Medicare: Need to Overhaul Costly Payment System for Medical Equipment
and Supplies (Letter Report, 05/12/1998, GAO/HEHS-98-102).

In 1996, Medicare part B (which generally covers non-hospital-based
care) paid $4.6 billion for medical equipment, supplies, prosthetics,
and orthotics--in other words, durable medical equipment (DME). Congress
included provisions in the Balanced Budget Act of 1997 authorizing the
Health Care Financing Administration (HCFA) to more quickly adjust
Medicare's fee schedule allowances by up to 15 percent per year. This
report reviews two problems that HCFA must overcome to use its new
authority effectively. First, HCFA must better identify products billed
to Medicare. The only product identifiers on the claims are HCFA billing
codes that cover broad ranges of products, quality, and prices. For
example, a single billing code is used for more than 200 different
urological catheters, whose prices range from $1 to $18 each. The claim
allowance is set at $11 for all catheters in this group; without better
product identification, HCFA cannot know what it is paying for. The
second problem with Medicare's DME payment system is that the fee
schedule allowances are often out of line with current market prices.
HCFA's new price-adjusting authority should help, but HCFA and its
contractors do not have sufficient current product and price information
for the thousands of DMEs covered. Another issue is that the fee
schedule applies to individuals and to large institutional claimants,
even though large institutions buy at significant discounts.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-98-102
     TITLE:  Medicare: Need to Overhaul Costly Payment System for
	     Medical Equipment and Supplies
      DATE:  05/12/1998
   SUBJECT:  Prices and pricing
	     Claims processing
	     Medical expense claims
	     Health insurance cost control
	     Medical supplies
	     Medical equipment
	     Health care programs
	     Billing procedures
	     Overpayments
IDENTIFIER:  Medicare Supplemental Medical Insurance Program
	     HCFA Common Procedure Coding System
	     Medicare Program

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GAO/HEHS-98-102

Cover
================================================================ COVER

Report to the Special Committee on Aging, U.S.  Senate

May 1998

MEDICARE - NEED TO OVERHAUL COSTLY
PAYMENT SYSTEM FOR MEDICAL
EQUIPMENT AND SUPPLIES

GAO/HEHS-98-102

Medicare DME Payments

(101581)

Abbreviations
=============================================================== ABBREV

  BBA - Balanced Budget Act of 1997
  DME - durable medical equipment
  DMERC - durable medical equipment regional carrier
  HCFA - Health Care Financing Administration
  HCPCS - Health Care Financing Administration Common Procedure
     Coding System
  HHS - Department of Health and Human Services
  HIPAA - Health Insurance Portability and Accountability Act of 1996
  OIG - Office of the Inspector General
  UPN - universal product number
  VA - Department of Veterans Affairs

Letter
=============================================================== LETTER

B-277617

May 12, 1998

The Honorable Charles E.  Grassley
Chairman
The Honorable John B.  Breaux
Ranking Minority Member
Special Committee on Aging
United States Senate

In 1996, Medicare's Supplementary Medical Insurance (Medicare part B)
paid over $4.6 billion for medical equipment, supplies, prosthetics,
and orthotics--products referred to as durable medical equipment
(DME) in this report.\1

Medicare part B pays for DME for patients who live at home or in
long-term care facilities, such as nursing homes.\2 Our prior studies
and a report by the Office of the Inspector General (OIG) in the
Department of Health and Human Services (HHS) have documented that
Medicare pays higher than market rates for some items.\3 The Health
Care Financing Administration (HCFA) agreed that Medicare pays too
much for some products but said that the "inherent reasonableness"
review process\4 it was required by statute to use hindered HCFA's
efforts to address overpricing.  This process was too slow and
cumbersome to be of practical use.  The process involved, for
example, a detailed notice and comment rulemaking procedure that
required clearance by the Administrator of HCFA, the Secretary of
HHS, and the Director of the Office of Management and Budget.

At your request, we reviewed Medicare payments for commonly
purchased, off-the-shelf DME such as walkers, catheters, glucose test
strips, and orthotic braces.  On June 17, 1997, we provided you with
an interim report,\5 and the Congress subsequently included
provisions in the Balanced Budget Act of 1997 (BBA) giving HCFA the
authority to more quickly adjust Medicare's fee schedule allowances
by up to 15 percent per year.  This report focuses on problems HCFA
must overcome to effectively use its new authority.  More
specifically, this report discusses the need to (1) better identify
products billed to Medicare and (2) bring Medicare fees more in line
with current marketplace prices.

To address these issues we researched Medicare laws and regulations
and met with officials from HCFA and its contractors to determine how
they set the Medicare fee schedule allowances.  We explored ways to
better identify products billed to Medicare by obtaining information
on universal product numbering systems for medical products from the
Department of Defense; associations representing medical equipment
suppliers, distributors, and manufacturers; a private consultant; and
two standards-setting organizations.  We also evaluated Medicare
payments for selected DME by collecting and analyzing information on
product pricing, distribution channels, and purchasing practices from
manufacturers, suppliers, and industry groups.

We performed our field work between March 1996 and February 1998 in
accordance with generally accepted government auditing standards,
except that we did not audit the cost and pricing information
obtained from suppliers; however, we noted that the cost and pricing
information we obtained was fairly consistent among the suppliers we
contacted.  Appendix I provides additional details on our scope and
methodology and a listing of the types of items included in our
review.

--------------------
\1 The Medicare payment represents the fee schedule allowances for
these products.  Medicare pays 80 percent of the allowance or the
amount billed on the claim, whichever is lower; Medicare
beneficiaries are responsible for the remaining 20 percent.  Medicare
DME payments for products not covered by fee schedules, such as drugs
and enteral and parenteral products used with DME, are not included
in the $4.6 billion or discussed in this report.

\2 Medicare part A generally pays for medical equipment and supplies
provided during in-patient stays in acute care hospitals and skilled
nursing facilities.  However, Medicare part B pays for orthotic
devices for patients in skilled nursing facilities as well as for
patients who live at home or in long-term care facilities.

\3 See Medicare:  Excessive Payments for Medical Supplies Continue
Despite Improvements (GAO/HEHS-95-171, Aug.  8, 1995), Medicare
Spending:  Modern Management Strategies Needed to Curb Billions in
Unnecessary Payments (GAO/HEHS-95-210, Sept.  19, 1995), and Durable
Medical
Equipment - Review of Medicare Payments for Home Blood Glucose
Monitors, HHS OIG, A-09-92-00034 (Washington, D.C.:  Dec.  1992).

\4 42 U.S.C.  1395m(a)(10) and 1395u(b)(8) and (9) (1994).

\5 Medicare:  Problems Affecting HCFA's Ability to Set Appropriate
Reimbursement Rates for Medical Equipment and Supplies
(GAO/HEHS-97-157R, June 17, 1997).

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

There are two underlying problems with Medicare's DME payment system.
First, HCFA does not know specifically what products Medicare is
paying for when its contractors process claims for DME.  The only
product identifiers on the claims are HCFA billing codes that cover a
broad range of product types, quality, and market prices.  For
example, we determined that one Medicare billing code is used for
more than 200 different urological catheters.  The wholesale prices
of these catheters range from about $1 to about $18, but information
we gathered from some suppliers showed that the catheters they most
frequently provide are also the least expensive--about $1.  Yet, the
Medicare fee schedule allowance for all the catheters in this group
is about $11.  Without more specific product identifiers on Medicare
claims, HCFA cannot routinely determine what products are being
billed under each billing code, which products should be grouped
together under the same billing code, or whether the Medicare payment
for all the products grouped under a billing code is reasonable.  The
health care industry is increasingly using bar-coded,
product-specific identifiers for medical products, but HCFA does not
have any plans to require these identifiers on Medicare claims.

The second underlying problem with Medicare's DME payment system is
that the fee schedule allowances for DME are often out of line with
current market prices.  Most Medicare fees are based on historical
supplier charges that are updated using the consumer price index.
The BBA gave HHS the authority to use a streamlined "inherent
reasonableness" review process to adjust Medicare fees by as much as
15 percent in one year.  This streamlined authority should help HCFA
bring the historical, charge-based fees into line with marketplace
prices, but some obstacles remain.  HCFA and its contractors do not
have sufficient, current product and pricing data for the thousands
of DME items covered by Medicare.  For example, some new products
that use improved technology and materials are not even listed in the
fee schedule--some hand/wrist braces are now self-adjustable and
available as off-the-shelf products, but the current fee schedule
lists only more expensive, custom-fabricated hand/wrist braces.
Another obstacle to appropriate reimbursement is that the fee
schedule allowances are the same for individuals and for large
institutional suppliers, even though large suppliers buy at
substantial discounts.  For example, over a 12-month period one large
supplier billed Medicare for over 37,200 catheters; the supplier's
weighted average cost for the catheters was less than $1 each, but
Medicare paid the supplier almost $12 per catheter.  Although the BBA
gives HHS the authority to more quickly adjust fees, addressing these
underlying problems may require additional statutory authority;
therefore, we have identified some options for congressional
consideration.

   BACKGROUND
------------------------------------------------------------ Letter :2

Medicare part B pays for most medical equipment and supplies using a
fee schedule system.  The fee schedules specify a Medicare allowance
for each of about 1,900 groups of products, and each product group is
identified by a HCFA Common Procedure Coding System (HCPCS) code.
All the products grouped under a HCPCS code have the same fee
schedule allowance and are intended to be similar items.\6 When
suppliers bill Medicare, they use the HCPCS code they believe best
describes the specific product provided to the patient.  Suppliers
and manufacturers may also petition HCFA to establish new HCPCS codes
for products they believe are not adequately described by existing
codes.

Various types of DME are covered by different fee schedules.  For
inexpensive, routinely purchased items, such as walkers, canes,
glucose test strips, and ostomy and urological products, Medicare has
a separate fee schedule for each state.  These fee schedules are
based on the average charges that Medicare allowed in each state in
1986 and 1987.  To reduce variation in Medicare fees among the
states, the state fees are subject to national floors and ceilings.
The national floor for each HCPCS code is 85 percent of the median of
all the state fees, and the ceiling is the median of all state
fees.\7 The state fees are usually adjusted annually for inflation
using the consumer price index, but the BBA amended Medicare law to
freeze the fee schedule allowances for medical equipment and supplies
for 5 years, beginning in 1998.

For orthotic and prosthetic devices, including off-the-shelf items
that do not require custom fittings and adjustments, Medicare uses 10
regional fee schedules.  Each regional fee schedule is based on a
weighted average of the charges Medicare allowed in 1986 and 1987 for
each state in the region.  Similar to the fee schedule for
inexpensive and routinely purchased items, the orthotic and
prosthetic fee schedules are subject to national floors and ceilings.
The national floor for each HCPCS code is 90 percent of the average
of all regional fees, and the ceiling is 120 percent of the average.
The orthotic and prosthetic fee schedules are also usually adjusted
annually for inflation using the consumer price index, but the BBA
amended Medicare law to limit the increases to 1 percent per year for
5 years, beginning in 1998.

Four HCFA contractors, called durable medical equipment regional
carriers (DMERC), process and pay claims for medical equipment and
supplies.  A fifth contractor is responsible for analyzing DME claims
and answering questions from the carriers and suppliers regarding use
of the HCPCS codes.

--------------------
\6 Under current policy, Medicare does not pay extra for products
that have convenience features but are equivalent to less expensive
products.

\7 Under 42 U.S.C.  1395m(a)(10)(A), Alaska, Hawaii, and Puerto Rico
are excluded from these national payment limits.

   CLAIMS DO NOT ADEQUATELY
   IDENTIFY PRODUCTS BILLED TO
   MEDICARE
------------------------------------------------------------ Letter :3

HCFA does not know specifically what Medicare is paying for when its
contractors process claims for DME.  We identified the products
billed under some HCPCS codes and found that the Medicare fee
schedule allowance was appropriate for a few of the products but
grossly excessive for many of the products billed under the same
code.  Without more specific product identifiers on Medicare claims,
HCFA cannot systematically determine if the fee schedule allowances
are appropriate.

      HCPCS CODES ARE NOT
      SUFFICIENT FOR MEDICARE
      REIMBURSEMENT
---------------------------------------------------------- Letter :3.1

Products that differ widely in properties, use, performance, and
price are being billed under the same HCPCS code and reimbursed at
the same fee schedule allowance.  For example, more than 200
short-term, medium-term, and long-term catheters are billed under one
HCPCS code for latex Foley catheters.\8

According to a major manufacturer of Foley catheters, specialized
coatings affect the durability, function, and price of the catheters
within this group.  The wholesale prices of these catheters range
from about $1 for a short-term catheter to almost $18 for a long-term
catheter.  The 1997 Medicare fee schedule allowance for all the
catheters in this group was between $9.95 (the national floor) and
$11.70 (the national ceiling).

Since Medicare pays the same fee for all the products billed under
the same HCPCS code, suppliers have a financial incentive to provide
patients the least costly product covered by the code--they can bill
Medicare the full fee schedule allowance regardless of the product
provided.  For the latex Foley catheters discussed previously,
information we gathered from some suppliers showed that the basic
short-term catheter, which wholesales for about $1, was the most
commonly provided catheter.  Since Medicare claims do not identify
specific products, HCFA would have to undertake a special study to
discover, as we did, that suppliers are usually providing $1
catheters for products with a Medicare fee schedule allowance of
about $10 to $12.

Without product-specific identifiers on Medicare claims forms, HCFA
cannot effectively review the mix of products billed under a HCPCS
code to (1) identify the need to regroup similar products under
existing or new billing codes, (2) adjust the code descriptions and
the guidance to suppliers advising them which HCPCS codes to bill,
(3) identify claims billed under inappropriate HCPCS codes, and (4)
adjust the fee schedule allowance for a HCPCS code so that it
reflects the costs of the products covered by the code.

--------------------
\8 A latex Foley catheter is typically billed under HCPCS code A4338
(indwelling catheter; Foley type; two-way latex with a coating, such
as Teflon, silicone, silicone elastomer, or hydrophilic).

      PRODUCT-SPECIFIC CODES ARE
      AVAILABLE TO BETTER IDENTIFY
      PRODUCTS
---------------------------------------------------------- Letter :3.2

Universal product numbers (UPN) and associated bar codes are
increasingly available to identify specific medical equipment and
supplies, similar to the way universal product codes are used in
supermarkets.  Manufacturers can use bar codes for each product to
identify characteristics such as the manufacturer, product type,
model, size, and unit of packaging (for example, 10 per carton).
Industry standards organizations have created two UPN formats for
medical equipment and supplies:  (1) an alphanumeric standard that
provides very detailed product information and (2) an all-numeric
standard that is more consistent with international coding standards.
Both these UPN formats can be used interchangeably in automated
claims-processing systems.

The Department of Defense and some hospital purchasing groups are
already setting deadlines for their vendors to use UPNs as the
standard product identification on all transactions involving medical
equipment and supplies.  UPNs will enable these government and
private purchasers to develop standard product groups, track market
prices, and use prudent purchasing methods--paying for medical
equipment and supplies that meet quality standards at competitive
market prices.  Also, a state Medicaid agency is developing a claims
processing system that would require UPNs on claims for medical
supplies billed to the state.

If suppliers were required to include UPNs as well as HCPCS codes on
Medicare claims, HCFA could routinely gather the information it needs
to group similar products under the same HCPCS code and set an
appropriate reimbursement rate for each code.  For example, according
to a product expert with a manufacturer of urological products, the
HCPCS code used for latex Foley catheters is too broad and could be
split into three separate codes and reimbursement rates--one each for
short-term, medium-term, and long-term catheters.  After implementing
these adjustments, HCFA contractors could use their automated
claims-processing systems to check the UPNs on claims and determine
if suppliers are billing for these catheters under the appropriate
HCPCS codes.

Section 262 of the Health Insurance Portability and Accountability
Act of 1996 (HIPAA) amended the Social Security Act to require the
Secretary of HHS to adopt standards for the electronic exchange of
health information.\9 These standards are expected to incorporate a
medical product coding system.  Although HCFA officials acknowledge
the limitations of coding under HCPCS, HHS plans to designate HCPCS
as the national standard to be implemented in the year 2000, based on
the belief that this would be less disruptive to the health care
industry.  However, industry groups and suppliers we contacted said
they find the HCPCS difficult to use, and industry surveys show that
many manufacturers already label their products with UPNs and bar
codes to track their inventories.  Industry groups contend that
Medicare, the nation's largest health care insurer, should be leading
the effort to require the use of UPNs, especially since this coding
system would enable HCFA to exercise better control over Medicare
payments for medical equipment and supplies.  HCFA officials said
they are willing to consider implementing changes to the national
coding standards after the year 2000, when the industry has had more
time to consider a uniform coding approach for medical equipment and
supplies.

--------------------
\9 42 U.S.C.A.  1320d-2 (West Supp.  1997).

   MEDICARE FEES DO NOT REFLECT
   CURRENT MARKET PRICES OR
   DISCOUNTS OBTAINED BY LARGE
   SUPPLIERS
------------------------------------------------------------ Letter :4

Medicare's fee schedule allowances for DME are often out of line with
current retail prices paid by individual beneficiaries and with
competitive marketplace prices paid by large suppliers.  Section 4316
of the BBA amended the Medicare law to permit HCFA to use a
streamlined process to adjust fee schedule allowances up or down by
as much as 15 percent in one year.  This new authority can help HCFA
bring the historical, charge-based fees into line with marketplace
prices, but some obstacles remain:  (1) HCFA and its contractors do
not have sufficient current product or pricing data on the thousands
of items covered by the DME fee schedule and (2) the fee schedule
reimburses large suppliers who buy at volume discounts the same fee
schedule allowances as individuals who buy single items at retail
prices.  A number of options are available for setting more
appropriate reimbursement rates.

      MEDICARE FEES ARE OFTEN OUT
      OF LINE WITH CURRENT PRICES
---------------------------------------------------------- Letter :4.1

Since the current Medicare fee schedule is based on supplier charges
that Medicare allowed in 1986 and 1987, some Medicare fees have
little correlation with today's market prices for medical equipment
and supplies.  Competition has led many suppliers to increase their
purchasing power and lower their product costs by consolidating with
similar businesses or joining purchasing cooperatives.  On the other
hand, new products that use more expensive materials to better meet
the needs of some patients may be more highly priced than the
Medicare fee schedule allowances for those products.  For example, a
HCFA contractor found that in 1996

  -- the average retail price for an irrigation tray with bulb (HCPCS
     code A4320) was $2.83, while Medicare's 1996 floor and ceiling
     for the item were $4.20 and $4.94, respectively;

  -- the average retail price for an intermittent urinary catheter
     with straight tip (HCPCS code A4351) was $0.87, while Medicare's
     1996 floor and ceiling for each item were $1.43 and $1.68,
     respectively; and

  -- the average retail price for a one-piece ostomy pouch (HCPCS
     code A5061) was $3.37, while Medicare's 1996 floor and ceiling
     for each item were $2.46 and $2.89, respectively.

Medicare payments for some orthotic devices are excessive because
even though improved technology and materials have made some
orthotics less costly, some of these less costly products are not
listed in the Medicare fee schedule.  Moldable plastic, velcro
closures, and prefitted sizes have eliminated the need to
individually design and fabricate many orthotic devices, but as the
HHS OIG recently reported, even though orthotic devices are
increasingly available off the shelf, the HCPCS codes still reflect
the more costly, custom-fabricated products.\10 For example, a
prefabricated, self-adjusting hand/wrist brace can be purchased from
a supplier's catalog for $120, but the only similar item listed in
the current Medicare fee schedule is a custom-fabricated brace with
an allowance of up to $290.92.  HCFA's contractors said that for
items not listed in the fee schedule, suppliers should bill a
"miscellaneous" HCPCS code and submit documentation describing the
item.  However, such claims must be processed manually, and the HHS
OIG reported that the outdated fee schedule leads some suppliers to
bill Medicare for these items using codes and allowances for the
custom-fabricated orthotics.

--------------------
\10 See OIG report, Medicare Orthotics, OEI-02-95-00380 (Washington,
D.C.:  HHS, Oct.  9, 1997).

      MEDICARE FEES DO NOT REFLECT
      VOLUME DISCOUNTS OBTAINED BY
      LARGE SUPPLIERS
---------------------------------------------------------- Letter :4.2

Medicare pays the same fees to individuals and to large institutional
suppliers, even though large suppliers obtain substantial discounts.
For example, information we obtained from one large nursing home
supplier showed that over a 12-month period the supplier billed
Medicare for over 37,200 latex Foley catheters.  The supplier's
weighted average cost for the catheters was less than $1 each, but
Medicare's fee schedule allowance was between $9.95 and $11.70 for
each catheter.  The same supplier billed Medicare for 78,100 bedside
drainage bags in a 12-month period.  The supplier's weighted average
cost was about $2.24 per bag, but Medicare's fee schedule allowance
was between $7.65 and $9.00.

Suppliers who bill Medicare incur administrative costs in addition to
product costs, but administrative costs do not account for the
disparity between large suppliers' unit costs and Medicare's fee
schedule allowances.  Administrative costs are largely attributable
to documenting the medical necessity for the initial claim;
subsequent claims to reorder items for the same patient involve less
time and cost.  Suppliers have estimated that the average
administrative cost for filing a Medicare claim for a reordered
product is about $10.  We did not verify that estimate, but it should
be noted that suppliers typically include several related supplies on
a single claim, and allocating the estimated $10 administrative cost
among the three or four items would reduce the administrative cost to
between $2.50 and $3.35 per item.

For some products a few large suppliers account for a substantial
number of the claims paid by Medicare.  For example, for one
particular type of catheter, 10 suppliers accounted for almost 55
percent of the charges billed to Medicare between July 1, 1996, and
September 30, 1996.  For five other HCPCS codes in our study, 10
suppliers accounted for 24 percent or more of total allowed charges.
These large suppliers include firms that billed Medicare directly for
equipment and supplies provided to Medicare beneficiaries in nursing
homes.  As discussed in the next section, the amendments in the BBA
now require nursing homes, rather than their suppliers, to bill
Medicare.

      HCFA HAS THE OPPORTUNITY TO
      DEVELOP NEW STRATEGIES FOR
      SETTING DME FEES
---------------------------------------------------------- Letter :4.3

Until enactment of the BBA, HCFA used an "inherent reasonableness"
review process, illustrated in appendix II, that was lengthy and
cumbersome to adjust Medicare fees for medical equipment and
supplies.\11 HCFA successfully used this process in only one case--it
took HCFA almost 3 years to adjust the Medicare fee schedule
allowance for blood glucose monitors.  The BBA provides HCFA the
opportunity to develop new strategies for setting DME fees; other
approaches that also merit consideration may require additional
statutory authority.

Section 4316 of the BBA allows HCFA to use a more flexible,
streamlined process to adjust Medicare fees by as much as 15 percent
in one year.\12 HCFA plans to implement this authority by having its
contractors (1) consider relevant pricing information, such as prices
listed in supplier catalogs and prices paid by the Department of
Veterans Affairs (VA), and other factors in proposing changes to the
fee schedule allowances; (2) notify suppliers and state Medicaid
agencies of the factors used to establish the proposed fees and
solicit comments; and (3) adjust the fee allowances after considering
the comments.\13 On January 17, 1998, HCFA published an interim final
rule with comment period to implement these plans.

HCFA and its contractors have to overcome some problems to
effectively implement these plans--the same problems encountered when
HCFA asked a contractor to review the reasonableness of Medicare fees
for products billed under 100 HCPCS codes.  According to HCFA staff,
its contractor (1) could not readily identify the specific products
billed under each HCPCS code and (2) encountered problems obtaining
information on market prices.  Requiring UPNs on Medicare claims, as
previously discussed, would help solve the first problem.  To address
the second problem--obtaining information on competitive marketplace
prices--the contractors could use commercial pricing databases and
prices set through Department of Defense competitive contracts to
supplement prices obtained from catalogs and VA competitive
contracts.  HCFA should then require the contractors to routinely
review and adjust fee schedule allowances for those HCPCS codes that
account for the largest proportion of Medicare spending for DME.

On June 18, 1997, HCFA proposed a regulation that offers another
strategy for paying more appropriate prices for DME.  In part, the
proposal would, by defining actual charges, set Medicare part B
reimbursements at the lower of the fee schedule allowance or the
lowest amount a provider has agreed to accept from other payers.
This proposal essentially states that Medicare, as the largest single
health care payer, should pay no more than the lowest amount a
provider charges other payers.  We believe that implementing this
proposal for medical equipment and supplies could allow Medicare to
pay large suppliers at rates that reflect the discounts they obtain,
since those suppliers are also likely to have competitive contracts
with hospital chains, nursing homes, and managed care organizations.
However, a HCFA official stated that many suppliers oppose HCFA's
efforts and that they would challenge HCFA's statutory authority to
implement such a regulation.  HCFA is reconsidering this proposal.

Subsection 4432(b) of the BBA amended Medicare law to require, in
effect, nursing facilities, rather than DME suppliers and other
nonphysician providers, to bill Medicare directly for DME and
nonphysician services provided to their patients under Medicare part
B.\14 This requirement will enable HCFA to identify DME supplied to
Medicare beneficiaries in nursing facilities.  Institutional
suppliers such as those servicing nursing homes obtain DME at
substantial discounts; establishing a separate fee schedule for DME
provided to nursing home patients would allow Medicare to pay fees
that reflect the institutional discounts, rather than paying retail
prices.  Pursuing this strategy could require new statutory authority
for HCFA.

The use of competitive contracting for high-volume medical equipment
and supplies also has merit.  Section 4319 of the BBA directs the
Secretary of HHS to undertake up to five competitive acquisition
demonstration projects, in three competitive acquisition areas, and
to complete these projects by the end of 2002.\15 Under this
arrangement, medical equipment and supplies billed to Medicare part B
would be reimbursed at rates set through competition.  HCFA has
completed the plans to administer this project but has not finalized
the demonstration sites.

--------------------
\11 42 U.S.C.  1395m(a)(10) and 1395(u)(b)(8) and (9) (1994).

\12 42 U.S.C.A.  1395m(a)(10) and 1395u(b)(8) and (9) (West Supp.
1997).

\13 To adjust fees by more than 15 percent in one year, HCFA must
still follow a complex process like that illustrated in app.  II.

\14 This change will affect patients residing in a skilled nursing
facility or a nursing home that includes a skilled nursing facility.
Some of the benefits of consolidated billing by nursing facilities
are discussed in Fraud and Abuse:  Providers Target Medicare Patients
in Nursing Facilities (GAO/HEHS-96-18, Jan.  24, 1996).

\15 42 U.S.C.A.  1395w-3 (West Supp.  1997).

   CONCLUSIONS
------------------------------------------------------------ Letter :5

Medicare spends billions of dollars on medical equipment, supplies,
and prosthetic and orthotic devices, but the prices Medicare pays
reflect historical charges and, in some cases, outdated products.
Similar to previous studies, our work indicates that Medicare grossly
overpays for some products.  Although the BBA gives HCFA greater
flexibility to more quickly adjust Medicare fee schedule allowances,
some underlying problems need to be resolved for HCFA to most
effectively use its new authority.

Medicare overpays some claims for DME because it does not know
specifically what it is paying for.  Resolving this problem is
fundamental to making sure that Medicare fees are reasonable.
Although UPNS offer a solution to the problem, HCFA and HHS are
reluctant to require UPNs on Medicare claims.

The current HCPCS codes and the fee schedule allowances do not
reflect changes in products and prices brought about by improved
technology and a more competitive marketplace.  Some products that
were once custom-made are now available as lower-cost, off-the-shelf
items, but in some cases the Medicare fee schedule lists only the
more expensive, custom-fabricated product.

Finally, Medicare pays institutional suppliers and retailers the same
fee schedule allowances, even though large suppliers benefit from
lower product acquisition costs.  Medicare does not currently have a
mechanism to set separate fees for large institutional suppliers and
retailers so both types of providers could be fairly reimbursed for
their costs.

   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :6

In order to help ensure that Medicare fees for DME are reasonable,
the Congress may wish to consider enacting legislation directing the
Secretary of HHS to

  -- reimburse providers of medical equipment, supplies, and devices
     at the lower of the Medicare fee schedule allowance or the
     lowest payment suppliers agreed to accept from other payers; and

  -- establish a separate fee schedule to reimburse nursing homes for
     the medical equipment, supplies, and devices provided to their
     patients.

   RECOMMENDATIONS TO THE
   ADMINISTRATOR OF HCFA
------------------------------------------------------------ Letter :7

In order for HCFA to gather information needed to adjust Medicare
fees for DME, we recommend that the Administrator of HCFA

  -- require suppliers to identify the specific medical equipment,
     supplies, and devices they bill to Medicare by including UPNs on
     their Medicare claims; and

  -- ensure that HCFA's contractors systematically gather and analyze
     market prices for medical equipment, supplies, and off-the-shelf
     orthotic devices billed to Medicare by using commercial pricing
     databases and considering competitive prices paid by VA, the
     Department of Defense, and other large payers.

We also recommend that the Administrator of HCFA

  -- use the authority provided by the BBA to adjust Medicare fee
     schedule allowances, setting a priority on items that account
     for the highest Medicare expenditures.

   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

We gave HHS and HCFA an opportunity to comment on a draft of this
report.  HHS did not provide us comments in the time required.  HCFA
provided us written comments, which we have included as appendix III.

HCFA agreed that Medicare overpays for some DME and stated that the
revised inherent reasonableness review authority and the competitive
bidding demonstration authority provided by the BBA give HCFA the
tools needed to begin to address long-standing payment issues.  HCFA
noted that it published an interim final rule on use of its inherent
reasonableness authority, is currently identifying the first items
for which it will use this authority, and will announce the first
site for the competitive bidding demonstration project this spring.
However, HCFA raised concerns about statements in the report
regarding (1) the current HCPCS billing codes, (2) Medicare fees for
prefabricated orthotics, (3) the potential use of UPNs, and (4) the
information available to set DME fee schedule allowances.

      CURRENT HCPCS BILLING CODES
---------------------------------------------------------- Letter :8.1

Our report states that HCFA does not know specifically what products
Medicare is paying for because the same HCPCS code can be used for a
broad range of product types, quality, and market prices.  HCFA
commented that this statement may be misleading because the HCPCS
codes represent unique product categories.  We disagree that our
statement may be misleading.  Our report notes that over 200
different catheters can be billed under HCPCS code A4338 (indwelling
Foley latex catheter) and that the prices for these catheters range
from about $1 to about $18 each.  HCFA acknowledged that a wide
variety of catheters fit this description and said that this problem
could be addressed by an expansion of the single code into multiple
codes if medical evidence indicates that the catheters are not
functionally equivalent.  However, HCFA cannot routinely perform the
analysis needed to determine whether the single HCPCS code should be
split into multiple codes with different fee schedule allowances.
More specific product identifiers are needed to determine (1) the
variety of catheters billed under the HCPCS code, (2) the quantity of
each kind of catheter billed to Medicare, and (3) the marketplace
prices of each kind of catheter.

      MEDICARE FEES FOR
      PREFABRICATED ORTHOTICS
---------------------------------------------------------- Letter :8.2

Our report and a 1997 HHS OIG report noted that even though orthotic
devices are increasingly available off the shelf, the HCPCS codes
still reflect more costly, custom-fabricated devices.  As an example,
our report states that a prefabricated, self-adjusting hand/wrist
brace can be purchased from a supplier's catalog for $120, but the
only similar item listed in the current Medicare fee schedule is a
custom-fabricated brace with a fee schedule allowance of up to
$290.92.  HCFA commented that HCPCS codes L3800 and L3805 can be used
for off-the-shelf hand/wrist braces and that the price comparison is
flawed because the $120 price is a wholesale not a retail price.
HCFA also noted that its Statistical Analysis Durable Medical
Equipment Regional Carrier oversees suppliers' use of the HCPCS codes
to ensure that the correct codes are used.  We consulted with HCFA's
statistical analysis carrier about this example during our review,
and the HCPCS coordinator told us that codes L3800 and L3805 should
be used for custom-fabricated hand/wrist braces.  We could not
reconcile the conflicting statements by HCFA and its contractor
regarding which codes should be used for the prefabricated braces,
and this conflicting information further illustrates our point that
HCFA does not know specifically what products are being billed under
the HCPCS codes.  Also, if HCFA rather than its contractor is correct
(that is, that HCPCS code L3805 can be used to bill Medicare for a
prefabricated, self-adjusting hand/wrist brace), Medicare could be
paying over a 140-percent markup over the catalog price--an amount we
believe warrants review.

      POTENTIAL USE OF UPNS
---------------------------------------------------------- Letter :8.3

HCFA stated that it recognizes UPNs may be useful to improve the
Medicare payment system; is considering the use of UPNs; and will be
looking closely at California's efforts to use UPNs in its Medicaid
claims processing system.  However, HCFA did not specify any project
or timetable for its own efforts to evaluate the use of UPNs.  As
discussed below, HCFA also raised several logistical and
implementation issues.

HCFA identified the need to establish a database to link functionally
equivalent UPNs with HCPCS codes.  To make these linkages, HCFA said
that it would need to collect detailed product information for about
1.7 million products, such as the product features, the purpose and
uses of the product, the number of items per package, and the
manufacturer's price.  HCFA also commented that it does not have the
authority to require manufacturers to reveal this information and
that implementing UPNs would require additional financial and
personnel resources.

While implementing UPNs may require additional HCFA resources, it
should be noted that HCFA and its contractors are already responsible
for many of the activities HCFA described.  For example, HCFA's
contractors have to gather detailed information on product
characteristics and prices to (1) classify products into functionally
equivalent groups, (2) advise suppliers which HCPCS codes to use when
billing Medicare, and (3) set an appropriate Medicare fee schedule
allowance for items billed under the HCPCS codes.  Without any change
in HCFA's authority, it can continue to gather information on product
characteristics and prices and one additional data element--the UPN
associated with the product.  Similarly, suppliers can continue to
bill Medicare using existing HCPCS codes as they have in the past,
but also supplying one additional data element on the claim--the UPN.
Then, using the claims data with the UPNs, HCFA can build a database
that identifies the specific products being billed under each HCPCS
code and use this database to analyze the appropriateness of the
HCPCS product groupings and the Medicare fee associated with each
HCPCS code.

Our report also noted that requiring UPNs on claims could help
identify claims billed under inappropriate HCPCS billing codes.  Such
claims could be identified by using the database described to
establish computerized claims processing screens of valid HCPCS/UPN
combinations.  In contrast, suppliers currently can claim that a
low-cost product "fits" a broad HCPCS description for a higher-cost
product; since the claim does not specifically identify the product,
the claim may never be questioned.  Contrary to one of HCFA's
comments, we did not suggest that UPNs could prevent outright
falsification of the information required on DME claims.

HCFA also expressed concerns that manufacturers have wide discretion
in how they assign UPNs to their products; that there are no
mandatory standards for UPNs; and, therefore, UPNs have no uniform
meaning.  We disagree that manufacturers have wide discretion in how
they assign UPNs to their products.  The coding councils for each of
the two UPN standards strictly define how the UPN is used to
represent the manufacturer, the product, and the packaging level.
The two UPN standards can be used interchangeably in claims
processing systems, since a portion of the UPN identifies which of
the two UPN standards is being used.

      INFORMATION AVAILABLE TO SET
      DME FEE SCHEDULE ALLOWANCES
---------------------------------------------------------- Letter :8.4

Our report recommends that HCFA ensure that its contractors
systematically gather and analyze market prices for medical
equipment, supplies, and off-the-shelf orthotic devices billed to
Medicare by using commercial databases and considering competitive
prices paid by VA, the Department of Defense, and other large payers.
HCFA commented that it has explored and will continue to explore
prices paid by other payers, such as VA, but that comparisons among
market prices, commercial pricing databases, other competitive
prices, and Medicare fees are difficult because (1) HCFA holds a
unique position in the marketplace as a payer rather than a purchaser
and (2) DME suppliers who deal directly with Medicare beneficiaries,
especially those in the home, have a different cost structure than
suppliers to hospitals or VA.

Our report does discuss the fact that suppliers servicing Medicare
patients incur administrative costs associated with documenting
medical necessity and filing claims--costs they might not incur in
doing business with purchasers rather than insurers.  As noted in the
report, we agree that these additional costs should be taken into
consideration when setting Medicare fees.

Our report also notes that institutional suppliers, such as those
that provide DME to patients in nursing homes, obtain substantial
discounts, but those discounts are not reflected in the Medicare
payments because Medicare pays the same fees to large institutional
suppliers that it pays to other suppliers.  Our report identifies
some options for setting lower Medicare fees for institutional
providers.

---------------------------------------------------------- Letter :8.5

As arranged with your office, unless you publicly release its
contents earlier, we plan no further distribution of this report for
30 days.  At that time, we will make copies available to other
congressional committees and Members of Congress with an interest in
these matters, and to the Secretary of Health and Human Services and
the Administrator of HCFA.  We will also make copies available to
others on request.

This report was prepared by William Reis, Teruni Rosengren, Suzanne
Rubins, and Thomas Taydus, under the direction of William J.
Scanlon, Director, Health Financing and Systems Issues.  Please call
me at (202) 512-6806 or Mr.  Scanlon at (202) 512-7114 if you or your
staff have any questions.

Richard L.  Hembra
Assistant Comptroller General

SCOPE AND METHODOLOGY

To determine how Medicare part B pays for medical equipment, supplies
and orthotics--products referred to as durable medical equipment
(DME)--we reviewed the federal statutes governing the fee schedules
and the inherent reasonableness process for adjusting Medicare fees.
We also reviewed the Balanced Budget Act of 1997 (BBA) to determine
how provisions of that legislation change the process for adjusting
Medicare part B fees for DME.  We met with officials from the Health
Care Financing Administration (HCFA) and representatives from HCFA's
statistical analysis contractor to discuss how they apply Medicare's
payment rules to set and adjust fee schedule allowances for the items
in our study.  In discussions with HCFA's claims processing
contractors, called durable medical equipment regional carriers, we
obtained information on their practices for adjusting state base fees
and for establishing Medicare fees for new Health Care Financing
Administration Common Procedure Coding System (HCPCS) codes.

We analyzed Medicare fee schedule payments for some commonly
purchased medical equipment and supplies.  Before deciding which
products to include in our study, we reviewed listings of the top 100
HCPCS codes by total allowed charges and by total units allowed by
Medicare for the first quarter of fiscal year 1996.  We discussed
many of these products with HCFA contractors and then selected the
following for our review:

  -- blood glucose test or reagent strips for home blood glucose
     monitor, per 50 strips (A4253);

  -- lancets, per box (A4259);

  -- irrigation tray with bulb or piston syringe, any purpose
     (A4320);

  -- indwelling catheter, Foley type, two-way latex with
     coating--Teflon, silicone, silicone elastomer, or hydrophilic,
     etc.  (A4338);

  -- indwelling catheter, Foley, two-way, all silicone (A4344) ;

  -- intermittent urinary catheter, straight tip (A4351);

  -- bedside drainage bag, day or night, with or without anti-reflex
     device, with or without tube (A4357);

  -- stoma cap (A5055);

  -- pouch, drainable with barrier attached--one piece (A5061);

  -- pouch, drainable for use on barrier with flange--two-piece
     system (A5063);

  -- skin barrier with flange--solid, flexible, or accordion, any
     size (A5123);

  -- cane, quad or three-prong, includes canes of all materials,
     adjustable or fixed, with tips (E0105);

  -- walker, folding (pickup), adjustable or fixed height (E0135);

  -- rigid walker, wheeled, with seat (E0142);

  -- commode chair, stationary, with fixed arms (E0163);

  -- vacuum erection system (K0163);

  -- tracheostomy care kit for established tracheostomy (K0165); and

  -- intermittent catheter with tray (code A4353).

We also reviewed Medicare payments for selected off-the-shelf
orthotic devices.  We reviewed the laws and regulations pertaining to
the fee schedules for orthotic and prosthetic devices and discussed
Medicare payment practices for orthotic devices with an official from
HCFA, HCFA's statistical analysis contractor, and a representative
from a medical supply distributor.  We also reviewed the Department
of Health and Human Services (HHS) Office of the Inspector General
(OIG) and GAO reports on billing practices and payment policies for
orthotic devices.  We selected the following orthotic devices for
review:

  -- wrist-hand-finger orthosis, long opponens, no attachments
     (L3805);

  -- wrist-hand-finger orthosis, addition to short and long opponens,
     thumb abduction "C" bar (L3810); and

  -- wrist-hand-finger orthosis, addition to short and long opponens,
     adjustable metacarpophalangeal and interphalangeal flexion
     control (L3860).

We also reviewed the HCPCS for DME.  We discussed the products
grouped under the HCPCS codes with officials from HCFA and HCFA's
statistical analysis and claims-processing contractors.  To identify
products billed under various HCPCS codes, we analyzed product lists
obtained from wholesalers, suppliers, and a commercial medical
products database.  We also discussed with manufacturers and
distributors of medical equipment and supplies and their industry
groups their perspectives on the use of HCPCS codes.

We gathered information on the use of universal product numbers (UPN)
from a manufacturer, suppliers, their industry groups, hospital
groups, two standards-setting organizations, the Department of
Defense, and a state Medicaid agency.  We met with HCFA officials to
discuss the uses of UPNs and the feasibility of adopting UPNs as a
national coding standard under the Health Insurance Portability and
Accountability Act of 1996 (HIPAA) legislation.

We obtained Medicare's national floor and ceiling payment limits for
selected products for the years 1995, 1996, and 1997, and we gathered
comparative price information from wholesalers and manufacturers.
HCFA's claims processing contractor also provided us with a
comparison of retail prices and Medicare's floor and ceiling payment
rates for selected items.

We also obtained product acquisition costs for selected items from
some large suppliers.  To identify the suppliers, we reviewed reports
from HCFA's statistical analysis contractor.  The reports listed the
30 suppliers who received the highest total Medicare payments for
selected products during the fourth quarter of fiscal year 1996.
From some of these suppliers we were able to gather information on
the specific products billed to Medicare, the suppliers' product
acquisition costs, administrative costs, purchasing and distribution
arrangements, and Medicare billing arrangements.  Our discussions
with suppliers also covered administrative costs, industry trends
regarding cooperative buying groups, and other efforts to lower
product acquisition costs.

OVERVIEW OF INHERENT
REASONABLENESS REVIEW PROCESS
========================================================== Appendix II

   (See figure in printed
   edition.)

(See figure in printed edition.)Appendix III
COMMENTS FROM THE HEALTH CARE
FINANCING ADMINISTRATION
========================================================== Appendix II

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

Now on p.  2.

(See figure in printed edition.)

(See figure in printed edition.)

RELATED GAO PRODUCTS

Medicare:  Home Oxygen Program Warrants Continued HCFA Attention
(GAO/HEHS-98-17, Nov.  7, 1997).

Medicare:  Problems Affecting HCFA's Ability to Set Appropriate
Reimbursement Rates for Medical Equipment and Supplies
(GAO/HEHS-97-157R, June 17, 1997).

Medicare:  Comparison of Medicare and VA Payment Rates for Home
Oxygen (GAO/HEHS-97-120R, May 15, 1997).

Nursing Homes:  Too Early to Assess New Efforts to Control Fraud and
Abuse (GAO/T-HEHS-97-114, Apr.  16, 1997).

Medicare Post-Acute Care:  Home Health and Skilled Nursing Facility
Cost Growth and Proposals for Prospective Payment (GAO/T-HEHS-97-90,
Mar.  4, 1997).

Fraud and Abuse:  Providers Target Medicare Patients in Nursing
Facilities (GAO/HEHS-96-18, Jan.  24, 1996).

Medicare Spending:  Modern Management Strategies Needed to Curb
Billions in Unnecessary Payments (GAO/HEHS-95-210, Sept.  19, 1995).

Durable Medical Equipment:  Regional Carriers' Coverage Criteria Are
Consistent With Medicare Law (GAO/HEHS-95-185, Sept.  19, 1995).

Medicare:  Excessive Payments for Medical Supplies Continue Despite
Improvements (GAO/HEHS-95-171, Aug.  8, 1995).

Medicare:  Adapting Private Sector Techniques Could Curb Losses to
Fraud and Abuse (GAO/T-HEHS-95-211, July 25, 1995).

Medicare:  Separate Payment for Fitting Braces and Artificial Limbs
Is Not Needed (GAO/HRD-93-98, July 21, 1993).

*** End of document. ***