Many individuals suffering from advanced chronic obstructive pulmonary disease or other respiratory and cardiac conditions are unable to meet their bodies’ oxygen needs through normal breathing. Supplemental oxygen has been shown to assist many of these patients and is considered a life-sustaining therapy. Physicians prescribe the volume of supplemental oxygen required in liters per minute, or liter flow. Medicare covers supplies and equipment necessary to provide supplemental oxygen if the beneficiary has (1) an appropriate diagnosis, such as chronic obstructive pulmonary disease; (2) reduced levels of oxygen in the blood, as documented with clinical tests; and (3) a physician’s certificate of medical necessity that documents that supplemental oxygen is required. There are three methods, or modalities, for the delivery of supplemental oxygen: oxygen concentrators, which are electrically operated machines about the size of a dehumidifier that extract oxygen from room air; liquid oxygen systems, which consist of both large stationary reservoirs and portable units; and compressed gas systems, which use tanks of various sizes, from large stationary cylinders to small portable cylinders. For most patients, each of the three modalities is equally effective for use as a stationary unit, and clinicians indicated that concentrators can meet the stationary oxygen needs of most patients. Oxygen concentrators account for about 89 percent of the stationary systems used by Medicare patients. Liquid oxygen systems account for about 11 percent of the stationary systems used by Medicare patients. Liquid oxygen systems are preferred by many pulmonologists and respiratory therapists for the less than 2 percent of patients who need a high liter flow—defined by Medicare as 4 or more liters of oxygen per minute. Liquid systems are also sometimes preferred by highly mobile patients because patients can refill lightweight portable liquid units directly from their home stationary reservoirs. Liquid oxygen is usually the most expensive modality for many reasons, including the cost of equipment and the need to use specially equipped delivery trucks, adhere to various regulatory requirements, and replenish a patient’s supply on a regular basis. Compressed gas accounts for less than 1 percent of the stationary systems used by Medicare patients. In addition to a stationary unit for use in the home, about 79 percent of Medicare home oxygen patients have portable units that allow them to perform activities away from their stationary unit and outside the home. The most common portable unit is a compressed gas E tank set on a small cart that can be pulled by the user. Pulmonologists and respiratory therapists advise that patients using supplemental oxygen get as much exercise as possible and believe that lightweight portable equipment can facilitate this activity. Such equipment options for active individuals include portable liquid oxygen units and lightweight gas cylinders, which can be carried in a backpack or shoulder bag. A recent technological improvement in the provision of oxygen is the use of conserving devices, which are more efficient in delivering oxygen and therefore maximize the time a lightweight gas cylinder can last. Without a conserving device, very small tanks only last between 1 and 2 hours at a flow rate of 2 liters per minute, making them impracticable for all but short trips away from home. However, not all patients who need lightweight equipment can use conserving devices. Pulmonary clinicians recommend that all patients be tested to ensure they are proper candidates for this technology, since some patients cannot maintain adequate blood oxygen levels when using conserving devices. In 1997, the monthly fee schedule allowance for a stationary oxygen system was about $300, and in 1998 the allowance was reduced to about $225. Medicare pays 80 percent of the allowance, and the patient is responsible for the remaining 20 percent. The Medicare oxygen allowance covers use of the equipment; all refills of gas or liquid oxygen; supplies such as tubing; and services such as equipment delivery and setup, training for patients and caregivers, periodic maintenance, and repairs. The Medicare monthly allowance for a portable unit was about $48 in 1997 and $36 in 1998. Medicare does not pay an additional allowance for a conserving device, but these devices can lower suppliers’ costs by reducing the frequency of deliveries to their patients. Regardless of the type of oxygen system supplied to a patient, Medicare pays a fixed monthly rate. This type of payment system is intended to give suppliers a financial incentive to lower their costs because they can keep the difference between their Medicare payments and their costs. Suppliers can reduce their costs in various ways, including streamlining operations or utilizing new technology to become more efficient, switching patients to less expensive modalities, and reducing the number or type of patient support services. Some of these approaches can reduce costs while maintaining the quality and adequacy of services. Others, however, could potentially compromise the effectiveness of home oxygen therapy for some Medicare beneficiaries. Most suppliers accept Medicare’s allowance as full payment for home oxygen equipment and file claims directly with the Medicare program through a process known as “assignment.” Suppliers do not have to accept assignment, however, and if they do not, there is no limit to the amount they can charge. The businesses that supply home oxygen to Medicare beneficiaries are diverse, varying in size from small companies run by one or two respiratory therapists to large publicly traded corporations with branches throughout the country. Home oxygen suppliers also include hospital affiliates, franchises, and nonprofit corporations. Some suppliers specialize in home oxygen and other respiratory services, others provide various types of medical equipment and services such as home infusion, and still others are part of a full-service pharmacy. Medicare is the single largest payer for home oxygen for most suppliers we met with, except those who specialize in VA and other large-volume contracts. Some states require that home oxygen suppliers be licensed and have respiratory therapists on staff, but others do not. Many suppliers are accredited by the Joint Commission for Accreditation of Healthcare Organizations, but this accreditation is not required by the Medicare program. Preliminary information indicates that access to home oxygen equipment remains largely unchanged, despite the 25-percent Medicare payment reduction that took effect in January 1998. Medicare claims data revealed little change in use patterns during the first 6 months after the January 1998 payment reduction, and virtually all oxygen suppliers continue to accept assignment for home oxygen. Some beneficiaries are expensive or difficult to serve because they live in rural areas served by few providers, require lightweight portable equipment, or require high-liter-flow liquid oxygen systems. These beneficiaries are, therefore, vulnerable to cutbacks by suppliers. Nevertheless, hospital discharge planners we interviewed said they can still arrange appropriate home oxygen equipment for most patients. In addition, we were told that, in general, the limitations on the availability of certain types of equipment that exist now were present before the payment reductions. Also, although there has been about a 6.5-percent decrease in the number of Medicare home oxygen suppliers, most Medicare patients can still choose from among competing firms. The full range of oxygen modalities continues to be available to Medicare beneficiaries, according to the Medicare claims reports, although oxygen concentrators predominate as the system most commonly provided for home oxygen. As the technology of concentrators continues to improve, oxygen concentrators have been slowly replacing stationary liquid systems. This trend is observed in the aggregate data, which show that claims for liquid stationary systems declined by approximately 12 percent between the first half of 1997 and the first half of 1998. During the same period, the use of portable liquid oxygen systems declined by 11 percent, even though the use of portable systems rose overall. (See table 1.) Another indication that home oxygen access has not been impaired is that the oxygen supplier assignment rates for all modalities have remained relatively unchanged since the 1998 payment reduction. In fact, the claims data show that assignment rates for home oxygen increased slightly between the first half of 1997 and the first half of 1998, leading us to conclude that the suppliers are willing to furnish home oxygen equipment and services even at the reduced rates. Although claims data for the first half of 1998 are not final, our claims data analysis from prior periods indicates that use rates established from preliminary data closely approximate the final results. However, subtle shifts in the kinds of oxygen equipment provided are not evident in aggregate claims data. For example, claims data do not identify the types of portable tanks provided to beneficiaries. Therefore, it is not possible to determine from the claims data how many beneficiaries are receiving lightweight portable tanks and how many are using the cart-mounted E tanks. Similarly, claims data do not indicate the number of refills provided to patients each month, so we could not determine if the frequency of tank refills has changed since the rate reduction. Overall, we found no evidence that home oxygen patients who are more expensive or difficult to serve—such as those who live in rural areas, need lightweight portable equipment, or require high-liter-flow systems—were adversely affected by the payment cuts. In response to the substantial payment reductions, suppliers could have been expected to try to reduce costs, making these higher-cost patients more vulnerable to treatment changes. Although we looked for indications that suppliers had refused to serve these special needs patients, limited the types of equipment made available, or reduced service levels, our interviews with suppliers, discharge planners, patient advocates, and physicians indicated that most Medicare beneficiaries continued to have access to appropriate equipment options. The only indication of access problems that we found occurred in Anchorage, Alaska, where pulmonary clinicians stated that liquid systems are no longer available on assignment to their Medicare patients. Beneficiaries in rural areas have always faced restrictions on home oxygen options, but their access, according to hospital discharge planners we interviewed, appears unchanged. These beneficiaries are more expensive to serve because they are farther from suppliers’ facilities and distances between patients are greater. Suppliers who serve patients in remote areas informed us that it is difficult to support the full range of equipment options because of such factors as vast distances, poor road conditions, and unpredictable weather but that this situation existed before the 1998 payment reductions. Several suppliers told us that they generally cannot provide liquid oxygen to people who live 40 to 60 miles from their facility.