Medicare: CMS Working to Address Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program
Published: 2009-11-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2007, Medicare spent $8.3 billion for durable medical equipment (DME) and related supplies. To reduce spending, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required that the Centers for Medicare & Medicaid Services (CMS) phase in, with several rounds of bidding, a large-scale competitive bidding program (CBP) for certain DME and other items. DME suppliers began bidding in round 1 of the CBP on May 15, 2007. After contracts were awarded, the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), was enacted on July 15, 2008. Because of numerous concerns MIPPA delayed the program, terminated supplier contracts, and required CMS to begin the CBP round 1 rebid in 2009. GAO was asked to report on (1) the results of CBP round 1, (2) the major challenges CMS had in conducting CBP round 1, and (3) the steps CMS has taken to improve future CBP rounds. GAO reviewed CMS data and relevant laws and regulations, and interviewed officials from CMS and its contractors, and DME suppliers and professional associations.
section_title: What GAO Found
paragraphs: About a quarter of the bids submitted during CBP round 1 resulted in awarded contracts. The contracts were in effect until terminated by MIPPA on July 15, 2008. Of the 6,374 bids submitted by 1,010 suppliers, half were disqualified before competing on price. Bids were most often disqualified for missing financial documentation or noncompliance with accreditation requirements. In nearly two-thirds of CBP round 1's price competitions--in which suppliers submitted bids to deliver items for a specific product category within a specific competitive bidding area (CBA)--the number of suppliers decreased by at least half. The largest decreases in suppliers were in the Miami CBA. CMS estimated that the reduction in Medicare payments for items acquired as a result of CBP round 1 would have averaged 26 percent when compared to payments under the Medicare fee schedule. CBP's round 1 presented several challenges to suppliers, including poor timing and lack of clarity in bid submission information, a failure to inform all suppliers that losing bids could be reviewed, and an inadequate electronic bid submission system. CMS provided some clarifying information about bidding after the bid window opened, repeatedly extended the bid window deadlines, and provided updated guidance to bidders throughout the bid window. The information CMS provided to suppliers about bidding requirements was sometimes unclear and inconsistent, particularly regarding financial documentation. CMS did not effectively notify suppliers of its postbidding review process. Because some suppliers were not aware of the review process, they missed the opportunity to have their disqualified bids reviewed. CMS found that some bids had been incorrectly disqualified. Finally, several problems with the electronic bid submission system, including data losses from automated logouts and unscheduled downtimes, made it difficult for some suppliers to submit bids. CMS has taken several steps to improve the bidding process for the round 1 rebid and subsequent rounds of the CBP. CMS is implementing MIPPA provisions to notify suppliers of missing financial documentation and create a CBP ombudsman. It has reduced financial documentation requirements and revised the request for bid instructions to make it clearer and more understandable. It is also developing a new electronic bidding submission system, the Durable Medical Equipment, Prosthetics, Orthotics, and Supplies bidding system (DBidS), which the agency claims will address the deficiencies of the system used for round 1. Bidding for the round 1 rebid began in late October 2009. The CBP has the potential to produce considerable benefits, including reducing overall Medicare spending for DME and limiting potential fraud through increased scrutiny of suppliers. Although challenges may be expected for any new program, problems occurred in round 1 because of poor communication by CMS and an inadequate bid submission system.

section_title: Letter
paragraphs: In 2007, Medicare—the federal health insurance program that currently  serves about 45 million elderly and disabled individuals—spent $8.3 billion  on durable medical equipment (DME), prosthetics, orthotics, and related  supplies. Both we and the Department of Health and Human Services’s  (HHS) Office of Inspector General have reported that Medicare and its  beneficiaries have sometimes paid higher than market rates for various  medical equipment and supply items. In 1997, Congress required the  Centers for Medicare & Medicaid Services (CMS)—the agency that  administers the Medicare program—to test competitive bidding for  selected DME and other items and services through demonstration  projects. The demonstrations were conducted from 1999 to 2002 and  showed that competitive bidding would save Medicare money.
Competitive bidding can reduce Medicare payments for DME and close  the disparity with prices paid by others for the same items. The Medicare  Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)  required that CMS implement a competitive acquisition program for DME  and certain other items. CMS was required to phase in the competitive  bidding program (CBP) in 2007 in 10 competitive bidding areas (CBA).  The CBP would be expanded in future rounds. CBP round 1 began when  the bid window opened May 15, 2007. In May 2008, CMS announced the  final winning suppliers, and contracts with winning suppliers took effect  July 1, 2008.
Some DME suppliers and trade associations raised concerns about the  CBP round 1, questioning several aspects of CMS’s bid submission and  contract award processes. They also questioned whether some winning  suppliers could provide the volume of items and services their contracts  required and whether contracts should have been awarded to suppliers  that had no prior business presence in a CBA. Two congressional hearings  addressed these concerns in May 2008.
On July 15, 2008, the CBP round 1 was stopped when the Medicare  Improvements for Patients and Providers Act (MIPPA) of 2008 was  enacted. MIPPA delayed the CBP, terminated the contracts already  awarded by CMS to suppliers in round 1, and required CMS to repeat the  competition for round 1 CBP in 2009—the CBP round 1 rebid. To ensure  budget neutrality, that is to compensate for the loss of the projected  savings from the CBP, beginning January 1, 2009, MIPPA reduced national  Medicare reimbursement payments by 9.5 percent nationally for items and  services that had been included in the CBP round 1. MIPPA also imposed  additional criteria for how CMS should conduct later CBP rounds,  including the round 1 rebid and subsequent rounds that will expand the  CBP to additional areas.
As CMS prepares to implement the CBP round 1 rebid, you asked us to  report on (1) the results of the CBP round 1, (2) the major challenges CMS  had in conducting the CBP round 1, and (3) the steps CMS has taken to  improve future CBP rounds.
To determine the results of the CBP round 1, we reviewed data from CMS  and Palmetto GBA—the contractor CMS selected to implement the CBP  bidding and contract award process—about the number of suppliers  participating in round 1 of the CBP process, the number of submitted bids,  and the bids’ outcomes. We interviewed and obtained information from  CMS and Palmetto GBA officials about the Competitive Bid Submission  System (CBSS), an electronic database used by suppliers to submit part of  their bid application, including information about covered system testing  and data processing procedures. We also reviewed the instructions  provided to bidding suppliers about entering data into the CBSS. We  interviewed Palmetto GBA officials about the Competitive Bidding  Evaluation System (CBES), a repository of bid data including financial  data entered by Palmetto GBA personnel and documentation of Palmetto  GBA actions, as well as about the system’s data transfer and data entry  protocols. We compared data published by CMS with the data provided to  us and followed up with the appropriate officials to resolve any  discrepancies. We assessed the reliability of round 1 data by interviewing  or reviewing information from CMS and Palmetto GBA officials and  determined that the data were sufficiently reliable for the purposes of this  report. We did not independently evaluate CMS’s estimates of beneficiary  demand, which relied on 2005 and 2006 DME claims data, the most recent  data available to it at the time, nor did we evaluate CMS’s estimates of  projected savings as the result of the CBP round 1.
To determine the major challenges CMS had conducting the CBP round 1,  we reviewed relevant federal laws, regulations, and policies concerning  the bidding and contract award processes. We interviewed CMS and  Palmetto GBA officials about the bid submission process, including the  CBSS, the bid evaluation and contract award processes, and the CMS and  Palmetto GBA postbidding review. We reviewed CMS and Palmetto GBA  bid submission instructions and related materials, communications to  suppliers during the bid window, and information on how CMS and  Palmetto GBA evaluated bids and awarded contracts. We also reviewed  information related to the Program Advisory and Oversight Committee  (PAOC), whose members are appointed by the HHS Secretary to advise  CMS on implementing the CBP. We reviewed PAOC meeting materials,  interviewed members about their role and input into the development of  round 1, and attended a committee meeting on June 16, 2008. We also  interviewed national and state DME trade associations and a small number  of randomly selected suppliers about the CBP bidding and contract award  processes.
To determine the steps that CMS has taken to improve the bidding process  for future CBP rounds, we reviewed applicable CBP provisions in relevant  MIPPA sections and implementing regulations, PAOC Federal Register  notices, and interviewed CMS and Palmetto GBA officials. We also  interviewed Maricom officials and reviewed available documentation  related to the development, testing, and proposed implementation of the  new electronic bid submission system—the Durable Medical Equipment,  Prosthetics, Orthotics, and Supplies bidding system (DBidS)—to be used  for the round 1 rebid. We attended a June 4, 2009, meeting at which CMS  updated the current PAOC about the process changes that have been  implemented or proposed for the CBP round 1 rebid. We did not assess the  reliability or functionality of DBidS, but we reviewed the processes  established by CMS and its contractors for testing and accepting such  systems. (See app. I for more detailed information on our methodology.)
We conducted this performance audit from June 2008 to September 2009  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Most Medicare beneficiaries participate in Medicare Part B, which helps  pay for certain DME and other equipment and supplies. This includes, for  example, wheelchairs, walkers, oxygen, and hospital beds. In 2007,  Medicare spent a total of $430.3 billion. Of that, $8.3 billion was spent on  DME and other medical equipment and supplies covered under Part B.
subsections: section_title: Medicare DME Payments
paragraphs: Since 1989, Medicare has paid for DME through fee schedules. These fee  schedules are based on the average amount that suppliers charged on  Medicare claims in 1986 and 1987 for individual DME items adjusted for  inflation. Medicare uses a fee schedule for each state to reflect  geographical price differences. The applicable state fee schedule is  determined by the beneficiary’s residence, not the DME supplier’s  location.
Medicare generally pays the lesser of either the supplier’s actual charge or  the Medicare fee schedule amount for the item or service. For suppliers,  Medicare assignment—accepting Medicare’s reimbursement amount for  an item as payment in full and limiting the amount the beneficiary can be  billed for that item—is optional. If a supplier agrees to assignment, then  Medicare generally pays 80 percent of the amount to the supplier and the  Medicare beneficiary is responsible for paying the supplier the remaining  20 percent (referred to as the coinsurance payment), once the  beneficiary’s annual deductible has been met. If the supplier does not  accept assignment, the supplier is not limited to charging the beneficiary  20 percent of the Medicare reimbursement for that item or service and the  beneficiary can be billed for whatever balance is due.
section_title: History of DME Competitive Bidding Payment Reform
paragraphs: The Balanced Budget Act of 1997 required CMS to test competitive bidding  as a new way to set payment rates for Part B services and supplies  selected by CMS. CMS conducted three CBP demonstration projects, two  in Florida (1999–2002) and one in Texas (2000–2002). Evaluations of the  demonstration projects estimated that they saved nearly $9.4 million.
About a year after the demonstrations ended, the MMA was enacted,  requiring CMS to implement a broader CBP in 2007. Changing the long- standing policy that any qualified provider be allowed to participate in  Medicare, the MMA provided that generally only suppliers who were  awarded contracts could be reimbursed by Medicare for providing covered  Part B items and services in the selected areas. The MMA imposed certain  criteria that CMS was required to follow—for example, eligible suppliers  had to meet quality and financial standards, the total amount to be paid to  contractors was expected to be less than would be paid otherwise, access  of beneficiaries to multiple suppliers in their area must be maintained, and  CMS must consider the ability of suppliers to meet the anticipated needs  of beneficiaries in the covered geographic area. CMS was also required to  ensure that small suppliers would be considered. The MMA required the  establishment of the PAOC to advise CMS on various aspects of the CBP,  including financial and quality standards. The MMA also prohibited any  administrative or judicial review of the designation of CBP’s CBAs, the  selection of items and services, the establishment of payment amounts, the  bidding structure and number of contract suppliers selected, the awarding  of contracts, and the phase-in of the CBP. CMS published a final rule,  effective on June 11, 2007, governing implementation of the CBP.
CMS contracted with Palmetto GBA to implement the CBP bidding and  contract award process and with Maricom to develop the Web-based  CBSS. CMS established the bidding process and approved policies and  procedures developed by Palmetto GBA. CMS implemented the CBP in 10  CBAs which were among the largest statistical metropolitan areas. CMS  chose the items and services to include in round 1 by focusing on the  highest cost and highest volume items and services with the largest  potential for savings. It selected 10 product categories, with 371 unique  items and services; spending for those product categories in the 10 CBP  CBAs accounted for about 9 percent of total Medicare spending on those  product categories in 2006. Within the 10 CBAs, the product categories  chosen accounted for 48 percent of Medicare's spending for DME,  prosthetics, orthotics, and related supplies that year.
On July 15, 2008, MIPPA was enacted, which terminated the CBP contracts  awarded during round 1. MIPPA reinstated Medicare reimbursement based  on the Medicare fee schedule for all items and services included in CBP  round 1, subject to a 9.5 percent reduction nationally for 2009. MIPPA  also required that CMS implement the CBP round 1 rebid in 2009, and  imposed additional criteria for this rebid and later rounds. CMS issued an  interim final rule implementing these MIPPA provisions.
section_title: The CBP Round 1 Competitive Bidding Process
paragraphs: The competitive bidding process had several steps: bidder registration, bid  submission, bid review, winner selection, setting Medicare payment  amounts, and contract offers (see fig. 1). To participate in CBP round 1,  DME suppliers must have met enrollment, quality, and financial standards,  obtained all the state and local licenses required to provide the relevant  services, and been accredited by a CMS-approved accrediting  organization. In addition, bids for each item had to be bona fide—that is,  not higher than the Medicare fee schedule but not lower than the  supplier’s cost.
Bidder registration. The first step in the CBP bidding process was  bidder registration. Suppliers had to register with a CMS identity  management and authentication system to gain access to the CBSS.  Suppliers registered in the CBSS as one of three types of bidding entities: a  supplier with a single location, multiple suppliers sharing common  ownership or control, or 2-20 small suppliers forming a network.
Bid submission. For purposes of the CBP, a bid was an offer by a supplier  to furnish all items within a product category throughout the entire CBA.  The bid had to include a proposed price for each item in the product  category. The number of items in a product category ranged from 3 to  142. A bid package consisted of two electronic forms, A and B, and  documents specified in the request-for-bid instructions and in other  communication with suppliers. Hard copies of the documents had to be  submitted to Palmetto GBA. Form A requested information about  suppliers, including Medicare billing numbers, addresses, ownership,  current or prior sanctions, and accreditation status. Each Form B  required suppliers to disclose annual revenues for the product category in  each CBA; estimates of the number of item units currently provided and  that could be provided in the future for that product category in that CBA;  expansion plans; and item prices, models, and manufacturers. Each Form  B constituted one bid—that is, suppliers had to submit a separate form for  each product category in each CBA. Suppliers could submit a Form B for  any product category up for bid in any CBA. Hard-copy documents  required to complete the bid package included financial documents, proof  of accreditation status, letters of intent to enter into agreements with  subcontractors, network agreements, and statements certifying the  accuracy of the submissions. Financial documentation requirements  included 3 years of annual financial statements, selected forms from the  last three annual tax returns, and credit reports and credit scores for a 90- day period ending close to the date of the bid’s submission. (See table 1.)
Bid review. After the bid window closed, Palmetto GBA began to review  the bids. It determined whether each bid package was complete,  compliant with bidding requirements, and whether the submitting  supplier’s financial score satisfied a minimum threshold to qualify to  compete on price. The financial score was determined using criteria  developed by CMS for this purpose including suppliers’ credit scores and  10 financial measures—described by CMS as standard accounting  measures. (See table 2.) If the bid package was complete, compliant with  bidding requirements, and the submitting supplier had a financial score  that was equal to or greater than the minimum threshold, the bid qualified  to compete on price. But before comparing prices, Palmetto GBA also  reviewed each qualified bid’s capacity projections—the supplier’s ability  to provide the volume of items claimed in the bid in light of the supplier’s  historical capacity, expansion plans, and financial score. It adjusted some  bids’ capacity projections according to certain guidelines.
Winner Selection. Palmetto GBA used several steps to identify the  winning bids based on price. Item prices submitted by competing suppliers  were compared using a composite pricing methodology. A bid’s composite  price was calculated as each item’s price multiplied by an item weight  summed across all items in the product category. Table 3 illustrates the  calculation for three hypothetical bids’ composite prices in a product  category containing three items. Each weight is based on the item’s share  of units billed to Medicare in 2006 as a percentage of all of the units for the  product category billed to Medicare nationwide that same year.
For each auction—a competition by qualified suppliers to deliver all items  within a single product category in a single CBA—Palmetto GBA ordered  the bids by composite price from lowest to highest. Starting with the bid  with the lowest composite price, Palmetto GBA calculated the cumulative  projected capacity of the competing bids. Palmetto GBA identified the bid  where cumulative projected capacity met or exceeded CMS’s estimated  beneficiary demand as the pivotal bid (see table 4). In table 4, the pivotal  bid was submitted by Supplier 9 with a composite price of $7.64, since  cumulative supply (1,765 units) reached CMS’s estimated demand (1,500  units) at that bid. If projected beneficiary demand could not be met by  qualified suppliers, a pivotal bid could not be established and the auction  was considered nonviable. Otherwise, bids with composite prices equal  to or less than the pivotal bid were winners on the basis of price.
Setting Medicare single payment amounts. Bids that won on price  were used to establish Medicare’s single payment amounts for each item in  the auction. For each item, Palmetto GBA ordered these winning bids’  price offers for each item from lowest to highest. The median price offered  for that item would be Medicare’s payment for that auction item in that  CBA. The use of the median in setting the item’s single payment amount  meant that Medicare’s payment amount could be less than or more than a  particular winning supplier’s actual bid for an item. Because CBP  payments may only be paid on assignment, Medicare would pay the  supplier 80 percent of the single payment amount for an item and the  beneficiary would be responsible for the remaining 20 percent.
Contract offers. In addition to winning on price, small suppliers’ bids  could also win if there were an insufficient number of small suppliers that  won on price alone. Before the initial set of contract offers, Palmetto  GBA determined whether CMS’s target—that 30 percent of the qualified  suppliers be small suppliers—had been met by small suppliers winning on  price. In the auctions where the goal had not been met, Palmetto GBA  moved up the composite pricing order, above the pivotal bid, for small  suppliers only as a means to include additional small suppliers. These  additional small suppliers would then be offered contracts, in addition to  those suppliers whose bids won on price alone. In March 2008, CMS and  Palmetto GBA notified suppliers of the auction results and CMS extended  contract offers to winning suppliers. In May 2008, CMS announced the  suppliers that had accepted contracts for the 3-year CBP contract period  from July 1, 2008, through June 30, 2011. However, MIPPA, which was  enacted on July 15, 2008, terminated the CBP round 1 contracts.
section_title: About One-Quarter of Bids Resulted in Contracts Generating Significant Potential Savings
paragraphs: About one-quarter of the bids submitted during CBP round 1 resulted in  awarded contracts. Of the 6,374 bids submitted by 1,010 suppliers, half  were disqualified before competing on price—most often for missing  financial documentation or noncompliance with accreditation  requirements. Nearly two-thirds of the 85 auctions saw the number of  suppliers decrease by 50 percent or more compared to the number of  suppliers billing Medicare for the product category in 2006. CMS estimated  that the volume-weighted reduction in Medicare’s payment amounts for  round 1 would have averaged 26 percent.
subsections: section_title: About One-Quarter of the Submitted Bids Resulted in Contracts, but Almost Half Were Disqualified for Missing Financial Documentation
paragraphs: Once the contract award process was completed, 22 percent of the bids  submitted (1,372 of 6,374) resulted in contracts between CMS and  suppliers to provide DME and other items to Medicare beneficiaries. (See  table 5 for step-by-step results.) CMS initially extended contract offers for  1,335 bids. Contracts were offered to additional suppliers when some  winners rejected the contract offers associated with 86 bids, as well as  after CMS reversed Palmetto GBA’s determinations to disqualify 27 bids.  Winning suppliers may have rejected contracts because the CBP single  payment amounts were less than the item prices the supplier had bid.
By the end of initial bid review, almost half of the bids submitted were  disqualified (3,143 of 6,374 submitted). A bid could be disqualified for  more than one reason. (See table 6.) Nearly 9 of every 10 disqualified bids  (86 percent of the 3,143) did not submit complete financial documentation.  Twenty-two percent of the bids were disqualified for noncompliance with  accreditation requirements; that is, they failed to receive accreditation by  the deadline established by CMS. Two percent of the bids were  disqualified because the bidding suppliers did not meet supplier financial  standards; that is, in CMS’s judgment, they were unlikely for financial  reasons to be able to fulfill their contract obligations. Disqualified bids  were ineligible to compete on price and were not considered for a contract  award.
In the preamble to the CBP final rule, CMS acknowledged that the number  of suppliers would decrease as the result of competitive bidding. In 2006,  the median number of suppliers per CBA for a product category was 31.  For the 2 weeks the CBP contracts were effective, the median number of  suppliers fell to 14, or 55 percent less than the number in 2006. Nearly  two-thirds of the auctions conducted during CBP round 1 had decreases in  the number of suppliers of 50 percent or more. (See app. II for auction- specific detail.) Mail-order diabetic suppliers had the largest decrease   (88 percent) while walkers and related accessories had the smallest  decrease. One of the 10 product categories, negative pressure wound  therapy pumps, had an increase in the number of suppliers as the result of  CBP. Compared to the other nine CBAs, the Miami CBA had the largest  number of suppliers in eight of nine product categories in 2006 and had the  greatest decreases in suppliers after CBP round 1. The median number of  suppliers across the 10 product categories decreased 87 percent in the  Miami CBA.
section_title: CMS Generally Met the Small Supplier Representation Goal
paragraphs: In 76 of the 85 auctions, at least 30 percent or more of the suppliers that  were awarded contracts were small. Small suppliers represented at least  57 percent of all suppliers registered on CBSS and 63 percent of the  winning suppliers (see table 7). Because small suppliers submitted fewer  bids on average, slightly less than half (48 percent) of all bids resulting in  contracts were from small suppliers.
section_title: CMS Estimated a 26 Percent Reduction in CBP Single Payment Amounts Compared to the Medicare Fee Schedule
paragraphs: CMS estimated that, compared to the 2008 Medicare fee schedule, the  volume-weighted reduction in Medicare’s payment amounts for items  acquired under CBP round 1 would have averaged 26 percent. (See   app. III for specifics by CBA and product category.) The items in the mail- order diabetic supply category had the largest reductions, with differences  between the CBP single payment amounts and the Medicare fee schedule  averaging 43 percent. CBP single payment amounts were reduced the least  for items in the complex rehabilitative power mobility devices and  negative pressure wound therapy pumps categories—on average, 15 and  16 percent lower than the 2008 Medicare fee schedule.
section_title: CMS Had Difficulty Providing Bidders with Clear, Timely Information, and Its Electronic Bid Submission System Was Problematic
paragraphs: CMS’s implementation of CBP round 1 presented several challenges to  suppliers. Some bid submission information was poorly timed and unclear,  confusing suppliers about bidding requirements and compelling some to  revise and resubmit their bids. In addition, the CBSS experienced several  problems that made submitting bids difficult. CMS did not notify all  suppliers of its postbidding review process, which reinstated some bids  that CMS found to have been incorrectly disqualified. While the PAOC  alerted CMS to potential challenges for round 1, some were not resolved  before the bid window opened.
subsections: section_title: CMS Provided Bidding Information to Suppliers after the Bid Window Opened and Extended the Window Deadlines Three Times
paragraphs: CMS clarified CBP bidding information after the bid window opened and  extended the bid window deadlines three times—actions making it more  difficult for suppliers to submit correct bids. (See fig. 2.) While the CBP  request-for-bid instructions, posted the day that the bid window opened,  were only revised once, CMS and Palmetto GBA provided additional  information explaining the instructions throughout the bid window.  Although suppliers could revise their submissions throughout the bid  window, when additional information was provided those that believed  they had submitted completed bids had to review them to ensure they  were still correct. For example, if a supplier revised any of its financial  documentation, it had to resubmit the entire financial documentation  package and certification statement in hard copy.
CMS’s bid window extensions resulted in a 4-month bid window, open  May 15, 2007, through September 25, 2007—about 2-½ months longer than  originally planned. A first 1-week extension was announced on June 29,  2007—about a week after the open bidder conference call to respond to  suppliers’ questions. Palmetto GBA and CMS then conducted a special   30-minute bidder conference call on July 9, 2007, to address suppliers’  concerns about CBSS data losses from an automated logout security  feature that caused suppliers to lose unsaved information. CMS  announced the second 1-week extension from July 20, 2007, to July 27,  2007. On July 27, 2007, CMS announced a third, 2-month deadline  extension to September 25, 2007, and explained there would be a targeted  period to address suppliers’ remaining questions and requested that  suppliers e-mail their questions to Palmetto GBA by August 10, 2007.
CMS allowed suppliers to submit CBP bids while their DME accreditation  was pending, and when the final bid window extension was made, the  accreditation deadline was also extended. Although CMS had encouraged  suppliers to begin the accreditation process before the bid window  opened, some suppliers were submitting bids while completing their  accreditation process. A CMS official told us that some suppliers did not  appreciate or understand the amount of information needed before the  accrediting organizations could conduct an accreditation site visit.
Whether suppliers had the required DME state licenses was to be  determined as part of the accreditation process. However, CMS  acknowledged that it checked supplier licenses after contract offers were  made and Palmetto GBA officials acknowledged that some suppliers were  awarded CBP contracts even though they did not have the necessary state  licenses at the time contracts were awarded.
section_title: CMS’s Competitive Bidding Submission Information Was Sometimes Unclear, Particularly for Financial Documentation
paragraphs: CMS and Palmetto GBA acknowledged that suppliers did not always  understand the request-for-bid instructions. CMS provided guidance to  suppliers through the CBP final rule and the request-for-bid instructions,  and CMS and Palmetto GBA provided additional information throughout  the bid window through multiple sources. These sources included the  Palmetto GBA Web site and its frequently asked questions section, bidder  conference calls, CMS and Palmetto GBA listservs, and the Palmetto GBA  customer service center. We found that these sources sometimes had  unclear or inconsistent information about the bidding instructions,  including the specialty supplier definition, how to estimate supplier  capacity, and how to complete bid application Forms A and B. (See app. IV  for examples.) Some suppliers told us that Palmetto GBA service center  employees could not answer their questions and one supplier told us it  was uncomfortable using the center because it was unsure the information  provided was correct.
CMS also acknowledged that many suppliers had particular difficulty  complying with the financial documentation requirement. A supplier told  us, for example, that it was a wholly owned subsidiary of a parent  company and did not understand which financial documentation  requirements in the request-for-bid instructions applied to it. A CMS  official told us that some suppliers did not understand that they had to  provide all of the required financial documents, and that the statement of  cash flow—described as a statement of changes in financial position—was  the document most often missing. We also found that CMS’s financial  documentation instructions did not clearly address differences among  supplier business types—for example, a sole proprietorship business  versus a publicly traded national corporation—and among the financial  documents needed to submit a bid for each supplier type. Because  business types did not easily link to the request-for-bid instructions,  suppliers were at risk of submitting incomplete or inaccurate financial  documentation.
We found that CMS’s request-for-bid instructions had inconsistent  information about the requirements for a credit report and credit score.  The Form A bid instructions for financial information discussed different  types of suppliers and their financial documents in six paragraphs. In two  paragraphs—for suppliers that submit individual tax returns that include  business taxes and for suppliers that submit corporate tax returns—the  instructions stated that those supplier types had to submit a current credit  report but stated nothing about a credit score. In the remaining four  paragraphs—for limited partnerships, publicly traded suppliers, new  suppliers, and networks—nothing was stated about either a credit report  or a credit score. The bid submission Form A stated that a credit rating  and score—rather than using the term credit report—had to be submitted.  Near the end of the bid window on September 13, 2007, Palmetto GBA  issued a “required document reminder” that stated that all bidders,  regardless of their business structure, had to submit both a credit report  and a credit score.
section_title: CMS Feedback to Suppliers on Bid Disqualification Reasons Were Vague and Incomplete
paragraphs: The feedback that CMS provided to suppliers that had bids disqualified  because of bid submission deficiencies was vague. CMS provided  suppliers that had bids disqualified with seven general reason codes to  explain the grounds for the disqualifications. (See table 8.) The suppliers  with disqualified bids received letters dated March 20, 2008, from Palmetto  GBA with attachments that indicated which reason code or codes applied  for each CBA and each product category for which the supplier submitted  a bid.
The reason codes provided as feedback may not help a supplier  understand how to resolve its bid issues for future CBP rounds. For  example, if a supplier’s bid did not provide all required financial  documentation, it was disqualified under the BSE-4 reason code. (See  table 9.) The BSE-4 reason code does not inform the supplier which  financial document or documents were not submitted. Likewise, if the  supplier did not meet the financial standards, the bid was disqualified  under the FS-1 reason, and the supplier would not know the standard or  standards it had not met. In addition, CMS did not always provide a  supplier with all reasons why a bid was disqualified. Palmetto GBA  officials told us that suppliers were informed of an accreditation  disqualification reason (BSE-3) if it was the bid’s only disqualifying reason.  If a supplier was disqualified both for a reason code other than BSE-3 and  for not being accredited, the supplier would not have been informed about  the accreditation reason.
section_title: CMS Postbidding Review Process Was Not Effectively Communicated to Suppliers and Was Inconsistent with CMS’s Earlier Interpretation of Its Authority to Conduct Such Reviews
paragraphs: CMS conducted a postbidding review process through which the agency  reversed Palmetto GBA’s decision to disqualify the bids of certain  suppliers. Specifically, Palmetto GBA and CMS reviewed a total of 1,935  bids from 357 suppliers from March 21, 2008, through July 9, 2008. They  only reviewed the disqualified bids of suppliers who contacted them with  questions or requested a review. As a result of this review, CMS  determined that 10 suppliers had 58 bids incorrectly disqualified; the  agency subsequently offered CBP contracts to 7 of these suppliers for 27  bids.
CMS did not effectively communicate to suppliers that they had an  opportunity to have disqualified round 1 bids reviewed. CMS officials  informed us that the agency made a decision on or about March 5, 2008, as  part of a quality assurance process, to permit Palmetto GBA to review  disqualified bids after suppliers received their March 20, 2008, letters  notifying them of their disqualifications. After the letters were sent to  suppliers on March 20, 2008, CMS officials told us that suppliers learned  about the bid review opportunity if they contacted Palmetto GBA with  questions about their bids, participated in an April 2008 CMS Open Door  Forum about the CBP program, or attended the June 16, 2008 PAOC  meeting. CMS and Palmetto GBA, however, did not provide any written  notification explaining this review process to suppliers prior to or after  they were informed of their bid disqualifications, and some suppliers were  not aware of this opportunity for review. For example, two suppliers  informed us that they were unaware that a postbidding review was an  option. Another supplier informed us that the company’s bids were  disqualified and when he called Palmetto GBA to follow up, he was  informed that there would be a review and response in 30 days, but he had  not received a response as of March 25, 2009. An additional supplier  informed us that in response to his inquiries, CMS stated that there was no  formal appeal process.
Moreover, the postbidding review was inconsistent with CMS’s earlier  interpretation of its authority to conduct such reviews. Before soliciting  bids for round 1, the agency determined that it would not have the  authority to review the results of bid evaluations. The MMA prohibited  administrative and judicial review of certain round 1 determinations,  including the awarding of contracts, the bidding structure, and number of  contractors selected. Neither the MMA nor its legislative history defined  the phrase “administrative review.” In the preamble to the CBP final rule,  however, CMS interpreted this provision as prohibiting review of the  results of bid evaluations. CMS did not explicitly address such a review  or any reversals of bid disqualifications elsewhere in its regulations or  other policy guidance. In the preamble, CMS also recounted that  commenters requested that it establish a grievance and review process for  suppliers. Among other things, commenters also expressed concern  about the potential for errors in disqualifying suppliers and requested that  CMS provide an opportunity for review to confirm the accuracy of these  disqualifications. In response to these comments, CMS indicated that it  did not have the authority to review the outcome of bid evaluations.  Specifically, it cited the prohibition on administrative or judicial review,  explaining that Congress enacted this prohibition to avoid any delay or  disruption in the implementation of the program as a result of challenges  brought by bidders.
In response to our inquiries during this evaluation, CMS officials informed  us that the postbidding review process was not an administrative review  prohibited by statute, but rather a quality assurance measure. In our view,  CMS’s characterization of the postbidding review process as a quality  assurance measure does not fully address the inconsistency with the  agency’s earlier position that it did not have the authority to conduct such  a review. In the preamble to the CBP final rule, CMS advised that it would  notify losing bidders but would not provide debriefings due to logistics,  volume of bidders, and time constraints. As an alternative, CMS explained  that the agency would conduct an extensive education and outreach  program for suppliers and was developing a quality assurance program.  But the postbidding review process was distinct from the specific quality  assurance steps that CMS described it would take in the preamble to the  CBP final rule. In addition to its own quality assurance system, CMS  indicated that Palmetto GBA would implement a quality assurance  program, but did not elaborate on the form this program would take.  However, the agency’s response to commenters rejected any suggestion of  a postbidding review citing prohibitions under federal law. CMS officials  have since informed us that the language in the CBP final rule was  ambiguous, thereby not precluding it from conducting the postbidding  review to be considered a quality assurance measure. Even if that were the  case, CMS did not provide any clarifying guidance to suppliers that  explicitly informed disqualified suppliers of the opportunity for a  postbidding review. Instead CMS made its March 5, 2008, decision to  conduct these reviews about 2 weeks before suppliers were mailed notice  of their bid disqualifications. The notification simply stated that suppliers  could call customer service with questions, and CMS and Palmetto GBA  conducted these reviews only for suppliers who contacted them or  requested a review.
section_title: CMS’s CBP Electronic Bid Submission System Had Information Technology Operational Problems
paragraphs: After the CBP round 1 bid window closed, CMS acknowledged that the  CBSS had information technology (IT) operational problems that affected  suppliers’ ability to submit their bids. CMS also acknowledged that loss  of bid submission data was a major problem for suppliers. During the early  part of the bid window, a CBSS security feature automatically logged a  supplier out of the system after 2 hours, which caused some suppliers to  lose data. Another security feature timed suppliers out of CBSS if there  was no activity for 30 minutes. To address suppliers’ concerns with the  CBSS’s bid submission data losses, CMS and Palmetto GBA conducted a  special bidder conference call July 9, 2007.
Some suppliers stated that the CBSS was difficult to use, which impeded  their ability to submit a bid. CMS officials acknowledged that the CBSS  user guide was not very detailed or user friendly. Some error messages  also used technical language that suppliers did not understand. In  addition, CBSS required data to be manually reentered for the same  product category in multiple CBAs because the CBSS did not have a “cut  and paste” function. The data reentry was time-consuming and increased  the risk of suppliers’ inputting incorrect data that could disqualify a bid.
CMS officials stated that there were cases when the CBSS was unavailable  to suppliers to submit their bids. CMS explained that CBSS had  unscheduled downtimes that inconvenienced the suppliers, particularly  those working in CBSS at the time. According to CMS, privacy and  security rules required that each user ID and password allow only one user  to access the CBSS at a time. However, the system did not have the  controls to prevent multiple users from attempting to do so. When this  scenario did occur, the system became inaccessible for all user IDs and  passwords. A supplier told us that it had to wait until nonworkday hours  to access the CBSS to submit its bids. On the last day of the bid window,  CBSS was unavailable for several hours.
section_title: CMS’s Program Advisory and Oversight Committee Provided Input to Address Supplier Challenges, but Not All Challenges Were Addressed
paragraphs: Although a CMS official said that the original PAOC was generally helpful  to CMS in developing and implementing CBP round 1 and that it provided  CMS with assistance in the overall design of the program, two members of  the original PAOC and three DME trade association representatives told us  that CMS did not always use the PAOC effectively. Though the PAOC  provided input to CMS to address potential supplier challenges during the  development and implementation of CBP round 1, some issues raised were  not fully resolved, such as concerns about missing or lost financial  documentation, the absence of a formal CMS bid review process, the  concern that small suppliers would be disadvantaged, and that the supplier  quality standards were not finalized before the CBP round 1 bid window  opened. One PAOC member stated that although the PAOC’s role was to  advise and to oversee the CBP, members were not provided enough  information and opportunities to provide feedback to fulfill these  responsibilities. One PAOC member also reported having insufficient time  to discuss and react to the CMS and Palmetto GBA presentations and  expressed dissatisfaction at not being able to formulate or vote on  recommendations. A CMS official stated that the PAOC had cochairs—one  CMS official and one industry representative—to encourage mutual  collaboration. However, the two PAOC members said this approach was  not effective because the CMS cochair had a greater role on the committee  than the industry cochair.
section_title: CMS Has Taken Several Steps to Improve Future Rounds of the CBP, Including Implementing MIPPA Provisions and Addressing IT Operational Problems
paragraphs: CMS has taken several steps to improve future rounds of the CBP. It  issued an interim final rule in 2009 to implement certain provisions of  MIPPA that affect the round 1 rebid. It has taken several additional actions  to make the round 1 rebid bidding process easier for suppliers to navigate  and the bidding information easier to understand. CMS’s new bid  submission system, DBidS, may address the IT operational deficiencies  that occurred during round 1. Finally, though MIPPA extended the  termination date of the PAOC, CMS disbanded the original PAOC and  appointed new members to the current PAOC to provide new expertise  and input for the round 1 rebid.
subsections: section_title: CMS Has Implemented Certain MIPPA Provisions
paragraphs: CMS’s interim final rule, effective April 18, 2009, implemented certain  MIPPA provisions, including changes that CMS is required to make for the  CBP round 1 rebid and future rounds.
Notification of missing financial documentation. CMS will notify and  provide feedback about any missing financial documentation to bidding  suppliers that submit their required financial documentation within a time  period known as the covered document review date. Once notified,  suppliers will have 10 business days to submit the missing  documentation.
Subcontractor information. Suppliers that enter into CBP contracts  with CMS must disclose (1) each subcontracting arrangement the supplier  enters into to provide items and services covered under its CBP contract  and (2) whether the subcontractor meets accreditation requirements, if  applicable. The supplier must provide this information to CMS within   10 days of entering into a CBP contract and within 10 days of entering any  subcontracting arrangement subsequent to the award of the contract.
In addition to the changes specifically required under the interim final  rule, MIPPA also included other changes to the CBP.
Accreditation deadline. Suppliers, including subcontractors, providing  items or services on or after October 1, 2009, must have submitted  evidence of accreditation prior to this date.
CBP ombudsman. A competitive acquisition ombudsman, within CMS,  must be appointed by the HHS Secretary to respond to CBP questions and  complaints made by suppliers and individuals. The ombudsman must  submit an annual report detailing CBP-related activities to Congress.
PAOC extension. The termination date for the PAOC is extended from  December 31, 2009, to December 31, 2011.
section_title: Additional CMS Actions to Improve the Round 1 Rebid
paragraphs: CMS has made several additional changes for the CBP round 1 rebid in  response to problems that occurred during CBP round 1. First, to reduce  the burden on bidding suppliers providing financial documentation, CMS,  as stated in the preamble to the interim final rule, will require suppliers to  submit 1 year of documentation instead of 3 years, which CMS now  believes is adequate to determine a supplier’s financial soundness. The  request-for-bid instructions now provides a chart that lists the required  financial documents by supplier type. For example, the chart distinguishes  the financial documentation required for a sole proprietorship versus a  corporation. In addition to the chart, the rebid’s request-for-bid  instructions also include a sample of a completed income statement,  balance sheet, statement of cash flow, and corporate tax return.
Second, CMS announced the timeline for the round 1 rebid bid window in  advance, and to improve the quality and availability of information to  bidding suppliers, CMS launched an intensive bidder education campaign  to provide suppliers with all the information necessary to submit a  complete bid during the round 1 rebid bid window. According to CMS, the  request-for-bid instructions has been made clearer and more  understandable. A Palmetto GBA official said that, if necessary, the  request-for-bid instructions will be updated until the bid window closes,  although CMS will notify suppliers if the bidding instructions are revised  or clarified during the bid window. Furthermore, to ensure that suppliers  can easily locate the most current CBP information, CMS will date every  page, article, and frequently asked question so that suppliers know when  new information has been posted.
As in CBP round 1, suppliers may enter into subcontracting arrangements  with other suppliers to provide items and services covered under their  CBP contract to eligible Medicare beneficiaries. However, CMS clarified  that subcontractors may be used only to purchase inventory, deliver and  instruct on the use of Medicare-covered items, and repair rental  equipment. Contract suppliers are responsible for furnishing items and  services in compliance with physicians’ orders and Medicare rules and  guidelines. These services include coordination of care with physicians,  submitting claims on behalf of beneficiaries, assuming ownership and  responsibility for equipment furnished to beneficiaries, and ensuring  product safety.
In addition, the original PAOC was concerned that suppliers new to a  product category were given the same consideration as experienced  suppliers during CBP round 1. For this reason, a CMS official announced  at the June 4, 2009, PAOC meeting that the agency is now considering  whether to apply a different standard to evaluate the capacity of suppliers  new to a DME product category. CMS later explained the new proposal to  us. For the CBP, all suppliers, both new and experienced, estimate the  number of items they can provide to meet the projected demand of  beneficiaries for a product category in a CBA. Currently, a supplier must  meet a minimum threshold based on CMS’s determination of its financial  strength in order for CMS to continue to evaluate its bid. If a supplier  meets that threshold, it is then evaluated against a second threshold to  determine whether CMS will accept the supplier’s estimate of its ability to  expand its current capacity. CMS is proposing that the second threshold  be higher for suppliers new to a product category than for experienced  suppliers. According to a CMS official, new suppliers that did not meet the  second higher threshold could still be offered a contract, although the  proposal would generally result in awarding more contracts to suppliers  with experience.
Suppliers participating in the round 1 rebid must have all local and state  licenses for a product category in a CBA at the time of bid submission in  order to be considered for a CBP contract. According to CMS, this is not a  change from CBP round 1. However, there were issues during the first  round that complicated licensure verification. CMS and Palmetto GBA  acknowledged and some trade association representatives told us that  some suppliers were offered CBP contracts during CBP round 1 for  product categories for which they were not properly licensed. Therefore,  for the round 1 rebid, CMS has further clarified the licensure requirement,  stating that suppliers must be licensed for the product category in the CBA  in which they are bidding and if a CBA covers more than one state, the  supplier needs to obtain applicable licensure in all states. To ensure that  the licensure requirement is met, CMS is improving quality assurance  checks to confirm that suppliers are properly licensed prior to accepting  suppliers’ bids in the CBP round 1 rebid.
On January 2, 2009, CMS published a final rule, effective March 3, 2009, to  implement a statutory requirement that certain DME suppliers post a  $50,000 surety bond. In responding to comments on the rule, CMS stated  that the surety bond is designed to reduce the amount of money that is lost  due to fraudulent or abusive billing schemes by suppliers. Existing  Medicare suppliers had until October 2, 2009, to comply, and as of May 4,  2009, new suppliers were required to post the bond as a condition of their  enrollment in Medicare. Suppliers that participate in the rebid will have  to comply with the surety bond requirement.
section_title: To Address CBSS Operational Deficiencies, CMS Is Developing a New Bid Submission System
paragraphs: According to CMS system and Palmetto GBA personnel, the agency  developed a new IT system to replace the CBSS and correct the  operational problems that were identified. This system, DBidS, was  developed in accordance with the agency’s defined system development  process and was designed to address the operational deficiencies  identified with CBSS. DBidS software testing, including user testing, was  completed in August 2009 and CMS management has accepted and  approved the system for operation.
CMS system development is guided by its Integrated IT Investment and  System Life Cycle Framework, which prescribes steps, activities, and  documents required to develop CMS IT systems. For example, the  framework describes processes to be followed in developing, validating,  and agreeing on requirements for system features and capabilities. It also  describes required testing, including user acceptance testing, which  validates that business requirements are met, as well as performance and  stress testing, in which large volumes of input data or simulated  concurrent users are introduced to determine levels beyond which the  system will fail. Finally, it describes the operational review that the agency  must perform to determine whether to accept and approve the system for  operation. According to experts in the software development field,  having a defined process increases the likelihood of a successful system  development, although it does not guarantee it.
In accordance with the framework, CMS officials assessed CBSS business  requirements and reviewed these with the contractors to establish a new  set of baseline requirements for DBidS. The agency used these  requirements to develop a design for the system, which was reviewed by  CMS in 2008. Based on this design, the system was developed and testing  began.
On May 29, 2009, CMS began advising all DME suppliers to update their  National Supplier Clearinghouse files to ensure that they contained correct  and current information. CMS stated that this was especially important for  suppliers planning to bid in the round 1 rebid because it would enable  them to avoid the registration issues that occurred during CBP round 1  because some of the information in the suppliers’ National Supplier  Clearinghouse files did not match the information that was submitted into  the Individuals Authorized Access to CMS Computer Systems. In May  2009, a CMS official stated that DBidS was designed to address specific  deficiencies identified in CBSS; it is designed to be more user friendly and  easier for suppliers to navigate, and it is to provide a logical flow of the  data that are requested, as well as detailed bidding instructions in user- friendly language. It is to have status indicators to indicate whether the  bidding forms are “complete,” “incomplete,” or “pending approval,” and  links in the system to direct suppliers to the incomplete data. In addition,  CMS said that DBidS will have a “copy and paste” function for the transfer  of certain data and many data-saving points to minimize loss of data.  DBidS is expected to also allow a supplier to have more than one  employee access DBidS at the same time, but to control data input the  system will not allow more than one employee to input the same data at  the same time.
In addition to the DBidS changes to address specific deficiencies identified  in CBSS, CMS also recognized that more thorough testing of CBSS might  have prevented certain systems deficiencies. As of August 2009, CMS has  completed testing DBidS, including two changes to correct a critical  defect and addressed the policy requirement that all suppliers be  accredited. As of September 2009, CMS has accepted DBidS for operation  and agency officials indicated that previous deficiencies have been  satisfactorily addressed. However, until DBidS is put into operation its  effectiveness in correcting these deficiencies is unknown.
section_title: CMS Changed PAOC Membership to Solicit New Expertise and Input
paragraphs: On October 2, 2008, CMS formally announced that because of the length of  the MIPPA extension, and because the PAOC was to perform additional  duties, the agency had ended the terms of service for the original PAOC  members, and was soliciting nominations for new individuals to serve on  the PAOC. On January 15, 2009, CMS announced the 17 new members of  the current PAOC who were chosen because of their expertise in a broad  range of issues, including quality standards, accreditation, and Medicare  beneficiary issues. Although CMS stated that this PAOC was to review  the bidding process for the round 1 rebid and consider all of the MIPPA  changes, CMS did not schedule the first meeting until June 4, 2009,   4-½ months after CMS had issued its interim final rule for public comment  to implement the MIPPA provisions on January 16, 2009. Like the original  PAOC, the current PAOC is cochaired by a CMS official and a DME  industry representative.
Similar to the meetings of the original PAOC, the June 4, 2009, PAOC  meeting included several presentations by CMS officials with limited time  allowed at the end of each for PAOC member discussion. The  presentations included information concerning DBidS; CBP requirements  and bidder responsibilities; suppliers’ financial documentation, licensure,  accreditation, and subcontracting requirements; new supplier issues; mail- order diabetic supplies; and the tentative timeline for the CBP round 1  rebid implementation. Although a CMS official told PAOC members that  they were encouraged to continue to provide individual feedback, advice,  and suggestions during the meeting and additionally by e-mail for CMS’s  consideration, as with the original PAOC meetings, CMS did not ask the  PAOC to provide recommendations that would reflect input from the  committee as a whole. Although CMS had not conducted PAOC meetings  by teleconference previously, the agency held a three-hour teleconference  on July 21, 2009, to solicit the current PAOC members’ feedback and  suggestions on (1) determining beneficiary demand, (2) assessing bidding  suppliers’ ability to meet the demand, and (3) reviewing regulations for  change of ownership and the sale of contracts. A four-page meeting  summary was posted on CMS’s Web site in August 2009, but a transcript  has not been posted. We cannot determine at this time the degree to which  the PAOC members’ input will be reflected in CMS’s implementation of the  round 1 rebid.
section_title: Conclusions
paragraphs: If wholly adopted, competitive bidding could reduce Medicare payments  for DME, help close the disparity with prices paid by others for the same  items and services, and also help reduce improper payments. It also  represents a change from Medicare’s long-standing policy that any  qualified provider can participate in Medicare because it authorizes CMS  to select suppliers to participate in Medicare, based in part on CMS’s  scrutiny of their financial documents and other bid submission materials.
CBP round 1 was the first time that both CMS and DME suppliers  participated in a large-scale DME competitive bidding process. Some  challenges may be expected for a new program, but problems occurred, in  part because of poor communication by CMS and an inadequate electronic  bid submission system. CMS was aware of these problems as the bidding  unfolded and extended the original bid window as it attempted to correct  them. The agency worked to address these problems before the round 1  rebid began.
DBidS, the new electronic bid submission system developed by CMS and  Maricom, could be an improvement if it successfully addresses the  deficiencies identified in the system used for round 1 as CMS claims it will.  CMS’s implementation of the MIPPA requirement that the agency provide  feedback on the status of suppliers’ financial documentation may help  reduce the number of bids disqualified for inadequate financial  documentation. And the agency’s implementation of the statutory  requirements that all suppliers, including subcontractors, provide evidence  of accreditation by October 1, 2009, and that suppliers generally must post  surety bonds may help ensure that only legitimate suppliers are enrolled in  Medicare and therefore are eligible to bid. To address the concerns that  suppliers have the experience to provide the DME items they win  contracts for, before they can submit bids, suppliers will also have to be  accredited and licensed for each DME product category and CBA in which  they bid. In addition, CMS’s early announcement of the timeline for the  rebid and the revised request-for-bid instructions gave suppliers more time  to decide whether to participate in the rebid and to begin preparing their  bids before the window opens.
Despite CMS’s actions to improve the program, difficulties may still arise  in the round 1 rebid and future rounds. Because CMS did not effectively  notify suppliers of the postbidding review conducted in round 1, some  suppliers missed the opportunity to have their disqualified bids reviewed.  Unless CMS commits to effectively notifying all bidders of any review of  disqualified bids, if it decides to allow such a process in future rounds of  the CBP, CMS will not be able to ensure that all bidding suppliers have an  equal opportunity to request a postbid review.
section_title: Recommendation for Executive Action
paragraphs: To improve future rounds of the competitive bidding program for DME,  we recommend that the Administrator of CMS take the following action:  If CMS decides to conduct a review of disqualification decisions during the  round 1 rebid and future rounds, CMS should notify all suppliers of any  such process, give suppliers equal opportunity for such reviews, and  clearly indicate how they can request a review.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, HHS agreed with our  recommendation that it effectively notify all suppliers of all aspects of the  CBP. This would include any process to review bid disqualifications. CMS  said it believes that suppliers should have the opportunity to raise  questions or concerns about the competitive bidding process, including  disqualification decisions. We found that CMS did not effectively notify  suppliers about its postbid review of disqualified bids which resulted in  some bid disqualifications being overturned in round 1 of the CBP. HHS  also commented that we had not identified concerns with the overall  structure and design of the CBP. However, such an analysis was beyond  the scope of this report.
HHS noted that it had a different perspective on some aspects of our  report. The agency commented that the number of suppliers with CBP  contracts did not account for the number of locations where DME items  and services might be available in the CBAs. Our work focused on the  number of suppliers participating in the CBP process, the number that  were disqualified, and the number that were awarded contracts. We used  the same contract supplier definition as CMS, which did not include the  number of locations. We did not analyze whether there were enough  locations to provide adequate Medicare beneficiary access during the  CBP’s 2-week operation.
HHS suggested that our statement that about half of the submitted bids  were disqualified before competing on price creates the impression that  additional suppliers would have won if they submitted bids that complied  with the terms and conditions of the request-for-bid instructions. However,  we believe our characterization is accurate because bids were first  reviewed for completeness, compliance with bidding requirements, and  financial score. The agency also argued that it relied heavily on the PAOC  for the design and implementation of the CBP. But as we stated in the  report, two original PAOC members and three trade association  representatives told us that CMS did not always use the PAOC effectively.  Our review of PAOC meeting transcripts also found members who were  dissatisfied with how the PAOC was used.
Finally, we revised the report according to HHS’s comment that a  reduction in the number of suppliers was an expected result of the CBP,  but not a goal of the program. As we noted in the report draft, the CBP  was structured to allow only suppliers with winning bids that accepted  contracts to provide DME items and services, in contrast to Medicare’s  long-standing policy that any qualified provider can participate in  Medicare.
HHS provided additional technical comments which we incorporated as  appropriate. HHS’s written comments are reprinted in appendix V.
As we agreed with your offices, unless you publicly announce the contents  of this report earlier, we plan no further distribution of it until 30 days  from its date. We are sending copies of this report to the Secretary of  Health and Human Services. The report will also be available at no charge  on our Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-7114 or kingk@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix VI.
section_title: Appendix I: Scope and Methodology
paragraphs: To assess the Centers for Medicare & Medicaid Services’s (CMS)  implementation of round 1 of the competitive bidding program (CBP), we  reviewed federal laws and regulations. We also interviewed officials from  CMS and Palmetto GBA—the contractor CMS selected to implement the  CBP bidding and contract award process—about the results of the bid  submission and review processes, CMS’s major challenges in  implementing CBP round 1, and the actions taken to improve future CBP  rounds.
To determine the results of the CBP round 1, we reviewed data from CMS  and Palmetto GBA about the number and characteristics of suppliers  participating in the CBP process, number and characteristics of bids  submitted, and the bids’ outcomes. We reviewed the Competitive Bid  Submission System (CBSS) User Guide, and instructions for entering data.  We interviewed and obtained information from officials from CMS and  Palmetto GBA about the CBSS, including system testing and data  processing. We asked Palmetto GBA officials about data transfers from the  CBSS to the Competitive Bidding Evaluation System (CBES), an  application designed by Palmetto GBA to automate specific portions of the  bid evaluation process that contained bid data, financial data entered by  Palmetto GBA personnel, and documentation of Palmetto GBA actions.  We asked them about CBES data checks, quality control, data entry  procedures, and security. We interviewed CMS officials about the criteria  and procedures for disqualifying bids, identifying winning bids, and  calculating single payment amounts. We reviewed information CMS  provided to the Program Advisory and Oversight Committee (PAOC) about  this process and its results. We compared data published by CMS with the  data provided to us and followed up with the appropriate officials to  resolve discrepancies. We assessed the reliability of round 1 data by  reviewing information from or interviewing CMS and Palmetto GBA  officials and determined that the data were sufficiently reliable for the  purposes of this report. We did not evaluate the reliability of CMS  estimates of beneficiary demand for durable medical equipment (DME)  which relied on 2005 and 2006 DME claims data, the most recent data  available to them at the time, nor did we evaluate CMS’s estimates of  projected savings as the result of round 1.
To determine the major challenges CMS had in conducting CBP round 1,  we interviewed CMS and Palmetto GBA officials and reviewed information  provided to suppliers, including CBP bid submission instructions and  related materials, bidder conference call transcripts, and CMS’s and  Palmetto GBA’s CBP Web sites. We reviewed these materials for  inconsistencies. We also reviewed an internal document provided by  Palmetto GBA about its implementation of the CBP round 1. We  interviewed two PAOC members concerning whether CMS used the PAOC  effectively and to gain insight about the committee’s role in advising CMS  about the implementation of the CBP and establishing standards for  suppliers that bid in round 1. We reviewed transcripts and meeting  summaries of the seven PAOC meetings to assess the concerns and  feedback that the members provided about potential supplier issues and  challenges. We also interviewed CMS and Palmetto GBA officials and  reviewed documentation about CBSS’s operational problems.
We interviewed 12 suppliers about their experiences with CBP. We  interviewed 4 suppliers that were not offered a contract, 4 suppliers that  accepted a CBP contract, and 4 suppliers that rejected their CBP contract  offer. The suppliers were randomly selected from CMS’s list of suppliers  that bid in CBP round 1. Because we interviewed a small number of  suppliers, our findings from these interviews are not generalizable to all  suppliers. In addition, we interviewed representatives from national and  state industry trade associations representing DME suppliers—the  American Association for Homecare, the National Association of  Independent Medical Equipment Suppliers, the Florida Association of  Medical Equipment Services, and the Ohio Association of Medical  Equipment Services. We also reviewed testimony from three congressional  hearings including two 2008 hearings about the CBP implementation and  a 2009 congressional hearing on the CBP’s impact on small business, in  which a CMS official discussed the results of CBP round 1, and six  representatives of various DME associations and interest groups discussed  the effect that the CBP had on their businesses and professions.
To analyze the postbidding review authorized by CMS and conducted by  Palmetto GBA, we interviewed CMS and Palmetto GBA officials about the  development and implementation of the review process and reviewed its  results. We also reviewed relevant federal laws and regulations and  interviewed CMS officials and attorneys representing the Department of  Health and Human Services (HHS), CMS division.
To determine the steps that CMS has taken to improve the bidding process  for future CBP rounds, we reviewed relevant federal laws and regulations,  PAOC Federal Register notices, and CMS press releases related to the  PAOC. We interviewed CMS and Palmetto GBA officials about the actions  they have taken and intend to take to improve the CBP bidding process  during the CBP round 1 rebid. We also attended the June 4, 2009, PAOC  meeting at which CMS provided updates of the process changes and  modifications that it made for the round 1 rebid.
In addition, we interviewed Maricom officials and reviewed available  documentation related to the development, testing, and proposed  implementation of the new electronic bid submission system—Durable  Medical Equipment, Prosthetics, Orthotics, and Supplies bidding system  (DBidS)—that will be used during the CBP round 1 rebid. We did not  assess the reliability or functionality of DBidS, but we reviewed the  processes established by CMS and its contractors for testing and accepting  such systems.
We conducted this performance audit from June 2008 to September 2009  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Change in Numbers of Suppliers by CBP Product Category and CBA: 2006- 2008
paragraphs: Appendix II: Change in Numbers of Suppliers  by CBP Product Category and CBA: 2006-2008 Competitive bidding area (CBA)
Competitive bidding area (CBA)
Competitive bidding area (CBA)
Support Surfaces (group 2 mattresses and overlays)
This table identifies the total number of suppliers that provided services in each competitive bidding  area (CBA) for each product category in CY 2006 with allowed charges for items in the product  category greater than $10,000 and the number of suppliers awarded CBP contracts in round 1 as of  June 11, 2008.  uipment, and supplies are used to provide food through a tube placed in the  nose, the stomach, or the small intestine.
section_title: Appendix III: Percentage Differences between 2008 Medicare Fee Schedule and CBP Round 1 Single Payment Amounts
paragraphs: Appendix III: Percentage Differences between  2008 Medicare Fee Schedule and CBP Round 1  Single Payment Amounts Competitive bidding area (CBA)
Competitive bidding area (CBA)
INS means that the estimated capacity of suppliers submitting ualified bids or accepting contracts  was insufficient to meet projected demand. NA means not applicable. No auctions were conducted for  these product category and CBA combinations.
Except for the last column, the data reflect volume-weighted average savings within an auction.  According to the CMS, the savings rate was derived by multiplying the difference between the 2008  Medicare fee schedule for each item in a product category in a CBA and the item’s CBP-derived  single payment amount by the same weights used to calculate composite prices for the product  category. CMS projected the overall savings for round 1 at approximately 26 percent annually to the  Medicare program and Medicare beneficiaries. The averages in the last column are unweighted. GAO  did not make a determination as to whether or not this methodology is an accurate measure of true  savings to the Medicare program.
Enteral nutrients, euipment, and supplies are used to provide food through a tube placed in the  nose, the stomach, or the small intestine.
Group 2 mattresses and overlays of the support surfaces product category are pressure-reducing  support surfaces for persons with large or multiple pressure ulcers.
section_title: Appendix IV: Omitted and Conflicting Information in Written Instructions on Submitting a Bid for CBP Round 1
paragraphs: The examples below are taken from two competitive bidding program  (CBP) documents that provided written information for suppliers about  how to submit a bid and information on bidding requirements. The  documents are from a Web-based seminar, or webinar, posted on the  Palmetto GBA Web site on April 30, 2007, and the request-for-bid  instructions posted on the same Web site on May 15, 2007.
section_title: Appendix V: Comments from the Department of Health and Human Services
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, key contributors to this report  were Martin T. Gahart, Assistant Director; Carrie Davidson; Neil Doherty;  JoAnn Martinez; Christie Motley; Michelle Paluga; Hemi Tewarson; Keo  Vongvanith; Timothy Walker; Opal Winebrenner; Suzanne Worth; and  Charles Youman.
section_title: Related GAO Products
paragraphs: Medicare: Covert Testing Exposes Weaknesses in the Durable Medical  Equipment Supplier Screening Process. GAO-08-955. Washington, D.C.:  July 3, 2008.
Medicare: Competitive Bidding for Medical Equipment and Supplies  Could Reduce Program Payments, but Adequate Oversight Is Critical.  GAO-08-767T. Washington, D.C.: May 6, 2008.
Medicare: Improvements Needed to Address Improper Payments for  Medical Equipment and Supplies. GAO-07-59. Washington, D.C.:   January 31, 2007.
Medicare Payment: CMS Methodology Adequate to Estimate National  Error Rate. GAO-06-300. Washington, D.C.: March 24, 2006.
Medicare Durable Medical Equipment: Class III Devices Do Not Warrant  a Distinct Annual Payment Update. GAO-06-62. Washington, D.C.:   March 1, 2006.
Medicare: More Effective Screening and Stronger Enrollment Standards  Needed for Medical Equipment Suppliers. GAO-05-656. Washington, D.C.:  September 22, 2005.
Medicare: CMS’s Program Safeguards Did Not Deter Growth in Spending  for Power Wheelchairs. GAO-05-43. Washington, D.C.: November 17, 2004.
Medicare: Past Experience Can Guide Future Competitive Bidding for  Medical Equipment and Supplies. GAO-04-765. Washington, D.C.:  September 7, 2004.
Medicare: CMS Did Not Control Rising Power Wheelchair Spending.  GAO-04-716T. Washington, D.C.: April 28, 2004.