Rule: Medicare: Durable Medical Equipment, Prosthetics, Orthotics, and Supplies and Other Issues Competitive Acquisition

Tuesday,
April 10, 2007
Part II
Department of
Health and Human
Services
Centers for Medicare & Medicaid Services
42 CFR Parts 411 and 414

Medicare Program; Competitive
Acquisition for Certain Durable Medical
Equipment, Prosthetics, Orthotics, and
Supplies (DMEPOS) and Other Issues;
Final Rule
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17992 Federal Register / Vol. 72, No. 68 / Tuesday, April 10, 2007 / Rules and Regulations
DEPARTMENT OF HEALTH AND BBA Balanced Budget Act of 1997, Pub. L. A. Summary of the Proposed Rule
HUMAN SERVICES 105–33 B. Public Comments Received
BESS [Medicare] Part B Extract and II. Issuance of Final Rules
Centers for Medicare & Medicaid Summary System A. Issuance of the FY 2007 IRF Final Rule
CBA Competitive bidding area Which Finalized Certain Provisions
Services CBIC Competitive bidding implementation Relating to Competitive Acquisition for
contractor DMEPOS and the Accreditation of
42 CFR Parts 411 and 414 CBSA Core-based statistical area DMEPOS Suppliers
CMS Centers for Medicare & Medicaid B. Future Issuance of a Final Rule on
[CMS–1270–F]
Services Certain Other Provisions Addressed in
RIN 0938–AN14 CPI–U Consumer Price Index—All Urban the May 1, 2006 Proposed Rule
Consumers III. Payment for DMEPOS Under Medicare
Medicare Program; Competitive CPT [Physician] Current Procedural Part B: Background
Acquisition for Certain Durable Terminology, Fourth Edition, 2007, A. Payment for DMEPOS on the Basis of
Medical Equipment, Prosthetics, copyrighted by the American Medical Reasonable Charges
Association. CPT is a trademark of the B. Payment for DMEPOS Under Fee
Orthotics, and Supplies (DMEPOS) and American Medical Association Schedules
Other Issues CY Calendar year C. Use of the Healthcare Common
AGENCY: Centers for Medicare & DME Durable medical equipment Procedure Coding System (HCPCS)
DME MAC Durable Medical Equipment IV. Medicare Competitive Bidding
Medicaid Services (CMS), HHS. Medicare Administrative Contractor Demonstrations
ACTION: Final rule. DMEPOS Durable medical equipment, V. Discussion of the Provisions of This Final
prosthetics, orthotics, and supplies Rule
SUMMARY: This final rule establishes DMERC Durable medical equipment VI. Medicare DMEPOS Competitive Bidding
competitive bidding programs for regional carrier Program
certain Medicare Part B covered items of DRA Deficit Reduction Act of 2005, Pub. L. A. Legislative Authority and Program
durable medical equipment, prosthetics, 109–171 Advisory and Oversight Committee
orthotics, and supplies (DMEPOS) FAR Federal Acquisition Regulation l. Legislative Authority
FEHB Federal Employees Health Benefits
throughout the United States in 2. Program Advisory and Oversight
Program Committee
accordance with sections 1847(a) and FFS Fee-for-service
(b) of the Social Security Act. These B. Purpose and Definitions (§§ 414.400 and
FTE Full-time equivalent
competitive bidding programs, which 414.402)
GAO Government Accountability Office
C. Competitive Bidding Implementation
will be phased in over several years, HCPCS Healthcare Common Procedure
Contractors (CBICs) (§§ 414.406(a) and
utilize bids submitted by DMEPOS Coding System
HHA Home health agency (e))
suppliers to establish applicable D. Payment Under the Medicare DMEPOS
payment amounts under Medicare Part HHS Department of Health and Human
Services Competitive Bidding Program
B. HIPAA Health Insurance Portability and 1. Payment Basis (§§ 414.408(a), (c), and
DATES: Effective Date: This final rule is Accountability Act of 1996, Pub. L. 104– (d))
effective on June 11, 2007. 191 2. General Payment Rules
IIC Inflation indexed charge 3. Special Rules for Certain Rented Items
FOR FURTHER INFORMATION, CONTACT: of DME and Oxygen (Grandfathering of
IRF Inpatient rehabilitation facility
Lorrie Ballantine, (410) 786–7543, Ralph Suppliers) (§ 414.408(j))
MMA Medicare Prescription Drug,
Goldberg, (410) 786–4870, Karen Jacobs, Improvement, and Modernization Act of a. Process for Grandfathering Suppliers
(410) 786–2173, Michael Keane, (410) 2003, Pub. L. 108–173 b. Payment Amounts to Grandfathered
786–4495, Alexis Meholic, (410) 786– MSA Metropolitan Statistical Area Suppliers
5395, Linda Smith, (410) 786–5650. NAICS North American Industry (1) Grandfathering of Suppliers Furnishing
Classification System Items Prior to the First Competitive
SUPPLEMENTARY INFORMATION:
NF Nursing facility Bidding Program in a CBA
Electronic Access NPWT Negative pressure wound therapy (2) Suppliers That Lose Their Contract
NSC National Supplier Clearinghouse Status in a Subsequent Competitive
This Federal Register document is Bidding Program
OBRA ’87 Omnibus Budget Reconciliation
also available from the Federal Register Act of 1987, Pub. L. 100–203 c. Payment for Accessories for Items
online database through GPO Access, a OIG Office of the Inspector General, HHS Subject to Grandfathering
service of the U.S. Government Printing OTS Off-the-shelf 4. Payment Adjustments
Office. Free public access is available on PAOC Program Advisory and Oversight a. Adjustment to Account for Inflation
a Wide Area Information Server (WAIS) Committee (§ 414.408(b))
through the Internet and via PEN Parenteral and enteral nutrition b. Adjustments to Single Payment
asynchronous dial-in. Internet users can POV Power-operated vehicle Amounts to Reflect Changes to the
RFB Request for bids HCPCS (§ 414.426)
access the database by using the World 5. Authority to Adjust Payments in Other
SADMERC Statistical Analysis Durable
Wide Web; the Superintendent of Medical Equipment Regional Carrier Areas
Documents’ home page address is SBA Small Business Administration 6. Requirement to Obtain Competitively
http://www.gpoaccess.gov/index.html, SGD Speech generating device Bid Items From a Contract Supplier
by using local WAIS client software, or SNF Skilled nursing facility (§ 414.408(e))
by telnet to swais.access.gpo.gov, then TENS Transcutaneous electrical nerve 7. Limitation on Beneficiary Liability for
login as guest (no password required). stimulator Items Furnished by Noncontract
Dial-in users should use Suppliers (§§ 414.408(e)(2)(iv) and (e)(3))
To assist readers in referencing
communications software and modem 8. Payment for Repair and Replacement of
sections contained in this document, we
Beneficiary-Owned Items (§ 414.408(l))

to call (202) 512–1661; type swais, then are providing the following table of E. Competitive Bidding Areas (§§ 414.406
login as guest (no password required). contents: and 414.410)
Alphabetical Listing of Acronyms 1. Background
Table of Contents
Appearing in This Final Rule 2. Methodology for MSA Selection for CYs
I. Provisions of the May 1, 2006 Proposed 2007 and 2009 Competitive Bidding
ABN Advance Beneficiary Notice Rule Programs (§§ 414.410(a) and (b))
Federal Register / Vol. 72, No. 68 / Tuesday, April 10, 2007 / Rules and Regulations 17993
a. MSAs for CY 2007 B. Change in Ownership (§ 414.422(d)) orthotics, and supplies (DMEPOS)
b. MSAs for CY 2009 C. Suspension or Termination of a Contract under sections 1847(a) and (b) of the
3. Establishing Competitive Bidding Areas (§§ 414.422(f) and (g)) Social Security Act (the Act), as
and Exemption of Rural Areas and Areas X. Administrative or Judicial Review of
With Low Population Density Within
amended by section 302(b)(1) of the
Determinations Made Under the
Urban Areas (§ 414.410(c)) Medicare DMEPOS Competitive Bidding Medicare Prescription Drug,
4. Establishing Competitive Bidding Areas Program (§ 414.424) Improvement, and Modernization Act of
for CYs 2007 and 2009 (§§ 414.406(b) XI. Opportunity for Participation by Small 2003 (MMA), Pub. L. 108–173.
and (c)) Suppliers (§ 414.414(g)) • Implement requirements for
5. Nationwide or Regional Mail Order XII. Opportunity for Networks (§ 414.418) independent accreditation organizations
Competitive Bidding Program XIII. Education and Outreach for Suppliers that will be applying quality standards
(§§ 414.410(d)(2) and 414.412(f) and (g)) and Beneficiaries to all DMEPOS suppliers as required by
6. Additional Competitive Bidding Areas XIV. Monitoring and Complaint Services for section 1834(a)(20) of the Act. (We note
After CY 2009 (§ 414.410(e)) the Medicare DMEPOS Competitive
F. Criteria for Item Selection (§§ 414.402
that, as explained later under section
Bidding Program
and 414.406(d)(1)) XV. Physician or Treating Practitioner
VII. of this final rule, we have finalized
G. Submission of Bids for Competitively Authorization and Consideration of certain provisions of the May 1, 2006
Bid DMEPOS (§§ 414.404, 414.408, Clinical Efficiency and Value of Items in proposed rule relating to accreditation
414.412. and 412.422) Determining Categories for Bids in the DMEPOS provisions of a final
1. Furnishing of Items (§§ 414.412(c) and (§ 414.420) rule entitled ‘‘Inpatient Rehabilitation
414.422(e)) XVI. Other Public Comments Received on the Facility Prospective Payment System for
a. Furnishing of Items to Medicare May 1, 2006 Proposed Rule Federal FY 2007; Provisions Concerning
Beneficiaries Who Maintain a Permanent XVII. Collection of Information Requirements
Residence in a CBA
Competitive Acquisition for Durable
XVIII. Regulatory Impact Analysis Medical Equipment, Prosthetics,
b. Furnishing of Items to Medicare A. Overall Impact
Beneficiaries Whose Permanent 1. Executive Order 12866
Orthotics, and Supplies (DMEPOS);
Residence Is Outside a CBA 2. Regulatory Flexibility Act (RFA) Accreditation of DMEPOS Suppliers,’’
2. Requirement for Providers to Submit 3. Small Rural Hospitals which appeared in the Federal Register
Bids (§§ 414.404(a)(2) and 414.422(e)(2)) 4. Unfunded Mandates on August 18, 2006 (71 FR 48354) and
3. Physicians and Certain Nonphysician 5. Federalism is referred to throughout this final rule
Practitioners (§§ 414.404(a) and (b)) B. Regulatory Flexibility Analysis as the ‘‘FY 2007 IRF final rule.’’)
4. Product Categories for Bidding Purposes
(§§ 414.402 and 414.412(b) Through (e))
1. Summary • Establish a new fee schedule for
2. The Need for and Objective of the Final home dialysis supplies and equipment
5. Bidding for Specific Types of Items and
Rule that continue to be paid on a reasonable
Associated Payment Rules (§§ 414.408(f)
3. Comments Regarding Small Suppliers charge basis. (We note that we will
Through (j))
a. Comments on Small Supplier Focus
a. Inexpensive or Other Routinely
Groups
respond to comments on this proposal
Purchased DME Items (§§ 414.408(f) and in a future final rule.)
b. Comments on the Definition of Small
(h)(6))
Supplier • Establish a revised methodology for
b. DME Items Requiring Frequent and calculating fee schedule amounts for
c. Comments on the Protections for Small
Substantial Servicing (§ 414.408(h)(7)) new DMEPOS items. (We note that we
c. Oxygen and Oxygen Equipment Suppliers
(§§ 414.408(i) and (j)) d. Comments on Bidding Requirements for will respond to comments on this
d. Capped Rental Items (§ 414.408(h)) Physician and Other Providers proposal in a future final rule.)
e. Enteral Nutrients, Equipment, and e. Comments on Bidding by Product • Codify in our regulations that the
Supplies (§§ 414.408(f), (g)(2), and (h)) Category statutorily imposed eyeglass coverage
f. Maintenance and Servicing of Enteral f. Comments on Financial Standards exclusion under Medicare Part B
Nutrition Equipment (§§ 414.408(h)(5) g. Comments on Supplier Networks
encompasses all devices that use lenses
and (i)(5)) 4. Description and Estimate of the Number
of Small Entities to aid vision or provide magnification of
g. Supplies Used in Conjunction With DME images for impaired vision. (We note
(§ 414.408(g)(1)) 5. Projected Reporting, Recordkeeping, and
Other Compliance Requirements that we will respond to comments on
h. Off-the-Shelf Orthotics (§ 414.408(g)(4))
VII. Conditions for Awarding Contracts for 6. Agency Efforts to Minimize the this proposal in a future final rule.)
Competitive Bids Significant Impact on Small Entities • Codify in regulations that the
A. Quality Standards and Accreditation C. Anticipated Effects Medicare fee schedule amount for
B. Eligibility (§ 414.414(b)) D. Implementation Costs therapeutic shoes, inserts, and shoe
C. Financial Standards (§ 414.414(d)) E. Program Savings modifications are established in
D. Evaluation of Bids (§ 414.414(e)) F. Effect on Beneficiaries accordance with the methodology
1. Market Demand and Supplier Capacity G. Effect on Suppliers
specified in sections 1833(o) and
(§§ 414.414(e)(1) and (e)(2)) 1. Affected Suppliers
2. Small Suppliers 1834(h) of the Act. (We note that we
2. Composite Bids (§§ 414.414(e)(3) and
H. Accounting Statement will respond to comments on this
(e)(4))
3. Determining the Pivotal Bid I. Executive Order 12866 proposal in a future final rule.)
(§§ 414.414(e)(5) and (e)(6)) B. Public Comments Received
Regulation Text
4. Assurance of Savings (§ 414.414(f))
5. Assurance of Multiple Contractors I. Provisions of the May 1, 2006 We received approximately 2,129
(§ 414.414(h)) Proposed Rule timely pieces of correspondence in
6. Selection of New Suppliers After response to the May 1, 2006 proposed
Bidding (§ 414.414(i)) A. Summary of the Proposed Rule rule. Except where indicated in section
VIII. Determining Single Payment Amounts On May 1, 2006, we published in the II.B. of this final rule, this final rule
for Individual Items discusses the provisions of the May 1,

Federal Register (71 FR 25654) a
A. Setting Single Payment Amounts for
Individual Items (§§ 414.416(a) and (b)) proposed rule to— 2006 proposed rule, summarizes the
B. Rebate Program • Establish and implement public comments received on each
IX. Terms of Contracts competitive bidding programs for subject area, sets out our responses to
A. Terms and Conditions of Contracts certain covered items of durable those comments, and sets forth our final
(§§ 414.422(a) Through (c)) medical equipment, prosthetics, rules.
II. Issuance of Final Rules January 1, 1989, payment for most of • Inexpensive or other routinely
these items was made on a reasonable purchased items (section 1834(a)(2) of
A. Issuance of the FY 2007 IRF Final
charge basis by Medicare carriers. the Act and § 414.220 of the
Rule Which Finalized Certain Provisions
Section 1842(b) of the Act sets forth the regulations);
Relating to Competitive Acquisition for • Items requiring frequent and
methodology for determining reasonable
DMEPOS and the Accreditation of charges. Implementing regulations for substantial servicing (section 1834(a)(3)
DMEPOS Suppliers section 1842(b) of the Act are located at of the Act and § 414.222 of the
To ensure timely implementation of 42 CFR Part 405, Subpart E. regulations);
the Medicare DMEPOS Competitive Reasonable charge determinations are • Customized items (section
Bidding Program, we responded to generally based on customary and 1834(a)(4) of the Act and § 414.224 of
comments submitted on certain prevailing charges derived from historic the regulations);
provisions of the May 1, 2006 proposed charge data, with the ‘‘reasonable • Oxygen and oxygen equipment
rule and finalized our proposals charge’’ for an item being the lowest of (section 1834(a)(5) of the Act and
concerning the designation of the following factors: § 414.226 of the regulations);
competitive bidding implementation • The supplier’s actual charge for the • Other items of DME (section
contractors (CBICs), competitive bidding item. 1834(a)(7) of the Act and § 414.229 of
education and outreach, and the • The supplier’s customary charge for the regulations).
accreditation of DMEPOS suppliers in the item. Each category has its own unique
the DMEPOS provisions of the FY 2007 • The prevailing charge in the locality payment rules. With the exception of
IRF final rule (71 FR 48354). We also for the item. The prevailing charge may customized items, a fee schedule
not exceed the 75th percentile of the amount is calculated for each item or
discussed in that final rule certain
customary charges of suppliers in the category of DME that is identified by a
issues relating to the establishment of
locality. code in the Healthcare Common
quality standards for DMEPOS suppliers
• The inflation indexed charge (IIC). Procedure Coding System (HCPCS). The
that will be applied by independent
The IIC is defined in § 405.509(a) of the HCPCS is discussed in section III.C. of
accreditation organizations.
Medicare regulations as the lowest of this final rule. The Medicare payment
B. Future Issuance of a Final Rule on the fee screens used to determine amount for a customized item of DME
Certain Other Provisions Addressed in reasonable charges for services, is based on the Medicare carrier’s
the May 1, 2006 Proposed Rule including supplies, and equipment paid individual consideration of that item.
We will respond to comments on a reasonable charge basis (excluding The fee schedule amounts for oxygen
submitted on certain provisions of the physicians’ services), that is in effect on and oxygen equipment are monthly
May 1, 2006 proposed rule and finalize December 31 of the previous fee screen payment amounts. Payment under the
our proposals concerning the following year, updated by the inflation DME benefit is made for supplies
provisions in a separate final rule that adjustment factor. The inflation necessary for the effective use of DME
will be published at a later date in the adjustment factor is based on the (for example, lancets used with blood
Federal Register: (1) Establishment of a current change in the Consumer Price glucose monitors). These supplies are
new fee schedule for home dialysis Index for All Urban Consumers (CPI–U), paid for using the same methodology
supplies and equipment that continue to as compiled by the Bureau of Labor that we use to pay for the purchase of
be paid on a reasonable charge basis; (2) Statistics, for the 12-month period inexpensive or routinely purchased
establishment of a revised methodology ending June 30 each year. items.
for calculating fee schedule amounts for The fee schedule amounts for DME
B. Payment for DMEPOS Under Fee
new DMEPOS items; (3) codification in are generally adjusted annually by the
Schedules
our regulations that the scope of the change in the CPI–U for the 12-month
Section 1834 of the Act, as added by period ending June 30 of the preceding
eyeglass coverage exclusion under section 4062 of the Omnibus Budget
Medicare Part B encompasses all year. The fee schedule amounts are also
Reconciliation Act of 1987 (OBRA ‘87), generally limited by a ceiling (upper
devices that use lenses to aid vision or Public Law 100–203, provides for
provide magnification of images for limit) and floor (lower limit) equal to
implementation of a fee schedule 100 percent and 85 percent,
impaired vision; and (4) codification in payment methodology for most durable
our regulations that the Medicare fee respectively, of the median of the
medical equipment (DME), prosthetic Statewide fee schedule amounts.
schedule amounts for therapeutic shoes, devices, and orthotic devices furnished Since 1994, Medicare has paid for
inserts, and shoe modifications are after January 1, 1989. Specifically, most surgical dressings in accordance
established in accordance with the sections 1834(a)(1)(A) and (B) and with section 1834(i) of the Act and
methodology specified in sections 1834(h)(1)(A) of the Act provide that § 414.220(g) of the regulations, using the
1833(o) and 1834(h) of the Act. Medicare payment for these items is same methodology as is used for
III. Payment for DMEPOS Under equal to 80 percent of the lesser of the payment of purchased inexpensive or
Medicare Part B: Background actual charge for the item or the fee routinely purchased DME.
schedule amount for the item. We Under section 1834(h) of the Act and
A. Payment for DMEPOS on the Basis of implemented this payment methodology § 414.228 of the regulations, payment
Reasonable Charges at 42 CFR Part 414, Subpart D of our for prosthetic and orthotic devices is
Payment for most DMEPOS items, regulations. Sections 1834(a)(2) through made on a lump sum basis and is equal
including supplies and equipment, (a)(5) and section 1834(a)(7) of the Act, to the lower of the fee schedule amount
furnished under Medicare Part B is and implementing regulations at calculated for the item or the actual
made through contractors known as § 414.200 through § 414.232 (with the charge for the item, less any unmet
Durable Medical Equipment Medicare exception of § 414.228), set forth deductible amount. The fee schedule
Administrative Contractors (DME separate payment categories of DME and amounts are calculated using a weighted
MACs) (previously Durable Medical describe how the fee schedule for each average of Medicare payments made in
Equipment Regional Carriers (DMERCs), of the following categories is the States in each of 10 CMS regions
also known as Medicare carriers). Before established: from July 1, 1986, through June 30,
1987, adjusted annually by the change amounts determined in accordance with the period of medical need. However,
in the CPI–U for the 12-month period section 1834(h) of the Act and Part 414, under section 1834(a)(5)(F)(ii)(II)(bb) of
ending June 30 of the preceding year. Subpart D of our regulations. the Act, maintenance and servicing
The regional fee schedule amounts are Section 5101(a) of the Deficit payments for beneficiary-owned oxygen
limited by a ceiling (upper limit) and Reduction Act of 2005 (DRA), Public equipment (for parts and labor not
floor (lower limit) equal to 120 percent Law 109–171, amended section covered by the supplier’s or
and 90 percent, respectively, of the 1834(a)(7)(A) of the Act to change the manufacturer’s warranty) will be made
average of the regional fee schedule way Medicare pays for capped rental only if they are reasonable and
amounts for each State. items. As a result, section necessary. These statutory changes went
As authorized under section 1842(s) 1834(a)(7)(A)(i)(I) of the Act now states into effect on January 1, 2006. For
of the Act and 42 CFR Part 414, Subpart that payment for a capped rental item beneficiaries receiving Medicare-
C of our regulations, Medicare pays for may not extend over a period of covered oxygen equipment as of
parenteral and enteral nutrition (PEN) continuous use (as determined by the December 31, 2005, the 36-month rental
nutrients, equipment, and supplies on Secretary) of longer than 13 months, and period began on January 1, 2006. We
the basis of 80 percent of the lesser of section 1834(a)(7)(A)(i)(II) of the Act implemented section 5101(b) of the
the actual charge for the item or the fee sets forth how the 13 monthly rental DRA in a final rule, entitled CMS–1304–
schedule amount for the item payment amounts are to be determined. F Home Health Prospective Payment
(§ 414.102(a)). The fee schedule In addition, section 1834(a)(7)(A)(ii) of System Rate Update for Calendar Year
amounts for PEN items are calculated on the Act now provides that on the first 2007 and Deficit Reduction Act of 2005;
a nationwide basis and are the lesser of day that begins after the 13th Changes to Medicare Payment for
the reasonable charges for CY 1995 or continuous month during which Oxygen Equipment and Capped Rental
the reasonable charges that would have payment is made for a capped rental Durable Medical Equipment, that was
been used in determining payment for item, the supplier of the capped rental published in the Federal Register on
these items in CY 2002 under the former item must transfer title to the item to the November 9, 2006 (71 FR 65884).
reasonable charge payment Medicare beneficiary. Once the title has
methodology (§ 414.104(b)). The fee transferred, or once a purchase C. Use of the Healthcare Common
schedule amounts are generally adjusted agreement for a power wheelchair has Procedure Coding System (HCPCS)
annually by the percentage increase in been entered into in accordance with The Healthcare Common Procedure
the CPI–U for the 12-month period section 1834(a)(7)(A)(iii) of the Act as Coding System (HCPCS) is a
ending with June 30 of the preceding amended, section 1834(a)(7)(A)(iv) of standardized coding system used to
year (§ 414.102(c)). Under § 414.104(a), the Act provides that reasonable and process claims submitted to Medicare,
payment for PEN nutrients and supplies necessary maintenance and servicing Medicaid, and other health insurance
is made on a purchase basis, and payments (for parts and labor not programs by providers, physicians, and
payment for PEN equipment that is covered by the supplier’s or the other suppliers. The HCPCS code set is
rented is made on a monthly basis. (We manufacturer’s warranty, as determined divided into the following two principal
note that we proposed to revise § 414.1 by the Secretary to be appropriate for subsystems, referred to as Level I and
in the May 1, 2006 proposed rule to the particular item) will be made. These Level II of the HCPCS:
specify that fee schedules were statutory changes apply only to capped • Level I of the HCPCS codes is
established for PEN items in accordance rental items whose first rental month comprised of Current Procedural
with our authority under section 1842(s) occurs on or after January 1, 2006. We Terminology (CPT) codes, which are
of Act. We will address this proposal in implemented section 5101(a) of the DRA copyrighted by the American Medical
a final rule that will be published later in a final rule, CMS–1304–F: Home Association. CPT codes are a uniform
in the Federal Register.) Health Prospective Payment System coding system consisting of descriptive
Section 1833(o)(2) of the Act, as Rate Update for Calendar Year 2007 and terms and identifying codes that are
amended by section 627 of the MMA, Deficit Reduction Act of 2005; Changes used primarily to identify medical
requires implementation of fee schedule to Medicare Payment for Oxygen services and procedures furnished by
amounts, effective January 1, 2005, for Equipment and Capped Rental Durable physicians and other health care
the purpose of determining payment for Medical Equipment, that was published professionals which are billed to public
custom molded shoes, extra-depth in the Federal Register on November 9, or private health insurance programs.
shoes, and inserts (collectively, 2006 (71 FR 65884). CPT codes are developed, published,
‘‘therapeutic shoes’’). We stated in the Section 5101(b) of the DRA amended and maintained by the American
May 1, 2006 proposed rule that we section 1834(a)(5) of the Act to limit Medical Association. CPT codes do not
believe this section of the MMA is monthly rental payments for oxygen include codes needed to separately
largely self-implementing because it equipment to a 36-month period of report medical items that are regularly
mandates use of the methodology set continuous use (as determined by the billed by suppliers other than
forth in section 1834(h) of the Act for Secretary). On the first day that begins physicians.
prosthetic and orthotic devices in after the 36th continuous month during • Level II of the HCPCS codes is a
determining the fee schedule amounts which payment is made for the oxygen standardized coding system used
for therapeutic shoes. We implemented equipment, new section primarily to identify products and
the methodology for payment for 1834(a)(5)(F)(ii)(I) of the Act provides supplies that are not included in the
prosthetic and orthotic devices in that the supplier must transfer title to CPT codes, such as DMEPOS when used
regulations at 42 CFR Part 414, Subpart the equipment to the Medicare outside a physician’s office.
D, and section 627 of the MMA provides beneficiary. Section • HCPCS Level II codes classify like
that the same methodology shall apply 1834(a)(5)(F)(ii)(II)(aa) of the Act items by category for the purpose of
to therapeutic shoes. We implemented provides that Medicare will continue to efficient claims processing. Assignment
section 627 of the MMA through make monthly payments for oxygen of a HCPCS code is not a coverage
program instructions, and on January 1, contents for beneficiary-owned oxygen determination, and does not imply that
2005, Medicare began paying for equipment in the amounts recognized any payer will cover the items in the
therapeutic shoes based on fee schedule under section 1834(a)(9) of the Act for code category. For some DMEPOS items,
such as wheelchairs and wheelchair bids in each round replaced the present a regulatory impact analysis of
cushions, minimum performance Statewide Medicare DMEPOS fees. The the provisions of this final rule in
standards must be met before an item second round of the demonstration in section XVIII. of this final rule. The
can be classified under a HCPCS code. Polk County ended in September 2002. regulation text appears at the end of this
In October 2003, the Secretary delegated Texas was the second site for the final rule.
authority under the Health Insurance demonstration. In Bexar, Comal, and
Portability and Accountability Act of Guadalupe counties in the San Antonio VI. Medicare DMEPOS Competitive
1996 (HIPAA) to CMS to maintain and MSA, we conducted bidding in 2000 for Bidding Program
distribute the HCPCS Level II codes. In five kinds of DMEPOS: oxygen A. Legislative Authority and Program
the May 1, 2006 proposed rule, we equipment and supplies; hospital beds Advisory and Oversight Committee
proposed that the HCPCS Level II codes and accessories; wheelchairs and
would be used to describe the DME, accessories; general orthotics; and 1. Legislative Authority
orthotic, and enteral nutrients, nebulizer drugs. Fifty-one suppliers Section 302(b)(1) of the MMA (Pub. L.
equipment, and supplies furnished were selected and began serving 108–173) amended section 1847 of the
under the Medicare DMEPOS Medicare beneficiaries under the new Act to require the Secretary to establish
Competitive Bidding Program, both for fees in February 2001. The San Antonio and implement programs under which
the purpose of requesting bids and for site ended operations in December 2002, competitive bidding areas (CBAs) are
establishing payment amounts. the statutorily required termination date established throughout the United
in the BBA. States for contract award purposes for
IV. Medicare Competitive Bidding In each area of evaluation, the data
Demonstrations the furnishing of certain competitively
indicated mostly favorable results for priced items for which payment is made
Prior to enactment of the MMA, the Medicare program. The under Medicare Part B (the ‘‘Medicare
section 4319 of the Balanced Budget Act demonstration led to lower Medicare DMEPOS Competitive Bidding
of 1997 (BBA), Pub. L. 105–33, fees for almost every item in almost Program’’). Section 1847(a)(2) of the Act
authorized implementation of up to five every product category in each round of provides that the items and services to
demonstration projects of competitive bidding. Fee reductions varied by which competitive bidding applies are
bidding for Medicare Part B items, product category and item, resulting in certain durable medical equipment
except physician services. In accordance a nearly 20 percent overall savings at (DME) and medical supplies, which are
with section 4319 of the BBA, we each site. Statistical and qualitative data covered items (as defined in section
planned and implemented the DMEPOS indicate that beneficiary access and 1834(a)(13) of the Act) for which
Competitive Bidding Demonstration to quality of services were essentially payment would otherwise be made
test the feasibility and program impacts unchanged. under section 1834(a) of the Act,
of using competitive bidding to set The DMEPOS Competitive Bidding
including items used in infusion and
prices for DMEPOS. The demonstration Demonstration offered valuable
drugs, (other than inhalation drugs) and
was implemented at two sites: Polk information for understanding the
supplies used in conjunction with DME,
County, Florida, and in the San impacts of competitive bidding for
but excluding class III devices under the
Antonio, Texas, Metropolitan Statistical Medicare services. This information is
Federal Food, Drug and Cosmetic Act;
Area (MSA). The competitive bidding especially important now because
enteral nutrients, equipment and
demonstrations, authorized under the section 302(b) of the MMA mandates a
larger role for competitive bidding supplies (as described in section
BBA, were implemented successfully in
within the Medicare program by 1842(s)(2)(D) of the Act); and OTS
both demonstration sites from 1999 to
requiring the Secretary to implement orthotics (as described in section
2002, resulted in a substantial savings to
competitive bidding programs for the 1861(s)(9) of the Act) for which payment
the program, and offered beneficiaries
sufficient access and quality products. furnishing of certain DME and would otherwise be made under section
At the first site, Polk County, Florida, associated supplies, enteral nutrition 1834(h) of the Act and which require
we conducted the first of two rounds of and associated supplies, and off-the- minimal self-adjustment. In addition,
bidding in 1999. Five categories of shelf (OTS) orthotics. In addition, sections 1847(a) and (b) of the Act
DMEPOS were put up for bidding: section 303(d) of the MMA required the specify certain requirements and
oxygen equipment and supplies Secretary to implement a competitive conditions for implementation of the
(required by statute); hospital beds and bidding program for certain Medicare Medicare DMEPOS Competitive Bidding
accessories; enteral nutrition formulas Part B drugs not paid on a cost or Program.
and equipment; urological supplies; and prospective payment system basis, and Competitive bidding provides a way
surgical dressings. A total of 16 contract section 302(b) of the MMA requires that to harness marketplace dynamics to
suppliers began providing competitive bidding demonstration create incentives for suppliers to
demonstration products in Polk County projects be implemented for clinical provide quality items in an efficient
on October 1, 1999, and continued for laboratory services and managed care. manner and at a reasonable cost to the
2 years. The second and final round of program. In our view, the Medicare
bidding in Polk County was conducted V. Discussion of the Provisions of This DMEPOS Competitive Bidding Program
in 2001 for the same product categories Final Rule has five main objectives:
minus enteral nutrition. (Enteral In this final rule we are adding new • To implement competitive bidding
nutrition was dropped to retain only sections to 42 CFR Part 414, Subpart F programs for certain DMEPOS items.
product categories that are that implement rules relating to the • To assure beneficiary access to
overwhelmingly used in private homes.) Medicare DMEPOS Competitive Bidding quality DMEPOS as a result of the
The second set of competitively bid Program. A discussion of the specific program.
payment amounts took effect in October provisions of the proposed rule, a • To reduce the amount Medicare
2001. As in round one, 16 suppliers summary of the public comments we pays for DMEPOS and create a payment
were selected, of whom half had received and our responses to those structure under competitive bidding
participated as winners previously. The comments are presented in sections VI. that is more reflective of a competitive
new fee schedules developed from the through XVII. of this final rule. We market.
• To limit the financial burden on certification/standards representatives, operate until December 31, 2009. Future
beneficiaries by reducing their out-of- six Federal and State program PAOC meeting dates, as well as other
pocket expenses for DMEPOS they representatives, one physician, and one information pertinent to the Medicare
obtain through the program. pharmacist. The representatives have DMEPOS Competitive Bidding Program,
• To contract with suppliers that expertise in a variety of subject matter can be found on the CMS Web site.
conduct business in a manner that is areas, including DMEPOS, competitive
beneficial for the program and for B. Purpose and Definitions (§§ 414.400
bidding methodologies and processes,
Medicare beneficiaries. and 414.402)
and rural and urban marketplace
As discussed in section IV. of this dynamics. In the May 1, 2006 proposed rule, we
final rule, the Medicare DMEPOS We held the first PAOC meeting, proposed in § 414.400 to state that the
competitive bidding demonstration which was announced in a Federal purpose of 42 CFR Part 414, Subpart F
projects that were conducted prior to Register notice (69 FR 31125), at the would be to implement the Medicare
the enactment of the MMA offered CMS Headquarters on October 6, 2004. DMEPOS Competitive Bidding Program
valuable information for understanding We held the second meeting on for certain DMEPOS items as required
the impacts of competitive bidding for December 6 and 7, 2004. We have held by sections 1847(a) and (b) of the Act.
Medicare services. This information, in two additional PAOC meetings in 2005 As set forth in proposed § 414.402, we
part, led to the adoption of section and 2006 during which we, along with proposed to define certain frequently
302(b) of the MMA, which requires that our contractor, RTI International, occurring terms that would be used in
the Secretary implement competitive presented material to both the PAOC competitive bidding. Specifically, we
bidding programs for the furnishing of and the public relating to the provisions proposed to define the following terms:
certain DMEPOS under the Medicare that are outlined in the proposed rule Bid means an offer to furnish an item
program. and in this final rule. The topics that we for a particular price and time period
2. Program Advisory and Oversight presented included— that includes, where appropriate, any
• Medicare’s timeline for services that are directly related to the
Committee
implementation of the Medicare furnishing of the item.
Section 1847(c) of the Act, as DMEPOS Competitive Bidding Program; Competitive bidding area (CBA)
amended by section 302(b)(1) of the • Results of the Medicare competitive means an area established by the
MMA, required the Secretary to bidding demonstration projects Secretary under this subpart [42 CFR
establish a Program Advisory and authorized by section 4319 of the BBA; Part 414, Subpart F]. (We note that the
Oversight Committee (PAOC) to provide • Structure of the Medicare DMEPOS definition language included in the
advice to the Secretary with respect to Competitive Bidding Program; preamble of the proposed rule was
the following functions: • Existing non-Medicare competitive inconsistent with the definition
• The implementation of the bidding programs for DMEPOS; language in the proposed regulation
Medicare DMEPOS Competitive Bidding • Program design options for the text, which was correct.)
Program. Medicare DMEPOS Competitive Bidding Composite bid means the sum of a
• The establishment of financial Program; bidding supplier’s weighted bids for all
standards for entities seeking contracts • Criteria for selecting Metropolitan items within a product category for
under the Medicare DMEPOS Statistical Areas (MSAs) in which purposes of allowing a comparison
Competitive Bidding Program, taking competition under the Medicare across bidding suppliers.
into account the needs of small DMEPOS Competitive Bidding Program
Competitive bidding program means a
providers. will occur in both CYs 2007 and 2009;
• The establishment of requirements program established under this subpart
• Criteria for selecting items for
for collection of data for the efficient [42 CFR Part 414, Subpart F]. (We note
competitive bidding;
management of the Medicare DMEPOS • Bidding process overview; that the definition language included in
Competitive Bidding Program. • Methodology for setting single the preamble of the proposed rule was
• The development of proposals for payment amounts for competitively bid inconsistent with the definition
efficient interaction among items; language in the proposed regulation
manufacturers, providers of services, • Capacity of DMEPOS suppliers and text, which was correct.)
suppliers (as defined in section 1861(d) beneficiary utilization of DMEPOS; Contract supplier means an entity that
of the Act), and individuals. • Financial capabilities of bidding is awarded a contract by CMS to furnish
• The establishment of quality suppliers; items under a competitive bidding
standards for DMEPOS suppliers under • Exception authority under section program.
section 1834(a)(20) of the Act. 1847(a)(3) of the Act for rural areas and DMEPOS stands for durable medical
In addition, section 1847(c)(3)(B) of areas with low population density equipment, prosthetics, orthotics and
the Act authorizes the PAOC to perform within urban areas that are not supplies.
such additional functions to assist the competitive; and Grandfathered item means any one of
Secretary in carrying out the Medicare • Quality standards and accreditation the following items for which payment
DMEPOS Competitive Bidding Program procedures applicable to DMEPOS is made on a rental basis prior to the
as the Secretary may specify. suppliers. implementation of a competitive
As authorized under section In addition to the PAOC meetings, we bidding program under this subpart [42
1847(c)(2) of the Act, the PAOC have designed and implemented a CMS CFR Part 414, Subpart F]:
members were appointed by the Web site at http://cms.hhs.gov/
Secretary and represent a broad mix of CompetitiveAcqforDMEPOS/PAOCMI/ (1) An inexpensive or routinely
relevant industry, consumer, and list.asp specifically for the public to purchased item described in § 414.220.
government parties. Specifically, the have access to all PAOC presentations, (2) An item requiring frequent and
membership roster includes two minutes, and updates for the Medicare substantial servicing as described in
beneficiary/consumer representatives, DMEPOS Competitive Bidding Program. § 414.222.
four manufacturer representatives, five In accordance with section 1847(c)(5) of (3) Oxygen and oxygen equipment
supplier representatives, three the Act, the PAOC will continue to described in § 414.226.
(4) A capped rental item described in Single payment amount means the discuss this revision in section VI.B. of
§ 414.229. allowed payment for an item furnished this final rule. Therefore, in this final
Grandfathered supplier means a under a competitive bidding program. rule, we have revised the definition of
noncontract supplier that furnishes a Supplier means an entity with a valid ‘‘item’’ to specify that an item for
grandfathered item. Medicare supplier number, including an purposes of competitive bidding may be
Item means one of the following entity that furnishes an item through the comprised of two or more products
products identified by a HCPCS code, mail. identified by different HCPCS codes
other than class III devices under the Treating practitioner means a and/or modifiers and that these codes
Federal Food, Drug and Cosmetic Act physician assistant, nurse practitioner, may be defined based on how a product
and inhalation drugs, and includes the or clinical nurse specialist, as those is furnished (for example, by mail).
services directly related to the terms are defined in section 1861(aa)(5) Comment: One commenter stated that
furnishing of that product to the of the Act. the definitions for the ‘‘composite bid’’
beneficiary: Weighted bid means the item weight and the ‘‘single payment amount’’ for
(1) Durable medical equipment multiplied by the bid price submitted the individual items should include all
(DME), as defined in § 414.202 and for that item. the costs associated with training the
Comment: Several commenters beneficiary and properly putting
further classified into the following
supported the definitions of ‘‘bid’’ and equipment in place to ensure the safe
categories:
‘‘item’’ because these definitions administration of a piece of DMEPOS in
(i) Inexpensive or routinely purchased
acknowledge that services are involved a beneficiary’s home.
items, as specified in § 414.220(a);
in the delivery of products to Medicare Response: We are not changing the
(ii) Items requiring frequent and beneficiaries. One commenter suggested
substantial servicing, as specified in definitions of ‘‘composite bid’’ and
that Medicare competitively bid class III ‘‘single payment amount’’ because these
§ 414.222(a); devices, which appear to be excluded definitions are based upon the bids,
(iii) Oxygen and oxygen equipment, under the proposed definition of which, by definition, include any
as specified in § 414.226(b). ‘‘item.’’ services that are directly related to the
(iv) Other DME (capped rental items), Response: We appreciate the furnishing of the item to the beneficiary.
as specified in § 414.229. commenters’ support. Section In addition, to the extent that the service
(2) Supplies necessary for the 1847(a)(2)(A) of the Act specifically component is included in the
effective use of DME. excludes class III devices under the definitions of ‘‘bid’’ and ‘‘item,’’ the
(3) Enteral nutrients, equipment, and Federal Food, Drug, and Cosmetic Act ‘‘composite bid’’ and the ‘‘single
supplies. from the Medicare DMEPOS payment amount’’ calculated for each
(4) Off-the-shelf orthotics, which are Competitive Bidding Program. item would reflect the costs of services
orthotics described in section 1861(s)(9) Therefore, we do not have the authority associated with furnishing that item to
of the Act that require minimal self- to conduct competitive bidding for these a beneficiary.
adjustment for appropriate use and do items. We are clarifying in the definition Comment: Several commenters
not require expertise in trimming, of ‘‘item’’ that the DME excludes class suggested that the proposed definition
bending, molding, assembling, or III devices under the Federal Food, Drug of ‘‘noncontract supplier’’ does not
customizing to fit a beneficiary. and Cosmetic Act as defined in address suppliers that are physically
Item weight is a number assigned to § 414.402 and that inhalation drugs are located outside of a CBA, yet provide
an item based on its beneficiary not included in the term ‘‘supplies services to beneficiaries whose
utilization rate in a competitive bidding necessary for the effective use of DME.’’ permanent address is inside a CBA. One
area when compared to other items in We are also revising the regulatory commenter suggested that the definition
the same product category. cross-reference for ‘‘oxygen and oxygen read: ‘‘A supplier that furnishes items to
Metropolitan Statistical Area (MSA) equipment.’’ beneficiaries in a competitive bidding
has the same meaning as that given by We agree with the commenters that area, but that is not awarded a contract
the Office of Management and Budget. the definition of an item should by Medicare to furnish items included
Nationwide competitive bidding area acknowledge what is included in an in the competitive bidding program for
means a competitive bidding area that item for which bids are being submitted. that area.’’
includes the United States and its Therefore, in this final rule, we are Response: Our proposed definition of
territories. revising the definition of ‘‘item’’ to the term ‘‘noncontract supplier’’ only
Noncontract supplier means a indicate that although we will always included suppliers located in a CBA or
supplier that is located in a competitive identify the product by its HCPCS code, that mailed items to beneficiaries in a
bidding area or that furnishes items we may combine several codes to form CBA. However, we recognize the
through the mail to beneficiaries in a one competitively bid item or specify a commenter’s concerns that this
competitive bidding area but that is not particular method by which the item is definition would not capture suppliers
awarded a contract by CMS to furnish furnished. For example, if we were to that are located outside the CBA but that
items included in a competitive bidding include diabetic test strips in a mail- furnish items to beneficiaries who
program for that area. order competitive bidding program, we maintain a permanent residence in a
Physician has the same meaning as in would identify the item by its HCPCS CBA. Therefore, we are revising the
section 1861(r)(1) of the Act. code and indicate that the product is to definition of the term ‘‘noncontract
Pivotal bid means the highest be furnished only by mail. We are supplier’’ in this final rule to mean: ‘‘a
composite bid based on bids submitted making this change because we need to supplier that is not awarded a contract
by a suppliers for a product category be able to modify HCPCS codes or by CMS to furnish items included in a
that will include a sufficient number of combine HCPCS codes to identify the competitive bidding program.’’
suppliers to meet beneficiary demand items for which we will be conducting Comment: Many commenters
for the items in that product category. competitive bidding because HCPCS suggested that the definition of
Product category means a grouping of codes, by themselves, do not always ‘‘physician’’ be expanded to allow
related items that are included in a fully define the items for which we wish podiatrists, optometrists and dentists to
competitive bidding program. to solicit competitive bids. We further prescribe a particular brand or mode of
delivery of DMEPOS, along with the mail to beneficiaries who maintain or less in annual receipts including
physician assistants, nurse practitioners, a permanent residence in a competitive Medicare and non-Medicare revenue,’’
and clinical nurse specialists. The bidding area.’’ This new definition is as discussed in section XII. of this final
commenters asserted that this expansion discussed in section V.I.E.5. of this final rule.
would allow a variety of qualified rule. We are also making the following
practitioners, in addition to physicians, • Adding a definition of ‘‘minimal technical changes to proposed
to prescribe particular brands or modes self-adjustment’’ to mean ‘‘an § 414.402:
of delivery where appropriate. The adjustment that the beneficiary, • Revising the definition of
commenters requested that the caretaker for the beneficiary, or supplier ‘‘competitive bidding program’’ to
definition of physician be changed from of the device can perform and does not clarify that such a program established
that specified in section 1861(r)(1) of the require the services of a certified under 42 CFR Part 414, Subpart F
Act to that specified in section 1861(r) orthotist (that is, an individual certified occurs ‘‘within a designated CBA.’’
of the Act. by either the American Board for • Clarifying the introductory language
Response: We agree with the Certification in Orthotics and of the definition of ‘‘grandfathered
commenters and are revising the Prosthetics, Inc., or the Board for item’’ to read: ‘‘any one of the following
definition of ‘‘physician’’ applicable in Orthotist/Prosthetist Certification) or an items for which payment is made on a
this final rule to have the same meaning individual who has specialized training. rental basis prior to the implementation
as in section 1861(r) of the Act. We This new definition is discussed in of a competitive bidding program and
believe that this revision is consistent section VI.F. of this final rule. for which payment is made after
with the intent of the 1847(a)(5)(A) as it • Adding a definition of ‘‘nationwide implementation of a competitive
reflects which professionals would be mail order contract supplier’’ to mean a bidding program to a grandfathered
ordering Medicare-covered items under mail order contract supplier that supplier that continues to furnish items
the Medicare DMEPOS Competitive furnishes items in a nationwide in accordance with § 414.408(j).’’
Bidding Program. In addition, we are competitive bidding area, and a • Revising the definition of
finalizing the definition that we had definition of ‘‘regional mail order ‘‘grandfathered supplier’’ to mean a
proposed that a treating practitioner contract supplier’’ to mean a mail order noncontract supplier ‘‘that chooses to
means a physician assistant, nurse contract supplier that furnishes items to continue to furnish grandfathered items
practitioner, or clinical nurse specialist, any Medicare beneficiary residing to a beneficiary in a CBA.’’
as defined in section 1861(aa)(5) of the within a certain region(s) that are • Revising the definition of a
Act. In ordering DMEPOS under the designated as CBAs and are located ‘‘nationwide competitive bidding area’’
Medicare program, these treating within the United States, its Territories, to mean a CBA that includes the United
practitioners can specify a particular or the District of Columbia, as discussed States, its Territories, and the District of
brand or mode of delivery for an item, in section VI.E.5. of this final rule. Columbia.’’
which would be paid at the single • Adding a definition of ‘‘network’’ to We are finalizing all of the other
payment amount. mean a group of small suppliers that definitions in proposed § 414.402
After consideration of the public form a legal entity that submits a bid to without modification.
comments received, we are finalizing furnish competitively bid items in a C. Competitive Bidding Implementation
proposed § 414.400 with only a CBA, and that meets additional Contractors (CBICs) (§§ 414.406(a) and
technical change to the heading of the requirements. This change is discussed (e))
section (changing the heading from in section XII. of this final rule.
‘‘Basis’’ to ‘‘Purpose and Basis’’). In • Revising the definition of ‘‘pivotal Section 1847(b)(9) of the Act provides
addition, we are revising the definitions bid’’ to mean the ‘‘lowest composite bid that the Secretary may contract with
of ‘‘item,’’ ‘‘noncontract supplier,’’ and based on bids submitted by suppliers for appropriate entities to implement the
‘‘physician’’ in § 414.402 as discussed a product category that includes a Medicare DMEPOS Competitive Bidding
above. We are also revising the sufficient number of suppliers to meet Program. Section 1847(a)(1)(C) of the
definitions of several other terms in beneficiary demand for the items in that Act also authorizes the Secretary to
§ 414.402, as well as adding new product category.’’ We consider this waive such provisions of the Federal
definitions. Below we state the revised revision to be a clarification that the Acquisition Regulation (FAR) as are
and new definitions and indicate where pivotal bid is the lowest composite bid necessary for the efficient
a full discussion of each change can be in terms of the bid amounts submitted implementation of this section, other
found in this final rule: by the suppliers rather than the highest than provisions relating to
• Revising the regulatory reference to composite bid that includes sufficient confidentiality of information and such
the oxygen payment classes in the number of suppliers to meet demand, as other provisions as the Secretary
definition of ‘‘item’’ so that the discussed in section VII.D.3. of this final determines appropriate.
definition now references rule. In the May 1, 2006 proposed rule (71
§ 414.226(c)(1) instead of § 414.225(b). • Revising the definition of ‘‘product FR 25661), we proposed to designate
We discuss this revision in section category’’ to mean ‘‘a grouping of related one or more competitive bidding
VI.G.6 of this final rule. items that are used to treat a similar implementation contractors (CBICs) for
• Revising the definition of ‘‘item medical condition’’, as discussed in the purpose of implementing the
weight’’ by removing the phrase ‘‘in a section VI.G.5. of this final rule. Medicare DMEPOS Competitive Bidding
competitive bidding area’’ and adding • Adding a definition of ‘‘regional Program (proposed § 414.406(a)). We
the phrase ‘‘using national data’’ in competitive bidding area ‘‘to mean’’ a also stated that we envisioned the
referencing the beneficiary utilization CBA that consists of a region of the program would have six primary
rate. We discuss this revision in section United States, its Territories, and/or the functions, including overall oversight
VI.D.2. (Evaluation of Bids) of this final District of Columbia’’as discussed in and decision making, operation design
rule. section VI.E.5. of this final rule. functions (including the design of both
• Adding a definition of ‘‘mail order • Adding a definition of ‘‘small bidding and outreach material
contract supplier’’ to mean a contract supplier’’ to mean the ‘‘a supplier that templates, as well as program
supplier that furnishes items through generates gross revenue of $3.5 million processes), bidding and evaluation,
access and quality monitoring, outreach implementation of a competitive and we have a legal obligation to
and education, and claims processing. bidding program would not preclude comply with this legislative mandate.
As we stated earlier, under the the use of an advanced beneficiary After consideration of the public
DMEPOS provisions of the FY 2007 IRF notice (ABN) to allow beneficiaries to comments we received, we are
final rule (71 FR 48354), we addressed make informed consumer choices finalizing, without substantive
the public comments we received on the regarding whether to obtain items for revisions, proposed § 414.408(a) that
proposed provisions relating to which Medicare might not make governs the payment basis under the
implementation contractors under the payment (proposed § 414.408(d)). Medicare DMEPOS Competitive Bidding
Medicare DMEPOS Competitive Bidding Finally, as required under section Program. We did not receive comments
Program and finalized regulations at 1847(b)(5)(C) of the Act, we proposed in on proposed §§ 414.408(c) and (d) and
§ 414.406(a), which allows us to § 414.408(c) that payment for an item are finalizing those sections. We have
designate one or more CBICs for the furnished under a competitive bidding made an editorial revision to § 414.408,
purpose of implementing the program, program would be made on an using the acronym CBA instead of the
and at § 414.406(e), which codifies our assignment-related basis. terms ‘‘area’’ or ‘‘competitive bidding
proposal to have the regional carrier Comment: Several commenters stated area.’’
(now referred to as a Durable Medical that basing payment amounts on the
Equipment Medicare Administrative 2. General Payment Rules
CBA where the beneficiary maintains a
Contractor, or DME MAC) that would permanent residence, and not on the Section 1834(a) of the Act and
otherwise be processing claims for a location where the item is furnished, implementing regulations at 42 CFR
particular geographic region also may cause suppliers to be paid less than § 414.200 through § 414.232 (with the
process claims for items furnished the single payment amount in their area. exception of § 414.228) set forth the
under a competitive bidding program in They recommended that CMS allow Medicare Part B payment methodology
the same geographic region. In the same payment to be made at the payment we currently use to pay for the rental or
final rule, we also finalized our policy amount for the area where the item is purchase of new and used DME. Each
regarding the elements of performance furnished. The commenters pointed out item of DME that is paid for under these
that will be included in a contract we that it will also be difficult for contract sections is classified into a payment
enter into with a CBIC. suppliers to determine what the single category, and each category has its own
payment amount is for beneficiaries unique payment rules. Section 1842(s)
D. Payment under the Medicare
who reside outside their CBA. of the Act provides authority for
DMEPOS Competitive Bidding Program
Response: Medicare currently pays for establishing a statewide or areawide fee
1. Payment Basis (§§ 414.408(a), (c), and all DMEPOS items based on the schedule to be used for the payment of
(d)) payment amount applicable for the items described in section 1842(s)(2) of
Section 1847(b)(5) of the Act primary residence of the beneficiary, the Act. Under this authority, we
mandates that a single payment amount regardless of where the item is implemented fee schedules for payment
be established for each item in each furnished. The Medicare payment for the purchase and rental of enteral
CBA based on the bids submitted and system is set up to base payment nutrients, equipment, and supplies
accepted for that item. Medicare amounts on the beneficiary’s primary (§ 414.100 through § 414.104). Section
payment for the item is then made on residence. We proposed to adopt this 1834(h) of the Act and § 414.228 of our
an assignment-related basis equal to 80 longstanding rule for the Medicare regulations set forth the Medicare Part B
percent of the applicable single payment DMEPOS Competitive Bidding Program payment methodology we currently use
amount, less any unmet Part B because it is an effective way to ensure to pay for orthotics and prosthetics.
deductible described in section 1833(b) that suppliers do not organize their Other than the rules governing
of the Act. Section 1847(a)(6) of the Act businesses to obtain higher payment calculation of the single payment
requires that this payment basis be amounts that apply to certain amount and other modifications to
substituted for the payment basis geographic areas of the country. We do existing rules that are addressed in this
otherwise applied under section 1834(a) not believe it will be difficult for final rule, we proposed that the current
of the Act for DME, section 1834(h) of contract suppliers to determine how requirements regarding the rental or
the Act for OTS orthotics, or section much they will be paid for an item purchase of DMEPOS items would
1842(s) of the Act for enteral nutrients, furnished to a beneficiary who does not continue to apply under the Medicare
equipment, and supplies, as reside in the contract supplier’s CBA DMEPOS Competitive Bidding Program.
appropriate. because we will make the single While we believe that we have
As discussed in detail in section II.C. payment amounts for each item in each discretion under section 1847(a)(6) of
of the May 1, 2006 proposed rule (71 FR CBA, along with the fee schedule the Act to adopt new rules that would
25662), we proposed that payment to amounts that will continue to be paid in govern these requirements, we proposed
the contract supplier would be based on areas that are not CBAs, publicly only to change the payment basis for
the single payment amount for the item available to all suppliers. these items and to make a few
in the CBA where the beneficiary Comment: Several commenters modifications to existing rules.
maintains a permanent residence suggested that CMS not conduct 3. Special Rules for Certain Rented
(proposed § 414.408(a)(1)). If an item competitive bidding, but simply lower Items of DME and Oxygen
that is included in a competitive the payment amounts for DMEPOS until (Grandfathering of Suppliers)
bidding program is furnished to a the only suppliers left to provide these (§ 414.408(j))
beneficiary who does not maintain a items are the minimum number
permanent residence in a CBA, the necessary to furnish items needed by a. Process for Grandfathering Suppliers
payment basis for the item would be 80 Medicare beneficiaries. Section 1847(a)(4) of the Act requires
percent of the lesser of the actual charge Response: Section 302(b) of the MMA that in the case of covered DME items
for the item, or the applicable fee mandated that the Secretary establish for which payment is made on a rental
schedule amount for the item (proposed and implement competitive bidding basis under section 1834(a) of the Act,
§ 414.408(a)(2)). We also proposed that programs for certain items of DMEPOS, and in the case of oxygen for which
payment is made under section would be required to accept the unlike oxygen equipment, the payment
1834(a)(5) of the Act, the Secretary shall beneficiary as a customer. Suppliers that amounts made for capped rental items
establish a ‘‘grandfathering’’ process by agree to be grandfathered suppliers for and inexpensive or routinely purchased
which rental agreements for those a specific item must agree to be a items are limited to the approximate
covered items and supply arrangements grandfathered supplier for all purchase fee for the item.
with oxygen suppliers entered into beneficiaries who request to continue to Therefore, for items that are furnished
before the start of a competitive bidding use their service for that item. on a rental basis under § 414.220 or
program may be continued. DME paid Comment: One commenter supported § 414.229, we proposed in
on a rental basis under section 1834(a) our grandfathering proposal. The §§ 414.408(k)(2)(i) and (k)(2)(ii)
of the Act includes inexpensive or commenter stated that our proposal (redesignated as §§ 414.408(j)(2)(i) and
routinely purchased items furnished on would allow some beneficiaries to (ii) in this final rule) that the
a rental basis (as described in § 414.220 maintain an established relationship grandfathered supplier could continue
of the regulations), items requiring with a current supplier and that this furnishing the items in accordance with
frequent and substantial servicing (as was important to minimize disruption existing rental agreements and continue
described in § 414.222 of the for beneficiaries. to be paid in accordance with section
regulations), and capped rental items (as Response: We appreciate the 1834(a) of the Act. We believe that
described in § 414.229 of the comment and agree that minimizing continuing to pay for these
regulations). Section 1834(a)(5) of the disruption of service for beneficiaries is grandfathered items at the fee schedule
Act and § 414.226 of our regulations an important principle that underlies rates is authorized under section
provide that payment be made on the our grandfathering rules. 1862(a)(17) of the Act, which allows the
basis of monthly payment amounts for Secretary to specify ‘‘other
oxygen and oxygen equipment (other b. Payment Amounts to Grandfathered circumstances’’ in which Medicare will
than portable oxygen equipment) with Suppliers make payment where the expenses for a
separate add-on payments for portable (1) Grandfathering of Suppliers competitively bid item furnished in a
oxygen equipment. In cases where the Furnishing Items Prior to the First CBA were incurred by a supplier other
beneficiary owns stationary and/or Competitive Bidding Program in a CBA than a contract supplier. In our view,
portable gaseous or liquid oxygen the limited duration of the rental
For items requiring frequent and agreements for capped rental items and
equipment, payment is made on the
substantial servicing, as well as oxygen inexpensive or routinely purchased
basis of monthly payment amounts for
and oxygen equipment, we proposed items furnished on a rental basis, in
oxygen contents.
In the May 1, 2006 proposed rule (71 that a grandfathered supplier may addition to the fact that payments for
FR 25662), in proposed § 414.408(k) continue furnishing these items to these items are based on or limited to
(redesignated as § 414.408(j) in this final beneficiaries in accordance with the purchase fees for the items,
rule), we proposed to establish the existing rental agreements or supply constitute appropriate circumstances
grandfathering process described below arrangements. However, we proposed under which we would allow these
for rented DME and oxygen and oxygen that, as long as the items remain rental agreements, including their
equipment when these items are medically necessary, the grandfathered payment terms, to continue until their
included under the Medicare DMEPOS supplier would be paid the single conclusion. The rental fee schedule
Competitive Bidding Program. We payment amounts determined for those amounts that we would pay for
proposed that this process would apply items under the competitive bidding grandfathered items in the capped rental
only to suppliers that began furnishing program because beneficiaries rent these or inexpensive or routinely purchased
the items described above to Medicare items for extended time periods categories would be those fee schedule
beneficiaries who maintain a permanent (proposed §§ 414.408(k)(2)(iii) and (iv)); amounts established for the State in
residence in an area prior to the redesignated as §§ 414.408(j)(2)(iii) and which the beneficiary maintains a
implementation of the competitive (iv) in this final rule). We believe that permanent residence.
bidding program in that area that this payment proposal is consistent with Comment: Some commenters stated
includes the same items. section 1847(a)(4) of the Act, which that the grandfathering and transition
In the case of the specific items requires us to establish a ‘‘process’’ policies are both unworkable and unfair
identified in this section, we proposed under which rental agreements and to contract suppliers that will be
in § 414.408(k)(4) to give Medicare supply arrangements ‘‘may be required to continue to furnish capped
beneficiaries the choice of deciding continued,’’ but is silent regarding the rental or oxygen equipment to
whether they would like to continue terms of that process. Because the rental beneficiaries in the CBA regardless of
receiving the item from the payments for these items are not the number of rental payments that have
grandfathered supplier or a contract calculated based on, or limited to, the already been made to other suppliers for
supplier, unless the grandfathered purchase fee for that item as is the case the equipment. They added that a
supplier is not willing to continue for other rented DME items, we do not contract supplier could inherit an
furnishing the item under the terms we believe that it is reasonable to continue unknown number of beneficiaries who
have specified below. If the paying the fee schedule amounts for have been renting oxygen equipment for
grandfathered supplier is not willing to these items and believe that payment at 20 to 30 months of continuous use. In
continue furnishing the item under the competitively determined rates (that these cases, the contract supplier would
these terms, a contract supplier would is, the single payment amounts) will receive a minimal number of rental
assume responsibility for continuing to comport with an overarching goal of payments that would be insufficient to
furnish the item and be paid based on competitive bidding to achieve savings cover the cost of oxygen equipment for
the single payment amount determined for the Medicare program. which title will transfer to the
for that item under the Medicare Unlike other items requiring frequent beneficiary after 36 months of
DMEPOS Competitive Bidding Program. and substantial servicing, the duration continuous use. The commenters stated
In addition, the beneficiary could elect, of the rental payments for capped rental that if a contract supplier has to supply
at any time, to transition to a contract items and inexpensive or routinely a capped rental item for the last 6
supplier and the contract supplier purchased items is limited. In addition, months of the rental cycle, the supplier
would only receive 45 percent of the beneficiary access to oxygen, oxygen because, as discussed in section VI.G.5.
single payment amount, which is not equipment and capped rental items, and of this final rule, the 13 monthly rental
enough to cover costs. They new payment classes for oxygen and payments for the capped rental item
recommended that Medicare initiate a oxygen equipment (see 71 FR 65884 for will be based on a single payment
new period of continuous use if a a full discussion of these provisions). amount that reflects the purchase price
beneficiary decides to switch from a We recognize that the title transfer for that item. At the end of this new 13
grandfathered supplier to a contract provisions that are part of these new month rental period, the contract
supplier. requirements, when read together with supplier will transfer title to the capped
One commenter suggested that CMS proposed § 414.408(k)(1) (allowing a rental item to the beneficiary. This rule
establish a defined timeframe within supplier to elect to be a grandfathered does not apply when a beneficiary who
which a beneficiary can transfer to a supplier) and proposed § 414.408(k)(4) is renting a capped rental item from a
new contract supplier. The commenter (allowing a beneficiary the choice of contract supplier elects to obtain the
also suggested that CMS not require receiving a grandfathered item from a same item from another contract
contract suppliers to accept, as grandfathered supplier or a contract supplier, because the grandfathering
customers, beneficiaries who are already supplier), might place a contract provisions, as described in section
currently using capped rental supplier in the position of being 1847(a)(4) of the Act, only apply to
equipment furnished by another required to furnish oxygen equipment or those situations in which a beneficiary
supplier. Another commenter stated that a capped rental item to a beneficiary had been previously receiving the item
CMS should mandate grandfathering by who previously rented the item from from a noncontract supplier. In this
requiring the supplier that furnished another supplier (either a supplier that case, the new contract supplier would
oxygen or a capped rental item to a does not elect to become a be paid the single payment amount for
beneficiary before the implementation grandfathered supplier or a the duration of the rental period.
of a competitive bidding program to grandfathered supplier) and then Oxygen Equipment: For oxygen
continue to furnish that item to the transfer title to that item without being equipment, we provide in a new
beneficiary for the remainder of the paid a sufficient amount to cover its § 414.408(i)(2) that a contract supplier
rental period. Some commenters also costs. We also recognize that contract that must begin furnishing oxygen
questioned how section 5101 of the suppliers will not be able to predict how
equipment after the rental period has
DRA, which imposes new requirements many beneficiaries will obtain capped
already begun to a beneficiary who is no
regarding the rental of oxygen, oxygen rental items or oxygen equipment from
equipment, and capped rental items, longer renting the item from his or her
them, rather than from a supplier that
will affect competitive bidding. Several previous supplier (because the previous
does not elect to become a
commenters suggested that the supplier elected not to become a
grandfathered supplier.
information in the proposed rule is In response to the commenters’ grandfathered supplier or the
inadequate to serve as a basis for public concerns, we are implementing two new beneficiary elected to change suppliers)
comments, especially with respect to payment rules to ensure that contract will receive at least 10 rental payments
the impact that the implementation of suppliers that must begin furnishing for furnishing the equipment. For
the DRA will have on competitive oxygen equipment and/or capped rental example, if a contract supplier begins
bidding. Several commenters noted that items to which the grandfathering furnishing oxygen equipment to a
until CMS establishes the scope of the process would otherwise apply receive beneficiary in months 2 through 26, we
DRA provisions and how they dovetail a sufficient number of monthly rental would make payment for the remaining
with competitive bidding, they cannot payments to recover their costs. We number of rental months in the 36-
provide meaningful comments or make believe that these changes are consistent month rental period, because the
recommendations. For example, the with our statutory mandate under number of payments to the contract
commenters questioned how CMS sections 1847(a) and (b) of the Act, supplier would be at least 10 payments.
intended to apply the DRA oxygen which give us broad authority regarding In other words, a contract supplier that
provisions to grandfathered suppliers how to structure the Medicare DMEPOS begins furnishing oxygen equipment
and beneficiaries and whether the Competitive Bidding Program, and more beginning with the 20th month of rental
grandfathered relationship would specifically with section 1847(b)(3)(A) will receive 17 payments (17 for the
terminate at the conclusion of 36 of the Act, which allows us to specify remaining number of rental months in
months. the terms and conditions of contracts we the 36 month rental period). However,
Response: Section 5101 of the DRA enter into with contract suppliers. if a contract supplier begins furnishing
(discussed in detail in section III.B. of Capped Rental: For capped rental oxygen equipment to a beneficiary in
this final rule) caps the number of rental items furnished on a rental basis, we are month 27 or later, we would make 10
payments that may be made for oxygen providing in a new § 414.408(h)(2) that rental payments assuming the
equipment and capped rental DME a contract supplier that must begin equipment remains medically
items and requires that title to these furnishing a capped rental item during necessary. We believe this is a
items transfer to the beneficiary at the the rental period to a beneficiary who is reasonable solution because our data
conclusion of the rental period. We no longer renting the item from his or from the GAO and the OIG and data
proposed in the May 1, 2006 proposed her previous supplier (because the available through the Internet show that
rule (71 FR 25662) that current previous supplier elected not to become most oxygen equipment can be
requirements regarding the rental or a grandfathered supplier or the purchased for $1,000 or less, and data
purchase of DMEPOS items would beneficiary elected to change suppliers) from the competitive bidding
continue to apply under the Medicare will receive 13 monthly rental payments demonstrations indicate that suppliers
DMEPOS Competitive Bidding Program. for the item, regardless of how many received more than $1,000 over 10
These requirements include the changes monthly rental payments Medicare months for furnishing oxygen
we recently made to 42 CFR Part 414, previously made to the prior supplier, equipment. Based on these data, we
Subpart D of our regulations that assuming the item remains medically believe that 10 months is sufficient to
implemented section 5101 of the DRA, necessary. This will ensure that the cover the contract supplier’s cost to
new supplier requirements that protect contract supplier can recover its costs furnish the equipment, irrespective of
the modality that is used to administer equipment because the rental payments status under a subsequent competitive
the oxygen. This rule regarding the for these items are not calculated based bidding program.
minimum number of rental payments on, or limited to, the purchase fees for However, where a supplier that is no
does not apply when a beneficiary these items. Therefore, we believe that longer a contract supplier continues to
switches from a contract supplier to it is reasonable to require suppliers that furnish a rental item or oxygen and
another contract supplier to receive his want to continue furnishing these items oxygen equipment on a grandfathered
or her oxygen equipment. In this case, as grandfathered suppliers to accept the basis, we proposed that Medicare make
the new contract supplier would be paid same payment that will be made for payment for the item in the amount
the single payment amount for the these items to contract suppliers. This established for that item under the new
remaining number of months in the achieves the goal of the program to competitive bidding program for that
rental period. achieve savings for the Medicare area. We believe that section 1847(a)(4)
We note that the DRA does not apply program. of the Act gives us this discretion, since
to inexpensive or routinely purchased However, the payment amounts made that section only requires us to establish
items when they are furnished on a to grandfathered suppliers for a ‘‘process’’ under which these rental
rental basis. Therefore, we do not see a furnishing capped rental and agreements or supply arrangements
need to make these special payment inexpensive or routinely purchased ‘‘may continue’’ but does not specify a
provisions applicable to those items. items will continue to be based on the payment methodology that must be used
Comment: Several commenters fee schedule amounts that are paid for under that process. In addition, we do
suggested that CMS establish a these items. Unlike items requiring not believe that the alternative, which
transition period that would allow frequent and substantial servicing and would be to make payment for the item
beneficiaries who reside in a CBA to oxygen and oxygen equipment, the under the fee schedule, is reasonable
continue to receive items from a monthly rental payments for these items since the rental agreement or supply
noncontract supplier. They indicated are made for a more limited period of arrangement began under a competitive
that suppliers should be paid the time. In addition, the payment amounts bidding program.
current fee schedule amounts for these for these items are based on the All rules that applied to grandfathered
items during this transition period. purchase fees for these items. Therefore, suppliers will apply in this situation
They further suggested that CMS could we believe that it is reasonable to when a supplier is a contact supplier in
use this period of time to educate continue paying for these items in under one competitive bidding program
beneficiaries and suppliers about the accordance with existing rental e.g. in round one but is not a contract
Medicare DMEPOS Competitive Bidding agreements. supplier in a subsequent competitive
Program. Other commenters stated that bidding program in the same CBA, e.g.
the payment amount to grandfathered (2) Suppliers That Lose Their Contract in round two. However, the payment
suppliers should always be the fee Status in a Subsequent Competitive amounts will not revert back to the
schedule amount (not just during a Bidding Program current fee schedule but rather the
transition period) and never be the There may be instances when a payment amounts will be the new
single payment amount. supplier that was awarded a contract to competitive bid single payment
Response: We proposed to establish a furnish rental items or oxygen and amounts as determined under § 414.416.
grandfathering process that would allow oxygen equipment under a competitive We did not receive any specific
existing rental agreements for certain bidding program is not awarded a comments on these proposals.
rented items to continue because we contract to furnish the same items under Therefore, in this final rule, we are
want to minimize the potential that a subsequent competitive bidding redesignating proposed § 414.408(k)(3)
these arrangements will be disruptive to program in the same area. We are as § 414.408(j)(3), making editorial
the beneficiary due to the concerned that if this occurs, revisions, and finalizing that section.
implementation of competitive bidding. beneficiaries will need to switch
suppliers in the middle of the rental c. Payment for Accessories for Items
We do not believe it is necessary to
period and could experience a Subject to Grandfathering
establish a transition process, however,
disruption of service as a result. In order (§ 414.408(j)(5))
as discussed in the proposed rule, we
are requiring that a supplier that elects to minimize this possibility, we We proposed that accessories and
to be a grandfathered supplier for a proposed to apply section 1847(a)(4) of supplies used in conjunction with an
specific item must serve as a the Act not only in a CBA where we item which is furnished under a
grandfathered supplier to all implement a competitive bidding grandfathering process described above
beneficiaries who elect to receive that program for the first time, but also in the may also be furnished by the
item from them. We plan to start same area when we implement a grandfathered supplier. Payment would
educating suppliers, beneficiaries, and subsequent competitive bidding be based on the single payment amount
referral agents about competitive program (proposed § 414.408(k)(3); established for the accessories and
bidding as soon as this final rule is redesignated § 414.408(j)(3) in this final supplies if the item is oxygen or oxygen
published and expect that these efforts rule). We believe our proposal is equipment or one that requires frequent
will make the transition to this new consistent with section 1847(a)(4) of the and substantial servicing. For
program go as smoothly as possible. We Act, which we interpret as applying to accessories and supplies used in
do not, however, have authority to each competitive bidding ‘‘program’’ conjunction with capped rental and
establish a grandfathering process that that we implement in an area because inexpensive or routinely purchased
would allow beneficiaries to continue each program will be unique in terms of items, we proposed that the payment
receiving from their current supplier bidders, contract suppliers, items amounts would be based on the fee
items other than those specified in included in the program, and prices. schedule amounts for the accessories
section 1847(a)(4) of the Act. Under the proposed rule, Medicare and supplies furnished prior to the
We proposed to pay grandfathered beneficiaries would be allowed to implementation of the first competitive
suppliers the single payment amount for continue renting medically necessary bidding program in an area, or on the
items requiring frequent and substantial items from their existing supplier, even newly established competitively bid
servicing and oxygen and oxygen if that supplier has lost its contract single payment amounts if the items are
furnished by a grandfathered supplier purchase basis, and in those cases indicated that competitive bidding
that was a contract supplier for a where a single payment amount has could force many beneficiaries to switch
competitive bidding program, but is no been established for the accessories or their glucose monitoring system if the
longer a contract supplier for a supplies, we believe it is reasonable to contract supplier does not offer the
subsequent competitive bidding pay the single payment amount for the testing supplies for the monitor they
program in the same area. accessories or supplies to the currently use.
Our proposal is similar to the grandfathered supplier for the base Another commenter suggested that
grandfathering approach that was used equipment. We believe this is Medicare allow grandfathering for all
in the DMEPOS competitive bidding reasonable, regardless of what payment DMEPOS items. Another commenter
demonstrations under which we paid category the base equipment falls under suggested that Medicare only allow
grandfathered suppliers the because the single payment amount grandfathering for oxygen equipment
competitively bid amount for certain reflects a reasonable payment amount because otherwise, competitive bidding
items and the fee schedule amounts for determined by a competitive market. If for capped rental items, oxygen, and
other items. We specifically solicited the grandfathered supplier chooses not oxygen equipment will only affect
comments on our grandfathering to furnish the accessories or supplies for beneficiaries who need to obtain these
proposals. the grandfathered base equipment, a items after a competitive bidding
Comment: Several commenters contract supplier would be responsible program has been implemented in their
supported our proposal to require that for furnishing the accessories or area, which undermines a program goal
accessories and supplies used in supplies. to harness market place dynamics.
conjunction with an item furnished Comment: One commenter suggested Response: Section 1847(a)(4) of the
under the grandfathering process be that CMS needs to establish a transition Act requires that we establish a process
furnished by a grandfathered supplier. plan for Medicare Advantage by which rental agreements for DME
Response: We appreciate the beneficiaries who disenroll from their and supply arrangements for suppliers
commenters’ support and continue to MA plan and enroll in traditional fee- of oxygen and oxygen equipment
believe that this approach is reasonable. for-service Medicare Part B. The entered into before the implementation
To clarify the situations in which this commenter pointed out that these of a competitive bidding program may
may occur, we are revising proposed beneficiaries may currently be using a be continued. We do not believe we
§ 414.408(k) (redesignated § 414.408(j) noncontract supplier and should be have authority to allow grandfathering
in this final rule) by adding a new given the option to remain with their for other DMEPOS, such as glucose
paragraph (j)(5) to specify that existing supplier under the testing supplies and enteral nutrition,
accessories and supplies that are grandfathering provisions. equipment, and supplies.
necessary for the effective use of DME Response: All beneficiaries to whom After consideration of the public
may also be furnished by the same the grandfathering process applies can comments received, we are
grandfathered supplier that furnishes elect to continue receiving certain redesignating proposed § 414.408 (k) as
the grandfathered item. This approach rented items from a supplier that elects § 414.408 (j) and finalizing this section
will provide the beneficiary with to become a grandfathered supplier. as discussed above and with additional
continuity of service by requiring one Therefore, if a supplier from whom a technical modifications. We are also
supplier to provide all related items the Medicare Advantage beneficiary adding new § 414.408(h)(2) and
beneficiary may need for the proper use previously rented one of these items is
§ 414.408(i)(2), which provide for
of their equipment. This rule will not eligible, and elects, to become a
special payments to certain contract
apply to accessories that are not an grandfathered supplier, then the
integral part of the base equipment. For suppliers that furnish certain rented
beneficiary could continue to receive
example, a standard mattress is an items.
the item from that supplier.
essential accessory for a hospital bed Comment: One commenter stated that 4. Payment Adjustments
and may be furnished by a the rule should apply grandfathering
a. Adjustment to Account for Inflation
grandfathered supplier of a hospital bed, provisions to enteral equipment,
(§ 414.408(b))
if the supplier has elected to be a nutrition, and supplies. The commenter
grandfathered supplier for the hospital stated that beneficiaries on enteral The fee schedule payment amounts
bed. However, a special, powered nutrition develop an ongoing for DMEPOS items are updated by
alternating pressure mattress furnished relationship with their suppliers. The annual update factors described in 42
to prevent decubitus ulcers is not an commenter pointed out that suppliers CFR Part 414, Subparts C and D. In
essential part of the base equipment and that furnish enteral equipment, general, the update factors are
is furnished in addition to the general nutrition, and supplies frequently established based on the percentage
service of furnishing the hospital bed. service and maintain the enteral pumps. change in the CPI–U for the 12-month
Assuming the grandfathered supplier The commenter added that, under the period ending June 30 of each year and
for the base equipment is willing to also proposed rule, contract suppliers would preceding the calendar year to which
furnish accessories or supplies for the be responsible for servicing and the update applies. In accordance with
base equipment, beneficiaries will be maintaining enteral pumps that they did section 1847(b)(3)(B) of the Act, the
able to choose to obtain any not provide to beneficiaries. The term of a competitive bidding contract
competitively bid accessories or commenter recommended that the may not exceed 3 years.
supplies from either the grandfathered previous enteral supplier be able to In the May 1, 2006 proposed rule (71
supplier or a contract supplier. We continue to provide enteral equipment, FR 25663), we proposed to apply an
believe that the amount to be paid under nutrition, and supplies to the annual inflation update to the single
the Medicare DMEPOS Competitive beneficiary until the 15-month rental payment amounts established for a
Bidding Program should be the single period ends. competitive bidding program (proposed
payment amount, regardless of which Another commenter stated that our § 414.408(b)). Specifically, beginning
supplier furnishes the accessories or grandfathering proposal did not include with the second year of a contract
supplies. Payment for most accessories a process for grandfathering glucose entered into under a competitive
or supplies for DME is made on a testing supplies. The commenter bidding program, we proposed to
update the single payment amounts by amounts for class III devices. The b. Adjustments to Single Payment
the percentage increase in the CPI–U for commenters indicated that the March Amounts to Reflect Changes in the
the 12-month period ending with June 2006 GAO report was flawed because it HCPCS (§ 414.426)
30 of the preceding calendar year. We did not provide a full assessment of We proposed under § 414.426 that
stated that using the CPI–U index would changes over time in the costs of revisions to HCPCS codes for items
be consistent with Medicare using this producing, supplying and servicing under a competitive bidding program
index to update the DME fee schedule. class III devices. The commenters also that occur in the middle of a bidding
This would account for inflation in the noted that the report does not specify a cycle would be handled as follows:
cost of business for suppliers submitting specific percentage update for CY 2007 • If a single HCPCS code for an item
bids for furnishing items under a multi- or CY 2008. Another commenter stated is divided into multiple codes for the
year contract. that the GAO report examines class III components of that item, the sum of
Comment: One commenter suggested
devices in relation to only a very limited payments for these new codes would be
that CMS not finalize its proposal to
number of higher-technology class III equal to the payment for the original
make an annual inflation update to the
items that may not be reflective of the item. Suppliers selected through
single payment amounts. The
general class III items. One commenter competitive bidding to provide the item
commenter believed that this payment
unfavorably compared the GAO report would also provide the components of
adjustment may make it possible for
single payment amounts to rise faster to the Medicare Payment Advisory the item. During the subsequent
than current fee schedule payment Commission (MedPAC) reports which competitive bidding cycle, suppliers
amounts, particularly in the event of a assess the adequacy of Medicare would bid on each new code for the
payment freeze or a payment reduction. payments for hospital inpatient and components of the item, and we would
The commenter recommended that CMS outpatient services, physician services, determine new single payment amounts
determine a single payment amount that outpatient dialysis services, skilled for these components.
will apply for the full term of the nursing facility services, home health • If a single HCPCS code for two or
contract or allow each bidder to specify services, long-term care hospital more similar items is divided into two
an annual adjustment in its bid. services and inpatient rehabilitation or more separate codes, the payment
Response: We agree with the amount applied to these codes would
facility services. (Following each
commenter and will not finalize our continue to be the same payment
detailed assessment, MedPAC then
proposal to make an annual inflation amount applied to the single code until
recommends an update policy for each
update to the single payment amounts. the next competitive bidding cycle.
provider category for the coming year.) During the next cycle, suppliers would
The single payment amounts will The commenter noted that the GAO
remain in effect for the duration of the bid on the new separate and distinct
report does not justify its alternative codes.
contract. We believe it is more assessment methodology or its failure to
appropriate for suppliers to address the • If the HCPCS codes for several
take into account changes over time in components of one item are merged into
possible effects of inflation or price manufacturer costs for class III devices.
increases when they formulate their one new code for the single item, the
Another commenter recommended that payment amount of the new code would
bids because automatic payment
the class III proposal be included in a be equal to the total of the separate
adjustments to competitively bid items
separate rulemaking procedure because payment amounts for the components.
may result in higher payment amounts
than would occurred under the it is not related to competitive bidding. Suppliers that were selected through
DMEPOS fee schedule payment Response: Pursuant to section competitive bidding to supply the
amounts if these amounts are subject to 1834(a)(14)(H)(i) of the Act, in various components of the item would
Congressional freezes or payment determining the appropriate fee continue to supply the item using the
reductions. schedule update percentages for class III new code. During the subsequent
Comment: Several commenters stated medical devices prescribed in section bidding cycle, suppliers would bid on
that the proposal did not address 513(a)(1)(C) of the Federal Food, Drug the new code for the single item to
situations where the manufacturers or and Cosmetic Act (21 U.S.C. determine a new single payment
distributors raise their prices, thereby 360(c)(1)(C)) for CY 2007, we must take amount for this new code.
requiring suppliers to pay more money into account recommendations • If multiple codes for different, but
to purchase their products. They believe contained in the report of the related or similar items are placed into
that suppliers may be required to Comptroller General of the United a single code, the payment amount for
continue to furnish these items at the States under section 302(c)(1)(B) of the the new single code would be the
single payment amounts MMA. We have not yet made a average (arithmetic mean) weighted by
notwithstanding the fact that their costs determination regarding the appropriate frequency of payments for the formerly
have increased. percentage change for CY 2007 in the separate codes. Suppliers would also
Response: While we recognize that fee schedule amounts for class III DME provide the item under the new single
increases in suppliers’ costs for code. During the subsequent bidding
and, therefore, are not making that
equipment and other costs can occur at cycle, suppliers would bid on the new
determination as part of this final rule.
any time, suppliers should be generally single code and determine a new single
We will address this issue in a future
aware of how often these changes occur payment amount for this code.
rulemaking.
and how these changes affect their Comment: Several commenters stated
businesses. We expect suppliers to After consideration of the public that when multiple codes for similar
consider this factor when developing comments received, in this final rule, items are merged to a new code, CMS
their bids, which represent bids for we are revising proposed § 414.408(b) to should continue to use the former codes
furnishing items during the entire specify that the single payment amount and single payment amounts for the
period that the contract will be in effect. for each item that is determined under remainder of the contract period. One
Comment: Several commenters each competition will be in effect for the commenter stated that the proposal that
recommended that CMS continue to use duration of the contract and will not be the payment amounts for new HCPCS
the CPI–U to adjust fee schedule adjusted by an annual inflation update. codes continue to be the same payment
amounts until the next competitive 5. Authority to Adjust Payments in conduct subsequent rulemaking prior to
bidding cycle is not an equitable Other Areas implementing these provisions.
proposal and a more appropriate Section 1834(a)(1)(F)(ii) of the Act Subsequent rulemaking would provide a
procedure must be developed. Another provides authority, effective for covered more detailed plan for using these
commenter stated that CMS’ only items furnished on or after January 1, authorities. Therefore, we are not
authority to adjust payment amounts for 2009, that are included in a competitive finalizing proposed § 414.408(e) until
an item is through the inherent bidding program, for us to use the the subsequent rulemaking is
reasonableness authority under the payment information determined under completed.
Medicare statute. The commenter that competitive bidding program to 6. Requirement to Obtain Competitively
disagreed with the proposal for paying adjust the payment amounts otherwise Bid Items From a Contract Supplier
for new HCPCS codes that are recognized under section (§§ 411.15(s), 414.408(e))
established during a competitive 1834(a)(1)(B)(ii) of the Act for the same Beneficiaries often travel, for
bidding cycle. The commenter stated DME items in areas not included in a example, to visit family members or to
that CMS should rebid these items, competitive bidding program. Sections reside in a State with a warmer climate
assuming they are appropriate for 1834(h)(1)(H)(ii) and 1842(s)(3)(B) of the during the winter months. To prevent
inclusion in the program. Act provide the same authority for these beneficiaries from having to return
Response: After further consideration, orthotic and prosthetic devices, and home to obtain needed DMEPOS, in
we are clarifying that when multiple enteral nutrition, respectively. proposed § 414.408(f)(2)(ii)
codes for different items are In the May 1, 2006 proposed rule (71 (redesignated § 414.408(e)(2)(iii) in this
discontinued and the items are placed FR 25664), we proposed to use this final rule), we proposed to allow
into a new single code, the payment for authority but stated that we had not yet beneficiaries who are traveling outside
the new code will be based on the fee developed a detailed methodology for the CBA where they permanently reside
schedule methodology, even if we had doing so. Therefore, we specifically to obtain items that they would
previously established a single payment invited comments and ordinarily be required to obtain from a
through competitive bidding for the recommendations on this issue. We contract supplier for their CBA from a
stated that we believed that our supplier that has not been awarded a
items included in the new code. The old
methodology would be influenced by contract to furnish items for that area. If
codes will be considered invalid and
our experience and information gained the area that the beneficiary is visiting
therefore will no longer be included in
from the competitive bidding programs is also a CBA and the item is subject to
the competitive bidding program for the
in CYs 2007 and 2009. When submitting the competitive bidding program in that
remainder of the contract term. During
recommendations on a methodology for area, the beneficiary would be required
a subsequent competitive bidding using this authority, we asked
program, suppliers would bid on the to obtain the item from a contract
commenters to keep in mind the supplier for that area. If the area that the
new single code and we will determine following factors that are likely to be beneficiary is visiting is not a CBA, or
a new single payment amounts for this incorporated in the methodology: if the area is a CBA but the item needed
code based on the bids submitted and • The threshold or amount or level of by the beneficiary is not included in the
accepted. We are not finalizing this part savings that the Medicare program must competitive bidding program for that
of the proposed methodology because realize for an item or group of items area, the beneficiary would be required
we do not believe the single payment before we would use payment to obtain the item from a supplier that
amount in this case would be reflective information from a competitive bidding has a valid Medicare supplier number.
of the bids submitted and accepted for program to adjust payment amounts for In either case, payment to the supplier
these multiple items. However, unlike those items in other areas. would be made based on the single
this proposal, our other three proposals • Whether adjustments of payment payment amount for the item in the
will be finalized because they are amounts in other areas would be on a CBA where the beneficiary maintains a
reflective of the bids submitted and local, regional, or national basis, permanent residence.
accepted for the items described by the depending on the extent to which the In the May 1, 2006 proposed rule, we
new codes. single payment amounts and price proposed that if a beneficiary is not
We note that we do not believe we indexes (for example, local prices used visiting another area, but is merely
have authority to use the inherent in calculating the CPI–U) for an item or receiving competitively bid items from
reasonableness authority to adjust the group of items varied across different a supplier located outside but near the
single payment amounts set through areas of the country. boundary of the CBA, the proposed
competitive bidding. We believe that the • Whether adjustments of payment exemption to the general rule that
prices set by competitive bidding will amounts in other areas would be based beneficiaries who reside in a CBA must
be reasonable because they will be on a certain percentage of the single obtain DMEPOS covered by competitive
reflective of the market. When we split payment amount(s) from the CBA(s). bidding from contract suppliers in that
Comment: Some commenters stated area would not apply. We stated that we
or merge HCPCS codes, we will ensure
that CMS must issue a final rule to spell plan to monitor the programs closely to
that the new payment amounts are
out a detailed plan for using the ensure that this type of abuse or
reflective of the previously established
authority provided by sections circumvention of the competitive
payment amounts, and this does not
1834(a)(1)(F)(ii), 1834(h)(1)(H)(ii), and bidding process and requirements to
require the use of the inherent
1842(s)(3)(B) of the Act before it can obtain items from a contract supplier
reasonableness authority or the need to implement these provisions. does not occur.
rebid the items. Response: We agree with the We also proposed to base claims
After consideration of the public commenters that a more detailed plan jurisdiction and the payment amount on
comments we received, we are must be developed for using the the beneficiary’s permanent residence as
finalizing §§ 414.426(a) through (c) and authorities provided by sections we have done since the early 1990s with
revising § 414.426(d) as discussed above 1834(a)(1)(F)(ii), 1834(h)(1)(H)(ii), and the current DMEPOS program under
and with additional technical changes. 1842(s)(3)(B) of the Act, and we plan to § 421.210(e). Under this proposal, the
DME MAC responsible for the area processed and paid under the standard schedule amount and the single
where the beneficiary maintains a fee schedule. payment amount may be substantial,
permanent residence would process all Response: We believe that the thereby hindering beneficiary access to
claims submitted for items furnished to commenters’ intent was to request that needed equipment. They recommended
that beneficiary, whether or not the Medicare pay for an item that was that CMS continue to pay for an item
beneficiary obtained the item in that furnished by a supplier that the based on the fee schedule amount that
area. If the beneficiary maintained a beneficiary is required to use under his corresponds with the beneficiary’s
permanent residence in a CBA and or her primary insurance policy even if permanent residence if the beneficiary
obtained an item included in the that item is furnished by a supplier that obtains the item while visiting another
competitive bidding program for that is not a contract supplier. We agree with area. The commenters were concerned
area, Medicare would pay the supplier the commenters that an exception under about the impact that the requirement to
the single payment amount for the item the Medicare DMEPOS Competitive obtain competitively bid items from a
determined under the competitive Bidding Program needs to be made for contract supplier would have on both
bidding program for that area. If the beneficiaries with Medicare as their suppliers and beneficiaries who travel
beneficiary did not maintain a secondary insurance. Section to ‘‘snowbird’’ areas.
permanent residence in a CBA, 1862(a)(17) of the Act allows the Response: The approach set out in the
Medicare would pay the supplier the fee Secretary to specify circumstances proposed rule is consistent with our
schedule amount for the area in which under which it would be appropriate to long-standing rule under which
the beneficiary maintains a permanent pay for an item that is furnished by an Medicare payment for DMEPOS is based
residence. We believe that this proposal entity other than a contract supplier. To on the beneficiary’s primary residence.
is consistent with our current policy, address secondary payer concerns, we If a beneficiary maintains a permanent
under which suppliers across the are adding an exception at residence in a CBA, payment for an item
country are paid the same amount for § 414.408(e)(2)(ii) of the list of that the beneficiary obtains while
similar products obtained by circumstances when Medicare will visiting another area will be based on
beneficiaries who maintain their make payment where the expenses for a the payment amount for the item in the
permanent residence within the same competitively bid DMEPOS item beneficiary’s CBA. We note that, under
geographic area. furnished in a CBA were incurred by a our current rule, there are instances
We proposed that Medicare supplier other than a contract supplier. when a supplier is paid more or less
beneficiaries who maintain their Under this exception Medicare may than the fee schedule amount that the
permanent residence in a CBA be make a secondary payment for a supplier would otherwise receive for an
required to obtain competitively bid DMEPOS item that is furnished by a item because the payment amount has
items from a contract supplier for that noncontract supplier if the beneficiary, been determined based on where the
area with the following two exceptions: in order to comply with his or her beneficiary resides. The same will be
primary insurance plan, does not have true under the Medicare DMEPOS
• A beneficiary may obtain an item
the option to use a contract supplier. In Competitive Bidding Program. For
from a supplier or a noncontract
addition, Medicare will only make a example, when a beneficiary who
supplier in accordance with the
secondary payment to a supplier that resides in an area that is not a CBA
competitive bidding program
the beneficiary is required to use under travels into a CBA and needs to obtain
grandfathering provisions described in
his or her insurance plan if the supplier an item, the supplier that furnishes the
section VI.C.3. of this final rule.
is eligible to submit claims to Medicare. item will be paid the current fee
• A beneficiary who is outside of the These suppliers will need to have a schedule amount for the item based on
CBA where he or she maintains a valid Medicare billing number to be the beneficiary’s residence, even if the
permanent residence may obtain an eligible to submit claims to Medicare. fee schedule amount is greater than the
item from a contract supplier, if he or This regulation does not supersede the single payment amount that the supplier
she is in another CBA and the same item established Medicare secondary payer would otherwise receive for furnishing
is included under a competitive bidding statutory and regulatory requirements, the item. We believe that it is
program for that area, or from a supplier including the Medicare secondary appropriate to adopt our current claims
with a valid Medicare supplier number, payment rules found at 42 CFR 411.32 jurisdiction policy for the Medicare
if he or she is either in another CBA that and 411.33, and payment will be DMEPOS Competitive Bidding Program
does not include the item in its program calculated in accordance with those because it minimizes the possibility that
or is in an area that is not a CBA. rules. suppliers will set up locations in certain
We proposed that unless one of the Comment: One commenter stated that geographic areas for the purpose of
exceptions discussed above applies, the requirement to obtain competitively obtaining higher payment amounts.
Medicare would not pay for the item. bid items from a contract supplier will We plan to conduct an extensive
We also proposed to add a new be extremely confusing to the traveling education campaign to minimize
§ 411.15(s) that would prohibit beneficiary and will limit beneficiary confusion on the part of both
Medicare from making payment for an access to DMEPOS while the beneficiary beneficiaries and suppliers regarding
item that is included in a competitive is away from his or her permanent this provision and all other provisions
bidding program if that item is residence. The commenter also of the Medicare DMEPOS Competitive
furnished by a supplier other than a proposed that the supplier outside of Bidding Program.
contract supplier, unless an exception the beneficiary’s CBA be reimbursed Comment: Several commenters stated
applies. either (a) the regular fee schedule that suppliers need access to a
Comment: Several commenters amount for the product if the area beneficiary database that identifies the
suggested that CMS exclude from traveled to is not a CBA or (b) the higher county in which a beneficiary resides at
competitive bidding beneficiaries who single payment amount for the two the zip code level, so they can
have Medicare as their secondary CBAs, if the area where the beneficiary determine if the beneficiary resides in a
insurance. The commenters stated that has traveled is in a CBA. CBA.
claims for beneficiaries with Medicare Some commenters were concerned Response: We do not believe that this
as a secondary payer should be that the difference between the fee is necessary for suppliers. Currently,
payment is based on beneficiary contract supplier’s contract. Instead, single payment amounts for each item
residence, and suppliers do not have beneficiaries will be able to obtain these in each CBA on our Web site.
access to beneficiary zip code items from any supplier for the After consideration of the public
information to bill for items. We will remainder of the contract period, and comments we received, we are
post all counties and zip codes where the supplier will be paid the fee redesignating proposed § 414.408(f) as
competitive bidding is conducted on schedule amount for those items. § 414.408(e) and adding a new
our Web site. The Medicare claims form Comment: One commenter stated that § 414.408(e)(2)(ii) that specifies that
requires a beneficiary address. competitive bidding will limit full-time Medicare may make a secondary
Therefore, the supplier will be able to access to supplies that are crucial to payment for a DMEPOS item that is
ascertain if the beneficiary resides in a beneficiaries with diabetes. The furnished by a supplier that is not
CBA. We currently post fee schedules commenter stated that beneficiaries may awarded a contract under a competitive
on our Web site and the single payment find that they can no longer purchase bidding program. We are also finalizing
amounts for each item in each CBA will their supplies from their current the remainder of proposed
also be posted. Therefore, suppliers can supplier and may be inconvenienced. §§ 414.408(f)(1) and (f)(2)(i) and (f)(2)(ii)
look to the postings to determine The commenter recommended that CMS (redesignated as §§ 414.408(e)(2)(i) and
payment amounts in other areas. In implement an aggressive education (e)(2)(iii)) with only technical
addition, our claims processing systems outreach program. modifications. We are also finalizing
are equipped to identify the appropriate Response: We do not believe that § 411.15(s).
payment amount so no calculations are competitive bidding will limit 7. Limitation on Medicare Payment and
necessary to determine the payment beneficiary access to any competitively Beneficiary Liability for Items
amount for an item. bid items, including diabetic supplies. Furnished by Noncontract Suppliers
Comment: Several commenters stated Although it is true that some (§§ 414.408(e)(3) and (e)(4)
that beneficiaries will not have access to beneficiaries will have to find a contract
newer technology for competitively bid In the May 1, 2006 proposed rule (71
supplier to purchase their supplies, we FR 25664), we proposed that if a
products. do not believe this will result in an
Response: One of the main objectives noncontract supplier located in a CBA
inconvenience to beneficiaries, because furnishes an item included in the
of the Medicare DMEPOS Competitive
there will be a sufficient number of competitive bidding program for that
Bidding Program is to ensure that
contract suppliers that furnish these area to a beneficiary who maintains a
beneficiaries have access to quality
items for each CBA. The process we permanent residence in that area, the
DMEPOS. Therefore, we have built
have proposed for awarding contracts beneficiary would have no financial
safeguards into the competitive bidding
under the Medicare DMEPOS liability to the noncontract supplier
program to ensure there is continued
access to quality medical equipment Competitive Bidding Program will unless the grandfathering exception
and supplies, as well as to services ensure that there are a sufficient number discussed in section VI.D.3. of this final
necessary to maintain the equipment. of contract suppliers to furnish items to rule applies (proposed
As we discuss more fully in response to all beneficiaries located in a CBA. We § 414.408(f)(2)(iii); redesignated
comments in section XV. Physician or plan to conduct an aggressive outreach § 414.408(e)(3) in this final rule).
Treating Practitioner Authorization and program for all beneficiaries, suppliers, We proposed that this rule would not
Consideration of Clinical Efficiency and and referral agents. (We refer readers to apply if the noncontract supplier
Value of Items in Determining the DMEPOS provisions of the FY 2007 furnished items that are not included in
Categories for Bids of this final rule IRF final rule (71 FR 48354) for a the competitive bidding program for the
(§ 414.422(c)), we have proposed to complete discussion of our planned area. We proposed to specially designate
include a nondiscrimination clause in education and outreach policy.) the supplier numbers of all noncontract
each contract awarded under this Comment: One commenter expressed suppliers so that we will easily be able
program. We believe that the inclusion concern that in a State with multiple to identify whether a noncontract
of this contract provision will ensure MSAs, there could be a different supplier has furnished a competitively
that beneficiaries who obtain items payment rate for the same item in each bid item to a beneficiary who maintains
under a competitive bidding program MSA. The commenter believed this a permanent residence in a CBA
have access to the same products as would add confusion and would (proposed § 414.408(f)(3)) (redesignated
other Medicare customers and private increase billing time and expenses, in this final rule as § 414.408(e)(4)).
pay individuals. In addition, we are which will, in turn, increase the price Comment: Several commenters
taking other steps to ensure that high of products. suggested that proposed
quality items are furnished to Response: We agree that if we § 414.408(f)(2)(ii) be clarified to include
beneficiaries under this program. We conducted competitive bidding in a limitation on beneficiary liability
plan to implement a complaint system multiple CBAs within a State, there unless the noncontract supplier has
so that beneficiaries, referral agents, could be different prices in each CBA obtained a signed ABN, which indicates
providers, and suppliers can report for the same item. However, we do not that the beneficiary was informed prior
problems and difficulties they believe that this would be a problem for to receiving service that there would be
encounter with the ordering and contract suppliers. Under the current no coverage due to the supplier’s
furnishing of DMEPOS in CBAs. In program, suppliers may have a customer noncontract status and that the
addition, we will not award a contract base that comes from areas with beneficiary still desired to receive the
to a supplier unless that supplier meets different fee schedule amounts because service from the noncontract supplier.
our eligibility standards, is accredited, the fee schedules vary by State. Response: We are revising the
and meets our financial standards. Therefore, we believe that many regulation to add § 414.408(e)(3)(ii) and
In addition, items that represent new suppliers are already equipped to § 414.408(c) to reflect that there is a
technology and that receive a new handle price variations for an item. In limitation on beneficiary liability unless
HCPCS code to separately designate addition, the fee schedule for each item the noncontract supplier has obtained a
them, rather than updates to current in each State is published on our Web signed ABN because, if the beneficiary
technology will not be added to a site, and we plan to also publish the desires to receive this item from a
supplier that is not a contract supplier, in its contract. The commenters Medicare services (§ 414.408(k)).
the ABN indicates the beneficiary’s remarked that a limited number of Payment will generally be made for
knowledge and understanding that suppliers have repair facilities. In parts and labor consistent with the
Medicare will not pay for that item. In addition, the commenters noted that methodology we currently use to make
this circumstance, a noncontract contract suppliers may not have access these payments, which can be found in
supplier cannot bill the Medicare to the parts necessary to repair 42 CFR 414.210(e)(1) of our regulations
program and receive payment for a equipment sold by another contract for durable medical equipment, and
competitively bid item provided to a supplier, and this provision would prosthetic and orthotic devices.
beneficiary whose primary residence is allow manufacturers to inflate the price However, if the part needed to repair the
in a CBA unless an exception discussed for parts that must be obtained by item is itself a competitively bid item
in this rule applies. contract suppliers that do not regularly for the CBA in which the beneficiary
We are also revising proposed furnish their products. The commenters maintains a permanent residence, we
§ 414.408(f)(2)(iii) (redesignated in this also suggested that, in cases where the will pay the supplier the single payment
final rule as § 414.408(e)(3)(ii) to delete manufacturer is the sole distributor of amount for the part because we do not
the phrase ‘‘who maintains a permanent an item, the repair parts and accessories believe that the payment amount for the
residence in a CBA.’’ We believe this for the item might not be part should be different from what it
change clarifies our final policy that interchangeable and the use of parts that would otherwise be in the CBA solely
beneficiaries will not be financially are not provided by the manufacturer because the part is furnished by a
responsible for making payment to a may void the manufacturer’s warranty. supplier that is not a contract supplier.
noncontract supplier that furnishes a The commenters also suggested that if For example, if a beneficiary needs to
competitively bid item in violation of there are warranties that must be obtain a new battery for his or her
the Medicare DMEPOS competitive honored on previously rented or wheelchair, and the battery is itself a
bidding program. purchased equipment, the cost of competitively bid item for the
After consideration of the public service should be borne by the contract applicable CBA, we will pay the
comments we received, we are supplier that received reimbursement supplier that performs the repair the
redesignating proposed for the malfunctioning item. Several reasonable and necessary charges for the
§§ 414.408(f)(2)(iii) and (f)(3) as final commenters expressed concern about labor needed to service the wheelchair
§§ 414.408(e)(3)(ii) and (e)(4), assuming the liability for modifying a and the single payment amount for the
respectively, and finalizing these splint if they were not the contract battery. We believe that allowing any
sections as discussed above and with supplier that originally furnished it. In supplier to furnish a part when
additional technical changes. addition, the commenters suggested that performing a repair, even though the
8. Payment for Repair and Replacement this proposal could restrict Medicare part is itself a competitively bid item, is
of Beneficiary-Owned Items beneficiary access to a choice of a reasonable accommodation that will
(§ 414.408(k)) suppliers that can repair their enable the supplier to complete the
equipment. Several commenters noted repair properly, and an appropriate
In the proposed rule (71 FR 25681), that contract suppliers may not have the circumstance under which we can make
we proposed that repair or replacement training and expertise required for payment to the supplier under our
of beneficiary-owned DME, enteral repairs. One commenter asked how the authority in section 1862(a)(17) of the
nutrition equipment, or OTS orthotics repair proposal might be affected by the Act.
that are subject to the Medicare DRA provisions that impose new In addition, under final
DMEPOS Competitive Bidding Program requirements regarding capped rental § 414.408(k)(2) to be consistent with our
must be furnished by a contract supplier items, oxygen, and oxygen equipment. current maintenance and servicing rules
because only winning suppliers can Another commenter recommended for oxygen equipment, we will make
provide these items in a CBA (proposed that repairs should be treated as a general maintenance and servicing
§ 414.422(c)). The contract supplier separate bid on the RFB, rather than as payments to suppliers that service
could not refuse to repair or replace a cost of furnishing an item in an overall oxygen equipment (other than liquid
beneficiary-owned items subject to product category. and gaseous equipment) in accordance
competitive bidding. We indicated that Response: After consideration of the with § 414.210(e)(2) and an additional
this proposed provision would help commenters’ concerns, we are revising payment to a supplier that picks up and
ensure that the beneficiaries will get the our proposal on payment for repairs and stores or disposes of beneficiary-owned
items from qualified suppliers, and is replacement of beneficiary-owned oxygen tanks or cylinders that are no
consistent with the competitive bidding items. We will not require that repairs longer medically necessary, as provided
program in that it directs business to of beneficiary-owned competitively bid under § 414.210(e)(3).
contract suppliers. items be performed by contract We note that we do not have authority
Therefore, we proposed that repair or suppliers because we recognize that under § 1847(a)(2) to include splints in
replacement of beneficiary-owned items contract suppliers may not have the the Medicare DMEPOS Competitive
subject to a competitive bidding training and expertise to repair every Bidding Program.
program must be furnished by a contract make and model of equipment that Comment: Numerous commenters
supplier. We indicated that this could be provided to a Medicare raised concerns regarding the
proposed requirement would not apply beneficiary. This policy will also apply requirement that replacement of
to Medicare beneficiaries who are to maintenance services required by the beneficiary-owned equipment that is
outside of a CBA. DRA. We will pay for maintenance and subject to the Medicare DMEPOS
Comment: Some commenters objected servicing of competitively bid items, Competitive Bidding Program must be
to the requirements that repair of including replacement parts that may be furnished by a contract supplier. The
beneficiary-owned equipment that is needed, that are performed by any commenters suggested that CMS allow
subject to a competitive bidding supplier as long as those repairs are contract suppliers to replace items even
program must be furnished by a contract made by suppliers that have a valid if they do not ordinarily furnish these
supplier and that a contract supplier Medicare billing number that enables items. The commenters believed that
must agree to service all items included them to receive payment for covered implementing the replacement
provision may be difficult as a rule will help ensure that beneficiaries E. Competitive Bidding Areas
replacement may relate to a warranty obtain replacement items from qualified (§§ 414.402, 414.406(b)–(c), 414.410,
claim or require that the same product suppliers, and it is consistent with one 414.412(f) and (g)
be furnished to ensure continuity of of the competitive bidding program’s
1. Background
care. The commenters also noted that, goals, that is, to direct business to
under the proposed provision, contract contract suppliers that conduct business Section 1847(a)(1)(A) of the Act
suppliers would be required to replace in a manner that is beneficial for the requires that competitive bidding
products that have been damaged Medicare program and for beneficiaries. programs be established and
despite the fact that they did not sell the Therefore, in final § 414.408(k)(3) we implemented in areas throughout the
item initially. The commenters asserted have retained this requirement. United States. We are interpreting the
that if a beneficiary purchased a product Medicare regulations at 42 CFR term ‘‘United States’’ to include all
from a noncontract supplier prior to 414.210(f) provide that if an item of States, Territories, and, as discussed in
competitive bidding, the noncontract DME or a prosthetic or orthotic device section VI.B. of this final rule, the
supplier should be responsible for paid for by Medicare has been in District of Columbia. Section
repairs or replacement and be paid continuous use by the patient for the 1847(a)(1)(B) of the Act provides us
accordingly. The commenters also equipment’s reasonable useful lifetime with the authority to phase in
stressed that payment rates should be or if the carrier determines that the item competitive bidding programs so that
generous enough to ensure that is lost, stolen, or irreparably damaged, the competition under the programs
beneficiaries receive an appropriate the patient may elect to obtain a new occurs in—
level of response or service, and piece of equipment. If these • 10 of the largest MSAs in CY 2007;
contract suppliers should be reimbursed requirements are met, the Medicare • 80 of the largest MSAs in CY 2009;
for the service and replacement items beneficiary would be required to go to and
they provide. The commenters remarked • Additional areas after CY 2009.
a contract supplier to obtain a complete We proposed to implement this
that the proposed rule assumes that replacement of beneficiary-owned statutory provision in § 414.406(b)–(c),
replacement equipment will be equipment. However, as we stated and in § 414.410.
provided and paid for in an amount above, if a beneficiary needs to obtain a Section 1847(a)(1)(B) of the Act also
equal to the single payment amount. replacement part for his or her authorizes us to phase in competitive
Several commenters suggested that CMS beneficiary-owned equipment, or needs bidding programs first among the
eliminate the requirement that to obtain maintenance or servicing of highest cost and volume items or those
beneficiary-owned equipment subject to the equipment, the beneficiary may items that we determine have the largest
competitive bidding must be replaced obtain the part or service from any savings potential. As we proposed, we
by a contract supplier. Other supplier that has a valid Medicare describe our methodologies for selecting
commenters requested that CMS revise billing number. If the replacement part the MSAs for CYs 2007 and 2009 below.
proposed § 414.422(c) to limit the scope is itself a competitively bid item in the Once the MSAs have been selected for
of this requirement so that contract CBA where the beneficiary maintains a CYs 2007 and 2009, we proposed to
suppliers that are FDA-approved permanent residence, the supplier that define the CBAs for CYs 2007 and 2009.
manufacturers and that only furnish performs the repair would generally be The process we proposed for
their own products to beneficiaries in paid for the labor associated with the establishing CBAs in future years,
the CBA are exempt and would only be repair in accordance with the which we are finalizing in this final
required to replace their own products. methodology described in rule, is also discussed below.
One commenter asked how the § 414.210(e)(1), and the single payment
replacement proposal might be affected amount for the part. 2. Methodology for MSA Selection for
by DRA provisions that imposed new We do not agree with the commenters CYs 2007 and 2009 Competitive Bidding
requirements regarding capped rental that our replacement rules would Programs (§§ 414.410(a) and (b))
items, oxygen, and oxygen equipment. generally require a contract supplier Based on sections 1847(a)(1)(B)(i)(I)
Response: As we stated above, we replace an entire competitively bid item and (II) of the Act, we have the authority
have decided to modify our proposal with the same make or model to ensure to select from among the largest MSAs
regarding the maintenance and servicing continuity of care. Rather, as we discuss during the first two implementation
of beneficiary-owned items to allow any in § 414.420 of this final rule, this phases in order to phase in the programs
supplier to perform this service, would only be required if a physician or in the most successful way, thereby
provided that the supplier has a valid treating practitioner prescribed a achieving the greatest savings while
Medicare billing number. However, we particular brand or mode of delivery for maintaining quality and beneficiary
do not believe that this modification an item. If a beneficiary needs a access to care. In phasing in the
should extend to situations where an replacement item, a manufacturer that competitive bidding programs, we
item must be replaced in its entirety only furnishes its own brand would proposed to adopt a definition of the
because the concern expressed by the generally be able to furnish that brand term ‘‘Metropolitan Statistical Area’’
commenters, namely that suppliers to the beneficiary. In addition, we (MSA) consistent with that issued by
cannot be expected to have the expertise expect that a manufacturer’s warranty the Office of Management and Budget
to repair every make and model of would be honored by the manufacturer, (OMB) and applicable for CYs 2007 and
equipment, would not be a factor in the regardless of which supplier from which 2009 (§ 414.402). OMB is the Federal
event that an item must be replaced. the Medicare beneficiary obtains the agency responsible for establishing the
Accordingly, we continue to believe that replacement. standards for defining MSAs for the
beneficiaries should be required to In summary, after consideration of the purpose of providing nationally
obtain a replacement of an entire item, public comments we received, in this consistent definitions for collecting,
as apposed to replacement of a part for final rule, we are redesignating tabulating, and publishing Federal
repair purposes, from a contract proposed § 414.422(c) as new statistics for a set of geographic areas.
supplier. As we stated in the May 1, § 414.408(k) and revising this section as OMB most recently revised its standards
2006 proposed rule (71 FR 25681), this discussed above. for defining MSAs in CY 2000 (65 FR
82228 through 82238). Under these population size. However, the U.S. 2007. First, we proposed to identify the
standards, an MSA is defined as a core- Census Bureau periodically publishes a 50 largest MSAs in terms of total
based statistical area (CBSA) (a Statistical Abstract of the United States, population in CY 2005 using population
statistical geographic area consisting of which contains a table listing large estimates published by the U.S. Census
the county or counties associated with MSAs, or MSAs having a population of Bureau in its table of large MSAs from
at least one core (urbanized area or 250,000 and over. For the purpose of the Statistical Abstract of the United
urban cluster) of at least 10,000 this rule, we proposed to use these data States. Second, 25 MSAs out of the 50
population, plus adjacent counties to identify the largest MSAs. MSAs identified in step one would be
having a high degree of social and In the May 1, 2006 proposed rule (71
eliminated from consideration based on
economic integration as measured FR 25665), we proposed a formula
our determination that they have the
through commuting ties with the driven methodology for selecting the
MSAs for competitive bidding in CYs lowest totals of DMEPOS allowed
counties containing the core) associated charges for items furnished in CY 2004.
with at least one urbanized area that has 2007 and 2009. After we select the
MSAs, we would define the CBAs. For This step would allow us to focus on the
a population of at least 50,000, and is 25 MSAs that have the highest totals of
the purpose of our proposal, DMEPOS
comprised of the central county or DMEPOS allowed charges which, we
allowed charges would be the Medicare
counties containing the core, plus believe, would produce a greater chance
fee-for-service (FFS) allowed charge
adjacent outlying counties having a high data for DMEPOS items that we have of savings as a result of competitive
degree of social and economic authority to include in a competitive bidding than MSAs with lower total
integration with the central county as bidding program. These data do not DMEPOS allowed charges. Table 1 of
measured through commuting. OMB include Medicare expenditures for the proposed rule (71 FR 25665 and
issues periodic updates of the MSAs DMEPOS items under the Medicare 25666), which is republished below,
between decennial censuses based on Advantage Program. illustrated the DMEPOS allowed charge
United States Census Bureau estimates, data for items furnished in CY 2003 and
but other than identifying certain MSAs a. MSAs for CY 2007
Census Bureau population estimates as
having a population core of at least 2.5 We proposed to use a multiple step
of July 1, 2003.
million, does not rank MSAs based on process in selecting the MSAs for CY
TABLE 1.—TOP 25 MSAS BASED ON TOTAL DMEPOS MEDICARE ALLOWED CHARGES FOR CY 2003
MSA Allowed charges
New York-Northern New Jersey-Long Island, NY-NJ-PA (New York) ............................................................................................ $312,124,291
Los Angeles-Long Beach-Santa Ana, CA (Los Angeles) ............................................................................................................... 253,382,483
Miami-Fort Lauderdale-Miami Beach, FL (Miami) ........................................................................................................................... 221,660,443
Chicago-Naperville-Joliet, IL-IN-WI (Chicago) ................................................................................................................................. 173,922,952
Houston-Baytown-Sugar Land, TX (Houston) ................................................................................................................................. 149,060,607
Dallas-Fort Worth-Arlington, TX (Dallas) ......................................................................................................................................... 139,910,862
Detroit-Warren-Livonia, MI (Detroit) ................................................................................................................................................ 121,444,298
San Juan, PR .................................................................................................................................................................................. 108,478,208
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD (Philadelphia) ................................................................................................... 97,487,063
Atlanta-Sandy Springs-Marietta, GA (Atlanta) ................................................................................................................................. 75,860,276
Tampa-St. Petersburg-Clearwater, FL (Tampa) .............................................................................................................................. 71,309,635
Boston-Cambridge-Quincy, MA-NH (Boston) .................................................................................................................................. 62,467,094
Washington-Arlington-Alexandria, DC-VA-MD-WV (DC) ................................................................................................................ 61,416,109
Baltimore-Towson, MD (Baltimore) ................................................................................................................................................. 59,714,310
Pittsburgh, PA .................................................................................................................................................................................. 56,612,095
St. Louis, MO-IL ............................................................................................................................................................................... 55,931,373
Riverside-San Bernardino-Ontario, CA (Riverside) ......................................................................................................................... 52,910,209
Cleveland-Elyria-Mentor, OH (Cleveland) ....................................................................................................................................... 52,237,312
Orlando, FL ...................................................................................................................................................................................... 51,982,164
San Francisco-Oakland-Fremont, CA (San Francisco) ................................................................................................................... 45,565,320
San Antonio, TX .............................................................................................................................................................................. 44,113,886
Cincinnati-Middletown, OH-KY-IN (Cincinnati) ................................................................................................................................ 41,582,961
Kansas City, MO-KS ........................................................................................................................................................................ 41,310,326
Virginia Beach-Norfolk-Newport News, VA-NC (Virginia Beach) .................................................................................................... 41,016,726
Charlotte-Gastonia-Concord, NC-SC (Charlotte) ............................................................................................................................ 37,874,144
Table 1 showed the 25 MSAs that available data at the time that the MSAs number of beneficiaries receiving
would be left for consideration after step are selected for CY 2007 DMEPOS items (suppliers per
two is completed. However, we implementation. We now have more beneficiary) in CY 2004, with equal
proposed to select the actual MSAs for current utilization data (that is, from CY weight (50 percent) being given to each
CY 2007 using U.S. Census Bureau 2005); we will use these data in factor. The MSAs would be ranked from
population data published as of July 1, selecting the MSAs for the first round of 1 to 25 in terms of DMEPOS allowed
2005, and DMEPOS allowed charge data competitive bidding. charges per FFS beneficiary (for
for items furnished in CY 2004. We Third, we proposed to score the MSAs example, the MSA with the highest
proposed using population data for CY based on combined rankings of DMEPOS allowed charges per FFS
2005 and DMEPOS allowed charge data DMEPOS allowed charges per FFS beneficiary would be ranked number 1).
for CY 2004 because we believed these beneficiary (charges per beneficiary) and Similarly, areas having more suppliers
data would be the most recently the number of DMEPOS suppliers per per beneficiary are more likely to be
competitive and would be ranked higher number of beneficiaries would be based would be an indicator of where more
than MSAs having fewer suppliers per on the number of beneficiaries receiving program funds would be spent on
beneficiary. Based on our experience DMEPOS items in the MSA in CY 2004. DMEPOS items subject to competitive
from the DMEPOS competitive bidding If more than one MSA receives the same bidding. Table 2 in the proposed rule
demonstrations, the number of suppliers score, we proposed to use total (71 FR 25666), which is republished
would be based on suppliers with at DMEPOS allowed charges for items that below, illustrated how the 25 MSAs
least $10,000 in allowed charges we have authority to include in a from Table 1 in the proposed rule would
attributed to them for DMEPOS items competitive bidding program in each be scored, based on data for CY 2003.
furnished in the MSA in CY 2004. The MSA as the tiebreaker because this
TABLE 2.—SCORING OF TOP 25 MSAS BASED ON DATA FOR CY 2003

[Scoring based on combined rank from columns 3 and 4]
Charges per Suppliers per

MSA Score Allowed charges
beneficiary beneficiary
Miami ............................................................................................................... 3 $428.44 (1) 0.01121 (2) $221,660,443

Houston ............................................................................................................ 6 348.83 (2) 0.00864 (4) 149,060,607
Dallas ............................................................................................................... 8 297.33 (3) 0.00749 (5) 139,910,862
Riverside .......................................................................................................... 9 220.93 (8) 0.01144 (1) 52,910,209
San Antonio ..................................................................................................... 9 243.03 (6) 0.00897 (3) 44,113,886
Los Angeles ..................................................................................................... 11 277.16 (5) 0.00692 (6) 253,382,483
Charlotte .......................................................................................................... 14 226.09 (7) 0.00661 (7) 37,874,144
Orlando ............................................................................................................ 18 212.57 (9) 0.00569 (9) 51,982,164
San Juan .......................................................................................................... 25 291.97 (4) 0.00388 (21) 108,478,208
Atlanta .............................................................................................................. 25 185.80 (15) 0.00569 (10) 75,860,276
Tampa .............................................................................................................. 25 190.30 (13) 0.00529 (12) 71,309,635
Kansas City ...................................................................................................... 25 186.39 (14) 0.00555 (11) 41,310,326
Pittsburgh ......................................................................................................... 26 197.95 (11) 0.00484 (15) 56,612,095
Virginia Beach .................................................................................................. 26 207.28 (10) 0.00477 (16) 41,016,726
St. Louis ........................................................................................................... 32 169.81 (18) 0.00488 (14) 55,931,373
San Francisco .................................................................................................. 32 127.56 (24) 0.00632 (8) 45,565,320
Cincinnati ......................................................................................................... 32 167.06 (19) 0.00528 (13) 41,582,961
Cleveland ......................................................................................................... 33 182.01 (16) 0.00470 (17) 52,237,312
Detroit .............................................................................................................. 37 195.99 (12) 0.00290 (25) 121,444,298
Baltimore .......................................................................................................... 37 174.38 (17) 0.00396 (20) 59,714,310
Philadelphia ..................................................................................................... 40 152.38 (21) 0.00443 (19) 97,487,063
DC .................................................................................................................... 41 128.97 (23) 0.00449 (18) 61,416,109
Chicago ............................................................................................................ 44 160.26 (20) 0.00327 (24) 173,922,952
New York ......................................................................................................... 45 139.81 (22) 0.00342 (23) 312,124,291
Boston .............................................................................................................. 47 113.99 (25) 0.00371 (22) 62,467,094
We proposed that the final scoring be the demonstrations were conducted was that is larger than a MSA. In the
based on utilization data for CY 2004 San Antonio (total population of 1.7 proposed rule, we solicited specific
and population data for CY 2005 million in 2000). We want to gain comments on these alternatives.
because we believed these data would experience with the competitive bidding Comment: Several commenters stated
be the most recently available data at process in MSAs larger than San that CMS does not have the authority to
the time that the MSAs are selected for Antonio before moving onto the three extend or decrease the size of the MSA
CY 2007 implementation. However, we largest MSAs. After we have gained boundaries and that this proposal is
will use utilization data for CY 2005 experience operating competitive inconsistent with the statute. They
when we perform the final scoring for bidding programs in CBAs that noted that section 1847(a)(1)(B) of the
the third step because this is the most encompass smaller MSAs in CYs 2007 Act requires that competitive
current utilization data that we have. and 2008, we plan to implement acquisition occur in MSAs in CY 2007
For purposes of phasing in the programs that include New York, Los and CY 2009, and only authorizes
programs, we proposed to exclude from Angeles, and Chicago in CY 2009. competitive acquisition in ‘‘other areas’’
consideration for competitive bidding In the May 1, 2006 proposed rule, we after CY 2009.
until CY 2009 the three largest MSAs in indicated that we were considering an Response: Section 1847(a)(1)(B) of the
terms of population, as well as any MSA alternative under which we would Act requires that competition under the
that is geographically located in an area establish CBAs that include portions of programs occur in CY 2007 and CY 2009
served by two DME MACs. The three one or more of these MSAs (for in a minimum number of MSAs. We did
largest MSAs based on total population example, by county). We believe that not propose to extend or decrease any
(based on CY 2003 data) are New York, this alternative is authorized by section MSA boundaries. Rather, we stated that
Los Angeles, and Chicago. We believe 1847(a)(1)(B)(II) of the Act, which states section 1847(a)(1)(B) of the Act does not
that these MSAs should not be phased that competition under the programs require us to define the boundaries of a
in until CY 2009 because of the logistics shall occur in 80 of the largest MSAs in CBA congruently with the boundaries of
associated with the start-up of this new CY 2009 but does not require the an MSA, as long as 10 MSAs are
and complex program. As of 2000, each competition to occur in the entire MSA. involved in CY 2007 and 80 MSAs are
of these three MSAs had a total In addition, section 1847 of the Act does involved in CY 2009. We also proposed
population of over 9 million. By not prohibit us from implementing a to consider an area for inclusion in a
comparison, the largest area in which competitive bidding program in an area CBA in CY 2007 or CY 2009, or both,
if (1) The area is not part of the MSA difference between the Medicare • Focus on the 25 MSAs from step
but adjoins an MSA in which a DMEPOS market in an MSA and the one with the greatest total of DMEPOS
competitive bidding program will be total population of an MSA. The allowed charges.
operating; (2) the area is competitive commenter also recommended that CMS • Score the MSAs from step two
(meaning that it has high DMEPOS exclude, until CY 2009, or once further based on combined rankings of
utilization, significant expenditures, experience has been accumulated and DMEPOS allowed charges per
and/or a large number of suppliers that cultural competency has been beneficiary and suppliers per
furnish items that will be included in accounted for, culturally diverse MSAs beneficiary, with lower scores
the competitive bidding program for the such as Miami and those located in indicating a greater potential for savings
adjoining MSA); and (3) the area is part Puerto Rico from competitive bidding. A if programs are implemented in those
of the normal service area or market for number of other commenters also areas.
suppliers that also serve the MSA recommended excluding MSAs located • Exclude the three largest MSAs in
market or areas within the boundaries in Puerto Rico. terms of population (New York, Los
for an MSA in which a competitive Response: We believe our Angeles, Chicago) and any MSA that
bidding program will be operating. We methodology results in the selection of crosses DME MAC boundaries.
continue to believe this approach is top priority areas in terms of potential • Select the lowest scoring MSA from
reasonable because if an area meets savings for the program. Cultural each DME MAC region.
these criteria, we believe that we could diversity is not one of the factors we • Select the next six lowest scoring
properly characterize the area as being considered when developing a formula MSAs regardless of DME MAC region,
integrated with the MSA in terms of the driven approach because our goal in but not more than two MSAs from one
DMEPOS market. implementing the program is to select State.
Comment: One commenter areas that provide the greatest • Break ties in scores using DMEPOS
recommended that, when picking the opportunity for savings. allowed charges, selecting MSAs with
first 10 MSAs, CMS should pick the We proposed not to include CBAs that higher total DMEPOS allowed charges.
smallest of the 10 largest MSAs. cross DME MAC regions because this In the proposed rule, we indicated
Response: Section 1847(a)(1)(B) of the could complicate implementation by that we considered a number of
Act requires us to phase-in the having two DME MACs processing alternative methods for selecting the
competitive bidding programs so that claims from one CBA. MSAs for CY 2007. We indicated that
the competition occurs in 10 of the The next step that we proposed the MSAs could be selected based on a
largest MSAs in 2007. The process that entails ensuring that there is at least one combination of one or more variables or
we proposed and are finalizing in this CBA in each DME MAC region by first measures including, but not limited to—
final rule is a formula driven approach selecting the highest scoring MSA in • General population;
that bases the decision on the total each DME MAC region (other than New • Medicare FFS beneficiary
population of an MSA, the Medicare York, Los Angeles, Chicago, or MSAs population;
allowed charges for DMEPOS items per that cross DME MAC boundaries). This • Number of beneficiaries receiving
FFS beneficiary in an MSA, the total would ensure that each DME MAC gains DMEPOS items that we have authority
number of DMEPOS suppliers per FFS some experience with competitive to include in a competitive bidding
beneficiary who received DMEPOS bidding prior to CY 2009, when program;
items in an MSA, and the MSA’s competitive bidding would be • Total Medicare allowed charges for
geographic location, for example, in the implemented in CBAs that include 80 DMEPOS items subject to competitive
first round, to ensure that there is at MSAs. bidding; and
least one CBA in each DME MAC Comment: One commenter • Number of suppliers of DMEPOS
region. We believe that this approach recommended that one MSA be selected items that we have authority to include
will result in the selection of MSAs that from each DME MAC region for CY in a competitive bidding program.
have more potential to produce savings 2007. In evaluating these alternatives, we
for the Medicare program than we might Response: Section 1847(a)(1)(B) defined the general population as all
otherwise achieve if we selected MSAs requires us to implement competitive individuals residing in an MSA,
based on their size alone. However, we bidding in 10 of the largest MSAs in CY whether or not they were enrolled in
also recognize that implementing the 2007. We are adopting as final the Medicare. One advantage of this
Medicare DMEPOS Competitive Bidding approach outlined in our proposed rule variable would have been that total
Program will involve many challenges, (71 FR 25667) which ensures that there population is a widely accepted
and we want to gain sufficient is a least one CBA in each DME MAC measure of gauging MSA size and the
experience in administering the region. This would ensure that each data are readily accessible to the general
program before we implement DME MAC region gains experience with public through the U.S. Census Bureau
competitive bidding programs in the the competitive bidding program prior Web site. Another advantage of using
three largest MSAs in terms of to CY 2009 when we phase in 70 this variable would be that total
population size. Therefore, we proposed additional CBAs. population takes into account the
to exclude the MSAs that include New We also proposed to select no more demand for DMEPOS items and other
York City, Los Angeles, and Chicago than two MSAs per State among the supplies from population groups other
from the competition that will occur in initial CBAs selected for CY 2007 in than the Medicare population. DMEPOS
CY 2007. order to learn how competitive bidding demand from non-Medicare individuals
Comment: One commenter works in more States and regions of the might make it less likely that a supplier
recommended excluding Miami from country. In summary, we proposed to not selected as a contract supplier
the first round of bidding. The select the 10 MSAs in which would exit the market. This could help
commenter noted that Miami has the competition under the programs would increase the likelihood of competition
largest MSA market based charges per occur in CY 2007 using the following in future rounds of competitive bidding
beneficiary, suppliers per beneficiary, steps: within that MSA. However, we
and total DMEPOS allowed charges. The • Identify the top 50 MSAs in terms recognize that the MSAs with the largest
commenter stated that there is a big of general population. total populations might not have the
most Medicare beneficiaries or the large MSAs with higher allowed charges take place in 10 of the largest MSAs in
greatest potential for savings. One for DMEPOS items, which is consistent CY 2007. In implementing competitive
reason is that the age distribution is not with section 1847(a)(1)(B)(ii) of the Act bidding programs in 10 CBAs that
uniform across MSAs. MSAs located in and which would allow us to phase in include these MSAs, we do not believe
States that have either large immigrant the Medicare DMEPOS Competitive it is necessary or practical to use the
populations or have experienced rapid Bidding Program first for those items staggered approach recommended by
recent growth often have younger than that have the highest cost and highest the commenters, as we believe that this
average age profiles. Another reason is volume, or those items that have the would likely result in confusion for
that DMEPOS utilization and potential largest savings potential. This step beneficiaries and suppliers and make
profits are not uniform across MSAs. It would directly address the question of the phase-in process too
is quite possible that some of the which MSAs have the highest costs. In administratively complicated.
smaller population MSAs may have a step 3 above, we proposed to use Comment: Several commenters
greater potential for savings than MSAs allowed DMEPOS charges per suggested that CMS use an area
with much larger populations. We beneficiary and the number of suppliers selection methodology that initially
believe that the disadvantages of per beneficiary to further measure the results in a limited number of small
selecting MSAs based on general savings potential for each MSA. CBAs. The commenters also stated that
population are greater than the Allowed DMEPOS charges per this is an experimental program. They
advantages of using this method and, beneficiary is a measure of per capita noted that there is little geographic
therefore, did not propose using general DMEPOS utilization in terms of the diversity in the CBAs identified in Table
population as the sole variable in overall DMEPOS cost per beneficiary. 2 of the proposed rule (republished as
selecting the MSAs for CY 2007. We believe that areas with higher Table 2 in this final rule), and that based
An advantage of selecting MSAs utilization rates and costs would have a on this table, the CBAs would be
based on the Medicare FFS population greater potential for savings under the disproportionately concentrated in DME
would have been that this population programs, which will rely on MAC Region C. The commenters
represents the number of individuals competition among suppliers to lower suggested that the geographic diversity
who could potentially be affected by costs in the area. Competition among should be expanded to provide more
competitive bidding. A disadvantage of suppliers is necessary for competitive useful information that CMS can
selecting MSAs based solely on this bidding to be successful. Without consider when implementing the
variable is that it does not reflect actual sufficient competition among suppliers, program in more areas in the future.
DMEPOS utilization. Therefore, we did suppliers have little incentive to submit Response: We believe that our
not propose using the FFS population as low bids in response to the RFBs for proposed methodology for selecting
the sole variable in selecting the MSAs DMEPOS products. In addition, we MSAs will result in the selection of the
for CY 2007. Per capita DMEPOS believe that competition for market most appropriate MSAs (and therefore
utilization rates vary across MSAs. As a share among winning suppliers will act CBAs) in terms of achieving one of the
result, MSAs with fewer Medicare as a market force to maintain a high most critical goals of the program to
beneficiaries could have a greater level of quality products. The number of reduce Medicare expenditures for
potential for savings from competitive suppliers per beneficiary is a direct DMEPOS. As we explained above,
bidding. The advantage of using the measure of how many suppliers are several aspects of our methodology,
number of Medicare beneficiaries competing for each beneficiary’s including in the first round of
receiving DMEPOS items to select the business. We expect that the higher the competitive bidding selecting at least
MSAs is that MSAs would be selected number of suppliers per beneficiary, the one MSA in each DME MAC region, and
based on the number of individual higher the degree of competition will be. selecting not more than two MSAs per
beneficiaries who are most likely to be In the proposed rule, we invited State, allow for geographic diversity.
directly affected by competitive bidding specific comments about the selection
because they already have a need for method for the original 10 MSAs in CY b. MSAs for CY 2009
these items. A disadvantage of this 2007. We welcomed recommendations In selecting the 70 additional MSAs in
variable is that the number of specific of other options and criteria for which competition will occur in CY
beneficiaries receiving DMEPOS items consideration. We indicated that, after 2009, we proposed using generally the
is only a static measure. The number of further consideration of comments same criteria used to select the MSAs
beneficiaries who would be receiving received, in the final rule, we may adopt for CY 2007 (proposed § 414.410(b)).
DMEPOS products in the future could other criteria regarding issues described Because the number of MSAs in which
be substantially different from the above or other criteria and options competition must occur in CY 2009 is
current number. Treatment patterns brought to our attention through the much higher than the number for CY
within the MSA could change or the comment process. 2007, we proposed that the steps in the
number of beneficiaries receiving Comment: Several commenters selection process would change as
DMEPOS items could fluctuate if recommended that CMS identify the follows:
beneficiaries switch from FFS benefits initial 10 MSAs in the final regulation. • We would score all of the MSAs
to a Medicare Advantage plan. For these Response: We plan to announce the included in the table of large MSAs in
reasons, we did not propose using the first 10 MSAs, which will be based on the most recent publication of the U.S.
number of beneficiaries receiving 10 of the largest MSAs, at the same time Census Bureau’s Statistical Abstract of
DMEPOS items as the sole variable in we publish this final rule. the United States.
selecting the MSAs for CY 2007. Comment: Several commenters • We would use the same criteria to
Selecting the MSAs using the steps recommended that CMS stagger the score the MSAs as we would use in
we proposed utilizes a variety of implementation of the initial 10 MSAs selecting the MSAs for CY 2007, but use
variables that we believe would help us to identify and correct problems data from CY 2006.
predict which MSAs will offer the encountered early in the In the proposed rule, we indicated
largest savings potential under a implementation process. that one option we were considering
competitive bidding program. In step 2 Response: Section 1847(a)(1)(B)(i)(I) and on which we requested comments
above, we would focus on a subset of of the Act requires that the competition is whether we should modify the
ranking of MSAs based on allowed We proposed to make decisions 4. Establishing Competitive Bidding
DMEPOS charges per beneficiary so that regarding what constitutes low Areas for CYs 2007 and 2009
it focuses on charges in each MSA for (noncompetitive) levels of utilization, (§§ 414.406(b) and (c))
the items that experienced the largest suppliers, and beneficiaries on the basis Section 1847(a)(1)(B) of the Act
payment reductions or savings under of our analysis of the data for allowed requires that the competition ‘‘occurs
the initial round of competitive bidding charges, allowed services for items that in’’ 10 of the largest MSAs in CY 2007,
in CY 2007. may be subject to competitive bidding, and in 80 of the largest MSAs in CY
In selecting the MSAs for CY 2009, we and the number of Medicare 2009, but does not require us to define
did not propose excluding the 3 largest beneficiaries receiving FFS benefits and the competition boundaries
MSAs in terms of population size or DMEPOS suppliers in specific concurrently with the MSA boundaries,
MSAs that cross DME MAC boundaries geographic areas. In defining urban and as long as 10 MSAs are involved in CY
from the 80 largest MSAs to be included rural areas, we proposed to use the 2007 and 80 MSAs are involved in CY
in the CBAs. In addition, we did not definitions currently in § 412.64(b)(1)(ii) 2009. Therefore, we do not believe that
propose limiting the number of MSAs of our regulations. We proposed to section 1847(a)(1)(B) of the Act
that could be selected from any one incorporate these provisions in prohibits us from extending individual
State. proposed § 414.410(c). competition areas beyond the MSA
We invited comments on the boundaries in CYs 2007 or 2009.
that New York, Los Angeles, and
methodologies we proposed for In the May 1, 2006 proposed rule, we
Chicago be top priorities in the CY 2009
determining whether an area within an proposed in § 414.406(b) to designate
phase of implementation due to the
urban area that has a low population through program instructions each CBA
potential for significant cost savings to
density is not competitive. We indicated in which a competitive bidding program
the Medicare program.
that we would be reviewing the total will take place, and we proposed in
Response: These MSAs are only being
allowed charges, the number of § 414.406(c) that we could revise the
excluded from consideration during the
beneficiaries, and the number of CBAs if necessary. We also proposed (71
first phase of competitive bidding and
suppliers to determine whether a rural FR 25668) that an area (for example, a
will be included in the selection
area should be exempted from county, parish, or zip code) outside the
methodology for the second phase.
After consideration of the public competitive bidding. In addition, we boundaries of an MSA be considered for
comments we received, we are invited comments on standards for inclusion in a CBA for CY 2007 or CY
finalizing our rules under proposed exempting particular rural areas from 2009, or both if all of the following
§§ 414.410(a) and (b) regarding the competitive bidding. apply:
methodology for MSA selection with Comment: Several commenters • The area adjoins an MSA in which
only technical changes. believed that competitive bidding a competitive bidding program will be
should not be implemented in MSAs operating in CY 2007 or CY 2009.
3. Establishing Competitive Bidding with less than 500,000 people. They • The area is not part of an MSA in
Areas and Exemption of Rural Areas indicated that this will help keep small which a competitive bidding program
and Areas With Low Population Density business owners in rural communities will be operating in CY 2007 or CY
Within Urban Areas (§ 414.410(c)) open and, therefore, beneficiary access 2009.
Section 1847(a)(1) of the Act requires in these areas will not be compromised. • The area is competitive, as
that we phase in competitive bidding explained below.
Response: Section 1847(a)(1) of the • The area is part of the normal
programs and establish CBAs Act requires that we establish
throughout the United States over service area or market for suppliers that
competitive bidding programs also serve the MSA market or areas
several years beginning in CY 2007. throughout the United States. We have
Section 1847(a)(3)(A) of the Act gives us within the boundaries of an MSA in
the authority under section 1847(a)(3) of which a competitive bidding program
the authority to exempt ‘‘rural areas and the Act to exempt rural areas and areas
areas with low population density will be operating in CY 2007 or CY
with low population density within 2009.
within urban areas that are not urban areas that are not competitive
competitive, unless there is a significant As explained in section VI.E.2. of this
unless there is a significant mail order final rule, we proposed to define an
national market through mail order for market for a particular item. When we
a particular item or service.’’ MSA as a Core Based Statistical Area
implement the program, we will only associated with at least one urbanized
In the May 1, 2006 proposed rule, we
include areas in CBAs that are area that has a population of at least
proposed to use the authority in section
competitive and that we believe will 50,000, and comprised of the central
1847(a)(3) of the Act to exempt areas
produce savings for the program. In county or counties containing the core,
from competitive bidding if data for the
addition, we have revised our rules plus adjacent outlying counties having a
areas indicate that they are not
regarding small suppliers in response to high degree of social and economic
competitive based on one or more of the
public comments and believe that the integration with the central county as
following indicators:
• Low utilization of items in terms of revised rules will help to ensure that measured through commuting.
the number of items and/or allowed small suppliers have an opportunity to However, when using this definition to
charges for DMEPOS in the area relative participate in the Medicare DMEPOS establish the boundaries of an MSA,
to other similar geographic areas. Competitive Bidding Program. A full OMB would not consider whether an
• Low number of suppliers of discussion of these modifications can be area or areas adjoining an MSA are
DMEPOS items subject to competitive found in section XI. of this final rule. served by the same DMEPOS suppliers
bidding serving the area relative to other After consideration of the public that furnish items to beneficiaries
similar geographic areas. comments we received, we are residing in the MSA. If an area has a
• Low number of Medicare finalizing, with only technical changes, high level of utilization, significant
beneficiaries receiving FFS benefits in proposed § 414.410(c) regarding the expenditures, and/or a large number of
the area relative to other similar exclusion of rural areas or areas with suppliers of DMEPOS items included in
geographic areas. low population density from a CBA. the competitive bidding program for the
adjoining MSA, we stated that we factors that we proposed to consider and the availability of competing
believe that it would be practical and when designating CBAs, will help suppliers. We believe that the criteria
beneficial to include this area in the ensure that the CBAs are geographically that we will be using are sufficiently
CBA. The savings to the program distributed in a way that does not limit representative to select the appropriate
associated with adding the area to the beneficiary access to competitively bid MSAs for competitive bidding because
CBA would likely offset any items. We also note that, as specified in they will identify those MSAs that have
incremental administrative costs § 414.412 of this final rule, each contract high beneficiary allowed charges and a
incurred by the CBIC associated with supplier will be required to furnish high number of DMEPOS suppliers per
including the area in the competitive items to every beneficiary who DMEPOS users. We acknowledge the
bidding program for the MSA. maintains a permanent residence in the value of more specific item data for the
Finally, we did not propose to contract supplier’s CBA. We believe that purposes of selecting items for
consider counties that do not adjoin an this requirement will further ensure that competitive bidding. Therefore, we will
MSA for inclusion in a CBA for CY 2007 beneficiary access to competitively bid be looking at utilization of items when
or CY 2009 because we believe that items is maintained. we select the items for competitive
these outlying counties are too far Comment: Several commenters bidding.
removed from the areas that OMB has suggested that CMS not rely heavily on Comment: One commenter suggested
determined to be economically DMEPOS allowed charges per that we identify the top 80 MSAs for
integrated. We stated that we have the beneficiary and suppliers per competitive bidding using the
discretion to define a CBA to be either beneficiary. methodology as proposed. However, for
concurrent with an MSA, larger than an Response: We disagree. We believe the initial competitive bidding program,
MSA, or smaller than an MSA. We also that our methodology properly the commenter proposed that the agency
stated that we would detail in the RFBs identifies large MSAs with a significant use only the allowed DMEPOS charges
the exact boundaries of each CBA. We savings potential by considering per beneficiary metric when selecting
invited comments on the criteria to be DMEPOS allowed charges per FFS the 10 MSAs from the set of 80. The
used in considering whether to include beneficiary and suppliers per FFS commenter believed that this selection
counties outside MSAs in a CBA in CY beneficiary, as these data would methodology will provide us with a
2007 or CY 2009. indicate that these MSAs have the range of valuable data regarding areas
Comment: Several commenters largest number of suppliers available for that have many suppliers per
recommended that the maximum competition and the most expenditures/
beneficiary and areas that have fewer
number of CBAs in a State should be utilization per Medicare beneficiary.
suppliers per beneficiary.
one instead of two. They stated that the Comment: One commenter suggested
that CMS divide the MSAs by some Response: We believe that selecting
methodology should be changed to
easily recognized boundaries as the initial 10 MSAs based on combined
distribute the CBAs so that there are
proposed as an alternative proposal in rankings of both DMEPOS allowed
three areas in each of two of the DME
MAC regions, and two in each of the the proposed rule. charges per FFS beneficiary and the
remaining two DME MAC regions to Response: We will establish the CBAs number of DMEPOS suppliers per
ensure geographic distribution. based on the most current data and use number of beneficiaries receiving
Response: We believe that our our authority to adjust the areas to DMEPOS items, as well as based on the
proposed methodology for selecting exclude rural areas and areas with low MSA’s total population and geographic
MSAs and designating CBAs will not population density within urban areas area, is important and necessary for
only produce large savings for the that are not competitive. We will set designating CBAs that will produce
Medicare program, but that it will also easily recognizable boundaries by using savings for the Medicare program. In
ensure that the work involved with county lines and zip codes to identify addition, we believe that these factors
administering the program and the CBAs we select. are appropriate indicators of how robust
processing claims is evenly distributed Comment: One commenter supported competition is likely to be in an area
among our contractors. We also note the criteria for MSA selection that which will ultimately result in lower
that one of the factors we proposed to would consider MSAs based on their prices and increased savings for the
consider when selecting MSAs is their total population, total DMEPOS charges, program.
geographic location. charges per beneficiary, and the number Comment: One commenter questioned
Comment: Several commenters urged of DMEPOS suppliers per DMEPOS CMS’ decision to exclude the top three
CMS to adopt CBAs that are somewhat users. The commenter also suggested MSAs from consideration for
smaller than the MSAs to help minimize considering the numbers of suppliers of competition prior to CY 2009. The
the risk of a CBA crossing a state line constituent categories of DMEPOS, for commenter stated that the decision was
or areas shared by more than one example, oxygen and supplies or arbitrary and discriminatory.
DMERC and to ensure adequate hospital beds. The commenter believed Response: As stated in the proposed
geographic distribution of suppliers that, if there are enough suppliers to rule, because of the logistics associated
within a CBA in order to maintain conduct a competition for each of the with the startup of this new and
beneficiary access to competitively bid constituent categories within a CBA, the complex program, we would like to gain
items. constituent categories should be experience in the first phase of
Response: We proposed to designate included in the competitive bidding competitive bidding prior to
CBAs whose boundaries are concurrent program. implementing programs in CBAs that
with, larger than, or smaller than the Response: We believe our include the three largest MSAs (New
associated MSA because we believe that methodology, which concentrates on York, Los Angeles, and Chicago).
it is practical and beneficial to allowed charges per beneficiary and However, we will include these MSAs
implement competitive bidding suppliers per beneficiary, will result in when we consider which MSAs to select
programs in areas that are integrated in the selection of areas with the most for the CY 2009 competition.
terms of DMEPOS utilization, potential for savings under the Comment: One commenter requested
expenditures, and suppliers. We believe programs. This methodology relies on that implementation of competitive
that these factors, as well as the other average expenditures per beneficiary bidding be delayed indefinitely to
permit thoughtful review and revisions number of beneficiaries and suppliers in Comment: One commenter
to the program. ‘‘snowbird’’ locations before selecting recommended initially implementing
Response: Section 1847(a)(1) of the CBAs. competitive bidding programs in 3
Act requires that competition under the Response: We believe that our MSAs, Miami, Houston, and Dallas,
competitive bidding program occurs in methodology provides us with the most then 120 days later, implementing
10 of the largest MSAs in CY 2007. appropriate CBA selection and greatest programs in the next 3 MSAs in
Therefore, the Act does not permit us to savings for the program. As part of our February, and finally implementing
delay indefinitely implementation of the evaluation of Medicare allowed charges programs in the last 4 MSAs. The
program. for items per fee-for-service beneficiary commenter indicated that this will
Comment: One commenter and the total number of suppliers per allow CMS to monitor and proactively
recommended that CMS count all fee-for-service beneficiary, we will make changes before it fully implements
suppliers that have submitted Medicare consider how these data might be programs in the 10 MSAs.
DMEPOS claims in the past year in affected in areas where beneficiaries Response: The statute requires that
determining the number of suppliers per reside for only part of the year. the competition occur in 10 of the
beneficiary. The commenter asked if Comment: One commenter largest MSAs in CY 2007. As we
CMS will only calculate suppliers with recommended that CMS exclude areas explained above, we believe that our
physical locations inside of the CBA or that have a high probability of methodology provides us with the most
if it will base its number of suppliers on experiencing a natural disaster until CY appropriate CBA selection methodology
those that have submitted Medicare 2009 and consult with both the Federal and greatest savings potential for the
claims for DMEPOS for a specific time Emergency Management Agency program and that initially implementing
period. Another commenter believed (FEMA) and the Department of programs in all 10 CBAs at once will
that the proposed dollar amount, Homeland Security before reduce the potential for confusion that
$10,000, for suppliers with allowed implementing competitive bidding in could otherwise result if we conducted
charges attributed to them for DMEPOS these areas. the competition in the sequence
items furnished in the MSA in CY 2004 Response: The statute provides us suggested by the commenter.
is too low. In addition, the commenter with a geographic exception authority Comment: One commenter requested
added that the $10,000 threshold may only for rural areas and areas with low that CMS define ‘‘combined rankings.’’
be too small for some items of DME. The population density within urban areas The commenter asked whether this term
commenter further stated that for higher that are not competitive, unless there is means the allowed charges that
cost items, $10,000 in allowed charges a significant nationwide market through suppliers have submitted to Medicare or
would not indicate that the supplier has mail order for a particular item or the allowed payments.
an adequate level of experience with a service. We do not have authority to Response: ‘‘Combined rankings’’
product to appropriately meet the needs exclude areas that might experience a means a combined score for the
of Medicare beneficiaries. The natural disaster. DMEPOS allowed charges per
commenter suggested that CMS look at Comment: One commenter beneficiary in an MSA and the number
total allowed charges and allowed recommended that CMS initially of DMEPOS suppliers per beneficiary in
charges for the items being bid. In implement competitive bidding the same MSA with equal weight given
addition, the commenter recommended programs in three CBAs in October to each. The term ‘‘allowed charges’’
that the supplier set an appropriate 2007; in three CBAs in February 2008, includes both Medicare’s approved
dollar threshold for each product and in four CBAs in June 2008. The payment amount and the beneficiary’s
category that would demonstrate that commenter also recommended coinsurance amount.
the supplier has adequate experience excluding St. Louis, Kansas City, Comment: One commenter
with the product category before Baltimore, and Washington, D.C. from recommended that, in the situation
counting that supplier for MSA the MSA selection process because where more than one MSA receives the
selection purposes. these MSAs overlap with multiple DME same score, instead of using the total
Response: We believe that the $10,000 MAC regions or recent transition to a DMEPOS allowed charges for items that
threshold will give us an assurance that new DME MAC. In addition, the CMS has the authority to include in
there will be a sufficient number of commenter recommended excluding competitive bidding in each MSA as the
suppliers that have the capability to Orlando and San Antonio from the MSA tiebreaker, CMS use the FFS charges for
serve the area regardless of the selection process because these areas the items proposed for bidding in each
experience with the particular product were part of the demonstration projects. MSA and the total number of accredited
category. For suppliers with less than Response: We believe that our suppliers in each MSA to break ties.
$10,000 in allowed charges, we do not approach to conduct the competition in Response: We chose to use the total
have the assurance that the majority of all 10 CBAs at once is appropriate and DMEPOS allowed charges because this
them because of the cost of participating will ensure that the CBAs are number indicates the size of the overall
in the competitive bidding program and geographically dispersed. In addition, as business that is conducted in an MSA
accreditation will be interested in stated above, we believe that this for items subjected to the competitive
participating in the competitive bidding approach will alleviate the confusion bidding program. We believe that using
program. By including in our that could otherwise result if we total DMEPOS allowed charges is a
calculations only those suppliers with conducted the competition in the better indication of savings than the
allowed charges of at least $10,000, we manner suggested by the commenter. total number of suppliers in an area for
are ensuring that we select MSAs that The statute provides us with a the purpose of having a tie breaker
have a large number of suppliers that geographic exception authority only for because this measure indicates how
are interested and able to participate in rural areas and areas with low many items are actually being furnished
the competitive bidding program population density within urban areas in an area.
considering those suppliers. that are not competitive, unless there is Comment: One commenter agreed
Comment: One commenter a significant nationwide market through with our proposal to exclude the three
recommended that CMS adjust data on mail order for a particular item or largest MSAs from inclusion in
DMEPOS allowed charges and on the service. competitive bidding until CY 2009.
Response: The three largest MSAs would not be required to participate in by nationwide mail order suppliers. We
will be included in the list of potential the nationwide or regional mail order believe that the implementation of a
MSA candidates for the CY 2009 competitive bidding program. However, separate mail order competitive bidding
competitive bidding program. we would only allow these suppliers to program would result in significant
continue furnishing the items in CBAs savings because it would focus on
5. Nationwide or Regional Mail Order
if they were selected as contract suppliers that can obtain discounts from
Competitive Bidding Program
suppliers. manufacturers because they furnish a
(§§ 414.410(d)(2) and 414.412(f) and (g)) We proposed to allow these nonmail large volume of items to beneficiaries
Our data show that a significant order suppliers to continue furnishing through the mail. Therefore, we
percentage of certain items such as these items in areas subject to a envision that large savings for the
diabetic testing supplies (blood glucose competitive bidding program if the Medicare program would result from the
test strips and lancets) are furnished to supplier has been selected as a contract implementation of a separate mail order
beneficiaries by nationwide mail order supplier. When furnishing items to program.
suppliers. Therefore, in the May 1, 2006 beneficiaries who do not maintain a Comment: Several commenters noted
proposed rule (71 FR 25669), we permanent residence in a CBA, nonmail that there is no definition of a ‘‘mail
proposed in § 414.410(d)(2) and order suppliers would be paid based on order supplier’’ or description of a
§§ 414.412(f) and (g) to establish a the payment amount applicable to the nationwide or regional mail order
nationwide or regional competitive area where the beneficiary maintains his company in the proposed rule.
bidding program, effective for items or her permanent residence. Response: In the proposed rule, we
furnished on or after January 1, 2010, for In a September 2004 report (GAO–04– provided a definition of a ‘‘supplier’’
the purpose of awarding contracts to 765), GAO recommended that we that includes an entity that furnishes
suppliers to furnish these items across consider using mail delivery for items items through the mail. However, to
the nation or region to beneficiaries who that can be provided directly to further prevent confusion, as discussed
elect to obtain them through the mail. beneficiaries in the home as a way to in section VI.A. we have added
We proposed that the national or implement a DMEPOS competitive
definitions of ‘‘mail order contract
regional CBAs under the Medicare bidding strategy. In the proposed rule,
suppler,’’ ‘‘nationwide mail order
DMEPOS Competitive Bidding Program we solicited comments on our proposal
contract supplier,’’ ‘‘regional
would be phased in after CY 2009, and to implement this recommendation and
competitive bidding area,’’ and
payment would be based on the bids on the types of items that would be
‘‘regional mail order contract supplier’’
submitted and accepted for the suitable for a mail order competitive
in § 414.402. For purposes of
furnishing of items through mail order bidding program.
throughout the nation or region. In addition, we requested public competitive bidding a ‘‘mail order
Suppliers that furnish these items comment on an alternative that would contract supplier’’ will be a contract
through mail order on either a national require that replacement of all supplies supplier that furnishes items through
or regional basis would be required to such as test strips and lancets for the mail to beneficiaries who maintain
submit bids to participate in any Medicare beneficiaries be furnished by a permanent residence in a competitive
competitive bidding program mail order suppliers under a nationwide bidding area.
implemented for the furnishing of mail or regional mail order program. For Comment: One commenter asked
order items. example, there are services paid under whether a supplier would qualify to
We proposed that, prior to the the Medicare Physician Fee Schedule participate in a mail order competitive
establishment of a nationwide or (MPFS) that are associated with the bidding program if the supplier
regional competitive bidding program in furnishing of blood glucose testing furnishes items both through the mail
CY 2010, mail order suppliers would be equipment (for example, home blood and through a storefront location to
eligible to submit bids for furnishing glucose monitors) such as training, beneficiaries.
items in one or more of the CBAs we education, assistance with product Response: Any national or regional
establish for purposes of the CYs 2007 selection, maintenance, and servicing, mail order competitive bidding program
and 2009 implementation phases. In that do not relate to the furnishing of that we might choose to implement
addition, beginning with programs replacement supplies used with the starting in CY 2010 would be limited to
implemented in CY 2010, we proposed equipment. Once the brand of monitor the furnishing of items through the mail.
that mail order suppliers would be has been selected by the beneficiary, the Therefore, if a supplier wants to
eligible to submit bids in one or more services associated with furnishing the participate in a mail order program, it
CBAs to furnish items that are not supplies must be provided on a timely will have to submit a separate mail
included in a nationwide or regional basis and the beneficiary must receive order program bid. Only a designated
competitive bidding program. the brand of test strips needed for his or mail order contract supplier may
Nationwide or regional mail order her monitor. We invited public furnish items under a mail order
suppliers would be required to submit comment on whether the service of competitive bidding program. To
bids and be selected as contract furnishing replacement test strips, participate in a program for providing
suppliers for each CBA in which they lancets or other supplies can easily, items from a local storefront, a separate
seek to furnish these items. However, effectively, and conveniently be bid would have to be submitted.
we proposed that they would have the performed by nationwide mail order Comment: One commenter noted that
choice of either submitting the same bid suppliers. mail order is an appropriate and cost
amounts for each CBA or submitting Comment: Several commenters effective vehicle for delivery of some
separate bids. suggested that a separate program for replacement supplies (test strips and
For items that are subject to a mail order is unnecessary for CY 2010. lancets). Several commenters opposed
nationwide or regional mail order They also noted that mail order supplies the requirement for beneficiaries to use
competitive bidding program, we are not excluded for CYs 2007 and 2009. the mail order suppliers and suggested
proposed that suppliers that furnish Response: Our data indicate that over that the mail order program be
these same items in the local market and 60 percent of Medicare expenditures for voluntary for beneficiaries. Several
do not furnish them via mail order diabetic supplies are for items furnished commenters noted that beneficiaries
must have the option to get the supplies their supplies through the mail or from proposed in § 414.410(d)(1) to designate
from their local suppliers. a local supplier. through program instructions additional
Response: We continue to believe that Comment: One commenter suggested CBAs based on our determination that
a national or regional mail order that CMS create a national supplier the implementation of a competitive
program will be cost effective for the designation for which suppliers, mail- bidding program in a particular area
Medicare program, and did not propose order or retail, can apply. would be likely to result in significant
that it would be mandatory for Response: As we discussed above, we savings to the Medicare program.
beneficiaries. Such a mail order program will separately designate the supplier We did not receive any comments on
will be voluntary and beneficiaries will numbers of all noncontract suppliers to this specific.
have the option to receive their items monitor whether they are complying Therefore, after considering the
through the mail or from a local contract with the rules regarding the limited comments we received on Section II. D.
supplier. circumstances under which they can of the proposed rule, we are finalizing
Comment: One commenter suggested furnish a competitively bid item. To §§ 414.406(b)–(c) and § 414.410 as
that CMS specifically ensure that all address the commenter’s concern, in discussed above and with additional
suppliers in a mail order competitive addition to differentiating between technical changes, which include
bidding program are in compliance with contract suppliers and noncontract specifying in § 414.406(b) that we may
the DMEPOS quality standard that suppliers, we will also differentiate designate CBAs through program
requires that ‘‘mail services are not used between mail order contract suppliers instructions or by other means. We are
for the initial delivery, set-up, and and mail order noncontract suppliers. also adding a several definitions,
beneficiary education/training’’ for DME We will be making those designations including a of ‘‘mail order contract
equipment and supplies. with the award of contracts. supplier’’ under § 414.402. Finally, we
Response: The DMEPOS quality Comment: One commenter are finalizing §§ 414.412(f) and (g) as
standard that the commenter is referring recommended that, if CMS decides to discussed above and with technical
to was included in the draft quality create a nationwide or regional mail changes.
standards that were released for public order competitive bidding program,
comments on September 25, 2005. CMS include a program oversight F. Criteria for Item Selection (§§ 414.402
Although the final quality standards do provision related to refilling of supplies. and 414.406(d))
not preclude suppliers from furnishing The commenter suggested that CMS Section 1847(a)(2) of the Act describes
certain DMEPOS through the mail, they prohibit contract suppliers from the DMEPOS items that are subject to
also require suppliers to verify that a automatically refilling and sending competitive bidding. They include:
beneficiary has received an item and to replacement supplies without receiving • Durable medical equipment and
provide clear instructions to the a refill request from the beneficiary. medical supplies: Covered items (as
beneficiary related to the use, Response: Section 200, Chapter 20 of defined in section 1834(a)(13) of the
maintenance, and potential hazards of the Medicare Claims Processing Manual Act) for which payment would
the item. A supplier cannot be (Publication 100–4), prohibits suppliers/ otherwise be made under section
accredited unless a CMS-approved manufacturers from automatically 1834(a) of the Act, including items used
accreditation organization has delivering replacement supplies to in infusion and drugs (other than
determined that the supplier is beneficiaries unless the beneficiary, or inhalation drugs) and supplies used in
complying with the quality standards, their caregiver has requested them. The conjunction with DME, but excluding
and accreditation is a prerequisite to a reason for this prohibition is to ensure class III devices under the Federal Food,
supplier being eligible to participate in that the beneficiary actually needs the Drug, and Cosmetic Act.
the Medicare DMEPOS Competitive replacement supplies. This requirement • Other equipment and supplies
Bidding Program. Therefore, our goal is will apply to the Medicare DMEPOS (enteral nutrition, equipment, and
to award contracts only to suppliers that Competitive Bidding Program. supplies)—Items described in section
conduct business in a manner that is Comment: One commenter opposed 1842(s)(2)(D) of the Act, other than
beneficial to beneficiaries under the mail order/drop shipping for oxygen parenteral nutrients, equipment, and
program. The final Quality Standards and related equipment because this supplies.
document can be found under the basic might actually encourage contract • OTS orthotics: Orthotics described
standards and the consumer services suppliers to ship oxygen cylinders or in section 1861(s)(9) of the Act for
section at the Medicare DMEPOS other similar devices than deliver which payment would otherwise be
Competitive Bidding Program Web site: directly to the beneficiary. made under section 1834(h) of the Act,
http://www.cms.hhs.gov/Competitive Response: Pursuant to our DMEPOS which require minimal self-adjustment
AcqforDMEPOS/04_New_Quality supplier standards at 42 CFR 424.57(c), for appropriate use and do not require
_Standards.asp#TopofPage. a supplier must operate its business and expertise in trimming, bending,
Comment: One commenter suggested furnish Medicare covered items in molding, assembling, or customizing to
that CMS not implement a mail order compliance with all applicable Federal fit the individual.
competitive bidding program for and State licensure and regulatory In the May 1, 2006 proposed rule, we
diabetes testing supplies until the requirements. Therefore, suppliers are proposed in § 414.406(d) to designate
effects of such a program on required to furnish oxygen cylinders the items that would be included in
beneficiaries with diabetes have been and other similar devices in accordance each competitive bidding program
carefully studied, perhaps through a with these requirements. through program instructions. We also
pilot program. proposed (71 FR 25669) to define
Response: We do not believe a pilot 6. Additional Competitive Bidding ‘‘minimal self-adjustment’’ to mean an
program is necessary. Our data show Areas After CY 2009 (§ 414.410(d)(1)) adjustment that the beneficiary,
that 60 percent of beneficiaries currently Section 1847(a)(1)(B)(III) of the Act caretaker for the beneficiary, or supplier
receive supplies from mail order requires that competition under the of the device can perform without the
suppliers. Under the competitive Medicare DMEPOS Competitive Bidding assistance of a certified orthotist (that is,
bidding programs, beneficiaries will Program occur in additional areas after an individual certified by either the
continue to have the option of receiving CY 2009. Beginning in CY 2010, we American Board for Certification in
Orthotics and Prosthetics, Inc., or the was low) in a given area compared to durable medical equipment regional
Board for Orthotist/Prosthetist other areas, we might choose to exempt carrier (SADMERC) for purposes of
Certification). We also proposed to commode chairs from the competitive illustration. The SADMERC has defined
consider any adjustments that can only bidding programs in the CBA where a set of 64 DMERC [DME MAC] policy
be made by a certified orthotist to be significant savings would not be likely groups for analytical purposes in its role
adjustments that require expertise in while including commode chairs in the as the statistical analysis contractor for
trimming, bending, molding, competitive bidding programs for other DMEPOS. A policy group is a set of
assembling, or customizing to fit the CBAs. This decision would be based on HCPCS codes that describe related items
individual. We proposed to consult with area-specific utilization data. that are addressed in a DME MAC
a variety of individuals, including We proposed to use the authority medical review policy. For example, the
experts in orthotics, to determine which provided by section 1847(a)(1)(B)(ii) of policy group ‘‘oxygen and supplies’’
items and/or HCPCS codes would be the Act to phase in only those items that consists of approximately 20 HCPCS
classified as OTS orthotics. We invited we determine are among the highest
codes. Although the product categories
comments on a process for identifying cost and highest volume items during
subject to competitive bidding will not
OTS orthotics subject to competitive each phase of the Medicare DMEPOS
necessarily correspond to these policy
bidding. Competitive Bidding Programs. In
Section 1847(a)(1)(B)(ii) of the Act section II.F. of the proposed rule, we groups, we presented data for these
gives us the authority to phase in proposed to conduct competitive policy groups and items contained in
competitive bidding ‘‘first among the bidding for product categories that these policy groups for the purpose of
highest cost and highest volume items would be described in each RFB. identifying the highest cost and highest
or those items that the Secretary Suppliers would submit a separate bid volume DMEPOS items that may be
determines have the largest savings for each item under a defined product subject to competitive bidding. In other
potential.’’ In addition, section category, unless specifically excluded in words, we proposed using SADMERC
1847(a)(3)(B) of the Act grants us the the RFB. We proposed to include a data for ‘‘policy groups’’ to identify
authority to exempt items for which the ‘‘core’’ set of product categories in each groups of items we will consider
application of competitive bidding is CBA. We indicated that we might elect phasing in first under the competitive
not likely to result in significant to phase in some individual product bidding programs, but the actual
savings. In exercising this authority, we categories in a limited number of CBAs ‘‘product categories’’ for which we
proposed to exempt items outright or on in order to test and learn about their would request bids could be a subset of
an area-by-area basis using area-specific suitability for competitive bidding. items from a ‘‘policy group’’ or a
utilization data. For example, if we Because we had not yet identified the combination of items from different
found that utilization (that is, allowed product categories for competitive ‘‘policy groups.’’ The highest volume
services or allowed charges) for bidding at the time we issued the items (HCPCS codes) fall into a
commode chairs was low (or the proposed rule, we used policy groups relatively small number of policy groups
number of commode chair suppliers developed by the statistical analysis as illustrated in Table 3.
TABLE 3.—CY 2003 HIGH VOLUME ITEMS (HCPCS CODES)

HCPCS code Allowed charges Product description Policy group
E1390 .................. $2,033,123,147 Oxygen concentrator ........................................................................... Oxygen.

K0011 * ................ 1,176,277,899 Power wheelchair with programmable features ................................. Wheelchairs.
A4253 .................. 779,756,243 Blood glucose/reagent strips, box of 50 ............................................. Diabetic Supplies & Equipment.
E0260 .................. 331,457,962 Semi-electric hospital bed ................................................................... Hospital Beds/Accessories.
E0431 .................. 228,066,037 Portable gaseous oxygen equipment ................................................. Oxygen.
B4150 * ................ 206,396,813 Enteral formula, category I ................................................................. Enteral Nutrition.
B4035 .................. 197,057,150 Enteral feeding supply kit, pump fed, per day .................................... Enteral Nutrition.
E0277 .................. 156,762,241 Powered air mattress .......................................................................... Support Surfaces.
E0439 .................. 141,268,474 Stationary liquid oxygen ...................................................................... Oxygen.
E0601 .................. 123,865,463 Continuous positive airway pressure device (CPAP) ......................... CPAP Devices.
K0001 .................. 103,217,209 Standard manual wheelchair .............................................................. Wheelchairs.
K0004 .................. 87,208,486 High strength lightweight manual wheelchair ..................................... Wheelchairs.
A4259 .................. 79,575,166 Lancets, box of 100 ............................................................................ Diabetic Supplies & Equipment.
E0570 .................. 76,588,088 Nebulizer with compressor ................................................................. Nebulizers.
B4154 * ................ 76,326,903 Enteral formula, category IV ............................................................... Enteral Nutrition.
E0143 .................. 75,950,410 Folding wheeled walker w/o seat ....................................................... Walkers.
K0533 * ................ 75,136,517 Respiratory assist device with backup rate feature ............................ Respiratory Assist Devices.
K0538 * ................ 65,603,531 Negative pressure wound therapy electrical pump ............................ Negative Pressure Wound Ther-
apy (NPWT) Devices.
K0532 * ................ 56,046,930 Respiratory assist device without backup rate feature ....................... Respiratory Assist Devices.
K0003 .................. 55,318,959 Lightweight manual wheelchair ........................................................... Wheelchairs.
K0108 .................. 52,139,979 Miscellaneous wheelchair accessory .................................................. Wheelchairs.
E0192 * ................ 48,413,938 Wheelchair cushion ............................................................................. Support Surfaces.
E0163 .................. 48,216,855 Stationary commode chair with fixed arms ........................................ Commodes.
B4034 .................. 42,277,968 Enteral feeding supply kit syringe, per day ........................................ Enteral Nutrition.
* Due to HCPCS coding changes made since 1993, the descriptions or code numbers for these codes have been modified. The power wheel-
chair codes became effective November 15, 2006 and will be billed under several new HCPCS codes.
Because we proposed that we would grouped into product categories, we DMEPOS allowed charges and volume
conduct competitive bidding for items indicated that we would consider at the product category level for the
purpose of selecting which items to the competitive bidding programs. Data Summary System) database for items
phase in first under the competitive from the SADMERC for claims received furnished in CY 2003. The percentage of
bidding programs. The table below in CY 2003 are used for all policy total allowed Medicare charges for
provides data for the top 20 policy groups except those for nebulizers and DMEPOS that each policy group makes
groups based on Medicare allowed OTS orthotics. For the nebulizer and up is included in Table 4.
charges for the items within each policy OTS orthotics groups, data are included
group that we may choose to include in from the CMS BESS (Part B Extract and
TABLE 4.—CY 2003 DMEPOS ALLOWED CHARGES BY POLICY GROUP

Percent of
Rank Policy group CY 2003 DMEPOS
1 .................................................... Oxygen Supplies/Equipment ................................................................ $2,433,713,269 21.3

2 .................................................... Wheelchairs/Power Operated Vehicle (POVs) ** ................................. 1,926,210,675 16.9
3 .................................................... Diabetic Supplies & Equipment ........................................................... 1,110,934,736 9.7
4 .................................................... Enteral Nutrition ................................................................................... 676,122,703 5.9
5 .................................................... Hospital Beds/Accessories .................................................................. 373,973,207 3.3
6 .................................................... CPAP Devices ..................................................................................... 204,774,837 1.8
7 .................................................... Support Surfaces ................................................................................. 193,659,248 1.7
8 .................................................... Infusion Pumps & Related Drugs ........................................................ 149,208,088 1.3
9 .................................................... Respiratory Assist Devices .................................................................. 133,645,918 1.2
10 .................................................. Lower Limb Orthoses * ......................................................................... 122,813,555 1.1
11 .................................................. Nebulizers * .......................................................................................... 98,951,212 0.9
12 .................................................. Walkers ................................................................................................ 96,654,035 0.8
13 .................................................. Negative Pressure wound therapy (NPWT) Devices .......................... 88,530,828 0.8
14 .................................................. Commodes/Bed Pans/Urinals .............................................................. 51,372,352 0.5
15 .................................................. Ventilators ............................................................................................ 42,890,761 0.4
16 .................................................. Spinal Orthoses * ................................................................................. 40,731,646 0.4
17 .................................................. Upper Limb Orthoses * ......................................................................... 29,069,027 0.3
18 .................................................. Patient Lifts .......................................................................................... 26,551,310 0.2
19 .................................................. Seat Lift Mechanisms .......................................................................... 15,318,552 0.1
20 .................................................. TENS Devices ** .................................................................................. 15,258,579 0.1
Total for 20 Groups .................................................................................................................................. 7,830,384,538 68.6

Total for DMEPOS .................................................................................................................................... 11,410,019,351 ............................
* Data are from the CMS BESS (Date of Service). Data for orthoses policy groups exclude data for custom fabricated orthotics, but may in-
clude data for other items that will not be considered OTS orthotics.
** POVs are power-operated vehicles (scooters), and TENS devices are transcutaneous electrical nerve stimulation devices.
Section 1847(a)(1)(B)(ii) of the Act probability that suppliers would are based on actual Medicare
provides that the items we phase in first compete on quality for business and competitive bidding and the amounts
under competitive bidding may include market share. We saw evidence in the suppliers actually were willing to accept
products having the greatest potential competitive bidding demonstrations as payment from Medicare. However,
for savings. In the May 1, 2006 proposed that products furnished by a large we recognize that these results should
rule, we proposed to use a combination number of suppliers had large savings be used with caution. The
of the following variables when making rates and fewer problems with quality. demonstrations occurred more than 3
determinations about an item’s potential We understand that having a large years ago and the fee schedule has
savings as a result of the application of number of suppliers is not always a changed as a result of certain provisions
competitive bidding: necessary condition for competition. A in the MMA (for example, section
• Annual Medicare DMEPOS allowed CBA could be more concentrated and 302(c)(2) of the MMA (codified at
charges. less competitive than the number of section 1834(a)(21) of the Act), which
• Annual growth in expenditures. suppliers would predict if the market is
• Number of suppliers. requires that CMS adjust the fee
dominated by only a few suppliers and schedules for certain items based on a
• Savings in the DMEPOS the remaining suppliers have only
competitive bidding demonstrations. comparison to other payers such as the
minimal charges.
• Reports and studies. Federal Employees Health Plan (FEHP)).
We proposed that items with high The DMEPOS competitive bidding
demonstrations took place from 1999 to The HHS Office of the Inspector
allowed charges or rapidly increasing General (OIG) and GAO frequently
allowed charges would be our highest 2002 in two MSAs: Polk County, Florida
and San Antonio, Texas. Five product conduct studies that analyze the extent
priority in selecting items for to which Medicare overpays for specific
competitive bidding. categories containing items we might
include in the Medicare DMEPOS items, and we believe that these studies
The number of suppliers furnishing a
Competitive Bidding Programs were could assist with determining the saving
particular item or group of items would
included in at least one round of these potential for an item if it were included
also be an important variable in
identifying items with high savings demonstrations: oxygen equipment and in competitive bidding. Examples of
potential. We believe that a relatively supplies; hospital beds and accessories; relevant OIG studies include the
large number of suppliers for a enteral nutrition; wheelchairs and following:
particular group of items would likely accessories; and general orthotics. • Medicare Allowed Charges for
increase the degree of competition The results of the demonstrations Orthotic Body Jackets, March 2000
among suppliers and increase the provide useful information because they (OEI–04–97–00391);
• Medicare Payments for Enteral orthotists. They added that, for those Board for Orthotist/Prosthetist
Nutrition, February 2004 (OEI–03–02– States that have such laws, the scope of Certification) or someone who possesses
00700); and practice varies considerably. The specialized training, it would not be an
• A Comparison of Prices for Power commenters recommended including OTS orthotic that is eligible to be
Wheelchairs in the Medicare Program, the statutory definition of ‘‘qualified included in a competitive bidding
April 2004 (OEI–03–03–00460). practitioner’’ located in section program.
In addition, CMS and the DME MACs 1834(h)(1)(F)(iii) of the Act to identify As we proposed, we will identify
obtain retail pricing information for those individuals with expertise in specific OTS orthotics that will be
items in the course of establishing fee custom fitting orthotics. They believed included in specific competitive
schedule amounts and considering that linking OTS orthotics to the work bidding programs through program
whether payment adjustments are of a certified orthotist would instructions.
warranted for items using the inherent dramatically expand the list of products Comment: Several commenters
reasonableness authority in section that are considered OTS orthotics that requested exemption of OTS orthotics
1842(b)(8) of the Act. In the proposed would be subject to competitive that have the HCPCS codes L3908–
rule, we indicated that we could use bidding. They further noted that the list L3954 (wrist, hand, and finger orthoses)
these studies to identify products where of OTS orthotics has yet to be and L3980–L3985 (upper extremity
CMS pays excessively and where we published. fracture orthoses). They believed that
could potentially achieve savings. these codes should be exempted
Excessive payments are only one Response: We appreciate the
because clinicians and practitioners use
factor to consider when evaluating comments. Section 1847(a)(2) of the Act
them for short-term protection and
whether savings will be realized by the describes OTS orthotics as those
stabilization of a joint or limb. They
application of competitive bidding to an orthotics described in section 1861(s)(9) further indicated that practitioners do
item. However, these studies offer us a of the Act for which payment would not dispense these items as a product or
guide regarding which items may have otherwise be made under section supply item but rather as part of the
the greatest potential for savings. We 1834(h) of the Act, which require evaluation and treatment of
also recognize that some studies are minimal self-adjustment for appropriate beneficiaries.
older than others and that recent MMA use and do not require expertise in Response: Section 1847(a)(2) of the
and FEHP reductions in fees may affect trimming, bending, molding, Act provides that OTS orthotics
whether the results of these studies are assembling, or customizing to fit to the described in section 1861(s)(9) of the
still relevant. individual. Orthotics that are currently Act, for which payment would
Comment: Many commenters objected paid under section 1834(h) of the Act otherwise be made under section
to the proposed definition for OTS and are described in section 1861(s)(9) 1834(h) of the Act, are to be included in
orthotics that would be subject to of the Act are leg, arm, back, and neck the Medicare DMEPOS Competitive
competitive bidding in accordance with braces. The Medicare Benefit Policy Bidding Program if they require
section 1847(a)(2)(C) of the Act. They Manual, Chapter 15, Section 130 minimal self-adjustment for appropriate
specifically objected to the discussion in provides the longstanding Medicare use and do not require expertise in
the proposed rule that states that the definition of ‘‘braces.’’ Braces are trimming, bending, molding,
expertise required to trim, bend, defined in this section as ‘‘rigid or semi- assembling, or customizing to fit the
assemble, mold, or custom fit an rigid devices which are used for the individual. Although the items
orthotic device for an individual would purpose of supporting a weak or identified by the commenters are
be that of a certified orthotist. They deformed body member or restricting or orthotics as described in section
pointed out that occupational therapists, eliminating motion in a diseased or 1861(s)(9) of the Act for which payment
physical therapists, and physicians are injured part of the body.’’ To clarify the is made under section 1834(h) of the
licensed and trained to trim, bend, definition of OTS orthotics for purposes Act, we have not yet determined
mold, assemble, and customize some of competitive bidding, in this final rule whether they require minimal self-
orthotics to fit a beneficiary. They we are defining the term ‘‘minimal self- adjustment. We have also not yet
indicated that under the Act, adjustment’’ to mean an adjustment that determined whether one or more of
occupational and physical therapists are the beneficiary, caretaker for the these items might not be appropriate for
recognized as Medicare practitioners beneficiary, or supplier of the device inclusion in the Medicare DMEPOS
who furnish orthotics to Medicare can perform and that does not require Competitive Bidding Program because it
beneficiaries pursuant to a written plan the services of a certified orthotist (that is not likely to produce significant
of care. The commenters added that the is, an individual who is certified by the savings. We will consider the
Act recognizes orthotists as suppliers of American Board for Certification in commenters’ suggestions and designate
DMEPOS only and not as practitioners. Orthotics and Prosthetics, Inc., or by the the items that will be included in each
They recommended revising the Board for Orthotist/Prosthetist competitive bidding program through
language to read: ‘‘ ‘Minimal self- Certification) or an individual who program instructions or by other means,
adjustment’ means an adjustment that possesses specialized training. These such as the RFB or our Web site.
the beneficiary, caretaker for the individuals possess specialized skills Comment: Several commenters
beneficiary, or supplier of the device and knowledge used to custom fit braces believed that the selection of items for
can perform without the assistance of a for individual beneficiaries so that they competitive bidding is being driven by
physician, physical therapist, function appropriately. Therefore, if an allowed charges and utilization only.
occupational therapist, orthotist, or adjustment to an OTS orthotic that They believed that this poses a risk and
other professional designated by the requires expertise in trimming, bending, allows competitive bidding to become a
Secretary.’’ molding, assembling, or customizing to substitute for appropriate coverage

In addition, many commenters stated fit the individual such that it must be policies as a way of controlling
that there is no Federal definition of performed by a certified orthotist (that expenditures. The commenters believed
orthotists or their scope of practice and is, an individual who is certified by the that consideration of clinical and
that a limited number of States have American Board for Certification in service factors specific to the product
licensure or certification laws for Orthotics and Prosthetics, Inc. or by the should be part of the selection criteria.
Response: We do not have data on supplies; diabetic shoes; diabetic inlays; charges and highest volume or potential
which we could evaluate clinical and prosthetics for the foot; crutches; for savings.
service factors specific to individual walkers; fracture ankle-foot orthoses; Many commenters requested the
items nor were any data submitted braces; splints; and surgical dressings. A exemption of manual wheelchairs
through the public comment process. In few commenters requested exemption of because as early as CY 2007, the HCPCS
addition to allowed charges and products commonly provided directly codes will be subjected to a recoding
utilization, we identified in the by manufacturers. They believed that process that is similar to the recoding
proposed rule the following variables the products are available from process that CMS recently undertook for
that we will use to select items for relatively few suppliers and would not power mobility devices. Under the
competitive bidding: Annual growth in produce Medicare savings. proposed rule, a supplier that bids on
expenditures; number of suppliers; A few commenters requested the the category of manual wheelchairs
savings in the DMEPOS competitive exemption of oxygen, continuous must be prepared to provide all types of
bidding demonstrations; and reports positive airway pressure devices, and manual wheelchairs including standard,
and studies. We stated that we would invasive and noninvasive ventilation ultra lightweight, bariatric, or manual
use all of these variables to make devices. They believed that these items tilt-in-space. They believed that the
determinations about an item’s potential are technologically complex devices. current HCPCS codes are too broad,
to reduce costs for the Medicare Several commenters recommended encompassing items that represent
program. We note that the Medicare exempting negative pressure wound vastly different technologies.
DMEPOS Competitive Bidding Program therapy (NPWT) devices from the first Several commenters requested the
is not a coverage program, and that this round of competitive bidding. They exemption of speech generating devices
final rule does not supersede in any way reported that in October 2000, a new (SGDs). They stated the functional,
Medicare coverage laws, regulations, or physical, operational, and support
HCPCS code (E2402) was established for
policies. characteristics of a specific SGD model
NPWT. Since 2003, more than 3,000
Comment: Several commenters are selected based on the individual
physicians have ordered NPWT devices
believed that ostomy products and needs of the beneficiary. The
more than 36,000 times. They reported
supplies do not meet the definition of commenters reported that Medicare has
that new products have been added to
DME and, therefore, are not part of the purchased fewer than 5,000 SGDs since
HCPCS code E2402 despite the fact that
items and services subject to the 2001. They indicated that, on average,
these new products are clinically
competitive bidding programs described 1,211 SGDs are purchased per year, and
different from the original NPWT
in section 1847(a)(2)(A) of the Act. that in 2004, Medicare spent only
product. The commenters believed that
Response: We believe that section $4,562 on SGDs (code E2511), less than
the newer items are not yet well-
1847(a)(2)(A) of the Act is ambiguous $220,000 on mounting systems (code
regarding whether ostomy products and understood or well-established and E2512), and less than $280,000 on all
supplies are to be included in the physician choice in selecting an item SGD accessories.
Medicare DMEPOS Competitive Bidding must be respected. Some commenters requested that
Program because the term ‘‘medical Many commenters requested CMS not create a product category that
supplies’’ in the section heading could exemption of power wheelchairs, consists of ‘‘infusion pumps and related
be interpreted either to modify the term including complex rehabilitative and drugs.’’ They pointed out that infusion
‘‘durable medical equipment’’ (meaning assistive technology devices, for the first drugs are covered under the DMEPOS
that the medical supplies would have to round of competitive bidding. They benefit because they go through the
be associated with the DME to be believed that competitively bidding pump, which is DME. They added that
included), or to be a separate category these devices would result in a negative managed care plans include home
of items that are not associated with impact on the clinical outcome for the infusion therapy coverage under either
DME. In addition, although the beneficiary. They described these items their major medical benefit or their
definition of ‘‘covered item’’ in section as being uniquely prescribed for the prescription drug benefit and that
1834(a)(13) of the Act means ‘‘durable beneficiary. The commenters Medicare Part D covers hundreds of
medical equipment (as defined in recommended exempting wheelchair home intravenous drugs. The
section 1861(n) [of the Act]), including cushions, adaptive seating, and commenters believed that there is
such equipment described in section positioning products. They indicated confusion among beneficiaries who
1861(m)(5) [of the Act] * * *,’’ the term beneficiaries who require complex require Medicare Part B and Part D
‘‘such equipment’’ in section 1861(m)(5) rehabilitative or assistive technology drugs, and that adding infusion pumps
of the Act could be interpreted to refer require a complete system to meet their that are used for drug administration to
either to the term ‘‘durable medical functional and medical needs. The competitive bidding will confuse both
equipment’’ or to the term ‘‘medical commenters pointed out that a complete beneficiaries and referral agents further.
supplies’’ (which would include ostomy system requires several pieces of They also indicated that these devices
supplies) in that section. In light of equipment, each meeting a specific vary in drug therapy, technology, length
these ambiguities, we believe we have medical or functional need and of treatment, and site of care, and that
discretion to interpret section determined to be compatible the devices range from critical acute
1847(a)(2)(A) of the Act to include or technologies. They believe that the care to chronic infusion.
exclude ostomy products and supplies recent changes in HCPCS codes for Some commenters requested the
in the competitive bidding programs. power mobility devices, a new local exemption of enteral nutrition
We are not planning to exercise our coverage determination policy, and new equipment and supplies. They believed
authority to include these items at this fee schedules will significantly impact that the use of competitive bidding to
time and will continue to review this the utilization and allowed charges for set prices under Medicare has not been
issue. these items. They believe that, in light tested sufficiently or successfully. The
Comment: Many commenters believed of these changes, there will be a lack of commenters indicated that Medicare
that the following items that are integral allowed charges and volume data that allowed charges for enteral nutrition
to beneficiary care should be exempted will make it difficult to determine decreased by approximately 5 percent
from competitive bidding: diabetic which codes have the highest allowed from CY 2003 to CY 2004. They
reported that there is confusion among in the May 1, 2006 proposed rule, we reported that payment for glucose
beneficiaries who require Medicare Part will consider annual Medicare allowed meters, test strips, and lancets were
B and Part D drugs, and believed that charges, annual growth in expenditures, previously frozen in CYs 1998, 1999,
adding competitive bidding will only the number of suppliers furnishing the and 2000 and again in CY 2002. They
confuse beneficiaries and referral agents item, reports and studies, and data indicated that these payment freezes
further. showing whether we realized savings by call into question the feasibility of
A few commenters requested the including the item in the competitive achieving significant additional
exemption of transcutaneous electrical bidding demonstrations to determine Medicare savings through competitive
nerve stimulator (TENS) devices from whether including an item(s) under the acquisition. The commenters believed
competitive bidding. They believed that competitive bidding programs is likely that the annual growth in expenditures
these devices constitute a miniscule to result in significant savings. As we for the above items could be attributed
percentage of Medicare charges, and evaluate specific items for inclusion in to other factors such as an increase in
that including these devices in one competitive bidding programs, we will the number of new beneficiaries or the
product category will induce also consider the recommendations elimination of Medicare Advantage
beneficiaries to purchase inferior offered by these commenters. We note Plans in various markets. Many
services. They reported that some that diabetic shoes and inserts, commenters recommended establishing
manufacturers include a post-sale prosthetics for the foot, splints and a savings threshold that would use
periodic monitoring service, whereas casts, prosthetic devices that aid vision, ongoing administrative allowed charges
others do not. and surgical dressings are not among the to assess the appropriateness of
Some commenters requested the items and services described in section competitive bidding for each product
exemption of support surfaces until the 1847(a)(2) of the Act and, therefore, category. They recommended using a
completion of the Support Surface cannot be included in the competitive threshold of a 10-percent margin to
Standards Initiative. They indicated that bidding programs. determine the net savings after
data from the Agency for Healthcare Comment: Some commenters excluding administrative costs
Research and Quality showed an recommended that CMS publish the associated with the ongoing support of
increase in hospitalizations for items that will be included in the initial the competitive bidding programs from
beneficiaries with pressure ulcers up to competitive bidding programs in an the total savings incurred.
63 percent during the period 1993 interim final rule. They also believed Response: We will determine which
through 2003. The commenters that a meeting should be scheduled with items offer the best savings potential.
recommended that if support surfaces the PAOC to solicit additional public We disagree that an exact dollar
are selected for competitive bidding, comment after product selections are threshold is appropriate for determining
CMS subdivide the codes and evaluate announced. if significant savings will be achieved
separate bids for each subcategory. They Response: We intend to announce the
for an item under a competitive bidding
also recommended that stakeholders be product categories for competitive
program because it would be logistically
consulted regarding the subcategories. bidding on or shortly after the date of
Several commenters stated that issuance of this final rule, and we will difficult to set an exact number for what
Medicare should not subject vision- designate the items to be included in the savings will be for a particular item
related DMEPOS commonly dispensed each competitive bidding program until we receive the bids. Once we
by optometrists to competitive bidding. through program instructions or by receive the bids, we can estimate the
They believed that optometrists should other means, such as the RFB, and post dollar savings amount to determine
not be required to submit a bid. them on our Web site. We do not believe whether that represents an appropriate
Many commenters recommended the that we need to publish the list of items savings. In addition to allowed charges
following sources for gathering in the form of an interim final rule in and utilization, we identified in the
information about various homecare the Federal Register. We also note that proposed rule the following variables
services and allowed charges: American the PAOC provided feedback on the that we will use to select items for
Society for Parenteral and Enteral criteria for item selection that we competitive bidding: annual growth in
Nutrition (ASPEN), American proposed in the May 1, 2006 proposed expenditures; number of suppliers;
Association for Respiratory Care rule. Further, the public had the savings in the DMEPOS competitive
(AARC), American Nurses Association opportunity to comment on our bidding demonstrations; and reports
(ANA), American Dietetic Association proposed methodology for item and studies. We stated that we would
(ADA), National Home Oxygen Patients selection through the public notice and use all of these variables to make
Association (NHOPA), American Lung comment rulemaking process, and the determinations about an item’s potential
Association (ALA), American Diabetes opportunity to participate in PAOC to reduce costs for the Medicare
Association (ADA), Joint Commission meetings that dealt with this subject. We program. We will also assure savings
on the Accreditation of Healthcare will take under consideration the because we will not accept a bid to
Organizations (JCAHO), and other commenters’ suggestion to hold future furnish an item unless the submitted bid
accrediting organizations. PAOC meetings on item selection. price is at or below the fee schedule
Response: Section 1847(a)(3)(B) of the Comment: Several commenters amount for the item.
Act grants us the authority to exempt requested an explanation of the specific Comment: Some commenters
items and services for which the measure that will be used to identify an suggested that the greatest potential for
application of competitive bidding is item’s true potential savings after savings to the Medicare program could
not likely to result in significant accounting for any recent policy be achieved by eliminating coverage of
savings. Section 1847(a)(1)(B)(ii) of the changes and rate cuts. They asked if any specific DME items or entire product
Act gives us the authority to phase in thresholds would be used to measure categories.
competitive bidding ‘‘first among the the actual savings. They reported that Response: We appreciate the
highest cost and highest volume items changes in payment policy significantly comment. However, competitive
and services or those items and services decreased CY 2003 allowed charges for bidding is a program for determining
that the Secretary determines have the oxygen equipment, nebulizers, and Medicare payment for covered items
largest savings potential.’’ As we stated inhalation drugs. The commenters also and services and does not supersede any
Medicare rules, policies, or procedures will not rely solely on these reports. As of the Act that is also a contract supplier
relating to coverage. we indicated in the proposed rule, we must only agree to furnish the items
Comment: Some commenters reported would rely on several variables in included in the contract to patients to
that the proposed rule indicates determining the savings potential for whom it would otherwise provide
Medicare expenditures for DME specific items or categories of items. Medicare Part B services (proposed
infusion pumps and related drugs in CY Those variables include annual allowed § 414.422(e)(2)(i)). In addition, we
2003 were approximately $149 million. charges, annual growth in expenditures, proposed that a physician who is also a
They indicated that this number appears number of suppliers, savings under the contract supplier must only agree to
to include expenditures made for demonstrations, and various reports and furnish the items included in the
insulin and insulin pumps for studies conducted by CMS and other contract to his or her patients (proposed
beneficiaries with diabetes, which are Federal agencies. § 414.422(e)(2)(ii)). Because suppliers
not provided by infusion pharmacies After consideration of the public will have to factor this requirement into
and largely serve a different beneficiary comments we received, we are adding a their responses to the RFBs, we have
market than infusion pumps and related definition of the term ‘‘minimal self- chosen to discuss this requirement in
drugs used by beneficiaries for other adjustment’’ under § 414.402. We are this section of the final rule.
medical conditions. They believe that also finalizing § 414.406(d), with a
the more accurate amount of Medicare technical change. We are specifying that a. Furnishing of Items to Medicare
expenditures for CY 2003 for DME when we designate the items that will Beneficiaries Who Maintain a
infusion pumps and related drugs was be included in each competitive bidding Permanent Residence in a CBA
approximately $87 million. program, we will do so by program In the May 1, 2006 proposed rule (71
Response: Insulin pumps are a type of instructions or by other means, such as FR 25681), we proposed that a contract
infusion pump used by beneficiaries the RFB or our Web site. supplier cannot refuse to furnish items
with diabetes and currently are and services to a beneficiary residing in
included in the SADMERC policy group G. Submission of Bids for Competitively a CBA based on the beneficiary’s
for external infusion pumps and related Bid DMEPOS (§§ 414.404, 414.408, geographic location within the CBA
drugs. Although we will be using the 414.412, and 414.422) (proposed § 414.422(e)(1)). We indicated
SADMERC policy groups to identify Sections 1847(b)(6)(A)(i) and that this rule would prohibit a contract
groups of items that we will consider (b)(6)(A)(ii) of the Act provide that supplier from refusing to furnish items
including in one or more competitive payment will not be made under to beneficiaries because they are not in
bidding programs, the actual product Medicare Part B for items furnished close proximity to that supplier. In
categories that we develop might be a under a competitive bidding program order to ensure beneficiary access to
subset of items from a SADMERC policy unless the supplier has submitted a bid competitively bid items that are rented,
group or a combination of items from to furnish those items and has been we proposed that the contract supplier
different SADMERC policy groups. In selected as a contract supplier. must agree to accept as a customer a
determining which items are Therefore, in order for a supplier that beneficiary who began renting the item
appropriate to include in a product furnishes competitively bid items in a from a different supplier regardless of
category, we will also evaluate its CBA to receive payment for those items, how many months the item has already
savings potential, as discussed above. the supplier must have submitted a bid been rented. This is particularly
Comment: Many commenters believed to furnish those particular items and important in those cases where a
that the OIG and GAO reports and must have been awarded a contract to supplier or noncontract supplier does
studies focus largely on a narrow issue do so by CMS (proposed § 414.412). In not elect to continue furnishing the item
or a small subset of issues, and as a section II.C.6. of the May 1, 2006 in accordance with the grandfathering
result, the reports often reflect a skewed proposed rule (71 FR 25664), we provisions discussed in section VI.D.3.
perspective of the particular problem proposed that there would be limited of this final rule. Suppliers must factor
and the suggested solution to that exceptions to this requirement for items the cost of furnishing items in these
problem. They believed that none of the required by beneficiaries who reside in situations into their bid submissions.
historical OIG studies reflects the cost of a CBA but are out of the area and need In addition, in order to ensure
accreditation or complying with the items (proposed § 414.408(f(2)(ii))). We beneficiary access to the competitively
quality standards that are the bases of also proposed that there would be an bid items in the inexpensive or
accreditation. They believed that the exception for suppliers that are routinely purchased DME payment
OIG studies do not focus on the services grandfathered to continue to provide category, or to a competitively bid
and functions required of suppliers, the and service certain items power wheelchair, we proposed that the
allowed charges associated with these (§ 414.408(f)(2)(i), as discussed in contract supplier must agree to give the
services and functions, or whether section VI.D.3. of this final rule. beneficiary or his or her caregiver the
payment rates are limited to the allowed choice of either renting or purchasing
charges of items and equipment. In 1. Furnishing of Items (§§ 414.412(c)
the item and must furnish the item on
addition, they indicated that the OIG and 414.422(e))
a rental or purchase basis as directed by
reports generally collect information In the May 1, 2006 proposed rule, the beneficiary or the beneficiary’s
from across the United States, while under proposed § 414.422(e) we caregiver. Suppliers must factor the cost
competitive bidding is market-specific. proposed that a contract supplier must of furnishing these items on both a
In light of these discrepancies, they agree to furnish the items included in its rental and purchase basis into their bid
recommended that our decisions should contract to all beneficiaries who submissions.
not rely heavily on OIG reports when maintain a permanent residence in, or Comment: One commenter requested
we select items for inclusion in the who visit, the CBA and who request that CMS clarify that a contract supplier
competitive bidding programs. these items from the contract supplier. can limit the number of items it
Response: We believe that the OIG However, as we explained in the provides in each category to its
and GAO reports and studies provide proposed rule (71 FR 25672 and 25681), contracted capacity.
useful information for identifying items we proposed that a skilled nursing Response: As part of a supplier’s
with high expenditures. However, we facility (SNF) as defined in section 1819 response to the RFB, a supplier will be
expected to state its projected capacity a CBA, if the item that the beneficiary purpose of competitive bidding is to
to furnish the items in each product needs is included in the competitive award contracts to certain suppliers
category for which it is submitting a bid. bidding program for the CBA that the based upon their winning bids and to
The projected capacity submitted by a beneficiary is visiting. A list of all ensure the beneficiaries receive items
supplier would not become a binding contract suppliers along with other from these suppliers.
term of the contract because contract competitive bidding information will be Comment: One commenter suggested
suppliers will be required to furnish the on the CMS and CBIC Web sites. This that CMS establish a system to ensure
items in their contract to all information will also be available to that all beneficiaries will continue to
beneficiaries who maintain a permanent beneficiaries through the toll-free have access to their DMEPOS supplies,
residence in the CBA, or who visit the telephone number 1–800 Medicare. even while visiting an area that is not
CBA, and who request the items from Comment: One commenter stated that the beneficiary’s CBA. The commenter
them unless one of the exceptions it was confused as to whether certain stated that CMS should require that
discussed in this final rule applies. products might be drop-shipped into the suppliers aggressively educate
area where the beneficiary is visiting. beneficiaries on the proper procedures
b. Furnishing of Items to Medicare The commenter requested clarification for obtaining their supplies while away
Beneficiaries Whose Permanent on this because the commenter believed from home, and should allow
Residence Is Outside a CBA there are many types of equipment such beneficiaries to purchase extra supplies
In the May 1, 2006 proposed rule (71 as oxygen equipment that should not be for extended vacations or temporary
FR 25681), we proposed that in order to drop-shipped. Another commenter changes of residence. The commenter
obtain medically necessary DMEPOS stated that a beneficiary visiting in the also urged CMS to allow beneficiaries to
items, a Medicare beneficiary whose CBA should not be required to use a purchase their supplies from
permanent residence is located outside contract supplier because such a noncontract suppliers in the event of an
of a CBA must use a contract supplier requirement would confuse emergency.
to obtain all items subject to competitive beneficiaries. The commenter Response: As we discussed above, we
bidding in the CBA that he or she visits. recommended that CMS not adopt the will conduct an extensive education
We considered allowing beneficiaries proposed rule or modify it so that it campaign to educate beneficiaries,
whose residence is outside of a CBA to only applies to beneficiaries who have suppliers, and referral agents on how
obtain these items from noncontract resided in the CBA for 3 or more beneficiaries who are away from home
suppliers when coming into a CBA. months. Two commenters stated that can obtain medically necessary items.
However, consistent with section there will be an undue impact on As we proposed, our contract supplier
1847(b)(6) of the Act, we proposed that ‘‘snowbirds’’ as a result of the selection methodology will ensure there
beneficiaries would be required to use a requirement that contract suppliers are enough contract suppliers in each
contract supplier because we believe furnish items to Medicare beneficiaries CBA to ensure beneficiary access to
that new business for competitively bid whose permanent address is outside the needed items and services. In addition,
items should be directed only to CBA and that this provision should not beneficiaries on vacation or who have
contract suppliers. Noncontract be adopted. temporary changes of residence will be
suppliers would be allowed to continue Response: The proposed requirement able to obtain competitively bid items
servicing current beneficiaries who would establish a process whereby that are included in the competitive
maintain a permanent residence in a beneficiaries visiting a CBA must get a bidding program for the CBA that they
CBA if they qualified for the competitively bid item for that CBA are visiting from contract suppliers for
grandfathering program discussed in from a contract supplier that furnishes that CBA. Contract suppliers will be
section VI.D.3. of this final rule. the item in the CBA. If, however, the listed on the Internet in order for
Comment: One commenter stated that beneficiary needs an item that is beneficiaries to determine who the
CMS should indicate how the provision included in the competitive bidding contract suppliers are in the CBA they
to furnish competitively bid items to program for the CBA that the beneficiary are visiting. As we explained above, we
Medicare beneficiaries whose is visiting (even if the item is not will require that contract suppliers
permanent residence is outside a CBA included in the competitive bidding assist Medicare beneficiaries in locating
will be communicated to beneficiaries program for the CBA where the contract suppliers while visiting other
who are visiting a CBA. beneficiary maintains a permanent CBAs. We do not believe an exception
Response: Noncontract suppliers residence), the beneficiary would be is needed in the event of an emergency
located in a CBA will be informed that required to obtain the item from a because we will ensure that there will
they are not eligible to furnish contract supplier in the CBA where the be a sufficient number of contract
competitively bid items to beneficiaries beneficiary is visiting. Therefore, if a suppliers in a CBA to meet the access
visiting the CBA and as we discussed beneficiary is visiting a CBA, he or she needs of beneficiaries.
earlier in this final rule, beneficiaries may obtain the item from a contract
will not be held liable to make a supplier, and there would be no reason 2. Requirements for Providers to Submit
payment for an item furnished in to drop-ship a product. As we explained Bids (§§ 414.404(a) and 414.422(e)(2))
contravention of this rule, unless the in our response to the previous In the May 1, 2006 proposed rule (71
beneficiary signs an ABN indicating the comment, we plan to implement a FR 25672), we proposed in § 414.404(a)
beneficiary’s knowledge and process by which beneficiaries will be that the Medicare DMEPOS Competitive
understanding that Medicare will not able to locate contract suppliers in a Bidding Program would apply to
pay for that item. Noncontract suppliers CBA where they are visiting. We believe suppliers, and in proposed § 414.404(b)
will be educated to refer beneficiaries to that a beneficiary who visits a CBA that the program would apply to
contract suppliers in these situations. should be required to obtain providers that furnish items under
We are also planning an extensive competitively bid items for that CBA Medicare Part B as suppliers.
educational campaign to inform the only from contract suppliers for that Accordingly, providers that furnish
public of the requirement that an item CBA because we believe that new Medicare Part B items are located in a
must be obtained from a contract business for these items should only be competitive bidding area, and that are
supplier when a beneficiary is visiting directed to contract suppliers. The also DMEPOS suppliers would be
required to submit bids in order to We continue to believe that Medicare The commenter believed that this
furnish competitively bid items to DMEPOS Competitive Bidding Program sentence could be interpreted to mean
Medicare beneficiaries. We also should apply to institutional providers that institutional providers are outside
proposed that providers that are not to the extent they furnish items under the scope of the competitive bidding
awarded contracts must use a contract Part B because section 1847 of the Act program. The commenter indicated that
supplier to furnish these items to does not distinguish these providers institutions already purchase items for
Medicare beneficiaries to whom they from other types of Part B suppliers. their patients through arrangements
provide services. However, we proposed However, we believe that SNFs and NFs made in a variety of ways and that
in new proposed § 414.422(e)(2)(i) that a should be treated differently from other requiring them to participate in the
SNF, as defined in section 1819(a) of the providers in terms of who they must Medicare DMEPOS Competitive Bidding
Act, would not be required to furnish furnish items to because they generally Program could result in actually raising
competitively bid items to beneficiaries do not use a commercial model of prices of items purchased by
outside of the SNF if it elected not to providing services throughout the institutions.
function as a commercial supplier. We community. Instead, they generally Response: We do not agree that
stated that this rule is consistent with provide items only to patients that sections 1847(a) and (b) of the Act only
the current practice of some SNFs to reside in their facility. We do not apply to items and services directly
furnish Medicare Part B services only to believe it would be in the best interest purchased by Medicare beneficiaries
their own residents. of the program to exempt institutional and does not apply to institutions that
Comment: Several commenters providers from participating or delay purchase on behalf of beneficiaries.
recommended that CMS exclude implementation in these settings Indeed, these sections identify the items
institutional providers, such as SNFs because these providers furnish items and services subject to competitive
and other long-term care facilities, from subject to competitive bidding to their bidding and provide that the program
competitive bidding or exempt products residents, and the category of enteral applies when these items are furnished
that are primarily used in institutional nutrition, as a whole, is made up of under Medicare Part B. Therefore, to the
settings from competitive bidding. They high-cost, high-volume items. extent that institutional providers are
stated that because the residents of these Therefore, we are finalizing our furnishing items as Part B suppliers, we
institutions are often among the most proposal under § 414.422(e)(2) to permit believe that the Medicare DMEPOS
frail and critically ill the level of care SNFs as defined in section 1819(a) of Competitive Bidding Program should
required for these patients should not be the Act, to furnish competitively bid apply to them. However, as we
threatened or compromised by rules items only to their own residents. We explained above, we are allowing SNFs
whose impact, although well-intended, are extending this provision to NFs, as and NFs to elect to only furnish
are not conducive to the long-term care defined in section 1919(a) of the Act, competitively bid items to residents in
environment. The commenters believed because we believe the services they their facilities if they are selected as
that competitive bidding may distort furnish, the customers they serve, and contract suppliers.
current institutional purchasing patterns their business model are parallel to Comment: Several commenters stated
and result in higher prices. Several SNFs. A SNF or NF will still be required that hospital-based suppliers should not
commenters also suggested that CMS to submit a bid and have a bid in the have to bid, as hospital-based suppliers
postpone bidding in long-term care winning range and the SNF or NF must are not structured to compete for all
settings until CMS convenes a working indicate in its response to the RFB it beneficiaries in the region. Some
group of key stakeholders to examine intends to elect this option. If the SNF commenters stated that hospital-based
how the requirements for competitive or NF is not selected as a contract suppliers should be eligible to
bidding impact these facilities. They supplier, it will have to use a contract participate in the competitive bidding
further stated that CMS should phase in supplier within the CBA to furnish program, if they are willing to accept the
the program over at least 4 years. Others competitively bid items to its residents. single payment amount. Other
suggested delaying implementation of In addition, should a SNF or NF commenters stated that CMS should
the program. indicate in its response to the RFB that exclude hospital-based suppliers from
Response: Congress specifically it plans to furnish items to beneficiaries having to serve all beneficiaries in a
provided that certain categories of items who are not residents of its facility, this CBA.
and services, specifically certain DME, special rule will not apply and the SNF Response: Hospital-based suppliers
medical supplies, enteral nutrients, or NF will be required to furnish items provide the same ranges of items and
equipment, and supplies, and OTS to all beneficiaries who maintain a services as other commercial suppliers.
orthotics are subject to the Medicare permanent residence in, or who visit, We believe hospital-based suppliers are
DMEPOS Competitive Bidding Program the CBA where the SNF or NF is different than SNFs and NFs because
and established phase-in located. they do use a commercial model and do
implementation rules. Items and Comment: One commenter stated that provide items to patients who do not
services may only be excepted from the section 1847 of the Act was never reside in a hospital. Therefore, the
program if we determine that they are intended to apply to institutional hospital-based suppliers are competing
not likely to result in significant savings providers and that the phrase ‘‘items with other commercial suppliers in the
if they are included. A large volume of and services’’ means those that are same area and should be considered as
enteral nutrients, equipment, and purchased directly by individuals and part of the same competitive bidding
supplies are furnished to patients in not by institutions on behalf of program for this reason.
SNFs and nursing facilities (NFs along individuals. The commenter further Comment: One commenter stated that
with some OTS orthotics. Currently, we stated that section 1847(b)(4)(A) of the CMS should not combine SNFs and
allow SNFs and nursing facilities (NFs) Act requires that CMS ‘‘take into physicians in the same competition
to choose whether to provide these account the ability of bidding entities to with commercial DMEPOS suppliers.
services directly or under contract with furnish items and services in sufficient The commenter believed that including
an outside supplier. To avoid disruption quantities to meet the anticipated needs all of these provider/supplier types in
of this practice, we will continue to * * * in the geographical area covered the same bidding will distort the bid
provide SNFs and NFs with this choice. under the contract on a timely basis.’’ evaluation and selection because SNFs
and physicians will have significantly Competitive Bidding Program to practitioner does not participate in the
lower operating costs arising from the physicians, and, as discussed below, competitive bidding program, he or she
fact that because they do not have to placing the new provisions in should be reimbursed at the single
serve all beneficiaries and they do not § 414.404(b). payment amount for any DME items that
have to accept beneficiaries from are furnished to his or her own patients.
3. Physicians and Certain Nonphysician
noncontract suppliers, regardless of In addition, the commenters requested
Practitioners (§§ 414.404(a) and (b))
rental month. that CMS clarify how the requirement
Response: We are establishing In the May 1, 2006 proposed rule (71 for physicians to submit bids and
provisions that treat SNFs, NFs, FR 25672), we proposed in proposed provide all items within a product
physicians, and certain other § 414.404(c) that the Medicare DMEPOS category does not violate the physician
nonphysician practitioners differently Competitive Bidding Program would self-referral law.
from other suppliers. As we discussed apply to physicians who furnish items Response: After considering the
above, we are allowing SNFs and NFs under Medicare Part B as suppliers. comments, in this final rule, we are
that are selected as contract suppliers to Accordingly, physicians who are also deleting proposed § 414.404(c) and
furnish items only to their own patients. DMEPOS suppliers would be required revising § 414.404(b) to give physicians
In addition, as we discuss more fully to submit bids and be awarded contracts (as defined at section 1861(r) of the Act,
below, we will permit physicians and in order to furnish items included in the which includes podiatric physicians)
certain nonphysician practitioners to competitive biding program for the area and treating practitioners (defined in
furnish certain competitively bid items in which they provide medical services. § 414.404 as physician assistants,
to their own patients without submitting We proposed that physicians who do clinical nurse specialists, and nurse
a bid and being selected as a contract not become contract suppliers must use practitioners) the option to furnish
supplier. We believe that it is a contract supplier to furnish certain types of competitively bid items
appropriate to allow SNFs (and, as competitively bid items to Medicare without participating in the Medicare
discussed above, NFs) to compete to beneficiaries. However, in proposed DMEPOS Competitive Bidding Program,
serve their own patients, but we believe § 414.422(e)(2)(ii), we proposed that provided that certain conditions are
it is appropriate to include them in the these physicians would not be required satisfied. First, the items that may be
same bidding process as other suppliers to furnish these items to Medicare furnished are limited to crutches, canes,
because the statute requires us to beneficiaries who are not their patients. walkers, folding manual wheelchairs,
conduct bidding for items in which we In proposing this policy for physicians blood glucose monitors, and infusion
expect savings. who are also DMEPOS suppliers, we pumps that are DME. Second, the items
Comment: One commenter stated that recognized that the physician self- must be furnished by the physician or
the requirement that suppliers that are referral law (section 1877 of the Act, treating practitioner to his or her own
not awarded contracts must use a also known as the Stark law) generally patients as part of his or her
contract supplier to furnish prohibits physicians from furnishing to professional service. Third, the items
competitively bid items to Medicare their office patients a variety of common must be billed using a billing number
beneficiaries to whom they do provide DMEPOS items. Therefore, we proposed assigned to the physician, the treating
services conflicts with current Medicare that physicians who choose to practitioner (if possible), or a group
policies. The commenter asked how participate in the competitive bidding practice to which the physician or
such a supplier would be able to process must ensure that their treating practitioner has reassigned the
subcontract to use a contract supplier to arrangements for referring for and right to receive Medicare payment. We
furnish supplies without violating furnishing DMEPOS items under a are adding a new § 414.404(b)(3)
current policies. competitive bidding program comply providing that the items furnished and
Response: We do not believe that this with the physician self-referral law as billed in this manner will be paid at the
requirement conflicts with current well as any other Federal or State law single payment amount, which is the
policy. Specifically, SNFs are currently or regulation governing billing or claims rate at which these items would
allowed to have arrangements under submission. otherwise be paid if this exception did
which outside suppliers come to their Comment: Several commenters not apply. We believe that physicians
facilities to provide enteral nutrients, suggested that CMS not require engaged in the practice of medicine (and
equipment, and supplies. SNFs physicians, including podiatric their medical practices) should have the
routinely engage in this practice. Under physicians, to participate in the option not to participate in the
competitive bidding, SNFs that are not competitive acquisition program for competitive bidding program because,
winning contractors must make certain DMEPOS. The commenters to comply with the physician self-
arrangements to use a contract supplier noted that under the physician self- referral prohibition, they generally
in the community to furnish referral (‘‘Stark’’) provisions under provide to their own patients only the
competitively bid items to residents of section 1877 of the Act, a physician in DMEPOS items noted above. Because
the facility. a group practice may not refer Medicare physician assistants, clinical nurse
Accordingly, we are revising beneficiaries to the group practice, and specialists, and certified nurse
§ 414.404(a) to specify that the Medicare the group practice may not bill for any practitioners furnish services under the
DMEPOS Competitive Bidding Program DME except crutches, canes, walkers, supervision of, or in collaboration with,
applies to providers that furnish items folding manual wheelchairs, and blood a physician, we believe they (and the
under Part B. In addition, we are glucose monitors. The commenters also group practices that may bill for their
redesignating proposed requested that CMS not require services) should similarly have the
§ 414.422(e)(2)(i) as § 414.422(e)(2) and physician assistants, physical therapists, option to not become a contract
finalizing that section with the or occupational therapists to participate supplier.

modifications discussed above. Finally, in the Medicare DMEPOS Competitive We are also modifying the regulation
as we discuss below, we are deleting Bidding Program because those health by adding § 414.404(b)(2) to give
§ 414.422(e)(2)(ii) because we have care professionals are licensed by State physical therapists in private practice
modified our proposal regarding the boards. According to the commenters, if and occupational therapists in private
applicability of the Medicare DMEPOS a physician or non-physician practice the option to furnish certain
types of competitively bid items without product category and CMS should allow 4. Product Categories for Bidding
participating in the Medicare DMEPOS them to participate even if they do not Purposes (§§ 414.402 and
Competitive Bidding Program, provided submit exactly the same type of bid 414.412(b)(1),(c) Through (e))
that certain conditions are satisfied. required of large suppliers. Several In the May 1, 2006 proposed rule (71
First, the items that they may furnish commenters suggested that CMS FR 25672), we proposed in
without becoming a contract supplier exclude all occupational and physical §§ 414.412(b) through (d) to conduct
are limited to OTS orthotics. Second, therapists and hand therapists that bidding for items that are grouped into
the items must be furnished only to provide pre-fabricated splints to product categories. We proposed to
their own patients as part of their Medicare beneficiaries from the require suppliers to submit a separate
professional service. OTS orthotics competitive bidding program. They bid for all items that we specify in a
furnished in accordance with stated that CMS should ensure that product category. The submitted bid
§ 414.404(b) by physical and occupational and physical therapists must include all costs related to the
occupational therapists who are not can continue to furnish orthotics to their furnishing of each item such as delivery,
contract suppliers will be paid at the patients. The commenters added that if set-up, training, and proper
single payment amount. We are limiting they cannot dispense OTS orthotics to maintenance for rental items. However,
this exception to the bidding patients during visits, beneficiaries will we proposed to require suppliers to only
requirement to OTS orthotics because need to make other arrangements to submit bids for the product categories
we have determined that these are the obtain the items. that they are seeking to furnish under
items that would ordinarily be Response: As we stated above, we are the program. All items that would be
furnished as an integral part of revising § 414.404(b) to give included in a product category for
occupational therapy or physical occupational therapists in private
therapy services. bidding purposes would be detailed in
practice and physical therapists in the RFBs. We proposed to define the
We note that if a physician, treating private practice the option to furnish
practitioner, physical therapist in term ‘‘product category’’ (proposed
OTS orthotics to their own patients as § 414.402) as a group of similar items
private practice, or occupational part of their professional practice
therapist in private practice wishes to used in the treatment of a related
without participating in the Medicare medical condition (for example,
furnish in a CBA a competitively bid DMEPOS Competitive Bidding Program.
item not specifically authorized by this hospital beds and accessories). We
We agree with these comments, but only explained that we believe the use of
rule, and can otherwise legally do so, as they relate to furnishing of OTS
the physician, treating practitioner, product categories will allow Medicare
orthotics by occupational and physical beneficiaries to receive all of their
physical therapist in private practice, or
therapists that provide these items in related products (for example, hospital
occupational therapist in private
the course of therapy. There is a specific beds and accessories) from one supplier,
practice would have to submit a bid and
statutory benefit to pay for the services which will minimize disruption to the
be awarded a contract to do so.
The Medicare DMEPOS Competitive of occupational therapists and physical beneficiary.
Bidding Program does not affect the therapists. However, there is no We also discussed in the proposed
applicability of the physician self- comparable benefit that only pertains to rule other design options that we
referral provisions in section 1877 of the hand therapists. We are limiting this considered but did not propose. One
Act. All provisions of the physician self- exception to the bidding requirement to option was to require suppliers to
referral law remain fully in effect. In OTS orthotics because we have submit a bid for all items in every
other words, notwithstanding the determined that these are the items that defined product category. Another
requirement that a contract supplier would ordinarily be furnished as part of option was for suppliers to bid at the
must furnish all items in a product occupational therapy or physical HCPCS level and submit a bid only for
category, a contract supplier cannot therapy professional services. In the individual items that they were
furnish an item as a result of a referral addition, physical and occupational seeking to furnish under the program.
prohibited under section 1877 of the therapists in private practice who elect There are currently approximately 55
Act. We are revising proposed to operate under this special exception separate policy groups already
§ 414.422(e) to provide that a contract may not furnish these items and established by the DME MACs.
supplier must furnish all items in each services to beneficiaries outside of their However, these policy groups were not
product category to which the contract normal practice without submitting a established for the purpose of
applies, ‘‘except as otherwise prohibited bid and being awarded a contract to do competitive bidding. We proposed to
under section 1877 of the Act or any so. specifically develop product categories
other applicable law or regulation.’’ After consideration of the public for the purpose of competitive bidding.
Comment: Several commenters stated comments, we are revising § 414.404(a) Each group would be defined and
that there is no reason to treat to specify that the Medicare DMEPOS comprised of individual HCPCS codes.
occupational therapists and physical Competitive Bidding Program generally Section 1847(a)(3)(B) of the Act gives
therapists differently from physicians. applies to physicians, treating us the authority to exempt items for
They stated that occupational therapists practitioners, physical therapists, and which the application of competitive
are not like ‘‘commercial suppliers’’ and occupational therapists that furnish bidding is unlikely to result in
should only have to furnish items under Part B. However, we are significant savings. We proposed not to
competitively bid items to their own revising proposed § 414.404(b) to include items in a product category if
patients. Several commenters requested specify the terms and conditions under they are rarely used or billed to the
that CMS exempt physical therapists in which physicians, treating practitioners, program. In addition, we did not
private practice from competitive physical therapists, and occupational propose to include items within a
bidding or give them special therapists do not have to participate in product category if we believed that
consideration under the competitive the program. Finally, to be consistent these were items for which we might
bidding program. They stated that with our changes to § 414.404(b), we are not realize savings. Therefore, under
physical therapists should be exempt not finalizing proposed this approach, we proposed to establish
from having to provide every item in a § 414.422(e)(2)(ii). product categories to identify those
items included in competitive bidding for the delivery of all medically competitive bidding or that we would
and stated that we might choose to necessary items that fall within a want to exempt from competitive
establish different product categories product category. bidding using our authority to exempt
from one CBA to another, as well as in Comment: Some commenters items. For this reason, the product
different rounds of competitive bidding recommended revising proposed categories for which we would request
in the same CBA. § 414.412(c) to read, ‘‘Product categories bids could also be a subset of items from
We proposed to allow suppliers to include items that are used to treat a a DME MAC policy group or a
submit bids only for the product related medical condition. The list of combination of items from different
categories they are seeking to furnish product categories, and the items policy groups.
under a competitive bidding program included in each product category are In response to the suggestion that we
because this option accommodates identified in the RFBs document. The create subcategories within a product
DMEPOS suppliers that want to product categories should be consistent category, we do not believe this
specialize in one or a few product with the policy groups of the approach is necessary because if we
categories. For example, if a supplier SADMERC, unless there is good cause to believed that we needed to separate
wanted to specialize in the treatment of align items differently for a particular items in a policy group, we would
respiratory conditions, the supplier competitive bidding program.’’ The create a new product category for each
could choose to bid on all items that fall commenters also recommended revising set of items instead of a product
within the oxygen product category, the § 414.412(d) to read, ‘‘Suppliers must category with subcategories.
continuous positive airway pressure submit a separate bid for every item Comment: A few commenters
product category, or the respiratory included in each product category that believed that a product category such as
assist device product category. We they are seeking to furnish under a ‘‘oxygen equipment and related
believe that specialization at the competitive bidding program unless a supplies’’ is likely to contain different
product category level will make it bid is determined for a sub-category for oxygen delivery modalities such as
easier for referral agents (entities that bidding purposes.’’ Many commenters stationary oxygen concentrators and
refer beneficiaries to health care believed it will cause confusion if new liquid oxygen systems. They indicated
practitioners or suppliers to obtain product categories are developed. They that, while this may appear logical on
DMEPOS items) and other practitioners reported that the CMS Web site is the surface, the groupings are, in fact,
to order related products from the same organized by policy groups and incompatible with accurate bidding.
supplier. accessed by suppliers frequently for The commenters added that the costs of
Establishing a bidding process that information. The commenters believed acquisition, beneficiary support, and
promotes specialization would allow that keeping track of old categories and equipment maintenance and servicing
suppliers to realize economies of scope new categories in a single market or are different for modalities.
within a product category, which means State would be next to impossible. Response: We appreciate the
that a supplier may be able to furnish Many commenters believed combining comments and recognize that there are
a bundle of items at a lower cost than medical policies may affect beneficiary different costs associated with the
it can produce each individual item. In access or quality of services. They different type of equipment that are
our view, this approach would also be believed the only providers and used to furnish oxygen therapy. The
more favorable to small suppliers suppliers that are eligible to bid are standard payment methodology and
because they could choose to specialize those that carry the broadest product monthly payment amount for oxygen
in only one product category. It would offerings, and sometimes these are not and oxygen equipment have been
be more difficult for a small supplier, as the providers or suppliers with the modality neutral since 1989. It is our
opposed to a large supplier, to furnish strongest expertise in a specific product intention at this time to maintain the
all product categories. This approach or HCPCS code. One commenter policy of modality neutral payments
would also be more convenient for suggested that CMS include under the competitive bidding programs
Medicare beneficiaries, as they could subcategories within a product category. because this guards against suppliers
choose to receive all their related Response: We have revised our attempting to furnish only the most
supplies from one supplier and would proposed definition of ‘‘product expensive modalities that result in
not have to deal with multiple suppliers category’’ to provide that product higher profits. For example, suppliers
to obtain the proper items for a single category is a grouping of related items that submit bids for stationary oxygen
condition. We recognized the that are used to treat a similar medical and oxygen equipment will need to
importance of the relationship between condition. The list of product categories factor in the costs of furnishing all of the
a DMEPOS supplier and the Medicare and the items included in each product different modalities or delivering
beneficiary. The supplier delivers the category that is included in each stationary oxygen to beneficiaries in the
item to the beneficiary, sets up the competitive bidding program will be CBA because physicians may specify a
equipment, and also educates the identified in the request for bids specific oxygen modality when ordering
beneficiary on the proper use of the document for that competitive bidding the equipment.
equipment. The use of product program and by other means. The DME Comment: One commenter stated that
categories would facilitate the transition MACs establish policy groups for the the majority of its clients do not
for those beneficiaries who have to purposes of developing Medical review purchase items from just one policy
change suppliers. We stated in the policies and for data analysis, and these group but rather from several groups.
proposed rule that it was our goal to policy groups will serve as the starting The commenter believed that bidding
establish a productive relationship point for establishing product per product category sends clients from
between the supplier and the categories. Product categories will one supplier to another as their needs
beneficiary, and we believe we can generally be consistent with these change and is not favorable to
accomplish this goal by designing the policy groups unless CMS determines beneficiaries.
Medicare DMEPOS Competitive Bidding that a policy group should be redefined Response: As stated above, we are
Program in a manner that would give for the purposes of competitive bidding revising § 414.402 to define a product
the beneficiary the option of selecting because there may be items in the policy category as a grouping of related items
one supplier that would be responsible group that are either not subject to that are used to treat a similar medical
condition, for example, hospital beds have been defined by our contractors beneficiaries can receive related items
and accessories. It is our goal to give and, in the future, will be established by from the same contract supplier.
beneficiaries an opportunity to receive our contractors. We do not plan to make Comment: Some commenters stated
all competitively bid items used to treat product categories overly broad, and we that complex rehabilitation products
an individual medical condition from do not intend to combine products from such as wheelchairs should not be
the same contract supplier, which will various policy groups into a single competitively bid. They indicated that
make the program convenient for them. product category unless the product the accessory codes are the same for the
This will be accomplished by requiring already falls in several policy groups. accessories whether they are provided
a supplier that chooses to bid on a However, the use of product categories for a standard wheelchair or a complex
particular product category to bid on instead of policy groups will allow us to mobility system. Therefore, they
every item within that category and to exclude from a product category low- believed that the same HCPCS code may
furnish every item within a product volume items or items that we believe fall into several categories.
category for which it is awarded a will not result in significant savings, Response: We recognize that certain
contract. Suppliers currently specialize and to add items that we believe are accessories that can be used on manual
in particular products, and we do not appropriate for inclusion because we wheelchairs can also be used with
see this process being interrupted by believe that they are related items used complex mobility systems. Under our
competitive bidding. In addition, to treat a similar medical condition. As revised definition of ‘‘item’’ a product
suppliers will be able to choose which we explain below, we will identify in might be identified by a HCPCS code
product categories for which they want the RFB and by other means such as our that has been specified for competitive
to submit a bid. Web site or program instruction, the bidding (such as when the product is
Comment: Several commenters raised product categories for each competitive furnished through the mail). One way
concerns regarding the development of bidding programs, the items within each that we might choose to specify a
product categories. The commenters product category, the historic product identified by a HCPCS code for
believed that product categories should beneficiary demand for each item in the competitive bidding is when an
be defined narrowly, to make sure they applicable CBA, and the item weight for accessory such as the one identified by
are consistent and representative of the each item within each product category. the commenters is needed for use with
products that a supplier might actually a particular item. When we announce
Comment: One commenter noted that
furnish. One commenter suggested, for the product categories and the items
the requirement to bid on all HCPCS
example, a broad category for included in each product category, we
codes in a product category would be a
wheelchairs or power wheelchairs could will identify any items specified for
major problem for manufacturers that
be problematic. The commenter added purposes of competitive bidding, such
also serve as suppliers. The commenter
that suppliers that do not specialize in as accessories used with certain base
also recommended that CMS adopt
rehabilitation may not carry every brand equipment in a specific product
special rules for manufacturers wishing
name of power wheelchairs that fall category. In this way, we will be able to
to bid, permitting them to only bid on
under a particular code. The ensure that each product category
products they manufacture.
commenters stated that CMS should not properly includes all the related items
Response: The goal of product that are used to treat a similar medical
combine products from multiple
categories is to minimize the disruption condition.
medical review policies into one
to beneficiaries by allowing them to Comment: One commenter argued
product category because it adds
complexity and risks to the beneficiary receive all related competitively bid that CMS should limit bids to one bid
because it may not allow suppliers to items for a similar medical condition per supplier. The commenter expressed
specialize in certain products. The from one contract supplier. Therefore, concerns regarding national chains with
commenters further stated that bidding we believe it would be in the best multiple supplier numbers and
by specific medical policies ensures that interest of beneficiaries if we require a indicated that these chains could
suppliers that specialize can address the contract supplier that is also a potentially submit multiple bids in a
needs of individuals with specific manufacturer to furnish all items within CBA and compromise competition. The
disease states/conditions. Several a product category. We also believe it commenter suggested that CMS require
commenters requested that CMS not would not be equitable to adopt special that a single entity that has multiple
establish broad product categories. They rules for manufacturers while requiring supplier numbers only be allowed to
further stated that many suppliers all other suppliers that are not submit one bid in each CBA. Under the
structure their business around specific physicians or certain nonphysician commenter’s suggestion, affiliated
disease states and conditions. The practitioners to furnish all items in a entities that do not have their own
commenters noted that CMS should product category as defined for Medicare supplier number, but that are
identify the quantities of each item purposes of competitive bidding. part of a national supplier and operate
within the product category that CMS Comment: Several commenters were under the national supplier’s 6-digit
expects will be required by Medicare in concerned that a supplier that wins a supplier number, would not be allowed
the respective CBA. Several commenters bid in the wheelchair category may lose to bid separately in a CBA. The
indicated that the core product the bid for the associated cushions that commenter further suggested that CMS
categories should have codes that are necessary for wheelchairs. They include a requirement in the regulations
include sufficiently similar items in believed this would cause the patient to that suppliers with common ownership
terms of capability, function, and other need to deal with two or more suppliers of 5 percent may only submit a single
relevant characteristics. Some for a single rehabilitation wheelchair. bid for each product category in a given
commenters believed that having broad Response: As explained above, CBA.
product categories will restrict a product categories will be comprised of Response: We agree with the
specialty practitioner’s ability to submit related items used to treat a similar commenter that commonly-owned
a bid. medical condition. Our goal is to suppliers or a supplier that has a
Response: As we stated above, we will minimize beneficiary disruption. controlling interest in another supplier
generally make the product categories Therefore, product categories will should not be allowed to submit
consistent with the policy groups that generally be established so that different bids for the same product
category in the same CBA. Therefore, we make it easier for beneficiaries to be of new items, and the fee schedule
are requiring under revised § 414.412(e) informed regarding who is or who is not amounts for the monthly rental of items
that all bidding suppliers must disclose a contract supplier for their CBA. are generally based on 10 percent of the
as part of their bid whether they have We are also revising our definition of fee schedule amounts for purchase of
an ownership or controlling interest in ‘‘product category’’ in § 414.402. We new items. This method of establishing
one or more other suppliers or if one or have combined proposed § 414.412(e) fee schedule amounts in the absence of
more other suppliers has an ownership and proposed § 414.412(c) into a new reasonable charge data has been in use
or controlling interest in it, CMS will § 414.412(c), but deleted the first since 1989. Under the Medicare
reject multiple bids submitted by sentence of proposed § 414.412(c) as DMEPOS Competitive Bidding Program,
commonly-owned or controlled redundant because we include the we proposed that bids be submitted
suppliers for the same product category definition of ‘‘product category’’ in only for the furnishing of new items in
in the same CBA because we believe § 414.402, specified that the bid must this category that are included in a
that allowing these suppliers to bid include all costs related to furnishing an competitive bidding program. Based on
against themselves will undermine the item to any beneficiary who maintains the bids submitted and accepted for
integrity of the bidding process. For a permanent residence in, or who visits, these new items, we proposed to also
purposes of this disclosure requirement, the CBA where those items will be calculate a single payment amount for
two or more suppliers are commonly- furnished and made additional used items based on 75 percent of the
owned if one or more of them has an technical changes. We are renumbering single payment amount for new items.
ownership interest totaling at least 5 proposed § 414.412(b) a final In addition, we proposed to calculate a
percent in the other(s). We are defining § 414.412(b)(1), and finalizing single payment amount for the rental of
the term ‘‘ownership interest’’ as ‘‘the § 414.412(d) with technical changes. these items based on 10 percent of the
possession of equity in the capital, the Finally, we are finalizing § 414.412(e), single payment amount for new items.
stock, or the profits of another which set forth our ownership rules, as We stated our belief that calculating
supplier.’’ This is consistent with how discussed above. single payment amounts for used items
the term ‘‘ownership interest’’ is defined We are redesignating proposed and items rented on a monthly basis
in 42 CFR § 420.201 of our regulations, § 414.412(e) as final §§ 414.412(d) and based on bids submitted and accepted
which contains terms relevant to what adding a new § 414.412(e) to require for new items will simplify the bidding
certain entities, including DMEPOS that all bidding suppliers must disclose process and will not create problems
suppliers, must currently disclose as part of their bid whether they have with access to used items or rented
regarding ownership and control an ownership interest in one or more items in this category.
information. We believe it is a logical other suppliers that would be Comment: One commenter stated that
and appropriate approach to adapt considered as contract supplier for the inexpensive and routinely purchased
definitions that apply to disclosure same CBA. DME items included in competitive
requirements in other parts of the bidding should be purchased items
5. Bidding for Specific Types of Items
Medicare program. In addition, the 5 only. The commenter believed that the
and Associated Payment Rules
percent requirement is consistent with additional expense for contract
(§§ 414.408(f) Through (j))
what constitutes a ‘‘person with an suppliers to bill for rental items is
In the May 1, 2006 proposed rule (71 prohibitive. The commenter added that,
ownership or control interest’’ in FR 25673 and 25674), we proposed that, for inexpensive and routinely purchased
§ 420.201. Finally , a supplier controls in preparing a bid in response to the items, the cost of billing and collection
another supplier for purposes of these RFBs, suppliers would use our existing must be done numerous times at a
disclosure requirements if one or more regulations at 42 CFR Part 414, Subparts substantial cost to the supplier.
of its owners is an officer, director, or C and Subpart D to determine whether Response: There are certain items,
partner in the other. This is also a rental or purchase payment would be such as pneumatic compression devices,
consistent with the definition of a made for the item and whether other that are routinely purchased but very
‘‘person with an ownership or control requirements would apply to the expensive and may only be needed on
interest’’ in § 420.201. furnishing of that item, as further a short-term basis. We believe that the
Commonly-owned or controlled explained below. option for renting these items is
suppliers with multiple locations in the necessary in order to enable
same CBA will be required to submit a a. Inexpensive or Other Routinely
beneficiaries to save money, and we will
single bid on behalf of all the locations Purchased DME Items (§§ 414.408(f) and
allow beneficiaries to continue to do so
and must indicate the combined (h)(6))
under the competitive bidding
capacity for all those locations. The bid The current fee schedule amounts for programs.
must also include any locations outside inexpensive or other routinely
the CBA that would be furnishing items purchased DME items are based on b. DME Items Requiring Frequent and
in the CBA if a contract is awarded. average reasonable charges for the Substantial Servicing (§ 414.408(h)(7))
Therefore, if we award a contract based purchase of new items, purchase of used In the May 1, 2006 proposed rule (71
on the single bid submitted by the items, and rental of items from July 1, FR 25673), we proposed that bids be
commonly-owned or controlled 1986, through June 30, 1987. In those submitted for the monthly rental of
suppliers, all of these suppliers would cases where reasonable charge data from items in this payment category with the
become contract suppliers. As stated 1986/1987 are not available, the fee exception of continuous passive motion
above, we believe that these rules are schedule amounts for the purchase of exercise devices. We proposed that bids
necessary to prevent commonly-owned new items are currently based on retail be submitted for the daily rental of
or controlled suppliers from bidding purchase prices deflated to the 1986/ continuous passive motion exercise
against themselves and undermining the 1987 base period by the percentage devices. For items in this category other
integrity of the bidding process. In change in the CPI-U, the fee schedule than continuous passive motion
addition, contracting with all or none of amounts for the purchase of used items exercise devices, we stated that this
the suppliers that are commonly-owned are generally based on 75 percent of the proposal would be consistent with
or controlled as described above will fee schedule amounts for the purchase § 414.222(b) of our existing regulations.
Coverage of continuous passive motion existing regulations. The rental fee the beneficiary elects to purchase a used
exercise devices is limited to 21 days of schedule payments for months 4 power wheelchair, the single payment
use in the home following knee through 15 are based on 7.5 percent of amount for the lump sum purchase of
replacement surgery. Therefore, the purchase price for the item as the used power wheelchair would be
payment can only be made on a daily determined under § 414.229(c) of our based on 75 percent of the single
basis as opposed to a monthly basis for existing regulations. Section 5101(a) of payment amount for a new power
this item. the DRA of 2005 amended section wheelchair. In the case of all items in
Based on the bids submitted and 1834(a) of the Act to require that on the this category that are furnished on a
accepted for these items, we would first day that begins after the 13th rental basis, the single payment amount
calculate single payment amounts for continuous month during which for rental of the item for months 1
the furnishing of these items on a rental payment is made for a capped rental through 3 would be based on 10 percent
basis. item, the supplier of the item must of the single payment amount for
c. Oxygen and Oxygen Equipment transfer title to the item to the purchase of the item, and the single
(§ 414.408(i)) individual. Since this change does not payment amount for rental of the item
apply to beneficiaries using a capped for months 4 through 13 would be based
If included under a competitive rental item prior to January 1, 2006, on 7.5 percent of the single payment
bidding program, we proposed that the these beneficiaries may still elect either amount for purchase of the item. We
single payment amounts for oxygen and to take ownership of the item after 13 stated our belief that calculating single
oxygen equipment would be calculated months of continuous use or to continue payment amounts for used items and
based on separate bids submitted and renting the item beyond 13 months of items rented on a monthly basis based
accepted for furnishing on a monthly continuous use. In addition, the DRA on bids submitted and accepted for new
basis of each of the oxygen and oxygen leaves intact the rule under which a items will simplify the bidding process
equipment categories of services supplier must offer the beneficiary the and will not result in problems with
described in § 414.226(b)(1)(i) through option to purchase a power wheelchair access to used items or rented items in
(b)(1)(iv). at the time the supplier initially this category.
Subsequent to the publication of the furnishes the item (in which case Comment: One commenter believed
May 1, 2006 proposed rule, we issued payment would be made for the item on that the rule does not address situations
a final rule that implemented new a lump-sum basis). However, with when a supplier has to rent an item to
payment classes for oxygen and oxygen regard to all other capped rental items a beneficiary and the item is defined by
equipment furnished for years after for which the rental period begins after the manufacturer as ‘‘single patient use
2006 (CMS–1304–F: Home Health January 1, 2006, the DRA requires the only.’’ The commenter also believed
Prospective Payment System Rate supplier to transfer title to the item to that the rule does not address what
Update for Calendar Year 2007 and the beneficiary after 13 months of happens to those products should the
Deficit Reduction Act of 2005; Changes continuous use. patient die. The commenter also
to Medicare Payment for Oxygen We proposed that the lump sum questioned how CMS will handle the
Equipment and Capped Rental Durable purchase option for power wheelchairs rental of products that have limited
Medical equipment (71 FR 65884)). In be retained under the Medicare manufacturer warranties.
accordance with these new rules, we DMEPOS Competitive Bidding Program. Response: If a beneficiary dies during
will now calculate the single payment At the time we issued the May 1, 2006 the period in which he or she is renting
amounts for oxygen and oxygen proposed rule, this purchase option an item, the contract supplier would
equipment based on the separate bids could be found in § 414.229(d) of our retain ownership of the item. As is the
submitted and accepted for the regulations. In accordance with a final case today, if the item is designated by
furnishing on a monthly basis of each of rule that we subsequently published in the manufacturer for a ‘‘single patient
the oxygen and oxygen equipment the Federal Register on November 9, use only,’’ meaning that it cannot be
payment classes described in 2006 (71 FR 65884), the purchase option used by other beneficiaries, the contract
§§ 414.226(c)(1)(i)–(v). for power wheelchairs furnished supplier may not furnish it to a new
We refer the reader to section VI.D.1. beginning on or after January 1, 2006, beneficiary. Medicare currently does not
of this final rule where we discuss a can be found in § 414.229(h). We also pay for costs that are covered by
new provision at § 414.408(i)(2) relating proposed that separate payment for manufacturers’ warranties and this
to additional payments to contract reasonable and necessary maintenance policy will not change under
suppliers that must begin furnishing and servicing only be made for competitive bidding.
oxygen equipment after the rental beneficiary-owned DME and that Comment: One commenter suggested
period has already begun to a payment for maintenance and servicing that CMS limit to discrete situations a
beneficiary who is no longer renting the of rented items would be included in requirement that contract suppliers of
item from his or her previous supplier the single payment amount for rental of power wheelchairs offer rental items.
because the previous supplier elected the item. The commenter was concerned that this
not to become a grandfathered supplier We also proposed in the May 1, 2006 rule would require suppliers to float a
or the beneficiary elected to change proposed rule that ‘‘purchase’’ bids be large volume of loans to subsidize
suppliers. submitted for the furnishing of new rentals. The commenter further believed
items in the capped rental category. that most beneficiaries requiring power
d. Capped Rental Items (§ 414.408(h)) Based on these bids, a single payment mobility have chronic progressive
With the exception of power amount for purchase of a new item will conditions that require them to keep the
wheelchairs, payment for items that fall be calculated for each item in this equipment for a long period of time.
into this payment category is currently category for the purpose of determining Response: We disagree with the
made on a rental basis only. The rental both the single payment amount for the commenter. Power wheelchairs are very
fee schedule payments for months 1 lump sum purchase of a new power expensive and may only be needed on
through 3 are based on 10 percent of the wheelchair, and for calculating the a short-term basis. The option for
purchase price for the item as single payment amounts for the rental of renting these items is necessary to
determined under § 414.229(c) of our all items in this category. In cases where enable beneficiaries to save money, and
for this reason, we will allow them to be The commenter stated that because f. Maintenance and Servicing of Enteral
rented under the competitive bidding parenteral nutrients, equipment, and Nutrition Equipment (§ 414.408(h)(5))
programs. supplies were never intended to be Section 6112(b)(2)(B) of OBRA ’89
We refer readers to section VI.D.1. of included in competitive bidding, it is requires that we pay for maintenance
this final rule where we discuss unclear why CMS proposed to revise and servicing of enteral nutrition
additional payments to contract this payment methodology at this time equipment after monthly rental
suppliers for capped rental DME when when some beneficiaries are attempting payments have been made for 15
a contract supplier must begin to coordinate their intravenous therapy months. The maintenance and servicing
furnishing a capped rental item during payments are to be made in amounts
needs between Medicare Part B and Part
the rental period to a beneficiary who is that we determine are reasonable and
D.
no longer renting the item from his or
Several commenters stated that, under necessary to ensure the proper operation
her previous supplier because the
the proposed rule, payment for enteral of the equipment. Since October 1,
previous supplier elected not to become
1990, program instructions have
a grandfathered supplier or the pumps would be determined as if
specified when and how these payments
beneficiary elected to change suppliers. enteral pumps were a capped rental
are made. These program instructions
e. Enteral Nutrients, Equipment, and item. They stated that enteral pumps fall are currently found at section 40.3 of
Supplies (§§ 414.408(f), (g)(2)–(3), and under the prosthetic device benefit and Chapter 20 of the Medicare Claims
(h)(4)) are paid under a specific fee schedule. Processing Manual (Pub. 100–04). These
These commenters added that there is instructions provide that maintenance
Enteral nutrients, equipment, and no basis for the change in payment
supplies are currently paid under and servicing payments may be made
methodology for enteral nutrients, beginning 6 months after the last rental
Medicare Part B on a purchase or rental
equipment, and supplies. Another payment for the equipment and no more
basis. Section 6112(b)(2)(A) of the
OBRA ’89 limits the rental payments to commenter noted that CMS should often than once every 6 months for
15 months. To be generally consistent modify the proposed payment structure actual incidents of maintenance where
with the bidding requirements for enteral pumps consistent with the equipment requires repairs and/or
discussed above for capped rental DME, current fee schedule policy. extensive maintenance. Extensive
in the May 1, 2006 proposed rule (71 FR Response: In accordance with section maintenance involves the breaking
25674), we proposed that bids be 1847(a)(2)(B) of the Act, parenteral down of sealed components or
submitted for the purchase of new items nutrients, equipment, and supplies performance of tests that requires
in this category. Based on the bids cannot be part of the Medicare DMEPOS specialized testing equipment not
submitted and accepted for new items, Competitive Bidding Program. However, available to the beneficiary or nursing
we would calculate a single payment facility. The program instructions also
the same section directs that enteral
amount for rented items for months 1 state that the maintenance and servicing
nutrients, equipment, and supplies be
through 3 based on 10 percent of the payments cannot exceed one-half of the
included in the program. In accordance rental payment amounts for the
single payment amount for new items.
with section 1847(a)(6) of the Act, the equipment.
The single payment amount for rented
payment basis determined under the Under the Medicare DMEPOS
items for months 4 through 15 would be
based on 7.5 percent of the single Medicare DMEPOS Competitive Bidding Competitive Bidding Program, we
payment amount for new items. In cases Program for enteral nutrients, proposed at § 414.408(i)(3) (redesignated
where the beneficiary elects to purchase equipment, and supplies replaces the as § 414.408(h)(4) in this final rule) that
enteral nutrients, equipment, and payment basis that would otherwise the monthly rental payments for enteral
supplies the single payment amount for apply under section 1842(s)(1) of the nutrition equipment for months 1
new enteral nutrients, equipment, and Act and 42 CFR Part 414, Subpart C of through 3 be equal to 10 percent of the
supplies would be based on the bids our regulations. Therefore, the payment single payment amounts for the
submitted and accepted for new enteral methodology we establish for enteral purchase of the new enteral nutrition
nutrients, equipment, and supplies, and nutrients, equipment, and supplies equipment. We proposed that for
the single payment amount for used furnished under this program will months 4 through 15, the monthly rental
enteral equipment would be based on 75 replace the fee schedule methodology payment amounts would be equal to 7.5
percent of the single payment amount for those items. We proposed to retain percent of the single payment amounts
for the purchase of new enteral many of the same rules that currently for the purchase of new items. We
equipment. govern the rental or purchase of enteral proposed that the contract supplier to
Based on the bids submitted and nutrients, equipment, and supplies to which payment is made in month 15 for
accepted for new items, we would make the transition to competitive furnishing enteral nutrition equipment
calculate a single payment amount for bidding easier for both suppliers and on a rental basis must continue to
purchase of enteral nutrients, beneficiaries. However, under furnish, maintain, and service the pump
equipment, and supplies. for as long as the equipment is
§ 414.408(f), we are establishing a
Comment: One commenter noted that medically necessary. In addition, we
process for a supplier to bid on the
intravenous medication and enteral proposed to establish the maintenance
nutrients, equipment, and supplies purchase price for a new enteral pump. and service payments under proposed
should not be included in competitive However, payments will be made on a § 414.408(i)(4) (redesignated as
bidding. The commenter did not believe rental basis if the beneficiary chooses to § 414.408(h)(5) in this final rule) for
it is appropriate to revise the payment obtain the item on a rental basis or a enteral nutrition equipment so that they
methodology in this rule. The purchase basis if the beneficiary chooses are equal to 5 percent of the single
commenter suggested that CMS should to obtain the item on a purchase basis. payment amounts for the purchase of
not revise the enteral nutrients, We also note that this rule does not new enteral nutrition equipment. This
equipment, and supplies fee schedule supersede any laws for rules that govern would limit the payment rate for
without formal comments from the whether a particular drug is covered maintenance and service to one-half of
industry. under Medicare Part B or Part D. the rental payment amount for the first
month of rental, which is similar to the 1834(a)(20) of the Act instructs the for accreditation organizations as a new
program instructions mentioned above. Secretary to establish and implement § 424.58 as part of the DMEPOS
The provisions of the proposed rule are quality standards for all DMEPOS provisions in the FY 2007 IRF final rule
similar to current Medicare payment suppliers in the Medicare program, not (71 FR 48354). We published the list of
rules in section 40.3 of Chapter 20 of the just for suppliers subject to competitive the selected accreditation organizations
Claims Processing Manual. bidding or in CBAs. All suppliers must and the final quality standards through
meet these quality standards to be program instructions and posted the
g. Supplies Used in Conjunction With eligible to submit claims to the response to comments document on the
DME (§ 414.408(g)(1)) Medicare program, irrespective of the quality standards. The names of the
We proposed under proposed Medicare DMEPOS Competitive Bidding accreditation organizations and the final
§ 414.408(h)(1) that bids be submitted Program. The quality standards are to be quality standards and our responses to
for the purchase of supplies necessary applied by recognized independent public comments on the quality
for the effective use of DME, including accreditation organizations that have standards and on the portion of the
drugs (other than inhalation drugs). been designated by the Secretary under proposed rule pertaining to the quality
Based on the bids submitted and section 1834(a)(20)(B) of the Act. standards are posted on the CMS Web
accepted for these items, we would Section 1834(a)(20)(E) of the Act site at: http://www.cms.hhs.gov/
calculate single payment amounts for explicitly authorizes the Secretary to competitiveAcqforDMEPOS.
the furnishing of these items on a establish the quality standards by
B. Eligibility (§ 414.414(a) Through (c))
purchase basis. program instruction or otherwise after
consultation with representatives of In the May 1, 2006 proposed rule (71
h. Off-the-Shelf (OTS) Orthotics FR 25675), we proposed in
relevant parties. We proposed that a
(§ 414.408(g)(4)) grace period may be granted for § 414.414(b)(1) that all bidders must
We proposed under proposed suppliers that have not had sufficient meet enrollment standards to be
§ 414.408(h)(4) that bids be submitted time to obtain accreditation before considered for selection as a contract
for the purchase of OTS orthotics. Based submitting a bid. If a supplier does not supplier under the Medicare DMEPOS
on the bids submitted and accepted for then successfully attain accreditation, Competitive Bidding Program. These
these items, we would calculate single we will suspend or terminate the standards are included in the supplier
payment amounts for the furnishing of supplier contract. The length of time for standards regulation at § 424.57. In
these items on a purchase basis. the grace period will be determined by addition, we proposed § 414.414(b)(2),
Comment: One commenter agreed the accrediting organizations’ ability to that each bidder must certify in its bid
with the proposed distinction for complete the accrediting process within that its high level employees, chief
prosthetics and orthotics. each competitive bidding area. The corporate officers, members of board of
Response: We agree with the length of time of the grace period will directors, affiliated companies and
commenter because the statute be specified in the RFB for each subcontractors are not now and have not
distinguishes between prosthetics and competitive bidding program. been sanctioned by any governmental
orthotics. In the May 1, 2006 proposed rule, we agency or accreditation or licensing
In summary, after consideration of all indicated that we had consulted with organization. In the alternative, the
of the public comments received on the the PAOC and determined that it is in bidding supplier must disclose
bidding requirements and associate the best interest of the industry and information about any prior or current
payment rules described above, we are beneficiaries to select the accreditation legal actions, sanctions, or debarments
renumbering proposed §§ 414.408((g) organizations and publish the quality by any Federal, State or local program,
through (j) as §§ 414.408(f) through (i), standards through program instructions including actions against any members
respectively, and finalizing these in order to ensure that suppliers that of the board of directors, chief corporate
sections (with the exception of wish to participate in competitive officers, high-level employees, affiliated
§ 414.408(h)(2) and (i)(2)), which have bidding will know what standards they companies, and subcontractors.
been added and finalized as described must meet in order to be awarded a In the preamble to the May 1, 2006
above, and with additional changes. contract. We proposed in § 414.414(c)(1) proposed rule (71 FR 25675) we stated
that all bidding suppliers must satisfy that sanctions would include, but are
VII. Conditions for Awarding Contracts the quality standards in order to be not limited to, debarment from any
for Competitive Bids eligible to participate in the Medicare Federal program, OIG sanctions, or
In proposed § 414.414, we set forth a DMEPOS Competitive Bidding Program. sanctions issued at the State or local
series of proposals regarding how we In proposed § 414.414(c)(2), we level. In addition, we proposed that the
would evaluate and select suppliers for proposed that all bidding suppliers bidder must have all State and local
contract award purposes under the must be accredited by a CMS-approved licenses required to furnish the items
Medicare DMEPOS Competitive Bidding accreditation organization, as defined that are being bid (proposed
Program. Proposed § 414.414(a) under 42 CFR 424.57(a), but stated that § 414.414(b)(3)). Finally, we proposed
provides generally that the rules in a supplier would be considered to be that the supplier must agree to all of the
§ 414.414 govern the evaluation and grandfathered if it had received a valid terms in the contract outlined in the
selection of suppliers under the accreditation before the CMS-approved RFBs (proposed § 414.414(b)(4)). We
program. The specifics of our other accreditation organizations were stated in the preamble to the May 1,
proposals are discussed below: designated and the accreditation was 2006 proposed rule (71 FR 25675) that
granted by an organization that CMS we would suspend or terminate a
A. Quality Standards and Accreditation contract if a supplier loses its good
designates as a CMS-approved
Section 1847(b)(2)(A)(i) of the Act accreditation organization under 42 CFR standing with us or any other
specifies that a contract may not be 424.58. government agency.
awarded to any entity unless the entity To expedite the accreditation process Comment: Several commenters
meets applicable quality standards for contract suppliers under the suggested that CMS require all contract
specified by the Secretary under section Medicare DMEPOS Competitive Bidding suppliers to be physically located in the
1834(a)(20) of the Act. Section Program, we finalized the requirements CBA for which they were awarded a
contract. Other commenters believed accreditation must take place before bid guilt and should not be used to
that relying on physical location would prices are arrayed and the pivotal bid negatively impact a supplier’s bid
prevent participation of many suppliers, selected. Otherwise, the commenter evaluation. Another commenter stated
including several suppliers with believed the bidding pool will be that the term ‘‘sanctioned’’ is subject to
capacity to operate on a national scale. tainted by bids from suppliers that are being interpreted differently by each
The commenters believed that relying not qualified. The commenter suggested supplier. The commenter suggested that
on physical location could cause that bids from suppliers that have not CMS detail what specific types of
product supply issues. Other satisfied the quality standards, are not ‘‘sanctions’’ should be included in the
commenters requested that CMS clarify accredited, and/or that do not meet disclosure. In addition, the commenter
whether a supplier can submit a bid if CMS’ financial and eligibility standards suggested that CMS more clearly define
the supplier is not physically located in should not be considered in selecting what it meant when it stated that
the CBA, but can show that it has a winning bids and setting payment bidding suppliers would have to
presence within the CBA. They asked amounts. The commenter also suggested ‘‘certify’’ in their bids that they, their
whether CMS would quantify this for that the rule should clarify that the high-level employees, chief corporate
evaluation purposes. establishment of a composite bid should officers, members of the board of
Response: We continue to believe that only be completed for suppliers that directors, affiliated companies, and
it is appropriate to allow suppliers that meet the bidding requirements. subcontractors are not, and have not
do not maintain a physical location in Response: We will not award a been, sanctioned by any governmental
a CBA to submit a bid to furnish items contract to any supplier that does not agency or accreditation or licensing
in that CBA. One of the purposes of the meet our bidding requirements. Those organization. The commenter also
program is to create a competitive requirements include complying with wanted to know if CMS intends for the
bidding payment structure that is more our eligibility standards, including certification to take the form of a simple
reflective of a competitive market. By compliance with the enrollment attestation or whether CMS would
accepting bids from all suppliers that standards in § 424.57(c) of our require suppliers to sign a prescribed
can meet the requirements of the regulations and disclosure of certain legal statement testifying to the veracity
program, regardless of their physical compliance-related issues, financial of the disclosures or lack of disclosures.
location, we believe that we will standards, quality standards, and
Response: We agree with this
encourage a more robust competition accreditation standards unless a grace
comment that investigations are not in
that will result in the best possible period for obtaining accreditation
prices for beneficiaries without applies. We may allow a grace period themselves evidence of guilt. We did
compromising their access to DMEPOS. for suppliers that have not yet been not propose in the May 1, 2006
It is our intent to review each bidder to accredited at the time they submit their proposed rule to require a bidding
determine whether it can meet the bid. To qualify for this grace period, a supplier to disclose information in its
requirements of the competitive bidding supplier must have submitted its bid about pending and prior
program for which they submit a bid. application for accreditation to a CMS- investigations, and this final rule
One of these requirements will be that approved accreditation organization and likewise does not require such
the supplier must be able to be waiting for the accreditation process disclosures. The RFB will conform to
demonstrate that it maintains a presence to be completed by that organization. this final rule. We are revising proposed
in the CBA. In other words, the supplier We expect that suppliers will have § 414.414(b)(2)(ii) so that it clarifies
must be able to furnish items to all obtained their accreditation before they what disclosures a supplier must make
beneficiaries who maintain a permanent are awarded a contract under the in its response to the RFB. Specifically,
residence in the CBA, regardless of Medicare DMEPOS Competitive Bidding we will require that each bidding
where that beneficiary is located, Program. We will evaluate a supplier’s supplier must disclose information
including delivering items and compliance with our bidding regarding—(1) Any revocations of a
providing necessary training and requirements before we finalize the supplier number; and (2) sanctions,
ensuring that items are appropriately pivotal bids as well as the single program-related convictions as defined
set-up in the beneficiary’s home. Thus, payment amounts. We will reject a bid in section 1128(a)(1) through (a)(4) of
a supplier’s ability to furnish items to that does not demonstrate that the the Act, exclusions, or debarments
all beneficiaries in the CBA, and not its supplier has met our bidding imposed against the supplier, its high-
physical location, will be evaluated to requirements. As a result, only bids level employees, chief corporate
determine whether the supplier meets from eligible, qualified, and financially officers, members of the board of
this requirement. We would reject a bid sound suppliers will be used to directors, affiliated companies, and
if we determined that the bidding determine the single payment amounts subcontractors by any Federal, State, or
supplier did not meet this bidding and select contract suppliers. local agency. We are finalizing proposed
requirement, or any other bidding We note that although we will be § 414.414(b)(2)(i) to require a supplier to
requirement. considering each supplier’s projected certify in its bid that this information is
Comment: Several commenters stated capacity as part of our determination of complete and accurate. We might reject
that CMS should apply an appropriate where to set the pivotal bid. a bid based on these disclosures. As
screening process to determine which Comment: One commenter stated that discussed more fully below, we might
bidder qualifies for consideration. They the proposed rule indicated that conclude that a contract supplier has
recommended that the bidding process suppliers would have to disclose breached its contract if we discover that
include a 3-step elimination process in information on debarments, sanctions, the contract supplier did not fully
this order: Accreditation; financial or other legal actions affecting them. comply with these disclosure
standards; capacity assessment. The However, Form A, the application requirements, or if it is sanctioned or
commenter suggested that only after this section of the RFB, requires suppliers to debarred, has legal action taken against
3-step screening is applied should CMS disclose information about pending or it, or falls out of compliance with the
accept a bid. prior investigations. The commenter Medicare program requirements
One commenter asserted that a noted that investigations are merely (compliance with which we
supplier’s financial stability and fact-finding tools that do not presume characterized in the proposed rule as
the supplier being in ‘‘good standing’’ suppliers might not be able to Comment: One commenter suggested
with CMS), including enrollment participate in the Medicare DMEPOS that CMS also publish the criteria it will
requirements set forth at §§ 424.500 et Competitive Bidding Program. They use to assess supplier’s financial
seq., during the contract term. added that, conversely, if financial stability and how it will rank suppliers
We have added a cross-reference to standards are too lax, suppliers may be based on these criteria. The commenter
final § 414.414(b) to indicate that financially unable to meet the stated that bank statements should only
networks (discussed more fully in challenges of a competitive market. be requested when we need to resolve
section XII. of this final rule) must also Response: We have revised proposed doubts about the supplier’s other
meet the network requirements found in § 414.414(d) to indicate that the RFB submissions. The commenter believed
final § 414.418. form will specify the documents that if we maintain the requirement for
After consideration of public required as part of the bid application bank statements, the statements need to
comments, we are finalizing and that each supplier must submit this be defined for the period for which we
§ 414.414(a) without modification. We documentation along with its bid. We are requesting the financial information.
are finalizing §§ 414.414(b)(1)–(3) with agree with the commenters that it is Response: As we explained above, we
the changes discussed above and with important to have financial standards recognize that our collection of financial
additional technical changes. that ensure suppliers are able to meet information must be comprehensive
C. Financial Standards (§ 414.414(d)) the challenges of competitive bidding enough to allow us to assess a supplier’s
and can fulfill their contract obligations. financial soundness, but not so
Section 1847(b)(2)(A)(ii) of the Act However, we also agree that our burdensome as to encumber the bidding
specifies that we may not award a financial standards should not be so process (especially for small suppliers)
contract to an entity unless the entity burdensome that suppliers, and and the bid evaluation process.
meets applicable financial standards especially small suppliers, cannot Therefore, as stated above, we will
specified by the Secretary, taking into satisfy them. After further consideration require that for the initial round of
account the needs of small providers. and in response to comments, we competition, suppliers must submit
Applying financial standards to believe that the proposed financial certain schedules from their tax returns,
suppliers assists us in assessing the documentation discussed in the a copy of their 10K filing report from the
expected quality of suppliers, estimating preamble to the proposed rule (71 FR 3 years immediately prior to the date on
the total potential capacity of selected 25675) would be too burdensome, which the bid is submitted (if the
suppliers, and ensuring that selected particularly for small suppliers. supplier is publicly traded), certain
suppliers are able to continue to serve Therefore, in order to obtain a sufficient specified financial statement reports,
market demand for the duration of their amount of information about each such as cash flow statements, and a
contracts. Ultimately, we believe that supplier while minimizing the burden copy of their current credit report,
financial standards for suppliers will on both bidding suppliers and the bid which must have been completed
help maintain beneficiary access to evaluation process, we will require that within 90 days prior to the date in
quality services. for the initial round of competition, which the supplier submits its bid and
Therefore, as part of the bid selection suppliers must submit certain schedules must have been prepared by one of the
process, we proposed that the RFBs from their tax returns, a copy of the 10K following: Experian; Equifax; or
would identify the specific information filing report from the immediate 3 years TransUnion.
we will require to evaluate suppliers immediately prior to the date on which We will generally require that
(proposed § 414.414(d)). We noted that the bid is submitted (if the supplier is suppliers submit the same types of
this information may include: a publicly traded) certain specified information for subsequent
supplier’s bank reference that reports financial statement reports, such as cash competitions, but we might choose to
general financial condition, credit flow statements, and a copy of their add or delete specific document
history, insurance documentation, current credit report, which must have requests as we gather experience on
business capacity and line of credit to been completed within 90 days prior to what financial information most
fulfill the contract successfully, net the date in which the supplier submits accurately predicts whether a suppler is
worth, and solvency. We welcomed its bid and must have been prepared by financially stable enough to participate
comments on the financial standards, in one of the following: Experian; Equifax; in the Medicare DMEPOS Competitive
particular the most appropriate or TransUnion. All documents that are Bidding Program.
documents that would support these not prepared as part of a tax return must Comment: Several commenters stated
standards. We found that, in the be certified as accurate by the supplier that CMS should consider the supplier’s
demonstration, general financial and must be prepared on an accrual or debt-to-equity ratio (long-term debt
condition, adequate financial ratios, cash basis of accounting. This financial divided by shareholders’ equity). They
positive credit history, adequate information will allow us to determine indicated that this is a measurement of
insurance documentation, adequate financial ratios, such as a supplier’s a supplier’s capacity to borrow and
business capacity and line of credit, net debt-to-equity ratio, and credit expand. One commenter indicated,
worth, and solvency were important worthiness, which will allow us to however, that this measurement will be
considerations for evaluating financial assess a supplier’s financial viability. problematic when applied to private
stability. We will generally require that firms. The commenters suggested that
Comment: Several comments argued suppliers submit the same types of an alternative would be to require the
that the financial standards were too information for subsequent EBITDA (earnings before interest, taxes,
strict for certain suppliers and should be competitions, but we might choose to depreciation and amortization)-to-debt
flexible enough to regulate mail order add or delete specific document ratio because this is more difficult to
suppliers, small local suppliers, SNFs, requests as we gather experience on manipulate. The commenter suggested
departments of hospitals, retail what financial information most that CMS could also use the quick ratio
pharmacies, and publicly-traded and accurately predicts whether a suppler is (current assets minus inventory divided
privately-held family firms. The financially stable enough to participate by current liabilities) because this
commenters stated that if financial in the Medicare DMEPOS Competitive measurement is favored by lending
standards are too restrictive, qualified Bidding Program. institutions. Some commenters
indicated that CMS should also define accounts payable. The commenters (Income Statement) for the three years
the accounts receivable as the quick indicated that this information provides immediately prior to the date on which
ratio (less than 180 days sales an additional measure of whether the the bid is submitted. Suppliers are also
outstanding). They indicated that this supplier is, in fact, able to meet its required to submit a copy of their
ratio shows how long it takes the current obligations. current credit report, which must have
supplier to collect money owed and Response: We will require suppliers been completed within 90 days prior to
measures a supplier’s liquidity and to provide us with information which is the date on which the bid is submitted.
ability to meet short-term operating included on a supplier’s credit report The credit report must be prepared by
needs. Some commenters also suggested when they submit their bids to assist us one of the following: Experian; Equifax;
that CMS inquire as to how long a in determining their financial or TransUnion.
supplier has been in business. soundness. • Limited partnerships and
Commenters also suggested that the Comment: One commenter argued partnerships must submit their
information that CMS collects should that CMS must recognize that publicly Schedule L from their 1065, U.S. Return
include 2 years of financial statements traded companies are different from of Partnership Income for the 3 years
prepared in accordance with generally privately held community pharmacies, immediately prior to the date on which
accepted accounting principles. Some as they have fiduciary obligations to the bid is submitted, along with all
commenters recommended the financial shareholders. Other commenters argued other financial documentation that must
statements be accompanied by a that the financial standards proposed be submitted by a supplier that files an
compilation, review, or audit report are too burdensome and discourage individual tax return.
from an independent certified public small suppliers from participating. They • Suppliers that file corporate tax
accountant, a certificate of insurance recommended that CMS define different returns are required to submit the
verifying a minimum of $1 million of standards for small suppliers and Schedule L (Balance Sheet) from their
liability coverage, and a letter from a pharmacies. The commenters suggested tax return for the 3 years immediately
primary institutional lender verifying that the standards be limited to credit prior to the date on which the bid is
current lending relationship and the report, lien searches, credit references
submitted. In addition to the tax return
potential borrowing capacity of the and 3 years’ worth of tax returns.
information, these suppliers are also
supplier. Commenters also Response: We are committed to
ensuring the financial soundness of required to submit a Statement of Cash
recommended that CMS receive a credit Flow (Statement of Changes in Financial
report from a recognized credit rating contract suppliers in the competitive
bidding program. In previous responses, Position), and a Statement of Operations
organization. One commenter wanted (Income Statement) for the 3 years
CMS to define a set ratio, for example, we have described the financial
documentation that will generally be immediately prior to the date on which
asset ratio should be not be higher than
required for the competitions. We have the bid is submitted. Suppliers are also
(X percent) and the asset to liability
determined that we can obtain the required to submit a copy of their
ratio should be no lower than (X
necessary information through current credit report, which must have
percent).
Response: We will use appropriate collection of a limited number of been completed within 90 days prior to
financial ratios to evaluate suppliers. If financial documents and believe that the date on which the supplier submits
suppliers do not meet certain ratios, the submission of this information will its bid. The credit report must be
they could be disqualified from the be less burdensome for all suppliers, prepared by one of the following:
competition. Examples of ratios we including small suppliers. We believe Experian; Equifax; or TransUnion.
might consider include a supplier’s we have balanced the needs of small • All documents that are not prepared
debt-to-equity ratio and a financial suppliers and the needs of the as part of a tax return must be certified
credit worthiness score from a reputable beneficiaries in requesting as accurate by the supplier and must be
financial services company. The documentation that will provide us with prepared on an accrual or cash basis of
supplier standards in § 424.57(c)(10) sufficient information to determine the accounting.
require that the supplier carry a financial soundness of a supplier. • Suppliers that are publicly traded
$300,000 comprehensive liability After consideration of the public companies must additionally submit a
policy. We believe that imposing an comments received, we are revising copy of their 10–K Filing Reports filed
additional cost for maintaining $1 discussed proposed § 414.414(d) so that with the Securities Exchange
million in liability coverage is not it now specifies that a supplier must Commission for the 3 years immediately
necessary. We will be reviewing all submit the financial information prior to the date on which the bid is
financial information in the aggregate specified in the RFB. For purposes of submitted. If a supplier is a wholly
and will not be basing our decision on the CY 2007 competition, the financial owned subsidiary of a publicly traded
one ratio but rather overall financial documents discussed in this section company, it must submit the parent
soundness. will be those that the RFB will require. company’s 10-K reports.
As we noted above, we will require These requirements are as follows: • If a supplier does not have financial
for CY 2007 competition that suppliers • Suppliers that file individual tax documentation for one or more of the 3
submit a credit report from one of three returns that include business taxes are years immediately prior to the date on
credit bureaus identified above to assist required to submit the Schedule C (the which the bid is submitted, then in
in determining a supplier’s financial Profit and Loss Statement) from their addition to submitting the financial
soundness. For all competition rounds, 1040 Tax Return for the 3 years documentation for the years in which it
we will specify in the RFB what immediately prior to the date on which is available, the supplier must also
financial information must be the bid is submitted. In addition to the submit projected financial statements.
submitted. tax return information, these suppliers The projected financial statements must
Comment: Several commenters are also required to submit a Compiled show what is likely to occur in the
recommended that CMS consider using Balance Sheet (Statement of Financial future based on key financial and
Dunn and Bradstreet accounts payable Position), a Statement of Cash Flow business assumptions of the present,
ratings (paydex score) which measures (Statement of changes in Financial and must include a description of the
how quickly a company pays its Position) and a Statement of Operations financial and business assumptions.
• For networks, the legal entity that consideration the expected demand over market capacity and demands. During
submits the bid must submit financial the total duration of the contract and the the February 28, 2005 PAOC meeting,
statements on behalf of each network seasonal effects (for example, an we asked the panel to discuss the issue
member in one complete package. increase in beneficiary population in of demand and capacity. Several
• If a supplier is submitting an Florida during the winter), and members of the committee, based upon
individual bid and is also part of a proposed to use 2 years of data to their expertise and knowledge of the
network, the supplier must submit identify any time trends. If there were industry, suggested that most DMEPOS
financial statements along with both the no seasonal effects or time trends, we suppliers would be able to easily
individual bid and the network bid. proposed to use the average monthly increase their total capacity to furnish
D. Evaluation of Bids (§ 414.414(e)) total and new patient figures as the items by up to 20 percent and the
market demand measures. However, if increase could be even larger for
In the May 1, 2006 proposed rule (71 there were seasonal effects or changes products like diabetes supplies that
FR 25675), we proposed to select the identified only during certain months, require relatively little labor.
product categories that include we proposed that the maximum We welcomed comments on our
individual items for which we will monthly total and new patient figures proposed approach for calculating
require competitive bidding. We stated would be used as the market demand market demand and estimating supplier
that individual products would be measures. If trends showed that there capacity. We were especially interested
identified by the HCPCS codes and was noticeable growth or reduction in in any information that would help us
would be further described in the RFBs. beneficiary demand for products in an compare current Medicare volume with
We proposed that suppliers would be area, we proposed to take these factors potential capacity, including potential
required to submit bids for each into consideration when developing formulas we could apply to determine
individual item within each product estimates of beneficiary demand for capacity.
category they are seeking to furnish competitively bid items. Comment: Several commenters argued
under the program, but would not be We proposed to adopt the following that there was insufficient information
required to bid for every product approach to estimate supplier capacity given as to how CMS will determine a
category. to meet the projected demand in a CBA. supplier’s capacity. The commenters
1. Market Demand and Supplier First, we proposed to analyze Medicare wanted to know if the projected
Capacity (§§ 414.414(e)(1) and (e)(2)) claims to determine how many items a capacity that suppliers must identify in
supplier was currently providing in the their responses to the RFB form was a
Section 1847(b)(4)(A) of the Act CBA, as well as in total. Second, as part bid commitment or estimation. The
requires that in awarding competitive of the bid, we would ask suppliers to commenters also noted that CMS did
bidding contracts, the Secretary may indicate how many units they were not describe what criteria it will use to
limit the number of contract suppliers willing and capable of supplying at the compare bidders (aside from bid price)
in a CBA to the number necessary to bid price in the CBA. We would and how these criteria will be applied.
furnish items to meet the projected compare this information to what the They further suggested that CMS look at
demand for items covered under the supplier has dispensed to Medicare a supplier’s history and allow a 20-
contract for the CBA. Therefore, we beneficiaries in the past and what it percent growth rate to determine the
proposed in proposed § 414.414(e)(1) to specified in its response to the RFB as supplier’s capacity.
calculate expected beneficiary demand its projected capacity. We proposed to Response: We proposed that suppliers
in a CBA for items in a product require evidence of financial resources would have to estimate in their response
category. We stated that in order to to support market expansion, such as to the RFB how many items they would
fulfill this statutory mandate, the first letters from investors or lending agents. be able to furnish in the CBA for the bid
step would be to determine the expected We would use this information to price. We also proposed that suppliers
demand for an item in a CBA. We evaluate the capacity of the bidder. would be required to submit
proposed to calculate expected demand Third, we proposed to compare documentation evidencing any planned
in each CBA in a relatively expected capacity and Medicare volume business expansion, such as letters from
straightforward way using existing to determine how many suppliers we investors or lending agents. We will
Medicare claims. We proposed to would need in an area. For new look at this documentation, as well as
examine claims data to determine the suppliers, we would ask them for their the supplier’s other financial
number of units of each item supplied expected capacity, look at trend data for documentation to determine the ability
to Medicare beneficiaries during the new suppliers in that area, and examine of that supplier to furnish its projected
past 2 years, and then to determine the the capacity of other suppliers in that capacity. The capacity identified in the
number of new beneficiaries who have area. We would need to use these data supplier’s response to the RFB form
entered the market during the last 2 to make estimates about capacity should represent the supplier’s best
years. We believed that 2 years’ worth because we believe that suppliers might estimation of the number of items it can
of data would be sufficient to allow us have more capacity potential than they provide to Medicare beneficiaries in a
to identify trend analyses and are currently exhibiting. given CBA. We might, however, make
utilization measurements. We also During the DMEPOS competitive two types of adjustments to a supplier’s
indicated that we would gather data on bidding demonstrations, demonstration projected capacity for purposes of
the number of new FFS Medicare suppliers were able to expand their finalizing the pivotal bid. First, if a
enrollees coming into a CBA and use output to meet market demand and supplier estimates that it can furnish
this number to project the number of replace market share previously more than 20 percent of what we
new enrollees. provided by nondemonstration determine to be the expected beneficiary
We discussed in the preamble to the suppliers; indeed, some demonstration demand for the product category in the
May 1, 2006 proposed rule (71 FR suppliers were disappointed that they CBA, we will lower that supplier’s
25675) how we proposed to calculate 2 did not gain more market share during capacity estimate to 20 percent. We
years of claims on a monthly basis to the demonstration. We presented believe that this capacity adjustment is
determine beneficiary demand. We numerous issues to the PAOC where we necessary to ensure that at least 5
stated that we would take into requested advice on issues such as suppliers have composite bids at or
below the pivotal bid for the product beneficiary demand for a product each supplier’s weighted bids for every
category, which will then enable us to category in a CBA by using two years of item in a product category would
award contracts to at least those 5 existing Medicare claims data, which become the supplier’s composite bid for
suppliers. By awarding contracts to at we believe is sufficient to allow us to that product category.
least 5 suppliers per product category, identify changing trends in utilization. We sought comment on the best
we expect that there will be sufficient In calculating the expected beneficiary method of weighting individual items
contract suppliers in the CBA to provide demand for a product category in a within a product category to determine
beneficiaries with more variety and CBA, we might also evaluate data the composite bid. We indicated that
choice. However, we are confident that, showing beneficiary demand for key one approach we were considering
due to the nature of supplies that can be high volume items in the product would be to set the weight for each item
furnished via mail order (for example, category. based on the volume of the individual
diabetic supplies) national or regional After consideration of the comments item’s share compared to the total
mail order suppliers will easily be able received, we are adopting as final utilization of the product category.
to expand to meet very large demands. § 414.414(e)(1), which provides that we Under this weighting system, the
Therefore, we do not believe it is will calculate the expected beneficiary composite bid would be exactly
necessary to ensure that there are at demand for items within a product proportional to the expected cost of
least five national or regional mail order category in each CBA as part of the bid furnishing the entire bundle of items.
suppliers. If we were to require at least evaluation process. In addition, we are Therefore, if supplier 1 had a lower
five such suppliers, we believe it would adding a new § 414.414(e)(2) to finalize composite bid than supplier 2, it would
dilute our savings. our proposal to evaluate the total also have a lower expected cost of
Second, we might further adjust a supplier capacity that would be furnishing the entire product bundle
supplier’s capacity if, after making the sufficient to meet beneficiary demand that makes up the product category.
initial adjustment discussed above, we for items in the CBA for the items in a Another approach we considered was to
conclude that the supplier’s financial product category. set the weight based on the payment
and business expansion documentation amounts attributable to each DMEPOS
2. Composite Bids (§§ 414.402,
do not support the projected capacity fee schedule item relative to the overall
414.414(e)(3) and (4))
stated in its bid. In determining whether payment amount for the total product
this further adjustment is necessary, we Because suppliers will be bidding for category. We stated that this approach
will give consideration to the suggestion multiple items in a product category, might better reflect the relative value of
of the PAOC that a supplier’s capacity the lowest bid for each item will not each item because it is based on how
could easily be increased by up to 20 always be submitted by the same
much we actually pay for an item, and
percent. We believe, however, that this supplier. In this case, looking at the bids
that this was the approach that we used
further adjustment may be necessary to for individual items would not tell us
in the first round of bidding in Polk
limit the potential that we would award which suppliers should be selected
County under the competitive bidding
contracts to an inadequate number of since different suppliers may submit the
demonstration program. However, we
suppliers based on inflated capacity lowest bids for different items.
stated that we also found that this
projections that the suppliers would not Therefore, in proposed §§ 414.414(e)(2)
approach could result in too much
be able to actually meet. If we believe and (e)(3) (redesignated as
weight being placed on low-volume and
that this further adjustment is necessary, § 414.414(e)(3) and (e)(4) in this final
high-priced items. The first year
we will lower the supplier’s projected rule), we proposed to use a composite
bid to compare all of the suppliers’ bids evaluation report also found that using
capacity to its historical capacity, as the allowed charges as the weights
evidenced by its financial submitted for an entire product category
in a CBA. We stated that using a could result in a supplier that offered
documentation and past claims data. lower bids having a higher composite
We note that after making these composite bid would be a way to
aggregate a supplier’s bids for bid than a supplier that offered a higher
adjustments, if we are still unable to
individual items within a product bid for individual items.
award five contracts in a CBA because In the May 1, 2006 proposed rule, we
there are not enough qualified suppliers, category into a single bid for the whole
used the volume of items or units
we will award at least 2 contracts to product category. This would allow us
to determine which suppliers can offer displayed in Table 5 of that rule (and as
qualified suppliers for the furnishing of republished below) as the basis of our
that product category under a the lowest expected costs to Medicare
for all items in a product category. To examples, but we requested comments
competitive bidding program. on which weighting method should be
We also note that the adjustments we compute the composite bid for a
product category, we would multiply a used in calculating the composite. We
might make to a supplier’s projected
supplier’s bid for each item in a product also requested comments on other
capacity would not impact the
category by the item’s weight and sum methods of weighting that could be
supplier’s ability to actually furnish
these numbers across items. The weight applied to individual items.
items if it is awarded a contract. In other
words, a contract supplier will be able of an item would be based on the
utilization of the individual item TABLE 5.—ITEM WEIGHTS
to furnish items to all beneficiaries who
wish to receive them from it. compared to other items within that
Item A B C All
Comment: Some commenters stated product category based on historic
that CMS must consider how changes in Medicare claims. Item weights would be Units ............ 5 3 2 10
coding, utilization, and documentation used to reflect the relative market Item Weight 0.5 0.3 0.2 1
may affect the utilization data for the importance of each item in the product
last 2 years. They cited, for example, category. We would select item weights The example above shows how our
that changes in wheelchair cushions that ensure that the composite bid is proposed weight-setting methodology
and respiratory coding may affect the directly comparable to the costs that would work. The expected volume for
utilization data. Medicare would pay if it bought the Items A, B, and C are 5, 3, and 2 units,
Response: We proposed that we expected bundle of items in the product respectively, for a total volume of 10
would calculate the expected category from the supplier. The sum of units. The item weight for Item A is 0.5
(5/10), the weight for Item B is 0.3 categories. In our example, supplier 1 to the composite bids; the factor of
(3/10), etc. bid $1.00 for item A, $4.00 for item B, proportionality is equal to the total
As explained above, the composite and $1.00 for item C. The composite bid number of units (10) in the product
bid for a supplier would equal the item for Supplier 1 = (0.5 * $1.00) + (0.3 * category. We used the composite bid to
weight times the item bid amount $4.00) + (0.2 * $1.00) = $1.90. Table 6 determine the expected costs for all of
summed across all items in the product shows the expected cost of the bundle the items in the product category based
category. The item weights would be the based on each supplier’s bids. The upon expected volume.
same for bidders for the same product expected costs are directly proportional
TABLE 6.—COMPOSITE BIDS

Expected cost
Item A B C Composite bid of bundle
Units ............................................................................... 5 3 2 ........................ ........................

Item weight ..................................................................... 0.5 0.3 0.2 ........................ ........................
Supplier 1 bid ................................................................. $1.00 $4.00 $1.00 $1.90 $19.00
Supplier 2 bid ................................................................. $3.00 $3.00 $2.00 $2.80 $28.00
Supplier 3 bid ................................................................. $2.00 $2.00 $2.00 $2.00 $20.00
Supplier 4 bid ................................................................. $1.00 $2.00 $2.00 $1.50 $15.00
Under the proposed methodology, bid Response: We understand the § 414.414(e)(3) and (e)(4) and adopting
selection would proceed by ranking the commenters’ concern and believe we them as final with a technical change to
composite bids from lowest to highest have simplified the methodology as paragraph (e)(4) to clarify that we will
(Table 6). In order to ensure that we much as possible. We plan to provide array the composite bids from the
would pay less under competitive the weights for each item prior to lowest ‘‘composite bid price’’ to the
bidding than we would under the bidding, so that bidders will be aware of highest ‘‘composite bid price.’’ We are
current fee schedule, as is required the weight given to each item. We stated also revising the definition of ‘‘item
under section 1847(b)(2)(A)(iii) of the in the proposed rule that using a weight’’ in § 414.402.
Act, we would compute the expected composite bid would be a way to
3. Determining the Pivotal Bid
cost of the bundle of goods for aggregate a supplier’s bids for
(§§ 414.414(e)(5) and (e)(6))
comparison purposes. This would individual items within a product
require us to calculate the bid amount category into a single bid for the whole We proposed that the pivotal bid
times the expected number of units that product category. This would allow us would be the point where expected
we expect suppliers will furnish based to determine which suppliers can offer combined capacity of the bidders would
on the most current Medicare claims the lowest expected costs to Medicare be sufficient to meet expected demands
data and sum across each item by for all items in a product category. To of beneficiaries for items in a product
supplier. For example, if supplier 1 bid compute the composite bid for a category. In the example below, the
$1.00 for item A and we expected to product category, we would multiply a projected demand would be for 1,000
purchase 5 units—$1.00 × 5 units = supplier’s bid for each item in a product units. Therefore, the supplier 10’s
category by the item’s weight and sum composite bid would represent the
$5.00, item B—$4.00 × 3 units = $12.00,
these numbers across items. In the pivotal bid, because that supplier’s
item C—$1.00 × 2 units = $2.00, the sum
proposed rule, we defined the term cumulative capacity of 1,100 would
for these 3 items would be $19.00. As
‘‘item weight’’ as a number assigned to exceed the projected demand of 1,000.
previously noted, prior to selecting a
an item based on its beneficiary The statute requires multiple winners,
supplier for a contract, we would ensure
utilization rate in a competitive bidding so in all cases where we award
that suppliers meet quality and financial contracts, we stated that we would need
area when compared to other items in
standards. to accept at least two winning bidders.
the same product category.’’ We are
Comment: One commenter stated that revising this definition to indicate that All bidders that were eligible for
the bidding should not be so complex. we will use national beneficiary selection and whose composite bid for
The commenter stated that the use of a utilization data to determine the item the product category was less than or
weighted composite bid is confusing weights for the CBA because we believe equal to the pivotal bid would be
and cumbersome. The commenter also that it results in a more representative selected as winning bidders. In the
stated that the weights should be number that reflects the utilization rate Table 7 below, for example, $135.00
provided to each supplier prior to for the item. We believe that this would be the pivotal bid. Suppliers 2,
bidding. Other commenters indicated weighting methodology will best reflect 3, 1, and 10 would then be selected as
that if the median methodology is used, the relative market importance of each winning bidders with supplier 10’s
bids should be weighted by proposed item in the product category. composite bid becoming the pivotal bid.
capacity so that payment rates more After consideration of the comments We acknowledged that this approach
accurately represent the market of received, we are redesignating proposed may leave out other suppliers with very
successful bidders. § 414.414(e)(2) and (e)(3) as close, but slightly higher bids.
TABLE 7.—DETERMINING THE PIVOTAL BID

[Point where beneficiary demand is met by supplier capacity—For this example, beneficiary expected demand is 1,000 units—Supplier 10’s bid is
the pivotal bid]
Eligible for Cumulative

Supplier No. Composite bid Supplier capacity
selection capacity
2 .................................................................................................. Yes ................... $100 100 100

3 .................................................................................................. Yes ................... 115 300 400
1 .................................................................................................. Yes ................... 120 400 800
10 ................................................................................................ Yes ................... 135 300 1100
4 .................................................................................................. Yes ................... 140 500 1600
7 .................................................................................................. Yes ................... 150 100 1700
No longer being considered
5 .................................................................................................. No ..................... 120 n.c. n.c.

6 .................................................................................................. No ..................... 130 n.c. n.c.
8 .................................................................................................. No ..................... 175 n.c. n.c.
9 .................................................................................................. No ..................... 200 n.c. n.c.
n.c. = not calculated.
We also noted that we had considered median, 45th percentile) associated with market demand. In addition, the target
the use of a competitive range to the distribution of bids from eligible number of winners must somehow be
determine the contract suppliers. In this suppliers. For example, the pivotal bid selected and this could have resulted in
approach, we would determine a could have been set equal to the median selecting an arbitrary number. If too
competitive range for the composite bid. bid submitted by eligible suppliers. We high, suppliers might have had little
We would array all suppliers by their stated that the advantage of this option incentive to bid aggressively.
bids and eliminate all suppliers whose would have been that the pivotal bid We also considered an option to base
composite bid is greater than the could be set near the central distribution the pivotal bid on a target composite
competitive range. We would then of bids. We also considered including bid; for example, we could have chosen
evaluate the quality and financial additional suppliers whose bids were a target that was 20 percent below the
standards only for those remaining close to the central distribution as being DMEPOS fee schedule amount for that
suppliers. eligible to become a contract supplier. product category. A possible advantage
During the demonstration, evaluating Both options would likely have affected of this approach would have been that
quality and financial standards was the number of contract suppliers. the target composite bid could be set to
time-consuming for the bid evaluation Finally, we noted that the exact ensure savings for the program. On the
panel and required bidders to provide summary statistic or percentile could other hand, we believed that suppliers
extensive information on quality and have been increased or decreased to might perceive this approach to be
finances. The last two rounds of the reflect the trade-off between the number anticompetitive. Rather than letting
demonstration used a competitive range of winners and program costs. One bidding and the market forces determine
to reduce the burden on the bid negative aspect of this approach would the pivotal bid and fee schedule, we
evaluation panel and bidders. After have been that winners might have might have been viewed as pre-
evaluating basic eligibility insufficient capacity. In addition, with a ordaining the outcome. In addition,
requirements, the composite bids were given percentile cutoff, the pivotal bid suppliers that bid below the target
calculated and arrayed, and a might have included an excessive composite bid might have had
competitive range was selected with number of winning bidders. As the insufficient capacity to meet projected
more than enough suppliers to serve the number of eligible bidders increased, so market demand.
market. Suppliers whose composite bids would the number of winners. If Comment: One commenter requested
were clearly outside of this range were additional bidders had higher costs, and additional explanation as to what
not required to provide detailed their bids fell into the upper half of the cumulative capacity is and how it is
financial information, and the bid panel distribution, the pivotal bid would calculated in the competitive bidding
was not required to evaluate the increase, resulting in greater payments program.
eligibility of these suppliers to by the Medicare program and a loss of Response: The cumulative capacity is
participate. Suppliers within the savings. determined by arraying the composite
competitive range provided detailed Another option we discussed would bids from the lowest to the highest, then
financial information and had their have been to base the pivotal bid on a calculating the pivotal bid for the
quality rigorously evaluated. The target number of winners. For example, product category by ensuring that the
remaining suppliers were only selected we might have decided to select five number of suppliers selected to furnish
as contract suppliers if they met the winners in each product category. items for that product category in a CBA
quality and financial standards and Suppliers might have responded to this have sufficient cumulative capacity to
their composite bids were at or below approach by bidding aggressively, do so. We will determine the
the pivotal bid. knowing that only a fixed number of cumulative capacity of bidding
We also discussed in the proposed winners would be guaranteed to be suppliers for the product category by
rule other options that we considered to selected. A negative aspect of this adding each supplier’s projected or
determine the pivotal bid. One of these approach would have been that there is adjusted capacity. For example, if
options would have been to make the no assurance that a predetermined target supplier 1 states it can provide 15 units,
pivotal bid depend on one of the number of winners would have had supplier 2 states it can provide 40 units,
summary statistics (for example, mean, sufficient capacity to meet projected and supplier 3 states it can provide 35
units, the cumulative capacity of those savings under the Medicare DMEPOS (redesignated as § 414.414(h) in this
suppliers is 90 units. Competitive Bidding Program. final rule) that we would have multiple
After consideration of the public Comment: Numerous commenters contract suppliers in each CBA for each
comments we received, we are disagreed with the proposed product category if at least two
redesignating proposed § 414.414(e)(4) requirement that bids must be at or suppliers met all requirements for
as § 414.414(e)(5), and finalizing newly below the current fee schedule for an participation, and the single payment
redesignated § 414.414(e)(5) with the item. The commenters believed that this amounts to be paid to those suppliers
changes discussed above. We also are places artificial constraints on a process did not exceed the fee schedule
redesignating proposed § 414.414(e)(5) that is designed to harness market amounts for the items that were bid. We
as § 414.414(e)(6) and revising newly forces. They indicated that, if bids are acknowledged that offering choices to
redesignated § 414.414(e)(6) so that it submitted higher than the current fee beneficiaries, referral agents, and
now provides that the only suppliers we schedule, CMS should choose not to treating practitioners that order
will select for contract award purposes include that particular item in the DMEPOS for Medicare beneficiaries is
will be those suppliers that have bidding product category. important to maintain competition
satisfied our eligibility, quality, Response: Section 1847(b)(2)(A)(iii) of among suppliers based on the quality of
accreditation (unless a grace period the Act prohibits CMS from awarding a items. We stated that we had to weigh
applies), and financial requirements. contract to a supplier under a that advantage against the disincentive
competitive bidding program unless the for a supplier to submit its best bid if
4. Assurance of Savings (§ 414.414(b)(2), total amounts to be paid to contractors we select too many suppliers to service
414.414(f)) in a CBA are expected to be less than a CBA. We believe we will be able to
Section 1847(b)(2)(A)(iii) of the Act the total amounts that would otherwise have multiple suppliers servicing one
prohibits awarding contracts to any be paid. In order to ensure that the product category in a CBA and still
entity for furnishing items unless the requirement is met and to guarantee accomplish the goals of competitive
total amounts to be paid to contractors savings for the Medicare program, we bidding.
in a CBA are expected to be less than must require the bids for each item to Comment: Several commenters
be at or below the current fee schedule recommended that CMS select more
the total amounts that would otherwise
amount for the item in order to preclude suppliers than necessary to meet
be paid. Under proposed § 414.414(f),
increases that may occur due to shifting minimum demand. The commenters
we proposed to interpret this
to items priced above the fee schedule. believed that this will ensure a
requirement to mean that contracts will
Without this safeguard, we are sufficient number of suppliers to
not be awarded to any entity unless the
concerned that suppliers might simply address contingency or emergency
amounts to be paid to contract suppliers
start furnishing the items priced above situations, such as a natural disaster.
in a CBA are expected to be less for a
the fee schedule rather than those that Several commenters recommended that
competitively bid item than would have
would normally be furnished because of CMS use 130 percent of anticipated
otherwise been paid. Therefore, we
the potential for higher profits. In capacity. A few commenters requested
stated that we would not accept any bid addition to increased expenditures, that CMS cap estimated capacity per
for an item that is higher than the because of a shift to items with higher supplier when selecting winning
current fee schedule amount for that payment amounts, we might exceed the bidders to preserve competition and
item. This approach would ensure that total amounts that we had been paying beneficiary choice. Some commenters
the single payment amount for each for particular products as a group within recommended that CMS cap each
item in a product category is equal to or a product category. This could also supplier’s capacity at 20 percent, or 25
less than our current fee schedule result in less appropriate products being percent, of anticipated demand to
amount for that item. furnished to Medicare beneficiaries. We ensure that a small number of very large
We acknowledged that an alternative believe that this requirement is suppliers do not become the only
interpretation of ‘‘less than the total necessary to structure a competitive winning bidders.
amounts that would otherwise be paid’’ bidding program that reflects the Response: We anticipate that we will
could mean contracts would not be requirements of the statute. select a sufficient number of suppliers
awarded to an entity unless the amounts Accordingly, we are adding a new to ensure beneficiary access. As we have
paid to contract suppliers in a CBA for § 414.412(b)(2), which provides that the explained above, we may make
the product category are expected to be bid for an item cannot exceed the adjustments to a supplier’s projected
less than what would have otherwise payment amount that would otherwise capacity in order to ensure that we
been paid for the entire product apply if the item was not included in award contracts to a sufficient number
category. During the demonstration, the competitive bidding program. In of suppliers. As explained below, we are
several product categories received addition, we are finalizing proposed also modifying our proposed rule for
overall savings, whereas payment § 414.414(f) with only technical participation by small suppliers to set a
amounts increased for a few individual changes. small supplier target which will be
items within those product categories. calculated by multiplying 30 percent
One concern we had with this approach 5. Assurance of Multiple Contractors times the number of winning suppliers
was that there might be a greater (§ 414.414(h)) at or below the pivotal bid for each
potential for shifting of utilizations from Section 1847(b)(4)(B) of the Act product category. As a result, we will be
one item to another higher priced item. specifies that the Secretary will award able to ensure that small suppliers have
We stated that this approach might not contracts to multiple entities submitting an opportunity to participate in the
result in adequate savings, and that we bids in each area for an item. In programs.
believed a reasonable interpretation of addition, section 1847(b)(2)(A)(iv) of the Comment: Several commenters
the Act would be one in which ‘‘the Act specifies that contracts may not be observed that the proposed rule does
total amounts’’ mean payment at the awarded unless access of individuals to not mention whether CMS will consider
item level. a choice of multiple suppliers is the geographic distribution of suppliers
We specifically requested comments maintained. As a result, we proposed when determining the number of
on the various methods for assuring under proposed § 414.414(g) contract suppliers for each product
category in each CBA. They believed suppliers, we will award contracts to at new round of bidding to select
that geographic distribution is important least 2 qualified suppliers. Finally, we additional suppliers. However, we did
to maintain local presence and for are adding a new § 414.414(h)(3), which not choose this option because it would
beneficiary convenience. They provides an exception for mail order delay the resolution of an access
suggested that CMS analyze capacity at suppliers to the requirement that if there problem and place an additional
the zip code level to ensure that each are at least 5 qualified suppliers, we will administrative burden on the program.
zip code is served by several contract award contracts to at least 5 qualified Comment: One commenter argued
suppliers. They also stated that there is suppliers. that it would be a violation of the statute
precedent for determining geographic to award contracts to a new supplier
6. Selection of New Suppliers After
distribution, citing that the TRICARE after contracts have been awarded
Bidding (§ 414.414(i))
standard and the Medicare Part D without conducting a new competition.
program have established guidelines for In the May 1, 2006 proposed rule (71 The commenter stated that the law
the required number of retail FR 25678), we proposed to select only requires that CMS conduct a
pharmacies, depending on the type of as many suppliers as necessary to competition for the award of any
area. One commenter also suggested that ensure we have enough capacity to meet contracts for a competitively bid item.
any competitive bidding program for projected demand. However, we noted Therefore, the commenter believed an
diabetic testing supplies include a that we might have to suspend or award to the bidder next-in-line when a
requirement that a minimum number of terminate a contract supplier’s contract contract supplier leaves the program or
community-based suppliers be included if that supplier falls out of compliance CMS find that it needs additional
and those suppliers be geographically with any of the requirements identified suppliers would not constitute a
dispersed within the CBA to provide in the regulation and in the bidding competitive acquisition.
convenient access for Medicare contract. Alternatively, we recognized Response: We agree that contracts
beneficiaries. that we could later determine that the cannot be awarded to a supplier that did
Response: We believe that we have number of contract suppliers we not compete. We disagree that this
created a contract supplier selection selected to furnish a product category regulation requirement results in
methodology that will ensure that under a competitive bidding program awarding a contract to a supplier that
beneficiaries have convenient access to was insufficient to meet beneficiary did not submit a bid. These suppliers
competitively bid items. Contract demand for those items. In situations have competed and met all applicable
suppliers will also be required to where CMS determines that there is an eligibility, quality, financial, and
furnish all items to all beneficiaries who unmet demand for items, for example, if accreditation requirements to be
maintain a permanent residence in a CMS terminates a contract supplier’s awarded a contract. We intend to only
CBA (or who visit a CBA) unless an contract, we proposed to contact the use this methodology when we find that
exception set forth in this final rule remaining contract suppliers for that there is a need for additional contract
applies. If a beneficiary is unable to product category to determine if they suppliers because a contract supplier’s
come to the storefront of the contract could absorb the unmet demand. If the contract is suspended or terminated or
supplier, we would expect that the remaining contract suppliers could not when CMS finds it needs additional
contract supplier would deliver the item absorb the unmet demand in a timely contract suppliers to meet beneficiary
to the beneficiary and, if necessary, set manner, we proposed to refer to the list
demand for a particular product
up the item in the beneficiary’s of suppliers that submitted bids for that
category in a CBA. It would not be in
residence and train the beneficiary how product category in that round of
the best interest of beneficiaries to delay
to use the item. This will ensure competitive bidding in that CBA, use
awarding the additional contracts when
beneficiary convenience and access to the list of composite bids that we
we need to ensure sufficient capacity
competitively bid items. We reviewed arrayed from lowest to highest, and
because a contract supplier’s contract
the TRICARE access standards and proceed to the next supplier on the list.
has been suspended or terminated or
believe the standards are not We would contact that supplier to
there is greater need in an area than we
appropriate for meeting the purposes of determine if it would be interested in
anticipated.
the Medicare DMEPOS Competitive becoming a contract supplier. If the
Comment: One commenter stated that
Bidding Program. The retail pharmacy supplier was interested, we proposed to
CMS should have a process identified if
industry is different from the DMEPOS require the supplier to provide updated
there are no suppliers located in a CBA
supplier industry. The retail pharmacy information to ensure its continued
eligibility for participation. A condition willing to accept the single payment
industry provides access through
for acceptance of a contract would be amount and enter into a competitive
storefront presence where they provide
that the supplier must agree to accept bidding contract.
a variety of consumer products. In Response: We would not be able to
contrast, most DMEPOS suppliers the already determined single payment
amounts for the individual items within have competitive bid pricing in a CBA
deliver medical products to the
the product category in the CBA. We in which no suppliers could accept the
beneficiaries’ homes.
After consideration of the public would continue to go down the list until single payment amount.
In summary, after consideration of the
comments we received, we are we were satisfied that the expected
public comments received, we are
redesignating proposed § 414.414(g) as demand would be met and beneficiary
§ 414.414(h)(1) and revising it to redesignating proposed § 414.414(h) as
access to the items in the product
provide that CMS will award at least § 414.414(i) and adopting it as final with
category would not be a problem. After
five contracts for the furnishing of a only technical changes.
consultation with the DMEPOS industry
product category under a competitive and PAOC, we were informed that VIII. Determining Single Payment
bidding program if the requirements in additional capacity should not be a Amounts for Individual Items
§§ 414.414(b) through (f) are met by at problem as suppliers would be willing
least 5 suppliers. We are also adding a A. Setting Single Payment Amounts for
and able to handle the expected
new § 414.414(h)(2), which provides Individual Items (§§ 414.416(a) and (b))
demand.
that if the requirements in §§ 414.414(b) Another option that we considered, Section 1847(b)(5)(A) of the Act
through (f) are not by at least 5 but did not propose, was to conduct a requires that the Secretary determine a
single payment amount for each item in single payment amount for that item in contract suppliers for a particular item
each CBA based on the bids submitted the CBA. would be the single payment amount
and accepted for that item, and we that we would establish under the
Principle 2
proposed in § 414.416(a) and (b) to competitive bidding program for the
implement this statutory requirement. We must expect to pay less for each HCPCS code that describes that item. In
Once contract suppliers are selected for individual item than we would have cases where there is an even number of
a product category based on their otherwise paid for that item under the winning bidders for an item, we would
composite bid and the pivotal bid, current fee schedule. Single payment employ the average (mean) of the two
single payment amounts for individual amounts cannot be higher than our bid prices in the middle of the array to
items in the product category must be current fee schedule amounts for set the single payment amount. In
individual items within a product addition, we proposed that the single
determined. We considered several
category. payment amount for each item must be
different methodologies for determining
To satisfy these principles, we less than the current fee schedule
the single payment amounts. Each of the
evaluated several different approaches amount for that item.
options we considered is discussed in
to setting payment amounts. As a result We believe that setting the single
detail in this section. After careful
of our review, we decided on a preferred payment amount based on the median
consideration of these options, we approach that would determine the of the contract suppliers’ bids satisfies
proposed to adopt the following single payment amounts for individual the statutory requirement that single
principles to determine the single items by using the median of the payment amounts are to be based on
payment amounts for individual items supplier bids that are at or below the bids submitted and accepted. This will
in a product category: pivotal bid for each individual item result in a single payment for an item
Principle 1 within each product category. The under a competitive bidding program
individual items would be identified by that is representative of all acceptable
Bid amounts from all winning bids for the appropriate HCPCS codes. The bids, not just the highest or the lowest
an item in a CBA will be used to set the median of the bids submitted by the of the winning bids for that item.
TABLE 8.—MEDIAN OF THE WINNING BIDS

Actual com-
Item A B C posite bid
Supplier 4 bid ................................................................................................... $1.00 $2.00 $2.00 $1.50

Supplier 1 bid ................................................................................................... 1.00 4.00 1.00 1.90
Supplier 3 bid ................................................................................................... 2.00 2.00 2.00 2.00
Median of winning bids—Single payment amount .......................................... 1.00 2.00 2.00
While this was our proposed bids per individual item. The second would have taken the average of the
approach, we solicited comments on step would have been to calculate the winning bids per item and multiplied
other methodologies for setting the average of the composite bids by taking that by the adjustment factor to adjust
single payment amount, including using the sum of the composite bids for all all bids up to the point of the pivotal
an adjustment factor as part of the contract suppliers in the applicable CBA bid, so that all winners would be paid
methodology for setting the single and dividing that number by the by Medicare as much for the total
payment amount. This was the number of contract suppliers. The third product category as the pivotal bidder.
methodology we used for the step would have been to determine an This amount would have become the
competitive bidding demonstrations, adjustment factor, the purpose of which single payment amount for the
and it would have required the would be to bring every winner’s overall individual item. This is the price that all
following steps. The first step of this bids for a product category up to the contract suppliers within a CBA would
methodology would have been to pivotal bidder’s composite bid. Once we have been paid for that product as
calculate the average of the winning determined the adjustment factor, we illustrated in Table 9. ?≤
TABLE 9.—ADJUSTING THE AVERAGE WINNING BIDS

Average com- Actual com-
Item A B C posite bid posite bid
Supplier 4 bid ....................................................................... $1.00 $2.00 $2.00 ........................ $1.50

Supplier 1 bid ....................................................................... 1.00 4.00 1.00 ........................ 1.90
Supplier 3 bid ....................................................................... 2.00 2.00 2.00 ........................ 2.00
Supplier 2 bid ....................................................................... N/A N/A N/A ........................ N/A
Average of winning bids ...................................................... 1.33 2.67 1.67 1.80 ........................
Adjustment factor = (Pivotal Composite Bid)/(Average
Composite Bid) ................................................................. 1.11 1.11 1.11 ........................ ........................
Adjusted average bids-single payment amount per item .... 1.48 2.96 1.85 ........................ ........................
This approach would have ensured may have guarded against suppliers alternative because, in general, most
that the overall payment amounts that leaving the Medicare program because payment amounts would have been
contract suppliers received were at least the payment amounts are not sufficient. higher than the actual bids as a result of
as much as their bids. As a result, this However, we did not favor this the adjustment factor being greater than
zero. This would have been true because The Medicare DMEPOS Competitive single payment amount is flawed
the purpose of the adjustment factor Bidding Program is designed to ensure because the median bid could be
would have been to make the composite that the Medicare payment amounts are vulnerable to a variety of gaming
bid of all winning suppliers equivalent appropriate and reasonable. In addition, strategies. They noted that, when using
to the composite bid of the pivotal competitive bidding will harness market the median, 50 percent of winning
supplier. We chose not to propose this forces and create competition among bidders would have to accept less than
approach because we believe that this suppliers. We believe that this their bids to participate. They indicated
approach is not reflective of all of the competition will prevent suppliers from that if a contract supplier is not able to
winning bids accepted. In addition, we offering the lowest cost devices, as provide the items at the median,
stated that we were concerned that this suppliers will be interested in demand would not be met and access
methodology might be confusing and increasing their market share by offering would be impaired. The commenters
overly complicated. appropriate services and high quality raised concerns that all bids would have
We also considered taking the products to maintain and increase their the same weight, and bids from small
minimum winning bid for each item in customer base. suppliers, which only serve a few Part
a CBA and not applying an adjustment In addition, and as discussed more B beneficiaries, would have the same
factor. We did not favor this alternative fully in section IX. of this final rule, we impact on the calculation as bids from
because we also did not consider it as will include a nondiscrimination clause suppliers responsible for a large number
being reflective of the actual bids in the contracts we enter into with of beneficiaries, which would give too
accepted because it is only reflective of contract suppliers. Under that much weight to small suppliers. Other
the lowest bid. The lowest bid would provision, contract suppliers will be commenters suggested that the use of
not be reflective of what suppliers obligated to make the same items the median bid favors large chain
would sell the item for as most of them available to beneficiaries under the suppliers that deliver large volume of
bid higher. Medicare DMEPOS Competitive Bidding items. Other commenters suggested that
Finally, we considered taking the Program that they make available to CMS include a mechanism to
maximum winning bid for each item. other customers. We believe that the ‘‘rationalize’’ bids to ensure there are no
However, this approach would have led inclusion of this clause will help to unreasonably low bids. They added that
to program payment amounts that were ensure that Medicare beneficiaries have CMS should have a mechanism to
higher than necessary because some access to the highest quality DMEPOS eliminate outlier bids. One commenter
suppliers were willing to provide these items. Section 1847(b)(2)(A)(iii) of the suggested that CMS calculate the single
items to beneficiaries at a lower cost. Act states that the total amounts to be payment amount only from among those
In the proposed rule, we indicated paid to contractors in a competitive bids that are ‘‘reasonable.’’ Numerous
that we were still in the process of acquisition area are expected to be less commenters suggested that CMS use the
determining the appropriate approach that the total amounts that would Adjustment Factor Method (AFM) that
for setting payment amounts, as well as otherwise be paid. In order to guarantee was used during the demonstration.
the alternatives considered and outlined that we implement this section to
above, and invited comments on our Because suppliers were paid at least as
ensure that we achieve savings for the much as they bid in aggregate,
proposed methodology. Medicare program, we must require bids
Comment: Several commenters commenters believed that the AFM
to be at or below the current fee would provide sufficient protections to
expressed concerns that the proposed schedule for the item. This will
method to determine the single payment encourage small suppliers to bid. One
preclude our setting single payment
amount would result in suppliers commenter suggested setting the
amounts for certain items above the fee
submitting low bids and only offering payment amount at the 90th percentile
schedule and causing contract suppliers
the lowest cost devices. They believed of winning bids or not lower than 5
to attempt to shift utilization to these
that quality and access would be percent below the highest winning bid.
items because of the higher payment
impacted by the use of the median bid. Another commenter recommended
amounts. Without this safeguard, we are
They further indicated that requiring calculation of the single payment
concerned that suppliers might simply
savings on each item rather than in the amount only from those bids that lie
start furnishing an alternative item,
aggregate encourages suppliers to bid on within one standard deviation of the
because the physician’s order may not
the oldest, lowest priced product within mean of the bids. One commenter
be item specific, within the same
each HCPCS code. The commenters product category because the item may supported the use of a median
suggested that CMS base savings at the have a greater potential for higher calculation as a statistically valid
product category level and not for each profits. In addition to increased method for determining the single
individual code. expenditures, this could also result in payment amount. Lastly, some
Response: We disagree with these less appropriate items being furnished commenters recommended that CMS
commenters. We recognize the necessity to Medicare beneficiaries. pay contract suppliers their bid amounts
for a process to identify and eliminate In addition, we believe that basing or the single payment amount,
irrational, infeasible bids. As required in product savings at the item level will whichever is lower. These commenters
§ 414.414(b)(4), each supplier must guarantee assurance of savings for the believed that this would be consistent
submit a bona fide bid that is complies Medicare DMEPOS Competitive Bidding with the statutory payment basis of the
with all the terms and conditions Program because accepting bids above fee schedule or the actual charge,
contained in the RFB. Also, as discussed the fee schedule for certain products whichever is less.
in section XIV of this final rule, we will may result in these items being Response: We disagree with the
establish a formal complaint and furnished as an alternative to other concerns raised by commenters
monitoring system for each CBA. items within the product category, regarding the use of median bid to set
Specifically, we will direct the CBIC to which would increase their utilization the single payment amount. We believe
establish a monitoring program that and expenditures compared to the that the use of the median takes into
includes beneficiary satisfaction current levels. consideration all bids submitted and
indicators and supplier performance Comment: Several commenters argued accepted and not just the high and low
indicators. that the use of the median bid to set the bids. We further believe that the median
is not influenced by outliers at the Secretary to determine a single payment the single payment amount in
extremes of the data set. For this reason, amount for each item in each CBA based §§ 414.416(a) and (b), by adopting
the median is often used when there are on the bids submitted and accepted for paragraph (a) in final (with technical
a few extreme values that could greatly that item. A ‘‘single payment amount’’ revisions), revising paragraph (b)(1) to
influence the mean and distort what is one amount, and does not lend itself address how the single payment will be
might be considered typical. We believe to an interpretation that would allow us computed when there is an even
the median of the accepted bids would to pay the lesser of the two amounts. number of winning bids. We are also
represent a reasonable payment amount We recognize the necessity for a adding new § 414.414(b)(4), which
and does not favor large or small process to identify and eliminate provides that each supplier must submit
suppliers, and we believe this approach irrational, infeasible bids. Accordingly, a bona fide bid that complies with all of
is more equitable than other approaches we will be evaluating bids to ensure that the terms and conditions in the RFB.
suggested in the comments. Regarding they are bona fide, and we may request
that a supplier submit additional B. Rebate Program
access, if a winning supplier does not
enter into a contract because it is not financial information, such as In the May 1, 2006 proposed rule (71
able to furnish the items at the median, manufacturer invoices, so that we can FR 25680), we proposed to allow
we believe that access will not be verify that the supplier can provide the contract suppliers that submitted bids
adversely affected because we will be product to the beneficiary for the bid for an individual item below the single
selecting a sufficient number of contract amount. If we conclude that a bid is not payment amount to provide the
suppliers to ensure that demand is met bona fide, we will eliminate the bid beneficiary with a rebate (proposed
in the CBA. In addition, we believe that from consideration. § 414.416(c)). We stated in the preamble
most, if not all, of the winning suppliers Comment: Several commenters of the proposed rule that the rebate
will be willing to furnish items in the suggested that a flaw in using the would be equal to the difference
product category at the single payment median methodology is that it is highly between their actual bid amount and the
amounts. dependent on whether there are an even single payment amount. The following
In addition, section 1847(b)(5)(A) of or odd number of suppliers in the final example illustrates how the rebates
the Act states that payment shall be array. would be applied under this proposed
based on bids submitted and accepted. Response: As included in our approach:
The single payment amount will be discussion in the preamble of the If, based on the bids received and
determined from only those bids that proposed rule regarding the use of the accepted for an item, we determined
are considered ‘‘acceptable,’’ meaning median, in cases where there is an even that the single payment amount for the
that the supplier meets all quality, number of winning bidders for an item, item was $100, Medicare payment for
financial, and eligibility standards and we would employ the average (mean) the item would be 80 percent of that
that the bid is in the wining range. For for the two bid prices in the middle of amount, or $80, and the coinsurance
this reason, we believe that the single the array to set the single payment amount for the item would be 20
payment amount should be amount. We are adding this rule to the percent, or $20. However, if a contract
representative of all of the accepted bids final regulations at § 414.416(b)(1). As supplier submitted a bid of $90 for this
and not just the highest or the lowest noted in the response to the previous item and chose to offer a rebate, the
bids. We further believe that using the comment, we believe that the use of the rebate amount would be equal to the
adjustment factor is not reflective of the median is not a flawed methodology. difference between the single payment
actual bids accepted because it is only Comment: One commenter suggested amount ($100) and the contract
reflective of the pivotal bid. We do not that CMS follow defined procedural supplier’s actual bid ($90), or $10.
believe that the adjustment factor is rules to select winning suppliers and Therefore, after the contract supplier
necessary to ensure that small suppliers determine the single payment amount, received the Medicare payment of $80
have the opportunity to be considered similar to the process that it has and the $20 coinsurance, the contract
for participation in the competitive developed for the National Coverage supplier would be responsible for
bidding program because the median Determination (NCD) process. For providing the beneficiary with a $10
represents a reasonable payment based example, the commenter suggested that rebate. We solicited comments on how
on accepted bids from suppliers that are CMS ensures that the public is informed to handle those cases in which the
at or below the pivotal bid. We note that at the time it initiates the process, rebates would exceed the copayment
we discuss special provisions for small provides for public input, and arranges amount.
suppliers in section XI. of this final rule. for all of these processes to occur during Before deciding to propose this
We will only be entering into contracts a defined time period. methodology, we considered whether to
with those suppliers that agree to accept Response: This final rule outlines a make the rebates mandatory or
the single payment amount. Moreover, defined process that we will follow to voluntary. We proposed that the rebates
as we explain above, we believe that select contract suppliers and determine be voluntary but that contract suppliers
using the median bid would not result the single payment amounts for each could not implement them on a case-by-
in an insufficient payment, and we also item in each product category in each case basis. If a contract supplier
believe that our contract supplier CBA. In addition, we are developing an submitted a bid below the single
selection methodology will ensure that extensive educational program that will payment amount and chooses to offer a
we have a sufficient number of contract educate and inform the public about the rebate, it must offer the rebate to all
suppliers to meet the demand for processes that will be used to conduct Medicare beneficiaries receiving the
competitively bid items in each product the bidding and to determine the competitively bid item to which the
category in each CBA. winning suppliers. Our plans for rebate applies. This commitment would
Further, we disagree with the education are described in more detail be incorporated into the contract
commenters’ suggestion that we would in the DMEPOS section of the FY 2007 supplier’s contract. Stated another way,
have the authority under the Act to pay IRF final rule (71 FR 48354). while the decision to offer rebates might
suppliers the lower of their bid amounts After consideration of the public be voluntary, once a contract supplier
or the single payment amount. Section comments we received, we are decides to provide rebates, the rebates
1847(b)(5)(A) of the Act requires the finalizing our methodology for setting would become a binding contractual
condition for payment during the term to reward bidders that submit good implementation of rebates. The
of the contract with CMS. Moreover, the faith, competitive bids. commenters stated that one supplier
contract supplier could not amend or Several commenters suggested that serving beneficiaries within the CBA
otherwise alter the provision of rebates rebates encourage suppliers to offer and outside the CBA would have two
during the term of the contract. Contract lower cost, less innovative products, different sets of rules because only CMS
suppliers would also be prohibited from particularly from large manufacturers. may inform the beneficiaries which
directly or indirectly advertising these Several commenters suggested that the suppliers offer a rebate. They asked how
rebates to beneficiaries, referral sources, use of rebates leads to beneficiaries a supplier should answer a direct
or prescribing health care professionals. selecting suppliers based solely on question about rebates when posed by a
However, this would not preclude CMS availability of rebates, rather than referral source or patient. They added
from providing to beneficiaries quality of care. The commenters that often the cost to issue a rebate
comparative information about contract indicated that this could lead to poorer check exceeds the value of the check
suppliers that offer rebates. patient outcomes. They added that large issued and asked how suppliers will
We proposed that only contract manufacturers can spread the cost of integrate a rebate with the patient’s Part
suppliers that submitted bids below the discounts across many products, but B supplemental insurance plan where
single payment amount for a small manufacturers may have only one the plan pays 100 percent of the
competitively bid item would have the or two products that would not support copayment or when the copayment is
choice to offer rebates. Contract rebates. The commenters asserted that waived because of financial hardship.
suppliers that submitted bids above the OIG states that the use of giveaways also One commenter suggested that the
single payment amount would not be favors large providers with greater rebate provision violates the single
allowed to issue rebates because their financial resources for such activities, payment amount provision of the Act by
actual bids for an individual item would disadvantaging smaller providers and permitting different payment amounts
be above this amount. businesses. They further added that the for different contract suppliers.
Our reason for proposing to allow rebate program may provide an One commenter suggested that the
these contract suppliers to offer rebates incentive to large suppliers to ‘‘lowball’’ rebate proposal may also have the effect
was to allow beneficiaries the ability to their bids, resulting in reduced of allowing retail store DMEPOS
realize additional savings and the full marketplace competition by small suppliers to ‘‘cherry pick’’ that portion
benefits of the Medicare DMEPOS suppliers. of the DMEPOS business that is least
Competitive Bidding Program. One commenter suggested that if CMS costly to provide, driving up the costs
We solicited comments concerning offers a rebate, it should not be of providing full-line services without
the rebate process outlined in the voluntary. Requiring suppliers to supply any comparable savings to the program.
proposed rule. We indicated that we a rebate would assure that the suppliers Several commenters suggested that
would continue to evaluate the fraud are not bidding low just to be selected rebates should not exceed the
and abuse risks of the proposed rebate and then have their payments raised to copayment amount in order to reduce
program, and we specifically solicited the median level automatically. The risks of overutilization. They believed
comments on such risks. commenter believed that this would that the current proposal could
Following is a summary of the public prevent deliberate low-ball bidding. eliminate all copayments in some cases
comments received. Several commenters questioned and lower the copayment below the
Comments: Several commenters whether rebates should become a amount that would otherwise typically
expressed concern over the proposed binding contractual commitment when apply in every case. Several commenters
rebate program. They argued that the an express contractual provision would suggested that the rebate runs counter to
rebate program would be illegal and not exist. a fundamental principle of the Medicare
violate the antikickback statute, the Several commenters suggested that a program that requires beneficiary
beneficiary inducement statute, and the rebate would be logistically impossible coinsurance. They pointed out that the
Medicare provisions of the Social for a supplier to implement in its purpose behind the 20-percent
Security Act governing the waiver of information system, branch operation, copayment is to discourage excessive or
copayments. They argued that the rebate and accounts receivable processes. They unnecessary utilization and stated that
program would promote fraud and added that physicians would have no CMS is not authorized to change the
abuse by encouraging beneficiaries to way of keeping the rebate logistics Medicare Part B plan design by using
purchase unnecessary supplies and the straight. The commenters believed that rebates that would reduce or eliminate
program will entice suppliers to ‘‘game’’ CMS would also experience difficulties copayments.
the program. They further stated that the in monitoring the program. Another Although we proposed that the rebate
OIG has issued numerous opinions that commenter inquired in what form CMS program be voluntary, one commenter
emphasize ‘‘that providing things of would require the rebate to be suggested that our proposal to
value to beneficiaries in exchange for distributed, that is, gift certificate to disseminate information about suppliers
referrals is unlawful.’’ The commenters family store, a money order, check, that participate in the rebate program
believed that rebates also create tension cash, among others. The commenter also would create an unfair marketing
with the Federal Anti-Kickback safe asked if claims are denied and a rebate advantage to those suppliers.
harbor statute. They pointed out that, to already paid, who would be responsible Response: After considering the
qualify for a safe harbor, a rebate must for collecting from the patient. comments we received, we have
be disclosed in writing prior to the Several commenters suggested that decided that rebates will not be
initial purchase. They added that the suppliers that pay rebates are less likely authorized under the Medicare
proposed rule expressly prohibits a to provide service in those areas where DMEPOS Competitive Bidding Program
supplier from advertising either directly the supplier has bid above the contract and the provisions of proposed
or indirectly to beneficiaries. One price and will focus on those items § 414.416(c) are not included in this
commenter supported the inclusion of where the payment amount is greater final rule. We believe that competition
the rebate provision in the program as than the supplier’s bid amount. will drive suppliers to compete for
an innovative means to control Several commenters suggested that beneficiaries based on value and
beneficiary’s out-of-pocket expenses and logistical challenges would exist with quality. We also recognize that requiring
rebates might raise fraud and abuse One commenter asked about the and identified a number of provisions
concerns. In addition, we have concerns ramifications to a subcontractor if the that will be included in the contract. We
that rebates may provide incentives to contract supplier violates its contract also stated that we might specify other
beneficiaries to obtain unnecessary with CMS. One commenter stated that terms in the contracts themselves. We
items. the requirements for subcontractors do not believe that an additional
In summary, we are not adopting in need to be clearly defined. The rulemaking is required in order to
this final rule the provisions of commenter asked if subcontractors specify other terms and conditions that
proposed § 414.416(c). would need to satisfy the same might be included in the contracts. In
accreditation and financial standards addition, we believe that our discretion
IX. Terms of Contracts required of contract suppliers and, if so, to specify the contract terms and
Section 1847(b)(3)(A) of the Act gives how CMS would enforce this. conditions would allow us to specify
the Secretary the authority to specify the Response: Our rules would not the terms and conditions for each new
terms and conditions of the contracts preclude a supplier from submitting an competition.
used for competitive bidding and we individual bid for a product category in Comment: One commenter stated that
proposed in § 414.422(a) to implement a CBA and also becoming a some bidders are likely to be large
this provision. Section 1847(b)(3)(B) of subcontractor to another supplier that nationwide or regional entities that are
the Act requires the Secretary to submits a bid in the same CBA for the publicly traded companies. The
recompete contracts under the Medicare same product category. As an example, commenter encouraged CMS to limit
DMEPOS Competitive Bidding Program a supplier can bid to become an oxygen information concerning ownership to
at least every 3 years and we proposed contract supplier and be awarded a those owners required to be disclosed in
in § 414.422(b) to implement this contract and still be a subcontractor for regular filings with the Securities and
provision. The length of the contracts another oxygen contract supplier. In Exchange Commission.
may be different for different product addition, a supplier that submits a bid Response: Our purpose for requesting
categories, and we proposed to specify and loses can become a subcontractor to information about key personnel is not
the length of each contract in the RFBs. a contract supplier. We will not evaluate the same as that for the Securities and
subcontractors to determine if they meet Exchange Commission. We need to
A. Terms and Conditions of Contracts the accreditation, quality, financial, and obtain information about key personnel,
(§§ 414.422(a) Through (c)) eligibility standards because a both corporate and local, in order to
In the May 1, 2006 proposed rule (71 subcontractor to a contract supplier determine the appropriateness of the bid
FR 25680), we proposed that the cannot itself be a contract supplier and submission and to ensure no key
competitive bidding contracts will cannot submit claims under the personnel have been the subject of legal
contain, at a minimum, provisions Medicare DMEPOS Competitive Bidding actions, or have been sanctioned or
relating to the following: Program. However, a supplier may not convicted of a crime. This information
• Covered product categories and subcontract with any supplier that has will also be useful in determining
covered beneficiaries operating policies. been excluded from the Medicare common ownership to ensure that
• Subcontracting rules. program, any State health program or companies are not bidding against
• Cooperation with us and our agents. any other government executive branch themselves to furnish the same product
• Potential onsite inspections. procurement or nonprocurement categories in the same CBA by
• Minimum length of participation. activity. In addition, the subcontractor submitting different bids for commonly
• Terms of contract suspension or will not have to submit a bid to be a owned separate locations.
termination. subcontractor. However, the contract Comment: Numerous commenters
• Our discretion not to proceed if we supplier will be responsible for urged that the contract length be the
find that the Medicare program will not fulfilling all of the terms of its contract, same for all products in a CBA to
realize significant savings as a result of even if it uses one or more minimize confusion among
the program. subcontractors. In other words, if a beneficiaries, referring physicians, and
• Compliance with changes in contract supplier breaches its contract suppliers. The commenters stated that,
Federal laws and regulations during the due to its subcontractor’s failure to because there are many variables that
course of the agreement. perform, the contract supplier will be stakeholders will have to understand
• Nondiscrimination against held liable for the breach. Therefore, the (such as which products are part of
beneficiaries in a CBA (so that all contract supplier needs to ensure that competitive bidding, boundaries of
Medicare beneficiaries inside and the subcontractor is performing its CBAs, among others), contracts of
outside of a CBA area receive the same duties appropriately. In their response different lengths of time within a CBA
products that the contract supplier to the RFB, bidders must submit any will be time consuming, costly, and
would provide to other customers). plans for subcontracting. confusing for all involved. One
• Supplier enrollment and quality Comment: One commenter stated that commenter stated that the length of each
standards. a number of different proposed contract contract should be specified in the RFB.
• The single payment amounts for terms were not listed in the proposed Another commenter recommended that
covered items. rule. The commenter presumed that the CMS recompete the contracts more
• Other terms as CMS may specify. actual contract provisions will be frequently in the early stages of the
Comment: One commenter asked if a subject to a separate notice of proposed competitive bidding program, in order
supplier that is a subcontractor to rulemaking in order to permit suppliers to capitalize on what it learns during
another supplier can submit a bid to to offer more productive comments. One this initial period.
furnish items in one product category in commenter suggested that CMS clearly Response: We agree that it is
a CBA and also be a subcontractor to define contract requirements so that important that we capitalize on what we
another supplier that submits a bid to suppliers can ensure that they meet learn during the early stages of
furnish items under another product Medicare guidelines. competitive bidding. However, we want
category. Another commenter also asked Response: In the proposed rule, we to retain the option for staggering the
if a losing bidder can become a discussed the details of the Medicare contract period for different product
subcontractor to a contract supplier. DMEPOS Competitive Bidding Program categories to allow for any changes in
coding or in technology and to facilitate contract supplier to Medicare its value as an individual variable in
use of the authority to phase in items beneficiaries be the same items that the determining whether the supplier is
under the programs. We would not have contract supplier furnishes to other eligible to receive a contract award.
different contract lengths for items customers is unrealistic. The Response: As proposed in
within the same product category commenters argued that this provision § 414.422(a), contract suppliers must
within the same CBA. The length of would impair beneficiary access to comply with all the terms of their
each contract will be specified in the DMEPOS and would limit the savings contracts, including any option
RFB; however, no contract will be that otherwise would be achieved exercised by CMS, for the full duration
longer than 3 years because section through competitive bidding. Another of the contract period. Once accredited,
1847(b)(3)(B) of the Act requires us to commenter stated that the proposed rule contract suppliers will be required to
recompete the competitive bid contracts provided very little detail about what retain that accreditation throughout the
no less often than every 3 years. would be expected or how CMS would duration of the contract. Accreditation
Comment: One commenter proposed ensure that the nondiscrimination requirements are mandatory and an
that CMS require all suppliers in a contract provision is being met and important step forward to make sure we
single CBA to be accredited in the same urged CMS to discuss the have quality suppliers. Compliance
year and then to place the contracts for nondiscrimination clause in more detail plans may be helpful to suppliers in
all product categories in that CBA on so that suppliers and beneficiaries will meeting Medicare requirements;
the same 3-year cycle as the be able to understand what CMS has in nevertheless, all suppliers have to meet
accreditation requirement. mind, and know what protections are our applicable standards and
Response: We believe that this being afforded to beneficiaries by this accreditation requirements. Therefore,
commenter’s suggestion would be too provision. we do not consider it appropriate to give
difficult to implement from a logistical Response: We believe that Medicare extra weight in the selection process to
standpoint and too regimented an beneficiaries should receive the same suppliers with compliance programs.
approach to adopt. Suppliers have the items that the contract supplier would Comment: One commenter suggested
option of pursuing accreditation at any furnish to other customers and, that CMS require contractors to
time. However, they must be accredited therefore, we proposed to include a subcontract portions of contracts to
before we can award contracts under the nondiscrimination provision in the minority or female-owned businesses to
Medicare DMEPOS Competitive Bidding contracts. One of the main objectives of comply with Federal contracting
Program, unless a grace period applies. the Medicare DMEPOS Competitive requirements.
As we explained above, in the first Bidding Program is to ensure that Response: Due to size, complexity and
round of bidding, a supplier’s beneficiaries have access to quality nature of this program, we do not
accreditation must at least be pending DMEPOS. Therefore, we have built believe it would be feasible to require
before a bid can be submitted. In safeguards into the competitive bidding subcontracting with minority or female
addition, a contract supplier that program to ensure there is continued owned businesses and still meet our
obtains its accreditation must maintain access to quality medical equipment other goals. We also note that these
that accreditation for the remainder of and supplies. We believe the contracts are not procurement contracts
the contract period. nondiscrimination clause will ensure and, therefore, are not subject to the
Comment: One commenter that Medicare beneficiaries have access SBA or FAR requirements. Pursuant to
recommended that no new products to the same items as other individuals. section 1847(b)(6)(D) of the Act, we are
should be added during a contract term. One mechanism that we would use to only required to give small suppliers
The commenter stated that suppliers enforce the nondiscrimination clause is certain considerations.
may or may not have access to the new the complaint and monitoring system Comment: One commenter urged
products and, as a result, may not be that we plan to implement. Under this CMS not to prohibit contract suppliers
able to furnish them. system, which is discussed more fully from turning away beneficiaries, since
Response: We agree with this in section XIV. of this final rule, there will be more than one contract
comment. If a new product does not fit beneficiaries, referral agents, providers, supplier per CBA. The commenter
under a code for which we have and suppliers can assure us that the stated that there may be circumstances
conducted competitive bidding a single supplier conducts business in a manner in which a contract supplier is already
payment amount will not be applied that is beneficial to Medicare and operating beyond capacity and would
until we conduct another round of beneficiaries. We have added this not be able to furnish items to
bidding A further discussion of our proposed requirement to the final additional beneficiaries. In addition, the
rules regarding HCPCS codes changes regulation at § 414.422(c). commenter noted that a contract
can be found in section VI.D.4 of this Comment: One commenter noted that supplier may not believe that a
final rule Under section 1847(b)(3)(B) of CMS should consider nonprice requested item is appropriate for the
the Act, we are required to recompete variables, such as a supplier’s beneficiary.
the contracts no less often than every 3 compliance with Medicare program Response: We continue to believe that
years. For purposes of competitive requirements when awarding contracts contract suppliers should not be able to
bidding, we cannot add additional for certain DMEPOS. The commenter turn away beneficiaries because we do
codes for items for which we have not also recommended that CMS revise not want to create an opportunity for
done bidding because we need to § 414.422(a) of the proposed regulations contract suppliers to turn away
conduct bidding before we can so that it would require a contract beneficiaries who have the most
determine the single payment amount supplier to comply with the difficult medical conditions or are
for these items. We would pay for these accreditation requirements specified in otherwise difficult to serve. We note
codes under the DMEPOS fee schedule. § 414.414(c) for the duration of the that we proposed that there would be a
Comment: Several commenters stated contract period. One commenter limited exception to this requirement if
that our proposal to include in each suggested that CMS retain the discretion there is a particular item that a
contract a nondiscrimination provision, to determine the likely value a physician or treating practitioner has
which would require that the particular supplier’s compliance ordered to avoid an adverse medical
competitively bid items furnished by a program brings Medicare and consider outcome, but is an item that the contract
supplier does not normally furnish. In after the order is received. The not submitted for items covered under
this case, if the contract supplier could commenter stated that delays could lead a manufacturer’s product warranty. To
not furnish the item, the requirements at to adverse events for beneficiaries. be eligible to submit a bid, DMEPOS
§ 414.420(b) of this final rule would Response: We do not believe it is suppliers must meet the supplier
apply. appropriate to establish a general standard found in 42 CFR 424.57(c)(1),
Comment: One commenter suggested timeframe within which all which require them to comply with
there be some mechanism in place to competitively bid items must be applicable Federal and State licensure
prevent the awarding of contracts to delivered to beneficiaries. Due to the and regulatory requirements. FDA
suppliers that do not provide at least individual characteristics of the regulations and requirements are
some percentage of the services products and beneficiary circumstances, applicable to items paid for under the
themselves. The commenter believed the items will vary widely in terms of competitive bidding program just as
that quality will be lost if winning whether they are in stock and must be they currently apply to items paid for
bidders are allowed to subcontract the customized. However, a contract under the fee schedule methodology.
entire or a large portion of the product supplier should furnish items to Comment: One commenter noted that
category, and that beneficiaries will beneficiaries in accordance with the proposed rule would require
receive lower quality items because the timeframes that meet the ordering suppliers to provide information as
winning bidder will make a profit on physician’s, or treating practitioner’s, requested regarding the integrity of each
items that it does not actually furnish. prescription. We also note that under product sold and billed under the
Another commenter suggested that in the final quality standards (under Medicare DMEPOS Competitive Bidding
order to prevent abuse of the bidding Consumer Services) that we issued, in Program, as well as information on the
process, the competitive bidding August 2006, and with which suppliers integrity of the suppliers’ businesses as
contracts should allow a winning must comply in order to participate in a whole. The commenter believed that
supplier to subcontract a portion of its the Medicare DMEPOS Competitive suppliers should not be required to
services only if the subcontractor Bidding Program, the supplier must provide information on product
entities satisfy the same quality and ensure it provides beneficiaries with integrity as long as there is a SADMERC
accreditation standards that must be information regarding expected coding verification that the product has
satisfied by the winning suppliers. timeframes for receipt of delivered items been approved for billing under a
Response: As explained above, we and the supplier must verify that particular HCPCS code. The commenter
will request information on the RFBs beneficiaries have received the items. In also believed that a rule that would
about the use of subcontractors. We addition, under § 424.57(c)(12) of our require suppliers to provide information
believe that the eligibility standards, regulations, which suppliers must also on their business integrity was
applicable accreditation standards and satisfy in order to participate in the inappropriate because it would
financial standards will ensure that program, suppliers are responsible for duplicate information provided during
contract suppliers are reputable, viable the delivery of Medicare-covered items certification and accreditation.
businesses and not just companies that to beneficiaries and must maintain proof Several commenters requested that
subcontract their work. In addition, we of delivery. The quality standards also CMS clarify whether it intends for all
will hold the contract supplier require the supplier to ensure that it suppliers to have a corporate
responsible for meeting all the terms provides beneficiaries with the compliance program, a mission
and conditions of its contract, whether necessary information and instructions statement and operating principles, and/
or not one of those terms is actually on how to use Medicare-covered items or other ethical aspects of their
performed by a subcontractor. safely and effectively. business; or clearly defined
Comment: One commenter stated that Comment: One commenter stated that organizational conflicts of interest. One
lack of timely DMEPOS access would be FDA regulations require manufacturers, commenter recommended that the
harmful for beneficiaries who are not suppliers, to evaluate product definition of ‘‘affiliate’’ be simplified for
clinically ready to return to home or to complaints and inform the FDA if the public companies with multiple
the community from the hospital. The problems are considered to be locations tied to a single tax
commenter also noted that delaying the reportable events. The commenter noted identification number so that suppliers
discharge of Medicare beneficiaries due that CMS should require suppliers to do not have to provide the names or
to restricted and untimely availability of inform the relevant DMEPOS supplier numbers of all locations on an
specific DMEPOS would produce manufacturer of any problem with application for a single CBA. The
serious problems for beneficiaries’ equipment or supplies, including any commenters requested that CMS
continuity of care and also for the adverse effects involving Medicare provide additional detail regarding the
hospital. The commenter stated that, beneficiaries, so that the manufacturers level of employee information it expects
from a hospital perspective, it is will be in a position to address the to be specified, for example, the highest
essential for CMS to ensure that problem, report to the FDA, or take ranking local manager and title or the
DMEPOS be available on a timely basis other corrective action if needed. The chief executive officer or chief operating
and to sanction providers for untimely commenter also noted that CMS should officer of a public company; and that
service. The commenter recommended in no way imply that a product warranty CMS define the term ‘‘customer service
that CMS take additional steps to is the supplier’s legal obligation, as protocol’’ because different companies
prevent these problems, including opposed to that of the product define the customer service process
imposing specific sanctions on contract manufacturer. differently.
suppliers that fail to timely furnish Response: The Medicare Claims Several commenters recommended
DMEPOS to these hospital patients, Processing Manual, Chapter 20-Section that CMS also require each supplier to
because such delays would delay 40.1 provides that suppliers are provide: a description of its corporate
discharge and jeopardize a patient’s prohibited from submitting a claim for compliance program; its procedure for
clinical progress. Another commenter a payment for items and services that ensuring that it does not knowingly
stated that beneficiaries should be are covered by manufacturer or supplier employ any individuals who have been
guaranteed prompt receipt of items, if in warranties. The supplier on record is debarred from participating in
stock, within a specified period of time responsible for ensuring that a claim is government programs; its procedure for
conducting background checks on contract we enter into with a supplier change ownership. One commenter
employees who will have direct contact under the Medicare DMEPOS suggested that notification regarding
with beneficiaries; awards, honors, or competitive bidding program. change of ownership be required within
other distinctions issued to the 30 days after change has occurred. The
B. Change in Ownership (§ 414.422(d))
company; a description of its commenters believed that the proposed
credentialing program if a subcontractor In the May 1, 2006 proposed rule, rule fails to take into consideration the
will be used to furnish items to under proposed § 414.422(d), we short time period in which acquisitions/
beneficiaries; a description of its proposed to evaluate a supplier’s mergers occur. The commenters added
emergency preparedness plan; and a ownership information, its compliance that the 60-day requirement is a
description of its process for selecting with appropriate quality standards, its burdensome restraint on legitimate
products. These commenters also financial status, and its compliance corporate transactions, and that
recommended that CMS independently status with government programs before acquisitions and mergers frequently
verify each supplier’s disclosure by we determine that a supplier can qualify occur in a much more compressed
using objective measures. Two as a contract supplier if there is a timeframe. They believed that our
commenters suggested that CMS explain change of ownership. For this reason, proposed timeframes are unrealistic,
and define the requirements and terms we proposed that suppliers would not and as a result, CMS could be notified
that would be included in the RFBs, be granted winning status by merely of numerous acquisitions that are not
including the conflicts of interest and merging with or acquiring a contract consummated. They emphasized that it
affiliated companies of the supplier. supplier’s business. We do not want to is important that the prior notice
One commenter suggested that CMS allow suppliers to adopt a strategy of requirement be optional and that notice
consider requesting complete disclosure circumventing the regular bidding promptly after transaction would be
on corporate integrity agreements, process by gaining winning status appropriate to protect the Medicare
entered into by the supplier as well as through acquisitions of or mergers with program and beneficiaries.
OIG convictions against the supplier, contract suppliers or to violate any The commenters pointed out that
and that CMS conduct criminal anticompetition prohibitions. Therefore, there generally is no advance notice
background checks. we proposed that contract suppliers requirement prior to completing an
Response: We appreciate these must notify CMS in writing 60 days acquisition and/or merger. They
comments. After consideration of the prior to any changes of ownership, requested clarification that any such
comments, we believe that the most mergers, or acquisitions being finalized. notices furnished to Medicare will
appropriate place to list the specific We proposed that we would have the remain confidential until the successor
information that we will need from each discretion to allow a successor entity, entity notifies CMS that the transaction
supplier is in the RFB. Our purpose in after a merger with or acquisition of a has been completed. To the extent
collecting such information is to contract supplier, to function as contract notice is required they recommended
evaluate suppliers’ bids, and we have supplier when— that the final rule should make it clear
attempted to minimize the burden on • There is a need for the successor that notice will be confidential and
bidders as much as possible. Therefore, entity as a contractor to ensure exempt from disclosure under
the specific information to be collected Medicare’s capacity to meet expected Exemption 4 of the Freedom of
will be detailed in the RFB. We will be beneficiary demand for a competitively Information Act (FOIA) and
requesting information such as: the bid item; and implementing HHS regulations as trade
supplier’s identifying information; • We determine that the successor secrets. The commenters also
information regarding the items that the entity meets all the requirements recommended that commercial or
supplier would furnish if awarded a applicable to contract suppliers. financial information obtained from a
contract; financial information; and We proposed that the successor entity person should be privileged or
corporate integrity information must agree to assume the contract confidential and that this is necessary so
We believe that many of these items supplier’s contract, including all that public companies can appropriately
are best addressed in the quality contract obligations and liabilities that maintain sensitive nonpublic
standards and accreditation standards. may have occurred after the awarding of information and at the same time ensure
We are using the RFB notice and the contract to the previous supplier. that disclosure is made appropriately
comment period to finalize the list of The successor entity is legally liable for when that disclosure is timely under
items that we are going to require. the nonfulfillment of obligations of the applicable securities regulations that
We are adding a clause to § 414.422(a) original contract supplier. protect shareholders.
which provides that we will specify the In addition, we proposed to only Response: We continue to believe that
terms and conditions in the competitive allow the successor entity to function as sufficient advance notice is necessary to
bidding contacts, and finalizing the a contract supplier if it executed a allow us to evaluate whether a new
remainder of § 414.422(a) which novation agreement with CMS. owner will meet all of the requirements
provides that a contract supplier must Comment: Numerous commenters to be a contract supplier under the
comply with all terms of its contract, objected to the proposed provision that Medicare DMEPOS Competitive Bidding
including any option exercised by CMS would require contract suppliers to Program. However, we are revising the
for the full duration of the contract notify CMS in writing 60 days prior to language under § 414.422(d)(1) to clarify
period and adopting revised any changes of ownership, mergers, or what a contract supplier’s obligations
§ 414.422(a) as final. acquisitions being finalized and are in the event of a change of
We are adopting as final, without recommended that the 60-day prior ownership. Specifically, § 414.422(d)(1)
modifications, § 414.422(b), which notice provision be modified to a notice now provides that if a contract supplier
provides that we will recompete the period of no more than 30 days. The is considering or negotiating a change in
competitive bidding contacts at least commenters also recommended that if ownership, the contract supplier must
once every 3 years. the transaction is set to close within less notify CMS 60 days before the
We are finalizing § 414.422(c) which than 30 days, the parties should have an anticipated effective date of the change.
provides that a nondiscrimination obligation to provide notice as soon as Under § 414.422(d)(2), if the supplier
provision will be included in each the parties sign a letter of intent to that acquires or merges with the
contract supplier wishes to itself found in 42 CFR 489.18(a), which in advance of incurring substantial
become a contract supplier, it must meet provides that a change of ownership for transaction costs.
all of our requirements, including a corporation occurs when the merger or Response: As stated in response to the
compliance with applicable quality provider corporation merges into previous set of comments, we plan to
standards, accreditation, eligibility another corporation or the consolidation evaluate the same information required
standards, and financial standards, and of two or more corporations, results in to be submitted by a bidding supplier if
must submit the documentation the creation of a new corporation, and a contract supplier purchases a
required in § 414.414. The new supplier states that the transfer of corporate stock noncontract supplier or if a noncontract
that seeks to become a contract supplier or the merger of another corporation supplier purchases a contract supplier.
must also submit a novation agreement into the provider corporation does not However, if a contract supplier
to CMS 30 days prior to the anticipated constitute change of ownership. purchases another contract supplier, we
effective change of ownership, Response: We want to evaluate will not ask the contract supplier to
indicating that it will assume all duties whether a supplier that acquires or duplicate information we already have
and obligations of the previous contract merges with a contract supplier and that on file.
supplier. We have clarified in wants to become a contract supplier
§ 414.422(d) that if a new entity will be itself meets our standards for being a Comment: One commenter stated that
formed as a result of the merger or contract supplier under the Medicare CMS should be able to assure itself that
acquisition, the existing contract DMEPOS Competitive Bidding Program. the acquired supplier continues to meet
supplier submits to CMS, at least 30 These requirements serve the needs of all obligations and requirements for
days before the anticipated effective the program because we do not want to contract suppliers, and its review
date of the change of ownership, its encourage suppliers to adopt a strategy should be limited to a consideration of
final draft of a novation agreement for of circumventing the regular bidding whether, post acquisition, the acquired
CMS review. The successor entity shall process by gaining winning status supplier: (1) Meets all the requirements
submit to CMS within 30 days after the through acquisitions of or mergers with of a contract supplier; (2) is willing to
effective date of the change of contract suppliers not to violate any assume all obligations under the
ownership an executed novation anticompetitive prohibitions. contract; and (3) has executed a
agreement acceptable to CMS. We We disagree with the commenter that novation agreement. The commenter
understand that the change of suggested that we apply the change of stressed that if CMS desires to
ownership information is highly ownership rules found in 42 CFR encourage all suppliers to bid, the
confidential, and will make every effort 489.18(a) because this section of our contract supplier’s status as the winning
to protect it as required by law. regulation applies only to Medicare Part bidder should be preserved as a
Comment: Numerous commenters A providers, such as hospitals, SNFs, valuable asset for consideration in any
recommended that CMS retain the and HHAs, but competitive bidding commercial transaction.
authority to disallow a successor entity applies to Medicare Part B suppliers. Other commenters were concerned
to participate as a contract supplier only Comment: One commenter stated that about the following issues: the
if CMS determines that allowing the the change of ownership provision successor’s liability for potentially
successor entity to participate as a should not apply when a contract fraudulent activities that could have
contract supplier would have significant supplier, as opposed to a noncontract occurred on the previous company’s
anticompetitive effects. The commenters supplier, purchases or acquires another watch; instances where the new contract
indicated that CMS should not supplier. The commenter noted that if a supplier determines a revised Certificate
unreasonably withhold its approval of a supplier that purchases or acquires a of Medical Necessity (CMN) is needed
change of ownership and that CMS does contract supplier does not intend to be and the physician or treating
not have the authority to, and, in any a contract supplier, there is no reason practitioner is no longer in practice or
event, should not deny winning for this requirement to apply, and if the refuses to execute a new CMN; and the
supplier status to a new owner on the acquiring supplier is already a contract tax implications of restricting change of
basis that its capacity is not necessary supplier, there is no reason to require an ownership transactions to only stock
within the CBA. They added that additional review as to its transactions. The commenter observed
contract suppliers in CBAs will most qualifications. The commenter stated that there may be instances where the
likely experience an increase in the that while it understands the need to sale of a supplier because of the death
value of their business and, therefore, conduct oversight and diligence if the of the owner would be prohibitively
should be able to take advantage of the acquiring supplier is not a contract expensive if executed as a stock
marketplace without interference from supplier, it requested that CMS clearly transaction, leaving the widow with
government agencies if they wish to specify requirements for approval of the little money and no recourse to dispose
lawfully transfer ownership. acquisition if the acquiring party is a of the business.
Several commenters agreed that CMS contract supplier but does not intend for
should not allow a supplier to the supplier it acquires to be a contract Response: As we stated earlier, our
circumvent the bidding process through supplier. requirements regarding change of
mergers or acquisitions, but suggested The commenter also urged that the ownership are intended to provide us
that the proposed rule creates a restraint final rule clarify that the requirements with assurance that the successor entity
of trade situation and/or devalues the for an acquirer would be no more meets all of our requirements before we
business of a supplier that decides to burdensome than the requirements to be can consider it to be eligible to assume
sell the company. a contract supplier because such the previous contract supplier’s
In addition, several commenters requirements could result in an unequal contract. A new contract supplier will
recommended that CMS revise the burden on entities that acquire contract be responsible for meeting all CMS
proposed change in ownership rules so suppliers. The commenter stated that, if program requirements.
that they are consistent with existing additional requirements are to be After consideration of the public
requirements for DMEPOS suppliers. imposed, CMS should state what they comments received, in this final rule we
Other commenters suggested that CMS are explicitly so that the public are finalizing § 414.422(d) as discussed
apply the change of ownership rules understands and can comply with them above.
C. Suspension or Termination of a structure. One commenter asked ‘‘correct the breach condition’’ where a
Contract (§§ 414.422(f) and (g)) whether the provision stating that CMS breach of contract had occurred. We are
In the May 1, 2006, proposed rule (71 could preclude a contract supplier that revising this language to state that CMS
FR 25682), we specified that contract breached its contract from participating may ‘‘[r]equire the contract supplier to
suppliers would be held to all the terms in the competitive bidding program submit a corrective action plan.’’ Also,
of their contracts for the full length of referred only to the program in the at § 414.422(f)(2)(ii), we proposed that
the contract period (proposed supplier’s CBA or the entire Medicare in the event of a breach of contract, CMS
§ 414.422(f)). Any deviation from DMEPOS Competitive Bidding Program. could ‘‘[s]uspend performance under
Response: We believe that defining a the contract.’’ We are revising this
contract requirements, including a
breach of contract as any deviation from language to state that in the event of a
failure to comply with governmental
contract requirements, including a breach of contract, CMS can ‘‘suspend
agency or licensing organization
failure to comply with governmental the contract supplier’s contract.’’
requirements, would constitute a breach
agency or licensing organization CMS agrees with the need for
of contract. We indicated that, if we requirements, will help ensure that procedural safeguards where CMS is
conclude that the contract supplier has contract suppliers do not breach their taking action to terminate a contract
breached its contract, the actions we contract requirements. We have set out supplier’s contract. CMS will provide
might take include, but are not limited a variety of potential actions of varying further guidance regarding the appeal
to, asking the contract supplier to levels of severity that we could take in procedures available to contract
correct the breach condition, the event of a breach of contract, such suppliers for termination actions, as
suspending the contract, terminating the as requiring that contract supplier well as other enforcement actions
contract for default (which might submit a plan to correct the deficiency involving contract supplier contracts, at
include reprocurement costs), that created the breach of contract, a future date.
precluding the supplier from suspending the contract, precluding the Comment: One commenter requested
participating in the competitive bidding contract supplier from participating in greater clarification of the phrase ‘‘for
program, or availing ourselves of other the competitive bidding program in the convenience’’ used in the preamble to
remedies permitted by law. We future, revoking the supplier number of the proposed rule (71 FR 25682) to
indicated that we also would have the the contract supplier, and/or availing describe a basis for CMS to terminate a
right to terminate the contract for ourselves of other remedies allowed by contract. The commenter stated that at
convenience (proposed § 414.422(g)). law. In deciding which course of action a minimum there should be an explicit
Comment: Several commenters to take, we will consider the nature of notice period required prior to
believed that CMS must include the breach, including whether the termination. Another commenter
additional procedural safeguards for breach is indicative of a substantial recommended deleting this provision.
contract suppliers before terminating failure to comply with the terms of the Response: In response to comments,
their contracts. The commenters supplier’s contract, and the extent to CMS has decided to delete this
suggested that CMS give a contract which the efficient and effective provision.
supplier notice that it believes the administration of the Medicare program Comment: One commenter stated that
supplier has breached its contract, an has been compromised by the breach. the proposed rule does not explicitly
opportunity and adequate timeframe for We are making several changes to the prohibit the Secretary from unilaterally
the contract supplier to cure the breach, proposed rule. In response to the changing the price of an item in a CBA
and a review or appeal mechanism if the comments which addressed the during the term of the competitive
contract supplier’s contract is potential problems that might stem from bidding contract. Several commenters
terminated. One commenter stated that our proposal to permit CMS to require also stated that there should be a
contract suppliers should only be terminated suppliers to reimburse CMS provision that allows suppliers to
terminated for ‘‘material breach’’ of their for reprocurement costs, proposed at terminate, without being in breach of
contracts. § 414.422(f)(2)(iii), we are deleting that contract, in cases of hardship or
Another commenter noted that the proposal. We are also making several material change in circumstances that
proposed rule grants CMS the unilateral revisions to our proposal to permit CMS are not the fault of or within the control
right to terminate a contract without to terminate a contract with a contract of the supplier if unexpected
cause which eliminates a principal supplier in the event of a breach of circumstances arise that hinder its
advantage for contract suppliers. The contract or to take other action against ability to render performance. Another
commenter stressed that without a supplier after a breach of contract has commenter stated that the lack of parity
modification of the proposed rule, occurred. We have eliminated the in the ability of the contracting parties
suppliers would be dissuaded from phrase ‘‘for default’’ from to terminate may serve as an
submitting the lowest bid possible § 414.422(f)(iii). We have revised the impediment to many potential bidders’
because they would have to calculate wording to state that CMS may submission of the lowest possible bid.
the financial risk of termination and ‘‘[t]erminate the contract.’’ We believe Response: Each supplier contract
compensate for this uncertainty in their that this is consistent with CMS’ under each competitive bidding
bid prices. approach to contracts and agreements program will identify the product
Another commenter stated that it is with providers, suppliers and other categories, items, and single payment
reasonable for CMS to expect that contracted entities in other areas of the amounts for items furnished under that
contract suppliers will be held to all the Medicare program. CMS will have the program. The single payment amount
terms of their contracts for the full authority to terminate a contract with a for each item in each contract will not
length of the contract period. Two contract supplier where a breach of change for the duration of the contract,
commenters objected to the provision contract has occurred. with the only exception being in limited
stating that CMS may include CMS is making several other minor cases where a HCPCS code is divided or
reprocurement costs if a contract clarifications to the language at merged as provided in § 414.426.
supplier’s contract is terminated § 414.422(f). Specifically, at However, even where § 414.426 applies,
because the contract supplier cannot § 414.422(f)(2)(i), we proposed that CMS the total single payment amounts for the
know Medicare’s reprocurement cost could require a contract supplier to sum of the item components, the newly
separated item(s), or the newly • Phased-in implementation of the Procedure Act but also individual and
combined item will be equal to the Medicare DMEPOS Competitive Bidding corporate rights to due process and to
single payment amounts that were Program; redress grievances. The commenter
originally listed in the contract. Contract • Selection of items for a competitive recommended that appeal rights be
suppliers will be held to all of the terms bidding program. restored as these rights exist elsewhere
of their contracts for the length of the • Bidding structure and number of in the Medicare program.
contract period and we will not allow contract suppliers selected under a Response: We understand the
them to suspend their performance competitive bidding program. commenters’ concerns. However, we
under their contracts without In the May 1, 2006, proposed rule (71 believe that Congress enacted section
consequences because of the potential FR 25682), we proposed to incorporate 1847(b)(10) of the Act to avoid any
hardship that the Medicare program and in a new proposed § 414.424 the delay or disruption in the
beneficiaries could suffer if there were provisions for no administrative or implementation of the program caused
no longer enough contract suppliers to judicial review of the determinations by challenges and appeals regarding
furnish one or more product categories specified in section 1847(b)(10) of the specified aspects of the Medicare
in a CBA. If a supplier breaches its Act listed above. We indicated that the DMEPOS Competitive Bidding Program.
contract with CMS, we have the right to proposed regulation would have no We intend to conduct an extensive
ask the contract supplier to correct the impact on the current beneficiary or education and outreach program to
breach, suspend the contract, terminate supplier right to appeal denied claims. ensure that the suppliers are educated
the contract, or preclude the supplier However, neither the beneficiary nor the about the rules and provisions of the
from participating in the Medicare supplier would be able to bring such an program and understand the contract
Competitive Bidding Program. We do, appeal if a competitively bid item was selection process and what is required
however, recognize the hardships may furnished in a CBA in a manner not of bidding suppliers. In addition, we
arise for contract suppliers and we will authorized by this rule. will be providing the suppliers with a
take this into consideration as we Comment: A number of commenters 60-day open bidding period during
decide what appropriate actions should agreed that the proposed rule tracked which they can change, update, or
be taken in the event of a breach. the provisions of the Act, which does correct their bid packages before
Comment: One commenter suggested not provide for administrative or certifying their final submissions.
that contract suppliers should have the judicial review under the Medicare Comment: Numerous commenters
ability to exit the program with a 90-day DMEPOS Competitive Bidding Program. recommended that CMS include a
notice. The commenter stated that this However, many of the commenters procedure for debriefing suppliers that
will allow the bidders that may have believed that CMS should establish were not selected as contract suppliers
failed to meet quality standards and some type of grievance and review and provide an opportunity for a review
reach their market expectations to exit process to provide contract suppliers an to determine, at a minimum, whether an
in a business-like manner. opportunity to review the competitive error on the part of CMS or its
Response: As we explained above, we bidding process and to challenge the contractors was the reason that the
are selecting a sufficient number of outcome of the bid evaluation process supplier lost the bid.
contract suppliers to furnish each and the selection of contract suppliers. Several commenters recommended
product category in each CBA, and One commenter added that because that CMS put appropriate procedures in
allowing contract suppliers to terminate Medicare is required to make available place for bidders to ensure that
their contracts may impede beneficiary to the public the final process calculations related to their bids are
access to competitively bid items and documentation under the Freedom of reviewed for accuracy and that these
otherwise result in a hardship for the Information Act requirements, it is only procedures provide suppliers an
Medicare program. Contract suppliers fair that CMS also provide an opportunity to redress issues such as
are expected to comply with their opportunity for suppliers to challenge simple calculation errors. One
contracts for their entire duration. any decisions in this documentation. commenter pointed out that because the
After consideration of the public Two commenters asserted that the review and award of contracts under the
comments received, in this final rule, statutory limitations on administrative competitive bidding program will be
we are finalizing the breach of contract and judicial review do not preclude the labor intensive, it is likely that there
and termination provisions in establishment of a process that would will be many inadvertent human and
§§ 414.422(f) and (g) with the changes give suppliers an opportunity to computer errors and/or indisputably
described above. communicate with CMS regarding arbitrary decisions. The commenter
grievances and seek redress. They pointed out that while the statute grants
X. Administrative or Judicial Review of asserted that the implementation of CMS discretion in making
Determinations Made Under the such a process would be consistent with determinations under the competitive
Medicare DMEPOS Competitive Constitutional due process rights. One bidding program, Congress has not
Bidding Program (§ 414.424) commenter recommended that CMS granted CMS the authority to render
Section 1847(b)(10) of the Act establish some type of expedited review moot the authority of published
provides that there will be no process specific to contract award regulations by using known improper or
administrative or judicial review of decisions and urged full transparency of erroneous information to implement
determinations made under section factors influencing contract award those regulations. Therefore, the
1869, section 1878, or any other section decisions in order to support the highest commenter recommended a
of the Act, for the— level of integrity in the process. One ‘‘reconsideration process’’ with regard
• Establishment of payment amounts commenter recommended that CMS to the award of contracts only, and
under a competitive bidding program; keep in place all current mechanisms to delegation of authority to the Provider
• Awarding of contracts under a defend the supplier’s rights, including Reimbursement Review Board or some
competitive bidding program; the Administrative Law Judge review. similar body within the Medicare
• Designation of CBAs for the One commenter believed that the program to hear such requests for
Medicare DMEPOS Competitive Bidding nonavailability of administrative review reconsideration. The commenter
Program; violates not only the Administrative acknowledged that under this process,
the agency’s decisions would not be whether CMS possesses the right to appropriate steps to ensure that small
administratively or judicially appealed. waive the FAR and avoid judicial or suppliers of items have an opportunity
However, the commenter pointed out administrative oversight, prudence and to be considered for participation in the
that the establishment of a the obligation to maintain integrity in Medicare DMEPOS Competitive Bidding
reconsideration process would, at least, the procurement process that it is Program. Section 1847(b)(2)(A)(ii) of the
enable errors to be corrected. developing require that CMS open the Act also states that the needs of small
Response: In accordance with section process up to protect review. suppliers must be taken into account
1847(b)(10) of the Act, we proposed that Response: We disagree with these when evaluating whether an entity
there will be no administrative or comments. The Medicare DMEPOS meets applicable financial standards.
judicial review for the awarding of Competitive Bidding Program is a Size definitions for small businesses
contracts or the establishment of unique program that differs in many are, for some purposes, developed by
payment amounts under a competitive ways from traditional government the Small Business Administration
bidding program. We believe that procurement. We are bound to (SBA) based on annual receipts or
Congress enacted section 1847(b)(10) of implement this program in accordance employees, using the North American
the Act to avoid any delay or disruption with the statute, which as noted earlier Industry Classification System (NAICS).
in the implementation of the program in this section, provides that there will Based on the advice from the SBA, we
that could arise if we had to defend be no administrative or judicial review expect that most DME suppliers will fall
numerous challenges and appeals of certain functions. In the proposed either into NAICS Code 532291, Home
brought by losing bidders. We intend to rule we provided notice to the public of Health Equipment Rental, or NAICS
conduct an extensive education and how we intend to implement the Code 446110, Pharmacies, since the
outreach program to ensure that Medicare DMEPOS Competitive Bidding SBA defines these small businesses as
suppliers are educated about the rules Program, and this final rule responds to businesses having less than $6.5 million
and provisions for the program. In the public’s comments. in annual receipts.
addition, we are developing a quality Comment: A number of commenters In the May 1, 2006 proposed rule (71
assurance system to ensure that bids pointed out that even though CMS FR 25682), we proposed using the SBA’s
submitted to us are correctly identified acknowledged in the preamble of the small business definition when
and recorded. We intend to allow proposed rule that the existing rights of evaluating whether a DMEPOS supplier
bidders to submit electronic bids. beneficiaries and suppliers to appeal is a small supplier. We relied on the
Bidders will have an opportunity to denied claims are undisturbed by expertise of the SBA to determine what
review their bids and certify their competitive bidding, the proposed constitutes the appropriate definition of
accuracy prior to submission. Bidders regulatory language of § 414.424 as a small supplier. We proposed that all
will be able to modify or change their written does not make clear that these contract suppliers would be expected to
bids at any time during the bidding existing rights are unaffected. The service the whole CBA. However, we
window. In addition, the CBIC will have commenters suggested the addition of considered allowing a small supplier
in place an auditing system and quality language in § 414.424 to clarify that that has fewer than 10 full-time
assurance program to monitor and these rights would be preserved. Three equivalent (FTE) employees to designate
ensure that it accurately records and commenters also indicated that the a geographic service area that is smaller
calculates the information furnished by statement in the regulation that ‘‘[a] than the entire CBA. We did not
suppliers. We will also be notifying all denied claim is not appealable if CMS propose this approach because we want
losing bidders, but believe it would not determines that a competitively bid item to ensure that beneficiaries have the
be administratively feasible to provide was furnished in a CBA in a manner not choice of going to any contract supplier
debriefings for all losing bidders, due to authorized by this subpart’’ is vague as in their respective CBA. Carved-out
logistics, volume of bidders, and time written and suggested that the statement areas could lead to confusion for
constraints. be rewritten for clarification or beneficiaries faced with multiple
Comment: One commenter strongly removed. One commenter suggested that competitive bidding subareas. Further,
objected to the lack of administrative or CMS add language to state that ‘‘A claim we believe such an approach would
judicial oversight of the process. The is not appealable if the denial is based allow selection of more favorable market
commenter stated that the Medicare on a determination by CMS that a areas by smaller businesses potentially
DMEPOS Competitive Bidding Program competitively bid item was furnished in leading to an unfair market advantage.
is a procurement program by which a CBA in a manner not authorized by We sought comments on this issue.
CMS seeks to acquire the same types of this subpart.’’ Information available to us on the size
commercial items that it acquires for Response: In this final rule, we have distribution of businesses that provide
itself in accordance with the FAR. The revised the language in § 414.424(b) to DMEPOS indicates that the majority of
commenter firmly believed that clarify that there are no appeal rights for suppliers in the DMEPOS industry
considering the number of claim denials if the denial is based on qualify as small businesses according to
procurements that are set aside each our determination that a competitively the SBA definitions. Our analysis of
year by GAO and the United States bid item was furnished in a CBA in a DMEPOS claims data suggests that at
Court of Federal Claims based on manner not authorized by 42 CFR Part least 90 percent of DMEPOS suppliers
government error, CMS should allow 414 Subpart F. had Medicare allowed charges of less
administrative or judicial review. The After consideration of the public than $1 million in CY 2003. The figure
commenter believed that the proposal comments we received, we are adopting of $1 million could be an underestimate
could lead to arbitrary and erroneous as final, with technical clarifications, of total receipts because it does not
awards, if not fraud. The commenter the provisions of proposed § 414.424. include non-Medicare receipts and non-
suggested that CMS clarify that all DMEPOS receipts, but it does suggest
contract awards and invitations to XI. Opportunity for Participation by that most DMEPOS suppliers are small.
participate will be subject to the Small Suppliers (§§ 414.402, 414.414(g)) Although section 1847(b)(6)(D) of the
traditional review of procurements Section 1847(b)(6)(D) of the Act Act focuses on ensuring participation in
conducted by the Government. The requires us, in developing bidding and the bidding, and not on bidding
commenter added that regardless of contract award procedures, to take outcomes, we believe that it is worth
noting how small suppliers fared in the they seek to participate in a competitive end technology equipment, respiratory
bidding in the Medicare competitive bidding program. As we indicated in the equipment, and customized products
bidding demonstration projects. Both proposed rule, we reviewed our efforts are more service intensive than other
small and large suppliers were selected to ensure participation by small products, such as standard wheelchairs,
as demonstration suppliers. Some small suppliers in the Medicare DMEPOS that involve fewer repairs, set-up time,
suppliers that were selected as Competitive Bidding Program after we and patient education.
demonstration suppliers were able to reviewed public comments on the Inclusion of mail order businesses in
increase their market share substantially proposed rule and the results of the competitive bidding was also a
during the demonstration. Others focus groups. We also considered the controversial issue for many
experienced little change in market findings of the focus groups, along with participants. Because mail order
share. the additional options and comments businesses often do not have a physical
We recognize the importance, presented on the proposed rule, in storefront and do not provide patient
benefits, and convenience offered by the developing this final rule. education, small suppliers argued that
local presence of small suppliers. In the Comment: Several commenters such businesses are in violation of the
May 1, 2006 proposed rule, we requested that CMS share the findings of 21 Medicare supplier standards.
proposed to take the following steps to the focus groups. Finally, many participants in the
ensure that small suppliers have the Response: Nine focus groups were focus groups believed that tax returns,
opportunity to be considered for conducted, during April and May 2005, quarterly standard financial statements,
participation in the program. with DMEPOS suppliers that had less and Dun & Bradstreet were helpful
First, as required by section than $3 million in gross revenue and sources of information about a
1847(b)(4)(B) of the Act, we will select employed up to 10 FTE employees. The business’s credit history and cash flow.
multiple winners in each CBA. If a purpose of the focus groups was to The participants noted that suppliers
single winner was selected in an area, explore small DMEPOS suppliers’ that grossed over $3 million in revenue
a small supplier would have difficulty thoughts and opinions on the potential used audited financial statements,
participating in the competition because impact of quality standards, whereas suppliers that grossed less than
the supplier, as a minimum, would have accreditation, competitive bidding, and $3 million in revenue used cash basis
to demonstrate that it could rapidly financial standards requirements on accounting principles. A summary of
expand to serve the entire projected their businesses. We presented an the PAOC discussion related to the
demand in the area. Selecting multiple overview and results of the focus groups focus group results can be accessed at
suppliers should make it easier for small related to quality standards and http://www.cms.hhs.gov/Competitive
suppliers to participate in the program. accreditation to the PAOC on September AcqforDMEPOS/downloads/
Second, we proposed to conduct 26, 2005. This PowerPoint Presentation PAOC_summary.pdf. We have used the
separate bidding competitions for can be accessed at http://www.cms. comments from the focus groups and
product categories, allowing suppliers hhs.gov/CompetitiveAcqforDMEPOS/ the public comment process in
to decide how many product categories PAOCMI/list.asp#TopOfPage. developing our final policies for the
for which they want to submit bids, The results of the focus groups related Medicare DMEPOS Competitive Bidding
rather than conduct a single bidding to competitive bidding and financial Program.
competition for all DMEPOS items and standards were presented to the PAOC Comment: Several commenters noted
other equipment. We believe that on May 23, 2006. Several focus group that section 1847(b)(6)(D) of the Act is
separate competitions for product participants remarked that the entitled ‘‘protection’’ of small suppliers
categories will encourage participation competitive bidding process would and not the mere identification of small
by small suppliers that specialize in one force many small suppliers out of suppliers. They reported that there are
or a few product categories. If a single business. The participants suggested currently 40,000 practitioners, providers
competition was held for all DMEPOS alternatives to competitive bidding, and suppliers enrolled as Medicare
items and other equipment, small, including: (1) CMS should determine suppliers, including approximately
specialized suppliers would have to product prices and allow all willing 1,078 physical therapists. They agreed
either significantly expand their product suppliers to provide products at the set with the option to define small supplier
and service offerings or submit bids for price; and (2) CMS should reserve a as fewer than 10 FTE employees. The
items they currently do not provide. percentage of winning bids for small commenters stated that health care
We stated that we recognize the suppliers. Many participants believed practitioners who provide DMEPOS as
importance of small suppliers in the that lower payment rates for suppliers an integral part of their professional
DMEPOS industry, and we welcomed would inevitably lead to lower quality services specialize in providing items
comments on the options identified in goods and services. Participants were for specific conditions. They added that
the proposed rule. We also expressed particularly emphatic in their belief that these suppliers offer considerable
interest in other ways to ensure that CMS continues to neglect the valuable expertise in evaluating both the patient
small suppliers have opportunities to be service component that small suppliers and the item in order to provide the
considered for participation in the provide to their customers. They patient with the best possible outcome.
program. believed that it is their commitment to They also believe that small suppliers
To collect additional information on service that sets them apart from the serve rural and underserved urban
this issue, we contracted with RTI national companies. A number of communities where larger suppliers
International to conduct focus groups participants were concerned about the may not operate.
with small suppliers. The purpose of the possibility of requiring small supplier The commenters proposed the
focus groups was to gather input on bid winners to furnish items in the following alternative policies: (1) At
ways to facilitate participation by small entire MSA, given the fact that some least 50 percent of suppliers that receive
suppliers in the program. The focus MSAs cross State boundaries. There was a contract should be small suppliers
groups also discussed the impact of the also a consensus among these small (based on $3 million or less in revenue
requirement for the quality standards suppliers that the impact of competitive or less than 10 FTE employees); (2) CMS
and accreditation, which will affect all bidding would differ by product line. should allow suppliers with less than 10
small suppliers, regardless of whether They believed that items involving high- FTE employees to furnish items to less
than the entire CBA; (3) CMS should • To help small suppliers to have an Comment: A few commenters
award contracts to small suppliers with opportunity to participate in the indicated that conducting separate
the lowest bids that exceed the pivotal Medicare DMEPOS Competitive Bidding bidding processes for individual
bid; (4) CMS should allow truly small Program and to generally support HHS’ product categories is administratively
suppliers to promise to accept the single goals for contracting with small burdensome. They stated that CMS’
payment amount; and (5) CMS should businesses, we have also established a assumption that large suppliers could
establish a certain volume of items in target number for DMEPOS small expand their products by offering
each geographic area that will be ‘‘set- supplier participation in each supplies and equipment easier or more
aside’’ for small suppliers. competitive bidding program. Our target quickly than small suppliers is a false
Response: We agree that section number for small supplier participation view of a company’s ability to expand.
1847(b)(6)(D) of the Act is entitled will be determined by multiplying 30 They also reported that large
‘‘Protection of Small Suppliers.’’ We percent times the number of suppliers organizations must seek approval from
recognize the concerns raised by the that have met our bidding requirements their boards or other stakeholders before
commenters and have considered the and whose composite bids are at or they can undertake certain business
suggested alternatives provided during lower than the pivotal bid for each expansion activities.
the small supplier focus groups and product category in each CBA. The Response: We appreciate the
through the public comment process. number resulting from this comment but believe that conducting
We also recognize the importance of multiplication represents our goal for separate bidding processes for
maintaining storefront capabilities to small supplier participation for that individual product categories will
meet the needs of beneficiaries. In this product category. We will then count to encourage the participation of small
final rule, we are revising our proposed see if the number of suppliers whose suppliers that specialize in one or a few
policies to ensure that small suppliers composite bids are at or below the product categories. It is our goal to
have an opportunity to be considered pivotal bid is equal or greater than the allow Medicare beneficiaries an
for participation in the Medicare target number we have computed for opportunity to receive all related
DMEPOS Competitive Bidding Program. that product category. If the number of equipment from the same supplier,
As of January 2006, the SBA defines a suppliers is lower than the target thereby minimizing disruption to the
small business as generating less than number, we will give the small supplier beneficiary. Suppliers currently
$6.5 million in annual receipts. The whose composite bid is above the specialize in particular products, and
SBA definition refers to small pivotal bid, but closest to it of all the we do not see this process being
businesses rather than ‘‘small small suppliers whose composite bids interrupted by competitive bidding.
suppliers.’’ We believe that $6.5 million are above the pivotal bid for the product After consideration of the public
is not representative of small suppliers category, the option of accepting a comments received, in this final rule,
that provide DMEPOS items to Medicare contract to furnish the product category we are adding a definition of ‘‘small
beneficiaries, as it would encompass too at the single payment amounts. If the supplier’’ at § 414.402 and finalizing
many suppliers. In coordination with target number is still not met, we will § 414.414(g), with revisions sets forth
the SBA, we are defining a small offer a contract to the small supplier our methodology for ensuring that a
supplier as a supplier that generates whose composite bid is the next closest sufficient number of small suppliers
gross revenue of $3.5 million or less in to, but above, the pivotal bid, and will have an opportunity to participate in the
annual receipts and we are revising use this methodology until we reach the Medicare DMEPOS Competitive Bidding
§ 414.402 to include this definition. We target number or there are no additional Program.
would accept relevant documentation small suppliers that submitted a bid for
from a supplier that shows its sales the product category. We are codifying XII. Opportunity for Networks
volume, including information that this methodology in final (§§ 414.402, 414.418)
would qualify as a ‘‘receipt’’ under 13 § 414.414(g)(1). In the May 1, 2006 proposed rule (71
CFR 121.104 to determine if the Comment: Many commenters FR 25683), we proposed to allow
supplier meets this definition. Before disagreed with using the definition of suppliers the option to form networks
we receive supplier bids, we would not the SBA for a ‘‘small business’’ (less for bidding purposes (proposed
have information on each supplier’s than $6 million in annual receipts) § 414.418). In the proposed rule, we
total revenue. We only have information because the CY 2003 Medicare data refer to networks as several companies
on suppliers’ Medicare revenues. As a showed that at least 90 percent of joined together through some type of
result, we had to make an assumption suppliers had less than $1 million in legal contractual relationship to submit
about what percent of a supplier’s allowed charges. They recommended bids for a product category under
revenues come from Medicare. We defining a small supplier as a supplier competitive bidding. This option would
looked at filings by public DMEPOS that generates less than $3 million in allow suppliers to band together to
companies and, based on that annual receipts. The commenters lower bidding costs, expand service
information, we assume one-half of the believed that a lack of small supplier options, or attain more favorable
average supplier’s revenues come from participation would negatively impact purchasing terms. We recognize that
Medicare DMEPOS. patient care. They added that small forming a network may be challenging
To ensure the participation of businesses would have to endure large for suppliers, and it also poses
multiple suppliers and storefront expenses in order to participate in the challenges for bid evaluation and
locations, beneficiary access, and Medicare DMEPOS Competitive Bidding program monitoring. Networking was
increased participation by small Program. included as an option in the Medicare
suppliers, we have revised our rules as Response: We agree with the competitive bidding demonstration
noted below: commenters and, as we explained project, but no networks submitted bids.
• The definition of a ‘‘small supplier’’ above, we have modified our definition Still, we believe that networking may be
is a supplier that generates gross of a small supplier so that it now means a useful option for suppliers in some
revenue of $3.5 million or less in annual a supplier that generates gross revenue cases. Therefore, we proposed to offer it
receipts. $3.5 million or less in annual receipts. as an option. If suppliers decide to form
networks, we proposed that the network must identify itself as a submitting a bid to beneficiaries
following rules must be met: network and identify all members in the throughout the entire geographic area of
• A legal entity must be formed for network. the CBA. The inclusion of this
the purpose of competitive bidding, • The legal entity would be certification from all network members
such as a joint venture, limited responsible for billing Medicare and will help assure us that each network
partnership, or contractor/subcontractor receiving payment on behalf of the member joined the network for a
relationship, which would act as the network suppliers. The legal entity legitimate, legal purpose (that is, it
applicant and submit the bid. We would also be responsible for cannot otherwise compete because it is
specifically requested comments appropriately distributing payments to unable to furnish the product category
regarding other types of suitable the other network members. throughout the entire geographic area of
arrangements that would not require Comment: Many commenters the CBA).
suppliers to form a new legal entity but expressed concern about potential The network option is a key piece of
would allow them to form a network for violations of Federal antitrust laws that our efforts to ensure that small suppliers
purposes of submitting bids. For could arise under the proposed network have an opportunity to be considered
example, one supplier could be provisions. For example, they expressed for participation in the Medicare
designated as a primary contractor and concern that forming a network could DMEPOS Competitive Bidding Program.
the other suppliers in the group would violate the Federal antitrust laws In response to comments requesting that
function as subcontractors. In this because those laws do not permit networks be limited to small suppliers,
example, if the contract with the suppliers to reach a mutual consensus we will limit network participation to
primary contractor was terminated, the on pricing. They also stated that the small suppliers which, as we explained
contracts with the subcontractors would proposed rule would require suppliers previously, will now be defined as
also be terminated, thus nullifying the to agree on proposed prices for all items suppliers that generate gross revenue of
entire contract. within a competitive bidding product $3.5 million or less in annual receipts.
• All legal contracts must be in place category. A commenter expressed We have revised § 414.418 to add this
and signed before the network entity concern that networks consisting of a provision. We believe that this
can submit a bid for the Medicare large number of suppliers would not be modification to our proposal will help
DMEPOS Competitive Bidding Program. legitimate under the antitrust laws. The ensure that the competition in each CBA
• Each member of the network must commenter also expressed concern that is actually a competition between
be independently eligible to bid. If a the proposed network policy could be suppliers of all sizes and that it is not
member of the network is determined to falsely interpreted as providing a safe dominated by a limited number of
be ineligible to bid, the network would harbor from the antitrust laws. networks comprised only of large
be notified and given 10 business days Many commenters believed that the suppliers that, in our estimation, should
to resubmit its application. option to form a network is not a be able to compete independently. In
• Each member must meet any realistic solution for ensuring that small addition, in response to concerns that
accreditation and quality standards that suppliers participate in the competitive networks would be anti-competitive if
are required. Each member is equally bidding program. They further believed they had excessively large number of
responsible for the quality of care, the proposed rule is complex, and that members, the size of each network will
service, and items that it delivers to suppliers would not have sufficient time be limited to 20 suppliers because with
Medicare beneficiaries. If any member to form a network and comply with all 20 suppliers, each network member
of the network falls out of compliance the requirements to meet the would generally be responsible for
with this requirement, CMS would have competitive bidding implementation furnishing items to no more than 5
the option of terminating the network timelines. A commenter indicated that percent of the geographic area of the
contract. the network option would reduce CBA. We believe that this limit would
• The network cannot be potential burdens on small suppliers protect against excessively large, anti-
anticompetitive. We proposed that the and specifically recommended limiting competitive networks while allowing
network members’ market shares for the network option to small suppliers. small suppliers to have an opportunity
competitively bid item(s), when added Response: We strongly agree that to be considered for participation under
together, cannot exceed 20 percent of networks must not violate antitrust laws the Medicare DMEPOS Competitive
the Medicare market within a CBA. We and that networks must take steps to Bidding Program.
believe that, by setting the maximum ensure that they are not in violation of Finally, to further implement
size of the network’s market shares at 20 Federal antitrust laws. We emphasize networking rules that promote a robust
percent of the marketplace, firms will be that suppliers that pursue the network competition and protect the Medicare
able to gain the potential efficiencies of option must comply with all applicable DMEPOS Competitive Bidding Program
networking while at the same time Federal antitrust laws, and we will against anticompetitive behavior, we are
ensure that there would continue to be reject a network bid if we believe it has deleting the provision at proposed
competition in the area. If the 20- been prepared in violation of those § 414.418(b)(2) that would have allowed
percent rule were adopted and suppliers laws. We will also refer any suspected networks 10 business days to resubmit
joined networks, there would still be at cases of Federal antitrust violations to bids that CMS rejected because we
least 5 networks competing in a the Department of Justice for further determined that a network member was
DMEPOS competitive bidding program, review. In response to comments ineligible to bid. In order not to allow
which we believe would allow for voicing concern that the network networks with an unnecessary
sufficient competition among suppliers. formation process could implicate the advantage over other suppliers, we are
In particular, we requested comments Federal antitrust laws, we will now deleting this provision because we do
about what percentage of the require that each network member sign not allow other suppliers not in a
marketplace would be appropriate for a statement in the bid submitted by the network this opportunity. Also, we are
networks for suppliers. network certifying that the supplier finalizing our proposal that at the time
• A supplier may only join one joined the network because it is unable of bidding, the network’s total market
network and cannot submit individual to furnish all of the items in the product share for each product category that is
bids if it is part of a network. The category for which the network is the subject of the network’s bid cannot
exceed 20 percent of the Medicare information required for each member more variety and choice, and will
demand for that product category in that of the network. We agree that a primary ensure that we select a sufficient
CBA. supplier should not be responsible for number of contract suppliers for each
Once again, we stress that these rules submitting claims to Medicare and product category in each CBA.
are intended to assist us in evaluating receiving payment on behalf of all Comment: Some commenters
network bids and to protect the network member suppliers and are suggested that CMS allow suppliers to
Medicare program against deleting that requirement. We will now join up to two networks, stating that
anticompetitive behavior, and they require each network member to submit many suppliers currently participate in
should not be interpreted as its own Medicare claims and receive several networks. They believed that
superseding any Federal laws or payment for those claims. this would ensure that the participating
regulations that protect against Comment: A few commenters supplier is not disadvantaged by a
anticompetitive behavior. believed that networks that submit bids requirement to commit to a single
We acknowledge that forming a to furnish more than one product network bid.
network may pose some challenges. category could create access problems Response: We agree with the
However, we believe that networks are for beneficiaries because not all the commenters. We will allow small
a realistic solution for small suppliers network members will furnish all the suppliers to join more than one
because we recognize that it may be product categories. They recommended network, but a small supplier cannot
difficult for small suppliers to service that CMS add requirements to ensure join more than one network that submits
the entire CBA independently. We that network bids are scrutinized to a bid to furnish items in the same
continue to believe that networks are an ensure that each network has product category in the same CBA. We
appropriate option for small suppliers appropriate mechanisms to service the believe that this rule is necessary
that cannot independently service the entire CBA. because, without it, the competitive
entire CBA to be able to participate in Response: All the members of a bidding process would be undermined
the Medicare DMEPOS Competitive network must be able to jointly service if small suppliers were allowed to bid
Bidding Program and to promote an entire CBA. While networks can against themselves to furnish the same
competition and efficiencies that could choose the product categories for which product category in the same CBA. In
improve services to beneficiaries. The they will submit a bid, once a contract addition, a small supplier would not be
proposed rule was published May 1, is awarded to a network, each member able to submit an individual bid to
2006. We believe sufficient notice has of the network must furnish all of the furnish the same product category in the
been given for these suppliers to items within the product categories for same CBA for which the network in
consider network options and plan which the network is awarded a which it is a member is also submitting
accordingly. Forming a network is a contract. Also, we will consider each a bid. However, a small supplier that
business decision, and we believe that product category separately and ensure wishes to furnish two different product
our network policy is constructed in a there is sufficient supplier capacity categories in a single CBA would be able
way that will help ensure that small within a CBA to meet beneficiary to join one network that submits a bid
suppliers have an opportunity to be demand for items within all product to furnish one of the product categories,
considered for participation in the categories. and another network that submits a bid
Medicare DMEPOS Competitive Bidding Comment: A few commenters to furnish the other product category.
Program. requested that CMS disclose the Provided the small supplier did not join
Comment: A few commenters agreed methodology that will be used to a network to furnish the same product
with our proposal to require that calculate the market share and monitor category in the same CBA, the small
suppliers participating in a network changes over the course of the contract. supplier would also be able to submit an
form a discrete legal entity and stated A few commenters questioned why a individual bid to furnish the product
that this would prevent the limit of 20 percent of the market share category.
commingling of Medicare funds, as well was assigned to the network, leaving 80 Comment: A few commenters asked
as violations of the Federal anti- percent of the Medicare market for a how networks would obtain a supplier
kickback statute, self-referral rules and large company. They suggested allowing billing number.
regulations, and allegations of unfair network members to obtain market Response: The Medicare competitive
business practices among the share not to exceed 35 percent, as bidding implementation contractor will
participating network suppliers. Other specified in the Department of Justice assign each network a bidder number
commenters believed that requiring monopoly guidelines. that will be used to monitor the
each network to bid independently Response: We believe that by setting network. As stated earlier, each member
defeats the entire purpose of the maximum size of a network’s shares of the network will be allowed to submit
networking. They disagreed with the at 20 percent of the marketplace at the its own claims and receive Medicare
primary legal entity being responsible time of bidding, we will be able to payments directly.
for billing Medicare and receiving the ensure that there will continue to be Comment: A few commenters
payments. They believed that each competition in the area because if all of requested that CMS clarify whether each
supplier should be responsible for its the winning suppliers are networks, supplier that is a member of a network
own finances. there would still be at least 5 networks. would be required to furnish all of the
Response: We appreciate the support However, once a supplier/network items for the product category for which
for our proposal that each network must receives a contract, there is no limit on the network submits a bid.
form a legal entity. Each member of the what percentage of the demand in the Response: Each member of the
network must meet all the applicable CBA that the supplier/network can network would be required to furnish
eligibility, financial, and accreditation furnish. After winning suppliers are all the items within the product
requirements in order to be awarded a selected, we will not exclude networks category for which the network submits
contract and this information must be or suppliers from expanding and a bid. This is consistent with our
included with the network bid. The exceeding the 20 percent capacity. We requirement that all contract suppliers
legal entity that submit a bid on behalf believe that this will ensure sufficient must furnish all items in a product
of the network must provide all the suppliers, provide beneficiaries with category. However, as explained above,
network members would not be rooting out fraud, waste, or abuse. posted on our Web site, or made
required to furnish the items in the Claims would still be reviewed for publicly available by other means.
product category throughout the entire medical necessity, coordination of Comment: Two commenters believed
geographic area of the CBA, provided benefits status, and benefits integrity. that beneficiary avoidance of certain
that the network as a whole can fulfill Any suspected instances of DMEPOS contract suppliers would provide a
this requirement. competitive bidding market strong indication that the Medicare
After consideration of the public manipulation and collusion would be DMEPOS Competitive Bidding Program
comments we received, we are adding a referred to the appropriate Federal is not meeting physician and beneficiary
definition of the term ‘‘network’’ to agencies that are responsible for needs in the area. The commenters
§ 414.402 that provides that a network is addressing these issues. stated that this activity should be
an entity meeting the requirements of We also proposed to establish a monitored as a measure of whether
§ 414.418. We are also finalizing formal complaint monitoring system to contract suppliers are providing
§ 414.418 as discussed above and with address complaints in each CBA. beneficiaries with a suitable level of
additional technical changes. Beneficiaries, referral agents, providers, quality and access.
and suppliers, including physicians, Response: We appreciate this
XIII. Education and Outreach for comment and will consider it as we
hospitals, nurses, and HHAs, would be
Suppliers and Beneficiaries develop our monitoring program. The
able to report problems or difficulties
In the May 1, 2006 proposed rule (71 that they encounter regarding the CBIC will be monitoring items furnished
FR 25683 through 25684), we proposed ordering and furnishing of DMEPOS in by contract suppliers to ensure they are
to undertake a proactive education a CBA. Some examples of problems that the same quality as the items for which
campaign to provide suppliers and we would consider serious include: the contract supplier submitted a bid
beneficiaries with information about the contract suppliers refusing to furnish and was awarded a contract. The RFB
Medicare DMEPOS Competitive Bidding items to beneficiaries in the CBA for will require suppliers to indicate the
Program. In the DMEPOS provisions of which they were awarded a contract; manufacturer, make and model numbers
the FY 2007 IRF final rule (71 FR contract suppliers furnishing items that for each type of item the supplier would
48354), we responded to public are inferior in quality to those that they furnish if awarded a contract. In
comments we received on the May 1, bid to furnish; and contract suppliers addition, we will require under the
2006 proposed rule on our education violating assignment and billing contracts that each contract supplier
and outreach services proposal and requirements. submit a quarterly report that indicates
finalized our rule. We refer readers to In addition, we proposed to monitor the items that were actually furnished to
the FY 2007 IRF final rule for a full Medicare claims data to ensure that beneficiaries. We also note that we will
discussion of these provisions. competitive bidding does not negatively be conducting a comprehensive
As we indicated in the proposed rule, affect beneficiary access to medically education campaign to ensure that
we have established the following Web necessary items. Claims data would be suppliers, beneficiaries, providers, and
site; https://www.cms.hhs.gov/ monitored to identify trends, spikes, or referral agents understand that Medicare
competitiveacqfordmepos/ decreases in utilization and changes in will only pay for competitively bid
01_overview.asp where RFBs and other utilization patterns within a product DMEPOS items and services if they are
pertinent program information will be category. furnished by contract suppliers, unless
posted and we plan to alert the supplier Comment: One commenter strongly an exception outlined in this final rule
community by email of all postings on supported CMS’ efforts to detect any applies. For more information about our
this Web site. In addition, we will be abuse that may occur under competitive plans for education on the Medicare
providing education and outreach to bidding and urged CMS to be especially DMEPOS Competitive Bidding Program,
suppliers on requirements for aggressive and timely in its oversight for we refer readers to the DMEPOS
submitting RFBs. Suppliers must fully monitoring equipment safety. The provisions of the FY 2007 IRF final rule
complete the RFB in order to be commenter believed that there is a (71 FR 48354).
considered for participation in a potential for one supplier to harm Comment: One commenter
competitive bidding program. The RFBs thousands of beneficiaries and encouraged CMS to specify clearly in
will require suppliers to complete, at a recommended that CMS notify affected the final rule or require CBICs to
minimum, such documents as an beneficiaries if a breach of quality has identify the necessary telephone and
application, bidding sheet, bank and been identified. Internet resources that beneficiaries may
financial information, and referral Response: Equipment safety is use to raise questions and concerns
source references. We stated that we addressed in the DMEPOS quality related to the Medicare DMEPOS
will establish an administrative process standards under the heading ‘‘Product Competitive Bidding Program. The
to ensure that all information that the Safety.’’ The CMS-approved commenter stated that it is extremely
supplier submitted is accurately accreditation organizations will monitor important that beneficiaries have readily
captured and considered in the bid supplier compliance with these available access to information during
evaluation process. This process will requirements as part of the accreditation their transition from their former
ensure that all the information process. In addition, as we proposed, suppliers to their new contract
submitted by each supplier is included the CBIC will develop and implement a suppliers. The commenter
as part of the bid evaluation process. complaint monitoring system for recommended that CMS establish a
competitively bid items and services. survey mechanism so that beneficiaries
XIV. Monitoring and Complaint This system will be outlined in more will be able to rate their satisfaction
Services for the Medicare DMEPOS detail through sub-regulatory guidance with contract suppliers they have
Competitive Bidding Program and enable beneficiaries, referral agents, chosen, as recommended in the
In the May 1, 2006 proposed rule (71 providers, and suppliers to report September 2004 GAO report entitled
FR 25684), we stated that moving to a problems or difficulties they experience ‘‘Past Experience Can Guide Future
competitive bidding environment would with respect to the furnishing of items Competitive Bidding for Medical
not adversely affect CMS’ program under the competitive bidding Equipment and Supplies.’’ The
integrity efforts in reviewing claims and programs. Additional details will be commenter also stated the proposed rule
fails to provide a method to obtain adequate data are available to guide evaluating beneficiary access to
feedback from beneficiaries concerning development of subsequent phases of competitively bid items, for example,
their satisfaction level with contract the program. through beneficiary surveys and
suppliers and disseminate this valuable Response: We appreciate the quarterly reports that will require
information to other beneficiaries. The suggestions of the commenters and will contract suppliers to disclose exactly
commenter noted that, without such an consider them as we operationalize the what items they have furnished to
evaluation system, CBICs would be ill- monitoring program. As we stated beneficiaries.
equipped to judge and, thus, monitor above, we will direct the CBIC to Comment: One commenter asked
either the quality of products that establish a monitoring program that CMS to clarify how it will monitor the
contract suppliers are furnishing or the includes beneficiary satisfaction quality of items based on the bid
accessibility of needed supplies for indicators and supplier performance submissions. Another commenter
beneficiaries. indicators. All parties affected by suggested that CMS monitor complaints
Response: We are establishing an competitive bidding (for example, to ensure there are no problems with
ombudsman program that will require beneficiaries, referral agencies, inferior products being furnished to
ombudsmen to identify, investigate, and suppliers, and providers) will be able to beneficiaries. The commenter stated that
resolve complaints made by, or on report problems or difficulties that they if the HCPCS codes were too vague,
behalf of beneficiaries. The telephone encounter regarding the ordering and CMS would have problems with
numbers and resources will be furnishing of DMEPOS in CBAs. monitoring the quality of items. Another
published through program instructions However, in the event we receive commenter acknowledged that although
or by other means, including postings complaints regarding medical it agrees that it would be a serious
on our Web site. We agree that complications with products, we will problem if a contract supplier furnished
beneficiaries must have readily convey that information to the FDA. items inferior in quality to those for
available access to information during Comment: One commenter urged which it bid but urged CMS to monitor
their transition from their former CMS to monitor contract suppliers this or address complaints if the HCPCS
suppliers to new contract suppliers. We aggressively to ensure that they are not codes are too vague or include multiple
plan to implement an extensive providing a different item than technologies. The commenter suggested
education campaign for beneficiaries as prescribed by the physician or treating that, in order for the monitoring policy
well as for suppliers and referral agents. practitioner, pressuring the physician to to be effective, the HCPCS codes that are
Our plans for education are described in revise his or her order, or delaying associated with competitively bid items
more detail in the DMEPOS provisions delivery of the item. The commenter must include the necessary level of
of the FY 2007 IRF final rule (71 FR stated that such actions could result in detail and specificity.
48354). We note that the CBIC would delays in patient care and increase the Response: As part of the RFB
administer beneficiary surveys risk that the patient will be injured. requirements for submission of bids, we
throughout the program to regularly Another commenter urged CMS to are asking suppliers to list the items
monitor beneficiary experiences with monitor aggressively the impact of the they will furnish by manufacturer,
the program. We also expect to have two Medicare DMEPOS Competitive Bidding make, and model number. Under the
ombudsmen assigned to each DME MAC Program on patient access to care. The contracts, we are requiring contract
region. The CBIC will be providing commenter stated that this is an entirely suppliers to submit a quarterly report in
oversight of this program. We are in the new and complex program that will which they are required to indicate the
process of assessing the appropriate significantly change the market items they have supplied under the
vehicles to disseminate the information dynamics for furnishing certain Medicare DMEPOS Competitive Bidding
that we collect through the beneficiary DMEPOS to beneficiaries, and CMS Program. We note that the MMA
survey. must ensure that these market changes requires the Secretary to submit a report
Comment: One commenter supported do not unintentionally limit the current to Congress evaluating this program.
CMS’s plans to establish a formal variety of DMEPOS available, thereby This report will be finalized in July
complaint monitoring system and adversely affecting beneficiary access to 2009 and, based on beneficiary surveys,
believed that the information collected these important Medicare items. will include information on access to
will be particularly helpful as CMS Response: If the contract supplier and quality of items and services, and
prepares to expand competitive bidding. provides an item that does not match satisfaction of individuals. As discussed
The commenter recommended that CMS the written prescription from the in section IX.A. of this final rule,
include in its complaint monitoring physician or treating practitioner, the suppliers will be required to allow
system a collection of brand-specific contract supplier should not bill beneficiaries to select items from the
information on medical complications Medicare, as this is considered a same range of items furnished to non-
related to competitively bid items, noncovered item. Our complaint and Medicare beneficiaries.
especially for blood glucose monitoring monitoring system will ensure that Comment: One commenter stated that,
products and enteral products (if contract suppliers either furnish the while claims monitoring may be
included in competitive bidding) items prescribed by a physician or effective for some purposes, using it to
because of the potential for treating practitioner, or assist the suggest that a spike in certain items’
complications to arise with these items. beneficiary in finding another contract utilization may be attributable to
The commenter also recommended that supplier to furnish the item under the competitive bidding is narrow-minded.
CMS collect data on contract suppliers circumstances. We expect that contract The commenter stated that product
that do not furnish particular brands of suppliers will advise beneficiaries utilization may have nothing to do with
equipment specified by physicians. The regarding the expected time frames for competitive bidding for various reasons,
commenter further recommended that delivery of items, as required under the such as baby boomers entering the
CMS release timely reports on the ‘‘Consumer Services’’ section of the Medicare program in disproportionately
results of its complaint monitoring quality standards, and that beneficiaries high numbers, the higher incidence of
system to encourage public dialogue will receive competitively bid items in certain diseases in specific areas of the
and analysis regarding the competitive a timely fashion. In addition, we will, as United States, and the development of
bidding program, and ensure that part of our monitoring system, be new products and technologies that
enable a larger number of patients to be required to furnish the item to the including beneficiaries, referral agents,
remain independent at home. beneficiary, whether by delivery or suppliers, and providers, will be able to
Response: We continue to believe that mail. Suppliers must include in their report problems or difficulties that they
it is useful to conduct claims bids the cost of providing the item and encounter regarding the ordering and
monitoring, and we would expect to any requisite services directly furnishing of DMEPOS in a CBA. The
monitor claims for each CBA. If we associated with the item, such as monitoring system will also include a
identify a utilization spike in a delivery, set-up, and retrieval. complaint resolution process, as well as
particular item, we can further Therefore, we do not believe it is a process by which we can track claims
investigate the cause of the spike, to necessary to create special provisions data to ensure that items are being
identify whether the spike happened regarding geographic distribution of properly furnished under the program.
because of competitive bidding. Our contract suppliers. CMS or the CBIC will issue additional
claims monitoring system will allow us Comment: One commenter agreed that details regarding this process through
to review claims data for each item an effective complaint monitoring program instruction or by other means,
within a CBA. system is needed as part of the such as the RFB, and post them on our
Comment: One commenter stated that competitive bidding program. The Web site. When we referred in the
in a September 2004 report entitled commenter noted that this should be a proposed rule to an item being of
‘‘Past Experience Can Guide Future simple process that incorporates ‘‘inferior quality,’’ we meant items that
Competitive Bidding for Medical existing mechanisms that allow beneficiaries or referral agents
Equipment and Supplies,’’ the GAO Medicare beneficiaries to voice complained were of inferior quality,
emphasized the importance of ensuring complaints, such as an ombudsman which would include any product that
continued quality, especially given that program, and should not attempt either the contract supplier furnishes to the
the implementation of competitive to recreate what exists in another beneficiary that does not meet the
bidding will create an added incentive section of the program or medical needs of the patient.
for suppliers to cut costs. The overcomplicate the process. The After consideration of the public
commenter noted that, in GAO’s view, commenter noted that the current comments received, we are finalizing
the central focus of these efforts should supplier standards require that our proposal to implement a monitoring
be ‘‘continued monitoring of beneficiary suppliers show the NSC the complaint and complaint system under the
satisfaction,’’ perhaps through a toll-free resolution process through onsite Medicare DMEPOS Competitive Bidding
complaint hotline and through inspection prior to the issuance of a Program.
beneficiary surveys. The commenter supplier number. The commenter also
stated that it would be unrealistic to XV. Physician or Treating Practitioner
suggested that patients be directed to
expect beneficiaries to monitor and Authorization and Consideration of
call their suppliers first regarding any
provide feedback on the quality of the Clinical Efficiency and Value of Items
alleged service issues before calling the
enteral formula they receive, through a in Determining Categories for Bids
ombudsman or other contractor.
hotline, through surveys, or otherwise. In addition, the commenter asked that Section 1847(a)(5)(A) of the Act
The commenter further noted that, given CMS define ‘‘items of inferior quality.’’ provides authorization to the Secretary
the importance of assuring continued The commenter believed that, in to establish a process for certain items
quality during a transition to a determining whether a supplier is under which a physician may prescribe
significantly revised pricing system, it experiencing a high level of complaints, a particular brand or mode of delivery
would be prudent for CMS initially to CMS must view complaints not in an of an item within a particular HCPCS
focus on those items and supplies for isolated, numerical manner but code if the physician determines that
which quality can be readily assessed expressed as a percentage of the total use of the particular item would avoid
and assured through monitoring efforts. number of in-home deliveries made to an adverse medical outcome on the
Response: As part of the monitoring Medicare patients in a given month. individual. In the May 1, 2006 proposed
system, we will collect data to evaluate Another commenter stated that the rule (71 FR 25684), we proposed to
changes in beneficiary satisfaction, proposed rule provides no specifics implement this statutory provision in
service, quality, access and cost-sharing about the proposed monitoring system. proposed § 414.420 (in the proposed
as a result of the new program. Several The commenter asked that the final rule rule, the regulatory provision was
questions will be customized to suit the provide more information about this erroneously cited in the preamble as
particular product line surveyed. These system. The commenter urged CMS to § 414.440), and to also apply it to certain
data will also be used to prepare the assure that ombudsmen are designated treating practitioners, including
congressionally mandated study and for each CBA because they play an physician assistants, nurse practitioners,
report due in July 2009, under section important role in addressing and and clinical nurse specialists, because
1847(d) of the Act. resolving beneficiary complaints. these practitioners also order DMEPOS
Comment: Two commenters urged Response: We agree that an effective for which Medicare makes payment.
CMS to ensure that suppliers are complaint monitoring system is needed Because a HCPCS code may contain
distributed throughout the CBAs to as part of the Medicare DMEPOS many brand products made by a wide
ensure beneficiary access. The Competitive Bidding Program. As we range of manufacturers, we expect that
commenters stated that patients currently do, we plan to use competitive suppliers will choose to offer only
(especially when injured) or the bidding ombudsmen who will be certain brands of products within a
caretaker should not have to travel long geographically distributed in each of the HCPCS code. This is a common practice
distances to obtain needed DMEPOS, as DME MAC regions to assist with used by suppliers to reduce the amount
this could put patients at risk and monitoring activities. The CBIC is of inventory they maintain. However,
increase Medicare costs. responsible for the monitoring program we proposed that the physician or
Response: We are requiring contract and will be issuing additional treating practitioner would be able to
suppliers to service the entire CBA, information. We plan to have a determine that a particular item would
which means that if a beneficiary cannot complaint process in place so that avoid an adverse medical outcome, and
travel to his or her chosen contract everyone affected by the Medicare that the physician or treating
supplier, the contract supplier will still DMEPOS Competitive Bidding Program, practitioner would have discretion to
specify a particular product brand or item, this situation should be acceptable commenter indicated that there is
mode of delivery. to CMS. concern that if CMS implements section
We proposed that when a physician Response: We recognize the 1847(a)(5) of the Act, the demand for
or other treating practitioner requests a commenter’s concerns, and we note that brand-specific items, will increase even
particular brand, or mode of delivery of we did not propose that a contract though the ‘‘brand name’’ may have the
an item, contract suppliers would be supplier would be required, no matter same clinical benefits of other products.
required to furnish that particular brand what the circumstance, to furnish a Several commenters opposed the
or mode of delivery, assist the brand name item or specific mode of manner in which CMS interpreted the
beneficiary in finding another contract delivery to a beneficiary. We also authority of the treating practitioner to
supplier in the CBA that can provide recognize that the wording of proposed order brand-specific items and
that brand item or mode of delivery, or §§ 414.420(b)(1) and (b)(2) and the equipment. They believed that the
consult with the physician or treating preamble to the proposed rule may not proposed rule mandates serious
practitioner to find a suitable alternative have been sufficiently clear regarding financial consequences for the supplier
product or mode of delivery for the whether a contract supplier must and creates unnecessary uncertainty in
beneficiary. If, after consulting with the furnish an item that it does not the bids to be submitted. They added
contract supplier, the physician or routinely carry to a beneficiary. that forcing suppliers to carry all
treating practitioner is willing to revise Therefore, we are clarifying, in final possible items and equipment will be
his or her order, that decision must be §§ 414.420(b)(1) through (b)(3) the burdensome and costly for suppliers.
reflected in a revised written process that contract suppliers must The commenters stated that contract
prescription. However, if the contract follow to address the situation where a suppliers may be financially responsible
supplier decides to provide an item that physician or treating practitioner orders to provide items outside their normal
does not match the written prescription a specific brand or mode of delivery to product line. However, they added that,
from the physician or treating avoid an adverse medical outcome. If a if a contract supplier does not carry that
practitioner, the contract supplier physician or treating practitioner product, the contract supplier may refer
should not bill Medicare, as this would prescribes a brand name item or specific the beneficiary to another contract
be considered a non-covered item under mode of delivery to avoid an adverse supplier. The commenters asked that
Medicare. medical outcome, the contract supplier CMS consider an exception process to
For the Medicare DMEPOS must make a reasonable effort to furnish compensate contract suppliers for
that brand name item or mode of provisions of items that are very
Competitive Bidding Program, we did
delivery. If the contract supplier cannot expensive compared to other products
not propose to require a contract
furnish that brand name item or mode within the same HCPCS code. They also
supplier to provide every brand of
of delivery, it must contact the suggested that CMS define ‘‘what is a
products included in a HCPCS code.
physician or treating practitioner to reasonable effort to locate an alternative
However, regardless of what brands the
determine if a substitution can be made supplier.’’
contract supplier furnishes, the single Response: We disagree with the
(and if so, the contract supplier must
payment amount for the HCPCS code commenters. Section 1847(a)(5) of the
obtain a revised written prescription). If
would apply. Nonetheless, we noted Act provides the Secretary with the
a substitution cannot be made, the
that this issue will be studied in more authority to establish a process for
contract supplier must assist the
detail by the OIG in 2009. At that time, beneficiary in finding another contract certain items and services under which
we will evaluate the need for a specific supplier that can furnish the brand a physician may prescribe a particular
process for certain brand names or name item or mode of delivery brand or mode of delivery of an item or
modes of delivery. prescribed by the physician or treating service to the beneficiary to avoid an
In addition, section 1847(b)(7) of the practitioner. adverse medical outcome. We proposed
Act provides authority to establish Comment: One commenter stated that that this process would also apply to
separate categories for items within the proposed rule does not establish an certain treating practitioners, including
HCPCS codes if the clinical efficiency appeal or dispute resolution system for physician assistants, nurse practitioners,
and value of items within a given code cases when the contract supplier in a and clinical nurse specialists, because
warrants a separate category for bidding CBA fails to provide the specific these practitioners also order DMEPOS
purposes. Currently, HCPCS codes are equipment selected by the physician. for which Medicare makes payment. We
developed for items that are similar in Response: As we state in this final stress that this process can only be used
function and purpose. For this reason, rule in § 414.420(d), a contract supplier when a physician or treating
items within the same code are paid at would be prohibited from billing practitioner determines that there is a
the same rate. We believe that the Medicare if it furnishes an item different need for the use of a particular item or
HCPCS process has worked well in the from that specified in the written mode of delivery to avoid an adverse
past, and we believe that it adequately prescription from the beneficiary’s medical outcome. Because bids will be
separates items based on their function. physician or treating practitioner. submitted for HCPCS codes, which are
Comment: One commenter stated that Comment: One commenter stated that carefully written to include items that
CMS should address the quite-common CMS should exercise its discretion perform the same therapeutic function,
situations in which a supplier does not under section 1847(a)(5) of the Act, and we do not believe there will be many
carry a particular item, or does not not permit such brand-specific instances in which a particular brand or
know how it works or how it must be prescriptions for items within a CBA. As mode of delivery is necessary to avoid
maintained. The commenter noted that an alternative, the commenter suggested an adverse medical outcome.
mandating a contract supplier to furnish that CMS consider making a finding Nevertheless, because it is possible such
an item it does not routinely supply that, under such circumstances, the a prescription may be necessary in a few
could raise concerns about patient and competitive bidding is not likely to cases, we believe it is important for
employee safety and other liability result in significant savings and, patient safety to retain this provision.
concerns. The commenter further stated accordingly, exempt these items from Therefore, we are clarifying that a
that as long as some contract suppliers the competitive bidding process under physician or treating practitioner must
in the CBA can supply that particular section 1847(a)(5) of the Act. The document in the beneficiary’s medical
records the medical necessity of a Response: Although we recognize that Comment: Several commenters stated
particular brand or mode of delivery of physical therapists and occupational that the physician/treating practitioner
an item or service to avoid an adverse therapists may furnish certain DMEPOS authorization proposal does not provide
medical outcome, if a particular brand as part of their professional practice, sufficient details. They pointed out that
or mode of delivery is prescribed. We current Medicare rules only allow the term ‘‘adverse medical outcome’’
note that section 1847(a)(5)(B) of the Act physicians, nurse practitioners, clinical has not been defined. The commenters
provides that a prescription written for nurse specialists, and physician urged CMS to develop a streamlined
a particular brand of item or mode of assistants to prescribe DMEPOS items. and quick process to facilitate the role
delivery will not affect the amount of Comment: Several commenters of a physician or treating practitioner as
payment otherwise applicable for the asserted that it is not fair that contract a key decision maker for each patient.
item under the HCPCS code involved, suppliers be required to furnish any Several commenters argued that it is
and that we do not currently pay a item within a HCPCS code if their bid crucial for the Medicare DMEPOS
supplier an additional amount for was accepted based on an item that they Competitive Bidding Program to allow
furnishing a particular brand of item or carry in their stock. The commenters health care providers to prescribe
mode of delivery. We also note that a stated that if no additional payments specific items with special features
contract supplier would not be required would be made for more specific when medically necessary. They stated
to furnish every brand of item. It would expensive products that are ordered by that the proposed rule does not
be able to work with the physician or physicians or treating practitioners, this adequately ensure that beneficiaries
treating practitioner to find a suitable may result in significant financial losses with diabetes will have access to the
alternative and, if that effort is for the contract supplier if the contract products for which their health
unsuccessful, to help the beneficiary supplier is required to furnish the professionals find are most appropriate
find another contract supplier that can particular brand or mode of delivery at and medically necessary for their
furnish the item. the single payment amount. Several individualized needs. The commenters
We agree that the use of the term commenters supported the physician/ remained concerned that contract
‘‘reasonable effort’’ is nebulous and may treating practitioner authorization suppliers will limit products to a
be subject to misinterpretation. We are proposal because it provides a safety net narrow range that do not account for a
deleting the term ‘‘reasonable effort’’. for the beneficiary. Another commenter wide spectrum of diabetes-related
Because of the importance for argued that when a physician or treating medical needs, and they will not receive
beneficiaries to receive medically practitioner specifies a product for his additional payment for providing such
appropriate items, we are now requiring or her patient, the physician or treating items.
that a supplier follow the process set out practitioner should have continuous The commenters recommended that
in final § 414.420(b)(1) though (b)(3). access to the latest innovative CMS modify the rule to allow for an
technologies. adequate variety of diabetes supplies to
Comment: Several commenters argued Response: As stated earlier in this suit a range of individualized needs of
that physician choice for determining section, we believe that it will rarely be beneficiaries with diabetes. They stated
appropriate wound care products is of necessary for a physician or treating that CMS must create a less burdensome
paramount importance. They were practitioner to prescribe a particular process to ensure that these supplies are
concerned that physician choice and brand or mode of delivery to avoid an rapidly available upon documentation
access to certain wound care products adverse medical outcome. Furthermore, of medical need. The commenters added
could be restricted as a result of in this final rule, we are specifically that it is possible that adjusting the
competitive bidding, specifically providing the contract supplier with a payment rate for these special items
Negative Pressure Wound Therapy specific process to follow when a upward will encourage contract
(NPWT), code E2402. In recent months, physician or treating practitioner suppliers to provide them in all cases.
new products have been added to code requests a specific brand item or mode Response: We believe that it is
E2402 despite the fact that these new of delivery to avoid an adverse medical appropriate for physicians and treating
products are clinically different from outcome. Under this process, the practitioners to have the discretion to
the original NPWT product. The supplier is required to furnish the item determine when it is medically
commenters stated that because of the or mode of delivery as prescribed, and necessary to prescribe a particular brand
newer items, it is conceivable that if it cannot furnish the item or mode of or mode of delivery of an item to avoid
wound healing would be compromised. delivery as prescribed consult with the an adverse medical outcome. We
Response: A physician or treating physician or treating practitioner to find consider the adverse medical outcome
practitioner may prescribe a particular a suitable alternative and have the determination to be part of the more
brand or mode of delivery to avoid an physician or treating practitioner revise general medical necessity requirement
adverse medical outcome for the his or her order, and if the physician or that must be met in order for Medicare
beneficiary. We note that HCPCS codes treating practitioner does not revise the to pay for an item under section
are carefully defined to ensure that only order, assist the beneficiary in finding 1862(a)(1)(A) of the Act. As with all
items that have the same therapeutic another contract supplier. We do not medical necessity determinations, there
function fall within particular codes. believe these requirements will place an must be documentation in the
Therefore, we believe it is unlikely that undue financial burden on a contract beneficiary’s medical record to support
there would be many instances in which supplier because there are provisions in the need for the particular brand or
a particular brand within a HCPCS code this process that give the contract mode of delivery. Therefore, the
would be necessary to avoid an adverse supplier the opportunity to substitute physician or treating practitioner must
medical outcome. the item or arrange to have another note in the beneficiary’s medical record
Comment: Several commenters contract supplier furnish the item. We the reason why the specific brand or
requested that CMS add language to the agree that physicians and treating mode of delivery is necessary to avoid
rule acknowledging that physical practitioners should have continuous an adverse medical outcome so that
therapists and occupational therapists access to the latest innovative contract suppliers can make a
play a key role in specifying the need technologies and be able to order them reasonable effort to furnish the item,
for a particular brand. for their patients. then consult with the physician or
treating practitioner to find a suitable match the written order in order for the rule, and we have both considered and
alternative, and then make a reasonable contract supplier to bill Medicare. responded to those comments in this
effort to assist the beneficiary in locating After consideration of the public final rule. Therefore, we believe that
a contract supplier that can furnish the comments we received, we are revising issuance of an interim final rule is not
item. We believe that these and finalizing proposed § 414.420 as necessary. We also note that this rule
requirements, along with other discussed above. does not finalize the DMEPOS quality
requirements that we have previously XVI. Other Public Comments Received standards and that section
discussed in this final rule, will ensure on the May 1, 2006 Proposed Rule 1834(a)(20)(E) of the Act explicitly
that beneficiaries have access to the permits us to establish the DMEPOS
most appropriate items for their medical Comment: Several commenters quality standards by program
condition under the Medicare DMEPOS suggested issuing an interim final rule, instruction or otherwise. The quality
Competitive Bidding Program. with a full 60-day notice and comment standards were published on August 15,
Comment: One commenter objected to period to allow for a more detailed 2006, and are available on the following
the statement in the proposed rule that proposal for public comment. In Web site: http://www.cms.hhs.gov/
suppliers should not discriminate addition, several commenters suggested CompetitiveAcqforDMEPOS/
against beneficiaries in a CBA and that publishing initial responses to the 04_New_Quality_Standards.asp. We
public comments as a new proposed note that the draft quality standards
contract suppliers must furnish the
rule. The commenters believed that this were published on September 26, 2005,
same items to beneficiaries that they do
suggestion is consistent with section which was more than 7 months prior to
to other individuals. The commenter
1871(a)(4) of the Act that states that a the publication of the proposed rule. We
argued that this appears to conflict with
final rule will be treated as a proposed also note that the quality standards
the requirement that a supplier must
rule if it includes provisions that are not apply to all suppliers, not just suppliers
provide product-specific items, if
logical outgrowths of a previously
ordered by the physician or treating that wish to participate in the Medicare
published notice of proposed
practitioner. DMEPOS Competitive Bidding Program,
rulemaking. The commenters indicated
Response: The nondiscrimination and that we provided a 60-day period
that another proposed regulation would
provision in this final rule (§ 414.422(c)) for the public to comment on them.
allow the public to consider and
specifies that discrimination against comment on CMS’ responses to issues Comment: Several commenters
beneficiaries is prohibited under the on which CMS requested comment in suggested that CMS schedule a meeting
Medicare DMEPOS Competitive Bidding the May 1, 2006 proposed rule. Other of the PAOC (1) After we publish an
Program. All Medicare beneficiaries to commenters requested that the comment interim final rule; (2) when we publish
whom a contract supplier furnishes period on the proposed rule be extended the MSAs and the DMEPOS items
competitively bid items must have the until at least 90 days following the subject to competitive bidding; and (3)
same choice of items that the contract publication of the final DMEPOS quality when the final regulation is issued. The
supplier provides to other customers. standards. commenters noted that scheduling a
We proposed to implement this Several commenters were concerned PAOC meeting following publication of
provision to protect beneficiaries from about Administrative Procedure Act an interim final rule would allow CMS
receiving sub-standard or inferior items compliance, which states that to obtain industry input before
in terms of quality. However, we do not administrative rulemaking must be publishing a final rule and initiating
believe that this provision conflicts with sufficiently descriptive of subjects and program implementation. Further,
the physician/treating practitioner issues involved so that interested parties several commenters suggested that CMS
authorization rules being implemented may offer informed criticism and include the PAOC in the review of the
in this final rule. Under these rules, a comments. The commenters also gave public comments received during the
physician or treating practitioner can other cites: Agency notices must comment period on the proposed rule
prescribe a brand name item or mode of describe the range of alternatives being and in the development of the final rule.
delivery to avoid an adverse medical considered with reasonable specificity; They stated that excluding the
outcome for the beneficiary, and the otherwise, interested parties will not important counsel and advice of the
contract supplier must follow the know what to comment on, and notice PAOC in a critical process would not be
process outlined in § 414.420(b) upon will not lead to better-informed agency consistent with the purpose for which
receiving the prescription. Nothing in decision making. Finally, the the PAOC was established.
these rules would prevent a contract commenters noted that an agency Response: The PAOC meets
supplier that furnishes a particular commits a serious procedural error periodically to review policy
brand or mode of delivery from making when it fails to reveal portions of considerations and to provide advice on
that brand or mode of delivery available technical basis for a proposed rule in the development and implementation of
to other beneficiaries or customers. time to allow for meaningful the Medicare DMEPOS Competitive
Comment: One commenter noted that commentary. Bidding Program. Since its
the rule requires a contract supplier get Response: The proposed rule establishment, the PAOC has met on
a revised written prescription if the presented for public comment our five occasions and will continue to be
physician treating practitioner allows proposed rules that will govern the available to provide us with advice until
for a modification of a brand-specific Medicare DMEPOS Competitive Bidding the end of 2009. Section 302 of the
product. The commenter stated that Program. This final rule does not MMA gives CMS discretion on when to
verbal orders are acceptable in most include any provisions that are not schedule PAOC meetings. We also
States, and this imposes a significant logical outgrowths of our proposals in discussed with the PAOC the full range
administrative burden on contract the May 1, 2006 proposed rule. In of competitive bidding issues, and we
suppliers and physicians/treating addition, we believe that our proposed continued to consider its advice and
practitioners. rules were sufficiently detailed to counsel as we reviewed the comments
Response: The requirement of a enable the public to provide meaningful and developed this final rule.
written order is consistent with current comments on them. Indeed, we received Comment: Several commenters noted
Medicare rules. The item provided must over 2,000 comments on the proposed that the Web site address for the PAOC
that was in the proposed rule was Response: Section 1847(a)(1)(B)(i)(I) significantly undermine the goal of the
incorrect. of the Act requires that the Medicare program to achieve savings.
Response: We recognize the DMEPOS Competitive Bidding Program Comment: One commenter stated that
importance of having a Web site be phased in such that competition one aspect of the DMEPOS competitive
available to distribute information in a under the programs occurs in 10 of the bidding demonstration projects that was
timely manner and regret the error. Our largest MSAs in CY 2007. We are never studied was Medicare patient
PAOC Meeting Information Web site can committed to meeting this statutory rehospitalization and/or emergency
be found at the following link: http:// mandate. We are mindful of the many room visit rates. The commenter stated
www.cms.hhs.gov/CompetitiveAcqfor key tasks that must be completed to that this is a key outcome measure that
DMEPOS/PAOCMI/list.asp. Included on ensure the success of this program and CMS should have evaluated to
the Web site are materials relating to are moving forward to complete these determine if savings created through
each PAOC meeting such as agendas, tasks expeditiously. We note that the Medicare Part B were actually resulting
meeting summaries, and presentations. final DMEPOS quality standards were in expenditures under Medicare Part A.
Comment: One commenter suggested issued on August 15, 2006, and that The commenter believed that it is
that the PAOC be subject to the Federal applications for participation in the possible that a price-oriented DMEPOS
Advisory Committee Act (FACA), which DMEPOS accreditation program were model might actually lead to higher
requires public access to meetings and solicited from independent accrediting levels of institutional care. The
proceedings. The commenter believed organizations in a Federal Register commenter indicated that it would be
that the PAOC has great power within notice published on August 16, 2006 (71 prudent for CMS to study this aspect in
the DMEPOS industry and that other FR 47230). Therefore, we do not believe the CY 2007 round of bidding.
affected members of the industry have it is necessary to publish a specific Response: We do not agree that
timetable of expected completion dates competitive bidding savings will result
not had an opportunity to review or
for other activities. However, we will in higher expenditures under Medicare
respond to PAOC assertions or
provide the public with sufficient notice Part A. Under the Medicare DMEPOS
recommendations.
as we proceed with implementation Competitive Bidding Program,
Response: Section 1847(c)(4) of the
activities. beneficiaries will receive items from
Act provides that the provisions of the contract suppliers that have satisfied
FACA do not apply to the PAOC. our quality, accreditation, financial, and
that CMS allow all beneficiaries to opt
However, the PAOC meetings have been eligibility standards. In addition,
out of the Medicare DMEPOS
open to the public, and we have contract suppliers will be required to
Competitive Bidding Program, select the
published summaries of the meetings on furnish to beneficiaries in a CBA the
supplier of their choice, and receive
our PAOC Web site http://www.cms. same level of services and quality items
DMEPOS items for which payment is
hhs.gov/CompetitiveAcqforDMEPOS/ that they furnish to other customers.
made based on the current fee schedule
PAOCMI/list.asp. Information about the amounts. Through our physician and treating
Medicare DMEPOS Competitive Bidding Response: Under section 1847(a) of practitioner authorization rules,
Program has also been made available the Act, we are required to establish and beneficiaries who maintain a permanent
through other methods, such as implement competitive bidding residence in a CBA will continue to
electronic supplier listserv messages programs throughout the United States receive items that meet their medical
and open door forums. CMS offers an for the furnishing of certain items for needs. Because we are enacting
electronic mailing list service for those which payment is made under Part B of safeguards to ensure the quality of items
interested in receiving news from CMS. the Medicare program. To the extent that are furnished under the competitive
From the following link, individuals can that we implement a competitive bidding programs by contract suppliers,
subscribe to the ‘‘Homehealth_Hospice bidding program in a particular CBA, as well as rules that we expect will
DMEODF–L’’ listserv to receive notices we do not believe that we have ensure that beneficiaries have access to
of upcoming open door forums: http:// authority to allow any beneficiary who new technology, we do not believe that
www.cms.hhs.gov/apps/mailinglists/. need items in that CBA to ‘‘opt out’’ of expenditures under Medicare Part A
Comment: Numerous commenters receiving those items from contract will rise or that it is necessary to
requested that CMS publish an updated suppliers and receive Medicare undertake a study. Moreover, we will
implementation timeline with expected payment. We also note that section monitor the entire program to make sure
completion dates. The commenters 1847(a)(6) of the Act provides that, for that complaints are addressed and
expect that the publication of such a each CBA in which a competitive resolved. We also believe that it would
timeline will highlight the significant bidding program is implemented, the be difficult to develop a study
problems that lie ahead based on an payment basis established under the evaluating increases in Medicare Part A
overly aggressive implementation plan. competitive bidding program shall be costs as a result of adverse competitive
The commenters suggested that the substituted for the payment basis that bidding outcomes because there are too
timeline should identify and provide would otherwise apply (which, in most many intervening variables, such as
expected completion dates for items cases, would be based on a fee physician and treating practitioner
such as the publication of the quality schedule). In accordance with section quality, that affect final patient
standards, approval of the accrediting 1847(b)(5)(A) of the Act, we are required outcome.
organizations, and issuance of final to establish a new payment amount for
regulations. The commenters further each item in each CBA. This new XVII. Collection of Information
suggested that CMS push back the payment amount is what we would pay Requirements
implementation date of October 1, 2007, to contract suppliers. Under the Under the Paperwork Reduction Act
to a more reasonable timeframe. The Medicare DMEPOS Competitive Bidding of 1995 (PRA), we are required to
commenters believed that a delay in Program, beneficiaries will be able to provide 30-day notice in the Federal
implementation will allow adequate select among the winning suppliers. Register and solicit public comment
time for small suppliers to create However, we believe that permitting before a collection of information
networks and to prepare their beneficiaries to opt out of the program requirement is submitted to the Office of
organizations for accreditation. would create an exception that would Management and Budget (OMB) for
review and approval. In order to fairly burden. The commenters believed that a standardized Medicare patient
evaluate whether an information competitive bidding will increase costs satisfaction questionnaire for DMEPOS;
collection should be approved by OMB, for both suppliers and CMS in the form (5) keeping the beneficiary and supplier
section 3506(c)(2)(A) of the PRA of increased staff and reporting education simple and low cost; (6)
requires that we solicit comment on the procedures. eliminating the brand-specific
following issues: Two commenters stated that they requirement and associated paperwork;
• The need for the information assumed CMS arrived at its estimate of (7) rather than requiring a separate bid
collection and its usefulness in carrying 70 hours per bid for each supplier to for every competitively bid product
out the proper functions of our agency. furnish information by using the median category in a given MSA, consolidating
• The accuracy of our estimate of the of the hours that suppliers estimated the application form itself into a check-
information collection burden. were required during the two less box format; and (8) rather than creating
• The quality, utility, and clarity of complicated demonstration projects, an all-new government infrastructure
the information to be collected. and that this estimate was per location. that essentially duplicates what exists in
• Recommendations to minimize the The commenters pointed out that it is the private sector, subcontracting with
information collection burden on the unclear as to whether this 70-hour several large managed care
affected public, including automated estimate includes time spent attending organizations to administer the program
collection techniques. bidders conferences and preparing for Medicare beneficiaries nationwide.
In response to the May 1, 2006 internal analyses or whether it is simply Response: We need detailed
proposed rule (71 FR 25654), we an estimate of the amount of time information on suppliers with whom we
received several public comments that needed to complete the application may enter into a contract. This
were submitted on the proposed rule bidding process. The commenters information will be used to evaluate the
that more appropriately pertain to indicated that if they considered in the suppliers. This is important because
provisions on the PRA process. We note estimate the time that executive and both Medicare and the beneficiaries will
that specific information requested from mid-level management spent reviewing, be dependent on the contract suppliers.
suppliers as part of the bid submission analyzing, and responding to the We need to evaluate capacity issues in
and many of the terms and conditions proposed rule, plus an estimated 70 order to ensure that suppliers’ capacity
that will be included in the contracts hours per their 25 branches for the meets beneficiary demand; we need to
under the Medicare DMEPOS application process and the first round evaluate financial stability in order to
Competitive Bidding Program are of competitive bidding for CY 2007, the ensure that contract suppliers are
discussed in detail in sections VI.G., companies would invest 1,750 hours in solvent and will be in business during
VII.C., and IX.A. of this final rule. In preparing competitive bids. the contract period; and we need to
these sections, we summarize the public In regard to the total number of hours obtain identification information in
comments we received on these specific that suppliers would invest in regard to order to ensure management is
information requirements and respond the CY 2007 programs, one commenter dependable and that the bidding
to those comments. Other comments pointed out that CMS’ own estimate is supplier is not excluded from
and responses on the general paperwork that 1,158,150 hours would be needed participating as a Medicare supplier.
burden that we outlined in the proposed by the industry (16,545 bids). The Our estimate of the time burden
rule follow: commenters pointed out that if a required for filling out the forms is
Comment: Two commenters conservative $35 per hour average salary based on reports from suppliers that
submitted general comments on the rate is used, this amounts to an participated in the DMEPOS
specific paperwork burden outlined in incremental $41 million attributable to competitive bidding demonstrations,
the proposed rule. The commenters the first 10 CBAs alone. The commenter which implemented competitive
believed that, due to the lack of added that, in CY 2008, this escalates bidding in two MSAs. The
specificity in the proposed rule, it is dramatically to an incremental demonstrations included RFB forms
impossible for commenters, or CMS, to 5,100,550 hours needed to prepare similar to those that will be included in
estimate accurately the amount of 72,865 bids, which in turn computes to this program and both small and large
incremental time that will be required of $178.5 million in supplier labor, and suppliers filled out the forms. Estimates
suppliers to complete the bid process to that these costs have to be accounted for of the required time ranged from 40 to
participate in the program. The in the bid that suppliers submit to CMS. 100 hours, and we used the midpoint
commenters indicated that only two Two commenters stated that the for our estimates. The estimates include
demonstration projects were performed, proposed bid process and certain other internal decision-making processes but
and they did not include many of the provisions of the proposed rule are too do not include the time spent attending
requirements that we have proposed. paper-intensive and gave bidders’ conferences. Based on our
The commenters also indicated that, recommendations for ways in which consideration of the public comments
overall, competitive bidding is an CMS could save a significant amount of received, we have eliminated the
administratively burdensome program paperwork for itself and suppliers: (1) requirement to submit reviewed and/or
for suppliers, Medicare, and its Automating the supplier bid process audited financials, as well as
contractors, and represents an and accreditation organization information regarding investigations.
incremental administrative process that application process by making it Web- We believe this will lessen the burden
is layered on top of an already complex based and allowing an attachment on suppliers.
Medicare Part B system. The feature; (2) allowing the bid review team
commenters urged CMS to adopt to start reviewing those bids that meet Section 414.412 Submission of Bids
existing accreditation standards, the quality and financial standards first Under a Competitive Bidding Program
existing patient satisfaction tools, before proceeding to review the bid Section 414.412 outlines the
existing patient complaints and prices; (3) allowing any multi-site requirements associated with submitting
resolution processes, and existing supplier that is owned by the same bids under the competitive bidding
financial reports, rather than attempt to corporate parent or tied to the same tax process. Specifically, § 414.412(a) states
‘‘reinvent the wheel,’’ in order to reduce number to provide certain standard that unless an exception applies,
both the paperwork and administrative information only one time; (4) adopting suppliers must submit a bid and be
awarded a contract under a competitive is subject to the PRA. This requirement Section 414.422 Terms of Contracts
bidding program in order to receive is currently approved under OMB
payment from Medicare for furnishing control number 0938–0717, with an Section 414.422(d) requires contract
the items. expiration date of November 30, 2007. suppliers to notify CMS if they are
The burden associated with this considering or negotiating a change of
requirement is the time and effort Section 414.420 Physician or Treating ownership. The notification must be
associated with drafting, completing, Practitioner Authorization and made 60 days prior to the anticipated
and submitting a bid. We estimate that, Consideration of Clinical Efficiency and effective date of the change. In addition,
on average, it will take a supplier 68 Value of Items a supplier must submit a novation
hours to complete and submit a bid. We agreement to CMS 30 days before the
Section 414.420(a) states that a
believe that we will receive 15,973 bids anticipated change of ownership takes
physician or treating practitioner may
for a total annual burden of 1,086,164 effect, stating that it will assume
hours. prescribe, in writing, a particular brand
of an item for which payment is made responsibility for meeting all of the
In addition, as part of the Medicare terms and conditions of the competitive
DMEPOS Competitive Bidding Program, under competitive bidding or a
particular mode of delivery for an item, bidding contract. The new supplier
beneficiaries will be surveyed to gather
if he or she determines that the must submit the same documentation
information pertaining to their
experiences with suppliers. We estimate particular brand or mode of delivery required of the original contract
that the burden associated with would avoid an adverse medical supplier unless it has already submitted
completing the survey is 15 minutes per outcome for the beneficiary and such documentation during the bidding
beneficiary. We estimate that the total documents this determination in the process and that documentation is still
annual burden associated with this beneficiary’s medical record. The current.
information collection requirement is burden associated with this requirement The burden associated with this
2,000 hours. is the time and effort associated with requirement is the time and effort
evaluating the beneficiary and, if associated with drafting and submitting
Section 414.414 Conditions for necessary, determining the best brand
Awarding Contracts the required notification to CMS. While
item or mode of delivery to avoid an
this burden is subject to the PRA, we
Section 414.414 contains the rules adverse medical outcome. In addition,
currently have no way to quantify the
pertaining to the evaluation and there is burden associated with the time
selection of suppliers for contract award and effort involved in writing the number of potential respondents. We
purposes under the Medicare DMEPOS prescription for the brand item or the will continue to monitor the program
Competitive Bidding Program. mode of delivery and documenting the requirement and seek OMB approval
Specifically, § 414.414(b)(1) states that medical record. The burden associated should the number of respondents
each supplier must meet the enrollment with this requirement is not subject to surpass the threshold of 10 individuals
standards specified in § 424.57. The the PRA as stated under 5 CFR or entities as specified in 5 CFR
burden associated with this requirement 1320.3(b)(2) and (h)(5). 1320.3(c)(4).
TABLE 10.—ESTIMATED ANNUAL REPORTING AND RECORDKEEPING BURDEN

Burden per Total annual
OMB control
Requirement Respondents Responses response burden
No. (in hours) (in hours)
§ 414.412(a) ............................................................................ 0938—New 15,973 15,973 68 1,086,164

0938—New 8000 8000 .25 2,000
0938—New 15,973 15,973 .166667 2662
§ 414.414(b)(1) ....................................................................... 0938—0717 35,000 35,000 8 280,000
Total ................................................................................ ..................... ........................ ........................ ........................ 1,370,826
As required by section 3504(h) of the 20503, Attn.: Carolyn Lovett, CMS 1. Executive Order 12866
PRA, we have submitted this final rule Desk Officer, CMS–1270–F, E-mail:
to OMB for its review and approval of carolyn_lovett@omb.eop.gov, Fax: Executive Order 12866 (as amended
the information collection requirements. (202) 395–6974. by Executive Order 13258, which
If you comment on these information merely reassigns responsibility of
collection requirements, please mail XVIII. Regulatory Impact Analysis duties) directs agencies to assess all
copies directly to the following: costs and benefits of available regulatory
A. Overall Impact
Centers for Medicare & Medicaid alternatives and, if regulation is
Services, Office of Strategic We have examined the impacts of this necessary, to select regulatory
Operations and Regulatory Affairs, final rule as required by Executive approaches that maximize net benefits
Regulations Development and Order 12866 (September 1993, (including potential economic,
Issuance Group, Attn.: William N. Regulatory Planning and Review), the environmental, public health and safety
Parham, III, CMS–1270–F, Room C5– Regulatory Flexibility Act (RFA) effects, distributive impacts, and
14–03, 7500 Security Boulevard, (September 19, 1980, Pub. L. 96–354), equity). A regulatory impact analysis
Baltimore, MD 21244–1850; and section 1102(b) of the Social Security (RIA) must be prepared for major rules
Office of Information and Regulatory Act, the Unfunded Mandates Reform with economically significant effects
Affairs, Office of Management and Act of 1995 (Pub. L. 104–4), and (that is, a final rule that would have an
Budget, Room 10235, New Executive Executive Order 13132. annual effect on the economy of $100
Office Building, Washington, DC million or more in any 1 year, or would
adversely affect in a material way the million. We do not expect this final rule of the Act requires us to take
economy, a sector or the economy, will result in direct costs that exceed appropriate steps to ensure that small
productivity, competition, jobs, the $120 million per year on State, local, or suppliers of items and services have an
environment, public health or safety, or tribal governments in the aggregate or opportunity to be considered for
communities). We have determined that the private sector, and thus the UMRA participation in the Medicare DMEPOS
this final rule is an economically would not apply. Competitive Bidding Program. Section
significant major rule and thus have 1847(b)(2)(A)(ii) of the Act also states
prepared a regulatory impact analysis. 5. Federalism that the needs of small providers must
Executive Order 13132 establishes be taken into account when evaluating
2. Regulatory Flexibility Act (RFA)
certain requirements that an agency whether an entity meets applicable
The RFA requires agencies to analyze must meet when it promulgates a financial standards.
options for regulatory relief of small proposed rule (and subsequent final Set out below is a summary of the
businesses. For purposes of section 604 rule) that imposes substantial direct significant issues raised by the public
of the RFA, small entities include small requirement costs on State and local comments in response to the initial
businesses, nonprofit organizations, and governments, preempts State law, or regulatory flexibility analysis, a
small governmental jurisdictions. otherwise has Federalism implications. summary of the assessment of the
Approximately 85 percent of DMEPOS We have determined that this final rule agency of such issues, and a statement
suppliers are considered small will not have substantial direct effects of any changes made in the proposed
businesses according to the Small on the rights, roles, and responsibilities rule as a result of such comments.
Business Administration’s size of States.
standards, with total revenues of $6.5 3. Comments Regarding Small Suppliers
million or less in any 1 year. Individuals B. Regulatory Flexibility Analysis The May 1, 2006 proposed rule did
and States are not included in the 1. Summary not include a separate initial regulatory
definition of a small entity. We expect flexibility analysis, but all information
that this final rule will have a The May 1, 2006 proposed rule did required for an RFA was contained
significant impact on a substantial not include a separate initial Regulatory elsewhere in the regulatory impact
number of small suppliers. The RFA Flexibility Analysis. However, analysis or the regulation preamble.
requires that we analyze regulatory information concerning small suppliers Below we list major comments on
options for small businesses and other was included throughout the proposed aspects of the proposed rule which
entities. The analysis must include a rule preamble and regulatory impact directly concern small suppliers that are
justification concerning the reason analysis. This document consolidates included in the final rule.
action is being taken, the kinds and and summarizes components of the
regulation concerning small businesses a. Comments on Small Supplier Focus
numbers of small entities the rule Groups
affects, and an explanation of any into a single RFA. Its contents are
meaningful options that achieve the included in more detail in various parts Several commenters requested that
objectives with less significant adverse of the regulatory impact analysis and CMS share the findings from the 9 small
economic impact on the small entities. the regulation preamble. supplier focus group meetings that were
We have provided this analysis in conducted during April and May 2005.
2. The Need for and Objectives of the
section XVIII.B. of the preamble to this Representatives of DMEPOS suppliers
Final Rule
final rule. that had less than $3 million in gross
Payment for DMEPOS is currently revenue and employed up to 10 FTE
3. Small Rural Hospitals based generally on fee schedule employees met with CMS’ contractor
In addition, section 1102(b) of the Act amounts. Section 302(b)(1) of the staff and were invited to share thoughts
requires us to prepare a regulatory Medicare Prescription Drug, and opinions on the potential impact of
impact analysis if a rule may have a Improvement, and Modernization Act of quality standards, accreditation,
significant impact on the operations of 2003 (MMA) (Pub. L. 108–173), requires competitive bidding, and financial
a substantial number of small rural the Secretary of Health and Human standards requirements on their
hospitals. For purposes of section Services to replace the current fee businesses. We presented an overview
1102(b) of the Act, we define a small schedule methodology for certain items and results of the focus groups related
rural hospital as a hospital that is with a competitive acquisition to quality standards and accreditation to
located outside of an MSA and has contracting program that will result in the PAOC on September 26, 2005
fewer than 100 beds. We have an improved Medicare methodology for (access at http://www.cms.hhs.gov/
determined that this rule will not have setting payment amounts for certain CompetitiveAcqforDMEPOS/PAOCMI/
a significant effect on small rural durable medical equipment and list.asp#TopOfPage).
hospitals. Rural health care facilities supplies, enteral nutrition equipment, The results of the focus groups related
should not be significantly impacted as nutrients and supplies, and off-the-shelf to competitive bidding and financial
the program is expected to operate orthotics. This new bidding process will standards were presented to the PAOC
primarily within relatively large MSAs. result in CMS awarding contracts with on May 23, 2006. Several focus group
to winning suppliers. Contracts will participants remarked that the
4. Unfunded Mandates stipulate the terms, conditions, and competitive bidding process would
Section 202 of the Unfunded payment rates for items and services for force many small suppliers out of
Mandates Reform Act of 1995 (UMRA) under the program. Generally, only business. The participants suggested
also requires that agencies assess suppliers that submit winning bids and alternatives to competitive bidding,
anticipated costs and benefits before are awarded contracts will be permitted including: (1) CMS should determine
issuing any rule whose mandates to furnish items under the program and product prices and allow all willing
require spending in any 1 year of $100 reimbursement for those items from suppliers to provide products at the set
million in 1995 dollars, updated Medicare. price; and (2) CMS should reserve a
annually for inflation. That threshold In developing bidding and contract percentage of winning bids for small
level is currently approximately $120 award procedures, section 1847(b)(6)(D) suppliers. Many participants believed
that lower payment rates for suppliers than $6 million in annual receipts) for participation in the program under
would inevitably lead to lower quality because the CY 2003 Medicare data this section. We recognize the concerns
goods and services. Participants were showed that at least 90 percent of raised by the commenters and have
particularly emphatic in their belief that suppliers had less than $1 million in considered the suggested alternatives
CMS continues to neglect the valuable allowed charges. They recommended provided during the small supplier
service component that small suppliers defining a small supplier as a supplier focus groups and through the public
provide to their customers. They that generates less than $3 million in comment process. We also recognize the
believed that it is their commitment to annual receipts. The commenters importance of maintaining storefront
service that sets them apart from the believed that a lack of small supplier capabilities to meet the needs of
national companies. A number of participation would negatively impact beneficiaries. To help small suppliers
participants were concerned about the patient care. They added that small have an opportunity to participate in the
possibility of requiring small winning businesses would have to endure large Medicare DMEPOS Competitive Bidding
supplier to furnish items in the entire expenses in order to participate in the Program and to support our
MSA, given the fact that some MSAs Medicare DMEPOS Competitive Bidding Departmental goals for contracting with
cross State boundaries. There was also Program. Most suggested that we define small suppliers, we have established a
a consensus among these small a small supplier as a supplier having target for small suppliers’ participation
suppliers that the impact of competitive fewer than 10 FTE employees. They also in the final rule. Our target for small
bidding would differ by product line. believe that small suppliers serve rural supplier’s participation in each product
They believed that items involving high- and underserved urban communities category will be determined by
end technology equipment, respiratory where larger suppliers may not operate. multiplying 30 percent times the
equipment, and customized products We agree with the commenters and number of suppliers that meet our
are more service intensive than other recognize the importance of small bidding requirements and whose
products, such as standard wheelchairs, supplier participation and understand composite bids are at or lower than the
that involve fewer repairs, set-up time, that there are upfront costs associated pivotal bid. The number resulting from
and patient education. with submitting a bid under the this multiplication represents our goal
Finally, many participants in the program. In the final rule, we revised for small supplier participation for the
focus groups believed that tax returns, our policies to ensure that small product category (§ 414.414(g)(1)(i)). If
quarterly standard financial statements, suppliers have an opportunity to be this 30-percent target is not achieved as
and Dun & Bradstreet were helpful considered for participation in the a result of this process, we will offer
sources of information about a Medicare DMEPOS Competitive Bidding contracts to small suppliers with
business’s credit history and cash flow. Program. To assure multiple suppliers, submitted bids that are above, but
The participants noted that suppliers storefront locations, beneficiary access, closest to, the pivotal bid until we reach
that grossed over $3 million in revenue and increased participation by small the target number or there are no
used audited financial statements, suppliers, we have in cooperation with additional small supplier bidders
whereas suppliers that grossed less than the SBA, revised the final rule such that (§ 414.414(g)(1)(iii)). In addition, we are
$3 million in revenue used cash basis the definition of a ‘‘small supplier’’ is a requiring that all contract suppliers
accounting principles. A summary of small supplier that generates gross must service the entire CBA, and we
the PAOC discussion related to the revenue of $3.5 million or less in annual have clarified that this can be done
focus group results can be accessed at: receipts, including Medicare and non- where appropriate either through home
http://www.cms.hhs.gov/Competitive Medicare revenue (§ 414.402). delivery, mail order, or storefront.
AcqforDMEPOS/downloads/ However, small suppliers that cannot
c. Comments on the Protections for
PAOC_summary.pdf. Small Suppliers service the entire area independently
We have used the comments from the can join together and bid as a network
focus groups as well as public comment Several commenters noted that (§ 414.418). The network, rather than
process in developing our final policies section 1847(b)(6)(D) of the Act is each individual supplier, would be
for the Medicare DMEPOS Competitive entitled ‘‘protection’’ of small suppliers required to service the entire CBA.
Bidding Program. and not the mere identification of small
suppliers. The commenters proposed d. Comments on Bidding Requirements
b. Comments on the Definition of Small the following policies: (1) At least 50 for Physicians and Other Providers
Suppliers percent of suppliers that receive a Several commenters suggested that
Some comments concerned the contract should be small suppliers CMS not require physicians, including
definition of small suppliers. Some (based on $3 million or less in revenue podiatric physicians, to participate in
commented on practitioner and or less than 10 FTE employees); (2) CMS the competitive acquisition program for
providers, reporting that there are should allow suppliers with less than 10 certain DMEPOS. The commenters
currently 40,000 practitioners and FTE employees to furnish items to less noted that under the physician self-
providers enrolled as suppliers, than the entire CBA; (3) CMS should referral (‘‘Stark’’) provisions under
including approximately 1,078 physical award contracts to small suppliers with section 1877 of the Act, a physician in
therapists. The commenters stated that the lowest bids that exceed the pivotal a group practice may not refer Medicare
health care practitioners who provide bid; (4) CMS should allow truly small beneficiaries to the group practice, and
DMEPOS as an integral part of their suppliers to promise to accept the single the group practice may not bill for any
professional services specialize in payment amount; and (5) CMS should DME except crutches, canes, walkers,
providing items for specific conditions. establish a certain volume of items in folding manual wheelchairs, and blood
They added that these suppliers offer each geographic area that will be ‘‘set- glucose monitors. The commenters also
considerable expertise in evaluating aside’’ for small suppliers. requested that CMS not require
both the patient and the item in order The statute at section 1847(b)(6)(D) of physician assistants, physical therapists,
to provide the patient with the best the Act requires that the Secretary shall and occupational therapists to
possible outcome. take appropriate steps to ensure that participate in the Medicare DMEPOS
Many commenters disagreed with small supplies of items and services Competitive Bidding Program because
using the definition of the SBA (less have an opportunity to be considered those health care professionals are
licensed by State boards. According to seek approval from their boards or other f. Comments on Financial Standards
the commenters, if a physician or non- stakeholders before they can undertake Several comments argued that the
physician practitioner does not certain business expansion activities. financial standards were too strict for
participate in the competitive bidding We received comments arguing that
certain suppliers and should be flexible
program, he or she should be product categories should be defined
enough to regulate mail order
reimbursed at the competitive bid rate narrowly or broadly. Others stated that
companies, small local suppliers, SNFs,
for any DME items that are furnished to the product categories should not differ
outpatient departments of hospitals,
his or her own patients. In addition, the from the SADMERC policy groups,
retail pharmacies, and publicly-traded
commenters requested that CMS clarify believing that combining medical
and privately-held family firms. Other
how the requirement for physicians to policies may affect beneficiary access or
commenters argued that the reporting
submit bids and provide all items quality of services. Suppliers also noted
requirements of the proposed financial
within a product category does not that suppliers are already familiar with
standards are too burdensome and
violate the physician self-referral law. the policy groups as that is how the
CMS Web site is organized and this is discourage small suppliers from
Other commenters stated that there is no
accessed by suppliers frequently for participating. They recommended that
reason to treat occupational therapists
information. Some commenters CMS define different standards for small
and physical therapists differently from
suggested that product categories should suppliers and pharmacies. The
physicians.
Based on these comments, we be uniform and as stable as possible commenters stated that if financial
modified the proposed rule by because keeping track of differently standards are too restrictive, qualified
expanding the definition of the term defined categories would be very suppliers may be eliminated from the
‘‘physicians’’ and by exempting difficult. Some commenters also called Medicare Part B program. They added
physicians and other treating for subcategories within product groups. that, conversely, if financial standards
practitioners from bidding requirements Based on public comments, we have are too lax, suppliers may be financially
to provide limited DMEPOS to their revised the proposed definition of the unable to meet the challenges of a
own patients (§ 414.402 and term ‘‘product category’’ in § 414.402 to competitive market.
§ 414.404(b)(1)). We are also modifying mean, ‘‘a grouping of related items that We agree with the commenters that it
the regulation to give physical therapists are used to treat a similar medical is important to have financial standards
in private practice and occupational condition’’. The list of product that ensure suppliers are able to meet
therapists in private practice the option categories and the items included in the challenges of competitive bidding
to furnish certain types of competitively each product category that is included and can fulfill their contract obligations.
bid items without participating in the in each competitive bidding program After further consideration and in
competitive bidding program will be identified in the request for bids response to comments, we believe that
(§ 414.404(b)(2)). document for that competitive bidding the financial documentation discussed
program or by other means. The policy in the proposed rule is too burdensome,
e. Comments on Bidding by Product groups will serve as the starting point particularly for small suppliers. We
Category for establishing product categories. have determined that we could obtain
We received numerous comments Product categories may generally be the necessary information through
concerning the definition and use of consistent with the policy groups that collection of a limited number of
product categories. We believe that are established by the SADMERC, financial documents and believe that
conducting separate bidding processes unless CMS determines that a policy the submission of this information will
for individual product categories will group should be redefined for the be less burdensome for all suppliers,
encourage the participation of small purposes of competitive bidding. The including small suppliers. We are
suppliers that specialize in one or a few SADMERC established policy groups for clarifying in the final rule that the RFB
product categories. It is our goal to the purposes of developing Medical will specify what financial documents
allow Medicare beneficiaries the review policies and for data analysis. will be required (§ 414.414(d)) so that
opportunity to receive all related However, the product categories for we can obtain a sufficient amount of
equipment from the same supplier, which we would request bids could be information about each supplier while
thereby minimizing disruption to the a subset of items from a SADMERC minimizing the burden on both bidding
beneficiary. Suppliers currently policy group or a combination of items suppliers and the bid evaluation
specialize in particular products, and from different policy groups. There may process. This financial information will
we do not see this process being be items in a policy group that are not provide enough information to allow us
interrupted by competitive bidding. The subject to competitive bidding or that to determine financial ratios, such as a
use of product categories is intended as we would want to exempt from supplier’s debt-to-equity ratio, and
a compromise that will maximize competitive bidding using our authority credit worthiness, which will allow us
beneficiary convenience while still to exempt items. In response to the to assess a supplier’s financial viability.
permitting suppliers, particularly small suggestion that we include We believe we have balanced the needs
suppliers, to specialize in a certain subcategories within a product category, of small suppliers and the needs of the
product category. we do not believe this approach would beneficiaries in requesting
A few commenters indicated that be consistent with the purpose and documentation that will provide us with
conducting separate bidding processes definition of product categories because sufficient information to determine the
for individual product categories is a product category is a group of related financial soundness of a supplier.
administratively burdensome. They items used to treat a medical condition
stated that CMS’ assumption that large and it would be designed to be g. Comments on Supplier Networks
suppliers could expand their products appropriate for Medicare competitive The May 1, 2006 proposed rule
by offering supplies and equipment bidding purposes. In addition, we do included a proposal to permit small
easier or more quickly than small not believe that there is a need for suppliers to form a legally binding
suppliers is an erroneous view of a subcategories because we would create network with other small suppliers for
company’s ability to expand. They also a new product category instead of a the purpose of submitting a bid. Many
reported that large organizations must subcategory. commenters believed that the option to
form a network is not a realistic solution small suppliers to no more than 20 is networks bids are scrutinized to ensure
for ensuring that small suppliers the following: that each network has appropriate
participate in the competitive bidding • This would help avoid collusion mechanisms to service the entire CBA.
program. They expressed concern that which could lead to less competition The commenters recommended that
forming a network could violate the and higher bids. each beneficiary have a single point of
Federal antitrust laws because those • It would ease administrative burden contact for the network to ensure
laws do not permit suppliers to reach a and reduce the overall cost of evaluating satisfactory resolution of performance
mutual consensus on pricing. They also each network. problems or other issues across the
stated that the proposed rule would • A 20-supplier network would be CBA. They also asked if subcontractors
require suppliers to agree on proposed able to serve an entire CBA even if each needed to meet the same requirements
prices for all items within a competitive of its members is small. Networks are as a contract supplier. Based on these
bidding product category. They further required to form a legal entity that concerns we are requiring that networks
believed the proposed rule is complex, functions as the bidder. We do not form a legal entity, such as a joint
and that suppliers would not have believe that a network should include venture or limited partnership. Each
sufficient time to form a network and more members than is necessary to network member will also be required to
comply with all the requirements to service an entire CBA because other satisfy all applicable bidding
meet the competitive bidding suppliers who are not in networks have requirements. Each network member is
implementation timelines. to service an entire CBA. equally responsible for the quality of
The network provisions do not care, service, and items that it delivers
We agree that forming a network may
establish a safe harbor or a safety-zone to Medicare beneficiaries. If any
pose a challenge for some suppliers. or in any way protect anticompetitive
However, forming a network is a member of the network falls out of
behavior. All of the Federal laws and compliance with this requirement, we
business decision and we continue to regulations that govern anticompetitive
believe that networks should be an have the option of terminating the
behavior, including the Federal antitrust network contract.
option for small suppliers to promote laws, will fully apply.
competition and efficiencies that could A few commenters questioned why a
A few commenters agreed with our limit of 20 percent of the market share
improve services to beneficiaries. The proposal to require that suppliers
proposed rule was published May 1, was assigned to the network, leaving 80
participating in a network form a percent of the Medicare market for a
2006. We believe sufficient notice has discrete legal entity and stated that this
been given for suppliers to consider large company. They suggested allowing
would prevent the commingling of network members to obtain market
network options and plan accordingly. Medicare funds, as well as violations of
We believe that our network policy is share not to exceed 35 percent, as
the Federal anti-kickback statute, self- specified in the Department of Justice
constructed in a way that maximizes referral rules and regulations, and monopoly guidelines. A few
participation of suppliers. allegations of unfair business practices commenters requested that CMS
Suppliers that pursue the network among the participating network disclose the methodology that will be
option must comply with all applicable suppliers. Other commenters believed used to calculate the market share and
Federal antitrust laws. We have taken that requiring each network to monitor changes over the course of the
steps to ensure that each network is not independently bid defeats the entire contract.
in violation of Federal antitrust laws or purpose of networking. They disagreed In this final rule, we have decided to
exhibits otherwise anticompetitive with the primary legal entity being finalize the proposed 20-percent market
behavior by including the following responsible for billing Medicare and share limitation on the capacity of
requirements: receiving the payments. They believed networks. However, once a network
Network participation will be limited that each supplier should be responsible receives a contract, there is no limit on
to small suppliers that cannot compete for its own finances. what percentage of the demand in the
in competitive bidding because they We appreciate the support for our CBA that the network can furnish. We
cannot independently service the entire proposal that each network must form a believe that this will ensure a sufficient
CBA. A written certification will be legal entity. We agree that the primary number of contract suppliers and
required from each network supplier legal entity should not be responsible provide beneficiaries with more variety
that it is unable to compete (that is, for billing Medicare and receiving the and choice.
cannot service the entire CBA on its payments and have revised Some commenters suggested that
own) without joining a network § 414.418(b)(4) to reflect this rule. We CMS allow suppliers to join up to two
(§ 414.418(b)(6)). We believe this are requiring each member of the networks, recognizing that many
provision will help ensure that a small network to submit its own Medicare suppliers currently participate in
supplier has a legitimate need to claims and are specifying that each several networks. They believed that
participate in a network. This will member will be paid directly for this would ensure that the participating
minimize the potential for Medicare products and services supplier is not disadvantaged by a
anticompetitive behavior and will assist furnished as part of its individual requirement to commit to a single
small suppliers by expanding their business. This is consistent with our network bid. We agree with the
opportunity to participate. Network current Medicare policies for each commenters. We will allow suppliers to
members’ Medicare market share at the supplier to submit claims to receive join more than one network, but a
time of bidding when added together Medicare payments. supplier cannot join more than one
cannot exceed 20 percent of the A few commenters believed that network for purposes of furnishing
Medicare market (§ 414.418(b)(7)). This networks that provide multiple product items in the same product category in
would guard against excessive network categories pose a risk because not all the the same CBA. We believe that this
market share. Network membership in network members will furnish all the policy is necessary because, without it,
any one network will be limited to 20 product categories; therefore, the competitive bidding process would
small suppliers to help promote beneficiaries may not have access to be undermined by allowing suppliers to
competition among suppliers. Our services. They recommended that CMS bid against themselves for the same
rationale for limiting the number of add requirements to ensure that product category. In other words, if a
supplier wants to independently furnish Although the network must provide affected in the Regulatory Impact
items for a product category, it would items to any beneficiary throughout a Analysis as described below. This
not be able to join another network that CBA, each member of the network is not analysis preceded finalization of the
furnishes the same product category in responsible for providing an item product categories and selection of
the same CBA. However, a supplier that throughout the entire CBA. bidding areas and is thus based on a
wishes to furnish products that are in 4. Description and Estimate of the number of assumptions, as detailed in
two different product categories would Number of Small Entities the Regulatory Impact Analysis. Based
be able to join a different network for on CY 2005 claims data, the average
each product category or submit a bid as As of January 2006, the SBA defines MSA in the top 25 MSAs, excluding
an individual supplier for one product a small business as generating less than New York, Los Angeles, and Chicago,
category while joining a network for the $6.5 million in annual receipts. We has 2,896 DMEPOS suppliers that
other product category. worked with the SBA to define small furnish any DMEPOS product and 1,972
supplier for the Medicare DMEPOS
A few commenters asked how suppliers that furnish products subject
Competitive Bidding Program. In this
networks would obtain a supplier to competitive bidding and could
final rule, we are defining a small
billing number. The Medicare potentially be affected by competitive
supplier as a supplier that generates
competitive bidding implementation bidding. We estimate that 28,960
gross revenue of $3.5 million or less in
contractor will assign each network a annual receipts. Before we receive suppliers will provide competitive bid
bidder number that will be used to supplier bids, we do not have items in the CBAs that we initially
monitor the network. As stated earlier, information on each supplier’s total designate. If suppliers furnish products
each member of the network will be revenue. We only have information on in more than one MSA, we counted
allowed to submit its own claims and suppliers’ Medicare revenues. As a them more than once because they are
receive Medicare payments directly. result, we had to make an assumption affected in more than one MSA. Not all
A few commenters requested that about what percent of a supplier’s products are subject to competitive
CMS clarify whether each supplier that revenues come from Medicare. We bidding; therefore, we estimate that 68
is a member of a network would be looked at filings by public DMEPOS percent of suppliers will furnish
required to provide all of the items for companies and, based on that products subject to competitive bidding
the product category for which the information, we assume one-half of the and will be affected by competitive
network submits a bid. The member of average supplier’s revenues come from bidding during the initial round of
the networks would be required to Medicare DMEPOS. competitive bidding. This means in CY
provide all the items within the product Suppliers that furnish products in a 2007, the remaining 32 percent of
category for which the network submits CBA in at least one product category suppliers in the 10 selected CBAs will
a bid. This is consistent with our selected for competitive bidding will be not be affected by competitive bidding
requirement that all winning suppliers affected by this program. A supplier that because they do not furnish products
must furnish all items in a product does not furnish competitively bid items subject to competitive bidding.
category. Therefore, each member of the and services to beneficiaries in a CBA However, the actual percentage of
network must be able to provide all will not be affected. Based on analysis affected suppliers may be smaller if we
items within the product categories for of CY 2005 Medicare DMEPOS claims, do not select all eligible product
which the network has submitted bids. we estimate the number of suppliers categories for competitive bidding.
NUMBER OF SMALL SUPPLIERS 1

[$3.5 million or less in Medicare allowed charges]
Number of Total number

Bidding year affected small of affected Percent
suppliers suppliers
2007 ..................................................................................................................................... 16,762 19,720 85

2008 ..................................................................................................................................... 90,500 106,470 85
2009 ..................................................................................................................................... 97,031 114,154 85
2010 ..................................................................................................................................... 103,562 121,838 85
2011 ..................................................................................................................................... 103,562 121,838 85
2012 ..................................................................................................................................... 103,562 121,838 85
1 Some suppliers furnish products in more than one selected MSA. Consequently, some suppliers may be counted more than once.
5. Projected Reporting, Recordkeeping, supplier education efforts, completing required hours to 68, due to changes we
and Other Compliance Requirements forms, and providing documentation. made to condense the bidding forms
Bidders must decide whether to bid, requirements, based on comments we
The primary compliance cost of the request or download an RFB, attend a received on the proposed rule.
proposed rule will be the cost of bid bidders conference (optional) and read According to 2005 Bureau of Labor
submission. As part of a separate rule, outreach materials, decide how much to Statistics (BLS) data, the average hourly
all DMEPOS suppliers will be required bid for each item, and prepare and wage for an accountant and auditor was
to gain and maintain accreditation submit a bid. In the demonstration,
$25.54 (National Compensation Survey:

which may lead to significant bidders in Polk County, Florida reported
Occupational Wages in the United
compliance costs. However these costs spending a total of 40 to 100 hours
are not considered under the States, June 2005, U.S. Department of
submitting bids. In the proposed rule we
competitive acquisition program, and assumed that suppliers would use the Labor, Bureau of Labor Statistics,
thus we concentrate on the costs of midpoint number of hours, 70 hours. Bulletin 2568, August 2006. http://
bidding which includes time devoted to We have reduced our estimate of the www.bls.gov/ncs/ocs/sp/ncbl0832.pdf).
Accounting for inflation and overhead, 6. Agency Efforts to Minimize the prices taking effect in April 2008, and
we assume suppliers will incur $33.87 Significant Economic Impact on Small the second round of bidding will occur
per hour in wage and overhead costs. Entities in CY 2008, with prices taking effect in
Based on this information, we assume Small suppliers constitute the large April 2009. We also assume rebidding
that a supplier that bids will spend majority of DMEPOS firms, and we will only occur every 3 years.
$2,303.16 ($33.87 * 68) to prepare its anticipate they will form the majority of Second, we assume that competitive
bid, taking into consideration that the contract suppliers. Therefore, bidding will occur in 10 of the largest
number of product categories included consideration of small suppliers MSAs in CY 2007, excluding New York,
in a bid, on average, will vary by influenced virtually all aspects of the Chicago, and Los Angeles. We exclude
supplier. We calculate the total cost for final rule. We detailed the aspects of the the three largest MSAs in CY 2007
all supplier bids, including those of final rule that, in particular, are because we are not including them in
both future winning and future losing intended to minimize the impact on the initial phase of implementation. We
suppliers. Therefore, we expect that CY small entities. These aspects and the are excluding the three largest MSAs
2007 total supplier bidding costs for respective section of the preamble of because we would like to gain more
this final rule are as follows: experience in smaller markets before we
15,973 bids will be $36,788,375
• Grandfathering of suppliers (see enter into the largest markets. For the
($2,303.16 * 15,973). This estimate is
section VI.D.3.a of this final rule). initial competition, we assume that
clearly dependent on our assumption • Requirement for physicians and bidding will take place in CY 2007, bids
that 81 percent of eligible suppliers will certain nonphysician practitioners to will be evaluated in CY 2007, and prices
bid. Our estimates incorporate the fact submit bids (see section VI.G.3 of this will go into effect on April 1, 2008. The
that a single organization may submit final rule). second round of bidding will take place
bids in more than one CBA in each • Product categories for bidding in 70 of the largest MSAs in CY 2008,
round. For example, a supplier that has purposes (see section VI.G.4 of this final and the prices will go into effect on
15 offices in the country and currently rule). April 1, 2009. The next round of
serves all 10 of the CBAs to be included • Financial standards (see section bidding will take place in 10 additional
in the initial round of bidding is VII.C, of this final rule) MSAs and will occur in CY 2009, with
counted 10 times in our estimates. Our • Selection of small suppliers (see bid prices going into effect on January
estimate of the time required for bidding section XI. of this final rule). 1, 2010. An additional round of bidding
assumes that suppliers in the • Opportunity for networks (see will include 10 MSAs and will occur in
section XII. of this final rule) CY 2010, with bid prices going into
competitive bidding program will bid
on about the same number of individual C. Anticipated Effects effect on January 1, 2011.
product categories as suppliers bid on We can anticipate the probable effects Third, we made some assumptions
during the demonstration project. We of this final rule, but the actual effects about which product categories would
expect that supplier bidding costs will will vary depending on which CBAs be selected for competitive bidding. We
rise with the number of product and product categories are ultimately recognize that potential savings,
categories bid upon; however, because selected for competitive bidding under implementation costs, the number of
there are fixed costs associated with the Medicare DMEPOS Competitive affected suppliers, and supplier bid
deciding whether to participate in the Bidding Program. The analysis that costs all depend on which product
competitive bidding program and some follows, taken together with the rest of groups are ultimately selected. The
of the bidding forms are only filled out this preamble, constitutes the final product categories have yet to be
once, the increase in costs associated regulatory impact analysis. decided. We expect that approximately
As a result, for the purpose of this 10 product categories will be selected
with each additional product category
impact analysis, it is necessary to make for competitive bidding for CY 2007 and
may be relatively small. Therefore, our
several assumptions. These assumptions as many as 7 or 8 of the selected product
estimate of the time required per bid categories will be among the 10 largest
are due to the uncertainty concerning
should be reasonably accurate unless in terms of allowed charges. The
the actual number of suppliers that will
suppliers bid on significantly more or remaining 2 or 3 product categories will
participate, the associated bid amounts,
fewer product categories than they bid and the specific items and areas for come from the top 20 policy groups
on during the demonstration. which competitive bidding will be ranked by allowed charges. Table 11
conducted. shows the top 20 eligible DMEPOS
First, we assume that the first round policy groups and their CY 2005
of bidding will occur in CY 2007, with allowed charges.
TABLE 11.—CY 2005 ALLOWED CHARGES: TOP 20 ELIGIBLE DME POLICY GROUPS
Percent of
Allowed charges eligible
Rank Policy group 2005* DMEPOS
charges
1 .............................. Oxygen Supplies/Equipment ...................................................................................... $2,669,015,203 34

2 .............................. Wheelchairs/POVs ..................................................................................................... 1,512,581,843 19
3 .............................. Diabetic Supplies & Equipment .................................................................................. 1,176,121,037 15
4 .............................. Enteral Nutrition .......................................................................................................... 582,085,753 7.5

5 .............................. CPAP .......................................................................................................................... 378,084,371 4.9
6 .............................. Hospital Beds/Accessories ......................................................................................... 320,372,566 4.1
7 .............................. Support Surfaces ........................................................................................................ 184,266,860 2.4
8 .............................. Negative Pressure Wound Therapy ........................................................................... 169,012,105 2.2
9 .............................. Infusion Pumps & Related Drugs** ............................................................................ 157,396,292 2.0
10 ............................ Respiratory Assist Device .......................................................................................... 135,023,095 1.7
TABLE 11.—CY 2005 ALLOWED CHARGES: TOP 20 ELIGIBLE DME POLICY GROUPS—Continued
Percent of
Allowed charges eligible
Rank Policy group 2005* DMEPOS
charges
11 ................................................ Walkers ................................................................................................... 106,661,034 1.4

12 ................................................ Nebulizers ............................................................................................... 97,574,696 1.3
13 ................................................ Ventilators ............................................................................................... 70,625,578 0.9
14 ................................................ Commodes/Bed Pans/Urinals ................................................................ 47,861,299 0.6
15 ................................................ Patient Lift .............................................................................................. 27,768,236 0.4
16 ................................................ TENS ...................................................................................................... 23,536,834 0.3
17 ................................................ Seat Lift Mechanism ............................................................................... 17,159,455 0.2
18 ................................................ CPM Device ........................................................................................... 17,023,378 0.2
19 ................................................ Suction Pump ......................................................................................... 14,096,633 0.2
20 ................................................ Off-the-shelf Orthotics ............................................................................ 13,807,205 0.2
Total for 20 Groups ............. ................................................................................................................. 7,719,487,197 99

* 2005 allowed charges projected based on 98 percent claims processed through March 2006.
** Includes $50 million in allowed charges for drugs.
However, we reiterate that the arise for referral agents. For example, we or use of American products, materials
discussion in this impact analysis are planning an extensive educational or labor. Further, the concern cannot be
should in no way be interpreted as campaign for suppliers, referral agents, dominant in its field, on a national
signifying which product categories will and beneficiaries. Educational materials, basis. Finally, the concern must meet
be selected for the actual competitive including an on-line supplier directory, the numerical small business size
bidding program. Our product category will expedite the process for identifying standard for its industry. SBA has
selection for this impact analysis is only and locating contract suppliers and established a size standard for most
to assist us in estimating the potential therefore minimizing any burden. In industries in the U.S. economy.’’ The
savings, costs of implementation, and addition, we will post on the internet size standard for NAICS code 532291,
supplier and beneficiary impacts. the list of brands that each contract Home Health Equipment Rental, is $6.5
Fourth, we assume that the Medicare supplier furnishes. This brand million. (See the Web site: http://
DMEPOS fee schedule will increase at information should be extremely useful www.sba.gov/size/sizetable2002.html,
the rate of inflation for those years in for referral agents and may even reduce read November 30, 2006.)
which a statutory freeze has not been burden under the program. Many of these suppliers provide
put in place by the Act. We base our The DMEPOS supplier industry is minimal amounts of DMEPOS, and thus
estimates on the expected growth in expected to be significantly impacted by the remaining larger suppliers control
Medicare Part B expenditures from the this final rule. However, not all significant market share. We anticipate
Trustees Reports. (Tables IV.F.2 and suppliers will be affected directly by the that the fixed costs required to undergo
IV.F.3 of the 2004 Medicare Trustees competitive bidding program. Suppliers the bidding process may be a larger
Report.). that furnish products in a CBA in at deterrent to small businesses than larger
This final rule is expected to affect the least one product category selected for firms. Because suppliers can choose
Medicare program and its beneficiaries, competitive bidding will be affected. A whether to submit a bid for the
certain CMS contractors, and DMEPOS supplier that does not furnish Medicare DMEPOS Competitive Bidding
suppliers. Although the workload of competitively bid items and services to Program, this final rule imposes no
referral agents, including hospital beneficiaries in a CBA will not be direct costs and, therefore, does not
discharge planners and some health care affected. Based on analysis of CY 2005 reach the $120 million direct cost
practitioners, appeared to increase Medicare DMEPOS claims, we estimate threshold under the UMRA. While not
during implementation of the that approximately 30,000 suppliers included in this final rule, we expect
demonstration, we do not anticipate that offer at least one product eligible for that the separate MMA requirement for
competitive bidding will result in a competitive bidding and are located in accreditation of suppliers will result in
large, ongoing burden on referral agents. one of the largest 100 MSAs and, added supplier costs beyond those
For many DMEPOS product categories, therefore, could be impacted by the included in this final rule.
referral agents play an important role in program. Some of these suppliers will Comment: One commenter stated that
helping beneficiaries select DMEPOS be affected in multiple CBAs if they the RFA analysis of the impact of the
suppliers that can meet the offer products in more than one CBA. proposed regulation was incomplete
beneficiaries’ needs. During the Based on our analysis of CY 2005 and inadequate because it did not
demonstration, those referral agents claims data, we also estimate that consider the impact of the proposed
who previously referred beneficiaries to approximately 85 percent of registered regulation on long-term care hospitals
non-demonstration suppliers had to DMEPOS suppliers are considered small and Medicare beneficiaries who reside
change their referral patterns. It is according to the SBA definition. in these facilities. Other commenters
difficult to quantify this burden because According to the SBA, ‘‘A small suggested that long-term care facilities
we have no data on the number of business is a concern that is organized would incur increased costs and the
referral agents who will be affected, nor for profit, with a place of business in the quality of treatment received by their
do we have information on the effort United States, and which operates patients would be diminished if they are
associated with identifying a new primarily within the United States or included in the Medicare DMEPOS
supplier. We note that we plan to take makes a significant contribution to the Competitive Bidding Program and
steps to mitigate any burden that might U.S. economy through payment of taxes offered alternatives to competitive
bidding that they believed would pumps which are not provided by will depend on the number of sites that
achieve cost savings. infusion pharmacies. have bidding that year.
Response: We considered the impact Response: The data in the proposed Our maintenance costs will include a
of the Medicare DMEPOS Competitive analysis include allowed charges for small staff to oversee the program, office
Bidding Program on all suppliers. We insulin and infusion pumps. Although costs for the staff, as well as staff travel
believe our estimates reflect the costs on these items may not be furnished by costs, and overhead. In addition, the
average that will be incurred by the infusion pharmacies, they are included CBIC(s) will be responsible for most of
suppliers that participate in the because they are subject to competitive the program maintenance. The
program. If a long-term care hospital bidding under the Act. maintenance costs could also include
decides to submit a bid to furnish items Comment: Several commenters the costs for an ombudsman(s) to assist
and services under the program, its bid disagreed with the statement in the suppliers, beneficiaries, and referral
should reflect its costs to furnish those preamble of the proposed rule (71 FR agents with the competitive bidding
items and services. In addition, the 25692) that the UMRA does not apply process and questions. We also expect
quality standards for DMEPOS suppliers to this rule. One commenter suggested to incur costs for education and
require that suppliers furnish quality that virtually all affected suppliers outreach expenses such as staff
items and services. would submit bids (and thus would resources and material costs for
Comment: One commenter disagreed incur costs) and even using CMS producing education materials and
with CMS’ assumption that the estimates (that the commenter believed supplier directories.
DMEPOS fee schedule will increase at to be too low), the costs for the CY 2008 We will incur bid costs in the years
the rate of inflation for those years in round of bidding would be $178
in which we conduct competitive
which a statutory freeze is not in effect bidding and when we evaluate bids.
million, an amount that the commenter
and that total charges will increase at These costs will be a direct result of the
believed exceeded the UMRA’s
the same rate as Medicare Part A and bid solicitation and evaluation process.
threshold of $120 million.
Medicare Part B expenditures (71 FR Bid solicitation costs include costs
25691). The commenter suggested that Response: We have updated our associated with mailing necessary
non-DME, non-home health care costs estimates in this final rule using CY information to suppliers, printing,
are the driving forces causing increases 2005 data. Based upon the estimated duplicating, and the cost of
in these programs. Other commenters number of suppliers that will submit administering an electronic bidding
suggested that home care expenditures bids, the costs of submitting bids, and program. The actual costs will vary by
are not increasing and that rising the fact that the average number of CBA and will depend on the number of
hospital, nursing home, physician, and suppliers per CBA will decrease in potential suppliers. We will incur bid
medication costs were the causes of future rounds of competitive bidding, evaluation costs whenever bidding
rising overall Medicare expenditures. we do not expect that costs will exceed occurs in a CBA. According to the
Response: Based on the public the UMRA’s $120 million threshold. DMEPOS evaluation report, it took
comments we received, we have D. Implementation Costs about 9.4 hours during the
clarified in this final revised impact demonstration to evaluate each bid and
analysis that our estimates on expected CMS will incur administrative costs the supplier to ensure that only quality
growth will be based on Medicare Part in connection with the implementation suppliers were selected. However,
B expenditures. DMEPOS expenditures and operation of the Medicare DMEPOS because the Medicare DMEPOS
have been growing at varying rates in Competitive Bidding Program, which Competitive Bidding Program uses
recent years (expenditures for 26 can affect the net savings that can be quality standards and accreditation as a
product categories rose 5 percent expected under this final rule. However, separate process, we expect that the
between 2004 and 2005 and 21 percent many of the variable costs associated time required to evaluate bids will be
between 2002 and 2005), and the rate of with bid solicitation and evaluation will less than in the demonstration. The total
growth has varied widely between ultimately depend on how many bid evaluation costs will ultimately
product categories, making precise suppliers choose to participate in depend on the number of suppliers that
estimates of growth for DMEPOS competitive bidding. Because of this choose to submit bids.
difficult. We believe that the overall uncertainty, we are not able to estimate Comment: Several commenters
growth rate for Medicare Part Be bid solicitation and evaluation costs at believed that the regulatory analysis in
expenditures provides a reasonable this time. the proposed rule significantly
estimate of the growth rate for DMEPOS We will incur initial startup costs. underestimated the administrative costs
because both growth rates are driven by CMS estimates internal costs and costs associated with implementing the
changes in Part B enrollment and to its contractors to be approximately $1 competitive bidding program, further
overall growth in medical care use. To million in immediate fixed calendar reducing any net savings. One
address inflation, we will be asking the year costs for contractor startup and commenter referred to a study that
suppliers to submit bids that include all system changes for the initial estimated that CMS would need 1,600
costs associated with furnishing each competitive bidding phase in CY 2007. new staff to implement the proposed
item for all 3 years of the contract. In addition to the initial startup costs, regulation.
Comment: A number of commenters we will also incur maintenance costs Response: As explained in the
objected to the data in Table 11 of the and bid solicitation and evaluation proposed rule, we are making the best
proposed rule (71 FR 25691) indicating costs. We will need to pay maintenance estimates based on the experience in the
that 2003 allowed charges for infusion costs every year for the running of the demonstrations. Even though these
pumps and related devices were program. However, we will only need to estimates will be affected by the number
approximately $149 million. These pay bid costs in the years in which of suppliers and items for which we do
commenters believed that the correct competitive bidding is conducted. competitive bidding, nevertheless they
amount was approximately $87 million. Yearly maintenance costs will depend represent our best estimates. After
The commenters believed that the $149 on the number of CBAs in which the careful review of the study referenced
million amount inappropriately program has been implemented, while by the commenter, we disagree with the
includes charges for insulin and insulin bid solicitation and evaluation costs estimate of the number of extra staff
needed to implement the proposed E. Program Savings average product group savings rate in
regulation. We believe our original We estimate significant savings from the demonstration ranged from 9 to 30
estimates better reflect the resource the Medicare DMEPOS Competitive percent per round, with most product
needs for the competitive bidding Bidding Program. Our estimates of gross groups having about a 20-percent
program. savings utilize as a starting point the savings. Table 12 shows the savings rate
results in the demonstration. Excluding for selected product groups and CBAs
surgical dressings, which are not by round during the DMEPOS
eligible for competitive bidding, the demonstration.
TABLE 12.—DMEPOS COMPETITIVE BIDDING DEMONSTRATION SAVINGS RATES
Product group Polk County Round 1 Polk County Round 2 San Antonio
Oxygen Equipment and Supplies .. $2,364,811 (17%) ......................... $1,525,490 (20%) ......................... $2,096,707 (19%)
Hospital Beds and Accessories ..... $290,715 (23%) ............................ $195,140 (31%) ............................ $644,514 (19%)
Urological Supplies ........................ $36,169 (18%) .............................. $12,585 (9%) ................................ Not included
Surgical Dressings ......................... ¥$30,321 (¥12%) ....................... ¥$637 (¥1%) .............................. Not included
Enteral Nutrition ............................. $342,251 (17%) ............................ Not Included ................................. Not included
Wheelchairs and Accessories ........ Not included .................................. Not included .................................. $796,617 (19%)
General Orthotics ........................... Not included .................................. Not included .................................. $89,462 (23%)
Nebulizer Drugs ............................. Not included .................................. Not included .................................. $1,020,072 (26%)
Source: Evaluation of Medicare’s Competitive Bidding Demonstration for DMEPOS, Final Evaluation Report (November 2003), pages 90 and
92.
Under this final rule, we will set lower than those produced by the payment, as well as the wheelchair
prices for individual items equal to the demonstration method, assuming that recoding initiative recently undertaken
median winning bid for that item. In the median pricing rule would not have by CMS.
contrast, the demonstration used a more affected the number of winning bidders Table 13 shows the impact on the FFS
complicated pricing rule that adjusted who signed contracts or the suppliers’
program for the 10 policy groups. In the
fees for each item to ensure that each bidding strategies. We have
table, savings are reported as negative
suppliers overall payment was equal to incorporated the effects of the median
the pivotal bid. In our estimates, we pricing rule into our estimates of values. The savings are attributable to
have taken into account that some savings from the program. We assumed the lower payment amounts anticipated
DMEPOS prices have been adjusted a 25 percent savings in the estimate from competitive bidding. The table
downward since CY 2000. We assume because of the median pricing shows the reduction in Medicare
that if prices for an individual item have methodology. We netted out any allowed charges, without any impact on
already been reduced by 10 percent after statutory reductions in prices that have the Medicare Advantage program,
the demonstrations were completed, already occurred, such as the CY 2005 associated with the program for the
prices would most likely fall 10 percent reductions in oxygen supplies and calendar year. The impact includes
rather than 20 percent. Therefore, we equipment. These numbers also reflect reductions in Medicare payments (80
found that the median pricing rule the reductions in Medicare payments percent) and reductions in beneficiary
would have produced fees that were that resulted from the DRA provisions coinsurance (20 percent).
approximately 5 percentage points on capped rental DME and oxygen
TABLE 13.—PROGRAM IMPACT FOR 10 POLICY GROUPS

[in millions] *
Calendar Year
2007 2008 2009 2010 2011 2012
Allowed Charges ...................................................................................... $0 ¥$108 ¥$766 ¥$1126 ¥$1224 ¥$1301

Medicare Share of Allowed Charges (80 percent of allowed charges) .. 0 ¥86 ¥613 ¥901 ¥979 ¥1041
Beneficiary Costs (20 percent of allowed charges) ................................. 0 ¥22 ¥153 ¥225 ¥245 ¥260
* Numbers may not add up due to rounding.
Table 14 presents the impact the prices for the Medicare DMEPOS Finally, the estimates in Table 14
differently than Table 13. In contrast to Competitive Bidding Program will be in incorporate spillover effects from the
Table 13, which is on a Medicare effect for 6 months of fiscal year 2008, competitive acquisition program onto
allowed charge-incurred basis and does but for 9 months of calendar year 2008.1 the Medicare Advantage program. The
not consider the Medicare Advantage Table 14 considers the impact on expectation is that lower prices for DME
program impact, Table 14 considers program expenditures, and does not products in FFS will lead to lower
fiscal year cash impact on the entire include beneficiary coinsurance. prices in the Medicare Advantage
Medicare program, including Medicare market.2
Advantage for the fiscal year rather than 1 Fiscal year 2008 will begin October 1, 2007, and
calendar year. The fiscal year–calendar the Medicare DMEPOS Competitive Bidding 2 In addition, most managed care plan rates are
year distinction is an important one Program payments become effective on April 1, linked to FFS expenditures. Therefore, a decrease
when comparing savings. For example, 2008. in FFS expenditures should translate into a
TABLE 14.—FISCAL YEAR COST ON F. Effect on Beneficiaries It is not clear whether this will have a
THE MEDICARE PROGRAM Possible impacts on beneficiaries are large impact on beneficiaries. There is
[in millions] a primary concern during the design little evidence on how frequently
and implementation of the Medicare beneficiaries receiving DMEPOS travel
Program Beneficiary DMEPOS Competitive Bidding Program. outside their CBA. Under current
Fiscal year policy, a traveling beneficiary must
impact costs While there may be some decrease in
choice of suppliers, there will be a already make arrangements for receipt
2007 .......... $0 $0 sufficient number of suppliers to ensure of his or her DMEPOS during travel and
2008 .......... ¥70 ¥20 adequate access. We also expect there payment is already based on the fee
2009 .......... ¥530 ¥130 will be an improvement in quality schedule for the beneficiary’s residence.
2010 .......... ¥1,000 ¥250 because we will more closely scrutinize We do not believe that our policy will
2011 .......... ¥1,240 ¥310 the suppliers before, during, and after have a large impact on beneficiaries
2012 .......... ¥1,370 ¥340 implementation of the program. The because we will ensure that we have a
evaluation of the impact of the DMEPOS sufficient number of contract suppliers
Comment: Several commenters competitive bidding demonstration on to meet beneficiary demand.
believed that the regulatory analysis patient access to care and quality Because beneficiaries face a 20
overstated the potential savings of the showed minimal adverse results (Final percent coinsurance rate for DMEPOS,
proposed rule because many of the Report to Congress: Evaluation of we assume that beneficiary out-of-
savings in the earlier demonstrations Medicare’s Competitive Bidding pocket expenses will decrease by 20
can no longer be achieved in other areas Demonstration For Durable Medical percent of program gross savings for
of the country due to changes in Equipment, Prosthetics, Orthotics, and those products for which we do
payment policies for major categories of Supplies; http://www.cms.hhs.gov/ competitive bidding (Table 15).
DMEPOS such as oxygen, subsequent DemoProjectsEvalRpts/downloads/
CPI freezes, and increases in supplier CMS_rtc.pdf). Moreover, because of the TABLE 15.—BENEFICIARY COINSUR-
quality standards and the provisions in ANCE ANNUAL SAVINGS ESTIMATES
costs in areas such as fuel and labor.
Another commenter suggested that this final rule to ensure access to and FOR 10 PRODUCTS
potential savings would be reduced if the furnishing of quality products, we [in millions]
suppliers submit higher bids in order to assume that there will be few negative
account for costs related to quality impacts on beneficiary access, as a Calendar year 10 products
standards and accreditation costs. One sufficient number of quality suppliers
will be selected to serve the entire 2007 ...................................... $0
commenter recommended that CMS 2008 ...................................... 22
recalculate these estimates. Another market.
2009 ...................................... 153
commenter stated that some of these We acknowledge that implementation
2010 ...................................... 225
of competitive bidding may result in 2011 ...................................... 245
factors also resulted in understating the
some beneficiaries needing to switch 2012 ...................................... 260
adverse impact of the proposed
from their current supplier if their
regulations on suppliers.
current supplier is not selected for Comment: One commenter argued
Response: We have updated the tables competitive bidding. However, we that since the analysis projects that 37
in the impact analysis of this final rule anticipate that the necessity of percent of suppliers will not become
to reflect all of the recent changes in switching suppliers will be minimized contract suppliers, the impact on
policy related to items subject to because of the existence of beneficiaries, especially those requiring
competitive bidding, including any grandfathering policies for rental diabetic supplies and equipment, will
payment reductions. The impact products such as capped rentals. For be greater than the analysis indicates.
analysis builds in the statutory purchased items that are not Response: Our methodology will
reimbursement cuts into the baseline grandfathered, some beneficiaries ensure that beneficiaries requiring
DME spending. For instance, the DRA currently using DMEPOS will have to diabetic supplies and equipment will
section 5101 is estimated to yield $880 switch from noncontract to contract have access to a sufficient number of
million savings over 5 years (2008 suppliers. This switch will not be very suppliers to meet their needs. As
through 2012). The FEHBP reductions burdensome, because the beneficiaries explained in various sections of the
are built into the baseline DME will already be making new purchases. preamble to this final rule, we will be
spending and yielded a 5 year savings We note that, if a beneficiary owns an taking several steps to ensure that there
(2008 through 2012) of $2,180 million. item subject to competitive bidding, the will be a sufficient number of suppliers
We believe that the demonstrations are beneficiary has the choice of having the to meet beneficiary demand. These steps
an appropriate gauge for estimating item serviced by either a noncontract or include the following:
projected savings. We also believe that contract supplier. Beneficiaries who • Evaluating the bidding suppliers’
the competitive bidding financial maintain a permanent residence in a capacity to ensure that there is enough
standards and the DMEPOS quality CBA who are traveling and need to rent supplier capacity to meet the Medicare
standards we have issued will result in or purchase DMEPOS during their demand for each product category in
more efficiently operating DMEPOS travels will have to make arrangements each CBA.
suppliers. to receive their equipment either from a • Implementing a small supplier
contract supplier in their CBA, from a target under which we will attempt to
contract supplier in the visited area if offer a sufficient number of small
decrease in Medicare Advantage plan payment

rates. The rate calculations for the Medicare that area is in a CBA and the item is suppliers the opportunity to participate
Advantage program reflect all the FFS adjustments, included in the competitive bidding for in the Medicare DMEPOS Competitive
including the Medicare DMEPOS Competitive that CBA, or—if the visited area is not Bidding Program.
Bidding Program savings. The Managed Care add-
on increases the FFS savings by 24.9 percent in CY
in a CBA—from a noncontract supplier • Requiring that all commonly owned
2008. This is a dynamic number that increases over who must accept the reimbursement or controlled suppliers must submit a
time. rate from the beneficiaries home CBAs. single bid on behalf of all locations
within the CBA, and additional 2007, the remaining 32 percent of who submitted a bid in a product
locations that would furnish items in suppliers in the 10 selected CBAs will category were selected as a winner in
the CBA. not be affected by competitive bidding that product category. Overall during
• Establishing a capacity calculation because they do not furnish products the demonstration, about 60 percent of
methodology that caps the estimated subject to competitive bidding. suppliers who submitted bids in any
capacity of each bidding supplier However, the actual percentage of categories were selected as winners in at
capacity at 20 percent for purposes of affected suppliers may be smaller if we least one product category. We believe
determining the pivotal bid for the do not select all eligible product the 60 percent figure represents a more
product category. categories for competitive bidding. accurate assessment of the probability
In addition, our estimates indicate Deciding whether or not to submit a that a bidding supplier will be selected
that beneficiaries will save money on bid is a business decision that will be as a winning bidder in at least one
their diabetic supplies and equipment made by each DMEPOS supplier. We product category. The bidding DMEPOS
under the program. expect that most suppliers providing suppliers that are not awarded a
competitively bid items will choose to contract because they did not submit a
G. Effect on Suppliers
participate in order to maintain and winning bid would represent about 22
We expect DMEPOS suppliers to be percent of the total DMEPOS suppliers
expand their businesses. For the
significantly impacted by the in these CBAs. We expect that losing
calculations in the proposed rule, we
implementation of this final rule. We bidders will be distributed roughly
assumed that 90 percent of suppliers
assume that suppliers may be affected in proportionately across the selected
that furnish items that we choose to
one of three ways as follows: CBAs, but the exact distribution will
• Suppliers that wish to participate in include in the program would submit a
bid. We assumed the remaining 10 depend on the distribution of bids
competitive bidding will have to incur received and the number of winners
the cost of submitting a bid. percent of suppliers would not bid
based on the low level of the Medicare selected in each CBA. We also note that
• Noncontract suppliers that if a supplier submitted a bid in multiple
furnished competitively bid items revenue received for the items subject to
competitive bidding or because they had product categories, its probability of
before the Medicare DMEPOS becoming a contract supplier would
Competitive Bidding Program took not received the necessary accreditation.
increase.
effect (including suppliers that do not Based on comments we received on the
It is difficult to estimate the impact
submit bids) will see a decrease in May 1, 2006 proposed rule, we will the Medicare DMEPOS Competitive
revenues because they will no longer permit physicians and certain Bidding Program will have on
receive payment from Medicare for nonphysician practitioners to furnish noncontract suppliers. The effect will
competitively bid items. certain limited items as part of their depend on how much revenue the
• Contract suppliers will see a professional practice without submitting supplier previously received from
decrease in expected revenue per item a bid and being awarded a contract, Medicare and whether the supplier
as a result of lower allowed charges provided certain conditions are met. continues to provide services to existing
from lower bid prices. However, These physicians and non-physician beneficiaries under the grandfathering
because there will be fewer suppliers, a practitioners would be required to policies. Estimates can be made by
contract supplier’s volume could submit bids and be awarded contracts if making assumptions about these factors.
increase. As a result, because we do not they wish to furnish other types of For example, if bidding occurred in 10
know which effect will dominate, the competitively bid items. These product categories, losing suppliers
net effect on an individual contract physicians and non-physician previously provided 50 percent of
supplier’s revenue is uncertain prior to practitioners account for about 10 allowed charges in these product
bidding. The increase in the supplier’s percent of all DMEPOS suppliers, categories, and losing suppliers did not
volume could help offset the decrease in according to the NSC. Therefore, we continue to serve any existing
revenue per item. now assume that 81 percent (= 0.9 *0.9) beneficiaries, the average lost Medicare
of affected suppliers will submit bids. allowed charges per losing supplier per
1. Affected Suppliers Based on this assumption, 15,973 CBA would be between $35,000 and
Based on CY 2005 claims data, the suppliers will submit a bid because they $40,000. Under these assumptions, the
average MSA in the top 25 MSAs, will want the opportunity to continue to total allowed charges lost by losing
excluding New York, Los Angeles, and provide these products to Medicare suppliers would be $275 million in CY
Chicago, has 2,896 DMEPOS suppliers beneficiaries and to expand their 2008, the first full year after the prices
that furnish any DMEPOS product and business base. We also assume, based on take effect, and increase to almost $2
1,972 suppliers that furnish products the results of the demonstration, that at billion in CY 2011. These estimates
subject to competitive bidding and least 60 percent of bidding suppliers reflect our best assumptions. As noted,
could potentially be affected by will be selected as winners in at least because of the nature of competitive
competitive bidding. one product category. This assumption bidding, winning bidders will absorb
We estimate that 28,960 suppliers will is slightly different than our assumption much of the allowed charges lost by
provide DMEPOS items in the CBAs in the proposed rule, where we stated, losing suppliers.
that we initially designate. If suppliers ‘‘We also assume, based on the results Suppliers that submit bids will incur
furnish products in more than one MSA, of the demonstration, that 50 percent of a cost of bidding. Bidders must decide
we counted them more than once bidding suppliers will be selected as whether to bid, request or download an
because they are affected in more than winners because approximately 50 RFB, read the RFB, attend a bidders
one MSA. Not all products are subject percent of those who submitted bids conference (optional) and read outreach
to competitive bidding; we estimate that during the demonstration were selected materials, decide how much to bid for
68 percent of suppliers will furnish as contract suppliers.’’ The 50 percent each item, and prepare and submit a
products subject to competitive bidding in the proposed rule was based on the bid. In the demonstration, bidders in
and will be affected by competitive demonstration experience within Polk County, Florida reported spending
bidding during the initial round of individual product categories; a total of 40 to 100 hours submitting
competitive bidding. This means in CY approximately 50 percent of the bidders bids. In the proposed rule we assumed
that suppliers would use the midpoint deciding whether to participate in the not requiring that suppliers use
number of hours, 70 hours. We have competitive bidding program and some accountants or auditors to prepare the
reduced our estimate of the required of the bidding forms are only filled out bid submission form. However, to
hours to 68, due to changes we made to once, the increase in costs associated calculate cost estimates for completing
condense the bidding forms with each additional product category the form, we used the wages for
requirements, based on comments we may be relatively small. Therefore, our accountants or auditors as a benchmark
received on the proposed rule. estimate of the time required per bid to determine the estimated costs to the
According to 2005 Bureau of Labor should be reasonably accurate unless supplier.
Statistics (BLS) data, the average hourly contract bidders bid on significantly In CY 2008, we will conduct
wage for an accountant and auditor was more or fewer product categories than competitive bidding in 70 MSAs, which
$25.54 (National Compensation Survey: they bid on during the demonstration. may include New York, Los Angeles,
Occupational Wages in the United Comment: One commenter believed and Chicago; and in CYs 2009 and 2010,
States, June 2005, U.S. Department of that the statement in the impact section we will add additional areas. This will
Labor, Bureau of Labor Statistics, of the proposed rule that not all increase the number of affected
Bulletin 2568, August 2006. http:// suppliers will be affected directly by the suppliers, contract suppliers, and
www.bls.gov/ncs/ocs/sp/ncbl0832.pdf). competitive bidding process (71 FR noncontract suppliers. For the purposes
Accounting for inflation and overhead, 25691) is not accurate because the of the impact analysis, we assume that
we assume suppliers will incur $33.87 commenter believed that costs for there will be at least 10 additional large
per hour in wage and overhead costs. mandatory accreditation alone will force CBAs added in both CYs 2009 and 2010.
Based on this information, we assume small suppliers out of business. The We also assume bid cycles will be 3
that a supplier that bids will spend commenter asked questions relating to years in length. Under our assumptions,
$2,303.16 ($33.87*68) to prepare its bid, the basis for determining that an we will conduct bidding for the initial
taking into consideration that the accountant would prepare the bid and 10 CBAs in CY 2007, for 70 additional
number of product categories included that the cost per hour of $31.25 is CBAs in CY 2008, and for additional
in a bid, on average, will vary by appropriate. The commenter believed areas in CYs 2009 and 2010. We note
supplier. We calculate the total cost for that it would cost small suppliers more that the estimated average number of
all supplier bids, including those of to prepare and submit bids because suppliers per CBA decreases over time.
both future winning and future losing large suppliers have more experience This is because smaller CBAs with
suppliers. Therefore, we expect that CY with managed care contracts and may be fewer beneficiaries and/or lower
2007 total supplier bidding costs for bidding in multiple MSAs. allowed charges have fewer suppliers.
15,973 bids will be $36,788,375 Response: The accreditation program Table 16 summarizes the effect on
($2,303.16*15,973). This estimate is is mandatory and affects all DMEPOS suppliers for CYs 2007 through 2012.
clearly dependent on our assumption suppliers; therefore, it is not a cost The table includes the costs of rebidding
that 81 percent of eligible suppliers will attributable to the Medicare DMEPOS for the first 10 CBAs in 2010, for 70
bid. Our estimates incorporate the fact Competitive Bidding Program. As we CBAs in 2011, and for 10 CBAs in 2012.
that a single organization may submit explained in the proposed rule (71 FR We assume that rebidding will require
bids in more than one CBA in each 25694), we used 2003 BLS data, the same resources as the initial bids.
round. For example, a supplier that has adjusted for inflation and overhead, to However, it is possible that suppliers
15 offices in the country and currently arrive at our estimate of $31.25 per hour will need less time for bidding after
serves all 10 of the CBAs to be included in wage and overhead costs for an gaining experience during their initial
in the initial round of bidding is accountant and auditor to prepare a round of bidding. Table 16 differs from
counted 10 times in our estimates. Our supplier’s bid. In our current estimates, the corresponding table in the proposed
estimate of the time required for bidding we have used 2005 BLS data on wages, rule because—(1) The number of
assumes that suppliers in the and adjusted this number to account for suppliers is now based on 2005 claims
competitive bidding program will bid inflation through 2007. We took the data; (2) the cost per hour to prepare a
on about the same number of individual midpoint of the reported number of bid has been increased from $31.25 to
product categories as suppliers bid on hours to prepare bids for the $33.87 to reflect wage increases through
during the demonstration project. We demonstration projects to develop our 2007; (3) the number of hours required
expect that supplier bidding costs will estimate of the number of hours needed to submit bids has been reduced from 70
rise with the number of product to prepare a bid. We believe that these to 68; and (4) we now estimate that 81
categories bid upon; however, because average estimated costs would be the percent (rather than 90 percent) of
there are fixed costs associated with same for large or small suppliers. We are suppliers will submit bids.
TABLE 16.—SUPPLIERS BIDDING YEARS: CYS 2007–2012

[10 product categories]
Bidding year
CY 2007 CY 2008 CY 2009 CY 2010 CY 2011 CY 2012
Average number of suppliers per CBA ........ 2,896 1,960 1,866 1,791 1,791 1,791
Average number of affected suppliers per
CBA .......................................................... 1,972 1,331 1,268 1,218 1,218 1,218
Total number of suppliers ............................ 28,960 156,767 167,921 179,075 179,075 179,075
Total number of affected suppliers .............. 19,720 106,470 114,154 121,838 121,838 121,838
Number of bidding suppliers ........................ 15,973 70,268 6,224 22,197 70,268 6,224
Cost of bidding ............................................. $36,788,375 *$161,838,447 $14,334,868 $51,123,243 $161,838,447 $14,334,868
Number of contract suppliers ....................... 9,584 51,744 55,479 59,213 59,213 59,213
Number of noncontract suppliers ................. 10,136 54,726 58,675 62,625 62,625 62,625
TABLE 16.—SUPPLIERS BIDDING YEARS: CYS 2007–2012—Continued

[10 product categories]
Bidding year
CY 2007 CY 2008 CY 2009 CY 2010 CY 2011 CY 2012
Noncontract suppliers as a percent of total

suppliers ................................................... 35% 35% 35% 35% 35% 35%
1 Actual
numbers will depend on CBAs selected, product groups selected, number of suppliers that choose to submit a bid, the prices bid, and
the number of contract suppliers selected.
2 Some suppliers furnish products in more than one selected CBA. Consequently, some suppliers may be counted more than once.
3 Numbers in the table are rounded.
* The spike in the private sector costs in CY 2008 is due to the addition of 70 additional CBAs that will be included in competitive bidding,
which would include the costs to suppliers submitting bids.
As noted in the start of this section, individual contract supplier’s revenue is about what percent of a supplier’s
affected suppliers will be impacted by uncertain prior to bidding. revenues come from Medicare. We
any reduction in Medicare allowed 2. Small Suppliers looked at filings by public DMEPOS
charges that results from the companies and, based on that
competitive bidding program. The As of January 2006, the SBA defines information, we assume one-half of the
estimated overall reduction in allowed a small business as generating less than average supplier’s revenues come from
$6.5 million in annual receipts. The Medicare DMEPOS. Table 17 shows our
charges is shown in the first row of
SBA definition refers to small estimate of the number of affected small
Table 13.
businesses rather than ‘‘small
As previously noted, noncontract suppliers and total affected suppliers.
suppliers.’’ We worked with the SBA to
suppliers that furnished competitively Some suppliers are counted more than
define small supplier for the Medicare
bid items before the program took effect DMEPOS Competitive Bidding Program. once if they are affected in more than
(including suppliers that do not submit In cooperation with the SBA, we are one CBA. These estimates are based on
bids) will see a decrease in revenues defining a small supplier as a small 10-digit National Supplier
because they will no longer receive business that generates gross revenue of Clearinghouse (NSC) identification
payment from Medicare for $3.5 million or less in annual receipts numbers. Some organizations have
competitively bid items. Contract in accordance with 13 CFR 121.104. We multiple NSC codes representing
are using this new small supplier multiple locations; however, these
suppliers will see a decrease in
definition to focus on the smallest of the organizations tend to be larger
expected revenue per item as a result of
DMEPOS suppliers in each CBA. Before suppliers. For the purpose of
lower allowed charges from lower bid
we receive supplier bids, we do not designating small suppliers for program
prices, but this decrease may be offset
have information on each supplier’s purposes on the basis of revenue,
by an increase in volume. As a result,
total revenue. We only have information revenue will be calculated based on an
because we do not know which effect
on suppliers’ Medicare revenues. As a organization’s tax identification
will dominate, the net effect on an result, we had to make an assumption number.
TABLE 17.—NUMBER OF SMALL SUPPLIERS 1
[$3.5 million or less in Medicare allowed charges]
Number of Total number

Bidding year affected small of affected Percent
suppliers suppliers
2007 ............................................................................................................................................. 16,762 19,720 85

2008 ............................................................................................................................................. 90,500 106,470 85
2009 ............................................................................................................................................. 97,031 114,154 85
2010 ............................................................................................................................................. 103,562 121,838 85
2011 ............................................................................................................................................. 103,562 121,838 85
2012 ............................................................................................................................................. 103,562 121,838 85
1 Some suppliers furnish products in more than one selected CBA. Consequently, some suppliers may be counted more than once.
Small suppliers are likely to have percent, and less than 0.01 percent, • Networks: As stated in section XII.
similar costs for submitting bids as large respectively. of this final rule, we discuss the option
suppliers. As discussed in the previous We considered the following options for suppliers to form networks for
section, the average cost of submitting a for minimizing the burden of bidding purposes. Networks are several
bid in one CBA is $2,125. The cost of competitive bidding on small small suppliers joining together to
bidding as a share of Medicare revenue submit bids for a product category
businesses. The first two options were

will depend on the size of the small under competitive bidding. This option
included in the demonstration project.
supplier’s Medicare revenue. The share will allow small suppliers to band
Some of the new options may increase
for a supplier with $50,000 in Medicare together to lower bidding costs, expand
revenue would be 4.4 percent; the totals Medicare potential savings, while others service options, or attain more favorable
for suppliers with $100,000, $1 million, may lower or have no effect on potential purchasing terms. We recognize that
and $3 million would be 2.2 percent, 0.2 savings. forming a network may be challenging
for suppliers but believe it is still a contracts to multiple entities and ensure supplies that require relatively little
viable and worthwhile option. that we have sufficient contract labor’’ (71 FR 25676). The commenters
Networking was allowed in the suppliers to meet the anticipated needs argued that the proposal creates the
demonstration project, but no networks of beneficiaries for competitive bid possibility that contract suppliers may,
submitted bids. If suppliers can form items on a timely basis. therefore, need to expand capacity
networks efficiently, they may be able to • Streamlined financial standards: beyond the 20-percent PAOC estimate.
submit lower bids than the individual We have streamlined the financial Two commenters noted that such
suppliers could submit, possibly standards to require submission of expansions could raise accreditation
increasing Medicare savings. certain tax information and other basic and licensure issues.
• Not requiring bids for every product financial information such as a Response: Our methodology will
category: As discussed in section VII. of compiled balance sheet. This provision, ensure that we select a sufficient
this final rule, we will conduct separate which was not included in the number of suppliers to meet the needs
bidding for items grouped together in demonstration, should make it easier for of Medicare beneficiaries for
product categories rather than conduct a small suppliers to bid. This has the competitively bid items. We also note
single bidding program for all items. potential to increase Medicare savings, that, as we stated in the preamble to the
Therefore, small suppliers will have the but it is not clear by how much. proposed rule (71 FR 25676), the PAOC
option of deciding how many product • Permitting physicians and certain indicated that suppliers of products
categories for which they want to non-physician practitioners to furnish such as diabetes supplies that require
submit bids. We believe this will help certain limited items. We will permit relatively little labor may be able to
minimize the burden on small physicians and certain practitioners to expand capacity even more. We will be
suppliers. This option was available furnish certain limited items that are selecting multiple contract suppliers,
during the demonstration projects, and provided to beneficiaries as part of their and we will be asking suppliers that
most suppliers did not bid in every professional practice without submitting plan to increase their capacity to submit
product category. We believe these a bid and being awarded a contract, plans on how they will achieve this
provisions will allow suppliers to bid provided that certain conditions are increased capacity. However, no
on the product category that they can met. These physicians and non-
contract supplier will be required to
most efficiently supply, and therefore physician practitioners would be
increase its capacity. In addition, as a
contributes to Medicare savings. required to submit bids if they wished
general rule, for a selection tool, we
• Small supplier target: Our goal for to furnish any other competitively bid
would not assign more than 20 percent
small supplier participation in each items. This provision was not included
of the total Medicare demand for a
product category will be determined by in the demonstration projects. We do
product category to any one supplier in
multiplying 30 percent times the not believe it will have a significant
estimating how many suppliers we need
number of suppliers whose composite effect on Medicare savings, because
in a given CBA. Based on these factors,
bids are at or lower than the pivotal bid relatively few items will be covered.
• Another option we considered but we do not believe that contract
for the product category. This target was
not included in the demonstration did not adopt would have allowed small suppliers will experience capacity
project. However, small suppliers were suppliers to be exempted from the problems.
selected in most product categories. We requirement that a contract supplier Comment: A number of commenters
expect that this provision will not affect must service an entire CBA. However, believed that the regulatory analysis in
potential Medicare savings because (1) we note that if a small supplier joined the proposed rule minimized the impact
The target may be met through the a network, an exception to this rule of the proposed rule on small businesses
normal selection process; and (2) if the would apply. This option is also because CMS estimates that half of the
target is not met, the additional small discussed in further detail in section XI. bidding suppliers will not be selected as
suppliers that are selected will have to of the preamble of this final rule. contract suppliers. The commenters
agree to accept the single payment Comment: Several commenters believed that this group would be
amount. believed that the analysis in the disproportionately comprised of small
• Capacity limit: The capacity limit proposed rule suggests potential businesses that are now providing
was not included in the demonstration capacity issues for successful bidders. DMEPOS and that many, faced with the
project. It is possible that the limit will These commenters argued that if 37 loss of Medicare business for
increase the pivotal bid because it may percent of existing suppliers will competitively bid items, would go out of
take more suppliers to reach the become noncontract suppliers as a business.
estimated need for capacity. The higher result of not bidding or not submitting Response: Our current estimates
pivotal bid will reduce potential successful bids as projected in Table 15 indicate that, of all the DMEPOS
Medicare savings. We have established of the proposed rule (71 FR 25695), and suppliers in a CBA, only 22 percent
a capacity limit for purposes of the current ratio of beneficiaries to would be noncontract suppliers because
calculating the pivotal bid such that no suppliers is roughly the same for they submitted a losing bid. Many
supplier’s or network’s estimated contract and noncontract suppliers, DMEPOS items are not subject to
capacity can be considered to meet more each contract supplier will experience, competitive bidding. Therefore, many
than 20 percent of the total need for on average, a 59 percent increase in the small suppliers such as suppliers of
capacity. Once winning suppliers are number of beneficiaries that it must specialty items, for example, are not
selected, we will not exclude networks serve. The commenters stated that CMS likely to be affected by competitive
or suppliers from expanding and indicated in the preamble to the bidding. For those suppliers that
exceeding the 20-percent capacity. This proposed rule that the PAOC, during its currently furnish competitively bid
will increase the opportunity for small February 28, 2006 meeting, suggested items, we are taking specific steps to
suppliers to be considered and ‘‘that most DMEPOS suppliers would be ensure that they have the opportunity to
participate in the program. It will also able to easily increase their total participate in the competitive bidding
help ensure that we meet the capacity to furnish items by up to 20 program. These steps include offering
requirement at section 1847(b)(4) of the percent and the increase could be even suppliers the opportunity to form
Act that the Secretary shall award larger for products like diabetes networks, small supplier targets, and
not requiring suppliers to submit bids a004/a-4.pdf), in the following table payments under the Medicare DMEPOS
for all product categories. below, we have prepared an accounting Competitive Bidding Program as a result
statement showing the classification of of the changes presented in this final
H. Accounting Statement
the expenditures associated with the rule. All expenditures are classified as
As required by OMB Circular A–4 provisions of this final rule. This table transfers to the Federal Government
(available at http:// provides our best estimate of the from DMEPOS suppliers.
www.whitehouse.gov/omb/circulars/ decreased expenditures in Medicare
TABLE 18.—ACCOUNTING STATEMENT—CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM FY 2007 TO FY 2012

Category Transfers
Annualized Monetized Transfers .............................................. 547.9 (in Millions).

From Whom To Whom? ........................................................... To Federal Government from Medicare DMEPOS Suppliers.
Annualized Monetized Transfers .............................................. 137.0.
From Whom To Whom? ........................................................... To Beneficiaries from Medicare DMEPOS Suppliers.
I. Executive Order 12866 PART 414—PAYMENT FOR PART B Grandfathered item means any one of
In accordance with the provisions of MEDICAL AND OTHER HEALTH the following items for which payment
Executive Order 12866, this final rule SERVICES is made on a rental basis prior to the
was reviewed by the OMB. implementation of a competitive
■ 3. The authority citation for part 414 bidding program and for which payment
List of Subjects continues to read as follows: is made after implementation of a
42 CFR Part 411 Authority: Secs. 1102, 1871, and 1881(b)(1) competitive bidding program to a
of the Social Security Act (42 U.S.C. 1302, grandfathered supplier that continues to
Kidney diseases, Medicare, Reporting 1395hh, and 1395rr(b)(1)). furnish the items in accordance with
and recordkeeping requirements. § 414.408(j):
Subpart F—Competitive Bidding for (1) An inexpensive or routinely
42 CFR Part 414
Certain Durable Medical Equipment, purchased item described in § 414.220.
Administrative practice and Prosthetics, Orthotics, and Supplies (2) An item requiring frequent and
procedure, Health facilities, Health (DMEPOS) substantial servicing, as described in
professions, Kidney diseases, Medicare, § 414.222.
Reporting and recordkeeping ■ 4. New §§ 414.400, 414.402, and (3) Oxygen and oxygen equipment
requirements. 414.404 are added to Subpart F to read described in § 414.226.
■ For the reasons set forth in the as follows: (4) Other DME described in § 414.229.
preamble, the Centers for Medicare & § 414.400 Purpose and basis.
Grandfathered supplier means a
Medicaid Services is amending 42 CFR noncontract supplier that chooses to
Chapter IV as set forth below: This subpart implements competitive continue to furnish grandfathered items
bidding programs for certain DMEPOS to a beneficiary in a CBA.
PART 411—EXCLUSIONS FOR items as required by sections 1847(a) Item means a product included in a
MEDICARE AND LIMITATIONS ON and (b) of the Act. competitive bidding program that is
MEDICARE PAYMENT § 414.402 Definitions. identified by a HCPCS code, which may
be specified for competitive bidding (for
■ 1. The authority for part 411 For purposes of this subpart, the example, a product when it is furnished
continues to read as follows: following definitions apply: through mail order), or a combination of
Authority: Secs. 1102 and 1871 of the Bid means an offer to furnish an item codes and/or modifiers, and includes
Social Security Act (42 U.S.C. 1302 and for a particular price and time period the services directly related to the
1395hh). that includes, where appropriate, any furnishing of that product to the
services that are directly related to the beneficiary. Items that may be included
Subpart A—General Exclusions and furnishing of the item.
Exclusions of Particular Services in a competitive bidding program are:
Competitive bidding area (CBA) (1) Durable medical equipment (DME)
means an area established by the other than class III devices under the
■ 2. Section 411.15 is amended by
Secretary under this subpart. Federal Food, Drug, and Cosmetic Act,
adding a new paragraph (s) to read as
Competitive bidding program means a as defined in § 414.202 of this part and
follows.
program established under this subpart further classified into the following
§ 411.15 Particular services excluded from within a designated CBA. categories:
coverage. Composite bid means the sum of a (i) Inexpensive or routinely purchased
* * * * * supplier’s weighted bids for all items items, as specified in § 414.220(a).
(s) Unless § 414.404(d) or within a product category for purposes (ii) Items requiring frequent and
§ 414.408(e)(2) of this subchapter of allowing a comparison across bidding substantial servicing, as specified in
applies, Medicare does not make suppliers. § 414.222(a).
payment if an item or service that is Contract supplier means an entity that (iii) Oxygen and oxygen equipment,
included in a competitive bidding is awarded a contract by CMS to furnish as specified in § 414.226(c)(1).

program (as described in Part 414, items under a competitive bidding (iv) Other DME (capped rental items),
Subpart F of this subchapter) is program. as specified in § 414.229.
furnished by a supplier other than a DMEPOS stands for durable medical (2) Supplies necessary for the
contract supplier (as defined in equipment, prosthetics, orthotics, and effective use of DME other than
§ 414.402 of this subchapter). supplies. inhalation drugs.
(3) Enteral nutrients, equipment, and Single payment amount means the ■ 5. Section 414.406 is amended by
supplies. allowed payment for an item furnished adding paragraphs (b), (c), and (d) to
(4) Off-the-shelf orthotics, which are under a competitive bidding program. read as follows:
orthotics described in section 1861(s)(9) Small supplier means, a supplier that
§ 414.406 Implementation of programs.
of the Act that require minimal self- generates gross revenue of $3.5 million
adjustment for appropriate use and do or less in annual receipts including * * * * *
not require expertise in trimming, Medicare and non-Medicare revenue. (b) Competitive bidding areas. CMS
bending, molding, assembling or Supplier means an entity with a valid designates through program instructions
customizing to fit a beneficiary. Medicare supplier number, including an or by other means, such as the request
Item weight is a number assigned to entity that furnishes an item through the for bids, each CBA in which a
an item based on its beneficiary mail. competitive bidding program may be
utilization rate using national data when Treating practitioner means a implemented under this subpart.
compared to other items in the same physician assistant, nurse practitioner, (c) Revisions to competitive bidding
product category. or clinical nurse specialist, as those areas. CMS may revise the CBAs
Mail order contract supplier is a terms are defined in section 1861(aa)(5) designated under paragraph (b) of this
contract supplier that furnishes items of the Act. section.
through the mail to beneficiaries who Weighted bid means the item weight (d) Competitively bid items. CMS
maintain a permanent residence in a multiplied by the bid price submitted designates the items that are included in
competitive bidding area. for that item. a competitive bidding program through
Metropolitan Statistical Area (MSA) program instructions or by other means
has the same meaning as that given by § 414.404 Scope and applicability. * * * * *
the Office of Management and Budget. (a) Applicability. Except as specified ■ 6. New §§ 414.408, 414.410, 414.412,
Minimal self-adjustment means an in paragraph (b) of this section, this 414.414, 414.416, 414.418, 414.420,
adjustment that the beneficiary, subpart applies to all suppliers that 414.422, 414.424, and 414.426 are
caretaker for the beneficiary, or supplier furnish the items defined in § 414.402 to added to Subpart F to read as follows:
of the device can perform and does not beneficiaries, including providers,
require the services of a certified physicians, treating practitioners, § 414.408 Payment rules.
orthotist (that is, an individual certified physical therapists, and occupational (a) Payment basis. (1) The payment
by either the American Board for therapists that furnish such items under basis for an item furnished under a
Certification in Orthotics and Medicare Part B. competitive bidding program is 80
Prosthetics, Inc., or the Board for (b) Exceptions. (1) Physicians and percent of the single payment amount
Orthotist/Prosthetist Certification) or an treating practitioners may furnish calculated for the item under § 414.416
individual who has specialized training. certain types of competitively bid items for the CBA in which the beneficiary
Nationwide competitive bidding area without submitting a bid and being maintains a permanent residence.
means a CBA that includes the United awarded a contract under this subpart, (2) If an item that is included in a
States, its Territories, and the District of provided that all of the following competitive bidding program is
Columbia. conditions are satisfied: furnished to a beneficiary who does not
Nationwide mail order contract (i) The items furnished are limited to maintain a permanent residence in a
supplier means a mail order contract crutches, canes, walkers, folding manual CBA, the payment basis for the item is
supplier that furnishes items in a wheelchairs, blood glucose monitors, 80 percent of the lesser of the actual
nationwide competitive bidding area. and infusion pumps that are DME. charge for the item, or the applicable fee
Network means a group of small (ii) The items are furnished by the schedule amount for the item, as
suppliers that form a legal entity to physician or treating practitioner to his determined under Subpart C or Subpart
provide competitively bid items or her own patients as part of his or her D.
throughout the entire CBA. professional service. (b) No changes to the single payment
Noncontract supplier means a (iii) The items are billed under a amount. The single payment amount
supplier that is not awarded a contract billing number assigned to the calculated for each item under each
by CMS to furnish items included in a physician, the treating practitioner (if competitive bidding program is paid for
competitive bidding program. possible), or a group practice to which the duration of the competitive bidding
Physician has the same meaning as in the physician or treating practitioner program and will not be adjusted by any
section 1861(r) of the Act. has reassigned the right to receive update factor.
Pivotal bid means the lowest Medicare payment. (c) Payment on an assignment-related
composite bid based on bids submitted (2) A physical therapist in private basis. Payment for an item furnished
by suppliers for a product category that practice (as defined in § 410.60(c) of this under this subpart is made on an
includes a sufficient number of chapter) or an occupational therapist in assignment-related basis.
suppliers to meet beneficiary demand private practice (as defined in (d) Applicability of advanced
for the items in that product category. § 410.59(c) of this chapter) may furnish beneficiary notice. Implementation of a
Product category means a grouping of competitively bid off-the-shelf orthotics program in accordance with this subpart
related items that are used to treat a without submitting a bid and being does not preclude the use of an
similar medical condition. awarded a contract under this subpart, advanced beneficiary notice.
Regional competitive bidding area provided that the items are furnished (e) Requirement to obtain
means a CBA that consists of a region only to the therapist’s own patients as competitively bid items from a contract
of the United States, its Territories, and part of the physical or occupational supplier. (1) General rule. Except as
the District of Columbia. therapy service. provided in paragraph (e)(2) of this
Regional mail order contract supplier (3) Payment for items furnished in section, all items that are included in a
means a mail order contract supplier accordance with paragraphs (b)(1) and competitive bidding program must be
that furnishes items in a regional (b)(2) of this section will be paid in furnished by a contract supplier for that
competitive bidding area. accordance with § 414.408(a). program.
(2) Exceptions. (i) A grandfathered payment amounts calculated for new supplier to which payment is made in
supplier may furnish a grandfathered purchased equipment under paragraph month 15 for furnishing enteral
item to a beneficiary in accordance with (f)(1) of this section. nutrition equipment on a rental basis
paragraph (j) of this section. (g) Purchased supplies and orthotics. must continue to furnish, maintain and
(ii) Medicare may make a secondary The single payment amounts for the service the equipment until a
payment for an item furnished by a following purchased items are determination is made by the
noncontract supplier that the calculated based on the bids submitted beneficiary’s physician or treating
beneficiary is required to use under his and accepted for the following items: practitioner that the equipment is no
or her primary insurance policy. The (1) Supplies used in conjunction with longer medically necessary.
provisions of this paragraph do not durable medical equipment. (5) Maintenance and servicing of
supersede Medicare secondary payer (2) Enteral nutrients. rented enteral nutrition equipment.
statutory and regulatory provisions, (3) Enteral nutrition supplies. Payment for the maintenance and
including the Medicare secondary (4) OTS orthotics. servicing of rented enteral nutrition
payment rules located in §§ 411.32 and (h) Rented equipment. (1) Capped equipment beginning 6 months after 15
411.33 of this subchapter, and payment rental DME. Subject to the provisions of months of rental payments is made in
will be calculated in accordance with paragraph (h)(2) of this section, payment an amount equal to 5 percent of the
those rules. for capped rental durable medical single payment amounts calculated for
(iii) If a beneficiary is outside of the equipment is made in an amount equal these items under paragraph (f)(1) of
CBA in which he or she maintains a to 10 percent of the single payment this section.
permanent residence, he or she may amounts calculated for new durable (6) Payment for inexpensive or
obtain an item from a— medical equipment under paragraph routinely purchased durable medical
(A) Contract supplier, if the (f)(1) of this section for each of the first equipment. Payment for inexpensive or
beneficiary obtains the item in another 3 months, and 7.5 percent of the single routinely purchased durable medical
CBA and the item is included in the payment amounts calculated for these equipment furnished on a rental basis is
competitive bidding program for that items for each of the remaining months made in an amount equal to 10 percent
CBA; or 4 through 13. of the single payment amount calculated
(B) Supplier with a valid Medicare (2) Additional payment to certain for new purchased equipment.
billing number, if the beneficiary contract suppliers for capped rental (7) Payment amounts for rented DME
obtains the item in an area that is not DME. (i) Except as specified in requiring frequent and substantial
a CBA, or if the beneficiary obtains the paragraph (h)(2)(ii) of this section, servicing. (i) General rule. Except as
item in another CBA but the item is not Medicare makes 13 monthly payments provided in paragraph (h)(7)(ii) of this
included in the competitive bidding to a contract supplier that furnishes section, the single payment amounts for
program for that CBA. capped rental durable medical rented durable medical equipment
(iv) A physician, treating practitioner, equipment to a beneficiary who would requiring frequent and substantial
physical therapist in private practice, or otherwise be entitled to obtain the item servicing are calculated based on the
occupational therapist in private from a grandfathered supplier under rental bids submitted and accepted for
practice may furnish an item in paragraph (j) of this section. Payment is the furnishing of these items on a
accordance with § 414.404(b) of this made using the methodology described monthly basis.
subpart. in paragraph (h)(1) of this section. The (ii) Exception. The single payment
(3) Unless paragraph (e)(2) of this contract supplier must transfer title to amounts for continuous passive motion
section applies: the item to the beneficiary on the first exercise devices are calculated based on
(i) Medicare will not make payment day that begins after the 13th the bids submitted and accepted for the
for an item furnished in violation of continuous month in which payments furnishing of these items on a daily
paragraph (e)(1) of this section, and are made in accordance with this basis.
(ii) A beneficiary has no financial paragraph. (i) Monthly payment amounts for
liability to a noncontract supplier that (ii) Medicare does not make payment oxygen and oxygen equipment. (1) Basic
furnishes an item included in the to a contract supplier under paragraph payment amount. Subject to the
competitive bidding program for a CBA (h)(2)(i) of this section if the contract provisions of paragraph (i)(2) of this
in violation of paragraph (e)(1) of this supplier furnishes capped rental section, the single payment amounts for
section, unless the beneficiary has durable medical equipment to a oxygen and oxygen equipment are
signed an advanced beneficiary notice. beneficiary who previously rented the calculated based on the bids submitted
(4) CMS separately designates the equipment from another contract and accepted for the furnishing on a
Medicare billing number of all supplier. monthly basis of each of the five classes
noncontract suppliers to monitor (3) Maintenance and servicing of of oxygen and oxygen equipment
compliance with paragraphs (e)(1) and rented DME. Separate maintenance and described in § 414.226(c)(1).
(e)(2) of this section. servicing payments are not made for any (2) Additional payment to certain
(f) Purchased equipment. (1) The rented durable medical equipment. contract suppliers. (i) Except as
single payment amounts for new (4) Payment for rented enteral specified in paragraph (i)(2)(iii) of this
purchased durable medical equipment, nutrition equipment. Payment for rented section, Medicare makes monthly
including power wheelchairs that are enteral nutrition equipment is made in payments to a contract supplier that
purchased when the equipment is an amount equal to 10 percent of the furnishes oxygen equipment to a
initially furnished, and enteral nutrition single payment amounts calculated for beneficiary who would otherwise be
equipment are calculated based on the new enteral nutrition equipment under entitled to obtain the item from a
bids submitted and accepted for these paragraph (f)(1) of this section for each grandfathered supplier under paragraph
items. of the first 3 months, and 7.5 percent of (j) of this section as follows:
(2) Payment for used purchased the single payment amount calculated (A) If Medicare made 26 or less
durable medical equipment and enteral for these items under paragraph (f)(1) of monthly payments to the former
nutrition equipment is made in an this section for each of the remaining supplier, Medicare makes a monthly
amount equal to 75 percent of the single months 4 through 15. The contract payment to the contract supplier for up
to the number of months equal to the (3) Payment for grandfathered items made for the replacement item in
difference between 36 and the number furnished during all subsequent accordance with paragraph (a)(1) of this
of months for which payment was made competitive bidding programs in a CBA. section.
to the former supplier. Beginning with the second competitive
bidding program implemented in a § 414.410 Phased-in implementation of
(B) If Medicare made 27 or more
competitive bidding programs.
monthly payments to the former CBA, payment is made for
supplier, Medicare makes 10 monthly grandfathered items in accordance with (a) Phase-in of competitive bidding
payments to the contract supplier. paragraph (a)(1) of this section. programs. CMS phases in competitive
(ii) Payment is made using the (4) Choice of suppliers. (i) bidding programs so that competition
methodology described in paragraph Beneficiaries who are renting an item under the programs occurs in—
(i)(1) of this section. On the first day that meets the definition of a (1) 10 of the largest MSAs in CY 2007;
after the month in which the final rental grandfathered item in § 414.402 of this (2) 80 of the largest MSAs in CY 2009;
payment is made under paragraph subpart may elect to obtain the item (3) Additional CBAs after CY 2009.
(i)(2)(i) of this section, the contract from a grandfathered supplier. (b) Selection of MSAs for CY 2007 and
supplier must transfer title of the (ii) A beneficiary who is otherwise CY 2009. CMS selects the MSAs for
oxygen equipment to the beneficiary. entitled to obtain a grandfathered item purposes of designating CBAs in CY
(iii) Medicare does not make payment from a grandfathered supplier under 2007 and CY 2009 by considering the
to a contract supplier under paragraph paragraph (j) of this section may elect to following variables:
obtain the same item from a contract (1) The total population of an MSA.
(i)(2) of this section if the contract
supplier at any time after a competitive (2) The Medicare allowed charges for
supplier furnishes oxygen equipment to
bidding program is implemented. DMEPOS items per fee-for-service
a beneficiary who previously rented the
(iii) If a beneficiary elects to obtain beneficiary in an MSA.
equipment from another contract
the same item from a contract supplier, (3) The total number of DMEPOS
supplier.
payment is made for the item suppliers per fee-for-service beneficiary
(j) Special rules for certain rented
accordance with paragraph (a)(1) of this who received DMEPOS items in an
durable medical equipment and oxygen
section. MSA.
and oxygen equipment. (1) Supplier
(5) Payment for accessories and (4) An MSA’s geographic location.
election. (i) A supplier that is furnishing
supplies for grandfathered items. (c) Exclusions from a CBA. CMS may
durable medical equipment or is
Accessories and supplies that are used exclude from a CBA a rural area (as
furnishing oxygen or oxygen equipment
in conjunction with and are necessary defined in § 412.64(b)(1)(ii)(C) of this
on a rental basis to a beneficiary prior
for the effective use of a grandfathered subchapter), or an area with low
to the implementation of a competitive
item may be furnished by the same population density based on one or
bidding program in the CBA where the
grandfathered supplier that furnishes more of the following factors—
beneficiary maintains a permanent
the grandfathered item. Payment is (1) Low utilization of DMEPOS items
residence may elect to continue
made in accordance with paragraph by Medicare beneficiaries receiving fee-
furnishing the item as a grandfathered
(a)(1) of this section. for-service benefits relative to similar
supplier.
(k) Payment for maintenance, geographic areas;
(ii) A supplier that elects to be a (2) Low number of DMEPOS suppliers
servicing and replacement of
grandfathered supplier must continue to relative to similar geographic areas; or
beneficiary-owned items.
furnish the grandfathered items to all (1) Payment is made for the (3) Low number of Medicare fee-for-
beneficiaries who elect to continue maintenance and servicing of service beneficiaries relative to similar
receiving the grandfathered items from beneficiary-owned items, provided the geographic areas.
that supplier for the remainder of the maintenance and servicing is performed (d) Selection of additional CBAs after
rental period for that item. by a contract supplier or a noncontract CY 2009. (1) Beginning after CY 2009,
(2) Payment for grandfathered items supplier having a valid Medicare billing CMS designates through program
furnished during the first competitive number, as follows: instructions or by other means
bidding program implemented in a (i) Payment for labor is made in additional CBAs based on CMS’
CBA. Payment for grandfathered items accordance with § 414.210(e)(1) of determination that the implementation
furnished during the first competitive Subpart D. of a competitive bidding program in a
bidding program implemented in a CBA (ii) Payment for parts that are not particular area would be likely to result
is made as follows: items (as defined in § 414.402) is made in significant savings to the Medicare
(i) For inexpensive and routinely in accordance with § 414.210(e)(1) of program.
purchased items described in Subpart D. (2) Beginning after CY 2009, CMS may
§ 414.220(a), payment is made in the (iii) Payment for parts that are items designate through program instructions
amount determined under § 414.220(b). (as defined in § 414.402) is made in or by other means a nationwide CBA or
(ii) For other durable medical accordance with paragraph (a)(1) of this one or more regional CBAs for purposes
equipment or capped rental items section. of implementing competitive bidding
described in § 414.229, payment is made (2) Additional payments are made in programs for items that are furnished
in the amount determined under accordance with §§ 414.210(e)(2) and through the mail by nationwide or
§ 414.229(b). (e)(3) of subpart D for the maintenance regional mail order contract suppliers.
(iii) For items requiring frequent and and servicing of oxygen equipment if
substantial servicing described in performed by a contract supplier or a § 414.412 Submission of bids under a
§ 414.222, payment is made in noncontract supplier having a valid competitive bidding program.
accordance with paragraph (a)(1) of this Medicare billing number. (a) Requirement to submit a bid.
section. (3) Beneficiaries must obtain a Except as provided under § 414.404(b),
(iv) For oxygen and oxygen replacement of a beneficiary-owned in order for a supplier to receive
equipment described in § 414.226(c)(1), item, other than parts needed for the payment for items furnished to
payment is made in accordance with repair of beneficiary-owned equipment beneficiaries under a competitive
paragraph (a)(1) of this section. from a contract supplier. Payment is bidding program, the supplier must
submit a bid to furnish those items and nationwide or regional mail order submitted a bid for the product
be awarded a contract under this competitive bidding program that category.
subpart. includes the same items. Suppliers may (4) Arraying the composite bids from
(b) Grouping of items into product continue to furnish these items in— the lowest composite bid price to the
categories. (1) Bids are submitted for (1) A CBA, if the supplier is awarded highest composite bid price;
items grouped into product categories. a contract under this subpart; or (5) Calculating the pivotal bid for the
(2) The bids submitted for each item (2) An area not designated as a CBA. product category;
in a product category cannot exceed the (6) Selecting all suppliers and
§ 414.414 Conditions for awarding
payment amount that would otherwise networks whose composite bids are less
contracts.
apply to the item under Subpart C or than or equal to the pivotal bid for that
(a) General rule. The rules set forth in product category, and that meet the
Subpart D of this part.
(c) Furnishing of items. A bid must this section govern the evaluation and requirements in paragraphs (b) through
include all costs related to furnishing an selection of suppliers for contract award (d) of this section.
item, including all services directly purposes under a competitive bidding (f) Expected savings. A contract is not
related to the furnishing of the item. program. awarded under this subpart unless CMS
(b) Basic supplier eligibility. (1) Each determines that the amounts to be paid
(d) Separate bids. For each product
supplier must meet the enrollment
category that a supplier is seeking to to contract suppliers for an item under
standards specified in § 424.57(c) of this
furnish under a competitive bidding a competitive bidding program are
chapter.
program, the supplier must submit a (2) Each supplier must disclose expected to be less than the amounts
separate bid for each item in that information about any prior or current that would otherwise be paid for the
product category. legal actions, sanctions, revocations same item under Subpart C or Subpart
(e) Commonly-owned or controlled D.
from the Medicare program, program-
suppliers. (1) For purposes of this (g) Special rules for small suppliers.
related convictions as defined in section
paragraph— (1) Target for small supplier
1128(a)(1) through (a)(4) of the Act,
(i) An ownership interest is the participation. CMS ensures that small
exclusions or debarments imposed
possession of equity in the capital, stock suppliers have the opportunity to
against it, or against any members of the
or profits of another supplier; participate in a competitive bidding
board of directors, chief corporate
(ii) A controlling interest exists if one program by taking the following steps:
officers, high-level employees, affiliated
or more of owners of a supplier is an (i) Setting a target number for small
companies, or subcontractors, by any
officer, director or partner in another supplier participation by multiplying 30
Federal, State, or local agency. The
supplier; and percent by the number of suppliers that
supplier must certify in its bid that this
(iii) Two or more suppliers are meet the requirements in paragraphs (b)
information is completed and accurate.
commonly-owned if one or more of through (d) of this section and whose
(3) Each supplier must have all State
them has an ownership interest totaling and local licenses required to perform composite bids are equal to or lower
at least 5 percent in the other(s). the services identified in the request for than the pivotal bid calculated for the
(2) A supplier must disclose in its bid product category;
bids.
each supplier in which it has an (4) Each supplier must submit a bona (ii) Identifying the number of
ownership or controlling interest and fide bid that complies with all the terms qualified small suppliers whose
each supplier which has an ownership and conditions contained in the request composite bids are at or below the
or controlling interest in it. for bids. pivotal bid for the product category;
(3) Commonly-owned or controlled (5) Each network must meet the (iii) Selecting additional small
suppliers must submit a single bid to requirements specified in § 414.418. suppliers whose composite bids are
furnish a product category in a CBA. (c) Quality standards and above the pivotal bid for the product
Each commonly-owned or controlled accreditation. Each supplier must meet category in ascending order based on
supplier that is located in the CBA for applicable quality standards developed the proximity of each small supplier’s
which the bid is being submitted must by CMS in accordance with section composite bid to the pivotal bid, until
be included in the bid. The bid must 1834(a)(20) of the Act and be accredited the number calculated in paragraph
also include any commonly-owned or by a CMS-approved accreditation (g)(1)(i) of this section is reached or
controlled supplier that is located organization that meets the there are no more composite bids
outside of the CBA but would furnish requirements of § 424.58 of this submitted by small suppliers for the
the product category to the beneficiaries subchapter, unless a grace period is product category.
who maintain a permanent residence in specified by CMS. (2) The bids by small suppliers that
the CBA. (d) Financial standards. Each supplier are selected under paragraph (g)(1)(iii)
(f) Mail order suppliers. (1) Suppliers must submit along with its bid the of this section are not used to calculate
that furnish items through the mail must applicable financial documentation the single payment amounts for any
submit a bid to furnish these items in a specified in the request for bids. items under § 414.416 of this subpart.
CBA in which a mail order competitive (e) Evaluation of bids. CMS evaluates (h) Sufficient number of suppliers.
bidding program that includes the items bids submitted for items within a (1) Except as provided in paragraph
is implemented. product category by— (h)(3) of this section. CMS will award at
(2) Suppliers that submit one or more (1) Calculating the expected least five contracts, if there are five
bids under paragraph (f)(1) of this beneficiary demand in the CBA for the suppliers satisfying the requirements in
section may submit the same bid items in the product category; paragraphs (b) through (f) of this
amount for each item under each (2) Calculating the total supplier section; or
competitive bidding program for which capacity that would be sufficient to (2) CMS will award at least two
it submits a bid. meet the expected beneficiary demand contracts, if there are less than five
(g) Applicability of the mail order in the CBA for the items in the product suppliers meeting these requirements
competitive bidding program. Suppliers category; and the suppliers satisfying these
that do not furnish items through the (3) Establishing a composite bid for requirements have sufficient capacity to
mail are not required to participate in a each supplier and network that satisfy beneficiary demand for the
product category calculated under (1) Each network must form a single particular brand or mode of delivery is
paragraph (e)(1) of this section. legal entity that acts as the bidder and medically necessary to avoid an adverse
(3) The provisions of paragraph (h)(1) submits the bid. Any agreement entered medical outcome.
of this section do not apply to regional into for purposes of forming a network (b) Furnishing of a prescribed
or nationwide mail order CBAs under must be submitted to CMS. The network particular brand item or mode of
§ 414.410(d)(2) of this subpart. must identify itself as a network and delivery. If a physician or treating
(i) Selection of new suppliers after identify all of its members. practitioner prescribes a particular
bidding. (1) Subsequent to the awarding (2) Each member of the network must brand of an item or mode of delivery,
of contracts under this subpart, CMS satisfy the requirements in § 414.414(b) the contract supplier must—
may award additional contracts if it through (d). (1) Furnish the particular brand or
determines that additional contract (3) A small supplier may join one or mode of delivery as prescribed by the
suppliers are needed to meet beneficiary more networks but cannot submit an physician or treating practitioner;
demand for items under a competitive individual bid to furnish the same (2) Consult with the physician or
bidding program. CMS selects product category in the same CBA as treating practitioner to find an
additional contract suppliers by— any network in which it is a member. appropriate alternative brand of item or
(i) Referring to the arrayed list of A small supplier may not be a member mode of delivery for the beneficiary and
suppliers that submitted bids for the of more than one network if those obtain a revised written prescription
product category included in the networks submit bids to furnish the from the physician or treating
competitive bidding program for which same product category in the same CBA. practitioner; or
beneficiary demand is not being met; (4) The network cannot be (3) Assist the beneficiary in locating a
and anticompetitive, and this section does contract supplier that can furnish the
(ii) Beginning with the supplier not supersede any Federal law or particular brand of item or mode of
whose composite bid is the first regulation that regulates anticompetitive delivery prescribed by the physician or
composite bid above the pivotal bid for behavior. treating practitioner.
that product category, determining if (5) A bid submitted by a network (c) Payment for a particular brand of
that supplier is willing to become a must include a statement from each item or mode of delivery. Medicare does
contract supplier under the same terms network member certifying that the not make an additional payment to a
and conditions that apply to other network member joined the network contract supplier that furnishes a
contract suppliers in the CBA. because it is unable independently to particular brand or mode of delivery for
(2) Before CMS awards additional furnish all of the items in the product an item, as directed by a prescription
contracts under paragraph (i)(1) of this category for which the network is written by the beneficiary’s physician or
section, a supplier must submit updated submitting a bid to beneficiaries treating practitioner.
information demonstrating that the throughout the entire geographic area of (d) Prohibition on billing for an item
supplier meets the requirements under the CBA. different from the particular brand of
paragraphs (b) through (d) of this (6) At the time that a network submits
item or mode of delivery prescribed. A
section. a bid, the network’s total market share
contract supplier is prohibited from
for each product category that is the
§ 414.416 Determination of competitive submitting a claim to Medicare if it
subject of the network’s bid cannot
bidding payment amounts. furnishes an item different from that
exceed 20 percent of the Medicare
(a) General rule. CMS establishes a specified in the written prescription
demand for that product category in the
single payment amount for each item received from the beneficiary’s
CBA.
furnished under a competitive bidding physician or treating practitioner.
(c) If the network is awarded a
program. Payment will not be made to a contract
contract, each supplier must submit its
(b) Methodology for setting payment supplier that submits a claim prohibited
own claims and will receive payment
amount. (1) The single payment amount by this paragraph.
directly from Medicare for the items that
for an item furnished under a it furnishes under the competitive § 414.422 Terms of contracts.
competitive bidding program is equal to bidding program.
the median of the bids submitted for (a) Basic rule. CMS specifies the terms
that item by suppliers whose composite § 414.420 Physician or treating practitioner and conditions of the contracts entered
bids for the product category that authorization and consideration of clinical into with contract suppliers under this
includes the item are equal to or below efficiency and value of items. subpart. A contract supplier must
the pivotal bid for that product category. (a) Prescription for a particular brand comply with all terms of its contract,
If there is an even number of bids, the item or mode of delivery. (1) A including any option exercised by CMS,
single payment amount for the item is physician or treating practitioner may for the full duration of the contract
equal to the average of the two middle prescribe, in writing, a particular brand period.
bids. of an item for which payment is made (b) Recompeting competitive bidding
(2) The single payment amount for an under a competitive bidding program, or contracts. CMS recompetes competitive
item must be less than or equal to the a particular mode of delivery for an bidding contracts at least once every 3
amount that would otherwise be paid item, if he or she determines that the years.
for the same item under Subpart C or particular brand or mode of delivery (c) Nondiscrimination. The items
Subpart D. would avoid an adverse medical furnished by a contract supplier under
outcome for the beneficiary. this subpart must be the same items that
§ 414.418 Opportunity for networks. (2) When a physician or treating the contract supplier makes available to
(a) A network may be comprised of at practitioner prescribes a particular other customers.

least 2 but not more than 20 small brand or mode of delivery of an item (d) Change of ownership. (1) A
suppliers. under paragraph (a)(1) of this section, contract supplier must notify CMS if it
(b) The following rules apply to the physician or treating practitioner is negotiating a change in ownership 60
networks that seek contracts under this must document the reason in the days before the anticipated date of the
subpart: beneficiary’s medical record why the change.
(2) CMS may award a contract to an 1919(a) of the Act that has elected to program begins, CMS adjusts the single
entity that merges with, or acquires, a furnish items only to its own residents payment amount for that item as
contract supplier if— and that is also a contract supplier may follows:
(i) The successor entity meets all furnish items under a competitive (a) If a single HCPCS code for an item
requirements applicable to contract bidding program to its own patients to is divided into two or more HCPCS
suppliers for the applicable competitive whom it would otherwise furnish Part B codes for the components of that item,
bidding program; services. the sum of single payment amounts for
(ii) The successor entity submits to (f) Breach of contract. (1) Any the new HCPCS codes equals the single
CMS the documentation described deviation from contract requirements, payment amount for the original item.
under § 414.414(b) through (d) if that including a failure to comply with Contract suppliers must furnish the
documentation has not previously been governmental agency or licensing components of the item and submit
submitted by the successor entity or the organization requirements, constitutes a claims using the new HCPCS codes.
contract supplier that is being acquired, breach of contract.
(b) If a single HCPCS code is divided
or is no longer current. This (2) In the event a contract supplier
into two or more separate HCPCS codes,
documentation must be submitted breaches its contract, CMS may take one
the single payment amount for each of
within 30 days prior to the anticipated or more of the following actions:
(i) Require the contract supplier to the new separate HCPCS codes is equal
effective date of the change of
submit a corrective action plan; to the single payment amount applied to
ownership. A successor entity is not
(ii) Suspend the contract supplier’s the single HCPCS code. Contract
required to duplicate previously
contract; suppliers must furnish the items and
submitted information if the previously
(iii) Terminate the contract; submit claims using the new separate
submitted information is still current;
(iii) The successor entity is acquiring (iv) Preclude the contract supplier HCPCS codes.
the assets of the existing contract from participating in the competitive (c) If the HCPCS codes for
supplier, it submits to CMS, at least 30 bidding program; components of an item are merged into
days before the anticipated effective (v) Revoke the supplier number of the a single HCPCS code for the item, the
date of the change of ownership, a contract supplier; or single payment amount for the new
signed novation agreement acceptable to (vi) Avail itself of other remedies HCPCS code is equal to the total of the
CMS stating that it will assume all allowed by law. separate single payment amounts for the
obligations under the contract; or components. Contract suppliers must
§ 414.424 Administrative or judicial review.
(iv) A new entity will be formed as a furnish the item and submit claims
result of the merger or acquisition, the (a) There is no administrative or using the new HCPCS code.
existing contract supplier submits to judicial review under this subpart of the
(d) If multiple HCPCS codes for
CMS, at least 30 days before the following:
similar items are merged into a single
anticipated effective date of the change (1) Establishment of payment
HCPCS code, the items to which the
of ownership, its final draft of a amounts.
(2) Awarding of contracts. new HCPCS codes apply may be
novation agreement as described in furnished by any supplier that has a
(3) Designation of CBAs.
paragraph (d)(2)(iii) of this section for (4) Phase-in of the competitive valid Medicare billing number. Payment
CMS review. The successor entity must bidding programs. for these items will be made in
submit to CMS, within 30 days after the (5) Selection of items for competitive accordance with Subpart C or Subpart
effective date of the change of bidding. D.
ownernship and executed novation (6) Bidding structure and number of (Catalog of Federal Domestic Assistance
agreement acceptable to CMS. contract suppliers selected for a Program No. 93.773, Medicare—Hospital
(e) Furnishing of items. Except as competitive bidding program. Insurance; and Program No. 93.774,
otherwise prohibited under section 1877 (b) A denied claim is not appealable Medicare—Supplementary Medical
of the Act, or any other applicable law if the denial is based on a determination Insurance Program)
or regulation: by CMS that a competitively bid item Dated: December 14, 2006.
(1) A contract supplier must agree to was furnished in a CBA in a manner not Leslie Norwalk,
furnish items under its contract to any authorized by this subpart. Acting Administrator, Centers for Medicare
beneficiary who maintains a permanent
& Medicaid Services.
residence in, or who visits, the CBA and § 414.426 Adjustments to competitively
bid payment amounts to reflect changes in Approved: March 13, 2007.
who requests those items from that
contract supplier. the HCPCS. Michael O. Leavitt,
(2) A skilled nursing facility defined If a HCPCS code for a competitively Secretary.
under section 1819(a) of the Act or a bid item is revised after the contract [FR Doc. 07–1701 Filed 4–2–07; 4:15 pm]
nursing facility defined under section period for a competitive bidding BILLING CODE 4120–01–P

Rule: Medicare: Durable Medical Equipment, Prosthetics, Orthotics, and Supplies and Other Issues Competitive Acquisition

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Rule: Medicare: Durable Medical Equipment, Prosthetics, Orthotics, and Supplies and Other Issues Competitive Acquisition

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Tuesday,

April 10, 2007

42 CFR Parts 411 and 414

Beneficiary-Owned Items (§ 414.408(l))

for Individual Items discusses the provisions of the May 1,

TABLE 2.—SCORING OF TOP 25 MSAS BASED ON DATA FOR CY 2003

Charges per Suppliers per

Miami ............................................................................................................... 3 $428.44 (1) 0.01121 (2) $221,660,443

TABLE 3.—CY 2003 HIGH VOLUME ITEMS (HCPCS CODES)

E1390 .................. $2,033,123,147 Oxygen concentrator ........................................................................... Oxygen.

TABLE 4.—CY 2003 DMEPOS ALLOWED CHARGES BY POLICY GROUP

1 .................................................... Oxygen Supplies/Equipment ................................................................ $2,433,713,269 21.3

Total for 20 Groups .................................................................................................................................. 7,830,384,538 68.6

Secretary.’’ molding, assembling, or customizing to substitute for appropriate coverage

finalizing that section with the or occupational therapists to participate supplier.

TABLE 6.—COMPOSITE BIDS

Units ............................................................................... 5 3 2 ........................ ........................

TABLE 7.—DETERMINING THE PIVOTAL BID

Eligible for Cumulative

2 .................................................................................................. Yes ................... $100 100 100

No longer being considered

5 .................................................................................................. No ..................... 120 n.c. n.c.

TABLE 8.—MEDIAN OF THE WINNING BIDS

Supplier 4 bid ................................................................................................... $1.00 $2.00 $2.00 $1.50

TABLE 9.—ADJUSTING THE AVERAGE WINNING BIDS

Supplier 4 bid ....................................................................... $1.00 $2.00 $2.00 ........................ $1.50

TABLE 10.—ESTIMATED ANNUAL REPORTING AND RECORDKEEPING BURDEN

§ 414.412(a) ............................................................................ 0938—New 15,973 15,973 68 1,086,164

Total ................................................................................ ..................... ........................ ........................ ........................ 1,370,826

NUMBER OF SMALL SUPPLIERS 1

Number of Total number

2007 ..................................................................................................................................... 16,762 19,720 85

$25.54 (National Compensation Survey:

1 .............................. Oxygen Supplies/Equipment ...................................................................................... $2,669,015,203 34

4 .............................. Enteral Nutrition .......................................................................................................... 582,085,753 7.5

11 ................................................ Walkers ................................................................................................... 106,661,034 1.4

Total for 20 Groups ............. ................................................................................................................. 7,719,487,197 99

TABLE 13.—PROGRAM IMPACT FOR 10 POLICY GROUPS

2007 2008 2009 2010 2011 2012

Allowed Charges ...................................................................................... $0 ¥$108 ¥$766 ¥$1126 ¥$1224 ¥$1301

decrease in Medicare Advantage plan payment

TABLE 16.—SUPPLIERS BIDDING YEARS: CYS 2007–2012

CY 2007 CY 2008 CY 2009 CY 2010 CY 2011 CY 2012

TABLE 16.—SUPPLIERS BIDDING YEARS: CYS 2007–2012—Continued

CY 2007 CY 2008 CY 2009 CY 2010 CY 2011 CY 2012

Noncontract suppliers as a percent of total

Number of Total number

2007 ............................................................................................................................................. 16,762 19,720 85

businesses. The first two options were

TABLE 18.—ACCOUNTING STATEMENT—CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM FY 2007 TO FY 2012

Annualized Monetized Transfers .............................................. 547.9 (in Millions).

included in a competitive bidding is awarded a contract by CMS to furnish as specified in § 414.226(c)(1).

(a) A network may be comprised of at practitioner prescribes a particular other customers.

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