Medicare: Divided Authority for Policies on Coverage of 	 
Procedures and Devices Results in Inequities (11-APR-03,	 
GAO-03-175).							 
                                                                 
Critical choices on whether new technology will be covered for	 
Medicare's 40 million beneficiaries are made nationally by the	 
Centers for Medicare & Medicaid Services (CMS)--the agency that  
administers Medicare--or locally by contractors that process and 
pay claims. GAO was asked to review the degree to which new	 
procedures and devices are incorporated into Medicare, the effect
of Medicare coverage policy-making processes on beneficiaries,	 
and to what extent CMS has addressed concerns about its national 
coverage process.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-175 					        
    ACCNO:   A06630						        
  TITLE:     Medicare: Divided Authority for Policies on Coverage of  
Procedures and Devices Results in Inequities			 
     DATE:   04/11/2003 
  SUBJECT:   Health care programs				 
	     Health insurance					 
	     Health services administration			 
	     Program management 				 
	     Managed health care				 
	     Medicare Program					 

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GAO-03-175

Report to the Chairman, Subcommittee on Health, Committee on Ways and
Means, House of Representatives

United States General Accounting Office

GAO

April 2003 MEDICARE Divided Authority for Policies on Coverage of
Procedures and Devices Results in Inequities

GAO- 03- 175

Medicare Covered Most New Procedures and Devices

Medicare covered about 99 percent of the procedures and devices that were
assigned codes by an American Medical Association panel or a committee of
insurers in 2001. About a quarter were introduced into the program without
coverage policies that describe the circumstances for Medicare coverage or
place restrictions on their use. Another quarter were affected by national
coverage policies and the rest were affected only by local coverage
policies. Variations in Local Coverage Led to Inequities

Because contractors can determine coverage for beneficiaries being treated
in their jurisdictions, coverage inequities for beneficiaries with similar
medical conditions have resulted. For example, until recently, coverage
for a new treatment for debilitating tremors, called bilateral deep brain
stimulation (DBS), had been allowed only for beneficiaries treated in some
states. On April 1, 2003, CMS implemented a consistent national coverage
policy on DBS, but coverage variation continues for other procedures.

Medicare Coverage for Bilateral DBS by State, as of July 31, 2002 CA OR

WA MT

ID ND

SD IA

AR TN KY WY

NV UT

AZ NM OK TX CO KS

NE MN

WI IL

MI IN OH

PA WV VA

NC SC GA AL

FL MS

LA NY

VT ME MA RI NH

DE MD DC CT

NJ MO

AK HI Covered

Not covered Case by case Source: GAO survey of carriers. National Coverage
Development Process Raises Concerns

While CMS creates national coverage policies that apply equally to all
Medicare beneficiaries, criticisms of its slow pace and its closed policy
development process prompted CMS to take steps to make its process more
understandable, open, and timely. Nevertheless, the national process
remains flawed because it lacks clear coverage criteria, remains closed in
fundamental ways to physician and beneficiary input, and has not
consistently met timeliness goals. Critical choices on whether new
technology will be covered for Medicare*s 40 million beneficiaries

are made nationally by the Centers for Medicare & Medicaid Services (CMS)*
the agency that administers Medicare* or locally by contractors that
process and

pay claims. GAO was asked to review the degree to which new procedures and
devices are incorporated into Medicare, the effect of Medicare

coverage policy- making processes on beneficiaries, and to what extent CMS
has addressed concerns about its national coverage process. GAO recommends
that CMS eliminate development of new local Medicare coverage policies for
procedures and devices that have been assigned codes; evaluate all current
local policies on procedures and devices with established codes to
determine if the policies should be incorporated into national policies or
be

rescinded; and establish a new, centrally managed process that is more
open, understandable, and timely to develop national coverage policies,
using expertise from other sources. HHS disagreed with our recommendations
to eliminate local coverage policy development for certain procedures and
devices

and to develop a new national process. It also disagreed with the intent
of our recommendation to evaluate its existing local policies. www. gao.
gov/ cgi- bin/ getrpt? GAO- 03- 175. To view the full report, including
the scope

and methodology, click on the link above. For more information, contact
Leslie G. Aronovitz at (312) 220- 7600. Highlights of GAO- 03- 175, a
report to the

Chairman, Subcommittee on Health, Committee on Ways and Means, House of
Representatives

April 2003

MEDICARE

Divided Authority for Policies on Coverage of Procedures and Devices
Results in Inequities

Page i GAO- 03- 175 Medicare Coverage Letter 1 Results in Brief 4
Background 5 Medicare Covered Most Procedures and Devices Assigned Codes
in

2001, Often Without National or Local Coverage Policy 10 Variations in
Local Coverage Policies Lead to Program Inequities and Inefficiencies 12
National Coverage Policy Adds Consistency, But Current Policy Development
Process Could Be Strengthened 20 Conclusions 31 Recommendations for
Executive Action 32 Agency Comments and Our Evaluation 32 Appendix I Scope
and Methodology 36

Appendix II Coding Assignment Process 38

Appendix III Process That CMS Follows to Develop National Coverage
Policies 39

Appendix IV Process That Carriers and Fiscal Intermediaries Follow to
Develop Local Coverage Policies 40

Appendix V Coverage Criteria for Medicare Claims Administration
Contractors 41

Appendix VI Comments from the Department of Health and Human Services 42
Contents

Page ii GAO- 03- 175 Medicare Coverage Appendix VII GAO Contact and Staff
Acknowledgments 48

GAO Contact 48 Acknowledgments 48 Tables

Table 1: Number and Percent of the New Coverable Procedure and Device
Codes for 2001 That Were Affected by National or Local Coverage Policy 11
Table 2: Variations in Local Coverage Policies in Northern and

Southern California 16 Table 3: Local Coverage Policies for Procedures
with New Codes Developed or Revised by Four Carriers in Four States 17
Figures

Figure 1: Carrier Coverage for Bilateral DBS by State, as of July 31, 2002
14 Figure 2: Process for Adding, Deleting, and Revising CPT and HCPCS
Level II Codes for Use in the Medicare Program 38 Figure 3: Criteria for
Claims Administration Contactors to Use to Determine Whether a Procedure
or Device Is Reasonable and Necessary 41

Page iii GAO- 03- 175 Medicare Coverage Abbreviations

AMA American Medical Association BIPA Medicare, Medicaid, and SCHIP
Benefits Improvement

and Protection Act of 2000 CAG Coverage and Analysis Group CMM Center for
Medicare Management CMS Centers for Medicare & Medicaid Services CPT
Current Procedural Terminology DBS deep brain stimulation DME durable
medical equipment FDA Food and Drug Administration HCFA Health Care
Financing Administration HCPCS Healthcare Common Procedure Coding System

HHS Department of Health and Human Services MCAC Medicare Coverage
Advisory Committee NHIC National Heritage Insurance Company OIG Office of
Inspector General SCHIP State Children*s Health Insurance Program This is
a work of the U. S. Government and is not subject to copyright protection
in the

United States. It may be reproduced and distributed in its entirety
without further permission from GAO. It may contain copyrighted graphics,
images or other materials. Permission from the copyright holder may be
necessary should you wish to reproduce copyrighted materials separately
from GAO*s product.

Page 1 GAO- 03- 175 Medicare Coverage April 11, 2003 The Honorable Nancy
L. Johnson Chairman

Subcommittee on Health Committee on Ways and Means House of
Representatives Dear Madam Chairman: As health care technology evolves,
beneficiaries, their families, physicians, and medical device
manufacturers are interested in having the Medicare program cover new
procedures 1 and devices that could improve individuals* clinical
outcomes. Such new procedures and devices are most commonly incremental
improvements upon those currently available, but can also represent
significant medical breakthroughs. Policies explaining whether, and under
what circumstances, new procedures or devices will be covered can be made
nationally by the Centers for Medicare & Medicaid Services (CMS)* the
agency that administers Medicare* or locally by Medicare claims
administration contractors in their service areas. These include 19
carriers, which pay part B claims for most physician, laboratory, and
certain other services and items, 2 and 27 fiscal 1 *Procedure* is used in
this report to define all medical actions taken to prevent, diagnose,
treat, or manage diseases, injuries, and impairments. This definition
includes services such

as counseling, evaluation, management of patients, surgery, and laboratory
and other tests. 2 Part B services include physician and outpatient
hospital services, diagnostic tests, mental health services, outpatient
physical and occupational therapy, ambulance services, some home health
services, durable medical equipment (DME), prosthetics, orthotics, and
medical supplies. United States General Accounting Office Washington, DC
20548

Page 2 GAO- 03- 175 Medicare Coverage intermediaries, which pay part A
claims for inpatient hospital and related post- hospital services and part
B claims submitted by part A providers. 3 , 4 Procedures and devices are
identified by codes that are assigned to them by two committees outside of
the Medicare program. When new procedures and devices are assigned codes,
CMS decides whether they are

among the types of health care benefits described in the Medicare statute
and are reasonable and necessary for a beneficiary*s treatment, and,
therefore, eligible for Medicare payment. CMS notifies contractors whether
each new code can be covered, and, based on this information, Medicare*s
automated claims processing systems pay or deny claims submitted with one
of these codes.

CMS or its claims administration contractors sometimes create coverage
policies to specify or limit when payment for a particular procedure or
device will be made, such as by allowing coverage of a procedure only for
certain specified diagnoses. CMS develops national coverage policies that
apply to all beneficiaries across the country. Claims administration

contractors issue local coverage policies that apply only to beneficiaries
treated in their service areas or to providers they service.

Physicians and beneficiary advocates have raised concerns about whether
local coverage policies that apply only in a contractor*s service area
lead to variations that result in inequitable coverage for beneficiaries.
In

addition, CMS has been criticized for the slow pace by which new
procedures and devices are introduced into the program and for the lack of
openness and understandability in the process it uses to make national
coverage policies.

3 Related post- hospital services include some care provided by skilled
nursing facilities and home health agencies. 4 In this report, we refer to
carriers, DME regional carriers, and fiscal intermediaries as *claims
administration contractors.* Unless otherwise specified, the term
*carrier* refers to a Medicare claims administration contractor that pays
part B claims. The 19 carriers

include 4 that also process DME claims and, in this role, are referred to
as *DME regional carriers.* Under part B, carriers pay claims for
treatments provided to beneficiaries in their service areas, which can be
portions of states, individual states, or multiple states. Under part A,
hospitals and other providers have a choice of which fiscal intermediary
to use, and, as a result, more than one fiscal intermediary may pay claims
for services provided in any particular geographic area.

Page 3 GAO- 03- 175 Medicare Coverage In light of these concerns, you
asked us to examine: 1. To what extent are new procedures and devices
incorporated into the

Medicare program? 2. What has been the effect of the local coverage
process on

beneficiaries, carrier and fiscal intermediary efficiency, and
stakeholders, including device manufacturers and physicians? 3. What has
been the effect of the national coverage process on

beneficiaries, physicians, and other providers, and to what degree has CMS
addressed concerns about the process?

In preparing this report, we focused on new procedures and devices that
are provided by physicians (and allied professionals under their
supervision) or other providers and that could be billed under part B,
including anesthesia and laboratory tests. We also included devices that
could be used by beneficiaries in their homes. Claims for covered
procedures and devices in our study are generally processed by carriers.
We included some procedures that physicians would perform in an inpatient
hospital setting* such as surgeries* that could also have related claims
by hospitals under part A that would be processed by fiscal

intermediaries. To determine the extent to which new procedures and
devices are incorporated into Medicare, we selected 320 codes for
procedures and devices that were new in 2001, analyzed information about
these codes, and reviewed national and local policies that affected them.
To evaluate the effects of the local and national coverage processes and
concerns about the national coverage process, we (1) reviewed CMS,
carrier, and fiscal intermediary coverage policies, including analyzing
national coverage policies that CMS made from February 1999 through July
2002, and (2) interviewed CMS regional and headquarters officials; Food
and Drug Administration (FDA) officials; Medicare staff at four carriers,
5 which included one DME regional carrier 6 and one that also served as a
fiscal intermediary; 7 and advocates representing physicians,

5 We conducted Medicare carrier site visits at National Heritage Insurance
Company, Blue Cross Blue Shield of Rhode Island, Noridian Administrative
Services, and CIGNA HealthCare Medicare Administration. 6 CIGNA also
serves as one of four DME regional carriers that process all Medicare
claims for DME, prosthetics, orthotics, and supplies. 7 Blue Cross Blue
Shield of Rhode Island serves as both the carrier and a fiscal
intermediary in that state.

Page 4 GAO- 03- 175 Medicare Coverage suppliers, and beneficiaries.
Appendix I contains more detail on our scope and methodology. Our work was
conducted from October 2001 through March 2003 in accordance with
generally accepted government auditing

standards. Medicare covered most* about 99 percent* of procedures and
devices assigned codes in 2001. For procedures and devices with
established codes, Medicare contractors* automated claims processing
systems generally accept* and pay* claims, unless coverage policies define
or restrict when Medicare will pay for their provision. About one quarter
of the new codes for procedures and devices were introduced into Medicare
without any coverage policies that affected their use. About one quarter
of the new codes had associated national coverage policies, while the rest

were affected only by local coverage policies developed by at least one
claims administration contractor. More than half of the codes affected by
national coverage policy were also affected by one or more local coverage
policies.

Dividing authority to develop coverage policies has led to coverage
inequities for Medicare beneficiaries with similar medical conditions
based on the location where they receive treatment and to inefficiencies
in program administration. For example, in July 2002, carriers provided

coverage for a new treatment for Parkinson*s disease for certain
beneficiaries with debilitating tremors treated in Kansas, but not in
Florida. On April 1, 2003, CMS implemented a national coverage policy for
this treatment. Coverage varies by state for certain tests to diagnose or
monitor an individual*s response to treatment for cancer. One test is
covered by carriers in Rhode Island and Pennsylvania, but is not covered
in Florida and New Jersey. In addition to coverage inequities, having each
carrier and fiscal intermediary separately develop policies for the same
procedure or device results in duplication of efforts and program

inefficiencies. For example, eight carriers have separately followed the
extensive, required steps to develop local policies for a method of
identifying a possible risk of sudden cardiac death. Despite these
problems, some groups, including device manufacturers* representatives and
physician groups, argue that local coverage policies have benefits. For
example, they state that local policies can be developed more rapidly than
national coverage policies and that the local coverage process is open to

physician and public input. Because CMS*s national policies apply to all
Medicare beneficiaries regardless of their treatment location, these
policies promote coverage Results in Brief

Page 5 GAO- 03- 175 Medicare Coverage consistency for beneficiaries,
physicians, and other providers. However, CMS*s national coverage process
had been criticized for being slow, not

clear, and not open to public input. To address these concerns, CMS
recently took steps to strengthen its national coverage process. In 1999,
for example, the agency made the process more understandable by publishing
the steps it takes to develop national coverage policies. Nevertheless,
some problems persist. For example, CMS does not publish its draft
national coverage policies for public comment. In addition, CMS does not
always consult with experts outside the agency when it develops coverage
policies.

Because of inequities and inefficiencies resulting from divided authority
to develop coverage policy among CMS, carriers, and fiscal intermediaries,
we are recommending that CMS eliminate claims administration contractors*
development of new local coverage policies for procedures and devices that
have established codes. We are also recommending that CMS establish a new
process for making national coverage policy.

In commenting on a draft of this report, the Department of Health and
Human Services (HHS) generally disagreed with our recommendations and
expressed concerns about the effects of these proposed changes on the
Medicare program and the resources that would be required to implement
them. We believe our recommendations would lead to more consistent
coverage policies for Medicare beneficiaries and would increase program
efficiency through redirecting the resources that are currently devoted to
duplicative policy making.

Medicare is the federal health insurance program that serves 40 million
beneficiaries who are aged 65 years and older, certain disabled people
under 65 years of age, and individuals with end- stage renal disease. The
program is administered by CMS* formerly the Health Care Financing
Administration (HCFA) 8 *an agency within HHS. Most beneficiaries receive
their care on a fee- for- service basis, with providers submitting claims
for payment for each service provided. CMS contracts with claims
administrators* health insurers* to process claims from nearly 1 million
hospitals, physicians, and other health care providers. In fiscal year
2000,

8 This report will refer to HCFA in discussing actions taken before the
agency*s name was officially changed on July 1, 2001. Background

Page 6 GAO- 03- 175 Medicare Coverage carriers processed about 740 million
claims and fiscal intermediaries processed about 151 million claims.

Medicare*s payment systems for claims are highly automated and rely on
codes to identify medical procedures and devices used in beneficiaries*
diagnoses and treatments. Contractors identify specific procedures and
devices billed on behalf of a beneficiary by Healthcare Common Procedure
Coding System (HCPCS) codes, a series of five digits used by Medicare and
other health insurance programs. The HCPCS also contains miscellaneous
codes that can be used to bill for procedures and devices for which there
are no established codes. 9 The HCPCS contains three sets of codes* Levels
I, II, and III. Level I consists of Current Procedural Terminology (CPT)
codes used primarily to identify medical services and procedures furnished
by physicians and other health care professionals. Level II codes
represent products, supplies, and services not included in CPT codes, such
as ambulance services and DME used in a beneficiary*s home. Level III
codes are *local* codes that have been developed by Medicare carriers and
fiscal intermediaries, Medicaid state agencies, and private insurers for
use only in their specific jurisdictions. Local codes are scheduled to be
eliminated in December 2003. 10 A request for a new HCPCS code may be made
by physicians or medical

device manufacturers for procedures and devices that may be clinically
different from existing treatment options* generally to better delineate a
new procedure from a similar one or when the cost of a new procedure or
device necessitates a different payment amount.

Two different entities are responsible for assigning new codes. The
American Medical Association*s (AMA) CPT Editorial Panel 11 annually

9 Physicians and suppliers must provide additional documentation when
submitting Medicare claims using a miscellaneous code. Contractors
manually review these claims to determine what procedure or device is
being billed, whether it should be covered, and the amount that should be
paid. In 2001, miscellaneous codes accounted for less than one quarter of
1 percent of part B payments.

10 Local codes are scheduled to be eliminated as part of the establishment
of standards and requirements for the transmission of health information
under the Health Insurance Portability and Accountability Act of 1996.
Pub. L. No. 106- 191, S: 262, 110 Stat. 1936, 2021. 11 The CPT Editorial
Panel is predominantly comprised of AMA- appointed physicians, but also
includes physicians nominated by CMS, the Blue Cross/ Blue Shield
Association, the American Hospital Association, the Health Insurance
Association of America, and a nonvoting representative from the American
Health Information Management Association. Medicare Payment for

Claims Relies on Codes for Billing

Page 7 GAO- 03- 175 Medicare Coverage updates codes for procedures and
other physician services* CPT codes. The HCPCS National Panel, which is
composed of CMS and insurer

representatives, 12 annually updates codes for medical devices and other
products* HCPCS Level II codes. Because the code sets maintained by the
AMA CPT Editorial Panel and HCPCS National Panel are designed to serve
multiple health insurers, not all of the codes are for services or items
covered by Medicare. 13 It usually takes at least 15 months from the date
a new code is requested for a new code to be assigned and put into use.

To be eligible for coverage under Medicare, specific health care services
must fit into 1 of about 55 categories of benefits described in statute.
The Secretary of HHS has been delegated legal authority to specify which
procedures, devices, and services are covered in the broad benefit
categories and under what conditions. The Secretary delegates this
responsibility to CMS, which, in turn, delegates some of this
responsibility to its claims administration contractors.

The law states that Medicare cannot pay for any items or services that are
not *reasonable and necessary* for the diagnosis and treatment of an
illness or injury or to improve functioning of a malformed body part. 14
The law excludes some services and items from coverage, such as routine
physical checkups, most immunizations, cosmetic surgeries, hearing aids,
eyeglasses, routine foot care, and routine dental care. 15 Medicare law
has been amended several times to add new coverage* including certain
preventative health care services such as immunizations for pneumonia and
influenza; mammogram, pap smear, and pelvic exam screenings; and tests for
prostate and colorectal cancer. 16 12 The HCPCS National Panel is
comprised of representatives from CMS, the Blue

Cross/ Blue Shield Association, and the Health Insurance Association of
America. 13 For additional information about codes, see U. S. General
Accounting Office, HIPAA Standards: Dual Code Sets Are Acceptable for
Reporting Medical Procedures, GAO- 02- 796 (Washington, D. C.: Aug. 9,
2002).

14 42 U. S. C. S: 1395y( a)( 1)( A) (2000). 15 Medicare does not cover
outpatient, self- administered drugs. However, it does cover physician-
administered drugs and drugs used in immunosuppressive therapy (for organ
transplant recipients) and anticancer chemotherapy. 42 U. S. C. S: 1395x(
s)( 2)( J) and (Q) (2000).

16 See U. S. General Accounting Office, Medicare: Beneficiary Use of
Clinical Preventive Services, GAO- 02- 422 (Washington, D. C.: Apr. 12,
2002). Medicare*s Statute Sets

Out Broad Categories of Covered Services and Items

Page 8 GAO- 03- 175 Medicare Coverage Each year, CMS reviews new CPT codes
and HCPCS Level II codes for procedures and devices to determine if these
codes fit into a Medicare

benefit category and can be covered because they are deemed reasonable and
necessary for a beneficiary*s diagnosis or treatment. Following its
review, CMS provides information on new codes to claims administration
contractors, including coverage, billing, and payment instructions. (See

app. II for more detail on the coding assignment process.) Even when CMS
determines that Medicare may cover a procedure or device, CMS or its
claims administration contractors may develop policies that delineate the
circumstances under which its use is considered reasonable and necessary,
and thus covered. Using a process that began in 1999, CMS*s Coverage and
Analysis Group (CAG), which is located in the

Office of Clinical Standards and Quality, develops national coverage
policies, which are binding on Medicare contractors and apply to all
beneficiaries. The agency has also compiled a body of national policy on
Medicare coverage that is included in manuals and other written materials

for claims administration contractors. In addition, claims administration
contractors develop local coverage policies, which apply to beneficiaries
being treated in their jurisdictions. CAG begins the national coverage
process when it receives a formal request from an outside party* a device
manufacturer, for instance* or when CAG internally identifies the need to
consider coverage. 17 CAG internally identifies the need for national
coverage policies under several circumstances* for example, when a
procedure or device is seemingly

being used inappropriately, controversy exists about its clinical benefit,
or new evidence of clinical effectiveness is available. Once CAG accepts a
request to consider a national coverage policy, it may complete an
analysis in- house or seek outside scientific help by requesting a
technical

assessment, referring the issue to an advisory committee, or both. After
conducting its own analysis and reviewing any external input, CAG may
arrive at several possible courses of action. (See app. III for more
information on the process CMS uses to develop national coverage
policies.) These include a national noncoverage policy, which precludes
claims administration contractors from making Medicare payment; a coverage
policy with specific restrictions; a policy that allows claims 17 In 2001,
CMS received 10 external requests for national coverage policies, and CMS
staff

internally decided to consider 8 additional national coverage policies.
CMS and Claims Administration

Contractors May Develop Policies Defining When New Procedures and Devices
Are Covered

Page 9 GAO- 03- 175 Medicare Coverage administration contractors to use
their discretion when deciding whether to cover the procedure or device in
their service areas; 18 or a coverage policy with no national
restrictions. By statute, CMS can issue policies on national coverage
without using the notice and comment rulemaking

procedures required for substantive changes. 19 In addition to CMS*s
national policies, carriers and fiscal intermediaries may develop coverage
policies that apply to the claims they process, as long as their policies
do not conflict with national coverage policy. Each contractor has at
least one physician who serves as a medical director to help develop local
coverage policies. Medicare claims administration contractors* role in
determining coverage dates back to 1965, when the Medicare program was
first authorized. At that time, the Congress arranged for many Medicare
operations to be placed in the hands of private insurers to allow the
program to be implemented rapidly by organizations already processing
claims for hospitals and physicians. Nevertheless, claims administration
contractors did not begin to develop written policies until the late
1970s.

Claims administration contractors develop local coverage policies for a
number of reasons. Local policies specify conditions to automatically deny
inappropriate claims through Medicare*s automated claims processing
systems. 20 In addition, contractors may develop local policies to address
their concerns about inappropriate utilization and improper billing for a
particular procedure or device. 21 Local coverage policies may specify
acceptable diagnoses, guidelines on use, and documentation requirements.
(See app. IV for more information on the process carriers and fiscal
intermediaries use to develop local policies.)

18 Some national policies specifically state that CMS is allowing carriers
to use their own discretion when determining coverage. For example, a
coverage memorandum regarding speech generating devices stated that
*carriers. . . will make coverage decisions for claims

for any [of these] devices on either a case- by- case basis or through a
local policy.* 19 42 U. S. C. S: 1395hh( a)( 2) (2000).

20 Even if the contractor has developed a policy that limits coverage, its
medical director may make an individual coverage decision for a
beneficiary with a rare condition or when a beneficiary has no other
treatment options.

21 Carriers have also developed local policy at the direction of CMS. For
example, CMS program memorandum AB- 01- 129, dated September 15, 2001,
directed carriers to develop local medical policies for Doppler flow
studies, a test that monitors a patient*s blood flow and can be used
during kidney dialysis.

Page 10 GAO- 03- 175 Medicare Coverage Unlike other carriers and fiscal
intermediaries that are allowed to develop their own local coverage
policies, the four DME regional carriers are required to jointly develop
and utilize one set of policies. Therefore, DME

regional carriers* policies outlining beneficiaries* coverage for DME,
prosthetics, orthotics, and supplies are identical across the nation.
While DME regional carriers develop coverage policy that has national
applicability, they follow a policy development process that is similar to
that employed by carriers and fiscal intermediaries, as outlined in
appendix IV. Overall, Medicare covered most procedures and devices that
had been assigned a code for 2001. Medicare*s automated payment systems

generally accept, and pay claims for, procedures and devices that have
established codes, unless coverage policies have been developed to define
or restrict when Medicare will pay for their provision. There were no
coverage policies for about one quarter of procedures and devices we
studied that were assigned codes in 2001. The remaining codes were
affected by national or local coverage policies or both.

We selected for our study 320 codes for procedures and devices issued in
2001. 22 Of these 320 codes, CMS identified 316 as coverable, and
identified only 4* or about 1 percent* as noncoverable. 23 The four
noncoverable services and devices were a vision screening test, a type of
rehabilitative physical exercise for arterial disease that is supervised
by a nurse or an exercise physiologist, smoking cessation counseling, and
a supportive garment. CMS determined that these services and devices were
not allowable according to Medicare statute.

22 A total of 1,146 new codes were added to the HCPCS list for 2001. There
were 826 new codes not included within the scope of our study, including
640 codes added to identify items to which special Medicare hospital
outpatient payment rates apply; 113 codes developed for private health
insurers or Medicaid; and 73 for other services, such as ambulance
services, drugs, and blood- related services. 23 In October 2000, CMS
identified 11 of the 320 new codes as noncoverable. Subsequently,

CMS deemed 7 of these 11 codes as coverable. Specifically, in a national
coverage policy that became effective in April 2001, CMS outlined
conditions under which contractors could cover 4 of these codes used to
bill for intestinal transplantation procedures. CMS also issued
instructions that 3 codes for medical nutrition therapy could be covered
after the Congress specified such therapy in statute as a Medicare
benefit, effective January 2002. Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000, Pub. L. No. 106- 554, app. F, S:
105, 114 Stat. 2761, 2763A- 471. Medicare Covered

Most Procedures and Devices Assigned Codes in 2001, Often Without National
or Local Coverage Policy

Page 11 GAO- 03- 175 Medicare Coverage We found that, as of May 2002,
there were no coverage policies for 25 percent of the 316 coverable new
codes for procedures and devices, and 26 percent were affected by a
national coverage policy. For example,

national policy permitted a new battery- powered piece of inhalation
therapy equipment to be covered only for patients with severely impaired
breathing ability. To implement national coverage policies, contractors

sometimes develop local coverage policies to provide more detailed billing
requirements. 24 As table 1 shows, 16 percent of the 2001 codes for
procedures and devices that were affected by national policy also had
local policy developed by claims administration contractors.

Table 1: Number and Percent of the New Coverable Procedure and Device
Codes for 2001 That Were Affected by National or Local Coverage Policy

Type of coverage policy Number of codes affected Percent of codes affected

National only 33 10 Both national and local 50 16 Local only 154 49 No
policy 79 25

Total 316 100

Source: GAO analysis. In the absence of a national coverage policy,
contractors have broad discretion to develop local coverage policies that
can define or restrict coverage for new procedures and devices. About 65
percent of the 316 new codes for procedures and devices were included in
at least one local coverage policy that had been created by at least one
claims administration contractor. 25 For example, in the absence of a
national

coverage policy, as of December 2002, three carriers and two fiscal
intermediaries had developed local coverage policies to define or restrict
coverage for a new, minimally invasive surgery for abdominal aortic
aneurysms.

24 For example, when a national policy indicates a procedure is covered,
claims administration contractors can supplement the policy by adding
conditions that must be met, the only acceptable diagnoses for billing, or
the frequency with which the procedure

can be provided as a covered service. 25 We conducted this analysis in
August 2002 by searching for the codes on LMRP. net. If a contractor
revised its policies to update them with new codes and published the
revisions on its local Web site, but neglected to update LMRP. net, such
revisions would not appear in

our analysis.

Page 12 GAO- 03- 175 Medicare Coverage While local coverage policies
affected about 65 percent of the new codes for procedures and devices,
each individual contractor*s policies generally affected only a small
number of the new codes. For example, we found

that* on average* individual carriers had policies that affected 8 percent
of the 316 procedure and device codes. Further, some of the new codes were
incorporated into local policy by only one single- state carrier. For
example, Blue Cross Blue Shield of Montana was the only carrier to develop
a local policy that outlined how to bill for a new code for venous access
catheters, which affected coverage only for beneficiaries in

Montana. Similarly, HGSAdministrators was the only carrier to establish a
local policy that outlined coverage for new codes involving certain
cochlear implantation procedures, which affected coverage only for
beneficiaries in Pennsylvania.

Allowing carriers and fiscal intermediaries to make local coverage
policies leads to different treatment for beneficiaries in different
locations and to inefficiencies due to duplication in contractors* policy-
making efforts. Because the authority to make local coverage policies is
divided among carriers and fiscal intermediaries, Medicare can cover a
procedure for a beneficiary receiving care in one locality and not cover
that procedure for a beneficiary with a similar medical condition being
treated in another location. Further, because more than one fiscal
intermediary can pay part A claims for hospitals in a given area, Medicare
can cover a procedure for

a specific diagnosis in one hospital, but not in another hospital in the
same local area. Local policy development is also inefficient because
carriers and fiscal intermediaries duplicate many of the steps* such as
identifying and assessing the medical literature to determine if the
procedure or device has clinical benefit* taken by other carriers or
fiscal intermediaries that have developed policies on the same procedures
and devices. Despite these problems, some groups still support coverage
policy developed at the local level. Variations in Local

Coverage Policies Lead to Program Inequities and Inefficiencies

Page 13 GAO- 03- 175 Medicare Coverage Because CMS gives claims
administration contractors discretion to determine coverage and develop
local coverage policy, beneficiaries*

coverage for specific procedures and devices varies nationwide. One recent
example of the impact on beneficiaries involves a surgical treatment*
called deep brain stimulation (DBS)* for tremors associated with the two
most common neurological disorders. 26 DBS may produce significant
improvement in physical functioning for people suffering from severe,
debilitating tremors that can no longer be controlled by medication. 27
There are two kinds of DBS* unilateral brain stimulation of

the thalamus and bilateral stimulation of other brain structures.
Bilateral DBS can help reduce the typically more debilitating symptoms of
Parkinson*s disease, including stiffness and slowness. According to a
survey of carriers we conducted, Medicare coverage of bilateral DBS varied
considerably. (See fig. 1.) As of July 31, 2002, carriers serving 30
states and part of another covered bilateral DBS, while carriers did not

cover this procedure in 10 states and the District of Columbia. In 9
states and part of another, carriers indicated that they might approve the
procedure on a case- by- case basis. For example, in Missouri, where two
carriers serve different parts of the state, bilateral DBS was covered in
the western part of the state and was covered on a case- by- case basis in
the eastern part.

26 Essential tremor and Parkinson*s disease are the two most common
neurological disorders. Essential tremor affects about 1.5 million
Americans; Parkinson*s disease affects about 1 million. Tremor is a common
symptom of both, but Parkinson*s disease also causes rigidity, slowness of
movement, and poor balance.

27 One device manufacturer estimated that about 85,000 individuals with
Parkinson*s disease and 5, 000 individuals with essential tremor are
candidates for treatment with DBS. Local Coverage Policy

Leads to Coverage Variations that Can Affect Beneficiaries* Access to
Treatment

Page 14 GAO- 03- 175 Medicare Coverage Figure 1: Carrier Coverage for
Bilateral DBS by State, as of July 31, 2002

In October 2001, a beneficiary with Parkinson*s disease requested that CMS
issue a national coverage policy on bilateral DBS. At the time of his
request, the beneficiary was not covered for bilateral DBS because he
lived in Texas, where the carrier did not cover this surgery. 28 On April
1,

28 The carrier began to cover this surgery on August 12, 2002.

Page 15 GAO- 03- 175 Medicare Coverage 2003, CMS implemented a national
policy that covered DBS for all beneficiaries who meet certain coverage
criteria. While a national coverage policy will help ensure consistent
bilateral DBS

coverage, variations in coverage continue to be a concern for
beneficiaries needing other procedures. For example, carriers vary in
their coverage for tumor assay tests that are used to diagnose or monitor
the response to treatment of cancer and were assigned codes in 2001.
Carriers in Florida and New Jersey have local policies that clearly
prohibit coverage for one of these tests because they do not consider its
clinical benefits to be proven. In contrast, carriers in other states*
such as Rhode Island and Pennsylvania* cover this test for physicians to
monitor the course of disease in patients with established diagnoses of
certain types of cancers. In 2001, Medicare paid over $382,000 for this
tumor assay test in 38 states. 29 We also found that part B coverage for
treatment options can differ even for beneficiaries who are treated in the
same state and are served by the

same carrier. One reason that policies may vary within a carrier*s service
area is that, since 1990, more than 40 percent of Medicare carriers have
left the program. As of October 2002, 11 of the remaining carriers have
assumed responsibilities for administering their claims. For example,
prior to December 1, 2000, National Heritage Insurance Company (NHIC)
served northern California and another carrier served southern California.
After NHIC assumed responsibility for claims administration in southern
California, NHIC staff assessed local policies in its jurisdiction to
understand the extent to which its policies varied. Our analysis of NHIC*s
data found that 38 percent of southern California*s policies were not
shared by northern California in September 2001. (See table 2.) 30 We
found that northern and southern California still had varying local
coverage policies as of October 2002, including the examples in table 2.
29 Based on claims analysis from part B summary data for 2001 claims
extracted as of June 5, 2002.

30 Until recently, beneficiaries in northern and southern California
suffering from essential tremor and Parkinson*s disease were covered
differently for DBS. In June 2002, NHIC consolidated local policies in
northern and southern California to cover bilateral stimulation.

Page 16 GAO- 03- 175 Medicare Coverage Table 2: Variations in Local
Coverage Policies in Northern and Southern California Region

Total local coverage

policies Number of

local coverage

policies limited to one

region Percent of

local coverage

policies limited to one

region Examples of local

coverage policies limited to one region

Northern California 80 22 28  Whole body bone

and/ or joint imaging  Extracapsular cataract removal Southern California
145 55 38  Audiology testing

 Pap smear, diagnostic

 Vagus nerve stimulation for epilepsy

Source: GAO analysis. Coverage policies for part A services can also vary
within each state because hospitals and other part A providers can choose
their fiscal intermediary. As a result, different fiscal intermediaries
may serve providers in the same state, or even in the same city. This can
result in differential coverage of a procedure, if two fiscal
intermediaries in the same state have differing policies. For example, the
two fiscal intermediaries who pay hospital claims in Kansas each have
local coverage policies on a specific type of cataract surgery. However,
these policies are not identical. One fiscal intermediary*s policy lists
covered diagnoses that are not listed as covered in the other fiscal
intermediary*s

policy, which leads to differences in claims payment. Further, CMS does
not require carriers and fiscal intermediaries that pay claims for
services and items in the same geographic area to develop similar local
coverage policies, even for the same treatments. This can lead to
differences in coverage depending on location of service, such as

whether a procedure is performed in a doctor*s office and paid by the
carrier, or performed in a hospital outpatient department and paid by the
fiscal intermediary responsible for that hospital*s claims.

Page 17 GAO- 03- 175 Medicare Coverage Allowing individual carriers and
fiscal intermediaries to develop their own policies results not only in
instances of inequitable coverage, but also is

inefficient as each contractor takes parallel steps to develop policies on
similar topics. For example, eight carriers have developed local coverage
policies for a method of measuring changes in heartbeats on an
electrocardiogram, which are a possible harbinger of sudden cardiac death.
Further, two fiscal intermediaries have developed local coverage policies
for a new, minimally invasive treatment for abdominal aortic aneurysms,
and four fiscal intermediaries have developed policies for upper
gastrointestinal endoscopy, which is a procedure using a lighted tube to
visualize the esophagus, stomach, and part of the small intestine. We
identified duplicative efforts to develop policies for procedures and

devices assigned codes in 2001 among the four carriers that we visited. As
table 3 shows, we found that for six procedures, two carriers
independently developed or revised their own coverage policies. For
example, two carriers each developed new local coverage policies for a
procedure to graft tissue- cultured skin, called bilaminate skin
substitute.

Table 3: Local Coverage Policies for Procedures with New Codes Developed
or Revised by Four Carriers in Four States Carrier/ state National
Heritage

Insurance Company Blue Cross Blue

Shield of Rhode Island

Noridian Administrative

Services CIGNA HealthCare

Medicare Administration Procedure addressed by local coverage policy
Massachusetts Rhode Island Nevada Tennessee

Bilaminate skin substitute X X Percutaneous vertroplasty X X Endoscopic
ultrasonography, upper gastrointestinal tract X X Ocular photodynamic
therapy X X Magnetic resonance angiography X X

Immunoassay for tumor antigen X X Source: GAO analysis. Although the
carriers we visited attempt to build on the work of others or

adapt policies developed by individual or groups of carrier medical
directors, they still often duplicate research efforts. Each carrier
ultimately has to arrive at, and justify, its own coverage policy, which
means that the carrier medical director and other staff must review the
evidence and other related policies. Each carrier also takes parallel
steps to complete the process required to adopt the policy, such as
consulting with experts, holding public and carrier advisory committee
meetings, Duplicative Efforts to

Develop Local Policies by Carriers and Fiscal Intermediaries Result in
Program Inefficiencies

Page 18 GAO- 03- 175 Medicare Coverage responding to input received, and
posting draft local coverage policies on the carrier*s Web site. 31 Each
contractor that develops policy must devote staff time to this

activity. One multistate carrier we visited developed or revised 21
policies in fiscal year 2002, which was a full- time task for a registered
nurse, with help from one of the carrier*s medical directors and support
staff. This carrier reported that its medical directors generally commit
10 to 30 percent of their time to policy development. Medical directors at
other

carriers also reported committing significant amounts of their time to
developing policy. One carrier medical director told us that, because his
resources for evidence gathering are limited, he often relies on
physicians and suppliers for evidence even though he knows this could bias
the

selection of information to be considered. Lack of information and
communication from CMS regarding the development of national coverage
policies has resulted in wasted local policy development efforts. Two
medical directors stated that there are no designated points of contact at
CMS headquarters and no established

channel of communication between them and CMS staff who make national
coverage policies. According to one carrier medical director, in the
absence of detailed information on the status of CMS*s efforts to develop
a national policy on ocular photodynamic therapy, which is a new procedure
that uses a laser- activated drug to treat macular degeneration, the
carrier developed its own policy. Overall, to clarify their coverage,

eight carriers developed local coverage policies for this treatment, which
could have affected beneficiaries in 23 states and a portion of another
state. While these carriers were obtaining comments on their draft
policies, in November 2000 HCFA issued a national coverage policy on this
therapy for beneficiaries with certain types of eye lesions.

While critics view variations in local coverage policy as inequitable
treatment of beneficiaries, device manufacturers* representatives, some
physicians and physician groups, and claims administration contractors

stated that the local coverage process has benefits. For example,
supporters indicated that the local process results in coverage policy
being

31 DraftLMRP. net, a CMS- sponsored Web site, allows the public to view
draft local policies of carriers, DME regional carriers, and fiscal
intermediaries posted to their Web sites during the required comment
period. Some Groups Contend that

Local Coverage Policy has Benefits

Page 19 GAO- 03- 175 Medicare Coverage made more rapidly than in the
national process. However, comparative timeliness information is difficult
to generate because claims

administration contractors and CMS track different key dates for their
processes. For example, CMS reports the date when a national coverage
policy is requested and the agency*s review is initiated. In contrast,
contractors report the date that a draft local policy is released for
comment* a point further along in the process than the initial request
date tracked in the national process. Nevertheless, certain features of
the local process may allow it to respond quickly in expanding coverage.
For example, claims administration contractors can follow an expedited
process when they expand coverage, such as when they add new diagnoses as
coverable in an existing policy.

Supporters of local coverage policy have also argued that the steps
Medicare claims administration contractors take to consult with physicians
and the DME industry are a positive characteristic of the local process.
As appendix IV shows, when contractors propose a new or more restrictive
local coverage policy, carriers* and DME regional carriers*

advisory committees 32 routinely review and comment on draft local
policies 33 and contractors hold public hearings about proposed policies.
Further, all contractors post draft policies on their Web sites and on a
centralized Web site, draftLMRP. net, and inform the public of how to
comment on draft policies and the closing dates for comments. 34 Carrier
medical directors, who regularly consult with practicing physicians on
draft policies, told us that such consultations help them avoid unintended
consequences, which might be obvious to practicing physicians or others,
and could be beneficial for CMS.

32 Carriers* advisory committees are composed of physicians, a beneficiary
representative, and representatives from other medical organizations. DME
regional carriers* advisory work groups consist of physicians, other
clinicians, beneficiaries, suppliers, and

manufacturers. 33 Fiscal intermediaries may have advisory committees, but
CMS does not require them to do so. 34 Claims administration contractors
can expand coverage without such consultation* for example, they can add
additional diagnoses for which a treatment would be considered medically
necessary.

Page 20 GAO- 03- 175 Medicare Coverage Developing national policy creates
more consistent coverage for beneficiaries because it applies to all
beneficiaries regardless of their

treatment location. Further, because national coverage policy does not
vary depending on location, it can be communicated more easily to
physicians, other providers, suppliers, and the general public. However,
concerns have been expressed about the openness, understandability, and
slow pace of the national coverage process, and CMS has attempted to
improve it* for example, by publishing the steps it takes to make national
coverage policies 35 and issuing coverage memorandums that outline the

evidence considered to arrive at its policies. Nevertheless, some problems
persist, such as the lack of consistent public, expert, or practitioner
input on proposed coverage changes.

Developing coverage policy with national applicability promotes coverage
consistency because it applies to all beneficiaries regardless of where
they receive treatment. Across the country, beneficiaries, physicians,
other

providers, and suppliers already have consistent coverage policies for
DME, prosthetics, orthotics, and medical supplies because DME regional
carriers develop identical policies. Companies providing DME in multiple
states can do so knowing that one set of coverage rules applies. In
addition, coverage for many laboratory services is subject to more
consistent policies. The Balanced Budget Act of 1997 mandated that HCFA
establish national coverage policies for laboratory tests 36 and, as of
November 2002, over 40 percent of laboratory services currently billed to
carriers were subject to national coverage policies.

Having national coverage policy simplifies coverage for providers who
serve beneficiaries in multiple states. In its report on Medicare
laboratory payment policy, the Institute of Medicine noted that Medicare*s
current administration of laboratory claims through its carriers and
fiscal intermediaries created inconsistency in the interpretation of
policy and procedures and led to variable interpretations of medical
necessity for the

same tests given under the same circumstances in different locations.
These inconsistencies created particular problems for laboratories that
performed tests on specimens drawn from beneficiaries in many different

35 64 Fed. Reg. 22, 619 (Apr. 27, 1999). 36 Pub. L. No. 105- 33, S: 4554(
b), 111 Stat. 251, 461. National Coverage

Policy Adds Consistency, But Current Policy Development Process Could Be
Strengthened

National Coverage Policy Promotes Programmatic Consistency

Page 21 GAO- 03- 175 Medicare Coverage states, because the laboratories
had to deal with differing policies and procedures for similar claims. 37
Although national coverage policy could lead to greater programmatic

consistency, Medicare still allows local variations in the application of
its national policies. For example, HCFA issued a memorandum on national
coverage of a noninvasive diagnostic test to measure heart function in
1998. 38 The national coverage policy stated that Medicare would cover the
test for beneficiaries with suspected or known cardiovascular disease.
Some carriers chose to clarify this broad coverage description in order to
automate claims denial by specifying the appropriate diagnoses and the

diagnostic codes that would indicate medical necessity for performing this
test, while other carriers did not. As a result, a beneficiary in
Tennessee diagnosed with *shortness of breath* could have the test covered
by Medicare, whereas a beneficiary with the same diagnosis in Michigan
would not have the test covered.

We and others have recommended that CMS work toward a more consistent
coverage approach. In 1996, we reported that carriers differed in their
policies for six groups of medical procedures that could be
inappropriately used. 39 As a result, we recommended that the agency
analyze expensive and inappropriately used services, identify local

coverage policies for these services, and work with claims administration
contractors to develop more consistent policies for them. Since then, the
agency has encouraged claims administration contractors to develop
policies to address expensive and inappropriately used services. More
recently, the Medicare Payment Advisory Commission recommended that the
local coverage policy- making process be abolished in favor of a single

national process in order to develop more consistency in the program. 40
The commission noted that eliminating local coverage policies would reduce
the current complexity, inconsistency, and uncertainty in the

37 Institute of Medicine, National Academy of Sciences, Medicare
Laboratory Payment Policy: Now and in the Future (Washington, D. C.:
2000). 38 HCFA issued its coverage memorandum on this test* cardiac output
monitoring by electrical bioimpedance* on September 22, 1998, with
coverage effective for services performed on or after July 1, 1999.

39 U. S. General Accounting Office, Medicare: Millions Can Be Saved by
Screening Claims for Overused Services, GAO/ HEHS- 96- 49 (Washington, D.
C.: Jan. 30, 1996). 40 Medicare Payment Advisory Commission, Reducing
Medicare Complexity and Regulatory Burden (Washington, DC: December 2001).

Page 22 GAO- 03- 175 Medicare Coverage Medicare program, along with the
associated burden on providers and beneficiaries.

Over the years, the agency*s national coverage process has been criticized
for its lack of openness, lack of understandability, and slow pace.
Critics have stated that the national coverage process was not open
because meetings of scientific experts and clinicians advising the agency
were not open to the public. Further, they have charged that the process
was not understandable because the steps that the agency followed were not
clear. In the late 1990s, the agency acknowledged that its advisory
committee structure had flaws, its process was not always clear and
understandable to outside parties, and its progress in developing policies
was not easy to follow. To address these problems, the agency began
developing a new coverage process. However, we found that the new national
process 1) does not routinely provide for consultation with experts or
allow the public to comment on draft policies, 2) is conducted without
clear criteria to guide policy making and make it more understandable to
interested

parties, and 3) generally does not meet agency- set time frames. One of
the first steps the agency took to make its national coverage process more
open was to establish a new advisory committee. In 1993, HCFA had created
the Technology Advisory Committee to provide it with expert advice
concerning whether Medicare should cover specific

technologies on a national basis. 41 This panel included officials from
HCFA, employees from other agencies within HHS, and carrier medical
directors. However, under the Federal Advisory Committee Act, committees
that include members who are not government employees and provide expert
advice to the federal government are required to do so through open public
meetings. 42 Because the Technology Advisory Committee included carrier
medical directors employed by private sector companies, the committee did
not fall within the exception in the act for advisory committees made up
wholly of government employees. In 1998, we found that, because meetings
of the committee had been closed, the

41 The Technology Advisory Committee was formed by merging two earlier
advisory groups, the Physicians Panel, which HCFA established in 1980, and
the Coverage/ Payment Technical Advisory Group, which HCFA established in
1983. 42 5 U. S. C. App. 5, S: 10( a) (2000). Concerns Remain about

the Openness, Understandability, and Timeliness of CMS*s National Coverage
Process

CMS Developed Its New National Coverage Process to Address Concerns about
Openness and Understandability

Page 23 GAO- 03- 175 Medicare Coverage Technology Advisory Committee was
in violation of the Federal Advisory Committee Act. 43 To make its
advisory process more open and understandable, in 1998

HCFA established a new group* MCAC. When CMS chooses to ask MCAC for
assistance, MCAC conducts open, public meetings to assess the scientific
and clinical evidence of the effectiveness and appropriateness of services
and items, such as DME, which are covered or eligible for coverage under
Medicare. 44 The committee* with up to 120 members divided into specialty
panels* includes experts in a broad range of medical, scientific, and
other professional disciplines, as well as consumer and industry
representatives as nonvoting members. MCAC does not advise CMS as to
whether Medicare should cover a service or item. Instead, it discusses
medical literature, technical assessments, and other information on the
clinical effectiveness of medical services and items, and advises CMS on
whether there is sufficient evidence to show that a service or item leads
to an appropriate health outcome. When CMS uses MCAC assistance,
interested parties have access to public meetings and transcripts, which
can help make CMS*s final coverage policy more understandable to them. To
further enhance openness and understandability, CMS routinely

publishes technical assessment reports on procedures and devices that it
is considering for coverage. Technical assessment reports are written
evaluations of the clinical usefulness of medical interventions, based on
a systematic review of the literature and a synthesis of the data from
multiple studies. In December 1999, CMS instituted an agreement with HHS*s
Agency for Healthcare Research and Quality to obtain, as needed, technical
assessment reports. The Agency for Healthcare Research and Quality
generally contracts for technical assessments to be conducted by academic
or research centers that specialize in evaluating medical

evidence. CMS decides, on a case- by- case basis, which issues will be 43
U. S. General Accounting Office, Office of the General Counsel, B- 278940
(Washington, D. C.: Jan. 13, 1998). 44 The first meeting of MCAC took
place in September 1999. MCAC meets on a varying schedule, depending on
requests for coverage policies.

Page 24 GAO- 03- 175 Medicare Coverage referred to MCAC, to the Agency for
Healthcare Research and Quality for an outside technical assessment
report, or to both. 45 CMS took other steps to make its national coverage
process more open and understandable. In January 1999, the agency created
a Web site that

provides information on pending and final national coverage policies*
including a tracking sheet that indicates the dates key actions were
taken, such as referral to MCAC for a review of clinical evidence, and
coverage memorandums that explain CMS*s rationale in making a particular
policy. 46 In addition, in April 1999, to help the public understand its
new process,

the agency published a notice in the Federal Register outlining the
procedural steps it would take in developing a national coverage policy.
47 CMS also noted that it would reconsider coverage policies based on new

scientific and medical information. This has allowed individuals to
challenge earlier coverage policies. Such challenges have been the most
common reason for external requestors to seek a national coverage policy.
In fiscal years 2000 and 2001, there were 12 external requests for CMS to
review a previously adopted policy, compared to 5 external requests to
create a policy for a new item or service.

CMS has taken significant steps to improve its policy making through its
new national coverage process. Nevertheless, the national process is not
always open to outside scientific experts, practicing clinicians,
beneficiaries, and others. CMS does not publish its draft national
coverage policies, and it does not always consult with MCAC, specialty or
practicing physician groups, and other experts when developing national
coverage policies.

While CMS has recently taken steps to obtain comments on national policies
as they are being developed, CMS does not post draft national coverage
policies on its Web site or use other means to obtain and incorporate
relevant input on draft policies before making them final. Beginning in
October 2001, CMS was required by law to ensure that the

45 The agency is currently developing guiding principles that will help it
determine when referrals for technical assessment reports, MCAC
assistance, or both should be made. 46 In December 2002, CMS launched a
Medicare coverage database, which allows users to

search for national coverage policies, documents related to national
coverage policies, and local coverage policies. The database may be
accessed at http:// www. cms. hhs. gov/ coverage/.

47 64 Fed. Reg. 22, 619 (Apr. 27, 1999). National Coverage Process Not

Always Open to Experts and the Public

Page 25 GAO- 03- 175 Medicare Coverage public is afforded notice and
opportunity to comment prior to implementation of a national coverage
policy. 48 CMS has not published a

Federal Register notice revising its procedural steps to indicate how this
notice and opportunity to comment will be provided. An agency official
noted that the public may check on the status of national coverage
policies that are being developed on the agency*s Web site and may submit
comments to CMS at any point in the policy development process. CMS noted
on its Web site that, for each national coverage policy requested since
April 2002, a 30- day comment period would occur starting from the date of
the request. However, because the agency does not publish its draft
national coverage policies, this comment process does not afford the
public the opportunity to review them. Furthermore, the comment process
does not require CMS to address in the public record any comments it has
received before contractors implement the final policy.

Furthermore, CMS does not always openly consult with outside experts when
developing national coverage policies. While MCAC provides a vehicle for
CMS to obtain advisory opinions in an open forum, CMS has used the MCAC
for less than one- sixth of its national coverage policies. CMS indicated
that it calls upon the MCAC when CMS deems the evidence to be more
difficult to assess or when the coverage issue is controversial or has
potential to have a major impact on the Medicare program. Since MCAC was
established, CMS has requested its input for 9 of the 55 completed
policies on national coverage* about 16 percent. 49 When CMS chooses not
to ask for MCAC*s views, there is no other provision for an open public
discussion. And, when MCAC is not used, it is also not clear to the public
how CMS is evaluating clinical evidence until the agency publishes a
coverage memorandum explaining the rationale for the final

policy. Finally, while CMS sometimes contracts with the Agency for
Healthcare Research and Quality for technical assessment reports, it does
not routinely obtain input from other HHS agencies that could provide

48 BIPA S: 522( b) and (c), 114 Stat. 2763A- 546. 49 MCAC was established
on December 14, 1998. As of July 31, 2002, CMS had published 55 national
coverage memorandums pertaining to requests after January 1, 1999.

Page 26 GAO- 03- 175 Medicare Coverage expertise, such as FDA. 50 Because
FDA considers evidence on safety and effectiveness before approving
medical devices and drugs for marketing,

routinely consulting with FDA officials who are familiar with such
evidence could provide additional insight on coverage issues for CMS.
However, when we began this review, FDA officials we interviewed reported
little contact with CMS staff working on coverage matters. CMS officials
responsible for coverage matters also reported having limited contact with
FDA. However, during our review, CMS and FDA officials met to discuss how
to coordinate more effectively, while allowing FDA to protect proprietary
information that companies have provided to it during the course of its
review.

CMS and FDA officials agreed that closer communication with FDA about its
reviews of particular devices and drugs could prove beneficial to* and
lack of coordination could hinder* CMS coverage policy making. For
example, in October 2001, CMS announced that it intended to cover ocular
photodynamic therapy, a laser procedure that requires a light- sensitive
drug, for patients with a certain type of age- related macular
degeneration* a disease that can cause blindness. However, FDA had not
added treatment for this type of macular degeneration as a labeled use of
the drug. After its October 2001 announcement, CMS developed concerns
about the underlying data from the clinical trial upon which the policy
was

50 Medicare generally will not cover new medical devices or drugs, or
procedures that depend on new devices or drugs, until after FDA has
approved the devices and drugs for marketing. However, FDA approval does
not guarantee Medicare coverage because the Medicare statute requires that
services and items fit into one of Medicare*s benefit

categories and be reasonable and necessary for beneficiaries* care in
order to be covered.

Page 27 GAO- 03- 175 Medicare Coverage based. After reconsideration, CMS
rescinded its memorandum on coverage for beneficiaries with this type of
the disease. 51 Recognizing the importance of having CMS work effectively
with FDA, in

November 2002 the HHS Secretary*s Advisory Committee on Regulatory Reform
52 issued a report that included five recommendations for improving
interagency coordination, collaboration, and communication relating to new
medical device technologies. 53 One of the recommendations was to
establish a process, with input from affected stakeholders, to enable
early coordination between FDA and CMS.

Further, the Advisory Committee recommended that, when appropriate, FDA
and CMS should have parallel reviews, thereby promoting more timely
patient access to innovative therapies. Such a parallel review could have
CMS consult with device manufacturers during the design of a clinical
trial developed under FDA auspices, so that the clinical trial could
address issues of concern for both CMS and FDA.

51 Ocular photodynamic therapy is a new treatment that uses a light-
sensitive drug to guide a laser. On November 8, 2000, HCFA issued a
memorandum announcing its intent to cover this therapy for patients with
predominantly classic lesions in the eye. In May 2001, The Vitreous
Society formally requested that HCFA also cover this treatment for
patients with nonclassic lesions. On October 17, 2001, CMS issued a
memorandum describing its intent to cover ocular photodynamic therapy for
patients with nonclassic lesions, based on the results published in a
clinical trial. FDA had not approved this use of the drug as a labeled use
in the procedure for patients with nonclassic lesions. Because the drug
had been found to be safe and effective for patients with classic lesions,
physicians could still use the drug

*off- label* for patients without classic lesions. Soon after CMS issued
its October 2001 memorandum indicating that it intended to cover this
therapy for patients with nonclassic lesions, the agency decided to
reconsider its stance. On March 28, 2002, CMS issued a new memorandum that
rescinded the October 2001 memorandum on covering patients with nonclassic
lesions, but maintained the coverage granted in November 2000 for those
with classic lesions.

52 On June 8, 2001, the HHS Secretary announced a departmentwide
initiative to reduce regulatory burdens in health care and respond faster
to the concerns of health care providers, state and local governments, and
individuals who are affected by HHS rules. As

part of this initiative, HHS established the Secretary*s Advisory
Committee on Regulatory Reform to provide findings and recommendations
regarding potential regulatory changes that would enable its programs to
reduce burdens and costs associated with the department*s regulations,
while at the same time maintaining or enhancing effectiveness, efficiency,
impact, and accessibility.

53 Department of Health and Human Services, Bringing Common Sense to
Health Care Regulation: Report of the Secretary*s Advisory Committee on
Regulatory Reform (Nov. 21, 2001).

Page 28 GAO- 03- 175 Medicare Coverage Critics of the national coverage
process have also been concerned that the basis for CMS*s policies was not
understandable, and this continues to be a problem. The fundamental
question in determining whether Medicare

should cover a new procedure or device is whether it is *reasonable and
necessary* for Medicare beneficiaries. However, the agency has not
published the criteria that it uses in the national process to determine
whether a service or item is reasonable and necessary, nor has it provided
information that outlines the evidence needed to demonstrate that a
procedure or device is clinically beneficial. 54 In May 2000, HCFA
published a notice of intent to develop a regulation

addressing the criteria for making coverage policies. 55 This was not the
agency*s first attempt to develop such a regulation. In 1989, HCFA had
proposed a regulation that would better define when a service or item was
*reasonable and necessary.* 56 The agency tried to include
costeffectiveness as part of the criteria, but this issue generated
controversy and the proposed rule was never finalized. HCFA*s approach in
its May 2000 notice of intent was to solicit public input before the
agency began developing a proposed rule. In addition to medical benefit,
this notice

proposed that an item or service would be covered only if it demonstrated
*added value** which meant that it substantially improved health outcomes;
provided access to a beneficial, but different treatment option (for
example, treating with a covered drug instead of surgery); or could
substitute for an existing item or service at an equal or lower cost to
the Medicare population. Proposing the *added value* criterion led to
resistance, due to concerns that the agency was planning to use cost
considerations as a basis for its coverage policies. CMS has not taken
further regulatory action to define what criteria it would apply to
determine whether a service or item was reasonable and necessary.

In response to questions we raised about the criteria it uses in its
national coverage process, CMS officials did not cite specific criteria
that are used. Instead, they stated that a set of case law criteria was
evolving through the national policies they had made, and suggested the
criteria could be

54 In contrast to CMS, FDA has established definitions for the *safety*
and *effectiveness* criteria that manufacturers must meet in order to
receive FDA approval for a device. FDA has also established standards for
the evidence it considers to be valid when deciding whether to approve a
device for marketing. 21 C. F. R. S: 860.7 (2002).

55 65 Fed. Reg. 31, 124 (May 16, 2000). 56 54 Fed. Reg. 4,302 (Jan. 30,
1989). Lack of Clear Criteria Raises

Concerns about Understandability of National Coverage Process

Page 29 GAO- 03- 175 Medicare Coverage inferred from reading the coverage
memorandums on the CMS Web site. However, having beneficiaries,
physicians, and device manufacturers infer

criteria that may apply to coverage policies from coverage memorandums
does not substitute for specifying, and making public, clear criteria.
Interested parties may not be able to infer the criteria from CMS*s
coverage memorandums or may differ in their interpretations. In contrast,
the agency has published guidance on criteria in a manual for claims
administration contractors to use in developing their coverage policies.

These criteria help contractors to determine when a procedure or device
that fits into Medicare*s benefit categories and is not excluded from
coverage by statute may be covered because it is considered reasonable and
necessary. (See app. V.)

In addition to not publishing the criteria for its national process, CMS
has not published guidance on how it will consider evidence in making
national coverage policies. Officials said that they are in the process of
preparing guidance to help the public better understand the types of
evidence used in making national policies. Agency officials stated that
they employ an evidence- based approach in the national coverage process.
Using this approach, clinical research results based on a strong
methodology are given more weight than other types of evidence. The MCAC
advisory input and technical assessments that CMS sometimes obtains are
part of its evidence- based approach. The timeliness of the agency*s
coverage policy making has been a longstanding

issue. We reported in 1994 that, when complicated clinical issues were
involved, it could take HCFA several years to develop national coverage
policies. 57 Device manufacturers raised the issue of timeliness of the
national coverage process again during a hearing before the House Ways and
Means Committee in l999. 58 HCFA responded to concerns about timeliness by
setting time frames for developing national coverage policies in its April
1999 Federal Register notice about its coverage procedures. In this
notice, HCFA stated that it intended to respond in writing to

requesters of national coverage policies within 90 calendar days of 57 U.
S. General Accounting Office, Medicare: Technology Assessment and Medical
Coverage Decisions, GAO/ HEHS- 94- 195FS (Washington, D. C.: July 20,
1994). 58 Medicare Coverage Decisions and Beneficiary Appeals: Hearing
Before the Subcommittee on Health of the House Committee on Ways and
Means, 106th Cong. 80- 81 (1999) (statement of Walter M. Rosebrough, Jr.,
on behalf of the Health Industry Manufacturers Association). Issues of
Timeliness Conflict

with Need for Public Input

Page 30 GAO- 03- 175 Medicare Coverage receiving the request. 59 The
agency noted that it generally expected to meet this 90- day time frame
and would likely be able to respond in less time if

the coverage issue was supported by clear medical and scientific evidence
and was not complex or controversial. However, the notice further stated
that the time frame could be longer if, for example, at a later time, the
requester submitted subsequent medical and scientific information for
consideration or if the coverage issue was referred to MCAC or required an
outside technical assessment.

In practice, CMS has generally taken considerably longer than the 90- day
goal established in 1999. Our analysis of 55 national coverage policies
showed that only 10 met the 90- day goal. 60 Our analysis showed
timeliness differences based on whether the coverage policy requester was
an outside party or within CMS and whether the issue was referred to MCAC
or for a technical assessment. Overall, the agency took an average of
about 7 1/2 months to issue a coverage memorandum for the 55 national
coverage policies, with 12 taking a year or more. 61 Policies responding
to requests

59 64 Fed. Reg. 22, 619, 22, 622 (Apr. 27, 1999). The notice also
indicated that the agency would follow the same procedures and time frames
when coverage policy questions were generated internally. After this
notice was issued, BIPA established a new process for beneficiaries to
directly appeal coverage policies. As part of this new coverage policy
appeals process, BIPA also imposed timeliness requirements on the
Secretary of HHS for responding to requests from beneficiaries that he
develop coverage policies for an item or service they need. Specifically,
BIPA requires that one of four actions be taken within 90 days: 1) issue a
national coverage policy, 2) issue a national noncoverage policy, 3)
determine that no national coverage or noncoverage policy is appropriate,
or 4) issue a notice stating that the review is not complete, identifying
the remaining review steps to be taken, and establishing a deadline by
which the review will be completed. On August 22, 2002, CMS issued
proposed regulations on BIPA*s new coverage policy appeals process. 67
Fed. Reg. 54,534.

60 We analyzed the 55 national coverage policies that were requested after
January 1, 1999, and had a coverage memorandum issued by July 31, 2002.
Timeliness data are based on information posted on CMS*s Web site that
indicates the date of request for a national coverage policy and the date
the coverage memorandum was issued. Publishing the coverage memorandum is
the first step to implementing the policy. It has taken up to 9 additional
months after publishing a coverage memorandum for CMS to issue the
national

instructions that constitute the coverage policy and for the claims
administration contractors to implement necessary payment changes.

61 In June 2002, CMS issued a report to the Congress on 10 national
coverage policies that were published and implemented in fiscal year 2001.
See Department of Health and Human Services, Report to Congress on
National Coverage Determinations (Washington, D. C.: June 2002). The
report showed that the average time to implement 4 policies without a
technical assessment or MCAC input was 96 days (not including 2 emergency
policies related to coverage of liver transplants) and the average time to
implement 4 policies that

had a technical assessment or MCAC input was almost 280 days.

Page 31 GAO- 03- 175 Medicare Coverage that were generated within the
agency took longer than those that were requested by an outside party*
such as a device manufacturer or a

provider association. There were 28 internal requests, which took an
average of about 251 days, and 27 external requests, which averaged about
188 days for CMS to issue a coverage memorandum. 62 Referring a coverage
issue to MCAC or requesting a technical assessment

report added months to the national coverage process. The agency requested
technical assessments for most issues referred to MCAC to help that
committee assess the evidence. 63 While the 39 policies that were
processed without outside advice took an average of about 152 days, the 16
policies that were referred for MCAC advice, a technical assessment, or
both averaged about 411 days* or over 8 months longer.

As a national program affecting 40 million beneficiaries, Medicare needs
consistent coverage policies. Giving contractors broad discretion to make
local coverage policies for procedures and devices has led to inequitable
variations in coverage for beneficiaries depending on where they are

treated. In addition, dividing the authority for making coverage policy
among local contractors has resulted in program inefficiencies. While
developing policy through a national process offers the advantages of
consistency and efficiency, concerns remain about the openness and
timeliness of CMS*s national coverage process. Further, concerns have been
expressed about the process because the agency has not published clear
criteria for judging if a particular procedure or device is reasonable and
necessary for Medicare beneficiaries.

We believe that a more equitable and efficient way to develop coverage
policy would be to eliminate development of local policy for procedures
and devices that have established codes. Instead, Medicare coverage
policies should be made through a new, single process that develops

consistent, national coverage policies for procedures and devices. Such a
62 Two of the 27 external requests had coverage memorandums dated on the
same day they were formally requested. Both of these involved temporary
coverage of liver transplants in nonapproved hospitals during a flooding
emergency in Houston, Tex.. When these two national coverage policies were
excluded from our analysis, the average time frame to issue a coverage
memorandum for the remaining 25 external requests increased to about

203 days. 63 As of July 31, 2002, all but two national coverage policies
that had been reviewed by MCAC also had technical assessments. Conclusions

Page 32 GAO- 03- 175 Medicare Coverage process could also examine current
local coverage policies on procedures and devices to determine whether
these policies should be consolidated

into national coverage policies that would be consistent for all
beneficiaries or be eliminated.

Developing a new national coverage process would require careful design
and implementation. The new process should address areas of longstanding
concern about openness, timeliness, and clarity of policy making. Key
aspects of a new process would include routinely consulting with the
public, clinicians, and other experts before finalizing coverage policies;
leveraging the expertise of others within HHS, such as those within FDA;
and closely adhering to established time frames to improve timeliness of
policy issuance. We also believe that CMS needs to develop clear criteria
for its national process to make its coverage policies more understandable
to others.

To ensure that all Medicare beneficiaries are treated equitably, we
recommend that the Administrator of CMS

 eliminate the ability of claims administration contractors to develop
new coverage policies for procedures and devices that have established
codes;  develop and implement a plan to evaluate the merits of all
existing local coverage policies that affect procedures and devices with
established

codes, with the intent of incorporating appropriate aspects of local
policies into national coverage policies and eliminating the remainder; 
establish a new process for making national coverage policies that

requires public input on draft policies, adheres to time frames, and
provides for routine consultation with key HHS and external stakeholders
with scientific, clinical, and programmatic expertise; and

 promulgate written criteria for assessing whether a service or item is
reasonable and necessary.

In its written comments, HHS generally disagreed with our recommendations
and stated that our draft report did not provide an adequate analytic
basis for our recommendations. (See app. VI for HHS*s

comments.) Specifically, HHS said that we did not demonstrate how
developing coverage policy nationally would eliminate inequities related
to differing coverage in different parts of the country and did not fully
explore the weakness of developing consistent national policy for
procedures and devices with established codes or the benefits of
developing differing local policies. Recommendations for

Executive Action Agency Comments and Our Evaluation

Page 33 GAO- 03- 175 Medicare Coverage Our report*s findings and
recommendations are based on considerable analytic work. For example, as
we noted in our draft report, we assessed

national and local policies that related to procedures and devices
assigned 320 new codes in 2001; conducted site visits to four Medicare
contractors that provided a basis for our analysis of the processes they
followed to develop policy and the policies they chose to develop;
analyzed the timeliness and process followed to develop 55 national
coverage policies; and conducted numerous interviews with, and analyzed
documents

provided by, CMS and FDA officials, carrier medical directors, experts on
evidence- based medicine, and representatives of beneficiaries,
physicians, and device manufacturers and suppliers. We believe that the
evidence demonstrates that allowing coverage policies to be developed by
different contractors leads to differing policies and inconsistent
coverage for beneficiaries. Such inequities would be addressed by
developing all policies nationally for procedures and devices with
established codes. The draft report acknowledges both the weaknesses in
the current national process and the strengths of the local processes.

In its comments on our specific recommendations, HHS disagreed with our
first recommendation* that CMS eliminate claims administration
contractors* ability to develop new coverage policies for procedures and
devices that have established codes. The department argued that developing
consistent policy nationally for procedures and devices with established
codes would drastically alter the intended design of the Medicare program
as a regionalized program, remove the Secretary*s discretion to make
coverage policies, and prevent Medicare from testing new, experimental
treatments before enough clinical evidence is available to warrant
national coverage. HHS also stated that CMS did not have the resources to
develop sufficient national policies, so that the recommendation would
increase Medicare payments in future years because contractors would not
be able to prevent overuse of certain services and items.

In our opinion, developing consistent coverage policies nationally for
procedures and devices with established codes would help modernize
Medicare and is an appropriate role for CMS. As our draft report
indicates, Medicare has already evolved into a program with a decreasing
number of contractors who often serve multiple states and develop policies
that are not specific to one locality*s needs. Implementing our first

recommendation would not remove the Secretary*s discretion over coverage
policies, although it would require greater commitment to fulfilling this
responsibility. Following implementation of our recommendation,
contractors would still be able to develop local policies

Page 34 GAO- 03- 175 Medicare Coverage for new procedures and devices
entering the market and billed under miscellaneous codes. These coverage
policies would allow for

experimentation and could provide a basis for national policy making once
the procedures or devices have codes assigned. Removing the inefficient,
duplicative policy making currently conducted

by 19 carriers and 27 fiscal intermediaries could allow CMS to focus the
$19.5 million allocated to local policy development and additional funds
allocated to national policy development to achieve a more strategic
approach to coverage policy. In addition, because similar types of
improper or abusive billing practices may be taking place in several
localities or may migrate from one locality to another, having consistent
national coverage policies to prevent improper billing or overuse of
services could result in program savings. It is also more equitable for
both providers and beneficiaries. Contractors that have concerns about
specific utilization problems would still have the opportunity to propose
new policies to be adopted nationally. Such national policies would
benefit other contractors that may experience similar utilization
problems.

Regarding our second recommendation* which calls for CMS to develop and
implement a plan to evaluate existing local coverage policies, with the
intent of incorporating aspects of them into national policies or retiring
them* HHS agreed that local coverage policies should be evaluated on a
regular basis. It noted that CMS currently requires its contractors to
separately evaluate their own policies. However, HHS did not respond to
the intent of our recommendation, namely that one entity should review all
policies for each procedure and device so that the best policy can be
developed nationwide.

HHS disagreed with our third recommendation, that CMS develop a new
process for making national coverage policies. The department indicated
that, instead, a Federal Register notice will soon be published that
incorporates process improvements and steps that have already been taken
to streamline the MCAC process. HHS also indicated that it routinely

communicates with FDA on coverage matters and has extensive contacts with
experts at the National Institutes of Health.

As we recognized in our draft report, CMS has made improvements in its
current national process. Because information on its newest planned
process improvements has not been published, we cannot comment on whether
these changes will fully address long- standing concerns about the
openness, understandability, and timeliness of its policy making. CMS has
made progress by streamlining the MCAC decision process and is working

Page 35 GAO- 03- 175 Medicare Coverage to improve its coordination with
FDA. We believe that communication with FDA should be an integral part of
the development of each Medicare

coverage policy that involves drugs and devices, or procedures that rely
on drugs and devices.

HHS disagreed with our fourth recommendation, which would require CMS to
publish written criteria it would use to assess whether a service or item
is reasonable and necessary. The department said it relies on

publishing the rationale for each coverage policy: that is, it uses a case
law approach and does not presently plan to engage in rule making on this
subject. HHS is considering other options that might be helpful, but is
not planning to issue guidance that would serve as written criteria. As a

national program of great significance, we believe Medicare should be
transparent in the criteria it uses for interpreting whether a service or
item is reasonable and necessary and can be covered. As agreed with your
office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days
after its issue date. At that time, we will send copies of this report to
the Secretary of HHS, the Administrators of CMS and FDA, appropriate
congressional committees, and other interested parties. We will also make
copies available to others on request. In addition, the report will be
available at no charge on the GAO Web site at http:// www. gao. gov.

If you or your staff 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 are listed in appendix VII.

Sincerely yours, Leslie G. Aronovitz Director, Health Care* Program
Administration and Integrity Issues

Appendix I: Scope and Methodology Page 36 GAO- 03- 175 Medicare Coverage
To assess the extent that new procedures and devices are incorporated into
the Medicare program, we analyzed new Current Procedural

Terminology (CPT) and Healthcare Common Procedure Coding System (HCPCS)
Level II codes from the HCPCS tape sent to contractors in October 2000.
This tape included the codes adopted by the American Medical Association*s
CPT Editorial Panel and the codes adopted by the HCPCS National Panel.
Most of these new codes became effective on January 1, 2001. We selected
the codes that represented procedures and devices used in a physician*s or
allied health professional*s office, or by beneficiaries in the home, as
well as anesthesia and laboratory services. We excluded codes that
represented drugs, blood work, ambulancerelated services, and devices used
only in the inpatient hospital setting. We did not include codes added to
identify items to which special Medicare

hospital outpatient payment rates apply or codes that the Panel had
adopted for other insurers, but not Medicare. We also did not analyze the
extent to which Medicare covered new procedures and devices that were not
assigned new codes in 2001. For the list of 320 codes in our scope, we
reviewed the coverage status the Centers for Medicare & Medicaid Services
(CMS) had given to each code, and we determined whether either national or
local coverage policies existed in 2002 for these codes. As part of our
research on local policies, we assessed coverage policies by carrier and
fiscal intermediary. We analyzed payment data from the Medicare part

B extract and summary system for the new codes. To determine the
percentage of Medicare part B payments billed under miscellaneous codes,
we also analyzed payment data from the Medicare part B extract and summary
system for HCPCS Level I and II miscellaneous codes and all HCPCS codes
billed.

To determine the effect of the local coverage process on beneficiaries,
carrier and fiscal intermediary efficiency, and stakeholders, including
device manufacturers and physicians, we interviewed key CMS officials and
staff and reviewed documents. We conducted site visits at four carriers:
Blue Cross Blue Shield of Rhode Island, CIGNA HealthCare Medicare
Administration, National Heritage Insurance Company, and Noridian
Administrative Services. CIGNA also serves as a durable medical equipment
(DME) regional carrier and Blue Cross Blue Shield of Rhode

Island also serves as a fiscal intermediary. We chose these carriers in
order to include both multistate and single- state carriers and to include
one carrier that was also a DME regional carrier and one that was also a
fiscal intermediary. At these site visits, we used a structured protocol
to interview contractor medical directors and other staff to assess their
local policy development processes and to document policies developed in
fiscal years 2000 and 2001. We also analyzed data on local coverage
Appendix I: Scope and Methodology

Appendix I: Scope and Methodology Page 37 GAO- 03- 175 Medicare Coverage
policies on LMRP. net, a CMS- sponsored Web site listing local policies by
carrier, DME regional carrier, and fiscal intermediary, and surveyed

carrier medical directors to determine whether deep brain stimulation, a
surgical procedure to treat tremors associated with Parkinson*s disease,
was covered under part B for physicians* services in each state. This

procedure was selected for study due to variation in its coverage at the
time we did our work.

To evaluate the effects of the national coverage process on beneficiaries
and other stakeholders and to identify concerns about it, we analyzed the
national process in terms of its steps, time frames, criteria and evidence
used, coordination with claims administration contractors, and
coordination with the Food and Drug Administration (FDA) approval
processes. We interviewed experts on evidence- based medicine, CMS and FDA
officials, Medicare Coverage Advisory Committee (MCAC) executive committee
members and MCAC panel members, and representatives of

beneficiaries, physicians, and device manufacturers and suppliers,
including the Center for Medicare Advocacy, AdvaMed, the AARP Foundation,
the Medical Group Management Association, the National Institute for
Health Care Management, the American College of PhysiciansAmerican Society
of Internal Medicine, the American College of Cardiology, the American
College of Chest Physicians, the Marshfield Clinic, and the American
Academy of Family Physicians. We obtained their views on issues related to
the national coverage process, such as the effectiveness of the national
process and the implications of the process for beneficiaries and others.
We also observed meetings of the MCAC executive committee, the MCAC
medical and surgical procedures panel, and the MCAC diagnostic imaging
panel, to understand their roles in the coverage policy- making process,
and reviewed MCAC minutes from selected meetings held in 1999 through
2002, as well as selected meeting transcripts. We analyzed 55 national
coverage policies, which were requested by external requestors or
internally by CMS after January 1, 1999, and had a CMS coverage memorandum
issued by July 31, 2002, in order to determine the amount of time needed
and the process used to

make each policy. We also analyzed the support and rationale used to make
some of these policies.

Appendix II: Coding Assignment Process Page 38 GAO- 03- 175 Medicare
Coverage Figure 2 shows the steps that occur for codes to be added for use
in the Medicare program. Common Procedure Terminology (CPT) codes are

used for medical services and procedures furnished by physicians and other
health care professionals and Healthcare Common Procedure Coding System
(HCPCS) Level II codes are used for other services, products, and
supplies. When new codes are added, old codes may need to be deleted or
revised so that the use of each code is clear.

Figure 2: Process for Adding, Deleting, and Revising CPT and HCPCS Level
II Codes for Use in the Medicare Program

Appendix II: Coding Assignment Process

CPT Advisors, representing health care providers, review the code request
applications. Physicians or others contact the American

Medical Association*s (AMA) CPT Editorial Panel to request a new or more
specific CPT code.

AMA*s CPT Editorial Panel adds, deletes, and revises CPT codes.

CMS determines if a new CPT or HCPCS Level II code represents a benefit
under the Medicare statute, and if so, the category of benefit. It also
reviews codes to determine whether they are associated with any national
policy.

Physicians or others, such as device manufacturers, contact CMS to request
a new or more specific HCPCS Level II code.

CMS reviews new HCPCS Level II code requests and presents its
recommendation to the HCPCS National Panel.

HCPCS National Panel adds, deletes, and revises HCPCS Level II codes.

CMS compiles a complete list of all codes and includes any related
national policy or guidance. It sends the list to contractors for
implementation.

Contractors update payment systems and local coverage policies to reflect
the new codes. (Most new codes are effective January 1.) Source: GAO.

Appendix III: Process That CMS Follows to Develop National Coverage
Policies

Page 39 GAO- 03- 175 Medicare Coverage Appendix III: Process That CMS
Follows to Develop National Coverage Policies

OR Results of CMS review

CMS returns request - incomplete information - requested service is not

a Medicare benefit in statute CMS action CMS accepts request

(combining duplicate pending requests)

Coverage memorandum by CMS

CMS assesses clinical evidence without MCAC assistance or technology
assessment External request

submitted to CMS Internal request

submitted by CMS staff

Technology assessment of clinical evidence

CMS develops program memorandum or other instructions for contractors

Contractor implements any needed changes into claims processing systems
and local coverage policies MCAC considers

clinical evidence Source: GAO.

Appendix IV: Process That Carriers and Fiscal Intermediaries Follow to
Develop Local Coverage Policies

Page 40 GAO- 03- 175 Medicare Coverage a Fiscal intermediaries may have
advisory committees, but CMS does not require them to do so.

Appendix IV: Process That Carriers and Fiscal Intermediaries Follow to
Develop Local Coverage Policies

Input/ review

Input 45- day comment period 45- day

notice period Public

hearing  Medical literature

 Other carrier medical director expertise  Carrier advisory

committee members  Fiscal intermediary

advisory committee members a  Medical societies  Other local experts

Revise draft local medical policy in response to comments; publish final
local

medical policy Local medical

policy effective Post revised draft

on carrier*s or fiscal intermediary*s Web site for comment Draft local
medical

policy presented to carrier advisory committee (local physicians nominated
by medical societies) or to fiscal intermediary advisory committee a 
Health professionals

 Specialty societies  Other carriers  Other fiscal intermediaries 
Quality improvement

organizations (organizations with Medicare contracts to evaluate treatment
quality)  General public

Gather/ review data and evidence

Policy issue identified

Policy internally requested by carrier or fiscal intermediary staff

Draft local medical policy Providers or others, such as

device manufacturers, contact a carrier or fiscal intermediary concerning
a coverage matter

Does draft policy require

comment? Yes, policy restricts coverage

No, policy does not restrict coverage Source: GAO.

Appendix V: Coverage Criteria for Medicare Claims Administration
Contractors Page 41 GAO- 03- 175 Medicare Coverage Figure 3 shows the
coverage criteria published for Medicare claims administration contractors
to help them determine whether a procedure or

device is reasonable and necessary. Criteria focus on whether services are
appropriate and clinically beneficial. Contractor guidance also describes
the different types of evidence that are used to determine whether a
procedure is reasonable and necessary and an assessment of the relative
quality of different types of evidence. Figure 3: Criteria for Claims
Administration Contactors to Use to Determine

Whether a Procedure or Device Is Reasonable and Necessary

a Services provided in routine clinical trials on or after September 19,
2000, and which meet the requirements of the Clinical Trials National
Coverage Determination are considered reasonable and necessary. See
Medicare Coverage Issues Manual, 30- 1, Routine Costs of Clinical Trials
(Sept. 19, 2000).

Appendix V: Coverage Criteria for Medicare Claims Administration
Contractors

As long as a procedure or device fits into Medicare*s benefit categories
and is not excluded from coverage, it would be considered reasonable and
necessary if it is: . safe and effective;

. not experimental or investigational* with certain exceptions; a

. appropriate, including the duration and frequency that is considered
appropriate for the service, in terms of whether it is: . furnished in
accordance with accepted standards of medical practice for the diagnosis
or treatment of the patient*s condition or to improve the function of a
malformed body member* or, for certain specified services, to prevent or

screen for illness or to palliate or manage terminal illness;

. furnished in a setting appropriate to the patient*s medical needs and
condition;

. ordered or furnished by qualified personnel;

. one that meets, but does not exceed, the patient*s medical need; and

. at least as beneficial as an existing and available medically
appropriate alternative. Source: GAO.

Appendix VI: Comments from the Department of Health and Human Services
Page 42 GAO- 03- 175 Medicare Coverage

Appendix VI: Comments from the Department of Health and Human Services

Appendix VI: Comments from the Department of Health and Human Services
Page 43 GAO- 03- 175 Medicare Coverage

Appendix VI: Comments from the Department of Health and Human Services
Page 44 GAO- 03- 175 Medicare Coverage

Appendix VI: Comments from the Department of Health and Human Services
Page 45 GAO- 03- 175 Medicare Coverage

Appendix VI: Comments from the Department of Health and Human Services
Page 46 GAO- 03- 175 Medicare Coverage

Appendix VI: Comments from the Department of Health and Human Services
Page 47 GAO- 03- 175 Medicare Coverage

Appendix VII: GAO Contact and Staff Acknowledgments

Page 48 GAO- 03- 175 Medicare Coverage Sheila K. Avruch, (202) 512- 7277
The following staff members made important contributions to this work:

Barrett Bader, Sandra Gove, Karen Kemper, Joy Kraybill, and Craig Winslow.
Appendix VII: GAO Contact and Staff

Acknowledgments GAO Contact Acknowledgments

(290129)

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512- 7470 Jeff Nelligan, managing director, NelliganJ@ gao. gov (202) 512-
4800

U. S. General Accounting Office, 441 G Street NW, Room 7149 Washington, D.
C. 20548 GAO*s Mission Obtaining Copies of

GAO Reports and Testimony

Order by Mail or Phone To Report Fraud, Waste, and Abuse in Federal
Programs Public Affairs
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