Most Medicare beneficiaries elect to enroll in Part B insurance, which helps pay for certain physician, outpatient hospital, laboratory, and other services; DME, such as oxygen, wheelchairs, hospital beds, and walkers; prosthetics and orthotics; and certain supplies. Medicare, under Part B, pays for most DMEPOS based on a series of state-specific or regional- specific fee schedules. Under the schedules, Medicare pays 80 percent, and the beneficiary pays the balance, of either the actual charge submitted by the supplier or the fee schedule amount, whichever is less. To review and process DMEPOS claims, CMS contracts with four insurance companies, known as DME regional carriers. The DME regional carriers review and pay DMEPOS claims submitted by outpatient providers and suppliers on behalf of beneficiaries residing in specific regions of the country. CMS contracts with Palmetto Government Benefits Administrators to serve as the National Supplier Clearinghouse. In fiscal year 2004, NSC received $11.4 million for these activities, and for fiscal year 2005, its approved budget was $11.5 million. Palmetto also serves as the DME regional carrier for Region C. In addition, Palmetto serves as the Statistical Analysis Durable Medical Equipment Regional Carrier, which analyzes claims and reports to the DME regional carriers and CMS on trends in DMEPOS payment and areas of potential fraud. Medicare’s 21 supplier standards were introduced primarily to deter individuals intent on committing fraud from entering the program and to safeguard Medicare beneficiaries by ensuring that suppliers were qualified. The 21 standards apply to a variety of business practices and establish certain requirements. (See app. II for a list of the 21 standards.) For example, the standards require suppliers to have a physical facility on an appropriate site that is accessible to beneficiaries and to CMS, with stated business hours clearly posted. CMS established the requirement for having an appropriate physical facility in December 2000 after investigators discovered fraudulent suppliers without fixed locations claiming vans or station wagons as their place of business or using mail drop boxes to receive Medicare payments for items they billed but never delivered. Among other things, the standards also require suppliers to: comply with applicable federal and state regulatory requirements, including state licensure, when providing DMEPOS items or services; maintain inventory on site or off site, or available through valid contracts with other companies not excluded from doing business with the federal government or its health care programs; and obtain comprehensive liability insurance. The 21 supplier standards also prohibit certain practices. For example, one standard generally prohibits suppliers from using telephone calls to solicit new business, because the Social Security Act prohibits this type of marketing to Medicare beneficiaries. NSC verifies compliance with the supplier standards primarily during enrollment and reenrollment, through on-site inspections and desk reviews conducted by NSC analysts. (App. II lists the standards and how NSC verifies them during enrollment and reenrollment.) For example, the on-site inspections are used to check the compliance with the standards for whether the supplier: has a physical facility on an appropriate site that is accessible to beneficiaries and to CMS, with a clearly visible sign with hours posted; has its own inventory in stock on site, off site at another location, or has a contract with another company for the purchase of inventory; maintains records that document delivery of items to beneficiaries and information provided to beneficiaries on warranties, including how repairs and exchanges will be handled, and how to contact the supplier in case of questions or problems; and has a written beneficiary complaint resolution policy and maintains records on beneficiary complaints and their resolution. NSC’s analysts are expected to follow procedures to review information provided by the on-site inspection and take other steps to verify suppliers’ compliance with the standards. For example, when on site the inspectors are expected to check that the supplier has all the valid occupation and business licenses required by its state and has a comprehensive liability insurance policy. The NSC analyst is expected to check that the supplier has all the state licenses that it would need to provide the items it disclosed in its application. The NSC analyst also is expected to contact the insurance underwriter to ensure that the supplier’s policy is valid, and the post office to make sure the supplier’s address is listed. NSC also has a procedure to match data from its supplier database with computerized lists maintained by the federal government to ensure that supply company owners are not prohibited from participating in federal health care programs or debarred from federal contracting. NSC does not specifically verify adherence to 4 of the 21 standards at enrollment and reenrollment, because violations would generally be apparent through its verification of other standards. For example, the standard that requires suppliers to furnish NSC with complete and accurate information on the application and notify NSC of any changes within 30 days is verified through checking the accuracy of the suppliers’ disclosures of information for other standards—such as ownership and the appropriateness of the physical facility. The majority of on-site inspections are conducted by more than 380 field representatives of Overland Solutions, Inc. (OSI), a company that performs this work as a subcontractor to NSC. In addition, NSC uses its own personnel, who are located in six cities, to conduct on-site inspections. NSC and OSI conducted over 20,000 on-site inspections in fiscal year 2004. In performing their reviews, the site inspectors follow certain procedures. NSC requires that site inspectors arrive unannounced for any inspection. Before the inspection, NSC provides the inspectors with briefing information on the supplier, including information on whether the supplier is enrolling or reenrolling and the type of state licenses to verify. While on site, inspectors are expected to take photographs of the supplier’s sign with its business name, posted hours of operation, complete inventory in stock, and facility. NSC also expects site inspectors to obtain copies of relevant documents, such as state licenses, comprehensive liability insurance, contracts with companies for inventory, and contracts for the service and maintenance of DME. As long as suppliers can demonstrate that they comply with the standards and have not been excluded from participating in any federal health care program, NSC must enroll or reenroll them in Medicare. Enrolled suppliers are issued a Medicare billing number. If NSC discovers that a new applicant or enrolled supplier is not in compliance with any of the 21 supplier standards, NSC can deny the application or, with CMS’s approval, revoke the supplier’s billing number. Suppliers whose applications have been denied or whose numbers have been revoked can submit a plan to NSC to correct the noncompliance or appeal the denial or revocation by requesting a hearing or both. If a supplier requests a hearing, the first level of appeal is conducted by a carrier hearing officer who was not involved in the original determination. The supplier can submit new information to address the compliance problems identified by NSC. If dissatisfied with the carrier hearing officer’s ruling, either NSC or the supplier can request a review by an administrative law judge, which became the second level of appeal as of December 8, 2004. Prior to that date, second level appeal hearings were conducted by a CMS review official. At both levels of the hearing process, if the supplier can demonstrate that it is currently in compliance with the standards, the supplier will be given a billing number. NSC’s Supplier Audit and Compliance Unit (SACU) also has responsibility to help verify suppliers’ compliance with the 21 standards and identify fraudulent activity. The SACU supervises NSC’s site inspectors and oversees the OSI on-site inspections. It also analyzes supplier billing and enrollment patterns. Based on billing or other irregularities, the SACU can help NSC identify suppliers for additional on-site inspections. For example, the SACU might discover that several new suppliers are owned by the same individuals as other companies that are under investigation for fraudulent billing. Based on this information, the SACU could target the new suppliers for additional on-site inspections or refer the suppliers for investigation by federal law enforcement, such as the OIG and the Federal Bureau of Investigation (FBI). NSC’s verification procedures have weaknesses that leave the Medicare program without assurance that suppliers billing the program are meeting the 21 standards, and thus, are qualified and legitimate. NSC’s procedures to verify state licenses have gaps that have allowed suppliers to be paid for DMEPOS items they are not licensed to supply in their states. In part, this is because CMS has not set requirements for a stronger licensure verification effort. Further, although on-site inspections play a key role in verifying suppliers’ compliance with the 21 standards, we estimate that NSC did not conduct more than 600 required on-site inspections and its inspection procedures have limitations. NSC does not have an effective means of identifying suppliers that violate the standard to have appropriate state licensure for the items they provide to beneficiaries. This is partly because CMS’s requirements are inadequate to assure an effective process and partly because NSC does not have effective procedures that are consistently followed. To determine whether it needs to verify a supplier’s license, NSC relies on the information the supplier provides—in enrollment or reenrollment applications—regarding the items or services the supplier intends to provide to Medicare beneficiaries. Suppliers are required to certify on their applications that they will notify CMS of any changes to the information they provided on the form. However, if the supplier fills out the application incorrectly or dishonestly and does not provide a license during an on-site inspection, NSC would not verify whether the supplier has all the licenses needed in its state. We also found that NSC did not consistently resolve discrepancies or omissions in the information provided by suppliers— such as not forwarding a copy of a needed state license–-before issuing suppliers billing numbers.