Medicare: Orthotics Ruling Has Implications for Beneficiary	 
Access and Federal and State Costs (22-MAY-02, GAO-02-330).	 
                                                                 
In the late 1980s and early 1990s, the Health Care Financing	 
Administration (HCFA), now called the Centers for Medicare and	 
Medicaid Services (CMS), became concerned that some suppliers	 
were improperly billing Medicare for certain items that attach to
wheelchairs and other equipment. These suppliers were billing	 
such items using codes for orthotic devices, which include leg,  
arm, back, and neck braces that provide rigid or semi-rigid	 
support to weak or deformed body parts or restrict or eliminate  
motion in a diseased or injured part of the body. However, other 
suppliers were billing devices that served essentially the same  
purpose using codes for durable medical equipment (DME), which is
equipment--such as wheelchairs and crutches--that serves a	 
medical purpose, can withstand repeated use, is not generally	 
useful in the absence of an illness or injury, and is appropriate
for use in the home. Whether an item is billed as an orthotic or 
DME device can affect whether such claims are paid. To clarify	 
Medicare's payment policy on orthotics, HCFA issued a ruling	 
stating that Medicare's long-standing policy was to consider	 
items that attach to DME as DME and not orthotics. HCFA issued	 
Ruling 96-1 to clarify the circumstances under which certain	 
items would be classified as orthotics or as DME for Medicare	 
part B payment purposes. A federal appellate court found that	 
HFCA had followed appropriate procedures to issue the rule as an 
interpretation of Medicare policy, the interpretation in the	 
ruling was wholly supportable, and the treating of seating	 
systems as DME was consistent with congressional intent. HCFA's  
ruling that attached bracing devices were in the DME benefits	 
category and could no longer be billed as orthotics affects	 
beneficiaries residing in Medicare-certified skilled nursing	 
facilities and other institutions primarily engaged in providing 
skilled nursing care (SNF). Because Medicare part B does not	 
cover DME in SNFs and other institutions primarily engaged in	 
providing skilled nursing care, claims for such items are no	 
longer paid for residents in nursing homes. This ruling affects  
residents of all nursing homes, not just SNFs. If HCFA's ruling  
were rescinded and Medicare's policy changed so that attached	 
bracing devices were classified as orthotics, how much Medicare  
and Medicaid spend if for orthotics would increase is uncertain. 
The increase in Medicare spending would depend on how extensively
attached bracing devices would be provided to nursing home	 
residents following the ruling's recission. There are a number of
program integrity implications should the ruling be rescinded.	 
The distinction between DME and orthotics would become less	 
clear, which could lead to inappropriate billing. Therefore, if  
the ruling were rescinded, additional controls, such as closely  
monitoring billing and reviewing medical justification for	 
customized items prior to payment, would be vital to help curb	 
potentially inappropriate billing.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-330 					        
    ACCNO:   A03360						        
  TITLE:     Medicare: Orthotics Ruling Has Implications for	      
Beneficiary Access and Federal and State Costs			 
     DATE:   05/22/2002 
  SUBJECT:   Billing procedures 				 
	     Health insurance					 
	     Health insurance cost control			 
	     Health resources utilization			 
	     Medical equipment					 
	     Managed health care				 
	     Health care costs					 
	     Skilled nursing facilities 			 
	     HCFA Common Procedure Coding System		 
	     Medicaid Program					 
	     Medicare Program					 


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GAO-02-330
     
Report to Congressional Requesters

United States General Accounting Office GAO

May 2002 MEDICARE Orthotics Ruling Has Implications for Beneficiary Access
and Federal and State Costs

GAO- 02- 330

Page i GAO- 02- 330 HCFA's Orthotics Ruling Letter 1 Results in Brief 4
Background 6 HCFA?s Ruling Issued to Clarify Medicare Policy for Orthotics
and DME 11 HCFA?s Ruling Affects Beneficiaries Who Reside in Nursing Homes
13 Rescinding the Ruling Would Increase Medicare Payments, But Financial
Impact on States Would Vary 22 Ruling?s Rescission Would Have Implications
for Medicare

Program Integrity 25 Concluding Observations 29 Agency Comments and Our
Evaluation 30 Appendix I Scope and Methodology 32

Appendix II Excerpt from HCFA?s Ruling 96- 1 35

Appendix III Comments from the Centers for Medicare and Medicaid Services 36

Table

Table 1: Orthotic and DME Coverage for Medicare Beneficiaries 9 Table 2:
Attached Bracing Devices HCFA?s Coding System Classified as Orthotics Prior
to the Ruling 15 Figure

Figure 1: Total Part B Annual Claims for Nine Attached Bracing Devices
Affected by the Ruling from 1993 through 2000 17 Contents

Page ii GAO- 02- 330 HCFA's Orthotics Ruling Abbreviations

ALJ administrative law judge BIPA Medicare, Medicare, and SCHIP Benefits
Improvement and Protection Act of 2000 CMS Centers for Medicare and Medicaid
Services DME durable medical equipment DMEPOS durable medical equipment,
orthotics, prosthetics, and

supplies DMERC durable medical equipment Regional Carrier HCFA Health Care
Financing Administration

HCPCS Healthcare Common Procedure Coding System HHS Department of Health and
Human Services ICF Intermediate care facility MDS minimum data set

NF nursing facility OBRA Omnibus Budget Reconciliation Act of 1990 OEI
Office of Evaluation and Inspections OIG Office of Inspector General RESNA
Rehabilitation Engineering and Assistive Technology

Society of North America SCHIP State Children?s Health Insurance Program SNF
skilled nursing facility

Page 1 GAO- 02- 330 HCFA's Orthotics Ruling May 22, 2002 The Honorable Max
Baucus

Chairman The Honorable Charles E. Grassley Ranking Minority Member Committee
on Finance

United States Senate The Honorable W. J. ?Billy? Tauzin Chairman The
Honorable John D. Dingell Ranking Minority Member Committee on Energy and
Commerce

House of Representatives The Honorable William M. Thomas Chairman The
Honorable Charles B. Rangel Ranking Minority Member Committee on Ways and
Means

House of Representatives In the late 1980s and early 1990s, the Health Care
Financing Administration (HCFA- now called the Centers for Medicare and
Medicaid Services or CMS) 1 -became concerned that some suppliers were
improperly billing Medicare for certain items that attach to wheelchairs

and other equipment. These suppliers were billing such items using codes for
orthotic devices, which include leg, arm, back, and neck braces that provide
rigid or semi- rigid support to weak or deformed body parts or restrict or
eliminate motion in a diseased or injured part of the body. However, other
suppliers were billing devices that served essentially the same purpose
using codes for durable medical equipment (DME), which is equipment- such as
wheelchairs and crutches- that serves a medical purpose, can withstand
repeated use, is not generally useful in the absence 1 On June 14, 2001, the
Secretary of Health and Human Services announced that the name of the Health
Care Financing Administration (HCFA) had been changed to CMS. In this
report, we will continue to refer to HCFA where the actions or statements
occurred before June

14, 2001.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 330 HCFA's Orthotics Ruling of an illness or injury, and is
appropriate for use in the home. 2 Whether an item is billed as an orthotic
or DME device can affect whether such claims are paid. To clarify Medicare?s
payment policy on orthotics, HCFA issued Ruling 96- 1 in September 1996. The
ruling stated that Medicare?s longstanding

policy was to consider items that attach to DME (or to other equipment) as
DME and not orthotics.

Medicare covers both orthotics and DME when medically necessary and
prescribed by a physician, but the type of coverage depends on where the
beneficiary receives care. For example, under part B, which is the part of
the program that pays for physician, laboratory, and certain other services,

Medicare covers both orthotics and DME for beneficiaries in their homes or
in institutions that serve as their homes, but covers only orthotics for
beneficiaries in a skilled nursing facility (SNF). 3 In contrast, some
states? Medicaid programs cover and pay for customized DME 4 items for
program

beneficiaries in SNFs, including wheelchairs with attachments that have been
measured and fitted to the beneficiary. Often such residents are eligible
for both Medicare and Medicaid benefits. In addition to HCFA?s concerns
about billing for certain items that attach

to wheelchairs and other equipment as orthotic devices, the Department of
Health and Human Services (HHS) Office of Inspector General (OIG) reported
several times on other types of problems related to inappropriate Medicare
payment for orthotic devices. 5 For example, when the OIG

reviewed a sample of beneficiary medical records, it found that many 2 42 C.
F. R. sect. 414.202 (2001). 3 The Medicare provision pertaining to DME does not
explicitly say that a SNF can never be considered a beneficiary?s home. 42
U. S. C. sect. 1395x( n) (Supp. IV 1998). Through cross- reference to part of
the Medicare definition of a SNF, it provides that an institution

(or a distinct part of an institution) ?primarily engaged in providing?
skilled nursing care or rehabilitation services may not be considered a
beneficiary?s home. 42 U. S. C. sect. 1395i- 3( a)( 1) (1994). For DME purposes,
CMS interprets the definition to encompass any

nursing home primarily engaged in providing skilled nursing care or
rehabilitation services, whether or not it is certified as a SNF. 4
Customized DME is uniquely constructed or substantially modified for a
specific beneficiary. 42 C. F. R. sect. 414.224 (2001). 5 Office of Inspector
General, Department of Health and Human Services, Medicare Payment for
Orthotics: Inappropriate Payments, OEI- 02- 99- 00120 (Washington, D. C.:
March 2000); Office of Inspector General, Department of Health and Human
Services,

Medicare Orthotics, OEI- 02- 95- 00380 (Washington, D. C.: October 1997);
and Office of Inspector General, Department of Health and Human Services,
Medicare Payments for Orthotic Body Jackets, OEI- 04- 92- 01080 (Washington,
D. C.: June 1994).

Page 3 GAO- 02- 330 HCFA's Orthotics Ruling orthotic devices were not being
provided to the beneficiaries as billed. The OIG also reported that
practitioners who had not been certified to

dispense these items were more likely than other suppliers to bill
inappropriately. To help address these program integrity concerns, in March
2000 the OIG recommended that only qualified practitioners be allowed to
provide to beneficiaries custom- fabricated orthotic devices that are
individually made for a specific patient. 6 In response, the Medicare,

Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA)
restricted payment for custom- fabricated orthotic devices that are
individually fabricated over a positive model of the patient- custommolded
devices- to practitioners and suppliers meeting prescribed accreditation or
other requirements. 7 The BIPA requirement applies only to custom- molded
orthotic items, but not to other custom- fabricated orthotic devices.

Cognizant of program integrity issues and concerned that the HCFA ruling
could have adversely affected Medicare beneficiaries, the Congress directed
us in BIPA to study the ruling. 8 We addressed the following questions: (1)
Why did HCFA issue its ruling and did it follow required procedures in
issuing it? (2) What has been the impact of the ruling on Medicare
beneficiaries? (3) If the ruling were rescinded by CMS, what would be the
financial impact on Medicare and Medicaid? (4) Given the

new BIPA requirement, what would be the implications for Medicare program
integrity if the ruling were rescinded? In preparing this report, we
conducted interviews with officials and

representatives from CMS, and from durable medical equipment regional
carriers (DMERC), who are contractors that process orthotics and DME claims.
We interviewed representatives from state Medicaid programs to determine the
potential financial impact of changing the ruling on states? Medicaid
spending for individuals dually- eligible for Medicare and

Medicaid. We also interviewed representatives from the OIG, advocacy groups,
orthotic industry representatives, and provider associations; reviewed
federal statutes and regulations, documents related to a legal challenge to
the ruling, CMS documents, and Medicare coverage policy;

6 See OEI- 02- 99- 00120. In 1997, the OIG made a similar recommendation-
see OEI- 02- 9500380. 7 Pub. L. No. 106- 554, App. F, sect. 427( a), 114 Stat.
2763, 2763A- 520 (to be codified at 42 U. S. C. sect. 1395m( h)( 1)( F)). 8 BIPA
sect. 427( c).

Page 4 GAO- 02- 330 HCFA's Orthotics Ruling and analyzed data on orthotic
claims and characteristics of nursing home residents. Appendix I presents
the details of our methodology. We performed our work from January 2001
through March 2002 in accordance with generally accepted government auditing
standards.

HCFA issued Ruling 96- 1 to clarify the circumstances under which certain
items would be classified as orthotics or as DME for Medicare part B payment
purposes. In the late 1980s and early 1990s, certain suppliers of an item
that consisted of many separate supports that attached to a frame were
billing part B for each support as a separate orthotic brace, using multiple
orthotics billing codes that described braces expected to be used
independently of other medical equipment. As DMERCs became aware of this
billing practice, they began to deny these orthotics claims because the
attached bracing devices 9 being provided as a group appeared to be similar
in function to a seating system or customized wheelchair, which was
considered DME. The distinction between orthotics and DME is significant
because orthotics can be paid for beneficiaries in SNFs under part B, but
DME cannot. While contractors began to deny such orthotics claims, in one
significant case involving multiple claims, an administrative law judge

(ALJ), who hears appeals of contractors? payment decisions, overturned some
of the claims denials. In order to clarify Medicare?s policy in a manner
that would be binding on ALJs, HCFA ruled that leg, arm, back, and neck
braces that are used independently are orthotics, whereas similar items that
are attached to equipment are DME. The validity of the agency?s orthotics
ruling was challenged in court, with the plaintiffs charging that the ruling
had been issued without following required

administrative procedures. However, a federal appellate court found that
HCFA had followed appropriate procedures to issue the rule as an
interpretation of Medicare policy, the interpretation in the ruling was
wholly supportable, and the treatment of seating systems as DME was
consistent with congressional intent. 10 9 In this report, we are using the
term ?attached bracing devices? to refer to the type of

items referenced in HCFA?s orthotics ruling that are attached to equipment
and support a body part, which is not meant to imply that they are braces or
orthotics under the Medicare statute or for part B payment purposes. CMS and
its DMERCs determine whether an item is a brace or orthotic under the
Medicare statute or for part B payment purposes.

10 Warder v. Shalala, 149 F. 3d 73 (1st Cir 1998), cert. denied, 526 U. S.
1064 (1999). Results in Brief

Page 5 GAO- 02- 330 HCFA's Orthotics Ruling HCFA?s ruling that attached
bracing devices were in the DME benefit category and could no longer be
billed as orthotics affects beneficiaries

residing in Medicare- certified SNFs and other institutions primarily
engaged in providing skilled nursing care- which include most nursing homes.
The ruling had no impact on beneficiaries living at home, or in

settings such as assisted living facilities, because Medicare covers both
orthotics and DME under part B for them. Therefore, claims for attached
bracing devices are still paid as DME for such beneficiaries following the
ruling. However, because Medicare part B does not cover DME in SNFs and
other institutions primarily engaged in providing skilled nursing care,
claims for such items are no longer paid for residents in nursing homes, who
would therefore need to purchase such devices with their own resources or
through other payers. Because attached bracing devices were clearly
classified as DME after the ruling, Medicare part B expenditures for such
devices declined by at least $1.4 million between 1996 and 1997 for

beneficiaries living in nursing homes and remained lower in subsequent
years. The ruling affected residents of all nursing homes, not just SNFs,
because the DMERCs? practice is not to pay for DME for any nursing home
residents, assuming that all nursing homes meet HCFA?s criteria for
institutions primarily engaged in providing skilled nursing care. If HCFA?s
ruling were rescinded and Medicare?s policy changed so that attached bracing
devices were classified as orthotics, how much Medicare and Medicaid
spending for orthotics would increase is uncertain. With a rescission of the
ruling, Medicare would pay for attached bracing devices for any nursing home
resident if medically necessary. The increase in Medicare spending would
depend on how extensively attached bracing devices would be provided to
nursing home residents following the ruling?s rescission. If utilization
returned to the pre- ruling level, Medicare?s annual costs for attached
bracing devices for nursing home residents would grow by a modest amount-
about $1.8 million, given previous claims volume and current payment
amounts. However, the potential exists for even greater spending increases.
Estimates of the number of beneficiaries who live in nursing homes, use
wheelchairs, and thus might potentially use such devices, are much higher
than prior utilization levels.

A payment change would provide financial incentives for suppliers to furnish
attached bracing devices to such beneficiaries. Rescinding the ruling would
affect individual state Medicaid programs? spending differently, depending
on their existing coverage policies. States that separately cover these
devices for beneficiaries in nursing homes would likely see a decrease in
expenditures because most of the cost of providing the devices would shift
from Medicaid to Medicare. In contrast, states not separately covering these
devices would likely see some increase in

Page 6 GAO- 02- 330 HCFA's Orthotics Ruling expenditures because they would
be responsible for some costs not paid by Medicare, such as copayments, for
beneficiaries who are covered by

both programs. However, to the extent that the costs of such items were part
of the per diem rates paid to nursing homes, states may decide to adjust
their Medicaid per diem rates downward to reflect this coverage change,
which could moderate their spending increases.

There are a number of program integrity implications should the ruling be
rescinded. HCFA issued its ruling to address concerns about inappropriate
billing for attached bracing devices under part B and thereby clarified the

distinction between DME and orthotics. If the ruling were rescinded, the
distinction between DME and orthotics would become less clear, which could
lead to inappropriate billing. Should the ruling be rescinded, the
requirement added by BIPA that restricts payment to qualified providers for
custom- molded orthotics would not safeguard against inappropriate billing
because none of the types of attached bracing devices that we identified as
affected by the ruling are fabricated in this manner.

Therefore, if the ruling were rescinded, additional controls, such as
closely monitoring billing and reviewing medical justification for
customized items prior to payment, would be vital to help curb potentially
inappropriate billing.

In commenting on a draft of this report, CMS generally agreed with the
report?s conclusions. CMS further noted that the federal appellate court,
which had held that the orthotics ruling was properly issued, had also

found that the content of the ruling was wholly supportable and that the
ruling well effectuated congressional intent by classifying seating systems
as DME. In addition, CMS also raised concerns about the potential impact
that rescinding the ruling could have on the provision of other types of
equipment as orthotics in SNFs.

CMS, an agency within HHS, is responsible for much of the federal
government?s multi- billion dollar payments for health care, primarily
through the Medicare and Medicaid programs. Medicare covers about 40 million
individuals 65 years old and older, as well as some disabled individuals.
Eligible individuals enroll to receive part A insurance, which helps pay for
inpatient hospital, SNF, hospice, and certain home health services. Most
Medicare beneficiaries also elect to purchase part B insurance, which helps
pay for physician, outpatient hospital, laboratory, and other services.
Background

Page 7 GAO- 02- 330 HCFA's Orthotics Ruling Medicaid is a state-
administered health insurance program, jointly funded by the federal and
state governments, that covers approximately 40 million

eligible low- income individuals including children and their parents, the
aged, blind, and disabled. Each state administers its own program and
determines, under broad federal guidelines, eligibility for, coverage of,
and reimbursement for specific services and items, such as orthotics and
DME. In 2000, about 5.5 million low- income aged and disabled Medicare
beneficiaries were also covered by Medicaid. 11 For such beneficiaries,
Medicare serves as their primary health care coverage, while Medicaid pays
for certain other health care costs. The extent of their Medicaid coverage
is primarily dependent on their income. For the lowest income beneficiaries,
Medicaid covers long- term care, prescription drugs, and their Medicare part
B premiums, deductibles, and copayments, as well as other items and services
not available through Medicare. For those duallyeligible beneficiaries with
somewhat higher incomes, Medicaid support is limited to cost sharing and/ or
part B premiums.

Benefits covered by Medicare are broadly established in statute and further
delineated through regulation and other means, such as rulings. Generally, a
regulation is a substantive requirement promulgated by a federal agency that
has the force and effect of law. Such regulations are generally first
proposed, to allow for a period of public notice and comment, before they
are finalized. In addition to such substantive regulations, CMS also issues
interpretive rules- including administrative rulings- that are decisions of
the agency?s administrator that serve as final opinions and statements of
policy and interpretation. They provide clarification on, and interpretation
of, complex or ambiguous provisions of the law or regulations relating to
Medicare, Medicaid, and related matters.

CMS characterizes rulings as interpreting previously promulgated policies,
rather than establishing new policies. Rulings are final upon issuance
without prior public notice or comment period.

Medicare pays for orthotic devices and DME under both its part A and part B
benefits. Through its post- hospital extended care services benefit under
part A, Medicare pays for inpatient skilled nursing care and rehabilitative
services furnished by a SNF. To qualify for this benefit, a Medicare

11 These individuals, called ?dual eligibles,? receive Medicare benefits and
also some form of Medicaid assistance. Dual eligibles include individuals
who either receive full Medicaid benefits (i. e., prescription drugs and
nursing home care) and Medicaid coverage of

Medicare?s cost- sharing and premiums or individuals who only receive some
assistance with Medicare cost- sharing and premiums.

Page 8 GAO- 02- 330 HCFA's Orthotics Ruling beneficiary must be admitted to
the SNF within a short period (generally 30 days) after a hospital stay of
at least 3 days and receive daily skilled

nursing care or rehabilitative services for a condition related to
hospitalization. Medicare?s part A per diem payment generally covers all
necessary services and supplies provided by the SNF, such as room, board,
and drugs, for as long as the need for daily skilled care continues, up to
100 days 12 of care per benefit period. 13 Medicare also covers both
orthotics and DME under the part A per diem payment for a beneficiary in a
SNF. HCFA considered whether orthotics should be separately reimbursed under
part B when the SNF payment method was being

developed. In advising the Congress on what to include in the part A per
diem payment, the agency took the position that it would be appropriate to
include orthotics in the SNF part A per diem payment, because orthotics were
frequently used, and could be overprovided, if separately reimbursed under
part B. 14 Medicare also covers orthotic devices and DME under part B in
some instances. Orthotic devices are covered under part B for a beneficiary
who

is not in a part A- covered SNF or hospital stay. In contrast, DME is not
covered under part B for a beneficiary in a facility that is primarily
engaged in providing skilled nursing or rehabilitative services. These

facilities include SNFs certified for Medicare part A payment and other
facilities that meet criteria developed by HCFA and used to determine
whether a facility is a SNF for DME payment purposes. However, Medicare part
B covers both orthotics and DME for a beneficiary living at home or in an
institution (other than a Medicare- certified SNF or other facility that
meets HCFA?s SNF criteria) that serves as a home. Information summarizing
Medicare coverage for orthotics and DME is presented in

table 1. 12 The beneficiary is responsible for up to $99 per day for days 21
through 100. 13 A benefit period begins on the first day of an inpatient
hospital stay and ends 60 days after the beneficiary is discharged from the
hospital or from a SNF or other inpatient facility

providing skilled nursing or rehabilitative services. There is no limit to
the number of benefit periods for a beneficiary.

14 U. S. General Accounting Office, Skilled Nursing Facilities: Services
Excluded From Medicare?s Daily Rate Need to be Reevaluated, GAO- 01- 816
(Washington, D. C.: Aug. 22, 2001).

Page 9 GAO- 02- 330 HCFA's Orthotics Ruling Table 1: Orthotic and DME
Coverage for Medicare Beneficiaries Location of beneficiary Medicare
coverage

Skilled nursing facility or hospital (part A stay) Medicare?s per diem under
part A

 includes orthotics and

 includes DME. a Skilled nursing facility (not part A stay) Medicare part B

 covers orthotics, but  does not cover DME. a Home, including an
institution serving as home Medicare part B  covers orthotics and  covers
DME. a Part B payment for DME is allowed within 2 days prior to discharge
from a SNF to allow for fitting of equipment for use in the home and
training the beneficiary in its use. Source: GAO analysis of Medicare
coverage policy. Suppliers and practitioners bill Medicare part B for
orthotics and DME using the Healthcare Common Procedure Coding System
(HCPCS) codes. Certain HCPCS codes are designated for orthotic devices,
while others are designated for DME. Orthotic HCPCS code listings give a
brief description of the device and state whether the device is
prefabricated or customfabricated. Prefabricated, off- the- shelf devices
are manufactured in quantity, such as an adjustable, semi- rigid, knee-
joint brace. A prefabricated orthotic may be trimmed, bent, adjusted, or
otherwise modified for use by a specific patient. An orthotic device that is
custom assembled from prefabricated components is still considered

prefabricated. Custom- fabricated devices are individually made for a
specific patient, starting with basic materials, such as plastic, metal,
leather, or cloth. These would include devices such as an ankle and foot
brace that is attached to a shoe to control stability of the ankle and has
been custom fabricated based on measurements of the patient?s ankle and
foot. Custom- fabricated orthotics include custom- molded devices, which are
molded to a model of the patient- such as an ankle and foot brace custom-
molded on a casting made from an impression of the patient?s ankle and foot.
15 Orthotics and DME suppliers and providers claim reimbursement for the
services and products provided to Medicare beneficiaries under part B

15 Molded to a patient model refers to the process in which an impression is
made of a specific body part, and the impression is used to make a positive
model of the body part. The orthotic device is then molded using this
positive model.

Page 10 GAO- 02- 330 HCFA's Orthotics Ruling from CMS?s four DMERCs. 16
DMERCs are responsible for checking the validity of, and paying, orthotics
and DME claims. Medicare part B has

different methodologies, specified in law, for determining payment amounts
for different categories of DME, 17 but generally uses separate fee
schedules for each state, based on historical charges that have been updated
some years to reflect inflation. 18 There are also upper and lower limits on
the fees paid for DME. 19 For orthotics, Medicare uses 10 regional fee
schedules, which are also based on historical supplier charges and are
subject to upper and lower limits. 20 Payments for DME and orthotics are
based on the lesser of the fee schedule amount or the submitted charge. DME
and orthotics fee schedules include amounts for newly purchased items,
rented items, and for purchase of used devices. The beneficiary is
responsible for a 20 percent copayment for DME and orthotics covered

under part B. 16 In October 1993, HCFA began processing all Medicare part B
claims for medical equipment, orthotics, prosthetics, and supplies through
DMERCs. Each DMERC serves a separate region of the country. 17 For DME and
other covered medical supplies, there are six payment categories. These are

(1) inexpensive and other routinely purchased items, (2) items requiring
frequent and substantial servicing, (3) certain customized items, (4) oxygen
and oxygen equipment, (5) other covered items (not DME), and (6) other DME
(frequently referred to as capped rental items). 42 U. S. C. sect. 1395m( a)(
2)-( 7) (1994 & Supp. IV 1998). Separate provisions address

Medicare payments for covered prosthetics and orthotics. 42 U. S. C. sect.
1395m( h) (1994 & Supp. IV 1998) and BIPA sect. 427( a).

18 Prior to 1998, these fees were adjusted each year using formulas tied to
the Consumer Price Index. No update was provided from 1998 through 2000 or
in 2002, although updates were provided in 2001. 42 U. S. C. sect. 1395m( a)(
14) (Supp. IV 1998); Medicare, Medicaid and SCHIP Balanced Budget Refinement
Act of 1999, Pub. L. No. 106- 113, App. F, sect. 228, 113 Stat. 1501, 1501A-
356; and BIPA sect. 425. 19 The upper limit is equal to the median or midpoint
of the statewide fee schedule amounts. The lower limit is equal to 85
percent of the median of the statewide fee schedule amounts. 20 For
orthotics, the upper limit is based on 120 percent of the average of the
regional statewide fees. The lower limit is based on 90 percent of the
average of the regional statewide fees.

Page 11 GAO- 02- 330 HCFA's Orthotics Ruling HCFA issued its orthotics
ruling in September 1996 to clarify the distinction between certain DME and
orthotics for Medicare part B billing

purposes. HCFA?s ruling helped address concerns about the manner in which
some suppliers were billing Medicare for a system consisting of leg, arm,
neck, and back supports that attached to a base. These suppliers were
billing for each attached support as a separate orthotic brace. HCFA?s
ruling stated that it has been Medicare?s longstanding policy to treat
braces attached to DME or other medical or nonmedical equipment as DME. The
ruling also said that only braces that could be used

independently qualified as orthotics. Attached devices that brace
individuals, such as items that attach to wheelchairs, would not be paid
under Medicare?s orthotics benefit. Shortly after it was issued, several
beneficiaries, a manufacturer, and several suppliers of attached bracing
devices challenged the ruling in court, claiming HCFA did not follow
appropriate procedures because it should have promulgated this decision

as a regulation after public notice and comment. However, a federal
appellate court found that HCFA had acted properly in issuing it as a
ruling, which is an appropriate way to interpret existing policy. The court
also found that the interpretation in the ruling was wholly supportable and
that the treatment of seating systems as DME was consistent with
congressional intent.

In the late 1980s and early 1990s, HCFA and its contractors had become
increasingly concerned about how certain suppliers were billing Medicare.
Particular concern was raised by the way in which suppliers of an item
manufactured by a company called OrthoConcepts 21 were billing Medicare. The
OrthoConcepts system consisted of leg, arm, neck, and back supports

that attached to a base that could be put on wheels. OrthoConcepts said that
its adjustable system of multiple supports provided orthotic support to the
body, which would be particularly helpful to individuals with severe

neurological problems who needed to be properly positioned. Suppliers of its
system were billing each attached support as a separate orthotic brace,
using multiple orthotics billing codes that described braces expected to be
used independently of other medical equipment. As DMERCs became aware of
this billing practice, they began to deny these orthotics claims because the
attached bracing devices being provided as a group appeared to be similar in
function to a seating system or customized wheelchair,

21 OrthoConcepts is an orthotic management company that has developed an
adjustable seating system for nursing home residents. HCFA?s Ruling Issued
to Clarify Medicare

Policy for Orthotics and DME

HCFA?s Ruling Clarified the Distinction Between Orthotics and DME

Page 12 GAO- 02- 330 HCFA's Orthotics Ruling which were both considered DME.
However, some of the claims denials were subsequently overturned by an ALJ,
who hears Medicare appeals on

denied claims. These decisions by an ALJ prompted HCFA to issue its
September 1996 ruling, which is binding on these judges. HCFA?s ruling
limited payment for orthotics under Medicare part B to leg, arm, back, and
neck braces that can be used independently of other equipment. (See app. II
for an excerpt

from the Conclusions and Illustrations section of the ruling to demonstrate
its practical application.) As a result of the ruling, attached bracing
devices, such as OrthoConcepts? items and other attached devices, were
placed in the DME benefit category and could no longer be billed as

orthotics. The ruling cited the Congress? action in the Omnibus Budget
Reconciliation Act of 1990 (OBRA) as evidence for Medicare?s policy on
whether attached items could be considered orthotics. OBRA provided that
wheelchairs measured, fitted, or adapted for a particular patient, and
assembled or ordered with customized features, modifications, or components
intended for a specific patient?s use, were considered

customized DME. 22 A committee report on the OBRA legislation discussed how
wheelchairs could be customized by adding attachments, such as postural
control devices and custom- molded cushions, inserts, or lateral supports
designed to brace the individual using the wheelchair. 23 HCFA concluded in
its ruling that, while the Congress specifically addressed only customized
wheelchairs and their accessories in OBRA, it also intended that devices
attached to noncustomized wheelchairs be considered part of the wheelchair
and, therefore, DME.

Concern about whether HCFA?s issuance of its ruling violated statutory
requirements was the focus of a court challenge in 1997. The ruling was
challenged by OrthoConcepts, whose seating system was affected by the
ruling; two Medicare beneficiaries, who used the OrthoConcepts product; 22
Pub. L. No. 101- 508, sect. 4152( c)( 4), 104 Stat. 1388, 1388- 79. The law
established relevant criteria applicable to items furnished after January 1,
1992, unless regulations establishing other criteria were developed before
that date. Regulations establishing other criteria,

closely related to those in the law, 42 C. F. R. sect. 414.224 (2001), were
finalized on December 20, 1991. 56 Fed. Reg. 65,995. 23 H. R. Rep. No. 101-
881, at 268 (1990), reprinted in 1990 U. S. C. C. A. N. 2017, 2270. Court
Finds HCFA Acted

Properly in Issuing the Ruling

Page 13 GAO- 02- 330 HCFA's Orthotics Ruling and three DME suppliers of the
OrthoConcepts product. These parties argued that the ruling was invalid
because it was adopted without

following the prescribed notice and comment procedures for a substantive
rule and that the agency?s refusal to classify the OrthoConcepts seating
system as orthotics was arbitrary and capricious. After these parties were
initially successful in challenging the ruling in the

United States District Court for the District of Massachusetts, HCFA
appealed the lower court?s decision. On July 27, 1998, the United States
Court of Appeals for the First Circuit found that HCFA?s characterization of
the OrthoConcepts seating system as DME was consistent with the agency?s
earlier stated position covering such devices and that the agency had merely
clarified its policy. Further, the court held that HCFA was not required to
provide for public notice and comment before issuing the ruling because it
was interpretive rather than legislative or substantive.

Because HCFA had followed federal requirements for an interpretive
rulemaking, the court also held that the agency had not acted in an
arbitrary and capricious manner in issuing the ruling. Furthermore, the
court found that the interpretation in the ruling was wholly supportable and
that the ruling?s treatment of seating systems as DME was consistent with
congressional intent. The Supreme Court denied a request to hear a

further appeal. As a result of HCFA?s ruling, attached bracing devices are
now clearly classified as DME and cannot be billed as orthotics, which
affects beneficiaries who live in nursing homes. Part B no longer pays
claims for attached bracing devices for beneficiaries in institutions
primarily engaged in providing skilled nursing care because part B does not
cover DME in these settings. HCFA and the DMERCs developed criteria and
guidance on how to define such institutions that prohibit payment for DME
for

beneficiaries in most nursing homes- not just Medicare- certified SNFs.
These beneficiaries would need to purchase such devices with their own
resources or through other payers.

When Medicare was established in 1965, facilities providing skilled nursing
care under part A were expected to serve as a bridge between the hospital
and other, less skilled care or home. 24 Medicare part B did not cover
medical and other health services- such as DME- provided in what were

24 S. Rep. No. 89- 404, pt. 1, at 30 (1965), reprinted in 1965 U. S. C. C.
A. N. 1943, 1971. HCFA?s Ruling Affects

Beneficiaries Who Reside in Nursing Homes

Page 14 GAO- 02- 330 HCFA's Orthotics Ruling then called extended care
facilities and are now called SNFs. 25 Medicare part B did pay for DME in
facilities that provide a lesser level of care, but

as the nursing home industry evolved, fewer did not provide skilled care. In
2001, most nursing homes were certified as SNFs. A significant number of
Medicare beneficiaries reside more or less permanently in SNFs or other
nursing homes that DMERCs consider as meeting HCFA?s criteria for a SNF for
DME payment purposes. Such beneficiaries are therefore unable

to obtain Medicare coverage for DME, while other beneficiaries living in
congregate settings such as assisted living facilities, as well as those
living at home, do receive DME coverage.

Following the ruling, claims were no longer paid for attached bracing
devices for beneficiaries living in nursing homes, which caused a drop in
the number and amount of such claims paid by Medicare. Medicare expenditures
for such devices declined by at least $1.4 million 26 between 1996 and 1997,
and expenditures remained lower in subsequent years. Prior to the ruling,
the HCPCS coding system had nine codes that described bracing devices that
attached to wheelchairs. 27 Suppliers used

these codes to bill for such items under Medicare?s orthotics benefit
category and DMERCs paid such claims. These devices included one back
support to position wheelchair users and eight mobile arm supports to assist
them in moving their hands and arms. (See table 2 for information on these
nine devices.) These codes were unlike other orthotics codes because most of
the other HCPCS orthotics codes were for braces designed to be used
independently of other equipment. In addition, most other items that
attached to wheelchairs- such as special headrests to

provide postural support- had codes that categorized them as DME and were
paid under the DME benefit category.

25 Social Security Amendments of 1965, Pub. L. No. 89- 97, sect. 102( a), sec.
1861( s), 79 Stat. 286, 321. 26 This amount is based on the difference
between calendar year 1996 and 1997 claims payment for nine codes that
described attached bracing devices that were classified as DME after the
ruling. 27 Having applicable codes does not mean that items are covered by
Medicare, or that they are in the appropriate benefit category. HCFA?s
Ruling Reduced

Medicare Payments For Beneficiaries in Nursing Homes by at Least $1.4
Million

Page 15 GAO- 02- 330 HCFA's Orthotics Ruling Table 2: Attached Bracing
Devices HCFA?s Coding System Classified as Orthotics Prior to the Ruling

Device name HCPCS code Description

Fee schedule amount a (floorceiling)

Back support system K0114 Prefabricated back support

system, with inner frame, for use with wheelchair.

$616.56- 725.36 Shoulder elbow orthosis L3964 Prefabricated mobile arm
support attached to wheelchair. Cost includes fitting and adjustment.

$505.08- 594.21 Shoulder elbow orthosis L3965 Prefabricated Rancho type
mobile arm support attached to wheelchair. Cost includes fitting and
adjustment.

$805.96- 948.19 Shoulder elbow orthosis L3966 Prefabricated mobile arm
support attached to wheelchair. Cost includes fitting and adjustment.

$607.16- 714.31 Shoulder elbow orthosis L3968 Prefabricated mobile arm
support attached to wheelchair. Cost includes fitting and adjustment.

$768.34- 903.93 Shoulder elbow orthosis L3969 Prefabricated mobile arm
support attached to wheelchair. Cost includes fitting and adjustment.

$537.30- 632.12 Shoulder elbow orthosis L3970 Addition to mobile arm
support, which elevates arm. $214.93- 252.86 Shoulder elbow orthosis L3972
Addition to mobile arm support. $136.67- 160.79 Shoulder elbow orthosis
L3974 Addition to mobile arm support. $115.92- 136.38 a Fee Schedule amount
is for new item. Source: 2001 Durable Medical Equipment, Prosthetics/
Orthotics, and Supplies Fee Schedule. To develop a conservative assessment
of the effect of the ruling on claims payment, we analyzed Medicare claims
data for the nine attached bracing devices that were classified in the DME-
rather than the orthotic- benefit category as a result of the clarification
in the ruling. Our analysis showed

that Medicare part B expenditures for the nine attached bracing devices
provided to beneficiaries in nursing homes dropped by about $1.4 million

Page 16 GAO- 02- 330 HCFA's Orthotics Ruling between 1996 and 1997 28 and
the number of claims paid for these beneficiaries for such devices declined
from about 3,200 claims in 1996 to

only 11 claims in 1997. Furthermore, the reduction has continued, with no
claims paid for the nine attached bracing devices for beneficiaries in
nursing homes in either 1999 or 2000. (See fig. 1.) However, our estimate of
the change in Medicare spending for attached bracing devices for nursing
home residents prior to and after the ruling is conservative because payment
under the nine codes we analyzed does not represent all payments for such
devices. Some suppliers- such as those providing OrthoConcepts? products-
were billing for attached bracing devices using

codes for nonattached braces. Because both attached and nonattached items
were being billed using these codes, we could not isolate the claims for
attached items from claims for nonattached items. As a result, we could not
analyze all billing in the orthotics benefit category for attached bracing
devices prior to the ruling.

28 The total decrease in expenditures for the nine attached bracing devices
is based on 1996 and 1997 claims for beneficiaries in nursing homes. We used
data from 1996 and 1997 because payment changes for the nine devices were
implemented on January 1, 1997.

Page 17 GAO- 02- 330 HCFA's Orthotics Ruling Figure 1: Total Part B Annual
Claims for Nine Attached Bracing Devices Affected by the Ruling from 1993
through 2000 a a Calendar year data for 1998 were not available in CMS?s
Medicare part B extract and summary

system for all nine devices. b Eleven claims were paid for beneficiaries in
nursing homes in 1997. Source: GAO analysis of data from CMS?s Medicare part
B extract and summary system. The effect of the ruling was to make
beneficiary place of residence pivotal as to whether Medicare would
reimburse for attached bracing devices under part B. HCFA?s ruling did not
affect Medicare beneficiaries living in their own homes, or settings such as
assisted living facilities, because

Page 18 GAO- 02- 330 HCFA's Orthotics Ruling attached bracing devices that
are considered DME are covered for beneficiaries in those settings. 29 The
ruling affected beneficiaries who are

long- term residents of SNFs and other institutions primarily engaged in
providing skilled nursing care because DME is not covered by part B for
beneficiaries in these facilities. If the beneficiary is in a part A-
covered stay, both orthotics and DME are included in the per diem part A
payment. However, when a beneficiary is not in a Medicare part A- covered
stay, part B will cover orthotics, but not DME, including customized DME
items that are uniquely constructed or substantially modified for a specific
beneficiary.

Some beneficiaries who reside in SNFs and other institutions primarily
engaged in providing skilled nursing care and need attached bracing devices
that are not paid for through Medicare can obtain them through other
sources. For example, certain state Medicaid programs separately cover
attached bracing and similar devices as customized DME for nursing home
residents, and other Medicaid programs may include payment for

these devices in their per diem rates. However, other beneficiaries may have
to pay out of pocket or forgo using such devices.

The policy of not covering DME for beneficiaries in facilities primarily
engaged in providing skilled nursing care has its roots in the early years
of the Medicare program. When the Congress created the Medicare program

in 1965, part A was designed to cover only hospitalizations and relatively
short- term, post- hospital care in the home or in a facility that provided
skilled nursing care. 30 Part A post- hospital care in such a facility was
expected to involve skilled nursing or rehabilitative care, which would
serve as a bridge between the hospital and other, less intense nursing care
or therapy. In this skilled nursing home environment, Medicare did not pay

for any service, drug, or other items under part A- including DME and
orthotics- that could not be paid for if furnished in a hospital. Payment
under part A for a beneficiary?s SNF stay would cover only such needs as
would be covered for a beneficiary?s hospital stay. When the Medicare

29 Deficit Reduction Act of 1984, Pub. L. No. 98- 369, sect. 2321, 98 Stat. 494,
1085 (codified as amended at 42 U. S. C. sect. 1395x( n) (1994)) explicitly
defined DME to include certain items used in the home, including in an
institution used as a home, other than one primarily providing hospital or
skilled nursing facility services. 30 Outpatient hospital diagnostic
services were originally covered under part A also. Social Security
Amendments of 1965, Pub. L. No. 89- 97, sec. 102( a), sect. 1812( a)( 4), 79
Stat. 286, 291- 92. DME Coverage Policy

Predates Evolution of Nursing Home Industry

Page 19 GAO- 02- 330 HCFA's Orthotics Ruling program began, facilities
providing skilled nursing care were not expected to serve as patients?
residences past the immediate recovery from their

hospitalization. Medicaid?s coverage of nursing home care is broader than
Medicare?s, because Medicaid also covers institutional care for
beneficiaries who do not need skilled nursing care. In 1971, the Congress
expressly designated intermediate care facilities (ICF) as a service states
could cover under Medicaid. ICFs were defined as providing regular health-
related care and services to individuals who needed institutional care and
services above the level of room and board, but not the level of care a
hospital or a SNF would provide. 31 State Medicaid policies, rather than the
statute?s distinction in the types of care provided, determined whether
nursing homes were designated as SNFs or ICFs. In some states, almost all
nursing homes were designated as SNFs, although many of these SNFs served
longer term residents who would be receiving care similar to that provided
by ICFs in other states.

Under the original 1965 Medicare statute, part B did not pay for medical and
health services provided by hospitals, extended care facilities (now known
as SNFs), or home health agencies. 32 As a result, DME and other

ancillary services- such as physical therapy- were not paid for under part B
in a SNF. In 1967, the law was changed to eliminate the prohibition on part
B payment for certain ancillary services provided in a SNF. In a report
accompanying the 1967 legislation, the Senate Finance Committee noted that
retaining a sweeping part B prohibition against paying for any services
under part B in a SNF would deprive a beneficiary who had exhausted, or
never qualified for, part A benefits of any payment for services that- in
another setting- would be separately coverable under part B. 33 However,

the Congress added language that retained the prohibition on paying for 31
H. R. Conf. Rep. 92- 747 at 9 (1971), reprinted in 1971 U. S. C. C. A. N.
2436, 2439. This included services in a public institution for the mentally
retarded if the primary purpose of such an institution was to provide health
or rehabilitative services- therefore, the provision of rehabilitative
services did not exclude a facility from being designated as an ICF. 32
Social Security Amendments of 1965, Pub. L. No. 89- 97, sect. 102( a), sec.
1861( s), 79 Stat. 286, 321. 33 S. Rep. No. 90- 744, at 85 (1967), reprinted
in 1967 U. S. C. C. A. N. 2834, 2908.

Page 20 GAO- 02- 330 HCFA's Orthotics Ruling DME under part B in a SNF, at
the same time that it allowed part B payment in a SNF for other ancillary
services. 34 HCFA and its carriers had to delineate when a facility was
primarily

engaged in providing skilled nursing care, particularly for facilities that
were not Medicare- or Medicaid- certified SNFs, such as ICFs. In 1982 and
1984, HCFA published rulings with criteria to determine under what
circumstances a facility would be classified as primarily engaged in

providing skilled nursing care. 35 A facility has to meet five criteria to
be considered as primarily engaged in providing skilled nursing care:

 Nursing services are provided under the direction or supervision of one or
more registered, licensed practical, or vocational nurses.

 Nursing personnel, including nursing aides or orderlies, are on duty on a
24- hour basis.

 On average, the ratio of full- time equivalent nursing personnel to the
number of beds (or average patient census) is no less than 1 to 15 per
shift.  Bed and board are provided to inpatients in connection with the
furnishing

of nursing care, plus one or more medically related health services, such as
physicians? services; physical, occupational, or speech therapy; diagnostic
and laboratory services; and administration of medication.

 The facility is not licensed or certified solely as an ICF. These criteria
provided a means for identifying facilities that may not meet all of the
requirements for SNFs but could be classified as primarily engaged in
providing skilled nursing care for the purposes of prohibiting part B DME
coverage. 36 In a 1985 court case, HCFA indicated that about 90 percent of
the 11,000 ICFs were classified as primarily providing skilled

nursing care, leaving about 10 percent of ICFs as being facilities in which
beneficiaries could have part B coverage for their DME.

34 Social Security Amendments of 1967, Pub. L. No. 90- 248, sect. 144( a) and
(d), 81 Stat. 821, 859. 35 47 Fed. Reg. 54, 551 (Dec. 3, 1982) and 49 Fed.
Reg. 10, 710 (Mar. 22, 1984). According to HCFA, the first four criteria
outlined in the 1982 ruling had been in use since 1966. Miller v. Heckler,
601 F. Supp. 1471, 1475 (E. D. Tex. 1985). The fifth criterion was added
through the

1984 ruling as a result of a court order in Kron v. Heckler, Civil Action
No. 80- 1332 (E. D. La., Oct. 17, 1983). 36 The full statutory definition of
a SNF includes being primarily engaged in providing skilled

nursing care, but includes other requirements as well. The prohibition on
providing DME is tied only to the first part of the statutory definition.

Page 21 GAO- 02- 330 HCFA's Orthotics Ruling ICF as a category of nursing
home distinct from a SNF under Medicaid disappeared when the Omnibus Budget
Reconciliation Act of 1987

combined them into a single category, nursing facility (NF). 37 A single set
of requirements was developed for all nursing homes participating in
Medicare and Medicaid. With the single set of participation requirements and
more generous Medicare coverage of stays, many more nursing homes became
wholly or partially 38 certified as Medicare SNFs to be eligible for part A
payment. 39 Most of their residents would, however, still need longer term
less skilled services that would not qualify for part A coverage.

In 2001, most nursing home residents were in SNFs, including Medicare
beneficiaries who were long- term residents. 40 Although they are in SNFs,
these Medicare beneficiaries may not be receiving a level of care that would
qualify them for the Medicare part A- covered SNF benefit or

otherwise might not be eligible for this coverage, which is only
posthospital and for a maximum of 100 days. Such beneficiaries who are
paying for their care out of their own pockets or through other payers are
not eligible for part B DME benefits that they could receive if living at
home or in an assisted living facility. This prohibition includes even
paying for items that need to be customized for them, such as customized

wheelchairs. Beneficiaries in NFs are also included in the group for which
DME is not payable under part B. The four DMERCs have issued guidance to
suppliers indicating that they will not pay for DME under part B in any
nursing

home. For example, the region B DMERC supplier manual, dated June 2000,
states ?DME and related supplies and accessories are not covered by

37 Pub. L. No. 100- 203, sect. 4211, 101 Stat. 1330, 1330- 182 (codified at 42
U. S. C. 1396r( a)( 1) (1994). A NF is defined somewhat more broadly than a
SNF. A NF includes an institution (or distinct part of an institution)
primarily engaged in providing skilled nursing care or rehabilitative
services. A NF also includes an institution primarily engaged, on a regular
basis, in providing health- related care and services to individuals who,
because of their physical or mental condition, require care and services
(above the level of room and board) that can be made available to them only
through institutional facilities, which were

formerly called ICFs. 42 U. S. C. sect. 1396r( a)( 1). 38 Medicare allows
nursing facilities to designate some beds as a distinct part that qualifies
as a SNF. Beneficiaries in those beds may be eligible for part A coverage
and payment. 39 Between 1989 and 1997, the number of SNFs participating in
the program increased from 8,638 to 14,619. 40 About 80 percent of
federally- certified nursing homes are certified as both SNFs and NFs, about
7 percent only as SNFs, and about 13 percent as only NFs.

Page 22 GAO- 02- 330 HCFA's Orthotics Ruling Medicare part B and claims must
not be submitted to the DMERC for patients in a SNF or NF, regardless of
whether the patient is in a Medicare

covered stay or not. This is true even if the nursing facility could be
considered the patient?s permanent residence.? CMS officials noted that
DMERCs do not pay for DME in nursing homes because DMERCs presume

that these facilities meet the criteria for being primarily engaged in
providing skilled nursing care for DME part B payment purposes and,
therefore, cannot be considered as a beneficiary?s home. If the ruling were
rescinded by CMS and attached bracing devices were

paid as orthotics, annual spending under Medicare part B for such devices
for beneficiaries in nursing homes would increase modestly if utilization
returned to the pre- ruling level. However, several factors suggest that

utilization could increase more with the ruling?s rescission. The effect on
Medicaid expenditures is less certain. Because state Medicaid coverage
policies are not uniform, rescinding the ruling would have a varying effect
on states? Medicaid expenditures.

It is difficult to predict with confidence how much Medicare payments might
increase if the ruling were rescinded. For example, if the utilization level
returned to the pre- ruling level, spending increases would be modest.
Rescinding the ruling would move the nine HCPCS codes for attached bracing
devices back into the orthotics benefit category. If the change were limited
to billing under those nine codes and we assumed no growth in future
billing, claims volume might only return to the pre- ruling level.

This would be an increase of about 3,000 claims, and payment increases of
about $1.8 million per year- given the amounts Medicare currently pays for
these items, which generally now cost between $500 and $800. 41 However, as
discussed above, this estimate is based on a claims analysis that does not
include all the billing for attached devices that occurred before the
ruling. Because some suppliers billed attached bracing devices using codes
that were not specific for such devices, all of the claims paid prior to the
ruling for attached bracing devices cannot be identified with certainty.

41 This estimate is based on 1996 claims volume for these nine devices for
beneficiaries in SNFs and NFs and 2001 fee schedule amounts for these items.
We used 1996 data on claims volume because payment changes for the nine
devices were implemented on January 1, 1997. Rescinding the Ruling

Would Increase Medicare Payments, But Financial Impact on States Would Vary

Page 23 GAO- 02- 330 HCFA's Orthotics Ruling Moreover, several factors could
lead to considerable growth in the use of such devices, which would increase
Medicare costs more substantially

than our conservative estimate. First, the number of Medicare beneficiaries
is likely to grow significantly over time, with the number over age 85
growing fastest, which would likely increase demand for bracing devices in
nursing homes. 42 In addition, estimates of the number of beneficiaries who
might use attached bracing devices are higher than the

prior utilization levels for the devices we identified. Our analysis of data
maintained by CMS on characteristics of nursing home residents identified
about 53,000 nursing home residents from July 1999 through June 2000

who at that time were 65 years and older, were likely eligible for Medicare
part B, and were wheelchair- bound with disabling medical conditions,
pressure ulcers, and functional limitations. Others have also developed

estimates on the number of elderly nursing home residents with
characteristics that indicate that they could potentially use attached
bracing devices. These estimates vary considerably- ranging from 35,000
individuals by OrthoConcepts 43 to almost 170, 000 individuals by
researchers at the University of Pittsburgh. 44 HCFA developed an estimate
of as many as 80,000 individuals who might potentially use these attached

bracing devices. Second, should the ruling be rescinded, Medicare part B
would pay for attached bracing devices for nursing home residents, providing
financial

42 According to estimates by the Urban Institute, assuming no change in the
eligibility rules, the number of beneficiaries in the Medicare program will
grow by 77 percent by the year 2025, from about 40 million to an estimated
70 million. The Institute of Medicine estimated that if current trends
continue, the number of people over age 85 will triple by 2030, reaching
about 8.8 million. This rapid growth in the oldest population will have a
major effect on the demand for long- term care services.

43 OrthoConcepts officials estimated that about 10 percent of these
individuals- or about 3,500 residents of nursing homes- would be suitable
candidates for their seating system, which is designed to meet the needs of
the most severely disabled with complex seating needs. 44 Geyer, et al,
Efficacy of Seat Cushions in Preventing Pressure Ulcers for At Risk Elderly
Nursing Home Residents: Research Issues, Departments of Rehabilitation
Science and

Technology and Epidemiology, University of Pittsburgh, (Pittsburgh: June 26-
30, 1998) pp. 122- 124.

Page 24 GAO- 02- 330 HCFA's Orthotics Ruling incentives that could lead to
increased utilization. 45 For example, suppliers who could profitably
furnish attached bracing and related devices to beneficiaries in nursing
homes would have a financial incentive to supply

that market. Manufacturers would have incentives to develop new products
that fit within the orthotics definition- such as chairs that provide
?orthotic? support- if such items could be paid for under part B.

Many items that support and position wheelchair- bound individuals could be
described as having an orthotic benefit, including the chair itself.
Furthermore, some nursing homes might shift a portion of the costs of their
beneficiary services to Medicare. For example, to increase their

revenues, nursing homes could substitute orthotics devices that could be
paid separately under part B for items of DME that are not separately paid
under part B. Finally, if the ruling were rescinded, the distinction between

DME and orthotic devices would be blurred, making it more confusing for
providers who are trying to bill appropriately and more difficult for DMERCs
to identify and deny claims that were inappropriately billed.

In addition to increasing Medicare expenditures, rescinding HCFA?s ruling
would also affect state Medicaid expenditures for beneficiaries who are
dually eligible for Medicare and Medicaid. 46 These effects also cannot be
quantified with certainty. The impact on a particular state?s spending would
depend on its current coverage policies for customized DME,

increases in the use of such items, and changes in state reimbursement
policies. For example, states paying separately for customized DME- for
example, Michigan, Ohio, and Washington- would likely see their expenditures
decrease. Since Medicare would become the primary payer for such items,
these states would be responsible only for the copayments and deductibles
for these beneficiaries. However, increases in the use of

such devices could significantly affect potential Medicaid cost savings.
Other states- such as Florida- do not separately cover customized DME. If
the ruling were rescinded, these states would become responsible for

45 For examples of changes in provider and supplier behavior associated with
changes in financial incentives, see U. S. General Accounting Office,
Medicare Home Health Care: Prospective Payment System Could Reverse Recent
Declines in Spending, GAO/ HEHS- 00- 176 (Washington, D. C.: Sept. 8, 2000);
U. S. General Accounting Office,

Medicare: HCFA Faces Challenges to Control Improper Payments, GAO/ T- HEHS-
00- 74 (Washington, D. C: Mar. 9, 2000); and Technical Review Panel on the
Medicare Trustees Report, Review of the Assumptions and Methods of the
Medicare Trustees? Financial Projections, Dec. 2000. 46 There are 1.5
million residents of nursing homes, and about 75 percent are covered by
Medicare, Medicaid, or both programs.

Page 25 GAO- 02- 330 HCFA's Orthotics Ruling copayments and deductibles for
Medicaid- eligible beneficiaries, which could cause states? payments to
increase. However, these states may offset potential cost increases if they
reduced their Medicaid per diem rates. Such reductions could be justified
because these states would now be

required to separately cover a portion of the cost of items that had been
previously covered in their nursing homes? per diem rate.

The rescission of HCFA?s ruling on orthotics would raise program integrity
concerns. If HCFA?s ruling on orthotics were rescinded by CMS, the
requirement in BIPA aimed at increasing program integrity by restricting
payment for custom- molded orthotics to qualified providers would not apply
to the attached bracing devices we identified as being affected by

the ruling. Even if some attached bracing devices were affected by the new
BIPA requirement after the ruling?s rescission, this requirement may have
limited potential for curbing inappropriate orthotic payments because most
Medicare payments are for orthotics not covered by the requirement and, if
industry trends continue, proportionally fewer devices may be covered by the
requirement in the future. In addition, the ruling?s rescission could lead
to inappropriate billing because suppliers would have more difficulty
determining if items should be billed as orthotics or DME, given that the
distinction between some items in these two benefit

categories would be less clear. Furthermore, Medicare beneficiaries in
nursing homes have been the target of fraudulent or abusive billing in the
past for orthotics, DME, and other services. Therefore, should the ruling be
rescinded, additional controls would be needed.

The BIPA requirement was developed because the HHS OIG had reported on
problems related to Medicare orthotics in recent years, including
inappropriate billing practices associated with these devices. 47 For
example, the OIG found that, compared to certified suppliers, noncertified
suppliers are more likely to inappropriately provide or bill for orthotics.

The OIG recommended that HCFA require that only qualified practitioners
provide beneficiaries with certain kinds of orthotic devices.

BIPA modified the Medicare requirements related to customized items to
stipulate that Medicare will pay for custom- molded orthotics only if
furnished by a qualified practitioner and fabricated by a qualified

47 OEI- 02- 99- 00120, OEI- 02- 95- 00380, and OEI- 04- 92- 01080. Ruling?s
Rescission

Would Have Implications for Medicare Program Integrity

BIPA Requirement Added to Safeguard Orthotics Payments

Page 26 GAO- 02- 330 HCFA's Orthotics Ruling practitioner or supplier. 48
The statutory definition of qualified practitioner includes a physician; an
orthotist who is licensed, certified, or has credentials and qualifications
approved by the HHS Secretary; or a

qualified physical therapist or occupational therapist. The language added
by BIPA describes a custom- fabricated orthotic as an item that (1) requires
education, training, and experience to fabricate, (2) is included in a list
of items to be developed by CMS, and (3) is individually fabricated over a
positive model of the patient. CMS will be working with experts in the field
of orthotics, using a negotiated rulemaking process, 49 to develop the list
of custom- fabricated orthotic items subject to the new requirement. 50
Professionals in the field of customized seating and orthotics told us that

they believe the new BIPA requirement relating to qualified providers will
help address some problems related to inappropriate billing. They also said
that the requirement will improve the quality of care provided to
beneficiaries by ensuring that providers have the knowledge and skills
needed to craft and fit custom- molded orthotic devices.

However, the BIPA requirement regarding qualified practitioners and
suppliers may have limited potential for curbing inappropriate orthotic
payments in the program as a whole for several reasons. Medicare

expenditures for custom- molded orthotics amounted to less than 30 percent
of Medicare spending for orthotics in 2000. 51 Furthermore, the requirement
may apply to an even smaller percentage of covered orthotic devices in the
future, because due to technological advances, more prefabricated devices
that can serve functions similar to customized

48 BIPA sect. 427( a) (to be codified at 42 U. S. C. sect. 1395m( h)( 1)( F)). 49
Negotiated rulemaking is a process for developing a proposed rule using a
committee of representatives with interests that may be significantly
affected by the rule, chartered as an advisory committee under the Federal
Advisory Committee Act. The committee works to reach consensus on key
elements of the rule before it is formally published as a proposal. An
impartial mediator assists the committee, which is open to the public. 50
BIPA required that CMS publish a regulation with a list of specific items by
December 21, 2001. On March 22, 2002, CMS published a notice of intent in
the Federal Register to form a negotiated rulemaking committee. CMS has
begun the chartering process for the committee, and agency officials do not
anticipate that the committee will begin the

required negotiations to develop a list of custom- fabricated orthotic items
subject to the new BIPA requirement before the summer of 2002.

51 For items covered by the BIPA requirement- custom- molded orthotic
devices- Medicare paid practitioners and suppliers approximately $70
million. In contrast, expenditures in 2000 for orthotic devices not covered
by the requirement amounted to more than $184 million.

Page 27 GAO- 02- 330 HCFA's Orthotics Ruling components with little or no
alteration are entering the market. Therefore, if this trend continues,
proportionately fewer devices will be covered by the new BIPA requirement
because the payment restriction is limited to

custom- molded orthotics. Finally, limiting payment to qualified
practitioners and suppliers does not, in itself, completely resolve
questionable billing practices because some of these providers have also
billed Medicare inappropriately. For example, in 1997, the HHS OIG reported
that certified orthotists billed improperly for items that were not
medically necessary or not provided as billed, but to a lesser degree than
other suppliers. In 1999, the OIG also reported on instances of improper

billing for therapy by physical and occupational therapists working in SNFs
52 -professionals who can be considered qualified practitioners and may
supply custom- molded orthotics under the BIPA requirement. If the ruling
were rescinded, the new requirement in BIPA that Medicare

pay only qualified practitioners and suppliers for custom- molded orthotics
would not apply to the attached bracing devices that we identified as
affected by the ruling. BIPA?s requirement applies only to custom- molded
orthotic devices, not all custom- fabricated ones. The devices we identified
as being affected by the ruling are not custom- molded because they are not
made over a positive model of the patient?s body part.

If HCFA?s ruling on orthotics were to be rescinded, a heightened level of
oversight of orthotics billing would be critical to safeguard program
dollars. Concerns about improper billing prompted HCFA to issue its
orthotics ruling to clarify the distinction between DME and orthotics for
Medicare part B billing purposes in the first place. Rescinding the ruling
would once again blur the distinction between DME and orthotics, increasing
the potential for inappropriate billing- both intentional and unintentional.
A heightened level of oversight would be also be critical, because the OIG

and we have reported that Medicare beneficiaries in nursing homes can be an
attractive target for fraudulent or abusive billing for orthotics, DME, 52
Office of Inspector General, Department of Health and Human Services,
Physical and Occupational Therapy in Nursing Homes: Medical Necessity and
Quality of Care, OEI09- 97- 00121 (Washington, D. C.: August 1999). Further
Controls Would

Better Ensure Program Integrity If The Ruling Were Rescinded

Page 28 GAO- 02- 330 HCFA's Orthotics Ruling and other services. 53 Because
nursing homes are institutions with a large number of co- located
beneficiaries, providing services to multiple

individuals in this setting can help maximize profits for providers and
suppliers. Although most providers and suppliers are honest and bill
appropriately, 54 some, including certain durable medical equipment and
orthotics suppliers, have been involved in fraudulent or abusive billing of
Medicare for services and supplies furnished to nursing home residents. 55
Other controls could enhance safeguards associated with Medicare

reimbursement for orthotics, should the ruling be rescinded. In the past,
Medicare expenditures have increased more than anticipated after a coverage
policy change, due, in part, to inappropriate billing. 56 Without adequate
monitoring of orthotics payments, rescinding the ruling could have a similar
outcome. DME claims are currently monitored so that DMERCs can follow
payment trends over time for groups of codes for similar types of items
(such as leg braces). If the ruling were rescinded, DMERCs might have to
extend their monitoring in order to analyze

payment trends for attached devices. Through monitoring claims billing,
DMERCs would be more likely to spot any questionable trends. If such trends
were identified, DMERCs could examine a sample of questionable claims and
their related medical records and take other steps as needed to determine if
the items were medically necessary and provided as billed.

A prior authorization process, such as those used by some state Medicaid
programs for higher priced or other selected orthotic or DME items, may also
provide better control, should the ruling be rescinded. These

53 Office of Inspector General, Department of Health and Human Services,
Part B Services in Nursing Homes, An Overview, OEI- 06- 92- 00865
(Washington, D. C.: March 1996); U. S. General Accounting Office, Nursing
Homes: Too Early to Assess New Efforts to Control Fraud and Abuse, GAO/ T-
HEHS- 97- 114 (Washington, D. C.: April 16, 1997); and U. S. General

Accounting Office, Fraud and Abuse: Providers Target Medicare Patients in
Nursing Facilities, GAO/ HEHS- 96- 18 (Washington, D. C.: Jan. 24, 1996). 54
The OIG reported that the majority of health care providers submit claims to
Medicare for services that are medically necessary, billed correctly, and
documented properly. See Office of Inspector General, Department of Health
and Human Services, Improper Fiscal Year 2000 Medicare Fee- for Service
Payments, A- 17- 00- 02000 (Washington, D. C.: February 2001). 55 GAO/ HEHS-
96- 18. 56 U. S. General Accounting Office, Medicare: Lessons Learned From
HCFA?s Implementation of Changes to Benefits, GAO/ HEHS- 00- 31 (Washington,
D. C.: Jan. 25, 2000).

Page 29 GAO- 02- 330 HCFA's Orthotics Ruling Medicaid programs review
medical justifications and a description of the orthotic or customized DME
item before it is provided to the beneficiary. If the item is justified,
Medicaid notifies the supplier in advance that it will pay for the item and
the amount it will pay. The Medicaid prior

authorization process helps ensure program integrity because it establishes
that the device is medically necessary. Some providers and suppliers also
noted that prior authorization protects them from the risk of supplying
devices without knowing whether and what they will be paid.

However, the use of the prior authorization process by the Medicaid program
involves an investment of time and resources for prior review of supporting
documentation.

For Medicare, DMERCs do not use all the elements of a prior authorization
process. However, they have begun to use a process for determining coverage-
but not payment- in advance for a few items of DME. As of October 1, 2001,
as part of ongoing program integrity efforts, DMERCs will accept requests
from beneficiaries and suppliers for an advance determination of Medicare
coverage for customized DME, which is an item that has been uniquely
constructed or substantially modified for a specific

beneficiary. 57 This process differs from the prior authorization used by
Medicaid programs in the states whose processes we reviewed because an
advance determination of Medicare coverage does not guarantee a specific

amount that Medicare will pay for an item. As a result, suppliers will be
uncertain about how much reimbursement to expect for customized wheelchairs
and accessories that they supply to beneficiaries.

Practitioners reported that such uncertainty affects suppliers? willingness
to provide customized items to beneficiaries. 58 HCFA?s 1996 ruling on
orthotics more clearly delineated the circumstances under which Medicare
would consider an item as an orthotic or DME for payment policy, and HCFA?s
issuance of the ruling was found to be proper in court. The ruling affected
relatively few devices and only a small percentage of overall Medicare
program expenditures. Without the ruling, 57 Previously, there was a process
that only considered whether power- driven vehicles, seatlift

mechanisms, and transcutaneous electrical nerve stimulators would be
covered. 58 Prior to this, suppliers had to code customized wheelchairs and
accessories as miscellaneous items and DMERCs made individual coverage and
payment decisions after the items were supplied to beneficiaries. As a
result, suppliers had no guarantee that Medicare would reimburse them for an
item at all. Concluding Observations

Page 30 GAO- 02- 330 HCFA's Orthotics Ruling there would be some confusion
for suppliers about whether bracing devices that are attached to wheelchairs
should be billed as DME or

orthotics and for DMERCs about whether particular claims should be paid.
Revising Medicare payment policy to treat attached bracing devices as
orthotics would likely increase program expenditures, although to what
degree is uncertain. We would caution that taking such a step without

addressing program integrity concerns could lead to an increase in
inappropriate payments by Medicare and Medicaid.

We provided a draft of this report to CMS for its review and comment. (See
app. III for CMS?s comments.) CMS generally agreed with our conclusions. In
its comments, CMS observed that, in addition to holding that the orthotics
ruling had been properly issued, the U. S. Court of Appeals decision in
Warder v. Shalala had also found that the content of

the ruling was wholly supportable and that the ruling well effectuated
congressional intent by classifying seating systems as DME. We agreed and
added language to that effect to our final report.

CMS also suggested that our report clearly indicate the precedent- setting
effect that rescinding the ruling could have on the provision of certain
types of equipment as DME in SNFs. For example, CMS said that if the

ruling were rescinded, other components of a wheelchair could be construed
to be an orthotic, such as the backrest of a wheelchair. In our report, we
discuss and provide examples of the potential impact of rescinding the
ruling, stating that there would be financial incentives that could lead to
increased utilization if Medicare part B paid for attached bracing devices
for nursing home residents. We also note that, if the ruling

were rescinded, the distinction between DME and orthotic devices would be
blurred, making it more confusing for providers who are trying to bill
appropriately and more difficult for DMERCs to identify and deny claims

that were inappropriately billed. In general, we agree with CMS?s comments,
but we did not change the report because we believe that we had adequately
addressed the concerns. CMS also provided technical comments that we
incorporated as appropriate. We are sending copies of this report to the
Administrator of the Centers

for Medicare and Medicaid Services, appropriate congressional committees,
and other interested parties. We will also make copies available to others
upon request. In addition, the report will be available at no charge on the
GAO Web site at http:// www. gao. gov. Agency Comments

and Our Evaluation

Page 31 GAO- 02- 330 HCFA's Orthotics Ruling If you or your staffs have any
questions about this report, please call me at (312) 220- 7600 or Sheila K.
Avruch at (202) 512- 7277. Other key contributors to this report were
Barrett Bader, Sandra Gove, and Craig

Winslow. Leslie G. Aronovitz Director, Health Care- Program Administration
and Integrity Issues

Appendix I: Scope and Methodology Page 32 GAO- 02- 330 HCFA's Orthotics
Ruling To determine why the Health Care Financing Administration (HCFA)
issued its orthotics ruling and if the agency followed required procedures
in issuing it, we conducted interviews with officials and representatives
from the agency, two Durable Medical Equipment Regional Carriers (DMERC),
and reviewed the ruling and agency documents related to its

development and issuance. We also interviewed a plaintiff and legal
representatives involved in the legal challenge to the ruling and reviewed
relevant documents, including the federal district and appellate courts?
decisions on whether HCFA had appropriately followed the proper statutory
procedures in issuing the ruling.

To assess the impact of the ruling on Medicare beneficiaries, we reviewed
Medicare payments and coverage policies for orthotics and durable medical
equipment (DME). We analyzed Medicare claims data from the Medicare part B
extract and summary system for the Healthcare Common Procedure Coding System
(HCPCS) codes associated with the nine attached bracing devices moved from
the orthotic to the DME benefit category as a result of the ruling. We also
discussed the impact of the ruling on beneficiaries living in nursing homes
with Centers for Medicare and Medicaid Services (CMS) officials, and state
Medicaid officials in Florida, Indiana, Michigan, Ohio, Pennsylvania, and
Washington. We

judgmentally chose these states to attain geographic diversity and because
these states have a large proportion of elderly Medicare beneficiaries.

We also discussed the impact of the ruling with four providers and suppliers
of attached bracing and other customized seating accessories, in addition to
national organizations representing them, 1 seven clinicians with experience
in the seating and positioning needs of elderly and

disabled individuals, and two manufacturers of attached bracing and similar
devices. We chose the clinicians, providers, suppliers, and manufacturers to
interview based on those recommended for their expertise by the national
organizations.

To assess the financial impact of rescinding the ruling, we reviewed
Medicare and Medicaid coverage and payment policies and then interviewed
representatives from CMS and Medicaid programs in Florida, Indiana,
Michigan, Ohio, Pennsylvania, and Washington. We also developed an estimate
of the number of beneficiaries who could use these 1 These included the
American Orthotic and Prosthetic Association, the American

Occupational Therapy Association, and the American Physical Therapy
Association. Appendix I: Scope and Methodology

Appendix I: Scope and Methodology Page 33 GAO- 02- 330 HCFA's Orthotics
Ruling devices by analyzing national data on nursing home residents from the
minimum data set (MDS), 2 and we reviewed demographic findings from other
studies. Our MDS analysis used data from July 1999 through June

2000 and was limited to Medicare beneficiaries with all of the following
characteristics: (1) functional limitations that required the use of
wheelchairs as their primary means of locomotion, (2) one or more of eight
neurological conditions 3 that experts told us could indicate a need

for attached bracing devices because individuals with such conditions can
have poor motor control and may not be able to readily brace or reposition
themselves in their wheelchairs, (3) pressure ulcers ranging from mild to
severe, and (4) limited ability to move while in bed or get out of bed
without requiring extensive assistance from either one or two other people.

To evaluate the implications for Medicare program integrity if the ruling
were rescinded, we interviewed officials from the Department of Health and
Human Services Office of the Inspector General (HHS- OIG) and

reviewed pertinent OIG reports. In order to assess the scope of the
requirement and its possible effect on attached bracing devices, we analyzed
claims data from the statistical analysis durable medical

equipment regional carrier 4 associated with custom- fabricated orthotics as
defined by the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000. We also interviewed providers and suppliers and 2
Since 1991, nursing homes have been required to periodically collect
information on all residents using MDS, a uniform assessment instrument. The
MDS contains over 500 individual assessment items regarding a resident?s
medical condition, cognitive and motor skills, and expected use of other
services. MDS assessments are conducted within 14 days of admission and at
routine intervals thereafter unless there is a significant change in
condition. 3 These conditions were cerebral palsy, multiple sclerosis,
osteoporosis, paraplegia,

Parkinson?s disease, quadriplegia, stroke, and traumatic brain injury.
Individuals with these conditions are susceptible to a number of secondary
complications, including pressure ulcers. About 456,000 nursing home
residents were aged 65 years and older and may have been eligible for part B
coverage, had one or more of these eight conditions, and used wheelchairs as
their primary means of locomotion. 4 The statistical analysis durable
medical equipment regional carrier is under contract with CMS to produce
standard quarterly reports and provide analyses of claims data to identify
trends and aberrant billing patterns. It also conducts postpayment review of
national suppliers in order to determine if future corrective action is
needed. The four DMERCs use these data to identify for prepayment review
those DME and orthotic suppliers who have unusual billing patterns or high-
dollar and high- volume claims.

Appendix I: Scope and Methodology Page 34 GAO- 02- 330 HCFA's Orthotics
Ruling organizations representing them and reviewed documents that they
provided to us to further assess the effect of the requirement on these

devices. We performed our work from January 2001 through March 2002 in
accordance with generally accepted government auditing standards.

Appendix II: Excerpt from HCFA?s Ruling 96- 1 Page 35 GAO- 02- 330 HCFA's
Orthotics Ruling The following discussion is excerpted from the Conclusions
and Illustrations section of HCFA?s ruling to demonstrate its application.

?A supplier manufactures and supplies medical devices to individuals who are
generally elderly and suffer from Alzheimer?s or other debilitating
neuromuscular diseases that have caused them to be non- ambulatory,
immobile, and confined to a chair or bed. Due to their immobility, these
patients may suffer from secondary complications, such as pressure sores,

multi- sited contractures, musculoskeletal degeneration and deformities, and
circulatory problems. Under a physician?s order, the supplier furnishes
individually fitted

attachments designed to be used in conjunction with a chair to seat and
position the patient. The attachments, which the supplier labels ?orthotic
braces,? are alleged to position limbs and other body parts properly;

restrict motion or weight bearing; immobilize and protect weak
musculoskeletal segments; reduce load; retard progression of musculoskeletal
deformity; and improve function. The design of the

supplier?s ?orthotic braces? requires them to be attached to the chair
frame, and the ?orthotic braces? cannot function or be used apart from the
chair to which they are attached.

Discussion: Although the devices in question may support or restrict
movement in parts of the body, they are not braces within the meaning of [42
U. S. C. sect. 1395x( s)( 9)] because they are integral parts of a seating
system and are not designed or intended to be used apart from the seating
system.? Appendix II: Excerpt from HCFA?s Ruling 96- 1

Page 36 GAO- 02- 330 HCFA's Orthotics Ruling

Appendix III: Comments from the Centers for Medicare and Medicaid Services
(290021)

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