[Senate Hearing 107-720]
[From the U.S. Government Publishing Office]
S. Hrg. 107-720
MEDICARE PAYMENTS FOR MEDICAL SUPPLIES
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
SPECIAL HEARING
JUNE 12, 2002--WASHINGTON, DC
__________
Printed for the use of the Committee on Appropriations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
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COMMITTEE ON APPROPRIATIONS
ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii TED STEVENS, Alaska
ERNEST F. HOLLINGS, South Carolina THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont ARLEN SPECTER, Pennsylvania
TOM HARKIN, Iowa PETE V. DOMENICI, New Mexico
BARBARA A. MIKULSKI, Maryland CHRISTOPHER S. BOND, Missouri
HARRY REID, Nevada MITCH McCONNELL, Kentucky
HERB KOHL, Wisconsin CONRAD BURNS, Montana
PATTY MURRAY, Washington RICHARD C. SHELBY, Alabama
BYRON L. DORGAN, North Dakota JUDD GREGG, New Hampshire
DIANNE FEINSTEIN, California ROBERT F. BENNETT, Utah
RICHARD J. DURBIN, Illinois BEN NIGHTHORSE CAMPBELL, Colorado
TIM JOHNSON, South Dakota LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island MIKE DeWINE, Ohio
Terrence E. Sauvain, Staff Director
Charles Kieffer, Deputy Staff Director
Steven J. Cortese, Minority Staff Director
Lisa Sutherland, Minority Deputy Staff Director
------
Subcommittee on Departments of Labor, Health and Human Services, and
Education, and Related Agencies
TOM HARKIN, Iowa, Chairman
ERNEST F. HOLLINGS, South Carolina ARLEN SPECTER, Pennsylvania
DANIEL K. INOUYE, Hawaii THAD COCHRAN, Mississippi
HARRY REID, Nevada JUDD GREGG, New Hampshire
HERB KOHL, Wisconsin LARRY CRAIG, Idaho
PATTY MURRAY, Washington KAY BAILEY HUTCHISON, Texas
MARY L. LANDRIEU, Louisiana TED STEVENS, Alaska
ROBERT C. BYRD, West Virginia MIKE DeWINE, Ohio
Professional Staff
Ellen Murray
Jim Sourwine
Mark Laisch
Adrienne Hallett
Erik Fatemi
Bettilou Taylor (Minority)
Mary Dietrich (Minority)
Sudip Shrikant Parikh (Minority)
Candice Rogers (Minority)
Administrative Support
Carole Geagley
C O N T E N T S
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Page
Opening statement of Senator Tom Harkin.......................... 1
Prepared statement........................................... 3
Opening statement of Senator Arlen Specter....................... 4
Statement of Janet Rehnquist, Inspector General, Department of
Health and Human Services...................................... 5
Prepared statement........................................... 9
Statement of Leslie G. Aronovitz, Director, Health Care, Program
Administration and Integrity Issues, United States General
Accounting Office.............................................. 16
Prepared statement........................................... 18
Statement of Thomas A. Scully, Administrator, Centers for
Medicare and Medicaid Services, Department of Health and Human
Services....................................................... 27
Prepared statement........................................... 29
Opening statement of Senator Patty Murray........................ 36
Statement of David T. Williams, director, Government Relations,
Invacare Corporation........................................... 51
Prepared statement........................................... 55
Prepared statement of the American Association for Homecare...... 59
Prepared statement of Advanced Medical Technology Association.... 63
MEDICARE PAYMENTS FOR MEDICAL SUPPLIES
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WEDNESDAY, JUNE 12, 2002
U.S. Senate,
Subcommittee on Labor, Health and Human
Services, and Education, and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 9:34 a.m., in room SD-124, Dirksen
Senate Office Building, Hon. Tom Harkin (chairman) presiding.
Present: Senators Harkin, Murray, and Specter.
opening statement of senator tom harkin
Senator Harkin. The Subcommittee on Labor, Health and Human
Services, and Education will come to order.
This morning the subcommittee will once again examine the
appropriateness of Medicare payments for medical supplies. Over
the past 12 years, this subcommittee has taken a leadership
role in trying to reduce the losses to the American taxpayer
and to millions of Medicare beneficiaries due to waste in the
Medicare program.
The good news is we have made some progress. 5 years ago,
the Inspector General found that about $23 billion, or about 14
percent of Medicare funds, were lost to mispayments. Through
the bipartisan efforts of this subcommittee and others here
today, that has been cut in half. In addition, we have reduced
waste in payments for oxygen equipment by over $1 billion. And
we have demonstrated that real savings can be achieved through
competitive bidding.
But it is not even close to time to be taking a victory
lap. Today we are releasing the results of a new investigation
by the Inspector General of Health and Human Services. At my
request, they analyzed Medicare's payments for 16 commonly used
medical supply items. The results are indeed staggering. The
report makes it clear that American taxpayers and Medicare
beneficiaries are still being taken to the cleaners. The IG
report found that Medicare is paying up to eight times more
than another Federal Government agency, the Veterans
Administration. In fact, the IG's analysis shows that Medicare
is paying more than double the VA rate for 11 of the 16 items.
They found that for just the 16 items they reviewed, if
Medicare simply paid the same rate as the Department of
Veterans Affairs, taxpayers and Medicare beneficiaries who pay
20 percent of the cost of supplies they use would save nearly
$1 billion a year. That is a savings of over half the current
$1.7 billion cost.
Now, I know there are some real differences in the Medicare
and VA systems, but because Medicare is by far the largest
purchaser of these items, it should be able to drive an even
better bargain than the VA. Despite this, the Inspector General
found that Medicare is paying even more than if you or I walked
off the street to the corner drugstore. In fact, we would save
over $80 million a year on these items if Medicare just went
down to the local drugstore and paid the average retail rate.
It is even more disturbing that Medicare has the authority
it needs to immediately put a halt to this fleecing of
taxpayers and our seniors. Yet, it has not acted.
In 1997, based on evidence gathered at our hearings, this
subcommittee, then under the guidance and direction of Senator
Specter, gave Medicare new streamlined authority to reduce
Medicare payments that are grossly excessive.
In 1999, HCFA, now CMS, proposed very modest reductions
that would save $487 million over 5 years. They were
temporarily stopped from proceeding by actions taken in the
other body. But that prohibition ended nearly 2 years ago when
the GAO issued their report supporting Medicare's proposed
actions.
I am very concerned that Medicare has failed to use its
authority to protect the taxpayers and our seniors, and I am
hopeful to learn today of their plans to move ahead without
further delay.
I also intend to continue to push to get Medicare the same
authority that the VA has used so effectively: good, old-
fashioned, free enterprise, competitive bidding. I am very,
very happy and pleased that the Bush administration in their
budget request is backing this long overdue reform, and I look
forward to working with them to make sure that competitive
bidding, with appropriate safeguards, as we all know, for rural
areas and highly customized items--I hear that all the time--is
made a part of any Medicare package that passes this year. In
other words, it is my intention to make sure that if any
Medicare thing passes this year, we are going to work with the
administration to get competitive bidding in there.
In closing, again I just want to say that this is really
important. First, there are few other Government programs so
important in the daily lives of so many Americans as Medicare.
Secondly, it is especially grating on me as a Senator from Iowa
that while Medicare is overpaying for these medical supplies,
it is underfunding services in my State. Iowa is on the bottom,
number 50, in terms of reimbursements. The money we are wasting
on medical supplies could be much better spent bringing greater
fairness to States like mine, let alone trying to get a decent
prescription drug benefit. That is why we have got to move
ahead aggressively on this.
We have a great panel of witnesses today, and I look
forward to the important contributions each of them will make
to our hearing today.
I thought I might, again for the benefit of some of those
who are here, point out some of the items we are talking about.
The Inspector General I know will also and so will the
Administrator of CMS.
But again, just to set the stage for what we are talking
about, first, consider blood glucose test strips. Medicare paid
$38.32 for 50. The VA pays $19.50 for 50. So, I had Jim here go
down to the drugstore. He actually went to Costco. I am not
here plugging Costco, but anyway he went to Costco. Now, I said
that Medicare paid $38.32 for 50. We went to Costco and got 100
for $70; plus, they threw in free lancets, and Medicare also
pays for the lancets. So, maybe we can go to Costco and have
some savings.
The next thing is saline solution. This is the one that
really gets me. Medicare is paying $8.68 a liter. Now, saline
solution is saltwater for any of you who do not know what that
means. It is sterile saltwater. VA is paying $1.02 a liter. I
would like to know what it costs to make it. If it costs over
15 or 20 cents, I would be surprised.
We have a TENS unit. Actually this is mine. I had some
muscle problems one time and I got one of these. Medicare is
paying $365. This is a TENS unit. It takes a couple of AA
batteries, and you put them on if you have a muscle spasm or
something like that in your back. Actually it is a pretty good
device. It does work. Medicare pays $365. The VA is paying $165
for these.
Here I have a blood glucose monitor that takes those test
strips. Actually this is one of the success stories that CMS
has done. They were paying $211 for this, and we found you
could get it locally for $57 and that is what Medicare pays for
it now. They are paying $57 for this. That is just one of the
items that was a great success. That alone--just this one
item--has saved $25 million in the last 5 years.
prepared statement
Another example is the commode chair that you see all the
time in hospitals. A simple commode chair. Medicare is paying
$109.74. The VA is paying $32.30 for them.
That just gives you some idea of the discrepancies that
were found in the IG's investigation of this. That is just a
few of 16 items.
[The statement follows:]
Prepared Statement of Senator Tom Harkin
Good Morning. The Subcommittee will come to order. This morning the
Subcommittee will once again examine the appropriateness of Medicare
payments for medical supplies. Over the last 12 years, this
Subcommittee has taken a leadership role in trying to reduce the losses
to the American taxpayer and millions of Medicare beneficiaries due to
waste in the Medicare program.
The good news is we've made some real progress. Five years ago, the
Inspector General found that $23 billion or about 14 percent of
Medicare funds were lost to mispayments. Through the bipartisan efforts
of this Subcommittee and others here today, that has been cut in half.
In addition, we've reduced waste in payments for oxygen equipment by
over $1 billion. And we have demonstrated that real savings can be
achieved through competitive bidding.
But it is not even close to being time to take a victory lap.
Today, I am releasing the results of a new investigation by the Health
and Human Services Inspector General. At my request, they analyzed
Medicare's payments for 16 commonly used medical supply items. The
results are staggering. The report makes it clear that American
taxpayers and Medicare beneficiaries are still being taken to the
cleaners. I'll make analogy to another example of government waste.
Remember a number of years ago we found that the Pentagon was paying
$500 for a toilet seat?
Well, the good news is, the Pentagon's no longer paying that price.
The bad news is, Medicare is.
The IG report found that Medicare is paying up to 8 times more than
another federal government agency, the Veterans Administration. In
fact, the IG's analysis shows that Medicare is paying more than double
the V.A. rate for 11 of the 16 items studied. They found that for just
the 16 items they reviewed, if Medicare simply paid the same rate as
the V.A. taxpayers and Medicare beneficiaries--who pay 20 percent of
the cost of supplies they use--would save nearly $1 billion a year.
That's a savings of over half the current $1.7 billion cost.
Now there are some real differences in the Medicare and V.A.
systems. But because Medicare is by far the largest purchaser of these
items, it should be able to drive even an better bargain than the V.A.
Despite this, the IG found that Medicare is paying even more than if
you or I walked off the street to the corner drug store. In fact, we
would save over $80 million a year if Medicare just paid the average
retail rate.
It is even more disturbing that Medicare has the authority it needs
to immediately put a halt to this fleecing of taxpayers and our
seniors, yet is refusing to act. In 1997, based on evidence gathered at
our hearings, we gave Medicare new streamlined authority to reduce
Medicare payments that are ``grossly excessive.'' In 1999, HCFA (now
CMS) proposed very modest reductions that would save $487 million over
5 years. They were temporarily stopped from proceeding by Congress.
But that prohibition ended nearly 2 years ago when the GAO issued
their report supporting Medicare's proposed action.
I am very concerned that Medicare has failed to use it's authority
to protect the taxpayer and our seniors. I'm hopeful we'll learn today
their plans to move ahead without further delay. I also intend to
continue my push to give Medicare the same authority the V.A. has used
so effectively--good old-fashioned free enterprise competitive bidding.
Im pleased to learn that the Bush Administration is now backing this
long overdue reform and look forward to working with them to make sure
competitive bidding--with appropriate safeguards for rural areas and
highly customized items--is made part of any Medicare package this
year. That is the real long-term solution.
In closing, I want to say why this is all so important. First,
there are few other government programs so important in the daily lives
of so many Americans as Medicare. Second, it is especially galling to
me as Senator from Iowa that while Medicare is overpaying for these
medical supplies, it is woefully under funding services in my state.
Our state is dead last by some measures in Medicare payments per
beneficiary, receiving less than half that of some other states. The
money we are wasting in medical supplies could be much better spent
bringing greater fairness to states like mine. Let along the need for a
decent prescription drug benefit. That is why we can't fail to act.
We have a great panel of witnesses today and I look forward to the
important contributions each of them will make to our hearing today.
Senator Harkin. So now we will turn to our Government
witnesses. First we have the Inspector General of the
Department of Health and Human Services.
Senator Specter. Well, first, you have your ranking member.
Senator Harkin. I am sorry.
Why do I not introduce them. Then I will turn to you.
Senator Specter. You give up the chairmanship, look what
happens.
Senator Harkin. Both of us have chaired this subcommittee,
going back more than 12 years. Senator Specter picked it up
during his chairmanship, and now we are back again. It has been
truly a bipartisan effort to try to get a handle on this.
Senator Specter. I never bypassed you for a commode chair,
not in all those years.
OPENING STATEMENT OF SENATOR ARLEN SPECTER
Thank you very much, Mr. Chairman. Just a comment or two.
I commend you, Senator Harkin, for this hearing. As Senator
Harkin has commented, he and I have changed the gavel and it
has been a seamless exchange, which is the way Congress ought
to function. We both subscribe to the basic principle that if
you want to get something done in Washington, you have to be
willing to cross party lines, and I think this subcommittee for
the last 12 years has been exhibit A.
Today's hearing is a very important hearing using as an
example 16 items on the agenda where the total savings would
have been $958 million, almost $1 billion for 1 year. But the
question on my mind is, what more is there there? Perhaps Ms.
Aronovitz from GAO can answer that question for us further, or
perhaps Mr. Scully or Ms. Rehnquist.
I welcome Tom Scully and Janet Rehnquist here for this
hearing. I believe this is the first time that they have
appeared before the committee, since taking over the new job.
We are very pleased with your credentials and your obvious
competency.
But this is a big, big subject, and right now we are
struggling in the conference to add things to Medicare on quite
a number of lines. People come forward very frequently and want
to add something to Medicare. Customarily they are very good
ideas, and at the top of the agenda is the prescription drug
issue. Last year when we had a $5.6 trillion surplus, we were
talking about $400 billion for Medicare, though that number has
since been pared to $190 billion, and we really do not know
what it will end up at. We are long past due in providing
prescription drugs. But if you pick up $958 million here--as
Everett Dirksen said, you pick up a billion here, you pick up a
billion there, pretty soon you have got enough money for
Medicare prescription drugs.
The business about what the VA is doing is really very,
very obvious. We have been through that on the Veterans Affairs
Committee, which I chaired for 6\1/2\ years. Now Senator
Rockefeller has picked it up, again on a bipartisan basis. HHS
bought a lot of drugs in response to the terrorist attack, and
there is a real question in my mind as to whether that might
have been done a lot cheaper through the VA. VA has such
enormous purchasing power, that they can get things cheaper.
I regret that I am not going to be able to stay, but I
would hope that the witnesses would address the question as to
why Medicare does not take advantage of the buying power of
your brother organization.
But this is a big hearing. There are big items involved
here. We would prefer not to get involved in the publicity on
the expensive hammer, the expensive toilet seat, or the rest of
it, which has plagued DOD for years, but get right down to what
can be done to save this money and apply it elsewhere where it
is needed.
Again, Mr. Chairman, I thank you for the introduction.
STATEMENT OF JANET REHNQUIST, INSPECTOR GENERAL,
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Senator Harkin. Thank you, Senator Specter.
First, I would like to introduce Janet Rehnquist who was
sworn in as Inspector General of the U.S. Department of Health
and Human Services on August 8, 2001. Prior to joining HHS, Ms.
Rehnquist served for several years as an Assistant United
States Attorney for the Eastern District of Virginia. Ms.
Rehnquist also served in the White House as associate counsel
to the President. She also served as counsel to the permanent
Subcommittee on Investigation for the United States Senate. Ms.
Rehnquist received her bachelor of arts degree with honors from
the University of Virginia and her juris doctorate from the
University of Virginia Law School.
It would be my intention to hear from you, Ms. Rehnquist,
and then Ms. Aronovitz, and then Mr. Scully. Then we will just
open it up for discussion. But welcome to the committee. All of
your statements will be made a part of the record in their
entirety, and Ms. Rehnquist, please proceed as you so desire.
INSPECTOR GENERAL REPORT ON MEDICAL EQUIPMENT AND SUPPLIES
Ms. Rehnquist. Thank you, Mr. Chairman. Good morning. I am
Janet Rehnquist, Inspector General of the Department of Health
and Human Services, and I appreciate this opportunity to appear
before you today regarding the important issue of Medicare
reimbursement for medical equipment and supplies.
Mr. Chairman, the results of our work have shown
consistently that Medicare and its beneficiaries pay too much
for medical equipment and supplies. This continuing problem
needs a solution to reduce the amount of Medicare overpayment.
The taxpayers deserve it, and as you have stated before, the
beneficiaries should settle for nothing less.
As you have stated, the problems we are discussing today
are not new. The OIG has performed numerous other reviews which
consistently found that Medicare pays too much for certain
items of medical equipment and supplies because Medicare
reimbursement rates are based on charges submitted to the
program in 1987. As a result, Medicare payments can bear little
resemblance to prices available in the marketplace or to the
actual cost of manufacturing and distributing the equipment.
Although Congress and the administration have done much to
improve Medicare's reimbursement for medical equipment and
supplies, we believe that even more needs to be done.
Mechanisms such as inherent reasonableness authority and
competitive bidding demonstrations are promising approaches to
reduce excessive reimbursement.
Medicare Part B expenditures for all medical equipment and
supplies totaled more than $6.8 billion in the year 2000, and I
think it is important to note that beneficiaries paid more than
$1.3 billion out of their own pockets in that year alone.
CAPPED RENTAL EQUIPMENT
On a related issue, a report we are releasing today,
entitled Medicare Maintenance Payments for Capped Rental
Equipment, in which we reviewed Medicare maintenance payments
made in the capped rental payment category, we found that
Medicare could save approximately $100 million per year by
eliminating maintenance payments and paying only for equipment
repairs when needed. CMS concurred with our recommendation to
eliminate maintenance payments and will seek legislation to
eliminate the purchase option for equipment in the capped
rental category.
COMPARISON OF PRICES PAID BY MEDICARE AND OTHER CONSUMERS
Mr. Chairman, you asked my office to compare the prices
Medicare pays for medical equipment and supplies with the
prices paid by other health care consumers. At your request, we
compared median 2002 Medicare prices for 16 DME and supply
items to the median prices of the Department of Veterans
Affairs, Medicaid, the Federal Employee Health Benefit Plan,
and retail suppliers. This work, in addition to the report we
are releasing today, illustrates again that Medicare pays too
much for DME and supply items compared to their consumers. In
our comparison, we found the Medicare's reimbursement was
greater than the VA median price for 15 of the 16 items.
Potential savings would be $958 million per year if Medicare
were to adopt these prices.
Now, as you know, there are distinctions between Medicare
and the VA which some say make this comparison like apples and
oranges. However, even with a 67 percent markup to account for
the distinction between Medicare as a payor and VA as a larger
purchaser, Medicare's potential savings would be approximately
$440 million a year.
We also found that Medicare reimbursement was more than
Medicaid reimbursement for 15 of the 16 items. If Medicare used
the median Medicaid prices for reimbursement on these items,
the program could have saved $193 million per year.
Medicare reimbursement was more than the FEHB plan's median
price for 15 of the 16 items also. If Medicare were to
reimburse based on the FEHB plans, the program could save $118
million.
INHERENT REASONABLENESS AND COMPETETIVE BIDDING
Medicare prices were more then the median retail price for
10 of the 16 items. Potential Medicare savings would reach $84
million if Medicare used median retail prices. In your
demonstration, that would be the Costco or the drugstore down
the street prices.
There is obviously a huge range of prices and Medicare's
overpayment for DME adversely affects the trust fund and the
beneficiaries. However, in terms of solutions, we believe the
Government has at least two options designed to begin solving
the problem of excessive DME reimbursement: the inherent
reasonableness authority and the competitive bidding process.
Inherent reasonableness authority is a vital tool for CMS
to adjust unreasonably high or low reimbursement rates for
medical equipment and supplies. The inherent reasonableness
process, created by the Social Security Act and related
Medicare regulations, permitted CMS to use other pricing
methods to make unreasonable DME payments analogous to current
market prices. CMS has attempted to use this tool in reducing
Medicare payments. However, congressional concerns resulted in
the suspension of the process until a GAO report on the subject
was issued and a final rule published.
The GAO report, issued in July 2000, found that CMS'
authority was reasonable and justified. The remaining task is
to promulgate a final rule so CMS can exercise its authority.
A second tool that shows promise for reducing excessive
payments is the competitive bidding demonstration project
undertaken by CMS. Competitive bidding is where suppliers are
required to submit bids to Medicare if they wish to provide
beneficiaries with certain types of DME equipment. As you know,
Medicare payments for medical equipment and supplies are based
on fee schedules, but studies show that under these fee
schedules, suppliers have been able to charge Medicare
beneficiaries higher prices than those charged in many retail
outlets for some medical equipment and supplies.
CMS has conducted competitive bidding demonstrations with
promising results. Through competitive bidding, CMS estimates
17 percent, or $1.3 million, annual savings for Medicare
beneficiaries in Polk County, Florida alone. Additionally,
Medicare implemented a competitive bidding demonstration in San
Antonio, Texas where CMS estimates a 22 percent savings for the
23-month demonstration period. Competitive bidding used in
conjunction with other mechanisms like inherent reasonableness
adjustments will go a long way to help alleviate Medicare
excessive payments.
INVESTIGATIONS
In addition to CMS' tools to reduce excessive payments, the
OIG has aggressively investigated individuals and entities that
have defrauded our programs in this area. Between 1996 and
2001, our investigations led to 88 successful criminal
prosecutions of DME suppliers and 82 civil settlements or
judgments. Together, these investigations resulted in more than
$277 million in restitutions, fines, and penalties being
ordered by the courts. And the OIG imposed 166 exclusions on
DME companies, their owners or employees.
Mr. Chairman, I see my time has expired and I would be
happy to answer any questions.
Senator Harkin. No, go right ahead. Finish.
Ms. Rehnquist. Just a couple more points. I guess in
conclusion I would like to just say that all of our work and I
know that the work of your staff too leads us to the same
conclusion, and that is that Medicare does pay too much for
some items of equipment and supplies. We believe that
fundamental reform is needed to ensure that Medicare and its
beneficiaries pay a fair price. But fortunately, through
inherent reasonableness authority and competitive bidding,
these valuable tools I think will be very effective in reducing
these excessive payments.
prepared statement
The administration and Congress are working together to
expand the bidding demonstrations, and as you mentioned, I
think this will go a long way towards making sure that Medicare
pays a fair and not an excessive price. The taxpayers and the
beneficiaries deserve nothing less.
Thank you for the opportunity to discuss these important
issues and I will be happy to answer any questions.
[The statement follows:]
Prepared Statement of Janet Rehnquist
Good morning, Mr. Chairman and Members of the Subcommittee. I am
Janet Rehnquist, Inspector General of the Department of Health and
Human Services. I appreciate this opportunity to appear before you
today to discuss some of the issues we have encountered with fraud,
waste and abuse related to Medicare reimbursement for medical equipment
and supplies.
We continue to find that Medicare and its beneficiaries pay too
much for medical equipment and supplies. You have specifically asked us
to compare the price Medicare pays for certain medical equipment and
supplies with that of other payers, including the Department of
Veterans Affairs (VA), Medicaid, Federal Employee Health Benefit (FEHB)
plans, and retail suppliers. Our price comparison demonstrates that
Medicare overpays for some medical equipment and supplies.
The problems that we are discussing today are not new. We have done
numerous reviews over the years documenting excessive reimbursement for
medical equipment and supplies. The Centers for Medicare & Medicaid
Services (CMS), the General Accounting Office (GAO) and Members of
Congress such as yourself, Mr. Chairman, have done much to improve
Medicare's reimbursement for medical equipment and supplies.
Improvements include creating supplier standards, centralizing claims
processing into four regional carriers, and reducing oxygen
reimbursement by 30 percent. In addition, inherent reasonableness
authority and competitive bidding demonstrations have been promising
approaches to reduce excessive reimbursement. We believe that even more
has to be done, and my testimony today will outline some specific steps
to reduce or eliminate problems that continue today.
background
Medicare Part B expenditures for all medical equipment and supplies
totaled more than $6.8 billion in 2000, of which beneficiaries paid
more than $1.3 billion out of their own pockets. Medicare covers
certain medical equipment and supplies, which include several
categories of items. Durable medical equipment (DME) are items that can
withstand repeated use and include oxygen equipment, hospital beds,
wheelchairs, and other equipment that physicians prescribe for home
use. Medicare Part B also covers certain drugs necessary for the
effective use of DME, including albuterol for use with a nebulizer.
Prosthetic devices replace all or part of a body organ. Medicare covers
enteral and parenteral nutrition therapy under this benefit. Medical
supplies include catheter, ostomy, incontinence, and wound care
supplies. Medicare also covers braces and artificial limbs.
recent oig work
We have conducted numerous studies in recent years, all showing
that Medicare pays too much for certain medical equipment and supplies.
Maintenance Payments for Capped Rental Equipment.--In a report we
are releasing today entitled Medicare Maintenance Payments for Capped
Rental Equipment, we reviewed Medicare's maintenance payments that are
made under the capped rental payment category. We found that Medicare
paid substantially more for maintenance on rented equipment than
repairs on purchased equipment. Medicare pays for maintenance even if
the supplier does not service the equipment. Furthermore, our
additional analysis of supplier documentation found only 9 percent of
the capped rental equipment actually received any maintenance and
servicing. We estimated that Medicare could save approximately $100
million per year by eliminating maintenance payments and, instead, pay
only for repairs when needed. CMS concurred with our recommendation to
eliminate maintenance payments and will seek legislation to eliminate
the purchase option under the capped rental category.
Respiratory Assist Devices.--In June 2001, we issued a report
entitledRespiratory Assist Devices With Back-up Rate. We concluded that
the current Medicare payment method used for bi-level respiratory
assist devices with back-up rate is inappropriate. Medicare could save
$11.5 million annually if this item were classified as a ``capped
rental'' item rather than an item needing ``frequent and substantial
service''. CMS is currently in the process of making this change.
Prescription Drugs Used with Medical Equipment.--In March 2002, we
released a report entitled Excessive Medicare Reimbursement for
Albuterol. We found that Medicare and its beneficiaries would save $264
million a year if albuterol were reimbursed at the median VA price and
between $226 million and $245 million if reimbursed at prices available
to suppliers. A separate March 2002 report entitled Excessive Medicare
Reimbursement for Ipratropium Bromide found that Medicare and its
beneficiaries would save $279 million a year if ipratropium bromide
were reimbursed at the median VA prices and between $223 million and
$262 million a year if reimbursed at prices available to suppliers.
Blood Glucose Test Strips.--In a June 2000 report entitled Blood
Glucose Test Strips: Inappropriate Medicare Payments, OEI-03-98-00230,
we found that Medicare allowed $79 million for blood glucose test strip
claims with missing or flawed documentation. Orders for 25 percent of
the sampled claims failed to establish beneficiaries' eligibility for
the supplies. Another 21 percent of claims had incomplete orders. We
found that suppliers submit claims for test strips at irregular
intervals, making it difficult to identify overlapping claims, claims
without correct supporting documentation, and claims for excessive
numbers of test strips. We recommended that CMS take several steps to
promote compliance with Medicare guidelines for blood glucose test
strips.
We have performed numerous other reviews which consistently found
that Medicare pays too much for certain items of medical equipment and
supplies because Medicare reimbursement rates are based on charges
submitted to the program in 1987. As a result, Medicare payments can
bear little resemblance to prices available in the marketplace or to
the actual cost of manufacturing and distributing the equipment.
price comparisons for 16 medical equipment and supply items
The price comparisons that you requested confirm once again that
Medicare pays more than other payers for certain medical equipment and
supplies. We compared Medicare payment rates for medical equipment and
supplies to the rates of other payers, and provided an estimate of
potential savings if the Medicare program were to adopt the rates of
these payers.
Our analysis shows that health care consumers, Federal health
insurance plans, State Medicaid agencies, and the VA pay less than
Medicare for some of the medical equipment and supplies we reviewed.
However, this analysis was not designed to follow the same process for
rate setting purposes that CMS will need to employ using the inherent
reasonableness authority authorized in Section 4316 of the Balanced
Budget Act of 1997. In order for CMS to affect a payment reduction for
items in our analysis, they would have to conduct a separate inherent
reasonableness determination in accordance with procedures set forth in
regulations. As discussed later in my testimony, revised standards have
to be promulgated before this authority can be utilized.
Also, unlike Medicare, which is a payer of services and not a
provider of services, the VA generally obtains medical equipment and
supplies by direct acquisition from manufacturers and wholesalers. The
prices that the VA pays for medical equipment and supplies provide a
rough estimate of the wholesale prices available to large purchasers.
These prices do not take into account the Medicare supplier costs
associated with getting an item to a Medicare beneficiary.
For our analysis, we compared the median Medicare price for 16
medical equipment and supply items with the median prices from the VA,
State Medicaid agencies, fee-for-service FEHB plans, and retail
suppliers. Twelve of these items were researched by the Chairman's
staff in 1996. The remaining four items had very large total Medicare
payments in 2000. The 16 items we reviewed represent more than $1.7
billion (26 percent) of $6.8 billion in total allowed charges for
medical equipment and supplies in 2000.
The table below provides a description for each of the 16 codes
reviewed. The methodology is provided as an appendix to this testimony.
------------------------------------------------------------------------
Medicare Code Description
------------------------------------------------------------------------
A4253............................. Blood glucose test or reagent strips
for home blood glucose monitor, per
50 strips
A4259............................. Lancets, per box of 100
A4323............................. Sterile saline irrigation solution,
1000 ml
B4035............................. Enteral feeding supply kit; pump
fed, per day
E0135............................. Walker, folding (pickup), adjustable
or fixed height
E0163............................. Commode chair, stationary, with
fixed arms
E0178............................. Gel or gel-like pressure pad or
cushion, nonpositioning
E0180............................. Pressure pad, alternating with pump
E0181............................. Pressure pad, alternating with pump,
heavy duty
E0260............................. Hospital bed, semi-electric (head
and foot adjustment), with any type
side rails, with mattress
E0277............................. Powered pressure-reducing air
mattress
E0570............................. Nebulizer, with compressor
E0730............................. TENS (transcutaneous and/or
neuromuscular electrical nerve
stimulators), four lead, larger
area/multiple nerve stimulation
E0776............................. IV pole
K0001............................. Standard wheelchair
K0011............................. Standard-weight frame motorized/
power wheelchair with programmable
control parameters for speed
adjustment, tremor dampening,
acceleration control and braking
------------------------------------------------------------------------
The results of our review are presented in the following table:
SUMMARY OF MEDICARE PRICES COMPARED TO VA, MEDICAID, RETAIL, AND FEHP PRICES FOR 16 ITEMS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Percentage
Percentage difference Percentage
Median VA difference Median VA between difference Percentage Percentage
Median price between price Medicare Median between Median difference Median difference
Medicare code Medicare without Medicare with 67 and VA Medicaid Medicare retail between FEHP between
price markup and VA percent with 67 price and price Medicare price Medicare
without markup percent Medicaid and retail and FEHP
markup markup
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
A4253............................................................. $38.32 $19.50 49.11 $32.57 15.01 $35.81 6.55 $42.42 -10.70 $36.75 4.10
A4259............................................................. 12.68 8.69 31.47 14.51 -14.43 10.95 13.64 7.40 41.64 12.00 5.36
A4323............................................................. 8.68 1.02 88.25 1.70 80.41 7.33 15.55 6.25 28.00 7.95 8.41
B4035............................................................. 10.67 2.40 77.51 4.01 62.42 10.67 .......... 9.05 15.18 11.30 -5.90
E0135............................................................. 83.43 39.36 52.82 65.73 21.22 69.57 16.61 95.60 -14.59 73.42 12.00
E0163............................................................. 109.74 32.30 70.57 53.94 50.85 89.16 18.75 112.50 -2.52 100.00 8.88
E0178............................................................. 120.74 N/A N/A N/A N/A 101.87 15.63 118.31 2.01 111.90 7.32
E0180............................................................. 227.01 94.20 58.50 157.31 30.70 222.17 2.13 287.50 -26.65 210.20 7.40
E0181............................................................. 251.58 71.00 71.78 118.57 52.87 230.40 8.42 242.05 3.79 231.65 7.92
E0260............................................................. 1,754.55 762.10 56.56 1,272.71 27.46 1,359.10 22.54 1,608.91 8.30 1,397.65 20.34
E0277............................................................. 7,933.91 5,297.50 33.23 8,846.83 -11.51 6,341.10 20.08 3,912.50 50.69 7,000.00 11.77
E0570............................................................. 206.2 32.24 84.37 53.84 73.89 158.51 23.14 182.0 11.74 160.29 22.27
E0730............................................................. 365.76 165.00 54.89 275.55 24.66 353.45 3.37 645.00 -76.35 334.39 8.58
E0776............................................................. 142.45 50.25 64.72 83.92 41.09 108.62 23.75 39.10 72.55 116.71 18.07
K0001............................................................. 570.68 127.72 77.62 213.29 62.63 456.12 20.07 533.50 6.52 530.00 7.13
K0011............................................................. 5,270.30 2,767.64 47.49 4,621.96 12.30 4,912.16 6.80 5,347.83 -1.47 5,097.40 3.28
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Centers for Medicare & Medicaid Services, Medicare Fee Schedules, January 2002; Department of Veterans Affairs (VA), Pharmacy Benefit Management, Drug & Pharmaceutical Prices, March
25, 2002; VA, National Acquisition Center, Federal Supply Schedule Contracts, March 2002; Office of Inspector General (OIG), Survey of State Medicaid Agencies, March 2002; OIG Survey of
Medical Equipment Suppliers, March 2002; OIG Survey of Federal Employee Health Plans (FEHPs), March 2002.
Findings
For some of the items in our analysis, Medicare consistently paid
more than the other payers we reviewed. For example, median prices from
all four sources (VA, Medicaid agencies, FEHB Plans, and retail
suppliers) were more than 10 percent lower than Medicare rates for 3 of
the 16 items. These items were powered pressure-reducing air mattress,
nebulizer with compressor, and IV pole. Additionally, three of the four
sources had prices that were at least 10 percent less than Medicare for
another four items. These items were lancets, sterile saline irrigation
solution, walker, and semi-electric hospital bed. A more detailed
discussion of the price comparisons follows:
Department of Veterans Affairs
Medicare's reimbursement amount was greater than the VA median
price for 15 of the 16 items reviewed. We could not find a VA price for
the remaining item. The VA median prices ranged from 31 to 88 percent
less than the Medicare prices. Maximum potential total savings would be
$958 million per year if Medicare were to adopt these median VA prices.
In addition to comparing the Medicare price to the median VA price
without a markup, we have compared it to the median VA price with a 67
percent markup. In the August 13, 1999 Federal Register, when CMS
compared Medicare prices to median VA prices, they added a 67 percent
markup to the VA prices. We used CMS' 67 percent figure since it was
the only available data concerning a potential markup percentage. We
did not verify or update the CMS markup percentage, nor do we advocate
this as the appropriate markup to VA prices. We have presented the 67
percent markup price comparison solely to provide an example of
possible savings, which take into account the distinction between
Medicare as a payer and the VA as a purchaser of medical equipment and
supplies. A mark up of 67 percent would result in potential savings of
$440 million.
Medicaid Prices
The Medicare reimbursement was more than the Medicaid reimbursement
for 15 of the16 items reviewed. Medicare reimbursed the same as
Medicaid for the remaining item. Median Medicaid prices ranged from 0-
24 percent less than Medicare prices. If Medicare had used the median
Medicaid prices for reimbursement on these items, the program could
have saved $193 million.
Federal Employee Health Plan Prices
Medicare reimbursed more than the FEHB Plans median price for all
but one of the items reviewed. The FEHB Plans prices ranged from 3 to
22 percent lower for the 15 items with reimbursement rates lower than
Medicare. If Medicare were to reimburse based on FEHB Plan median
prices, the program could save $118 million.
Retail Prices
Medicare prices were more than the median retail price for 10 of
the 16 items. These median prices ranged from to 2 to 73 percent less
than the Medicare price for the item. Potential Medicare savings would
reach $84 million if Medicare used median retail prices for
reimbursement on these 16 items.
Competitive Bidding Demonstration Prices
I would also like to note that four of the items in our analysis
(saline solution, enteral feeding supply kits, semi-electric hospital
beds, and standard wheelchairs) have been, or are currently, in
Medicare's competitive bidding demonstrations for DME, prosthetics,
orthotics, and supplies. Competitive bid prices were 8 to 33 percent
less than Medicare reimbursement rates for these four items.
inherent reasonableness
CMS has certain authorities to control unreasonably high or low
payment levels for medical equipment and supplies. Using the inherent
reasonableness process, CMS is permitted to use other payment
methodologies to align payment amounts with current market prices.
Congress gave CMS added flexibility in making inherent reasonableness
adjustments in the Balanced Budget Act of 1997. The law allows CMS to
make inherent reasonableness adjustments, without formal rulemaking, as
long as the annual adjustments are 15 percent or less. For these
adjustments, CMS is required to describe in regulation the factors to
be used in determining when payment amounts are not inherently
reasonable and those factors to be considered when establishing
reasonable payment amounts.
In 1998, CMS published an interim final rule revising the inherent
reasonableness regulations. The DMERCs then surveyed retail prices for
products they believed might have excessive Medicare payment rates. The
DMERCs notified suppliers that they proposed to adjust Medicare
payments for eight products and solicited public comments. The medical
equipment and supplies industry raised concerns about the proposed
reductions, and CMS suspended them.
The CMS also attempted to use the inherent reasonableness process
in August 1999 by issuing a proposed notice to replace current fee
schedules and implement special payment limits for five items of DME
and one prosthetic device. The CMS determined that Medicare
reimbursement for the six items was grossly excessive relative to the
amount paid by the VA, and therefore not inherently reasonable. The CMS
increased the median VA wholesale prices by a mark up of 67 percent to
make a valid comparison between Medicare and VA prices.
Because of concerns associated with the inherent reasonableness
process, the Congress passed legislation in November 1999 prohibiting
CMS from using its inherent reasonableness authority until a GAO report
on the subject was issued, and a final rule has been published that
responded to the GAO report and to public comments. The GAO report,
issued in July 2000, found that there was sufficient evidence to
indicate that Medicare overpays for most of the items identified by the
DMERCs in 1998, and that the use of the inherent reasonableness process
for some items was justified. For other items, GAO questioned the rigor
that carriers used in their collection of pricing data. The GAO
recommended that CMS define what grossly excessive or deficient prices
were in the final rule on the inherent reasonableness process. It also
recommended that CMS develop and implement a more structured and
consistent data collection sampling and survey methodology for inherent
reasonableness reviews. In addition, GAO recommended that CMS monitor
patient access to products with reduced payments. To date, the final
rule for inherent reasonableness has not been promulgated.
competitive bidding
The Balanced Budget Act of 1997 authorizes CMS to enter into
competitive bidding demonstrations for some categories of DME,
prosthetics, orthotics and supplies. Using this authority, CMS has
conducted multiple competitive bidding demonstrations with promising
results.
In the first demonstration, CMS selected five categories of DME,
prosthetics, orthotics and supplies for competitive bidding in Polk
County, Florida. Payments under the first demonstration began on
October 1, 1999 and were in effect through September 30, 2001. Medicare
implemented a second round of competitive bidding in Polk County in
October 2001 for four product categories. Payments under this
demonstration will remain in effect through September 30, 2002. The CMS
estimates savings for Medicare and Polk County beneficiaries of 17
percent ($1.3 million) annually as compared to payments that would have
been incurred under the year 2000 Medicare fee schedules.
Medicare implemented an additional competitive bidding
demonstration in San Antonio, Texas from February 1, 2001 through
December 31, 2002 for five product categories. The CMS estimates 22
percent savings with this round of competitive bidding.
investigative cases
In addition to our audits and evaluations, the OIG has aggressively
investigated individuals and entities that have defrauded our programs
in this area. Between 1996 and 2001, our investigations led to 88
successful criminal prosecutions of DME suppliers. During this same
period, there were 82 civil settlements or judgments imposed. Together,
these criminal convictions and civil adjudications resulted in more
than $277 million in restitution, fines and penalties being ordered by
the courts. Also, during this time period, 166 exclusions were imposed
on DME companies or their owners and employees.
I would like to highlight two of these cases for you today. The
first case involved the misbranding of a SureStep glucose meter. The
company submitted documents to the Food and Drug Administration (FDA)
and marketed the SureStep glucose meter without disclosing two defects
that led some users to become medically compromised. In this case, the
equipment manufacturer was willing to risk the death of beneficiaries
from the use of defective equipment because it could make so much money
selling glucose monitoring strips for use with the meter. This company
plead guilty to the misbranding allegation and paid a $30 million
criminal fine in addition to a $30 million civil penalty. The second
case involved one of the nation's largest suppliers of respiratory
services. Allegations included submission of forged and falsified
documents, self-qualifying of oxygen tests, double billing, claims for
undelivered items, claims for deceased patients and inflated claims. A
random sample of filed from one of the company's subsidiaries revealed
a 95 percent error rate. The company agreed to pay the government $17
million to resolve its liability under the False Claims Act for these
allegations.
conclusion
Mr. Chairman, over the years you have expressed concern that
Medicare payments for many medical supplies remain excessive when
compared to those of other payers. I know that you have worked
diligently to safeguard taxpayer dollars and protect the Medicare
program and its beneficiaries from fraud and abuse. We greatly
appreciate your efforts. CMS also has made significant improvements
over the years to this important benefit including consolidating claims
processing, establishing supplier standards and requiring supplier
applications. Competitive bidding also has shown promising initial
results.
Our work on the 16 items, as well as our prior work, documents that
Medicare pays too much for some medical equipment and supplies. We
believe that fundamental reform is needed to ensure that Medicare and
its beneficiaries pay a fair price. Fortunately, two promising reforms
which we have long supported are already available for use. In fact, it
is noteworthy that for nine items in our review, CMS has proposed
reducing prices through the inherent reasonableness process or has used
competitive bidding to actually lower prices. However, CMS needs to
complete its inherent reasonableness regulation, and the Administration
and the Congress need to work together to expand the competitive
bidding provision beyond the demonstration phase.
Thank you for the opportunity to discuss these important issues. I
will be happy to answer your questions.
Appendix A.--Price Comparisons for 16 Medical Equipment and Supply
Items Methodology
For the items reviewed, we calculated the median price from each
source (VA, Medicaid agencies, FEHB Plans, and retailers) and compared
it to Medicare's median price. We then calculated the percentage
difference between the Medicare price and the median prices of each of
the four sources (i.e., we found the difference between the Medicare
price and the other source's lower price, and divided the difference by
the Medicare price). For those items where the Medicare price was
higher than the source's price, we multiplied this percentage by the
total Medicare payments for the item in 2000 to get an estimated annual
dollar savings. We used the January 2002 Medicare fee schedules to
determine the Medicare purchase prices for the 16 Medicare codes in our
sample. Since fee schedule rates for the same codes differ among
States, we calculated the median rate from the fee schedule rates for
all 50 States, Puerto Rico, and the Virgin Islands.
For the seven codes in the capped rental payment category, we used
the Medicare formula to calculate how much these items would cost if
beneficiaries chose to own them. For all but one of the items, the
least expensive purchase price is equal to 13 months of rental, and for
the remaining item (motorized wheelchair) it is equal to 10 months of
rental. Six codes in our sample are items that may be purchased new or
used. In these cases, we used the fee schedule purchase price for new
items. The remaining three codes in our sample are supplies that cannot
be re-used and there is only one possible purchase price for these
items in the fee schedule.
We also gathered information from past and current CMS competitive
bidding demonstration projects in Polk County, Florida and San Antonio,
Texas. We reviewed the list of items included in the demonstrations to
determine if any of the 16 items we reviewed had competitive bid
prices.
We sent a request to the VA's National Acquisition Center to
provide us with current Federal Supply Schedule prices for equipment
and supplies that matched the description of our 16 Medicare codes. The
National Acquisition Center handles the largest combined contracting
activity within the VA. The National Acquisition Center determined
which vendor contracts might contain products that matched the
descriptions for 14 of the codes, and sent us the contract containing
prices. For the two remaining codes (A4253--blood glucose test strips
and A4259--lancets), we obtained Federal Supply Schedule prices from
the VA's Pharmacy Benefit Management website. From the available VA
data, we identified items that we believed matched the descriptions of
our Medicare codes.
We sent requests to 52 State Medicaid agencies and 58 fee-for-
service FEHB Plans to provide current reimbursement prices for items
matching the description of the 16 Medicare codes. We received
responses from 40 Medicaid agencies and 30 FEHB Plans. Not all of the
respondents could provide rates for every item.
Finally, for each of the 16 codes, we identified Medicare suppliers
that received the highest payments for that particular code in 2000.
For each code we obtained retail prices from 10 suppliers. We asked
suppliers how much it would cost to buy the item, in cash, including
tax and delivery charges. For three of the 16 items--blood glucose test
strips for home blood glucose monitors, lancets, and enteral feeding
supply kits for use with pumps--we requested more than one price.
Generally, blood glucose test strips are made to fit specific brands of
equipment. Therefore, prior to calling suppliers, we identified two
commonly-used brands of test strips. We then requested the prices of
these two brands of test strips from suppliers. Blood glucose test
strips and lancets are often sold through mail order which may result
in different prices than retail prices. Therefore, we asked for the
mail order as well as the retail price. For enteral feeding supply
kits, we identified two supply kits billed under code B4035, and then
we asked suppliers for the prices of both supply kits. In addition, the
enteral feeding supply kits are covered by Medicare on a per day basis,
while the prices we were quoted were per unit. In our analysis, we
compared the per-unit price to Medicare's per-day price.
Senator Harkin. Ms. Rehnquist, thank you very much. I did
not know that timing clock was on. I wanted to give you plenty
of time, but we will get into a discussion.
Again, let me just thank you and your whole office for
really being diligent on this and doing it in a good time frame
and not dragging it out for a long time.
Ms. Rehnquist. Well, thank you.
Senator Harkin. We really appreciate that very much. I went
over the whole report. I just thought you did everything
exemplary in terms of the investigation and bringing to light
what we were paying on these items. So, again, I thank you and,
through you, the staff that works for you.
Ms. Rehnquist. They deserve a lot of the credit.
Senator Harkin. Thank you.
STATEMENT OF LESLIE G. ARONOVITZ, DIRECTOR, HEALTH
CARE, PROGRAM ADMINISTRATION AND INTEGRITY
ISSUES, UNITED STATES GENERAL ACCOUNTING
OFFICE
Senator Harkin. Now we will turn to Ms. Aronovitz. Leslie
Aronovitz is a Director of the Health Care Team for the GAO,
the General Accounting Office. She received her bachelor's
degree from the University of Georgia and her M.B.A. from the
Boston University. Again, Ms. Aronovitz, your testimony will be
made a part of the record in its entirety, but please proceed
as you desire.
Ms. Aronovitz. Thank you, Mr. Chairman. I am pleased to be
here today to discuss Medicare payment methods for medical
equipment, supplies, and covered outpatient drugs.
You have heard from the Inspector General about the wide
disparities between Medicare's payment rates and the prices
paid by others such as the VA or even retail customers. In a
similar vein, we reported last year on Medicare's policy of
paying list price for covered outpatient drugs, while
physicians and pharmacy suppliers could purchase them at
substantial discounts--in one case as high as 86 percent off
the list price.
To best understand how to begin fixing this problem, I
would like to take a minute to review the context in which
Medicare operates as a payer of health care services and
products. This will help explain in part why effective
solutions have been so elusive.
MEDICARE PAYMENT APPROACHES LACK FLEXIBILITY TO KEEP PACE WITH MARKET
CHANGES
Medicare is a highly visible public program with certain
obligations that may not be consistent with efficient business
practices. For example, CMS is constrained from acting swiftly
to reprice services and products even when prevailing market
rates suggest that payments should be modified. When making
substantive changes, Medicare is generally required to obtain
public input. While this minimizes the potential for actions to
have unintended consequences, seeking and responding to public
input from various provider and supplier groups has been a
cumbersome and time consuming process which often takes years
to make needed changes.
In addition, Medicare faces constraints on excluding
qualified providers which is the leverage that purchasers
typically use to make competition effective. Currently
Medicare's method of paying for medical equipment and supplies
is through fee schedules that remain tied to suppliers'
historical charges rather than market prices. Similarly,
Medicare's method of determining outpatient drug payments is
based on list prices, not prices that other purchasers actually
pay for the drugs.
Thus, neither method links Medicare payments to the
marketplace, and that is one of our suggestions--that Medicare
needs to have current price information, and information on
actual transactions that occur in the marketplace. Add to this
a process for revising rates that lacks the flexibility to make
adjustments quickly, and you can see why Medicare has
difficulty keeping pace with market changes.
BBA REFORMS SOUGHT TO IMPROVE MEDICARE'S ABILITY TO SET APPROPRIATE
RATES
Even though the Balanced Budget Act of 1997 gave CMS--then
HCFA--the authority to use a streamlined process to adjust
payment rates for most medical equipment and supplies, CMS
remains effectively precluded by the Congress from using this
authority because of certain procedural steps that the Agency
has not fulfilled. This authority is expected to be restored
when CMS publishes final regulations establishing a streamlined
process that includes sufficient steps for public notice and
comment.
Under the BBA of 1997, Medicare does have the authority to
conduct competitive bidding demonstrations for a limited number
of items at a few locations. Two demonstrations thus far have
involved suppliers competing for the right to supply certain
items on the basis of quality and price. These demonstrations
have reported savings without measurable problems in regards to
beneficiary access.
PAST EFFORTS TO CORRECT INAPPROPRIATE PAYMENTS SUGGEST LESSONS FOR THE
FUTURE
What we have learned from past efforts to lower Medicare's
overly generous payments is that changes are most effectively
implemented when the process used is rigorously defensible.
Thus, lesson one is that payment changes need to be based on
data-driven analyses of their potential impact on provider
behavior and beneficiary access. This helps avoid one extreme
of taking premature action based on external pressures and the
other extreme of taking no action when it is clearly warranted.
Lesson two--which relates to the first lesson--is that CMS
has not been well-positioned to collect and analyze data
regarding current market prices and the potential effects that
price adjustments could have on suppliers and beneficiaries
before the agency takes action. For example, information on
Medicare claims from medical equipment and supplies is not
specific enough to enable CMS to determine which products
Medicare is actually paying for.
prepared statement
Lesson three is that the positive results achieved from the
two competitive bidding demonstrations may be difficult to
expand on a national scale. This is due to the labor-intensive
outreach efforts in each of the two communities and the ongoing
monitoring required in regards to beneficiary access and
product quality. Despite this, the early success of competitive
bidding demonstrations in Florida and Texas clearly shows that
CMS can and should continue along this route.
Mr. Chairman, this concludes my prepared statement, and I
will be happy to answer any questions that you have.
[The statement follows:]
Prepared Statement of Leslie G. Aronovitz
medicare--challenges remain in setting payments for medical equipment
and supplies and covered drugs
Mr. Chairman and Members of the Subcommittee: I am pleased to be
here as you discuss Medicare payment methods related to durable medical
equipment, prosthetics, orthotics, and supplies--products referred to
in this statement as medical equipment and supplies--and covered
outpatient drugs. Over the years, we and the Department of Health and
Human Services (HHS) Office of the Inspector General (OIG) have
periodically reported that Medicare has paid higher than market rates
for various medical equipment and supply items and often considerably
higher than provider acquisition costs for Medicare-covered outpatient
drugs.\1\ Since the late 1980s, the Congress has enacted a series of
legislative changes affecting payment methods and payment adjustment
authority for medical equipment and supplies and outpatient drugs.
However, the progress made in setting appropriate rates has been mixed,
owing, in part, to various constraints faced by the agency responsible
for administering Medicare--the Centers for Medicare and Medicaid
Services (CMS), formerly called the Health Care Financing
Administration (HCFA).\2\
---------------------------------------------------------------------------
\1\ A list of related GAO products is included at the end of this
statement.
\2\ This statement will refer to HCFA in discussing actions taken
before the agency's name was officially changed on July 1, 2001.
---------------------------------------------------------------------------
In this regard, my remarks today will focus on: (1) Medicare's
experience in setting payment rates for medical equipment and supplies
and outpatient drugs; (2) certain changes designed to assist in setting
payments for medical equipment and supplies and outpatient drugs
incorporated in the Balanced Budget Act of 1997 (BBA); \3\ and (3)
lessons learned from efforts to improve the appropriateness of
Medicare's payments. My comments are based primarily on our previously
issued work.
---------------------------------------------------------------------------
\3\ Pub. L. No. 105-33, 111 Stat. 251.
---------------------------------------------------------------------------
In summary, because of the program's size, scope, and role as a
public payer, Medicare has limited options to set and adjust payments
for medical equipment and supplies and outpatient drugs. For example,
in cases where Medicare is the dominant payer for a service or product,
the program's share of the payments can distort the market, making
reliance on market prices problematic. Medicare's method of paying for
medical equipment and supplies is through fee schedules that remain
tied to suppliers' historical charges to Medicare rather than market
prices. Similarly, Medicare's method of determining outpatient drug
payments is based on list prices, not prices that purchasers actually
pay for the outpatient drugs. Medicare's payment approaches lack
flexibility to keep pace with market changes, and as a result, Medicare
often pays higher prices than other public payers for medical equipment
and supplies and outpatient drugs.
Despite dramatic instances of wide disparities in market prices and
Medicare's payment rates for medical equipment and supplies and
outpatient drugs, Medicare is not in a position to take prompt action.
To lower unreasonably high payment rates, it must follow a lengthy and
complicated regulatory process for making payment adjustments. The BBA
gave HCFA authority to use a streamlined process to adjust payment
rates for most medical equipment and supplies and outpatient drugs.\4\
However, the agency's attempt to use this authority drew intense
industry criticism, in part because the agency acted before it
responded to public comment on how it would implement the authority.
The Congress then prohibited use of either the original or streamlined
processes until public comments are addressed and a final rule
issued.\5\ To date, a final rule has not been published, effectively
precluding the use of the original or streamlined processes to adjust
Medicare payment rates, where excessive. Nevertheless, the BBA also
provided HCFA the authority to test an alternative to setting prices
administratively.\6\ This authority permitted HCFA to conduct
demonstrations, for a limited number of items at a few locations, using
competition to determine an appropriate payment for these items. In
this process, suppliers competed for the right to supply certain items
on the basis of quality and price. Two such demonstrations have
reported savings without any measurable problems in beneficiary access.
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\4\ BBA at Sec. 4316, 111 Stat. 390 (codified at 42 U.S.C. Sec.
1395u(b)(8) and (9) (Supp. III 1997)).
\5\ Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of
1999, Pub. L. No. 106-113, App. F, Sec. 223, 113 Stat. 1501, 1501 A-
352 (to be codified at 42 U.S.C. 1395u(b)(8) (Supp. V 1999)).
\6\ BBA at Sec. 4318, 111 Stat. 392 (codified at 42 U.S.C. Sec.
1395w-3 (Supp. III 1997)).
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Past efforts to lower Medicare's overly generous payments suggest
several lessons. First, payment changes are most effectively
implemented when the process used to set or adjust a rate is
defensible. Medicare's size and impact on the nation's health care
economy means that its payment methods and rate adjustments, no matter
how reasonable, will face close scrutiny. As a result, the need for CMS
to collect sufficient information on market prices and potential
effects on suppliers and beneficiaries before taking action is
paramount. A second lesson, related to the first, is that the
information on Medicare claims for medical equipment and supplies is
not specific enough to enable CMS to determine which products Medicare
is actually paying for. Thus, the agency has difficulty trying to use
market prices to set appropriate rates. A third lesson is that for the
foreseeable future, CMS will have to continue to rely on fee schedules
based on historical charges in setting payment rates for medical
equipment and supply items. The recent demonstrations that set payments
for items through competitive bidding were instructive, but the
positive results achieved may be neither applicable nor practical on a
wider scale for many products.
background
CMS, an agency within HHS, is responsible for much of the federal
government's multi-billion-dollar payments for health care, primarily
through the Medicare and Medicaid programs. Medicare--the nation's
largest health insurance program--covers about 40 million elderly and
disabled beneficiaries. Medicaid is a state-administered health
insurance program, jointly funded by the federal and state governments,
that covers eligible low-income individuals including children and
their parents, and aged, blind, and disabled individuals. Each state
administers its own program and determines--under broad federal
guidelines--eligibility for, coverage of, and reimbursement for,
specific services and items.
Most Medicare beneficiaries purchase part B insurance, which helps
pay for certain physician, outpatient hospital, laboratory, and other
services; medical supplies and durable medical equipment (such as
oxygen, wheelchairs, hospital beds, and walkers); and certain
outpatient drugs. Medicare part B pays for most medical equipment and
supplies using a series of fee schedules. Medicare pays 80 percent, and
the beneficiary pays the balance, of either the actual charge submitted
by the supplier or the fee schedule amount, whichever is less.
Generally, Medicare has a separate fee schedule for each state for most
categories of items, and there are upper and lower limits on the
allowable amounts that can be paid in different states to reduce
variation in what Medicare pays for similar items in different parts of
the country.
The fee schedules specify a Medicare-allowable payment amount for
each of about 1,900 groups of products. Each product group is
identified by a Healthcare Common Procedure Coding System (HCPCS) Level
II code, and all products grouped under a code are intended to be items
that are alike and serve a similar health care function. For example,
one code (E1130) describes a standard wheelchair with fixed arms. Many
different brands can be billed under this code, so long as they fit the
basic description.
Medicare part B also covers roughly 450 outpatient drugs--generally
those that cannot be self-administered and are related to physicians
services, such as cancer chemotherapy, or are provided in conjunction
with covered durable medical equipment, such as inhalation drugs used
with a nebulizer.\7\ In addition, Medicare part B covers selected
immunizations and certain outpatient drugs that can be self-
administered, such as blood clotting factors and some oral drugs used
in association with cancer treatment and immunosuppressive therapy.
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\7\ A nebulizer is a device driven by a compressed air machine that
allows the patient to take medicine in the form of a mist or wet
aerosol.
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To administer Medicare part B fee-for-service claims, CMS contracts
with insurance companies, referred to as carriers, who review and pay
claims that have been submitted by physicians and other outpatient
providers and suppliers. To ensure appropriate payment, carriers
conduct claims reviews that determine, for example, whether the
services claimed are covered by Medicare, are reasonable and necessary,
and have been billed with the proper codes.
payment approaches lack flexibility to keep pace with market changes
Medicare's size and complexity make it extremely challenging to
develop payment methods that prudently reimburse providers while
promoting beneficiary access to items and services. As Medicare's
steward, CMS cannot passively accept what providers want to charge the
program. However, because of its size, Medicare profoundly influences
health care markets. Medicare is often the dominant payer for services
and products, and in such cases, it cannot rely on market prices to
determine appropriate payment amounts because Medicare's share of
payments distorts the market. In addition, Medicare has had difficulty
relying on competition to determine prices. Because of constraints on
excluding any qualified provider from participating in the program,
Medicare traditionally includes all such providers who want to
participate. Finding ways of encouraging competition without excluding
some providers--a normal leverage that purchasers use to make
competition work--has been problematic. As a result, Medicare has had
to administratively set payment amounts for thousands of services and
items, trying to do so in ways that encourage efficient delivery, while
ensuring beneficiary access to them.
Adding to the complexity of setting payment amounts is Medicare's
status as a highly visible public program with certain obligations that
may not be consistent with efficient business practices. For example,
CMS is constrained from acting swiftly to reprice services and supplies
even when prevailing market rates suggest that payments should be
modified. When making substantive changes, Medicare's enabling
legislation generally requires public input. This minimizes the
potential for actions to have unintended consequences. However, seeking
and responding to public input from various provider and supplier
groups can be a time-consuming process that can sometimes thwart
efficient program management.
Prior to 1987, Medicare payments for medical equipment and supplies
were based on supplier charges, subject to some limitations. As part of
their responsibilities to administer Medicare claims, individual
Medicare carriers raised or lowered payments to suppliers in their
local areas to align them with market prices. When carriers sought to
adjust payments on this basis, they employed a process that involved
gathering relevant pricing data from local area markets, determining
new payment levels on the basis of the price information obtained, and
notifying area suppliers of the changes. Although HCFA monitored
carriers' performance in carrying out these steps, it did not evaluate
the appropriateness of the new payment levels established.
In 1987, the Congress and HCFA began the process of moving the
Medicare program from paying on the basis of individual providers'
charges for medical equipment and supplies and covered outpatient
drugs, to developing payment methods intended to pay more prudently
through use of program-determined amounts. Specifically, the Congress
introduced fee schedules for medical equipment and supplies in 1987.\8\
Statewide fees were determined on the basis of average supplier charges
on Medicare claims allowed in each state in 1986 and 1987, and were
updated for inflation in some years.\9\ However, the agency lacked
mechanisms to otherwise adjust fees to reflect marketplace changes. As
a result, disparities between fee schedule amounts and market prices
developed over time, and Medicare significantly overpaid for some
medical equipment and supplies.
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\8\ Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203,
Sec. 4062, 101 Stat. 1330, 1330-101 (codified at 42 U.S.C. Sec. 1395m
(1988)). Certain medical equipment and supply items not originally on a
fee schedule were added later--for example, surgical dressings, were
added by the Omnibus Budget Reconciliation Act of 1993 Pub. L. No. 103-
66, Sec. 13544(b), 107 Stat. 312, 589 (codified at 42 U.S.C. Sec.
1395m(i) (1994)).
\9\ Prior to 1998, these fees were adjusted each year using
formulas tied to the Consumer Price Index. No update was provided from
1998 through 2000 or in 2002, although updates were provided in 2001.
42 U.S.C. Sec. 1395m(a)(14) (Supp. IV 1998); Medicare, Medicaid and
SCHIP Balanced Budget Refinement Act of 1999, Pub. L. No. 106-113, App.
F, Sec. 228, 113 Stat. 1501, 1501A-356; and Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000, Pub. L. No. 106-
554, App. F, Sec. 425, 114 Stat. 2763, 2763A-519 (to be codified at 42
U.S.C. Sec. 1395m(a)(14)).
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In recent years, we and the HHS OIG reported on instances where
Medicare payments for certain medical equipment and supplies and
outpatient drugs were excessive compared with retail and other prices.
One notable example of excessive Medicare payments is included in our
1995 report on surgical dressings.\10\ We estimated that Medicare could
have saved almost $20 million in 1995 if it had paid the lowest
wholesale prices available in a national catalog for 44 types of
surgical dressings. Although Medicare's fee schedule for surgical
dressings was based on medians of retail prices found in supply
catalogs when the schedule was set, Medicare's statute did not permit
HCFA to lower the fee schedule when retail prices for dressings
decreased.\11\
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\10\ U.S. General Accounting Office, Medicare: Excessive Payments
for Medical Supplies Continue Despite Improvements, GAO/HEHS-95-171
(Washington, D.C.: Aug. 8, 1995).
\11\ Authority to adjust payment rates that were excessive did not
extend to surgical dressings and certain other medical supplies at that
time. The BBA extended the authority to adjust rates for any payments
under part B that are excessive. BBA at Sec. 4316, sec.
1842(b)(8)(A)(i)(I), 111 Stat. 390 (changing ``application of this
subsection'' to ``application of this part).'' Clarifying this
broadened scope, ``application of this part'' was later changed to
``application of this title to payment under this part.'' Medicare,
Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. No.
106-113, App. F, Sec. 223(c), 113 Stat. 1501, 1501A-353.
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Another instance of excessive Medicare payment was for home oxygen
equipment and supplies provided to patients with pulmonary
insufficiency. Medicare fee schedule allowances for home oxygen were
significantly higher than the rates paid for almost identical services
by the Department of Veterans Affairs (VA), which in fiscal year 1995
paid for home oxygen benefits for over 23,000 patients. In 1997, we
estimated that Medicare could have saved over $500 million in fiscal
year 1996 if it had paid rates for home oxygen comparable to those paid
by VA.\12\
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\12\ The savings estimate includes adding a 30-percent adjustment
to VA payment rates to account for differences between the Medicare and
VA programs. See U.S. General Accounting Office, Medicare: Comparative
Information on Medicare and VA Patients, Services, and Payment Rates
for Home Oxygen, GAO/HEHS-97-151R (Washington, D.C.: June 6, 1997).
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Medicare's payments for outpatient drugs have been similarly
excessive, although the methodology used to determine payment amounts
is somewhat different and attempts to tie Medicare's payments to market
prices. In 1989, the Congress required that physician services be paid
based on fee schedules beginning in 1992.\13\ The fee schedules
developed by HCFA to comply with this requirement provided for all
outpatient drugs furnished to Medicare beneficiaries not paid on a cost
or prospective payment basis to be paid based on the lower of the
estimated acquisition cost or the national average wholesale price
(AWP).\14\ Manufacturers report AWPs to organizations that publish them
in drug price compendia, which are typically updated annually, and
Medicare carriers base providers' payments on these published AWPs.
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\13\ Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-
239, Sec. 6102, 103 Stat. 2106, 2169 (codified at 42 U.S.C. Sec.
1395w-4 (Supp. I 1989)).
\14\ 56 Fed. Reg. 59,502, 59,507 (Nov. 25, 1991).
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In concept, such a payment method has the potential to be market-
based and self-adjusting. The reality is, however, that AWP is neither
an average nor a price that wholesalers charge. Because the term AWP is
not defined in law or regulation, there are no requirements or
conventions that AWP reflect the price of any actual sale of drugs by a
manufacturer. Given the latitude manufacturers have in setting AWPs,
Medicare's payments are often not related to market prices that
physicians and suppliers actually pay for the products.
A June 1997 House Budget Committee report accompanying the bill
that became the BBA, in explaining the reason for specifying a 5-
percent reduction from AWP, cited a report by the HHS OIG regarding
Medicare payments for outpatient drugs.\15\ Among the OIG findings were
that Medicare payments ranged from 20 percent to nearly 1,000 percent
of certain oncology drugs' commercially available prices.
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\15\ H.R. Rep. No. 105-149, at 1354 (1997).
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Our recent work found that Medicare payments in 2001 for part B-
covered outpatient drugs remained significantly higher than prices
widely available to physicians and pharmacy suppliers.\16\ For example,
most physician-administered drugs had widely available discounts
ranging from 13 to 34 percent below AWP. Two other physician-
administered drugs had discounts of 65 and 86 percent. Pharmacy
suppliers--the predominant billers for 10 of the high-expenditure and
high-volume drugs we analyzed--also purchased drugs at prices
considerably lower than Medicare payments. For example, two inhalation
drugs accounting for most of Medicare payments to pharmacy suppliers
had widely available discounts averaging 78 percent and 85 percent from
AWP.
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\16\ U.S. General Accounting Office, Medicare: Payments for Covered
Outpatient Drugs Exceed Providers' Cost, GAO-01-1118 (Washington, D.C.:
Sept. 21, 2001).
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bba reforms sought to improve medicare's ability to set appropriate
rates
Despite such dramatic illustrations of disparities between Medicare
payments and prices widely available to others acquiring medical
equipment and supplies and covered outpatient drugs, Medicare has not
had the tools to respond quickly in such instances. Carriers used to
adjust payment amounts as part of their responsibility to appropriately
pay Medicare claims, but in 1987, the Congress effectively prohibited
use of this process to lower Medicare payment rates until 1991.\17\ In
1988, the Congress required use of a more formal ``inherent
reasonableness'' process that could be accomplished only by HCFA, not
by the carriers.\18\ In other reports, we have described this process
as slow and cumbersome and have noted that it is not available for some
items, such as surgical supplies.\19\ Since 1991, when HCFA was first
permitted to use the inherent reasonableness process to adjust payments
for medical equipment and supplies, it successfully did so only once--
for blood glucose monitors--and in that instance took almost 3 years to
adjust the maximum allowable Medicare payment from $185.79 to $58.71.
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\17\ Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-
203, Sec. 4062(b), 101 Stat. 1330, 1330-100.
\18\ Medicare Catastrophic Coverage Act of 1988, Pub. L. No. 100-
360, Sec. 411(g)(1)(B)(xiii), 102 Stat. 683, 782. These procedures
were previously applicable only to any inherent reasonableness review
with respect to physician services. 42 U.S.C. 1395m(a)(10)(B) (1988).
\19\ Changing an unreasonable payment level required, among other
things, a formal notice-and-comment rulemaking process that involved
the HCFA Administrator, the Secretary of Health and Human Services, and
the Director of the Office of Management and Budget (OMB). U.S. General
Accounting Office, Medicare Payments: Use of Revised ``Inherent
Reasonableness'' Process Generally Appropriate, GAO/HEHS-00-79
(Washington, D.C.: July 5, 2000) and GAO/HEHS-95-171.
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In 1997, in response to concerns about HCFA's difficulties in
adjusting payment rates determined to be excessive, the Congress
included a provision in the BBA that gave HCFA authority to use a
streamlined inherent reasonableness process to adjust payments for
medical equipment and supplies and covered outpatient drugs by up to 15
percent a year.\20\ Subsequent legislation required that a final
regulation taking into account public comments be published before the
agency could use any inherent reasonableness authority. Because the
agency has not issued the final regulation, it cannot adjust Medicare's
fee schedules to respond to market price information. The BBA also
provided HCFA with opportunities to test an alternative to setting
rates administratively that could be more responsive to market
prices.\21\ This alternative is competitive bidding--a process allowing
suppliers to compete for the right to supply their products on the
basis of established criteria, such as quality and price.\22\
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\20\ BBA at Sec. 4316, 111 Stat. 251, 390.
\21\ BBA at Sec. 4319, 111 Stat. 251, 392. (Codified at 42 U.S.C.
Sec. 1395w-4 (Supp. III 1997).
\22\ In the competitive bidding demonstration projects authorized
under BBA, Medicare part B items and services (other than physician
services) were furnished under competitively awarded contracts. For
each demonstration product or service, the prices bid by winning
suppliers were used to determine the competitively bid fee schedule
price.
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streamlined process to adjust fees needs further regulatory action to
be implemented
The BBA gave HCFA authority to use a streamlined inherent
reasonableness process for part B services (excluding physician's
services). Under this authority, HCFA can adjust payments by up to 15
percent per year using a streamlined process, or can use its original
process with formal notice and comment to make larger adjustments. In
January 1998, the agency published an ``interim final rule with comment
period'' for the streamlined inherent reasonableness process that
became effective 60 days after it was published.\23\ This was a
departure from the usual practice of first responding to public
comments before issuing a final regulation.
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\23\ 63 Fed. Reg. 687 (Jan. 7, 1998). In this interim final rule,
HCFA committed to having a notice and comment period for any payment
adjustments, even through the streamlined process.
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Under the interim final rule, HCFA delegated authority to use the
streamlined process to the Medicare carriers that process claims for
medical equipment and supplies, with final action on payment
adjustments to be approved by the agency. The carriers attempted to
lower maximum payment rates for eight groups of products, gathering
information on retail prices through surveys conducted in at least 16
states. In September 1998, the carriers notified suppliers of proposed
adjustments for eight groups of products and solicited comments.
Industry groups representing various medical equipment and supply
manufacturers and suppliers expressed serious concerns about how the
inherent reasonableness process was implemented and whether the surveys
were conducted properly. The Congress requested that we review the
appropriateness of implementing the streamlined inherent reasonableness
authority through an interim final rule and the soundness of the
carriers' surveys. Pending the results of our review, HCFA suspended
the carrier-proposed payment reductions in March 1999.
In November 1999, the Congress passed legislation prohibiting HCFA
or the carriers from using any inherent reasonableness authority until
we issued our report and the agency issued a final rule taking into
account our findings and public comment.\24\ In our July 2000 report,
we concluded that, while the carriers could have conducted their
surveys more rigorously, the surveys and other evidence sufficiently
justified the carriers' proposed payment reductions for five of eight
product groups.\25\ In our report, we recommended that HCFA clarify
criteria for using its inherent reasonableness authority, strengthen
agency or carrier survey methodology in the future, collect additional
data on prices for the other three product groups before adjusting
their payment amounts, and monitor beneficiary access after any payment
changes. Although our report is almost 2 years old, CMS has not issued
a final regulation that would allow it to use either its streamlined or
original inherent reasonableness processes to adjust Medicare payment
amounts for part B supplier-billed services. Thus, the agency lacks a
tool to adjust its fee schedules, short of statutory changes.
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\24\ Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act
of 1999, Pub. L. No. 106-113, App. F, Sec. 223, 113 Stat. 1501, 1501A-
352 (signed into law January 29, 1999).
\25\ GAO/HEHS-00-79.
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bba provisions authorized competitive bidding demonstration projects
In order to experiment with other ways of setting Medicare's
payments for medical equipment and supplies and outpatient drugs, the
BBA provided authority for HCFA to conduct demonstration projects using
competitive bidding and to include home oxygen in at least one of the
demonstrations.\26\ Evidence from two competitive bidding projects
suggests that, for most of the items selected, competition might
provide a tool that facilitates setting more appropriate payment rates
and result in program savings.
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\26\ BBA at Sec. 4219, 111 Stat. 392. The BBA at 4552(a), 111
Stat. 459, also reduced home oxygen payment amounts by 25 percent
effective January 1, 1998, and an additional 5 percent effective
January 1, 1999.
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In its first competitive bidding demonstration, conducted in Polk
County, Florida, HCFA set rates for oxygen, hospital beds, surgical
dressings, enteral nutrition and supplies, and urological supplies
through competitive bidding. HCFA reported that the new rates set by
this competitive process in the Florida demonstration saved Medicare an
average of 17 percent on the cost of these medical equipment and supply
items without compromising beneficiary access to these items.\27\
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\27\ Medicare program savings did not occur in all product
categories; there were higher prices for surgical dressings, one of
five product categories in the demonstration.
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In a second demonstration in San Antonio, Texas, the agency
included oxygen; hospital beds; manual wheelchairs; noncustomized
orthotic devices, including ``off-the-shelf'' items such as braces and
splints; and albuterol sulfate and other nebulizer drugs. Preliminary
CMS information on the San Antonio competitive bidding demonstration
identified an average savings of 20 percent, without any negative
effects on beneficiary access.
past efforts to correct inappropriate payments suggest lessons for the
future
Whether attempting to adjust payments administratively or through
competitive bidding, CMS can only be effective if it has a defensible
process for doing so and accurate information upon which to base
action. Any change to Medicare's payments, particularly a reduction in
fees for medical equipment and supplies or covered outpatient drugs,
should be accompanied by an ongoing assessment of whether the new
payments adequately support Medicare beneficiaries' access to such
items and services and properly reimburse providers and suppliers. Such
monitoring needs to examine current experience so that prompt fee
adjustments can be made if access problems are found.
Efforts to lower excessive payment rates through the inherent
reasonableness process illustrate the difficulties CMS has in making
even minor adjustments, as the agency's actions can have wide
ramifications for providers, suppliers, and beneficiaries. When HCFA
tried to use its streamlined inherent reasonableness authority in 1998
to reduce payment rates for various medical equipment and supply items
and outpatient drugs, it attempted to take action before responding to
public comment, thereby leaving the effort open to criticism. In
addition, we concluded that the carriers' survey methodology was not
rigorous enough to provide a basis to adjust fees nationally for all of
the products under review.
What the agency lacked was sufficient information on market prices.
Such information, along with current local, as well as national, data
on beneficiaries' use of services and program expenditures, is key to
setting rates administratively. Because HCFA did not have reliable
acquisition cost information, its carriers engaged in a very labor-
intensive information-gathering effort.
One major problem CMS has when going to the marketplace to collect
information is that it cannot determine the specific products Medicare
is paying for when carriers process claims for medical equipment and
supplies. Carriers pay claims on the basis of billing codes indicating
that the supplied items belong to a particular product group. These
groups can cover a broad range of product types, quality, and market
prices. As a result, products that differ widely in properties, use,
performance, and price are billed under the same code and the program
pays the same amount. For example, we reported in 1998 that catheters
belonging to a single product category varied in type and price, from
about $1 to $18, with Medicare's maximum fee payments ranging across
states from $9.95 to $11.70.\28\ However, HCFA had no information on
which catheters were being provided to beneficiaries.
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\28\ U.S. General Accounting Office, Medicare: Need to Overhaul
Costly Payment System for Medical Equipment and Supplies, GAO/HEHS-98-
102 (Washington, D.C.: May 12, 1998).
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To address the problem of insufficient specificity, we recommended
in the 1998 report that suppliers be required to include universal
product numbers (UPN) as well as current billing codes on claims. UPNs
and associated bar codes are increasingly used to identify specific
medical equipment and supplies, similar to the way universal product
codes are used in supermarkets. Manufacturers can use bar codes for
each product to identify characteristics such as the manufacturer,
product type, model, size, and unit of packaging. Using UPNs--or some
other mechanism--incorporated into claim forms to bring more
specificity to what is provided to beneficiaries could help CMS better
determine appropriate payments.
Under provisions in the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), HHS has adopted standards for
coding medical services, procedures, and equipment and supplies.\29\
These provisions were aimed at simplifying data reporting and claims
processing requirements across all public and private payers. Under the
standards, HCPCS Level II was designated as the code set for medical
equipment and supplies. Its limitation in specificity argues for
evaluating whether the current code set can be adjusted to better
distinguish between various products currently grouped within a single
HCPCS Level II code.
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\29\ Pub. L. No. 104-191, Sec. 262(a), Sec. 1173(c), 110 Stat.
1936, 2025.
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Lack of specificity has been a similar problem for the codes used
to define inpatient hospital procedures. The HIPAA standard code set
for reporting hospital inpatient procedures is the International
Classification of Disease, 9th Edition, Clinical Modification, Volume 3
(ICD-9 CM Vol. 3). The inadequacy of this code set is widely
recognized, as it lacks both the specificity to accurately identify
many key aspects of medical procedures as well as the capacity to
expand in order to appropriately incorporate codes in response to new
technology. In fact, HHS recognized that in adopting the ICD-9-CM Vol.
3 as a HIPAA standard, the agency would need to replace it, given the
code set's limitations. As a consequence, CMS plans to implement a new
code set, the International Classification of Disease, 10th Edition,
Procedural Coding System (10 PCS), which would provide much greater
specificity.
Our work on payments for covered outpatient drugs, which identified
strategies used by other payers to obtain prices closer to acquisition
costs, underscores the value of accurate information for determining
appropriate payments. For example, the VA uses the leverage of federal
purchasers to secure verifiable information on actual market
transactions by private purchasers--specifically, the prices that drug
manufacturers charge their ``most-favored'' private customers. To
enable the VA to determine the most-favored-customer price, by statute,
manufacturers who wish to sell their products to the federal agencies
involved are required to provide information on price discounts and
rebates offered to domestic customers and the terms and conditions
involved, such as length of contract periods and ordering and delivery
practices.\30\ The manufacturers provide this information and agree to
offer the VA and other government purchasers drugs at these prices,
subject to VA audit of their records,\31\ in order to have state
Medicaid programs cover their drugs.
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\30\ 38 U.S.C. Sec. 8126 (1994).
\31\ The VA negotiates prices for and purchases medical equipment,
supplies, and drugs through the Federal Supply Schedule. Federal Supply
Schedule prices are available to any federal agency that directly
procures pharmaceuticals or medical equipment and supplies, including
VA medical centers, the Department of Defense, the Bureau of Prisons,
the Public Health Service, and other designated entities such as the
District of Columbia, U.S. territorial governments, the Indian Health
Service, and some state veterans homes.
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This type of information could be helpful in setting payment
amounts for certain Medicare drugs. It is already available to CMS, but
for use only in the Medicaid--not the Medicare--program.\32\ With
congressional approval, CMS could use the information provided to
Medicaid to determine appropriate prices for Medicare that would be
based on actual prices being paid in the market. One key step would be
to determine the formula to use to calculate payments based on the
price data. Most likely, Medicare would not set payments to match the
prices paid by most favored customers but would need to pay closer to
average market prices to ensure access for all beneficiaries and
adequate payments to providers.
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\32\ Under a provision of the Omnibus Budget Reconciliation Act of
1990 (OBRA), state Medicaid programs receive rebates from manufacturers
based on either the manufacturer's ``best price'' to a private
purchaser or the average price (including cash discounts and other
price reductions) paid to drug manufacturers by U.S. wholesalers for
certain drugs. In order to have their drugs covered by Medicaid,
manufacturers must be willing to provide the rebate and price
information to calculate it. Sec. 1927 of the Social Security Act,
added by OBRA 1990, Public Law 101-508, Sec. 4401, 104 Stat. 1388,
1388-143 (1990) (classified to 42 U.S.C. Sec. 1396r-8).
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Results from the competitive bidding demonstrations suggest that
competition can also serve as a tool to obtain more appropriate prices
for medical equipment and supplies and outpatient drugs. By competing a
small number of products and limiting the geographic area of
competition, CMS took steps to manage the process, which included
monitoring of beneficiary access and product quality. In its fiscal
year 2003 budget, the Administration proposed expanding competitive
bidding for medical equipment and supplies nationally, which it
estimates could save $240 million in fiscal year 2003 and $5 billion
over 10 years.
The Administration's expansion proposal to translate these limited
demonstrations into a competition involving a larger number of products
nationally would be a substantial undertaking and may not be practical
or appropriate for all products. CMS would require new authority to
begin to use competitive bidding outside of a demonstration. A key
element to the new authority would be the extent to which and the basis
whereby providers could be excluded from Medicare. While Medicare
normally allows any qualified provider to participate in the program,
competitive bidding may be most effective only by limiting the number
of providers or suppliers who could provide items or services. For
example, in the Polk County demonstration, only 16 out of the 30
bidders were selected to participate. Limiting the number of
participating suppliers obviously has an effect on both beneficiaries
and suppliers. While provider participation is not an entitlement, the
effects of exclusion--in terms of numbers of providers and the volume
of services affected--need to be identified and assessed. Similarly,
for some products, who the provider is may be of little consequence for
the beneficiary, but for others, maintaining greater beneficiary choice
and direct access to the provider could be important.
Whether payment rates are set or adjusted through competitive
bidding or administrative fee-setting, monitoring to ensure that
beneficiaries continue to have access to the items or services is a
critical component of such efforts. For example, when the Congress
reduced Medicare home oxygen payment rates by 25 percent effective
January 1, 1998, and an additional 5 percent effective January 1, 1999,
it wanted assurance that beneficiaries could continue to receive
satisfactory service.\33\ To evaluate the impact of the home oxygen
payment reduction on access and quality, the BBA required studies
conducted by us and HHS.\34\ Neither study found any significant access
problems with the payment reduction. In addition, home oxygen was
included in both competitive bidding demonstrations, and through those
demonstrations, prices were reduced further. HCFA estimated that
Medicare's home oxygen payments were reduced by 16 percent in the Polk
County demonstration, without beneficiary access problems. Such
monitoring is important, not just when required by statute but as part
of an ongoing effort to ensure the Medicare program is effectively
serving its beneficiaries.
---------------------------------------------------------------------------
\33\ For beneficiaries who receive oxygen at home, Medicare part B
pays suppliers a fixed monthly fee per beneficiary that covers a
stationary, home-based oxygen unit and all related services and
supplies, such as tank refills. There is a separate fixed monthly fee
for a portable unit, if one is prescribed. Medicare's oxygen payment
method is called ``modality neutral'' because the payment rate is the
same regardless of the type of oxygen delivery system prescribed, i.e.
compressed gas, liquid oxygen, or oxygen concentrator.
\34\ U.S. General Accounting Office, Medicare: Access to Home
Oxygen Largely Unchanged; Closer HCFA Monitoring Needed, GAO/HEHS-99-56
(Washington, D.C.: Apr. 5, 1999) and Rebecca Olson, Carolyn Harper,
Stephanie Lui, and others. Report on Peer Review Evaluation of Home
Oxygen Equipment. California Medical Review, Inc. (San Francisco,
Calif.: Sept. 30, 2000). This HHS study analyzed 1996 and 1998 claims
data to calculate the number of Medicare oxygen prescriptions, and also
conducted 1999 surveys of physicians, suppliers, and beneficiaries.
---------------------------------------------------------------------------
Unfortunately, such studies to review the effects of payment
reductions on access are the exception. As we have reported before, CMS
has not been able to generate data that are timely, accurate, and
useful on payment and service trends essential to effective program
monitoring.\35\ One of the principal lessons to be drawn from the many
BBA payment reforms is that newly implemented policies need a thorough
assessment of their effects. Policy changes, particularly those that
constrain payment, almost inevitably spark calls for revisions.
Considerations of such revisions need to be based on sufficient
information so that, at one extreme, policies are not unduly affected
by external pressures and premature conclusions as to their impact, and
at the other extreme, policies do not remain static when change is
clearly warranted.\36\ CMS has not been well-positioned to collect and
analyze data regarding beneficiaries' use of services--information that
is essential to managing the program effectively.\37\ This year's 5.4
percent reduction of physicians' fees from what was paid in 2001 raised
concerns about beneficiaries' access. While prior information available
on physicians' willingness to see Medicare beneficiaries did not
indicate access problems, this information is somewhat dated.\38\
Informed decisions about appropriate payment rates and rate changes
cannot be made unless policymakers have detailed and recent data on
beneficiaries' access to needed services.
---------------------------------------------------------------------------
\35\ U.S. General Accounting Office, Major Management Challenges
and Program Risks: Department of Health and Human Services, GAO-01-247
(Washington, D.C.: Jan. 2001).
\36\ U.S. General Accounting Office, Balanced Budget Act: Any
Proposed Fee-for-Service Payment Modifications Need Thorough
Evaluation, GAO/T-HEHS-99-139 (Washington, D.C.: June 10, 1999).
\37\ U.S.General Accounting Office, Medicare: HCFA Faces Challenges
to Control Improper Payments, GAO/T-HEHS-00-74, (Washington, D.C.: Mar.
9, 2000).
\38\ 9U.S. General Accounting Office, Medicare Physician Payments:
Spending Targets Encourage Fiscal Discipline, Modifications Could
Stabilize Fees, GAO-02-441T, (Washington, D.C.: Feb. 14, 2002).
---------------------------------------------------------------------------
Mr. Chairman, this concludes my prepared remarks. I will be happy
to answer any questions you or the Subcommittee Members may have.
Contact and Acknowledgments For further information regarding this
testimony, please contact me at (312) 220-7600. Sheila Avruch, Hannah
Fein, Sandra Gove, Joy Kraybill, and Craig Winslow made contributions
to this statement.
related gao products
Medicare Outpatient Drugs: Program Payments Should Better Reflect
Market Prices. GAO-02-531T. Washington, D.C.: March 14, 2002.
Medicare Physician Payments: Spending Targets Encourage Fiscal
Discipline, Modifications Could Stabilize Fees. GAO-02-441T.
Washington, D.C.: February 14, 2002.
Medicare: Payments for Covered Outpatient Drugs Exceed Providers'
Cost. GAO-01-1118. Washington, D.C.: September 21, 2001.
Medicare Part B Drugs: Program Payments Should Reflect Market
Prices. GAO-01-1142T. Washington, D.C.: September 21, 2001.
Medicare Management: CMS Faces Challenges to Sustain Progress and
Address Weaknesses. GAO-01-817. Washington, D.C.: July 31, 2001.
DOD and VA Pharmacy: Progress and Remaining Challenges in Jointly
Buying and Mailing Out Drugs. GAO-01-588. Washington, D.C.: May 25,
2001.
Medicare Payments: Use of Revised ``Inherent Reasonableness''
Process Generally Appropriate. GAO/HEHS-00-79. Washington, D.C.: July
5, 2000.
Balanced Budget Act: Any Proposed Fee-for-Service Payment
Modifications Need Thorough Evaluation. GAO/T-HEHS-99-139. Washington,
D.C.: June 10, 1999.
Medicare: Need to Overhaul Costly Payment System for Medical
Equipment and Supplies. GAO/HEHS-98-102. Washington, D.C.: May 12,
1998.
Medicare: Access to Home Oxygen Largely Unchanged; Closer HCFA
Monitoring Needed. GAO/HEHS-99-56. Washington, D.C.: April 5, 1999.
Medicare: Comparative Information on Medicare and VA Patients,
Services, and Payment Rates for Home Oxygen. GAO/HEHS-97-151R.
Washington, D.C.: June 6, 1997.
Medicare: Excessive Payments for Medical Supplies Continue Despite
Improvements. GAO/HEHS-95-171. Washington, D.C.: August 8, 1995.
STATEMENT OF THOMAS A. SCULLY, ADMINISTRATOR, CENTERS
FOR MEDICARE AND MEDICAID SERVICES,
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Senator Harkin. Thank you, Ms. Aronovitz. I do have some
questions about this.
Next we turn to Mr. Tom Scully, the Administrator for the
Centers for Medicare and Medicaid Services, formerly known as
HCFA. Prior to this assignment, Mr. Scully was President of the
Federation of American Health Systems representing for-profit
hospital systems. Mr. Scully is also a former senior official
with the OMB in the first Bush administration.
Welcome to the committee, Mr. Scully. Your statement will
be made a part of the record in its entirety, and again please
proceed as you so desire.
Mr. Scully. Chairman Harkin and Senator Murray, thank you
for inviting me to discuss Part B payments for medical supplies
today.
Mr. Chairman, I want to thank you in particular for pushing
us aggressively to move forward on the inherent reasonableness
regulation. This is a high priority of mine. I can assure you
we have been working for months to get this regulation out, and
as I have said repeatedly in the last couple of days in the
press, you are totally right on this issue and we completely
agree with you.
Senator Harkin. I appreciate that.
Mr. Scully. I also want to thank Janet Rehnquist, the
Inspector General, a far more distinguished member of the
University of Virginia 1979 graduating class than I am, by the
way.
MEDICARE PROGRAM
Senator Harkin. You were both in the same class?
Mr. Scully. Same class. Hard to believe. She tries not to
admit that for the most part.
I want to thank her for the IG's assistance in helping us
to identify areas where we can improve our payment process and
clearly save seniors money. Saving the Medicare program money
is important, but what a lot of people forget, I think, is that
not only does part of this money go in the premiums for
seniors, but also co-payments. So, every dollar we ever pay for
these supplies is more money coming out of seniors' pockets.
I would also note that not only for this issue--and I know
Leslie's testimony talked a little about AWP for drugs, which
is a very similar parallel issue--we are also overpaying--and
that we propose to fix.
But all across the board, since I have come to CMS, one of
my general approaches has been to try to find places where we
either overpay or underpay for services. One of the first
things I did is I hired two Wall Street analysts to put out
reports on the basic industry sectors. Basically we deal with a
lot of people, hospitals, nursing homes, managed care plans,
DME providers. They're all giant Government contractors, and I
think it is the Government's role to figure out what their
appropriate margins are. We believe people should make
appropriate margins when they are Government contractors, but
they should not make too much, they should not make too little.
I would note that we put out fairly detailed reports on
managed care about 4 months ago, on nursing facilities about 2
months ago, on hospitals last month. We are actually going to
have one out on home health payments which a lot of these
issues revolve around, hopefully by the end of this week. The
goal here is to identify when industries are overpaid,
underpaid, whether their margins are too low or too high what
is essentially Government contract business.
Switching back to the issue at hand today, we have a number
of potential tools available to make sure the beneficiaries get
the care they deserve and are not overpaying for these types of
supplies. It is hard for me to see how anybody can argue with
the concept that Medicare should be paying inherently
reasonable prices for these supplies. So, we are determined to
get this out.
Are there places where we not only--clearly the attention
is where we overpay. There are some where arguably we underpay,
and I have gotten hundreds of e-mails, for instance, on ostomy
supplies in the last few weeks. We are looking into that. I
think there are probably far more places where we overpay than
underpay, but I think inherent reasonableness can clearly be
used in both directions if there are places where we are
underpaying for historical reasons.
The process in the past has been incredibly cumbersome. It
has also been, obviously, very difficult politically. It was so
cumbersome that in the BBA in 1997, Congress tried to
streamline the inherent reasonableness process. In January of
1998, HCFA, now CMS, published an interim final rule
implementing the inherent reasonableness process in the BBA in
which we compared a lot of the payments that we are making to
the VA and other public payors and found that we were paying
too much. And we proposed lowering the payments for many items.
Our durable medical equipment carriers similarly proposed
lowering payments for additional items, which again lowers co-
payments and premiums for seniors.
The medical equipment industry reacted pretty strongly to
these proposals, and in response, the Clinton administration
pulled those proposals back. Subsequent to that, Congress in
1999 passed limitations on our ability to use our inherent
reasonableness authority and put a number of requirements in
requiring us to come back and look at additional regulatory
guidelines before we used it.
We, in fact, as Leslie mentioned, have done a number of
demonstration projects for DME that I think have worked
reasonably well, and I think the results do hold some promise.
We averaged about 20 percent savings in both Florida and Texas,
and of those savings, about $1.3 billion we project in our
budget savings. It could be lower savings for co-payments and
premiums to beneficiaries, as well as the $5 billion in the
President's budget over 10 years that we think we would save
the program.
I do think you have to be careful when you do this, and I
do think there are differences in the way VA operates and the
way Medicare operates. When I was at OMB, I had the VA's budget
for 4 years. The VA can, in fact, use its market power like a
private entity because they usually have 2, 4 percent market
power to go out and buy the next piece of equipment on marginal
rates, and people are usually willing to sell the extra
hospital bed or whatever at a marginally lower rate.
We have to be careful in Medicare in the fact that in many
cases we are the market. For some of these supplies, we are 95
percent of the market. So, how we use our market power and how
we throw it around, while we are clearly overpaying, we need to
be careful. And I think we tried to do this in the
demonstrations to make sure that we do not wipe out local small
businesses that rely on this and to make sure that when we do
competitive bidding, we do it in a way that makes sure we do
not use our dominant market power.
However, clearly we need to use this in a much more
aggressive way. The demonstration program expires December 31,
2002. We certainly hope it is continued.
The President has proposed competitive bidding in a much
broader way in his budget. I believe in the House bill that is
likely to come out of the Ways and Means and Commerce
Committees in the next 2 weeks, it is pretty clear that durable
medical equipment competitive bidding is a major proposal in
that. I am happy to hear that you support that, Senator. We
would love to work with you and the Senate to get that done.
But I think our goal across the board is to find out whether it
is durable medical equipment, whether it is other suppliers,
whether it is AWP for drugs. The Medicare program has the
responsibility to the taxpayers to make sure that we are not
overpaying.
prepared statement
On this issue, you have been incredibly aggressive, and we
appreciate it. We hope to get a reg out soon, and I do not want
to overcommit, but I think in the next month is a reasonable
target. It is already out of my Agency and is basically going
through the rest of the administration for clearance.
So, thank you very much, Mr. Chairman. I appreciate your
having me here today.
[The statement follows:]
Prepared Statement of Hon. Thomas A. Scully
Chairman Harkin, Senator Specter, distinguished Subcommittee
members, thank you for inviting me to discuss the appropriateness of
Medicare Part B payments for medical supplies. As you know, at the
Centers for Medicare & Medicaid Services (CMS), we have the
responsibility of ensuring that some of America's most vulnerable
citizens, the elderly and disabled, have access to the health care they
need, and that Medicare payment is set at levels appropriate for
ensuring that beneficiary access to care is not compromised. At the
same time, we must ensure that taxpayer dollars are spent appropriately
and safeguard the Medicare Trust Funds from unnecessary waste.
Additionally, when Medicare pays appropriately for care, beneficiaries
are protected because cost sharing amounts are appropriate as well.
We have a number of potential tools available to help us meet these
goals, including the flexibility to adjust payments when statutory
payment formulas, based on historic charges, result in payment levels
that are either unreasonably high or low. This ``inherent
reasonableness'' authority, which currently is suspended by law, would
give us the ability to raise payment levels when they are so low that
they threaten to reduce beneficiary access to care; and it allows us to
lower payment levels when we are confronted with grossly excessive
charges. We also are wrapping up a demonstration project to find better
ways to obtain market-based prices for certain part B items, such as
durable medical equipment (DME). The results so far hold some promise.
The demonstration has shown to that competitive bidding can produce
significant savings for Medicare and beneficiaries. This market-based
approach is another tool we are using to ensure Medicare pays
appropriately for these items, and we support making competitive
bidding for durable medical equipment a permanent part of Medicare.
I appreciate this Subcommittee's longstanding interest in and
support of our efforts. I want to thank you, Chairman Harkin, for
pushing us to move forward on the inherent reasonableness regulation.
It is a priority of mine, and I can assure you we have been working for
months to finalize the regulation. The regulation is complicated, and
as you know, we have a number of competing regulatory priorities at
CMS. Nevertheless, we intend to publish it soon. I also want to thank
Inspector General Rehnquist and the GAO for their valuable assistance
in helping us to identify areas where we can improve our payment
processes. We have worked cooperatively on many issues--and this
cooperation can only work to better serve the nation's 40 million
Medicare beneficiaries who depend on us.
inherent reasonableness authority
The Secretary has always had inherent authority to determine what
charges are not reasonable; and in the mid-1980's, Congress made
explicit this authority to correct ``unreasonable'' Medicare payment
amounts for specific items or services paid for under Medicare Part B,
including drugs, laboratory services, and DME. This authority now
excludes physician services. The goal is to allow us to ensure our
payments are appropriate when statutory formulas call for payment
levels that are grossly deficient or excessive. This sort of situation
could arise when:
--The marketplace is not competitive, for instance, when a limited
number of suppliers furnish the item or service;
--Medicare and Medicaid are the sole or primary sources of payment
for a category of items or services;
--The payment amounts for a category of items or services do not
reflect changing technology, or changes in acquisition,
production, or supplier costs;
--Payment amounts are grossly higher or lower than acquisition or
production costs;
--There have been increases in payment amounts for a category of
items or services that cannot be explained by inflation or
technology;
--The payment amounts in a particular locality are grossly higher or
lower than payment amounts in other comparable localities,
taking into account the relative costs of furnishing the
category of items or services in the different localities; and,
--The payment amounts are grossly higher or lower than the payments
made for the same category of items or services by other
purchasers in the same locality.
In situations like these, Medicare might not be paying enough for
suppliers to continue providing the items or services, and, as a
consequence, Medicare may risk forcing them out of the market, leaving
Medicare beneficiaries without access to needed care. Conversely,
Medicare might be vastly overpaying for an item and we need to ensure
that we are managing the taxpayers' money appropriately. So we might
determine that Medicare payment levels ought to be raised or lowered.
In theory, inherent reasonableness gave us the authority to make common
sense changes to payment levels in order to protect beneficiary access,
and beneficiary and Trust Fund dollars. Unfortunately, the process for
actually using this authority was quite cumbersome, and so the
authority has seldom been used successfully.
Because the process was so cumbersome, in the Balanced Budget Act
of 1997 (BBA) Congress tried to streamline inherent reasonableness. The
BBA simplified the process for making Medicare payment level
adjustments of 15 percent or less, up or down, in any year. It also
gave Medicare Carriers, the local private sector contractors that
process and pay Part B claims, the authority under CMS's supervision to
adjust payments based on inherent reasonableness. And it gave CMS some
additional authority to streamline the inherent reasonableness process.
In January 1998, CMS, then the Health Care Financing
Administration, published an interim final rule implementing the
inherent reasonableness provision of the BBA. Later that year, the
Agency compared Medicare's payment levels for a number of items with
the amounts paid by the Veterans Administration, and we found some
disturbing instances where Medicare, and therefore beneficiaries, were
paying far too much. So the Agency proposed reducing unreasonable
payment levels for:
--Two types of walkers, up to 37 percent;
--Commode chairs, up to 40 percent;
--Two types of transcutaneous electronic nerve stimulators, up to 57
percent; and
--Vacuum erection devices, up to 46 percent.
Likewise, Medicare's Durable Medical Equipment Regional Carriers
also found circumstances where they were grossly overpaying for certain
products, and they proposed to reduce Medicare's payment for those
items, including:
--Glucose test strips, up to 3.38 percent;
--Lancets, up to 35.72 percent;
--Catheters, up to 24.02 percent;
--Enteral products, by 16.39 percent overall;
--Albuterol, by 10.64 percent overall; and
--Eyeglass frames, up to 21.04 percent.
The medical equipment industry expressed strong concerns about
these proposed reductions and, consequently, Congress took action to
ensure that we were adjusting payment levels appropriately. In the
Balanced Budget Refinement Act of 1999 (BBRA), Congress requested that
the General Accounting Office (GAO) examine our proposed regulation and
the Carriers' use of the inherent reasonableness authority. The BBRA
also suspended Medicare's inherent reasonableness authority until the
following conditions were met:
--The GAO released its report regarding the interim final regulation
and Carriers' use of inherent reasonableness;
--CMS publishes a notice of final rulemaking on inherent
reasonableness that responds to the GAO report and to comments
received in response to the 1998 interim final regulation;
--CMS issues a final regulation that reevaluates the criteria
included in the interim final regulation for identifying
payments that are excessive or deficient; and,
--CMS takes appropriate steps to ensure the use of valid and reliable
data when exercising inherent reasonableness authority.
I know that you, Mr. Chairman, were disappointed to see CMS's
ability to use inherent reasonableness authority restricted.
Additionally, I want to note that inherent reasonableness is a two-way
street. For every concern we hear that we are overpaying, we receive
other comments that we are not paying enough for items like ostomy
supplies or catheters. Giving Medicare the flexibility to make common
sense changes that protect beneficiaries and the Trust Fund simply is
the right thing to do, and the Agency is committed to moving forward in
that direction.
The GAO issued its report in July 2000, and was generally
supportive of CMS's previous implementation of inherent reasonableness
authority. Since then, CMS has been working hard to develop a final
rule that addresses all of the GAO's recommendations as well as the
numerous comments that we received on our 1998 Interim Final Rule. I
agree with you, Mr. Chairman, that inherent reasonableness represents a
potentially potent tool for protecting beneficiary access to needed
care, reducing beneficiary cost sharing, and safeguarding the Medicare
Trust Funds from waste. And to ensure our adjustments are fair to the
industry, before we make a payment adjustment we intend to first
publish a proposed notice informing affected parties and soliciting
comments. We would then respond to the comments received and publish
our response in a final notice. Similarly, under CMS supervision,
Carriers would notify affected parties within their areas and allow 60
days for comments. The final rule, which would reestablish inherent
reasonableness authority, is a priority for me, and I have been doing
everything in my power to ensure that it will be published
expeditiously, taking into account the important recommendations from
GAO and the comments we received on our 1998 interim final rule.
competitive bidding
While we have worked hard to finalize the inherent reasonableness
rule, we are exploring other ways to ensure that we are paying
appropriately for items and services. With the authority provided in
BBA, we are conducting a demonstration project where private sector
businesses competitively bid to supply DME and prosthetics, orthotics,
and supplies for Medicare beneficiaries. Although the demonstration and
our evaluation of it are still ongoing, the results appear to be
promising. When suppliers bid prices in competition with one another,
it allows the market price to become the Medicare allowable price. The
Administration supports expanding the effective use of competition to
save money and improve the quality of DME services for Medicare
beneficiaries. This is one element of the President's proposals to
modernize the Medicare program by using market forces to help us avoid
setting prices that do not respond to improvements and efficiency and
obtain savings for the program and its beneficiaries. As long as the
federal government does not allow any one company to obtain an overly
dominant market share for a particular product, competitive bidding can
replace inflexible fee schedules set by law and can be a fair,
effective way to ensure that Medicare pays competitive, fair market
prices for DME.
The demonstration currently is ongoing in Polk County, FL, and San
Antonio, TX. In these two areas we requested bids for:
--Oxygen;
--Hospital beds;
--Surgical dressings;
--Urological supplies;
--Enteral nutrition;
--Manual wheelchairs;
--Nebulizer drugs; and,
--Simple orthotics.
To date, we have been successful in reducing Medicare costs for
most of these supplies. Savings vary by site and product, but averaged
20 percent in the latest bids in both Florida and Texas. This saves
money for our beneficiaries, by way of their cost sharing, and the
Medicare Trust Fund. It will save around $5 billion over ten years, of
which nearly $1.3 billion is through lower premiums for beneficiaries,
by paying more appropriately for medical equipment.
Moreover, one of our fundamental goals in the demonstration is to
maintain high quality service for our beneficiaries. For example, we
chose multiple suppliers in each category, so competition gives
suppliers an incentive to provide high quality products and services.
We also developed specific quality standards for the demonstration that
the suppliers must meet. Moreover, winners of the bidding competition
must pass site inspections and reviews by an expert panel before they
can supply items and services to our beneficiaries. Additionally, we
hired an ombudsman for each site to solve any beneficiary difficulties,
including quality concerns.
We also have paid close attention to the providers in this project.
A large part of the DME industry is made up of small businesses, and we
were very careful to ensure that small businesses could compete for the
Medicare DME business on a level playing field with the large
suppliers. For instance, by choosing multiple winners for each product
category, we were able to choose many small suppliers rather than only
the largest suppliers. Additionally, for our San Antonio demonstration,
the suppliers were not required to serve the entire area, but could
choose to bid for just one county, giving small businesses an even
better opportunity compete. As a result, more than three-fourths of the
suppliers we selected are small businesses.
This demonstration will end on December 31, 2002, according to the
authorizing legislation. The President has asked Congress to make
competitive bidding a permanent part of Medicare, and it appears likely
to be included in the draft bill emerging in the U.S. House of
Representatives. By encouraging suppliers of durable medical equipment
to compete on quality and price, and by making sure that beneficiaries
have choices about how to get their equipment, we can both save money
and improve the DME services that beneficiaries receive. Like inherent
reasonableness, it makes sense for beneficiaries and taxpayers--it is
the right thing to do. I look forward to working with this Subcommittee
and your colleagues in Congress enact legislation this year to ensure
that we continue and improve upon this important initiative.
conclusion
We know that Medicare, in some instances, pays much more for
equipment and services than other health care purchasers. Additionally,
sometimes we may not pay enough. Although this payment disparity often
can be attributed to Medicare payment formulas required by law, it is
nonetheless an important concern and we are working hard to address it.
The competitive bidding demonstration embraces market forces to ensure
Medicare pays a fair price for the items and services it covers, and by
all accounts an effective competitive bidding program may achieve more
appropriate Medicare payments for DME. Likewise, our inherent
reasonableness authority gives us common sense flexibility to correct
grossly excessive or inadequate payment levels when statutory payment
formulas produce them. We are in the last stages of finalizing our
inherent reasonableness regulation, and we hope to publish it soon.
Thank you again for inviting me to be a part of this discussion today,
as well as for your continuing support for Medicare, and your
commitment to protecting beneficiaries and the Trust Fund. I am happy
to answer any questions.
INHERENT REASONABLENESS AUTHORITY SUSPENSION
Senator Harkin. Thank you, Mr. Scully. I thank you for your
paying attention to this and being aggressive on this issue. I
would like to explore with each of you where we are, where we
have been and what the situation is right now.
Mr. Scully, in your written statement--and it may have been
just a mistake in writing or something--in your first page, you
say, ``This inherent reasonableness authority, which currently
is suspended by law.''
Mr. Scully. I was afraid you would notice that, Mr.
Chairman. I saw that on the way over this morning.
Senator Harkin. Okay, it was a misprint. All right, thank
you.
Mr. Scully. You are right. It is suspended by law because
of us. As soon as we put out our regulation, it is no longer
suspended by law, and you are correct. The thing holding it up
is us, and we hope to remedy that soon.
Senator Harkin. When the GAO issued its report in July 2000
under the law that was passed--it has been nearly 2 years--some
on your watch, some not on your watch--you could have issued
regulations on this. Having been at this for 12 years now, I
keep hearing, well, something is going to happen, something is
going to happen, and something is going to happen.
Now, I went through that whole process in the 1990's when
Senator Specter was Chair here, and I can tell you exactly what
happened. We passed it here, and then it was changed in the
conference with the House. Then we came back again with the
competitive bidding which we passed here. The Senate passed it.
Then it went into the House and again was put into a
demonstration. Then we had the two demonstrations. Then we had
the study that had to be done by GAO before you could go ahead
with inherent reasonableness. But it was said that as soon as
the GAO report was filed, then you automatically could use the
inherent reasonableness clause again.
So, we have been waiting for these regulations. You just
mentioned next month. Can we pretty much count on that?
Mr. Scully. Well, I apologize if there was a holdup on my
part. I have been on the job exactly 1 year last week, and I
think, to be honest, the first time this came up with me as an
issue--as you know, Nancy Ann had spent some time on it, and
there was a gap between administrations, obviously, where there
was not a political appointee running the agency.
The first time it came up to me probably was last, I think,
October from Tom Hoyer, who I think both these agencies know
basically is the person who has done home health and DME for
years in the agency. As soon as they brought it up and said,
should we do an inherent reasonableness regulation, I said yes.
I think we have pretty aggressively pushed forward since then.
It has been out of CMS for not that long, but the fact is
it has to go through the administration for clearance and OMB.
And the Small Business Administration, appropriately, has had a
lot of concerns over the years because a lot of these providers
are small businesses, and I think we're hopeful. Your interest
certainly helps, but CMS clearly would like to do this. I
believe the Secretary would like to do it, but your strong
interest certainly helps.
But there is a lot of concern in the equipment business.
There is a lot of concern from small providers. A lot of them
are small businesses. We certainly want to make sure we take
the right safeguards to protect small business. But it is a
controversial issue.
Senator Harkin. But give me a date on that. Give me a
timetable on the regulations.
Mr. Scully. Well, to some degree, Mr. Chairman, to be
honest, it is out of my control once I send it into the
administration process. I certainly hope it is going to be
done--I would like to have it done certainly if not before the
July 4 recess, certainly right after that.
Senator Harkin. The regulations are out of your shop.
Mr. Scully. It has been out of my shop for a while. I hope
to have it through the Department and the administration within
a month. I think that is certainly a reasonable goal.
COMPETITIVE BIDDING
Senator Harkin. I also wanted to ask about competitive
bidding. That is in the President's proposal and I am hopeful
that we can move ahead very aggressively on that. Can you see
working together with the Congress, if there is some Medicare
bill that goes through this year, of starting that process this
year, building on the two projects that we had in Texas and
Florida?
I do have a question for Ms. Aronovitz, which I am going to
follow up on, in terms of making this nationwide. You said
there may be some problems with that.
Would it be the administration's intention to move ahead on
this, since it was in the President's proposed 10-year budget
plan, this year?
Mr. Scully. Absolutely, and we have been encouraging the
Ways and Means Committee and the Commerce Committee in the
House and the Finance Committee over here to put it in their
bills. We think it is a good proposal. I will say that
everybody is looking for savings, for offsets this time of
year.
My major concern, having been a formerly bad antitrust
lawyer, is that the Government needs to use its market power
just like private payers do, and I think we need to be
careful--in many cases, we are 95 percent of the market--that
we do this in a reasonable, balanced way and that we make sure
that we do not--you know, we do have a much different market
leverage than the VA does or even some of the other Government
programs.
So, I clearly think this is the right way to go. I hope we
do it in a sound, reasonable, and balanced way so that we do
not set expectations too high so that we have to be too
aggressive because I think this program has great potential.
But I hope it does not blow up the first time we try it.
Senator Harkin. Well, we just had these demonstrations.
You mentioned the impact on small business. This has come
up repeatedly time and time again over the last 12 years. But
it has been my understanding--and maybe you can talk about this
or Ms. Aronovitz--that in the two demonstrations, that in Texas
a significant number of the winning bidders were small
businesses. Is that true?
Mr. Scully. 77 percent, I think, were small businesses, and
we made a big effort. I think 16 of the 40 bidders actually got
a contract. But I think that is the kind of thing that you do
to make sure--when the Government comes in and has 95 percent
market power, whoever does not get a bid is out of business.
So, I just think we need to make sure we are conscious of that.
Senator Harkin. What is the thrust of what you just said?
Mr. Scully. I think we have done it appropriately in San
Antonio and I think we have done it appropriately in Polk
County in Florida.
Senator Harkin. But obviously, if some people are losers on
the bid, they do not get it.
Mr. Scully. Sure. Well, they may get it in another county.
And I think that is the nature of competitive bidding.
I think the way we have done our demonstrations is exactly
fine. I just think we need to focus on--some of the proposals I
have seen in Congress--I guess my concern is the budget
assumptions. If they get too high on how much we are going to
save from this, it will drive policy that limits our ability to
protect the small business interests.
So, I am certain we can do it. I think the demonstrations
are well balanced, and if we do it based on those
demonstrations, I think we will be fine. I also think there are
some places like in Iowa and in rural areas that we have to be
more sensitive and probably may not be able to do competitive
bidding.
Senator Harkin. What have we learned about rural areas from
these two sites, Texas and Florida? Did we learn anything about
it? Were there some rural areas involved?
Mr. Scully. No. They are basically urban. Polk County in
Florida is mostly urban, and San Antonio, Texas obviously is
urban. So, I think there may be some different challenges in
rural areas. I think clearly if you are trying to provide
motorized wheelchairs, for instance, in a rural area of Iowa,
there may only be one person doing it. So, having a competitive
bid--it can probably well be done, but I think you just have to
be a little bit more cautious.
Senator Harkin. Although even in rural areas, there are
urban places close by where they have this, whether it is Des
Moines or Omaha or the Quad Cities or someplace where you will
find plenty of interest in this.
Mr. Scully. Well, even there I think some combination of
inherent reasonableness where clearly there is one provider
where you can go in and say we are overpaying and lower the
prices, that combined in markets where maybe there were not
multiple bidders, certainly we can look at the prices and lower
them. We are clearly overpaying in a lot of cases.
Senator Harkin. It is my assumption and what we have
intended all along is if we have competitive bidding, we do not
do away with inherent reasonableness. Let me see if I can
explain how I envision it.
In the past it has been those who are selling these items
start at the top level. They get the highest prices. CMS could
use its inherent reasonableness to try to get it down. What I
envision is competitive bidding where the Government and the
beneficiaries get the best price. If there are reasons why it
needs to be higher than that for a rural area or for whatever
reason, then you can use inherent reasonableness to get the
price up. That is the difference. I think the taxpayers and the
beneficiaries will get a better deal if you use your inherent
reasonableness to answer those few cases where, for whatever
particular reason it might be, that a competitive bid simply
won't work and we have to have a different device. That is how
I envision it working, and if you have any comments, that would
be fine.
Mr. Scully. No. I agree totally.
Senator Harkin. Ms. Aronovitz, I did have a question. But I
have been taking enough time here, but I would yield to Senator
Murray from Washington both for an opening statement and for
any questions you might have. Then I will pick it up after you.
OPENING STATEMENT OF SENATOR PATTY MURRAY
Senator Murray. Great. Well, thank you very much, Mr.
Chairman. First of all, let me thank you for having this really
important hearing that you are having today. Washington State
has 750,000 seniors and disabled who rely on Medicare, and
there are a lot of problems within the Medicare program that
need to be addressed and one of them really is making sure that
Medicare payments for medical supplies are adequate and
accurate. So, I appreciate your statement today and our
witnesses who are here today to talk about this issue.
I am going to take the advantage of the fact that Mr.
Scully is here to bring to his attention an issue that I think
is critical regarding Medicare because I am concerned about any
issue that prevents those on Medicare from getting the care
they need. That is why I am especially troubled by one of the
underlying issues that is limiting access to seniors and
disabled in my State.
The recent 5.4 percent reduction in physician payments, the
deep reductions imposed by CMS as a result of the Balanced
Budget Act have really created major problems in my home State
of Washington. These cuts have been forced on providers who are
already in my State receiving less than adequate reimbursement
rates and payments from Medicare. Because of a flawed, outdated
formula, health care providers in my State of Washington
receive significantly less reimbursements than providers in
other States for providing the same service. My State ranks
42nd in the Nation for beneficiary payment.
I know the chairman is 50th on that list, the lowest in
reimbursement. I know he shares my passion on this issue and I
really want to bring this issue to this committee's attention,
to Mr. Scully's attention to try to recognize how critical it
is.
The results of these less payments are really devastating
on seniors and the disabled in my State. We have providers that
are refusing to take new Medicare beneficiaries. We have
doctors who are leaving our State and hospitals that are
operating at less than 2 percent margins. Hospitals in my home
State are competing for a shrinking pool of nurses, as we all
are, and health care professionals nationwide. When the
reimbursement levels are less in our State, they go to where
they are much higher. And I love Florida and California, but I
do not want all the doctors and nurses and health care
professionals in my State moving to those States because they
can get better reimbursement, but that is what is happening.
Again, I know Chairman Harkin is well aware of this and is
working with me as we try to address this.
But, Mr. Scully, I wanted to bring this up with you because
you were out in my State recently. And I appreciate your coming
out there, but I was, frankly, fairly surprised at some of your
comments that I read in the press. I was not there, so I am
assuming they are accurate, but you can change them if you
want. But the East Side Journal quoted you as saying: ``I don't
think it's a significant problem for seniors,'' and you said
that you believed that doctors were not fleeing, despite
legitimate concerns.
I have to tell you seniors in my State were really outraged
by those comments. I had a doctor from Olympia who wrote to me
after that and said: ``Unfortunately, when Tom Scully was
recently in our State, he denied the reality of access
problems. His agency will never fix this problem until seniors,
physicians, and leaders like those in our own congressional
delegation hammer home the message that the system is broken
and we need to demand a fix.''
Mr. Chairman, I am here to hammer home the message. It is
broken. It is a problem. It is impacting access.
I have to say I was also very concerned because you were
quoted as saying: ``The answer is not to give Seattle more, but
to give the rest of the country less.'' Well, first of all,
this is not just a Seattle problem. Every rural community in my
State is affected by this. But the reality is that giving the
rest of the country less is not a solution to this.
I recognize we have a flawed formula, but I think denying
there is a problem is not going to allow us to get to a
solution. To say that our providers are not being paid too
little, but others are being paid too much, just really offers
very little hope this is going to be addressed.
So, Mr. Chairman, I apologize for bringing this issue up
when your hearing is on another very critical issue, but I
wanted to take advantage of Mr. Scully's first opportunity to
come before our committee this year to bring this up and to
really press you and to see if you recognize that this is an
access to health care problem issue in my State that we have to
work together to address.
Mr. Scully. Senator, I do. I seem to have a rare talent to
both be misquoted and outrage people at the same time.
There are a number of questions. I clearly think we have an
access problem. By the way, the comment I made about Seattle,
which was a misquote, more rather than less, I was
complimenting--I was in Iowa for 2 days last week as well, as
the chairman knows. What I said basically was that Louisiana--I
think the national average per senior in spending is about
$7,700 per senior. I believe in Washington State it is about
$6,000.
Senator Murray. Less than.
COMPETITIVE BIDDING
Mr. Scully. Some of the numbers from the State were a
little lower because they are a couple of years old. I think
this year it is about $6,000. In Louisiana, for instance, it is
more like $9,000. In the District of Columbia, I think it is
$10,500.
What I was saying was I was complimenting, because I used
to work in the Washington State delegation, as you may know,
that there is a good health care culture in Puget Sound and in
the Seattle area, and that certainly there are inequities in
the system, but to some degree we ought to get some of the
other States to operate more like Iowa and Washington State.
That way we would not necessarily bring everybody up to $10,500
a year, but to encourage the inefficient States to be more
efficient. I was not saying in Seattle, everybody should come
down to where Washington State was.
What I was trying to say was that there are some models in
Iowa, which happens to have an extremely good health care
culture as well, and a lot of this is utilization per patient.
And Puget Sound and Washington State does too, and it is
inequitable, but to some degree the health care traditions and
practices of both Iowa and Washington State are great and
should be a model for other parts of the country. So, some of
it is redistributing the money more fairly. Some of it is
trying to get the health care and medical practices in some of
these lower cost areas distributed around the country.
In that case I believe I was misquoted. It was a long town
hall meeting, about 3 hours, and we had a pretty lengthy
discussion of that. I was not trying to claim that everybody
should go down to $6,000 per year. I was saying that some of it
is inequitable historical distribution and some of it is that
the culture of health care in Seattle, in particular, and Puget
Sound, but in the whole State is very positive, and the
utilization in Iowa, for instance, has always been much lower
than the rest of the country. Iowa, I believe, has the oldest
population, close to Pennsylvania, as far as the highest
percentage of seniors in the country as well. So, I think that
was a little misquote.
On the access issue, I spent a lot of time with physicians,
a number in my family. The negative 5.4 percent cut we said
repeatedly has to be fixed. The administration supported a fix.
I believe again the House bill will at least fix it for 3
years. There is no question the formula is broken.
I have also said repeatedly the RBRVS formula, which I was
one of the two people--I think one of my first jobs in the
first Bush administration in 1989 was pushing that through.
I believe if you look at nursing home payments, which have
been a roller coaster for years, hospital payments, which have
been a roller coaster, home health, most of the Medicare
payment formulas have been very inconsistent. The RBRVS system
has worked exceptionally well since 1989, and I think it is a
good system.
It is broken largely because my agency made a mistake,
which a lot of physicians do not understand. The physician
payment growth--I might be slightly off on the numbers--in the
year 2000 was supposed to be under the targets in the law,
about 6 percent, and in 2001, it was supposed to be 6 percent
as well.
We added a bunch of new codes. There are about 6,500
physician codes. We added a number of new codes in 2000 and
2001, and believe it or not, we forgot to count them. So, we
overpaid in bulk. We pay about $66 billion a year out for
physician services and physician related services. And by
accident in those 2 years, we overpaid by about $3.7 billion
one year and $2.5 billion the next year. So, in bulk, under the
formula--and it is a very rigid formula--we overpaid 2 years in
a row without knowing it by $6 billion and the law, which is
inflexible, recaptures that.
I think the law is broken. I think the fundamental formula
for physicians is fair and works and has been by far the most
stable payment system in Medicare for the last 14 years. It is
broken. It needs to be fixed, and it is not fair. And trying to
explain to physicians that they were overpaid in bulk for a
couple of years does not go very well. But I do think it is
important to explain to them what happened. There was a
mistake.
I think the fundamental RBRVS system is solid and works
well. I think it has a major glitch in it. The system has a
short-term flaw and it needs to be fixed and the administration
supports fixing it this year. I certainly hope--and everybody I
have talked to in the House and Senate, Senator Baucus and
Senator Grassley and others have supported fixing it this year.
So, we strongly support doing something to fix it before it
goes out.
On the issue of access, many doctors are outraged, as they
should be. It is a negative 5.7 percent reduction in their base
conversion factor fee this year. If it is not fixed, it is a
negative 4.4 percent next year. I do think, and I have said
repeatedly, if we do not fix it, we are going to have an access
problem. It is inevitable. Doctors are angry. They read a lot
of things in their journals and AMA reports about how their
fees are getting cut, so they are angry and they are saying
they are not taking new Medicare patients. So far, we have not
seen, as a matter of access, a major drop-off in access.
ACCESS PROBLEMS
Senator Murray. Well, let me just interrupt you. In my
State we do have doctors who are now refusing to treat Medicare
patients. We have numbers of them. I am happy to get you the
statistics on this. This is not a ``if we don't fix it, it will
happen.'' It is a ``happening right now'' issue.
Mr. Scully. Senator, I agree. I spent 2\1/2\ hours in
Seattle meeting with the Washington State Medical Association
and I am very sensitive to the issue. I think there is clearly
a problem. We still have about 90 percent of physicians taking
mandatory assignment, and there is an issue of them taking new
Medicare patients. And it probably has been more acute and I
have heard more about it in Puget Sound than some other areas.
But I spent a lot of time also with patient groups and AARP
and others, and I think if we do not fix it, we are going to
have an enormous problem. As of right now, I think a lot of it
is angry physicians, and they have a right to be angry. But I
think we have not yet seen from the AARP or other patient
groups a major systemic access problem.
Senator Murray. Well, I will just tell you it is an access
problem in my State. I want to work with you on this. I will
work with the chairman. I will work with anybody else, but I am
going to keep talking about this.
I will just end with a story, Mr. Chairman. I was up in
Sequim, Washington. It is about 3 hours from Seattle in the
northwest section, a small, retired community, probably the
highest number of seniors. And they are livid because a number
of doctors are refusing to take Medicare patients. A woman came
up to me in a parking lot with a cast on her arm, told me she
had broken her arm about a month before that. The doctor put a
cast on it. She went back and he is now not taking Medicare
patients, and she wanted to know how she was supposed to get
the cast off. This is an access problem.
Thank you, Mr. Chairman.
Senator Harkin. Thank you, Senator Murray. I appreciate
your bringing this up because it is a big issue in Iowa too.
Well, it is a big issue in a lot of States where they are way
below the national average. Some States are way above it. We
have seniors in our State that many times will go down to Texas
or places like that for the winter, and they come back and they
say, Medicare down there, you can get eye glasses. You can get
all kinds of things, but you cannot get them in Iowa. And they
pay the same amount per month there as they do in Iowa. So, it
really is a fairness issue.
But we could go on with that for some time here. I wanted
to bring it back to the focus on this issue. As Senator Murray
said, it is a big issue. It is one that cannot be put off any
longer. We have got to make some changes this year in that
reimbursement formula.
I also believe that we cannot afford to wait any longer on
this issue either, about cutting down on some of the waste,
fraud, and abuse. I guess those are the words that are used,
but just the wasteful payments that are being made in Medicare.
We know they are going out, and we are close to getting our
hands on this.
Ms. Aronovitz, I wanted to ask you about the part of your
statement wherein you said that the positive results achieved
from the two competitive demonstrations may be difficult to
expand on a national scale. This is due to the need for a labor
intensive outreach effort in each community and an ongoing
monitoring of beneficiary access and product quality. Some of
that I think I understand. Some of it I do not understand.
Could you elaborate on that please?
Ms. Aronovitz. Yes. I would also like to address Senator
Murray's comment for a moment. Although she apologized for
getting off the topic, I think her comments related directly to
the topic. What Senator Murray is referring to is the
fundamental question of how CMS knows what it is paying for and
whether the Agency can defend what it is paying for.
There were a lot of changes in the BBA of 1997 that
affected many different industry groups. CMS will always have
to deal with industry groups and others who are upset or
concerned about any changes in price.
We think that with DME or with any other payment system,
CMS has to have the information technology infrastructure to
collect data so that the Agency can defend its prices and knows
internally what the correct price should be. Some of the
previous BBA give-backs to providers have occurred because CMS
could not explain beneficiary access issues or outcomes issues,
and it could not defend its decisions to move in a certain
direction.
This is another situation where, with better information,
we could probably know exactly how much higher the physician
fee schedule rates should be. Clearly it is a legal formula, so
it does not allow a lot of flexibility, but obviously, CMS
needs to have much better information about what it is paying
for and how much it should be paying. I just want to make that
clear.
We think that the early success in competitive bidding
shows that it could be a very important tool for CMS.
Unfortunately, we do not think it is the complete answer and it
is clear that you agree with that.
Senator Harkin. I just want to interrupt you right there.
Since we started on this years ago, the GAO has repeatedly
testified before this subcommittee in support of giving
Medicare competitive bidding authority and that is still your
position.
Ms. Aronovitz. Absolutely. That is 100 percent correct.
Senator Harkin. I did not want to misinterpret that.
Ms. Aronovitz. You did not misinterpret it. Not only do we
think it is important to have CMS use competitive bidding
authority in these types of demonstrations, but we have also
talked more broadly about giving CMS wider contracting
authority in other aspects of its operations.
In terms of competitive bidding, there are some important
lessons that CMS and we are learning about how implementation
should occur. One of the early and important issues that made
these bidding demonstrations successful is the fact that there
was an on-site ombudsman who could understand the environment
and could settle issues that arose. You need to have ongoing
monitoring to ensure that providers receive a fair price and
will be able to stay in the market, and that beneficiaries have
access to the items.
Also, there is a lot of outreach and education that must
occur in order to help the community understand what the
changes will be. Therefore, there are costs associated with
making a demonstration effective, and we want to be certain
that you understand and accept the fact there is a lot of hard
work, money, and resources required to make these successful.
This fact needs to be considered as the demonstrations are
expanded.
COMPETITIVE BIDDING
Senator Harkin. In reading through the testimonies last
night, I made a note on my paper on this, and then Senator
Specter brought it up too. Why do you not just buy from the VA?
Mr. Scully or Ms. Aronovitz.
Mr. Scully. Well, I think the issue there is really market
clout, the same issue with drugs.
Senator Harkin. It is what?
Mr. Scully. Is market power.
Senator Harkin. No. I am just saying why does Medicare not
just say, okay, VA, you are now our purchasing authority. You
buy all these things. We are going to buy them from you at
cost. Obviously, VA is not in the business of making a profit.
Mr. Scully. Well, the VA would probably hate that for one
reason. They would end up paying higher prices. We went through
the same thing on Medicaid. Medicaid drug rebates, for
instance, which I was involved----
Senator Harkin. Why would VA hate it?
Mr. Scully. Well, I will give you just one example,
Medicaid drug rebates, which were passed in 1990, which I was
involved in again in the first Bush administration, where the
States went out and got roughly--the drug prices are a moving
target, but roughly 15 percent discounts off of whatever market
prices theoretically were. VA was getting a lot less than that.
We had to exclude VA. The subcommittee, in fact, went out--
actually it was the HUD, VA subcommittee. They excluded VA from
that because VA was getting lower prices. If VA became the best
price in the Federal Government, the drug companies were not
willing to sell it to everybody for what--you know, VA was able
to go out and use their 4 or 5 percent market clout to get
really lower prices. Once that became the best price, their
price was going to go up.
For example, let us say with 4 percent market clout, you
can go out and get tremendous discounts because somebody is
willing to sell you the next marginal commode chair or whatever
else for the lowest possible price. Once the Government is
buying every commode chair at that price, they are not going to
give the VA that good a price. The price is going to go up.
Once you throw Medicare in there, Medicare plus VA is the
entire market.
Senator Harkin. Let me interrupt you. VA goes out with
competitive bids.
Mr. Scully. VA gets competitive bids for 4 percent. I am
just saying hypothetically, if you went out and said that a
commode chair--I cannot remember the price--but let us say that
we are paying $200 and maybe the VA is paying $110.
Senator Harkin. Let us see. What was it? VA is paying $32
and Medicare is paying $109.
Mr. Scully. Okay. Let us say that the commode chair--I am
not an expert, thank God, in commode chairs. If you are a
commode chair manufacturer and you are making the commode
chairs and your actual cost is $30, you are probably willing to
sell them to the VA in bulk for $32, but you are probably not
willing to sell them to the entire Government for $32. $100 and
some is probably way overpriced, but if you went out and said
VA and Medicare together are going to go out and competitively
bid for commode chairs, you are probably not going to get that
price.
Senator Harkin. You know, I do not understand that, Mr.
Scully. There are always cost reductions in mass manufacturing.
So, obviously, if a company is making commode chairs and they
can make a profit of $2 each for selling 100 chairs, they could
make a lot more profit selling 1,000 chairs because the cost of
production will come down as they mass produce it seems to me.
Mr. Scully. Well, I will give you the example from the
hospital business. This is the same issue when you get into
centers of excellence in hospitals. Let us say Medicare went
out and said we wanted to have competitive bidding for hip
replacements in northern Virginia. We do all the hip
replacements. Probably 90 percent of the hip replacements are
Medicare. So, if you went out and did that, an insurance
company could come along and get a lower price if they have 2
percent market share because a hospital--let us say you are at
Alexandria Hospital and an HMO comes to you with 2 or 3 percent
market share. You may get a significant discount. If a hip
replacement costs $10,000, they may be willing to tell Blue
Cross of Northern Virginia, we will give you one for $8,000
because we are already doing a lot, and on the next marginal
hip replacement to fill an empty bed, we will do for a little
less. But you cannot do every one of them for $8,000.
That's exactly the problem, for instance, with centers of
excellence that I have with that for Medicare. If we went out
with Medicare and said we want to take competitive bids for hip
replacements in northern Virginia, INOVA, who is the dominant
player out there, would do the lowest bidder. Everybody else
would have to get out of the hip replacement business and there
would not be any competition left, and they would marginally
raise their prices over the future years.
Senator Harkin. But you could go out of State for that. Why
would you just limit it to northern Virginia for the bids?
Mr. Scully. Well, most patients, unfortunately, on Medicare
want to go to a local facility, a local hospital.
Senator Harkin. You are talking about the procedure.
Mr. Scully. Yes, procedure.
Senator Harkin. We are not talking about competitive bids
for procedures, are we?
Mr. Scully. I am just using that as an example.
Senator Harkin. I thought you were talking just about the
replaced hip.
Mr. Scully. Let us say motorized wheelchairs.
Senator Harkin. We are not talking about procedures, Mr.
Scully. We are talking about equipment and supplies, medicine,
that type of thing.
Mr. Scully. I agree. But let us say hypothetically that we
went out--if the Veterans Hospital up on North Capitol Street
went out and did competitive bidding for wheelchairs, they
would probably get the wheelchair suppliers to sell at their
lowest marginal cost because they are making the wheelchairs
anyway and they will sell it for the lowest marginal cost. If
Medicare went out and tracked onto the VA's price list, we
would have combined 95 percent of the mobilized wheelchair
markets and the entire cost for the entire sector would go up
because they are not going to sell them all for that lowest
marginal price. I think that is just pure economics.
Senator Harkin. I do not understand. That flies in the face
of WalMart's success.
Mr. Scully. We have far more market clout than WalMart does
in the Medicare program. As a percentage of buying these
devices, in some cases we are the entire market. WalMart never
has more than, say, probably 10, 12 percent market share.
Senator Harkin. Well, it has been my experience in my
lifetime, Mr. Scully, that if you had that much clout in the
marketplace, as demand goes up--and that is what we are talking
about. This is more demand from one buyer--that if the seller
is increasing the prices exorbitantly, you will find other
sellers come in. You will find other people saying, wait a
minute. I can make that cheaper than that.
Mr. Scully. It is basically an antitrust issue and I
believe the Government needs to operate just like a private
company does in antitrust. Let us say hypothetically we went
out and did wheelchair bids, competitive bidding nationally. My
guess is the biggest mobile wheelchair maker, which is probably
Invacare, would come in, give us the lowest price. They would
run everybody else out of the business. We would have one big
supplier left over the years and then they would jack their
prices back up. It is just a pure antitrust model. It is the
same issue that Microsoft has. I mean, we have so much market
clout. I totally agree with you we need to use it, but we just
need to use it in a way that we do not blow up the market
because the VA is a relatively small purchaser, both on drugs,
wheelchairs, devices. They have 2, 3, 4 percent market clout.
Medicaid, generally in most States, has 12, 13 percent.
Medicare in some of these devices has 85, 90 percent. We are
the market. And if we went out and just found one----
Senator Harkin. But we just found, Mr. Scully, in the GAO
study that I believe--correct me if I am wrong--in I do not
know how many instances Medicaid is paying less than Medicare.
Mr. Scully. In some instances, but the Medicaid prices are
much closer to Medicare, and Medicaid has some of the same
issues, which is their bigger purchasing power. But still
Medicaid in most places has probably a third the clout of
Medicare. I think actually in their testimony GAO, in probably
a more cogent way, made exactly this argument. They basically
made this argument in their testimony.
Ms. Aronovitz. Maybe I could shed some light on this. We
definitely think that CMS needs to use current prices. The
Federal Supply Schedule, which is the VA schedule of prices, is
a great index to use.
We do say, however, that to assure access for beneficiaries
across the country and to be certain that providers get a fair
price and remain in the market, there would need to be some
markup from the VA Federal Supply Schedule. A lot of it depends
on the relationship between the beneficiary and his or her
provider. The provider who delivers the wheelchair, who
maintains it, who fixes it if it breaks--this provider has a
relationship with the beneficiary. If a Medicare beneficiary
takes a nebulizer drug and something happens which requires the
nebulizer machine to be repaired, there can be service costs
associated with some DME.
We think that CMS is currently paying prices that are much
too high. Some prices are higher than market prices. We think
that if CMS used the Federal Supply Schedule prices and could
build from those, it could save a tremendous amount of money.
It would be paying somewhere in between----
Senator Harkin. Why can they not know that?
Mr. Scully. I think we agree on that. I think if you look
at the savings, for instance----
Senator Harkin. My question is--you said they do not know.
Why can they not know it?
Mr. Scully. In fact, the original regulation that HCFA came
out with in 1998 was largely based--and I think that was so
controversial--on a hybrid of the VA supply schedule. So, I
think we can look at that.
I think in the GAO testimony, they point out that the
savings versus--or maybe it was the IG's. Excuse me. The
savings that they said versus VA was $958 million versus
Medicaid was $193 million and versus FEHBP was $118 million. I
think the reality is we probably cannot save as much as VA. We
are probably somewhere between what FEHBP and VA is, and I
think that is where our estimates and our competitive bidding
demo show probably somewhere around $300 million or $400
million a year.
I think we clearly can save a lot of money. I just do not
want to raise the bar so high that we just are not in the same
situation as VA, and I am not sure we can ever get the same
exact discounts VA----
Senator Harkin. Just a second, Mr. Scully. I want to
understand if I heard you correctly. We are talking about 16
items that the Inspector General's Office looked at, and if you
use the median VA price compared to what Medicare is paying for
those 16 items, the potential savings per year, $958 million.
Then you pointed out that using Medicaid, which was $193
million, and you said you probably would fall somewhere in
between there, $200 million or $300 million a year. I saw Ms.
Aronovitz nodding at that.
I am saying to myself, wait a minute. We are talking about
16 items, Ms. Aronovitz and Mr. Scully. And as I look at these,
walkers, commode chairs, pressure pads, nebulizers, TENS units,
and all of the things we talked about here, I find it hard to
believe that you cannot get the same price for these items as
VA. I am talking about just these items. Now, there may be some
others, I will grant you, that are highly technical, that are
different where Medicare may have to pay different than VA. But
I am talking about just these 16 items. You are telling me you
cannot get an IV pole savings for the same thing or a standard
wheelchair? I mean, these are standard items. When you look at
these, I just find it hard to believe that on those 16 items
that CMS cannot get the same price as the VA and maybe even
better.
Mr. Scully. Well, Senator, the easy thing for me to do
would be to agree with you.
Senator Harkin. I understand what you are saying is that in
some cases you may not be able to get the same savings as VA. I
understand that. I am just talking about these 16 items.
Mr. Scully. Well, I will just try to pick out one of these
16. For example, just say the hospital beds. The median
Medicare price--I am just looking at the IG's list--we are
paying $1,754.55. VA is paying $762. If you look over to the
FEHBP, they are paying $1,397. Clearly we are paying way too
much, but the VA can go to all the bed manufacturers, pick one
with their 3 or 4 percent market share and say we want the
lowest bid. Well, they are already making beds anyway. This may
be very close to their costs, and they may be selling them for
absolute cost to the VA. We are not going to be able to get
that from a broad range of suppliers. The VA probably picks one
nationally and buys all their beds from them. So, I just do not
want to raise expectations to think that Medicare--we could go
out and say we are going to buy all hospital beds for Medicare
from one supplier. We would wipe out all the rest of them.
Senator Harkin. Now, first of all, Mr. Scully, I will take
issue with you there. I will lay you 10 to 1 odds--more than
that--that whoever is selling that bed for $762.10 is not
selling it at cost. They are making money on it. They are not
going to sell it at cost. They are making money on it.
I will buttress that by pointing out that when Congress
enacted a 30 percent cut on oxygen, I heard the same story
about, oh, it is going to put people of business. Then we went
out for competitive bids and we got people actually bidding
lower than that. And they are not losing money.
Mr. Scully. I agree. Oxygen is a good example. In fact, the
report you are going to see us come out with next week on home
health is going to----
Senator Harkin. So, I am just saying I heard this story
before that, oh, gosh, it is going to be very bad. But even
when we cut it 30 percent, competitive bidders came in and bid
actually--I forget--16 percent below that and they are making
money.
Mr. Scully. And I hope that is the case. I think in fact
when you look at our competitive bidding----
Senator Harkin. We ought to get the IG's Office a little
bit more involved here. I would like to know how many bed
manufacturers are there out there that would make a bed like
that, a hospital bed, semi-electric, head and foot adjustments.
That is the typical hospital that I see when you go in and you
punch the button and they go up and down. How many
manufacturers are there out there? I do not know. Are there
more than enough and what is the cost of manufacturing one of
those? I have no idea.
Ms. Rehnquist. Well, I certainly do not know, Senator, but
one distinction on a bed, it seems to me, is that Medicare is
not simply a supplier. It is an insurer, so it is reimbursing a
DME company to provide the bed to a beneficiary and to service
that bed, at least up until now--and that brings up the whole
capped rental category too--and provide repairs to that bed. VA
would never do that. VA is simply a purchaser and a supplier.
Mr. Scully. VA is generally buying beds for hospitals and
nursing homes. In this case, it is usually us buying it at home
to be delivered at home, serviced at home.
Ms. Rehnquist. Exactly. The same thing I know would apply
to oxygen where they have to come out monthly and service the
equipment, and take the oximetry test to see if it is the right
level of oxygen.
Mr. Scully. Mr. Chairman, I think you are pushing us
exactly in the right direction. I am totally supportive. I am
just trying to make sure that expectations where we can save
are reasonable, so when I come back in a year and talk about
it, we are----
Senator Harkin. Well, that is true.
Ms. Aronovitz. Yes, I think that Medicare could use its
purchasing leverage by developing reasonable and defensible
prices. Right now, a lot of Medicare's payment rates are not
reasonable or defensible. If prices are reasonable and
defensible, they could be pushed lower in order to maintain the
competition needed in order to continue to sustain low prices.
We are trying to explain that this is important for Medicare.
Senator Harkin. I understand that. I would still like to
get a better handle on the costs of these items and what the
markup is. I mentioned that saline solution, for example. That
has got to be a huge markup. That is just unreasonable. But
that is just one item.
Ms. Rehnquist, I think it was in your testimony. We were
talking about the----
Mr. Scully. Mr. Chairman, can I ask you a question just
because I appreciate your intense interest in this?
Senator Harkin. Yes.
MEDICARE DRUG PRICES
Mr. Scully. There is a very parallel interest, which is in
the GAO testimony, on average wholesale prices for drugs,
which, if you got into it, would probably shock you 100 times
more. So, I hope we can get you just as interested in that
issue because what we are paying for on Medicare drug prices
for outpatient drugs is so much beyond this it is frightening.
I appreciate your interest. I think you are pushing us to do
exactly the right thing.
Senator Harkin. I really believe that is another thing that
we have got to look at. Absolutely. Perhaps we will get into
that at some point later on. In fact, I think you are right. We
have to look at that.
Do not get me started on advertising and stuff like that
for prescription drugs.
RENTAL EQUIPMENT AND SERVICE OPTIONS
I was looking at something here that had to do with the
rental equipment and service options. I believe you got into
that, right, Ms. Rehnquist?
Ms. Rehnquist. Yes, we have.
Senator Harkin. And you were pointing out that in many
cases Medicare was paying for these service options and the
purchase options that they had and that they could save a lot
of money by eliminating the purchase option under the capped
rental category of equipment.
Ms. Rehnquist. I think what we were pointing out was the
service contracts, like in retail, if you go to Circuit City
and buy an extended warranty on a piece of equipment.
Senator Harkin. Right.
Ms. Rehnquist. What we found was that the Medicare program
would save I think it is like $100 million a year if it would
simply perform repairs when needed on equipment and not buy
these extended warranties, if you will.
Senator Harkin. Right.
Ms. Rehnquist. Because then it is like an insurance company
buying insurance. It just does not make any sense. We found
that they would just save money making repairs on equipment as
necessary because in these extended warranty options----
Senator Harkin. Do you need legislation to do that, Mr.
Scully, or can you do that?
Ms. Rehnquist. Yes, and CMS concurred with our report. But
yes, it does require legislation.
Senator Harkin. It cannot be done regulatory-wise.
Mr. Scully. I think we tried to drop the lease extension
option a few years back and were prohibited from doing it. So,
I think we do need legislation. This is basically the issue.
Basically after 13 months, I believe the patient has an option
to buy and if they do not, there is a lease and there is a 20
percent of the lease cost maintenance payment after that in
perpetuity. And we tried to end that a number of times without
success. And I think that is very good policy.
Senator Harkin. Well, again, I hope to work with you to
craft legislation. I am open for suggestions that you might
have for this. I think the Inspector General said that there
were four different reforms to payments that they could save
about $550 million a year. I assume all of those require
legislative changes. So, my question then is for both of you.
To the Inspector General, will you work with us and work with
Mr. Scully to craft this legislative language to achieve these
savings?
Ms. Rehnquist. My office would be happy to do whatever we
can do to help bring that along.
Senator Harkin. Mr. Scully?
Mr. Scully. Absolutely. We have had tremendous cooperation
with the Inspector General's Office in the year I have been
there. We would be happy to do that.
Senator Harkin. Well, that would be good. I think we ought
to get that language ready to go this year. There is most
likely going to be some bill on Medicare this year.
Mr. Scully. I certainly hope so.
Senator Harkin. Something.
Mr. Scully. As do the doctors in the Puget Sound area.
THE FOUR REFORMS
Senator Harkin. Something is going to be moving on Medicare
and these are some of the minimal things that we have got to
get included.
These four reforms. Was one of those competitive bidding?
Was that one of the four reforms you were talking about?
Ms. Rehnquist. I do not think so.
Senator Harkin. That is right. The four reforms you were
talking about were the maintenance payments for capped rental
equipment we talked about, respiratory assist devices,
prescription drugs used with medical equipment, albuterol and
the other one was ipratropium bromide. Those were four.
Mr. Scully. I think all of those are involved in the
competitive bidding demo. I know the nebulizer, albuterol--that
is in the demo I think.
Senator Harkin. Well, those four items and some of those
are in competitive bidding, some may not be. We need to work
with you to get language ready for the bill this year on those,
and I would appreciate working with you on that.
Mr. Scully, what steps have you taken to respond to GAO's
recommendation on using the UPN's, the universal product
numbers, on Medicare claims to get better information about the
specific products that Medicare is paying for?
That was another thing that goes back a long time, getting
specific information on products. Everything has a UPN, I
think, in the world. I do not know, but when we tried to find
out how many, there just was not that information.
Mr. Scully. Well, the codes we pay under, which GAO pointed
out are pretty broad--we basically have a wheelchair code and
we pay for----
Senator Harkin. Why not use a UPN code for every item? That
way you have got all the data you need. Is that what you were
getting at, Ms. Aronovitz?
Ms. Aronovitz. Yes. It would be quite an undertaking to
look at all of 1,900 groups of products, but CMS could start
with ones that they know are overpaid and obtain UPN
information on the products within those categories. CMS should
start small and focus inherent reasonableness activities on
product groupings where it is known that overpayments likely
occur. The first and fundamental issue is for CMS to know what
products it is paying for, and what products are actually being
delivered to beneficiaries. The second thing is to know what
the price of those items should be. After obtaining those
pieces of information, it is a matter of having the courage and
the foresight to move forward, use inherent reasonableness, be
able to defend the prices that the Agency would like to pay,
and then execute these rates.
Mr. Scully. Mr. Chairman, can I just raise--since you are
our appropriator, the number one barrier to us doing this well,
to be honest with you, is that when we save money from the
trust funds like the demo in Polk County or the other demo in
San Antonio, we save money to the trust funds on the
entitlement side, which goes to the Finance Committee, the Ways
and Means Committee. The money to run the demos comes out of
our domestic discretionary appropriations account, and that
cost us about $17 million, $20 million last year. The committee
said, do these demos, and we had to come up with the money to
do them. And not to complain, because I am a cheap former OMB
guy, but as we----
Senator Harkin. I was going to say, can you help us with
OMB, Mr. Scully?
Mr. Scully. Well, it is not just OMB. Again, I am not
complaining about our budget, but I am saying the fact is we
run a $260 billion Medicare program on a $2.5 billion
administrative budget. About a $1.5 billion of that--most of
this is done by the contractors. The contractors are largely
the Blue Cross plans--run a huge program, $260 billion on $1.5
billion in domestic spending, and we go out and tell them--you
know, a lot of this is really the DME carriers and the DME
contractors. And we just do not have the bodies or the money to
do a lot of this.
For example, if we go out to do competitive bidding
nationwide, I mean, the tradition would be the committees will
tell us, do competitive bidding, save all this money in DME,
and there will not be any appropriated money for us to have the
staff to do it. The reality is it is going to be extremely
expensive to do.
I think fundamentally we have a lot of demands to save
money for the trust funds.
COMPETITIVE BIDDING
Senator Harkin. I think OMB ought to account those savings
to this side of the ledger. It has been one of our frustrations
in the past, that we get these savings, but it is never really
counted as savings to us. It would be very helpful. I have made
that argument to OMB for years, probably back when you were
there. For me it does not make sense. It should be counted that
way, but we have never been able to get OMB to do that under
any administration, whether Democrat or Republican or whatever.
We have never been able to get that done. But any help you can
give us on that----
Mr. Scully. I will be happy to work with you on it. For
example, when the Justice Department makes collections on
recoupment in Medicare cases, a certain part of that goes back
in the Justice Department. I think you can make an argument in
some of these cases that if you want us to do more things on
competitive bidding to save money for the trust funds, we just
do not have the capability to do it right now.
There is a lot of push from the committees about putting in
the BIPA reforms. If you have a Medicare appeal, it takes 2
years now, and there is a very rational reform policy that has
been out there for 2 years, but we have not funded it because I
do not have the money to do it. It is ridiculous that Medicare
beneficiaries have to wait 2 years for their claims to be
appealed, but we do not have the financing to reform the
system. It is just a reality. The authorizing committees
authorize things and then the money to make them happen is not
appropriated, and there is a disconnect. I am just making that
commentary.
Senator Harkin. If we get OMB to score us the savings, we
could probably do a lot more.
Mr. Scully. I will be happy to work with you on it. Thank
you.
Senator Harkin. All right. Well, listen, thank you all very
much.
What I got out of this hearing is, first, the proposed
regulations on inherent reasonableness are out of your shop and
they are being reviewed now at the OMB level. And we are going
to push as hard as we can to get those done. I cannot see any
reason why they could not have them done in a month if they
have been out of your shop for some time. I did not get exactly
when they came out of your shop, but it is about time we get
those.
Second, the administration will continue to press ahead
this year on any Medicare legislation to start the competitive
bidding process going and enact that.
Third, you are going to work with the IG's Office and
hopefully with us to draft some proposed language in any
legislation we might get up this year--and it might be soon. It
might be happening this summer, so time is of the essence
here--to address a couple of the problems that the IG came up
with on some of the things like the service contracts and
things like that.
Did I miss anything? I think that is it.
Well, I am encouraged. I am more encouraged now perhaps
than I have been at any time in the past because, A, the
administration is now supporting competitive bidding. That sure
does help. Second, we have jumped through every hoop, the
demonstration programs, the GAO investigation. Hopefully, there
is not going to be another roadblock thrown up again this year
to say that we have got to do another study. We have done
enough studies. We have got to go ahead on this.
Thank you all very much for being here. Again, I thank you,
Inspector General, for your great work. Thanks, Mr. Scully.
Next we will turn to the supplier side of this equation,
and we will hear from Mr. David Williams, who is Director of
Government Operations for Invacare Corporation, which was
mentioned earlier, the largest manufacturer of home medical
equipment in the country. Prior to joining Invacare, he served
as a senior policy advisor to the Governor of Ohio on health
and disability policy. Mr. Williams is also a member of the
board of directors of the American Association for Home Care.
Mr. Williams, I did not get a chance to read your
statement, but please go ahead. It will be made a part of the
record in its entirety. Please proceed as you so desire.
STATEMENT OF DAVID T. WILLIAMS, DIRECTOR, GOVERNMENT
RELATIONS, INVACARE CORPORATION
Mr. Williams. Well, trusting that you will read it, I will
not read it to you and bore you with it, but I will summarize
it if I can.
Mr. Chairman, I am honored to have the opportunity to
testify before you and present what nominally could be the
other side of the funding issue. You will note in my written
statement that I did not--before I go on, I do want to
acknowledge that two representatives of the industry, Tom
Connaughton, who is the President and CEO of the American
Association for Home Care, and Kimberlie Rogers-Bowers, who is
on the Regulatory Affairs committee of our trade association,
are here with me today. If you have some tough questions, I
will punt, if you do not mind.
Senator Harkin. All right.
Mr. Williams. You will note in my written testimony that I
did not mention the data the OIG included regarding Medicaid
retail sales and FEHB comparisons. I would be happy to do that,
but I kind of focused on the VA. But I would like to get into
the other in Q&A, if you do not mind.
I really want to make three points to the subcommittee to
illuminate what I consider to be the inaccuracies in the
report, but before I do, I want to make sure that you, Mr.
Chairman, and all the members of the subcommittee know that the
home medical equipment--you call it durable, we call it home
medical equipment--services industry--we acknowledge that there
must be a fair and accurate mechanism in place to ensure that
the Medicare program is not being overcharged for the goods and
services we provide. In other words, we do not oppose a
reasonable IR rule that is reasonably implemented.
The problem in the past is that the inherent reasonableness
rule was either applied unreasonably or used unreasonable data,
and both the GAO and the Inspector General have supported the
industry in that in the past. And that was the reason it was
suspended while they worked at refining the rule to make sure
that the data used in inherent reasonableness was fair and
accurate, in other words, apples-to-apples comparisons.
While we accept inherent reasonableness, I also want to
point out that inherently reasonableness does not necessarily
equate to the price that Medicare pays, inherently reasonable
only if it equals what the VA pays or even what Medicaid pays
or that FEHB pays because again there is a difference there.
It is important to remember that when we talk about DME in
the Medicare program, that we are not talking about a
commodity. You showed a picture of a commode. That commode
comes with the provider delivering it to the Medicare
beneficiary, setting it up--believe it or not, if you look at
that picture closely, you will see the legs are adjustable, and
there are parameters for those legs to be adjusted--and showing
the patient both how to maintain it and to use it. There is a
safe way to get on that commode and an unsafe way. So, they
actually train the patient to do it. So, we have got delivery,
we have got set up, we have got training. Then we have got the
Medicare costs of billing associated with that commode.
So, there is a whole lot more that goes with that commode
than just the product in the picture, and it makes no
difference whether we are talking about that commode or
nebulizers, respiratory therapy using nebulizer drugs, or
motorized power wheelchairs. They all have a huge, huge service
component.
The respiratory drugs, for example, with a nebulizer. I
told you what happened with the commode. With the nebulizer,
under Medicare rules, the provider goes out and again delivers
the nebulizer to the patient with a respiratory therapist to
instruct them how to use it and then has to follow up on a
regular basis with the patient with a trained respiratory care
specialist to make sure that the patient, A, is complying and,
B, still needs to machine. We are required to do that under
Medicare.
Rehab technology is something that is pretty close to me,
as you will note. The Rehab Council, the professional
organization representing the rehab, did a study recently and
found that just before the wheelchair is delivered, like the
power wheelchair I am sitting in today, before it could be
delivered to me, there are 35 hours of professional service
time involved in evaluating me to make sure I have the right
equipment, getting the right equipment, adjusting the right
equipment, programming the equipment, training me how to use
the equipment, then reevaluating me to make sure it works
right.
To do a power wheelchair right, we have to send somebody
out to the beneficiary's home to evaluate the home to make sure
that the product we provide will work in their home. And then
in the first year afterward, we find that on average we spend
about 5 to 6 hours reprogramming the product, just going back
and reassuring the beneficiary. I know it looks pretty smooth
when you see somebody like me who has been in a chair for 25
years, but the first year in a power wheelchair is hell. I can
take you to my home and show you the damaged woodwork to prove
that fact.
So, again, none of these examples include what Medicare has
acknowledged time and time again, which is the cost of doing
business with Medicare which is both the cost of the billing
process which is hugely expensive because of the amount of
paperwork and documentation involved and the cost of money, if
you will. The provider has to buy this power wheelchair from
Invacare at a price of about $7,000 and wait in most cases 5 to
6 months to get their money back. There is a cost associated
with that money. They are paying interest on it either to us or
to a bank or to a credit card or something.
The next point I want to make is the fundamental difference
between the VA health system and the Medicare program. As has
been said, Medicare is an insurance plan. It is just like Blue
Cross Blue Shield and everything. It purchases goods and
services through private providers on a patient-by-patient
basis. The Medicare fees for DME include the costs of all the
services that I mentioned, as well as those associated with the
actual price.
Again, it is important to note that 70 percent of the home
medical equipment service providers who service Medicare
beneficiaries are small businesses. And in Iowa, just to make a
point for you, that number is 85 percent. The vast majority are
small business, and they purchase supplies and equipment on an
as-needed basis. They do not keep a ton of product in a
warehouse that they can ship off and buy in huge quantities to
get the kind of discounts that, for example, the VA does.
On the other hand, the VA medical program is conducted by a
fully integrated, Government-owned and operated health system.
As a manufacturer, we sell our products directly to the VA on a
national contract. I know we have talked about competitive
bidding. They have a fee schedule that comes out, the national
contract that comes out. Under Federal law, we have to as a
manufacturer--for example, if a large national provider comes
to us and negotiates a lower price, automatically our price to
the VA goes down under Federal law. So, we have to make a
decision, are we going to continue to provide, say, K0011 power
wheelchairs to the VA at the price that it went down to because
a contract changed with a national provider. And there are a
lot of business decisions in there, but you have to understand
that that is the lowest possible price.
And it disregards volume. We could have a national
provider--there is national chain, for example, that would buy
more product than the VA in that category, K0011 power chairs,
but even though they buy more, the VA would get the lower price
than they get even though they buy less. So, there is a
fundamental difference in the way it happens.
More importantly for the VA is the fact that--like
Kimberlie's company, they provide the respiratory therapist
that goes out and makes the visits. They provide the delivery
truck and driver who delivers the commode. They provide the
physical and occupational therapist who do the evaluations and
fittings and all the follow-up on the power chair. The VA does
that with existing staff and existing infrastructure. So they
pay the price for the product. They pay our wholesale price. It
is a fundamental difference.
And another big difference with the VA is that there is no
billing cost associated with it. The cost of doing business
with the VA is waiting to get your check from the Government
which is relatively quick.
In order to come up with the true cost of what the VA pays
for DME, you would have to amortize the costs of that entire
infrastructure, the employees, all the physical infrastructure,
determine what percent of it is associated with the DME benefit
to veterans and then add that percentage to what you are paying
for the actual product. Then you begin to understand what the
true costs are. To compare the VA to Medicare is really, as has
been said earlier by the GAO, an apples and oranges comparison.
So, that is very important.
Again, I want to say that we do not object to having
mechanisms in place to set Medicare fees at reasonable levels.
However, we do strongly feel that the only way to determine
what is inherently reasonable is to make inherently reasonable
comparisons. It is inherently unreasonable to state that
Medicare fees for DME are too high just because of what the VA
pays is less.
I believe that the OIG has done a disservice to this
subcommittee and, more importantly, to Medicare providers and
beneficiaries by publishing a report that is both inaccurate
and invalid because of the comparisons it makes. With all due
respect to the IG, she has reached these conclusions because of
the comparisons made and the validity of the data. Some of the
data showed up in earlier reports.
For example, in the 1999 information that came up that was
a result of the suspension of the IR rule, on enteral nutrients
they compared what Medicare was paying for prescription enteral
nutrition, what you put in through a feeding tube, to Ensure,
which they bought off a drugstore shelf, maybe at Costco. Now,
there is an apples and oranges. On catheters, they went to a
wholesaler and just sent in and looked at a box of catheters
and said, what does this box of catheters cost, and then
compared it to the Medicare price. It turned out that the
product that they compared was out of date and could not be
sold in this country because it was not considered to be
sterile. So, we need to make sure that there always is valid
data.
I respectfully ask and our industry asks that you reject
the OIG's report but instruct the Centers for Medicare and
Medicaid Services to use its IR authority judiciously and to
base all decisions on accurate and appropriate data and
comparisons.
It is important to remember that the model used to deliver
services to Medicare beneficiaries is the same model, Mr.
Chairman, that you would receive DME, should you need it,
through the Federal Employee Health Plan. Many of them are
managed care plans and so forth, but they contract with private
providers and they include in the price the services. So, it is
important that you realize that that one fee is paid for a
combination of quality products and the associated services
needed to achieve the clinical outcome you expect and your
doctor expects when they write the prescription. Under
Medicare, DME is not a commodity. It is a combination of goods
and services. I cannot express that strongly enough.
You asked us to answer your question in the beginning why
HHS does not take advantage of VA type buying power and why it
will not work. I just jotted down a few things that I would
point out to you that are different between the HME providers
serving Medicare beneficiaries and the VA system.
The HME provider is a small business that must comply with
21 supplier standards. They must be accredited in order to
operate their business, which requires having a strong
compliance plan and a strong training and education plan within
their business, and they must pay the cost of staff licensure
and credentialing. For example, that occupational therapist
that is involved in fitting and measuring for the power
wheelchair has to have continuing education every year and they
must pay that cost. The VA absorbs that cost if they used a
licensed occupational therapist. That respiratory therapist has
to be licensed in the State that they work in and so forth. So,
there are some fundamental differences in the model.
The second point is that one of the things that has not
been brought up here--it was touched on, but not brought up and
you mentioned when you mentioned the UPN, universal product
numbers. One of the reasons Medicare is in this conundrum right
now is the gross inadequacy of the HCPC coding system as it is
used for the DME benefit. In one product used in your
comparison, for example, the K0011 motorized power wheelchair,
there are products in that category that Invacare manufactures
that the manufacturer's suggested retail price is $4,200, and
there are products in that category, because of their
complexity, the technological advancement, and their
application, cost nearly $8,000. They are all in the same
category. So, how do you come in and say Medicare is paying too
much when what you are comparing to has such a breadth? The
coding system is grossly inadequate and I submit you cannot
really even begin to make comparisons until you have the coding
system fixed.
Finally, I just want to close. You have talked about
competitive bidding a lot, and I want you to know that our
industry welcomes true competition. We really do welcome true
competition. But I want to point out the difference between
competitive bidding and the competitive bidding demonstration.
In competitive bidding, which our customers engage in with
health plans all the time, they know how many covered lives
that they are going to get, the approximate utilization so they
can make a business decision in their bid. They know the
volume, they know the potential volume, the up side, the down
side, the demands, and all the parameters.
The competitive bidding demonstration in Polk County and
San Antonio, bidders came in and then they took the lowest bid.
And then they said, okay, anybody who bid, even if you were
higher, if you are willing to do it for this lowest bid, you
are in. That is not competitive bidding. That is Government-
sponsored price setting by any stretch of the imagination.
And despite all of the flowers that have been laid at the
foot of those two demonstrations, as the GAO pointed out, they
still do not know the cost of it. We do not know the associated
costs because you do not look at how many people have been
readmitted to the hospital because they did not get the
appropriate follow-up by a respiratory therapist in Polk
County, Florida. It has happened, Mr. Chairman. What has
happened in Polk County, despite the suggestion that it did
not, is by the end of the second round, 73 percent of the
respiratory care in Polk County, Florida is provided by one
company. Lots of small businesses went out of business, and the
level of service is diminished, and when the level of service
is diminished on respiratory care, people get sick and are
readmitted to the hospital. That never shows up on your score
sheets.
prepared statement
So, my statement is probably more lucid than my oral
comments.
Senator Harkin. No, it is very good, a good statement.
Mr. Williams. I would be pleased to answer any questions
that you have.
[The statement follows:]
Prepared Statement of David T. Williams
Mr. Chairman, Members of the Subcommittee; my name is David T.
Williams and I am the Director of Government Relations for Invacare
Corporation. Invacare is the world's leading manufacturer and
distributor of medical equipment and supplies for use in post acute
care. Most of the products in our various catalogues are covered under
the Medicare DME benefit.
I am honored to have the opportunity to testify before you today to
present the ``other side'' of the issue of Medicare payments for
durable medical equipment (DME). My statement today will be brief and I
respectfully ask that it be entered into the record of today's
proceedings.
I want to make three points to this Subcommittee that illuminate
the inaccuracies in the information contained in the report from the
Inspector General. Before I do, I want to make sure that everyone on
this Subcommittee knows that the home medical equipment services
industry acknowledges that there must be a fair and accurate mechanism
in place to insure that the Medicare program is not being overcharged
for the goods and services that we provide. However, I also want to
point out that ``inherently reasonable pricing'' under Medicare does
not equate to fees that are equal to what the Department of Veterans
Affairs pays, for what appears to be the same products.
The first point I want to make today is that DME is not a
commodity. It is a combination of a product and the services necessary
to get the desired clinical outcome for the patient. It does not matter
if you are talking about a walker, home respiratory therapy using a
nebulizer or a motorized/power wheelchair--there is a significant
service component included in the Medicare payment for each of these
products.
An HME provider must deliver, measure, adjust and train the
beneficiary in the proper use and care of a walker under Medicare. The
same goes for a nebulizer with the additional responsibility of having
a trained respiratory care specialist visit the patient on a regular
basis to check their progress and document compliance with the
physician's orders. The Rehab and Assistive Technology Council of the
American Association for Homecare conducted a survey that shows that on
average, proper evaluation, fitting, adjustment, training and delivery
of a motorized wheelchair takes 35 hours of trained professional
service time before the power wheelchair is delivered. During the first
year, the rehab provider can expect to spend another 5 to 6 hours in
making additional adjustments in the programming and seating of the
unit. Note that none of these examples include the significant amount
of effort and time required to submit a claim for home medical
equipment services under Medicare.
The next point I want to make is the difference between Medicare
and the VA Health System when it comes to the DME benefit.
Medicare is an insurance program just like any private health
insurance company. It purchases goods and services through private
providers on a patient-by-patient basis. Medicare fees for DME include
the costs of all the services associated with the actual product.
Seventy percent (70 percent) of the home medical equipment service
providers who serve Medicare beneficiaries are small businesses that
purchase supplies and equipment on an as-needed basis.
The VA medical program is conducted by a fully integrated,
government-owned and operated health system. Manufacturers sell their
products directly to the VA on a national contract. Under federal law,
the VA receives the lowest contract price the manufacturer sells it
products for to any of its customers, regardless of comparative volume.
More importantly, the VA Health System provides the services
required for successful outcomes using its existing infrastructure and
staff. The VA costs sited in the OIG's report reflect the cost of the
product only and that amount is the lowest price available. Employees
of the VA do product delivery. Therapists and technicians employed by
the VA do all evaluations, fittings, patient training and adjustments.
Respiratory therapists employed by the VA visit veterans requiring
respiratory medications delivered by nebulizers. Finally, there are no
billing costs associated with providing DME through the VA Health
System.
In order to come up with the true costs of items of DME provided
through the VA, this Subcommittee would have to amortize all the costs
of the federal employees working for the agency as well as the costs of
its vast physical infrastructure. It would then have to determine and
assign a percentage of these amortized costs to the price paid for each
item of DME it dispenses. These would be the true costs of DME provided
through the VA Health System.
Mr. Chairman, Members of this Subcommittee; let me say again that
the HME services industry does not object to having a mechanism in
place to set Medicare fees at inherently reasonable levels. However, we
do feel strongly that the only way to determine what is inherently
reasonable is to make reasonable comparisons. It is inherently
unreasonable to state that Medicare fees for DME are too high based on
a comparison with what the VA pays for the same products. I believe
that the OIG has done a disservice to this Subcommittee and, more
importantly, Medicare providers and beneficiaries by publishing a
report that is both inaccurate and invalid.
With all due respect, the OIG report has reached invalid
conclusions because it has based its findings on an ``apples to
oranges'' comparison. On behalf of Invacare Corporation and the entire
HME services industry, I respectfully ask that you reject the report
the OIG presented today and instruct the Centers for Medicare and
Medicaid Services to use its inherent reasonableness authority
judiciously and base all decisions on accurate and appropriate data and
comparisons.
Finally, I want to remind each of you that the way Medicare
administers the DME benefit is the same way DME would be provided to
each of you, should you need it, under the Federal Employees Benefits
Program. One fee is paid for quality products AND the associated
services necessary to achieve the clinical outcome that you and your
physician would expect. Under Medicare, DME is not a commodity. It is a
combination of goods and services for which providers have a right to
be adequately and fairly compensated.
Thank you for giving me the opportunity to testify this morning and
I would be happy to answer any questions you may have for me.
Senator Harkin. Well, thank you. That was a good
presentation. I listened intently.
I think my history and my record will show that I take a
back seat to no one in support of quality of care for people
with disabilities, but I want you to know I have been down that
road a lot of times. Again, I would just point out one example,
and that is oxygen. I cannot tell you how many times I met with
oxygen suppliers back in the 1990's when we were working on
this. It is an item that requires services. It requires visits.
It requires all kinds of things that you just mentioned. And
they protested loudly that it just could not be cut because of
all these services that were required for oxygen. We cut it by
30 percent. We just cut it by 30 percent. Then we put out for
bids, and they came in and bid 16 percent lower than that for
oxygen with the services.
So, again, that example informs me a lot about what might
be out there. Oxygen is the largest category of medical
supplies paid for by Medicare. And again, it requires a lot of
services also.
Mr. Williams. Mr. Chairman, I believe if you do check in
Polk County, you will find that there is a reduction in service
and that the level of professional care is greatly diminished.
Senator Harkin. If you want to have some input on that, I
would be glad to take it.
Mr. Williams. We will provide you with it.
Senator Harkin. According to GAO, that is not the case. So,
we have a disagreement there.
Now, again, I would say, Mr. Williams--and I mentioned this
earlier--that there are going to be devices, equipment,
different things that because of a specialized need and
specialized types of settings are going to require a different
level of reimbursement. That is why I start at the bottom. We
do the competitive bidding, and if it requires something
special, then you have inherent reasonableness to pick it up. I
understand that there are going to be those kinds of items.
But you just cannot tell me that it requires some special
kind of services to teach people how to use a saline solution.
I am sorry. On these blood glucose monitor strips that they
bought from Costco, right now they threw in 25 lancets free.
Medicare is paying for those. They are paying through the nose
for the strips too.
You may come and say that there are certain pieces of
equipment, whether it is motorized wheelchairs and other kinds
of things that require something different. I will grant you
that. But you cannot convince me that is true of blood glucose
test strips, lancets, saline irrigation solution, a walker.
Mr. Williams. I would disagree with you having had the
experience of having to use a walker.
Senator Harkin. Well, I will disagree with you too. I just
had a brother that had to use a walker, and his services and
his instruction on how to use it did not come from the people
who made it. It came from the therapist associated with Mercy
Hospital in Des Moines who taught him how to use it. It did not
come from the company. I was there. It was the therapist who
adjusted it, got it. Medicare paid for the walker. There is no
doubt about that. I do not know who made the walker.
Mr. Williams. Medicaid?
Senator Harkin. Medicare paid for it. But there was not
anyone from the company coming out doing anything.
And then pressure pads. There may be some things that are
associated with services, but I do not think it warrants paying
three times more than what the VA is paying. Plus, I am also
informed that in some of these cases where VA is paying for
these, they are also getting the services. VA pays for them.
You have a veteran living at home. The services go to that
veteran. They paid this. They get the same services that a
Medicare person gets.
Mr. Williams. They get paid additional. Mr. Chairman, for
example, if the VA had a--let us take the bed in Iowa and
because they did not have a distribution center there, they may
go to a local provider and say, would you deliver a bed to
Veteran Jones in a small town because he is not close by. They
will pay the VA price for the bed. They will also pay a
delivery fee and they will pay a setup fee. They will provide
additional amounts plus the price of the bed from the fee
schedule.
Senator Harkin. We found out that the Department of
Veterans Affairs, in providing the oxygen, required the same
services as provided by Medicare, exactly the same. This was
not some additional add-on. The Veterans Administration said
here is what we pay for the oxygen, and included in that must
be all these services. It was not an add-on. And we got a 30
percent cut in that.
So, I do not know. Maybe there are some add-ons. I will
look at it. Maybe the VA says, okay, we will pay for this, but
then we will pay additional services. But the one that I am
most familiar with, oxygen, it was the same services.
Ms. Rogers-Bowers. [Inaudible.]
Senator Harkin. I am sorry. Would you identify yourself for
the record please?
Ms. Rogers-Bowers. My name is Kimberlie Rogers-Bowers and I
sit on the American Association for Home Care's Regulatory
Committee. I was also very much part of the review of the GAO
report when the oxygen was analyzed. Actually with the VA
study, I understand that there were additional add-ons for the
portable system and for the portable refills and also a
delivery charge in some cases.
Senator Harkin. That may have been just for the portable
one, maybe. But for the ones in the home, I do not think so.
Ms. Rogers-Bowers. For the additional portable system, if a
patient was portable, as well as any refills that the patient
was receiving, there was an additional add-on for that, as well
as in some cases delivery charges, which we can pull that
information and send it to you.
Senator harkin. Why do you not get that information to me.
I will be glad to take a look at it.
[The information follows:]
Prepared Statement of the American Association for Homecare
The American Association for Homecare (AAHomecare) submits the
following testimony to the Senate Subcommittee on Labor, Health and
Human Services, Education and Related Agencies in response to the
updated comparison of Medicare payment rates to other payers for
certain items of durable medical equipment, prosthetics, orthotics and
supplies (DMEPOS). AAHomecare represents all segments of the homecare
industry, including providers and suppliers of home health services,
durable medical equipment (DME) services and supplies, infusion and
respiratory care services and rehabilitative and assistive
technologies. Many of the individuals our members serve are Medicare
beneficiaries.
In its most recent examination of Medicare payments, the Inspector
General of the Department of Health and Human Services (HHS) compares
the Medicare payment rate for sixteen items of DMEPOS with the rates
paid by the Department of Veterans Affairs (VA), state Medicaid
programs, retail establishments and the Federal Employee Health Plans
(FEHPs). The OIG review is a rehash of its previous studies,
essentially reaching the same conclusions without addressing any of the
systemic differences between the programs it compares. The OIG contends
that its conclusions support its previous findings that CMS could
achieve significant savings by adopting any of the alternative payment
systems of the four programs listed above. However, in this recent
comparison--as in the OIG's previous studies--it fails to account for
the structural differences in the programs and the additional
administrative costs of providing DMEPOS to Medicare beneficiaries,
which are described in greater detail below.
the oig's comparison of medicare to other programs is fundamentally
flawed
Comparing the VA to Medicare is like comparing apples to oranges.
The fundamental differences between the methods used by the VA,
Medicaid, the FEHP or retail suppliers and Medicare suppliers to
purchase, deliver and get paid for items of DME and supplies render it
inappropriate to compare payment rates between them. The industry has
higher administrative costs when servicing Medicare beneficiaries than
it does other patient groups. Medicare providers spend a significant
amount of time and money filing claims for Medicare reimbursement and
obtaining documentation to support the claim. The differences between
the Medicare program and the VA have, for example, been recognized by
the GAO \1\ and the OIG, and the OIG has held that the higher costs of
servicing Medicare beneficiaries can justify higher charges to Medicare
by suppliers.\2\ Suppliers must document the medical necessity of each
claim, obtain a prescription from physicians, often must request
portions of the beneficiary's medical record to document medical
necessity and must document proof of delivery. Providers also incur the
expense of billing and collecting Medicare co-pays and deductibles and
bear the risk of bad debt.
---------------------------------------------------------------------------
\1\ Comparison of Medicare and VA Payment Rates for Home Oxygen,
Letter dated May 15, 1997 from William Scanlon, Director, Health
Financing and Systems Issues, GAO to William Roth, Chairman of Finance,
United States Senate.
\2\ See OIG Advisory Opinion, No. 98-8.
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Moreover, VA payment amounts do not reflect the costs for delivery
of the items because they are absorbed under other parts of the VA
budget. The VA purchases items directly from manufacturers and
distributes them to beneficiaries through the VA facility network.
Unlike most homecare suppliers, the VA can purchase directly from
manufacturers in large quantities. There are many small homecare
suppliers that may serve only two or three hundred beneficiaries each
year. The VA, in contrast, can commit a large volume purchase to a
manufacturer.
In contrast, Medicare suppliers provide beneficiaries with services
and delivery of the items that are not directly reimbursed by the
Medicare program. Transaction costs for servicing Medicare
beneficiaries are higher than they are for VA patients because of the
significant cost of complying with Medicare program rules. Medicare
suppliers must meet twenty-one supplier standards which include
maintaining a physical facility, delivering items to the beneficiary,
providing education to the beneficiary and maintaining a complaint
resolution procedure.\3\
---------------------------------------------------------------------------
\3\ See 65 Fed. Reg. 60366 (October 11, 2000).
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The OIG attempts to address the disparities between the VA and the
Medicare program by incorporating a 67 percent mark-up from VA payment
rates into its analysis. However, this mark-up amount derived by CMS
bears no relationship to a provider's costs of furnishing DMEPOS items.
CMS calculated the percentage based on the suggested retail price for
items in the manufacturers' requests for HCPCS codes spanning over ten
years. Not only did CMS use stale data, it did not undertake any
analysis of the costs to providers of participating in the Medicare
program. The 67 percent figure is arbitrary and should not be given any
weight as a benchmark for Medicare payment amounts.
the medicare program can not be directly compared to other public or
private insurance programs or retail establishments
The OIG also compares Medicare payment rates to state Medicaid
programs, the Federal Employee Health Plans and retail operations.
These comparisons are equally flawed because they compare Medicare to
drastically different health care delivery models.
--Medicaid programs vary widely by state and it is therefore
imprecise to compare Medicare reimbursement rates to an
amalgamation of Medicaid rates. For instance, some Medicaid
programs have large participation by managed care companies. In
addition, many Medicaid programs offer a simpler, more
predictable administrative framework which include mechanisms
like prior approval which streamlines the reimbursement process
and guarantees that the supplier will be paid for the items it
provides.
--Many Medicaid programs have regional concerns that affect the
payment for DMEPOS in that state. For instance, the Wisconsin
Department of Health and Family Services recently responded to
an investigation by the Office of Inspector General (OIG) for
the Department of Health and Human Services (HHS) that found
that the Wisconsin Medicaid program could save money by
reducing its reimbursement rates for oxygen to the Medicare
rate. In refusing to accept the OIG's recommendations, the
Department stated: ``while we agree with your conclusion that
Wisconsin Medicaid pays more than the Medicare rate, we
disagree with the recommendation that we reduce our payment
level to match Medicare. It remains our belief that such a
reduction would result in the refusal of providers to serve
Medicaid clients. It should be noted that many of the fiscal
disparities that resulted from the 1997 Balanced Budget Act
have been identified as causing a loss of providers, and that
many of those limitations have since been rescinded. Therefore,
we intend to maintain the level of reimbursement that we
believe is appropriate for our state.'' \4\
---------------------------------------------------------------------------
\4\ Department of Health and Human Services Office of Inspector
General, Review of Medicaid Payment Amounts for Oxygen Related Durable
Medical Equipment And Supplies, Wisconsin Department of Health and
Family Services, Madison Wisconsin, October 2001; A-05-01-00031, (OIG
Study).
---------------------------------------------------------------------------
--Retail prices do not account for the services associated with
delivering DMEPOS items to Medicare beneficiaries. The service
levels for retail or internet suppliers are extremely low or
nonexistent when compared to those of Medicare suppliers.
Medicare suppliers provide many additional services as part of
delivering items to a beneficiary including patient education,
clinical monitoring and care management. Medicare suppliers are
required to meet twenty-one supplier standards, which include
requiring a supplier to deliver items to a Medicare
beneficiary, while retail customers must pick-up their items.
These additional costs are not accounted for in the OIG report.
Importantly, however, even considering the disparity in
services levels between Medicare DMEPOS suppliers and retail
establishments, the OIG found that the Medicare median is
actually lower than the retail median for six of the sixteen
items examined, with an additional four items having only a
nominal price discrepancy.
--The OIG's comparison of Medicare payment to the Federal Employees
Health Benefits Plan (FEHB) is flawed because it compares two
drastically different health care delivery models. FEHB is a
health insurance program that includes many managed care
companies. Managed care entities typically contract with
suppliers for negotiated rates and guarantee a certain number
of enrollees in return for the contracted rate. The
administrative burden of servicing managed care enrollees is
lower than dealing with the Medicare program. Generally,
enrollees in these kinds of plans have more limited choices of
suppliers than do Medicare beneficiaries. Managed care
companies offer streamlined processes like prior approval which
reduces the days sales outstanding, and the burdens of
certifying medical necessity and collecting reimbursement.
neither competitive bidding nor inherent reasonableness are viable
payment methodologies for the medicare program
The OIG has advocated the use of competitive bidding or inherent
reasonableness as a method for reducing the prices that Medicare pays
for certain DMEPOS items. Neither of these methodologies, however,
accurately account for the full range of services associated with
delivering the items to Medicare beneficiaries. In addition, both
payment methodologies have serious structural and procedural flaws
which would need to be addressed prior to CMS implementation.
The competitive bidding demonstration prices are a result of an
artificially manipulated marketplace and therefore do not accurately
reflect DMEPOS payment amounts that will sustain the level of services
currently given Medicare beneficiaries. Although the four items
analyzed by the OIG that were subject to the competitive bidding
demonstrations achieved savings, it is too soon to fully understand the
effect that these reductions will have on beneficiary access to
critical services and choice of products. Competitive bidding may
significantly reduce the services available to Medicare beneficiaries
in the demonstration area. In fact, even CMS' in its January 2001
report ``Evaluation of Medicare's Competitive Bidding Demonstration for
DMEPOS, First Year Annual Evaluation Report'' acknowledged that
``[a]lthough we have learned a number of lessons from the evaluation so
far, we caution that it is premature to make final conclusions about
the long-term impact of the demonstration on many of the evaluation
issues.''
It is premature to make any economic assumptions based on the
minimal amount of data coming out of the limited demonstration project.
The costs of administering a national competitive bidding program are
likely to offset any savings to the program. In addition to the
reduction in services, competitive bidding would result in the
elimination of small DMEPOS providers. This will result in a dearth of
bidders when it is time to update or renew the bidding process. As a
result, bid prices are likely to rise and patient choice is likely to
diminish as more suppliers are eliminated.
CMS' use of IR authority is equally ill-advised given the serious
procedural missteps in implementing the authority. CMS published an
interim final rule with comment period in January 1998 implementing the
authority granted in the Balanced Budget Act of 1997 (BBA 97). CMS did
not respond to any of the comments submitted. Later that year, CMS
issued a proposal to cut payments for eight groups of products. CMS
issued another proposal for an additional round of cuts in August of
1999. Congress subsequently suspended CMS' IR authority pending a GAO
study on the issue and the publication of a final rule.
The GAO report raised serious shortcomings regarding CMS' use of
its inherent reasonableness authority including that CMS' data
collection was not consistent and did not set out sufficient criteria.
Because of the considerable amount of time that has passed since the
initial rule was released and CMS' failure to respond to the comments
submitted pursuant to the interim final rule, CMS should release a new
inherent reasonableness rule for comment to allow a fair and full
administrative process. In addition, prior to using inherent
reasonableness, CMS needs to develop a process to ensure that any data
used is statistically valid market data, develop a sound methodology
and ensure an appeal mechanism for review.
conclusion
In conclusion, Medicare payments should not and cannot be compared
to the payments of the Department of Veterans Affairs, retail
establishments or other private or public insurance programs because of
the disparities inherent in the different health care delivery models.
CMS should not use competitive bidding or inherent reasonableness to
adjust payments until the procedural flaws in those methodologies are
addressed.
Senator Harkin. Well, I hear you and I understand that
suppliers have an intense interest in this. I understand that.
And I want to make sure we get quality products too. But the
fact is we went from $23 billion where the GAO estimates that
we were spending down to about $12 billion in cutting a lot of
these things out. Quite frankly, I have not heard any hew and
cry from Medicare beneficiaries anywhere in this country that
they are getting less services or less quality than what they
got before.
I just think we need to tighten down on it a little bit
more, and the administration agrees with competitive bidding.
But I believe there ought to be inherent reasonableness to
address the specific kinds of concerns that you have to make
sure that those anomalies that might be out there or specific
things that might require some special additional types of
things are addressed. That is why I wanted to make it clear
this morning in my questioning of the administration people,
especially GAO, that they were not saying that with competitive
bidding they could do without inherent reasonableness. I do not
believe so. I believe it has got to be there.
But I am sure you saw my example earlier where I said you
can take inherent reasonableness from the top down or from the
bottom up. I think it ought to be from the bottom up. That is
just my opinion after working on this for 12 years.
Mr. Williams. Mr. Chairman, I do not disagree with what you
are saying. As long as IR is based on validated and valid
comparisons, and as an industry, we do not even disagree on the
issue of competitive bidding, so long as it is true competitive
bidding where you can make reasonable business decisions and
accurate business projections.
Senator Harkin. Do you also agree we ought to have UPN's on
every item?
Mr. Williams. Mr. Chairman, I do. We as a company do
because you can get more information.
Senator Harkin. You and I agree on that.
Mr. Williams. For example, that K0011 code, I mean, golly,
geez, within that product alone, you are getting information on
a code. For example, you were giving comparative information.
We do not know whether they were comparing it for all the high-
end products or what.
Senator Harkin. That is right.
Mr. Williams. So, with the UPN's you are going to get that.
Senator Harkin. That is right.
Mr. Williams. I really do believe that, and as a company we
put it on everything anyhow because we have to. The VA requires
it.
Senator Harkin. I have to get from CMS what the cost would
be associated with that. They indicated some costs. He did not
know. But I believe that is something else that we are going to
have to enact in legislation, that is a requirement of a UPN
code on every single device. The technology is there. They can
keep data storage systems for information like that. It is
easy. So, I do not see why they cannot do it. That way we would
have a better handle and better knowledge in comparisons of
what we are talking about. I think that would better enable
them to use inherent reasonableness also to address some of the
issues you brought up.
Mr. Williams. I agree.
Senator Harkin. Thank you very much. I appreciate it, Mr.
Williams.
Mr. Williams. Thank you for your time, Mr. Chairman.
Senator Harkin. Thank you for being here.
STATEMENT FOR THE RECORD
We have received the statement of the Advanced Medical
Technology Association that will be made part of the hearing
record.
[The statement follow:]
Prepared Statement of Advanced Medical Technology Association
The Advanced Medical Technology Association (AdvaMed) is the
largest medical technology trade association in the world, representing
more than 800 medical device, diagnostic products, and health
information systems manufacturers of all sizes. AdvaMed member firms
provide nearly 90 percent of the $68 billion of health care technology
products purchased annually in the United States and nearly 50 percent
of the $159 billion purchased annually around the world.
AdvaMed is pleased to present this written testimony on behalf of
our member companies and the patients they serve. We understand
Congress' and the Inspector General's concern regarding the differences
in purchase prices between various government and private programs.
However, we are troubled that the Office of the Inspector General (OIG)
failed to use a rigorous study methodology that would adequately assess
Medicare payment levels for the 16 products it reviewed. In fact, the
OIG report stated: ``This limited study was not designed to meet the
rigorous inherent reasonableness standards for revising Medicare
payment rates as defined by Section 4316 of the Balanced Budget Act of
1997.''
AdvaMed supports the goal of seeking greater economy and efficiency
in Medicare payment programs. We believe this is in the best interest
of patients, the medical device industry, and the U.S. economy as a
whole. However, we believe that there are important distinctions
between Medicare, the Veterans Administration (VA), private insurers,
and retail sales that Congress must recognize in assessing the various
pricing structures. These differences deserve careful consideration
before new mandates are imposed on Medicare.
To address any overpayments for medical supplies, we recommend that
the Centers for Medicare and Medicaid Services (CMS) issue a new notice
of proposed rulemaking with a comment period to describe the
implementation of its inherent reasonableness (IR) authority, including
provisions for conducting valid market surveys. With an open,
collaborative, transparent, and responsive IR process, experimental
approaches to cut payments, such as competitive bidding, would be
unnecessary.
comparing medicare to the veterans administration
The OIG's June 2002 report ``Price Comparisons for 16 Medical
Equipment and Supply Items'' reviews the difference in payment levels
between Medicare and the VA for medical supplies. In comparing the
payment values, we must also consider the significant differences
between the two programs. The Medicare program is a health insurance
payment program that is structured to pay for services provided by
physicians, hospitals, suppliers, and other facilities, practitioners,
and providers. Medicare does not directly provide any health-related
services. The VA, however, is a direct provider of services through its
hospitals and clinics. That difference is critical; and it directly
affects the prices that suppliers can offer in at least five separate
ways.
First, the VA itself provides some of the services that would
otherwise be the responsibility of the supplier. As a direct provider,
the VA offers storage, delivery, training, and other product-related
services directly to veterans. As a result, since the suppliers do not
need to offer these services, these costs are not factored into the
prices of the products that the VA purchases. On the other hand,
products reimbursed under Medicare must include the costs for these
additional services so that beneficiaries can receive and appropriately
utilize the products.
Second, there are billing efficiencies in supplying a program that
is a direct central purchaser, rather than a reimbursement program. As
you know, the VA includes a relatively fixed number of dedicated
hospitals, clinics and patients, compared to the Medicare program. As a
result, the VA can manage the contracting process centrally, and enter
into exclusive contracts with suppliers. Even though the program is
smaller than Medicare, the VA is large enough that its central
contracts provide high volume, predictable purchase agreements, and
one-step billing. That reduces the supplier's cost of administering the
account. In contrast to the VA, Medicare cannot contract centrally for
direct purchases because it is fundamentally set up to reimburse. Even
the competitive bidding proposals we have seen in Congress to date,
while they attempt to arrive at one price, do not change the program to
a direct provider approach and therefore do nothing to make the
paperwork associated with a reimbursement system more efficient. Thus,
even competitive bidding would not change the economics of serving the
Medicare market, and in fact could make it more expensive.
Third, compliance costs are less with the VA. Medicare must pay
providers to document the receipt and delivery of the product to the
patient, the physician's order, the patient's diagnosis, treatment plan
and anticipated course of the patient's disease.
Fourth, carrying costs are greater for Medicare. Medicare claims
are paid months after the product is delivered to a patient, making
Medicare transactions significantly more costly than those with the VA.
For example, enteral nutrition is typically ordered for a patient
during one month, and provided to the patient during the subsequent
month. In the third month, documentation and claims paperwork for the
preceding month is filed with the DMERC. Receipt of payment may be four
months or more after the product is first purchased by the supplier.
Lastly, the OIG's study does not directly compare the same products
in its analysis because the VA tends to buy different, less expensive
products. Also, where products differ widely but share the same code,
the VA can choose to contract for bulk supplies of the product that
offers fewer features in the range of products available--yielding
lower prices.
comparing medicare to other care systems
The Medicare program is not comparable to Medicaid or private
insurers. One of the differences is the scope of the programs. Medicaid
and private insurers have a much smaller population, with different
characteristics from Medicare beneficiaries, a limited area, and the
ability to develop purchasing relationships with local facilities,
practitioners, providers, and suppliers.
The OIG study's methodology provides anecdotal, not statistically
valid information comparing Medicare reimbursement to other payers, and
likely overestimates the actual savings. In establishing the ``median
retail price,'' the OIG surveys only ten suppliers, but then simply
extrapolates the results to apply to over a hundred thousand suppliers.
For example, even if all ten suppliers surveyed provide blood glucose
equipment and supplies, this would not be a statistically significant
sample to predict nationwide for the nearly 20,000 blood glucose
suppliers. We are concerned that these unscientific approaches can lead
to inappropriate policy and a chilling effect on Medicare
beneficiaries' access to medical technology.
comparing apples to oranges--the oig's use of data
The OIG's study references CMS's mark-up of 67 percent over the
wholesale price, presented in CMS's August, 1999 proposed inherent
reasonableness notice for selected products. The OIG reports that CMS
developed this 67 percent mark-up by comparing wholesale prices to
suggested retail prices, provided in coding applications. However,
CMS's methodology for developing that mark-up amount did not account
for many costs unique to Medicare, not the least of which is the cost
of billing under the Medicare program.
Also, market wholesale prices are significantly different from the
wholesale prices paid by the VA. To do business with the VA, its
regulations require manufacturers to discount their wholesale prices
(if they provide wholesale pricing) or substantially discount their
list prices, below any other customer. The 67 percent amount
significantly underestimates the difference in costs between providing
products to the VA and to other purchasers, including Medicare
providers and suppliers.
achieving appropriate payments--inherent reasonableness authority
AdvaMed supports the goal of seeking greater economy and efficiency
in Medicare payment programs, and believes CMS has the authority
necessary to make appropriate payment changes. The Balanced Budget Act
(BBA) of 1997 included provisions to streamline the procedures that the
CMS and its carriers must follow in using the inherent reasonableness
process to adjust Medicare payment levels.
This authority, however, must be used in a predictable and valid
way and many concerns have been raised about CMS' implementation of it.
The lack of a valid approach to assessing the inherent reasonableness
and in proposing new reimbursement rates for certain durable medical
equipment (DME) products, led the General Accounting Office (GAO), in
2000, to recommend that CMS: ``develop and implement a more structured
survey design, including sample selection, survey instrumentation, and
data collection methods, and ensure that the design is consistently
used by all entities conducting the survey.'' GAO also recommended that
CMS:
--in its final rule implementing the inherent reasonableness process,
``define with sufficient clarity the terms grossly excessive,
and grossly deficient''
--``collect and analyze additional information to more precisely
estimate any payment reductions for glucose test strips,
albuterol sulfate, and enteral formulas, as well as for
additional payment reductions in subsequent years for lancets,
eyeglass frames, latex Foley catheters, and catheter insertion
trays without drainage bags''
--monitor indicators that could signal potential problems with
patient access to the product groups for which it is reducing
maximum payments, and act quickly to rectify any problems that
arise.
Under the Balanced Budget Refinement Act (BBRA) of 1999, Congress
not only mandated the GAO study, but also prohibited IR implementation
until final regulations were published. The House and Senate Conference
Agreement specifically stated that IR authority ``should be
administered judiciously and applied only after public concerns and
suggestions about proposed administrative criteria have been openly
addressed.'' Since more than three years have passed, we believe that
the best way to accomplish this is through a new notice of proposed
rulemaking.
AdvaMed has been working with Congress and the Administration for
many years to assure the appropriate implementation of CMS's inherent
reasonableness authority. A new notice of proposed rulemaking on the
use of inherent reasonableness authority should permit a meaningful
exchange of comments on CMS's position, and address the following
concerns:
--CMS should base its IR determination on an analysis of the
marketplace for the items and services under review using
statistically valid market data and sound methodology.
--CMS should use the higher due process procedures specified in
existing regulations if payment levels are proposed to be
changed by more than 15 percent in any period less than five
years.
--CMS should use national-level due process procedures when two or
more local carriers acting in concert or any regional carrier
make a determination that a reduction is necessary.
--CMS should improve the process for making changes of less than 15
percent in any period less than five years. * CMS should
provide an appeals mechanism for review.
The Small Business Administration (SBA) had similar concerns
regarding CMS's implementation of the BBA 1997 IR authority, especially
its impact on small business. In a 1998 letter to the CMS
Administrator, the SBA said: ``If Congress intended for HCFA [CMS] to
skirt the notice and comment requirements when the reduction exceeds 15
percent, Congress probably would not have bothered to put in any notice
and comment requirements in the first place.'' Further, the SBA
asserted that CMS should use notice and comment even in reductions of
less than 15 percent, arguing that BBA 1997 is silent on the matter:
``Since the language in the BBA did not specify or require that HCFA
[CMS] should bypass notice and comment when the fee reduction falls
below 15 percent, the office of Advocacy believes that HCFA [CMS]
should subject such reductions to notice and comment as a matter of
good administrative policy.''
AdvaMed seeks to work with Congress and the Administration to
ensure that CMS's processes for implementing pricing programs must be
open, transparent, collaborative, and responsive.
competitive bidding concerns
In an effort to address payments for medical supplies, the BBA of
1997 also included a demonstration project to test out the feasibility
of using competitive bidding methodologies. In reviewing the short
duration of the competitive bidding demonstrations, the IG report
quotes an estimated savings from price cuts of 17 percent under the
Polk County, Florida competitive bidding demonstration projects. We
believe that this amount overstates the actual savings to Medicare, and
that there are many procedural problems raised by this demonstration
project.
The projects in Florida and Texas have not yet generated a working
model that can be replicated for other geographic areas and for other
products. It is not known how competitive bidding will impact patient
access to the latest life-saving and life-enhancing medical
technologies. Nor have the full costs of the effort been determined,
including those associated with the significant administrative
infrastructure, system changes, and physician, beneficiary and provider
education activities that are required in a venture of this sort. These
costs are likely to cut deeply into the savings derived from the
bidding process. And, according to CBO testimony before the Senate
Finance Committee in 1999, ``potential savings will erode over time.''
The IG study methodology oversimplified and combined price
reductions under IR and competitive bidding. AdvaMed believes that it
is inappropriate and unnecessary to combine these approaches. With
appropriate implementation of IR authority, competitive bidding is
unnecessary.
conclusion
AdvaMed looks forward to working with Congress and the
Administration on ways to achieve greater economy and efficiency in
Medicare payment programs. Unfortunately, the OIG's study does not
provide helpful information for achieving this goal. The purchasing and
pricing of certain DME products by the Veterans Administration for the
provision of services to veterans is not applicable to Medicare in its
role as a payer of services. And, the data used by the OIG are
inadequate to support the study's broad conclusions.
AdvaMed supports the use of IR authority in a predictable, open and
transparent fashion to correct any Medicare overpayments or
underpayments. AdvaMed remains concerned about the effectiveness of
competitive bidding models in general and believe it is premature to
apply competitive bidding nationwide. We recommend that CMS issue a new
notice of proposed rulemaking with comment period to fully describe its
inherent reasonableness authority, including conducting valid market
surveys, and instituting due process procedures.
CONCLUSION OF HEARING
Senator Harkin. Thank you all very much for being here,
that concludes our hearing.
[Whereupon, at 11:32 a.m., Wednesday, June 12, the hearing
was concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]