CMS Issues Proposed Rule to Implement Medicare Competitive Bidding Program & Other Payment Reforms for Durable Medical Equipment, Prosthetics, Orthotics, & Supplies (Part Two)

The MMA requires the Secretary to develop quality standards for DMEPOS suppliers. Note that the quality standards will apply to all suppliers furnishing items under Medicare Part B, not only suppliers participating in the DMEPOS competitive bidding program. CMS issued draft quality standards in September 2005.¹⁵ The lengthy and detailed standards include (1) business quality standards that apply to all Medicare suppliers, regardless of specialization (e.g., standards for administration; financial management; human resource management; beneficiary services; performance management; environment and safety; beneficiary rights/ethics; and information management); and (2) product-specific quality standards. As discussed at greater length in the Proposed Rule, the quality standards are to be applied by recognized independent accreditation organizations designated by the Secretary. The quality standards have not yet been finalized, but CMS officials have indicated that final standards may be released in June 2006. Many supplier organizations have raised concerns about the ability to comment constructively on the totality of the Proposed Rule without being able to review the final quality standards, since they are a critically-important component of the proposed competitive bidding program.

CMS proposes that it will not award a contract to any entity unless the entity meets applicable quality standards. A grace period could be granted for suppliers that have not had sufficient time to obtain accreditation before submitting a bid. If a supplier does not then successfully attain accreditation, CMS would suspend or terminate the supplier contract (note that CMS also could suspend or terminate contracts for certain other deviations from contract requirements). The length of time for the grace period would be determined by the accrediting organizations’ ability to complete the accrediting process within each CBA and specified in the RFB. CMS is soliciting comments on the appropriate length of time for the grace period. CMS also proposes a process to grandfather certain accreditations obtained by suppliers before CMS-approved accreditation organizations are designated.

The Proposed Rule also would require bidders to meet eligibility rules to be considered for selection, including being enrolled as a Medicare supplier and meeting DMEPOS supplier standards. Bidders could not be under current Medicare sanctions, and they must certify that high-level employees, chief corporate officers, members of board of directors, affiliated companies, and subcontractors are not and have not been sanctioned by any governmental agency or accreditation or licensing organization. Alternatively, the bidding supplier must disclose information about prior or current legal actions, sanctions, or debarments at the federal, state, or local levels. Bidder also must have all state and local licenses required to furnish the items that are being bid, and agree to the terms of the contract. CMS could suspend or terminate a contract if a supplier loses its good standing with CMS or any other government agency.

Suppliers also must meet applicable financial standards specified by the Secretary. The RFBs would identify the specific information CMS would require to evaluate suppliers, which could include: a supplier’s bank reference that reports general financial condition, credit history, insurance documentation, business capacity and line of credit to successfully fulfill the contract, net worth, and solvency. CMS welcomes comments on the financial standards, in particular the most appropriate documents that would support these standards. CMS notes that its goal is to "obtain as much information as possible while minimizing the burden on bidding suppliers and the bid evaluation process."

CMS would ensure that suppliers meet the established quality and financial standards prior to considering bid amounts and selecting contract suppliers.

CMS intends to select the number of contract suppliers necessary to meet the projected demand for DMEPOS items in the geographic area. To determine expected demand, CMS would examine Medicare claims data to determine the number of units of each item furnished during the past two years, and then estimate the number of new beneficiaries that have entered the market during the last two years. CMS also would consider seasonal fluxuations in demand and other trends in beneficiary demand for products in an area.

To gauge the necessary number of suppliers to meet expected beneficiary demand, CMS intends to examine suppliers’ current capabilities and the number of units the supplier is willing and capably of supplying at the bid price in the CBA. CMS would require evidence of financial resources to support market expansion, such as letters from investors or lending agents. CMS would compare expected capacity and Medicare volume to determine how many suppliers it would need in an area. CMS cites consultations with industry representatives that suggest that "most DMEPOS suppliers would be able to easily increase their total capacity to furnish items by up to 20 percent and the increase could be even larger for products like diabetes supplies that require relatively little labor." CMS invites comments on its proposed approach for calculating market demand and estimating supplier capacity, especially information that would help the agency compare current Medicare volume with potential capacity.

CMS’s consideration of a supplier’s expansion capabilities has the potential to result in significant consolidation of suppliers in CBAs. Moreover, CMS does not discuss the potential impact of mail order suppliers on its estimates of the number of suppliers necessary to serve an MSA, which could further limit the number of retail suppliers with which CMS intends to contract, nor does CMS suggest that it is considering convenient beneficiary access to suppliers as a factor in determining the appropriate number of winning bidders in an area.

CMS would use composite bids to aggregate a supplier’s bids for individual items (i.e., HCPCS codes) within a product category into a single bid for the whole product category. This would allow CMS to determine which suppliers could offer the lowest expected costs for all items in a product category. CMS would weight individual items within the product categories based on utilization of the item by Medicare beneficiaries. To compute a composite bid, CMS would multiply a supplier’s bid for each item in the product category by the item’s weight and sum the numbers across items.

CMS seeks comments on the best method of weighting individual items within a product category to determine the composite bid. CMS suggests the following two options, but notes that other methods could be appropriate: (1) setting the weight for each item based on the volume of the individual item’s share compared to the total utilization of the product category, or (2) setting the weight based on the payment amounts attributable to each DMEPOS fee schedule item relative to the overall payment amount for the total product category.

CMS would array the composite bids from lowest to highest. CMS then would establish as the "pivotal bid" the point where the expected combined capacity of the bidders is sufficient to meet expected demands of the beneficiaries for the items in the product category. All bidders who are eligible for selection and whose composite bid for the product category is less than or equal to the pivotal bid would be selected as winning bidders.¹⁶ CMS notes that this methodology could leave out suppliers with very close but slightly higher bids than the pivotal bids. CMS considered a number of other approaches to determine the winning suppliers, including establishing the pivotal bid at the median bid from eligible suppliers or basing the pivotal bid on a target number of winners or target composite. CMS does not support these approaches, however, because they would not provide the appropriate capacity levels or result in the most competitive bid prices.

CMS proposes not to accept any bid for an item that is higher than the current fee schedule amount for the item. CMS notes that an alternative interpretation of its statutory requirement to pay "less than the total amounts that would otherwise be paid" would be to provide that the total payment for the product category must be less than otherwise would have been paid. CMS is concerned that the alternative approach would not result in adequate savings and could encourage the shifting of utilization from one item to another higher priced item. CMS solicits comments on methods for assuring savings under the Medicare DMEPOS competitive bidding program.

CMS also states that it is interpreting the MMA’s requirement for multiple winning entities in a CBA to mean that there must be at least two suppliers in each bidding area for each product category. CMS does not specify whether one or more of the suppliers must be a retail supplier, rather than a mail order supplier.

Once CMS has selected contract suppliers for a product category based on the composite bid and the pivotal bid, CMS would establish single payment amounts for each individual item (by HCPCS code) in the product category. CMS’s preferred approach would determine the single payment amounts for individual items by using the median of the supplier bids that are at or below the pivotal bid for each individual item within each product category. The following table illustrates the use of this methodology.

CMS asserts that this methodology would result in a single payment amount "that is representative of the winning bids for that item." Moreover, CMS observes that this proposal would reduce the effect of excessively high or excessively low bids. Note, however, that CMS already is proposing to exclude the highest bids by applying the pivotal bid threshold, and CMS’s proposal would by definition result in approximately half of winning suppliers being reimbursed less than they bid for a particular item, and the other half being paid more. CMS is soliciting comments on other possible approaches, including using adjustments to average amounts to ensure that the overall payment amounts that winning suppliers received are at least as much as their bids, or using the minimum or maximum winning bid as the single payment amount.

In a controversial provision, CMS is proposing to allow contract suppliers that submit bids for an individual item below the single payment amount to provide the beneficiary with a rebate equal to the difference between the supplier’s actual bid and the single payment amount. Contract suppliers that submitted bids above the single payment amount would not be permitted to issue such rebates. CMS is soliciting comments on how to handle cases in which the rebates would exceed the beneficiary copayment amount.

CMS is proposing that the rebates be voluntary, although it considered making the rebates mandatory. However, if a contract supplier chooses to offer a rebate, it must offer the rebate to all Medicare beneficiaries receiving the competitively bid item to which the rebate applies. Indeed, once a contract supplier decides to provide rebates, the rebates would become a binding contractual condition for payment during the term of the contract with CMS, and the supplier could not amend or otherwise alter the provision of rebates during the term of the contract.

CMS states that contract suppliers would be prohibited from directly or indirectly advertising these rebates to beneficiaries, referral sources, or prescribing health care professionals. However, this would not preclude CMS from providing to beneficiaries comparative information about contract suppliers that offer rebates.

CMS notes that it "will continue to evaluate the fraud and abuse risks of the proposed rebate program," and CMS specifically solicits comments on such risks. CMS does not elaborate, however, on how it reconciles its proposal with the statutory prohibition on beneficiary inducements. Section 1128A(a)(5) of the Social Security Act prohibits the offering or transfer of "remuneration" -- including waiver of coinsurance -- that the entity knows or should know is likely to influence the beneficiary’s selection of a particular Medicare provider, practitioner, or supplier. While the definition of "remuneration" contains a number of specific exceptions, including non-routine, unadvertised waivers of copayments or deductible amounts based on individualized determinations of financial need or exhaustion of reasonable collection efforts, none of these statutory exceptions appear to apply to the rebate provision CMS is proposing. Although CMS presumably has been consulting with the HHS Office of Inspector General ("OIG") in developing this proposal, it is unclear how the fraud and abuse concerns associated with the rebates would be resolved.

While CMS states that its reason for permitting rebates is to allow beneficiaries to "realize additional savings and the full benefits of the Medicare DMEPOS Competitive Bidding Program," CMS undoubtedly hopes that the competitive advantage of being able to offer a rebate (even if not directly advertised by the supplier) would further drive down supplier bids.

The Proposed Rule includes additional details about the terms and conditions of competitive bidding contracts. Among other things, the Proposed Rule would provide that:

• Repair or replacement of patient-owned items subject to a competitive bidding program must be furnished by a contract supplier.

• A contract supplier cannot refuse to furnish items and services to a beneficiary residing in a CBA based on the beneficiary’s geographic location within the CBA.

• A contract supplier must agree to accept as a customer a beneficiary who began renting the item from a different supplier regardless of how many months the item has already been rented; suppliers must factor the cost of furnishing items in these situations into their bid submissions.

• With regard to inexpensive or routinely purchased DME and competitively bid power wheelchair, the contract supplier must agree to give the beneficiary the choice of either renting or purchasing the item.

CMS wants to ensure that suppliers do not "adopt a strategy of circumventing the regular bidding process by gaining winning status through acquisitions of or mergers with contract suppliers or to violate any anti-competition prohibitions." CMS therefore is proposing that contract suppliers notify CMS in writing 60 days prior to any changes of ownership, mergers, or acquisitions being finalized. CMS states that it has the discretion to allow a successor entity after a merger with or acquisition of a contract supplier to function as contract supplier if --

• There is a need for the successor entity as a contractor to ensure Medicare s capacity to meet expected beneficiary demand for a competitively bid item;

• CMS determines that the successor entity meets all the requirements applicable to contract suppliers; and

• The successor entity agrees to assume the contract supplier s contract, including all contract obligations and liabilities that may have occurred after the awarding of the contract to the previous supplier.

The successor entity would be legally liable for the non-fulfillment of obligations of the original contract supplier. In addition, CMS would only allow the successor entity to function as a contract supplier if it executed a novation agreement.

CMS is not requiring a contract supplier to provide every brand of product or mode of delivery included within a HCPCS code, and indeed, the agency expects suppliers to choose to offer only certain brands within a code. Under the Proposed Rule, a physician or treating practitioner¹⁷ would be authorized to prescribe in writing a particular brand of an item or mode of delivery of an item if he or she determines that it would avoid an adverse medical outcome for the beneficiary. CMS proposed that Medicare would not make an additional payment to a contract supplier that furnishes a particular brand as directed by a prescription.

When a particular brand or mode of delivery is specified, the proposed regulatory text states that the supplier must make a "reasonable effort" to furnish the particular brand or mode of delivery prescribed by the physician/practitioner. In the preamble to the Proposed Rule, CMS specifies that the supplier would be required to furnish the item or mode of delivery, assist the beneficiary in finding another contract supplier in the CBA that could provide the item, or consult with the physician/practitioner to find a suitable alternative product or mode of delivery for the beneficiary. Any change to a prescription must be memorialized in a revised written prescription. A contract supplier would be prohibited from billing Medicare if it furnishes an item different from that specified in the written prescription.

CMS cites an OIG report, mandated by the MMA, that will examine the extent to which (if any) suppliers subject to competitive acquisition are soliciting physicians to prescribe certain brands or modes of delivery of covered items based on profitability. CMS states that it will evaluate the need for a specific process for certain brand names or modes of delivery after the OIG issues this report. Note, however, that the OIG report is not due to Congress until July 1, 2009.

CMS also observes that the statute provides authority to establish separate categories for items within HCPCS codes if the clinical efficiency and value of items within a given code warrants a separate category for bidding purposes. CMS declines to propose exercising this authority, however, stating that "the HCPCS process has worked well in the past, and we believe that it adequately separates items based on their function." CMS welcomes public comment on this issue. We would point out, however, that many HCPCS codes encompass a wide range of products, and many manufacturers and suppliers believe there should be greater differentiation within codes to recognize advanced and different medical technologies. Moreover, CMS has created new codes based on criteria other than "function." An example of an area that may require attention is blood glucose test strips; there is one HCPCS code for blood glucose test strips, despite the range of features and accuracy levels of the products on the market. CMS is likely to be urged to explore developing subcategories for bidding purposes to appropriately recognize differences in technology, as well as function, within codes.

CMS is proposing the following rules regarding changes in HCPCS codes during a bidding cycle:

• If a new HCPCS code is added, CMS would use a new process (discussed below) to establish a fee schedule payment for the item until it is added to a product category subject to competitive bidding. Any qualified Medicare supplier would be allowed to supply this item until the next bidding cycle, at which time CMS would set a new single payment amount for the item.

• If a single HCPCS code is divided into multiple codes for the components of that item, the sum of payments for these new codes would not be higher than the payment for the original item. Contracted suppliers also would provide the components of the item. During the subsequent competitive bidding cycle, suppliers would bid on each new code for the components, and CMS would determine new single payment amounts for the components.

• If a single HCPCS code for two or more similar items is divided into two or more separate codes, the payment amount applied to these codes would continue to be the same payment amount applied to the single code until the next competitive bidding cycle, when suppliers would bid on the new separate codes.

• If the HCPCS codes for several components of one item are merged into one new code for the single item, the payment amount of the new code would be equal to the total of the separate payment amounts for the components. Contract suppliers would continue to supply the item using the new code. During the subsequent bidding cycle, suppliers would bid on the new code and CMS would determine a new single payment amount.

• If multiple codes for different, but related or similar items are placed into a single code, the payment amount for the new single code would be the average (arithmetic mean) weighted by frequency of payments for the formerly separate codes. Suppliers providing the items originally also would provide the item under the new single code. During the subsequent bidding cycle, suppliers would bid on the new single code and CMS would determine a new single payment amount for this code.

• Administrative or Judicial Review -- As specified under the MMA, the Proposed Rule provides that there would be no administrative or judicial review related to: establishment of competitive bidding payment amounts; awarding of contracts; designation of CBAs; the phased-in implementation schedule; selection of items; or the bidding structure and number of contract suppliers selected.

• Small Suppliers -- CMS considered allowing a small supplier that has fewer than 10 fulltime equivalent employees to designate a geographic service area that is smaller than the entire CBA. CMS is not proposing this for a number of reasons, including its concern that it would provide small businesses with an unfair market advantage by allowing the selection of more favorable market areas. CMS seeks comments on this issue and on other ways to ensure small businesses have an opportunity to participate in the program.

• Supplier Networks -- CMS is proposing allowing suppliers to form networks for bidding purposes if a number of conditions are met. Among other things, a legal entity, such as a joint venture, limited partnership, or contractor/subcontractor relationship, must be formed for the purposes of competitive bidding that would act as the applicant and submit the bid. Each member of the network must be eligible to participate and meet any accreditation and quality standards. CMS also proposes that the network member’s market share cannot exceed 20 percent of the Medicare market within the CBA. A supplier could only join one network and could not submit individuals bids if part of a network.

• Education and Outreach -- CMS proposes a wide range of supplier and beneficiary education initiatives related to the competitive bidding program.

• Monitoring and Complaint Services -- CMS is proposing to establish a formal complaint monitoring system to address complaints in each CBA. Examples of problems that CMS would consider to be serious include contract suppliers furnishing items of inferior quality than those that they bid to furnish. CMS also proposes to monitor Medicare claims data to ensure that competitive bidding does not negatively impact beneficiary access to medically necessary items, and to identify changes in utilization patterns within a product category.

As part of the DMEPOS competitive acquisition rule, CMS is proposing significant revisions to its current "gap fill" pricing policy that would affect DMEPOS fee schedule amounts in areas not subject to competitive bidding. Moreover, while CMS entitles this section as "Establishing Payment Amounts for New DMEPOS Items," CMS proposes using this new process to reconsider established pricing policies.

By way of background, CMS has used a gap filling process since 1989 to calculate payments for specific items of DME and supplies that are not listed on a Medicare fee schedule and which have no associated 1986-1987 base charge data. The process essentially involves calculating a new 1986-1987 base period by deflating current prices to approximate the base year price and then reinflating those amounts by any inflation update provided for in the statute for the intervening years. CMS is concerned that this method can lead to very high or very low fee schedule amounts without validation that these amounts are realistic and equitable relative to the cost of furnishing the item. For instance, CMS points out that most base fees have been gap filled using either supplier price lists or manufacturer’s suggested retail prices, and the agency believes that manufacturers can establish inflated retail prices that lead to inflated payment amounts.

CMS has undertaken an initiative to ensure fair treatment across technologies and "recognize those technologies that provide a demonstrated clinical benefit and clearly identify the additional benefits over existing technologies." It has engaged contractors to compile the technical information needed to evaluate technologies for the purpose of making payment and HCPCS coding decisions for new items. The technologies studied were assessed in terms of the following three main areas:

• Functional Assessment -- This step involved evaluating the device’s operations, safety, and user documentation relative to the Medicare population. Interviews were conducted with health care providers to determine how and under what circumstances they would prescribe the product for a Medicare beneficiary.

• Price Comparison Analysis -- A comparative cost analysis determined how the cost of this product compared to similar products on the market or alternative treatment modalities.

• Medical Benefit Assessment -- This step focused on the effectiveness of the product in doing what it claims to do. Scientific literature reviews and interviews with health care providers were conducted to determine if the product significantly improved clinical outcomes compared to other products and treatment modalities.

CMS is proposing to use these three types of assessments to help set fee schedule amounts for DMEPOS (including parenteral and enteral nutrients, equipment, and supplies). Specifically, CMS would discontinue the gap fill practice of deflating supplier prices and manufacturers’ suggested retail prices to the fee schedule base period. Instead, payment for new items could be based on:

• The median retail price for items and services classified under the new HCPCS code (CMS determines the retail price for an individual item and service based on supplier price lists, manufacturer suggested retail prices, or wholesale prices plus an appropriate mark-up);

• Fee schedule amounts for comparable items; and/or

• A functional technology assessment of the items or services, taking into account one or more of the following factors: functional assessment; price comparison analysis; and/or medical benefit assessment.

Moreover, CMS would be authorized to use the technology assessment process to adjust prices that were previously established using the gap-filling methodology at any time on or after January 1, 2007 if it is determined that those pricing methods resulted in payment amounts that do not reflect the cost of furnishing the item.

This process has implications for both coding and pricing determinations. CMS states that the functional technology assessments would enable the agency to ensure that "HCPCS codes reflect current technology and functional differences in items and that new products are included within the appropriate HCPCS code." Moreover, this process would allow CMS "to compare older, similar products already on the market and newer more expensive products," and help the agency determine the need to create unique HCPCS code categories. Likewise, price comparison analyses would enable CMS to "determine if manufacturers’ suggested retail prices are overly inflated, will provide a basis for establishing adequate payment amounts for new items, and will assist in establishing payment amounts for new items that are introduced after a bidding cycle has begun."

CMS has not yet provided key details on the criteria it would use in performing functional technology assessments, such as how it would determine appropriate "similar products" for comparison purposes, how it defines "significantly improved clinical outcomes," or its evidentiary standards in making such determinations. The rights of manufacturers in this process are not defined, nor does CMS mention how it intends to ensure the transparency of the decisionmaking process. More significantly, CMS does not discuss potentially far-reaching implications of the convergence of reimbursement, coding, and coverage determinations.

CMS is proposing to implement a fee schedule payment methodology for home dialysis supplies and equipment, which currently are reimbursed based on reasonable charge.

The MMA authorized CMS to determine the appropriate fee schedule update percentages for calendar years 2007 and 2008 for DME that are class III medical devices, classified by the FDA as those that support or sustain human life, are of substantial importance in preventing impairment of human health, or present unreasonable risk of illness or injury (e.g., osteogenesis or bone growth stimulators, implantable infusion pumps, external defibrillators, and ultraviolet light therapy systems). These determinations, the Secretary was required to consider recommendations by the Government Accountability Office ("GAO").

On March 1, 2007, the GAO released its report on reimbursement for class III medical devices.¹⁸ The GAO found that while manufacturers of class III devices generally have higher premarketing costs than do manufacturers of similar class II devices, the Medicare DME rate-setting methodology accounts for such costs in a consistent manner. The GAO recommends that the Secretary establish a uniform payment update in 2007 for class II and class III devices, and that Congress consider establishing a uniform DME payment update in 2008 for both categories of devices. CMS agreed with GAO’s recommendations.

In the Proposed Rule, CMS is soliciting comments on how to determine the appropriate fee schedule percentage change for these devices for 2007 and 2008, which it would consider in conjunction with the GAO’s recommendations.

The Medicare regulations currently exclude from coverage eyeglasses and contact lenses, except for: post-surgical prosthetic lenses customarily used during convalescence for eye surgery in which the lens of the eye was removed; prosthetic lenses for patients who lack the lens of the eye because of congenital absence or surgical removal; and one pair of conventional eyeglasses or conventional contact lenses furnished after each cataract surgery during which an intraocular lens is inserted. The Proposed Rule would clarify that the scope of the eyeglass coverage exclusion encompasses all devices irrespective of their size, form, or technological features that use one or more lens to aid vision or provide magnification of images for impaired vision.

CMS also is proposing to codify an MMA provision establishing Medicare fee schedule amounts for therapeutic shoes, inserts, and shoe modifications.

Competitive bidding could be expected to have a significant impact on Medicare DMEPOS pricing in the CBAs in which it is instituted. CMS expects competitive bidding to reduce Medicare spending by $38 million in 2007, rising to $844 million in 2009 when bidding is expanded to 80 MSAs, and $1 billion or more annually beginning in 2010. The new program also could result in changes in the distribution of DMEPOS, with consolidation of suppliers within individual CBAs, the potential increase in use of mail-order suppliers, and the prospect of more complicated supplier arrangements for SNFs.

Of particular concern to many DMEPOS manufacturers are the incentives within the competitive bidding structure for suppliers to bid on the least expensive products within a particular HCPCS code – particularly if suppliers are permitted to offer beneficiary rebates. While CMS would provide a process for physicians to prescribe a particular brand within a code, it is unclear how onerous this process would be for clinicians or whether a supplier’s "reasonable efforts" to fulfill the prescription would be adequate to ensure beneficiary access to the most clinically-appropriate products.

Moreover, the Proposed Rule could be expected to result in pricing pressures beyond the MSAs in which competitive bidding is implemented by enabling CMS to use pricing information it obtains through the bidding process to adjust payments outside of bidding areas. Perhaps even more significantly, CMS has proposed a pricing methodology for all new DMEPOS that is based on vague functional and medical benefits criteria that could further blur distinctions between coding, reimbursement, and coverage decisions and impose new hurdles for manufacturers seeking Medicare coverage and adequate pricing for new medical technology. This methodology also could be applied to long-established pricing determinations, extending the potential impact of this proposal.

As previously noted, CMS is accepting comments on the Proposed Rule until June 30, 2006. We would be pleased to assist you with filing comments or discussing further specific issues raised in the proposal. 

This article is presented for informational purposes only and is not intended to constitute legal advice.