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

Letter

Background

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.

Medicare Payment for DME, Prosthetics, Orthotics, and Supplies

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.

Medicare Competitive Bidding

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.

CMS’s Experience Can Guide Agency Efforts to Implement Competitive Bidding

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.

Many High-Cost Items Could Be Included in Large- Scale Competitive Bidding

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.

Larger-Scale Competitive Bidding May Benefit from Streamlined Implementation

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.

Better Information on Specific Items Provided to Beneficiaries Could Ensure More Appropriate Payment

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.

Ensuring Quality and Service for Beneficiaries Is Critical

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Scope and Methodology

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.

Medicare’s 21 Standards for Medicare Suppliers of DME, Prosthetics, Orthotics, and Supplies

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.

Comments from the Centers for Medicare & Medicaid Services

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