Medicare: Durable Medical Equipment Fee Schedules Have Widely Varying Rates

Published by the Government Accountability Office on 1990-05-22.

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

                    United States General Accounting Office

For Release          MEDICARE:
on Delivery          Durable Medical Equipment
Expected at          Fee Schedules Have Widely
10:00  a.m. EST      Varying Rates
May 22, 1990

                     Statement   of
                     Janet Shikles,    Director
                        Health Financing     and Policy
                     Human Resources Division
                     Before the
                     Subcommittee  on Health
                     Committee on Ways and Means
                     House of Representatives

GAO/T-HRD -a90 32
                                                              GAO   Form160(12/27)
       In the Omnibus Budget Reconciliation              Act of 1987, the
Congress created      a fee schedule system for Medicare reimbursement
of durable    medical    equipment,     orthotics,      and prosthetics,
commonly called     DME. This reimbursement             system became effective
in 1989 and replaced       the reasonable        charge system of reimbursing
for DME. The fee schedules           were implemented        on a carrier-area
basis,   with a fee schedule        calculated      for each of the 57
Medicare carrier      areas in the country.            At the request     of
Congress,    GAO has reviewed the appropriateness              of those fee
        GAO found that the fee schedules       implemented    by the Medicare
carriers    have widely    varying  rates for the same or similar         items
in various     parts of the country.      These variances     are not
reasonable     nor are they explained     by differences    in suppliers'
costs.     For 95 percent     of the items GAO reviewed,      the highest     fee
schedule    amount was at least twice as much as the lowest,            and for
over 40 percent      of the items, the highest       amount was at least
six times as much as the lowest.
       In the fiscal    year 1991 budget proposal            for the Department
of Health and Human Services,          the Administration           proposes several
changes to the fee schedules          for DME that the Administration
estimates    would save about $240 million            in fiscal      year 1991.
These changes include        (1) capping the carrier           fee schedules     at
the national    median for each item,           (2) rebasing      the fee schedules
for one category      of DME equipment        (to make the base consistent
with the other categories         for which fee schedules            were computed)
and reducing     the total    amount that can be paid for this category
of equipment,      (3) reducing     payments for oxygen and oxygen
equipment    by 5 percent,      and (4) limiting        the rental      payments for
items that require       frequent    servicing.
       Capping the payments at the national            median will      lower
payments in carrier      areas where payments         are relatively       high
while not adversely      affecting    those areas      with relatively         low
payment rates.      Also, there is precedent          for this change.           Since
July 1986, the Medicare         fee schedules  for      clinical    diagnostic
laboratory    procedures    have been capped at         rates based on the
national    median.
        GAO believes  that the proposals  to rebase the fee schedule
for "Other DME" and to place an upper limit        on the maximum amount
of rental    payments for items requiring   frequent    and substantial
servicing    also have merit.
Mr.   Chairman              and Members of the                         Subcommittee:
       We are pleased                          to be here             today      to discuss             the      results            of
our analyses                of the Medicare                        fee schedules            for     durable            medical
equipment              (DME) authorized                       by the      Omnibus Budget                  Reconciliation
Act   of   1987 (OBRA).                         We found            extremely         wide variations                       in the
amounts      paid            for        the     same or similar                  items      across         the        states.
For 95 percent                     of the            items        we reviewed,           the highest              fee schedule
amount     was at least                        twice         as much as the              lowest,          and for            over        40
percent          of the            items,            the     highest      amount was at least                         six     times
as much as the                     lowest.             These wide             differences               are not        explained
by cost          differences                   among areas.               They are also                  not     reasonable.
       As an example                      of these                differences,           the      fee schedule                for
purchasing              crutches               in Richmond,              Virginia,          is $20;            in Washington,
D. C.,      it         is    $36:        and in Baltimore,                     Maryland,           it     is     $72.         In San
Francisco,              California,                   Medicare         will      pay a monthly                 rent         of $78
for   a self-contained                           nebulizerl             for    a beneficiary,                  but     will         pay
$182 per month                     for        that         item    in Reno,         Nevada.
         Our analysis                    shows another                  problem.           For one category                     of
DME, Medicare                 can pay more per month                             in rent          under        the      fee
schedules              than        it    would         have under             the    old    reasonable                charge
system      because                of the way the                    fee schedule           was computed.
         The Administration                                has proposed          legislation              that        would
address          the        problems             we found            and several           other         issues         about            DME
payments          it        believes             need to be addressed.                         My statement                  will
discuss          those        proposals.

lA device that provides                                moisture          to the       respiratory                system         to
prevent  it from drying                               out.
      Prior         to   1989,    DME was paid        under       Medicare's      part    B
reasonable          charge      payment     system.        OBRA created         the    fee schedule
payment      system       for    DME, effective           in    1989.   The fee        schedule
system     is based on six            categories,          and a different            method   of
payment      is used for          each category.               The categories         and payment
methods      are:
          DME Catesorv                                            Pavment method
1.   Inexpensive             or routinely                  Purchase or rental,    with total
     purchased                                             rental  payments limited    to the
                                                           purchase price   for new
2.   Items requiring              frequent                 Rental
     and substantial              servicing
3.   Oxygen and oxygen               equipment             Rental
4.   Orthotics           and prosthetics                   Purchase
5.   Items that must be uniquely                           Purchase,     based on the
     constructed    or                                     Medicare carrier's      individual
     substantially      modified to                        determination      of a reasonable
     meet the needs of an                                  price.
     individual    patient

6.   Other DME (items that do                              Rental,     with a cap on the
     not fit     in any of the other                       total    rental     payments.       The
     categories,     including                             monthly rent is 10% of the
     wheelchairs     and hospital                          purchase price         for a maximum
     beds)                                                 of 15 months for a single
                                                           period of continuous           use.
                                                           Beginning       with the 21st month
                                                           of continuous        use and every 6
                                                           months thereafter,          a service
                                                           and maintenance          fee may be
                                                           paid to the supplier           for the
                                                           beneficiary's        continued      use of
                                                           the item.

A fee schedule            was not         established                  for     the      customized        equipment
category       because         each item          is uniquely                  constructed            to meet
specific       patient         needs.       Suppliers              will         continue            to be paid         for
this     equipment        based on Medicare's                          reasonable            charge      system.
         OBBA required           us to conduct                  a study             of the        appropriateness
of the       level     of payments          allowed              for         covered      DME items           under        the
Medicare       program         and to report              on the              results        of the      study        by
January       1, 1991.          My testimony              will          be     based to a large                 degree        on
work that        we have performed                 in response                  to that           requirement.               We
are continuing            work under          the     required                 study      and plan        to     issue
the    complete        study     results          later         this          year.
         My testimony           today      will      focus             on the Administration's                        cost
reduction        proposals          for    DME.       For some analyses                           of those
proposals,           we used 1989 fee schedule                               data     from    all     Medicare
carriers2        for     selected         items3      of DME.                  For other            analyses,         we
analyzed        1989 fee schedule                 data      from             23 of Medicare's             57 carrier
areas.        Our selections              were made judgmentally                             to     include      a
relatively           high-volume          and low-volume                      state      from each of the

2Medicare carriers      are private     firms,   such as Blue Shield                                                 plans
and commercial    insurance      companies,    who contract  with the                                                Health
Care Financing    Administration      to process and pay Medicare
30ur analyses     were based on 16 items in the inexpensive          or
routinely    purchased category,     9 in the category    of equipment
requiring    frequent     servicing, 2 from the category    for oxygen, 5
in the orthotic       and prosthetic  devices category,    and 14 items
from the category       for "Other DME". In 1987, these items
accounted    for about 54 percent     of the $1.5 billion     in Medicare
expenditures     for the five categories     of DME subject     to fee

Health       Care Financing                 Administration's                         (HCFA's)        10 regions.
Additional              carriers         were       included            to obtain             statewide          data         for
those       selected            states      that           are served           by two or more                  carriers.
         In looking              at the       fee schedule                  amounts           among carrier               areas,
large       differences              in the         amounts            allowed         for     similar          items         are
apparent.               It     is not unusual                to     find       cases     where           the    highest             fee
schedule         amount          is two or more times                          the     lowest        amount.
Moreover,          cases         exist      where the highest                         fee schedule              amount            is
two or more times                    the median              amount.            We do not believe                      that         such
differences                  are reasonable                or explained              based on differences                           in
suppliers'              costs.
         The Administration                      has proposed                  capping         the       DME fee
schedules          at the median                 of the           carrier        fee schedules                  for     each
item.        We believe              that       a national              cap at the median                      for     these
five     categories              of equipment                is appropriate                   because          of the wide
disparity          in fee schedule                    amounts           for     the     same or similar
products         among the              carriers.
         The first              category--          inexpensive                or routinely               purchased
equipment        --includes              seat       lift         chairs,        a high-volume                  item     in
1987.          Colorado's            fee schedule                 amount        for     seat      lift         chairs         is
$1,135,         whereas            in neighboring                 Wyoming the                amount       is    $769,         a
difference              of $366 or 48 percent.                             The median            fee      schedule            amount
for     seat     lift          chairs       is $866,             the    rate     in Wisconsin,                  and the
range       among the            57 carriers                is    $518 in Iowa to $1,520                             in Alaska.

         For the          second       category--        items         requiring                  frequent           and
substantial          servicing--the                 fee schedules                  are monthly                    rental
amounts.           The disparity              in rental             rates         among the               carriers             can be
illustrated          by the          rates      established                for     a portable                ventilator,4
which     ranges          from     $183 a month           in New Mexico                       and Oklahoma                  to
$1,124        a month        in Michigan.             The median                  rate        for     this         item        is
about     $585,      the      rate      in Delaware.
         Similar          to the       two categories                of DME discussed                            above,        there
is also        significant             variation         in the            fee schedule                   amounts           for
prosthetic          and orthotic              devices.              For example,                    the     fee schedules
for     a lower       limb       prosthesis          range          from         $1,700           in New Jersey                   to
$4,154        in Nevada,           and the national                  median             is    $2,739,             the      rate        in
Colorado        and Florida.
         Another          category      --"Other         DME" which                 includes              wheelchairs
and hospital              beds --also         exhibited             wide         variation            in         fee schedule
amounts.           For example,              the monthly             rental          payment               for     a hospital
bed ranged          from      $45 in Oregon to $129 in western                                        New York              state.
The median          among the           carriers         for        this         item        is     $84.
         OBRA established                 a special            payment            formula            for         oxygen
equipment          and oxygen           contents.              The formula                   combined
approximately               25 separate            oxygen          product          codes           (equipment              and
contents)          that      could      be either         purchased                 or rented               into        four
groups.         Two rental             rates,       one for          stationary                   oxygen          equipment
and another           for     portable          oxygen         equipment,                are applicable                     to all
oxygen        equipment          and oxygen          contents              provided               to Medicare

4A device          that      assists         a patient             to breathe.

beneficiaries              who did       not         already          own their             equipment            when the
fee     schedule          system       was implemented                     in 1989.              Two other          payment
rates       were established                  for      oxygen         contents             for     beneficiaries             who
already       owned their              equipment              when the            fee schedule              system       was
implemented.               Because           oxygen          equipment            rental          (including
contents)          will     encompass               most of the Medicare                          expenditures             for
oxygen       now and in the                  future,          we focused             our analysis                 on the         two
oxygen       equipment         rental          amounts.
           The current         monthly              rental       fees       for      stationary             equipment
range       from     $189 in North                  Dakota       to $357 in Massachusetts.                                 For

portable        equipment,             the minimum               fee schedule                    amount     is about             $19
for     Texas      as compared           with          the maximum of $86 in Maryland.                                      The
median       fee schedule              for         stationary          oxygen         equipment             is     $254,         and
it    is    $41 for        portable           equipment.
           We do not        believe           the wide           variation            in fee schedule
amounts       in these         five          categories              is reasonable,                 and we support
the Administration's                    proposals               to cap the            fee schedules.
Moreover        there       is precedent                   in the Medicare                  program         for     national
caps on fee schedules.                             Since      July      1, 1984,            Medicare           has paid           for
clinical        diagnostic             laboratory               services           from          a fee schedule.
Beginning          July     1, 1986,               those      fee schedules                 were capped             and,         as
of January           1, 1990,          the         cap was set             at 93 percent               of       the median.
           The fee schedule                  for      "Other         DME" was based on average
submitted          purchase        prices,             while         the    fee schedules                 for      the     other
categories           were based on average                           reasonable             charges         as determined
by Medicare.             This       basis        was chosen               because         of concerns                   raised
about       the validity            or accuracy               of the         reasonable                  charge
determinations              made by some carriers.                            The Administration's
proposal        calls       for     changing            the      base for          the     fee schedules                       for
"Other       DME" to be consistent                        with         the base used for                        the     other         fee
         We reviewed              HCFA's regional                  office         validations                   of the
carriers*          fee schedules                for     10 high-volume                   "Other            DME" items                for
23 carriers.             We recalculated                     the        fee schedules                for        those         items
using       Medicare's            prevailing            charges.             Basing        the           fee schedule                 on
prevailing          charges          rather           than    submitted            charges               for         these
selected         items      in 23 carrier                 areas          would     reduce            total            Medicare
payments        by about           $15.0        million          a year.           Beneficiary                       coinsurance
would       be reduced            by about            $3.8 million               annually.
         We believe          the Administration's                           proposal            to rebase               the      fee
schedules          for     "Other         DME" on allowed                   amounts            is    reasonable.
Before       the    fee schedules                became effective                    in 1989,                  all     DME items
were paid          for   based         on reasonable                    charges.          It        is     inconsistent                    to
single       out    one category                of items           and base the                 fee schedule                   on
submitted          rather         than     reasonable                  charges.          The information                       we
reviewed         showed that              the    23 carriers                had data            they           could         use to
compute         a payment          rate     based on prevailing                          charges,                and using
that     data      would      result          in a reduction                 in Medicare                   payment            rates
of about         9 percent.

       In a report                issued         in 1985,5               we suggested               that     Congress
consider       limiting               rental       allowances               for      high-cost             DME items            to a
percentage          in excess             of the purchase                      price.         We concluded                 that
such a limit              would        produce        savings             when compared                to the practice
at the      time         of making             individual            decisions              to rent         or purchase
such items.
       Under        the        current          fee schedules,                    "Other      DME" is rented,                     and
the   beneficiary               has use of the                    items        as long         as necessary.                    The
supplier       is paid            a monthly           rental             fee      for      15 months         of continuous
use and then              receives             a maintenance                and servicing                  fee every            6
months      that         the    beneficiary               still          has need of the                   item.          In
contrast,          for     items         requiring            frequent              servicing,             the     supplier
receives       a monthly               rental        fee      for        as long           as the beneficiary
needs the          item.             For example,             the median                 monthly       rental        rate           for
a ventilator              is    $723.           Ventilators               cost          suppliers          about     $3,500               to
$5,000,      so in half                the      carrier           areas,          suppliers          may recoup                their
purchase       price           for     ventilators                in 8 months               or less.
       The Administration                         proposes              to limit           the payments             for        items

requiring          frequent            servicing            to the          first          15 months         of
continuous          rental            and then        to pay a periodic                        servicing            fee every
6 months       thereafter                for      as long           as the          item     is     rented         to a

5See wProcedure For Avoiding   Excessive Rental Payments For
Durable Medical  Equipment Under Medicare Should Be Modified",
GAO/BRD-85-35,  July 30, 1985.
beneficiary.                  The thrust          of this      proposal       is reasonable          and
consistent             with     our earlier           suggestion          to the    Congress.
         The Administration                     made two other            proposals.         One proposal
would     reduce          the maximum amount                  of rental       payments       for    the    "Other
DME" category                 from      150 to 120 percent              of the     purchase        price      of
those     items.              The other         would     reduce    by 5 percent            the    fee
schedule         amounts          for      oxygen       and oxygen        equipment.         We do not have
enough data             to     form      an opinion          on those      proposals.
         We used our data                      from the      23 carriers         and selected         high-
volume         items      to estimate             the Medicare          savings     that     would       accrue
if    the Administration's                       proposals      were enacted.              Our results         were
consistent             with     the      Administration's           cost      savings       estimate,         and
its     estimate          of $240 million                does not       appear     to be overstated.
         Mr.     Chairman,              this     concludes      my prepared         remarks.          I will        be
happy to answer                 any questions             you have.