The Medicare Supplementary Medical Insurance Program (Part B) currently covers a wide variety of durable medical equipment, prosthetics, orthotics, and other medical supplies (DMEPOS) if they are medically necessary and are prescribed by a physician. Medicare beneficiaries who are prescribed an item of DMEPOS obtain it from a DMEPOS supplier, who then bills Medicare for reimbursement. Durable medical equipment (DME) is equipment that (1) can withstand repeated use, (2) has an expected life of at least three years (effective with respect to items classified as DME after January 1, 2012), (3) is used to serve a medical purpose, (4) generally is not useful in the absence of an illness or injury, and (5) is appropriate for use in the home. Examples include hospital beds, blood glucose monitors, and wheelchairs. The benefit also includes related supplies, such as drugs and biologicals that are necessary for effective use of the product. Prosthetics (P) replace all or part of a body organ, such as colostomy bags, pacemakers, and breast prostheses for post-mastectomy patients. Orthotics (O) are artificial or mechanical aids, such as braces, to prevent or assist movement of weak or injured joints or muscles, and include leg, arm, back, and neck braces. Medicare also covers some items or supplies (S), such as disposable surgical dressings when used in conjunction with DMEPOS. According to the National Health Expenditure Accounts, Medicare spending on DME in CY2011 represented 20% of all spending on DME; over half of DME spending (55%) is paid out-of pocket. Medicare Part B program expenditures for DMEPOS were $7.8 billion in CY2011. There were approximately 98,000 active DMEPOS suppliers in the United States in May 2012; approximately half of those suppliers (50,000) had total allowed Medicare payments of greater than $10,000 between May 2011 and May 2012. Approximately one in three beneficiaries uses DMEPOS in a given year. Medicare generally pays for most DMEPOS on the basis of fee schedules. A fee schedule is a list of Medicare payments for specific items and services, which are calculated according to statutorily specified formula and take into account the actual amount of care (or items) provided. Medicare pays 80% of the fee schedule amount, while the beneficiary is responsible for paying the remaining 20% (co-insurance), in addition to any unmet deductible. Unless otherwise specified by Congress, fee schedule amounts are updated each year by a measure of price inflation and economy-wide productivity. However, investigations by the Government Accountability Office (GAO) and the Office of the Inspector General (OIG) in the Department of Health and Human Services (HHS) have shown that Medicare pays above-market prices for certain items of DME. Such overpayments may be due partly to the fee schedule mechanism of payment, which does not reflect market changes, such as new and less-expensive technologies, changes in production or supplier costs, or variations in prices in comparable localities. The Medicare program and beneficiaries are disadvantaged when Medicare pays above-market prices for DMEPOS. First, the higher payments result in an otherwise greater amount of Part B (Supplementary Medical Insurance) program payments, which are financed primarily through general tax revenues and beneficiary premiums. Second, the beneficiaries who use DMEPOS pay more; though the proportion of co-insurance paid by beneficiaries remains at 20%, the higher fee schedule payment means the beneficiary co-insurance results in a higher dollar amount. Third, the payment differential between market prices and Medicare payments for DMEPOS make fraud "particularly lucrative, further attracting bad actors to the system." However, legitimate Medicare participating suppliers and DMEPOS manufacturers are advantaged by the higher Medicare prices, which may, in part, enable less efficiently run businesses to remain in business. Following competitive bidding demonstrations required by the Balanced Budget Act of 1997 ( P.L. 105-33 , BBA 97), the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ( P.L. 108-173 , MMA) required the Secretary of HHS to establish a competitive acquisition program (also known as competitive bidding) under which prices for selected DMEPOS sold in specified areas would be determined not by a fee schedule, but by suppliers' bids. A bid represents the amount a DMEPOS supplier is willing to accept to provide specified items or services to a Medicare beneficiary. The first round of the competitive bidding program began on July 1, 2008, but was suspended, contracts dissolved, and a rebid required due to implementation concerns. Between October and December 2009, DMEPOS suppliers submitted new bids for nine categories of equipment in nine competitive bidding areas; payments based on the bids of winning suppliers went into effect on January 1, 2011 (referred to in this report as Round 1 Rebid). Payment amounts based on Round 2 of competitive bidding are scheduled to take effect in 91 additional metropolitan areas on July 1, 2013, for a slightly modified set of nine equipment categories; Round 2 also includes a competition for mail order diabetic testing supplies, which applies to the entire nation. Because the contracts signed with winning bidders are limited to three years, the process to "Recompete" for the contracts in Round 1 areas has already started. Payments based on the re-compete are expected to go into effect on January 1, 2014. This report describes the DMEPOS competitive bidding program, including how winning bidders are chosen and how payments for equipment are determined. It summarizes evaluations of the first round of the program. Finally, it discusses issues for congress and recently introduced legislation. The text box below provides a brief legislative history; a more detailed legislative history can be found in the Appendix . This section describes the statutory and regulatory requirements of where competitive bidding takes place, what items are included (or excluded), how winning bidders are determined, and how the payments for the competitively bid items (single payment amounts) are determined. It includes a discussion of the concerns of small suppliers. Often the authorizing statutes for the competitive bidding program are broad, allowing or requiring the Secretary to determine the specific policies under this program. The statutes require the Secretary to establish and implement the DMEPOS competitive bidding program and specify a phase-in schedule, and areas to be excluded from competition. Round 1 was originally to take place in 10 of the largest metropolitan statistical areas (MSAs) based on a competition in 2007, but the law was later amended to require the competition to take place in nine MSAs in 2009 (in what is referred to as the Round 1 Rebid). Round 2 was originally to take place in 80 areas in 2009, but was later expanded to 91 additional areas for a competition in 2011. The statutes also require a national mail order competition is to take place after 2010. The Secretary is required to extend the program or apply competitively bid rates to remaining areas by 2016. The Secretary is required to exclude certain areas from competition before 2015: (1) rural areas, (2) MSAs not selected for Round 1 or Round 2 with a population of less than 250,000, and (3) areas with low population density within an MSA that is otherwise selected. The Secretary is allowed to subdivide MSAs of greater than 8 million people into separate DMEPOS competitive bidding markets. The statutes, otherwise, give the Secretary authority to determine competitive bidding areas. The Secretary described the methodology to be used to implement the competitive bidding program (including the choice of competitive bidding areas) in a final rule published on April 10, 2007. Competitive Bidding Areas (CBAs) for Round 1 were determined through a multi-step process. First, the 50 MSAs with the largest population were identified. Second, of those MSAs, the 25 with the highest DMEPOS allowed charges in CY2004 were identified and retained for consideration. Third, a score was calculated for each of the 25 MSAs based on (1) DMEPOS charges per Medicare beneficiary, and (2) the number of suppliers per Medicare beneficiary receiving an item of DMEPOS, with equal weight being given to each factor. The MSAs were ranked according to that score. Fourth, the three largest MSAs by population size were eliminated from consideration for the first round of the program due to the complexity of implementing the program in such large areas. Fifth, MSAs in areas served by two DME Medicare Administrative Contractors (DME MACs) were excluded, also due to complexity. Sixth, the top MSAs were selected to be CBAs as long as no state had more than two CBAs. Table 1 shows the Round 1 areas. According to the final rule, the process for identifying Round 2 areas was substantially the same. The scoring criteria were the same; however, more recent data were used. Also, the three largest MSAs and MSAs that cross the DME MAC boundaries were not excluded. Round 2 areas are shown in Table 2 . The statute did not require the boundaries of a CBA to be the same as that of the MSA. CMS could add counties, parishes, or zip codes outside of an MSA to the CBA if all of the following applied: (1) the area was contiguous to the MSA; (2) the area was not otherwise a part of a different CBA; (3) the area was competitive as evidenced by high use of DMEPOS, significant expenditures, or a large number of suppliers; and (4) the area was part of the normal market area for the DMEPOS suppliers. The final rule did not identify the boundaries of the CBAs, but that information is available on the implementation contractor's website. The final rule also established a nationwide mail order competitive bidding program.