Medicare: Home Oxygen Program Warrants Continued HCFA Attention (Letter
Report, 11/07/97, GAO/HEHS-98-17).

Pursuant to a congressional request, GAO reviewed the appropriateness of
Medicare's reimbursement rates for home oxygen, focusing on: (1) its
comparison of Medicare and Department of Veterans' Affairs (VA) payment
rates; (2) concerns about access to liquid oxygen systems and
lightweight portable equipment for patients who are highly active; and
(3) standards for the services associated with meeting patients' home
oxygen needs.

GAO noted that: (1) Medicare's fee schedule allowances for home oxygen
exceeded GAO's adjusted estimate for the competitive marketplace rates
paid by VA by almost 38 percent; (2) the rate reductions mandated by the
Balanced Budget Act of 1997 will bring Medicare's fee schedule more into
line with the competitive marketplace costs for home oxygen; (3)
concerns have been raised that these reductions could reduce Medicare
beneficiaries' access to portable units; (4) under Medicare's
modality-neutral payment system, home-based liquid oxygen systems, which
patients can use to refill portable units, do not offer suppliers the
attractive profit margins associated with lower-cost oxygen
concentrators; (5) lightweight, less cumbersome portable systems, which
may increase patient mobility, are more expensive than traditional
portable gas cylinders; (6) GAO's analysis shows that VA patients were
receiving more portable units and refills than Medicare patients were,
even though VA's payment rate, adjusted for comparability, was lower
than Medicare's; (7) the upcoming reductions in Medicare allowances may
lead some suppliers to provide Medicare patients with the least costly
systems available, regardless of their patients' needs; (8) the
Department of Health and Human Services (HHS) could use its authority
under the recently enacted legislation to establish separate
reimbursement rates for oxygen concentrators, liquid systems, regular
portable units, and lightweight portable units, as long as the impact on
overall Medicare costs is budget neutral; (9) the evolution in
technology and costs of oxygen delivery systems--and the clinical
indications for initiating and terminating the use of more expensive,
lightweight portable units--warrant further examination by HHS and the
Health Care Financing Administration (HCFA) before deciding whether
Medicare's reimbursement system should be restructured; (10) HCFA has
not established standards to ensure that home oxygen suppliers provide
Medicare patients even basic support services; (11) oxygen suppliers who
serve Medicare patients need only comply with basic registration and
business requirements associated with obtaining a Medicare supplier
number; (12) in contrast, VA encourages its medical centers to contract
with suppliers who are accredited by the Joint Commission on
Accreditation of Healthcare Organizations or comply with its standards;
(13) VA patients typically received more frequent service visits than
Medicare patients; and (14) the Balanced Budget Act requires HHS to
establish service standards for Medicare home oxygen suppliers.

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

 REPORTNUM:  HEHS-98-17
     TITLE:  Medicare: Home Oxygen Program Warrants Continued HCFA 
             Attention
      DATE:  11/07/97
   SUBJECT:  Home health care services
             Health care cost control
             Medical supplies
             Health care programs
             Respiratory diseases
             Quality assurance
             Veterans benefits
             Medical services rates
             Comparative analysis
             Medical equipment
IDENTIFIER:  Medicare Program
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Finance, U.S.  Senate

November 1997

MEDICARE - HOME OXYGEN PROGRAM
WARRANTS CONTINUED HCFA ATTENTION

GAO/HEHS-98-17

Medicare Payments for Oxygen

(101569)


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

  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  JCAHO - Joint Commission on Accreditation of Healthcare
     Organizations
  OIG - Office of the Inspector General
  VA - Department of Veterans Affairs

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


B-277568

November 7, 1997

The Honorable William V.  Roth, Jr.
Chairman, Committee on Finance
United States Senate

Dear Mr.  Chairman: 

In fiscal year 1996, almost 480,000 Medicare beneficiaries received
supplemental oxygen at home at a cost of about $1.7 billion.  For
patients that qualify for home oxygen, Medicare pays suppliers a
fixed monthly fee that covers a stationary, home-based unit and all
related services and supplies, such as tank refills.  Medicare also
pays a separate fixed monthly fee for a portable unit if one is
prescribed.  Supplies and services for portable units are covered by
the monthly fee for the stationary unit.  Medicare's reimbursements
for oxygen are called "modality neutral" because they are the same
for all types of oxygen delivery systems--compressed gas tanks,
liquid oxygen cylinders, and oxygen concentrators. 

The amount of the monthly Medicare reimbursement for home oxygen has
been the subject of considerable debate since 1994.  Therefore, you
asked that we undertake an independent review of the appropriateness
of Medicare's reimbursement rates.  In May 1997, we provided you an
interim report comparing Medicare's oxygen fees with the rates paid
by the Department of Veterans Affairs (VA).\1 Our analysis showed
that even after adding a 30-percent adjustment to VA rates to account
for differences between the Medicare and VA programs, Medicare would
have saved over $500 million in fiscal year 1996 had it reimbursed
oxygen suppliers at the adjusted VA rates.  In June 1997, we provided
additional information on our comparison of Medicare and VA rates to
the Chairman, Subcommittee on Health, House Committee on Ways and
Means.\2 Subsequently, the Congress mandated reductions in Medicare
reimbursement rates for home oxygen, beginning January 1, 1998, as
specified in the Balanced Budget Act of 1997.\3 The act also gives
the Secretary of Health and Human Services (HHS) the authority to
restructure reimbursement rates in a budget-neutral manner and
requires the Secretary to develop service requirements for Medicare
home oxygen suppliers. 

This report (1) recaps our comparison of Medicare and VA payment
rates, (2) addresses concerns about access to liquid oxygen systems
and lightweight portable equipment for patients who are highly
active, and (3) discusses standards for the services associated with
meeting patients' home oxygen needs. 

To address these issues, we reviewed Medicare regulations and VA
policies regarding home oxygen benefits.  We also obtained
information from the Health Care Financing Administration (HCFA),
which administers the Medicare program; the VA central office and
selected VA medical centers; home oxygen suppliers and industry
representatives; and patient advocacy groups, physicians, and
respiratory therapists.  We reviewed invoices to obtain data on VA
payments for home oxygen for the first quarter of fiscal year 1996
for a nationwide sample of about 5,000 VA patients, drawn from 46 of
the 162 VA medical centers that have home oxygen contracts.  We
included at least one medical center from each of VA's 22 Veterans'
Integrated Service Networks in our sample to ensure complete
geographic coverage.  We obtained information on Medicare patients
from Medicare claims databases and by reviewing records of home
oxygen suppliers for about 550 Medicare patients.  We did not
evaluate the quality of care provided to Medicare or VA patients or
the clinical outcomes of their home oxygen therapy.  Neither did we
examine the internal and data processing controls of the Medicare
claims databases maintained by HCFA's contractors.  Otherwise, we
performed our work between May 1996 and June 1997 in accordance with
generally accepted government auditing standards. 


--------------------
\1 Medicare:  Comparison of Medicare and VA Payment Rates for Home
Oxygen (GAO/HEHS-97-120R, May 15, 1997). 

\2 Medicare:  Comparative Information on Medicare and VA Patients,
Services, and Payment Rates for Home Oxygen (GAO/HEHS-97-151R, June
6, 1997). 

\3 P.L.  105-33, Aug.  5, 1997. 


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

Medicare's fee schedule allowances for home oxygen exceeded our
adjusted estimate of the competitive marketplace rates paid by VA by
almost 38 percent.\4 Our analysis of data for the first quarter of
fiscal year 1996 showed that Medicare allowances averaged $320 per
month for each patient on home oxygen.  In contrast, the comparable
VA monthly costs averaged $200 per patient, after inflating actual VA
payments by 30 percent to account for differences between the
Medicare and VA programs.  Our analysis was based on the Medicare fee
schedule allowances, all VA payments to oxygen suppliers for a
nationwide sample of 5,000 VA home oxygen patients, and consideration
of any factors that could account for differences in the costs of
servicing Medicare and VA home oxygen patients. 

The rate reductions mandated by the Balanced Budget Act of 1997 will
bring Medicare's fee schedule allowances more into line with the
competitive marketplace costs for home oxygen.  However, concerns
have been raised that these reductions could reduce Medicare
beneficiaries' access to portable units.  Under Medicare's
modality-neutral payment system, home-based liquid oxygen systems,
which patients can use to refill portable units, do not offer
suppliers the attractive profit margins associated with lower-cost
oxygen concentrators.  Also, lightweight, less cumbersome portable
systems, which may increase patient mobility, are more expensive than
traditional portable gas cylinders.  Our analysis showed that VA
patients were receiving more portable units and refills than Medicare
patients were, even though VA's payment rate, adjusted for
comparability, was lower than Medicare's.  Nevertheless, the upcoming
reductions in Medicare allowances may lead some suppliers to provide
Medicare patients with the least costly systems available, regardless
of their patients' needs.  HHS could use its authority under the
recently enacted legislation to establish separate reimbursement
rates for oxygen concentrators, liquid systems, regular portable
units, and lightweight portable units, as long as the impact on
overall Medicare costs is budget neutral.  However, the evolution in
the technology and costs of oxygen delivery systems--and the clinical
indications for initiating and terminating the use of more expensive,
lightweight portable units--warrant further examination by HHS and
HCFA before deciding whether Medicare's reimbursement system should
be restructured. 

HCFA has not established standards to ensure that home oxygen
suppliers provide Medicare patients even basic support services. 
Home oxygen equipment requires more support and maintenance than most
other types of home medical equipment.  However, oxygen suppliers who
serve Medicare patients need only comply with the basic registration
and business requirements associated with obtaining a Medicare
supplier number.  In contrast, VA encourages its medical centers to
contract with suppliers who are accredited by the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO) or comply with its
standards.  Further, VA contracts typically require suppliers to
comply with specific patient support and equipment maintenance
requirements.  Our analysis of VA contracts and our review of
Medicare and VA patient records showed that VA patients typically
received more frequent service visits than Medicare patients did. 
The Balanced Budget Act of 1997 requires HHS to establish service
standards for Medicare home oxygen suppliers.  Since HCFA is already
developing oxygen supplier standards for a competitive pricing
demonstration project, we believe prompt compliance with this
congressional mandate is possible and warranted. 


--------------------
\4 Since VA uses competitive bidding to meet the home oxygen needs of
its patients, VA payments can be considered an indicator of
competitive marketplace rates. 


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

Many individuals suffering from advanced chronic obstructive
pulmonary disease or certain other respiratory and cardiac conditions
are unable to meet their bodies' oxygen needs through normal
breathing.  Supplemental oxygen has been clinically shown to assist
many of these patients.  Medicare's eligibility criteria for the home
oxygen benefit are quite specific.  Patients must have (1) an
appropriate diagnosis, such as chronic obstructive pulmonary disease;
(2) clinical tests documenting reduced levels of oxygen in the blood;
and (3) a certificate of medical necessity, signed by a physician,
prescribing the volume of supplemental oxygen required in liters per
minute and documenting whether the patient needs a portable unit in
addition to a home-based stationary unit. 

Physicians can prescribe a specific type of oxygen system on the
certificate of medical necessity, or they can allow the oxygen
supplier to decide which type of system best meets a patient's needs. 
Currently, there are three methods, or modalities, through which
patients can obtain supplemental oxygen: 

  -- compressed gas, which is available in various sized tanks, from
     large stationary cylinders to small portable cylinders;

  -- oxygen concentrators, which are electrically operated machines
     about the size of a dehumidifier that extract oxygen from room
     air; and

  -- liquid oxygen, which is available in large stationary reservoirs
     and portable units. 

For most patients, each of the three modalities--compressed gas,
liquid oxygen, and oxygen concentrator--is clinically equally
effective for use as a stationary unit.  However, liquid oxygen is
most often prescribed for the small proportion of patients that
require a very high oxygen liter flow.  As shown in table 1, over the
past 10 years the use of oxygen concentrators has increased
substantially, and the use of compressed gas as the primary,
home-based unit is now negligible. 



                                Table 1
                
                Types of Stationary Oxygen Systems Used
                by Medicare Beneficiaries, 1986 and 1996

                                                        Percentage of
                                                           Medicare
                                                         oxygen users
                                                        --------------
Stationary system                                         1986    1996
------------------------------------------------------  ------  ------
Oxygen concentrator                                         66      85
Liquid oxygen                                               12      14
Compressed gas                                              22       1
----------------------------------------------------------------------
At the time of our review, the monthly Medicare fee schedule
allowance for a stationary oxygen system was about $285, and it is
currently about $300.\5

Medicare pays 80 percent of the allowance, and the patient is
responsible for the remaining 20 percent.  The Medicare allowance
covers use of the equipment; all refills of gas or liquid oxygen;
supplies such as tubing; a backup unit, if provided, for patients
using a concentrator;\6 and services such as patient assessments,
equipment setup, training for patients and caregivers, periodic
maintenance, and repairs. 

In addition to a stationary unit for use in the home, about 75
percent of Medicare home oxygen patients have portable units that
allow them to perform activities away from their stationary unit and
outside the home.\7 The most common portable unit is a compressed gas
tank set on a small cart that can be pulled by the user.  Highly
active individuals who spend a great deal of time outside the home
may use a portable liquid oxygen cylinder or a lightweight gas
cylinder, both of which can be carried in a backpack or shoulder bag. 
These units may be used with an oxygen conserving device to increase
the amount of time a single cylinder can be used.  The Medicare
monthly allowance for portable equipment is currently about $48,
regardless of the type of unit.  For the period we reviewed, the
allowance was about $45.\8

The Balanced Budget Act of 1997 reduced Medicare reimbursement rates
for home oxygen by 25 percent effective January 1, 1998, and by an
additional 5 percent effective January 1, 1999.  Thereafter, the
Medicare rates are to be frozen through 2002.  The act also requires
the Secretary of HHS to undertake a 3-year competitive bidding
demonstration project for home oxygen, to be completed by December
31, 2002. 


--------------------
\5 The monthly Medicare allowance for oxygen varies by state.  During
the first quarter of fiscal year 1996, the allowance ranged from
$262.40 to $308.71.  For our analysis, we used the midpoint:  $285. 
As of Jan.  1, 1997, the allowance ranged from $277.84 to $326.87. 
The allowance can be increased by 50 percent for those beneficiaries
whose prescribed liter flow is over 4 liters per minute and decreased
by 50 percent for patients whose prescribed liter flow is less than 1
liter per minute.  Our analysis of Medicare claims showed that the
monthly allowance was adjusted for liter flow for less than 2 percent
of the claims for each type of stationary system. 

\6 Since oxygen concentrators are electrically operated, suppliers
should provide backup tanks for use in the event of a power failure. 

\7 Stationary units usually come with about 50 feet of tubing to
allow some mobility within the home. 

\8 The monthly allowance for a portable unit varies by state.  During
the first quarter of fiscal year 1996, the allowance ranged from
$41.23 to $48.51.  For our analysis, we used the midpoint:  $45. 
Beginning Jan.  1, 1997, the fee ranged from $43.66 to $51.37. 


   MEDICARE PAYS MUCH HIGHER THAN
   MARKETPLACE RATES FOR HOME
   OXYGEN
------------------------------------------------------------ Letter :3

Medicare's monthly fee schedule allowances for home oxygen are much
higher than the rates VA pays.\9 As shown in table 2, during the
first quarter of fiscal year 1996, Medicare's monthly fee schedule
allowance averaged $320 per patient, including an allowance for a
portable unit for the 75 percent of Medicare patients that obtain
portables.  VA's average monthly payment, based on all costs for a
sample of 5,000 VA patients, was $155.  After adding a 30-percent
adjustment to VA payments to account for the higher costs associated
with servicing Medicare patients, the average VA monthly payment was
$200, or almost 38 percent less than Medicare's allowance of $320. 



                          Table 2
          
           Comparison of Average Monthly Medicare
          and VA Payments for Home Oxygen Supplies
          and Services, First Quarter, Fiscal Year
                            1996

                                                   Monthly
                                               payment per
Cost category                                      patient
--------------------------------------------  ------------
Medicare
----------------------------------------------------------
Basic fee schedule allowance\a                        $285
Additional allowance for portable unit\b                35
Total Medicare allowance                               320

VA
----------------------------------------------------------
Average monthly payment\c                              155
Plus adjustment for comparability with                  45
 Medicare\d
Total adjusted VA monthly payment                      200
Difference between Medicare and adjusted VA           $120
 payments
----------------------------------------------------------
\a The Medicare basic monthly fee schedule allowance for oxygen
varies by geographic area.  During the first quarter of fiscal year
1996, the fee was subject to a floor of $262.40 and a ceiling of
$308.71.  This analysis uses $285, the approximate midpoint between
the floor and ceiling. 

\b The Medicare monthly fee schedule allowance for a portable unit
also varies by geographic area.  During the first quarter of fiscal
year 1996, the fee was subject to a floor of $41.23 and a ceiling of
$48.51.  We determined that Medicare paid for portable units for
about 75 percent of oxygen patients; therefore, we adjusted the
per-patient allowance for portable units to $35, or about 75 percent
of the approximate midpoint between the floor and ceiling. 

\c VA payment rates are based on VA competitive contracts with oxygen
suppliers.  The average monthly payment used in this analysis is a
"bundled" rate, including all supplies, services, oxygen contents,
and portable units provided to a sample of 5,000 patients.  The
average VA monthly payment for patients using oxygen concentrators
was about $125, and the average monthly payment for patients using
liquid oxygen systems was about $315.  The combined average, weighted
by the number of patients using each type of system, was $155. 

\d This is the estimated additional cost that a VA supplier would
incur to provide home oxygen to a Medicare patient.  This estimate
includes the cost of oxygen supplies and services provided to new
patients subsequently determined not to be medically eligible; the
administrative costs associated with preparing and processing claims,
including obtaining a physician's certificate of medical necessity;
the administrative costs associated with collecting the Medicare
copayment; and the lack of a guaranteed patient pool. 

In comparing Medicare and VA payments, we carefully considered all
factors that could account for differences in the costs of servicing
the two patient groups.  Such factors could include clinical
characteristics of each patient population as well as differences in
how the two programs are administered.  Regarding clinical
differences, Medicare and VA patients with pulmonary insufficiency
must meet the same medical eligibility criteria for home oxygen, and
clinical experts and suppliers told us that the home oxygen needs of
the two patient groups are essentially the same.  We excluded from
our analysis the small number of VA patients who were receiving home
oxygen for conditions other than pulmonary insufficiency, such as
cluster headaches.  Utilization patterns for stationary equipment
were remarkably similar.\10 Of the 5,000 VA patients in our
nationwide sample, about 84 percent used an oxygen concentrator, and
16 percent used stationary liquid oxygen systems.  Among Medicare
beneficiaries nationwide, 86 percent used oxygen concentrators.  In
contrast, program differences do affect the costs suppliers incur
when serving VA patients, and our analysis included an adjustment to
reflect those factors before we compared VA and Medicare's payment
rates. 


--------------------
\9 The appendix discusses the reasons we compared Medicare payments
with VA's rates rather than with those of other insurers or
third-party payers. 

\10 We excluded from both patient groups the relatively small number
of patients using compressed gas as their stationary oxygen system. 


   ACCESS TO PORTABLE EQUIPMENT
   AND REFILLS WARRANTS HCFA
   MONITORING
------------------------------------------------------------ Letter :4

The upcoming reductions in the modality-neutral Medicare payment
rates have raised concerns that Medicare patients will have less
access to (1) stationary liquid systems, from which patients can
refill portables; (2) refills of gas or liquid portable units for
patients that have concentrators; and (3) new lightweight, but more
expensive, portable systems.  In response to these concerns, some
groups have proposed changes to Medicare's modality-neutral payment
system. 


      ACCESS TO STATIONARY LIQUID
      SYSTEMS
---------------------------------------------------------- Letter :4.1

Although stationary liquid oxygen systems are more expensive than
concentrators, they enable highly mobile patients to refill their
portable liquid units from their stationary reservoirs.  This
provides these patients greater autonomy and requires suppliers to
make fewer deliveries of replacement tanks than are needed for
patients using concentrators along with portable compressed gas
tanks.  The Medicare fee schedule allowance is the same for both
stationary liquid systems and concentrators--about $285 per month
during the first quarter of fiscal year 1996.  During the same
period, monthly VA payments averaged about $125 for patients with
concentrators and $315 for patients with stationary liquid
systems.\11 Yet about 15 percent of both Medicare and VA patients had
liquid stationary systems, an indication that the Medicare
modality-neutral rates then in effect did not restrict patient access
to liquid systems. 

The upcoming reduction in Medicare payment rates, however, could lead
some suppliers to shore up their profits by offering only oxygen
concentrators for stationary systems, which would also reduce access
to liquid portable refills from stationary units.  Most Medicare
suppliers now provide relatively few stationary liquid systems or
none at all.  Of about 6,500 Medicare home oxygen suppliers, about 82
percent obtained 5 percent or less of their Medicare revenues from
stationary liquid oxygen systems.  Furthermore, almost 25 percent of
oxygen suppliers received virtually all of their Medicare revenue
from oxygen concentrators.  Providing only concentrators allows these
suppliers to maximize their profits by avoiding the higher costs
associated with stationary liquid as well as with portable units. 
(Medicare considers the monthly fee for the stationary unit to cover
supplies and services for portable units, so providing portable units
costs suppliers more.)

Since VA acquires home oxygen services under a fee-for-service
payment system, VA can ensure that its patients have access to
stationary liquid oxygen systems by paying more for them.  In
addition, VA doctors prescribe the type of system that they feel is
most appropriate for their patients.  Physicians with Medicare
patients can help ensure that they obtain access to the type of
oxygen delivery system they need by specifying on the certificate of
medical necessity the oxygen delivery system that should be supplied. 
However, some physicians allow the supplier to decide. 


--------------------
\11 The average VA payments are based on all supplier charges,
including charges for portable units and refills. 


      ACCESS TO PORTABLE UNITS AND
      REFILLS
---------------------------------------------------------- Letter :4.2

Our study included an analysis of the number of Medicare and VA
patients that were provided portable units.  Even though Medicare
paid higher monthly fees to oxygen suppliers than VA, only about 75
percent of Medicare beneficiaries using home oxygen had portable
units, while about 97 percent of the VA patients in our sample had
portable units.  About 1,500 suppliers, or almost 25 percent of all
Medicare home oxygen suppliers, provided portable units to no more
than 10 percent of their Medicare patients--far below the portable
utilization rate of about 75 percent among all Medicare home oxygen
beneficiaries.  Among patients using compressed gas portable systems,
VA patients in our sample obtained about four cylinders per month,
while Medicare beneficiaries whose records we reviewed received about
two cylinders per month.  On the basis of these data, we determined
that the lower VA payment rates did not result in less access to
portable units or refills. 


      ACCESS TO LIGHTWEIGHT
      PORTABLE EQUIPMENT
---------------------------------------------------------- Letter :4.3

Pulmonary specialists frequently recommend that their patients get as
much exercise as possible.  Clinicians point out that an overall
respiratory therapy regime that includes exercise may slow the
deterioration associated with pulmonary insufficiency.  According to
some experts, an effective exercise program requires portable systems
that are lighter and less cumbersome--but more expensive--than the
common compressed gas E tanks that are pulled on a small cart. 
Currently available alternatives are portable liquid oxygen units,
which can be refilled from stationary reservoirs at home, or
lightweight aluminum gas cylinders, both of which may be used with an
oxygen conserving device.  Both of these portable systems are small
and light enough to be carried in a backpack or shoulder bag, but
they are more expensive than the traditional cart-mounted E tanks. 

Medicare claims data show that of the 363,000 Medicare patients with
portable oxygen units in fiscal year 1996, almost 75,000, or about 21
percent, had portable liquid oxygen cylinders.  Medicare claims do
not identify how many patients with portable gas systems had the
traditional E tank or the smaller, lightweight cylinders.  Our review
of about 550 Medicare patient records indicated that only about 8
percent had lightweight tanks. 


      SOME GROUPS HAVE PROPOSED
      RESTRUCTURING MEDICARE'S
      MODALITY-NEUTRAL PAYMENT
---------------------------------------------------------- Letter :4.4

The National Association for Medical Direction of Respiratory Care
has proposed retaining Medicare's modality-neutral payment for
stationary systems but establishing two reimbursement rates for
portable units--a lower rate for traditional E tanks and a higher
rate for lightweight portable cylinders, which the Association
describes as an ambulatory system.\12 The Association proposes that
prescribing physicians decide which type of portable system is most
suitable for their patients.  This approach has also been endorsed by
the American Thoracic Society and the American Lung Association. 

In contrast, others have noted that Medicare's modality-neutral rate
is designed to meet the needs of the entire home oxygen population: 
Some patients are more expensive to service than others, but the rate
is designed so suppliers will make a profit overall.  These
supporters of the modality-neutral rate also believe that the lack of
clinical criteria for deciding which patients need a lightweight
ambulatory unit means far more patients will obtain such ambulatory
units than will benefit from them.  Also, once a patient obtains an
ambulatory unit, a lack of adequate controls in the Medicare program
could lead to continued payment for the more costly unit when it is
no longer needed.  Since chronic obstructive pulmonary disease is
progressive, a patient's activity level and the need for a portable
or ambulatory system can be expected to eventually decline.  However,
in our case record reviews, we could not identify any cases where
monthly Medicare payments for a portable unit were discontinued for a
patient receiving home oxygen. 

The Balanced Budget Act of 1997 allows HHS to establish separate
payment rates and categories for different types of home oxygen
equipment, as long as the adjustments are budget neutral.  This
provides HHS the flexibility to restructure reimbursements to ensure
patient access to the equipment and services they need and to reflect
market changes and new oxygen delivery technology, which continues to
evolve.  However, some suppliers, industry experts, and HCFA
officials have expressed reservations about abandoning
modality-neutral payments, citing the administrative complexity and
oversupply of more expensive services that motivated creation of the
modality-neutral system. 


--------------------
\12 The National Association for Medical Direction of Respiratory
Care defines an ambulatory system as one that weighs less than 10
pounds and allows the individual to remain apart from the stationary
oxygen system for at least 4 hours at a liter flow of 2 liters per
minute. 


   HCFA HAS NOT DEVELOPED SERVICE
   STANDARDS FOR HOME OXYGEN
   SUPPLIERS
------------------------------------------------------------ Letter :5

Although Medicare payments for home oxygen include reimbursement for
services, HCFA has not specified the type or frequency of services it
expects home oxygen suppliers to provide.  In contrast, VA encourages
its medical centers to contract with suppliers that are accredited by
JCAHO or comply with its standards.  Even though VA's reimbursements
are less generous than Medicare's, VA patients received more frequent
service visits than the Medicare patients whose records we reviewed. 

To qualify as a Medicare home oxygen supplier, a company must obtain
a supplier number from Medicare's National Supplier Clearinghouse and
follow basic business practices, such as filling orders, delivering
goods, honoring warranties, maintaining equipment, disclosing
requested information, and accepting returns of substandard or
inappropriate items from beneficiaries.  Other than these
requirements, Medicare has no standards specific to the needs of home
oxygen patients. 

In contrast, VA has both broad accreditation standards and specific
contract terms that often define the specific type and frequency of
services VA home oxygen patients should receive.  VA contracts
frequently specify company and personnel qualifications; requirements
for staff training, patient education, and development of a patient
plan of care; the type and number of patient service visits
necessary; required response time for emergencies; and procedures for
addressing patient concerns.  Many VA contracts also identify the
type of equipment to be used, often specifying brand names or
equivalents, and equipment repair requirements.  To ensure that
suppliers comply with the terms of the contract, VA schedules random
home visits by VA staff for a minimum of 10 percent of VA patients
receiving home oxygen each year. 

Records we reviewed at oxygen suppliers for about 550 Medicare
patients showed that 49 percent of the patients had clinical
assessments during a 3-month period, and 30 percent had visits to
check and maintain equipment.  For the remaining 20 percent, there
was no evidence in the suppliers' records that the patient had been
visited within the 3-month period for either a clinical assessment or
an equipment check.  Similarly, in 1994, the HHS Office of the
Inspector General (OIG) reported on the services provided to Medicare
home oxygen patients using oxygen concentrators.\13 The OIG found
that 17.5 percent of these Medicare patients did not receive an
equipment check within a 3-month period, and over 60 percent did not
receive any other patient services, such as a clinical assessment. 

In contrast, we found that 43 of the 46 VA medical centers in our
review required the supplier to perform a clinical assessment, an
equipment check, or both at least once every 3 months.  Of these 43
medical centers, 36 required monthly clinical assessments or
equipment checks, and 24 specified that these visits be conducted by
respiratory therapists.\14 The remaining three medical centers
required that visits be conducted in accordance with oxygen equipment
manufacturers' specifications or in compliance with standards
established by JCAHO.  VA officials stated that each of these three
medical centers had assessments and checks conducted at least once
every 3 months. 

The Balanced Budget Act of 1997 mandates that the Secretary of HHS
establish service standards for home oxygen "as soon as practicable."
The act also requires that peer review organizations evaluate access
to, and quality of, home oxygen equipment provided to Medicare
beneficiaries.  Because no definitive national guidelines exist for
the most appropriate level of patient support and equipment
monitoring services, it is important that HCFA consult with the
medical community and equipment manufacturers when developing
standards to help ensure that those standards are based on the best
available information. 


--------------------
\13 HHS, OIG, Oxygen Concentrator Services, OEI-03-91-01710
(Washington, D.C.:  HHS, Nov.  1994). 

\14 Respiratory therapists are licensed to perform respiratory care
under medical direction in a variety of settings, including the home. 
They educate patients in the proper use of their equipment and
periodically review patients' understanding of their therapy.  A
physician's authorization is necessary for any diagnostic or
therapeutic services.  During a clinical assessment visit, a
respiratory therapist will typically review a patient's overall
health status, assess respiratory symptoms such as lung sounds and
respiration rates, perform equipment checks, monitor patient
compliance, and discuss therapeutic goals and progress with the
patient and family. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

Medicare's reimbursement rates for home oxygen exceed the competitive
marketplace rates paid by VA, even after inflating rates by 30
percent to adjust for differences between the two programs.  Yet the
higher monthly rates Medicare pays appear to purchase the same home
oxygen benefits as VA's lower rates--or even fewer oxygen benefits. 
About 15 percent of both VA and Medicare patients received the more
expensive stationary liquid oxygen systems, rather than
concentrators.  About 97 percent of VA patients received portable
oxygen units, compared with about 75 percent of the Medicare
patients.  VA patients also received more refills of portable gas
tanks and more frequent service visits.  And, unlike Medicare
patients, VA home oxygen patients benefit from specific home oxygen
supplier standards to help ensure that they receive the equipment and
services they need. 

The Balanced Budget Act of 1997 includes provisions that will bring
Medicare's reimbursement rates more into line with the competitive
marketplace rates paid by VA.  The act also requires HHS to develop
specific service standards for home oxygen suppliers that service
Medicare patients as well as to monitor patient access to home oxygen
equipment.  Finally, the act gives HHS the flexibility to restructure
the modality-neutral payment, if warranted, to ensure that Medicare
patients obtain access to the equipment and services appropriate to
their needs. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

We recommend that the Administrator of HCFA do the following: 

  -- monitor trends in Medicare beneficiaries' use of and access to
     stationary liquid oxygen systems and liquid and gas portables;

  -- monitor the availability and costs of new and evolving oxygen
     delivery systems, including lightweight portable systems and
     oxygen conserving devices, and work with the medical community
     to (1) evaluate the clinical benefits associated with the use of
     such equipment, (2) identify the patient populations most likely
     to benefit from the use of such equipment, and (3) educate
     prescribing physicians about existing options in oxygen delivery
     systems and their right to prescribe the system that best meets
     their patients' needs;

  -- advise the Secretary of HHS whether a budget-neutral
     restructuring of the Medicare reimbursement system for home
     oxygen is needed to provide patient access to the more expensive
     home oxygen systems, and whether Medicare controls can be
     implemented to ensure that the use of such systems is limited to
     patients that can benefit from their use; and

  -- work with the medical community, the oxygen industry, patient
     advocacy groups, accreditation organizations, and VA officials
     to promptly finalize service standards for Medicare home oxygen
     suppliers. 


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

We provided a draft of this report to the Administrator of HCFA and
the Secretary of VA.  VA and HCFA officials suggested some technical
changes, and we modified the text to reflect their comments.  HCFA
officials said that they are forming a work group that includes
representatives of peer review organizations, the oxygen and health
care industries, Medicare contractors, patient advocacy groups, and
VA.  This work group will develop the protocols for the peer review
organizations to follow in their evaluation of access to, and quality
of, home oxygen equipment.  HCFA officials also stated that it would
not be appropriate to establish a separate, higher reimbursement for
a specific type of oxygen system, such as liquid portables, unless
there were clear clinical criteria defining the medical need for such
a system. 


---------------------------------------------------------- Letter :8.1

As agreed with your office, unless you release its contents earlier,
we plan no further distribution of this report for 2 days.  At that
time we will make copies available to other congressional committees
and Members of Congress with an interest in this matter, the
Secretary of Health and Human Services, and the Secretary of Veterans
Affairs. 

This report was prepared by Frank Putallaz and Suzanne Rubins, under
the direction of William Reis, Assistant Director.  Please call Mr. 
Reis at (617) 565-7488 or me at (202) 512-7114 if you or your staff
have any questions about the information in this report. 

Sincerely yours,

William J.  Scanlon
Director, Health Financing and
 Systems Issues


BASIS FOR COMPARISON OF MEDICARE
AND VA REIMBURSEMENT RATES
==================================================== Appendix Appendix

To evaluate the appropriateness of Medicare's reimbursement rates for
home oxygen, we considered comparing Medicare's rates to those paid
by Medicaid, private insurance companies, managed care plans, and the
Department of Veterans Affairs (VA).  All such comparisons have some
inherent limitations.  After evaluating the alternatives, we decided
to use VA's competitive contracting rates, with some adjustments, for
our rate comparisons. 


   WHY WE COMPARED MEDICARE'S
   RATES WITH VA'S RATES
-------------------------------------------------- Appendix Appendix:1

We did not use Medicaid payment rates for our comparisons because
each state has wide latitude in determining the benefits it covers
and its reimbursement rates.  Also, since Medicare is the largest
single payer of home oxygen benefits, many states base their payment
levels on Medicare's fee schedule. 

Similarly, we found that private insurance companies use a wide range
of methods to establish payment rates.  Some firms base their fees on
Medicare's reimbursement levels, while others pay submitted charges
or negotiate rates on a case-by-case basis.  We found that some
private insurers pay more than Medicare and others pay less.  We were
not able to identify any insurance company with a large number of
beneficiaries on long-term home oxygen therapy whose rates could
serve as the basis for a nationwide comparison with Medicare's rates. 
Nor could we identify any private insurer that had done a study to
determine the appropriate reimbursement level for home oxygen
services.  Furthermore, the coverage criteria for home oxygen varied
both from company to company and within the same company depending on
the type of coverage purchased by an individual or a group health
plan. 

Medicare managed care plans that we contacted were unwilling to
provide us information on the rates they negotiate with oxygen
suppliers because they consider that information to be proprietary. 
However, during our patient file reviews at oxygen suppliers, we
identified two Medicare managed care plans that pay about $200 a
month for services comparable to those provided to fee-for-service
Medicare beneficiaries.  Because the availability of these data was
very limited, we could not use them for our analysis. 

We concluded that the VA home oxygen program was the best available
source of rates for comparison with Medicare reimbursement rates. 
Both are federally funded, nationwide programs with a significant
patient population on home oxygen.  In fiscal year 1995, VA provided
oxygen benefits to 23,000 patients at a cost of almost $26.5 million. 
VA's medical criteria for using supplemental oxygen to treat
pulmonary insufficiency are the same as Medicare's.  Further,
clinical experts and suppliers told us that the home oxygen service
needs of VA and Medicare patients with pulmonary insufficiency are
essentially the same. 


   INFORMATION USED FOR OUR
   COMPARISONS
-------------------------------------------------- Appendix Appendix:2

We analyzed claims and charge data compiled by the four Durable
Medical Equipment Regional Carriers and the Statistical Analysis
Durable Medical Equipment Regional Carrier.\15 These data provided
information on how the Medicare home oxygen benefit has grown and how
suppliers structure their Medicare billing for the different types of
home oxygen systems.  The Statistical Analysis Durable Medical
Equipment Regional Carrier began compiling national claims data for
home oxygen in 1994, so we concentrated on data from the past 2
fiscal years.  We supplemented the national Medicare claims data with
information from home oxygen suppliers' records for about 550
Medicare patients. 

We obtained data on VA payments for home oxygen from original
contractor invoices for a nationwide sample of about 5,000 VA
patients, drawn from 46 of the 162 VA medical centers that have home
oxygen contracts.  These 46 VA medical centers included at least one
VA medical center from each of VA's 22 Veterans' Integrated Service
Networks.  Since each contract differs, we reviewed the contracts at
each of the medical centers in our sample.  The invoices we used were
for October, November, and December 1995, and they included the cost
of equipment rental; oxygen refills; supplies; and services,
including the cost of any portable systems and contents provided to
the patient. 

After excluding the relatively small number of patients using
stationary gas systems from both patient groups, we found that about
84 percent of VA patients in our study used an oxygen concentrator,
and 16 percent used a stationary liquid oxygen system.  Among
Medicare beneficiaries nationwide, 86 percent used concentrators, and
14 percent used stationary liquid oxygen systems. 

Many centers pay flat monthly rates that cover equipment rental,
setup and service visits, and supplies, and they pay separately for
gas and liquid oxygen refills on the basis of patient use.  Other
medical centers may incur additional charges for setup and service
visits, for example, or for various types of supplies.  Since
Medicare pays one fee for everything, we "rebundled" the costs
incurred by each VA center to compare the total per-patient cost with
Medicare reimbursement rates. 

We excluded from our analysis cases in which VA medical centers
provided the supplier with the equipment to be used and only paid the
supplier a fee to maintain VA equipment.  Further, we did not include
the small number of VA patients in our analysis who used only
compressed gas because this modality was likely to be used by
patients to relieve cluster headaches, a condition not covered by
Medicare's home oxygen benefit.  Included in our sample were VA
patients who were using an oxygen concentrator or a stationary liquid
oxygen system for the treatment of pulmonary insufficiency and who
were required to meet the same medical criteria as Medicare patients
on home oxygen. 

To determine if there were any significant geographic differences in
costs, we grouped the VA medical centers by the geographic areas
served by each of Medicare's four Durable Medical Equipment Regional
Carriers.  We found that the average weighted cost for home oxygen
for VA medical centers in three of the four geographic areas was
within 10 percent of the $155 nationwide average.  The average
weighted cost for the VA medical centers in the fourth geographic
area was 17 percent higher than the nationwide average.  This region
also had the highest percentage of patients on liquid oxygen, while
the region with the lowest average cost had the highest percentage of
patients on concentrators.  We concluded that the modality mix within
a region affected the average price more than geography did. 


--------------------
\15 The Durable Medical Equipment Regional Carriers process Medicare
claims for durable medical equipment, orthotics, prosthetics, and
supplies within designated geographic areas for the Health Care
Financing Administration (HCFA).  The Statistical Analysis Durable
Medical Equipment Regional Carrier performs a variety of statistical
reporting and analysis functions relating to Medicare's durable
medical equipment benefit under contract with HCFA. 


   DIFFERENCES BETWEEN THE
   MEDICARE AND VA PROGRAMS
-------------------------------------------------- Appendix Appendix:3

Significant differences between the Medicare and VA programs may
account for some of the variation in home oxygen payment rates
between VA and Medicare.  Most significantly, VA competitively
procures oxygen supplies and services, and Medicare does not.  Other
differences between the programs can place a greater administrative
burden on suppliers who service Medicare patients.  For example, VA
preapproves each patient for home oxygen services, while Medicare
requires that oxygen suppliers furnish a certificate of medical
necessity completed by a physician before paying the suppliers'
claims.  Also, VA patients are not responsible for any copayment;
therefore, VA suppliers do not have to bill VA patients for
copayments as they do for Medicare patients. 

In our meetings with home oxygen suppliers and industry
representatives, we solicited their views and any data they could
provide to quantify the differences in costs between serving VA and
Medicare patients.  One 1995 industry study estimated that the
administrative requirements of Medicare could be accounted for by
adding a 15-percent cost differential to the rates VA pays.\16 In
other words, the industry study estimated that the rates obtained by
VA for home oxygen should be increased by 15 percent before they are
compared with Medicare's rates.  However, on the basis of our
analysis of the differences between VA and Medicare programs, which
are further discussed below, we concluded that a 30-percent
adjustment to VA's payment rates more adequately reflects the higher
costs suppliers incur when servicing Medicare beneficiaries. 


--------------------
\16 Home Oxygen Services Coalition, "HME Industry Findings:  The
Health Care Financing Administration's Initiative on Medicare Payment
for Home Oxygen" (Washington, D.C.:  Home Oxygen Services Coalition,
Sept.  7, 1995). 


      VA'S USE OF COMPETITIVE
      CONTRACTING AND SPECIFIC
      SUPPLIER REQUIREMENTS
------------------------------------------------ Appendix Appendix:3.1

Each VA medical center is responsible for procuring its home oxygen
through the competitive bidding process.  VA central office policy
encourages the medical centers to contract with a supplier that is
either accredited by the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO) or complies with its standards. 
Within certain guidelines, each center can structure its contract to
reflect its own operating philosophy relating to financial management
and patient care as well as the local market for home oxygen.  Most
of the contracts we reviewed were very specific regarding the
services they required and even the type of equipment to be provided
the patients.  The competitive process allows each VA medical center
to procure services from the supplier that can deliver the services
required at the lowest cost to that medical center. 

VA's competitive contracting process is attractive to some suppliers
because the volume of patients it can ensure allows for economies of
scale.  Suppliers have said there are other advantages associated
with the local VA contract.  For example, winning a VA contract
enhances a firm's reputation and visibility in the local market.  In
addition, some firms hope to retain their VA patients if they become
eligible for Medicare. 

By contrast, Medicare reimburses all qualifying suppliers for oxygen
equipment provided to beneficiaries--it does not directly contract
with suppliers; therefore, it cannot guarantee a fixed number of
patients to any supplier. 


      VA'S PREAPPROVAL PROCESS
------------------------------------------------ Appendix Appendix:3.2

When a supplier under a VA contract is told by a VA medical center to
provide home oxygen for a patient, the supplier knows that it will be
paid for those services.  For Medicare patients, the supplier is told
by the prescribing doctor to provide oxygen services, generally
arranged upon discharge from the hospital.  However, it is only after
the service is provided that the supplier knows for sure whether
Medicare will pay for this service.  The industry study noted above
quantifies this risk as adding 5 percent to the cost of the VA rate
in order for the VA program to serve a Medicare beneficiary. 

Our analysis of Medicare claims data showed that 18.7 percent of home
oxygen claims in the first quarter of fiscal year 1996 were denied. 
However, most of these denials were for administrative reasons, such
as duplicate claims or missing information.  The actual denial rate
for medical ineligibility was 2 percent.  Medicare's criteria for
eligibility are specific and clear cut, and suppliers told us they
know if patients are going to qualify for coverage. 

We concluded that the risk of medically based claims denial is not a
major factor in explaining the cost differential between VA and
Medicare.  However, because this factor results from the different
ways home oxygen is authorized in the two programs, we considered it
as part of our overall adjustment of VA payment rates. 


      VA'S LESS CUMBERSOME
      ADMINISTRATIVE PROCESS
------------------------------------------------ Appendix Appendix:3.3

Industry representatives stated that the administrative burden of
complying with Medicare requirements accounts for a major portion of
the difference between VA and Medicare payment rates.  One major
burden they cited is the certificate of medical necessity, which must
be completed by the prescribing physician before the claim can be
submitted to Medicare for payment.  Every supplier we interviewed
complained about the difficulty in quickly obtaining this document. 
The industry study estimated that documenting patient eligibility
represents 4 percent of the difference between VA and Medicare
payment rates. 

HCFA officials acknowledged the suppliers' dilemma.  They realize
that a supplier provides services to patients immediately upon
referral by a doctor, and there may be a significant delay between
the start of service and the completion of the certificate of medical
necessity.  However, they pointed out that the establishment of
eligibility for the home oxygen benefit usually results in continuous
Medicare coverage of this benefit for the life of the patient.  HCFA
officials believe that the documentation requirements for this
expensive, often lifelong benefit should be fairly stringent.  Recent
changes have reduced the administrative burden by allowing many
patients to receive lifetime certification.  Also, HCFA recently
issued a draft revision of the certificate of medical necessity in an
attempt to simplify the form and make it easier for doctors to
complete.  For example, the revised certificate no longer requires
doctors to justify the portable unit. 

Our review of patient case records showed that, while most
certificates are completed within 30 days of service setup, there is
documentary support for the suppliers' contention that there are
significant problems with this process.  We found several examples of
long delays and one case in which a patient died and the doctor
refused to fill out the certificate, so the firm was not paid at all
for its services.  Most suppliers we talked with had developed
strategies to facilitate the completion of these certificates.  These
strategies involved extra staff time and costs:  for example, sending
a representative to doctors' offices to request the certificate in
person.  For the records we reviewed, we found that 64 percent of the
certificates were completed within 30 days of the supplier's starting
service and 88 percent were done within 90 days. 

While obtaining the certificate of medical necessity represents a
major start-up cost, the impact on the difference between the monthly
VA and Medicare payment rates is less when that cost is amortized
over the length of time that the certificate is valid.  For most
patients, eligibility must be renewed after the first year.\17 At
that time, the doctor may certify the patient for lifetime
eligibility, and the patient never has to be recertified again.  Once
a patient's eligibility is established, Medicare billing is usually
electronic and fairly straightforward.  One VA contractor we visited
noted that the electronic billing process for Medicare is far less
cumbersome than submitting paper invoices each month to the local VA
medical center.  This indicates that the VA system is not entirely
without processing costs, although when the medical eligibility
documentation is included, Medicare's overall administrative burden
on suppliers is greater. 

We concluded that the administrative burden for documenting medical
eligibility and obtaining Medicare reimbursement is significantly
greater than that associated with providing services under a VA
medical center contract.  Therefore, an adjustment to the VA rate is
appropriate for comparison with the Medicare rate. 


--------------------
\17 Those patients whose partial pressure of oxygen in the arteries
is between 56 and 59 as measured in millimeters of mercury must be
recertified within 90 days in order to maintain eligibility. 


      VA'S LACK OF A COPAYMENT
      REQUIREMENT
------------------------------------------------ Appendix Appendix:3.4

The Medicare home oxygen benefit requires that beneficiaries pay an
annual deductible and 20 percent of the allowed reimbursement amount
every month.  Industry representatives contend that the cost of
billing and collecting this copayment adds to the cost of providing
services to Medicare beneficiaries.  In addition, they point out that
a portion of the copayment owed to them may never be collected.  The
VA program, in contrast, pays 100 percent of the contract price.  The
industry estimate states that this accounts for 6 percent of the
difference between the cost of the VA program and Medicare. 

Noncollection of copayments does represent a cost differential
between VA and Medicare but can only justify a small amount of the
difference in payment rates.  Our review of case records at the
suppliers we visited showed that 86 percent of the Medicare
beneficiaries whose records we saw either had supplemental insurance
or were covered by Medicaid.\18 Of the 14 percent of beneficiaries
with neither private supplemental insurance nor Medicaid coverage, we
found that only 3 percent had financial hardship waivers in their
records.  Even if suppliers were not able to collect copayments from
three times the number of patients with hardship waivers, the
uncollected amount would represent only 2 percent of the total
revenue suppliers receive for Medicare home oxygen. 


--------------------
\18 While some state Medicaid programs, such as Oregon's, do not
cover the Medicare copayment for their clients on home oxygen, many
do. 


*** End of document. ***