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    Statement by
    Thomas A. Scully
    Administrator Centers For Medicare & Medicaid Services
    Medicare Payment For Medical Supplies
    before the
    Senate Appropriations Labor, Health and Human Services, Subcommittee on Education

    June 12, 2002

    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 General Accounting Office 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.


    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.


    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.


    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.

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Last revised: May 13, 2003