On April 10, 2007, the Centers for Medicare and Medicaid Services (CMS) published the final rule on the competitive bidding program for durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) (Final Rule).1 The Final Rule implements the first phase of a new reimbursement methodology for certain DMEPOS items in ten metropolitan areas. Additional items and areas will be added in 2009 and 2010, when the program will be fully implemented. CMS expects to begin the bidding process in late April 2007, and the new payment rates will go into effect in April 2008.

Ten Covered Categories of DMEPOS

In the first phase of the DMEPOS competitive bidding program, CMS will accept bids on the following ten categories of items:

  • Oxygen Supplies and Equipment; 
  • Standard Power Wheelchairs, Scooters, and Related Accessories; 
  • Complex Rehabilitative Power Wheelchairs and Related Accessories; 
  • Mail-Order Diabetic Supplies; 
  • Enteral Nutrients, Equipment, and Supplies;  Continuous Positive Airway Pressure (CPAP) Devices, Respiratory Assist Devices (RADs), and Related Supplies and Accessories; 
  • Hospital Beds and Related Accessories; 
  • Negative Pressure Wound Therapy (NPWT) Pumps and Related Supplies and Accessories; 
  • Walkers and Related Accessories; and 
  • Support Surfaces (group 2 and 3 mattresses and overlays) (Miami and San Juan Only).2

CMS announced these categories on its website, rather than in the Final Rule. In addition, lists of the Healthcare Common Procedure Coding System (HCPCS) codes included in each of these categories are posted on the Competitive Bidding Implementation Contractor’s (CBIC) website.3 Although the agency summarized the comments it received regarding the categories of DMEPOS products to be included in the first round of bidding in the Final Rule, it often did not explain why it chose to include or exclude certain categories. For example, CMS described the comments it received asking that the agency exclude infusion pumps and related drugs from the product categories subject to bidding, yet it did not discuss its decision to exclude those products from the first phase of the program. Items excluded from the first phase of the program, including infusion pumps and related drugs, could be included in future phases of the program.

Ten Competitive Bidding Areas

As required by the Medicare statute4, CMS will begin the competitive bidding program in ten of the nation’s largest metropolitan areas, excluding New York, Los Angeles, and Chicago.5 Again, CMS announced the competitive bidding areas (CBAs) on its website rather than in the Final Rule. These areas are

  •  Charlotte-Gastonia-Concord, NC-SC; 
  • Cincinnati-Middletown, OH-KY-IN; 
  • Cleveland-Elyria-Mentor, OH; 
  • Dallas-Fort Worth-Arlington, TX; 
  • Kansas City, MO-KS; 
  • Miami-Fort Lauderdale-Miami Beach, FL; 
  • Orlando, FL; 
  • Pittsburgh, PA; 
  • Riverside-San Bernardino-Ontario, CA; and 
  • San Juan-Caguas-Guaynabo, PR.6

CMS selected these areas by considering four variables: (1) the total population of the area, (2) the Medicare allowed charges for DMEPOS items per Medicare beneficiary, (3) the number of DMEPOS suppliers per beneficiary who received DMEPOS, and (4) the area’s geographic location. CMS will use the same criteria to identify the 70 additional areas that will join the program in 2009. CMS also selected the CBAs for 2008 with the goals of minimizing administrative complexity and giving all of Medicare’s DME Medicare administrative contractors (MACs) experience with the program. The agency also attempted to simplify the program’s rollout by excluding from the first phase any metropolitan area that is served by two DME MACs. Finally, CMS will include at least one metropolitan area in each DME MAC region to allow each contractor to gain experience with the program in 2008.

Payment Rates Set Through Competitive Bidding

Under the competitive bidding program, CMS will select suppliers by evaluating and ranking their “composite bids.” A composite bid is the sum of a supplier’s bids, weighted by utilization of each item, for all items in a product category. CMS will rank the composite bids and will identify as the “pivotal bid” the lowest composite bid that will ensure that a sufficient number of suppliers, as determined by CMS, can participate to meet beneficiary demand. Suppliers whose composite bids are less than or equal to the composite bid will be selected if they meet the other requirements for participation, including quality and financial standards.

CMS will use the winning bids to set a “single payment amount” for each item of DMEPOS furnished under the competitive bidding program that is less than the payment for the item under the current fee schedule. The single payment amount for each item will be set at the median of the bids submitted by winning bidders for that item. CMS selected this approach despite receiving comments that argued that its proposal would harm access to appropriate DMEPOS. The comments argued that this method of setting the single payment amount would create rates that are below many suppliers’ threshold for participation in the program and that they would encourage suppliers to provide only the oldest, lowest priced product within each HCPCS code.

The first competitive bidding contracts offered under the program will be for a three-year term. Instead of adjusting the single payment amounts for inflation during that term, CMS will ask bidders to factor inflation into their bids.

Opportunity for Participation by Small Suppliers and Manufacturers

CMS revised several of its proposals to address concerns that small suppliers and manufacturers would not be able to compete in the program. First, CMS abandoned its proposal to allow suppliers to offer rebates when their bids are below the single payment amount. In the Final Rule, CMS summarized and acknowledged comments that this proposal would raise fraud and abuse concerns, encourage overuse of some items of DMEPOS, and would give large manufacturers and suppliers an unfair advantage.

Second, CMS will define a “small supplier” as a business with gross revenue of $3.5 million or less in annual receipts. The agency worked with the Small Business Administration to develop this definition, which it believes will facilitate small suppliers’ participation in the program. Under the Medicare statute, the Secretary is required to take “appropriate steps” to ensure that small suppliers have an opportunity to be considered for participation in the program.7

Third, to help improve small suppliers’ opportunities to participate in the program, CMS will set a target for small provider participation equal to 30 percent of the winning suppliers. If this target is not met, CMS will offer certain small suppliers who do not submit winning bids the option of furnishing covered items at the single payment amounts.

Fourth, CMS will allow a small supplier that is unable to serve an entire CBA on its own to form a network with other small suppliers for bidding purposes. Several commenters raised concerns that these networks could violate the antitrust laws. CMS responded to these concerns by noting that the network provisions do not create a safe harbor from the antitrust laws, and members of networks must comply with the antitrust laws and all other applicable laws. CMS also established requirements for the networks. The network must form a legal entity, such as a joint venture or limited partnership, that will act as the bidder. Each member of the network must satisfy the supplier eligibility requirements for participation in the program. The suppliers must have a combined market share of 20 percent or less at the time they submit their bid, and no more than 20 suppliers may join a network. In addition, CMS will require each member of a network to sign a statement certifying that it joined the network because it could not furnish all of the items in the category for the entire area for which the network is submitting a bid.

Finally, CMS will allow physicians and other practitioners to provide certain items of DMEPOS to their patients without submitting bids under the program. These items are DME infusion pumps, crutches, canes, walkers, folding manual wheelchairs, and blood glucose monitors, and they must be furnished as part of the practitioner’s professional service. When a physician or other practitioner provides these items, Medicare will reimburse them at the single payment amount. Because DME infusion pumps are not included in the first year of the competitive bidding program, they would continue to be reimbursed under the current methodology in 2008.

Choice of DMEPOS Items and Payment for New Technologies

The Final Rule includes procedures to protect physicians’ choice of DMEPOS items. CMS will allow physicians and other prescribing practitioners to prescribe specific items of DMEPOS or modes of delivery for their patients when they determine that the particular brand of mode of delivery would avoid an adverse medical outcome for the patient. The supplier will be required to provide the item or mode of delivery, and if the supplier cannot provide that item or mode of delivery, it will be required to consult the practitioner to find a suitable alternative and obtain a new prescription. If the practitioner will not agree to revise the order, the supplier must assist the beneficiary in locating another supplier who can furnish the prescribed item or mode of delivery. In the Final Rule, CMS also responded to suggestions that suppliers should be required to provide a choice of products under each HCPCS code. CMS rejected this suggestion and concluded that “it is unlikely that there would be many instances in which a particular brand within a HCPCS code would be necessary to avoid an adverse medical outcome.”8 CMS also asserted that “HCPCS codes are carefully defined to ensure that only items that have the same therapeutic function fall within particular codes,”9 and therefore there is no need to ensure that a range of products are available in each code. CMS will revisit the issue of coding for specific brand names or modes of delivery after the Office of Inspector General completes its study, to be started in 2009 of the application of a single payment amount to all brands within a HCPCS code.

Finally, CMS will exclude from competitive bidding new products that are granted their own HCPCS codes during the term of a competitive bidding contract. If a new product is not covered by a code that was included in the competitive bidding process, it will be reimbursed under the DMEPOS fee schedule.

Additional Final Rules to be Issued

CMS announced that it will issue final rules at a later date on the following topics:

  • Establishment of a new fee schedule for home dialysis supplies and equipment that continue to be paid on a reasonable charge basis, 
  • Establishment of a revised methodology for calculating fee schedule amounts for new DMEPOS items, 
  • Codification of the scope of the eyeglass coverage exclusion, and 
  • Codification of the methodology for establishing fee schedule amounts for therapeutic shoes, inserts, and shoe modifications.