Medicare: CMS Did Not Control Rising Power Wheelchair Spending	 
(28-APR-04, GAO-04-716T).					 
                                                                 
Medicare spending for power wheelchairs, one of the program's	 
most expensive items of durable medical equipment (DME), rose 450
percent from 1999 through 2003, while overall Medicare spending  
rose by about 11 percent for the same period, according to the	 
Centers for Medicare & Medicaid Services (CMS). This spending	 
growth has raised concerns that Medicare made improper payments  
and has payment rates that are out of line with market prices. In
May 2003, the Department of Justice indicted power wheelchair	 
suppliers in Texas alleged to have fraudulently billed Medicare. 
The Medicare Prescription Drug, Improvement, and Modernization	 
Act of 2003 (MMA) contains provisions regarding DME, such as	 
changing payment setting methods. GAO was asked to examine (1)	 
steps taken by CMS and its contractors to identify and respond to
improper payments for power wheelchairs and (2) how MMA will	 
affect CMS's ability to set payment rates for DME. To examine	 
these issues, GAO analyzed claims data reports for CMS's four DME
regions, reviewed applicable legislation, regulations, and CMS	 
and contractor documents, and interviewed CMS and contractor	 
officials, DME suppliers and manufacturers, DME industry	 
representatives, and beneficiary advocacy groups. GAO focused	 
attention on region C, which includes Texas.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-716T					        
    ACCNO:   A09894						        
  TITLE:     Medicare: CMS Did Not Control Rising Power Wheelchair    
Spending							 
     DATE:   04/28/2004 
  SUBJECT:   Claims processing					 
	     Erroneous payments 				 
	     Fraud						 
	     Health care programs				 
	     Health insurance cost control			 
	     Medical equipment					 
	     Medical expense claims				 
	     Prices and pricing 				 
	     Contractors					 
	     Health care cost control				 
	     Health insurance					 
	     Managed health care				 
	     Medicare Program					 

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GAO-04-716T

United States General Accounting Office

GAO Testimony

Before the Committee on Finance, U.S.

Senate

For Release on Delivery

Expected at 10:00 a.m. EDT MEDICARE

Wednesday, April 28, 2004

                           CMS Did Not Control Rising
                           Power Wheelchair Spending

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

GAO-04-716T

Highlights of GAO-04-716T, a testimony before the Committee on Finance,
U.S. Senate

Medicare spending for power wheelchairs, one of the program's most
expensive items of durable medical equipment (DME), rose 450 percent from
1999 through 2003, while overall Medicare spending rose by about 11
percent for the same period, according to the Centers for Medicare &
Medicaid Services (CMS).

This spending growth has raised concerns that Medicare made improper
payments and has payment rates that are out of line with market prices. In
May 2003, the Department of Justice indicted power wheelchair suppliers in
Texas alleged to have fraudulently billed Medicare. The Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
contains provisions regarding DME, such as changing payment setting
methods. GAO was asked to examine (1) steps taken by CMS and its
contractors to identify and respond to improper payments for power
wheelchairs and (2) how MMA will affect CMS's ability to set payment rates
for DME.

To examine these issues, GAO analyzed claims data reports for CMS's four
DME regions, reviewed applicable legislation, regulations, and CMS and
contractor documents, and interviewed CMS and contractor officials, DME
suppliers and manufacturers, DME industry representatives, and beneficiary
advocacy groups. GAO focused attention on region C, which includes Texas.

www.gao.gov/cgi-bin/getrpt?GAO-04-716T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Leslie G. Arnonovitz at
(312) 220-7600.

April 28, 2004

MEDICARE

CMS Did Not Control Rising Power Wheelchair Spending

Although the four contractors that process DME claims identified
escalating power wheelchair spending as early as 1997, CMS did not lead a
coordinated response until September 2003. Inadequate information to
review claims; limited resources, which caused contractors to scale back
their claims review efforts; and flaws in the process to screen suppliers
before they could bill Medicare left the program vulnerable to millions of
dollars in claims paid improperly. Medicare spending for power wheelchairs
grew fastest in region C, but resources to review claims were particularly
constrained for that region's contractor. CMS has introduced a 10-point
plan that appears to be a reasonable approach to reduce improper payments.

Medicare Power Wheelchair Spending, Region C Compared to All Other Regions

Note: Medicare spending includes federal payments and beneficiary cost
sharing.

The MMA requires CMS to use competitive bidding to set payment rates for
DME. Competitive bidding shows potential for CMS to set market-driven
payment rates to help keep pace with changes in prices for medical
equipment.

GAO discussed these findings with program officials, who provided
technical comments.

Mr. Chairman and Members of the Committee:

I am pleased to be here today as you discuss issues regarding Medicare
program payments for power wheelchairs. Medicare fee-for-service power
wheelchair spending is expected to total over $1 billion in 2003. Spending
for power wheelchairs rose 450 percent from 1999 through 2003, according
to the Centers for Medicare & Medicaid Services (CMS),1 the agency
responsible for managing the Medicare program. In contrast, overall
Medicare spending increased by about 11 percent during the same period. At
about the same time, the number of beneficiary claims for this item of
durable medical equipment (DME) nearly tripled, while the overall Medicare
population increased by just 1 percent. 2 Power wheelchairs rank among
Medicare's most expensive items of DME, and in 2003, Medicare paid about
$5,000 for each basic power wheelchair with standard options, and even
more if special accessories were included.

Escalating spending can be fueled by improper payments and payment rates
that are out of line with market prices. Improper payments can result from
mistakes on the part of suppliers, beneficiaries, or beneficiaries'
physicians. For example, improper payments can occur when suppliers submit
claims on behalf of beneficiaries who do not meet Medicare's coverage
criteria for power wheelchairs. Improper payments can be due to
fraud-intentional misrepresentation-and abuse. For example, in May 2003,
the Department of Justice began indicting some physicians and wheelchair
suppliers in Texas that were alleged to have billed Medicare for power
wheelchairs that beneficiaries never received. Rising spending can also
result when Medicare pays above-market prices for power wheelchairs. We
and the Department of Health and Human Services (HHS) Office of Inspector
General (OIG) have reported that Medicare pays more than other insurers
and public programs for some items of DME-

1Until July 1, 2001, CMS was called the Health Care Financing
Administration (HCFA).

2Medicare defines DME as equipment that may be prescribed by a physician
for a patient's use for an extended period of time. This equipment serves
a medical purpose, can withstand repeated use, is generally not useful in
the absence of an illness or injury, and is appropriate for use in the
home. 42 U.S.C. S: 1395x(n) (2000).

including power wheelchairs.3 As we have testified in the past, CMS and
its contractors-insurance companies that administer Medicare
fee-forservice DME claims, called DME regional carriers-have had
difficulty setting payments for DME that reflect current health care
market prices.4 The Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) contains provisions to address some of the
difficulties regarding DME payment setting and requirements that will
affect the conditions under which power wheelchairs are provided. 5

My remarks today will focus on (1) steps taken by CMS and its contractors
to identify and respond to improper payments for power wheelchairs and (2)
how MMA will affect CMS's ability to set payment rates for DME. Because
about two-thirds of power wheelchair payments were made by Palmetto
Government Benefits Administrators in 2002-including those in Texas-I will
be focusing some of my remarks specifically on that DME regional carrier.

To evaluate the steps CMS and its contractors took in identifying and
responding to improper payments, we reviewed DME claims payment data
analysis reports on DME claims payment from CMS's statistical contractor;
written policies and procedures from CMS and its contractors; budget and
expense data for contractor activities; Medicare coverage policies, which
explain the criteria for determining whether and under what conditions
items are covered; and CMS's plan for responding to payment problems with
Medicare's power wheelchair benefit. We also interviewed CMS and
contractor officials, suppliers, industry representatives, manufacturers,
and beneficiary advocacy groups. For DME claims payment data covering 1997
to 2002, we reviewed CMS and contractor internal control procedures to
help ensure that these data were

3Testimony of Janet Rehnquist, Inspector General, Department of Health and
Human Services, Medicare Reimbursement for Medical Equipment and Supplies,
before the Senate Committee on Appropriations, Subcommittee on Labor,
Health and Human Services, and Education, 107th Cong., 2nd sess.,
Washington, D.C.: June 12, 2002; U.S. General Accounting Office, Medicare
Payments: Use of Revised "Inherent Reasonableness" Process Generally
Appropriate, GAO/HEHS-00-79 (Washington, D.C.: July 5, 2000); and U.S.
General Accounting Office, Medicare: Home Oxygen Program Warrants
Continued HCFA Attention, GAO/HEHS-98-17 (Washington, D.C.: Nov. 7, 1997).

4U.S. General Accounting Office, Medicare: Challenges Remain in Setting
Payments for Medical Equipment and Supplies and Covered Drugs, GAO-02-833T
(Washington, D.C.: June 12, 2002).

5Pub. L. No. 108-173, S: 302, 117 Stat. 2066, 2223.

accurate, timely, and complete, and, where appropriate, we tested data for
internal consistency. We determined that these data were adequate for
addressing the issues in this testimony. Contractor budget and expense
data are self-reported by CMS or the contractors, and we did not validate
these data. To understand CMS's experience with setting payments for DME
that are in line with market prices, we reviewed CMS regulations and other
documents, and interviewed CMS staff. We also reviewed our previous
reports and reports issued by the HHS OIG and CMS to identify alternative
approaches to setting prices for DME. We conducted our work from February
through April 2004 in accordance with generally accepted government
auditing standards.

In summary, starting as early as 1997, contractors identified problems
with power wheelchair payments, but it was not until September 2003 that
CMS began to lead a full-scale, coordinated effort to address improper
payments. Further, the agency did not address program safeguard
shortcomings that contributed to the growth in spending for this benefit.
These included inadequate information to properly review and adjudicate
claims; limited resources, which caused contractors to scale back their
claims review efforts; and flaws in the process to screen suppliers before
they could bill Medicare. CMS's recent coordinated effort to reduce
improper payments for power wheelchairs through a 10-point plan appears
reasonable, and the agency has at least started, and in some cases has
implemented, all of its elements.

The MMA requires CMS to use a new approach to setting DME payments by
using competitive bidding among suppliers to help determine payment
rates.6 The agency's use of Medicare's prior authority to adjust DME
payment rates has not enabled Medicare to keep pace with changes in prices
for medical equipment. As a result, Medicare often pays more for a DME
item than other public payers. In contrast, competitive bidding shows
promise as a way for CMS to use market forces to set more reasonable
payment rates.

Background 	Most Medicare beneficiaries purchase part B insurance, which
helps pay for certain physician, outpatient hospital, laboratory, and
other services; medical supplies and DME; and certain outpatient drugs. A
wide variety of DME items-including power wheelchairs-are covered if they
are

                        6MMA S: 302(b), 117 Stat. 2224.

medically necessary for the beneficiary's use in the home and prescribed
by a physician. Medicare part B pays for most DME using state-specific fee
schedules based on statewide average supplier charges on Medicare claims
paid during 1986 and 1987. Since then, fee schedules have been updated for
inflation in some years. Medicare pays 80 percent and the beneficiary pays
the balance of either the actual charge submitted by the supplier or the
fee schedule amount, whichever is less. If a beneficiary has supplemental
insurance, the insurance may cover the 20 percent copayment.

Four DME regional carriers are each responsible for reviewing and paying
claims submitted by outpatient providers and suppliers on behalf of
beneficiaries living in specific parts of the country.7 For example,
Palmetto is responsible for processing claims for beneficiaries
permanently residing in region C, which encompasses 14 states-including
Texas and Florida- and Puerto Rico and the Virgin Islands.

The DME regional carriers and other contractors conduct program safeguard
activities to identify and respond to improper payments for DME claims
(see table 1). In addition to the DME regional carriers, three other
contractors play important roles:

o  	The Statistical Analysis Durable Medical Equipment Regional Carrier
(SADMERC) analyzes claims data and identifies and reports trends in
billing by item, geographic region, supplier, and physician to DME
regional carriers and CMS staff.

o  	TriCenturion, LLC is a specialized program safeguard contractor
responsible for reviewing claims and investigating and developing fraud
cases for claims processed by region A. The other three DME regional
contractors conduct these activities themselves for the claims they
process.

o  	The National Supplier Clearinghouse (NSC) enrolls and authorizes
suppliers to bill Medicare by evaluating supplier applications and
performing on-site visits to suppliers' places of business.

7The four DME regional carriers are HealthNow New York, Inc. (region A),
AdminaStar Federal (region B), Palmetto Government Benefits Administrators
(region C), and CIGNA HealthCare Medicare Administration (region D). See
app. I for the states in each DME regional carrier's jurisdiction. In this
testimony, "states" refers to the 50 states, the District of Columbia,
U.S. territories, and the Commonwealth of Puerto Rico.

CMS oversees these contractors' activities through various means, such as
performing yearly site visit evaluations, reviewing planned activities,
monitoring data and periodic reports, and conducting regular conference
calls and other monitoring activities.

 Table 1: Contractors' Activities to Identify and Respond to Improper Payments

Responsibility  Contractor                   Activities                    
Analyze billing  SADMERC   The SADMERC conducts ongoing data analysis and  
                                  reporting for the DME regional carriers and 
                                                             CMS. Its reports 
                                   are used to identify trends in payment and 
                                                             potential fraud. 

TriCenturion and DME regional carriers for regions B, C, and D

Review claims against coverage TriCenturion and DME regional criteria
carriers for regions B, C, and D TriCenturion and the DME regional
carriers for regions B, C, and D analyze claims payment data to uncover
improper payments or to investigate and develop fraud cases.

These contractors are responsible for conducting medical reviews of
submitted claims either before or after payment to determine if the claims
should be, or should have been, paid. Claims are reviewed to see if the
beneficiaries' conditions meet Medicare coverage criteria. Medical review
can be conducted through automated decisions to pay or deny claims based
on coverage criteria or may require complex medical reviews. Complex
medical reviews are conducted by clinical staff, such as a nurse or
doctor, who examines additional documentation provided by the supplier or
the beneficiary's physician, such as copies of the beneficiary's medical
records or an evaluation by a physical or occupational therapist of the
beneficiary's ability to walk. If medical review identifies claims that
should not have been paid, the DME regional carrier that paid the claim is
responsible for collecting overpayments and educating the supplier about
appropriate billing.

Investigate potential TriCenturion and DME    These contractors            
           fraud         regional                investigate cases of         
                                                 suspected fraud,             
                         carriers for regions B, which can involve conducting 
                         C, and D                a more detailed analysis of  
                                                             claims and other 
                                                  investigative steps. Once a 
                                                                case has been 
                                                 developed, it is referred to 
                                                    the HHS OIG or to law     
                                                 enforcement for prosecution. 

Enroll suppliers NSC 	NSC is responsible for verifying information on
supplier applications to ensure that suppliers meet 21 standards and that
only valid suppliers can bill Medicare. NSC also issues suppliers' billing
numbers, maintains a central database of information on DME suppliers,
reenrolls active suppliers, and assists with fraud and abuse
investigations.

Source: GAO.

CMS Slow to Respond Although there were multiple warning signs over a
6-year period that

growth in claims and payments for power wheelchairs may have been to
Escalating Power excessive, CMS did not lead a full-scale, coordinated
effort to address the Wheelchair Payments, issue until September 2003. CMS
has recently taken actions to reduce

improper payments for power wheelchairs through a 10-point action plan.
but Recent Plan In addition, Congress recently took steps intended to
bolster efforts to Appears Reasonable tackle fraud and abuse in the power
wheelchair benefit.

Despite Recurrent Warnings, CMS Did Not Lead Effort to Reduce Escalating
Power Wheelchair Payments Until 2003

In 1997, CMS's data analysis contractor-the SADMERC-issued an alert about
rapid increases in the utilization of power wheelchairs. As part of its
data monitoring efforts, the SADMERC noted that payments for power
wheelchairs had tripled from October 1995 to March 1997, growing from
almost $8 million to about $24 million. For the next few years, the
SADMERC's reports continued to regularly highlight the abnormally rapid
growth in power wheelchair payments, identifying the states and the
suppliers for which claims volume was particularly high. Although these
reports went to agency officials responsible for ensuring that program
funds are safeguarded, CMS staff told us that their contractors-the DME
regional carriers-have primary responsibility for using and responding to
data indicating rapid increases in utilization.

After reviewing SADMERC data in 1997, all four DME regional carriers'
medical directors became concerned and identified possible approaches to
address what they described as "tremendous growth" in Medicare power
wheelchair spending. In a joint April 1998 memorandum sent to CMS, the
medical directors notified the agency of these concerns and requested
assistance to address power wheelchair payment growth. The 1998 memorandum
cited a 472 percent increase in power wheelchair spending from the first
quarter of 1995 compared to the fourth quarter of 1997, and proposed
implementing changes in the coverage policy for power wheelchairs.
However, because of competing priorities, the DME regional carrier medical
directors never completed the policy revision, nor did CMS direct them to
do so. Figure 1 illustrates national Medicare power wheelchair spending
between 1997 and 2002.

Figure 1: National Medicare Power Wheelchair Spending

Note: Medicare spending includes federal payments and beneficiary cost
sharing.

Between 1998 and 2000, DME regional carriers again tried to address
significant increases in power wheelchair payments by using the tools that
they already had to address improper payments. The DME regional carriers
examined power wheelchair claims through medical review- either before or
after claims payment-and investigated potential fraud cases. However, CMS
decreased the funding it provided to DME regional carriers to conduct
medical review activities about 22 percent, comparing fiscal year 1999 and
fiscal year 2003. Funding for medical review covers activities such as
computerized claims review and complex medical review. For example, in
fiscal year 2003, Palmetto received $3.1 million for medical review
activities, about 15 percent less than it received in 1999. The decline in
funding for claims review is even more dramatic when weighed against the
increase in Medicare claims payment by DME regional contractors. Overall,
the amount of medical review funding per $100 in submitted claims dropped
over 50 percent from fiscal year 1999 through 2003 for claims processed by
the DME regional carriers. Moreover, compared to the three other regions,
Palmetto received less medical review funding per $100 in submitted claims
each year from fiscal year 1999 through 2003. As figure 2 shows, Palmetto
had the highest volume of power wheelchair claims payment and its payment
growth was outstripping that of other regions. Although Palmetto had more
than tripled the number of submitted power wheelchair claims on which it
conducted complex medical review from fiscal year 2000 to 2002, it still

only reviewed about 3 percent of its power wheelchair claims in 2002. The
number of claims that received complex medical review in regions B, C, and
D fell 39 percent from fiscal years 2001 through 2003.8 Medical review is
one of the activities that CMS has noted as saving Medicare about $17 for
every dollar spent.9

Figure 2: Regional Medicare Power Wheelchair Spending

                              Dollars in millions

600

500

400

300

200

100 0

                         1997 1998 1999 2000 2001 2002

Region A (HealthNow New York, Inc.)
Region B (AdminaStar Federal)
Region C (Palmetto Government Benefits Administrators)
Region D (CIGNA HealthCare Medicare Administration)

Source: CMS.

Note: Medicare spending includes federal payment and beneficiary cost
sharing.

In the late 1990s, power wheelchair fraud had also surfaced as a serious
problem. Palmetto launched a major fraud investigation of power wheelchair
suppliers in Florida and other southeastern states in 1996. This
investigation uncovered fraudulent supplier activities, including billing
for services not rendered or not medically necessary and delivering a less

8This information was not available from region A.

9U.S. Department of Health and Human Services, Centers for Medicare &
Medicaid Services, Justification of Estimates for Appropriations
Committees, Fiscal Year 2004 (Washington, D.C.: n.d.) CMS reported data on
past savings from fiscal years 2002 through 2004.

expensive power-operated vehicle when billing for a more expensive power
wheelchair. As a result of this investigation, Palmetto prepared a fraud
alert about power wheelchairs for other contractors and investigative
agencies, which CMS issued in June 1998. While fraud alerts increase
external awareness of potential vulnerabilities, they also help the agency
direct its efforts to address potential fraud. In this case, however, CMS
did not require DME regional carriers to specifically scrutinize power
wheelchair claims or undertake any other efforts to identify fraudulent
billing for this item.

In June 2000, the DME regional carriers' medical directors sent a second
jointly signed memorandum to CMS officials. They noted that, despite their
efforts over a 2-year period to review power wheelchair claims, payments
for power wheelchairs continued to increase significantly. The 2000
memorandum noted that Medicare spending for power wheelchairs had grown by
869 percent from the first quarter of 1995 compared to the first quarter
of 2000, and identified several problems that the carriers could not
address alone. Despite this second warning from the contractors, CMS
officials still did not attempt to aggressively address escalating power
wheelchair spending-for example, it did not require a coordinated and
consistent medical review or fraud investigation strategy by DME regional
carriers.

One problem cited in the 2000 memorandum was the disconnect between
documentation the physician is required to sign to order a wheelchair and
the program's coverage criteria. To be reimbursed for power wheelchairs,
suppliers must provide the carrier with a claim form and a supporting
document called a Certificate of Medical Necessity (CMN). The physician or
other clinician fills out a section of the CMN that answers questions
about the beneficiary's physical condition. However, the CMN does not ask
about the beneficiary's condition in enough detail for the DME regional
carrier to determine whether Medicare's coverage criteria are met. For
example, the CMN for power wheelchairs questions whether the beneficiary
requires a wheelchair to move about the home. In contrast, Medicare's
coverage policy for power wheelchairs is more specific, stating that the
item is covered "if the patient's condition is such that without the use
of a wheelchair, he would otherwise be bed-or chair-confined."10 Further,
Medicare's coverage criteria state that the patient must be

10Coverage Issues Manual, rev. 36, Section 60-9,
www.cms.gov/manuals/06_cim/ci60.asp.

capable of safely operating the controls of a power wheelchair-a question
not asked in the CMN.

Despite the lack of a coordinated effort by CMS to curb rising costs, we
found that the DME regional carriers tried to address the problem on their
own. For example, several had shifted resources to medical reviews of
power wheelchair claims. Around March 2002, Palmetto began to suspect
another fraudulent wheelchair scheme was occurring in a different state.
Specifically, Palmetto began to suspect that fraudulent power wheelchair
claims had been submitted by suppliers in Harris County, Texas, and other
parts of the state. A Palmetto fraud analyst had identified highly
aberrant billing behavior for one supplier, which he began to monitor.
Palmetto analysts also discovered that some suppliers were billing for a
power wheelchair or for power wheelchair accessories multiple times on
behalf of the same beneficiaries. By January 2003, Palmetto had referred
many cases of suspected fraud concerning suppliers of power wheelchairs to
the Dallas office of the HHS OIG for potential prosecution. Palmetto
conducted additional investigations and made referrals throughout 2003,
and investigations continue today. While Palmetto kept CMS informed about
its investigations, its efforts to develop suspected fraud cases in 2002
still did not convince CMS officials that it was time to take decisive
action.

Also in 2002, legitimate power wheelchair suppliers in Harris County,
Texas, became increasingly suspicious about other suppliers' activities in
their area. For example, the two suppliers with whom we spoke learned that
Medicare had paid other suppliers for power wheelchairs that beneficiaries
had never received. Suppliers told us that they, other suppliers, and
beneficiaries reported their suspicions to the Palmetto fraud unit, the
Medicare fraud hotline, the Federal Bureau of Investigation, and the HHS
OIG. The suppliers' suspicions were supported by data indicating that, in
2002, 14 percent of Medicare's power wheelchair spending was for
beneficiaries in Harris County, although only 1 percent of Medicare
beneficiaries lived in that area in 2001.

Later in 2002, the CMS contractor responsible for DME supplier
enrollment-NSC-noted that Texas had an unusually high number of suppliers
compared to the number of beneficiaries residing there. Upon CMS's
request, NSC stationed one of its own employees in the Harris County area
to conduct supplier site visits. During these site visits that began in
September 2002, NSC's inspector found instances of suppliers that did not
have an appropriate place of business or had moved the business without
giving NSC a forwarding address. Based on these

findings, from August 2003 through January 2004, NSC's inspector led an
effort to conduct site visits of every active supplier in Harris County,
Texas, that had not received a site inspection since January 2003-about
1,300 suppliers.11 These inspections found additional problems, including
suppliers that lacked appropriate inventory or insurance or did not meet
other requirements for Medicare DME suppliers. As a result, from September
2002 through March 2004, NSC revoked 367 Medicare power wheelchair
supplier billing numbers for suppliers in the Harris County area. Supplier
revocations occurred because steps taken by NSC to enroll only legitimate
suppliers were unsuccessful. These steps did not protect Medicare from
suppliers that failed to meet the supplier standards or committed power
wheelchair fraud.12

Three weaknesses in the supplier enrollment process left the Medicare
program vulnerable to unscrupulous suppliers. First, NSC failed to verify
submitted documents. NSC officials told us that they had traditionally
accepted copies of key documents, such as liability insurance forms, at
face value without verifying them. Failure to verify the accuracy of these
documents had enabled supplier applicants to submit falsified papers and
allowed them to become enrolled as Medicare suppliers.

Second, the standards NSC uses to evaluate suppliers are not explicit.
Officials at CMS and NSC told us that some of Medicare's supplier
standards lack specificity as criteria for NSC to use in determining the
legitimacy of a supplier and played a role in allowing widespread fraud in
Harris County, Texas. For example, one standard requires that the supplier
"fills orders, fabricates, or fits items from its own inventory or by
contracting with other companies for the purchase of items necessary to
fill the order. If it does, it must provide, upon request, copies of
contracts or other documentation showing compliance with this standard."
This standard does not specify a reasonable amount or type of inventory
that would be expected, given the items the supplier intends to provide to
Medicare beneficiaries. Further, NSC staff noted that the standard does
not preclude a supplier from using another supplier as its primary source
of inventory-even if neither of the two suppliers had enough inventory to

11NSC did not visit active suppliers that were large chains, physicians,
optometrists, and pharmacies.

12Suppliers must meet 21 standards. 42 C.F.R S: 424.57(c)(1) - (21) (2003)
(in effect since December 11, 2000). Suppliers must be in compliance with
these standards in order to obtain and maintain their Medicare billing
privileges.

be viable businesses. According to NSC staff, the broad language used in
this standard is difficult to interpret and enforce. In their opinion, the
broad language helped allow the widespread fraud in Harris County.

Third, the predictability of site visits may render them less effective.
CMS requires NSC to conduct a site visit of a supplier to assess
compliance with the 21 standards before authorizing a new supplier to bill
Medicare, and to conduct a site visit every 3 years thereafter, which is
when suppliers must reenroll.13 However, applicants know to expect a site
visit prior to receiving a supplier number and during a reenrollment
period. Therefore, suppliers that are intent on committing fraud can
present an illusion of legitimacy long enough to pass the inspection,
knowing an inspector is not likely to return for 3 years.

Recent Steps May Help Curb Improper Payments

CMS officials indicated to us that they first became concerned about power
wheelchair billing in early 2003. At that time, CMS created a task force
to address abuses of the wheelchair benefit and developed a 10-point plan
for addressing this potential abuse. CMS issued the plan in September
2003. In December 2003, Congress passed the MMA, which includes measures
that should also help CMS deter improper payments for power wheelchairs
and other DME items.

CMS's 10-point plan provides a reasonable framework to strengthen the
processes that CMS and its contractors use to identify and respond to
improper payments for power wheelchairs. Two points in the plan
specifically address fraud, abuse, and utilization issues in Harris
County, Texas. They require CMS staff to review all payments for power
wheelchairs in the county and conduct mandatory training of all power
wheelchair suppliers in the county about Medicare coverage rules. CMS's
review of payments in Harris County is ongoing, and all suppliers in
Harris County had been trained as of October 2003. Other parts of the
10-point plan are in different stages, from planning or early
implementation to completion. Information on each of the 10 points is
presented in table 2.

13CMS does not require NSC to visit every supplier. Suppliers that are
Medicare-enrolled entities (hospitals, skilled nursing facilities, home
health agencies, physicians, and ambulatory surgical centers) and existing
supplier chains with 25 or more locations are excluded from site visits.

Table 2: CMS's 10-Point Plan Point Purpose

Plans and actions

Prevent fraudulent suppliers from enrolling in CMS stated that it would
begin to aggressively scrutinize all new

Medicare for the sole purpose of receiving applications. NSC stopped
issuing new supplier numbers in Harris

inappropriate payments. 	County, Texas, in April 2003 and nationally in
September 2003. NSC began issuing supplier numbers again in November 2003.

Identify and prevent inappropriate enrollment of CMS stated its intent to
publish regulations to enhance the ability to
suppliers by providing a more detailed screening screen new supplier
applications.
process, allowing CMS the time needed to properly
review applications, and providing sanctions against
suppliers abusing the enrollment process.

Address rampant fraud and abuse in the Harris CMS stated that, effective
with the plan's issuance, all payments for

County, Texas, area. 	power wheelchairs in the Harris County, Texas, area
would be individually approved by CMS staff in the Dallas regional office.

Ensure that all wheelchair suppliers in Harris County, CMS stated that it
would require all wheelchair suppliers in Harris Texas, know and
understand Medicare coverage County, Texas to attend mandatory training on
wheelchair coverage rules. and medical review policies.

5 	Quickly identify and punish fraudulent suppliers and CMS, DME regional
carriers, and law enforcement agencies will stop the improper
"hemorrhaging" of Medicare collaborate to process civil and criminal
prosecutions. CMS also dollars. pledged to use payment suspensions.

6 	Ensure that national policy accurately defines the CMS stated that it
would finalize regulations revising coverage policy conditions under which
Medicare will cover mobility for power wheelchairs and scooters; the
policy will require a medical products. provider to see a patient before
prescribing a power wheelchair or

                                    scooter.

7 	Accurately portray the clinical conditions for which CMS stated that
DME regional carriers would immediately adopt local mobility products are
reasonable and necessary and medical review policies to educate suppliers
and beneficiaries on facilitate correct billing and payment for mobility
Medicare's coverage criteria for wheelchairs. devices.

When national billing and utilization trends are identified, ensure that
only claims that are reasonable and necessary are paid and resolve
national billing problems in a consistent manner.

CMS stated that the DME regional carriers would adopt a consistent
approach to medical review.

Ensure that Medicare is paying appropriately for

CMS stated that it would develop inherent reasonableness guidelines power
        wheelchairs. and apply this process first to power wheelchairs.

Put physicians and beneficiaries back in charge of CMS stated that it
would clarify physicians' responsibilities for

their mobility equipment decisions. 	prescribing power wheelchairs and
educate beneficiaries about Medicare's coverage criteria.

Source: GAO analysis of CMS's 10-point plan.

In December 2003, following release of the plan, the DME regional carriers
issued a bulletin outlining coverage criteria for power wheelchairs. The
bulletin sparked controversy among suppliers, beneficiary advocates, and
industry representatives, who argued that it reflected a new, overly
restrictive coverage policy for power wheelchairs. CMS countered that the
bulletin clarified long-standing national policy, but because of the

concerns raised, it rescinded the bulletin. CMS is still considering
whether change to coverage criteria for power wheelchairs is needed.

One area beyond the scope of the 10-point plan is the marketing of power
wheelchairs to Medicare beneficiaries. Many individuals with whom we spoke
contended that abusive and misleading marketing have further escalated
utilization nationwide. A Texas supplier and CMS staff reported that
companies were soliciting business door-to-door or promising free power
wheelchairs to beneficiaries. Supplier advertisements on the Internet, in
print, and on television have used the word "free" in connection with
beneficiaries' receiving power wheelchairs. Appendix II shows an example
of an Internet advertisement that appears to illegally offer to waive
Medicare copayments.14 A statutory provision prohibits suppliers from
calling beneficiaries to solicit their business15 and this is reflected in
the supplier standards. CMS has authority, however, to impose additional
requirements16 and has not utilized this authority to ensure that supplier
marketing is not abusive or misleading.

The MMA includes two provisions that are intended to help CMS curb
improper payments for power wheelchairs. First, it requires CMS to develop
a new set of quality standards for suppliers17 that should complement the
21 standards suppliers must currently meet. The MMA also includes a
provision that requires a face-to-face examination of a beneficiary by a
physician, physician assistant, nurse practitioner, or clinical nurse
specialist to certify the medical need for a power wheelchair.18 This
provision is more stringent than the prior regulation, which did not
necessitate a face-to-face appointment between a beneficiary and his or
her prescribing health care professional. CMS is now developing quality
standards for oxygen services and diabetic shoes, and regulations to
implement the provision regarding a face-to face examination.

14Medicare prohibits suppliers from waiving copayments routinely or when
waiver is offered as part of an advertisement or solicitation. 42 U.S.C.
S: 1320a-7a(a)(5) and (i)(6)(A) (2000).

1542 U.S.C. S: 1395m(a)(17) 2000.

1642 U.S.C. S: 1395m(j)(1)(B)(ii)(IV) (2000).

17MMA S: 302(a)(1), 117 Stat. 2223.

18MMA S: 302(a)(2), 117 Stat. 2224.

  New Authority Holds Promise for Improving CMS's Success in Adjusting DME
  Payment Rates

New authority and requirements for CMS in the MMA show more promise than
past agency authority for setting market-driven payment rates. In the
past, CMS generally was not successful in adjusting Medicare payments for
DME to keep pace with changes in prices for medical equipment.19 As a
result, Medicare often pays substantially more for an item than other
public payers. The MMA requires CMS to begin using competitive bidding to
set payment rates for DME.20 Competitive bidding has shown promise as a
way to use market forces to reduce payment rates for selected items.

Agency Attempts to Adjust DME Payment Rates to Reflect Market Prices
Largely Unsuccessful

Prior to 1997, CMS could adjust DME payment rates that were inherently
unreasonable, but the process required was slow, cumbersome, and used
successfully only once. In the Balanced Budget Act of 1997,21 Congress
responded to concerns about CMS's difficulties in adjusting excessive
payment rates by authorizing use of a streamlined inherent reasonableness
process for part B services (excluding physician services) and equipment.
Under this authority, CMS could adjust payments by up to 15 percent per
year using the streamlined process or could use a process with formal
notice and comment to make larger adjustments. CMS published an interim
final rule with comment period in order to allow the DME regional carriers
to use the authority as soon as possible.22 CMS did not respond to
comments before its rule became effective.

DME regional carriers collected price data for eight groups of items and
then took the first steps in applying the inherent reasonableness process
to change payment rates for those items by publishing a notice to
suppliers in September 1998. At that point, industry groups and suppliers
expressed concerns about how the streamlined process had been implemented
and the appropriateness of how price data were collected. Congress
directed that we review the implementation of the streamlined inherent
reasonableness process and in 1999, suspended any use of this authority
until we issued our report and the agency issued a final rule taking into
account our findings and public comments.23 Our July 5, 2000, report

19GAO-02-833T.

20MMA S: 302(b), 117 Stat. 2224.

21Pub. L. No. 105-33, S: 4316, 111 Stat. 251, 390.

2263 Fed. Reg. 687 (Jan. 7, 1998).

23Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999,
Pub. L. No. 106113, App. F, S: 223, 113 Stat. 1501, 1501A-352 (signed into
law November 29, 1999).

recommended, among other things, that CMS clarify criteria for using its
inherent reasonableness authority, strengthen carrier data collection
methodology, and monitor beneficiary access after any payment changes.24

Since issuance of that report, CMS has not used its inherent
reasonableness process to adjust payment rates. CMS issued an interim
final regulation to implement its authority on December 13, 2002, which
responded to comments on its previous regulation and our report.25 The
agency is still completing more specific guidelines for revising payments,
including how to collect data that are valid and reliable. CMS and a
contractor are developing the guidelines and the agency intends to issue
them by the end of 2004, after which it can begin using the inherent
reasonableness process. In its 10-point plan, CMS has pledged to collect
data on power wheelchair prices as soon as these guidelines are finalized.

In our report, we recommended that CMS define in its regulation when
payment rates would be considered what the statute calls "grossly
excessive" and "grossly deficient." It is in these situations that CMS may
use its inherent reasonableness authority. CMS indicated in its regulation
that it would adjust payment rates only when they were at least 15 percent
above or below a "realistic and equitable" amount. By doing so, CMS
limited its authority to adjust payment rates, since the agency has
statutory authority to adjust fees when the difference is less than 15
percent.

New Authority Holds Promise to Help CMS Set Payment Rates Closer to Market
Prices

The MMA gave CMS new authority and the requirement to begin using
competitive bidding to set payment rates for DME. Through competitive
bidding, suppliers provide information on amounts they would accept to
gain business from Medicare beneficiaries, and their bids are used as a
basis for the payment rate. In a demonstration of competitive bidding for
DME and other part B-covered items in two localities that concluded in
December 2002, fees set through bids were generally lower than fees
otherwise paid by Medicare. As a result, Medicare should achieve estimated
reductions in payments and beneficiary cost sharing that should

24GAO/HEHS-00-79. 2567 Fed. Reg. 76,684.

result in gross savings of $8.5 million.26 Products chosen for the
demonstration were among those with the highest Medicare spending and
considered by the agency to have the potential for savings. The products
chosen did not include power wheelchairs. Estimated savings from the
demonstration were accomplished without significant reported effects on
beneficiaries' access to competitively bid products.

The MMA requires CMS to implement competitive bidding for DME,
offthe-shelf orthotics, and supplies in at least 10 of the largest
metropolitan areas by 2007, and 80 of these areas by 2009. CMS has the
authority to choose the items to be bid and the specific localities for
bidding. CMS has not decided whether power wheelchairs are among the items
to be included in its initial implementation. Having suppliers offer bid
prices appears to be a promising approach to achieve closer to market
prices, compared to the experience CMS has had with the inherent
reasonableness process. The MMA allows CMS to use information from the
competitive bidding process to adjust payment rates in other localities.

We discussed our findings with program officials, who provided us with
technical comments, which we incorporated as appropriate.

  Contact and Acknowledgments

Mr. Chairman, this completes my prepared statement. I will be happy to
answer questions you or other Members of the Committee may have.

For further information regarding this testimony, please contact Leslie G.
Aronovitz at (312) 220-7600. Sheila K. Avruch, Jennie Apter, Emily Gamble
Gardiner, Sandra Gove, Joy L. Kraybill, Elizabeth T. Morrison, Lisa
Rogers, and Craig Winslow contributed to this statement.

26CMS conducted the demonstration in Polk County, Florida, and in the San
Antonio area in Texas for selected items of DME, orthotics, prosthetics,
and supplies (DMEPOS). Two evaluations of the demonstration have been
published. See U.S. Department of Health and Human Services, Health Care
Financing Administration, Evaluation of Medicare's Competitive Bidding
Demonstration for DMEPOS: First Year Annual Evaluation Report

(Baltimore, Md.: September 2000, Revised January 2001) and U.S. Department
of Health and Human Services, Centers for Medicare & Medicaid Services,
Evaluation of Medicare's Competitive Bidding Demonstration for DMEPOS:
Second Year Annual Evaluation Report (Baltimore, Md.: April 2002).

Note: AS = American Samoa; GU = Guam; NMI = Northern Mariana Islands; PR =
Puerto Rico; and VI = Virgin Islands.

Appendix II: Internet Advertisement for Power Wheelchairs

                           Source: Internet Web site.

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