[Federal Register Volume 67, Number 240 (Friday, December 13, 2002)]
[Rules and Regulations]
[Pages 76684-76697]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31126]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Center for Medicare & Medicaid Services

42 CFR Part 405

[CMS-1908-IFC]
RIN 0938-AJ97


Medicare Program; Application of Inherent Reasonableness to All 
Medicare Part B Services (Other Than Physician Services)

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Interim final rule.

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SUMMARY: This interim final rule sets forth the process for 
establishing a realistic and equitable payment amount for all Medicare 
Part B services (other than physician services) when the existing 
payment amounts are inherently unreasonable because they are either 
grossly excessive or deficient. We also do not intend to apply this 
rule to services paid under a prospective payment system, such as 
outpatient hospital or home health. This rule describes the factors we 
(or our carrier) will consider and the procedures we will follow in 
establishing realistic and equitable payment amounts. This rule also 
responds to the public comments we received on the interim final rule 
with comment period that described the factors we will follow in 
establishing realistic and equitable payment amounts. In addition, the 
rule responds to a General Accounting Office report (as required by 
section 223 of the Balanced Budget Refinement Act of 1999), and it 
implements sections 1842(b)(8) and (b)(9) of the Social Security Act as 
revised by section 4316 of the Balanced Budget Act of 1997.

DATES: Effective date: These regulations are effective on February 11, 
2003.
    Comment date: Comments will be considered if we receive them at the 
appropriate address, as provided below, no later than 5 p.m. on 
February 11, 2003.

ADDRESSES: In commenting, please refer to file code CMS-1908-IFC. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission or e-mail. Mail written comments (one 
original and three copies) to the following address only:
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-1908-IFC, P.O. Box 8017, Baltimore, MD 
21244-8017.
    Please allow sufficient time for mailed comments to be timely 
received in the event of delivery delays.
    If you prefer, you may deliver (by hand or courier) your written 
comments (one original and three copies) to one of the following 
addresses:

Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or Room C5-14-03, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.

    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for commenters wishing to retain a proof of filing by 
stamping in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and could be considered late.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: William Long, (410) 786-5655.

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: Comments 
received timely will be available for public inspection as they are 
received,

[[Page 76685]]

generally beginning approximately 3 weeks after publication of a 
document, at the headquarters of the Centers for Medicare & Medicaid 
Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday 
through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an 
appointment to view public comments, call telephone number: (410) 786-
7195.

I. Background

    Title XVIII of the Social Security Act (the Act) contains various 
methodologies for making payment under Part B of the Medicare program. 
These payment methodologies vary among the different categories of 
items and services covered under Part B.
    Section 4316 of the Balanced Budget Act of 1997 (BBA), Pub. L. 105-
33, enacted on August 5, 1997, however, permits the Secretary to 
deviate from the payment methodologies prescribed in title XVIII of the 
Act if their application results in a payment amount that, because it 
is determined to be grossly excessive or deficient, is not inherently 
reasonable. Section 4316 of the BBA also requires the Secretary to 
describe the factors to be considered in determining an amount that is 
realistic and equitable.
    The inherent reasonableness concept is not new to the statute. The 
Secretary has always taken the position that the authority to regulate 
unreasonable payment amounts is inherent in his authority to determine 
reasonable charges according to section 1842 of the Act. Moreover, 
effective September 10, 1986, section 9304(a) of the Consolidated 
Omnibus Budget Reconciliation Act (COBRA) (Pub. L. 99-272) of 1985 
added section 1842(b)(8) and (b)(9) of the Act. These provisions 
expressly authorize the Secretary to deviate from the payment 
methodologies prescribed in the Act if their application results in a 
payment amount for a particular service or group of services, that is 
determined to be grossly excessive or deficient and is therefore, not 
inherently reasonable. The statute requires the Secretary to describe 
in regulations the factors to be considered in determining an amount 
that is realistic and equitable.
    Regulations implementing this provision are contained in 42 CFR 
405.502(g) and (h) and were published on August 11, 1986 in the Federal 
Register (51 FR 28710). These regulations describe the factors to be 
used in determining if the application of the reasonable charge 
methodology results in a charge that is grossly excessive or grossly 
deficient. The regulations also describe the factors to be considered 
in establishing a reasonable charge that is realistic and equitable.
    As implemented by the current regulations, section 1842(b)(8) of 
the Act applies not only to our authority to establish national 
reasonable charge limits, but also to our carriers' authority to 
establish carrier-level reasonable charge limits on grossly excessive 
or deficient charges.
    Section 4316 of the BBA amends section 1842(b)(8) of the Act and 
includes the following key differences:
    [sbull] It excludes physician services from application of inherent 
reasonableness.
    [sbull] It extends the authority to establish special payment 
limits to Medicare carriers regardless of the methodology used for 
determining payment and simplifies the inherent reasonableness process 
for adjustments to payment amounts that are 15 percent or less.
    On January 7, 1998 we published in the Federal Register (63 FR 687) 
an interim final rule implementing section 4316 of the BBA.

II. Provisions of the 1998 Interim Final Rule

    In the January 7, 1998 interim final rule, we revised Sec.  
405.502(g) and (h) by excluding references to physician services. We 
also deleted specific references to the reasonable charge payment 
methodology. We deleted these references because the inherent 
reasonableness provisions apply to all Part B services, except 
physician services, irrespective of the payment methodology. However, 
we do not intend to apply this rule to services paid under a 
prospective payment system, such as outpatient hospital or home health 
services. We also reflected the change in the statute that permitted us 
to simplify the process for making adjustments to payment amounts for a 
category of items or services when the increase or decrease in the 
payment amount is no more than 15 percent per year. (For purposes of 
Sec.  405.502(g) and (h), a ``category of items or services'' may 
consist of a single item or service or any number of items or 
services.)
    Although the BBA gives the Secretary discretion to reduce the 
number of factors that are used to make inherent reasonableness 
determinations, we retained all but one of the factors that appear in 
Sec.  405.502(g)(1), because they remain as appropriate examples of 
factors that may result in deficient or excessive payment amounts. We 
removed the factor related to the use of new technology for which an 
extensive charge history does not exist because there was already in 
place an alternative process for establishing payment amounts for new 
items or services for which an extensive charge history does not exist. 
(We reinserted this example in the final regulation; however, due to 
comments we received requesting that this example not be deleted.)
    When we implemented section 9304(a) of COBRA of 1985, we 
interpreted the statute as codifying both our authority and a carrier's 
authority to establish realistic and equitable payment amounts. We 
interpreted the provisions of section 4316 of the BBA in the same way. 
Thus, the final regulations describe the circumstances and factors our 
carriers and we would use in setting realistic and equitable payment 
amounts if the existing payment amounts are grossly excessive or 
deficient.
    Section 4316 of the BBA amends section 1842(b)(8), adding 
provisions that apply if a reduction or increase would vary the payment 
amount by 15 percent or less ``during any year.'' (Other provisions 
apply to larger increases and decreases.) Under this authority, we (or 
a carrier) may determine that more than a 15-percent adjustment is 
warranted, but we may choose to apply only a 15-percent adjustment in 
any given year and use the ``15 percent'' methodology. For example, we 
(or a carrier) may determine that a 25-percent reduction is warranted. 
However, the adjustment could be accomplished over 2 years--15 percent 
applied the first year, and 10 percent applied the following year.
    Other than these BBA changes and some minor modifications, the 
revised 1998 interim final regulations were the same as the final 
regulations that were published in the Federal Register (53 FR 26067) 
on July 11, 1988.
    While amended section 1842(b)(8)(C) of the Act does not 
specifically require that we include all the factors for making 
inherent reasonableness determinations for a category of items or 
services currently contained in Sec.  405.502(g), it permits the 
Secretary to consider any additional factors determined to be 
appropriate. The additional pre-BBA factors we may consider, in 
accordance with current Sec.  405.502(g)(1), include the following:
    [sbull] The market place is not competitive.
    [sbull] The payment amounts in a particular locality grossly exceed 
amounts paid in other localities for the category of items or services.
    [sbull] The payment amounts grossly exceed acquisition or 
production costs for the category of items or services.
    [sbull] There have been increases in payment amounts that cannot be 
explained by inflation or technology.

[[Page 76686]]

III. Balanced Budget Refinement Act of 1999

    Section 223 of the Balanced Budget Refinement Act (BBRA) of 1999, 
Pub. L. 106-113, enacted on November 29, 1999, prohibits the use of the 
inherent reasonableness authority until the following events have 
occurred:
    Step 1: The Comptroller General releases a report regarding the 
impact of the Secretary's fiscal intermediaries' and carriers' use of 
the authority.
    This report entitled ``Medicare Payments-Use of Revised `Inherent 
Reasonableness' Generally Appropriate (GAO/HEHS-OO-79)'' was released 
by the General Accounting Office (GAO) in July 2000. A discussion of 
this report and our response to its recommendations is contained in 
section IV of this regulation.
    Step 2: The Secretary has published a notice of final rulemaking in 
the Federal Register that relates to the authority and that responds to 
the report and to comments received in response to the Secretary's 
interim final regulation relating to the authority that was published 
on January 7, 1998.
    This regulation constitutes a notice of final rulemaking relating 
to inherent reasonableness authority. In addition to responding to the 
GAO Report, this regulation also responds to the comments received 
regarding the interim final regulation that was published January 7, 
1998. Section V of this regulation includes our responses to these 
comments. However, we are issuing this regulation as an interim final 
rule so that the public will have an additional opportunity to comment. 
We are particularly interested in receiving comments on two provisions 
that contain further specificity than found in the 1998 interim final 
rule. These two provisions are the definitions of ``grossly excessive'' 
and ``grossly deficient'' in Sec.  405.502(g)(1)(ii) and the criteria 
for using valid and reliable data in Sec.  405.502(g)(4). Comments on 
the 1998 interim final rule are addressed in section V of this interim 
final rule.
    Step 3: In publishing the final regulation, the Secretary will 
reevaluate the appropriateness of the criteria included in the interim 
final regulation for identifying payments that are excessive or 
deficient.
    The criteria set forth in the interim final rule were never 
intended to include every set of circumstances where inherent 
reasonableness would be considered appropriate. We have reviewed the 
criteria that were included in the interim final rule. These same 
criteria were also included in the 1986 final regulation and are, 
therefore, not new but have been in effect for over 10 years. These 
criteria were originally established by the Congress. We believe the 
criteria remain as appropriate today as they were when the Congress 
established them, and we would need compelling reasons for determining 
that any of the criteria are inappropriate. A more detailed discussion 
of the criteria is contained in section V of this preamble. Once again, 
we would point out that these criteria are furnished as examples of 
situations of possible grossly excessive or deficient payment amounts 
and we believe they are realistic and continue to be relevant. In 
addition, the criteria were never intended to include every set of 
circumstances for which inherent reasonableness would be considered 
appropriate.
    Step 4: Take appropriate steps to ensure the use of valid and 
reliable data when exercising the authority.
    The regulation has been revised to include a new section that 
provides a methodology taken from the GAO report to ensure the use of 
valid and reliable data (Sec.  405.502(g)(4)). The criteria include 
doing the following:
    [sbull] Develop written guidelines for data collection and 
analysis;
    [sbull] Ensure consistency in any survey to collect and analyze 
pricing data.
    [sbull] Develop a consistent set of survey questions to use when 
requesting retail prices.
    [sbull] Ensure that sampled prices fully represent the range of 
prices nationally.
    [sbull] Consider the geographic distribution of Medicare 
beneficiaries.
    [sbull] Consider relative prices in the various localities to 
ensure that an appropriate mix of areas with high, medium, and low 
consumer prices was included.
    [sbull] Consider criteria to define populous State, less populous 
State, urban area, and rural area.
    [sbull] Consider a consistent approach in selecting retail outlets 
within selected cities.
    [sbull] Consider whether the distribution of sampled prices from 
localities surveyed is fully representative of the distribution of the 
U.S. population.
    [sbull] Consider the products generally used by beneficiaries and 
collect prices of these products.
    [sbull] When using wholesale costs, consider the cost of the 
services necessary to furnish a product to beneficiaries.

IV. Response to GAO Report

    In July 2000, the GAO released a report entitled ``Medicare 
Payments--Use of Revised `Inherent Reasonableness' Generally 
Appropriate (GAO/HEHS-00-79).'' This interim final regulation responds 
to the GAO report and, in section V, responds to the comments received 
regarding the January 7, 1998 interim final regulation. In its report, 
the GAO found that CMS's use of the revised inherent reasonableness 
process was generally appropriate. Also, the GAO made four specific 
recommendations that are discussed below.
    Recommendation: In publishing the final rule on the inherent 
reasonableness process, CMS should define with sufficient clarity the 
terms ``grossly excessive'' and ``grossly deficient.''
    Response: We concur with this recommendation. The GAO indicated 
that the definition of these terms is needed so that it is clear to the 
medical equipment industry precisely what constitutes grossly excessive 
or grossly deficient. In its report, the GAO states that ``clearly an 
adjustment of under 15 percent could qualify [as grossly excessive or 
grossly deficient], because the inherent reasonableness authority 
extends to situations in which the difference between a current and 
proposed payment amount is under 15 percent.''
    In addition, the statute provides two different processes once a 
determination is made that a payment amount is grossly excessive or 
deficient. That is, the statute specifies a process for adjustments of 
15 percent or more in a given year and a simplified process for 
adjustments of less than 15 percent in a given year. However, the 
statute does not define what constitutes a grossly excessive or 
deficient payment amount. Nevertheless, the statute places significant 
importance on a 15 percent criterion. For this reason, we believe that 
differences between current and proposed payment amounts of less than 
15 percent should not be considered grossly excessive or grossly 
deficient and therefore do not provide a sufficient basis for using 
Inherent Reasonableness authority. This definition does not preclude 
adjustments of less than 15 percent in a given year once it is 
determined that an overall adjustment of 15 percent or more is 
justified.
    Recommendation: For future inherent reasonableness reviews based on 
survey data, CMS or the carriers should develop and implement a more 
structured survey design, including sample selection, survey 
instrumentation, and data collection methods, and ensure that the 
design is consistently used by all entities conducting the survey.
    Response: In September of 1998, the carriers proposed reducing 
payment

[[Page 76687]]

amounts for blood glucose test strips, lancets, intermittent urinary 
catheters, basic enteral formula, albuterol sulfate (an inhalation 
solution), and eyeglass frames. The basis for these payment reductions 
was their determination that the current fees were grossly excessive. 
The carriers based this determination on a comparison of the current 
fees with the retail prices charged by suppliers. The retail data were 
gathered from telephone inquiries and on-site visits to retailers. Each 
DMERC obtained retail prices from four States in their region (three 
populous States and one less populous State). Thus, the carriers 
obtained prices from a total of 16 States across the country (12 
populous States and 4 less populous States). Within each State, the 
carriers obtained prices from three urban areas and two rural areas. 
Within each urban area, the carriers obtained prices from four large 
stores and one small store. Within each rural area, the carriers 
selected one store. At least 200 observations were made for each of the 
six items with over 1,000 observations being made for blood glucose 
test strips.
    The following are the GAO's main criticisms of this retail price 
survey as stated in the report and our responses:
    [sbull] The carriers' sampling plan was developed without fully 
considering the geographic distribution of Medicare beneficiaries.
    Based on this criticism from the GAO, in the future we will ensure 
that greater consideration is given to survey design including the 
geographic distribution of Medicare beneficiaries for the purpose of 
conducting retail price surveys.
    [sbull] The carriers did not consider relative prices in the 
localities from which they sampled, which would have helped ensure that 
an appropriate mix of areas with high, medium, and low consumer prices 
was included.
    The carriers surveyed both large and small States, urban and rural 
areas, and independent and chain stores for this purpose. In the 
future, we will take steps to ensure that consideration is given to 
including areas with high, medium, and low consumer prices.
    [sbull] The carriers did not establish criteria to define populous 
State, less populous State, urban area, rural area, and, consequently, 
each carrier used different criteria in selecting locations.
    [sbull] We will adopt more standard definitions of what constitutes 
populous States, less populous States, urban areas, and rural areas and 
will ensure that the carriers use these definitions.
    [sbull] The carriers were not consistent in how they chose retail 
outlets within selected cities.
    While the carriers surveyed both independent and chain stores, we 
will instruct the carriers to be more consistent in the methodology 
they use to make these selections.
    [sbull] The carriers did not use consistent methods to collect and 
analyze the pricing data and did not develop written guidelines for 
data collection and analysis.
    The carriers did use written spreadsheets to contain the basic 
information that they were looking for when they contacted each retail 
store. The method that was used was a simple example of price shopping, 
namely, pricing data were collected by contacting retail stores to find 
out how much they charge for a certain list of items. The carriers 
followed general guidelines that were provided by CMS. We will issue 
more detailed guidelines to the carriers to ensure that a more 
standardized method is used when obtaining pricing information in the 
future.
    Also, based on these GAO criticisms of the carriers price survey, 
the carriers will not finalize their September 1998 proposed 
adjustments since the methodology used by the carriers' for making the 
proposed adjustments does not reflect the revised regulatory criteria 
recommended by GAO for making inherent reasonableness determinations. 
Likewise, the CMS inherent reasonableness proposals that were published 
in August 1999 will not be finalized since the methodology used for 
making the proposed adjustments also do not reflect the revised 
criteria recommended by GAO and adapted in this final regulation.
    Recommendation: CMS and the carriers should collect and analyze 
additional information to more precisely estimate any payment 
reductions for glucose test strips, albuterol sulfate, and enteral 
formulas, as well as for additional payment reductions in subsequent 
years for lancets, eyeglass frames, latex Foley catheters, and catheter 
insertion trays without drainage bags.
    Response: See response to previous recommendation.
    Recommendation: CMS should monitor indicators that could signal 
potential problems with patient access to the product groups for which 
it is reducing maximum payments and act quickly to rectify any problems 
that arise.
    Response: As stated in our comments on the draft report, we will 
monitor patient access to items for which payment amounts are adjusted 
using the inherent reasonableness process by periodically checking the 
rate at which suppliers are accepting assignment for these items and by 
monitoring any beneficiary complaints regarding access.

V. Comments and Responses

A. General

    The January 7, 1998 interim final rule invited comments. The 
specific comments and our responses to these comments follow:
    Comment: Only the Congress should be permitted to revise payment 
rates.
    Response: The inherent reasonableness authority was first expressly 
granted to the Secretary by the Congress in section 9304 of COBRA of 
1985. The inherent reasonableness process was specifically established 
by the Congress for the Secretary to use in adjusting unreasonable 
payment amounts. In section 4316 of the BBA, the Congress further 
modified the inherent reasonableness authority which allows the 
Secretary to revise payment rates. Therefore, the Congress clearly 
granted the Secretary the authority to revise payment rates using the 
inherent reasonableness process.
    Comment: The statute limits inherent reasonableness adjustments to 
particular items, not categories of items.
    Response: The regulations have always referred to inherent 
reasonableness as applying to categories of services. While the statute 
makes reference to particular items or services, we do not believe that 
this precludes our applying inherent reasonableness to categories of 
particular items or services that are similar in function and 
technology, for example, durable medical equipment grouped together 
under the same code in the Health Care Common Procedure Coding System 
(HCPCS). It would be impractical to make separate inherent 
reasonableness adjustments for each unique item or service. For 
example, it would not be practical to make inherent reasonableness 
determinations for every different manufacturer, brand name, or model 
of a specific type of wheelchair described by a particular HCPCS code. 
Moreover, if a category of items is so similar that payment is made 
based on the same code and same payment determination, it seems to us 
completely logical to apply the same limitation to the whole category.
    Comment: The inherent reasonableness provision should not be 
applied to hospital outpatient services.
    Response: The statute applies inherent reasonableness to all Part B 
items and services other than physicians' services as defined and paid 
for under section 1848 of the Act. By statute, hospital outpatient 
services,

[[Page 76688]]

therefore, are not excluded from the inherent reasonableness process. 
However, we do not intend to apply this rule to services paid under a 
prospective payment system, such as outpatient hospital or home health 
services.
    Comment: The inherent reasonableness provision should not be 
applied to drugs administered in physicians' offices.
    Response: The statute applies inherent reasonableness to all Part B 
items and services other than physicians' services as defined and paid 
for under section 1848 of the Act. Drugs are paid under section 1842(o) 
of the Act and not section 1848 of the Act. The inherent reasonableness 
authority can and should be used in cases for which the standard rules 
for determining payment amounts for drugs result in grossly deficient 
or excessive payment amounts. However, we do not intend to apply this 
rule to services paid under a prospective payment system, such as 
outpatient hospital or home health services. Further, no item or 
service will be subjected to a change in payment under the inherent 
reasonable authority until it is published by either CMS in the Federal 
Register or its carriers in their own publication and consideration of 
comments received in response to the proposed notice. (CMS notices are 
published in the Federal Register.)
    Comment: It would be inappropriate for CMS to change laboratory 
payments while the Institute of Medicine is conducting a study on Part 
B payments.
    Response: Before applying inherent reasonableness to laboratory 
services, we will consider the results of the study conducted by the 
Institute of Medicine. As we noted above, the inherent reasonableness 
authority can and should be used in cases where the standard rules for 
determining payment amounts for laboratory services result in grossly 
deficient or excessive payment amounts. Moreover, no item or service 
will be subjected to a change in payment under the inherent 
reasonableness authority until it is published by either CMS in the 
Federal Register or its carriers in their own publication and 
consideration of comments received in response to the proposed notice.
    Comment: CMS should not ignore grossly deficient situations. CMS 
should include the mechanisms for increasing deficient payments.
    Response: We will monitor all complaints from beneficiaries, 
suppliers, providers, and others regarding patient access to items and 
services for which payment amounts may be adjusted using the inherent 
reasonableness process. If we determine that a payment amount is 
grossly deficient, then we will propose that the payment amount be 
adjusted using the inherent reasonableness process.
    Comment: CMS should increase payment allowances for items used by 
ostomy patients.
    Response: The inherent reasonableness authority was suspended by 
the BBRA (see section III of this final rule for a discussion of the 
BBRA). Before that statute, we were reviewing the payment amounts for 
several ostomy items to determine if inherent reasonableness 
adjustments were necessary. We intend to continue reviewing payment for 
these items once the inherent reasonableness authority is restored.
    Comment: If CMS or a carrier decides to reduce excessive payment 
allowances by more than 15 percent spread out over 2 or more years, it 
should repeat the review process each year; otherwise, this provision 
contravenes congressional intent.
    Response: As recommended in the GAO report, when adjustments of 
more than 15 percent are spread out over multiple years, we will review 
market prices in the years subsequent to the year that the initial 15 
percent reduction is effective. The purpose of this review is to ensure 
that further reductions continue to be appropriate. However, the GAO 
does not recommend that a new proposed notice be published for each 
year in which reductions are implemented in addition to the initial 15 
percent reduction, and we agree that it is not necessary to publish 
another notice.
    Comment: Arbitrary adjustments to payment rates will affect patient 
access, assignment rates, beneficiary liability, and quality of care.
    Response: The purpose of the inherent reasonableness process is to 
establish realistic and equitable payment amounts when it is determined 
that the current payment methods result in amounts that are grossly 
excessive or grossly deficient. If payment amounts are proposed using 
the inherent reasonableness process that are not realistic and 
equitable, then the public has an opportunity to address this during 
the comment period. Information we or our carriers receive during the 
comment period or at any other time that demonstrates that inherent 
reasonableness adjustments will affect patient access, assignment 
rates, beneficiary liability, or quality of care would result in our 
appropriately adjusting the payment amount.
    Whether attempting to adjust payments centrally through a Federal 
Register notice or through the Medicare carriers, we believe that 
payment adjustments can only be effective if they follow a defensible 
process for doing so and are based on accurate information. As 
described in Sec.  405.502(g)(1) through (g)(4) of this regulation, a 
carrier proposing to establish a special payment limit for a category 
of items or services must inform the affected suppliers and Medicaid 
agencies of the proposed payment amounts and the factors considered in 
proposing the particular limit. As part of its analysis, all carriers 
must also consider the following elements:
    [sbull] The effects on the Medicare program, including costs, 
savings, assignment rates, beneficiary liability, and quality of care.
    [sbull] What entities would be affected such as classes of 
providers or suppliers and beneficiaries.
    [sbull] How significantly would these entities be affected.
    [sbull] How would the adjustment affect beneficiary access to items 
or services.
    The intent of these requirements is to assure that carriers collect 
sufficient information on market prices and potential effects on 
suppliers and beneficiaries before taking action.
    Comment: Inherent reasonableness adjustments could cause other 
payers to subsidize the Medicare program.
    Response: The goal of the inherent reasonableness process is to 
establish payment amounts that are realistic and equitable. When 
Medicare has realistic and equitable payment amounts, this should not 
result in other payers subsidizing the Medicare program, or conversely, 
Medicare subsidizing other payers.
    Comment: CMS needs to establish an inherent reasonableness appeals 
procedure.
    Response: The statute does not provide for an appeals process in 
the case of inherent reasonableness adjustments to payment amounts. 
Thus, the Congress obviously did not intend for a special appeal 
process to be available. However, issues or concerns identified during 
the public comment period on proposed inherent reasonableness 
adjustments are given full consideration and a final determination is 
published before the actual adjustments in payment are made. The 
comment period, therefore, provides a mechanism for commenters to raise 
issues and concerns regarding inherent reasonableness adjustments 
before they are put in place. In addition, after an adjustment is made, 
we will continue to monitor issues relating to patient access and take 
corrective action if necessary.

[[Page 76689]]

B. Factors Used in Making an Inherent Reasonableness Determination

    Comment: CMS should consider all the factors that may result in 
grossly deficient or excessive payment and not limit consideration to 
just one or two of the factors.
    Response: The examples listed in Sec.  405.502(g)(1)(vii) are just 
examples, and the regulation explicitly states that the list of 
examples is not all-inclusive. When making an inherent reasonableness 
determination, we can use one or more of the examples listed in the 
regulation or an example that is not listed in the regulation. This 
approach allows us to adapt the methodology we use to address the 
various specific issues that may pertain to any particular case 
regarding the use and availability of data as well as other factors 
relevant to making an inherent reasonableness determination in that 
case.
    Comment: The regulation should include greater specificity and 
guidance on the criteria and data that will be used to make payment 
adjustments. It should define grossly deficient or excessive. It should 
also define ``windfall profit.''
    Response: Both Sec.  405.502(g)(1)(vii) and section 1842(b)(8)(C) 
of the statute give examples of factors that can result in payment 
amounts that are grossly excessive or grossly deficient. The Act and 
regulation also give examples of methods that can be used in order to 
establish reasonable payment amounts. It is not necessary or practical 
to make these lists of examples all-inclusive. Moreover, having general 
criteria allows us flexibility in adapting inherent reasonableness 
applications to the wide array of items and services encompassed within 
Medicare Part B, different marketing conditions, and the availability 
of data. We define the terms ``grossly excessive'' and ``grossly 
deficient'' in this rule in section IV dealing with the GAO report and 
its recommendations. In this rule, we removed the term ``windfall'' and 
we replaced it with the term ``excessive'' because for purposes of this 
regulation they both have the same meaning. We define the term 
excessive in Sec.  405.502(g)(1)(ii).
    Comment: The factors to be considered should be rephrased to ensure 
that they apply to deficient payment allowances as well as excessive 
payment allowances.
    Response: The factors in Sec.  405.502(g)(1)(vii) apply to both 
excessive and deficient payment amounts.
    Comment: CMS should specify that national inherent reasonableness 
determinations are made by CMS, and carrier determinations are made by 
carriers/intermediaries or groups of carriers/intermediaries without 
regard to whether the determination applies in every carrier area or to 
a particular geographic area.
    Response: We agree with this comment, and we are revising Sec.  
405.502(g)(3) of the regulation to provide further clarification on the 
terms we use to distinguish between inherent reasonableness conducted 
by CMS and inherent reasonableness conducted by the carriers.
    Comment: CMS should use caution when comparing Medicare payment 
amounts to other purchasers' payment amounts. Some suppliers may take a 
loss on a small portion of business.
    Response: We recognize that some suppliers' charges may reflect 
marketing strategies and business practices independent of Medicare. 
For example, some businesses may sell an item for less than cost in 
order to increase customer traffic. Also, some suppliers may charge 
excessive amounts for products in order to subsidize other products. 
However, the purpose of inherent reasonableness is not to accommodate 
marketing strategies, but to ensure that the Medicare payment amounts 
for items or categories of items are realistic and equitable. In 
addition, in identifying prices, we check a variety of suppliers and 
types of suppliers. This levels out the effect of these marketing 
strategies.
    Comment: In comparing Medicare's allowances with other purchasers' 
allowances, CMS should take into account volume commitments to 
suppliers by other purchasers. It would be inappropriate to compare 
laboratory prices charged to physicians and other large purchasers to 
prices charged to Medicare because physicians and other purchasers can 
guarantee the laboratory a certain volume of patients and need only 
bill once per month. Billing Medicare for each patient is more 
expensive.
    Response: While the statute generally does not give CMS the 
authority to negotiate volume discounts with suppliers, it also does 
not permit CMS to subsidize the discounts that suppliers grant to other 
purchasers. CMS's charge is to calculate a fair and equitable payment 
amount, not to underwrite suppliers' profitability. Medicare is the 
largest volume purchaser for many items and services. As a payer, 
Medicare expenditures represent 17.6 percent of total national health 
expenditures by all payers. Expenditures for Part B, excluding 
physician services, are approximately $60 billion per year. Although 
Medicare does not give specific volume guarantees to suppliers and does 
not ask for volume discounts, there is a predictable volume of Medicare 
business, and suppliers have the opportunity to profit from this. To 
suggest that Medicare's payments be higher than other purchasers' 
payments in light of the large Medicare volume is unwarranted. 
Logically, it does not follow that a large purchaser such as Medicare 
should be expected to pay more than other smaller purchasers.
    Comment: CMS should not use the Veterans Administration's (VA) 
prices for comparison as the VA program is vastly different than 
Medicare.
    Response: Section 1842(b)(8) of the Act provides that comparing 
Medicare payments with payments made by other purchasers is an 
appropriate way to determine whether or not Medicare payment amounts 
are reasonable. The VA is a major purchaser of medical supplies and 
devices. The VA payment amounts in some cases, such as for oxygen 
equipment, are retail prices and can be compared with Medicare's 
payment amount without adding a mark-up factor. In other cases, the VA 
purchases items directly from manufacturers and supplies them to the VA 
patients. In addition, the VA may directly provide certain services 
that would otherwise be provided by suppliers under the Medicare 
program. Therefore, in many cases, the VA payments represent wholesale 
prices, and, thus, we have imputed a markup before comparing these 
amounts to Medicare payment amounts. Using wholesale prices with a 
markup has long been recognized in regulations at Sec.  405.502(g)(2) 
as an appropriate method for determining reasonable payment amounts 
under the inherent reasonableness authority. When we publish a proposed 
inherent reasonableness notice, we will explain the criteria we used to 
establish an appropriate markup.
    Comment: In determining if the marketplace is not competitive, CMS 
should consider if the lack of competition is a result of Medicare's 
deficient payment allowances.
    Response: The examples in Sec.  405.502(g)(1)(vii) are situations 
for which adjustments in payment may be required, such as the one 
referred to in this comment, may or may not result in excessive or 
deficient payment amounts. That is, the number of suppliers for a 
particular item does not in itself indicate whether or not our payment 
amount is excessive or deficient. While the number of suppliers may in 
certain cases be relevant and be considered, it would have to be 
considered along with

[[Page 76690]]

other factors to determine if an inherent reasonableness adjustment is 
warranted. We believe the language used in the regulation is consistent 
with this interpretation.
    Comment: In determining if the payment allowance in a locality is 
different than the amount paid in other localities, CMS should consider 
differences in costs in the other localities.
    Response: For purposes of inherent reasonableness, it is not always 
necessary to consider local variations in payment amounts which is 
consistent with the Congress limiting the degree of local variation by 
eliminating the reasonable charge payment methodology for most items 
and services. In the past, the reasonable charge methodology in some 
instances resulted in variations among areas as high as 300 percent. In 
place of the reasonable charge payment methodology, the Congress has 
established fee schedule payment methodologies with national payment 
limits or caps for most items and services previously paid on a 
reasonable charge basis. In the case of durable medical equipment (DME) 
and prosthetics and orthotics, the Congress established a fee schedule 
methodology with national floors and ceilings that allow maximum 
variations only up to 15 percent for DME and 30 percent for prosthetics 
and orthotics. (According to regulations at Sec. Sec.  442.220 and 
442.228, for DME, the ceiling is equal to the weighted average of local 
payment amounts; the floor is equal to 85 percent of the weighted 
average. For prosthetics and orthotics, the ceiling is equal to 120 
percent of the national average purchase price; the floor is equal to 
90 percent of the national average.) Also, we note that for some items 
covered by Medicare, items are available for an established price on a 
national basis through catalogues or the internet. For this reason, the 
regulatory provision pertaining to local variations in costs will 
probably have limited applicability. However, when it is used, we will 
take into account the relative costs of furnishing a category of items 
or services in different locations as described in the regulation.
    Comment: In determining whether the payment allowances are grossly 
in excess of acquisition or production costs, CMS should consider other 
types of relevant costs, for example, rent. CMS should consider all 
direct and indirect costs, including any service component, in making 
an inherent reasonableness determination.
    Response: In some instances, it may be appropriate to use cost 
rather than retail or wholesale prices in determining whether a payment 
amount is grossly excessive or deficient. In those instances in which 
we use cost data, we will consider both direct and indirect costs of 
the supplier as well as any service component.
    Comment: In determining if increases in payment amounts cannot be 
explained by inflation or technology, CMS should also examine other 
factors such as malpractice or product liability risks.
    Response: If we determine that increases in payment amounts cannot 
be explained by inflation or technology but can be explained by other 
factors, we will consider these other factors when making an inherent 
reasonableness determination.
    Comment: By removing the example relating to increases in payment 
amounts that cannot be explained by inflation or technology, in the 
interim final rule with comment, CMS would never again consider making 
an inherent reasonableness adjustment based on new technology.
    Response: As indicated previously, the factors listed in Sec.  
405.502(g)(1)(vii) are merely examples. There is no requirement that 
any specific example must be used or that only the specific examples 
listed in the regulation can be used. However, because this is a good 
example, we are putting it back into the regulation.
    Comment: CMS should consider improvements in technology in making 
an inherent reasonableness determination.
    Response: As indicated in Sec.  405.502(g)(1)(vii)(C) of this final 
rule, improvements in technology are listed as a factor that we may 
consider when making inherent reasonableness determinations.
    Comment: CMS's gap-filling methodology does not result in adequate 
payment levels for medical equipment and supplies, especially for new 
technology.
    Response: Section 1834 of the Act stipulates that the fee schedule 
payment amounts for DME and prosthetics and orthotics be calculated 
based on the average reasonable charge for the item from a base period, 
for example, 1986 and 1987. These base fee schedule amounts are updated 
on an annual basis by a factor legislated by the Congress. When the 
reasonable charge data from the base period do not exist, for example, 
when an item was not on the market at that time, the Medicare carriers 
establish the base fee schedule amounts using a ``gap-filling'' 
methodology. This methodology is used to approximate historic 
reasonable charges, from the base period. For example, Medicare 
carriers may use fee schedule amounts for comparable items or supplier 
price lists with prices for comparable items.
    When base year data are not available and more current prices are 
used, the carriers decrease the more current prices by a ``deflation'' 
factor in order to approximate the base year price for gap-filling 
purposes. The deflation factors are based on the percentage change in 
the consumer price index for all urban consumers (CPI-U) from the mid-
point of the fee schedule base period to the mid-point of the year that 
the price is in effect. The gap-filling process is only used when the 
base year data required by the statute for use in calculating the fee 
schedules do not exist. We believe that this methodology does result in 
adequate payment amounts by taking into account comparable prices, 
retail prices, and inflationary factors. However, we can adjust gap-
filled fee schedule amounts that we determine are grossly excessive or 
grossly deficient using the inherent reasonableness process.
    Comment: For laboratory services, competitive pricing or changing 
technology are not relevant to pricing under inherent reasonableness 
since laboratory services are paid on a fee schedule basis.
    Response: Fee schedules as payment methodologies do not preclude 
the use of inherent reasonableness. The inherent reasonableness process 
is the process that the Congress has established to address fee 
schedule amounts or other payment amounts that are not reasonable for 
various reasons. As indicated by previous GAO and the Office of 
Inspector General (OIG) reports, fee schedule payment amounts may not 
always be realistic and equitable. Inherent reasonableness, as 
authorized by the statute, allows us to look at other factors such as 
competitive pricing and changes in technology in order to determine 
whether the fee schedule amounts are excessive or deficient.
    Comment: The methodology for making inherent reasonableness 
determinations should include valid statistical techniques.
    Response: As mentioned previously, section 223(b) of the BBRA 
requires that, in publishing this regulation, the Secretary will take 
appropriate steps to ensure the use of valid and reliable data when 
exercising inherent reasonableness authority. We have added a provision 
in Sec.  405.502(g)(4) of the final regulation that defines the steps 
we will take to ensure the use of valid and reliable data. See our 
response

[[Page 76691]]

regarding this topic in section III of this regulation.
    Comment: CMS does not have the authority under inherent 
reasonableness to require that it receive the ``best price.''
    Response: The commenter is referring to a methodology that we may 
use in determining whether payment amounts are grossly excessive or 
grossly deficient. As described in Sec.  405.502(g)(1)(vii)(D), one 
methodology that may be used to make an inherent reasonableness 
determination is whether the payment amount for an item or service is 
substantially higher or lower than the payments made for the item or 
service by other purchasers in the same locality. If we identify a 
price and there are indications that the item or service is readily 
available at that price, then, we believe, this price would be a 
realistic and equitable payment amount. As the GAO observed in its 
report on inherent reasonableness, ``retail prices represent the prices 
generally available to individual beneficiaries, include a share of the 
costs of maintaining retail space as well as other services, and are 
generally higher than what a prudent large-volume purchaser would 
pay.'' Therefore, using the best retail price available on the open 
market for an item or service would be appropriate as long as 
beneficiary access to the item or service is not significantly 
affected.
    Comment: CMS needs to find a ``pattern'' of excessive charges 
before it can use its inherent reasonableness authority.
    Response: We disagree with this comment. We do not believe that 
identifying patterns of excessive charges is necessary to determine 
that Medicare is paying a grossly excessive or deficient payment 
amount. For example, even though multiple payers may be paying an 
excessive amount for an item or service, a single payer may be paying 
significantly less than the other payers. This may be the result of the 
single payer using a more innovative payment methodology, such as 
competitive bidding or negotiated rate setting. We do not believe we 
should be precluded from comparing, in this case, Medicare's excessive 
payment amount with another entity's significantly lower amount that 
was a result of a more innovative payment methodology.

C. Factors Used in Establishing a Special Payment Amount

    Comment: A payment amount should not be established based on bulk 
purchasing.
    Response: In an open market system, bulk purchasing ordinarily 
results in a discounted price. Medicare pays for items on an individual 
claim-by-claim basis and does not enter into contracts to purchase a 
predetermined number of items. Nevertheless, a large volume of claims 
is paid by Medicare and the total Medicare dollars that are paid out 
for Part B items and services (other than physician services) 
(approximately $60 billion dollars in fiscal year 2001) are 
significant. Because Medicare may account for a significant part of the 
market, we believe that Medicare should not be precluded from taking 
into consideration discounts available to other payers when determining 
what constitutes a reasonable payment amount for an item or service.
    Comment: A payment amount should permit the small supplier to 
continue to have reasonable revenues and profit margins. For example, 
mail order catalogs should not be used for establishing a payment 
amount because small dealers are unable to take advantage of discounted 
pricing.
    Response: The purpose of inherent reasonableness is to replace 
grossly excessive and grossly deficient payment amounts with realistic 
and equitable payment amounts. We recognize that small suppliers may be 
necessary to provide service to beneficiaries and to ensure appropriate 
access to items and services. However, there are instances in which 
catalog prices are useful in determining whether adjustments in 
payments are warranted. For example, in 1995, catalog prices were used 
to reduce the Medicare payment amounts for home blood glucose monitors 
and, since then, we have not received any complaints that beneficiaries 
are having trouble obtaining home blood glucose monitors. Other items, 
such as blood glucose test strips, are ordinarily purchased by Medicare 
beneficiaries through catalogs.
    Comment: A payment amount should reflect the ``added'' costs of 
doing business with Medicare.
    Response: In considering retail prices, we recognize that 
businesses, in setting these prices, take into account the costs of 
providing their customers with appropriate services. For example, 
retail stores take into account the costs of processing VISA and 
MasterCard claims, including the user fees that suppliers must pay to 
accept credit cards and the costs of submitting bills to credit card 
companies. Businesses generally do not charge VISA and MasterCard 
customers more than other customers. Also, it should be noted that 
there are distinct costs to service cash customers, such as necessary 
security systems and the deposit of funds in banks. Ordinarily, 
purchasers, whether they use coupons, obtain an American Association of 
Retired Persons (AARP) discount, use a credit card, write a check, or 
use private or public insurance, do not expect to pay more than the 
retail price; nor does a customer needing help in selecting a 
particular item expect to pay more than the retail price. Thus, retail 
prices take into account these costs of doing business. However, if we 
do not consider retail prices, but instead use wholesale prices as a 
basis for calculating inherent reasonableness, we will include a markup 
to make these prices comparable to retail prices.
    Comment: CMS should establish single national payment amounts and 
should not recognize any geographic variation.
    Response: There are instances in which it is appropriate to 
establish a single national payment amount (for example, home blood 
glucose monitors). There may be other items that are available at the 
same price on a national basis. However, in other instances, when there 
is a significant labor or service component, it may not be appropriate 
to establish a single national payment amount for an item or service. 
The Congress seemed to recognize, to a limited extent, the need for 
variation in payment amounts for some items and services. For example, 
the Congress mandated both upper and lower limits for the fee schedule 
amounts for DME, with a range in payment of 15 percent.
    Comment: Reductions should not exceed 7 percent in 1 year and 
should be limited to a total of 20 percent over 3 years.
    Response: The statute provides us the authority to adjust payments 
by as much as necessary in order to correct a grossly excessive or 
grossly deficient payment amount. It would be inappropriate for 
Medicare to spend excessive amounts for items and services, once it had 
determined that the payment amount was grossly excessive or deficient.

D. Carrier Procedures

    Comment: Inherent reasonableness decisions should not be made by 
carriers but should be made through the formal rulemaking process or at 
least published in the Federal Register. Carriers should not be 
permitted to reprice items without national policy or greater CMS 
scrutiny. The carriers are making de facto national policy under this 
rule.
    Response: Before the BBA, CMS requested an amendment to the 
inherent reasonableness statutory requirements to allow carriers to 
make inherent reasonableness adjustments so that we could respond 
timely to frequent price

[[Page 76692]]

changes in the marketplace. We had specifically asked the Congress to 
drop the requirement that all inherent reasonableness determinations 
had to be made through publishing in the Federal Register so that 
carriers could make their own inherent reasonableness determinations 
without pursuing the cumbersome and lengthy Federal Register process. 
The BBA gives us that latitude.
    As authorized by section 1842(a) of the Act, carriers, under our 
direction, have historically been used to make determinations regarding 
payment amounts, coverage determinations, in the absence of a national 
coverage determination, and utilization safeguards. Also, section 
1842(b) of the Act specifies that inherent reasonableness adjustments 
of more than 15 percent a year must be published in the Federal 
Register. This clearly demonstrates that it was the intent of the 
Congress that adjustments of 15 percent or less in a given year can be 
made without publishing in the Federal Register. The regulations 
specifically provide for inherent reasonableness adjustments to be made 
by the Secretary or our carriers and includes specific instructions for 
carrier use of inherent reasonableness. Specifically, carriers are able 
to make inherent reasonableness determinations efficiently and respond 
quickly to price changes in the market place. Before the BBA, we 
completed only one inherent reasonableness adjustment because of the 
cumbersome statutory requirements. Because of the cumbersome inherent 
reasonableness process, we were not able to use inherent reasonableness 
to address the numerous OIG, GAO, and newspaper reports that Medicare's 
payments were excessive. The effect of the BBA was to facilitate the 
implementation of inherent reasonableness determinations by allowing 
carriers to make payment adjustments. The GAO concurs that the use of 
carriers to make inherent reasonableness adjustments is appropriate. 
The GAO states in its report on inherent reasonableness that:

    CMS acted within its authority in delegating the revised 
inherent reasonableness process to the carriers. The BBA was 
important in removing the barriers that prevented the carriers from 
conducting inherent reasonableness reviews. * * * Moreover, 
delegation is proper because pricing Medicare goods and services is 
already a responsibility of the carriers and the statute does not 
specifically preclude delegation of this authority to the carriers.

    Comment: CMS needs to ensure against arbitrary and capricious 
decisions and carrier abuse of inherent reasonableness authority. 
Carriers should seek CMS's review and approval of all inherent 
reasonableness adjustments.
    Response: The regulation requires that no payment adjustments may 
take place without informing suppliers of the proposed payment amounts, 
the factors considered in proposing the limit, and soliciting comments 
from suppliers. After considering the comments received, the regulation 
also requires the carriers to inform CMS of any inherent reasonableness 
limitations it plans to establish. No limitations can take affect until 
we have informed the carriers that we have received the carrier's 
notification. This allows us the opportunity to review the carrier's 
determination and ensure that arbitrary and capricious limitations are 
not implemented. In cases where one or more of our carriers undertake 
an adjustment using this inherent reasonableness authority that either 
has an impact of $100 million or more in any one year, or has a 
significant effect on a substantial number of small entities, the 
carrier or carriers will notify providers of the planned adjustment and 
the analysis on which it is based. In this way, affected parties would 
be able to comment on the planned adjustment.
    Comment: Carriers may abuse their inherent reasonableness authority 
by reducing payment allowances by more than 15 percent over more than a 
1-year period without the procedural protection of rulemaking, that is, 
compliance with the Administrative Procedure Act (APA).
    Response: The statute allows the carriers to make inherent 
reasonableness adjustments of more than 15 percent over 2 or more years 
as long as the adjustments do not exceed 15 percent in a single year. 
This was confirmed in the GAO report on inherent reasonableness. In 
addition, before implementing inherent reasonableness limits, the 
carriers are required by the regulation to inform affected suppliers of 
the factors it used in establishing the limit and to provide the 
opportunity for suppliers to comment.
    Comment: Allowing carriers to make independent payment decisions 
will result in payment disparities between carriers.
    Response: Inherent reasonableness is the authority for establishing 
realistic and equitable payment amounts. In some cases, applying 
inherent reasonableness may result in payment amounts that vary by 
geographic area. In other cases, it may be justifiable to eliminate 
payment disparities by establishing a single national payment amount. 
In certain situations, the Congress has recognized the need for 
variation in payment amounts.
    Comment: Carriers should only be permitted to make inherent 
reasonableness adjustments once every 5 years or be limited in the 
number of items subject to inherent reasonableness.
    Response: The statute does not limit the number of times that this 
authority may be used, nor does it limit the number of items that can 
be reviewed using this authority. In some cases, it may be necessary to 
make more frequent adjustments than every 5 years to take into account 
changes in technology or economics.
    Comment: Section 4554 of the BBA requires that any advisory 
committee established by a carrier for coverage and administrative 
policies under Part B will include an individual to represent the 
independent clinical laboratories.
    Response: Section 4554 of the BBA, by its own terms, provides only 
for laboratory representatives to be on carrier advisory committees for 
coverage and administrative policies. This section does not implicate 
Medicare payment policies, nor is there any implication that an 
advisory committee would be part of an inherent reasonableness review 
of payment levels by the carrier.
    Comment: This rule should apply to intermediaries as well as 
carriers.
    Response: The inherent reasonableness authority applies to all Part 
B items and services except physician services. Therefore, this rule 
applies to both carriers and intermediaries who process Medicare Part B 
claims. However, we do not intend to apply this rule to services paid 
under a prospective payment system, such as outpatient hospital or home 
health services.
    Comment: A process should be put into place to allow suppliers to 
formally petition carriers for inherent reasonableness reviews. The 
petitions would be required to meet specific standards to be considered 
for inherent reasonableness.
    Response: Anyone has the opportunity to submit a request to CMS or 
a Medicare carrier for an inherent reasonableness adjustment. The 
regulations provide guidance on the criteria that will be used in 
determining whether an adjustment in the Medicare payment amount(s) is 
warranted. We do not believe that there would be an added benefit to 
creating a formal process; we believe that it is best to keep the 
process flexible so that we and the carriers can respond to the various 
situations that could arise. For example,

[[Page 76693]]

the type and quantity of data needed in order to conduct an inherent 
reasonableness review cannot be determined ahead of time and may vary 
significantly depending on the item or service at issue.
    Comment: Will carriers take into account suppliers' administrative 
and service costs in making inherent reasonableness determinations?
    Response: In those cases for which actual cost data are used as a 
basis for an inherent reasonableness determination, administrative and 
service costs would be taken into account. Conversely, when we or a 
carrier use retail prices or data on payments made by other payers as a 
basis for an inherent reasonableness determination, administrative and 
service costs are typically included as part of the retail prices or 
third party payer amounts.
    Comment: Who at the DMERC has inherent reasonableness authority?
    Response: Each carrier determines which of its staff or components 
are best qualified to conduct inherent reasonableness reviews, as they 
do in the case of other pricing issues.
    Comment: Carriers should be required to provide affected parties 
with the data and all relevant information they use to make inherent 
reasonableness determinations.
    Response: The carriers will publish the data and all relevant 
information they use to make inherent reasonableness determinations in 
the proposed notice to suppliers. Any additional background data used 
by the carriers in making inherent reasonableness determinations that 
are not published in the proposed notice will be made available.
    Comment: Carriers need more guidance to ensure that they contact 
all relevant parties when publishing an inherent reasonableness 
adjustment.
    Response: Carriers will be required to notify all suppliers and/or 
organizations representing suppliers of any proposed inherent 
reasonableness adjustments. Therefore, those parties that are directly 
affected by the changes in payment will be notified of the proposed 
adjustments and may respond to these proposed changes before they take 
effect (see Sec.  405.502(g)(3)(ii)).
    Comment: Carriers should provide a written response to comments on 
inherent reasonableness adjustments.
    Response: In the final notice of inherent reasonableness that is 
sent to suppliers and/or organizations representing suppliers, the 
carriers will be required to provide written responses to the comments 
they received on the proposed notice of inherent reasonableness.
    Comment: The sequence of steps a carrier will follow in making an 
inherent reasonableness determination should be made clearer.
    Response: We concur with this comment. We have revised Sec.  
405.502(g)(3)(ii) to clarify the procedures a carrier must follow.
    Comment: Interested parties should have the ability to comment on 
decisions when the adjustment is less than 15 percent.
    Response: All proposed inherent reasonableness adjustments will be 
published and a comment period will be provided for all adjustments 
regardless of the percentage change in payment; some will be published 
on a carrier-wide basis, while those made by CMS will be published in 
the Federal Register.

E. Impact

    Comment: In compliance with the APA, the inherent reasonableness 
rule should be withdrawn and published as a notice of proposed 
rulemaking with a public comment period. This would give the industry 
the opportunity to comment before implementation. Suppliers no longer 
have the procedural safeguards that have been in place since 1986. 
``Good cause'' does not exist to waive the proposed rulemaking process.
    Response: Section 223 of the BBRA prohibits us from using the 
inherent reasonableness authority until we respond to the GAO report 
and publish a notice of final rulemaking that responds to comments 
received on the January 7, 1998, interim final regulation on inherent 
reasonableness. We are meeting the mandate of section 223 of the BBRA 
by publishing this interim final rule and are therefore in compliance 
with the statute. Moreover, consistent with both section 223 of the 
BBRA and the APA, the 1998 interim final rule served the same purpose 
as a notice of proposed rulemaking since this regulation invited public 
comment. This interim final rule responds to the comments we received 
on the 1998 interim final regulation.
    Also, we note that the GAO report addressed this issue and 
concluded that a notice of proposed rulemaking was not necessary. 
Specifically, the GAO report states that ``going through the notice of 
proposed rulemaking to issue inherent reasonableness regulations would 
have serious financial implications for Medicare and its 
beneficiaries.'' In addition, the GAO states that ``CMS's reliance on 
the good cause exception to bypass formal notice and comment rulemaking 
procedures seems reasonable.''
    Comment: The rule does not comply with the Regulatory Flexibility 
Act and will have a significant economic impact on a substantial number 
of small entities. In addition, CMS indicates in the regulatory impact 
statement that it has insufficient data to predict exactly the nature 
of the impact of this rule; yet CMS certifies that the rule will not 
have a significant impact on a substantial number of small entities.
    Response: Because this rule does not include any actual proposed or 
final inherent reasonableness determinations, it will have no impact on 
Medicare's payment amounts. However, we believe that the rule, by 
allowing us to conduct inherent reasonableness in the future, has the 
potential to significantly impact small businesses. This belief is 
based on a June 2002 OIG report indicating that Medicare may be 
overpaying between $130 million and $958 million per year for 16 items 
of medical equipment. In addition, in 2002, the GAO indicated that 
Medicare may be overpaying for medical equipment by more than 20 
percent. However, we are unable to predict the specific dollar impact 
based on the future application of inherent reasonableness. Since we 
recognize the potential for future payment adjustments, either upward 
or downward, we will publish in the Federal Register impact statements 
that will comply with Executive Order 12866 whenever CMS proposed 
national limits and the dollar impact of inherent reasonableness 
determinations exceeds $100 million in any one year, and will address 
impact on small entities in accordance with the Regulatory Flexibility 
Act. However, we believe that, if inherent reasonableness adjustments 
are applied, then they will eliminate grossly excessive or deficient 
payment amounts. If a payment amount is adjusted upward because it is 
deficient, it will benefit suppliers and beneficiaries. A more generous 
payment amount may result in greater availability of items and services 
to Medicare beneficiaries. The converse may not be true if the payment 
amount is adjusted downward. A lower payment amount should not 
necessarily result in a lack of availability of items and services 
since the revised payment amount would be realistic and equitable. We 
believe that a realistic and equitable payment amount would ensure 
continued availability of items and services. Thus, we believe that the 
application of an adjustment will merely serve as a vehicle for 
eliminating excessive profits. This adjustment will benefit the 
Medicare program by

[[Page 76694]]

reducing costs and benefit beneficiaries by reducing coinsurance 
payments.
    Comment: The rule does not comply with the Contract With America 
Advancement Act of 1996, which requires that a major rule must be 
submitted to the Congress before that rule can become effective.
    Response: Since this rule has been determined to be a major rule, 
it is being submitted to the Congress consistent with the Contract With 
American Advancement Act.
    Comment: In making inherent reasonableness determinations, CMS 
should have to consider the impact on quality of care, access issues, 
and the financial viability of suppliers in the marketplace.
    Response: We will consider the impact of future inherent 
reasonableness adjustments, and as stated above, whenever CMS proposed 
national limits and the dollar impact of inherent reasonableness 
determinations exceed $100 million in any one year, we will analyze the 
impact on quality of care, access issues, and the financial viability 
of suppliers in the marketplace. However, we do not believe that using 
the inherent reasonableness authority will have a negative impact 
because the purpose of the authority is to ensure that Medicare makes 
payments that are realistic and equitable, and better reflect market 
prices.

F. Effective Date

    Comment: The effective date should be 6 months following 
publication of payment reductions.
    Response: The effective date for payment adjustments will be 
determined on a case-by-case basis, but in no case will the effective 
date be sooner than 60 days after publication of the final notice of 
inherent reasonableness. We believe that in most cases it would not be 
in the best interest of the Medicare program to delay implementation of 
inherent reasonableness adjustments more than 60 days as this would 
result in the continuation of payment amounts that are either grossly 
excessive or deficient.
    Comment: All inherent reasonableness decisions should be made at 
the same time so that suppliers can offset payment reductions with 
payment increases.
    Response: The purpose of inherent reasonableness is not to be 
budget neutral or to make an equal number of increases and decreases in 
payment. The purpose is to address situations in which the standard 
payment rules result in grossly excessive or deficient amounts. It 
would be unreasonable for us to delay making an increase in payment 
because we have not yet identified an item or service that warranted a 
decrease in payment. The converse is also true. We note that 
historically the GAO and OIG have conducted studies that indicate that 
Medicare's payment amounts are generally excessive.
    Comment: Carriers should have to provide for a 60-day comment 
period and a 60-day notification period before the effective date of an 
inherent reasonableness determination.
    Response: We concur with the commenter. We will inform carriers to 
provide for a 60-day comment period and that any final carrier inherent 
reasonableness determination may not be effective until 60 days 
following public notice.

VI. Provisions of This Interim Final Regulation

    In response to comments on the January 7, 1998 interim final rule, 
we made the following changes in this interim final rule:
    [sbull] Clarified Sec.  405.502(g)(1)(ii) by stating that a payment 
amount will not be considered grossly excessive or grossly deficient if 
the overall payment adjustment is less than 15 percent.
    [sbull] Amended Sec.  405.502(g)(1)(iii) by clarifying the 
difference between a national determination and a carrier 
determination.
    [sbull] Added Sec.  405.502(g)(2)(vii)(H) to include an example of 
new technology that exists and is not reflected in the existing payment 
allowance.
    [sbull] Amended Sec.  405.502(g)(3)(ii) by adding ``proposed 
payment amounts and the'' to the first sentence to provide suppliers 
the opportunity to comment on the carrier's proposed payment allowances 
as well as the factors the carrier considered; and adding a requirement 
that a carrier notify us in writing of any final limits it plans to 
establish.
    [sbull] Added Sec.  405.502(g)(4) to include the criteria for using 
valid and reliable data.
    [sbull] Added Sec.  405.502(g)(5) to provide that when payment 
adjustments of more than 15 percent are spread out over multiple years, 
subsequent adjustments will be reviewed for their appropriateness.
    However, because we are interested in receiving comments on this 
rule, particularly the two provisions that contain further specificity 
than found in the 1998 interim final rule, we are publishing this rule 
as an interim final rule and are soliciting comments. These two 
provisions are the definitions of ``grossly excessive'' and ``grossly 
deficient'' in Sec.  405.502(g)(1)(ii) and the criteria for using valid 
and reliable data in Sec.  405.502(g)(4). We already received comments 
on the other provisions when we published the interim final rule in 
January 1998. These comments are addressed in section V of this interim 
final rule.

VII. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it does not need to be 
reviewed by the Office of Management and Budget under the authority of 
the Paperwork Reduction Act of 1995.

VIII. Regulatory Impact Statement

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review) and the 
Regulatory Flexibility Act (RFA) (September 16, 1980 Public Law 96-
354). Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more annually). This regulation 
has no immediate economic effect on current Medicare payments. However, 
it establishes a process that could be used in the future to establish 
reasonable and equitable payment amounts. Because this rule does not 
include any actual inherent reasonableness determinations, it has no 
immediate impact on Medicare's payment amounts. However, we do believe 
that the future use of inherent reasonableness has the potential to 
have significant impact; therefore it is a major rule. This belief is 
based on a June 2002 OIG report indicating that Medicare may be 
overpaying between $130 million and $958 million per year for 16 items 
of medical equipment. In addition, the GAO recently indicated that 
Medicare may be overpaying for medical equipment by more than 20 
percent. However, these reports were not done to the specifications we 
are establishing in this rule and, therefore, they may not be an 
accurate estimate of the specific dollar impact that could result from 
the future application of inherent reasonableness under these 
requirements. Since we recognize the potential for future payment 
adjustments, either upward or

[[Page 76695]]

downward, when CMS makes adjustments we will publish in the Federal 
Register regulatory impact statements that will comply with Executive 
Order 12866 and the Regulatory Flexibility Act whenever the dollar 
impact of inherent reasonableness determinations exceed $100 million in 
any one year. At this time, we lack sufficient data to conduct a 
quantitative analysis of the impact of this rule.
    We lack such data because until we publish this rule, and we are 
able to conduct an inherent reasonableness study using the criteria 
described in this rule, we are unable to determine whether Medicare is 
overpaying or underpaying for items or services and to what degree. We 
do not know if, or when, or for which services, we would make payment 
adjustments, or the percentage adjustment we would make, or even the 
particular industry that would be affected. Also, we do not know if 
these adjustments would increase or decrease Medicare payment amounts. 
As a result, we cannot anticipate the specific dollar effect or impact 
on suppliers and beneficiaries.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations and government agencies. Most 
hospitals and most other providers and suppliers are small entities, 
either by nonprofit status or by having revenues of $6 million to $26 
million or less in any 1 year (see 65 FR 69432 for details). For 
purposes of the RFA, all suppliers of Medicare Part B services are 
considered to be small entities. Individuals and States are not 
included in the definition of a small entity. Since this rule does not 
include any actual inherent reasonableness determinations, it will not 
have an impact on small businesses. However, it establishes a process 
that could be used in the future to establish reasonable and equitable 
payment amounts.
    In addition, 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. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any 1 year by State, 
local, or tribal governments, in the aggregate, or by the private 
sector, of $110 million. This regulation does not mandate expenditures 
by State, local, or tribal governments, or by the private sector. 
Therefore, the requirements of section 202 do not apply.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. Since this regulation does not impose any costs on State 
or local governments, the requirements of E.O. 13132 are not 
applicable.
    We do not expect suppliers of Part B services to be immediately 
affected by this rule since the rule will have no immediate impact on 
Medicare's payment amounts. However, we do believe that use of inherent 
reasonableness has the potential to significantly impact small 
businesses in the future. This belief is based on a June 2002 OIG 
report indicating that Medicare may be overpaying between $130 million 
and $958 million per year for 16 items of medical equipment. In 
addition, the GAO recently indicated that Medicare may be overpaying 
for medical equipment by more than 20 percent. However, we are still 
unable to predict the specific dollar impact on the future application 
of inherent reasonableness. Since we recognize the potential for future 
payment adjustments, either upward or downward, when CMS makes 
adjustments we will publish in the Federal Register impact statements 
that will comply with Executive Order 12866 and the Regulatory 
Flexibility Act whenever the dollar impact of inherent reasonableness 
determinations exceed $100 million in any one year, or when the 
adjustments will have a significant impact on a substantial number of 
small entities. We do not have sufficient data to predict exactly the 
nature of the future impact of this rule or the magnitude of the 
impact. Below, we discuss likely outcomes. Should the provisions of 
these regulations be applied, the resultant payment amounts will no 
longer be grossly excessive or deficient. If a payment amount is 
adjusted upward because it is deficient, it will benefit suppliers and 
beneficiaries. A more generous payment amount may result in greater 
availability of items and services to Medicare beneficiaries. The 
converse may not be true if the payment amount is adjusted downward. A 
lower payment amount should not necessarily result in a lack of 
availability of items and services since the revised payment amount 
would be realistic and equitable, and would better reflect market 
prices for the given item or service. We believe that a realistic and 
equitable payment amount would ensure continued availability of items 
and services. This adjustment will benefit the Medicare program by 
reducing costs, thereby protecting the Medicare trust fund, and benefit 
beneficiaries by reducing coinsurance payments. In addition, this 
regulation only specifies the criteria and methodology for determining 
when a service or item is inherently unreasonable and does not result 
in any adjustments.
    After publication of this regulation, if CMS initiates an inherent 
reasonableness determination that results in payment adjustments in 
excess of $100 million in any one year, CMS will publish in the Federal 
Register an analysis in compliance with Executive Order 12866. If the 
CMS adjustment will have a significant impact on a substantial number 
of small entities, we will also conduct an analysis in accordance with 
the Regulatory Flexibility Act. In cases where one or more of our 
carriers undertake an adjustment using this inherent reasonableness 
authority that either has an impact of $100 million or more in any one 
year, or has a significant effect on a substantial number of small 
entities, the carrier or carriers will notify providers of the planned 
adjustment and the analysis on which it is based. In this way, affected 
parties would be able to comment on the planned adjustment.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in Part 405

    Administrative practice and procedure, Health facilities, Health 
professions, Kidney diseases, Medicare, Reporting and recordkeeping 
requirements, Rural areas, X-rays.

    For the reasons set forth in the preamble, 42 CFR chapter IV, part 
405 is amended as set forth below:

PART 405--FEDERAL HEALTH INSURANCE FOR THE AGED AND DISABLED

Subpart E--Criteria for Determining Reasonable Charges

    1. The authority citation for part 405, subpart E, continues to 
read as follows:


[[Page 76696]]


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

    2. In Sec.  405.502, paragraphs (g) and (h) are revised to read as 
follows:


Sec.  405.502  Criteria for determining reasonable charges.

* * * * *
    (g) Determination of payment amounts in special circumstances--(1) 
General. (i) For purposes of this paragraph, a ``category of items or 
services'' may consist of a single item or service or any number of 
items or services.
    (ii) CMS or a carrier may determine that the standard rules for 
calculating payment amounts set forth in this subpart for a category of 
items or services identified in section 1861(s) of the Act (other than 
physician services paid under section 1848 of the Act and those items 
and services for which payment is made under a prospective payment 
system, such as outpatient hospital or home health) will result in 
grossly deficient or excessive amounts. A payment amount will not be 
considered grossly excessive or deficient if it is determined that an 
overall payment adjustment of less than 15 percent is necessary to 
produce a realistic and equitable payment amount. For CMS initiated 
adjustments, CMS will publish in the Federal Register an analysis of 
payment adjustments that exceed $100 million per year in compliance 
with Executive Order 12866. If CMS makes adjustments that have a 
significant effect on a substantial number of small entities, it will 
publish an analysis in compliance with the Regulatory Flexibility Act.
    (iii) If CMS or the carrier determines that the standard rules for 
calculating payment amounts for a category of items or services will 
result in grossly deficient or excessive amounts, CMS, or the carrier, 
may establish special payment limits that are realistic and equitable 
for a category of items or services. If CMS makes a determination, it 
is considered a national determination. A carrier determination is one 
made by a carrier/intermediary or groups of carriers/intermediaries 
even if the determination applies to all State fees.
    (iv) The limit on the payment amount is either an upper limit to 
correct a grossly excessive payment amount or a lower limit to correct 
a grossly deficient payment amount.
    (v) The limit is either a specific dollar amount or is based on a 
special method to be used in determining the payment amount.
    (vi) Except as provided in paragraph (h) of this section, a payment 
limit for a given year may not vary by more than 15 percent from the 
payment amount established for the preceding year.
    (vii) Examples of excessive or deficient payment amounts. Examples 
of the factors that may result in grossly deficient or excessive 
payment amounts include, but are not limited to, the following:
    (A) The marketplace is not competitive. This includes circumstances 
in which the marketplace for a category of items or services is not 
truly competitive because a limited number of suppliers furnish the 
item or service.
    (B) Medicare and Medicaid are the sole or primary sources of 
payment for a category of items or services.
    (C) The payment amounts for a category of items or services do not 
reflect changing technology, increased facility with that technology, 
or changes in acquisition, production, or supplier costs.
    (D) The payment amounts for a category of items or services in a 
particular locality are grossly higher or lower than payment amounts in 
other comparable localities for the category of items or services, 
taking into account the relative costs of furnishing the category of 
items or services in the different localities.
    (E) Payment amounts for a category of items or services are grossly 
higher or lower than acquisition or production costs for the category 
of items or services.
    (F) There have been increases in payment amounts for a category of 
items or services that cannot be explained by inflation or technology.
    (G) The payment amounts for a category of items or services are 
grossly higher or lower than the payments made for the same category of 
items or services by other purchasers in the same locality.
    (H) A new technology exists which is not reflected in the existing 
payment allowances.
    (2) Establishing a limit. In establishing a payment limit for a 
category of items or services, CMS or a carrier considers the available 
information that is relevant to the category of items or services and 
establishes a payment amount that is realistic and equitable. The 
factors CMS or a carrier consider in establishing a specific dollar 
amount or special payment method for a category of items or services 
may include, but are not limited to, the following:
    (i) Price markup. This is the relationship between the retail and 
wholesale prices or manufacturer's costs of a category of items or 
services. If information on a particular category of items or services 
is not available, CMS or a carrier may consider the markup on a similar 
category of items or services and information on general industry 
pricing trends.
    (ii) Differences in charges. CMS or a carrier may consider the 
differences in charges for a category of items or services made to non-
Medicare and Medicare patients or to institutions and other large 
volume purchasers.
    (iii) Costs. CMS or a carrier may consider resources (for example, 
overhead, time, acquisition costs, production costs, and complexity) 
required to produce a category of items or services.
    (iv) Use. CMS or a carrier may impute a reasonable rate of use for 
a category of items or services and consider unit costs based on 
efficient use.
    (v) Payment amounts in other localities. CMS or a carrier may 
consider payment amounts for a category of items or services furnished 
in another locality.
    (3) Notification of limits--(i) National limits. CMS publishes in 
the Federal Register proposed and final notices announcing a special 
payment limit described in paragraph (g) of this section before it 
adopts the limit. The notices set forth the criteria and circumstances, 
if any, under which a carrier may grant an exception to a payment limit 
for a category of items or services.
    (ii)(A) Carrier-level limits. A carrier proposing to establish a 
special payment limit for a category of items or services must inform 
the affected suppliers and Medicaid agencies of the proposed payment 
amounts, the factors it considered in proposing the particular limit, 
as described in paragraphs (g)(1) through (g)(4) of this section, and 
solicit comments. The notice must also consider the following:
    (1) The effects on the Medicare program, including costs, savings, 
assignment rates, beneficiary liability, and quality of care.
    (2) What entities would be affected such as classes of providers or 
suppliers and beneficiaries.
    (3) How significantly would these entities be affected.
    (4) How would the adjustment affect beneficiary access to items or 
services.
    (B) The carrier must evaluate the comments it receives. The carrier 
must notify CMS in writing of any final limits it plans to establish. 
CMS will acknowledge in writing to the carrier that it received the 
carrier's notification. After the carrier has received CMS's 
acknowledgement, the carrier must inform the affected suppliers and 
State Medicaid agencies of any final limits it

[[Page 76697]]

establishes. The effective date for a final payment limit may apply to 
services furnished at least 60 days after the date that the carrier 
notifies affected suppliers and State Medicaid agencies of the final 
limit.
    (4) Use of valid and reliable data. In determining whether a 
payment amount is excessive or deficient and in establishing an 
appropriate payment amount, valid and reliable data will be used. To 
ensure the use of valid and reliable data, CMS or the carrier must meet 
the following criteria to the extent applicable:
    (i) Develop written guidelines for data collection and analysis;
    (ii) Ensure consistency in any survey to collect and analyze 
pricing data.
    (iii) Develop a consistent set of survey questions to use when 
requesting retail prices.
    (iv) Ensure that sampled prices fully represent the range of prices 
nationally.
    (v) Consider the geographic distribution of Medicare beneficiaries.
    (vi) Consider relative prices in the various localities to ensure 
that an appropriate mix of areas with high, medium, and low consumer 
prices was included.
    (vii) Consider criteria to define populous State, less populous 
State, urban area, and rural area.
    (viii) Consider a consistent approach in selecting retail outlets 
within selected cities.
    (ix) Consider whether the distribution of sampled prices from 
localities surveyed is fully representative of the distribution of the 
U.S. population.
    (x) Consider the products generally used by beneficiaries and 
collect prices of these products.
    (xi) When using wholesale costs, consider the cost of the services 
necessary to furnish a product to beneficiaries.
    (5) If CMS or a carrier makes a payment adjustment of more than 15 
percent spread over multiple years, CMS or the carrier will review 
market prices in the years subsequent to the year that the initial 
reduction is effective in order to ensure that further reductions 
continue to be appropriate.
    (h) Special payment limit adjustments greater than 15 percent of 
the payment amount. In addition to applying the general rules under 
paragraphs (g)(1) through (g)(4) of this section, CMS applies the 
following rules in establishing a payment adjustment greater than 15 
percent of the payment amount for a category of items or services 
within a year:
    (1) Potential impact of special limit. CMS considers the potential 
impact on quality, access, beneficiary liability, assignment rates, and 
participation of suppliers.
    (2) Supplier consultation. Before making a determination that a 
payment amount for a category of items or services is not inherently 
reasonable by reason of its grossly excessive or deficient amount, CMS 
consults with representatives of the supplier industry likely to be 
affected by the change in the payment amount.
    (3) Publication of national limits. If CMS determines under 
paragraph (h) of this section to establish a special payment limit for 
a category of items or services, it publishes in the Federal Register 
the proposed and final notices of a special payment limit before it 
adopts the limit. The notices set forth the criteria and circumstances, 
if any, under which a carrier may grant an exception to the limit for 
the category of items or services.
    (i) Proposed notice. The proposed notice--
    (A) Explains the factors and data that CMS considered in 
determining that the payment amount for a category of items or services 
is grossly excessive or deficient;
    (B) Specifies the proposed payment amount or methodology to be 
established for a category of items or services;
    (C) Explains the factors and data that CMS considered in 
determining the payment amount or methodology, including the economic 
justification for a uniform fee or payment limit if it is proposed;
    (D) Explains the potential impacts of a limit on a category of 
items or services as described in paragraph (h)(1) of this section; and
    (E) Allows no less than 60 days for public comment on the proposed 
payment limit for the category of items or services.
    (ii) Final notice. The final notice--
    (A) Explains the factors and data that CMS considered, including 
the economic justification for any uniform fee or payment limit 
established; and
    (B) Responds to the public comments.


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



    Dated: February 2, 2002.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: July 22, 2002.
Tommy G. Thompson,
Secretary.
[FR Doc. 02-31126 Filed 12-12-02; 8:45 am]
BILLING CODE 4120-01-P