[Federal Register Volume 71, Number 83 (Monday, May 1, 2006)]
[Proposed Rules]
[Pages 25654-25704]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-3982]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 411, 414, and 424



Medicare Program; Competitive Acquisition for Certain Durable Medical 
Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) and Other 
Issues; Proposed Rule

  Federal Register / Vol. 71, No. 83 / Monday, May 1, 2006 / Proposed 
Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 414, and 424

[CMS-1270-P]
RIN 0938-AN14


Medicare Program; Competitive Acquisition for Certain Durable 
Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) and 
Other Issues

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement competitive bidding 
programs for certain covered items of durable medical equipment, 
prosthetics, orthotics, and supplies (DMEPOS) throughout the United 
States in accordance with sections 1847(a) and (b) of the Social 
Security Act (the Act). These programs would change the way that 
Medicare pays for these items under Part B of the Medicare program by 
utilizing bids submitted by DMEPOS suppliers to establish applicable 
payment amounts. We would phase in these programs over several years.
    This proposed rule would also detail requirements for CMS approved 
accreditation organizations that will be applying quality standards for 
all DMEPOS suppliers, including DMEPOS suppliers that participate in 
the DMEPOS competitive bidding program. In addition, this rule proposes 
a new fee schedule for home dialysis supplies and equipment still paid 
on a reasonable charge basis. This proposed rule would also clarify our 
policy on the scope of the statutory eyeglass coverage exclusion. We 
are proposing to specify in regulations that the eyeglass exclusion 
encompasses all devices that use lenses to aid vision or provide 
magnification of images for impaired vision. Further, this proposed 
rule would implement a revised methodology for calculating fee schedule 
amounts for new DMEPOS items.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on June 30, 2006.

ADDRESSES: In commenting, please refer to file code CMS-1270-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.cms.hhs.gov/eRulemaking. 
(Attachments should be in Microsoft Word, WordPerfect, or Excel; 
however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address only: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1270-P, P.O. Box 8013, Baltimore, MD 21244-8013.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address only: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1270-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 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 persons 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 received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: 

Lorrie Ballantine, (410) 786-7543--Overall implementation.
Joel Kaiser, (410) 786-4499--Overall implementation.
Michael Keane, (410) 786-4495--Overall implementation.
Walter Rutemueller, (410) 786-5395--Overall implementation.
Linda Smith, (410) 786-5650--Quality Standards and Accreditation.

SUPPLEMENTARY INFORMATION: 
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-1270-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. CMS posts all electronic 
comments received before the close of the comment period on its public 
Web site as soon as possible after they have been received. Hard copy 
comments received timely will be available for public inspection as 
they are received, 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, phone 1-800-
743-3951.

Table of Contents

I. Background
    A. Payment Under Reasonable Charges
    B. Payment Under Fee Schedules
    C. Healthcare Common Procedural Coding System (HCPCS)
    D. Medicare Competitive Bidding Demonstrations
    E. Medicare Prescription Drug, Improvement, and Modernization 
Act of 2003
    F. Deficit Reduction Act (DRA)
    G. Program Advisory and Oversight Committee
    H. Quality Standards for Suppliers of (DMEPOS)
    I. Accreditation for Suppliers of DMEPOS and Other Items
    J. Low Vision Aid Exclusion
    K. Establishing Fee Schedule Amounts for New DMEPOS Items
    L. New Fee Schedules for Home Dialysis Supplies and Equipment

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    M. Covered Item Updates for Class III DME for CYs 2007 and 2008
II. Provisions of the Proposed Regulations
    A. Purpose and Definitions (Proposed Sec.  414.400 and Sec.  
414.402)
    B. Implementation Contractor (Proposed Sec.  414.406)
    C. Payment Basis (Proposed Sec.  414.408)
    1. Payment Basis (Proposed Sec.  414.408(a))
    2. General Payment Rules (Proposed Sec.  414.408(c)-(j))
    3. Special Rules for Certain Rented Items of DME and Oxygen 
(Grandfathering of Suppliers) (Proposed Sec.  414.408(k))
    a. Process for Grandfathering Suppliers
    b. Payment Amounts to Grandfathered Suppliers
    (1) Grandfathering of Suppliers Furnishing Items Prior to the 
First Competitive Bidding Program in an Area (Proposed Sec.  
414.408(k))
    (2) Suppliers That Lose Their Contract Status in a Subsequent 
Competitive Bidding Program
    c. Payment for Accessories for Items Subject to Grandfathering
    4. Payment Adjustment to Account for Inflation (Proposed Sec.  
414.408(b))
    5. Authority to Adjust Payments in Other Areas (Proposed Sec.  
414.408(e))
    6. Requirement to Obtain Competitively Bid Items From a Contract 
Supplier (Proposed Sec.  414.408(f))
    7. Limitation on Beneficiary Liability for Items Furnished by 
Non Contract Suppliers (Proposed Sec.  414.408(f))
    D. Competitive Bidding Areas
    1. Proposed Methodology for MSA Selection for 2007 and 2009 
Competitive Bidding Programs (Proposed Sec.  414.410)
    a. MSAs for 2007
    b. MSAs for 2009
    2. Establishing Competitive Bidding Areas (Proposed Sec.  
414.410)
    a. Authority to Exempt Rural Areas and Areas With Low Population 
Density Within Urban Areas (Proposed Sec.  414.410(c))
    b. Establishing the Competitive Bidding Areas for 2007 and 2009 
(Proposed Sec.  414.410(b))
    c. Nationwide or Regional Mail Order Competitive Bidding Program 
(Proposed Sec.  414.410(d)(2))
    d. Additional Competitive Bidding Areas After 2009 (Proposed 
Sec.  414.410(d))
    E. Criteria for Item Selection
    F. Submission of Bids Under the Competitive Bidding Program 
(Proposed Sec.  414.412)
    1. Providers (Proposed Sec.  414.404 and 414.422)
    2. Physicians (Proposed Sec.  414.422)
    3. Product Categories for Bidding Purposes (Proposed Sec.  
414.412)
    4. Bidding Requirements (Proposed Sec.  414.408)
    a. Inexpensive or Other Routinely Purchased DME Items
    b. DME Items Requiring Frequent and Substantial Servicing
    c. Oxygen and Oxygen Equipment
    d. Capped Rental Items
    e. Enteral Equipment and Supplies
    f. Maintenance and Servicing of Enteral Infusion Pumps
    g. Supplies Used in Conjunction With DME
    h. OTS Orthotics
    G. Conditions for Awarding Contracts (Proposed Sec.  414.414)
    1. Quality Standards and Accreditation (Proposed Sec.  
414.414(c))
    2. Eligibility (Proposed Sec.  414.414(b))
    3. Financial Standards (Proposed Sec.  414.414(d))
    4. Evaluation of Bids (Proposed Sec.  414.414(e))
    a. Market Demand and Supplier Capacity (Proposed Sec.  
414.414(e))
    b. Composite Bids (Proposed Sec.  414.414(e))
    c. Determine the Pivotal Bid (Proposed Sec.  414.414(e))
    d. Assurance of Savings (Proposed Sec.  414.414(f))
    e. Assurance of Multiple Contractors (Proposed Sec.  414.414(g))
    f. Selection of New Suppliers After Bidding (Proposed Sec.  
414.414(h))
    H. Determining Single Payment Amounts for Individual Items 
(Proposed Sec.  414.416)
    1. Setting Single Payment Amounts for Individual Items (Proposed 
Sec.  414.416(b))
    2. Rebate Program (Proposed Sec.  414.416(c))
    I. Terms of Contracts (Proposed Sec.  414.422)
    1. Terms and Conditions of Contracts
    2. Furnishing of Items (Proposed Sec.  414.422(c))
    3. Repairs and Replacements of Patient Owned Items Subject to 
Competitive Bidding (Proposed Sec.  414.422(c))
    4. Furnishing Items to Beneficiaries Whose Permanent Residence 
Is Within a CBA
    5. Furnishing Items to Beneficiaries Whose Permanent Residence 
Is Outside a CBA
    6. Information Collection from the Supplier
    7. Change in Ownership (Proposed Sec.  414.422(d))
    8. Suspension or Termination of a Contract (Proposed Sec.  
414.422(f))
    J. Administrative or Judicial Review (Proposed Sec.  414.424)
    K. Opportunity for Participation by Small Suppliers
    L. Opportunity for Networks (Proposed Sec.  414.418)
    M. Education and Outreach
    1. Supplier Education
    2. Beneficiary Education
    N. Monitoring and Complaint Services for the Competitive Bidding 
Program
    O. Physician Authorization/Treating Practitioner and 
Consideration of Clinical Efficiency and Value of Items in 
Determining Categories for Bids (Proposed Sec.  414.420)
    P. Quality Standards and Accreditation for Suppliers of DMEPOS
    1. Special Payment Rules for Items Furnished by DMEPOS Suppliers 
and Issuance of DMEPOS Supplier Billing Privileges (Proposed Sec.  
424.57)
    2. Accreditation (Proposed Sec.  424.58)
    3. Ongoing Responsibilities of CMS Approved Accreditation 
Organizations
    4. Continuing Federal Oversight of Approved Accreditation 
Organizations
    a. Equivalency Review
    b. Validation Review
    c. Notice of Intent To Withdraw Approval for Deeming Authority
    d. Withdrawal of Approval for Deeming Authority
    e. Reconsideration
    Q. Low Vision Aid Exclusion (Proposed Sec.  414.15)
    R. Establishing Payment Amounts for New DMEPOS (Gap-filling) 
(Proposed Sec.  414.210(g))
    S. Fee Schedules for Home DialysIs Supplies and Equipment 
(Proposed Sec.  414.107)
    T. Fee Schedules for Therapeutic Shoes (Proposed Sec.  
414.228(c))
III. Collection of Information Requirements
IV. Response to Comments
V. Regulatory Impact AnalysIs
    A. Overall Impact
    B. Anticipated Affects
    C. Implementation Costs
    D. Program Savings
    E. Effect on Beneficiaries
    F. Effect on Suppliers
    1. Affected Suppliers
    2. Small Suppliers
    G. Accounting Statement
Regulation Text

I. Background

A. Payment Under Reasonable Charges

    Payment for most DMEPOS items, including supplies and equipment, 
furnished under Part B of the Medicare program (Supplementary Medical 
Insurance) is made through contractors known as Medicare carriers. 
Before January 1, 1989, payment for most of these services was made on 
a reasonable charge basis by these carriers. The methodology for 
determining reasonable charges is set forth in section 1842(b) of the 
Social Security Act (Act) and 42 CFR part 405, subpart E of the 
regulations. Reasonable charge determinations are generally based on 
customary and prevailing charges derived from historic charge data, 
with the ``reasonable charge'' for an item being the lowest of the 
following factors:
     The supplier's actual charge for the item.
     The supplier's customary charge for the item.
     The prevailing charge in the locality for the item. The 
prevailing charge may not exceed the 75th percentile of the customary 
charges of suppliers in the locality.
     The inflation indexed charge (IIC). The IIC is defined in 
Sec.  405.509(a) as the lowest of the fee screens used to determine 
reasonable charges for services, including supplies, and equipment paid 
on a reasonable charge basis (excluding physicians' services) that is 
in effect on December 31 of the previous fee screen year, updated by 
the inflation adjustment factor. The inflation adjustment factor is 
based on the current change in the consumer price index for all urban 
consumers (CPI-U), as compiled by the Bureau of Labor Statistics, for 
the 12-month period ending June 30 each year.

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B. Payment Under Fee Schedules

    Section 4062 of the Omnibus Budget Reconciliation Act of 1987 (Pub. 
L. 100-203) (OBRA ``87) added section 1834 to the Act and implemented a 
fee schedule payment methodology for most durable medical equipment 
(DME), prosthetic devices, and orthotic devices furnished after January 
1, 1989. Specifically, sections 1834(a)(1)(A) and (B) and 1834(h)(1)(A) 
of the Act provide that Medicare payment for these items is equal to 80 
percent of the lesser of the actual charge for the item or the fee 
schedule amount for the item. We implemented this new payment 
methodology at 42 CFR part 414, subpart D of our regulations. Sections 
1834(a)(2) through (a)(5) and section 1834(a)(7) of the Act, as well as 
Sec.  414.200 through Sec.  414.232 (with the exception of Sec.  
414.228) of the regulations, set forth separate payment categories of 
DME and describe how the fee schedule for each of the following 
categories is established:
     Inexpensive or other routinely purchased items (section 
1834(a)(2) of the Act and Sec.  414.220 of the regulations);
     Items requiring frequent and substantial servicing 
(section 1834(a)(3) of the Act and Sec.  414.222);
     Customized items (section 1834(a)(4) of the Act and Sec.  
414.224);
     Oxygen and oxygen equipment (section 1834(a)(5) of the Act 
and Sec.  414.226);
     Other items of DME (section 1834(a)(7) of the Act and 
Sec.  414.229).
    Each category has its own unique payment rules. With the exception 
of customized items, a fee schedule amount is calculated for each item 
or category of DME that is identified by a code in the Healthcare 
Common Procedure Coding System (HCPCS). The Medicare payment amount for 
a customized item of DME is based on the Medicare carrier's individual 
consideration of that item. The fee schedule amounts for oxygen and 
oxygen equipment are monthly payment amounts. Payment under the DME 
benefit is made for supplies necessary for the effective use of DME 
(for example, lancets and test strips used with blood glucose 
monitors). These supplies are paid for using the same methodology that 
we use to pay for inexpensive or routinely purchased items.
    The fee schedule amounts for DME are generally adjusted annually by 
the change in the CPI-U for the 12-month period ending June 30 of the 
preceding year. The fee schedule amounts are also generally limited by 
a ceiling (upper limit) and floor (lower limit) equal to 100 percent 
and 85 percent, respectively, of the median of the statewide fee 
schedule amounts.
    Since 1994, Medicare has paid for most surgical dressings in 
accordance with section 1834(i) of the Act and Sec.  414.220(g) of the 
regulations, using the same methodology as is used for payment of 
inexpensive or routinely purchased DME.
    Under section 1834(h) of the Act and Sec.  414.228 of the 
regulations, payment for prosthetic and orthotic devices is made on a 
lump sum basis and is equal to the lower of the fee schedule amount 
calculated for the item or the actual charge for the item, less any 
unmet deductible. The fee schedule amounts are calculated using a 
weighted average of Medicare payments made in the States in each of 10 
CMS regions from July 1, 1986 through June 30, 1987, adjusted annually 
by the change in the CPI-U for the 12-month period ending June 30 of 
the preceding year. The regional fee schedule amounts are limited by a 
ceiling (upper limit) and floor (lower limit) equal to 120 percent and 
90 percent, respectively, of the average of the regional fee schedule 
amounts for each State.
    As authorized under section 1842(s) of the Act and 42 CFR, part 
414, subpart C of our regulations, Medicare pays for parenteral and 
enteral nutrition (PEN) nutrients, equipment and supplies on the basis 
of 80 percent of the lesser of the actual charge for the item, or the 
fee schedule amount for the item (Sec.  414.102(a)). The fee schedule 
amounts for PEN items are calculated on a nationwide basis and are the 
lesser of the reasonable charges for 1995, or the reasonable charges 
that would have been used in determining payment for these items in 
2002 under the former reasonable charge payment methodology (Sec.  
414.104(b)). The fee schedule amounts are generally adjusted annually 
by the percentage increase in the CPI-U for the 12-month period ending 
with June 30 of the preceding year (Sec.  414.102(c)). Under Sec.  
414.104(a), payment for PEN nutrients and supplies is made on a 
purchase basis, and payment for PEN equipment that is rented is made on 
a monthly basis. We are proposing to revise Sec.  414.1 of our 
regulations to specify that fee schedules were established for PEN 
items in accordance with our authority under section 1842(s) of Act.
    Section 627 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173) amended section 
1833(o)(2) of the Act to require implementation of fee schedule 
amounts, effective January 1, 2005, for the purpose of determining 
payment for custom molded shoes, extra-depth shoes, and inserts 
(collectively, ``therapeutic shoes''). We believe that this section of 
the MMA is largely self-implementing because it mandates use of the 
methodology set forth in section 1834(h) of the Act for prosthetic and 
orthotic devices in determining the fee schedule amounts for 
therapeutic shoes. We implemented that methodology through regulations 
at part 414, subpart D, and section 627 of the MMA provides that the 
same methodology shall apply to therapeutic shoes. Section 627 of the 
MMA was implemented through program instructions, and on January 1, 
2005, Medicare began paying for therapeutic shoes based on fee schedule 
amounts determined in accordance with section 1834(h) of the Act and 
part 414, subpart D of our regulations.

C. Healthcare Common Procedure Coding System (HCPCS)

    The Healthcare Common Procedure Coding System (HCPCS) is a 
standardized coding system used to process claims submitted to 
Medicare, Medicaid, and other health insurance programs by providers, 
physicians, and other suppliers. The HCPCS code set is divided into the 
following 2 principal subsystems, referred to as level I and level II 
of the HCPCS:
     Level I of the HCPCS codes is comprised of Current 
Procedural Terminology (CPT) codes. CPT codes are a uniform coding 
system consisting of descriptive terms and identifying codes that are 
used primarily to identify medical services and procedures furnished by 
physicians and other health care professionals which are billed to 
public or private health insurance programs. CPT codes are developed, 
published, and maintained by the American Medical Association. CPT 
codes do not include codes needed to separately report medical items 
that are regularly billed by suppliers other than physicians.
     Level II of the HCPCS codes is a standardized coding 
system used primarily to identify products and supplies that are not 
included in the CPT codes, such as DME, orthotics, prosthetics, and 
supplies when used outside a physician's office.
    HCPCS Level II Codes classify like items by category for the 
purpose of efficient claims processing. Assignment of a HCPCS code is 
not a coverage determination, and does not imply that any payer will 
cover the items in the code category. For some DMEPOS items, such as 
wheelchairs and wheelchair cushions, minimum performance

[[Page 25657]]

standards must be met before an item can be classified under a HCPCS 
code. In October of 2003, the Secretary delegated authority under the 
Health Insurance Portability and Accountability Act of 1996 (HIPAA) to 
CMS to maintain and distribute the HCPCS Level II Codes. The HCPCS 
Level II Codes will be used to describe the DME, orthotic, and enteral 
nutrition items furnished under the competitive bidding programs being 
proposed in this proposed rule, both for the purpose of requesting bids 
and for establishing payment amounts.

D. Medicare Competitive Bidding Demonstrations

    Section 4319 of the Balanced Budget Act of 1997 (BBA) authorized 
implementation of up to five demonstration projects of competitive 
bidding for Medicare Part B items, except physician services. In 
accordance with section 4319 of the BBA, we planned and implemented the 
DMEPOS Competitive Bidding Demonstration to test the feasibility and 
program impacts of using competitive bidding to set prices for DME and 
prosthetics, orthotics, and supplies. The demonstration was implemented 
at two sites: Polk County, Florida, and in the San Antonio, Texas, 
Metropolitan Statistical Area (MSA). The competitive bidding 
demonstrations, authorized under the BBA, were implemented successfully 
in both demonstration sites from 1999 to 2002, resulted in a 
substantial savings to the program and offered beneficiaries sufficient 
access and a quality product.
    At the first site, Polk County, Florida, we conducted the first of 
two rounds of bidding in 1999. Five categories of DMEPOS were put up 
for bidding: Oxygen equipment and supplies (required by statute), 
hospital beds and accessories, enteral nutrition formulas and 
equipment, urological supplies, and surgical dressings. A total of 16 
contract suppliers began providing demonstration products in Polk 
County on October 1, 1999, and continued for 2 years. The second and 
final round of bidding in Polk County was conducted in 2001 for the 
same product categories minus enteral nutrition. (Enteral nutrition was 
dropped to retain only product categories that are overwhelmingly used 
in private homes.) The second set of competitively bid payment amounts 
took effect in October 2001. As in round one, 16 suppliers were 
selected, of whom half had participated as winners previously. The new 
fee schedules developed from the bids in each round replaced the 
statewide Medicare DMEPOS fees. The second round of the demonstration 
in Polk County ended in September 2002.
    Texas was the second site for the demonstration. In the San Antonio 
MSA's Bexar, Comal, and Guadalupe counties we conducted bidding in 2000 
for five kinds of DMEPOS: Oxygen equipment and supplies, hospital beds 
and accessories, wheelchairs and accessories, general orthotics, and 
nebulizer drugs. Fifty-one suppliers were selected and began serving 
Medicare beneficiaries under the new fees in February 2001. The San 
Antonio site ended operations in December 2002, the statutorily 
required termination date in the BBA.
    In each area of evaluation, the data indicated mostly favorable 
results for the Medicare program. The demonstration led to lower 
Medicare fees for almost every item in almost every product category in 
each round of bidding. Fee reductions varied by product category and 
item, resulting in a nearly 20 percent overall savings at each site. 
Statistical and qualitative data indicate that beneficiary access and 
quality of services were essentially unchanged.
    The DMEPOS Competitive Bidding Demonstration offers valuable 
lessons for understanding the impacts of competitive bidding for 
Medicare services. These lessons are especially important now because 
the MMA mandates a larger role for competitive bidding within the 
Medicare program. Specifically, section 302(b) of the MMA requires the 
Secretary to establish and implement competitive bidding programs for 
the furnishing of certain DME and associated supplies, enteral 
nutrition and associated supplies, and off-the-shelf orthotics. In 
addition, section 303(d) of the MMA requires the Secretary to implement 
a competitive bidding program for certain Medicare Part B drugs not 
paid on a cost or prospective payment system basis, and section 302(b) 
of the MMA mandates competitive bidding demonstration projects for 
clinical laboratory services and managed care.

E. Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (Pub. L. 108-173)

    Section 302(b)(1) of the MMA amended section 1847 of the Act to 
require the Secretary to establish and implement programs under which 
competitive bidding areas are established throughout the United States 
for contract award purposes for the furnishing of certain competitively 
priced items for which payment is made under Part B (the ``Medicare 
DMEPOS Competitive Bidding Program''). Competitive bidding provides a 
way to harness marketplace dynamics to create incentives for suppliers 
to provide quality items in an efficient manner and at a reasonable 
cost. In our view, the Medicare DMEPOS Competitive Bidding Program has 
five objectives, as follows:
     To implement competitive bidding programs for certain 
DMEPOS items.
     To assure beneficiary access to quality DMEPOS as a result 
of the program.
     To reduce the amount Medicare pays for DMEPOS and create a 
payment structure under competitive bidding that is more reflective of 
a competitive market.
     To limit the financial burden on beneficiaries by reducing 
their out-of-pocket expenses for DMEPOS they obtain through the 
program.
     To contract with suppliers who conduct business in a 
manner that is beneficial for the program and for Medicare 
beneficiaries.

F. Deficit Reduction Act of 2005 (Pub. L. 109-171)

    Section 5101(a) of the Deficit Reduction Act of 2005 (DRA) amended 
section 1834(a)(7)(A) of the Act to change the way Medicare pays for 
capped rental items. This section revised the period of payment for 
capped rental from 15 to 13 months. After rental payments are made for 
a 13 month period of continuous use, title to the capped rental items 
transfers from the supplier to the beneficiary. Once the title has 
transferred, amended section 1834(a)(7)(A)(iv) provides that reasonable 
and necessary maintenance and servicing payments (for parts and labor 
not covered by the supplier's or manufacturer's warranty, as determined 
by the Secretary to be appropriate for the particular item) will be 
made. These statutory changes apply only to capped rental items whose 
first rental month occurs on or after January 1, 2006.
    Section 5101(b) of the DRA also amended section 1834(a)(5) of the 
Act to limit monthly payments for oxygen equipment to a 36 month period 
of continuous use. Then ownership of the oxygen equipment will be 
transferred from the supplier to the beneficiary. Medicare will 
continue making monthly payments for oxygen contents when appropriate 
for beneficiary owned stationary and portable systems in the amounts 
recognized under section 1834(a)(9) after title to the equipment 
transfers to the beneficiary. However, under new section 
1834(a)(5)(F)(II)(bb), maintenance and servicing payments for 
beneficiary owned oxygen equipment (for parts and labor not covered by 
the supplier's or manufacturer's warranty)

[[Page 25658]]

will be made only if they are reasonable and necessary. These statutory 
changes went into effect on January 1, 2006. For beneficiaries 
receiving Medicare covered oxygen equipment as of December 31, 2005, 
the 36-month rental period begins January 1, 2006. In a future 
rulemaking, we will propose to revise regulations found in part 414, 
subpart D to incorporate these DRA provisions.

G. Program Advisory and Oversight Committee

    Section 1847(c) of the Act requires the Secretary to establish a 
Program Advisory and Oversight Committee (PAOC) that will provide 
advice to the Secretary with respect to the following functions, 
including--
     The implementation of the Medicare DMEPOS Competitive 
Bidding Program;
     The establishment of financial standards for entities 
seeking contracts under the Medicare DMEPOS Competitive Bidding 
Program, taking into account the needs of small providers;
     The establishment of requirements for collection of data 
for the efficient management of the Medicare DMEPOS Competitive Bidding 
Program;
     The development of proposals for efficient interaction 
among manufacturers, providers of services, suppliers (as defined in 
section 1861(d) of the Act) and individuals; and
     The establishment of quality standards for DMEPOS 
suppliers under section 1834(a)(20) of the Act.
    In addition, section 1847(c)(3)(B) of the Act authorizes the PAOC 
to perform additional functions to assist the Secretary in carrying out 
the Medicare DMEPOS Competitive Bidding Program as the Secretary may 
specify.
    As authorized under section 1847(c)(2) of the Act, the PAOC members 
were appointed by the Secretary of Health and Human Services and 
represent a broad mix of relevant industry, consumer, and government 
parties. Specifically, the membership roster includes two beneficiary/
consumer representatives, four manufacturer representatives, five 
supplier representatives, three certification/standards 
representatives, six Federal and State program representatives, one 
physician and one pharmacist. The representatives have expertise in a 
variety of subject matter areas, including DMEPOS, competitive bidding 
methodologies and processes, and rural and urban marketplace dynamics. 
The first PAOC meeting was announced in a Federal Register notice (CMS-
1279-N2, 69 FR 31125) and was held at CMS on October 6, 2004.
    We have held two additional PAOC meetings where we, along with our 
contractor RTI, presented material to both the PAOC and the public 
relating to the provisions that are outlined in this proposed rule. The 
topics that we presented include--
     Medicare's timeline for implementation of the Medicare 
DMEPOS Competitive Bidding Program;
     Results of the Medicare competitive bidding demonstration 
projects authorized by section 4319 of the BBA;
     Structure of the Medicare DMEPOS Competitive Bidding 
Program being proposed in this proposed rule;
     Existing non-Medicare competitive bidding programs for 
DMEPOS items;
     Program design options for the Medicare DMEPOS Competitive 
Bidding Program being proposed in this proposed rule;
     Criteria for selecting Metropolitan Statistical Areas 
(MSAs) in which competition under the Medicare DMEPOS Competitive 
Bidding Program will occur in both 2007 and 2009;
     Criteria for selecting items for competitive bidding;
     Bidding process overview;
     Methodology for setting single payment amounts for 
competitively bid items;
     Capacity of DMEPOS suppliers and beneficiary utilization 
of DMEPOS items;
     Financial capabilities of bidding suppliers;
     Exception authority under section 1847(a)(3) of the Act 
for rural areas and areas with low population density within urban 
areas that are not competitive; and
     Quality standards and accreditation procedures applicable 
to all DMEPOS suppliers.
    In addition to the PAOC meetings, we have designed and implemented 
a CMS Web site (http://cms.hhs.gov/suppliers/dmepos/compbid/paoc.asp) 
specifically for the public to have access to all PAOC presentations, 
minutes, and updates for the Medicare DMEPOS Competitive Bidding 
Program. In accordance with section 1847(c)(5) of the Act, the PAOC 
will continue to operate until December 31, 2009. Future PAOC meeting 
dates, as well as other information pertinent to the Medicare DMEPOS 
Competitive Bidding Program, can be found on our Web site.

H. Quality Standards for Suppliers of (DMEPOS)

    Section 302(a)(1) of the MMA added section 1834(a)(20) to the Act, 
which requires the Secretary to establish and implement quality 
standards for suppliers of certain items, including consumer service 
standards, to be applied by recognized independent accreditation 
organizations. Suppliers of DMEPOS must comply with the quality 
standards in order to furnish any item for which payment is made under 
Part B, and to receive and retain a provider or supplier billing number 
used to submit claims for reimbursement for any such item for which 
payment may be made under Medicare. Section 1834(a)(20)(D) of the Act 
requires us to apply these quality standards to suppliers of the 
following items for which we deem the standards to be appropriate:
     Covered items, as that term is defined in section 
1834(a)(13), for which payment may be made under section 1834(a);
     Prosthetic devices and orthotics and prosthetics described 
in section 1834(h)(4); and
     Items described in section 1842(s)(2) of the Act, which 
include medical supplies, home dialysis supplies and equipment, 
therapeutic shoes, parenteral and enteral nutrients, equipment, and 
supplies, electromyogram devices, salivation devices, blood products, 
and transfusion medicine.
    Section 1834(a)(20)(E) of the Act explicitly authorizes the 
Secretary to establish the quality standards by program instruction or 
otherwise after consultation with representatives of relevant parties. 
We consulted with the PAOC and determined that it is in the best 
interest of the industry and beneficiaries to publish the quality 
standards through program instructions and select the accreditation 
organizations in order to ensure that suppliers that wish to 
participate in competitive bidding will know what standards they must 
meet in order to be awarded a contract. The standards will be applied 
prospectively and will be published on our website. All suppliers of 
DMEPOS and other items to which section 1834(a)(20) of the Act applies 
will be required to meet the quality standards established under that 
section. Finally, section 1847(b)(2)(A)(i) of the Act requires an 
entity (a DMEPOS supplier) to meet the quality standards specified by 
the Secretary under section 1834(a)(20) of the Act before being awarded 
a contract under the Medicare DMEPOS Competitive Bidding Program.
    Since December 11, 2000, suppliers have been required to meet the 
Medicare enrollment standards at Sec.  424.57, satisfaction of which is 
required for these suppliers to participate in the Medicare program and

[[Page 25659]]

receive Medicare payments for DMEPOS and other items. Even with the 
implementation of the enrollment standards at Sec.  424.57, we believe 
there has not been sufficient oversight of suppliers of DMEPOS and 
other items related to the quality and provision of their products. The 
Department of Health and Human Services, Office of Inspector General 
(OIG), has conducted several investigations of suppliers of DMEPOS and 
other items to determine the legitimacy of their businesses and has 
uncovered many examples of fraud and abuse. Examples of the types of 
fraud and abuse that were discovered include--
     Billing for services not performed;
     Billing for a more expensive service than was rendered;
     Billing separately for several services that should be 
combined into one billing;
     Billing twice for the same service;
     Billing for more expensive equipment or supplies than were 
used;
     Offering or receiving kickbacks (that is, offering or 
accepting something in return for services);
     Offering or accepting a bribe to use a particular service 
or company;
     Providing unnecessary services; and
     Submitting false cost reports.
    The OIG began publicizing fraud alerts as a vehicle to identify 
fraudulent and abusive practices being committed by DMEPOS suppliers 
within the health care industry.
    To enhance the quality of services provided by suppliers of DMEPOS 
and further reduce fraudulent practices, we are developing quality 
standards, as required by section 1834(a)(20) of the Act, to address 
suppliers' accountability, business integrity, provision of quality 
products to beneficiaries, and performance management. These standards 
will measure the effect of suppliers' services on beneficiaries. The 
supplier quality standards will include product specific requirements 
that will focus on a consumer-directed model of service delivery for 
suppliers to improve beneficiary access to information about DMEPOS. We 
believe these requirements will empower beneficiaries to make better-
informed choices regarding equipment selection and the proper and safe 
use of DMEPOS, which we believe will lead to increased beneficiary 
satisfaction, safe and appropriate use of purchased equipment, and 
positive health outcomes. The supplier quality standards will provide 
more efficient processes and standardized materials for suppliers to 
increase consistency and continuity for supplier services to 
beneficiaries, beneficiary education, and responsiveness to beneficiary 
requests for equipment options. We are using contractor support and 
input from industry suppliers and national associations to develop the 
quality standards. Additionally, the contractors will meet with 
beneficiaries who use the specific products to solicit their input and 
assurance that their needs are being addressed by the quality standards 
requirements.
    The quality standards will include performance management 
requirements to ensure the development, implementation, monitoring, and 
evaluation of policies, procedures, and products so that suppliers can 
maintain compliance with regulatory requirements and our policy 
instructions. The quality standards will include language from current 
CMS standards and industry best practice standards for the following 
areas: Administration; financial management; human resource management; 
beneficiary services; performance management; environment and safety; 
beneficiary rights/ethics; and information management. Additionally, 
the supplier quality standards will include requirements for monitoring 
beneficiary satisfaction with products and suppliers' responses to 
beneficiary complaints. As is authorized under section 1834(a)(20)(E), 
we will be establishing the supplier quality standards through program 
instructions and will publish them on our Web site. Additionally, in a 
future rule, we will propose to address DMEPOS supplier requirements 
for enrollment and enforcement procedures.

I. Accreditation for Suppliers of DMEPOS and Other Items

    Section 1834(a)(20)(B) of the Act requires the Secretary, 
notwithstanding section 1865(b) of the Act, to designate and approve 
one or more independent accreditation organizations to apply the 
quality standards to suppliers of DMEPOS and other items. The Medicare 
program currently contracts with State Agencies to perform survey and 
review functions for providers and suppliers to approve their 
participation in or coverage under the Medicare program. Additionally, 
section 1865(b) of the Act sets forth the general procedures for CMS to 
designate national accreditation organizations to deem providers or 
suppliers to meet Medicare conditions of participation or coverage if 
they are accredited by a national accreditation organization approved 
by CMS. Many types of providers and suppliers have a choice between 
having the State Agency or the CMS approved accreditation organization 
survey them. If the provider or supplier selects the CMS-approved 
accreditation organization and is in compliance with the accreditation 
organization standards, it is generally deemed to meet the Medicare 
conditions of participation or coverage. CMS is responsible for the 
oversight and monitoring of the State Agencies and the approved 
accreditation organizations. The procedures, implemented by the 
Secretary, for designating private and national accreditation 
organizations and the Federal review process for accreditation 
organizations are located at 42 CFR parts 422 (for Medicare Advantage 
organizations) and 488 (for most providers and suppliers). Although, 
the statute itself does not require us to issue a rulemaking or provide 
notice in the Federal Register in order to designate and approve DMEPOS 
accreditation organizations, we believe that the Administrative 
Procedure Act does require us to give notice and an opportunity for 
comment before we institute our procedures for designating and 
supervising these organizations. To accommodate suppliers that wish to 
participate in the Medicare DMEPOS Competitive Bidding Program, we will 
phase-in the accreditation process and require accreditation 
organizations to prioritize their surveys to accredit suppliers in the 
selected MSAs and competitive bidding areas. We will provide further 
guidance in a Federal Register notice on the grandfathering-in of 
suppliers that have already been accredited, and the submission 
procedures for accreditation after this rule is finalized.

J. Low Vision Aid Exclusion

    Section 1862(a)(7) of the Act excludes payment where ``expenses are 
for * * * eyeglasses (other than eyewear described in section 
1861(s)(8)) or eye examinations for the purpose of prescribing, 
fitting, or changing eyeglasses, procedures performed (during the 
course of any eye examination) to determine the refractive state of the 
eyes * * *.'' The Medicare regulations at Sec.  411.15(b) exclude from 
coverage eyeglasses and contact lenses, except for--
     Post-surgical prosthetic lenses customarily used during 
convalescence for eye surgery in which the lens of the eye was removed 
(for example, cataract surgery);
     Prosthetic lenses for patients who lack the lens of the 
eye because of congenital absence or surgical removal; and
     One pair of conventional eyeglasses or conventional 
contact lenses furnished

[[Page 25660]]

after each cataract surgery during which an intraocular lens is 
inserted.
    From as early as 1980, we have clarified that we viewed closed 
circuit visual aid systems and other low vision devices to be subject 
to the eyeglass coverage exclusion at section 1862(a)(7) of the Act. We 
have also concurred with carrier policies that have excluded payment 
for low vision aids because of the eyeglass exclusion. Moreover, the 
Medicare Appeals Council has recognized that video magnifiers, or 
closed circuit televisions (CCTVs), are excluded from coverage by 
section 1862(a)(7) of the Act. However, we have never issued a 
regulation or national coverage decision that specifically states that 
the eyeglass exclusion at section 1862(a)(7) of the Act applies to low 
vision aids. We are proposing to revise Sec.  411.15(b), with certain 
specific exceptions, to expressly state that the eyeglass exclusion 
applies to all devices that use one or more lens for the primary 
purpose of aiding vision. In proposing this revision, we are mindful 
that three United States district courts have found that section 
1862(a)(7) of the Act does not prohibit payment for video magnifiers. 
(Collins v. Thompson, No 2:03-cv-265-FtM-29SPC (M.D. Fla. June 4, 
2004); Davidson v. Thompson, No. Civ. 04-32 LFG (D.N.M. 2004); Currier 
v. Thompson, 369 F. Supp. 2d 65 (D. Me. 2005).) The Currier court, 
however, recognized that the statute was ambiguous. Moreover, the 
Supreme Court has recently recognized that a prior judicial 
construction of an ambiguous statute does not categorically control an 
agency's contrary construction. (National Cable & Telecommunications 
Association v. Brand X Internet Services, 125 S. Ct. 2688, 2701 
(2005).) In section II.O. of this proposed rule, we explain the reasons 
for our interpretation of the statute that the eyeglass exclusion does 
apply to low vision aids.

K. Establishing Fee Schedule Amounts for New DMEPOS Items

    Since 1989, CMS and its contractors have used an administrative 
process known as gap-filling to establish fee schedule amounts for 
DMEPOS items when fee schedule base data is not available, such as when 
a new code is added to Level II of the HCPCS to describe a new category 
of items. For example, section 1834(a)(2)(B) of the Act requires that 
the fee schedules for inexpensive or routinely purchased DME (for 
example, canes) be based on average reasonable charges for the item 
from July 1, 1986 through June 30, 1987. When a new code for an item 
(for example, a new category of canes) falling under this category is 
added to the HCPCS, reasonable charge data from 1986/87 is not 
available and the gap-filling process is used to estimate 1986/87 
reasonable charges. Since 1989, fee schedule amounts have been gap-
filled using either--
     Fee schedule amounts for comparable items;
     Supplier or retail prices; or
     Wholesale or manufacturer prices plus a reasonable mark-
up.
    There is currently no methodology set forth in regulations for 
establishing fee schedule amounts for DMEPOS items in these situations. 
Therefore, in Sec.  414.210, we are proposing a modified version of our 
existing gap-filling process to be used in establishing fee schedule 
amounts for DMEPOS items to which are assigned new HCPCS Level II 
Codes. This process will be used to set payment amounts for all new 
DMEPOS items, even if those items fall within a product category that 
is subject to competitive bidding, until bids for those items are 
available for establishing payments in accordance with section 
1847(b)(5) of the Act.

L. New Fee Schedules for Home Dialysis Supplies and Equipment

    Section 1842(s)(1) of the Act gives the Secretary the authority to 
implement fee schedules to be used for payment under Medicare of 
specific items (listed in section 1842(s)(2) of the Act) still paid 
using the reasonable charge payment methodology described in section 
I.A. of this proposed rule. In Sec.  414.107, we are proposing to use 
this authority to implement a fee schedule payment methodology for home 
dialysis supplies and equipment, one of these specified items.

M. Covered Item Updates for Class III DME for CYs 2007 and 2008

    Sections 1834(a)(14)(H) and (I) of the Act give the Secretary 
discretion in determining the appropriate fee schedule update 
percentages for CYs 2007 and 2008, respectively, for DME which are 
``class III medical devices described in section 513(a)(1)(C) of the 
Federal Food, Drug, and Cosmetic Act (21 U.S.C. 360(c)(1)(C)).'' In 
making these determinations, the Secretary must take into account 
recommendations contained in a report from the Government 
Accountability Office (GAO) regarding the appropriate update 
percentages for these devices. The GAO report is mandated by section 
302(c)(1)(B) of the MMA and must be submitted to the Congress and 
transmitted to the Secretary by no later than March 1, 2006. Class III 
devices paid in accordance with the DME fee schedule payment 
methodology include osteogenesis or bone growth stimulators, 
implantable infusion pumps, external defibrillators, and ultraviolet 
light therapy systems. We are soliciting comments on how to determine 
the appropriate fee schedule percentage change for these devices for 
2007 and 2008 and will consider these comments in conjunction with the 
recommendations in the GAO report in determining the appropriate update 
percentage for these devices for 2007 and 2008.

II. Provisions of the Proposed Regulation

    We are proposing to add a new subpart F to part 414 to specify the 
requirements for the Medicare DMEPOS Competitive Bidding Program. 
Subpart F would set forth policies and procedures relating to the 
program in Sec. Sec.  414.400 through 414.446.

A. Purpose and Definitions (Proposed Sec.  414.400 and Sec.  414.402)

[If you choose to comment on issues in this section, please include the 
caption ``Use of terms'' at the beginning of your comments.]

    We propose in Sec.  414.400 to state that the purpose of proposed 
new subpart F would be to implement the Medicare DMEPOS Competitive 
Bidding Program for certain DMEPOS items as required by sections 
1847(a) and (b) of the Act.
    As set forth in proposed Sec.  414.402, we are proposing to define 
certain frequently occurring terms that will be used in competitive 
bidding. Specifically, we are proposing to define the following terms:
    Bid means an offer to furnish an item for a particular price and 
time period that includes, where appropriate, any services that are 
directly related to the furnishing of the item.
    Competitive bidding area (CBA) means an area established by the 
Secretary under this proposed rule.
    Composite bid means the sum of a bidding supplier's weighted bids 
for all items within a product category for purposes of allowing a 
comparison across bidding suppliers.
    Competitive bidding program means a program established under this 
proposed rule.
    Contract supplier means an entity that is awarded a contract by CMS 
to furnish items under a competitive bidding program.
    DMEPOS stands for durable medical equipment, prosthetics, orthotics 
and supplies.
    Grandfathered item means any one of the following items for which 
payment is made on a rental basis prior to the

[[Page 25661]]

implementation of a competitive bidding program.
    (1) An inexpensive or routinely purchased item described in Sec.  
414.220;
    (2) An item requiring frequent and substantial servicing as 
described in Sec.  414.222;
    (3) Oxygen and oxygen equipment described in Sec.  414.226; and
    (4) A capped rental item described in Sec.  414.229.
    Grandfathered supplier means a noncontract supplier that furnishes 
a grandfathered item.
    Item means one of the following products identified by a HCPCS 
code, other than class III devices under the Federal Food, Drug and 
Cosmetic Act and inhalation drugs, and includes the services directly 
related to the furnishing of that product to the beneficiary:
    (1) Durable medical equipment (DME), as defined in Sec.  414.202 
and further classified into the following categories:
    (a) Inexpensive or routinely purchased items, as specified in Sec.  
414.220(a);
    (b) Items requiring frequent and substantial servicing, as 
specified in Sec.  414.222(a);
    (c) Oxygen and oxygen equipment, as specified in Sec.  414.226(b); 
and
    (d) Other DME (capped rental items), as specified in Sec.  414.229.
    (2) Supplies necessary for the effective use of DME.
    (3) Enteral nutrients, equipment, and supplies.
    (4) Off-the-shelf orthotics, which are orthotics described in 
section 1861(s)(9) of the Act that require minimal self-adjustment for 
appropriate use and do not require expertise in trimming, bending, 
molding, assembling, or customizing to fit a beneficiary.
    Item weight is a number assigned to an item based on its 
beneficiary utilization rate in a competitive bidding area when 
compared to other items in the same product category.
    Metropolitan Statistical Area (MSA) has the same meaning as that 
given by the Office of Management and Budget.
    Nationwide competitive bidding area means a competitive bidding 
area that includes the United States and its territories.
    Noncontract supplier means a supplier that is located in a 
competitive bidding area or that furnishes items through the mail to 
beneficiaries in a competitive bidding area but that is not awarded a 
contract by CMS to furnish items included in the competitive bidding 
program for that area.
    Physician has the same meaning as in section 1861(r)(1) of the Act.
    Pivotal bid means the highest composite bid based on bids submitted 
by suppliers for a product category that will include a sufficient 
number of suppliers to meet beneficiary demand for the items in that 
product category.
    Product category means a grouping of related items that are 
included in a competitive bidding program.
    Single payment amount means the allowed payment for an item 
furnished under a competitive bidding program.
    Supplier means an entity with a valid Medicare supplier number, 
including an entity that furnishes items through the mail.
    Treating practitioner means a physician assistant, nurse 
practitioner, or clinical nurse specialist, as those terms are defined 
in section 1861(aa)(5) of the Act.
    Weighted bid means the item weight multiplied by the bid price 
submitted for that item.

B. Implementation Contractor (Proposed Sec.  414.406)

[If you choose to comment on issues in this section, please include the 
caption ``Implementation Contractor'' at the beginning of your 
comments.]

    Section 1847(b)(9) of the Act provides that the Secretary may 
contract with appropriate entities to implement the Medicare DMEPOS 
Competitive Bidding Program. Therefore, in proposed Sec.  414.406(a), 
we would designate one or more competitive bidding implementation 
contractors (CBICs) for the purpose of implementing the Medicare 
Competitive Bidding Program. Section 1847(a)(1)(C) of the Act also 
authorizes the Secretary to waive such provisions of the Federal 
Acquisition Regulation (FAR) as are necessary for the efficient 
implementation of this section, other than provisions relating to 
confidentiality of information and such other provisions as the 
Secretary determines appropriate. The Secretary is exercising this 
authority to waive all requirements of the FAR, other than provisions 
dealing with confidentiality, because of the need for expeditious 
implementation of a program of this significance and magnitude. 
However, this does not preclude us from voluntarily using or adapting 
certain provisions of the FAR for purposes of the competitive bidding 
contracts.
    We envision that the Medicare DMEPOS Competitive Bidding Program 
will have six primary functions, including overall oversight and 
decision making, operation design functions (including the design of 
both bidding and outreach material templates, as well as program 
processes), bidding and evaluation, access and quality monitoring, 
outreach and education, and claims processing. We considered the 
organizational structure and requirements necessary to conduct these 
functions, and have chosen to exercise our contracting authority under 
section 1847(b)(9) of the Act and contract with one or more CBICs to 
assist us with many of these functions.
    We considered several options in designing the most appropriate 
framework for implementing the Medicare DMEPOS Competitive Bidding 
Program. Since the implementation of competitive bidding involves many 
functions that are time limited and require specialized skills, for 
example, setting up bidding areas, reviewing bids, and setting single 
payment amounts, we believe that it would be prudent to initially 
implement most aspects of the Medicare Competitive Bidding Program 
through one or more CBICs. Processing of Medicare claims for most 
DMEPOS is currently done by four DME regional carriers (DMERCs). These 
DMERCs would continue to process claims for DMEPOS items subject to 
competitive bidding and would continue to perform other existing DMERC 
functions. We have evaluated the anticipated feasibility and cost of 
using one or more implementation contractor(s) to assist us with 
implementing the Medicare DMEPOS Competitive Bidding Program, 
concentrating on the potential for capturing economies of scale and 
scope, program consistency, existing resources and infrastructure, and 
the viability of implementation under the timeframe mandated by section 
1847(a)(1)(B) of the Act.
    We would contract with one or more CBICs to conduct some program 
functions at a national level and interact with the DMERC contractors. 
Specifically, we envision that the CBIC(s) would conduct certain 
functions related to competitive bidding, such as preparing the request 
for bids (RFB), performing bid evaluations, selecting qualified 
suppliers, and setting single payment amounts for all competitive 
bidding areas. Additionally, the CBIC(s) would be charged with 
educating the DMERCs on the bidding process and procedures. The CBIC(s) 
would also assist CMS and the DMERCs in monitoring program 
effectiveness, access, and quality. The DMERCs would continue to 
provide outreach and education to beneficiaries and suppliers in their 
regions, process claims, apply the single payment amounts set by the 
CBIC(s) for each competitive bidding area, and continue to be 
responsible for complaints related to claims processing. We would 
continue to be responsible for overall

[[Page 25662]]

oversight and decision making, as well as policy related outreach and 
education to the CBIC(s), DMERCs, suppliers, and beneficiaries.
    In our view, this approach would achieve economies of scale since 
the responsibility for producing program materials and evaluating bids 
would rest with the CBIC(s). As a result, we believe that this approach 
would both lower costs and ensure regional consistency in that the 
responsibility would not be divided between various entities.
    We considered two other alternatives for implementation of the 
Medicare DMEPOS Competitive Bidding Program. The first was to have each 
DMERC conduct competitive bidding in its respective area and be 
responsible for all activities related to competitive bidding. The 
second alternative was to have the CMS Consortium Contractor Management 
Officer (CCMO)/ Regional Offices (RO) and the DMERCs implement the 
program. However, we believe that by using one or more specialized 
CBICs, we can successfully implement and effectively manage this 
program.

C. Payment Basis (Proposed Sec.  414.408)

[If you choose to comment on issues in this section, please include the 
caption ``Payment Basis'' at the beginning of your comments.]

1. Payment Basis (Sec.  414.408(a))
    Section 1847(b)(5) of the Act mandates that a single payment amount 
be established for each item in each competitive bidding area based on 
the bids submitted and accepted for that item. Medicare payment for the 
item is then made on an assignment-related basis equal to 80 percent of 
the applicable single payment amount, less any unmet Part B deductible 
described in section 1833(b) of the Act. Section 1847(a)(6) of the Act 
requires that this payment basis be substituted for the payment basis 
otherwise applied under section 1834(a) of the Act for DME, section 
1834(h) of the Act for Off-The-Shelf (OTS) orthotics, or section 
1842(s) of the Act for enteral nutrition, as appropriate.
    We are proposing in Sec.  414.408 that payment to the contract 
supplier would be based on the single payment amount for the item in 
the competitive bidding area where the beneficiary maintains a 
permanent residence. If an item that is included in a competitive 
bidding program is furnished to a beneficiary who does not maintain a 
permanent residence in a competitive bidding area, the payment basis 
for the item would be 80 percent of the lesser of the actual charge for 
the item, or the applicable fee schedule amount for the item. We are 
also proposing that implementation of a competitive bidding program 
would not preclude the use of an Advanced Beneficiary Notice (ABN) to 
allow beneficiaries to make informed consumer choices regarding whether 
to obtain items for which Medicare might not make payment.
2. General Payment Rules (Proposed Sec.  414.408 (c-j))
    Section 1834(a) of the Act and Sec.  414.200 through Sec.  414.232 
(with the exception of Sec.  414.228) set forth the Medicare Part B 
payment methodology we use to pay for the rental or purchase of new and 
used DME. Each item of DME that is paid for under these sections is 
classified into a payment category, and each category has its own 
unique payment rules. Section 1842(s) of the Act provides authority for 
establishing a statewide or area wide fee schedule to be used for the 
payment of items described in section 1842(s)(2) of the Act. Under this 
authority, we implemented fee schedules for the payment of purchased 
and rented enteral nutrients, equipment, and supplies (see Sec.  
414.100 through Sec.  414.104). Section 1834(h) of the Act and Sec.  
414.228 of our regulations set forth the Medicare Part B payment 
methodology we use to pay for orthotics and prosthetics.
    Other than the rules governing calculation of the single payment 
amount and other proposed modifications to existing policies that are 
addressed in this regulation, we propose that the current requirements 
regarding the rental or purchase of DMEPOS items would continue to 
apply under the Medicare DMEPOS Competitive Bidding Program. While we 
believe that we have discretion under section 1847(a)(6) of the Act to 
adopt new rules that would govern these requirements, at this time we 
are proposing only to change the payment basis for these items.
3. Special Rules for Certain Rented Items of DME and Oxygen 
(Grandfathering of Suppliers) (Proposed Sec.  414.408(k))
a. Process for Grandfathering Suppliers
    Section 1847(a)(4) of the Act requires that in the case of covered 
DME items for which payment is made on a rental basis under section 
1834(a) of the Act, and in the case of oxygen for which payment is made 
under section 1834(a)(5) of the Act, the Secretary shall establish a 
``grandfathering'' process by which rental agreements for those covered 
items and supply arrangements with oxygen suppliers entered into before 
the start of a competitive bidding program may be continued. DME paid 
on a rental basis under section 1834(a) of the Act includes inexpensive 
or routinely purchased items furnished on a rental basis, items 
requiring frequent and substantial servicing, and capped rental items. 
Section 1834(a)(5) of the Act mandates that payment be made for oxygen 
and oxygen equipment on the basis of monthly payment amounts for oxygen 
and oxygen equipment (other than portable oxygen equipment) with 
separate add-on payments for portable oxygen equipment. We are 
proposing the grandfathering process described below for rented DME and 
oxygen and oxygen equipment when these items are included under a 
competitive bidding program. This process would apply only to suppliers 
that began furnishing the items described above to beneficiaries who 
maintain a permanent residence in an area prior to the implementation 
of a competitive bidding program in that area that includes the same 
items.
    In the case of the specific items identified in this section, we 
are proposing in Sec.  414.408 to give beneficiaries the choice of 
deciding whether they would like to continue renting the item from the 
grandfathered supplier or a contract supplier, unless the grandfathered 
supplier is not willing to continue furnishing the item under the terms 
we have specified below. If the grandfathered supplier is not willing 
to continue furnishing the item under these terms, then a contract 
supplier would assume responsibility for continuing to furnish the item 
and be paid based on the single payment amount determined for that item 
under the competitive bidding program. In addition, the beneficiary 
could elect, at any time, to transition to a contract supplier and the 
contract supplier would be required to accept the beneficiary as a 
customer. Suppliers who agree to be grandfathered suppliers for a 
specific item must agree to be a grandfathered supplier for all 
beneficiaries who request to continue to use their service for that 
item.
b. Payment Amounts to Grandfathered Suppliers (Sec.  414.408(k))
(1) Grandfathering of Suppliers Furnishing Items Prior to the First 
Competitive Bidding Program in an Area
    For items requiring frequent and substantial servicing, as well as 
oxygen and oxygen equipment, we are proposing that a grandfathered 
supplier may continue furnishing these items to beneficiaries in 
accordance with

[[Page 25663]]

existing rental agreements or supply arrangements. However, we are also 
proposing that the grandfathered supplier be paid the single payment 
amounts determined for those items under the competitive bidding 
program since beneficiaries rent these items for extended time periods 
as long as the items remain medically necessary. We believe that this 
payment proposal is consistent with section 1847(a)(4), which requires 
us to establish a ``process'' under which rental agreements and supply 
arrangements ``may be continued,'' but is silent regarding the terms of 
that process. Since the rental payments are not calculated based on or 
limited to the purchase fee for that item as is the case for other 
rented DME items, we do not believe that it is not reasonable to 
continue paying the fee schedule amounts for these items and that 
payment at the competitively determined rates will comport with an 
overarching goal of competitive bidding to achieve savings for the 
Medicare program.
    Unlike items requiring frequent and substantial servicing, the 
duration of the rental payments for capped rental items and inexpensive 
or routinely purchased items are limited. In addition, unlike oxygen 
equipment, the payment amounts made for capped rental items and 
inexpensive or routinely purchased items are limited to the approximate 
purchase fee for the item. For items that are furnished on a rental 
basis under Sec.  414.220 or Sec.  414.229, we are proposing in Sec.  
414.408 that the grandfathered supplier could continue furnishing the 
items in accordance with existing rental agreements and continue to be 
paid in accordance with section 1834(a) of the Act. We believe that 
continuing to pay for these grandfathered items at the fee schedule 
rates is authorized under section 1862(a)(17) of the Act, which allows 
the Secretary to specify ``other circumstances'' in which Medicare will 
make payment where the expenses for a competitively bid item furnished 
in a competitive bidding area were incurred by a supplier other than a 
contract supplier. In our view, the limited duration of the rental 
agreements for capped rental items and inexpensive or routinely 
purchased items furnished on a rental basis, in addition to the fact 
that payments for these items are based on or limited to the purchase 
fees for the items, constitute appropriate circumstances under which we 
would allow these rental agreements, including their payment terms, to 
continue until their conclusion. The rental fee schedule amounts that 
we would pay for grandfathered items in the capped rental or 
inexpensive or routinely purchased categories would be those fee 
schedule amounts established for the State in which the beneficiary 
maintains a permanent residence.
(2) Suppliers That Lose Their Contract Status in a Subsequent 
Competitive Bidding Program
    There may be instances when a supplier that was awarded a contract 
to furnish rental items or oxygen and oxygen equipment under a 
competitive bidding program is not awarded a contract to furnish the 
same rental items under a subsequent competitive bidding program in the 
same area. We are concerned that if this occurs, beneficiaries will 
need to switch suppliers in the middle of the rental period and could 
experience a disruption of service as a result. In order to minimize 
this possibility, we are proposing to apply section 1847(a)(4) not only 
in an area where we implement a competitive bidding program for the 
first time, but also in the same area when we implement a subsequent 
competitive bidding program. We believe this proposal is consistent 
with section 1847(a)(4), which we interpret as applying to each 
competitive bidding ``program'' that we implement in an area, since 
each program will be unique in terms of bidders, contract suppliers, 
items included in the program, and prices. Our proposed policy would 
allow beneficiaries to continue renting medically necessary items from 
their existing supplier, even if that supplier has lost its contract 
status under a subsequent competitive bidding program.
    However, where a supplier that is no longer a contract supplier 
continues to furnish a rental item or oxygen and oxygen equipment on a 
grandfathered basis, we are proposing that Medicare make payment for 
the item in the amount established for that item under the new 
competitive bidding program for that area. We believe that section 
1847(a)(4) gives us this discretion, since that section only requires 
us to establish a ``process'' under which these rental agreements or 
supply arrangements ``may continue'' but does not specify a payment 
methodology that must be used under that process. In addition, we do 
not believe that the alternative, which would be to make payment for 
the item under the fee schedule, is reasonable since the rental 
agreement or supply arrangement began under a competitive bidding 
program.
c. Payment for Accessories for Items Subject to Grandfathering
    We propose that accessories and supplies used in conjunction with 
an item which is furnished under a grandfathering process described 
above may also be furnished by the grandfathered supplier. Payment 
would be based on the single payment amount established for the 
accessories and supplies if the item is oxygen or oxygen equipment or 
one that requires frequent and substantial servicing. For accessories 
and supplies used in conjunction with capped rental and inexpensive or 
routinely purchased items, the payment amounts would be based on the 
fee schedule amounts for the accessories and supplies furnished prior 
to the implementation of the first competitive bidding program in an 
area, or on the newly established competitively bid single payment 
amounts if the items are furnished by a grandfathered supplier that was 
a contract supplier for a competitive bidding program, but is no longer 
a contract supplier for a subsequent competitive bidding program in the 
same area.
    Our proposal is similar to the grandfathering approach that was 
used in the DME competitive bidding demonstrations in that we paid 
grandfathered suppliers the competitively bid amount for certain items 
and the fee schedule amounts for other items. We specifically solicit 
comments on our grandfathering proposals.
4. Payment Adjustment to Account for Inflation (proposed Sec.  
414.408(b))
    The fee schedule payment amounts for DMEPOS items are updated by 
annual update factors described in part 414, subparts C and D. In 
general, the update factors are established based on the percentage 
change in the CPI-U for the 12-month period ending June of each year 
and preceding the calendar year to which the update applies. In 
accordance with section 1847(b)(3)(B) of the Act, the term of a 
competitive bidding contract may not exceed three years. We propose 
applying an annual inflation update to the single payment amounts 
established for a competitive bidding program. Specifically, beginning 
with the second year of a contract entered into under a competitive 
bidding program, we would update the single payment amounts by the 
percentage increase in the CPI-U for the 12-month period ending with 
June of the preceding calendar year. Using the CPI-U index is 
consistent with Medicare using this index to update the

[[Page 25664]]

DME fee schedule. This will obviate the need for the supplier to 
consider inflation in the cost of business when submitting its bids for 
furnishing competitively bid items under a multi-year contract.
5. Authority To Adjust Payments in Other Areas (Sec.  414.408(e))
    Section 1834(a)(1)(F)(ii) of the Act provides authority, effective 
for covered items furnished on or after January 1, 2009 that are 
included in a competitive bidding program, for us to use the payment 
information determined under that competitive bidding program to adjust 
the payment amounts otherwise recognized under section 
1834(a)(1)(B)(ii) of the Act for the same DMEPOS in areas not included 
in a competitive bidding program. Sections 1834(h)(1)(H)(ii) and 
1842(s)(3)(B) of the Act provide the same authority for orthotic and 
prosthetic devices, and enteral nutrition, respectively. We are 
proposing to use this authority but have not yet developed a detailed 
methodology for doing so. Therefore, we specifically invite comments 
and recommendations on this issue. We believe that our methodology will 
be informed by our experience and information gained from the 
competitive bidding programs in 2007 and 2009. When submitting 
recommendations on a methodology for using this authority, commenters 
should keep in mind the following factors that are likely to be 
incorporated in the methodology:
     The threshold or amount or level of savings that the 
Medicare program must realize for an item or group of items before we 
would use payment information from a competitive bidding program to 
adjust payment amounts for those items in other areas.
     Whether adjustments of payment amounts in other areas 
would be on a local, regional, or national basis, depending on the 
extent to which the single payment amounts and price indexes (for 
example, local prices used in calculating the CPI-U) for an item or 
group of items varied across different areas of the country.
     Whether adjustments of payment amounts in other areas 
would be based on a certain percentage of the single payment amount(s) 
from the competitive bidding area(s).
    We will fully consider all comments and recommendations we receive 
on this subject.
6. Requirement To Obtain Competitively Bid Items From a Contract 
Supplier (Sec.  414.408(f))
    Beneficiaries often travel to visit family members or to reside in 
a State with a warmer climate during the winter months. So that these 
beneficiaries do not have to return home to obtain needed DMPEOS items, 
in Sec.  414.408(f)(2)(ii), we are proposing that beneficiaries on 
travel status be allowed to obtain items that they would ordinarily be 
required to obtain from a contract supplier for their competitive 
bidding area from a supplier that has not been awarded a contract to 
furnish items for that area. If the area that the beneficiary is 
visiting is also a competitive bidding area and the item is subject to 
the competitive bidding program in that area, he or she would be 
required to obtain the item from a contract supplier for that area. If 
the area that the beneficiary is visiting is not a competitive bidding 
area, or if the area is a competitive bidding area but the item needed 
by the beneficiary is not included in the competitive bidding program 
for that area, he or she would be required to obtain the item from a 
supplier that has a valid Medicare supplier number. In either case, 
payment to the supplier would be paid based on the single payment 
amount for the item in the competitive bidding area where the 
beneficiary maintains a permanent residence. We propose that if a 
beneficiary is not visiting another area, but is merely receiving 
competitively bid items from a supplier located outside but near the 
boundary of the competitive bidding area, the proposed travel status 
exemption would not apply. We plan to closely monitor the programs to 
ensure that this type of abuse or circumvention of the competitive 
bidding process and requirements to obtain items from a contract 
supplier does not occur.
    We are also proposing to base claims jurisdiction and the payment 
amount on the beneficiary's permanent residence as we have done since 
the early 1990s with the current DMEPOS program under Sec.  421.210(e). 
Under this proposal, the DMERC responsible for the area where the 
beneficiary maintains a permanent residence would process all claims 
submitted for items furnished to that beneficiary, whether or not the 
beneficiary obtained the item in that area. If the beneficiary 
maintained a permanent residence in a competitive bidding area and 
obtained an item included in the competitive bidding program for that 
area, Medicare would pay the supplier the single payment amount for the 
item determined under the competitive bidding program for that area. If 
the beneficiary did not maintain a permanent residence in a competitive 
bidding area, Medicare would pay the supplier the fee schedule amount 
for the area in which the beneficiary maintains a permanent residence. 
We believe that this proposal is consistent with our current policy, 
under which suppliers across the country are paid the same amount for 
similar products obtained by beneficiaries who maintain their permanent 
residence within the same geographic area.
    We are proposing that Medicare beneficiaries who maintain their 
permanent residence in a competitive bidding area be required to obtain 
competitively bid items from a contract supplier for that area with the 
following two exceptions:
     A beneficiary may obtain an item from a supplier or a 
noncontract supplier in accordance with the competitive bidding program 
grandfathering provisions described in section II.C.3. above.
     A beneficiary who is outside of the competitive bidding 
area where he or she maintains a permanent residence may obtain an item 
from a contract supplier, if he or she is in another competitive 
bidding area and the same item is included under a competitive bidding 
program for that area, or from a supplier with a valid Medicare 
supplier number, if he or she is either in another competitive bidding 
area that does not include the item in its program or is in an area 
that is not a competitive bidding area.
    Unless one of the exceptions discussed above applies, Medicare 
would not pay for the item.
7. Limitation on Beneficiary Liability for Items Furnished by 
Noncontract Suppliers (Sec.  414.408(f))
    We are proposing that if a noncontract supplier located in a 
competitive bidding area furnishes an item included in the competitive 
bidding program for that area to a beneficiary who maintains a 
permanent residence in that area, the beneficiary would have no 
financial liability to the noncontract supplier unless the 
grandfathering exception discussed in section II.C.3. of this preamble 
applies. This rule would not apply if the noncontract supplier 
furnished items that are not included in the competitive bidding 
program for the area. We are proposing to specially designate the 
supplier numbers of all noncontract suppliers so that we will be able 
to easily identify whether a noncontract supplier has furnished a 
competitively bid item to a beneficiary who maintains a permanent 
residence in a CBA.

[[Page 25665]]

D. Competitive Bidding Areas

[If you choose to comment on issues in this section, please include the 
caption ``Competitive Bidding Areas'' at the beginning of your 
comments.]

    Section 1847(a)(1)(A) of the Act requires that competitive bidding 
programs be established and implemented in areas throughout the United 
States. We are interpreting the term ``United States'' to include all 
states, territories, and the District of Columbia. Section 
1847(a)(1)(B) of the Act provides us with the authority to phase-in 
competitive bidding programs so that the competition under the programs 
occurs in--
     10 of the largest MSAs in 2007;
     80 of the largest MSAs in 2009; and
     Additional areas after 2009.
    Section 1847(a)(1)(B) of the Act also authorizes us to phase-in 
competitive bidding programs first among the highest cost and volume 
items or those items that we determine have the largest savings 
potential. Our proposed methodologies for selecting the MSAs for 2007 
and 2009 are described in section II.D.1. of this preamble. Once the 
MSAs are selected for 2007 and 2009, we would define the competitive 
bidding areas for 2007 and 2009. The process we propose to use in 
establishing competitive bidding areas in future years is provided in 
section II.D.2. of this preamble.
1. Proposed Methodology for MSA Selection for 2007 and 2009 Competitive 
Bidding Programs (Sec.  414.410)
    Based on sections 1847(a)(1)(B)(i)(I) and (II) of the Act, we have 
the authority to select from among the largest MSAs during the first 
two implementation phases in order to phase-in the programs in the most 
successful way, thereby achieving the greatest savings while 
maintaining quality and beneficiary access to care. In phasing in the 
competitive bidding programs, we would adopt a definition of the term 
``metropolitan statistical area'' consistent with that issued by the 
Office of Management and Budget (OMB) and applicable for the years 2007 
and 2009. OMB is the Federal agency responsible for establishing the 
standards for defining MSAs for the purpose of providing nationally 
consistent definitions for collecting, tabulating, and publishing 
Federal statistics for a set of geographic areas. OMB most recently 
revised its standards for defining MSAs in 2000 (65 FR 82228-82238). 
Under these standards, an MSA is defined as a core based statistical 
area (a statistical geographic area consisting of the county or 
counties associated with at least one core (urbanized area or urban 
cluster) of at least 10,000 population, plus adjacent counties having a 
high degree of social and economic integration as measured through 
commuting ties with the counties containing the core) associated with 
at least one urbanized area that has a population of at least 50,000, 
and is comprised of the central county or counties containing the core, 
plus adjacent outlying counties having a high degree of social and 
economic integration with the central county as measured through 
commuting. The OMB issues periodic updates of the MSAs between 
decennial censuses based on United States Census Bureau estimates, but 
other than identifying certain MSAs having a population core of at 
least 2.5 million, does not rank MSAs based on population size. The 
U.S. Census Bureau, however, periodically publishes a Statistical 
Abstract of the United States, which contains a table listing large 
MSAs, or MSAs having a population of 250,000 and over. For the purpose 
of this rule, we are proposing to use this data to identify the largest 
MSAs.
    In this section, we propose formula driven methodology for 
selecting the MSAs for competitive bidding in 2007 and 2009. After we 
select the MSAs, we would define the competitive bidding areas. For the 
purpose of this section, DMEPOS allowed charges are the Medicare fee-
for-service (FFS) allowed charge data for DMEPOS items that we have 
authority to include in a competitive bidding program. This data does 
not include Medicare expenditures for DMEPOS items under the Medicare 
Advantage Program.
a. MSAs for 2007
    We propose to use a multiple step process in selecting the MSAs for 
2007. First, we propose to identify the 50 largest MSAs in terms of 
total population in 2005 using population estimates published by the 
U.S. Census Bureau in its table of large MSAs from the Statistical 
Abstract of the United States. Second, the 25 MSAs out of the 50 MSAs 
identified in step one would be eliminated from consideration based on 
our determination that they have the lowest totals of DMEPOS allowed 
charges for items furnished in calendar year (CY) 2004. This step would 
allow us to focus on the 25 MSAs that have the highest totals of DMEPOS 
allowed charges which, we believe, would produce a greater chance of 
savings as a result of competitive bidding than MSAs with lower total 
DMEPOS allowed charges. For illustration purposes only, based on DMEPOS 
allowed charge data for items furnished in CY 2003 and Census Bureau 
population estimates as of July 1, 2003, the 25 MSAs that would be left 
for consideration after step two is completed are shown in Table 1. 
However, we would propose to select the actual MSAs for 2007 using U.S. 
Census Bureau population data published as of July 1, 2005, and DMEPOS 
allowed charge data for items furnished in CY 2004. We would propose 
using population data for 2005 and DMEPOS allowed charge data for 2004 
since this data will be the most recently available data at the time 
that the MSAs are selected for 2007 implementation.

Table 1.--Top 25 MSAs Based on Total DMEPOS Medicare Allowed Charges for
                                  2003
------------------------------------------------------------------------
                         MSA                            Allowed charges
------------------------------------------------------------------------
New York-Northern New Jersey-Long Island, NY-NJ-PA          $312,124,291
 (New York)..........................................
Los Angeles-Long Beach-Santa Ana, CA (Los Angeles)...        253,382,483
Miami-Fort Lauderdale-Miami Beach, FL (Miami)........        221,660,443
Chicago-Naperville-Joliet, IL-IN-WI (Chicago)........        173,922,952
Houston-Baytown-Sugar Land, TX (Houston).............        149,060,607
Dallas-Fort Worth-Arlington, TX (Dallas).............        139,910,862
Detroit-Warren-Livonia, MI (Detroit).................        121,444,298
San Juan, PR.........................................        108,478,208
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD                   97,487,063
 (Philadelphia)......................................
Atlanta-Sandy Springs-Marietta, GA (Atlanta).........         75,860,276
Tampa-St. Petersburg-Clearwater, FL (Tampa)..........         71,309,635
Boston-Cambridge-Quincy, MA-NH (Boston)..............         62,467,094
Washington-Arlington-Alexandria, DC-VA-MD-WV (DC)....         61,416,109

[[Page 25666]]

 
Baltimore-Towson, MD (Baltimore).....................         59,714,310
Pittsburgh, PA.......................................         56,612,095
St. Louis, MO-IL.....................................         55,931,373
Riverside-San Bernardino-Ontario, CA (Riverside).....         52,910,209
Cleveland-Elyria-Mentor, OH (Cleveland)..............         52,237,312
Orlando, FL..........................................         51,982,164
San Francisco-Oakland-Fremont, CA (San Francisco)....         45,565,320
San Antonio, TX......................................         44,113,886
Cincinnati-Middletown, OH-KY-IN (Cincinnati).........         41,582,961
Kansas City, MO-KS...................................         41,310,326
Virginia Beach-Norfolk-Newport News, VA-NC (Virginia          41,016,726
 Beach)..............................................
Charlotte-Gastonia-Concord, NC-SC (Charlotte)........         37,874,144
------------------------------------------------------------------------

    Third, we propose to score the MSAs based on combined rankings of 
DMEPOS allowed charges per FFS beneficiary (charges per beneficiary) 
and the number of DMEPOS suppliers per number of beneficiaries 
receiving DMEPOS items (suppliers per beneficiary) in CY 2004, with 
equal weight (50 percent) being given to each factor. The MSAs would be 
ranked from 1 to 25 in terms of DMEPOS allowed charges per FFS 
beneficiary (for example, the MSA with the highest DMEPOS allowed 
charges per FFS beneficiary would be ranked number 1). Similarly, areas 
having more suppliers per beneficiary are more likely to be competitive 
and would be ranked higher than MSAs having fewer suppliers per 
beneficiary. Based on our experience from the DMEPOS competitive 
bidding demonstrations, the number of suppliers would be based on 
suppliers with at least $10,000 in allowed charges attributed to them 
for DMEPOS items furnished in the MSA in CY 2004. The number of 
beneficiaries would be based on the number of beneficiaries receiving 
DMEPOS items in the MSA in CY 2004. If more than one MSA receives the 
same score, we would propose to use total DMEPOS allowed charges for 
items that we have authority to include in a competitive bidding in 
each MSA as the tiebreaker since this would be an indicator of where 
more program funds would be spent on DMEPOS items subject to 
competitive bidding. Table 2 illustrates how the 25 MSAs from Table 1 
above would be scored based on data for CY 2003. The MSA rankings for 
charges per beneficiary and suppliers per beneficiary are listed in 
parentheses. We propose that the final scoring be based on utilization 
data for CY 2004 and population data for CY 2005.

                             Table 2.--Scoring of Top 25 MSAs Based on Data for 2003
                              [Scoring based on combined rank from columns 3 and 4]
----------------------------------------------------------------------------------------------------------------
                                                            Charges per       Suppliers per
                    MSA                        Score        beneficiary        beneficiary      Allowed charges
----------------------------------------------------------------------------------------------------------------
Miami.....................................            3        $428.44 (1)        0.01121 (2)       $221,660,443
Houston...................................            6         348.83 (2)        0.00864 (4)        149,060,607
Dallas....................................            8         297.33 (3)        0.00749 (5)        139,910,862
Riverside.................................            9         220.93 (8)        0.01144 (1)         52,910,209
San Antonio...............................            9         243.03 (6)        0.00897 (3)         44,113,886
Los Angeles...............................           11         277.16 (5)        0.00692 (6)        253,382,483
Charlotte.................................           14         226.09 (7)        0.00661 (7)         37,874,144
Orlando...................................           18         212.57 (9)        0.00569 (9)         51,982,164
San Juan..................................           25         291.97 (4)       0.00388 (21)        108,478,208
Atlanta...................................           25        185.80 (15)       0.00569 (10)         75,860,276
Tampa.....................................           25        190.30 (13)       0.00529 (12)         71,309,635
Kansas City...............................           25        186.39 (14)       0.00555 (11)         41,310,326
Pittsburgh................................           26        197.95 (11)       0.00484 (15)         56,612,095
Virginia Beach............................           26        207.28 (10)       0.00477 (16)         41,016,726
St. Louis.................................           32        169.81 (18)       0.00488 (14)         55,931,373
San Francisco.............................           32        127.56 (24)        0.00632 (8)         45,565,320
Cincinnati................................           32        167.06 (19)       0.00528 (13)         41,582,961
Cleveland.................................           33        182.01 (16)       0.00470 (17)         52,237,312
Detroit...................................           37        195.99 (12)       0.00290 (25)        121,444,298
Baltimore.................................           37        174.38 (17)       0.00396 (20)         59,714,310
Philadelphia..............................           40        152.38 (21)       0.00443 (19)         97,487,063
DC........................................           41        128.97 (23)       0.00449 (18)         61,416,109
Chicago...................................           44        160.26 (20)       0.00327 (24)        173,922,952
New York..................................           45        139.81 (22)       0.00342 (23)        312,124,291
Boston....................................           47        113.99 (25)       0.00371 (22)         62,467,094
----------------------------------------------------------------------------------------------------------------

    For purposes of phasing-in the programs, we would propose to 
exclude from consideration for competitive bidding until 2009 the three 
largest MSAs in terms of population, as well as any MSA that is 
geographically located in an area served by two DMERCs. The three 
largest MSAs based on total population (based on 2003 data) are New 
York, Los Angeles, and Chicago. We believe that these MSAs should not 
be phased in until 2009 because of the

[[Page 25667]]

logistics associated with the start-up of this new and complex program. 
As of 2000, these three MSAs all had total populations of over 9 
million. By comparison, the largest area in which the demonstrations 
were conducted was San Antonio (total population of 1.7 million in 
2000). We want to gain experience with the competitive bidding process 
in MSAs larger than San Antonio before moving on to the three largest 
MSAs. After we have gained experience operating competitive bidding 
programs in CBAs that encompass smaller MSAs in 2007 and 2008, we would 
propose to implement programs that include New York, Los Angeles and 
Chicago in 2009.
    However, we are considering an alternative under which we would 
establish CBAs that include portions of one or more of these MSAs (for 
example, by county). We believe that this alternative is authorized by 
section 1847(a)(1)(B)(II), which states that competition under the 
programs shall occur in 80 of the largest MSAs in 2009 but does not 
require the competition to occur in the entire MSA. In addition, 
section 1847 does not prohibit us from implementing a competitive 
bidding program in an area that is larger than a MSA. We welcome 
comments on these alternatives.
    We are proposing not to include competitive bidding areas that 
cross DMERC regions because this could complicate implementation by 
having two DMERCs processing claims from one competitive bidding area.
    The next step we propose would entail ensuring that there is at 
least one competitive bidding area in each DMERC region by first 
selecting the highest scoring MSA in each DMERC region (other than New 
York, Los Angeles, Chicago, or MSAs that cross DMERC boundaries). This 
would ensure that each DMERC gains some experience with competitive 
bidding prior to 2009, when competitive bidding would be implemented in 
CBAs that include eighty MSAs. We would also propose to select no more 
than two MSAs per State among the initial competitive bidding areas 
selected for 2007 in order to learn how competitive bidding works in 
more states and regions of the country. In summary, we are proposing to 
select the ten MSAs in which competition under the programs would occur 
in 2007 using the following steps:
     Identify the top 50 MSAs in terms of general population.
     Focus on the 25 MSAs from step one with the greatest total 
of DMEPOS allowed charges.
     Score the MSAs from step two based on combined rankings of 
DMEPOS allowed charges per beneficiary and suppliers per beneficiary, 
with lower scores indicating a greater potential for savings if 
programs are implemented in those areas.
     Exclude the 3 largest MSAs in terms of population (New 
York, Los Angeles, Chicago) and any MSA that crosses DMERC boundaries.
     Select the lowest scoring MSA from each DMERC region.
     Select the next 6 lowest scoring MSAs regardless of DMERC 
region, but not more than 2 MSAs from 1 State.
     Break ties in scores using DMEPOS allowed charges, 
selecting MSAs with higher total DMEPOS allowed charges.
    There are a number of alternative methods for selecting the MSAs 
for 2007 that we considered. The MSAs could have been selected based on 
a combination of one or more variables or measures including, but not 
limited to--
     General population;
     Medicare FFS beneficiary population; Number of 
beneficiaries receiving DMEPOS items that we have authority to include 
in a competitive bidding; Total Medicare allowed charges for DMEPOS 
items subject to competitive bidding; and
     Number of suppliers of DMEPOS items that we have authority 
to include in a competitive bidding program.
    In evaluating this alternative, we defined the general population 
as all individuals residing in an MSA, whether or not they were 
enrolled in Medicare. One advantage of this variable is that total 
population is a widely accepted measure of gauging MSA size and the 
data are readily accessible to the general public through the U.S. 
Census Bureau webpage. Another advantage of this option is that total 
population takes into account the demand for DMEPOS items and other 
supplies from population groups other than the Medicare population. 
DMEPOS demand from non-Medicare individuals might make it less likely 
that a supplier not selected for competitive bidding would exit the 
market. This could help increase the likelihood of competition in 
future rounds of competitive bidding within that MSA. However, we 
recognize that the MSAs with the largest total populations may not have 
the most Medicare beneficiaries or the greatest potential for savings. 
One reason is that the age distribution is not uniform across MSAs. 
MSAs located in states that have either large immigrant populations or 
have experienced rapid recent growth often have younger than average 
age profiles. Another reason is that DMEPOS utilization and potential 
profits are not uniform across MSAs. It is quite possible that some of 
the smaller population MSAs may have a greater potential for savings 
than MSAs with much larger populations. We believe that the 
disadvantages of selecting MSAs based on general population are greater 
than the advantages of using this method and, therefore, do not propose 
using general population as the sole variable in selecting the MSAs for 
2007.
    An advantage of selecting MSAs based on the Medicare FFS population 
is that this population represents the number of individuals who could 
potentially be affected by competitive bidding. A disadvantage of 
selecting MSAs based solely on this variable is that it does not 
reflect actual DMEPOS utilization; therefore, we do not propose using 
FFS population as the sole variable in selecting the MSAs for 2007. Per 
capita DMEPOS utilization rates vary across MSAs. As a result, MSAs 
with fewer Medicare beneficiaries could have a greater potential for 
savings from competitive bidding. The advantage of using the number of 
Medicare beneficiaries receiving DMEPOS items to select the MSAs is 
that MSAs would be selected based on the number of individual 
beneficiaries that are most likely to be directly affected by 
competitive bidding because they already have a need for these items. A 
disadvantage of this option is that the number of specific 
beneficiaries receiving DMEPOS items is only a static measure. The 
number of beneficiaries who would be receiving DMEPOS products in the 
future could be substantially different from the current number. 
Treatment patterns within the MSA could change or the number of 
beneficiaries receiving DMEPOS items could fluctuate if beneficiaries 
switch from FFS to a Medicare Advantage plan. For these reasons, we do 
not propose using number of beneficiaries receiving DMEPOS items as the 
sole variable in selecting the MSAs for 2007.
    Selecting the MSAs using the steps we propose utilizes a variety of 
variables that we believe will help us predict which MSAs will offer 
the largest savings potential under a competitive bidding program. In 
step 2 above, we would focus on a subset of large MSAs with higher 
allowed charges for DMEPOS items, which is consistent with section 
1847(a)(1)(B)(ii) of the Act, which would allow us to phase in the 
Medicare DMEPOS Competitive Bidding Program first for those items that 
have the highest cost and highest volume, or those items that have the 
largest savings potential. This step would directly address the 
question of which MSAs have the highest costs. In step 3 above,

[[Page 25668]]

we would use allowed DMEPOS charges per beneficiary and the number of 
suppliers per beneficiary to further measure the savings potential for 
each MSA. Allowed DMEPOS charges per beneficiary is a measure of per 
capita DMEPOS utilization in terms of the overall DMEPOS cost per 
beneficiary. We believe that areas with higher utilization rates and 
costs would have a greater potential for savings under the programs, 
which will rely on competition among suppliers to lower costs in the 
area. Competition among suppliers is necessary for competitive bidding 
to be successful. Without sufficient competition among suppliers, 
suppliers have little incentive to submit low bids in response to the 
request for bids for DMEPOS products. In addition, we believe that 
competition for market share among winning suppliers will act as a 
market force to maintain a high level of quality products. The number 
of suppliers per beneficiary is a direct measure of how many suppliers 
are competing for each beneficiary's business. We expect that the 
higher the number of suppliers per beneficiary, the higher the degree 
of competition will be.
    We welcome comments about the selection method for the original ten 
MSAs in 2007. We welcome recommendations of other options and criteria 
for consideration. After further consideration of comments, in the 
final rule, we may adopt other criteria regarding issues described 
above or other criteria and options brought to our attention through 
the comment process.
b. MSAs for 2009
    In selecting the 70 additional MSAs in which competition will occur 
in 2009, we propose using generally the same criteria used to select 
the MSAs for 2007. Since the number of MSAs in which competition must 
occur in 2009 is much higher than the number for 2007, the steps in the 
selection process would change as follows:
     We would score all of the MSAs included in the table of 
large MSAs in the most recent publication of the U.S. Census Bureau s 
Statistical Abstract of the United States.
     We would propose using the same criteria to score the MSAs 
as we would use in selecting the MSAs for 2007, but use data from CY 
2006.
    One option we are considering and on which we are requesting 
comments is whether we should modify the ranking of MSAs based on 
allowed DMEPOS charges per beneficiary so that it focuses on charges in 
each MSA for the items that experienced the largest payment reductions 
or savings under the initial round of competitive bidding in 2007.
    In selecting the MSAs for 2009, we do not propose excluding the 3 
largest MSAs in terms of population size or MSAs that cross DMERC 
boundaries from the 80 largest MSAs to be included in the CBAs. In 
addition, we do not propose limiting the number of MSAs that can be 
selected from any one state.
2. Establishing Competitive Bidding Areas (Sec.  414.410)
    Section 1847(a)(1) of the Act requires that we phase in competitive 
bidding programs and establish competitive bidding areas throughout the 
United States over several years beginning in 2007. Section 1847(a)(3) 
of the Act gives us the authority to ``exempt rural areas and areas 
with low population density within urban areas that are not 
competitive, unless there is a significant national market through mail 
order for a particular item.'' Our proposed methodology for 
establishing competitive bidding areas under the Medicare DMEPOS 
Competitive Bidding Program is presented below.
a. Authority To Exempt Rural Areas and Areas With Low Population 
Density Within Urban Areas (Sec.  414.410(c))
    Section 1847(a)(3) of the Act allows us to exempt from the Medicare 
DMEPOS Competitive Bidding Program rural areas and areas with low 
population density within urban areas that are not competitive, unless 
there is a significant national market through mail order for a 
particular item. We propose to use this authority to exempt areas from 
competitive bidding if data for the areas indicate that they are not 
competitive based on a combination of the following indicators:
     Low utilization of items in terms of number of items and/
or allowed charges for DMEPOS in the area relative to other similar 
geographic areas.
     Low number of suppliers of DMEPOS items subject to 
competitive bidding serving the area relative to other similar 
geographic areas; and/or
     Low number of Medicare FFS beneficiaries in the area 
relative to other similar geographic areas.
    We would propose to make decisions regarding what constitutes low 
(non-competitive) levels of utilization, suppliers, and beneficiaries 
on the basis of our analysis of the data for allowed charges, allowed 
services for items that may be subject to competitive bidding, and the 
number of Medicare FFS beneficiaries and DMEPOS suppliers in specific 
geographic areas. In defining urban and rural areas, we propose to use 
the definitions currently in Sec.  412.64(b)(1)(ii) of the regulations.
    We invite comments on the methodologies we have proposed for 
determining whether an area within an urban area that has a low 
population density is not competitive. We will be reviewing the total 
allowed charges, number of beneficiaries, and number of suppliers to 
determine whether a rural area should be exempted from competitive 
bidding. In addition, we also are inviting comments on standards for 
exempting particular rural areas from competitive bidding.
b. Establishing the Competitive Bidding Areas for 2007 and 2009 (Sec.  
414.410(b))
    Section 1847(a)(1)(B) of the Act requires that the competition 
``occurs in'' 10 of the largest MSAs in 2007, and in 80 of the largest 
MSAs in 2009, but does not require us to define the competition 
boundaries concurrently with the MSA boundaries, as long as 10 MSAs are 
involved in 2007 and 80 MSAs are involved in 2009. Therefore, we do not 
believe that section 1847(a)(1)(B) of the Act prohibits us from 
extending individual competition areas beyond the MSA boundaries in 
2007 or 2009. We propose that an area (for example, a county, parish, 
zip code, etc.) outside the boundaries of an MSA be considered for 
inclusion in a competitive bidding area for 2007 and/or 2009 if all of 
the following apply:
     The area adjoins an MSA in which a competitive bidding 
program will be operating in 2007 or 2009.
     The area is not part of an MSA in which a competitive 
bidding program will be operating in 2007 or 2009.
     The area is competitive, as explained below.
     The area is part of the normal service area or market for 
suppliers who also serve the MSA market or areas within the boundaries 
of an MSA in which a competitive bidding program will be operating in 
2007 or 2009.
    As explained in section D.1. above, we are defining an MSA as a 
core based statistical area associated with at least one urbanized area 
that has a population of at least 50,000, and comprised of the central 
county or counties containing the core, plus adjacent outlying counties 
having a high degree of social and economic integration with the 
central county as measured through commuting. However, when using this 
definition to establish the boundaries of an MSA, the OMB would not 
consider whether an area or areas adjoining an MSA are served by the 
same DMEPOS suppliers that furnish items to beneficiaries residing in 
the MSA. If an area has a high level of utilization, significant 
expenditures, and/or a large number of

[[Page 25669]]

suppliers of DMEPOS items included in the competitive bidding program 
for the adjoining MSA, we believe that it would be practical and 
beneficial to include this area in the competitive bidding area. The 
savings to the program associated with adding the area to the 
competitive bidding area would likely offset any incremental 
administrative costs incurred by the implementation contractor 
associated with including the area in the competitive bidding program 
for the MSA. Finally, we are not proposing to consider counties that do 
not adjoin an MSA for inclusion in a competitive bidding area for 2007 
or 2009 because we believe that these outlying counties are too far 
removed from the areas that OMB has determined to be economically 
integrated. We are proposing that we have the discretion to define a 
CBA to be either concurrent with an MSA, larger than an MSA, or smaller 
than an MSA. We will detail in the request for bids the exact 
boundaries of each CBA. We invite comments on the criteria to be used 
in considering whether to include counties outside MSAs in a 
competitive bidding area in 2007 or 2009.
c. Nationwide or Regional Mail Order Competitive Bidding Program (Sec.  
414.410(d)(2))
    Our data shows that a significant percentage of certain items such 
as diabetic testing supplies (blood glucose test strips and lancets) 
are furnished to beneficiaries by national mail order suppliers. 
Therefore, we propose to establish a nationwide or regional competitive 
bidding program, effective for items furnished on or after January 1, 
2010, for the purpose of awarding contracts to suppliers to furnish 
these items across the nation or region to beneficiaries who elect to 
obtain them through the mail order outlet. The national or regional 
competitive bidding areas under this program would be phased in after 
2009, and payment would be based on the bids submitted and accepted for 
the furnishing of items through mail order throughout the nation or 
region. Suppliers that furnish these items through mail order on either 
a national or regional basis would be required to submit bids to 
participate in any competitive bidding program implemented for the 
furnishing of mail order items.
    We propose that prior to the establishment of a nationwide or 
regional competitive bidding program in 2010, mail order suppliers 
would be eligible to submit bids for furnishing items in one or more of 
the CBAs we establish for purposes of the 2007 and 2009 implementation 
phases. In addition, beginning with programs implemented in 2010, mail 
order suppliers would be eligible to submit bids in one or more CBAs to 
furnish items that are not included in a nationwide or regional 
competitive bidding program. National or regional mail order suppliers 
would be required to submit bids and be selected as contract suppliers 
for each CBA in which they seek to furnish these items. They would, 
however, have the choice of either submitting the same bid amounts for 
each CBA or submitting separate bids.
    For items that are subject to a nationwide or regional mail order 
competitive bidding program, we propose that suppliers who furnish 
these same items in the local market and do not furnish them via mail 
order would not be required to participate in the national or regional 
mail order competitive bidding program. However, we would only allow 
these suppliers to continue furnishing the items in areas if they were 
selected as a contract supplier.
    We propose to allow these non-mail order suppliers to continue 
furnishing these items in areas subject to a competitive bidding 
program if the supplier has been selected as a contract supplier. When 
furnishing items to beneficiaries that do not maintain a permanent 
residence in a competitive bidding area, non-mail order suppliers would 
be paid based on the payment amount applicable to the area where the 
beneficiary maintains his or her permanent residence.
    In its September 2004 report (GAO-04-765), the GAO recommended that 
we consider using mail delivery for items that can be provided directly 
to beneficiaries in the home as a way to implement a DMEPOS competitive 
bidding strategy. We are asking for comments on our proposal to 
implement this recommendation, as well as for comments on the types of 
items that would be suitable for a mail order competitive bidding 
program. In addition, we are requesting public comment on an 
alternative that would require replacement of all supplies such as test 
strips and lancets for Medicare beneficiaries to be furnished by mail 
order suppliers under a nationwide or regional mail order program. For 
example, there are services paid under the physician fee schedule that 
are associated with the furnishing of blood glucose testing equipment 
(for example, home blood glucose monitors) such as training, education, 
assistance with product selection, maintenance and servicing, that do 
not relate to the furnishing of replacement supplies used with the 
equipment. Once the brand of monitor has been selected by the patient, 
the services associated with furnishing the supplies must be provided 
on a timely basis and the patient must receive the brand of test strips 
needed for his or her monitor. We invite public comment on whether the 
service of furnishing replacement test strips, lancets or other 
supplies can easily, effectively, and conveniently be performed by 
national mail order suppliers.
d. Additional Competitive Bidding Areas After 2009 (Sec.  414.410(d))
    Section 1847(a)(1)(B)(III) of the Act requires that competition 
under the Medicare DMEPOS Competitive Bidding Program occur in 
additional areas after 2009. Beginning in 2010, we would designate 
through program instructions additional competitive bidding areas based 
on our determination that the implementation of a competitive bidding 
program in a particular area would be likely to result in significant 
savings to the Medicare program.

E. Criteria for Item Selection

If you choose to comment on issues in this section, please include the 
caption ``Criteria for Item Selection'' at the beginning of your 
comments.>

    Section 1847(a)(2) of the Act describes the items subject to 
competitive bidding as follows:
     Durable Medical Equipment and Medical Supplies--Covered 
items (as defined in section 1834(a)(13) of the Act) for which payment 
would otherwise be made under section 1834(a) of the Act, including 
items used in infusion and drugs (other than inhalation drugs) and 
supplies used in conjunction with DME, but excluding class III devices 
under the Federal Food, Drug, and Cosmetic Act. ?>
     Other Equipment and Supplies (enteral nutrition, equipment 
and supplies)--items described in section 1842(s)(2)(D) of the Act, 
other than parenteral nutrients, equipment, and supplies.
     Off-The-Shelf (OTS) Orthotics--orthotics described in 
section 1861(s)(9) of the Act for which payment would otherwise be made 
under section 1834(h) of the Act, which require minimal self-adjustment 
for appropriate use and do not require expertise in trimming, bending, 
molding, assembling, or customizing to fit the individual.
    We are proposing that minimal self-adjustment would mean 
adjustments that the beneficiary, caretaker for the beneficiary, or 
supplier of the device can perform without the assistance of a

[[Page 25670]]

certified orthotist (that is, an individual certified by either the 
American Board for Certification in Orthotics and Prosthetics, Inc. or 
the Board for Orthotist/Prosthetist Certification). By contrast, we 
would consider any adjustments that can only be made by a certified 
orthotist to be adjustments that require an expertise in trimming, 
bending, molding, assembling, or customizing to fit the individual. We 
are proposing to consult with a variety of individuals including 
experts in orthotics to determine which items and/or HCPCS codes would 
be classified as OTS orthotics. We welcome comments on a process for 
identifying OTS orthotics subject to competitive bidding.
    Section 1847(a)(1)(B)(ii) of the Act gives us the authority to 
phase in competitive bidding ``first among the highest cost and highest 
volume items or those items that the Secretary determines have the 
largest savings potential.'' In addition, section 1847(a)(3)(B) of the 
Act grants us the authority to exempt items for which the application 
of competitive bidding is not likely to result in significant savings. 
In exercising this authority, we propose to exempt items outright or on 
an area by area basis using area-specific utilization data. For 
example, if we found that utilization (that is, allowed services or 
allowed charges) for commode chairs was low (or the number of commode 
chair suppliers was low) in a given area compared to other areas, we 
might choose to exempt commode chairs from the competitive bidding 
program in the CBA where significant savings would not be likely while 
including commode chairs in the competitive bidding programs for other 
CBAs. This decision would be based on area-specific utilization data.
    We are proposing to use the authority provided by section 
1847(a)(1)(B)(ii) of the Act to phase in only those items that we 
determine are among the highest cost and highest volume items during 
each phase of the Medicare DMEPOS Competitive Bidding Program. In 
section II.F. of this preamble, we propose to conduct competitive 
bidding for product categories that would be described in each RFB. 
Suppliers will submit a separate bid for each item under a defined 
product category, unless specifically excluded in the RFB. We propose 
to include a ``core'' set of product categories in each competitive 
bidding area. We may elect to phase in some individual product 
categories in a limited number of competitive bidding areas in order to 
test and learn about their suitability for competitive bidding.
    Because we have not yet identified the product categories for 
competitive bidding, we are using policy groups developed by the 
statistical analysis durable medical equipment regional carrier 
(SADMERC) for purposes of illustration. The SADMERC has defined a set 
of 64 DMERC policy groups for analytical purposes in its role as the 
statistical analysis contractor for DMEPOS. A policy group is a set of 
HCPCS codes that describe related items that are addressed in a DMERC 
medical review policy. For example, the policy group, oxygen and 
supplies, consists of approximately 20 HCPCS codes. Although the 
product categories subject to competitive bidding will not necessarily 
correspond to these policy groups, we present data for these policy 
groups and items contained in these policy groups for the purpose of 
identifying the highest cost and highest volume DMEPOS items that may 
be subject to competitive bidding. In other words, we propose using 
SADMERC data for ``policy groups'' to identify groups of items we will 
consider phasing in first under the competitive bidding programs, but 
the actual ``product categories'' for which we would request bids could 
be a subset of items from a ``policy group'' or a combination of items 
from different ``policy groups.'' The highest volume items (HCPCS 
codes) fall into a relatively small number of policy groups as 
illustrated in Table 3.

                                        Table 3.--2003 High Volume Items
                                                  [HCPCS Codes]
----------------------------------------------------------------------------------------------------------------
                 HCPCS                    Allowed charges      Product description           Product group
----------------------------------------------------------------------------------------------------------------
E1390..................................     $2,033,123,147  Oxygen concentrator......  Oxygen.
K0011*.................................      1,176,277,899  Power wheelchair with      Wheelchairs.
                                                             programmable features.
A4253..................................        779,756,243  Blood glucose/reagent      Diabetic Supplies &
                                                             strips, box of 50.         Equipment.
E0260..................................        331,457,962  Semi-electric hospital     Hospital Beds/
                                                             bed.                       Accessories.
E0431..................................        228,066,037  Portable gaseous oxygen    Oxygen.
                                                             equipment.
B4150*.................................        206,396,813  Enteral formula, category  Enteral Nutrition.
                                                             I.
B4035..................................        197,057,150  Enteral feeding supply     Enteral Nutrition.
                                                             kit, pump fed, per day.
E0277..................................        156,762,241  Powered air mattress.....  Support Surfaces.
E0439..................................        141,268,474  Stationary liquid oxygen.  Oxygen.
E0601..................................        123,865,463  Continuous positive        CPAP Devices.
                                                             airway pressure device
                                                             (CPAP).
K0001..................................        103,217,209  Standard manual            Wheelchairs.
                                                             wheelchair.
K0004..................................         87,208,486  High strength lightweight  Wheelchairs.
                                                             manual wheelchair.
A4259..................................         79,575,166  Lancets, box of 100......  Diabetic Supplies &
                                                                                        Equipment.
E0570..................................         76,588,088  Nebulizer with compressor  Nebulizers.
B4154*.................................         76,326,903  Enteral formula, category  Enteral Nutrition.
                                                             IV.
E0143..................................         75,950,410  Folding wheeled walker w/  Walkers.
                                                             o seat.
K0533*.................................         75,136,517  Respiratory assist device  Respiratory Assist
                                                             with backup rate feature.  Devices.
K0538*.................................         65,603,531  Negative pressure wound    Negative Pressure Wound
                                                             therapy electrical pump.   Therapy (NPWT) Devices.
K0532*.................................         56,046,930  Respiratory assist device  Respiratory Assist
                                                             without backup rate        Devices.
                                                             feature.
K0003..................................         55,318,959  Lightweight manual         Wheelchairs.
                                                             wheelchair.
K0108..................................         52,139,979  Miscellaneous wheelchair   Wheelchairs.
                                                             accessory.
E0192*.................................         48,413,938  Wheelchair cushion.......  Support Surfaces.
E0163..................................         48,216,855  Stationary commode chair   Commodes.
                                                             with fixed arms.
B4034..................................         42,277,968  Enteral feeding supply     Enteral Nutrition.
                                                             kit syringe, per day.
----------------------------------------------------------------------------------------------------------------
* Due to HCPCS coding changes made since 1993, the descriptions or code numbers for several codes above have
  been modified. We expect that power wheelchairs (K0011) will be billed under several new HCPCS codes in the
  near future.


[[Page 25671]]

    Because we propose that we will conduct competitive bidding for 
items grouped into product categories, we will consider DMEPOS allowed 
charges and volume at the product category level for the purpose of 
selecting which items to phase in first under the competitive bidding 
programs. The table below provides data for the top 20 policy groups 
based on Medicare allowed charges for the items within each policy 
group that we may choose to include in a competitive bidding program. 
Data from the SADMERC for claims received in 2003 is used for all 
policy groups except those for nebulizers and OTS orthotics. For the 
nebulizer and OTS orthotics groups, data is included from the CMS BESS 
(Part B Extract and Summary System) database for items furnished in 
2003. The percentage of total allowed Medicare charges for DMEPOS that 
each policy group makes up is included in Table 4.

                              Table 4.--2003 DMEPOS Allowed Charges by Policy Group
----------------------------------------------------------------------------------------------------------------
                                                                                                   Percent of
                   Rank                              Policy group                  2003              DMEPOS
----------------------------------------------------------------------------------------------------------------
1........................................  Oxygen Supplies/Equipment......     $2,433,713,269               21.3
2........................................  Wheelchairs/POVs**.............      1,926,210,675               16.9
3........................................  Diabetic Supplies & Equipment..      1,110,934,736                9.7
4........................................  Enteral Nutrition..............        676,122,703                5.9
5........................................  Hospital Beds/Accessories......        373,973,207                3.3
6........................................  CPAP Devices...................        204,774,837                1.8
7........................................  Support Surfaces...............        193,659,248                1.7
8........................................  Infusion Pumps & Related Drugs.        149,208,088                1.3
9........................................  Respiratory Assist Devices.....        133,645,918                1.2
10.......................................  Lower Limb Orthoses*...........        122,813,555                1.1
11.......................................  Nebulizers*....................         98,951,212                0.9
12.......................................  Walkers........................         96,654,035                0.8
13.......................................  NPWT Devices...................         88,530,828                0.8
14.......................................  Commodes/Bed Pans/Urinals......         51,372,352                0.5
15.......................................  Ventilators....................         42,890,761                0.4
16.......................................  Spinal Orthoses*...............         40,731,646                0.4
17.......................................  Upper Limb Orthoses*...........         29,069,027                0.3
18.......................................  Patient Lifts..................         26,551,310                0.2
19.......................................  Seat Lift Mechanisms...........         15,318,552                0.1
20.......................................  TENS Devices**.................         15,258,579                0.1
                                                                           -------------------------------------
                                            Total for 20 Groups...........      7,830,384,538               68.6
                                                                           -------------------------------------
                                            Total for DMEPOS..............     11,410,019,351  .................
----------------------------------------------------------------------------------------------------------------
* Data is from BESS (Date of Service). Data for orthoses policy groups excludes data for custom fabricated
  orthotics, but may include data for other items that will not be considered OTS orthotics.
** POVs are power operated vehicles (scooters) and TENS devices are transcutaneous electrical nerve stimulation
  devices.

    Section 1847(a)(1)(B)(ii) of the Act provides that the items we 
phase in first under competitive bidding may include products having 
the greatest potential for savings. We are proposing to use a 
combination of the following variables when making determinations about 
an item's potential savings as a result of the application of 
competitive bidding.
     Annual Medicare DMEPOS Allowed Charges
     Annual Growth in Expenditures
     Number of Suppliers
     Savings in the DMEPOS Demonstrations
     Reports and Studies
    Items with high allowed charges or rapidly increasing allowed 
charges would be our highest priority in selecting items for 
competitive bidding.
    The number of suppliers furnishing a particular item or group of 
items would also be an important variable in identifying items with 
high savings potential. We believe that a relatively large number of 
suppliers for a particular group of items would likely increase the 
degree of competition among suppliers and increase the probability that 
suppliers would compete on quality for business and market share. We 
saw evidence in the competitive bidding demonstrations that products 
furnished by a large number of suppliers had large savings rates and 
fewer problems with quality. We understand that having a large number 
of suppliers is not always a necessary condition for competition. A 
competitive bidding area could be more concentrated and less 
competitive than the number of suppliers would predict if the market is 
dominated by only a few suppliers and the remaining suppliers have only 
minimal charges.
    The DMEPOS demonstration took place from 1999 to 2002 in two MSAs: 
Polk County, Florida and San Antonio, Texas. Five product categories 
containing items we might include in the Medicare DMEPOS Competitive 
Bidding Program were included in at least one round of the DMEPOS 
demonstration: Oxygen equipment and supplies; hospital beds and 
accessories; enteral nutrition; wheelchairs and accessories; and 
general orthotics.
    The demonstration results provide useful information because they 
are based on actual Medicare competitive bidding and the amounts 
suppliers actually were willing to accept as payment from Medicare. 
However, we recognize that these results should be used with caution. 
The demonstration occurred more than three years ago and the fee 
schedule has changed as a result of certain provisions in the MMA, such 
as, section 302(c)(2) (codified at 1834(a)(21) of the Act), which 
requires that CMS adjust the fee schedules for certain items based on a 
comparison to other payers such as the Federal employee health plan 
(FEHP).
    The Office of Inspector General (OIG) and the GAO frequently 
conduct studies that analyze the extent to which Medicare overpays for 
specific items, and we believe that these studies could assist with 
determining the saving potential for an item(s) if it were included in 
competitive bidding. Examples of relevant studies from the OIG include 
the following:

[[Page 25672]]

     Medicare Allowed Charges for Orthotic Body Jackets, March 
2000 (OEI-04-97-00391);
     Medicare Payments for Enteral Nutrition, February 2004 
(OEI-03-02-00700); and
     A Comparison of Prices for Power Wheelchairs in the 
Medicare Program, April 2004 (OEI-03-03-00460).
    In addition, CMS and the DMERCs obtain retail pricing information 
for items in the course of establishing fee schedule amounts and 
considering whether payment adjustments are warranted for items using 
the inherent reasonableness authority in section 1842(b)(8) of the Act. 
We could use these studies to identify products where CMS pays 
excessively and where we could potentially achieve savings.
    Excessive payments are only one factor to consider when evaluating 
whether savings will be realized by the application of competitive 
bidding to an item. However, these studies do offer us a guide 
regarding which items may have the greatest potential for savings. We 
also recognize that some studies are older than others and that recent 
MMA and FEHP reductions in fees may affect the results of these 
studies.

F. Submission of Bids Under the Competitive Bidding Program (Proposed 
Sec.  414.412)

[If you choose to comment on issues in this section, please include the 
caption ``Submission of Bids Under the Competitive Bidding Program'' at 
the beginning of your comments.]

    Sections 1847(b)(6)(A)(i) and (ii) of the Act state that payment 
will not be made for items furnished under a competitive bidding 
program unless the supplier has submitted a bid to furnish those items 
and has been selected as a contract supplier. Therefore, in order for a 
supplier that furnishes competitively bid items in a competitive 
bidding area to receive payment for those items, the supplier must have 
submitted a bid to furnish those particular items and must have been 
awarded a contract to do so by CMS. There are limited exceptions to 
this requirement for beneficiaries who reside in a competitive bidding 
area but are out of the area and need items. There is also an exception 
for suppliers that are grandfathered to continue to provide and service 
certain items, as discussed in section II.C.3. of this preamble.
1. Providers (Proposed Sec.  414.404, Sec.  414.422)
    We are proposing that providers that furnish Part B items and are 
located in a competitively bidding area and are also DMEPOS suppliers, 
must submit bids in order to furnish competitively bid items to 
Medicare beneficiaries. Providers that are not awarded contracts must 
use a contract supplier to furnish these items to the Medicare 
beneficiaries to whom they provide services. However, a skilled nursing 
facility (SNF) defined in section 1819(a) of the Act would not be 
required to furnish competitively bid items to beneficiaries outside of 
the SNF, if it elected not to function as a commercial supplier. This 
is consistent with the current practice of some SNFs to furnish Part B 
services only to their own residents.
2. Physicians (Proposed Sec.  414.404, Sec.  414.422)
    We are proposing that physicians that are also DMEPOS suppliers 
must submit bids and be awarded contracts in order to furnish items 
included in the competitive biding program for the area in which they 
provide medical services. Physicians that do not become contract 
suppliers must use a contract supplier to furnish competitively bid 
items to their Medicare patients. However, they will not be required to 
furnish these items to beneficiaries who are not their patients if they 
choose not to function as commercial suppliers. In proposing this 
policy for physicians who are also DMEPOS suppliers, we recognize that 
the physician self-referral law (section 1877 of the Act) generally 
prohibits physicians from furnishing to their office patients a variety 
of common DMEPOS items. Physicians who choose to participate in the 
competitive bidding process must ensure that their arrangements for 
referring for and furnishing DMEPOS items under a competitive bidding 
program comply with the physician self-referral law as well as any 
other Federal or State law or regulation governing billing or claims 
submission.
    We have established a Web site where requests for bids (RFBs) and 
other pertinent program information will be posted, and we plan to 
alert the supplier community by e-mail of all postings on this site. In 
addition, we will be providing education and outreach to suppliers on 
requirements for submitting RFBs. Suppliers must fully complete the RFB 
in order to be considered for participation in a competitive bidding 
program. The RFBs will require suppliers to complete at a minimum such 
documents as an application, bidding sheet, bank and financial 
information and referral source references. We will establish an 
administrative process to ensure that all information that the supplier 
submitted is accurately captured and considered in the bid evaluation 
process. This process will ensure that all the information submitted by 
the supplier is included as part of the bid evaluation process.
    We considered requiring all suppliers to be physically located 
within a competitive bidding area in order to submit a bid to furnish 
items in that area. However, we feel that this requirement would be too 
proscriptive. We believe that suppliers that are located outside of a 
competitive bidding area, but do business in the competitive bidding 
area and are able to service beneficiaries residing within the CBA 
should be permitted to submit bids and participate in the competitive 
bidding program for that area.
3. Product Categories for Bidding Purposes (Proposed Sec.  414.412)
    We propose to conduct bidding for items that are grouped into 
product categories. Suppliers would be required to submit a separate 
bid for all items that we specify in a product category. The submitted 
bid must include all costs related to the furnishing of each item such 
as delivery, set-up, training, and proper maintenance for rental items. 
However, suppliers would only be required to submit bids for the 
product categories that they are seeking to furnish under the program. 
All items that would be included in a product category for bidding 
purposes would be detailed in the RFB. We propose to define the term 
``product category'' as a group of similar items used in the treatment 
of a related medical condition (for example, hospital beds and 
accessories). We believe that the use of product categories will allow 
Medicare beneficiaries to receive all of their related products (for 
example, hospital beds and accessories) from one supplier, which will 
minimize disruption to the beneficiary.
    There were other design options that we considered but did not 
propose. One option was to require suppliers to submit a bid for all 
items in every defined product category. Another option was for 
suppliers to bid at the HCPCS level and submit a bid only for the 
individual items that they were seeking to furnish under the program.
    There are currently approximately 55 separate policy groups already 
established by the DMERCs. However, these policy groups were not 
established for the purpose of competitive bidding. We are proposing to 
specifically develop product categories for the purpose of competitive 
bidding. We anticipate that the product categories will range from 
Breast Prosthesis, Dialysis Equipment and Supplies, to Oxygen and Power 
Wheelchairs. Each

[[Page 25673]]

group would be defined and comprised of individual HCPCS codes.
    Section 1847(a)(3)(B) of the Act gives us the authority to exempt 
items for which the application of competitive bidding is unlikely to 
result in significant savings. We would propose not to include items in 
a product category if they are rarely used or billed to the program. In 
addition, we would not include items within a product category if we 
believed that these were items for which we might not realize a 
savings. Therefore, under this approach, we propose to establish 
product categories to identify those items included in competitive 
bidding and may establish different product categories from one CBA to 
another, as well as in different rounds of competitive bidding in the 
same CBA.
    We chose to allow suppliers to submit bids only for the product 
categories they are seeking to furnish under a competitive bidding 
program because this option accommodates DMEPOS suppliers who want to 
specialize in one or a few product categories. For example, if a 
supplier wants to specialize in the treatment of respiratory 
conditions, the supplier can choose to bid on all items that fall 
within the Oxygen product category, the Continuous Positive Airway 
Pressure product category, or the Respiratory Assist Device product 
category. We believe that specialization at the product category level 
will make it easier for referral agents (entities that refer 
beneficiaries to health care practitioners or suppliers to obtain 
DMEPOS items) and other practitioners to order related products from 
the same supplier.
    Establishing a bidding process that promotes specialization would 
allow suppliers to realize economies of scope within a product 
category, which means that a supplier may be able to furnish a bundle 
of items at a lower cost than it can produce each individual item. This 
approach is also more favorable to small suppliers because they can 
choose to specialize in only one product category. It would be more 
difficult for a small supplier rather than a large supplier to furnish 
all product categories. This approach is also more convenient for 
Medicare beneficiaries, as they can choose to receive all their related 
supplies from one supplier and would not have to deal with multiple 
suppliers to obtain the proper items for their condition. We recognize 
the importance of the relationship between a DMEPOS supplier and the 
Medicare beneficiary. The supplier delivers the item to the 
beneficiary, sets up the equipment and also educates the beneficiary on 
the proper use of the equipment. The use of product categories will 
facilitate the transition for those beneficiaries who have to change 
suppliers. It is also our goal to establish a productive relationship 
between the supplier and the beneficiary, and we believe we can 
accomplish this goal by designing the competitive bidding program so 
the beneficiary has the option of selecting one supplier that would be 
responsible for the delivery of all medically necessary items that fall 
within a product category.
4. Bidding Requirements (Sec.  414.408)
    In preparing a bid in response to the request for bids, we would 
propose that suppliers look to our existing regulations at part 414, 
subparts C and D to determine whether a rental or purchase payment 
would be made for the item and whether other requirements would apply 
to the furnishing of that item, as further explained below.
a. Inexpensive or Other Routinely Purchased DME Items
    The current fee schedule amounts for these items are based on 
average reasonable charges for the purchase of new items, purchase of 
used items, and rental of items from July 1, 1986 through June 30, 
1987. In those cases where reasonable charge data from 1986/87 is not 
available, the fee schedule amounts for the purchase of new items are 
generally based on retail purchase prices deflated to the 1986/1987 
base period by the percentage change in the CPI-U, the fee schedule 
amounts for the purchase of used items are generally based on 75 
percent of the fee schedule amounts for the purchase of new items, and 
the fee schedule amounts for the monthly rental of items are generally 
based on 10 percent of the fee schedule amounts for purchase of new 
items. This method of establishing fee schedule amounts in the absence 
of reasonable charge data has been in use since 1989. Under the 
Medicare DMEPOS Competitive Bidding Program, we propose that bids be 
submitted only for the furnishing of new items in this category that 
are included in a competitive bidding program. Based on the bids 
submitted and accepted for these new items, we would propose to also 
calculate a single payment amount for used items based on 75 percent of 
the single payment amount for new items. In addition, we would propose 
to calculate a single payment amount for the rental of these items 
based on 10 percent of the single payment amount for new items. We 
believe that calculating single payment amounts for used items and 
items rented on a monthly basis based on bids submitted and accepted 
for new items will simplify the bidding process and will not create 
problems with access to used items or rented items in this category.
b. DME Items Requiring Frequent and Substantial Servicing
    We propose that bids be submitted for the monthly rental of items 
in this payment category with the exception of continuous passive 
motion exercise devices. We propose that bids be submitted for the 
daily rental of continuous passive motion exercise devices. For items 
in this category other than continuous passive motion exercise devices, 
this is consistent with Sec.  414.222(b) our regulations. Coverage of 
continuous passive motion exercise devices is limited to 21 days of use 
in the home following knee replacement surgery; therefore, payment can 
only be made on a daily basis as opposed to a monthly basis for this 
item.
    Based on the bids submitted and accepted for these items, we would 
calculate single payment amounts for the furnishing of these items on a 
rental basis.
c. Oxygen and Oxygen Equipment
    If included under a competitive bidding program, we would propose 
that the single payment amounts for oxygen and oxygen equipment be 
calculated based on separate bids submitted and accepted for furnishing 
on a monthly basis of each of the oxygen and oxygen equipment 
categories of services described in Sec.  414.226(b)(1)(i) through 
(b)(1)(iv).
d. Capped Rental Items
    With the exception of power wheelchairs, payment for items that 
fall into this payment category is currently made on a rental basis 
only. The rental fee schedule payments for months 1 through 3 are based 
on 10 percent of the purchase price for the item as determined under 
Sec.  414.229(c). The rental fee schedule payments for months 4 through 
15 are based on 7.5 percent of the purchase price for the item as 
determined under Sec.  414.229(c). Since the DRA change does not apply 
to beneficiaries using a capped rental item prior to January 1, 2006, 
these beneficiaries may still elect either to take ownership of the 
item after 13 months of continuous use or to continue renting the item 
beyond 13 months of continuous use. In addition, the DRA leaves in tact 
the rule under which a supplier must offer the beneficiary the option 
to purchase a power wheelchair

[[Page 25674]]

at the time the supplier initially furnishes the item (in which case 
payment would be made for the item on a lump-sum basis). However, with 
regard to all other capped rental items for which the rental period 
begins after January 1, 2006, the DRA requires suppliers to transfer 
title to the item to the beneficiary after 13 months of continuous use. 
Under the Medicare DMEPOS Competitive Bidding Program, we propose that 
separate payment for reasonable and necessary maintenance and servicing 
only be made for beneficiary-owned DME. Payment for maintenance and 
servicing of rented equipment would be included in the single payment 
amount for rental of the item. We propose that the lump sum purchase 
option in Sec.  414.229(d) for power wheelchairs be retained under the 
Medicare DMEPOS Competitive Bidding Program.
    Under the Medicare DMEPOS Competitive Bidding Program, we propose 
that ``purchase'' bids be submitted for the furnishing of new items in 
this category. Based on these bids, a single payment amount for 
purchase of a new item will be calculated for each item in this 
category for the purpose of determining both the single payment amount 
for the lump sum purchase of a new power wheelchair, and for 
calculating the single payment amounts for the rental of all items in 
this category. In cases where the beneficiary elects to purchase a used 
power wheelchair the single payment amount for the lump sum purchase of 
the used power wheelchair would be based on 75 percent of the single 
payment amount for a new power wheelchair. In the case of all items in 
this category that are furnished on a rental basis, the single payment 
amount for rental of the item for months 1 through 3 would be based on 
10 percent of the single payment amount for purchase of the item, and 
the single payment amount for rental of the item for months 4 through 
13 would be based on 7.5 percent of the single payment amount for 
purchase of the item. We believe that calculating single payment 
amounts for used items and items rented on a monthly basis based on 
bids submitted and accepted for new items will simplify the bidding 
process and will not result in problems with access to used items or 
rented items in this category.
e. Enteral Nutrition Equipment and Supplies
    Enteral nutrition equipment is currently paid on a purchase or 
rental basis. Section 6112(b)(2)(A) of the Omnibus Budget 
Reconciliation Act of 1989 (Pub. L. 101-239) (OBRA 89) limits the 
rental payments to 15 months. To be consistent with the bidding 
requirements proposed above for capped rental DME, we propose that bids 
be submitted for the purchase of new items in this category. Based on 
the bids submitted and accepted for new items, we would calculate a 
single payment amount for rented items for months 1 through 3 based on 
10 percent of the single payment amount for new items. The single 
payment amount for rented items for months 4 through 15 would be based 
on 7.5 percent of the single payment amount for new items. In cases 
where the beneficiary elects to purchase enteral nutrition equipment, 
the single payment amount for new enteral nutrition equipment would be 
based on the bids submitted and accepted for new enteral nutrition 
equipment, and the single payment amount for used enteral nutrition 
equipment would be based on 75 percent of the single payment amount for 
the purchase of new enteral nutrition equipment.
    Based on the bids submitted and accepted for new items, we would 
calculate a single payment amount for purchase of enteral nutrients and 
supplies.
f. Maintenance and Servicing of Enteral Nutrition Equipment
    Section 6112(b)(2)(B) of OBRA 89 requires payment for maintenance 
and servicing of enteral nutrition equipment after monthly rental 
payments have been made for 15 months. The maintenance and servicing 
payments are to be made in amounts that we determine are reasonable and 
necessary to ensure the proper operation of the equipment. Since 
October 1, 1990, program instructions have specified when and how these 
payments are made. These program instructions are currently found at 
section 40.3 of chapter 20 of the Medicare Claims Processing Manual 
(pub. 100-04). These instructions provide that maintenance and 
servicing payments may be made beginning 6 months after the last rental 
payment for the equipment and no more often than once every 6 months 
for actual incidents of maintenance where the equipment requires 
repairs and/or extensive maintenance. Extensive maintenance involves 
the breaking down of sealed components or performance of tests that 
require specialized testing equipment not available to the beneficiary 
or nursing facility. The program instructions also state that the 
maintenance and servicing payments cannot exceed one-half of the rental 
payment amounts for the equipment. Under the Medicare DMEPOS 
Competitive Bidding Program, we propose that the monthly rental 
payments for enteral nutrition equipment for months 1 through 3 be 
equal to 10 percent of the single payment amounts for the purchase of 
the new enteral nutrition equipment. We propose that for months 4 
through 15, the monthly rental payment amounts would be equal to 7.5 
percent of the single payment amounts for the purchase of new items. In 
addition, we propose to establish the maintenance and service payments 
for enteral nutrition equipment so that they are equal to 5 percent of 
the single payment amounts for the purchase of new enteral nutrition 
equipment. This would limit the payment rate for maintenance and 
service to one-half of the rental payment amount for the first month of 
rental, which is similar to the program instructions mentioned above. 
We are proposing that the contract supplier to which payment is made in 
month 15 for furnishing enteral nutrition equipment on a rental basis 
must continue to furnish, maintain and service the pump for as long as 
the equipment is medically necessary. This proposed policy is similar 
to current Medicare payment rules in Chapter 20 of the claims 
processing manual, section 40.3.
g. Supplies Used in Conjunction With DME
    We propose that bids be submitted for the purchase of supplies 
necessary for the effective use of DME, including drugs (other than 
inhalation drugs). Based on the bids submitted and accepted for these 
items, we would calculate single payment amounts for the furnishing of 
these items on a purchase basis.
h. OTS Orthotics
    We propose that bids be submitted for the purchase of OTS 
orthotics. Based on the bids submitted and accepted for these items, we 
would calculate single payment amounts for the furnishing of these 
items on a purchase basis.

G. Conditions for Awarding Contracts (Proposed Sec.  414.414)

[If you choose to comment on issues in this section, please include the 
caption ``Conditions for Awarding Contracts'' at the beginning of your 
comments.]
1. Quality Standards and Accreditation (Proposed Sec.  414.414(c))
    Section 1847(b)(2)(A)(i) of the Act specifies that a contract may 
not be awarded to any entity unless the entity meets applicable quality 
standards specified by the Secretary under section

[[Page 25675]]

1834(a)(20) of the Act. Section 1834(a)(20) instructs the Secretary to 
establish and implement quality standards for all DMEPOS suppliers in 
the Medicare program, not just for suppliers in the competitive bidding 
areas. All suppliers will have to meet these quality standards to be 
eligible to submit claims to the Medicare program, irrespective of the 
competitive bidding program. The quality standards are to be applied by 
recognized independent accreditation organizations designated by the 
Secretary under section 1834(a)(20)(B) of the Act. A grace period may 
be granted for suppliers that have not had sufficient time to obtain 
accreditation before submitting a bid. If a supplier does not then 
successfully attain accreditation, we will suspend or terminate the 
supplier contract. The length of time for the grace period will be 
determined by the accrediting organizations' ability to complete the 
accrediting process within each competitive bidding area. The length of 
time of the grace period will be specified in the RFB for each 
competitive bidding program. We solicit public comments on the length 
of time for the grace period.
    Suppliers that received a valid accreditation before CMS-approved 
accreditation organizations are designated will be considered to be 
grandfathered if the accreditation was granted by an organization that 
we designate through the process described in proposed Sec.  424.58. 
These suppliers will not need to be re-accredited until their next 
regularly scheduled accreditation.
2. Eligibility (Proposed Sec.  414.414(b))
    We propose that all bidders must meet eligibility rules to be 
considered for selection under the Medicare DMEPOS Competitive Bidding 
Program. The eligibility rules are included in the supplier standards 
regulation at Sec.  424.57. Also, each bidder must be enrolled with 
Medicare and be a current supplier, in good standing with the Medicare 
program, and not under any current Medicare sanctions. Each bidding 
supplier must certify in its bid that it, its high level employees, 
chief corporate officers, members of board of directors, affiliated 
companies and subcontractors are not now and have not been sanctioned 
by any governmental agency or accreditation or licensing organization. 
In the alternative, the bidding supplier must disclose information 
about any prior or current legal actions, sanctions, or debarments by 
any Federal, State or local program, including actions against any 
members of the board of directors, chief corporate officers, high-level 
employees, affiliated companies, and subcontractors.
    Sanctions would include, but are not limited to, debarment from any 
Federal program, sanctions issued by the Office of Inspector General, 
or sanctions issued at the State or local level. In addition, the 
bidder must have all State and local licenses required to furnish the 
items that are being bid. Finally, the supplier must agree to all of 
the terms in the contract outlined in the RFBs. We would suspend or 
terminate a contract if a supplier loses its good standing with us or 
any other government agency.
3. Financial Standards (Proposed Sec.  414.414(d))
    Section 1847(b)(2)(A)(ii) specifies that we may not award a 
contract to an entity unless the entity meets applicable financial 
standards specified by the Secretary. Evaluation of financial standards 
for suppliers assists us in assessing the expected quality of 
suppliers, estimating the total potential capacity of selected 
suppliers, and ensuring that selected suppliers are able to continue to 
serve market demand for the duration of their contracts. Ultimately, we 
believe that financial standards for suppliers will help maintain 
beneficiary access to quality services.
    Therefore, as part of the bid selection process, the RFBs will 
identify the specific information we will require to evaluate 
suppliers, which may include: a supplier's bank reference that reports 
general financial condition, credit history, insurance documentation, 
business capacity and line of credit to successfully fulfill the 
contract, net worth, and solvency. We welcome comments on the financial 
standards, in particular the most appropriate documents that will 
support these standards.
    We found that in the demonstration, general financial condition, 
adequate financial ratios, positive credit history, adequate insurance 
documentation, adequate business capacity and line of credit, net 
worth, and solvency, were important considerations for evaluating 
financial stability.
    As we develop our methodology for financial standards, we will 
further consider which individual measures should be required so that 
we can obtain as much information as possible while minimizing the 
burden on bidding suppliers and the bid evaluation process.
4. Evaluation of Bids (Proposed Sec.  414.414(e))
    We are proposing to select the product categories that include 
individual items for which we will require competitive bidding. 
Individual products will be identified by the Healthcare Common 
Procedure Coding System (HCPCS Codes) and will be further described in 
the RFB. Suppliers will be required to submit bids for each individual 
item within each product category they are seeking to furnish under the 
program, but will not be required to bid for every product category.
a. Market Demand and Supplier Capacity (Proposed Sec.  414.414(e))
    Section 1847(b)(4)(A) of the Act requires that in awarding 
competitive bidding contracts, the Secretary must select the number of 
contract suppliers necessary to furnish items to meet the projected 
demand in the geographic area. Therefore, the first step is for us to 
determine the expected demand for an item in a competitive bidding 
area. We propose to calculate expected demand in each competitive 
bidding area in a relatively straightforward way using existing 
Medicare claims. We will examine claims data to determine the number of 
units of each item supplied to Medicare beneficiaries during the past 2 
years, and then determine the number of new beneficiaries that have 
entered the market during the last 2 years. We feel that 2 years worth 
of data is sufficient to allow us to identify trend analyses and 
utilization measurements. We will also gather data on the number of new 
fee-for-service Medicare enrollees coming into a competitive bidding 
area and use this number to project the number of new enrollees.
    We propose to calculate two years worth of claims on a monthly 
basis to determine beneficiary demand. We will take into consideration 
the expected demand over the total duration of the contract and the 
seasonal effects (for example, an increase in beneficiary population in 
Florida during the winter), and propose to use 2 years of data to 
identify any time trends. If there are no seasonal effects or time 
trends, we propose to use the average monthly total and new patient 
figures as the market demand measures. If there are seasonal effects or 
changes identified only during certain months, the maximum monthly 
total and new patient figures would be used as the market demand 
measures. If trends show that there is noticeable growth or reduction 
in beneficiary demand for products in an area, we would take these 
factors into consideration when developing estimates of beneficiary 
demand for competitively bid items.
    We propose to adopt the following approach to estimate supplier 
capacity

[[Page 25676]]

to meet the projected demand in a CBA. First, we propose to analyze 
Medicare claims to determine how many items a supplier is currently 
providing in the competitive bidding area, as well as in total. Second, 
as part of the bid, we would ask suppliers to say how many units they 
are willing and capable of supplying at the bid price in the CBA. We 
would compare this information to what the supplier has dispensed to 
Medicare beneficiaries in the past and what it specified in its 
response to the RFB as its projected capacity. We would require 
evidence of financial resources to support market expansion, such as 
letters from investors or lending agents. We would use this information 
to evaluate the capacity of the bidder. Third, we would compare 
expected capacity and Medicare volume to determine how many suppliers 
we would need in an area. For new suppliers, we would ask them for 
their expected capacity, look at trend data for new suppliers in that 
area, and examine the capacity of other suppliers in that area. We 
would need to use this data to make estimates about capacity because 
suppliers may have more capacity potential than they are currently 
exhibiting. During the DMEPOS demonstration, demonstration suppliers 
were able to expand their output to meet market demand and replace 
market share previously provided by non-demonstration suppliers; 
indeed, some demonstration suppliers were disappointed that they did 
not gain more market share during the demonstration. We presented 
numerous issues to the PAOC where we requested advice on issues such as 
market capacity and demands. During the February 28, 2005 PAOC meeting, 
we asked the panel to discuss the issue of demand and capacity. Several 
members of the committee, based upon their expertise and knowledge of 
the industry, suggested that most DMEPOS suppliers would be able to 
easily increase their total capacity to furnish items by up to 20 
percent and the increase could be even larger for products like 
diabetes supplies that require relatively little labor.
    We welcome comments on our proposed approach for calculating market 
demand and estimating supplier capacity. We are especially interested 
in any information that would help us compare current Medicare volume 
with potential capacity, including potential formulas we could apply to 
determine capacity.
b. Composite Bids (Proposed Sec.  414.414(e))
    When suppliers are bidding for multiple items in a product 
category, the lowest bid for each item will not always be submitted by 
the same supplier. In this case, looking at the bids for individual 
items would not tell us which supplier should be selected since 
different suppliers may submit the lowest bids for different items. 
Therefore, we propose to use a composite bid to compare all of the 
suppliers' bids submitted for an entire product category in a CBA. 
Using a composite bid is a way to aggregate a supplier's bids for 
individual items within a product category into a single bid for the 
whole product category. This will allow us to determine which suppliers 
can offer the lowest expected costs to Medicare for all items in a 
product category. To compute the composite bid for a product category, 
we would multiply a supplier's bid for each item in a product category 
by the item's weight and sum these numbers across items. The weight of 
an item would be based on the utilization of the individual item 
compared to other items within that product category based on historic 
Medicare claims. Item weights would be used to reflect the relative 
market importance of each item in the product category. We would select 
item weights that ensure that the composite bid is directly comparable 
to the costs that Medicare would pay if it bought the expected bundle 
of items in the product category from the supplier. The sum of each 
supplier's weighted bids for every item in a product category would 
become the supplier's composite bid for that product category.
    We seek comment on the best method of weighting individual items 
within a product category to determine the composite bid. One approach 
we are considering is to set the weight for each item based on the 
volume of the individual item's share compared to the total utilization 
of the product category. Under this weighting system, the composite bid 
would be exactly proportional to the expected cost of furnishing the 
entire bundle of items. Therefore, if supplier 1 had a lower composite 
bid than supplier 2, it would also have a lower expected cost of 
furnishing the entire product bundle that makes up the product 
category. Another approach we are considering is to set the weight 
based on the payment amounts attributable to each DMEPOS fee schedule 
item relative to the overall payment amount for the total product 
category. This approach may better reflect the relative value of each 
item because it is based on how much we actually pay for an item. This 
is the approach that we used in the round 1 bidding in Polk County 
under the competitive bidding demonstration program. However, we found 
that this approach could result in too much weight being placed on low 
volume and high-priced items. The first year evaluation report also 
found that using the allowed charges as the weights could result in a 
supplier who offered lower bids having a higher composite bid than a 
supplier who offered a higher bid for individual items.
    We use volume of items or units as the basis of the following 
examples but we are requesting comments on which weighting method 
should be used in calculating the composite. We also request comments 
on other methods of weighting that could be applied to individual 
items.

                                             Table 5.--Item Weights
----------------------------------------------------------------------------------------------------------------
                               Item                                     A           B           C         All
----------------------------------------------------------------------------------------------------------------
Units............................................................         5           3           2           10
Item Weight......................................................         0.5         0.3         0.2          1
----------------------------------------------------------------------------------------------------------------

    The example above shows how a proposed weight setting methodology 
would work. The expected volume for Items A, B, and C are 5, 3, and 2 
units, respectively, for a total volume of 10 units. The item weight 
for Item A is 0.5 (5/10), the weight for Item B is 0.3 (3/10), etc.
    As explained above, the composite bid for a supplier would equal 
the item weight times the item bid summed across all items in the 
product category. The item weights would be the same for bidders for 
the same product categories. In our example, supplier 1 bid $1.00 for 
item A, $4.00 for item B and $1.00 for item C. The composite bid for 
Supplier 1 = (0.5 * $1.00) + (0.3 * $4.00) + (0.2 * $1.00) = 1.90. The 
table shows the expected cost of the bundle based on

[[Page 25677]]

each supplier's bids. The expected costs are directly proportional to 
the composite bids; the factor of proportionality is equal to the total 
number of units (10) in the product category. We used the composite bid 
to determine the expected costs for all of the items in the product 
category based upon expected volume.

                                            Table 6.--Composite Bids
----------------------------------------------------------------------------------------------------------------
                                                                                                       Expected
                        Item                               A           B           C       Composite    cost of
                                                                                              bid       bundle
----------------------------------------------------------------------------------------------------------------
Units...............................................        5           3           2     ..........  ..........
Item weight.........................................        0.5         0.3         0.2   ..........  ..........
Supplier 1 bid......................................       $1.00       $4.00       $1.00       $1.90      $19.00
Supplier 2 bid......................................       $3.00       $3.00       $2.00        2.80       28.00
Supplier 3 bid......................................       $2.00       $2.00       $2.00        2.00       20.00
Supplier 4 bid......................................       $1.00       $2.00       $2.00        1.50       15.00
----------------------------------------------------------------------------------------------------------------

    Under this proposed methodology, bid selection would proceed by 
ranking the composite bids from lowest to highest (Table 6). In order 
to ensure that we would pay less under competitive bidding than we 
would under the current fee schedule, as is required under section 
1847(b)(2)(A)(iii), we would compute the expected cost of the bundle of 
goods for comparison purposes. This would require us to calculate the 
bid amount times the expected number of units that we expect suppliers 
will furnish based on the most current Medicare claims data and sum 
across each item by supplier. For example, if supplier 1 bid $1.00 for 
item A and we expected to purchase 5 units--$1.00 x 5 units = $5.00, 
item B--$4.00 x 3 units = $12.00, item C--$1.00 x 2 units = $2.00, the 
sum for these 3 items would be $19.00. As previously noted, prior to 
bid selection we would first ensure that suppliers meet quality and 
financial standards prior to arraying the bids and selecting suppliers.
c. Determine the Pivotal Bid (Proposed Sec.  414.414(e))
    We propose that the pivotal bid would be the point where expected 
combined capacity of the bidders is sufficient to meet expected demands 
of beneficiaries for items in a product category. In the example below, 
the projected demand would be for 1000 units, therefore supplier 10's 
composite bid would represent the pivotal bid, since the cumulative 
capacity of 1100 would exceed the projected demand of 1000. The statute 
requires multiple winners, so in all cases where we award bids, we 
would need to accept at least two winning bidders. All bidders who are 
eligible for selection and whose composite bid for the product category 
is less than or equal to the pivotal bid would be selected as winning 
bidders. In the table below, for example, $135.00 would be the pivotal 
bid. Suppliers 2, 3, 1, and 10 would then be selected as winning 
bidders with supplier 10's composite bid becoming the pivotal bid. We 
realize that this approach may leave out other suppliers with very 
close, but slightly higher bids.

                                       Table 7.--Determine the Pivotal Bid
  [Point where beneficiary demand is met by supplier capacity--for this example, beneficiary expected demand is
                                1000 units--supplier 10's bid is the pivotal bid]
----------------------------------------------------------------------------------------------------------------
                                                                            Composite     Supplier    Cumulative
              Supplier number                   Eligible for selection         bid        capacity     capacity
----------------------------------------------------------------------------------------------------------------
2.........................................  Yes..........................         $100          100          100
3.........................................  Yes..........................          115          300          400
1.........................................  Yes..........................          120          400          800
10........................................  Yes..........................          135          300         1100
4.........................................  Yes..........................          140          500         1600
7.........................................  Yes..........................          150          100         1700
No longer being considered:
5.........................................  No...........................          120         n.c.         n.c.
6.........................................  No...........................          130         n.c.         n.c.
8.........................................  No...........................          175         n.c.         n.c.
9.........................................  No...........................          200         n.c.        n.c.
----------------------------------------------------------------------------------------------------------------
n.c. = not calculated.

    We also considered the use of a competitive range to determine the 
contract suppliers. In this approach we would determine a competitive 
range for the composite bid. We would array all suppliers by their bids 
and eliminate all suppliers whose composite bid is greater than the 
competitive range. We would then evaluate the quality and financial 
standards only for those remaining suppliers.
    During the demonstration, evaluating quality and financial 
standards was time-consuming for the bid evaluation panel and required 
bidders to provide extensive information on quality and finances. The 
last two rounds of the demonstration used a competitive range to reduce 
the burden on the bid evaluation panel and bidders. After evaluating 
basic eligibility requirements, the composite bids were calculated and 
arrayed, and a competitive range was selected with more than enough 
suppliers to serve the market. Suppliers whose composite bids were 
clearly outside of this range were not required to provide detailed 
financial information, and the bid panel was not required to evaluate 
the eligibility of these suppliers to participate. Suppliers within the 
competitive range provided detailed financial information and had their 
quality rigorously evaluated. The

[[Page 25678]]

remaining suppliers were only selected as contract suppliers if they 
met the quality and financial standards and their composite bids were 
at or below the pivotal bid.
    There are other options that we have considered to determine the 
pivotal bid. One of these options would be to make the pivotal bid 
depend on one of the summary statistics (for example, mean, median, 
45th percentile) associated with the distribution of bids from eligible 
suppliers. For example, the pivotal bid could be set equal to the 
median bid from eligible suppliers. This option has the advantage that 
the pivotal bid could be set near the central distribution of bids. We 
considered including additional suppliers who are close to the central 
distribution as being eligible to become a contract supplier. Both 
options would likely affect the number of contract suppliers. Finally, 
the exact summary statistic or percentile can be increased or decreased 
to reflect our trade-off between the number of winners and program 
costs. One negative aspect of this approach would be that winners may 
have insufficient capacity. In addition, with a given percentile 
cutoff, the pivotal bid might include an excessive number of winning 
bidders. As the number of eligible bidders increases, so does the 
number of winners. If additional bidders have higher costs, and their 
bids fall into the upper half of the distribution, the pivotal bid will 
increase, resulting in greater payments by the Medicare program and a 
loss of savings.
    Another option would be to base the pivotal bid on a target number 
of winners. For example, we may decide to select 5 winners in each 
product category. Suppliers may respond to this approach by bidding 
aggressively, knowing that only a fixed number of winners are 
guaranteed to be selected. A negative aspect of this approach is that 
there is no assurance that a predetermined target number of winners 
would have sufficient capacity to meet projected market demand. In 
addition, the target number of winners must somehow be selected and 
this could result in selecting an arbitrary number. If too high, 
suppliers may have little incentive to bid aggressively.
    We also considered an option to base the pivotal bid on a target 
composite bid, for example, we would choose a target that was 20 
percent below the DMEPOS fee schedule amount for that product category. 
A possible advantage of this approach is that the target composite bid 
can be set to ensure savings for the program. On the other hand, we 
believed that suppliers might perceive this approach to be 
anticompetitive. Rather than letting bidding and the market forces 
determine the pivotal bid and fee schedule we might have been viewed as 
pre-ordaining the outcome. In addition, suppliers that bid below the 
target composite bid might have had insufficient capacity to meet 
projected market demand.
    We are proposing that the pivotal bid be at the point where we have 
a sufficient number of suppliers to ensure we have enough capacity to 
meet projected demand and that beneficiaries have adequate access to 
quality items.
d. Assurance of Savings (Proposed Sec.  414.414(f))
    Section 1847(b)(2)(A)(iii) of the Act prohibits awarding contracts 
to any entity for furnishing items unless the total amounts to be paid 
to contractors in a competitive bidding area are expected to be less 
than the total amounts that would otherwise be paid. We are proposing 
to interpret this requirement to mean that contracts will not be 
awarded to any entity unless the amounts to be paid to contract 
suppliers in a competitive bidding area are expected to be less for a 
competitively bid item than would have otherwise been paid. Therefore, 
we would not accept any bid for an item that is higher than the current 
fee schedule amount for that item. This approach would require that 
single payment amounts for each item in a product category be equal to 
or less than our current fee schedule amount for that item.
    An alternative interpretation of ``less than the total amounts that 
would otherwise be paid'' could mean contracts will not be awarded to 
an entity unless the amounts paid to contract suppliers in a CBA for 
the product category are expected to be less than that would have 
otherwise been paid. During the demonstration, several product 
categories received overall savings, whereas payment amounts increased 
for a few individual items within those product categories. This 
approach may not result in adequate savings, and we believe a 
reasonable interpretation of the Act would be one in which ``the total 
amounts'' mean payment at the item level. One concern with this 
approach is that there may be a greater potential for shifting of 
utilizations from one item to another higher priced item.
    We specifically request comments on the various methods for 
assuring savings under the Medicare DMEPOS Competitive Bidding Program.
e. Assurance of Multiple Contractors (Proposed Sec.  414.414(g))
    Section 1847(b)(4)(B) of the Act specifies that the Secretary will 
award contracts to multiple entities submitting bids in each area for 
an item. In addition, section 1847(b)(2)(A)(iv) of the Act specifies 
that contracts may not be awarded unless access of individuals to a 
choice of multiple suppliers is maintained. As a result, we will have 
multiple contract suppliers in each competitive bidding area for each 
product category if at least two suppliers meet all requirements for 
participation, and the single payment amounts to be paid to those 
suppliers do not exceed the fee schedule amounts for the items that 
were bid. We know that offering choices to beneficiaries, referral 
agents, and treating practitioners that order DMEPOS for Medicare 
beneficiaries is important to maintain competition among suppliers 
based on quality of items. We have to weigh that advantage against the 
disincentive for a supplier to submit its best bid if we select too 
many suppliers to service a competitive bidding area. Therefore, we 
believe that having multiple suppliers servicing one product category 
in a competitive bidding area will allow us to accomplish these goals.
f. Selection of New Suppliers After Bidding (Proposed Sec.  414.414(h))
    We are proposing to select only as many suppliers as necessary to 
ensure we have enough capacity to meet projected demand. However, we 
may have to suspend or terminate a contract supplier's contract if that 
supplier falls out of compliance with any of the requirements 
identified in the regulation and in the bidding contract. 
Alternatively, we could determine that the number of contract suppliers 
we selected to furnish a product category under a competitive bidding 
program was insufficient to meet beneficiary demand for those items. In 
situations where CMS determines that there is an unmet demand for 
items, for example, if CMS terminates a contract supplier's contract, 
we would propose to contact the remaining contract suppliers for that 
product category to determine if they could absorb the unmet demand. If 
the remaining contract suppliers could not absorb the unmet demand in a 
timely manner, we would propose to then refer to the list of suppliers 
that submitted bids for that product category in that round of 
competitive bidding in that competitive bidding area, use the list of 
composite bids that we arrayed from lowest to highest, and proceed to 
the next supplier on the list. We would

[[Page 25679]]

contact that supplier to determine if it would be interested in 
becoming a contract supplier. If the supplier was interested, we would 
require the supplier to provide updated information to ensure its 
continued eligibility for participation. A condition for acceptance of 
a contract would be that the supplier must agree to accept the already 
determined single payment amounts for the individual items within the 
product category in the competitive bidding area. We would continue to 
go down the list until we were satisfied that the expected demand would 
be met and beneficiary access to the items in the product category 
would not be a problem. After consultation with the DMEPOS industry and 
PAOC, CMS was told that additional capacity should not be a problem as 
suppliers would be willing and able to handle the expected demand.
    Another option that we considered, but are not proposing, was to 
conduct a new round of bidding to select additional suppliers. However, 
we did not choose this option because it would delay the resolution of 
an access problem and place an additional administrative burden on the 
program.

H. Determining Single Payment Amounts for Individual Items (Proposed 
Sec.  414.416)

[If you choose to comment on issues in this section, please include the 
caption ``Determining Single Payment Amounts for Individual Items'' at 
the beginning of your comments.]
1. Setting Single Payment Amounts for Individual Items (Proposed Sec.  
414.416(b))
    Section 1847(b)(5)(A) of the Act requires that the Secretary 
determine a single payment amount for each item in each competitive 
bidding area based on the bids submitted and accepted for that item. 
Once contract suppliers are selected for a product category based on 
their composite bid and the pivotal bid, single payment amounts for 
individual items in the product category must be determined. We are 
considering several different methodologies for determining the single 
payment amounts. Each of the options under consideration are discussed 
in detail in this section. After careful consideration of these 
options, we are proposing to adopt the following principles to 
determine the single payment amounts for individual items in a product 
category:

Principle 1

    Bid amounts from all winning bids for an item in a CBA will be used 
to set the single payment amount for that item in the CBA.

Principle 2

    We must expect to pay less for each individual item than we would 
have otherwise paid for that item under the current fee schedule. 
Single payment amounts cannot be higher than our current fee schedule 
amounts for individual items within a product category.
    To satisfy these principles, we evaluated several different 
approaches to setting payment amounts. As a result of our review, we 
have decided on a preferred approach that would determine the single 
payment amounts for individual items by using the median of the 
supplier bids that are at or below the pivotal bid for each individual 
item within each product category. The individual items would be 
identified by the appropriate HCPCS codes. The median of the bids 
submitted by the contract suppliers for a particular item would be the 
single payment amount that we would establish under the competitive 
bidding program for the HCPCS code that describes that item. In cases 
where there is an even number of winning bidders for an item, we would 
employ the average (mean) of the two bid prices in the middle of the 
array to set the single payment amount.
    We believe that setting the single payment amount based on the 
median of the contract suppliers' bids satisfies the statutory 
requirement that single payment amounts are to be based on bids 
submitted and accepted. This will result in a single payment for an 
item under a competitive bidding program that is representative of the 
winning bids for that item. This methodology also has the advantage of 
being easily understood by suppliers and implemented by our 
contractors. It also results in what we consider to be a reasonable 
payment amount based on prices available in the marketplace. As 
illustrated in Table 8, this methodology would reduce the effect of 
excessively high or excessively low bids and would also help to ensure 
savings for the Medicare program. We believe it is also consistent with 
the intent of competitive bidding.

                                      Table 8.--Median of the Winning Bids
----------------------------------------------------------------------------------------------------------------
                                                                                                        Actual
                            Item                                   A            B            C        composite
                                                                                                         bid
----------------------------------------------------------------------------------------------------------------
Supplier 4 bid..............................................        $1.00        $2.00        $2.00        $1.50
Supplier 1 bid..............................................         1.00         4.00         1.00         1.90
Supplier 3 bid..............................................         2.00         2.00         2.00         2.00
Median of winning bids--Single payment amount...............         1.00         2.00         2.00  ...........
----------------------------------------------------------------------------------------------------------------

    While this is our proposed approach, we are soliciting comments on 
other methodologies for setting the single payment amount, including 
using an adjustment factor as part of the methodology for setting the 
single payment amount. This was the methodology we used for the 
competitive bidding demonstrations, and it would require the following 
steps. The first step of this methodology would be to calculate the 
average of the winning bids per individual item. The second step would 
be to calculate the average of the composite bids by taking the sum of 
the composite bids for all contract suppliers in the applicable CBA and 
dividing that number by the number of contract suppliers. The third 
step would be to determine an adjustment factor, the purpose of which 
would be to bring every winner's overall bids for a product category up 
to the pivotal bidder's composite bid. Once we determined the 
adjustment factor, we would take the average of the winning bids per 
item and multiply that by the adjustment factor to adjust all bids up 
to the point of the pivotal bid, so that all winners would be paid by 
Medicare as much for the total product category as the pivotal bidder. 
This amount would become the single payment amount for the individual 
item. This is the price that all contract suppliers within a 
competitive bidding area would be paid for that product as illustrated 
in Table 9.

[[Page 25680]]



                                  Table 9.--Adjusting the Average Winning Bids
----------------------------------------------------------------------------------------------------------------
                                                                                          Average       Actual
                      Item                            A            B            C        composite    composite
                                                                                            bid          bid
----------------------------------------------------------------------------------------------------------------
Supplier 4 bid.................................        $1.00        $2.00        $2.00  ...........        $1.50
Supplier 1 bid.................................         1.00         4.00         1.00  ...........         1.90
Supplier 3 bid.................................         2.00         2.00         2.00  ...........         2.00
Supplier 2 bid.................................          N/A          N/A          N/A  ...........          N/A
Average of winning bids........................         1.33         2.67         1.67         1.80  ...........
Adjustment factor = (Pivotal Composite Bid) /           1.11         1.11         1.11  ...........  ...........
 (Average Composite Bid).......................
Adjusted average bids--single payment amount            1.48         2.96         1.85  ...........  ...........
 per item......................................
----------------------------------------------------------------------------------------------------------------

    This approach would ensure that the overall payment amounts that 
contract suppliers received was at least as much as their bids. As a 
result, this may have guarded against suppliers leaving the Medicare 
program because the payment amounts are not sufficient. However, we do 
not favor this alternative because, in general, most payment amounts 
would be higher than the actual bids as a result of the adjustment 
factor being greater than zero. This is true because the purpose of the 
adjustment factor would have been to make the composite bid of all 
winning suppliers equivalent to the composite bid of the pivotal 
supplier. While this approach is still under consideration, we are 
considering whether this approach is reflective of the actual winning 
bids accepted. Also, we are concerned that this methodology may be 
confusing and overly complicated.
    We also considered taking the minimum winning bid for each item in 
a CBA and not applying an adjustment factor. We do not favor this 
alternative because we also do not consider it as being reflective of 
the actual bids accepted because it is only reflective of the lowest 
bid. The lowest bid would not be reflective of what suppliers would 
sell the item for since most of them bid higher.
    Finally, we considered taking the maximum winning bid for each 
item. However, this approach would have led to program payment amounts 
that were higher than necessary because some suppliers were willing to 
provide these items to beneficiaries at a lower cost.
    We are still in the process of determining the appropriate approach 
for setting payment amounts, as well as the alternatives considered and 
outlined above and invite comments on our proposed methodology. We will 
consider all comments in the final regulation.
2. Rebate Program (Proposed Sec.  414.416(c))
    We are proposing to allow contract suppliers that submitted bids 
for an individual item below the single payment amount to provide the 
beneficiary with a rebate. The rebate would be equal to the difference 
between their actual bid amount and the single payment amount. The 
following example illustrates how the rebates would be applied:
    If, based on the bids received and accepted for an item, we 
determined that the single payment amount for the item was $100, 
Medicare payment for the item would be 80 percent of that amount, or 
$80, and the co-insurance amount for the item would be 20 percent, or 
$20. However, if a contract supplier submitted a bid of $90 for this 
item and chose to offer a rebate, the rebate amount would be equal to 
the difference between the single payment amount ($100) and the 
contract supplier's actual bid ($90), or $10. Therefore, after the 
contract supplier received the Medicare payment of $80 and the $20 co-
insurance, the contract supplier would be responsible for providing the 
beneficiary with a $10 rebate. We are soliciting comments on how to 
handle those cases in which the rebates would exceed the co-payment 
amount.
    Before deciding to propose this methodology, we considered whether 
to make the rebates mandatory or optional. We are proposing that the 
rebates be voluntary but that contract suppliers cannot implement them 
on a case by case basis. If a contract supplier submits a bid below the 
single payment amount and chooses to offer a rebate, it must offer the 
rebate to all Medicare beneficiaries receiving the competitively bid 
item to which the rebate applies. This commitment would be incorporated 
into the contract supplier's contract. Stated another way, while the 
decision to offer rebates may be voluntary, once a contract supplier 
decides to provide rebates, the rebates become a binding contractual 
condition for payment during the term of the contract with CMS. 
Moreover, the contract supplier may not amend or otherwise alter the 
provision of rebates during the term of the contract. Contract 
suppliers would also be prohibited from directly or indirectly 
advertising these rebates to beneficiaries, referral sources, or 
prescribing health care professionals. However, this would not preclude 
CMS from providing to beneficiaries comparative information about 
contract suppliers that offer rebates.
    Only contract suppliers that submitted bids below the single 
payment amount for a competitively bid item would have the choice to 
offer rebates. Contract suppliers that submitted bids above the single 
payment amount would not be allowed to issue rebates because their 
actual bids for an individual item would be above this amount.
    Our reasons for allowing these contract suppliers to offer rebates 
is to allow beneficiaries the ability to realize additional savings and 
the full benefits of the Medicare DMEPOS Competitive Bidding Program.
    We are asking for comments concerning the rebate process outlined 
in this proposed rule. CMS will continue to evaluate the fraud and 
abuse risks of the proposed rebate program, and we are specifically 
soliciting comments on such risks.

I. Terms of Contracts (Proposed Sec.  414.422)

[If you choose to comment on issues in this section, please include the 
caption ``Terms of Contract'' at the beginning of your comments.]

    Section 1847(b)(3)(A) of the Act gives the Secretary the authority 
to specify the terms and conditions of the contracts used for 
competitive bidding. Section 1847(b)(3)(B) requires the Secretary to 
recompete contracts under the Medicare DMEPOS Competitive Bidding 
Program at least every 3 years. The length of the contracts may be 
different for different product categories, and we propose to specify 
the length of each contract in the Request for Bids.
1. Terms and Conditions of Contracts
    We propose that the competitive bidding contracts will contain, at 
a

[[Page 25681]]

minimum, provisions relating to the following:
     Covered product categories and covered beneficiaries, 
operating policies.
     Subcontracting rules.
     Cooperation with us and our agents.
     Potential onsite inspections.
     Minimum length of participation.
     Terms of contract suspension or termination.
     Our discretion not to proceed if we find that the Medicare 
program will not realize significant savings as a result of the 
program.
     Compliance with changes in Federal laws and regulations 
during the course of the agreement.
     Non-discrimination against beneficiaries in a competitive 
bidding area (so that all beneficiaries inside and outside of a 
competitive bidding area receive the same products that the contract 
supplier would provide to other customers).
     Supplier enrollment and quality standards.
     The single payment amounts for covered items.
     Other terms as we may specify.
2. Furnishing of Items (Proposed Sec.  414.422(c))
    A contract supplier must agree to furnish the items included in its 
contract to all beneficiaries who maintain a permanent residence or who 
visit the competitive bidding area and request those items from the 
contract supplier. However, as explained in sections II.F.1 and II.F.2 
above, a skilled nursing facility defined in section 1819(a) of the Act 
that is also a contract supplier must only agree to furnish the items 
included in its contract to patients to whom it would otherwise furnish 
Part B services. In addition, a physician that is also a contract 
supplier must only agree to furnish the items included in its contract 
to his or her patients.
3. Repairs and Replacements of Patient Owned Items Subject to 
Competitive Bidding. (Proposed Sec.  414.422(c))
    Repair or replacement of patient-owned DME, enteral nutrition 
equipment or off-the-shelf orthotics, that are subject to the 
competitive bidding program, must be furnished by a contract supplier 
because only winning suppliers can provide these items in a competitive 
bidding area. The contract supplier cannot refuse to repair or replace 
patient-owned items subject to competitive bidding. This proposed 
policy will help ensure that the beneficiaries will get the items from 
qualified suppliers, and it is consistent with the competitive bidding 
program in that it directs business to contract suppliers.
    Therefore, we propose that repair or replacement of patient-owned 
items subject to a competitive bidding program must be furnished by a 
contract supplier. This requirement does not apply to beneficiaries who 
are outside of a competitive bidding area.
4. Furnishing Items to Beneficiaries Whose Permanent Residence Is 
Within a CBA
    We propose that a contract supplier cannot refuse to furnish items 
and services to a beneficiary residing in a CBA based on the 
beneficiary's geographic location within the CBA. This policy will 
prohibit contract suppliers from refusing to furnish items to 
beneficiaries because they are not in close proximity to that supplier. 
In order to ensure beneficiary access to competitively bid items that 
are rented, we are proposing that the contract supplier must agree to 
accept as a customer a beneficiary who began renting the item from a 
different supplier regardless of how many months the item has already 
been rented. This is particularly important in those cases where a 
supplier or noncontract supplier does not elect to continue furnishing 
the item in accordance with the grandfathering provisions discussed in 
section II.C.3. above. Suppliers must factor the cost of furnishing 
items in these situations into their bid submissions. Also, in order to 
ensure beneficiary access to the competitively bid items in the 
inexpensive or routinely purchased DME payment category or to a 
competitively bid power wheelchair, the contract supplier must agree to 
give the beneficiary or his or her caregiver the choice of either 
renting or purchasing the item and must furnish the item on a rental or 
purchase basis as directed by the beneficiary or the beneficiary's 
caregiver. Suppliers must factor the cost of furnishing these items on 
both a rental and purchase basis into their bid submissions.
5. Furnishing Items to Beneficiaries Whose Permanent Residence Is 
Outside a CBA
    In order to obtain medically necessary DMEPOS or other equipment, a 
beneficiary whose permanent residence is located outside of a CBA must 
use a contract supplier to obtain all items subject to competitive 
bidding in the competitive bidding area that he or she visits. We 
considered allowing beneficiaries whose residence is outside of a 
competitive bidding area to obtain these items from noncontract 
suppliers when coming into a competitive bidding area. However, 
consistent with section 1847(b)(6), we are proposing that they be 
required to use a contract supplier because we believe that new 
business for competitively bid items should be directed only to 
contract suppliers. Noncontract suppliers would be allowed to continue 
servicing current beneficiaries who maintain a permanent residence in a 
competitive bidding area if they qualified for the grandfathering 
program discussed in section II.C.3 above.
6. Information Collection From the Supplier
    The following is a list of some of the terms, conditions and 
information that we propose a supplier must agree to provide to CMS for 
purposes of assessment prior to becoming a contract supplier:
     Information on product integrity.
     Information on business integrity.
     Organizational conflicts of interest.
     Name.
     Physical address.
     Billing address.
     Phone number.
     NSC number.
     Names of all owners.
     NSC number of any affiliated company.
     Address and phone number of any affiliated company.
     Employee information.
     Number of employees.
     Training and qualifications.
     Customer service protocol.
     Information on any bankruptcy proceedings involving the 
bidding company or any affiliated company.
    We invite comments on what terms and conditions should be included 
in a contract for the competitive bidding program. We are interested 
both in terms and conditions that should be omitted as well as terms 
and conditions that should be added.
7. Change in Ownership (Proposed Sec.  414.422(d))
    We propose to evaluate a company's ownership information, its 
compliance with appropriate quality standards, its financial status, 
and its compliance status with government programs before we determine 
that a supplier can qualify as a contract supplier if there is a change 
of ownership. For this reason, we are proposing that suppliers would 
not be granted winning status by merely merging with or acquiring a 
contract supplier's business. We do not want to allow suppliers to 
adopt a strategy of circumventing the regular bidding process by 
gaining winning status through acquisitions of or mergers with

[[Page 25682]]

contract suppliers or to violate any anti-competition prohibitions. 
Therefore, contract suppliers must notify CMS in writing 60 days prior 
to any changes of ownership, mergers or acquisitions being finalized.
    We have the discretion to allow a successor entity after a merger 
with or acquisition of a contract supplier to function as contract 
supplier when--
     There is a need for the successor entity as a contractor 
to ensure Medicare s capacity to meet expected beneficiary demand for a 
competitively bid item; and
     We determine that the successor entity meets all the 
requirements applicable to contract suppliers.
     The successor entity must agree to assume the contract 
supplier s contract, including all contract obligations and liabilities 
that may have occurred after the awarding of the contract to the 
previous supplier. The successor entity is legally liable for the non-
fulfillment of obligations of the original contract supplier.
    In addition, we would only allow the successor entity to function 
as a contract supplier if it executed a novation agreement.
8. Suspension or Termination of a Contract (Proposed Sec.  414.422(f))
    Contract suppliers are held to all the terms of their contracts for 
the full length of the contract period. Any deviation from contract 
requirements, including a failure to comply with governmental agency or 
licensing organization requirements, would constitute a breach of 
contract. If we conclude that the contract supplier has breached its 
contract, the actions we might take include, but are not limited to, 
asking the contract supplier to correct the breach condition, 
suspending the contract, terminating the contract for default (that may 
include reprocurement costs), precluding the supplier from 
participating in the competitive bidding program, or availing ourselves 
of other remedies permitted by law. We would also have the right to 
terminate the contract for convenience.

J. Administrative or Judicial Review (Sec.  414.424)

[If you choose to comment on issues in this section, please include the 
caption ``Administrative or Judicial Review'' at the beginning of your 
comments.]

    Section 1847(b)(10) of the Act provides that there will be no 
administrative or judicial review under section 1869, section 1878, or 
any other section of the Act, for the:
     Establishment of payment amounts under a competitive 
bidding program;
     Awarding of contracts under a competitive bidding program;
     Designation of competitive bidding areas for the Medicare 
DMEPOS Competitive Bidding Program;
     Phased-in implementation of the Medicare DMEPOS 
Competitive Bidding Program;
     Selection of items for a competitive bidding program.
     Bidding structure and number of contract suppliers 
selected under a competitive bidding program.
    This proposed regulation has no impact on the current beneficiary 
or supplier right to appeal denied claims. However, neither the 
beneficiary nor the supplier would be able to bring such an appeal if a 
competitively bid item was furnished in a competitive bidding area in a 
manner not authorized by this rule.

K. Opportunity for Participation by Small Suppliers

[If you choose to comment on issues in this section, please include the 
caption ``Opportunity for Participation by Small Suppliers'' at the 
beginning of your comments.]

    In developing bidding and contract award procedures, section 
1847(b)(6)(D) of the Act requires us to take appropriate steps to 
ensure that small suppliers of items have an opportunity to be 
considered for participation in the Medicare DMEPOS Competitive Bidding 
Program. Section 1847(b)(2)(A)(ii)) of the Act also states that the 
needs of small suppliers must be taken into account when evaluating 
whether an entity meets applicable financial standards.
    Size definitions for small businesses are, for some purposes, 
developed by the Small Business Administration (SBA) based on annual 
receipts or employees, using the North American Industry Classification 
System (NAICS). Based on the advice from the SBA, we expect that most 
DME suppliers will fall into either NAICS Code 532291, Home Health 
Equipment Rental, or NAICS Code 446110, Pharmacies, since the SBA 
defines these small businesses as businesses having less than $6 
million in annual receipts.
    We propose using the SBA small business definition when evaluating 
whether a DMEPOS supplier is a small supplier. We are relying on the 
expertise of the SBA to determine what constitutes the appropriate 
definition of a small supplier. All contract suppliers are expected to 
service the whole competitive bidding area. However, we considered 
allowing a small supplier that has fewer than 10 full-time equivalent 
employees to designate a geographic service area that is smaller than 
the entire competitive bidding area. However, we are not proposing this 
approach because we want to ensure that beneficiaries have the choice 
of going to any contract supplier in their respective CBA. Carve out 
areas could lead to confusion for the beneficiary faced with multiple 
competitive bidding sub-areas. Further, we believe such an approach 
would allow selection of more favorable market areas by smaller 
businesses potentially leading to an unfair market advantage. We seek 
comments on this issue.
    Information available to us on the size distribution of businesses 
that provide DMEPOS indicates that the majority of suppliers in the 
DMEPOS industry qualify as small businesses according to the SBA 
definitions. Our analysis of DMEPOS claims data suggests that at least 
90 percent of DMEPOS suppliers had Medicare allowed charges of less 
than $1 million in 2003. The figure of $1 million could be an 
underestimate of total receipts, since it does not include non-Medicare 
receipts and non-DMEPOS receipts, but it does suggest that most DMEPOS 
suppliers are small.
    Although section 1847(b)(6)(D) of the Act focuses on ensuring 
participation in the bidding, and not on bidding outcomes, we believe 
that it is worth noting how small suppliers fared in the bidding in the 
demonstration. Both small and large suppliers were selected as 
demonstration suppliers. Some small suppliers that were selected as 
demonstration suppliers were able to increase their market share 
substantially during the demonstration. Others experienced little 
change in market share.
    We recognize the importance, benefits and convenience offered by 
the local presence of small suppliers. We propose to take the following 
steps to ensure that small suppliers have the opportunity to be 
considered for participation in the program.
    First, as required by section 1847(b)(4)(B) of the Act, we will 
select multiple winners in each CBA. If a single winner was selected in 
an area, a small supplier would have difficulty participating in the 
competition because the supplier would have to somehow demonstrate that 
it could rapidly expand to serve the entire projected demand in the 
area. Selecting multiple suppliers should make it easier for small 
suppliers to participate in the program.
    Second, we propose to conduct separate bidding competitions for 
product categories, allowing suppliers to decide how many product 
categories

[[Page 25683]]

for which they want to submit bids, rather than conduct a single 
bidding competition for all DMEPOS items and other equipment. We 
believe that separate competitions for product categories will 
encourage participation by small suppliers that specialize in one or a 
few product categories. If a single competition was held for all DMEPOS 
items and other equipment, small, specialized suppliers would have to 
either significantly expand their product and service offerings or 
submit bids for items they currently do not provide.
    We recognize the importance of small suppliers in the DMEPOS 
industry, and we welcome comments on any the options identified above. 
We are also interested in other ways to ensure that small suppliers 
have opportunities to be considered for participation in the program.
    To collect additional information on this issue, we contracted with 
RTI International to conduct focus groups with small suppliers. The 
purpose of the focus groups was to gather input on ways to facilitate 
participation by small suppliers in the program. The focus groups also 
discussed the impact of the requirement for the quality standards and 
accreditation, which will affect all small suppliers, regardless of 
whether they seek to participate in a competitive bidding program. We 
will review our efforts to ensure participation by small suppliers in 
the Medicare DMEPOS Competitive Bidding Program after we review 
comments to this proposed rule and the results of the focus groups. We 
will consider the findings of the focus groups along with additional 
options and comments presented on this proposed rule.

L. Opportunity for Networks (Proposed Sec.  414.418)

[If you choose to comment on issues in this section, please include the 
caption ``Opportunity for Networks'' at the beginning of your 
comments.]

    We propose allowing suppliers the option to form networks for 
bidding purposes. Networks are several companies joining together via 
some type of legal contractual relationship to submit bids for a 
product category under competitive bidding. This option will allow 
suppliers to band together to lower bidding costs, expand service 
options, or attain more favorable purchasing terms. We recognize that 
forming a network may be challenging for suppliers, and it also poses 
challenges for bid evaluation and program monitoring. Networking was 
included as an option in the demonstration project, but no networks 
submitted bids. Still, we believe that networking may be a useful 
option for suppliers in some cases, so we propose to offer it as an 
option. If suppliers do decide to form networks, we propose that the 
following rules must be met:
     A legal entity must be formed for the purpose of 
competitive bidding, such as a joint venture, limited partnership, or 
contractor/subcontractor relationship which would act as the applicant 
and submit the bid. We are specifically requesting comments regarding 
other types of suitable arrangements that would not require suppliers 
to form a new legal entity but would allow them to form a network for 
purposes of submitting bids. For example, one supplier could be 
designated as a primary contractor and the other suppliers in the group 
would function as subcontractors. In this example, if the contract with 
the primary contractor was terminated, the contracts with the 
subcontractors would also be terminated, thus nullifying the entire 
contract.
     All legal contracts must be in place and signed before the 
network entity can submit a bid for the Medicare DMEPOS Competitive 
Bidding Program.
     Each member of the network must be independently eligible 
to bid. If a member of the network is determined to be ineligible to 
bid, the network will be notified and given 10 business days to 
resubmit its application.
     Each member must meet any accreditation and quality 
standards that are required. Each member is equally responsible for the 
quality of care, service and items that it delivers to Medicare 
beneficiaries. If any member of the network falls out of compliance 
with this requirement, we would have the option of terminating the 
network contract.
     The network cannot be anti-competitive. We propose that 
the network members' market shares for competitive bid item(s) when 
added together, cannot exceed 20 percent of the Medicare market within 
a competitive bidding area. We believe that by setting the maximum size 
of the network's market shares at 20 percent of the marketplace, firms 
will be able to gain the potential efficiencies of networking while at 
the same time ensure that there would continue to be competition in the 
area. If the 20 percent rule were adopted and suppliers joined 
networks, there would still be at least 5 networks competing in a 
DMEPOS competitive bidding program, which we believe would allow for 
sufficient competition among suppliers. In particular, we are 
requesting comment about what percentage of the marketplace would be 
appropriate for networks for suppliers.
     A supplier may only join one network and cannot submit 
individual bids if part of a network. The network must identify itself 
as a network and identify all members in the network.
     The legal entity would be responsible for billing Medicare 
and receiving payment on behalf of the network suppliers. The legal 
entity would also be responsible for appropriately distributing 
reimbursements to the other network members.

M. Education and Outreach

[If you choose to comment on issues in this section, please include the 
caption ``Education and Outreach'' at the beginning of your comments.]
1. Supplier Education
    We would also propose to undertake a proactive education campaign 
to provide all suppliers with information about the Medicare DMEPOS 
Competitive Bidding Program, bidding timelines, and bidding and program 
requirements. The goal of this campaign would be to make it as easy as 
possible for suppliers to submit bids.
    To ensure that suppliers have timely access to accurate information 
on competitive bidding, we are proposing to instruct the CBIC and the 
DMERCs to provide early education and resources to all suppliers, 
referral agents, beneficiaries and other providers who service a 
competitive bidding area. Customer service support, ombudsmen networks, 
and the claims processing system would all be used to notify and 
educate all parties regarding competitive bidding. The CBIC(s) would be 
instructed to utilize data analysis in tailoring outreach to those that 
will be directly affected by competitive bidding.
    After the release of bidding instructions, we would also propose to 
hold bidders conferences that would provide an open forum for suppliers 
and allow us to disseminate additional information. More information on 
the bidders conferences and other competitive bidding activities will 
be available on our Web site at http://cms.hhs.gov/suppliers/dmepos/compbid/paoc.asp.
    We are also proposing that each DMERC include discussions and 
updates on competitive bidding as part of its existing outreach 
mechanisms. The fundamental goal of our supplier educational outreach 
is to ensure that those who supply DMEPOS products to Medicare 
beneficiaries receive information they need in a timely

[[Page 25684]]

manner so they have an understanding of the program and our 
expectations.
2. Beneficiary Education
    The competitive bidding program will have an impact on the 
beneficiaries who receive DMEPOS items in a competitive bidding area. 
Competitive bidding represents a new way for Medicare beneficiaries to 
receive their DMEPOS products, so we believe that education is 
important to the success of the program.
    We propose to educate beneficiaries utilizing numerous approaches. 
For example, our press office may consider creating press releases and 
fact sheets for each CBA. Notices would provide summaries of 
competitive bidding, background information, and objectives of the 
competitive bidding program. Publications may also be available on CMS 
Web sites, and from local contractors and the DMERCS.
    We believe that it is important for beneficiaries to learn about 
the benefits of the Medicare DMEPOS Competitive Bidding Program, such 
as lower out-of-pocket expenses and increased quality of products, from 
suppliers that have completed the detailed selection process that CMS 
will require under the program. Enforcement of supplier standards and 
the threat of exclusion from the Medicare program will encourage 
suppliers to maintain a high level of service. These factors make an 
extensive outreach approach critical to the program's success.
    Although we are not proposing at this time any additional education 
requirements, we are interested in seeking comments on other mechanisms 
that might be utilized to inform beneficiaries and suppliers about the 
competitive bidding program.

N. Monitoring and Complaint Services for the Competitive Bidding 
Program

[If you choose to comment on issues in this section, please include the 
caption ``Monitoring and Complaint Services for the Competitive Bidding 
Program'' at the beginning of your comments.]

    Moving to a competitive bidding environment will not adversely 
affect CMS'' program integrity efforts in reviewing claims and rooting 
out fraud, waste, or abuse. Claims will still be reviewed for medical 
necessity, coordination of benefits status, and benefits integrity. Any 
suspected instances of DMEPOS competitive bidding market manipulation 
and collusion will be referred to the appropriate federal agencies that 
are responsible for addressing these issues.
    We are proposing to establish a formal complaint monitoring system 
to address complaints in each competitive bidding area. Beneficiaries, 
referral agents, providers, and suppliers, including physicians, 
hospitals, nurses, and home health agencies, will be able to report 
problems or difficulties that they encounter regarding the ordering and 
furnishing of DMEPOS in a competitive bidding area. Some examples of 
problems that we would consider to be serious include: Contract 
suppliers refusing to furnish items to beneficiaries in the competitive 
bidding area for which they were awarded a contract; contract suppliers 
furnishing items of inferior quality than those that they bid to 
furnish; or contract suppliers violating assignment and billing 
requirements.
    We also propose to monitor Medicare claims data to ensure that 
competitive bidding does not negatively impact beneficiary access to 
medically necessary items. Claims data will be monitored to identify 
trends, spikes or decreases in utilization and changes in utilization 
patterns within a product category.

O. Physician Authorization/Treating Practitioner and Consideration of 
Clinical Efficiency and Value of Items in Determining Categories for 
Bids (Proposed Sec.  414.420)

[If you choose to comment on issues in this section, please include the 
caption ``Physician Authorization/Treating Practitioner'' at the 
beginning of your comments.]

    Section 1847(a)(5)(A) of the Act provides authorization to the 
Secretary to establish a process for certain items under which a 
physician may prescribe a particular brand or mode of delivery of an 
item within a particular HCPCS code if the physician determines that 
use of the particular item would avoid an adverse medical outcome on 
the individual. We are proposing to implement this section in proposed 
Sec.  414.440, and to also apply it to certain treating practitioners, 
including physician assistants, nurse practitioners, and clinical nurse 
specialists, since these practitioners also order DMEPOS for which 
Medicare makes payment. Since a HCPCS code may contain many brand 
products made by a wide range of manufacturers, we expect that 
suppliers will choose to only offer certain brands of products within a 
HCPCS code. This is a common practice used by suppliers to reduce the 
amount of inventory they maintain. However, we are proposing that the 
physician or treating practitioner would be able to determine that a 
particular item would avoid an adverse medical outcome, and that the 
physician or treating practitioner would have discretion to specify a 
particular product brand or mode of delivery.
    When a physician or other treating practitioner requests a specific 
item, brand, or mode of delivery, contract suppliers would be required 
to furnish that item or mode of delivery, assist the beneficiary in 
finding another contract supplier in the CBA that can provide that 
item, or consult with the physician or treating practitioner to find a 
suitable alternative product or mode of delivery for the beneficiary. 
If, after consulting with the contract supplier, the physician or 
treating practitioner is willing to revise his or her order, that 
decision must be reflected in a revised written prescription. However, 
if the contract supplier decides to provide an item that does not match 
the written prescription from the physician or treating practitioner, 
the contract supplier should not bill Medicare as this would be 
considered a non-covered item.
    For the Medicare DMEPOS Competitive Bidding Program, we would not 
require a contract supplier to provide every brand of products included 
in a HCPCS code. However, regardless of what brands the contract 
supplier furnishes, the single payment amount for the HCPCS code would 
apply. This issue will be studied in more detail by the Office of the 
Inspector General in 2009. At that time, we will evaluate the need for 
a specific process for certain brand names or modes of delivery.
    In addition, section 1847(b)(7) of the Act provides authority to 
establish separate categories for items within HCPCS codes if the 
clinical efficiency and value of items within a given code warrants a 
separate category for bidding purposes. Currently, HCPCS codes are 
developed for items that are similar in function and purpose. For this 
reason, items within the same code are paid at the same rate. We 
believe that the HCPCS process has worked well in the past, and we 
believe that it adequately separates items based on their function. We 
welcome public comment on this issue.

P. Quality Standards and Accreditation for Suppliers of DMEPOS

[If you choose to comment on issues in this section, please include the 
caption ``Quality Standards and Accreditation for Supplies of DMEPOS'' 
at the beginning of your comments.]

    Section 1847(b)(2)(A)(i) of the Act specifies that a contract may 
not be awarded to any entity unless the entity meets applicable quality 
standards specified by the Secretary under section

[[Page 25685]]

1834(a)(20) of the Act. Any supplier seeking to participate in the 
Medicare DMEPOS Competitive Bidding Program will need to satisfy the 
quality standards issued under section 1834(a)(20) of the Act. 
Additionally, section 1834(a)(20) of the Act gives us the authority to 
establish through program instructions or otherwise quality standards 
for all suppliers of DMEPOS and other items, including those who do not 
participate in competitive bidding, and to designate one or more 
independent accreditation organizations to implement the quality 
standards. Therefore, to ensure the integrity of suppliers' businesses, 
products, we are proposing to revise Sec.  424.57 and add a new Sec.  
424.58.
1. Special Payment Rules for Items Furnished by DMEPOS Suppliers and 
Issuance of DMEPOS Supplier Billing Privileges (Sec.  424.57)
    In accordance with sections 1834(a)(20) and 1834(j)(1)(B)(ii)(IV) 
of the Act, we propose to amend Sec.  424.57 as discussed in this 
section of the proposed rule. In paragraph (a), Definitions, we would 
propose to define the following terms:
     CMS-approved accreditation organization is an independent 
accreditation organization selected by CMS to apply the supplier 
quality standards established by CMS;
     Accredited DMEPOS supplier means a supplier that has been 
accredited by an independent accreditation organization meeting the 
requirements of and approved by CMS in accordance with Sec.  424.58; 
and
     Independent accreditation organization means an 
accreditation organization that accredits a supplier of DMEPOS and 
other items and services for a specific DMEPOS product category or a 
full line of DMEPOS product categories.
    Proposed new paragraph (c)(22) would specify that all suppliers of 
DMEPOS and other items be accredited by a CMS approved accreditation 
organization before receiving a supplier billing number.
2. Accreditation (Sec.  424.58)
    Under section 1834(a)(20) of the Act, we would add a new section 
Sec.  424.58 to address the requirements for CMS approved accreditation 
organizations in the application of the quality standards to suppliers 
of DMEPOS and other items.
    To promote consistency in accrediting providers and suppliers 
throughout the Medicare program, we would use existing procedures for 
the application, reapplication, selection, and oversight of 
accreditation organizations detailed at Part 488 and apply them to 
organizations accrediting suppliers of DMEPOS and other items. We would 
make modifications to the existing requirements for accreditation 
organizations to meet the specialized needs of the DMEPOS industry. 
These modifications may require an independent accreditation 
organization applying for approval or re-approval of deeming authority 
to--
     Identify the product-specific types of DMEPOS suppliers 
for which the organization is requesting approval or re-approval;
     Provide CMS with a detailed comparison of the 
organization's accreditation requirements and standards with the 
applicable Medicare quality standards (for example, a crosswalk);
     Provide a detailed description of the organization's 
survey processes including procedures for performing unannounced 
surveys, frequency of the surveys performed, copies of the 
organization's survey forms, guidelines and instructions to surveyors, 
quality review processes for deficiencies identified with accreditation 
requirements;
     Describe the decision-making processes; describe 
procedures used to notify suppliers of compliance or noncompliance with 
the accreditation requirements;
     Describe procedures used to monitor the correction of 
deficiencies found during the survey; and
     Describe procedures for coordinating surveys with another 
accrediting organization if the organization does not accredit all 
products the supplier provides.
    We also propose to use the application procedure currently 
specified in Sec.  488.4(c) through (i) as the application process for 
DMEPOS accreditation organizations.
    We may request detailed information about the professional 
background of the individuals who perform surveys for the accreditation 
organization including: The size and composition of accreditation 
survey teams for each type of supplier accredited; the education and 
experience requirements surveyors must meet; the content and frequency 
of the continuing education training provided to survey personnel; the 
evaluation systems used to monitor the performance of individual 
surveyors and survey teams; and policies and procedures for a surveyor 
or institutional affiliate of an accrediting organization that 
participates in a survey or accreditation decision regarding a DMEPOS 
supplier with which this individual or institution is professionally or 
financially affiliated.
    We may request a description of the organization's data management, 
analysis, and reporting system for its surveys and accreditation 
decisions, including the kinds of reports, tables, and other displays 
generated by that system. We may require a description of the 
organization's procedures for responding to and investigating 
complaints against accredited facilities including policies and 
procedures regarding coordination of these activities with appropriate 
licensing bodies, ombudsmen programs, National Supplier Clearinghouse, 
and with CMS; a description of the organization's policies and 
procedures for notifying CMS of facilities that fail to meet the 
requirements of the accrediting organization; a description of all 
types, categories, and duration of accreditation decisions offered by 
the organization; a list of all currently accredited DMEPOS suppliers; 
a list of the types and categories of accreditation currently held by 
each supplier; a list of the expiration date of each supplier's current 
accreditation; and a list of the next survey cycles for all DMEPOS 
suppliers accreditation surveys scheduled to be performed by the 
organization.
    We may require the accreditation organization to submit the 
following supporting documentation:
     A written presentation that would demonstrate the 
organization's ability to furnish CMS with electronic data in ASCII-
comparable code;
     A resource analysis that would demonstrate that the 
organization's staffing, funding and other resources are sufficient to 
perform the required surveys and related activities; and
     An acknowledgement that the organization would permit its 
surveyors to serve as witnesses if CMS took an adverse action against 
the DMEPOS supplier based on the accreditation organization's findings.
    We propose to survey accredited suppliers from time to time to 
validate the survey process of a DMEPOS accreditation organization 
(validation survey). These surveys would be conducted on a 
representative sample basis, or in response to allegations of supplier 
noncompliance with quality standards. When conducted on a 
representative sample basis, the survey would be comprehensive and 
address all Medicare supplier quality standards or would focus on a 
specific standard. When conducted in response to an allegation, the CMS 
survey team would survey for any standard that CMS determined was 
related to the

[[Page 25686]]

allegations. If the CMS survey team substantiated a deficiency and 
determined that the supplier was out of compliance with Medicare 
supplier quality standards, we would revoke the supplier's billing 
number and re-evaluate the accreditation organization's approved 
status. A supplier selected for a validation survey would be required 
to authorize the validation survey to occur and authorize the CMS 
survey team to monitor the correction of any deficiencies found through 
the validation survey. If a supplier selected for a validation survey 
failed to comply with the requirements at Sec.  424.58, it would no 
longer meet the Medicare supplier quality standards and its supplier 
billing number would be revoked.
3. Ongoing Responsibilities of CMS Approved Accreditation Organizations
    A DMEPOS independent accreditation organization approved by CMS 
would be required to undertake the following activities on an ongoing 
basis:
     Provide to CMS in written form and on a monthly basis all 
of the following:
    ++ Copies of all accreditation surveys along with any survey-
related information that CMS may require (including corrective action 
plans and summaries of CMS requirements that were not met).
    ++ Notice of all accreditation decisions.
    ++ Notice of all complaints related to suppliers of DMEPOS and 
other items.
    ++ Information about any suppliers of DMEPOS and other items for 
which the accrediting organization has denied the supplier's 
accreditation status.
    ++ Notice of any proposed changes in its accreditation standards or 
requirements or survey process. If the organization implemented the 
changes before or without CMS approval, CMS could withdraw its approval 
of the accreditation organization.
     Submit to CMS (within 30 days of a change in CMS 
requirements):
    ++ An acknowledgment of CMS's notification of the change;
    ++ A revised cross-walk reflecting the new requirements; and
    ++ An explanation of how the accreditation organization would alter 
its standards to conform to CMS' new requirements, within the time 
frames specified by CMS in the notification of change it received.
     Permit its surveyors to serve as witnesses if CMS takes an 
adverse action based on accreditation findings.
     Provide CMS with written notice of any deficiencies and 
adverse actions implemented by the independent accreditation 
organization against an accredited DMEPOS supplier within 2 days of 
identifying such deficiencies, if such deficiencies pose immediate 
jeopardy to a beneficiary or to the general public.
     Provide written notice of the withdrawal to all accredited 
suppliers within 10 days of CMS's notice to withdraw approval of the 
accreditation organization.
     Provide, on an annual basis, summary data specified by CMS 
that related to the past year's accreditation activities and trends.
4. Continuing Federal Oversight of Approved Accreditation Organizations
    This paragraph would establish specific criteria and procedures for 
continuing oversight and for withdrawing approval of an accreditation 
organization.
a. Equivalency Review
    We would compare the accreditation organization's standards and its 
application and enforcement of those standards to the comparable CMS 
requirements and processes when: CMS imposed new requirements or 
changed its survey process; an accreditation organization proposed to 
adopt new standards or changes in its survey process; or the term of an 
accreditation organization's approval expired.
b. Validation Review
    A CMS survey team would conduct a survey of an accredited 
organization, examine the results of the accreditation organization's 
own survey procedure onsite, or observe the accreditation 
organization's survey, in order to validate the organization's 
accreditation process. At the conclusion of the review, we would 
identify any accreditation programs for which validation survey results 
indicated:
     A 10 percent rate of disparity between findings by the 
accreditation organization and findings by CMS on standards that did 
not constitute immediate jeopardy to patient health and safety if not 
met;
     Any disparity between findings by the accreditation 
organization and findings by CMS on standards that constituted 
immediate jeopardy to patient health and safety if not met; or
     There were widespread or systemic problems in the 
organization's accreditation process such that the accreditation no 
longer provided assurance that suppliers met or exceeded the Medicare 
requirements, irrespective of the rate of disparity.
c. Notice of Intent To Withdraw Approval for Deeming Authority
    If an equivalency review, validation review, onsite observation, or 
our concerns with the ethical conduct of the accreditation organization 
suggest that the accreditation organization is not meeting the 
requirements of proposed Sec.  424.58, we would provide the 
organization written notice of its intent to withdraw approval of the 
accreditation organization's deeming authority.
d. Withdrawal of Approval for Deeming Authority
    We could withdraw approval of an accreditation organization at any 
time if we determine that: Accreditation by the organization no longer 
guaranteed that the suppliers of DMEPOS and other items met the 
supplier quality standards and the failure to meet those requirements 
could pose an immediate jeopardy to the health or safety of Medicare 
beneficiaries or constitute a significant hazard to the public health; 
or the accreditation organization failed to meet its obligations for 
application and reapplication procedures.
e. Reconsideration
    An accreditation organization dissatisfied with a determination 
that its accreditation requirements did not provide or do not continue 
to provide reasonable assurance that the entities accredited by the 
accreditation organization met the applicable supplier quality 
standards would be entitled to a reconsideration. We would reconsider 
any determination to deny, remove, or not renew the approval of deeming 
authority to accreditation organizations if the accreditation 
organization filed a written request for a reconsideration through its 
authorized officials or through its legal representative.
    The request would have to be filed within 30 days of the receipt of 
CMS notice of an adverse determination or nonrenewal. The request for 
reconsideration would be required to specify the findings or issues 
with which the accreditation organization disagreed and the reasons for 
the disagreement. A requestor could withdraw its request for 
reconsideration at any time before the issuance of a reconsideration 
determination. In response to a request for reconsideration, we would 
provide the accrediting organization the opportunity for an informal 
hearing that would be conducted by a hearing officer appointed by the 
Administrator of CMS and provide the accrediting organization the 
opportunity to present, in writing

[[Page 25687]]

and in person, evidence or documentation to refute the determination to 
deny approval, or to withdraw or not renew deeming authority.
    We would provide written notice of the time and place of the 
informal hearing at least 10 days before the scheduled date. The 
informal reconsideration hearing would be open to CMS and the 
organization requesting the reconsideration, including authorized 
representatives, technical advisors (individuals with knowledge of the 
facts of the case or presenting interpretation of the facts), and legal 
counsel. The hearing would be conducted by the hearing officer who 
would receive testimony and documents related to the proposed action. 
Testimony and other evidence could be accepted by the hearing officer. 
However, it would be inadmissible under the usual rules of court 
procedures. The hearing officer would not have the authority to compel 
by subpoena the production of witnesses, papers, or other evidence. 
Within 45 days of the close of the hearing, the hearing officer would 
present the findings and recommendations to the accrediting 
organization that requested the reconsideration. The written report of 
the hearing officer would include separate numbered findings of fact 
and the legal conclusions of the hearing officer. The hearing officer's 
decision would be final.

Q. Low Vision Aid Exclusion (Proposed Sec.  414.15)

[If you choose to comment on issues in this section, please include the 
caption ``Low vision aid exclusion'' at the beginning of your 
comments.]

    We are proposing to clarify that the scope of the eyeglass coverage 
exclusion encompasses all devices irrespective of their size, form, or 
technological features that use one or more lens to aid vision or 
provide magnification of images for impaired vision. This proposed 
regulatory provision clarifies that the statute does not support the 
interpretation that the term eyeglasses only applies to lenses 
supported by frames that pass around the nose and ears. The underlying 
technology and the function of eyeglasses are to use lenses to assist 
persons with impaired vision. Dorland's Illustrated Medical Dictionary 
(28th Ed. 1994) defines ``eyeglass'' simply as a ``lens for aiding 
sight.'' We interpret the eyeglass exclusion at section 1862(a)(7) of 
the Act as encompassing all of the various types of devices that use 
lenses for the correction of vision unless there is a statutory 
provision that provides for coverage. For example, section 1861(s)(8) 
of the Act provides for intraocular lenses, conventional eyeglasses and 
contact lenses after each cataract surgery with insertion of an 
intraocular lens. We specifically invite public comment on this issue.
    We note that if the term ``eyeglasses'' as used at section 
1862(a)(7) of the Act only refers to the exclusion of payment for 
lenses supported by frames that pass around the nose and ears, then the 
eyeglass exclusion would not apply to contact lenses and there would 
have been no reason for the Congress to make an exception to section 
1862(a)(7) of the Act for contact lenses. However, the Congress did 
make such an exception to section 1862(a)(7) of the Act for 
conventional contact lenses after cataract surgery.
    A comparison of sections 1862(a) and 1861(s) of the Act indicate 
that the eyeglass exclusion also applies to contact lenses except for 
one pair after cataract surgery. By applying the eyeglass exclusion to 
contact lenses, the statute reinforces the interpretation that the use 
of lenses to aid impaired vision is the scope of what is excluded by 
the eyeglass exclusion and not just lenses supported by frames that 
pass around the nose and ears. Also, when referring to ``conventional 
eyeglasses,'' section 1861(s)(8) of the Act is affirming that the term 
``eyeglasses'' has a wider application than ``conventional eyeglasses'' 
and the terms ``conventional eyeglasses'' and ``eyeglasses'' are not 
synonymous in the statute.
    This interpretation of the term eyeglasses is consistent with the 
regulatory language used for the optional benefit in the Medicaid 
program under Sec.  440.120(d) for eyeglasses, which is ``lenses, 
including frames, and other aids to vision * * *'' This language gives 
States that cover eyeglasses the flexibility to adopt a reasonable 
definition that includes low vision aids that are determined medically 
necessary. The definition used by the Medicaid program demonstrates 
that the term eyeglasses can appropriately be defined to include low 
vision aids. Consistent with this framework, we consider the eyeglass 
exclusion for the Medicare program to apply to eyepieces, hand-held 
magnifying glasses, contact lenses and other instruments, such as 
closed-circuit televisions and video magnifiers that use lenses to aid 
vision.
    Although the technology of using lenses to aid low vision may be 
improved with new innovations, such as contact lenses, progressive 
lenses and low vision aids, this does not exempt the new technology 
from the eyeglass exclusion. The adaptation of the vision aid 
technology does not change the essential nature of the device: A video 
magnifier is still a device that utilizes a lens to enhance vision. We 
believe this interpretation is consistent with the decision in Warder 
v. Shalala, 149 F 3d73 (1st Cir. 1998), in which the United States 
Court of Appeals for the First Circuit held, in part, that the 
Secretary's classification of a technologically advanced seating system 
as DME, and not as an orthotic, was supported by the Medicare statute 
and regulations. In reaching this conclusion, the court stated that the 
Secretary could conclude that the seating system met the definition of 
DME, which ``unequivocally includes `wheelchairs', '' since the system 
served the same (as well as additional) functions as a wheelchair. We 
believe this case affirms the principle that the Secretary has the 
discretion to interpret the statute and to assign a product to a 
particular Medicare category even when this will result in non-coverage 
determinations by Medicare.

R. Establishing Payment Amounts for New DMEPOS Items (Gap-Filling) 
(Proposed Sec.  414.210(g))

[If you choose to comment on issues in this section, please include the 
caption ``Gap-filling'' at the beginning of your comments.]

    There is no process set forth in the statute or regulations for 
calculating fee schedule amounts for new DMEPOS items (that is, new 
HCPCS codes representing categories of items for which there is no 
historic Medicare pricing information). Since 1989, CMS and its 
contractors have used a process referred to as ``gap filling'' to 
establish fee schedule amounts for items for which fee schedule base 
data is not available. In the past, the gap-filling process was 
described in the Medicare Carriers Manual. The process is now contained 
in the Medicare Claims Processing Manual and provides that fee schedule 
amounts are to be gap-filled using fee schedule amounts already 
established for comparable items; properly calculated fee schedule 
amounts from a neighboring carrier; or supplier price lists with prices 
in effect during the database year.
    If the only available price information is from a period other than 
the fee schedule base period (for example, 1992 for surgical 
dressings), a deflation factor is applied to the price in order to 
approximate the base year price for gap-filling purposes. The deflation 
factors are based on the percentage change in

[[Page 25688]]

the CPI-U from the mid-point of the fee schedule base period (for 
example, June 1992 for surgical dressings) to the mid-point (that is, 
June) of the calendar year that the gap-filling source price is in 
effect. When gap-filling base fees for capped rental items, it is 
necessary to first gap-fill the purchase fee and then compute the 
rental fee based on 10 percent of the gap-filled purchase fee. For used 
equipment, base fees are gap-filled using 75 percent of the gap-filled 
fee for new equipment.
    The process of gap-filling essentially estimates what the average 
reasonable charges would be for an item if it was paid for under 
Medicare during the fee schedule base period. The gap-filled base fees 
are updated by the covered item updates and are subject to regional 
fees, and ceiling and floor limitations, if applicable. We have 
consistently used the gap-filling process as the method for replicating 
historical charge data. However, this method can lead to very high or 
very low fee schedule amounts without validation that these amounts are 
realistic and equitable relative to the cost of furnishing the item. 
Since the gap-filling process began in 1989, most base fees have been 
gap-filled using either supplier price lists or manufacturers' 
suggested retail prices. Many manufacturers are aware of the process 
and realize that if a unique HCPCS code is added for their device, they 
can establish inflated suggested retail prices that would be used to 
establish the Medicare fee schedule payment amounts. We also view the 
continued use of deflation factors to replicate historic prices or 
charges to be an imperfect method of establishing base fee schedule 
amounts. Under the Medicare DMEPOS benefits, there is an inherent 
responsibility to pay enough for beneficial new technologies to ensure 
beneficiary access to care, while also being a prudent payer. To 
increase the Medicare program's ability to ensure fair treatment across 
technologies, we have focused on developing strategies that recognize 
those technologies that provide a demonstrated clinical benefit and 
clearly identify the additional benefits over existing technologies. 
This initiative has been endorsed by the Council on Technology and 
Innovation (CTI), which was established under section 942 of the MMA to 
coordinate the activities of coverage, coding, and payment processes 
affecting new technologies and procedures and to coordinate the 
exchange of information on new technologies between CMS and other 
entities that make similar decisions.
    We procured two contractors to conduct a pilot study on the 
benefits, effectiveness, and costs of several products. These projects 
were very successful in compiling the technical information that is 
necessary to evaluate technologies for the purpose of making payment 
and HCPCS coding decisions for new items. The products studied were 
assessed in terms of three main areas as follows:
     Functional Assessment--This step involved evaluating the 
device's operations, safety, and user documentation relative to the 
Medicare population. Interviews were conducted with health care 
providers to determine how and under what circumstances they would 
prescribe the product for a Medicare beneficiary.
     Price Comparison Analysis--A comparative cost analysis 
determined how the cost of this product compared to similar products on 
the market or alternative treatment modalities.
     Medical Benefit Assessment--This step focused on the 
effectiveness of the product in doing what it claims to do. Scientific 
literature reviews and interviews with health care providers were 
conducted to determine if the product significantly improved clinical 
outcomes compared to other products and treatment modalities.
    Competitive bidding will allow market forces to determine the price 
Medicare pays for certain DMEPOS items. In order to ensure that only 
quality products are provided to our beneficiaries, we are proposing to 
use the three types of assessments described above to assist us in 
ensuring that the HCPCS codes for DMEPOS items reflect current 
technology and functional differences in items and that new products 
are included within the appropriate HCPCS code. The functional 
technology assessment will allow us to compare older, similar products 
already on the market and newer more expensive products. The functional 
assessment and medical benefit assessment of devices will greatly aid 
our decision-making process regarding the need to create unique HCPCS 
code categories. The price comparison analysis of devices will help us 
determine if manufacturers' suggested retail prices are overly 
inflated, will provide a basis for establishing adequate payment 
amounts for new items, and will assist in establishing payment amounts 
for new items that are introduced after a bidding cycle has begun.
    Sections 1834(a), (h), (i) and 1833(o) of the Act require the 
establishment of fee schedule amounts to pay for DME, prosthetic 
devices, orthotics, prosthetics, surgical dressings, and therapeutic 
shoes. In addition, payment for PEN is also based on fee schedule 
amounts authorized by section 1842(s) of the Act. The fee schedule 
amounts are based on average payments made under the previous 
reasonable charge payment methodology as mandated by the statute. When 
a new HCPCS code is created for a category of items, the gap-filling 
process outlined in this section is used to establish the fee schedule 
amounts for the new code. We are proposing that this gap-filling 
process be revised as follows:
     We would continue to make every effort to utilize existing 
fee schedule amounts or historic Medicare payment amounts, if 
applicable, in establishing payment amounts for new HCPCS codes. In 
addition, the method of using payment amounts for comparable items 
would be retained under the revised process for establishing payment 
amounts for new HCPCS codes.
     We would discontinue the practice of deflating supplier 
prices and manufacturers suggested retail prices to the fee schedule 
base period. When fee schedule amounts are established based on pricing 
information, prices in effect at the time that the fee schedule amounts 
are established would be used. For subsequent years, the fee schedule 
amounts established using supplier or manufacturer pricing information 
would be updated as required by the statute as it is applicable to each 
category of items. In the past, when retail pricing information is not 
available, wholesale prices plus an appropriate mark-up are used to 
establish the fee schedule amounts.
     We would use the functional technology assessment process, 
in part or in whole, as another method for establishing payment amounts 
for new items. Based on the results of the technology assessment, the 
fee schedule amounts would be established using fee schedule amounts 
for items determined to be comparable to the new item or an amount 
determined to be appropriate for the new item based on the cost 
comparison analysis. We can use the technology assessment process at 
any time to adjust prices on or after January 1, 2007 that were 
previously established using the gap-filling methodology if it is 
determined that those pricing methods resulted in payment amounts that 
do not reflect the cost of furnishing the item. Fee schedule amounts 
established using this process would be updated as required by the 
statute as it is applicable to each category of items.
    In those cases where the addition of the HCPCS code for a new item 
occurs in the middle of a bidding cycle and a Medicare pricing history 
or profile does not exist for the item or is not applicable

[[Page 25689]]

for the new code category, we propose that the revised gap-filling 
process for establishing fee schedule payment amounts for new DMEPOS 
items would also be used in establishing payment amounts for new items 
until they are added to a product category subject to competitive 
bidding. Any qualified Medicare supplier will be allowed to supply one 
of these items until the next bidding cycle. The next bidding cycle 
will set a new single payment amounts for this item.
    We propose that other revisions to HCPCS codes for items under a 
competitive bidding program that occur in the middle of a bidding cycle 
will be handled as follows:
     If a single HCPCS code for an item is divided into 
multiple codes for the components of that item, the sum of payments for 
these new codes will not be higher than the payment for the original 
item. Suppliers selected through competitive bidding to provide the 
item will also provide the components of the item. During the 
subsequent competitive bidding cycle, suppliers will bid on each new 
code for the components of the item, and we will determine new single 
payment amounts for these components.
     If a single HCPCS code for two or more similar items is 
divided into two or more separate codes, the payment amount applied to 
these codes will continue to be the same payment amount applied to the 
single code until the next competitive bidding cycle. During the next 
cycle, suppliers will bid on the new separate and distinct codes.
     If the HCPCS codes for several components of one item are 
merged into one new code for the single item, the payment amount of the 
new code will be equal to the total of the separate payment amounts for 
the components. Suppliers that were selected through competitive 
bidding to supply the various components of the item will continue to 
supply the item using the new code. During the subsequent bidding 
cycle, suppliers will bid on the new code for the single item to 
determine a new single payment amount for this new code.
     If multiple codes for different, but related or similar 
items are placed into a single code, the payment amount for the new 
single code will be the average (arithmetic mean) weighted by frequency 
of payments for the formerly separate codes. Suppliers providing the 
items originally will also provide the item under the new single code. 
During the subsequent bidding cycle, suppliers will bid on the new 
single code and determine a new single payment amounts for this code.

S. Fee Schedules for Home Dialysis Supplies and Equipment (Proposed 
Sec.  414.107)

[If you choose to comment on issues in this section, please include the 
caption ``Fee Schedules for Home Dialysis Supplies and Equipment'' at 
the beginning of your comments.]

    Section 1842(s) of the Act provides authority for implementing 
statewide or other area wide fee schedules to be used for payment of 
home dialysis supplies and equipment. Section 1842(s)(1) of the Act 
provides that the fee schedules are to be updated on an annual basis by 
the percentage increase in the CPI-U (United States city average) for 
the 12-month period ending with June of the preceding year. Section 
4315(d) of the BBA requires that the fee schedules that are established 
using this authority are set initially so that total payments under the 
fee schedules are approximately equal to the estimated total payments 
that would be made under the reasonable charge payment methodology.
    On July 27, 1999, we published a proposed rule, Replacement of 
Reasonable Charge Methodology by Fee Schedules (64 FR 40534), to 
establish fee schedules for these items. Fee schedules were established 
for PEN items and services in 2002 following the publication of the 
final rule, Replacement of Reasonable Charge Methodology by Fee 
Schedules for Parenteral and Enteral Nutrients, Equipment, and 
Supplies, on August 28, 2001 (66 FR 45173). However, fee schedule 
amounts were not established for home dialysis supplies and equipment 
because the data needed to establish budget neutral fee schedule 
amounts was not available at the time that final rule was published. We 
are now proposing to establish fee schedule amounts for home dialysis 
supplies and equipment because the data needed to establish budget 
neutral fee schedule amounts are now available.
    Sections 1832(a)(1) and 1861(s)(2)(F) of the Act establish that 
home dialysis supplies and equipment are a covered benefit under Part B 
of the Medicare program. Home dialysis supplies and equipment are 
defined under section 1881(b)(8) of the Act as ``medically necessary 
supplies and equipment (including supportive equipment) required by an 
individual suffering from end stage renal disease in connection with 
renal dialysis carried out in his home (as defined in regulations), 
including obtaining, installing, and maintaining such equipment.'' We 
implemented these provisions in title 42, part 414 subpart E of the 
regulations.
    Total monthly payments to a supplier for home dialysis supplies and 
equipment may not exceed the limit for equipment and supplies 
established in Sec.  414.330(c)(2). We have determined that total 
monthly payments for these items per supplier were equal to the monthly 
limit 79 percent of the time for items furnished from January 1, 2004 
through November 30, 2004. This means that suppliers billed up to or in 
excess of the monthly payment limit in 79 percent of the claims 
submitted during this 11-month period. We are proposing that nationwide 
fee schedule amounts be implemented for these items effective January 
1, 2007. These amounts would be based on the average allowed charges 
calculated using data for allowed services furnished from January 1, 
2005 through December 31, 2005, increased by the percentage change in 
the CPI-U for the 24-month period ending June of 2006. We expect that 
the total payments made under the fee schedule will be approximately 
equal to the total payments that would be made under the reasonable 
charge payment methodology because the overall payment limit for 
equipment and supplies established in Sec.  414.330(c)(2) is not 
affected by implementation of the fee schedules for these items. By 
using the average, we do not anticipate a significant impact on 
utilization of home dialysis, supplies and equipment.
    Beginning with 2008, the fee schedule amounts for home dialysis 
supplies and equipment will be updated on an annual basis by the 
percentage increase in the CPI-U for the 12-month period ending with 
June of the preceding year under section 1842(s)(1) of the Act.

T. Fee Schedules for Therapeutic Shoes (Proposed Sec.  414.228(c))

[If you choose to comment on issues in this section, please include the 
caption ``Fee Schedules for Therapeutic Shoes'' at the beginning of 
your comments.]

    We are proposing to add Sec.  414.228(c) to part 414, subpart D of 
the regulations to specify that the Medicare fee schedule amounts for 
therapeutic shoes, inserts, and shoe modifications are established in 
accordance with the methodology specified in sections 1833(o) and 
1834(h) of the Act.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate

[[Page 25690]]

whether an information collection should be approved by OMB, section 
3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we 
solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements.

Section 414.412 Submission of Bids Under the Competitive Bidding 
Program

    Section 414.412 establishes the requirements for the submission of 
bids under the competitive bidding process. The burden associated with 
these requirements is the time and effort necessary to prepare and 
submit a bid. The burden is estimated to be 70 hours per bid. In the 
competitive bidding demonstration, suppliers estimated that they spent 
between 40 and 100 hours to complete the bids. We therefore use the 
median of 70 hours per bid. In connection with the competitive bidding 
programs that we are proposing to begin implementing in 2006, we assume 
that 90 percent of suppliers of potentially eligible products in the 
designated competitive bidding areas will submit bids resulting in 
16,545 bids. Therefore, we estimate it would take 1,158,150 total 
annual hours to complete the bids in 2006. In later years, as 
additional CBAs are added, the number of bids will increase as will the 
estimated total annual number of hours to complete the bids. By 2008, 
if 90 percent of suppliers of eligible products in the bidding CBAs 
submit bids there will be 72,865 bids. We estimate that the annual 
hours to complete the bids will rise to 5,100,550 total annual hours in 
connection with the competitive bidding round that we expect to occur 
in 2008, which will involve 70 of the largest MSAs. However, the number 
of hours necessary to complete the bids may fall over time as suppliers 
become more familiar with the forms and the competitive bidding 
process. The number of hours may also be lower if additional suppliers 
do not submit bids. As a result, it is possible that the above figures 
overestimate the number of hours required to fill out the bidding 
forms.
    The cost associated with the requirements pertaining to the 
accreditation program are not included as part of the cost or burden 
for the competitive bidding program.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Regulations Development and 
Issuances Group, Attn: William Parham, Room C4-26-05, 7500 Security 
Boulevard, Baltimore, MD 21244-1850; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Carolyn Lovett, CMS Desk Officer, [email protected]. Fax (202) 395-6974.

IV. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

V. Regulatory Impact Analysis

[If you choose to comment on issues in this section, please include the 
caption ``Regulatory Impact Analysis'' at the beginning of your 
comments.]

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 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 (that is, a final rule that would have 
an annual effect on the economy of $100 million or more in any 1 year, 
or would adversely affect in a material way the economy, a sector or 
the economy, productivity, competition, jobs, the environment, public 
health or safety, or communities).
    Since this rule is considered to be a major rule because it is 
economically significant, we have prepared a regulatory impact 
analysis. We expect that this rule will have a significant impact on a 
substantial number of small suppliers. The RFA requires that we analyze 
regulatory options for small businesses and other entities. The 
analysis must include a justification concerning the reason action is 
being taken, the kinds and numbers of small entities the rule affects, 
and an explanation of any meaningful options that achieve the 
objectives with less significant adverse economic impact on the small 
entities.

B. Anticipated Affects

    We can anticipate the probable effects of the regulation, but the 
actual effects will vary depending on which competitive bidding areas 
and product categories are ultimately selected for competitive bidding. 
The analysis which follows, taken together with the rest of this 
preamble, constitutes both a regulatory impact analysis (RIA) and an 
initial regulation flexibility analysis (IRFA).
    Therefore, for the purpose of this impact analysis, because of the 
uncertainty concerning the actual number of suppliers who will 
participate, the bid amounts and the specific items and areas for which 
competitive bidding will be conducted, it is necessary to make several 
assumptions.
    First, we assume that the first round of bidding will occur in 2006 
with prices taking effect in October, 2007, and the second round of 
bidding will occur in 2008 with prices taking effect in January, 2009. 
We also assume rebidding will only occur every three years.
    Second, we assume that competitive bidding will occur in 10 of the 
largest MSAs in 2006, excluding New York, Chicago, and Los Angeles. We 
exclude the three largest MSAs in 2006 because we are proposing not to 
include them in the initial phase implementation. We are excluding the 
three largest MSAs because they are significantly larger than any of 
the areas in which we implemented the competitive bidding 
demonstrations and we would like to gain more experience in smaller 
markets before we enter into the largest markets.

[[Page 25691]]

Competitive bidding will take place in 70 of the largest MSAs in 2008 
and an additional 10 competitive bidding areas (CBAs) will be added in 
both 2009 and 2010 for a total of 100 CBAs. For the initial 
competition, we assume that bidding will take place in fall 2006, bids 
will be evaluated in 2007, and prices will go into effect in October 
2007. We also assume that the same timeframes will apply when bidding 
takes place in the initial 10 MSAs in fall 2009. In all other cases, we 
assume that competitive bidding will take place in the fall and prices 
will go into effect on January 1 of the following year in the relevant 
CBAs.
    Third, we make some assumptions about which product categories 
would be selected for competitive bidding. We recognize that potential 
savings, implementation costs, the number of affected suppliers, and 
supplier bid costs all depend on which product groups are ultimately 
selected. The product categories have yet to be decided. We estimate 
that approximately 10 product categories will be selected for 
competitive bidding for 2006 and as many as 7 or 8 of the selected 
product categories will be among the 10 largest in terms of allowed 
charges. The remaining 2 or 3 product categories will come from the top 
20 product groups ranked by allowed charges. Table 10 shows the top 20 
eligible DMEPOS policy groups and their 2003 allowed charges.

                       Table 10.--2003 Allowed Charges: Top 20 Eligible DME Policy Groups
----------------------------------------------------------------------------------------------------------------
                                                                                                   Percent of
                   Rank                              Policy group                  2003         eligible DMEPOS
                                                                                                    charges
----------------------------------------------------------------------------------------------------------------
1........................................  Oxygen Supplies/Equipment......     $2,433,713,269                 29
2........................................  Wheelchairs/POVs...............      1,926,210,675                 23
3........................................  Diabetic Supplies & Equipment..      1,110,934,736                 13
4........................................  Enteral Nutrition..............        676,122,703                  8
5........................................  Hospital Beds/Accessories......        373,973,207                  4
6........................................  CPAP...........................        204,774,837                  2
7........................................  Support Surfaces...............        193,659,248                  2
8........................................  Infusion Pumps & Related Drugs.        149,208,088                  2
9........................................  Respiratory Assist Device......        133,645,918                  2
10.......................................  Lower Limb Orthoses*...........        122,813,555                  1
11.......................................  Nebulizers.....................         98,951,212                  1
12.......................................  Walkers........................         96,654,035                  1
13.......................................  Negative Pressure Wound Therapy         88,530,828                  1
14.......................................  Commodes/Bed Pans/Urinals......         51,372,352                  1
15.......................................  Ventilators....................         42,890,761                  0
16.......................................  Spinal Orthoses*...............         40,731,646                  0
17.......................................  Upper Limb Orthoses*...........         29,069,027                  0
18.......................................  Patient Lift...................         26,551,310                  0
19.......................................  Seat Lift Mechanism............         15,318,552                  0
20.......................................  TENS...........................         15,258,579                  0
                                            Total for 20 Groups...........      7,830,384,538                 92
----------------------------------------------------------------------------------------------------------------
*Excludes Custom Fabricated Items; but does not exclude all items that might require more than minimal self-
  adjustment or expertise in trimming, bending, molding, assembling, or customizing to fit the individual.

    However, we reiterate that our selection for the impact analysis 
should in no way be interpreted as signifying which product categories 
will be selected for the actual competitive bidding program. Our 
product category selection for this impact analysis is only to assist 
us in estimating the potential savings, costs of implementation, and 
supplier impact.
    Fourth, we assume that the Medicare DMEPOS fee schedule will 
increase at the rate of inflation for those years in which a statutory 
freeze has not been put in place by the MMA, and that total charges 
will increase at the same rate as Part A and Part B Medicare 
expenditures. We exclude Part D expenditure growth because this data is 
not currently available. We base our estimates on the expected growth 
in Part A and Part B expenditures from the Trustees Reports. (Tables 
IV.F.2 and IV.F.3 of the 2004 Medicare Trustees Report).
    This proposed rule is expected to affect Medicare and its 
beneficiaries, certain CMS contractors including the four current 
DMERCs, the SADMERC, the NSC, one or more proposed CBICs, and DMEPOS 
suppliers. Although the work-load of referral agents, including 
hospital discharge planners and some healthcare providers, appeared to 
increase during implementation of the demonstration, we do not 
anticipate that competitive bidding will result in an appreciable, 
ongoing burden on referral agents. In addition, rural healthcare 
facilities should not be significantly impacted as the program is 
expected to operate primarily within relatively large MSAs.
    The DMEPOS supplier industry is expected to be significantly 
impacted by this rule when finalized. However, not all suppliers will 
be affected directly by the competitive bidding program. Only suppliers 
who furnish products in at least one product category eligible for 
competitive bidding and in areas selected for competitive bidding could 
potentially be affected. A customized orthotics supplier in Manhattan 
that does not supply off-the-shelf orthotics will not be affected. We 
estimate that approximately 30,000 suppliers offer at least one product 
eligible for competitive bidding and are located in one of the largest 
100 MSAs and could therefore be impacted by the program. Some of these 
suppliers will be affected in multiple CBAs if they offer products in 
more than one CBA.
    Based on our analysis of 2003 claims data, we also estimate that 
approximately 90 percent of registered DMEPOS suppliers are considered 
small according to the SBA definition. According to the SBA, ``A small 
business is a concern that is organized for profit, with a place of 
business in the United States, and which operates primarily within the 
United States or makes a significant contribution to the U.S. economy 
through payment of taxes or use of American products, materials or 
labor. Further, the concern cannot be dominant in its field, on a 
national basis. Finally, the concern must meet the numerical small 
business size

[[Page 25692]]

standard for its industry. SBA has established a size standard for most 
industries in the U.S. economy.'' The size standard for NAICS code, 
532291, Home Health Equipment Rental is $6 million. (see http://www.sba.gov/size/sizetable2002.html, read May 9, 2005.)
    Many of these suppliers provide minimal amounts of DMEPOS, and thus 
the remaining larger suppliers control significant market share. We 
anticipate that the bidding process will be designed to neither reward 
nor penalize small suppliers, however the fixed costs required to 
undergo the bidding process may be a larger deterrent to small 
businesses than larger firms. We do not expect that the regulation will 
result in direct costs that exceed $120 million per year, and thus the 
Unfunded Mandates Reform Act (UMRA) would not apply. Since suppliers 
can choose whether to submit a bid for the competitive bid program, the 
regulation imposes no direct costs and therefore does not reach the 
$120 million direct cost threshold under UMRA. While not included in 
this regulation, it is expected that the separate MMA requirement for 
accreditation will result in added supplier costs beyond those included 
in this regulation.
    The proposed rule will also impact CMS and its contractors. There 
are four DMERCs currently contracted by CMS to process claims for the 
DMEPOS benefit. The Statistical Analysis DME Regional Carrier, 
(SADMERC), the existing contractor assigned to perform statistical 
support and the National Supplier Clearinghouse, (NSC), which maintains 
a registry of approved suppliers, will need to adapt to the competitive 
bidding environment. Finally, we will need to devote resources 
necessary for overseeing program operations.

C. Implementation Costs

    We will incur administrative costs in connection with the 
implementation and operation of competitive bidding, which can affect 
the net savings that can be expected under the proposed rule. However, 
many of the variable costs associated with bid solicitation and 
evaluation will ultimately depend on how many suppliers choose to 
participate in competitive bidding. Because of this uncertainty, we do 
not estimate bid solicitation and evaluation costs at this time.
    We will incur initial start up costs. We estimate the costs to CMS 
and its contractors will include approximately $1 million in immediate 
fixed costs for contractor startup and system changes for the initial 
competitive bidding phase in 2006. In addition to the initial start up 
costs, we will also incur maintenance costs and bid solicitation and 
evaluation costs. We will need to pay maintenance costs every year for 
the running of the program; however, we will only need to pay bid costs 
in the years in which competitive bidding is conducted. Yearly 
maintenance costs will depend on the number of CBAs where the program 
has been implemented, while bid solicitation and evaluation costs will 
depend on the number of sites which have bidding that year.
    Our maintenance costs will include a small staff to oversee the 
program, office costs for the staff, as well as staff travel costs, and 
overhead. In addition, we propose that the CBIC(s) will be responsible 
for much of the program maintenance. The maintenance costs could also 
include the costs for an Ombudsman(s) per DMERC region to assist 
suppliers, beneficiaries, and referral agents with the competitive 
bidding process and questions. We also expect to incur costs for 
education and outreach expenses such as staff resources and material 
costs for producing education materials and supplier directories.
    We will incur bid costs in the years in which we conduct 
competitive bidding and when we evaluate bids. These costs will be a 
direct result of the bid solicitation and evaluation process. Bid 
solicitation costs include costs associated with mailing necessary 
information to beneficiaries, printing, and duplicating. The actual 
costs will vary by CBA and will depend on the number of potential 
suppliers. We will incur bid evaluation costs whenever bidding occurs 
in a CBA. We are proposing that the bid evaluation will be done by the 
CBIC(s). According to the DMEPOS evaluation report, it took about 9.4 
hours to evaluate each bid during the demonstration. However, since the 
Medicare DMEPOS Competitive Bidding Program entails Quality Standards/
Accreditation as a separate process, we expect that the time required 
to evaluate bids will be lower than in the demonstration. The total bid 
evaluation costs will ultimately depend on the number of suppliers that 
choose to submit bids.

D. Program Savings

    We estimate large savings from the competitive bidding program. Our 
estimates of gross savings utilize as a starting point the savings 
results in the demonstration. Excluding surgical dressings that are not 
eligible for competitive bidding, the average product group savings 
rate in the demonstration ranged from 9 to 30 percent in a CBA round 
with most product groups around a 20 percent savings. Table 11 shows 
the savings rate for selected product groups and CBAs by round during 
the DMEPOS demonstration.

                        Table 11.--DMEPOS Competitive Bidding Demonstration Savings Rates
----------------------------------------------------------------------------------------------------------------
                                                                    Polk County     Polk County
                          Product group                               round 1         round 2       San Antonio
----------------------------------------------------------------------------------------------------------------
Oxygen Equipment and Supplies...................................      $2,364,811      $1,525,490      $2,096,707
                                                                           (17%)           (20%)           (19%)
Hospital Beds and Accessories...................................        $290,715        $195,140        $644,514
                                                                           (23%)           (31%)           (19%)
Urological Supplies.............................................         $36,169         $12,585           (\1\)
                                                                           (18%)            (9%)
Surgical Dressings..............................................        -$30,321           -$637           (\1\)
                                                                          (-12%)           (-1%)
Enteral Nutrition...............................................        $342,251           (\1\)           (\1\)
                                                                           (17%)
Wheelchairs and Accessories.....................................           (\1\)           (\1\)        $796,617
                                                                                                           (19%)
General Orthotics...............................................           (\1\)           (\1\)         $89,462
                                                                                                           (23%)

[[Page 25693]]

 
Nebulizer Drugs.................................................           (\1\)           (\1\)      $1,020,072
                                                                                                           (26%)
----------------------------------------------------------------------------------------------------------------
Source: Evaluation of Medicare's Competitive Bidding Demonstration for DMEPOS, Final Evaluation Report (November
  2003), pages 90 and 92.
\1\ Not included.

    In our estimates, we have taken into account that some DMEPOS 
prices have been adjusted downward since 2000. We assume that if prices 
for an individual item have already been reduced by 10 percent after 
the demonstrations were completed, then prices would most likely fall 
10 percent rather than 20 percent. We, therefore, netted out any 
statutory reductions in prices that had already occurred such as the 
2005 reductions in oxygen supplies.
    Table 12 shows the fee-for-service program impact for the 10 policy 
groups. In the table, savings are reported as negative values. The 
savings are attributable to the lower prices anticipated from 
competitive bidding. The table shows the reduction in Medicare allowed 
charges, without any impact on Medicare Advantage, associated with the 
program for the calendar year. The impact includes reductions in 
Medicare payments (80 percent) and reductions in beneficiary co-
insurance (20 percent).

                           Table 12.--Program Impact for 10 Policy Groups in Millions*
----------------------------------------------------------------------------------------------------------------
                                                                           Year
                                         -----------------------------------------------------------------------
                                             2006        2007        2008        2009        2010        2011
----------------------------------------------------------------------------------------------------------------
Allowed Charges.........................         -$0        -$38       -$120       -$844      -$1000     -$1,199
Medicare share of allowed charges (80%            -0         -30         -96        -675        -800        -959
 of allowed charges)....................
Beneficiary Costs (20% of allowed                  0          -8         -24        -169        -200        -240
 charges)...............................
----------------------------------------------------------------------------------------------------------------
* Numbers may not add up due to rounding.

    Table 13 presents the impact differently than Table 12. In contrast 
to Table 12, which is on a Medicare-allowed-charge-incurred basis and 
is without considering the Medicare Advantage impact, Table 13 
considers fiscal year cash impact on the entire Medicare Program 
including Medicare Advantage for the fiscal year rather than calendar 
year. The fiscal year--calendar year distinction is an important one 
when comparing savings. For example, the prices for the Medicare DMEPOS 
Competitive Bidding program will be in effect for 0 months of fiscal 
year 2007, but for 3 months of calendar year 2007.\1\ Table 13 
considers the impact on program expenditures, and does not include 
beneficiary coinsurance. Finally, the estimates in Table 13 incorporate 
spillover effects from the competitive acquisition program onto the MA 
program. The expectation is that lower prices for DME products in FFS 
will lead to lower prices in the MA market.\2\
---------------------------------------------------------------------------

    \1\ Fiscal year 2007 will end September 30, 2007, and the 
Medicare DMEPOS Competitive Bidding Program will begin on October 1, 
2007.
    \2\ In addition, most managed care plan rates are linked to FFS 
expenditures, so a decrease in FFS expenditures should translate 
into a decrease in Medicare Advantage plan payment rates.

           Table 13.--Fiscal Year Cost on the Medicare Program
                              [In millions]
------------------------------------------------------------------------
                          Year                              10 products
------------------------------------------------------------------------
2006....................................................              $0
2007....................................................               0
2008....................................................            -110
2009....................................................            -620
2010....................................................            -990
2011....................................................          -1,230
------------------------------------------------------------------------

E. Effect on Beneficiaries

    Possible impacts on beneficiaries are a primary concern during the 
design and implementation of the program. While there may be some 
decrease in choice of suppliers, there will be a sufficient number of 
suppliers to ensure adequate access. We also expect there will be an 
improvement in quality because we will more closely scrutinize the 
suppliers before, during, and after implementation of the program. The 
analysis of the impact of the DMEPOS competitive bidding demonstration 
on patient access to care and quality showed minimal adverse results. 
Therefore, we assume that there will be no negative impacts on 
beneficiary access as a sufficient number of quality suppliers will be 
selected to serve the entire market.
    We acknowledge that implementation of competitive bidding may 
result in some beneficiaries needing to switch from their current 
supplier if their current supplier is not selected for competitive 
bidding. However, we anticipate that the necessity of switching 
suppliers will be minimal in many product categories because of the 
existence of grandfather policies for products such as capped rentals.
    We assume that beneficiary out of pocket expenses will decrease by 
20 percent of program gross savings for those products for which we do 
competitive bidding.

  Table 14.--Beneficiary Co-Insurance Savings Estimates for 10 Products
                              [In millions]
------------------------------------------------------------------------
                          Year                              10 products
------------------------------------------------------------------------
2007....................................................              $8
2008....................................................              24
2009....................................................             169
2010....................................................             200
2011....................................................             240
------------------------------------------------------------------------

F. Effect on Suppliers

    We expect DME suppliers to be significantly impacted by the 
implementation of the proposed rule. We assume that suppliers may be 
affected in one of 3 ways as follows:

[[Page 25694]]

     Suppliers that wish to participate in competitive bidding 
will have to incur the cost of submitting a bid.
     Noncontract suppliers (including suppliers who do not 
submit bids) will see a decrease in revenues because they will no 
longer receive payment from Medicare for competitively bid items.
     Contract suppliers will see a decrease in expected revenue 
per item as a result of lower allowed charges from lower bid prices.
    However, because there will be fewer suppliers, a supplier's volume 
could increase. As a result, because we do not know which effect will 
dominate, the net effect on an individual contract supplier's revenue 
is uncertain prior to bidding. The increase in the supplier's volume 
could offset the decrease in revenue per item.
1. Affected Suppliers
    Based on 2003 claims data, the average MSA in the top 25 MSAs, 
excluding New York, Los Angeles, and Chicago, has 2754 DMEPOS suppliers 
that furnish any DMEPOS product and 1838 suppliers that furnish 
products subject to competitive bidding and could potentially be 
affected by competitive bidding.
    We estimate that 27,540 suppliers will provide DMEPOS items in the 
CBAs that we initially designate. If suppliers furnish products in more 
than one MSA, we counted them more than once because they are affected 
in more than one MSA. Not all products are subject to competitive 
bidding; we estimate that only 18,383 suppliers will furnish products 
subject to competitive bidding and will be affected by competitive 
bidding. This means in 2006, the remaining 9157 suppliers in the 10 
selected MSAs will not be affected by competitive bidding because they 
do not furnish products subject to competitive bidding. However, the 
actual number of affected suppliers may be smaller if we do not select 
all eligible product categories for competitive bidding.
    Deciding whether or not to submit a bid is a business decision that 
will be made by each DMEPOS supplier. We expect that most suppliers 
providing covered services will choose to participate in order to 
maintain and expand their businesses. For the calculations below, we 
assume that 90 percent of suppliers will submit a bid. We assume the 
remaining 10 percent of suppliers will not have received the necessary 
accreditation to submit a bid. Based on this assumption, 16,545 
suppliers will submit a bid because they will want the opportunity to 
continue to provide these products to Medicare beneficiaries and to 
expand their business base. We also assume, based on the results of the 
demonstration, that 50 percent of bidding suppliers will be selected as 
winners because approximately 50 percent of those who submitted bids 
during the demonstration were selected as contract suppliers. As a 
result, we expect that there will be 8272 contract suppliers and 10,111 
non contract suppliers in the competitive bidding areas that we 
initially designate. The 10,111 suppliers that are not awarded a 
contract, either because they chose not to submit a bid or did not 
submit a winning bid would represent about 37 percent of the total 
DMEPOS suppliers in these CBAs. We expect that losing bidders will be 
distributed roughly proportionately across the selected CBAs, but the 
exact distribution will depend on the distribution of bids received and 
the number of winners selected in each CBA. It is important to note 
that there will be a revenue shift from the non contract suppliers to 
the contract suppliers, and that although some suppliers may be worse 
off, it is because they did not offer competitive prices or quality. We 
also note that if a supplier submitted a bid in multiple product 
categories, its probability of winning would increase, so that the 
total number of wining suppliers would be higher, and the number of non 
contract suppliers would be lower.
    It is difficult to estimate how much revenue a losing supplier will 
lose because of the DMEPOS competitive acquisition program. The amount 
will depend on how much revenue the supplier previously received from 
Medicare and whether the supplier continues to provide services to 
existing patients under transition policies. Estimates can be made by 
making assumptions about these factors. For example, if bidding 
occurred in 10 product categories, losing suppliers previously provided 
50 percent of allowed charges in these product categories, and losing 
suppliers did not continue to serve any existing patients, then the 
average lost Medicare allowed charges per losing supplier per CBA would 
be between $35,000 and $40,000. Under these assumptions, the total 
allowed charges lost by losing suppliers would be $275 million in 2008, 
the first full year after the prices take effect, and increase to 
almost $2 billion in 2011. These estimates reflect our best 
assumptions. As noted, because of the nature of competitive bidding, 
winning bidders will absorb much of the allowed charges lost by losing 
suppliers.
    Suppliers who submit bids will incur a cost of bidding. In the 
demonstration, bidders in Polk County, Florida reported spending 40 to 
100 hours submitting bids. We therefore assume that suppliers will use 
the midpoint number of hours, 70 hours, to complete their bids. 
According to 2003 Bureau of Labor Statistics (BLS) data, the average 
hourly wage for an accountant and auditor was $24.35. Accounting for 
inflation and overhead, we assume suppliers will incur $31.25 per hour 
in wage and overhead costs. Based on this information, we assume that a 
supplier that bids will spend $2,187.50 ($31.25*70) to prepare its bid. 
We calculate the total cost for all supplier bids, including those of 
both future winning and future losing suppliers. Therefore, we expect 
that 2006 total supplier bidding costs for 16,545 bids will be 
$36,192,187 ($2187.50*16545). This estimate is clearly dependent on our 
assumption that all eligible suppliers will bid.
    In 2008, we will conduct competitive bidding in 80 MSAs, which may 
include New York, Los Angeles, and Chicago; and in 2009 and 2010 we 
will add additional areas. This will increase the number of affected 
suppliers, contract suppliers, and non contract suppliers. For the 
purposes of the impact analysis, we assume that there will be at least 
10 additional large CBAs added in both 2009 and 2010. We also assume 
bid cycles will be three years in length. Under our assumptions, we 
will conduct bidding for programs that involve the initial 10 MSAs in 
2006 and 2009, for programs that involve 70 additional MSAs in 2008 and 
2011, and for programs that involve additional areas in 2009 and 2010. 
It is interesting to note that the average number of suppliers per CBA 
decreases over time. This is because smaller CBAs with fewer 
beneficiaries and lower allowed charges have fewer suppliers. Table 15 
summarizes the effect on suppliers for 2006 through 2011.

[[Page 25695]]



                                                      Table 15.--Suppliers Bidding Years: 2006-2011
                                                                 [10 product categories]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Bidding year
                                                         -----------------------------------------------------------------------------------------------
                                                               2006            2007            2008            2009            2010            2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average number of suppliers per CBA.....................            2754            2754            1863            1776            1687            1863
Average number of affected suppliers per CBA............            1838            1838            1242            1183            1125            1242
Total number of suppliers...............................           27540           27540          149035          159864          168702          149035
Total number of affected suppliers......................           18383           18383           99344          106439          112471           99344
Number of bidding suppliers.............................           16545               0           72865           22930            5429           72865
Cost of bidding.........................................     $36,192,188              $0    $159,392,188     $50,159,375     $11,875,938    $159,392,188
Number of contract suppliers............................            8272            8272           44705           47898           50612           44705
Number of non contract suppliers........................           10111           10111           54639           58541           61859           54639
Non contract suppliers as a percent of total suppliers..             37%             37%             37%             37%             37%            37%
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Actual numbers will depend on CBAs selected, product groups selected, number of suppliers that choose to submit a bid, the prices bid, and the
  number of contract suppliers selected.
\2\ Some suppliers furnish products in more than one selected CBA. Consequently, some suppliers may be counted more than once.
\3\ Numbers in the table are rounded.

2. Small Suppliers
    We use the Small Business Administration definition of a small 
supplier. The SBA defines a small supplier in Home Health Equipment 
(NAICS Code 532291) as having less than $6 million in revenues. We do 
not have information on each supplier's total revenue. We only have 
information on suppliers' Medicare revenues. As a result, we had to 
make an assumption about what percent of a supplier's revenues come 
from Medicare. We looked at filings by public DMEPOS companies and 
based on that information, we assume one-half of the average supplier's 
revenues come from Medicare DEMPOS. We therefore classified a small 
supplier as any supplier with fewer than $3 million in Medicare allowed 
charges for all DMEPOS products whether or not they are eligible for 
competitive bidding. For example, an orthotics supplier's allowed 
charges could include charges for both customized and off-the-shelf 
orthotics, but customized orthotics are not subject to competitive 
bidding. By this definition, the majority of DMEPOS suppliers are 
small. Table 16 shows our estimate of the number of affected small 
suppliers and total affected suppliers. Some suppliers are counted more 
than once if they are affected in more than one CBA.

                                    Table 16.--Number of Small Suppliers \1\
                                [$3 million or less in Medicare allowed charges]
----------------------------------------------------------------------------------------------------------------
                                                                     Number of     Total  number
                          Bidding year                            affected small   of  affected       Percent
                                                                     suppliers       suppliers
----------------------------------------------------------------------------------------------------------------
2006............................................................          16,741          18,383              91
2007............................................................          16,741          18,383              91
2008............................................................          88,912          99,344              90
2009............................................................          94,969         106,439              89
2010............................................................         100,083         112,471              89
2011............................................................         100,083         112,471              89
----------------------------------------------------------------------------------------------------------------
\1\ Some suppliers furnish products in more than one selected CBA. Consequently, some suppliers may be counted
  more than once.

    Small suppliers are likely to have similar costs for submitting 
bids as large suppliers. As discussed in the previous section, the 
average cost of submitting a bid in one CBA is $2187.50. The cost of 
bidding as a share of Medicare revenue will depend on the size of the 
small supplier's Medicare revenue. The share for a supplier with 
$50,000 in Medicare revenue would be 4.4 percent; the totals for 
suppliers with $100,000, $1,000,000, and $3,000,000 would be 2.2 
percent, 0.2 percent, and less than 0.01 percent, respectively.
    We considered the following options for minimizing the burden of 
competitive bidding on small businesses:
     Networking: As stated in section L of the preamble we 
discuss our proposal for allowing suppliers the option to form networks 
for bidding purposes. Networks are several companies joining together 
to submit bids for a product category under competitive bidding. This 
option will allow small suppliers to band together to lower bidding 
costs, expand service options, or attain more favorable purchasing 
terms. We recognize that forming a network may be challenging for 
suppliers, and it also poses challenges for bid evaluation and program 
monitoring.
     Not requiring bids for every product category: As 
discussed previously in the preamble, we are proposing to conduct 
separate bidding for items grouped together in product categories 
rather than conduct a single bidding program for all items. Therefore, 
small suppliers will have the option of deciding how many product 
categories for which they want to submit bids. We believe this will 
help minimize the burden on small suppliers.
     Another option we considered but did not accept would have 
allowed small suppliers to be exempted from the requirement that a 
contract supplier must service an entire CBA. This option

[[Page 25696]]

is also discussed in further detail in the preamble.
     We also considered the option to allow a small supplier to 
not submit a bid and then decide after the bidding whether or not they 
would accept the new competitive bidding single payment amounts. We are 
not accepting this option because the statue is clear about the 
requirement that suppliers must have submitted a bid in order to be a 
contract supplier. We believe that to allow this option would be an 
inappropriate interpretation of the statute.

G. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in the following table 
below, we have prepared an accounting statement showing the 
classification of the expenditures associated with the provisions of 
this proposed rule. This table provides our best estimate of the 
decreased expenditures in Medicare payments under the Medicare DMEPOS 
Competitive Bidding Program as a result of the changes presented in 
this proposed rule. All expenditures are classified as transfers to the 
Federal Government from DMEPOS suppliers.

      Table 17.--Accounting Statement--Classification of Estimated
                  Expenditures, From FY 2007 to FY 2011
------------------------------------------------------------------------
                Category                            Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers.........  $570.3 (in Millions).
From Whom To Whom?.....................  To Federal Government From
                                          Medicare DMEPOS Suppliers.
------------------------------------------------------------------------

    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 411

    Kidney diseases, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 414

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

42 CFR Part 424

    Emergency medical services, Health facilities, Health professions, 
Medicare, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV as set forth 
below:

PART 411--EXCLUSIONS FOR MEDICARE AND LIMITATIONS ON MEDICARE 
PAYMENT

    1. The authority for part 411 continues to read as follows:

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

Subpart A--General Exclusions and Exclusions of Particular Services

    2. Section 411.15 is amended by--
    A. Revising paragraph (b).
    B. Adding new paragraph (s).
    The revision and addition read as follows:


Sec.  411.15  Particular services excluded from coverage.

* * * * *
    (b) Low vision aid exclusion. (1) Scope. The scope of the eyeglass 
exclusion encompasses all devices irrespective of their size, form, or 
technological features that use one or more lens to aid vision or 
provide magnification of images for impaired vision.
    (2) Exceptions. (i) Post-surgical prosthetic lenses customarily 
used during convalescence for eye surgery in which the lens of the eye 
was removed (for example, cataract surgery).
    (ii) Prosthetic intraocular lenses and one pair of conventional 
eyeglasses or contact lenses furnished subsequent to each cataract 
surgery with insertion of an intraocular lens.
    (iii) Prosthetic lenses used by Medicare beneficiaries who are 
lacking the natural lens of the eye and who were not furnished with an 
intraocular lens.
* * * * *
    (s) Unless Sec.  414.408(f)(2) of this chapter applies, Medicare 
does not make payment if an item or service that is included in a 
competitive bidding program (as described in part 414, subpart F of 
this chapter) is furnished by a supplier other than a contract supplier 
(as defined in Sec.  414.402).

PART 414--PAYMENT FOR PART B MEDICAL AND OTHER HEALTH SERVICES

    3. The authority citation for part 414 continues to read as 
follows:

    Authority: Secs. 1102, 1871, and 1881(b)(1) of the Social 
Security Act (42 U.S.C. 1302, 1395hh, and 1395rr(b)(1)).

Subpart A--General Provisions

    4. Section 414.1 is amended by adding in numerical order the 
statutory sections to read as follows:


Sec.  414.1  Basis and scope.

* * * * *
    1842(s)--Fee schedules for parenteral and enteral nutrition (PEN) 
nutrients, equipment, and supplies and home dialysis supplies and 
equipment.
    1847(a) and (b)--Competitive bidding for certain durable medical 
equipment, prosthetics, orthotics, and supplies (DMEPOS).
* * * * *
    4a. The heading for subpart C is revised to read as follows:

Subpart C--Fee Schedules for Parenteral and Enteral Nutrition (PEN) 
Nutrients, Equipment, and Supplies, and Home Dialysis Supplies and 
Equipment

    5. Section 414.100 is revised to read as follows:


Sec.  414.100  Purpose.

    This subpart implements fee schedules for parenteral and enteral 
nutrition (PEN) items and services and home dialysis supplies and 
equipment as authorized by section 1842(s) of the Act.
    6. Section 414.102 is revised to read as follows:


Sec.  414.102  General payment rules.

    (a) General rule. For PEN items and services specified under 
paragraph (b) of this section and furnished on or after January 1, 
2002, and for home dialysis supplies and equipment specified under 
paragraph (b) of this section and furnished on or after January 1, 
2007, Medicare pays for the items and services on the basis of 80 
percent of the lesser of--
    (1) The actual charge for the item or service; or
    (2) The fee schedule amount for the item or service, as determined 
in accordance with Sec.  414.104 or Sec.  414.107.
    (b) Payment classification. (1) CMS or the carrier determines fee 
schedules for PEN nutrients, equipment, and supplies

[[Page 25697]]

in accordance with Sec.  414.104, and the fee schedules for home 
dialysis supplies and equipment in accordance with Sec.  414.107.
    (2) CMS designates the specific items and services in each category 
through program instructions.
    (c) Updating the fee schedule amounts. (1) For each calendar year 
subsequent to CY 2002, the fee schedule amounts of the preceding year 
for PEN items and services are updated by the percentage increase in 
the CPI-U for the 12-month period ending with June of the preceding 
calendar year.
    (2) For each calendar year subsequent to CY 2007, the fee schedule 
amounts of the preceding year for home dialysis supplies and equipment 
are updated by the percentage increase in the CPI-U for the 12-month 
period ending with June of the preceding calendar year.
    (d) Establishing payment amounts for new items. (1) The DMERC or 
local carrier uses the process described in paragraph (d)(3) of this 
section to establish the fee schedule amounts for the items and 
services included in a new HCPCS code created for a category of items 
and services payable under this subpart, but only if reasonable charge 
data are not available to calculate a fee schedule amount.
    (2) The fee schedule amounts are updated in accordance with this 
subpart.
    (3) CMS calculates the Medicare fee schedule amounts for the items 
and services described in paragraph (d)(1) of this section taking into 
account one or more of the following:
    (i) The median retail price for items and services classified under 
the new HCPCS code. CMS determines the retail price for an individual 
item and service based on supplier price lists, manufacturer suggested 
retail prices, or wholesale prices plus an appropriate mark-up;
    (ii) Fee schedule amounts for comparable items; or
    (iii) A functional technology assessment of the items or services 
classified under the new HCPCS code that takes into account one or more 
of the following factors:
    (A) Functional assessment.
    (B) Price comparison analysis.
    (C) Medical benefit assessment.
    (4) A functional technology assessment described in paragraph 
(d)(2)(iii) of this section is also used to adjust fee schedule amounts 
calculated under paragraph (d)(2) of this section if CMS determines 
that these amounts do no reflect the costs of furnishing the item or 
service.
    7. A new Sec.  414.107 is added to read as follows:


Sec.  414.107  Home dialysis supplies and equipment.

    (a) Payment rules. Payment for home dialysis supplies and equipment 
defined in Sec.  410.52(a)(1) and (a)(2) of this chapter is made in a 
lump sum for supplies and equipment that are purchased, and on a 
monthly basis for supplies and equipment that are rented. Total 
payments per month for supplies and equipment may not exceed the 
payment limits described in Sec.  414.330(c)(2) of this part.
    (b) Fee schedule amount. The fee schedule amount for payment of 
home dialysis supplies and equipment defined in Sec.  410.52(a)(1) and 
(a)(2) of this chapter and furnished in CY 2007 is the average 
reasonable charge for the supplies and equipment furnished from January 
1, 2005 through December 31, 2005, increased by the percentage change 
in the CPI-U for the 24-month period ending June 2006.

Subpart D--Payment for Durable Medical Equipment and Prosthetic and 
Orthotic Devices

    8. Section 414.210 is amended by adding a new paragraph (g) to read 
as follows:


Sec.  414.210  General payment rules.

* * * * *
    (g) Establishing fee schedule amounts for new items and services. 
(1) The DMERC or local carrier uses the process described in paragraph 
(g)(2) of this section to establish the fee schedule amounts for the 
items and services included in a new HCPCS code created for a category 
of items and services payable under this subpart, but only if 
reasonable charge data are not available to calculate a fee schedule 
amount.
    (i) The fee schedule amounts are updated in accordance with this 
subpart.
    (ii) Items described in Sec.  414.224 are not subject to paragraph 
(g)(1) of this section.
    (2) CMS calculates the Medicare fee schedule amounts for the items 
and services described in paragraph (g)(1) of this section taking into 
account one or more of the following:
    (i) The median retail price for items and services classified under 
the new HCPCS code (CMS determines the retail price for an individual 
item and service based on supplier price lists, manufacturer suggested 
retail prices, or wholesale prices plus an appropriate mark-up);
    (ii) Existing fee schedule amounts for comparable items; or
    (iii) A functional technology assessment of the items or services 
classified under the new HCPCS code that takes into account one or more 
of the following factors:
    (A) Functional assessment.
    (B) Price comparison analysis.
    (C) Medical benefit assessment.
    (3) A functional technology assessment described in paragraph 
(g)(2)(iii) of this section is also used to adjust fee schedule amounts 
calculated under paragraph (g)(2) of this section if CMS determines 
that these amounts do not reflect the costs of furnishing the item or 
service.
    9. Section 414.228 is amended by adding paragraph (c) to read as 
follows:


Sec.  414.228  Prosthetic and orthotic devices.

* * * * *
    (c) Payment for therapeutic shoes. The payment rules specified in 
paragraphs (a) and (b) of this section are applicable to custom molded 
and extra depth shoes, modifications, and inserts (therapeutic shoes) 
furnished after December 31, 2004.

Subpart E--Determination of Reasonable Charges Under the ESRD 
Program

    10. Section 414.330 is amended by revising paragraph (a)(2) 
introductory text to read as follows:


Sec.  414.330  Payment for home dialysis equipment, supplies, and 
support services.

    (a) * * *
    (2) Exception. If the conditions in paragraphs (a)(2)(i) through 
(a)(2)(iv) of this section are met, Medicare pays for home dialysis 
equipment and supplies on a fee schedule basis in accordance with Sec.  
414.102, but the amount of payment may not exceed the limit for 
equipment and supplies described in paragraph (c)(2) of this section.
* * * * *
    11. A new subpart F is added to read as follows:
Subpart F--Competitive Bidding for Certain Durable Medical Equipment, 
Prosthetics, Orthotics, and Supplies (DMEPOS)
Sec.
414.400 Purpose.
414.402 Definitions.
414.404 Basis, scope, and applicability.
414.406 Implementation of programs.
414.408 Payment rules.
414.410 Phased-in implementation of competitive bidding programs.
414.412 Submission of bids under a competitive bidding program.
414.414 Conditions for awarding contracts.
414.416 Determination of competitive bidding payment amounts.
414.418 Opportunity for networks.
414.420 Physician or treating practitioner authorization and 
consideration of clinical efficiency and value of items.
414.422 Terms of contracts.

[[Page 25698]]

414.424 Administrative or judicial review.
414.426 Adjustments to competitive bidding payment amounts to 
reflect changes in the HCPCS.

Subpart F--Competitive Bidding for Certain Durable Medical 
Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS)


Sec.  414.400  Purpose.

    This subpart implements competitive bidding programs for certain 
DMEPOS items as required by sections 1847(a) and (b) of the Act.


Sec.  414.402  Definitions.

    For purposes of this subpart, the following definitions apply:
    Bid means an offer to furnish an item for a particular price and 
time period that includes, where appropriate, any services that are 
directly related to the furnishing of the item.
    Competitive bidding area (CBA) means an area established by the 
Secretary under this subpart.
    Composite bid means the sum of a supplier's weighted bids for all 
items within a product category for purposes of allowing a comparison 
across bidding suppliers.
    Competitive bidding program means a program established under this 
subpart.
    Contract supplier means an entity that is awarded a contract by CMS 
to furnish items under a competitive bidding program.
    DMEPOS stands for durable medical equipment, prosthetics, orthotics 
and supplies.
    Grandfathered item means any one of the following items for which 
payment is made on a rental basis prior to the implementation of a 
competitive bidding program under this subpart:
    (1) An inexpensive or routinely purchased item described in Sec.  
414.220.
    (2) An item requiring frequent and substantial servicing, as 
described in Sec.  414.222.
    (3) Oxygen and oxygen equipment described in Sec.  414.226.
    (4) A capped rental item described in Sec.  414.229.
    Grandfathered supplier means a noncontract supplier that furnishes 
a grandfathered item.
    Item means one of the following products identified by a HCPCS 
code, other than class III devices under the Federal Food, Drug and 
Cosmetic Act and inhalation drugs, and includes the services directly 
related to the furnishing of that product to the beneficiary:
    (1) Durable medical equipment (DME), as defined in Sec.  414.202 of 
this part and further classified into the following categories:
    (i) Inexpensive or routinely purchased items, as specified in Sec.  
414.220(a).
    (ii) Items requiring frequent and substantial servicing, as 
specified in Sec.  414.222(a).
    (iii) Oxygen and oxygen equipment, as specified in Sec.  
414.226(b).
    (iv) Other durable medical equipment (capped rental items), as 
specified in Sec.  414.229.
    (2) Supplies necessary for the effective use of DME.
    (3) Enteral nutrients, equipment, and supplies.
    (4) Off-the-shelf orthotics, which are orthotics described in 
section 1861(s)(9) of the Act that require minimal self-adjustment for 
appropriate use and do not require expertise in trimming, bending, 
molding, assembling, or customizing to fit a beneficiary.
    Item weight is a number assigned to an item based on its 
beneficiary utilization rate in a competitive bidding area when 
compared to other items in the same product category.
    Metropolitan Statistical Area (MSA) has the same meaning as that 
given by the Office of Management and Budget.
    Nationwide competitive bidding area means a competitive bidding 
area that includes the United States and its territories.
    Noncontract supplier means a supplier that is located in a 
competitive bidding area or that furnishes items through the mail to 
beneficiaries in a competitive bidding area but that is not awarded a 
contract by CMS to furnish items included in a competitive bidding 
program for that area.
    Physician has the same meaning as in section 1861(r)(1) of the Act.
    Pivotal bid means the highest composite bid based on bids submitted 
by a suppliers for a product category that will include a sufficient 
number of suppliers to meet beneficiary demand for the items in that 
product category.
    Product category means a grouping of related items that are 
included in a competitive bidding program.
    Single payment amount means the allowed payment for an item 
furnished under a competitive bidding program.
    Supplier means an entity with a valid Medicare supplier number, 
including an entity that furnishes an item through the mail.
    Treating practitioner means a physician assistant, nurse 
practitioner, or clinical nurse specialist, as those terms are defined 
in section 1861(aa)(5) of the Act.
    Weighted bid means the item weight multiplied by the bid price 
submitted for that item.


Sec.  414.404  Basis, scope, and applicability.

    This subpart applies to the following entities that furnish the 
items described in Sec.  414.402 to beneficiaries under a competitive 
bidding program:
    (a) Suppliers.
    (b) Providers that furnish items under Medicare Part B as 
suppliers.
    (c) Physicians that furnish items under Medicare Part B as 
suppliers.


Sec.  414.406  Implementation of programs.

    (a) Implementation contractor. CMS designates one or more 
implementation contractors for the purpose of implementing this 
subpart.
    (b) Competitive bidding areas. CMS designates through program 
instructions each competitive bidding area in which a competitive 
bidding program may be implemented under this subpart.
    (c) Revisions to competitive bid. CMS may revise the competitive 
bidding areas designated under paragraph (b) of this section.
    (d) Competitively bid items. CMS designates the items that are 
included in a competitive bidding program through program instructions.
    (e) Claims processing. The regional carrier designated under Sec.  
421.210 of this chapter to process DMEPOS claims for a particular 
geographic region also processes claims for items furnished under a 
competitive bidding program in the same geographic region.


Sec.  414.408  Payment rules.

    (a) Payment basis. (1) The payment basis for an item furnished 
under a competitive bidding program is 80 percent of the single payment 
amount calculated for the item under Sec.  414.416 for the competitive 
bidding area in which the beneficiary maintains a permanent residence.
    (2) If an item that is included in a competitive bidding program is 
furnished to a beneficiary who does not maintain a permanent residence 
in a competitive bidding area, the payment basis for the item is 80 
percent of the lesser of the actual charge for the item, or the 
applicable fee schedule amount for the item, as determined under 
subparts C or D of this part.
    (b) Updating the single payment amounts. Beginning with the second 
year of a contract entered into under this subpart, the single payment 
amounts are updated by the percentage increase in the CPI-U for the 12-
month period ending with June of the preceding calendar year.
    (c) Payment on an assignment-related basis. Payment for an item 
furnished under this subpart is made on an assignment-related basis.
    (d) Applicability of advanced beneficiary notice. Implementation of 
a

[[Page 25699]]

program in accordance with this subpart does not preclude the use of an 
advanced beneficiary notice.
    (e) Adjustment of payment amounts in other areas. For items 
furnished to Medicare beneficiaries on or after January 1, 2009 for 
which payment is made under this subpart, CMS may use the single 
payment amounts determined under Sec.  414.416 of this subpart to 
adjust the amounts Medicare pays for the same items in areas that are 
not designated as competitive bidding areas.
    (f) Requirement to obtain competitively bid items from a contract 
supplier. (1) General rule. All items that are included in a 
competitive bidding program must be furnished by a contract supplier 
for that program.
    (2) Exceptions. (i) A grandfathered supplier may furnish a 
grandfathered item to a beneficiary in accordance with paragraph (k) of 
this section.
    (ii) If a beneficiary is outside of the competitive bidding area in 
which he or she maintains a permanent residence, he or she may obtain 
an item included in the competitive bidding program for that area from 
a--
    (A) Contract supplier, if the beneficiary is in another competitive 
bidding area and the item is included in the competitive bidding 
program for that area; or
    (B) Supplier, if the beneficiary is not in another competitive 
bidding area.
    (iii) Unless paragraph (f)(2) of this section applies, a 
beneficiary who maintains a permanent residence in a competitive 
bidding area has no financial liability to a supplier that furnishes an 
item included in the competitive bidding program for that area in 
violation of paragraph (f)(1) of this section.
    (3) CMS separately designates the supplier numbers of all 
noncontract suppliers to monitor compliance with paragraph (f)(1) of 
this section.
    (g) Purchased equipment. (1) The single payment amounts for new 
purchased durable medical equipment, including power wheelchairs that 
are purchased when the equipment is initially furnished, and enteral 
nutrition equipment, if included under a competitive bidding program, 
are calculated based on the bids submitted and accepted for these 
items. (2) Payment for used purchased durable medical equipment and 
enteral nutrition equipment, if included under a competitive bidding 
program, is made in an amount equal to 75 percent of the single payment 
amounts calculated for new purchased equipment under paragraph (g)(1) 
of this section.
    (h) Purchased supplies and orthotics. The single payment amounts 
for the following purchased items, if included under a competitive 
bidding program, are calculated based on the bids submitted and 
accepted for the following items:
    (1) Supplies used in conjunction with durable medical equipment.
    (2) Enteral nutrients.
    (3) Enteral nutrition supplies.
    (4) Orthotics.
    (i) Rented equipment. (1) Payment for capped rental durable medical 
equipment, if included under a competitive bidding program, is made in 
an amount equal to 10 percent of the single payment amounts calculated 
for new durable medical equipment under paragraph (g)(1) of this 
section for each of the first 3 months, and 7.5 percent of the single 
payment amounts calculated for these items for each of the remaining 
months 4 through 13.
    (2) Separate maintenance and servicing payments will not be made 
for any rented equipment. Payment for maintenance and servicing of 
rented equipment is included in the single payment amount for rental of 
the item.
    (3) Payment for enteral nutrition equipment, if included under a 
competitive bidding program, is made in an amount equal to 10 percent 
of the single payment amounts calculated for new enteral nutrition 
equipment under paragraph (g)(1) of this section for each of the first 
3 months, and 7.5 percent of the single payment amount calculated for 
these items under paragraph (g)(1) of this section for each of the 
remaining months 4 through 15. The contract supplier to which payment 
is made in month 15 for furnishing enteral nutrition equipment on a 
rental basis must continue to furnish, maintain and service the 
equipment until a determination is made by the beneficiary's physician 
or treating practitioner that the equipment is no longer medically 
necessary.
    (4) Payment for the maintenance and servicing of rented enteral 
nutrition equipment, if included under a competitive bidding program, 
is made in an amount equal to 5 percent of the single payment amounts 
calculated for these items under paragraph (g)(1) of this section.
    (5) Payment for inexpensive or routinely purchased durable medical 
equipment furnished on a rental basis, if included under a competitive 
bidding program, is made in an amount equal to 10 percent of the single 
payment amount calculated for new purchased equipment.
    (6) The single payment amounts for rented durable medical equipment 
requiring frequent and substantial servicing, if included under a 
competitive bidding program, are calculated based on the bids submitted 
and accepted for these items.
    (j) Monthly payment amounts for oxygen and oxygen equipment. The 
single payment amounts for oxygen and oxygen equipment, if included 
under a competitive bidding program, are calculated based on the 
separate bids submitted and accepted for the furnishing on a monthly 
basis of each of the four categories of oxygen and oxygen equipment 
described in Sec.  414.226(b)(1)(i) through (b)(1)(iv).
    (k) Special rules for certain rented durable medical equipment and 
oxygen and oxygen equipment. (1) Supplier election. (i) A supplier that 
is furnishing DME on a rental basis or is furnishing oxygen and oxygen 
equipment on a monthly basis to a beneficiary prior to the 
implementation of a competitive bidding program in the area where the 
beneficiary maintains a permanent residence may elect to continue 
furnishing the item as a grandfathered supplier.
    (ii) A supplier that elects to be a grandfathered supplier must 
continue to furnish a grandfathered item to all beneficiaries who elect 
to continue receiving the grandfathered item from that supplier.
    (2) Payment for grandfathered items furnished during the first 
competitive bidding program implemented in an area. Medicare pays for 
grandfathered items furnished during the first competitive bidding 
program implemented in an area as follows:
    (i) For items described in Sec.  414.220, payment is made in the 
amount determined under Sec.  414.220(b).
    (ii) For items that meet the definition of a capped rental item in 
Sec.  414.229, payment is made in the amount determined under Sec.  
414.229(b).
    (iii) For items described in Sec.  414.222, payment is made in the 
amount determined under Sec.  414.416.
    (iv) For items described in Sec.  414.226, payment is made in the 
amount determined under Sec.  414.416.
    (3) Payment for grandfathered items furnished during all subsequent 
competitive bidding programs in an area. Beginning with the second 
competitive bidding program implemented in an area, payment is made for 
grandfathered items in the amounts determined under Sec.  414.416.
    (4) Choice of suppliers. (i) Beneficiaries described in paragraph 
(k)(1) of this section may elect to obtain a grandfathered item from a 
grandfathered supplier.
    (ii) A beneficiary who is otherwise entitled to obtain an item from 
a grandfathered supplier under paragraph

[[Page 25700]]

(k) of this section may elect to obtain the same item from a contract 
supplier at any time after a competitive bidding program is 
implemented.
    (iii) If a beneficiary elects to obtain the item from a contract 
supplier, payment is made for the item in the amount determined under 
Sec.  414.416.


Sec.  414.410  Phased-in implementation of competitive bidding 
programs.

    (a) Phase-in of MSA for CY 2007, CY 2009, and subsequent calendar 
years. CMS phases in competitive bidding programs so that competition 
under the programs occurs in--
    (1) Ten of the largest MSAs in CY 2007;
    (2) Eighty of the largest MSAs in CY 2009;
    (3) Additional areas after CY 2009.
    (b) Selection of MSAs for CY 2007 and CY 2009. CMS selects the MSAs 
for purposes of designating competitive bidding areas in CY 2007 and CY 
2009 by considering the following variables:
    (1) The total population of an MSA.
    (2) The Medicare allowed charges for DMEPOS items per fee-for-
service (FFS) beneficiary in an MSA.
    (3) The total number of DMEPOS suppliers per FFS beneficiary that 
received DMEPOS items in an MSA.
    (4) An MSA's geographic location.
    (c) Exclusions from a competitive bidding area. CMS may exclude 
from a competitive bidding area a rural area (as defined in Sec.  
412.64(b)(1)(ii)(C) of this chapter), or an area with low population 
density based on the following factors--
    (1) Low utilization of DMEPOS items by Medicare FFS beneficiaries 
relative to similar geographic areas;
    (2) Low number of DMEPOS suppliers relative to similar geographic 
areas; or
    (3) Low number of Medicare FFS beneficiaries relative to similar 
geographic areas.
    (d) Selection of additional areas after CY 2009. (1) Beginning in 
CY 2010, CMS designates additional competitive bidding areas based on 
CMS' determination that the implementation of a competitive bidding 
program in an area is likely to result in significant savings to the 
Medicare program.
    (2) CMS may designate one or more regional or nationwide 
competitive bidding areas for purposes of implementing competitive 
bidding programs for items that are furnished through the mail.


Sec.  414.412  Submission of bids under a competitive bidding program.

    (a) In order for a supplier to receive payment for items furnished 
to beneficiaries under a competitive bidding program, the supplier must 
submit a bid to furnish those items and be awarded a contract under 
this subpart.
    (b) Bids are submitted for items grouped into product categories.
    (c) Product categories include items that are used to treat a 
related medical condition. The list of product categories, and the 
items included in each product category that is included in a 
particular competitive bidding program, are identified in the request 
for bids for that competitive bidding program.
    (d) Suppliers must submit a separate bid for every item included in 
each product category that they are seeking to furnish under a 
competitive bidding program.
    (e) A bid must include all costs related to furnishing an item, 
including all services directly related to the furnishing of the item.
    (f) Mail order suppliers. (1) Suppliers that furnish items through 
the mail must submit a bid to furnish these items in any area in which 
a competitive bidding program is implemented which includes the items.
    (2) Suppliers that submit one or more bids under paragraph (f)(1) 
of this section may submit the same bid amount for each item under each 
competitive bidding program for which it submits a bid.
    (g) Applicability of the mail order program. Suppliers that do not 
furnish items through the mail are not required to participate in a 
national or regional mail order competitive bidding program that 
includes the same items. Suppliers may continue to furnish these items 
in--
    (1) A competitive bidding area, if the supplier is awarded a 
contract under this subpart; or
    (2) An area not designated as a competitive bidding area.


Sec.  414.414  Conditions for awarding contracts.

    (a) General rule. The rules set forth in this section govern the 
evaluation and selection of suppliers for contract award purposes under 
a competitive bidding program.
    (b) Basic supplier eligibility. (1) Each bidding supplier must meet 
the enrollment standards specified in Sec.  424.57 of this chapter.
    (2) Each bidding supplier must--
    (i) Certify in its bid that it, its high level employees, chief 
corporate officers, members of its board of directors, its affiliated 
companies, and its subcontractors are not now and was not sanctioned by 
any governmental agency or accreditation or licensing organization, or
    (ii) Disclose information about any prior or current legal actions, 
sanctions, or debarments by any Federal, State or local program, 
including actions against any members of the board of directors, chief 
corporate officers, high-level employees, affiliated companies, and 
subcontractors.
    (3) Each bidding supplier must submit with its bid evidence of all 
State and local licenses required to perform the services identified in 
its response to the request for bids.
    (4) Each bidding supplier must agree to all the terms contained in 
the request for bids and the supplier contract.
    (c) Quality standards and accreditation. (1) Quality standards. All 
bidding suppliers must meet applicable quality standards developed by 
CMS in accordance with section 1834(a)(20) of the Act.
    (2) Accreditation. (i) All bidding suppliers must be accredited by 
a CMS approved accreditation organization, as defined under Sec.  
424.57(a) of this chapter.
    (ii) A supplier satisfies paragraph (c)(2)(i) of this section if it 
was accredited by an organization that CMS designates as a CMS-approved 
accreditation organization under Sec.  424.58 of this chapter.
    (d) Financial standards. All suppliers must meet the applicable 
financial standards specified in the request for bids.
    (e) Evaluation of bids. CMS evaluates bids submitted for a product 
category by--
    (1) Calculating the expected beneficiary demand in a competitive 
bidding area for items in a product category;
    (2) Establishing a composite bid for each supplier that submitted a 
bid for the product category;
    (3) Arraying the composite bids from the lowest to the highest;
    (4) Calculating the pivotal bid for the product category; and
    (5) Selecting all bidding suppliers whose composite bids are less 
than or equal to the pivotal bid for that product category, and that 
meet the requirements in paragraphs (b) through (d) of this section.
    (f) Expected savings. CMS does not award a contract under this 
subpart unless CMS determines that the amounts to be paid to a contract 
supplier for an item under a competitive bidding program are expected 
to be less than the amounts that would otherwise be paid for the same 
item under subparts C or D of this part.
    (g) Sufficient number of suppliers. If the requirements in 
paragraphs (e)(5) and (f) of this section are satisfied by two or more 
suppliers for a product category under a competitive bidding

[[Page 25701]]

program, then CMS awards at least two contracts for the furnishing of 
that product category under a competitive bidding program.
    (h) Selection of new suppliers after bidding. (1) Subsequent to the 
awarding of contracts under this subpart, CMS may award additional 
contracts if it determines that additional contract suppliers are 
needed to meet beneficiary demand for items under a competitive bidding 
program. CMS selects additional contract suppliers by--
    (i) Referring to the arrayed list of suppliers that submitted bids 
for the product category included in the competitive bidding program 
for which beneficiary demand is not being met; and
    (ii) Beginning with the supplier whose composite bid is the first 
composite bid above the pivotal bid for that product category, 
determining if that supplier is willing to become a contract supplier 
under the same terms and conditions that apply to other contract 
suppliers in the competitive bidding area.
    (2) Before CMS awards additional contracts under paragraph (h)(1) 
of this section, a supplier must submit updated eligibility 
information, and CMS must determine that the supplier continues to meet 
the requirements under paragraphs (b) through (d) of this section.


Sec.  414.416  Determination of competitive bidding payment amounts.

    (a) General rule. CMS establishes a single payment amount for each 
item furnished under a competitive bidding program.
    (b) Methodology for setting payment amount. (1) The single payment 
amount for an item furnished under a competitive bidding program is 
equal to the median of the accepted bids for that item that are at or 
below the pivotal bid for the product category that includes the item.
    (2) The single payment amount for an item must be less than the 
amount that would otherwise be paid for the same item under subparts C 
or D of this part.
    (c) Rebate. (1) A contract supplier that submitted a bid for an 
item in an amount that is below the single payment amount calculated by 
CMS for that item may elect to issue a rebate.
    (2) A contract supplier that elects to offer a rebate under 
paragraph (c)(1) of this section must agree to issue the same rebate to 
all beneficiaries to whom it furnishes an item to which a rebate 
applies.
    (3) A contract supplier's election to offer a rebate will be 
included as an express term in the contract supplier's contract to 
furnish items under this subpart.
    (4) The rebate election cannot be amended or otherwise modified 
during the term of the contract.
    (5) A contract supplier may not advertise that it issues a rebate 
for any item furnished under this subpart.


Sec.  414.418  Opportunity for networks.

    (a) For purposes of this section, a network is comprised of at 
least two suppliers that collectively submit a single bid to furnish 
the items included in a product category under a competitive bidding 
program.
    (b) The following rules apply to networks that seek contracts under 
this subpart:
    (1) Each network must form a single legal entity that acts as the 
bidder and submits the bid. Any agreement entered into for purposes of 
forming a network must be submitted to CMS.
    (2) Each member of the network must be independently eligible to 
bid. If CMS determines that a member of the network is ineligible to 
bid, CMS notifies the network, and the network has 10 business days to 
resubmit its bid.
    (3) Each network member must meet all accreditation and quality 
standards that are required. Each member is responsible for the quality 
of care, service, and items that it furnishes to Medicare 
beneficiaries. If any network member does not comply with this 
requirement, CMS may terminate its contract with the network.
    (4) The network cannot be anticompetitive. The network members' 
market shares for a product category, when added together, cannot 
exceed 20 percent of the Medicare market within a competitive bidding 
area.
    (5) A supplier may only join one network and cannot submit 
individual bids if part of a network. The network must identify itself 
as a network and identify all of its members.
    (6) The network must designate a primary contract supplier among 
its members. The primary contract supplier bills and receives payment 
on behalf of the network members. The primary contract supplier is 
responsible for appropriately distributing reimbursement to other 
network members.


Sec.  414.420  Physician or treating practitioner authorization and 
consideration of clinical efficiency and value of items.

    (a) A physician or treating practitioner may prescribe in writing a 
particular brand of an item for which payment is made under a 
competitive bidding program, or a particular mode of delivery for an 
item, if he or she determines that the particular brand or mode of 
delivery would avoid an adverse medical outcome for the beneficiary.
    (b)(1) The contract supplier must make a reasonable effort to 
furnish the particular brand or mode of delivery of an item as 
prescribed by the physician or treating practitioner.
    (2) A contract supplier that, despite making a reasonable effort 
under paragraph (b)(1) of this section, cannot furnish an item as 
prescribed under paragraph (a) of this section, must consult with the 
physician or treating practitioner to find an appropriate item, or mode 
of delivery, for the beneficiary.
    (3) Any change to a prescription made in accordance with paragraph 
(b)(2) of this section must be memorialized in a revised written 
prescription.
    (c) Medicare does not make an additional payment to a contract 
supplier that furnishes a particular item or provides a particular mode 
of delivery for an item, as directed by a prescription written by the 
beneficiary's physician or treating practitioner.
    (d) A contract supplier is prohibited from billing Medicare if it 
furnishes an item different from that specified in the written 
prescription received from the beneficiary's physician or treating 
practitioner.


Sec.  414.422  Terms of contracts.

    (a) A contract supplier must comply with all terms of its contract, 
including any option exercised by CMS, for the full duration of the 
contract period.
    (b) Recompeting competitive bidding contracts. CMS recompetes 
competitive bidding contracts at least once every 3 years.
    (c) Repair and replacement of patient owned equipment. (1) 
Beneficiary owned items furnished under a competitive bidding program 
must be serviced by a contract supplier for that competitive bidding 
program, and a contract supplier must agree to service all items 
included in its contract and furnished to any beneficiary who maintains 
a permanent residence in that contract supplier's competitive bidding 
area.
    (2) Paragraph (c)(1) of this section does not apply if the 
beneficiary is outside the competitive bidding area.
    (d) Change of ownership. (1) A contract supplier must notify CMS in 
writing 60 days prior to any change of ownership, mergers or 
acquisitions.
    (2) CMS may award a contract to an entity that merges with, or 
acquires, a contract supplier if--
    (i) CMS determines that awarding a contract to the successor entity 
is necessary to ensure that beneficiary

[[Page 25702]]

demand for the items furnished by the contract supplier continues to be 
met;
    (ii) The successor entity meets all requirements applicable to 
contract suppliers for the applicable competitive bidding program;
    (iii) The successor entity agrees to assume all obligations and 
liabilities borne by the prior contract supplier under the contract;
    (iv) The successor entity executes a novation agreement.
    (e) Furnishing of items. (1) A contract supplier must agree to 
furnish items under a competitive bidding program to any beneficiary 
who maintains a permanent residence in, or who visits, the competitive 
bidding area and who requests those items from that contract supplier.
    (2) Exceptions. (i) A skilled nursing facility defined under 
section 1819(a) of the Act that is also a contract supplier must agree 
to furnish items under a competitive bidding program to patients to 
whom it would otherwise furnish Part B services.
    (ii) A physician that is also a contract supplier must agree to 
furnish items under the competitive bidding program to his or her 
patients.
    (f) Breach of contract. (1) Any deviation from contract 
requirements, including a failure to comply with governmental agency or 
licensing organization requirements, constitutes a breach of contract.
    (2) In the event a contract supplier breaches the contract, CMS may 
take one or more of the following actions:
    (i) Require the contract supplier to correct the breach condition;
    (ii) Suspend performance under the contract;
    (iii) Terminate the contract for default (which may include 
requiring the contract supplier to reimburse CMS' reprocurement costs);
    (iv) Preclude the contract supplier from participating in the 
competitive bidding program;
    (v) Revoke the supplier number of the contract supplier; or
    (vi) Avail itself of other remedies allowed by law.
    (g) CMS has the right to terminate performance under the contract 
in whole or in part when termination would be in CMS' interest.


Sec.  414.424  Administrative or judicial review.

    (a) There is no administrative or judicial review under this 
subpart of the following:
    (1) Establishment of payment amounts.
    (2) Awarding of contracts.
    (3) Designation of competitive bidding areas.
    (4) Phase-in of the competitive bidding programs.
    (5) Selection of items for competitive bidding.
    (6) Bidding structure and number of contract suppliers selected for 
a competitive bidding program.
    (b) A denied claim is not appealable if CMS determines that a 
competitively bid item was furnished in a competitive bidding area in a 
manner not authorized by this subpart.


Sec.  414.426  Adjustments to competitively bid payment amounts to 
reflect changes in the HCPCS.

    If a HCPCS code for a competitively bid item is revised during a 
competitive bidding program, CMS adjusts the single payment amount for 
that item as follows:
    (a) If a single HCPCS code for an item is divided into multiple 
codes for the components of that item, the sum of single payment 
amounts for the new codes equals the single payment amount for the 
original item, and contract suppliers must furnish the components of 
the item in accordance with the new codes.
    (b) If a single HCPCS code for two or more similar items is divided 
into two or more separate codes, the single payment amount applied to 
these codes is the same single payment amount applied to the single 
code, and contract suppliers must furnish the items in accordance with 
the new codes.
    (c) If the HCPCS codes for components of an item are merged into a 
single code for the item, the single payment amount for the new code is 
equal to the total of the separate single payment amounts for the 
components, and contract suppliers must furnish the item in accordance 
with the new code.
    (d) If multiple codes for similar items are merged into a single 
code, the single payment amount for the new single code is the average 
(arithmetic mean) weighted by the frequency of payments for the 
formerly separate codes, and contract suppliers must furnish the item 
under the new single code.

PART 424--CONDITIONS FOR MEDICARE PAYMENT

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

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

Subpart A--General Provisions

    13. Section 424.1 is amended by adding in numerical order the 
statutory sections to read as follows:


Sec.  424.1  Basis and scope.

* * * * *
    1834(a)--Payment for durable medical equipment.
    1834(j)--Requirements for suppliers of medical equipment and 
supplies.
* * * * *

Subpart D--To Whom Payment is Ordinarily Made

    14. Section 424.57 is amended by--
    A. Adding the definitions ``Accredited DMEPOS supplier,'' ``CMS 
approved accreditation organization'' and ``Independent accreditation 
organization'' in alphabetical order in paragraph (a).
    B. Adding a new paragraph (c)(22).
    The additions read as follows:


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

    (a) Definitions. * * *
* * * * *
    Accredited DMEPOS supplier means a supplier that has been 
accredited by a recognized independent accreditation organization 
meeting the requirements of and approved by CMS in accordance with 
Sec.  424.58.
    CMS approved accreditation organization means a recognized 
independent accreditation organization approved by CMS under Sec.  
424.58.
* * * * *
    Independent accreditation organization means an accreditation 
organization that accredits a supplier of DMEPOS and other items and 
services for a specific DMEPOS product category or a full line of 
DMEPOS product categories.
* * * * *
    (c) Application certification standards. * * *
    (22) All suppliers of DMEPOS and other items and services must be 
accredited by a CMS approved accreditation organization before 
receiving a supplier billing number.
* * * * *
    15. A new Sec.  424.58 is added to read as follows:


Sec.  424.58  Accreditation.

    (a) Scope and purpose. This part implements section 1834(a)(20)(B) 
of the Act, which requires the Secretary to designate and approve one 
or more independent accreditation organizations for purposes of 
enforcing the quality standards for suppliers of DMEPOS and other items 
of service. Section 1847(b)(2)(A)(i) of the Act requires a DMEPOS 
supplier to meet the quality standards under section 1834(a)(20) of

[[Page 25703]]

the Act before being awarded a contract under part 414, subpart F of 
this chapter.
    (b) Application and reapplication procedures for accreditation 
organizations. (1) An independent accreditation organization applying 
for approval or reapproval of authority to survey suppliers for 
compliance with Medicare DMEPOS supplier quality standards is required 
to furnish the following to CMS:
    (i) A list of the product-specific types of DMEPOS suppliers for 
which the organization is requesting approval.
    (ii) A detailed comparison of the organization's accreditation 
requirements and standards with the applicable Medicare quality 
standards, such as a crosswalk.
    (iii) A detailed description of the organization's survey process, 
including procedures for performing unannounced surveys, frequency of 
the surveys performed, copies of the organization's survey forms, 
guidelines and instructions to surveyors, accreditation survey review 
process and the accreditation status decision-making process.
    (iv) Procedures used to notify suppliers of compliance or 
noncompliance with the accreditation requirements.
    (v) Procedures used to monitor the correction of deficiencies found 
during an accreditation survey.
    (vi) Procedures for coordinating surveys with another accrediting 
organization if the organization does not accredit all products the 
supplier provides.
    (vii) Detailed professional information about the individuals who 
perform surveys for the accreditation organization, including the size 
and composition of accreditation survey teams for each type of supplier 
accredited, and the education and experience requirements surveyors 
must meet. The information must include the following:
    (A) The content and frequency of the continuing education training 
provided to survey personnel.
    (B) The evaluation systems used to monitor the performance of 
individual surveyors and survey teams.
    (C) Policies and procedures for a surveyor or institutional 
affiliate of the independent accrediting organization that participates 
in a survey or accreditation decision regarding a DMEPOS supplier with 
which that individual or institution is professionally or financially 
affiliated.
    (viii) A description of the organization's data management, 
analysis and reporting system for its surveys and accreditation 
decisions, including the kinds of reports, tables, and other displays 
generated by that system.
    (ix) Procedures for responding to, and investigating complaints 
against, accredited facilities, including policies and procedures 
regarding coordination of these activities with appropriate licensing 
bodies, ombudsmen programs, the National Supplier Clearinghouse, and 
CMS.
    (x) The organization's policies and procedures for notifying CMS of 
facilities that fail to meet the accreditation organization's 
requirements.
    (xi) A description of all types, categories, and durations of 
accreditations offered by the organization.
    (xii) A list of the following:
    (A) All currently accredited DMEPOS suppliers.
    (B) The types and categories of accreditation currently held by 
each supplier.
    (C) The expiration date of each supplier's current accreditation.
    (D) The upcoming survey cycles for all DMEPOS suppliers' 
accreditation surveys scheduled to be performed by the organization. 
(xiii) A written presentation that demonstrates the organization's 
ability to furnish CMS with electronic data in ASCII comparable code.
    (xiv) A resource analysis that demonstrates that the organization's 
staffing, funding and other resources are adequate to perform fully the 
required surveys and related activities.
    (xv) An agreement that makes surveyors available as witnesses if 
CMS takes an adverse action based on accreditation findings.
    (2) Validation survey. CMS surveys suppliers of DMEPOS and other 
items and services accredited under this section on a representative 
sample basis, or in response to substantial allegations of 
noncompliance, in order to validate the accreditation organization's 
survey process. When conducted--
    (i) On a representative sample basis, the CMS survey may be 
comprehensive or focus on a specific standard;
    (ii) In response to a substantial allegation, CMS surveys for any 
standard that CMS determines is related to the allegations.
    (3) Discovery of a deficiency. If CMS discovers a deficiency and 
determines that the DMEPOS supplier is out of compliance with Medicare 
supplier quality standards, CMS may revoke the suppliers' billing 
number or require the accreditation organization to perform a 
subsequent full accreditation survey at the accreditation 
organization's expense.
    (4) A supplier selected for a validation survey. A supplier 
selected for a validation survey must authorize the--
    (i) Validation survey to take place; and
    (ii) CMS survey team to monitor the correction of any deficiencies 
found through the validation survey.
    (5) Refusal to cooperate with survey. If a supplier selected for a 
validation survey fails to comply with the requirements specified at 
paragraph (b)(4) of this section, it is deemed to no longer meet the 
Medicare supplier quality standards and may have its supplier billing 
number revoked.
    (6) Validation survey findings. If a validation survey results in a 
finding that the supplier is out of compliance with one or more 
Medicare supplier quality standards, the supplier no longer meets the 
Medicare standards and may have its supplier billing number revoked.
    (c) Ongoing responsibilities of a CMS approved accreditation 
organization. An accreditation organization approved by CMS must 
undertake the following activities on an ongoing basis:
    (1) Provide to CMS all of the following in written format and on a 
monthly basis all of the following:
    (i) Copies of all accreditation surveys, together with any survey-
related information that CMS may require (including corrective action 
plans and summaries of unmet CMS requirements).
    (ii) Notice of all accreditation decisions.
    (iii) Notice of all complaints related to suppliers of DMEPOS and 
other items and services.
    (iv) Information about any suppliers of DMEPOS and other items and 
services against which the CMS approved accreditation organization has 
taken remedial or adverse action, including revocation, withdrawal, or 
revision of the supplier's accreditation.
    (v) Notice of any proposed changes in its accreditation standards 
or requirements or survey process. If the organization implements the 
changes before or without CMS' approval, CMS may withdraw its approval 
of the accreditation organization.
    (2) Within 30 days of a change in CMS requirements, submit to CMS:
    (i) An acknowledgment of CMS' notification of the change.
    (ii) A revised cross-walk reflecting the new requirements.
    (iii) An explanation of how the accreditation organization plans to 
alter its standards to conform to CMS's new requirements, within the 
timeframes

[[Page 25704]]

specified in the notification of change it receives from CMS.
    (3) Permit its surveyors to serve as witnesses if CMS takes an 
adverse action based on accreditation findings.
    (4) Within 2 calendar days of identifying a deficiency of an 
accredited DMEPOS supplier that poses immediate jeopardy to a 
beneficiary or to the general public, provide CMS with written notice 
of the deficiency and any adverse action implemented by the 
accreditation organization.
    (5) Within 10 days after CMS's notice to a CMS approved 
accreditation organization that CMS intends to withdraw approval of the 
accreditation organization, provide written notice of the withdrawal to 
all the CMS approved accreditation organization's accredited suppliers.
    (6) Provide, on an annual basis, summary data specified by CMS that 
relate to the past year's accreditation activities and trends.
    (d) Continuing Federal oversight of approved accreditation 
organizations. This paragraph establishes specific criteria and 
procedures for continuing oversight and for withdrawing approval of a 
CMS approved accreditation organization.
    (1) Equivalency review. CMS compares the accreditation 
organization's standards and its application and enforcement of those 
standards to the comparable CMS requirements and processes when--
    (i) CMS imposes new requirements or changes its survey process;
    (ii) An accreditation organization proposes to adopt new standards 
or changes in its survey process; or
    (iii) The term of an accreditation organization's approval expires.
    (2) Validation survey. CMS or its designated survey team may 
conduct a survey of an accredited DMEPOS supplier, examine the results 
of a CMS approved accreditation organization's survey of a supplier, or 
observe a CMS approved accreditation organization's onsite survey of a 
DMEPOS supplier, in order to validate the CMS approved accreditation 
organization's accreditation process. At the conclusion of the review, 
CMS identifies any accreditation programs for which validation survey 
results indicate--
    (i) A 10 percent rate of disparity between findings by the 
accreditation organization and findings by CMS or its designated survey 
team on standards that do not constitute immediate jeopardy to patient 
health and safety if unmet;
    (ii) Any disparity between findings by the accreditation 
organization and findings by CMS on standards that constitute immediate 
jeopardy to patient health and safety if unmet; or
    (iii) That, irrespective of the rate of disparity, there are 
widespread or systemic problems in an organization's accreditation 
process such that accreditation by that accreditation organization no 
longer provides CMS with adequate assurance that suppliers meet or 
exceed the Medicare requirements.
    (3) Notice of intent to withdraw approval. CMS provides the 
organization written notice of its intent to withdraw approval if an 
equivalency review, validation review, onsite observation, or CMS's 
daily experience with the accreditation organization suggests that the 
accreditation organization is not meeting the requirements of this 
section.
    (4) Withdrawal of approval. CMS may withdraw its approval of an 
accreditation organization at any time if CMS determines that--
    (i) Accreditation by the organization no longer guarantees that the 
suppliers of DMEPOS and other items and services are meeting the 
supplier quality standards, and that failure to meet those requirements 
could jeopardize the health or safety of Medicare beneficiaries and 
could constitute a significant hazard to the public health; or
    (ii) The accreditation organization has failed to meet its 
obligations with respect to application or reapplication procedures.
    (e) Reconsideration. (1) An accreditation organization dissatisfied 
with a determination that its accreditation requirements do not provide 
or do not continue to provide reasonable assurance that the entities 
accredited by the accreditation organization meet the applicable 
supplier quality standards is entitled to a reconsideration. CMS 
reconsiders any determination to deny, remove, or not renew the 
approval of deeming authority to accreditation organizations if the 
accreditation organization files a written request for reconsideration 
by its authorized officials or through its legal representative.
    (2) The request must be filed within 30 days of the receipt of CMS 
notice of an adverse determination or non renewal.
    (3) The request for reconsideration must specify the findings or 
issues with which the accreditation organization disagrees and the 
reasons for the disagreement.
    (4) A requestor may withdraw its request for reconsideration at any 
time before the issuance of a reconsideration determination.
    (5) In response to a request for reconsideration, CMS provides the 
accreditation organization the opportunity for an informal hearing to 
be conducted by a hearing officer appointed by the Administrator of CMS 
and provide the accreditation organization the opportunity to present, 
in writing and in person, evidence or documentation to refute the 
determination to deny approval, or to withdraw or not renew deeming 
authority.
    (6) CMS provides written notice of the time and place of the 
informal hearing at least 10 days before the scheduled date.
    (7) The informal reconsideration hearing is open to CMS and the 
organization requesting the reconsideration, including authorized 
representatives; technical advisors (individuals with knowledge of the 
facts of the case or presenting interpretation of the facts); and legal 
counsel.
    (i) The hearing is conducted by the hearing officer who receives 
testimony and documents related to the proposed action.
    (ii) Testimony and other evidence may be accepted by the hearing 
officer even though it is inadmissible under the rules of court 
procedures.
    (iii) The hearing officer does not have the authority to compel by 
subpoena the production of witnesses, papers, or other evidence.
    (8) Within 45 days of the close of the hearing, the hearing officer 
presents the findings and recommendations to the accreditation 
organization that requested the reconsideration.
    (9) The written report of the hearing officer includes separate 
numbered findings of fact and the legal conclusions of the hearing 
officer. The hearing officer's decision is final.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program; Catalog of Federal Domestic Assistance Program 
No. 93.773, Medicare--Hospital Insurance; and Program No. 93.774, 
Medicare--Supplementary Medical Insurance Program)

    Dated: August 15, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: April 3, 2006.
Michael O. Leavitt,
Secretary.
[FR Doc. 06-3982 Filed 4-24-06; 4:00 pm]
BILLING CODE 4120-01-P