FR Doc 07-1701

[Federal Register: April 10, 2007 (Volume 72, Number 68)]
[Rules and Regulations]
[Page 17991-18090]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ap07-9]

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Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Parts 411 and 414

Medicare Program; Competitive Acquisition for Certain Durable Medical
Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) and Other
Issues; Final Rule

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411 and 414

[CMS-1270-F]
RIN 0938-AN14

Medicare Program; Competitive Acquisition for Certain Durable
Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) and
Other Issues

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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SUMMARY: This final rule establishes competitive bidding programs for
certain Medicare Part B covered items of durable medical equipment,
prosthetics, orthotics, and supplies (DMEPOS) throughout the United
States in accordance with sections 1847(a) and (b) of the Social
Security Act. These competitive bidding programs, which will be phased
in over several years, utilize bids submitted by DMEPOS suppliers to
establish applicable payment amounts under Medicare Part B.

DATES: Effective Date: This final rule is effective on June 11, 2007.

FOR FURTHER INFORMATION, CONTACT: Lorrie Ballantine, (410) 786-7543,
Ralph Goldberg, (410) 786-4870, Karen Jacobs, (410) 786-2173, Michael
Keane, (410) 786-4495, Alexis Meholic, (410) 786-5395, Linda Smith,
(410) 786-5650.

SUPPLEMENTARY INFORMATION:

Electronic Access

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Alphabetical Listing of Acronyms Appearing in This Final Rule

ABN Advance Beneficiary Notice
BBA Balanced Budget Act of 1997, Pub. L. 105-33
BESS [Medicare] Part B Extract and Summary System
CBA Competitive bidding area
CBIC Competitive bidding implementation contractor
CBSA Core-based statistical area
CMS Centers for Medicare & Medicaid Services
CPI-U Consumer Price Index--All Urban Consumers
CPT [Physician] Current Procedural Terminology, Fourth Edition,
2007, copyrighted by the American Medical Association. CPT[reg] is a
trademark of the American Medical Association
CY Calendar year
DME Durable medical equipment
DME MAC Durable Medical Equipment Medicare Administrative Contractor
DMEPOS Durable medical equipment, prosthetics, orthotics, and
supplies
DMERC Durable medical equipment regional carrier
DRA Deficit Reduction Act of 2005, Pub. L. 109-171
FAR Federal Acquisition Regulation
FEHB Federal Employees Health Benefits Program
FFS Fee-for-service
FTE Full-time equivalent
GAO Government Accountability Office
HCPCS Healthcare Common Procedure Coding System
HHA Home health agency
HHS Department of Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996,
Pub. L. 104-191
IIC Inflation indexed charge
IRF Inpatient rehabilitation facility
MMA Medicare Prescription Drug, Improvement, and Modernization Act
of 2003, Pub. L. 108-173
MSA Metropolitan Statistical Area
NAICS North American Industry Classification System
NF Nursing facility
NPWT Negative pressure wound therapy
NSC National Supplier Clearinghouse
OBRA '87 Omnibus Budget Reconciliation Act of 1987, Pub. L. 100-203
OIG Office of the Inspector General, HHS
OTS Off-the-shelf
PAOC Program Advisory and Oversight Committee
PEN Parenteral and enteral nutrition
POV Power-operated vehicle
RFB Request for bids
SADMERC Statistical Analysis Durable Medical Equipment Regional
Carrier
SBA Small Business Administration
SGD Speech generating device
SNF Skilled nursing facility
TENS Transcutaneous electrical nerve stimulator

To assist readers in referencing sections contained in this
document, we are providing the following table of contents:

Table of Contents

I. Provisions of the May 1, 2006 Proposed Rule
A. Summary of the Proposed Rule
B. Public Comments Received
II. Issuance of Final Rules
A. Issuance of the FY 2007 IRF Final Rule Which Finalized
Certain Provisions Relating to Competitive Acquisition for DMEPOS
and the Accreditation of DMEPOS Suppliers
B. Future Issuance of a Final Rule on Certain Other Provisions
Addressed in the May 1, 2006 Proposed Rule
III. Payment for DMEPOS Under Medicare Part B: Background
A. Payment for DMEPOS on the Basis of Reasonable Charges
B. Payment for DMEPOS Under Fee Schedules
C. Use of the Healthcare Common Procedure Coding System (HCPCS)
IV. Medicare Competitive Bidding Demonstrations
V. Discussion of the Provisions of This Final Rule
VI. Medicare DMEPOS Competitive Bidding Program
A. Legislative Authority and Program Advisory and Oversight
Committee
l. Legislative Authority
2. Program Advisory and Oversight Committee
B. Purpose and Definitions (Sec. Sec. 414.400 and 414.402)
C. Competitive Bidding Implementation Contractors (CBICs)
(Sec. Sec. 414.406(a) and (e))
D. Payment Under the Medicare DMEPOS Competitive Bidding Program
1. Payment Basis (Sec. Sec. 414.408(a), (c), and (d))
2. General Payment Rules
3. Special Rules for Certain Rented Items of DME and Oxygen
(Grandfathering of Suppliers) (Sec. 414.408(j))
a. Process for Grandfathering Suppliers
b. Payment Amounts to Grandfathered Suppliers
(1) Grandfathering of Suppliers Furnishing Items Prior to the
First Competitive Bidding Program in a CBA
(2) Suppliers That Lose Their Contract Status in a Subsequent
Competitive Bidding Program
c. Payment for Accessories for Items Subject to Grandfathering
4. Payment Adjustments
a. Adjustment to Account for Inflation (Sec. 414.408(b))
b. Adjustments to Single Payment Amounts to Reflect Changes to
the HCPCS (Sec. 414.426)
5. Authority to Adjust Payments in Other Areas
6. Requirement to Obtain Competitively Bid Items From a Contract
Supplier (Sec. 414.408(e))
7. Limitation on Beneficiary Liability for Items Furnished by
Noncontract Suppliers (Sec. Sec. 414.408(e)(2)(iv) and (e)(3))
8. Payment for Repair and Replacement of Beneficiary-Owned Items
(Sec. 414.408(l))
E. Competitive Bidding Areas (Sec. Sec. 414.406 and 414.410)
1. Background
2. Methodology for MSA Selection for CYs 2007 and 2009
Competitive Bidding Programs (Sec. Sec. 414.410(a) and (b))

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a. MSAs for CY 2007
b. MSAs for CY 2009
3. Establishing Competitive Bidding Areas and Exemption of Rural
Areas and Areas With Low Population Density Within Urban Areas
(Sec. 414.410(c))
4. Establishing Competitive Bidding Areas for CYs 2007 and 2009
(Sec. Sec. 414.406(b) and (c))
5. Nationwide or Regional Mail Order Competitive Bidding Program
(Sec. Sec. 414.410(d)(2) and 414.412(f) and (g))
6. Additional Competitive Bidding Areas After CY 2009 (Sec.
414.410(e))
F. Criteria for Item Selection (Sec. Sec. 414.402 and
414.406(d)(1))
G. Submission of Bids for Competitively Bid DMEPOS (Sec. Sec.
414.404, 414.408, 414.412. and 412.422)
1. Furnishing of Items (Sec. Sec. 414.412(c) and 414.422(e))
a. Furnishing of Items to Medicare Beneficiaries Who Maintain a
Permanent Residence in a CBA
b. Furnishing of Items to Medicare Beneficiaries Whose Permanent
Residence Is Outside a CBA
2. Requirement for Providers to Submit Bids (Sec. Sec.
414.404(a)(2) and 414.422(e)(2))
3. Physicians and Certain Nonphysician Practitioners (Sec. Sec.
414.404(a) and (b))
4. Product Categories for Bidding Purposes (Sec. Sec. 414.402
and 414.412(b) Through (e))
5. Bidding for Specific Types of Items and Associated Payment
Rules (Sec. Sec. 414.408(f) Through (j))
a. Inexpensive or Other Routinely Purchased DME Items
(Sec. Sec. 414.408(f) and (h)(6))
b. DME Items Requiring Frequent and Substantial Servicing (Sec.
414.408(h)(7))
c. Oxygen and Oxygen Equipment (Sec. Sec. 414.408(i) and (j))
d. Capped Rental Items (Sec. 414.408(h))
e. Enteral Nutrients, Equipment, and Supplies (Sec. Sec.
414.408(f), (g)(2), and (h))
f. Maintenance and Servicing of Enteral Nutrition Equipment
(Sec. Sec. 414.408(h)(5) and (i)(5))
g. Supplies Used in Conjunction With DME (Sec. 414.408(g)(1))
h. Off-the-Shelf Orthotics (Sec. 414.408(g)(4))
VII. Conditions for Awarding Contracts for Competitive Bids
A. Quality Standards and Accreditation
B. Eligibility (Sec. 414.414(b))
C. Financial Standards (Sec. 414.414(d))
D. Evaluation of Bids (Sec. 414.414(e))
1. Market Demand and Supplier Capacity (Sec. Sec. 414.414(e)(1)
and (e)(2))
2. Composite Bids (Sec. Sec. 414.414(e)(3) and (e)(4))
3. Determining the Pivotal Bid (Sec. Sec. 414.414(e)(5) and
(e)(6))
4. Assurance of Savings (Sec. 414.414(f))
5. Assurance of Multiple Contractors (Sec. 414.414(h))
6. Selection of New Suppliers After Bidding (Sec. 414.414(i))
VIII. Determining Single Payment Amounts for Individual Items
A. Setting Single Payment Amounts for Individual Items
(Sec. Sec. 414.416(a) and (b))
B. Rebate Program
IX. Terms of Contracts
A. Terms and Conditions of Contracts (Sec. Sec. 414.422(a)
Through (c))
B. Change in Ownership (Sec. 414.422(d))
C. Suspension or Termination of a Contract (Sec. Sec.
414.422(f) and (g))
X. Administrative or Judicial Review of Determinations Made Under
the Medicare DMEPOS Competitive Bidding Program (Sec. 414.424)
XI. Opportunity for Participation by Small Suppliers (Sec.
414.414(g))
XII. Opportunity for Networks (Sec. 414.418)
XIII. Education and Outreach for Suppliers and Beneficiaries
XIV. Monitoring and Complaint Services for the Medicare DMEPOS
Competitive Bidding Program
XV. Physician or Treating Practitioner Authorization and
Consideration of Clinical Efficiency and Value of Items in
Determining Categories for Bids (Sec. 414.420)
XVI. Other Public Comments Received on the May 1, 2006 Proposed Rule
XVII. Collection of Information Requirements
XVIII. Regulatory Impact Analysis
A. Overall Impact
1. Executive Order 12866
2. Regulatory Flexibility Act (RFA)
3. Small Rural Hospitals
4. Unfunded Mandates
5. Federalism
B. Regulatory Flexibility Analysis
1. Summary
2. The Need for and Objective of the Final Rule
3. Comments Regarding Small Suppliers
a. Comments on Small Supplier Focus Groups
b. Comments on the Definition of Small Supplier
c. Comments on the Protections for Small Suppliers
d. Comments on Bidding Requirements for Physician and Other
Providers
e. Comments on Bidding by Product Category
f. Comments on Financial Standards
g. Comments on Supplier Networks
4. Description and Estimate of the Number of Small Entities
5. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
6. Agency Efforts to Minimize the Significant Impact on Small
Entities
C. Anticipated Effects
D. Implementation Costs
E. Program Savings
F. Effect on Beneficiaries
G. Effect on Suppliers
1. Affected Suppliers
2. Small Suppliers
H. Accounting Statement
I. Executive Order 12866

Regulation Text

I. Provisions of the May 1, 2006 Proposed Rule

A. Summary of the Proposed Rule

On May 1, 2006, we published in the Federal Register (71 FR 25654)
a proposed rule to--
Establish and implement competitive bidding programs for
certain covered items of durable medical equipment, prosthetics,
orthotics, and supplies (DMEPOS) under sections 1847(a) and (b) of the
Social Security Act (the Act), as amended by section 302(b)(1) of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA), Pub. L. 108-173.
Implement requirements for independent accreditation
organizations that will be applying quality standards to all DMEPOS
suppliers as required by section 1834(a)(20) of the Act. (We note that,
as explained later under section VII. of this final rule, we have
finalized certain provisions of the May 1, 2006 proposed rule relating
to accreditation in the DMEPOS provisions of a final rule entitled
``Inpatient Rehabilitation Facility Prospective Payment System for
Federal FY 2007; Provisions Concerning Competitive Acquisition for
Durable Medical Equipment, Prosthetics, Orthotics, and Supplies
(DMEPOS); Accreditation of DMEPOS Suppliers,'' which appeared in the
Federal Register on August 18, 2006 (71 FR 48354) and is referred to
throughout this final rule as the ``FY 2007 IRF final rule.'')
Establish a new fee schedule for home dialysis supplies
and equipment that continue to be paid on a reasonable charge basis.
(We note that we will respond to comments on this proposal in a future
final rule.)
Establish a revised methodology for calculating fee
schedule amounts for new DMEPOS items. (We note that we will respond to
comments on this proposal in a future final rule.)
Codify in our regulations that the statutorily imposed
eyeglass coverage exclusion under Medicare Part B encompasses all
devices that use lenses to aid vision or provide magnification of
images for impaired vision. (We note that we will respond to comments
on this proposal in a future final rule.)
Codify in regulations that the Medicare fee schedule
amount for therapeutic shoes, inserts, and shoe modifications are
established in accordance with the methodology specified in sections
1833(o) and 1834(h) of the Act. (We note that we will respond to
comments on this proposal in a future final rule.)

B. Public Comments Received

We received approximately 2,129 timely pieces of correspondence in
response to the May 1, 2006 proposed rule. Except where indicated in
section II.B. of this final rule, this final rule discusses the
provisions of the May 1, 2006 proposed rule, summarizes the public
comments received on each subject area, sets out our responses to those
comments, and sets forth our final rules.

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II. Issuance of Final Rules

A. Issuance of the FY 2007 IRF Final Rule Which Finalized Certain
Provisions Relating to Competitive Acquisition for DMEPOS and the
Accreditation of DMEPOS Suppliers

To ensure timely implementation of the Medicare DMEPOS Competitive
Bidding Program, we responded to comments submitted on certain
provisions of the May 1, 2006 proposed rule and finalized our proposals
concerning the designation of competitive bidding implementation
contractors (CBICs), competitive bidding education and outreach, and
the accreditation of DMEPOS suppliers in the DMEPOS provisions of the
FY 2007 IRF final rule (71 FR 48354). We also discussed in that final
rule certain issues relating to the establishment of quality standards
for DMEPOS suppliers that will be applied by independent accreditation
organizations.

B. Future Issuance of a Final Rule on Certain Other Provisions
Addressed in the May 1, 2006 Proposed Rule

We will respond to comments submitted on certain provisions of the
May 1, 2006 proposed rule and finalize our proposals concerning the
following provisions in a separate final rule that will be published at
a later date in the Federal Register: (1) Establishment of a new fee
schedule for home dialysis supplies and equipment that continue to be
paid on a reasonable charge basis; (2) establishment of a revised
methodology for calculating fee schedule amounts for new DMEPOS items;
(3) codification in our regulations that the scope of the eyeglass
coverage exclusion under Medicare Part B encompasses all devices that
use lenses to aid vision or provide magnification of images for
impaired vision; and (4) codification in our regulations that the
Medicare fee schedule amounts for therapeutic shoes, inserts, and shoe
modifications are established in accordance with the methodology
specified in sections 1833(o) and 1834(h) of the Act.

III. Payment for DMEPOS Under Medicare Part B: Background

A. Payment for DMEPOS on the Basis of Reasonable Charges

Payment for most DMEPOS items, including supplies and equipment,
furnished under Medicare Part B is made through contractors known as
Durable Medical Equipment Medicare Administrative Contractors (DME
MACs) (previously Durable Medical Equipment Regional Carriers (DMERCs),
also known as Medicare carriers). Before January 1, 1989, payment for
most of these items was made on a reasonable charge basis by Medicare
carriers. Section 1842(b) of the Act sets forth the methodology for
determining reasonable charges. Implementing regulations for section
1842(b) of the Act are located at 42 CFR Part 405, Subpart E.
Reasonable charge determinations are generally based on customary
and prevailing charges derived from historic charge data, with the
``reasonable charge'' for an item being the lowest of the following
factors:
The supplier's actual charge for the item.
The supplier's customary charge for the item.
The prevailing charge in the locality for the item. The
prevailing charge may not exceed the 75th percentile of the customary
charges of suppliers in the locality.
The inflation indexed charge (IIC). The IIC is defined in
Sec. 405.509(a) of the Medicare regulations as the lowest of the fee
screens used to determine reasonable charges for services, including
supplies, and equipment paid on a reasonable charge basis (excluding
physicians' services), that is in effect on December 31 of the previous
fee screen year, updated by the inflation adjustment factor. The
inflation adjustment factor is based on the current change in the
Consumer Price Index for All Urban Consumers (CPI-U), as compiled by
the Bureau of Labor Statistics, for the 12-month period ending June 30
each year.

B. Payment for DMEPOS Under Fee Schedules

Section 1834 of the Act, as added by section 4062 of the Omnibus
Budget Reconciliation Act of 1987 (OBRA `87), Public Law 100-203,
provides for implementation of a fee schedule payment methodology for
most durable medical equipment (DME), prosthetic devices, and orthotic
devices furnished after January 1, 1989. Specifically, sections
1834(a)(1)(A) and (B) and 1834(h)(1)(A) of the Act provide that
Medicare payment for these items is equal to 80 percent of the lesser
of the actual charge for the item or the fee schedule amount for the
item. We implemented this payment methodology at 42 CFR Part 414,
Subpart D of our regulations. Sections 1834(a)(2) through (a)(5) and
section 1834(a)(7) of the Act, and implementing regulations at Sec.
414.200 through Sec. 414.232 (with the exception of Sec. 414.228),
set forth separate payment categories of DME and describe how the fee
schedule for each of the following categories is established:
Inexpensive or other routinely purchased items (section
1834(a)(2) of the Act and Sec. 414.220 of the regulations);
Items requiring frequent and substantial servicing
(section 1834(a)(3) of the Act and Sec. 414.222 of the regulations);
Customized items (section 1834(a)(4) of the Act and Sec.
414.224 of the regulations);
Oxygen and oxygen equipment (section 1834(a)(5) of the Act
and Sec. 414.226 of the regulations);
Other items of DME (section 1834(a)(7) of the Act and
Sec. 414.229 of the regulations).
Each category has its own unique payment rules. With the exception
of customized items, a fee schedule amount is calculated for each item
or category of DME that is identified by a code in the Healthcare
Common Procedure Coding System (HCPCS). The HCPCS is discussed in
section III.C. of this final rule. The Medicare payment amount for a
customized item of DME is based on the Medicare carrier's individual
consideration of that item. The fee schedule amounts for oxygen and
oxygen equipment are monthly payment amounts. Payment under the DME
benefit is made for supplies necessary for the effective use of DME
(for example, lancets used with blood glucose monitors). These supplies
are paid for using the same methodology that we use to pay for the
purchase of inexpensive or routinely purchased items.
The fee schedule amounts for DME are generally adjusted annually by
the change in the CPI-U for the 12-month period ending June 30 of the
preceding year. The fee schedule amounts are also generally limited by
a ceiling (upper limit) and floor (lower limit) equal to 100 percent
and 85 percent, respectively, of the median of the Statewide fee
schedule amounts.
Since 1994, Medicare has paid for most surgical dressings in
accordance with section 1834(i) of the Act and Sec. 414.220(g) of the
regulations, using the same methodology as is used for payment of
purchased inexpensive or routinely purchased DME.
Under section 1834(h) of the Act and Sec. 414.228 of the
regulations, payment for prosthetic and orthotic devices is made on a
lump sum basis and is equal to the lower of the fee schedule amount
calculated for the item or the actual charge for the item, less any
unmet deductible amount. The fee schedule amounts are calculated using
a weighted average of Medicare payments made in the States in each of
10 CMS regions from July 1, 1986, through June 30,

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1987, adjusted annually by the change in the CPI-U for the 12-month
period ending June 30 of the preceding year. The regional fee schedule
amounts are limited by a ceiling (upper limit) and floor (lower limit)
equal to 120 percent and 90 percent, respectively, of the average of
the regional fee schedule amounts for each State.
As authorized under section 1842(s) of the Act and 42 CFR Part 414,
Subpart C of our regulations, Medicare pays for parenteral and enteral
nutrition (PEN) nutrients, equipment, and supplies on the basis of 80
percent of the lesser of the actual charge for the item or the fee
schedule amount for the item (Sec. 414.102(a)). The fee schedule
amounts for PEN items are calculated on a nationwide basis and are the
lesser of the reasonable charges for CY 1995 or the reasonable charges
that would have been used in determining payment for these items in CY
2002 under the former reasonable charge payment methodology (Sec.
414.104(b)). The fee schedule amounts are generally adjusted annually
by the percentage increase in the CPI-U for the 12-month period ending
with June 30 of the preceding year (Sec. 414.102(c)). Under Sec.
414.104(a), payment for PEN nutrients and supplies is made on a
purchase basis, and payment for PEN equipment that is rented is made on
a monthly basis. (We note that we proposed to revise Sec. 414.1 in the
May 1, 2006 proposed rule to specify that fee schedules were
established for PEN items in accordance with our authority under
section 1842(s) of Act. We will address this proposal in a final rule
that will be published later in the Federal Register.)
Section 1833(o)(2) of the Act, as amended by section 627 of the
MMA, requires implementation of fee schedule amounts, effective January
1, 2005, for the purpose of determining payment for custom molded
shoes, extra-depth shoes, and inserts (collectively, ``therapeutic
shoes''). We stated in the May 1, 2006 proposed rule that we believe
this section of the MMA is largely self-implementing because it
mandates use of the methodology set forth in section 1834(h) of the Act
for prosthetic and orthotic devices in determining the fee schedule
amounts for therapeutic shoes. We implemented the methodology for
payment for prosthetic and orthotic devices in regulations at 42 CFR
Part 414, Subpart D, and section 627 of the MMA provides that the same
methodology shall apply to therapeutic shoes. We implemented section
627 of the MMA through program instructions, and on January 1, 2005,
Medicare began paying for therapeutic shoes based on fee schedule
amounts determined in accordance with section 1834(h) of the Act and
Part 414, Subpart D of our regulations.
Section 5101(a) of the Deficit Reduction Act of 2005 (DRA), Public
Law 109-171, amended section 1834(a)(7)(A) of the Act to change the way
Medicare pays for capped rental items. As a result, section
1834(a)(7)(A)(i)(I) of the Act now states that payment for a capped
rental item may not extend over a period of continuous use (as
determined by the Secretary) of longer than 13 months, and section
1834(a)(7)(A)(i)(II) of the Act sets forth how the 13 monthly rental
payment amounts are to be determined. In addition, section
1834(a)(7)(A)(ii) of the Act now provides that on the first day that
begins after the 13th continuous month during which payment is made for
a capped rental item, the supplier of the capped rental item must
transfer title to the item to the Medicare beneficiary. Once the title
has transferred, or once a purchase agreement for a power wheelchair
has been entered into in accordance with section 1834(a)(7)(A)(iii) of
the Act as amended, section 1834(a)(7)(A)(iv) of the Act provides that
reasonable and necessary maintenance and servicing payments (for parts
and labor not covered by the supplier's or the manufacturer's warranty,
as determined by the Secretary to be appropriate for the particular
item) will be made. These statutory changes apply only to capped rental
items whose first rental month occurs on or after January 1, 2006. We
implemented section 5101(a) of the DRA in a final rule, CMS-1304-F:
Home Health Prospective Payment System Rate Update for Calendar Year
2007 and Deficit Reduction Act of 2005; Changes to Medicare Payment for
Oxygen Equipment and Capped Rental Durable Medical Equipment, that was
published in the Federal Register on November 9, 2006 (71 FR 65884).
Section 5101(b) of the DRA amended section 1834(a)(5) of the Act to
limit monthly rental payments for oxygen equipment to a 36-month period
of continuous use (as determined by the Secretary). On the first day
that begins after the 36th continuous month during which payment is
made for the oxygen equipment, new section 1834(a)(5)(F)(ii)(I) of the
Act provides that the supplier must transfer title to the equipment to
the Medicare beneficiary. Section 1834(a)(5)(F)(ii)(II)(aa) of the Act
provides that Medicare will continue to make monthly payments for
oxygen contents for beneficiary-owned oxygen equipment in the amounts
recognized under section 1834(a)(9) of the Act for the period of
medical need. However, under section 1834(a)(5)(F)(ii)(II)(bb) of the
Act, maintenance and servicing payments for beneficiary-owned oxygen
equipment (for parts and labor not covered by the supplier's or
manufacturer's warranty) will be made only if they are reasonable and
necessary. These statutory changes went into effect on January 1, 2006.
For beneficiaries receiving Medicare-covered oxygen equipment as of
December 31, 2005, the 36-month rental period began on January 1, 2006.
We implemented section 5101(b) of the DRA in a final rule, entitled
CMS-1304-F Home Health Prospective Payment System Rate Update for
Calendar Year 2007 and Deficit Reduction Act of 2005; Changes to
Medicare Payment for Oxygen Equipment and Capped Rental Durable Medical
Equipment, that was published in the Federal Register on November 9,
2006 (71 FR 65884).

C. Use of the Healthcare Common Procedure Coding System (HCPCS)

The Healthcare Common Procedure Coding System (HCPCS) is a
standardized coding system used to process claims submitted to
Medicare, Medicaid, and other health insurance programs by providers,
physicians, and other suppliers. The HCPCS code set is divided into the
following two principal subsystems, referred to as Level I and Level II
of the HCPCS:
Level I of the HCPCS codes is comprised of Current
Procedural Terminology (CPT) codes, which are copyrighted by the
American Medical Association. CPT codes are a uniform coding system
consisting of descriptive terms and identifying codes that are used
primarily to identify medical services and procedures furnished by
physicians and other health care professionals which are billed to
public or private health insurance programs. CPT codes are developed,
published, and maintained by the American Medical Association. CPT
codes do not include codes needed to separately report medical items
that are regularly billed by suppliers other than physicians.
Level II of the HCPCS codes is a standardized coding
system used primarily to identify products and supplies that are not
included in the CPT codes, such as DMEPOS when used outside a
physician's office.
HCPCS Level II codes classify like items by category for
the purpose of efficient claims processing. Assignment of a HCPCS code
is not a coverage determination, and does not imply that any payer will
cover the items in the code category. For some DMEPOS items,

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such as wheelchairs and wheelchair cushions, minimum performance
standards must be met before an item can be classified under a HCPCS
code. In October 2003, the Secretary delegated authority under the
Health Insurance Portability and Accountability Act of 1996 (HIPAA) to
CMS to maintain and distribute the HCPCS Level II codes. In the May 1,
2006 proposed rule, we proposed that the HCPCS Level II codes would be
used to describe the DME, orthotic, and enteral nutrients, equipment,
and supplies furnished under the Medicare DMEPOS Competitive Bidding
Program, both for the purpose of requesting bids and for establishing
payment amounts.

IV. Medicare Competitive Bidding Demonstrations

Prior to enactment of the MMA, section 4319 of the Balanced Budget
Act of 1997 (BBA), Pub. L. 105-33, authorized implementation of up to
five demonstration projects of competitive bidding for Medicare Part B
items, except physician services. In accordance with section 4319 of
the BBA, we planned and implemented the DMEPOS Competitive Bidding
Demonstration to test the feasibility and program impacts of using
competitive bidding to set prices for DMEPOS. The demonstration was
implemented at two sites: Polk County, Florida, and in the San Antonio,
Texas, Metropolitan Statistical Area (MSA). The competitive bidding
demonstrations, authorized under the BBA, were implemented successfully
in both demonstration sites from 1999 to 2002, resulted in a
substantial savings to the program, and offered beneficiaries
sufficient access and quality products.
At the first site, Polk County, Florida, we conducted the first of
two rounds of bidding in 1999. Five categories of DMEPOS were put up
for bidding: oxygen equipment and supplies (required by statute);
hospital beds and accessories; enteral nutrition formulas and
equipment; urological supplies; and surgical dressings. A total of 16
contract suppliers began providing demonstration products in Polk
County on October 1, 1999, and continued for 2 years. The second and
final round of bidding in Polk County was conducted in 2001 for the
same product categories minus enteral nutrition. (Enteral nutrition was
dropped to retain only product categories that are overwhelmingly used
in private homes.) The second set of competitively bid payment amounts
took effect in October 2001. As in round one, 16 suppliers were
selected, of whom half had participated as winners previously. The new
fee schedules developed from the bids in each round replaced the
Statewide Medicare DMEPOS fees. The second round of the demonstration
in Polk County ended in September 2002.
Texas was the second site for the demonstration. In Bexar, Comal,
and Guadalupe counties in the San Antonio MSA, we conducted bidding in
2000 for five kinds of DMEPOS: oxygen equipment and supplies; hospital
beds and accessories; wheelchairs and accessories; general orthotics;
and nebulizer drugs. Fifty-one suppliers were selected and began
serving Medicare beneficiaries under the new fees in February 2001. The
San Antonio site ended operations in December 2002, the statutorily
required termination date in the BBA.
In each area of evaluation, the data indicated mostly favorable
results for the Medicare program. The demonstration led to lower
Medicare fees for almost every item in almost every product category in
each round of bidding. Fee reductions varied by product category and
item, resulting in a nearly 20 percent overall savings at each site.
Statistical and qualitative data indicate that beneficiary access and
quality of services were essentially unchanged.
The DMEPOS Competitive Bidding Demonstration offered valuable
information for understanding the impacts of competitive bidding for
Medicare services. This information is especially important now because
section 302(b) of the MMA mandates a larger role for competitive
bidding within the Medicare program by requiring the Secretary to
implement competitive bidding programs for the furnishing of certain
DME and associated supplies, enteral nutrition and associated supplies,
and off-the-shelf (OTS) orthotics. In addition, section 303(d) of the
MMA required the Secretary to implement a competitive bidding program
for certain Medicare Part B drugs not paid on a cost or prospective
payment system basis, and section 302(b) of the MMA requires that
competitive bidding demonstration projects be implemented for clinical
laboratory services and managed care.

V. Discussion of the Provisions of This Final Rule

In this final rule we are adding new sections to 42 CFR Part 414,
Subpart F that implement rules relating to the Medicare DMEPOS
Competitive Bidding Program. A discussion of the specific provisions of
the proposed rule, a summary of the public comments we received and our
responses to those comments are presented in sections VI. through XVII.
of this final rule. We present a regulatory impact analysis of the
provisions of this final rule in section XVIII. of this final rule. The
regulation text appears at the end of this final rule.

VI. Medicare DMEPOS Competitive Bidding Program

A. Legislative Authority and Program Advisory and Oversight Committee

1. Legislative Authority
Section 302(b)(1) of the MMA (Pub. L. 108-173) amended section 1847
of the Act to require the Secretary to establish and implement programs
under which competitive bidding areas (CBAs) are established throughout
the United States for contract award purposes for the furnishing of
certain competitively priced items for which payment is made under
Medicare Part B (the ``Medicare DMEPOS Competitive Bidding Program'').
Section 1847(a)(2) of the Act provides that the items and services to
which competitive bidding applies are certain durable medical equipment
(DME) and medical supplies, which are covered items (as defined in
section 1834(a)(13) of the Act) for which payment would otherwise be
made under section 1834(a) of the Act, including items used in infusion
and drugs, (other than inhalation drugs) and supplies used in
conjunction with DME, but excluding class III devices under the Federal
Food, Drug and Cosmetic Act; enteral nutrients, equipment and supplies
(as described in section 1842(s)(2)(D) of the Act); and OTS orthotics
(as described in section 1861(s)(9) of the Act) for which payment would
otherwise be made under section 1834(h) of the Act and which require
minimal self-adjustment. In addition, sections 1847(a) and (b) of the
Act specify certain requirements and conditions for implementation of
the Medicare DMEPOS Competitive Bidding Program.
Competitive bidding provides a way to harness marketplace dynamics
to create incentives for suppliers to provide quality items in an
efficient manner and at a reasonable cost to the program. In our view,
the Medicare DMEPOS Competitive Bidding Program has five main
objectives:
To implement competitive bidding programs for certain
DMEPOS items.
To assure beneficiary access to quality DMEPOS as a result
of the program.
To reduce the amount Medicare pays for DMEPOS and create a
payment structure under competitive bidding that is more reflective of
a competitive market.

[[Page 17997]]

To limit the financial burden on beneficiaries by reducing
their out-of-pocket expenses for DMEPOS they obtain through the
program.
To contract with suppliers that conduct business in a
manner that is beneficial for the program and for Medicare
beneficiaries.
As discussed in section IV. of this final rule, the Medicare DMEPOS
competitive bidding demonstration projects that were conducted prior to
the enactment of the MMA offered valuable information for understanding
the impacts of competitive bidding for Medicare services. This
information, in part, led to the adoption of section 302(b) of the MMA,
which requires that the Secretary implement competitive bidding
programs for the furnishing of certain DMEPOS under the Medicare
program.
2. Program Advisory and Oversight Committee
Section 1847(c) of the Act, as amended by section 302(b)(1) of the
MMA, required the Secretary to establish a Program Advisory and
Oversight Committee (PAOC) to provide advice to the Secretary with
respect to the following functions:
The implementation of the Medicare DMEPOS Competitive
Bidding Program.
The establishment of financial standards for entities
seeking contracts under the Medicare DMEPOS Competitive Bidding
Program, taking into account the needs of small providers.
The establishment of requirements for collection of data
for the efficient management of the Medicare DMEPOS Competitive Bidding
Program.
The development of proposals for efficient interaction
among manufacturers, providers of services, suppliers (as defined in
section 1861(d) of the Act), and individuals.
The establishment of quality standards for DMEPOS
suppliers under section 1834(a)(20) of the Act.
In addition, section 1847(c)(3)(B) of the Act authorizes the PAOC
to perform such additional functions to assist the Secretary in
carrying out the Medicare DMEPOS Competitive Bidding Program as the
Secretary may specify.
As authorized under section 1847(c)(2) of the Act, the PAOC members
were appointed by the Secretary and represent a broad mix of relevant
industry, consumer, and government parties. Specifically, the
membership roster includes two beneficiary/consumer representatives,
four manufacturer representatives, five supplier representatives, three
certification/standards representatives, six Federal and State program
representatives, one physician, and one pharmacist. The representatives
have expertise in a variety of subject matter areas, including DMEPOS,
competitive bidding methodologies and processes, and rural and urban
marketplace dynamics.
We held the first PAOC meeting, which was announced in a Federal
Register notice (69 FR 31125), at the CMS Headquarters on October 6,
2004. We held the second meeting on December 6 and 7, 2004. We have
held two additional PAOC meetings in 2005 and 2006 during which we,
along with our contractor, RTI International, presented material to
both the PAOC and the public relating to the provisions that are
outlined in the proposed rule and in this final rule. The topics that
we presented included--
Medicare's timeline for implementation of the Medicare
DMEPOS Competitive Bidding Program;
Results of the Medicare competitive bidding demonstration
projects authorized by section 4319 of the BBA;
Structure of the Medicare DMEPOS Competitive Bidding
Program;
Existing non-Medicare competitive bidding programs for
DMEPOS;
Program design options for the Medicare DMEPOS Competitive
Bidding Program;
Criteria for selecting Metropolitan Statistical Areas
(MSAs) in which competition under the Medicare DMEPOS Competitive
Bidding Program will occur in both CYs 2007 and 2009;
Criteria for selecting items for competitive bidding;
Bidding process overview;
Methodology for setting single payment amounts for
competitively bid items;
Capacity of DMEPOS suppliers and beneficiary utilization
of DMEPOS;
Financial capabilities of bidding suppliers;
Exception authority under section 1847(a)(3) of the Act
for rural areas and areas with low population density within urban
areas that are not competitive; and
Quality standards and accreditation procedures applicable
to DMEPOS suppliers.
In addition to the PAOC meetings, we have designed and implemented
a CMS Web site at http://cms.hhs.gov/CompetitiveAcqforDMEPOS/PAOCMI/list.asp
specifically for the public to have access to all PAOC

presentations, minutes, and updates for the Medicare DMEPOS Competitive
Bidding Program. In accordance with section 1847(c)(5) of the Act, the
PAOC will continue to operate until December 31, 2009. Future PAOC
meeting dates, as well as other information pertinent to the Medicare
DMEPOS Competitive Bidding Program, can be found on the CMS Web site.

B. Purpose and Definitions (Sec. Sec. 414.400 and 414.402)

In the May 1, 2006 proposed rule, we proposed in Sec. 414.400 to
state that the purpose of 42 CFR Part 414, Subpart F would be to
implement the Medicare DMEPOS Competitive Bidding Program for certain
DMEPOS items as required by sections 1847(a) and (b) of the Act.
As set forth in proposed Sec. 414.402, we proposed to define
certain frequently occurring terms that would be used in competitive
bidding. Specifically, we proposed to define the following terms:
Bid means an offer to furnish an item for a particular price and
time period that includes, where appropriate, any services that are
directly related to the furnishing of the item.
Competitive bidding area (CBA) means an area established by the
Secretary under this subpart [42 CFR Part 414, Subpart F]. (We note
that the definition language included in the preamble of the proposed
rule was inconsistent with the definition language in the proposed
regulation text, which was correct.)
Composite bid means the sum of a bidding supplier's weighted bids
for all items within a product category for purposes of allowing a
comparison across bidding suppliers.
Competitive bidding program means a program established under this
subpart [42 CFR Part 414, Subpart F]. (We note that the definition
language included in the preamble of the proposed rule was inconsistent
with the definition language in the proposed regulation text, which was
correct.)
Contract supplier means an entity that is awarded a contract by CMS
to furnish items under a competitive bidding program.
DMEPOS stands for durable medical equipment, prosthetics, orthotics
and supplies.
Grandfathered item means any one of the following items for which
payment is made on a rental basis prior to the implementation of a
competitive bidding program under this subpart [42 CFR Part 414,
Subpart F]:

(1) An inexpensive or routinely purchased item described in Sec.
414.220.
(2) An item requiring frequent and substantial servicing as
described in Sec. 414.222.
(3) Oxygen and oxygen equipment described in Sec. 414.226.

[[Page 17998]]

(4) A capped rental item described in Sec. 414.229.
Grandfathered supplier means a noncontract supplier that furnishes
a grandfathered item.
Item means one of the following products identified by a HCPCS
code, other than class III devices under the Federal Food, Drug and
Cosmetic Act and inhalation drugs, and includes the services directly
related to the furnishing of that product to the beneficiary:
(1) Durable medical equipment (DME), as defined in Sec. 414.202
and further classified into the following categories:
(i) Inexpensive or routinely purchased items, as specified in Sec.
414.220(a);
(ii) Items requiring frequent and substantial servicing, as
specified in Sec. 414.222(a);
(iii) Oxygen and oxygen equipment, as specified in Sec.
414.226(b).
(iv) Other DME (capped rental items), as specified in Sec.
414.229.
(2) Supplies necessary for the effective use of DME.
(3) Enteral nutrients, equipment, and supplies.
(4) Off-the-shelf orthotics, which are orthotics described in
section 1861(s)(9) of the Act that require minimal self-adjustment for
appropriate use and do not require expertise in trimming, bending,
molding, assembling, or customizing to fit a beneficiary.
Item weight is a number assigned to an item based on its
beneficiary utilization rate in a competitive bidding area when
compared to other items in the same product category.
Metropolitan Statistical Area (MSA) has the same meaning as that
given by the Office of Management and Budget.
Nationwide competitive bidding area means a competitive bidding
area that includes the United States and its territories.
Noncontract supplier means a supplier that is located in a
competitive bidding area or that furnishes items through the mail to
beneficiaries in a competitive bidding area but that is not awarded a
contract by CMS to furnish items included in a competitive bidding
program for that area.
Physician has the same meaning as in section 1861(r)(1) of the Act.
Pivotal bid means the highest composite bid based on bids submitted
by a suppliers for a product category that will include a sufficient
number of suppliers to meet beneficiary demand for the items in that
product category.
Product category means a grouping of related items that are
included in a competitive bidding program.
Single payment amount means the allowed payment for an item
furnished under a competitive bidding program.
Supplier means an entity with a valid Medicare supplier number,
including an entity that furnishes an item through the mail.
Treating practitioner means a physician assistant, nurse
practitioner, or clinical nurse specialist, as those terms are defined
in section 1861(aa)(5) of the Act.
Weighted bid means the item weight multiplied by the bid price
submitted for that item.
Comment: Several commenters supported the definitions of ``bid''
and ``item'' because these definitions acknowledge that services are
involved in the delivery of products to Medicare beneficiaries. One
commenter suggested that Medicare competitively bid class III devices,
which appear to be excluded under the proposed definition of ``item.''
Response: We appreciate the commenters' support. Section
1847(a)(2)(A) of the Act specifically excludes class III devices under
the Federal Food, Drug, and Cosmetic Act from the Medicare DMEPOS
Competitive Bidding Program. Therefore, we do not have the authority to
conduct competitive bidding for these items. We are clarifying in the
definition of ``item'' that the DME excludes class III devices under
the Federal Food, Drug and Cosmetic Act as defined in Sec. 414.402 and
that inhalation drugs are not included in the term ``supplies necessary
for the effective use of DME.'' We are also revising the regulatory
cross-reference for ``oxygen and oxygen equipment.''
We agree with the commenters that the definition of an item should
acknowledge what is included in an item for which bids are being
submitted. Therefore, in this final rule, we are revising the
definition of ``item'' to indicate that although we will always
identify the product by its HCPCS code, we may combine several codes to
form one competitively bid item or specify a particular method by which
the item is furnished. For example, if we were to include diabetic test
strips in a mail-order competitive bidding program, we would identify
the item by its HCPCS code and indicate that the product is to be
furnished only by mail. We are making this change because we need to be
able to modify HCPCS codes or combine HCPCS codes to identify the items
for which we will be conducting competitive bidding because HCPCS
codes, by themselves, do not always fully define the items for which we
wish to solicit competitive bids. We further discuss this revision in
section VI.B. of this final rule. Therefore, in this final rule, we
have revised the definition of ``item'' to specify that an item for
purposes of competitive bidding may be comprised of two or more
products identified by different HCPCS codes and/or modifiers and that
these codes may be defined based on how a product is furnished (for
example, by mail).
Comment: One commenter stated that the definitions for the
``composite bid'' and the ``single payment amount'' for the individual
items should include all the costs associated with training the
beneficiary and properly putting equipment in place to ensure the safe
administration of a piece of DMEPOS in a beneficiary's home.
Response: We are not changing the definitions of ``composite bid''
and ``single payment amount'' because these definitions are based upon
the bids, which, by definition, include any services that are directly
related to the furnishing of the item to the beneficiary. In addition,
to the extent that the service component is included in the definitions
of ``bid'' and ``item,'' the ``composite bid'' and the ``single payment
amount'' calculated for each item would reflect the costs of services
associated with furnishing that item to a beneficiary.
Comment: Several commenters suggested that the proposed definition
of ``noncontract supplier'' does not address suppliers that are
physically located outside of a CBA, yet provide services to
beneficiaries whose permanent address is inside a CBA. One commenter
suggested that the definition read: ``A supplier that furnishes items
to beneficiaries in a competitive bidding area, but that is not awarded
a contract by Medicare to furnish items included in the competitive
bidding program for that area.''
Response: Our proposed definition of the term ``noncontract
supplier'' only included suppliers located in a CBA or that mailed
items to beneficiaries in a CBA. However, we recognize the commenter's
concerns that this definition would not capture suppliers that are
located outside the CBA but that furnish items to beneficiaries who
maintain a permanent residence in a CBA. Therefore, we are revising the
definition of the term ``noncontract supplier'' in this final rule to
mean: ``a supplier that is not awarded a contract by CMS to furnish
items included in a competitive bidding program.''
Comment: Many commenters suggested that the definition of
``physician'' be expanded to allow podiatrists, optometrists and
dentists to prescribe a particular brand or mode of

[[Page 17999]]

delivery of DMEPOS, along with physician assistants, nurse
practitioners, and clinical nurse specialists. The commenters asserted
that this expansion would allow a variety of qualified practitioners,
in addition to physicians, to prescribe particular brands or modes of
delivery where appropriate. The commenters requested that the
definition of physician be changed from that specified in section
1861(r)(1) of the Act to that specified in section 1861(r) of the Act.
Response: We agree with the commenters and are revising the
definition of ``physician'' applicable in this final rule to have the
same meaning as in section 1861(r) of the Act. We believe that this
revision is consistent with the intent of the 1847(a)(5)(A) as it
reflects which professionals would be ordering Medicare-covered items
under the Medicare DMEPOS Competitive Bidding Program. In addition, we
are finalizing the definition that we had proposed that a treating
practitioner means a physician assistant, nurse practitioner, or
clinical nurse specialist, as defined in section 1861(aa)(5) of the
Act. In ordering DMEPOS under the Medicare program, these treating
practitioners can specify a particular brand or mode of delivery for an
item, which would be paid at the single payment amount.
After consideration of the public comments received, we are
finalizing proposed Sec. 414.400 with only a technical change to the
heading of the section (changing the heading from ``Basis'' to
``Purpose and Basis''). In addition, we are revising the definitions of
``item,'' ``noncontract supplier,'' and ``physician'' in Sec. 414.402
as discussed above. We are also revising the definitions of several
other terms in Sec. 414.402, as well as adding new definitions. Below
we state the revised and new definitions and indicate where a full
discussion of each change can be found in this final rule:
Revising the regulatory reference to the oxygen payment
classes in the definition of ``item'' so that the definition now
references Sec. 414.226(c)(1) instead of Sec. 414.225(b). We discuss
this revision in section VI.G.6 of this final rule.
Revising the definition of ``item weight'' by removing the
phrase ``in a competitive bidding area'' and adding the phrase ``using
national data'' in referencing the beneficiary utilization rate. We
discuss this revision in section VI.D.2. (Evaluation of Bids) of this
final rule.
Adding a definition of ``mail order contract supplier'' to
mean a contract supplier that furnishes items through the mail to
beneficiaries who maintain a permanent residence in a competitive
bidding area.'' This new definition is discussed in section V.I.E.5. of
this final rule.
Adding a definition of ``minimal self-adjustment'' to mean
``an adjustment that the beneficiary, caretaker for the beneficiary, or
supplier of the device can perform and does not require the services of
a certified orthotist (that is, an individual certified by either the
American Board for Certification in Orthotics and Prosthetics, Inc., or
the Board for Orthotist/Prosthetist Certification) or an individual who
has specialized training. This new definition is discussed in section
VI.F. of this final rule.
Adding a definition of ``nationwide mail order contract
supplier'' to mean a mail order contract supplier that furnishes items
in a nationwide competitive bidding area, and a definition of
``regional mail order contract supplier'' to mean a mail order contract
supplier that furnishes items to any Medicare beneficiary residing
within a certain region(s) that are designated as CBAs and are located
within the United States, its Territories, or the District of Columbia,
as discussed in section VI.E.5. of this final rule.
Adding a definition of ``network'' to mean a group of
small suppliers that form a legal entity that submits a bid to furnish
competitively bid items in a CBA, and that meets additional
requirements. This change is discussed in section XII. of this final
rule.
Revising the definition of ``pivotal bid'' to mean the
``lowest composite bid based on bids submitted by suppliers for a
product category that includes a sufficient number of suppliers to meet
beneficiary demand for the items in that product category.'' We
consider this revision to be a clarification that the pivotal bid is
the lowest composite bid in terms of the bid amounts submitted by the
suppliers rather than the highest composite bid that includes
sufficient number of suppliers to meet demand, as discussed in section
VII.D.3. of this final rule.
Revising the definition of ``product category'' to mean
``a grouping of related items that are used to treat a similar medical
condition'', as discussed in section VI.G.5. of this final rule.
Adding a definition of ``regional competitive bidding area
``to mean'' a CBA that consists of a region of the United States, its
Territories, and/or the District of Columbia''as discussed in section
VI.E.5. of this final rule.
Adding a definition of ``small supplier'' to mean the ``a
supplier that generates gross revenue of $3.5 million or less in annual
receipts including Medicare and non-Medicare revenue,'' as discussed in
section XII. of this final rule.
We are also making the following technical changes to proposed
Sec. 414.402:
Revising the definition of ``competitive bidding program''
to clarify that such a program established under 42 CFR Part 414,
Subpart F occurs ``within a designated CBA.''
Clarifying the introductory language of the definition of
``grandfathered item'' to read: ``any one of the following items for
which payment is made on a rental basis prior to the implementation of
a competitive bidding program and for which payment is made after
implementation of a competitive bidding program to a grandfathered
supplier that continues to furnish items in accordance with Sec.
414.408(j).''
Revising the definition of ``grandfathered supplier'' to
mean a noncontract supplier ``that chooses to continue to furnish
grandfathered items to a beneficiary in a CBA.''
Revising the definition of a ``nationwide competitive
bidding area'' to mean a CBA that includes the United States, its
Territories, and the District of Columbia.''
We are finalizing all of the other definitions in proposed Sec.
414.402 without modification.

C. Competitive Bidding Implementation Contractors (CBICs) (Sec. Sec.
414.406(a) and (e))

Section 1847(b)(9) of the Act provides that the Secretary may
contract with appropriate entities to implement the Medicare DMEPOS
Competitive Bidding Program. Section 1847(a)(1)(C) of the Act also
authorizes the Secretary to waive such provisions of the Federal
Acquisition Regulation (FAR) as are necessary for the efficient
implementation of this section, other than provisions relating to
confidentiality of information and such other provisions as the
Secretary determines appropriate.
In the May 1, 2006 proposed rule (71 FR 25661), we proposed to
designate one or more competitive bidding implementation contractors
(CBICs) for the purpose of implementing the Medicare DMEPOS Competitive
Bidding Program (proposed Sec. 414.406(a)). We also stated that we
envisioned the program would have six primary functions, including
overall oversight and decision making, operation design functions
(including the design of both bidding and outreach material templates,
as well as program processes), bidding and evaluation,

[[Page 18000]]

access and quality monitoring, outreach and education, and claims
processing.
As we stated earlier, under the DMEPOS provisions of the FY 2007
IRF final rule (71 FR 48354), we addressed the public comments we
received on the proposed provisions relating to implementation
contractors under the Medicare DMEPOS Competitive Bidding Program and
finalized regulations at Sec. 414.406(a), which allows us to designate
one or more CBICs for the purpose of implementing the program, and at
Sec. 414.406(e), which codifies our proposal to have the regional
carrier (now referred to as a Durable Medical Equipment Medicare
Administrative Contractor, or DME MAC) that would otherwise be
processing claims for a particular geographic region also process
claims for items furnished under a competitive bidding program in the
same geographic region. In the same final rule, we also finalized our
policy regarding the elements of performance that will be included in a
contract we enter into with a CBIC.

D. Payment under the Medicare DMEPOS Competitive Bidding Program

1. Payment Basis (Sec. Sec. 414.408(a), (c), and (d))
Section 1847(b)(5) of the Act mandates that a single payment amount
be established for each item in each CBA based on the bids submitted
and accepted for that item. Medicare payment for the item is then made
on an assignment-related basis equal to 80 percent of the applicable
single payment amount, less any unmet Part B deductible described in
section 1833(b) of the Act. Section 1847(a)(6) of the Act requires that
this payment basis be substituted for the payment basis otherwise
applied under section 1834(a) of the Act for DME, section 1834(h) of
the Act for OTS orthotics, or section 1842(s) of the Act for enteral
nutrients, equipment, and supplies, as appropriate.
As discussed in detail in section II.C. of the May 1, 2006 proposed
rule (71 FR 25662), we proposed that payment to the contract supplier
would be based on the single payment amount for the item in the CBA
where the beneficiary maintains a permanent residence (proposed Sec.
414.408(a)(1)). If an item that is included in a competitive bidding
program is furnished to a beneficiary who does not maintain a permanent
residence in a CBA, the payment basis for the item would be 80 percent
of the lesser of the actual charge for the item, or the applicable fee
schedule amount for the item (proposed Sec. 414.408(a)(2)). We also
proposed that implementation of a competitive bidding program would not
preclude the use of an advanced beneficiary notice (ABN) to allow
beneficiaries to make informed consumer choices regarding whether to
obtain items for which Medicare might not make payment (proposed Sec.
414.408(d)). Finally, as required under section 1847(b)(5)(C) of the
Act, we proposed in Sec. 414.408(c) that payment for an item furnished
under a competitive bidding program would be made on an assignment-
related basis.
Comment: Several commenters stated that basing payment amounts on
the CBA where the beneficiary maintains a permanent residence, and not
on the location where the item is furnished, may cause suppliers to be
paid less than the single payment amount in their area. They
recommended that CMS allow payment to be made at the payment amount for
the area where the item is furnished. The commenters pointed out that
it will also be difficult for contract suppliers to determine what the
single payment amount is for beneficiaries who reside outside their
CBA.
Response: Medicare currently pays for all DMEPOS items based on the
payment amount applicable for the primary residence of the beneficiary,
regardless of where the item is furnished. The Medicare payment system
is set up to base payment amounts on the beneficiary's primary
residence. We proposed to adopt this longstanding rule for the Medicare
DMEPOS Competitive Bidding Program because it is an effective way to
ensure that suppliers do not organize their businesses to obtain higher
payment amounts that apply to certain geographic areas of the country.
We do not believe it will be difficult for contract suppliers to
determine how much they will be paid for an item furnished to a
beneficiary who does not reside in the contract supplier's CBA because
we will make the single payment amounts for each item in each CBA,
along with the fee schedule amounts that will continue to be paid in
areas that are not CBAs, publicly available to all suppliers.
Comment: Several commenters suggested that CMS not conduct
competitive bidding, but simply lower the payment amounts for DMEPOS
until the only suppliers left to provide these items are the minimum
number necessary to furnish items needed by Medicare beneficiaries.
Response: Section 302(b) of the MMA mandated that the Secretary
establish and implement competitive bidding programs for certain items
of DMEPOS, and we have a legal obligation to comply with this
legislative mandate.
After consideration of the public comments we received, we are
finalizing, without substantive revisions, proposed Sec. 414.408(a)
that governs the payment basis under the Medicare DMEPOS Competitive
Bidding Program. We did not receive comments on proposed Sec. Sec.
414.408(c) and (d) and are finalizing those sections. We have made an
editorial revision to Sec. 414.408, using the acronym CBA instead of
the terms ``area'' or ``competitive bidding area.''
2. General Payment Rules
Section 1834(a) of the Act and implementing regulations at 42 CFR
Sec. 414.200 through Sec. 414.232 (with the exception of Sec.
414.228) set forth the Medicare Part B payment methodology we currently
use to pay for the rental or purchase of new and used DME. Each item of
DME that is paid for under these sections is classified into a payment
category, and each category has its own unique payment rules. Section
1842(s) of the Act provides authority for establishing a statewide or
areawide fee schedule to be used for the payment of items described in
section 1842(s)(2) of the Act. Under this authority, we implemented fee
schedules for payment for the purchase and rental of enteral nutrients,
equipment, and supplies (Sec. 414.100 through Sec. 414.104). Section
1834(h) of the Act and Sec. 414.228 of our regulations set forth the
Medicare Part B payment methodology we currently use to pay for
orthotics and prosthetics.
Other than the rules governing calculation of the single payment
amount and other modifications to existing rules that are addressed in
this final rule, we proposed that the current requirements regarding
the rental or purchase of DMEPOS items would continue to apply under
the Medicare DMEPOS Competitive Bidding Program. While we believe that
we have discretion under section 1847(a)(6) of the Act to adopt new
rules that would govern these requirements, we proposed only to change
the payment basis for these items and to make a few modifications to
existing rules.
3. Special Rules for Certain Rented Items of DME and Oxygen
(Grandfathering of Suppliers) (Sec. 414.408(j))
a. Process for Grandfathering Suppliers
Section 1847(a)(4) of the Act requires that in the case of covered
DME items for which payment is made on a rental basis under section
1834(a) of the Act, and in the case of oxygen for which

[[Page 18001]]

payment is made under section 1834(a)(5) of the Act, the Secretary
shall establish a ``grandfathering'' process by which rental agreements
for those covered items and supply arrangements with oxygen suppliers
entered into before the start of a competitive bidding program may be
continued. DME paid on a rental basis under section 1834(a) of the Act
includes inexpensive or routinely purchased items furnished on a rental
basis (as described in Sec. 414.220 of the regulations), items
requiring frequent and substantial servicing (as described in Sec.
414.222 of the regulations), and capped rental items (as described in
Sec. 414.229 of the regulations). Section 1834(a)(5) of the Act and
Sec. 414.226 of our regulations provide that payment be made on the
basis of monthly payment amounts for oxygen and oxygen equipment (other
than portable oxygen equipment) with separate add-on payments for
portable oxygen equipment. In cases where the beneficiary owns
stationary and/or portable gaseous or liquid oxygen equipment, payment
is made on the basis of monthly payment amounts for oxygen contents.
In the May 1, 2006 proposed rule (71 FR 25662), in proposed Sec.
414.408(k) (redesignated as Sec. 414.408(j) in this final rule), we
proposed to establish the grandfathering process described below for
rented DME and oxygen and oxygen equipment when these items are
included under the Medicare DMEPOS Competitive Bidding Program. We
proposed that this process would apply only to suppliers that began
furnishing the items described above to Medicare beneficiaries who
maintain a permanent residence in an area prior to the implementation
of the competitive bidding program in that area that includes the same
items.
In the case of the specific items identified in this section, we
proposed in Sec. 414.408(k)(4) to give Medicare beneficiaries the
choice of deciding whether they would like to continue receiving the
item from the grandfathered supplier or a contract supplier, unless the
grandfathered supplier is not willing to continue furnishing the item
under the terms we have specified below. If the grandfathered supplier
is not willing to continue furnishing the item under these terms, a
contract supplier would assume responsibility for continuing to furnish
the item and be paid based on the single payment amount determined for
that item under the Medicare DMEPOS Competitive Bidding Program. In
addition, the beneficiary could elect, at any time, to transition to a
contract supplier and the contract supplier would be required to accept
the beneficiary as a customer. Suppliers that agree to be grandfathered
suppliers for a specific item must agree to be a grandfathered supplier
for all beneficiaries who request to continue to use their service for
that item.
Comment: One commenter supported our grandfathering proposal. The
commenter stated that our proposal would allow some beneficiaries to
maintain an established relationship with a current supplier and that
this was important to minimize disruption for beneficiaries.
Response: We appreciate the comment and agree that minimizing
disruption of service for beneficiaries is an important principle that
underlies our grandfathering rules.
b. Payment Amounts to Grandfathered Suppliers
(1) Grandfathering of Suppliers Furnishing Items Prior to the First
Competitive Bidding Program in a CBA
For items requiring frequent and substantial servicing, as well as
oxygen and oxygen equipment, we proposed that a grandfathered supplier
may continue furnishing these items to beneficiaries in accordance with
existing rental agreements or supply arrangements. However, we proposed
that, as long as the items remain medically necessary, the
grandfathered supplier would be paid the single payment amounts
determined for those items under the competitive bidding program
because beneficiaries rent these items for extended time periods
(proposed Sec. Sec. 414.408(k)(2)(iii) and (iv)); redesignated as
Sec. Sec. 414.408(j)(2)(iii) and (iv) in this final rule). We believe
that this payment proposal is consistent with section 1847(a)(4) of the
Act, which requires us to establish a ``process'' under which rental
agreements and supply arrangements ``may be continued,'' but is silent
regarding the terms of that process. Because the rental payments for
these items are not calculated based on, or limited to, the purchase
fee for that item as is the case for other rented DME items, we do not
believe that it is reasonable to continue paying the fee schedule
amounts for these items and believe that payment at the competitively
determined rates (that is, the single payment amounts) will comport
with an overarching goal of competitive bidding to achieve savings for
the Medicare program.
Unlike other items requiring frequent and substantial servicing,
the duration of the rental payments for capped rental items and
inexpensive or routinely purchased items is limited. In addition,
unlike oxygen equipment, the payment amounts made for capped rental
items and inexpensive or routinely purchased items are limited to the
approximate purchase fee for the item.
Therefore, for items that are furnished on a rental basis under
Sec. 414.220 or Sec. 414.229, we proposed in Sec. Sec.
414.408(k)(2)(i) and (k)(2)(ii) (redesignated as Sec. Sec.
414.408(j)(2)(i) and (ii) in this final rule) that the grandfathered
supplier could continue furnishing the items in accordance with
existing rental agreements and continue to be paid in accordance with
section 1834(a) of the Act. We believe that continuing to pay for these
grandfathered items at the fee schedule rates is authorized under
section 1862(a)(17) of the Act, which allows the Secretary to specify
``other circumstances'' in which Medicare will make payment where the
expenses for a competitively bid item furnished in a CBA were incurred
by a supplier other than a contract supplier. In our view, the limited
duration of the rental agreements for capped rental items and
inexpensive or routinely purchased items furnished on a rental basis,
in addition to the fact that payments for these items are based on or
limited to the purchase fees for the items, constitute appropriate
circumstances under which we would allow these rental agreements,
including their payment terms, to continue until their conclusion. The
rental fee schedule amounts that we would pay for grandfathered items
in the capped rental or inexpensive or routinely purchased categories
would be those fee schedule amounts established for the State in which
the beneficiary maintains a permanent residence.
Comment: Some commenters stated that the grandfathering and
transition policies are both unworkable and unfair to contract
suppliers that will be required to continue to furnish capped rental or
oxygen equipment to beneficiaries in the CBA regardless of the number
of rental payments that have already been made to other suppliers for
the equipment. They added that a contract supplier could inherit an
unknown number of beneficiaries who have been renting oxygen equipment
for 20 to 30 months of continuous use. In these cases, the contract
supplier would receive a minimal number of rental payments that would
be insufficient to cover the cost of oxygen equipment for which title
will transfer to the beneficiary after 36 months of continuous use. The
commenters stated that if a contract supplier has to supply a capped
rental item for the last 6 months of the rental cycle, the supplier

[[Page 18002]]

would only receive 45 percent of the single payment amount, which is
not enough to cover costs. They recommended that Medicare initiate a
new period of continuous use if a beneficiary decides to switch from a
grandfathered supplier to a contract supplier.
One commenter suggested that CMS establish a defined timeframe
within which a beneficiary can transfer to a new contract supplier. The
commenter also suggested that CMS not require contract suppliers to
accept, as customers, beneficiaries who are already currently using
capped rental equipment furnished by another supplier. Another
commenter stated that CMS should mandate grandfathering by requiring
the supplier that furnished oxygen or a capped rental item to a
beneficiary before the implementation of a competitive bidding program
to continue to furnish that item to the beneficiary for the remainder
of the rental period. Some commenters also questioned how section 5101
of the DRA, which imposes new requirements regarding the rental of
oxygen, oxygen equipment, and capped rental items, will affect
competitive bidding. Several commenters suggested that the information
in the proposed rule is inadequate to serve as a basis for public
comments, especially with respect to the impact that the implementation
of the DRA will have on competitive bidding. Several commenters noted
that until CMS establishes the scope of the DRA provisions and how they
dovetail with competitive bidding, they cannot provide meaningful
comments or make recommendations. For example, the commenters
questioned how CMS intended to apply the DRA oxygen provisions to
grandfathered suppliers and beneficiaries and whether the grandfathered
relationship would terminate at the conclusion of 36 months.
Response: Section 5101 of the DRA (discussed in detail in section
III.B. of this final rule) caps the number of rental payments that may
be made for oxygen equipment and capped rental DME items and requires
that title to these items transfer to the beneficiary at the conclusion
of the rental period. We proposed in the May 1, 2006 proposed rule (71
FR 25662) that current requirements regarding the rental or purchase of
DMEPOS items would continue to apply under the Medicare DMEPOS
Competitive Bidding Program. These requirements include the changes we
recently made to 42 CFR Part 414, Subpart D of our regulations that
implemented section 5101 of the DRA, new supplier requirements that
protect beneficiary access to oxygen, oxygen equipment and capped
rental items, and new payment classes for oxygen and oxygen equipment
(see 71 FR 65884 for a full discussion of these provisions). We
recognize that the title transfer provisions that are part of these new
requirements, when read together with proposed Sec. 414.408(k)(1)
(allowing a supplier to elect to be a grandfathered supplier) and
proposed Sec. 414.408(k)(4) (allowing a beneficiary the choice of
receiving a grandfathered item from a grandfathered supplier or a
contract supplier), might place a contract supplier in the position of
being required to furnish oxygen equipment or a capped rental item to a
beneficiary who previously rented the item from another supplier
(either a supplier that does not elect to become a grandfathered
supplier or a grandfathered supplier) and then transfer title to that
item without being paid a sufficient amount to cover its costs. We also
recognize that contract suppliers will not be able to predict how many
beneficiaries will obtain capped rental items or oxygen equipment from
them, rather than from a supplier that does not elect to become a
grandfathered supplier.
In response to the commenters' concerns, we are implementing two
new payment rules to ensure that contract suppliers that must begin
furnishing oxygen equipment and/or capped rental items to which the
grandfathering process would otherwise apply receive a sufficient
number of monthly rental payments to recover their costs. We believe
that these changes are consistent with our statutory mandate under
sections 1847(a) and (b) of the Act, which give us broad authority
regarding how to structure the Medicare DMEPOS Competitive Bidding
Program, and more specifically with section 1847(b)(3)(A) of the Act,
which allows us to specify the terms and conditions of contracts we
enter into with contract suppliers.
Capped Rental: For capped rental items furnished on a rental basis,
we are providing in a new Sec. 414.408(h)(2) that a contract supplier
that must begin furnishing a capped rental item during the rental
period to a beneficiary who is no longer renting the item from his or
her previous supplier (because the previous supplier elected not to
become a grandfathered supplier or the beneficiary elected to change
suppliers) will receive 13 monthly rental payments for the item,
regardless of how many monthly rental payments Medicare previously made
to the prior supplier, assuming the item remains medically necessary.
This will ensure that the contract supplier can recover its costs
because, as discussed in section VI.G.5. of this final rule, the 13
monthly rental payments for the capped rental item will be based on a
single payment amount that reflects the purchase price for that item.
At the end of this new 13 month rental period, the contract supplier
will transfer title to the capped rental item to the beneficiary. This
rule does not apply when a beneficiary who is renting a capped rental
item from a contract supplier elects to obtain the same item from
another contract supplier, because the grandfathering provisions, as
described in section 1847(a)(4) of the Act, only apply to those
situations in which a beneficiary had been previously receiving the
item from a noncontract supplier. In this case, the new contract
supplier would be paid the single payment amount for the duration of
the rental period.
Oxygen Equipment: For oxygen equipment, we provide in a new Sec.
414.408(i)(2) that a contract supplier that must begin furnishing
oxygen equipment after the rental period has already begun to a
beneficiary who is no longer renting the item from his or her previous
supplier (because the previous supplier elected not to become a
grandfathered supplier or the beneficiary elected to change suppliers)
will receive at least 10 rental payments for furnishing the equipment.
For example, if a contract supplier begins furnishing oxygen equipment
to a beneficiary in months 2 through 26, we would make payment for the
remaining number of rental months in the 36-month rental period,
because the number of payments to the contract supplier would be at
least 10 payments. In other words, a contract supplier that begins
furnishing oxygen equipment beginning with the 20th month of rental
will receive 17 payments (17 for the remaining number of rental months
in the 36 month rental period). However, if a contract supplier begins
furnishing oxygen equipment to a beneficiary in month 27 or later, we
would make 10 rental payments assuming the equipment remains medically
necessary. We believe this is a reasonable solution because our data
from the GAO and the OIG and data available through the Internet show
that most oxygen equipment can be purchased for $1,000 or less, and
data from the competitive bidding demonstrations indicate that
suppliers received more than $1,000 over 10 months for furnishing
oxygen equipment. Based on these data, we believe that 10 months is
sufficient to cover the contract supplier's cost to furnish the
equipment, irrespective of

[[Page 18003]]

the modality that is used to administer the oxygen. This rule regarding
the minimum number of rental payments does not apply when a beneficiary
switches from a contract supplier to another contract supplier to
receive his or her oxygen equipment. In this case, the new contract
supplier would be paid the single payment amount for the remaining
number of months in the rental period.
We note that the DRA does not apply to inexpensive or routinely
purchased items when they are furnished on a rental basis. Therefore,
we do not see a need to make these special payment provisions
applicable to those items.
Comment: Several commenters suggested that CMS establish a
transition period that would allow beneficiaries who reside in a CBA to
continue to receive items from a noncontract supplier. They indicated
that suppliers should be paid the current fee schedule amounts for
these items during this transition period. They further suggested that
CMS could use this period of time to educate beneficiaries and
suppliers about the Medicare DMEPOS Competitive Bidding Program. Other
commenters stated that the payment amount to grandfathered suppliers
should always be the fee schedule amount (not just during a transition
period) and never be the single payment amount.
Response: We proposed to establish a grandfathering process that
would allow existing rental agreements for certain rented items to
continue because we want to minimize the potential that these
arrangements will be disruptive to the beneficiary due to the
implementation of competitive bidding. We do not believe it is
necessary to establish a transition process, however, as discussed in
the proposed rule, we are requiring that a supplier that elects to be a
grandfathered supplier for a specific item must serve as a
grandfathered supplier to all beneficiaries who elect to receive that
item from them. We plan to start educating suppliers, beneficiaries,
and referral agents about competitive bidding as soon as this final
rule is published and expect that these efforts will make the
transition to this new program go as smoothly as possible. We do not,
however, have authority to establish a grandfathering process that
would allow beneficiaries to continue receiving from their current
supplier items other than those specified in section 1847(a)(4) of the
Act.
We proposed to pay grandfathered suppliers the single payment
amount for items requiring frequent and substantial servicing and
oxygen and oxygen equipment because the rental payments for these items
are not calculated based on, or limited to, the purchase fees for these
items. Therefore, we believe that it is reasonable to require suppliers
that want to continue furnishing these items as grandfathered suppliers
to accept the same payment that will be made for these items to
contract suppliers. This achieves the goal of the program to achieve
savings for the Medicare program.
However, the payment amounts made to grandfathered suppliers for
furnishing capped rental and inexpensive or routinely purchased items
will continue to be based on the fee schedule amounts that are paid for
these items. Unlike items requiring frequent and substantial servicing
and oxygen and oxygen equipment, the monthly rental payments for these
items are made for a more limited period of time. In addition, the
payment amounts for these items are based on the purchase fees for
these items. Therefore, we believe that it is reasonable to continue
paying for these items in accordance with existing rental agreements.
(2) Suppliers That Lose Their Contract Status in a Subsequent
Competitive Bidding Program
There may be instances when a supplier that was awarded a contract
to furnish rental items or oxygen and oxygen equipment under a
competitive bidding program is not awarded a contract to furnish the
same items under a subsequent competitive bidding program in the same
area. We are concerned that if this occurs, beneficiaries will need to
switch suppliers in the middle of the rental period and could
experience a disruption of service as a result. In order to minimize
this possibility, we proposed to apply section 1847(a)(4) of the Act
not only in a CBA where we implement a competitive bidding program for
the first time, but also in the same area when we implement a
subsequent competitive bidding program (proposed Sec. 414.408(k)(3);
redesignated Sec. 414.408(j)(3) in this final rule). We believe our
proposal is consistent with section 1847(a)(4) of the Act, which we
interpret as applying to each competitive bidding ``program'' that we
implement in an area because each program will be unique in terms of
bidders, contract suppliers, items included in the program, and prices.
Under the proposed rule, Medicare beneficiaries would be allowed to
continue renting medically necessary items from their existing
supplier, even if that supplier has lost its contract status under a
subsequent competitive bidding program.
However, where a supplier that is no longer a contract supplier
continues to furnish a rental item or oxygen and oxygen equipment on a
grandfathered basis, we proposed that Medicare make payment for the
item in the amount established for that item under the new competitive
bidding program for that area. We believe that section 1847(a)(4) of
the Act gives us this discretion, since that section only requires us
to establish a ``process'' under which these rental agreements or
supply arrangements ``may continue'' but does not specify a payment
methodology that must be used under that process. In addition, we do
not believe that the alternative, which would be to make payment for
the item under the fee schedule, is reasonable since the rental
agreement or supply arrangement began under a competitive bidding
program.
All rules that applied to grandfathered suppliers will apply in
this situation when a supplier is a contact supplier in under one
competitive bidding program e.g. in round one but is not a contract
supplier in a subsequent competitive bidding program in the same CBA,
e.g. in round two. However, the payment amounts will not revert back to
the current fee schedule but rather the payment amounts will be the new
competitive bid single payment amounts as determined under Sec.
414.416.
We did not receive any specific comments on these proposals.
Therefore, in this final rule, we are redesignating proposed Sec.
414.408(k)(3) as Sec. 414.408(j)(3), making editorial revisions, and
finalizing that section.
c. Payment for Accessories for Items Subject to Grandfathering (Sec.
414.408(j)(5))
We proposed that accessories and supplies used in conjunction with
an item which is furnished under a grandfathering process described
above may also be furnished by the grandfathered supplier. Payment
would be based on the single payment amount established for the
accessories and supplies if the item is oxygen or oxygen equipment or
one that requires frequent and substantial servicing. For accessories
and supplies used in conjunction with capped rental and inexpensive or
routinely purchased items, we proposed that the payment amounts would
be based on the fee schedule amounts for the accessories and supplies
furnished prior to the implementation of the first competitive bidding
program in an area, or on the newly established competitively bid
single payment amounts if the items are

[[Page 18004]]

furnished by a grandfathered supplier that was a contract supplier for
a competitive bidding program, but is no longer a contract supplier for
a subsequent competitive bidding program in the same area.
Our proposal is similar to the grandfathering approach that was
used in the DMEPOS competitive bidding demonstrations under which we
paid grandfathered suppliers the competitively bid amount for certain
items and the fee schedule amounts for other items. We specifically
solicited comments on our grandfathering proposals.
Comment: Several commenters supported our proposal to require that
accessories and supplies used in conjunction with an item furnished
under the grandfathering process be furnished by a grandfathered
supplier.
Response: We appreciate the commenters' support and continue to
believe that this approach is reasonable. To clarify the situations in
which this may occur, we are revising proposed Sec. 414.408(k)
(redesignated Sec. 414.408(j) in this final rule) by adding a new
paragraph (j)(5) to specify that accessories and supplies that are
necessary for the effective use of DME may also be furnished by the
same grandfathered supplier that furnishes the grandfathered item. This
approach will provide the beneficiary with continuity of service by
requiring one supplier to provide all related items the beneficiary may
need for the proper use of their equipment. This rule will not apply to
accessories that are not an integral part of the base equipment. For
example, a standard mattress is an essential accessory for a hospital
bed and may be furnished by a grandfathered supplier of a hospital bed,
if the supplier has elected to be a grandfathered supplier for the
hospital bed. However, a special, powered alternating pressure mattress
furnished to prevent decubitus ulcers is not an essential part of the
base equipment and is furnished in addition to the general service of
furnishing the hospital bed.
Assuming the grandfathered supplier for the base equipment is
willing to also furnish accessories or supplies for the base equipment,
beneficiaries will be able to choose to obtain any competitively bid
accessories or supplies from either the grandfathered supplier or a
contract supplier. We believe that the amount to be paid under the
Medicare DMEPOS Competitive Bidding Program should be the single
payment amount, regardless of which supplier furnishes the accessories
or supplies. Payment for most accessories or supplies for DME is made
on a purchase basis, and in those cases where a single payment amount
has been established for the accessories or supplies, we believe it is
reasonable to pay the single payment amount for the accessories or
supplies to the grandfathered supplier for the base equipment. We
believe this is reasonable, regardless of what payment category the
base equipment falls under because the single payment amount reflects a
reasonable payment amount determined by a competitive market. If the
grandfathered supplier chooses not to furnish the accessories or
supplies for the grandfathered base equipment, a contract supplier
would be responsible for furnishing the accessories or supplies.
Comment: One commenter suggested that CMS needs to establish a
transition plan for Medicare Advantage beneficiaries who disenroll from
their MA plan and enroll in traditional fee-for-service Medicare Part
B. The commenter pointed out that these beneficiaries may currently be
using a noncontract supplier and should be given the option to remain
with their existing supplier under the grandfathering provisions.
Response: All beneficiaries to whom the grandfathering process
applies can elect to continue receiving certain rented items from a
supplier that elects to become a grandfathered supplier. Therefore, if
a supplier from whom a Medicare Advantage beneficiary previously rented
one of these items is eligible, and elects, to become a grandfathered
supplier, then the beneficiary could continue to receive the item from
that supplier.
Comment: One commenter stated that the rule should apply
grandfathering provisions to enteral equipment, nutrition, and
supplies. The commenter stated that beneficiaries on enteral nutrition
develop an ongoing relationship with their suppliers. The commenter
pointed out that suppliers that furnish enteral equipment, nutrition,
and supplies frequently service and maintain the enteral pumps. The
commenter added that, under the proposed rule, contract suppliers would
be responsible for servicing and maintaining enteral pumps that they
did not provide to beneficiaries. The commenter recommended that the
previous enteral supplier be able to continue to provide enteral
equipment, nutrition, and supplies to the beneficiary until the 15-
month rental period ends.
Another commenter stated that our grandfathering proposal did not
include a process for grandfathering glucose testing supplies. The
commenter indicated that competitive bidding could force many
beneficiaries to switch their glucose monitoring system if the contract
supplier does not offer the testing supplies for the monitor they
currently use.
Another commenter suggested that Medicare allow grandfathering for
all DMEPOS items. Another commenter suggested that Medicare only allow
grandfathering for oxygen equipment because otherwise, competitive
bidding for capped rental items, oxygen, and oxygen equipment will only
affect beneficiaries who need to obtain these items after a competitive
bidding program has been implemented in their area, which undermines a
program goal to harness market place dynamics.
Response: Section 1847(a)(4) of the Act requires that we establish
a process by which rental agreements for DME and supply arrangements
for suppliers of oxygen and oxygen equipment entered into before the
implementation of a competitive bidding program may be continued. We do
not believe we have authority to allow grandfathering for other DMEPOS,
such as glucose testing supplies and enteral nutrition, equipment, and
supplies.
After consideration of the public comments received, we are
redesignating proposed Sec. 414.408 (k) as Sec. 414.408 (j) and
finalizing this section as discussed above and with additional
technical modifications. We are also adding new Sec. 414.408(h)(2) and
Sec. 414.408(i)(2), which provide for special payments to certain
contract suppliers that furnish certain rented items.
4. Payment Adjustments
a. Adjustment to Account for Inflation (Sec. 414.408(b))
The fee schedule payment amounts for DMEPOS items are updated by
annual update factors described in 42 CFR Part 414, Subparts C and D.
In general, the update factors are established based on the percentage
change in the CPI-U for the 12-month period ending June 30 of each year
and preceding the calendar year to which the update applies. In
accordance with section 1847(b)(3)(B) of the Act, the term of a
competitive bidding contract may not exceed 3 years.
In the May 1, 2006 proposed rule (71 FR 25663), we proposed to
apply an annual inflation update to the single payment amounts
established for a competitive bidding program (proposed Sec.
414.408(b)). Specifically, beginning with the second year of a contract
entered into under a competitive bidding program, we proposed to

[[Page 18005]]

update the single payment amounts by the percentage increase in the
CPI-U for the 12-month period ending with June 30 of the preceding
calendar year. We stated that using the CPI-U index would be consistent
with Medicare using this index to update the DME fee schedule. This
would account for inflation in the cost of business for suppliers
submitting bids for furnishing items under a multi-year contract.
Comment: One commenter suggested that CMS not finalize its proposal
to make an annual inflation update to the single payment amounts. The
commenter believed that this payment adjustment may make it possible
for single payment amounts to rise faster than current fee schedule
payment amounts, particularly in the event of a payment freeze or a
payment reduction. The commenter recommended that CMS determine a
single payment amount that will apply for the full term of the contract
or allow each bidder to specify an annual adjustment in its bid.
Response: We agree with the commenter and will not finalize our
proposal to make an annual inflation update to the single payment
amounts. The single payment amounts will remain in effect for the
duration of the contract. We believe it is more appropriate for
suppliers to address the possible effects of inflation or price
increases when they formulate their bids because automatic payment
adjustments to competitively bid items may result in higher payment
amounts than would occurred under the DMEPOS fee schedule payment
amounts if these amounts are subject to Congressional freezes or
payment reductions.
Comment: Several commenters stated that the proposal did not
address situations where the manufacturers or distributors raise their
prices, thereby requiring suppliers to pay more money to purchase their
products. They believe that suppliers may be required to continue to
furnish these items at the single payment amounts notwithstanding the
fact that their costs have increased.
Response: While we recognize that increases in suppliers' costs for
equipment and other costs can occur at any time, suppliers should be
generally aware of how often these changes occur and how these changes
affect their businesses. We expect suppliers to consider this factor
when developing their bids, which represent bids for furnishing items
during the entire period that the contract will be in effect.
Comment: Several commenters recommended that CMS continue to use
the CPI-U to adjust fee schedule amounts for class III devices. The
commenters indicated that the March 2006 GAO report was flawed because
it did not provide a full assessment of changes over time in the costs
of producing, supplying and servicing class III devices. The commenters
also noted that the report does not specify a specific percentage
update for CY 2007 or CY 2008. Another commenter stated that the GAO
report examines class III devices in relation to only a very limited
number of higher-technology class III items that may not be reflective
of the general class III items. One commenter unfavorably compared the
GAO report to the Medicare Payment Advisory Commission (MedPAC) reports
which assess the adequacy of Medicare payments for hospital inpatient
and outpatient services, physician services, outpatient dialysis
services, skilled nursing facility services, home health services,
long-term care hospital services and inpatient rehabilitation facility
services. (Following each detailed assessment, MedPAC then recommends
an update policy for each provider category for the coming year.) The
commenter noted that the GAO report does not justify its alternative
assessment methodology or its failure to take into account changes over
time in manufacturer costs for class III devices. Another commenter
recommended that the class III proposal be included in a separate
rulemaking procedure because it is not related to competitive bidding.
Response: Pursuant to section 1834(a)(14)(H)(i) of the Act, in
determining the appropriate fee schedule update percentages for class
III medical devices prescribed in section 513(a)(1)(C) of the Federal
Food, Drug and Cosmetic Act (21 U.S.C. 360(c)(1)(C)) for CY 2007, we
must take into account recommendations contained in the report of the
Comptroller General of the United States under section 302(c)(1)(B) of
the MMA. We have not yet made a determination regarding the appropriate
percentage change for CY 2007 in the fee schedule amounts for class III
DME and, therefore, are not making that determination as part of this
final rule. We will address this issue in a future rulemaking.
After consideration of the public comments received, in this final
rule, we are revising proposed Sec. 414.408(b) to specify that the
single payment amount for each item that is determined under each
competition will be in effect for the duration of the contract and will
not be adjusted by an annual inflation update.
b. Adjustments to Single Payment Amounts to Reflect Changes in the
HCPCS (Sec. 414.426)
We proposed under Sec. 414.426 that revisions to HCPCS codes for
items under a competitive bidding program that occur in the middle of a
bidding cycle would be handled as follows:
If a single HCPCS code for an item is divided into
multiple codes for the components of that item, the sum of payments for
these new codes would be equal to the payment for the original item.
Suppliers selected through competitive bidding to provide the item
would also provide the components of the item. During the subsequent
competitive bidding cycle, suppliers would bid on each new code for the
components of the item, and we would determine new single payment
amounts for these components.
If a single HCPCS code for two or more similar items is
divided into two or more separate codes, the payment amount applied to
these codes would continue to be the same payment amount applied to the
single code until the next competitive bidding cycle. During the next
cycle, suppliers would bid on the new separate and distinct codes.
If the HCPCS codes for several components of one item are
merged into one new code for the single item, the payment amount of the
new code would be equal to the total of the separate payment amounts
for the components. Suppliers that were selected through competitive
bidding to supply the various components of the item would continue to
supply the item using the new code. During the subsequent bidding
cycle, suppliers would bid on the new code for the single item to
determine a new single payment amount for this new code.
If multiple codes for different, but related or similar
items are placed into a single code, the payment amount for the new
single code would be the average (arithmetic mean) weighted by
frequency of payments for the formerly separate codes. Suppliers would
also provide the item under the new single code. During the subsequent
bidding cycle, suppliers would bid on the new single code and determine
a new single payment amount for this code.
Comment: Several commenters stated that when multiple codes for
similar items are merged to a new code, CMS should continue to use the
former codes and single payment amounts for the remainder of the
contract period. One commenter stated that the proposal that the
payment amounts for new HCPCS codes continue to be the same payment

[[Page 18006]]

amounts until the next competitive bidding cycle is not an equitable
proposal and a more appropriate procedure must be developed. Another
commenter stated that CMS' only authority to adjust payment amounts for
an item is through the inherent reasonableness authority under the
Medicare statute. The commenter disagreed with the proposal for paying
for new HCPCS codes that are established during a competitive bidding
cycle. The commenter stated that CMS should rebid these items, assuming
they are appropriate for inclusion in the program.
Response: After further consideration, we are clarifying that when
multiple codes for different items are discontinued and the items are
placed into a new single code, the payment for the new code will be
based on the fee schedule methodology, even if we had previously
established a single payment through competitive bidding for the items
included in the new code. The old codes will be considered invalid and
therefore will no longer be included in the competitive bidding program
for the remainder of the contract term. During a subsequent competitive
bidding program, suppliers would bid on the new single code and we will
determine a new single payment amounts for this code based on the bids
submitted and accepted. We are not finalizing this part of the proposed
methodology because we do not believe the single payment amount in this
case would be reflective of the bids submitted and accepted for these
multiple items. However, unlike this proposal, our other three
proposals will be finalized because they are reflective of the bids
submitted and accepted for the items described by the new codes.
We note that we do not believe we have authority to use the
inherent reasonableness authority to adjust the single payment amounts
set through competitive bidding. We believe that the prices set by
competitive bidding will be reasonable because they will be reflective
of the market. When we split or merge HCPCS codes, we will ensure that
the new payment amounts are reflective of the previously established
payment amounts, and this does not require the use of the inherent
reasonableness authority or the need to rebid the items.
After consideration of the public comments we received, we are
finalizing Sec. Sec. 414.426(a) through (c) and revising Sec.
414.426(d) as discussed above and with additional technical changes.
5. Authority to Adjust Payments in Other Areas
Section 1834(a)(1)(F)(ii) of the Act provides authority, effective
for covered items furnished on or after January 1, 2009, that are
included in a competitive bidding program, for us to use the payment
information determined under that competitive bidding program to adjust
the payment amounts otherwise recognized under section
1834(a)(1)(B)(ii) of the Act for the same DME items in areas not
included in a competitive bidding program. Sections 1834(h)(1)(H)(ii)
and 1842(s)(3)(B) of the Act provide the same authority for orthotic
and prosthetic devices, and enteral nutrition, respectively.
In the May 1, 2006 proposed rule (71 FR 25664), we proposed to use
this authority but stated that we had not yet developed a detailed
methodology for doing so. Therefore, we specifically invited comments
and recommendations on this issue. We stated that we believed that our
methodology would be influenced by our experience and information
gained from the competitive bidding programs in CYs 2007 and 2009. When
submitting recommendations on a methodology for using this authority,
we asked commenters to keep in mind the following factors that are
likely to be incorporated in the methodology:
The threshold or amount or level of savings that the
Medicare program must realize for an item or group of items before we
would use payment information from a competitive bidding program to
adjust payment amounts for those items in other areas.
Whether adjustments of payment amounts in other areas
would be on a local, regional, or national basis, depending on the
extent to which the single payment amounts and price indexes (for
example, local prices used in calculating the CPI-U) for an item or
group of items varied across different areas of the country.
Whether adjustments of payment amounts in other areas
would be based on a certain percentage of the single payment amount(s)
from the CBA(s).
Comment: Some commenters stated that CMS must issue a final rule to
spell out a detailed plan for using the authority provided by sections
1834(a)(1)(F)(ii), 1834(h)(1)(H)(ii), and 1842(s)(3)(B) of the Act
before it can implement these provisions.
Response: We agree with the commenters that a more detailed plan
must be developed for using the authorities provided by sections
1834(a)(1)(F)(ii), 1834(h)(1)(H)(ii), and 1842(s)(3)(B) of the Act, and
we plan to conduct subsequent rulemaking prior to implementing these
provisions. Subsequent rulemaking would provide a more detailed plan
for using these authorities. Therefore, we are not finalizing proposed
Sec. 414.408(e) until the subsequent rulemaking is completed.
6. Requirement to Obtain Competitively Bid Items From a Contract
Supplier (Sec. Sec. 411.15(s), 414.408(e))
Beneficiaries often travel, for example, to visit family members or
to reside in a State with a warmer climate during the winter months. To
prevent these beneficiaries from having to return home to obtain needed
DMEPOS, in proposed Sec. 414.408(f)(2)(ii) (redesignated Sec.
414.408(e)(2)(iii) in this final rule), we proposed to allow
beneficiaries who are traveling outside the CBA where they permanently
reside to obtain items that they would ordinarily be required to obtain
from a contract supplier for their CBA from a supplier that has not
been awarded a contract to furnish items for that area. If the area
that the beneficiary is visiting is also a CBA and the item is subject
to the competitive bidding program in that area, the beneficiary would
be required to obtain the item from a contract supplier for that area.
If the area that the beneficiary is visiting is not a CBA, or if the
area is a CBA but the item needed by the beneficiary is not included in
the competitive bidding program for that area, the beneficiary would be
required to obtain the item from a supplier that has a valid Medicare
supplier number. In either case, payment to the supplier would be made
based on the single payment amount for the item in the CBA where the
beneficiary maintains a permanent residence.
In the May 1, 2006 proposed rule, we proposed that if a beneficiary
is not visiting another area, but is merely receiving competitively bid
items from a supplier located outside but near the boundary of the CBA,
the proposed exemption to the general rule that beneficiaries who
reside in a CBA must obtain DMEPOS covered by competitive bidding from
contract suppliers in that area would not apply. We stated that we plan
to monitor the programs closely to ensure that this type of abuse or
circumvention of the competitive bidding process and requirements to
obtain items from a contract supplier does not occur.
We also proposed to base claims jurisdiction and the payment amount
on the beneficiary's permanent residence as we have done since the
early 1990s with the current DMEPOS program under Sec. 421.210(e).
Under this proposal, the

[[Page 18007]]

DME MAC responsible for the area where the beneficiary maintains a
permanent residence would process all claims submitted for items
furnished to that beneficiary, whether or not the beneficiary obtained
the item in that area. If the beneficiary maintained a permanent
residence in a CBA and obtained an item included in the competitive
bidding program for that area, Medicare would pay the supplier the
single payment amount for the item determined under the competitive
bidding program for that area. If the beneficiary did not maintain a
permanent residence in a CBA, Medicare would pay the supplier the fee
schedule amount for the area in which the beneficiary maintains a
permanent residence. We believe that this proposal is consistent with
our current policy, under which suppliers across the country are paid
the same amount for similar products obtained by beneficiaries who
maintain their permanent residence within the same geographic area.
We proposed that Medicare beneficiaries who maintain their
permanent residence in a CBA be required to obtain competitively bid
items from a contract supplier for that area with the following two
exceptions:
A beneficiary may obtain an item from a supplier or a
noncontract supplier in accordance with the competitive bidding program
grandfathering provisions described in section VI.C.3. of this final
rule.
A beneficiary who is outside of the CBA where he or she
maintains a permanent residence may obtain an item from a contract
supplier, if he or she is in another CBA and the same item is included
under a competitive bidding program for that area, or from a supplier
with a valid Medicare supplier number, if he or she is either in
another CBA that does not include the item in its program or is in an
area that is not a CBA.
We proposed that unless one of the exceptions discussed above
applies, Medicare would not pay for the item. We also proposed to add a
new Sec. 411.15(s) that would prohibit Medicare from making payment
for an item that is included in a competitive bidding program if that
item is furnished by a supplier other than a contract supplier, unless
an exception applies.
Comment: Several commenters suggested that CMS exclude from
competitive bidding beneficiaries who have Medicare as their secondary
insurance. The commenters stated that claims for beneficiaries with
Medicare as a secondary payer should be processed and paid under the
standard fee schedule.
Response: We believe that the commenters' intent was to request
that Medicare pay for an item that was furnished by a supplier that the
beneficiary is required to use under his or her primary insurance
policy even if that item is furnished by a supplier that is not a
contract supplier. We agree with the commenters that an exception under
the Medicare DMEPOS Competitive Bidding Program needs to be made for
beneficiaries with Medicare as their secondary insurance. Section
1862(a)(17) of the Act allows the Secretary to specify circumstances
under which it would be appropriate to pay for an item that is
furnished by an entity other than a contract supplier. To address
secondary payer concerns, we are adding an exception at Sec.
414.408(e)(2)(ii) of the list of circumstances when Medicare will make
payment where the expenses for a competitively bid DMEPOS item
furnished in a CBA were incurred by a supplier other than a contract
supplier. Under this exception Medicare may make a secondary payment
for a DMEPOS item that is furnished by a noncontract supplier if the
beneficiary, in order to comply with his or her primary insurance plan,
does not have the option to use a contract supplier. In addition,
Medicare will only make a secondary payment to a supplier that the
beneficiary is required to use under his or her insurance plan if the
supplier is eligible to submit claims to Medicare. These suppliers will
need to have a valid Medicare billing number to be eligible to submit
claims to Medicare. This regulation does not supersede the established
Medicare secondary payer statutory and regulatory requirements,
including the Medicare secondary payment rules found at 42 CFR 411.32
and 411.33, and payment will be calculated in accordance with those
rules.
Comment: One commenter stated that the requirement to obtain
competitively bid items from a contract supplier will be extremely
confusing to the traveling beneficiary and will limit beneficiary
access to DMEPOS while the beneficiary is away from his or her
permanent residence. The commenter also proposed that the supplier
outside of the beneficiary's CBA be reimbursed either (a) the regular
fee schedule amount for the product if the area traveled to is not a
CBA or (b) the higher single payment amount for the two CBAs, if the
area where the beneficiary has traveled is in a CBA.
Some commenters were concerned that the difference between the fee
schedule amount and the single payment amount may be substantial,
thereby hindering beneficiary access to needed equipment. They
recommended that CMS continue to pay for an item based on the fee
schedule amount that corresponds with the beneficiary's permanent
residence if the beneficiary obtains the item while visiting another
area. The commenters were concerned about the impact that the
requirement to obtain competitively bid items from a contract supplier
would have on both suppliers and beneficiaries who travel to
``snowbird'' areas.
Response: The approach set out in the proposed rule is consistent
with our long-standing rule under which Medicare payment for DMEPOS is
based on the beneficiary's primary residence. If a beneficiary
maintains a permanent residence in a CBA, payment for an item that the
beneficiary obtains while visiting another area will be based on the
payment amount for the item in the beneficiary's CBA. We note that,
under our current rule, there are instances when a supplier is paid
more or less than the fee schedule amount that the supplier would
otherwise receive for an item because the payment amount has been
determined based on where the beneficiary resides. The same will be
true under the Medicare DMEPOS Competitive Bidding Program. For
example, when a beneficiary who resides in an area that is not a CBA
travels into a CBA and needs to obtain an item, the supplier that
furnishes the item will be paid the current fee schedule amount for the
item based on the beneficiary's residence, even if the fee schedule
amount is greater than the single payment amount that the supplier
would otherwise receive for furnishing the item. We believe that it is
appropriate to adopt our current claims jurisdiction policy for the
Medicare DMEPOS Competitive Bidding Program because it minimizes the
possibility that suppliers will set up locations in certain geographic
areas for the purpose of obtaining higher payment amounts.
We plan to conduct an extensive education campaign to minimize
confusion on the part of both beneficiaries and suppliers regarding
this provision and all other provisions of the Medicare DMEPOS
Competitive Bidding Program.
Comment: Several commenters stated that suppliers need access to a
beneficiary database that identifies the county in which a beneficiary
resides at the zip code level, so they can determine if the beneficiary
resides in a CBA.
Response: We do not believe that this is necessary for suppliers.
Currently,

[[Page 18008]]

payment is based on beneficiary residence, and suppliers do not have
access to beneficiary zip code information to bill for items. We will
post all counties and zip codes where competitive bidding is conducted
on our Web site. The Medicare claims form requires a beneficiary
address. Therefore, the supplier will be able to ascertain if the
beneficiary resides in a CBA. We currently post fee schedules on our
Web site and the single payment amounts for each item in each CBA will
also be posted. Therefore, suppliers can look to the postings to
determine payment amounts in other areas. In addition, our claims
processing systems are equipped to identify the appropriate payment
amount so no calculations are necessary to determine the payment amount
for an item.
Comment: Several commenters stated that beneficiaries will not have
access to newer technology for competitively bid products.
Response: One of the main objectives of the Medicare DMEPOS
Competitive Bidding Program is to ensure that beneficiaries have access
to quality DMEPOS. Therefore, we have built safeguards into the
competitive bidding program to ensure there is continued access to
quality medical equipment and supplies, as well as to services
necessary to maintain the equipment. As we discuss more fully in
response to comments in section XV. Physician or Treating Practitioner
Authorization and Consideration of Clinical Efficiency and Value of
Items in Determining Categories for Bids of this final rule (Sec.
414.422(c)), we have proposed to include a nondiscrimination clause in
each contract awarded under this program. We believe that the inclusion
of this contract provision will ensure that beneficiaries who obtain
items under a competitive bidding program have access to the same
products as other Medicare customers and private pay individuals. In
addition, we are taking other steps to ensure that high quality items
are furnished to beneficiaries under this program. We plan to implement
a complaint system so that beneficiaries, referral agents, providers,
and suppliers can report problems and difficulties they encounter with
the ordering and furnishing of DMEPOS in CBAs. In addition, we will not
award a contract to a supplier unless that supplier meets our
eligibility standards, is accredited, and meets our financial
standards.
In addition, items that represent new technology and that receive a
new HCPCS code to separately designate them, rather than updates to
current technology will not be added to a contract supplier's contract.
Instead, beneficiaries will be able to obtain these items from any
supplier for the remainder of the contract period, and the supplier
will be paid the fee schedule amount for those items.
Comment: One commenter stated that competitive bidding will limit
full-time access to supplies that are crucial to beneficiaries with
diabetes. The commenter stated that beneficiaries may find that they
can no longer purchase their supplies from their current supplier and
may be inconvenienced. The commenter recommended that CMS implement an
aggressive education outreach program.
Response: We do not believe that competitive bidding will limit
beneficiary access to any competitively bid items, including diabetic
supplies. Although it is true that some beneficiaries will have to find
a contract supplier to purchase their supplies, we do not believe this
will result in an inconvenience to beneficiaries, because there will be
a sufficient number of contract suppliers that furnish these items for
each CBA. The process we have proposed for awarding contracts under the
Medicare DMEPOS Competitive Bidding Program will ensure that there are
a sufficient number of contract suppliers to furnish items to all
beneficiaries located in a CBA. We plan to conduct an aggressive
outreach program for all beneficiaries, suppliers, and referral agents.
(We refer readers to the DMEPOS provisions of the FY 2007 IRF final
rule (71 FR 48354) for a complete discussion of our planned education
and outreach policy.)
Comment: One commenter expressed concern that in a State with
multiple MSAs, there could be a different payment rate for the same
item in each MSA. The commenter believed this would add confusion and
would increase billing time and expenses, which will, in turn, increase
the price of products.
Response: We agree that if we conducted competitive bidding in
multiple CBAs within a State, there could be different prices in each
CBA for the same item. However, we do not believe that this would be a
problem for contract suppliers. Under the current program, suppliers
may have a customer base that comes from areas with different fee
schedule amounts because the fee schedules vary by State. Therefore, we
believe that many suppliers are already equipped to handle price
variations for an item. In addition, the fee schedule for each item in
each State is published on our Web site, and we plan to also publish
the single payment amounts for each item in each CBA on our Web site.
After consideration of the public comments we received, we are
redesignating proposed Sec. 414.408(f) as Sec. 414.408(e) and adding
a new Sec. 414.408(e)(2)(ii) that specifies that Medicare may make a
secondary payment for a DMEPOS item that is furnished by a supplier
that is not awarded a contract under a competitive bidding program. We
are also finalizing the remainder of proposed Sec. Sec. 414.408(f)(1)
and (f)(2)(i) and (f)(2)(ii) (redesignated as Sec. Sec.
414.408(e)(2)(i) and (e)(2)(iii)) with only technical modifications. We
are also finalizing Sec. 411.15(s).
7. Limitation on Medicare Payment and Beneficiary Liability for Items
Furnished by Noncontract Suppliers (Sec. Sec. 414.408(e)(3) and (e)(4)
In the May 1, 2006 proposed rule (71 FR 25664), we proposed that if
a noncontract supplier located in a CBA furnishes an item included in
the competitive bidding program for that area to a beneficiary who
maintains a permanent residence in that area, the beneficiary would
have no financial liability to the noncontract supplier unless the
grandfathering exception discussed in section VI.D.3. of this final
rule applies (proposed Sec. 414.408(f)(2)(iii); redesignated Sec.
414.408(e)(3) in this final rule).
We proposed that this rule would not apply if the noncontract
supplier furnished items that are not included in the competitive
bidding program for the area. We proposed to specially designate the
supplier numbers of all noncontract suppliers so that we will easily be
able to identify whether a noncontract supplier has furnished a
competitively bid item to a beneficiary who maintains a permanent
residence in a CBA (proposed Sec. 414.408(f)(3)) (redesignated in this
final rule as Sec. 414.408(e)(4)).
Comment: Several commenters suggested that proposed Sec.
414.408(f)(2)(ii) be clarified to include a limitation on beneficiary
liability unless the noncontract supplier has obtained a signed ABN,
which indicates that the beneficiary was informed prior to receiving
service that there would be no coverage due to the supplier's
noncontract status and that the beneficiary still desired to receive
the service from the noncontract supplier.
Response: We are revising the regulation to add Sec.
414.408(e)(3)(ii) and Sec. 414.408(c) to reflect that there is a
limitation on beneficiary liability unless the noncontract supplier has
obtained a signed ABN because, if the beneficiary desires to receive
this item from a

[[Page 18009]]

supplier that is not a contract supplier, the ABN indicates the
beneficiary's knowledge and understanding that Medicare will not pay
for that item. In this circumstance, a noncontract supplier cannot bill
the Medicare program and receive payment for a competitively bid item
provided to a beneficiary whose primary residence is in a CBA unless an
exception discussed in this rule applies.
We are also revising proposed Sec. 414.408(f)(2)(iii)
(redesignated in this final rule as Sec. 414.408(e)(3)(ii) to delete
the phrase ``who maintains a permanent residence in a CBA.'' We believe
this change clarifies our final policy that beneficiaries will not be
financially responsible for making payment to a noncontract supplier
that furnishes a competitively bid item in violation of the Medicare
DMEPOS competitive bidding program.
After consideration of the public comments we received, we are
redesignating proposed Sec. Sec. 414.408(f)(2)(iii) and (f)(3) as
final Sec. Sec. 414.408(e)(3)(ii) and (e)(4), respectively, and
finalizing these sections as discussed above and with additional
technical changes.
8. Payment for Repair and Replacement of Beneficiary-Owned Items (Sec.
414.408(k))
In the proposed rule (71 FR 25681), we proposed that repair or
replacement of beneficiary-owned DME, enteral nutrition equipment, or
OTS orthotics that are subject to the Medicare DMEPOS Competitive
Bidding Program must be furnished by a contract supplier because only
winning suppliers can provide these items in a CBA (proposed Sec.
414.422(c)). The contract supplier could not refuse to repair or
replace beneficiary-owned items subject to competitive bidding. We
indicated that this proposed provision would help ensure that the
beneficiaries will get the items from qualified suppliers, and is
consistent with the competitive bidding program in that it directs
business to contract suppliers.
Therefore, we proposed that repair or replacement of beneficiary-
owned items subject to a competitive bidding program must be furnished
by a contract supplier. We indicated that this proposed requirement
would not apply to Medicare beneficiaries who are outside of a CBA.
Comment: Some commenters objected to the requirements that repair
of beneficiary-owned equipment that is subject to a competitive bidding
program must be furnished by a contract supplier and that a contract
supplier must agree to service all items included in its contract. The
commenters remarked that a limited number of suppliers have repair
facilities. In addition, the commenters noted that contract suppliers
may not have access to the parts necessary to repair equipment sold by
another contract supplier, and this provision would allow manufacturers
to inflate the price for parts that must be obtained by contract
suppliers that do not regularly furnish their products. The commenters
also suggested that, in cases where the manufacturer is the sole
distributor of an item, the repair parts and accessories for the item
might not be interchangeable and the use of parts that are not provided
by the manufacturer may void the manufacturer's warranty. The
commenters also suggested that if there are warranties that must be
honored on previously rented or purchased equipment, the cost of
service should be borne by the contract supplier that received
reimbursement for the malfunctioning item. Several commenters expressed
concern about assuming the liability for modifying a splint if they
were not the contract supplier that originally furnished it. In
addition, the commenters suggested that this proposal could restrict
Medicare beneficiary access to a choice of suppliers that can repair
their equipment. Several commenters noted that contract suppliers may
not have the training and expertise required for repairs. One commenter
asked how the repair proposal might be affected by the DRA provisions
that impose new requirements regarding capped rental items, oxygen, and
oxygen equipment.
Another commenter recommended that repairs should be treated as a
separate bid on the RFB, rather than as a cost of furnishing an item in
an overall product category.
Response: After consideration of the commenters' concerns, we are
revising our proposal on payment for repairs and replacement of
beneficiary-owned items. We will not require that repairs of
beneficiary-owned competitively bid items be performed by contract
suppliers because we recognize that contract suppliers may not have the
training and expertise to repair every make and model of equipment that
could be provided to a Medicare beneficiary. This policy will also
apply to maintenance services required by the DRA. We will pay for
maintenance and servicing of competitively bid items, including
replacement parts that may be needed, that are performed by any
supplier as long as those repairs are made by suppliers that have a
valid Medicare billing number that enables them to receive payment for
covered Medicare services (Sec. 414.408(k)). Payment will generally be
made for parts and labor consistent with the methodology we currently
use to make these payments, which can be found in 42 CFR 414.210(e)(1)
of our regulations for durable medical equipment, and prosthetic and
orthotic devices. However, if the part needed to repair the item is
itself a competitively bid item for the CBA in which the beneficiary
maintains a permanent residence, we will pay the supplier the single
payment amount for the part because we do not believe that the payment
amount for the part should be different from what it would otherwise be
in the CBA solely because the part is furnished by a supplier that is
not a contract supplier. For example, if a beneficiary needs to obtain
a new battery for his or her wheelchair, and the battery is itself a
competitively bid item for the applicable CBA, we will pay the supplier
that performs the repair the reasonable and necessary charges for the
labor needed to service the wheelchair and the single payment amount
for the battery. We believe that allowing any supplier to furnish a
part when performing a repair, even though the part is itself a
competitively bid item, is a reasonable accommodation that will enable
the supplier to complete the repair properly, and an appropriate
circumstance under which we can make payment to the supplier under our
authority in section 1862(a)(17) of the Act.
In addition, under final Sec. 414.408(k)(2) to be consistent with
our current maintenance and servicing rules for oxygen equipment, we
will make general maintenance and servicing payments to suppliers that
service oxygen equipment (other than liquid and gaseous equipment) in
accordance with Sec. 414.210(e)(2) and an additional payment to a
supplier that picks up and stores or disposes of beneficiary-owned
oxygen tanks or cylinders that are no longer medically necessary, as
provided under Sec. 414.210(e)(3).
We note that we do not have authority under Sec. 1847(a)(2) to
include splints in the Medicare DMEPOS Competitive Bidding Program.
Comment: Numerous commenters raised concerns regarding the
requirement that replacement of beneficiary-owned equipment that is
subject to the Medicare DMEPOS Competitive Bidding Program must be
furnished by a contract supplier. The commenters suggested that CMS
allow contract suppliers to replace items even if they do not
ordinarily furnish these items. The commenters believed that
implementing the replacement

[[Page 18010]]

provision may be difficult as a replacement may relate to a warranty
claim or require that the same product be furnished to ensure
continuity of care. The commenters also noted that, under the proposed
provision, contract suppliers would be required to replace products
that have been damaged despite the fact that they did not sell the item
initially. The commenters asserted that if a beneficiary purchased a
product from a noncontract supplier prior to competitive bidding, the
noncontract supplier should be responsible for repairs or replacement
and be paid accordingly. The commenters also stressed that payment
rates should be generous enough to ensure that beneficiaries receive an
appropriate level of response or service, and contract suppliers should
be reimbursed for the service and replacement items they provide. The
commenters remarked that the proposed rule assumes that replacement
equipment will be provided and paid for in an amount equal to the
single payment amount. Several commenters suggested that CMS eliminate
the requirement that beneficiary-owned equipment subject to competitive
bidding must be replaced by a contract supplier. Other commenters
requested that CMS revise proposed Sec. 414.422(c) to limit the scope
of this requirement so that contract suppliers that are FDA-approved
manufacturers and that only furnish their own products to beneficiaries
in the CBA are exempt and would only be required to replace their own
products. One commenter asked how the replacement proposal might be
affected by DRA provisions that imposed new requirements regarding
capped rental items, oxygen, and oxygen equipment.
Response: As we stated above, we have decided to modify our
proposal regarding the maintenance and servicing of beneficiary-owned
items to allow any supplier to perform this service, provided that the
supplier has a valid Medicare billing number. However, we do not
believe that this modification should extend to situations where an
item must be replaced in its entirety because the concern expressed by
the commenters, namely that suppliers cannot be expected to have the
expertise to repair every make and model of equipment, would not be a
factor in the event that an item must be replaced. Accordingly, we
continue to believe that beneficiaries should be required to obtain a
replacement of an entire item, as apposed to replacement of a part for
repair purposes, from a contract supplier. As we stated in the May 1,
2006 proposed rule (71 FR 25681), this rule will help ensure that
beneficiaries obtain replacement items from qualified suppliers, and it
is consistent with one of the competitive bidding program's goals, that
is, to direct business to contract suppliers that conduct business in a
manner that is beneficial for the Medicare program and for
beneficiaries. Therefore, in final Sec. 414.408(k)(3) we have retained
this requirement.
Medicare regulations at 42 CFR 414.210(f) provide that if an item
of DME or a prosthetic or orthotic device paid for by Medicare has been
in continuous use by the patient for the equipment's reasonable useful
lifetime or if the carrier determines that the item is lost, stolen, or
irreparably damaged, the patient may elect to obtain a new piece of
equipment. If these requirements are met, the Medicare beneficiary
would be required to go to a contract supplier to obtain a complete
replacement of beneficiary-owned equipment. However, as we stated
above, if a beneficiary needs to obtain a replacement part for his or
her beneficiary-owned equipment, or needs to obtain maintenance or
servicing of the equipment, the beneficiary may obtain the part or
service from any supplier that has a valid Medicare billing number. If
the replacement part is itself a competitively bid item in the CBA
where the beneficiary maintains a permanent residence, the supplier
that performs the repair would generally be paid for the labor
associated with the repair in accordance with the methodology described
in Sec. 414.210(e)(1), and the single payment amount for the part.
We do not agree with the commenters that our replacement rules
would generally require a contract supplier replace an entire
competitively bid item with the same make or model to ensure continuity
of care. Rather, as we discuss in Sec. 414.420 of this final rule,
this would only be required if a physician or treating practitioner
prescribed a particular brand or mode of delivery for an item. If a
beneficiary needs a replacement item, a manufacturer that only
furnishes its own brand would generally be able to furnish that brand
to the beneficiary. In addition, we expect that a manufacturer's
warranty would be honored by the manufacturer, regardless of which
supplier from which the Medicare beneficiary obtains the replacement.
In summary, after consideration of the public comments we received,
in this final rule, we are redesignating proposed Sec. 414.422(c) as
new Sec. 414.408(k) and revising this section as discussed above.

E. Competitive Bidding Areas (Sec. Sec. 414.402, 414.406(b)-(c),
414.410, 414.412(f) and (g)

1. Background
Section 1847(a)(1)(A) of the Act requires that competitive bidding
programs be established and implemented in areas throughout the United
States. We are interpreting the term ``United States'' to include all
States, Territories, and, as discussed in section VI.B. of this final
rule, the District of Columbia. Section 1847(a)(1)(B) of the Act
provides us with the authority to phase in competitive bidding programs
so that the competition under the programs occurs in--
10 of the largest MSAs in CY 2007;
80 of the largest MSAs in CY 2009; and
Additional areas after CY 2009.
We proposed to implement this statutory provision in Sec.
414.406(b)-(c), and in Sec. 414.410.
Section 1847(a)(1)(B) of the Act also authorizes us to phase in
competitive bidding programs first among the highest cost and volume
items or those items that we determine have the largest savings
potential. As we proposed, we describe our methodologies for selecting
the MSAs for CYs 2007 and 2009 below. Once the MSAs have been selected
for CYs 2007 and 2009, we proposed to define the CBAs for CYs 2007 and
2009. The process we proposed for establishing CBAs in future years,
which we are finalizing in this final rule, is also discussed below.
2. Methodology for MSA Selection for CYs 2007 and 2009 Competitive
Bidding Programs (Sec. Sec. 414.410(a) and (b))
Based on sections 1847(a)(1)(B)(i)(I) and (II) of the Act, we have
the authority to select from among the largest MSAs during the first
two implementation phases in order to phase in the programs in the most
successful way, thereby achieving the greatest savings while
maintaining quality and beneficiary access to care. In phasing in the
competitive bidding programs, we proposed to adopt a definition of the
term ``Metropolitan Statistical Area'' (MSA) consistent with that
issued by the Office of Management and Budget (OMB) and applicable for
CYs 2007 and 2009 (Sec. 414.402). OMB is the Federal agency
responsible for establishing the standards for defining MSAs for the
purpose of providing nationally consistent definitions for collecting,
tabulating, and publishing Federal statistics for a set of geographic
areas. OMB most recently revised its standards for defining MSAs in CY
2000 (65 FR

[[Page 18011]]

82228 through 82238). Under these standards, an MSA is defined as a
core-based statistical area (CBSA) (a statistical geographic area
consisting of the county or counties associated with at least one core
(urbanized area or urban cluster) of at least 10,000 population, plus
adjacent counties having a high degree of social and economic
integration as measured through commuting ties with the counties
containing the core) associated with at least one urbanized area that
has a population of at least 50,000, and is comprised of the central
county or counties containing the core, plus adjacent outlying counties
having a high degree of social and economic integration with the
central county as measured through commuting. OMB issues periodic
updates of the MSAs between decennial censuses based on United States
Census Bureau estimates, but other than identifying certain MSAs having
a population core of at least 2.5 million, does not rank MSAs based on
population size. However, the U.S. Census Bureau periodically publishes
a Statistical Abstract of the United States, which contains a table
listing large MSAs, or MSAs having a population of 250,000 and over.
For the purpose of this rule, we proposed to use these data to identify
the largest MSAs.
In the May 1, 2006 proposed rule (71 FR 25665), we proposed a
formula driven methodology for selecting the MSAs for competitive
bidding in CYs 2007 and 2009. After we select the MSAs, we would define
the CBAs. For the purpose of our proposal, DMEPOS allowed charges would
be the Medicare fee-for-service (FFS) allowed charge data for DMEPOS
items that we have authority to include in a competitive bidding
program. These data do not include Medicare expenditures for DMEPOS
items under the Medicare Advantage Program.
a. MSAs for CY 2007
We proposed to use a multiple step process in selecting the MSAs
for CY 2007. First, we proposed to identify the 50 largest MSAs in
terms of total population in CY 2005 using population estimates
published by the U.S. Census Bureau in its table of large MSAs from the
Statistical Abstract of the United States. Second, 25 MSAs out of the
50 MSAs identified in step one would be eliminated from consideration
based on our determination that they have the lowest totals of DMEPOS
allowed charges for items furnished in CY 2004. This step would allow
us to focus on the 25 MSAs that have the highest totals of DMEPOS
allowed charges which, we believe, would produce a greater chance of
savings as a result of competitive bidding than MSAs with lower total
DMEPOS allowed charges. Table 1 of the proposed rule (71 FR 25665 and
25666), which is republished below, illustrated the DMEPOS allowed
charge data for items furnished in CY 2003 and Census Bureau population
estimates as of July 1, 2003.

Table 1.--Top 25 MSAs Based on Total DMEPOS Medicare Allowed Charges for
CY 2003
------------------------------------------------------------------------
MSA Allowed charges
------------------------------------------------------------------------
New York-Northern New Jersey-Long Island, NY-NJ-PA $312,124,291
(New York)...........................................
Los Angeles-Long Beach-Santa Ana, CA (Los Angeles).... 253,382,483
Miami-Fort Lauderdale-Miami Beach, FL (Miami)......... 221,660,443
Chicago-Naperville-Joliet, IL-IN-WI (Chicago)......... 173,922,952
Houston-Baytown-Sugar Land, TX (Houston).............. 149,060,607
Dallas-Fort Worth-Arlington, TX (Dallas).............. 139,910,862
Detroit-Warren-Livonia, MI (Detroit).................. 121,444,298
San Juan, PR.......................................... 108,478,208
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 97,487,063
(Philadelphia).......................................
Atlanta-Sandy Springs-Marietta, GA (Atlanta).......... 75,860,276
Tampa-St. Petersburg-Clearwater, FL (Tampa)........... 71,309,635
Boston-Cambridge-Quincy, MA-NH (Boston)............... 62,467,094
Washington-Arlington-Alexandria, DC-VA-MD-WV (DC)..... 61,416,109
Baltimore-Towson, MD (Baltimore)...................... 59,714,310
Pittsburgh, PA........................................ 56,612,095
St. Louis, MO-IL...................................... 55,931,373
Riverside-San Bernardino-Ontario, CA (Riverside)...... 52,910,209
Cleveland-Elyria-Mentor, OH (Cleveland)............... 52,237,312
Orlando, FL........................................... 51,982,164
San Francisco-Oakland-Fremont, CA (San Francisco)..... 45,565,320
San Antonio, TX....................................... 44,113,886
Cincinnati-Middletown, OH-KY-IN (Cincinnati).......... 41,582,961
Kansas City, MO-KS.................................... 41,310,326
Virginia Beach-Norfolk-Newport News, VA-NC (Virginia 41,016,726
Beach)...............................................
Charlotte-Gastonia-Concord, NC-SC (Charlotte)......... 37,874,144
------------------------------------------------------------------------

Table 1 showed the 25 MSAs that would be left for consideration
after step two is completed. However, we proposed to select the actual
MSAs for CY 2007 using U.S. Census Bureau population data published as
of July 1, 2005, and DMEPOS allowed charge data for items furnished in
CY 2004. We proposed using population data for CY 2005 and DMEPOS
allowed charge data for CY 2004 because we believed these data would be
the most recently available data at the time that the MSAs are selected
for CY 2007 implementation. We now have more current utilization data
(that is, from CY 2005); we will use these data in selecting the MSAs
for the first round of competitive bidding.
Third, we proposed to score the MSAs based on combined rankings of
DMEPOS allowed charges per FFS beneficiary (charges per beneficiary)
and the number of DMEPOS suppliers per number of beneficiaries
receiving DMEPOS items (suppliers per beneficiary) in CY 2004, with
equal weight (50 percent) being given to each factor. The MSAs would be
ranked from 1 to 25 in terms of DMEPOS allowed charges per FFS
beneficiary (for example, the MSA with the highest DMEPOS allowed
charges per FFS beneficiary would be ranked number 1). Similarly, areas
having more suppliers per beneficiary are more likely to be

[[Page 18012]]

competitive and would be ranked higher than MSAs having fewer suppliers
per beneficiary. Based on our experience from the DMEPOS competitive
bidding demonstrations, the number of suppliers would be based on
suppliers with at least $10,000 in allowed charges attributed to them
for DMEPOS items furnished in the MSA in CY 2004. The number of
beneficiaries would be based on the number of beneficiaries receiving
DMEPOS items in the MSA in CY 2004. If more than one MSA receives the
same score, we proposed to use total DMEPOS allowed charges for items
that we have authority to include in a competitive bidding program in
each MSA as the tiebreaker because this would be an indicator of where
more program funds would be spent on DMEPOS items subject to
competitive bidding. Table 2 in the proposed rule (71 FR 25666), which
is republished below, illustrated how the 25 MSAs from Table 1 in the
proposed rule would be scored, based on data for CY 2003.

Table 2.--Scoring of Top 25 MSAs Based on Data for CY 2003
[Scoring based on combined rank from columns 3 and 4]
----------------------------------------------------------------------------------------------------------------
Charges per Suppliers per
MSA Score beneficiary beneficiary Allowed charges
----------------------------------------------------------------------------------------------------------------
Miami............................................ 3 $428.44 (1) 0.01121 (2) $221,660,443
Houston.......................................... 6 348.83 (2) 0.00864 (4) 149,060,607
Dallas........................................... 8 297.33 (3) 0.00749 (5) 139,910,862
Riverside........................................ 9 220.93 (8) 0.01144 (1) 52,910,209
San Antonio...................................... 9 243.03 (6) 0.00897 (3) 44,113,886
Los Angeles...................................... 11 277.16 (5) 0.00692 (6) 253,382,483
Charlotte........................................ 14 226.09 (7) 0.00661 (7) 37,874,144
Orlando.......................................... 18 212.57 (9) 0.00569 (9) 51,982,164
San Juan......................................... 25 291.97 (4) 0.00388 (21) 108,478,208
Atlanta.......................................... 25 185.80 (15) 0.00569 (10) 75,860,276
Tampa............................................ 25 190.30 (13) 0.00529 (12) 71,309,635
Kansas City...................................... 25 186.39 (14) 0.00555 (11) 41,310,326
Pittsburgh....................................... 26 197.95 (11) 0.00484 (15) 56,612,095
Virginia Beach................................... 26 207.28 (10) 0.00477 (16) 41,016,726
St. Louis........................................ 32 169.81 (18) 0.00488 (14) 55,931,373
San Francisco.................................... 32 127.56 (24) 0.00632 (8) 45,565,320
Cincinnati....................................... 32 167.06 (19) 0.00528 (13) 41,582,961
Cleveland........................................ 33 182.01 (16) 0.00470 (17) 52,237,312
Detroit.......................................... 37 195.99 (12) 0.00290 (25) 121,444,298
Baltimore........................................ 37 174.38 (17) 0.00396 (20) 59,714,310
Philadelphia..................................... 40 152.38 (21) 0.00443 (19) 97,487,063
DC............................................... 41 128.97 (23) 0.00449 (18) 61,416,109
Chicago.......................................... 44 160.26 (20) 0.00327 (24) 173,922,952
New York......................................... 45 139.81 (22) 0.00342 (23) 312,124,291
Boston........................................... 47 113.99 (25) 0.00371 (22) 62,467,094
----------------------------------------------------------------------------------------------------------------

We proposed that the final scoring be based on utilization data for
CY 2004 and population data for CY 2005 because we believed these data
would be the most recently available data at the time that the MSAs are
selected for CY 2007 implementation. However, we will use utilization
data for CY 2005 when we perform the final scoring for the third step
because this is the most current utilization data that we have.
For purposes of phasing in the programs, we proposed to exclude
from consideration for competitive bidding until CY 2009 the three
largest MSAs in terms of population, as well as any MSA that is
geographically located in an area served by two DME MACs. The three
largest MSAs based on total population (based on CY 2003 data) are New
York, Los Angeles, and Chicago. We believe that these MSAs should not
be phased in until CY 2009 because of the logistics associated with the
start-up of this new and complex program. As of 2000, each of these
three MSAs had a total population of over 9 million. By comparison, the
largest area in which the demonstrations were conducted was San Antonio
(total population of 1.7 million in 2000). We want to gain experience
with the competitive bidding process in MSAs larger than San Antonio
before moving onto the three largest MSAs. After we have gained
experience operating competitive bidding programs in CBAs that
encompass smaller MSAs in CYs 2007 and 2008, we plan to implement
programs that include New York, Los Angeles, and Chicago in CY 2009.
In the May 1, 2006 proposed rule, we indicated that we were
considering an alternative under which we would establish CBAs that
include portions of one or more of these MSAs (for example, by county).
We believe that this alternative is authorized by section
1847(a)(1)(B)(II) of the Act, which states that competition under the
programs shall occur in 80 of the largest MSAs in CY 2009 but does not
require the competition to occur in the entire MSA. In addition,
section 1847 of the Act does not prohibit us from implementing a
competitive bidding program in an area that is larger than a MSA. In
the proposed rule, we solicited specific comments on these
alternatives.
Comment: Several commenters stated that CMS does not have the
authority to extend or decrease the size of the MSA boundaries and that
this proposal is inconsistent with the statute. They noted that section
1847(a)(1)(B) of the Act requires that competitive acquisition occur in
MSAs in CY 2007 and CY 2009, and only authorizes competitive
acquisition in ``other areas'' after CY 2009.
Response: Section 1847(a)(1)(B) of the Act requires that
competition under the programs occur in CY 2007 and CY 2009 in a
minimum number of MSAs. We did not propose to extend or decrease any
MSA boundaries. Rather, we stated that section 1847(a)(1)(B) of the Act
does not require us to define the boundaries of a CBA congruently with
the boundaries of an MSA, as long as 10 MSAs are involved in CY 2007
and 80 MSAs are involved in CY 2009. We also proposed to consider an
area for inclusion in a CBA in CY 2007 or CY 2009, or both,

[[Page 18013]]

if (1) The area is not part of the MSA but adjoins an MSA in which a
competitive bidding program will be operating; (2) the area is
competitive (meaning that it has high DMEPOS utilization, significant
expenditures, and/or a large number of suppliers that furnish items
that will be included in the competitive bidding program for the
adjoining MSA); and (3) the area is part of the normal service area or
market for suppliers that also serve the MSA market or areas within the
boundaries for an MSA in which a competitive bidding program will be
operating. We continue to believe this approach is reasonable because
if an area meets these criteria, we believe that we could properly
characterize the area as being integrated with the MSA in terms of the
DMEPOS market.
Comment: One commenter recommended that, when picking the first 10
MSAs, CMS should pick the smallest of the 10 largest MSAs.
Response: Section 1847(a)(1)(B) of the Act requires us to phase-in
the competitive bidding programs so that the competition occurs in 10
of the largest MSAs in 2007. The process that we proposed and are
finalizing in this final rule is a formula driven approach that bases
the decision on the total population of an MSA, the Medicare allowed
charges for DMEPOS items per FFS beneficiary in an MSA, the total
number of DMEPOS suppliers per FFS beneficiary who received DMEPOS
items in an MSA, and the MSA's geographic location, for example, in the
first round, to ensure that there is at least one CBA in each DME MAC
region. We believe that this approach will result in the selection of
MSAs that have more potential to produce savings for the Medicare
program than we might otherwise achieve if we selected MSAs based on
their size alone. However, we also recognize that implementing the
Medicare DMEPOS Competitive Bidding Program will involve many
challenges, and we want to gain sufficient experience in administering
the program before we implement competitive bidding programs in the
three largest MSAs in terms of population size. Therefore, we proposed
to exclude the MSAs that include New York City, Los Angeles, and
Chicago from the competition that will occur in CY 2007.
Comment: One commenter recommended excluding Miami from the first
round of bidding. The commenter noted that Miami has the largest MSA
market based charges per beneficiary, suppliers per beneficiary, and
total DMEPOS allowed charges. The commenter stated that there is a big
difference between the Medicare DMEPOS market in an MSA and the total
population of an MSA. The commenter also recommended that CMS exclude,
until CY 2009, or once further experience has been accumulated and
cultural competency has been accounted for, culturally diverse MSAs
such as Miami and those located in Puerto Rico from competitive
bidding. A number of other commenters also recommended excluding MSAs
located in Puerto Rico.
Response: We believe our methodology results in the selection of
top priority areas in terms of potential savings for the program.
Cultural diversity is not one of the factors we considered when
developing a formula driven approach because our goal in implementing
the program is to select areas that provide the greatest opportunity
for savings.
We proposed not to include CBAs that cross DME MAC regions because
this could complicate implementation by having two DME MACs processing
claims from one CBA.
The next step that we proposed entails ensuring that there is at
least one CBA in each DME MAC region by first selecting the highest
scoring MSA in each DME MAC region (other than New York, Los Angeles,
Chicago, or MSAs that cross DME MAC boundaries). This would ensure that
each DME MAC gains some experience with competitive bidding prior to CY
2009, when competitive bidding would be implemented in CBAs that
include 80 MSAs.
Comment: One commenter recommended that one MSA be selected from
each DME MAC region for CY 2007.
Response: Section 1847(a)(1)(B) requires us to implement
competitive bidding in 10 of the largest MSAs in CY 2007. We are
adopting as final the approach outlined in our proposed rule (71 FR
25667) which ensures that there is a least one CBA in each DME MAC
region. This would ensure that each DME MAC region gains experience
with the competitive bidding program prior to CY 2009 when we phase in
70 additional CBAs.
We also proposed to select no more than two MSAs per State among
the initial CBAs selected for CY 2007 in order to learn how competitive
bidding works in more States and regions of the country. In summary, we
proposed to select the 10 MSAs in which competition under the programs
would occur in CY 2007 using the following steps:
Identify the top 50 MSAs in terms of general population.
Focus on the 25 MSAs from step one with the greatest total
of DMEPOS allowed charges.
Score the MSAs from step two based on combined rankings of
DMEPOS allowed charges per beneficiary and suppliers per beneficiary,
with lower scores indicating a greater potential for savings if
programs are implemented in those areas.
Exclude the three largest MSAs in terms of population (New
York, Los Angeles, Chicago) and any MSA that crosses DME MAC
boundaries.
Select the lowest scoring MSA from each DME MAC region.
Select the next six lowest scoring MSAs regardless of DME
MAC region, but not more than two MSAs from one State.
Break ties in scores using DMEPOS allowed charges,
selecting MSAs with higher total DMEPOS allowed charges.
In the proposed rule, we indicated that we considered a number of
alternative methods for selecting the MSAs for CY 2007. We indicated
that the MSAs could be selected based on a combination of one or more
variables or measures including, but not limited to--
General population;
Medicare FFS beneficiary population;
Number of beneficiaries receiving DMEPOS items that we
have authority to include in a competitive bidding program;
Total Medicare allowed charges for DMEPOS items subject to
competitive bidding; and
Number of suppliers of DMEPOS items that we have authority
to include in a competitive bidding program.
In evaluating these alternatives, we defined the general population
as all individuals residing in an MSA, whether or not they were
enrolled in Medicare. One advantage of this variable would have been
that total population is a widely accepted measure of gauging MSA size
and the data are readily accessible to the general public through the
U.S. Census Bureau Web site. Another advantage of using this variable
would be that total population takes into account the demand for DMEPOS
items and other supplies from population groups other than the Medicare
population. DMEPOS demand from non-Medicare individuals might make it
less likely that a supplier not selected as a contract supplier would
exit the market. This could help increase the likelihood of competition
in future rounds of competitive bidding within that MSA. However, we
recognize that the MSAs with the largest total populations might not
have the

[[Page 18014]]

most Medicare beneficiaries or the greatest potential for savings. One
reason is that the age distribution is not uniform across MSAs. MSAs
located in States that have either large immigrant populations or have
experienced rapid recent growth often have younger than average age
profiles. Another reason is that DMEPOS utilization and potential
profits are not uniform across MSAs. It is quite possible that some of
the smaller population MSAs may have a greater potential for savings
than MSAs with much larger populations. We believe that the
disadvantages of selecting MSAs based on general population are greater
than the advantages of using this method and, therefore, did not
propose using general population as the sole variable in selecting the
MSAs for CY 2007.
An advantage of selecting MSAs based on the Medicare FFS population
would have been that this population represents the number of
individuals who could potentially be affected by competitive bidding. A
disadvantage of selecting MSAs based solely on this variable is that it
does not reflect actual DMEPOS utilization. Therefore, we did not
propose using the FFS population as the sole variable in selecting the
MSAs for CY 2007. Per capita DMEPOS utilization rates vary across MSAs.
As a result, MSAs with fewer Medicare beneficiaries could have a
greater potential for savings from competitive bidding. The advantage
of using the number of Medicare beneficiaries receiving DMEPOS items to
select the MSAs is that MSAs would be selected based on the number of
individual beneficiaries who are most likely to be directly affected by
competitive bidding because they already have a need for these items. A
disadvantage of this variable is that the number of specific
beneficiaries receiving DMEPOS items is only a static measure. The
number of beneficiaries who would be receiving DMEPOS products in the
future could be substantially different from the current number.
Treatment patterns within the MSA could change or the number of
beneficiaries receiving DMEPOS items could fluctuate if beneficiaries
switch from FFS benefits to a Medicare Advantage plan. For these
reasons, we did not propose using the number of beneficiaries receiving
DMEPOS items as the sole variable in selecting the MSAs for CY 2007.
Selecting the MSAs using the steps we proposed utilizes a variety
of variables that we believe would help us predict which MSAs will
offer the largest savings potential under a competitive bidding
program. In step 2 above, we would focus on a subset of large MSAs with
higher allowed charges for DMEPOS items, which is consistent with
section 1847(a)(1)(B)(ii) of the Act and which would allow us to phase
in the Medicare DMEPOS Competitive Bidding Program first for those
items that have the highest cost and highest volume, or those items
that have the largest savings potential. This step would directly
address the question of which MSAs have the highest costs. In step 3
above, we proposed to use allowed DMEPOS charges per beneficiary and
the number of suppliers per beneficiary to further measure the savings
potential for each MSA. Allowed DMEPOS charges per beneficiary is a
measure of per capita DMEPOS utilization in terms of the overall DMEPOS
cost per beneficiary. We believe that areas with higher utilization
rates and costs would have a greater potential for savings under the
programs, which will rely on competition among suppliers to lower costs
in the area. Competition among suppliers is necessary for competitive
bidding to be successful. Without sufficient competition among
suppliers, suppliers have little incentive to submit low bids in
response to the RFBs for DMEPOS products. In addition, we believe that
competition for market share among winning suppliers will act as a
market force to maintain a high level of quality products. The number
of suppliers per beneficiary is a direct measure of how many suppliers
are competing for each beneficiary's business. We expect that the
higher the number of suppliers per beneficiary, the higher the degree
of competition will be.
In the proposed rule, we invited specific comments about the
selection method for the original 10 MSAs in CY 2007. We welcomed
recommendations of other options and criteria for consideration. We
indicated that, after further consideration of comments received, in
the final rule, we may adopt other criteria regarding issues described
above or other criteria and options brought to our attention through
the comment process.
Comment: Several commenters recommended that CMS identify the
initial 10 MSAs in the final regulation.
Response: We plan to announce the first 10 MSAs, which will be
based on 10 of the largest MSAs, at the same time we publish this final
rule.
Comment: Several commenters recommended that CMS stagger the
implementation of the initial 10 MSAs to identify and correct problems
encountered early in the implementation process.
Response: Section 1847(a)(1)(B)(i)(I) of the Act requires that the
competition take place in 10 of the largest MSAs in CY 2007. In
implementing competitive bidding programs in 10 CBAs that include these
MSAs, we do not believe it is necessary or practical to use the
staggered approach recommended by the commenters, as we believe that
this would likely result in confusion for beneficiaries and suppliers
and make the phase-in process too administratively complicated.
Comment: Several commenters suggested that CMS use an area
selection methodology that initially results in a limited number of
small CBAs. The commenters also stated that this is an experimental
program. They noted that there is little geographic diversity in the
CBAs identified in Table 2 of the proposed rule (republished as Table 2
in this final rule), and that based on this table, the CBAs would be
disproportionately concentrated in DME MAC Region C. The commenters
suggested that the geographic diversity should be expanded to provide
more useful information that CMS can consider when implementing the
program in more areas in the future.
Response: We believe that our proposed methodology for selecting
MSAs will result in the selection of the most appropriate MSAs (and
therefore CBAs) in terms of achieving one of the most critical goals of
the program to reduce Medicare expenditures for DMEPOS. As we explained
above, several aspects of our methodology, including in the first round
of competitive bidding selecting at least one MSA in each DME MAC
region, and selecting not more than two MSAs per State, allow for
geographic diversity.
b. MSAs for CY 2009
In selecting the 70 additional MSAs in which competition will occur
in CY 2009, we proposed using generally the same criteria used to
select the MSAs for CY 2007 (proposed Sec. 414.410(b)). Because the
number of MSAs in which competition must occur in CY 2009 is much
higher than the number for CY 2007, we proposed that the steps in the
selection process would change as follows:
We would score all of the MSAs included in the table of
large MSAs in the most recent publication of the U.S. Census Bureau's
Statistical Abstract of the United States.
We would use the same criteria to score the MSAs as we
would use in selecting the MSAs for CY 2007, but use data from CY 2006.
In the proposed rule, we indicated that one option we were
considering and on which we requested comments is whether we should
modify the

[[Page 18015]]

ranking of MSAs based on allowed DMEPOS charges per beneficiary so that
it focuses on charges in each MSA for the items that experienced the
largest payment reductions or savings under the initial round of
competitive bidding in CY 2007.
In selecting the MSAs for CY 2009, we did not propose excluding the
3 largest MSAs in terms of population size or MSAs that cross DME MAC
boundaries from the 80 largest MSAs to be included in the CBAs. In
addition, we did not propose limiting the number of MSAs that could be
selected from any one State.
Comment: One commenter suggested that New York, Los Angeles, and
Chicago be top priorities in the CY 2009 phase of implementation due to
the potential for significant cost savings to the Medicare program.
Response: These MSAs are only being excluded from consideration
during the first phase of competitive bidding and will be included in
the selection methodology for the second phase.
After consideration of the public comments we received, we are
finalizing our rules under proposed Sec. Sec. 414.410(a) and (b)
regarding the methodology for MSA selection with only technical
changes.
3. Establishing Competitive Bidding Areas and Exemption of Rural Areas
and Areas With Low Population Density Within Urban Areas (Sec.
414.410(c))
Section 1847(a)(1) of the Act requires that we phase in competitive
bidding programs and establish CBAs throughout the United States over
several years beginning in CY 2007. Section 1847(a)(3)(A) of the Act
gives us the authority to exempt ``rural areas and areas with low
population density within urban areas that are not competitive, unless
there is a significant national market through mail order for a
particular item or service.''
In the May 1, 2006 proposed rule, we proposed to use the authority
in section 1847(a)(3) of the Act to exempt areas from competitive
bidding if data for the areas indicate that they are not competitive
based on one or more of the following indicators:
Low utilization of items in terms of the number of items
and/or allowed charges for DMEPOS in the area relative to other similar
geographic areas.
Low number of suppliers of DMEPOS items subject to
competitive bidding serving the area relative to other similar
geographic areas.
Low number of Medicare beneficiaries receiving FFS
benefits in the area relative to other similar geographic areas.
We proposed to make decisions regarding what constitutes low
(noncompetitive) levels of utilization, suppliers, and beneficiaries on
the basis of our analysis of the data for allowed charges, allowed
services for items that may be subject to competitive bidding, and the
number of Medicare beneficiaries receiving FFS benefits and DMEPOS
suppliers in specific geographic areas. In defining urban and rural
areas, we proposed to use the definitions currently in Sec.
412.64(b)(1)(ii) of our regulations. We proposed to incorporate these
provisions in proposed Sec. 414.410(c).
We invited comments on the methodologies we proposed for
determining whether an area within an urban area that has a low
population density is not competitive. We indicated that we would be
reviewing the total allowed charges, the number of beneficiaries, and
the number of suppliers to determine whether a rural area should be
exempted from competitive bidding. In addition, we invited comments on
standards for exempting particular rural areas from competitive
bidding.
Comment: Several commenters believed that competitive bidding
should not be implemented in MSAs with less than 500,000 people. They
indicated that this will help keep small business owners in rural
communities open and, therefore, beneficiary access in these areas will
not be compromised.
Response: Section 1847(a)(1) of the Act requires that we establish
competitive bidding programs throughout the United States. We have the
authority under section 1847(a)(3) of the Act to exempt rural areas and
areas with low population density within urban areas that are not
competitive unless there is a significant mail order market for a
particular item. When we implement the program, we will only include
areas in CBAs that are competitive and that we believe will produce
savings for the program. In addition, we have revised our rules
regarding small suppliers in response to public comments and believe
that the revised rules will help to ensure that small suppliers have an
opportunity to participate in the Medicare DMEPOS Competitive Bidding
Program. A full discussion of these modifications can be found in
section XI. of this final rule.
After consideration of the public comments we received, we are
finalizing, with only technical changes, proposed Sec. 414.410(c)
regarding the exclusion of rural areas or areas with low population
density from a CBA.
4. Establishing Competitive Bidding Areas for CYs 2007 and 2009
(Sec. Sec. 414.406(b) and (c))
Section 1847(a)(1)(B) of the Act requires that the competition
``occurs in'' 10 of the largest MSAs in CY 2007, and in 80 of the
largest MSAs in CY 2009, but does not require us to define the
competition boundaries concurrently with the MSA boundaries, as long as
10 MSAs are involved in CY 2007 and 80 MSAs are involved in CY 2009.
Therefore, we do not believe that section 1847(a)(1)(B) of the Act
prohibits us from extending individual competition areas beyond the MSA
boundaries in CYs 2007 or 2009.
In the May 1, 2006 proposed rule, we proposed in Sec. 414.406(b)
to designate through program instructions each CBA in which a
competitive bidding program will take place, and we proposed in Sec.
414.406(c) that we could revise the CBAs if necessary. We also proposed
(71 FR 25668) that an area (for example, a county, parish, or zip code)
outside the boundaries of an MSA be considered for inclusion in a CBA
for CY 2007 or CY 2009, or both if all of the following apply:
The area adjoins an MSA in which a competitive bidding
program will be operating in CY 2007 or CY 2009.
The area is not part of an MSA in which a competitive
bidding program will be operating in CY 2007 or CY 2009.
The area is competitive, as explained below.
The area is part of the normal service area or market for
suppliers that also serve the MSA market or areas within the boundaries
of an MSA in which a competitive bidding program will be operating in
CY 2007 or CY 2009.
As explained in section VI.E.2. of this final rule, we proposed to
define an MSA as a Core Based Statistical Area associated with at least
one urbanized area that has a population of at least 50,000, and
comprised of the central county or counties containing the core, plus
adjacent outlying counties having a high degree of social and economic
integration with the central county as measured through commuting.
However, when using this definition to establish the boundaries of an
MSA, OMB would not consider whether an area or areas adjoining an MSA
are served by the same DMEPOS suppliers that furnish items to
beneficiaries residing in the MSA. If an area has a high level of
utilization, significant expenditures, and/or a large number of
suppliers of DMEPOS items included in the competitive bidding program
for the

[[Page 18016]]

adjoining MSA, we stated that we believe that it would be practical and
beneficial to include this area in the CBA. The savings to the program
associated with adding the area to the CBA would likely offset any
incremental administrative costs incurred by the CBIC associated with
including the area in the competitive bidding program for the MSA.
Finally, we did not propose to consider counties that do not adjoin
an MSA for inclusion in a CBA for CY 2007 or CY 2009 because we believe
that these outlying counties are too far removed from the areas that
OMB has determined to be economically integrated. We stated that we
have the discretion to define a CBA to be either concurrent with an
MSA, larger than an MSA, or smaller than an MSA. We also stated that we
would detail in the RFBs the exact boundaries of each CBA. We invited
comments on the criteria to be used in considering whether to include
counties outside MSAs in a CBA in CY 2007 or CY 2009.
Comment: Several commenters recommended that the maximum number of
CBAs in a State should be one instead of two. They stated that the
methodology should be changed to distribute the CBAs so that there are
three areas in each of two of the DME MAC regions, and two in each of
the remaining two DME MAC regions to ensure geographic distribution.
Response: We believe that our proposed methodology for selecting
MSAs and designating CBAs will not only produce large savings for the
Medicare program, but that it will also ensure that the work involved
with administering the program and processing claims is evenly
distributed among our contractors. We also note that one of the factors
we proposed to consider when selecting MSAs is their geographic
location.
Comment: Several commenters urged CMS to adopt CBAs that are
somewhat smaller than the MSAs to help minimize the risk of a CBA
crossing a state line or areas shared by more than one DMERC and to
ensure adequate geographic distribution of suppliers within a CBA in
order to maintain beneficiary access to competitively bid items.
Response: We proposed to designate CBAs whose boundaries are
concurrent with, larger than, or smaller than the associated MSA
because we believe that it is practical and beneficial to implement
competitive bidding programs in areas that are integrated in terms of
DMEPOS utilization, expenditures, and suppliers. We believe that these
factors, as well as the other factors that we proposed to consider when
designating CBAs, will help ensure that the CBAs are geographically
distributed in a way that does not limit beneficiary access to
competitively bid items. We also note that, as specified in Sec.
414.412 of this final rule, each contract supplier will be required to
furnish items to every beneficiary who maintains a permanent residence
in the contract supplier's CBA. We believe that this requirement will
further ensure that beneficiary access to competitively bid items is
maintained.
Comment: Several commenters suggested that CMS not rely heavily on
DMEPOS allowed charges per beneficiary and suppliers per beneficiary.
Response: We disagree. We believe that our methodology properly
identifies large MSAs with a significant savings potential by
considering DMEPOS allowed charges per FFS beneficiary and suppliers
per FFS beneficiary, as these data would indicate that these MSAs have
the largest number of suppliers available for competition and the most
expenditures/utilization per Medicare beneficiary.
Comment: One commenter suggested that CMS divide the MSAs by some
easily recognized boundaries as proposed as an alternative proposal in
the proposed rule.
Response: We will establish the CBAs based on the most current data
and use our authority to adjust the areas to exclude rural areas and
areas with low population density within urban areas that are not
competitive. We will set easily recognizable boundaries by using county
lines and zip codes to identify the CBAs we select.
Comment: One commenter supported the criteria for MSA selection
that would consider MSAs based on their total population, total DMEPOS
charges, charges per beneficiary, and the number of DMEPOS suppliers
per DMEPOS users. The commenter also suggested considering the numbers
of suppliers of constituent categories of DMEPOS, for example, oxygen
and supplies or hospital beds. The commenter believed that, if there
are enough suppliers to conduct a competition for each of the
constituent categories within a CBA, the constituent categories should
be included in the competitive bidding program.
Response: We believe our methodology, which concentrates on allowed
charges per beneficiary and suppliers per beneficiary, will result in
the selection of areas with the most potential for savings under the
programs. This methodology relies on average expenditures per
beneficiary and the availability of competing suppliers. We believe
that the criteria that we will be using are sufficiently representative
to select the appropriate MSAs for competitive bidding because they
will identify those MSAs that have high beneficiary allowed charges and
a high number of DMEPOS suppliers per DMEPOS users. We acknowledge the
value of more specific item data for the purposes of selecting items
for competitive bidding. Therefore, we will be looking at utilization
of items when we select the items for competitive bidding.
Comment: One commenter suggested that we identify the top 80 MSAs
for competitive bidding using the methodology as proposed. However, for
the initial competitive bidding program, the commenter proposed that
the agency use only the allowed DMEPOS charges per beneficiary metric
when selecting the 10 MSAs from the set of 80. The commenter believed
that this selection methodology will provide us with a range of
valuable data regarding areas that have many suppliers per beneficiary
and areas that have fewer suppliers per beneficiary.
Response: We believe that selecting the initial 10 MSAs based on
combined rankings of both DMEPOS allowed charges per FFS beneficiary
and the number of DMEPOS suppliers per number of beneficiaries
receiving DMEPOS items, as well as based on the MSA's total population
and geographic area, is important and necessary for designating CBAs
that will produce savings for the Medicare program. In addition, we
believe that these factors are appropriate indicators of how robust
competition is likely to be in an area which will ultimately result in
lower prices and increased savings for the program.
Comment: One commenter questioned CMS' decision to exclude the top
three MSAs from consideration for competition prior to CY 2009. The
commenter stated that the decision was arbitrary and discriminatory.
Response: As stated in the proposed rule, because of the logistics
associated with the startup of this new and complex program, we would
like to gain experience in the first phase of competitive bidding prior
to implementing programs in CBAs that include the three largest MSAs
(New York, Los Angeles, and Chicago). However, we will include these
MSAs when we consider which MSAs to select for the CY 2009 competition.
Comment: One commenter requested that implementation of competitive
bidding be delayed indefinitely to

[[Page 18017]]

permit thoughtful review and revisions to the program.
Response: Section 1847(a)(1) of the Act requires that competition
under the competitive bidding program occurs in 10 of the largest MSAs
in CY 2007. Therefore, the Act does not permit us to delay indefinitely
implementation of the program.
Comment: One commenter recommended that CMS count all suppliers
that have submitted Medicare DMEPOS claims in the past year in
determining the number of suppliers per beneficiary. The commenter
asked if CMS will only calculate suppliers with physical locations
inside of the CBA or if it will base its number of suppliers on those
that have submitted Medicare claims for DMEPOS for a specific time
period. Another commenter believed that the proposed dollar amount,
$10,000, for suppliers with allowed charges attributed to them for
DMEPOS items furnished in the MSA in CY 2004 is too low. In addition,
the commenter added that the $10,000 threshold may be too small for
some items of DME. The commenter further stated that for higher cost
items, $10,000 in allowed charges would not indicate that the supplier
has an adequate level of experience with a product to appropriately
meet the needs of Medicare beneficiaries. The commenter suggested that
CMS look at total allowed charges and allowed charges for the items
being bid. In addition, the commenter recommended that the supplier set
an appropriate dollar threshold for each product category that would
demonstrate that the supplier has adequate experience with the product
category before counting that supplier for MSA selection purposes.
Response: We believe that the $10,000 threshold will give us an
assurance that there will be a sufficient number of suppliers that have
the capability to serve the area regardless of the experience with the
particular product category. For suppliers with less than $10,000 in
allowed charges, we do not have the assurance that the majority of them
because of the cost of participating in the competitive bidding program
and accreditation will be interested in participating in the
competitive bidding program. By including in our calculations only
those suppliers with allowed charges of at least $10,000, we are
ensuring that we select MSAs that have a large number of suppliers that
are interested and able to participate in the competitive bidding
program considering those suppliers.
Comment: One commenter recommended that CMS adjust data on DMEPOS
allowed charges and on the number of beneficiaries and suppliers in
``snowbird'' locations before selecting CBAs.
Response: We believe that our methodology provides us with the most
appropriate CBA selection and greatest savings for the program. As part
of our evaluation of Medicare allowed charges for items per fee-for-
service beneficiary and the total number of suppliers per fee-for-
service beneficiary, we will consider how these data might be affected
in areas where beneficiaries reside for only part of the year.
Comment: One commenter recommended that CMS exclude areas that have
a high probability of experiencing a natural disaster until CY 2009 and
consult with both the Federal Emergency Management Agency (FEMA) and
the Department of Homeland Security before implementing competitive
bidding in these areas.
Response: The statute provides us with a geographic exception
authority only for rural areas and areas with low population density
within urban areas that are not competitive, unless there is a
significant nationwide market through mail order for a particular item
or service. We do not have authority to exclude areas that might
experience a natural disaster.
Comment: One commenter recommended that CMS initially implement
competitive bidding programs in three CBAs in October 2007; in three
CBAs in February 2008, and in four CBAs in June 2008. The commenter
also recommended excluding St. Louis, Kansas City, Baltimore, and
Washington, D.C. from the MSA selection process because these MSAs
overlap with multiple DME MAC regions or recent transition to a new DME
MAC. In addition, the commenter recommended excluding Orlando and San
Antonio from the MSA selection process because these areas were part of
the demonstration projects.
Response: We believe that our approach to conduct the competition
in all 10 CBAs at once is appropriate and will ensure that the CBAs are
geographically dispersed. In addition, as stated above, we believe that
this approach will alleviate the confusion that could otherwise result
if we conducted the competition in the manner suggested by the
commenter. The statute provides us with a geographic exception
authority only for rural areas and areas with low population density
within urban areas that are not competitive, unless there is a
significant nationwide market through mail order for a particular item
or service.
Comment: One commenter recommended initially implementing
competitive bidding programs in 3 MSAs, Miami, Houston, and Dallas,
then 120 days later, implementing programs in the next 3 MSAs in
February, and finally implementing programs in the last 4 MSAs. The
commenter indicated that this will allow CMS to monitor and proactively
make changes before it fully implements programs in the 10 MSAs.
Response: The statute requires that the competition occur in 10 of
the largest MSAs in CY 2007. As we explained above, we believe that our
methodology provides us with the most appropriate CBA selection
methodology and greatest savings potential for the program and that
initially implementing programs in all 10 CBAs at once will reduce the
potential for confusion that could otherwise result if we conducted the
competition in the sequence suggested by the commenter.
Comment: One commenter requested that CMS define ``combined
rankings.'' The commenter asked whether this term means the allowed
charges that suppliers have submitted to Medicare or the allowed
payments.
Response: ``Combined rankings'' means a combined score for the
DMEPOS allowed charges per beneficiary in an MSA and the number of
DMEPOS suppliers per beneficiary in the same MSA with equal weight
given to each. The term ``allowed charges'' includes both Medicare's
approved payment amount and the beneficiary's coinsurance amount.
Comment: One commenter recommended that, in the situation where
more than one MSA receives the same score, instead of using the total
DMEPOS allowed charges for items that CMS has the authority to include
in competitive bidding in each MSA as the tiebreaker, CMS use the FFS
charges for the items proposed for bidding in each MSA and the total
number of accredited suppliers in each MSA to break ties.
Response: We chose to use the total DMEPOS allowed charges because
this number indicates the size of the overall business that is
conducted in an MSA for items subjected to the competitive bidding
program. We believe that using total DMEPOS allowed charges is a better
indication of savings than the total number of suppliers in an area for
the purpose of having a tie breaker because this measure indicates how
many items are actually being furnished in an area.
Comment: One commenter agreed with our proposal to exclude the
three largest MSAs from inclusion in competitive bidding until CY 2009.

[[Page 18018]]

Response: The three largest MSAs will be included in the list of
potential MSA candidates for the CY 2009 competitive bidding program.
5. Nationwide or Regional Mail Order Competitive Bidding Program
(Sec. Sec. 414.410(d)(2) and 414.412(f) and (g))
Our data show that a significant percentage of certain items such
as diabetic testing supplies (blood glucose test strips and lancets)
are furnished to beneficiaries by nationwide mail order suppliers.
Therefore, in the May 1, 2006 proposed rule (71 FR 25669), we proposed
in Sec. 414.410(d)(2) and Sec. Sec. 414.412(f) and (g) to establish a
nationwide or regional competitive bidding program, effective for items
furnished on or after January 1, 2010, for the purpose of awarding
contracts to suppliers to furnish these items across the nation or
region to beneficiaries who elect to obtain them through the mail. We
proposed that the national or regional CBAs under the Medicare DMEPOS
Competitive Bidding Program would be phased in after CY 2009, and
payment would be based on the bids submitted and accepted for the
furnishing of items through mail order throughout the nation or region.
Suppliers that furnish these items through mail order on either a
national or regional basis would be required to submit bids to
participate in any competitive bidding program implemented for the
furnishing of mail order items.
We proposed that, prior to the establishment of a nationwide or
regional competitive bidding program in CY 2010, mail order suppliers
would be eligible to submit bids for furnishing items in one or more of
the CBAs we establish for purposes of the CYs 2007 and 2009
implementation phases. In addition, beginning with programs implemented
in CY 2010, we proposed that mail order suppliers would be eligible to
submit bids in one or more CBAs to furnish items that are not included
in a nationwide or regional competitive bidding program. Nationwide or
regional mail order suppliers would be required to submit bids and be
selected as contract suppliers for each CBA in which they seek to
furnish these items. However, we proposed that they would have the
choice of either submitting the same bid amounts for each CBA or
submitting separate bids.
For items that are subject to a nationwide or regional mail order
competitive bidding program, we proposed that suppliers that furnish
these same items in the local market and do not furnish them via mail
order would not be required to participate in the nationwide or
regional mail order competitive bidding program. However, we would only
allow these suppliers to continue furnishing the items in CBAs if they
were selected as contract suppliers.
We proposed to allow these nonmail order suppliers to continue
furnishing these items in areas subject to a competitive bidding
program if the supplier has been selected as a contract supplier. When
furnishing items to beneficiaries who do not maintain a permanent
residence in a CBA, nonmail order suppliers would be paid based on the
payment amount applicable to the area where the beneficiary maintains
his or her permanent residence.
In a September 2004 report (GAO-04-765), GAO recommended that we
consider using mail delivery for items that can be provided directly to
beneficiaries in the home as a way to implement a DMEPOS competitive
bidding strategy. In the proposed rule, we solicited comments on our
proposal to implement this recommendation and on the types of items
that would be suitable for a mail order competitive bidding program.
In addition, we requested public comment on an alternative that
would require that replacement of all supplies such as test strips and
lancets for Medicare beneficiaries be furnished by mail order suppliers
under a nationwide or regional mail order program. For example, there
are services paid under the Medicare Physician Fee Schedule (MPFS) that
are associated with the furnishing of blood glucose testing equipment
(for example, home blood glucose monitors) such as training, education,
assistance with product selection, maintenance, and servicing, that do
not relate to the furnishing of replacement supplies used with the
equipment. Once the brand of monitor has been selected by the
beneficiary, the services associated with furnishing the supplies must
be provided on a timely basis and the beneficiary must receive the
brand of test strips needed for his or her monitor. We invited public
comment on whether the service of furnishing replacement test strips,
lancets or other supplies can easily, effectively, and conveniently be
performed by nationwide mail order suppliers.
Comment: Several commenters suggested that a separate program for
mail order is unnecessary for CY 2010. They also noted that mail order
supplies are not excluded for CYs 2007 and 2009.
Response: Our data indicate that over 60 percent of Medicare
expenditures for diabetic supplies are for items furnished by
nationwide mail order suppliers. We believe that the implementation of
a separate mail order competitive bidding program would result in
significant savings because it would focus on suppliers that can obtain
discounts from manufacturers because they furnish a large volume of
items to beneficiaries through the mail. Therefore, we envision that
large savings for the Medicare program would result from the
implementation of a separate mail order program.
Comment: Several commenters noted that there is no definition of a
``mail order supplier'' or description of a nationwide or regional mail
order company in the proposed rule.
Response: In the proposed rule, we provided a definition of a
``supplier'' that includes an entity that furnishes items through the
mail. However, to further prevent confusion, as discussed in section
VI.A. we have added definitions of ``mail order contract suppler,''
``nationwide mail order contract supplier,'' ``regional competitive
bidding area,'' and ``regional mail order contract supplier'' in Sec.
414.402. For purposes of competitive bidding a ``mail order contract
supplier'' will be a contract supplier that furnishes items through the
mail to beneficiaries who maintain a permanent residence in a
competitive bidding area.
Comment: One commenter asked whether a supplier would qualify to
participate in a mail order competitive bidding program if the supplier
furnishes items both through the mail and through a storefront location
to beneficiaries.
Response: Any national or regional mail order competitive bidding
program that we might choose to implement starting in CY 2010 would be
limited to the furnishing of items through the mail. Therefore, if a
supplier wants to participate in a mail order program, it will have to
submit a separate mail order program bid. Only a designated mail order
contract supplier may furnish items under a mail order competitive
bidding program. To participate in a program for providing items from a
local storefront, a separate bid would have to be submitted.
Comment: One commenter noted that mail order is an appropriate and
cost effective vehicle for delivery of some replacement supplies (test
strips and lancets). Several commenters opposed the requirement for
beneficiaries to use the mail order suppliers and suggested that the
mail order program be voluntary for beneficiaries. Several commenters
noted that beneficiaries

[[Page 18019]]

must have the option to get the supplies from their local suppliers.
Response: We continue to believe that a national or regional mail
order program will be cost effective for the Medicare program, and did
not propose that it would be mandatory for beneficiaries. Such a mail
order program will be voluntary and beneficiaries will have the option
to receive their items through the mail or from a local contract
supplier.
Comment: One commenter suggested that CMS specifically ensure that
all suppliers in a mail order competitive bidding program are in
compliance with the DMEPOS quality standard that requires that ``mail
services are not used for the initial delivery, set-up, and beneficiary
education/training'' for DME equipment and supplies.
Response: The DMEPOS quality standard that the commenter is
referring to was included in the draft quality standards that were
released for public comments on September 25, 2005. Although the final
quality standards do not preclude suppliers from furnishing certain
DMEPOS through the mail, they also require suppliers to verify that a
beneficiary has received an item and to provide clear instructions to
the beneficiary related to the use, maintenance, and potential hazards
of the item. A supplier cannot be accredited unless a CMS-approved
accreditation organization has determined that the supplier is
complying with the quality standards, and accreditation is a
prerequisite to a supplier being eligible to participate in the
Medicare DMEPOS Competitive Bidding Program. Therefore, our goal is to
award contracts only to suppliers that conduct business in a manner
that is beneficial to beneficiaries under the program. The final
Quality Standards document can be found under the basic standards and
the consumer services section at the Medicare DMEPOS Competitive
Bidding Program Web site: http://www.cms.hhs.gov/CompetitiveAcqforDMEPOS/04_New_Quality_Standards.asp#TopofPage
.

Comment: One commenter suggested that CMS not implement a mail
order competitive bidding program for diabetes testing supplies until
the effects of such a program on beneficiaries with diabetes have been
carefully studied, perhaps through a pilot program.
Response: We do not believe a pilot program is necessary. Our data
show that 60 percent of beneficiaries currently receive supplies from
mail order suppliers. Under the competitive bidding programs,
beneficiaries will continue to have the option of receiving their
supplies through the mail or from a local supplier.
Comment: One commenter suggested that CMS create a national
supplier designation for which suppliers, mail-order or retail, can
apply.
Response: As we discussed above, we will separately designate the
supplier numbers of all noncontract suppliers to monitor whether they
are complying with the rules regarding the limited circumstances under
which they can furnish a competitively bid item. To address the
commenter's concern, in addition to differentiating between contract
suppliers and noncontract suppliers, we will also differentiate between
mail order contract suppliers and mail order noncontract suppliers. We
will be making those designations with the award of contracts.
Comment: One commenter recommended that, if CMS decides to create a
nationwide or regional mail order competitive bidding program, CMS
include a program oversight provision related to refilling of supplies.
The commenter suggested that CMS prohibit contract suppliers from
automatically refilling and sending replacement supplies without
receiving a refill request from the beneficiary.
Response: Section 200, Chapter 20 of the Medicare Claims Processing
Manual (Publication 100-4), prohibits suppliers/manufacturers from
automatically delivering replacement supplies to beneficiaries unless
the beneficiary, or their caregiver has requested them. The reason for
this prohibition is to ensure that the beneficiary actually needs the
replacement supplies. This requirement will apply to the Medicare
DMEPOS Competitive Bidding Program.
Comment: One commenter opposed mail order/drop shipping for oxygen
and related equipment because this might actually encourage contract
suppliers to ship oxygen cylinders or other similar devices than
deliver directly to the beneficiary.
Response: Pursuant to our DMEPOS supplier standards at 42 CFR
424.57(c), a supplier must operate its business and furnish Medicare
covered items in compliance with all applicable Federal and State
licensure and regulatory requirements. Therefore, suppliers are
required to furnish oxygen cylinders and other similar devices in
accordance with these requirements.
6. Additional Competitive Bidding Areas After CY 2009 (Sec.
414.410(d)(1))
Section 1847(a)(1)(B)(III) of the Act requires that competition
under the Medicare DMEPOS Competitive Bidding Program occur in
additional areas after CY 2009. Beginning in CY 2010, we proposed in
Sec. 414.410(d)(1) to designate through program instructions
additional CBAs based on our determination that the implementation of a
competitive bidding program in a particular area would be likely to
result in significant savings to the Medicare program.
We did not receive any comments on this specific.
Therefore, after considering the comments we received on Section
II. D. of the proposed rule, we are finalizing Sec. Sec. 414.406(b)-
(c) and Sec. 414.410 as discussed above and with additional technical
changes, which include specifying in Sec. 414.406(b) that we may
designate CBAs through program instructions or by other means. We are
also adding a several definitions, including a of ``mail order contract
supplier'' under Sec. 414.402. Finally, we are finalizing Sec. Sec.
414.412(f) and (g) as discussed above and with technical changes.

F. Criteria for Item Selection (Sec. Sec. 414.402 and 414.406(d))

Section 1847(a)(2) of the Act describes the DMEPOS items that are
subject to competitive bidding. They include:
Durable medical equipment and medical supplies: Covered
items (as defined in section 1834(a)(13) of the Act) for which payment
would otherwise be made under section 1834(a) of the Act, including
items used in infusion and drugs (other than inhalation drugs) and
supplies used in conjunction with DME, but excluding class III devices
under the Federal Food, Drug, and Cosmetic Act.
Other equipment and supplies (enteral nutrition,
equipment, and supplies)--Items described in section 1842(s)(2)(D) of
the Act, other than parenteral nutrients, equipment, and supplies.
OTS orthotics: Orthotics described in section 1861(s)(9)
of the Act for which payment would otherwise be made under section
1834(h) of the Act, which require minimal self-adjustment for
appropriate use and do not require expertise in trimming, bending,
molding, assembling, or customizing to fit the individual.
In the May 1, 2006 proposed rule, we proposed in Sec. 414.406(d)
to designate the items that would be included in each competitive
bidding program through program instructions. We also proposed (71 FR
25669) to define ``minimal self-adjustment'' to mean an adjustment that
the beneficiary, caretaker for the beneficiary, or supplier of the
device can perform without the assistance of a certified orthotist
(that is, an individual certified by either the American Board for
Certification in

[[Page 18020]]

Orthotics and Prosthetics, Inc., or the Board for Orthotist/Prosthetist
Certification). We also proposed to consider any adjustments that can
only be made by a certified orthotist to be adjustments that require
expertise in trimming, bending, molding, assembling, or customizing to
fit the individual. We proposed to consult with a variety of
individuals, including experts in orthotics, to determine which items
and/or HCPCS codes would be classified as OTS orthotics. We invited
comments on a process for identifying OTS orthotics subject to
competitive bidding.
Section 1847(a)(1)(B)(ii) of the Act gives us the authority to
phase in competitive bidding ``first among the highest cost and highest
volume items or those items that the Secretary determines have the
largest savings potential.'' In addition, section 1847(a)(3)(B) of the
Act grants us the authority to exempt items for which the application
of competitive bidding is not likely to result in significant savings.
In exercising this authority, we proposed to exempt items outright or
on an area-by-area basis using area-specific utilization data. For
example, if we found that utilization (that is, allowed services or
allowed charges) for commode chairs was low (or the number of commode
chair suppliers was low) in a given area compared to other areas, we
might choose to exempt commode chairs from the competitive bidding
programs in the CBA where significant savings would not be likely while
including commode chairs in the competitive bidding programs for other
CBAs. This decision would be based on area-specific utilization data.
We proposed to use the authority provided by section
1847(a)(1)(B)(ii) of the Act to phase in only those items that we
determine are among the highest cost and highest volume items during
each phase of the Medicare DMEPOS Competitive Bidding Programs. In
section II.F. of the proposed rule, we proposed to conduct competitive
bidding for product categories that would be described in each RFB.
Suppliers would submit a separate bid for each item under a defined
product category, unless specifically excluded in the RFB. We proposed
to include a ``core'' set of product categories in each CBA. We
indicated that we might elect to phase in some individual product
categories in a limited number of CBAs in order to test and learn about
their suitability for competitive bidding.
Because we had not yet identified the product categories for
competitive bidding at the time we issued the proposed rule, we used
policy groups developed by the statistical analysis durable medical
equipment regional carrier (SADMERC) for purposes of illustration. The
SADMERC has defined a set of 64 DMERC [DME MAC] policy groups for
analytical purposes in its role as the statistical analysis contractor
for DMEPOS. A policy group is a set of HCPCS codes that describe
related items that are addressed in a DME MAC medical review policy.
For example, the policy group ``oxygen and supplies'' consists of
approximately 20 HCPCS codes. Although the product categories subject
to competitive bidding will not necessarily correspond to these policy
groups, we presented data for these policy groups and items contained
in these policy groups for the purpose of identifying the highest cost
and highest volume DMEPOS items that may be subject to competitive
bidding. In other words, we proposed using SADMERC data for ``policy
groups'' to identify groups of items we will consider phasing in first
under the competitive bidding programs, but the actual ``product
categories'' for which we would request bids could be a subset of items
from a ``policy group'' or a combination of items from different
``policy groups.'' The highest volume items (HCPCS codes) fall into a
relatively small number of policy groups as illustrated in Table 3.

Table 3.--CY 2003 High Volume Items (HCPCS Codes)
----------------------------------------------------------------------------------------------------------------
HCPCS code Allowed charges Product description Policy group
----------------------------------------------------------------------------------------------------------------
E1390................................ $2,033,123,147 Oxygen concentrator.......... Oxygen.
K0011 *.............................. 1,176,277,899 Power wheelchair with Wheelchairs.
programmable features.
A4253................................ 779,756,243 Blood glucose/reagent strips, Diabetic Supplies &
box of 50. Equipment.
E0260................................ 331,457,962 Semi-electric hospital bed... Hospital Beds/
Accessories.
E0431................................ 228,066,037 Portable gaseous oxygen Oxygen.
equipment.
B4150 *.............................. 206,396,813 Enteral formula, category I.. Enteral Nutrition.
B4035................................ 197,057,150 Enteral feeding supply kit, Enteral Nutrition.
pump fed, per day.
E0277................................ 156,762,241 Powered air mattress......... Support Surfaces.
E0439................................ 141,268,474 Stationary liquid oxygen..... Oxygen.
E0601................................ 123,865,463 Continuous positive airway CPAP Devices.
pressure device (CPAP).
K0001................................ 103,217,209 Standard manual wheelchair... Wheelchairs.
K0004................................ 87,208,486 High strength lightweight Wheelchairs.
manual wheelchair.
A4259................................ 79,575,166 Lancets, box of 100.......... Diabetic Supplies &
Equipment.
E0570................................ 76,588,088 Nebulizer with compressor.... Nebulizers.
B4154 *.............................. 76,326,903 Enteral formula, category IV. Enteral Nutrition.
E0143................................ 75,950,410 Folding wheeled walker w/o Walkers.
seat.
K0533 *.............................. 75,136,517 Respiratory assist device Respiratory Assist
with backup rate feature. Devices.
K0538 *.............................. 65,603,531 Negative pressure wound Negative Pressure Wound
therapy electrical pump. Therapy (NPWT) Devices.
K0532 *.............................. 56,046,930 Respiratory assist device Respiratory Assist
without backup rate feature. Devices.
K0003................................ 55,318,959 Lightweight manual wheelchair Wheelchairs.
K0108................................ 52,139,979 Miscellaneous wheelchair Wheelchairs.
accessory.
E0192 *.............................. 48,413,938 Wheelchair cushion........... Support Surfaces.
E0163................................ 48,216,855 Stationary commode chair with Commodes.
fixed arms.
B4034................................ 42,277,968 Enteral feeding supply kit Enteral Nutrition.
syringe, per day.
----------------------------------------------------------------------------------------------------------------
* Due to HCPCS coding changes made since 1993, the descriptions or code numbers for these codes have been
modified. The power wheelchair codes became effective November 15, 2006 and will be billed under several new
HCPCS codes.

Because we proposed that we would conduct competitive bidding for
items grouped into product categories, we indicated that we would
consider DMEPOS allowed charges and volume at the product category
level for the

[[Page 18021]]

purpose of selecting which items to phase in first under the
competitive bidding programs. The table below provides data for the top
20 policy groups based on Medicare allowed charges for the items within
each policy group that we may choose to include in the competitive
bidding programs. Data from the SADMERC for claims received in CY 2003
are used for all policy groups except those for nebulizers and OTS
orthotics. For the nebulizer and OTS orthotics groups, data are
included from the CMS BESS (Part B Extract and Summary System) database
for items furnished in CY 2003. The percentage of total allowed
Medicare charges for DMEPOS that each policy group makes up is included
in Table 4.

Table 4.--CY 2003 DMEPOS Allowed Charges by Policy Group
----------------------------------------------------------------------------------------------------------------
Percent of
Rank Policy group CY 2003 DMEPOS
----------------------------------------------------------------------------------------------------------------
1........................................... Oxygen Supplies/Equipment..... $2,433,713,269 21.3
2........................................... Wheelchairs/Power Operated 1,926,210,675 16.9
Vehicle (POVs) **.
3........................................... Diabetic Supplies & Equipment. 1,110,934,736 9.7
4........................................... Enteral Nutrition............. 676,122,703 5.9
5........................................... Hospital Beds/Accessories..... 373,973,207 3.3
6........................................... CPAP Devices.................. 204,774,837 1.8
7........................................... Support Surfaces.............. 193,659,248 1.7
8........................................... Infusion Pumps & Related Drugs 149,208,088 1.3
9........................................... Respiratory Assist Devices.... 133,645,918 1.2
10.......................................... Lower Limb Orthoses *......... 122,813,555 1.1
11.......................................... Nebulizers *.................. 98,951,212 0.9
12.......................................... Walkers....................... 96,654,035 0.8
13.......................................... Negative Pressure wound 88,530,828 0.8
therapy (NPWT) Devices.
14.......................................... Commodes/Bed Pans/Urinals..... 51,372,352 0.5
15.......................................... Ventilators................... 42,890,761 0.4
16.......................................... Spinal Orthoses *............. 40,731,646 0.4
17.......................................... Upper Limb Orthoses *......... 29,069,027 0.3
18.......................................... Patient Lifts................. 26,551,310 0.2
19.......................................... Seat Lift Mechanisms.......... 15,318,552 0.1
20.......................................... TENS Devices **............... 15,258,579 0.1
-----------------------------------
Total for 20 Groups..................................................... 7,830,384,538 68.6
Total for DMEPOS........................................................ 11,410,019,351 ................
----------------------------------------------------------------------------------------------------------------
* Data are from the CMS BESS (Date of Service). Data for orthoses policy groups exclude data for custom
fabricated orthotics, but may include data for other items that will not be considered OTS orthotics.
** POVs are power-operated vehicles (scooters), and TENS devices are transcutaneous electrical nerve stimulation
devices.

Section 1847(a)(1)(B)(ii) of the Act provides that the items we
phase in first under competitive bidding may include products having
the greatest potential for savings. In the May 1, 2006 proposed rule,
we proposed to use a combination of the following variables when making
determinations about an item's potential savings as a result of the
application of competitive bidding:
Annual Medicare DMEPOS allowed charges.
Annual growth in expenditures.
Number of suppliers.
Savings in the DMEPOS competitive bidding demonstrations.
Reports and studies.
We proposed that items with high allowed charges or rapidly
increasing allowed charges would be our highest priority in selecting
items for competitive bidding.
The number of suppliers furnishing a particular item or group of
items would also be an important variable in identifying items with
high savings potential. We believe that a relatively large number of
suppliers for a particular group of items would likely increase the
degree of competition among suppliers and increase the probability that
suppliers would compete on quality for business and market share. We
saw evidence in the competitive bidding demonstrations that products
furnished by a large number of suppliers had large savings rates and
fewer problems with quality. We understand that having a large number
of suppliers is not always a necessary condition for competition. A CBA
could be more concentrated and less competitive than the number of
suppliers would predict if the market is dominated by only a few
suppliers and the remaining suppliers have only minimal charges.
The DMEPOS competitive bidding demonstrations took place from 1999
to 2002 in two MSAs: Polk County, Florida and San Antonio, Texas. Five
product categories containing items we might include in the Medicare
DMEPOS Competitive Bidding Programs were included in at least one round
of these demonstrations: oxygen equipment and supplies; hospital beds
and accessories; enteral nutrition; wheelchairs and accessories; and
general orthotics.
The results of the demonstrations provide useful information
because they are based on actual Medicare competitive bidding and the
amounts suppliers actually were willing to accept as payment from
Medicare. However, we recognize that these results should be used with
caution. The demonstrations occurred more than 3 years ago and the fee
schedule has changed as a result of certain provisions in the MMA (for
example, section 302(c)(2) of the MMA (codified at section 1834(a)(21)
of the Act), which requires that CMS adjust the fee schedules for
certain items based on a comparison to other payers such as the Federal
Employees Health Plan (FEHP)).
The HHS Office of the Inspector General (OIG) and GAO frequently
conduct studies that analyze the extent to which Medicare overpays for
specific items, and we believe that these studies could assist with
determining the saving potential for an item if it were included in
competitive bidding. Examples of relevant OIG studies include the
following:
Medicare Allowed Charges for Orthotic Body Jackets, March
2000 (OEI-04-97-00391);

[[Page 18022]]

Medicare Payments for Enteral Nutrition, February 2004
(OEI-03-02-00700); and
A Comparison of Prices for Power Wheelchairs in the
Medicare Program, April 2004 (OEI-03-03-00460).
In addition, CMS and the DME MACs obtain retail pricing information
for items in the course of establishing fee schedule amounts and
considering whether payment adjustments are warranted for items using
the inherent reasonableness authority in section 1842(b)(8) of the Act.
In the proposed rule, we indicated that we could use these studies to
identify products where CMS pays excessively and where we could
potentially achieve savings.
Excessive payments are only one factor to consider when evaluating
whether savings will be realized by the application of competitive
bidding to an item. However, these studies offer us a guide regarding
which items may have the greatest potential for savings. We also
recognize that some studies are older than others and that recent MMA
and FEHP reductions in fees may affect whether the results of these
studies are still relevant.
Comment: Many commenters objected to the proposed definition for
OTS orthotics that would be subject to competitive bidding in
accordance with section 1847(a)(2)(C) of the Act. They specifically
objected to the discussion in the proposed rule that states that the
expertise required to trim, bend, assemble, mold, or custom fit an
orthotic device for an individual would be that of a certified
orthotist. They pointed out that occupational therapists, physical
therapists, and physicians are licensed and trained to trim, bend,
mold, assemble, and customize some orthotics to fit a beneficiary. They
indicated that under the Act, occupational and physical therapists are
recognized as Medicare practitioners who furnish orthotics to Medicare
beneficiaries pursuant to a written plan of care. The commenters added
that the Act recognizes orthotists as suppliers of DMEPOS only and not
as practitioners. They recommended revising the language to read: ``
`Minimal self-adjustment' means an adjustment that the beneficiary,
caretaker for the beneficiary, or supplier of the device can perform
without the assistance of a physician, physical therapist, occupational
therapist, orthotist, or other professional designated by the
Secretary.''
In addition, many commenters stated that there is no Federal
definition of orthotists or their scope of practice and that a limited
number of States have licensure or certification laws for orthotists.
They added that, for those States that have such laws, the scope of
practice varies considerably. The commenters recommended including the
statutory definition of ``qualified practitioner'' located in section
1834(h)(1)(F)(iii) of the Act to identify those individuals with
expertise in custom fitting orthotics. They believed that linking OTS
orthotics to the work of a certified orthotist would dramatically
expand the list of products that are considered OTS orthotics that
would be subject to competitive bidding. They further noted that the
list of OTS orthotics has yet to be published.
Response: We appreciate the comments. Section 1847(a)(2) of the Act
describes OTS orthotics as those orthotics described in section
1861(s)(9) of the Act for which payment would otherwise be made under
section 1834(h) of the Act, which require minimal self-adjustment for
appropriate use and do not require expertise in trimming, bending,
molding, assembling, or customizing to fit to the individual. Orthotics
that are currently paid under section 1834(h) of the Act and are
described in section 1861(s)(9) of the Act are leg, arm, back, and neck
braces. The Medicare Benefit Policy Manual, Chapter 15, Section 130
provides the longstanding Medicare definition of ``braces.'' Braces are
defined in this section as ``rigid or semi-rigid devices which are used
for the purpose of supporting a weak or deformed body member or
restricting or eliminating motion in a diseased or injured part of the
body.'' To clarify the definition of OTS orthotics for purposes of
competitive bidding, in this final rule we are defining the term
``minimal self-adjustment'' to mean an adjustment that the beneficiary,
caretaker for the beneficiary, or supplier of the device can perform
and that does not require the services of a certified orthotist (that
is, an individual who is certified by the American Board for
Certification in Orthotics and Prosthetics, Inc., or by the Board for
Orthotist/Prosthetist Certification) or an individual who possesses
specialized training. These individuals possess specialized skills and
knowledge used to custom fit braces for individual beneficiaries so
that they function appropriately. Therefore, if an adjustment to an OTS
orthotic that requires expertise in trimming, bending, molding,
assembling, or customizing to fit the individual such that it must be
performed by a certified orthotist (that is, an individual who is
certified by the American Board for Certification in Orthotics and
Prosthetics, Inc. or by the Board for Orthotist/Prosthetist
Certification) or someone who possesses specialized training, it would
not be an OTS orthotic that is eligible to be included in a competitive
bidding program.
As we proposed, we will identify specific OTS orthotics that will
be included in specific competitive bidding programs through program
instructions.
Comment: Several commenters requested exemption of OTS orthotics
that have the HCPCS codes L3908-L3954 (wrist, hand, and finger
orthoses) and L3980-L3985 (upper extremity fracture orthoses). They
believed that these codes should be exempted because clinicians and
practitioners use them for short-term protection and stabilization of a
joint or limb. They further indicated that practitioners do not
dispense these items as a product or supply item but rather as part of
the evaluation and treatment of beneficiaries.
Response: Section 1847(a)(2) of the Act provides that OTS orthotics
described in section 1861(s)(9) of the Act, for which payment would
otherwise be made under section 1834(h) of the Act, are to be included
in the Medicare DMEPOS Competitive Bidding Program if they require
minimal self-adjustment for appropriate use and do not require
expertise in trimming, bending, molding, assembling, or customizing to
fit the individual. Although the items identified by the commenters are
orthotics as described in section 1861(s)(9) of the Act for which
payment is made under section 1834(h) of the Act, we have not yet
determined whether they require minimal self-adjustment. We have also
not yet determined whether one or more of these items might not be
appropriate for inclusion in the Medicare DMEPOS Competitive Bidding
Program because it is not likely to produce significant savings. We
will consider the commenters' suggestions and designate the items that
will be included in each competitive bidding program through program
instructions or by other means, such as the RFB or our Web site.
Comment: Several commenters believed that the selection of items
for competitive bidding is being driven by allowed charges and
utilization only. They believed that this poses a risk and allows
competitive bidding to become a substitute for appropriate coverage
policies as a way of controlling expenditures. The commenters believed
that consideration of clinical and service factors specific to the
product should be part of the selection criteria.

[[Page 18023]]

Response: We do not have data on which we could evaluate clinical
and service factors specific to individual items nor were any data
submitted through the public comment process. In addition to allowed
charges and utilization, we identified in the proposed rule the
following variables that we will use to select items for competitive
bidding: Annual growth in expenditures; number of suppliers; savings in
the DMEPOS competitive bidding demonstrations; and reports and studies.
We stated that we would use all of these variables to make
determinations about an item's potential to reduce costs for the
Medicare program. We note that the Medicare DMEPOS Competitive Bidding
Program is not a coverage program, and that this final rule does not
supersede in any way Medicare coverage laws, regulations, or policies.
Comment: Several commenters believed that ostomy products and
supplies do not meet the definition of DME and, therefore, are not part
of the items and services subject to the competitive bidding programs
described in section 1847(a)(2)(A) of the Act.
Response: We believe that section 1847(a)(2)(A) of the Act is
ambiguous regarding whether ostomy products and supplies are to be
included in the Medicare DMEPOS Competitive Bidding Program because the
term ``medical supplies'' in the section heading could be interpreted
either to modify the term ``durable medical equipment'' (meaning that
the medical supplies would have to be associated with the DME to be
included), or to be a separate category of items that are not
associated with DME. In addition, although the definition of ``covered
item'' in section 1834(a)(13) of the Act means ``durable medical
equipment (as defined in section 1861(n) [of the Act]), including such
equipment described in section 1861(m)(5) [of the Act] * * *,'' the
term ``such equipment'' in section 1861(m)(5) of the Act could be
interpreted to refer either to the term ``durable medical equipment''
or to the term ``medical supplies'' (which would include ostomy
supplies) in that section. In light of these ambiguities, we believe we
have discretion to interpret section 1847(a)(2)(A) of the Act to
include or exclude ostomy products and supplies in the competitive
bidding programs. We are not planning to exercise our authority to
include these items at this time and will continue to review this
issue.
Comment: Many commenters believed that the following items that are
integral to beneficiary care should be exempted from competitive
bidding: diabetic supplies; diabetic shoes; diabetic inlays;
prosthetics for the foot; crutches; walkers; fracture ankle-foot
orthoses; braces; splints; and surgical dressings. A few commenters
requested exemption of products commonly provided directly by
manufacturers. They believed that the products are available from
relatively few suppliers and would not produce Medicare savings.
A few commenters requested the exemption of oxygen, continuous
positive airway pressure devices, and invasive and noninvasive
ventilation devices. They believed that these items are technologically
complex devices. Several commenters recommended exempting negative
pressure wound therapy (NPWT) devices from the first round of
competitive bidding. They reported that in October 2000, a new HCPCS
code (E2402) was established for NPWT. Since 2003, more than 3,000
physicians have ordered NPWT devices more than 36,000 times. They
reported that new products have been added to HCPCS code E2402 despite
the fact that these new products are clinically different from the
original NPWT product. The commenters believed that the newer items are
not yet well-understood or well-established and physician choice in
selecting an item must be respected.
Many commenters requested exemption of power wheelchairs, including
complex rehabilitative and assistive technology devices, for the first
round of competitive bidding. They believed that competitively bidding
these devices would result in a negative impact on the clinical outcome
for the beneficiary. They described these items as being uniquely
prescribed for the beneficiary. The commenters recommended exempting
wheelchair cushions, adaptive seating, and positioning products. They
indicated beneficiaries who require complex rehabilitative or assistive
technology require a complete system to meet their functional and
medical needs. The commenters pointed out that a complete system
requires several pieces of equipment, each meeting a specific medical
or functional need and determined to be compatible technologies. They
believe that the recent changes in HCPCS codes for power mobility
devices, a new local coverage determination policy, and new fee
schedules will significantly impact the utilization and allowed charges
for these items. They believe that, in light of these changes, there
will be a lack of allowed charges and volume data that will make it
difficult to determine which codes have the highest allowed charges and
highest volume or potential for savings.
Many commenters requested the exemption of manual wheelchairs
because as early as CY 2007, the HCPCS codes will be subjected to a
recoding process that is similar to the recoding process that CMS
recently undertook for power mobility devices. Under the proposed rule,
a supplier that bids on the category of manual wheelchairs must be
prepared to provide all types of manual wheelchairs including standard,
ultra lightweight, bariatric, or manual tilt-in-space. They believed
that the current HCPCS codes are too broad, encompassing items that
represent vastly different technologies.
Several commenters requested the exemption of speech generating
devices (SGDs). They stated the functional, physical, operational, and
support characteristics of a specific SGD model are selected based on
the individual needs of the beneficiary. The commenters reported that
Medicare has purchased fewer than 5,000 SGDs since 2001. They indicated
that, on average, 1,211 SGDs are purchased per year, and that in 2004,
Medicare spent only $4,562 on SGDs (code E2511), less than $220,000 on
mounting systems (code E2512), and less than $280,000 on all SGD
accessories.
Some commenters requested that CMS not create a product category
that consists of ``infusion pumps and related drugs.'' They pointed out
that infusion drugs are covered under the DMEPOS benefit because they
go through the pump, which is DME. They added that managed care plans
include home infusion therapy coverage under either their major medical
benefit or their prescription drug benefit and that Medicare Part D
covers hundreds of home intravenous drugs. The commenters believed that
there is confusion among beneficiaries who require Medicare Part B and
Part D drugs, and that adding infusion pumps that are used for drug
administration to competitive bidding will confuse both beneficiaries
and referral agents further. They also indicated that these devices
vary in drug therapy, technology, length of treatment, and site of
care, and that the devices range from critical acute care to chronic
infusion.
Some commenters requested the exemption of enteral nutrition
equipment and supplies. They believed that the use of competitive
bidding to set prices under Medicare has not been tested sufficiently
or successfully. The commenters indicated that Medicare allowed charges
for enteral nutrition decreased by approximately 5 percent from CY 2003
to CY 2004. They

[[Page 18024]]

reported that there is confusion among beneficiaries who require
Medicare Part B and Part D drugs, and believed that adding competitive
bidding will only confuse beneficiaries and referral agents further.
A few commenters requested the exemption of transcutaneous
electrical nerve stimulator (TENS) devices from competitive bidding.
They believed that these devices constitute a miniscule percentage of
Medicare charges, and that including these devices in one product
category will induce beneficiaries to purchase inferior services. They
reported that some manufacturers include a post-sale periodic
monitoring service, whereas others do not.
Some commenters requested the exemption of support surfaces until
the completion of the Support Surface Standards Initiative. They
indicated that data from the Agency for Healthcare Research and Quality
showed an increase in hospitalizations for beneficiaries with pressure
ulcers up to 63 percent during the period 1993 through 2003. The
commenters recommended that if support surfaces are selected for
competitive bidding, CMS subdivide the codes and evaluate separate bids
for each subcategory. They also recommended that stakeholders be
consulted regarding the subcategories.
Several commenters stated that Medicare should not subject vision-
related DMEPOS commonly dispensed by optometrists to competitive
bidding. They believed that optometrists should not be required to
submit a bid.
Many commenters recommended the following sources for gathering
information about various homecare services and allowed charges:
American Society for Parenteral and Enteral Nutrition (ASPEN), American
Association for Respiratory Care (AARC), American Nurses Association
(ANA), American Dietetic Association (ADA), National Home Oxygen
Patients Association (NHOPA), American Lung Association (ALA), American
Diabetes Association (ADA), Joint Commission on the Accreditation of
Healthcare Organizations (JCAHO), and other accrediting organizations.
Response: Section 1847(a)(3)(B) of the Act grants us the authority
to exempt items and services for which the application of competitive
bidding is not likely to result in significant savings. Section
1847(a)(1)(B)(ii) of the Act gives us the authority to phase in
competitive bidding ``first among the highest cost and highest volume
items and services or those items and services that the Secretary
determines have the largest savings potential.'' As we stated in the
May 1, 2006 proposed rule, we will consider annual Medicare allowed
charges, annual growth in expenditures, the number of suppliers
furnishing the item, reports and studies, and data showing whether we
realized savings by including the item in the competitive bidding
demonstrations to determine whether including an item(s) under the
competitive bidding programs is likely to result in significant
savings. As we evaluate specific items for inclusion in competitive
bidding programs, we will also consider the recommendations offered by
these commenters. We note that diabetic shoes and inserts, prosthetics
for the foot, splints and casts, prosthetic devices that aid vision,
and surgical dressings are not among the items and services described
in section 1847(a)(2) of the Act and, therefore, cannot be included in
the competitive bidding programs.
Comment: Some commenters recommended that CMS publish the items
that will be included in the initial competitive bidding programs in an
interim final rule. They also believed that a meeting should be
scheduled with the PAOC to solicit additional public comment after
product selections are announced.
Response: We intend to announce the product categories for
competitive bidding on or shortly after the date of issuance of this
final rule, and we will designate the items to be included in each
competitive bidding program through program instructions or by other
means, such as the RFB, and post them on our Web site. We do not
believe that we need to publish the list of items in the form of an
interim final rule in the Federal Register. We also note that the PAOC
provided feedback on the criteria for item selection that we proposed
in the May 1, 2006 proposed rule. Further, the public had the
opportunity to comment on our proposed methodology for item selection
through the public notice and comment rulemaking process, and the
opportunity to participate in PAOC meetings that dealt with this
subject. We will take under consideration the commenters' suggestion to
hold future PAOC meetings on item selection.
Comment: Several commenters requested an explanation of the
specific measure that will be used to identify an item's true potential
savings after accounting for any recent policy changes and rate cuts.
They asked if any thresholds would be used to measure the actual
savings. They reported that changes in payment policy significantly
decreased CY 2003 allowed charges for oxygen equipment, nebulizers, and
inhalation drugs. The commenters also reported that payment for glucose
meters, test strips, and lancets were previously frozen in CYs 1998,
1999, and 2000 and again in CY 2002. They indicated that these payment
freezes call into question the feasibility of achieving significant
additional Medicare savings through competitive acquisition. The
commenters believed that the annual growth in expenditures for the
above items could be attributed to other factors such as an increase in
the number of new beneficiaries or the elimination of Medicare
Advantage Plans in various markets. Many commenters recommended
establishing a savings threshold that would use ongoing administrative
allowed charges to assess the appropriateness of competitive bidding
for each product category. They recommended using a threshold of a 10-
percent margin to determine the net savings after excluding
administrative costs associated with the ongoing support of the
competitive bidding programs from the total savings incurred.
Response: We will determine which items offer the best savings
potential. We disagree that an exact dollar threshold is appropriate
for determining if significant savings will be achieved for an item
under a competitive bidding program because it would be logistically
difficult to set an exact number for what the savings will be for a
particular item until we receive the bids. Once we receive the bids, we
can estimate the dollar savings amount to determine whether that
represents an appropriate savings. In addition to allowed charges and
utilization, we identified in the proposed rule the following variables
that we will use to select items for competitive bidding: annual growth
in expenditures; number of suppliers; savings in the DMEPOS competitive
bidding demonstrations; and reports and studies. We stated that we
would use all of these variables to make determinations about an item's
potential to reduce costs for the Medicare program. We will also assure
savings because we will not accept a bid to furnish an item unless the
submitted bid price is at or below the fee schedule amount for the
item.
Comment: Some commenters suggested that the greatest potential for
savings to the Medicare program could be achieved by eliminating
coverage of specific DME items or entire product categories.
Response: We appreciate the comment. However, competitive bidding
is a program for determining Medicare payment for covered items and
services and does not supersede any

[[Page 18025]]

Medicare rules, policies, or procedures relating to coverage.
Comment: Some commenters reported that the proposed rule indicates
Medicare expenditures for DME infusion pumps and related drugs in CY
2003 were approximately $149 million. They indicated that this number
appears to include expenditures made for insulin and insulin pumps for
beneficiaries with diabetes, which are not provided by infusion
pharmacies and largely serve a different beneficiary market than
infusion pumps and related drugs used by beneficiaries for other
medical conditions. They believe that the more accurate amount of
Medicare expenditures for CY 2003 for DME infusion pumps and related
drugs was approximately $87 million.
Response: Insulin pumps are a type of infusion pump used by
beneficiaries with diabetes and currently are included in the SADMERC
policy group for external infusion pumps and related drugs. Although we
will be using the SADMERC policy groups to identify groups of items
that we will consider including in one or more competitive bidding
programs, the actual product categories that we develop might be a
subset of items from a SADMERC policy group or a combination of items
from different SADMERC policy groups. In determining which items are
appropriate to include in a product category, we will also evaluate its
savings potential, as discussed above.
Comment: Many commenters believed that the OIG and GAO reports and
studies focus largely on a narrow issue or a small subset of issues,
and as a result, the reports often reflect a skewed perspective of the
particular problem and the suggested solution to that problem. They
believed that none of the historical OIG studies reflects the cost of
accreditation or complying with the quality standards that are the
bases of accreditation. They believed that the OIG studies do not focus
on the services and functions required of suppliers, the allowed
charges associated with these services and functions, or whether
payment rates are limited to the allowed charges of items and
equipment. In addition, they indicated that the OIG reports generally
collect information from across the United States, while competitive
bidding is market-specific. In light of these discrepancies, they
recommended that our decisions should not rely heavily on OIG reports
when we select items for inclusion in the competitive bidding programs.
Response: We believe that the OIG and GAO reports and studies
provide useful information for identifying items with high
expenditures. However, we will not rely solely on these reports. As we
indicated in the proposed rule, we would rely on several variables in
determining the savings potential for specific items or categories of
items. Those variables include annual allowed charges, annual growth in
expenditures, number of suppliers, savings under the demonstrations,
and various reports and studies conducted by CMS and other Federal
agencies.
After consideration of the public comments we received, we are
adding a definition of the term ``minimal self-adjustment'' under Sec.
414.402. We are also finalizing Sec. 414.406(d), with a technical
change. We are specifying that when we designate the items that will be
included in each competitive bidding program, we will do so by program
instructions or by other means, such as the RFB or our Web site.

G. Submission of Bids for Competitively Bid DMEPOS (Sec. Sec. 414.404,
414.408, 414.412, and 414.422)

Sections 1847(b)(6)(A)(i) and (b)(6)(A)(ii) of the Act provide that
payment will not be made under Medicare Part B for items furnished
under a competitive bidding program unless the supplier has submitted a
bid to furnish those items and has been selected as a contract
supplier. Therefore, in order for a supplier that furnishes
competitively bid items in a CBA to receive payment for those items,
the supplier must have submitted a bid to furnish those particular
items and must have been awarded a contract to do so by CMS (proposed
Sec. 414.412). In section II.C.6. of the May 1, 2006 proposed rule (71
FR 25664), we proposed that there would be limited exceptions to this
requirement for items required by beneficiaries who reside in a CBA but
are out of the area and need items (proposed Sec. 414.408(f(2)(ii))).
We also proposed that there would be an exception for suppliers that
are grandfathered to continue to provide and service certain items
(Sec. 414.408(f)(2)(i), as discussed in section VI.D.3. of this final
rule.
1. Furnishing of Items (Sec. Sec. 414.412(c) and 414.422(e))
In the May 1, 2006 proposed rule, under proposed Sec. 414.422(e)
we proposed that a contract supplier must agree to furnish the items
included in its contract to all beneficiaries who maintain a permanent
residence in, or who visit, the CBA and who request these items from
the contract supplier. However, as we explained in the proposed rule
(71 FR 25672 and 25681), we proposed that a skilled nursing facility
(SNF) as defined in section 1819 of the Act that is also a contract
supplier must only agree to furnish the items included in the contract
to patients to whom it would otherwise provide Medicare Part B services
(proposed Sec. 414.422(e)(2)(i)). In addition, we proposed that a
physician who is also a contract supplier must only agree to furnish
the items included in the contract to his or her patients (proposed
Sec. 414.422(e)(2)(ii)). Because suppliers will have to factor this
requirement into their responses to the RFBs, we have chosen to discuss
this requirement in this section of the final rule.
a. Furnishing of Items to Medicare Beneficiaries Who Maintain a
Permanent Residence in a CBA
In the May 1, 2006 proposed rule (71 FR 25681), we proposed that a
contract supplier cannot refuse to furnish items and services to a
beneficiary residing in a CBA based on the beneficiary's geographic
location within the CBA (proposed Sec. 414.422(e)(1)). We indicated
that this rule would prohibit a contract supplier from refusing to
furnish items to beneficiaries because they are not in close proximity
to that supplier. In order to ensure beneficiary access to
competitively bid items that are rented, we proposed that the contract
supplier must agree to accept as a customer a beneficiary who began
renting the item from a different supplier regardless of how many
months the item has already been rented. This is particularly important
in those cases where a supplier or noncontract supplier does not elect
to continue furnishing the item in accordance with the grandfathering
provisions discussed in section VI.D.3. of this final rule. Suppliers
must factor the cost of furnishing items in these situations into their
bid submissions.
In addition, in order to ensure beneficiary access to the
competitively bid items in the inexpensive or routinely purchased DME
payment category, or to a competitively bid power wheelchair, we
proposed that the contract supplier must agree to give the beneficiary
or his or her caregiver the choice of either renting or purchasing the
item and must furnish the item on a rental or purchase basis as
directed by the beneficiary or the beneficiary's caregiver. Suppliers
must factor the cost of furnishing these items on both a rental and
purchase basis into their bid submissions.
Comment: One commenter requested that CMS clarify that a contract
supplier can limit the number of items it provides in each category to
its contracted capacity.
Response: As part of a supplier's response to the RFB, a supplier
will be

[[Page 18026]]

expected to state its projected capacity to furnish the items in each
product category for which it is submitting a bid. The projected
capacity submitted by a supplier would not become a binding term of the
contract because contract suppliers will be required to furnish the
items in their contract to all beneficiaries who maintain a permanent
residence in the CBA, or who visit the CBA, and who request the items
from them unless one of the exceptions discussed in this final rule
applies.
b. Furnishing of Items to Medicare Beneficiaries Whose Permanent
Residence Is Outside a CBA
In the May 1, 2006 proposed rule (71 FR 25681), we proposed that in
order to obtain medically necessary DMEPOS items, a Medicare
beneficiary whose permanent residence is located outside of a CBA must
use a contract supplier to obtain all items subject to competitive
bidding in the CBA that he or she visits. We considered allowing
beneficiaries whose residence is outside of a CBA to obtain these items
from noncontract suppliers when coming into a CBA. However, consistent
with section 1847(b)(6) of the Act, we proposed that beneficiaries
would be required to use a contract supplier because we believe that
new business for competitively bid items should be directed only to
contract suppliers. Noncontract suppliers would be allowed to continue
servicing current beneficiaries who maintain a permanent residence in a
CBA if they qualified for the grandfathering program discussed in
section VI.D.3. of this final rule.
Comment: One commenter stated that CMS should indicate how the
provision to furnish competitively bid items to Medicare beneficiaries
whose permanent residence is outside a CBA will be communicated to
beneficiaries who are visiting a CBA.
Response: Noncontract suppliers located in a CBA will be informed
that they are not eligible to furnish competitively bid items to
beneficiaries visiting the CBA and as we discussed earlier in this
final rule, beneficiaries will not be held liable to make a payment for
an item furnished in contravention of this rule, unless the beneficiary
signs an ABN indicating the beneficiary's knowledge and understanding
that Medicare will not pay for that item. Noncontract suppliers will be
educated to refer beneficiaries to contract suppliers in these
situations. We are also planning an extensive educational campaign to
inform the public of the requirement that an item must be obtained from
a contract supplier when a beneficiary is visiting a CBA, if the item
that the beneficiary needs is included in the competitive bidding
program for the CBA that the beneficiary is visiting. A list of all
contract suppliers along with other competitive bidding information
will be on the CMS and CBIC Web sites. This information will also be
available to beneficiaries through the toll-free telephone number 1-800
Medicare.
Comment: One commenter stated that it was confused as to whether
certain products might be drop-shipped into the area where the
beneficiary is visiting. The commenter requested clarification on this
because the commenter believed there are many types of equipment such
as oxygen equipment that should not be drop-shipped. Another commenter
stated that a beneficiary visiting in the CBA should not be required to
use a contract supplier because such a requirement would confuse
beneficiaries. The commenter recommended that CMS not adopt the
proposed rule or modify it so that it only applies to beneficiaries who
have resided in the CBA for 3 or more months. Two commenters stated
that there will be an undue impact on ``snowbirds'' as a result of the
requirement that contract suppliers furnish items to Medicare
beneficiaries whose permanent address is outside the CBA and that this
provision should not be adopted.
Response: The proposed requirement would establish a process
whereby beneficiaries visiting a CBA must get a competitively bid item
for that CBA from a contract supplier that furnishes the item in the
CBA. If, however, the beneficiary needs an item that is included in the
competitive bidding program for the CBA that the beneficiary is
visiting (even if the item is not included in the competitive bidding
program for the CBA where the beneficiary maintains a permanent
residence), the beneficiary would be required to obtain the item from a
contract supplier in the CBA where the beneficiary is visiting.
Therefore, if a beneficiary is visiting a CBA, he or she may obtain the
item from a contract supplier, and there would be no reason to drop-
ship a product. As we explained in our response to the previous
comment, we plan to implement a process by which beneficiaries will be
able to locate contract suppliers in a CBA where they are visiting. We
believe that a beneficiary who visits a CBA should be required to
obtain competitively bid items for that CBA only from contract
suppliers for that CBA because we believe that new business for these
items should only be directed to contract suppliers. The purpose of
competitive bidding is to award contracts to certain suppliers based
upon their winning bids and to ensure the beneficiaries receive items
from these suppliers.
Comment: One commenter suggested that CMS establish a system to
ensure that all beneficiaries will continue to have access to their
DMEPOS supplies, even while visiting an area that is not the
beneficiary's CBA. The commenter stated that CMS should require that
suppliers aggressively educate beneficiaries on the proper procedures
for obtaining their supplies while away from home, and should allow
beneficiaries to purchase extra supplies for extended vacations or
temporary changes of residence. The commenter also urged CMS to allow
beneficiaries to purchase their supplies from noncontract suppliers in
the event of an emergency.
Response: As we discussed above, we will conduct an extensive
education campaign to educate beneficiaries, suppliers, and referral
agents on how beneficiaries who are away from home can obtain medically
necessary items. As we proposed, our contract supplier selection
methodology will ensure there are enough contract suppliers in each CBA
to ensure beneficiary access to needed items and services. In addition,
beneficiaries on vacation or who have temporary changes of residence
will be able to obtain competitively bid items that are included in the
competitive bidding program for the CBA that they are visiting from
contract suppliers for that CBA. Contract suppliers will be listed on
the Internet in order for beneficiaries to determine who the contract
suppliers are in the CBA they are visiting. As we explained above, we
will require that contract suppliers assist Medicare beneficiaries in
locating contract suppliers while visiting other CBAs. We do not
believe an exception is needed in the event of an emergency because we
will ensure that there will be a sufficient number of contract
suppliers in a CBA to meet the access needs of beneficiaries.
2. Requirements for Providers to Submit Bids (Sec. Sec. 414.404(a) and
414.422(e)(2))
In the May 1, 2006 proposed rule (71 FR 25672), we proposed in
Sec. 414.404(a) that the Medicare DMEPOS Competitive Bidding Program
would apply to suppliers, and in proposed Sec. 414.404(b) that the
program would apply to providers that furnish items under Medicare Part
B as suppliers. Accordingly, providers that furnish Medicare Part B
items are located in a competitive bidding area, and that are also
DMEPOS suppliers would be

[[Page 18027]]

required to submit bids in order to furnish competitively bid items to
Medicare beneficiaries. We also proposed that providers that are not
awarded contracts must use a contract supplier to furnish these items
to Medicare beneficiaries to whom they provide services. However, we
proposed in new proposed Sec. 414.422(e)(2)(i) that a SNF, as defined
in section 1819(a) of the Act, would not be required to furnish
competitively bid items to beneficiaries outside of the SNF if it
elected not to function as a commercial supplier. We stated that this
rule is consistent with the current practice of some SNFs to furnish
Medicare Part B services only to their own residents.
Comment: Several commenters recommended that CMS exclude
institutional providers, such as SNFs and other long-term care
facilities, from competitive bidding or exempt products that are
primarily used in institutional settings from competitive bidding. They
stated that because the residents of these institutions are often among
the most frail and critically ill the level of care required for these
patients should not be threatened or compromised by rules whose impact,
although well-intended, are not conducive to the long-term care
environment. The commenters believed that competitive bidding may
distort current institutional purchasing patterns and result in higher
prices. Several commenters also suggested that CMS postpone bidding in
long-term care settings until CMS convenes a working group of key
stakeholders to examine how the requirements for competitive bidding
impact these facilities. They further stated that CMS should phase in
the program over at least 4 years. Others suggested delaying
implementation of the program.
Response: Congress specifically provided that certain categories of
items and services, specifically certain DME, medical supplies, enteral
nutrients, equipment, and supplies, and OTS orthotics are subject to
the Medicare DMEPOS Competitive Bidding Program and established phase-
in implementation rules. Items and services may only be excepted from
the program if we determine that they are not likely to result in
significant savings if they are included. A large volume of enteral
nutrients, equipment, and supplies are furnished to patients in SNFs
and nursing facilities (NFs along with some OTS orthotics. Currently,
we allow SNFs and nursing facilities (NFs) to choose whether to provide
these services directly or under contract with an outside supplier. To
avoid disruption of this practice, we will continue to provide SNFs and
NFs with this choice.
We continue to believe that Medicare DMEPOS Competitive Bidding
Program should apply to institutional providers to the extent they
furnish items under Part B because section 1847 of the Act does not
distinguish these providers from other types of Part B suppliers.
However, we believe that SNFs and NFs should be treated differently
from other providers in terms of who they must furnish items to because
they generally do not use a commercial model of providing services
throughout the community. Instead, they generally provide items only to
patients that reside in their facility. We do not believe it would be
in the best interest of the program to exempt institutional providers
from participating or delay implementation in these settings because
these providers furnish items subject to competitive bidding to their
residents, and the category of enteral nutrition, as a whole, is made
up of high-cost, high-volume items.
Therefore, we are finalizing our proposal under Sec. 414.422(e)(2)
to permit SNFs as defined in section 1819(a) of the Act, to furnish
competitively bid items only to their own residents. We are extending
this provision to NFs, as defined in section 1919(a) of the Act,
because we believe the services they furnish, the customers they serve,
and their business model are parallel to SNFs. A SNF or NF will still
be required to submit a bid and have a bid in the winning range and the
SNF or NF must indicate in its response to the RFB it intends to elect
this option. If the SNF or NF is not selected as a contract supplier,
it will have to use a contract supplier within the CBA to furnish
competitively bid items to its residents. In addition, should a SNF or
NF indicate in its response to the RFB that it plans to furnish items
to beneficiaries who are not residents of its facility, this special
rule will not apply and the SNF or NF will be required to furnish items
to all beneficiaries who maintain a permanent residence in, or who
visit, the CBA where the SNF or NF is located.
Comment: One commenter stated that section 1847 of the Act was
never intended to apply to institutional providers and that the phrase
``items and services'' means those that are purchased directly by
individuals and not by institutions on behalf of individuals. The
commenter further stated that section 1847(b)(4)(A) of the Act requires
that CMS ``take into account the ability of bidding entities to furnish
items and services in sufficient quantities to meet the anticipated
needs * * * in the geographical area covered under the contract on a
timely basis.'' The commenter believed that this sentence could be
interpreted to mean that institutional providers are outside the scope
of the competitive bidding program. The commenter indicated that
institutions already purchase items for their patients through
arrangements made in a variety of ways and that requiring them to
participate in the Medicare DMEPOS Competitive Bidding Program could
result in actually raising prices of items purchased by institutions.
Response: We do not agree that sections 1847(a) and (b) of the Act
only apply to items and services directly purchased by Medicare
beneficiaries and does not apply to institutions that purchase on
behalf of beneficiaries. Indeed, these sections identify the items and
services subject to competitive bidding and provide that the program
applies when these items are furnished under Medicare Part B.
Therefore, to the extent that institutional providers are furnishing
items as Part B suppliers, we believe that the Medicare DMEPOS
Competitive Bidding Program should apply to them. However, as we
explained above, we are allowing SNFs and NFs to elect to only furnish
competitively bid items to residents in their facilities if they are
selected as contract suppliers.
Comment: Several commenters stated that hospital-based suppliers
should not have to bid, as hospital-based suppliers are not structured
to compete for all beneficiaries in the region. Some commenters stated
that hospital-based suppliers should be eligible to participate in the
competitive bidding program, if they are willing to accept the single
payment amount. Other commenters stated that CMS should exclude
hospital-based suppliers from having to serve all beneficiaries in a
CBA.
Response: Hospital-based suppliers provide the same ranges of items
and services as other commercial suppliers. We believe hospital-based
suppliers are different than SNFs and NFs because they do use a
commercial model and do provide items to patients who do not reside in
a hospital. Therefore, the hospital-based suppliers are competing with
other commercial suppliers in the same area and should be considered as
part of the same competitive bidding program for this reason.
Comment: One commenter stated that CMS should not combine SNFs and
physicians in the same competition with commercial DMEPOS suppliers.
The commenter believed that including all of these provider/supplier
types in the same bidding will distort the bid evaluation and selection
because SNFs

[[Page 18028]]

and physicians will have significantly lower operating costs arising
from the fact that because they do not have to serve all beneficiaries
and they do not have to accept beneficiaries from noncontract
suppliers, regardless of rental month.
Response: We are establishing provisions that treat SNFs, NFs,
physicians, and certain other nonphysician practitioners differently
from other suppliers. As we discussed above, we are allowing SNFs and
NFs that are selected as contract suppliers to furnish items only to
their own patients. In addition, as we discuss more fully below, we
will permit physicians and certain nonphysician practitioners to
furnish certain competitively bid items to their own patients without
submitting a bid and being selected as a contract supplier. We believe
that it is appropriate to allow SNFs (and, as discussed above, NFs) to
compete to serve their own patients, but we believe it is appropriate
to include them in the same bidding process as other suppliers because
the statute requires us to conduct bidding for items in which we expect
savings.
Comment: One commenter stated that the requirement that suppliers
that are not awarded contracts must use a contract supplier to furnish
competitively bid items to Medicare beneficiaries to whom they do
provide services conflicts with current Medicare policies. The
commenter asked how such a supplier would be able to subcontract to use
a contract supplier to furnish supplies without violating current
policies.
Response: We do not believe that this requirement conflicts with
current policy. Specifically, SNFs are currently allowed to have
arrangements under which outside suppliers come to their facilities to
provide enteral nutrients, equipment, and supplies. SNFs routinely
engage in this practice. Under competitive bidding, SNFs that are not
winning contractors must make arrangements to use a contract supplier
in the community to furnish competitively bid items to residents of the
facility.
Accordingly, we are revising Sec. 414.404(a) to specify that the
Medicare DMEPOS Competitive Bidding Program applies to providers that
furnish items under Part B. In addition, we are redesignating proposed
Sec. 414.422(e)(2)(i) as Sec. 414.422(e)(2) and finalizing that
section with the modifications discussed above. Finally, as we discuss
below, we are deleting Sec. 414.422(e)(2)(ii) because we have modified
our proposal regarding the applicability of the Medicare DMEPOS
Competitive Bidding Program to physicians, and, as discussed below,
placing the new provisions in Sec. 414.404(b).
3. Physicians and Certain Nonphysician Practitioners (Sec. Sec.
414.404(a) and (b))
In the May 1, 2006 proposed rule (71 FR 25672), we proposed in
proposed Sec. 414.404(c) that the Medicare DMEPOS Competitive Bidding
Program would apply to physicians who furnish items under Medicare Part
B as suppliers. Accordingly, physicians who are also DMEPOS suppliers
would be required to submit bids and be awarded contracts in order to
furnish items included in the competitive biding program for the area
in which they provide medical services. We proposed that physicians who
do not become contract suppliers must use a contract supplier to
furnish competitively bid items to Medicare beneficiaries. However, in
proposed Sec. 414.422(e)(2)(ii), we proposed that these physicians
would not be required to furnish these items to Medicare beneficiaries
who are not their patients. In proposing this policy for physicians who
are also DMEPOS suppliers, we recognized that the physician self-
referral law (section 1877 of the Act, also known as the Stark law)
generally prohibits physicians from furnishing to their office patients
a variety of common DMEPOS items. Therefore, we proposed that
physicians who choose to participate in the competitive bidding process
must ensure that their arrangements for referring for and furnishing
DMEPOS items under a competitive bidding program comply with the
physician self-referral law as well as any other Federal or State law
or regulation governing billing or claims submission.
Comment: Several commenters suggested that CMS not require
physicians, including podiatric physicians, to participate in the
competitive acquisition program for certain DMEPOS. The commenters
noted that under the physician self-referral (``Stark'') provisions
under section 1877 of the Act, a physician in a group practice may not
refer Medicare beneficiaries to the group practice, and the group
practice may not bill for any DME except crutches, canes, walkers,
folding manual wheelchairs, and blood glucose monitors. The commenters
also requested that CMS not require physician assistants, physical
therapists, or occupational therapists to participate in the Medicare
DMEPOS Competitive Bidding Program because those health care
professionals are licensed by State boards. According to the
commenters, if a physician or non-physician practitioner does not
participate in the competitive bidding program, he or she should be
reimbursed at the single payment amount for any DME items that are
furnished to his or her own patients. In addition, the commenters
requested that CMS clarify how the requirement for physicians to submit
bids and provide all items within a product category does not violate
the physician self-referral law.
Response: After considering the comments, in this final rule, we
are deleting proposed Sec. 414.404(c) and revising Sec. 414.404(b) to
give physicians (as defined at section 1861(r) of the Act, which
includes podiatric physicians) and treating practitioners (defined in
Sec. 414.404 as physician assistants, clinical nurse specialists, and
nurse practitioners) the option to furnish certain types of
competitively bid items without participating in the Medicare DMEPOS
Competitive Bidding Program, provided that certain conditions are
satisfied. First, the items that may be furnished are limited to
crutches, canes, walkers, folding manual wheelchairs, blood glucose
monitors, and infusion pumps that are DME. Second, the items must be
furnished by the physician or treating practitioner to his or her own
patients as part of his or her professional service. Third, the items
must be billed using a billing number assigned to the physician, the
treating practitioner (if possible), or a group practice to which the
physician or treating practitioner has reassigned the right to receive
Medicare payment. We are adding a new Sec. 414.404(b)(3) providing
that the items furnished and billed in this manner will be paid at the
single payment amount, which is the rate at which these items would
otherwise be paid if this exception did not apply. We believe that
physicians engaged in the practice of medicine (and their medical
practices) should have the option not to participate in the competitive
bidding program because, to comply with the physician self-referral
prohibition, they generally provide to their own patients only the
DMEPOS items noted above. Because physician assistants, clinical nurse
specialists, and certified nurse practitioners furnish services under
the supervision of, or in collaboration with, a physician, we believe
they (and the group practices that may bill for their services) should
similarly have the option to not become a contract supplier.
We are also modifying the regulation by adding Sec. 414.404(b)(2)
to give physical therapists in private practice and occupational
therapists in private practice the option to furnish certain

[[Page 18029]]

types of competitively bid items without participating in the Medicare
DMEPOS Competitive Bidding Program, provided that certain conditions
are satisfied. First, the items that they may furnish without becoming
a contract supplier are limited to OTS orthotics. Second, the items
must be furnished only to their own patients as part of their
professional service. OTS orthotics furnished in accordance with Sec.
414.404(b) by physical and occupational therapists who are not contract
suppliers will be paid at the single payment amount. We are limiting
this exception to the bidding requirement to OTS orthotics because we
have determined that these are the items that would ordinarily be
furnished as an integral part of occupational therapy or physical
therapy services.
We note that if a physician, treating practitioner, physical
therapist in private practice, or occupational therapist in private
practice wishes to furnish in a CBA a competitively bid item not
specifically authorized by this rule, and can otherwise legally do so,
the physician, treating practitioner, physical therapist in private
practice, or occupational therapist in private practice would have to
submit a bid and be awarded a contract to do so.
The Medicare DMEPOS Competitive Bidding Program does not affect the
applicability of the physician self-referral provisions in section 1877
of the Act. All provisions of the physician self-referral law remain
fully in effect. In other words, notwithstanding the requirement that a
contract supplier must furnish all items in a product category, a
contract supplier cannot furnish an item as a result of a referral
prohibited under section 1877 of the Act. We are revising proposed
Sec. 414.422(e) to provide that a contract supplier must furnish all
items in each product category to which the contract applies, ``except
as otherwise prohibited under section 1877 of the Act or any other
applicable law or regulation.''
Comment: Several commenters stated that there is no reason to treat
occupational therapists and physical therapists differently from
physicians. They stated that occupational therapists are not like
``commercial suppliers'' and should only have to furnish competitively
bid items to their own patients. Several commenters requested that CMS
exempt physical therapists in private practice from competitive bidding
or give them special consideration under the competitive bidding
program. They stated that physical therapists should be exempt from
having to provide every item in a product category and CMS should allow
them to participate even if they do not submit exactly the same type of
bid required of large suppliers. Several commenters suggested that CMS
exclude all occupational and physical therapists and hand therapists
that provide pre-fabricated splints to Medicare beneficiaries from the
competitive bidding program. They stated that CMS should ensure that
occupational and physical therapists can continue to furnish orthotics
to their patients. The commenters added that if they cannot dispense
OTS orthotics to patients during visits, beneficiaries will need to
make other arrangements to obtain the items.
Response: As we stated above, we are revising Sec. 414.404(b) to
give occupational therapists in private practice and physical
therapists in private practice the option to furnish OTS orthotics to
their own patients as part of their professional practice without
participating in the Medicare DMEPOS Competitive Bidding Program. We
agree with these comments, but only as they relate to furnishing of OTS
orthotics by occupational and physical therapists that provide these
items in the course of therapy. There is a specific statutory benefit
to pay for the services of occupational therapists and physical
therapists. However, there is no comparable benefit that only pertains
to hand therapists. We are limiting this exception to the bidding
requirement to OTS orthotics because we have determined that these are
the items that would ordinarily be furnished as part of occupational
therapy or physical therapy professional services. In addition,
physical and occupational therapists in private practice who elect to
operate under this special exception may not furnish these items and
services to beneficiaries outside of their normal practice without
submitting a bid and being awarded a contract to do so.
After consideration of the public comments, we are revising Sec.
414.404(a) to specify that the Medicare DMEPOS Competitive Bidding
Program generally applies to physicians, treating practitioners,
physical therapists, and occupational therapists that furnish items
under Part B. However, we are revising proposed Sec. 414.404(b) to
specify the terms and conditions under which physicians, treating
practitioners, physical therapists, and occupational therapists do not
have to participate in the program. Finally, to be consistent with our
changes to Sec. 414.404(b), we are not finalizing proposed Sec.
414.422(e)(2)(ii).
4. Product Categories for Bidding Purposes (Sec. Sec. 414.402 and
414.412(b)(1),(c) Through (e))
In the May 1, 2006 proposed rule (71 FR 25672), we proposed in
Sec. Sec. 414.412(b) through (d) to conduct bidding for items that are
grouped into product categories. We proposed to require suppliers to
submit a separate bid for all items that we specify in a product
category. The submitted bid must include all costs related to the
furnishing of each item such as delivery, set-up, training, and proper
maintenance for rental items. However, we proposed to require suppliers
to only submit bids for the product categories that they are seeking to
furnish under the program. All items that would be included in a
product category for bidding purposes would be detailed in the RFBs. We
proposed to define the term ``product category'' (proposed Sec.
414.402) as a group of similar items used in the treatment of a related
medical condition (for example, hospital beds and accessories). We
explained that we believe the use of product categories will allow
Medicare beneficiaries to receive all of their related products (for
example, hospital beds and accessories) from one supplier, which will
minimize disruption to the beneficiary.
We also discussed in the proposed rule other design options that we
considered but did not propose. One option was to require suppliers to
submit a bid for all items in every defined product category. Another
option was for suppliers to bid at the HCPCS level and submit a bid
only for the individual items that they were seeking to furnish under
the program.
There are currently approximately 55 separate policy groups already
established by the DME MACs. However, these policy groups were not
established for the purpose of competitive bidding. We proposed to
specifically develop product categories for the purpose of competitive
bidding. Each group would be defined and comprised of individual HCPCS
codes.
Section 1847(a)(3)(B) of the Act gives us the authority to exempt
items for which the application of competitive bidding is unlikely to
result in significant savings. We proposed not to include items in a
product category if they are rarely used or billed to the program. In
addition, we did not propose to include items within a product category
if we believed that these were items for which we might not realize
savings. Therefore, under this approach, we proposed to establish
product categories to identify those

[[Page 18030]]

items included in competitive bidding and stated that we might choose
to establish different product categories from one CBA to another, as
well as in different rounds of competitive bidding in the same CBA.
We proposed to allow suppliers to submit bids only for the product
categories they are seeking to furnish under a competitive bidding
program because this option accommodates DMEPOS suppliers that want to
specialize in one or a few product categories. For example, if a
supplier wanted to specialize in the treatment of respiratory
conditions, the supplier could choose to bid on all items that fall
within the oxygen product category, the continuous positive airway
pressure product category, or the respiratory assist device product
category. We believe that specialization at the product category level
will make it easier for referral agents (entities that refer
beneficiaries to health care practitioners or suppliers to obtain
DMEPOS items) and other practitioners to order related products from
the same supplier.
Establishing a bidding process that promotes specialization would
allow suppliers to realize economies of scope within a product
category, which means that a supplier may be able to furnish a bundle
of items at a lower cost than it can produce each individual item. In
our view, this approach would also be more favorable to small suppliers
because they could choose to specialize in only one product category.
It would be more difficult for a small supplier, as opposed to a large
supplier, to furnish all product categories. This approach would also
be more convenient for Medicare beneficiaries, as they could choose to
receive all their related supplies from one supplier and would not have
to deal with multiple suppliers to obtain the proper items for a single
condition. We recognized the importance of the relationship between a
DMEPOS supplier and the Medicare beneficiary. The supplier delivers the
item to the beneficiary, sets up the equipment, and also educates the
beneficiary on the proper use of the equipment. The use of product
categories would facilitate the transition for those beneficiaries who
have to change suppliers. We stated in the proposed rule that it was
our goal to establish a productive relationship between the supplier
and the beneficiary, and we believe we can accomplish this goal by
designing the Medicare DMEPOS Competitive Bidding Program in a manner
that would give the beneficiary the option of selecting one supplier
that would be responsible for the delivery of all medically necessary
items that fall within a product category.
Comment: Some commenters recommended revising proposed Sec.
414.412(c) to read, ``Product categories include items that are used to
treat a related medical condition. The list of product categories, and
the items included in each product category are identified in the RFBs
document. The product categories should be consistent with the policy
groups of the SADMERC, unless there is good cause to align items
differently for a particular competitive bidding program.'' The
commenters also recommended revising Sec. 414.412(d) to read,
``Suppliers must submit a separate bid for every item included in each
product category that they are seeking to furnish under a competitive
bidding program unless a bid is determined for a sub-category for
bidding purposes.'' Many commenters believed it will cause confusion if
new product categories are developed. They reported that the CMS Web
site is organized by policy groups and accessed by suppliers frequently
for information. The commenters believed that keeping track of old
categories and new categories in a single market or State would be next
to impossible. Many commenters believed combining medical policies may
affect beneficiary access or quality of services. They believed the
only providers and suppliers that are eligible to bid are those that
carry the broadest product offerings, and sometimes these are not the
providers or suppliers with the strongest expertise in a specific
product or HCPCS code. One commenter suggested that CMS include
subcategories within a product category.
Response: We have revised our proposed definition of ``product
category'' to provide that product category is a grouping of related
items that are used to treat a similar medical condition. The list of
product categories and the items included in each product category that
is included in each competitive bidding program will be identified in
the request for bids document for that competitive bidding program and
by other means. The DME MACs establish policy groups for the purposes
of developing Medical review policies and for data analysis, and these
policy groups will serve as the starting point for establishing product
categories. Product categories will generally be consistent with these
policy groups unless CMS determines that a policy group should be
redefined for the purposes of competitive bidding because there may be
items in the policy group that are either not subject to competitive
bidding or that we would want to exempt from competitive bidding using
our authority to exempt items. For this reason, the product categories
for which we would request bids could also be a subset of items from a
DME MAC policy group or a combination of items from different policy
groups.
In response to the suggestion that we create subcategories within a
product category, we do not believe this approach is necessary because
if we believed that we needed to separate items in a policy group, we
would create a new product category for each set of items instead of a
product category with subcategories.
Comment: A few commenters believed that a product category such as
``oxygen equipment and related supplies'' is likely to contain
different oxygen delivery modalities such as stationary oxygen
concentrators and liquid oxygen systems. They indicated that, while
this may appear logical on the surface, the groupings are, in fact,
incompatible with accurate bidding. The commenters added that the costs
of acquisition, beneficiary support, and equipment maintenance and
servicing are different for modalities.
Response: We appreciate the comments and recognize that there are
different costs associated with the different type of equipment that
are used to furnish oxygen therapy. The standard payment methodology
and monthly payment amount for oxygen and oxygen equipment have been
modality neutral since 1989. It is our intention at this time to
maintain the policy of modality neutral payments under the competitive
bidding programs because this guards against suppliers attempting to
furnish only the most expensive modalities that result in higher
profits. For example, suppliers that submit bids for stationary oxygen
and oxygen equipment will need to factor in the costs of furnishing all
of the different modalities or delivering stationary oxygen to
beneficiaries in the CBA because physicians may specify a specific
oxygen modality when ordering the equipment.
Comment: One commenter stated that the majority of its clients do
not purchase items from just one policy group but rather from several
groups. The commenter believed that bidding per product category sends
clients from one supplier to another as their needs change and is not
favorable to beneficiaries.
Response: As stated above, we are revising Sec. 414.402 to define
a product category as a grouping of related items that are used to
treat a similar medical

[[Page 18031]]

condition, for example, hospital beds and accessories. It is our goal
to give beneficiaries an opportunity to receive all competitively bid
items used to treat an individual medical condition from the same
contract supplier, which will make the program convenient for them.
This will be accomplished by requiring a supplier that chooses to bid
on a particular product category to bid on every item within that
category and to furnish every item within a product category for which
it is awarded a contract. Suppliers currently specialize in particular
products, and we do not see this process being interrupted by
competitive bidding. In addition, suppliers will be able to choose
which product categories for which they want to submit a bid.
Comment: Several commenters raised concerns regarding the
development of product categories. The commenters believed that product
categories should be defined narrowly, to make sure they are consistent
and representative of the products that a supplier might actually
furnish. One commenter suggested, for example, a broad category for
wheelchairs or power wheelchairs could be problematic. The commenter
added that suppliers that do not specialize in rehabilitation may not
carry every brand name of power wheelchairs that fall under a
particular code. The commenters stated that CMS should not combine
products from multiple medical review policies into one product
category because it adds complexity and risks to the beneficiary
because it may not allow suppliers to specialize in certain products.
The commenters further stated that bidding by specific medical policies
ensures that suppliers that specialize can address the needs of
individuals with specific disease states/conditions. Several commenters
requested that CMS not establish broad product categories. They further
stated that many suppliers structure their business around specific
disease states and conditions. The commenters noted that CMS should
identify the quantities of each item within the product category that
CMS expects will be required by Medicare in the respective CBA. Several
commenters indicated that the core product categories should have codes
that include sufficiently similar items in terms of capability,
function, and other relevant characteristics. Some commenters believed
that having broad product categories will restrict a specialty
practitioner's ability to submit a bid.
Response: As we stated above, we will generally make the product
categories consistent with the policy groups that have been defined by
our contractors and, in the future, will be established by our
contractors. We do not plan to make product categories overly broad,
and we do not intend to combine products from various policy groups
into a single product category unless the product already falls in
several policy groups. However, the use of product categories instead
of policy groups will allow us to exclude from a product category low-
volume items or items that we believe will not result in significant
savings, and to add items that we believe are appropriate for inclusion
because we believe that they are related items used to treat a similar
medical condition. As we explain below, we will identify in the RFB and
by other means such as our Web site or program instruction, the product
categories for each competitive bidding programs, the items within each
product category, the historic beneficiary demand for each item in the
applicable CBA, and the item weight for each item within each product
category.
Comment: One commenter noted that the requirement to bid on all
HCPCS codes in a product category would be a major problem for
manufacturers that also serve as suppliers. The commenter also
recommended that CMS adopt special rules for manufacturers wishing to
bid, permitting them to only bid on products they manufacture.
Response: The goal of product categories is to minimize the
disruption to beneficiaries by allowing them to receive all related
competitively bid items for a similar medical condition from one
contract supplier. Therefore, we believe it would be in the best
interest of beneficiaries if we require a contract supplier that is
also a manufacturer to furnish all items within a product category. We
also believe it would not be equitable to adopt special rules for
manufacturers while requiring all other suppliers that are not
physicians or certain nonphysician practitioners to furnish all items
in a product category as defined for purposes of competitive bidding.
Comment: Several commenters were concerned that a supplier that
wins a bid in the wheelchair category may lose the bid for the
associated cushions that are necessary for wheelchairs. They believed
this would cause the patient to need to deal with two or more suppliers
for a single rehabilitation wheelchair.
Response: As explained above, product categories will be comprised
of related items used to treat a similar medical condition. Our goal is
to minimize beneficiary disruption. Therefore, product categories will
generally be established so that beneficiaries can receive related
items from the same contract supplier.
Comment: Some commenters stated that complex rehabilitation
products such as wheelchairs should not be competitively bid. They
indicated that the accessory codes are the same for the accessories
whether they are provided for a standard wheelchair or a complex
mobility system. Therefore, they believed that the same HCPCS code may
fall into several categories.
Response: We recognize that certain accessories that can be used on
manual wheelchairs can also be used with complex mobility systems.
Under our revised definition of ``item'' a product might be identified
by a HCPCS code that has been specified for competitive bidding (such
as when the product is furnished through the mail). One way that we
might choose to specify a product identified by a HCPCS code for
competitive bidding is when an accessory such as the one identified by
the commenters is needed for use with a particular item. When we
announce the product categories and the items included in each product
category, we will identify any items specified for purposes of
competitive bidding, such as accessories used with certain base
equipment in a specific product category. In this way, we will be able
to ensure that each product category properly includes all the related
items that are used to treat a similar medical condition.
Comment: One commenter argued that CMS should limit bids to one bid
per supplier. The commenter expressed concerns regarding national
chains with multiple supplier numbers and indicated that these chains
could potentially submit multiple bids in a CBA and compromise
competition. The commenter suggested that CMS require that a single
entity that has multiple supplier numbers only be allowed to submit one
bid in each CBA. Under the commenter's suggestion, affiliated entities
that do not have their own Medicare supplier number, but that are part
of a national supplier and operate under the national supplier's 6-
digit supplier number, would not be allowed to bid separately in a CBA.
The commenter further suggested that CMS include a requirement in the
regulations that suppliers with common ownership of 5 percent may only
submit a single bid for each product category in a given CBA.
Response: We agree with the commenter that commonly-owned suppliers
or a supplier that has a controlling interest in another supplier
should not be allowed to submit different bids for the same product

[[Page 18032]]

category in the same CBA. Therefore, we are requiring under revised
Sec. 414.412(e) that all bidding suppliers must disclose as part of
their bid whether they have an ownership or controlling interest in one
or more other suppliers or if one or more other suppliers has an
ownership or controlling interest in it, CMS will reject multiple bids
submitted by commonly-owned or controlled suppliers for the same
product category in the same CBA because we believe that allowing these
suppliers to bid against themselves will undermine the integrity of the
bidding process. For purposes of this disclosure requirement, two or
more suppliers are commonly-owned if one or more of them has an
ownership interest totaling at least 5 percent in the other(s). We are
defining the term ``ownership interest'' as ``the possession of equity
in the capital, the stock, or the profits of another supplier.'' This
is consistent with how the term ``ownership interest'' is defined in 42
CFR Sec. 420.201 of our regulations, which contains terms relevant to
what certain entities, including DMEPOS suppliers, must currently
disclose regarding ownership and control information. We believe it is
a logical and appropriate approach to adapt definitions that apply to
disclosure requirements in other parts of the Medicare program. In
addition, the 5 percent requirement is consistent with what constitutes
a ``person with an ownership or control interest'' in Sec. 420.201.
Finally , a supplier controls another supplier for purposes of these
disclosure requirements if one or more of its owners is an officer,
director, or partner in the other. This is also consistent with the
definition of a ``person with an ownership or control interest'' in
Sec. 420.201.
Commonly-owned or controlled suppliers with multiple locations in
the same CBA will be required to submit a single bid on behalf of all
the locations and must indicate the combined capacity for all those
locations. The bid must also include any locations outside the CBA that
would be furnishing items in the CBA if a contract is awarded.
Therefore, if we award a contract based on the single bid submitted by
the commonly-owned or controlled suppliers, all of these suppliers
would become contract suppliers. As stated above, we believe that these
rules are necessary to prevent commonly-owned or controlled suppliers
from bidding against themselves and undermining the integrity of the
bidding process. In addition, contracting with all or none of the
suppliers that are commonly-owned or controlled as described above will
make it easier for beneficiaries to be informed regarding who is or who
is not a contract supplier for their CBA.
We are also revising our definition of ``product category'' in
Sec. 414.402. We have combined proposed Sec. 414.412(e) and proposed
Sec. 414.412(c) into a new Sec. 414.412(c), but deleted the first
sentence of proposed Sec. 414.412(c) as redundant because we include
the definition of ``product category'' in Sec. 414.402, specified that
the bid must include all costs related to furnishing an item to any
beneficiary who maintains a permanent residence in, or who visits, the
CBA where those items will be furnished and made additional technical
changes. We are renumbering proposed Sec. 414.412(b) a final Sec.
414.412(b)(1), and finalizing Sec. 414.412(d) with technical changes.
Finally, we are finalizing Sec. 414.412(e), which set forth our
ownership rules, as discussed above.
We are redesignating proposed Sec. 414.412(e) as final Sec. Sec.
414.412(d) and adding a new Sec. 414.412(e) to require that all
bidding suppliers must disclose as part of their bid whether they have
an ownership interest in one or more other suppliers that would be
considered as contract supplier for the same CBA.
5. Bidding for Specific Types of Items and Associated Payment Rules
(Sec. Sec. 414.408(f) Through (j))
In the May 1, 2006 proposed rule (71 FR 25673 and 25674), we
proposed that, in preparing a bid in response to the RFBs, suppliers
would use our existing regulations at 42 CFR Part 414, Subparts C and
Subpart D to determine whether a rental or purchase payment would be
made for the item and whether other requirements would apply to the
furnishing of that item, as further explained below.
a. Inexpensive or Other Routinely Purchased DME Items (Sec. Sec.
414.408(f) and (h)(6))
The current fee schedule amounts for inexpensive or other routinely
purchased DME items are based on average reasonable charges for the
purchase of new items, purchase of used items, and rental of items from
July 1, 1986, through June 30, 1987. In those cases where reasonable
charge data from 1986/1987 are not available, the fee schedule amounts
for the purchase of new items are currently based on retail purchase
prices deflated to the 1986/1987 base period by the percentage change
in the CPI-U, the fee schedule amounts for the purchase of used items
are generally based on 75 percent of the fee schedule amounts for the
purchase of new items, and the fee schedule amounts for the monthly
rental of items are generally based on 10 percent of the fee schedule
amounts for purchase of new items. This method of establishing fee
schedule amounts in the absence of reasonable charge data has been in
use since 1989. Under the Medicare DMEPOS Competitive Bidding Program,
we proposed that bids be submitted only for the furnishing of new items
in this category that are included in a competitive bidding program.
Based on the bids submitted and accepted for these new items, we
proposed to also calculate a single payment amount for used items based
on 75 percent of the single payment amount for new items. In addition,
we proposed to calculate a single payment amount for the rental of
these items based on 10 percent of the single payment amount for new
items. We stated our belief that calculating single payment amounts for
used items and items rented on a monthly basis based on bids submitted
and accepted for new items will simplify the bidding process and will
not create problems with access to used items or rented items in this
category.
Comment: One commenter stated that inexpensive and routinely
purchased DME items included in competitive bidding should be purchased
items only. The commenter believed that the additional expense for
contract suppliers to bill for rental items is prohibitive. The
commenter added that, for inexpensive and routinely purchased items,
the cost of billing and collection must be done numerous times at a
substantial cost to the supplier.
Response: There are certain items, such as pneumatic compression
devices, that are routinely purchased but very expensive and may only
be needed on a short-term basis. We believe that the option for renting
these items is necessary in order to enable beneficiaries to save
money, and we will allow beneficiaries to continue to do so under the
competitive bidding programs.
b. DME Items Requiring Frequent and Substantial Servicing (Sec.
414.408(h)(7))
In the May 1, 2006 proposed rule (71 FR 25673), we proposed that
bids be submitted for the monthly rental of items in this payment
category with the exception of continuous passive motion exercise
devices. We proposed that bids be submitted for the daily rental of
continuous passive motion exercise devices. For items in this category
other than continuous passive motion exercise devices, we stated that
this proposal would be consistent with Sec. 414.222(b) of our existing
regulations.

[[Page 18033]]

Coverage of continuous passive motion exercise devices is limited to 21
days of use in the home following knee replacement surgery. Therefore,
payment can only be made on a daily basis as opposed to a monthly basis
for this item.
Based on the bids submitted and accepted for these items, we would
calculate single payment amounts for the furnishing of these items on a
rental basis.
c. Oxygen and Oxygen Equipment (Sec. 414.408(i))
If included under a competitive bidding program, we proposed that
the single payment amounts for oxygen and oxygen equipment would be
calculated based on separate bids submitted and accepted for furnishing
on a monthly basis of each of the oxygen and oxygen equipment
categories of services described in Sec. 414.226(b)(1)(i) through
(b)(1)(iv).
Subsequent to the publication of the May 1, 2006 proposed rule, we
issued a final rule that implemented new payment classes for oxygen and
oxygen equipment furnished for years after 2006 (CMS-1304-F: Home
Health Prospective Payment System Rate Update for Calendar Year 2007
and Deficit Reduction Act of 2005; Changes to Medicare Payment for
Oxygen Equipment and Capped Rental Durable Medical equipment (71 FR
65884)). In accordance with these new rules, we will now calculate the
single payment amounts for oxygen and oxygen equipment based on the
separate bids submitted and accepted for the furnishing on a monthly
basis of each of the oxygen and oxygen equipment payment classes
described in Sec. Sec. 414.226(c)(1)(i)-(v).
We refer the reader to section VI.D.1. of this final rule where we
discuss a new provision at Sec. 414.408(i)(2) relating to additional
payments to contract suppliers that must begin furnishing oxygen
equipment after the rental period has already begun to a beneficiary
who is no longer renting the item from his or her previous supplier
because the previous supplier elected not to become a grandfathered
supplier or the beneficiary elected to change suppliers.
d. Capped Rental Items (Sec. 414.408(h))
With the exception of power wheelchairs, payment for items that
fall into this payment category is currently made on a rental basis
only. The rental fee schedule payments for months 1 through 3 are based
on 10 percent of the purchase price for the item as determined under
Sec. 414.229(c) of our existing regulations. The rental fee schedule
payments for months 4 through 15 are based on 7.5 percent of the
purchase price for the item as determined under Sec. 414.229(c) of our
existing regulations. Section 5101(a) of the DRA of 2005 amended
section 1834(a) of the Act to require that on the first day that begins
after the 13th continuous month during which payment is made for a
capped rental item, the supplier of the item must transfer title to the
item to the individual. Since this change does not apply to
beneficiaries using a capped rental item prior to January 1, 2006,
these beneficiaries may still elect either to take ownership of the
item after 13 months of continuous use or to continue renting the item
beyond 13 months of continuous use. In addition, the DRA leaves intact
the rule under which a supplier must offer the beneficiary the option
to purchase a power wheelchair at the time the supplier initially
furnishes the item (in which case payment would be made for the item on
a lump-sum basis). However, with regard to all other capped rental
items for which the rental period begins after January 1, 2006, the DRA
requires the supplier to transfer title to the item to the beneficiary
after 13 months of continuous use.
We proposed that the lump sum purchase option for power wheelchairs
be retained under the Medicare DMEPOS Competitive Bidding Program. At
the time we issued the May 1, 2006 proposed rule, this purchase option
could be found in Sec. 414.229(d) of our regulations. In accordance
with a final rule that we subsequently published in the Federal
Register on November 9, 2006 (71 FR 65884), the purchase option for
power wheelchairs furnished beginning on or after January 1, 2006, can
be found in Sec. 414.229(h). We also proposed that separate payment
for reasonable and necessary maintenance and servicing only be made for
beneficiary-owned DME and that payment for maintenance and servicing of
rented items would be included in the single payment amount for rental
of the item.
We also proposed in the May 1, 2006 proposed rule that ``purchase''
bids be submitted for the furnishing of new items in the capped rental
category. Based on these bids, a single payment amount for purchase of
a new item will be calculated for each item in this category for the
purpose of determining both the single payment amount for the lump sum
purchase of a new power wheelchair, and for calculating the single
payment amounts for the rental of all items in this category. In cases
where the beneficiary elects to purchase a used power wheelchair, the
single payment amount for the lump sum purchase of the used power
wheelchair would be based on 75 percent of the single payment amount
for a new power wheelchair. In the case of all items in this category
that are furnished on a rental basis, the single payment amount for
rental of the item for months 1 through 3 would be based on 10 percent
of the single payment amount for purchase of the item, and the single
payment amount for rental of the item for months 4 through 13 would be
based on 7.5 percent of the single payment amount for purchase of the
item. We stated our belief that calculating single payment amounts for
used items and items rented on a monthly basis based on bids submitted
and accepted for new items will simplify the bidding process and will
not result in problems with access to used items or rented items in
this category.
Comment: One commenter believed that the rule does not address
situations when a supplier has to rent an item to a beneficiary and the
item is defined by the manufacturer as ``single patient use only.'' The
commenter also believed that the rule does not address what happens to
those products should the patient die. The commenter also questioned
how CMS will handle the rental of products that have limited
manufacturer warranties.
Response: If a beneficiary dies during the period in which he or
she is renting an item, the contract supplier would retain ownership of
the item. As is the case today, if the item is designated by the
manufacturer for a ``single patient use only,'' meaning that it cannot
be used by other beneficiaries, the contract supplier may not furnish
it to a new beneficiary. Medicare currently does not pay for costs that
are covered by manufacturers' warranties and this policy will not
change under competitive bidding.
Comment: One commenter suggested that CMS limit to discrete
situations a requirement that contract suppliers of power wheelchairs
offer rental items. The commenter was concerned that this rule would
require suppliers to float a large volume of loans to subsidize
rentals. The commenter further believed that most beneficiaries
requiring power mobility have chronic progressive conditions that
require them to keep the equipment for a long period of time.
Response: We disagree with the commenter. Power wheelchairs are
very expensive and may only be needed on a short-term basis. The option
for renting these items is necessary to enable beneficiaries to save
money, and

[[Page 18034]]

for this reason, we will allow them to be rented under the competitive
bidding programs.
We refer readers to section VI.D.1. of this final rule where we
discuss additional payments to contract suppliers for capped rental DME
when a contract supplier must begin furnishing a capped rental item
during the rental period to a beneficiary who is no longer renting the
item from his or her previous supplier because the previous supplier
elected not to become a grandfathered supplier or the beneficiary
elected to change suppliers.
e. Enteral Nutrients, Equipment, and Supplies (Sec. Sec. 414.408(f),
(g)(2)-(3), and (h)(4))
Enteral nutrients, equipment, and supplies are currently paid under
Medicare Part B on a purchase or rental basis. Section 6112(b)(2)(A) of
the OBRA '89 limits the rental payments to 15 months. To be generally
consistent with the bidding requirements discussed above for capped
rental DME, in the May 1, 2006 proposed rule (71 FR 25674), we proposed
that bids be submitted for the purchase of new items in this category.
Based on the bids submitted and accepted for new items, we would
calculate a single payment amount for rented items for months 1 through
3 based on 10 percent of the single payment amount for new items. The
single payment amount for rented items for months 4 through 15 would be
based on 7.5 percent of the single payment amount for new items. In
cases where the beneficiary elects to purchase enteral nutrients,
equipment, and supplies the single payment amount for new enteral
nutrients, equipment, and supplies would be based on the bids submitted
and accepted for new enteral nutrients, equipment, and supplies, and
the single payment amount for used enteral equipment would be based on
75 percent of the single payment amount for the purchase of new enteral
equipment.
Based on the bids submitted and accepted for new items, we would
calculate a single payment amount for purchase of enteral nutrients,
equipment, and supplies.
Comment: One commenter noted that intravenous medication and
enteral nutrients, equipment, and supplies should not be included in
competitive bidding. The commenter did not believe it is appropriate to
revise the payment methodology in this rule. The commenter suggested
that CMS should not revise the enteral nutrients, equipment, and
supplies fee schedule without formal comments from the industry.
The commenter stated that because parenteral nutrients, equipment,
and supplies were never intended to be included in competitive bidding,
it is unclear why CMS proposed to revise this payment methodology at
this time when some beneficiaries are attempting to coordinate their
intravenous therapy needs between Medicare Part B and Part D.
Several commenters stated that, under the proposed rule, payment
for enteral pumps would be determined as if enteral pumps were a capped
rental item. They stated that enteral pumps fall under the prosthetic
device benefit and are paid under a specific fee schedule. These
commenters added that there is no basis for the change in payment
methodology for enteral nutrients, equipment, and supplies. Another
commenter noted that CMS should modify the proposed payment structure
for enteral pumps consistent with current fee schedule policy.
Response: In accordance with section 1847(a)(2)(B) of the Act,
parenteral nutrients, equipment, and supplies cannot be part of the
Medicare DMEPOS Competitive Bidding Program. However, the same section
directs that enteral nutrients, equipment, and supplies be included in
the program. In accordance with section 1847(a)(6) of the Act, the
payment basis determined under the Medicare DMEPOS Competitive Bidding
Program for enteral nutrients, equipment, and supplies replaces the
payment basis that would otherwise apply under section 1842(s)(1) of
the Act and 42 CFR Part 414, Subpart C of our regulations. Therefore,
the payment methodology we establish for enteral nutrients, equipment,
and supplies furnished under this program will replace the fee schedule
methodology for those items. We proposed to retain many of the same
rules that currently govern the rental or purchase of enteral
nutrients, equipment, and supplies to make the transition to
competitive bidding easier for both suppliers and beneficiaries.
However, under Sec. 414.408(f), we are establishing a process for a
supplier to bid on the purchase price for a new enteral pump. However,
payments will be made on a rental basis if the beneficiary chooses to
obtain the item on a rental basis or a purchase basis if the
beneficiary chooses to obtain the item on a purchase basis. We also
note that this rule does not supersede any laws for rules that govern
whether a particular drug is covered under Medicare Part B or Part D.
f. Maintenance and Servicing of Enteral Nutrition Equipment (Sec.
414.408(h)(5))
Section 6112(b)(2)(B) of OBRA '89 requires that we pay for
maintenance and servicing of enteral nutrition equipment after monthly
rental payments have been made for 15 months. The maintenance and
servicing payments are to be made in amounts that we determine are
reasonable and necessary to ensure the proper operation of the
equipment. Since October 1, 1990, program instructions have specified
when and how these payments are made. These program instructions are
currently found at section 40.3 of Chapter 20 of the Medicare Claims
Processing Manual (Pub. 100-04). These instructions provide that
maintenance and servicing payments may be made beginning 6 months after
the last rental payment for the equipment and no more often than once
every 6 months for actual incidents of maintenance where the equipment
requires repairs and/or extensive maintenance. Extensive maintenance
involves the breaking down of sealed components or performance of tests
that requires specialized testing equipment not available to the
beneficiary or nursing facility. The program instructions also state
that the maintenance and servicing payments cannot exceed one-half of
the rental payment amounts for the equipment.
Under the Medicare DMEPOS Competitive Bidding Program, we proposed
at Sec. 414.408(i)(3) (redesignated as Sec. 414.408(h)(4) in this
final rule) that the monthly rental payments for enteral nutrition
equipment for months 1 through 3 be equal to 10 percent of the single
payment amounts for the purchase of the new enteral nutrition
equipment. We proposed that for months 4 through 15, the monthly rental
payment amounts would be equal to 7.5 percent of the single payment
amounts for the purchase of new items. We proposed that the contract
supplier to which payment is made in month 15 for furnishing enteral
nutrition equipment on a rental basis must continue to furnish,
maintain, and service the pump for as long as the equipment is
medically necessary. In addition, we proposed to establish the
maintenance and service payments under proposed Sec. 414.408(i)(4)
(redesignated as Sec. 414.408(h)(5) in this final rule) for enteral
nutrition equipment so that they are equal to 5 percent of the single
payment amounts for the purchase of new enteral nutrition equipment.
This would limit the payment rate for maintenance and service to one-
half of the rental payment amount for the first

[[Page 18035]]

month of rental, which is similar to the program instructions mentioned
above. The provisions of the proposed rule are similar to current
Medicare payment rules in section 40.3 of Chapter 20 of the Claims
Processing Manual.
g. Supplies Used in Conjunction With DME (Sec. 414.408(g)(1))
We proposed under proposed Sec. 414.408(h)(1) that bids be
submitted for the purchase of supplies necessary for the effective use
of DME, including drugs (other than inhalation drugs). Based on the
bids submitted and accepted for these items, we would calculate single
payment amounts for the furnishing of these items on a purchase basis.
h. Off-the-Shelf (OTS) Orthotics (Sec. 414.408(g)(4))
We proposed under proposed Sec. 414.408(h)(4) that bids be
submitted for the purchase of OTS orthotics. Based on the bids
submitted and accepted for these items, we would calculate single
payment amounts for the furnishing of these items on a purchase basis.
Comment: One commenter agreed with the proposed distinction for
prosthetics and orthotics.
Response: We agree with the commenter because the statute
distinguishes between prosthetics and orthotics.
In summary, after consideration of all of the public comments
received on the bidding requirements and associate payment rules
described above, we are renumbering proposed Sec. Sec. 414.408((g)
through (j) as Sec. Sec. 414.408(f) through (i), respectively, and
finalizing these sections (with the exception of Sec. 414.408(h)(2)
and (i)(2)), which have been added and finalized as described above,
and with additional changes.

VII. Conditions for Awarding Contracts for Competitive Bids

In proposed Sec. 414.414, we set forth a series of proposals
regarding how we would evaluate and select suppliers for contract award
purposes under the Medicare DMEPOS Competitive Bidding Program.
Proposed Sec. 414.414(a) provides generally that the rules in Sec.
414.414 govern the evaluation and selection of suppliers under the
program. The specifics of our other proposals are discussed below:

A. Quality Standards and Accreditation

Section 1847(b)(2)(A)(i) of the Act specifies that a contract may
not be awarded to any entity unless the entity meets applicable quality
standards specified by the Secretary under section 1834(a)(20) of the
Act. Section 1834(a)(20) of the Act instructs the Secretary to
establish and implement quality standards for all DMEPOS suppliers in
the Medicare program, not just for suppliers subject to competitive
bidding or in CBAs. All suppliers must meet these quality standards to
be eligible to submit claims to the Medicare program, irrespective of
the Medicare DMEPOS Competitive Bidding Program. The quality standards
are to be applied by recognized independent accreditation organizations
that have been designated by the Secretary under section 1834(a)(20)(B)
of the Act. Section 1834(a)(20)(E) of the Act explicitly authorizes the
Secretary to establish the quality standards by program instruction or
otherwise after consultation with representatives of relevant parties.
We proposed that a grace period may be granted for suppliers that have
not had sufficient time to obtain accreditation before submitting a
bid. If a supplier does not then successfully attain accreditation, we
will suspend or terminate the supplier contract. The length of time for
the grace period will be determined by the accrediting organizations'
ability to complete the accrediting process within each competitive
bidding area. The length of time of the grace period will be specified
in the RFB for each competitive bidding program.
In the May 1, 2006 proposed rule, we indicated that we had
consulted with the PAOC and determined that it is in the best interest
of the industry and beneficiaries to select the accreditation
organizations and publish the quality standards through program
instructions in order to ensure that suppliers that wish to participate
in competitive bidding will know what standards they must meet in order
to be awarded a contract. We proposed in Sec. 414.414(c)(1) that all
bidding suppliers must satisfy the quality standards in order to be
eligible to participate in the Medicare DMEPOS Competitive Bidding
Program. In proposed Sec. 414.414(c)(2), we proposed that all bidding
suppliers must be accredited by a CMS-approved accreditation
organization, as defined under 42 CFR 424.57(a), but stated that a
supplier would be considered to be grandfathered if it had received a
valid accreditation before the CMS-approved accreditation organizations
were designated and the accreditation was granted by an organization
that CMS designates as a CMS-approved accreditation organization under
42 CFR 424.58.
To expedite the accreditation process for contract suppliers under
the Medicare DMEPOS Competitive Bidding Program, we finalized the
requirements for accreditation organizations as a new Sec. 424.58 as
part of the DMEPOS provisions in the FY 2007 IRF final rule (71 FR
48354). We published the list of the selected accreditation
organizations and the final quality standards through program
instructions and posted the response to comments document on the
quality standards. The names of the accreditation organizations and the
final quality standards and our responses to public comments on the
quality standards and on the portion of the proposed rule pertaining to
the quality standards are posted on the CMS Web site at: http://www.cms.hhs.gov/competitiveAcqforDMEPOS
.

B. Eligibility (Sec. 414.414(a) Through (c))

In the May 1, 2006 proposed rule (71 FR 25675), we proposed in
Sec. 414.414(b)(1) that all bidders must meet enrollment standards to
be considered for selection as a contract supplier under the Medicare
DMEPOS Competitive Bidding Program. These standards are included in the
supplier standards regulation at Sec. 424.57. In addition, we proposed
Sec. 414.414(b)(2), that each bidder must certify in its bid that its
high level employees, chief corporate officers, members of board of
directors, affiliated companies and subcontractors are not now and have
not been sanctioned by any governmental agency or accreditation or
licensing organization. In the alternative, the bidding supplier must
disclose information about any prior or current legal actions,
sanctions, or debarments by any Federal, State or local program,
including actions against any members of the board of directors, chief
corporate officers, high-level employees, affiliated companies, and
subcontractors.
In the preamble to the May 1, 2006 proposed rule (71 FR 25675) we
stated that sanctions would include, but are not limited to, debarment
from any Federal program, OIG sanctions, or sanctions issued at the
State or local level. In addition, we proposed that the bidder must
have all State and local licenses required to furnish the items that
are being bid (proposed Sec. 414.414(b)(3)). Finally, we proposed that
the supplier must agree to all of the terms in the contract outlined in
the RFBs (proposed Sec. 414.414(b)(4)). We stated in the preamble to
the May 1, 2006 proposed rule (71 FR 25675) that we would suspend or
terminate a contract if a supplier loses its good standing with us or
any other government agency.
Comment: Several commenters suggested that CMS require all contract
suppliers to be physically located in the CBA for which they were
awarded a

[[Page 18036]]

contract. Other commenters believed that relying on physical location
would prevent participation of many suppliers, including several
suppliers with capacity to operate on a national scale. The commenters
believed that relying on physical location could cause product supply
issues. Other commenters requested that CMS clarify whether a supplier
can submit a bid if the supplier is not physically located in the CBA,
but can show that it has a presence within the CBA. They asked whether
CMS would quantify this for evaluation purposes.
Response: We continue to believe that it is appropriate to allow
suppliers that do not maintain a physical location in a CBA to submit a
bid to furnish items in that CBA. One of the purposes of the program is
to create a competitive bidding payment structure that is more
reflective of a competitive market. By accepting bids from all
suppliers that can meet the requirements of the program, regardless of
their physical location, we believe that we will encourage a more
robust competition that will result in the best possible prices for
beneficiaries without compromising their access to DMEPOS. It is our
intent to review each bidder to determine whether it can meet the
requirements of the competitive bidding program for which they submit a
bid. One of these requirements will be that the supplier must be able
to demonstrate that it maintains a presence in the CBA. In other words,
the supplier must be able to furnish items to all beneficiaries who
maintain a permanent residence in the CBA, regardless of where that
beneficiary is located, including delivering items and providing
necessary training and ensuring that items are appropriately set-up in
the beneficiary's home. Thus, a supplier's ability to furnish items to
all beneficiaries in the CBA, and not its physical location, will be
evaluated to determine whether the supplier meets this requirement. We
would reject a bid if we determined that the bidding supplier did not
meet this bidding requirement, or any other bidding requirement.
Comment: Several commenters stated that CMS should apply an
appropriate screening process to determine which bidder qualifies for
consideration. They recommended that the bidding process include a 3-
step elimination process in this order: Accreditation; financial
standards; capacity assessment. The commenter suggested that only after
this 3-step screening is applied should CMS accept a bid.
One commenter asserted that a supplier's financial stability and
accreditation must take place before bid prices are arrayed and the
pivotal bid selected. Otherwise, the commenter believed the bidding
pool will be tainted by bids from suppliers that are not qualified. The
commenter suggested that bids from suppliers that have not satisfied
the quality standards, are not accredited, and/or that do not meet CMS'
financial and eligibility standards should not be considered in
selecting winning bids and setting payment amounts. The commenter also
suggested that the rule should clarify that the establishment of a
composite bid should only be completed for suppliers that meet the
bidding requirements.
Response: We will not award a contract to any supplier that does
not meet our bidding requirements. Those requirements include complying
with our eligibility standards, including compliance with the
enrollment standards in Sec. 424.57(c) of our regulations and
disclosure of certain compliance-related issues, financial standards,
quality standards, and accreditation standards unless a grace period
for obtaining accreditation applies. We may allow a grace period for
suppliers that have not yet been accredited at the time they submit
their bid. To qualify for this grace period, a supplier must have
submitted its application for accreditation to a CMS-approved
accreditation organization and be waiting for the accreditation process
to be completed by that organization. We expect that suppliers will
have obtained their accreditation before they are awarded a contract
under the Medicare DMEPOS Competitive Bidding Program. We will evaluate
a supplier's compliance with our bidding requirements before we
finalize the pivotal bids as well as the single payment amounts. We
will reject a bid that does not demonstrate that the supplier has met
our bidding requirements. As a result, only bids from eligible,
qualified, and financially sound suppliers will be used to determine
the single payment amounts and select contract suppliers.
We note that although we will be considering each supplier's
projected capacity as part of our determination of where to set the
pivotal bid.
Comment: One commenter stated that the proposed rule indicated that
suppliers would have to disclose information on debarments, sanctions,
or other legal actions affecting them. However, Form A, the application
section of the RFB, requires suppliers to disclose information about
pending or prior investigations. The commenter noted that
investigations are merely fact-finding tools that do not presume guilt
and should not be used to negatively impact a supplier's bid
evaluation. Another commenter stated that the term ``sanctioned'' is
subject to being interpreted differently by each supplier. The
commenter suggested that CMS detail what specific types of
``sanctions'' should be included in the disclosure. In addition, the
commenter suggested that CMS more clearly define what it meant when it
stated that bidding suppliers would have to ``certify'' in their bids
that they, their high-level employees, chief corporate officers,
members of the board of directors, affiliated companies, and
subcontractors are not, and have not been, sanctioned by any
governmental agency or accreditation or licensing organization. The
commenter also wanted to know if CMS intends for the certification to
take the form of a simple attestation or whether CMS would require
suppliers to sign a prescribed legal statement testifying to the
veracity of the disclosures or lack of disclosures.
Response: We agree with this comment that investigations are not in
themselves evidence of guilt. We did not propose in the May 1, 2006
proposed rule to require a bidding supplier to disclose information in
its bid about pending and prior investigations, and this final rule
likewise does not require such disclosures. The RFB will conform to
this final rule. We are revising proposed Sec. 414.414(b)(2)(ii) so
that it clarifies what disclosures a supplier must make in its response
to the RFB. Specifically, we will require that each bidding supplier
must disclose information regarding--(1) Any revocations of a supplier
number; and (2) sanctions, program-related convictions as defined in
section 1128(a)(1) through (a)(4) of the Act, exclusions, or debarments
imposed against the supplier, its high-level employees, chief corporate
officers, members of the board of directors, affiliated companies, and
subcontractors by any Federal, State, or local agency. We are
finalizing proposed Sec. 414.414(b)(2)(i) to require a supplier to
certify in its bid that this information is complete and accurate. We
might reject a bid based on these disclosures. As discussed more fully
below, we might conclude that a contract supplier has breached its
contract if we discover that the contract supplier did not fully comply
with these disclosure requirements, or if it is sanctioned or debarred,
has legal action taken against it, or falls out of compliance with the
Medicare program requirements (compliance with which we characterized
in the proposed rule as

[[Page 18037]]

the supplier being in ``good standing'' with CMS), including enrollment
requirements set forth at Sec. Sec. 424.500 et seq., during the
contract term.
We have added a cross-reference to final Sec. 414.414(b) to
indicate that networks (discussed more fully in section XII. of this
final rule) must also meet the network requirements found in final
Sec. 414.418.
After consideration of public comments, we are finalizing Sec.
414.414(a) without modification. We are finalizing Sec. Sec.
414.414(b)(1)-(3) with the changes discussed above and with additional
technical changes.

C. Financial Standards (Sec. 414.414(d))

Section 1847(b)(2)(A)(ii) of the Act specifies that we may not
award a contract to an entity unless the entity meets applicable
financial standards specified by the Secretary, taking into account the
needs of small providers. Applying financial standards to suppliers
assists us in assessing the expected quality of suppliers, estimating
the total potential capacity of selected suppliers, and ensuring that
selected suppliers are able to continue to serve market demand for the
duration of their contracts. Ultimately, we believe that financial
standards for suppliers will help maintain beneficiary access to
quality services.
Therefore, as part of the bid selection process, we proposed that
the RFBs would identify the specific information we will require to
evaluate suppliers (proposed Sec. 414.414(d)). We noted that this
information may include: a supplier's bank reference that reports
general financial condition, credit history, insurance documentation,
business capacity and line of credit to fulfill the contract
successfully, net worth, and solvency. We welcomed comments on the
financial standards, in particular the most appropriate documents that
would support these standards. We found that, in the demonstration,
general financial condition, adequate financial ratios, positive credit
history, adequate insurance documentation, adequate business capacity
and line of credit, net worth, and solvency were important
considerations for evaluating financial stability.
Comment: Several comments argued that the financial standards were
too strict for certain suppliers and should be flexible enough to
regulate mail order suppliers, small local suppliers, SNFs, departments
of hospitals, retail pharmacies, and publicly-traded and privately-held
family firms. The commenters stated that if financial standards are too
restrictive, qualified suppliers might not be able to participate in
the Medicare DMEPOS Competitive Bidding Program. They added that,
conversely, if financial standards are too lax, suppliers may be
financially unable to meet the challenges of a competitive market.
Response: We have revised proposed Sec. 414.414(d) to indicate
that the RFB form will specify the documents required as part of the
bid application and that each supplier must submit this documentation
along with its bid. We agree with the commenters that it is important
to have financial standards that ensure suppliers are able to meet the
challenges of competitive bidding and can fulfill their contract
obligations. However, we also agree that our financial standards should
not be so burdensome that suppliers, and especially small suppliers,
cannot satisfy them. After further consideration and in response to
comments, we believe that the proposed financial documentation
discussed in the preamble to the proposed rule (71 FR 25675) would be
too burdensome, particularly for small suppliers. Therefore, in order
to obtain a sufficient amount of information about each supplier while
minimizing the burden on both bidding suppliers and the bid evaluation
process, we will require that for the initial round of competition,
suppliers must submit certain schedules from their tax returns, a copy
of the 10K filing report from the immediate 3 years immediately prior
to the date on which the bid is submitted (if the supplier is publicly
traded) certain specified financial statement reports, such as cash
flow statements, and a copy of their current credit report, which must
have been completed within 90 days prior to the date in which the
supplier submits its bid and must have been prepared by one of the
following: Experian; Equifax; or TransUnion. All documents that are not
prepared as part of a tax return must be certified as accurate by the
supplier and must be prepared on an accrual or cash basis of
accounting. This financial information will allow us to determine
financial ratios, such as a supplier's debt-to-equity ratio, and credit
worthiness, which will allow us to assess a supplier's financial
viability.
We will generally require that suppliers submit the same types of
information for subsequent competitions, but we might choose to add or
delete specific document requests as we gather experience on what
financial information most accurately predicts whether a suppler is
financially stable enough to participate in the Medicare DMEPOS
Competitive Bidding Program.
Comment: One commenter suggested that CMS also publish the criteria
it will use to assess supplier's financial stability and how it will
rank suppliers based on these criteria. The commenter stated that bank
statements should only be requested when we need to resolve doubts
about the supplier's other submissions. The commenter believed that if
we maintain the requirement for bank statements, the statements need to
be defined for the period for which we are requesting the financial
information.
Response: As we explained above, we recognize that our collection
of financial information must be comprehensive enough to allow us to
assess a supplier's financial soundness, but not so burdensome as to
encumber the bidding process (especially for small suppliers) and the
bid evaluation process. Therefore, as stated above, we will require
that for the initial round of competition, suppliers must submit
certain schedules from their tax returns, a copy of their 10K filing
report from the 3 years immediately prior to the date on which the bid
is submitted (if the supplier is publicly traded), certain specified
financial statement reports, such as cash flow statements, and a copy
of their current credit report, which must have been completed within
90 days prior to the date in which the supplier submits its bid and
must have been prepared by one of the following: Experian; Equifax; or
TransUnion.
We will generally require that suppliers submit the same types of
information for subsequent competitions, but we might choose to add or
delete specific document requests as we gather experience on what
financial information most accurately predicts whether a suppler is
financially stable enough to participate in the Medicare DMEPOS
Competitive Bidding Program.
Comment: Several commenters stated that CMS should consider the
supplier's debt-to-equity ratio (long-term debt divided by
shareholders' equity). They indicated that this is a measurement of a
supplier's capacity to borrow and expand. One commenter indicated,
however, that this measurement will be problematic when applied to
private firms. The commenters suggested that an alternative would be to
require the EBITDA (earnings before interest, taxes, depreciation and
amortization)-to-debt ratio because this is more difficult to
manipulate. The commenter suggested that CMS could also use the quick
ratio (current assets minus inventory divided by current liabilities)
because this measurement is favored by lending institutions. Some
commenters

[[Page 18038]]

indicated that CMS should also define the accounts receivable as the
quick ratio (less than 180 days sales outstanding). They indicated that
this ratio shows how long it takes the supplier to collect money owed
and measures a supplier's liquidity and ability to meet short-term
operating needs. Some commenters also suggested that CMS inquire as to
how long a supplier has been in business.
Commenters also suggested that the information that CMS collects
should include 2 years of financial statements prepared in accordance
with generally accepted accounting principles. Some commenters
recommended the financial statements be accompanied by a compilation,
review, or audit report from an independent certified public
accountant, a certificate of insurance verifying a minimum of $1
million of liability coverage, and a letter from a primary
institutional lender verifying current lending relationship and the
potential borrowing capacity of the supplier. Commenters also
recommended that CMS receive a credit report from a recognized credit
rating organization. One commenter wanted CMS to define a set ratio,
for example, asset ratio should be not be higher than (X percent) and
the asset to liability ratio should be no lower than (X percent).
Response: We will use appropriate financial ratios to evaluate
suppliers. If suppliers do not meet certain ratios, they could be
disqualified from the competition. Examples of ratios we might consider
include a supplier's debt-to-equity ratio and a financial credit
worthiness score from a reputable financial services company. The
supplier standards in Sec. 424.57(c)(10) require that the supplier
carry a $300,000 comprehensive liability policy. We believe that
imposing an additional cost for maintaining $1 million in liability
coverage is not necessary. We will be reviewing all financial
information in the aggregate and will not be basing our decision on one
ratio but rather overall financial soundness.
As we noted above, we will require for CY 2007 competition that
suppliers submit a credit report from one of three credit bureaus
identified above to assist in determining a supplier's financial
soundness. For all competition rounds, we will specify in the RFB what
financial information must be submitted.
Comment: Several commenters recommended that CMS consider using
Dunn and Bradstreet accounts payable ratings (paydex score) which
measures how quickly a company pays its accounts payable. The
commenters indicated that this information provides an additional
measure of whether the supplier is, in fact, able to meet its current
obligations.
Response: We will require suppliers to provide us with information
which is included on a supplier's credit report when they submit their
bids to assist us in determining their financial soundness.
Comment: One commenter argued that CMS must recognize that publicly
traded companies are different from privately held community
pharmacies, as they have fiduciary obligations to shareholders. Other
commenters argued that the financial standards proposed are too
burdensome and discourage small suppliers from participating. They
recommended that CMS define different standards for small suppliers and
pharmacies. The commenters suggested that the standards be limited to
credit report, lien searches, credit references and 3 years' worth of
tax returns.
Response: We are committed to ensuring the financial soundness of
contract suppliers in the competitive bidding program. In previous
responses, we have described the financial documentation that will
generally be required for the competitions. We have determined that we
can obtain the necessary information through collection of a limited
number of financial documents and believe that the submission of this
information will be less burdensome for all suppliers, including small
suppliers. We believe we have balanced the needs of small suppliers and
the needs of the beneficiaries in requesting documentation that will
provide us with sufficient information to determine the financial
soundness of a supplier.
After consideration of the public comments received, we are
revising discussed proposed Sec. 414.414(d) so that it now specifies
that a supplier must submit the financial information specified in the
RFB. For purposes of the CY 2007 competition, the financial documents
discussed in this section will be those that the RFB will require.
These requirements are as follows:
Suppliers that file individual tax returns that include
business taxes are required to submit the Schedule C (the Profit and
Loss Statement) from their 1040 Tax Return for the 3 years immediately
prior to the date on which the bid is submitted. In addition to the tax
return information, these suppliers are also required to submit a
Compiled Balance Sheet (Statement of Financial Position), a Statement
of Cash Flow (Statement of changes in Financial Position) and a
Statement of Operations (Income Statement) for the three years
immediately prior to the date on which the bid is submitted. Suppliers
are also required to submit a copy of their current credit report,
which must have been completed within 90 days prior to the date on
which the bid is submitted. The credit report must be prepared by one
of the following: Experian; Equifax; or TransUnion.
Limited partnerships and partnerships must submit their
Schedule L from their 1065, U.S. Return of Partnership Income for the 3
years immediately prior to the date on which the bid is submitted,
along with all other financial documentation that must be submitted by
a supplier that files an individual tax return.
Suppliers that file corporate tax returns are required to
submit the Schedule L (Balance Sheet) from their tax return for the 3
years immediately prior to the date on which the bid is submitted. In
addition to the tax return information, these suppliers are also
required to submit a Statement of Cash Flow (Statement of Changes in
Financial Position), and a Statement of Operations (Income Statement)
for the 3 years immediately prior to the date on which the bid is
submitted. Suppliers are also required to submit a copy of their
current credit report, which must have been completed within 90 days
prior to the date on which the supplier submits its bid. The credit
report must be prepared by one of the following: Experian; Equifax; or
TransUnion.
All documents that are not prepared as part of a tax
return must be certified as accurate by the supplier and must be
prepared on an accrual or cash basis of accounting.
Suppliers that are publicly traded companies must
additionally submit a copy of their 10-K Filing Reports filed with the
Securities Exchange Commission for the 3 years immediately prior to the
date on which the bid is submitted. If a supplier is a wholly owned
subsidiary of a publicly traded company, it must submit the parent
company's 10-K reports.
If a supplier does not have financial documentation for
one or more of the 3 years immediately prior to the date on which the
bid is submitted, then in addition to submitting the financial
documentation for the years in which it is available, the supplier must
also submit projected financial statements. The projected financial
statements must show what is likely to occur in the future based on key
financial and business assumptions of the present, and must include a
description of the financial and business assumptions.

[[Page 18039]]

For networks, the legal entity that submits the bid must
submit financial statements on behalf of each network member in one
complete package.
If a supplier is submitting an individual bid and is also
part of a network, the supplier must submit financial statements along
with both the individual bid and the network bid.

D. Evaluation of Bids (Sec. 414.414(e))

In the May 1, 2006 proposed rule (71 FR 25675), we proposed to
select the product categories that include individual items for which
we will require competitive bidding. We stated that individual products
would be identified by the HCPCS codes and would be further described
in the RFBs. We proposed that suppliers would be required to submit
bids for each individual item within each product category they are
seeking to furnish under the program, but would not be required to bid
for every product category.
1. Market Demand and Supplier Capacity (Sec. Sec. 414.414(e)(1) and
(e)(2))
Section 1847(b)(4)(A) of the Act requires that in awarding
competitive bidding contracts, the Secretary may limit the number of
contract suppliers in a CBA to the number necessary to furnish items to
meet the projected demand for items covered under the contract for the
CBA. Therefore, we proposed in proposed Sec. 414.414(e)(1) to
calculate expected beneficiary demand in a CBA for items in a product
category. We stated that in order to fulfill this statutory mandate,
the first step would be to determine the expected demand for an item in
a CBA. We proposed to calculate expected demand in each CBA in a
relatively straightforward way using existing Medicare claims. We
proposed to examine claims data to determine the number of units of
each item supplied to Medicare beneficiaries during the past 2 years,
and then to determine the number of new beneficiaries who have entered
the market during the last 2 years. We believed that 2 years' worth of
data would be sufficient to allow us to identify trend analyses and
utilization measurements. We also indicated that we would gather data
on the number of new FFS Medicare enrollees coming into a CBA and use
this number to project the number of new enrollees.
We discussed in the preamble to the May 1, 2006 proposed rule (71
FR 25675) how we proposed to calculate 2 years of claims on a monthly
basis to determine beneficiary demand. We stated that we would take
into consideration the expected demand over the total duration of the
contract and the seasonal effects (for example, an increase in
beneficiary population in Florida during the winter), and proposed to
use 2 years of data to identify any time trends. If there were no
seasonal effects or time trends, we proposed to use the average monthly
total and new patient figures as the market demand measures. However,
if there were seasonal effects or changes identified only during
certain months, we proposed that the maximum monthly total and new
patient figures would be used as the market demand measures. If trends
showed that there was noticeable growth or reduction in beneficiary
demand for products in an area, we proposed to take these factors into
consideration when developing estimates of beneficiary demand for
competitively bid items.
We proposed to adopt the following approach to estimate supplier
capacity to meet the projected demand in a CBA. First, we proposed to
analyze Medicare claims to determine how many items a supplier was
currently providing in the CBA, as well as in total. Second, as part of
the bid, we would ask suppliers to indicate how many units they were
willing and capable of supplying at the bid price in the CBA. We would
compare this information to what the supplier has dispensed to Medicare
beneficiaries in the past and what it specified in its response to the
RFB as its projected capacity. We proposed to require evidence of
financial resources to support market expansion, such as letters from
investors or lending agents. We would use this information to evaluate
the capacity of the bidder. Third, we proposed to compare expected
capacity and Medicare volume to determine how many suppliers we would
need in an area. For new suppliers, we would ask them for their
expected capacity, look at trend data for new suppliers in that area,
and examine the capacity of other suppliers in that area. We would need
to use these data to make estimates about capacity because we believe
that suppliers might have more capacity potential than they are
currently exhibiting.
During the DMEPOS competitive bidding demonstrations, demonstration
suppliers were able to expand their output to meet market demand and
replace market share previously provided by nondemonstration suppliers;
indeed, some demonstration suppliers were disappointed that they did
not gain more market share during the demonstration. We presented
numerous issues to the PAOC where we requested advice on issues such as
market capacity and demands. During the February 28, 2005 PAOC meeting,
we asked the panel to discuss the issue of demand and capacity. Several
members of the committee, based upon their expertise and knowledge of
the industry, suggested that most DMEPOS suppliers would be able to
easily increase their total capacity to furnish items by up to 20
percent and the increase could be even larger for products like
diabetes supplies that require relatively little labor.
We welcomed comments on our proposed approach for calculating
market demand and estimating supplier capacity. We were especially
interested in any information that would help us compare current
Medicare volume with potential capacity, including potential formulas
we could apply to determine capacity.
Comment: Several commenters argued that there was insufficient
information given as to how CMS will determine a supplier's capacity.
The commenters wanted to know if the projected capacity that suppliers
must identify in their responses to the RFB form was a bid commitment
or estimation. The commenters also noted that CMS did not describe what
criteria it will use to compare bidders (aside from bid price) and how
these criteria will be applied. They further suggested that CMS look at
a supplier's history and allow a 20-percent growth rate to determine
the supplier's capacity.
Response: We proposed that suppliers would have to estimate in
their response to the RFB how many items they would be able to furnish
in the CBA for the bid price. We also proposed that suppliers would be
required to submit documentation evidencing any planned business
expansion, such as letters from investors or lending agents. We will
look at this documentation, as well as the supplier's other financial
documentation to determine the ability of that supplier to furnish its
projected capacity. The capacity identified in the supplier's response
to the RFB form should represent the supplier's best estimation of the
number of items it can provide to Medicare beneficiaries in a given
CBA. We might, however, make two types of adjustments to a supplier's
projected capacity for purposes of finalizing the pivotal bid. First,
if a supplier estimates that it can furnish more than 20 percent of
what we determine to be the expected beneficiary demand for the product
category in the CBA, we will lower that supplier's capacity estimate to
20 percent. We believe that this capacity adjustment is necessary to
ensure that at least 5 suppliers have composite bids at or

[[Page 18040]]

below the pivotal bid for the product category, which will then enable
us to award contracts to at least those 5 suppliers. By awarding
contracts to at least 5 suppliers per product category, we expect that
there will be sufficient contract suppliers in the CBA to provide
beneficiaries with more variety and choice. However, we are confident
that, due to the nature of supplies that can be furnished via mail
order (for example, diabetic supplies) national or regional mail order
suppliers will easily be able to expand to meet very large demands.
Therefore, we do not believe it is necessary to ensure that there are
at least five national or regional mail order suppliers. If we were to
require at least five such suppliers, we believe it would dilute our
savings.
Second, we might further adjust a supplier's capacity if, after
making the initial adjustment discussed above, we conclude that the
supplier's financial and business expansion documentation do not
support the projected capacity stated in its bid. In determining
whether this further adjustment is necessary, we will give
consideration to the suggestion of the PAOC that a supplier's capacity
could easily be increased by up to 20 percent. We believe, however,
that this further adjustment may be necessary to limit the potential
that we would award contracts to an inadequate number of suppliers
based on inflated capacity projections that the suppliers would not be
able to actually meet. If we believe that this further adjustment is
necessary, we will lower the supplier's projected capacity to its
historical capacity, as evidenced by its financial documentation and
past claims data.
We note that after making these adjustments, if we are still unable
to award five contracts in a CBA because there are not enough qualified
suppliers, we will award at least 2 contracts to qualified suppliers
for the furnishing of that product category under a competitive bidding
program.
We also note that the adjustments we might make to a supplier's
projected capacity would not impact the supplier's ability to actually
furnish items if it is awarded a contract. In other words, a contract
supplier will be able to furnish items to all beneficiaries who wish to
receive them from it.
Comment: Some commenters stated that CMS must consider how changes
in coding, utilization, and documentation may affect the utilization
data for the last 2 years. They cited, for example, that changes in
wheelchair cushions and respiratory coding may affect the utilization
data.
Response: We proposed that we would calculate the expected
beneficiary demand for a product category in a CBA by using two years
of existing Medicare claims data, which we believe is sufficient to
allow us to identify changing trends in utilization. In calculating the
expected beneficiary demand for a product category in a CBA, we might
also evaluate data showing beneficiary demand for key high volume items
in the product category.
After consideration of the comments received, we are adopting as
final Sec. 414.414(e)(1), which provides that we will calculate the
expected beneficiary demand for items within a product category in each
CBA as part of the bid evaluation process. In addition, we are adding a
new Sec. 414.414(e)(2) to finalize our proposal to evaluate the total
supplier capacity that would be sufficient to meet beneficiary demand
for items in the CBA for the items in a product category.
2. Composite Bids (Sec. Sec. 414.402, 414.414(e)(3) and (4))
Because suppliers will be bidding for multiple items in a product
category, the lowest bid for each item will not always be submitted by
the same supplier. In this case, looking at the bids for individual
items would not tell us which suppliers should be selected since
different suppliers may submit the lowest bids for different items.
Therefore, in proposed Sec. Sec. 414.414(e)(2) and (e)(3)
(redesignated as Sec. 414.414(e)(3) and (e)(4) in this final rule), we
proposed to use a composite bid to compare all of the suppliers' bids
submitted for an entire product category in a CBA. We stated that using
a composite bid would be a way to aggregate a supplier's bids for
individual items within a product category into a single bid for the
whole product category. This would allow us to determine which
suppliers can offer the lowest expected costs to Medicare for all items
in a product category. To compute the composite bid for a product
category, we would multiply a supplier's bid for each item in a product
category by the item's weight and sum these numbers across items. The
weight of an item would be based on the utilization of the individual
item compared to other items within that product category based on
historic Medicare claims. Item weights would be used to reflect the
relative market importance of each item in the product category. We
would select item weights that ensure that the composite bid is
directly comparable to the costs that Medicare would pay if it bought
the expected bundle of items in the product category from the supplier.
The sum of each supplier's weighted bids for every item in a product
category would become the supplier's composite bid for that product
category.
We sought comment on the best method of weighting individual items
within a product category to determine the composite bid. We indicated
that one approach we were considering would be to set the weight for
each item based on the volume of the individual item's share compared
to the total utilization of the product category. Under this weighting
system, the composite bid would be exactly proportional to the expected
cost of furnishing the entire bundle of items. Therefore, if supplier 1
had a lower composite bid than supplier 2, it would also have a lower
expected cost of furnishing the entire product bundle that makes up the
product category. Another approach we considered was to set the weight
based on the payment amounts attributable to each DMEPOS fee schedule
item relative to the overall payment amount for the total product
category. We stated that this approach might better reflect the
relative value of each item because it is based on how much we actually
pay for an item, and that this was the approach that we used in the
first round of bidding in Polk County under the competitive bidding
demonstration program. However, we stated that we also found that this
approach could result in too much weight being placed on low-volume and
high-priced items. The first year evaluation report also found that
using the allowed charges as the weights could result in a supplier
that offered lower bids having a higher composite bid than a supplier
that offered a higher bid for individual items.
In the May 1, 2006 proposed rule, we used the volume of items or
units displayed in Table 5 of that rule (and as republished below) as
the basis of our examples, but we requested comments on which weighting
method should be used in calculating the composite. We also requested
comments on other methods of weighting that could be applied to
individual items.

Table 5.--Item Weights
------------------------------------------------------------------------
Item A B C All
------------------------------------------------------------------------
Units.................................... 5 3 2 10
Item Weight.............................. 0.5 0.3 0.2 1
------------------------------------------------------------------------

The example above shows how our proposed weight-setting methodology
would work. The expected volume for Items A, B, and C are 5, 3, and 2
units, respectively, for a total volume of 10 units. The item weight
for Item A is 0.5

[[Page 18041]]

(5/10), the weight for Item B is 0.3 (3/10), etc.
As explained above, the composite bid for a supplier would equal
the item weight times the item bid amount summed across all items in
the product category. The item weights would be the same for bidders
for the same product categories. In our example, supplier 1 bid $1.00
for item A, $4.00 for item B, and $1.00 for item C. The composite bid
for Supplier 1 = (0.5 * $1.00) + (0.3 * $4.00) + (0.2 * $1.00) = $1.90.
Table 6 shows the expected cost of the bundle based on each supplier's
bids. The expected costs are directly proportional to the composite
bids; the factor of proportionality is equal to the total number of
units (10) in the product category. We used the composite bid to
determine the expected costs for all of the items in the product
category based upon expected volume.

Table 6.--Composite Bids
----------------------------------------------------------------------------------------------------------------
Expected cost
Item A B C Composite bid of bundle
----------------------------------------------------------------------------------------------------------------
Units........................... 5 3 2 .............. ..............
Item weight..................... 0.5 0.3 0.2 .............. ..............
Supplier 1 bid.................. $1.00 $4.00 $1.00 $1.90 $19.00
Supplier 2 bid.................. $3.00 $3.00 $2.00 $2.80 $28.00
Supplier 3 bid.................. $2.00 $2.00 $2.00 $2.00 $20.00
Supplier 4 bid.................. $1.00 $2.00 $2.00 $1.50 $15.00
----------------------------------------------------------------------------------------------------------------

Under the proposed methodology, bid selection would proceed by
ranking the composite bids from lowest to highest (Table 6). In order
to ensure that we would pay less under competitive bidding than we
would under the current fee schedule, as is required under section
1847(b)(2)(A)(iii) of the Act, we would compute the expected cost of
the bundle of goods for comparison purposes. This would require us to
calculate the bid amount times the expected number of units that we
expect suppliers will furnish based on the most current Medicare claims
data and sum across each item by supplier. For example, if supplier 1
bid $1.00 for item A and we expected to purchase 5 units--$1.00 x 5
units = $5.00, item B--$4.00 x 3 units = $12.00, item C--$1.00 x 2
units = $2.00, the sum for these 3 items would be $19.00. As previously
noted, prior to selecting a supplier for a contract, we would ensure
that suppliers meet quality and financial standards.
Comment: One commenter stated that the bidding should not be so
complex. The commenter stated that the use of a weighted composite bid
is confusing and cumbersome. The commenter also stated that the weights
should be provided to each supplier prior to bidding. Other commenters
indicated that if the median methodology is used, bids should be
weighted by proposed capacity so that payment rates more accurately
represent the market of successful bidders.
Response: We understand the commenters' concern and believe we have
simplified the methodology as much as possible. We plan to provide the
weights for each item prior to bidding, so that bidders will be aware
of the weight given to each item. We stated in the proposed rule that
using a composite bid would be a way to aggregate a supplier's bids for
individual items within a product category into a single bid for the
whole product category. This would allow us to determine which
suppliers can offer the lowest expected costs to Medicare for all items
in a product category. To compute the composite bid for a product
category, we would multiply a supplier's bid for each item in a product
category by the item's weight and sum these numbers across items. In
the proposed rule, we defined the term ``item weight'' as a number
assigned to an item based on its beneficiary utilization rate in a
competitive bidding area when compared to other items in the same
product category.'' We are revising this definition to indicate that we
will use national beneficiary utilization data to determine the item
weights for the CBA because we believe that it results in a more
representative number that reflects the utilization rate for the item.
We believe that this weighting methodology will best reflect the
relative market importance of each item in the product category.
After consideration of the comments received, we are redesignating
proposed Sec. 414.414(e)(2) and (e)(3) as Sec. 414.414(e)(3) and
(e)(4) and adopting them as final with a technical change to paragraph
(e)(4) to clarify that we will array the composite bids from the lowest
``composite bid price'' to the highest ``composite bid price.'' We are
also revising the definition of ``item weight'' in Sec. 414.402.
3. Determining the Pivotal Bid (Sec. Sec. 414.414(e)(5) and (e)(6))
We proposed that the pivotal bid would be the point where expected
combined capacity of the bidders would be sufficient to meet expected
demands of beneficiaries for items in a product category. In the
example below, the projected demand would be for 1,000 units.
Therefore, the supplier 10's composite bid would represent the pivotal
bid, because that supplier's cumulative capacity of 1,100 would exceed
the projected demand of 1,000. The statute requires multiple winners,
so in all cases where we award contracts, we stated that we would need
to accept at least two winning bidders. All bidders that were eligible
for selection and whose composite bid for the product category was less
than or equal to the pivotal bid would be selected as winning bidders.
In the Table 7 below, for example, $135.00 would be the pivotal bid.
Suppliers 2, 3, 1, and 10 would then be selected as winning bidders
with supplier 10's composite bid becoming the pivotal bid. We
acknowledged that this approach may leave out other suppliers with very
close, but slightly higher bids.

[[Page 18042]]

Table 7.--Determining the Pivotal Bid
[Point where beneficiary demand is met by supplier capacity--For this example, beneficiary expected demand is
1,000 units--Supplier 10's bid is the pivotal bid]
----------------------------------------------------------------------------------------------------------------
Eligible for Cumulative
Supplier No. selection Composite bid Supplier capacity capacity
----------------------------------------------------------------------------------------------------------------
2.............................. Yes................... $100 100 100
3.............................. Yes................... 115 300 400
1.............................. Yes................... 120 400 800
10............................. Yes................... 135 300 1100
4.............................. Yes................... 140 500 1600
7.............................. Yes................... 150 100 1700
----------------------------------------------------------------------------------------------------------------
No longer being considered
----------------------------------------------------------------------------------------------------------------
5.............................. No.................... 120 n.c. n.c.
6.............................. No.................... 130 n.c. n.c.
8.............................. No.................... 175 n.c. n.c.
9.............................. No.................... 200 n.c. n.c.
----------------------------------------------------------------------------------------------------------------
n.c. = not calculated.

We also noted that we had considered the use of a competitive range
to determine the contract suppliers. In this approach, we would
determine a competitive range for the composite bid. We would array all
suppliers by their bids and eliminate all suppliers whose composite bid
is greater than the competitive range. We would then evaluate the
quality and financial standards only for those remaining suppliers.
During the demonstration, evaluating quality and financial
standards was time-consuming for the bid evaluation panel and required
bidders to provide extensive information on quality and finances. The
last two rounds of the demonstration used a competitive range to reduce
the burden on the bid evaluation panel and bidders. After evaluating
basic eligibility requirements, the composite bids were calculated and
arrayed, and a competitive range was selected with more than enough
suppliers to serve the market. Suppliers whose composite bids were
clearly outside of this range were not required to provide detailed
financial information, and the bid panel was not required to evaluate
the eligibility of these suppliers to participate. Suppliers within the
competitive range provided detailed financial information and had their
quality rigorously evaluated. The remaining suppliers were only
selected as contract suppliers if they met the quality and financial
standards and their composite bids were at or below the pivotal bid.
We also discussed in the proposed rule other options that we
considered to determine the pivotal bid. One of these options would
have been to make the pivotal bid depend on one of the summary
statistics (for example, mean, median, 45th percentile) associated with
the distribution of bids from eligible suppliers. For example, the
pivotal bid could have been set equal to the median bid submitted by
eligible suppliers. We stated that the advantage of this option would
have been that the pivotal bid could be set near the central
distribution of bids. We also considered including additional suppliers
whose bids were close to the central distribution as being eligible to
become a contract supplier. Both options would likely have affected the
number of contract suppliers. Finally, we noted that the exact summary
statistic or percentile could have been increased or decreased to
reflect the trade-off between the number of winners and program costs.
One negative aspect of this approach would have been that winners might
have insufficient capacity. In addition, with a given percentile
cutoff, the pivotal bid might have included an excessive number of
winning bidders. As the number of eligible bidders increased, so would
the number of winners. If additional bidders had higher costs, and
their bids fell into the upper half of the distribution, the pivotal
bid would increase, resulting in greater payments by the Medicare
program and a loss of savings.
Another option we discussed would have been to base the pivotal bid
on a target number of winners. For example, we might have decided to
select five winners in each product category. Suppliers might have
responded to this approach by bidding aggressively, knowing that only a
fixed number of winners would be guaranteed to be selected. A negative
aspect of this approach would have been that there is no assurance that
a predetermined target number of winners would have had sufficient
capacity to meet projected market demand. In addition, the target
number of winners must somehow be selected and this could have resulted
in selecting an arbitrary number. If too high, suppliers might have had
little incentive to bid aggressively.
We also considered an option to base the pivotal bid on a target
composite bid; for example, we could have chosen a target that was 20
percent below the DMEPOS fee schedule amount for that product category.
A possible advantage of this approach would have been that the target
composite bid could be set to ensure savings for the program. On the
other hand, we believed that suppliers might perceive this approach to
be anticompetitive. Rather than letting bidding and the market forces
determine the pivotal bid and fee schedule, we might have been viewed
as pre-ordaining the outcome. In addition, suppliers that bid below the
target composite bid might have had insufficient capacity to meet
projected market demand.
Comment: One commenter requested additional explanation as to what
cumulative capacity is and how it is calculated in the competitive
bidding program.
Response: The cumulative capacity is determined by arraying the
composite bids from the lowest to the highest, then calculating the
pivotal bid for the product category by ensuring that the number of
suppliers selected to furnish items for that product category in a CBA
have sufficient cumulative capacity to do so. We will determine the
cumulative capacity of bidding suppliers for the product category by
adding each supplier's projected or adjusted capacity. For example, if
supplier 1 states it can provide 15 units, supplier 2 states it can
provide 40 units, and supplier 3 states it can provide 35

[[Page 18043]]

units, the cumulative capacity of those suppliers is 90 units.
After consideration of the public comments we received, we are
redesignating proposed Sec. 414.414(e)(4) as Sec. 414.414(e)(5), and
finalizing newly redesignated Sec. 414.414(e)(5) with the changes
discussed above. We also are redesignating proposed Sec. 414.414(e)(5)
as Sec. 414.414(e)(6) and revising newly redesignated Sec.
414.414(e)(6) so that it now provides that the only suppliers we will
select for contract award purposes will be those suppliers that have
satisfied our eligibility, quality, accreditation (unless a grace
period applies), and financial requirements.
4. Assurance of Savings (Sec. 414.414(b)(2), 414.414(f))
Section 1847(b)(2)(A)(iii) of the Act prohibits awarding contracts
to any entity for furnishing items unless the total amounts to be paid
to contractors in a CBA are expected to be less than the total amounts
that would otherwise be paid. Under proposed Sec. 414.414(f), we
proposed to interpret this requirement to mean that contracts will not
be awarded to any entity unless the amounts to be paid to contract
suppliers in a CBA are expected to be less for a competitively bid item
than would have otherwise been paid. Therefore, we stated that we would
not accept any bid for an item that is higher than the current fee
schedule amount for that item. This approach would ensure that the
single payment amount for each item in a product category is equal to
or less than our current fee schedule amount for that item.
We acknowledged that an alternative interpretation of ``less than
the total amounts that would otherwise be paid'' could mean contracts
would not be awarded to an entity unless the amounts paid to contract
suppliers in a CBA for the product category are expected to be less
than what would have otherwise been paid for the entire product
category. During the demonstration, several product categories received
overall savings, whereas payment amounts increased for a few individual
items within those product categories. One concern we had with this
approach was that there might be a greater potential for shifting of
utilizations from one item to another higher priced item. We stated
that this approach might not result in adequate savings, and that we
believed a reasonable interpretation of the Act would be one in which
``the total amounts'' mean payment at the item level.
We specifically requested comments on the various methods for
assuring savings under the Medicare DMEPOS Competitive Bidding Program.
Comment: Numerous commenters disagreed with the proposed
requirement that bids must be at or below the current fee schedule for
an item. The commenters believed that this places artificial
constraints on a process that is designed to harness market forces.
They indicated that, if bids are submitted higher than the current fee
schedule, CMS should choose not to include that particular item in the
bidding product category.
Response: Section 1847(b)(2)(A)(iii) of the Act prohibits CMS from
awarding a contract to a supplier under a competitive bidding program
unless the total amounts to be paid to contractors in a CBA are
expected to be less than the total amounts that would otherwise be
paid. In order to ensure that the requirement is met and to guarantee
savings for the Medicare program, we must require the bids for each
item to be at or below the current fee schedule amount for the item in
order to preclude increases that may occur due to shifting to items
priced above the fee schedule. Without this safeguard, we are concerned
that suppliers might simply start furnishing the items priced above the
fee schedule rather than those that would normally be furnished because
of the potential for higher profits. In addition to increased
expenditures, because of a shift to items with higher payment amounts,
we might exceed the total amounts that we had been paying for
particular products as a group within a product category. This could
also result in less appropriate products being furnished to Medicare
beneficiaries. We believe that this requirement is necessary to
structure a competitive bidding program that reflects the requirements
of the statute.
Accordingly, we are adding a new Sec. 414.412(b)(2), which
provides that the bid for an item cannot exceed the payment amount that
would otherwise apply if the item was not included in the competitive
bidding program. In addition, we are finalizing proposed Sec.
414.414(f) with only technical changes.
5. Assurance of Multiple Contractors (Sec. 414.414(h))
Section 1847(b)(4)(B) of the Act specifies that the Secretary will
award contracts to multiple entities submitting bids in each area for
an item. In addition, section 1847(b)(2)(A)(iv) of the Act specifies
that contracts may not be awarded unless access of individuals to a
choice of multiple suppliers is maintained. As a result, we proposed
under proposed Sec. 414.414(g) (redesignated as Sec. 414.414(h) in
this final rule) that we would have multiple contract suppliers in each
CBA for each product category if at least two suppliers met all
requirements for participation, and the single payment amounts to be
paid to those suppliers did not exceed the fee schedule amounts for the
items that were bid. We acknowledged that offering choices to
beneficiaries, referral agents, and treating practitioners that order
DMEPOS for Medicare beneficiaries is important to maintain competition
among suppliers based on the quality of items. We stated that we had to
weigh that advantage against the disincentive for a supplier to submit
its best bid if we select too many suppliers to service a CBA. We
believe we will be able to have multiple suppliers servicing one
product category in a CBA and still accomplish the goals of competitive
bidding.
Comment: Several commenters recommended that CMS select more
suppliers than necessary to meet minimum demand. The commenters
believed that this will ensure a sufficient number of suppliers to
address contingency or emergency situations, such as a natural
disaster. Several commenters recommended that CMS use 130 percent of
anticipated capacity. A few commenters requested that CMS cap estimated
capacity per supplier when selecting winning bidders to preserve
competition and beneficiary choice. Some commenters recommended that
CMS cap each supplier's capacity at 20 percent, or 25 percent, of
anticipated demand to ensure that a small number of very large
suppliers do not become the only winning bidders.
Response: We anticipate that we will select a sufficient number of
suppliers to ensure beneficiary access. As we have explained above, we
may make adjustments to a supplier's projected capacity in order to
ensure that we award contracts to a sufficient number of suppliers. As
explained below, we are also modifying our proposed rule for
participation by small suppliers to set a small supplier target which
will be calculated by multiplying 30 percent times the number of
winning suppliers at or below the pivotal bid for each product
category. As a result, we will be able to ensure that small suppliers
have an opportunity to participate in the programs.
Comment: Several commenters observed that the proposed rule does
not mention whether CMS will consider the geographic distribution of
suppliers when determining the number of contract suppliers for each
product

[[Page 18044]]

category in each CBA. They believed that geographic distribution is
important to maintain local presence and for beneficiary convenience.
They suggested that CMS analyze capacity at the zip code level to
ensure that each zip code is served by several contract suppliers. They
also stated that there is precedent for determining geographic
distribution, citing that the TRICARE standard and the Medicare Part D
program have established guidelines for the required number of retail
pharmacies, depending on the type of area. One commenter also suggested
that any competitive bidding program for diabetic testing supplies
include a requirement that a minimum number of community-based
suppliers be included and those suppliers be geographically dispersed
within the CBA to provide convenient access for Medicare beneficiaries.
Response: We believe that we have created a contract supplier
selection methodology that will ensure that beneficiaries have
convenient access to competitively bid items. Contract suppliers will
also be required to furnish all items to all beneficiaries who maintain
a permanent residence in a CBA (or who visit a CBA) unless an exception
set forth in this final rule applies. If a beneficiary is unable to
come to the storefront of the contract supplier, we would expect that
the contract supplier would deliver the item to the beneficiary and, if
necessary, set up the item in the beneficiary's residence and train the
beneficiary how to use the item. This will ensure beneficiary
convenience and access to competitively bid items. We reviewed the
TRICARE access standards and believe the standards are not appropriate
for meeting the purposes of the Medicare DMEPOS Competitive Bidding
Program. The retail pharmacy industry is different from the DMEPOS
supplier industry. The retail pharmacy industry provides access through
storefront presence where they provide a variety of consumer products.
In contrast, most DMEPOS suppliers deliver medical products to the
beneficiaries' homes.
After consideration of the public comments we received, we are
redesignating proposed Sec. 414.414(g) as Sec. 414.414(h)(1) and
revising it to provide that CMS will award at least five contracts for
the furnishing of a product category under a competitive bidding
program if the requirements in Sec. Sec. 414.414(b) through (f) are
met by at least 5 suppliers. We are also adding a new Sec.
414.414(h)(2), which provides that if the requirements in Sec. Sec.
414.414(b) through (f) are not by at least 5 suppliers, we will award
contracts to at least 2 qualified suppliers. Finally, we are adding a
new Sec. 414.414(h)(3), which provides an exception for mail order
suppliers to the requirement that if there are at least 5 qualified
suppliers, we will award contracts to at least 5 qualified suppliers.
6. Selection of New Suppliers After Bidding (Sec. 414.414(i))
In the May 1, 2006 proposed rule (71 FR 25678), we proposed to
select only as many suppliers as necessary to ensure we have enough
capacity to meet projected demand. However, we noted that we might have
to suspend or terminate a contract supplier's contract if that supplier
falls out of compliance with any of the requirements identified in the
regulation and in the bidding contract. Alternatively, we recognized
that we could later determine that the number of contract suppliers we
selected to furnish a product category under a competitive bidding
program was insufficient to meet beneficiary demand for those items. In
situations where CMS determines that there is an unmet demand for
items, for example, if CMS terminates a contract supplier's contract,
we proposed to contact the remaining contract suppliers for that
product category to determine if they could absorb the unmet demand. If
the remaining contract suppliers could not absorb the unmet demand in a
timely manner, we proposed to refer to the list of suppliers that
submitted bids for that product category in that round of competitive
bidding in that CBA, use the list of composite bids that we arrayed
from lowest to highest, and proceed to the next supplier on the list.
We would contact that supplier to determine if it would be interested
in becoming a contract supplier. If the supplier was interested, we
proposed to require the supplier to provide updated information to
ensure its continued eligibility for participation. A condition for
acceptance of a contract would be that the supplier must agree to
accept the already determined single payment amounts for the individual
items within the product category in the CBA. We would continue to go
down the list until we were satisfied that the expected demand would be
met and beneficiary access to the items in the product category would
not be a problem. After consultation with the DMEPOS industry and PAOC,
we were informed that additional capacity should not be a problem as
suppliers would be willing and able to handle the expected demand.
Another option that we considered, but did not propose, was to
conduct a new round of bidding to select additional suppliers. However,
we did not choose this option because it would delay the resolution of
an access problem and place an additional administrative burden on the
program.
Comment: One commenter argued that it would be a violation of the
statute to award contracts to a new supplier after contracts have been
awarded without conducting a new competition. The commenter stated that
the law requires that CMS conduct a competition for the award of any
contracts for a competitively bid item. Therefore, the commenter
believed an award to the bidder next-in-line when a contract supplier
leaves the program or CMS find that it needs additional suppliers would
not constitute a competitive acquisition.
Response: We agree that contracts cannot be awarded to a supplier
that did not compete. We disagree that this regulation requirement
results in awarding a contract to a supplier that did not submit a bid.
These suppliers have competed and met all applicable eligibility,
quality, financial, and accreditation requirements to be awarded a
contract. We intend to only use this methodology when we find that
there is a need for additional contract suppliers because a contract
supplier's contract is suspended or terminated or when CMS finds it
needs additional contract suppliers to meet beneficiary demand for a
particular product category in a CBA. It would not be in the best
interest of beneficiaries to delay awarding the additional contracts
when we need to ensure sufficient capacity because a contract
supplier's contract has been suspended or terminated or there is
greater need in an area than we anticipated.
Comment: One commenter stated that CMS should have a process
identified if there are no suppliers located in a CBA willing to accept
the single payment amount and enter into a competitive bidding
contract.
Response: We would not be able to have competitive bid pricing in a
CBA in which no suppliers could accept the single payment amount.
In summary, after consideration of the public comments received, we
are redesignating proposed Sec. 414.414(h) as Sec. 414.414(i) and
adopting it as final with only technical changes.

VIII. Determining Single Payment Amounts for Individual Items

A. Setting Single Payment Amounts for Individual Items (Sec. Sec.
414.416(a) and (b))

Section 1847(b)(5)(A) of the Act requires that the Secretary
determine a

[[Page 18045]]

single payment amount for each item in each CBA based on the bids
submitted and accepted for that item, and we proposed in Sec.
414.416(a) and (b) to implement this statutory requirement. Once
contract suppliers are selected for a product category based on their
composite bid and the pivotal bid, single payment amounts for
individual items in the product category must be determined. We
considered several different methodologies for determining the single
payment amounts. Each of the options we considered is discussed in
detail in this section. After careful consideration of these options,
we proposed to adopt the following principles to determine the single
payment amounts for individual items in a product category:
Principle 1
Bid amounts from all winning bids for an item in a CBA will be used
to set the single payment amount for that item in the CBA.
Principle 2
We must expect to pay less for each individual item than we would
have otherwise paid for that item under the current fee schedule.
Single payment amounts cannot be higher than our current fee schedule
amounts for individual items within a product category.
To satisfy these principles, we evaluated several different
approaches to setting payment amounts. As a result of our review, we
decided on a preferred approach that would determine the single payment
amounts for individual items by using the median of the supplier bids
that are at or below the pivotal bid for each individual item within
each product category. The individual items would be identified by the
appropriate HCPCS codes. The median of the bids submitted by the
contract suppliers for a particular item would be the single payment
amount that we would establish under the competitive bidding program
for the HCPCS code that describes that item. In cases where there is an
even number of winning bidders for an item, we would employ the average
(mean) of the two bid prices in the middle of the array to set the
single payment amount. In addition, we proposed that the single payment
amount for each item must be less than the current fee schedule amount
for that item.
We believe that setting the single payment amount based on the
median of the contract suppliers' bids satisfies the statutory
requirement that single payment amounts are to be based on bids
submitted and accepted. This will result in a single payment for an
item under a competitive bidding program that is representative of all
acceptable bids, not just the highest or the lowest of the winning bids
for that item.

Table 8.--Median of the Winning Bids
----------------------------------------------------------------------------------------------------------------
Actual
Item A B C composite bid
----------------------------------------------------------------------------------------------------------------
Supplier 4 bid.................................. $1.00 $2.00 $2.00 $1.50
Supplier 1 bid.................................. 1.00 4.00 1.00 1.90
Supplier 3 bid.................................. 2.00 2.00 2.00 2.00
Median of winning bids--Single payment amount... 1.00 2.00 2.00
----------------------------------------------------------------------------------------------------------------

While this was our proposed approach, we solicited comments on
other methodologies for setting the single payment amount, including
using an adjustment factor as part of the methodology for setting the
single payment amount. This was the methodology we used for the
competitive bidding demonstrations, and it would have required the
following steps. The first step of this methodology would have been to
calculate the average of the winning bids per individual item. The
second step would have been to calculate the average of the composite
bids by taking the sum of the composite bids for all contract suppliers
in the applicable CBA and dividing that number by the number of
contract suppliers. The third step would have been to determine an
adjustment factor, the purpose of which would be to bring every
winner's overall bids for a product category up to the pivotal bidder's
composite bid. Once we determined the adjustment factor, we would have
taken the average of the winning bids per item and multiplied that by
the adjustment factor to adjust all bids up to the point of the pivotal
bid, so that all winners would be paid by Medicare as much for the
total product category as the pivotal bidder. This amount would have
become the single payment amount for the individual item. This is the
price that all contract suppliers within a CBA would have been paid for
that product as illustrated in Table 9. ?>

Table 9.--Adjusting the Average Winning Bids
----------------------------------------------------------------------------------------------------------------
Average Actual
Item A B C composite bid composite bid
----------------------------------------------------------------------------------------------------------------
Supplier 4 bid.................. $1.00 $2.00 $2.00 .............. $1.50
Supplier 1 bid.................. 1.00 4.00 1.00 .............. 1.90
Supplier 3 bid.................. 2.00 2.00 2.00 .............. 2.00
Supplier 2 bid.................. N/A N/A N/A .............. N/A
Average of winning bids......... 1.33 2.67 1.67 1.80 ..............
Adjustment factor = (Pivotal 1.11 1.11 1.11 .............. ..............
Composite Bid)/(Average
Composite Bid).................
Adjusted average bids-single 1.48 2.96 1.85 .............. ..............
payment amount per item........
----------------------------------------------------------------------------------------------------------------

This approach would have ensured that the overall payment amounts
that contract suppliers received were at least as much as their bids.
As a result, this may have guarded against suppliers leaving the
Medicare program because the payment amounts are not sufficient.
However, we did not favor this alternative because, in general, most
payment amounts would have been higher than the actual bids as a result
of the adjustment factor being greater than

[[Page 18046]]

zero. This would have been true because the purpose of the adjustment
factor would have been to make the composite bid of all winning
suppliers equivalent to the composite bid of the pivotal supplier. We
chose not to propose this approach because we believe that this
approach is not reflective of all of the winning bids accepted. In
addition, we stated that we were concerned that this methodology might
be confusing and overly complicated.
We also considered taking the minimum winning bid for each item in
a CBA and not applying an adjustment factor. We did not favor this
alternative because we also did not consider it as being reflective of
the actual bids accepted because it is only reflective of the lowest
bid. The lowest bid would not be reflective of what suppliers would
sell the item for as most of them bid higher.
Finally, we considered taking the maximum winning bid for each
item. However, this approach would have led to program payment amounts
that were higher than necessary because some suppliers were willing to
provide these items to beneficiaries at a lower cost.
In the proposed rule, we indicated that we were still in the
process of determining the appropriate approach for setting payment
amounts, as well as the alternatives considered and outlined above, and
invited comments on our proposed methodology.
Comment: Several commenters expressed concerns that the proposed
method to determine the single payment amount would result in suppliers
submitting low bids and only offering the lowest cost devices. They
believed that quality and access would be impacted by the use of the
median bid. They further indicated that requiring savings on each item
rather than in the aggregate encourages suppliers to bid on the oldest,
lowest priced product within each HCPCS code. The commenters suggested
that CMS base savings at the product category level and not for each
individual code.
Response: We disagree with these commenters. We recognize the
necessity for a process to identify and eliminate irrational,
infeasible bids. As required in Sec. 414.414(b)(4), each supplier must
submit a bona fide bid that is complies with all the terms and
conditions contained in the RFB. Also, as discussed in section XIV of
this final rule, we will establish a formal complaint and monitoring
system for each CBA. Specifically, we will direct the CBIC to establish
a monitoring program that includes beneficiary satisfaction indicators
and supplier performance indicators.
The Medicare DMEPOS Competitive Bidding Program is designed to
ensure that the Medicare payment amounts are appropriate and
reasonable. In addition, competitive bidding will harness market forces
and create competition among suppliers. We believe that this
competition will prevent suppliers from offering the lowest cost
devices, as suppliers will be interested in increasing their market
share by offering appropriate services and high quality products to
maintain and increase their customer base.
In addition, and as discussed more fully in section IX. of this
final rule, we will include a nondiscrimination clause in the contracts
we enter into with contract suppliers. Under that provision, contract
suppliers will be obligated to make the same items available to
beneficiaries under the Medicare DMEPOS Competitive Bidding Program
that they make available to other customers. We believe that the
inclusion of this clause will help to ensure that Medicare
beneficiaries have access to the highest quality DMEPOS items. Section
1847(b)(2)(A)(iii) of the Act states that the total amounts to be paid
to contractors in a competitive acquisition area are expected to be
less that the total amounts that would otherwise be paid. In order to
guarantee that we implement this section to ensure that we achieve
savings for the Medicare program, we must require bids to be at or
below the current fee schedule for the item. This will preclude our
setting single payment amounts for certain items above the fee schedule
and causing contract suppliers to attempt to shift utilization to these
items because of the higher payment amounts. Without this safeguard, we
are concerned that suppliers might simply start furnishing an
alternative item, because the physician's order may not be item
specific, within the same product category because the item may have a
greater potential for higher profits. In addition to increased
expenditures, this could also result in less appropriate items being
furnished to Medicare beneficiaries.
In addition, we believe that basing product savings at the item
level will guarantee assurance of savings for the Medicare DMEPOS
Competitive Bidding Program because accepting bids above the fee
schedule for certain products may result in these items being furnished
as an alternative to other items within the product category, which
would increase their utilization and expenditures compared to the
current levels.
Comment: Several commenters argued that the use of the median bid
to set the single payment amount is flawed because the median bid could
be vulnerable to a variety of gaming strategies. They noted that, when
using the median, 50 percent of winning bidders would have to accept
less than their bids to participate. They indicated that if a contract
supplier is not able to provide the items at the median, demand would
not be met and access would be impaired. The commenters raised concerns
that all bids would have the same weight, and bids from small
suppliers, which only serve a few Part B beneficiaries, would have the
same impact on the calculation as bids from suppliers responsible for a
large number of beneficiaries, which would give too much weight to
small suppliers. Other commenters suggested that the use of the median
bid favors large chain suppliers that deliver large volume of items.
Other commenters suggested that CMS include a mechanism to
``rationalize'' bids to ensure there are no unreasonably low bids. They
added that CMS should have a mechanism to eliminate outlier bids. One
commenter suggested that CMS calculate the single payment amount only
from among those bids that are ``reasonable.'' Numerous commenters
suggested that CMS use the Adjustment Factor Method (AFM) that was used
during the demonstration. Because suppliers were paid at least as much
as they bid in aggregate, commenters believed that the AFM would
provide sufficient protections to encourage small suppliers to bid. One
commenter suggested setting the payment amount at the 90th percentile
of winning bids or not lower than 5 percent below the highest winning
bid. Another commenter recommended calculation of the single payment
amount only from those bids that lie within one standard deviation of
the mean of the bids. One commenter supported the use of a median
calculation as a statistically valid method for determining the single
payment amount. Lastly, some commenters recommended that CMS pay
contract suppliers their bid amounts or the single payment amount,
whichever is lower. These commenters believed that this would be
consistent with the statutory payment basis of the fee schedule or the
actual charge, whichever is less.
Response: We disagree with the concerns raised by commenters
regarding the use of median bid to set the single payment amount. We
believe that the use of the median takes into consideration all bids
submitted and accepted and not just the high and low bids. We further
believe that the median

[[Page 18047]]

is not influenced by outliers at the extremes of the data set. For this
reason, the median is often used when there are a few extreme values
that could greatly influence the mean and distort what might be
considered typical. We believe the median of the accepted bids would
represent a reasonable payment amount and does not favor large or small
suppliers, and we believe this approach is more equitable than other
approaches suggested in the comments. Regarding access, if a winning
supplier does not enter into a contract because it is not able to
furnish the items at the median, we believe that access will not be
adversely affected because we will be selecting a sufficient number of
contract suppliers to ensure that demand is met in the CBA. In
addition, we believe that most, if not all, of the winning suppliers
will be willing to furnish items in the product category at the single
payment amounts.
In addition, section 1847(b)(5)(A) of the Act states that payment
shall be based on bids submitted and accepted. The single payment
amount will be determined from only those bids that are considered
``acceptable,'' meaning that the supplier meets all quality, financial,
and eligibility standards and that the bid is in the wining range. For
this reason, we believe that the single payment amount should be
representative of all of the accepted bids and not just the highest or
the lowest bids. We further believe that using the adjustment factor is
not reflective of the actual bids accepted because it is only
reflective of the pivotal bid. We do not believe that the adjustment
factor is necessary to ensure that small suppliers have the opportunity
to be considered for participation in the competitive bidding program
because the median represents a reasonable payment based on accepted
bids from suppliers that are at or below the pivotal bid. We note that
we discuss special provisions for small suppliers in section XI. of
this final rule. We will only be entering into contracts with those
suppliers that agree to accept the single payment amount. Moreover, as
we explain above, we believe that using the median bid would not result
in an insufficient payment, and we also believe that our contract
supplier selection methodology will ensure that we have a sufficient
number of contract suppliers to meet the demand for competitively bid
items in each product category in each CBA.
Further, we disagree with the commenters' suggestion that we would
have the authority under the Act to pay suppliers the lower of their
bid amounts or the single payment amount. Section 1847(b)(5)(A) of the
Act requires the Secretary to determine a single payment amount for
each item in each CBA based on the bids submitted and accepted for that
item. A ``single payment amount'' is one amount, and does not lend
itself to an interpretation that would allow us to pay the lesser of
the two amounts.
We recognize the necessity for a process to identify and eliminate
irrational, infeasible bids. Accordingly, we will be evaluating bids to
ensure that they are bona fide, and we may request that a supplier
submit additional financial information, such as manufacturer invoices,
so that we can verify that the supplier can provide the product to the
beneficiary for the bid amount. If we conclude that a bid is not bona
fide, we will eliminate the bid from consideration.
Comment: Several commenters suggested that a flaw in using the
median methodology is that it is highly dependent on whether there are
an even or odd number of suppliers in the final array.
Response: As included in our discussion in the preamble of the
proposed rule regarding the use of the median, in cases where there is
an even number of winning bidders for an item, we would employ the
average (mean) for the two bid prices in the middle of the array to set
the single payment amount. We are adding this rule to the final
regulations at Sec. 414.416(b)(1). As noted in the response to the
previous comment, we believe that the use of the median is not a flawed
methodology.
Comment: One commenter suggested that CMS follow defined procedural
rules to select winning suppliers and determine the single payment
amount, similar to the process that it has developed for the National
Coverage Determination (NCD) process. For example, the commenter
suggested that CMS ensures that the public is informed at the time it
initiates the process, provides for public input, and arranges for all
of these processes to occur during a defined time period.
Response: This final rule outlines a defined process that we will
follow to select contract suppliers and determine the single payment
amounts for each item in each product category in each CBA. In
addition, we are developing an extensive educational program that will
educate and inform the public about the processes that will be used to
conduct the bidding and to determine the winning suppliers. Our plans
for education are described in more detail in the DMEPOS section of the
FY 2007 IRF final rule (71 FR 48354).
After consideration of the public comments we received, we are
finalizing our methodology for setting the single payment amount in
Sec. Sec. 414.416(a) and (b), by adopting paragraph (a) in final (with
technical revisions), revising paragraph (b)(1) to address how the
single payment will be computed when there is an even number of winning
bids. We are also adding new Sec. 414.414(b)(4), which provides that
each supplier must submit a bona fide bid that complies with all of the
terms and conditions in the RFB.

B. Rebate Program

In the May 1, 2006 proposed rule (71 FR 25680), we proposed to
allow contract suppliers that submitted bids for an individual item
below the single payment amount to provide the beneficiary with a
rebate (proposed Sec. 414.416(c)). We stated in the preamble of the
proposed rule that the rebate would be equal to the difference between
their actual bid amount and the single payment amount. The following
example illustrates how the rebates would be applied under this
proposed approach:
If, based on the bids received and accepted for an item, we
determined that the single payment amount for the item was $100,
Medicare payment for the item would be 80 percent of that amount, or
$80, and the coinsurance amount for the item would be 20 percent, or
$20. However, if a contract supplier submitted a bid of $90 for this
item and chose to offer a rebate, the rebate amount would be equal to
the difference between the single payment amount ($100) and the
contract supplier's actual bid ($90), or $10. Therefore, after the
contract supplier received the Medicare payment of $80 and the $20
coinsurance, the contract supplier would be responsible for providing
the beneficiary with a $10 rebate. We solicited comments on how to
handle those cases in which the rebates would exceed the copayment
amount.
Before deciding to propose this methodology, we considered whether
to make the rebates mandatory or voluntary. We proposed that the
rebates be voluntary but that contract suppliers could not implement
them on a case-by-case basis. If a contract supplier submitted a bid
below the single payment amount and chooses to offer a rebate, it must
offer the rebate to all Medicare beneficiaries receiving the
competitively bid item to which the rebate applies. This commitment
would be incorporated into the contract supplier's contract. Stated
another way, while the decision to offer rebates might be voluntary,
once a contract supplier decides to provide rebates, the rebates would
become a binding contractual

[[Page 18048]]

condition for payment during the term of the contract with CMS.
Moreover, the contract supplier could not amend or otherwise alter the
provision of rebates during the term of the contract. Contract
suppliers would also be prohibited from directly or indirectly
advertising these rebates to beneficiaries, referral sources, or
prescribing health care professionals. However, this would not preclude
CMS from providing to beneficiaries comparative information about
contract suppliers that offer rebates.
We proposed that only contract suppliers that submitted bids below
the single payment amount for a competitively bid item would have the
choice to offer rebates. Contract suppliers that submitted bids above
the single payment amount would not be allowed to issue rebates because
their actual bids for an individual item would be above this amount.
Our reason for proposing to allow these contract suppliers to offer
rebates was to allow beneficiaries the ability to realize additional
savings and the full benefits of the Medicare DMEPOS Competitive
Bidding Program.
We solicited comments concerning the rebate process outlined in the
proposed rule. We indicated that we would continue to evaluate the
fraud and abuse risks of the proposed rebate program, and we
specifically solicited comments on such risks.
Following is a summary of the public comments received.
Comments: Several commenters expressed concern over the proposed
rebate program. They argued that the rebate program would be illegal
and violate the antikickback statute, the beneficiary inducement
statute, and the Medicare provisions of the Social Security Act
governing the waiver of copayments. They argued that the rebate program
would promote fraud and abuse by encouraging beneficiaries to purchase
unnecessary supplies and the program will entice suppliers to ``game''
the program. They further stated that the OIG has issued numerous
opinions that emphasize ``that providing things of value to
beneficiaries in exchange for referrals is unlawful.'' The commenters
believed that rebates also create tension with the Federal Anti-
Kickback safe harbor statute. They pointed out that, to qualify for a
safe harbor, a rebate must be disclosed in writing prior to the initial
purchase. They added that the proposed rule expressly prohibits a
supplier from advertising either directly or indirectly to
beneficiaries. One commenter supported the inclusion of the rebate
provision in the program as an innovative means to control
beneficiary's out-of-pocket expenses and to reward bidders that submit
good faith, competitive bids.
Several commenters suggested that rebates encourage suppliers to
offer lower cost, less innovative products, particularly from large
manufacturers. Several commenters suggested that the use of rebates
leads to beneficiaries selecting suppliers based solely on availability
of rebates, rather than quality of care. The commenters indicated that
this could lead to poorer patient outcomes. They added that large
manufacturers can spread the cost of discounts across many products,
but small manufacturers may have only one or two products that would
not support rebates. The commenters asserted that OIG states that the
use of giveaways also favors large providers with greater financial
resources for such activities, disadvantaging smaller providers and
businesses. They further added that the rebate program may provide an
incentive to large suppliers to ``lowball'' their bids, resulting in
reduced marketplace competition by small suppliers.
One commenter suggested that if CMS offers a rebate, it should not
be voluntary. Requiring suppliers to supply a rebate would assure that
the suppliers are not bidding low just to be selected and then have
their payments raised to the median level automatically. The commenter
believed that this would prevent deliberate low-ball bidding.
Several commenters questioned whether rebates should become a
binding contractual commitment when an express contractual provision
would not exist.
Several commenters suggested that a rebate would be logistically
impossible for a supplier to implement in its information system,
branch operation, and accounts receivable processes. They added that
physicians would have no way of keeping the rebate logistics straight.
The commenters believed that CMS would also experience difficulties in
monitoring the program. Another commenter inquired in what form CMS
would require the rebate to be distributed, that is, gift certificate
to family store, a money order, check, cash, among others. The
commenter also asked if claims are denied and a rebate already paid,
who would be responsible for collecting from the patient.
Several commenters suggested that suppliers that pay rebates are
less likely to provide service in those areas where the supplier has
bid above the contract price and will focus on those items where the
payment amount is greater than the supplier's bid amount.
Several commenters suggested that logistical challenges would exist
with implementation of rebates. The commenters stated that one supplier
serving beneficiaries within the CBA and outside the CBA would have two
different sets of rules because only CMS may inform the beneficiaries
which suppliers offer a rebate. They asked how a supplier should answer
a direct question about rebates when posed by a referral source or
patient. They added that often the cost to issue a rebate check exceeds
the value of the check issued and asked how suppliers will integrate a
rebate with the patient's Part B supplemental insurance plan where the
plan pays 100 percent of the copayment or when the copayment is waived
because of financial hardship.
One commenter suggested that the rebate provision violates the
single payment amount provision of the Act by permitting different
payment amounts for different contract suppliers.
One commenter suggested that the rebate proposal may also have the
effect of allowing retail store DMEPOS suppliers to ``cherry pick''
that portion of the DMEPOS business that is least costly to provide,
driving up the costs of providing full-line services without any
comparable savings to the program.
Several commenters suggested that rebates should not exceed the
copayment amount in order to reduce risks of overutilization. They
believed that the current proposal could eliminate all copayments in
some cases and lower the copayment below the amount that would
otherwise typically apply in every case. Several commenters suggested
that the rebate runs counter to a fundamental principle of the Medicare
program that requires beneficiary coinsurance. They pointed out that
the purpose behind the 20-percent copayment is to discourage excessive
or unnecessary utilization and stated that CMS is not authorized to
change the Medicare Part B plan design by using rebates that would
reduce or eliminate copayments.
Although we proposed that the rebate program be voluntary, one
commenter suggested that our proposal to disseminate information about
suppliers that participate in the rebate program would create an unfair
marketing advantage to those suppliers.
Response: After considering the comments we received, we have
decided that rebates will not be authorized under the Medicare DMEPOS
Competitive Bidding Program and the provisions of proposed Sec.
414.416(c) are not included in this final rule. We believe that
competition will drive suppliers to compete for beneficiaries based on
value and quality. We also recognize that requiring

[[Page 18049]]

rebates might raise fraud and abuse concerns. In addition, we have
concerns that rebates may provide incentives to beneficiaries to obtain
unnecessary items.
In summary, we are not adopting in this final rule the provisions
of proposed Sec. 414.416(c).

IX. Terms of Contracts

Section 1847(b)(3)(A) of the Act gives the Secretary the authority
to specify the terms and conditions of the contracts used for
competitive bidding and we proposed in Sec. 414.422(a) to implement
this provision. Section 1847(b)(3)(B) of the Act requires the Secretary
to recompete contracts under the Medicare DMEPOS Competitive Bidding
Program at least every 3 years and we proposed in Sec. 414.422(b) to
implement this provision. The length of the contracts may be different
for different product categories, and we proposed to specify the length
of each contract in the RFBs.

A. Terms and Conditions of Contracts (Sec. Sec. 414.422(a) Through
(c))

In the May 1, 2006 proposed rule (71 FR 25680), we proposed that
the competitive bidding contracts will contain, at a minimum,
provisions relating to the following:
Covered product categories and covered beneficiaries
operating policies.
Subcontracting rules.
Cooperation with us and our agents.
Potential onsite inspections.
Minimum length of participation.
Terms of contract suspension or termination.
Our discretion not to proceed if we find that the Medicare
program will not realize significant savings as a result of the
program.
Compliance with changes in Federal laws and regulations
during the course of the agreement.
Nondiscrimination against beneficiaries in a CBA (so that
all Medicare beneficiaries inside and outside of a CBA area receive the
same products that the contract supplier would provide to other
customers).
Supplier enrollment and quality standards.
The single payment amounts for covered items.
Other terms as CMS may specify.
Comment: One commenter asked if a supplier that is a subcontractor
to another supplier can submit a bid to furnish items in one product
category in a CBA and also be a subcontractor to another supplier that
submits a bid to furnish items under another product category. Another
commenter also asked if a losing bidder can become a subcontractor to a
contract supplier. One commenter asked about the ramifications to a
subcontractor if the contract supplier violates its contract with CMS.
One commenter stated that the requirements for subcontractors need to
be clearly defined. The commenter asked if subcontractors would need to
satisfy the same accreditation and financial standards required of
contract suppliers and, if so, how CMS would enforce this.
Response: Our rules would not preclude a supplier from submitting
an individual bid for a product category in a CBA and also becoming a
subcontractor to another supplier that submits a bid in the same CBA
for the same product category. As an example, a supplier can bid to
become an oxygen contract supplier and be awarded a contract and still
be a subcontractor for another oxygen contract supplier. In addition, a
supplier that submits a bid and loses can become a subcontractor to a
contract supplier. We will not evaluate subcontractors to determine if
they meet the accreditation, quality, financial, and eligibility
standards because a subcontractor to a contract supplier cannot itself
be a contract supplier and cannot submit claims under the Medicare
DMEPOS Competitive Bidding Program. However, a supplier may not
subcontract with any supplier that has been excluded from the Medicare
program, any State health program or any other government executive
branch procurement or nonprocurement activity. In addition, the
subcontractor will not have to submit a bid to be a subcontractor.
However, the contract supplier will be responsible for fulfilling all
of the terms of its contract, even if it uses one or more
subcontractors. In other words, if a contract supplier breaches its
contract due to its subcontractor's failure to perform, the contract
supplier will be held liable for the breach. Therefore, the contract
supplier needs to ensure that the subcontractor is performing its
duties appropriately. In their response to the RFB, bidders must submit
any plans for subcontracting.
Comment: One commenter stated that a number of different proposed
contract terms were not listed in the proposed rule. The commenter
presumed that the actual contract provisions will be subject to a
separate notice of proposed rulemaking in order to permit suppliers to
offer more productive comments. One commenter suggested that CMS
clearly define contract requirements so that suppliers can ensure that
they meet Medicare guidelines.
Response: In the proposed rule, we discussed the details of the
Medicare DMEPOS Competitive Bidding Program and identified a number of
provisions that will be included in the contract. We also stated that
we might specify other terms in the contracts themselves. We do not
believe that an additional rulemaking is required in order to specify
other terms and conditions that might be included in the contracts. In
addition, we believe that our discretion to specify the contract terms
and conditions would allow us to specify the terms and conditions for
each new competition.
Comment: One commenter stated that some bidders are likely to be
large nationwide or regional entities that are publicly traded
companies. The commenter encouraged CMS to limit information concerning
ownership to those owners required to be disclosed in regular filings
with the Securities and Exchange Commission.
Response: Our purpose for requesting information about key
personnel is not the same as that for the Securities and Exchange
Commission. We need to obtain information about key personnel, both
corporate and local, in order to determine the appropriateness of the
bid submission and to ensure no key personnel have been the subject of
legal actions, or have been sanctioned or convicted of a crime. This
information will also be useful in determining common ownership to
ensure that companies are not bidding against themselves to furnish the
same product categories in the same CBA by submitting different bids
for commonly owned separate locations.
Comment: Numerous commenters urged that the contract length be the
same for all products in a CBA to minimize confusion among
beneficiaries, referring physicians, and suppliers. The commenters
stated that, because there are many variables that stakeholders will
have to understand (such as which products are part of competitive
bidding, boundaries of CBAs, among others), contracts of different
lengths of time within a CBA will be time consuming, costly, and
confusing for all involved. One commenter stated that the length of
each contract should be specified in the RFB. Another commenter
recommended that CMS recompete the contracts more frequently in the
early stages of the competitive bidding program, in order to capitalize
on what it learns during this initial period.
Response: We agree that it is important that we capitalize on what
we learn during the early stages of competitive bidding. However, we
want to retain the option for staggering the contract period for
different product categories to allow for any changes in

[[Page 18050]]

coding or in technology and to facilitate use of the authority to phase
in items under the programs. We would not have different contract
lengths for items within the same product category within the same CBA.
The length of each contract will be specified in the RFB; however, no
contract will be longer than 3 years because section 1847(b)(3)(B) of
the Act requires us to recompete the competitive bid contracts no less
often than every 3 years.
Comment: One commenter proposed that CMS require all suppliers in a
single CBA to be accredited in the same year and then to place the
contracts for all product categories in that CBA on the same 3-year
cycle as the accreditation requirement.
Response: We believe that this commenter's suggestion would be too
difficult to implement from a logistical standpoint and too regimented
an approach to adopt. Suppliers have the option of pursuing
accreditation at any time. However, they must be accredited before we
can award contracts under the Medicare DMEPOS Competitive Bidding
Program, unless a grace period applies. As we explained above, in the
first round of bidding, a supplier's accreditation must at least be
pending before a bid can be submitted. In addition, a contract supplier
that obtains its accreditation must maintain that accreditation for the
remainder of the contract period.
Comment: One commenter recommended that no new products should be
added during a contract term. The commenter stated that suppliers may
or may not have access to the new products and, as a result, may not be
able to furnish them.
Response: We agree with this comment. If a new product does not fit
under a code for which we have conducted competitive bidding a single
payment amount will not be applied until we conduct another round of
bidding A further discussion of our rules regarding HCPCS codes changes
can be found in section VI.D.4 of this final rule Under section
1847(b)(3)(B) of the Act, we are required to recompete the contracts no
less often than every 3 years. For purposes of competitive bidding, we
cannot add additional codes for items for which we have not done
bidding because we need to conduct bidding before we can determine the
single payment amount for these items. We would pay for these codes
under the DMEPOS fee schedule.
Comment: Several commenters stated that our proposal to include in
each contract a nondiscrimination provision, which would require that
the competitively bid items furnished by a contract supplier to
Medicare beneficiaries be the same items that the contract supplier
furnishes to other customers is unrealistic. The commenters argued that
this provision would impair beneficiary access to DMEPOS and would
limit the savings that otherwise would be achieved through competitive
bidding. Another commenter stated that the proposed rule provided very
little detail about what would be expected or how CMS would ensure that
the nondiscrimination contract provision is being met and urged CMS to
discuss the nondiscrimination clause in more detail so that suppliers
and beneficiaries will be able to understand what CMS has in mind, and
know what protections are being afforded to beneficiaries by this
provision.
Response: We believe that Medicare beneficiaries should receive the
same items that the contract supplier would furnish to other customers
and, therefore, we proposed to include a nondiscrimination provision in
the contracts. One of the main objectives of the Medicare DMEPOS
Competitive Bidding Program is to ensure that beneficiaries have access
to quality DMEPOS. Therefore, we have built safeguards into the
competitive bidding program to ensure there is continued access to
quality medical equipment and supplies. We believe the
nondiscrimination clause will ensure that Medicare beneficiaries have
access to the same items as other individuals. One mechanism that we
would use to enforce the nondiscrimination clause is the complaint and
monitoring system that we plan to implement. Under this system, which
is discussed more fully in section XIV. of this final rule,
beneficiaries, referral agents, providers, and suppliers can assure us
that the supplier conducts business in a manner that is beneficial to
Medicare and beneficiaries. We have added this proposed requirement to
the final regulation at Sec. 414.422(c).
Comment: One commenter noted that CMS should consider nonprice
variables, such as a supplier's compliance with Medicare program
requirements when awarding contracts for certain DMEPOS. The commenter
also recommended that CMS revise Sec. 414.422(a) of the proposed
regulations so that it would require a contract supplier to comply with
the accreditation requirements specified in Sec. 414.414(c) for the
duration of the contract period. One commenter suggested that CMS
retain the discretion to determine the likely value a particular
supplier's compliance program brings Medicare and consider its value as
an individual variable in determining whether the supplier is eligible
to receive a contract award.
Response: As proposed in Sec. 414.422(a), contract suppliers must
comply with all the terms of their contracts, including any option
exercised by CMS, for the full duration of the contract period. Once
accredited, contract suppliers will be required to retain that
accreditation throughout the duration of the contract. Accreditation
requirements are mandatory and an important step forward to make sure
we have quality suppliers. Compliance plans may be helpful to suppliers
in meeting Medicare requirements; nevertheless, all suppliers have to
meet our applicable standards and accreditation requirements.
Therefore, we do not consider it appropriate to give extra weight in
the selection process to suppliers with compliance programs.
Comment: One commenter suggested that CMS require contractors to
subcontract portions of contracts to minority or female-owned
businesses to comply with Federal contracting requirements.
Response: Due to size, complexity and nature of this program, we do
not believe it would be feasible to require subcontracting with
minority or female owned businesses and still meet our other goals. We
also note that these contracts are not procurement contracts and,
therefore, are not subject to the SBA or FAR requirements. Pursuant to
section 1847(b)(6)(D) of the Act, we are only required to give small
suppliers certain considerations.
Comment: One commenter urged CMS not to prohibit contract suppliers
from turning away beneficiaries, since there will be more than one
contract supplier per CBA. The commenter stated that there may be
circumstances in which a contract supplier is already operating beyond
capacity and would not be able to furnish items to additional
beneficiaries. In addition, the commenter noted that a contract
supplier may not believe that a requested item is appropriate for the
beneficiary.
Response: We continue to believe that contract suppliers should not
be able to turn away beneficiaries because we do not want to create an
opportunity for contract suppliers to turn away beneficiaries who have
the most difficult medical conditions or are otherwise difficult to
serve. We note that we proposed that there would be a limited exception
to this requirement if there is a particular item that a physician or
treating practitioner has ordered to avoid an adverse medical outcome,
but is an item that the contract

[[Page 18051]]

supplier does not normally furnish. In this case, if the contract
supplier could not furnish the item, the requirements at Sec.
414.420(b) of this final rule would apply.
Comment: One commenter suggested there be some mechanism in place
to prevent the awarding of contracts to suppliers that do not provide
at least some percentage of the services themselves. The commenter
believed that quality will be lost if winning bidders are allowed to
subcontract the entire or a large portion of the product category, and
that beneficiaries will receive lower quality items because the winning
bidder will make a profit on items that it does not actually furnish.
Another commenter suggested that in order to prevent abuse of the
bidding process, the competitive bidding contracts should allow a
winning supplier to subcontract a portion of its services only if the
subcontractor entities satisfy the same quality and accreditation
standards that must be satisfied by the winning suppliers.
Response: As explained above, we will request information on the
RFBs about the use of subcontractors. We believe that the eligibility
standards, applicable accreditation standards and financial standards
will ensure that contract suppliers are reputable, viable businesses
and not just companies that subcontract their work. In addition, we
will hold the contract supplier responsible for meeting all the terms
and conditions of its contract, whether or not one of those terms is
actually performed by a subcontractor.
Comment: One commenter stated that lack of timely DMEPOS access
would be harmful for beneficiaries who are clinically ready to return
to home or to the community from the hospital. The commenter also noted
that delaying the discharge of Medicare beneficiaries due to restricted
and untimely availability of specific DMEPOS would produce serious
problems for beneficiaries' continuity of care and also for the
hospital. The commenter stated that, from a hospital perspective, it is
essential for CMS to ensure that DMEPOS be available on a timely basis
and to sanction providers for untimely service. The commenter
recommended that CMS take additional steps to prevent these problems,
including imposing specific sanctions on contract suppliers that fail
to timely furnish DMEPOS to these hospital patients, because such
delays would delay discharge and jeopardize a patient's clinical
progress. Another commenter stated that beneficiaries should be
guaranteed prompt receipt of items, if in stock, within a specified
period of time after the order is received. The commenter stated that
delays could lead to adverse events for beneficiaries.
Response: We do not believe it is appropriate to establish a
general timeframe within which all competitively bid items must be
delivered to beneficiaries. Due to the individual characteristics of
the products and beneficiary circumstances, the items will vary widely
in terms of whether they are in stock and must be customized. However,
a contract supplier should furnish items to beneficiaries in accordance
with timeframes that meet the ordering physician's, or treating
practitioner's, prescription. We also note that under the final quality
standards (under Consumer Services) that we issued, in August 2006, and
with which suppliers must comply in order to participate in the
Medicare DMEPOS Competitive Bidding Program, the supplier must ensure
it provides beneficiaries with information regarding expected
timeframes for receipt of delivered items and the supplier must verify
that beneficiaries have received the items. In addition, under Sec.
424.57(c)(12) of our regulations, which suppliers must also satisfy in
order to participate in the program, suppliers are responsible for the
delivery of Medicare-covered items to beneficiaries and must maintain
proof of delivery. The quality standards also require the supplier to
ensure that it provides beneficiaries with the necessary information
and instructions on how to use Medicare-covered items safely and
effectively.
Comment: One commenter stated that FDA regulations require
manufacturers, not suppliers, to evaluate product complaints and inform
the FDA if the problems are considered to be reportable events. The
commenter noted that CMS should require suppliers to inform the
relevant DMEPOS manufacturer of any problem with equipment or supplies,
including any adverse effects involving Medicare beneficiaries, so that
the manufacturers will be in a position to address the problem, report
to the FDA, or take other corrective action if needed. The commenter
also noted that CMS should in no way imply that a product warranty is
the supplier's legal obligation, as opposed to that of the product
manufacturer.
Response: The Medicare Claims Processing Manual, Chapter 20-Section
40.1 provides that suppliers are prohibited from submitting a claim for
a payment for items and services that are covered by manufacturer or
supplier warranties. The supplier on record is responsible for ensuring
that a claim is not submitted for items covered under a manufacturer's
product warranty. To be eligible to submit a bid, DMEPOS suppliers must
meet the supplier standard found in 42 CFR 424.57(c)(1), which require
them to comply with applicable Federal and State licensure and
regulatory requirements. FDA regulations and requirements are
applicable to items paid for under the competitive bidding program just
as they currently apply to items paid for under the fee schedule
methodology.
Comment: One commenter noted that the proposed rule would require
suppliers to provide information as requested regarding the integrity
of each product sold and billed under the Medicare DMEPOS Competitive
Bidding Program, as well as information on the integrity of the
suppliers' businesses as a whole. The commenter believed that suppliers
should not be required to provide information on product integrity as
long as there is a SADMERC coding verification that the product has
been approved for billing under a particular HCPCS code. The commenter
also believed that a rule that would require suppliers to provide
information on their business integrity was inappropriate because it
would duplicate information provided during certification and
accreditation.
Several commenters requested that CMS clarify whether it intends
for all suppliers to have a corporate compliance program, a mission
statement and operating principles, and/or other ethical aspects of
their business; or clearly defined organizational conflicts of
interest. One commenter recommended that the definition of
``affiliate'' be simplified for public companies with multiple
locations tied to a single tax identification number so that suppliers
do not have to provide the names or supplier numbers of all locations
on an application for a single CBA. The commenters requested that CMS
provide additional detail regarding the level of employee information
it expects to be specified, for example, the highest ranking local
manager and title or the chief executive officer or chief operating
officer of a public company; and that CMS define the term ``customer
service protocol'' because different companies define the customer
service process differently.
Several commenters recommended that CMS also require each supplier
to provide: a description of its corporate compliance program; its
procedure for ensuring that it does not knowingly employ any
individuals who have been debarred from participating in government
programs; its procedure for

[[Page 18052]]

conducting background checks on employees who will have direct contact
with beneficiaries; awards, honors, or other distinctions issued to the
company; a description of its credentialing program if a subcontractor
will be used to furnish items to beneficiaries; a description of its
emergency preparedness plan; and a description of its process for
selecting products. These commenters also recommended that CMS
independently verify each supplier's disclosure by using objective
measures. Two commenters suggested that CMS explain and define the
requirements and terms that would be included in the RFBs, including
the conflicts of interest and affiliated companies of the supplier. One
commenter suggested that CMS consider requesting complete disclosure on
corporate integrity agreements, entered into by the supplier as well as
OIG convictions against the supplier, and that CMS conduct criminal
background checks.
Response: We appreciate these comments. After consideration of the
comments, we believe that the most appropriate place to list the
specific information that we will need from each supplier is in the
RFB. Our purpose in collecting such information is to evaluate
suppliers' bids, and we have attempted to minimize the burden on
bidders as much as possible. Therefore, the specific information to be
collected will be detailed in the RFB. We will be requesting
information such as: the supplier's identifying information;
information regarding the items that the supplier would furnish if
awarded a contract; financial information; and corporate integrity
information
We believe that many of these items are best addressed in the
quality standards and accreditation standards. We are using the RFB
notice and comment period to finalize the list of items that we are
going to require.
We are adding a clause to Sec. 414.422(a) which provides that we
will specify the terms and conditions in the competitive bidding
contacts, and finalizing the remainder of Sec. 414.422(a) which
provides that a contract supplier must comply with all terms of its
contract, including any option exercised by CMS for the full duration
of the contract period and adopting revised Sec. 414.422(a) as final.
We are adopting as final, without modifications, Sec. 414.422(b),
which provides that we will recompete the competitive bidding contacts
at least once every 3 years.
We are finalizing Sec. 414.422(c) which provides that a
nondiscrimination provision will be included in each contract we enter
into with a supplier under the Medicare DMEPOS competitive bidding
program.

B. Change in Ownership (Sec. 414.422(d))

In the May 1, 2006 proposed rule, under proposed Sec. 414.422(d),
we proposed to evaluate a supplier's ownership information, its
compliance with appropriate quality standards, its financial status,
and its compliance status with government programs before we determine
that a supplier can qualify as a contract supplier if there is a change
of ownership. For this reason, we proposed that suppliers would not be
granted winning status by merely merging with or acquiring a contract
supplier's business. We do not want to allow suppliers to adopt a
strategy of circumventing the regular bidding process by gaining
winning status through acquisitions of or mergers with contract
suppliers or to violate any anticompetition prohibitions. Therefore, we
proposed that contract suppliers must notify CMS in writing 60 days
prior to any changes of ownership, mergers, or acquisitions being
finalized.
We proposed that we would have the discretion to allow a successor
entity, after a merger with or acquisition of a contract supplier, to
function as contract supplier when--
There is a need for the successor entity as a contractor
to ensure Medicare's capacity to meet expected beneficiary demand for a
competitively bid item; and
We determine that the successor entity meets all the
requirements applicable to contract suppliers.
We proposed that the successor entity must agree to assume the
contract supplier's contract, including all contract obligations and
liabilities that may have occurred after the awarding of the contract
to the previous supplier. The successor entity is legally liable for
the nonfulfillment of obligations of the original contract supplier.
In addition, we proposed to only allow the successor entity to
function as a contract supplier if it executed a novation agreement
with CMS.
Comment: Numerous commenters objected to the proposed provision
that would require contract suppliers to notify CMS in writing 60 days
prior to any changes of ownership, mergers, or acquisitions being
finalized and recommended that the 60-day prior notice provision be
modified to a notice period of no more than 30 days. The commenters
also recommended that if the transaction is set to close within less
than 30 days, the parties should have an obligation to provide notice
as soon as the parties sign a letter of intent to change ownership. One
commenter suggested that notification regarding change of ownership be
required within 30 days after change has occurred. The commenters
believed that the proposed rule fails to take into consideration the
short time period in which acquisitions/mergers occur. The commenters
added that the 60-day requirement is a burdensome restraint on
legitimate corporate transactions, and that acquisitions and mergers
frequently occur in a much more compressed timeframe. They believed
that our proposed timeframes are unrealistic, and as a result, CMS
could be notified of numerous acquisitions that are not consummated.
They emphasized that it is important that the prior notice requirement
be optional and that notice promptly after transaction would be
appropriate to protect the Medicare program and beneficiaries.
The commenters pointed out that there generally is no advance
notice requirement prior to completing an acquisition and/or merger.
They requested clarification that any such notices furnished to
Medicare will remain confidential until the successor entity notifies
CMS that the transaction has been completed. To the extent notice is
required they recommended that the final rule should make it clear that
notice will be confidential and exempt from disclosure under Exemption
4 of the Freedom of Information Act (FOIA) and implementing HHS
regulations as trade secrets. The commenters also recommended that
commercial or financial information obtained from a person should be
privileged or confidential and that this is necessary so that public
companies can appropriately maintain sensitive nonpublic information
and at the same time ensure that disclosure is made appropriately when
that disclosure is timely under applicable securities regulations that
protect shareholders.
Response: We continue to believe that sufficient advance notice is
necessary to allow us to evaluate whether a new owner will meet all of
the requirements to be a contract supplier under the Medicare DMEPOS
Competitive Bidding Program. However, we are revising the language
under Sec. 414.422(d)(1) to clarify what a contract supplier's
obligations are in the event of a change of ownership. Specifically,
Sec. 414.422(d)(1) now provides that if a contract supplier is
considering or negotiating a change in ownership, the contract supplier
must notify CMS 60 days before the anticipated effective date of the
change. Under Sec. 414.422(d)(2), if the supplier that acquires or
merges with the

[[Page 18053]]

contract supplier wishes to itself become a contract supplier, it must
meet all of our requirements, including compliance with applicable
quality standards, accreditation, eligibility standards, and financial
standards, and must submit the documentation required in Sec. 414.414.
The new supplier that seeks to become a contract supplier must also
submit a novation agreement to CMS 30 days prior to the anticipated
effective change of ownership, indicating that it will assume all
duties and obligations of the previous contract supplier. We have
clarified in Sec. 414.422(d) that if a new entity will be formed as a
result of the merger or acquisition, the existing contract supplier
submits to CMS, at least 30 days before the anticipated effective date
of the change of ownership, its final draft of a novation agreement for
CMS review. The successor entity shall submit to CMS within 30 days
after the effective date of the change of ownership an executed
novation agreement acceptable to CMS. We understand that the change of
ownership information is highly confidential, and will make every
effort to protect it as required by law.
Comment: Numerous commenters recommended that CMS retain the
authority to disallow a successor entity to participate as a contract
supplier only if CMS determines that allowing the successor entity to
participate as a contract supplier would have significant
anticompetitive effects. The commenters indicated that CMS should not
unreasonably withhold its approval of a change of ownership and that
CMS does not have the authority to, and, in any event, should not deny
winning supplier status to a new owner on the basis that its capacity
is not necessary within the CBA. They added that contract suppliers in
CBAs will most likely experience an increase in the value of their
business and, therefore, should be able to take advantage of the
marketplace without interference from government agencies if they wish
to lawfully transfer ownership.
Several commenters agreed that CMS should not allow a supplier to
circumvent the bidding process through mergers or acquisitions, but
suggested that the proposed rule creates a restraint of trade situation
and/or devalues the business of a supplier that decides to sell the
company.
In addition, several commenters recommended that CMS revise the
proposed change in ownership rules so that they are consistent with
existing requirements for DMEPOS suppliers. Other commenters suggested
that CMS apply the change of ownership rules found in 42 CFR 489.18(a),
which provides that a change of ownership for a corporation occurs when
the merger or provider corporation merges into another corporation or
the consolidation of two or more corporations, results in the creation
of a new corporation, and states that the transfer of corporate stock
or the merger of another corporation into the provider corporation does
not constitute change of ownership.
Response: We want to evaluate whether a supplier that acquires or
merges with a contract supplier and that wants to become a contract
supplier itself meets our standards for being a contract supplier under
the Medicare DMEPOS Competitive Bidding Program. These requirements
serve the needs of the program because we do not want to encourage
suppliers to adopt a strategy of circumventing the regular bidding
process by gaining winning status through acquisitions of or mergers
with contract suppliers not to violate any anticompetitive
prohibitions.
We disagree with the commenter that suggested that we apply the
change of ownership rules found in 42 CFR 489.18(a) because this
section of our regulation applies only to Medicare Part A providers,
such as hospitals, SNFs, and HHAs, but competitive bidding applies to
Medicare Part B suppliers.
Comment: One commenter stated that the change of ownership
provision should not apply when a contract supplier, as opposed to a
noncontract supplier, purchases or acquires another supplier. The
commenter noted that if a supplier that purchases or acquires a
contract supplier does not intend to be a contract supplier, there is
no reason for this requirement to apply, and if the acquiring supplier
is already a contract supplier, there is no reason to require an
additional review as to its qualifications. The commenter stated that
while it understands the need to conduct oversight and diligence if the
acquiring supplier is not a contract supplier, it requested that CMS
clearly specify requirements for approval of the acquisition if the
acquiring party is a contract supplier but does not intend for the
supplier it acquires to be a contract supplier.
The commenter also urged that the final rule clarify that the
requirements for an acquirer would be no more burdensome than the
requirements to be a contract supplier because such requirements could
result in an unequal burden on entities that acquire contract
suppliers. The commenter stated that, if additional requirements are to
be imposed, CMS should state what they are explicitly so that the
public understands and can comply with them in advance of incurring
substantial transaction costs.
Response: As stated in response to the previous set of comments, we
plan to evaluate the same information required to be submitted by a
bidding supplier if a contract supplier purchases a noncontract
supplier or if a noncontract supplier purchases a contract supplier.
However, if a contract supplier purchases another contract supplier, we
will not ask the contract supplier to duplicate information we already
have on file.
Comment: One commenter stated that CMS should be able to assure
itself that the acquired supplier continues to meet all obligations and
requirements for contract suppliers, and its review should be limited
to a consideration of whether, post acquisition, the acquired supplier:
(1) Meets all the requirements of a contract supplier; (2) is willing
to assume all obligations under the contract; and (3) has executed a
novation agreement. The commenter stressed that if CMS desires to
encourage all suppliers to bid, the contract supplier's status as the
winning bidder should be preserved as a valuable asset for
consideration in any commercial transaction.
Other commenters were concerned about the following issues: the
successor's liability for potentially fraudulent activities that could
have occurred on the previous company's watch; instances where the new
contract supplier determines a revised Certificate of Medical Necessity
(CMN) is needed and the physician or treating practitioner is no longer
in practice or refuses to execute a new CMN; and the tax implications
of restricting change of ownership transactions to only stock
transactions. The commenter observed that there may be instances where
the sale of a supplier because of the death of the owner would be
prohibitively expensive if executed as a stock transaction, leaving the
widow with little money and no recourse to dispose of the business.
Response: As we stated earlier, our requirements regarding change
of ownership are intended to provide us with assurance that the
successor entity meets all of our requirements before we can consider
it to be eligible to assume the previous contract supplier's contract.
A new contract supplier will be responsible for meeting all CMS program
requirements.
After consideration of the public comments received, in this final
rule we are finalizing Sec. 414.422(d) as discussed above.

[[Page 18054]]

C. Suspension or Termination of a Contract (Sec. Sec. 414.422(f) and
(g))

In the May 1, 2006, proposed rule (71 FR 25682), we specified that
contract suppliers would be held to all the terms of their contracts
for the full length of the contract period (proposed Sec. 414.422(f)).
Any deviation from contract requirements, including a failure to comply
with governmental agency or licensing organization requirements, would
constitute a breach of contract. We indicated that, if we conclude that
the contract supplier has breached its contract, the actions we might
take include, but are not limited to, asking the contract supplier to
correct the breach condition, suspending the contract, terminating the
contract for default (which might include reprocurement costs),
precluding the supplier from participating in the competitive bidding
program, or availing ourselves of other remedies permitted by law. We
indicated that we also would have the right to terminate the contract
for convenience (proposed Sec. 414.422(g)).
Comment: Several commenters believed that CMS must include
additional procedural safeguards for contract suppliers before
terminating their contracts. The commenters suggested that CMS give a
contract supplier notice that it believes the supplier has breached its
contract, an opportunity and adequate timeframe for the contract
supplier to cure the breach, and a review or appeal mechanism if the
contract supplier's contract is terminated. One commenter stated that
contract suppliers should only be terminated for ``material breach'' of
their contracts.
Another commenter noted that the proposed rule grants CMS the
unilateral right to terminate a contract without cause which eliminates
a principal advantage for contract suppliers. The commenter stressed
that without modification of the proposed rule, suppliers would be
dissuaded from submitting the lowest bid possible because they would
have to calculate the financial risk of termination and compensate for
this uncertainty in their bid prices.
Another commenter stated that it is reasonable for CMS to expect
that contract suppliers will be held to all the terms of their
contracts for the full length of the contract period. Two commenters
objected to the provision stating that CMS may include reprocurement
costs if a contract supplier's contract is terminated because the
contract supplier cannot know Medicare's reprocurement cost structure.
One commenter asked whether the provision stating that CMS could
preclude a contract supplier that breached its contract from
participating in the competitive bidding program referred only to the
program in the supplier's CBA or the entire Medicare DMEPOS Competitive
Bidding Program.
Response: We believe that defining a breach of contract as any
deviation from contract requirements, including a failure to comply
with governmental agency or licensing organization requirements, will
help ensure that contract suppliers do not breach their contract
requirements. We have set out a variety of potential actions of varying
levels of severity that we could take in the event of a breach of
contract, such as requiring that contract supplier submit a plan to
correct the deficiency that created the breach of contract, suspending
the contract, precluding the contract supplier from participating in
the competitive bidding program in the future, revoking the supplier
number of the contract supplier, and/or availing ourselves of other
remedies allowed by law. In deciding which course of action to take, we
will consider the nature of the breach, including whether the breach is
indicative of a substantial failure to comply with the terms of the
supplier's contract, and the extent to which the efficient and
effective administration of the Medicare program has been compromised
by the breach.
We are making several changes to the proposed rule. In response to
the comments which addressed the potential problems that might stem
from our proposal to permit CMS to require terminated suppliers to
reimburse CMS for reprocurement costs, proposed at Sec.
414.422(f)(2)(iii), we are deleting that proposal. We are also making
several revisions to our proposal to permit CMS to terminate a contract
with a contract supplier in the event of a breach of contract or to
take other action against a supplier after a breach of contract has
occurred. We have eliminated the phrase ``for default'' from Sec.
414.422(f)(iii). We have revised the wording to state that CMS may
``[t]erminate the contract.'' We believe that this is consistent with
CMS' approach to contracts and agreements with providers, suppliers and
other contracted entities in other areas of the Medicare program. CMS
will have the authority to terminate a contract with a contract
supplier where a breach of contract has occurred.
CMS is making several other minor clarifications to the language at
Sec. 414.422(f). Specifically, at Sec. 414.422(f)(2)(i), we proposed
that CMS could require a contract supplier to ``correct the breach
condition'' where a breach of contract had occurred. We are revising
this language to state that CMS may ``[r]equire the contract supplier
to submit a corrective action plan.'' Also, at Sec. 414.422(f)(2)(ii),
we proposed that in the event of a breach of contract, CMS could
``[s]uspend performance under the contract.'' We are revising this
language to state that in the event of a breach of contract, CMS can
``suspend the contract supplier's contract.''
CMS agrees with the need for procedural safeguards where CMS is
taking action to terminate a contract supplier's contract. CMS will
provide further guidance regarding the appeal procedures available to
contract suppliers for termination actions, as well as other
enforcement actions involving contract supplier contracts, at a future
date.
Comment: One commenter requested greater clarification of the
phrase ``for convenience'' used in the preamble to the proposed rule
(71 FR 25682) to describe a basis for CMS to terminate a contract. The
commenter stated that at a minimum there should be an explicit notice
period required prior to termination. Another commenter recommended
deleting this provision.
Response: In response to comments, CMS has decided to delete this
provision.
Comment: One commenter stated that the proposed rule does not
explicitly prohibit the Secretary from unilaterally changing the price
of an item in a CBA during the term of the competitive bidding
contract. Several commenters also stated that there should be a
provision that allows suppliers to terminate, without being in breach
of contract, in cases of hardship or material change in circumstances
that are not the fault of or within the control of the supplier if
unexpected circumstances arise that hinder its ability to render
performance. Another commenter stated that the lack of parity in the
ability of the contracting parties to terminate may serve as an
impediment to many potential bidders' submission of the lowest possible
bid.
Response: Each supplier contract under each competitive bidding
program will identify the product categories, items, and single payment
amounts for items furnished under that program. The single payment
amount for each item in each contract will not change for the duration
of the contract, with the only exception being in limited cases where a
HCPCS code is divided or merged as provided in Sec. 414.426. However,
even where Sec. 414.426 applies, the total single payment amounts for
the sum of the item components, the newly

[[Page 18055]]

separated item(s), or the newly combined item will be equal to the
single payment amounts that were originally listed in the contract.
Contract suppliers will be held to all of the terms of their contracts
for the length of the contract period and we will not allow them to
suspend their performance under their contracts without consequences
because of the potential hardship that the Medicare program and
beneficiaries could suffer if there were no longer enough contract
suppliers to furnish one or more product categories in a CBA. If a
supplier breaches its contract with CMS, we have the right to ask the
contract supplier to correct the breach, suspend the contract,
terminate the contract, or preclude the supplier from participating in
the Medicare Competitive Bidding Program. We do, however, recognize the
hardships may arise for contract suppliers and we will take this into
consideration as we decide what appropriate actions should be taken in
the event of a breach.
Comment: One commenter suggested that contract suppliers should
have the ability to exit the program with a 90-day notice. The
commenter stated that this will allow the bidders that may have failed
to meet quality standards and reach their market expectations to exit
in a business-like manner.
Response: As we explained above, we are selecting a sufficient
number of contract suppliers to furnish each product category in each
CBA, and allowing contract suppliers to terminate their contracts may
impede beneficiary access to competitively bid items and otherwise
result in a hardship for the Medicare program. Contract suppliers are
expected to comply with their contracts for their entire duration.
After consideration of the public comments received, in this final
rule, we are finalizing the breach of contract and termination
provisions in Sec. Sec. 414.422(f) and (g) with the changes described
above.

X. Administrative or Judicial Review of Determinations Made Under the
Medicare DMEPOS Competitive Bidding Program (Sec. 414.424)

Section 1847(b)(10) of the Act provides that there will be no
administrative or judicial review of determinations made under section
1869, section 1878, or any other section of the Act, for the--
Establishment of payment amounts under a competitive
bidding program;
Awarding of contracts under a competitive bidding program;
Designation of CBAs for the Medicare DMEPOS Competitive
Bidding Program;
Phased-in implementation of the Medicare DMEPOS
Competitive Bidding Program;
Selection of items for a competitive bidding program.
Bidding structure and number of contract suppliers
selected under a competitive bidding program.
In the May 1, 2006, proposed rule (71 FR 25682), we proposed to
incorporate in a new proposed Sec. 414.424 the provisions for no
administrative or judicial review of the determinations specified in
section 1847(b)(10) of the Act listed above. We indicated that the
proposed regulation would have no impact on the current beneficiary or
supplier right to appeal denied claims. However, neither the
beneficiary nor the supplier would be able to bring such an appeal if a
competitively bid item was furnished in a CBA in a manner not
authorized by this rule.
Comment: A number of commenters agreed that the proposed rule
tracked the provisions of the Act, which does not provide for
administrative or judicial review under the Medicare DMEPOS Competitive
Bidding Program. However, many of the commenters believed that CMS
should establish some type of grievance and review process to provide
contract suppliers an opportunity to review the competitive bidding
process and to challenge the outcome of the bid evaluation process and
the selection of contract suppliers. One commenter added that because
Medicare is required to make available to the public the final process
documentation under the Freedom of Information Act requirements, it is
only fair that CMS also provide an opportunity for suppliers to
challenge any decisions in this documentation.
Two commenters asserted that the statutory limitations on
administrative and judicial review do not preclude the establishment of
a process that would give suppliers an opportunity to communicate with
CMS regarding grievances and seek redress. They asserted that the
implementation of such a process would be consistent with
Constitutional due process rights. One commenter recommended that CMS
establish some type of expedited review process specific to contract
award decisions and urged full transparency of factors influencing
contract award decisions in order to support the highest level of
integrity in the process. One commenter recommended that CMS keep in
place all current mechanisms to defend the supplier's rights, including
the Administrative Law Judge review.
One commenter believed that the nonavailability of administrative
review violates not only the Administrative Procedure Act but also
individual and corporate rights to due process and to redress
grievances. The commenter recommended that appeal rights be restored as
these rights exist elsewhere in the Medicare program.
Response: We understand the commenters' concerns. However, we
believe that Congress enacted section 1847(b)(10) of the Act to avoid
any delay or disruption in the implementation of the program caused by
challenges and appeals regarding specified aspects of the Medicare
DMEPOS Competitive Bidding Program. We intend to conduct an extensive
education and outreach program to ensure that the suppliers are
educated about the rules and provisions of the program and understand
the contract selection process and what is required of bidding
suppliers. In addition, we will be providing the suppliers with a 60-
day open bidding period during which they can change, update, or
correct their bid packages before certifying their final submissions.
Comment: Numerous commenters recommended that CMS include a
procedure for debriefing suppliers that were not selected as contract
suppliers and provide an opportunity for a review to determine, at a
minimum, whether an error on the part of CMS or its contractors was the
reason that the supplier lost the bid.
Several commenters recommended that CMS put appropriate procedures
in place for bidders to ensure that calculations related to their bids
are reviewed for accuracy and that these procedures provide suppliers
an opportunity to redress issues such as simple calculation errors. One
commenter pointed out that because the review and award of contracts
under the competitive bidding program will be labor intensive, it is
likely that there will be many inadvertent human and computer errors
and/or indisputably arbitrary decisions. The commenter pointed out that
while the statute grants CMS discretion in making determinations under
the competitive bidding program, Congress has not granted CMS the
authority to render moot the authority of published regulations by
using known improper or erroneous information to implement those
regulations. Therefore, the commenter recommended a ``reconsideration
process'' with regard to the award of contracts only, and delegation of
authority to the Provider Reimbursement Review Board or some similar
body within the Medicare program to hear such requests for
reconsideration. The commenter acknowledged that under this process,

[[Page 18056]]

the agency's decisions would not be administratively or judicially
appealed. However, the commenter pointed out that the establishment of
a reconsideration process would, at least, enable errors to be
corrected.
Response: In accordance with section 1847(b)(10) of the Act, we
proposed that there will be no administrative or judicial review for
the awarding of contracts or the establishment of payment amounts under
a competitive bidding program. We believe that Congress enacted section
1847(b)(10) of the Act to avoid any delay or disruption in the
implementation of the program that could arise if we had to defend
numerous challenges and appeals brought by losing bidders. We intend to
conduct an extensive education and outreach program to ensure that
suppliers are educated about the rules and provisions for the program.
In addition, we are developing a quality assurance system to ensure
that bids submitted to us are correctly identified and recorded. We
intend to allow bidders to submit electronic bids. Bidders will have an
opportunity to review their bids and certify their accuracy prior to
submission. Bidders will be able to modify or change their bids at any
time during the bidding window. In addition, the CBIC will have in
place an auditing system and quality assurance program to monitor and
ensure that it accurately records and calculates the information
furnished by suppliers. We will also be notifying all losing bidders,
but believe it would not be administratively feasible to provide
debriefings for all losing bidders, due to logistics, volume of
bidders, and time constraints.
Comment: One commenter strongly objected to the lack of
administrative or judicial oversight of the process. The commenter
stated that the Medicare DMEPOS Competitive Bidding Program is a
procurement program by which CMS seeks to acquire the same types of
commercial items that it acquires for itself in accordance with the
FAR. The commenter firmly believed that considering the number of
procurements that are set aside each year by GAO and the United States
Court of Federal Claims based on government error, CMS should allow
administrative or judicial review. The commenter believed that the
proposal could lead to arbitrary and erroneous awards, if not fraud.
The commenter suggested that CMS clarify that all contract awards and
invitations to participate will be subject to the traditional review of
procurements conducted by the Government. The commenter added that
regardless of whether CMS possesses the right to waive the FAR and
avoid judicial or administrative oversight, prudence and the obligation
to maintain integrity in the procurement process that it is developing
require that CMS open the process up to protect review.
Response: We disagree with these comments. The Medicare DMEPOS
Competitive Bidding Program is a unique program that differs in many
ways from traditional government procurement. We are bound to implement
this program in accordance with the statute, which as noted earlier in
this section, provides that there will be no administrative or judicial
review of certain functions. In the proposed rule we provided notice to
the public of how we intend to implement the Medicare DMEPOS
Competitive Bidding Program, and this final rule responds to the
public's comments.
Comment: A number of commenters pointed out that even though CMS
acknowledged in the preamble of the proposed rule that the existing
rights of beneficiaries and suppliers to appeal denied claims are
undisturbed by competitive bidding, the proposed regulatory language of
Sec. 414.424 as written does not make clear that these existing rights
are unaffected. The commenters suggested the addition of language in
Sec. 414.424 to clarify that these rights would be preserved. Three
commenters also indicated that the statement in the regulation that
``[a] denied claim is not appealable if CMS determines that a
competitively bid item was furnished in a CBA in a manner not
authorized by this subpart'' is vague as written and suggested that the
statement be rewritten for clarification or removed. One commenter
suggested that CMS add language to state that ``A claim is not
appealable if the denial is based on a determination by CMS that a
competitively bid item was furnished in a CBA in a manner not
authorized by this subpart.''
Response: In this final rule, we have revised the language in Sec.
414.424(b) to clarify that there are no appeal rights for claim denials
if the denial is based on our determination that a competitively bid
item was furnished in a CBA in a manner not authorized by 42 CFR Part
414 Subpart F.
After consideration of the public comments we received, we are
adopting as final, with technical clarifications, the provisions of
proposed Sec. 414.424.

XI. Opportunity for Participation by Small Suppliers (Sec. Sec.
414.402, 414.414(g))

Section 1847(b)(6)(D) of the Act requires us, in developing bidding
and contract award procedures, to take appropriate steps to ensure that
small suppliers of items have an opportunity to be considered for
participation in the Medicare DMEPOS Competitive Bidding Program.
Section 1847(b)(2)(A)(ii) of the Act also states that the needs of
small suppliers must be taken into account when evaluating whether an
entity meets applicable financial standards.
Size definitions for small businesses are, for some purposes,
developed by the Small Business Administration (SBA) based on annual
receipts or employees, using the North American Industry Classification
System (NAICS). Based on the advice from the SBA, we expect that most
DME suppliers will fall either into NAICS Code 532291, Home Health
Equipment Rental, or NAICS Code 446110, Pharmacies, since the SBA
defines these small businesses as businesses having less than $6.5
million in annual receipts.
In the May 1, 2006 proposed rule (71 FR 25682), we proposed using
the SBA's small business definition when evaluating whether a DMEPOS
supplier is a small supplier. We relied on the expertise of the SBA to
determine what constitutes the appropriate definition of a small
supplier. We proposed that all contract suppliers would be expected to
service the whole CBA. However, we considered allowing a small supplier
that has fewer than 10 full-time equivalent (FTE) employees to
designate a geographic service area that is smaller than the entire
CBA. We did not propose this approach because we want to ensure that
beneficiaries have the choice of going to any contract supplier in
their respective CBA. Carved-out areas could lead to confusion for
beneficiaries faced with multiple competitive bidding subareas.
Further, we believe such an approach would allow selection of more
favorable market areas by smaller businesses potentially leading to an
unfair market advantage. We sought comments on this issue.
Information available to us on the size distribution of businesses
that provide DMEPOS indicates that the majority of suppliers in the
DMEPOS industry qualify as small businesses according to the SBA
definitions. Our analysis of DMEPOS claims data suggests that at least
90 percent of DMEPOS suppliers had Medicare allowed charges of less
than $1 million in CY 2003. The figure of $1 million could be an
underestimate of total receipts because it does not include non-
Medicare receipts and non-DMEPOS receipts, but it does suggest that
most DMEPOS suppliers are small.
Although section 1847(b)(6)(D) of the Act focuses on ensuring
participation in the bidding, and not on bidding outcomes, we believe
that it is worth

[[Page 18057]]

noting how small suppliers fared in the bidding in the Medicare
competitive bidding demonstration projects. Both small and large
suppliers were selected as demonstration suppliers. Some small
suppliers that were selected as demonstration suppliers were able to
increase their market share substantially during the demonstration.
Others experienced little change in market share.
We recognize the importance, benefits, and convenience offered by
the local presence of small suppliers. In the May 1, 2006 proposed
rule, we proposed to take the following steps to ensure that small
suppliers have the opportunity to be considered for participation in
the program.
First, as required by section 1847(b)(4)(B) of the Act, we will
select multiple winners in each CBA. If a single winner was selected in
an area, a small supplier would have difficulty participating in the
competition because the supplier, as a minimum, would have to
demonstrate that it could rapidly expand to serve the entire projected
demand in the area. Selecting multiple suppliers should make it easier
for small suppliers to participate in the program.
Second, we proposed to conduct separate bidding competitions for
product categories, allowing suppliers to decide how many product
categories for which they want to submit bids, rather than conduct a
single bidding competition for all DMEPOS items and other equipment. We
believe that separate competitions for product categories will
encourage participation by small suppliers that specialize in one or a
few product categories. If a single competition was held for all DMEPOS
items and other equipment, small, specialized suppliers would have to
either significantly expand their product and service offerings or
submit bids for items they currently do not provide.
We stated that we recognize the importance of small suppliers in
the DMEPOS industry, and we welcomed comments on the options identified
in the proposed rule. We also expressed interest in other ways to
ensure that small suppliers have opportunities to be considered for
participation in the program.
To collect additional information on this issue, we contracted with
RTI International to conduct focus groups with small suppliers. The
purpose of the focus groups was to gather input on ways to facilitate
participation by small suppliers in the program. The focus groups also
discussed the impact of the requirement for the quality standards and
accreditation, which will affect all small suppliers, regardless of
whether they seek to participate in a competitive bidding program. As
we indicated in the proposed rule, we reviewed our efforts to ensure
participation by small suppliers in the Medicare DMEPOS Competitive
Bidding Program after we reviewed public comments on the proposed rule
and the results of the focus groups. We also considered the findings of
the focus groups, along with the additional options and comments
presented on the proposed rule, in developing this final rule.
Comment: Several commenters requested that CMS share the findings
of the focus groups.
Response: Nine focus groups were conducted, during April and May
2005, with DMEPOS suppliers that had less than $3 million in gross
revenue and employed up to 10 FTE employees. The purpose of the focus
groups was to explore small DMEPOS suppliers' thoughts and opinions on
the potential impact of quality standards, accreditation, competitive
bidding, and financial standards requirements on their businesses. We
presented an overview and results of the focus groups related to
quality standards and accreditation to the PAOC on September 26, 2005.
This PowerPoint Presentation can be accessed at http://www.cms.hhs.gov/CompetitiveAcqforDMEPOS/PAOCMI/list.asp#TopOfPage
.

The results of the focus groups related to competitive bidding and
financial standards were presented to the PAOC on May 23, 2006. Several
focus group participants remarked that the competitive bidding process
would force many small suppliers out of business. The participants
suggested alternatives to competitive bidding, including: (1) CMS
should determine product prices and allow all willing suppliers to
provide products at the set price; and (2) CMS should reserve a
percentage of winning bids for small suppliers. Many participants
believed that lower payment rates for suppliers would inevitably lead
to lower quality goods and services. Participants were particularly
emphatic in their belief that CMS continues to neglect the valuable
service component that small suppliers provide to their customers. They
believed that it is their commitment to service that sets them apart
from the national companies. A number of participants were concerned
about the possibility of requiring small supplier bid winners to
furnish items in the entire MSA, given the fact that some MSAs cross
State boundaries. There was also a consensus among these small
suppliers that the impact of competitive bidding would differ by
product line. They believed that items involving high-end technology
equipment, respiratory equipment, and customized products are more
service intensive than other products, such as standard wheelchairs,
that involve fewer repairs, set-up time, and patient education.
Inclusion of mail order businesses in competitive bidding was also
a controversial issue for many participants. Because mail order
businesses often do not have a physical storefront and do not provide
patient education, small suppliers argued that such businesses are in
violation of the 21 Medicare supplier standards.
Finally, many participants in the focus groups believed that tax
returns, quarterly standard financial statements, and Dun & Bradstreet
were helpful sources of information about a business's credit history
and cash flow. The participants noted that suppliers that grossed over
$3 million in revenue used audited financial statements, whereas
suppliers that grossed less than $3 million in revenue used cash basis
accounting principles. A summary of the PAOC discussion related to the
focus group results can be accessed at http://www.cms.hhs.gov/CompetitiveAcqforDMEPOS/downloads/PAOC_summary.pdf.
We have used the

comments from the focus groups and the public comment process in
developing our final policies for the Medicare DMEPOS Competitive
Bidding Program.
Comment: Several commenters noted that section 1847(b)(6)(D) of the
Act is entitled ``protection'' of small suppliers and not the mere
identification of small suppliers. They reported that there are
currently 40,000 practitioners, providers and suppliers enrolled as
Medicare suppliers, including approximately 1,078 physical therapists.
They agreed with the option to define small supplier as fewer than 10
FTE employees. The commenters stated that health care practitioners who
provide DMEPOS as an integral part of their professional services
specialize in providing items for specific conditions. They added that
these suppliers offer considerable expertise in evaluating both the
patient and the item in order to provide the patient with the best
possible outcome. They also believe that small suppliers serve rural
and underserved urban communities where larger suppliers may not
operate.
The commenters proposed the following alternative policies: (1) At
least 50 percent of suppliers that receive a contract should be small
suppliers (based on $3 million or less in revenue or less than 10 FTE
employees); (2) CMS should allow suppliers with less than 10 FTE
employees to furnish items to less

[[Page 18058]]

than the entire CBA; (3) CMS should award contracts to small suppliers
with the lowest bids that exceed the pivotal bid; (4) CMS should allow
truly small suppliers to promise to accept the single payment amount;
and (5) CMS should establish a certain volume of items in each
geographic area that will be ``set-aside'' for small suppliers.
Response: We agree that section 1847(b)(6)(D) of the Act is
entitled ``Protection of Small Suppliers.'' We recognize the concerns
raised by the commenters and have considered the suggested alternatives
provided during the small supplier focus groups and through the public
comment process. We also recognize the importance of maintaining
storefront capabilities to meet the needs of beneficiaries. In this
final rule, we are revising our proposed policies to ensure that small
suppliers have an opportunity to be considered for participation in the
Medicare DMEPOS Competitive Bidding Program. As of January 2006, the
SBA defines a small business as generating less than $6.5 million in
annual receipts. The SBA definition refers to small businesses rather
than ``small suppliers.'' We believe that $6.5 million is not
representative of small suppliers that provide DMEPOS items to Medicare
beneficiaries, as it would encompass too many suppliers. In
coordination with the SBA, we are defining a small supplier as a
supplier that generates gross revenue of $3.5 million or less in annual
receipts and we are revising Sec. 414.402 to include this definition.
We would accept relevant documentation from a supplier that shows its
sales volume, including information that would qualify as a ``receipt''
under 13 CFR 121.104 to determine if the supplier meets this
definition. Before we receive supplier bids, we would not have
information on each supplier's total revenue. We only have information
on suppliers' Medicare revenues. As a result, we had to make an
assumption about what percent of a supplier's revenues come from
Medicare. We looked at filings by public DMEPOS companies and, based on
that information, we assume one-half of the average supplier's revenues
come from Medicare DMEPOS.
To ensure the participation of multiple suppliers and storefront
locations, beneficiary access, and increased participation by small
suppliers, we have revised our rules as noted below:
The definition of a ``small supplier'' is a supplier that
generates gross revenue of $3.5 million or less in annual receipts.
To help small suppliers to have an opportunity to
participate in the Medicare DMEPOS Competitive Bidding Program and to
generally support HHS' goals for contracting with small businesses, we
have also established a target number for DMEPOS small supplier
participation in each competitive bidding program. Our target number
for small supplier participation will be determined by multiplying 30
percent times the number of suppliers that have met our bidding
requirements and whose composite bids are at or lower than the pivotal
bid for each product category in each CBA. The number resulting from
this multiplication represents our goal for small supplier
participation for that product category. We will then count to see if
the number of suppliers whose composite bids are at or below the
pivotal bid is equal or greater than the target number we have computed
for that product category. If the number of suppliers is lower than the
target number, we will give the small supplier whose composite bid is
above the pivotal bid, but closest to it of all the small suppliers
whose composite bids are above the pivotal bid for the product
category, the option of accepting a contract to furnish the product
category at the single payment amounts. If the target number is still
not met, we will offer a contract to the small supplier whose composite
bid is the next closest to, but above, the pivotal bid, and will use
this methodology until we reach the target number or there are no
additional small suppliers that submitted a bid for the product
category. We are codifying this methodology in final Sec.
414.414(g)(1).
Comment: Many commenters disagreed with using the definition of the
SBA for a ``small business'' (less than $6 million in annual receipts)
because the CY 2003 Medicare data showed that at least 90 percent of
suppliers had less than $1 million in allowed charges. They recommended
defining a small supplier as a supplier that generates less than $3
million in annual receipts. The commenters believed that a lack of
small supplier participation would negatively impact patient care. They
added that small businesses would have to endure large expenses in
order to participate in the Medicare DMEPOS Competitive Bidding
Program.
Response: We agree with the commenters and, as we explained above,
we have modified our definition of a small supplier so that it now
means a supplier that generates gross revenue $3.5 million or less in
annual receipts.
Comment: A few commenters indicated that conducting separate
bidding processes for individual product categories is administratively
burdensome. They stated that CMS' assumption that large suppliers could
expand their products by offering supplies and equipment easier or more
quickly than small suppliers is a false view of a company's ability to
expand. They also reported that large organizations must seek approval
from their boards or other stakeholders before they can undertake
certain business expansion activities.
Response: We appreciate the comment but believe that conducting
separate bidding processes for individual product categories will
encourage the participation of small suppliers that specialize in one
or a few product categories. It is our goal to allow Medicare
beneficiaries an opportunity to receive all related equipment from the
same supplier, thereby minimizing disruption to the beneficiary.
Suppliers currently specialize in particular products, and we do not
see this process being interrupted by competitive bidding.
After consideration of the public comments received, in this final
rule, we are adding a definition of ``small supplier'' at Sec. 414.402
and finalizing Sec. 414.414(g), with revisions sets forth our
methodology for ensuring that a sufficient number of small suppliers
have an opportunity to participate in the Medicare DMEPOS Competitive
Bidding Program.

XII. Opportunity for Networks (Sec. Sec. 414.402, 414.418)

In the May 1, 2006 proposed rule (71 FR 25683), we proposed to
allow suppliers the option to form networks for bidding purposes
(proposed Sec. 414.418). In the proposed rule, we refer to networks as
several companies joined together through some type of legal
contractual relationship to submit bids for a product category under
competitive bidding. This option would allow suppliers to band together
to lower bidding costs, expand service options, or attain more
favorable purchasing terms. We recognize that forming a network may be
challenging for suppliers, and it also poses challenges for bid
evaluation and program monitoring. Networking was included as an option
in the Medicare competitive bidding demonstration project, but no
networks submitted bids. Still, we believe that networking may be a
useful option for suppliers in some cases. Therefore, we proposed to
offer it as an option. If suppliers decide to form

[[Page 18059]]

networks, we proposed that the following rules must be met:
A legal entity must be formed for the purpose of
competitive bidding, such as a joint venture, limited partnership, or
contractor/subcontractor relationship, which would act as the applicant
and submit the bid. We specifically requested comments regarding other
types of suitable arrangements that would not require suppliers to form
a new legal entity but would allow them to form a network for purposes
of submitting bids. For example, one supplier could be designated as a
primary contractor and the other suppliers in the group would function
as subcontractors. In this example, if the contract with the primary
contractor was terminated, the contracts with the subcontractors would
also be terminated, thus nullifying the entire contract.
All legal contracts must be in place and signed before the
network entity can submit a bid for the Medicare DMEPOS Competitive
Bidding Program.
Each member of the network must be independently eligible
to bid. If a member of the network is determined to be ineligible to
bid, the network would be notified and given 10 business days to
resubmit its application.
Each member must meet any accreditation and quality
standards that are required. Each member is equally responsible for the
quality of care, service, and items that it delivers to Medicare
beneficiaries. If any member of the network falls out of compliance
with this requirement, CMS would have the option of terminating the
network contract.
The network cannot be anticompetitive. We proposed that
the network members' market shares for competitively bid item(s), when
added together, cannot exceed 20 percent of the Medicare market within
a CBA. We believe that, by setting the maximum size of the network's
market shares at 20 percent of the marketplace, firms will be able to
gain the potential efficiencies of networking while at the same time
ensure that there would continue to be competition in the area. If the
20-percent rule were adopted and suppliers joined networks, there would
still be at least 5 networks competing in a DMEPOS competitive bidding
program, which we believe would allow for sufficient competition among
suppliers. In particular, we requested comments about what percentage
of the marketplace would be appropriate for networks for suppliers.
A supplier may only join one network and cannot submit
individual bids if it is part of a network. The network must identify
itself as a network and identify all members in the network.
The legal entity would be responsible for billing Medicare
and receiving payment on behalf of the network suppliers. The legal
entity would also be responsible for appropriately distributing
payments to the other network members.
Comment: Many commenters expressed concern about potential
violations of Federal antitrust laws that could arise under the
proposed network provisions. For example, they expressed concern that
forming a network could violate the Federal antitrust laws because
those laws do not permit suppliers to reach a mutual consensus on
pricing. They also stated that the proposed rule would require
suppliers to agree on proposed prices for all items within a
competitive bidding product category. A commenter expressed concern
that networks consisting of a large number of suppliers would not be
legitimate under the antitrust laws. The commenter also expressed
concern that the proposed network policy could be falsely interpreted
as providing a safe harbor from the antitrust laws.
Many commenters believed that the option to form a network is not a
realistic solution for ensuring that small suppliers participate in the
competitive bidding program. They further believed the proposed rule is
complex, and that suppliers would not have sufficient time to form a
network and comply with all the requirements to meet the competitive
bidding implementation timelines. A commenter indicated that the
network option would reduce potential burdens on small suppliers and
specifically recommended limiting the network option to small
suppliers.
Response: We strongly agree that networks must not violate
antitrust laws and that networks must take steps to ensure that they
are not in violation of Federal antitrust laws. We emphasize that
suppliers that pursue the network option must comply with all
applicable Federal antitrust laws, and we will reject a network bid if
we believe it has been prepared in violation of those laws. We will
also refer any suspected cases of Federal antitrust violations to the
Department of Justice for further review. In response to comments
voicing concern that the network formation process could implicate the
Federal antitrust laws, we will now require that each network member
sign a statement in the bid submitted by the network certifying that
the supplier joined the network because it is unable to furnish all of
the items in the product category for which the network is submitting a
bid to beneficiaries throughout the entire geographic area of the CBA.
The inclusion of this certification from all network members will help
assure us that each network member joined the network for a legitimate,
legal purpose (that is, it cannot otherwise compete because it is
unable to furnish the product category throughout the entire geographic
area of the CBA).
The network option is a key piece of our efforts to ensure that
small suppliers have an opportunity to be considered for participation
in the Medicare DMEPOS Competitive Bidding Program. In response to
comments requesting that networks be limited to small suppliers, we
will limit network participation to small suppliers which, as we
explained previously, will now be defined as suppliers that generate
gross revenue of $3.5 million or less in annual receipts. We have
revised Sec. 414.418 to add this provision. We believe that this
modification to our proposal will help ensure that the competition in
each CBA is actually a competition between suppliers of all sizes and
that it is not dominated by a limited number of networks comprised only
of large suppliers that, in our estimation, should be able to compete
independently. In addition, in response to concerns that networks would
be anti-competitive if they had excessively large number of members,
the size of each network will be limited to 20 suppliers because with
20 suppliers, each network member would generally be responsible for
furnishing items to no more than 5 percent of the geographic area of
the CBA. We believe that this limit would protect against excessively
large, anti-competitive networks while allowing small suppliers to have
an opportunity to be considered for participation under the Medicare
DMEPOS Competitive Bidding Program.
Finally, to further implement networking rules that promote a
robust competition and protect the Medicare DMEPOS Competitive Bidding
Program against anticompetitive behavior, we are deleting the provision
at proposed Sec. 414.418(b)(2) that would have allowed networks 10
business days to resubmit bids that CMS rejected because we determined
that a network member was ineligible to bid. In order not to allow
networks with an unnecessary advantage over other suppliers, we are
deleting this provision because we do not allow other suppliers not in
a network this opportunity. Also, we are finalizing our proposal that
at the time of bidding, the network's total market share for each
product category that is the subject of the network's bid cannot

[[Page 18060]]

exceed 20 percent of the Medicare demand for that product category in
that CBA.
Once again, we stress that these rules are intended to assist us in
evaluating network bids and to protect the Medicare program against
anticompetitive behavior, and they should not be interpreted as
superseding any Federal laws or regulations that protect against
anticompetitive behavior.
We acknowledge that forming a network may pose some challenges.
However, we believe that networks are a realistic solution for small
suppliers because we recognize that it may be difficult for small
suppliers to service the entire CBA independently. We continue to
believe that networks are an appropriate option for small suppliers
that cannot independently service the entire CBA to be able to
participate in the Medicare DMEPOS Competitive Bidding Program and to
promote competition and efficiencies that could improve services to
beneficiaries. The proposed rule was published May 1, 2006. We believe
sufficient notice has been given for these suppliers to consider
network options and plan accordingly. Forming a network is a business
decision, and we believe that our network policy is constructed in a
way that will help ensure that small suppliers have an opportunity to
be considered for participation in the Medicare DMEPOS Competitive
Bidding Program.
Comment: A few commenters agreed with our proposal to require that
suppliers participating in a network form a discrete legal entity and
stated that this would prevent the commingling of Medicare funds, as
well as violations of the Federal anti-kickback statute, self-referral
rules and regulations, and allegations of unfair business practices
among the participating network suppliers. Other commenters believed
that requiring each network to bid independently defeats the entire
purpose of networking. They disagreed with the primary legal entity
being responsible for billing Medicare and receiving the payments. They
believed that each supplier should be responsible for its own finances.
Response: We appreciate the support for our proposal that each
network must form a legal entity. Each member of the network must meet
all the applicable eligibility, financial, and accreditation
requirements in order to be awarded a contract and this information
must be included with the network bid. The legal entity that submit a
bid on behalf of the network must provide all the information required
for each member of the network. We agree that a primary supplier should
not be responsible for submitting claims to Medicare and receiving
payment on behalf of all network member suppliers and are deleting that
requirement. We will now require each network member to submit its own
Medicare claims and receive payment for those claims.
Comment: A few commenters believed that networks that submit bids
to furnish more than one product category could create access problems
for beneficiaries because not all the network members will furnish all
the product categories. They recommended that CMS add requirements to
ensure that network bids are scrutinized to ensure that each network
has appropriate mechanisms to service the entire CBA.
Response: All the members of a network must be able to jointly
service an entire CBA. While networks can choose the product categories
for which they will submit a bid, once a contract is awarded to a
network, each member of the network must furnish all of the items
within the product categories for which the network is awarded a
contract. Also, we will consider each product category separately and
ensure there is sufficient supplier capacity within a CBA to meet
beneficiary demand for items within all product categories.
Comment: A few commenters requested that CMS disclose the
methodology that will be used to calculate the market share and monitor
changes over the course of the contract. A few commenters questioned
why a limit of 20 percent of the market share was assigned to the
network, leaving 80 percent of the Medicare market for a large company.
They suggested allowing network members to obtain market share not to
exceed 35 percent, as specified in the Department of Justice monopoly
guidelines.
Response: We believe that by setting the maximum size of a
network's shares at 20 percent of the marketplace at the time of
bidding, we will be able to ensure that there will continue to be
competition in the area because if all of the winning suppliers are
networks, there would still be at least 5 networks. However, once a
supplier/network receives a contract, there is no limit on what
percentage of the demand in the CBA that the supplier/network can
furnish. After winning suppliers are selected, we will not exclude
networks or suppliers from expanding and exceeding the 20 percent
capacity. We believe that this will ensure sufficient suppliers,
provide beneficiaries with more variety and choice, and will ensure
that we select a sufficient number of contract suppliers for each
product category in each CBA.
Comment: Some commenters suggested that CMS allow suppliers to join
up to two networks, stating that many suppliers currently participate
in several networks. They believed that this would ensure that the
participating supplier is not disadvantaged by a requirement to commit
to a single network bid.
Response: We agree with the commenters. We will allow small
suppliers to join more than one network, but a small supplier cannot
join more than one network that submits a bid to furnish items in the
same product category in the same CBA. We believe that this rule is
necessary because, without it, the competitive bidding process would be
undermined if small suppliers were allowed to bid against themselves to
furnish the same product category in the same CBA. In addition, a small
supplier would not be able to submit an individual bid to furnish the
same product category in the same CBA for which the network in which it
is a member is also submitting a bid. However, a small supplier that
wishes to furnish two different product categories in a single CBA
would be able to join one network that submits a bid to furnish one of
the product categories, and another network that submits a bid to
furnish the other product category. Provided the small supplier did not
join a network to furnish the same product category in the same CBA,
the small supplier would also be able to submit an individual bid to
furnish the product category.
Comment: A few commenters asked how networks would obtain a
supplier billing number.
Response: The Medicare competitive bidding implementation
contractor will assign each network a bidder number that will be used
to monitor the network. As stated earlier, each member of the network
will be allowed to submit its own claims and receive Medicare payments
directly.
Comment: A few commenters requested that CMS clarify whether each
supplier that is a member of a network would be required to furnish all
of the items for the product category for which the network submits a
bid.
Response: Each member of the network would be required to furnish
all the items within the product category for which the network submits
a bid. This is consistent with our requirement that all contract
suppliers must furnish all items in a product category. However, as
explained above,

[[Page 18061]]

network members would not be required to furnish the items in the
product category throughout the entire geographic area of the CBA,
provided that the network as a whole can fulfill this requirement.
After consideration of the public comments we received, we are
adding a definition of the term ``network'' to Sec. 414.402 that
provides that a network is an entity meeting the requirements of Sec.
414.418. We are also finalizing Sec. 414.418 as discussed above and
with additional technical changes.

XIII. Education and Outreach for Suppliers and Beneficiaries

In the May 1, 2006 proposed rule (71 FR 25683 through 25684), we
proposed to undertake a proactive education campaign to provide
suppliers and beneficiaries with information about the Medicare DMEPOS
Competitive Bidding Program. In the DMEPOS provisions of the FY 2007
IRF final rule (71 FR 48354), we responded to public comments we
received on the May 1, 2006 proposed rule on our education and outreach
services proposal and finalized our rule. We refer readers to the FY
2007 IRF final rule for a full discussion of these provisions.
As we indicated in the proposed rule, we have established the
following Web site; https://www.cms.hhs.gov/competitiveacqfordmepos/01_overview.asp
where RFBs and other pertinent program information

will be posted and we plan to alert the supplier community by email of
all postings on this Web site. In addition, we will be providing
education and outreach to suppliers on requirements for submitting
RFBs. Suppliers must fully complete the RFB in order to be considered
for participation in a competitive bidding program. The RFBs will
require suppliers to complete, at a minimum, such documents as an
application, bidding sheet, bank and financial information, and
referral source references. We stated that we will establish an
administrative process to ensure that all information that the supplier
submitted is accurately captured and considered in the bid evaluation
process. This process will ensure that all the information submitted by
each supplier is included as part of the bid evaluation process.

XIV. Monitoring and Complaint Services for the Medicare DMEPOS
Competitive Bidding Program

In the May 1, 2006 proposed rule (71 FR 25684), we stated that
moving to a competitive bidding environment would not adversely affect
CMS' program integrity efforts in reviewing claims and rooting out
fraud, waste, or abuse. Claims would still be reviewed for medical
necessity, coordination of benefits status, and benefits integrity. Any
suspected instances of DMEPOS competitive bidding market manipulation
and collusion would be referred to the appropriate Federal agencies
that are responsible for addressing these issues.
We also proposed to establish a formal complaint monitoring system
to address complaints in each CBA. Beneficiaries, referral agents,
providers, and suppliers, including physicians, hospitals, nurses, and
HHAs, would be able to report problems or difficulties that they
encounter regarding the ordering and furnishing of DMEPOS in a CBA.
Some examples of problems that we would consider serious include:
contract suppliers refusing to furnish items to beneficiaries in the
CBA for which they were awarded a contract; contract suppliers
furnishing items that are inferior in quality to those that they bid to
furnish; and contract suppliers violating assignment and billing
requirements.
In addition, we proposed to monitor Medicare claims data to ensure
that competitive bidding does not negatively affect beneficiary access
to medically necessary items. Claims data would be monitored to
identify trends, spikes, or decreases in utilization and changes in
utilization patterns within a product category.
Comment: One commenter strongly supported CMS' efforts to detect
any abuse that may occur under competitive bidding and urged CMS to be
especially aggressive and timely in its oversight for monitoring
equipment safety. The commenter believed that there is a potential for
one supplier to harm thousands of beneficiaries and recommended that
CMS notify affected beneficiaries if a breach of quality has been
identified.
Response: Equipment safety is addressed in the DMEPOS quality
standards under the heading ``Product Safety.'' The CMS-approved
accreditation organizations will monitor supplier compliance with these
requirements as part of the accreditation process. In addition, as we
proposed, the CBIC will develop and implement a complaint monitoring
system for competitively bid items and services. This system will be
outlined in more detail through sub-regulatory guidance and enable
beneficiaries, referral agents, providers, and suppliers to report
problems or difficulties they experience with respect to the furnishing
of items under the competitive bidding programs. Additional details
will be posted on our Web site, or made publicly available by other
means.
Comment: Two commenters believed that beneficiary avoidance of
certain contract suppliers would provide a strong indication that the
Medicare DMEPOS Competitive Bidding Program is not meeting physician
and beneficiary needs in the area. The commenters stated that this
activity should be monitored as a measure of whether contract suppliers
are providing beneficiaries with a suitable level of quality and
access.
Response: We appreciate this comment and will consider it as we
develop our monitoring program. The CBIC will be monitoring items
furnished by contract suppliers to ensure they are the same quality as
the items for which the contract supplier submitted a bid and was
awarded a contract. The RFB will require suppliers to indicate the
manufacturer, make and model numbers for each type of item the supplier
would furnish if awarded a contract. In addition, we will require under
the contracts that each contract supplier submit a quarterly report
that indicates the items that were actually furnished to beneficiaries.
We also note that we will be conducting a comprehensive education
campaign to ensure that suppliers, beneficiaries, providers, and
referral agents understand that Medicare will only pay for
competitively bid DMEPOS items and services if they are furnished by
contract suppliers, unless an exception outlined in this final rule
applies. For more information about our plans for education on the
Medicare DMEPOS Competitive Bidding Program, we refer readers to the
DMEPOS provisions of the FY 2007 IRF final rule (71 FR 48354).
Comment: One commenter encouraged CMS to specify clearly in the
final rule or require CBICs to identify the necessary telephone and
Internet resources that beneficiaries may use to raise questions and
concerns related to the Medicare DMEPOS Competitive Bidding Program.
The commenter stated that it is extremely important that beneficiaries
have readily available access to information during their transition
from their former suppliers to their new contract suppliers. The
commenter recommended that CMS establish a survey mechanism so that
beneficiaries will be able to rate their satisfaction with contract
suppliers they have chosen, as recommended in the September 2004 GAO
report entitled ``Past Experience Can Guide Future Competitive Bidding
for Medical Equipment and Supplies.'' The commenter also stated the
proposed rule

[[Page 18062]]

fails to provide a method to obtain feedback from beneficiaries
concerning their satisfaction level with contract suppliers and
disseminate this valuable information to other beneficiaries. The
commenter noted that, without such an evaluation system, CBICs would be
ill-equipped to judge and, thus, monitor either the quality of products
that contract suppliers are furnishing or the accessibility of needed
supplies for beneficiaries.
Response: We are establishing an ombudsman program that will
require ombudsmen to identify, investigate, and resolve complaints made
by, or on behalf of beneficiaries. The telephone numbers and resources
will be published through program instructions or by other means,
including postings on our Web site. We agree that beneficiaries must
have readily available access to information during their transition
from their former suppliers to new contract suppliers. We plan to
implement an extensive education campaign for beneficiaries as well as
for suppliers and referral agents. Our plans for education are
described in more detail in the DMEPOS provisions of the FY 2007 IRF
final rule (71 FR 48354). We note that the CBIC would administer
beneficiary surveys throughout the program to regularly monitor
beneficiary experiences with the program. We also expect to have two
ombudsmen assigned to each DME MAC region. The CBIC will be providing
oversight of this program. We are in the process of assessing the
appropriate vehicles to disseminate the information that we collect
through the beneficiary survey.
Comment: One commenter supported CMS's plans to establish a formal
complaint monitoring system and believed that the information collected
will be particularly helpful as CMS prepares to expand competitive
bidding. The commenter recommended that CMS include in its complaint
monitoring system a collection of brand-specific information on medical
complications related to competitively bid items, especially for blood
glucose monitoring products and enteral products (if included in
competitive bidding) because of the potential for complications to
arise with these items. The commenter also recommended that CMS collect
data on contract suppliers that do not furnish particular brands of
equipment specified by physicians. The commenter further recommended
that CMS release timely reports on the results of its complaint
monitoring system to encourage public dialogue and analysis regarding
the competitive bidding program, and ensure that adequate data are
available to guide development of subsequent phases of the program.
Response: We appreciate the suggestions of the commenters and will
consider them as we operationalize the monitoring program. As we stated
above, we will direct the CBIC to establish a monitoring program that
includes beneficiary satisfaction indicators and supplier performance
indicators. All parties affected by competitive bidding (for example,
beneficiaries, referral agencies, suppliers, and providers) will be
able to report problems or difficulties that they encounter regarding
the ordering and furnishing of DMEPOS in CBAs. However, in the event we
receive complaints regarding medical complications with products, we
will convey that information to the FDA.
Comment: One commenter urged CMS to monitor contract suppliers
aggressively to ensure that they are not providing a different item
than prescribed by the physician or treating practitioner, pressuring
the physician to revise his or her order, or delaying delivery of the
item. The commenter stated that such actions could result in delays in
patient care and increase the risk that the patient will be injured.
Another commenter urged CMS to monitor aggressively the impact of the
Medicare DMEPOS Competitive Bidding Program on patient access to care.
The commenter stated that this is an entirely new and complex program
that will significantly change the market dynamics for furnishing
certain DMEPOS to beneficiaries, and CMS must ensure that these market
changes do not unintentionally limit the current variety of DMEPOS
available, thereby adversely affecting beneficiary access to these
important Medicare items.
Response: If the contract supplier provides an item that does not
match the written prescription from the physician or treating
practitioner, the contract supplier should not bill Medicare, as this
is considered a noncovered item. Our complaint and monitoring system
will ensure that contract suppliers either furnish the items prescribed
by a physician or treating practitioner, or assist the beneficiary in
finding another contract supplier to furnish the item under the
circumstances. We expect that contract suppliers will advise
beneficiaries regarding the expected time frames for delivery of items,
as required under the ``Consumer Services'' section of the quality
standards, and that beneficiaries will receive competitively bid items
in a timely fashion. In addition, we will, as part of our monitoring
system, be evaluating beneficiary access to competitively bid items,
for example, through beneficiary surveys and quarterly reports that
will require contract suppliers to disclose exactly what items they
have furnished to beneficiaries.
Comment: One commenter asked CMS to clarify how it will monitor the
quality of items based on the bid submissions. Another commenter
suggested that CMS monitor complaints to ensure there are no problems
with inferior products being furnished to beneficiaries. The commenter
stated that if the HCPCS codes were too vague, CMS would have problems
with monitoring the quality of items. Another commenter acknowledged
that although it agrees that it would be a serious problem if a
contract supplier furnished items inferior in quality to those for
which it bid but urged CMS to monitor this or address complaints if the
HCPCS codes are too vague or include multiple technologies. The
commenter suggested that, in order for the monitoring policy to be
effective, the HCPCS codes that are associated with competitively bid
items must include the necessary level of detail and specificity.
Response: As part of the RFB requirements for submission of bids,
we are asking suppliers to list the items they will furnish by
manufacturer, make, and model number. Under the contracts, we are
requiring contract suppliers to submit a quarterly report in which they
are required to indicate the items they have supplied under the
Medicare DMEPOS Competitive Bidding Program. We note that the MMA
requires the Secretary to submit a report to Congress evaluating this
program. This report will be finalized in July 2009 and, based on
beneficiary surveys, will include information on access to and quality
of items and services, and satisfaction of individuals. As discussed in
section IX.A. of this final rule, suppliers will be required to allow
beneficiaries to select items from the same range of items furnished to
non-Medicare beneficiaries.
Comment: One commenter stated that, while claims monitoring may be
effective for some purposes, using it to suggest that a spike in
certain items' utilization may be attributable to competitive bidding
is narrow-minded. The commenter stated that product utilization may
have nothing to do with competitive bidding for various reasons, such
as baby boomers entering the Medicare program in disproportionately
high numbers, the higher incidence of certain diseases in specific
areas of the United States, and the development of new products and
technologies that

[[Page 18063]]

enable a larger number of patients to remain independent at home.
Response: We continue to believe that it is useful to conduct
claims monitoring, and we would expect to monitor claims for each CBA.
If we identify a utilization spike in a particular item, we can further
investigate the cause of the spike, to identify whether the spike
happened because of competitive bidding. Our claims monitoring system
will allow us to review claims data for each item within a CBA.
Comment: One commenter stated that in a September 2004 report
entitled ``Past Experience Can Guide Future Competitive Bidding for
Medical Equipment and Supplies,'' the GAO emphasized the importance of
ensuring continued quality, especially given that the implementation of
competitive bidding will create an added incentive for suppliers to cut
costs. The commenter noted that, in GAO's view, the central focus of
these efforts should be ``continued monitoring of beneficiary
satisfaction,'' perhaps through a toll-free complaint hotline and
through beneficiary surveys. The commenter stated that it would be
unrealistic to expect beneficiaries to monitor and provide feedback on
the quality of the enteral formula they receive, through a hotline,
through surveys, or otherwise. The commenter further noted that, given
the importance of assuring continued quality during a transition to a
significantly revised pricing system, it would be prudent for CMS
initially to focus on those items and supplies for which quality can be
readily assessed and assured through monitoring efforts.
Response: As part of the monitoring system, we will collect data to
evaluate changes in beneficiary satisfaction, service, quality, access
and cost-sharing as a result of the new program. Several questions will
be customized to suit the particular product line surveyed. These data
will also be used to prepare the congressionally mandated study and
report due in July 2009, under section 1847(d) of the Act.
Comment: Two commenters urged CMS to ensure that suppliers are
distributed throughout the CBAs to ensure beneficiary access. The
commenters stated that patients (especially when injured) or the
caretaker should not have to travel long distances to obtain needed
DMEPOS, as this could put patients at risk and increase Medicare costs.
Response: We are requiring contract suppliers to service the entire
CBA, which means that if a beneficiary cannot travel to his or her
chosen contract supplier, the contract supplier will still be required
to furnish the item to the beneficiary, whether by delivery or mail.
Suppliers must include in their bids the cost of providing the item and
any requisite services directly associated with the item, such as
delivery, set-up, and retrieval. Therefore, we do not believe it is
necessary to create special provisions regarding geographic
distribution of contract suppliers.
Comment: One commenter agreed that an effective complaint
monitoring system is needed as part of the competitive bidding program.
The commenter noted that this should be a simple process that
incorporates existing mechanisms that allow Medicare beneficiaries to
voice complaints, such as an ombudsman program, and should not attempt
either to recreate what exists in another section of the program or
overcomplicate the process. The commenter noted that the current
supplier standards require that suppliers show the NSC the complaint
resolution process through onsite inspection prior to the issuance of a
supplier number. The commenter also suggested that patients be directed
to call their suppliers first regarding any alleged service issues
before calling the ombudsman or other contractor.
In addition, the commenter asked that CMS define ``items of
inferior quality.'' The commenter believed that, in determining whether
a supplier is experiencing a high level of complaints, CMS must view
complaints not in an isolated, numerical manner but expressed as a
percentage of the total number of in-home deliveries made to Medicare
patients in a given month.
Another commenter stated that the proposed rule provides no
specifics about the proposed monitoring system. The commenter asked
that the final rule provide more information about this system. The
commenter urged CMS to assure that ombudsmen are designated for each
CBA because they play an important role in addressing and resolving
beneficiary complaints.
Response: We agree that an effective complaint monitoring system is
needed as part of the Medicare DMEPOS Competitive Bidding Program. As
we currently do, we plan to use competitive bidding ombudsmen who will
be geographically distributed in each of the DME MAC regions to assist
with monitoring activities. The CBIC is responsible for the monitoring
program and will be issuing additional information. We plan to have a
complaint process in place so that everyone affected by the Medicare
DMEPOS Competitive Bidding Program, including beneficiaries, referral
agents, suppliers, and providers, will be able to report problems or
difficulties that they encounter regarding the ordering and furnishing
of DMEPOS in a CBA. The monitoring system will also include a complaint
resolution process, as well as a process by which we can track claims
data to ensure that items are being properly furnished under the
program. CMS or the CBIC will issue additional details regarding this
process through program instruction or by other means, such as the RFB,
and post them on our Web site. When we referred in the proposed rule to
an item being of ``inferior quality,'' we meant items that
beneficiaries or referral agents complained were of inferior quality,
which would include any product that the contract supplier furnishes to
the beneficiary that does not meet the medical needs of the patient.
After consideration of the public comments received, we are
finalizing our proposal to implement a monitoring and complaint system
under the Medicare DMEPOS Competitive Bidding Program.

XV. Physician or Treating Practitioner Authorization and Consideration
of Clinical Efficiency and Value of Items in Determining Categories for
Bids

Section 1847(a)(5)(A) of the Act provides authorization to the
Secretary to establish a process for certain items under which a
physician may prescribe a particular brand or mode of delivery of an
item within a particular HCPCS code if the physician determines that
use of the particular item would avoid an adverse medical outcome on
the individual. In the May 1, 2006 proposed rule (71 FR 25684), we
proposed to implement this statutory provision in proposed Sec.
414.420 (in the proposed rule, the regulatory provision was erroneously
cited in the preamble as Sec. 414.440), and to also apply it to
certain treating practitioners, including physician assistants, nurse
practitioners, and clinical nurse specialists, because these
practitioners also order DMEPOS for which Medicare makes payment.
Because a HCPCS code may contain many brand products made by a wide
range of manufacturers, we expect that suppliers will choose to offer
only certain brands of products within a HCPCS code. This is a common
practice used by suppliers to reduce the amount of inventory they
maintain. However, we proposed that the physician or treating
practitioner would be able to determine that a particular item would
avoid an adverse medical outcome, and that the physician or treating
practitioner would have discretion to

[[Page 18064]]

specify a particular product brand or mode of delivery.
We proposed that when a physician or other treating practitioner
requests a particular brand, or mode of delivery of an item, contract
suppliers would be required to furnish that particular brand or mode of
delivery, assist the beneficiary in finding another contract supplier
in the CBA that can provide that brand item or mode of delivery, or
consult with the physician or treating practitioner to find a suitable
alternative product or mode of delivery for the beneficiary. If, after
consulting with the contract supplier, the physician or treating
practitioner is willing to revise his or her order, that decision must
be reflected in a revised written prescription. However, if the
contract supplier decides to provide an item that does not match the
written prescription from the physician or treating practitioner, the
contract supplier should not bill Medicare, as this would be considered
a non-covered item under Medicare.
For the Medicare DMEPOS Competitive Bidding Program, we did not
propose to require a contract supplier to provide every brand of
products included in a HCPCS code. However, regardless of what brands
the contract supplier furnishes, the single payment amount for the
HCPCS code would apply. Nonetheless, we noted that this issue will be
studied in more detail by the OIG in 2009. At that time, we will
evaluate the need for a specific process for certain brand names or
modes of delivery.
In addition, section 1847(b)(7) of the Act provides authority to
establish separate categories for items within HCPCS codes if the
clinical efficiency and value of items within a given code warrants a
separate category for bidding purposes. Currently, HCPCS codes are
developed for items that are similar in function and purpose. For this
reason, items within the same code are paid at the same rate. We
believe that the HCPCS process has worked well in the past, and we
believe that it adequately separates items based on their function.
Comment: One commenter stated that CMS should address the quite-
common situations in which a supplier does not carry a particular item,
or does not know how it works or how it must be maintained. The
commenter noted that mandating a contract supplier to furnish an item
it does not routinely supply could raise concerns about patient and
employee safety and other liability concerns. The commenter further
stated that as long as some contract suppliers in the CBA can supply
that particular item, this situation should be acceptable to CMS.
Response: We recognize the commenter's concerns, and we note that
we did not propose that a contract supplier would be required, no
matter what the circumstance, to furnish a brand name item or specific
mode of delivery to a beneficiary. We also recognize that the wording
of proposed Sec. Sec. 414.420(b)(1) and (b)(2) and the preamble to the
proposed rule may not have been sufficiently clear regarding whether a
contract supplier must furnish an item that it does not routinely carry
to a beneficiary. Therefore, we are clarifying, in final Sec. Sec.
414.420(b)(1) through (b)(3) the process that contract suppliers must
follow to address the situation where a physician or treating
practitioner orders a specific brand or mode of delivery to avoid an
adverse medical outcome. If a physician or treating practitioner
prescribes a brand name item or specific mode of delivery to avoid an
adverse medical outcome, the contract supplier must make a reasonable
effort to furnish that brand name item or mode of delivery. If the
contract supplier cannot furnish that brand name item or mode of
delivery, it must contact the physician or treating practitioner to
determine if a substitution can be made (and if so, the contract
supplier must obtain a revised written prescription). If a substitution
cannot be made, the contract supplier must assist the beneficiary in
finding another contract supplier that can furnish the brand name item
or mode of delivery prescribed by the physician or treating
practitioner.
Comment: One commenter stated that the proposed rule does not
establish an appeal or dispute resolution system for cases when the
contract supplier in a CBA fails to provide the specific equipment
selected by the physician.
Response: As we state in this final rule in Sec. 414.420(d), a
contract supplier would be prohibited from billing Medicare if it
furnishes an item different from that specified in the written
prescription from the beneficiary's physician or treating practitioner.
Comment: One commenter stated that CMS should exercise its
discretion under section 1847(a)(5) of the Act, and not permit such
brand-specific prescriptions for items within a CBA. As an alternative,
the commenter suggested that CMS consider making a finding that, under
such circumstances, the competitive bidding is not likely to result in
significant savings and, accordingly, exempt these items from the
competitive bidding process under section 1847(a)(5) of the Act. The
commenter indicated that there is concern that if CMS implements
section 1847(a)(5) of the Act, the demand for brand-specific items,
will increase even though the ``brand name'' may have the same clinical
benefits of other products.
Several commenters opposed the manner in which CMS interpreted the
authority of the treating practitioner to order brand-specific items
and equipment. They believed that the proposed rule mandates serious
financial consequences for the supplier and creates unnecessary
uncertainty in the bids to be submitted. They added that forcing
suppliers to carry all possible items and equipment will be burdensome
and costly for suppliers. The commenters stated that contract suppliers
may be financially responsible to provide items outside their normal
product line. However, they added that, if a contract supplier does not
carry that product, the contract supplier may refer the beneficiary to
another contract supplier. The commenters asked that CMS consider an
exception process to compensate contract suppliers for provisions of
items that are very expensive compared to other products within the
same HCPCS code. They also suggested that CMS define ``what is a
reasonable effort to locate an alternative supplier.''
Response: We disagree with the commenters. Section 1847(a)(5) of
the Act provides the Secretary with the authority to establish a
process for certain items and services under which a physician may
prescribe a particular brand or mode of delivery of an item or service
to the beneficiary to avoid an adverse medical outcome. We proposed
that this process would also apply to certain treating practitioners,
including physician assistants, nurse practitioners, and clinical nurse
specialists, because these practitioners also order DMEPOS for which
Medicare makes payment. We stress that this process can only be used
when a physician or treating practitioner determines that there is a
need for the use of a particular item or mode of delivery to avoid an
adverse medical outcome. Because bids will be submitted for HCPCS
codes, which are carefully written to include items that perform the
same therapeutic function, we do not believe there will be many
instances in which a particular brand or mode of delivery is necessary
to avoid an adverse medical outcome. Nevertheless, because it is
possible such a prescription may be necessary in a few cases, we
believe it is important for patient safety to retain this provision.
Therefore, we are clarifying that a physician or treating practitioner
must document in the beneficiary's medical

[[Page 18065]]

records the medical necessity of a particular brand or mode of delivery
of an item or service to avoid an adverse medical outcome, if a
particular brand or mode of delivery is prescribed. We note that
section 1847(a)(5)(B) of the Act provides that a prescription written
for a particular brand of item or mode of delivery will not affect the
amount of payment otherwise applicable for the item under the HCPCS
code involved, and that we do not currently pay a supplier an
additional amount for furnishing a particular brand of item or mode of
delivery. We also note that a contract supplier would not be required
to furnish every brand of item. It would be able to work with the
physician or treating practitioner to find a suitable alternative and,
if that effort is unsuccessful, to help the beneficiary find another
contract supplier that can furnish the item.
We agree that the use of the term ``reasonable effort'' is nebulous
and may be subject to misinterpretation. We are deleting the term
``reasonable effort''. Because of the importance for beneficiaries to
receive medically appropriate items, we are now requiring that a
supplier follow the process set out in final Sec. 414.420(b)(1) though
(b)(3).
Comment: Several commenters argued that physician choice for
determining appropriate wound care products is of paramount importance.
They were concerned that physician choice and access to certain wound
care products could be restricted as a result of competitive bidding,
specifically Negative Pressure Wound Therapy (NPWT), code E2402. In
recent months, new products have been added to code E2402 despite the
fact that these new products are clinically different from the original
NPWT product. The commenters stated that because of the newer items, it
is conceivable that wound healing would be compromised.
Response: A physician or treating practitioner may prescribe a
particular brand or mode of delivery to avoid an adverse medical
outcome for the beneficiary. We note that HCPCS codes are carefully
defined to ensure that only items that have the same therapeutic
function fall within particular codes. Therefore, we believe 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.
Comment: Several commenters requested that CMS add language to the
rule acknowledging that physical therapists and occupational therapists
play a key role in specifying the need for a particular brand.
Response: Although we recognize that physical therapists and
occupational therapists may furnish certain DMEPOS as part of their
professional practice, current Medicare rules only allow physicians,
nurse practitioners, clinical nurse specialists, and physician
assistants to prescribe DMEPOS items.
Comment: Several commenters asserted that it is not fair that
contract suppliers be required to furnish any item within a HCPCS code
if their bid was accepted based on an item that they carry in their
stock. The commenters stated that if no additional payments would be
made for more specific expensive products that are ordered by
physicians or treating practitioners, this may result in significant
financial losses for the contract supplier if the contract supplier is
required to furnish the particular brand or mode of delivery at the
single payment amount. Several commenters supported the physician/
treating practitioner authorization proposal because it provides a
safety net for the beneficiary. Another commenter argued that when a
physician or treating practitioner specifies a product for his or her
patient, the physician or treating practitioner should have continuous
access to the latest innovative technologies.
Response: As stated earlier in this section, we believe that it
will rarely be necessary for a physician or treating practitioner to
prescribe a particular brand or mode of delivery to avoid an adverse
medical outcome. Furthermore, in this final rule, we are specifically
providing the contract supplier with a specific process to follow when
a physician or treating practitioner requests a specific brand item or
mode of delivery to avoid an adverse medical outcome. Under this
process, the supplier is required to furnish the item or mode of
delivery as prescribed, and if it cannot furnish the item or mode of
delivery as prescribed consult with the physician or treating
practitioner to find a suitable alternative and have the physician or
treating practitioner revise his or her order, and if the physician or
treating practitioner does not revise the order, assist the beneficiary
in finding another contract supplier. We do not believe these
requirements will place an undue financial burden on a contract
supplier because there are provisions in this process that give the
contract supplier the opportunity to substitute the item or arrange to
have another contract supplier furnish the item. We agree that
physicians and treating practitioners should have continuous access to
the latest innovative technologies and be able to order them for their
patients.
Comment: Several commenters stated that the physician/treating
practitioner authorization proposal does not provide sufficient
details. They pointed out that the term ``adverse medical outcome'' has
not been defined. The commenters urged CMS to develop a streamlined and
quick process to facilitate the role of a physician or treating
practitioner as a key decision maker for each patient. Several
commenters argued that it is crucial for the Medicare DMEPOS
Competitive Bidding Program to allow health care providers to prescribe
specific items with special features when medically necessary. They
stated that the proposed rule does not adequately ensure that
beneficiaries with diabetes will have access to the products for which
their health professionals find are most appropriate and medically
necessary for their individualized needs. The commenters remained
concerned that contract suppliers will limit products to a narrow range
that do not account for a wide spectrum of diabetes-related medical
needs, and they will not receive additional payment for providing such
items.
The commenters recommended that CMS modify the rule to allow for an
adequate variety of diabetes supplies to suit a range of individualized
needs of beneficiaries with diabetes. They stated that CMS must create
a less burdensome process to ensure that these supplies are rapidly
available upon documentation of medical need. The commenters added that
it is possible that adjusting the payment rate for these special items
upward will encourage contract suppliers to provide them in all cases.
Response: We believe that it is appropriate for physicians and
treating practitioners to have the discretion to determine when it is
medically necessary to prescribe a particular brand or mode of delivery
of an item to avoid an adverse medical outcome. We consider the adverse
medical outcome determination to be part of the more general medical
necessity requirement that must be met in order for Medicare to pay for
an item under section 1862(a)(1)(A) of the Act. As with all medical
necessity determinations, there must be documentation in the
beneficiary's medical record to support the need for the particular
brand or mode of delivery. Therefore, the physician or treating
practitioner must note in the beneficiary's medical record the reason
why the specific brand or mode of delivery is necessary to avoid an
adverse medical outcome so that contract suppliers can make a
reasonable effort to furnish the item, then consult with the physician
or

[[Page 18066]]

treating practitioner to find a suitable alternative, and then make a
reasonable effort to assist the beneficiary in locating a contract
supplier that can furnish the item. We believe that these requirements,
along with other requirements that we have previously discussed in this
final rule, will ensure that beneficiaries have access to the most
appropriate items for their medical condition under the Medicare DMEPOS
Competitive Bidding Program.
Comment: One commenter objected to the statement in the proposed
rule that suppliers should not discriminate against beneficiaries in a
CBA and that contract suppliers must furnish the same items to
beneficiaries that they do to other individuals. The commenter argued
that this appears to conflict with the requirement that a supplier must
provide product-specific items, if ordered by the physician or treating
practitioner.
Response: The nondiscrimination provision in this final rule (Sec.
414.422(c)) specifies that discrimination against beneficiaries is
prohibited under the Medicare DMEPOS Competitive Bidding Program. All
Medicare beneficiaries to whom a contract supplier furnishes
competitively bid items must have the same choice of items that the
contract supplier provides to other customers. We proposed to implement
this provision to protect beneficiaries from receiving sub-standard or
inferior items in terms of quality. However, we do not believe that
this provision conflicts with the physician/treating practitioner
authorization rules being implemented in this final rule. Under these
rules, a physician or treating practitioner can prescribe a brand name
item or mode of delivery to avoid an adverse medical outcome for the
beneficiary, and the contract supplier must follow the process outlined
in Sec. 414.420(b) upon receiving the prescription. Nothing in these
rules would prevent a contract supplier that furnishes a particular
brand or mode of delivery from making that brand or mode of delivery
available to other beneficiaries or customers.
Comment: One commenter noted that the rule requires a contract
supplier get a revised written prescription if the physician treating
practitioner allows for a modification of a brand-specific product. The
commenter stated that verbal orders are acceptable in most States, and
this imposes a significant administrative burden on contract suppliers
and physicians/treating practitioners.
Response: The requirement of a written order is consistent with
current Medicare rules. The item provided must match the written order
in order for the contract supplier to bill Medicare.
After consideration of the public comments we received, we are
revising and finalizing proposed Sec. 414.420 as discussed above.

XVI. Other Public Comments Received on the May 1, 2006 Proposed Rule

Comment: Several commenters suggested issuing an interim final
rule, with a full 60-day notice and comment period to allow for a more
detailed proposal for public comment. In addition, several commenters
suggested publishing initial responses to the public comments as a new
proposed rule. The commenters believed that this suggestion is
consistent with section 1871(a)(4) of the Act that states that a final
rule will be treated as a proposed rule if it includes provisions that
are not logical outgrowths of a previously published notice of proposed
rulemaking. The commenters indicated that another proposed regulation
would allow the public to consider and comment on CMS' responses to
issues on which CMS requested comment in the May 1, 2006 proposed rule.
Other commenters requested that the comment period on the proposed rule
be extended until at least 90 days following the publication of the
final DMEPOS quality standards.
Several commenters were concerned about Administrative Procedure
Act compliance, which states that administrative rulemaking must be
sufficiently descriptive of subjects and issues involved so that
interested parties may offer informed criticism and comments. The
commenters also gave other cites: Agency notices must describe the
range of alternatives being considered with reasonable specificity;
otherwise, interested parties will not know what to comment on, and
notice will not lead to better-informed agency decision making.
Finally, the commenters noted that an agency commits a serious
procedural error when it fails to reveal portions of technical basis
for a proposed rule in time to allow for meaningful commentary.
Response: The proposed rule presented for public comment our
proposed rules that will govern the Medicare DMEPOS Competitive Bidding
Program. This final rule does not include any provisions that are not
logical outgrowths of our proposals in the May 1, 2006 proposed rule.
In addition, we believe that our proposed rules were sufficiently
detailed to enable the public to provide meaningful comments on them.
Indeed, we received over 2,000 comments on the proposed rule, and we
have both considered and responded to those comments in this final
rule. Therefore, we believe that issuance of an interim final rule is
not necessary. We also note that this rule does not finalize the DMEPOS
quality standards and that section 1834(a)(20)(E) of the Act explicitly
permits us to establish the DMEPOS quality standards by program
instruction or otherwise. The quality standards were published on
August 15, 2006, and are available on the following Web site: http://www.cms.hhs.gov/CompetitiveAcqforDMEPOS/04_New_Quality_Standards.asp.
We note that the draft quality standards were published

on September 26, 2005, which was more than 7 months prior to the
publication of the proposed rule. We also note that the quality
standards apply to all suppliers, not just suppliers that wish to
participate in the Medicare DMEPOS Competitive Bidding Program, and
that we provided a 60-day period for the public to comment on them.
Comment: Several commenters suggested that CMS schedule a meeting
of the PAOC (1) After we publish an interim final rule; (2) when we
publish the MSAs and the DMEPOS items subject to competitive bidding;
and (3) when the final regulation is issued. The commenters noted that
scheduling a PAOC meeting following publication of an interim final
rule would allow CMS to obtain industry input before publishing a final
rule and initiating program implementation. Further, several commenters
suggested that CMS include the PAOC in the review of the public
comments received during the comment period on the proposed rule and in
the development of the final rule. They stated that excluding the
important counsel and advice of the PAOC in a critical process would
not be consistent with the purpose for which the PAOC was established.
Response: The PAOC meets periodically to review policy
considerations and to provide advice on the development and
implementation of the Medicare DMEPOS Competitive Bidding Program.
Since its establishment, the PAOC has met on five occasions and will
continue to be available to provide us with advice until the end of
2009. Section 302 of the MMA gives CMS discretion on when to schedule
PAOC meetings. We also discussed with the PAOC the full range of
competitive bidding issues, and we continued to consider its advice and
counsel as we reviewed the comments and developed this final rule.
Comment: Several commenters noted that the Web site address for the
PAOC

[[Page 18067]]

that was in the proposed rule was incorrect.
Response: We recognize the importance of having a Web site
available to distribute information in a timely manner and regret the
error. Our PAOC Meeting Information Web site can be found at the
following link: http://www.cms.hhs.gov/CompetitiveAcqforDMEPOS/PAOCMI/list.asp.
Included on the Web site are materials relating to each PAOC

meeting such as agendas, meeting summaries, and presentations.
Comment: One commenter suggested that the PAOC be subject to the
Federal Advisory Committee Act (FACA), which requires public access to
meetings and proceedings. The commenter believed that the PAOC has
great power within the DMEPOS industry and that other affected members
of the industry have not had an opportunity to review or respond to
PAOC assertions or recommendations.
Response: Section 1847(c)(4) of the Act provides that the
provisions of the FACA do not apply to the PAOC. However, the PAOC
meetings have been open to the public, and we have published summaries
of the meetings on our PAOC Web site http://www.cms.hhs.gov/CompetitiveAcqforDMEPOS/PAOCMI/list.asp.
Information about the Medicare

DMEPOS Competitive Bidding Program has also been made available through
other methods, such as electronic supplier listserv messages and open
door forums. CMS offers an electronic mailing list service for those
interested in receiving news from CMS. From the following link,
individuals can subscribe to the ``Homehealth--Hospice DMEODF-L''
listserv to receive notices of upcoming open door forums: http://www.cms.hhs.gov/apps/mailinglists/
.

Comment: Numerous commenters requested that CMS publish an updated
implementation timeline with expected completion dates. The commenters
expect that the publication of such a timeline will highlight the
significant problems that lie ahead based on an overly aggressive
implementation plan. The commenters suggested that the timeline should
identify and provide expected completion dates for items such as the
publication of the quality standards, approval of the accrediting
organizations, and issuance of final regulations. The commenters
further suggested that CMS push back the implementation date of October
1, 2007, to a more reasonable timeframe. The commenters believed that a
delay in implementation will allow adequate time for small suppliers to
create networks and to prepare their organizations for accreditation.
Response: Section 1847(a)(1)(B)(i)(I) of the Act requires that the
Medicare DMEPOS Competitive Bidding Program be phased in such that
competition under the programs occurs in 10 of the largest MSAs in CY
2007. We are committed to meeting this statutory mandate. We are
mindful of the many key tasks that must be completed to ensure the
success of this program and are moving forward to complete these tasks
expeditiously. We note that the final DMEPOS quality standards were
issued on August 15, 2006, and that applications for participation in
the DMEPOS accreditation program were solicited from independent
accrediting organizations in a Federal Register notice published on
August 16, 2006 (71 FR 47230). Therefore, we do not believe it is
necessary to publish a specific timetable of expected completion dates
for other activities. However, we will provide the public with
sufficient notice as we proceed with implementation activities.
Comment: One commenter suggested that CMS allow all beneficiaries
to opt out of the Medicare DMEPOS Competitive Bidding Program, select
the supplier of their choice, and receive DMEPOS items for which
payment is made based on the current fee schedule amounts.
Response: Under section 1847(a) of the Act, we are required to
establish and implement competitive bidding programs throughout the
United States for the furnishing of certain items for which payment is
made under Part B of the Medicare program. To the extent that we
implement a competitive bidding program in a particular CBA, we do not
believe that we have authority to allow any beneficiary who need items
in that CBA to ``opt out'' of receiving those items from contract
suppliers and receive Medicare payment. We also note that section
1847(a)(6) of the Act provides that, for each CBA in which a
competitive bidding program is implemented, the payment basis
established under the competitive bidding program shall be substituted
for the payment basis that would otherwise apply (which, in most cases,
would be based on a fee schedule). In accordance with section
1847(b)(5)(A) of the Act, we are required to establish a new payment
amount for each item in each CBA. This new payment amount is what we
would pay to contract suppliers. Under the Medicare DMEPOS Competitive
Bidding Program, beneficiaries will be able to select among the winning
suppliers. However, we believe that permitting beneficiaries to opt out
of the program would create an exception that would significantly
undermine the goal of the program to achieve savings.
Comment: One commenter stated that one aspect of the DMEPOS
competitive bidding demonstration projects that was never studied was
Medicare patient rehospitalization and/or emergency room visit rates.
The commenter stated that this is a key outcome measure that CMS should
have evaluated to determine if savings created through Medicare Part B
were actually resulting in expenditures under Medicare Part A. The
commenter believed that it is possible that a price-oriented DMEPOS
model might actually lead to higher levels of institutional care. The
commenter indicated that it would be prudent for CMS to study this
aspect in the CY 2007 round of bidding.
Response: We do not agree that competitive bidding savings will
result in higher expenditures under Medicare Part A. Under the Medicare
DMEPOS Competitive Bidding Program, beneficiaries will receive items
from contract suppliers that have satisfied our quality, accreditation,
financial, and eligibility standards. In addition, contract suppliers
will be required to furnish to beneficiaries in a CBA the same level of
services and quality items that they furnish to other customers.
Through our physician and treating practitioner authorization rules,
beneficiaries who maintain a permanent residence in a CBA will continue
to receive items that meet their medical needs. Because we are enacting
safeguards to ensure the quality of items that are furnished under the
competitive bidding programs by contract suppliers, as well as rules
that we expect will ensure that beneficiaries have access to new
technology, we do not believe that expenditures under Medicare Part A
will rise or that it is necessary to undertake a study. Moreover, we
will monitor the entire program to make sure that complaints are
addressed and resolved. We also believe that it would be difficult to
develop a study evaluating increases in Medicare Part A costs as a
result of adverse competitive bidding outcomes because there are too
many intervening variables, such as physician and treating practitioner
quality, that affect final patient outcome.

XVII. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995 (PRA), we are required to
provide 30-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

[[Page 18068]]

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:
The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection
burden.
The quality, utility, and clarity of the information to be
collected.
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
In response to the May 1, 2006 proposed rule (71 FR 25654), we
received several public comments that were submitted on the proposed
rule that more appropriately pertain to provisions on the PRA process.
We note that specific information requested from suppliers as part of
the bid submission and many of the terms and conditions that will be
included in the contracts under the Medicare DMEPOS Competitive Bidding
Program are discussed in detail in sections VI.G., VII.C., and IX.A. of
this final rule. In these sections, we summarize the public comments we
received on these specific information requirements and respond to
those comments. Other comments and responses on the general paperwork
burden that we outlined in the proposed rule follow:
Comment: Two commenters submitted general comments on the specific
paperwork burden outlined in the proposed rule. The commenters believed
that, due to the lack of specificity in the proposed rule, it is
impossible for commenters, or CMS, to estimate accurately the amount of
incremental time that will be required of suppliers to complete the bid
process to participate in the program. The commenters indicated that
only two demonstration projects were performed, and they did not
include many of the requirements that we have proposed. The commenters
also indicated that, overall, competitive bidding is an
administratively burdensome program for suppliers, Medicare, and its
contractors, and represents an incremental administrative process that
is layered on top of an already complex Medicare Part B system. The
commenters urged CMS to adopt existing accreditation standards,
existing patient satisfaction tools, existing patient complaints and
resolution processes, and existing financial reports, rather than
attempt to ``reinvent the wheel,'' in order to reduce both the
paperwork and administrative burden. The commenters believed that
competitive bidding will increase costs for both suppliers and CMS in
the form of increased staff and reporting procedures.
Two commenters stated that they assumed CMS arrived at its estimate
of 70 hours per bid for each supplier to furnish information by using
the median of the hours that suppliers estimated were required during
the two less complicated demonstration projects, and that this estimate
was per location. The commenters pointed out that it is unclear as to
whether this 70-hour estimate includes time spent attending bidders
conferences and preparing internal analyses or whether it is simply an
estimate of the amount of time needed to complete the application
bidding process. The commenters indicated that if they considered in
the estimate the time that executive and mid-level management spent
reviewing, analyzing, and responding to the proposed rule, plus an
estimated 70 hours per their 25 branches for the application process
and the first round of competitive bidding for CY 2007, the companies
would invest 1,750 hours in preparing competitive bids.
In regard to the total number of hours that suppliers would invest
in regard to the CY 2007 programs, one commenter pointed out that CMS'
own estimate is that 1,158,150 hours would be needed by the industry
(16,545 bids). The commenters pointed out that if a conservative $35
per hour average salary rate is used, this amounts to an incremental
$41 million attributable to the first 10 CBAs alone. The commenter
added that, in CY 2008, this escalates dramatically to an incremental
5,100,550 hours needed to prepare 72,865 bids, which in turn computes
to $178.5 million in supplier labor, and that these costs have to be
accounted for in the bid that suppliers submit to CMS. Two commenters
stated that the proposed bid process and certain other provisions of
the proposed rule are too paper-intensive and gave recommendations for
ways in which CMS could save a significant amount of paperwork for
itself and suppliers: (1) Automating the supplier bid process and
accreditation organization application process by making it Web-based
and allowing an attachment feature; (2) allowing the bid review team to
start reviewing those bids that meet the quality and financial
standards first before proceeding to review the bid prices; (3)
allowing any multi-site supplier that is owned by the same corporate
parent or tied to the same tax number to provide certain standard
information only one time; (4) adopting a standardized Medicare patient
satisfaction questionnaire for DMEPOS; (5) keeping the beneficiary and
supplier education simple and low cost; (6) eliminating the brand-
specific requirement and associated paperwork; (7) rather than
requiring a separate bid for every competitively bid product category
in a given MSA, consolidating the application form itself into a check-
box format; and (8) rather than creating an all-new government
infrastructure that essentially duplicates what exists in the private
sector, subcontracting with several large managed care organizations to
administer the program for Medicare beneficiaries nationwide.
Response: We need detailed information on suppliers with whom we
may enter into a contract. This information will be used to evaluate
the suppliers. This is important because both Medicare and the
beneficiaries will be dependent on the contract suppliers. We need to
evaluate capacity issues in order to ensure that suppliers' capacity
meets beneficiary demand; we need to evaluate financial stability in
order to ensure that contract suppliers are solvent and will be in
business during the contract period; and we need to obtain
identification information in order to ensure management is dependable
and that the bidding supplier is not excluded from participating as a
Medicare supplier.
Our estimate of the time burden required for filling out the forms
is based on reports from suppliers that participated in the DMEPOS
competitive bidding demonstrations, which implemented competitive
bidding in two MSAs. The demonstrations included RFB forms similar to
those that will be included in this program and both small and large
suppliers filled out the forms. Estimates of the required time ranged
from 40 to 100 hours, and we used the midpoint for our estimates. The
estimates include internal decision-making processes but do not include
the time spent attending bidders' conferences. Based on our
consideration of the public comments received, we have eliminated the
requirement to submit reviewed and/or audited financials, as well as
information regarding investigations. We believe this will lessen the
burden on suppliers.

Section 414.412 Submission of Bids Under a Competitive Bidding Program

Section 414.412 outlines the requirements associated with
submitting bids under the competitive bidding process. Specifically,
Sec. 414.412(a) states that unless an exception applies, suppliers
must submit a bid and be

[[Page 18069]]

awarded a contract under a competitive bidding program in order to
receive payment from Medicare for furnishing the items.
The burden associated with this requirement is the time and effort
associated with drafting, completing, and submitting a bid. We estimate
that, on average, it will take a supplier 68 hours to complete and
submit a bid. We believe that we will receive 15,973 bids for a total
annual burden of 1,086,164 hours.
In addition, as part of the Medicare DMEPOS Competitive Bidding
Program, beneficiaries will be surveyed to gather information
pertaining to their experiences with suppliers. We estimate that the
burden associated with completing the survey is 15 minutes per
beneficiary. We estimate that the total annual burden associated with
this information collection requirement is 2,000 hours.

Section 414.414 Conditions for Awarding Contracts

Section 414.414 contains the rules pertaining to the evaluation and
selection of suppliers for contract award purposes under the Medicare
DMEPOS Competitive Bidding Program. Specifically, Sec. 414.414(b)(1)
states that each supplier must meet the enrollment standards specified
in Sec. 424.57. The burden associated with this requirement is subject
to the PRA. This requirement is currently approved under OMB control
number 0938-0717, with an expiration date of November 30, 2007.

Section 414.420 Physician or Treating Practitioner Authorization and
Consideration of Clinical Efficiency and Value of Items

Section 414.420(a) states that a physician or treating practitioner
may prescribe, in writing, a particular brand of an item for which
payment is made under competitive bidding or a particular mode of
delivery for an item, if he or she determines that the particular brand
or mode of delivery would avoid an adverse medical outcome for the
beneficiary and documents this determination in the beneficiary's
medical record. The burden associated with this requirement is the time
and effort associated with evaluating the beneficiary and, if
necessary, determining the best brand item or mode of delivery to avoid
an adverse medical outcome. In addition, there is burden associated
with the time and effort involved in writing the prescription for the
brand item or the mode of delivery and documenting the medical record.
The burden associated with this requirement is not subject to the PRA
as stated under 5 CFR 1320.3(b)(2) and (h)(5).

Section 414.422 Terms of Contracts

Section 414.422(d) requires contract suppliers to notify CMS if
they are considering or negotiating a change of ownership. The
notification must be made 60 days prior to the anticipated effective
date of the change. In addition, a supplier must submit a novation
agreement to CMS 30 days before the anticipated change of ownership
takes effect, stating that it will assume responsibility for meeting
all of the terms and conditions of the competitive bidding contract.
The new supplier must submit the same documentation required of the
original contract supplier unless it has already submitted such
documentation during the bidding process and that documentation is
still current.
The burden associated with this requirement is the time and effort
associated with drafting and submitting the required notification to
CMS. While this burden is subject to the PRA, we currently have no way
to quantify the number of potential respondents. We will continue to
monitor the program requirement and seek OMB approval should the number
of respondents surpass the threshold of 10 individuals or entities as
specified in 5 CFR 1320.3(c)(4).

Table 10.--Estimated Annual Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
Burden per Total annual
Requirement OMB control No. Respondents Responses response (in burden (in
hours) hours)
----------------------------------------------------------------------------------------------------------------
Sec. 414.412(a)............ 0938--New........ 15,973 15,973 68 1,086,164
0938--New........ 8000 8000 .25 2,000
0938--New........ 15,973 15,973 .166667 2662
Sec. 414.414(b)(1)......... 0938--0717....... 35,000 35,000 8 280,000
----------------------------------------------------------------------------------
Total.................... ................. .............. .............. .............. 1,370,826
----------------------------------------------------------------------------------------------------------------

As required by section 3504(h) of the PRA, we have submitted this
final rule to OMB for its review and approval of the information
collection requirements.
If you comment on these information collection requirements, please
mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic
Operations and Regulatory Affairs, Regulations Development and Issuance
Group, Attn.: William N. Parham, III, CMS-1270-F, Room C5-14-03, 7500
Security Boulevard, Baltimore, MD 21244-1850; and
Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 10235, New Executive Office Building, Washington, DC
20503, Attn.: Carolyn Lovett, CMS Desk Officer, CMS-1270-F, E-mail:
carolyn_lovett@omb.eop.gov, Fax: (202) 395-6974.

XVIII. Regulatory Impact Analysis

A. Overall Impact

We have examined the impacts of this final rule as required by
Executive Order 12866 (September 1993, Regulatory Planning and Review),
the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-
354), section 1102(b) of the Social Security Act, the Unfunded Mandates
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
1. Executive Order 12866
Executive Order 12866 (as amended by Executive Order 13258, which
merely reassigns responsibility of duties) directs agencies to assess
all costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). A
regulatory impact analysis (RIA) must be prepared for major rules with
economically significant effects (that is, a final rule that would have
an annual effect on the economy of $100 million or more in any 1 year,
or would

[[Page 18070]]

adversely affect in a material way the economy, a sector or the
economy, productivity, competition, jobs, the environment, public
health or safety, or communities). We have determined that this final
rule is an economically significant major rule and thus have prepared a
regulatory impact analysis.
2. Regulatory Flexibility Act (RFA)
The RFA requires agencies to analyze options for regulatory relief
of small businesses. For purposes of section 604 of the RFA, small
entities include small businesses, nonprofit organizations, and small
governmental jurisdictions. Approximately 85 percent of DMEPOS
suppliers are considered small businesses according to the Small
Business Administration's size standards, with total revenues of $6.5
million or less in any 1 year. Individuals and States are not included
in the definition of a small entity. We expect that this final rule
will have a significant impact on a substantial number of small
suppliers. The RFA requires that we analyze regulatory options for
small businesses and other entities. The analysis must include a
justification concerning the reason action is being taken, the kinds
and numbers of small entities the rule affects, and an explanation of
any meaningful options that achieve the objectives with less
significant adverse economic impact on the small entities. We have
provided this analysis in section XVIII.B. of the preamble to this
final rule.
3. Small Rural Hospitals
In addition, 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. For
purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside of an MSA and has fewer
than 100 beds. We have determined that this rule will not have a
significant effect on small rural hospitals. Rural health care
facilities should not be significantly impacted as the program is
expected to operate primarily within relatively large MSAs.
4. Unfunded Mandates
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also
requires that agencies assess anticipated costs and benefits before
issuing any rule whose mandates require spending in any 1 year of $100
million in 1995 dollars, updated annually for inflation. That threshold
level is currently approximately $120 million. We do not expect this
final rule will result in direct costs that exceed $120 million per
year on State, local, or tribal governments in the aggregate or the
private sector, and thus the UMRA would not apply.
5. Federalism
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on State
and local governments, preempts State law, or otherwise has Federalism
implications. We have determined that this final rule will not have
substantial direct effects on the rights, roles, and responsibilities
of States.

B. Regulatory Flexibility Analysis

1. Summary
The May 1, 2006 proposed rule did not include a separate initial
Regulatory Flexibility Analysis. However, information concerning small
suppliers was included throughout the proposed rule preamble and
regulatory impact analysis. This document consolidates and summarizes
components of the regulation concerning small businesses into a single
RFA. Its contents are included in more detail in various parts of the
regulatory impact analysis and the regulation preamble.
2. The Need for and Objectives of the Final Rule
Payment for DMEPOS is currently based generally on fee schedule
amounts. Section 302(b)(1) of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173),
requires the Secretary of Health and Human Services to replace the
current fee schedule methodology for certain items with a competitive
acquisition contracting program that will result in an improved
Medicare methodology for setting payment amounts for certain durable
medical equipment and supplies, enteral nutrition equipment, nutrients
and supplies, and off-the-shelf orthotics. This new bidding process
will result in CMS awarding contracts with to winning suppliers.
Contracts will stipulate the terms, conditions, and payment rates for
items and services for under the program. Generally, only suppliers
that submit winning bids and are awarded contracts will be permitted to
furnish items under the program and reimbursement for those items from
Medicare.
In developing bidding and contract award procedures, section
1847(b)(6)(D) of the Act requires us to take appropriate steps to
ensure that small suppliers of items and services have an opportunity
to be considered for participation in the Medicare DMEPOS Competitive
Bidding Program. Section 1847(b)(2)(A)(ii) of the Act also states that
the needs of small providers must be taken into account when evaluating
whether an entity meets applicable financial standards.
Set out below is a summary of the significant issues raised by the
public comments in response to the initial regulatory flexibility
analysis, a summary of the assessment of the agency of such issues, and
a statement of any changes made in the proposed rule as a result of
such comments.
3. Comments Regarding Small Suppliers
The May 1, 2006 proposed rule did not include a separate initial
regulatory flexibility analysis, but all information required for an
RFA was contained elsewhere in the regulatory impact analysis or the
regulation preamble. Below we list major comments on aspects of the
proposed rule which directly concern small suppliers that are included
in the final rule.
a. Comments on Small Supplier Focus Groups
Several commenters requested that CMS share the findings from the 9
small supplier focus group meetings that were conducted during April
and May 2005. Representatives of DMEPOS suppliers that had less than $3
million in gross revenue and employed up to 10 FTE employees met with
CMS' contractor staff and were invited to share thoughts and opinions
on the potential impact of quality standards, accreditation,
competitive bidding, and financial standards requirements on their
businesses. We presented an overview and results of the focus groups
related to quality standards and accreditation to the PAOC on September
26, 2005 (access at http://www.cms.hhs.gov/CompetitiveAcqforDMEPOS/PAOCMI/list.asp#TopOfPage
).

[[Page 18071]]

that lower payment rates for suppliers would inevitably lead to lower
quality goods and services. Participants were particularly emphatic in
their belief that CMS continues to neglect the valuable service
component that small suppliers provide to their customers. They
believed that it is their commitment to service that sets them apart
from the national companies. A number of participants were concerned
about the possibility of requiring small winning supplier to furnish
items in the entire MSA, given the fact that some MSAs cross State
boundaries. There was also a consensus among these small suppliers that
the impact of competitive bidding would differ by product line. They
believed that items involving high-end technology equipment,
respiratory equipment, and customized products are more service
intensive than other products, such as standard wheelchairs, that
involve fewer repairs, set-up time, and patient education.
Finally, many participants in the focus groups believed that tax
returns, quarterly standard financial statements, and Dun & Bradstreet
were helpful sources of information about a business's credit history
and cash flow. The participants noted that suppliers that grossed over
$3 million in revenue used audited financial statements, whereas
suppliers that grossed less than $3 million in revenue used cash basis
accounting principles. A summary of the PAOC discussion related to the
focus group results can be accessed at: http://www.cms.hhs.gov/CompetitiveAcqforDMEPOS/downloads/PAOC_summary.pdf
.

We have used the comments from the focus groups as well as public
comment process in developing our final policies for the Medicare
DMEPOS Competitive Bidding Program.
b. Comments on the Definition of Small Suppliers
Some comments concerned the definition of small suppliers. Some
commented on practitioner and providers, reporting that there are
currently 40,000 practitioners and providers enrolled as suppliers,
including approximately 1,078 physical therapists. The commenters
stated that health care practitioners who provide DMEPOS as an integral
part of their professional services specialize in providing items for
specific conditions. They added that these suppliers offer considerable
expertise in evaluating both the patient and the item in order to
provide the patient with the best possible outcome.
Many commenters disagreed with using the definition of the SBA
(less than $6 million in annual receipts) because the CY 2003 Medicare
data showed that at least 90 percent of suppliers had less than $1
million in allowed charges. They recommended defining a small supplier
as a supplier that generates less than $3 million in annual receipts.
The commenters believed that a lack of small supplier participation
would negatively impact patient care. They added that small businesses
would have to endure large expenses in order to participate in the
Medicare DMEPOS Competitive Bidding Program. Most suggested that we
define a small supplier as a supplier having fewer than 10 FTE
employees. They also believe that small suppliers serve rural and
underserved urban communities where larger suppliers may not operate.
We agree with the commenters and recognize the importance of small
supplier participation and understand that there are upfront costs
associated with submitting a bid under the program. In the final rule,
we revised our policies to ensure that small suppliers have an
opportunity to be considered for participation in the Medicare DMEPOS
Competitive Bidding Program. To assure multiple suppliers, storefront
locations, beneficiary access, and increased participation by small
suppliers, we have in cooperation with the SBA, revised the final rule
such that the definition of a ``small supplier'' is a small supplier
that generates gross revenue of $3.5 million or less in annual
receipts, including Medicare and non-Medicare revenue (Sec. 414.402).
c. Comments on the Protections for Small Suppliers
Several commenters noted that section 1847(b)(6)(D) of the Act is
entitled ``protection'' of small suppliers and not the mere
identification of small suppliers. The commenters proposed the
following policies: (1) At least 50 percent of suppliers that receive a
contract should be small suppliers (based on $3 million or less in
revenue or less than 10 FTE employees); (2) CMS should allow suppliers
with less than 10 FTE employees to furnish items to less than the
entire CBA; (3) CMS should award contracts to small suppliers with the
lowest bids that exceed the pivotal bid; (4) CMS should allow truly
small suppliers to promise to accept the single payment amount; and (5)
CMS should establish a certain volume of items in each geographic area
that will be ``set-aside'' for small suppliers.
The statute at section 1847(b)(6)(D) of the Act requires that the
Secretary shall take appropriate steps to ensure that small supplies of
items and services have an opportunity to be considered for
participation in the program under this section. We recognize the
concerns raised by the commenters and have considered the suggested
alternatives provided during the small supplier focus groups and
through the public comment process. We also recognize the importance of
maintaining storefront capabilities to meet the needs of beneficiaries.
To help small suppliers have an opportunity to participate in the
Medicare DMEPOS Competitive Bidding Program and to support our
Departmental goals for contracting with small suppliers, we have
established a target for small suppliers' participation in the final
rule. Our target for small supplier's participation in each product
category will be determined by multiplying 30 percent times the number
of suppliers that meet our bidding requirements and whose composite
bids are at or lower than the pivotal bid. The number resulting from
this multiplication represents our goal for small supplier
participation for the product category (Sec. 414.414(g)(1)(i)). If
this 30-percent target is not achieved as a result of this process, we
will offer contracts to small suppliers with submitted bids that are
above, but closest to, the pivotal bid until we reach the target number
or there are no additional small supplier bidders (Sec.
414.414(g)(1)(iii)). In addition, we are requiring that all contract
suppliers must service the entire CBA, and we have clarified that this
can be done where appropriate either through home delivery, mail order,
or storefront. However, small suppliers that cannot service the entire
area independently can join together and bid as a network (Sec.
414.418). The network, rather than each individual supplier, would be
required to service the entire CBA.
d. Comments on Bidding Requirements for Physicians and Other Providers
Several commenters suggested that CMS not require physicians,
including podiatric physicians, to participate in the competitive
acquisition program for certain DMEPOS. The commenters noted that under
the physician self-referral (``Stark'') provisions under section 1877
of the Act, a physician in a group practice may not refer Medicare
beneficiaries to the group practice, and the group practice may not
bill for any DME except crutches, canes, walkers, folding manual
wheelchairs, and blood glucose monitors. The commenters also requested
that CMS not require physician assistants, physical therapists, and
occupational therapists to participate in the Medicare DMEPOS
Competitive Bidding Program because those health care professionals are

[[Page 18072]]

licensed by State boards. According to the commenters, if a physician
or non-physician practitioner does not participate in the competitive
bidding program, he or she should be reimbursed at the competitive bid
rate for any DME items that are furnished to his or her own patients.
In addition, the commenters requested that CMS clarify how the
requirement for physicians to submit bids and provide all items within
a product category does not violate the physician self-referral law.
Other commenters stated that there is no reason to treat occupational
therapists and physical therapists differently from physicians.
Based on these comments, we modified the proposed rule by expanding
the definition of the term ``physicians'' and by exempting physicians
and other treating practitioners from bidding requirements to provide
limited DMEPOS to their own patients (Sec. 414.402 and Sec.
414.404(b)(1)). We are also modifying the regulation to give physical
therapists in private practice and occupational therapists in private
practice the option to furnish certain types of competitively bid items
without participating in the competitive bidding program (Sec.
414.404(b)(2)).
e. Comments on Bidding by Product Category
We received numerous comments concerning the definition and use of
product categories. We believe that conducting separate bidding
processes for individual product categories will encourage the
participation of small suppliers that specialize in one or a few
product categories. It is our goal to allow Medicare beneficiaries the
opportunity to receive all related equipment from the same supplier,
thereby minimizing disruption to the beneficiary. Suppliers currently
specialize in particular products, and we do not see this process being
interrupted by competitive bidding. The use of product categories is
intended as a compromise that will maximize beneficiary convenience
while still permitting suppliers, particularly small suppliers, to
specialize in a certain product category.
A few commenters indicated that conducting separate bidding
processes for individual product categories is administratively
burdensome. They stated that CMS' assumption that large suppliers could
expand their products by offering supplies and equipment easier or more
quickly than small suppliers is an erroneous view of a company's
ability to expand. They also reported that large organizations must
seek approval from their boards or other stakeholders before they can
undertake certain business expansion activities.
We received comments arguing that product categories should be
defined narrowly or broadly. Others stated that the product categories
should not differ from the SADMERC policy groups, believing that
combining medical policies may affect beneficiary access or quality of
services. Suppliers also noted that suppliers are already familiar with
the policy groups as that is how the CMS Web site is organized and this
is accessed by suppliers frequently for information. Some commenters
suggested that product categories should be uniform and as stable as
possible because keeping track of differently defined categories would
be very difficult. Some commenters also called for subcategories within
product groups.
Based on public comments, we have revised the proposed definition
of the term ``product category'' in Sec. 414.402 to mean, ``a grouping
of related items that are used to treat a similar medical condition''.
The list of product categories and the items included in each product
category that is included in each competitive bidding program will be
identified in the request for bids document for that competitive
bidding program or by other means. The policy groups will serve as the
starting point for establishing product categories. Product categories
may generally be consistent with the policy groups that are established
by the SADMERC, unless CMS determines that a policy group should be
redefined for the purposes of competitive bidding. The SADMERC
established policy groups for the purposes of developing Medical review
policies and for data analysis. However, the product categories for
which we would request bids could be a subset of items from a SADMERC
policy group or a combination of items from different policy groups.
There may be items in a policy group that are not subject to
competitive bidding or that we would want to exempt from competitive
bidding using our authority to exempt items. In response to the
suggestion that we include subcategories within a product category, we
do not believe this approach would be consistent with the purpose and
definition of product categories because a product category is a group
of related items used to treat a medical condition and it would be
designed to be appropriate for Medicare competitive bidding purposes.
In addition, we do not believe that there is a need for subcategories
because we would create a new product category instead of a
subcategory.
f. Comments on Financial Standards
Several comments argued that the financial standards were too
strict for certain suppliers and should be flexible enough to regulate
mail order companies, small local suppliers, SNFs, outpatient
departments of hospitals, retail pharmacies, and publicly-traded and
privately-held family firms. Other commenters argued that the reporting
requirements of the proposed financial standards are too burdensome and
discourage small suppliers from participating. They recommended that
CMS define different standards for small suppliers and pharmacies. The
commenters stated that if financial standards are too restrictive,
qualified suppliers may be eliminated from the Medicare Part B program.
They added that, conversely, if financial standards are too lax,
suppliers may be financially unable to meet the challenges of a
competitive market.
We agree with the commenters that it is important to have financial
standards that ensure suppliers are able to meet the challenges of
competitive bidding and can fulfill their contract obligations. After
further consideration and in response to comments, we believe that the
financial documentation discussed in the proposed rule is too
burdensome, particularly for small suppliers. We have determined that
we could obtain the necessary information through collection of a
limited number of financial documents and believe that the submission
of this information will be less burdensome for all suppliers,
including small suppliers. We are clarifying in the final rule that the
RFB will specify what financial documents will be required (Sec.
414.414(d)) so that we can obtain a sufficient amount of information
about each supplier while minimizing the burden on both bidding
suppliers and the bid evaluation process. This financial information
will provide enough information to allow us to determine financial
ratios, such as a supplier's debt-to-equity ratio, and credit
worthiness, which will allow us to assess a supplier's financial
viability. We believe we have balanced the needs of small suppliers and
the needs of the beneficiaries in requesting documentation that will
provide us with sufficient information to determine the financial
soundness of a supplier.
g. Comments on Supplier Networks
The May 1, 2006 proposed rule included a proposal to permit small
suppliers to form a legally binding network with other small suppliers
for the purpose of submitting a bid. Many commenters believed that the
option to

[[Page 18073]]

form a network is not a realistic solution for ensuring that small
suppliers participate in the competitive bidding program. They
expressed concern that forming a network could violate the Federal
antitrust laws because those laws do not permit suppliers to reach a
mutual consensus on pricing. They also stated that the proposed rule
would require suppliers to agree on proposed prices for all items
within a competitive bidding product category. They further believed
the proposed rule is complex, and that suppliers would not have
sufficient time to form a network and comply with all the requirements
to meet the competitive bidding implementation timelines.
We agree that forming a network may pose a challenge for some
suppliers. However, forming a network is a business decision and we
continue to believe that networks should be an option for small
suppliers to promote competition and efficiencies that could improve
services to beneficiaries. The proposed rule was published May 1, 2006.
We believe sufficient notice has been given for suppliers to consider
network options and plan accordingly. We believe that our network
policy is constructed in a way that maximizes participation of
suppliers.
Suppliers that pursue the network option must comply with all
applicable Federal antitrust laws. We have taken steps to ensure that
each network is not in violation of Federal antitrust laws or exhibits
otherwise anticompetitive behavior by including the following
requirements:
Network participation will be limited to small suppliers that
cannot compete in competitive bidding because they cannot independently
service the entire CBA. A written certification will be required from
each network supplier that it is unable to compete (that is, cannot
service the entire CBA on its own) without joining a network (Sec.
414.418(b)(6)). We believe this provision will help ensure that a small
supplier has a legitimate need to participate in a network. This will
minimize the potential for anticompetitive behavior and will assist
small suppliers by expanding their opportunity to participate. Network
members' Medicare market share at the time of bidding when added
together cannot exceed 20 percent of the Medicare market (Sec.
414.418(b)(7)). This would guard against excessive network market
share. Network membership in any one network will be limited to 20
small suppliers to help promote competition among suppliers. Our
rationale for limiting the number of small suppliers to no more than 20
is the following:
This would help avoid collusion which could lead to less
competition and higher bids.
It would ease administrative burden and reduce the overall
cost of evaluating each network.
A 20-supplier network would be able to serve an entire CBA
even if each of its members is small. Networks are required to form a
legal entity that functions as the bidder. We do not believe that a
network should include more members than is necessary to service an
entire CBA because other suppliers who are not in networks have to
service an entire CBA.
The network provisions do not establish a safe harbor or a safety-
zone or in any way protect anticompetitive behavior. All of the Federal
laws and regulations that govern anticompetitive behavior, including
the Federal antitrust laws, will fully apply.
A few commenters agreed with our proposal to require that suppliers
participating in a network form a discrete legal entity and stated that
this would prevent the commingling of Medicare funds, as well as
violations of the Federal anti-kickback statute, self-referral rules
and regulations, and allegations of unfair business practices among the
participating network suppliers. Other commenters believed that
requiring each network to independently bid defeats the entire purpose
of networking. They disagreed with the primary legal entity being
responsible for billing Medicare and receiving the payments. They
believed that each supplier should be responsible for its own finances.
We appreciate the support for our proposal that each network must
form a legal entity. We agree that the primary legal entity should not
be responsible for billing Medicare and receiving the payments and have
revised Sec. 414.418(b)(4) to reflect this rule. We are requiring each
member of the network to submit its own Medicare claims and are
specifying that each member will be paid directly for Medicare products
and services furnished as part of its individual business. This is
consistent with our current Medicare policies for each supplier to
submit claims to receive Medicare payments.
A few commenters believed that networks that provide multiple
product categories pose a risk because not all the network members will
furnish all the product categories; therefore, beneficiaries may not
have access to services. They recommended that CMS add requirements to
ensure that networks bids are scrutinized to ensure that each network
has appropriate mechanisms to service the entire CBA. The commenters
recommended that each beneficiary have a single point of contact for
the network to ensure satisfactory resolution of performance problems
or other issues across the CBA. They also asked if subcontractors
needed to meet the same requirements as a contract supplier. Based on
these concerns we are requiring that networks form a legal entity, such
as a joint venture or limited partnership. Each network member will
also be required to satisfy all applicable bidding requirements. Each
network member is equally responsible for the quality of care, service,
and items that it delivers to Medicare beneficiaries. If any member of
the network falls out of compliance with this requirement, we have the
option of terminating the network contract.
A few commenters questioned why a limit of 20 percent of the market
share was assigned to the network, leaving 80 percent of the Medicare
market for a large company. They suggested allowing network members to
obtain market share not to exceed 35 percent, as specified in the
Department of Justice monopoly guidelines. A few commenters requested
that CMS disclose the methodology that will be used to calculate the
market share and monitor changes over the course of the contract.
In this final rule, we have decided to finalize the proposed 20-
percent market share limitation on the capacity of networks. However,
once a network receives a contract, there is no limit on what
percentage of the demand in the CBA that the network can furnish. We
believe that this will ensure a sufficient number of contract suppliers
and provide beneficiaries with more variety and choice.
Some commenters suggested that CMS allow suppliers to join up to
two networks, recognizing that many suppliers currently participate in
several networks. They believed that this would ensure that the
participating supplier is not disadvantaged by a requirement to commit
to a single network bid. We agree with the commenters. We will allow
suppliers to join more than one network, but a supplier cannot join
more than one network for purposes of furnishing items in the same
product category in the same CBA. We believe that this policy is
necessary because, without it, the competitive bidding process would be
undermined by allowing suppliers to bid against themselves for the same
product category. In other words, if a

[[Page 18074]]

supplier wants to independently furnish items for a product category,
it would not be able to join another network that furnishes the same
product category in the same CBA. However, a supplier that wishes to
furnish products that are in two different product categories would be
able to join a different network for each product category or submit a
bid as an individual supplier for one product category while joining a
network for the other product category.
A few commenters asked how networks would obtain a supplier billing
number. The Medicare competitive bidding implementation contractor will
assign each network a bidder number that will be used to monitor the
network. As stated earlier, each member of the network will be allowed
to submit its own claims and receive Medicare payments directly.
A few commenters requested that CMS clarify whether each supplier
that is a member of a network would be required to provide all of the
items for the product category for which the network submits a bid. The
member of the networks would be required to provide all the items
within the product category for which the network submits a bid. This
is consistent with our requirement that all winning suppliers must
furnish all items in a product category. Therefore, each member of the
network must be able to provide all items within the product categories
for which the network has submitted bids. Although the network must
provide items to any beneficiary throughout a CBA, each member of the
network is not responsible for providing an item throughout the entire
CBA.
4. Description and Estimate of the Number of Small Entities
As of January 2006, the SBA defines a small business as generating
less than $6.5 million in annual receipts. We worked with the SBA to
define small supplier for the Medicare DMEPOS Competitive Bidding
Program. In this final rule, we are defining a small supplier as a
supplier that generates gross revenue of $3.5 million or less in annual
receipts. Before we receive supplier bids, we do not have information
on each supplier's total revenue. We only have information on
suppliers' Medicare revenues. As a result, we had to make an assumption
about what percent of a supplier's revenues come from Medicare. We
looked at filings by public DMEPOS companies and, based on that
information, we assume one-half of the average supplier's revenues come
from Medicare DMEPOS.
Suppliers that furnish products in a CBA in at least one product
category selected for competitive bidding will be affected by this
program. A supplier that does not furnish competitively bid items and
services to beneficiaries in a CBA will not be affected. Based on
analysis of CY 2005 Medicare DMEPOS claims, we estimate the number of
suppliers affected in the Regulatory Impact Analysis as described
below. This analysis preceded finalization of the product categories
and selection of bidding areas and is thus based on a number of
assumptions, as detailed in the Regulatory Impact Analysis. Based on CY
2005 claims data, the average MSA in the top 25 MSAs, excluding New
York, Los Angeles, and Chicago, has 2,896 DMEPOS suppliers that furnish
any DMEPOS product and 1,972 suppliers that furnish products subject to
competitive bidding and could potentially be affected by competitive
bidding. We estimate that 28,960 suppliers will provide competitive bid
items in the CBAs that we initially designate. If suppliers furnish
products in more than one MSA, we counted them more than once because
they are affected in more than one MSA. Not all products are subject to
competitive bidding; therefore, we estimate that 68 percent of
suppliers will furnish products subject to competitive bidding and will
be affected by competitive bidding during the initial round of
competitive bidding. This means in CY 2007, the remaining 32 percent of
suppliers in the 10 selected CBAs will not be affected by competitive
bidding because they do not furnish products subject to competitive
bidding. However, the actual percentage of affected suppliers may be
smaller if we do not select all eligible product categories for
competitive bidding.

Number of Small Suppliers \1\
[$3.5 million or less in Medicare allowed charges]
----------------------------------------------------------------------------------------------------------------
Number of Total number of
Bidding year affected small affected Percent
suppliers suppliers
----------------------------------------------------------------------------------------------------------------
2007........................................................ 16,762 19,720 85
2008........................................................ 90,500 106,470 85
2009........................................................ 97,031 114,154 85
2010........................................................ 103,562 121,838 85
2011........................................................ 103,562 121,838 85
2012........................................................ 103,562 121,838 85
----------------------------------------------------------------------------------------------------------------
\1\ Some suppliers furnish products in more than one selected MSA. Consequently, some suppliers may be counted
more than once.

5. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The primary compliance cost of the proposed rule will be the cost
of bid submission. As part of a separate rule, all DMEPOS suppliers
will be required to gain and maintain accreditation which may lead to
significant compliance costs. However these costs are not considered
under the competitive acquisition program, and thus we concentrate on
the costs of bidding which includes time devoted to supplier education
efforts, completing forms, and providing documentation.
Bidders must decide whether to bid, request or download an RFB,
attend a bidders conference (optional) and read outreach materials,
decide how much to bid for each item, and prepare and submit a bid. In
the demonstration, bidders in Polk County, Florida reported spending a
total of 40 to 100 hours submitting bids. In the proposed rule we
assumed that suppliers would use the midpoint number of hours, 70
hours. We have reduced our estimate of the required hours to 68, due to
changes we made to condense the bidding forms requirements, based on
comments we received on the proposed rule. According to 2005 Bureau of
Labor Statistics (BLS) data, the average hourly wage for an accountant
and auditor was $25.54 (National Compensation Survey: Occupational
Wages in the United States, June 2005, U.S. Department of Labor, Bureau
of Labor Statistics, Bulletin 2568, August 2006. http://www.bls.gov/ncs/ocs/sp/ncbl0832.pdf
).

[[Page 18075]]

Accounting for inflation and overhead, we assume suppliers will incur
$33.87 per hour in wage and overhead costs. Based on this information,
we assume that a supplier that bids will spend $2,303.16 ($33.87 * 68)
to prepare its bid, taking into consideration that the number of
product categories included in a bid, on average, will vary by
supplier. We calculate the total cost for all supplier bids, including
those of both future winning and future losing suppliers. Therefore, we
expect that CY 2007 total supplier bidding costs for 15,973 bids will
be $36,788,375 ($2,303.16 * 15,973). This estimate is clearly dependent
on our assumption that 81 percent of eligible suppliers will bid. Our
estimates incorporate the fact that a single organization may submit
bids in more than one CBA in each round. For example, a supplier that
has 15 offices in the country and currently serves all 10 of the CBAs
to be included in the initial round of bidding is counted 10 times in
our estimates. Our estimate of the time required for bidding assumes
that suppliers in the competitive bidding program will bid on about the
same number of individual product categories as suppliers bid on during
the demonstration project. We expect that supplier bidding costs will
rise with the number of product categories bid upon; however, because
there are fixed costs associated with deciding whether to participate
in the competitive bidding program and some of the bidding forms are
only filled out once, the increase in costs associated with each
additional product category may be relatively small. Therefore, our
estimate of the time required per bid should be reasonably accurate
unless suppliers bid on significantly more or fewer product categories
than they bid on during the demonstration.
6. Agency Efforts to Minimize the Significant Economic Impact on Small
Entities
Small suppliers constitute the large majority of DMEPOS firms, and
we anticipate they will form the majority of contract suppliers.
Therefore, consideration of small suppliers influenced virtually all
aspects of the final rule. We detailed the aspects of the final rule
that, in particular, are intended to minimize the impact on small
entities. These aspects and the respective section of the preamble of
this final rule are as follows:
Grandfathering of suppliers (see section VI.D.3.a of this
final rule).
Requirement for physicians and certain nonphysician
practitioners to submit bids (see section VI.G.3 of this final rule).
Product categories for bidding purposes (see section
VI.G.4 of this final rule).
Financial standards (see section VII.C, of this final
rule)
Selection of small suppliers (see section XI. of this
final rule).
Opportunity for networks (see section XII. of this final
rule)

C. Anticipated Effects

We can anticipate the probable effects of this final rule, but the
actual effects will vary depending on which CBAs and product categories
are ultimately selected for competitive bidding under the Medicare
DMEPOS Competitive Bidding Program. The analysis that follows, taken
together with the rest of this preamble, constitutes the final
regulatory impact analysis.
As a result, for the purpose of this impact analysis, it is
necessary to make several assumptions. These assumptions are due to the
uncertainty concerning the actual number of suppliers that will
participate, the associated bid amounts, and the specific items and
areas for which competitive bidding will be conducted.
First, we assume that the first round of bidding will occur in CY
2007, with prices taking effect in April 2008, and the second round of
bidding will occur in CY 2008, with prices taking effect in April 2009.
We also assume rebidding will only occur every 3 years.
Second, we assume that competitive bidding will occur in 10 of the
largest MSAs in CY 2007, excluding New York, Chicago, and Los Angeles.
We exclude the three largest MSAs in CY 2007 because we are not
including them in the initial phase of implementation. We are excluding
the three largest MSAs because we would like to gain more experience in
smaller markets before we enter into the largest markets. For the
initial competition, we assume that bidding will take place in CY 2007,
bids will be evaluated in CY 2007, and prices will go into effect on
April 1, 2008. The second round of bidding will take place in 70 of the
largest MSAs in CY 2008, and the prices will go into effect on April 1,
2009. The next round of bidding will take place in 10 additional MSAs
and will occur in CY 2009, with bid prices going into effect on January
1, 2010. An additional round of bidding will include 10 MSAs and will
occur in CY 2010, with bid prices going into effect on January 1, 2011.
Third, we made some assumptions about which product categories
would be selected for competitive bidding. We recognize that potential
savings, implementation costs, the number of affected suppliers, and
supplier bid costs all depend on which product groups are ultimately
selected. The product categories have yet to be decided. We expect that
approximately 10 product categories will be selected for competitive
bidding for CY 2007 and as many as 7 or 8 of the selected product
categories will be among the 10 largest in terms of allowed charges.
The remaining 2 or 3 product categories will come from the top 20
policy groups ranked by allowed charges. Table 11 shows the top 20
eligible DMEPOS policy groups and their CY 2005 allowed charges.

Table 11.--CY 2005 Allowed Charges: Top 20 Eligible DME Policy Groups
----------------------------------------------------------------------------------------------------------------
Percent of
Rank Policy group Allowed charges eligible DMEPOS
2005* charges
----------------------------------------------------------------------------------------------------------------
1.......................................... Oxygen Supplies/Equipment...... $2,669,015,203 34
2.......................................... Wheelchairs/POVs............... 1,512,581,843 19
3.......................................... Diabetic Supplies & Equipment.. 1,176,121,037 15
4.......................................... Enteral Nutrition.............. 582,085,753 7.5
5.......................................... CPAP........................... 378,084,371 4.9
6.......................................... Hospital Beds/Accessories...... 320,372,566 4.1
7.......................................... Support Surfaces............... 184,266,860 2.4
8.......................................... Negative Pressure Wound Therapy 169,012,105 2.2
9.......................................... Infusion Pumps & Related 157,396,292 2.0
Drugs**.
10......................................... Respiratory Assist Device...... 135,023,095 1.7

[[Page 18076]]

11......................................... Walkers........................ 106,661,034 1.4
12......................................... Nebulizers..................... 97,574,696 1.3
13......................................... Ventilators.................... 70,625,578 0.9
14......................................... Commodes/Bed Pans/Urinals...... 47,861,299 0.6
15......................................... Patient Lift................... 27,768,236 0.4
16......................................... TENS........................... 23,536,834 0.3
17......................................... Seat Lift Mechanism............ 17,159,455 0.2
18......................................... CPM Device..................... 17,023,378 0.2
19......................................... Suction Pump................... 14,096,633 0.2
20......................................... Off-the-shelf Orthotics........ 13,807,205 0.2
--------------------------------------------------------------------
Total for 20 Groups.................... ............................... 7,719,487,197 99
----------------------------------------------------------------------------------------------------------------
* 2005 allowed charges projected based on 98 percent claims processed through March 2006.
** Includes $50 million in allowed charges for drugs.

However, we reiterate that the discussion in this impact analysis
should in no way be interpreted as signifying which product categories
will be selected for the actual competitive bidding program. Our
product category selection for this impact analysis is only to assist
us in estimating the potential savings, costs of implementation, and
supplier and beneficiary impacts.
Fourth, we assume that the Medicare DMEPOS fee schedule will
increase at the rate of inflation for those years in which a statutory
freeze has not been put in place by the Act. We base our estimates on
the expected growth in Medicare Part B expenditures from the Trustees
Reports. (Tables IV.F.2 and IV.F.3 of the 2004 Medicare Trustees
Report.).
This final rule is expected to affect the Medicare program and its
beneficiaries, certain CMS contractors, and DMEPOS suppliers. Although
the workload of referral agents, including hospital discharge planners
and some health care practitioners, appeared to increase during
implementation of the demonstration, we do not anticipate that
competitive bidding will result in a large, ongoing burden on referral
agents. For many DMEPOS product categories, referral agents play an
important role in helping beneficiaries select DMEPOS suppliers that
can meet the beneficiaries' needs. During the demonstration, those
referral agents who previously referred beneficiaries to non-
demonstration suppliers had to change their referral patterns. It is
difficult to quantify this burden because we have no data on the number
of referral agents who will be affected, nor do we have information on
the effort associated with identifying a new supplier. We note that we
plan to take steps to mitigate any burden that might arise for referral
agents. For example, we are planning an extensive educational campaign
for suppliers, referral agents, and beneficiaries. Educational
materials, including an on-line supplier directory, will expedite the
process for identifying and locating contract suppliers and therefore
minimizing any burden. In addition, we will post on the internet the
list of brands that each contract supplier furnishes. This brand
information should be extremely useful for referral agents and may even
reduce burden under the program.
The DMEPOS supplier industry is expected to be significantly
impacted by this final rule. However, not all suppliers will be
affected directly by the competitive bidding program. Suppliers that
furnish products in a CBA in at least one product category selected for
competitive bidding will be affected. A supplier that does not furnish
competitively bid items and services to beneficiaries in a CBA will not
be affected. Based on analysis of CY 2005 Medicare DMEPOS claims, we
estimate that approximately 30,000 suppliers offer at least one product
eligible for competitive bidding and are located in one of the largest
100 MSAs and, therefore, could be impacted by the program. Some of
these suppliers will be affected in multiple CBAs if they offer
products in more than one CBA.
Based on our analysis of CY 2005 claims data, we also estimate that
approximately 85 percent of registered DMEPOS suppliers are considered
small according to the SBA definition. According to the SBA, ``A small
business is a concern that is organized for profit, with a place of
business in the United States, and which operates primarily within the
United States or makes a significant contribution to the U.S. economy
through payment of taxes or use of American products, materials or
labor. Further, the concern cannot be dominant in its field, on a
national basis. Finally, the concern must meet the numerical small
business size standard for its industry. SBA has established a size
standard for most industries in the U.S. economy.'' The size standard
for NAICS code 532291, Home Health Equipment Rental, is $6.5 million.
(See the Web site: http://www.sba.gov/size/sizetable2002.html, read

November 30, 2006.)
Many of these suppliers provide minimal amounts of DMEPOS, and thus
the remaining larger suppliers control significant market share. We
anticipate that the fixed costs required to undergo the bidding process
may be a larger deterrent to small businesses than larger firms.
Because suppliers can choose whether to submit a bid for the Medicare
DMEPOS Competitive Bidding Program, this final rule imposes no direct
costs and, therefore, does not reach the $120 million direct cost
threshold under the UMRA. While not included in this final rule, we
expect that the separate MMA requirement for accreditation of suppliers
will result in added supplier costs beyond those included in this final
rule.
Comment: One commenter stated that the RFA analysis of the impact
of the proposed regulation was incomplete and inadequate because it did
not consider the impact of the proposed regulation on long-term care
hospitals and Medicare beneficiaries who reside in these facilities.
Other commenters suggested that long-term care facilities would incur
increased costs and the quality of treatment received by their patients
would be diminished if they are included in the Medicare DMEPOS
Competitive Bidding Program and offered alternatives to competitive

[[Page 18077]]

bidding that they believed would achieve cost savings.
Response: We considered the impact of the Medicare DMEPOS
Competitive Bidding Program on all suppliers. We believe our estimates
reflect the costs on average that will be incurred by the suppliers
that participate in the program. If a long-term care hospital decides
to submit a bid to furnish items and services under the program, its
bid should reflect its costs to furnish those items and services. In
addition, the quality standards for DMEPOS suppliers require that
suppliers furnish quality items and services.
Comment: One commenter disagreed with CMS' assumption that the
DMEPOS fee schedule will increase at the rate of inflation for those
years in which a statutory freeze is not in effect and that total
charges will increase at the same rate as Medicare Part A and Medicare
Part B expenditures (71 FR 25691). The commenter suggested that non-
DME, non-home health care costs are the driving forces causing
increases in these programs. Other commenters suggested that home care
expenditures are not increasing and that rising hospital, nursing home,
physician, and medication costs were the causes of rising overall
Medicare expenditures.
Response: Based on the public comments we received, we have
clarified in this final revised impact analysis that our estimates on
expected growth will be based on Medicare Part B expenditures. DMEPOS
expenditures have been growing at varying rates in recent years
(expenditures for 26 product categories rose 5 percent between 2004 and
2005 and 21 percent between 2002 and 2005), and the rate of growth has
varied widely between product categories, making precise estimates of
growth for DMEPOS difficult. We believe that the overall growth rate
for Medicare Part Be expenditures provides a reasonable estimate of the
growth rate for DMEPOS because both growth rates are driven by changes
in Part B enrollment and overall growth in medical care use. To address
inflation, we will be asking the suppliers to submit bids that include
all costs associated with furnishing each item for all 3 years of the
contract.
Comment: A number of commenters objected to the data in Table 11 of
the proposed rule (71 FR 25691) indicating that 2003 allowed charges
for infusion pumps and related devices were approximately $149 million.
These commenters believed that the correct amount was approximately $87
million. The commenters believed that the $149 million amount
inappropriately includes charges for insulin and insulin pumps which
are not provided by infusion pharmacies.
Response: The data in the proposed analysis include allowed charges
for insulin and infusion pumps. Although these items may not be
furnished by infusion pharmacies, they are included because they are
subject to competitive bidding under the Act.
Comment: Several commenters disagreed with the statement in the
preamble of the proposed rule (71 FR 25692) that the UMRA does not
apply to this rule. One commenter suggested that virtually all affected
suppliers would submit bids (and thus would incur costs) and even using
CMS estimates (that the commenter believed to be too low), the costs
for the CY 2008 round of bidding would be $178 million, an amount that
the commenter believed exceeded the UMRA's threshold of $120 million.
Response: We have updated our estimates in this final rule using CY
2005 data. Based upon the estimated number of suppliers that will
submit bids, the costs of submitting bids, and the fact that the
average number of suppliers per CBA will decrease in future rounds of
competitive bidding, we do not expect that costs will exceed the UMRA's
$120 million threshold.

D. Implementation Costs

CMS will incur administrative costs in connection with the
implementation and operation of the Medicare DMEPOS Competitive Bidding
Program, which can affect the net savings that can be expected under
this final rule. However, many of the variable costs associated with
bid solicitation and evaluation will ultimately depend on how many
suppliers choose to participate in competitive bidding. Because of this
uncertainty, we are not able to estimate bid solicitation and
evaluation costs at this time.
We will incur initial startup costs. CMS estimates internal costs
and costs to its contractors to be approximately $1 million in
immediate fixed calendar year costs for contractor startup and system
changes for the initial competitive bidding phase in CY 2007. In
addition to the initial startup costs, we will also incur maintenance
costs and bid solicitation and evaluation costs. We will need to pay
maintenance costs every year for the running of the program. However,
we will only need to pay bid costs in the years in which competitive
bidding is conducted. Yearly maintenance costs will depend on the
number of CBAs in which the program has been implemented, while bid
solicitation and evaluation costs will depend on the number of sites
that have bidding that year.
Our maintenance costs will include a small staff to oversee the
program, office costs for the staff, as well as staff travel costs, and
overhead. In addition, the CBIC(s) will be responsible for most of the
program maintenance. The maintenance costs could also include the costs
for an ombudsman(s) to assist suppliers, beneficiaries, and referral
agents with the competitive bidding process and questions. We also
expect to incur costs for education and outreach expenses such as staff
resources and material costs for producing education materials and
supplier directories.
We will incur bid costs in the years in which we conduct
competitive bidding and when we evaluate bids. These costs will be a
direct result of the bid solicitation and evaluation process. Bid
solicitation costs include costs associated with mailing necessary
information to suppliers, printing, duplicating, and the cost of
administering an electronic bidding program. The actual costs will vary
by CBA and will depend on the number of potential suppliers. We will
incur bid evaluation costs whenever bidding occurs in a CBA. According
to the DMEPOS evaluation report, it took about 9.4 hours during the
demonstration to evaluate each bid and the supplier to ensure that only
quality suppliers were selected. However, because the Medicare DMEPOS
Competitive Bidding Program uses quality standards and accreditation as
a separate process, we expect that the time required to evaluate bids
will be less than in the demonstration. The total bid evaluation costs
will ultimately depend on the number of suppliers that choose to submit
bids.
Comment: Several commenters believed that the regulatory analysis
in the proposed rule significantly underestimated the administrative
costs associated with implementing the competitive bidding program,
further reducing any net savings. One commenter referred to a study
that estimated that CMS would need 1,600 new staff to implement the
proposed regulation.
Response: As explained in the proposed rule, we are making the best
estimates based on the experience in the demonstrations. Even though
these estimates will be affected by the number of suppliers and items
for which we do competitive bidding, nevertheless they represent our
best estimates. After careful review of the study referenced by the
commenter, we disagree with the estimate of the number of extra staff

[[Page 18078]]

needed to implement the proposed regulation. We believe our original
estimates better reflect the resource needs for the competitive bidding
program.

E. Program Savings

We estimate significant savings from the Medicare DMEPOS
Competitive Bidding Program. Our estimates of gross savings utilize as
a starting point the results in the demonstration. Excluding surgical
dressings, which are not eligible for competitive bidding, the average
product group savings rate in the demonstration ranged from 9 to 30
percent per round, with most product groups having about a 20-percent
savings. Table 12 shows the savings rate for selected product groups
and CBAs by round during the DMEPOS demonstration.

Table 12.--DMEPOS Competitive Bidding Demonstration Savings Rates
----------------------------------------------------------------------------------------------------------------
Product group Polk County Round 1 Polk County Round 2 San Antonio
----------------------------------------------------------------------------------------------------------------
Oxygen Equipment and Supplies........ $2,364,811 (17%)....... $1,525,490 (20%)....... $2,096,707 (19%)
Hospital Beds and Accessories........ $290,715 (23%)......... $195,140 (31%)......... $644,514 (19%)
Urological Supplies.................. $36,169 (18%).......... $12,585 (9%)........... Not included
Surgical Dressings................... -$30,321 (-12%)........ -$637 (-1%)............ Not included
Enteral Nutrition.................... $342,251 (17%)......... Not Included........... Not included
Wheelchairs and Accessories.......... Not included........... Not included........... $796,617 (19%)
General Orthotics.................... Not included........... Not included........... $89,462 (23%)
Nebulizer Drugs...................... Not included........... Not included........... $1,020,072 (26%)
----------------------------------------------------------------------------------------------------------------
Source: Evaluation of Medicare's Competitive Bidding Demonstration for DMEPOS, Final Evaluation Report (November
2003), pages 90 and 92.

Under this final rule, we will set prices for individual items
equal to the median winning bid for that item. In contrast, the
demonstration used a more complicated pricing rule that adjusted fees
for each item to ensure that each suppliers overall payment was equal
to the pivotal bid. In our estimates, we have taken into account that
some DMEPOS prices have been adjusted downward since CY 2000. We assume
that if prices for an individual item have already been reduced by 10
percent after the demonstrations were completed, prices would most
likely fall 10 percent rather than 20 percent. Therefore, we found that
the median pricing rule would have produced fees that were
approximately 5 percentage points lower than those produced by the
demonstration method, assuming that the median pricing rule would not
have affected the number of winning bidders who signed contracts or the
suppliers' bidding strategies. We have incorporated the effects of the
median pricing rule into our estimates of savings from the program. We
assumed a 25 percent savings in the estimate because of the median
pricing methodology. We netted out any statutory reductions in prices
that have already occurred, such as the CY 2005 reductions in oxygen
supplies and equipment. These numbers also reflect the reductions in
Medicare payments that resulted from the DRA provisions on capped
rental DME and oxygen payment, as well as the wheelchair recoding
initiative recently undertaken by CMS.
Table 13 shows the impact on the FFS program for the 10 policy
groups. In the table, savings are reported as negative values. The
savings are attributable to the lower payment amounts anticipated from
competitive bidding. The table shows the reduction in Medicare allowed
charges, without any impact on the Medicare Advantage program,
associated with the program for the calendar year. The impact includes
reductions in Medicare payments (80 percent) and reductions in
beneficiary coinsurance (20 percent).

Table 13.--Program Impact for 10 Policy Groups
[in millions] *
----------------------------------------------------------------------------------------------------------------
Calendar Year
-----------------------------------------------------------------
2007 2008 2009 2010 2011 2012
----------------------------------------------------------------------------------------------------------------
Allowed Charges............................... $0 -$108 -$766 -$1126 -$1224 -$1301
Medicare Share of Allowed Charges (80 percent 0 -86 -613 -901 -979 -1041
of allowed charges)..........................
Beneficiary Costs (20 percent of allowed 0 -22 -153 -225 -245 -260
charges).....................................
----------------------------------------------------------------------------------------------------------------
* Numbers may not add up due to rounding.

Table 14 presents the impact differently than Table 13. In contrast
to Table 13, which is on a Medicare allowed charge-incurred basis and
does not consider the Medicare Advantage program impact, Table 14
considers fiscal year cash impact on the entire Medicare program,
including Medicare Advantage for the fiscal year rather than calendar
year. The fiscal year-calendar year distinction is an important one
when comparing savings. For example, the prices for the Medicare DMEPOS
Competitive Bidding Program will be in effect for 6 months of fiscal
year 2008, but for 9 months of calendar year 2008.\1\ Table 14
considers the impact on program expenditures, and does not include
beneficiary coinsurance. Finally, the estimates in Table 14 incorporate
spillover effects from the competitive acquisition program onto the
Medicare Advantage program. The expectation is that lower prices for
DME products in FFS will lead to lower prices in the Medicare Advantage
market.\2\
---------------------------------------------------------------------------

\1\ Fiscal year 2008 will begin October 1, 2007, and the
Medicare DMEPOS Competitive Bidding Program payments become
effective on April 1, 2008.
\2\ In addition, most managed care plan rates are linked to FFS
expenditures. Therefore, a decrease in FFS expenditures should
translate into a decrease in Medicare Advantage plan payment rates.
The rate calculations for the Medicare Advantage program reflect all
the FFS adjustments, including the Medicare DMEPOS Competitive
Bidding Program savings. The Managed Care add-on increases the FFS
savings by 24.9 percent in CY 2008. This is a dynamic number that
increases over time.

[[Page 18079]]

Table 14.--Fiscal Year Cost on the Medicare Program
[in millions]
------------------------------------------------------------------------
Beneficiary
Fiscal year Program impact costs
------------------------------------------------------------------------
2007.................................... $0 $0
2008.................................... -70 -20
2009.................................... -530 -130
2010.................................... -1,000 -250
2011.................................... -1,240 -310
2012.................................... -1,370 -340
------------------------------------------------------------------------

Comment: Several commenters believed that the regulatory analysis
overstated the potential savings of the proposed rule because many of
the savings in the earlier demonstrations can no longer be achieved in
other areas of the country due to changes in payment policies for major
categories of DMEPOS such as oxygen, subsequent CPI freezes, and
increases in supplier costs in areas such as fuel and labor. Another
commenter suggested that potential savings would be reduced if
suppliers submit higher bids in order to account for costs related to
quality standards and accreditation costs. One commenter recommended
that CMS recalculate these estimates. Another commenter stated that
some of these factors also resulted in understating the adverse impact
of the proposed regulations on suppliers.
Response: We have updated the tables in the impact analysis of this
final rule to reflect all of the recent changes in policy related to
items subject to competitive bidding, including any payment reductions.
The impact analysis builds in the statutory reimbursement cuts into the
baseline DME spending. For instance, the DRA section 5101 is estimated
to yield $880 million savings over 5 years (2008 through 2012). The
FEHBP reductions are built into the baseline DME spending and yielded a
5 year savings (2008 through 2012) of $2,180 million. We believe that
the demonstrations are an appropriate gauge for estimating projected
savings. We also believe that the competitive bidding financial
standards and the DMEPOS quality standards we have issued will result
in more efficiently operating DMEPOS suppliers.

F. Effect on Beneficiaries

Possible impacts on beneficiaries are a primary concern during the
design and implementation of the Medicare DMEPOS Competitive Bidding
Program. While there may be some decrease in choice of suppliers, there
will be a sufficient number of suppliers to ensure adequate access. We
also expect there will be an improvement in quality because we will
more closely scrutinize the suppliers before, during, and after
implementation of the program. The evaluation of the impact of the
DMEPOS competitive bidding demonstration on patient access to care and
quality showed minimal adverse results (Final Report to Congress:
Evaluation of Medicare's Competitive Bidding Demonstration For Durable
Medical Equipment, Prosthetics, Orthotics, and Supplies; http://www.cms.hhs.gov/DemoProjectsEvalRpts/downloads/CMS_rtc.pdf
). Moreover,

because of the quality standards and the provisions in this final rule
to ensure access to and the furnishing of quality products, we assume
that there will be few negative impacts on beneficiary access, as a
sufficient number of quality suppliers will be selected to serve the
entire market.
We acknowledge that implementation of competitive bidding may
result in some beneficiaries needing to switch from their current
supplier if their current supplier is not selected for competitive
bidding. However, we anticipate that the necessity of switching
suppliers will be minimized because of the existence of grandfathering
policies for rental products such as capped rentals. For purchased
items that are not grandfathered, some beneficiaries currently using
DMEPOS will have to switch from noncontract to contract suppliers. This
switch will not be very burdensome, because the beneficiaries will
already be making new purchases. We note that, if a beneficiary owns an
item subject to competitive bidding, the beneficiary has the choice of
having the item serviced by either a noncontract or contract supplier.
Beneficiaries who maintain a permanent residence in a CBA who are
traveling and need to rent or purchase DMEPOS during their travels will
have to make arrangements to receive their equipment either from a
contract supplier in their CBA, from a contract supplier in the visited
area if that area is in a CBA and the item is included in the
competitive bidding for that CBA, or--if the visited area is not in a
CBA--from a noncontract supplier who must accept the reimbursement rate
from the beneficiaries home CBAs. It is not clear whether this will
have a large impact on beneficiaries. There is little evidence on how
frequently beneficiaries receiving DMEPOS travel outside their CBA.
Under current policy, a traveling beneficiary must already make
arrangements for receipt of his or her DMEPOS during travel and payment
is already based on the fee schedule for the beneficiary's residence.
We do not believe that our policy will have a large impact on
beneficiaries because we will ensure that we have a sufficient number
of contract suppliers to meet beneficiary demand.
Because beneficiaries face a 20 percent coinsurance rate for
DMEPOS, we assume that beneficiary out-of-pocket expenses will decrease
by 20 percent of program gross savings for those products for which we
do competitive bidding (Table 15).

Table 15.--Beneficiary Coinsurance Annual Savings Estimates for 10
products
[in millions]
------------------------------------------------------------------------
Calendar year 10 products
------------------------------------------------------------------------
2007.................................................... $0
2008.................................................... 22
2009.................................................... 153
2010.................................................... 225
2011.................................................... 245
2012.................................................... 260
------------------------------------------------------------------------

Comment: One commenter argued that since the analysis projects that
37 percent of suppliers will not become contract suppliers, the impact
on beneficiaries, especially those requiring diabetic supplies and
equipment, will be greater than the analysis indicates.
Response: Our methodology will ensure that beneficiaries requiring
diabetic supplies and equipment will have access to a sufficient number
of suppliers to meet their needs. As explained in various sections of
the preamble to this final rule, we will be taking several steps to
ensure that there will be a sufficient number of suppliers to meet
beneficiary demand. These steps include the following:
Evaluating the bidding suppliers' capacity to ensure that
there is enough supplier capacity to meet the Medicare demand for each
product category in each CBA.
Implementing a small supplier target under which we will
attempt to offer a sufficient number of small suppliers the opportunity
to participate in the Medicare DMEPOS Competitive Bidding Program.
Requiring that all commonly owned or controlled suppliers
must submit a single bid on behalf of all locations

[[Page 18080]]

within the CBA, and additional locations that would furnish items in
the CBA.
Establishing a capacity calculation methodology that caps
the estimated capacity of each bidding supplier capacity at 20 percent
for purposes of determining the pivotal bid for the product category.
In addition, our estimates indicate that beneficiaries will save
money on their diabetic supplies and equipment under the program.

G. Effect on Suppliers

We expect DMEPOS suppliers to be significantly impacted by the
implementation of this final rule. We assume that suppliers may be
affected in one of three ways as follows:
Suppliers that wish to participate in competitive bidding
will have to incur the cost of submitting a bid.
Noncontract suppliers that furnished competitively bid
items before the Medicare DMEPOS Competitive Bidding Program took
effect (including suppliers that do not submit bids) will see a
decrease in revenues because they will no longer receive payment from
Medicare for competitively bid items.
Contract suppliers will see a decrease in expected revenue
per item as a result of lower allowed charges from lower bid prices.
However, because there will be fewer suppliers, a contract supplier's
volume could increase. As a result, because we do not know which effect
will dominate, the net effect on an individual contract supplier's
revenue is uncertain prior to bidding. The increase in the supplier's
volume could help offset the decrease in revenue per item.
1. Affected Suppliers
Based on CY 2005 claims data, the average MSA in the top 25 MSAs,
excluding New York, Los Angeles, and Chicago, has 2,896 DMEPOS
suppliers that furnish any DMEPOS product and 1,972 suppliers that
furnish products subject to competitive bidding and could potentially
be affected by competitive bidding.
We estimate that 28,960 suppliers will provide DMEPOS items in the
CBAs that we initially designate. If suppliers furnish products in more
than one MSA, we counted them more than once because they are affected
in more than one MSA. Not all products are subject to competitive
bidding; we estimate that 68 percent of suppliers will furnish products
subject to competitive bidding and will be affected by competitive
bidding during the initial round of competitive bidding. This means in
CY 2007, the remaining 32 percent of suppliers in the 10 selected CBAs
will not be affected by competitive bidding because they do not furnish
products subject to competitive bidding. However, the actual percentage
of affected suppliers may be smaller if we do not select all eligible
product categories for competitive bidding.
Deciding whether or not to submit a bid is a business decision that
will be made by each DMEPOS supplier. We expect that most suppliers
providing competitively bid items will choose to participate in order
to maintain and expand their businesses. For the calculations in the
proposed rule, we assumed that 90 percent of suppliers that furnish
items that we choose to include in the program would submit a bid. We
assumed the remaining 10 percent of suppliers would not bid based on
the low level of the Medicare revenue received for the items subject to
competitive bidding or because they had not received the necessary
accreditation. Based on comments we received on the May 1, 2006
proposed rule, we will permit physicians and certain nonphysician
practitioners to furnish certain limited items as part of their
professional practice without submitting a bid and being awarded a
contract, provided certain conditions are met. These physicians and
non-physician practitioners would be required to submit bids and be
awarded contracts if they wish to furnish other types of competitively
bid items. These physicians and non-physician practitioners account for
about 10 percent of all DMEPOS suppliers, according to the NSC.
Therefore, we now assume that 81 percent (= 0.9 *0.9) of affected
suppliers will submit bids. Based on this assumption, 15,973 suppliers
will submit a bid because they will want the opportunity to continue to
provide these products to Medicare beneficiaries and to expand their
business base. We also assume, based on the results of the
demonstration, that at least 60 percent of bidding suppliers will be
selected as winners in at least one product category. This assumption
is slightly different than our assumption in the proposed rule, where
we stated, ``We also assume, based on the results of the demonstration,
that 50 percent of bidding suppliers will be selected as winners
because approximately 50 percent of those who submitted bids during the
demonstration were selected as contract suppliers.'' The 50 percent in
the proposed rule was based on the demonstration experience within
individual product categories; approximately 50 percent of the bidders
who submitted a bid in a product category were selected as a winner in
that product category. Overall during the demonstration, about 60
percent of suppliers who submitted bids in any categories were selected
as winners in at least one product category. We believe the 60 percent
figure represents a more accurate assessment of the probability that a
bidding supplier will be selected as a winning bidder in at least one
product category. The bidding DMEPOS suppliers that are not awarded a
contract because they did not submit a winning bid would represent
about 22 percent of the total DMEPOS suppliers in these CBAs. We expect
that losing bidders will be distributed roughly proportionately across
the selected CBAs, but the exact distribution will depend on the
distribution of bids received and the number of winners selected in
each CBA. We also note that if a supplier submitted a bid in multiple
product categories, its probability of becoming a contract supplier
would increase.
It is difficult to estimate the impact the Medicare DMEPOS
Competitive Bidding Program will have on noncontract suppliers. The
effect will depend on how much revenue the supplier previously received
from Medicare and whether the supplier continues to provide services to
existing beneficiaries under the grandfathering policies. Estimates can
be made by making assumptions about these factors. For example, if
bidding occurred in 10 product categories, losing suppliers previously
provided 50 percent of allowed charges in these product categories, and
losing suppliers did not continue to serve any existing beneficiaries,
the average lost Medicare allowed charges per losing supplier per CBA
would be between $35,000 and $40,000. Under these assumptions, the
total allowed charges lost by losing suppliers would be $275 million in
CY 2008, the first full year after the prices take effect, and increase
to almost $2 billion in CY 2011. These estimates reflect our best
assumptions. As noted, because of the nature of competitive bidding,
winning bidders will absorb much of the allowed charges lost by losing
suppliers.
Suppliers that submit bids will incur a cost of bidding. Bidders
must decide whether to bid, request or download an RFB, read the RFB,
attend a bidders conference (optional) and read outreach materials,
decide how much to bid for each item, and prepare and submit a bid. In
the demonstration, bidders in Polk County, Florida reported spending a
total of 40 to 100 hours submitting bids. In the proposed rule we
assumed

[[Page 18081]]

that suppliers would use the midpoint number of hours, 70 hours. We
have reduced our estimate of the required hours to 68, due to changes
we made to condense the bidding forms requirements, based on comments
we received on the proposed rule. According to 2005 Bureau of Labor
Statistics (BLS) data, the average hourly wage for an accountant and
auditor was $25.54 (National Compensation Survey: Occupational Wages in
the United States, June 2005, U.S. Department of Labor, Bureau of Labor
Statistics, Bulletin 2568, August 2006. http://www.bls.gov/ncs/ocs/sp/ncbl0832.pdf
). Accounting for inflation and overhead, we assume

suppliers will incur $33.87 per hour in wage and overhead costs. Based
on this information, we assume that a supplier that bids will spend
$2,303.16 ($33.87*68) to prepare its bid, taking into consideration
that the number of product categories included in a bid, on average,
will vary by supplier. We calculate the total cost for all supplier
bids, including those of both future winning and future losing
suppliers. Therefore, we expect that CY 2007 total supplier bidding
costs for 15,973 bids will be $36,788,375 ($2,303.16*15,973). This
estimate is clearly dependent on our assumption that 81 percent of
eligible suppliers will bid. Our estimates incorporate the fact that a
single organization may submit bids in more than one CBA in each round.
For example, a supplier that has 15 offices in the country and
currently serves all 10 of the CBAs to be included in the initial round
of bidding is counted 10 times in our estimates. Our estimate of the
time required for bidding assumes that suppliers in the competitive
bidding program will bid on about the same number of individual product
categories as suppliers bid on during the demonstration project. We
expect that supplier bidding costs will rise with the number of product
categories bid upon; however, because there are fixed costs associated
with deciding whether to participate in the competitive bidding program
and some of the bidding forms are only filled out once, the increase in
costs associated with each additional product category may be
relatively small. Therefore, our estimate of the time required per bid
should be reasonably accurate unless contract bidders bid on
significantly more or fewer product categories than they bid on during
the demonstration.
Comment: One commenter believed that the statement in the impact
section of the proposed rule that not all suppliers will be affected
directly by the competitive bidding process (71 FR 25691) is not
accurate because the commenter believed that costs for mandatory
accreditation alone will force small suppliers out of business. The
commenter asked questions relating to the basis for determining that an
accountant would prepare the bid and that the cost per hour of $31.25
is appropriate. The commenter believed that it would cost small
suppliers more to prepare and submit bids because large suppliers have
more experience with managed care contracts and may be bidding in
multiple MSAs.
Response: The accreditation program is mandatory and affects all
DMEPOS suppliers; therefore, it is not a cost attributable to the
Medicare DMEPOS Competitive Bidding Program. As we explained in the
proposed rule (71 FR 25694), we used 2003 BLS data, adjusted for
inflation and overhead, to arrive at our estimate of $31.25 per hour in
wage and overhead costs for an accountant and auditor to prepare a
supplier's bid. In our current estimates, we have used 2005 BLS data on
wages, and adjusted this number to account for inflation through 2007.
We took the midpoint of the reported number of hours to prepare bids
for the demonstration projects to develop our estimate of the number of
hours needed to prepare a bid. We believe that these average estimated
costs would be the same for large or small suppliers. We are not
requiring that suppliers use accountants or auditors to prepare the bid
submission form. However, to calculate cost estimates for completing
the form, we used the wages for accountants or auditors as a benchmark
to determine the estimated costs to the supplier.
In CY 2008, we will conduct competitive bidding in 70 MSAs, which
may include New York, Los Angeles, and Chicago; and in CYs 2009 and
2010, we will add additional areas. This will increase the number of
affected suppliers, contract suppliers, and noncontract suppliers. For
the purposes of the impact analysis, we assume that there will be at
least 10 additional large CBAs added in both CYs 2009 and 2010. We also
assume bid cycles will be 3 years in length. Under our assumptions, we
will conduct bidding for the initial 10 CBAs in CY 2007, for 70
additional CBAs in CY 2008, and for additional areas in CYs 2009 and
2010. We note that the estimated average number of suppliers per CBA
decreases over time. This is because smaller CBAs with fewer
beneficiaries and/or lower allowed charges have fewer suppliers. Table
16 summarizes the effect on suppliers for CYs 2007 through 2012. The
table includes the costs of rebidding for the first 10 CBAs in 2010,
for 70 CBAs in 2011, and for 10 CBAs in 2012. We assume that rebidding
will require the same resources as the initial bids. However, it is
possible that suppliers will need less time for bidding after gaining
experience during their initial round of bidding. Table 16 differs from
the corresponding table in the proposed rule because--(1) The number of
suppliers is now based on 2005 claims data; (2) the cost per hour to
prepare a bid has been increased from $31.25 to $33.87 to reflect wage
increases through 2007; (3) the number of hours required to submit bids
has been reduced from 70 to 68; and (4) we now estimate that 81 percent
(rather than 90 percent) of suppliers will submit bids.

Table 16.--Suppliers Bidding Years: CYs 2007-2012
[10 product categories]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Bidding year
----------------------------------------------------------------------------------------
CY 2007 CY 2008 CY 2009 CY 2010 CY 2011 CY 2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average number of suppliers per CBA............................ 2,896 1,960 1,866 1,791 1,791 1,791
Average number of affected suppliers per CBA................... 1,972 1,331 1,268 1,218 1,218 1,218
Total number of suppliers...................................... 28,960 156,767 167,921 179,075 179,075 179,075
Total number of affected suppliers............................. 19,720 106,470 114,154 121,838 121,838 121,838
Number of bidding suppliers.................................... 15,973 70,268 6,224 22,197 70,268 6,224
Cost of bidding................................................ $36,788,375 *$161,838,447 $14,334,868 $51,123,243 $161,838,447 $14,334,868
Number of contract suppliers................................... 9,584 51,744 55,479 59,213 59,213 59,213
Number of noncontract suppliers................................ 10,136 54,726 58,675 62,625 62,625 62,625

[[Page 18082]]

Noncontract suppliers as a percent of total suppliers.......... 35% 35% 35% 35% 35% 35%
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Actual numbers will depend on CBAs selected, product groups selected, number of suppliers that choose to submit a bid, the prices bid, and the
number of contract suppliers selected.
\2\ Some suppliers furnish products in more than one selected CBA. Consequently, some suppliers may be counted more than once.
\3\ Numbers in the table are rounded.
* The spike in the private sector costs in CY 2008 is due to the addition of 70 additional CBAs that will be included in competitive bidding, which
would include the costs to suppliers submitting bids.

As noted in the start of this section, affected suppliers will be
impacted by any reduction in Medicare allowed charges that results from
the competitive bidding program. The estimated overall reduction in
allowed charges is shown in the first row of Table 13.
As previously noted, noncontract suppliers that furnished
competitively bid items before the program took effect (including
suppliers that do not submit bids) will see a decrease in revenues
because they will no longer receive payment from Medicare for
competitively bid items. Contract suppliers will see a decrease in
expected revenue per item as a result of lower allowed charges from
lower bid prices, but this decrease may be offset by an increase in
volume. As a result, because we do not know which effect will dominate,
the net effect on an individual contract supplier's revenue is
uncertain prior to bidding.
2. Small Suppliers
As of January 2006, the SBA defines a small business as generating
less than $6.5 million in annual receipts. The SBA definition refers to
small businesses rather than ``small suppliers.'' We worked with the
SBA to define small supplier for the Medicare DMEPOS Competitive
Bidding Program. In cooperation with the SBA, we are defining a small
supplier as a small business that generates gross revenue of $3.5
million or less in annual receipts in accordance with 13 CFR 121.104.
We are using this new small supplier definition to focus on the
smallest of the DMEPOS suppliers in each CBA. Before we receive
supplier bids, we do not have information on each supplier's total
revenue. We only have information on suppliers' Medicare revenues. As a
result, we had to make an assumption about what percent of a supplier's
revenues come from Medicare. We looked at filings by public DMEPOS
companies and, based on that information, we assume one-half of the
average supplier's revenues come from Medicare DMEPOS. Table 17 shows
our estimate of the number of affected small suppliers and total
affected suppliers. Some suppliers are counted more than once if they
are affected in more than one CBA. These estimates are based on 10-
digit National Supplier Clearinghouse (NSC) identification numbers.
Some organizations have multiple NSC codes representing multiple
locations; however, these organizations tend to be larger suppliers.
For the purpose of designating small suppliers for program purposes on
the basis of revenue, revenue will be calculated based on an
organization's tax identification number.

Table 17.--Number of Small Suppliers \1\
[$3.5 million or less in Medicare allowed charges]
----------------------------------------------------------------------------------------------------------------
Number of Total number
Bidding year affected small of affected Percent
suppliers suppliers
----------------------------------------------------------------------------------------------------------------
2007............................................................ 16,762 19,720 85
2008............................................................ 90,500 106,470 85
2009............................................................ 97,031 114,154 85
2010............................................................ 103,562 121,838 85
2011............................................................ 103,562 121,838 85
2012............................................................ 103,562 121,838 85
----------------------------------------------------------------------------------------------------------------
\1\ Some suppliers furnish products in more than one selected CBA. Consequently, some suppliers may be counted
more than once.

Small suppliers are likely to have similar costs for submitting
bids as large suppliers. As discussed in the previous section, the
average cost of submitting a bid in one CBA is $2,125. The cost of
bidding as a share of Medicare revenue will depend on the size of the
small supplier's Medicare revenue. The share for a supplier with
$50,000 in Medicare revenue would be 4.4 percent; the totals for
suppliers with $100,000, $1 million, and $3 million would be 2.2
percent, 0.2 percent, and less than 0.01 percent, respectively.
We considered the following options for minimizing the burden of
competitive bidding on small businesses. The first two options were
included in the demonstration project. Some of the new options may
increase Medicare potential savings, while others may lower or have no
effect on potential savings.
Networks: As stated in section XII. of this final rule, we
discuss the option for suppliers to form networks for bidding purposes.
Networks are several small suppliers joining together to submit bids
for a product category under competitive bidding. This option will
allow small suppliers to band together to lower bidding costs, expand
service options, or attain more favorable purchasing terms. We
recognize that forming a network may be challenging

[[Page 18083]]

for suppliers but believe it is still a viable and worthwhile option.
Networking was allowed in the demonstration project, but no networks
submitted bids. If suppliers can form networks efficiently, they may be
able to submit lower bids than the individual suppliers could submit,
possibly increasing Medicare savings.
Not requiring bids for every product category: As
discussed in section VII. of this final rule, we will conduct separate
bidding for items grouped together in product categories rather than
conduct a single bidding program for all items. Therefore, small
suppliers will have the option of deciding how many product categories
for which they want to submit bids. We believe this will help minimize
the burden on small suppliers. This option was available during the
demonstration projects, and most suppliers did not bid in every product
category. We believe these provisions will allow suppliers to bid on
the product category that they can most efficiently supply, and
therefore contributes to Medicare savings.
Small supplier target: Our goal for small supplier
participation in each product category will be determined by
multiplying 30 percent times the number of suppliers whose composite
bids are at or lower than the pivotal bid for the product category.
This target was not included in the demonstration project. However,
small suppliers were selected in most product categories. We expect
that this provision will not affect potential Medicare savings because
(1) The target may be met through the normal selection process; and (2)
if the target is not met, the additional small suppliers that are
selected will have to agree to accept the single payment amount.
Capacity limit: The capacity limit was not included in the
demonstration project. It is possible that the limit will increase the
pivotal bid because it may take more suppliers to reach the estimated
need for capacity. The higher pivotal bid will reduce potential
Medicare savings. We have established a capacity limit for purposes of
calculating the pivotal bid such that no supplier's or network's
estimated capacity can be considered to meet more than 20 percent of
the total need for capacity. Once winning suppliers are selected, we
will not exclude networks or suppliers from expanding and exceeding the
20-percent capacity. This will increase the opportunity for small
suppliers to be considered and participate in the program. It will also
help ensure that we meet the requirement at section 1847(b)(4) of the
Act that the Secretary shall award contracts to multiple entities and
ensure that we have sufficient contract suppliers to meet the
anticipated needs of beneficiaries for competitive bid items on a
timely basis.
Streamlined financial standards: We have streamlined the
financial standards to require submission of certain tax information
and other basic financial information such as a compiled balance sheet.
This provision, which was not included in the demonstration, should
make it easier for small suppliers to bid. This has the potential to
increase Medicare savings, but it is not clear by how much.
Permitting physicians and certain non-physician
practitioners to furnish certain limited items. We will permit
physicians and certain practitioners to furnish certain limited items
that are provided to beneficiaries as part of their professional
practice without submitting a bid and being awarded a contract,
provided that certain conditions are met. These physicians and non-
physician practitioners would be required to submit bids if they wished
to furnish any other competitively bid items. This provision was not
included in the demonstration projects. We do not believe it will have
a significant effect on Medicare savings, because relatively few items
will be covered.
Another option we considered but did not adopt would have
allowed small suppliers to be exempted from the requirement that a
contract supplier must service an entire CBA. However, we note that if
a small supplier joined a network, an exception to this rule would
apply. This option is also discussed in further detail in section XI.
of the preamble of this final rule.
Comment: Several commenters believed that the analysis in the
proposed rule suggests potential capacity issues for successful
bidders. These commenters argued that if 37 percent of existing
suppliers will become noncontract suppliers as a result of not bidding
or not submitting successful bids as projected in Table 15 of the
proposed rule (71 FR 25695), and the current ratio of beneficiaries to
suppliers is roughly the same for contract and noncontract suppliers,
each contract supplier will experience, on average, a 59 percent
increase in the number of beneficiaries that it must serve. The
commenters stated that CMS indicated in the preamble to the proposed
rule that the PAOC, during its February 28, 2006 meeting, suggested
``that most DMEPOS suppliers would be able to easily increase their
total capacity to furnish items by up to 20 percent and the increase
could be even larger for products like diabetes supplies that require
relatively little labor'' (71 FR 25676). The commenters argued that the
proposal creates the possibility that contract suppliers may,
therefore, need to expand capacity beyond the 20-percent PAOC estimate.
Two commenters noted that such expansions could raise accreditation and
licensure issues.
Response: Our methodology will ensure that we select a sufficient
number of suppliers to meet the needs of Medicare beneficiaries for
competitively bid items. We also note that, as we stated in the
preamble to the proposed rule (71 FR 25676), the PAOC indicated that
suppliers of products such as diabetes supplies that require relatively
little labor may be able to expand capacity even more. We will be
selecting multiple contract suppliers, and we will be asking suppliers
that plan to increase their capacity to submit plans on how they will
achieve this increased capacity. However, no contract supplier will be
required to increase its capacity. In addition, as a general rule, for
a selection tool, we would not assign more than 20 percent of the total
Medicare demand for a product category to any one supplier in
estimating how many suppliers we need in a given CBA. Based on these
factors, we do not believe that contract suppliers will experience
capacity problems.
Comment: A number of commenters believed that the regulatory
analysis in the proposed rule minimized the impact of the proposed rule
on small businesses because CMS estimates that half of the bidding
suppliers will not be selected as contract suppliers. The commenters
believed that this group would be disproportionately comprised of small
businesses that are now providing DMEPOS and that many, faced with the
loss of Medicare business for competitively bid items, would go out of
business.
Response: Our current estimates indicate that, of all the DMEPOS
suppliers in a CBA, only 22 percent would be noncontract suppliers
because they submitted a losing bid. Many DMEPOS items are not subject
to competitive bidding. Therefore, many small suppliers such as
suppliers of specialty items, for example, are not likely to be
affected by competitive bidding. For those suppliers that currently
furnish competitively bid items, we are taking specific steps to ensure
that they have the opportunity to participate in the competitive
bidding program. These steps include offering suppliers the opportunity
to form networks, small supplier targets, and

[[Page 18084]]

not requiring suppliers to submit bids for all product categories.

H. Accounting Statement

As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf
), in the following table

below, we have prepared an accounting statement showing the
classification of the expenditures associated with the provisions of
this final rule. This table provides our best estimate of the decreased
expenditures in Medicare payments under the Medicare DMEPOS Competitive
Bidding Program as a result of the changes presented in this final
rule. All expenditures are classified as transfers to the Federal
Government from DMEPOS suppliers.

Table 18.--Accounting Statement--Classification of Estimated
Expenditures, From FY 2007 to FY 2012
------------------------------------------------------------------------
Category Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers......... 547.9 (in Millions).
From Whom To Whom?..................... To Federal Government from
Medicare DMEPOS Suppliers.
Annualized Monetized Transfers......... 137.0.
From Whom To Whom?..................... To Beneficiaries from Medicare
DMEPOS Suppliers.
------------------------------------------------------------------------

I. Executive Order 12866

In accordance with the provisions of Executive Order 12866, this
final rule was reviewed by the OMB.

List of Subjects

42 CFR Part 411

Kidney diseases, Medicare, Reporting and recordkeeping
requirements.

42 CFR Part 414

Administrative practice and procedure, Health facilities, Health
professions, Kidney diseases, Medicare, Reporting and recordkeeping
requirements.

0
For the reasons set forth in the preamble, the Centers for Medicare &
Medicaid Services is amending 42 CFR Chapter IV as set forth below:

PART 411--EXCLUSIONS FOR MEDICARE AND LIMITATIONS ON MEDICARE
PAYMENT

0
1. The authority for part 411 continues to read as follows:

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

Subpart A--General Exclusions and Exclusions of Particular Services

0
2. Section 411.15 is amended by adding a new paragraph (s) to read as
follows.

Sec. 411.15 Particular services excluded from coverage.

* * * * *
(s) Unless Sec. 414.404(d) or Sec. 414.408(e)(2) of this
subchapter applies, Medicare does not make payment if an item or
service that is included in a competitive bidding program (as described
in Part 414, Subpart F of this subchapter) is furnished by a supplier
other than a contract supplier (as defined in Sec. 414.402 of this
subchapter).

PART 414--PAYMENT FOR PART B MEDICAL AND OTHER HEALTH SERVICES

0
3. The authority citation for part 414 continues to read as follows:

Authority: Secs. 1102, 1871, and 1881(b)(1) of the Social
Security Act (42 U.S.C. 1302, 1395hh, and 1395rr(b)(1)).

Subpart F--Competitive Bidding for Certain Durable Medical
Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS)

0
4. New Sec. Sec. 414.400, 414.402, and 414.404 are added to Subpart F
to read as follows:

Sec. 414.400 Purpose and basis.

This subpart implements competitive bidding programs for certain
DMEPOS items as required by sections 1847(a) and (b) of the Act.

Sec. 414.402 Definitions.

For purposes of this subpart, the following definitions apply:
Bid means an offer to furnish an item for a particular price and
time period that includes, where appropriate, any services that are
directly related to the furnishing of the item.
Competitive bidding area (CBA) means an area established by the
Secretary under this subpart.
Competitive bidding program means a program established under this
subpart within a designated CBA.
Composite bid means the sum of a supplier's weighted bids for all
items within a product category for purposes of allowing a comparison
across bidding suppliers.
Contract supplier means an entity that is awarded a contract by CMS
to furnish items under a competitive bidding program.
DMEPOS stands for durable medical equipment, prosthetics,
orthotics, and supplies.
Grandfathered item means any one of the following items for which
payment is made on a rental basis prior to the implementation of a
competitive bidding program and for which payment is made after
implementation of a competitive bidding program to a grandfathered
supplier that continues to furnish the items in accordance with Sec.
414.408(j):
(1) An inexpensive or routinely purchased item described in Sec.
414.220.
(2) An item requiring frequent and substantial servicing, as
described in Sec. 414.222.
(3) Oxygen and oxygen equipment described in Sec. 414.226.
(4) Other DME described in Sec. 414.229.
Grandfathered supplier means a noncontract supplier that chooses to
continue to furnish grandfathered items to a beneficiary in a CBA.
Item means a product included in a competitive bidding program that
is identified by a HCPCS code, which may be specified for competitive
bidding (for example, a product when it is furnished through mail
order), or a combination of codes and/or modifiers, and includes the
services directly related to the furnishing of that product to the
beneficiary. Items that may be included in a competitive bidding
program are:
(1) Durable medical equipment (DME) other than class III devices
under the Federal Food, Drug, and Cosmetic Act, as defined in Sec.
414.202 of this part and further classified into the following
categories:
(i) Inexpensive or routinely purchased items, as specified in Sec.
414.220(a).
(ii) Items requiring frequent and substantial servicing, as
specified in Sec. 414.222(a).
(iii) Oxygen and oxygen equipment, as specified in Sec.
414.226(c)(1).
(iv) Other DME (capped rental items), as specified in Sec.
414.229.
(2) Supplies necessary for the effective use of DME other than
inhalation drugs.

[[Page 18085]]

(3) Enteral nutrients, equipment, and supplies.
(4) Off-the-shelf orthotics, which are orthotics described in
section 1861(s)(9) of the Act that require minimal self-adjustment for
appropriate use and do not require expertise in trimming, bending,
molding, assembling or customizing to fit a beneficiary.
Item weight is a number assigned to an item based on its
beneficiary utilization rate using national data when compared to other
items in the same product category.
Mail order contract supplier is a contract supplier that furnishes
items through the mail to beneficiaries who maintain a permanent
residence in a competitive bidding area.
Metropolitan Statistical Area (MSA) has the same meaning as that
given by the Office of Management and Budget.
Minimal self-adjustment means an adjustment that the beneficiary,
caretaker for the beneficiary, or supplier of the device can perform
and does not require the services of a certified orthotist (that is, an
individual certified by either the American Board for Certification in
Orthotics and Prosthetics, Inc., or the Board for Orthotist/Prosthetist
Certification) or an individual who has specialized training.
Nationwide competitive bidding area means a CBA that includes the
United States, its Territories, and the District of Columbia.
Nationwide mail order contract supplier means a mail order contract
supplier that furnishes items in a nationwide competitive bidding area.
Network means a group of small suppliers that form a legal entity
to provide competitively bid items throughout the entire CBA.
Noncontract supplier means a supplier that is not awarded a
contract by CMS to furnish items included in a competitive bidding
program.
Physician has the same meaning as in section 1861(r) of the Act.
Pivotal bid means the lowest composite bid based on bids submitted
by suppliers for a product category that includes a sufficient number
of suppliers to meet beneficiary demand for the items in that product
category.
Product category means a grouping of related items that are used to
treat a similar medical condition.
Regional competitive bidding area means a CBA that consists of a
region of the United States, its Territories, and the District of
Columbia.
Regional mail order contract supplier means a mail order contract
supplier that furnishes items in a regional competitive bidding area.
Single payment amount means the allowed payment for an item
furnished under a competitive bidding program.
Small supplier means, a supplier that generates gross revenue of
$3.5 million or less in annual receipts including Medicare and non-
Medicare revenue.
Supplier means an entity with a valid Medicare supplier number,
including an entity that furnishes an item through the mail.
Treating practitioner means a physician assistant, nurse
practitioner, or clinical nurse specialist, as those terms are defined
in section 1861(aa)(5) of the Act.
Weighted bid means the item weight multiplied by the bid price
submitted for that item.

Sec. 414.404 Scope and applicability.

(a) Applicability. Except as specified in paragraph (b) of this
section, this subpart applies to all suppliers that furnish the items
defined in Sec. 414.402 to beneficiaries, including providers,
physicians, treating practitioners, physical therapists, and
occupational therapists that furnish such items under Medicare Part B.
(b) Exceptions. (1) Physicians and treating practitioners may
furnish certain types of competitively bid items without submitting a
bid and being awarded a contract under this subpart, provided that all
of the following conditions are satisfied:
(i) The items furnished are limited to crutches, canes, walkers,
folding manual wheelchairs, blood glucose monitors, and infusion pumps
that are DME.
(ii) The items are furnished by the physician or treating
practitioner to his or her own patients as part of his or her
professional service.
(iii) The items are billed under a billing number assigned to the
physician, the treating practitioner (if possible), or a group practice
to which the physician or treating practitioner has reassigned the
right to receive Medicare payment.
(2) A physical therapist in private practice (as defined in Sec.
410.60(c) of this chapter) or an occupational therapist in private
practice (as defined in Sec. 410.59(c) of this chapter) may furnish
competitively bid off-the-shelf orthotics without submitting a bid and
being awarded a contract under this subpart, provided that the items
are furnished only to the therapist's own patients as part of the
physical or occupational therapy service.
(3) Payment for items furnished in accordance with paragraphs
(b)(1) and (b)(2) of this section will be paid in accordance with Sec.
414.408(a).

0
5. Section 414.406 is amended by adding paragraphs (b), (c), and (d) to
read as follows:

Sec. 414.406 Implementation of programs.

* * * * *
(b) Competitive bidding areas. CMS designates through program
instructions or by other means, such as the request for bids, each CBA
in which a competitive bidding program may be implemented under this
subpart.
(c) Revisions to competitive bidding areas. CMS may revise the CBAs
designated under paragraph (b) of this section.
(d) Competitively bid items. CMS designates the items that are
included in a competitive bidding program through program instructions
or by other means
* * * * *

0
6. New Sec. Sec. 414.408, 414.410, 414.412, 414.414, 414.416, 414.418,
414.420, 414.422, 414.424, and 414.426 are added to Subpart F to read
as follows:

Sec. 414.408 Payment rules.

(a) Payment basis. (1) The payment basis for an item furnished
under a competitive bidding program is 80 percent of the single payment
amount calculated for the item under Sec. 414.416 for the CBA in which
the beneficiary maintains a permanent residence.
(2) If an item that is included in a competitive bidding program is
furnished to a beneficiary who does not maintain a permanent residence
in a CBA, the payment basis for the item is 80 percent of the lesser of
the actual charge for the item, or the applicable fee schedule amount
for the item, as determined under Subpart C or Subpart D.
(b) No changes to the single payment amount. The single payment
amount calculated for each item under each competitive bidding program
is paid for the duration of the competitive bidding program and will
not be adjusted by any update factor.
(c) Payment on an assignment-related basis. Payment for an item
furnished under this subpart is made on an assignment-related basis.
(d) Applicability of advanced beneficiary notice. Implementation of
a program in accordance with this subpart does not preclude the use of
an advanced beneficiary notice.
(e) Requirement to obtain competitively bid items from a contract
supplier. (1) General rule. Except as provided in paragraph (e)(2) of
this section, all items that are included in a competitive bidding
program must be furnished by a contract supplier for that program.

[[Page 18086]]

(2) Exceptions. (i) A grandfathered supplier may furnish a
grandfathered item to a beneficiary in accordance with paragraph (j) of
this section.
(ii) Medicare may make a secondary payment for an item furnished by
a noncontract supplier that the beneficiary is required to use under
his or her primary insurance policy. The provisions of this paragraph
do not supersede Medicare secondary payer statutory and regulatory
provisions, including the Medicare secondary payment rules located in
Sec. Sec. 411.32 and 411.33 of this subchapter, and payment will be
calculated in accordance with those rules.
(iii) If a beneficiary is outside of the CBA in which he or she
maintains a permanent residence, he or she may obtain an item from a--
(A) Contract supplier, if the beneficiary obtains the item in
another CBA and the item is included in the competitive bidding program
for that CBA; or
(B) Supplier with a valid Medicare billing number, if the
beneficiary obtains the item in an area that is not a CBA, or if the
beneficiary obtains the item in another CBA but the item is not
included in the competitive bidding program for that CBA.
(iv) A physician, treating practitioner, physical therapist in
private practice, or occupational therapist in private practice may
furnish an item in accordance with Sec. 414.404(b) of this subpart.
(3) Unless paragraph (e)(2) of this section applies:
(i) Medicare will not make payment for an item furnished in
violation of paragraph (e)(1) of this section, and
(ii) A beneficiary has no financial liability to a noncontract
supplier that furnishes an item included in the competitive bidding
program for a CBA in violation of paragraph (e)(1) of this section,
unless the beneficiary has signed an advanced beneficiary notice.
(4) CMS separately designates the Medicare billing number of all
noncontract suppliers to monitor compliance with paragraphs (e)(1) and
(e)(2) of this section.
(f) Purchased equipment. (1) The single payment amounts for new
purchased durable medical equipment, including power wheelchairs that
are purchased when the equipment is initially furnished, and enteral
nutrition equipment are calculated based on the bids submitted and
accepted for these items.
(2) Payment for used purchased durable medical equipment and
enteral nutrition equipment is made in an amount equal to 75 percent of
the single payment amounts calculated for new purchased equipment under
paragraph (f)(1) of this section.
(g) Purchased supplies and orthotics. The single payment amounts
for the following purchased items are calculated based on the bids
submitted and accepted for the following items:
(1) Supplies used in conjunction with durable medical equipment.
(2) Enteral nutrients.
(3) Enteral nutrition supplies.
(4) OTS orthotics.
(h) Rented equipment. (1) Capped rental DME. Subject to the
provisions of paragraph (h)(2) of this section, payment for capped
rental durable medical equipment is made in an amount equal to 10
percent of the single payment amounts calculated for new durable
medical equipment under paragraph (f)(1) of this section for each of
the first 3 months, and 7.5 percent of the single payment amounts
calculated for these items for each of the remaining months 4 through
13.
(2) Additional payment to certain contract suppliers for capped
rental DME. (i) Except as specified in paragraph (h)(2)(ii) of this
section, Medicare makes 13 monthly payments to a contract supplier that
furnishes capped rental durable medical equipment to a beneficiary who
would otherwise be entitled to obtain the item from a grandfathered
supplier under paragraph (j) of this section. Payment is made using the
methodology described in paragraph (h)(1) of this section. The contract
supplier must transfer title to the item to the beneficiary on the
first day that begins after the 13th continuous month in which payments
are made in accordance with this paragraph.
(ii) Medicare does not make payment to a contract supplier under
paragraph (h)(2)(i) of this section if the contract supplier furnishes
capped rental durable medical equipment to a beneficiary who previously
rented the equipment from another contract supplier.
(3) Maintenance and servicing of rented DME. Separate maintenance
and servicing payments are not made for any rented durable medical
equipment.
(4) Payment for rented enteral nutrition equipment. Payment for
rented enteral nutrition equipment is made in an amount equal to 10
percent of the single payment amounts calculated for new enteral
nutrition equipment under paragraph (f)(1) of this section for each of
the first 3 months, and 7.5 percent of the single payment amount
calculated for these items under paragraph (f)(1) of this section for
each of the remaining months 4 through 15. The contract supplier to
which payment is made in month 15 for furnishing enteral nutrition
equipment on a rental basis must continue to furnish, maintain and
service the equipment until a determination is made by the
beneficiary's physician or treating practitioner that the equipment is
no longer medically necessary.
(5) Maintenance and servicing of rented enteral nutrition
equipment. Payment for the maintenance and servicing of rented enteral
nutrition equipment beginning 6 months after 15 months of rental
payments is made in an amount equal to 5 percent of the single payment
amounts calculated for these items under paragraph (f)(1) of this
section.
(6) Payment for inexpensive or routinely purchased durable medical
equipment. Payment for inexpensive or routinely purchased durable
medical equipment furnished on a rental basis is made in an amount
equal to 10 percent of the single payment amount calculated for new
purchased equipment.
(7) Payment amounts for rented DME requiring frequent and
substantial servicing. (i) General rule. Except as provided in
paragraph (h)(7)(ii) of this section, the single payment amounts for
rented durable medical equipment requiring frequent and substantial
servicing are calculated based on the rental bids submitted and
accepted for the furnishing of these items on a monthly basis.
(ii) Exception. The single payment amounts for continuous passive
motion exercise devices are calculated based on the bids submitted and
accepted for the furnishing of these items on a daily basis.
(i) Monthly payment amounts for oxygen and oxygen equipment. (1)
Basic payment amount. Subject to the provisions of paragraph (i)(2) of
this section, the single payment amounts for oxygen and oxygen
equipment are calculated based on the bids submitted and accepted for
the furnishing on a monthly basis of each of the five classes of oxygen
and oxygen equipment described in Sec. 414.226(c)(1).
(2) Additional payment to certain contract suppliers. (i) Except as
specified in paragraph (i)(2)(iii) of this section, Medicare makes
monthly payments to a contract supplier that furnishes oxygen equipment
to a beneficiary who would otherwise be entitled to obtain the item
from a grandfathered supplier under paragraph (j) of this section as
follows:
(A) If Medicare made 26 or less monthly payments to the former
supplier, Medicare makes a monthly payment to the contract supplier for
up

[[Page 18087]]

to the number of months equal to the difference between 36 and the
number of months for which payment was made to the former supplier.
(B) If Medicare made 27 or more monthly payments to the former
supplier, Medicare makes 10 monthly payments to the contract supplier.
(ii) Payment is made using the methodology described in paragraph
(i)(1) of this section. On the first day after the month in which the
final rental payment is made under paragraph (i)(2)(i) of this section,
the contract supplier must transfer title of the oxygen equipment to
the beneficiary.
(iii) Medicare does not make payment to a contract supplier under
paragraph (i)(2) of this section if the contract supplier furnishes
oxygen equipment to a beneficiary who previously rented the equipment
from another contract supplier.
(j) Special rules for certain rented durable medical equipment and
oxygen and oxygen equipment. (1) Supplier election. (i) A supplier that
is furnishing durable medical equipment or is furnishing oxygen or
oxygen equipment on a rental basis to a beneficiary prior to the
implementation of a competitive bidding program in the CBA where the
beneficiary maintains a permanent residence may elect to continue
furnishing the item as a grandfathered supplier.
(ii) A supplier that elects to be a grandfathered supplier must
continue to furnish the grandfathered items to all beneficiaries who
elect to continue receiving the grandfathered items from that supplier
for the remainder of the rental period for that item.
(2) Payment for grandfathered items furnished during the first
competitive bidding program implemented in a CBA. Payment for
grandfathered items furnished during the first competitive bidding
program implemented in a CBA is made as follows:
(i) For inexpensive and routinely purchased items described in
Sec. 414.220(a), payment is made in the amount determined under Sec.
414.220(b).
(ii) For other durable medical equipment or capped rental items
described in Sec. 414.229, payment is made in the amount determined
under Sec. 414.229(b).
(iii) For items requiring frequent and substantial servicing
described in Sec. 414.222, payment is made in accordance with
paragraph (a)(1) of this section.
(iv) For oxygen and oxygen equipment described in Sec.
414.226(c)(1), payment is made in accordance with paragraph (a)(1) of
this section.
(3) Payment for grandfathered items furnished during all subsequent
competitive bidding programs in a CBA. Beginning with the second
competitive bidding program implemented in a CBA, payment is made for
grandfathered items in accordance with paragraph (a)(1) of this
section.
(4) Choice of suppliers. (i) Beneficiaries who are renting an item
that meets the definition of a grandfathered item in Sec. 414.402 of
this subpart may elect to obtain the item from a grandfathered
supplier.
(ii) A beneficiary who is otherwise entitled to obtain a
grandfathered item from a grandfathered supplier under paragraph (j) of
this section may elect to obtain the same item from a contract supplier
at any time after a competitive bidding program is implemented.
(iii) If a beneficiary elects to obtain the same item from a
contract supplier, payment is made for the item accordance with
paragraph (a)(1) of this section.
(5) Payment for accessories and supplies for grandfathered items.
Accessories and supplies that are used in conjunction with and are
necessary for the effective use of a grandfathered item may be
furnished by the same grandfathered supplier that furnishes the
grandfathered item. Payment is made in accordance with paragraph (a)(1)
of this section.
(k) Payment for maintenance, servicing and replacement of
beneficiary-owned items.
(1) Payment is made for the maintenance and servicing of
beneficiary-owned items, provided the maintenance and servicing is
performed by a contract supplier or a noncontract supplier having a
valid Medicare billing number, as follows:
(i) Payment for labor is made in accordance with Sec.
414.210(e)(1) of Subpart D.
(ii) Payment for parts that are not items (as defined in Sec.
414.402) is made in accordance with Sec. 414.210(e)(1) of Subpart D.
(iii) Payment for parts that are items (as defined in Sec.
414.402) is made in accordance with paragraph (a)(1) of this section.
(2) Additional payments are made in accordance with Sec. Sec.
414.210(e)(2) and (e)(3) of subpart D for the maintenance and servicing
of oxygen equipment if performed by a contract supplier or a
noncontract supplier having a valid Medicare billing number.
(3) Beneficiaries must obtain a replacement of a beneficiary-owned
item, other than parts needed for the repair of beneficiary-owned
equipment from a contract supplier. Payment is made for the replacement
item in accordance with paragraph (a)(1) of this section.

Sec. 414.410 Phased-in implementation of competitive bidding
programs.

(a) Phase-in of competitive bidding programs. CMS phases in
competitive bidding programs so that competition under the programs
occurs in--
(1) 10 of the largest MSAs in CY 2007;
(2) 80 of the largest MSAs in CY 2009;
(3) Additional CBAs after CY 2009.
(b) Selection of MSAs for CY 2007 and CY 2009. CMS selects the MSAs
for purposes of designating CBAs in CY 2007 and CY 2009 by considering
the following variables:
(1) The total population of an MSA.
(2) The Medicare allowed charges for DMEPOS items per fee-for-
service beneficiary in an MSA.
(3) The total number of DMEPOS suppliers per fee-for-service
beneficiary who received DMEPOS items in an MSA.
(4) An MSA's geographic location.
(c) Exclusions from a CBA. CMS may exclude from a CBA a rural area
(as defined in Sec. 412.64(b)(1)(ii)(C) of this subchapter), or an
area with low population density based on one or more of the following
factors--
(1) Low utilization of DMEPOS items by Medicare beneficiaries
receiving fee-for-service benefits relative to similar geographic
areas;
(2) Low number of DMEPOS suppliers relative to similar geographic
areas; or
(3) Low number of Medicare fee-for-service beneficiaries relative
to similar geographic areas.
(d) Selection of additional CBAs after CY 2009. (1) Beginning after
CY 2009, CMS designates through program instructions or by other means
additional CBAs based on CMS' determination that the implementation of
a competitive bidding program in a particular area would be likely to
result in significant savings to the Medicare program.
(2) Beginning after CY 2009, CMS may designate through program
instructions or by other means a nationwide CBA or one or more regional
CBAs for purposes of implementing competitive bidding programs for
items that are furnished through the mail by nationwide or regional
mail order contract suppliers.

Sec. 414.412 Submission of bids under a competitive bidding program.

(a) Requirement to submit a bid. Except as provided under Sec.
414.404(b), in order for a supplier to receive payment for items
furnished to beneficiaries under a competitive bidding program, the
supplier must

[[Page 18088]]

submit a bid to furnish those items and be awarded a contract under
this subpart.
(b) Grouping of items into product categories. (1) Bids are
submitted for items grouped into product categories.
(2) The bids submitted for each item in a product category cannot
exceed the payment amount that would otherwise apply to the item under
Subpart C or Subpart D of this part.
(c) Furnishing of items. A bid must include all costs related to
furnishing an item, including all services directly related to the
furnishing of the item.
(d) Separate bids. For each product category that a supplier is
seeking to furnish under a competitive bidding program, the supplier
must submit a separate bid for each item in that product category.
(e) Commonly-owned or controlled suppliers. (1) For purposes of
this paragraph--
(i) An ownership interest is the possession of equity in the
capital, stock or profits of another supplier;
(ii) A controlling interest exists if one or more of owners of a
supplier is an officer, director or partner in another supplier; and
(iii) Two or more suppliers are commonly-owned if one or more of
them has an ownership interest totaling at least 5 percent in the
other(s).
(2) A supplier must disclose in its bid each supplier in which it
has an ownership or controlling interest and each supplier which has an
ownership or controlling interest in it.
(3) Commonly-owned or controlled suppliers must submit a single bid
to furnish a product category in a CBA. Each commonly-owned or
controlled supplier that is located in the CBA for which the bid is
being submitted must be included in the bid. The bid must also include
any commonly-owned or controlled supplier that is located outside of
the CBA but would furnish the product category to the beneficiaries who
maintain a permanent residence in the CBA.
(f) Mail order suppliers. (1) Suppliers that furnish items through
the mail must submit a bid to furnish these items in a CBA in which a
mail order competitive bidding program that includes the items is
implemented.
(2) Suppliers that submit one or more bids under paragraph (f)(1)
of this section may submit the same bid amount for each item under each
competitive bidding program for which it submits a bid.
(g) Applicability of the mail order competitive bidding program.
Suppliers that do not furnish items through the mail are not required
to participate in a nationwide or regional mail order competitive
bidding program that includes the same items. Suppliers may continue to
furnish these items in--
(1) A CBA, if the supplier is awarded a contract under this
subpart; or
(2) An area not designated as a CBA.

Sec. 414.414 Conditions for awarding contracts.

(a) General rule. The rules set forth in this section govern the
evaluation and selection of suppliers for contract award purposes under
a competitive bidding program.
(b) Basic supplier eligibility. (1) Each supplier must meet the
enrollment standards specified in Sec. 424.57(c) of this chapter.
(2) Each supplier must disclose information about any prior or
current legal actions, sanctions, revocations from the Medicare
program, program-related convictions as defined in section 1128(a)(1)
through (a)(4) of the Act, exclusions or debarments imposed against it,
or against any members of the board of directors, chief corporate
officers, high-level employees, affiliated companies, or
subcontractors, by any Federal, State, or local agency. The supplier
must certify in its bid that this information is completed and
accurate.
(3) Each supplier must have all State and local licenses required
to perform the services identified in the request for bids.
(4) Each supplier must submit a bona fide bid that complies with
all the terms and conditions contained in the request for bids.
(5) Each network must meet the requirements specified in Sec.
414.418.
(c) Quality standards and accreditation. Each supplier must meet
applicable quality standards developed by CMS in accordance with
section 1834(a)(20) of the Act and be accredited by a CMS-approved
accreditation organization that meets the requirements of Sec. 424.58
of this subchapter, unless a grace period is specified by CMS.
(d) Financial standards. Each supplier must submit along with its
bid the applicable financial documentation specified in the request for
bids.
(e) Evaluation of bids. CMS evaluates bids submitted for items
within a product category by--
(1) Calculating the expected beneficiary demand in the CBA for the
items in the product category;
(2) Calculating the total supplier capacity that would be
sufficient to meet the expected beneficiary demand in the CBA for the
items in the product category;
(3) Establishing a composite bid for each supplier and network that
submitted a bid for the product category.
(4) Arraying the composite bids from the lowest composite bid price
to the highest composite bid price;
(5) Calculating the pivotal bid for the product category;
(6) Selecting all suppliers and networks whose composite bids are
less than or equal to the pivotal bid for that product category, and
that meet the requirements in paragraphs (b) through (d) of this
section.
(f) Expected savings. A contract is not awarded under this subpart
unless CMS determines that the amounts to be paid to contract suppliers
for an item under a competitive bidding program are expected to be less
than the amounts that would otherwise be paid for the same item under
Subpart C or Subpart D.
(g) Special rules for small suppliers. (1) Target for small
supplier participation. CMS ensures that small suppliers have the
opportunity to participate in a competitive bidding program by taking
the following steps:
(i) Setting a target number for small supplier participation by
multiplying 30 percent by the number of suppliers that meet the
requirements in paragraphs (b) through (d) of this section and whose
composite bids are equal to or lower than the pivotal bid calculated
for the product category;
(ii) Identifying the number of qualified small suppliers whose
composite bids are at or below the pivotal bid for the product
category;
(iii) Selecting additional small suppliers whose composite bids are
above the pivotal bid for the product category in ascending order based
on the proximity of each small supplier's composite bid to the pivotal
bid, until the number calculated in paragraph (g)(1)(i) of this section
is reached or there are no more composite bids submitted by small
suppliers for the product category.
(2) The bids by small suppliers that are selected under paragraph
(g)(1)(iii) of this section are not used to calculate the single
payment amounts for any items under Sec. 414.416 of this subpart.
(h) Sufficient number of suppliers.
(1) Except as provided in paragraph (h)(3) of this section. CMS
will award at least five contracts, if there are five suppliers
satisfying the requirements in paragraphs (b) through (f) of this
section; or
(2) CMS will award at least two contracts, if there are less than
five suppliers meeting these requirements and the suppliers satisfying
these requirements have sufficient capacity to satisfy beneficiary
demand for the

[[Page 18089]]

product category calculated under paragraph (e)(1) of this section.
(3) The provisions of paragraph (h)(1) of this section do not apply
to regional or nationwide mail order CBAs under Sec. 414.410(d)(2) of
this subpart.
(i) Selection of new suppliers after bidding. (1) Subsequent to the
awarding of contracts under this subpart, CMS may award additional
contracts if it determines that additional contract suppliers are
needed to meet beneficiary demand for items under a competitive bidding
program. CMS selects additional contract suppliers by--
(i) Referring to the arrayed list of suppliers that submitted bids
for the product category included in the competitive bidding program
for which beneficiary demand is not being met; and
(ii) Beginning with the supplier whose composite bid is the first
composite bid above the pivotal bid for that product category,
determining if that supplier is willing to become a contract supplier
under the same terms and conditions that apply to other contract
suppliers in the CBA.
(2) Before CMS awards additional contracts under paragraph (i)(1)
of this section, a supplier must submit updated information
demonstrating that the supplier meets the requirements under paragraphs
(b) through (d) of this section.

Sec. 414.416 Determination of competitive bidding payment amounts.

(a) General rule. CMS establishes a single payment amount for each
item furnished under a competitive bidding program.
(b) Methodology for setting payment amount. (1) The single payment
amount for an item furnished under a competitive bidding program is
equal to the median of the bids submitted for that item by suppliers
whose composite bids for the product category that includes the item
are equal to or below the pivotal bid for that product category. If
there is an even number of bids, the single payment amount for the item
is equal to the average of the two middle bids.
(2) The single payment amount for an item must be less than or
equal to the amount that would otherwise be paid for the same item
under Subpart C or Subpart D.

Sec. 414.418 Opportunity for networks.

(a) A network may be comprised of at least 2 but not more than 20
small suppliers.
(b) The following rules apply to networks that seek contracts under
this subpart:
(1) Each network must form a single legal entity that acts as the
bidder and submits the bid. Any agreement entered into for purposes of
forming a network must be submitted to CMS. The network must identify
itself as a network and identify all of its members.
(2) Each member of the network must satisfy the requirements in
Sec. 414.414(b) through (d).
(3) A small supplier may join one or more networks but cannot
submit an individual bid to furnish the same product category in the
same CBA as any network in which it is a member. A small supplier may
not be a member of more than one network if those networks submit bids
to furnish the same product category in the same CBA.
(4) The network cannot be anticompetitive, and this section does
not supersede any Federal law or regulation that regulates
anticompetitive behavior.
(5) A bid submitted by a network must include a statement from each
network member certifying that the network member joined the network
because it is unable independently to furnish all of the items in the
product category for which the network is submitting a bid to
beneficiaries throughout the entire geographic area of the CBA.
(6) At the time that a network submits a bid, the network's total
market share for each product category that is the subject of the
network's bid cannot exceed 20 percent of the Medicare demand for that
product category in the CBA.
(c) If the network is awarded a contract, each supplier must submit
its own claims and will receive payment directly from Medicare for the
items that it furnishes under the competitive bidding program.

Sec. 414.420 Physician or treating practitioner authorization and
consideration of clinical efficiency and value of items.

(a) Prescription for a particular brand item or mode of delivery.
(1) A physician or treating practitioner may prescribe, in writing, a
particular brand of an item for which payment is made under a
competitive bidding program, or a particular mode of delivery for an
item, if he or she determines that the particular brand or mode of
delivery would avoid an adverse medical outcome for the beneficiary.
(2) When a physician or treating practitioner prescribes a
particular brand or mode of delivery of an item under paragraph (a)(1)
of this section, the physician or treating practitioner must document
the reason in the beneficiary's medical record why the particular brand
or mode of delivery is medically necessary to avoid an adverse medical
outcome.
(b) Furnishing of a prescribed particular brand item or mode of
delivery. If a physician or treating practitioner prescribes a
particular brand of an item or mode of delivery, the contract supplier
must--
(1) Furnish the particular brand or mode of delivery as prescribed
by the physician or treating practitioner;
(2) Consult with the physician or treating practitioner to find an
appropriate alternative brand of item or mode of delivery for the
beneficiary and obtain a revised written prescription from the
physician or treating practitioner; or
(3) Assist the beneficiary in locating a contract supplier that can
furnish the particular brand of item or mode of delivery prescribed by
the physician or treating practitioner.
(c) Payment for a particular brand of item or mode of delivery.
Medicare does not make an additional payment to a contract supplier
that furnishes a particular brand or mode of delivery for an item, as
directed by a prescription written by the beneficiary's physician or
treating practitioner.
(d) Prohibition on billing for an item different from the
particular brand of item or mode of delivery prescribed. A contract
supplier is prohibited from submitting a claim to Medicare if it
furnishes an item different from that specified in the written
prescription received from the beneficiary's physician or treating
practitioner. Payment will not be made to a contract supplier that
submits a claim prohibited by this paragraph.

Sec. 414.422 Terms of contracts.

(a) Basic rule. CMS specifies the terms and conditions of the
contracts entered into with contract suppliers under this subpart. A
contract supplier must comply with all terms of its contract, including
any option exercised by CMS, for the full duration of the contract
period.
(b) Recompeting competitive bidding contracts. CMS recompetes
competitive bidding contracts at least once every 3 years.
(c) Nondiscrimination. The items furnished by a contract supplier
under this subpart must be the same items that the contract supplier
makes available to other customers.
(d) Change of ownership. (1) A contract supplier must notify CMS if
it is negotiating a change in ownership 60 days before the anticipated
date of the change.

[[Page 18090]]

(2) CMS may award a contract to an entity that merges with, or
acquires, a contract supplier if--
(i) The successor entity meets all requirements applicable to
contract suppliers for the applicable competitive bidding program;
(ii) The successor entity submits to CMS the documentation
described under Sec. 414.414(b) through (d) if that documentation has
not previously been submitted by the successor entity or the contract
supplier that is being acquired, or is no longer current. This
documentation must be submitted within 30 days prior to the anticipated
effective date of the change of ownership. A successor entity is not
required to duplicate previously submitted information if the
previously submitted information is still current;
(iii) The successor entity is acquiring the assets of the existing
contract supplier, it submits to CMS, at least 30 days before the
anticipated effective date of the change of ownership, a signed
novation agreement acceptable to CMS stating that it will assume all
obligations under the contract; or
(iv) A new entity will be formed as a result of the merger or
acquisition, the existing contract supplier submits to CMS, at least 30
days before the anticipated effective date of the change of ownership,
its final draft of a novation agreement as described in paragraph
(d)(2)(iii) of this section for CMS review. The successor entity must
submit to CMS, within 30 days after the effective date of the change of
ownernship and executed novation agreement acceptable to CMS.
(e) Furnishing of items. Except as otherwise prohibited under
section 1877 of the Act, or any other applicable law or regulation:
(1) 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) A skilled nursing facility defined under section 1819(a) of the
Act or a nursing facility defined under section 1919(a) of the Act that
has elected to furnish items only to its own residents and that is also
a contract supplier may furnish items under a competitive bidding
program to its own patients to whom it would otherwise furnish Part B
services.
(f) Breach of contract. (1) Any deviation from contract
requirements, including a failure to comply with governmental agency or
licensing organization requirements, constitutes a breach of contract.
(2) In the event a contract supplier breaches its contract, CMS may
take one or more of the following actions:
(i) Require the contract supplier to submit a corrective action
plan;
(ii) Suspend the contract supplier's contract;
(iii) Terminate the contract;
(iv) Preclude the contract supplier from participating in the
competitive bidding program;
(v) Revoke the supplier number of the contract supplier; or
(vi) Avail itself of other remedies allowed by law.

Sec. 414.424 Administrative or judicial review.

(a) There is no administrative or judicial review under this
subpart of the following:
(1) Establishment of payment amounts.
(2) Awarding of contracts.
(3) Designation of CBAs.
(4) Phase-in of the competitive bidding programs.
(5) Selection of items for competitive bidding.
(6) Bidding structure and number of contract suppliers selected for
a competitive bidding program.
(b) A denied claim is not appealable if the denial is based on a
determination by CMS that a competitively bid item was furnished in a
CBA in a manner not authorized by this subpart.

Sec. 414.426 Adjustments to competitively bid payment amounts to
reflect changes in the HCPCS.

If a HCPCS code for a competitively bid item is revised after the
contract period for a competitive bidding program begins, CMS adjusts
the single payment amount for that item as follows:
(a) If a single HCPCS code for an item is divided into two or more
HCPCS codes for the components of that item, the sum of single payment
amounts for the new HCPCS codes equals the single payment amount for
the original item. Contract suppliers must furnish the components of
the item and submit claims using the new HCPCS codes.
(b) If a single HCPCS code is divided into two or more separate
HCPCS codes, the single payment amount for each of the new separate
HCPCS codes is equal to the single payment amount applied to the single
HCPCS code. Contract suppliers must furnish the items and submit claims
using the new separate HCPCS codes.
(c) If the HCPCS codes for components of an item are merged into a
single HCPCS code for the item, the single payment amount for the new
HCPCS code is equal to the total of the separate single payment amounts
for the components. Contract suppliers must furnish the item and submit
claims using the new HCPCS code.
(d) If multiple HCPCS codes for similar items are merged into a
single HCPCS code, the items to which the new HCPCS codes apply may be
furnished by any supplier that has a valid Medicare billing number.
Payment for these items will be made in accordance with Subpart C or
Subpart D.

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

Dated: December 14, 2006.
Leslie Norwalk,
Acting Administrator, Centers for Medicare & Medicaid Services.
Approved: March 13, 2007.
Michael O. Leavitt,
Secretary.
[FR Doc. 07-1701 Filed 4-2-07; 4:15 pm]

BILLING CODE 4120-01-P