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GAO-11-337R: 

United States Government Accountability Office: 
Washington, DC 20548: 

May 31, 2011: 

The Honorable Pete Stark: 
Ranking Member: 
Subcommittee on Health: 
Committee On Ways And Means: 
House of Representatives: 

The Honorable Charles E. Grassley: 
Ranking Member:
Committee on The Judiciary: 
United States Senate: 

Subject: Medicare: Issues For Manufacturer-Level Competitive Bidding 
For Durable Medical Equipment: 

In 2009, Medicare--a federal health insurance program that serves 
about 46.3 million beneficiaries[Footnote 1]--spent approximately $8.1 
billion on durable medical equipment (DME), prosthetics, orthotics, 
and related supplies for 10.6 million beneficiaries.[Footnote 2] DME 
includes items such as wheelchairs, hospital beds, and walkers. 
Medicare beneficiaries typically obtain DME items from suppliers, who 
submit claims for payment for these items to Medicare on behalf of 
beneficiaries. The Centers for Medicare & Medicaid Cervices (CMS), an 
agency within the department of Health and Human Services (HHS), has 
responsibility for administering the Medicare program. Both we and 
HHS's Office of Inspector General (OIG) have reported that Medicare 
and its beneficiaries--through their out-of-pocket costs--have 
sometimes paid higher than market rates for various medical equipment 
and supplies.[footnote 3] 

To achieve Medicare savings for DME and to address DME fraud concerns, 
Congress, through the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA)[Footnote 4] required CMS to phase in a 
competitive bidding program (CBP)[Footnote 5] for DME suppliers in 
selected competitive bidding areas (CBA). In CBP, suppliers submit bid 
prices in the amounts they are willing to accept as payment to provide 
DME items to medicare beneficiaries. CMS then enters into contracts 
with selected DME suppliers to provide DME items at the prices 
determined by CBP. CBP is a fundamental departure from CMS's usual 
method of paying for DME, in which CMS pays any qualified supplier a 
set fee schedule. CBP also provides an incentive for DME suppliers to 
accept lower medicare payment amounts in exchange for the ability to 
serve beneficiaries and to potentially increase their medicare market 
share. 

CMS began implementing CBP in 2007 and 2008--referred to as round 1. 
Concerns about CBP's round 1 bid submission and contract award 
processes were raised during two congressional hearings in May 2008. 
CBP's round 1 was stopped by the enactment of the Medicare 
Improvements for Patients and Providers Act of 2008 (MIPPA),[Footnote 
6] which terminated the contracts already awarded to suppliers, 
delayed the program's restart, and required CMS to repeat the 
competition. [Footnote 7] To compensate for the loss of the projected 
savings from the CBP delay, beginning January 1, 2009, MIPPA reduced 
Medicare payments by 9.5 percent nationally for items in the 10 
product categories that had been included in the CBP round 1. The CBP 
competition--referred to as the round 1 rebid--was repeated in 2009 
and 2010. On January 1, 2011, CBP began with 356 suppliers awarded 
contracts to provide DME items in nine DME product categories[Footnote 
8] in nine CBAs.[Footnote 9] CMS stated that the CBP payment amounts 
are projected to result in an average savings of 32 percent as 
compared to the current Medicare fee schedule payments for the same 
items. 

In contrast to CBP’s supplier-level approach, some health care 
purchasers use a manufacturer-level approach to buy DME items directly 
from DME manufacturers to obtain savings by leveraging their 
purchasing power. CMS has not been required to develop a manufacturer-
level approach, and there are no current proposals for it to do so. You
expressed interest in obtaining information on health care purchasers 
that currently use a manufacturer-level approach and on issues that 
would need to be addressed if CMS implemented such an approach. 
[Footnote 10] In this report, we describe (1) efforts used by some non-
Medicare purchasers to reduce DME spending by contracting with DME 
manufacturers or using purchasing intermediaries, and (2) issues that 
CMS might face if required to implement a DME manufacturer-level 
approach with broad authority to do so. 

To describe how some non-Medicare purchasers[Footnote 11] reduce 
spending on DME items, we interviewed government and private 
purchasers that contract with DME manufacturers or use purchasing 
intermediaries to reduce DME spending. We selected purchasers for 
further study that reflected a wide range of manufacturer-level 
purchasing approaches. We interviewed officials from the Department of 
Veterans Affairs (VA), which provided care to more than 5.6 million 
patients in fiscal year 2010, to identify how VA competitively 
purchases DME directly from manufacturers and how VA contracts with 
suppliers to provide services such as delivery and setup of DME items. 
To compare the costs of certain DME items, we compared VA’s national 
contract prices for DME items in 2010 with Medicare’s 2010 payments 
for those same items. We also interviewed Medicaid[Footnote 12] 
officials about program operations and lessons learned from either 
attempting to, or successfully contracting with, manufacturers. 
[Footnote 13] To identify additional approaches to reducing spending, 
we interviewed officials from selected entities that negotiate 
favorable prices from manufacturers through purchasing intermediaries. 
We interviewed officials from one group purchasing organization (GPO)—-
a purchasing intermediary that negotiates contracts between its 
customers and vendors of medical products. This GPO administers DME 
benefits on behalf of health insurers. We also interviewed officials 
from a third-party administrator (TPA)-—a group that, under a service 
contract, processes claims and also provides certain administrative 
services to a health insurer—which negotiates discounts from diabetic 
supply manufacturers on behalf of some state Medicaid programs. 

To describe the issues CMS could face if it were to implement a 
competitive bidding program at the manufacturer-level for Medicare 
DME, we reviewed competitive bidding studies and interviewed 
stakeholders in the DME industry to learn about the structure of the 
industry and how a manufacturer-level competitive bidding program 
could affect their business. Specifically, we interviewed 
representatives from trade associations representing both DME
suppliers and DME manufacturers,[Footnote 14] representatives from 
selected DME suppliers and DME manufacturers, and officials from a CMS 
contractor responsible for processing Medicare DME claims. On the 
basis of these interviews, we compared the issues CMS considered in the
current Medicare DME CBP with the issues CMS could consider if the 
agency were to implement a manufacturer-level competitive bidding 
program. 

We conducted this performance audit from March 2010 to May 2011 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 based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings based 
on our audit objectives. 

Results in Brief: 

Some government and private health care purchasers leverage their 
buying power to reduce spending on DME (durable medical equipment) by 
contracting with DME manufacturers or using purchasing intermediaries. 
VA requires its medical centers to purchase certain DME items directly 
from manufacturers through one of three mechanisms. By offering 
manufacturers the opportunity to serve VA’s medical centers, VA 
leverages its buying power when negotiating for lower prices for high-
volume and recurring-need DME items. VA can purchase DME items through 
the Federal Supply Schedule (FSS), where contracts are awarded to an 
unlimited number of manufacturers offering VA what are known as most 
favored customer pricing-—prices at least as low as those given to the 
manufacturers’ most favored commercial customers. To purchase items 
that are widely used on a recurring basis, VA may use blanket purchase 
agreements (BPA) and national contracts. VA enters into these 
agreements and contracts with a limited number of manufacturers—
offering to increase the manufacturers’ VA market share for certain 
DME items in exchange for prices that must be lower than those listed 
on the FSS. Like VA, some Medicaid programs contract with 
manufacturers for DME items. These programs select either a single or 
limited number of manufacturers to provide a particular DME item, 
enabling them to leverage their buying power in exchange for price 
discounts from DME manufacturers on items requiring little or no 
servicing. Purchasers can also leverage their buying power by 
negotiating favorable prices from DME manufacturers through purchasing 
intermediaries. For example, several private insurers may use one GPO 
to administer their DME benefits and negotiate favorable manufacturer 
pricing on their behalf. Similarly, some Medicaid programs use a TPA to
negotiate rebates from diabetic supply manufacturers on their behalf. 

CMS could face issues both similar to those that it addressed in 
implementing CBP at the supplier level and specific to competitive 
bidding involving manufacturers if it were required to implement a 
Medicare DME manufacturer-level approach and were given broad authority
to do so. Key issues similar to those CMS considered for CBP could 
include choosing which DME items to competitively bid that would 
result in the most Medicare savings, determining whether to operate 
the program for some items at a national level, and considering the 
range of Medicare beneficiary choices for DME items. CMS could also 
consider key issues specific to competitive bidding at the 
manufacturer level. For example, CMS currently has a minimal 
relationship with DME manufacturers unless they are also Medicare 
suppliers, and it might need to strengthen its regulatory relationship 
with DME manufacturers for competitive bidding. CMS could also 
consider whether a new Medicare payment system would need to be 
created that could separate payments for the cost of a manufacturer’s 
item from the cost for an item’s services provided by suppliers. 

In commenting on a draft of this report, HHS stated that the report 
provides useful information about other ways the Medicare program, and 
its beneficiaries, can obtain better value for DMEPOS items and 
services. HHS also noted that the report demonstrates how other payers 
use various acquisition strategies to receive better prices than 
Medicare for the same DMEPOS items and services, despite the fact that 
Medicare often pays for a larger quantity of items and services. 

Background: 

Medicare is the federal program that helps pay for a variety of health 
care services for about 46.3 million beneficiaries-—people age 65 and 
older, certain disabled individuals, and those with end-stage renal 
disease. Most Medicare beneficiaries participate in Medicare Part B,
which helps pay for DME items and supplies, such as oxygen, 
wheelchairs, hospital beds, walkers; orthotics, prosthetics, and 
supplies if they are medically necessary and prescribed by a 
physician.[Footnote 15] Part B also covers certain outpatient 
prescription drugs used with DME or that are not usually self-
administered by the patient; some of these drugs, such as inhalation 
therapy drugs, are classified as supplies. 

Medicare and DME Suppliers and Manufacturers: 

Medicare beneficiaries typically obtain their DME items from 
suppliers, who submit claims for payment to Medicare on the beneficiary’
s behalf. To be able to bill Medicare, DME suppliers must enroll in 
Medicare and must meet certain requirements, such as accreditation
to ensure that they meet minimum quality standards, in order to reduce 
the risk of enrolling suppliers intent on defrauding or abusing 
Medicare.[Footnote 16] Suppliers can include DME retail 
establishments, and outpatient providers, such as physicians, home 
health agencies, and physical therapists. Suppliers may also provide 
DME items, such as diabetic testing supplies, directly to a beneficiary’
s residence through a common carrier, such as the U.S. Postal
Service or shipping or courier services. 

Suppliers purchase DME items from DME manufacturers or from 
distributors that sell items from multiple manufacturers to suppliers. 
[Footnote 17] (See figure 1.) Suppliers may negotiate—-either
directly or indirectly through a third party-—with manufacturers to 
obtain item prices lower than the Medicare payment for that item. 
Suppliers have an incentive to negotiate DME price discounts, as they 
may retain the difference between the negotiated item price and its
Medicare payment. In general, the larger a supplier is, the more it 
can leverage its buying power to negotiate price discounts. 

Figure 1: How Medicare Beneficiaries May Receive DME Items: 

[Refer to PDF for image: illustration] 

Manufacturers: 

Distributors: 

Suppliers: 

Beneficiaries. 

[Manufacturers to Suppliers, skipping Distributors, in some cases] 

Source: GAO. 

Note: Medicare beneficiaries can receive DME items directly from 
entities that are enrolled as Medicare suppliers. If enrolled as
Medicare suppliers, other entities such as manufacturers, 
distributors, and pharmacies, and providers such as hospitals,
nursing homes, and home health agencies, may also furnish items to 
beneficiaries. 

[End of figure] 

Medicare DME Payments: 

Medicare pays for most DME through fee schedules based on suppliers' 
historical charges to Medicare.[Footnote 18] The Medicare payment is 
generally equal to 80 percent of the lesser of either the supplier's 
actual charge or the Medicare fee schedule for a particular item or 
service. Medicare beneficiaries are responsible for paying the 
supplier the remaining 20 percent.[Footnote 19] 

The Medicare fee schedules classify most DME, prosthetics, orthotics, 
and supplies (DMEPOS) items into six payment categories, for example 
the inexpensive or other routinely purchased items category includes 
items such as standard walkers and canes. Depending on the category, 
the items may be paid as a lump sum--onetime--payment, or as rental 
payments--monthly payments over a set time period--and may or may not 
include payment for repair, maintenance, and delivery of the 
item.[Footnote 20] (See enclosure I.) 

In submitting claims for Medicare payments, suppliers use a 
standardized coding system--the Healthcare Common Procedure Coding 
System (HCPCS). The codes identify a category of like DME items or 
services, for example hospital beds, rather than specific products or 
brand or trade names. Medicare's DME fee schedule has nearly 3,000 
HCPCS codes. Individual HCPCS codes used by suppliers can cover a 
broad range of items that serve the same general purpose, but vary in 
price, characteristics, and quality.[Footnote 21] To handle DME 
payment claims processing, including coverage and payment 
determinations, CMS contracts with DME Medicare administrative 
contractors. 

History of DME Competitive Bidding: 

The Balanced Budget Act of 1997 required CMS to test competitive 
bidding as a new way to set payment rates for Medicare Part B items 
and services selected by CMS.[Footnote 22] CMS conducted three DME CBP 
demonstration projects, two in Florida (1999-2002) and one in Texas 
(2000-2002). About a year after the demonstrations ended, the MMA was 
enacted, requiring CMS to implement a broader CBP beginning in 2007. 
Changing the long-standing policy that any qualified supplier be 
allowed to enroll in Medicare, the MMA provided that generally only 
suppliers who were awarded CBP contracts could be paid by Medicare for 
providing CBP-covered Part B DME items and services in selected CBAs. 

In 2007 and 2008, CMS began the phase-in of CBP--round 1--with 
suppliers submitting price bids for items in 10 product categories 
[Footnote 23] in 10 CBAs.[Footnote 24] Through CBP, CMS established 
competitively determined Medicare payments for the bid items and 
competitively selected a limited number of suppliers to provide items 
to Medicare beneficiaries residing in the CBAs.[Footnote 25] Suppliers 
submitted bids for supplying 1 or more of the 10 product categories in 
1 or more of the 10 CBAs. The MMA imposed certain CBP criteria 
including, for example, that the total amount to be paid to winning 
suppliers be less than would otherwise be paid by Medicare under 
existing fee schedules and that the ability of suppliers to meet the 
anticipated needs of beneficiaries in a CBA be considered in choosing 
the CBP suppliers. 

MIPPA imposed additional requirements for how CMS should conduct later 
CBP rounds, including the round 1 rebid and the subsequent rounds that 
will expand CBP to additional CBAs. CMS began the CBP round 1 rebid 
with nine product categories in nine CBAs in 2009,[Footnote 26] it 
announced its winning suppliers in November 2010, and the contracts 
awarded through the CBP round 1 rebid and its Medicare payments were 
effective January 1, 2011. 

Some Non-Medicare Purchasers Contract with DME Manufacturers or Use 
Purchasing Intermediaries to Reduce DME Spending: 

To reduce DME spending, some non-Medicare government purchasers--both 
federal and state--leverage their buying power by contracting with 
manufacturers for DME items. Other private purchasers leverage their 
buying power through purchasing intermediaries such as group 
purchasing organizations (GPO) and third-party administrators (TPA) 
that negotiate favorable prices from DME manufacturers on their 
behalf. (See enclosure II for a summary of DME purchasing approaches.) 

Contracting with Manufacturers: 

To reduce spending, some non-Medicare government purchasers--both 
federal and state--leverage their buying power by contracting with DME 
manufacturers. VA is both a purchaser and provider of DME items and 
services, and is able to leverage its DME buying power by having its 
medical centers purchase DME items from those manufacturers who have 
entered into VA contracts or agreements through one of three 
mechanisms. Some Medicaid programs have also reported reducing their 
DME spending by contracting, either on their own or with other state 
Medicaid programs, with manufacturers for DME items requiring little 
or no servicing. 

VA Contracting Mechanisms: 

VA leverages its DME buying power by requiring that its medical 
centers purchase DME items through one of three mechanisms: the 
Federal Supply Schedule (FSS),[Footnote 27] blanket purchase 
agreements (BPA), and national contracts. The discount VA is able to 
achieve off the manufacturer's retail price for DME items depends, in 
part, on the exclusivity provided to the manufacturer under each 
mechanism and the type of DME item involved. To determine the most 
appropriate mechanism to use for each DME item that VA purchases, VA 
staff conduct product research, including VA purchasing history for 
the particular DME item. 

VA can purchase DME items through contracts with manufacturers that 
have agreed to provide an uninterrupted supply of an item at a given 
price to federal agencies through the FSS program.[Footnote 28] Under 
this program, VA awards contracts to multiple vendors--manufacturers 
in the case of DME items--for commercially available goods and 
services; federal agencies--in this case VA--place orders under these 
contracts. To obtain best prices, VA negotiates for the best price 
that a vendor--or manufacturer in the case of DME--provides to its 
most-favored customer prior to awarding a contract.[Footnote 29] VA 
maintains the best prices through a price-reduction clause in FSS 
contracts that allows VA to receive a lower contract price if the 
vendor lowers its price to a similarly situated commercial 
customer.[Footnote 30] 

VA generally uses BPAs to fill a recurring need by an agency for 
supplies or services and to seek pricing lower than listed on the FSS. 
[Footnote 31] Agencies may award BPAs to one vendor--known as a single 
award BPA--or to more than one vendor--known as multiple award BPAs, 
[Footnote 32] and then issue individual orders against BPAs to fulfill 
requirements for supplies as the need arises. The Federal Acquisition 
Regulation requires federal agencies to seek reductions from vendors' 
FSS prices when negotiating BPAs because the use of BPAs limits the 
number of vendors from whom items are purchased, thus granting greater 
exclusivity to those vendors.[Footnote 33] For example, the price 
under a VA BPA for a 50-count box of blood glucose strips for one 
manufacturer is $11.06, compared to the same manufacturer's FSS price 
of $13.07.[Footnote 34] 

According to VA officials, VA generally negotiates national contracts 
with a single manufacturer to exclusively provide particular DME items 
to VA medical centers, including with manufacturers that are not 
listed on the FSS. VA typically uses these contracts for items it 
needs in large quantities, such as hospital beds.[Footnote 35] 
Manufacturers bid competitively to provide the DME item, and VA 
conducts best-value determinations[Footnote 36] to select the 
manufacturer that would provide the greatest overall benefit. For 
example, VA's national contract price in 2010 for power lifts used to 
transfer patients included a 70 percent discount off the 
manufacturer's suggested retail price. (See table 1 for a summary of 
VA contracting mechanisms.) 

Table 1: Summary of Three VA Contracting Mechanisms for DME Items: 

Contracting mechanism: Federal Supply Schedule (FSS); 
Relationship to Federal Supply Schedule (FSS): VA operates two 
schedules that include DME[A]; 
Number of awards: No limit to the number of contract awards for a 
single item; the manufacturer must be able to provide an uninterrupted 
supply of the item; 
How the DME item price is determined: Price is no greater than the 
manufacturer's most-favored commercial customer price; 
What VA medical centers can purchase: Any item on FSS. 

Contracting mechanism: Blanket purchase agreement (BPA)[B]; 
Relationship to Federal Supply Schedule (FSS): Manufacturers that 
already participate in the FSS can compete to provide the item; 
Number of awards: Generally, no more than three BPAs are awarded; 
How the DME item price is determined: Price must be lower than the 
manufacturer's FSS price; 
What VA medical centers can purchase: The BPA-included item from any 
one of the selected manufacturers. 

Contracting mechanism: National contract; 
Relationship to Federal Supply Schedule (FSS): Manufacturers do not 
have to participate in the FSS; 
Number of awards: One contract award; 
How the DME item price is determined: Price is determined through 
competitive bidding and a best-value determination that includes a 
trade-off of price and nonprice factors[C]; 
What VA medical centers can purchase: The item from the winning 
manufacturer. 

Source: GAO analysis based on the Federal Acquisition Regulation and 
interviews with VA officials. 

Notes: VA medical centers are required to purchase items first from a 
national contract, second from a BPA, and third from an FSS. Only when 
items are not available from these sources can the Veterans Integrated 
Service Networks (VISN) or VA medical centers enter into local 
contracts with local manufacturers or suppliers. See 48 C.F.R. § 
808.002 (2010). 

[A] The GSA directs and manages the FSS program and has delegated 
authority to VA to operate FSS 65 (medical and surgical supplies) and 
FSS 66 (laboratory) which include DME items from manufacturers, 
distributors, and resellers that are contractually required to provide 
an uninterrupted supply of items. 

[B] BPAs are not contracts, but rather agreements between federal 
agencies and vendors with terms and conditions, including prices, for 
future use. When the need arises, agencies enter into contracts with 
vendors by issuing individual orders against BPAs. 

[C] The best-value determination, in addition to price, considers 
nonprice factors such as the past performance record of the bidder and 
whether the business is considered to be a small business. 

[End of table] 

According to VA officials, VA may also use local contracts to obtain 
servicing for the DME items that the department purchases and are not 
available under the FSS program, BPAs, or national contracts. Each 
Veterans Integrated Service Network (VISN)[Footnote 37] or VA medical 
center may competitively award these local service contracts to 
suppliers. Under these contracts, local DME suppliers may be 
responsible for delivering, setting up, and servicing DME items at 
beneficiaries' homes. For example, we reviewed one VISN's contract 
with a DME supplier to store, deliver, set up, and service DME items, 
such as hospital beds and wheelchairs, in that VISN's region.[Footnote 
38] This 1-year contract, awarded in 2007 with four 1-year option 
periods for renewal, had a value of approximately $177,000. 

VA has been able to negotiate for lower prices than Medicare for 
certain DME items. For example, in 2002, the HHS OIG reported that, 
compared to Medicare, VA's median prices for 15 selected DME items 
were 31 to 88 percent less than Medicare's fee schedule prices. 
[Footnote 39] In addition, we recently reported that, had Medicare 
applied average VA payment rates for home oxygen equipment to 
estimated Medicare utilization, Medicare spending for this category 
could have been 38 percent lower in 2009.[Footnote 40] We also found 
some examples where VA has been able to obtain lower prices than 
Medicare. (See table 2.) We found that VA's national contract price in 
2010 for a fully electric hospital bed was $396.85, while Medicare's 
payment for the same bed was $1,638.38. According to VA officials, 
VA's contract price does not include service components that are 
included in the Medicare payment, such as delivery and set up of these 
hospital beds, which could reduce the difference between VA and 
Medicare. 

Table 2: Examples of Medicare Payments and VA National Contract Prices 
for Select DME Items, 2010: 

General item description: Power Wheelchair; 
Item name: Jazzy Power Chair; 
Medicare payments[A]: $3,855.50[B]; 
VA national contract price: $2,004.98. 

General item description: Dry Pressure Mattress; 
Item name: CareGuard 101; 
Medicare payments[A]: $187.97; 
VA national contract price: $103.01. 

General item description: Hospital Bed, Total Electric; 
Item name: Full-Electric Bed 5410IVC; 
Medicare payments[A]: $1,638.38[B]; 
VA national contract price: $396.85. 

Source: GAO analysis of VA and CMS data. 

Notes: While these Medicare payments include servicing and delivery of 
DME items, these VA national contract prices may not include servicing 
and delivery. 

[A] This Medicare payment is the average payment across states. 
Medicare has a separate fee schedule for each state based on the 
average charges that Medicare allowed in the state in 1986 and 1987. 

[B] These two items are categorized by Medicare as capped rental DME. 
Capped rental DME is a category of DME for which Medicare contractors 
pay DME suppliers a fee schedule amount that is "capped" after a 
certain number of continuous months of rental by a Medicare 
beneficiary. We determined the Medicare payment by using the Medicare 
formula to calculate how much these items would cost if a beneficiary 
rents long enough to own them, which occurs after 13 months of rental. 
Therefore, the least expensive purchase price is equal to 13 months of 
rental payments. 

[End of table] 

Medicaid Programs: 

We examined the Michigan and New Hampshire Medicaid programs and found 
that these states also contract with manufacturers and select either a 
single or limited number of manufacturers of DME items through a 
competitive bidding process.[Footnote 41] This process enables these 
Medicaid programs to offer their purchasing power in exchange for 
price discounts on certain DME items requiring little or no servicing. 
These Medicaid programs pay manufacturers the negotiated contract rate 
for the DME item and may make a separate payment to DME suppliers for 
dispensing the item and for providing follow-up services. A Medicaid 
official from Michigan told us that limiting the number of 
manufacturers has allowed the state to achieve both administrative 
efficiencies and cost savings. For example, Michigan has a contract 
with a single manufacturer to provide eligible beneficiaries both 
eyeglass frames and lenses.[Footnote 42] According to program 
officials, Michigan's program saves approximately $73 per complete set 
of eyeglasses compared to retail chain prices.[Footnote 43] Michigan 
also has a volume purchase contract with one distributor of 
incontinence supplies that enables Medicaid beneficiaries to receive 
incontinence supplies by mail.[Footnote 44] Officials told us 
Michigan's program saves about $50,000 to $55,000 per month on 
incontinence supplies. For hearing aids, Michigan entered into a 
multistate contract with 13 manufacturers in 2009 along with Minnesota 
and Wisconsin, allowing all three states to leverage their buying 
power and purchase the hearing aids from any of the 13 manufacturers 
at reduced prices.[Footnote 45] 

Officials from New Hampshire's Medicaid program told us that New 
Hampshire also contracted with a single DME distributor that was 
selected through a competitive process to obtain high-volume discounts 
for incontinence supplies. The distributor provides incontinence 
supplies from multiple manufacturers to either Medicaid DME suppliers 
or directly to beneficiaries by mail. All Medicaid suppliers must 
obtain incontinence supplies through this distributor at the 
contracted rate set by the state through competitive bidding unless 
there is a medical exception.[Footnote 46] The state reimburses 
Medicaid suppliers for these products at the established Medicaid fee-
for-service payment, which includes the contracted rate and an 
additional markup for administrative and dispensing costs. For 
Medicaid beneficiaries selecting the mail-order option, the 
distributor must provide incontinence supplies by mail at the same 
Medicaid fee-for-service payment paid to other Medicaid suppliers. 
According to the New Hampshire Medicaid officials, contracting with a 
single distributor has allowed New Hampshire to secure high-volume 
discounts, stabilize the product line to obtain quality control, and 
ease the administrative burden of dealing with multiple distributors. 
Officials also told us that contracting with a single distributor has 
produced program savings of more than 50 percent--with the state's 
average payment per unit for incontinence supplies down to $0.42 from 
$0.90. 

Negotiations with Manufacturers through Purchasing Intermediaries: 

Some purchasers of DME leverage their buying power through purchasing 
intermediaries that negotiate favorable prices from manufacturers on 
their behalf. For example, we contacted one GPO and one TPA that 
negotiate with DME manufacturers on behalf of the purchasers in order 
to reduce their DME spending. 

Group Purchasing Organization (GPO): 

One GPO[Footnote 47] we contacted acts as a purchasing intermediary by 
negotiating DME item discounts from manufacturers on behalf of its 
clients--private health insurers. The GPO maintains a network of DME 
suppliers for these insurers and leverages the network's purchasing 
power to obtain manufacturer discounts, thus lowering the insurers' 
DME spending. For each major DME product category, the GPO typically 
contracts with one competitively selected preferred manufacturer, 
although items are also available at lesser discounts from 
approximately another 20 to 25 manufacturers. According to a GPO 
official, manufacturers give the GPO DME item discounts in exchange 
for access to its large supplier network and may give additional 
discounts depending on supplier purchasing volume. Once contracts are 
established with DME manufacturers, the GPO establishes a discounted 
fee schedule for each insurer by adding estimated DME item service 
costs[Footnote 48] to an average manufacturer price for that item. 
[Footnote 49] Suppliers in the network procure DME items directly from 
these manufacturers at the discounted rates and submit claims for 
payment to the GPO.[Footnote 50] The GPO--acting as a benefit manager 
for the insurers--then makes a fee schedule payment to suppliers for 
providing the DME items to beneficiaries.[Footnote 51] Suppliers that 
join the GPO's network gain access to these high-volume discounts in 
exchange for accepting the reduced payments.[Footnote 52] A GPO 
official told us that in addition to a discounted DME fee schedule, 
the GPO provides utilization-management services for its clients--such 
as requiring preauthorization for certain DME items--and achieves 
additional administrative cost savings. The official also told us that 
the GPO's fee schedule rates are about 70 percent of Medicare fee 
schedule rates, saving insurers between 20 percent and 30 percent 
compared to Medicare--an amount roughly equivalent to CMS's projected 
CBP round 1 rebid savings of 32 percent. According to the official, 
the savings the GPO is able to achieve for insurers varies by product 
category. 

Third-Party Administrator (TPA): 

Some Medicaid programs, including those that use both managed care and 
fee-for-service (FFS) plans,[Footnote 53] use a TPA to negotiate with 
certain manufacturers of diabetic supplies on their behalf before they 
contract with these manufacturers.[Footnote 54] A TPA official told us 
that these programs operate a rebate program by having the TPA that is 
already operating their pharmacy benefits negotiate rebate amounts 
with manufacturers of diabetic supplies. This is similar to Medicaid's 
supplemental rebate program[Footnote 55] for preferred drugs--where 
the TPA negotiates supplemental rebates for participating states from 
pharmaceutical manufacturers based on their placement on a state's 
preferred drug list (PDL).[Footnote 56] According to TPA and Medicaid 
officials, states determine the rebate amounts based on the number of 
manufacturers they select to be on their preferred list. For example, 
the rebate is higher if a state has only one manufacturer instead of 
three manufacturers on its preferred list because it provides a larger 
market share to that manufacturer. However, states may select more 
than one manufacturer to provide beneficiaries with greater item 
choice. Officials from the rebate program said that diabetic supplies 
work for this approach because they can be easily substituted--one 
manufacturer's blood-glucose monitor can be interchanged with that of 
another manufacturer.[Footnote 57] Medicaid programs file rebate 
claims quarterly with the DME manufacturer based on the utilization of 
the specific manufacturer's products. 

CMS Could Face a Number of Issues If Required to Implement a Medicare 
DME Competitive Bidding Program at the Manufacturer-Level: 

CMS could face several issues regarding competitive bidding if it 
developed a DME manufacturer-level competitive bidding program. Some 
of these issues would be similar to those CMS faced in implementing 
CBP while others would be specific to implementing a manufacturer-
level program. 

Several Issues CMS Faced When Implementing CBP Could Again Be Issues 
for a Medicare Manufacturer-Level Competitive Bidding Program: 

If CMS is given broad authority to implement a manufacturer-level 
competitive bidding program, it would face issues similar to those it 
addressed in implementing CBP. These program issues are, among others, 
which DME items to include, the geographic level on which to operate, 
the potential effect on small businesses, the range of beneficiary 
choice, and the implementation time including program demonstrations. 

DME items to include. For CBP, CMS chose the DME items to include-- 
generally those with the highest utilization and cost with the largest 
savings potential--organized by product category, which is a grouping 
of related items used to treat a similar medical condition.[Footnote 
58] DME suppliers must provide all DME items in a CBP product 
category.[Footnote 59] If a manufacturer-level program is implemented, 
CMS could face the issue of whether to conduct the program at the item 
level because manufacturers do not always produce all items within a 
Medicare-covered product category.[Footnote 60] Also, some experts and 
stakeholders we interviewed suggested that commodity-type items--items 
considered to be standard and interchangeable--may be preferable to 
include in a manufacturer-level program. Examples of commodity-type 
items include diabetic monitors,[Footnote 61] walkers, and canes. A 
CMS official told us that commodity items that do not need to be 
delivered by a supplier to a beneficiary's home, or replacement items 
such as diabetic supplies that can be mailed from a manufacturer to a 
beneficiary, could be considered. Furthermore, industry stakeholders 
also told us that CMS would need to consider the number of major 
manufacturers producing a particular item in the market. For example, 
if one manufacturer dominates the market for a particular item, that 
manufacturer may not have sufficient incentive to discount its prices 
if it believes Medicare must include its item to meet beneficiary 
demand. 

Geographic level to operate. For CBP, CMS determined which of the 
largest MSAs to include as the CBAs for the competitive bidding 
rounds.[Footnote 62] CMS could consider at what geographic level--for 
example, by region or nationally--to operate a manufacturer-level 
program. It may be possible for CMS to implement a manufacturer-level 
competitive bidding program on a national basis, which would limit the 
number of bid competitions needed as compared to CBP. DME 
manufacturers generally use distributors to provide their items to DME 
suppliers throughout the country, which could allow for national 
competitions. An industry stakeholder told us, however, that some DME 
manufacturers only provide their items locally. If these local 
manufacturers are to be included, a more regionalized competitive 
bidding approach may be needed. 

Small-business consideration. To protect small DME suppliers in CBP, 
CMS established a target that at least 30 percent of the winning 
suppliers be small suppliers, and also allowed small suppliers to bid 
together as networks under certain conditions.[Footnote 63] For a 
manufacturer-level program, CMS could consider whether to allow for 
special consideration of smaller manufacturers. A trade association 
told us that there are small DME manufacturers, including specialty 
manufacturers that may produce only one item, such as wheelchair seat 
cushions, and therefore may not be able to compete with larger, 
national DME manufacturers that produce a range of items under a 
Medicare competitive bidding program. 

Range of beneficiary choice. When developing CBP, CMS determined it 
would award contracts to enough suppliers to both meet projected 
demand and to ensure that beneficiaries would have a choice of 
suppliers. For CBP, CMS established a minimum of two winning suppliers 
in each product category for each CBA and sought to have at least five 
suppliers in each category.[Footnote 64] For a manufacturer-level 
program, CMS could consider the trade-off between limiting the number 
of manufacturers to achieve more savings and ensuring access to a wide 
array of DME items for Medicare beneficiaries. As demonstrated by 
other DME purchasing programs, leveraging purchasing power by limiting 
the number of manufacturers participating in a program generally 
allows for greater cost savings. The more limited the participation 
would be for manufacturers in a manufacturer-level program, the more 
savings CMS could likely achieve as manufacturers may be willing to 
provide greater discounts in return for a greater Medicare market 
share. However, greater exclusivity would limit the array of DME items 
that Medicare beneficiaries would be allowed to choose. Additionally, 
CMS could consider including a process to allow beneficiaries to have 
DME items not produced or carried by contracted manufacturers in cases 
of medical necessity. As required by federal law,[Footnote 65] CMS has 
a similar medical necessity process for CBP--referred to as the 
physician authorization process. 

Implementation and demonstrations. CMS might consider whether 
demonstrations would be necessary to test a manufacturer-level program 
and the length of time and associated costs needed to develop a 
program. For CBP, CMS began work in 1995 and conducted three supplier- 
level program demonstrations over 4 years--1999 through 2002--to test 
how the program's design would work; the demonstrations were 
subsequently evaluated. CMS's first attempt to implement CBP on a 
nondemonstration basis--round 1--ended when MIPPA, enacted in July 
2008, terminated the CBP contracts awarded during that round. 
Contracts awarded as a result of CBP's round 1 rebid began operating 
in January 2011. 

Table 3 summarizes the key issues CMS could face if it were required 
to implement a manufacturer-level competitive bidding program and how 
these issues were resolved in CBP. 

Table 3: Comparison of Key Issues in Supplier-Level Competitive 
Bidding Program and a Possible Manufacturer-Level Competitive Bidding 
Program: 

Issue: DME items to include: 
Supplier-level competitive bidding program (CBP): CBP began with nine 
product categories[A] generally including high-utilization and high-
cost items with the potential for the most Medicare savings; 
Possible manufacturer-level competitive bidding program: High-
utilization and high-cost items may not provide the most savings if 
the item cost is a small proportion of total Medicare payment. 
Commodity items may be preferable. 

Issue: DME items to include: 
Supplier-level competitive bidding program (CBP): CBP winning 
suppliers must provide all items within a product category; 
Possible manufacturer-level competitive bidding program: Manufacturers 
may need to bid by item rather than product category because one 
manufacturer may not be able to provide all items within a product 
category. 

Issue: Geographic level to operate; 
Supplier-level competitive bidding program (CBP): CBP was phased in 
beginning with 9 competitive bidding areas (CBA); 
competition is to occur in 91 of the largest MSAs in round 2; 
Possible manufacturer-level competitive bidding program: May be 
possible to conduct a program at the national level. 

Issue: Small-business consideration; 
Supplier-level competitive bidding program (CBP): CBP has a target 
that a minimum of 30 percent of winning suppliers be small suppliers. 
Small suppliers can bid together as networks under certain conditions; 
Possible manufacturer-level competitive bidding program: Small 
specialty manufacturers may find it difficult to compete against 
larger manufacturers. 

Issue: Range of beneficiary choice; 
Supplier-level competitive bidding program (CBP): CBP tried to have 
five winning suppliers--a minimum of at least two--for each product 
category in each CBA to provide Medicare beneficiaries with a choice 
of suppliers; 
Possible manufacturer-level competitive bidding program: Limiting the 
number of winning manufacturers may limit the range of item models 
available to Medicare beneficiaries. 

Issue: Implementation and demonstrations; 
Supplier-level competitive bidding program (CBP): Work began on a 
supplier-level competitive bidding demonstration in 1995. CBP's round 
1 rebid was effective January 1, 2011; 
Possible manufacturer-level competitive bidding program: Time would be 
needed to possibly conduct demonstrations, and to establish a new 
manufacturer-level competitive bidding program. 

Source: GAO analysis. 

[A] The nine product categories were: oxygen, oxygen equipment, and 
supplies; standard power wheelchairs, scooters, and related 
accessories; complex rehabilitative power wheelchairs and related 
accessories (group 2--power wheelchairs with power options); mail-
order diabetic supplies; enteral nutrition, equipment, and supplies; 
continuous positive airway pressure devices, respiratory assist 
devices, and related supplies and accessories; hospital beds and 
related accessories; walkers and related accessories; and support 
services (group 2 mattresses and overlays) in only one CBA. 

[End of table] 

Additional Issues CMS Could Face with a Manufacturer-Level Competitive 
Bidding Program: 

Depending on how a manufacturer-level competitive bidding program 
might be designed, CMS could face issues other than those it faced for 
CBP. These issues include establishing a more direct relationship 
between CMS and DME manufacturers, changing Medicare's DME payment 
system, and changing the DME coding system used for billing. 

CMS relationship with DME manufacturers. CMS currently has a minimal 
relationship with DME manufacturers unless they are also Medicare 
suppliers.[Footnote 66] For example, DME manufacturers that are not 
Medicare suppliers submit their products to a CMS contractor for HCPCS 
code assignment, which is needed for suppliers to bill Medicare and 
other health insurers. DME manufacturers generally do not have systems 
to submit claims to Medicare or other health insurers. DME suppliers 
must meet a set of Medicare enrollment requirements, be accredited, 
and obtain a unique supplier number to be able to bill Medicare. 
[Footnote 67] For CBP, CMS had additional regulatory requirements that 
suppliers had to meet, for example, having all required state licenses 
for items and services in the bid. Suppliers also had to submit 
financial documentation, such as a balance sheet and a credit rating 
score with their bids. Once participating in Medicare, DME suppliers 
have systems and standards for billing Medicare. 

The extent of the relationship needed between CMS and DME 
manufacturers would depend on how a manufacturer-level competitive 
bidding program might be designed. If the program were designed like 
the VA or Medicaid programs, under which a specific manufacturer or 
set of manufacturers is chosen to exclusively provide DME items to 
beneficiaries, then CMS could consider developing product 
specifications that manufacturers would need to meet and create 
committees to review the DME items that manufacturers propose to 
provide through their bids. VA, for instance, includes product 
requirements in its requests for bids for BPAs and national contracts, 
and has clinical staff that review DME samples during the bidding 
process. CMS also could consider the need to accredit DME 
manufacturers, as it does DME suppliers, or to review DME manufacturer 
financial information, as it does for DME suppliers in CBP. 

Changes to DME payment system. If CMS implemented a manufacturer-level 
competitive bidding program that required separate payments for the 
item and the supplier's service, a new payment system for suppliers 
might be needed to account for the service component associated with 
each DME item that requires servicing. Currently, the Medicare payment 
to the DME supplier generally includes the cost of both the items and 
services provided to beneficiaries. Under some other payers' 
competitive bidding programs, the service component is separated from 
the payment for the DME item. This is the case, for instance, with 
items provided by the VA, such as hospital beds, that require local 
service contracts for delivery and setup in the patient's home, and 
for the hearing aids provided by a Medicaid program that includes 
separate dispensing fees for the hearing-aid supplier. The service 
component payment would likely need to vary by DME item because some 
DME items, such as home oxygen, require more service by a DME supplier 
than others. According to a CMS official, previous attempts by the 
agency to separate the item cost component and the service cost 
component for DME items have not been successful. During the 1990s, 
Congress required the agency to examine how a split payment for DME, 
which would include one payment for the cost of an item and one 
payment for the servicing associated with an item, would work. 
According to CMS officials, DME suppliers would not provide the agency 
with the information necessary to respond to the mandate. 

However, CMS was able to establish a separate servicing payment in one 
non-DME program--the Competitive Acquisition Program for Part B drugs, 
which was in effect from July 1, 2006, through December 31, 2008. 
[Footnote 68] Under this program, CMS competitively contracted with a 
specialty pharmacy to supply a designated basket of Part B drugs to 
physicians, whose participation in the program was voluntary. The 
specialty pharmacy billed Medicare for the predetermined cost of the 
drug--which was determined as part of the bid process--and the 
physician billed Medicare for the administration of the drug. 

Changes to DME coding system. If CMS implemented a manufacturer-level 
competitive bidding program that required the identification of the 
manufacturer of the item provided, like the existing Medicaid rebate 
programs for diabetic supplies, the coding system for DME might need 
to be changed to include manufacturer information. Under a rebate 
program, the amount that the manufacturer pays in the form of the 
rebate is determined by the number of the manufacturer's items that 
are purchased, which means claims need to identify the manufacturer. 
HCPCS, which is currently used by Medicare to code DME items, does not 
allow for identification of the manufacturer of a DME item or the 
model of an item being provided to the beneficiary. A DME 
administrative contractor official also noted there are limitations to 
the number of fields on the current Medicare claim form that could 
also be a problem due to the number of different models that exist 
within the DME industry.[Footnote 69] As an example, according to the 
CMS contractor that assigns HCPCS codes to DME items, 506 different 
products produced by 55 different manufacturers have been assigned the 
HCPCS code E0143, which is for folding walkers with wheels. CMS 
officials told us another way to accomplish the same goal would be to 
modify the DME claim form to identify a product's manufacturer. 

We provided a draft of this report for comment to HHS. HHS provided 
written comments, which are summarized below, and reprinted in 
enclosure III. HHS also provided technical comments that we 
incorporated as appropriate. 

In its comments, HHS stated that the report provides useful 
information about other ways the Medicare program, and its 
beneficiaries, can obtain better value for DMEPOS items and services. 
HHS also noted that the report demonstrates how other payers use 
various acquisition strategies to receive better prices than Medicare 
for the same DMEPOS items and services, despite the fact that Medicare 
often pays for a larger quantity of items and services. Given 
Medicare's scarce resources, the department noted the importance of 
considering various ways to leverage Medicare's buying power to 
achieve savings. 

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 enclosure IV. 

Signed by: 

Kathleen M. King: 
Director, Health Care: 

Enclosures - 4: 

[End of section] 

Enclosure I: Six Durable Medical Equipment, Prosthetics, Orthotics, 
and Supplies (DMEPOS) Medicare Fee Schedule Categories: 

Fee schedule category: Inexpensive or other routinely purchased items; 
DMEPOS example: Inexpensive equipment that has a purchase price that 
does not exceed $150; Other routinely purchased equipment that is 
bought--rather than rented--at least 75 percent of the time; 
Medicare payment: Depending on the beneficiary's choice, equipment may 
be paid as a lump-sum purchase of new or used equipment, or as rental 
equipment. The total payment amount may not exceed the actual charge 
or the fee schedule for a purchase. 

Fee schedule category: Items requiring frequent and substantial 
servicing; 
DMEPOS example: Ventilators and intermittent positive pressure 
breathing machines, and continuous passive motion machines; 
Medicare payment: Equipment is only paid on a rental basis. Payments 
are based on the monthly fee schedule amounts until the beneficiary's 
medical necessity ends; No payments are made for the purchase of 
equipment, for maintenance and servicing, or for replacement of items; 
Supplies and accessories are not allowed separately. 

Fee schedule category: Certain customized items; 
DMEPOS example: Items uniquely constructed or substantially modified 
for a specific beneficiary prescribed by a physician; 
Medicare payment: The coverage and allowable amounts for custom 
equipment is decided by individual evaluation based on medical 
indications and is paid as a lump-sum payment. 

Fee schedule category: Other prosthetic and orthotic devices; 
DMEPOS example: All prosthetic and orthotic devices except items 
requiring frequent and substantial servicing, certain customized 
items, parenteral and enteral nutritional supplies and equipment, and 
intraocular lenses; 
Medicare payment: Payment is on a lump-sum purchase basis. 

Fee schedule category: Capped rental items; 
DMEPOS example: Electric wheelchairs; 
Medicare payment: Payment is on a monthly rental basis not to exceed a 
13-month period of continuous use for rentals beginning on or after 
January 1, 2006.[A] After the 13th month, the equipment is owned by 
the beneficiary. 

Fee schedule category: Oxygen and oxygen equipment; 
DMEPOS example: Stationary and portable oxygen system; 
Medicare payment: Payment for oxygen equipment is on a rental basis 
only. The total number of continuous rental months is capped at 36 
months. The costs of oxygen contents, maintenance, and repairs are 
bundled into the rental payment. After 36 months, rental payments 
cease but Medicare will pay separately for oxygen contents and 
nonroutine maintenance. 

Source: GAO analysis of Centers for Medicare & Medicaid Services data. 

Notes: The data are from the Medicare claims processing manual and DME 
Medicare Administrative Contractor supplier manuals. 

[A] Prior to January 1, 2006, the monthly rentals are not to exceed a 
period of continuous use of 15 months or on a purchase option basis 
not to exceed a period of continuous use of 13 months. 

[End of table] 

[End of enclosure] 

Enclosure II: Summary of Durable Medical Equipment (DME) Purchasing 
Approaches: 

Purchasing approaches: Contracting with manufacturers; Department of 
Veterans Affairs (VA) federal supply schedule (FSS); 
DME Items purchased: Any item on FSS; 
How prices are set: VA contracts directly with manufacturers and price 
is no greater than the manufacturer's most-favored commercial customer 
price; 
How prices are set: Any manufacturer offering VA their best item price. 

Purchasing approaches: Contracting with manufacturers; VA blanket 
purchase agreements (BPA)[A]; 
DME Items purchased: 
* Continuous positive airway pressure (CPAP), Bi-level positive airway 
pressure (BPAP), Auto positive airway pressure (APAP) equipment[B]; 
* Masks, headgear, filters[B]; 
How prices are set: VA enters into agreements directly with 
manufacturers listed on the FSS, and prices must be lower than the 
manufacturer's FSS price for that item; 
How prices are set: VA enters into agreements with one manufacturer in 
a single award BPA and with more than one manufacturer in a multiple 
award BPA. 

Purchasing approaches: Contracting with manufacturers; VA national 
contracts; 
DME Items purchased: 
* Enteral nutrients[B]; 
* Standard power wheelchairs, scooters, and related accessories[B]; 
* Hospital beds, related accessories[B]; 
How prices are set: VA contracts with one manufacturer and price is 
determined through best-value determinations, which include a trade-
off of price and nonprice factors; 
How prices are set: Typically a single manufacturer is chosen based on 
the lowest bid for the item through a competitive bidding process. 

Purchasing approaches: Contracting with manufacturers; Medicaid 
programs; 
DME Items purchased: 
* Incontinence supplies; 
* Hearing aids; 
* Eyeglasses; 
How prices are set:Some Medicaid programs directly contract with one 
or a limited number of manufacturers, and prices are set based on bids 
submitted by the manufacturers; 
How prices are set:Medicaid programs contract with one or a limited 
number of manufacturers. 

Purchasing approaches: Negotiations through purchasing intermediaries; 
Purchasing approaches: Group Purchasing Organization (GPO); 
DME Items purchased: All covered DME; 
How prices are set: One GPO contracts with manufacturers on behalf of 
private insurers to establish a discounted fee schedule for its 
national network of suppliers, and prices are set by the GPO, which 
calculates service costs that are added onto an average manufacturer 
price for that item; 
How prices are set: GPO selects manufacturers to provide DME to its 
network of suppliers. 

Purchasing approaches: Negotiations through purchasing intermediaries; 
Third-Party Administrator (TPA); 
DME Items purchased: Diabetic supplies; 
How prices are set: One TPA operates a rebate program on behalf of 
certain state Medicaid programs, and prices are set based on bids 
submitted to the TPA by manufacturers; 
How prices are set: States select one or a limited number of 
manufacturers to provide diabetic supplies based on a list provided by 
the TPA. 

Source: GAO's analysis of information from VA, Medicaid programs, and 
purchasing intermediaries. 

[A] BPAs are not contracts, but rather agreements between federal 
agencies and vendors with terms and conditions, including prices, for 
future use. When the need arises, agencies enter into contracts by 
issuing individual orders against BPAs. 

[B] Examples include only items in the competitive bidding program's 
round 1 rebid product categories. 

[End of table] 

[End of enclosure] 

Enclosure III: Comments from the Department of Health and Human 
Services: 

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

April 29, 2011: 

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

Dear Ms. King: 

Attached are comments on the U.S. Government Accountability Office's 
(GAO) draft correspondence entitled: "Medicare: Issues for 
Manufacturer-level Competitive Bidding for Durable Medical Equipment" 
(GAO-11-337R). 

The Department appreciates the opportunity to review this 
correspondence before its publication. 

Sincerely, 

Signed by: 

Jim R. Esquea: 
Assistant Secretary for Legislation: 

Attachment: 

[End of letter] 

General Comments Of The Department Of Health And Human Services (HHS) 
On The Government Accountability Office's (GAO) Draft Correspondence 
Entitled, "Medicare: Issues For Manufacturer-Level Competitive Bidding 
For Durable Medical Equipment" (GAO-11-337R): 

The Department appreciates the opportunity to review and comment on 
this draft correspondence. 

This exploration of manufacturer-level competitive bidding provides 
useful information about other ways the Medicare program, and its 
beneficiaries, can obtain better value for quality durable medical 
equipment prosthetics, orthotics, and supplies (DMEPOS) items and 
services. It is important to consider the various ways that Medicare's 
buying power could be used to leverage savings for overpriced DMEPOS 
items and preserve scarce Medicare resources. 

This correspondence demonstrates how other payers employ various 
acquisition strategies to receive better prices than Medicare for the 
same DMEPOS items and services, despite the fact that Medicare, in 
many cases, pays for a considerably higher quantity of items and 
services than other payers. In general, there are a number of 
important issues identified in this report that might need to be 
addressed if manufacturer-level bidding is considered as an 
alternative for reforming how Medicare items and services are 
acquired. In particular, GAO points out that the idea of manufacturer-
level bidding might have more potential for commodity items such as 
diabetic test strips that can be shipped directly to the beneficiary 
without an extensive local distribution network and without in home 
equipment set up requirements. However, the possibility of bidding at 
the manufacturer level for other items should not be dismissed and 
could have merit. 

[End of enclosure] 

Enclosure IV: GAO Contact and Staff Acknowledgments: 

Contact: 

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

Staff Acknowledgments: 

In addition to the contact named above, key contributors to this 
report were: Martin T. Gahart, Assistant Director; Lori Achman; 
Krister Friday; Thomas Han; Erica Pereira; Hemi Tewarson; and Opal 
Winebrenner. 

[End of enclosure] 

In CBP, winning suppliers must provide all items in the product 
category for which they are awarded a contract, and must provide the 
same items to Medicare beneficiaries and non-Medicare customers. 

Footnotes: 

[1] Medicare is the federal health insurance program for people age 65 
and older, individuals under age 65 with certain disabilities, and 
individuals diagnosed with end-stage renal disease. 

[2] 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. 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 for 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. 

[3] GAO, Medicare: CMS has Addressed Some Implementation Problems from 
Round 1 of the Durable Medical Equipment Competitive Bidding Program 
for the Round 1 Rebid, [hyperlink, 
http://www.gao.gov/products/GAO-10-1057T] (Washington, D.C.: Sept. 15, 
2010); 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); Daniel R. Levinson, Inspector General, Department of 
Health and Human Services, Medicare's Competitive Bidding Program for 
Durable Medical Equipment: Implications for Quality, Cost, and Access, 
testimony before the House of Representatives Committee on Energy and 
Commerce, Subcommittee on Health, 111th Cong., 2nd sess., Sept. 15, 
2010; Department of Health and Human Services Office of Inspector 
General, 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. 

[4] Medicare Prescription Drug, Improvement, and Modernization Act of 
2003, Pub. L. No. 108-173, § 302(b), 117 Stat. 2066, 2224-29 (2003) 
(codified as amended at 42 U.S.C. § 1395w-3). MMA established a 
competitive acquisition program for certain Medicare-covered items of 
DME, prosthetics, orthotics, and supplies referred to as DMEPOS. CMS 
refers to this program as the Medicare DMEPOS competitive bidding 
program. The items and services covered by the competition were DME and
related supplies, off-the-shelf orthotics, and enteral nutrients and 
related equipment and supplies. 

[5] For this report, the term CBP is used to refer to CMS's supplier- 
level Medicare DMEPOS competitive bidding program, and the term DME 
refers to durable medical equipment, prosthetics, orthotics, and 
related supplies. 

[6] Pub. L. No. 110-275, § 154, 122 Stat. 2494, 2560-68 (2008) 
(amending 42 U.S.C. § 1395w-3). 

[7] In a November 2009 report, we documented round 1 implementation 
problems, including, for example, that CMS had not provided suppliers 
with timely and clear bid submission information. GAO, Medicare: CMS 
Working to Address Problems from Round 1 of the Durable Medical 
Equipment Competitive Bidding Program, GAO-10-27 (Washington, D.C.: 
Nov. 6, 2009). 

[8] A product category is a grouping of related DME items that are 
used to treat a similar medical condition. The nine DME product 
categories and their items selected by CMS for bidding were generally 
high-volume and high-cost items. The product categories are: oxygen 
supplies and equipment; standard power wheelchairs, scooters, and 
related accessories; complex rehabilitative power wheelchairs and 
related accessories (limited to group 2--power wheelchairs with power 
options); 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; 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 CBA only). The enteral 
nutrition product category--equipment and supplies to provide 
nutrition through a tube into the stomach or small intestine--is 
covered under the Medicare prosthetic device benefit for beneficiaries. 

[9] The CBAs were required to be selected from the largest 
metropolitan statistical areas (MSA). The nine selected CBAs are: 
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-Pompano Beach, Florida); Orlando 
(Orlando-Kissimmee, Florida); Pittsburgh (Pittsburgh, Pennsylvania); 
and Riverside (Riverside-San Bernardino-Ontario, California). 

[10] Actual implementation issues presented by such a program, 
however, would depend on whether and how Congress may design the 
program and the nature of the authority Congress provides to CMS for
implementation. 

[11] In this report, we use the term "purchaser" to refer both to 
those who obtain DME and provide it to beneficiaries, such as the 
Department of Veterans Affairs (VA), and to those who pay for DME 
obtained by beneficiaries, such as CMS. 

[12] Medicaid is the joint federal-state program that finances medical 
services for certain low-income adults and children. 

[13] We contacted Medicaid officials and an official from an 
association of state public health and human services departments to 
identify states whose Medicaid programs attempted to or were using 
competitive bidding programs for certain DME items. We interviewed 
Medicaid officials from California, Florida, Michigan, Nevada, New 
Hampshire, New York, Rhode Island, South Carolina, and Texas. 

[14] We interviewed representatives from the American Association for 
Homecare, which is an organization of DME suppliers, the Advanced 
Medical Technology Association, which is an organization of DME and 
medical device manufacturers, and the National Association for the 
Support of Long Term Care, which is an organization of DME 
manufacturers and DME suppliers that provide medical supplies to long-
term care facilities and home care providers. 

[15] Medicare Part B helps pay for certain physician, outpatient 
hospital, laboratory, and other services, and medical equipment and 
supplies. Beneficiaries are required to pay a monthly premium for Part B
coverage, an annual deductible, and coinsurance. 

[16] For a list of Medicare enrollment standards applying to DME 
suppliers, see 42 C.F.R. § 424.57(c) (2010). For a list of quality 
standards applying to DME suppliers, see [hyperlink, 
http://www.cms.hhs.gov/MedicareProviderSupEnroll/Downloads/DMEPOSAccredi
tationStandards.pdf] (downloaded on Jan. 20, 2011). 

[17] A distributor generally transfers DME items from one or more DME 
manufacturers to suppliers who then provide the items to Medicare 
beneficiaries. A distributor is not regulated by CMS unless it enrolls 
in Medicare as a supplier and then provides items directly to Medicare 
beneficiaries. 

[18] Medicare adjusts fee schedules for DME for each state, reflecting 
geographic price differences that are subject to national floor and 
ceiling limits. The applicable state fee schedule is determined by the 
Medicare beneficiary's residence, not the DME supplier's location. 

[19] 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. For CBP items, 
Medicare assignment is mandatory for suppliers. 

[20] Repairs are paid separately only if the item is being purchased 
or is already owned by the beneficiary, and the repair is necessary to 
make the item serviceable. For some DME items, manufacturers are 
responsible for warranty repair work; repairs made under warranty are 
not a covered Medicare service and no Medicare payment is made. 
Maintenance is also paid only if the item is being purchased or is 
already owned by the beneficiary, and if the maintenance is extensive 
amounting to repairs that require the services of skilled technicians. 
Routine maintenance and periodic servicing are not covered by Medicare 
payment. 

[21] For example, 82 products are listed under the HCPCS code E0260 
"Hospital Bed, Semi-Electric (Head and Foot Adjustment), With Any Type 
Side Rails, With Mattress." 

[22] Pub. L. No. 105-33, § 4319(a), 111 Stat. 251, 392-94 (1997) 
(adding 42 U.S.C. § 1395w-3). 

[23] The 10 DME product categories--a grouping of related items used 
to treat a similar medical condition--selected by CMS for bidding were 
generally high-volume and high-cost items. The product categories were 
the same as the CBP round 1 rebid, except that round 1 also included 
the negative pressure wound therapy pumps and related supplies and 
accessories category. 

[24] To begin the program's national phase-in, 10 CBAs were chosen 
from the largest MSAs. In CBP's round 1 rebid there were 9 CBAs. For 
round 2, the Patient Protection and Affordable Care Act (PPACA) 
provided for competition to occur in 91 of the largest MSAs. Pub. L. 
No. 111-148, § 6410, 124 Stat. 119, 773 (2010). 

[25] To submit CBP bids, CMS required eligible suppliers to have met 
Medicare enrollment, quality, and financial standards, obtained the 
state licenses required to provide the relevant services, and have 
been accredited by a CMS-approved accrediting organization. The 
competitive bidding process had several steps: bidder registration, 
bid submission, bid review, winner selection, setting CBP Medicare 
payments--referred to as single payment amounts--for each item in a 
product category in each CBA, and awarding contracts to winning 
suppliers. 

[26] In CBP's round 1 rebid, the product categories were revised to 
delete the negative pressure wound therapy category and to exclude 
group 3 complex rehabilitative power wheelchairs from the entire CBP, 
and the San Juan, Puerto Rico, CBA was deleted. 

[27] The General Services Administration (GSA) directs and manages the 
FSS program, which government agencies use to procure commonly used 
goods and services. The GSA, for example, is responsible for acquiring 
vehicles for government agencies to use in the federal fleet. See GAO, 
Federal Energy and Fleet Management: Plug-in Vehicles Offer Potential 
Benefits, but High Costs and Limited Information Could Hinder 
Integration into the Federal Fleet, [hyperlink, 
http://www.gao.gov/products/GAO-09-493] (Washington, D.C.: June 9, 
2009). The GSA has delegated authority to VA to operate the FSS 
schedules and contract for medical supplies and services, including 
DME, for federal agencies. The GSA has not delegated VA the authority 
to prescribe the policies and procedures that govern the FSS program. 

[28] Contracts awarded through the FSS program are indefinite delivery-
indefinite quantity contracts. These contracts allow the federal 
agency to order unspecified quantities, within stated limits, of 
products or services during a fixed period when the agency cannot 
predetermine its needs. 

[29] Most-favored customers are customers or categories of customers 
that receive the best price from vendors. See 48 C.F.R. §§ 538.270(a), 
538.271, and 538.272 (2010). The pursuit of most-favored customer 
pricing is consistent with the objective of negotiating a fair and 
reasonable price. See 62 Fed. Reg. 44,518, 44,519 (Aug. 21, 1997). 

[30] See 48 C.F.R. § 538.272 (2010). Previous GAO work has shown that 
some of the tools for obtaining the best price are used on a limited 
basis, which hinders the ability of the government to determine 
whether the FSS program is achieving its goal of obtaining best 
prices. See GAO, Contracting Strategies: Data and Oversight Problems 
Hamper Opportunities to Leverage Value of Interagency and 
Enterprisewide Contracts, [hyperlink, 
http://www.gao.gov/products/GAO-10-367] (Washington, D.C.: Apr. 29, 
2010). 

[31 VA can only award a BPA to a manufacturer that is already 
participating in the FSS program. BPAs are not contracts, but rather 
agreements between federal agencies and vendors with terms and 
conditions, including prices, for future use. When the need arises, 
agencies enter into contracts with vendors by issuing individual 
orders against BPAs. Previous GAO work has identified a number of 
issues with federal agencies' use of BPAs. See GAO, Contract 
Management: Agencies Are Not Maximizing Opportunities for Competition 
or Savings under Blanket Purchase Agreements despite Significant 
Increase in Usage, [hyperlink, http://www.gao.gov/products/GAO-09-792] 
(Washington, D.C.: Sept. 9, 2009). 

[32] Multiple award BPAs provide an opportunity to benefit from 
further competition when placing orders because vendors compete 
against other BPA vendors for a particular product. 

[33] VA has BPAs in place for a number of DME items, including 
continuous positive airway pressure (CPAP) machines and accessories, 
which are used to treat sleep problems. 

[34] In order to purchase the strips at the lower BPA price, all VA 
medical centers must sign a letter of participation and agree to 
purchase at least 90 percent of their test strips from this 
manufacturer. 

[35] Among the CBP DME items for which VA has national contracts are 
enteral nutrients, standard power wheelchairs, scooters, and related 
accessories. 

[36] The best-value determination, in addition to price, considers 
nonprice factors such as the past performance record of the bidder and 
whether the business is considered to be a small business. 

[37] The VA healthcare system is organized into 21 regional networks, 
which are called VISNs. VA has delegated to VISNs decision-making 
authority regarding financing and service delivery for health care 
services, including most budget and management responsibilities 
concerning VA medical center operations. 

[38] This contract had a series of requirements for the DME supplier, 
including that the supplier respond to service calls within 48 hours 
under normal circumstances and to an emergency call within 8 hours. 

[39] Rehnquist, Medicare Reimbursement for Medical Equipment and 
Supplies. 

[40] GAO, Medicare Home Oxygen: Refining Payment Methodology Has 
Potential to Lower Program and Beneficiary Spending, [hyperlink, 
http://www.gao.gov/products/GAO-11-56] (Washington, D.C.: Jan. 21, 
2011). We also calculated that this difference between VA and Medicare 
costs would be reduced if we accounted for the assumed lower 
administrative costs for serving VA patients. 

[41] Medicare and Medicaid do not always cover the same DME items. 

[42] According to the contract, the Michigan Department of Community 
Health has been authorized to contract for volume purchase of 
eyeglasses since 1979. Since 1980, 10 contracts have been awarded 
ranging in length from 18 months to 5 years. Medicare only covers 
eyeglass frames and lenses for beneficiaries who have had cataract 
surgery. 

[43] Michigan's Medicaid program obtains both eyeglass frames and 
lenses for about $27 per complete set under its vision services 
contract. Michigan officials told us that chain vision suppliers' 
prices of approximately $100 per set indicates the savings Michigan 
achieved for the same quality and styles available in retail optical 
stores. 

[44] According to state officials, Michigan has been contracting with 
distributors of incontinence supplies under its Medicaid Diaper and 
Incontinence Supply Program since 1997. Medicare does not include 
incontinence supplies in its DME benefit. 

[45] Medicare does not cover hearing aids or the exam for fitting 
hearing aids. 

[46] New Hampshire's Medicaid program grants a medical necessity 
exception--for example, if a beneficiary is obese or has a specific 
skin condition--to the requirement that suppliers obtain only those 
products on the state's approved list of incontinence supplies from 
the distributor. The medical necessity exception also applies to 
beneficiaries who receive supplies directly from the distributor. 

[47] A GPO official told us that the entity also describes itself as a 
durable medical equipment benefits manager. In addition to DME, the 
GPO also manages orthotic and prosthetic services. 

[48] The profit margin points--reflecting DME item service costs--that 
the GPO adds to the average item price in calculating its fee schedule 
would be lower for items requiring little or no servicing than for 
items requiring the supplier to deliver the item to the beneficiary's 
home, educate the beneficiary about its use, and intermittently 
service the item. 

[49] To set average prices for each DME item on the fee schedule, the 
GPO collects information on the average cost of standard and basic DME 
items from three to four leading manufacturers. 

[50] A GPO official told us that in the event a network supplier is 
able to purchase DME at a lower cost than under a GPO contract, they 
are free to do so. 

[51] The GPO we interviewed is also accredited for utilization 
management and claims management by the Utilization Review 
Accreditation Committee. 

[52] When selecting DME suppliers for its network, the GPO we 
interviewed checks a supplier's accreditation status to ensure the 
supplier is enrolled in Medicare and also checks to make sure the 
supplier has been in business for a certain number of years. 

[53] States generally cover Medicaid services for beneficiaries 
through two major payment approaches: FFS, in which the Medicaid 
program directly pays suppliers for care provided to beneficiaries, 
and capitated managed care, in which the state prospectively pays 
managed care organizations a fixed monthly fee per enrollee to provide 
or arrange for most health care services. 

[54] Diabetic supplies include blood-glucose monitors and test strips. 

[55] Medicaid drug supplemental rebates are in addition to rebates 
already received under the Medicaid national drug agreement. 

[56] To contain prescription drug program costs, Medicaid's PDL 
programs encourage physicians to prescribe drugs on the list, which 
are deemed functionally safe and equivalent to more expensive drugs in 
the same drug class. Nonpreferred drugs are available through prior 
medical authorization. 

[57] There are specialized blood-glucose monitors, such as voice 
synthesized monitors for the visually impaired that are exempted from 
this program. 

[58] CMS chose the CBP items to include from (1) DME in four 
categories--inexpensive or routinely purchased items, items requiring 
frequent and substantial servicing, oxygen and oxygen equipment, and 
other capped rental DME items; (2) supplies necessary for the 
effective use of DME; (3) enteral nutrients, equipment, and supplies; 
and (4) off-the-shelf orthotics. 

[59] In CBP, winning suppliers must provide all items in the product 
category for which they are awarded a contract, and must provide the 
same items to Medicare beneficiaries and non-Medicare customers. 

[60] While CMS also chose to begin CBP by including high-cost and high-
volume DME product categories, these same product categories may not 
provide the same savings under a manufacturer-level program, if the 
item's cost is a small portion of the total Medicare payment. 

[61] The CBP round 1 rebid includes a mail-order diabetic supplies 
product category that includes replacement supplies. Mail-order for 
the round 1 rebid is defined as items that are ordered remotely, for 
example, by phone or e-mail, and that are delivered to a beneficiary's 
residence by a common carrier. 

[62] MMA required that CBP first be implemented in 10 of the largest 
MSAs, and that CMS would choose which MSAs would be used as CBAs. 
MIPPA designated the round 1 rebid CBAs. PPACA increased the number of 
MSAs for round 2. CMS also has discretion to operate CBP regionally or 
nationally for items furnished by mail. 

[63] For CBP, a network is defined as a group of between 2 to 20 small 
suppliers that meet certain requirements, including that they cannot 
independently furnish all items in the product category for which the 
network is submitting a bid to beneficiaries throughout the entire 
CBA, and that they collectively submit a bid as a single entity. 

[64] When there are not five suppliers, at least two suppliers are 
selected. The mail-order diabetic supply product category in regional 
and national CBAs was exempted from the five-supplier minimum. 

[65] See 42 U.S.C. § 1395w-3(a)(5)(A). 

[66] Manufacturers that make DME items that meet the definition of a 
device are subject to regulation by the Food and Drug Administration 
(FDA). FDA defines a home health care medical device as any product or 
equipment that is used in the home environment by people who are ill 
or have disabilities including, for example, ventilators and 
nebulizers, wheelchairs, infusion pumps, and blood-glucose meters. For 
more information, see GAO, Medical Devices: Shortcomings in FDA's 
Premarket Review, Postmarket Surveillance, and Inspections of Device 
Manufacturing Establishments, [hyperlink, 
http://www.gao.gov/products/GAO-09-370T] (Washington, D.C.: June 18, 
2009). 

[67] To ensure suppliers meet these requirements, suppliers must be 
accredited by a CMS-deemed accrediting organization. CMS published a 
final rule in the Federal Register, effective September 27, 2010, to 
clarify and expand the existing enrollment requirements suppliers must 
be in compliance with to obtain and retain their Medicare billing 
privileges; there are 30 supplier standards, including, for example, 
that the supplier meets all state licensure and regulatory 
requirements to furnish certain DME items or services. 75 Fed. Reg. 
52,629 (Aug. 27, 2010) (amending 42 C.F.R. § 424.57(c)). As of October 
2009, suppliers were required to obtain and submit a surety bond in 
the amount of at least $50,000. See 42 U.S.C. § 1395m(a)(16)(B). A 
surety bond is issued by an entity guaranteeing that erroneous 
Medicare payments that result from a supplier's fraudulent or abusive 
billing practices can be recouped by means of the bond. 

[68] Medicare covers drugs typically provided in a physician's office 
under Part B. Section 303(d)(2) of MMA required CMS to implement the 
Competitive Acquisition Program. 

[69] Under a contract with CMS, DME administrative contractors process 
and pay Medicare DME claims. 

[End of section] 

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