For CBP round 1, we found problems with the bidding process, including poor timing and lack of clarity in bid submission information and CMS's inability to inform suppliers of missing financial documentation. In comparison with CBP round 1, CMS provided CBP round 1 rebid bidding information to suppliers earlier, and its financial documentation instructions were clearer and suppliers were notified of missing documentation. CMS also added program information about determining suppliers' capacity, and provided directories to inform suppliers about state licensure requirements. CMS had difficulty providing clear bidding information in CBP round 1. For example, CMS provided new bidding information several times after the bid window opened, such as announcing the 10 financial measures used to evaluate the financial viability of bidding suppliers; clarified CBP round 1's bidding information in response to supplier confusion, such as providing additional explanatory information concerning the request-for- bid instructions; and extended the bid window deadline. These changes in bidding information made it more difficult for suppliers to submit correct bids. CMS and Palmetto GBA acknowledged that during CBP round 1 suppliers did not always understand the request-for-bid instructions. The instructions were not available to suppliers until the day the bid window opened. During the first 2 months of the bid window, while suppliers were preparing their bid submissions, Palmetto GBA held informational bidder conference calls on how to submit bids and maintained audio recordings on the CBP Web site for a limited time. Questions also were not organized by subject matter, and while the Web site had a frequently asked questions section, it was difficult for suppliers to determine when questions had been added. CMS improved its communication with suppliers about bidding information for the CBP round 1 rebid. For example, CMS provided suppliers with bidding information before the bidding window opened on October 21, 2009, so that bid window extensions were not needed. Prior to the bid window opening, the rebid's request-for-bid instructions had been available to potential bidding suppliers for over 2 months, since August 3, 2009, and CMS had already held seven informational bidder conference calls. Transcripts, audio recordings, and PowerPoint presentations from the calls were available on the Palmetto GBA CBP Web site throughout the round 1 rebid. CMS made two minor clarifications to the CBP round 1 rebid instructions. First, on the day the bid window opened, CMS provided the actual bid submission deadlines, including the covered document review date, and provided further instructions on how a supplier needed to approve a bid in the online bidding system and would submit the required hard copy financial documents. Second, on November 17, 2009, CMS clarified that the financial statements for the last operating year that suppliers were required to submit as part of their bids could be for either calendar or fiscal years. For the CBP round 1 rebid, Palmetto GBA maintained suppliers' frequently asked questions on the CBP's Web site by topic. The questions were provided for three topics--Bidding Guidelines, Bidding Process, and Payment Policies--and dated in chronological order, unlike in CBP round 1, so suppliers could more easily determine when new ones were posted on the Web site. The Web site also has a "What's New" section to allow suppliers to find any new CBP information, for example, information for the suppliers that were offered contracts, such as the form to request that business locations be added or removed from their contracts. In our 2009 report, we found that financial documentation instructions were sometimes unclear in CBP round 1. CMS acknowledged that during CBP round 1 many suppliers had particular difficulty complying with the financial documentation requirements and that the statement of cash flow--described as a statement of changes in financial position--was the document most often missing. We found that CMS's CBP round 1 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 type. Because business types could not easily be cross-referenced to the request-for-bid instructions, suppliers were at risk of submitting incomplete or inaccurate financial documentation. We also found that CMS's CBP round 1 request-for-bid instructions had inconsistent information about the requirements for the credit report and credit score submission. For example, the bid submission form 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, Palmetto GBA then issued a "required document reminder" that all bidders had to submit both a credit report and a credit score. For the CBP round 1 rebid, CMS clarified financial documentation instructions by providing additional tools to guide suppliers through the bid submission process. The request-for-bid instructions included a chart--Required Financial Documents by Business Type--that more clearly explained which documents were to be submitted by business type. For example, the chart specified which portions of a supplier's tax return were required based on its business type such as a sole proprietorship. The chart also included a credit report column that stated bidders must submit a "Credit Report with numerical score completed within 90 days of bid submission," and the bid instructions included the same description. To further assist suppliers to provide the correct financial documents, the instructions included a Required Financial Documents appendix with sample documents and more specific explanations of the income statement, balance sheet, statement of cash flow, revenue and expense portion of the tax return, and the credit report, along with a Checklist of Required Hardcopy Documents for Bid Submission. For the CBP round 1 rebid, CMS officials told us they notified bidding suppliers that submitted their hard copy financial documents by the round's covered review date of any missing documents, as required by MIPPA. Once notified, suppliers had 10 business days to submit their missing documentation. CMS officials told us that 791 suppliers submitted their financial documentation by the CBP round 1 rebid covered document review date and 321 were notified that they had missing documentation. Fourteen suppliers did not subsequently submit the missing documents and their bids were disqualified. For this review, tax record documents were the most often missing financial documentation. In CBP round 1, questions were raised about the capacity of some suppliers to fulfill their awarded contracts on day one of the CBP's contract period, including whether they had experience providing the DME product category, had business locations in the competitive bidding areas, and could expand their businesses, if needed, to supply all Medicare beneficiaries in their competitive bidding areas. CMS officials told us that the CBP's Program Advisory and Oversight Committee (PAOC) raised concerns that suppliers new to a competitive bidding area, new to a DME product category, or that reported high capacity figures would not be able to increase reported capacity in time to meet the projected demand for the DME items in the competitive bidding areas. To address the concerns, CMS officials told us that the agency added a systematic method of reviewing suppliers' capacity and expansion plans for the CBP round 1 rebid. CMS developed a three-step method to determine whether a supplier new to a product category or a competitive bidding area or an experienced supplier that reported high capacity figures would be able to increase capacity to meet the projected demand for the DME items. The three steps were as follows: First, CMS determined whether the total capacity of all experienced suppliers in the competitive bidding area reporting modest growth projections and eligible for a competitive bidding program contract offer could meet the projected demand for items in the contract's first year. If the capacity from these experienced suppliers was sufficient to cover the item demand on day one of the program, then the capacity offered by any additional suppliers with expansion plans and eligible for a contract offer was considered surplus capacity and no further review was conducted. Second, if the total capacity of the experienced suppliers identified in step one did not meet the projected demand for the first year of the contract, then CMS reviewed the expansion plans provided by the new and high- growth or high-volume suppliers to verify their capacity to furnish the items. The expansion plan review involved an in-depth examination of the supplier's financial information, specifically to verify whether the supplier had the liquid assets and available credit needed to expand capacity. If the verified capacity from these suppliers with expansion plans was sufficient to meet demand, CMS determined that the suppliers eligible for a CBP contract offer had the ability to meet demand on day one of the program. Third, if the results of the first two steps indicated that more suppliers were needed to meet demand on day one of the program, CMS made more suppliers eligible for a CBP contract offer. As of September 10, 2010, CMS had not disclosed how many capacity evaluations were conducted during the CBP round 1 rebid. In 2009, we found that some suppliers that won CBP round 1 contracts were not yet licensed in states where they would be operating. For the CBP round 1 rebid, CMS further clarified the state licensure requirement, stating that suppliers must be licensed for the product category in the competitive bidding area in which they are bidding, and if a competitive bidding area covers more than one state, the supplier needs to obtain applicable licensure in all states. In order to better inform suppliers about these licensure requirements, CMS and Palmetto GBA provided licensure state directories for the 11 states included in the CBP round 1 rebid competitive bidding areas. The directories, which served only as guides for suppliers, provided a list of licenses required by each state for each product category for suppliers with a physical location in that state. Suppliers without a physical location in the state but that would be providing DME items and services to Medicare beneficiaries in the state were directed to consult the appropriate state licensing agency; contact information for those agencies was also provided. The suppliers were required to file copies of applicable state licenses with the National Supplier Clearinghouse--which processes Medicare enrollment applications by DME suppliers--prior to submitting a bid. CMS acknowledged that CBP round 1's competitive bid submission system--CBSS--had operational problems that affected suppliers' ability to submit their bids. These problems included, for example, loss of bid submission data caused by CBSS security features that automatically logged suppliers out after 2 hours and that timed out suppliers if there was no activity for 30 minutes, and cases when CBSS was unavailable because of unscheduled downtimes. Additionally, CBSS did not have a "cut and paste" function and manual data reentry was time-consuming and increased the risk of suppliers inputting incorrect data that could disqualify a bid. CMS officials also acknowledged that the CBSS user guide was not very detailed or user friendly. CMS developed a new electronic bid submission--DBidS--for the CBP round 1 rebid. DBidS was designed to address CBSS's specific deficiencies by being more user friendly and easier for suppliers to navigate and providing a logical flow of the requested data, as well as detailed bidding instructions in user-friendly language. Suppliers were provided a DBidS reference guide on the DMEPOS Competitive Bidding Program Web site that included screen shot explanations for the bid submission Forms A and B. It also has a "copy and paste" function for the transfer of certain data and many data-saving points to minimize loss of data. Suppliers could have more than one employee access DBidS at the same time, but to control data input DBidS will not allow more than one employee to input the same data at the same time. DBidS has status indicators to indicate whether the bidding forms are "complete," "incomplete," or "pending approval," and has links in the system to direct suppliers to the incomplete data. CMS officials told us that DBids did not have significant operational issues and only a few suppliers experienced minor problems. In CBP round 1, CMS sent notification letters to both the winning and losing suppliers before announcing the final winning suppliers that accepted contracts for the CBP. The letters sent to suppliers that had bids disqualified included an attachment using seven general reason codes to explain the grounds for the disqualifications. Disqualified bids were ineligible to compete on price and were not considered for a contract award. During CBP round 1, CMS also conducted a postbidding review process through which the agency considered concerns raised by losing suppliers and in some cases, reversed decisions to disqualify the bids of certain suppliers. We found that CMS had not effectively notified suppliers about the opportunity for this postbidding review process. To improve future rounds of the CBP, we recommended in our 2009 report that if CMS decides to conduct a review of disqualification decisions made during the CBP 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. CMS agreed with our recommendation. For the CBP round 1 rebid, CMS sent notification letters to winning suppliers beginning in July 2010. CMS officials informed us that after the CBP round 1 rebid contracting process is completed, CMS plans to send letters to all disqualified suppliers with the reasons why their bids were disqualified. CMS officials said the letters will explain the process by which suppliers may ask questions and express concerns. CMS officials also stated that in the course of responding to such questions or concerns, if CMS determines an error was made, it is possible that a CBP contract may be offered to the supplier. As required by MIPPA, we will study the CBP round 1 rebid, including, for example, the program's impact on Medicare beneficiary access to items and services and on DME small business suppliers. Our study is to be completed no later than one year after the CBP round 1 rebid's Medicare competitively determined payments are first made, which become effective for covered items and services on January 1, 2011. In commenting on the information presented in this testimony, CMS officials stated they appreciated GAO noting the administrative improvements to the competitive bidding process the agency made for the round 1 rebid. The officials further stated that they believe that CMS made many improvements to the CBP. CMS also provided technical comments that we incorporated as appropriate. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or other members of the subcommittee may have. For further information about this statement, please contact Kathleen M. King 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 statement. In addition to the contact named above, key contributors to this testimony were Martin T. Gahart, and Christie Motley, Assistant Directors; Lori Achman; Kye Briesath; Krister Friday; Thomas Han; Erica Pereira; Hemi Tewarson; Opal Winebrenner; and Charles Youman. Medicare Fraud, Waste, and Abuse: Challenges and Strategies for Preventing Improper Payments. GAO-10-844T. Washington, D.C.: June 15, 2010. Medicare: CMS Working to Address Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program. GAO-10-27. Washington, D.C.: November 6, 2009. 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. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Summary:
To reduce spending on durable medical equipment (DME) and related items, under federal law the Centers for Medicare & Medicaid Services (CMS) is phasing in, with several rounds of bidding, a competitive bidding program (CBP) for certain DME and other items. Because of numerous concerns, the Medicare Improvements for Patient and Providers Act of 2008 (MIPPA) terminated the CBP round 1 supplier contracts and required CMS to repeat the CBP round 1, the rebid that began in 2009. In November 2009, GAO issued the report Medicare: CMS Working to Address Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program (GAO-10-27) that documented problems in CMS's implementation of CBP round 1. This statement discusses some of the problems GAO identified and how CMS has or plans to address them in the ongoing CBP rebid bidding process, particularly (1) the bid submission information provided to suppliers, (2) the electronic bid submission system, and (3) the bid disqualification notification process. For the 2009 report, GAO reviewed data provided by CMS and relevant laws and regulations, and interviewed CMS officials. For this statement, GAO also obtained select information on how CMS addressed the CBP round 1 problems identified in GAO's report by reviewing agency documents and interviewing CMS officials in August and September 2010. In the November 2009 report on CBP round 1, GAO noted that problems with the bidding process included poor timing and lack of clarity in bid submission information and the inability to inform suppliers of missing financial documentation. Several times after the CBP round 1 bid window opened, CMS provided new bidding information and clarified other bidding information. The bid window was also extended beyond the initial deadline. These changes made it more difficult for suppliers to submit correct bids. CMS improved implementation of these steps in the bidding process for the CBP round 1 rebid. For example, for the CBP round 1 rebid, CMS provided bidding information to suppliers prior to the bid window opening, including the rebid's request-for-bid instructions, which were available to potential bidding suppliers for over 2 months before the bid window opening. CMS also provided clearer financial documentation instructions and additional financial documentation tools to guide suppliers in the CBP round 1 rebid. For example, the request-for-bid instructions included a chart that more clearly explained which documents were to be submitted by the supplier's business type, for example, a sole proprietorship. CMS also conducted a financial document review during the round 1 rebid, which informed suppliers whether their bid submission was missing required financial documents. Of the 321 suppliers that were notified they had missing documentation, only 14 did not subsequently submit the missing documents. As CMS acknowledged, suppliers had difficulty entering bidding information in the bid submission system used in CBP round 1 and its user guide was not sufficiently detailed. CMS developed a new electronic bid submission system for the CBP round 1 rebid. CMS officials told us that the new system did not have significant operational issues and only a few suppliers experienced minor problems. GAO found that CMS had not effectively notified all suppliers about the opportunity for a postbidding review process in CBP round 1. To address GAO's 2009 recommendation that the agency effectively notify all suppliers of all aspects of the CBP round 1 rebid and future rounds, including any process to review disqualifications, CMS officials stated that the agency plans to notify the losing suppliers of the disqualification reasons by sending each of these suppliers a letter that will explain the process for asking questions or expressing concerns. Officials also stated that in the course of responding to suppliers' questions or concerns, if CMS determines an error was made, it is possible that the supplier may be offered a contract. In commenting on the information presented in this testimony, CMS officials stated they appreciated GAO noting the administrative improvements to the competitive bidding process the agency made for the round 1 rebid. The officials further stated that they believe that CMS made many improvements to the CBP.