Procurement of Eyeglasses and Other Medicaid Supplies and Services

Published by the Government Accountability Office on 1977-05-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

   V A L/3 L E
 NJI                      United States General Accounting Office
(NJ                               W4ashington, D.C. 20548
                                                   FOR RELEASE ON DELIVERY
                                                   Exoected at 9:30 a.m. EDT
                                                   Wednesday, May 25, 1977

                                  Statement of
                           Gregory J. Ahart, Director
                            Human Resources Division
                                   before the
                            Subcommittee on Monopoly
                       Select Committee on Small Business
                              United States Senate
                          Procurement of Eyeglasses and
                      Other Medicaid Supolies and Services

       Mr.   Chairman and Members of      the Subcommittee:

              We are oleased   to aopear   here today to discuss     our    review

       of    the   rocurement of eyeglasses and other Medicaid sunplies

       and services.      We are making    a review of    the practices of

       four States--California,      Idaho, Oregon, and Washington--for

       obtaining    eyeglasses, hearing aids,     oxygen, and durable medi-

       cal    euipment for Medicaid recipients.          We have also obtained

       information on New York City's attempt to contract for              the

       purchase of Medicaid clinical        laboratory services.

              Since our   review   is not yet comolete,     our comments today

       will be limited primarily to the purchase of eyeglasses for

       Medicaid recipients and New York City's attemot to contract

       for    the purchase of Medicaid clinical laboratory services.
     Medicaid--authorized by Title XIX of the Social Security

Act, as amended--is a grant-in-aid             program under which the

Federal Government pays part of the costs incurred by States

in providing medical supplies and services to persons unable

to pay for    such care.    The Federal Government Days            rom   50

to 78 percent of the costs       incurred by States        in providing

medical suDolies and services under the Medicaid oroqram.

     The Health Care Financinq Administration of               the Deoart-

ment of Health, Education,       and Welfare (HEW) administers

Medicaid at the Federal       level.    The individual      States are

resoonsible    for administerinq       their    individual Medicaid


     Under the Medicaid program, reimbursement               rocedures        for

eyeglasses and other       suoolies and services are set forth            in

the individual State plans.        Payments for such         items are

qenerally limited to the vendor's usual             and   customary charges.

In some States,    these charges are also subject to ore-established

State maximum prices.        Participating vendors agree           that the

amount paid by Medicaid will be accepted as               ayment    in full.


     The Social Security Act reauires             that Medicaid services be

proided to persons     receiving federally supported            financial

assistance--generally       kncwn as the categorically         needy.     In

                                        - 2-
addition, States can cover other persons, generally known as

the medically needy, whose incomes and other resources exceed

State or Federal requirements to qualify for D,iblic assistance

but which are not enouqh to pay for necessary medical care.

     The Social Security Act requires that State Medicaid

programs provide    certain basic services includinq laboratory

and X-ray services.    However, while eyeglasses and hearing

aids must be Dnovided to children, they are otional         services

for other Medicai.d recipients which mav be provided     if a

State so chooses.

     Thirty-five States and jurisdictions       rovide eyeglasses

to Medicaid recipients, but 10 of these States do not        rovide

eyeglasses to the medically needy.       Seventeen States and

Puerto Rico do not     rovide eyeglasses to Medicaid recinientL

other than children.

     Twenty-three States    rovide hearina aids to adults, but

nine of these do not provide aids to the medically needy.

Twenty-six States and the District of Columbia do not. provide

hearing   aids to adults.

     F;)rty-two States and jurisdictions provide durable medical

equioment such as wheelchairs, crutches, and canes, to Medicaid

recipients, but 1     of these States do not provide durable medi-

cal equipment to the medically needy.      Ten States and

                                 - 3 -
Pu2rto Rico do not provide ciurable medical equipment under their

Medicaid proqrams.

     To illustrate the differences       in Statt   practices,    Cali-

fornia and Washington       rovide eyeglasses,    hearing aids,      and

iurable medical equipmert      tI, both the categorically and medi-

cally needy, while Oregon Provides such services           nly to the

categorically needy, and      Iaho   rovides eyeglasses and hearing

aids only to eligible children.



     The California State Department         of health,   edi-Cal

Division, administers the State's Medicaid orogram.            Reimburse-

ments for    ontometric services are based on the State's maximum

reimbursement    rates or   the provider's usual    and customary

charge, whichever    is lower.    The Rates and     Fees Section of

the Department of Health establishes the maximum reimbursement

rates for medical services.       In addition to materiel      costs,

the maximum allowances      include services such as      fittinq,

adjusting,    and followup visits.

     The maximum reimbursement       rates are based on a 1975        study

by the Rates and Fees Section of material and service cost data

provided by opticians and optometrists.          The cost data obtained

in the study was us d       to determine the proposed payment        level.

                                     - 4 -
The   50th percentile of the reported usual and customary charges

was used    to establish the payment level               for lenses.        The State

determined that     the 50th percentile would cover the costs

reported    by most optometrists and orovide an adequate profit.

        The maximum payment level            for     single vision          lass lens

ranged from $12.3U      to $37.75, deDendinq on the type and

strength of the lens.       These prices            include both provider

services and material.          For    example,      the $12.30      lens price

includes $5.41      for material and          $6.89 for orovider services.

        The reimbursement    rate for         frames was set at $14,           at

the 28th percentile.        The State felt           that an adequate number

of durable and serviceable plastic                  frames were avai'       bhle at

a maximum price of $14       which      includes $8       for   frames and          6

for   provider services.

        During calendar year      1976, California paid about

$7,246,0U0    for   the material cost of eveglass               lenses and      frames

under the Medicaid program.             During 1976, California's              averaqe

material    price was    5.4~    for one single vision              lens,     1U.16

for one bifocal      lens, and        7.91    for   frames.


        The Idaho Department of Health and Welfare,                   Bureau of

Medical Assistance administers               the State's Medicaid program.

Payments for eyeglasses are limited to                   20   for   frames, $22         for

                                             - 5-
a pair of single vision lses, and $25 for a pair of bifocal
lenses, or the provider's usual and customary charge, which-

ever is lower.    Accordingly, the maximum   rice for single

vision eyeglass lenses and frames is $42.    The Chief of the

Bureau of Medical Assistance advised us that the maximums
were established by the Bureeu    rior to 1474   ased on a

survey of Medicaid prices being paid in nearby States.

     During calendar yar 1976, Idaho     aid $76,712   for new

eyeglasses.    The State of Idaho's cost reports do not separate

eyeglass costs by lenses cr frames.

     Oregon's Deuartment of Human Resources administers the

State's Medicaid program through its Public Welfare Division.

The Medical Assistance Unit of the Division establishes maxi-

mum fee schedules for eyeglasses.
     The Medical Assistance Unit reviewed the published prices

of large ootical firms to establish the maximum allowable

rates for eyealass frames and lenses.    The maximum rate was

set based on the highest published prices     lus an allowance

for postage.

     Providers are limited to the lesser of their usual and

customary charges or the maximum allowable a     payment in full

for goods and services provided.

                                 - 6
     The ma::imum allo.able cost for one single vision lens

ranges between $4.9U and $11.4.      The maximum allowable cost

of frames is $8.50.     Accordina to the State's optometric

consultant, this maximum charge limits the number of frame

styles available to about 10, most of which are plastic.

     A maximum dispensing fee of $3.95 per single vision lens

was established effective July 1, 1976, as a result of a fee

survey conducted by the Oregon O0    ometric Association.

     During calendar year    1976, Oreqon sent $283,632      for

eyeqlass lenses and frames under the Medicaid program.          The

average cost for one single vision lens was $5.3U,     for    Goe

bifocal lens. $11.31,    and frames, $Sd.41.


     The State of Washinqton Deoartment of Social and !Health

Services administers that State's Mledicaid program.      In July

1975, Washinqton requested bids from ontical supoliers to

provide eyeglass lenses and frames for the State Medicaid

proqram and the State Vocational Rehabilitation     roaram.

Effective October 1, 1975, Bausch and Lomb began suoPPvinq

eyegl'iss lenses and frames for these programs.    Under the

contract, Bausch and Lomb provides frames manufactured by

two other companies as well as    its own to the State.

                                 - 7 -
        The contract provides single vision,                  bifocal, and         trifocal

corrected curved white plastic or                  impact resistant glass dress

eyewear mounted        in approved frames.           Three styles         each of

dress frames for men, women,              boys, and girls are orovided

making a total of            12 dress frame styles.           In addition,         occuoa-

tional protective lenses and frames are available for                          men and

women.        The contract requires that a suitable case be                     included.

        From October 1975         through June 1976,          the contractor pro-

vided    two single vision         lenses for      $6.35,     two bifocal       lenses

for   $14.35,     and frames for prices ranging               from    2.oU    to      .dfl.

From July       1976 through June 1977,            the contract cost of two

single vision lenses            rose to $7.10.           The contractor       provides

the eyeglasses to oroviders who are willing                     to Darticioate           in

the Medicaid program for               a maximum disoensinq          fee cf    $12.3U.

        For    the year      October   197) through         eptmber     197b, Wa:shinqton

spent $362,292         for    eyeglasses unoer       this contract.           The State

estimates       chat   the annual      saving was about         56b,000    comoared to

the State's prior            method of ourchasing          eyeglasses at oroviders'

usual and customary            charges subject to mnaximul            orices established

by the State.


        Wasninaton paid $6.35            for   a   air    of single vision lenses

during the period January               through June       1976 and    $7.1U during           the
period July throuqh December 19/6 as compared to orices of

$10.60        and $10.90 which Oregon and California, respectively,

oaid durina calendar           ear 1976.

         Durinq calenoar year            7b, Washington       aid from $2.t0

to $D.Ui        for frames, as opoosed t             7.9l and S8.41       aid by

California arid Oreqon, resoe             t ivel.

         California could have saved abotit               3.4 million durinq

197-b    if it had nurchased eyeclasses at th,                rate    naii      ,by

Washington.         Likewise, OreGon could have saved about $114,UU0

if   it had       urchased eveolasses at the rates naid by                   ashinqtton.


         Althouqh our     review of other Medicaid suPlies i.; not                      com-

olete, we have observed other               otential savinqs          in th(e     rocure-

rr,ent   ot    hearinq aids,    oxvlen, and durable medical             elou,)mt.nt.

         None of    the four    States    reviewed nurchased hear ina                 ids

for Medicaid recionients          on a Statewide comt)etitive            contract

basis.         Washinqton pays     U     ercent     of   the retail    rrice of

hearing        aids uo to $325) base d     on 1972       aqreements with hearin

aid dealers.         In contrast,        reqon has       rcentlv      tarted nur-

chas; iq       some hearini    aid s   for the M dicaid        rogram under           or ice

aqreements negotiated with various oroviders                    by the Oreqon

Department of General Services.                Under these price agreements,

substantial        savings over        the retail rrices of thest, aids can
be realized.         For    example, during             ebruary 1977          a Portland,

Oregon, Public Welfare Office decided to purchase a hearing

aid    for   $162   under     their State price agreements                    instead of

oaying a        cal dealer        375     for    the same hearinq aid.

       Washinqton contracts for                 the Durchase of             oxvyen   for

Medicaid      recipients at        from $3.10           to $4.30      per    1UU cubic

feet depending on the             location.           By contrast, California

purchases oxvqen at the                r3viders' usual              and customary

charges up to a             aximum cf         14.35     for   244    to 27i cubic feet,

or     bout $.22       to $5.dd     per       10U cubic       feet.

        In December         197b, California ourchased 4,811                    cylinders,

ranging from 244            to 27b cubic        feet     of   oxyaen    at an averLge

cost     f    14.03.        The cost     of    217    cubic feet       of oxygen under

the Washington contract would                   range from          d.53     to $11.63.

The Washington contracL)r                also has offices             in the State of

Oregon and charges the Oregon Medicaid                          rogram,       on a non-

contractual basis, $17             for    244    cubic feet of oxyoen.

        Washington purchases most of                    its durable medical            euti)-

ment and      lends    it    to   roqram beneficiaries but                   retains    title

to it.       The beneficiaries are reauired to return the eclujn-

ment to a       ool when they no longer need                    it.     Washington

Medicaid officials advised us                   that purchase discounts of                 as

much as 20 percent from manufacturers'                         suggested list          prices

                                                     - 10 -
had been obtained from large suppliers on purchases of durable

medical equipment.     For example, Washinqton is paying $264.35

for a wheelchair, which lists for $311, and which must be

returned to the State     or reissue.    California on the other

hand, gives the wheelchair to the recipient and,         in many

cases is paying thp manufacturer's list price.


     New York City officials,    interested i,, better cost control

and dissatisfied with the quality of work performed by labora-

tories uinder the Medicaid program, attemnuted to contract for

laboratory services.

     In ApLil 1975, the city advertised for bids for         its Medicaid

laboratory services.     Potential bidders were invited to submit

bids to service any or all of New York City's five boroughs.

Successful bidders, however, could be awarded no more than one

borough plus the borough of Staten Island.         A sequential system

of bid openings was designed based on the decreasing order               f

each borough's Medicaid population.          If bidders were awarded

one borough, they would become ineligible for further aards,

except for Staten Island although they may have been low bidder.

The intention was to maximize laboratory particioation in the

award process.   Because of its low Medicaid population,           the

borough of Staten Island was to be awarded last and to the

lowest bidder, regardless of prior awards.

                                  -   11 -
        The bidders were L quired to submit the bid in two parts--

a maximum aggregate fee and a unit price for each test.          The

maximum aggregate fee represented the fixed ceiling price for

which the contractor agreed to provide all clinical laboratory

services requested within the designated borough during the

stipulated time period.     This amount would be the basis for

the contract award.

        A contract was to run for 3 years with a safety clause

which automatically increased the maximum agregate bid on a

prorated basis to cover future increases in the Medicaid

population.     This maximum aggregate price   is significant,

especially in light of the city's expenditures for laboratory

services which rose from $3.7 million in 1970      to $10.7 million

in 1975.

        The unit price was the single fixed charge for any labo-

ratory test processed,    regardless of the cost of a particular

test.     This was important because actual reimbursement was to

be limi'ed to the unit price times the actual number of tests

performed,    up to the maximum aggregate bid.

        The aggregate prices obtained by the city for   its five

boroughs totaled $5.7    million with unit orices varying from

$0.89 to $4.00.    This solicitation, had    it been consummated,

would have represented about a $S million annual savings.

                                  -   12 -
     This proposed contracting procedure represented not only

a potential cost savings but also provided for more expedi-

tious testing,    increased quality control, and a computerized

record of services provided to each patient and ordered by

each physician.

     A coalition of clinical laboratories sought a Federal

court injunction preventing the award of such contracts on

the grounds that the city proposal would impair a Medicaid

recipient's right under Medicaid law to freedom of choice

to choose a clinical laboratory.

     The city contended that no patient's freedom of choice

was involved since it was the attending physician who tradi-

tionally made this decision.

     In August 1975, the court enjoined New York City from

awarding contracts for all the city's clinical laboratory

services.   However,   it   ermitted the city to award a contract

in one of the city's five boroughs.        As of April 1977, a

contract had not been awarded.

     The court stated that     in the future it would address the

question of whether the statutory freedom of choice require-

ment is applicable to laboratory services.

     Proposed legislation, S. 705, was introduced on Febru-

ary 10, 1977, which would amend the Social Security Act to

permit competitive bidding for laboratory services.

                                  - 13 -

        The 1972 Amendments   to the Social Security Act provided

that reasonable charges for Medicaid medical supplies,                 eauip-

ment,    and services which do nuc d         fer significantly    in aual-

ity from one supplier      to another will be limiLtd         to the    lowest

charqe levels consistently and widely available within a

geoQraphic area.       In January    1977,    HEW published draft      requla-

tions to implement the Medicaid reasonable charge requirement.

        The draft   regulations     rovide that when the ouality of

medical supplies,     eauioment, and services do not varv siqnifi-

c3ntly from one supplier to another,              reimbuLsement will    be

based on    the lowest charge level at which these           items are

generally available in a locality.

        While the lowest charge concept should help to reduce

the prices being      aid by Medicaid,        it does not   insure that

the lowest possible price is being            aid.     In our opinion,

agreements with suppliers--through competitive bids or

negotiations--would provide greater assurance.

        Contracting for eyeglasses, hearing aids,           and durable

medical euipment at       reduced prices is          racticed by several

Federal aqercies,     including the Department of Defense and

the Veterans Administration.

                                       - 14   -
     On September 29,    1976, HEW awarde      a contract to the

National Institute for Advanced Studies for the evaluation

of selected Medicaid services reimbursement practices and

policies--hearing aioas, eyeglasses, clinical laboratory

services, and Health Maintenance Organizations.         In May

1977, the Institute issued a report entitled, "Alternative

Reimbursement Approaches for Eyealasses and        Implications

for Medicaid Policy," which pointed out the benefits of the

Washington eyeglass contract in terms of saving money and

guaranteeing   uality.   In May 1977,      the Institute also

issued a report which Presented alternate reimbursement

approaches for Medicaid healinq aids.


     The Social Security Act (42 U.S.C. Section 1396a(a)(23))


     "* * * that any individual eligible for medical

     assistance (including drugs) may obtain such

     assistance from any institution, agency, com-

     munity pharmacy, or person aualified to Perform

     tne service or services reauired * * * who under-

     takes to provide him such services * * *."

    Both the House and Senate reports accompanying H.R. 12080

which added this section state that this provision was

                                -   15 -
included in order to provide Medicaid recipients with freedom

in their choice of medical institution or medical practitioner.

    Our reviews have indicated that          ast efforts by certain

States to minimize Medicaid procurement costs have raised the

auestion of whether such practices are in conflict with the

freedom-of-choice provisions.     For example, HEW filed a friend

of the court brief in the New York City laboratory case.            In

its brief, HEW stated that:

          "*   * *   in liaht of the clear wordinq of

    Section 1396a(a)(23) itself and HEW's consistent

     construction that the      rovision encompasses

     freedom of choice as to all providers of

     services, including laboratories, the Secretary

     submits that the New York proposal, which would

     effectively end a recinient's freedom of choice

     in obtaining laboratory services,        is contrary

     to federal law."

The HEW brief went on to state that the New York City laboratory

project might be acceptable as either an experimental, pilot, or

demonstration project for a limited duration;        or as a non-

exclusive contract with a     articular laboratory which would           er-

mit those Medicaid recipients wishing to choose a different

qualified laboratory if that laboratory would perform the medical

services at the same fee.

                                  -   16 -
     The HEW brief also noted that:

     "* * * as practical matter most Medicaid Patients do

     not make a meaningful choice as to which labora-

     tory is to     erform their laboratory tests but as

     a normal practice simply accet the referral of

     their doctor."

     As another example, on May 12, 1972, we issued a report

regarding durable medical euiDment        in which     e discussed the

State of Washinqton's practice of        urchasinq and ooolinq this

eauipment under its Medicaid program.        The use     f an euipment

pool appeared to HEW to conflict with the freedom-of-choice

provision.   By letter     ted January 26,    1972, HEW's General

Counsel stated that HEW believed Washinqton's          ractice was

contrary to Federal law and regulations.

     Regarding contractinq for other Medicaid suoolies, it

appears to us that the Social Security Act permits States to

contract for the purchase of eyeglasses, hearing aids, and

oxygen.   However, the issue is not clear-cut since by the

terms of the contract for hearing aids and oxygqen,        program

beneficiaries may not have a "free" choice in the selection,

of the providers.

     In summary, we believe that the competitive biddinq and

equipment pooling     ractices of Washington represent economical

methods which can help contain costs and assure optimum use of

                                - 17 -
available resources.    The potential savings to both the Federal

and State Governments through contracting for the purchase of

certain Medicaid supplies and services is substantial.    How-

ever, because such contracting miqht conflict with the legis-

lative provision concerning freedom of choice, the Congress

should clarify its intent in this regard.

     Mr. Chairman, this concludes my statement.    We shall be

happy to answer any    uestions that you or other members of the

Subcommittee might have.

                               -   id