	Background

The Medicare Supplementary Medical Insurance Program (Part B) currently covers a wide variety of durable medical equipment, prosthetics, orthotics, and other medical supplies (DMEPOS) if they are medically necessary and are prescribed by a physician. Durable medical equipment (DME) is equipment that (1) can withstand repeated use, (2) has an expected life of at least three years (effective with respect to items classified as DME after January 1, 2012), (3) is used to serve a medical purpose, (4) generally is not useful in the absence of an illness or injury, and (5) is appropriate for use in the home. Examples include hospital beds, blood glucose monitors, and wheelchairs. Prosthetics (P) replace all or part of a body organ, such as colostomy bags, pacemakers, and breast prostheses for post-mastectomy patients. Medicare also covers some items or supplies (S), such as disposable surgical dressings when used in conjunction with DMEPOS. Medicare generally pays for most DMEPOS on the basis of fee schedules. Medicare pays 80% of the fee schedule amount, while the beneficiary is responsible for paying the remaining 20% (co-insurance), in addition to any unmet deductible. Unless otherwise specified by Congress, fee schedule amounts are updated each year by a measure of price inflation and economy-wide productivity. However, investigations by the Government Accountability Office (GAO) and the Office of the Inspector General (OIG) in the Department of Health and Human Services (HHS) have shown that Medicare pays above-market prices for certain items of DME. Such overpayments may be due partly to the fee schedule mechanism of payment, which does not reflect market changes, such as new and less-expensive technologies, changes in production or supplier costs, or variations in prices in comparable localities. 108-173 , MMA) required the Secretary of HHS to establish a competitive acquisition program (also known as competitive bidding) under which prices for selected DMEPOS sold in specified areas would be determined not by a fee schedule, but by suppliers' bids. The first round of the competitive bidding program began on July 1, 2008, but was suspended, contracts dissolved, and a rebid required due to implementation concerns. Between October and December 2009, DMEPOS suppliers submitted new bids for nine categories of equipment in nine competitive bidding areas; payments based on the bids of winning suppliers went into effect on January 1, 2011 (referred to in this report as Round 1 Rebid). Payments based on the re-compete are expected to go into effect on January 1, 2014. The Secretary is required to extend the program or apply competitively bid rates to remaining areas by 2016. Competitive Bidding Areas (CBAs) for Round 1 were determined through a multi-step process. In limited circumstances, non-winning suppliers are allowed to sell competitively bid items, and certain suppliers are exempt from the program, as discussed below. (Outside of the competitive bidding program, assignment is optional for Medicare-participating DMEPOS suppliers. The final rule for the Competitive Bidding Program also established additional safeguards and payment adjustments. MIPPA expanded the scope of the study to include an analysis of (1) beneficiary access to items and services including the impact on access of awarding contracts to bidders that did not have a physical presence in the area where they received the contract or had not previously provided the product category they were contracted to provide; (2) beneficiary satisfaction with the program and cost savings; (3) costs to the suppliers of participating in the program and recommendations on ways to reduce those costs without compromising quality standards or savings to Medicare; (4) the impact of the program on small businesses; (5) the impact on use of different items and services within the same Healthcare Common Procedure Coding System (HCPCS) code; (6) the costs to CMS, including payments to contractors, for administering the program compared to administration of the fee schedule, in comparison with relative savings of the program; (7) the impact on access, Medicare spending, and beneficiary spending of any difference in treatment for diabetic testing supplies depending on how the supplies are furnished; and, (8) other topics as the GAO determines appropriate.
The Medicare Supplementary Medical Insurance Program (Part B) currently covers a wide variety of durable medical equipment, prosthetics, orthotics, and other medical supplies (DMEPOS) if they are medically necessary and are prescribed by a physician.
Durable medical equipment (DME) is equipment that (1) can withstand repeated use, (2) has an expected life of at least three years (effective for items classified as DME after January 1, 2012), (3) is used to serve a medical purpose, (4) generally is not useful in the absence of an illness or injury, and (5) is appropriate for use in the home. Examples include hospital beds, blood glucose monitors, and wheelchairs. Prosthetic and orthotic devices (PO) are items that replace all or part of an internal body organ, such as colostomy bags, as well as such items as leg braces and artificial legs, arms, and eyes. Medicare also covers some items or supplies (S), such as disposable surgical dressings that do not meet the definition of DME or PO.
Medicare generally pays for most DMEPOS on the basis of fee schedules. Medicare pays 80% of the fee schedule amount, while the beneficiary is responsible for the remaining 20%, plus any unmet deductible. Unless otherwise specified by Congress, fee schedule amounts are updated yearly by a measure of inflation and economy-wide productivity. However, studies by federal agencies have shown that Medicare pays above-market prices for certain items of DME. Such overpayments may be due partly to the fee schedule mechanism of payment, which does not reflect market changes, such as new and less-expensive technologies, changes in production or supplier costs, or geographic price variations.
Congress enacted legislation to establish a Medicare competitive acquisition program (competitive bidding) under which prices for selected DMEPOS sold in specified areas are determined by suppliers' bids rather than fee schedules. The first round of the program began on July 1, 2008, but was suspended due to implementation concerns. Suppliers submitted new bids for the first round "rebid," and payments based on winning suppliers' bids went into place in the first nine areas on January 1, 2011. Round 2 is set to begin in 91 additional areas on July 1, 2013. The process for re-competing the contracts for Round 1 has started, and payments based on winning bids are expected to be in place on January 1, 2014. Starting in 2016, the Secretary of Health and Human Services (the Secretary) is required to either expand competitive bidding to additional areas, or apply information gained from the program to adjust fee schedule amounts in remaining areas.
Competitive bidding has been shown to decrease Medicare payments for DMEPOS, leading to savings for Medicare and lower beneficiary cost sharing. Evidence from the competitive bidding demonstration and the Round 1 Rebid also suggests, based on evaluations of the program thus far, that competition did not deteriorate beneficiary access to DMEPOS, or the quality and product selection available to them.
In general, the technical implementation concerns that halted the 2008 competition appear to have been addressed, however, concerns over the auction methodology have been raised, drawing into question whether the competitively bid payments are an accurate reflection of the market for DMEPOS. Finally, the competitive bidding program will result in fewer suppliers being allowed to sell competitively bid items to Medicare beneficiaries, though all suppliers may continue to sell non-competitively bid items to beneficiaries and may repair competitively bid and non-competitively bid DMEPOS.