For suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS, herein referred to as DME, except when referenced by a federal authority) included in Medicare’s competitive bidding program (CBP), the first quarter of 2024 has been defined by continuing regulatory and economic uncertainty.
Following the expiration of its contracts for off-the-shelf (OTS) back and knee braces on December 31, 2023, the Centers for Medicare & Medicaid Services (CMS) currently has no contracts in place for any of the 16 DME product categories nominally covered under CBP. Instead, the agency has instituted a temporary gap period as it works to “complete the formal public notice and comment rulemaking process” and implements changes to improve the program.
This current pause is the latest undertaken in a complex program that has been characterized by phased and uneven implementation. Beyond presenting unknowns for suppliers, it also has broader implications for Medicare beneficiaries.
BACKGROUND
Medicare coverage of DME
Medicare Part B covers 80 percent of the cost of medically necessary DME when prescribed by a Medicare-enrolled healthcare provider and dispensed by a Medicare-enrolled supplier. Depending upon the item, this may be a rental fee or purchase price. Once beneficiaries have met their annual Medicare Part B deductible ($240 in 2024), they are responsible for covering the remaining 20 percent of the cost as coinsurance. This may represent an out-of-pocket expense or be covered by supplemental or secondary insurance.
To qualify for Medicare reimbursement, a DME item must satisfy all five criteria in CMS’s definition of DME. This includes being able to withstand repeated use, being used for a medical purpose, not generally being of use in the absence of illness or injury, having a life expectancy of a minimum of three years, and being appropriate for use in the home.
Even with these constraints, Medicare’s DME benefit is wide-ranging. In addition to walkers, wheelchairs, hospital beds, and lifts, it includes oxygen, continuous positive airway pressure devices, blood glucose monitors, continuous glucose monitors, insulin pumps, and enteral and parenteral nutrition pumps. Any supplies that are used in the operation of a DME item are also covered under the DME benefit.
Approximately one quarter of the over 30 million beneficiaries covered by Medicare Part B obtain some form of DME through Medicare annually. CMS reported spending approximately $7.5 billion on DME in 2022, the most recent year for which data is available.
Implementation of the Competitive Bidding Program
Ensuring fair compensation for providers and suppliers while also protecting federal funds has been a perennial challenge in Medicare. The DME program has not been spared this hurdle.
Medicare initially reimbursed suppliers of DME for “usual, customary, and reasonable” charges. However, because these terms are not legally defined, the so-called reasonable charge payment methodology allowed for cost creep in the best of cases and cost explosion in the worst.
Under the Omnibus Budget Reconciliation Act (OBRA) of 1987, Congress mandated the replacement of cost-based reimbursement in DME with a fee schedule model under which payment would be based upon the application of a statutorily specified formula to the cost of individual items. As part of broader efforts to control growth in Medicare expenditures, the implementation of fee schedules was also expected to ensure consistency in reimbursement rates.
Medicare spending continued to grow in both absolute numbers and as a percentage of the federal budget. . Studies by the Office of the Inspector General of Health and Human Services and the General Accounting Office confirmed critics’ assertions that Medicare paid more than private companies and other government agencies for such DME items as oxygen and enteral nutrition products.
A decade after the adoption of fee schedules, Congress was still seeking methods to rein in Medicare costs. The Balanced Budget Act of 1997 (BBA) directed the Department of Health and Human Services (HHS) to undertake demonstration projects to determine if competitive bidding for Medicare items and services could limit costs without jeopardizing patient access.
From 1999 to 2002, CMS implemented DMEPOS Competitive Bidding Demonstrations in Florida and Texas to pilot the effectiveness of the competitive bidding program for certain categories of DMEPOS items. An HHS evaluation of the demonstrations found 20 percent savings to the program, without any negative impact to beneficiary access to items and quality of services provided.
Before HHS had published its final report to Congress on the competitive bidding demonstrations, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), which, while best known for the creation of the Part D prescription drug benefit in Medicare, also called for the adoption of competitive bidding in the DMEPOS program. This introduction of market-oriented practices into the Medicare program reflected an acknowledgment of the need to sustainably manage the growing costs associated with providing healthcare to an aging population.
Mechanics of the CBP program
Only some categories of DMEPOS products are included in CBP. These are typically categories that CMS has found to have high volume, high cost, annual growth in expenditures, or experienced rapid utilization or fraud and abuse. One of the strongest reasons for an item to be included in CBP is the opportunity for savings. Over the last decade, CMS has both expanded the product categories and items included in the CBP and removed items from the program.
Under CBP, suppliers submit bids for the contract to sell certain items in individual categories to Medicare beneficiaries within geographically defined competitive bidding areas (CBAs). CBAs, which are identified by counties and ZIP codes, are selected based on criteria such as the total population of Medicare beneficiaries and the potential for cost savings.
Traditionally, CMS has required bidders to submit separate bids for each product category. In doing so bidders also agree to provide every item listed under the product category, if they win the contract. In addition, bidders must include documentation demonstrating their ability to meet Medicare’s quality and financial standards.
Successful bidders are awarded contracts to supply their items in specific CBAs. To qualify for reimbursement, Medicare beneficiaries in these areas must obtain their DMEPOS items from contracted suppliers.
A key feature of the program is the establishment of single payment amounts (SPAs) for each item included in the program. SPAs, which replace fee schedule prices, are based on the bid prices submitted by the suppliers and are intended to reflect a fair market price for each item. In the most recent round of CBP, CMS based the SPAs on maximum winning bid amounts for the lead item in each product category. Importantly, successful bidders who contract with CMS not only have the right to provide specified products in specified CBAs, but they also must do so. Failure to do so constitutes a breach of contract, under which a supplier may be precluded from future participation in the CBP.[1]
The vision, the issues
Both sides of the American political divide have endorsed competitive bidding at some point. Free market conservatives including the Heritage Foundation and the American Enterprise Institute embraced the model for its potential to reduce Medicare spending for DME. Progressives, including the Center for American Progress, saw competitive bidding as a means of lowering beneficiaries’ premiums and coinsurance.
CMS believes CBP has succeeded. CMS has previously said that CBP has been successful at reducing costs without comprising beneficiary access. In 2018, the Medicare Payment Advisory Commission reported that CBP had “successfully driven down the cost of DMEPOS products for the Medicare program and beneficiaries” even as “DMEPOS products excluded from the CBP have continued to grow.” A study published in Health Affairs in 2020 found that competitive bidding reduced Medicare spending on diabetes testing supplies without negatively affecting beneficiary outcomes.
However, critics say that CBP drives market concentration and has led to a decline in the total number of DME suppliers. Many believe this has resulted in reduced access for Medicare beneficiaries and that it ultimately reduces competition, the very premise upon which the program was built.
There is evidence that CBP may have unintended consequences for Medicare’s more vulnerable members.
Because contracts are awarded for product categories, beneficiaries with multiple conditions needing a variety of DME may have to interface with several different suppliers to acquire prescribed items. Critics have faulted CBP for contributing to the “perplexing tangle of bureaucracy” faced by beneficiaries covered by both Medicare and Medicaid.
Some have characterized CBP as forcing a “potential tradeoff between cost and access” and that assessing the program’s success requires a holistic perspective. If reductions in expenditures are achieved through reducing utilization linked to inappropriate deferrals of care, CBP is not meeting larger Medicare program goals.
Regulatory uncertainty
The current gap period is not unusual. Although Congress mandated competitive bidding in DMEPOS in 2003, the CBP was not fully implemented until 2011. This delay, which included a suspension of the first round of bidding in 2008, foreshadowed the challenges CMS would face in fine-tuning the program.
In a Final Rule released in 2014, CMS established a methodology for price adjustments in CPB. Critics faulted it for relying on pricing from urban CBAs, asserting that it would negatively impact rural areas.
In response to these concerns, Congress included a provision in the 21st Century Cures Act postponing scheduled price adjustments.
CMS also paused the program from January 1, 2019, to December 31, 2020.
In the most recent bidding round, Round 2021, CMS only awarded contracts for OTS back braces and OTS knee braces in 127 of 130 CBAs. The agency noted that for the for the remaining 14 categories, “payment amounts did not achieve expected savings.” Payment rates for items in these categories remained the same. This has led some to speculate about the future of the program and which categories might be included in future bidding rounds.
Round 2021 of DMEPOS CBP expired on December 31, 2023. The next round will not commence until after formal public notice and comment rulemaking process and the implementation of what CMS has characterized as “necessary DMEPOS CBP changes.” A proposed rule on changes to the CBP is expected this year.
Economic issues
Consistently implemented, CBP could offer successful bidders a framework for business planning. However, CMS has faced challenges in developing a reimbursement methodology for items under the CBP that aligns with supplier expectations of profitability. The program’s multiple interruptions have contributed to a climate of uncertainty. Additionally, the fixed nature of contracts and statutory penalties for non-compliance may limit suppliers’ ability to adapt to the evolving business environment.
DME suppliers fault CBP for failing to make appropriate allowances for fluctuations in the administrative and labor costs associated with delivering items to beneficiaries. As an example, they point to unanticipated increases in shipping costs and supply chain disruptions which decreased their profit margins in previously active competitive bidding areas.
While the CBP program is on pause, items that were previously furnished under the CBP are reimbursed under a different pricing methodology than DME items that have not been included in the program.[2]
Under the DMEPOS fee schedule, CMS updates rural and non-rural payment rates for all items furnished. For DME items included in the CBP, CMS additionally maintains a fee schedule for items furnished in former CBAs. CMS utilizes a different payment methodology for establishing payment rates for each of the three fee schedules. For the former CBAs, CMS pays SPAs established during DMEPOS CBP updated by an inflation adjustment factor on an annual basis.
Many DME suppliers believe that the non-rural payment methodology for these items is unfair since the price is not adjusted with annual inflation and does not reflect the reality of the costs of furnishing these items.
Conclusion
DME manufacturers and suppliers have a vested interest in the long-term viability of the Medicare program. However, for those with items identified for inclusion in CBP, CMS’s pursuit of cost savings introduces constraints and requires commitments that extend well beyond three-year bidding rounds. As a result, the possibility that an item may be added to the CBP can make suppliers and manufacturers apprehensive.
CMS is statutorily mandated to utilize the CBP program as a mechanism for cost-saving. While the agency has some flexibility in implementing the program, there is no flexibility in the payment methodology it uses to set rates in specific geographic areas, as the authority to change this lies with Congress.
[1] 42 C.F.R. 414.422 states that “(a) contract supplier must agree to furnish items under its contract to any beneficiary who maintains a permanent residence in, or who visits, the CBA and who requests those items from that contract supplier.”
[2] The Fee schedule amounts for DME items not included in the CBP are increased annually by the percentage increase in the consumer price index for all urban consumers (CPI-U) for the 12-month period ending in June of the previous year, adjusted by the change in the economy-wide productivity equal to the 10-year moving average of changes in annual economy-wide private nonfarm business Multi-Factor Productivity (MFP).