[Federal Register Volume 62, Number 136 (Wednesday, July 16, 1997)]
[Notices]
[Pages 38100-38107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-18716]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration
[BPD-845-PN]
RIN 0938-AH28


Medicare Program; Special Payment Limits for Home Oxygen

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed notice.

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SUMMARY: This notice would establish special payment limits for home 
oxygen. Currently, payment under the Medicare program for home oxygen 
and other items of durable medical equipment is equal to 80 percent of 
the lesser of the actual charge for the item or the fee schedule amount 
for the item. Based on our experience and after consulting with 
representatives of home oxygen suppliers, we have determined that the 
Medicare fee schedule amounts for home oxygen are grossly excessive and 
are not inherently reasonable because they are excessively high 
relative to the payment amount for similar services by the Department 
of Veterans Affairs which uses a true competitive payment methodology. 
This notice would replace the use of the fee schedule amount and 
proposes that payment for home oxygen be equal to 80 percent of the 
lesser of the actual charge or a special payment limit set by HCFA, 
which would vary by locality. It is intended to prevent continuation of 
excessive payment. The special limit would be based on the average 
payment amount for home oxygen services by the Department of Veterans 
Affairs.

DATES: Comments will be considered if we receive them at the 
appropriate address, as provided below, by 5 p.m. on September 15, 
1997.

ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: BPD-845-PN, P.O. Box 26676, 
Baltimore, MD 21207-0476.
    If you prefer, you may deliver your written comments (1 original 
and 3 copies) to one of the following addresses: Room 309-G, Hubert H. 
Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, 
or Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code BPD-845-PN. Comments received timely will be available for 
public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 309-G of 
the Department's offices at 200 Independence Avenue, SW., Washington, 
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FOR FURTHER INFORMATION CONTACT: William J. Long (410) 786-5655.

SUPPLEMENTARY INFORMATION:

I. Background

A. Payment Under Reasonable Charges

    Payment for durable medical equipment (DME) furnished under Part B 
of the Medicare program (Supplementary Medical Insurance) is made 
through contractors known as Medicare carriers. Before January 1, 1989, 
payment for DME was made on a reasonable charge basis by these 
carriers. The methodology used by the carriers to establish reasonable 
charges is set forth in sections 1833 and 1842(b) of the Social 
Security Act (the Act) and 42 CFR part 405, subpart E of our 
regulations. Reasonable charge determinations are generally based on 
customary and prevailing charges derived from historic charge data. The 
reasonable charge for an item of DME was generally set at the lowest of 
the following factors--
     The supplier's actual charge for the item.
     The supplier's customary charge.
     The prevailing charge in the locality for the item. (The 
prevailing charge may not exceed the 75th percentile of the customary 
charges of suppliers in the locality.)
     The inflation indexed charge (IIC). (The IIC is defined in 
Sec. 405.509(a) as the lowest of the fee screens used to determine 
reasonable charges for services, supplies, and equipment paid on a 
reasonable charge basis (excluding physician services) that is in 
effect on December 31st of the previous fee screen year, updated by the 
inflation adjustment factor.)

B. Exception to the Reasonable Charge Payment Methodology--Special 
Reasonable Charge Limits

    Section 1842(b)(3) of the Act requires that payments under Part B 
of the Medicare program that are made on a charge basis must be 
reasonable. Paragraphs (8) and (9) of section 1842(b) provide that we 
may establish a special reasonable charge for a category of service if, 
after appropriate consultation with representatives of affected 
parties, we determine that the standard rules for calculating 
reasonable charges result in grossly deficient or grossly excessive 
charges.
    The applicable regulations are located at Sec. 405.502(g) and 
require us to consider the available information that is relevant to 
the category of service and establish reasonable charge limits that are 
realistic and equitable. The limit on the reasonable charge is an upper 
limit to correct a grossly excessive charge or a lower limit to correct 
a grossly

[[Page 38101]]

deficient charge. The limit is either a specific dollar amount or is 
based on a special method to be used in determining the reasonable 
charge.
    Section 405.502(g)(1) provides the following examples of 
circumstances that may result in grossly deficient or excessive 
charges--
     The marketplace is not competitive.
     Medicare and Medicaid are the sole or primary source of 
payment for a service.
     The charges involve the use of new technology for which an 
extensive charge history does not exist.
     The charges do not reflect changing technology, increased 
facility with that technology, or changes in acquisition, production, 
or supplier costs.
     The prevailing charges for a service in a particular 
locality are substantially higher or lower than prevailing charges in 
other comparable localities, taking into account the relative costs of 
furnishing the services in the different localities.
     Charges are grossly lower than or exceed acquisition or 
production costs.
     There have been increases in charges for a service that 
cannot be explained by inflation or technology.
     The prevailing charges for a service are substantially 
higher or lower than the payments made for the service by other 
purchasers in the same locality.
    Section 405.502(g)(3) requires that we publish proposed payment 
limits in the Federal Register. We then allow 60 days for receipt of 
public comments on the proposal. After we have considered all timely 
comments, we publish in the Federal Register a final notice announcing 
the special payment limits and our analyses and responses to the 
comments. Section 405.502(g)(3) also provides that the proposed and 
final notices must set forth the criteria and circumstances, if any, 
under which a carrier may grant an exception to the limit(s).

C. Durable Medical Equipment Fee Schedules

    On December 22, 1987, the Congress passed section 4062 of the 
Omnibus Budget Reconciliation Act of 1987, Public Law 100-203, which 
added section 1834(a) to the Act. Section 1834(a) provides for a fee 
schedule payment methodology for DME furnished on or after January 1, 
1989. Section 4152(h) of the Omnibus Budget Reconciliation Act of 1990, 
Public Law 101-508, delayed the effective date of the oxygen fee 
schedule payment methodology until June 1, 1989. (This fee schedule 
payment methodology is set forth in 42 CFR part 414, subpart D.) 
Sections 1834(a)(1)(A) and (B) of the Act provide that Medicare payment 
for DME is equal to 80 percent of the lesser of the actual charge for 
the item or the fee schedule amount for the item. Section 1834(a) of 
the Act classifies DME into the following payment categories:
     Inexpensive or other routinely purchased DME.
     Items requiring frequent and substantial servicing.
     Customized items.
     Oxygen and oxygen equipment.
     Other items of DME (capped rental items).
    There is a separate methodology for determining the fee schedule 
payment amount for each category of DME and the fee schedules are 
adjusted annually by a covered item update factor. The covered item 
update factor is generally equal to the change in the Consumer Price 
Index for all Urban Consumers (CPI-U) for the 12-month period ending 
June 30 of the preceding year.
    Section 1834(a)(10)(B) of the Act provides that we may apply the 
special payment limits authority of paragraphs (8) and (9) of section 
1842(b) to covered items of DME and suppliers of these items and 
payments under section 1834(a) in the same manner as these provisions 
apply to physician services and physician and reasonable charges under 
section 1842(b).

D. Current Payment for Home Oxygen

    Home oxygen is covered by the Medicare program as DME and is paid 
for in accordance with the methodology specified in the oxygen and 
oxygen equipment payment category. This methodology is contained in 
sections 1834(a)(5) and (9) of the Act. Section 1834(a)(5) requires 
that payment for oxygen and oxygen equipment be on a monthly basis. An 
add-on for portable oxygen equipment is provided under this section as 
well as a 50 percent increase in payments when the prescribed liter 
flow is greater than 4 liters of oxygen per minute or a 50 percent 
decrease in payments when the prescribed liter flow is less than 1 
liter of oxygen per minute.
    Section 1834(a)(9)(A) specifies how the monthly payment amount is 
computed. Section 1834(a)(9)(A) requires that each Medicare carrier 
compute a base local average monthly payment rate per beneficiary as an 
amount equal to the total reasonable charges for all items of oxygen 
and oxygen equipment (other than portable oxygen equipment) divided by 
the total number of months for all beneficiaries receiving oxygen 
during 1986. For 1989 and 1990, the base local average monthly payment 
rate was equal to 95 percent of the base local average monthly payment 
rate increased by the percentage increase in the CPI-U for the six-
month period ending with December 1987. For subsequent years, the 
payment rate is increased by the covered item update, generally the 
percentage increase in the CPI-U for the 12-month period ending with 
June of the previous year.
    In addition, section 1834(a)(9)(B) requires the computation of a 
national limited monthly payment rate beginning in 1991. The national 
limited monthly payment rate is defined as an amount not to exceed 100 
percent of the median of all local monthly payment rates computed for 
the item or less than 85 percent of the median.
    Regulations implementing the statutory provisions of sections 
1834(a)(9)(A) and (a)(9)(B) are contained in 42 CFR 414.226.
    Currently, there are three types of oxygen delivery systems: gas, 
liquid, and concentrators. As a result of the fee schedule methodology, 
Medicare pays for home oxygen without regard to the type of system. The 
fee schedule amounts are based on an average of the amounts paid for 
all three types of oxygen delivery systems during the 1986 base period. 
A major expectation under this modality neutral payment methodology was 
that suppliers would be able to furnish the most cost effective and 
medically appropriate system to their patients.
    The current fee schedule amounts for home oxygen are a result of 
the fee schedule methodology as specified in sections 1834(a)(5) and 
(9) of the Act and Sec. 414.226 as discussed above.
    Since the enactment of section 1834(a)(5), we have not utilized the 
special reasonable charge limits located at Sec. 405.502(g) to 
determine whether the standard fee schedule payment rules for oxygen 
result in grossly deficient or excessive charges. However, as explained 
below, we are proposing to reduce Medicare's payment amounts for home 
oxygen because Medicare's payment amounts for oxygen are substantially 
higher than the payments made by another purchaser in the same 
locality.

E. Comparison With the Department of Veterans Affairs

    The Department of Veterans Affairs (VA) also administers a national 
program for the furnishing of oxygen to patients at home. The VA is 
different from Medicare and most other payers in that it uses a 
competitive bidding methodology for making payment, whereas Medicare 
carriers use historical charge data to establish a base local average 
monthly payment per

[[Page 38102]]

beneficiary that is used to determine a national limited monthly 
payment rate.
    The primary objective of a competitive bidding methodology is to 
utilize competitive market forces in order to establish a payment 
amount that is closer to suppliers' marginal costs of doing business 
including a fair profit amount. Under competitive bidding, suppliers 
are required to specify in advance the minimum price they will accept 
for each product of service, and low bidders are awarded contracts on 
either an exclusive or non-exclusive basis to provide these items to 
program clients. In that bidders are in competition with one another, 
each bidder's bid is likely to reflect its true costs plus a reasonable 
rate of profit, because unrealistically high bid prices would ensure a 
bidder's exclusion from a particular segment of the market and 
unrealistically lower bids would result in reimbursement rates that are 
below costs. Therefore, we conclude that a competitive bidding 
methodology results in a bid that reflects a supplier's true costs plus 
a reasonable profit. In contrast, suppliers do not reveal their true 
costs to Medicare because Medicare reimbursement rates for oxygen 
reflect a ``reasonable charge'' methodology driven by supplier charges 
and then a modality neutral fee schedule derived from charges in a base 
year. These payment rates are likely, over time, to have little, if 
any, relationship to suppliers' costs.
    No other payment methodology that we reviewed takes full advantage 
of competitive market forces to the extent of the competitive bidding 
methodology. Only in a competitive environment can buyers take full 
advantage of the sellers' marginal costs of doing business in that the 
potential for lost business is brought to bear on those suppliers whose 
prices exceed their competitors' prices. The lowest bid is the best 
indicator of the actual costs of supplying the product by an efficient 
supplier, plus a reasonable profit. Thus, we believe that the VA's 
competitive bidding payment methodology produces a payment amount that 
takes advantage of true competitive forces and, therefore, is a better 
measure upon which to compare current Medicare payment amounts.
    Economic analyses of Medicare reimbursement arrangements have been 
undertaken for a variety of health care providers and suppliers over 
the past two decades. A principal motivation in these analyses is to 
understand how reimbursement arrangements affect the price taxpayers 
pay for the purchased good or service. In its 1990 ``Review of 
Reimbursement Methods of Other Payers for Durable Medical Equipment,'' 
Abt Associates Inc., found ample evidence that competitive bidding 
encourages suppliers to bid prices closer to their true costs while 
Medicare's reimbursement methods offer no such incentives to suppliers. 
Abt found that competitive bidding programs for oxygen concentrators at 
VA Medical Centers obtained reimbursement levels as much as 70 percent 
lower than Medicare. A similar procurement program for concentrators in 
the Utah Medicaid program obtained a monthly rental price that was 42 
percent below the average Medicare prices in the State for the 1986 to 
1988 period. The Minnesota Medicaid program obtained a monthly rental 
price for concentrators that was 60 percent below the Medicare prices 
in the State for this same three-year period.
    An examination of the payment outcomes produced by the Medicare 
payment methodology and the reimbursement mechanisms for oxygen 
concentrators in Utah and Minnesota indicates that while starting at a 
lower level than Medicare, the competitive Medicaid payment levels 
decreased from the mid- to late-1980's, while the corresponding 
Medicare prices increased over the same period. We believe that the 
differences in both the absolute amounts of these prices and the 
opposing direction of price changes over time, demonstrate the inherent 
inability of Medicare's formulaic, historical, charge-based 
reimbursement methodology (whether fee schedule or reasonable charge) 
to accurately reflect the true costs of suppliers in the home oxygen 
market.
    In its yearly home oxygen program report ``National Home Oxygen 
Program, FY94 Cost Review'', the VA indicated that the weighted average 
payment amount for oxygen concentrators is $125.96 per month. The VA 
reports that this amount includes the costs of the portable/back-up 
system and refills. In contrast, Medicare pays an average monthly 
payment amount of approximately $280 for a stationary oxygen system 
(including contents), regardless of the type of oxygen system, plus an 
average of $45 per month for a portable system, for a total of $325 per 
month. Thus Medicare is paying 2.6 times as much as the VA for an 
oxygen concentrator plus portable system and portable refills.

II. Provisions of This Proposed Notice

    Based on our experience and after consulting with representatives 
of home oxygen suppliers, we have determined that the Medicare fee 
schedule payment amounts for home oxygen are not inherently reasonable 
because they are grossly excessive relative to the payment amount for 
similar services by the VA which uses a true competitive payment 
methodology. In accordance with section 1842(b)(8) of the Act, we are 
proposing to replace the use of the current fee schedule payment with 
special payment limits for home oxygen.

A. Special Payment Limits for Home Oxygen

    For home oxygen services furnished to Medicare beneficiaries, we 
propose a special payment limit.
    The national limited monthly payment rate for stationary home 
oxygen services for 1994 would be reduced by 40.11 percent, then 
updated by the covered item update for years subsequent to 1994. 
Similarly, the 1994 local stationary fee schedule amount for Alaska, 
Hawaii, Puerto Rico, and the U.S. Virgin Islands, would be reduced by 
40.11 percent, then updated by the covered item update for years 
subsequent to 1994.
    We arrived at the 40.11 percent adjustment by comparing what 
Medicare would have paid for oxygen services in 1994 had it paid the 
1994 VA weighted average payment amount for concentrators plus a 30 
percent differential ($37.79). Using the VA weighted average of $125.96 
for oxygen concentrators plus portable system, plus a 30 percent 
differential (i.e., $125.96 + $37.79 = $163.75) instead of Medicare's 
average payment amounts for a concentrator, i.e., approximately $325, 
would yield a reduction of 40.11 percent in annual costs of stationary 
oxygen.
    The following chart illustrates this computation. Column B contains 
Medicare expenditures for home oxygen by type of oxygen system. We 
assumed the ratio of expenditures for portable equipment would be the 
same as the ratio of patients using portable equipment, that is, 82.4 
percent for concentrators, 16 percent for liquid, and 1.6 percent for 
gas. We applied these ratios to total expenditures for portable 
equipment, that is, $143 million. Similarly, column C contains the 
number of Medicare beneficiary months by type of oxygen system. 
Medicare's oxygen concentrator expenditures for 1994 would have been 
$617,274,286, as reflected in column E, rather than the actual 
$1,210,578,776 had the payment rate calculations been based on VA's 
weighted average payment amount for concentrator plus portable systems 
(i.e., $125.96) plus a 30 percent differential (i.e., $163.75).
    Medicare's total expenditures for home oxygen for 1994 would have 
been

[[Page 38103]]

$885,858,597 rather than the $1,479,163,088 had payment been based on 
the VA's payment amount for home oxygen plus a 30 percent differential. 
Thus, Medicare would have saved $593,304,490 (i.e., $1,479,163,088 less 
$885,858,597) or 40.11 percent.
    We would point out that this proposed adjustment does not apply to 
Medicare's portable add-on even though such adjustment would be 
justified in that the VA payment amounts for concentrators include 
payment for portable oxygen equipment. We estimate that application of 
this proposed adjustment to portable equipment would generate an 
additional savings of 4 percent. We specifically solicit comments on 
applying the adjustment to portable equipment.
    We would also point out that the 40.11 percent reduction could be 
further reduced since it does not take into account that the VA also 
pays less for gas and liquid equipment and contents than Medicare.

                                  Recomputation of Medicare Oxygen Expenditures                                 
----------------------------------------------------------------------------------------------------------------
                                                                                                      1994      
                                                1994                                              Expenditures  
                                          Expenditures for                                      Based on Revised
                                               Oxygen        1994 Number of    Revised Average  1994 VA Concent.
    Type of Stationary Oxygen System       (Stationary and     Beneficiary     Monthly Payment   Pricing (C X D)
                                            Contents and     Months Source 1   Amount Source 2         for      
                                          Portable) Source                                       Concentrators B
                                                  1                                              for Liquid and 
                                                                                                       Gas      
A                                                        B                 C                 D                 E
----------------------------------------------------------------------------------------------------------------
    Total...............................     1,479,163,088         4,559,200  ................       885,858,597
                                         -----------------------------------------------------------------------
Concentrators...........................     1,210,578,776         3,769,660            163.75       617,274,286
Liquid..................................       249,994,932           728,900  ................       249,994,932
Gas.....................................        18,589,379            60,640  ................        18,589,379
----------------------------------------------------------------------------------------------------------------


                   Inherent Reasonableness Adjustment                   
    1994 Total Expenditures = (B).....................     1,479,163,088
                                                       -----------------
Minus Total 1994 Expenditures Based on VA Concentrator                  
 Prices = (E).........................................       885,858,597
Amount That Would Have Reduced Total Expenditures had                   
 Expenditures Been Based on VA Prices = (B--E)........       593,304,490
                                                       =================
Result: Reduce 1994 Oxygen Fees By (40.11%)...........     593,304,490/B
                                                                        
Source 1: from 1994 HCFA data files                                     
Source 2: based on weighted average VA monthly rental payment for       
  concentrators + 30 percent.                                           

    This formula recognizes that suppliers' costs of doing business 
with Medicare are somewhat higher than the VA. The VA, by its very 
nature is a provider as well as a payer of services. The VA's dual role 
has resulted in a series of administrative features which reduces the 
supplier's costs. In addition, the VA preauthorizes all services before 
they are provided to patients thus effectively removing the need for 
suppliers to add a cost factor for uncollectible services or bad debts.
    Given that Medicare is a payer and not a provider of services, and 
given the size and geographic distribution of Medicare's beneficiary 
population, it would be difficult to duplicate these administrative 
features for the Medicare program. Therefore, in the absence of such 
features, some of the cost differences between Medicare and the VA 
payments for oxygen can be explained by the higher costs of doing 
business with Medicare. Another factor, less easy to quantify, is the 
industry's assertion that an exact comparison of the VA's payment 
allowances with Medicare's allowances is inappropriate because of the 
dynamics of the oxygen marketplace. An economist described in some 
detail the potential for a situation in which an industry may sell the 
yield of excess capacity in a smaller market for less than the price at 
which it could afford to sell the product to a larger market if the 
demand were great enough to require additional manufacturing capacity. 
This argument rests on the contention that the VA's consumption of 
oxygen is so small in comparison to Medicare's that the industry's 
pricing reflects the marginal value of excess productivity, not the 
full cost of basic production. We also tentatively accept this argument 
and have also made allowance for it since sections 1842(b)(8) and 
(b)(9) require that a special payment limit be realistic and equitable.
    The 30 percent differential is designed to be a proxy for these 
costs and other factors identified and unidentified, that may affect 
the differences between the prices the VA pays for oxygen and the 
prices HCFA pays.
    We arrived at the differential by taking account of factors 
explicitly known to us and then by doubling the resultant estimate to 
assure that we have more than offset the effect of estimating errors 
and omissions.
    We would note that the industry itself has previously indicated, in 
writing, that there is a 15 percent cost disadvantage attributable to 
furnishing oxygen services to Medicare beneficiaries as compared with 
the VA. We are tentatively accepting the industry's finding and have 
included this amount as part of the 30 percent cost differential.
    We would expect this differential to be sustained only if the 
comments we receive on this notice provide the necessary documentation 
and support for the contentions that underlie it. In this connection, 
we believe there is a real burden on the industry to provide 
documentation to support these contentions. We would note that the 
industry's only written contention--that the differential is 15 
percent--would have led us to recommend a 45 percent reduction in the 
price of stationary oxygen. Thus, we are particularly interested in 
receiving comments and further data relating to the factors that 
underlie the cost differential and the values assigned to them. 
Commentors are encouraged to submit verifiable data.
    We are also interested in receiving comments regarding the 
implementation of this payment reduction. We realize that a 40.11 
percent reduction in payment allowances for oxygen is significant. For 
this reason, we would consider alternative implementation 
methodologies, such as phasing in the 40.11 percent reduction over a 
period of time.

B. Applicability

    The initial special payment limits we propose would apply to home 
oxygen furnished on or after the effective date of the published final 
notice and before January 1, 1998. For home oxygen furnished in 
calendar year 1997, the

[[Page 38104]]

special payment limits would be equal to the initial special payment 
limits increased by the 1995, 1996, and 1997 covered item update 
factors (the factor used to update other items of DME). The covered 
item update for 1995, 1996, 1997, and each subsequent year, is defined 
in section 1834(a)(14)(B) of the Act as the percentage increase in the 
consumer price index-urban for the 12-month period ending with June of 
the previous year. The covered item update factor for 1995, 1996, and 
1997 is 2.5, 3.0, and 2.8 percent respectively. For each calendar year 
after 1997, the special payment limits would be equal to the special 
payment limits for the preceding calendar year increased by the covered 
item update for the calendar year to which the limits would apply.

C. Proposed Payment for Home Oxygen

    We propose that payment for a stationary home oxygen system, which 
includes the oxygen delivery device and all supplies and accessories as 
well as the contents for the portable system, equal 80 percent of the 
lesser of the actual charge for the system or the appropriate special 
payment limit, as described in section A. above.

D. Carrier-Granted Exceptions

    We are not proposing any circumstances under which a carrier may 
grant an exception to the application of the proposed special payment 
limit. We solicit comments on any circumstances where such an exception 
should be granted.

III. Other Provisions Considered Under This Proposed Notice

    In developing this proposed notice, we also considered a number of 
other factors and met with industry representatives. These other 
factors as well as the industry representatives' major comments are 
discussed below.

A. Technological Changes

    Although we did not directly rely on technological changes to 
determine either that our payments are grossly excessive or that our 
proposed special payment limit is realistic and equitable, we did rely 
on information regarding technological changes to conclude that 
reliance on the VA's competitive bidding methodology was appropriate as 
a basis of comparison with Medicare payments.
    Under the modality neutral oxygen payment methodology that went 
into effect in 1989, suppliers have greatly reduced their operating 
costs by taking advantage of less costly means of oxygen delivery. 
Suppliers have increased their use of less costly oxygen concentrators 
and reduced their use of the more costly gas and liquid systems. The 
Office of Inspector General's report ``Trends in Home Oxygen Use'' 
(OEI-03-91-00710), dated August 1991, found that oxygen concentrator 
usage has increased since 1986, both in absolute terms and as a 
percentage of total services for all types of systems. According to the 
report, from 1986 to 1988 oxygen concentrator usage increased, while 
gaseous system usage decreased and liquid system usage remained 
constant. In 1986, the number of Medicare patients using oxygen 
concentrators was 66 percent. By 1989, 78 percent of all Medicare 
patients were using oxygen concentrators.
    HCFA data for the period 1987 to 1994 indicates that Medicare 
patients using concentrators increased from 68 percent to 82.7 percent.
    The VA indicates that 80 percent of their patients used 
concentrators in 1994.
    Oxygen concentrators produce oxygen for patients by removing 
impurities from room air, for example, nitrogen. Patients receive 
oxygen from tubing attached to these concentrator machines. Unlike 
compressed gas and liquid oxygen, which must be replaced or filled on a 
regular basis, concentrators require no contents. Suppliers favor these 
devices for home use of oxygen due to the decreased costs associated 
with not having to make costly oxygen deliveries to the patient's home.
    A 1993 study by ECRI, a nonprofit, healthcare research institute 
located in Pennsylvania that evaluates the safety, performance, and 
cost effectiveness of healthcare technology, found that suppliers chose 
to maximize their profits and minimize the need for ongoing support by 
providing oxygen concentrators to patients. ECRI pointed out in 
testimony before the Senate Appropriations Subcommittee on Labor, 
Health and Human Services on November 2, 1994, that it found that 
suppliers are excessively reimbursed for oxygen services. ECRI 
testified: ``The acquisition cost of oxygen concentrators, as reported 
by the manufacturers to us in 1993, ranged from $965 to $1,175 for 
units with a 5-liter per minute capacity.''
    With regard to maintenance requirements of oxygen concentrators, 
ECRI testified: ``They have, for all practical purposes, an unlimited 
service life as all components may be replaced. We have estimated the 
service frequency of the components through review of the service 
manuals and interviews with service centers and DME providers.'' ECRI 
goes on to estimate that the total annual cost for the maintenance of a 
concentrator is $405.
    Assuming an oxygen concentrator has a useful life of 5 years, an 
oxygen supplier's equipment cost per month would be about $17 (i.e., 
$1,000 / 60 months) and another $34 in cost for maintenance (i.e., $405 
/ 12 months) for a total cost of $51 per month to the supplier.
    Another technological improvement in the provision of oxygen 
services is the use of oxygen conserving devices. These devices, which 
conserve oxygen when the patient is not inhaling, can reduce the amount 
of oxygen normally consumed by up to 50 percent. We are unsure of the 
extent to which these devices are used with oxygen equipment and 
specifically request comments concerning the frequency with which these 
devices are used.
    By taking into account the increased use of less costly oxygen 
concentrators by suppliers since the base year (i.e., 1986), we 
estimate that suppliers are incurring 6.8 percent less in costs than 
they would have if this increase had not taken place. We determined 
this percentage decrease by computing the increased use of less costly 
oxygen concentrators and applied the applicable charge for the less 
costly concentrators to the increase in utilization of these systems. 
We presented our analysis of the increased use of concentrators to the 
industry representatives. Their comments and our responses are 
discussed in C. below.

B. Payments Made by Other Purchasers

    Similarly, we did not directly rely on payments made by other 
purchasers to determine either that our payments are grossly excessive 
or that our proposed special payment limit is realistic and equitable. 
However, we did rely on such information to conclude that reliance on 
the VA's competitive bidding methodology was appropriate as a basis of 
comparison with Medicare payments.
    Early this year, we requested payment data from other insurers to 
compare Medicare's payment amounts. In most instances, the payment 
amounts of other insurers are the same as or more than Medicare's 
payment amounts. The reason for the payment similarities is that many 
insurers use Medicare's current fee schedule payment methodology or its 
previous reasonable charge methodology. In either case, the resulting 
payment allowances are very near Medicare's current fees. This finding 
does not necessarily indicate that Medicare's allowances are not 
grossly excessive. The other insurers' payment allowances may also be 
grossly

[[Page 38105]]

excessive. In other words, if Medicare's allowances are excessive using 
a fee schedule or reasonable charge methodology, and other insurers use 
the same or a similar methodology, then the other insurers' allowances 
will also be excessive. It appears from the data of the other insurers 
that Medicare is a model for other insurers when it comes to making 
payment for home oxygen and that most other insurers duplicate 
Medicare's payment methodology resulting in very similar payment 
amounts.
    Also, a number of Medicaid insurers, such as New York, Ohio, and 
Minnesota pay significantly less for home oxygen than Medicare. All of 
these States pay less than $200 per month for a stationary oxygen 
system while the 1995 Medicare payment in each of these States is $308, 
$308, and $262 per month respectively. This indicates to us that there 
are a number of payers, typically those that use a different payment 
methodology or base period other than Medicare's, that are paying 
significantly less than Medicare yet attract a sufficient number of 
suppliers to furnish home oxygen to their insured beneficiaries. This 
further indicates to us that in at least these three States, the 
Medicare payment amounts for home oxygen are grossly excessive in 
comparison with these States' payment amounts.
    However, because of the mixed reporting by insurers other than the 
VA, we are unable to reach any definitive conclusions regarding the 
reasonableness of Medicare's payments on a national basis with respect 
to other payers other than the VA. We specifically solicit comments 
with regard to payments by other insurers. We would point out that a 
comparison to many insurers may be inappropriate due to the other 
insurers' heavy reliance on Medicare's payment methodology. As such, a 
comparison would merely mirror Medicare's payment amounts. We would 
also point out, however, that some States pay significantly less than 
what Medicare pays for the same service yet are able to attract a 
sufficient number of suppliers to provide oxygen services. In 
particular, the VA pays significantly less for home oxygen than does 
Medicare and manages to attract a sufficient number of suppliers to 
provide its patients with home oxygen.
    Of the States responding to our request for payment data, 22 use a 
fee schedule similar to Medicare's fee schedule. Two others use a 
reasonable charge methodology and another State reports using a cost 
methodology. Of the remaining States, three use a negotiated rate 
methodology, two use a competitive bidding methodology, and a single 
State pays based on a percent of the submitted charge.

C. Supplier Consultation

    Section 1842(b)(9)(A) of the Act requires that we consult with 
representatives of the suppliers likely to be affected by any change in 
payment before making a determination that a fee schedule amount is not 
inherently reasonable by reason of its grossly excessive or deficient 
amount.
    Over the past two and one half years, we had numerous discussions 
with supplier representatives concerning Medicare payment amounts for 
home oxygen services. We met with industry representatives to discuss 
the use of VA data for purposes of comparing the VA payment amounts 
with Medicare's payment amounts. On August 30, 1995, we held a public 
meeting with supplier representatives to formally discuss issues 
relating to Medicare payment for home oxygen. Since the August 30th 
meeting, we had several rounds of discussions with industry 
representatives. After publication of this proposed notice, we expect 
to receive additional comments that will be considered in making a 
determination regarding whether our payment amounts for home oxygen are 
inherently reasonable. The following is a synopsis of the comments and 
concerns of the supplier representatives as expressed at and since the 
August 30th meeting.
    The supplier representatives wanted to know if, after studying our 
findings, they could submit additional comments. We indicated that we 
would consider any comments they chose to submit from and including the 
August 30th meeting until the end of the 60-day comment period. The 
major comments we received are included in the discussion below. All 
comments received during the 60-day comment period will be discussed in 
a final notice. Moreover, we may elect to engage in further 
consultation with industry representatives if the comments we receive 
make such further consultation necessary or appropriate.
    Some supplier representatives expressed concern with the data we 
used in estimating that suppliers are incurring 6.8 percent less in 
costs than they would have incurred had they not taken advantage of 
less costly oxygen delivery systems. We indicated that we would share 
these data with them and did meet with selected supplier 
representatives on September 8, 1995 to review these data.
    Some supplier representatives asserted that suppliers of oxygen 
equipment are using more costly liquid oxygen systems as a percentage 
of all oxygen systems than they were using during the base period and 
that more patients are using portable systems than were used during the 
base period. We agree with the supplier representatives that suppliers 
of oxygen equipment are using more costly liquid oxygen systems than 
used during the base period, however, since it is impossible to 
ascertain from our data the amount of oxygen being used in portable 
oxygen systems or to ascertain the extent of patients utilizing oxygen 
conserving devices, we are unable to either validate or challenge the 
supplier representatives' assertions at this time. Therefore, until we 
are able to obtain sufficient data to address these assertions, we will 
not use data that indicates that suppliers are using less costly oxygen 
delivery systems in the inherent reasonableness process.
    Some supplier representatives have challenged the VA data 
indicating that we should conduct an independent recalculation and 
verification of the VA data. We do not believe it would be appropriate 
for us to conduct a recalculation and verification of a VA report. We 
have discussed with the VA the information contained in its report on a 
number of occasions. The VA indicated confidence in its report and we 
have no evidence upon which to question either the VA's integrity or 
the accuracy of its fundamental calculations.
    In its FY 1994 report, which is used for analysis and decision 
making in this notice, the developers of the report have included all 
commercial costs for all facilities. In response to suggestions from 
the oxygen industry and others, the VA's National Center for Cost 
Containment worked closely with these facilities in the development and 
reporting of data to assure the accuracy of these cost figures. 
Therefore, the FY 1994 Cost Review represents an exacting effort to 
gather accurate cost information from the 164 facilities that have home 
oxygen programs. An improvement over previous year's analysis is the 
development of ``weighted averages'' for each of the monthly average 
costs per patient modality. This has provided for a more meaningful 
comparison with Medicare data as well as an overview of the VA Home 
Oxygen Program nationally, because weighted averages account for the 
extreme variances in costs for a small number of facilities.
    Some supplier representatives indicated that they believe that we 
have been indiscriminately and inappropriately selective in our choice 
of the VA program as the sole comparative payor to Medicare and that

[[Page 38106]]

we have ignored information solicited from other payers. We have 
addressed this issue above indicating that the mixed reporting by these 
other insurers did not furnish any conclusive information regarding the 
reasonableness of Medicare's payments on a national basis. We would 
point out that a comparison to many insurers may be inappropriate due 
to the other insurers' heavy reliance on Medicare's payment 
methodology. As such, a comparison would merely mirror Medicare's 
payment amounts. We would also point out, however, that some States pay 
significantly less than what Medicare pays for the same service yet are 
able to attract a sufficient number of suppliers to provide oxygen 
services. In particular, the VA pays significantly less for home oxygen 
than does Medicare and manages to attract a sufficient number of 
suppliers to provide its patients with home oxygen.
    Some supplier representatives indicated that they believe that the 
VA payment amount is ``unbundled,'' that is, it represents only the 
cost of the oxygen concentrator and not the oxygen contents of a 
portable system, accessories used with the concentrator, set-up and 
delivery charges, etc. However, the VA report states: ``This year's 
figures include costs for all components of the modalities including 
refills to the portable/back-up or system itself, as appropriate.'' 
(See page vii of the FY 1994 VA report.) This assertion indicates to us 
that the VA's payment amounts include not only the same bundle of 
services as is included in Medicare's bundled rate for oxygen 
concentrators but also the portable equipment that is paid separately 
by Medicare.
    Some supplier representatives indicated that our analysis failed to 
consider supplier costs. We do not believe that we are required to 
include an analysis of supplier costs. Although the regulations at 
Sec. 405.502(g)(1)(iv) allow us to consider supplier costs as an 
example of factors in making an inherent reasonableness determination, 
they do not require such consideration. Moreover, we did not consider 
supplier costs, in part, because, in our experience, such costs are 
unattainable. A United States General Accounting Office Report to 
Congress entitled: ``Medicare, Effect of Durable Medical Equipment Fee 
Schedules on Six Suppliers' Profits'' (GAO/HRD-92-22), dated November, 
1991, states: ``DME suppliers do not maintain records in a manner that 
permits direct computation of costs and profits by DME item. * * *'' 
Although we have not evaluated supplier costs directly, we have 
considered supplier costs indirectly by relying on the VA's competitive 
bidding methodology to draw our conclusions regarding the relationship 
of costs to Medicare payment.
    As discussed previously, under the VA's competitive bidding 
methodology, bidders make bids that reflect their true costs (plus a 
reasonable rate of profit).

IV. Regulatory Impact Statement

A. Executive Order 12866

    Executive Order 12866 (E.O. 12866) requires us to prepare an 
analysis for any notice that meets one of the E.O. 12866 criteria for a 
``significant regulatory action''; that is, that may--
     Have an annual effect on the economy of $100 million or 
more or adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities;
     Create a serious inconsistency or otherwise interfere with 
an action taken or planned by another agency;
     Materially alter the budgetary impact of entitlements, 
grants, user fees, or loan programs or the rights and obligations of 
recipients thereof; or
     Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
E.O. 12866.
    This proposed notice would reduce unnecessary Medicare program 
expenditures for home oxygen services. Currently, payment under the 
Medicare program for home oxygen services is equal to 80 percent of the 
lesser of the actual charge for the item or the fee schedule amount for 
the item. Under this proposed notice, payment would be equal to 80 
percent of the lesser of the actual charge or the appropriate special 
payment limit proposed by this notice.
    We are proposing special payment limits for home oxygen services 
that would reduce the national limited monthly payment rate for home 
oxygen services for 1994 by 40.11 percent, then updated by the covered 
item update for years subsequent to 1994. Similarly, the 1994 local fee 
schedule amount for Alaska, Hawaii, Puerto Rico, and the U.S. Virgin 
Islands, would be reduced by 40.11 percent, then updated by the covered 
item update for years subsequent to 1994.
    We estimate that the proposed special payment limits would produce 
the following savings:

            [By fiscal year, savings in millions of dollars]            
1997............................................................    $120
1998............................................................     200
1999............................................................     230
2000............................................................     240
2001............................................................     260
                                                                        

    We have determined that the provisions of this proposed notice 
would meet the $100 million criterion. Therefore, it is a significant 
regulatory action and an impact analysis under E.O. 12866 is required.
    We expect suppliers of home oxygen services and beneficiaries to be 
affected by this special payment limit. We do not have sufficient data 
to predict exactly the nature of the impact of this proposed notice or 
the magnitude of such impact. Below, we discuss likely outcomes.
1. Suppliers
    Suppliers of home oxygen would review the special payment limits to 
determine what strategy would maximize their profits. In response to a 
final notice that implemented the special payment limits as the 
proposed notice, we expect them to compare this limit to their costs of 
furnishing home oxygen to Medicare beneficiaries. We would expect that 
as a result of this comparison, many suppliers may seek to economize by 
reducing unnecessary expenditures. Many suppliers may consider whether 
or not to continue to accept assignment on Medicare claims. Suppliers 
that provide mostly home oxygen services would be more adversely 
affected by the special payment limits than those suppliers that also 
provide the full range of durable medical equipment in addition to 
oxygen because they will have other revenue sources from which to 
obtain income.
2. Beneficiaries
    The effect of the proposed special payment limits on beneficiaries 
depends on whether there is a significant local change in the 
assignment rate. If the assignment rate were to remain the same, 
beneficiaries may expect lower coinsurance since the fee schedule 
amount for oxygen would be lower. However, if the assignment rate goes 
down, beneficiaries may have to make a greater effort to find a 
supplier that accepts assignment or have increased out-of-pocket 
expenses.
3. Conclusion
    The primary benefit expected to result from this proposal is the 
anticipated reduction in the cost to the Medicare program of home 
oxygen services and reduced coinsurance payments by beneficiaries to 
the extent that suppliers continue to accept assignment. The 
disadvantages that could result from this proposed special payment 
limit

[[Page 38107]]

would be more initial out-of-pocket expenses for the beneficiary if the 
assignment rate is reduced.

B. Regulatory Flexibility Act

    We generally prepare a regulatory flexibility analysis that is 
consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
through 612), unless we certify that a notice would not have a 
significant economic impact on a substantial number of small entities. 
For purposes of the RFA, all suppliers are considered to be small 
entities. Individuals and States are not included in the definition of 
a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a notice may have a significant impact on 
the operations of a substantial number of small rural hospitals. Such 
an analysis must conform to the provisions of section 603 of the RFA. 
For purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 50 beds.
    In determining whether to adjust payment rates under section 
1842(b)(8)(A) and (9)(A) of the Act, we are required to consider the 
potential impacts on quality, access, and beneficiary liability of the 
adjustment, including the likely effects on assignment rates, 
reasonable charge reductions on unassigned claims, and participation 
rates of suppliers.
    This proposed reduction in Medicare payment would affect suppliers 
of home oxygen. These suppliers would have their payment allowances for 
Medicare home oxygen patients reduced. Suppliers can choose to accept 
assignment, which means they agree to accept Medicare's approved amount 
as payment in full. It is possible that, as a consequence of our 
reducing payments for home oxygen, the number of suppliers accepting 
assignment of a beneficiary's claim for Medicare payment for these 
services may decrease if suppliers choose instead to charge 
beneficiaries the full difference between the amount charged and the 
lower Medicare payment. Also, the number of suppliers who elect to 
become or remain ``participating suppliers'' may decrease as a result 
of reduced payments for home oxygen. Under the Medicare participation 
program, a supplier that decides to become a ``participating supplier'' 
must agree to accept assignment for all covered services furnished to 
Medicare beneficiaries. Participating suppliers benefit by being listed 
in the Medicare Participating Physician/Supplier Directories, known as 
Medpards, which are compiled by the Medicare carriers and furnished to 
various senior citizen groups. A Medicare beneficiary can obtain the 
Medpard for his or her State from the Medicare carrier.
    Suppliers who do not accept assignment and charge more than the 
Medicare approved amount can collect the balance; that is, the actual 
charge minus Medicare payment, from the beneficiary. Therefore, 
beneficiaries who receive services from suppliers who do not accept 
assignment are exposed to greater financial liability than those who 
receive services from a supplier taking assignment. As a result, 
Medicare beneficiaries may choose to deal with suppliers who accept 
assignment in order to reduce their financial liability. We expect that 
this special payment limit would have minimal effects on the quality of 
home oxygen services furnished to beneficiaries since we do not expect 
suppliers to reduce the quality or the type of services provided. Also, 
we expect only minimal effects on beneficiary access to home oxygen, 
even in rural areas, since we do not expect many suppliers to 
discontinue supplying oxygen.
    Although a payment reduction of 40.11 percent for home oxygen 
appears large, it is a result of Medicare's grossly excessive payment 
allowances that have resulted in windfall profits. We would expect 
suppliers to adjust to the elimination of this windfall accordingly.
    In accordance with the provisions of Executive Order 12866, this 
notice was reviewed by the Office of Management and Budget.

IV. Paperwork Reduction Act

    This notice does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 through 3511).

V. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the DATES 
section of this preamble, and, if we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document. Moreover, we may elect to engage in further consultation with 
industry representatives if comments we receive make such further 
consultation necessary or appropriate.

    Authority: Sections 1834(a) and 1842(b) of the Social Security 
Act (42 U.S.C. 1395m and 1395u).

(Catalog of Federal Domestic Assistance Program No. 93.774, 
Medicare--Supplementary Medical Insurance Program)

    Dated: April 14, 1997.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.

    Dated: May 6, 1997.

Donna E. Shalala,
Secretary.
[FR Doc. 97-18716 Filed 7-11-97; 1:30 pm]
BILLING CODE 4120-03-P