Medicare: Divided Authority for Policies on Coverage of Procedures and Devices Results in Inequities

Published by the Government Accountability Office on 2003-04-11.

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

             United States General Accounting Office

GAO          Report to the Chairman, Subcommittee
             on Health, Committee on Ways and
             Means, House of Representatives

April 2003

             Divided Authority for
             Policies on Coverage
             of Procedures and
             Devices Results in

                                               April 2003


                                               Divided Authority for Policies on
Highlights of GAO-03-175, a report to the
Chairman, Subcommittee on Health,              Coverage of Procedures and Devices
Committee on Ways and Means, House of
Representatives                                Results in Inequities

Critical choices on whether new                Medicare Covered Most New Procedures and Devices
technology will be covered for                 Medicare covered about 99 percent of the procedures and devices that were
Medicare’s 40 million beneficiaries            assigned codes by an American Medical Association panel or a committee of
are made nationally by the Centers             insurers in 2001. About a quarter were introduced into the program without
for Medicare & Medicaid Services
                                               coverage policies that describe the circumstances for Medicare coverage or
(CMS)—the agency that
administers Medicare—or locally                place restrictions on their use. Another quarter were affected by national
by contractors that process and                coverage policies and the rest were affected only by local coverage policies.
pay claims.
                                               Variations in Local Coverage Led to Inequities
GAO was asked to review the                    Because contractors can determine coverage for beneficiaries being treated
degree to which new procedures                 in their jurisdictions, coverage inequities for beneficiaries with similar
and devices are incorporated into              medical conditions have resulted. For example, until recently, coverage for
Medicare, the effect of Medicare               a new treatment for debilitating tremors, called bilateral deep brain
coverage policy-making processes               stimulation (DBS), had been allowed only for beneficiaries treated in some
on beneficiaries, and to what
                                               states. On April 1, 2003, CMS implemented a consistent national coverage
extent CMS has addressed
concerns about its national                    policy on DBS, but coverage variation continues for other procedures.
coverage process.
                                               Medicare Coverage for Bilateral DBS by State, as of July 31, 2002

GAO recommends that CMS                                                          MT        ND                                           ME
eliminate development of new local                     OR                                            MN                             VT
Medicare coverage policies for                                     ID                                           WI                    NH   MA
                                                                                           SD                           MI        NY
                                                                                 WY                                                        RI
procedures and devices that have                                                                                                           CT
                                                                                                      IA                       PA
been assigned codes; evaluate all                           NV                             NE                                        NJ    DE
                                                                                                                 IL   IN OH
current local policies on                           CA                                CO                                    WV
                                                                                            KS            MO                   VA          DC
procedures and devices with                                                                                              KY
established codes to determine if                                                                                     TN          NC
                                                                     AZ           NM            OK        AR
the policies should be incorporated                                                                                               SC
                                                                                                                 MS AL       GA
into national policies or be
rescinded; and establish a new,                                                            TX              LA
centrally managed process that is                                                                                                 FL
more open, understandable, and                                                                                          AK
timely to develop national coverage                      Covered                                                HI
policies, using expertise from other                     Not covered
sources. HHS disagreed with our                          Case by case
recommendations to eliminate
                                               Source: GAO survey of carriers.
local coverage policy development
for certain procedures and devices             National Coverage Development Process Raises Concerns
and to develop a new national                  While CMS creates national coverage policies that apply equally to all
process. It also disagreed with the            Medicare beneficiaries, criticisms of its slow pace and its closed policy
intent of our recommendation to                development process prompted CMS to take steps to make its process more
evaluate its existing local policies.
                                               understandable, open, and timely. Nevertheless, the national process
www.gao.gov/cgi-bin/getrpt?GAO-03-175.         remains flawed because it lacks clear coverage criteria, remains closed in
                                               fundamental ways to physician and beneficiary input, and has not
To view the full report, including the scope
and methodology, click on the link above.
                                               consistently met timeliness goals.
For more information, contact Leslie G.
Aronovitz at (312) 220-7600.

Letter                                                                                 1
               Results in Brief                                                        4
               Background                                                              5
               Medicare Covered Most Procedures and Devices Assigned Codes in
                 2001, Often Without National or Local Coverage Policy                10
               Variations in Local Coverage Policies Lead to Program Inequities
                 and Inefficiencies                                                   12
               National Coverage Policy Adds Consistency, But Current Policy
                 Development Process Could Be Strengthened                            20
               Conclusions                                                            31
               Recommendations for Executive Action                                   32
               Agency Comments and Our Evaluation                                     32

Appendix I     Scope and Methodology                                                  36

Appendix II    Coding Assignment Process                                              38

Appendix III   Process That CMS Follows to Develop National
               Coverage Policies                                                      39

Appendix IV    Process That Carriers and Fiscal Intermediaries
               Follow to Develop Local Coverage Policies                              40

Appendix V     Coverage Criteria for Medicare Claims
               Administration Contractors                                             41

Appendix VI    Comments from the Department of Health and
               Human Services                                                         42

               Page i                                       GAO-03-175 Medicare Coverage
Appendix VII   GAO Contact and Staff Acknowledgments                                      48
               GAO Contact                                                                48
               Acknowledgments                                                            48

               Table 1: Number and Percent of the New Coverable Procedure and
                        Device Codes for 2001 That Were Affected by National or
                        Local Coverage Policy                                             11
               Table 2: Variations in Local Coverage Policies in Northern and
                        Southern California                                               16
               Table 3: Local Coverage Policies for Procedures with New Codes
                        Developed or Revised by Four Carriers in Four States              17

               Figure 1: Carrier Coverage for Bilateral DBS by State, as of July 31,
                        2002                                                              14
               Figure 2: Process for Adding, Deleting, and Revising CPT and
                        HCPCS Level II Codes for Use in the Medicare Program              38
               Figure 3: Criteria for Claims Administration Contactors to Use to
                        Determine Whether a Procedure or Device Is Reasonable
                        and Necessary                                                     41

               Page ii                                          GAO-03-175 Medicare Coverage

AMA               American Medical Association
BIPA              Medicare, Medicaid, and SCHIP Benefits Improvement
                  and Protection Act of 2000
CAG               Coverage and Analysis Group
CMM               Center for Medicare Management
CMS               Centers for Medicare & Medicaid Services
CPT               Current Procedural Terminology
DBS               deep brain stimulation
DME               durable medical equipment
FDA               Food and Drug Administration
HCFA              Health Care Financing Administration
HCPCS             Healthcare Common Procedure Coding System
HHS               Department of Health and Human Services
MCAC              Medicare Coverage Advisory Committee
NHIC              National Heritage Insurance Company
OIG               Office of Inspector General
SCHIP             State Children’s Health Insurance Program

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Page iii                                                  GAO-03-175 Medicare Coverage
United States General Accounting Office
Washington, DC 20548

                                   April 11, 2003

                                   The Honorable Nancy L. Johnson
                                   Subcommittee on Health
                                   Committee on Ways and Means
                                   House of Representatives

                                   Dear Madam Chairman:

                                   As health care technology evolves, beneficiaries, their families, physicians,
                                   and medical device manufacturers are interested in having the Medicare
                                   program cover new procedures1 and devices that could improve
                                   individuals’ clinical outcomes. Such new procedures and devices are most
                                   commonly incremental improvements upon those currently available, but
                                   can also represent significant medical breakthroughs. Policies explaining
                                   whether, and under what circumstances, new procedures or devices will
                                   be covered can be made nationally by the Centers for Medicare &
                                   Medicaid Services (CMS)—the agency that administers Medicare—or
                                   locally by Medicare claims administration contractors in their service
                                   areas. These include 19 carriers, which pay part B claims for most
                                   physician, laboratory, and certain other services and items,2 and 27 fiscal

                                    “Procedure” is used in this report to define all medical actions taken to prevent, diagnose,
                                   treat, or manage diseases, injuries, and impairments. This definition includes services such
                                   as counseling, evaluation, management of patients, surgery, and laboratory and other tests.
                                    Part B services include physician and outpatient hospital services, diagnostic tests, mental
                                   health services, outpatient physical and occupational therapy, ambulance services, some
                                   home health services, durable medical equipment (DME), prosthetics, orthotics, and
                                   medical supplies.

                                   Page 1                                                     GAO-03-175 Medicare Coverage
intermediaries, which pay part A claims for inpatient hospital and related
post-hospital services and part B claims submitted by part A providers.3 4

Procedures and devices are identified by codes that are assigned to them
by two committees outside of the Medicare program. When new
procedures and devices are assigned codes, CMS decides whether they are
among the types of health care benefits described in the Medicare statute
and are reasonable and necessary for a beneficiary’s treatment, and,
therefore, eligible for Medicare payment. CMS notifies contractors
whether each new code can be covered, and, based on this information,
Medicare’s automated claims processing systems pay or deny claims
submitted with one of these codes.

CMS or its claims administration contractors sometimes create coverage
policies to specify or limit when payment for a particular procedure or
device will be made, such as by allowing coverage of a procedure only for
certain specified diagnoses. CMS develops national coverage policies that
apply to all beneficiaries across the country. Claims administration
contractors issue local coverage policies that apply only to beneficiaries
treated in their service areas or to providers they service.

Physicians and beneficiary advocates have raised concerns about whether
local coverage policies that apply only in a contractor’s service area lead
to variations that result in inequitable coverage for beneficiaries. In
addition, CMS has been criticized for the slow pace by which new
procedures and devices are introduced into the program and for the lack
of openness and understandability in the process it uses to make national
coverage policies.

 Related post-hospital services include some care provided by skilled nursing facilities and
home health agencies.
 In this report, we refer to carriers, DME regional carriers, and fiscal intermediaries as
“claims administration contractors.” Unless otherwise specified, the term “carrier” refers to
a Medicare claims administration contractor that pays part B claims. The 19 carriers
include 4 that also process DME claims and, in this role, are referred to as “DME regional
carriers.” Under part B, carriers pay claims for treatments provided to beneficiaries in their
service areas, which can be portions of states, individual states, or multiple states. Under
part A, hospitals and other providers have a choice of which fiscal intermediary to use, and,
as a result, more than one fiscal intermediary may pay claims for services provided in any
particular geographic area.

Page 2                                                      GAO-03-175 Medicare Coverage
In light of these concerns, you asked us to examine:

1. To what extent are new procedures and devices incorporated into the
   Medicare program?

2. What has been the effect of the local coverage process on
   beneficiaries, carrier and fiscal intermediary efficiency, and
   stakeholders, including device manufacturers and physicians?

3. What has been the effect of the national coverage process on
   beneficiaries, physicians, and other providers, and to what degree has
   CMS addressed concerns about the process?

In preparing this report, we focused on new procedures and devices that
are provided by physicians (and allied professionals under their
supervision) or other providers and that could be billed under part B,
including anesthesia and laboratory tests. We also included devices that
could be used by beneficiaries in their homes. Claims for covered
procedures and devices in our study are generally processed by carriers.
We included some procedures that physicians would perform in an
inpatient hospital setting—such as surgeries—that could also have related
claims by hospitals under part A that would be processed by fiscal
intermediaries. To determine the extent to which new procedures and
devices are incorporated into Medicare, we selected 320 codes for
procedures and devices that were new in 2001, analyzed information about
these codes, and reviewed national and local policies that affected them.
To evaluate the effects of the local and national coverage processes and
concerns about the national coverage process, we (1) reviewed CMS,
carrier, and fiscal intermediary coverage policies, including analyzing
national coverage policies that CMS made from February 1999 through
July 2002, and (2) interviewed CMS regional and headquarters officials;
Food and Drug Administration (FDA) officials; Medicare staff at four
carriers,5 which included one DME regional carrier6 and one that also
served as a fiscal intermediary;7 and advocates representing physicians,

 We conducted Medicare carrier site visits at National Heritage Insurance Company, Blue
Cross Blue Shield of Rhode Island, Noridian Administrative Services, and CIGNA
HealthCare Medicare Administration.
 CIGNA also serves as one of four DME regional carriers that process all Medicare claims
for DME, prosthetics, orthotics, and supplies.
 Blue Cross Blue Shield of Rhode Island serves as both the carrier and a fiscal intermediary
in that state.

Page 3                                                     GAO-03-175 Medicare Coverage
                   suppliers, and beneficiaries. Appendix I contains more detail on our scope
                   and methodology. Our work was conducted from October 2001 through
                   March 2003 in accordance with generally accepted government auditing

                   Medicare covered most—about 99 percent—of procedures and devices
Results in Brief   assigned codes in 2001. For procedures and devices with established
                   codes, Medicare contractors’ automated claims processing systems
                   generally accept—and pay—claims, unless coverage policies define or
                   restrict when Medicare will pay for their provision. About one quarter of
                   the new codes for procedures and devices were introduced into Medicare
                   without any coverage policies that affected their use. About one quarter of
                   the new codes had associated national coverage policies, while the rest
                   were affected only by local coverage policies developed by at least one
                   claims administration contractor. More than half of the codes affected by
                   national coverage policy were also affected by one or more local coverage

                   Dividing authority to develop coverage policies has led to coverage
                   inequities for Medicare beneficiaries with similar medical conditions
                   based on the location where they receive treatment and to inefficiencies in
                   program administration. For example, in July 2002, carriers provided
                   coverage for a new treatment for Parkinson’s disease for certain
                   beneficiaries with debilitating tremors treated in Kansas, but not in
                   Florida. On April 1, 2003, CMS implemented a national coverage policy for
                   this treatment. Coverage varies by state for certain tests to diagnose or
                   monitor an individual’s response to treatment for cancer. One test is
                   covered by carriers in Rhode Island and Pennsylvania, but is not covered
                   in Florida and New Jersey. In addition to coverage inequities, having each
                   carrier and fiscal intermediary separately develop policies for the same
                   procedure or device results in duplication of efforts and program
                   inefficiencies. For example, eight carriers have separately followed the
                   extensive, required steps to develop local policies for a method of
                   identifying a possible risk of sudden cardiac death. Despite these
                   problems, some groups, including device manufacturers’ representatives
                   and physician groups, argue that local coverage policies have benefits. For
                   example, they state that local policies can be developed more rapidly than
                   national coverage policies and that the local coverage process is open to
                   physician and public input.

                   Because CMS’s national policies apply to all Medicare beneficiaries
                   regardless of their treatment location, these policies promote coverage

                   Page 4                                          GAO-03-175 Medicare Coverage
             consistency for beneficiaries, physicians, and other providers. However,
             CMS’s national coverage process had been criticized for being slow, not
             clear, and not open to public input. To address these concerns, CMS
             recently took steps to strengthen its national coverage process. In 1999,
             for example, the agency made the process more understandable by
             publishing the steps it takes to develop national coverage policies.
             Nevertheless, some problems persist. For example, CMS does not publish
             its draft national coverage policies for public comment. In addition, CMS
             does not always consult with experts outside the agency when it develops
             coverage policies.

             Because of inequities and inefficiencies resulting from divided authority to
             develop coverage policy among CMS, carriers, and fiscal intermediaries,
             we are recommending that CMS eliminate claims administration
             contractors’ development of new local coverage policies for procedures
             and devices that have established codes. We are also recommending that
             CMS establish a new process for making national coverage policy.

             In commenting on a draft of this report, the Department of Health and
             Human Services (HHS) generally disagreed with our recommendations
             and expressed concerns about the effects of these proposed changes on
             the Medicare program and the resources that would be required to
             implement them. We believe our recommendations would lead to more
             consistent coverage policies for Medicare beneficiaries and would
             increase program efficiency through redirecting the resources that are
             currently devoted to duplicative policy making.

             Medicare is the federal health insurance program that serves 40 million
Background   beneficiaries who are aged 65 years and older, certain disabled people
             under 65 years of age, and individuals with end-stage renal disease. The
             program is administered by CMS—formerly the Health Care Financing
             Administration (HCFA)8—an agency within HHS. Most beneficiaries
             receive their care on a fee-for-service basis, with providers submitting
             claims for payment for each service provided. CMS contracts with claims
             administrators—health insurers—to process claims from nearly 1 million
             hospitals, physicians, and other health care providers. In fiscal year 2000,

              This report will refer to HCFA in discussing actions taken before the agency’s name was
             officially changed on July 1, 2001.

             Page 5                                                    GAO-03-175 Medicare Coverage
                             carriers processed about 740 million claims and fiscal intermediaries
                             processed about 151 million claims.

Medicare Payment for         Medicare’s payment systems for claims are highly automated and rely on
Claims Relies on Codes for   codes to identify medical procedures and devices used in beneficiaries’
Billing                      diagnoses and treatments. Contractors identify specific procedures and
                             devices billed on behalf of a beneficiary by Healthcare Common
                             Procedure Coding System (HCPCS) codes, a series of five digits used by
                             Medicare and other health insurance programs. The HCPCS also contains
                             miscellaneous codes that can be used to bill for procedures and devices
                             for which there are no established codes.9 The HCPCS contains three sets
                             of codes—Levels I, II, and III. Level I consists of Current Procedural
                             Terminology (CPT) codes used primarily to identify medical services and
                             procedures furnished by physicians and other health care professionals.
                             Level II codes represent products, supplies, and services not included in
                             CPT codes, such as ambulance services and DME used in a beneficiary’s
                             home. Level III codes are “local” codes that have been developed by
                             Medicare carriers and fiscal intermediaries, Medicaid state agencies, and
                             private insurers for use only in their specific jurisdictions. Local codes are
                             scheduled to be eliminated in December 2003.10

                             A request for a new HCPCS code may be made by physicians or medical
                             device manufacturers for procedures and devices that may be clinically
                             different from existing treatment options—generally to better delineate a
                             new procedure from a similar one or when the cost of a new procedure or
                             device necessitates a different payment amount.

                             Two different entities are responsible for assigning new codes. The
                             American Medical Association’s (AMA) CPT Editorial Panel11 annually

                              Physicians and suppliers must provide additional documentation when submitting
                             Medicare claims using a miscellaneous code. Contractors manually review these claims to
                             determine what procedure or device is being billed, whether it should be covered, and the
                             amount that should be paid. In 2001, miscellaneous codes accounted for less than one
                             quarter of 1 percent of part B payments.
                              Local codes are scheduled to be eliminated as part of the establishment of standards and
                             requirements for the transmission of health information under the Health Insurance
                             Portability and Accountability Act of 1996. Pub. L. No. 106-191, § 262, 110 Stat. 1936, 2021.
                              The CPT Editorial Panel is predominantly comprised of AMA-appointed physicians, but
                             also includes physicians nominated by CMS, the Blue Cross/Blue Shield Association, the
                             American Hospital Association, the Health Insurance Association of America, and a
                             nonvoting representative from the American Health Information Management Association.

                             Page 6                                                      GAO-03-175 Medicare Coverage
                          updates codes for procedures and other physician services—CPT codes.
                          The HCPCS National Panel, which is composed of CMS and insurer
                          representatives,12 annually updates codes for medical devices and other
                          products—HCPCS Level II codes. Because the code sets maintained by the
                          AMA CPT Editorial Panel and HCPCS National Panel are designed to serve
                          multiple health insurers, not all of the codes are for services or items
                          covered by Medicare.13 It usually takes at least 15 months from the date a
                          new code is requested for a new code to be assigned and put into use.

Medicare’s Statute Sets   To be eligible for coverage under Medicare, specific health care services
Out Broad Categories of   must fit into 1 of about 55 categories of benefits described in statute. The
Covered Services and      Secretary of HHS has been delegated legal authority to specify which
                          procedures, devices, and services are covered in the broad benefit
Items                     categories and under what conditions. The Secretary delegates this
                          responsibility to CMS, which, in turn, delegates some of this responsibility
                          to its claims administration contractors.

                          The law states that Medicare cannot pay for any items or services that are
                          not “reasonable and necessary” for the diagnosis and treatment of an
                          illness or injury or to improve functioning of a malformed body part.14 The
                          law excludes some services and items from coverage, such as routine
                          physical checkups, most immunizations, cosmetic surgeries, hearing aids,
                          eyeglasses, routine foot care, and routine dental care.15 Medicare law has
                          been amended several times to add new coverage—including certain
                          preventative health care services such as immunizations for pneumonia
                          and influenza; mammogram, pap smear, and pelvic exam screenings; and
                          tests for prostate and colorectal cancer.16

                           The HCPCS National Panel is comprised of representatives from CMS, the Blue
                          Cross/Blue Shield Association, and the Health Insurance Association of America.
                            For additional information about codes, see U.S. General Accounting Office, HIPAA
                          Standards: Dual Code Sets Are Acceptable for Reporting Medical Procedures, GAO-02-796
                          (Washington, D.C.: Aug. 9, 2002).
                           42 U.S.C. § 1395y(a)(1)(A) (2000).
                            Medicare does not cover outpatient, self-administered drugs. However, it does cover
                          physician-administered drugs and drugs used in immunosuppressive therapy (for organ
                          transplant recipients) and anticancer chemotherapy. 42 U.S.C. § 1395x(s)(2)(J) and (Q)
                           See U.S. General Accounting Office, Medicare: Beneficiary Use of Clinical Preventive
                          Services, GAO-02-422 (Washington, D.C.: Apr. 12, 2002).

                          Page 7                                                   GAO-03-175 Medicare Coverage
                          Each year, CMS reviews new CPT codes and HCPCS Level II codes for
                          procedures and devices to determine if these codes fit into a Medicare
                          benefit category and can be covered because they are deemed reasonable
                          and necessary for a beneficiary’s diagnosis or treatment. Following its
                          review, CMS provides information on new codes to claims administration
                          contractors, including coverage, billing, and payment instructions. (See
                          app. II for more detail on the coding assignment process.)

CMS and Claims            Even when CMS determines that Medicare may cover a procedure or
Administration            device, CMS or its claims administration contractors may develop policies
Contractors May Develop   that delineate the circumstances under which its use is considered
                          reasonable and necessary, and thus covered. Using a process that began in
Policies Defining When    1999, CMS’s Coverage and Analysis Group (CAG), which is located in the
New Procedures and        Office of Clinical Standards and Quality, develops national coverage
Devices Are Covered       policies, which are binding on Medicare contractors and apply to all
                          beneficiaries. The agency has also compiled a body of national policy on
                          Medicare coverage that is included in manuals and other written materials
                          for claims administration contractors. In addition, claims administration
                          contractors develop local coverage policies, which apply to beneficiaries
                          being treated in their jurisdictions.

                          CAG begins the national coverage process when it receives a formal
                          request from an outside party—a device manufacturer, for instance—or
                          when CAG internally identifies the need to consider coverage.17 CAG
                          internally identifies the need for national coverage policies under several
                          circumstances—for example, when a procedure or device is seemingly
                          being used inappropriately, controversy exists about its clinical benefit, or
                          new evidence of clinical effectiveness is available. Once CAG accepts a
                          request to consider a national coverage policy, it may complete an analysis
                          in-house or seek outside scientific help by requesting a technical
                          assessment, referring the issue to an advisory committee, or both. After
                          conducting its own analysis and reviewing any external input, CAG may
                          arrive at several possible courses of action. (See app. III for more
                          information on the process CMS uses to develop national coverage
                          policies.) These include a national noncoverage policy, which precludes
                          claims administration contractors from making Medicare payment; a
                          coverage policy with specific restrictions; a policy that allows claims

                            In 2001, CMS received 10 external requests for national coverage policies, and CMS staff
                          internally decided to consider 8 additional national coverage policies.

                          Page 8                                                    GAO-03-175 Medicare Coverage
administration contractors to use their discretion when deciding whether
to cover the procedure or device in their service areas;18 or a coverage
policy with no national restrictions. By statute, CMS can issue policies on
national coverage without using the notice and comment rulemaking
procedures required for substantive changes.19

In addition to CMS’s national policies, carriers and fiscal intermediaries
may develop coverage policies that apply to the claims they process, as
long as their policies do not conflict with national coverage policy. Each
contractor has at least one physician who serves as a medical director to
help develop local coverage policies. Medicare claims administration
contractors’ role in determining coverage dates back to 1965, when the
Medicare program was first authorized. At that time, the Congress
arranged for many Medicare operations to be placed in the hands of
private insurers to allow the program to be implemented rapidly by
organizations already processing claims for hospitals and physicians.
Nevertheless, claims administration contractors did not begin to develop
written policies until the late 1970s.

Claims administration contractors develop local coverage policies for a
number of reasons. Local policies specify conditions to automatically deny
inappropriate claims through Medicare’s automated claims processing
systems.20 In addition, contractors may develop local policies to address
their concerns about inappropriate utilization and improper billing for a
particular procedure or device.21 Local coverage policies may specify
acceptable diagnoses, guidelines on use, and documentation requirements.
(See app. IV for more information on the process carriers and fiscal
intermediaries use to develop local policies.)

  Some national policies specifically state that CMS is allowing carriers to use their own
discretion when determining coverage. For example, a coverage memorandum regarding
speech generating devices stated that “carriers. . . will make coverage decisions for claims
for any [of these] devices on either a case-by-case basis or through a local policy.”
 42 U.S.C. § 1395hh(a)(2) (2000).
 Even if the contractor has developed a policy that limits coverage, its medical director
may make an individual coverage decision for a beneficiary with a rare condition or when a
beneficiary has no other treatment options.
  Carriers have also developed local policy at the direction of CMS. For example, CMS
program memorandum AB-01-129, dated September 15, 2001, directed carriers to develop
local medical policies for Doppler flow studies, a test that monitors a patient’s blood flow
and can be used during kidney dialysis.

Page 9                                                      GAO-03-175 Medicare Coverage
                        Unlike other carriers and fiscal intermediaries that are allowed to develop
                        their own local coverage policies, the four DME regional carriers are
                        required to jointly develop and utilize one set of policies. Therefore, DME
                        regional carriers’ policies outlining beneficiaries’ coverage for DME,
                        prosthetics, orthotics, and supplies are identical across the nation. While
                        DME regional carriers develop coverage policy that has national
                        applicability, they follow a policy development process that is similar to
                        that employed by carriers and fiscal intermediaries, as outlined in
                        appendix IV.

                        Overall, Medicare covered most procedures and devices that had been
Medicare Covered        assigned a code for 2001. Medicare’s automated payment systems
Most Procedures and     generally accept, and pay claims for, procedures and devices that have
                        established codes, unless coverage policies have been developed to define
Devices Assigned        or restrict when Medicare will pay for their provision. There were no
Codes in 2001, Often    coverage policies for about one quarter of procedures and devices we
                        studied that were assigned codes in 2001. The remaining codes were
Without National or     affected by national or local coverage policies or both.
Local Coverage Policy
                        We selected for our study 320 codes for procedures and devices issued in
                        2001.22 Of these 320 codes, CMS identified 316 as coverable, and identified
                        only 4—or about 1 percent—as noncoverable.23 The four noncoverable
                        services and devices were a vision screening test, a type of rehabilitative
                        physical exercise for arterial disease that is supervised by a nurse or an
                        exercise physiologist, smoking cessation counseling, and a supportive
                        garment. CMS determined that these services and devices were not
                        allowable according to Medicare statute.

                          A total of 1,146 new codes were added to the HCPCS list for 2001. There were 826 new
                        codes not included within the scope of our study, including 640 codes added to identify
                        items to which special Medicare hospital outpatient payment rates apply; 113 codes
                        developed for private health insurers or Medicaid; and 73 for other services, such as
                        ambulance services, drugs, and blood-related services.
                          In October 2000, CMS identified 11 of the 320 new codes as noncoverable. Subsequently,
                        CMS deemed 7 of these 11 codes as coverable. Specifically, in a national coverage policy
                        that became effective in April 2001, CMS outlined conditions under which contractors
                        could cover 4 of these codes used to bill for intestinal transplantation procedures. CMS
                        also issued instructions that 3 codes for medical nutrition therapy could be covered after
                        the Congress specified such therapy in statute as a Medicare benefit, effective January
                        2002. Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000,
                        Pub. L. No. 106-554, app. F, § 105, 114 Stat. 2761, 2763A-471.

                        Page 10                                                   GAO-03-175 Medicare Coverage
We found that, as of May 2002, there were no coverage policies for 25
percent of the 316 coverable new codes for procedures and devices, and
26 percent were affected by a national coverage policy. For example,
national policy permitted a new battery-powered piece of inhalation
therapy equipment to be covered only for patients with severely impaired
breathing ability. To implement national coverage policies, contractors
sometimes develop local coverage policies to provide more detailed billing
requirements.24 As table 1 shows, 16 percent of the 2001 codes for
procedures and devices that were affected by national policy also had
local policy developed by claims administration contractors.

Table 1: Number and Percent of the New Coverable Procedure and Device Codes
for 2001 That Were Affected by National or Local Coverage Policy

 Type of coverage policy       Number of codes affected       Percent of codes affected
 National only                                       33                              10
 Both national and local                             50                              16
 Local only                                         154                              49
 No policy                                           79                              25
 Total                                              316                             100

Source: GAO analysis.

In the absence of a national coverage policy, contractors have broad
discretion to develop local coverage policies that can define or restrict
coverage for new procedures and devices. About 65 percent of the 316
new codes for procedures and devices were included in at least one local
coverage policy that had been created by at least one claims
administration contractor.25 For example, in the absence of a national
coverage policy, as of December 2002, three carriers and two fiscal
intermediaries had developed local coverage policies to define or restrict
coverage for a new, minimally invasive surgery for abdominal aortic

 For example, when a national policy indicates a procedure is covered, claims
administration contractors can supplement the policy by adding conditions that must be
met, the only acceptable diagnoses for billing, or the frequency with which the procedure
can be provided as a covered service.
 We conducted this analysis in August 2002 by searching for the codes on LMRP.net. If a
contractor revised its policies to update them with new codes and published the revisions
on its local Web site, but neglected to update LMRP.net, such revisions would not appear in
our analysis.

Page 11                                                   GAO-03-175 Medicare Coverage
                      While local coverage policies affected about 65 percent of the new codes
                      for procedures and devices, each individual contractor’s policies generally
                      affected only a small number of the new codes. For example, we found
                      that—on average—individual carriers had policies that affected 8 percent
                      of the 316 procedure and device codes. Further, some of the new codes
                      were incorporated into local policy by only one single-state carrier. For
                      example, Blue Cross Blue Shield of Montana was the only carrier to
                      develop a local policy that outlined how to bill for a new code for venous
                      access catheters, which affected coverage only for beneficiaries in
                      Montana. Similarly, HGSAdministrators was the only carrier to establish a
                      local policy that outlined coverage for new codes involving certain
                      cochlear implantation procedures, which affected coverage only for
                      beneficiaries in Pennsylvania.

                      Allowing carriers and fiscal intermediaries to make local coverage policies
Variations in Local   leads to different treatment for beneficiaries in different locations and to
Coverage Policies     inefficiencies due to duplication in contractors’ policy-making efforts.
                      Because the authority to make local coverage policies is divided among
Lead to Program       carriers and fiscal intermediaries, Medicare can cover a procedure for a
Inequities and        beneficiary receiving care in one locality and not cover that procedure for
                      a beneficiary with a similar medical condition being treated in another
Inefficiencies        location. Further, because more than one fiscal intermediary can pay part
                      A claims for hospitals in a given area, Medicare can cover a procedure for
                      a specific diagnosis in one hospital, but not in another hospital in the same
                      local area. Local policy development is also inefficient because carriers
                      and fiscal intermediaries duplicate many of the steps—such as identifying
                      and assessing the medical literature to determine if the procedure or
                      device has clinical benefit—taken by other carriers or fiscal intermediaries
                      that have developed policies on the same procedures and devices. Despite
                      these problems, some groups still support coverage policy developed at
                      the local level.

                      Page 12                                          GAO-03-175 Medicare Coverage
Local Coverage Policy        Because CMS gives claims administration contractors discretion to
Leads to Coverage            determine coverage and develop local coverage policy, beneficiaries’
Variations that Can Affect   coverage for specific procedures and devices varies nationwide. One
                             recent example of the impact on beneficiaries involves a surgical
Beneficiaries’ Access to     treatment—called deep brain stimulation (DBS)—for tremors associated
Treatment                    with the two most common neurological disorders.26 DBS may produce
                             significant improvement in physical functioning for people suffering from
                             severe, debilitating tremors that can no longer be controlled by
                             medication.27 There are two kinds of DBS—unilateral brain stimulation of
                             the thalamus and bilateral stimulation of other brain structures. Bilateral
                             DBS can help reduce the typically more debilitating symptoms of
                             Parkinson’s disease, including stiffness and slowness. According to a
                             survey of carriers we conducted, Medicare coverage of bilateral DBS
                             varied considerably. (See fig. 1.) As of July 31, 2002, carriers serving 30
                             states and part of another covered bilateral DBS, while carriers did not
                             cover this procedure in 10 states and the District of Columbia. In 9 states
                             and part of another, carriers indicated that they might approve the
                             procedure on a case-by-case basis. For example, in Missouri, where two
                             carriers serve different parts of the state, bilateral DBS was covered in the
                             western part of the state and was covered on a case-by-case basis in the
                             eastern part.

                               Essential tremor and Parkinson’s disease are the two most common neurological
                             disorders. Essential tremor affects about 1.5 million Americans; Parkinson’s disease affects
                             about 1 million. Tremor is a common symptom of both, but Parkinson’s disease also causes
                             rigidity, slowness of movement, and poor balance.
                              One device manufacturer estimated that about 85,000 individuals with Parkinson’s disease
                             and 5,000 individuals with essential tremor are candidates for treatment with DBS.

                             Page 13                                                    GAO-03-175 Medicare Coverage
Figure 1: Carrier Coverage for Bilateral DBS by State, as of July 31, 2002

                                          In October 2001, a beneficiary with Parkinson’s disease requested that
                                          CMS issue a national coverage policy on bilateral DBS. At the time of his
                                          request, the beneficiary was not covered for bilateral DBS because he
                                          lived in Texas, where the carrier did not cover this surgery.28 On April 1,

                                            The carrier began to cover this surgery on August 12, 2002.

                                          Page 14                                                    GAO-03-175 Medicare Coverage
2003, CMS implemented a national policy that covered DBS for all
beneficiaries who meet certain coverage criteria.

While a national coverage policy will help ensure consistent bilateral DBS
coverage, variations in coverage continue to be a concern for beneficiaries
needing other procedures. For example, carriers vary in their coverage for
tumor assay tests that are used to diagnose or monitor the response to
treatment of cancer and were assigned codes in 2001. Carriers in Florida
and New Jersey have local policies that clearly prohibit coverage for one
of these tests because they do not consider its clinical benefits to be
proven. In contrast, carriers in other states—such as Rhode Island and
Pennsylvania—cover this test for physicians to monitor the course of
disease in patients with established diagnoses of certain types of cancers.
In 2001, Medicare paid over $382,000 for this tumor assay test in 38 states.29

We also found that part B coverage for treatment options can differ even
for beneficiaries who are treated in the same state and are served by the
same carrier. One reason that policies may vary within a carrier’s service
area is that, since 1990, more than 40 percent of Medicare carriers have
left the program. As of October 2002, 11 of the remaining carriers have
assumed responsibilities for administering their claims. For example, prior
to December 1, 2000, National Heritage Insurance Company (NHIC) served
northern California and another carrier served southern California. After
NHIC assumed responsibility for claims administration in southern
California, NHIC staff assessed local policies in its jurisdiction to
understand the extent to which its policies varied. Our analysis of NHIC’s
data found that 38 percent of southern California’s policies were not
shared by northern California in September 2001. (See table 2.)30 We found
that northern and southern California still had varying local coverage
policies as of October 2002, including the examples in table 2.

 Based on claims analysis from part B summary data for 2001 claims extracted as of
June 5, 2002.
  Until recently, beneficiaries in northern and southern California suffering from essential
tremor and Parkinson’s disease were covered differently for DBS. In June 2002, NHIC
consolidated local policies in northern and southern California to cover bilateral

Page 15                                                     GAO-03-175 Medicare Coverage
Table 2: Variations in Local Coverage Policies in Northern and Southern California

                                         Number of       Percent of
                                                local          local
                                           coverage       coverage
                        Total local         policies       policies Examples of local
                         coverage     limited to one limited to one coverage policies
 Region                   policies            region         region limited to one region
 Northern                        80                22             28 • Whole body bone
 California                                                            and/or joint imaging
                                                                     • Extracapsular cataract
 Southern                      145                 55             38 • Audiology testing
 California                                                          • Pap smear, diagnostic
                                                                     • Vagus nerve
                                                                       stimulation for

Source: GAO analysis.

Coverage policies for part A services can also vary within each state
because hospitals and other part A providers can choose their fiscal
intermediary. As a result, different fiscal intermediaries may serve
providers in the same state, or even in the same city. This can result in
differential coverage of a procedure, if two fiscal intermediaries in the
same state have differing policies. For example, the two fiscal
intermediaries who pay hospital claims in Kansas each have local
coverage policies on a specific type of cataract surgery. However, these
policies are not identical. One fiscal intermediary’s policy lists covered
diagnoses that are not listed as covered in the other fiscal intermediary’s
policy, which leads to differences in claims payment.

Further, CMS does not require carriers and fiscal intermediaries that pay
claims for services and items in the same geographic area to develop
similar local coverage policies, even for the same treatments. This can lead
to differences in coverage depending on location of service, such as
whether a procedure is performed in a doctor’s office and paid by the
carrier, or performed in a hospital outpatient department and paid by the
fiscal intermediary responsible for that hospital’s claims.

Page 16                                                        GAO-03-175 Medicare Coverage
Duplicative Efforts to                  Allowing individual carriers and fiscal intermediaries to develop their own
Develop Local Policies by               policies results not only in instances of inequitable coverage, but also is
Carriers and Fiscal                     inefficient as each contractor takes parallel steps to develop policies on
                                        similar topics. For example, eight carriers have developed local coverage
Intermediaries Result in                policies for a method of measuring changes in heartbeats on an
Program Inefficiencies                  electrocardiogram, which are a possible harbinger of sudden cardiac
                                        death. Further, two fiscal intermediaries have developed local coverage
                                        policies for a new, minimally invasive treatment for abdominal aortic
                                        aneurysms, and four fiscal intermediaries have developed policies for
                                        upper gastrointestinal endoscopy, which is a procedure using a lighted
                                        tube to visualize the esophagus, stomach, and part of the small intestine.

                                        We identified duplicative efforts to develop policies for procedures and
                                        devices assigned codes in 2001 among the four carriers that we visited. As
                                        table 3 shows, we found that for six procedures, two carriers
                                        independently developed or revised their own coverage policies. For
                                        example, two carriers each developed new local coverage policies for a
                                        procedure to graft tissue-cultured skin, called bilaminate skin substitute.

Table 3: Local Coverage Policies for Procedures with New Codes Developed or Revised by Four Carriers in Four States

                                                            Blue Cross Blue           Noridian        CIGNA HealthCare
                                       National Heritage    Shield of Rhode        Administrative         Medicare
                                     Insurance Company           Island               Services         Administration
 Procedure addressed by local
 coverage policy                       Massachusetts          Rhode Island            Nevada              Tennessee
 Bilaminate skin substitute                 X                                                                 X
 Percutaneous vertroplasty                  X                                                                 X
 Endoscopic ultrasonography, upper
 gastrointestinal tract                       X                                          X
 Ocular photodynamic therapy                  X                                          X
 Magnetic resonance angiography                                     X                                         X
 Immunoassay for tumor antigen                                      X                                         X

Source: GAO analysis.

                                        Although the carriers we visited attempt to build on the work of others or
                                        adapt policies developed by individual or groups of carrier medical
                                        directors, they still often duplicate research efforts. Each carrier
                                        ultimately has to arrive at, and justify, its own coverage policy, which
                                        means that the carrier medical director and other staff must review the
                                        evidence and other related policies. Each carrier also takes parallel steps
                                        to complete the process required to adopt the policy, such as consulting
                                        with experts, holding public and carrier advisory committee meetings,

                                        Page 17                                              GAO-03-175 Medicare Coverage
                            responding to input received, and posting draft local coverage policies on
                            the carrier’s Web site.31

                            Each contractor that develops policy must devote staff time to this
                            activity. One multistate carrier we visited developed or revised 21 policies
                            in fiscal year 2002, which was a full-time task for a registered nurse, with
                            help from one of the carrier’s medical directors and support staff. This
                            carrier reported that its medical directors generally commit 10 to 30
                            percent of their time to policy development. Medical directors at other
                            carriers also reported committing significant amounts of their time to
                            developing policy. One carrier medical director told us that, because his
                            resources for evidence gathering are limited, he often relies on physicians
                            and suppliers for evidence even though he knows this could bias the
                            selection of information to be considered.

                            Lack of information and communication from CMS regarding the
                            development of national coverage policies has resulted in wasted local
                            policy development efforts. Two medical directors stated that there are no
                            designated points of contact at CMS headquarters and no established
                            channel of communication between them and CMS staff who make
                            national coverage policies. According to one carrier medical director, in
                            the absence of detailed information on the status of CMS’s efforts to
                            develop a national policy on ocular photodynamic therapy, which is a new
                            procedure that uses a laser-activated drug to treat macular degeneration,
                            the carrier developed its own policy. Overall, to clarify their coverage,
                            eight carriers developed local coverage policies for this treatment, which
                            could have affected beneficiaries in 23 states and a portion of another
                            state. While these carriers were obtaining comments on their draft
                            policies, in November 2000 HCFA issued a national coverage policy on this
                            therapy for beneficiaries with certain types of eye lesions.

Some Groups Contend that    While critics view variations in local coverage policy as inequitable
Local Coverage Policy has   treatment of beneficiaries, device manufacturers’ representatives, some
Benefits                    physicians and physician groups, and claims administration contractors
                            stated that the local coverage process has benefits. For example,
                            supporters indicated that the local process results in coverage policy being

                             DraftLMRP.net, a CMS-sponsored Web site, allows the public to view draft local policies
                            of carriers, DME regional carriers, and fiscal intermediaries posted to their Web sites
                            during the required comment period.

                            Page 18                                                  GAO-03-175 Medicare Coverage
made more rapidly than in the national process. However, comparative
timeliness information is difficult to generate because claims
administration contractors and CMS track different key dates for their
processes. For example, CMS reports the date when a national coverage
policy is requested and the agency’s review is initiated. In contrast,
contractors report the date that a draft local policy is released for
comment—a point further along in the process than the initial request date
tracked in the national process. Nevertheless, certain features of the local
process may allow it to respond quickly in expanding coverage. For
example, claims administration contractors can follow an expedited
process when they expand coverage, such as when they add new
diagnoses as coverable in an existing policy.

Supporters of local coverage policy have also argued that the steps
Medicare claims administration contractors take to consult with
physicians and the DME industry are a positive characteristic of the local
process. As appendix IV shows, when contractors propose a new or more
restrictive local coverage policy, carriers’ and DME regional carriers’
advisory committees32 routinely review and comment on draft local
policies33 and contractors hold public hearings about proposed policies.
Further, all contractors post draft policies on their Web sites and on a
centralized Web site, draftLMRP.net, and inform the public of how to
comment on draft policies and the closing dates for comments.34 Carrier
medical directors, who regularly consult with practicing physicians on
draft policies, told us that such consultations help them avoid unintended
consequences, which might be obvious to practicing physicians or others,
and could be beneficial for CMS.

 Carriers’ advisory committees are composed of physicians, a beneficiary representative,
and representatives from other medical organizations. DME regional carriers’ advisory
work groups consist of physicians, other clinicians, beneficiaries, suppliers, and
 Fiscal intermediaries may have advisory committees, but CMS does not require them to
do so.
 Claims administration contractors can expand coverage without such consultation—for
example, they can add additional diagnoses for which a treatment would be considered
medically necessary.

Page 19                                                  GAO-03-175 Medicare Coverage
                           Developing national policy creates more consistent coverage for
National Coverage          beneficiaries because it applies to all beneficiaries regardless of their
Policy Adds                treatment location. Further, because national coverage policy does not
                           vary depending on location, it can be communicated more easily to
Consistency, But           physicians, other providers, suppliers, and the general public. However,
Current Policy             concerns have been expressed about the openness, understandability, and
                           slow pace of the national coverage process, and CMS has attempted to
Development Process        improve it—for example, by publishing the steps it takes to make national
Could Be                   coverage policies35 and issuing coverage memorandums that outline the
Strengthened               evidence considered to arrive at its policies. Nevertheless, some problems
                           persist, such as the lack of consistent public, expert, or practitioner input
                           on proposed coverage changes.

National Coverage Policy   Developing coverage policy with national applicability promotes coverage
Promotes Programmatic      consistency because it applies to all beneficiaries regardless of where they
Consistency                receive treatment. Across the country, beneficiaries, physicians, other
                           providers, and suppliers already have consistent coverage policies for
                           DME, prosthetics, orthotics, and medical supplies because DME regional
                           carriers develop identical policies. Companies providing DME in multiple
                           states can do so knowing that one set of coverage rules applies. In
                           addition, coverage for many laboratory services is subject to more
                           consistent policies. The Balanced Budget Act of 1997 mandated that HCFA
                           establish national coverage policies for laboratory tests36 and, as of
                           November 2002, over 40 percent of laboratory services currently billed to
                           carriers were subject to national coverage policies.

                           Having national coverage policy simplifies coverage for providers who
                           serve beneficiaries in multiple states. In its report on Medicare laboratory
                           payment policy, the Institute of Medicine noted that Medicare’s current
                           administration of laboratory claims through its carriers and fiscal
                           intermediaries created inconsistency in the interpretation of policy and
                           procedures and led to variable interpretations of medical necessity for the
                           same tests given under the same circumstances in different locations.
                           These inconsistencies created particular problems for laboratories that
                           performed tests on specimens drawn from beneficiaries in many different

                            64 Fed. Reg. 22,619 (Apr. 27, 1999).
                            Pub. L. No. 105-33, § 4554(b), 111 Stat. 251, 461.

                           Page 20                                               GAO-03-175 Medicare Coverage
states, because the laboratories had to deal with differing policies and
procedures for similar claims.37

Although national coverage policy could lead to greater programmatic
consistency, Medicare still allows local variations in the application of its
national policies. For example, HCFA issued a memorandum on national
coverage of a noninvasive diagnostic test to measure heart function in
1998.38 The national coverage policy stated that Medicare would cover the
test for beneficiaries with suspected or known cardiovascular disease.
Some carriers chose to clarify this broad coverage description in order to
automate claims denial by specifying the appropriate diagnoses and the
diagnostic codes that would indicate medical necessity for performing this
test, while other carriers did not. As a result, a beneficiary in Tennessee
diagnosed with “shortness of breath” could have the test covered by
Medicare, whereas a beneficiary with the same diagnosis in Michigan
would not have the test covered.

We and others have recommended that CMS work toward a more
consistent coverage approach. In 1996, we reported that carriers differed
in their policies for six groups of medical procedures that could be
inappropriately used.39 As a result, we recommended that the agency
analyze expensive and inappropriately used services, identify local
coverage policies for these services, and work with claims administration
contractors to develop more consistent policies for them. Since then, the
agency has encouraged claims administration contractors to develop
policies to address expensive and inappropriately used services. More
recently, the Medicare Payment Advisory Commission recommended that
the local coverage policy-making process be abolished in favor of a single
national process in order to develop more consistency in the program.40
The commission noted that eliminating local coverage policies would
reduce the current complexity, inconsistency, and uncertainty in the

 Institute of Medicine, National Academy of Sciences, Medicare Laboratory Payment
Policy: Now and in the Future (Washington, D.C.: 2000).
 HCFA issued its coverage memorandum on this test—cardiac output monitoring by
electrical bioimpedance—on September 22, 1998, with coverage effective for services
performed on or after July 1, 1999.
  U.S. General Accounting Office, Medicare: Millions Can Be Saved by Screening Claims
for Overused Services, GAO/HEHS-96-49 (Washington, D.C.: Jan. 30, 1996).
 Medicare Payment Advisory Commission, Reducing Medicare Complexity and
Regulatory Burden (Washington, DC: December 2001).

Page 21                                                 GAO-03-175 Medicare Coverage
                               Medicare program, along with the associated burden on providers and

Concerns Remain about          Over the years, the agency’s national coverage process has been criticized
the Openness,                  for its lack of openness, lack of understandability, and slow pace. Critics
Understandability, and         have stated that the national coverage process was not open because
                               meetings of scientific experts and clinicians advising the agency were not
Timeliness of CMS’s            open to the public. Further, they have charged that the process was not
National Coverage Process      understandable because the steps that the agency followed were not clear.
                               In the late 1990s, the agency acknowledged that its advisory committee
                               structure had flaws, its process was not always clear and understandable
                               to outside parties, and its progress in developing policies was not easy to
                               follow. To address these problems, the agency began developing a new
                               coverage process. However, we found that the new national process
                               1) does not routinely provide for consultation with experts or allow the
                               public to comment on draft policies, 2) is conducted without clear criteria
                               to guide policy making and make it more understandable to interested
                               parties, and 3) generally does not meet agency-set time frames.

CMS Developed Its New          One of the first steps the agency took to make its national coverage
National Coverage Process to   process more open was to establish a new advisory committee. In 1993,
Address Concerns about         HCFA had created the Technology Advisory Committee to provide it with
Openness and                   expert advice concerning whether Medicare should cover specific
Understandability              technologies on a national basis.41 This panel included officials from
                               HCFA, employees from other agencies within HHS, and carrier medical
                               directors. However, under the Federal Advisory Committee Act,
                               committees that include members who are not government employees and
                               provide expert advice to the federal government are required to do so
                               through open public meetings.42 Because the Technology Advisory
                               Committee included carrier medical directors employed by private sector
                               companies, the committee did not fall within the exception in the act for
                               advisory committees made up wholly of government employees. In 1998,
                               we found that, because meetings of the committee had been closed, the

                                 The Technology Advisory Committee was formed by merging two earlier advisory groups,
                               the Physicians Panel, which HCFA established in 1980, and the Coverage/Payment
                               Technical Advisory Group, which HCFA established in 1983.
                                5 U.S.C. App. 5, § 10(a) (2000).

                               Page 22                                                GAO-03-175 Medicare Coverage
Technology Advisory Committee was in violation of the Federal Advisory
Committee Act.43

To make its advisory process more open and understandable, in 1998
HCFA established a new group—MCAC. When CMS chooses to ask MCAC
for assistance, MCAC conducts open, public meetings to assess the
scientific and clinical evidence of the effectiveness and appropriateness of
services and items, such as DME, which are covered or eligible for
coverage under Medicare.44 The committee—with up to 120 members
divided into specialty panels—includes experts in a broad range of
medical, scientific, and other professional disciplines, as well as consumer
and industry representatives as nonvoting members. MCAC does not
advise CMS as to whether Medicare should cover a service or item.
Instead, it discusses medical literature, technical assessments, and other
information on the clinical effectiveness of medical services and items,
and advises CMS on whether there is sufficient evidence to show that a
service or item leads to an appropriate health outcome. When CMS uses
MCAC assistance, interested parties have access to public meetings and
transcripts, which can help make CMS’s final coverage policy more
understandable to them.

To further enhance openness and understandability, CMS routinely
publishes technical assessment reports on procedures and devices that it
is considering for coverage. Technical assessment reports are written
evaluations of the clinical usefulness of medical interventions, based on a
systematic review of the literature and a synthesis of the data from
multiple studies. In December 1999, CMS instituted an agreement with
HHS’s Agency for Healthcare Research and Quality to obtain, as needed,
technical assessment reports. The Agency for Healthcare Research and
Quality generally contracts for technical assessments to be conducted by
academic or research centers that specialize in evaluating medical
evidence. CMS decides, on a case-by-case basis, which issues will be

 U.S. General Accounting Office, Office of the General Counsel, B-278940 (Washington,
D.C.: Jan. 13, 1998).
 The first meeting of MCAC took place in September 1999. MCAC meets on a varying
schedule, depending on requests for coverage policies.

Page 23                                                 GAO-03-175 Medicare Coverage
                                referred to MCAC, to the Agency for Healthcare Research and Quality for
                                an outside technical assessment report, or to both.45

                                CMS took other steps to make its national coverage process more open
                                and understandable. In January 1999, the agency created a Web site that
                                provides information on pending and final national coverage policies—
                                including a tracking sheet that indicates the dates key actions were taken,
                                such as referral to MCAC for a review of clinical evidence, and coverage
                                memorandums that explain CMS’s rationale in making a particular policy.46
                                In addition, in April 1999, to help the public understand its new process,
                                the agency published a notice in the Federal Register outlining the
                                procedural steps it would take in developing a national coverage policy.47
                                CMS also noted that it would reconsider coverage policies based on new
                                scientific and medical information. This has allowed individuals to
                                challenge earlier coverage policies. Such challenges have been the most
                                common reason for external requestors to seek a national coverage policy.
                                In fiscal years 2000 and 2001, there were 12 external requests for CMS to
                                review a previously adopted policy, compared to 5 external requests to
                                create a policy for a new item or service.

National Coverage Process Not   CMS has taken significant steps to improve its policy making through its
Always Open to Experts and      new national coverage process. Nevertheless, the national process is not
the Public                      always open to outside scientific experts, practicing clinicians,
                                beneficiaries, and others. CMS does not publish its draft national coverage
                                policies, and it does not always consult with MCAC, specialty or practicing
                                physician groups, and other experts when developing national coverage

                                While CMS has recently taken steps to obtain comments on national
                                policies as they are being developed, CMS does not post draft national
                                coverage policies on its Web site or use other means to obtain and
                                incorporate relevant input on draft policies before making them final.
                                Beginning in October 2001, CMS was required by law to ensure that the

                                  The agency is currently developing guiding principles that will help it determine when
                                referrals for technical assessment reports, MCAC assistance, or both should be made.
                                  In December 2002, CMS launched a Medicare coverage database, which allows users to
                                search for national coverage policies, documents related to national coverage policies, and
                                local coverage policies. The database may be accessed at
                                 64 Fed. Reg. 22,619 (Apr. 27, 1999).

                                Page 24                                                    GAO-03-175 Medicare Coverage
public is afforded notice and opportunity to comment prior to
implementation of a national coverage policy.48 CMS has not published a
Federal Register notice revising its procedural steps to indicate how this
notice and opportunity to comment will be provided. An agency official
noted that the public may check on the status of national coverage policies
that are being developed on the agency’s Web site and may submit
comments to CMS at any point in the policy development process. CMS
noted on its Web site that, for each national coverage policy requested
since April 2002, a 30-day comment period would occur starting from the
date of the request. However, because the agency does not publish its draft
national coverage policies, this comment process does not afford the
public the opportunity to review them. Furthermore, the comment process
does not require CMS to address in the public record any comments it has
received before contractors implement the final policy.

Furthermore, CMS does not always openly consult with outside experts
when developing national coverage policies. While MCAC provides a
vehicle for CMS to obtain advisory opinions in an open forum, CMS has
used the MCAC for less than one-sixth of its national coverage policies.
CMS indicated that it calls upon the MCAC when CMS deems the evidence
to be more difficult to assess or when the coverage issue is controversial
or has potential to have a major impact on the Medicare program. Since
MCAC was established, CMS has requested its input for 9 of the 55
completed policies on national coverage—about 16 percent.49 When CMS
chooses not to ask for MCAC’s views, there is no other provision for an
open public discussion. And, when MCAC is not used, it is also not clear to
the public how CMS is evaluating clinical evidence until the agency
publishes a coverage memorandum explaining the rationale for the final

Finally, while CMS sometimes contracts with the Agency for Healthcare
Research and Quality for technical assessment reports, it does not
routinely obtain input from other HHS agencies that could provide

 BIPA § 522(b) and (c), 114 Stat. 2763A-546.
 MCAC was established on December 14, 1998. As of July 31, 2002, CMS had published 55
national coverage memorandums pertaining to requests after January 1, 1999.

Page 25                                                GAO-03-175 Medicare Coverage
expertise, such as FDA.50 Because FDA considers evidence on safety and
effectiveness before approving medical devices and drugs for marketing,
routinely consulting with FDA officials who are familiar with such
evidence could provide additional insight on coverage issues for CMS.
However, when we began this review, FDA officials we interviewed
reported little contact with CMS staff working on coverage matters. CMS
officials responsible for coverage matters also reported having limited
contact with FDA. However, during our review, CMS and FDA officials
met to discuss how to coordinate more effectively, while allowing FDA to
protect proprietary information that companies have provided to it during
the course of its review.

CMS and FDA officials agreed that closer communication with FDA about
its reviews of particular devices and drugs could prove beneficial to—and
lack of coordination could hinder—CMS coverage policy making. For
example, in October 2001, CMS announced that it intended to cover ocular
photodynamic therapy, a laser procedure that requires a light-sensitive
drug, for patients with a certain type of age-related macular
degeneration—a disease that can cause blindness. However, FDA had not
added treatment for this type of macular degeneration as a labeled use of
the drug. After its October 2001 announcement, CMS developed concerns
about the underlying data from the clinical trial upon which the policy was

 Medicare generally will not cover new medical devices or drugs, or procedures that
depend on new devices or drugs, until after FDA has approved the devices and drugs for
marketing. However, FDA approval does not guarantee Medicare coverage because the
Medicare statute requires that services and items fit into one of Medicare’s benefit
categories and be reasonable and necessary for beneficiaries’ care in order to be covered.

Page 26                                                   GAO-03-175 Medicare Coverage
based. After reconsideration, CMS rescinded its memorandum on
coverage for beneficiaries with this type of the disease.51

Recognizing the importance of having CMS work effectively with FDA, in
November 2002 the HHS Secretary’s Advisory Committee on Regulatory
Reform52 issued a report that included five recommendations for
improving interagency coordination, collaboration, and communication
relating to new medical device technologies.53 One of the
recommendations was to establish a process, with input from affected
stakeholders, to enable early coordination between FDA and CMS.
Further, the Advisory Committee recommended that, when appropriate,
FDA and CMS should have parallel reviews, thereby promoting more
timely patient access to innovative therapies. Such a parallel review could
have CMS consult with device manufacturers during the design of a
clinical trial developed under FDA auspices, so that the clinical trial could
address issues of concern for both CMS and FDA.

  Ocular photodynamic therapy is a new treatment that uses a light-sensitive drug to guide
a laser. On November 8, 2000, HCFA issued a memorandum announcing its intent to cover
this therapy for patients with predominantly classic lesions in the eye. In May 2001, The
Vitreous Society formally requested that HCFA also cover this treatment for patients with
nonclassic lesions. On October 17, 2001, CMS issued a memorandum describing its intent
to cover ocular photodynamic therapy for patients with nonclassic lesions, based on the
results published in a clinical trial. FDA had not approved this use of the drug as a labeled
use in the procedure for patients with nonclassic lesions. Because the drug had been found
to be safe and effective for patients with classic lesions, physicians could still use the drug
“off-label” for patients without classic lesions. Soon after CMS issued its October 2001
memorandum indicating that it intended to cover this therapy for patients with nonclassic
lesions, the agency decided to reconsider its stance. On March 28, 2002, CMS issued a new
memorandum that rescinded the October 2001 memorandum on covering patients with
nonclassic lesions, but maintained the coverage granted in November 2000 for those with
classic lesions.
  On June 8, 2001, the HHS Secretary announced a departmentwide initiative to reduce
regulatory burdens in health care and respond faster to the concerns of health care
providers, state and local governments, and individuals who are affected by HHS rules. As
part of this initiative, HHS established the Secretary’s Advisory Committee on Regulatory
Reform to provide findings and recommendations regarding potential regulatory changes
that would enable its programs to reduce burdens and costs associated with the
department’s regulations, while at the same time maintaining or enhancing effectiveness,
efficiency, impact, and accessibility.
 Department of Health and Human Services, Bringing Common Sense to Health Care
Regulation: Report of the Secretary’s Advisory Committee on Regulatory Reform (Nov.
21, 2001).

Page 27                                                      GAO-03-175 Medicare Coverage
Lack of Clear Criteria Raises   Critics of the national coverage process have also been concerned that the
Concerns about                  basis for CMS’s policies was not understandable, and this continues to be
Understandability of National   a problem. The fundamental question in determining whether Medicare
Coverage Process                should cover a new procedure or device is whether it is “reasonable and
                                necessary” for Medicare beneficiaries. However, the agency has not
                                published the criteria that it uses in the national process to determine
                                whether a service or item is reasonable and necessary, nor has it provided
                                information that outlines the evidence needed to demonstrate that a
                                procedure or device is clinically beneficial.54

                                In May 2000, HCFA published a notice of intent to develop a regulation
                                addressing the criteria for making coverage policies.55 This was not the
                                agency’s first attempt to develop such a regulation. In 1989, HCFA had
                                proposed a regulation that would better define when a service or item was
                                “reasonable and necessary.”56 The agency tried to include cost-
                                effectiveness as part of the criteria, but this issue generated controversy
                                and the proposed rule was never finalized. HCFA’s approach in its May
                                2000 notice of intent was to solicit public input before the agency began
                                developing a proposed rule. In addition to medical benefit, this notice
                                proposed that an item or service would be covered only if it demonstrated
                                “added value”—which meant that it substantially improved health
                                outcomes; provided access to a beneficial, but different treatment option
                                (for example, treating with a covered drug instead of surgery); or could
                                substitute for an existing item or service at an equal or lower cost to the
                                Medicare population. Proposing the “added value” criterion led to
                                resistance, due to concerns that the agency was planning to use cost
                                considerations as a basis for its coverage policies. CMS has not taken
                                further regulatory action to define what criteria it would apply to
                                determine whether a service or item was reasonable and necessary.

                                In response to questions we raised about the criteria it uses in its national
                                coverage process, CMS officials did not cite specific criteria that are used.
                                Instead, they stated that a set of case law criteria was evolving through the
                                national policies they had made, and suggested the criteria could be

                                 In contrast to CMS, FDA has established definitions for the “safety” and “effectiveness”
                                criteria that manufacturers must meet in order to receive FDA approval for a device. FDA
                                has also established standards for the evidence it considers to be valid when deciding
                                whether to approve a device for marketing. 21 C.F.R. § 860.7 (2002).
                                 65 Fed. Reg. 31,124 (May 16, 2000).
                                 54 Fed. Reg. 4,302 (Jan. 30, 1989).

                                Page 28                                                   GAO-03-175 Medicare Coverage
                                inferred from reading the coverage memorandums on the CMS Web site.
                                However, having beneficiaries, physicians, and device manufacturers infer
                                criteria that may apply to coverage policies from coverage memorandums
                                does not substitute for specifying, and making public, clear criteria.
                                Interested parties may not be able to infer the criteria from CMS’s
                                coverage memorandums or may differ in their interpretations. In contrast,
                                the agency has published guidance on criteria in a manual for claims
                                administration contractors to use in developing their coverage policies.
                                These criteria help contractors to determine when a procedure or device
                                that fits into Medicare’s benefit categories and is not excluded from
                                coverage by statute may be covered because it is considered reasonable
                                and necessary. (See app. V.)

                                In addition to not publishing the criteria for its national process, CMS has
                                not published guidance on how it will consider evidence in making
                                national coverage policies. Officials said that they are in the process of
                                preparing guidance to help the public better understand the types of
                                evidence used in making national policies. Agency officials stated that they
                                employ an evidence-based approach in the national coverage process.
                                Using this approach, clinical research results based on a strong
                                methodology are given more weight than other types of evidence. The
                                MCAC advisory input and technical assessments that CMS sometimes
                                obtains are part of its evidence-based approach.

Issues of Timeliness Conflict   The timeliness of the agency’s coverage policy making has been a long-
with Need for Public Input      standing issue. We reported in 1994 that, when complicated clinical issues
                                were involved, it could take HCFA several years to develop national
                                coverage policies.57 Device manufacturers raised the issue of timeliness of
                                the national coverage process again during a hearing before the House
                                Ways and Means Committee in l999.58 HCFA responded to concerns about
                                timeliness by setting time frames for developing national coverage policies
                                in its April 1999 Federal Register notice about its coverage procedures. In
                                this notice, HCFA stated that it intended to respond in writing to
                                requesters of national coverage policies within 90 calendar days of

                                 U.S. General Accounting Office, Medicare: Technology Assessment and Medical Coverage
                                Decisions, GAO/HEHS-94-195FS (Washington, D.C.: July 20, 1994).
                                  Medicare Coverage Decisions and Beneficiary Appeals: Hearing Before the Subcommittee
                                on Health of the House Committee on Ways and Means, 106th Cong. 80-81 (1999)
                                (statement of Walter M. Rosebrough, Jr., on behalf of the Health Industry Manufacturers

                                Page 29                                                GAO-03-175 Medicare Coverage
receiving the request.59 The agency noted that it generally expected to meet
this 90-day time frame and would likely be able to respond in less time if
the coverage issue was supported by clear medical and scientific evidence
and was not complex or controversial. However, the notice further stated
that the time frame could be longer if, for example, at a later time, the
requester submitted subsequent medical and scientific information for
consideration or if the coverage issue was referred to MCAC or required
an outside technical assessment.

In practice, CMS has generally taken considerably longer than the 90-day
goal established in 1999. Our analysis of 55 national coverage policies
showed that only 10 met the 90-day goal.60 Our analysis showed timeliness
differences based on whether the coverage policy requester was an
outside party or within CMS and whether the issue was referred to MCAC
or for a technical assessment. Overall, the agency took an average of about
7½ months to issue a coverage memorandum for the 55 national coverage
policies, with 12 taking a year or more.61 Policies responding to requests

  64 Fed. Reg. 22,619, 22,622 (Apr. 27, 1999). The notice also indicated that the agency
would follow the same procedures and time frames when coverage policy questions were
generated internally. After this notice was issued, BIPA established a new process for
beneficiaries to directly appeal coverage policies. As part of this new coverage policy
appeals process, BIPA also imposed timeliness requirements on the Secretary of HHS for
responding to requests from beneficiaries that he develop coverage policies for an item or
service they need. Specifically, BIPA requires that one of four actions be taken within 90
days: 1) issue a national coverage policy, 2) issue a national noncoverage policy, 3)
determine that no national coverage or noncoverage policy is appropriate, or 4) issue a
notice stating that the review is not complete, identifying the remaining review steps to be
taken, and establishing a deadline by which the review will be completed. On August 22,
2002, CMS issued proposed regulations on BIPA’s new coverage policy appeals process. 67
Fed. Reg. 54,534.
  We analyzed the 55 national coverage policies that were requested after January 1, 1999,
and had a coverage memorandum issued by July 31, 2002. Timeliness data are based on
information posted on CMS’s Web site that indicates the date of request for a national
coverage policy and the date the coverage memorandum was issued. Publishing the
coverage memorandum is the first step to implementing the policy. It has taken up to 9
additional months after publishing a coverage memorandum for CMS to issue the national
instructions that constitute the coverage policy and for the claims administration
contractors to implement necessary payment changes.
  In June 2002, CMS issued a report to the Congress on 10 national coverage policies that
were published and implemented in fiscal year 2001. See Department of Health and Human
Services, Report to Congress on National Coverage Determinations (Washington, D.C.:
June 2002). The report showed that the average time to implement 4 policies without a
technical assessment or MCAC input was 96 days (not including 2 emergency policies
related to coverage of liver transplants) and the average time to implement 4 policies that
had a technical assessment or MCAC input was almost 280 days.

Page 30                                                    GAO-03-175 Medicare Coverage
              that were generated within the agency took longer than those that were
              requested by an outside party—such as a device manufacturer or a
              provider association. There were 28 internal requests, which took an
              average of about 251 days, and 27 external requests, which averaged about
              188 days for CMS to issue a coverage memorandum.62

              Referring a coverage issue to MCAC or requesting a technical assessment
              report added months to the national coverage process. The agency
              requested technical assessments for most issues referred to MCAC to help
              that committee assess the evidence.63 While the 39 policies that were
              processed without outside advice took an average of about 152 days, the
              16 policies that were referred for MCAC advice, a technical assessment, or
              both averaged about 411 days—or over 8 months longer.

              As a national program affecting 40 million beneficiaries, Medicare needs
Conclusions   consistent coverage policies. Giving contractors broad discretion to make
              local coverage policies for procedures and devices has led to inequitable
              variations in coverage for beneficiaries depending on where they are
              treated. In addition, dividing the authority for making coverage policy
              among local contractors has resulted in program inefficiencies. While
              developing policy through a national process offers the advantages of
              consistency and efficiency, concerns remain about the openness and
              timeliness of CMS’s national coverage process. Further, concerns have
              been expressed about the process because the agency has not published
              clear criteria for judging if a particular procedure or device is reasonable
              and necessary for Medicare beneficiaries.

              We believe that a more equitable and efficient way to develop coverage
              policy would be to eliminate development of local policy for procedures
              and devices that have established codes. Instead, Medicare coverage
              policies should be made through a new, single process that develops
              consistent, national coverage policies for procedures and devices. Such a

                Two of the 27 external requests had coverage memorandums dated on the same day they
              were formally requested. Both of these involved temporary coverage of liver transplants in
              nonapproved hospitals during a flooding emergency in Houston, Tex.. When these two
              national coverage policies were excluded from our analysis, the average time frame to
              issue a coverage memorandum for the remaining 25 external requests increased to about
              203 days.
               As of July 31, 2002, all but two national coverage policies that had been reviewed by
              MCAC also had technical assessments.

              Page 31                                                    GAO-03-175 Medicare Coverage
                         process could also examine current local coverage policies on procedures
                         and devices to determine whether these policies should be consolidated
                         into national coverage policies that would be consistent for all
                         beneficiaries or be eliminated.

                         Developing a new national coverage process would require careful design
                         and implementation. The new process should address areas of long-
                         standing concern about openness, timeliness, and clarity of policy making.
                         Key aspects of a new process would include routinely consulting with the
                         public, clinicians, and other experts before finalizing coverage policies;
                         leveraging the expertise of others within HHS, such as those within FDA;
                         and closely adhering to established time frames to improve timeliness of
                         policy issuance. We also believe that CMS needs to develop clear criteria
                         for its national process to make its coverage policies more understandable
                         to others.

                         To ensure that all Medicare beneficiaries are treated equitably, we
Recommendations for      recommend that the Administrator of CMS
Executive Action
                     •   eliminate the ability of claims administration contractors to develop new
                         coverage policies for procedures and devices that have established codes;
                     •   develop and implement a plan to evaluate the merits of all existing local
                         coverage policies that affect procedures and devices with established
                         codes, with the intent of incorporating appropriate aspects of local
                         policies into national coverage policies and eliminating the remainder;
                     •   establish a new process for making national coverage policies that
                         requires public input on draft policies, adheres to time frames, and
                         provides for routine consultation with key HHS and external stakeholders
                         with scientific, clinical, and programmatic expertise; and
                     •   promulgate written criteria for assessing whether a service or item is
                         reasonable and necessary.

                         In its written comments, HHS generally disagreed with our
Agency Comments          recommendations and stated that our draft report did not provide an
and Our Evaluation       adequate analytic basis for our recommendations. (See app. VI for HHS’s
                         comments.) Specifically, HHS said that we did not demonstrate how
                         developing coverage policy nationally would eliminate inequities related to
                         differing coverage in different parts of the country and did not fully
                         explore the weakness of developing consistent national policy for
                         procedures and devices with established codes or the benefits of
                         developing differing local policies.

                         Page 32                                         GAO-03-175 Medicare Coverage
Our report’s findings and recommendations are based on considerable
analytic work. For example, as we noted in our draft report, we assessed
national and local policies that related to procedures and devices assigned
320 new codes in 2001; conducted site visits to four Medicare contractors
that provided a basis for our analysis of the processes they followed to
develop policy and the policies they chose to develop; analyzed the
timeliness and process followed to develop 55 national coverage policies;
and conducted numerous interviews with, and analyzed documents
provided by, CMS and FDA officials, carrier medical directors, experts on
evidence-based medicine, and representatives of beneficiaries, physicians,
and device manufacturers and suppliers. We believe that the evidence
demonstrates that allowing coverage policies to be developed by different
contractors leads to differing policies and inconsistent coverage for
beneficiaries. Such inequities would be addressed by developing all
policies nationally for procedures and devices with established codes. The
draft report acknowledges both the weaknesses in the current national
process and the strengths of the local processes.

In its comments on our specific recommendations, HHS disagreed with
our first recommendation—that CMS eliminate claims administration
contractors’ ability to develop new coverage policies for procedures and
devices that have established codes. The department argued that
developing consistent policy nationally for procedures and devices with
established codes would drastically alter the intended design of the
Medicare program as a regionalized program, remove the Secretary’s
discretion to make coverage policies, and prevent Medicare from testing
new, experimental treatments before enough clinical evidence is available
to warrant national coverage. HHS also stated that CMS did not have the
resources to develop sufficient national policies, so that the
recommendation would increase Medicare payments in future years
because contractors would not be able to prevent overuse of certain
services and items.

In our opinion, developing consistent coverage policies nationally for
procedures and devices with established codes would help modernize
Medicare and is an appropriate role for CMS. As our draft report indicates,
Medicare has already evolved into a program with a decreasing number of
contractors who often serve multiple states and develop policies that are
not specific to one locality’s needs. Implementing our first
recommendation would not remove the Secretary’s discretion over
coverage policies, although it would require greater commitment to
fulfilling this responsibility. Following implementation of our
recommendation, contractors would still be able to develop local policies

Page 33                                         GAO-03-175 Medicare Coverage
for new procedures and devices entering the market and billed under
miscellaneous codes. These coverage policies would allow for
experimentation and could provide a basis for national policy making once
the procedures or devices have codes assigned.

Removing the inefficient, duplicative policy making currently conducted
by 19 carriers and 27 fiscal intermediaries could allow CMS to focus the
$19.5 million allocated to local policy development and additional funds
allocated to national policy development to achieve a more strategic
approach to coverage policy. In addition, because similar types of
improper or abusive billing practices may be taking place in several
localities or may migrate from one locality to another, having consistent
national coverage policies to prevent improper billing or overuse of
services could result in program savings. It is also more equitable for both
providers and beneficiaries. Contractors that have concerns about specific
utilization problems would still have the opportunity to propose new
policies to be adopted nationally. Such national policies would benefit
other contractors that may experience similar utilization problems.

Regarding our second recommendation—which calls for CMS to develop
and implement a plan to evaluate existing local coverage policies, with the
intent of incorporating aspects of them into national policies or retiring
them—HHS agreed that local coverage policies should be evaluated on a
regular basis. It noted that CMS currently requires its contractors to
separately evaluate their own policies. However, HHS did not respond to
the intent of our recommendation, namely that one entity should review
all policies for each procedure and device so that the best policy can be
developed nationwide.

HHS disagreed with our third recommendation, that CMS develop a new
process for making national coverage policies. The department indicated
that, instead, a Federal Register notice will soon be published that
incorporates process improvements and steps that have already been
taken to streamline the MCAC process. HHS also indicated that it routinely
communicates with FDA on coverage matters and has extensive contacts
with experts at the National Institutes of Health.

As we recognized in our draft report, CMS has made improvements in its
current national process. Because information on its newest planned
process improvements has not been published, we cannot comment on
whether these changes will fully address long-standing concerns about the
openness, understandability, and timeliness of its policy making. CMS has
made progress by streamlining the MCAC decision process and is working

Page 34                                         GAO-03-175 Medicare Coverage
to improve its coordination with FDA. We believe that communication
with FDA should be an integral part of the development of each Medicare
coverage policy that involves drugs and devices, or procedures that rely on
drugs and devices.

HHS disagreed with our fourth recommendation, which would require
CMS to publish written criteria it would use to assess whether a service or
item is reasonable and necessary. The department said it relies on
publishing the rationale for each coverage policy: that is, it uses a case law
approach and does not presently plan to engage in rule making on this
subject. HHS is considering other options that might be helpful, but is not
planning to issue guidance that would serve as written criteria. As a
national program of great significance, we believe Medicare should be
transparent in the criteria it uses for interpreting whether a service or item
is reasonable and necessary and can be covered.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after its
issue date. At that time, we will send copies of this report to the Secretary
of HHS, the Administrators of CMS and FDA, appropriate congressional
committees, and other interested parties. We will also make copies
available to others on request. In addition, the report will be available at
no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please call me at
(312) 220-7600 or Sheila K. Avruch at (202) 512-7277. Other key
contributors to this report are listed in appendix VII.

Sincerely yours,

Leslie G. Aronovitz
Director, Health Care—Program
 Administration and Integrity Issues

Page 35                                            GAO-03-175 Medicare Coverage
             Appendix I: Scope and Methodology
Appendix I: Scope and Methodology

             To assess the extent that new procedures and devices are incorporated
             into the Medicare program, we analyzed new Current Procedural
             Terminology (CPT) and Healthcare Common Procedure Coding System
             (HCPCS) Level II codes from the HCPCS tape sent to contractors in
             October 2000. This tape included the codes adopted by the American
             Medical Association’s CPT Editorial Panel and the codes adopted by the
             HCPCS National Panel. Most of these new codes became effective on
             January 1, 2001. We selected the codes that represented procedures and
             devices used in a physician’s or allied health professional’s office, or by
             beneficiaries in the home, as well as anesthesia and laboratory services.
             We excluded codes that represented drugs, blood work, ambulance-
             related services, and devices used only in the inpatient hospital setting. We
             did not include codes added to identify items to which special Medicare
             hospital outpatient payment rates apply or codes that the Panel had
             adopted for other insurers, but not Medicare. We also did not analyze the
             extent to which Medicare covered new procedures and devices that were
             not assigned new codes in 2001. For the list of 320 codes in our scope, we
             reviewed the coverage status the Centers for Medicare & Medicaid
             Services (CMS) had given to each code, and we determined whether either
             national or local coverage policies existed in 2002 for these codes. As part
             of our research on local policies, we assessed coverage policies by carrier
             and fiscal intermediary. We analyzed payment data from the Medicare part
             B extract and summary system for the new codes. To determine the
             percentage of Medicare part B payments billed under miscellaneous
             codes, we also analyzed payment data from the Medicare part B extract
             and summary system for HCPCS Level I and II miscellaneous codes and all
             HCPCS codes billed.

             To determine the effect of the local coverage process on beneficiaries,
             carrier and fiscal intermediary efficiency, and stakeholders, including
             device manufacturers and physicians, we interviewed key CMS officials
             and staff and reviewed documents. We conducted site visits at four
             carriers: Blue Cross Blue Shield of Rhode Island, CIGNA HealthCare
             Medicare Administration, National Heritage Insurance Company, and
             Noridian Administrative Services. CIGNA also serves as a durable medical
             equipment (DME) regional carrier and Blue Cross Blue Shield of Rhode
             Island also serves as a fiscal intermediary. We chose these carriers in
             order to include both multistate and single-state carriers and to include
             one carrier that was also a DME regional carrier and one that was also a
             fiscal intermediary. At these site visits, we used a structured protocol to
             interview contractor medical directors and other staff to assess their local
             policy development processes and to document policies developed in
             fiscal years 2000 and 2001. We also analyzed data on local coverage

             Page 36                                          GAO-03-175 Medicare Coverage
Appendix I: Scope and Methodology

policies on LMRP.net, a CMS-sponsored Web site listing local policies by
carrier, DME regional carrier, and fiscal intermediary, and surveyed
carrier medical directors to determine whether deep brain stimulation, a
surgical procedure to treat tremors associated with Parkinson’s disease,
was covered under part B for physicians’ services in each state. This
procedure was selected for study due to variation in its coverage at the
time we did our work.

To evaluate the effects of the national coverage process on beneficiaries
and other stakeholders and to identify concerns about it, we analyzed the
national process in terms of its steps, time frames, criteria and evidence
used, coordination with claims administration contractors, and
coordination with the Food and Drug Administration (FDA) approval
processes. We interviewed experts on evidence-based medicine, CMS and
FDA officials, Medicare Coverage Advisory Committee (MCAC) executive
committee members and MCAC panel members, and representatives of
beneficiaries, physicians, and device manufacturers and suppliers,
including the Center for Medicare Advocacy, AdvaMed, the AARP
Foundation, the Medical Group Management Association, the National
Institute for Health Care Management, the American College of Physicians-
American Society of Internal Medicine, the American College of
Cardiology, the American College of Chest Physicians, the Marshfield
Clinic, and the American Academy of Family Physicians. We obtained their
views on issues related to the national coverage process, such as the
effectiveness of the national process and the implications of the process
for beneficiaries and others. We also observed meetings of the MCAC
executive committee, the MCAC medical and surgical procedures panel,
and the MCAC diagnostic imaging panel, to understand their roles in the
coverage policy-making process, and reviewed MCAC minutes from
selected meetings held in 1999 through 2002, as well as selected meeting
transcripts. We analyzed 55 national coverage policies, which were
requested by external requestors or internally by CMS after January 1,
1999, and had a CMS coverage memorandum issued by July 31, 2002, in
order to determine the amount of time needed and the process used to
make each policy. We also analyzed the support and rationale used to
make some of these policies.

Page 37                                        GAO-03-175 Medicare Coverage
              Appendix II: Coding Assignment Process
Appendix II: Coding Assignment Process

              Figure 2 shows the steps that occur for codes to be added for use in the
              Medicare program. Common Procedure Terminology (CPT) codes are
              used for medical services and procedures furnished by physicians and
              other health care professionals and Healthcare Common Procedure
              Coding System (HCPCS) Level II codes are used for other services,
              products, and supplies. When new codes are added, old codes may need
              to be deleted or revised so that the use of each code is clear.

              Figure 2: Process for Adding, Deleting, and Revising CPT and HCPCS Level II
              Codes for Use in the Medicare Program

                Physicians or others contact the American       Physicians or others, such as device
                Medical Association’s (AMA) CPT Editorial       manufacturers, contact CMS to request a new or
                Panel to request a new or more specific         more specific HCPCS Level II code.
                CPT code.

                CPT Advisors, representing health care          CMS reviews new HCPCS Level II code
                providers, review the code request              requests and presents its recommendation to
                applications.                                   the HCPCS National Panel.

                AMA’s CPT Editorial Panel adds, deletes,         HCPCS National Panel adds, deletes, and
                and revises CPT codes.                           revises HCPCS Level II codes.

                CMS determines if a new CPT or HCPCS Level II code represents a benefit under the
                Medicare statute, and if so, the category of benefit. It also reviews codes to determine whether
                they are associated with any national policy.

                                       CMS compiles a complete list of all codes and
                                       includes any related national policy or
                                       guidance. It sends the list to contractors for

                                       Contractors update payment systems and local
                                       coverage policies to reflect the new codes.
                                       (Most new codes are effective January 1.)

               Source: GAO.

              Page 38                                                          GAO-03-175 Medicare Coverage
              Appendix III: Process That CMS Follows to
Appendix III: Process That CMS Follows to
              Develop National Coverage Policies

Develop National Coverage Policies

                    External request                                            Internal request
                    submitted to CMS                  OR                        submitted by CMS

                                             CMS returns request
                         Results of          - incomplete information
                        CMS review           - requested service is not
                                               a Medicare benefit in statute

                   CMS accepts request
                   (combining duplicate
                   pending requests)

                 Technology                  MCAC considers           CMS assesses clinical evidence
                 assessment                  clinical evidence        without MCAC assistance or
                 of clinical                                          technology assessment

                                             memorandum by

                                          CMS develops                   Contractor implements any
                                          program memorandum             needed changes into claims
                                          or other instructions for      processing systems and local
                                          contractors                    coverage policies

              Source: GAO.

              Page 39                                                      GAO-03-175 Medicare Coverage
              Appendix IV: Process That Carriers and Fiscal
Appendix IV: Process That Carriers and
              Intermediaries Follow to Develop Local
              Coverage Policies

Fiscal Intermediaries Follow to Develop
Local Coverage Policies

                  Providers or others, such as
                  device manufacturers,
                  contact a carrier or fiscal                 Policy                Policy internally
                  intermediary concerning a                   issue                 requested by carrier or
                  coverage matter                           identified              fiscal intermediary staff

                  • Health professionals                                             • Medical literature
                  • Specialty societies                Gather/review data            • Other carrier medical
                  • Other carriers                     and evidence                    director expertise
                  • Other fiscal intermediaries                                      • Carrier advisory
                  • Quality improvement                                                committee members
                    organizations                                                    • Fiscal intermediary
                                                review Draft local
                    (organizations with                                                advisory committee
                    Medicare contracts to                medical policy
                    evaluate treatment quality)                                      • Medical societies
                  • General public                                                   • Other local experts
                                                           Does draft
                                                          policy require
                  Draft local medical                      comment?
                  policy presented to
                  carrier advisory
                                                  Yes, policy restricts coverage
                  committee (local
                  physicians nominated
                                                            Public         No, policy does not restrict coverage
                  by medical societies)
                  or to fiscal intermediary                 hearing
                  advisory committeea
                                            period       Revise draft local
                   Post revised draft                    medical policy in     45-day
                   on carrier’s or fiscal                response to comments; notice           Local medical
                   intermediary’s Web                                          period           policy effective
                                                         publish final local
                   site for comment
                                                         medical policy
              Source: GAO.

              Fiscal intermediaries may have advisory committees, but CMS does not require them to do so.

              Page 40                                                          GAO-03-175 Medicare Coverage
              Appendix V: Coverage Criteria for Medicare
Appendix V: Coverage Criteria for Medicare
              Claims Administration Contractors

Claims Administration Contractors

              Figure 3 shows the coverage criteria published for Medicare claims
              administration contractors to help them determine whether a procedure or
              device is reasonable and necessary. Criteria focus on whether services are
              appropriate and clinically beneficial. Contractor guidance also describes
              the different types of evidence that are used to determine whether a
              procedure is reasonable and necessary and an assessment of the relative
              quality of different types of evidence.

              Figure 3: Criteria for Claims Administration Contactors to Use to Determine
              Whether a Procedure or Device Is Reasonable and Necessary

                  As long as a procedure or device fits into Medicare’s benefit categories and is not
                  excluded from coverage, it would be considered reasonable and necessary if it is:
                    · safe and effective;
                    · not experimental or investigational—with certain exceptions; a
                    · appropriate, including the duration and frequency that is considered appropriate for
                      the service, in terms of whether it is:
                         · furnished in accordance with accepted standards of medical practice for the
                           diagnosis or treatment of the patient’s condition or to improve the function of a
                           malformed body member—or, for certain specified services, to prevent or
                                     screen for illness or to palliate or manage terminal illness;
                         · furnished in a setting appropriate to the patient’s medical needs and
                         · ordered or furnished by qualified personnel;
                         · one that meets, but does not exceed, the patient’s medical need; and
                         · at least as beneficial as an existing and available medically appropriate
                  Source: GAO.
               Services provided in routine clinical trials on or after September 19, 2000, and which meet the
              requirements of the Clinical Trials National Coverage Determination are considered reasonable and
              necessary. See Medicare Coverage Issues Manual, 30-1, Routine Costs of Clinical Trials (Sept. 19,

              Page 41                                                        GAO-03-175 Medicare Coverage
             Appendix VI: Comments from the Department of Health and Human Services
Appendix VI: Comments from the
Department of Health and Human Services

             Page 42                                               GAO-03-175 Medicare Coverage
Appendix VI: Comments from the Department of Health and Human Services

Page 43                                               GAO-03-175 Medicare Coverage
Appendix VI: Comments from the Department of Health and Human Services

Page 44                                               GAO-03-175 Medicare Coverage
Appendix VI: Comments from the Department of Health and Human Services

Page 45                                               GAO-03-175 Medicare Coverage
Appendix VI: Comments from the Department of Health and Human Services

Page 46                                               GAO-03-175 Medicare Coverage
Appendix VI: Comments from the Department of Health and Human Services

Page 47                                               GAO-03-175 Medicare Coverage
                  Appendix VII: GAO Contact and Staff
Appendix VII: GAO Contact and Staff


                  Sheila K. Avruch, (202) 512-7277
GAO Contact
                  The following staff members made important contributions to this work:
Acknowledgments   Barrett Bader, Sandra Gove, Karen Kemper, Joy Kraybill, and Craig

                  Page 48                                       GAO-03-175 Medicare Coverage
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