[Federal Register Volume 62, Number 136 (Wednesday, July 16, 1997)]
[Notices]
[Pages 38100-38107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-18716]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
[BPD-845-PN]
RIN 0938-AH28
Medicare Program; Special Payment Limits for Home Oxygen
AGENCY: Health Care Financing Administration (HCFA), HHS.
ACTION: Proposed notice.
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SUMMARY: This notice would establish special payment limits for home
oxygen. Currently, payment under the Medicare program for home oxygen
and other items of durable medical equipment is equal to 80 percent of
the lesser of the actual charge for the item or the fee schedule amount
for the item. Based on our experience and after consulting with
representatives of home oxygen suppliers, we have determined that the
Medicare fee schedule amounts for home oxygen are grossly excessive and
are not inherently reasonable because they are excessively high
relative to the payment amount for similar services by the Department
of Veterans Affairs which uses a true competitive payment methodology.
This notice would replace the use of the fee schedule amount and
proposes that payment for home oxygen be equal to 80 percent of the
lesser of the actual charge or a special payment limit set by HCFA,
which would vary by locality. It is intended to prevent continuation of
excessive payment. The special limit would be based on the average
payment amount for home oxygen services by the Department of Veterans
Affairs.
DATES: Comments will be considered if we receive them at the
appropriate address, as provided below, by 5 p.m. on September 15,
1997.
ADDRESSES: Mail written comments (1 original and 3 copies) to the
following address: Health Care Financing Administration, Department of
Health and Human Services, Attention: BPD-845-PN, P.O. Box 26676,
Baltimore, MD 21207-0476.
If you prefer, you may deliver your written comments (1 original
and 3 copies) to one of the following addresses: Room 309-G, Hubert H.
Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201,
or Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.
Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code BPD-845-PN. Comments received timely will be available for
public inspection as they are received, generally beginning
approximately 3 weeks after publication of a document, in Room 309-G of
the Department's offices at 200 Independence Avenue, SW., Washington,
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(phone: (202) 690-7890).
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FOR FURTHER INFORMATION CONTACT: William J. Long (410) 786-5655.
SUPPLEMENTARY INFORMATION:
I. Background
A. Payment Under Reasonable Charges
Payment for durable medical equipment (DME) furnished under Part B
of the Medicare program (Supplementary Medical Insurance) is made
through contractors known as Medicare carriers. Before January 1, 1989,
payment for DME was made on a reasonable charge basis by these
carriers. The methodology used by the carriers to establish reasonable
charges is set forth in sections 1833 and 1842(b) of the Social
Security Act (the Act) and 42 CFR part 405, subpart E of our
regulations. Reasonable charge determinations are generally based on
customary and prevailing charges derived from historic charge data. The
reasonable charge for an item of DME was generally set at the lowest of
the following factors--
The supplier's actual charge for the item.
The supplier's customary charge.
The prevailing charge in the locality for the item. (The
prevailing charge may not exceed the 75th percentile of the customary
charges of suppliers in the locality.)
The inflation indexed charge (IIC). (The IIC is defined in
Sec. 405.509(a) as the lowest of the fee screens used to determine
reasonable charges for services, supplies, and equipment paid on a
reasonable charge basis (excluding physician services) that is in
effect on December 31st of the previous fee screen year, updated by the
inflation adjustment factor.)
B. Exception to the Reasonable Charge Payment Methodology--Special
Reasonable Charge Limits
Section 1842(b)(3) of the Act requires that payments under Part B
of the Medicare program that are made on a charge basis must be
reasonable. Paragraphs (8) and (9) of section 1842(b) provide that we
may establish a special reasonable charge for a category of service if,
after appropriate consultation with representatives of affected
parties, we determine that the standard rules for calculating
reasonable charges result in grossly deficient or grossly excessive
charges.
The applicable regulations are located at Sec. 405.502(g) and
require us to consider the available information that is relevant to
the category of service and establish reasonable charge limits that are
realistic and equitable. The limit on the reasonable charge is an upper
limit to correct a grossly excessive charge or a lower limit to correct
a grossly
[[Page 38101]]
deficient charge. The limit is either a specific dollar amount or is
based on a special method to be used in determining the reasonable
charge.
Section 405.502(g)(1) provides the following examples of
circumstances that may result in grossly deficient or excessive
charges--
The marketplace is not competitive.
Medicare and Medicaid are the sole or primary source of
payment for a service.
The charges involve the use of new technology for which an
extensive charge history does not exist.
The charges do not reflect changing technology, increased
facility with that technology, or changes in acquisition, production,
or supplier costs.
The prevailing charges for a service in a particular
locality are substantially higher or lower than prevailing charges in
other comparable localities, taking into account the relative costs of
furnishing the services in the different localities.
Charges are grossly lower than or exceed acquisition or
production costs.
There have been increases in charges for a service that
cannot be explained by inflation or technology.
The prevailing charges for a service are substantially
higher or lower than the payments made for the service by other
purchasers in the same locality.
Section 405.502(g)(3) requires that we publish proposed payment
limits in the Federal Register. We then allow 60 days for receipt of
public comments on the proposal. After we have considered all timely
comments, we publish in the Federal Register a final notice announcing
the special payment limits and our analyses and responses to the
comments. Section 405.502(g)(3) also provides that the proposed and
final notices must set forth the criteria and circumstances, if any,
under which a carrier may grant an exception to the limit(s).
C. Durable Medical Equipment Fee Schedules
On December 22, 1987, the Congress passed section 4062 of the
Omnibus Budget Reconciliation Act of 1987, Public Law 100-203, which
added section 1834(a) to the Act. Section 1834(a) provides for a fee
schedule payment methodology for DME furnished on or after January 1,
1989. Section 4152(h) of the Omnibus Budget Reconciliation Act of 1990,
Public Law 101-508, delayed the effective date of the oxygen fee
schedule payment methodology until June 1, 1989. (This fee schedule
payment methodology is set forth in 42 CFR part 414, subpart D.)
Sections 1834(a)(1)(A) and (B) of the Act provide that Medicare payment
for DME is equal to 80 percent of the lesser of the actual charge for
the item or the fee schedule amount for the item. Section 1834(a) of
the Act classifies DME into the following payment categories:
Inexpensive or other routinely purchased DME.
Items requiring frequent and substantial servicing.
Customized items.
Oxygen and oxygen equipment.
Other items of DME (capped rental items).
There is a separate methodology for determining the fee schedule
payment amount for each category of DME and the fee schedules are
adjusted annually by a covered item update factor. The covered item
update factor is generally equal to the change in the Consumer Price
Index for all Urban Consumers (CPI-U) for the 12-month period ending
June 30 of the preceding year.
Section 1834(a)(10)(B) of the Act provides that we may apply the
special payment limits authority of paragraphs (8) and (9) of section
1842(b) to covered items of DME and suppliers of these items and
payments under section 1834(a) in the same manner as these provisions
apply to physician services and physician and reasonable charges under
section 1842(b).
D. Current Payment for Home Oxygen
Home oxygen is covered by the Medicare program as DME and is paid
for in accordance with the methodology specified in the oxygen and
oxygen equipment payment category. This methodology is contained in
sections 1834(a)(5) and (9) of the Act. Section 1834(a)(5) requires
that payment for oxygen and oxygen equipment be on a monthly basis. An
add-on for portable oxygen equipment is provided under this section as
well as a 50 percent increase in payments when the prescribed liter
flow is greater than 4 liters of oxygen per minute or a 50 percent
decrease in payments when the prescribed liter flow is less than 1
liter of oxygen per minute.
Section 1834(a)(9)(A) specifies how the monthly payment amount is
computed. Section 1834(a)(9)(A) requires that each Medicare carrier
compute a base local average monthly payment rate per beneficiary as an
amount equal to the total reasonable charges for all items of oxygen
and oxygen equipment (other than portable oxygen equipment) divided by
the total number of months for all beneficiaries receiving oxygen
during 1986. For 1989 and 1990, the base local average monthly payment
rate was equal to 95 percent of the base local average monthly payment
rate increased by the percentage increase in the CPI-U for the six-
month period ending with December 1987. For subsequent years, the
payment rate is increased by the covered item update, generally the
percentage increase in the CPI-U for the 12-month period ending with
June of the previous year.
In addition, section 1834(a)(9)(B) requires the computation of a
national limited monthly payment rate beginning in 1991. The national
limited monthly payment rate is defined as an amount not to exceed 100
percent of the median of all local monthly payment rates computed for
the item or less than 85 percent of the median.
Regulations implementing the statutory provisions of sections
1834(a)(9)(A) and (a)(9)(B) are contained in 42 CFR 414.226.
Currently, there are three types of oxygen delivery systems: gas,
liquid, and concentrators. As a result of the fee schedule methodology,
Medicare pays for home oxygen without regard to the type of system. The
fee schedule amounts are based on an average of the amounts paid for
all three types of oxygen delivery systems during the 1986 base period.
A major expectation under this modality neutral payment methodology was
that suppliers would be able to furnish the most cost effective and
medically appropriate system to their patients.
The current fee schedule amounts for home oxygen are a result of
the fee schedule methodology as specified in sections 1834(a)(5) and
(9) of the Act and Sec. 414.226 as discussed above.
Since the enactment of section 1834(a)(5), we have not utilized the
special reasonable charge limits located at Sec. 405.502(g) to
determine whether the standard fee schedule payment rules for oxygen
result in grossly deficient or excessive charges. However, as explained
below, we are proposing to reduce Medicare's payment amounts for home
oxygen because Medicare's payment amounts for oxygen are substantially
higher than the payments made by another purchaser in the same
locality.
E. Comparison With the Department of Veterans Affairs
The Department of Veterans Affairs (VA) also administers a national
program for the furnishing of oxygen to patients at home. The VA is
different from Medicare and most other payers in that it uses a
competitive bidding methodology for making payment, whereas Medicare
carriers use historical charge data to establish a base local average
monthly payment per
[[Page 38102]]
beneficiary that is used to determine a national limited monthly
payment rate.
The primary objective of a competitive bidding methodology is to
utilize competitive market forces in order to establish a payment
amount that is closer to suppliers' marginal costs of doing business
including a fair profit amount. Under competitive bidding, suppliers
are required to specify in advance the minimum price they will accept
for each product of service, and low bidders are awarded contracts on
either an exclusive or non-exclusive basis to provide these items to
program clients. In that bidders are in competition with one another,
each bidder's bid is likely to reflect its true costs plus a reasonable
rate of profit, because unrealistically high bid prices would ensure a
bidder's exclusion from a particular segment of the market and
unrealistically lower bids would result in reimbursement rates that are
below costs. Therefore, we conclude that a competitive bidding
methodology results in a bid that reflects a supplier's true costs plus
a reasonable profit. In contrast, suppliers do not reveal their true
costs to Medicare because Medicare reimbursement rates for oxygen
reflect a ``reasonable charge'' methodology driven by supplier charges
and then a modality neutral fee schedule derived from charges in a base
year. These payment rates are likely, over time, to have little, if
any, relationship to suppliers' costs.
No other payment methodology that we reviewed takes full advantage
of competitive market forces to the extent of the competitive bidding
methodology. Only in a competitive environment can buyers take full
advantage of the sellers' marginal costs of doing business in that the
potential for lost business is brought to bear on those suppliers whose
prices exceed their competitors' prices. The lowest bid is the best
indicator of the actual costs of supplying the product by an efficient
supplier, plus a reasonable profit. Thus, we believe that the VA's
competitive bidding payment methodology produces a payment amount that
takes advantage of true competitive forces and, therefore, is a better
measure upon which to compare current Medicare payment amounts.
Economic analyses of Medicare reimbursement arrangements have been
undertaken for a variety of health care providers and suppliers over
the past two decades. A principal motivation in these analyses is to
understand how reimbursement arrangements affect the price taxpayers
pay for the purchased good or service. In its 1990 ``Review of
Reimbursement Methods of Other Payers for Durable Medical Equipment,''
Abt Associates Inc., found ample evidence that competitive bidding
encourages suppliers to bid prices closer to their true costs while
Medicare's reimbursement methods offer no such incentives to suppliers.
Abt found that competitive bidding programs for oxygen concentrators at
VA Medical Centers obtained reimbursement levels as much as 70 percent
lower than Medicare. A similar procurement program for concentrators in
the Utah Medicaid program obtained a monthly rental price that was 42
percent below the average Medicare prices in the State for the 1986 to
1988 period. The Minnesota Medicaid program obtained a monthly rental
price for concentrators that was 60 percent below the Medicare prices
in the State for this same three-year period.
An examination of the payment outcomes produced by the Medicare
payment methodology and the reimbursement mechanisms for oxygen
concentrators in Utah and Minnesota indicates that while starting at a
lower level than Medicare, the competitive Medicaid payment levels
decreased from the mid- to late-1980's, while the corresponding
Medicare prices increased over the same period. We believe that the
differences in both the absolute amounts of these prices and the
opposing direction of price changes over time, demonstrate the inherent
inability of Medicare's formulaic, historical, charge-based
reimbursement methodology (whether fee schedule or reasonable charge)
to accurately reflect the true costs of suppliers in the home oxygen
market.
In its yearly home oxygen program report ``National Home Oxygen
Program, FY94 Cost Review'', the VA indicated that the weighted average
payment amount for oxygen concentrators is $125.96 per month. The VA
reports that this amount includes the costs of the portable/back-up
system and refills. In contrast, Medicare pays an average monthly
payment amount of approximately $280 for a stationary oxygen system
(including contents), regardless of the type of oxygen system, plus an
average of $45 per month for a portable system, for a total of $325 per
month. Thus Medicare is paying 2.6 times as much as the VA for an
oxygen concentrator plus portable system and portable refills.
II. Provisions of This Proposed Notice
Based on our experience and after consulting with representatives
of home oxygen suppliers, we have determined that the Medicare fee
schedule payment amounts for home oxygen are not inherently reasonable
because they are grossly excessive relative to the payment amount for
similar services by the VA which uses a true competitive payment
methodology. In accordance with section 1842(b)(8) of the Act, we are
proposing to replace the use of the current fee schedule payment with
special payment limits for home oxygen.
A. Special Payment Limits for Home Oxygen
For home oxygen services furnished to Medicare beneficiaries, we
propose a special payment limit.
The national limited monthly payment rate for stationary home
oxygen services for 1994 would be reduced by 40.11 percent, then
updated by the covered item update for years subsequent to 1994.
Similarly, the 1994 local stationary fee schedule amount for Alaska,
Hawaii, Puerto Rico, and the U.S. Virgin Islands, would be reduced by
40.11 percent, then updated by the covered item update for years
subsequent to 1994.
We arrived at the 40.11 percent adjustment by comparing what
Medicare would have paid for oxygen services in 1994 had it paid the
1994 VA weighted average payment amount for concentrators plus a 30
percent differential ($37.79). Using the VA weighted average of $125.96
for oxygen concentrators plus portable system, plus a 30 percent
differential (i.e., $125.96 + $37.79 = $163.75) instead of Medicare's
average payment amounts for a concentrator, i.e., approximately $325,
would yield a reduction of 40.11 percent in annual costs of stationary
oxygen.
The following chart illustrates this computation. Column B contains
Medicare expenditures for home oxygen by type of oxygen system. We
assumed the ratio of expenditures for portable equipment would be the
same as the ratio of patients using portable equipment, that is, 82.4
percent for concentrators, 16 percent for liquid, and 1.6 percent for
gas. We applied these ratios to total expenditures for portable
equipment, that is, $143 million. Similarly, column C contains the
number of Medicare beneficiary months by type of oxygen system.
Medicare's oxygen concentrator expenditures for 1994 would have been
$617,274,286, as reflected in column E, rather than the actual
$1,210,578,776 had the payment rate calculations been based on VA's
weighted average payment amount for concentrator plus portable systems
(i.e., $125.96) plus a 30 percent differential (i.e., $163.75).
Medicare's total expenditures for home oxygen for 1994 would have
been
[[Page 38103]]
$885,858,597 rather than the $1,479,163,088 had payment been based on
the VA's payment amount for home oxygen plus a 30 percent differential.
Thus, Medicare would have saved $593,304,490 (i.e., $1,479,163,088 less
$885,858,597) or 40.11 percent.
We would point out that this proposed adjustment does not apply to
Medicare's portable add-on even though such adjustment would be
justified in that the VA payment amounts for concentrators include
payment for portable oxygen equipment. We estimate that application of
this proposed adjustment to portable equipment would generate an
additional savings of 4 percent. We specifically solicit comments on
applying the adjustment to portable equipment.
We would also point out that the 40.11 percent reduction could be
further reduced since it does not take into account that the VA also
pays less for gas and liquid equipment and contents than Medicare.
Recomputation of Medicare Oxygen Expenditures
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1994
1994 Expenditures
Expenditures for Based on Revised
Oxygen 1994 Number of Revised Average 1994 VA Concent.
Type of Stationary Oxygen System (Stationary and Beneficiary Monthly Payment Pricing (C X D)
Contents and Months Source 1 Amount Source 2 for
Portable) Source Concentrators B
1 for Liquid and
Gas
A B C D E
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Total............................... 1,479,163,088 4,559,200 ................ 885,858,597
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Concentrators........................... 1,210,578,776 3,769,660 163.75 617,274,286
Liquid.................................. 249,994,932 728,900 ................ 249,994,932
Gas..................................... 18,589,379 60,640 ................ 18,589,379
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Inherent Reasonableness Adjustment
1994 Total Expenditures = (B)..................... 1,479,163,088
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Minus Total 1994 Expenditures Based on VA Concentrator
Prices = (E)......................................... 885,858,597
Amount That Would Have Reduced Total Expenditures had
Expenditures Been Based on VA Prices = (B--E)........ 593,304,490
=================
Result: Reduce 1994 Oxygen Fees By (40.11%)........... 593,304,490/B
Source 1: from 1994 HCFA data files
Source 2: based on weighted average VA monthly rental payment for
concentrators + 30 percent.
This formula recognizes that suppliers' costs of doing business
with Medicare are somewhat higher than the VA. The VA, by its very
nature is a provider as well as a payer of services. The VA's dual role
has resulted in a series of administrative features which reduces the
supplier's costs. In addition, the VA preauthorizes all services before
they are provided to patients thus effectively removing the need for
suppliers to add a cost factor for uncollectible services or bad debts.
Given that Medicare is a payer and not a provider of services, and
given the size and geographic distribution of Medicare's beneficiary
population, it would be difficult to duplicate these administrative
features for the Medicare program. Therefore, in the absence of such
features, some of the cost differences between Medicare and the VA
payments for oxygen can be explained by the higher costs of doing
business with Medicare. Another factor, less easy to quantify, is the
industry's assertion that an exact comparison of the VA's payment
allowances with Medicare's allowances is inappropriate because of the
dynamics of the oxygen marketplace. An economist described in some
detail the potential for a situation in which an industry may sell the
yield of excess capacity in a smaller market for less than the price at
which it could afford to sell the product to a larger market if the
demand were great enough to require additional manufacturing capacity.
This argument rests on the contention that the VA's consumption of
oxygen is so small in comparison to Medicare's that the industry's
pricing reflects the marginal value of excess productivity, not the
full cost of basic production. We also tentatively accept this argument
and have also made allowance for it since sections 1842(b)(8) and
(b)(9) require that a special payment limit be realistic and equitable.
The 30 percent differential is designed to be a proxy for these
costs and other factors identified and unidentified, that may affect
the differences between the prices the VA pays for oxygen and the
prices HCFA pays.
We arrived at the differential by taking account of factors
explicitly known to us and then by doubling the resultant estimate to
assure that we have more than offset the effect of estimating errors
and omissions.
We would note that the industry itself has previously indicated, in
writing, that there is a 15 percent cost disadvantage attributable to
furnishing oxygen services to Medicare beneficiaries as compared with
the VA. We are tentatively accepting the industry's finding and have
included this amount as part of the 30 percent cost differential.
We would expect this differential to be sustained only if the
comments we receive on this notice provide the necessary documentation
and support for the contentions that underlie it. In this connection,
we believe there is a real burden on the industry to provide
documentation to support these contentions. We would note that the
industry's only written contention--that the differential is 15
percent--would have led us to recommend a 45 percent reduction in the
price of stationary oxygen. Thus, we are particularly interested in
receiving comments and further data relating to the factors that
underlie the cost differential and the values assigned to them.
Commentors are encouraged to submit verifiable data.
We are also interested in receiving comments regarding the
implementation of this payment reduction. We realize that a 40.11
percent reduction in payment allowances for oxygen is significant. For
this reason, we would consider alternative implementation
methodologies, such as phasing in the 40.11 percent reduction over a
period of time.
B. Applicability
The initial special payment limits we propose would apply to home
oxygen furnished on or after the effective date of the published final
notice and before January 1, 1998. For home oxygen furnished in
calendar year 1997, the
[[Page 38104]]
special payment limits would be equal to the initial special payment
limits increased by the 1995, 1996, and 1997 covered item update
factors (the factor used to update other items of DME). The covered
item update for 1995, 1996, 1997, and each subsequent year, is defined
in section 1834(a)(14)(B) of the Act as the percentage increase in the
consumer price index-urban for the 12-month period ending with June of
the previous year. The covered item update factor for 1995, 1996, and
1997 is 2.5, 3.0, and 2.8 percent respectively. For each calendar year
after 1997, the special payment limits would be equal to the special
payment limits for the preceding calendar year increased by the covered
item update for the calendar year to which the limits would apply.
C. Proposed Payment for Home Oxygen
We propose that payment for a stationary home oxygen system, which
includes the oxygen delivery device and all supplies and accessories as
well as the contents for the portable system, equal 80 percent of the
lesser of the actual charge for the system or the appropriate special
payment limit, as described in section A. above.
D. Carrier-Granted Exceptions
We are not proposing any circumstances under which a carrier may
grant an exception to the application of the proposed special payment
limit. We solicit comments on any circumstances where such an exception
should be granted.
III. Other Provisions Considered Under This Proposed Notice
In developing this proposed notice, we also considered a number of
other factors and met with industry representatives. These other
factors as well as the industry representatives' major comments are
discussed below.
A. Technological Changes
Although we did not directly rely on technological changes to
determine either that our payments are grossly excessive or that our
proposed special payment limit is realistic and equitable, we did rely
on information regarding technological changes to conclude that
reliance on the VA's competitive bidding methodology was appropriate as
a basis of comparison with Medicare payments.
Under the modality neutral oxygen payment methodology that went
into effect in 1989, suppliers have greatly reduced their operating
costs by taking advantage of less costly means of oxygen delivery.
Suppliers have increased their use of less costly oxygen concentrators
and reduced their use of the more costly gas and liquid systems. The
Office of Inspector General's report ``Trends in Home Oxygen Use''
(OEI-03-91-00710), dated August 1991, found that oxygen concentrator
usage has increased since 1986, both in absolute terms and as a
percentage of total services for all types of systems. According to the
report, from 1986 to 1988 oxygen concentrator usage increased, while
gaseous system usage decreased and liquid system usage remained
constant. In 1986, the number of Medicare patients using oxygen
concentrators was 66 percent. By 1989, 78 percent of all Medicare
patients were using oxygen concentrators.
HCFA data for the period 1987 to 1994 indicates that Medicare
patients using concentrators increased from 68 percent to 82.7 percent.
The VA indicates that 80 percent of their patients used
concentrators in 1994.
Oxygen concentrators produce oxygen for patients by removing
impurities from room air, for example, nitrogen. Patients receive
oxygen from tubing attached to these concentrator machines. Unlike
compressed gas and liquid oxygen, which must be replaced or filled on a
regular basis, concentrators require no contents. Suppliers favor these
devices for home use of oxygen due to the decreased costs associated
with not having to make costly oxygen deliveries to the patient's home.
A 1993 study by ECRI, a nonprofit, healthcare research institute
located in Pennsylvania that evaluates the safety, performance, and
cost effectiveness of healthcare technology, found that suppliers chose
to maximize their profits and minimize the need for ongoing support by
providing oxygen concentrators to patients. ECRI pointed out in
testimony before the Senate Appropriations Subcommittee on Labor,
Health and Human Services on November 2, 1994, that it found that
suppliers are excessively reimbursed for oxygen services. ECRI
testified: ``The acquisition cost of oxygen concentrators, as reported
by the manufacturers to us in 1993, ranged from $965 to $1,175 for
units with a 5-liter per minute capacity.''
With regard to maintenance requirements of oxygen concentrators,
ECRI testified: ``They have, for all practical purposes, an unlimited
service life as all components may be replaced. We have estimated the
service frequency of the components through review of the service
manuals and interviews with service centers and DME providers.'' ECRI
goes on to estimate that the total annual cost for the maintenance of a
concentrator is $405.
Assuming an oxygen concentrator has a useful life of 5 years, an
oxygen supplier's equipment cost per month would be about $17 (i.e.,
$1,000 / 60 months) and another $34 in cost for maintenance (i.e., $405
/ 12 months) for a total cost of $51 per month to the supplier.
Another technological improvement in the provision of oxygen
services is the use of oxygen conserving devices. These devices, which
conserve oxygen when the patient is not inhaling, can reduce the amount
of oxygen normally consumed by up to 50 percent. We are unsure of the
extent to which these devices are used with oxygen equipment and
specifically request comments concerning the frequency with which these
devices are used.
By taking into account the increased use of less costly oxygen
concentrators by suppliers since the base year (i.e., 1986), we
estimate that suppliers are incurring 6.8 percent less in costs than
they would have if this increase had not taken place. We determined
this percentage decrease by computing the increased use of less costly
oxygen concentrators and applied the applicable charge for the less
costly concentrators to the increase in utilization of these systems.
We presented our analysis of the increased use of concentrators to the
industry representatives. Their comments and our responses are
discussed in C. below.
B. Payments Made by Other Purchasers
Similarly, we did not directly rely on payments made by other
purchasers to determine either that our payments are grossly excessive
or that our proposed special payment limit is realistic and equitable.
However, we did rely on such information to conclude that reliance on
the VA's competitive bidding methodology was appropriate as a basis of
comparison with Medicare payments.
Early this year, we requested payment data from other insurers to
compare Medicare's payment amounts. In most instances, the payment
amounts of other insurers are the same as or more than Medicare's
payment amounts. The reason for the payment similarities is that many
insurers use Medicare's current fee schedule payment methodology or its
previous reasonable charge methodology. In either case, the resulting
payment allowances are very near Medicare's current fees. This finding
does not necessarily indicate that Medicare's allowances are not
grossly excessive. The other insurers' payment allowances may also be
grossly
[[Page 38105]]
excessive. In other words, if Medicare's allowances are excessive using
a fee schedule or reasonable charge methodology, and other insurers use
the same or a similar methodology, then the other insurers' allowances
will also be excessive. It appears from the data of the other insurers
that Medicare is a model for other insurers when it comes to making
payment for home oxygen and that most other insurers duplicate
Medicare's payment methodology resulting in very similar payment
amounts.
Also, a number of Medicaid insurers, such as New York, Ohio, and
Minnesota pay significantly less for home oxygen than Medicare. All of
these States pay less than $200 per month for a stationary oxygen
system while the 1995 Medicare payment in each of these States is $308,
$308, and $262 per month respectively. This indicates to us that there
are a number of payers, typically those that use a different payment
methodology or base period other than Medicare's, that are paying
significantly less than Medicare yet attract a sufficient number of
suppliers to furnish home oxygen to their insured beneficiaries. This
further indicates to us that in at least these three States, the
Medicare payment amounts for home oxygen are grossly excessive in
comparison with these States' payment amounts.
However, because of the mixed reporting by insurers other than the
VA, we are unable to reach any definitive conclusions regarding the
reasonableness of Medicare's payments on a national basis with respect
to other payers other than the VA. We specifically solicit comments
with regard to payments by other insurers. We would point out that a
comparison to many insurers may be inappropriate due to the other
insurers' heavy reliance on Medicare's payment methodology. As such, a
comparison would merely mirror Medicare's payment amounts. We would
also point out, however, that some States pay significantly less than
what Medicare pays for the same service yet are able to attract a
sufficient number of suppliers to provide oxygen services. In
particular, the VA pays significantly less for home oxygen than does
Medicare and manages to attract a sufficient number of suppliers to
provide its patients with home oxygen.
Of the States responding to our request for payment data, 22 use a
fee schedule similar to Medicare's fee schedule. Two others use a
reasonable charge methodology and another State reports using a cost
methodology. Of the remaining States, three use a negotiated rate
methodology, two use a competitive bidding methodology, and a single
State pays based on a percent of the submitted charge.
C. Supplier Consultation
Section 1842(b)(9)(A) of the Act requires that we consult with
representatives of the suppliers likely to be affected by any change in
payment before making a determination that a fee schedule amount is not
inherently reasonable by reason of its grossly excessive or deficient
amount.
Over the past two and one half years, we had numerous discussions
with supplier representatives concerning Medicare payment amounts for
home oxygen services. We met with industry representatives to discuss
the use of VA data for purposes of comparing the VA payment amounts
with Medicare's payment amounts. On August 30, 1995, we held a public
meeting with supplier representatives to formally discuss issues
relating to Medicare payment for home oxygen. Since the August 30th
meeting, we had several rounds of discussions with industry
representatives. After publication of this proposed notice, we expect
to receive additional comments that will be considered in making a
determination regarding whether our payment amounts for home oxygen are
inherently reasonable. The following is a synopsis of the comments and
concerns of the supplier representatives as expressed at and since the
August 30th meeting.
The supplier representatives wanted to know if, after studying our
findings, they could submit additional comments. We indicated that we
would consider any comments they chose to submit from and including the
August 30th meeting until the end of the 60-day comment period. The
major comments we received are included in the discussion below. All
comments received during the 60-day comment period will be discussed in
a final notice. Moreover, we may elect to engage in further
consultation with industry representatives if the comments we receive
make such further consultation necessary or appropriate.
Some supplier representatives expressed concern with the data we
used in estimating that suppliers are incurring 6.8 percent less in
costs than they would have incurred had they not taken advantage of
less costly oxygen delivery systems. We indicated that we would share
these data with them and did meet with selected supplier
representatives on September 8, 1995 to review these data.
Some supplier representatives asserted that suppliers of oxygen
equipment are using more costly liquid oxygen systems as a percentage
of all oxygen systems than they were using during the base period and
that more patients are using portable systems than were used during the
base period. We agree with the supplier representatives that suppliers
of oxygen equipment are using more costly liquid oxygen systems than
used during the base period, however, since it is impossible to
ascertain from our data the amount of oxygen being used in portable
oxygen systems or to ascertain the extent of patients utilizing oxygen
conserving devices, we are unable to either validate or challenge the
supplier representatives' assertions at this time. Therefore, until we
are able to obtain sufficient data to address these assertions, we will
not use data that indicates that suppliers are using less costly oxygen
delivery systems in the inherent reasonableness process.
Some supplier representatives have challenged the VA data
indicating that we should conduct an independent recalculation and
verification of the VA data. We do not believe it would be appropriate
for us to conduct a recalculation and verification of a VA report. We
have discussed with the VA the information contained in its report on a
number of occasions. The VA indicated confidence in its report and we
have no evidence upon which to question either the VA's integrity or
the accuracy of its fundamental calculations.
In its FY 1994 report, which is used for analysis and decision
making in this notice, the developers of the report have included all
commercial costs for all facilities. In response to suggestions from
the oxygen industry and others, the VA's National Center for Cost
Containment worked closely with these facilities in the development and
reporting of data to assure the accuracy of these cost figures.
Therefore, the FY 1994 Cost Review represents an exacting effort to
gather accurate cost information from the 164 facilities that have home
oxygen programs. An improvement over previous year's analysis is the
development of ``weighted averages'' for each of the monthly average
costs per patient modality. This has provided for a more meaningful
comparison with Medicare data as well as an overview of the VA Home
Oxygen Program nationally, because weighted averages account for the
extreme variances in costs for a small number of facilities.
Some supplier representatives indicated that they believe that we
have been indiscriminately and inappropriately selective in our choice
of the VA program as the sole comparative payor to Medicare and that
[[Page 38106]]
we have ignored information solicited from other payers. We have
addressed this issue above indicating that the mixed reporting by these
other insurers did not furnish any conclusive information regarding the
reasonableness of Medicare's payments on a national basis. We would
point out that a comparison to many insurers may be inappropriate due
to the other insurers' heavy reliance on Medicare's payment
methodology. As such, a comparison would merely mirror Medicare's
payment amounts. We would also point out, however, that some States pay
significantly less than what Medicare pays for the same service yet are
able to attract a sufficient number of suppliers to provide oxygen
services. In particular, the VA pays significantly less for home oxygen
than does Medicare and manages to attract a sufficient number of
suppliers to provide its patients with home oxygen.
Some supplier representatives indicated that they believe that the
VA payment amount is ``unbundled,'' that is, it represents only the
cost of the oxygen concentrator and not the oxygen contents of a
portable system, accessories used with the concentrator, set-up and
delivery charges, etc. However, the VA report states: ``This year's
figures include costs for all components of the modalities including
refills to the portable/back-up or system itself, as appropriate.''
(See page vii of the FY 1994 VA report.) This assertion indicates to us
that the VA's payment amounts include not only the same bundle of
services as is included in Medicare's bundled rate for oxygen
concentrators but also the portable equipment that is paid separately
by Medicare.
Some supplier representatives indicated that our analysis failed to
consider supplier costs. We do not believe that we are required to
include an analysis of supplier costs. Although the regulations at
Sec. 405.502(g)(1)(iv) allow us to consider supplier costs as an
example of factors in making an inherent reasonableness determination,
they do not require such consideration. Moreover, we did not consider
supplier costs, in part, because, in our experience, such costs are
unattainable. A United States General Accounting Office Report to
Congress entitled: ``Medicare, Effect of Durable Medical Equipment Fee
Schedules on Six Suppliers' Profits'' (GAO/HRD-92-22), dated November,
1991, states: ``DME suppliers do not maintain records in a manner that
permits direct computation of costs and profits by DME item. * * *''
Although we have not evaluated supplier costs directly, we have
considered supplier costs indirectly by relying on the VA's competitive
bidding methodology to draw our conclusions regarding the relationship
of costs to Medicare payment.
As discussed previously, under the VA's competitive bidding
methodology, bidders make bids that reflect their true costs (plus a
reasonable rate of profit).
IV. Regulatory Impact Statement
A. Executive Order 12866
Executive Order 12866 (E.O. 12866) requires us to prepare an
analysis for any notice that meets one of the E.O. 12866 criteria for a
``significant regulatory action''; that is, that may--
Have an annual effect on the economy of $100 million or
more or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or tribal governments or
communities;
Create a serious inconsistency or otherwise interfere with
an action taken or planned by another agency;
Materially alter the budgetary impact of entitlements,
grants, user fees, or loan programs or the rights and obligations of
recipients thereof; or
Raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles set forth in
E.O. 12866.
This proposed notice would reduce unnecessary Medicare program
expenditures for home oxygen services. Currently, payment under the
Medicare program for home oxygen services is equal to 80 percent of the
lesser of the actual charge for the item or the fee schedule amount for
the item. Under this proposed notice, payment would be equal to 80
percent of the lesser of the actual charge or the appropriate special
payment limit proposed by this notice.
We are proposing special payment limits for home oxygen services
that would reduce the national limited monthly payment rate for home
oxygen services for 1994 by 40.11 percent, then updated by the covered
item update for years subsequent to 1994. Similarly, the 1994 local fee
schedule amount for Alaska, Hawaii, Puerto Rico, and the U.S. Virgin
Islands, would be reduced by 40.11 percent, then updated by the covered
item update for years subsequent to 1994.
We estimate that the proposed special payment limits would produce
the following savings:
[By fiscal year, savings in millions of dollars]
1997............................................................ $120
1998............................................................ 200
1999............................................................ 230
2000............................................................ 240
2001............................................................ 260
We have determined that the provisions of this proposed notice
would meet the $100 million criterion. Therefore, it is a significant
regulatory action and an impact analysis under E.O. 12866 is required.
We expect suppliers of home oxygen services and beneficiaries to be
affected by this special payment limit. We do not have sufficient data
to predict exactly the nature of the impact of this proposed notice or
the magnitude of such impact. Below, we discuss likely outcomes.
1. Suppliers
Suppliers of home oxygen would review the special payment limits to
determine what strategy would maximize their profits. In response to a
final notice that implemented the special payment limits as the
proposed notice, we expect them to compare this limit to their costs of
furnishing home oxygen to Medicare beneficiaries. We would expect that
as a result of this comparison, many suppliers may seek to economize by
reducing unnecessary expenditures. Many suppliers may consider whether
or not to continue to accept assignment on Medicare claims. Suppliers
that provide mostly home oxygen services would be more adversely
affected by the special payment limits than those suppliers that also
provide the full range of durable medical equipment in addition to
oxygen because they will have other revenue sources from which to
obtain income.
2. Beneficiaries
The effect of the proposed special payment limits on beneficiaries
depends on whether there is a significant local change in the
assignment rate. If the assignment rate were to remain the same,
beneficiaries may expect lower coinsurance since the fee schedule
amount for oxygen would be lower. However, if the assignment rate goes
down, beneficiaries may have to make a greater effort to find a
supplier that accepts assignment or have increased out-of-pocket
expenses.
3. Conclusion
The primary benefit expected to result from this proposal is the
anticipated reduction in the cost to the Medicare program of home
oxygen services and reduced coinsurance payments by beneficiaries to
the extent that suppliers continue to accept assignment. The
disadvantages that could result from this proposed special payment
limit
[[Page 38107]]
would be more initial out-of-pocket expenses for the beneficiary if the
assignment rate is reduced.
B. Regulatory Flexibility Act
We generally prepare a regulatory flexibility analysis that is
consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601
through 612), unless we certify that a notice would not have a
significant economic impact on a substantial number of small entities.
For purposes of the RFA, all suppliers are considered to be small
entities. Individuals and States are not included in the definition of
a small entity.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a notice may have a significant impact on
the operations of a substantial number of small rural hospitals. Such
an analysis must conform to the provisions of section 603 of the RFA.
For purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside of a Metropolitan
Statistical Area and has fewer than 50 beds.
In determining whether to adjust payment rates under section
1842(b)(8)(A) and (9)(A) of the Act, we are required to consider the
potential impacts on quality, access, and beneficiary liability of the
adjustment, including the likely effects on assignment rates,
reasonable charge reductions on unassigned claims, and participation
rates of suppliers.
This proposed reduction in Medicare payment would affect suppliers
of home oxygen. These suppliers would have their payment allowances for
Medicare home oxygen patients reduced. Suppliers can choose to accept
assignment, which means they agree to accept Medicare's approved amount
as payment in full. It is possible that, as a consequence of our
reducing payments for home oxygen, the number of suppliers accepting
assignment of a beneficiary's claim for Medicare payment for these
services may decrease if suppliers choose instead to charge
beneficiaries the full difference between the amount charged and the
lower Medicare payment. Also, the number of suppliers who elect to
become or remain ``participating suppliers'' may decrease as a result
of reduced payments for home oxygen. Under the Medicare participation
program, a supplier that decides to become a ``participating supplier''
must agree to accept assignment for all covered services furnished to
Medicare beneficiaries. Participating suppliers benefit by being listed
in the Medicare Participating Physician/Supplier Directories, known as
Medpards, which are compiled by the Medicare carriers and furnished to
various senior citizen groups. A Medicare beneficiary can obtain the
Medpard for his or her State from the Medicare carrier.
Suppliers who do not accept assignment and charge more than the
Medicare approved amount can collect the balance; that is, the actual
charge minus Medicare payment, from the beneficiary. Therefore,
beneficiaries who receive services from suppliers who do not accept
assignment are exposed to greater financial liability than those who
receive services from a supplier taking assignment. As a result,
Medicare beneficiaries may choose to deal with suppliers who accept
assignment in order to reduce their financial liability. We expect that
this special payment limit would have minimal effects on the quality of
home oxygen services furnished to beneficiaries since we do not expect
suppliers to reduce the quality or the type of services provided. Also,
we expect only minimal effects on beneficiary access to home oxygen,
even in rural areas, since we do not expect many suppliers to
discontinue supplying oxygen.
Although a payment reduction of 40.11 percent for home oxygen
appears large, it is a result of Medicare's grossly excessive payment
allowances that have resulted in windfall profits. We would expect
suppliers to adjust to the elimination of this windfall accordingly.
In accordance with the provisions of Executive Order 12866, this
notice was reviewed by the Office of Management and Budget.
IV. Paperwork Reduction Act
This notice does not impose information collection and
recordkeeping requirements. Consequently, it need not be reviewed by
the Office of Management and Budget under the authority of the
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 through 3511).
V. Response to Comments
Because of the large number of items of correspondence we normally
receive on Federal Register documents published for comment, we are not
able to acknowledge or respond to them individually. We will consider
all comments we receive by the date and time specified in the DATES
section of this preamble, and, if we proceed with a subsequent
document, we will respond to the comments in the preamble to that
document. Moreover, we may elect to engage in further consultation with
industry representatives if comments we receive make such further
consultation necessary or appropriate.
Authority: Sections 1834(a) and 1842(b) of the Social Security
Act (42 U.S.C. 1395m and 1395u).
(Catalog of Federal Domestic Assistance Program No. 93.774,
Medicare--Supplementary Medical Insurance Program)
Dated: April 14, 1997.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
Dated: May 6, 1997.
Donna E. Shalala,
Secretary.
[FR Doc. 97-18716 Filed 7-11-97; 1:30 pm]
BILLING CODE 4120-03-P
