This is the accessible text file for GAO report number GAO-10-27 
entitled 'Medicare: CMS Working to Address Problems from Round 1 of the 
Durable Medical Equipment Competitive Bidding Program' which was 
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Report to Congressional Requesters: 

United States Government Accountability Office: 
GAO: 

November 2009: 

Medicare: 

CMS Working to Address Problems from Round 1 of the Durable Medical 
Equipment Competitive Bidding Program: 

GAO-10-27: 

GAO Highlights: 

Highlights of GAO-10-27, a report to congressional requesters. 

Why GAO Did This Study: 

In 2007, Medicare spent $8.3 billion for durable medical equipment 
(DME) and related supplies. To reduce spending, the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 
required that the Centers for Medicare & Medicaid Services (CMS) phase 
in, with several rounds of bidding, a large-scale competitive bidding 
program (CBP) for certain DME and other items. DME suppliers began 
bidding in round 1 of the CBP on May 15, 2007. After contracts were 
awarded, the Medicare Improvements for Patients and Providers Act of 
2008 (MIPPA), was enacted on July 15, 2008. Because of numerous 
concerns MIPPA delayed the program, terminated supplier contracts, and 
required CMS to begin the CBP round 1 rebid in 2009. GAO was asked to 
report on (1) the results of CBP round 1, (2) the major challenges CMS 
had in conducting CBP round 1, and (3) the steps CMS has taken to 
improve future CBP rounds. GAO reviewed CMS data and relevant laws and 
regulations, and interviewed officials from CMS and its contractors, 
and DME suppliers and professional associations. 

What GAO Found: 

About a quarter of the bids submitted during CBP round 1 resulted in 
awarded contracts. The contracts were in effect until terminated by 
MIPPA on July 15, 2008. Of the 6,374 bids submitted by 1,010 suppliers, 
half were disqualified before competing on price. Bids were most often 
disqualified for missing financial documentation or noncompliance with 
accreditation requirements. In nearly two-thirds of CBP round 1’s price 
competitions—in which suppliers submitted bids to deliver items for a 
specific product category within a specific competitive bidding area 
(CBA)—the number of suppliers decreased by at least half. The largest 
decreases in suppliers were in the Miami CBA. CMS estimated that the 
reduction in Medicare payments for items acquired as a result of CBP 
round 1 would have averaged 26 percent when compared to payments under 
the Medicare fee schedule. 

CBP’s round 1 presented several challenges to suppliers, including poor 
timing and lack of clarity in bid submission information, a failure to 
inform all suppliers that losing bids could be reviewed, and an 
inadequate electronic bid submission system. CMS provided some 
clarifying information about bidding after the bid window opened, 
repeatedly extended the bid window deadlines, and provided updated 
guidance to bidders throughout the bid window. The information CMS 
provided to suppliers about bidding requirements was sometimes unclear 
and inconsistent, particularly regarding financial documentation. CMS 
did not effectively notify suppliers of its post-bidding review 
process. Because some suppliers were not aware of the review process, 
they missed the opportunity to have their disqualified bids reviewed. 
CMS found that some bids had been incorrectly disqualified. Finally, 
several problems with the electronic bid submission system, including 
data losses from automated logouts and unscheduled downtimes, made it 
difficult for some suppliers to submit bids. 

CMS has taken several steps to improve the bidding process for the 
round 1 rebid and subsequent rounds of the CBP. CMS is implementing 
MIPPA provisions to notify suppliers of missing financial documentation 
and create a CBP ombudsman. It has reduced financial documentation 
requirements and revised the request for bid instructions to make it 
clearer and more understandable. It is also developing a new electronic 
bidding submission system, the Durable Medical Equipment, Prosthetics, 
Orthotics, and Supplies bidding system (DBidS), which the agency claims 
will address the deficiencies of the system used for round 1. Bidding 
for the round 1 rebid began in late October 2009. 

The CBP has the potential to produce considerable benefits, including 
reducing overall Medicare spending for DME and limiting potential fraud 
through increased scrutiny of suppliers. Although challenges may be 
expected for any new program, problems occurred in round 1 because of 
poor communication by CMS and an inadequate bid submission system. 

What GAO Recommends: 

GAO recommends that if CMS decides to conduct reviews of disqualified 
bids, CMS should notify all suppliers of this process, giving suppliers 
equal opportunity for such reviews and clearly indicate how to request 
them. CMS agreed with GAO’s recommendation. 

View [hyperlink, http://www.gao.gov/products/GAO-10-27] or key 
components. For more information, contact Kathleen M. King at (202) 512-
7114 or kingk@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

About One-Quarter of Bids Resulted in Contracts Generating Significant 
Potential Savings: 

CMS Had Difficulty Providing Bidders with Clear, Timely Information, 
and Its Electronic Bid Submission System Was Problematic: 

CMS Has Taken Several Steps to Improve Future Rounds of the CBP, 
Including Implementing MIPPA Provisions and Addressing IT Operational 
Problems: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Change in Numbers of Suppliers by CBP Product Category and 
CBA: 2006-2008: 

Appendix III: Percentage Differences between 2008 Medicare Fee Schedule 
and CBP Round 1 Single Payment Amounts: 

Appendix IV: Omitted and Conflicting Information in Written 
Instructions on Submitting a Bid for CBP Round 1: 

Appendix V: Comments from the Department of Health and Human Services: 

Appendix VI: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Required Financial Documents for CBP Round 1: 

Table 2: Ten Financial Measures Used to Determine a Supplier's 
Financial Score, CBP Round 1: 

Table 3: Bid Composite Price Calculation for a Product Category with 
Three Items: 

Table 4: Determining the Pivotal Bid: 

Table 5: CBP Round 1 Bid Counts by Process Step: 

Table 6: Number and Percentage of CBP Disqualified Bids by Reason for 
Disqualification: 

Table 7: CBP Round 1 Contract Awards by Supplier Size: 

Table 8: CMS's CBP Bid Disqualification Reason Codes and Descriptions, 
CBP Round 1: 

Table 9: Text of One Disqualified Bid Letter's Attachment Information: 

Table 10: Examples of Conflicting and Omitted Information, CBP Round 1: 

Figures: 

Figure 1: CBP Round 1 Process: 

Figure 2: CBP Round 1 Timeline, 2007-2008: 

Abbreviations: 

BBA: Balanced Budget Act of 1997: 

CBA: competitive bidding area: 

CBES: Competitive Bidding Evaluation System: 

CBP: competitive bidding program: 

CBSS: Competitive Bid Submission System: 

CMS: Centers for Medicare & Medicaid Services: 

CY: calendar year: 

DBidS: Durable Medical Equipment, Prosthetics, Orthotics, and Supplies 
bidding system: 

DME: durable medical equipment: 

HHS: Department of Health and Human Services: 

IT: information technology: 

MIPPA: Medicare Improvements for Patients and Providers Act of 2008: 

MMA: Medicare Prescription Drug, Improvement, and Modernization Act of 
2003: 

PAOC: Program Advisory and Oversight Committee: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

November 6, 2009: 

The Honorable Max Baucus: 
Chairman: 
Committee on Finance: 
United States Senate: 

The Honorable Henry A. Waxman: 
Chairman: 
The Honorable John D. Dingell: 
Chair Emeritus: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Charles B. Rangel: 
Chairman: 
Committee on Ways and Means: 
House of Representatives: 

In 2007, Medicare--the federal health insurance program that currently 
serves about 45 million elderly and disabled individuals--spent $8.3 
billion on durable medical equipment (DME), prosthetics, orthotics, and 
related supplies.[Footnote 1] Both we and the Department of Health and 
Human Services's (HHS) Office of Inspector General have reported that 
Medicare and its beneficiaries have sometimes paid higher than market 
rates for various medical equipment and supply items.[Footnote 2] In 
1997, Congress required the Centers for Medicare & Medicaid Services 
(CMS)--the agency that administers the Medicare program--to test 
competitive bidding for selected DME and other items and services 
through demonstration projects.[Footnote 3] The demonstrations were 
conducted from 1999 to 2002 and showed that competitive bidding would 
save Medicare money. 

Competitive bidding can reduce Medicare payments for DME and close the 
disparity with prices paid by others for the same items. The Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 
required that CMS implement a competitive acquisition program for DME 
and certain other items.[Footnote 4] CMS was required to phase in the 
competitive bidding program (CBP) in 2007 in 10 competitive bidding 
areas (CBA).[Footnote 5] The CBP would be expanded in future rounds. 
CBP round 1 began when the bid window opened May 15, 2007. In May 2008, 
CMS announced the final winning suppliers, and contracts with winning 
suppliers took effect July 1, 2008. 

Some DME suppliers and trade associations raised concerns about the CBP 
round 1, questioning several aspects of CMS's bid submission and 
contract award processes. They also questioned whether some winning 
suppliers could provide the volume of items and services their 
contracts required and whether contracts should have been awarded to 
suppliers that had no prior business presence in a CBA. Two 
congressional hearings addressed these concerns in May 2008.[Footnote 
6] 

On July 15, 2008, the CBP round 1 was stopped when the Medicare 
Improvements for Patients and Providers Act (MIPPA) of 2008 was 
enacted.[Footnote 7] MIPPA delayed the CBP, terminated the contracts 
already awarded by CMS to suppliers in round 1, and required CMS to 
repeat the competition for round 1 CBP in 2009--the CBP round 1 rebid. 
To ensure budget neutrality, that is to compensate for the loss of the 
projected savings from the CBP, beginning January 1, 2009, MIPPA 
reduced national Medicare reimbursement payments by 9.5 percent 
nationally for items and services that had been included in the CBP 
round 1.[Footnote 8] MIPPA also imposed additional criteria for how CMS 
should conduct later CBP rounds, including the round 1 rebid and 
subsequent rounds that will expand the CBP to additional areas. 
[Footnote 9] 

As CMS prepares to implement the CBP round 1 rebid, you asked us to 
report on (1) the results of the CBP round 1, (2) the major challenges 
CMS had in conducting the CBP round 1, and (3) the steps CMS has taken 
to improve future CBP rounds. 

To determine the results of the CBP round 1, we reviewed data from CMS 
and Palmetto GBA--the contractor CMS selected to implement the CBP 
bidding and contract award process--about the number of suppliers 
participating in round 1 of the CBP process, the number of submitted 
bids, and the bids' outcomes. We interviewed and obtained information 
from CMS and Palmetto GBA officials about the Competitive Bid 
Submission System (CBSS), an electronic database used by suppliers to 
submit part of their bid application, including information about 
covered system testing and data processing procedures. We also reviewed 
the instructions provided to bidding suppliers about entering data into 
the CBSS. We interviewed Palmetto GBA officials about the Competitive 
Bidding Evaluation System (CBES), a repository of bid data including 
financial data entered by Palmetto GBA personnel and documentation of 
Palmetto GBA actions, as well as about the system's data transfer and 
data entry protocols. We compared data published by CMS with the data 
provided to us and followed up with the appropriate officials to 
resolve any discrepancies. We assessed the reliability of round 1 data 
by interviewing or reviewing information from CMS and Palmetto GBA 
officials and determined that the data were sufficiently reliable for 
the purposes of this report. We did not independently evaluate CMS's 
estimates of beneficiary demand, which relied on 2005 and 2006 DME 
claims data, the most recent data available to it at the time, nor did 
we evaluate CMS's estimates of projected savings as the result of the 
CBP round 1. 

To determine the major challenges CMS had conducting the CBP round 1, 
we reviewed relevant federal laws, regulations, and policies concerning 
the bidding and contract award processes. We interviewed CMS and 
Palmetto GBA officials about the bid submission process, including the 
CBSS, the bid evaluation and contract award processes, and the CMS and 
Palmetto GBA post-bidding review. We reviewed CMS and Palmetto GBA bid 
submission instructions and related materials, communications to 
suppliers during the bid window, and information on how CMS and 
Palmetto GBA evaluated bids and awarded contracts. We also reviewed 
information related to the Program Advisory and Oversight Committee 
(PAOC), whose members are appointed by the HHS Secretary to advise CMS 
on implementing the CBP. We reviewed PAOC meeting materials, 
interviewed members about their role and input into the development of 
round 1, and attended a committee meeting on June 16, 2008. We also 
interviewed national and state DME trade associations and a small 
number of randomly selected suppliers about the CBP bidding and 
contract award processes. 

To determine the steps that CMS has taken to improve the bidding 
process for future CBP rounds, we reviewed applicable CBP provisions in 
relevant MIPPA sections and implementing regulations, PAOC Federal 
Register notices, and interviewed CMS and Palmetto GBA officials. We 
also interviewed Maricom officials and reviewed available documentation 
related to the development, testing, and proposed implementation of the 
new electronic bid submission system--the Durable Medical Equipment, 
Prosthetics, Orthotics, and Supplies bidding system (DBidS)--to be used 
for the round 1 rebid. We attended a June 4, 2009, meeting at which CMS 
updated the current PAOC about the process changes that have been 
implemented or proposed for the CBP round 1 rebid. We did not assess 
the reliability or functionality of DBidS, but we reviewed the 
processes established by CMS and its contractors for testing and 
accepting such systems. (See appendix I for more detailed information 
on our methodology.) 

We conducted this performance audit from June 2008 to September 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Background: 

Most Medicare beneficiaries participate in Medicare Part B, which helps 
pay for certain DME and other equipment and supplies.[Footnote 10] This 
includes, for example, wheelchairs, walkers, oxygen, and hospital beds. 
In 2007, Medicare spent a total of $430.3 billion. Of that, $8.3 
billion was spent on DME and other medical equipment and supplies 
covered under Part B.[Footnote 11] 

Medicare DME Payments: 

Since 1989, Medicare has paid for DME through fee schedules. These fee 
schedules are based on the average amount that suppliers charged on 
Medicare claims in 1986 and 1987 for individual DME items adjusted for 
inflation.[Footnote 12] Medicare uses a fee schedule for each state to 
reflect geographical price differences. The applicable state fee 
schedule is determined by the beneficiary's residence, not the DME 
supplier's location. 

Medicare generally pays the lesser of either the supplier's actual 
charge or the Medicare fee schedule amount for the item or service. For 
suppliers, Medicare assignment--accepting Medicare's reimbursement 
amount for an item as payment in full and limiting the amount the 
beneficiary can be billed for that item--is optional. If a supplier 
agrees to assignment, then Medicare generally pays 80 percent of the 
amount to the supplier and the Medicare beneficiary is responsible for 
paying the supplier the remaining 20 percent (referred to as the 
coinsurance payment), once the beneficiary's annual deductible has been 
met. If the supplier does not accept assignment, the supplier is not 
limited to charging the beneficiary 20 percent of the Medicare 
reimbursement for that item or service and the beneficiary can be 
billed for whatever balance is due. 

History of DME Competitive Bidding Payment Reform: 

The Balanced Budget Act of 1997 required CMS to test competitive 
bidding as a new way to set payment rates for Part B services and 
supplies selected by CMS.[Footnote 13] CMS conducted three CBP 
demonstration projects, two in Florida (1999-2002) and one in Texas 
(2000-2002). Evaluations of the demonstration projects estimated that 
they saved nearly $9.4 million.[Footnote 14] 

About a year after the demonstrations ended, the MMA was enacted, 
requiring CMS to implement a broader CBP in 2007.[Footnote 15] Changing 
the long-standing policy that any qualified provider be allowed to 
participate in Medicare, the MMA provided that generally only suppliers 
who were awarded contracts could be reimbursed by Medicare for 
providing covered Part B items and services in the selected areas. The 
MMA imposed certain criteria that CMS was required to follow--for 
example, eligible suppliers had to meet quality and financial 
standards, the total amount to be paid to contractors was expected to 
be less than would be paid otherwise, access of beneficiaries to 
multiple suppliers in their area must be maintained, and CMS must 
consider the ability of suppliers to meet the anticipated needs of 
beneficiaries in the covered geographic area. CMS was also required to 
ensure that small suppliers would be considered. The MMA required the 
establishment of the PAOC to advise CMS on various aspects of the CBP, 
including financial and quality standards.[Footnote 16] The MMA also 
prohibited any administrative or judicial review of the designation of 
CBP's CBAs, the selection of items and services, the establishment of 
payment amounts, the bidding structure and number of contract suppliers 
selected, the awarding of contracts, and the phase-in of the CBP. CMS 
published a final rule, effective on June 11, 2007, governing 
implementation of the CBP.[Footnote 17] 

CMS contracted with Palmetto GBA to implement the CBP bidding and 
contract award process and with Maricom to develop the Web-based CBSS. 
CMS established the bidding process and approved policies and 
procedures developed by Palmetto GBA. CMS implemented the CBP in 10 
CBAs which were among the largest statistical metropolitan areas. 
[Footnote 18] CMS chose the items and services to include in round 1 by 
focusing on the highest cost and highest volume items and services with 
the largest potential for savings. It selected 10 product 
categories,[Footnote 19] with 371 unique items and services; spending 
for those product categories in the 10 CBP CBAs accounted for about 9 
percent of total Medicare spending on those product categories in 2006. 
Within the 10 CBAs, the product categories chosen accounted for 48 
percent of Medicare's spending for DME, prosthetics, orthotics, and 
related supplies that year. 

On July 15, 2008, MIPPA was enacted, which terminated the CBP contracts 
awarded during round 1. MIPPA reinstated Medicare reimbursement based 
on the Medicare fee schedule for all items and services included in CBP 
round 1, subject to a 9.5 percent reduction nationally for 
2009.[Footnote 20] MIPPA also required that CMS implement the CBP round 
1 rebid in 2009, and imposed additional criteria for this rebid and 
later rounds.[Footnote 21] CMS issued an interim final rule 
implementing these MIPPA provisions.[Footnote 22] 

The CBP Round 1 Competitive Bidding Process: 

The competitive bidding process had several steps: bidder registration, 
bid submission, bid review, winner selection, setting Medicare payment 
amounts, and contract offers (see figure 1). To participate in CBP 
round 1, DME suppliers must have met enrollment, quality, and financial 
standards, obtained all the state and local licenses required to 
provide the relevant services, and been accredited by a CMS-approved 
accrediting organization.[Footnote 23] In addition, bids for each item 
had to be bona fide--that is, not higher than the Medicare fee schedule 
but not lower than the supplier's cost. 

Figure 1: CBP Round 1 Process: 

[Refer to PDF for image: illustration] 

Bidder registration and submission: 
* Suppliers register to bid; 
* Suppliers submit bids. 

Bid review: 
* Palmetto GBA reviews bids; 
* Palmetto GBA determines if bid is qualified based on completeness, 
compliance with bidding requirements, and financial score; 
* Bid is disqualified; or: Bid is qualified. 

Price competition and setting Medicare payment amounts: 
* Qualified bids compete on price; 
* Palmetto GBA selects winning bids;
* Bid loses on price; or: Bid wins on price; 
* Using bids that won on price, Palmetto GBA determines Medicare 
payment amounts for each item. 

Contract offers: 
* If necessary to meet small supplier target, Palmetto GBA selects 
additional bids submitted by small suppliers for contract offers; 
* Palmetto GBA notifies losing suppliers of round 1 results and CMS 
extends contract offers to winning suppliers. 

Source: GAO based on information provided by CMS. 

[End of figure] 

Bidder registration. The first step in the CBP bidding process was 
bidder registration. Suppliers had to register with a CMS identity 
management and authentication system to gain access to the CBSS. 
Suppliers registered in the CBSS as one of three types of bidding 
entities: a supplier with a single location, multiple suppliers sharing 
common ownership or control, or 2-20 small suppliers forming a network. 
[Footnote 24] 

Bid submission. For purposes of the CBP, a bid was an offer by a 
supplier to furnish all items within a product category throughout the 
entire CBA. The bid had to include a proposed price for each item in 
the product category. The number of items in a product category ranged 
from 3 to 142.[Footnote 25] A bid package consisted of two electronic 
forms, A and B, and documents specified in the request-for-bid 
instructions and in other communication with suppliers. Hard copies of 
the documents had to be submitted to Palmetto GBA. Form A requested 
information about suppliers, including Medicare billing numbers, 
addresses, ownership, current or prior sanctions, and accreditation 
status.[Footnote 26] Each Form B required suppliers to disclose annual 
revenues for the product category in each CBA; estimates of the number 
of item units currently provided and that could be provided in the 
future for that product category in that CBA; expansion plans; and item 
prices, models, and manufacturers. Each Form B constituted one bid-- 
that is, suppliers had to submit a separate form for each product 
category in each CBA. Suppliers could submit a Form B for any product 
category up for bid in any CBA.[Footnote 27] Hard-copy documents 
required to complete the bid package included financial documents, 
proof of accreditation status, letters of intent to enter into 
agreements with subcontractors, network agreements, and statements 
certifying the accuracy of the submissions. Financial documentation 
requirements included 3 years of annual financial statements, selected 
forms from the last three annual tax returns, and credit reports and 
credit scores for a 90-day period ending close to the date of the bid's 
submission.[Footnote 28] (See table 1.) 

Table 1: Required Financial Documents for CBP Round 1: 

Financial document as described in request-for-bid instructions: 
Compiled balance sheet (Statement of Financial Position); 
Request-for-bid instructions' term definitions: The balance sheet and 
statement of financial position terms were defined as: 
Balance sheet: The position statement, that is, it presents the 
cumulative financial position of a firm at a specific date. The balance 
sheets reports financial position in terms of the basic economic model 
of the enterprise: Assets = Creditors' Equity + Owners' Equity; 
Statement of financial position: An alternative term for the term 
"balance sheet." The financial position of an enterprise at a 
particular time comprises its assets, liabilities, and owners' equity 
and the relationship among them, plus contingencies, commitments, and 
other financial matters that pertain to the enterprise at the time. 

Financial document as described in request-for-bid instructions: 
Statement of Cash Flow (Statement of Changes in Financial Position); 
Request-for-bid instructions' term definitions: Term was not defined. 

Financial document as described in request-for-bid instructions: 
Statement of Operations (Income Statement); 
Request-for-bid instructions' term definitions: Income statement: 
Reports on the results of an entity's operations for a given period of 
time as opposed to a specific point in time. 

Financial document as described in request-for-bid instructions: 
Schedule C from 1040 Tax Return (Profit and loss statement); 
Request-for-bid instructions' term definitions: No further description 
provided. 

Financial document as described in request-for-bid instructions: 
Schedule L from 1065, U.S. Return of Partnership Income (limited 
partnerships and partnerships); 
Request-for-bid instructions' term definitions: No further description 
provided. 

Financial document as described in request-for-bid instructions: 
Schedule L (balance sheet) from corporate tax return (corporations); 
Request-for-bid instructions' term definitions: No further description 
provided. 

Financial document as described in request-for-bid instructions: 10-K 
filing reports with Securities and Exchange Commission (publicly traded 
companies); 
Request-for-bid instructions' term definitions: No further description 
provided. 

Financial document as described in request-for-bid instructions: 
Current credit report and credit score; 
Request-for-bid instructions' term definitions: Terms were not defined. 

Source: CMS. 

Note: Data are from CMS's Instructions for Completing Bid Forms for 
Medicare DMEPOS Competitive Bidding Program (May 2007). 

[End of table] 

Bid review. After the bid window closed, Palmetto GBA began to review 
the bids. It determined whether each bid package was complete, 
compliant with bidding requirements, and whether the submitting 
supplier's financial score satisfied a minimum threshold to qualify to 
compete on price.[Footnote 29] The financial score was determined using 
criteria developed by CMS for this purpose including suppliers' credit 
scores and 10 financial measures--described by CMS as standard 
accounting measures. (See table 2.) If the bid package was complete, 
compliant with bidding requirements, and the submitting supplier had a 
financial score that was equal to or greater than the minimum 
threshold, the bid qualified to compete on price. But before comparing 
prices, Palmetto GBA also reviewed each qualified bid's capacity 
projections--the supplier's ability to provide the volume of items 
claimed in the bid in light of the supplier's historical capacity, 
expansion plans, and financial score. It adjusted some bids' capacity 
projections according to certain guidelines.[Footnote 30] 

Table 2: Ten Financial Measures Used to Determine a Supplier's 
Financial Score, CBP Round 1: 

Financial measure: Current ratio; 
Description provided to suppliers: Current assets/current liabilities. 

Financial measure: Collection period; 
Description provided to suppliers: Accounts receivable/sales x 360. 

Financial measure: Working capital; 
Description provided to suppliers: Current assets - current 
liabilities. 

Financial measure: Accounts payable to sales; 
Description provided to suppliers: Accounts payable/net sales. 

Financial measure: Quick ratio; 
Description provided to suppliers: (Cash + accounts receivable)/current 
liabilities. 

Financial measure: Current liabilities to net worth; 
Description provided to suppliers: Current liabilities/net worth. 

Financial measure: Quality of earnings; 
Description provided to suppliers: Cash flow from operations/(net 
income + depreciation). 

Financial measure: Operating cash flow to sales; 
Description provided to suppliers: Cash flow from operations/(revenue - 
adjustment to revenue). 

Financial measure: Return on sales; 
Description provided to suppliers: Net income/sales. 

Financial measure: Sales to inventory; 
Description provided to suppliers: Net sales/inventory. 

Source: CMS. 

[End of table] 

Winner Selection. Palmetto GBA used several steps to identify the 
winning bids based on price. Item prices submitted by competing 
suppliers were compared using a composite pricing methodology. A bid's 
composite price was calculated as each item's price multiplied by an 
item weight summed across all items in the product category. Table 3 
illustrates the calculation for three hypothetical bids' composite 
prices in a product category containing three items. Each weight is 
based on the item's share of units billed to Medicare in 2006 as a 
percentage of all of the units for the product category billed to 
Medicare nationwide that same year. 

Table 3: Bid Composite Price Calculation for a Product Category with 
Three Items: 

Item weight; 
Item A: 0.5; 
Item B: 0.3; 
Item C: 0.2. 

Supplier 1 bid; 
Item A: $1.00 x 0.5; + Item B: $4.00 x 0.3; + Item C: $1.00 x 0.2; 
= Composite price: $1.90. 

Supplier 2 bid; 
Item A: $3.00 x 0.5; + Item B: $3.00 x 0.3; + Item C: $2.00 x 0.2; 
= Composite price: $2.80. 

Supplier 3 bid; 
Item A: $2.00 x 0.5; + Item B: $3.00 x 0.3; + Item C: $2.00 x 0.2; 
= Composite price: $2.30. 

Source: GAO. 

[End of table] 

For each auction--a competition by qualified suppliers to deliver all 
items within a single product category in a single CBA--Palmetto GBA 
ordered the bids by composite price from lowest to highest.[Footnote 
31] Starting with the bid with the lowest composite price, Palmetto GBA 
calculated the cumulative projected capacity of the competing bids. 
Palmetto GBA identified the bid where cumulative projected capacity met 
or exceeded CMS's estimated beneficiary demand as the pivotal bid (see 
table 4). In table 4, the pivotal bid was submitted by Supplier 9 with 
a composite price of $7.64, since cumulative supply (1,765 units) 
reached CMS's estimated demand (1,500 units) at that bid. If projected 
beneficiary demand could not be met by qualified suppliers, a pivotal 
bid could not be established and the auction was considered nonviable. 
[Footnote 32] Otherwise, bids with composite prices equal to or less 
than the pivotal bid were winners on the basis of price. 

Table 4: Determining the Pivotal Bid: 

Bids: Supplier 15 bid; 
Composite price (ordered): $4.00; 
Each bid's projected capacity: 400; 
Cumulative projected capacity: 400; 
Estimated beneficiary demand: 1,500: Does not meet; 
Pivotal bid: [Empty]. 

Bids: Supplier 6 bid; 
Composite price (ordered): $5.70; 
Each bid's projected capacity: 320; 
Cumulative projected capacity: 720; 
Estimated beneficiary demand: 1,500: Does not meet; 
Pivotal bid: [Empty]. 

Bids: Supplier 1 bid; 
Composite price (ordered): $5.76; 
Each bid's projected capacity: 200; 
Cumulative projected capacity: 920; 
Estimated beneficiary demand: 1,500: Does not meet; 
Pivotal bid: [Empty]. 

Bids: Supplier 7 bid; 
Composite price (ordered): $5.87; 
Each bid's projected capacity: 100; 
Cumulative projected capacity: 1,020; 
Estimated beneficiary demand: 1,500: Does not meet; 
Pivotal bid: [Empty]. 

Bids: Supplier 12 bid; 
Composite price (ordered): $6.20; 
Each bid's projected capacity: 245; 
Cumulative projected capacity: 1,265; 
Estimated beneficiary demand: 1,500: Does not meet; 
Pivotal bid: [Empty]. 

Bids: Supplier 10 bid; 
Composite price (ordered): $6.21; 
Each bid's projected capacity: 200; 
Cumulative projected capacity: 1,465; 
Estimated beneficiary demand: 1,500: Does not meet; 
Pivotal bid: [Empty]. 

Bids: Supplier 9 Bid; 
Composite price (ordered): $7.64; 
Each bid's projected capacity: 300; 
Cumulative projected capacity: 1,765; 
Estimated beneficiary demand: 1,500: Meets; 
Pivotal bid: [Check]. 

Bids: Supplier 3 bid; 
Composite price (ordered): $9.75; 
Each bid's projected capacity: 400; 
Cumulative projected capacity: 2,165; 
Estimated beneficiary demand: 1,500: [Empty]; 
Pivotal bid: [Empty]. 

Bids: Supplier 2 bid; 
Composite price (ordered): $9.89; 
Each bid's projected capacity: 100; 
Cumulative projected capacity: 2,265; 
Estimated beneficiary demand: 1,500: [Empty]; 
Pivotal bid: [Empty]. 

Source: GAO. 

[End of table] 

Setting Medicare single payment amounts. Bids that won on price were 
used to establish Medicare's single payment amounts for each item in 
the auction.[Footnote 33] For each item, Palmetto GBA ordered these 
winning bids' price offers for each item from lowest to highest. The 
median price offered for that item would be Medicare's payment for that 
auction item in that CBA. The use of the median in setting the item's 
single payment amount meant that Medicare's payment amount could be 
less than or more than a particular winning supplier's actual bid for 
an item. Because CBP payments may only be paid on assignment, Medicare 
would pay the supplier 80 percent of the single payment amount for an 
item and the beneficiary would be responsible for the remaining 20 
percent. 

Contract offers. In addition to winning on price, small suppliers' bids 
could also win if there were an insufficient number of small suppliers 
that won on price alone.[Footnote 34] Before the initial set of 
contract offers, Palmetto GBA determined whether CMS's target--that 30 
percent of the qualified suppliers be small suppliers--had been met by 
small suppliers winning on price. In the auctions where the goal had 
not been met, Palmetto GBA moved up the composite pricing order, above 
the pivotal bid, for small suppliers only as a means to include 
additional small suppliers. These additional small suppliers would then 
be offered contracts, in addition to those suppliers whose bids won on 
price alone. In March 2008, CMS and Palmetto GBA notified suppliers of 
the auction results and CMS extended contract offers to winning 
suppliers. In May 2008, CMS announced the suppliers that had accepted 
contracts for the 3-year CBP contract period from July 1, 2008, through 
June 30, 2011.[Footnote 35] However, MIPPA, which was enacted on July 
15, 2008, terminated the CBP round 1 contracts. 

About One-Quarter of Bids Resulted in Contracts Generating Significant 
Potential Savings: 

About one-quarter of the bids submitted during CBP round 1 resulted in 
awarded contracts. Of the 6,374 bids submitted by 1,010 suppliers, half 
were disqualified before competing on price--most often for missing 
financial documentation or noncompliance with accreditation 
requirements. Nearly two-thirds of the 85 auctions saw the number of 
suppliers decrease by 50 percent or more compared to the number of 
suppliers billing Medicare for the product category in 2006. CMS 
estimated that the volume-weighted reduction in Medicare's payment 
amounts for round 1 would have averaged 26 percent. 

About One-Quarter of the Submitted Bids Resulted in Contracts, but 
Almost Half Were Disqualified for Missing Financial Documentation: 

Once the contract award process was completed, 22 percent of the bids 
submitted (1,372 of 6,374) resulted in contracts between CMS and 
suppliers to provide DME and other items to Medicare 
beneficiaries.[Footnote 36] (See table 5 for step-by-step results.) CMS 
initially extended contract offers for 1,335 bids.[Footnote 37] 
Contracts were offered to additional suppliers when some winners 
rejected the contract offers associated with 86 bids, as well as after 
CMS reversed Palmetto GBA's determinations to disqualify 27 bids. 
Winning suppliers may have rejected contracts because the CBP single 
payment amounts were less than the item prices the supplier had bid. 

Table 5: CBP Round 1 Bid Counts by Process Step: 

Process step: 1. Bid review; 

Bids reviewed; 
Number of round 1 bids: 6,374; 
Percentage of total bids reviewed: 100. 

Bids disqualified on first review; 
Number of round 1 bids: (3,143); 
Percentage of total bids reviewed: 49. 

Bids qualified but rejected because auction deemed nonviable; 
Number of round 1 bids: (65); 
Percentage of total bids reviewed: 1. 

Process step: 2. Winner selection; 

Qualified bids used to determine pivotal bids; 
Number of round 1 bids: 3,166; 
Percentage of total bids reviewed: 50. 

Bids that lost on price; 
Number of round 1 bids: (1,831); 
Percentage of total bids reviewed: 29. 

Bids that won on price or were contracts with small suppliers added to 
meet 30 percent target, or both; 
Number of round 1 bids: 1,335; 
Percentage of total bids reviewed: 21. 

Process step: 3. Contract offers; 

Initial round of contract offers; 
Number of round 1 bids: 1,335; 
Percentage of total bids reviewed: 21. 

Additional offers extended; 
Number of round 1 bids: 137; 
Percentage of total bids reviewed: 2. 

Process step: 4. Contract outcomes; 

Total contract offers made; 
Number of round 1 bids: 1,472; 
Percentage of total bids reviewed: 23. 

Contract offers rejected; 
Number of round 1 bids: (86); 
Percentage of total bids reviewed: 1. 

Acceptances in nonviable auctions that were withdrawn; 
Number of round 1 bids: (14); 
Percentage of total bids reviewed: <1. 

Final contracts; 
Number of round 1 bids: 1,372; 
Percentage of total bids reviewed: 22. 

Source: Palmetto GBA. 

Note: Numbers in parentheses are decreases. 

[End of table] 

By the end of initial bid review, almost half of the bids submitted 
were disqualified (3,143 of 6,374 submitted). A bid could be 
disqualified for more than one reason. (See table 6.) Nearly 9 of every 
10 disqualified bids (86 percent of the 3,143) did not submit complete 
financial documentation. Twenty-two percent of the bids were 
disqualified for noncompliance with accreditation requirements; that 
is, they failed to receive accreditation by the deadline established by 
CMS. Two percent of the bids were disqualified because the bidding 
suppliers did not meet supplier financial standards; that is, in CMS's 
judgment, they were unlikely for financial reasons to be able to 
fulfill their contract obligations. Disqualified bids were ineligible 
to compete on price and were not considered for a contract award. 

Table 6: Number and Percentage of CBP Disqualified Bids by Reason for 
Disqualification: 

Reason for bid disqualification: One or more suppliers lacked required 
financial documentation; 
Bids disqualified for this reason: 2,698; 
Percentage of bids disqualified: 86. 

Reason for bid disqualification: No suppliers were accredited by a CMS- 
approved accreditation organization for the product category; 
Bids disqualified for this reason: 681; 
Percentage of bids disqualified: 22. 

Reason for bid disqualification: A bid price for one or more items was 
deemed not bona fide; 
Bids disqualified for this reason: 230; 
Percentage of bids disqualified: 7. 

Reason for bid disqualification: One or more suppliers did not meet 
enrollment standards for supplier billing privileges; 
Bids disqualified for this reason: 120; 
Percentage of bids disqualified: 4. 

Reason for bid disqualification: Suppliers sharing common ownership or 
management were competing in the same auction; 
Bids disqualified for this reason: 104; 
Percentage of bids disqualified: 3. 

Reason for bid disqualification: One or more suppliers did not meet 
financial standards; 
Bids disqualified for this reason: 48; 
Percentage of bids disqualified: 2. 

Reason for bid disqualification: Bid submitted by a network did not 
meet all network requirements; 
Bids disqualified for this reason: 3; 
Percentage of bids disqualified: <1. 

Source: GAO based on information provided by CMS. 

Note: Percentages add to more than 100 because bids could be 
disqualified for more than one reason. 

[End of table] 

In the preamble to the CBP final rule, CMS acknowledged that the number 
of suppliers would decrease as the result of competitive bidding. 
[Footnote 38] In 2006, the median number of suppliers per CBA for a 
product category was 31.[Footnote 39] For the 2 weeks the CBP contracts 
were effective, the median number of suppliers fell to 14, or 55 
percent less than the number in 2006.[Footnote 40] Nearly two-thirds of 
the auctions conducted during CBP round 1 had decreases in the number 
of suppliers of 50 percent or more. (See appendix II for auction- 
specific detail.) Mail-order diabetic suppliers had the largest 
decrease (88 percent) while walkers and related accessories had the 
smallest decrease. One of the 10 product categories, negative pressure 
wound therapy pumps, had an increase in the number of suppliers as the 
result of CBP. Compared to the other nine CBAs, the Miami CBA had the 
largest number of suppliers in eight of nine product categories in 2006 
and had the greatest decreases in suppliers after CBP round 1.[Footnote 
41] The median number of suppliers across the 10 product categories 
decreased 87 percent in the Miami CBA. 

CMS Generally Met the Small Supplier Representation Goal: 

In 76 of the 85 auctions, at least 30 percent or more of the suppliers 
that were awarded contracts were small. Small suppliers represented at 
least 57 percent of all suppliers registered on CBSS and 63 percent of 
the winning suppliers (see table 7).[Footnote 42] Because small 
suppliers submitted fewer bids on average, slightly less than half (48 
percent) of all bids resulting in contracts were from small suppliers. 

Table 7: CBP Round 1 Contract Awards by Supplier Size: 

Size of suppliers: Small supplier; 
Number of registered suppliers: 574; 
Percentage of registered suppliers: 57; 
Number of registered suppliers awarded contracts: 208; 
Percentage of registered suppliers awarded contracts: 63. 

Size of suppliers: Large supplier; 
Number of registered suppliers: 300; 
Percentage of registered suppliers: 30; 
Number of registered suppliers awarded contracts: 121; 
Percentage of registered suppliers awarded contracts: 37. 

Size of suppliers: Unknown[A]; 
Number of registered suppliers: 136; 
Percentage of registered suppliers: 13; 
Number of registered suppliers awarded contracts: NA; 
Percentage of registered suppliers awarded contracts: NA. 

Size of suppliers: Total; 
Number of registered suppliers: 1,010; 
Percentage of registered suppliers: 100; 
Number of registered suppliers awarded contracts: 329; 
Percentage of registered suppliers awarded contracts: 100. 

Source: GAO based on information provided by CMS. 

Notes: NA means not applicable. These suppliers did not submit 
sufficient financial information to determine their gross revenues and 
were disqualified. These suppliers were not eligible for contract 
awards. 

[A] Palmetto GBA was unable to classify the size for 136 registered 
suppliers and 746 of their bids because the suppliers did not include 
income statements or revenue information with their bid package. 

[End of table] 

CMS Estimated a 26 Percent Reduction in CBP Single Payment Amounts 
Compared to the Medicare Fee Schedule: 

CMS estimated that, compared to the 2008 Medicare fee schedule, the 
volume-weighted reduction in Medicare's payment amounts for items 
acquired under CBP round 1 would have averaged 26 percent.[Footnote 43] 
(See appendix III for specifics by CBA and product category.) The items 
in the mail-order diabetic supply category had the largest reductions, 
with differences between the CBP single payment amounts and the 
Medicare fee schedule averaging 43 percent. CBP single payment amounts 
were reduced the least for items in the complex rehabilitative power 
mobility devices and negative pressure wound therapy pumps categories--
on average, 15 and 16 percent lower than the 2008 Medicare fee 
schedule. 

CMS Had Difficulty Providing Bidders with Clear, Timely Information, 
and Its Electronic Bid Submission System Was Problematic: 

CMS's implementation of CBP round 1 presented several challenges to 
suppliers. Some bid submission information was poorly timed and 
unclear, confusing suppliers about bidding requirements and compelling 
some to revise and resubmit their bids. In addition, the CBSS 
experienced several problems that made submitting bids difficult. CMS 
did not notify all suppliers of its post-bidding review process, which 
reinstated some bids that CMS found to have been incorrectly 
disqualified. While the PAOC alerted CMS to potential challenges for 
round 1, some were not resolved before the bid window opened. 

CMS Provided Bidding Information to Suppliers after the Bid Window 
Opened and Extended the Window Deadlines Three Times: 

CMS clarified CBP bidding information after the bid window opened and 
extended the bid window deadlines three times--actions making it more 
difficult for suppliers to submit correct bids. (See figure 2.) While 
the CBP request-for-bid instructions, posted the day that the bid 
window opened, were only revised once,[Footnote 44] CMS and Palmetto 
GBA provided additional information explaining the instructions 
throughout the bid window.[Footnote 45] Although suppliers could revise 
their submissions throughout the bid window, when additional 
information was provided those that believed they had submitted 
completed bids had to review them to ensure they were still correct. 
For example, if a supplier revised any of its financial documentation, 
it had to resubmit the entire financial documentation package and 
certification statement in hard copy.[Footnote 46] 

Figure 2: CBP Round 1 Timeline, 2007-2008: 

[Refer to PDF for image: illustration] 

April 2, 2007: CMS issued the CBP Final Rule and announced the round 1 
CBAs and product categories. 

April 9, 2007: CBP's supplier bid registration opened (Registration for 
CBP). 

April 10, 2007: CMS's CBP Final Rule published in the Federal Register. 

May 15, 2007: CMS issued the CBP request-for-bid instructions; CBP bid 
window opened (Bidding process). 

June 4, 2007: Palmetto GBA Bidders Conference Call[A] — Submitting Your 
Bid. 

June 6, 2007: Palmetto GBA Bidders Conference Call[A] — Understanding 
the Bidding Rules. 

June 8, 2007: Palmetto GBA Bidders Conference Call[A] — Product 
Categories. 

June 11, 2007: CBP Final Rule effective. 

June 20, 2007: Palmetto GBA Bidders Conference Call[A] — Small 
Suppliers. 

June 21, 2007: Palmetto GBA Bidders Conference Call[A] — Open Call. 

June 30, 2007: Original bid registration deadline; extended until July 
7 (Registration for CBP). 

July 7, 2007: Second bid registration deadline; reopened again on July 
27 (Registration for CBP). 

July 9, 2007: Palmetto GBA Special Bidders Conference Call — Addressed 
Bidding Process Issues. 

July 13, 2007: Original bid window deadline; first extension to July 20 
(Bidding process). 

July 20, 2007: Second bid window deadline; second extension to July 27 
(Bidding process). 

July 27, 2007: Third bid window deadline; third extension to September 
25. CMS reopened CBP registration deadline (Bidding process). 

August 27, 2007: Reopened CBP registration period closed (Accreditation 
process). 

August 31, 2007: Supplier accreditation deadline; extended until 
October 31. 

September 13, 2007: CMS revised the CBP request-for-bid instructions. 

September 25, 2007: Fourth and final CBP bid window deadline; suppliers 
had to be accredited or have accreditation pending (Bidding process). 

October 31, 2007: Suppliers had to have received their accreditation 
(Accreditation process). 

March 20, 2008: CMS mailed letters to all suppliers that bid to notify 
them of the result of their bid submissions. 

May 19, 2008: CMS released the names of the suppliers that accepted CBP 
contracts. 

July 1, 2008: CBP round 1 began operation. 

July 15, 2008: MIPPA[B] enacted; round 1 stopped and round 1 rebid 
postponed until 2009. 

Source: GAO analysis of CMS data. 

[A] CMS conducted bidder conference calls to inform potential bidders 
about the bidding process. 

[B] Medicare Improvements for Patients and Providers Act of 2008. 

[End of figure] 

CMS's bid window extensions resulted in a 4-month bid window, open May 
15, 2007, through September 25, 2007--about 2-½ months longer than 
originally planned. A first 1-week extension was announced on June 29, 
2007--about a week after the open bidder conference call to respond to 
suppliers' questions. Palmetto GBA and CMS then conducted a special 30- 
minute bidder conference call on July 9, 2007, to address suppliers' 
concerns about CBSS data losses from an automated logout security 
feature that caused suppliers to lose unsaved information. CMS 
announced the second 1-week extension from July 20, 2007, to July 27, 
2007. On July 27, 2007, CMS announced a third, 2-month deadline 
extension to September 25, 2007, and explained there would be a 
targeted period to address suppliers' remaining questions and requested 
that suppliers e-mail their questions to Palmetto GBA by August 10, 
2007. 

CMS allowed suppliers to submit CBP bids while their DME accreditation 
was pending, and when the final bid window extension was made, the 
accreditation deadline was also extended. Although CMS had encouraged 
suppliers to begin the accreditation process before the bid window 
opened, some suppliers were submitting bids while completing their 
accreditation process. A CMS official told us that some suppliers did 
not appreciate or understand the amount of information needed before 
the accrediting organizations could conduct an accreditation site 
visit. 

Whether suppliers had the required DME state licenses was to be 
determined as part of the accreditation process. However, CMS 
acknowledged that it checked supplier licenses after contract offers 
were made and Palmetto GBA officials acknowledged that some suppliers 
were awarded CBP contracts even though they did not have the necessary 
state licenses at the time contracts were awarded.[Footnote 47] 

CMS's Competitive Bidding Submission Information Was Sometimes Unclear, 
Particularly for Financial Documentation: 

CMS and Palmetto GBA acknowledged that suppliers did not always 
understand the request-for-bid instructions.[Footnote 48] CMS provided 
guidance to suppliers through the CBP final rule and the request-for- 
bid instructions, and CMS and Palmetto GBA provided additional 
information throughout the bid window through multiple sources. These 
sources included the Palmetto GBA Web site and its frequently asked 
questions section,[Footnote 49] bidder conference calls, CMS and 
Palmetto GBA listservs, and the Palmetto GBA customer service 
center.[Footnote 50] We found that these sources sometimes had unclear 
or inconsistent information about the bidding instructions, including 
the specialty supplier definition, how to estimate supplier capacity, 
and how to complete bid application Forms A and B. (See appendix IV for 
examples.) Some suppliers told us that Palmetto GBA service center 
employees could not answer their questions and one supplier told us it 
was uncomfortable using the center because it was unsure the 
information provided was correct. 

CMS also acknowledged that many suppliers had particular difficulty 
complying with the financial documentation requirement. A supplier told 
us, for example, that it was a wholly owned subsidiary of a parent 
company and did not understand which financial documentation 
requirements in the request-for-bid instructions applied to it. A CMS 
official told us that some suppliers did not understand that they had 
to provide all of the required financial documents, and that the 
statement of cash flow--described as a statement of changes in 
financial position--was the document most often missing. We also found 
that CMS's financial documentation instructions did not clearly address 
differences among supplier business types--for example, a sole 
proprietorship business versus a publicly traded national corporation--
and among the financial documents needed to submit a bid for each 
supplier type.[Footnote 51] Because business types did not easily link 
to the request-for-bid instructions, suppliers were at risk of 
submitting incomplete or inaccurate financial documentation. 

We found that CMS's request-for-bid instructions had inconsistent 
information about the requirements for a credit report and credit 
score. The Form A bid instructions for financial information discussed 
different types of suppliers and their financial documents in six 
paragraphs. In two paragraphs--for suppliers that submit individual tax 
returns that include business taxes and for suppliers that submit 
corporate tax returns--the instructions stated that those supplier 
types had to submit a current credit report but stated nothing about a 
credit score. In the remaining four paragraphs--for limited 
partnerships, publicly traded suppliers, new suppliers, and networks-- 
nothing was stated about either a credit report or a credit score. The 
bid submission Form A stated that a credit rating and score--rather 
than using the term credit report--had to be submitted. Near the end of 
the bid window on September 13, 2007, Palmetto GBA issued a "required 
document reminder" that stated that all bidders, regardless of their 
business structure, had to submit both a credit report and a credit 
score. 

CMS Feedback to Suppliers on Bid Disqualification Reasons Were Vague 
and Incomplete: 

The feedback that CMS provided to suppliers that had bids disqualified 
because of bid submission deficiencies was vague.[Footnote 52] CMS 
provided suppliers that had bids disqualified with seven general reason 
codes to explain the grounds for the disqualifications. (See table 8.) 
The suppliers with disqualified bids received letters dated March 20, 
2008, from Palmetto GBA with attachments that indicated which reason 
code or codes applied for each CBA and each product category for which 
the supplier submitted a bid.[Footnote 53] 

Table 8: CMS's CBP Bid Disqualification Reason Codes and Descriptions, 
CBP Round 1: 

Reason code: BSE-1; 
Reason code description: Bidder did not meet enrollment standards 
specified in 42 C.F.R. 424.57(c). 

Reason code: BSE-2; 
Reason code description: Bidder did not submit a bona fide bid that 
complies with all the terms and conditions contained in the request for 
bids (RFB). 

Reason code: BSE-3; 
Reason code description: Bidder did not meet applicable quality 
standards developed by CMS in accordance with § 1834(a) (20) of the 
Social Security Act/was not accredited by a CMS-approved accreditation 
organization. 

Reason code: BSE-4; 
Reason code description: Bidder did not submit along with its bid the 
applicable financial documentation specified in the request for bids 
(RFB). 

Reason code: NR-1; 
Reason code description: Bidder did not meet network requirements. 

Reason code: CO-1; 
Reason code description: Bidder did not submit a single bid for 
commonly-owned or controlled suppliers. 

Reason code: FS-1; 
Reason code description: Bidder did not meet financial standards. 

Source: CMS and Palmetto GBA. 

[End of table] 

The reason codes provided as feedback may not help a supplier 
understand how to resolve its bid issues for future CBP rounds. For 
example, if a supplier's bid did not provide all required financial 
documentation, it was disqualified under the BSE-4 reason code. (See 
table 9.) The BSE-4 reason code does not inform the supplier which 
financial document or documents were not submitted. Likewise, if the 
supplier did not meet the financial standards, the bid was disqualified 
under the FS-1 reason, and the supplier would not know the standard or 
standards it had not met. In addition, CMS did not always provide a 
supplier with all reasons why a bid was disqualified. Palmetto GBA 
officials told us that suppliers were informed of an accreditation 
disqualification reason (BSE-3) if it was the bid's only disqualifying 
reason. If a supplier was disqualified both for a reason code other 
than BSE-3 and for not being accredited, the supplier would not have 
been informed about the accreditation reason. 

Table 9: Text of One Disqualified Bid Letter's Attachment Information: 

Competitive bidding area: Charlotte-Gastonia-Concord, NC-SC: 
Product category: Oxygen Equipment and Supplies.
Product category: BSE-4. 

Source: CMS and Palmetto GBA. 

[End of table] 

CMS Post-bidding Review Process Was Not Effectively Communicated to 
Suppliers and Was Inconsistent with CMS's Earlier Interpretation of Its 
Authority to Conduct Such Reviews: 

CMS conducted a post-bidding review process through which the agency 
reversed Palmetto GBA's decision to disqualify the bids of certain 
suppliers. Specifically, Palmetto GBA and CMS reviewed a total of 1,935 
bids from 357 suppliers from March 21, 2008, through July 9, 2008. 
[Footnote 54] They only reviewed the disqualified bids of suppliers who 
contacted them with questions or requested a review.[Footnote 55] As a 
result of this review, CMS determined that 10 suppliers had 58 bids 
incorrectly disqualified; the agency subsequently offered CBP contracts 
to 7 of these suppliers for 27 bids.[Footnote 56] 

CMS did not effectively communicate to suppliers that they had an 
opportunity to have disqualified round 1 bids reviewed. CMS officials 
informed us that the agency made a decision on or about March 5, 2008, 
as part of a quality assurance process, to permit Palmetto GBA to 
review disqualified bids after suppliers received their March 20, 2008, 
letters notifying them of their disqualifications.[Footnote 57] After 
the letters were sent to suppliers on March 20, 2008, CMS officials 
told us that suppliers learned about the bid review opportunity if they 
contacted Palmetto GBA with questions about their bids,[Footnote 58] 
participated in an April 2008 CMS Open Door Forum[Footnote 59] about 
the CBP program, or attended the June 16, 2008 PAOC meeting.[Footnote 
60] CMS and Palmetto GBA, however, did not provide any written 
notification explaining this review process to suppliers prior to or 
after they were informed of their bid disqualifications, and some 
suppliers were not aware of this opportunity for review. For example, 
two suppliers informed us that they were unaware that a post-bidding 
review was an option. Another supplier informed us that the company's 
bids were disqualified and when he called Palmetto GBA to follow up, he 
was informed that there would be a review and response in 30 days, but 
he had not received a response as of March 25, 2009. An additional 
supplier informed us that in response to his inquiries, CMS stated that 
there was no formal appeal process. 

Moreover, the post-bidding review was inconsistent with CMS's earlier 
interpretation of its authority to conduct such reviews. Before 
soliciting bids for round 1, the agency determined that it would not 
have the authority to review the results of bid evaluations. The MMA 
prohibited administrative and judicial review of certain round 1 
determinations, including the awarding of contracts, the bidding 
structure, and number of contractors selected.[Footnote 61] Neither the 
MMA nor its legislative history defined the phrase "administrative 
review." In the preamble to the CBP final rule, however, CMS 
interpreted this provision as prohibiting review of the results of bid 
evaluations.[Footnote 62] CMS did not explicitly address such a review 
or any reversals of bid disqualifications elsewhere in its regulations 
or other policy guidance. In the preamble, CMS also recounted that 
commenters requested that it establish a grievance and review process 
for suppliers.[Footnote 63] Among other things, commenters also 
expressed concern about the potential for errors in disqualifying 
suppliers and requested that CMS provide an opportunity for review to 
confirm the accuracy of these disqualifications.[Footnote 64] In 
response to these comments, CMS indicated that it did not have the 
authority to review the outcome of bid evaluations. Specifically, it 
cited the prohibition on administrative or judicial review, explaining 
that Congress enacted this prohibition to avoid any delay or disruption 
in the implementation of the program as a result of challenges brought 
by bidders. 

In response to our inquiries during this evaluation, CMS officials 
informed us that the post-bidding review process was not an 
administrative review prohibited by statute, but rather a quality 
assurance measure. In our view, CMS's characterization of the post-
bidding review process as a quality assurance measure does not fully 
address the inconsistency with the agency's earlier position that it 
did not have the authority to conduct such a review. In the preamble to 
the CBP final rule, CMS advised that it would notify losing bidders but 
would not provide debriefings due to logistics, volume of bidders, and 
time constraints. As an alternative, CMS explained that the agency 
would conduct an extensive education and outreach program for suppliers 
and was developing a quality assurance program. But the post-bidding 
review process was distinct from the specific quality assurance steps 
that CMS described it would take in the preamble to the CBP final 
rule.[Footnote 65] In addition to its own quality assurance system, CMS 
indicated that Palmetto GBA would implement a quality assurance 
program, but did not elaborate on the form this program would 
take.[Footnote 66] However, the agency's response to commenters 
rejected any suggestion of a post-bidding review citing prohibitions 
under federal law. CMS officials have since informed us that the 
language in the CBP final rule was ambiguous, thereby not precluding it 
from conducting the post-bidding review to be considered a quality 
assurance measure. Even if that were the case, CMS did not provide any 
clarifying guidance to suppliers that explicitly informed disqualified 
suppliers of the opportunity for a post-bidding review. Instead CMS 
made its March 5, 2008, decision to conduct these reviews about 2 weeks 
before suppliers were mailed notice of their bid disqualifications. The 
notification simply stated that suppliers could call customer service 
with questions, and CMS and Palmetto GBA conducted these reviews only 
for suppliers who contacted them or requested a review. 

CMS's CBP Electronic Bid Submission System Had Information Technology 
Operational Problems: 

After the CBP round 1 bid window closed, CMS acknowledged that the CBSS 
had information technology (IT) operational problems that affected 
suppliers' ability to submit their bids.[Footnote 67] CMS also 
acknowledged that loss of bid submission data was a major problem for 
suppliers. During the early part of the bid window, a CBSS security 
feature automatically logged a supplier out of the system after 2 
hours, which caused some suppliers to lose data.[Footnote 68] Another 
security feature timed suppliers out of CBSS if there was no activity 
for 30 minutes. To address suppliers' concerns with the CBSS's bid 
submission data losses, CMS and Palmetto GBA conducted a special bidder 
conference call July 9, 2007. 

Some suppliers stated that the CBSS was difficult to use, which impeded 
their ability to submit a bid. CMS officials acknowledged that the CBSS 
user guide was not very detailed or user friendly. Some error messages 
also used technical language that suppliers did not understand. In 
addition, CBSS required data to be manually reentered for the same 
product category in multiple CBAs because the CBSS did not have a "cut 
and paste" function. The data reentry was time-consuming and increased 
the risk of suppliers' inputting incorrect data that could disqualify a 
bid. 

CMS officials stated that there were cases when the CBSS was 
unavailable to suppliers to submit their bids. CMS explained that CBSS 
had unscheduled downtimes that inconvenienced the suppliers, 
particularly those working in CBSS at the time. According to CMS, 
privacy and security rules required that each user ID and password 
allow only one user to access the CBSS at a time. However, the system 
did not have the controls to prevent multiple users from attempting to 
do so. When this scenario did occur, the system became inaccessible for 
all user IDs and passwords. A supplier told us that it had to wait 
until nonworkday hours to access the CBSS to submit its bids. On the 
last day of the bid window, CBSS was unavailable for several hours. 

CMS's Program Advisory and Oversight Committee Provided Input to 
Address Supplier Challenges, but Not All Challenges Were Addressed: 

Although a CMS official said that the original PAOC was generally 
helpful to CMS in developing and implementing CBP round 1 and that it 
provided CMS with assistance in the overall design of the program, two 
members of the original PAOC and three DME trade association 
representatives told us that CMS did not always use the PAOC 
effectively. Though the PAOC provided input to CMS to address potential 
supplier challenges during the development and implementation of CBP 
round 1, some issues raised were not fully resolved,[Footnote 69] such 
as concerns about missing or lost financial documentation, the absence 
of a formal CMS bid review process, the concern that small suppliers 
would be disadvantaged, and that the supplier quality standards were 
not finalized before the CBP round 1 bid window opened. One PAOC member 
stated that although the PAOC's role was to advise and to oversee the 
CBP, members were not provided enough information and opportunities to 
provide feedback to fulfill these responsibilities. One PAOC member 
also reported having insufficient time to discuss and react to the CMS 
and Palmetto GBA presentations and expressed dissatisfaction at not 
being able to formulate or vote on recommendations. A CMS official 
stated that the PAOC had cochairs--one CMS official and one industry 
representative--to encourage mutual collaboration. However, the two 
PAOC members said this approach was not effective because the CMS 
cochair had a greater role on the committee than the industry cochair. 

CMS Has Taken Several Steps to Improve Future Rounds of the CBP, 
Including Implementing MIPPA Provisions and Addressing IT Operational 
Problems: 

CMS has taken several steps to improve future rounds of the CBP. It 
issued an interim final rule in 2009 to implement certain provisions of 
MIPPA that affect the round 1 rebid. It has taken several additional 
actions to make the round 1 rebid bidding process easier for suppliers 
to navigate and the bidding information easier to understand. CMS's new 
bid submission system, DBidS, may address the IT operational 
deficiencies that occurred during round 1. Finally, though MIPPA 
extended the termination date of the PAOC, CMS disbanded the original 
PAOC and appointed new members to the current PAOC to provide new 
expertise and input for the round 1 rebid. 

CMS Has Implemented Certain MIPPA Provisions: 

CMS's interim final rule, effective April 18, 2009,[Footnote 70] 
implemented certain MIPPA provisions, including changes that CMS is 
required to make for the CBP round 1 rebid and future rounds.[Footnote 
71] 

* Notification of missing financial documentation. CMS will notify and 
provide feedback about any missing financial documentation to bidding 
suppliers that submit their required financial documentation within a 
time period known as the covered document review date.[Footnote 72] 
Once notified, suppliers will have 10 business days to submit the 
missing documentation.[Footnote 73] 

* Subcontractor information. Suppliers that enter into CBP contracts 
with CMS must disclose (1) each subcontracting arrangement the supplier 
enters into to provide items and services covered under its CBP 
contract and (2) whether the subcontractor meets accreditation 
requirements, if applicable.[Footnote 74] The supplier must provide 
this information to CMS within 10 days of entering into a CBP contract 
and within 10 days of entering any subcontracting arrangement 
subsequent to the award of the contract.[Footnote 75] 

In addition to the changes specifically required under the interim 
final rule, MIPPA also included other changes to the CBP.[Footnote 76] 

* Accreditation deadline. Suppliers, including subcontractors, 
providing items or services on or after October 1, 2009, must have 
submitted evidence of accreditation prior to this date.[Footnote 77] 

* CBP ombudsman. A competitive acquisition ombudsman, within CMS, must 
be appointed by the HHS Secretary to respond to CBP questions and 
complaints made by suppliers and individuals. The ombudsman must submit 
an annual report detailing CBP-related activities to Congress.[Footnote 
78] 

* PAOC extension. The termination date for the PAOC is extended from 
December 31, 2009, to December 31, 2011.[Footnote 79] 

Additional CMS Actions to Improve the Round 1 Rebid: 

CMS has made several additional changes for the CBP round 1 rebid in 
response to problems that occurred during CBP round 1. First, to reduce 
the burden on bidding suppliers providing financial documentation, CMS, 
as stated in the preamble to the interim final rule, will require 
suppliers to submit 1 year of documentation instead of 3 years, which 
CMS now believes is adequate to determine a supplier's financial 
soundness. The request-for-bid instructions now provides a chart that 
lists the required financial documents by supplier type. For example, 
the chart distinguishes the financial documentation required for a sole 
proprietorship versus a corporation. In addition to the chart, the 
rebid's request-for-bid instructions also include a sample of a 
completed income statement, balance sheet, statement of cash flow, and 
corporate tax return. 

Second, CMS announced the timeline for the round 1 rebid bid window in 
advance, and to improve the quality and availability of information to 
bidding suppliers, CMS launched an intensive bidder education campaign 
to provide suppliers with all the information necessary to submit a 
complete bid during the round 1 rebid bid window. According to CMS, the 
request-for-bid instructions has been made clearer and more 
understandable. A Palmetto GBA official said that, if necessary, the 
request-for-bid instructions will be updated until the bid window 
closes, although CMS will notify suppliers if the bidding instructions 
are revised or clarified during the bid window.[Footnote 80] 
Furthermore, to ensure that suppliers can easily locate the most 
current CBP information, CMS will date every page, article, and 
frequently asked question so that suppliers know when new information 
has been posted. 

As in CBP round 1, suppliers may enter into subcontracting arrangements 
with other suppliers to provide items and services covered under their 
CBP contract to eligible Medicare beneficiaries. However, CMS clarified 
that subcontractors may be used only to purchase inventory, deliver and 
instruct on the use of Medicare-covered items, and repair rental 
equipment. Contract suppliers are responsible for furnishing items and 
services in compliance with physicians' orders and Medicare rules and 
guidelines. These services include coordination of care with 
physicians, submitting claims on behalf of beneficiaries, assuming 
ownership and responsibility for equipment furnished to beneficiaries, 
and ensuring product safety. 

In addition, the original PAOC was concerned that suppliers new to a 
product category were given the same consideration as experienced 
suppliers during CBP round 1. For this reason, a CMS official announced 
at the June 4, 2009, PAOC meeting that the agency is now considering 
whether to apply a different standard to evaluate the capacity of 
suppliers new to a DME product category. CMS later explained the new 
proposal to us. For the CBP, all suppliers, both new and experienced, 
estimate the number of items they can provide to meet the projected 
demand of beneficiaries for a product category in a CBA. Currently, a 
supplier must meet a minimum threshold based on CMS's determination of 
its financial strength in order for CMS to continue to evaluate its 
bid. If a supplier meets that threshold, it is then evaluated against a 
second threshold to determine whether CMS will accept the supplier's 
estimate of its ability to expand its current capacity. CMS is 
proposing that the second threshold be higher for suppliers new to a 
product category than for experienced suppliers. According to a CMS 
official, new suppliers that did not meet the second higher threshold 
could still be offered a contract, although the proposal would 
generally result in awarding more contracts to suppliers with 
experience. 

Suppliers participating in the round 1 rebid must have all local and 
state licenses for a product category in a CBA at the time of bid 
submission in order to be considered for a CBP contract. According to 
CMS, this is not a change from CBP round 1. However, there were issues 
during the first round that complicated licensure verification. CMS and 
Palmetto GBA acknowledged and some trade association representatives 
told us that some suppliers were offered CBP contracts during CBP round 
1 for product categories for which they were not properly licensed. 
Therefore, for the round 1 rebid, CMS has further clarified the 
licensure requirement, stating that suppliers must be licensed for the 
product category in the CBA in which they are bidding and if a CBA 
covers more than one state, the supplier needs to obtain applicable 
licensure in all states. To ensure that the licensure requirement is 
met, CMS is improving quality assurance checks to confirm that 
suppliers are properly licensed prior to accepting suppliers' bids in 
the CBP round 1 rebid. 

On January 2, 2009, CMS published a final rule, effective March 3, 
2009, to implement a statutory requirement that certain DME suppliers 
post a $50,000 surety bond.[Footnote 81] In responding to comments on 
the rule, CMS stated that the surety bond is designed to reduce the 
amount of money that is lost due to fraudulent or abusive billing 
schemes by suppliers. Existing Medicare suppliers had until October 2, 
2009, to comply, and as of May 4, 2009, new suppliers were required to 
post the bond as a condition of their enrollment in Medicare.[Footnote 
82] Suppliers that participate in the rebid will have to comply with 
the surety bond requirement. 

To Address CBSS Operational Deficiencies, CMS Is Developing a New Bid 
Submission System: 

According to CMS system and Palmetto GBA personnel, the agency 
developed a new IT system to replace the CBSS and correct the 
operational problems that were identified. This system, DBidS, was 
developed in accordance with the agency's defined system development 
process and was designed to address the operational deficiencies 
identified with CBSS. DBidS software testing, including user testing, 
was completed in August 2009 and CMS management has accepted and 
approved the system for operation. 

CMS system development is guided by its Integrated IT Investment and 
System Life Cycle Framework, which prescribes steps, activities, and 
documents required to develop CMS IT systems. For example, the 
framework describes processes to be followed in developing, validating, 
and agreeing on requirements for system features and capabilities. It 
also describes required testing, including user acceptance testing, 
which validates that business requirements are met, as well as 
performance and stress testing, in which large volumes of input data or 
simulated concurrent users are introduced to determine levels beyond 
which the system will fail. Finally, it describes the operational 
review that the agency must perform to determine whether to accept and 
approve the system for operation.[Footnote 83] According to experts in 
the software development field,[Footnote 84] having a defined process 
increases the likelihood of a successful system development, although 
it does not guarantee it. 

In accordance with the framework, CMS officials assessed CBSS business 
requirements and reviewed these with the contractors to establish a new 
set of baseline requirements for DBidS. The agency used these 
requirements to develop a design for the system, which was reviewed by 
CMS in 2008. Based on this design, the system was developed and testing 
began. 

On May 29, 2009, CMS began advising all DME suppliers to update their 
National Supplier Clearinghouse files to ensure that they contained 
correct and current information. CMS stated that this was especially 
important for suppliers planning to bid in the round 1 rebid because it 
would enable them to avoid the registration issues that occurred during 
CBP round 1 because some of the information in the suppliers' National 
Supplier Clearinghouse files did not match the information that was 
submitted into the Individuals Authorized Access to CMS Computer 
Systems.[Footnote 85] In May 2009, a CMS official stated that DBidS was 
designed to address specific deficiencies identified in CBSS; it is 
designed to be more user friendly and easier for suppliers to navigate, 
and it is to provide a logical flow of the data that are requested, as 
well as detailed bidding instructions in user-friendly language. It is 
to have status indicators to indicate whether the bidding forms are 
"complete," "incomplete," or "pending approval," and links in the 
system to direct suppliers to the incomplete data. In addition, CMS 
said that DBidS will have a "copy and paste" function for the transfer 
of certain data and many data-saving points to minimize loss of data. 
DBidS is expected to also allow a supplier to have more than one 
employee access DBidS at the same time, but to control data input the 
system will not allow more than one employee to input the same data at 
the same time.[Footnote 86] 

In addition to the DBidS changes to address specific deficiencies 
identified in CBSS, CMS also recognized that more thorough testing of 
CBSS might have prevented certain systems deficiencies. As of August 
2009, CMS has completed testing DBidS, including two changes to correct 
a critical defect[Footnote 87] and addressed the policy requirement 
that all suppliers be accredited. As of September 2009, CMS has 
accepted DBidS for operation and agency officials indicated that 
previous deficiencies have been satisfactorily addressed. However, 
until DBidS is put into operation its effectiveness in correcting these 
deficiencies is unknown. 

CMS Changed PAOC Membership to Solicit New Expertise and Input: 

On October 2, 2008, CMS formally announced that because of the length 
of the MIPPA extension, and because the PAOC was to perform additional 
duties, the agency had ended the terms of service for the original PAOC 
members, and was soliciting nominations for new individuals to serve on 
the PAOC.[Footnote 88] On January 15, 2009, CMS announced the 17 new 
members of the current PAOC who were chosen because of their expertise 
in a broad range of issues, including quality standards, accreditation, 
and Medicare beneficiary issues.[Footnote 89] Although CMS stated that 
this PAOC was to review the bidding process for the round 1 rebid and 
consider all of the MIPPA changes, CMS did not schedule the first 
meeting until June 4, 2009, 4-½ months after CMS had issued its interim 
final rule for public comment to implement the MIPPA provisions on 
January 16, 2009. Like the original PAOC, the current PAOC is cochaired 
by a CMS official and a DME industry representative.[Footnote 90] 

Similar to the meetings of the original PAOC, the June 4, 2009, PAOC 
meeting included several presentations by CMS officials with limited 
time allowed at the end of each for PAOC member discussion. The 
presentations included information concerning DBidS; CBP requirements 
and bidder responsibilities; suppliers' financial documentation, 
licensure, accreditation, and subcontracting requirements; new supplier 
issues; mail-order diabetic supplies; and the tentative timeline for 
the CBP round 1 rebid implementation. Although a CMS official told PAOC 
members that they were encouraged to continue to provide individual 
feedback, advice, and suggestions during the meeting and additionally 
by e-mail for CMS's consideration, as with the original PAOC meetings, 
CMS did not ask the PAOC to provide recommendations that would reflect 
input from the committee as a whole. Although CMS had not conducted 
PAOC meetings by teleconference previously, the agency held a three-
hour teleconference on July 21, 2009, to solicit the current PAOC 
members' feedback and suggestions on (1) determining beneficiary 
demand, (2) assessing bidding suppliers' ability to meet the demand, 
and (3) reviewing regulations for change of ownership and the sale of 
contracts. A four-page meeting summary was posted on CMS's Web site in 
August 2009, but a transcript has not been posted. We cannot determine 
at this time the degree to which the PAOC members' input will be 
reflected in CMS's implementation of the round 1 rebid. 

Conclusions: 

If wholly adopted, competitive bidding could reduce Medicare payments 
for DME, help close the disparity with prices paid by others for the 
same items and services, and also help reduce improper payments. It 
also represents a change from Medicare's long-standing policy that any 
qualified provider can participate in Medicare because it authorizes 
CMS to select suppliers to participate in Medicare, based in part on 
CMS's scrutiny of their financial documents and other bid submission 
materials. 

CBP round 1 was the first time that both CMS and DME suppliers 
participated in a large-scale DME competitive bidding process. Some 
challenges may be expected for a new program, but problems occurred, in 
part because of poor communication by CMS and an inadequate electronic 
bid submission system. CMS was aware of these problems as the bidding 
unfolded and extended the original bid window as it attempted to 
correct them. The agency worked to address these problems before the 
round 1 rebid began. 

DBidS, the new electronic bid submission system developed by CMS and 
Maricom, could be an improvement if it successfully addresses the 
deficiencies identified in the system used for round 1 as CMS claims it 
will. CMS's implementation of the MIPPA requirement that the agency 
provide feedback on the status of suppliers' financial documentation 
may help reduce the number of bids disqualified for inadequate 
financial documentation. And the agency's implementation of the 
statutory requirements that all suppliers, including subcontractors, 
provide evidence of accreditation by October 1, 2009, and that 
suppliers generally must post surety bonds may help ensure that only 
legitimate suppliers are enrolled in Medicare and therefore are 
eligible to bid. To address the concerns that suppliers have the 
experience to provide the DME items they win contracts for, before they 
can submit bids, suppliers will also have to be accredited and licensed 
for each DME product category and CBA in which they bid. In addition, 
CMS's early announcement of the timeline for the rebid and the revised 
request-for-bid instructions gave suppliers more time to decide whether 
to participate in the rebid and to begin preparing their bids before 
the window opens. 

Despite CMS's actions to improve the program, difficulties may still 
arise in the round 1 rebid and future rounds. Because CMS did not 
effectively notify suppliers of the post-bidding review conducted in 
round 1, some suppliers missed the opportunity to have their 
disqualified bids reviewed. Unless CMS commits to effectively notifying 
all bidders of any review of disqualified bids, if it decides to allow 
such a process in future rounds of the CBP, CMS will not be able to 
ensure that all bidding suppliers have an equal opportunity to request 
a postbid review. 

Recommendation for Executive Action: 

To improve future rounds of the competitive bidding program for DME, we 
recommend that the Administrator of CMS take the following action: 

* If CMS decides to conduct a review of disqualification decisions 
during the round 1 rebid and future rounds, CMS should notify all 
suppliers of any such process, give suppliers equal opportunity for 
such reviews, and clearly indicate how they can request a review. 

Agency Comments and Our Evaluation: 

In written comments on a draft of this report, HHS agreed with our 
recommendation that it effectively notify all suppliers of all aspects 
of the CBP. This would include any process to review bid 
disqualifications. CMS said it believes that suppliers should have the 
opportunity to raise questions or concerns about the competitive 
bidding process, including disqualification decisions. We found that 
CMS did not effectively notify suppliers about its postbid review of 
disqualified bids which resulted in some bid disqualifications being 
overturned in round 1 of the CBP. HHS also commented that we had not 
identified concerns with the overall structure and design of the CBP. 
However, such an analysis was beyond the scope of this report. 

HHS noted that it had a different perspective on some aspects of our 
report. The agency commented that the number of suppliers with CBP 
contracts did not account for the number of locations where DME items 
and services might be available in the CBAs. Our work focused on the 
number of suppliers participating in the CBP process, the number that 
were disqualified, and the number that were awarded contracts. We used 
the same contract supplier definition as CMS, which did not include the 
number of locations. We did not analyze whether there were enough 
locations to provide adequate Medicare beneficiary access during the 
CBP's 2-week operation. 

HHS suggested that our statement that about half of the submitted bids 
were disqualified before competing on price creates the impression that 
additional suppliers would have won if they submitted bids that 
complied with the terms and conditions of the request-for-bid 
instructions. However, we believe our characterization is accurate 
because bids were first reviewed for completeness, compliance with 
bidding requirements, and financial score. The agency also argued that 
it relied heavily on the PAOC for the design and implementation of the 
CBP. But as we stated in the report, two original PAOC members and 
three trade association representatives told us that CMS did not always 
use the PAOC effectively. Our review of PAOC meeting transcripts also 
found members who were dissatisfied with how the PAOC was used. 

Finally, we revised the report according to HHS's comment that a 
reduction in the number of suppliers was an expected result of the CBP, 
but not a goal of the program. As we noted in the report draft, the CBP 
was structured to allow only suppliers with winning bids that accepted 
contracts to provide DME items and services, in contrast to Medicare's 
long-standing policy that any qualified provider can participate in 
Medicare. 

HHS provided additional technical comments which we incorporated as 
appropriate. HHS's written comments are reprinted in appendix V. 

As we agreed with your offices, unless you publicly announce the 
contents of this report earlier, we plan no further distribution of it 
until 30 days from its date. We are sending copies of this report to 
the Secretary of Health and Human Services. The report will also be 
available at no charge on our Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-7114 or kingk@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions to 
this report are listed in appendix VI. 

Signed by: 

Kathleen M. King: 
Director, Health Care: 

[End of section] 

Appendix I: Scope and Methodology: 

To assess the Centers for Medicare & Medicaid Services's (CMS) 
implementation of round 1 of the competitive bidding program (CBP), we 
reviewed federal laws and regulations. We also interviewed officials 
from CMS and Palmetto GBA--the contractor CMS selected to implement the 
CBP bidding and contract award process--about the results of the bid 
submission and review processes, CMS's major challenges in implementing 
CBP round 1, and the actions taken to improve future CBP rounds. 

To determine the results of the CBP round 1, we reviewed data from CMS 
and Palmetto GBA about the number and characteristics of suppliers 
participating in the CBP process, number and characteristics of bids 
submitted, and the bids' outcomes. We reviewed the Competitive Bid 
Submission System (CBSS) User Guide, and instructions for entering 
data. We interviewed and obtained information from officials from CMS 
and Palmetto GBA about the CBSS, including system testing and data 
processing. We asked Palmetto GBA officials about data transfers from 
the CBSS to the Competitive Bidding Evaluation System (CBES), an 
application designed by Palmetto GBA to automate specific portions of 
the bid evaluation process that contained bid data, financial data 
entered by Palmetto GBA personnel, and documentation of Palmetto GBA 
actions. We asked them about CBES data checks, quality control, data 
entry procedures, and security. We interviewed CMS officials about the 
criteria and procedures for disqualifying bids, identifying winning 
bids, and calculating single payment amounts. We reviewed information 
CMS provided to the Program Advisory and Oversight Committee (PAOC) 
about this process and its results. We compared data published by CMS 
with the data provided to us and followed up with the appropriate 
officials to resolve discrepancies. We assessed the reliability of 
round 1 data by reviewing information from or interviewing CMS and 
Palmetto GBA officials and determined that the data were sufficiently 
reliable for the purposes of this report. We did not evaluate the 
reliability of CMS estimates of beneficiary demand for durable medical 
equipment (DME) which relied on 2005 and 2006 DME claims data, the most 
recent data available to them at the time, nor did we evaluate CMS's 
estimates of projected savings as the result of round 1. 

To determine the major challenges CMS had in conducting CBP round 1, we 
interviewed CMS and Palmetto GBA officials and reviewed information 
provided to suppliers, including CBP bid submission instructions and 
related materials, bidder conference call transcripts, and CMS's and 
Palmetto GBA's CBP Web sites. We reviewed these materials for 
inconsistencies. We also reviewed an internal document provided by 
Palmetto GBA about its implementation of the CBP round 1. We 
interviewed two PAOC members concerning whether CMS used the PAOC 
effectively and to gain insight about the committee's role in advising 
CMS about the implementation of the CBP and establishing standards for 
suppliers that bid in round 1. We reviewed transcripts and meeting 
summaries of the seven PAOC meetings to assess the concerns and 
feedback that the members provided about potential supplier issues and 
challenges. We also interviewed CMS and Palmetto GBA officials and 
reviewed documentation about CBSS's operational problems. 

We interviewed 12 suppliers about their experiences with CBP. We 
interviewed 4 suppliers that were not offered a contract, 4 suppliers 
that accepted a CBP contract, and 4 suppliers that rejected their CBP 
contract offer. The suppliers were randomly selected from CMS's list of 
suppliers that bid in CBP round 1. Because we interviewed a small 
number of suppliers, our findings from these interviews are not 
generalizable to all suppliers. In addition, we interviewed 
representatives from national and state industry trade associations 
representing DME suppliers--the American Association for Homecare, the 
National Association of Independent Medical Equipment Suppliers, the 
Florida Association of Medical Equipment Services, and the Ohio 
Association of Medical Equipment Services. We also reviewed testimony 
from three congressional hearings including two 2008 hearings about the 
CBP implementation[Footnote 91] and a 2009 congressional hearing on the 
CBP's impact on small business,[Footnote 92] in which a CMS official 
discussed the results of CBP round 1, and six representatives of 
various DME associations and interest groups discussed the effect that 
the CBP had on their businesses and professions. 

To analyze the post-bidding review authorized by CMS and conducted by 
Palmetto GBA, we interviewed CMS and Palmetto GBA officials about the 
development and implementation of the review process and reviewed its 
results. We also reviewed relevant federal laws and regulations and 
interviewed CMS officials and attorneys representing the Department of 
Health and Human Services (HHS), CMS division. 

To determine the steps that CMS has taken to improve the bidding 
process for future CBP rounds, we reviewed relevant federal laws and 
regulations, PAOC Federal Register notices, and CMS press releases 
related to the PAOC. We interviewed CMS and Palmetto GBA officials 
about the actions they have taken and intend to take to improve the CBP 
bidding process during the CBP round 1 rebid. We also attended the June 
4, 2009, PAOC meeting at which CMS provided updates of the process 
changes and modifications that it made for the round 1 rebid. 

In addition, we interviewed Maricom officials and reviewed available 
documentation related to the development, testing, and proposed 
implementation of the new electronic bid submission system--Durable 
Medical Equipment, Prosthetics, Orthotics, and Supplies bidding system 
(DBidS)--that will be used during the CBP round 1 rebid. We did not 
assess the reliability or functionality of DBidS, but we reviewed the 
processes established by CMS and its contractors for testing and 
accepting such systems. 

We conducted this performance audit from June 2008 to September 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix II: Change in Numbers of Suppliers by CBP Product Category and 
CBA: 2006-2008: 

Product category: Oxygen Supplies and Equipment; 

Calendar year (CY) 2006 suppliers[A]: 
Competitive bidding area (CBA): 
Charlotte: 39; 
Cincinnati: 45; 
Cleveland: 38; 
Dallas: 133; 
Kansas City: 41; 
Miami: 488; 
Orlando: 71; 
Pittsburgh: 47; 
Riverside: 53; 
San Juan: NA; 
Median: 47. 

Competitive bidding program (CBP) contract suppliers: 
Competitive bidding area (CBA): 
Charlotte: 18; 
Cincinnati: 18; 
Cleveland: 22; 
Dallas: 36; 
Kansas City: 17; 
Miami: 43; 
Orlando: 34; 
Pittsburgh: 22; 
Riverside: 18; 
San Juan: INS; 
Median: 22. 

Percent change in number of suppliers: 
Competitive bidding area (CBA): 
Charlotte: -54; 
Cincinnati: -60; 
Cleveland: -42; 
Dallas: -73; 
Kansas City: -59; 
Miami: -91; 
Orlando: -52; 
Pittsburgh: -53; 
Riverside: -66; 
San Juan: NA; 
Median: -53. 

Product category: Standard Power Wheelchairs, Scooters and Related 
Accessories: 

CY 2006 suppliers: 
Competitive bidding area (CBA): 
Charlotte: 30; 
Cincinnati: 19; 
Cleveland: 18; 
Dallas: 92; 
Kansas City: 18; 
Miami: 91; 
Orlando: 27; 
Pittsburgh: 12; 
Riverside: 72; 
San Juan: 34; 
Median: 29. 

CBP contract suppliers: 
Competitive bidding area (CBA): 
Charlotte: 11; 
Cincinnati: 13; 
Cleveland: 12; 
Dallas: 24; 
Kansas City: 14; 
Miami: 18; 
Orlando: 13; 
Pittsburgh: 11; 
Riverside: 19; 
San Juan: 6; 
Median: 13. 

Percent change in number of suppliers: 
Competitive bidding area (CBA): 
Charlotte: -63; 
Cincinnati: -32; 
Cleveland: -33; 
Dallas: -74; 
Kansas City: -22; 
Miami: -80; 
Orlando: -52; 
Pittsburgh: -8; 
Riverside: -74; 
San Juan: -82; 
Median: -54. 

Product category: Complex Rehabilitative Power Wheelchairs and Related 
Accessories: 

CY 2006 suppliers: 
Competitive bidding area (CBA): 
Charlotte: 27; 
Cincinnati: 21; 
Cleveland: 20; 
Dallas: 74; 
Kansas City: 19; 
Miami: 101; 
Orlando: 21; 
Pittsburgh: 11; 
Riverside: 49; 
San Juan: NA; 
Median: 21. 

CBP contract suppliers: 
Competitive bidding area (CBA): 
Charlotte: 10; 
Cincinnati: 7; 
Cleveland: 6; 
Dallas: 11; 
Kansas City: 4; 
Miami: 6; 
Orlando: 6; 
Pittsburgh: 5; 
Riverside: 8; 
San Juan: INS; 
Median: 6. 

Percent change in number of suppliers: 
Competitive bidding area (CBA): 
Charlotte: -63; 
Cincinnati: -67; 
Cleveland: -70; 
Dallas: -85; 
Kansas City: -79; 
Miami: -94; 
Orlando: -71; 
Pittsburgh: -55; 
Riverside: -84; 
San Juan: NA; 
Median: -71. 

Product category: Mail-Order Diabetic Supplies: 

CY 2006 suppliers: 
Competitive bidding area (CBA): 
Charlotte: 118; 
Cincinnati: 101; 
Cleveland: 93; 
Dallas: 150; 
Kansas City: 96; 
Miami: 294; 
Orlando: 87; 
Pittsburgh: 79; 
Riverside: 68; 
San Juan: 129; 
Median: 99. 

CBP contract suppliers: 
Competitive bidding area (CBA): 
Charlotte: 10; 
Cincinnati: 15; 
Cleveland: 12; 
Dallas: 15; 
Kansas City: 10; 
Miami: 18; 
Orlando: 12; 
Pittsburgh: 12; 
Riverside: 7; 
San Juan: 13; 
Median: 12. 

Percent change in number of suppliers: 
Competitive bidding area (CBA): 
Charlotte: -92; 
Cincinnati: -85; 
Cleveland: -87; 
Dallas: -90; 
Kansas City: -90; 
Miami: -94; 
Orlando: -86; 
Pittsburgh: -85; 
Riverside: -90; 
San Juan: -90; 
Median: -88. 

Product category: Enteral Nutrients, Equipment and Supplies[B]: 

CY 2006 suppliers: 
Competitive bidding area (CBA): 
Charlotte: 48; 
Cincinnati: 47; 
Cleveland: 67; 
Dallas: 100; 
Kansas City: 34; 
Miami: 338; 
Orlando: 47; 
Pittsburgh: 50; 
Riverside: 67; 
San Juan: NA; 
Median: 50. 

CBP contract suppliers: 
Competitive bidding area (CBA): 
Charlotte: 12; 
Cincinnati: 11; 
Cleveland: 14; 
Dallas: 13; 
Kansas City: 13; 
Miami: 29; 
Orlando: 21; 
Pittsburgh: 10; 
Riverside: 19; 
San Juan: INS; 
Median: 13. 

Percent change in number of suppliers: 
Competitive bidding area (CBA): 
Charlotte: -75; 
Cincinnati: -77; 
Cleveland: -79; 
Dallas: -87; 
Kansas City: -62; 
Miami: -91; 
Orlando: -55; 
Pittsburgh: -80; 
Riverside: -72; 
San Juan: NA; 
Median: -74. 

Product category: Continuous Positive Airway Pressure Devices, 
Respiratory Assist Devices and Related Supplies and Accessories: 

CY 2006 suppliers: 
Competitive bidding area (CBA): 
Charlotte: 34; 
Cincinnati: 28; 
Cleveland: 32; 
Dallas: 72; 
Kansas City: 24; 
Miami: 172; 
Orlando: 46; 
Pittsburgh: 29; 
Riverside: 32; 
San Juan: 13; 
Median: 32. 

CBP contract suppliers: 
Competitive bidding area (CBA): 
Charlotte: 18; 
Cincinnati: 13; 
Cleveland: 17; 
Dallas: 26; 
Kansas City: 15; 
Miami: 33; 
Orlando: 23; 
Pittsburgh: 15; 
Riverside: 17; 
San Juan: 15; 
Median: 17. 

Percent change in number of suppliers: 
Competitive bidding area (CBA): 
Charlotte: -47; 
Cincinnati: -54; 
Cleveland: -47; 
Dallas: -64; 
Kansas City: -38; 
Miami: -81; 
Orlando: -50; 
Pittsburgh: -48; 
Riverside: -47; 
San Juan: 15; 
Median: -47. 

Product category: Hospital Beds and Related Accessories: 

CY 06 suppliers: 
Competitive bidding area (CBA): 
Charlotte: 33; 
Cincinnati: 29; 
Cleveland: 33; 
Dallas: 103; 
Kansas City: 21; 
Miami: 160; 
Orlando: 30; 
Pittsburgh: 35; 
Riverside: 45; 
San Juan: NA; 
Median: 33. 

CBP contract suppliers: 
Competitive bidding area (CBA): 
Charlotte: 13; 
Cincinnati: 12; 
Cleveland: 12; 
Dallas: 51; 
Kansas City: 15; 
Miami: 43; 
Orlando: 29; 
Pittsburgh: 15; 
Riverside: 32; 
San Juan: INS; 
Median: 15. 

Percent change in number of suppliers: 
Competitive bidding area (CBA): 
Charlotte: -61; 
Cincinnati: -59; 
Cleveland: -64; 
Dallas: -50; 
Kansas City: -29; 
Miami: -73; 
Orlando: -3; 
Pittsburgh: -57; 
Riverside: -29; 
San Juan: NA; 
Median: -55. 

Product category: Negative Pressure Wound Therapy Pumps and Related 
Supplies and Accessories: 

CY 06 suppliers: 
Competitive bidding area (CBA): 

Charlotte: 1; 
Cincinnati: 2; 
Cleveland: 1; 
Dallas: 3; 
Kansas City: NA; 
Miami: 242; 
Orlando: 4; 
Pittsburgh: 2; 
Riverside: 2; 
San Juan: NA; 
Median: 2. 

CBP contract suppliers: 
Competitive bidding area (CBA): 
Charlotte: 10; 
Cincinnati: 8; 
Cleveland: 9; 
Dallas: 16; 
Kansas City: INS; 
Miami: 15; 
Orlando: 14; 
Pittsburgh: 6; 
Riverside: 5; 
San Juan: INS; 
Median: 10. 

Percent change in number of suppliers:
Competitive bidding area (CBA): 
Charlotte: 900; 
Cincinnati: 300; 
Cleveland: 800; 
Dallas: 433; 
Kansas City: NA; 
Miami: -94; 
Orlando: 250; 
Pittsburgh: 200; 
Riverside: 150; 
San Juan: NA; 
Median: 375. 

Product category: Walkers and Related Accessories: 

CY 06 suppliers: 
Competitive bidding area (CBA): 
Charlotte: 15; 
Cincinnati: 18; 
Cleveland: 21; 
Dallas: 34; 
Kansas City: 8; 
Miami: 42; 
Orlando: 18; 
Pittsburgh: 18; 
Riverside: 12; 
San Juan: 9; 
Median: 18. 

CBP contract suppliers: 
Competitive bidding area (CBA): 
Charlotte: 8; 
Cincinnati: 10; 
Cleveland: 10; 
Dallas: 20; 
Kansas City: 14; 
Miami: 25; 
Orlando: 16; 
Pittsburgh: 14; 
Riverside: 12; 
San Juan: 17; 
Median: 14. 

Percent change in number of suppliers: 
Competitive bidding area (CBA): 
Charlotte: -47; 
Cincinnati: -44; 
Cleveland: -52; 
Dallas: -41; 
Kansas City: 75; 
Miami: -40; 
Orlando: -11; 
Pittsburgh: -22; 
Riverside: 0; 
San Juan: 89; 
Median: -22. 

Product category: Support Surfaces (group 2 mattresses and 
overlays)[C]: 

CY 06 suppliers: 
Competitive bidding area (CBA): 
Charlotte: NA; 
Cincinnati: NA; 
Cleveland: NA; 
Dallas: NA; 
Kansas City: NA; 
Miami: 417; 
Orlando: NA; 
Pittsburgh: NA; 
Riverside: NA; 
San Juan: NA; 
Median: 417. 

CBP contract suppliers: 
Competitive bidding area (CBA): 
Charlotte: NA; 
Cincinnati: NA; 
Cleveland: NA; 
Dallas: NA; 
Kansas City: NA; 
Miami: 37; 
Orlando: NA; 
Pittsburgh: NA; 
Riverside: NA; 
San Juan: INS; 
Median: 37. 

Percent change in number of suppliers: 
Competitive bidding area (CBA): 
Charlotte: NA; 
Cincinnati: NA; 
Cleveland: NA; 
Dallas: NA; 
Kansas City: NA; 
Miami: -91; 
Orlando: NA; 
Pittsburgh: NA; 
Riverside: NA; 
San Juan: NA; 
Median: -91. 

Product category: Change in median number of suppliers: 

Median CY 06 suppliers: 
Competitive bidding area (CBA): 
Charlotte: 33; 
Cincinnati: 28; 
Cleveland: 32; 
Dallas: 92; 
Kansas City: 23; 
Miami: 207; 
Orlando: 30; 
Pittsburgh: 29; 
Riverside: 49; 
San Juan: 24; 
Median: 31. 

Median CBP contract suppliers as of 6/11/08: 
Competitive bidding area (CBA): 
Charlotte: 11; 
Cincinnati: 12; 
Cleveland: 12; 
Dallas: 20; 
Kansas City: 14; 
Miami: 27; 
Orlando: 16; 
Pittsburgh: 12; 
Riverside: 17; 
San Juan: 14; 
Median: 14. 

Percent change in median number of suppliers: 
Competitive bidding area (CBA): 
Charlotte: -67; 
Cincinnati: -57; 
Cleveland: -63; 
Dallas: -78; 
Kansas City: -38; 
Miami: -87; 
Orlando: -47; 
Pittsburgh: -59; 
Riverside: -65; 
San Juan: -40; 
Median: -55. 

Source: Centers for Medicare & Medicaid Services (CMS). 

Notes: The source for CY 2006 data was the Statistical Analysis Durable 
Medical Equipment Regional Carrier claims data based on the 6-byte base 
supplier number, for dates of service from January 1, 2006, to December 
31, 2006. GAO calculated the medians and percent changes in median 
numbers of suppliers. INS means that the estimated capacity of 
suppliers submitting qualified bids or accepting contracts was 
insufficient to meet projected demand. NA means not applicable. 

[A] This table identifies the total number of suppliers that provided 
services in each competitive bidding area (CBA) for each product 
category in CY 2006 with allowed charges for items in the product 
category greater than $10,000 and the number of suppliers awarded CBP 
contracts in round 1 as of June 11, 2008. 

[B] Enteral nutrients, equipment, and supplies are used to provide food 
through a tube placed in the nose, the stomach, or the small intestine. 

[C] Group 2 mattresses and overlays of the support surfaces product 
category are pressure-reducing support surfaces for persons with large 
or multiple pressure ulcers. 

[End of table] 

[End of section] 

Appendix III: Percentage Differences between 2008 Medicare Fee Schedule 
and CBP Round 1 Single Payment Amounts: 

Product category: Oxygen Supplies and Equipment; 
Competitive bidding area(CBA)[A]: 
Charlotte: 30; 
Cincinnati: 30; 
Cleveland: 27; 
Dallas: 23; 
Kansas City: 25; 
Miami: 29; 
Orlando: 32; 
Pittsburgh: 28; 
Riverside: 22; 
San Juan: INS; 
Product category average: 27. 

Product category: Standard Power Wheelchairs, Scooters and Related 
Accessories; 
Competitive bidding area(CBA)[A]: 
Charlotte: 20; 
Cincinnati: 15; 
Cleveland: 18; 
Dallas: 21; 
Kansas City: 12; 
Miami: 30; 
Orlando: 25; 
Pittsburgh: 17; 
Riverside: 27; 
San Juan: 25; 
Product category average: 21. 

Product category: Complex Rehabilitative Power Wheelchairs and Related 
Accessories; 
Competitive bidding area(CBA)[A]: 
Charlotte: 10; 
Cincinnati: 19; 
Cleveland: 17; 
Dallas: 19; 
Kansas City: 10; 
Miami: 18; 
Orlando: 20; 
Pittsburgh: 10; 
Riverside: 11; 
San Juan: INS; 
Product category average: 15. 

Product category: Mail-Order Diabetic Supplies; 
Competitive bidding area(CBA)[A]: 
Charlotte: 43; 
Cincinnati: 43; 
Cleveland: 43; 
Dallas: 37; 
Kansas City: 42; 
Miami: 41; 
Orlando: 42; 
Pittsburgh: 48; 
Riverside: 57; 
San Juan: 36; 
Product category average: 43. 

Product category: Enteral Nutrients, Equipment and Supplies[B]; 
Competitive bidding area(CBA)[A]: 
Charlotte: 25; 
Cincinnati: 29; 
Cleveland: 28; 
Dallas: 26; 
Kansas City: 20; 
Miami: 30; 
Orlando: 25; 
Pittsburgh: 29; 
Riverside: 22; 
San Juan: INS; 
Product category average: 26. 

Product category: Continuous Positive Airway Pressure Devices, 
Respiratory Assist Devices and Related Supplies and Accessories; 
Competitive bidding area(CBA)[A]: 
Charlotte: 31; 
Cincinnati: 33; 
Cleveland: 33; 
Dallas: 25; 
Kansas City: 30; 
Miami: 30; 
Orlando: 31; 
Pittsburgh: 31; 
Riverside: 24; 
San Juan: 20; 
Product category average: 29. 

Product category: Hospital Beds and Related Accessories; 
Competitive bidding area(CBA)[A]: 
Charlotte: 31; 
Cincinnati: 36; 
Cleveland: 32; 
Dallas: 25; 
Kansas City: 25; 
Miami: 29; 
Orlando: 31; 
Pittsburgh: 30; 
Riverside: 20; 
San Juan: INS; 
Product category average: 29. 

Product category: Negative Pressure Wound Therapy Pumps and Related 
Supplies and Accessories; 
Competitive bidding area(CBA)[A]: 
Charlotte: 9; 
Cincinnati: 15; 
Cleveland: 18; 
Dallas: 20; 
Kansas City: INS; 
Miami: 20; 
Orlando: 23; 
Pittsburgh: 18; 
Riverside: 7; 
San Juan: INS; 
Product category average: 16. 

Product category: Walkers and Related Accessories; 
Competitive bidding area(CBA)[A]: 
Charlotte: 25; 
Cincinnati: 34; 
Cleveland: 24; 
Dallas: 30; 
Kansas City: 24; 
Miami: 31; 
Orlando: 29; 
Pittsburgh: 32; 
Riverside: 30; 
San Juan: 10; 
Product category average: 27. 

Product category: Support Surfaces (group 2 mattresses and 
overlays)[C]; 
Competitive bidding area(CBA)[A]: 
Charlotte: NA; 
Cincinnati: NA; 
Cleveland: NA; 
Dallas: NA; 
Kansas City: NA; 
Miami: 36; 
Orlando: NA; 
Pittsburgh: NA; 
Riverside: NA; 
San Juan: INS; 
Product category average: 36. 

Product category: Average of all auctions; 
Product category average: 26. 

Source: Centers for Medicare & Medicaid Services (CMS). 

Notes: GAO reformatted a CMS table distributed at the June 16, 2008 
Program Advisory and Oversight Committee meeting. 

INS means that the estimated capacity of suppliers submitting qualified 
bids or accepting contracts was insufficient to meet projected demand. 
NA means not applicable. No auctions were conducted for these product 
category and CBA combinations. 

[A] Except for the last column, the data reflect volume-weighted 
average savings within an auction. According to the CMS, the savings 
rate was derived by multiplying the difference between the 2008 
Medicare fee schedule for each item in a product category in a CBA and 
the item's CBP-derived single payment amount by the same weights used 
to calculate composite prices for the product category. CMS projected 
the overall savings for round 1 at approximately 26 percent annually to 
the Medicare program and Medicare beneficiaries. The averages in the 
last column are unweighted. GAO did not make a determination as to 
whether or not this methodology is an accurate measure of true savings 
to the Medicare program. 

[B] Enteral nutrients, equipment, and supplies are used to provide food 
through a tube placed in the nose, the stomach, or the small intestine. 

[C] Group 2 mattresses and overlays of the support surfaces product 
category are pressure-reducing support surfaces for persons with large 
or multiple pressure ulcers. 

[End of table] 

[End of section] 

Appendix IV: Omitted and Conflicting Information in Written 
Instructions on Submitting a Bid for CBP Round 1: 

The examples below are taken from two competitive bidding program (CBP) 
documents that provided written information for suppliers about how to 
submit a bid and information on bidding requirements. The documents are 
from a Web-based seminar, or webinar, posted on the Palmetto GBA Web 
site on April 30, 2007, and the request-for-bid instructions posted on 
the same Web site on May 15, 2007. 

Table 10: Examples of Conflicting and Omitted Information, CBP Round 1: 

Topic: Number of Form A's required to complete a bid submission; 
Source: Webinar and request-for-bid instructions; 
Summary of what was stated in the instruction: Told suppliers to 
complete one Form A per competitive bidding area (CBA) per bidding 
entity; 
GAO comments: Inconsistent with a bidder conference call on June 4, 
2007. The correct answer is that a bidding entity had to only complete 
one Form A regardless of the number of CBAs or product categories being 
bid; 
Implications: Suppliers had only limited opportunities to obtain the 
correct information from Palmetto GBA: (1) to join the bidder 
conference call on June 4, 2007; 
(2) read the call's transcript posted on the Palmetto GBA website; 
or (3) call the Palmetto GBA customer service center. The webinar and 
request-for-bid instructions, posted on the Palmetto GBA Web site 
throughout the bid window, were not corrected. 

Topic: On how to estimate capacity; 
Source: Webinar; 
Summary of what was stated in the instruction: Referred suppliers to 
column D of the printed version of Form B as well as to a separate 
document called the Product Category chart to determine the type of 
units to use in reporting total estimated capacity. column D contained 
the definition of a unit for purposes of pricing an item; 
GAO comments: Conflicting and incomplete information. Column D did not 
describe the units to use in reporting total estimated capacity while 
the Product Category chart did; 
Implications: If winning suppliers estimated capacity on units other 
than the type of unit specified in the Product Category chart, the 
cumulative capacity for the auction's winning suppliers would have been 
incorrect[A]. 

Topic: On how to estimate capacity; 
Source: Request-for-bid instructions; 
Summary of what was stated in the instruction: Told suppliers to 
estimate the number of units of each item that the bidding entity 
currently furnishes to Medicare beneficiaries plus any additional 
capacity the bidding entity would be capable of providing per item; 
GAO comments: Incomplete. Information needed for correctly reporting 
expanded capacity, for example, time period to use in reporting, payer 
source of units to include in reporting, and geographic area to use, 
were omitted. Source also did not identify the type of units to use for 
each item or direct the supplier to a source for the correct unit to 
use in reporting current or expanded capacity[B]; 
Implications: If winning suppliers did not similarly report expanded 
capacity for the same item in a product category, the cumulative 
capacity for the auction's winning suppliers would have been 
incorrect.[A]. 

Topic: On finding each item's price limit; 
Source: Webinar and request-for-bid Instructions; 
Summary of what was stated in the instruction: Omitted; 
GAO comments: Incomplete. While both documents indicated that an item's 
bid cannot exceed the Medicare fee schedule, neither document directed 
suppliers to a source of information for the bid limit; 
Implications: Submission of one or more item prices in excess of the 
Medicare fee schedule would have resulted in the exclusion of the bid 
from competing for the product category[C]. 

Source: GAO analysis of information provided by Centers for Medicare & 
Medicaid Services (CMS) and Palmetto GBA. 

[A] Cumulative capacity, combined with CMS estimates of beneficiary 
demand, determine the pivotal bid, the number of winning suppliers 
based on price, and, indirectly, single payment amounts. Also, because 
bidding suppliers did not report the unit used to report expanded 
capacity, Palmetto GBA would have been unable to detect these types of 
errors. 

[B] Out of 371 items subject to competitive bidding, 275 may be 
furnished and paid for as new or used equipment or on a rental basis. 

[C] This information was also omitted from the data entry screen of the 
electronic bid submission system. 

[End of table] 

[End of section] 

Appendix V: Comments from the Department of Health and Human Services: 

Department Of Health & Human Services: 
Office Of The Secretary
Assistant Secretary for Legislation: 
Washington, DC 20201: 

October 23, 2009: 

Kathleen M. King Director, Health Care: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Ms. King: 

Enclosed are the Departments comments on the U.S. Government 
Accountability Office's (GAO) draft report entitled: "Medicare: CMS 
Working to Address Problems from Round 1 of the Durable Medical 
Equipment Competitive Bidding Program (GAO-10-27). 

The Department appreciates the opportunity to comment on this report 
before its publication. 

Sincerely, 

Signed by: 

Andrea Palm: 
Acting Assistant Secretary for Legislation: 

Enclosure: 

[End of letter] 

Department Of Health & Human Services: 
Centers for Medicare & Medicaid Services: 
Administrator: 
Washington, DC 20201: 

Date: October 22, 2009: 

To: Andrea Palm: 
Acting Assistant Secretary for Legislation: 

From: [Signed by] Charlene Frizzera: 
Acting Administrator: 

Subject: Government Accountability Office's Draft Report: "CMS Working 
to Address Problems from Round 1 of the Durable Medical Equipment 
Competitive Bidding Program" (GAO-10-27): 

The Centers for Medicare & Medicaid Services (CMS) appreciates the 
opportunity to review and comment on the Government Accountability 
Office's (GAO) draft report entitled, "CMS Working to Address Problems 
from Round 1 of the Durable Medical Equipment (DME) Competitive Bidding 
Program." The report recognized CMS' efforts to refine certain features 
of the program based upon changes in the law and upon the Agency's 
experience from Round 1 of the durable medical equipment, prosthetics, 
orthotics, and supplies (DMEPOS) competitive bidding program. We are 
pleased that the GAO identified no concerns with the overall structure 
and design of the program and recognized its potential benefits. 

As mentioned in the draft report, the Department of Health and Human 
Services' (DHHS) Office of Inspector General and the GAO have both 
reported that CMS could reduce program payments for various medical and 
supply items for which Medicare pays higher than market rates. Congress 
mandated the development and implementation of a competitive bidding 
program for certain items of DMEPOS in the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA). The law required that 
the program be phased in, beginning in 10 Metropolitan Statistical 
Areas (MSAs) in the first round, expanding to additional MSAs and areas 
throughout the United States after this initial phase. 

After conducting the required competition, CMS implemented the new 
competitive bidding program in 10 competitive bidding areas (CBA) for 
10 categories of DMEPOS, with payments based on the competitively bid 
single payment amounts beginning July 1, 2008. However, in the Medicare 
Improvements for Patients and Providers Act of 2008 (MIPPA), enacted 
July 15, 2008, Congress delayed the competitive bidding program 
retroactive to July 1, 2008, and required CMS to make certain changes 
to the program. 

Since the enactment of the MIPPA, CMS has been actively working toward 
effective implementation of the Round 1 re-bid. On January 16, 2009, 
CMS issued an interim final rule with comment period (IFC) modifying 
the program to conform to the MIPPA changes. The IFC became effective 
on April 18, 2009. CMS announced the bidding timeline, created a new on-
line bid submission system, and initiated an aggressive bidder 
education program well in advance of bidding, which is scheduled to 
open October 21, 2009. The Agency's operational modifications to the 
program, along with the MIPPA reforms, are expected to result in a 
bidding process that is easier for suppliers to navigate, and that 
ultimately will benefit Medicare beneficiaries. 

While we appreciate the GAO's acknowledgement of CMS' preparations for 
the Round 1 re-bid, we do have a different perspective, in some cases, 
on various components of the program discussed in the report. For 
instance, CMS designed the Program Advisory and Oversight Committee 
(PAOC) discussions to encourage individual members with different 
backgrounds and perspectives to provide feedback and advice, in 
contrast to the consensus approach, which GAO seems to prefer. CMS also 
relied heavily on the PAOC members' advice in the design and 
implementation of the program leading up to 2008. Just a few examples 
of their suggestions adopted by CMS include: including a process to 
ensure that bids are bona fide; permitting any enrolled supplier to 
repair equipment; and requiring submission of certain financial 
documents. 

In addition, we disagree with the GAO's assertion that an underlying 
purpose of the program is to reduce the number of suppliers, though we 
recognize that the natural result of the competition is that fewer 
contracts are awarded than suppliers that bid. We would also like to 
note that CMS was required to ensure that projected beneficiary demand 
was met when awarding contracts to suppliers. We also find that the 
manner in which some of the data from 2008 is presented in the report 
is very misleading. We note that the number of contract suppliers 
(entities) does not represent the number of store fronts or locations 
within an area that are available to serve beneficiaries, nor does it 
account for the large number of non-contract suppliers that received 
professional exemptions or that chose to be grandfathered suppliers, 
allowing many beneficiaries to continue receiving equipment from their 
current supplier. This must be taken into account when considering the 
total number of supplier locations available to serve beneficiaries 
under the program. 

GAO Recommendation: 

If CMS decides to conduct a review of the disqualification decisions 
during the round 1 re-bid and future rounds, CMS should notify all 
suppliers of any such process, give suppliers equal opportunity for 
such reviews, and clearly indicate how they can request a review. 

CMS Response: 

We agree that all suppliers should receive notice about all aspects of 
the competitive bidding program and note that all Round 1 bidders were 
specifically advised in writing of the opportunity to ask questions 
about their bid results. CMS continues to believe that suppliers should 
have the opportunity to raise questions or concerns about the 
competitive bidding process, including disqualification decisions. 
Further, we also continue to believe that the competitive bidding 
program statute and regulations permit us to conduct quality assurance 
checks during the course of responding to bidders' questions as part of 
our other extensive quality assurance efforts. We remain committed to 
answering suppliers' questions and will continue to ensure that all 
suppliers are sufficiently informed about opportunities for the Round 1 
re-bid and future rounds. 

The CMS looks forward to implementing the Round 1 re-bid of the program 
along with the many improvements discussed in this report. We 
appreciate the opportunity to comment on this report. 

[End of section] 

Appendix VI: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Kathleen M. King, (202) 512-7114 or kingk@gao.gov: 

Acknowledgments: 

In addition to the contact named above, key contributors to this report 
were Martin T. Gahart, Assistant Director; Carrie Davidson; Neil 
Doherty; JoAnn Martinez; Christie Motley; Michelle Paluga; Hemi 
Tewarson; Keo Vongvanith; Timothy Walker; Opal Winebrenner; Suzanne 
Worth; and Charles Youman. 

[End of section] 

Related GAO Products: 

Medicare: Covert Testing Exposes Weaknesses in the Durable Medical 
Equipment Supplier Screening Process. [hyperlink, 
http://www.gao.gov/products/GAO-08-955]. Washington, D.C.: July 3, 2008. 

Medicare: Competitive Bidding for Medical Equipment and Supplies Could 
Reduce Program Payments, but Adequate Oversight Is Critical. [hyperlink, 
http://www.gao.gov/products/GAO-08-767T]. Washington, D.C.: May 6, 2008. 

Medicare: Improvements Needed to Address Improper Payments for Medical 
Equipment and Supplies. [hyperlink, http://www.gao.gov/products/GAO-07-59]. 
Washington, D.C.: January 31, 2007. 

Medicare Payment: CMS Methodology Adequate to Estimate National Error 
Rate. [hyperlink, http://www.gao.gov/products/GAO-06-300]. Washington, 
D.C.: March 24, 2006. 

Medicare Durable Medical Equipment: Class III Devices Do Not Warrant a 
Distinct Annual Payment Update. [hyperlink, 
http://www.gao.gov/products/GAO-06-62]. Washington, D.C.: March 1, 
2006. 

Medicare: More Effective Screening and Stronger Enrollment Standards 
Needed for Medical Equipment Suppliers. [hyperlink, 
http://www.gao.gov/products/GAO-05-656]. Washington, D.C.: September 
22, 2005. 

Medicare: CMS's Program Safeguards Did Not Deter Growth in Spending for 
Power Wheelchairs. [hyperlink, http://www.gao.gov/products/GAO-05-43]. 
Washington, D.C.: November 17, 2004. 

Medicare: Past Experience Can Guide Future Competitive Bidding for 
Medical Equipment and Supplies. [hyperlink, 
http://www.gao.gov/products/GAO-04-765]. Washington, D.C.: September 
7, 2004. 

Medicare: CMS Did Not Control Rising Power Wheelchair Spending. 
[hyperlink, http://www.gao.gov/products/GAO-04-716T]. Washington, 
D.C.: April 28, 2004. 

[End of section] 

Footnotes: 

[1] DME is equipment that serves a medical purpose, can withstand 
repeated use, is generally not useful in the absence of an illness or 
injury, and is appropriate for use in the home. DME includes items such 
as wheelchairs, hospital beds, and walkers. Prosthetic devices (other 
than dental) are defined as devices needed to replace body parts or 
functions such as artificial limbs, enteral nutrition, and cardiac 
pacemakers. Orthotic devices are defined as providing rigid or 
semirigid support to weak or deformed body parts or restricting or 
eliminating motion in a diseased or injured part of the body, such as 
leg, arm, back, and neck braces. Medicare-reimbursed supplies are items 
that are used and consumed with DME, such as drugs used for inhalation 
therapy, or that need to be replaced frequently (usually daily), such 
as surgical dressings. 

[2] GAO, Medicare: Competitive Bidding for Medical Equipment and 
Supplies Could Reduce Program Payments, but Adequate Oversight Is 
Critical, [hyperlink, http://www.gao.gov/products/GAO-08-767T] 
(Washington, D.C.: May 6, 2008); GAO, Medicare: Past Experience Can 
Guide Future Competitive Bidding for Medical Equipment and Supplies, 
[hyperlink, http://www.gao.gov/products/GAO-04-765] (Washington, D.C.: 
Sept. 7, 2004); Office of Inspector General, Department of Health and 
Human Services, A Comparison of Prices for Power Wheelchairs in the 
Medicare Program, OEI-03-03-00460 (April 2004); and Janet Rehnquist, 
Inspector General, Department of Health and Human Services, Medicare 
Reimbursement for Medical Equipment and Supplies, testimony before the 
Senate Committee on Appropriations, Subcommittee on Labor, Health and 
Human Services, and Education, 107th Cong., 2nd sess., June 12, 2002. 

[3] Balanced Budget Act of 1997 (BBA), Pub. L. No. 105-33, § 4319(a), 
111 Stat. 251, 392 (1997). This competitive bidding was designed to 
provide a new way to set fees for Medicare Part B items and services 
specified by CMS. 

[4] Pub. L. No. 108-173 § 302(b), 117 Stat. 2066, 2224 (2003) 
(codified, as amended, at 42 U.S.C. § 1395w-3). Items and services 
covered by the competition were DME and related supplies, off-the-shelf 
orthotics, and enteral nutrients and related equipment and supplies. In 
this report, we refer to the competitive acquisition program as the 
competitive bidding program. 

[5] The 10 CBAs had to be selected from the largest metropolitan 
statistical areas. The 10 CBAs were: Charlotte (Charlotte-Gastonia- 
Concord, North Carolina and South Carolina); Cincinnati (Cincinnati- 
Middletown, Ohio, Kentucky, and Indiana); Cleveland (Cleveland-Elyria- 
Mentor, Ohio); Dallas (Dallas-Fort Worth-Arlington, Texas); Kansas City 
(Kansas City, Missouri and Kansas); Miami (Miami-Fort Lauderdale-Miami 
Beach, Florida); Orlando (Orlando-Kissimmee, Florida); Pittsburgh 
(Pittsburgh, Pennsylvania); Riverside (Riverside-San Bernardino- 
Ontario, California); and San Juan (San Juan-Caguas-Guaynabo, Puerto 
Rico). 

[6] Hearings on CBP were held by the House of Representatives's 
Committee on Ways and Means, Subcommittee on Health, on May 6, 2008, 
and the Committee on Small Business, Subcommittee on Rural and Urban 
Entrepreneurship, on May 21, 2008. 

[7] Pub. L. No. 110-275, § 154, 122 Stat. 2494, 2560 (2008) (codified, 
as amended, at 42 U.S.C. § 1395w-3). 

[8] House of Representatives's Committee on Ways and Means, 
Subcommittee on Health, hearing on Medicare's DMEPOS Competitive 
Bidding Program (May 6, 2008). 

[9] MIPPA also changed the CBP phase-in dates to 2009 for the round 1 
rebid in 9 CBAs, to 2011 for round 2 in 70 additional CBAs, and after 
2011 for additional CBAs (or after 2010 for national mail order items 
and services). 

[10] In addition to DME, Medicare Part B covers certain physician 
services, outpatient hospital, laboratory, and other services. 
Beneficiaries who enroll in Part B pay a monthly premium and have an 
annual deductible--$135 in 2009. Under Part B, Medicare generally pays 
the supplier 80 percent of the lesser of the actual charge or fee 
schedule amount for a covered item or service and the Medicare 
beneficiary pays the supplier the remaining 20 percent, once the 
beneficiary's annual deductible has been met. 

[11] This Medicare Part B total does not include the amount of 
coinsurance or deductibles paid by Medicare beneficiaries or 
administrative expenses. Medicare Part C also helps pays for DME 
covered under Medicare Advantage health plans, which are operated by 
private companies. 

[12] In general, DME fee schedule rates are subject to national floor 
and ceiling limits, and updated annually by the consumer price index 
for all urban consumers. 

[13] The BBA authorized CMS to implement up to five competitive bidding 
demonstration projects in no more than three metropolitan statistical 
areas over a 3-year period. Pub. L. No. 105-33, § 4319(a), 111 Stat. 
251, 392 (1997). 

[14] Medicare expenditures for medical equipment and supplies provided 
by demonstration participants decreased by about $7.5 million, and 
corresponding beneficiary cost sharing for the medical equipment and 
supplies decreased by about $1.9 million. 

[15] Pub. L. No. 108-173, § 302(b), 117 Stat. 2066, 2224 (2003) 
(codified, as amended, at 42 U.S.C. § 1395w-3). Under the MMA, CMS 
could include DME and medical supplies, off-the-shelf orthotics, and 
enteral nutrients and related equipment and supplies. CMS was required 
to establish competitive acquisition areas, phasing in the CBP program 
beginning with 10 of the largest metropolitan statistical areas in 
2007, and more in later years. CMS also could phase in the CBP 
beginning with the highest cost and volume items and services or those 
that had the largest savings potential. 

[16] PAOC members included representatives of: beneficiaries and 
consumers, physicians and providers, DME manufacturers, suppliers, 
certification and quality standards, and federal and state programs. 

[17] CMS, Medicare Program; Competitive Acquisition for Certain Durable 
Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) and 
Other Issues; Final Rule, 72 Fed. Reg. 17,992, 18,055-56 (Apr. 10, 
2007). In this report, we refer to this rule as "the CBP final rule." 
CMS officials informed us that the agency determined that the Federal 
Acquisition Regulation (FAR) did not apply to contracts awarded by CMS 
to suppliers because these contracts did not contemplate the 
acquisition of goods for the federal government. 

[18] The CBP does not apply to items and supplies covered by Medicare 
Advantage health plans. 

[19] The 10 product categories were oxygen supplies and equipment; 
standard power wheelchairs, scooters, and related accessories; complex 
rehabilitative power wheelchairs and related accessories; mail-order 
diabetic supplies; enteral nutrients, equipment, and supplies; 
continuous positive airway pressure devices, and respiratory assist 
devices, and related supplies and accessories; hospital beds and 
related accessories; negative pressure wound therapy pumps and related 
supplies and accessories; walkers and related accessories; and support 
surfaces (limited to group 2 mattresses and overlays--pressure reducing 
support surfaces for persons with or at high risk for pressure ulcers--
in the Miami and San Juan CBAs only). 

[20] Pub. L. No. 110-275, § 154, 122 Stat. 2494, 2560 (2008) (codified, 
as amended, at 42 U.S.C. § 1395w-3). 

[21] For example, MIPPA required that CMS notify bidding suppliers of 
missing financial documentation. 

[22] CMS, Medicare Program: Changes to the Competitive Acquisition of 
Certain DMEPOS by Certain Provisions of MIPPA, 74 Fed. Reg. 2873 (Jan. 
16, 2009). CMS clarified that, with the exception of the new provisions 
in this rule, the CBP final rule published in April of 2007 would 
continue to govern the CBP. In this report, we refer to this rule as 
the "interim final rule." 

[23] For a list of Medicare enrollment standards applying to all DME 
suppliers, see 42 C.F.R. § 424.57(c). For a list of quality standards 
applying to all DME suppliers, see [hyperlink, 
http://www.cms.hhs.gov/MedicareProviderSupEnroll/Downloads/DMEPOSAccredi
tationStandards.pdf] (downloaded on March 19, 2009). 

[24] The CBSS registration process allowed only one supplier to 
register per bidding entity. A bidding entity could be one or more 
suppliers associated with one or more bids. 

[25] For example, in the walker and related accessories category, there 
were 17 items, including a folding wheeled walker with adjustable or 
fixed height, a walker seat attachment, and a replacement handgrip. 

[26] A bidding entity completed one Form A, regardless of how many 
suppliers made up the bidding entity or how many bids were associated 
with the bidding entity. 

[27] Commonly owned or controlled suppliers were required to submit a 
single bid to furnish a product category in a CBA. Two or more 
suppliers are commonly owned if one or more of them has an ownership 
interest totaling at least 5 percent of the other supplier. A supplier 
controls another supplier if one or more of its owners is an officer, 
director, or partner in the other. 

[28] New suppliers were required to submit projected financial 
documents to substitute for any year for which they did not have past 
financial information because they were not suppliers of DME and other 
items. 

[29] If the bidding entity was other than a single supplier, the 
financial scores of each supplier making up the bidding entity were 
combined into a score for the bidding entity. 

[30] If the supplier had a low financial score, the supplier's 
projected capacity was limited to historical capacity. If the supplier 
did not have a low score but reported projected capacity as less than 
historical capacity, projected capacity was adjusted upward to 
historical capacity. If the supplier's projected capacity for the 
product category was 20 percent or more of expected beneficiary demand, 
projected capacity was limited to 20 percent of expected beneficiary 
demand for purposes of the bid review process only. 

[31] CBP round 1 consisted of 92 auctions. Though there were 10 CBAs 
and 10 product categories in round 1, support surfaces (group 2 
mattresses and overlays) were only bid in Miami and San Juan. 

[32] When an auction was declared nonviable, the DME items in the 
product category in that CBA would continue to be paid according to the 
Medicare DME fee schedule and all Medicare enrolled DME suppliers would 
continue to be allowed to submit DME claims for these items in that 
CBA. In CBP round 1, seven auctions were declared nonviable. 

[33] The same DME items could have different single payment amounts in 
different CBAs. 

[34] CMS defined small suppliers as those that generate gross revenue 
of $3.5 million or less in annual receipts including Medicare and non- 
Medicare revenue. 

[35] The contract period for diabetes mail-order supplies was July 1, 
2008, through March 31, 2010. 

[36] Three percent of the bids competed in seven nonviable auctions. Of 
the 178 bids submitted for the nonviable auctions, 81 were qualified. 

[37] CMS entered into these contracts with suppliers, which, among 
other things, required suppliers to deliver all items in a product 
category throughout a CBA. 

[38] 72 Fed. Reg. at 18077. 

[39] This number includes only those suppliers submitting at least 
$10,000 worth of claims to Medicare for the product category within the 
CBA for dates of service between January 1, 2006, and December 31, 
2006. 

[40] Only those suppliers that had entered into CBP contracts with CMS 
as of June 11, 2008, are included. 

[41] Miami was the only CBA with CBP contracts for group 2 support 
surfaces in 2008, so it was not possible to compare changes in the 
number of suppliers between Miami and the other CBAs. 

[42] If the suppliers of unknown size were excluded from calculating 
the percentage of total suppliers, small suppliers would have 
represented 66 percent of the total instead of 57 percent. 

[43] According to CMS officials, the savings estimate for each 
combination of CBA and product category was derived by multiplying the 
difference between the 2008 Medicare fee schedule for each item in the 
product category and the CBP-derived single payment amounts by the 
item's percentage share of the total number of units represented by all 
items in the product category provided by Medicare in 2006, the same 
weights used in estimating composite prices in 2007. 

[44] CMS revised the request-for-bid instructions on September 13, 
2007--about 2 weeks before the CBP bid window closed on September 25, 
2007--and posted the revision on Palmetto GBA's Web site. The revised 
instruction informed suppliers that it was their responsibility to 
ensure that they had submitted a complete package of all required 
hardcopy documents to Palmetto GBA, and that their CBSS homepage would 
indicate whether the package had been received, but "this does not mean 
that the package is necessarily accurate, completeness [sic] or meets 
CMS criteria." The original instructions had stated that suppliers' bid 
submissions would be reviewed by Palmetto GBA for completeness 
beginning 10 business days before the bid window closed. Suppliers also 
received a listserv message--a message sent to multiple e-mail 
addresses on a subscriber mailing list--from CMS that stated Palmetto 
GBA "will not be able to notify bidders of any specific missing 
documentation or otherwise provide confirmation of the accuracy or 
completeness of the hard-copy documentation." The message did not 
indicate that it was a revision of the request-for-bid instructions. 
(In its agency comments to this report, CMS told us that it also 
notified suppliers by individual e-mails.) 

[45] Throughout the bid window, CMS continued to provide additional 
information about the bidding process; for example, on May 25, 2007--10 
days after the bid window opened--CMS announced the 10 financial 
measures that would be used to evaluate the financial viability of 
bidding suppliers. During the original 60-day bid window, Palmetto GBA 
conducted six bidder conference calls--three within the first 30 days--
to provide more information about the bidding process. The calls were 
conducted to help suppliers understand the request-for-bid instructions 
that were released the day the bid window opened. The first three 
calls--conducted about 3 weeks after the bid window opened and within 5 
days of each other--focused on how suppliers should submit a bid, 
understanding bidding rules, and the product categories. The next two 
calls--conducted on consecutive days--focused on the bidding provisions 
specific to small suppliers, and an open call to allow suppliers to ask 
CBP questions--were held less than a month before the first bid window 
deadline of July 13, 2007. The sixth and last call--to address bidding 
process issues--was held 4 days before the July 13 deadline. 

[46] The supplier's signed certification statement applied to all bid 
information submitted electronically or in hard copy. The request-for- 
bid instructions explained that the statement certified that the 
financial documents included--which were not prepared as part of a tax 
return--were accurate and had been prepared on an accrual or cash basis 
of accounting. 

[47] After contract awards were announced, two state DME associations 
told us that they found some winning suppliers did not have the 
necessary state licenses. 

[48] CMS and Maricom developed the request-for-bid instructions; 
Palmetto GBA provided comments and recommendations. 

[49] CMS officials told us that more than 90 percent of the frequently 
asked questions were posted on the Palmetto GBA Web site during the bid 
window. The CMS Web site had links to the Palmetto GBA Web site and to 
medicare.gov, the official Web site for Medicare beneficiaries. 

[50] CMS also had fact sheets available on its Web site concerning post-
CBP bidding issues such as the grandfathering of certain suppliers who 
may continue to provide items and services even if they had not been 
awarded a contract under CBP and how items would be repaired or 
replaced. 

[51] On the bid submission Form A, suppliers self-identified themselves 
as one of eight supplier types--business corporation, professional 
organization, sole proprietorship, franchise, general partnership, 
publicly traded company, joint venture, or other. Different categories 
were used in the request-for-bid instructions. There suppliers were 
described for financial documentation purposes as suppliers that 
submitted individual tax returns that include business taxes, limited 
partnerships and partnerships, suppliers that submit corporate tax 
returns, suppliers that are publicly traded companies, new suppliers, 
and suppliers submitting an individual bid and also being part of a 
network. Only the publicly traded company term was used in both. 

[52] CMS had stated in the preamble to the CBP final rule, that given 
the expected bid volume, logistics, and time constraints, it would not 
be administratively feasible to provide losing suppliers individual bid 
debriefing meetings to discuss the inadequacies of their bid. 

[53] Suppliers that had bids that failed on price and suppliers that 
were offered contracts for their winning bids also received 
notification letters dated March 20, 2008. 

[54] CMS officials confirmed that bid reviews took an average of 34 
days to complete and suppliers were notified of the results of their 
bid reviews from April 21 through August 28, 2008. Palmetto GBA 
acknowledged that because of the volume of challenges, the time 
required for review and the fact that no time frame was specified, the 
reviews continued after July 1, 2008, the implementation date of the 
CBP program. 

[55] CMS informed us that the 290 suppliers with disqualified bids who 
did not call Palmetto GBA or CMS with questions or request a review did 
not receive one. 

[56] These 10 suppliers had been disqualified for (1) failing to submit 
required financial documentation, (2) failing to be appropriately 
accredited, (3) having a bid price for one or more items that was not 
bona fide, or (4) sharing common ownership or management when competing 
in the same auction. The incorrectly disqualified suppliers were 
offered contracts if they had bids equal to or less than the pivotal 
bid or were needed to meet the small-supplier participation goal. 

[57] CMS officials stated that Palmetto GBA reviewed disqualified bids 
and made recommendations as to whether the disqualification 
determination should be overturned; those recommendations were 
subsequently reviewed and acted upon by CMS. 

[58] The March 20, 2008, letters to suppliers stated that "If you have 
any questions, please contact the customer service center at 877-577- 
5331." 

[59] CMS periodically conducts open door forums for DME suppliers using 
telephone conference calls. The forums offer suppliers an opportunity 
for live dialogue with CMS officials about policy and program-related 
issues. Participants may call in without having to register. Once 
posted on the CMS Web site, forum replays are available for 30 days. 

[60] A CMS official stated at the PAOC meeting on June 16, 2008, that 
suppliers had been informed there was a bid review process and that 
they could contact Palmetto GBA to request their bids be reviewed. A 
meeting summary was not posted to the CMS Web site until August 2009, 
but it did not make any references to the postbid review process. As of 
September 10, 2009, no transcript of the June 16, 2008, meeting had 
been posted. 

[61] The MMA stated, "there shall be no administrative or judicial 
review under [42 U.S.C. § 1395ff, § 1395oo], or otherwise, of … the 
awarding of contracts … or the bidding structure and number of 
contractors selected…". Pub. L. No. 108-173, § 302, 117 Stat. 2066, 
2224 (2003) (codified, as amended, at 42 U.S.C. § 1395w-3(b)(10)). CMS 
subsequently incorporated this prohibition in its regulations 
implementing the CBP. 42 C.F.R. § 414.424. 

[62] 72 Fed. Reg. at 18055-56. In the CBP final rule, CMS did provide 
for one situation in which contracts could be awarded to losing 
suppliers. Specifically, subsequent to the awarding of contracts, CMS 
may award additional contracts when there is a need for additional 
contract suppliers to meet beneficiary demand for a particular product 
category. 42 C.F.R. § 414.414(i). During round 1, CMS awarded contracts 
to some suppliers who were deemed qualified but who lost their bids on 
price; these actions were separate and distinct from the post-bidding 
review process described above. 

[63] For example, while acknowledging the statutory prohibition on 
administrative review, two commenters asserted that it did not preclude 
the establishment of a process that would give suppliers an opportunity 
to communicate with CMS regarding grievances and seek redress. 

[64] For example, numerous commenters recommended that CMS implement a 
procedure for debriefing suppliers that were not selected and provide 
an opportunity for a review to determine, at a minimum, whether an 
error on the part of CMS or its contractors was the reason that the 
supplier was not selected. 

[65] CMS specifically defined these quality assurance steps as allowing 
bidders to submit electronic bids and providing suppliers with a 60-day 
open bidding period during which they could change, update, or correct 
their bid packages before certifying their final submissions. 

[66] In the preamble, CMS noted that Palmetto GBA would implement an 
auditing system and quality assurance program to monitor and ensure 
that it accurately recorded and calculated information provided by 
suppliers. 

[67] CMS presented this information at the PAOC meeting held October 
11, 2007. 

[68] Later in the bid window, the CBSS time-out period was extended to 
12 hours. 

[69] During its 4 years, the PAOC met seven times beginning in 2004 
through 2008. The PAOC held four meetings in 2004 and 2005 where CMS 
presented CBP options being considered--for example, for selecting the 
items for competitive bidding, organizing the items into product 
category groups, establishing supplier capacity and beneficiary demand 
estimates, calculating single payment amounts, and ensuring the 
participation of small suppliers. After CMS published a proposed rule 
for implementing CBP round 1 in May 2006, 71 Fed. Reg. 25,654, the PAOC 
met for the fifth time, May 22-23, 2006, to provide feedback on the 
proposed implementation process. About a year and a half later, the 
PAOC met for the sixth time on October 11, 2007--16 days after the CBP 
bid window closed. At this meeting, CMS updated the PAOC on the CBP 
round 1 bidding. The PAOC's seventh meeting, June 16, 2008, was held 2 
weeks before the contracts awarded to suppliers in CBP round 1 took 
effect. PAOC members were briefed by CMS and Palmetto GBA on the CBP 
process and CMS's CBP round 1 education and monitoring activities, and 
were asked for their feedback for improving the next CBP round. CMS 
provided meeting summaries, agendas, and presentation materials for the 
first five meetings on the CMS Web site. The summaries for the last two 
PAOC meetings--held on October 11, 2007, and June 16, 2008--were not 
available on CMS's Web site until August 2009. A Palmetto GBA official 
stated that Palmetto GBA was responsible for preparing the meeting 
summaries of the last three PAOC meetings. Meeting transcripts, though 
available for all of the meetings held through 2008, have not been 
posted on the CMS Web site. 

[70] The original effective date of CMS's interim final rule was 
February 17, 2009, but CMS issued a Federal Register notice on February 
19, 2009, that delayed the effective date until April 18, 2009. 74 Fed. 
Reg. 7653 (Feb. 19, 2009). 

[71] 74 Fed. Reg. 2873. 

[72] Financial documentation means a financial, tax, or other document 
required to be submitted in order to meet CMS's financial standards for 
the CBP. MIPPA and implementing regulations define the covered document 
review date as the later of: (1) 30 days before the final date for the 
close of the bid window; or (2) 30 days after the bid window opens. 
During the round 1 rebid, CMS is required to notify eligible suppliers 
of missing financial documentation within 45 days after the end of the 
covered document review date. For future rounds, CMS must notify 
eligible suppliers of missing financial documentation within 90 days 
after the end of the covered document review date. 

[73] 42 C.F.R. §§ 414.402, 414.414. MIPPA provided, however, that this 
process only applies to the timely submission of financial 
documentation and does not apply to any determination by CMS as to the 
accuracy or completeness of the documentation submitted or whether the 
documents meet applicable financial requirements. 

[74] See 42 U.S.C. § 1395m(a)(20)(F)(i) for accreditation requirements. 

[75] 42 C.F.R. § 414.422. 

[76] Pub. L. No. 110-275, § 154, 122 Stat. 2494, 2560 (2008). 

[77] 42 U.S.C. § 1395m(a)(20)(F)(i). This requirement is not limited to 
suppliers and subcontractors participating in the CBP and instead 
applies to any supplier and subcontractor providing items and services 
to Medicare beneficiaries on or after October 1, 2009. According to 
CMS, suppliers that are not accredited by September 30, 2009, will be 
barred from participating in Medicare. 

[78] 42 U.S.C. § 1395w-3(b)(3)(f). 

[79] 42 U.S.C. § 1395w-3(c)(2). 

[80] Any revision regarding financial documentation could cause 
challenges for suppliers seeking to meet the covered document review 
date because suppliers have a limited time period within the bid window 
to submit financial documentation to meet this date and CMS has a 
specified time period to provide notification to suppliers on missing 
documentation. 

[81] CMS, Medicare Program: Surety Bond Requirement for Suppliers of 
DMEPOS, 74 Fed. Reg. 166 (Jan. 2, 2009). The BBA had required the 
Secretary to impose a surety bond for at least $50,000 as a condition 
of suppliers becoming eligible to bill Medicare for the provision of 
DME and other items to beneficiaries. 

[82] Under limited circumstances, CMS may exempt from the surety bond 
requirement (1) government-operated suppliers, (2) state-licensed 
orthotic and prosthetic personnel, (3) physicians and nonphysician 
practitioners in private practice, and (4) physical and occupational 
therapists in private practice. 

[83] In addition, CMS policy includes a requirement that contracts for 
system development efforts be performed by an IT contractor that meets 
or exceeds a specific maturity level as measured using the Software 
Engineering Institute Capability Maturity Model Integration®. According 
to CMS, IT contractor compliance with such maturity standards and 
methodologies signifies a greater capability to perform software 
development and integration activities in a repeatable and consistently 
high-quality manner. According to a published assessment reported by 
the institute, the DBidS development contractor meets the minimum level 
of maturity established by CMS policy. 

[84] Software Engineering Institute, Understanding and Leveraging a 
Supplier's CMMI® Efforts: A Guidebook for Acquirers, CMU/SEI-2007-TR- 
004 (Pittsburgh PA: March 2007). 

[85] The Individuals Authorized Access to CMS Computer Systems is an 
application that provides authentication of authorized users for the 
supplier and support communities of DBidS. 

[86] CMS said that the authorized official who registers in the 
Individuals Authorized Access to CMS Computer Systems and DBidS should 
authorize a backup and an end user to ensure that an official in the 
organization will be able to access DBidS. The authorized official must 
be listed on the supplier's Medicare enrollment form and must register 
through the Individuals Authorized Access to CMS Computer Systems and 
DBidS. Once CMS verifies the supplier organization and personal 
information entered, CMS will mail the authorized official a temporary 
password and identification number. The official can then authorize a 
backup. They are authorized to input data, approve Form A, and certify 
Form B. They can also authorize an end user, an employee of the 
supplier, to input data. 

[87] According to CMS, a critical defect renders the whole system 
nonoperational, corrupts critical system data or information, or makes 
it impossible to continue with testing because of the severity of the 
error. 

[88] CMS, Medicare Program: Request for Nominations for the Program 
Advisory and Oversight Committee for the Competitive Acquisition of 
Durable Medical Equipment and Other Items, 73 Fed. Reg. 57363 (Oct. 2, 
2008). 

[89] The current PAOC membership includes representatives of Medicare 
beneficiaries and consumers, physicians and other practitioners, 
suppliers, organizations that help to establish professional standards, 
financial standards experts, DME industry associations, and 
manufacturers. 

[90] The CMS cochairs on each of the PAOCs, the Director of CMS's 
Center for Medicare Management, were not listed on either PAOC's 
membership roster. 

[91] House of Representatives, Committee on Ways and Means, 
Subcommittee on Health, Hearing on "Medicare's Durable Medical 
Equipment, Prosthetics, Orthotics, and Supplies Competitive Bidding 
Program," May 6, 2008, and House of Representatives, Committee on Small 
Business, Subcommittee on Rural and Urban Entrepreneurship, Hearing on 
"Competitive Bidding for Durable Medical Equipment," May 21, 2008. 

[92] House of Representatives, Committee on Small Business, 
Subcommittee on Rural Development, Entrepreneurship, and Trade, Hearing 
on "The Impact of Competitive Bidding on Small Businesses in the 
Durable Medical Equipment Community," February 11, 2009. 

[End of section] 

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