Medicare: Competitive Bidding for Medical Equipment and Supplies 
Could Reduce Program Payments, but Adequate Oversight Is Critical
(06-MAY-08, GAO-08-767T).					 
                                                                 
For more than a decade, GAO has reported that Medicare has paid  
higher than market rates for medical equipment and supplies	 
provided to beneficiaries under Medicare Part B. Since 1989,	 
Medicare has used fee schedules primarily based on historical	 
charges to set payment amounts. But this approach lacks 	 
flexibility to keep pace with market changes and increases costs 
to the federal government and Medicare's 44 million elderly and  
disabled beneficiaries. The Balanced Budget Act of 1997 required 
the Centers for Medicare & Medicaid Services (CMS)--the agency	 
that administers Medicare--to test competitive bidding as a new  
way to set payments. CMS did this through a demonstration in two 
locations in which suppliers could compete on the basis of price 
and other factors for the right to provide their products. The	 
Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) required CMS to conduct competitive bidding on a large
scale and suppliers to obtain accreditation. GAO was asked to	 
describe the effects that competitive bidding could have on	 
Medicare program payments and suppliers and the need for adequate
oversight to ensure quality and access for beneficiaries in a	 
competitive bidding environment. This testimony is based	 
primarily on GAO work conducted from May 1994 to January 2007,	 
which GAO updated by interviewing CMS officials and reviewing	 
agency documents.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-767T					        
    ACCNO:   A81970						        
  TITLE:     Medicare: Competitive Bidding for Medical Equipment and  
Supplies Could Reduce Program Payments, but Adequate Oversight Is
Critical							 
     DATE:   05/06/2008 
  SUBJECT:   Accountability					 
	     Beneficiaries					 
	     Bid evaluation					 
	     Bids						 
	     Competition					 
	     Cost analysis					 
	     Cost control					 
	     Cost effectiveness analysis			 
	     Federal procurement				 
	     Fees						 
	     Health care cost control				 
	     Insurance cost control				 
	     Medical equipment					 
	     Medical supplies					 
	     Medicare						 
	     Payments						 
	     Prices and pricing 				 
	     Program evaluation 				 
	     Program management 				 
	     Program goals or objectives			 
	     Medicare Program					 

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GAO-08-767T

   

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Testimony: 

Before the Subcommittee on Health, Committee on Ways and Means, House 
of Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 1:00 p.m. EDT:
Tuesday, May 6, 2008: 

Medicare: 

Competitive Bidding for Medical Equipment and Supplies Could Reduce 
Program Payments, but Adequate Oversight Is Critical: 

Statement of Kathleen M. King:
Director, Health Care: 

GAO-08-767T: 

GAO Highlights: 

Highlights of GAO-08-767T, a testimony before the Subcommittee on 
Health, Committee on Ways and Means, House of Representatives. 

Why GAO Did This Study: 

For more than a decade, GAO has reported that Medicare has paid higher 
than market rates for medical equipment and supplies provided to 
beneficiaries under Medicare Part B. Since 1989, Medicare has used fee 
schedules primarily based on historical charges to set payment amounts. 
But this approach lacks flexibility to keep pace with market changes 
and increases costs to the federal government and Medicareï¿½s 44 million 
elderly and disabled beneficiaries. The Balanced Budget Act of 1997 
required the Centers for Medicare & Medicaid Services (CMS)ï¿½the agency 
that administers Medicareï¿½to test competitive bidding as a new way to 
set payments. CMS did this through a demonstration in two locations in 
which suppliers could compete on the basis of price and other factors 
for the right to provide their products. The Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003 (MMA) required CMS to 
conduct competitive bidding on a large scale and suppliers to obtain 
accreditation. 

GAO was asked to describe the effects that competitive bidding could 
have on Medicare program payments and suppliers and the need for 
adequate oversight to ensure quality and access for beneficiaries in a 
competitive bidding environment. This testimony is based primarily on 
GAO work conducted from May 1994 to January 2007, which GAO updated by 
interviewing CMS officials and reviewing agency documents. 

What GAO Found: 

Competitive bidding could reduce Medicare program payments by providing 
an incentive for suppliers to accept lower payments for items and 
services to retain their ability to serve beneficiaries and potentially 
increase their market share. Fundamentally different from fee schedules 
based on historical charges to Medicare, competitive bidding allows the 
market to help CMS determine payment amounts. In the demonstration, the 
new fee schedule amounts were based on the winning suppliersï¿½ bids for 
items included and 50 percent to 55 percent of the bids from suppliers 
were selected. Evidence from CMSï¿½s competitive bidding demonstration 
suggests that competition saved Medicare $7.5 million and saved 
beneficiaries $1.9 millionï¿½without significantly affecting beneficiary 
access. For the competitive bidding program, CMS required suppliers to 
obtain accreditation based on quality standards and provide financial 
documents to participate. This added scrutiny gives CMS the chance to 
screen out suppliers that may not be stable, legitimate businesses, 
which could contribute to lower rates of improper payment. CMS also 
evaluated the bids based on demand, capacity, and price and chose 
suppliers whose bids were at or under a certain amount. CMS estimates 
that the first round of its competitive bidding program will result in 
payment amounts that average 26 percent less than the current fee 
schedule amounts. Competitive bidding also changes Medicareï¿½s 
relationship with suppliers and departs from Medicareï¿½s practice of 
doing business with any qualified provider, because it is designed to 
limit the number of suppliers to those whose bids are at or under a 
certain amount. 

Because of concerns that competitive bidding may prompt suppliers to 
cut their costs by providing lower-quality items and curtailing 
services, ensuring quality and access through adequate oversight is 
critical for the success of the competitive bidding program. In 
September 2004, GAO indicated that quality assurance steps could 
include monitoring beneficiary satisfaction, setting standards for 
suppliers, giving beneficiaries a choice of suppliers, and selecting 
winning bidders based on quality and the dollar amount of the bids. As 
competitive bidding expands, problems that beneficiaries might 
experience could be magnified. Therefore, continued monitoring of 
beneficiary satisfaction will be critical to identify problems with 
suppliers or with items provided to beneficiaries. As required in the 
MMA, GAO will review and report on the competitive bidding programï¿½s 
impact on suppliers and manufacturers and its effect on quality and 
access for beneficiaries. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-767T]. For more 
information, contact Kathleen M. King at (202) 512-7114 or 
[email protected]. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here as you discuss the Medicare competitive bidding 
program for durable medical equipment (DME), prosthetics, orthotics, 
and supplies--products referred to in this statement as medical 
equipment and supplies.[Footnote 1] For more than a decade, we and the 
Department of Health and Human Services (HHS) Office of Inspector 
General (OIG) have periodically reported that Medicare, administered by 
the Centers for Medicare & Medicaid Services (CMS), has paid higher 
than market rates for various medical equipment and supply 
items.[Footnote 2] These overpayments increase costs to the program and 
to Medicare's 44 million elderly and disabled beneficiaries. CMS 
reported in 2007 that total Medicare expenditures for medical equipment 
and supplies were about $10 billion.[Footnote 3] 

Since 1989, Medicare has paid for medical equipment and supplies 
through fee schedules that list a maximum and minimum payment amount. 
The schedules are based on average supplier charges on Medicare claims 
in 1986 and 1987 and have been updated in some years to reflect 
inflation.[Footnote 4] However, this payment approach lacks flexibility 
to keep pace with market changes, and as a result, Medicare often pays 
higher prices than other public payers for medical equipment and 
supplies. The Balanced Budget Act of 1997 (BBA)[Footnote 5] required 
CMS to test competitive bidding as a new way for Medicare to set fees 
for Part B items and services specified by CMS, which the agency did 
through a demonstration focused on medical equipment and supplies. 
[Footnote 6] Competitive bidding is a process in which suppliers of 
medical equipment and supplies compete for the right to provide their 
products on the basis of established criteria, such as quality and 
price. About a year after the demonstration concluded, the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 
required CMS to conduct a competitive bidding program for DME, 
supplies, off-the-shelf orthotics, and enteral nutrients and related 
equipment and supplies on a large scale.[Footnote 7] 

In my testimony today, I will discuss (1) the effects that competitive 
bidding could have on Medicare program payments and suppliers and (2) 
the need for adequate oversight to ensure quality and access for 
beneficiaries in a competitive bidding environment. My testimony is 
based primarily on our previously issued work, conducted from May 1994 
to January 2007, which we updated with information on the competitive 
bidding process by interviewing CMS officials and reviewing agency 
documents. We shared a statement of facts regarding this testimony with 
CMS and incorporated the agency's comments as appropriate. We conducted 
this performance audit from April 2008 through May 2008 in accordance 
with generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings and 
conclusions based on our audit objectives. We believe that the evidence 
obtained provides a reasonable basis for our findings and conclusions 
based on our audit objectives. 

In summary, competitive bidding could reduce Medicare program payments 
by providing an incentive for suppliers to accept lower payments for 
items and services to retain their ability to serve beneficiaries and 
potentially increase their market share. Fundamentally different from 
fee schedules based on historical charges to Medicare, competitive 
bidding allows the market to help CMS determine payment amounts. In the 
demonstration, the new fee schedule amounts were based on the winning 
suppliers' bids for items included and 50 percent to 55 percent of the 
bids from suppliers were selected. Evidence from CMS's competitive 
bidding demonstration suggests that competition saved Medicare $7.5 
million and saved beneficiaries $1.9 million--without significantly 
affecting beneficiary access. For the competitive bidding program, CMS 
required suppliers to obtain accreditation based on quality 
standards[Footnote 8] and provide financial documents to participate. 
This added scrutiny gives CMS the chance to screen out suppliers that 
may not be stable, legitimate businesses, which could contribute to 
lower rates of improper payment. CMS also evaluated the bids based on 
demand, capacity, and price and chose suppliers whose bids were at or 
under a certain amount. CMS estimates that the first round of its 
competitive bidding program will result in payment amounts that average 
26 percent less than the current fee schedule amounts. Competitive 
bidding also changes Medicare's relationship with suppliers and departs 
from Medicare's practice of doing business with any qualified provider, 
because it is designed to limit the number of suppliers to those whose 
bids are at or under a certain amount. 

Because of concerns that competitive bidding may prompt suppliers to 
cut their costs by providing lower-quality items and curtailing 
services, ensuring quality and access through adequate oversight is 
critical for the success of the competitive bidding program. In 
September 2004, GAO indicated that quality assurance steps could 
include monitoring beneficiary satisfaction, setting standards for 
suppliers, giving beneficiaries a choice of suppliers, and selecting 
winning bidders based on quality and the dollar amount of the bids. As 
competitive bidding expands, problems that beneficiaries might 
experience could be magnified. Therefore, continued monitoring of 
beneficiary satisfaction will be critical to identify problems with 
suppliers or with items provided to beneficiaries. As required in the 
MMA, GAO will review and report on the competitive bidding program's 
impact on suppliers and manufacturers and its effect on quality and 
access for beneficiaries. 

Background: 

Medicare is the federal program that helps pay for a variety of health 
care services for about 44 million elderly and disabled beneficiaries. 
Most Medicare beneficiaries participate in Medicare Part B, which helps 
pay for certain physician, outpatient hospital, laboratory, and other 
services; medical equipment and supplies, such as oxygen, wheelchairs, 
hospital beds, walkers, orthotics, prosthetics, and surgical dressings; 
and certain outpatient drugs.[Footnote 9] Medicare Part B pays for most 
medical equipment and supplies using a series of fee schedules. 
Generally, Medicare has a separate fee schedule for each state that 
includes most items, and there are upper and lower limits on the 
allowable amounts that can be paid in different states to reduce 
variation in what Medicare pays for similar items in different parts of 
the country. Medicare pays 80 percent of the lesser of the actual 
charge for the item or fee schedule amount for the item, and the 
beneficiary pays the balance. Beneficiaries typically obtain medical 
equipment and supplies from suppliers, who submit claims to Medicare on 
beneficiaries' behalf. Suppliers include medical equipment retail 
establishments and outpatient providers, such as physicians, home 
health agencies, and physical therapists. To handle claims processing 
for medical equipment and supplies, CMS contracts with durable medical 
equipment Medicare administrative contractors. 

The Competitive Bidding Demonstration: 

Using its authority under the BBA, CMS conducted a competitive bidding 
demonstration to set Medicare Part B payment rates for groups of 
selected medical equipment and supplies.[Footnote 10] CMS contracted 
with Palmetto Government Benefits Administrators (Palmetto) to 
administer the competitive bidding demonstration,[Footnote 11] which 
was implemented in two locations--the Polk County, Florida, 
metropolitan statistical area and parts of the San Antonio, Texas, 
metropolitan statistical area. 

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. One cycle of bidding took place 
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. The demonstration ended on December 31, 
2002. 

The Competitive Bidding Program: 

In December 2003, the MMA required CMS to conduct competitive bidding 
for DME, supplies, off-the-shelf orthotics, and enteral nutrients and 
related equipment and supplies on a large scale.[Footnote 12] The MMA 
required that competition under the program begin in 10 of the largest 
metropolitan statistical areas in 2007, in 80 of the largest 
metropolitan statistical areas in 2009, and in other areas after 2009. 
The law established a new accreditation requirement for all Medicare 
suppliers of medical equipment and supplies and required CMS to develop 
financial and quality standards to use in selecting suppliers for the 
competitive bidding program. The law required CMS to take appropriate 
steps to ensure that small suppliers have an opportunity to be 
considered for participation in the competitive bidding program. CMS 
was required to establish a methodology for selecting bids from 
suppliers so that enough suppliers were selected to meet demand for 
competitively bid items within a given area. The law specified that at 
least two suppliers would be selected in each competitive area. The law 
also precluded judicial or administrative review of CMS's decisions to 
establish payment amounts, award contracts, designate areas for 
competition, select items and services, phase in implementation, and 
determine the bidding structure and number of suppliers selected under 
the competitive bidding program. The MMA required that an advisory 
committee be established to assist in carrying out the program. 

To help implement the competitive bidding program, CMS published its 
notice of proposed rulemaking on May 1, 2006, and its final rule on 
April 10, 2007. CMS's final rule provided more detail on the agency's 
implementation steps. For example, the law specified that the agency 
could not award a contract to an entity unless it met applicable 
financial standards specified by the Secretary of HHS. In its 
regulation, CMS specified the financial documents that had to be 
submitted by suppliers to be considered as potential bidders. 
Similarly, while the law indicated that the agency needed to ensure 
that small suppliers had an opportunity to participate, the regulation 
sets out a process to include a certain number of small suppliers based 
on the percentage of those who bid and met all applicable requirements. 

CMS established the initial round of bidding in 10 metropolitan 
statistical areas that included Charlotte, N.C.; Cincinnati, Ohio; 
Cleveland, Ohio; Dallas, Tex.; Kansas City, Mo.; Miami, Fla.; Orlando, 
Fla.; Pittsburgh, Pa.; Riverside, Calif.; and San Juan, P.R. On April 
9, 2007, CMS opened the initial registration of suppliers for the first 
round of bidding and the bid period opened on May 15, 2007. As part of 
its program implementation for the first round, CMS conducted a 
supplier-education campaign, which included meetings, listserve 
announcements, a dedicated Web site, and a toll-free help desk. The bid 
period closed on September 25, 2007. CMS concluded bid evaluations and 
began the contracting process in March 2008, and the agency plans to 
announce the first round of winning suppliers in May 2008. Suppliers 
whose bids were disqualified because their bid did not meet program and 
bidding requirements will receive a letter informing them of the reason 
or reasons for their disqualification. After the program begins, 
suppliers whose bids were not chosen generally cannot receive Medicare 
payment for the competitively bid items in the metropolitan statistical 
areas included in the competitive bidding program. However, suppliers 
of certain rental items or oxygen that did not become suppliers in the 
competitive bidding program could continue to serve their existing 
Medicare customers. Suppliers that did not have bids chosen in the 
first round of the program may bid in the future rounds of competition. 
CMS said it plans to conduct a beneficiary-education campaign before 
the program goes into effect on July 1, 2008. 

Competitive Bidding Could Reduce Program Payments by Creating an 
Incentive for Suppliers to Accept Lower Payment Amounts: 

Competitive bidding could reduce Medicare program payments by providing 
an incentive for suppliers to accept lower payment amounts for items 
and services to retain their ability to serve beneficiaries and 
potentially increase their market share. Using competition to obtain 
market prices in order to set payments for medical equipment and 
supplies is a new approach for Medicare that is fundamentally different 
than relying on fee schedules based on suppliers' historical charges to 
Medicare. Competitive bidding allows the market to provide information 
to CMS on what amounts suppliers will accept as payment to serve 
beneficiaries. 

In its demonstration, CMS used a competitive bidding process to 
determine which suppliers would be included and the competitively set 
fees that 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. Suppliers could submit bids and have 
winning bids for one or more groups of items. 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. All demonstration suppliers 
were reimbursed for each competitively bid item provided to 
beneficiaries at the demonstration fee schedule amounts. 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. 

Evidence from the demonstration suggests that, for the items selected, 
competition helped set lower payment amounts and resulted in estimated 
program savings of $7.5 million. The demonstration's independent 
evaluators also estimated that beneficiaries saved $1.9 million. The 
demonstration provided evidence to health policy experts, including us 
and the Medicare Payment Advisory Commission, that competitive bidding 
for medical equipment and supplies could be a viable way for the 
program to use market forces to set lower payments without 
significantly affecting beneficiary access.[Footnote 13] 

About a year after the demonstration ended, the MMA required CMS to 
implement competitive bidding on a large scale and added requirements 
that suppliers would have to meet to participate in the competitive 
bidding program. The MMA also required the agency to develop quality 
standards and for suppliers to be assessed on those standards by 
accreditation organizations. In addition, the agency had to include a 
financial and quality assessment of suppliers as part of competitive 
bidding. 

The competitive bidding program was structured to operate much like the 
demonstration. Suppliers submitted bids, along with other materials 
specified by CMS. The application required suppliers to submit 3 years 
of financial documents, including income statements, credit reports, 
and balance sheets. The review of the financial documents was used as 
part of the criteria for determining which bids to consider. The 
bidders had to have a valid Medicare supplier billing number and be 
accredited. Suppliers had to submit bids for one or more groups of 
items. CMS then evaluated the bids based on demand, capacity, and price 
and chose bids that were at or under a certain amount. 

CMS estimates that the first round of its competitive bidding program 
will result in payment amounts that overall average 26 percent less 
than the current fee schedule amounts for the groups of items included, 
leading to savings for the Medicare program and its beneficiaries. CMS 
based its estimate on the price points suppliers submitted with their 
bids, weighted by market area and past utilization of items in each 
group. The estimated savings differed by groups of items, with the 
largest savings of 43 percent estimated for mail-order diabetic 
supplies. 

Competitive bidding changes Medicare's relationship with suppliers. 
Competitive bidding is designed to reduce payments by allowing CMS to 
choose suppliers based on their bids--a change from the long-standing 
policy that any qualified provider can participate in the program. The 
competitive bidding process was designed to limit the number of 
suppliers to those whose bids were at or under a certain amount while 
ensuring that enough suppliers were included to meet beneficiary 
demand. In the demonstration, 50 percent to 55 percent of the 
suppliers' bids were selected. With few exceptions, only the suppliers 
whose bids were chosen could be reimbursed by Medicare for 
competitively bid items provided to beneficiaries residing in the 
demonstration area.[Footnote 14] 

Furthermore, competitive bidding could help reduce improper payments 
because it provides CMS with the authority to select suppliers, based 
in part on new scrutiny of their financial documents and other 
application materials. In November 2007, CMS estimated that 10.3 
percent of Medicare payments made to suppliers of medical equipment and 
supplies were improper--more than double the percentage of improper 
payments to other Medicare providers. Providing additional scrutiny of 
suppliers gives CMS the opportunity to screen out those whose finances 
do not indicate that they are stable, legitimate businesses. 

Adequate Oversight Is Critical to Ensure Quality and Access: 

Because of concerns that competitive bidding may prompt suppliers to 
cut their costs by providing lower-quality items and curtailing 
services, ensuring quality and access through adequate oversight is 
critical. Limiting the number of suppliers could potentially affect 
beneficiaries' access to quality items and services if there are an 
insufficient number to meet their needs. For some beneficiaries, having 
a choice of suppliers for some items and services could be important. 

In our September 2004 report, we evaluated CMS's competitive bidding 
demonstration and recommended implementation actions for CMS to 
consider, including how to ensure access to quality items and services 
for beneficiaries. We indicated that quality assurance steps could 
include monitoring beneficiary satisfaction, setting standards for 
suppliers, providing beneficiaries with a choice of suppliers, and 
selecting winning bidders based on quality, in addition to the dollar 
amounts of bids. 

The demonstration projects used several approaches for ensuring quality 
and services for beneficiaries, including monitoring beneficiary 
satisfaction and applying quality measures as criteria to select 
winning suppliers. During the demonstration, CMS and Palmetto used full-
time, onsite ombudsmen to respond to complaints, concerns, and 
questions from beneficiaries, suppliers, and others. In addition, to 
gauge beneficiary satisfaction, independent evaluators of the 
demonstration fielded two beneficiary surveys by mail--one for oxygen 
users and another for users of other products in the demonstration. 
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 survey results 
indicating that beneficiaries generally remained satisfied with both 
the products provided and with their suppliers. The independent 
evaluators identified some areas for concern, including a decline in 
the use of portable oxygen among users and the possible shift away from 
suppliers making home deliveries, which may have indicated that 
suppliers were visiting new medical equipment users less frequently to 
provide routine maintenance visits. 

Because we considered careful monitoring of beneficiaries' experiences 
essential to ensure that any quality or access problems were identified 
quickly, we recommended that CMS monitor beneficiary satisfaction with 
the items and services provided under the new competitive bidding 
program. As competitive bidding expands and affects larger numbers of 
beneficiaries, problems such as those identified in the evaluations of 
the demonstration projects could become 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. Such monitoring is important, not just when required 
by statute, but as part of an ongoing effort to ensure that the 
Medicare program is serving its beneficiaries effectively. 

CMS agreed with our recommendation and stated that the agency would 
monitor the beneficiary satisfaction with the quality and services 
provided under the competitive bidding process. CMS also stated in the 
preamble of its final rule on accreditation of suppliers published 
August 18, 2006, that it expects that implementing medical equipment 
and supplies quality standards and accreditation will lead to increased 
quality of items and services throughout the industry. Furthermore, CMS 
stated that it plans to provide education to Medicare beneficiaries on 
the competitive bidding process using approaches such as press 
releases, fact sheets, and notices. 

We will be assessing CMS's implementation of the competitive bidding 
program. As part of the MMA, we are required to review and report on 
the program's impact on suppliers and manufacturers and on quality and 
access of items and services provided to beneficiaries. As part of this 
review, we have been specifically requested to assess CMS's 
implementation of the program. 

Concluding Observations: 

We believe that competitive bidding could reduce payments for both the 
Medicare program and beneficiaries. The independent evaluators 
estimated savings achieved in the demonstration, and CMS has projected 
reductions in payment amounts in its competitive bidding program for 
both Medicare and its beneficiaries. In addition, the new financial 
standards and accreditation process being implemented in conjunction 
with the competitive bidding program should help improve the financial 
viability and quality of medical suppliers providing services to 
Medicare beneficiaries. But competitive bidding also provides 
incentives that could affect access to services and lower quality of 
items and services provided to beneficiaries, which need to be 
monitored carefully. 

Mr. Chairman, this concludes my prepared statement. I will be happy to 
answer any questions that you or members of the Subcommittee may have. 

Contacts and Acknowledgments: 

For further information regarding this testimony, please contact me at 
(202) 512-7114 or [email protected]. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this testimony. Sheila Avruch, Assistant Director; Catina 
Bradley; Kelli Jones; Kevin Milne; Lisa Rogers; and Timothy Walker made 
contributions to this statement. 

[End of section] 

Related GAO Products: 

Medicare: Improvements Needed to Address Improper Payments for Medical 
Equipment and Supplies. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-07-59]. Washington, D.C.: January 31, 2007. 

Medicare Durable Medical Equipment: Class III Devices Do Not Warrant a 
Distinct Annual Payment Update. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-06-62]. Washington, D.C.: March 1, 2006. 

Medicare: More Effective Screening and Stronger Enrollment Standards 
Needed for Medical Equipment Suppliers. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-656]. Washington, D.C.: 
September 22, 2005. 

Medicare: CMS's Program Safeguards Did Not Deter Growth in Spending for 
Power Wheelchairs. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-
43]. Washington, D.C.: November 17, 2004. 

Medicare: Past Experience Can Guide Future Competitive Bidding for 
Medical Equipment and Supplies. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-04-765]. Washington, D.C.: September 7, 2004. 

Medicare: CMS Did Not Control Rising Power Wheelchair Spending. 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-716T]. Washington, 
D.C.: April 28, 2004. 

Medicare: Challenges Remain in Setting Payments for Medical Equipment 
and Supplies and Covered Drugs. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-02-833T]. Washington, D.C.: June 12, 2002. 

Medicare Payments: Use of Revised "Inherent Reasonableness" Process 
Generally Appropriate. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/HEHS-00-79]. Washington, D.C.: July 5, 2000. 

Medicare: Access to Home Oxygen Largely Unchanged; Closer HCFA 
Monitoring Needed. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/HEHS-99-56]. Washington, D.C.: April 5, 1999. 

Medicare: Need to Overhaul Costly Payment System for Medical Equipment 
and Supplies. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-98-
102]. Washington, D.C.: May 12, 1998. 

Medicare: Home Oxygen Program Warrants Continued HCFA Attention. 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-98-17]. 
Washington, D.C.: November 7, 1997. 

Medicare: Excessive Payments for Medical Supplies Continue Despite 
Improvements. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-95-
171]. Washington, D.C.: August 8, 1995. 

[End of section] 

Footnotes: 

[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 nutrients, 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] A list of related GAO products is included at the end of this 
statement. 

[3] These expenditures reflect claims submitted April 1, 2006, through 
March 31, 2007. 

[4] CMS has established a process to price new items that are added to 
the fee schedule. 

[5] Pub. L. No. 105-33, ï¿½ 4319(a), 111 Stat. 251, 392 (1997). 

[6] Medicare Part B helps pay for certain physician, outpatient 
hospital, laboratory, and other services, and medical equipment and 
supplies. Beneficiaries are required to pay a monthly premium for their 
Part B coverage. 

[7] The competitive bidding program changes the way that Medicare 
determines the payment amounts for medical equipment and supplies by 
replacing the current fee schedule payment amounts for selected items 
in certain areas with payment amounts based on competitive bids 
submitted by Medicare suppliers. Pub. L. No. 108-173, ï¿½ 302(b), 117 
Stat. 2066, 2224. 

[8] The quality standards are to be applied by one or more independent 
accreditation organizations designated by the agency. Accreditation is 
a process of certifying that health care organizations comply with 
specific standards and requirements. 

[9] Outpatient drugs covered under Part B include self-administered 
drugs, such as certain immunosuppressive and oral anticancer drugs, or 
drugs administered in conjunction with DME, such as inhalation drugs 
used with a nebulizer. A nebulizer is a device driven by a compressed 
air machine that allows the patient to take medicine in the form of a 
mist or wet aerosol. 

[10] These groups were enteral nutrients, equipment and supplies, 
hospital beds and accessories, nebulizer inhalation drugs, manual 
wheelchairs and accessories, noncustomized general orthotics, oxygen 
contents, equipment and supplies, surgical dressings, and urological 
supplies. 

[11] 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. 

[12] Pub. L. No. 108-173, ï¿½ 302(b), 117 Stat. 2066, 2224. 

[13] The Medicare Payment Advisory Commission is an independent federal 
body established by the BBA to advise the U.S. Congress on issues 
affecting the Medicare program. Medicare Payment Advisory Commission, 
Report to the Congress: Variation and Innovation in Medicare, 
(Washington, D.C., 2003). 

[14] 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 fees set by 
the demonstration. Transition policies also allowed beneficiaries to 
maintain pre-existing 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. 

[End of section] 

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