-order delivery for items that could be provided directly  to beneficiaries in the home, as a way to implement a national competitive  bidding strategy.  Based on CMS’s comments, we clarified the discussion in  the report to indicate businesses that currently provide, or have the  potential to provide, national mail-order delivery would be appropriate to  include as bidders in nationwide competition.  CMS also agreed with our  recommendations to periodically obtain specific identifying information on  selected high-cost items and to monitor beneficiary satisfaction with the  items and services provided and indicated that it would be establishing  a  process to do so.  CMS agreed with our recommendation to seek input from  individuals with technical knowledge about the items and services  suppliers provide to beneficiaries.  The agency noted that pursuant to  MMA, CMS would be convening a panel of experts, the Program Advisory  and Oversight Committee, to assist with implementation of competitive  bidding.
CMS disagreed with one of our draft recommendations—to evaluate  individual HCPCS codes to determine if they needed to be subdivided  because the range in price of items included under the codes was too  broad.  The agency stated that subdividing codes according to price would  lead to Medicare setting codes for particular brand names in circumstances  where a manufacturer has established higher prices for products that do  not have meaningful clinical differences or higher quality.  In response to  the agency’s comment, we modified our discussion of HCPCS codes and  revised our recommendation to state that CMS, in reevaluating individual  HCPCS codes, should consider both the characteristics and prices of items.
We have reprinted CMS’s letter in appendix III.  CMS also provided us with  technical comments, which we have incorporated as appropriate.
We are sending copies of this report to the Administrator of CMS,  appropriate congressional committees, and other interested parties. We  will also make copies available to others upon request.  This report is also  available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please call me at  (312) 220-7600 or Sheila K. Avruch at (202) 512-7277.  Other key  contributors to this report are Sandra D. Gove, Lisa S. Rogers, and Kevin  Milne.
section_title: Scope and Methodology
paragraphs: To assess issues that the Centers for Medicare & Medicaid Services (CMS)  might consider as it implements the Medicare Prescription Drug,  Improvement, and Modernization Act of 2003 (MMA) provisions  concerning competitive bidding, we reviewed the relevant provisions of  MMA.  We also reviewed the first and second evaluation reports on the  Medicare competitive bidding demonstration and discussed methodology  and findings with the evaluators.  We interviewed officials from CMS and  Palmetto Government Benefits Administrators (Palmetto) about  experience gained during the demonstration.
For the product selection issue, we analyzed calendar year 2002 Medicare  durable medical equipment (DME), prosthetics, orthotics, and supply  claims data obtained from the statistical analysis durable medical  equipment regional carrier (SADMERC).  Through this analysis, we  identified the product groups and items that represented the largest  Medicare allowed charges and the allowed charges for items included in  the demonstration.  We also used these data to identify items that  accounted for higher Medicare spending but were excluded from the  demonstration.  We determined that the data obtained from the SADMERC  were sufficiently reliable for addressing the issues in this report.  These  data were extracted from a CMS file that includes all Medicare claims  payment data.  CMS has a number of computerized edits to help ensure that  Medicare payment data are accurately recorded, and the SADMERC has  internal controls to ensure that data extracted from the CMS file are timely  and complete.  Where appropriate, we tested data manually against  published sources for consistency.  To identify items that could be included  in future competitive bidding, we interviewed CMS and Palmetto officials  and the medical directors at the four DME regional carriers.
For the issue of streamlining implementation, we obtained information on  the cost of the demonstration from the second evaluation report.  To  estimate the number of fee-for-service beneficiaries who will be affected by  future competitive bidding, we adjusted the Census 2000 population  estimates for individuals age 65 and over to account for the number of  beneficiaries enrolled in Medicare’s managed care program by using data  obtained from the Medicare Managed Care Market Penetration  State/County Data Files. We assessed the reliability of the Census 2000 data  by reviewing relevant documentation and working with an official from the  U.S. Census Bureau.  We assessed the reliability of the Medicare Managed  Care Market Penetration State/County Data Files by reviewing relevant  documentation.  We determined these data sources to be sufficiently  reliable for the purposes of our report.  We also obtained information from  CMS on the demonstration items that beneficiaries obtained by mail and  conducted research to identify items delivered directly to customers’  homes by private sector organizations.  We also solicited input from the  medical directors at the four DME regional carriers concerning items that  could be delivered by mail-order and included in a nationwide competition.
For the issue concerning information on specific items provided to  beneficiaries, we reviewed prior GAO reports and testimonies.  In addition,  we interviewed the following representatives of industry and advocacy  groups:  Abbott Laboratories; the Advanced Medical Technology  Association; the American Association for Homecare; the American  Occupational Therapy Association; the American Orthotic and Prosthetic  Association; the Consortium for Citizens with Disabilities; the Diabetic  Product Suppliers Coalition; LifeScan, Inc.; Johnson & Johnson Company;  Kinetic Concepts, Inc.; Tyco Healthcare Group; the National Alliance for  Infusion Therapy; Roche Diagnostics; and the United Ostomy Association.
For the issue relating to ensuring quality items and services for  beneficiaries, we discussed quality assurance steps and approaches for  monitoring beneficiary satisfaction used during the demonstration with  CMS and Palmetto officials and the demonstration’s evaluators.  We also  interviewed the two demonstration ombudsmen to discuss beneficiaries’  concerns and experiences in obtaining items during the demonstration.  We  discussed issues related to competitive bidding and beneficiaries’ access to  quality products and services with suppliers of DME, including three  suppliers that participated in the demonstration; the industry and advocacy  groups listed above; and the DME regional carrier medical directors.  In  addition, we compared quality standards for demonstration suppliers with  the 21 supplier standards that apply to all Medicare suppliers of DME,  prosthetics, orthotics, and supplies.
section_title: Medicare’s 21 Standards for Medicare Suppliers of DME, Prosthetics, Orthotics, and Supplies
paragraphs: Suppliers of DME, prosthetics, orthotics, and supplies must meet 21  standards in order to obtain and retain their Medicare billing privileges.  An  abbreviated version of these standards, which became effective December  11, 2000, is presented in table 3.  MMA requires CMS to develop new  standards that must be at least as stringent as current standards for all  Medicare suppliers of DME, prosthetics, orthotics, and supplies.  Supplier  compliance will be determined by one or more designated independent  accreditation organizations.
section_title: Comments from the Centers for Medicare & Medicaid Services
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