Many individuals suffering from advanced chronic obstructive pulmonary disease or certain other respiratory and cardiac conditions are unable to meet their bodies’ oxygen needs through normal breathing. Supplemental oxygen has been clinically shown to assist many of these patients. Medicare’s eligibility criteria for the home oxygen benefit are quite specific. Patients must have (1) an appropriate diagnosis, such as chronic obstructive pulmonary disease; (2) clinical tests documenting reduced levels of oxygen in the blood; and (3) a certificate of medical necessity, signed by a physician, prescribing the volume of supplemental oxygen required in liters per minute and documenting whether the patient needs a portable unit in addition to a home-based stationary unit. Physicians can prescribe a specific type of oxygen system on the certificate of medical necessity, or they can allow the oxygen supplier to decide which type of system best meets a patient’s needs. Currently, there are three methods, or modalities, through which patients can obtain supplemental oxygen: compressed gas, which is available in various sized tanks, from large stationary cylinders to small portable cylinders; oxygen concentrators, which are electrically operated machines about the size of a dehumidifier that extract oxygen from room air; and liquid oxygen, which is available in large stationary reservoirs and portable units. For most patients, each of the three modalities—compressed gas, liquid oxygen, and oxygen concentrator—is clinically equally effective for use as a stationary unit. However, liquid oxygen is most often prescribed for the small proportion of patients that require a very high oxygen liter flow. As shown in table 1, over the past 10 years the use of oxygen concentrators has increased substantially, and the use of compressed gas as the primary, home-based unit is now negligible. At the time of our review, the monthly Medicare fee schedule allowance for a stationary oxygen system was about $285, and it is currently about $300. Medicare pays 80 percent of the allowance, and the patient is responsible for the remaining 20 percent. The Medicare allowance covers use of the equipment; all refills of gas or liquid oxygen; supplies such as tubing; a backup unit, if provided, for patients using a concentrator; and services such as patient assessments, equipment setup, training for patients and caregivers, periodic maintenance, and repairs. In addition to a stationary unit for use in the home, about 75 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 tank set on a small cart that can be pulled by the user. Highly active individuals who spend a great deal of time outside the home may use a portable liquid oxygen cylinder or a lightweight gas cylinder, both of which can be carried in a backpack or shoulder bag. These units may be used with an oxygen conserving device to increase the amount of time a single cylinder can be used. The Medicare monthly allowance for portable equipment is currently about $48, regardless of the type of unit. For the period we reviewed, the allowance was about $45. The Balanced Budget Act of 1997 reduced Medicare reimbursement rates for home oxygen by 25 percent effective January 1, 1998, and by an additional 5 percent effective January 1, 1999. Thereafter, the Medicare rates are to be frozen through 2002. The act also requires the Secretary of HHS to undertake a 3-year competitive bidding demonstration project for home oxygen, to be completed by December 31, 2002. Medicare’s monthly fee schedule allowances for home oxygen are much higher than the rates VA pays. As shown in table 2, during the first quarter of fiscal year 1996, Medicare’s monthly fee schedule allowance averaged $320 per patient, including an allowance for a portable unit for the 75 percent of Medicare patients that obtain portables. VA’s average monthly payment, based on all costs for a sample of 5,000 VA patients, was $155. After adding a 30-percent adjustment to VA payments to account for the higher costs associated with servicing Medicare patients, the average VA monthly payment was $200, or almost 38 percent less than Medicare’s allowance of $320. In comparing Medicare and VA payments, we carefully considered all factors that could account for differences in the costs of servicing the two patient groups. Such factors could include clinical characteristics of each patient population as well as differences in how the two programs are administered. Regarding clinical differences, Medicare and VA patients with pulmonary insufficiency must meet the same medical eligibility criteria for home oxygen, and clinical experts and suppliers told us that the home oxygen needs of the two patient groups are essentially the same. We excluded from our analysis the small number of VA patients who were receiving home oxygen for conditions other than pulmonary insufficiency, such as cluster headaches. Utilization patterns for stationary equipment were remarkably similar. Of the 5,000 VA patients in our nationwide sample, about 84 percent used an oxygen concentrator, and 16 percent used stationary liquid oxygen systems. Among Medicare beneficiaries nationwide, 86 percent used oxygen concentrators. In contrast, program differences do affect the costs suppliers incur when serving VA patients, and our analysis included an adjustment to reflect those factors before we compared VA and Medicare’s payment rates. The upcoming reductions in the modality-neutral Medicare payment rates have raised concerns that Medicare patients will have less access to (1) stationary liquid systems, from which patients can refill portables; (2) refills of gas or liquid portable units for patients that have concentrators; and (3) new lightweight, but more expensive, portable systems. In response to these concerns, some groups have proposed changes to Medicare’s modality-neutral payment system. Although stationary liquid oxygen systems are more expensive than concentrators, they enable highly mobile patients to refill their portable liquid units from their stationary reservoirs. This provides these patients greater autonomy and requires suppliers to make fewer deliveries of replacement tanks than are needed for patients using concentrators along with portable compressed gas tanks. The Medicare fee schedule allowance is the same for both stationary liquid systems and concentrators—about $285 per month during the first quarter of fiscal year 1996. During the same period, monthly VA payments averaged about $125 for patients with concentrators and $315 for patients with stationary liquid systems. Yet about 15 percent of both Medicare and VA patients had liquid stationary systems, an indication that the Medicare modality-neutral rates then in effect did not restrict patient access to liquid systems. The upcoming reduction in Medicare payment rates, however, could lead some suppliers to shore up their profits by offering only oxygen concentrators for stationary systems, which would also reduce access to liquid portable refills from stationary units. Most Medicare suppliers now provide relatively few stationary liquid systems or none at all. Of about 6,500 Medicare home oxygen suppliers, about 82 percent obtained 5 percent or less of their Medicare revenues from stationary liquid oxygen systems. Furthermore, almost 25 percent of oxygen suppliers received virtually all of their Medicare revenue from oxygen concentrators. Providing only concentrators allows these suppliers to maximize their profits by avoiding the higher costs associated with stationary liquid as well as with portable units. (Medicare considers the monthly fee for the stationary unit to cover supplies and services for portable units, so providing portable units costs suppliers more.) Since VA acquires home oxygen services under a fee-for-service payment system, VA can ensure that its patients have access to stationary liquid oxygen systems by paying more for them. In addition, VA doctors prescribe the type of system that they feel is most appropriate for their patients. Physicians with Medicare patients can help ensure that they obtain access to the type of oxygen delivery system they need by specifying on the certificate of medical necessity the oxygen delivery system that should be supplied. However, some physicians allow the supplier to decide. Our study included an analysis of the number of Medicare and VA patients that were provided portable units. Even though Medicare paid higher monthly fees to oxygen suppliers than VA, only about 75 percent of Medicare beneficiaries using home oxygen had portable units, while about 97 percent of the VA patients in our sample had portable units. About 1,500 suppliers, or almost 25 percent of all Medicare home oxygen suppliers, provided portable units to no more than 10 percent of their Medicare patients—far below the portable utilization rate of about 75 percent among all Medicare home oxygen beneficiaries. Among patients using compressed gas portable systems, VA patients in our sample obtained about four cylinders per month, while Medicare beneficiaries whose records we reviewed received about two cylinders per month. On the basis of these data, we determined that the lower VA payment rates did not result in less access to portable units or refills. Pulmonary specialists frequently recommend that their patients get as much exercise as possible. Clinicians point out that an overall respiratory therapy regime that includes exercise may slow the deterioration associated with pulmonary insufficiency. According to some experts, an effective exercise program requires portable systems that are lighter and less cumbersome—but more expensive—than the common compressed gas E tanks that are pulled on a small cart. Currently available alternatives are portable liquid oxygen units, which can be refilled from stationary reservoirs at home, or lightweight aluminum gas cylinders, both of which may be used with an oxygen conserving device. Both of these portable systems are small and light enough to be carried in a backpack or shoulder bag, but they are more expensive than the traditional cart-mounted E tanks. Medicare claims data show that of the 363,000 Medicare patients with portable oxygen units in fiscal year 1996, almost 75,000, or about 21 percent, had portable liquid oxygen cylinders. Medicare claims do not identify how many patients with portable gas systems had the traditional E tank or the smaller, lightweight cylinders. Our review of about 550 Medicare patient records indicated that only about 8 percent had lightweight tanks. The National Association for Medical Direction of Respiratory Care has proposed retaining Medicare’s modality-neutral payment for stationary systems but establishing two reimbursement rates for portable units—a lower rate for traditional E tanks and a higher rate for lightweight portable cylinders, which the Association describes as an ambulatory system. The Association proposes that prescribing physicians decide which type of portable system is most suitable for their patients.