Medicare: Past Experience Can Guide Future Competitive Bidding	 
for Medical Equipment and Supplies (07-SEP-04, GAO-04-765).	 
                                                                 
The Medicare Prescription Drug, Improvement, and Modernization	 
Act of 2003 (MMA) requires the Centers for Medicare & Medicaid	 
Services (CMS) to conduct large-scale competitive bidding for	 
durable medical equipment, supplies, off-the-shelf orthotics, and
enteral nutrients and related equipment and supplies provided to 
beneficiaries. The Balanced Budget Act of 1997 mandated that GAO 
study an earlier Medicare competitive bidding demonstration. To  
address this mandate, GAO assessed this past experience in	 
relation to four issues that CMS might consider as it implements 
large-scale competitive bidding: (1) items for competitive	 
bidding, (2) how to streamline implementation, (3) ways to	 
collect information on specific items provided to beneficiaries, 
and (4) steps to ensure quality items and services.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-765 					        
    ACCNO:   A12134						        
  TITLE:     Medicare: Past Experience Can Guide Future Competitive   
Bidding for Medical Equipment and Supplies			 
     DATE:   09/07/2004 
  SUBJECT:   Competitive procurement				 
	     Data collection					 
	     Federal procurement				 
	     Health care cost control				 
	     Health care programs				 
	     Health care services				 
	     Medical equipment					 
	     Medical services rates				 
	     Medical supplies					 
	     Standards and standardization			 
	     Medicare Program					 

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GAO-04-765

                 United States Government Accountability Office

                     GAO Report to Congressional Committees

September 2004

MEDICARE

 Past Experience Can Guide Future Competitive Bidding for Medical Equipment and
                                    Supplies

                                       a

GAO-04-765

Highlights of GAO-04-765, a report to congressional committees.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) requires the Centers for Medicare & Medicaid Services (CMS) to
conduct largescale competitive bidding for durable medical equipment,
supplies, off-the-shelf orthotics, and enteral nutrients and related
equipment and supplies provided to beneficiaries. The Balanced Budget Act
of 1997 mandated that GAO study an earlier Medicare competitive bidding
demonstration. To address this mandate, GAO assessed this past experience
in relation to four issues that CMS might consider as it implements
large-scale competitive bidding: (1) items for competitive bidding, (2)
how to streamline implementation, (3) ways to collect information on
specific items provided to beneficiaries, and (4) steps to ensure quality
items and services.

GAO is making several recommendations to CMS concerning competitive
bidding, including recommendations on ways to increase potential savings,
streamline implementation, help ensure that Medicare is paying
appropriately for items, and promote beneficiary satisfaction. CMS agreed
with most of our recommendations and indicated that it would give serious
consideration to this report throughout development and implementation of
national competitive bidding.

September 2004

MEDICARE

Past Experience Can Guide Future Competitive Bidding for Medical Equipment and
Supplies

CMS's experience in the Medicare competitive bidding demonstration may
prove instructive as the agency implements provisions in MMA to conduct
large-scale competitive bidding for durable medical equipment, supplies,
offthe-shelf orthotics, and enteral nutrients and related equipment and
supplies. The experience gained during the demonstration provides insight
as the agency considers four implementation issues:

o  	Items for competitive bidding. Items for competitive bidding could
include those selected for the demonstration and others that account for
high levels of Medicare spending. For example, nondemonstration items that
CMS could choose for competitive bidding include power wheelchairs and
lancets and test strips used by diabetics. In 2002, these three items
accounted for about $1.7 billion in charges for the Medicare program and
its beneficiaries.

o  	How to streamline implementation. Because of the large scale of future
competitive bidding, it will be prudent for CMS to consider ways to
streamline implementation. Two ways to streamline are developing a
standardized competitive bidding approach that can be replicated in
multiple geographic locations and using mail-order delivery for selected
items, with uniform fees established through a nationwide competition.

o  	Ways to collect information on specific items provided to
beneficiaries. Gathering specific information on competitively bid items
provided to beneficiaries could help ensure that suppliers do not
substitute lower-priced items to reduce their costs. Currently, CMS is not
able, or does not routinely, collect specific information on the items
that suppliers provide to beneficiaries.

o  	Steps to ensure quality items and services for beneficiaries. Routine
monitoring could help ensure that beneficiaries continue to have access to
suppliers that deliver quality items and services. The agency, when
implementing significant Medicare changes in the past that affected
payment methods, has lacked information on how the changes affected
beneficiary access. As competitive bidding expands, small problems could
be potentially magnified. Using quality measures to choose multiple
suppliers and having suppliers meet more detailed standards than are
currently required can also help ensure quality for beneficiaries.

www.gao.gov/cgi-bin/getrpt?GAO-04-765.

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

                                    Contents

     Letter                                                                 1 
                                  Results in Brief                          4 
                                     Background                             5 
                 CMS's Experience Can Guide Agency Efforts to Implement 
                                 Competitive Bidding                       10 
                                     Conclusions                           20 
                        Recommendations for Executive Action               21 
                         Agency Comments and Our Evaluation                21 

Appendixes                                                              
                Appendix I:             Scope and Methodology              24 
                            Medicare's 21 Standards for Medicare Suppliers 
              Appendix II:                     of DME,                     
                                 Prosthetics, Orthotics, and Supplies      26 
                               Comments from the Centers for Medicare &    
              Appendix III:                    Medicaid                    
                                               Services                    28 
                               Table 1: Product Groups Included in the     
     Tables                              Demonstration's Two               
                                              Locations                     8 
                               Table 2: Product Groups Representing the    
                                           Highest Medicare                
                                    Spending in 2002 for DME, Prosthetics, 
                                                            Orthotics, and 
                                               Supplies                    11 
                             Table 3: Standards for Medicare Suppliers of  
                                          DME, Prosthetics,                
                                       Orthotics, and Supplies             26 

Contents

Abbreviations

AWP average wholesale price
BBA Balanced Budget Act of 1997
CMS Centers for Medicare & Medicaid Services
DME durable medical equipment
HCFA Health Care Financing Administration
HCPCS Healthcare Common Procedure Coding System
HHS Department of Health and Human Services
MMA Medicare Prescription Drug, Improvement, and

Modernization Act of 2003 MSA metropolitan statistical area OIG Office of
Inspector General SADMERC statistical analysis durable medical equipment
regional carrier

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separately.

A

United States Government Accountability Office Washington, D.C. 20548

September 7, 2004

The Honorable Charles E. Grassley
Chairman
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Joe Barton
Chairman
The Honorable John D. Dingell
Ranking Minority Member
Committee on Energy and Commerce
House of Representatives

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

In 2002, the Medicare program and its beneficiaries paid almost $9.7
billion
for durable medical equipment (DME), prosthetics, orthotics, and
supplies.1 For most of these items, Medicare payment rates are not based
on current market prices, but are primarily based on historical charges
from the mid-1980s, adjusted for inflation in some years.2 The Centers for

1 Medicare guidance defines DME as equipment that 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.
DME includes items such as wheelchairs, hospital beds, and walkers.
Medicare defines prosthetic devices (other than dental) as devices that
are needed to replace body parts or functions. Prosthetic devices include
artificial limbs and eyes, enteral nutrition, ostomy bags, and cardiac
pacemakers. Medicare defines orthotic devices to include leg, arm, back,
and neck braces that provide rigid or semirigid support to weak or
deformed body parts or restrict or eliminate motion in a diseased or
injured part of the body. Medicare-reimbursed supplies are items that are
used in conjunction with DME and are consumed during the use of the
equipment, such as drugs used for inhalation therapy, or need to be
replaced frequently (usually daily), such as surgical dressings.

2 Prior to 1998, these payment rates were adjusted each year using
formulas tied to the Consumer Price Index. Since 1998, payment rates have
been updated in some years, but not others.

Medicare & Medicaid Services (CMS)-formerly called the Health Care
Financing Administration (HCFA)3-lacked mechanisms to readily adjust
payment rates to reflect marketplace changes. As a result, disparities
arose between Medicare payment rates and market prices. As we and the
Department of Health and Human Services' (HHS) Office of Inspector General
(OIG) have reported, the Medicare program and its beneficiaries have been
paying too much for some items of DME, prosthetics, orthotics, and
supplies-sometimes three or four times the amount paid by others.4 In
addition to increasing program costs, inflated payment rates increase
beneficiaries' costs because beneficiaries are responsible for 20 percent
of the Medicare rate as coinsurance.

The Balanced Budget Act of 1997 (BBA)5 required CMS to test competitive
bidding as a new way for Medicare to set fees for part B6 items and
services specified by CMS.7,8 Competitive bidding provides incentives for
suppliers to lower their prices for items and services to retain their
ability to serve Medicare beneficiaries and potentially increase their
market share. Using its authority under BBA, CMS conducted a competitive
bidding demonstration to set Medicare part B payment rates for selected
DME, prosthetics, orthotics, and supply items. The demonstration and CMS's
authority to conduct competitive bidding ended on December 31, 2002. In
December 2003, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) required CMS to conduct competitive

3 HCFA's name was changed to CMS as of July 1, 2001. We use the name CMS
throughout this report.

4 Janet Rehnquist, Inspector General, Department of Health and Human
Services, Medicare Reimbursement for Medical Equipment and Supplies,
testimony 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; GAO, Medicare: Payments for Covered
Outpatient Drugs Exceed Providers' Cost, GAO-01-1118 (Washington, D.C.:
Sept. 21, 2001); and GAO, Medicare: Home Oxygen Program Warrants Continued
HCFA Attention, GAO/HEHS-98-17 (Washington, D.C.: Nov. 7, 1997).

5 Pub. L. No. 105-33, S: 4319(a), 111 Stat. 251, 392 (1997).

6 Medicare part B helps pay for certain physician, outpatient hospital,
laboratory, and other services.

7 While the statute required HHS to test competitive bidding, CMS
administers the Medicare program and was responsible for testing
competitive bidding.

8 Physician services were not included in the authority to conduct
competitive bidding.

bidding for DME, supplies, off-the-shelf orthotics, and enteral nutrients
and related equipment and supplies on a large scale.9

BBA also mandated that GAO study the effectiveness of the Medicare
competitive bidding demonstration.10 To address this mandate, as discussed
with the committees of jurisdiction, we assessed four issues that CMS
might consider as it implements MMA provisions for competitive bidding,
given its prior demonstration experience. The four issues are (1) items to
be chosen for competitive bidding, (2) how to streamline implementation,
(3) ways to collect information on specific items provided to
beneficiaries, and (4) steps to ensure quality items and services to
beneficiaries.

In preparing this report, we reviewed documents related to the competitive
bidding demonstration for DME, prosthetics, orthotics, and supplies
provided under Medicare part B. These included evaluations of the
demonstration.11 Two evaluation reports on the demonstration have been
published,12 and a final report is pending. We also conducted interviews
with officials from CMS, the contractor that administered the
demonstration, and its evaluators. We analyzed claims data on Medicare

9 Pub. L. No. 108-173, S: 302(b), 117 Stat. 2066, 2224. While the statute
requires HHS to conduct the competitive bidding program, CMS administers
the Medicare program and is responsible for implementing the program and
establishing quality standards for suppliers of DME, prosthetics,
orthotics, and supplies.

10 BBA, S: 4319(c), 111 Stat. 394.

11 BBA required that HHS evaluate the competitive bidding demonstration
for its impact on Medicare program payments, beneficiary access to care,
quality, and diversity of product selection. BBA, S: 4319(a), 111 Stat.
393. In 1998, CMS contracted with the University of Wisconsin-Madison to
conduct an independent evaluation of the demonstration. The evaluation
team consisted of researchers from the University of Wisconsin-Madison,
the Research Triangle Institute, and Northwestern University.

12 University of Wisconsin-Madison, Center for Health Systems Research and
Analysis; Research Triangle Institute, Center for Economics Research; and
Northwestern University, Institute for Health Services Research and Policy
Studies, Evaluation of Medicare's Competitive Bidding Demonstration for
DMEPOS: First-Year Annual Evaluation Report (Baltimore, Md.: Centers for
Medicare & Medicaid Services, September 2000, Revised January 2001), and
University of Wisconsin-Madison, Center for Health Systems Research and
Analysis; Research Triangle Institute-Health, Social, and Economics
Research; and Northwestern University, Institute for Health Services
Research and Policy Studies,

Evaluation of Medicare's Competitive Bidding Demonstration for DMEPOS:
Second-Year Annual Evaluation Report (Baltimore, Md.: Centers for Medicare
& Medicaid Services, April 2002).

spending for DME, prosthetics, orthotics, and supply items. To determine
that these data were accurate, timely, and complete, we interviewed the
CMS contractor that provided the data and reviewed CMS's internal control
procedures. Where appropriate, we tested data manually against published
sources for consistency. We determined that these data were sufficiently
reliable for addressing the issues in this report. We solicited feedback
on item selection and quality assurance steps from medical directors at
the four DME regional carriers.13 We also interviewed representatives from
advocacy groups and industry. Appendix I includes a more detailed
discussion of our scope and methodology. Our work was conducted from
February 2003 through August 2004 in accordance with generally accepted
government auditing standards.

Results in Brief	As CMS moves forward with its new competitive bidding
effort, the experience it gained during the demonstration can provide
insights as the agency considers four implementation issues. First, items
to be chosen for competitive bidding could include those in the
demonstration and others that account for high levels of Medicare
spending. By selecting items with high overall Medicare spending for the
competitive bidding demonstration, the agency achieved estimated gross
savings of $8.5 million for the Medicare program and its beneficiaries.
Second, because of the large scale of future competitive bidding, it will
be prudent to consider ways to streamline implementation. Such
streamlining approaches could include developing a standardized
competitive bidding approach for multiple locations that builds on
practical experience from the demonstration and using mail-order delivery
for selected items included in a nationwide competition. Third,
identifying approaches to collect better information on the specific items
provided to beneficiaries would help ensure that Medicare is paying
appropriately for items. Fourth, once implementation of competitive
bidding begins on a large scale, routine monitoring could help ensure that
beneficiaries' access to quality items and services is not compromised. To
assist CMS in future efforts to conduct competitive bidding for DME,
off-the-shelf orthotics, supplies, and enteral nutrients and related
equipment and supplies, we are making recommendations on

13 Medicare pays contractors to administer its fee-for-service claims. The
contractors responsible for processing most part B claims are called
carriers. In October 1993, CMS began processing all Medicare part B claims
for DME, orthotics, prosthetics, and supplies through DME regional
carriers. Each of the four DME regional carriers serves a separate region
of the country.

selecting products, using mail-order delivery as a mechanism to implement
a national competitive bidding strategy, obtaining more detailed
information on products provided to beneficiaries, and monitoring
beneficiary satisfaction. CMS agreed with most of our recommendations and
stated that it would give serious consideration to this report throughout
the development and implementation of national competitive bidding.

Background	Medicare is a federal program that helps pay for a variety of
health care services and items on behalf of about 41 million elderly and
disabled beneficiaries. Medicare part B covers DME for the beneficiary's
use in the home, prosthetics, orthotics, and supplies if they are
medically necessary and prescribed by a physician. Part B also covers
certain outpatient prescription drugs that are used with DME or that are
not usually selfadministered by the patient. Some of these drugs are
classified as supplies.

  Medicare Payment for DME, Prosthetics, Orthotics, and Supplies

In submitting claims for Medicare payment, suppliers use codes in the
Healthcare Common Procedure Coding System (HCPCS) to identify DME,
prosthetics, orthotics, and supplies that they are providing to
beneficiaries. These codes are used for health insurance billing purposes
to identify health care services, equipment, and supplies used in
beneficiaries' diagnoses and treatments. Individual HCPCS codes used by
suppliers can cover a broad range of items that serve the same general
purpose, but vary in price, characteristics, and quality. The HCPCS
National Panel, a group composed of CMS and other insurers, maintains the
HCPCS codes.

Medicare uses a variety of methodologies, which are specified in law, for
determining what it will pay for specific types of DME, prosthetics,
orthotics, and supplies. Medicare has established a fee schedule for DME
and supplies, which lists the fees paid for these items in each state.
Prosthetics and orthotics are paid according to 10 regional fee schedules.
Prior to the passage of MMA, outpatient prescription drugs covered by
Medicare part B were paid on a fee schedule based on 95 percent of the
manufacturers' average wholesale price (AWP), a price determined by

manufacturers themselves.14 Except for these outpatient prescription
drugs, the amounts paid under the fee schedules are generally based on the
amounts charged by suppliers in 1986 and 1987 (or the amount set by
Medicare if the item was subsequently added to the fee schedule).
Suppliers are reimbursed according to the supplier's actual charge or the
Medicare fee schedule amount, whichever is lower.

Over the years, we have reported that Medicare fees for certain medical
equipment, supplies, and outpatient drugs were excessive compared with
retail and other prices. For example, in 2000, we reported that retail
price data collected by the four DME regional carriers showed that
Medicare payments were much higher than the median surveyed retail prices
for five commonly used medical products.15 While Medicare paid 5 percent
less than AWP for covered prescription drugs, in 2001 we reported that
prices widely available to physicians averaged from 13 percent to 34
percent less than AWP for a sample of physician-administered drugs.16 For
two inhalation drugs17 covered by Medicare-albuterol and ipratropium
bromide-prices widely available to pharmacy suppliers in 2001 reflected
average discounts of 85 percent and 78 percent from AWP, respectively.18

  Medicare Competitive Bidding

In 1997, BBA required CMS to establish up to five demonstration projects
to be operated over 3-year periods that used competitive bidding to set
fees for Medicare part B items and services. BBA required that at least
one demonstration project include oxygen and oxygen equipment; all

14 MMA changed Medicare's methodology for determining reimbursement for
outpatient drugs covered under part B. Most part B drugs furnished on or
after January 1, 2004, are reimbursed at 85 percent of the drugs' AWPs
determined as of April 1, 2003. Beginning in 2005, Medicare part B
drugs-with certain exceptions, such as some vaccines-will be paid using
either a competitive acquisition program or an average sales price
methodology.

15 These products were lancets, eyeglass frames, a type of urinary
catheter, and two types of catheter insertion trays. See GAO, Medicare
Payments: Use of Revised "Inherent Reasonableness" Process Generally
Appropriate, GAO/HEHS-00-79 (Washington, D.C.: July 5, 2000).

16 In 1999, drugs provided in physician office settings accounted for over
75 percent of the almost $4 billion spent by Medicare for covered
prescription drugs.

17 Inhalation drugs are used as therapy for respiratory ailments, such as
asthma or emphysema, and are delivered through a piece of equipment called
a nebulizer.

18 GAO-01-1118.

demonstration areas be metropolitan statistical areas (MSA) or parts of
MSAs;19 and criteria for selecting demonstration areas include
availability and accessibility of services and probability of savings.20

CMS contracted with one of the four DME regional carriers-Palmetto
Government Benefits Administrators (Palmetto)-to implement the competitive
bidding demonstration for DME, prosthetics, orthotics, and supplies. 21
The demonstration was implemented in two locations-Polk County, Florida,
and the San Antonio, Texas, area.22 Two cycles of bidding took place in
Polk County, with competitively set fees effective from October 1, 1999,
to September 30, 2001, and from October 1, 2001, to September 30, 2002.
There was one cycle of bidding in San Antonio, and competitively set fees
were effective from February 1, 2001, to December 31, 2002. Bidding and
implementation processes were similar at both locations.

CMS set up competitive bidding for groups of related DME, prosthetics,
orthotics, and supplies and held a separate competition for each group.
Items included in the demonstration were identified by HCPCS codes.
Suppliers were required to bid on each HCPCS code included in the product
group in which they were competing. Table 1 shows the eight product groups
in CMS's competitive bidding demonstration at the two locations.

19 The Office of Management and Budget defines an MSA as a county or group
of counties containing a core of at least 50,000 people, together with
adjacent areas having a high degree of economic and social integration
with that core.

20 BBA, S: 4319(a), 111 Stat. 392.

21 In this role, Palmetto was responsible for helping to plan the
demonstration; educating beneficiaries, suppliers, and other stakeholders
about the demonstration; soliciting and evaluating bids; processing
claims; and responding to inquiries and complaints about the
demonstration. CMS maintained oversight responsibility for the
demonstration, reviewed all documents and Palmetto decisions, and made
final design and policy decisions.

22 The first demonstration location, Polk County, Florida, is an MSA that
includes the cities of Lakeland and Winter Haven. The second demonstration
location included three of the four counties (Bexar, Comal, and Guadalupe)
in the San Antonio, Texas, MSA.

Table 1: Product Groups Included in the Demonstration's Two Locations

                Product groups Polk County San Antonio location

Enteral nutrients, equipment, and supplies  o

                      Hospital beds and accessories  o   o

                         Nebulizer inhalation drugs  o

                     Manual wheelchairs and accessories  o

                       Noncustomized general orthotics  o

                Oxygen contents, equipment, and supplies  o   o

Surgical dressings  o

Urological supplies  o

Source: GAO analysis of CMS data.

The competitive bidding process was used to determine the suppliers
included in the demonstration and the rates they would be paid. From among
the bidders, the agency and Palmetto selected multiple demonstration
suppliers to provide items in each group of related products. These
suppliers were not guaranteed that they would increase their business or
serve a specific number of Medicare beneficiaries. Instead, the
demonstration suppliers had to compete for beneficiaries' business. With
few exceptions, only demonstration suppliers were reimbursed by Medicare
for competitively bid items provided to beneficiaries permanently residing
in the demonstration area.23 However, beneficiaries already receiving
certain items were allowed to continue to use their existing
nondemonstration suppliers.24 All demonstration suppliers were reimbursed
for each competitively bid item provided to

23 Medicare payments for DME, prosthetics, orthotics, and supply items
obtained in a demonstration location during the demonstration by a
visiting beneficiary who had a permanent address elsewhere were based on
the fee schedule in effect for the beneficiary's permanent address.

24 Transition policies allowed beneficiaries to continue receiving oxygen
equipment and supplies and nebulizer drugs from their original suppliers,
regardless of whether the suppliers were included in the demonstration.
However, the supplier had to accept the new demonstration fee schedules.
Transition policies also allowed beneficiaries to maintain preexisting
rental agreements or purchase contracts with their suppliers of enteral
nutrition equipment, hospital beds and accessories, and manual wheelchairs
and accessories. These suppliers were paid under the normal statewide
Medicare fee schedule for the duration of the rental period.

beneficiaries at the demonstration fee schedule amounts.25 The new fee
schedules were based on the winning suppliers' bids for items included in
the demonstration. Any Medicare supplier that served demonstration
locations could provide items not included in the demonstration to
beneficiaries.

About 1 year after CMS's demonstration authority ended, MMA required the
agency to conduct competitive bidding for DME, supplies, off-the-shelf
orthotics, and enteral nutrients and related equipment and supplies.
Competition is to be implemented in 10 of the largest MSAs in 2007, 80 of
the largest MSAs in 2009, and additional areas thereafter. Items excluded
from this authority are inhalation drugs; parenteral nutrients, equipment,
and supplies; Class III devices;26 and customized orthotics that require
expertise to fit individual beneficiaries. CMS may phase in implementation
of competitive bidding first for the highest cost and highest volume items
or those items with the greatest savings potential. The law requires that
a Program Advisory and Oversight Committee be established to provide
recommendations to CMS on its implementation of competitive bidding.

MMA also gives CMS significant new authority to use competitive bidding
results as a basis for determining reasonable payment rates throughout the
country in 2009. CMS has the authority to apply the information obtained
from competitive bidding to adjust payments in parts of the country
outside of the competitive areas for DME, supplies, off-the-shelf
orthotics, and enteral nutrients and related equipment and supplies. Thus,
CMS will be able to more easily adjust its payment rates nationally to
reflect market prices within the largest MSAs by using information gleaned
through competitive bidding.

25 The demonstration did not include beneficiaries enrolled in Medicare's
managed care component. Provision of DME, prosthetics, orthotics, and
supplies to these beneficiaries is included in the managed care plans'
services and not billed separately to Medicare.

26 The Food and Drug Administration uses a three-part classification
system for devices, based on the device's level of risk and the extent of
control necessary to ensure the safety and effectiveness of the device.
Class III, or high-risk devices, usually sustain or support life, are of
substantial importance in preventing impairment of human health, or
present potential unreasonable risk of illness or injury.

CMS's Experience Can While MMA sets specific requirements for competitive
bidding, it also

leaves certain implementation issues to CMS. As CMS implementsGuide Agency
Efforts competitive bidding, its payment-setting experience in the
demonstration to Implement will prove useful as the agency considers items
for competitive bidding and Competitive Bidding approaches to streamline
implementation, collect information on specific

items provided to beneficiaries, and ensure that beneficiaries' access to

quality items and services is not compromised.

  Many High-Cost Items Could Be Included in Large-Scale Competitive Bidding

Selecting items with high levels of Medicare spending may prove fruitful
in generating significant savings in the first years of large-scale
competitive bidding efforts. The demonstration provided CMS with
experience in item selection, and MMA provides direction and guidance for
future efforts. By including items that accounted for a large share of
Medicare spending, the demonstration generated estimated gross savings
that were substantially more than its implementation costs. In addition to
the items included in the demonstration, others are worth considering for
selection in future competitive bidding.

For the competitive bidding demonstration, Palmetto and CMS chose items
from six of the eight product groups that accounted for almost 78 percent
of Medicare allowed charges in calendar year 2002, as table 2 shows.27 The
demonstration also included items from two other product groups with lower
levels of Medicare spending-urological supplies and surgical dressings.
According to a CMS official, CMS did not include glucose monitors and
supplies in competitive bidding because beneficiaries must frequently use
brand-name supplies with their monitors. Ensuring that specific brands of
glucose test strips were included would have complicated the first test of
competitive bidding in the demonstration. However, the CMS official noted
that CMS could consider including glucose supplies in future competitive
bidding. Similarly, lower and upper limb prosthetics were not included
because these items are generally custom made or fitted to beneficiaries
and, for simplicity, the demonstration focused on noncustomized items.

27 In 2003, Medicare placed related items into 62 product groups. For
example, the wheelchair product group included manual and power
wheelchairs and accessories, such as adjustable-height armrests and
antitipping devices. Within these product groups, items are identified by
HCPCS codes. A product group may consist of one HCPCS code or up to
several hundred HCPCS codes.

Table 2: Product Groups Representing the Highest Medicare Spending in 2002
for DME, Prosthetics, Orthotics, and Supplies

Some items from Total Medicare Total Medicare product group allowed
charges allowed charges included in the Product group (dollars in
millions) (percentage) demonstration

                                Oxygen contents,   $2,219        22.9     Yes 
                                  equipment, and                      
                                        supplies                      
                                 Wheelchairs and    1,411        14.6     Yes 
                                     accessories                      
                           Nebulizer and related    1,175        12.1     Yes 
                                           drugs                      
                            Glucose monitors and     895          9.2   No    
                                        supplies                      
                              Enteral nutrients,     636          6.6     Yes 
                                  equipment, and                      
                                        supplies                      
                            Lower and upper limb     463          4.8   No    
                                     prosthetics                      
                               Hospital beds and     359          3.7     Yes 
                                     accessories                      
                            Lower and upper limb     350          3.6     Yes 
                                       orthotics                      
                                           Total   $7,508        77.5 

Source: GAO analysis of CMS and statistical analysis durable medical
equipment regional carrier (SADMERC) data.

Notes: Total allowed charges and percentages are rounded. Total allowed
charges for each product group shown is the sum of allowed charges for the
items included in that group. The allowed charge for each item is the
payment for each item billed multiplied by the volume of the item billed
on behalf of beneficiaries. The data used for this analysis were supplied
by the SADMERC, a contractor that provides data analysis support to CMS.
The data analyzed represented claims with service dates from January 1,
2002, through December 31, 2002, and were received by the SADMERC through
December 31, 2003.

Our analysis of national Medicare spending for DME, prosthetics,
orthotics, and supplies found that items included in the demonstration
accounted for about half of all Medicare allowed charges in 2002. This was
less than the total billing for all items in the product group because not
all the individual items identified by HCPCS codes within product groups
were included in the demonstration. For example, CMS excluded power
wheelchairs from the competition.

Estimated savings for competitively bid items in the demonstration would
total about 20 percent of the fee schedule amounts, according to the

demonstration evaluators. This equaled an estimated gross savings of $8.5
million in allowed charges, which include Medicare payments and
beneficiary cost-sharing amounts.28 The estimated cost of the
demonstration was about $4.8 million-about 40 percent lower than the
estimated $8.5 million reduction in allowed charges associated with the
demonstration. The demonstration's $4.8 million cost included $1.2 million
for planning and development from September 1, 1995, through July 1, 1998,
and $3.6 million for demonstration operating expenses through December
2002.

For future efforts, MMA states that initial competitive bidding may
include items with the highest Medicare cost and volume or items
determined by the agency to have the largest savings potential. Working
within these parameters for competitive bidding, CMS could select some
items included in the demonstration as well as items with high Medicare
spending that were not included in the demonstration. For example,
nondemonstration items that CMS could choose include power wheelchairs and
lancets and test strips used by diabetics. These three items accounted for
about $1.7 billion, or about 17 percent, of Medicare allowed charges for
DME, prosthetics, orthotics, and supplies in 2002.29 A CMS official and
DME regional carrier medical directors told us that these items could be
considered for inclusion in future competitive bidding.

Two medical directors also suggested that continuous positive airway
pressure devices30 and accessories, with $137 million in allowed charges-
or 1.4 percent of Medicare allowed charges for DME, prosthetics,
orthotics, and supplies in 2002-could be considered for inclusion in
future competitive bidding. CMS officials suggested that these devices and
accessories could be included in early implementation of competitive
bidding. Furthermore, if CMS is able to lower operating costs through
efficiencies and streamlining, CMS could consider selecting additional
products for competitive bidding with comparatively low levels of program
spending for competitive bidding, such as commodes, canes, and crutches.

28 The demonstration's evaluators estimated that gross savings were $4.0
million in Polk County and $4.5 million in the San Antonio location.

29 Spending for power wheelchairs was about $857 million, for diabetic
test strips about $752 million, and for lancets about $79 million in 2002.

30 Individuals who have obstructive sleep apnea use continuous positive
airway pressure devices while sleeping to provide constant levels of air
pressure from a flow generator via a nose mask.

  Larger-Scale Competitive Bidding May Benefit from Streamlined Implementation

While the demonstration laid the groundwork for future competition, given
the expanded scale of future competitive bidding, CMS will have to focus
on a second issue-ways to streamline implementation. The demonstration
took place in just two MSAs and affected less than 1 percent of
fee-for-service beneficiaries. In contrast, by 2009, MMA requires CMS to
implement competitive bidding in 80 of the largest MSAs in the country.
Our analysis showed that about half of Medicare's fee-for-service
beneficiaries live in the 80 largest MSAs.31 In order to expand
competitive bidding, CMS could potentially use two streamlining
approaches- developing standardized steps that are easily replicated in
different locations and using mail-order delivery for selected items for
which fees are determined through nationwide competitive bidding.

In conducting the demonstration, CMS and Palmetto gained practical
experience in planning how competitive bidding could be conducted,
communicating with beneficiaries and suppliers, choosing demonstration
items, developing software to process demonstration claims, establishing
policies, and soliciting and evaluating supplier bids. In expanding the
scope of competitive bidding, CMS will be able to leverage its experience
to develop a standardized or "cookie-cutter" approach that can be applied
in multiple locations. This would include a standard set of competitively
bid items, procedures and policies, and informational materials for
suppliers and beneficiaries. Through standardization, the costs of
implementation in individual MSAs would likely be reduced relative to
program savings. In the demonstration, adding a second location allowed
CMS and Palmetto to spread much of the implementation costs across two
locations, rather than one.32 The incremental costs of adding the San
Antonio location, once the demonstration had been planned and begun in
Polk County, were relatively low. For the San Antonio location, the
estimated annual implementation

31 Population estimates for the 80 largest MSAs are from Census 2000 and
include the District of Columbia and Puerto Rico.

32 In economic theory, this is called having "economies of scale," where
producing more services or products can be accomplished at lower costs per
unit because the overall costs are spread over a larger number of units.
However, at some point, according to the economies of scale theory, the
relative savings in implementation costs from expanding competitive
bidding to more locations would likely decrease as fixed costs for
additional locations stabilize. In addition, as CMS expands competitive
bidding by MSA, at some point the agency might reach the maximum number of
MSAs that it can administer without increasing fixed implementation costs.

costs ranged from $100,000 in a nonbidding year to $310,000 when bidding
occurred, according to the second evaluation report.

Another potential streamlining approach would be to provide items by
mail-order delivery-a convenience for beneficiaries-with uniform fees
determined through nationwide competitive bidding. Because MMA authorizes
CMS to designate the geographic areas for competition for different items,
designating the entire country as the competitive area for selected items
is a possibility. In addition, MMA states that areas within MSAs that have
low population density should not be excluded from competition if a
significant national market exists through mail-order for a particular
item or service. In contrast to conducting competitive bidding on a
piecemeal basis in multiple geographic areas, a consolidated nationwide
approach would allow CMS to more quickly implement competitive bidding on
a large scale. This approach would enable companies that provide, or
demonstrate the ability to provide, nationwide mail-order service to
compete for Medicare beneficiaries' business.

Items that lend themselves to mail delivery are light, easy to ship, and
used by beneficiaries on an ongoing basis. Precedents exist for mail-order
delivery of items that have been subject to competitive bidding.
Demonstration suppliers provided surgical dressings, urological supplies,
and inhalation drugs to beneficiaries by mail. In San Antonio, 30 percent
of beneficiaries reported receiving their inhalation drugs through the
mail, according to a demonstration evaluator, and Medicare paid an
estimated 25 percent less than the fee schedule for Texas for these
drugs.33 Glucose test strips and lancets are two items currently mailed to
Medicare beneficiaries' homes that could be included in a future
nationwide competition. In 2002, these items accounted for $831 million,
or about 8.6 percent, of Medicare allowed charges for DME, prosthetics,
orthotics, and supplies. Because glucose test strips generally must be
used with the glucose monitors made by the same manufacturer, CMS would
need to ensure that the most commonly used types of test strips were
included.

33 MMA excludes inhalation drugs from competitive bidding. Other specific
provisions of MMA set payments for these drugs.

  Better Information on Specific Items Provided to Beneficiaries Could Ensure
  More Appropriate Payment

Finding ways to collect better information on the specific items provided
to beneficiaries is the third issue for CMS to consider as it implements
competitive bidding on a larger scale. Industry and advocacy groups have
raised concerns that competitive bidding may encourage some suppliers to
reduce their costs by substituting lower-quality or lower-priced items.
However, CMS lacks the capability to identify specific items provided to
beneficiaries because suppliers' claims use HCPCS codes, which can cover
items that differ considerably in characteristics and price. Therefore,
during the demonstration, CMS would not have been able to determine if
suppliers tended to provide less costly items to beneficiaries.
Furthermore, as CMS proceeds with competitive bidding, it will be
difficult for the agency to appropriately monitor the type or price of
specific items for which it is paying.

A single HCPCS code can cover a broad range of items serving the same
general purpose but with differing characteristics and prices. For
example, in April 2004, the HHS OIG reported that prices available to
consumers on supplier Web sites it surveyed for different models of power
wheelchairs represented by a single HCPCS code ranged from $1,600 to
almost $17,000.34 The 2003 Medicare fee schedule amount for all of the
power wheelchairs under this code was a median of $5,297. Because Medicare
pays the same amount for all of the items billed under the same HCPCS
code, suppliers have an incentive to provide beneficiaries with the least
costly item designated by that code. Since the Medicare program does not
routinely collect specific information on items within a code for which it
is paying, it is unable to determine if suppliers are providing
lower-priced items or higher-priced items to beneficiaries. Using
information from related work to determine the specific power wheelchairs
provided to beneficiaries, the HHS OIG found that beneficiaries tend to
receive lowerpriced wheelchairs.35 The OIG recommended that CMS create a
new

34 The HHS OIG studied purchase prices available to consumers and
suppliers for power wheelchairs that Medicare reimburses when billed as
HCPCS code K0011, which is the code suppliers most commonly use to bill
Medicare for power wheelchairs. See U.S. Department of Health and Human
Services, Office of Inspector General, A Comparison of Prices for Power
Wheelchairs in the Medicare Program, OEI-03-03-00460 (Washington, D.C.:
April 2004).

35 The HHS OIG reported that the median price to consumers was $3,888 for
a random sample of power wheelchair claims paid in 2001, with prices
ranging from a low of $2,000 to a high of $5,995. Out of 247 prices the
OIG reviewed for power wheelchairs actually provided to Medicare
beneficiaries, there were four instances where the cost available to
retail consumers on Internet Web sites was greater than Medicare's
reimbursement amount.

coding system for the most commonly provided power wheelchairs to account
for the variety in models and prices. CMS is currently working to develop
a new set of codes to better describe the power wheelchairs currently on
the market and plans to develop payment ceilings for each of the new
codes.

Under competitive bidding, suppliers might have even greater incentive to
substitute less costly products listed under a code. For example, one of
the demonstration suppliers explained that while a specific curved-tip
catheter was superior for patients with scar tissue or obstructions,
competitive bidding would encourage suppliers to substitute other,
less-expensive catheters that can be paid under the same code. Thus, even
if competitive bidding reduces fees paid, when suppliers substitute less
costly items for more costly items, Medicare can pay too much for the
actual items provided to beneficiaries. CMS officials pointed out that
this is also true under the current fee schedule.

CMS might better monitor the items being provided to beneficiaries if it
subdivided certain HCPCS codes or collected identifying information.
Subdividing HCPCS codes for items with significant variations in
characteristics and price into smaller groupings is a way to narrow the
differences among the items provided under a single code. The four DME
regional carriers or the advisory committee established under MMA might be
able to assist CMS in identifying those individual codes for items with
the most significant variations in characteristics and price. Once these
codes had been identified, CMS would be in a position to decide whether to
request the panel that makes decisions on HCPCS codes for DME, orthotics,
and supplies to consider whether to divide the codes into betterdefined
item groupings. Another way to get better information on the range of
items provided under a code is to collect specific, identifying
information (such as manufacturer, make, and model information) on
selected, high-cost competitively bid items provided to beneficiaries. The
DME regional carriers require suppliers to provide such information when
it is requested for detailed reviews of claims for power wheelchairs. If
CMS requested these data from suppliers for selected items provided under
a HCPCS code for a statistically representative sample of claims, it would
be able to analyze trends in the actual items provided to beneficiaries in
competitive bidding areas or monitor the provision of items under the same
code in competitive and noncompetitive areas.

  Ensuring Quality and Service for Beneficiaries Is Critical

Because of concerns that competitive bidding may prompt suppliers to cut
their costs by providing lower-quality items and curtailing services, a
fourth issue for CMS to consider is ensuring that quality items and
services are provided to beneficiaries. Quality assurance steps could
include monitoring beneficiary satisfaction, as well as setting standards
for suppliers, providing beneficiaries with a choice of suppliers, and
selecting winning bidders based on quality in addition to amounts bid.
During the demonstration, the agency and Palmetto gained practical
experience in implementing quality assurance steps. This experience could
prove instructive as CMS moves forward with competitive bidding efforts.

As competitive bidding proceeds, routine monitoring of beneficiaries'
complaints, concerns, and satisfaction can be used as a tool to help
ensure that beneficiaries continue to have access to quality items. During
the demonstration, the agency and Palmetto used full-time, on-site
ombudsmen to respond to complaints, concerns, and questions from
beneficiaries, suppliers, and others. In addition, to gauge beneficiary
satisfaction, the evaluators of the demonstration fielded two beneficiary
surveys by mail- one for oxygen users and another for users of other
products included in the demonstration.36 These surveys contained measures
of beneficiaries' assessments of their overall satisfaction, access to
equipment, and quality of training and service provided by suppliers.
Evaluators reported that their survey data indicated that beneficiaries
generally remained satisfied with both the products provided and with
their suppliers.

As competitive bidding expands and affects larger numbers of
beneficiaries, small problems could be potentially magnified. Therefore,
continued monitoring of beneficiary satisfaction will be critical to
identifying problems with suppliers or with items provided to
beneficiaries. When such problems are identified in a timely manner, CMS
may develop steps to address them. In the past, when implementing
significant Medicare changes, such as new payment methods for skilled
nursing

36 For comparison purposes, evaluators sent beneficiary surveys to
beneficiaries in the two demonstration locations and to two groups of
Medicare beneficiaries from areas similar to Polk County and the San
Antonio location. Evaluators selected comparison sites outside of the
demonstration areas to identify changes in the demonstration locations
that were due to the demonstration and changes that may have resulted from
general trends. Brevard County, Florida, was chosen as the comparison site
for Polk County, and the Austin-San Marcos MSA, Texas, was the comparison
site for the San Antonio location. Evaluators surveyed beneficiaries both
before and after demonstration prices took effect in these locations.

facilities and home health services, the agency has lacked timely and
accurate information about how the changes affected beneficiary access.

Nevertheless, it may not be practical in a larger competitive bidding
effort to replicate the monitoring steps used in the demonstration.
Developing less staff-intensive approaches to monitoring would reduce
implementation costs. For example, a Palmetto official told us that while
having an on-site ombudsman function may prove useful in the initial
stages of competitive bidding, using a centralized ombudsman available
through a toll-free number staffed by a contractor could provide some of
the same benefits at a lower cost.

In addition, certain monitoring enhancements could prove useful. For
example, CMS did not use a formal mechanism for ombudsmen to summarize or
report information on complaints from beneficiaries or suppliers,
according to the demonstration ombudsmen. Collecting and analyzing
complaint information may provide a credible gauge of problems related to
beneficiary access to quality products.

Continued use of satisfaction surveys could help track beneficiaries'
satisfaction with items and services over time. However, advocacy group
representatives have cautioned that beneficiaries may not have the
technical knowledge to accurately assess the quality of the items or
services being provided. Supplemental information might be obtained
through standardized surveys of individuals who refer beneficiaries to
suppliers, physicians, and supplier representatives, who may be better
equipped to assess the technical quality of products and services.

Two MMA requirements-the selection of multiple suppliers to serve
beneficiaries and the establishment of supplier standards-help ensure that
beneficiaries are satisfied with suppliers and the items they provide. The
selection of multiple suppliers to serve beneficiaries was part of the
competitive bidding process used during the demonstration. The
establishment of supplier standards is broader than the competitive
bidding program in that it applies to all suppliers, regardless of whether
they choose to participate in competitive bidding.

MMA requires that CMS select multiple suppliers that meet quality and
financial standards to maintain choice in a competitive acquisition area.
According to a CMS official, choosing to include multiple suppliers in the
demonstration for each product group allowed beneficiaries to switch
suppliers if dissatisfied with the quality of the services or items
provided.

CMS officials stated that selecting multiple suppliers encouraged
suppliers to compete on the basis of quality and service to gain
beneficiaries' business. After completing the bid evaluation process, CMS
generally selected about 50 percent of the suppliers that bid in each
group, with an average of 12 suppliers selected across the product
groups.37

MMA also requires that CMS establish and implement quality standards for
all suppliers of DME, prosthetics, orthotics, and supplies.38 These
standards must be at least as stringent as the 21 general standards that
all suppliers of DME, prosthetics, orthotics, and supplies are required to
comply with in order to obtain and retain their Medicare billing
privileges.39 (See app. II.) For the demonstration, suppliers were also
required to meet standards developed by Palmetto that were more stringent
and explicit than the current 21 general standards.40 For example, the
demonstration standards required that only qualified staff deliver, set
up, and pick up equipment and supplies and established time frames for
suppliers to pick up equipment after a beneficiary had requested its
removal. Palmetto monitored suppliers' adherence to the standards through
initial and annual site visits.

Applying quality measures as criteria to select winning suppliers is
another demonstration assurance step that can be used in future efforts.
During the demonstration bid evaluation process, Palmetto solicited
references from financial institutions and from at least five individuals
who had referred beneficiaries to each bidding supplier. In reviewing
referrals, Palmetto looked for evidence of quality and service. This
included evidence of

37 The number of suppliers selected ranged from 3 suppliers of surgical
dressings in Polk County to 32 suppliers of oxygen equipment and supplies
in San Antonio.

38 These quality standards are to be applied by one or more designated,
independent accreditation organizations selected within 1 year of
implementing the quality standards. MMA, S: 302(a), 117 Stat. 2223.

39 Some of these 21 general standards promote quality services, while
others exist to ensure that the supplier is a legitimate business. For
example, the standards require that a supplier maintain a physical
facility on an appropriate site and have a primary business telephone
number listed under the name of the business. 42 C.F.R. S: 424.57(c)(7),
(9) (2003).

40 Demonstration suppliers also were required to participate in the
Medicare program; have active Medicare supplier numbers, which a supplier
must have to submit claims and receive payment for items and services
furnished under Medicare; and comply with all state and federal licensure
and regulatory requirements, Medicare and Medicaid statutes and
regulations, and Medicare billing guidelines.

financial stability and good credit standing, a record of providing
products that met beneficiaries' needs, compliance with Medicare's rules
and regulations, acceptable business practices, ethical behavior, and
maintenance of accurate records. The bid evaluation process also included
inspections of bidding suppliers' facilities that focused on indicators of
quality and service. These on-site inspections were more comprehensive
than those normally performed for Medicare suppliers of DME, prosthetics,
orthotics, and supplies. For example, inspectors were tasked with
determining if the supplier had access to the full range of products for
which it had bid, documentation of infection control procedures,
instructions on using equipment, and patient files with required
information. In some cases, a demonstration supplier's selection was
conditional on the supplier making specified improvements. For example,
according to a CMS official, some suppliers were told to clarify
instructions for beneficiaries, properly store oxygen equipment, or
improve procedures for following up with patients after initial service
was provided. CMS and Palmetto officials told us that comprehensive
inspections were useful in ensuring the selection of quality suppliers.

Conclusions	CMS can use its experience from the demonstration to make
informed decisions as it implements large-scale competitive bidding within
the framework established by MMA. The demonstration showed that
competitive bidding has the potential to garner significant savings for
both the Medicare program and its beneficiaries, especially on items with
high levels of Medicare spending. While the potential exists for
significant savings, moving from small-scale to large-scale competitive
bidding calls for streamlining implementation. Developing a cookie-cutter
approach to competitive bidding-for example, using the same policies and
processes in multiple locations-could help CMS roll out its implementation
in over 80 locations more easily, while employing mail-order to deliver
items with prices set through nationwide competitive bidding could allow
CMS to more quickly implement competitive bidding on a large scale. To
ensure that competitive bidding savings are not achieved by the suppliers'
substitution of lower-cost items, CMS can consider ways to collect better
information on the specific items that suppliers are providing to
beneficiaries. Finally, careful monitoring of beneficiaries' experiences
will be essential to ensure that problems are quickly identified. This
will allow CMS to adjust its implementation and quality assurance steps as
it manages competition on a greater scale.

  Recommendations for Executive Action

To increase potential savings from competitive bidding, streamline
implementation, help ensure that Medicare is paying appropriately for
items, and promote beneficiary satisfaction, we recommend that the
Administrator of CMS take the following seven actions:

o 	consider conducting competitive bidding for demonstration items and
items that represent high Medicare spending that were not included in the
competitive bidding demonstration;

o 	develop a standardized approach for competitive bidding for use at
multiple locations;

o 	consider using mail delivery for items that can be provided directly to
beneficiaries in the home, as a way to implement a national competitive
bidding strategy;

o 	evaluate individual HCPCS codes to determine if codes need to be
subdivided because the range in characteristics and price of items
included under the individual codes is too broad;

o 	periodically obtain specific identifying information on selected
highcost items to monitor the characteristics of items subject to
competitive bidding that are provided to beneficiaries, such as
manufacturer, make, and model number;

o  monitor beneficiary satisfaction with items and services provided; and

o 	seek input from individuals with technical knowledge about the items
and services suppliers provide to beneficiaries.

  Agency Comments and Our Evaluation

In its written comments on a draft of this report, CMS agreed with most of
the recommendations and agreed to give serious consideration to the report
throughout the development and implementation of national competitive
bidding. CMS agreed to consider conducting competitive bidding for
demonstration items and items that represent high Medicare spending that
were not included in the demonstration. CMS indicated that the agency was
working to develop a list of items for the first bidding cycle in 2007.
CMS also agreed to develop a standardized approach for competitive bidding
that could be used in multiple locations and indicated the agency's
intention to outline such an approach through regulation.

CMS stated it would explore the feasibility of our recommendation to
consider using mail-order delivery for items that could be provided
directly to beneficiaries in the home, as a way to implement a national
competitive bidding strategy. Based on CMS's comments, we clarified the
discussion in the report to indicate businesses that currently provide, or
have the potential to provide, national mail-order delivery would be
appropriate to include as bidders in nationwide competition. CMS also
agreed with our recommendations to periodically obtain specific
identifying information on selected high-cost items and to monitor
beneficiary satisfaction with the items and services provided and
indicated that it would be establishing a process to do so. CMS agreed
with our recommendation to seek input from individuals with technical
knowledge about the items and services suppliers provide to beneficiaries.
The agency noted that pursuant to MMA, CMS would be convening a panel of
experts, the Program Advisory and Oversight Committee, to assist with
implementation of competitive bidding.

CMS disagreed with one of our draft recommendations-to evaluate individual
HCPCS codes to determine if they needed to be subdivided because the range
in price of items included under the codes was too broad. The agency
stated that subdividing codes according to price would lead to Medicare
setting codes for particular brand names in circumstances where a
manufacturer has established higher prices for products that do not have
meaningful clinical differences or higher quality. In response to the
agency's comment, we modified our discussion of HCPCS codes and revised
our recommendation to state that CMS, in reevaluating individual HCPCS
codes, should consider both the characteristics and prices of items.

We have reprinted CMS's letter in appendix III. CMS also provided us with
technical comments, which we have incorporated as appropriate.

We are sending copies of this report to the Administrator of CMS,
appropriate congressional committees, and other interested parties. We
will also make copies available to others upon request. This report is
also available at no charge on GAO's 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 Sandra D. Gove, Lisa S. Rogers, and Kevin
Milne.

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

Appendix I

Scope and Methodology

To assess issues that the Centers for Medicare & Medicaid Services (CMS)
might consider as it implements the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA) provisions concerning
competitive bidding, we reviewed the relevant provisions of MMA. We also
reviewed the first and second evaluation reports on the Medicare
competitive bidding demonstration and discussed methodology and findings
with the evaluators. We interviewed officials from CMS and Palmetto
Government Benefits Administrators (Palmetto) about experience gained
during the demonstration.

For the product selection issue, we analyzed calendar year 2002 Medicare
durable medical equipment (DME), prosthetics, orthotics, and supply claims
data obtained from the statistical analysis durable medical equipment
regional carrier (SADMERC). Through this analysis, we identified the
product groups and items that represented the largest Medicare allowed
charges and the allowed charges for items included in the demonstration.
We also used these data to identify items that accounted for higher
Medicare spending but were excluded from the demonstration. We determined
that the data obtained from the SADMERC were sufficiently reliable for
addressing the issues in this report. These data were extracted from a CMS
file that includes all Medicare claims payment data. CMS has a number of
computerized edits to help ensure that Medicare payment data are
accurately recorded, and the SADMERC has internal controls to ensure that
data extracted from the CMS file are timely and complete. Where
appropriate, we tested data manually against published sources for
consistency. To identify items that could be included in future
competitive bidding, we interviewed CMS and Palmetto officials and the
medical directors at the four DME regional carriers.

For the issue of streamlining implementation, we obtained information on
the cost of the demonstration from the second evaluation report. To
estimate the number of fee-for-service beneficiaries who will be affected
by future competitive bidding, we adjusted the Census 2000 population
estimates for individuals age 65 and over to account for the number of
beneficiaries enrolled in Medicare's managed care program by using data
obtained from the Medicare Managed Care Market Penetration State/County
Data Files. We assessed the reliability of the Census 2000 data by
reviewing relevant documentation and working with an official from the
U.S. Census Bureau. We assessed the reliability of the Medicare Managed
Care Market Penetration State/County Data Files by reviewing relevant
documentation. We determined these data sources to be sufficiently
reliable for the purposes of our report. We also obtained information from

Appendix I Scope and Methodology

CMS on the demonstration items that beneficiaries obtained by mail and
conducted research to identify items delivered directly to customers'
homes by private sector organizations. We also solicited input from the
medical directors at the four DME regional carriers concerning items that
could be delivered by mail-order and included in a nationwide competition.

For the issue concerning information on specific items provided to
beneficiaries, we reviewed prior GAO reports and testimonies. In addition,
we interviewed the following representatives of industry and advocacy
groups: Abbott Laboratories; the Advanced Medical Technology Association;
the American Association for Homecare; the American Occupational Therapy
Association; the American Orthotic and Prosthetic Association; the
Consortium for Citizens with Disabilities; the Diabetic Product Suppliers
Coalition; LifeScan, Inc.; Johnson & Johnson Company; Kinetic Concepts,
Inc.; Tyco Healthcare Group; the National Alliance for Infusion Therapy;
Roche Diagnostics; and the United Ostomy Association.

For the issue relating to ensuring quality items and services for
beneficiaries, we discussed quality assurance steps and approaches for
monitoring beneficiary satisfaction used during the demonstration with CMS
and Palmetto officials and the demonstration's evaluators. We also
interviewed the two demonstration ombudsmen to discuss beneficiaries'
concerns and experiences in obtaining items during the demonstration. We
discussed issues related to competitive bidding and beneficiaries' access
to quality products and services with suppliers of DME, including three
suppliers that participated in the demonstration; the industry and
advocacy groups listed above; and the DME regional carrier medical
directors. In addition, we compared quality standards for demonstration
suppliers with the 21 supplier standards that apply to all Medicare
suppliers of DME, prosthetics, orthotics, and supplies.

Appendix II

Medicare's 21 Standards for Medicare Suppliers of DME, Prosthetics, Orthotics,
and Supplies

Suppliers of DME, prosthetics, orthotics, and supplies must meet 21
standards in order to obtain and retain their Medicare billing privileges.
An abbreviated version of these standards, which became effective December
11, 2000, is presented in table 3. MMA requires CMS to develop new
standards that must be at least as stringent as current standards for all
Medicare suppliers of DME, prosthetics, orthotics, and supplies. Supplier
compliance will be determined by one or more designated independent
accreditation organizations.

 Table 3: Standards for Medicare Suppliers of DME, Prosthetics, Orthotics, and
                                    Supplies

Standard number Standard description

A supplier must be in compliance with all applicable federal and state licensure
                          and regulatory requirements.

A supplier must provide complete and accurate information on the
application for suppliers of DME, prosthetics, orthotics, and supplies.
Any changes to this information must be reported to CMS within 30 days of
the change.

An authorized individual (one whose signature is binding) must sign the
application for billing privileges.

A supplier must fill orders from its own inventory, or must contract with
other companies for the purchase of items necessary to fill the order. A
supplier may not contract with any entity that is currently excluded from
the Medicare program, from any state health care programs, or from any
other federal procurement or nonprocurement program or activity.

A supplier must advise beneficiaries that they may rent or purchase
inexpensive or routinely purchased DME and of the purchase option for
capped rental DME.

A supplier must honor all warranties under applicable state law and repair
or replace free of charge Medicare-covered items that are under warranty.

A supplier must maintain a physical facility on an appropriate site.

A supplier must permit CMS or its agents to conduct on-site inspections to
ascertain the supplier's compliance with these standards. The supplier
location must be accessible to beneficiaries during reasonable business
hours and must maintain a visible sign and posted hours of operation.

A supplier must maintain a primary business telephone listed under the
name of the business in a local directory or a tollfree number available
through directory assistance. The exclusive use of a beeper, answering
machine, or cell phone as the primary business telephone number is
prohibited.

A supplier must have comprehensive liability insurance in the amount of at
least $300,000 that covers both the supplier's place of business and all
customers and employees of the supplier. If the supplier manufactures its
own items, this insurance must also cover product liability and completed
operations.

11	A supplier must agree not to initiate telephone contact with
beneficiaries, with a few exceptions allowed. This standard prohibits
suppliers from calling beneficiaries in order to solicit new business.

12	A supplier is responsible for delivery and must document that it, or
another qualified party, instructed beneficiaries on the use of
Medicare-covered items, and maintain proof of delivery.

13 A supplier must answer questions and respond to complaints of beneficiaries,
                  and maintain documentation of such contacts.

14	A supplier must maintain and replace at no charge or repair directly,
or through a service contract with another company, Medicare-covered items
it has rented to beneficiaries.

15	A supplier must accept returns of substandard (less than full quality
for the particular item) or unsuitable items (inappropriate for the
beneficiary at the time it was fitted and rented or sold) from
beneficiaries.

Appendix II Medicare's 21 Standards for Medicare Suppliers of DME,
Prosthetics, Orthotics, and Supplies

(Continued From Previous Page)

Standard number Standard description

A supplier must disclose these supplier standards to each beneficiary to
whom it supplies a Medicare-covered item.

A supplier must disclose to the government any person having ownership,
financial, or controlling interest in the supplier.

A supplier must not convey or reassign a supplier number; that is, the
supplier may not sell or allow another entity to use its Medicare billing
number.

A supplier must have a complaint resolution protocol established to
address beneficiary complaints that relate to these standards. A record of
these complaints must be maintained at the physical facility.

Complaint records must include the name, address, telephone number, and
health insurance claim number of the beneficiary; a summary of the
complaint; and any actions taken to resolve it.

A supplier must agree to furnish CMS with any information required by the
Medicare statute and implementing regulations.

             Source: GAO analysis of 42 C.F.R. S: 424.57(c) (2003).

Appendix III

Comments from the Centers for Medicare & Medicaid Services

Appendix III
Comments from the Centers for Medicare &
Medicaid Services

Appendix III
Comments from the Centers for Medicare &
Medicaid Services

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