[Federal Register Volume 70, Number 37 (Friday, February 25, 2005)]
[Rules and Regulations]
[Pages 9232-9239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-3728]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 421

[CMS-1219-F]
RIN 0938-AL76


Medicare Program; Durable Medical Equipment Regional Carrier 
Service Areas and Related Matters

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

ACTION: Final rule.

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SUMMARY: This final rule provides a mechanism for us to expeditiously 
make changes to the durable medical equipment regional carrier (DMERC) 
service area boundaries without notice and comment rulemaking. Through 
this mechanism, we can change the geographical boundaries served by the 
regional contractors that process durable medical equipment claims 
through issuance of a Federal Register notice and make other minor 
changes in the contract administration of the DMERCs. The mechanism 
provides a method for increasing or decreasing the number of DMERCs, 
changing the boundaries of DMERCs based on criteria other than the 
boundaries of the Common Working File sectors, and awarding new 
contractors to perform statistical analysis or maintain the national 
supplier clearinghouse. We will publish these changes and their 
justifications in a Federal Register notice, rather than through notice 
and comment rulemaking.
    Although we may change the number and configuration of regional 
carriers, we are not altering the criteria and factors that we use in 
awarding contracts.
    Through this final rule, we are improving the contracting process 
so that we can swiftly meet the challenges of the changing healthcare 
industry and address the changing needs of beneficiaries, suppliers, 
and the Medicare program.

DATES: Effective Date: These regulations are effective on March 28, 
2005.

FOR FURTHER INFORMATION CONTACT: Pat Williams, (410) 786-6139.

SUPPLEMENTARY INFORMATION: This Federal Register document is available 
from the Federal Register online database through GPO access, a service 
of the U.S. Government Printing Office. The Web site address is http://www.gpoaccess.gov/fr/index.html.

I. Background

A. Legislative Overview of Durable Medical Equipment, Prosthetics, 
Orthotics, and Supplies (DMEPOS) Claims Administration Covering 1966 
Through 1992

    Medicare has covered medically necessary items of durable medical 
equipment, prosthetics, orthotics, and supplies (DMEPOS) under Part B 
since the inception of the Medicare program in 1966. In the original 
authorizing legislation for the Medicare program, coverage was provided 
under sections 1832 and 1861(s) of the Social Security Act (the Act) 
(Pub. L. 89-97). Since that time, the coverage and payment rules for 
DMEPOS, which may now be found in sections 1832, 1834, and 1861 of the 
Act and their implementing regulations, have changed significantly.
    From 1986 to 1992, the number of complaints about fraud and abuse 
in the DMEPOS benefit began to increase markedly, and a variety of 
government investigations identified specific weaknesses in the 
program. We sought solutions to known claims processing problems, 
including the increasing level of fraud and abuse in billing. 
Subsequently, the Omnibus Budget Reconciliation Act of 1987 (OBRA 1987) 
(Pub. L. 100-203), enacted on December 22, 1987, authorized the 
Secretary to designate, by regulation, regional carriers to process 
DMEPOS claims. (See sections 1834(a)(12) and 1834(h)(3) of the Act.)
    Before 1993, Medicare Part B claims for DMEPOS items and services 
were assigned to each of the more than 30 local Medicare carriers and 
represented, on average, only 5 percent of each carrier's overall 
workload. After further review, we concluded that this was not the most 
effective structure for administering DMEPOS claims under the Medicare 
program. It was difficult for carriers to devote significant 
administrative review resources to this small percentage of claims.
    In addition, DMEPOS claims were generally complex and time-
consuming to process. The protocol for suppliers to obtain a Medicare 
billing number was ill-defined and required little identifying 
information or compliance with any particular business or operational 
standards.
    Furthermore, carriers' medical review policies varied significantly 
and contributed to inconsistent claims processing decisions. Finally, 
certain DMEPOS suppliers who engaged in unethical practices were able 
to exploit our local Medicare carriers by electing to submit claims to 
carriers that provided more generous coverage, paid more than other 
carriers, or both. As documented in program audits and congressional 
hearings, fraudulent suppliers manipulated our then existing ``point of 
sale'' claims jurisdiction rule; these suppliers could simply locate 
their business offices where conditions were most favorable. The 
collective impact of these issues resulted in significant abuse of the 
Medicare program by a subset of the DMEPOS supplier community, without 
any measurable improvement in patient care and outcomes.

[[Page 9233]]

B. Agency and Congressional Efforts To Reform DMEPOS Claims 
Administration, 1987 Through 1994

    To address the problem of fraud and abuse in the supplier 
community, we initiated an effort to reform the administration of the 
DMEPOS benefit category using several strategies. On November 6, 1991, 
we published a proposed rule (56 FR 56612) setting forth a new 
framework for DMEPOS claims processing. In that rule, we proposed to 
limit the number of carriers handling DMEPOS claims by establishing 
regional carriers who would be expert processors of DMEPOS claims. That 
rule also proposed to change the requirement for assigning DMEPOS 
claims to carriers (that is, the DMEPOS claim jurisdiction rule) from a 
``point of sale'' framework to a framework based on ``beneficiary 
residence.'' In addition, the rule proposed to establish supplier 
business standards and information disclosure requirements. We expected 
that these changes, taken together, would make Medicare's DMEPOS claim 
administration apparatus less susceptible to supplier manipulation.
    On June 18, 1992, we published a final rule with comment period (57 
FR 27290) to implement this revised statutory authority. Additional 
changes were made by the final rule published on November 18, 1993 (58 
FR 60789). This final rule:
     Established four regional carriers (known as DME Regional 
Carriers or DMERCS) to standardize the coverage and payment of DMEPOS.
     Designated the States and territories to be served by each 
DMERC.
     Consolidated and focused efforts to curb fraud and abuse.
     Controlled the enrollment of all DMEPOS suppliers through 
a National Supplier Clearinghouse (NSC) (a contractor that reviews and 
approves supplier applications for Medicare program billing numbers).
     Introduced the concept of a Statistical Analysis DME 
Regional Carrier (SADMERC) to review supplier billing patterns.
     Established minimum business standards for all suppliers 
wishing to enroll in the Medicare Program.
     Required that regional carriers administer DMEPOS claims 
based on the location (State) of the beneficiary's primary residence. 
The regulations for DMERC contracts, in accordance with these 
authorities are set forth at Sec.  405.874, Sec.  421.210, Sec.  
421.212, and Sec.  424.57.
    On October 31, 1994, the Congress enacted the Social Security 
Amendments of 1994 (Pub. L. 103-432). Among other matters, this statute 
established section 1834(j)(1) of the Act, which incorporated and 
augmented the supplier business and operational standards established 
in the final rule of June 18, 1992.

C. Provisions of the Existing DMERC Regulations

    As noted above, there are several regulatory provisions pertaining 
to the operation of the DMERCs and related functions.
     Section 405.874 establishes a process by which the NSC 
makes determinations on whether to issue a Medicare billing number to a 
supplier applicant and specifies an administrative appeals process if 
we make an adverse determination.
     Section 421.212 specifies that the Railroad Retirement 
Board will use the CMS-contracted DMERCs to make DMEPOS claim 
determinations for Medicare-eligible railroad retirees.
     Section 424.57 provides special payment rules for DMEPOS 
suppliers and requirements for the issuance of DMEPOS supplier billing 
numbers, including a series of business and operational standards that 
DMEPOS suppliers must meet in order to qualify for Medicare billing 
privileges.
    Section 421.210, which we are amending in this regulation, could be 
viewed as the cornerstone regulation for the DMERC carrier structure.
    On June 18, 1992 (57 FR 27290), we published and implemented the 
existing regulations at Sec.  421.210 under the authority of sections 
1842, 1834(a), and 1834(h) of the Act. The existing regulation at Sec.  
421.210 augments and expands on the underlying statutory provisions and 
provides for the following:
    Paragraph (a) identifies the statutory basis for the rule and 
indicates that the purpose of the rule is to designate one or more 
carriers ``by specific regions'' to process DMEPOS claims.
    Paragraph (b) identifies the types of claims for DMEPOS items and 
services that are processed by the DMEPOS carrier.
    Paragraph (c) defines four specific regions for the processing of 
DMEPOS claims by naming the States and territories to be included in 
each region. This section also states that the DMERC regions coincide 
with the ``sector'' boundaries of our Common Working File System.
    Paragraph (d) specifies criteria that we use in designating 
entities to serve as regional carriers for DMEPOS claims.
    Paragraph (e)(1) requires that the DMERCs process DMEPOS claims 
only for beneficiaries whose permanent residence falls within their 
designated regional areas (as established by paragraph (c) of this 
section). Paragraph (e)(1) also specifies that, in processing DMEPOS 
claims, the DMERCs apply the payment rates applicable to the State of 
residence of the beneficiary. In addition, the rule makes clear that 
the ``beneficiary residence'' jurisdiction rule applies to qualified 
Railroad Retirement beneficiaries and defines ``permanent residence'' 
for the purpose of the rule.
    Paragraph (e)(2) identifies by name the initial DMERCs; paragraph 
(e)(3) identifies by name the initial NSC and SADMERC; paragraph (e)(4) 
commits us to periodically re-compete the four DME regional carrier 
contracts.
    Paragraph (f) requires the DMERCs to collect ownership and control 
information, as well as supplier standard certifications, from each 
DMEPOS supplier that they service.
    We discuss several changes to paragraphs (a), (c), (d), and (e) of 
Sec.  421.210 in section II of this preamble, ``Provisions of the 
Proposed Regulations''.

D. Establishment and Operation of the DMERCs, 1993 Through 2003

    We issued a Request for Proposal in May 1992 for the four regional 
DMERC contracts. We also solicited offers for two DMEPOS-related 
national contracts, the above-mentioned NSC and the SADMERC. In 
December 1992, the contracts, designed around Common Working File 
sectors, were awarded as follows:
    Region A: Travelers Insurance Company for 10 States in the 
Northeast.\1\
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    \1\ The contract was initially awarded to Travelers Insurance 
Company and the regulations use this name. Through a series of 
corporate transactions, United Healthcare became the successor-in-
interest to Travelers and served as the DMERC until September 2000, 
when HealthNow was awarded the DMERC contract for Region A.
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    Region B: AdminaStar Federal for 9 States in the Midwest and the 
District of Columbia.
    Region C: Palmetto Government Benefits Administrators (GBA) for 14 
States and 2 territories in the South.
    Region D: CIGNA for 17 States and 3 territories in the West.
    NSC: Palmetto GBA.
    SADMERC: Palmetto GBA.
    Initially, the DMERC and SADMERC contracts were 2-year contracts 
with two 1-year renewal options. The NSC was given two 1-year contracts 
and two 1-year renewal options. The contracts were modeled, to a 
significant extent, after requirements in the Federal Acquisition 
Regulations (FAR).

[[Page 9234]]

    One of the biggest challenges and accomplishments of the transition 
to the DMERC processing arrangement was the consolidation of diverse 
carrier medical policies for DMEPOS. Our initiative to configure 
geographical regions to process DMEPOS claims by consolidating DME 
workloads from the 34 carriers to 4 DMERCs greatly improved the rigor 
and consistency of medical review. Formerly, each carrier developed its 
own local medical review policies for DMEPOS claims with minimal 
guidelines and oversight from us. During the transition period, our 
coverage and medical review staff worked closely with the DMERC medical 
directors to streamline and standardize medical policy within and 
across the DMERC regions. Regionalization allowed the DMERCs to have a 
consistent uniform interpretation of coverage policies, local medical 
review policies, and pricing for similar items and services. Today, the 
DMERCs share essentially one approach to coverage and medical review 
for all DMEPOS items.

E. Requirements for Issuance of Regulations

    Section 902 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) amended section 1871(a) of the Act and 
requires the Secretary, in consultation with the Director of the Office 
of Management and Budget, to establish and publish timelines for the 
publication of Medicare final regulations based on the previous 
publication of a Medicare proposed or interim final regulation. Section 
902 of the MMA also states that the timelines for these regulations may 
vary but shall not exceed 3 years after publication of the preceding 
proposed or interim final regulation except under exceptional 
circumstances.
    This final rule finalizes provisions set forth in the March 26, 
2004 proposed regulation (69 FR 15755). In addition, this final rule 
has been published within the 3-year time limit imposed by section 902 
of the MMA. Therefore, we believe that the final rule is in accordance 
with the Congress' intent to ensure timely publication of final 
regulations.

II. Provisions of the Proposed Regulations

    (This rule uses the term ``carrier'' to describe the Durable 
Medical Equipment administrative contractor. Effective October 1, 2005, 
according to section 911(e) of the MMA, the term ``carrier'' should be 
read as ``Medicare Administrative Contractor.'')
    We proposed a number of changes to Sec.  421.210 which concern the 
designation of regional carriers to process claims for DMEPOS. Broadly 
speaking, we are seeking greater future flexibility to revise the 
number and boundaries of DMERC regional areas. We also desire greater 
flexibility in contracting for DMERC, NSC, and SADMERC functions. We 
have examined the statutory framework (section 1834(a)(12) of the Act, 
as set forth below at paragraph (a), ``Basis'') for Sec.  421.210 and 
have concluded that the existing regulation is more restrictive on the 
Secretary's contracting discretion than required either by statute or 
the Medicare program's interest.
    Specifically, we proposed to make the following changes to Sec.  
421.210 ``Designations of regional carriers to process claims for 
durable medical equipment, prosthetics, orthotics, and supplies'':
     Paragraph (a), ``Basis.''
    We proposed to revise paragraph (a) to more closely follow the 
actual language of section 1834(a)(12) of the Act that authorizes the 
Secretary to ``designate, by regulation under section 1842 of the Act, 
one carrier for one or more entire regions to process all claims within 
the region for covered items under this section.'' We therefore 
proposed to revise paragraph (a) to state that the Secretary is 
authorized to designate carriers for ``one or more entire regions'' 
rather than to designate carriers by ``specific'' regions.
     Paragraph (c), ``Region designation.''
    We proposed to revise paragraph (c), designate the existing 
paragraph (c) as (c)(1), and add a new paragraph (c)(2).
    In paragraph (c), we proposed to clarify the Secretary's authority 
to revise the number or configuration of DMEPOS regional areas in the 
future, based on appropriate factors and criteria.
    The existing regulations in Sec.  421.210(c) specify that there are 
four regional areas for DMEPOS claims and further specify that these 
areas be drawn to coincide with the Common Working File sectors. The 
regulations also specify, by name, which States and territories are 
assigned to each region for DMEPOS claims. To allow greater 
flexibility, in paragraph (c)(1), we proposed to add the word 
``initial'' in front of the listing of the current DMERC service areas, 
to make clear that this configuration could change in the future.
    In addition, we proposed to revise paragraph (c)(1) to remove a 
specific reference to the Common Working File sector framework as a 
determinant for the DMERC regions. Advances in technology have greatly 
diminished the importance of this consideration and, therefore, its 
inclusion in regulation is unnecessary.
    The existing reference to Common Working File sectors in paragraph 
(c)(1), as a constraint for the DMERC region boundaries, illustrates 
the approach of the original rule. The June 18, 1992 final rule (57 FR 
27290) acknowledged a technical Medicare claims processing system 
constraint that was significant at the time. Since that time, advances 
in our claims processing system have greatly reduced the impact of 
``out of the area'' processing, and it is no longer necessary to 
structure the DMERCs around the Common Working File sectors.
    New paragraph (c)(2) proposed a mechanism for us to revise the 
number and boundaries of DMERC regional service areas in the future 
based on appropriate factors and criteria. Our goal is to constantly 
strive to improve beneficiary and supplier satisfaction. Therefore, in 
our decisions, we will consider the effect of any service area changes 
on beneficiaries and suppliers. Examples of factors and criteria 
include population shifts or natural disasters that require a 
reallocation of workload, and workforce conditions that may make it 
difficult for DMERCs in certain areas to recruit and retain qualified 
employees. We specified in paragraph (c)(2) that this change would 
provide a mechanism for us to identify which States and territories are 
assigned to various DMERC regions by publication of a Federal Register 
notice. The Federal Register notice will identify the nature of any 
changes in the DMERC service areas, as well as our rationale for the 
changes.
    Under the current regulation, we would have to maintain the current 
DMERC configuration even if our administrative and program needs 
change. Currently, the only existing mechanism for changing the 
structure of the DMERC regions is to undertake notice and comment 
rulemaking for each change. We believe that it is not the intent of the 
statute to constrain the Secretary's administrative discretion to this 
extent. In seeking this regulation change, we anticipate that new 
program circumstances may arise that would require alterations in the 
number or configuration of DMERC service areas. We believe that we 
would have a definite need to move swiftly and make DMERC service area 
changes without going through notice and comment rulemaking whenever 
administrative issues arise. Just as critical, we believe it is 
important to consider the effects of these kinds of changes on 
beneficiaries

[[Page 9235]]

and suppliers and to provide the public with an explanation of changes 
when they are made.
    Under our March 26, 2004 proposed rule, we would not administer 
four DMEPOS areas, would not determine these DMEPOS areas based on the 
sector areas of the Common Working File, and would not go through 
notice and comment rulemaking to modify the assignment of the States 
and territories to revised DMEPOS areas.
    In our March 26, 2004 proposed rule, we provided a hypothetical 
example of a situation that cannot be adequately addressed under the 
current regulation. In this example, DMERC X, which has historically 
performed well, is having difficulty serving all beneficiaries and 
suppliers in all of its assigned States, due to problems in recruiting 
a sufficient number of qualified personnel. At present, the regulations 
appear to limit our options to--(1) expecting that DMERC X will improve 
its performance; or (2) terminating DMERC X's contract for the entire 
service area and procuring and installing a replacement. We do not have 
the third option of removing a limited number of States from DMERC X's 
contract and attaching these service areas to another DMERC's service 
area (or setting up a fifth DMERC jurisdiction). However, under the 
proposed regulation, the third contract management option could yield 
many benefits, in that DMERC X could focus its resources on its 
remaining workload. Under the existing regulation, moving a State to 
another area, or setting up a fifth jurisdiction, would require an 
extended rulemaking process unless the rules take a more general 
approach, as we proposed.
     Paragraph (d), ``Criteria for designating regional 
carriers.''
    Paragraph (d) under this section currently discusses our 
``designation'' of regional carriers in a manner that does not 
explicitly acknowledge the fact that these designations must be 
premised on the awarding of Medicare carrier contracts in accordance 
with applicable law.
    We also proposed to revise paragraph (d) under this section to make 
clear that we would designate regional carriers to process DMEPOS 
claims by awarding DMERC contracts in accordance with applicable law. 
We did not propose any changes to the current criteria under paragraphs 
(d)(1) through (d)(5) of this section, which we use in our procurement 
evaluation processes for this particular kind of contract.
     Paragraph (e), ``Carrier designation.''
    In paragraph (e)(1), we proposed to make minor revisions to conform 
the language to the changes made in Sec.  421.210(c).
    We proposed to revise paragraph (e) to provide us with flexibility 
and discretion with respect to contracting for DMERC and related 
functions. The existing regulations in Sec.  421.210(e) name the 
initial DMERC-contracting companies and also identify the particular 
region each company serves. The existing regulations could be 
interpreted as requiring that we constantly update our rules whenever 
our business partners change.
    The proposed regulatory framework clarified our discretion not to 
name a contracting company in future regulations if we re-compete a 
DMERC contract after its conclusion or termination. This proposed 
change would potentially reduce the agency's administrative burden when 
a DMERC contract is not renewed. We proposed to notify affected 
beneficiaries and suppliers when we change contractors.
    Specifically in paragraph (e)(2), we proposed to remove the names 
of the initial DMERCs from the regulation. This change clarified our 
future discretion to award a DMERC contract to process DMEPOS claims 
under the Medicare program (that is, designate a DMERC), without any 
obligation to name the new DMERC(s) in regulations or by Federal 
Register notice. We would, however, notify affected beneficiaries and 
suppliers to the change in contractors. Therefore, we proposed to 
revise paragraph (e)(2) to add that we would notify affected Medicare 
beneficiaries when we designate a regional carrier.
    We proposed to revise paragraphs (e)(3) and (e)(4) to provide us 
with a mechanism to contract for the performance of NSC functions 
through either an amendment to a DMERC contract or through a non-DMERC 
Medicare carrier contract. In paragraph (e)(4), the existing 
regulations for NSC functions limit our selection of NSC contractors to 
one of the DMERCs. However, section 1834(j)(1)(E) of the Act more 
broadly permits any carrier with a contract under section 1842 of the 
Act to perform NSC functions. We believe that our regulations should 
reflect this broader discretion under the statute. Therefore, in 
paragraph (e)(4), we proposed to remove the limitation that restricts 
our list of contractors to only four DME regional carriers. This 
proposed revision gives us greater flexibility when we re-compete a 
DMERC contract after its conclusion or termination.
    In addition, we proposed to delete the references to the SADMERC 
function in Sec.  421.210(e)(3) and Sec.  421.210(e)(4). SADMERCS are 
responsible for storing national DMEPOS claims history data, for 
distributing to the DMERCS national pricing files, and for conducting 
data analysis. Although we recognize the importance of the activities 
that the SADMERC provides to us and to the DMERCS, these activities are 
not identified elsewhere in the regulations, and we believe that little 
purpose is served by naming an entity in the regulations without any 
reference to its functions. Therefore, we do not believe it necessary 
to reference the SADMERC in our regulations.
    By removing the existing reference to the SADMERC, including the 
constraint that this activity be included in a DMERC's contract, we 
would have the flexibility to include this function in a DMERC contract 
or to contract for the SADMERC activity through some other vehicle.
    In summary, the March 26, 2004 proposed rule would provide a 
mechanism for us to change the geographical boundaries served by the 
regional contractors that process DME claims and to make other minor 
changes in contract administration of the DMERCS. We would have the 
mechanism to increase or decrease the number of DMERCS or change the 
boundaries of the DMERCs through a Federal Register notice. Further, we 
could name new contractors to perform the functions of the DMERC and 
NSC without going through notice and comment rulemaking. Instead, we 
would notify affected beneficiaries and suppliers of contractor changes 
through our outreach and education initiative.

III. Analysis of and Responses to Public Comments

    We received a total of twelve timely public comments in response to 
the March 26, 2004 proposed rule (69 FR 15755). Commenters included 
national trade associations, health care providers, existing CMS 
contractors, and private citizens. All public comments were reviewed 
and grouped by like or related topics. The comments and our responses 
are summarized below.
    Comment: A few commenters stated that the impacted business 
communities must receive sufficient notification of proposed changes 
and sufficient information to provide substantive comments.
    Response: This final rule states that we consider the impact on 
beneficiaries and suppliers of any modifications to the boundaries or 
number of DMERC

[[Page 9236]]

jurisdictions. This analysis will include the question of whether 
providers, suppliers, and patients have reasonable access to payer 
decision-makers. We will provide sufficient public notification to 
affected Medicare suppliers and beneficiaries. We will publish any 
changes to DMERC service areas and their justifications in a Federal 
Register notice, rather than through notice and comment rulemaking. 
Furthermore, open door forums or town hall meetings will be held to 
give the public the opportunity to comment. Customer service and 
continuity of high quality service for both beneficiaries and suppliers 
remain our top priorities and any future changes will be consistent 
with our commitment. We will also consider the operational management 
and oversight structure impacts of any future changes.
    Comment: A few commenters noted that CMS must provide more 
information so that the community can comment and understand the reason 
for any revised DMERC boundaries.
    Response: On December 8, 2003, the President signed the MMA into 
law. Since we are developing our implementation plan and strategy, 
these changes will give us the flexibility to ensure coordinated 
implementation across all benefit types, enabling us to administer high 
quality, consistent service and benefit management to suppliers and 
beneficiaries. This final rule ensures that our changes are made in a 
more flexible manner. Our rationale for these changes was explained in 
the March 26, 2004 proposed rule. We will publish our rationale for any 
specific DMERC area changes in a Federal Register notice to ensure that 
we address the needs of beneficiaries and suppliers.
    Comment: Two commenters stated that our proposal to explain any 
modifications to the boundaries or number of the DMERC jurisdictions in 
a Federal Register notice, with supporting criteria and considerations, 
is not adequate. These commenters asserted that we should fully 
identify the criteria that would be employed in any decision to modify 
the boundaries or number of the DMERC jurisdictions in our proposed 
changes to Sec.  421.210(c). One of the two commenters argued that 
giving providers and patients reasonable access to payer decision-
makers should be a factor in determining the scope of a contractor's 
territory.
    Response: This final rule states that we consider the impact on 
beneficiaries and suppliers of any modifications to the boundaries or 
number of DMERC jurisdictions. This analysis would include the question 
of whether providers, suppliers, and patients have reasonable access to 
payer decision-makers. (We note, however, that we and our contractors 
can ensure this access through many means in addition to the specific 
design of the DMERC regions--for instance, through maintaining toll-
free lines for providers and suppliers). The preamble to our proposed 
rule also outlined other possible supporting criteria and 
considerations for a particular change--for instance, we discussed how 
we might adjust the DMERC areas due to population shifts, or to address 
performance problems at contractors.
    There are any number of other potential reasons that might lead us 
to consider adjusting the DMERC jurisdictions--for example, we are now 
considering this issue as part of our implementation of the Medicare 
contracting reform provisions under the MMA (section 911). We will make 
every effort to clearly identify the criteria used in any decision to 
modify boundaries or numbers of participants.
    Comment: Several commenters voiced concerns about the potential 
impact of changing DMERC contractors through the competitive process, 
including changing the SADMERC and NSC, and the transition impact of 
this action to ongoing operations. The commenter asked about our 
methods to alleviate those perceived impacts.
    Response: The intent of this rule is to provide the government a 
mechanism to expeditiously make changes to the DMERC service area 
boundaries without notice and comment rulemaking. Through this 
mechanism, we can change the geographical boundaries served by the 
regional contractors that process durable medical equipment claims 
through issuance of a Federal Register notice. Transition impacts are 
not addressed in this regulation; however, in the event that 
transitions would occur, CMS has considerable experience in workforce 
transitions and will ensure that supplier and beneficiary customer 
service and continuity of high quality service remain our top priority. 
Our normal practice, when transferring contractual responsibility for 
Medicare claims processing and related functions from one contractor to 
another, is to transfer all work-in-progress as of a certain date to 
the new contractor. We will consider the comments provided in our 
operational management of the DMERCs and any future transitions.
    Comment: Two commenters offered constructive suggestions on having 
overall better performance and consistency of output, as well as a 
unified approach to DMERC policies, as a result of any CMS changes.
    Response: Our proposed change to this regulation does not directly 
address these issues. Supplier and beneficiary customer service and 
continuity of high quality service remain our top priority. We will 
consider these suggestions in our operational management of the DMERCs 
and all contractors.
    Comment: One commenter noted that suppliers must make adjustments 
in order to interact with a new DMERC, such as updating their patient 
accounts and electronic billing to reflect the new DMERC address, or 
adjusting their Medicare fee tables if the new DMERC pays claims 
differently. Because of these issues, the commenter asserted that the 
proposed rule would have a significant impact on small businesses and 
that a Regulatory Flexibility Analysis should have been conducted.
    Response: We agree that suppliers must make adjustments in their 
billing when there are changes in DMERCs, but we do not believe that 
these adjustments are significant enough to warrant a Regulatory 
Flexibility Analysis, given the narrow scope of the proposed changes to 
the existing regulations.
    First, all DMERCs--now and in the future--will be required to apply 
the proper Medicare fee tables developed in accordance with the 
statute, and so changes in the identity of DMERCs will not affect the 
payment allowances received by suppliers.
    Suppliers will need to adjust their billing mechanisms when there 
is a new DMERC. These adjustments must be made whenever there is a 
change in the insurance coverage for any non-Medicare patient of the 
supplier. Further, these changes could occur even in the absence of the 
proposed regulation change, as existing regulations commit us to 
periodically re-compete the DMERC contracts. There is no guarantee that 
incumbent contractors will always retain their existing contracts in 
the competitive process. Finally, section 911 of the MMA requires the 
application of competitive procedures to all Medicare claims processing 
contracts, including these contracts, not less than once every 5 years.
    We note that the original proposed and final rules pertaining to 
DMEPOS claims processing (56 FR 56612, 57 FR 27290, 58 FR 60789) did 
not require a Regulatory Flexibility Analysis, although their scope was 
broader and more significant than our proposed rule. For instance, 
those rulemaking actions consolidated the number of entities handling 
DMEPOS claims from more than thirty to four, established the

[[Page 9237]]

``beneficiary residence'' billing requirement, various business 
standards for Medicare suppliers, and some new information collection 
requirements. Our final rule, by contrast, only gives us some 
additional flexibility in modifying the DMERC jurisdictions and in 
structuring the DMERC contracts. Any adjustments to the DMERC 
jurisdictions that we might make under our final rule would have a very 
modest impact relative to the effects of our original rulemaking 
activities (which did not require a full Regulatory Flexibility 
Analysis).
    Nonetheless, in the spirit of the Regulatory Flexibility Act, our 
final rule states that we will consider the impact on suppliers and 
beneficiaries of any future changes we make in DMERC jurisdictions, and 
we will discuss these issues in the Federal Register notice or notices 
as stated in our proposed rule.
    Comment: Three commenters, including one who is a current 
contractor who performs DMERC, NSC, and SADMERC functions, expressed 
concern over the removal of the SADMERC and NSC functions from a DMERC.
    Response: This regulation does not mandate removal of the SADMERC 
and NSC functions from a DMERC contract. Removing references to the 
SADMERC and NSC from the regulation does not mean we will not contract 
out for these services. The changes to the regulation give us 
flexibility in terms of how we contract out for the SADMERC and NSC 
functions. We will consider these comments in any future operational 
strategies for the processing of DMEPOS claims.
    Comment: Two commenters asked how the Medicare contracting reform 
provisions of the MMA (section 911) would affect the underlying DMERC 
regulations at Sec.  421.210, as well as our proposal to modify them. 
One of these commenters also asked whether we might adjust the DMERC 
regions or functions in our implementation of the Medicare contracting 
reform provision, while the other queried whether our proposal would 
affect the implementation of the other DME-related provisions in MMA 
(for instance, the DME competitive bidding program established by 
section 302 of the MMA).
    Response: Section 911(e) of the MMA states that any statutes and 
regulations pertaining to Medicare intermediaries and carriers, if not 
modified by or contrary to the explicit provisions of the MMA, should 
be read as applying to the Medicare administrative contractors that 
will replace the intermediaries and carriers. Thus, our regulation 
change will continue to apply to our contracting for DMEPOS claims 
processing even after the effective date of section 911 of the MMA 
(October 1, 2005). We note that the MMA did not modify or repeal 
section 1834(a)(12) of the Act, which is one of the underlying 
authorities for this regulation and for our changes to the regulation. 
Further, we have made the decision to continue to operate specialized 
claims processing contractors for DMEPOS in our implementation plan for 
the MMA, at least for the initial round of competitive contracts let 
under the MMA authority.
    The MMA will certainly affect our contracting activities with 
respect to DMEPOS claims processing; for instance, we will be required 
to re-compete each one of these contracts consistent with the MMA.
    We are currently considering the question of whether to adjust the 
DMERC regions and functions as part of the broader implementation of 
Medicare contracting reform. Our specific plans on these issues will be 
made public in the near future.
    We do not anticipate that our changes will affect the 
implementation of the other MMA provisions relating to DME, including 
the competitive bidding program established by section 302 of the MMA. 
For instance, we would see the DMERCs as implementing any pricing 
changes for DMEPOS items based on that provision. We have devoted and 
will continue to devote significant program management and transition 
planning efforts to analyzing and mitigating these issues to the 
greatest extent possible.
    Comment: A commenter offered recommendations and suggestions 
regarding a medical approach to the payment provisions for prosthetic-
orthotic services and supplies.
    Response: The recommendations and suggestions submitted were 
coverage and policy issues, which are outside the scope of this 
regulation. We are forwarding this letter to the appropriate staff who 
can review and consider these recommendations in terms of our future 
policymaking decisions.
    Comment: A commenter inquired as to how ``ongoing claims disputes'' 
are handled when there is a change in the DMERCs, and whether these 
issues are transferred to the new DMERC.
    Response: Our normal practice, when transferring contractual 
responsibility for Medicare claims processing and related functions 
from one contractor to another, is to transfer all work-in-progress, 
including pending claims appeals, as of a certain date to the new 
contractor. We anticipate that we will generally follow this practice 
in regard to any changes in DMERC contractors, although it is possible 
that, under some circumstances, the outgoing contractor could agree to 
finalize some appeal cases under a subcontract with its successor.
    It should be noted that recent statutory changes (in the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(Pub. L. 106-554, enacted on December 21, 2000), as amended by the MMA) 
mandated significant changes to the Medicare appeals process. In the 
future, Medicare claims processing contractors, including the DMERCs, 
will handle only first-level re-determination requests on any claim. 
After the DMERC takes this action, a Qualified Independent Contractor 
(QIC) designated to process these DME appeals will handle the next 
review level for any claims-related appeals. Future interactions 
between an affiliated contractor and the QIC include: Consolidating the 
case file materials for the QIC and effectuating favorable decisions 
(either from the QIC, Administrative Law Judge, or the Departmental 
Appeals Board).
    Comment: One commenter asserted that if we anticipate making major 
changes to the number or boundaries of the DMERC jurisdictions, then we 
should use the traditional notice and comment rulemaking process so 
that those who will be impacted by the changes are given sufficient 
opportunity to respond. A second commenter asked that our March 26, 
2004 proposed rule include a description of the process by which the 
agency will seek public comment through a less formal means than 
rulemaking. This commenter believes that any formal or informal process 
should permit comments on proposed changes, with sufficient response 
time, before the changes are finalized. A third commenter also 
suggested that we should consult with beneficiary and supplier 
stakeholders before implementing these kinds of changes.
    Response: We believe that the agency has many potential avenues 
outside of notice and comment rulemaking for obtaining input on planned 
changes in the number or boundaries of the DMERC jurisdictions. These 
include, but are not limited to, publishing the changes for comment on 
our Web site (http://www.cms.hhs.gov), holding industry conferences at 
either a national or local level, or holding a ``town hall''-type 
meeting.
    We intend to conduct these types of exchanges, but do not believe 
that we have to identify these informal approaches to obtaining the 
views of

[[Page 9238]]

affected stakeholders in this final rule. Instead, we believe that our 
commitment to publish planned changes in a Federal Register notice, and 
to include our assessment of the effect of any change on beneficiaries 
and suppliers in our analysis (along with other information supporting 
the change) provides a sufficient commitment--from a regulatory 
perspective--to advance notification and fair process.
    Under this regulation, if sufficient informal commentary has not 
been received, we are not precluded from requesting public comment 
through the required Federal Register notice. Indeed, if there should 
be a change of such magnitude as to warrant full notice and comment 
rulemaking, we have the option of employing that process.
    It is our intention to advise and consult with affected 
stakeholders, especially suppliers and beneficiaries, about potential 
changes in the number or boundaries of DMERC jurisdictions well in 
advance of implementation. For instance, this will occur as a matter of 
course as we develop our planned approach to implementing Medicare 
contracting reform; any changes in contractor jurisdictions associated 
with that initiative will be well-publicized. Short of a public 
emergency, the agency would make these kinds of plans public at least 
several months before implementation. These practices, which we believe 
do not require codification in the regulations, will ensure that 
beneficiaries and suppliers have continuity in access to DMERC claims 
processing services.
    Comment: One commenter stated that, when we make a change in a 
DMERC contractor, we should notify affected beneficiaries and suppliers 
through a Federal Register notice at least 90 days in advance.
    Response: We completely agree that, when we replace any established 
Medicare claims processing contractor with a new contractor, the 
affected public, including suppliers and beneficiaries, must be 
informed. In fact, we always consider a potential replacement 
contractor's plan for conducting provider and beneficiary outreach 
during the transition period as a major element in our contract award 
process. Our program experience indicates that this kind of outreach 
effort is a critical success factor for any contractor transition. 
However, our program experience also indicates that using the Federal 
Register for this kind of activity is slow, ineffective, and 
cumbersome. There are many other, more efficient ways to introduce the 
new Medicare contractor to the affected stakeholders. We do not use the 
Federal Register to notify the public when we contract with a new 
intermediary or non-DMERC carrier, and there is no reason why this 
approach to notifying the public should be used when a DMERC is 
replaced.

IV. Provisions of the Final Regulations

    This final rule incorporates the provisions of the proposed rule. 
The provisions of this final rule do not differ from those in the 
proposed rule.

V. Collection of Information Requirements

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

VI. Regulatory Impact

A. Overall Impact

    We have examined the impacts of this final rule as required by 
Executive Order (E.O.) 12866 (September 1993, Regulatory Planning and 
Review), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. 
L. 96-354), section 1102(b) of the Act, the Unfunded Mandates Reform 
Act of 1995 (Pub. L. 104-4), and E.O. 13132.
    E.O. 12866 (as amended by E.O. 13258, which merely reassigns 
responsibility of duties) 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 in any 1 year). This final 
rule does not reach the economic threshold and thus is not considered a 
major rule. This rule merely provides the Secretary with greater 
contracting flexibility consistent with the statute and will not have 
any direct economic impact. Because this final rule only affects our 
administrative structures and does not change in any way the Medicare 
DMEPOS benefit (that is, neither coverage nor payment is changed), this 
rule will not affect the amount or distribution of the Medicare benefit 
payment for DMEPOS. Further, any possible restructuring of the DMERC 
regions in the future will not remotely approach a net economic impact 
of $100 million on either our administrative costs or the 
administrative costs of DMEPOS suppliers. Therefore, we do not believe 
that a regulatory impact analysis is necessary under E.O. 12866.
    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 $29 million in any 1 year. Individuals and States are not 
included in the definition of a small entity. This final rule, as noted 
above, will not have any significant direct economic impact on DMEPOS 
suppliers, because it will not affect the scope of benefits, coverage, 
or payment rules for DMEPOS, nor will it affect the billing 
requirements for these services. This rule does not designate any 
particular reconfiguration of the DMERC areas. However, we agree to 
consider any effects on DMEPOS suppliers in any future reconfigurations 
of the DMERC regions. We are not preparing an analysis for the RFA 
because we have determined that this rule will not have a significant 
economic impact on a substantial number of small entities. We hereby 
certify, under 5 U.S.C. 605(b), that the final rule will not have a 
significant economic impact on a substantial number of small entities, 
including small businesses, organizations, and local governments.
    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. This rule pertains to our 
processes for configuring and designating contractors to process DMEPOS 
claims and will not have a significant impact on the operations of a 
substantial number of small rural hospitals. Therefore, we are not 
preparing an analysis for section 1102(b) of the Act.
    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 rule will not have a consequential effect 
on

[[Page 9239]]

the governments mentioned or on the private sector.
    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 will not impose any costs on local 
governments, the requirements of E.O. 13132 are not applicable.

B. Conclusion

    For these reasons, we are not preparing analyses for either the RFA 
or section 1102(b) of the Act because we have determined that this rule 
will not have a significant economic impact on a substantial number of 
small entities or a significant impact on the operations of a 
substantial number of small rural hospitals.

C. Alternatives Considered

    We could have chosen to continue to operate under the constraints 
of our current regulations. This option would require that we 
periodically undertake notice and comment rulemaking to update the 
regulations with the names of new contactors. We have provided 
additional discussion in the preamble describing why we believe this is 
not the optimal solution. We believe our decision to make modest 
changes to our regulations will offer us greater flexibility in 
contracting with DMERCs and allow us to be more responsive to the needs 
of all key stakeholders.
    In accordance with the provisions of E.O. 12866, this regulation 
was reviewed by the Office of Management and Budget.

List of Sections in 42 CFR Part 421

    Administrative practice and procedure, Health facilities, Health 
professions, Medicare, Reporting and recordkeeping requirements.


0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV, part 421 as set forth 
below:

PART 421--INTERMEDIARIES AND CARRIERS

0
1. The authority citation for part 421 continues to read as follows:

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

Subpart C--Carriers

0
2. Section 421.210 is amended as follows:
0
A. Revise paragraph (a).
0
B. Revise paragraph (c).
0
C. Revise the introductory text of paragraph (d).
0
D. Revise paragraph (e).
    The revisions read as follows:


Sec.  421.210  Designations of regional carriers to process claims for 
durable medical equipment, prosthetics, orthotics, and supplies.

    (a) Basis. This section is based on sections 1834(a)(12) and 
1834(h) of the Act, which authorize the Secretary to designate one 
carrier for one or more entire regions to process claims for durable 
medical equipment, prosthetic devices, prosthetics, orthotics, and 
other supplies (DMEPOS). This authority has been delegated to CMS.
* * * * *
    (c) Region designation. (1) The boundaries of the initial four 
regions for processing claims described in paragraph (b) of this 
section contain the following States and territories:
    (i) Region A: Maine, New Hampshire, Vermont, Massachusetts, 
Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, and 
Delaware.
    (ii) Region B: Maryland, the District of Columbia, Virginia, West 
Virginia, Ohio, Michigan, Indiana, Illinois, Wisconsin, and Minnesota.
    (iii) Region C: North Carolina, South Carolina, Kentucky, 
Tennessee, Georgia, Florida, Alabama, Mississippi, Louisiana, Texas, 
Arkansas, Oklahoma, New Mexico, Colorado, Puerto Rico, and the Virgin 
Islands.
    (iv) Region D: Alaska, Hawaii, American Samoa, Guam, the Northern 
Mariana Islands, California, Nevada, Arizona, Washington, Oregon, 
Montana, Idaho, Utah, Wyoming, North Dakota, South Dakota, Nebraska, 
Kansas, Iowa, and Missouri.
    (2) CMS has the option to modify the number and boundaries of the 
regions established in paragraph (c)(1) of this section based on 
appropriate criteria and considerations, including the effect of the 
change on beneficiaries and DMEPOS suppliers. To announce changes, CMS 
publishes a notice in the Federal Register that delineates the regional 
boundary or boundaries changed, the States and territories affected, 
and supporting criteria or considerations.
    (d) Criteria for designating regional carriers. CMS designates 
regional carriers to achieve a greater degree of effectiveness and 
efficiency in the administration of the Medicare program. In making 
this designation, CMS will award regional carrier contracts in 
accordance with applicable law and will consider some or all of the 
following criteria--
* * * * *
    (e) Carrier designation. (1) Each carrier designated a regional 
carrier must process claims for items listed in paragraph (b) of this 
section for beneficiaries whose permanent residence is within that 
carrier's region as designated under paragraph (c) of this section. 
When processing the claims, the carrier must use the payment rates 
applicable for the State of residence of the beneficiary, including a 
qualified Railroad Retirement beneficiary. A beneficiary's permanent 
residence is the address at which he or she intends to spend 6 months 
or more of the calendar year.
    (2) CMS notifies affected Medicare beneficiaries and suppliers when 
it designates a regional carrier (in accordance with paragraph (d) of 
this section) to process DMEPOS claims (as defined in paragraph (b) of 
this section) for all Medicare beneficiaries residing in their 
respective regions (as designated under paragraph (c) of this section).
    (3) CMS may contract for the performance of National Supplier 
Clearinghouse functions through a contract amendment to one of the DME 
regional carrier contracts or through a contract amendment to any 
Medicare carrier contract under Sec.  421.200.
    (4) CMS periodically recompetes the contracts for the DME regional 
carriers. CMS also periodically recompetes the National Supplier 
Clearinghouse function.
* * * * *

    Dated: December 23, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: February 22, 2005.
Michael O. Leavitt,
Secretary.
[FR Doc. 05-3728 Filed 2-24-05; 8:45 am]
BILLING CODE 4120-01-P