oversight

Medicare: Home Oxygen Program Warrants Continued HCFA Attention

Published by the Government Accountability Office on 1997-11-07.

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

                 United States General Accounting Office

GAO              Report to the Chairman, Committee on
                 Finance, U.S. Senate



November 1997
                 MEDICARE
                 Home Oxygen Program
                 Warrants Continued
                 HCFA Attention




GAO/HEHS-98-17
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-277568

      November 7, 1997

      The Honorable William V. Roth, Jr.
      Chairman, Committee on Finance
      United States Senate

      Dear Mr. Chairman:

      In fiscal year 1996, almost 480,000 Medicare beneficiaries received
      supplemental oxygen at home at a cost of about $1.7 billion. For patients
      that qualify for home oxygen, Medicare pays suppliers a fixed monthly fee
      that covers a stationary, home-based unit and all related services and
      supplies, such as tank refills. Medicare also pays a separate fixed monthly
      fee for a portable unit if one is prescribed. Supplies and services for
      portable units are covered by the monthly fee for the stationary unit.
      Medicare’s reimbursements for oxygen are called “modality neutral”
      because they are the same for all types of oxygen delivery
      systems—compressed gas tanks, liquid oxygen cylinders, and oxygen
      concentrators.

      The amount of the monthly Medicare reimbursement for home oxygen has
      been the subject of considerable debate since 1994. Therefore, you asked
      that we undertake an independent review of the appropriateness of
      Medicare’s reimbursement rates. In May 1997, we provided you an interim
      report comparing Medicare’s oxygen fees with the rates paid by the
      Department of Veterans Affairs (VA).1 Our analysis showed that even after
      adding a 30-percent adjustment to VA rates to account for differences
      between the Medicare and VA programs, Medicare would have saved over
      $500 million in fiscal year 1996 had it reimbursed oxygen suppliers at the
      adjusted VA rates. In June 1997, we provided additional information on our
      comparison of Medicare and VA rates to the Chairman, Subcommittee on
      Health, House Committee on Ways and Means.2 Subsequently, the
      Congress mandated reductions in Medicare reimbursement rates for home
      oxygen, beginning January 1, 1998, as specified in the Balanced Budget Act
      of 1997.3 The act also gives the Secretary of Health and Human Services
      (HHS) the authority to restructure reimbursement rates in a budget-neutral


      1
      Medicare: Comparison of Medicare and VA Payment Rates for Home Oxygen (GAO/HEHS-97-120R,
      May 15, 1997).
      2
      Medicare: Comparative Information on Medicare and VA Patients, Services, and Payment Rates for
      Home Oxygen (GAO/HEHS-97-151R, June 6, 1997).
      3
       P.L. 105-33, Aug. 5, 1997.



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                   manner and requires the Secretary to develop service requirements for
                   Medicare home oxygen suppliers.

                   This report (1) recaps our comparison of Medicare and VA payment rates,
                   (2) addresses concerns about access to liquid oxygen systems and
                   lightweight portable equipment for patients who are highly active, and
                   (3) discusses standards for the services associated with meeting patients’
                   home oxygen needs.

                   To address these issues, we reviewed Medicare regulations and VA policies
                   regarding home oxygen benefits. We also obtained information from the
                   Health Care Financing Administration (HCFA), which administers the
                   Medicare program; the VA central office and selected VA medical centers;
                   home oxygen suppliers and industry representatives; and patient advocacy
                   groups, physicians, and respiratory therapists. We reviewed invoices to
                   obtain data on VA payments for home oxygen for the first quarter of fiscal
                   year 1996 for a nationwide sample of about 5,000 VA patients, drawn from
                   46 of the 162 VA medical centers that have home oxygen contracts. We
                   included at least one medical center from each of VA’s 22 Veterans’
                   Integrated Service Networks in our sample to ensure complete geographic
                   coverage. We obtained information on Medicare patients from Medicare
                   claims databases and by reviewing records of home oxygen suppliers for
                   about 550 Medicare patients. We did not evaluate the quality of care
                   provided to Medicare or VA patients or the clinical outcomes of their home
                   oxygen therapy. Neither did we examine the internal and data processing
                   controls of the Medicare claims databases maintained by HCFA’s
                   contractors. Otherwise, we performed our work between May 1996 and
                   June 1997 in accordance with generally accepted government auditing
                   standards.


                   Medicare’s fee schedule allowances for home oxygen exceeded our
Results in Brief   adjusted estimate of the competitive marketplace rates paid by VA by
                   almost 38 percent.4 Our analysis of data for the first quarter of fiscal year
                   1996 showed that Medicare allowances averaged $320 per month for each
                   patient on home oxygen. In contrast, the comparable VA monthly costs
                   averaged $200 per patient, after inflating actual VA payments by 30 percent
                   to account for differences between the Medicare and VA programs. Our
                   analysis was based on the Medicare fee schedule allowances, all VA
                   payments to oxygen suppliers for a nationwide sample of 5,000 VA home

                   4
                    Since VA uses competitive bidding to meet the home oxygen needs of its patients, VA payments can
                   be considered an indicator of competitive marketplace rates.



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oxygen patients, and consideration of any factors that could account for
differences in the costs of servicing Medicare and VA home oxygen
patients.

The rate reductions mandated by the Balanced Budget Act of 1997 will
bring Medicare’s fee schedule allowances more into line with the
competitive marketplace costs for home oxygen. However, concerns have
been raised that these reductions could reduce Medicare beneficiaries’
access to portable units. Under Medicare’s modality-neutral payment
system, home-based liquid oxygen systems, which patients can use to refill
portable units, do not offer suppliers the attractive profit margins
associated with lower-cost oxygen concentrators. Also, lightweight, less
cumbersome portable systems, which may increase patient mobility, are
more expensive than traditional portable gas cylinders. Our analysis
showed that VA patients were receiving more portable units and refills than
Medicare patients were, even though VA’s payment rate, adjusted for
comparability, was lower than Medicare’s. Nevertheless, the upcoming
reductions in Medicare allowances may lead some suppliers to provide
Medicare patients with the least costly systems available, regardless of
their patients’ needs. HHS could use its authority under the recently
enacted legislation to establish separate reimbursement rates for oxygen
concentrators, liquid systems, regular portable units, and lightweight
portable units, as long as the impact on overall Medicare costs is budget
neutral. However, the evolution in the technology and costs of oxygen
delivery systems—and the clinical indications for initiating and
terminating the use of more expensive, lightweight portable
units—warrant further examination by HHS and HCFA before deciding
whether Medicare’s reimbursement system should be restructured.

HCFA has not established standards to ensure that home oxygen suppliers
provide Medicare patients even basic support services. Home oxygen
equipment requires more support and maintenance than most other types
of home medical equipment. However, oxygen suppliers who serve
Medicare patients need only comply with the basic registration and
business requirements associated with obtaining a Medicare supplier
number. In contrast, VA encourages its medical centers to contract with
suppliers who are accredited by the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO) or comply with its standards. Further, VA
contracts typically require suppliers to comply with specific patient
support and equipment maintenance requirements. Our analysis of VA
contracts and our review of Medicare and VA patient records showed that
VA patients typically received more frequent service visits than Medicare




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                 patients did. The Balanced Budget Act of 1997 requires HHS to establish
                 service standards for Medicare home oxygen suppliers. Since HCFA is
                 already developing oxygen supplier standards for a competitive pricing
                 demonstration project, we believe prompt compliance with this
                 congressional mandate is possible and warranted.


                 Many individuals suffering from advanced chronic obstructive pulmonary
Background       disease or certain other respiratory and cardiac conditions are unable to
                 meet their bodies’ oxygen needs through normal breathing. Supplemental
                 oxygen has been clinically shown to assist many of these patients.
                 Medicare’s eligibility criteria for the home oxygen benefit are quite
                 specific. Patients must have (1) an appropriate diagnosis, such as chronic
                 obstructive pulmonary disease; (2) clinical tests documenting reduced
                 levels of oxygen in the blood; and (3) a certificate of medical necessity,
                 signed by a physician, prescribing the volume of supplemental oxygen
                 required in liters per minute and documenting whether the patient needs a
                 portable unit in addition to a home-based stationary unit.

                 Physicians can prescribe a specific type of oxygen system on the
                 certificate of medical necessity, or they can allow the oxygen supplier to
                 decide which type of system best meets a patient’s needs. Currently, there
                 are three methods, or modalities, through which patients can obtain
                 supplemental oxygen:

             •   compressed gas, which is available in various sized tanks, from large
                 stationary cylinders to small portable cylinders;
             •   oxygen concentrators, which are electrically operated machines about the
                 size of a dehumidifier that extract oxygen from room air; and
             •   liquid oxygen, which is available in large stationary reservoirs and portable
                 units.

                 For most patients, each of the three modalities—compressed gas, liquid
                 oxygen, and oxygen concentrator—is clinically equally effective for use as
                 a stationary unit. However, liquid oxygen is most often prescribed for the
                 small proportion of patients that require a very high oxygen liter flow. As
                 shown in table 1, over the past 10 years the use of oxygen concentrators
                 has increased substantially, and the use of compressed gas as the primary,
                 home-based unit is now negligible.




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Table 1: Types of Stationary Oxygen
Systems Used by Medicare                                                                                          Percentage of Medicare
Beneficiaries, 1986 and 1996                                                                                          oxygen users
                                      Stationary system                                                                   1986            1996
                                      Oxygen concentrator                                                                    66              85
                                      Liquid oxygen                                                                          12              14
                                      Compressed gas                                                                         22                   1

                                      At the time of our review, the monthly Medicare fee schedule allowance
                                      for a stationary oxygen system was about $285, and it is currently about
                                      $300.5 Medicare pays 80 percent of the allowance, and the patient is
                                      responsible for the remaining 20 percent. The Medicare allowance covers
                                      use of the equipment; all refills of gas or liquid oxygen; supplies such as
                                      tubing; a backup unit, if provided, for patients using a concentrator;6 and
                                      services such as patient assessments, equipment setup, training for
                                      patients and caregivers, periodic maintenance, and repairs.

                                      In addition to a stationary unit for use in the home, about 75 percent of
                                      Medicare home oxygen patients have portable units that allow them to
                                      perform activities away from their stationary unit and outside the home.7
                                      The most common portable unit is a compressed gas tank set on a small
                                      cart that can be pulled by the user. Highly active individuals who spend a
                                      great deal of time outside the home may use a portable liquid oxygen
                                      cylinder or a lightweight gas cylinder, both of which can be carried in a
                                      backpack or shoulder bag. These units may be used with an oxygen
                                      conserving device to increase the amount of time a single cylinder can be
                                      used. The Medicare monthly allowance for portable equipment is currently
                                      about $48, regardless of the type of unit. For the period we reviewed, the
                                      allowance was about $45.8



                                      5
                                       The monthly Medicare allowance for oxygen varies by state. During the first quarter of fiscal year
                                      1996, the allowance ranged from $262.40 to $308.71. For our analysis, we used the midpoint: $285. As
                                      of Jan. 1, 1997, the allowance ranged from $277.84 to $326.87. The allowance can be increased by
                                      50 percent for those beneficiaries whose prescribed liter flow is over 4 liters per minute and decreased
                                      by 50 percent for patients whose prescribed liter flow is less than 1 liter per minute. Our analysis of
                                      Medicare claims showed that the monthly allowance was adjusted for liter flow for less than 2 percent
                                      of the claims for each type of stationary system.
                                      6
                                       Since oxygen concentrators are electrically operated, suppliers should provide backup tanks for use
                                      in the event of a power failure.
                                      7
                                       Stationary units usually come with about 50 feet of tubing to allow some mobility within the home.
                                      8
                                       The monthly allowance for a portable unit varies by state. During the first quarter of fiscal year 1996,
                                      the allowance ranged from $41.23 to $48.51. For our analysis, we used the midpoint: $45. Beginning
                                      Jan. 1, 1997, the fee ranged from $43.66 to $51.37.



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                        The Balanced Budget Act of 1997 reduced Medicare reimbursement rates
                        for home oxygen by 25 percent effective January 1, 1998, and by an
                        additional 5 percent effective January 1, 1999. Thereafter, the Medicare
                        rates are to be frozen through 2002. The act also requires the Secretary of
                        HHS to undertake a 3-year competitive bidding demonstration project for
                        home oxygen, to be completed by December 31, 2002.


                        Medicare’s monthly fee schedule allowances for home oxygen are much
Medicare Pays Much      higher than the rates VA pays.9 As shown in table 2, during the first quarter
Higher Than             of fiscal year 1996, Medicare’s monthly fee schedule allowance averaged
Marketplace Rates for   $320 per patient, including an allowance for a portable unit for the
                        75 percent of Medicare patients that obtain portables. VA’s average
Home Oxygen             monthly payment, based on all costs for a sample of 5,000 VA patients, was
                        $155. After adding a 30-percent adjustment to VA payments to account for
                        the higher costs associated with servicing Medicare patients, the average
                        VA monthly payment was $200, or almost 38 percent less than Medicare’s
                        allowance of $320.




                        9
                        The appendix discusses the reasons we compared Medicare payments with VA’s rates rather than
                        with those of other insurers or third-party payers.



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Table 2: Comparison of Average
Monthly Medicare and VA Payments                                                                                           Monthly payment
for Home Oxygen Supplies and           Cost category                                                                            per patient
Services, First Quarter, Fiscal Year   Medicare
1996
                                       Basic fee schedule allowancea                                                                        $285
                                                                                  b
                                       Additional allowance for portable unit                                                                  35
                                       Total Medicare allowance                                                                                320
                                       VA
                                       Average monthly paymentc                                                                                155
                                                                                               d
                                       Plus adjustment for comparability with Medicare                                                         45
                                       Total adjusted VA monthly payment                                                                       200
                                       Difference between Medicare and adjusted VA payments                                                 $120
                                       a
                                        The Medicare basic monthly fee schedule allowance for oxygen varies by geographic area.
                                       During the first quarter of fiscal year 1996, the fee was subject to a floor of $262.40 and a ceiling
                                       of $308.71. This analysis uses $285, the approximate midpoint between the floor and ceiling.
                                       b
                                        The Medicare monthly fee schedule allowance for a portable unit also varies by geographic
                                       area. During the first quarter of fiscal year 1996, the fee was subject to a floor of $41.23 and a
                                       ceiling of $48.51. We determined that Medicare paid for portable units for about 75 percent of
                                       oxygen patients; therefore, we adjusted the per-patient allowance for portable units to $35, or
                                       about 75 percent of the approximate midpoint between the floor and ceiling.
                                       c
                                        VA payment rates are based on VA competitive contracts with oxygen suppliers. The average
                                       monthly payment used in this analysis is a “bundled” rate, including all supplies, services, oxygen
                                       contents, and portable units provided to a sample of 5,000 patients. The average VA monthly
                                       payment for patients using oxygen concentrators was about $125, and the average monthly
                                       payment for patients using liquid oxygen systems was about $315. The combined average,
                                       weighted by the number of patients using each type of system, was $155.
                                       d
                                        This is the estimated additional cost that a VA supplier would incur to provide home oxygen to a
                                       Medicare patient. This estimate includes the cost of oxygen supplies and services provided to
                                       new patients subsequently determined not to be medically eligible; the administrative costs
                                       associated with preparing and processing claims, including obtaining a physician’s certificate of
                                       medical necessity; the administrative costs associated with collecting the Medicare copayment;
                                       and the lack of a guaranteed patient pool.



                                       In comparing Medicare and VA payments, we carefully considered all
                                       factors that could account for differences in the costs of servicing the two
                                       patient groups. Such factors could include clinical characteristics of each
                                       patient population as well as differences in how the two programs are
                                       administered. Regarding clinical differences, Medicare and VA patients
                                       with pulmonary insufficiency must meet the same medical eligibility
                                       criteria for home oxygen, and clinical experts and suppliers told us that
                                       the home oxygen needs of the two patient groups are essentially the same.
                                       We excluded from our analysis the small number of VA patients who were
                                       receiving home oxygen for conditions other than pulmonary insufficiency,
                                       such as cluster headaches. Utilization patterns for stationary equipment




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                              were remarkably similar.10 Of the 5,000 VA patients in our nationwide
                              sample, about 84 percent used an oxygen concentrator, and 16 percent
                              used stationary liquid oxygen systems. Among Medicare beneficiaries
                              nationwide, 86 percent used oxygen concentrators. In contrast, program
                              differences do affect the costs suppliers incur when serving VA patients,
                              and our analysis included an adjustment to reflect those factors before we
                              compared VA and Medicare’s payment rates.


                              The upcoming reductions in the modality-neutral Medicare payment rates
Access to Portable            have raised concerns that Medicare patients will have less access to
Equipment and Refills         (1) stationary liquid systems, from which patients can refill portables;
Warrants HCFA                 (2) refills of gas or liquid portable units for patients that have
                              concentrators; and (3) new lightweight, but more expensive, portable
Monitoring                    systems. In response to these concerns, some groups have proposed
                              changes to Medicare’s modality-neutral payment system.


Access to Stationary Liquid   Although stationary liquid oxygen systems are more expensive than
Systems                       concentrators, they enable highly mobile patients to refill their portable
                              liquid units from their stationary reservoirs. This provides these patients
                              greater autonomy and requires suppliers to make fewer deliveries of
                              replacement tanks than are needed for patients using concentrators along
                              with portable compressed gas tanks. The Medicare fee schedule allowance
                              is the same for both stationary liquid systems and concentrators—about
                              $285 per month during the first quarter of fiscal year 1996. During the same
                              period, monthly VA payments averaged about $125 for patients with
                              concentrators and $315 for patients with stationary liquid systems.11 Yet
                              about 15 percent of both Medicare and VA patients had liquid stationary
                              systems, an indication that the Medicare modality-neutral rates then in
                              effect did not restrict patient access to liquid systems.

                              The upcoming reduction in Medicare payment rates, however, could lead
                              some suppliers to shore up their profits by offering only oxygen
                              concentrators for stationary systems, which would also reduce access to
                              liquid portable refills from stationary units. Most Medicare suppliers now
                              provide relatively few stationary liquid systems or none at all. Of about
                              6,500 Medicare home oxygen suppliers, about 82 percent obtained


                              10
                               We excluded from both patient groups the relatively small number of patients using compressed gas
                              as their stationary oxygen system.
                              11
                                The average VA payments are based on all supplier charges, including charges for portable units and
                              refills.



                              Page 8                                          GAO/HEHS-98-17 Medicare Payments for Oxygen
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                           5 percent or less of their Medicare revenues from stationary liquid oxygen
                           systems. Furthermore, almost 25 percent of oxygen suppliers received
                           virtually all of their Medicare revenue from oxygen concentrators.
                           Providing only concentrators allows these suppliers to maximize their
                           profits by avoiding the higher costs associated with stationary liquid as
                           well as with portable units. (Medicare considers the monthly fee for the
                           stationary unit to cover supplies and services for portable units, so
                           providing portable units costs suppliers more.)

                           Since VA acquires home oxygen services under a fee-for-service payment
                           system, VA can ensure that its patients have access to stationary liquid
                           oxygen systems by paying more for them. In addition, VA doctors prescribe
                           the type of system that they feel is most appropriate for their patients.
                           Physicians with Medicare patients can help ensure that they obtain access
                           to the type of oxygen delivery system they need by specifying on the
                           certificate of medical necessity the oxygen delivery system that should be
                           supplied. However, some physicians allow the supplier to decide.


Access to Portable Units   Our study included an analysis of the number of Medicare and VA patients
and Refills                that were provided portable units. Even though Medicare paid higher
                           monthly fees to oxygen suppliers than VA, only about 75 percent of
                           Medicare beneficiaries using home oxygen had portable units, while about
                           97 percent of the VA patients in our sample had portable units. About 1,500
                           suppliers, or almost 25 percent of all Medicare home oxygen suppliers,
                           provided portable units to no more than 10 percent of their Medicare
                           patients—far below the portable utilization rate of about 75 percent
                           among all Medicare home oxygen beneficiaries. Among patients using
                           compressed gas portable systems, VA patients in our sample obtained
                           about four cylinders per month, while Medicare beneficiaries whose
                           records we reviewed received about two cylinders per month. On the basis
                           of these data, we determined that the lower VA payment rates did not
                           result in less access to portable units or refills.


Access to Lightweight      Pulmonary specialists frequently recommend that their patients get as
Portable Equipment         much exercise as possible. Clinicians point out that an overall respiratory
                           therapy regime that includes exercise may slow the deterioration
                           associated with pulmonary insufficiency. According to some experts, an
                           effective exercise program requires portable systems that are lighter and
                           less cumbersome—but more expensive—than the common compressed
                           gas E tanks that are pulled on a small cart. Currently available alternatives



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                           are portable liquid oxygen units, which can be refilled from stationary
                           reservoirs at home, or lightweight aluminum gas cylinders, both of which
                           may be used with an oxygen conserving device. Both of these portable
                           systems are small and light enough to be carried in a backpack or shoulder
                           bag, but they are more expensive than the traditional cart-mounted E
                           tanks.

                           Medicare claims data show that of the 363,000 Medicare patients with
                           portable oxygen units in fiscal year 1996, almost 75,000, or about
                           21 percent, had portable liquid oxygen cylinders. Medicare claims do not
                           identify how many patients with portable gas systems had the traditional E
                           tank or the smaller, lightweight cylinders. Our review of about 550
                           Medicare patient records indicated that only about 8 percent had
                           lightweight tanks.


Some Groups Have           The National Association for Medical Direction of Respiratory Care has
Proposed Restructuring     proposed retaining Medicare’s modality-neutral payment for stationary
Medicare’s                 systems but establishing two reimbursement rates for portable units—a
                           lower rate for traditional E tanks and a higher rate for lightweight portable
Modality-Neutral Payment   cylinders, which the Association describes as an ambulatory system.12 The
                           Association proposes that prescribing physicians decide which type of
                           portable system is most suitable for their patients. This approach has also
                           been endorsed by the American Thoracic Society and the American Lung
                           Association.

                           In contrast, others have noted that Medicare’s modality-neutral rate is
                           designed to meet the needs of the entire home oxygen population: Some
                           patients are more expensive to service than others, but the rate is designed
                           so suppliers will make a profit overall. These supporters of the
                           modality-neutral rate also believe that the lack of clinical criteria for
                           deciding which patients need a lightweight ambulatory unit means far
                           more patients will obtain such ambulatory units than will benefit from
                           them. Also, once a patient obtains an ambulatory unit, a lack of adequate
                           controls in the Medicare program could lead to continued payment for the
                           more costly unit when it is no longer needed. Since chronic obstructive
                           pulmonary disease is progressive, a patient’s activity level and the need for
                           a portable or ambulatory system can be expected to eventually decline.
                           However, in our case record reviews, we could not identify any cases


                           12
                            The National Association for Medical Direction of Respiratory Care defines an ambulatory system as
                           one that weighs less than 10 pounds and allows the individual to remain apart from the stationary
                           oxygen system for at least 4 hours at a liter flow of 2 liters per minute.



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                     where monthly Medicare payments for a portable unit were discontinued
                     for a patient receiving home oxygen.

                     The Balanced Budget Act of 1997 allows HHS to establish separate payment
                     rates and categories for different types of home oxygen equipment, as long
                     as the adjustments are budget neutral. This provides HHS the flexibility to
                     restructure reimbursements to ensure patient access to the equipment and
                     services they need and to reflect market changes and new oxygen delivery
                     technology, which continues to evolve. However, some suppliers, industry
                     experts, and HCFA officials have expressed reservations about abandoning
                     modality-neutral payments, citing the administrative complexity and
                     oversupply of more expensive services that motivated creation of the
                     modality-neutral system.


                     Although Medicare payments for home oxygen include reimbursement for
HCFA Has Not         services, HCFA has not specified the type or frequency of services it expects
Developed Service    home oxygen suppliers to provide. In contrast, VA encourages its medical
Standards for Home   centers to contract with suppliers that are accredited by JCAHO or comply
                     with its standards. Even though VA’s reimbursements are less generous
Oxygen Suppliers     than Medicare’s, VA patients received more frequent service visits than the
                     Medicare patients whose records we reviewed.

                     To qualify as a Medicare home oxygen supplier, a company must obtain a
                     supplier number from Medicare’s National Supplier Clearinghouse and
                     follow basic business practices, such as filling orders, delivering goods,
                     honoring warranties, maintaining equipment, disclosing requested
                     information, and accepting returns of substandard or inappropriate items
                     from beneficiaries. Other than these requirements, Medicare has no
                     standards specific to the needs of home oxygen patients.

                     In contrast, VA has both broad accreditation standards and specific
                     contract terms that often define the specific type and frequency of services
                     VA home oxygen patients should receive. VA contracts frequently specify
                     company and personnel qualifications; requirements for staff training,
                     patient education, and development of a patient plan of care; the type and
                     number of patient service visits necessary; required response time for
                     emergencies; and procedures for addressing patient concerns. Many VA
                     contracts also identify the type of equipment to be used, often specifying
                     brand names or equivalents, and equipment repair requirements. To
                     ensure that suppliers comply with the terms of the contract, VA schedules




                     Page 11                             GAO/HEHS-98-17 Medicare Payments for Oxygen
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random home visits by VA staff for a minimum of 10 percent of VA patients
receiving home oxygen each year.

Records we reviewed at oxygen suppliers for about 550 Medicare patients
showed that 49 percent of the patients had clinical assessments during a
3-month period, and 30 percent had visits to check and maintain
equipment. For the remaining 20 percent, there was no evidence in the
suppliers’ records that the patient had been visited within the 3-month
period for either a clinical assessment or an equipment check. Similarly, in
1994, the HHS Office of the Inspector General (OIG) reported on the services
provided to Medicare home oxygen patients using oxygen concentrators.13
The OIG found that 17.5 percent of these Medicare patients did not receive
an equipment check within a 3-month period, and over 60 percent did not
receive any other patient services, such as a clinical assessment.

In contrast, we found that 43 of the 46 VA medical centers in our review
required the supplier to perform a clinical assessment, an equipment
check, or both at least once every 3 months. Of these 43 medical centers,
36 required monthly clinical assessments or equipment checks, and 24
specified that these visits be conducted by respiratory therapists.14 The
remaining three medical centers required that visits be conducted in
accordance with oxygen equipment manufacturers’ specifications or in
compliance with standards established by JCAHO. VA officials stated that
each of these three medical centers had assessments and checks
conducted at least once every 3 months.

The Balanced Budget Act of 1997 mandates that the Secretary of HHS
establish service standards for home oxygen “as soon as practicable.” The
act also requires that peer review organizations evaluate access to, and
quality of, home oxygen equipment provided to Medicare beneficiaries.
Because no definitive national guidelines exist for the most appropriate
level of patient support and equipment monitoring services, it is important
that HCFA consult with the medical community and equipment
manufacturers when developing standards to help ensure that those
standards are based on the best available information.


13
  HHS, OIG, Oxygen Concentrator Services, OEI-03-91-01710 (Washington, D.C.: HHS, Nov. 1994).
14
  Respiratory therapists are licensed to perform respiratory care under medical direction in a variety of
settings, including the home. They educate patients in the proper use of their equipment and
periodically review patients’ understanding of their therapy. A physician’s authorization is necessary
for any diagnostic or therapeutic services. During a clinical assessment visit, a respiratory therapist
will typically review a patient’s overall health status, assess respiratory symptoms such as lung sounds
and respiration rates, perform equipment checks, monitor patient compliance, and discuss therapeutic
goals and progress with the patient and family.



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                      Medicare’s reimbursement rates for home oxygen exceed the competitive
Conclusions           marketplace rates paid by VA, even after inflating rates by 30 percent to
                      adjust for differences between the two programs. Yet the higher monthly
                      rates Medicare pays appear to purchase the same home oxygen benefits as
                      VA’s lower rates—or even fewer oxygen benefits. About 15 percent of both
                      VA and Medicare patients received the more expensive stationary liquid
                      oxygen systems, rather than concentrators. About 97 percent of VA
                      patients received portable oxygen units, compared with about 75 percent
                      of the Medicare patients. VA patients also received more refills of portable
                      gas tanks and more frequent service visits. And, unlike Medicare patients,
                      VA home oxygen patients benefit from specific home oxygen supplier
                      standards to help ensure that they receive the equipment and services they
                      need.

                      The Balanced Budget Act of 1997 includes provisions that will bring
                      Medicare’s reimbursement rates more into line with the competitive
                      marketplace rates paid by VA. The act also requires HHS to develop specific
                      service standards for home oxygen suppliers that service Medicare
                      patients as well as to monitor patient access to home oxygen equipment.
                      Finally, the act gives HHS the flexibility to restructure the modality-neutral
                      payment, if warranted, to ensure that Medicare patients obtain access to
                      the equipment and services appropriate to their needs.


                      We recommend that the Administrator of HCFA do the following:
Recommendations
                  •   monitor trends in Medicare beneficiaries’ use of and access to stationary
                      liquid oxygen systems and liquid and gas portables;
                  •   monitor the availability and costs of new and evolving oxygen delivery
                      systems, including lightweight portable systems and oxygen conserving
                      devices, and work with the medical community to (1) evaluate the clinical
                      benefits associated with the use of such equipment, (2) identify the patient
                      populations most likely to benefit from the use of such equipment, and
                      (3) educate prescribing physicians about existing options in oxygen
                      delivery systems and their right to prescribe the system that best meets
                      their patients’ needs;
                  •   advise the Secretary of HHS whether a budget-neutral restructuring of the
                      Medicare reimbursement system for home oxygen is needed to provide
                      patient access to the more expensive home oxygen systems, and whether
                      Medicare controls can be implemented to ensure that the use of such
                      systems is limited to patients that can benefit from their use; and




                      Page 13                              GAO/HEHS-98-17 Medicare Payments for Oxygen
                         B-277568




                     •   work with the medical community, the oxygen industry, patient advocacy
                         groups, accreditation organizations, and VA officials to promptly finalize
                         service standards for Medicare home oxygen suppliers.


                         We provided a draft of this report to the Administrator of HCFA and the
Agency Comments          Secretary of VA. VA and HCFA officials suggested some technical changes,
and Our Evaluation       and we modified the text to reflect their comments. HCFA officials said that
                         they are forming a work group that includes representatives of peer review
                         organizations, the oxygen and health care industries, Medicare
                         contractors, patient advocacy groups, and VA. This work group will
                         develop the protocols for the peer review organizations to follow in their
                         evaluation of access to, and quality of, home oxygen equipment. HCFA
                         officials also stated that it would not be appropriate to establish a
                         separate, higher reimbursement for a specific type of oxygen system, such
                         as liquid portables, unless there were clear clinical criteria defining the
                         medical need for such a system.


                         As agreed with your office, unless you release its contents earlier, we plan
                         no further distribution of this report for 2 days. At that time we will make
                         copies available to other congressional committees and Members of
                         Congress with an interest in this matter, the Secretary of Health and
                         Human Services, and the Secretary of Veterans Affairs.

                         This report was prepared by Frank Putallaz and Suzanne Rubins, under
                         the direction of William Reis, Assistant Director. Please call Mr. Reis at
                         (617) 565-7488 or me at (202) 512-7114 if you or your staff have any
                         questions about the information in this report.

                         Sincerely yours,




                         William J. Scanlon
                         Director, Health Financing and
                           Systems Issues




                         Page 14                             GAO/HEHS-98-17 Medicare Payments for Oxygen
Page 15   GAO/HEHS-98-17 Medicare Payments for Oxygen
Contents



Letter                                                                                           1


Appendix                                                                                        18
                       Why We Compared Medicare’s Rates With VA’s Rates                         18
Basis for Comparison   Information Used for Our Comparisons                                     19
of Medicare and VA     Differences Between the Medicare and VA Programs                         20
Reimbursement Rates
Tables                 Table 1: Types of Stationary Oxygen Systems Used by Medicare              5
                         Beneficiaries, 1986 and 1996
                       Table 2: Comparison of Average Monthly Medicare and VA                    7
                         Payments for Home Oxygen Supplies and Services, First Quarter,
                         Fiscal Year 1996




                       Abbreviations

                       HCFA      Health Care Financing Administration
                       HHS       Department of Health and Human Services
                       JCAHO     Joint Commission on Accreditation of Healthcare
                                      Organizations
                       OIG       Office of the Inspector General
                       VA        Department of Veterans Affairs


                       Page 16                          GAO/HEHS-98-17 Medicare Payments for Oxygen
Page 17   GAO/HEHS-98-17 Medicare Payments for Oxygen
Appendix

Basis for Comparison of Medicare and VA
Reimbursement Rates

                        To evaluate the appropriateness of Medicare’s reimbursement rates for
                        home oxygen, we considered comparing Medicare’s rates to those paid by
                        Medicaid, private insurance companies, managed care plans, and the
                        Department of Veterans Affairs (VA). All such comparisons have some
                        inherent limitations. After evaluating the alternatives, we decided to use
                        VA’s competitive contracting rates, with some adjustments, for our rate
                        comparisons.


                        We did not use Medicaid payment rates for our comparisons because each
Why We Compared         state has wide latitude in determining the benefits it covers and its
Medicare’s Rates With   reimbursement rates. Also, since Medicare is the largest single payer of
VA’s Rates              home oxygen benefits, many states base their payment levels on
                        Medicare’s fee schedule.

                        Similarly, we found that private insurance companies use a wide range of
                        methods to establish payment rates. Some firms base their fees on
                        Medicare’s reimbursement levels, while others pay submitted charges or
                        negotiate rates on a case-by-case basis. We found that some private
                        insurers pay more than Medicare and others pay less. We were not able to
                        identify any insurance company with a large number of beneficiaries on
                        long-term home oxygen therapy whose rates could serve as the basis for a
                        nationwide comparison with Medicare’s rates. Nor could we identify any
                        private insurer that had done a study to determine the appropriate
                        reimbursement level for home oxygen services. Furthermore, the coverage
                        criteria for home oxygen varied both from company to company and
                        within the same company depending on the type of coverage purchased by
                        an individual or a group health plan.

                        Medicare managed care plans that we contacted were unwilling to provide
                        us information on the rates they negotiate with oxygen suppliers because
                        they consider that information to be proprietary. However, during our
                        patient file reviews at oxygen suppliers, we identified two Medicare
                        managed care plans that pay about $200 a month for services comparable
                        to those provided to fee-for-service Medicare beneficiaries. Because the
                        availability of these data was very limited, we could not use them for our
                        analysis.

                        We concluded that the VA home oxygen program was the best available
                        source of rates for comparison with Medicare reimbursement rates. Both
                        are federally funded, nationwide programs with a significant patient
                        population on home oxygen. In fiscal year 1995, VA provided oxygen



                        Page 18                            GAO/HEHS-98-17 Medicare Payments for Oxygen
                       Appendix
                       Basis for Comparison of Medicare and VA
                       Reimbursement Rates




                       benefits to 23,000 patients at a cost of almost $26.5 million. VA’s medical
                       criteria for using supplemental oxygen to treat pulmonary insufficiency
                       are the same as Medicare’s. Further, clinical experts and suppliers told us
                       that the home oxygen service needs of VA and Medicare patients with
                       pulmonary insufficiency are essentially the same.


                       We analyzed claims and charge data compiled by the four Durable Medical
Information Used for   Equipment Regional Carriers and the Statistical Analysis Durable Medical
Our Comparisons        Equipment Regional Carrier.15 These data provided information on how
                       the Medicare home oxygen benefit has grown and how suppliers structure
                       their Medicare billing for the different types of home oxygen systems. The
                       Statistical Analysis Durable Medical Equipment Regional Carrier began
                       compiling national claims data for home oxygen in 1994, so we
                       concentrated on data from the past 2 fiscal years. We supplemented the
                       national Medicare claims data with information from home oxygen
                       suppliers’ records for about 550 Medicare patients.

                       We obtained data on VA payments for home oxygen from original
                       contractor invoices for a nationwide sample of about 5,000 VA patients,
                       drawn from 46 of the 162 VA medical centers that have home oxygen
                       contracts. These 46 VA medical centers included at least one VA medical
                       center from each of VA’s 22 Veterans’ Integrated Service Networks. Since
                       each contract differs, we reviewed the contracts at each of the medical
                       centers in our sample. The invoices we used were for October, November,
                       and December 1995, and they included the cost of equipment rental;
                       oxygen refills; supplies; and services, including the cost of any portable
                       systems and contents provided to the patient.

                       After excluding the relatively small number of patients using stationary gas
                       systems from both patient groups, we found that about 84 percent of VA
                       patients in our study used an oxygen concentrator, and 16 percent used a
                       stationary liquid oxygen system. Among Medicare beneficiaries
                       nationwide, 86 percent used concentrators, and 14 percent used stationary
                       liquid oxygen systems.

                       Many centers pay flat monthly rates that cover equipment rental, setup and
                       service visits, and supplies, and they pay separately for gas and liquid

                       15
                        The Durable Medical Equipment Regional Carriers process Medicare claims for durable medical
                       equipment, orthotics, prosthetics, and supplies within designated geographic areas for the Health Care
                       Financing Administration (HCFA). The Statistical Analysis Durable Medical Equipment Regional
                       Carrier performs a variety of statistical reporting and analysis functions relating to Medicare’s durable
                       medical equipment benefit under contract with HCFA.



                       Page 19                                           GAO/HEHS-98-17 Medicare Payments for Oxygen
                      Appendix
                      Basis for Comparison of Medicare and VA
                      Reimbursement Rates




                      oxygen refills on the basis of patient use. Other medical centers may incur
                      additional charges for setup and service visits, for example, or for various
                      types of supplies. Since Medicare pays one fee for everything, we
                      “rebundled” the costs incurred by each VA center to compare the total
                      per-patient cost with Medicare reimbursement rates.

                      We excluded from our analysis cases in which VA medical centers provided
                      the supplier with the equipment to be used and only paid the supplier a fee
                      to maintain VA equipment. Further, we did not include the small number of
                      VA patients in our analysis who used only compressed gas because this
                      modality was likely to be used by patients to relieve cluster headaches, a
                      condition not covered by Medicare’s home oxygen benefit. Included in our
                      sample were VA patients who were using an oxygen concentrator or a
                      stationary liquid oxygen system for the treatment of pulmonary
                      insufficiency and who were required to meet the same medical criteria as
                      Medicare patients on home oxygen.

                      To determine if there were any significant geographic differences in costs,
                      we grouped the VA medical centers by the geographic areas served by each
                      of Medicare’s four Durable Medical Equipment Regional Carriers. We
                      found that the average weighted cost for home oxygen for VA medical
                      centers in three of the four geographic areas was within 10 percent of the
                      $155 nationwide average. The average weighted cost for the VA medical
                      centers in the fourth geographic area was 17 percent higher than the
                      nationwide average. This region also had the highest percentage of
                      patients on liquid oxygen, while the region with the lowest average cost
                      had the highest percentage of patients on concentrators. We concluded
                      that the modality mix within a region affected the average price more than
                      geography did.


                      Significant differences between the Medicare and VA programs may
Differences Between   account for some of the variation in home oxygen payment rates between
the Medicare and VA   VA and Medicare. Most significantly, VA competitively procures oxygen

Programs              supplies and services, and Medicare does not. Other differences between
                      the programs can place a greater administrative burden on suppliers who
                      service Medicare patients. For example, VA preapproves each patient for
                      home oxygen services, while Medicare requires that oxygen suppliers
                      furnish a certificate of medical necessity completed by a physician before
                      paying the suppliers’ claims. Also, VA patients are not responsible for any
                      copayment; therefore, VA suppliers do not have to bill VA patients for
                      copayments as they do for Medicare patients.



                      Page 20                                   GAO/HEHS-98-17 Medicare Payments for Oxygen
                           Appendix
                           Basis for Comparison of Medicare and VA
                           Reimbursement Rates




                           In our meetings with home oxygen suppliers and industry representatives,
                           we solicited their views and any data they could provide to quantify the
                           differences in costs between serving VA and Medicare patients. One 1995
                           industry study estimated that the administrative requirements of Medicare
                           could be accounted for by adding a 15-percent cost differential to the rates
                           VA pays.16 In other words, the industry study estimated that the rates
                           obtained by VA for home oxygen should be increased by 15 percent before
                           they are compared with Medicare’s rates. However, on the basis of our
                           analysis of the differences between VA and Medicare programs, which are
                           further discussed below, we concluded that a 30-percent adjustment to
                           VA’s payment rates more adequately reflects the higher costs suppliers
                           incur when servicing Medicare beneficiaries.


VA’s Use of Competitive    Each VA medical center is responsible for procuring its home oxygen
Contracting and Specific   through the competitive bidding process. VA central office policy
Supplier Requirements      encourages the medical centers to contract with a supplier that is either
                           accredited by the Joint Commission on Accreditation of Healthcare
                           Organizations (JCAHO) or complies with its standards. Within certain
                           guidelines, each center can structure its contract to reflect its own
                           operating philosophy relating to financial management and patient care as
                           well as the local market for home oxygen. Most of the contracts we
                           reviewed were very specific regarding the services they required and even
                           the type of equipment to be provided the patients. The competitive process
                           allows each VA medical center to procure services from the supplier that
                           can deliver the services required at the lowest cost to that medical center.

                           VA’s competitive contracting process is attractive to some suppliers
                           because the volume of patients it can ensure allows for economies of
                           scale. Suppliers have said there are other advantages associated with the
                           local VA contract. For example, winning a VA contract enhances a firm’s
                           reputation and visibility in the local market. In addition, some firms hope
                           to retain their VA patients if they become eligible for Medicare.

                           By contrast, Medicare reimburses all qualifying suppliers for oxygen
                           equipment provided to beneficiaries—it does not directly contract with
                           suppliers; therefore, it cannot guarantee a fixed number of patients to any
                           supplier.



                           16
                            Home Oxygen Services Coalition, “HME Industry Findings: The Health Care Financing
                           Administration’s Initiative on Medicare Payment for Home Oxygen” (Washington, D.C.: Home Oxygen
                           Services Coalition, Sept. 7, 1995).



                           Page 21                                      GAO/HEHS-98-17 Medicare Payments for Oxygen
                           Appendix
                           Basis for Comparison of Medicare and VA
                           Reimbursement Rates




VA’s Preapproval Process   When a supplier under a VA contract is told by a VA medical center to
                           provide home oxygen for a patient, the supplier knows that it will be paid
                           for those services. For Medicare patients, the supplier is told by the
                           prescribing doctor to provide oxygen services, generally arranged upon
                           discharge from the hospital. However, it is only after the service is
                           provided that the supplier knows for sure whether Medicare will pay for
                           this service. The industry study noted above quantifies this risk as adding
                           5 percent to the cost of the VA rate in order for the VA program to serve a
                           Medicare beneficiary.

                           Our analysis of Medicare claims data showed that 18.7 percent of home
                           oxygen claims in the first quarter of fiscal year 1996 were denied.
                           However, most of these denials were for administrative reasons, such as
                           duplicate claims or missing information. The actual denial rate for medical
                           ineligibility was 2 percent. Medicare’s criteria for eligibility are specific
                           and clear cut, and suppliers told us they know if patients are going to
                           qualify for coverage.

                           We concluded that the risk of medically based claims denial is not a major
                           factor in explaining the cost differential between VA and Medicare.
                           However, because this factor results from the different ways home oxygen
                           is authorized in the two programs, we considered it as part of our overall
                           adjustment of VA payment rates.


VA’s Less Cumbersome       Industry representatives stated that the administrative burden of
Administrative Process     complying with Medicare requirements accounts for a major portion of the
                           difference between VA and Medicare payment rates. One major burden
                           they cited is the certificate of medical necessity, which must be completed
                           by the prescribing physician before the claim can be submitted to
                           Medicare for payment. Every supplier we interviewed complained about
                           the difficulty in quickly obtaining this document. The industry study
                           estimated that documenting patient eligibility represents 4 percent of the
                           difference between VA and Medicare payment rates.

                           HCFA  officials acknowledged the suppliers’ dilemma. They realize that a
                           supplier provides services to patients immediately upon referral by a
                           doctor, and there may be a significant delay between the start of service
                           and the completion of the certificate of medical necessity. However, they
                           pointed out that the establishment of eligibility for the home oxygen
                           benefit usually results in continuous Medicare coverage of this benefit for
                           the life of the patient. HCFA officials believe that the documentation



                           Page 22                                   GAO/HEHS-98-17 Medicare Payments for Oxygen
Appendix
Basis for Comparison of Medicare and VA
Reimbursement Rates




requirements for this expensive, often lifelong benefit should be fairly
stringent. Recent changes have reduced the administrative burden by
allowing many patients to receive lifetime certification. Also, HCFA recently
issued a draft revision of the certificate of medical necessity in an attempt
to simplify the form and make it easier for doctors to complete. For
example, the revised certificate no longer requires doctors to justify the
portable unit.

Our review of patient case records showed that, while most certificates
are completed within 30 days of service setup, there is documentary
support for the suppliers’ contention that there are significant problems
with this process. We found several examples of long delays and one case
in which a patient died and the doctor refused to fill out the certificate, so
the firm was not paid at all for its services. Most suppliers we talked with
had developed strategies to facilitate the completion of these certificates.
These strategies involved extra staff time and costs: for example, sending
a representative to doctors’ offices to request the certificate in person. For
the records we reviewed, we found that 64 percent of the certificates were
completed within 30 days of the supplier’s starting service and 88 percent
were done within 90 days.

While obtaining the certificate of medical necessity represents a major
start-up cost, the impact on the difference between the monthly VA and
Medicare payment rates is less when that cost is amortized over the length
of time that the certificate is valid. For most patients, eligibility must be
renewed after the first year.17 At that time, the doctor may certify the
patient for lifetime eligibility, and the patient never has to be recertified
again. Once a patient’s eligibility is established, Medicare billing is usually
electronic and fairly straightforward. One VA contractor we visited noted
that the electronic billing process for Medicare is far less cumbersome
than submitting paper invoices each month to the local VA medical center.
This indicates that the VA system is not entirely without processing costs,
although when the medical eligibility documentation is included,
Medicare’s overall administrative burden on suppliers is greater.

We concluded that the administrative burden for documenting medical
eligibility and obtaining Medicare reimbursement is significantly greater
than that associated with providing services under a VA medical center
contract. Therefore, an adjustment to the VA rate is appropriate for
comparison with the Medicare rate.

17
 Those patients whose partial pressure of oxygen in the arteries is between 56 and 59 as measured in
millimeters of mercury must be recertified within 90 days in order to maintain eligibility.



Page 23                                         GAO/HEHS-98-17 Medicare Payments for Oxygen
                           Appendix
                           Basis for Comparison of Medicare and VA
                           Reimbursement Rates




VA’s Lack of a Copayment   The Medicare home oxygen benefit requires that beneficiaries pay an
Requirement                annual deductible and 20 percent of the allowed reimbursement amount
                           every month. Industry representatives contend that the cost of billing and
                           collecting this copayment adds to the cost of providing services to
                           Medicare beneficiaries. In addition, they point out that a portion of the
                           copayment owed to them may never be collected. The VA program, in
                           contrast, pays 100 percent of the contract price. The industry estimate
                           states that this accounts for 6 percent of the difference between the cost
                           of the VA program and Medicare.

                           Noncollection of copayments does represent a cost differential between VA
                           and Medicare but can only justify a small amount of the difference in
                           payment rates. Our review of case records at the suppliers we visited
                           showed that 86 percent of the Medicare beneficiaries whose records we
                           saw either had supplemental insurance or were covered by Medicaid.18 Of
                           the 14 percent of beneficiaries with neither private supplemental
                           insurance nor Medicaid coverage, we found that only 3 percent had
                           financial hardship waivers in their records. Even if suppliers were not able
                           to collect copayments from three times the number of patients with
                           hardship waivers, the uncollected amount would represent only 2 percent
                           of the total revenue suppliers receive for Medicare home oxygen.




                           18
                             While some state Medicaid programs, such as Oregon’s, do not cover the Medicare copayment for
                           their clients on home oxygen, many do.



(101569)                   Page 24                                       GAO/HEHS-98-17 Medicare Payments for Oxygen
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