Medicare will begin paying competitively bid prices for durable medical equipment in certain parts of the U.S. on Oct. 1, 2007, according to a proposed regulation.

The proposal, released April 25, would significantly alter the way Medicare sets payment amounts for durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) by replacing the current fee schedule with a program that asks suppliers to submit bids. The competitive acquisition program would be the first change in the DME payment process since 1989.

Mandated by the Medicare Modernization Act of 2003, the initiative is aimed at saving the Medicare program money and reducing beneficiary out-of-pocket expenses.

CMS anticipates large savings from the program. According to one estimate, savings attributable to lower prices expected from competitive bidding could be $110 mil. in FY 2008 and reach $1.2 bil. by FY 2011.

"Competitive bidding provides a way to harness marketplace dynamics to create incentives for suppliers to provide quality items in an efficient manner and at a reasonable cost," CMS says in the preamble to the proposed rule. The agency notes that the Medicare Modernization Act also requires it to set up competitive bidding programs for certain Medicare Part B drugs and to run competitive bidding demonstration projects for clinical laboratory services and managed care.

Competitive bidding demonstration projects in Polk County, Fla., and in the San Antonio, Texas, area from 1999 to 2002 provided a template for the current proposal. The demos led to lower Medicare fees for almost every type of product involved and a nearly 20% overall savings at each site, CMS found.

CMS also received input from the HHS Program Advisory and Oversight Committee in developing the competitive bidding program.

The new program will be implemented in 10 of the largest metropolitan areas in 2007, expanding to 80 areas in 2008, 90 in 2009 and 100 in 2010. CMS assumes that the first round of bidding will occur in the fall of 2006, with the bids evaluated in 2007 and prices going into effect that October. In later phases, prices will become effective on Jan. 1.

The agency also proposes a new fee schedule for home dialysis supplies and equipment still paid on a reasonable charge basis and a new process for calculating fee schedule amounts for new DMEPOS items.

CMS Excludes Nation's Largest Cities In First Year

For the 2007 program, the agency proposes to use Census Bureau data from 2005 and DMEPOS-allowed charge data from 2004 to identify large metropolitan areas with the greatest potential for generating savings.

However, New York, Los Angeles and Chicago - the three largest metropolitan areas based on 2003 data - are excluded from consideration for competitive bidding in the initial program because of the logistics involved in starting up the complex program.

CMS also proposes to exempt rural areas and regions that are not competitive, including those with few DME suppliers or low utilization of durable medical equipment. Inclusion of these areas will be reconsidered in future years.

For bidding purposes, the agency intends to develop product categories that would group similar items used in the treatment of a medical condition. For example, hospital beds and accessories might be one category, while dialysis equipment and supplies might be another. Each category would be defined and comprised of individual HCPCS codes.

Although the product categories haven't been established yet, CMS estimates that 10 will be selected for 2006, with priority given to products with the highest costs and highest volumes. The agency might establish different product categories from one competitive bidding area to another, as well as in different rounds of competitive bidding within an area. It also may exempt from competitive bidding any items within a category that are unlikely to result in significant savings.

Suppliers would be required to submit separate bids for each individual item within a product category, but will not be required to bid on all product categories. This approach, says CMS, "is more favorable to small suppliers because they can choose to specialize in only one product category."

Under the proposal, CMS would select only as many suppliers as needed to meet projected demand in each competitive bidding area. Expected demand would be calculated by using Medicare claims data from the last two years.

Based on the bids received, CMS would determine a "pivotal bid," where the expected combined capacity of the bidders is sufficient to meet expected demand in a product category. All bidders whose composite bid for the product category is less than or equal to the pivotal bid would be selected as winners.

The new reimbursement rate would then be calculated according to the median bid price of the chosen suppliers. Single payment amounts for each item in a category must be equal to or less than the current fee schedule amount for the item.

Contracts would be renegotiated at least every three years, and the agency would update the reimbursement amount annually to account for inflation.

Quality Standards For All DME Suppliers

In a separate initiative, CMS is developing standards to improve the quality of services provided by DME suppliers. A draft of the quality standards was presented during a Program Advisory & Oversight Committee meeting last October, and CMS is now reviewing comments on the proposal, with a final version expected this spring (¹ Also see "Panel Advises CMS To Relax Quality Standards For DMEPOS Suppliers" - Medtech Insight, 3 October, 2005., p. 16).

Addressing this companion effort, the competitive bidding proposal outlines the application process for independent organizations that will accredit DME suppliers for compliance with the quality standards.

All DMEPOS suppliers will have to meet the quality standards to be eligible to submit claims to Medicare, regardless of whether they participate in the competitive bidding program. Those that do participate will have to show that they meet the standards before being awarded a contract.

The preamble to the draft regulation includes strong language describing a history of fraudulent practices by DMEPOS suppliers. "We believe there has not been sufficient oversight of suppliers of DMEPOS and other items related to the quality and provision of their products," it states.

It notes that several investigations by the HHS Office of Inspector General have uncovered "many examples of fraud and abuse," including billing for services not performed, billing for a more expensive service than was rendered, billing twice for the same service, and offering or receiving kickbacks and bribes.

In another move intended to improve the quality of suppliers' services, the draft competitive bidding rule calls for a formal complaint monitoring system that will enable beneficiaries and healthcare providers to report any problems they have in ordering and receiving products.

Issues the agency would consider serious include contract suppliers refusing to furnish items to beneficiaries in the competitive bidding area for which they were awarded a contract; contract suppliers furnishing items of a quality inferior to those they bid on; and contract suppliers violating assignment and billing requirements.

Impact On Industry Will Be Significant, CMS Predicts

CMS anticipates a significant but uneven impact on the DMEPOS supplier industry from the new program. "Only suppliers who furnish products in at least one product category eligible for competitive bidding and in areas selected for competitive bidding could potentially be affected," the agency says, adding, for example, that "a customized orthotics supplier in Manhattan that does not supply off-the-shelf orthotics will not be affected."

The agency estimates there will be around 27,500 suppliers offering eligible products in the first 10 competitive bidding areas, and that 90% will submit a bid. The vast majority of suppliers, it notes, are small businesses providing minimal amounts of items, with larger companies controlling "significant market share."

CMS believes that permitting bids on individual items within product categories will make it easier for small suppliers to compete. It also proposes letting small suppliers form networks for bidding purposes.

Overall, the agency says, "there will be a revenue shift from the non-contract suppliers to the contract suppliers, and...although some suppliers may be worse off, it is because they did not offer competitive prices or quality."

The agency is seeking comments, due June 30, on all aspects of the draft rule, which appears in the Federal Register May 1. A final regulation is due in the fall.

- Katherine Thomas

DME Competitive Bidding Program Detailed In Proposed Medicare Regulation

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