	Background

CMS, an agency within HHS, is responsible for much of the federal  government’s multi-billion-dollar payments for health care, primarily  through the Medicare and Medicaid programs. Medicare part B pays for most medical equipment and supplies using a  series of fee schedules. Payment Approaches Lack Flexibility to Keep Pace with Market Changes

Medicare’s size and complexity make it extremely challenging to develop  payment methods that prudently reimburse providers while promoting  beneficiary access to items and services. In addition, Medicare has had difficulty relying on  competition to determine prices. Prior to 1987, Medicare payments for medical equipment and supplies  were based on supplier charges, subject to some limitations. As a result,  disparities between fee schedule amounts and market prices developed  over time, and Medicare significantly overpaid for some medical  equipment and supplies. Given the  latitude manufacturers have in setting AWPs, Medicare’s payments are  often not related to market prices that physicians and suppliers actually  pay for the products. BBA Reforms Sought to Improve Medicare’s Ability to Set Appropriate Rates

Despite such dramatic illustrations of disparities between Medicare  payments and prices widely available to others acquiring medical  equipment and supplies and covered outpatient drugs, Medicare has not  had the tools to respond quickly in such instances. In 1997, in response to concerns about HCFA’s difficulties in adjusting  payment rates determined to be excessive, the Congress included a  provision in the BBA that gave HCFA authority to use a streamlined  inherent reasonableness process to adjust payments for medical  equipment and supplies and covered outpatient drugs by up to 15 percent  a year. One major problem CMS has when going to the marketplace to collect  information is that it cannot determine the specific products Medicare is  paying for when carriers process claims for medical equipment and  supplies.
What GAO Found

Medicare has paid higher than market rates for various medical equipment and supplies and often considerably higher than provider acquisition costs for Medicare-covered outpatient drugs. Congress has enacted a series of legislative changes affecting payment methods and payment adjustment authority for medical equipment and supplies and outpatient drugs since the late 1980s. However, progress in setting appropriate rates has been mixed, owing, in part, to various constraints faced by the agency responsible for administering Medicare--the Centers for Medicare and Medicaid Services (CMS). Because of the program's size, scope, and role as a public payer, Medicare has limited options to set and adjust payments for medical equipment, supplies and outpatient drugs. Medicare's method of paying for medical equipment and supplies is through fee schedules that remain tied to suppliers' historical charges to Medicare rather than market prices. Medicare's payment approaches lack flexibility to keep pace with market changes, and, as a result, Medicare often pays higher prices than other public payers. Previous efforts to lower Medicare's overly generous payments suggest several lessons. First, payment changes are most effectively implemented when the process used to set or adjust a rate is defensible. Second, the information on Medicare claims for medical equipment and supplies is not specific enough to enable CMS to determine which products Medicare is actually paying for. Also, for the foreseeable future, CMS will have to continue to rely on fee schedules based on historical charges in setting payment rates for medical equipment and supply items.