98-963. Medicare Program; Additional Supplier Standards

[Federal Register Volume 63, Number 12 (Tuesday, January 20, 1998)]
[Proposed Rules]
[Pages 2926-2939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-963]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 424

[HCFA-1864-P]
RIN 0938-AH19


Medicare Program; Additional Supplier Standards

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would establish additional standards for an 
entity to qualify as a Medicare supplier for purposes of submitting 
claims for durable medical equipment, prosthetics, orthotics, and 
supplies (DMEPOS). This proposed rule would establish additional 
standards that must be satisfied before a DMEPOS supplier could receive 
payment from the Medicare program. The Social Security Act Amendments 
of 1994 require that a DMEPOS supplier meet standards related to 
compliance with State and Federal licensure requirements, maintaining a 
physical facility on an appropriate site, proof of appropriate 
liability insurance, and other standards the Secretary may specify.

DATES: Comments will be considered if we receive them at the 
appropriate address, as provided below, no later than 5 p.m. on March 
23, 1998.

ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: HCFA-1864-P, P.O. Box 26676, 
Baltimore, MD 21207.
    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 HCFA-1864-P. 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, 
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m. 
(phone: [phone]). Electronically submitted comments will also be 
available for public inspection at the Independence Avenue address.

FOR FURTHER INFORMATION CONTACT: Larry Bonander, [phone].

SUPPLEMENTARY INFORMATION:

I. Background

    Medicare services are furnished by two types of entities, that is, 
providers and suppliers. The term ``provider'', as defined in our 
regulations at Sec. 400.202, means a hospital, a rural primary care 
hospital, a skilled nursing facility, a comprehensive outpatient 
rehabilitation facility, a home health agency, or a hospice that has in 
effect an agreement to participate in Medicare. A clinic, a 
rehabilitation agency, or a public health agency that has a similar 
agreement to furnish outpatient physical therapy or speech pathology 
services, or a community mental health center with a similar agreement 
to furnish partial hospitalization services, is also considered a 
provider (see sections 1861(u) and 1866(e) of the Social Security Act 
(the Act)).
    In general, a supplier is an individual or entity that furnishes 
certain types of medical and other health services under Medicare Part 
B. There are different definitions of the term ``supplier'' and 
specific regulations governing different types of suppliers. A supplier 
that furnishes durable medical equipment, prosthetics, orthotics, and 
supplies (DMEPOS) is one category of supplier. Other categories of 
suppliers could include, for example, physicians, nurse practitioners, 
and physical therapists. The term ``DMEPOS'' encompasses the types of 
items included in the definition of medical equipment and supplies 
found at section 1834(j)(5) of the Act.
    For purposes of DMEPOS supplier standards, the term ``supplier'' is 
currently defined in Sec. 424.57(a) of our regulations as an entity or 
individual, including a physician or Part A provider, that sells or 
rents Part B covered DMEPOS items to Medicare beneficiaries, and that 
meets certain standards. We are retaining this

[[Page 2927]]

definition for purposes of identifying those entities that must meet 
DMEPOS supplier standards in order to obtain a supplier number. Those 
individuals or entities that do not furnish DMEPOS items but only 
furnish other types of health care services, such as physicians' 
services or nurse practitioner services, would not be subject to these 
standards. Moreover, a supplier number is not necessary before Medicare 
payment can be made with respect to medical equipment and supplies 
furnished ``incident to'' a physician's service.

Durable Medical Equipment

    Durable medical equipment (DME) is included in the definition of 
``medical and other health services'' as indicated by section 
1861(s)(6) of the Act. The term DME is defined at section 1861(n) of 
the Act. This definition, in part, excludes from coverage as DME, items 
furnished in skilled nursing facilities and hospitals. (Equipment 
furnished in those facilities is paid for as part of their routine or 
ancillary costs.) The term is also defined in Sec. 414.202 of our 
regulations as meaning ``equipment, furnished by a supplier or a home 
health agency that--
    (1) Can withstand repeated use;
    (2) Is primarily and customarily used to serve a medical purpose;
    (3) Generally is not useful to an individual in the absence of an 
illness or injury; and
    (4) Is appropriate for use in the home.'' Examples of DME include 
such items as blood glucose monitors, hospital beds, nebulizers, oxygen 
delivery systems, and wheelchairs.

Prosthetic Devices

    Prosthetic devices are also included in the definition of ``medical 
and other health services'' under section 1861(s)(8) of the Act. They 
are defined in this section of the Act as ``devices (other than dental) 
which replace all or part of an internal body organ (including 
colostomy bags and supplies directly related to colostomy care), 
including replacement of such devices, and including one pair of 
conventional eyeglasses or contact lenses furnished subsequent to each 
cataract surgery with insertion of an intraocular lens.'' Other 
examples of prosthetic devices include cardiac pacemakers, cochlear 
implants, electrical continence aids, electrical nerve stimulators, and 
tracheostomy speaking valves.

Orthotics and Prosthetics

    Section 1861(s)(9) of the Act provides for the coverage of ``leg, 
arm, back, and neck braces, and artificial legs, arms, and eyes * * *'' 
under the term ``medical and other health services.'' As indicated by 
section 1834(h)(4)(C) of the Act, these items are often referred to as 
``orthotics and prosthetics.''

Supplies

    Section 1861(s)(5) of the Act includes ``surgical dressings, and 
splints, casts, and other devices used for reduction of fractures and 
dislocations;'' as one of the ``medical and other health services'' 
that is covered by Medicare. Other items that may be furnished by 
suppliers would include (among others):
    (1) Prescription drugs used in immunosuppressive therapy furnished 
to an individual who receives an organ transplant for which payment is 
made under this title, and that are furnished within a certain time 
period after the date of the transplant procedure as noted at section 
1861(s)(2)(J) of the Act.
    (2) Extra-depth shoes with inserts or custom molded shoes with 
inserts for an individual with diabetes as listed at section 
1861(s)(12) of the Act.
    (3) Home dialysis supplies and equipment, self-care home dialysis 
support services, and institutional dialysis services and supplies 
included at section 1861(s)(2)(F) of the Act.
    (4) Oral drugs prescribed for use as an anticancer therapeutic 
agent as noted at section 1861(s)(2)(Q) of the Act.
    (5) Self-administered erythropoietin (as described in section 
1861(s)(2)(O) of the Act).

II. Publication of Final Rule With Comment Period

    On December 11, 1995, we published a final rule with comment period 
in the Federal Register (60 FR 63440) to reflect the changes made to 
section 1834 of the Act by section 131 of the Social Security Act 
Amendments of 1994 (SSA '94, Public Law 103-432, enacted on October 31, 
1994). In the SSA '94, a new subsection (j) was added to section 1834 
of the Act that established additional requirements that a DMEPOS 
supplier must meet in order to obtain a supplier number. The final rule 
set forth additional supplier standards consistent with the new 
subsection by revising Sec. 424.57(c) of our regulations.
    The standards in the final rule included all of the standards that 
were in the prior Sec. 424.57(c) and those standards specifically 
required by section 1834(j)(1)(B)(ii)(I) through (III) of the Act. The 
standards specifically identified in section 1834(j)(1)(B)(ii) require 
that a DME supplier--
    (1) Comply with all applicable State and Federal licensure and 
regulatory requirements;
    (2) Maintain a physical facility on an appropriate site; and
    (3) Have proof of appropriate liability insurance. Congress also 
has expressly delegated authority to the Secretary to specify other 
requirements through section 1834(j)(1)(B)(ii)(IV) of the Act.
    In SSA '94, the Congress enacted numerous substantive provisions 
designed to protect beneficiaries from abusive practices by suppliers. 
These legislative changes indicate that the Congress has serious 
concerns about the business practices employed by certain suppliers, 
and that beneficiaries require additional protection from these 
practices. We believe it is the Congress' intent to strengthen existing 
standards in order to protect the public interest. We also view this 
proposed rule as another tool to further our efforts to prevent fraud 
and abuse in the Medicare program. After consulting with 
representatives of medical equipment and supply companies, carriers, 
and consumers, we are now proposing to establish additional standards 
to protect beneficiaries. These standards would not apply to physicians 
or other practitioners that are only submitting claims for coverage of 
items that are furnished as incident to their professional services. 
However, in order to submit claims for items that are not covered under 
the incident to benefit, physicians must obtain a supplier number and 
meet supplier standards.

III. Proposed Revisions

    Medicare will not pay for any items furnished by a DMEPOS supplier 
prior to the date a supplier number is issued. In order to obtain a 
supplier number, a supplier must complete an application certifying 
that it meets the supplier standards found in Sec. 424.57 of our 
proposed regulation. In addition, when renewing an application for a 
DMEPOS supplier billing number, a supplier must recertify that it meets 
all of the supplier standards.
    Under current regulations, a DMEPOS supplier must renew its 
application for a billing number 3 years after the billing numbers are 
first issued, except for the first reissuance process. For the first 
reissuance process, one-third of suppliers must renew their 
applications 2 years after initial issuance of billing numbers. Another 
one-third of suppliers must reapply 3 years after initial issuance. The 
last third of suppliers must reapply 4 years after initial issuance. 
Thereafter, a supplier must reapply 3 years after its last number is 
issued.
    We do not intend to require all DMEPOS suppliers to submit new 
applications for billing numbers on the date this regulation becomes 
effective, but will require DMEPOS suppliers to

[[Page 2928]]

submit new applications as the old numbers expire. We believe this to 
be the least burdensome approach for a supplier, as well as the most 
cost-effective approach, to obtain the required information. However, 
in certain circumstances (such as an investigation regarding compliance 
with standards) a supplier may be required to demonstrate compliance 
with all standards prior to the supplier's billing number expiration 
date. Although we do not intend to require suppliers with current 
numbers to certify compliance with these revised standards until they 
reapply, it is important to note that as of the effective date of this 
regulation, all DMEPOS suppliers must comply with these standards. We 
may revoke a supplier number if we find evidence that the standards are 
not satisfied.

A. Specific Requirements for Supplier Standards

Compliance With Medicare Statutory Provisions and Applicable 
Regulations (Sec. 424.57(c)(1))
    In addition to the specific standards cited in this proposed rule, 
there are other Medicare statutory provisions that establish 
requirements pertaining to the activities of DMEPOS suppliers. For 
example, section 1848(g) of the Act establishes requirements regarding 
the completion and submission of Medicare claims by certain entities, 
including DMEPOS suppliers. To be consistent and to support and 
reinforce the implementation of the other provisions of the Act and 
regulations that pertain to DMEPOS suppliers, we are proposing adding 
this new standard. This standard would require a DMEPOS supplier to 
comply with Medicare statutory provisions, as well as all other 
applicable regulations.
Compliance with Applicable Federal and State Licensure and Regulatory 
Requirements (Sec. 424.57(c)(2))
    We propose amending Sec. 424.57(c)(9) of current regulations to 
require a DMEPOS supplier to operate its business and furnish Medicare 
covered items in compliance with all applicable Federal and State 
licensure and regulatory requirements. If a DMEPOS supplier is found to 
be out of compliance with any Federal or State licensure or regulatory 
requirement by the appropriate enforcement agency for that requirement, 
we may revoke that supplier's number. We will focus on whether the 
violation negatively affects a supplier's ability to furnish DMEPOS 
supplies in a manner that protects beneficiaries and the Medicare 
program. When a supplier is actually found out of compliance, and is 
cited by the appropriate enforcement agency for a violation, we would 
determine whether that violation should be deemed indicative of a 
failure to meet this standard.
    Clearly, it is not in the interest of beneficiaries for us to 
revoke a supplier number for reasons that are unrelated to a DMEPOS 
supplier's ability to furnish Medicare covered items. For example, and 
by way of illustration only, it would not ordinarily seem necessary to 
consider as a violation of this standard necessitating revocation, 
situations where a supplier is involved in a zoning dispute or has 
built a fence three feet over the property line. However, when the 
supplier's violation of applicable Federal or State licensure or 
regulatory requirements affects the health and safety of Medicare 
beneficiaries, we would determine that this standard has not been met.
Misrepresentation of Facts (Sec. 424.57(c)(3))
    As stated, a DMEPOS supplier's certification that the standards are 
met must be completed before a supplier number will be issued. A 
government contractor verifies the data in the supplier number 
application and issues numbers to approved DMEPOS suppliers. When a 
supplier submits an inaccurate or incomplete application, it impedes 
the ability of the contractor to determine, with reasonable confidence, 
that a supplier meets and will comply with the DMEPOS supplier 
standards.
    We propose amending the regulations to clarify that a DMEPOS 
supplier is responsible for accurately completing the application for a 
supplier number. Any deliberate misrepresentation or concealment of 
material information in the application constitutes a violation of this 
supplier standard and may subject a supplier to liability under civil 
and criminal laws. Also, since the government, through its contractor, 
issues a supplier number based upon, and after verification of, the 
information contained in the application, a DMEPOS supplier must notify 
us within 35 days of any change in the data provided on the supplier 
number application.
Signature Used on a Supplier Number Application (Sec. 424.57(c)(4))
    When a DMEPOS supplier signs the application for a supplier number, 
it certifies that all information provided on the application is 
accurate and that the supplier meets the standards set forth in 
Sec. 424.57(c). These standards affect how the supplier does business. 
This proposed standard would require that the individual signing the 
application understand his or her responsibility for confirming the 
accuracy of all of the statements in the application and have the 
authority to certify that the supplier will comply with these 
standards. The person who signs the application must have the authority 
to bind the business entity. This standard would help ensure the 
accuracy of the information on the supplier number application and will 
help ensure that the DMEPOS supplier is committed to taking the 
necessary steps to comply with these standards.
Providing Requested Information and Documentation (Sec. 424.57(c)(5))
    We propose adding a standard that specifically requires a DMEPOS 
supplier to agree to provide us with pertinent information and 
documentation. As a basic condition for payment, a supplier must 
furnish sufficient information and documentation for us to make a 
correct payment determination. We are responsible for ensuring that all 
claims are medically and reasonably necessary, that all services are 
rendered as billed, and that all claims are billed in accordance with 
local, regional and national policies.
    Upon request, a supplier must also provide a copy of any contract 
it has with another company to furnish DMEPOS items or supplies. A 
DMEPOS supplier also must provide, upon request, documentation 
substantiating that it has advised beneficiaries about their option to 
rent or purchase inexpensive or routinely purchased equipment, and also 
about the purchase option for capped rental equipment. It is important 
that beneficiaries understand that the overall Medicare payments for 
renting inexpensive or routinely purchased DME may not exceed the 
Medicare fee schedule amount for that item.
    A DMEPOS supplier must provide, upon request, documentation 
substantiating that it has explained to beneficiaries the warranty 
coverage for supplies and equipment. We believe that explaining to 
beneficiaries the warranty coverage for a particular item will prevent 
the Medicare program from being billed for repairs to supplies or 
equipment covered under warranty. A supplier must provide, upon 
request, documentation that it maintains and repairs directly, or 
through a service contract with another company, items it has rented to 
beneficiaries. This would ensure that beneficiaries are aware that any 
services needed for rented items will be provided by the supplier of 
the items.

[[Page 2929]]

    A supplier also must provide, upon request, documentation 
demonstrating that it has delivered Medicare covered items to 
beneficiaries. A supplier must provide, upon request, proof of 
appropriate liability insurance protecting retail customers against 
accidents or negligence in the sale or rental of medical equipment or 
supplies.
Scope of Exclusions (Sec. 424.57(c)(6) and (d))
    We propose amending Sec. 424.57(c)(1) and (d) of the current 
regulations to be consistent with the Office of Inspector General (OIG) 
regulations on program integrity for the Medicare and State Health Care 
programs at Sec. 1001.1901. The OIG program exclusion regulations were 
amended effective August 25, 1995, in accordance with the Federal 
Acquisition Streamlining Act of 1994 (Pub. L. 103-355), and with the 
Department's Common Rule at 45 FR Part 76, to explain the scope and 
effect of an OIG exclusion. The OIG regulations now provide that an OIG 
exclusion will be recognized and given effect not only for all 
departmental programs but also for all Executive Branch procurement and 
nonprocurement activities. Therefore, consistent with the OIG 
regulations, these regulations would require that a DMEPOS supplier 
must agree not to contract with entities subject to an OIG exclusion 
for the purchase of items necessary to fill their orders. These 
proposed regulations also would provide that if a DMEPOS supplier is 
subject to an OIG exclusion, we will revoke its supplier number 
automatically, effective with the date of the exclusion.
Rental or Purchase Option (Sec. 424.57(c)(7))
    A DMEPOS supplier must advise beneficiaries of their option to rent 
or purchase inexpensive or routinely purchased equipment. A DMEPOS 
supplier also must advise the beneficiary of the purchase option for 
capped rental equipment. Currently, the decision as to whether 
inexpensive or routinely purchased equipment should be rented or 
purchased is made by the beneficiary. Because of the coinsurance 
implications involved, it is important that beneficiaries understand 
that the overall Medicare payments for renting such DME may not exceed 
the Medicare fee schedule amount for that item. If the beneficiary 
needs an item after Medicare has made its last rental payment, the 
beneficiary becomes financially liable for any additional payment. 
Therefore, if a beneficiary anticipates needing an item of inexpensive 
or routinely purchased DME for an extended period of time, purchasing 
that item may result in a savings for the beneficiary. This information 
must be provided in an easily understood and clear manner and should 
include an explanation of the implications of the rental or purchase 
choice.
Warranties (Sec. 424.57(c)(8))
    Our current regulations provide that a supplier must honor all 
expressed and implied warranties. However, in some instances, a 
supplier does not fully explain warranty coverage to beneficiaries and 
the Medicare program is billed for repairs to supplies or equipment 
covered under warranty. We propose to amend Sec. 424.57(c)(3) of our 
current regulations to require that a DMEPOS supplier check with 
manufacturers to determine the extent of a warranty for an item they 
are supplying. A DMEPOS supplier is prohibited from billing either 
beneficiaries or the Medicare program for repairs, parts, or other 
equipment or supplies covered either by an expressed warranty or an 
implied warranty. Items that are furnished to the beneficiary, whether 
purchased or rented, must include copies of warranty information.
Delivery (Sec. 424.57(c)(9))
    Under our current regulations at Sec. 424.57(c)(2), a supplier is 
responsible for the delivery of Medicare covered items to 
beneficiaries. Consistent with the goal of protecting beneficiaries, we 
propose expanding this standard to require a DMEPOS supplier, at the 
time of delivery, to provide beneficiaries with necessary information 
and instructions on how to use Medicare covered items safely and 
effectively. In addition, we anticipate that beneficiaries may have 
questions subsequent to delivery and should have telephonic access to 
the supplier to receive additional instructions, as necessary. 
Telephonic access is addressed in proposed supplier standard 
Sec. 424.57(c)(17).
Reassignment of Supplier Numbers (Sec. 424.57(c)(15))
    This proposed standard would prohibit a DMEPOS supplier from 
conveying or reassigning a supplier number. We have the authority, 
through our authorized agents, to issue DMEPOS supplier billing 
numbers. These numbers are issued only after we have verified pertinent 
information about a supplier and have otherwise taken measures intended 
to protect the Medicare program, as well as beneficiaries. The supplier 
billing numbers are issued for the use of a specific supplier. A DMEPOS 
supplier does not have independent authority to transfer or convey the 
billing number we issue. All DMEPOS suppliers must undergo our 
application process in order to obtain a supplier number.
Physical Facility (Sec. 424.57(c)(16) and (f))
    We propose amending Sec. 424.57(c)(10) and (f) of our current 
regulations to require a DMEPOS supplier to have a physical facility 
where it can conduct its business operations. The physical facility 
must be a site where a supplier's delivery, maintenance, and 
beneficiary communication records can be properly stored and mail can 
be delivered. In addition, all written complaints and related 
correspondence taken in response to a beneficiary complaint must be 
kept at the physical facility.
    Using these minimal requirements for a physical facility, there 
should be no burden on a legitimate supplier. Section 1834(j) of the 
Act was amended to ensure beneficiary protection. We believe protection 
of the beneficiary includes requiring a supplier to conduct business at 
a physical facility that is beneficiary accessible. In the past, a 
supplier was not required to conduct business at a fixed physical 
location. We found evidence of vans, as well as station wagons, being 
claimed as supplier business locations. A supplier using these types of 
``establishments'' for business are not easily accessible to the 
beneficiary or HCFA if there is a problem with the supply or equipment, 
a repair is needed, or the beneficiary has a question. Requiring that a 
supplier operate out of a fixed physical facility will help protect 
beneficiaries, as well as aid in eliminating fraudulent suppliers.
Business Telephone (Sec. 424.57(c)(17))
    In order to accept inquiries from potential customers, maintain 
relationships with current customers, and conduct business with 
contractors in today's business markets, virtually every business must 
allow access by telephone. Telephonic access to a DMEPOS supplier is 
crucial also to the Durable Medical Equipment Regional Carrier in 
obtaining additional information to process and pay a claim.
    In this proposed rule, a DMEPOS supplier must have a business 
telephone located at the physical facility. This telephone number must 
be listed under the name of the business (i.e., name of supplier 
company) and listed in the business portion of the local telephone 
company directory. A beeper number, answering machine, answering 
service, pager, facsimile machine, car phone or residential listing 
would not adequately

[[Page 2930]]

provide telephonic access equivalent to a primary business telephone 
and, therefore, would not fulfill this requirement. Requiring a 
business telephone at the physical facility would help ensure that a 
supplier is a valid business company that is soliciting and conducting 
business at the physical facility. This requirement would also help 
filter out those companies that do not have a physical site and may be 
conducting business out of mobile vans, making it difficult for 
beneficiaries and the general public to determine the legitimacy of the 
business, resolve questions, obtain demonstrations of a DMEPOS item and 
resolve any maintenance or repair concerns.
Liability Insurance (Sec. 424.57(c)(18))
    The December 11, 1995, final rule with comment implementing the 
changes made by section 1834(j) of the Act, added a standard requiring 
suppliers to have proof of appropriate liability insurance. One member 
of the DME industry commented on this standard and suggested certain 
insurance requirements and limitations. In addition, we consulted with 
an insurance industry trade group with expertise in liability 
insurance. Based on the comment received and our consultation, we 
propose requiring that a supplier have a comprehensive liability 
insurance policy that covers both the supplier's place of business and 
any and all customers and employees of the supplier.
    While this proposal would only require comprehensive liability 
insurance, our concern for beneficiary safety is such that we feel we 
should specify in the final rule a dollar amount for this coverage. We 
believe that coverage in the amount of $500,000 would be adequate for 
most businesses. According to industry sources, there are no State 
requirements concerning either mandatory liability insurance or the 
recommended level of protection. However, we believe that most 
suppliers follow common business practices and obtain adequate 
insurance in order to limit their financial exposure. We invite the 
public to comment on the need for and the extent to which suppliers 
maintain liability insurance and the appropriate coverage level for 
that insurance.
Telemarketing (Sec. 424.57(c)(19))
    This proposed standard reiterates restrictions found at sections 
1834(a)(17)(A) and 1834(h)(3) of the Act that bar a supplier from 
violating existing telemarketing rules.
Prescription Drugs (Sec. 424.57(c)(20))
    This proposed standard would protect the health and safety of our 
beneficiaries by ensuring that only those DMEPOS suppliers that are 
licensed to dispense drugs may furnish drugs used as Medicare covered 
supplies with durable medical equipment (DME) or prosthetic devices. 
Although a supplier that furnishes oxygen may not have to be a 
pharmacy, it must meet applicable State licensure laws. This standard 
would stipulate that unless a supplier meets applicable State licensing 
requirements, it may not bill Medicare for prescription drugs used with 
DME or a prosthetic device.
    This standard also would help to ensure payment is not made for 
prescription drugs, other than oxygen, that are prepared or dispensed 
by companies not properly licensed and not regulated or monitored by a 
State's pharmacy board. In addition, this standard would support 
Medicare's policy of not paying for prescription drugs used with DME or 
a prosthetic device unless the drugs are furnished by an entity that is 
licensed to dispense these drug products.

B. Additional Revisions

    Section 4312(a) of the Balanced Budget Act of 1997 (BBA '97), Pub. 
L. 105-33, which was enacted on August 5, 1997, amended section 1834(a) 
of the Social Security Act by adding a new paragraph (16). That new 
paragraph requires the Secretary, as a condition of providing for the 
issuance or renewal of a provider number for a DME supplier for 
purposes of payment under the Medicare statute, to provide the 
Secretary, on a continuing basis, with a surety bond. Section 
1834(a)(16), as amended by section 4312(c) of the BBA '97, further 
provides that the Secretary may, at the Secretary's discretion, impose 
a surety bond on some or all providers or suppliers who furnish items 
or services under Medicare Part B other than physicians or other 
practitioners. We request comments on the advisability of exercising 
this authority to impose a surety bond on all suppliers of prosthetics, 
orthotics, and supplies to the same extent as required for suppliers of 
durable medical equipment.
    We are adding a new paragraph (e) to stipulate that for every tax 
identification number for which a supplier billing number is issued, a 
DMEPOS supplier must obtain a surety bond. The surety bond must be in a 
form specified by the Secretary and in an amount not less than $50,000.
    Although we are authorized to waive the surety bond requirement if 
a DMEPOS supplier provides a comparable surety bond under State law, we 
have not implemented that waiver authority in this rule. The limited 
amount of time available to us, between the enactment of BBA '97 and 
the effective date of the surety bond requirement, did not permit us 
sufficient time to effectively analyze the potential specifications of 
a waiver provision. However, we are mindful that some States may 
already have, or may be considering implementing, surety bond 
requirements that could affect DMEPOS suppliers. Moreover, section 4712 
of the BBA '97 establishes a Medicaid surety bond requirement that the 
States will be implementing. We do not want to add unnecessary costs to 
DMEPOS suppliers that may be required to obtain multiple surety bonds. 
However, our principal concern is to safeguard the Medicare Trust Funds 
from the losses resulting from dramatically increasing unrecovered 
Medicare debts. We solicit comments on useful standards and criteria 
for implementing a waiver of our surety bond requirements that would, 
nonetheless, maintain the same or a greater level of protection of the 
Medicare Trust Funds than our requirements achieve.
    A ``surety bond'' is a three-party written agreement under which 
the surety guarantees to HCFA as surety that it will be responsible for 
debts owed to HCFA by a DMEPOS supplier. The surety bond can only be 
obtained through a surety bond company that has been approved by the 
Department of Treasury and listed in the current edition of the 
Department of Treasury's Department Circular No. 570 ``Companies 
Holding Certificates of Authority as Acceptable Sureties on Federal 
Bonds and as Acceptable Reinsuring Companies''.
    We propose establishing a sliding scale for the penal amount of the 
bond that relates to the volume of business a supplier does with 
Medicare. The penal amount is the amount for which a surety company 
would be liable to HCFA. The sliding scale would be used in combination 
with a $50,000 minimum and a $3,000,000 ceiling. For chain 
organizations, these amounts would pertain to the chain as a whole. The 
sliding scale will be based on 15 percent of the amount paid to the 
supplier by the Medicare program in the previous year with a $50,000 
minimum and a $3,000,000 maximum penal bond amount. Thus, the penal 
amount of the surety bond and the premium for the surety bond are 
directly tied to the

[[Page 2931]]

amount of Medicare payments received by the supplier. We believe that 
15 percent is a reasonable percentage on which to base the penal amount 
of the bond since it would not be too high as to be a barrier to entry 
for small companies, yet high enough to provide the Medicare Trust Fund 
with access to funds to recover debts owed to the program. Also, in 
determining this percentage amount, we consulted with an insurance 
industry trade group.
    In accordance with section 4312(a) of the BBA '97, paragraph (e) 
includes a $50,000 floor per supplier. Therefore, we are proposing that 
this $50,000 amount represent the penal amount for a supplier that has 
not previously participated in the Medicare program. We also propose 
establishing a penal amount ceiling of $3,000,000 per supplier to 
accommodate national companies that have several locations. The 
$3,000,000 ceiling would lessen the burden on national companies that 
have one supplier number with multiple locations.
    HCFA would verify that each supplier has purchased the correct bond 
amount by having the National Supplier Clearinghouse access either the 
supplier's IRS Form No. 1099 prepared by the supplier's DMERC (DME 
Regional Carrier) or historic payment information from the DMERC's 
provider payment history file. The IRS Form No. 1099 will show the 
amount of Medicare revenues received by the DMEPOS supplier during the 
previous year. This verification would be done on an annual basis by 
the National Supplier Clearinghouse.
    As stated, we believe that Congressional intent of section 4312 of 
the BBA '97 is to protect both Medicare beneficiaries and the Medicare 
Trust Fund. Under current law, a DMEPOS supplier only may receive 
payment from the Medicare program if it demonstrates that it meets the 
standards imposed in the Act and in regulations. Section 4312 of the 
BBA '97, in effect, authorizes as a supplier standard the requirement 
that a DMEPOS supplier provides, on a continuing basis, a surety bond 
of at least $50,000. We believe that Congressional intent is that a 
surety bond be of an adequate amount to ensure supplier performance and 
to prompt compliance with Medicare program rules and requirements. The 
amount of the surety bond must be sufficient to protect both Medicare 
beneficiaries and the Medicare Trust Fund by providing a mechanism for 
recovering debts owed to the program. (Debts to the program include 
overpayments, interest, and any civil money penalties and assessments.) 
We also believe it will decrease spurious applications for supplier 
numbers, and ensure that only viable companies who are financially 
stable obtain supplier numbers. Therefore, we believe it is necessary 
that the surety bond be based on a sliding scale of 15 percent of the 
amount paid to the supplier by the Medicare program, for claims for 
Medicare covered items provided in the previous year and with a floor 
of $50,000 and a ceiling of $3,000,000.
    We also considered including within the scope of the Surety's 
potential liability a guarantee of payment for unpaid civil money 
penalties and assessments that were imposed by the Office of the 
Inspector General. However, because of the short time period between 
when the BBA '97 was enacted and the effective date of the Surety bond 
provision, we were unable to fully consider this option. In addition, 
because of our unfamiliarity with surety bonds as a component of 
program administration, we believed that we did not fully understand 
how best to implement this option. We solicit comments on the 
advisability of including within the scope of the Surety's potential 
liability unpaid Office of Inspector General-imposed civil money 
penalties and assessments.
Financial Rationale for the Surety Bond
    We have a statutory responsibility under the Act to be a prudent 
purchaser of medical services. Therefore, we need to address the issue 
of how to reduce risk to the Medicare Trust Fund. Bonding is a method 
that has long been employed in the private sector to assure a 
satisfactory level of performance. We believe a surety bond is a cost 
effective method to reduce risk to the Medicare Trust Fund. This 
requirement would provide the Medicare program with the ability to 
mitigate its losses should a supplier billing number be revoked or if 
the company no longer conducts business with Medicare. In other words, 
a surety bond would provide us with the means to recover a portion of 
the monies due the Medicare program. A claim could be made against the 
surety bond should a demand letter for overpayments not be satisfied, 
whether due to insufficient assets by a supplier or inability to locate 
a supplier.
    We do not have a fail-safe method of ensuring that DMEPOS items for 
which we have been billed actually have been supplied to a beneficiary 
in the quantity or the type billed. Only with the passage of time do we 
discover that DMEPOS items for which Medicare payments have been made 
were not actually supplied in the manner represented in the claim. With 
Medicare DMEPOS expenditures of $10.2 billion in 1995, even a small 
percentage of improper payments represents excessive program losses.
    In calendar year 1995, as a part of our activities associated with 
Operation Restore Trust, we revoked the supplier billing number of 
approximately 1,700 Florida suppliers who were found to have billed for 
DMEPOS items that either were not furnished or were not furnished as 
billed. These supplier billings were associated with erroneous payments 
amounting to approximately $40 million.
    Our belief is that many of these suppliers would never have sought 
or obtained a Medicare supplier number if, as a prerequisite, they 
would have been required to obtain a surety bond. Even if some of these 
suppliers had been able to obtain a surety bond and still received 
erroneous payments, the Medicare program, by making a claim against the 
surety bond, would have had a source to mitigate some of its losses. 
Based on our estimates of the scope of past fraudulent and excessive 
expenditures, we must take steps to prevent such practices from 
continuing. Surety bonds will enhance our control of Medicare Trust 
Fund expenditures by expanding our options for recovering payments 
later determined to be improper, whether due to fraud or other reasons. 
We are interested in any recommendations or suggestions anyone may have 
on this proposed standard.
    In addition to the changes discussed above, we have taken this 
opportunity to make several clarifying and editorial changes to the 
existing regulations.

C. Patient Care Standards

    The proposed DMEPOS supplier standards set forth business operation 
standards, however, they do not include standards that relate directly 
to patient care. By patient care, we are referring to care that goes 
beyond that which is directly furnished by the covered equipment, such 
as taking the patient's vital signs. Determinations relating to patient 
care would be the subject of another rulemaking.

IV. 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.

[[Page 2932]]

V. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), agencies are 
required to provide a 60-day notice in the Federal Register and solicit 
public comment before a collection of information requirement is 
submitted to the Office of Management and Budget (OMB) for review and 
approval. In order to fairly evaluate whether an information collection 
should be approved by OMB, section 3506(c)(2)(A) of the PRA requires 
that we solicit comment on the following issues:
     Whether the information collection is necessary and useful 
to carry out the proper functions of the agency;
     The accuracy of the agency's estimate of the information 
collection burden;
     The quality, utility, and clarity of the information to be 
collected; and
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comment on each of these issues 
for the information collection requirements discussed below.
    The following sections of this document contain information 
collection requirements as described below:
    Section 424.57(c)(3) (Supplier Enrollment Form HCFA-855) would 
require a supplier to provide complete and accurate information on its 
application for a billing number. However, the burden associated with 
the requirements set forth in 424.57(c)(3) and (c)(4) are currently 
captured in HCFA-855 (OMB Approval No. 0938-0685). Thus, there is no 
additional collection of information burden associated with 
Sec. 424.57(c)(3) and (c)(4).
    Section 424.57(c)(5) (Providing Requested Information and 
Documentation) would set forth several information collection 
requirements, as referenced below, which we believe are exempt under 
the terms of the PRA for the following reasons:
    (1) Under 5 CFR 1320.4(a)(2), information collections are exempt 
during the conduct of an administrative action, investigation, or audit 
involving an agency against specific individuals or entities;
    (2) As described in 5 CFR 1320.3(h)(9), facts or opinions obtained 
or solicited through nonstandardized follow-up questions designed to 
clarify responses to approved collections, are exempt from the PRA; 
and/or
    (3) Nonstandardized information collections directed to less then 
10 persons, does not constitute an information collection as outlined 
in 5 CFR 1320.3(c).
    The following information collection requirements arise as a result 
of requiring DMEPOS suppliers to submit all supplemental information or 
documentation necessary to adjudicate claims. A DMEPOS supplier bears 
the burden of providing records and information sufficient to support 
the determination of appropriate Medicare payment. Since we believe 
that the following collection requirements are either part of the 
administrative, audit and/or adjudicatory process, collected in a 
nonstandardized manner, and/or collected from less then ten persons, 
they fall under these exceptions. We explicitly solicit comment on this 
PRA determination. The excepted sections are:

--Section 424.57(c)(5)(i)--Adjudication of Claims
--Section 424.57(c)(5)(viii)--Supplemental Documentation

    Under 5 CFR 1320.3(b)(2), the burden associated with the time, 
effort and financial resources necessary to comply with a collection of 
information that would be incurred by persons in the normal course of 
business will be excluded from an information collection. The burden in 
connection with such types of collection activities can be disregarded 
if it can be demonstrated that such collection activities are usual and 
customary. Each of the collection requirements referenced below are of 
the type that are usual and customary in the conduct of commercial 
business. Thus, we believe they fall under this exception and solicit 
comment on this determination:

--Section 424.57(c)(5)(ii)--Contracts with Third Parties
--Section 424.57(c)(5)(v)--Delivery Documentation
--Section 424.57(c)(5)(vi)--Maintenance documentation
--Section 424.57(c)(5)(vii)--Proof of Liability Insurance
--Section 424.57(c)(5)(viii)--Supplemental Documentation.

    The information collection requirements and associated burden as 
summarized below are subject to the PRA:

--Section 424.57(c)(5)(iii) would require a supplier to develop, 
disclose to beneficiaries, and maintain an attestation document 
demonstrating that beneficiaries have been advised about their option 
to rent or purchase inexpensive or routinely purchased equipment and of 
the purchase option for capped rental equipment. We believe that during 
the normal course of business the vast majority of suppliers currently 
advise their beneficiaries of their rental and purchase options. 
Therefore, the burden associated with this provision is the one-time 
burden on the provider to create an attestation form and the 
recordkeeping requirement on the supplier to retain a copy of the 
beneficiary attestation in their files. We believe that most suppliers 
would create and maintain a form to suit their specific business needs 
that a beneficiary would sign to attest that the beneficiary was 
advised of the rent or purchase option described above (Refer to 
Sec. 424.57(c)(7)).
--Section 424.57(c)(5)(iv) would require a supplier to maintain 
documentation demonstrating that beneficiaries have been adequately 
informed about items covered under warranty. We do not prescribe a 
specific format and rely on the supplier to develop some mechanism to 
note that it has advised a beneficiary about warranty coverage. (Refer 
to Sec. 424.57(c)(8)). We anticipate that suppliers will simultaneously 
advise beneficiaries of their purchase/rental equipment options and 
warranty disclosure, and capture the required acknowledgments for both 
Sec. 424.57(c)(5)(iii) and 424.57(c)(5)(iv) in one form. Thus, the 
burden associated with Sec. 424.57 paragraph (c)(5)(iv) is reflected in 
the burden calculations for paragraph (c)(5)(iii). The chart below 
summarizes the estimated annual reporting and recordkeeping burden for 
the attestation requirements and the additional requirements referenced 
below.
--Section 424.57(e) would require when current suppliers apply for 
renewal of their supplier billing number that they submit a copy of 
their current surety bond and, as appropriate, copies of previous 
surety bonds that have been obtained annually for the appropriate 
amount, thus demonstrating that their surety bond has been in effect. 
New suppliers must submit a copy of their surety bond at the time of 
initial application in order to have it approved. The only burden we 
are imposing would be the amount of time it takes to mail a copy of the 
surety bond concurrent with the initial submission or renewal of a 
provider's application (form HCFA-855).

    As a note, the provider/supplier enrollment forms HCFA-855, HCFA-
855C, HCFA-855R, and HCFA-855S and related instructions, which are 
currently approved under OMB Approval No. 0938-0685, are in process

[[Page 2933]]

of being revised. In particular, an emergency clearance of these 
information collection requirements was requested by HCFA. A notice was 
published in the Federal Register on December 18, 1997, requesting that 
OMB approve the revised collection by December 31, 1997. In that notice 
the public was given from the date of the notice's publication, until 
December 29, 1997 to comment on the proposed collection. It should be 
noted that the emergency clearance sought by HCFA would have a maximum 
approval period of 6 months from the date of OMB approval.
    The table below indicates the annual number of responses for each 
regulation section in this proposed rule containing information 
collection requirements, the average burden per response in minutes or 
hours, and the total annual burden hours.

                               Estimated Annual Reporting and Recordkeeping Burden                              
----------------------------------------------------------------------------------------------------------------
                                                                              Average burden                    
            CFR sections               Annual Number of   Annual frequency     per response      Annual burden  
                                          responses                             (minutes)            hours      
----------------------------------------------------------------------------------------------------------------
424.57(c)(5)(iii) and(iv)...........             68,000                 50                  5            283,333
424.57(e)...........................    68,000/3=22,667                  1                  1                378
                                                                                              ------------------
      Total hours...................  .................  .................  .................            283,711
----------------------------------------------------------------------------------------------------------------

    We have submitted a copy of this proposed rule to OMB for its 
review of the information collection requirements in Sec. 424.57 (c) 
and (e). These requirements are not effective until they have been 
approved by OMB.
    If you comment on any of these information collection and 
recordkeeping requirements, please mail copies directly to the 
following:

Health Care Financing Administration, Office of Information Services, 
Information Technology Investment Management Group, Division of HCFA 
Enterprise Standards, Room C2-26-17, 7500 Security Boulevard, 
Baltimore, MD 21244-1850. ATTN: John Burke HCFA-1864-P
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503. Attn.: Allison Herron Eydt, HCFA Desk Officer

VI. Regulatory Impact Analysis

    We have examined the impacts of this proposed rule under Executive 
Order 12866, the Unfunded Mandate Act of 1995, and the Regulatory 
Flexibility Act. Executive Order 12866 directs agencies to assess all 
costs and benefits of available regulatory alternatives and, when 
regulation is necessary, to select regulatory approaches that maximize 
net benefits. In addition, a Regulatory Impact Analysis (RIA) must be 
prepared for major rules with economically significant effects ($100 
million or more annually). The costs associated with this rule are the 
following:
     Surety bond requirement (Sec. 424.57(e)). Approximately 
$57 million annually. See Table 3 in this section for computations.
     Liability insurance requirement (Sec. 424.57(c)(18)). We 
estimate that only 10 percent of DMEPOS suppliers do not already have 
liability insurance that meets this requirement. Ten percent of the 
total DMEPOS suppliers is approximately 6,800 suppliers. Multiplying 
6,800 by $250 results in an approximate additional liability insurance 
cost of $1.7 million annually to the DMEPOS industry due to this rule.
     Primary business telephone at a physical facility 
requirement (Sec. 424.57(c)(17)). We estimate that only 1% of DMEPOS 
suppliers do not already meet this requirement. Therefore, 680 times 
the approximate $600 annual cost of telephone service results in an 
additional cost of $410,000 annually.

Total Cost = $57 Million + $1.7 Million + $410,000 = $59,110,000 
annually.

    The Unfunded Mandates Reform Act of 1995 requires (in section 202) 
that agencies prepare an assessment of anticipated costs and benefits 
before proposing any rule that may result in an annual expenditure by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $100 million. The proposed rule has no consequential 
effect on State, local, or tribal governments. We believe that the 
private sector costs of this rule fall below these thresholds but 
nonetheless, due to uncertainties of these estimates, have prepared 
this RIA providing such an assessment.
    Consistent with the Regulatory Flexibility Act, we prepare a 
Regulatory Flexibility Analysis (RFA) unless we certify that a rule 
would not have a significant economic impact on a substantial number of 
small entities. For purposes of the Act, suppliers with annual sales of 
$5 million or less are considered to be small entities. (Individuals 
and States are not included in the definition of a small entity.) The 
RFA is to include a justification of why action is being taken, the 
kinds and number of small entities which the proposed rule will affect, 
and an explanation of any considered meaningful options that achieve 
the objectives and would lessen any significant adverse economic impact 
on the small entities.
    We believe that our proposed standards would help bar fraudulent 
suppliers from participating in the Medicare program, or in the event 
that a supplier should provide excessive supplies or defraud the 
Medicare program, we will be assured of recovering a portion of those 
funds. Therefore, we expect to have a significant impact on an unknown 
number of persons and entities who will effectively be prevented from 
repeating their aberrant billing activities. The vast majority of 
suppliers will not be significantly affected by this rule. The 
significant reduction in program overpayments that we expect to achieve 
as a result of this rule justifies the relatively small burden the rule 
would impose on all entities.
    The following analysis, together with the rest of this preamble, 
explains the rationale for and purposes of the rule, details the costs 
and benefits of the rule, analyzes alternatives, and presents the 
measures we propose to minimize the burden on small entities.

A. Rationale and Purposes

    We expect this rule to deter some entities that supply DME to 
Medicare beneficiaries from abusive billing practices or defrauding the 
Medicare program. For example, abusive practices include refusing to 
honor manufacturers' warranties or improperly installing equipment in 
Medicare beneficiaries' homes. Fraudulent practices include billing the 
Medicare program for supplies that were not furnished. In a 
surprisingly large

[[Page 2934]]

number of instances, when either the beneficiaries or HCFA attempted to 
contact suppliers alleged to have committed abuses, it was difficult to 
reach them because they did not have a fixed address or had closed the 
business and fled. Our experience has been that the market has failed 
to address these problems because of the motivation for unseemly 
profits, inadequate control by gatekeepers, and insufficient 
information on the part of Medicare beneficiaries to detect abuse. This 
market failure makes it necessary for HCFA to impose standards on DME 
suppliers and establish safeguards that enable the Medicare program to 
better recover improper payments.

B. Characteristics of Suppliers

    The single most striking characteristic of Medicare DMEPOS 
suppliers is their diversity. DMEPOS suppliers fill a business need and 
do it in a variety of ways. Some set out from the beginning to 
establish a business furnishing DMEPOS items. Others evolve into being 
suppliers. For example, a firm dealing with oxygen needs of the medical 
community, may add a department that provides oxygen services and 
supplies as a medical supply as a logical extension of an existing 
business. Similarly, a retail rental store may add wheelchairs or 
hospital beds and a pharmacy may add walkers to an inventory of 
otherwise unrelated commodities and use existing advertisements to 
announce the availability of these items.
    Based on the small size of the businesses, it is more 
characteristic that suppliers furnish a limited number of items in 
greater demand than to maintain a large inventory of items covering the 
gamut of covered DMEPOS items. Thus, the only things any two suppliers 
may have in common is their provision of DMEPOS items and their 
understanding that the activity will meet the needs of the business. 
Suppliers are in a position to direct their marketing activities to 
optimize their most profitable revenue sources, and in seeking to meet 
patient demand, can choose to provide only those items that meet their 
business objectives.
    For purposes of the RFA, a small entity is one with annual revenues 
of less than $5 million. As indicated by Table 1, which examines 
reimbursements to unique billing numbers (a supplier may have multiple 
locations, e.g., a chain organization, but use only one unique billing 
number), 97 percent of all DMEPOS suppliers generate billings of less 
than $350,000 in Medicare revenues annually.

     Table 1.--Total Number of Suppliers Arranged By Reimbursements     
              [Dates of Service--January to December 1995]              
------------------------------------------------------------------------
                                                                 Unique 
                      Dollars reimbursed                        billing 
                                                                  Nos.  
------------------------------------------------------------------------
>$3,000,000..................................................        102
$1,000,000-2,999,999.........................................        430
$500,001-999,999.............................................        933
$350,000-499,999.............................................        740
<$350,000.................................................... 66,106="" total..................................................="" 68,311="" ------------------------------------------------------------------------="" c.="" geographic="" distribution="" of="" suppliers="" individual="" patients="" may="" receive="" their="" durable="" medical="" equipment,="" supplies,="" and="" prosthetics="" either="" from="" a="" local="" supplier="" or="" from="" a="" regional="" or="" national="" concern="" that="" functions="" much="" like="" a="" mail="" order="" catalogue="" distribution="" center.="" as="" shown="" in="" table="" 2,="" suppliers="" locate="" in="" areas="" where="" there="" is="" greatest="" demand,="" leaving="" other="" areas="" to="" be="" served="" by="" catalogue,="" mail="" order="" or="" drop="" shipments.="" no="" states="" appear="" to="" be="" underserved,="" and="" competition="" exists="" in="" large="" population="" areas,="" leading="" us="" to="" believe="" that="" the="" imposition="" of="" some="" additional="" standards="" will="" not="" have="" adverse="" effects="" on="" competition="" or="" on="" the="" availability="" of="" an="" adequate="" number="" of="" suppliers="" to="" meet="" patients'="" needs.="" table="" 2="" ----------------------------------------------------------------------------------------------------------------="" number="" of="" number="" of="" beneficiaries="" beneficiary="" state="" suppliers="" per="" using="" dme="" per="" per="" supplier="" state="" state="" ----------------------------------------------------------------------------------------------------------------="" ak..............................................................="" 206="" 3300="" 16="" al..............................................................="" 2111="" 63700="" 30="" ar..............................................................="" 1450="" 59300="" 40="" az..............................................................="" 2051="" 59300="" 28="" ca..............................................................="" 13028="" 361000="" 27="" co..............................................................="" 2055="" 41800="" 20="" ct..............................................................="" 2095="" 50000="" 23="" dc..............................................................="" 241="" 7800="" 32="" de..............................................................="" 371="" 10000="" 26="" fl..............................................................="" 10137="" 259700="" 25="" ga..............................................................="" 3710="" 82600="" 22="" hi..............................................................="" 427="" 14800="" 32="" ia..............................................................="" 2236="" 47300="" 21="" id..............................................................="" 829="" 14900="" 17="" il..............................................................="" 5524="" 161000="" 29="" in..............................................................="" 4152="" 81900="" 19="" ks..............................................................="" 1752="" 38100="" 21="" ky..............................................................="" 2427="" 58200="" 23="" la..............................................................="" 2254="" 57700="" 25="" ma..............................................................="" 2981="" 92800="" 31="" md..............................................................="" 2384="" 59700="" 24="" me..............................................................="" 856="" 20100="" 23="" mi..............................................................="" 4319="" 134000="" 21="" mn..............................................................="" 2513="" 62800="" 24="" mo..............................................................="" 3076="" 82800="" 26="" ms..............................................................="" 1312="" 39400="" 30="" mt..............................................................="" 792="" 12900="" 16="" nc..............................................................="" 4134="" 101800="" 24="" nd..............................................................="" 500="" 10300="" 20="" [[page="" 2935]]="" ne..............................................................="" 1390="" 24800="" 17="" nh..............................................................="" 669="" 15500="" 23="" nj..............................................................="" 4447="" 116200="" 26="" nm..............................................................="" 669="" 20900="" 31="" nv..............................................................="" 664="" 19000="" 28="" ny..............................................................="" 7720="" 262300="" 33="" oh..............................................................="" 6675="" 165700="" 24="" ok..............................................................="" 2062="" 48400="" 23="" or..............................................................="" 1828="" 46500="" 25="" pa..............................................................="" 7610="" 206000="" 27="" ri..............................................................="" 651="" 16700="" 25="" sc..............................................................="" 2041="" 50400="" 25="" sd..............................................................="" 639="" 11600="" 18="" tn..............................................................="" 2762="" 206200="" 27="" tx..............................................................="" 8219="" 206200="" 25="" ut..............................................................="" 829="" 18600="" 22="" va..............................................................="" 3225="" 81100="" 25="" vt..............................................................="" 355="" 8200="" 23="" wa..............................................................="" 3355="" 68200="" 20="" wi..............................................................="" 2922="" 75700="" 26="" wv..............................................................="" 1134="" 32800="" 28="" wy..............................................................="" 373="" 6000="" 16="" ----------------="" total.....................................................="" 140,162="" ----------------------------------------------------------------------------------------------------------------="" we="" note="" that="" the="" purpose="" of="" table="" 2="" is="" to="" illustrate="" the="" locations="" that="" provide="" durable="" medical="" equipment="" and="" supplies="" to="" medicare="" beneficiaries.="" many="" of="" these="" entities="" are="" members="" of="" chain="" organizations.="" while="" there="" are="" more="" than="" 140,000="" individual="" suppliers,="" due="" to="" the="" affiliation="" of="" some="" suppliers="" with="" chains,="" as="" of="" december="" 1995,="" there="" were="" only="" 68,311="" unique="" billing="" numbers.="" hence,="" tables="" 1="" and="" 3,="" which="" describe="" medicare="" payments="" to="" 68,311="" billing="" numbers,="" and="" table="" 2,="" which="" describes="" the="" more="" than="" 140,000="" actual="" locations,="" describe="" the="" same="" universe="" of="" suppliers.="" according="" to="" an="" industry="" source,="" medicare="" accounts="" for="" approximately="" 40="" percent="" of="" the="" average="" dmepos="" supplier's="" revenue.="" the="" approximate="" percentage="" amounts="" for="" other="" revenue="" sources="" are="" 25="" percent="" private="" insurance,="" 15="" percent="" medicaid,="" 10="" percent="" institutional,="" and="" 10="" percent="" private="" credit="" and="" cash="" sales.="" for="" calendar="" year="" 1995,="" submitted="" charges="" for="" dmepos="" items="" were="" $10.2="" billion.="" we="" believe="" that="" for="" most="" suppliers="" any="" additional="" costs="" imposed="" by="" our="" standards="" would="" be="" outweighed="" by="" the="" benefits="" gained="" by="" continuing="" to="" be="" a="" medicare="" dmepos="" supplier.="" these="" standards,="" of="" themselves,="" should="" not="" result="" in="" changes="" in="" the="" number="" of="" legitimate="" business="" suppliers,="" because,="" as="" set="" forth="" below="" and="" elsewhere="" in="" this="" preamble,="" most="" requirements="" are="" logical="" extensions="" of="" good="" business="" practices="" that="" we="" believe="" currently="" are="" being="" met="" by="" the="" vast="" majority="" of="" suppliers.="" d.="" discussion="" of="" alternatives="" we="" believe="" it="" was="" the="" congress'="" intent="" to="" strengthen="" dmepos="" supplier="" standards="" to="" protect="" beneficiaries="" and="" the="" medicare="" program="" from="" potential="" fraud="" and="" abuse="" in="" billing="" practices.="" therefore,="" we="" did="" not="" choose="" the="" alternative="" of="" staying="" with="" the="" existing="" supplier="" standards="" which="" we="" believe="" are="" minimal="" safeguards.="" instead="" of="" relying="" on="" minimal="" supplier="" standards,="" we="" have="" expanded="" the="" supplier="" standards,="" using="" as="" our="" statutory="" basis="" either="" the="" specific="" section="" of="" the="" law="" referenced="" in="" this="" discussion="" (for="" example,="" section="" 4312="" of="" the="" bba'97),="" or="" section="" 1834(j)(1)(b)(ii)(iv)="" of="" the="" act,="" which="" states="" that="" the="" supplier="" must="" ``meet="" such="" other="" requirements="" as="" the="" secretary="" may="" specify.''="" this="" proposed="" rule="" would="" provide="" a="" basis="" to="" better="" screen="" applicants="" and="" to="" revoke="" the="" supplier="" numbers="" of="" those="" who="" do="" not="" meet="" these="" standards.="" for="" purposes="" of="" this="" impact="" statement,="" we="" have="" divided="" the="" proposed="" supplier="" standards="" into="" the="" following="" two="" broad="" categories:="" statutory="" requirements="" and="" good="" business="" practices.="" e.="" statutory="" requirements="" liability="" insurance--the="" statutory="" authority="" for="" sec.="" 424.57(c)(18)="" is="" section="" 1834(j)(1)(b)(ii)(iii)="" of="" the="" act.="" the="" proposed="" rule="" would="" require="" a="" supplier="" to="" have="" comprehensive="" liability="" insurance="" protecting="" the="" supplier's="" place="" of="" business="" and="" any="" and="" all="" retail="" customers="" and="" employees.="" we="" have="" not="" specified="" a="" minimum="" amount="" in="" this="" proposed="" rule,="" but,="" as="" explained="" elsewhere,="" suggest="" a="" minimum="" of="" $500,000="" in="" coverage.="" we="" estimate="" that="" approximately="" 10="" percent="" of="" all="" suppliers="" do="" not="" currently="" carry="" liability="" insurance.="" we="" estimate="" the="" cost="" per="" year="" for="" a="" supplier="" to="" carry="" liability="" insurance="" in="" the="" amount="" of="" $500,000="" would="" be="" approximately="" $250.="" we="" believe="" that="" the="" $250="" cost="" per="" supplier="" does="" not="" represent="" a="" significant="" economic="" impact="" on="" the="" estimated="" 10="" percent="" of="" suppliers="" not="" currently="" carrying="" liability="" insurance.="" in="" order="" to="" provide="" the="" greatest="" safeguards="" to="" medicare="" beneficiaries,="" we="" considered="" imposing="" liability="" insurance="" that="" included:="" (1)="" coverage="" for="" damages="" resulting="" from="" the="" failure="" of="" a="" medicare="" covered="" item="" to="" perform="" as="" expected="" that="" are="" not="" otherwise="" fully="" covered="" by="" the="" manufacturer's="" warranty;="" (2)="" coverage="" for="" liability="" arising="" in="" connection="" with="" the="" rental,="" sale,="" delivery,="" installation="" and="" retrieval="" of="" the="" medicare="" covered="" items,="" including="" customized="" items;="" (3)="" coverage="" for="" damages="" that="" arise="" from="" premises="" operations,="" such="" as,="" for="" example,="" those="" arising="" out="" of="" showroom="" operations="" or="" equipment="" demonstrations;="" and="" (4)="" coverage="" for="" damages="" that="" arise="" from="" [[page="" 2936]]="" personal="" injury="" and="" from="" breaches="" of="" customer="" privacy="" or="" confidentiality.="" while="" the="" above="" provisions="" would="" provide="" significant="" liability="" protection="" for="" beneficiaries,="" we="" believe="" that="" for="" two="" of="" the="" provisions,="" coverage="" for="" damages="" that="" are="" not="" covered="" by="" the="" manufacturer's="" warranty="" and="" coverage="" for="" damages="" that="" arise="" from="" breaches="" of="" customer="" privacy="" or="" confidentiality,="" coverage="" is="" not="" generally="" available="" from="" the="" insurance="" industry.="" furthermore,="" we="" believe="" that="" the="" above="" provisions,="" taken="" as="" a="" whole,="" would="" be="" much="" more="" costly="" and="" rigid="" requirements="" than="" the="" alternative="" selected,="" and="" would="" impose="" an="" unnecessary="" burden="" on="" suppliers.="" thus,="" we="" have="" chosen="" an="" alternative="" that="" we="" believe="" is="" cost="" effective="" and="" will="" ensure="" that="" suppliers="" have="" appropriate="" liability="" insurance.="" nonetheless,="" we="" request="" comments="" on="" whether="" there="" are="" alternative="" insurance="" coverage="" standards="" that="" would="" strengthen="" protections="" in="" a="" cost="" effective="" manner="" and="" information="" about="" the="" cost="" and="" availability="" of="" such="" coverage.="" f.="" good="" business="" practices="" most="" of="" our="" proposed="" supplier="" standards="" speak="" directly="" to="" business="" practices.="" we="" do="" not="" believe="" that="" these="" would="" result="" in="" a="" significant="" impact="" on="" any="" sizeable="" number="" of="" legitimate="" suppliers.="" for="" these="" additional="" proposed="" standards,="" the="" economic="" impact="" on="" most="" suppliers="" is="" negligible,="" although="" the="" benefits="" to="" the="" program="" and="" to="" the="" beneficiary="" may="" be="" greater.="" for="" example,="" the="" requirement="" at="" sec.="" 424.57(c)(8)="" that="" a="" supplier="" must="" not="" charge="" medicare="" for="" repair="" or="" replacement="" of="" medicare="" covered="" items="" or="" for="" services="" covered="" under="" warranty,="" coupled="" with="" the="" requirement="" at="" sec.="" 424.57(c)(5)(iv)="" that="" the="" supplier="" provide="" documentation,="" upon="" request,="" that="" it="" has="" advised="" medicare="" beneficiaries="" about="" medicare="" covered="" items="" covered="" under="" warranty,="" should="" result="" in="" claims="" for="" repairs,="" parts="" or="" replacement="" being="" made="" against="" the="" warranty,="" thus="" decreasing="" the="" monies="" paid="" by="" the="" program.="" the="" monies="" paid="" out="" by="" the="" program="" and="" the="" beneficiary="" may="" also="" decrease="" as="" a="" result="" of="" the="" requirement="" that="" the="" supplier="" inform="" the="" beneficiary="" of="" the="" rental="" or="" purchase="" option="" and="" the="" copay="" implications="" involved.="" more="" beneficiaries="" may="" elect="" to="" purchase="" their="" equipment,="" instead="" of="" renting="" for="" long="" periods="" of="" time.="" in="" most="" instances,="" these="" proposed="" standards="" do="" not="" exceed="" the="" usual="" business="" practices="" necessary="" for="" any="" retail="" business="" to="" succeed.="" in="" other="" words,="" we="" believe="" that="" a="" supplier="" that="" expects="" to="" conduct="" a="" successful="" business="" would="" already="" have="" in="" place="" procedures="" to="" meet="" these="" standards.="" because,="" we="" consider="" these="" basic="" requirements="" that="" a="" business="" would="" have="" to="" meet="" to="" provide="" satisfactory="" customer="" service="" and="" to="" manage="" properly="" its="" inventory="" we="" did="" not="" develop="" alternatives.="" under="" sec.="" 424.57(c)(17),="" a="" supplier="" would="" be="" required="" to="" maintain="" a="" separate="" phone="" that="" is="" used="" primarily="" for="" business="" purposes="" at="" its="" physical="" facility.="" in="" order="" to="" accept="" inquiries="" from="" potential="" customers,="" maintain="" relationships="" with="" current="" customers,="" and="" conduct="" business="" with="" contractors="" in="" today's="" business="" market,="" it="" is="" necessary="" that="" virtually="" every="" business="" have="" telephonic="" access.="" beneficiaries="" also="" need="" to="" have="" access="" to="" their="" supplier="" in="" case="" they="" have="" a="" problem="" with="" or="" questions="" about="" their="" dmepos="" items.="" we="" believe="" that="" this="" standard="" would="" be="" met="" by="" nearly="" all="" legitimate="" businesses.="" however,="" we="" believe="" approximately="" one="" percent="" of="" dmepos="" suppliers="" currently="" do="" not="" meet="" the="" fixed="" telephone="" requirement.="" the="" estimated="" cost="" per="" year="" for="" any="" supplier="" to="" establish="" and="" maintain="" a="" separate="" phone="" line="" to="" conduct="" business="" would="" be="" approximately="" $600="" ($50="" a="" month).="" thus,="" the="" aggregate="" cost="" is="" negligible.="" we="" believe="" the="" benefits="" of="" full="" time="" access="" to="" the="" supplier="" would="" far="" exceed="" any="" minor="" economic="" impact="" on="" a="" supplier.="" in="" addition,="" we="" note="" that="" requiring="" the="" supplier="" to="" have="" a="" primary="" business="" telephone="" listed="" in="" the="" business="" portion="" of="" the="" local="" telephone="" directory="" and="" maintained="" at="" the="" physical="" location="" of="" the="" supplier="" business="" may="" even="" result="" in="" increased="" business="" for="" a="" supplier.="" this="" proposed="" requirement="" would="" help="" beneficiaries="" to="" contact="" their="" suppliers="" in="" the="" event="" of="" equipment="" problems,="" failures,="" and="" to="" resolve="" questions.="" telephonic="" access="" to="" a="" supplier="" is="" crucial="" so="" that="" the="" durable="" medical="" equipment="" regional="" carriers="" may="" call="" and="" obtain="" additional="" information="" to="" process="" and="" pay="" claims.="" we="" are="" aware="" that="" telephone="" technology="" is="" rapidly="" changing.="" we="" had="" considered="" putting="" limitations="" on="" the="" use="" of="" mobile="" telephones,="" which="" have="" been="" associated="" with="" abusive="" practices.="" however,="" we="" concluded="" that="" additional="" limitations="" might="" penalize="" legitimate="" suppliers,="" or="" might="" not="" be="" responsive="" to="" technological="" change.="" we="" specifically="" solicit="" comments="" on="" whether="" there="" are="" alternative="" ways="" to="" establish="" telephone="" requirements="" that="" minimize="" potential="" abusive="" practices="" while="" not="" raising="" costs="" for="" legitimate="" small="" businesses.="" g.="" protection="" of="" the="" trust="" fund="" and="" beneficiary="" while="" each="" of="" these="" proposed="" supplier="" standards="" is="" designed="" to="" protect="" the="" medicare="" trust="" fund="" and="" beneficiaries,="" one="" standard="" warrants="" separate="" discussion.="" in="" accordance="" with="" section="" 4312="" of="" the="" bba="" `97,="" a="" surety="" bond="" will="" be="" required="" as="" long="" as="" an="" entity="" remains="" a="" dmepos="" supplier.="" under="" sec.="" 424.57(e),="" a="" supplier="" would="" be="" required="" to="" obtain="" a="" surety="" bond="" equal="" to="" at="" least="" 15="" percent="" of="" the="" amount="" paid="" to="" the="" supplier="" by="" the="" medicare="" program="" for="" the="" previous="" year="" as="" reflected="" in="" their="" irs="" form="" no.="" 1099,="" or="" by="" the="" historic="" payment="" information="" from="" the="" dmerc="" provider="" payment="" history="" file.="" we="" propose="" establishing="" a="" sliding="" scale="" that="" reflects="" the="" volume="" of="" business="" a="" supplier="" does="" with="" medicare.="" the="" sliding="" scale="" would="" be="" used="" in="" combination="" with="" a="" $50,000="" floor="" and="" a="" $3,000,000="" ceiling.="" by="" using="" a="" sliding="" scale,="" based="" on="" 15="" percent="" of="" the="" amount="" paid="" to="" the="" supplier="" by="" the="" medicare="" program="" for="" the="" previous="" year,="" the="" penal="" amount="" of="" the="" surety="" bond="" and="" the="" premium="" for="" the="" surety="" bond="" are="" directly="" tied="" to="" the="" amount="" of="" medicare="" payments="" received="" by="" the="" supplier.="" we="" believe="" that="" 15="" percent="" is="" a="" reasonable="" percentage="" on="" which="" to="" base="" the="" penal="" amount="" of="" the="" bond="" since="" it="" would="" not="" be="" too="" high="" as="" to="" be="" a="" barrier="" to="" entry="" for="" small="" companies,="" yet="" high="" enough="" to="" provide="" the="" medicare="" trust="" fund="" with="" some="" recourse="" for="" compensation="" for="" debts="" owed="" to="" the="" program.="" we="" are="" interested="" in="" comments="" about="" the="" reasonableness="" of="" the="" percent="" amount="" and="" the="" proposed="" floor="" and="" ceiling.="" a="" surety="" company="" charges="" its="" underwriting="" fee="" based="" on="" the="" penal="" amount="" of="" the="" bond.="" for="" this="" type="" of="" surety="" bond,="" the="" industry="" usually="" has="" an="" underwriting="" charge="" of="" 1="" to="" 2="" percent.="" based="" on="" this="" information="" table="" 3="" indicates="" the="" costs="" of="" a="" surety="" bond="" based="" on="" the="" supplier's="" annual="" medicare="" revenue="" assuming="" that="" bonds="" cost="" 1.5="" percent="" of="" the="" protected="" amount.="" this="" table="" also="" shows="" that="" the="" total="" costs="" of="" bonds="" is="" likely="" to="" be="" about="" $57="" million="" and="" that="" on="" average="" the="" cost="" of="" bonds="" will="" be="" about="" one-half="" of="" one="" percent="" of="" gross="" sales="" (somewhat="" less="" for="" larger="" suppliers)="" for="" the="" smallest="" suppliers="" who="" make="" up="" the="" overwhelming="" majority="" of="" all="" suppliers.="" we="" request="" comment="" on="" the="" accuracy="" of="" these="" estimates.="" [[page="" 2937]]="" table="" 3.--cost="" of="" program-universal="" bonding="" without="" time="" limit="" ----------------------------------------------------------------------------------------------------------------="" total="" bond="" range="" of="" sales="" (1000s)="" bond="" cost="" number="" of="" total="" sales="" cost="" cost/sales="" suppliers="" (1000s)="" (1000s)="" (percent)="" ----------------------------------------------------------------------------------------------------------------=""><$350.......................................... $788="" 66,106="" $9,915,900="" $52,092="" 0.53="" $350-499.......................................="" 956="" 740="" 314,500="" 707="" 0.22="" $500-999.......................................="" 1,688="" 933="" 699,750="" 1,575="" 0.23="" $1,000-2,999...................................="" 4,388="" 430="" 860,000="" 1,887="" 0.22="">3,000.........................................        6,750          102      408,000          689         0.17
                                                             ---------------------------------------            
      Total....................................  ...........       68,311   12,198,150       56,950         0.47
----------------------------------------------------------------------------------------------------------------

    For 97 percent of the suppliers the cost of a surety bond would be 
on average $788 annually. The Durable Medical Equipment Regional 
Carriers report that each year tens of millions of dollars cannot be 
recovered because the supplier has gone out of business or does not 
have resources to repay debts owed to Medicare. We believe that if 
these suppliers had possessed a surety bond, the Medicare program could 
decrease its potential losses.
    We realize that surety bonds represent a new cost of approximately 
$57 million to DMEPOS suppliers, with the use of a sliding scale adding 
approximately $5 million to the cost when compared to what it would 
cost if we required only the $50,000 surety bond amount for each 
supplier. However, we believe that the benefits to the Medicare program 
and Medicare beneficiaries would outweigh these costs. For example, as 
part of Operation Restore Trust in 1995 in Florida we found that $40 
million was billed for nonfurnished DMEPOS items. This $40 million 
represented 8% of the total Medicare expenditures made for DMEPOS items 
in the State of Florida in 1995. If we assume that this 8% figure 
represents a typical experience, and multiply the 8% times the total 
Medicare expenditures made nationally, we can project potential 
Medicare erroneous payments to be $492 million for the entire nation. 
However, Florida may not necessarily be typical of other States or the 
Nation as a whole.
    In addition, the use of an 8% figure, which has been extrapolated 
from 1995 data, to make cost saving projections in 1997 does not take 
into account the advances that Medicare has made over the last two 
years to protect Medicare funds. For example, as a result of the 
Operation Restore Trust project, which was conducted in five States, 
Medicare has strengthened its efforts to identify and exclude from the 
program companies engaged in fraud or that fail to meet other supplier 
standards.
    Efforts to reduce improper Medicare payments include section 201(b) 
of the Health Insurance Portability and Accountability Act of 1996 
(P.L. 104-191), enacted August 21, 1996, that amended section 1817 of 
the Act by creating a Health Care Fraud and Abuse Control Account. 
Funds will be appropriated to this Account each year to carry out the 
Medicare Integrity Program under section 1893 of the Act.
    While it is not possible to estimate with accuracy the savings that 
will result from this provision, we believe it is important to set 
standards for DMEPOS suppliers that do business with the Medicare 
program, for program integrity purposes. We believe that surety bonds 
combined with other efforts will diminish the number of suppliers that 
currently fraudulently bill Medicare, while serving as a deterrent to 
others tempted to engage in fraudulent behavior.

H. Conclusion

    As indicated elsewhere in this preamble, to the extent that we are 
imposing a burden it is a necessary one. The public interest is best 
served by establishing safeguards that prevent suppliers from taking 
advantage of the current minimal supplier standards, even though some 
may view the additional standards as impeding their competitiveness. It 
is by design that these standards would have the greatest impact on 
those suppliers that need to change the most. We believe that the loss 
of a supplier as a result of these supplier standards, for example one 
who operates out of a van or who does not provide a value added 
service, is far outweighed by what these standards would do in terms of 
protecting the health and safety of beneficiaries and preserving the 
Medicare Trust Fund.

I. Rural Hospital Impact Statement

    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a rule 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. We are not preparing a 
rural impact statement since we have determined, and certify, that this 
proposed rule would not have a significant impact on the operations of 
a substantial number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
proposed rule was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 424

    Emergency medical services, Health facilities, Health professions, 
Medicare.

    42 CFR Chapter IV would be amended as set forth below:

PART 424--CONDITIONS FOR MEDICARE PAYMENT

    1. The authority citation for part 424 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).

    2. Section 424.57 is amended by revising paragraphs (b) through (f) 
and adding a new paragraph (g) to read as follows:


Sec. 424.57  Special payment rules for items furnished by DMEPOS 
suppliers and issuance of DMEPOS supplier billing numbers.

* * * * *
    (b) Medicare will not pay for any Medicare covered items provided 
by a DMEPOS supplier prior to the date HCFA issues a DMEPOS supplier 
number. Medicare will not pay for any covered items provided by a 
DMEPOS supplier during any period when a DMEPOS supplier number is 
revoked or during a period of exclusion.
    (c) Medicare will issue a DMEPOS billing number, or reissue a 
number previously issued, to a supplier that submits a completed 
application to furnish Medicare covered medical equipment and supplies, 
as defined in section 1834(j)(5) of the Act, after the

[[Page 2938]]

supplier meets, and certifies in its application for a billing number 
that it meets, the following standards:
    (1) A supplier must agree to comply with the provisions of Title 
XVIII of the Act and any applicable regulations.
    (2) A supplier must operate its business and furnish Medicare 
covered items in compliance with all applicable Federal and State 
licensure and regulatory requirements.
    (3) A supplier must not make, or cause to be made, any false 
statement or misrepresentation of a material fact on an application for 
a billing number. A supplier must provide complete and accurate 
information in response to questions on its application for a billing 
number. Any changes in information supplied on the application must be 
reported within 35 days of the change.
    (4) A supplier's application for a billing number must be signed by 
an individual whose signature binds a supplier.
    (5) A supplier must agree to furnish to HCFA all information or 
documentation HCFA requires, including--
    (i) Information or documentation needed to process or adjudicate 
Medicare claims;
    (ii) Upon request, copies of contracts with third parties for 
furnishing Medicare covered items to Medicare beneficiaries;
    (iii) Upon request, documentation that it has advised beneficiaries 
that they may either rent or purchase inexpensive or routinely 
purchased equipment and about the purchase option for capped rental 
equipment;
    (iv) Upon request, documentation that it has advised Medicare 
beneficiaries about Medicare covered items covered under warranty;
    (v) Upon request, documentation demonstrating that it has delivered 
Medicare covered items to Medicare beneficiaries;
    (vi) Upon request, documentation that it maintains and repairs 
directly, or through a service contract with another company, Medicare 
covered items rented to beneficiaries;
    (vii) Upon request, proof of liability insurance; and
    (viii) Any other information required by this or other Medicare 
requirements.
    (6) A supplier must fill orders from its own inventory or by 
contracting with other companies for the purchase of items necessary to 
fill the order. A supplier may also fabricate or fit items for sale 
from supplies it buys under contract. A supplier may not contract with 
any entity that currently is excluded from the Medicare program, any 
State health care programs, or from any other Federal Government 
Executive Branch procurement or nonprocurement program or activity.
    (7) A supplier must advise beneficiaries that they may either rent 
or purchase inexpensive or routinely purchased equipment, and of the 
purchase option for capped rental equipment, as defined in 
Sec. 414.220(a) of this subchapter.
    (8) A supplier must honor all warranties expressed and implied 
under applicable State law. A supplier must not charge the beneficiary 
or the Medicare program for the repair or replacement of Medicare 
covered items or for services covered under warranty. This standard 
applies to all purchased and rented items, including capped rental 
items, as described in Sec. 414.229 of this subchapter.
    (9) A supplier must be responsible for the delivery of Medicare 
covered items to beneficiaries. A supplier must provide beneficiaries 
with necessary information and instructions on how to use Medicare 
covered items safely and effectively.
    (10) A supplier must answer questions and respond to complaints a 
beneficiary has about the Medicare covered item that was sold or 
rented. A supplier must refer beneficiaries with Medicare questions to 
the appropriate carrier.
    (11) A supplier must maintain and repair directly, or through a 
service contract with another company, Medicare covered items it has 
rented to beneficiaries.
    (12) A supplier must accept returns from beneficiaries of 
substandard (less than full quality for the particular item) or 
unsuitable items (inappropriate for the beneficiary at the time it was 
fitted and/or sold).
    (13) A supplier must disclose consumer information, which must 
include these supplier standards, to each beneficiary whom it supplies 
a Medicare covered item.
    (14) A supplier must comply with the disclosure provisions in 
Sec. 420.206 of this subchapter.
    (15) A supplier cannot convey or reassign a supplier number.
    (16) A supplier must maintain a physical facility on an appropriate 
site. The physical facility must contain space for storing business 
records including the supplier's delivery, maintenance, and beneficiary 
communication records. For purposes of this requirement, a post office 
box or commercial mailbox is not considered a physical facility.
    (17) A supplier must maintain a primary business telephone at the 
physical facility. This telephone number must be listed under the name 
of the business and in the business portion of the local telephone 
company directory. The exclusive use of a beeper number, answering 
service, pager, facsimile machine, car phone, or an answering machine 
may not be used as the primary business telephone for purposes of this 
regulation.
    (18) A supplier must have a comprehensive liability insurance 
policy that covers both the supplier's place of business and any and 
all customers and employees of the supplier.
    (19) As required by sections 1834(a)(17)(A) and 1834(h)(3) of the 
Act, a supplier of a Medicare covered item must agree not to contact a 
beneficiary by telephone regarding the furnishing of a Medicare covered 
item to the individual unless one of the following applies--
    (i) The individual has given written permission to the supplier to 
make contact by telephone regarding the furnishing of a Medicare 
covered item;
    (ii) The supplier has furnished a Medicare covered item to the 
individual and the supplier is contacting the individual only regarding 
the furnishing of such Medicare covered item; or
    (iii) If the contact is regarding the furnishing of a Medicare 
covered item other than a covered item already furnished to the 
individual, the supplier has furnished at least one covered item to the 
individual during the 15-month period preceding the date on which the 
supplier makes such contact.
    (20) Only a supplier that is licensed to dispense the drug may bill 
for a drug used as a Medicare covered supply with durable medical 
equipment or prosthetic devices. A supplier of drugs must bill and 
receive payment for the drug in its own name.
    (d) If a supplier is found not to meet the standards in paragraph 
(c) of this section, its billing number will be revoked. The revocation 
will be effective 15 days after the entity is sent notice of the 
revocation, as specified in Sec. 405.874(b) and (e) of this subchapter.
    (e) Surety bond. (1) A supplier must obtain a surety bond for each 
tax identification number for which it has a billing number issued by 
Medicare. When a supplier applies for renewal of its supplier billing 
number the supplier must submit with the supplier application to the 
National Supplier Clearinghouse a copy of its current surety bond. 
Copies of previous surety bonds demonstrating compliance with the 
surety bond requirement since the last renewal or initial application 
must also be submitted when renewing a supplier number. New suppliers 
must submit a copy of their surety bond for

[[Page 2939]]

the appropriate amount at the time of their initial application in 
order to have the application approved. The company issuing a surety 
bond must be listed in the Treasury Department Circular 570, 
``Companies Holding Certificates of Authority as Acceptable Sureties on 
Federal Bonds and as Acceptable Reinsuring Companies.'' This list 
appears in the Federal Register on or about July 1 of each year. Copies 
of the Circular and interim changes may be obtained directly from the 
Government Printing Office [phone], or contact the U.S. 
Department of the Treasury, Financial Management Service, Surety Bond 
Branch, 3700 East West Highway, Room 6F04, Hyattsville, Maryland 20782, 
telephone [phone] or Fax [phone].
    (2) The surety bond must be for a term of 12 months and must be 
renewed annually. The surety bond must be in an amount equal to at 
least 15 percent of the amount paid to the supplier by the Medicare 
program for claims for Medicare covered items provided in the previous 
year, as reflected in a supplier's IRS Form No. 1099, or by the 
historic payment information from the durable medical equipment 
regional carrier provider payment history file. The minimum surety bond 
amount for a supplier billing number, regardless of its Medicare 
revenues, is $50,000 annually. The maximum surety bond amount for a 
supplier billing number, regardless of its Medicare revenues, is 
$3,000,000 annually.
    (3) For a supplier that has not previously participated in the 
Medicare program, the amount of the surety bond for each billing number 
must be equal to the sum of $50,000 for the first year of participation 
in the Medicare program. Thereafter, the rules set forth in 
Sec. 424.57(e)(1) and (2) apply.
    (4) As the obligee of the bond, HCFA may seek recovery by resorting 
to the surety bond if there are outstanding debts to the Medicare 
program, including overpayments, interest, civil money penalties and 
assessments or if a supplier's number is revoked.
    (f) A supplier number will expire and a supplier must renew its 
application for a billing number 3 years after the billing number is 
first issued. Each supplier must complete an application for a billing 
number 3 years after its last number is issued.
    (g) A supplier must have a complaint resolution protocol to address 
beneficiary complaints that relate to supplier standards in paragraph 
(c) of this section and to keep written complaints and related 
correspondence and any notes of actions taken in response to written 
and oral complaints. Failure to maintain such information may be 
considered evidence that supplier standards have not been met. Such 
information must be kept at its physical facility and made available to 
HCFA, upon request. A supplier must maintain the following information 
on all written and oral beneficiary complaints, including telephone 
complaints, it receives:
    (1) The name, address, telephone number, and health insurance claim 
number of the beneficiary.
    (2) A summary of the complaint and the date it was made; the name 
of the person taking the complaint; and a summary of any actions taken 
to resolve the complaint.
    (3) If an investigation was not conducted, the name of the person 
making the decision and the reason for the decision.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: January 24, 1997.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
    Dated: August 14, 1997.
Donna Shalala
Secretary.
[FR Doc. 98-963 Filed 1-16-98; 8:45 am]
BILLING CODE 4120-01-P