Medicare:

Issues for Manufacturer-Level Competitive Bidding for Durable Medical Equipment

GAO-11-337R: Published: May 31, 2011. Publicly Released: Jun 29, 2011.

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In 2009, Medicare--a federal health insurance program that serves about 46.3 million beneficiaries--spent approximately $8.1 billion on durable medical equipment (DME), prosthetics, orthotics, and related supplies for 10.6 million beneficiaries. DME includes items such as wheelchairs, hospital beds, and walkers. Medicare beneficiaries typically obtain DME items from suppliers, who submit claims for payment for these items to Medicare on behalf of beneficiaries. The Centers for Medicare & Medicaid Services (CMS), an agency within the Department of Health and Human Services (HHS), has responsibility for administering the Medicare program. Both we and HHS's Office of Inspector General (OIG) have reported that Medicare and its beneficiaries--through their out-of-pocket costs--have sometimes paid higher than market rates for various medical equipment and supplies. To achieve Medicare savings for DME and to address DME fraud concerns, Congress, through the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), required CMS to phase in a competitive bidding program (CBP) for DME suppliers in selected competitive bidding areas (CBA). In CBP, suppliers submit bid prices in the amounts they are willing to accept as payment to provide DME items to Medicare beneficiaries. CMS then enters into contracts with select DME suppliers to provide DME items at the prices determined by CBP. CBP is a fundamental departure from CMS's usual method of paying for DME, in which CMS pays any qualified supplier a set fee schedule. CBP also provides an incentive for DME suppliers to accept lower Medicare payment amounts in exchange for the ability to serve beneficiaries and to potentially increase their Medicare market share. CMS began implementing CBP in 2007 and 2008--referred to as round 1. Concerns about CBP's round 1 bid submission and contract award processes were raised during two congressional hearings in May 2008. CBP's round 1 was stopped by the enactment of the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), which terminated the contracts already awarded to suppliers, delayed the program's restart, and required CMS to repeat the competition. To compensate for the loss of the projected savings from the CBP delay, beginning January 1, 2009, MIPPA reduced Medicare payments by 9.5 percent nationally for items in the 10 product categories that had been included in the CBP round 1. The CBP competition--referred to as the round 1 rebid--was repeated in 2009 and 2010. On January 1, 2011, CBP began with 356 suppliers awarded contracts to provide DME items in nine DME product categories in nine CBAs. CMS stated that the CBP payment amounts are projected to result in an average savings of 32 percent as compared to the current Medicare fee schedule payments for the same items. In contrast to CBP's supplier-level approach, some health care purchasers use a manufacturer-level approach to buy DME items directly from DME manufacturers to obtain savings by leveraging their purchasing power. CMS has not been required to develop a manufacturer-level approach, and there are no current proposals for it to do so. You expressed interest in obtaining information on health care purchasers that currently use a manufacturer-level approach and on issues that would need to be addressed if CMS implemented such an approach. In this report, we describe (1) efforts used by some non- Medicare purchasers to reduce DME spending by contracting with DME manufacturers or using purchasing intermediaries, and (2) issues that CMS might face if required to implement a DME manufacturer-level approach with broad authority to do so.

Some government and private health care purchasers leverage their buying power to reduce spending on DME (durable medical equipment) by contracting with DME manufacturers or using purchasing intermediaries. VA requires its medical centers to purchase certain DME items directly from manufacturers through one of three mechanisms. By offering manufacturers the opportunity to serve VA's medical centers, VA leverages its buying power when negotiating for lower prices for high-volume and recurring-need DME items. VA can purchase DME items through the Federal Supply Schedule (FSS), where contracts are awarded to an unlimited number of manufacturers offering VA what are known as mostfavored customer pricing--prices at least as low as those given to the manufacturers' mostfavored commercial customers. To purchase items that are widely used on a recurring basis, VA may use blanket purchase agreements (BPA) and national contracts. VA enters into these agreements and contracts with a limited number of manufacturers--offering to increase the manufacturers' VA market share for certain DME items in exchange for prices that must be lower than those listed on the FSS. Like VA, some Medicaid programs contract with manufacturers for DME items. These programs select either a single or limited number of manufacturers to provide a particular DME item, enabling them to leverage their buying power in exchange for price discounts from DME manufacturers on items requiring little or no servicing. Purchasers can also leverage their buying power by negotiating favorable prices from DME manufacturers through purchasing intermediaries. For example, several private insurers may use one GPO to administer their DME benefits and negotiate favorable manufacturer pricing on their behalf. Similarly, some Medicaid programs use a TPA to negotiate rebates from diabetic supply manufacturers on their behalf. CMS could face issues both similar to those that it addressed in implementing CBP at the supplier level and specific to competitive bidding involving manufacturers if it were required to implement a Medicare DME manufacturer-level approach and were given broad authority to do so. Key issues similar to those CMS considered for CBP could include choosing which DME items to competitively bid that would result in the most Medicare savings, determining whether to operate the program for some items at a national level, and considering the range of Medicare beneficiary choices for DME items. CMS could also consider key issues specific to competitive bidding at the manufacturer level. For example, CMS currently has a minimal relationship with DME manufacturers unless they are also Medicare suppliers, and it might need to strengthen its regulatory relationship with DME manufacturers for competitive bidding. CMS could also consider whether a new Medicare payment system would need to be created that could separate payments for the cost of a manufacturer's item from the cost for an item's services provided by suppliers. In commenting on a draft of this report, HHS stated that the report provides useful information about other ways the Medicare program, and its beneficiaries, can obtain better value for DMEPOS items and services. HHS also noted that the report demonstrates how other payers use various acquisition strategies to receive better prices than Medicare for the same DMEPOS items and services, despite the fact that Medicare often pays for a larger quantity of items and services.

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