[Federal Register Volume 65, Number 197 (Wednesday, October 11, 2000)]
[Rules and Regulations]
[Pages 60366-60378]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25495]



[[Page 60366]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 424

[HCFA-6004-FC]
RIN 0938-AH19


Medicare Program; Additional Supplier Standards.

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule with comment period.

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SUMMARY: This final rule establishes additional standards for an entity 
to qualify as a Medicare supplier for purposes of submitting claims and 
receiving payment for durable medical equipment, prosthetics, 
orthotics, and supplies (DMEPOS). These regulations will ensure that 
suppliers of DMEPOS are qualified to provide the appropriate health 
care services and will help safeguard the Medicare program and its 
beneficiaries from any instances of fraudulent or abusive billing 
practices.

DATES: Effective Date: These regulations are effective on December 11, 
2000.
    Comment Date: We will accept comments on the policies discussed in 
section IV of the Supplementary Information section of this document. 
Comments will be considered if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on December 11, 2000.

ADDRESSES: Mail an original and 3 copies of written comments to the 
following address only:

Health Care Financing Administration, Department of Health and Human 
Services, Attention: 6004-FC, P.O. Box 8013, Baltimore, MD 21244-8013
Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, D.C. 20201, or
Room C5-16-03, 7500 Security Boulevard, Baltimore, Maryland 21244-1850.

    To ensure that mailed comments are received in time for us to 
consider them, please allow for possible delays in delivering them.
    Comments mailed to the above addresses may be delayed and received 
too late for us to consider them.
    Because of staff and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-6004-FC. Comments received timely will be available 
for public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 443-G of 
the Department's office at 200 Independence Avenue, SW., Washington, 
DC, on Monday through Friday of each week from 8:30 to 5 p.m. (phone: 
(202) 690-7890).

FOR FURTHER INFORMATION CONTACT: Charles Waldhauser, (410) 786-6140.

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I. Background

A. General

    Medicare services are furnished by two types of entities, providers 
and suppliers. The term ``provider'', as defined in our regulations at 
42 CFR 400.202, means a hospital, a critical access hospital, a skilled 
nursing facility, a comprehensive outpatient rehabilitation facility, a 
home health agency, or a hospice, that has in effect an agreement to 
participate in Medicare. A clinic, a rehabilitation agency, or a public 
health agency that has in effect a similar agreement but only to 
furnish outpatient physical therapy or speech pathology services, or a 
community mental health center with a similar agreement to furnish 
partial hospitalization services, is also considered a provider (see 
sections 1861(u) and 1866(e) of the Social Security Act (the Act) 
concerning definitions and provider agreements, respectively).
    Generally, a Medicare ``supplier'' is an individual or entity that 
furnishes certain types of medical and other health items and services 
under Medicare Part B. There are different types of suppliers and thus, 
different definitions of the term ``supplier,'' as well as specific 
regulations governing the different types of suppliers. A supplier that 
furnishes durable medical equipment, prosthetics, orthotics, and 
supplies (DMEPOS) is one category of supplier known as a DMEPOS 
supplier.
    In current regulations at Sec. 424.57(a) concerning payment rules 
for items furnished by DMEPOS suppliers, we define the term 
``supplier'' as an entity or individual, including a physician or Part 
A provider, that sells or rents Part B covered items to Medicare 
beneficiaries, and that meets certain standards. The Part B covered 
items to which the definition refers are DMEPOS.

B. Legislative History

    Section 131 of the Social Security Act Amendments of 1994 (Public 
Law 103-432, enacted on October 31, 1994) made changes to section 1834 
of the Act, ``Special Payment Rules for Particular Items and 
Services.'' Specifically, it added a new subsection (j) to section 1834 
of the Act that established additional requirements that a DMEPOS 
supplier must meet in order to obtain a supplier number. (A ``supplier 
number'' is the equivalent of a ``billing number'' that a supplier must 
have in order to submit claims and receive payment for items and 
services furnished under Medicare.) In section 1834(j)(1)(B)(ii)(IV) of 
the Act, the Congress also expressly delegated authority to the 
Secretary to specify any other requirements that a supplier must meet.

II. Provisions of the Proposed Regulations

    On January 20, 1998, we published in the Federal Register (63 FR 
2926) a proposed rule that would require DMEPOS suppliers to meet 
additional standards in order to submit claims and receive payment. We 
issued the proposal on the basis of section 1834(j)(1)(B)(ii)(IV) of 
the Act that authorizes the Secretary to specify additional 
requirements a DMEPOS supplier must meet. We note that we consulted 
with representatives of medical equipment and supply companies, 
carriers, and consumers before issuing the proposal.
    As we stated in the proposed rule, we believe it was the Congress' 
intent in enacting section 131 of the Social Security Act Amendments of 
1994 to

[[Page 60367]]

strengthen existing standards in order to protect the public interest. 
We also stated our belief that the additional standards we proposed 
would help safeguard the Medicare program and would serve to protect 
beneficiaries.
    The major provisions of the proposed rule are as follows:

A. Specific Requirements for Supplier Standards

    We proposed changes to clarify our current policy concerning 
certification and recertification for DMEPOS. Specifically, we proposed 
that in order to obtain a supplier number, a supplier must complete an 
application certifying that it meets the supplier standards found in 
Sec. 424.57(c). Additionally, we proposed that when renewing an 
application for a DMEPOS supplier billing number, a supplier must 
recertify that it meets all of the supplier standards.
    We proposed new standards and revisions to existing standards 
relating to the following subject areas:
     Compliance with Medicare statutory provisions and 
applicable regulations.
     Compliance with applicable Federal and State licensure and 
regulatory requirements.
     Misrepresentation of facts.
     Signature used on a supplier number application.
     Providing requested information and documentation.
     Scope of exclusions.
     Rental or purchase option.
     Warranties.
     Delivery.
     Reassignment of supplier numbers.
     Physical facility.
     Business telephone.
     Liability insurance.
     Telemarketing.
     Prescription drugs.

B. Additional Revisions

    We also proposed to require that DMEPOS suppliers obtain a surety 
bond. We based this requirement on section 1834(a)(16) of the Act which 
requires DME suppliers to provide the Secretary, on a continuing basis, 
with a surety bond. We requested comments on the advisability of 
exercising this authority to impose a surety bond on all suppliers of 
prosthetics, orthotics, and supplies to the same extent as required for 
suppliers of durable medical equipment.

III. Analysis of and Responses to Public Comments

    We received 120 comments on the proposed rule primarily from 
suppliers of DMEPOS and organizations representing various types of 
DMEPOS suppliers. A summary of the comments and our responses to them 
follow.

A. Payment Rules (Proposed Sec. 424.57(b))

    Comment: One commenter requested that an exception be granted to 
the effective date provision in a change of ownership situation. The 
commenter was referring to the statement in the proposed rule that 
Medicare will not pay for any Medicare covered items provided by a 
DMEPOS supplier prior to the date HCFA issues a DMEPOS supplier number. 
The commenter suggested that in the case of a change of ownership, 
Medicare should pay for covered services as of the date of acquisition.
    Response: We are aware of the change of ownership issue. However, 
at this time we are not prepared to include a change of ownership 
provision in this final regulation. We plan to address change of 
ownership issues in a separate rulemaking.
    Comment: One commenter stated that a supplier should not receive 
multiple billing numbers for the same physical location, regardless of 
how many tax ID numbers they possess.
    Response: This suggestion is problematic, in that the Internal 
Revenue Service (IRS) Employer Identification Number (EIN) is the basic 
identification number that we use to distinguish between suppliers. 
Suppliers also may obtain multiple EINs for different lines of 
business.
    We note that section 1834(j)(1)(D) of the Act states that ``The 
Secretary may not issue more than one supplier number to any supplier 
of medical equipment and supplies unless the issuance of more than one 
number is appropriate to identify subsidiary or regional entities under 
the supplier's ownership or control.'' Therefore, we encourage 
suppliers to request only one supplier number per physical location. 
However, we are not prepared at this time to forbid multiple billing 
numbers based on multiple EINs if we can establish through a site visit 
or other means that clearly distinct lines of business are being 
conducted at a location. In this final rule, we are adding a new 
paragraph (b)(1) to Sec. 424.57 to require suppliers to enroll separate 
physical locations, other than warehouses or repair facilities.

B. Supplier Standards (Proposed Sec. 424.57(c))

1. General
    Comment: One commenter suggested that we require immediate 
recertification of all suppliers based on the new standards.
    Response: This would create a heavy administrative burden on both 
HCFA and the suppliers. As we stated in the proposed rule, we will not 
require all DMEPOS suppliers to submit new applications for billing 
numbers on the date this regulation becomes effective, but will require 
DMEPOS suppliers to submit new applications as the old numbers expire. 
Although we may not routinely check to determine the compliance of 
current suppliers with new standards, it is important to note that as 
of the effective date of this regulation, December 11, 2000, all DMEPOS 
suppliers must comply with these standards. We may perform random or 
focused reviews of previously enrolled suppliers to determine their 
compliance with the new standards. We may revoke a supplier number if 
we find evidence that the standards are not satisfied.
    Comment: One commenter stated that physicians should be exempt from 
supplier standards because they have to meet similar standards in order 
to be licensed.
    Response: While physicians are required to meet State licensing 
requirements, these may vary by State, and do not necessarily apply to 
physicians while they are functioning as suppliers. More importantly, 
standards are different for physicians than suppliers. Therefore, we 
decline to exempt physicians from the requirements.
2. Compliance With Medicare Statutory Provisions and Applicable 
Regulations (Proposed Sec. 424.57(c)(1))
    Comment: One commenter suggested that HCFA provide a list of the 
requirements that a supplier would need in order to comply with this 
standard.
    Response: We have not accepted this suggestion. The intent of this 
standard is to ensure that the supplier meets all Medicare requirements 
that may apply. The standard is essentially a restatement of section 
1834(j)(1)(B)(ii)(I) of the Act. We note that we do make extensive 
efforts to educate suppliers on the requirements they must meet through 
manuals, bulletins, seminars, and other means.
3. Compliance With Applicable Federal and State Licensure and 
Regulatory Requirements (Proposed Sec. 424.57(c)(2))
    Comment: One commenter stated the standard requiring that a 
supplier must operate its business and furnish Medicare covered items 
in compliance with all applicable Federal and State licensure and 
regulatory requirements is vague and excessive. Additionally, one

[[Page 60368]]

commenter stated that when Medicaid requirements are stricter than 
Medicare's, we should use the Medicaid requirements. One commenter also 
suggested that we allow no exceptions to State licensing requirements. 
One commenter recommended that consideration be given to waiving 
Federal standards where applicable State safeguards exist. The 
commenter added that complying with layers of rules adds confusion, 
cost, and diverts resources from clinical functions to administrative 
functions.
    Response: This requirement is merely a restatement of the law--see 
section 1834(j)(l)(B)(ii)(I) of the Act. While we agree with the 
philosophy of requiring suppliers to meet the highest possible 
standards, it would introduce an increased level of complexity and 
administrative burden on providers operating in more than one State to 
meet different requirements in different States in order for the 
supplier to bill Medicare. For this reason, we have declined to pursue 
this option. We will take under consideration the possibility of 
granting waivers, from parts of the National Supplier Clearinghouse 
(NSC) review process (for example, site visits), to suppliers who are 
certified or licensed by States with sufficiently stringent 
requirements. We intend to allow no exceptions to applicable State 
licensing requirements.
4. Misrepresentation of Facts (Proposed Sec. 424.57(c)(3))
    The proposed standard states that a supplier must not make, or 
cause to be made, any false statement or misrepresentation of a 
material fact on an application for a billing number. A supplier must 
provide complete and accurate information in response to questions on 
its application for a billing number. Any changes in information 
supplied on the application must be reported within 35 days of the 
change.
    Comment: One commenter stated that this standard needs further 
clarification. One commenter requested a definition of ``false 
statement'' and ``misrepresentation''. Also, one commenter suggested 
that the application form use simple, clear terminology to provide 
unambiguous guidance as to the information required.
    Response: This standard is now located at Sec. 424.57(c)(2). We are 
not providing definitions of the terms ``false statement'' and 
``misrepresentation''. These are not technical terms and carry the 
common meaning normally associated with them. We will continue to 
develop the application form to be as clear, simple and unambiguous as 
possible. We note that we are revising the time frame allowed to a 
supplier to report changes to the information supplied on the 
application form. We are changing the proposed ``35 days'' to ``30 
days'' to be consistent with the standard established through the 
application form. In addition to revocation of the billing number, if 
the supplier knowingly fills out the application incorrectly (for 
example, misrepresentation of facts or failure to report critical 
information) the supplier may be subject to civil and criminal 
penalties for submitting a false statement in connection with a health 
care matter.
5. Signature Used on a Supplier Number Application (Proposed 
Sec. 424.57(c)(4))
    Comment: One commenter suggested that HCFA should clarify that the 
signature does not have to be that of an officer of the company, but of 
a responsible official with first hand knowledge of the requirements 
listed on the application.
    Response: We have not changed the proposed language because we 
believe that the specificity suggested by the commenter is addressed in 
the instructions for the DMEPOS application form (Form HCFA-855S). This 
standard is now located at Sec. 424.57(c)(3). Those instructions 
specify that the application must be signed by an authorized 
representative of the supplier. An authorized representative is defined 
as ``The appointed official (for example, officer, chief executive 
officer, general partner, etc.) who has the authority to enroll the 
entity in Medicare or other Federal health care programs as well as to 
make changes and/or updates to the applicant's status, and to commit 
the corporation to Medicare or other Federal health care program laws 
and regulations.'' We believe this requirement protects the integrity 
of the supplier's information and makes the supplier accountable for 
its dealings with the Medicare program.
6. Providing Requested Information and Documentation (Proposed 
Sec. 424.57(c)(5)).
    This section, as published in the January 20, 1998 proposed rule, 
stated that a supplier must agree to furnish to HCFA all information or 
documentation HCFA requires, including--
     Information or documentation needed to process or 
adjudicate Medicare claims;
     Upon request, copies of contracts with third parties for 
furnishing Medicare covered items to Medicare beneficiaries;
     Upon request, documentation that it has advised 
beneficiaries that they may either rent or purchase inexpensive or 
routinely purchased equipment and about the purchase option for capped 
rental equipment;
     Upon request, documentation that it has advised Medicare 
beneficiaries about Medicare covered items covered under warranty;
     Upon request, documentation demonstrating that it has 
delivered Medicare covered items to Medicare beneficiaries;
     Upon request, documentation that it maintains and repairs 
directly, or through a service contract with another company, Medicare 
covered items rented to beneficiaries;
     Upon request, proof of liability insurance; and
     Any other information required by this or other Medicare 
requirements.
    Comment: Several commenters stated that the intent of the 
requirement to furnish copies of contracts (proposed 
Sec. 424.57(c)(5)(ii)) is unclear. Several commenters also objected to 
requiring Health Maintenance Organizations (HMO) and Managed Care 
Organizations (MCO) contracts. Many commenters stated that Medicare has 
no right to ``Most Favored Nation'' treatment. One commenter requested 
clarification of the requirement pertaining to contracts for the 
delivery of items.
    Response: Regarding the comments concerning copies of contracts 
with third parties for furnishing Medicare covered items to Medicare 
beneficiaries, we never intended to require information that would lead 
to ``Most Favored Nation'' treatment. (By ``Most Favored Nation'' 
treatment we believe the commenter is referring to a situation in which 
the seller gives the purchaser a better price than he or she gives any 
of the seller's other customers.) We think the commenter believes that 
we intend to gain special privileges for the Medicare program. We only 
expect assurance of the supplier's compliance with the provisions 
currently shown in Sec. 424.57(c)(6). Medicare pays based on the lower 
of the supplier's actual change or the fee schedule. We also do not 
require copies of HMO/MCO contracts. We have clarified this standard to 
require only copies of contracts that a supplier has with other 
entities that deliver supplies to Medicare beneficiaries on the 
supplier's behalf or that provide supplies to the supplier for use in 
providing items to Medicare beneficiaries. This would include 
arrangements for providing componentry. Note, however, that the 
standard in proposed Sec. 424.57(c)(3), requires a contract if the 
supplier has no

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inventory of its own. This standard is now located at 
Sec. 424.57(c)(4).
    Comment: Several commenters questioned the type of documentation 
required by HCFA and whether beneficiaries would have to sign the 
documents. A number of commenters suggested that we remove redundancy 
by including the documentation requirements in the specific standards 
to which they apply.
    Response: Neither the proposal nor this final rule specifies that 
the beneficiary has to sign documents under this requirement. As 
suggested by the commenters, we have moved most of the documentation 
requirements to the specific standards to which they apply, for clarity 
and to eliminate redundancy.
    Comment: With respect to the standard requiring documentation 
advising beneficiaries that they may either rent or purchase 
inexpensive or routinely purchased equipment, one commenter objected to 
additional documentation requirements and paperwork because most 
beneficiaries prefer to purchase inexpensive and routinely purchased 
equipment. The commenter believed that HCFA would increase the cost of 
processing claims if patients rented equipment up to the purchase 
price, when by physician order, other medical documentation, or 
expected length of need, one would anticipate usage beyond the months 
required to reach the purchase price. In addition, the standard would 
require that the purchase option for capped rental equipment must be 
given to the beneficiary and documented. The commenter stated that a 
conversation is usually held with the beneficiary at the time they 
receive a capped rental item, in order to ensure that they understand 
the equipment is owned by the supplier until such time as the purchase 
option is offered in the tenth month. At the tenth month, the purchase 
option letter is forwarded to the beneficiary, and suppliers 
customarily make every effort to communicate with the beneficiary with 
regard to the purchase or continued rental option. The commenter 
believed that this section of the standards is unnecessary because the 
purchase option letter should fulfill the need for this documentation.
    Response: We have not specified any additional documentation 
requirements and paperwork. A purchase option letter is one way to 
document compliance with this requirement. The requirements for the 
purchase option are spelled out in Sec. 414.229(d) of this part and in 
section 1834(a)(7)(A) of the Act. It is not the intent of this 
regulation to address the purchase option requirement other than to 
state that it must be met and documented.
    Comment: With respect to the standard requiring documentation 
advising beneficiaries about Medicare covered items covered under 
warranty, one commenter questioned whether the supplier has to obtain a 
signed statement to this effect from the beneficiary, pointing out that 
it would add to the cost of providing services to Medicare patients.
    Response: A signed statement by the beneficiary is not necessary to 
comply with this requirement. We will also consider other 
documentation, such as delivery logs and copies of warranty information 
provided to beneficiaries.
    Comment: With respect to the standard requiring documentation that 
the supplier has delivered Medicare covered items to Medicare 
beneficiaries, several commenters asked what is considered reasonable 
documentation for orthotic and prosthetic devices and services because 
there are no delivery slips as there are in DME.
    Response: We believe it is reasonable to require a receipt for 
delivery of an orthotic or prosthetic device if they are not routinely 
provided items.
    Comment: With respect to the standard requesting any other 
information required by this or other Medicare requirements, several 
commenters stated that this requirement needs limits, otherwise it will 
generate meaningless paper. Several commenters stated that we should 
follow the rules in 42 CFR 300 et. seq. concerning access to records 
and contracts between suppliers and subcontractors. One commenter 
stated that we cannot argue that we are entitled to greater access to 
information and documentation from Part B suppliers than from Part A 
suppliers' subcontractors. One commenter suggested that we add a 
requirement for telephone logs showing contacts with physicians, 
regarding physicians orders, and with beneficiaries and that we should 
require a list of delivery charges billed to Medicare or the 
beneficiary. One commenter stated that they had no objection to this 
requirement as long as the information required is referenced in the 
Medicare Carriers Manual and the DMERC supplier manual.
    Response: We concur with much of the comment and are clarifying 
this requirement. Specifically, we are requiring that a supplier must 
agree to furnish to HCFA any information required by this or other 
applicable Medicare statute and regulations. We believe the references 
to 42 CFR 300ff should have been to 42 CFR 420.304, which contain the 
procedures that the Department of Health and Human Services follows in 
obtaining access to books, documents, and records in order to verify 
the costs of subcontractor services to a Medicare supplier. Although 
the procedures are reasonable for the purposes to which they are 
addressed, we believe that the changes we have made are a reasonable 
accommodation to purposes addressed in this regulation.
    We disagree with the comment that we are not entitled to greater 
access to information from suppliers than from suppliers' 
subcontractors. The Congress specifically gave us authority with 
respect to DMEPOS suppliers in section 1834(j) of the Act.
    Although we consider the maintenance of telephone logs for 
physician and beneficiary contacts good business practice, we are not 
prepared at this time to mandate their use because there may be other 
means to satisfy the requirements. We also are not prepared to require 
information on delivery charges. We will consider referencing the 
information required in the suggested manuals.
7. Scope of exclusions (Proposed Sec. 424.57(c)(6))
    Comment: With regard to the standard prohibiting a supplier from 
contracting with entities excluded from the Medicare program, one 
commenter stated that it may be necessary to contract with excluded 
entities in some situations--for example, if there is limited 
availability. Several commenters stated that it is unreasonable to 
expect that health care suppliers be able to accurately avoid such 
entities. They have no source to obtain this information and would, 
therefore, have to rely solely on the word of the subcontractor, which 
might not be accurate. Therefore, such policing activity should be the 
responsibility of HCFA. One commenter questioned the impact this 
requirement would have on inventory on-hand and servicing items under 
warranty.
    Response: Information on excluded entities is available from the 
Government Printing Office and from the HHS Office of Inspector General 
(OIG). The OIG web site shows sanctioned entities. The web site address 
is: http//www.hhs.gov/progorg/oig/cumsan/index.htm. Allowing an 
excluded entity to contract with a Medicare supplier and indirectly 
receive Medicare funds because they are a source of items of limited 
availability would place the entity above the law because of this 
scarcity. We believe that the marketplace would soon adapt to fill this 
need, or that suppliers can be resourceful enough to find other

[[Page 60370]]

accommodations. We would also expect suppliers to take reasonable steps 
to determine if an entity with which they have a contractual 
arrangement is excluded or debarred. The standard is now located at 
Sec. 424.57(c)(4).
8. Rental or Purchase Option (Proposed Sec. 424.57(c)(7))
    Comment: One commenter suggested that we revise the standard 
stating that a supplier must advise beneficiaries that they may either 
rent or purchase inexpensive or routinely purchased equipment and of 
the purchase option for capped rentals. The commenter suggested that 
the standard give suppliers the discretion of making the decision on 
whether to rent or purchase based on the length of need estimated by 
the ordering physician. A related issue is that warranty information 
should be provided to beneficiaries at the time the title to an item 
transfers. Including warranty information in the explanation of capped 
rental may serve to further confuse beneficiaries. Additionally, 
several commenters suggested that we clarify that this standard applies 
only to the inexpensive or routinely purchased and capped rental DME 
categories--and not other items, such as home dialysis supplies and 
equipment.
    Response: This standard is merely a reinforcement of our 
regulations at Sec. 414.229(d) which refer to the purchase option on 
capped rental items, and the statute, at section 1834(a)(7) of the Act 
referring to payment for other items of DME. Since it is the 
beneficiary's decision whether to rent or purchase items, the supplier 
must explain the ramifications of this decision to the beneficiary at 
the required points in time to help the beneficiary make an informed 
decision. We are clarifying the standard in this final rule to state 
that it applies only when DME items are provided. This standard is now 
located at Sec. 424.57(c)(5).
9. Warranties (Proposed Sec. 424.57(c)(8))
    This proposed standard states that a supplier must honor all 
warranties, expressed and implied under applicable State law. A 
supplier must not charge the beneficiary or the Medicare program for 
the repair or replacement of Medicare covered items or for services 
covered under warranty.
    Comment: One commenter suggested that the supplier be required to 
give the beneficiary a list of the warranty periods for all products 
sold by that supplier. This provides the beneficiary with full 
disclosure and ensures basic supplier compliance with the standard. One 
commenter suggested that warranty information be provided to 
beneficiaries at the time the title to an item transfers. Another 
commenter requested that this documentation be provided as part of the 
delivery document, rather than a separate notice.
    Response: With regard to the suggestion about providing a complete 
list of warranties, we think that this requirement is too onerous for 
larger suppliers. We do not specify at what point in time the warranty 
information is to be provided--at the time of delivery or at time of 
transfer of title both seem to be reasonable points of time. This 
standard is located at Sec. 424.57(c)(6).
    Comment: One commenter suggested that this standard covers 
equipment components only. The commenter noted that the cost of repair 
or replacement not only includes the cost of the actual component(s), 
but also the extensive labor to remove the old units, install the new, 
refit and possibly realign the device. In addition, the commenter 
stated that the warranty from the manufacturer covers only the 
component costs. A related comment stated that, while the warranty 
provisions that were set forth in the proposed rule may make sense for 
off-the-shelf items, they create anomalies for customized devices. 
Medicare fees for orthotics and prosthetics devices include evaluation, 
fitting, costs of components, and repairs due to normal wear and tear 
for 90 days when not necessitated by changes in the residual limb or 
the patient's functional capabilities. Medicare fees do not include 
professional service charges for repairs beyond 90 days even though the 
manufacturer's warranty for parts may exceed 90 days. The commenter 
suggested that it is in the best interest of the Medicare program to 
pay the labor cost to replace a component part of a device rather than 
replace the entire device; therefore, the rules should clarify that the 
professional service costs to evaluate, fit, disassemble and reassemble 
an orthotic or prosthetic component covered under a manufacturer's 
warranty is a covered service.
    Response: Medicare does not cover maintenance and servicing of 
equipment when such services are covered under warranty. Medicare does 
not make separate payment for ``fees'' charged to process warranty 
items, paperwork, etc. These fees have been built into the 
reimbursement rate. We do make payments for maintenance and servicing 
of equipment after the warranty has expired.
10. Delivery (Proposed Sec. 424.57(c)(9))
    This proposed standard stated that a supplier must be responsible 
for the delivery of Medicare covered items to beneficiaries. A supplier 
must provide beneficiaries with necessary information and instructions 
on how to use Medicare covered items safely and effectively.
    Comment: One commenter stated that the capability of providing 
proof of delivery exists only when someone is at a beneficiary's home 
to sign for each delivery. They recommended, instead, that proof of 
delivery may be maintained by drivers in their individual daily ``log 
worksheets,'' as well as in the bills of lading for the supplies and 
equipment that are delivered. One commenter suggested that we include 
persons who are hearing impaired or have other disabilities. One 
commenter stated that, in some situations, instructions on how to use 
Medicare covered items are provided by physicians or other facilities 
(an ESRD facility, for example), so that the supplier is not directly 
responsible. One commenter urged that we coordinate any further 
developments of these standards with the Food and Drug Administration 
(FDA), insofar as they involve product information that is made 
available to the public. One commenter stated that instructions often 
are verbal rather than written, so that documentation in the medical 
record should suffice.
    Response: It is our intention that all beneficiaries, including 
beneficiaries who are hearing impaired, or have other disabilities, 
always receive the necessary information to safely and effectively use 
the items they receive. We recognize that this may be accomplished 
through different means. This requirement can be satisfied as long as 
the supplier can establish that the necessary training/instructions 
have been delivered at an appropriate time and in an appropriate 
manner. We are modifying the language of this standard to clarify that 
a supplier must document that it, or other qualified parties, has 
provided the beneficiaries with necessary information and instructions 
at an appropriate time. This standard is now located at 
Sec. 424.57(c)(12). When questions arise on the use of products, we 
consult with the FDA.
11. Repairs (Proposed Sec. 424.57(c)(11))
    Comment: One commenter stated that the standard stating that a 
supplier must maintain and repair directly, or through contract, 
Medicare covered items it has rented to beneficiaries does not address 
the issue of whether a supplier may

[[Page 60371]]

function under the manufacturer's warranty and meet the standard, that 
is, instead of repairing the item, the supplier simply replaces the 
product and returns the item in need of repairs to the manufacturer. 
Another commenter questioned how this was to be documented and what 
level of repair is needed.
    Response: We are modifying this standard, now located at 
Sec. 424.57(c)(14), to allow suppliers to replace items and to clarify 
that the level of repair should be sufficient that the item functions 
as required and intended.
12. Return of Items (Proposed Sec. 424.57(c)(12))
    This proposed standard states that a supplier must accept returns 
from beneficiaries of substandard (less than full quality for the 
particular item) or unsuitable items (inappropriate for the beneficiary 
at the time it was fitted and/or sold).
    Comment: One commenter suggested that the supplier should be 
required to maintain a log of all returns from beneficiaries of 
substandard or unsuitable items. This would be helpful to ensure 
compliance with the standard. Another commenter suggested that the 
standard needed a time limit. One commenter stated that, if an item is 
ordered by a physician and used by the beneficiary, a supplier should 
not be required to accept returns if the beneficiary no longer wants 
the item for reasons other than quality.
    Response: While we agree that such a log would be helpful in 
verifying compliance, we believe that such a mechanism is not the only 
method for ensuring compliance. Therefore, we have not modified this 
standard. This standard is located at Sec. 424.57(c)(15). With regard 
to the comments regarding time limits and reasons for return, this 
standard has been in place since December 11, 1995 with few problems. 
Since the revision suggested regarding time limit contained no 
suggestion for a time limit, and we received no other suggestions, we 
are retaining the requirement without change. We also believe the 
requirement is clear enough with regard to the intent that it is the 
quality or suitability of the item that must determine whether it 
should be returnable. If necessary, we will address this last issue 
through program instructions.
13. Physical Facility (Proposed Sec. 424.57(c)(16))
    This proposed standard states that a supplier must maintain a 
physical facility on an appropriate site. The physical facility must 
contain space for storing business records including the supplier's 
delivery, maintenance, and beneficiary communication records. For 
purposes of this requirement, a post office box or commercial mailbox 
is not considered a physical facility.
    Comment: One commenter suggested that all suppliers need to be in 
compliance with the Americans with Disabilities Act and be beneficiary 
accessible. The requirement should apply to both commercial business 
and residential locations. The commenter also stated that the standard 
should require that the business have a sign and have hours of 
operation posted.
    Response: Medicare suppliers must meet all laws and regulations 
that might apply to them, including any applicable provisions of the 
Americans with Disabilities Act. This is provided for under the 
standard at Sec. 424.57 (c)(1), which requires that suppliers operate 
their business in compliance with all applicable Federal and State 
licensure and regulatory requirements. The requirements apply whether 
the supplier is located at a commercial location or a residence, 
because it is still a business. In response to the comment concerning 
the posting of a sign and hours of operation, we are adding to this 
final rule a statement at Sec. 424.57(c)(8), that the supplier location 
must be accessible during reasonable business hours to beneficiaries 
and to HCFA, and must maintain a visible sign and posted hours of 
operation.
    Comment: One commenter suggested that this standard should restate 
the guidance established in title XVIII of the Act that only one 
supplier number is allowed per location, regardless of whether multiple 
Tax Identification Numbers are obtained. This would eliminate numerous 
questionable supplier operations in which several supplier numbers are 
located at the same address. Another commenter suggested that HCFA 
develop protocols for conducting an on-site inspection of every entity 
that submits an initial application for a supplier number prior to 
approving the application. One commenter stated that some suppliers 
have no physical facility where they treat clients, placing the 
commenter at a competitive disadvantage because he had a large and 
ongoing investment in real estate, tools, supplies, equipment, etc. 
Several commenters suggested that HCFA exempt national concerns with 
central sites for record storage from this requirement, or more clearly 
define the objectives underlying this requirement as a performance 
specification, and allow companies to satisfy the government's needs in 
other ways. One commenter stated that warehouses should not be covered 
by the standards.
    Response: As previously noted in describing our changes to 
Sec. 424.57(c)(6), section 1834(j)(1)(D) of the Act states that the 
Secretary may not issue more than one supplier number to any supplier 
of medical equipment and supplies unless the issuance of more than one 
number is appropriate to identify subsidiary or regional entities under 
the supplier's ownership or control. We are adding a sentence to state 
that in the case of a multi-site supplier, records may be maintained at 
a centralized location. A supplier must demonstrate a legitimate need 
for additional numbers. With regard to the physical site requirement, 
it is not our intention to ensure that no entities have competitive 
advantage over others. This is a natural by-product of the marketplace 
and business environment. Our intention is to ensure that we do 
business with legitimate entities who can provide safe and effective 
service to Medicare beneficiaries. We recognize that some suppliers may 
have multiple sites from which they do business, and may maintain 
records at one central site. Such suppliers may supply evidence of such 
recordkeeping, as long as the central site is an enrolled Medicare 
supplier site or represents a central function of a larger corporation 
of which the supplier is a part. We note that locations serving simply 
as warehouses are not subject to these standards.
14. Business Telephone (Proposed Sec. 424.57(c)(17))
    This proposed standard states that a supplier must maintain a 
primary business telephone at the physical facility. This telephone 
number must be listed under the name of the business and in the 
business portion of the local telephone company directory. The 
exclusive use of a beeper number, answering service, pager, facsimile 
machine, car phone, or an answering machine may not be used as the 
primary business telephone.
    Comment: Several commenters strongly supported the standard 
requiring a supplier to maintain a business telephone at the physical 
facility where it does business. One commenter, however, noted that 
some suppliers maintain centralized customer service lines. A strict 
interpretation of the proposed standard would preclude this practice. 
Likewise, many suppliers maintain warehouse locations that are not used 
for retail customers. These types of locations should not be subject to 
the telephone standard because appropriately trained customer service 
representatives would not be available

[[Page 60372]]

to respond to the public's questions. The commenters suggested that 
HCFA should modify the proposed regulation to state that the telephone 
standard would not apply in the above scenarios. One commenter noted 
that telephone directories are normally published annually, contracts 
for inclusion are made several months in advance. Therefore, unless the 
regulations allow adequate time for suppliers to comply with the 
requirement, they will not be able to meet the standard.
    Response: We recognize the practices of large organizations with 
regard to centralized telephone service as well as centralized records. 
Therefore, we are modifying the standard now at Sec. 424.57(c)(9) to 
permit the use of toll free numbers that may not be listed in the 
business portion of the local telephone directory. Documentation of a 
paid application for a telephone listing will be considered to meet 
this requirement. However, the telephone number itself must be in place 
and available through the telephone company's directory services 
(information).
15. Liability Insurance (Proposed Sec. 424.57(c)(18))
    This proposed standard states that a supplier must have a 
comprehensive liability insurance policy that covers both the 
supplier's place of business and any and all customers and employees of 
the supplier.
    Comment: One commenter suggested that, if we feel that minimum 
coverage of $500,000 is adequate for most businesses, then state it 
clearly as part of the standard requiring that suppliers have a 
comprehensive liability insurance policy. Experience has indicated that 
most suppliers and many agents are confused by the lack of such 
guidance. Another commenter suggested that $300,000 was adequate for 
the types of businesses under consideration. Several commenters 
supported this requirement and some suggested that suppliers of custom 
devices should be required to have professional and product liability 
insurance to protect the patient and themselves. One commenter stated 
that national, publicly traded companies with large assets maintain 
adequate insurance and reinsurance coverages through multiple carriers, 
but that coverage necessarily includes self-insured retentions. The 
commenter further stated that HCFA should make it clear that 
corporations with assets in excess of some fixed amount should not be 
required to change their insurance profile to satisfy this requirement. 
Another commenter stated that HCFA's general description of the 
required ``comprehensive liability insurance policy'' is inadequate. 
The commenter felt that it is necessary for a seller and supplier of 
medical equipment to have a Comprehensive General Liability Insurance 
Policy plus coverage for product liability and completed operations. 
The commenter, a national group of home medical equipment supply 
companies, stated that more than 80 percent of the claims it had 
received during the last 11 years involved alleged product deficiencies 
or failures.
    Response: We are revising this standard, now at Sec. 424.57(c)(10), 
to require a comprehensive liability insurance policy of at least 
$300,000. We agree that partial self insurance is an acceptable means 
of meeting this requirement for publicly traded companies with 
sufficient assets. However, we are not able at this time to 
sufficiently define how this would be accomplished. We are also 
revising this standard to refer to product and operation liability and 
clarifying that the insurance must remain in force at all times. In 
addition, we have revised the language to allow suppliers with multiple 
sites to procure an umbrella policy for each tax ID number.
16. Telephone Contact (Proposed Sec. 424.57(c)(19))
    This proposed standard states that a supplier of a Medicare covered 
item must agree not to contact a beneficiary by telephone regarding the 
furnishing of a Medicare covered item to the individual unless certain 
specified situations apply.
    Comment: One commenter suggested that we add an exception to this 
standard. Specifically, the commenter suggested that we permit 
telephone contact if the supplier receives a referral from a medical 
professional involved in the patient's care.
    Response: While this may be reasonable in some situations, we find 
it problematic in that it may have unintended consequences as a 
loophole by allowing suppliers to purchase ``referrals'' (client lists) 
from medical professionals. This standard is located at 
Sec. 424.57(c)(11).
17. Prescription Drugs (Proposed Sec. 424.57(c)(20))
    This proposed standard states that only a supplier that is licensed 
by the State to dispense the drug may bill for a drug used as a 
Medicare covered supply with durable medical equipment or prosthetic 
devices. A supplier of drugs must bill and receive payment for the drug 
in its own name.
    Comment: One commenter requested that we clarify that physicians 
may dispense and bill for drugs if permitted by the State. One 
commenter requested that we clarify that it is not necessary to have a 
pharmacy license in order to dispense drugs in connection with ESRD. 
One commenter requested that we clarify that suppliers may dispense 
oxygen with a prescription, consistent with FDA requirements. Several 
commenters supported this requirement completely.
    Response: We are revising the standard, now at Sec. 424.57(b)(4) to 
reflect that physicians may dispense and bill for drugs if authorized 
to do so under State law. There is no exception to the licensure 
requirement for dispensing drugs furnished in connection with ESRD.

C. Surety Bonds (proposed Sec. 424.57(e))

    We received many comments on the proposed surety bond provisions. 
Most of the commenters were opposed to the provisions citing costs as 
their major objection. Because we have decided to make extensive 
changes to this requirement and build on our experience with surety 
bond requirements for home health agencies, as well as a General 
Accounting Office Study of Medicare surety bonds, we have decided not 
to incorporate the provisions related to surety bonds in this final 
rule. Rather, we will issue the surety bond provisions as a proposed 
rule at a future date and will consider the comments in the development 
of that rule.

D. Other Comments

    Comment: One commenter suggested that we require that suppliers be 
certified by appropriate national certification bodies, including the 
Board for Certification in Pedorthics, before they are eligible to 
dispense therapeutic shoes for diabetics.
    Response: This is a good suggestion. Because of the potential 
impact on the supplier community and the need for public opportunity to 
comment, we will consider it for future revisions.
    Comment: One commenter suggested that we implement a specialty code 
for pedorthics.
    Response: This can be done administratively, without a regulation. 
If deemed feasible, we will consider it.
    Comment: One commenter stated that no physician or hospital should 
own, in whole or in part, a DME supplier. This is a common practice and 
is strictly self-referral, which leads to corruption.
    Response: Although the supplier standards do not address the issue 
of whether a physician may have an ownership interest in a DME 
supplier, the physician self-referral provisions in

[[Page 60373]]

section 1877 of the Act do address this issue. Under the physician 
self-referral provisions, a physician may not refer a Medicare or 
Medicaid patient for any ``designated health services'' listed in 
section 1877(h)(6) of the Act to an entity with which the physician or 
an immediate family member of the physician has a financial 
relationship, unless an exception applies. Designated health services 
include, but are not limited to, DME and supplies; parenteral and 
enteral nutrients (PEN); equipment and supplies; and prosthetics; 
orthotics, and prosthetic devices and supplies. A financial 
relationship may be through an ownership or investment interest or a 
compensation relationship. There are certain exceptions that apply to 
ownership interests. Some exceptions apply to compensation 
relationships, and some exceptions apply to both ownership and 
compensation. The physician referral prohibition also has an effect on 
Federal health care programs (including Medicaid and Medicare). For 
additional information about physician referral issues, please contact 
Joanne Sinsheimer at (410) 786-4620.
    The current supplier standards do not address the issue of whether 
a hospital should own a DME supplier. We may consider this suggestion 
in future revisions because of the potential impact on the supplier 
community and the need for public opportunity to comment.
    We want to draw your attention to the possibility that, based on 
the facts in each case, referrals may be prohibited under the anti-
kickback statute. This statute applies to those who knowingly and 
willfully offer, pay, solicit, or receive remuneration to induce the 
furnishing of items or services paid for, in whole or in part, by any 
Federal health care program, including Medicare or Medicaid. For 
further information about the anti-kickback statute, please contact the 
Office of the Inspector General for HHS at (202) 619-0335.
    Comment: One commenter suggested that HCFA ensure that the 
application form itself uses simple, clear terminology to provide 
unambiguous guidance as to the information required. The Form HCFA-855 
should be reviewed by the OIG prior to issuance to ensure that the use 
of vague and ambiguous terminology is minimized and that instructions 
are clear.
    Response: The Form HCFA-855 was reviewed by OIG prior to issuance. 
In addition, we are in the process of revising the Form HCFA-855. We 
will solicit input from all concerned parties, via a Federal Register 
notice prior to requesting the Office of Management and Budget's (OMB) 
approval of the revised form. We will consider detailed recommendations 
related to the revised Form HCFA-855.
    Comment: One commenter stated that we should submit this rule to 
the Congress for a 60-day review in accordance with the Contract with 
America Advancement Act (P.L. 104-121).
    Response: We are submitting a report to Congress for this rule 
pursuant to the congressional review procedures established by the 
Contract with America Advancement Act. We note that OMB has determined 
that this rule is not a major rule as defined by the Act.
    Comment: One commenter stated that the proposed rule did not 
categorize the range of DMEPOS services and items. In addition, we did 
not provide in Table 2 a breakdown distribution by service or item 
speciality.
    Response: The range of DMEPOS services and items are stipulated in 
various sections of the Act. The preamble of the proposed rule makes 
references to some of the sections of the Act. We do not have the data 
to provide a national geographic distribution of each type of service 
or item furnished by DMEPOS suppliers.

E. Orthotics/Prosthetics

    Comment: Several commenters stated that orthotics and prosthetics 
suppliers should be licensed or certified. They believed that the 
provision of custom orthotic and prosthetic devices should be limited 
to facilities that are accredited by, or practitioners certified by, 
the American Board for Certification in Orthotics and Prosthetics or 
that meet equivalent educational and performance standards. One 
commenter suggested that we allow accreditation by the American Board 
for Certification in Orthotics and Prosthetics to serve as the 
equivalent of meeting the Medicare provider standards. One commenter 
stated that orthotics and prosthetics suppliers should be required to 
document each case in writing; should be required to give treatment 
alternatives in writing to each customer; should be required to give 
written cost estimates to each customer; and should be required to give 
a one year guarantee. Several commenters stated that orthotics and 
prosthetics suppliers should be required to have a bond. Several 
commenters suggested that orthotics and prosthetics suppliers should 
have separate standards from other suppliers.
    Response: We will consider these suggestions in future revisions 
because of the potential impact on the supplier community and the need 
for public opportunity to comment.

IV. Request for Comment on Certain Supplier Standards

    The Balanced Budget Act of 1997 (BBA) requires the Secretary to 
establish service standards for home oxygen suppliers. The U.S. General 
Accounting Office (GAO), in Report GAO/HEHS-99-56: Access to Home 
Oxygen Equipment, states that such service standards ``such as the 
frequency of maintenance visits and the level of patient education * * 
* would define what Medicare is paying for in the home oxygen benefit 
and what beneficiaries should expect from suppliers.'' We solicit 
comments as to what should comprise such supplier standards.
    In addition, section 1861(s)(12) of the Act permits Medicare 
payment for extra-depth shoes with inserts or custom molded shoes with 
inserts for an individual with diabetes, if, among other things, the 
shoes are fitted and furnished by a podiatrist or other qualified 
individual (such as a pedorthist or orthotist, as established by the 
Secretary). We solicit comments as to what standards should be 
established for suppliers of such shoes and the qualifications to 
require of the fitting individual.
    The Office of the Inspector General in a report titled ``Medicare 
Orthotics'' (OEI-02-95-00380) recommended that HCFA ``consider stricter 
standards for who is allowed to bill for orthotics, such as requiring 
professional credentials for orthotics suppliers.'' We solicit comments 
as to what standards should be established for suppliers of Medicare-
covered orthoses. We also solicit comments as to whether similar 
standards should be applied to prostheses.
    We also welcome comments as to whether and what kind of standards 
should apply for home infusion therapy, durable medical equipment such 
as wheelchairs, or any other item provided under the DMEPOS benefit.

V. Provisions of the Final Regulations

    We are adopting the provisions set forth in the proposed rule with 
the exceptions noted in the Analysis of and Responses to Public 
Comments (section III. above) as well as the following change.
    Throughout Sec. 424.57, we are changing most of the references to 
``billing number'' to ``billing privileges'', noting in 
Sec. 424.57(b)(2) that billing privileges must be conveyed along with a 
billing number.
    Also, we reiterate that although we do not intend to require 
suppliers with

[[Page 60374]]

current numbers to immediately certify to HCFA their compliance with 
these revised standards (they will do so when they reapply), it is 
important to note that as of the effective date of this regulation, all 
DMEPOS suppliers must comply with the standards as revised. We may 
revoke a supplier number if we find evidence that the standards are not 
satisfied.

VI. Collection of Information Requirements

    This final regulation contains requirements that are subject to 
review by the Office of Management and Budget (OMB) under the Paperwork 
Reduction Act of 1995 (44 U.S.C. Chapter 35). However, all have been 
approved by OMB. The OMB approval numbers associated with these 
approved requirements are 0938-0717, DMEPOS Supplier Standards: 
Additional Information Collection Requirements, for which the approval 
expires on April 30, 2001, and 0938-0685, Medicare Carrier Provider/
Supplier Enrollment Application, for which the approval expires on 
September 30, 2001.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:

Health Care Financing Administration, Office of Information Services, 
Information Technology Investment Management Group, Attn: John Burke, 
Room N2-14-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office building, Washington, DC 
20503, Attn: Allison Herron Eydt, HCFA Desk Officer.

VII. Regulatory Impact Analysis

    We have examined the impacts of this final rule under Executive 
Order 12866, the Unfunded Mandate Act of 1995, and the Regulatory 
Flexibility Act. Executive Order 12866 directs agencies to assess all 
costs and benefits of available regulatory alternatives and, when 
regulation is necessary, to select regulatory approaches that maximize 
net benefits. In addition, a Regulatory Impact Analysis (RIA) must be 
prepared for major rules with economically significant effects ($100 
million or more annually).
    The costs associated with this rule are as follows:
     Liability insurance requirement (Sec. 424.57(c)(10)). We 
estimate that only 10 percent of DMEPOS suppliers do not already have 
liability insurance that meets this requirement. Based on Medicare data 
as of May 1999, 10 percent of the total DMEPOS suppliers is 
approximately 6,600 suppliers. We note that commenters on the proposed 
rule gave varying estimates of the cost of liability insurance. The 
range commenters suggested was between $1300 and $1800 annually. Using 
the highest estimate received ($1,800 annually), results in an 
approximate additional liability insurance cost of $11.9 million 
annually (6,600 times $1,800) to the DMEPOS industry due to this rule.
     Primary business telephone listed under the name of the 
business locally or toll-free for beneficiaries requirement 
(Sec. 424.57(c)(9)). We estimate that only 1 percent of DMEPOS 
suppliers do not already meet this requirement. Based on Medicare data 
as of May 1999, we determined that one percent of DMEPOS suppliers is 
660 suppliers. Therefore, 660 times the approximate $600 annual cost of 
telephone service results in an additional cost of $0.4 million 
annually.
    Total Cost = $11.9 Million + $0.4 = $12.3 million annually.
    The Unfunded Mandates Reform Act of 1995 requires (in section 202) 
that agencies prepare an assessment of anticipated costs and benefits 
before issuing any rule that may result in an expenditure in any one 
year by State, local, or tribal governments, in the aggregate, or by 
the private sector, of $100 million. This final rule has no 
consequential effect on State, local, or tribal governments.
    Consistent with the Regulatory Flexibility Act, we prepare a 
Regulatory Flexibility Analysis (RFA) unless we certify that a rule 
will not have a significant economic impact on a substantial number of 
small entities. For purposes of the Act, suppliers with annual sales of 
$5 million or less are considered to be small entities. (Individuals 
and States are not included in the definition of a small entity.) The 
RFA is to include a justification of why action is being taken, the 
kinds and number of small entities which the rule will affect, and an 
explanation of any considered meaningful options that achieve the 
objectives and would lessen any significant adverse economic impact on 
the small entities.
    We believe that our standards will help bar fraudulent suppliers 
from participating in the Medicare program and provide an added level 
of protection to Medicare beneficiaries. Therefore, we expect to have 
an impact on an unknown number of persons and entities who will 
effectively be prevented from practicing their aberrant billing 
activities. The vast majority of suppliers will not be significantly 
affected by this rule. The reduction in program overpayments and the 
added level of protection to beneficiaries that we expect to achieve as 
a result of this rule justifies the relatively small burden the rule 
would impose on all small entities.
    The following analysis, together with the rest of this preamble, 
explains the rationale for and purposes of the rule, details the 
estimable costs and benefits of the rule, analyzes alternatives, and 
presents the measures we propose to minimize the burden on small 
entities.

A. Rationale and Purposes

    We expect this rule to deter some entities that supply DME to 
Medicare beneficiaries from abusive billing practices or defrauding the 
Medicare program. For example, abusive practices include refusing to 
honor manufacturers' warranties or improperly installing equipment in 
Medicare beneficiaries' homes.
    Fraudulent practices include billing the Medicare program for 
supplies that were not furnished. In a surprisingly large number of 
instances, when either the beneficiaries or HCFA attempted to contact 
suppliers alleged to have committed abuses, it was difficult to reach 
them because they did not have a fixed address or had closed the 
business and fled. Our experience has been that the market has failed 
to address these problems because of the motivation for unseemly 
profits, inadequate control by gatekeepers, and insufficient 
information on the part of Medicare beneficiaries to detect abuse. This 
market failure makes it necessary for HCFA to impose standards on DME 
suppliers and establish safeguards that enable the Medicare program to 
better protect beneficiary interests.

B. Characteristics of Suppliers

    The single most striking characteristic of Medicare DMEPOS 
suppliers is their diversity. DMEPOS suppliers fill a business need and 
do it in a variety of ways. Some suppliers set out from the beginning 
to establish a business furnishing DMEPOS items; others evolve into 
being suppliers. For example, a firm dealing with the oxygen needs of 
the medical community may add a department that provides oxygen 
services and supplies as a medical supply as a logical extension of an 
existing business.
    Similarly, a retail rental store may add wheelchairs or hospital 
beds and a pharmacy may add walkers to an inventory of otherwise 
unrelated commodities and use existing

[[Page 60375]]

advertisements to announce the availability of these items.
    Based on the small size of some businesses, it is more 
characteristic that suppliers furnish a limited number of items in 
greater demand than to maintain a large inventory of items covering the 
gamut of covered DMEPOS items. Thus, the only things any two suppliers 
may have in common is their provision of DMEPOS items and their 
understanding that the activity will meet the needs of the business. 
Suppliers are in a position to direct their marketing activities to 
optimize their most profitable revenue sources, and in seeking to meet 
patient demand, can choose to provide only those items that meet their 
business objectives.
    For purposes of the RFA, a small entity is one with annual revenues 
of less than $5 million. Medicare data indicates that more than 95 
percent of all DMEPOS suppliers generate billings of less than $350,000 
in Medicare revenues annually, and 99 percent less than $5 million.

C. Geographic Distribution of Suppliers

    Individual patients may receive their durable medical equipment, 
supplies, and prosthetics either from a local supplier or from a 
regional or national concern that functions much like a mail order 
catalogue distribution center. As shown in Table 1, which is based on 
Medicare data as of May 1999, suppliers locate in areas where there is 
greatest demand, leaving other areas to be served by catalog, mail 
order or drop shipments. No States appear to be under served, and 
competition exists in large population areas, leading us to believe 
that the imposition of some additional standards will not have adverse 
effects on competition or on the availability of an adequate number of 
suppliers to meet patients' needs.

                                  Table 1
------------------------------------------------------------------------
                                    Number of    Number of   Beneficiary
              State                 suppliers   beneficiary      per
                                    per State    per State     supplier
------------------------------------------------------------------------
AK...............................          140         5500           39
AL...............................         1960       151600           77
AR...............................         1207        92400           77
AZ...............................         1518        73100           48
CA...............................         9612       469800           49
CO...............................         1383        64200           46
CT...............................         1552        79700           51
DC...............................          167        10800           65
DE...............................          274        17400           63
FL...............................         7894       491200           62
GA...............................         3180       186400           59
HI...............................          345        16700           48
IA...............................         1733        98400           57
ID...............................          603        33500           56
IL...............................         4212       268000           64
IN...............................         2731       163800           60
KS...............................         1386        76300           55
KY...............................         2008       126200           63
LA...............................         1996       115900           58
MA...............................         2175       125200           58
MD...............................         1837       102600           56
ME...............................          636        38500           60
MI...............................         3196       295600           92
MN...............................         2001       105100           53
MO...............................         2363       156100           66
MS...............................         1094        96700           88
MT...............................          608        28000           46
NC...............................         3472       235000           68
ND...............................          388        22200           57
NE...............................         1026        48300           47
NH...............................          520        24800           48
NJ...............................         3291       172700           52
NM...............................          539        34300           64
NV...............................          553        27900           50
NY...............................         6152       404700           66
OH...............................         5101       294000           58
OK...............................         1576        96700           61
OR...............................         1316        61400           47
PA...............................         5749       325900           57
RI...............................          455        22000           48
SC...............................         1666       124400           75
SD...............................          458        23800           52
TN...............................         2494       171600           69
TX...............................         7021       408700           58
UT...............................          690        36000           52
VA...............................         2864       163300           57
VT...............................          275        13600           49
WA...............................         2268       107900           48
WI...............................         2356       146200           62
WV...............................          947        64400           68
WY...............................          294        13300           45
                                  --------------------------------------

[[Page 60376]]

 
    Total........................      109,782  ...........  ...........
------------------------------------------------------------------------

    We note that the purpose of Table 1 is to illustrate the locations 
that provide durable medical equipment and supplies to Medicare 
beneficiaries. Many of these entities are members of chain 
organizations. While Table 1 indicates there are more than 109,000 
suppliers, due to the affiliation of some suppliers with chains, as of 
May 1999, there were only 65,528 unique billing numbers. Hence, 
although in several sections of this preamble we mention 65,528 billing 
numbers, this reference and Table 1, which describes the more than 
109,000 actual locations, describe the same universe of suppliers. 
According to an industry source, Medicare accounts for approximately 40 
percent of the average DMEPOS supplier's revenue. The approximate 
percentage amounts for other revenue sources are 25 percent private 
insurance, 15 percent Medicaid, 10 percent institutional, and 10 
percent private credit and cash sales. For calendar year 1997, Medicare 
program allowed charges amounted to $6.7 billion for DMEPOS items. We 
believe that for most suppliers any additional costs imposed by our 
standards would be outweighed by the benefits gained by continuing to 
be a Medicare DMEPOS supplier.
    These standards should not result in changes in the number of 
legitimate business suppliers, because, as set forth below and 
elsewhere in this preamble, most requirements are logical extensions of 
good business practices that we believe currently are being met by the 
vast majority of suppliers.

D. Discussion of Alternatives

    We believe it was the intent of the Congress to strengthen DMEPOS 
supplier standards to protect beneficiaries and ensure the integrity of 
the Medicare program. Therefore, we proposed expanded supplier 
standards, using as our statutory basis section 1834(j)(1)(B)(ii)(III) 
of the Act for liability insurance and section 1834(j)(1)(B)(ii)(IV) of 
the Act, which states that the supplier must meet such other 
requirements as the Secretary may specify. This final rule will provide 
a basis to better screen applicants and to revoke the supplier numbers 
of those who do not meet these standards.
    For purposes of this impact statement, we have divided the supplier 
standards into the following two broad categories: statutory 
requirements and good business practices.
1. Statutory requirements
    Liability Insurance--The statutory authority for Sec. 424.57(c)(10) 
is section 1834(j)(1)(B)(ii)(III) of the Act. This rule requires a 
supplier to have comprehensive liability insurance, including product 
liability and completed operations in the case of a supplier that makes 
its own items, that covers the supplier's place of business and any and 
all customers and employees. Based on comments received on the proposed 
rule, we are requiring a minimum of $300,000 in coverage. Based on 
discussions with industry experts, we estimate that approximately 10 
percent of all suppliers do not currently carry liability insurance. 
Based on comments received, we estimate the cost per year for a 
supplier to carry liability insurance in the amount of $300,000 would 
be no more than approximately $1,800. We believe that the $1,800 cost 
per supplier does not represent a significant economic impact on the 
estimated 10 percent of suppliers not currently carrying liability 
insurance. We also believe that it is good business practice to carry 
such insurance, as indicated by the fact that 90 percent or more of 
suppliers already do so.
2. Good Business Practices
    Most of the supplier standards in this final rule deal directly 
with business practices. We do not believe that these standards will 
result in a significant impact on any sizeable number of legitimate 
suppliers. For these additional standards, the economic impact on most 
suppliers is negligible, although the benefits to the program and to 
the beneficiary will be greater. For example, the requirement at 
Sec. 424.57(c)(6) that a supplier must not charge Medicare for repair 
or replacement of Medicare covered items or for services covered under 
warranty, coupled with the requirement that the supplier provide 
documentation, upon request, that it has advised Medicare beneficiaries 
about Medicare covered items covered under warranty, should result in 
claims for repairs, parts or replacement being made against the 
warranty, thus decreasing the monies paid by Medicare. The monies paid 
out by the program and the beneficiary also may decrease as a result of 
the requirement that the supplier inform the beneficiary of the rental 
or purchase option and the copay implications involved. More 
beneficiaries may elect to purchase their equipment, instead of renting 
for long periods of time.
    In most instances, these standards do not exceed the usual business 
practices necessary for any retail business to succeed. In other words, 
we believe that a supplier that expects to conduct a successful 
business would already have in place procedures to meet these 
standards. We did not develop alternatives because we consider the 
final supplier standards to be basic requirements that a business would 
have to meet in order to provide satisfactory customer service and 
manage properly its inventory.
    Under Sec. 424.57(c)(9), a supplier is required to maintain a 
telephone that is used primarily for business purposes at its physical 
facility and is listed under the name of the business locally or toll-
free for beneficiaries. In order to accept inquiries from potential 
customers, maintain relationships with current customers, and conduct 
business with contractors in today's business market, it is necessary 
that virtually every business have telephonic access. Beneficiaries 
also need access to their supplier in case they have a problem with or 
questions about their DMEPOS items.
    We believe that this standard is currently met by nearly all 
legitimate businesses. However, we believe approximately one percent of 
DMEPOS suppliers currently do not meet the fixed telephone requirement. 
The estimated cost per year for any supplier to establish and maintain 
a telephone line to conduct business would be approximately $600 ($50 a 
month). Thus, the aggregate cost is negligible. We believe the benefits 
of full time access to the supplier will far exceed the minor economic 
impact on a supplier.
    This requirement will help beneficiaries contact their suppliers in

[[Page 60377]]

the event of equipment problems and failures, and to resolve questions. 
Telephonic access to a supplier is also crucial so that the Durable 
Medical Equipment Regional Carriers may call and obtain additional 
information to process and pay claims.

E. Conclusion

    As indicated elsewhere in this preamble, to the extent that we are 
imposing a burden, it is a necessary one. The public interest is best 
served by establishing safeguards that prevent suppliers from taking 
advantage of the current minimal supplier standards. It is by design 
that these standards would have the greatest impact on those suppliers 
that need to change the most. We believe that the loss of a few 
suppliers as a result of these supplier standards, for example those 
who operate out of a van or who do not provide a value added service, 
is far outweighed by the benefits of protecting the health and safety 
of beneficiaries and preserving the Medicare Trust Fund.

F. Rural Hospital Impact Statement

    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a rule may have a significant impact on the 
operations of a substantial number of small rural hospitals. Such an 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, a small rural hospital is a 
hospital that is located outside of a Metropolitan Statistical Area and 
has fewer than 50 beds. We are not preparing a rural impact statement 
since we have determined, and certify, that this proposed rule will not 
have a significant impact on the operations of a substantial number of 
small rural hospitals.

VIII. Federalism

    We have reviewed this final rule under the threshold criteria of 
Executive Order 13132, Federalism and we have determined that it does 
not significantly affect the rights, roles, and responsibilities of 
States.

List of Subjects in 42 CFR Part 424

    Emergency medical services, Health facilities, Health professions, 
Medicare.
    42 CFR chapter IV is amended as set forth below:

PART 424--CONDITIONS FOR MEDICARE PAYMENT

    1. The authority citation for part 424 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).


    2. Section 424.57 is revised as follows:


Sec. 424.57  Special payment rules for items furnished by DMEPOS 
suppliers and issuance of DMEPOS supplier billing privileges.

    (a) Definitions. As used in this section, the following definitions 
apply:
    DMEPOS stands for durable medical equipment, prosthetics, orthotics 
and supplies.
    DMEPOS supplier means an entity or individual, including a 
physician or a Part A provider, which sells or rents Part B covered 
items to Medicare beneficiaries and which meets the standards in 
paragraph (c) of this section.
    Medicare covered items means medical equipment and supplies as 
defined in section 1834(j)(5) of the Act.
    (b) General rule. A DMEPOS supplier must meet the following 
conditions in order to be eligible to receive payment for a Medicare-
covered item:
    (1) The supplier has submitted a completed application to HCFA to 
furnish Medicare-covered items including required enrollment forms. 
(The supplier must enroll separate physical locations it uses to 
furnish Medicare-covered DMEPOS, with the exception of locations that 
it uses solely as warehouses or repair facilities.)
    (2) The item was furnished on or after the date HCFA issued to the 
supplier a DMEPOS supplier number conveying billing privileges. (HCFA 
issues only one supplier number for each location.) This requirement 
does not apply to items furnished incident to a physician's service.
    (3) HCFA has not revoked or excluded the DMEPOS supplier's 
privileges during the period which the item was furnished has not been 
revoked or excluded.
    (4) A supplier that furnishes a drug used as a Medicare-covered 
supply with durable medical equipment or prosthetic devices must be 
licensed by the State to dispense drugs (A supplier of drugs must bill 
and receive payment for the drug in its own name. A physician, who is 
enrolled as a DMEPOS supplier, may dispense, and bill for, drugs under 
this standard if authorized by the State as part of the physician's 
license.)
    (5) The supplier has furnished to HCFA all information or 
documentation required to process the claim.
    (c) Application certification standards. The supplier must meet and 
must certify in its application for billing privileges that it meets 
and will continue to meet the following standards. The supplier:
    (1) Operates its business and furnishes Medicare-covered items in 
compliance with all applicable Federal and State licensure and 
regulatory requirements;
    (2) Has not made, or caused to be made, any false statement or 
misrepresentation of a material fact on its application for billing 
privileges. (The supplier must provide complete and accurate 
information in response to questions on its application for billing 
privileges. The supplier must report to HCFA any changes in information 
supplied on the application within 30 days of the change.);
    (3) Must have the application for billing privileges signed by an 
individual whose signature binds a supplier;
    (4) Fills orders, frabicates, or fits items from its own inventory 
or by contracting with other companies for the purchase of items 
necessary to fill the order. If it does, it must provide, upon request, 
copies of contracts or other documentation showing compliance with this 
standard. A supplier may not contract with any entity that is currently 
excluded from the Medicare program, any State health care programs, or 
from any other Federal Government Executive Branch procurement or 
nonprocurement program or activity;
    (5) Advises beneficiaries that they may either rent or purchase 
inexpensive or routinely purchased durable medical equipment, and of 
the purchase option for capped rental durable medical equipment, as 
defined in Sec. 414.220(a) of this subchapter. (The supplier must 
provide, upon request, documentation that it has provided beneficiaries 
with this information, in the form of copies of letters, logs, or 
signed notices.);
    (6) Honors all warranties expressed and implied under applicable 
State law. A supplier must not charge the beneficiary or the Medicare 
program for the repair or replacement of Medicare covered items or for 
services covered under warranty. This standard applies to all purchased 
and rented items, including capped rental items, as described in 
Sec. 414.229 of this subchapter. The supplier must provide, upon 
request, documentation that it has provided beneficiaries with 
information about Medicare covered items covered under warranty, in the 
form of copies of letters, logs, or signed notices;
    (7) Maintains a physical facility on an appropriate site. The 
physical facility must contain space for storing business records 
including the supplier's delivery, maintenance, and beneficiary 
communication records. For purposes of this standard, a post office box 
or commercial mailbox is not considered a

[[Page 60378]]

physical facility. In the case of a multi-site supplier, records may be 
maintained at a centralized location;
    (8) Permits HCFA, or its agents to conduct on-site inspections to 
ascertain supplier compliance with the requirements of this section. 
The supplier location must be accessible during reasonable business 
hours to beneficiaries and to HCFA, and must maintain a visible sign 
and posted hours of operation;
    (9) Maintains a primary business telephone listed under the name of 
the business locally or toll-free for beneficiaries. The supplier must 
furnish information to beneficiaries at the time of delivery of items 
on how the beneficiary can contact the supplier by telephone. The 
exclusive use of a beeper number, answering service, pager, facsimile 
machine, car phone, or an answering machine may not be used as the 
primary business telephone for purposes of this regulation;
    (10) Has a comprehensive liability insurance policy in the amount 
of at least $300,000 that covers both the supplier's place of business 
and all customers and employees of the supplier. In the case of a 
supplier that manufactures its own items, this insurance must also 
cover product liability and completed operations. Failure to maintain 
required insurance at all times will result in revocation of the 
supplier's billing privileges retroactive to the date the insurance 
lapsed;
    (11) Must agree not to contact a beneficiary by telephone when 
supplying a Medicare-covered item unless one of the following applies:
    (i) The individual has given written permission to the supplier to 
contact them by telephone concerning the furnishing of a Medicare-
covered item that is to be rented or purchased.
    (ii) The supplier has furnished a Medicare-covered item to the 
individual and the supplier is contacting the individual to coordinate 
the delivery of the item.
    (iii) If the contact concerns the furnishing of a Medicare-covered 
item other than a covered item already furnished to the individual, the 
supplier has furnished at least one covered item to the individual 
during the 15-month period preceding the date on which the supplier 
makes such contact.
    (12) Must be responsible for the delivery of Medicare covered items 
to beneficiaries and maintain proof of delivery. (The supplier must 
document that it or another qualified party has at an appropriate time, 
provided beneficiaries with necessary information and instructions on 
how to use Medicare-covered items safely and effectively);
    (13) Must answer questions and respond to complaints a beneficiary 
has about the Medicare-covered item that was sold or rented. A supplier 
must refer beneficiaries with Medicare questions to the appropriate 
carrier. A supplier must maintain documentation of contacts with 
beneficiaries regarding complaints or questions;
    (14) Must maintain and replace at no charge or repair directly, or 
through a service contract with another company, Medicare-covered items 
it has rented to beneficiaries. The item must function as required and 
intended after being repaired or replaced;
    (15) Must accept returns from beneficiaries of substandard (less 
than full quality for the particular item or unsuitable items, 
inappropriate for the beneficiary at the time it was fitted and rented 
or sold);
    (16) Must disclose these supplier standards to each beneficiary to 
whom it supplies a Medicare-covered item;
    (17) Must comply with the disclosure provisions in Sec. 420.206 of 
this subchapter;
    (18) Must not convey or reassign a supplier number;
    (19) Must have a complaint resolution protocol to address 
beneficiary complaints that relate to supplier standards in paragraph 
(c) of this section and keep written complaints, related correspondence 
and any notes of actions taken in response to written and oral 
complaints. Failure to maintain such information may be considered 
evidence that supplier standards have not been met. (This information 
must be kept at its physical facility and made available to HCFA, upon 
request.);
    (20) Must maintain the following information on all written and 
oral beneficiary complaints, including telephone complaints, it 
receives:
    (i) The name, address, telephone number, and health insurance claim 
number of the beneficiary.
    (ii) A summary of the complaint; the date it was received; the name 
of the person receiving the complaint, and a summary of actions taken 
to resolve the complaint.
    (iii) If an investigation was not conducted, the name of the person 
making the decision and the reason for the decision.
    (21) Provides to HCFA, upon request, any information required by 
the Medicare statute and implementing regulations.
    (d) Failure to meet standards. HCFA will revoke a supplier's 
billing privileges if it is found not to meet the standards in 
paragraphs (b) and (c) of this section. (The revocation is effective 15 
days after the entity is sent notice of the revocation, as specified in 
Sec. 405.874 of this subchapter.)
    (e) Renewal of billing privileges. A supplier must renew its 
application for billing privileges every 3 years after the billing 
privileges are first granted. (Each supplier must complete a new 
application for billing privileges 3 years after its last renewal of 
privileges.)

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: December 15, 1999.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing, Administration.

    Approved: March 29, 2000.
Donna E. Shalala,
Secretary.
    Editorial Note: This document was received at the Office of the 
Federal Register September 29, 2000.
[FR Doc. 00-25495 Filed 10-10-00; 8:45 am]
BILLING CODE 4120-01-P