# Medicare Program; 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; Final Rule

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URL: https://www.frixlaw.com/law-library/documents/fr%3A06-9068

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** November 9, 2006
- **Citation:** 71 FR 65884

## Text

DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 414 and 484
[CMS-1304-F]
RIN 0938-AN76
Medicare Program; 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; Final Rule

AGENCY:

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

ACTION:

Final rule.

SUMMARY:

This final rule sets forth an update to the 60-day national episode rates and the national per-visit amounts under the Medicare prospective payment system for home health services. In addition, this final rule sets forth policy changes related to Medicare payment for certain durable medical equipment for the purpose of implementing sections 1834(a)(5) and 1834(a)(7) of the Social Security Act, as amended by section 5101 of the Deficit Reduction Act of 2005. This final rule also responds to public comments on the August 3, 2006, proposed rule that pertain to a number of issues including the requirement that home health payments are based on the reporting of specific quality data by home health agencies.

DATES:

Effective Date:
These regulations are effective on January 1, 2007.

FOR FURTHER INFORMATION CONTACT:

Randy Throndset, (410) 786-0131, or Sharon Ventura, (410) 786-1985 (for issues related to the home health prospective payment system). Doug Brown, (410) 786-0028 (for issues related to reporting home health quality data). Alexis Meholic, (410) 786-2300 (for issues related to payments for oxygen equipment and capped rental durable medical equipment).

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Background

The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33), enacted on August 5, 1997, significantly changed the way Medicare pays for Medicare home health services. Until the implementation of a home health prospective payment system (HH PPS) on October 1, 2000, home health agencies (HHAs) received payment under a cost-based reimbursement system. Section 4603 of the BBA governed the development of the HH PPS.

Section 4603(a) of the BBA provides the authority for the development of a PPS for all Medicare-covered home health services provided under a plan of care that were paid on a reasonable cost basis by adding section 1895, entitled “Prospective Payment For Home Health Services,” to the Social Security Act (the Act).

Section 1895(b)(1) of the Act requires the Secretary to establish a PPS for all costs of home health services paid under Medicare.

Section 1895(b)(3)(A) of the Act requires that (1) the computation of a standard prospective payment amount include all costs of home health services covered and paid for on a reasonable cost basis and be initially based on the most recent audited cost report data available to the Secretary, and (2) the prospective payment amounts be standardized to eliminate the effects of case-mix and wage levels among HHAs.

Section 1895(b)(3)(B) of the Act addresses the annual update to the standard prospective payment amounts by the home health applicable increase percentage as specified in the statute.

Section 1895(b)(4) of the Act governs the payment computation. Sections 1895(b)(4)(A)(i) and (b)(4)(A)(ii) of the Act require the standard prospective payment amount to be adjusted for case-mix and geographic differences in wage levels. Section 1895(b)(4)(B) of the Act requires the establishment of an appropriate case-mix adjustment factor that explains a significant amount of the variation in cost among different units of services. Similarly, section 1895(b)(4)(C) of the Act requires the establishment of wage-adjustment factors that reflect the relative level of wages and wage-related costs applicable to the furnishing of home health services in a geographic area compared to the national average applicable level. These wage-adjustment factors may be the factors used by the Secretary for the different area wage levels for purposes of section 1886(d)(3)(E) of the Act.

Section 1895(b)(5) of the Act gives the Secretary the option to grant additions or adjustments to the payment amount otherwise made in the case of outliers because of unusual variations in the type or amount of medically necessary care. Total outlier payments in a given fiscal year cannot exceed 5 percent of total payments projected or estimated.

On February 8, 2006, the Congress enacted the Deficit Reduction Act (DRA) of 2005 (Pub. L. 109-171). This legislation made additional changes to the HH PPS.

Section 5201 of the DRA changed the CY 2006 update from the applicable home health market basket percentage increase minus 0.8 percentage points to a 0 percent update.

Section 5201 of the DRA amended section 421(a) of the MMA. The amended section 421(a) of the MMA requires, for home health services furnished in a rural area (as defined in section 1886(d)(2)(D) of the Act) with respect to episodes and visits beginning on or after January 1, 2006 and before January 1, 2007, that the Secretary increase by 5 percent the payment amount otherwise made under section 1895 of the Act. The statute waives budget neutrality for purposes of this increase as it specifically requires that the Secretary not reduce the standard prospective payment amount (or amounts) under section 1895 of the Act applicable to home health services furnished during a period to offset the increase in payments resulting in the application of this section of the statute.

The 0 percent update to the payment rates and the rural add-on provisions of the DRA were implemented through Pub. 100-20, One Time Notification, Transmittal 211 issued February 10, 2006.

In addition, section 5201(c) of the DRA amends the statute to add section 1895(b)(3)(B)(v) to the Act, requiring HHAs to submit data for purposes of measuring health care quality. This requirement is applicable for 2007 and each subsequent year. For 2007 and each subsequent year, in the case of a HHA that does not submit quality data, the home health market basket percentage increase would be reduced by 2 percentage points.

B. Updates

1. 2000 Final Rule

On July 3, 2000, we published a final rule (65 FR 41128) in the
Federal Register
to implement the HH PPS legislation. That final rule established requirements for a new PPS for HHAs as required by section 4603 of the BBA, and as subsequently amended by section 5101 of the Omnibus Consolidated and Emergency Supplemental Appropriations Act (OCESAA) for Fiscal Year 1999 (Pub. L. 105-277), enacted on October 21, 1998; and by sections 302, 305, and 306 of the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act (BBRA) of 1999 (Pub. L. 106-113), enacted on November 29, 1999. The requirements include the implementation of a PPS for home

health services, consolidated billing requirements, and a number of other related changes. The PPS described in that rule replaced the retrospective reasonable-cost-based system that was used by Medicare for the payment of home health services under Part A and Part B.

2. 2005 Final Rule

On November 9, 2005, we published a final rule (70 FR 68132), which set forth an update to the 60-day national episode rates and the national per-visit amounts under the Medicare prospective payment system for home health services for CY 2006. As part of that final rule, we adopted revised area labor market Metropolitan Statistical Area designations for CY 2006. In implementing the new area labor market designations, we allowed for a 1-year transition period. This transition consists of a blend of 50 percent of the new area labor market designations' wage index and 50 percent of the previous area labor market designations' wage index. In addition, we revised the fixed dollar loss ratio, which is used in the calculation of outlier payments.

C. System for Payment of Home Health Services

Generally, Medicare makes payment under the HH PPS on the basis of a national standardized 60-day episode payment, adjusted for case mix and wage index. For episodes with four or fewer visits, Medicare pays on the basis of a national per-visit amount by discipline, referred to as a low utilization payment adjustment (LUPA). Medicare also adjusts the 60-day episode payment for certain intervening events that give rise to a partial episode payment adjustment (PEP adjustment) or a significant change in condition adjustment (SCIC). For certain cases that exceed a specific cost threshold, an outlier adjustment may also be available. For a complete and full description of the HH PPS as required by the BBA and as amended by OCESAA and BBRA, see the July 3, 2000 HH PPS final rule (65 FR 41128).

D. Changes in Payment for Oxygen and Oxygen Equipment and Other Durable Medical Equipment (Capped Rental Items)

The Medicare payment rules for durable medical equipment (DME) are set forth in section 1834(a) of the Act and 42 CFR part 414, subpart D of our regulations. General payment rules for DME are set forth in section 1834(a)(1) of the Act and § 414.210 of our regulations, and § 414.210 also contains paragraphs relating to maintenance and servicing of items and replacement of items. Specific rules for oxygen and oxygen equipment are set forth in section 1834(a)(5) of the Act and § 414.226 of our regulations, and specific rules for capped rental items are set forth in section 1834(a)(7) of the Act and § 414.229 of our regulations. Rules for determining a period of continuous use for the rental of DME are set forth in § 414.230 of our regulations. The Medicare payment basis for DME is equal to 80 percent of either the lower of the actual charge or the fee schedule amount for the item. The beneficiary coinsurance is equal to 20 percent of either the lower of the actual charge or the fee schedule amount for the item.

In accordance with the rules set forth in section 1834(a)(5) of the Act and § 414.226 of our regulations, since 1989, suppliers have been paid monthly for furnishing oxygen and oxygen equipment to Medicare beneficiaries. Suppliers have also been paid an add-on fee for furnishing portable oxygen equipment to patients when medically necessary. Before the enactment of the DRA, these monthly payments continued for the duration of use of the equipment, provided that Medicare Part B coverage and eligibility criteria were met. Medicare covers three types of oxygen delivery systems: (1) Stationary or portable oxygen concentrators, which concentrate oxygen in room air; (2) stationary or portable liquid oxygen systems, which use oxygen stored as a very cold liquid in cylinders and tanks; and (3) stationary or portable gaseous oxygen systems, which administer compressed oxygen directly from cylinders. Both liquid and gaseous oxygen systems require delivery of oxygen contents.

Medicare payment for furnishing oxygen and oxygen equipment is made on a monthly basis and the fee schedule amounts vary by State. Payment for oxygen contents for both stationary and portable equipment is included in the fee schedule allowances for stationary equipment. Medicare fee schedules for home oxygen equipment are modality neutral; meaning that in a given State, there is one fee schedule amount that applies to all stationary systems and one fee schedule amount that applies to all portable systems.

Effective January 1, 2006, section 5101(b) of the DRA amended the Act at section 1834(a)(5) of the Act, limiting to 36 months the total number of continuous months for which Medicare will pay for oxygen equipment on a rental basis. At the end of the 36-month period, this section mandates that the supplier transfer title to the stationary and portable oxygen equipment to the beneficiary. Section 5101(b) of the DRA does not, however, limit the number of months for which Medicare will pay for oxygen contents for beneficiary-owned stationary or portable gaseous or liquid systems, and payment will continue to be made as long as the oxygen remains medically necessary. Section 5101(b) of the DRA also provides that payment for reasonable and necessary maintenance and servicing of beneficiary-owned oxygen equipment will be made for parts and labor not covered by a supplier's or manufacturer's warranty. In the case of beneficiaries using oxygen equipment on December 31, 2005, the 36-month rental period prescribed by the DRA begins on January 1, 2006.

In accordance with the rules set forth in section 1834(a)(7) of the Act and § 414.229 of our regulations, before the enactment of the DRA, suppliers of capped rental items (that is, other DME not described in paragraphs (2) through (6) of section 1834(a) of the Act) were paid on a rental or purchase option basis. Payment for most items in the capped rental category was made on a monthly rental basis, with rental payments being capped at 15 months or 13 months, depending on whether the beneficiary chose to continue renting the item or to take over ownership of the item through the “purchase option.” For all capped rental items, the supplier was required to inform the beneficiary of his or her purchase option, during the 10th rental month, to enter into a purchase agreement under which the supplier would transfer title to the item to the beneficiary on the first day after the 13th continuous month during which payment was made for the rental of the item. Therefore, if the beneficiary chose the purchase option, rental payments to the supplier would continue through the 13th month of continuous use of the equipment, after which time title to the equipment would transfer from the supplier to the beneficiary. Medicare would also make payment for any reasonable and necessary repair or maintenance and servicing of the equipment following the transfer of title. If the beneficiary did not choose the purchase option, rental payments would continue through the 15th month of continuous use. In these cases, suppliers would maintain title to the equipment but would have to continue furnishing the item to the beneficiary as long as medical necessity continued. Beginning 6 months after the 15th month of continuous use in which payment was made, Medicare would also make semi-annual maintenance and servicing payments to suppliers. These payments were approximately equal to 10 percent

of the purchase price for the equipment as determined by the statute. Total Medicare payments made through the 13th and 15th months of rental equal 105 and 120 percent, respectively, of the purchase price for the equipment.

In the case of power-driven wheelchairs, since 1989 payment has also been made on a lump-sum purchase basis at the time that the item is initially furnished to the beneficiary if the beneficiary chooses to obtain the item in this manner. Most beneficiaries choose to obtain power-driven wheelchairs via this lump-sum purchase option.

Effective for items for which the first rental month occurs on or after January 1, 2006, section 5101(a) of the DRA of 2005 amended section 1834(a)(7) of the Act, limiting to 13 months the total number of continuous months for which Medicare will pay for DME in this category. After a 13-month period of continuous use during which rental payments are made, the statute requires that the supplier transfer title to the equipment to the beneficiary. Beneficiaries may still elect to obtain power-driven wheelchairs on a lump-sum purchase agreement basis. In all cases, payment for reasonable and necessary maintenance and servicing of beneficiary-owned equipment will be made for parts and labor not covered by the supplier's or manufacturer's warranty.

E. Requirements for Issuance of Regulations

Section 902 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) amended section 1871(a) of the Act and requires the Secretary, in consultation with the Director of the Office of Management and Budget, to establish and publish timelines for the publication of Medicare final regulations based on the previous publication of a Medicare proposed or interim final regulation. Section 902 of the MMA also states that the timelines for these regulations may vary but shall not exceed 3 years after publication of the preceding proposed or interim final regulation except under exceptional circumstances.

This final rule finalizes provisions set forth in the August 3, 2006 proposed rule. In addition, this final rule has been published within the 3-year time limit imposed by section 902 of the MMA. Therefore, we believe that the final rule is in accordance with the Congress' intent to ensure timely publication of final regulations.

II. Provisions of the Proposed Regulations

We published a proposed rule in the
Federal Register
on August 3, 2006 (71 FR 44081) that set forth a proposed update to the 60-day national episode rates and the national per-visit amounts under the Medicare prospective payment system for home health services. In addition, that proposed rule set forth proposed policy changes related to Medicare payment for certain durable medical equipment for the purpose of implementing sections 1834(a)(5) and 1834(a)(7) of the Social Security Act, as amended by section 5101 of the Deficit Reduction Act of 2005. That proposed rule also invited comments on a number of issues including payments based on reporting quality data, the adoption of health information technology, as well as how to improve data transparency for consumers.

A. National Standardized 60-Day Episode Rate

The Medicare HH PPS has been effective since October 1, 2000. As set forth in the final rule published July 3, 2000 in the
Federal Register
(65 FR 41128), the unit of payment under the Medicare HH PPS is a national standardized 60-day episode rate. As set forth in § 484.220, we adjust the national standardized 60-day episode rate by a case mix grouping and a wage index value based on the site of service for the beneficiary. The proposed CY 2007 HH PPS rates used the same case-mix methodology and application of the wage index adjustment to the labor portion of the HH PPS rates as set forth in the July 3, 2000 final rule. In the October 22, 2004 final rule, we rebased and revised the home health market basket, resulting in a labor-related share of 76.775 percent and a non-labor portion of 23.225 percent (69 FR 62126). We multiply the national 60-day episode rate by the patient's applicable case-mix weight. We divide the case-mix adjusted amount into a labor and non-labor portion. We multiply the labor portion by the applicable wage index based on the site of service of the beneficiary.

As required by section 1895(b)(3)(B) of the Act, we have updated the HH PPS rates annually in a separate
Federal Register
document. Section 484.225 sets forth the specific annual percentage update. To reflect section 1895(b)(3)(B)(v) of the Act, as added by section 5201 of the DRA, we proposed to revise § 484.225, paragraph (g) as follows:

(g) For 2007 and subsequent calendar years, the unadjusted national rate is equal to the rate for the previous calendar year increased by the applicable home health market basket index amount unless the HHA has not submitted quality data in which case the unadjusted national rate is equal to the rate for the previous calendar year increased by the applicable home health market basket index amount minus 2 percentage points.

For CY 2007, we proposed to use again the design and case-mix methodology described in section III.G of the HH PPS July 3, 2000 final rule (65 FR 41192 through 41203). For CY 2007, we will base the wage index adjustment to the labor portion of the PPS rates on the most recent pre-floor and pre-reclassified hospital wage index as discussed in section II.F of the August 3, 2006 proposed rule (not including any reclassifications under section 1886(d)(8)(B) of the Act).

As discussed in the July 3, 2000 HH PPS final rule, for episodes with four or fewer visits, Medicare pays the national per-visit amount by discipline, referred to as a LUPA. We update the national per-visit amounts by discipline annually by the applicable home health market basket percentage. We adjust the national per-visit amount by the appropriate wage index based on the site of service for the beneficiary as set forth in § 484.230. We will adjust the labor portion of the updated national per-visit amounts by discipline used to calculate the LUPA by the most recent pre-floor and pre-reclassified hospital wage index, as discussed in section II.F of the August 3, 2006 proposed rule.

Medicare pays the 60-day case-mix and wage-adjusted episode payment on a split percentage payment approach. The split percentage payment approach includes an initial percentage payment and a final percentage payment as set forth in § 484.205(b)(1) and § 484.205(b)(2). We may base the initial percentage payment on the submission of a request for anticipated payment (RAP) and the final percentage payment on the submission of the claim for the episode, as discussed in § 409.43. The claim for the episode that the HHA submits for the final percentage payment determines the total payment amount for the episode and whether we make an applicable adjustment to the 60-day case-mix and wage-adjusted episode payment. The end date of the 60-day episode as reported on the claim determines which calendar year rates Medicare would use to pay the claim.

We may also adjust the 60-day case-mix and wage-adjusted episode payment based on the information submitted on the claim to reflect the following:

• A low utilization payment provided on a per-visit basis as set forth in § 484.205(c) and § 484.230.

• A partial episode payment adjustment as set forth in § 484.205(d) and § 484.235.

• A significant change in condition adjustment as set forth in § 484.205(e) and § 484.237.

• An outlier payment as set forth in § 484.205(f) and § 484.240.

B. CY 2007 Update to the Home Health Market Basket Index

Section 1895(b)(3)(B) of the Act, as amended by section 5201 of the DRA, requires for CY 2007 that the standard prospective payment amounts be increased by a factor equal to the applicable home health market basket update. The proposed rule contained a home health market basket update of 3.1 percent. Since publication of the proposed rule, we have estimated a new home health market basket update of 3.3 percent for CY 2007.

CY 2007 Adjustments

In calculating the annual update for the CY 2007 60-day episode rates, we first look at the CY 2006 rates as a starting point. The CY 2006 national 60-day episode rate, as modified by section 5201(a)(4) of the DRA (and implemented through Pub. 100-20, One Time Notification, Transmittal 211 issued February 10, 2006) is $2,264.28.

In order to calculate the CY 2007 national 60-day episode rate, we multiply the CY 2006 national 60-day episode rate ($2,264.28) by the estimated home health market basket update of 3.3 percent for CY 2007. The estimated home health market basket percentage increase reflects changes over time in the prices of an appropriate mix of goods and services included in covered home health services. The estimated home health market basket percentage increase is generally used to update the HH PPS rates on an annual basis.

We increase the CY 2006 60-day episode payment rate by the estimated home health market basket update (3.3 percent) ($2,264.28 × 1.033) to yield the updated CY 2007 national 60-day episode rate ($2,339.00) (see Table 1 below). The CY 2007 HH PPS rates apply to episodes ending on or after January 1, 2007, and before January 1, 2008.

Table 1.—National 60-Day Episode Amounts Updated by the Estimated Home Health Market Basket Update for CY 2007, Before Case-Mix Adjustment

Total CY 2006 Prospective Payment Amount Per 60-day Episode

Multiply by the Estimated Home Health Market Basket Update (3.3 Percent)
1

CY 2007 Updated National 60-Day Episode Rate

$2,264.28
× 1.033
$2,339.00

1
The estimated home health market basket update of 3.3 percent for CY 2007 is based on Global Insight, Inc, 3rd Qtr, 2006 forecast with historical data through 2nd Qtr, 2006.

National Per-Visit Amounts Used To Pay LUPAs and Compute Imputed Costs Used in Outlier Calculations

As discussed previously in the August 3, 2006 proposed rule, the policies governing the LUPAs and outlier calculations set forth in the July 3, 2000 HH PPS final rule will continue during CY 2007. In calculating the annual update for the CY 2007 national per-visit amounts we use to pay LUPAs and to compute the imputed costs in outlier calculations, we look again at the CY 2006 rates as a starting point. We then multiply those amounts by the estimated home health market basket update for CY 2007 (3.3 percent) to yield the updated per-visit amounts for each home health discipline for CY 2007 (episodes ending on or after January 1, 2007, and before January 1, 2008) (see Table 2 below).

Table 2.—National Per-Visit Amounts for LUPAs and Outlier Calculations Updated by the Estimated Home Health Market Basket Update for CY 2007

Home health discipline type
Final CY 2006 per-visit amounts per 60-day episode for LUPAs

Multiply by the estimated home health market basket (3.3 percent)
1

CY 2007 per-visit payment amount per discipline for LUPAs

Home Health Aide
$44.76
× 1.033
$46.24

Medical Social Services
158.45
× 1.033
163.68

Occupational Therapy
108.81
× 1.033
112.40

Physical Therapy
108.08
× 1.033
111.65

Skilled Nursing
98.85
× 1.033
102.11

Speech-Language Pathology
117.44
× 1.033
121.32

1
The estimated home health market basket update of 3.3 percent for CY 2007 is based on Global Insight, Inc, 3rd Qtr, 2006 forecast with historical data through 2nd Qtr, 2006.

C. Rural Add-On

As stated above, section 5201(b) of the DRA requires, for home health services furnished in a rural area (as defined in section 1886(d)(2)(D) of the Act) with respect to episodes and visits beginning on or after January 1, 2006 and before January 1, 2007, that the Secretary increase by 5 percent the payment amount otherwise made under section 1895 of the Act. The statute waives budget neutrality related to this provision as it specifically states that the Secretary shall not reduce the standard prospective payment amount (or amounts) under section 1895 of the Act applicable to home health services furnished during a period to offset the increase in payments resulting in the application of this section of the statute.

While the rural add-on primarily affects those episodes paid based on CY 2006 rates, it also affects a number of CY 2007 episodes. For example, an episode that begins on December 20, 2006 and ends on February 17, 2007 for services furnished in a rural area, will be paid based on CY 2007 rates because the episode ends on or after January 1, 2007 and before January 1, 2008; and the

episode will also receive the rural add-on because the episode begins on or after January 1, 2006 and before January 1, 2007.

The applicable case-mix and wage index adjustment is subsequently applied to the 60-day episode amount for the provision of home health services where the site of service for the beneficiary is a non-Metropolitan Statistical Area (MSA). Similarly, the applicable wage index adjustment is subsequently applied to the LUPA per-visit amounts adjusted for the provision of home health services where the site of service for the beneficiary is a non-MSA area. We implemented this provision for CY 2006 on February 13, 2006 through Pub. 100-20, One Time Notification, Transmittal 211 issued February 10, 2006. The 5 percent rural add-on is noted in tables 3 and 4 below.

Table 3.—Payment Amounts for 60-Day Episodes Beginning in CY 2006 and Ending in CY 2007 Updated by the Estimated Home Health Market Basket Update for CY 2007 with Rural Add-on, Before Case-Mix Adjustment

CY 2007 Total prospective payment amount per 60-day episode
5 Percent rural add-on
CY 2007 Payment amount per 60-day episode beginning in CY 2006 and before January 1, 2007 and ending in CY 2007 for a beneficiary who resides in a non-MSA area

$2,339
× 1.05
$2,455.95

Table 4.—Per-Visit Amounts for Episodes Beginning in CY 2006 and Ending in CY 2007 Updated by the Estimated Home Health Market Basket Update for CY 2007 with Rural Add-on

Home health discipline type
CY 2007 Per-visit amounts
Multiply by the 5 percent rural add-on
CY 2007 per-visit payment amount per discipline for 60-day episodes beginning on or after January 1, in CY 2006 and ending in CY 2007 for a beneficiary who resides in a non-MSA area

Home Health Aide
$46.24
× 1.05
$48.55

Medical Social Services
163.68
× 1.05
171.86

Occupational Therapy
112.40
× 1.05
118.02

Physical Therapy
111.65
× 1.05
117.23

Skilled Nursing
102.11
× 1.05
107.22

Speech-Language Pathology
121.32
× 1.05
127.39

D. Home Health Care Quality Improvement

Section 5201(c)(2) of the DRA added section 1895(b)(3)(B)(v)(II) to the Act, requiring that “each home health agency shall submit to the Secretary such data that the Secretary determines are appropriate for the measurement of health care quality. Such data shall be submitted in a form and manner, and at a time, specified by the Secretary for purposes of this clause.” In addition, section 1895(b)(3)(B)(v)(I) of the Act, as also added by section 5201(c)(2) of the DRA, dictates that “for 2007 and each subsequent year, in the case of a home health agency that does not submit data to the Secretary in accordance with subclause (II) with respect to such a year, the home health market basket percentage increase applicable under such clause for such year shall be reduced by 2 percentage points.”

The Omnibus Budget Reconciliation Act of 1987 (OBRA 87) required the use of a standardized assessment instrument for quality oversight of HHAs. A standardized assessment instrument provides an HHA with a uniform mechanism to assess the needs of their patients and provide CMS with a uniform mechanism to assess the HHA's ability to adequately address those needs. To fulfill the OBRA 87 mandate, CMS required that, as part of their comprehensive assessment process, HHAs collect and report Outcome and Assessment Information Set (OASIS) data and later mandated the submission of this data as a Medicare Condition of Participation for home health agencies at 42 CFR 484.20 and 484.55.

The OASIS data provide consumers and HHAs with ten publicly-reported home health quality measures which have been endorsed by the National Quality Forum (NQF). Reporting this quality data has also required the development of several supporting mechanisms such as the HAVEN software used to encode and transmit data using a CMS standard electronic record layout, edit specifications, and data dictionary. Use of the HAVEN software, which includes the OASIS, has become a standard practice within HHA operations. These early investments in data infrastructure and supporting software that CMS and HHAs have made over the past several years in order to create this quality reporting structure, have made quality reporting and measurement an important component of the HHA industry. The 10 measures are:

(1) Improvement in ambulation/locomotion

(2) Improvement in bathing

(3) Improvement in transferring

(4) Improvement in management of oral medications

(5) Improvement in pain interfering with activity

(6) Acute care hospitalization

(7) Emergent care

(8) Improvement in dyspnea

(9) Improvement in urinary incontinence

(10) Discharge to community

We proposed to use OASIS data and the 10 quality measures based on those data as the appropriate measure of home health quality for CY 2007. Continuing to use the OASIS instrument minimizes

the burden to providers and ensures that costs associated with the development and testing of a new reporting mechanism are not incurred. We believe that the noted 10 quality measures are the most appropriate measure of home health quality. Accordingly, for CY 2007, we proposed to require that the OASIS data, specifically the 10 quality measures, be submitted by HHAs, to meet the requirement that each HHA submit data appropriate for the measurement of health care quality, as determined by the Secretary.

Additionally, section 1895(b)(3)(B)(v)(II) of the Act provides the Secretary with the discretion to require the submission of the required data in a form, manner, and time specified by him. For CY 2007, we proposed to consider OASIS data submitted by HHAs to CMS for episodes beginning on or after July 1, 2005 and before July 1, 2006 as meeting the reporting requirement. This proposed reporting time period would allow a full 12 months of data and provides CMS the time necessary to analyze and make any necessary payment adjustments to the CY 2007 payment rates for HHAs that fail to meet the reporting requirement. HHAs that met the reporting requirement would be eligible for the full home health market basket percentage increase. Using historical data to determine a prospective update is also used for hospital pay for reporting.

As discussed in the August 3, 2006 proposed rule, during the next few years, we noted that we would be pursuing the development of patient level process measures for home health agencies. We also proposed to continue to refine the current OASIS tool in response to recommendations from a Technical Expert Panel conducted to review the data elements that make up the OASIS tool. These process measures would refer to specific care practices that are, or are not, followed by the home health agency for each patient. An example of this type of measure may be: the percentage of patients at risk of falls for whom prevention of falls was addressed in the care plan. We expect to introduce these additional measures over CY 2008 and CY 2009 so as to complement the existing OASIS outcome measures. During the years leading to CY 2010 payments, we will test and refine these measures to determine if they can more accurately reflect the level of quality care being provided at HHAs without being overly burdensome with the data collection instrument. Some process measures are in the very early stages of development. To the extent that evidence-based data are available on which to determine the appropriate measure specifications, and adequate risk-adjustments are made, we anticipate collecting and reporting these measures as part of each agency's home health quality plan. We believe that future modifications to the current OASIS tool including reducing the number of questions on the tool, refining possible responses, as well as adding new process measures will be made. In all cases, we anticipate that any future quality measures should be evidence-based, clearly linked to improved outcomes, and able to be reliably captured with the least burden to the provider. We are also beginning work in order to measure patient experience of care (in the form of a patient satisfaction survey) in the home health setting.

We recognize, however, that the conditions of participation (42 CFR part 484) that require OASIS submission also provide for exclusions from this requirement. Generally, agencies are not subject to the OASIS submission requirement, and thus do not receive Medicare payments, for patients that are not Medicare beneficiaries or for patients that are not receiving Medicare-covered home health services. Under the conditions of participation, agencies are excluded from the OASIS reporting requirement on individual patients if:

• Those patients are receiving only non-skilled services,

• Neither Medicare nor Medicaid is paying for home health care (patients receiving care under a Medicare or Medicaid Managed Care Plan are not excluded from the OASIS reporting requirement),

• Those patients are receiving pre- or post-partum services,

• Those patients are under 18 years of age.

We believe that the rationale behind our proposal to exclude these agencies from submitting OASIS data on patients excluded from OASIS submission as a condition of participation is equally applicable to HHAs for purposes of meeting the DRA quality data reporting requirement. If an agency is not submitting OASIS for patients excluded from OASIS submission as a condition of participation, we believe that the submission of OASIS data for quality measures for Medicare payment purposes is also not necessary. Accordingly, we proposed that HHAs would not need to submit quality measures for DRA reporting purposes for those patients who are excluded from OASIS submission as a condition of participation.

Additionally, we proposed that agencies that are newly certified (on or after May 31, 2006 for payments to be made in CY 2007) would be excluded from the DRA reporting requirement as data submission and analysis would not be possible for an agency certified this late in the reporting time period. In future years, agencies that certify on or after May 31 of the preceding year involved would be excluded from any payment penalty under the DRA for the following calendar year. For example, for purposes of determining compliance with the quality data reporting requirement for CY 2007, if HHA “X” were to enroll in the Medicare Program on or before May 30, 2006, CMS would expect HHA “X” to submit the required quality data (unless covered by another exclusion protocol) on or before June 30, 2006 (the end of the reporting period for payments effectuated in CY 2007). However, if HHA “Y” was to enroll in the Medicare Program on or after May 31, 2006, CMS would automatically exclude HHA “Y” from the DRA quality data reporting requirements and the agency would be entitled to the full market basket increase for CY 2007. We note that these proposed exclusions would only affect reporting requirements under the DRA and would not otherwise affect the agency's OASIS reporting responsibilities under the conditions of participation.

We proposed to require that all HHAs, unless covered by these specific exclusions, meet the reporting requirement, or be subject to a 2 percent reduction in the home health market basket percentage increase in accordance with section 1895(b)(3)(B)(v)(I) of the Act. The 2 percent reduction would apply to all episodes ending on or before December 31, 2007. We provide the reduced payment rates in tables 5, 6, 7, and 8 below.

Table 5.—For HHAs That Do Not Submit the Required Quality Data— National 60-Day Episode Amount Updated by the Estimated Home Health Market Basket Update for CY 2007, Minus 2 Percentage Points, Before Case-Mix Adjustment

Total CY 2006 prospective payment amount per 60-day episode

Multiply by the estimated home health market basket update (3.3 Percent
1
minus 2 percent)

CY 2007 updated national 60-day episode rate for HHAs that do not submit required quality data

$2,264.28
× 1.013
$2,293.72

1
The estimated home health market basket update of 3.3 percent for CY 2007 is based on Global Insight, Inc, 3rd Qtr, 2006 forecast with historical data through 2nd Qtr, 2006.

Table 6—For HHAs That Do Not Submit the Required Quality Data—National Per-Visit Amounts Updated by the Estimated Home Health Market Basket Update for CY 2007, Minus 2 Percentage Points

Home health discipline type
Final CY 2006 per-visit amounts per 60-day episode

Multiply by the estimated home health market basket update (3.3 percent
1
minus 2 percent)

CY 2007 per-visit payment amount per discipline for HHAs that do not submit required quality data

Home Health Aide
$44.76
× 1.013
$45.34

Medical Social Services
158.45
× 1.013
160.51

Occupational Therapy
108.81
× 1.013
110.22

Physical Therapy
108.08
× 1.013
109.49

Skilled Nursing
98.85
× 1.013
100.14

Speech-Language Pathology
117.44
× 1.013
118.97

1
The estimated home health market basket update of 3.3 percent for CY 2007 is based on Global Insight, Inc, 3rd Qtr, 2006 forecast with historical data through 2nd Qtr, 2006.

Table 7.—For HHAs That Do Not Submit the Required Quality Data— Payment Amount for 60-Day Episodes Beginning in CY 2006 and Ending in CY 2007 Updated by the Estimated Home Health Market Basket for CY 2007, Minus 2 Percentage Points, with Rural Add-on, Before Case-Mix Adjustment

CY 2007 Updated national 60-day episode rate for HHAs that do not submit required quality data
5 Percent rural add-on
CY 2007 Payment amount per 60-day episode beginning in CY 2006 and ending in CY 2007 for a beneficiary who resides in a non-MSA area for HHAs that do not submit required quality data

$2,293.72
× 1.05
$2,408.41

Table 8—For HHAs That Do Not Submit the Required Quality Data— Per-Visit Payment Amounts for Episodes Beginning in CY 2006 and Ending in CY 2007 Updated by the Estimated Home Health Market Basket for CY 2007, Minus 2 Percentage Points, with Rural Add-on

Home health discipline type
CY 2007 Per-visit amounts for HHAs that do not submit required quality data
5 Percent rural add-on
CY 2007 Per-visit payment amounts for episodes beginning in CY 2006 and ending in CY 2007 for a beneficiary who resides in a non-MSA area for HHAs that do not submit required quality data

Home Health Aide
$45.34
× 1.05
$47.61

Medical Social Services
160.51
× 1.05
168.54

Occupational Therapy
110.22
× 1.05
115.73

Physical Therapy
109.49
× 1.05
114.96

Skilled Nursing
100.14
× 1.05
105.55

Speech-Language Pathology
118.97
× 1.05
124.92

Section 1895(b)(3)(B)(v)(III) of the Act further requires that the “Secretary shall establish procedures for making data submitted under subclause (II) available to the public.” Additionally, the statute requires that “such procedures shall ensure that a home health agency has the opportunity to review the data that is to be made public with respect to the agency prior to such data being made public.” To meet the requirement for making such data public, we proposed

to continue to use the CMS
Home Health Compare
Web site whereby HHAs are listed geographically. Currently the 10 proposed quality measures are posted on the CMS
Home Health Compare
Web site. Consumers can search for all Medicare-approved home health providers that serve their city or zip code and then find the agencies offering the types of services they need as well as the required quality measures. See
http://www.medicare.gov/HHCompare
. HHAs would continue to have access (through the
Home Health Compare
contractor) to its own quality data (updated periodically) and we would establish a process by which agencies would receive a report before reporting the data publicly.

Currently, the CMS
Home Health Compare
Web site does not publicly report data when agencies have fewer than 20 episodes of care within a reporting period. In light of the DRA requirements, we recognize the need to provide the required data to the public and would make these statistics available through expansion of the CMS
Home Health Compare
Web site.

In the July 27, 2005 Medicare Payment Advisory Commission (MedPAC) testimony before the U.S. Senate Committee on Finance, MedPAC expressed support for the concept of differential payments for Medicare providers, which could create incentives to improve quality. To support this initiative, MedPAC stated that “outcome measures from CMS' Outcome-based Quality Indicators” (currently collected through the OASIS instrument) “could form the starter set.” MedPAC further states “* * * the Agency for Healthcare Research and Quality concur(s) that a set of these measures is reliable and adequately risk adjusted.”

The MedPAC testimony recognizes that while the goal of care for many home health patients is improving health and functioning, for some patients the goal of the HHA is to simply stabilize their conditions and prevent further decline. Additionally, the MedPAC testimony reflects that measures of structure and process could also be considered.

Various home health outcome measures are now in common use and have been studied for some time. A number of these measures have been endorsed by the National Quality Forum (NQF) and are evidence-based, well accepted, and not unduly burdensome. When determining outcome measures that will be most appropriate, it is important to measure aspects of care that providers can control and are adequately risk-adjusted. Home-based care presents particular difficulties for provider control because patient conditions are compounded by a variety of home environment and support system issues.

We are currently pursuing the development of patient-level process measures for HHAs, as well as refining the current OASIS tool in response to recommendations from a Technical Expert Panel conducted to review the data elements that make up the OASIS tool. These additional measures would complement the existing OASIS outcome measures and would assist us in identifying processes of care that lead to improvements for certain populations of patients. These process measures are currently in the very early stages of development. As we stated previously, to the extent that evidence-based data are available on which to determine the appropriate measure specifications, and adequate risk-adjustments are made, we anticipate collecting and reporting these measures as part of our home health quality plan. Possible modifications to the current OASIS tool include reducing the number of questions on the tool, refining possible responses, as well as adding new process measures.

We solicited comments on how to make the outcome measures more useful. We also solicited comments on measures of home health care processes for which there is evidence of improved care to beneficiaries. In all cases, we noted that measures should be evidence-based, clearly linked to improved outcomes, and able to be reliably captured with the least burden to the provider. We also considered measures of patient experience of care in the home health setting, as well as efficiency measures, and solicited comment on the use of these measures and their importance in the home health setting. In the proposed rule, we noted that we would address any changes to the HH PPS quality data submission requirement in future rulemaking.

We also stated our intent to provide guidance on the specifications, definitions, and reporting requirements of any additional measures through the standard protocol for measure development.

We proposed to revise the regulations at § 484.225 to reflect these proposed payment requirements which would require submission of quality data. For CY 2007, we will finalize the requirement to use the 10 OASIS measures as meeting the DRA quality data reporting requirement as discussed in section II.D. of the August 3, 2006 proposed rule and the regulations at § 484.225.

E. Outliers and Fixed Dollar Loss Ratio

Outlier payments are payments made in addition to regular 60-day case-mix and wage-adjusted episode payments for episodes that incur unusually large costs due to patient home health care needs. Outlier payments are made for episodes for which the estimated cost exceeds a threshold amount. The episode's estimated cost is the sum of the national wage-adjusted per-visit payment amounts for all visits delivered during the episode. The outlier threshold for each case-mix group, PEP adjustment, or total SCIC adjustment is defined as the 60-day episode payment amount, PEP adjustment, or total SCIC adjustment for that group plus a fixed dollar loss amount. Both components of the outlier threshold are wage-adjusted.

The wage-adjusted fixed dollar loss (FDL) amount represents the amount of loss that an agency must bear before an episode becomes eligible for outlier payments. The FDL is computed by multiplying the wage-adjusted 60-day episode payment amount by the FDL ratio, which is a proportion expressed in terms of the national standardized episode payment amount. The outlier payment is defined to be a proportion of the wage-adjusted estimated costs beyond the wage-adjusted threshold. The proportion of additional costs paid as outlier payments is referred to as the loss-sharing ratio.

Section 1895(b)(5) of the Act requires that estimated total outlier payments are no more than 5 percent of total estimated HH PPS payments. In response to the concerns about potential financial losses that might result from unusually expensive cases expressed in comments to the October 28, 1999 proposed rule (64 FR 58133), the July 2000 final rule set the target for estimated outlier payments at the 5 percent level. The FDL ratio and the loss-sharing ratio were then selected so that estimated total outlier payments would meet the 5 percent target.

For a given level of outlier payments, there is a trade-off between the values selected for the FDL ratio and the loss-sharing ratio. A high FDL ratio reduces the number of episodes that can receive outlier payments, but makes it possible to select a higher loss-sharing ratio and, therefore, increase outlier payments for outlier episodes. Alternatively, a lower FDL ratio means that more episodes can qualify for outlier payments, but outlier payments per episode must be lower. As a result of public comments on the October 28, 1999 proposed rule, in our July 2000 final rule, we made the decision to attempt to do the former.

In the July 2000 final rule, we chose a value of 0.80 for the loss-sharing ratio, which preserves incentives for agencies to attempt to provide care efficiently for outlier cases. A loss-sharing ratio of 0.80 was also consistent with the loss-sharing ratios used in other Medicare PPS outlier policies. Furthermore, we estimated the value of the FDL ratio that would yield estimated total outlier payments that were 5 percent of total home health PPS payments. The resulting value for the FDL ratio for the July 2000 final rule was 1.13.

Our CY 2005 update to the HH PPS rates (69 FR 62124) changed the FDL ratio from the original 1.13 to 0.70 to allow more home health episodes to qualify for outlier payments and to better meet the 5 percent target of outlier payments to total HH PPS payments. We stated in that CY 2005 update that we planned to continue to monitor the outlier expenditures on a yearly basis and to make adjustments as necessary (69 FR 62129). To do so, we planned on using the best Medicare data available at the time of publication. For the CY 2005 update, we used CY 2003 home health claims data.

Our CY 2006 update to the HH PPS rates (70 FR 68132) changed the FDL ratio from 0.70 to 0.65 to allow even more home health episodes to qualify for outlier payments and to better meet the 5 percent target of outlier payments to total HH PPS payments. For the CY 2006 update, we used CY 2004 home health claims data.

At the time of publication of the August 3, 2006 proposed rule, we did not have more recent data, but we noted that we may update the FDL ratio for CY 2007 depending on the availability of more recent data. We further noted that if we updated the FDL ratio for the CY 2007 update, we would use the same methodology performed in updating the current FDL ratio described in the October 22, 2004 final rule. Subsequent to the publication of the August 3, 2006 proposed rule, we have now obtained more recent data, that is, CY 2005 home health claims data.

Accordingly for this final rule, we have used the same methodology and performed an analysis on the CY 2005 HH PPS analytic data to update the FDL ratio for CY 2007. The results of this analysis indicate that an FDL ratio of 0.67 is consistent with the existing loss-sharing ratio of 0.80 and a projected target percentage of estimated outlier payments of 5 percent. Therefore, we are updating the FDL ratio from the current 0.65 to 0.67 for CY 2007.

Expressed in terms of a fixed dollar loss amount, an FDL ratio of 0.67 indicates that providers would absorb approximately $1,567 of their costs (before wage adjustment), in addition to their loss-sharing portion of the estimated cost in excess of the outlier threshold. This fixed dollar loss amount of approximately $1,567 is computed by multiplying the standard 60-day episode payment amount (2,339.00) by the FDL ratio (0.67). In contrast, using the current FDL ratio (0.65), the fixed dollar loss amount would be approximately $1,520 ($2,339.00 × 0.65)

F. Hospital Wage Index—Revised OMB Definitions for Geographical Statistical Areas

Sections 1895(b)(4)(A)(ii) and (b)(4)(C) of the Act require the Secretary to establish area wage adjustment factors that reflect the relative level of wages and wage-related costs applicable to the furnishing of home health services and to provide appropriate adjustments to the episode payment amounts under the HH PPS to account for area wage differences. We apply the appropriate wage index value to the labor portion (76.775 percent; see 60 FR 62126) of the HH PPS rates based on the geographic area in which the beneficiary received home health services as discussed in section II.A of the August 3, 2006 proposed rule. Generally, we determine each HHA's labor market area based on definitions of Metropolitan Statistical Areas (MSAs) issued by the Office of Management and Budget (OMB).

We acknowledged in our October 22, 2004 final rule that on June 6, 2003, the OMB issued an OMB Bulletin (No. 03-04) announcing revised definitions for MSAs, new definitions for Micropolitan Statistical Areas and Combined Statistical Areas, and guidance on using the statistical definitions. A copy of the Bulletin may be obtained at the following Internet address:
http://www.whitehouse.gov/omb/bulletins/b03-04.html.
At that time, we did not propose to apply these new definitions known as Core-Based Statistical Areas (CBSAs). In the November 9, 2005 final rule, we adopted the OMB-revised definitions and implemented a one-year transition policy consisting of a 50/50 blend of the MSA-based and the new CBSA-based wage indexes.

As discussed previously and set forth in the July 3, 2000 final rule, the statute provides that the wage adjustment factors may be the factors used by the Secretary for purposes of section 1886(d)(3)(E) of the Act for hospital wage adjustment factors. Again, as discussed in the July 3, 2000 final rule, we proposed to use the pre-floor and pre-reclassified hospital wage index data to adjust the labor portion of the HH PPS rates based on the geographic area in which the beneficiary receives the home health services. We believe the use of the pre-floor and pre-reclassified hospital wage index data results in the appropriate adjustment to the labor portion of the costs as required by statute. For the CY 2007 update to the home health payment rates, we proposed to continue using the most recent pre-floor and pre-reclassified hospital wage index available at the time of publication. See Addenda A and B of this final rule, respectively, for the rural and urban hospital wage indexes using the CBSA designations. For the HH PPS rates addressed in the August 3, 2006 proposed rule, we used preliminary 2007 pre-floor and pre-reclassified hospital wage index data. We incorporated updated hospital wage index data for the 2007 pre-floor and pre-reclassified hospital wage index to be used in this final rule (not including any reclassifications under section 1886(d)(8)(B) of the Act).

As implemented under the HH PPS in the July 3, 2000 HH PPS final rule, each HHA's labor market is determined based on definitions of MSAs issued by OMB. In general, an urban area is defined as an MSA or New England County Metropolitan Area (NECMA) as defined by OMB. Under § 412.62(f)(1)(iii), a rural area is defined as any area outside of an urban area. The urban and rural area geographic classifications are defined in § 412.62(f)(1)(ii) and § 412.62(f)(1)(iii), respectively, and have been used under the HH PPS since it was implemented.

Under the HH PPS, the wage index value is based upon the site of service for the beneficiary (defined by section 1861(m) of the Act as the beneficiary's place of residence). As has been our longstanding practice, any area not included in an MSA (urban area) is considered to be nonurban (§ 412.64(b)(1)(ii)(C)) and receives the statewide rural wage index value (see, for example, 65 FR 41173).

For CY 2007, we proposed using 100 percent of the CBSA-based wage area designations for purposes of determining the HH PPS wage index adjustment.

In adopting the CBSA designations, we identified some geographic areas where there were no hospitals, and thus no hospital wage data on which to base the calculation of the CY 2007 home health wage index. For CY 2006, we adopted a policy in the HH PPS final rule (70 FR 68132) of using the CY 2005 pre-floor, pre-reclassified hospital wage index value for rural areas when no rural hospital wage data are available. We also adopted a policy that for urban labor markets without an urban hospital

from which a hospital wage index can be derived, all of the CBSAs within the State would be used to calculate a statewide urban average wage index to use as a reasonable proxy for these areas. We have not received any concerns from the industry regarding our policy to calculate an urban wage index, using an average of all of the urban CBSAs wage index values within the State, for urban labor markets without an urban hospital from which a hospital wage index can be derived. Consequently, in the August 3, 2006 proposed rule, we proposed to continue to apply the average wage index from all urban areas in the state to any urban areas lacking hospital wage data in that state. Currently, the only CBSA that would be affected by this is CBSA 25980 Hinesville, Georgia.

In the August 3, 2006 proposed rule, we again proposed to apply the CY 2005 pre-floor/pre-reclassified hospital wage index to rural areas where no hospital wage data is available. Currently, the only rural areas that would be affected by this are Massachusetts and Puerto Rico. Since publication of the CY 2006 HH PPS final rule, representatives of the home health industry have expressed concerns with this policy, specifically as it applies to Massachusetts. In response to these concerns and in recognition that, in the future, there may be additional rural areas impacted by a lack of hospital wage data from which to derive a wage index, we considered alternative methodologies for imputing a rural wage index for areas where no hospital wage data are available.

We specifically considered imputing a rural wage index by computing a simple average of all of the statewide (rural) wage indexes at the Census Division level. Census Divisions are defined by the U.S. Census Bureau and may be found at
www.census.gov/geo/www/us_regdiv.pdf.
Massachusetts is located in Census Division I, along with Connecticut, Maine, New Hampshire, Vermont and Rhode Island. The Census Bureau states, “Puerto Rico and the Island Areas are not part of any census region or census division.” Therefore, we could not compute a rural wage index for Puerto Rico using this alternative methodology.

In the August 3, 2006 proposed rule, we solicited comments on the current methodology and alternative methodologies for determining a wage index for areas without the necessary hospital wage data. Since publication of the August 3, 2006 proposed rule, we have received numerous comments regarding our policy for determining a wage index for rural areas without the necessary hospital wage data. In direct response to these comments, we have decided to revise the methodology for imputing a rural wage index. We discuss the change to the methodology for imputing a rural wage index in section III of this final rule.

G. Payment for Oxygen, Oxygen Equipment and Capped Rental DME Items

As discussed in the August 3, 2006 proposed rule, we would amend our regulations at § 414.226 by revising the payment rules for oxygen and oxygen equipment in paragraph (a), adding a new paragraph (f) that provides that the beneficiary assumes ownership of oxygen equipment on the first day that begins after the 36th continuous month in which rental payments are made, and adding a new paragraph (g) that contains new supplier requirements that we believe are necessary in light of the amendments made to section 1834(a)(5) of the Act by section 5101(b) of the DRA. As discussed in the August 3, 2006 proposed rule, we would amend our regulations at § 414.226 by adding a new paragraph (c) that establishes new classes and national payment amounts for oxygen and oxygen equipment based on our authority in section 1834(a)(9)(D) of the Act. We also proposed to revise paragraph (b) of this section to incorporate the special payment rules for oxygen equipment mandated by section 1834(a)(21) of the Act. The provisions of section 1834(a)(21), which we believe are self-implementing, resulted in adjustments to Medicare payment amounts for oxygen contents and stationary oxygen equipment as well as portable oxygen equipment in 2005, which were implemented through program instructions. We are now seeking to codify these changes to make our regulations consistent with the payment methodology for these items in 2005 and 2006, and because the payment reductions mandated by section 1834(a)(21) are incorporated into our proposal, as more fully discussed in section I of the August 3, 2006 proposed rule, to create new payment classes for oxygen and oxygen equipment. The August 3, 2006 proposed rule indicated that we would redesignate old paragraph (c) of this section as paragraph (d) and would amend this paragraph to indicate under what situations payments would be made for the items and services described in new paragraph (c). Finally, the August 3, 2006 proposed rule indicated that we would redesignate old paragraph (d) of this section as paragraph (e) and would make technical changes to this paragraph so that the cross-references are accurate in light of the other changes we proposed to make to § 414.226.

The August 3, 2006 proposed rule would also amend our regulations at § 414.229 by revising the payment rules for capped rental durable medical equipment (DME) items (also called capped rental items) in paragraph (a), revising paragraph (f) to provide for new payment rules for capped rental items furnished beginning on or after January 1, 2006, revising paragraph (g) to provide for supplier requirements that we believe are necessary in light of the amendments made to section 1834(a)(7)(A) of the Act by section 5101(a) of the DRA, and adding a new paragraph (h) to address the lump-sum purchase option for power-driven wheelchairs furnished on or after January 1, 2006. The language in current paragraphs (f) and (g) of this section is obsolete, and therefore, we proposed to delete this language.

The August 3, 2006 proposed rule indicated that we would amend our regulations at § 414.210 by revising the maintenance and servicing rules in paragraph (e) and the replacement of equipment rules in paragraph (f) to further implement the new supplier requirements that we proposed below.

Finally, we proposed to revise § 414.230(b) to incorporate section 5101(b)(2)(B) of the DRA, which provides that for all beneficiaries receiving oxygen equipment paid for under section 1834(a) on December 31, 2005, the period of continuous use begins on January 1, 2006. We also proposed to revise § 414.230(f), which governs when a new period of continuous use begins if a beneficiary receives new equipment, to account for the fact that oxygen equipment is paid on a modality neutral basis.

Section 5101(a) of the DRA changes the Medicare payment methodology for capped rental equipment to beneficiary ownership after 13 months of continuous use, for those beneficiaries who need the equipment for more than 13 months. This section also makes the transfer of title for the capped rental items a requirement rather than a beneficiary option after 13 months of continuous use. The changes made by this section of the DRA apply to capped rental items, including rented power-driven wheelchairs, for which the first rental month occurs on or after January 1, 2006. We proposed to update § 414.229 of our regulations to reflect these new statutory requirements. However, for capped rental items and rented power-driven wheelchairs for which the first rental month occurred before January 1, 2006, the existing rules in § 414.229 would continue to apply. In

addition, as was the case before enactment of the DRA, beneficiaries may elect to obtain power-driven wheelchairs furnished on or after January 1, 2006, on a lump-sum purchase basis.

Section 5101(b) of the DRA changes the Medicare payment methodology for oxygen equipment from continuous rental to beneficiary ownership after 36 months of continuous use, for those beneficiaries who medically need the oxygen equipment for more than 36 months. For beneficiaries who were receiving oxygen equipment on December 31, 2005 for which payment was made under section 1834(a) of the Act, the 36-month rental period began on January 1, 2006. For beneficiaries who begin to rent oxygen equipment on or after January 1, 2006, the 36-month rental period commences at the time they begin to rent the equipment. We proposed to update § 414.226 of our regulations to incorporate these new requirements.

In light of the changes made by sections 5101(a) and (b) of the DRA, we believe it was necessary to propose additional supplier requirements in order to maintain beneficiary protections and access to oxygen, oxygen equipment, and capped rental DME items under section 1834(a) of the Act. For both capped rental DME items and oxygen equipment, the DRA amendments make the transfer of title from the supplier to the beneficiary a requirement rather than an option after the statutorily-prescribed rental period ends for each category of items. Therefore, suppliers and beneficiaries should be aware that title to these items will automatically transfer to the beneficiary if the medical need for the equipment continues for a period of continuous use that is longer than 36 months for oxygen equipment and 13 months for capped rental items. We are concerned that there may be incentives for suppliers to avoid having to transfer title to equipment to beneficiaries as required by the DRA. For example, we are aware of cases where a supplier has informed beneficiaries that it would decline to accept assignment for capped rental items and would charge beneficiaries who elected the purchase option the full retail price for the item during the 13th rental month (which was right before the supplier would be required to transfer title under the purchase option). In these cases, the beneficiary would become financially liable for the total retail price for the equipment in the 13th month if they elected the purchase option. In our August 3, 2006 proposed rule, we made several proposals relating to the furnishing of oxygen equipment and capped rental items which we believe protect beneficiaries from these types of abusive practices and which we believe are reasonable for a supplier to comply with. Our authority to promulgate these requirements stems from our authority to administer the payment rules at section 1834(a)(5) of the Act for oxygen equipment and section 1834(a)(7) of the Act for capped rental items, as well as the general authority provided in section 1871 of the Act for prescribing regulations necessary for administering the Medicare program. Other than the length of the rental periods, which the DRA made effective beginning on January 1, 2006 for all oxygen equipment and for capped rental items for which the first rental period began on or after that date, we proposed that the requirements presented in this section of the regulations would be effective on January 1, 2007, and would apply to suppliers that furnish oxygen equipment or capped rental items on a rental basis.

We believe that a supplier of an item that is subject to these new payment rules that furnishes the item in the first month for which a rental payment is made has an obligation to continue furnishing the item to the beneficiary for the entire period of medical need in which payments are made, up to and including the time when title to the equipment transfers to the beneficiary. We believe it is reasonable for the beneficiary to have an expectation that he or she will not be forced to change equipment or suppliers during the period of medical need unless he or she wants to. Therefore, we proposed that unless an exception applies, the supplier that furnishes oxygen equipment or a capped rental item for the first month of the statutorily prescribed rental period must continue to furnish the oxygen equipment or the capped rental item for as long as the equipment remains medically necessary, up to and including the last month for which a rental payment is made by Medicare. We believe that this proposal was necessary to ensure beneficiary access to equipment during a period of medical need, which we believe could be jeopardized if suppliers have the option to take back the rented equipment just before the rental period expires in order to retain title to that equipment. We proposed that this requirement would be subject to the following exceptions: (1) Cases where the item becomes subject to a competitive acquisition program implemented in accordance with section 1847(a) of the Act; (2) cases where a beneficiary relocates on either a temporary or permanent basis to an area that is outside the normal service area of the initial supplier; (3) cases where the beneficiary chooses to obtain equipment from a different supplier; and (4) other cases where CMS or the carrier determine that an exception is warranted. We have proposed rules in connection with the first exception in our Notice of Proposed Rulemaking for Competitive Acquisition for Certain Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) and Other Issues. These proposed rules are addressed beginning on page 25662 of the May 1, 2006 proposed rule (71 FR 25654). If the second exception applies, we proposed that the supplier or beneficiary would need to arrange for another supplier in the new area to furnish the item on either a temporary or permanent basis. This proposed exception is consistent with what currently happens when beneficiaries move outside a supplier's service area on either a temporary or permanent basis. The third exception is intended to protect a beneficiary's right to obtain the equipment from the supplier of his or her choice. Finally, we proposed to allow other exceptions to this proposed requirement on a case-by-case basis at the discretion of CMS or the Medicare contractor. CMS will be monitoring the case-by-case determinations made by the Medicare contractor.

We are concerned that there might be potential incentives for a supplier to replace more valuable or newer equipment used by the beneficiary with less valuable or older equipment from its inventory at some point before the 36th rental month for oxygen equipment or 13th rental month for capped rental DME expires in order to avoid losing title to the more valuable equipment. In order to avoid such potential situations, we proposed that the supplier may not provide different equipment from that which was initially furnished to the beneficiary at any time during the 36-month period for oxygen equipment or 13th rental month for capped rental DME unless one of the following exceptions applies: (1) The equipment is lost, stolen, or irreparably damaged; (2) the equipment is being repaired while loaner equipment is in use; (3) there is a change in the beneficiary's medical condition such that the equipment initially furnished is no longer appropriate or medically necessary; or (4) the carrier determines that a change in equipment is warranted. However, we proposed that a change from one oxygen equipment modality to another

without physician documentation that such a change is medically necessary for the individual would not be considered a change in equipment that is warranted under the fourth exception stated above since there is no medical basis for the change. In those cases where the equipment is replaced, we proposed that the replacement item must be equipment that is, at minimum, in the same condition as the equipment being replaced. That proposal was intended to safeguard beneficiary access to quality oxygen equipment and capped rental items throughout the duration of the rental period.

Under Medicare, suppliers who furnish items of DME can accept assignment on all claims for Medicare services or on a claim-by-claim basis. Assignment is an agreement between the supplier and the beneficiary under which the supplier agrees to request direct payment from Medicare for the item, to accept 80 percent of the Medicare allowed payment amount for the item from the carrier, and to charge the beneficiary not more than the remaining 20 percent of the Medicare approved payment amount, plus any unmet deductible. If a supplier elects not to accept assignment, Medicare pays the beneficiary 80 percent of the Medicare allowed payment amount, after subtracting any unmet deductible, and there is no limit under Title XVIII of the Act on the amount the supplier can charge the beneficiary for rental of the DME item. The beneficiary, in these situations, is financially responsible for the difference between 80 percent of the Medicare allowed payment amount and the amount the supplier charges for the rental of the DME item.

Section 1842(h) allows suppliers to sign a participation agreement where the supplier agrees voluntarily, before a calendar year, to accept assignment for all Medicare items and services furnished to a beneficiary for the following calendar year. Current supplier participation agreements are renewable annually. However, the agreements do not apply for a full period of medical need for specific beneficiaries in cases where such need extends for more than a calendar year. Nor do current participation agreements apply to periods of medical need where such a period overlaps calendar years. In the latter case, while a supplier may renew its participation agreement annually, a beneficiary would not know before choosing a supplier whether the supplier would be willing to accept assignment of all claims during the 13-month or 36-month rental period.

In order for the beneficiary to make an informed choice, we proposed that before furnishing the oxygen equipment or a capped rental item, the supplier must disclose to the beneficiary its intentions regarding whether it will accept assignment of all monthly rental claims for the equipment during the period of medical necessity, up to and including the 36th month of continuous use for oxygen equipment or the 13th rental month of continuous use for capped rental DME in which rental payments could potentially be made. We believe that it is reasonable for the supplier to disclose to each beneficiary its intentions regarding assignment of claims for all months during a rental period as this decision has a direct financial effect on the beneficiary. A supplier's intentions could be expressed in the form of a written agreement between the supplier and a beneficiary. This proposal would require suppliers to give beneficiaries advance notice of the possible extent of their financial liability during the period of medical need in which monthly rental payments are made for the equipment, so that they can use this information to help select a supplier. Additionally, to promote informed beneficiary choices, we plan to post information on a CMS and/or CMS contractor Web site(s) indicating supplier specific information on oxygen equipment and capped rental items such as (1) the percentage of beneficiaries for whom each supplier accepted assignment during a prior period of time (for example, a quarter), and/or (2) the percentage of cases in which the supplier accepted assignment during the beneficiary's entire rental period. We believe that those proposals create reasonable rules for suppliers that furnish oxygen equipment and capped rental items and ensure that beneficiaries have information necessary to make informed choices that could have significant financial consequences for them.

H. Payment for Oxygen Contents for Beneficiary-Owned Oxygen Equipment

Section 1834(a)(5) of the Act, as amended by section 5101(b)(1) of the DRA, requires that Medicare continue to make monthly payments for the delivery and refilling of oxygen contents for the period of medical need after beneficiaries own their own gaseous or liquid oxygen stationary or portable equipment. Before the enactment of the DRA, Medicare made monthly payments for the delivery and refilling of oxygen contents for beneficiaries who own their own stationary and/or portable equipment (equipment they obtained on a purchase basis before June 1, 1989, out-of-pocket, or before they enrolled in Medicare Part B). In accordance with the DRA, we proposed that after the supplier transfers title to the stationary and/or portable oxygen equipment to the beneficiary, Medicare would continue to make separate monthly payments for gaseous or liquid oxygen contents until medical necessity ends. We also proposed that if the beneficiary-owned equipment is replaced, and Medicare pays for the replacement in accordance with proposed revised § 414.210(f) (see section K of this final rule for a more complete discussion of our proposed oxygen equipment replacement policies), a new 36-month rental period start and the payment for oxygen contents would be included in the monthly rental payments. We proposed that all oxygen content payment amounts would be based on new rates developed in accordance with our proposal to establish new payment classes, as discussed in section I below.

In transferring title to gaseous or liquid oxygen equipment used during the 36-month rental period, we proposed that suppliers must transfer title for all equipment that will meet the beneficiary's continued medical need, including those oxygen cylinders or vessels that are refilled at the supplier's place of business. Customary practice by suppliers for refilling oxygen contents is to deliver to the beneficiary cylinders filled with contents and take back the empty cylinders to the supplier's place of business to refill the oxygen contents. Under our proposal, title would transfer for both sets of cylinders, meaning the ones that are being used by the beneficiary for the month and the ones that the supplier refills in its business location and delivers for use during the next subsequent month. This policy would apply to both gaseous and liquid oxygen stationary equipment and portable systems. Similarly, in those cases where the beneficiary uses an oxygen equipment system which includes a compressor which fills portable gaseous cylinders in the beneficiary's home, we proposed that suppliers must transfer title for this equipment to the beneficiary.

Concerns have been raised regarding beneficiary access to, and safety issues associated with, the delivery of oxygen contents for beneficiary-owned stationary and portable gaseous or liquid equipment. We believe that these concerns are based on the misconception that beneficiaries become responsible for filling their own cylinders. To the contrary, there are numerous State and Federal regulations governing the safe handling, filling, and transport of oxygen and those regulations are unaffected by the DRA oxygen provisions. We expect that

suppliers will continue to furnish replacement contents for beneficiary-owned gaseous and liquid systems in the same way that they have furnished replacement contents for beneficiary-owned equipment in the past. For example, suppliers that deliver a 1 month supply of gaseous cylinders to a beneficiary's home at the same time that they are picking up empty cylinders that the beneficiary used during the previous month could continue this practice under section 5101(b) of the DRA.

I. Classes of Oxygen and Oxygen Equipment

Based on information from paid Medicare claims with dates of service in calendar year 2004, distribution of usage among the four general categories of oxygen systems was: (a) 69 percent of beneficiaries used both a stationary concentrator (which does not require delivery of oxygen contents) and a portable system that requires delivery of gaseous or liquid oxygen, (b) 5 percent of beneficiaries used a stationary system that requires delivery of gaseous or liquid oxygen and a portable system that requires delivery of gaseous or liquid oxygen, (c) 24 percent of beneficiaries used a stationary concentrator system only, and (d) 2 percent of beneficiaries used only a stationary system that requires delivery of liquid or gaseous oxygen. The prevalent use of stationary concentrator systems is due, in part, to the fact that this system is the most cost-effective and dependable of the stationary oxygen modalities. The main reason that the concentrator system is the most cost-effective system is that the oxygen is concentrated from room air, and therefore, the high cost of delivering contents to the beneficiary's residence is removed when this system is used. Medicare's current payment structure results in two separate payments for beneficiaries using both stationary and portable systems, both of which are modality neutral, meaning that the payment amount does not differ depending on the type of oxygen delivery system (gaseous, liquid, or concentrator) that is furnished. One payment, hereinto referred to as the “stationary payment,” includes payment for the rental of stationary equipment, delivery of stationary oxygen contents (for gaseous or liquid systems), and delivery of portable oxygen contents (for gaseous or liquid systems). A separate add-on payment, hereinto referred to as the “portable add-on,” is also made in cases where the beneficiary is renting portable oxygen equipment. As a result of this payment methodology which has been in place since 1989, suppliers have a financial incentive to furnish low cost concentrator systems as opposed to more expensive gaseous or liquid systems because the monthly payment is the same regardless of which system is used. Finally, in implementing section 1834(a)(5) and (9) of the Act, monthly payment amounts were established through regulations at § 414.226 for (1) stationary and portable oxygen contents (for beneficiaries who use stationary and, if applicable, portable equipment), and (2) portable oxygen contents only (for beneficiaries who only use portable oxygen equipment). The current average statewide monthly payment amounts are:

Equipment & Contents
Oxygen Contents Only

Stationary Pmt
$199
Stationary & Portable
$156

Portable Add-on
32
Portable Only
21

Based on our data, 36 percent of Medicare beneficiaries continue using oxygen equipment for more than 3 years, that is, beyond the 36th month after which title for the equipment would transfer to the beneficiary in accordance with the DRA.

We have heard concerns about the appropriateness of the current payment structure for oxygen and oxygen equipment in light of changes in the technologies for oxygen delivery systems that have occurred since 1989, and these concerns have been amplified in light of the recent changes made by the DRA. The specific concerns pertain to beneficiary access to (1) portable oxygen contents after title to the equipment transfers to the beneficiary, (2) devices that allow a beneficiary to fill portable tanks at home (otherwise referred to in the oxygen equipment industry as transfilling systems), and (3) portable oxygen concentrators. As we implement the DRA provisions for oxygen equipment and promulgate additional supplier requirements, we want to ensure that the Medicare payment methodology results in payments for oxygen and oxygen equipment that are accurate, do not impede beneficiary access to innovations in technology, and do not create inappropriate incentives for suppliers.

Some believe that Medicare's stationary payment for equipment and contents (average of $199) is “too high” and that Medicare's payment for portable oxygen contents only for beneficiary-owned portable equipment (average of $21) is “too low”. While some contend that the overall payment (stationary payment plus portable add-on) for oxygen and oxygen equipment is adequate as long as the beneficiary continues to rent the equipment, they are concerned about the adequacy of Medicare's $21 monthly payment for furnishing oxygen contents for beneficiary-owned portable equipment. Some believe that Medicare's current average monthly payment of $156 for oxygen contents, which includes payment for both stationary and portable systems, is high enough to create an incentive for suppliers to furnish stationary oxygen systems that require the ongoing delivery of oxygen contents, rather than stationary concentrator systems that do not require delivery of oxygen contents.

Some technologies provide an attachment to a stationary oxygen concentrator that allows beneficiaries to fill their own portable tanks at home. Delivery of portable oxygen contents to the beneficiary's home is, therefore, not necessary since this equipment refills the beneficiary's rented or owned portable oxygen tanks. This transfilling technology eliminates the need for frequent and costly trips by a supplier to a beneficiary's home to refill portable oxygen tanks and would save the Medicare program and beneficiaries who use portable equipment the expense of paying for delivery of portable oxygen contents. We note that we are not aware that a similar “transfilling” technology has been developed that would be capable of filling stationary tanks in the beneficiary's home. Therefore, there remains a need for ongoing delivery of gaseous or liquid oxygen contents for stationary equipment. In accordance with the DRA, after 36 months of continuous use, title for the transfilling equipment and accompanying portable oxygen tanks would transfer to the beneficiary who would then own a portable equipment system that self-generates oxygen in their home. However, some are concerned that current Medicare payment rules that

allow payment for oxygen contents for stationary equipment creates an incentive for suppliers to furnish stationary oxygen equipment that require liquid or gaseous oxygen deliveries, rather than concentrators and transfilling equipment that self-generate oxygen in the beneficiary's home. In addition, portable oxygen concentrators are now available that meet both the beneficiary's stationary and portable oxygen needs. Some have raised concern about whether the combination of the Medicare stationary payment and portable add-on payment (approximately $231 per month), which is what is currently paid for portable oxygen concentrators, is sufficient to facilitate use of this new technology which, like a transfilling system, eliminates the need for delivery of oxygen contents, but is more expensive than a “standard” or “non-portable” concentrator.

In light of these concerns, we proposed regulatory changes to address the Medicare payment rates for oxygen and oxygen equipment. We proposed to address these issues by using our authority under section 1834(a)(9)(D) of the Act to establish separate classes and monthly payment rates for items of oxygen and oxygen equipment. Specifically, there are two changes we proposed for oxygen and oxygen equipment:

1. We proposed to establish a new class and monthly payment amount for oxygen generating portable oxygen equipment (for example, portable concentrators and transfilling systems).

2. We proposed to establish separate classes and monthly payment amounts for gaseous and liquid oxygen contents that must be delivered for beneficiary-owned stationary and portable oxygen equipment.

The first change involves creating a new separate class for portable oxygen systems that generate their own oxygen and therefore eliminate the need for delivery of oxygen contents (for example, portable concentrator systems or transfilling systems). A higher monthly payment amount would be allowed, as described below, for these systems to account for the increased, up-front costs to the supplier of furnishing these more expensive concentrator or transfilling systems, which would be partially offset by the reduced payments that the supplier would receive from the Medicare program and beneficiaries due to the fact that these systems do not require the delivery of oxygen contents.

The second change involves creating two separate classes (stationary contents only and portable contents only) and monthly payment rates for furnishing oxygen contents for beneficiary-owned stationary and portable systems. Currently, the combined average monthly payment amount of $156 for furnishing oxygen contents for beneficiary-owned stationary and portable systems includes payment for both stationary contents and portable contents. The current fee schedule amounts for oxygen contents are based on calendar year data from 1986 for the combined average Medicare monthly payment for both stationary and portable contents divided by number of rental months for stationary liquid and gaseous oxygen equipment. As a result, the current combined stationary/portable contents payment results in Medicare payments for portable contents even in those cases where the beneficiary does not use portable oxygen equipment. Under our proposal to create one payment class for oxygen contents used for stationary equipment, and a separate class for oxygen contents used for portable equipment, new national monthly payment amounts for stationary contents delivery and portable contents delivery would be established by splitting the combined payment of $156 into two new payments as explained below. This change would increase the monthly payment for furnishing portable oxygen contents and would address the concerns that the monthly payment rate of $21 is too low for the delivery and filling of portable tanks after the beneficiary assumes ownership of the equipment in accordance with the DRA.

In order to achieve budget neutrality for the new classes of oxygen and increase payment amounts for furnishing portable contents, we would need to reduce other Medicare oxygen payment rates. Budget neutrality would require that Medicare's total spending for all modalities of stationary and portable systems, including contents, be the same under the proposed change as they would be without the change.

We proposed to achieve budget neutrality by reducing the current monthly payment amounts (the stationary payment) for stationary oxygen equipment and oxygen contents (for stationary or portable equipment) made during the rental period. This reduction in payment is necessary to offset increased payments for the changes identified above and to meet the requirement in section 1834(a)(9)(D)(ii) that the classes and payments be established in a budget neutral fashion. In most cases, suppliers furnish Medicare beneficiaries with stationary oxygen concentrators. These devices can be purchased for $1,000 or less and the current, average Medicare payment of $199 pays suppliers $1,990 over 10 months. We believe that these facts indicate that making a reduction (from $199 on average to $177) in Medicare payment for this relatively inexpensive oxygen equipment in order to pay oxygen suppliers adequately for furnishing portable oxygen contents and more expensive portable oxygen equipment technologies is warranted. With this approach, the proposed new classes, as well as proposed new national monthly payment rates, would be as follows:

1. Stationary Payment: $177.

2. Portable Add-On: $32.

3. Oxygen Generating Portable Equipment Add-On (portable concentrators or transfilling systems): $64.

4. Stationary Contents Delivery: $101.

5. Portable Contents Delivery: $55.

We provide a detailed discussion of the payment rate calculations/adjustments in the paragraphs that follow. Under the proposed new oxygen and oxygen equipment class structure described above, in those cases where the beneficiary needs both stationary and portable oxygen, monthly payments of $241 or $209 (proposed revised stationary payment of $177 plus one of two proposed portable equipment payments, $32 or $64) would be made during rental months 1 through 36. The stationary payment (which includes payment for stationary equipment, as well as oxygen contents for stationary and portable systems) of $177 would be made during rental months 1 through 36 for beneficiaries who only need stationary oxygen and oxygen equipment. Monthly payments of $101 for stationary oxygen contents and/or $55 for portable oxygen contents would be made in cases where beneficiaries own their stationary and/or portable oxygen equipment. As explained in more detail in the paragraphs that follow, the $101 payment is for stationary oxygen contents only and is derived from the current payment of $156, which is made for both stationary and portable oxygen contents. The $55 payment for portable oxygen contents only is also derived from the current payment of $156 that is made for both stationary and portable oxygen contents and would replace the current statewide portable oxygen contents fees (average of $21), which was based on a relatively small number of claims and allowed services compared to the number of claims and allowed services that were used in computing the statewide fees (average of $156) for a combination of stationary and portable oxygen contents.

As noted above, the proposed national payment rates for delivery of oxygen contents for beneficiary-owned gaseous/liquid equipment were derived from the current average payment for a combined oxygen contents delivery of $156. We proposed to establish $101, or 65 percent of $156, as the monthly payment rate for delivery of larger, heavier, beneficiary-owned stationary gaseous oxygen cylinders or liquid oxygen vessels and $55, or 35 percent of $156, as the monthly payment rate for delivery of smaller, lighter, beneficiary-owned portable gaseous oxygen cylinders or liquid oxygen vessels. The 65/35 split is based on our understanding that there are higher costs associated with delivering stationary tanks (cylinders of gaseous oxygen and vessels of liquid oxygen) which are approximately twice as large as the portable tanks. Such costs include supplier overhead costs, including the costs to purchase, maintain, and dispatch trucks, obtain insurance, and purchase fuel. The 65/35 split is intended to account for the difference in costs associated with the size of the tanks. Larger tanks take up more space on the trucks, take longer to fill, are harder to move, and result in increased fuel costs.

We estimate that the increase from $21 to $55 in the monthly payment rate for delivery of oxygen contents for beneficiary-owned portable equipment will result in increased expenditures of approximately $22 million over a 24 month period, or $11 million annually. This figure is based on current data on utilization of portable oxygen by Medicare beneficiaries.

The add-on payment amount of $64 for the oxygen generating portable equipment class was calculated based on data indicating long term savings generated from use of equipment that eliminated the need for payment of $55 per month for portable oxygen contents. The first step in calculating the proposed $64 payment for oxygen generating portable equipment involves the computation of a national, enhanced, modality neutral monthly payment amount of $241 for new technology systems (stationary concentrators and transfilling systems, as well as portable concentrators), which was derived from the sum of the current average stationary payment ($199), the current average portable add-on payment ($32), and an additional $10 to pay suppliers for furnishing more expensive equipment that eliminates the need for delivery of portable oxygen contents. Specifically, we calculated the modality neutral increased payment (that is, $10 above the current combination of the stationary payment and portable add-on payment) by estimating potential savings that the Medicare program would realize as a result of not having to pay for delivery of oxygen contents for beneficiary-owned portable oxygen systems in the fourth and fifth years of use. We calculated the increased payment to be equal to potential savings from not delivering oxygen contents. In calculating this increased payment, we were only factoring in savings from the fourth and fifth years of use since we assume that most beneficiaries will elect to obtain replacement equipment after the 5-year reasonable useful lifetime for their equipment has expired. Since our data indicate that 35.8 percent of beneficiaries will use oxygen equipment for more than 3 years, and that approximately 74 percent of these beneficiaries use portable equipment, the $10 amount is calculated based on the following formula, and is rounded to the nearest dollar:

ER09NO06.000

We estimate that the additional $10 payment per month for oxygen generating portable equipment (transfilling units and portable concentrators) will result in increased expenditures of approximately $15 million over a 36 month period, or $5 million annually. This figure is based on current data on utilization of stationary and portable oxygen by Medicare beneficiaries over 36 months.

The second step in calculating the proposed $64 add-on payment for the proposed new class of oxygen generating portable equipment involves subtracting the proposed new stationary payment. Therefore, the national monthly payment of $241 computed in the first step above would be reduced by $177, the proposed new adjusted stationary payment amount, to arrive at the proposed add-on payment of $64 for just the oxygen generating portable equipment. In addition, to offset the increased annual payments of approximately $16 million that will result from increased payments for portable oxygen contents ($11 million) and newer technology oxygen generating portable equipment ($5 million), we proposed to decrease the current stationary payment by $22 ($199-$177). We estimated that this offset would result in annual Medicare savings of approximately $16 million, and would therefore offset the increased payments for new technology oxygen generating portable equipment and delivery of oxygen contents for other beneficiary-owned portable equipment. We proposed that these fees be established on a nationwide basis due to the fact that the variation in the current statewide fee schedule amounts for oxygen and oxygen equipment, as well as the portable equipment add-on payment, are currently only 3 percent and 5 percent, respectively.

We proposed that the $64 add-on payment would be made for oxygen generating portable equipment only if the equipment eliminates the need for delivery or portable oxygen contents. However, if transfilling equipment is used in connection with a stationary oxygen concentrator (whether as an integrated system component or as a separate part) to both deliver stationary oxygen and fill portable oxygen tanks, Medicare would make both a $177 stationary payment for the stationary oxygen concentrator and stationary oxygen contents, and a separate $64 oxygen generating portable equipment payment for the portable oxygen transfilling equipment.

There are also portable oxygen transfilling products that are not part of or used in conjunction with a stationary oxygen concentrator. These products are only used to fill portable oxygen tanks in the beneficiary's home. If the beneficiary is using one of these products, Medicare would make a $64 oxygen generating portable equipment payment. If the patient is also renting any type of stationary oxygen equipment (gaseous, liquid, or concentrator), Medicare would make a separate, additional $177 stationary equipment payment for that equipment.

If a portable oxygen concentrator is furnished, Medicare would make the $64 oxygen generating portable equipment add-on payment if the portable oxygen concentrator is used as both the beneficiary's stationary oxygen equipment and portable oxygen equipment. In this case, the portable oxygen concentrator equipment would fall under both the stationary oxygen equipment class and the oxygen generating portable equipment class. Therefore, the $177 stationary payment would also be made in this situation, since the equipment being furnished meets the beneficiary's needs for both stationary and portable oxygen equipment. In this case, it would be necessary for the supplier to use two HCPCS codes to bill for this device since it is being used as both the stationary and portable oxygen equipment for the beneficiary. If the beneficiary owns any type of stationary equipment (concentrator, liquid, or gaseous), and is also furnished with a portable oxygen concentrator, only the

oxygen generating payment of $64 would be made (that is, the supplier would not also receive the $177 payment) and the portable oxygen concentrator equipment would fall under the oxygen generating portable equipment class because it is only being used to meet the beneficiary's need for portable oxygen equipment. Finally, if, the beneficiary is renting any type of stationary equipment (concentrator, liquid, or gaseous), and is also furnished with a portable oxygen concentrator, the oxygen generating add-on payment of $64 would be paid for the portable oxygen concentrator and the stationary payment of $177 would be paid separately for the stationary oxygen equipment and contents.

In summary, we proposed new payment classes for oxygen contents for beneficiary-owned stationary equipment, oxygen contents for beneficiary-owned portable equipment, and oxygen generating portable equipment. Payments for oxygen contents for beneficiary-owned portable equipment and oxygen generating portable equipment would exceed what is currently paid for these items to ensure access to portable oxygen regardless of the type of equipment used. These increased payments would be offset by a reduction in the stationary payment. The six broad categories of oxygen equipment used by beneficiaries are as follows:

A. Concentrator and liquid or gaseous portable equipment.

B. Concentrator and/or oxygen generating portable equipment.

C. Liquid or gaseous stationary equipment and liquid or gaseous portable equipment.

D. Liquid or gaseous stationary equipment and oxygen generating portable equipment.

E. Concentrator only.

F. Liquid or gaseous stationary equipment only.

Based on our proposed new payment classes, Medicare payment under these six categories would be as follows:

Category

Equipment rental
and contents

Contents for beneficiary-owned equipment

A
$209 ($177 + $32)
$55

B
$241 ($177 + $64)
$0

C
$209 ($177 + $32)
$156 ($101 + $55)

D
$241 ($177 + $64)
$101

E
$177
$0

F
$177
$101

We proposed to revise our regulations in order to implement these new payment classes and payment amounts, effective for claims with dates of service on or after January 1, 2007.

J. Payment for Maintenance and Servicing of Oxygen and Oxygen Equipment and Capped Rental Items

Immediately following passage of the DRA, concerns were raised regarding the ability of a beneficiary to obtain maintenance and servicing of his or her DME once he or she has taken title to it. We believe that these concerns are largely based on misconceptions that the beneficiary will “be on his or her own” in terms of maintenance and servicing of equipment and submission of claims for payment for these services. We believe that these concerns are unfounded because Medicare payment has traditionally been made for reasonable and necessary repair and maintenance of beneficiary-owned DME. In addition, section 1834(a)(5)(F)(ii)(II)(bb) of the Act, as amended by section 5101(b)(1)(B) of the DRA, and Section 1834(a)(7)(A)(iv) of the Act, as amended by Section 5101(A)(1) of the DRA, require that Medicare continue to pay for reasonable and necessary maintenance and servicing for parts and labor not covered under a manufacturer's or supplier's warranty in amounts determined to be appropriate by the Secretary.

Medicare has also traditionally paid for loaner equipment used while the beneficiary's equipment is being repaired, or in some cases, when the beneficiary does not have access to the equipment (for example, in cases when a natural disaster such as a hurricane forces the beneficiary to be evacuated from his or her home). We proposed to continue Medicare payment for such loaner equipment.

We are not aware of instances where beneficiaries have encountered problems in finding suppliers to provide maintenance and servicing of beneficiary-owned DME. Section 414.210(e) of our regulations currently provides that reasonable and necessary charges for maintenance and servicing of DME are those charges made for parts and labor not otherwise covered under a manufacturer's or supplier's warranty. This definition has been applied in paying claims for maintenance and servicing of beneficiary-owned DME for several years, and the wording of this regulatory definition is parallel to that used in amended sections 1834(a)(7)(A)(iv) and (a)(5)(F)(ii)(II)(bb) of the Act in describing the “maintenance and servicing” payments that are permitted for capped rental DME and oxygen equipment after title has transferred to the beneficiary. We proposed to continue use of this existing regulatory definition to define “maintenance and servicing” in section 5101 of the DRA. We, however, also proposed to apply our existing policy of not covering certain routine maintenance or periodic servicing of purchased equipment, such as testing, cleaning, regulating, changing filters, and general inspection of beneficiary-owned DME that can be done by the beneficiary or caregiver, to beneficiary-owned oxygen equipment and to continue that policy for beneficiary-owned capped rental equipment. As specified in current program instructions at section 110.2.B of chapter 15 of the Medicare Benefit Policy Manual (Pub 100-02), “the owner [of the equipment] is expected to perform such routine maintenance rather than a retailer or some other person who charges the beneficiary.” We expect that the supplier, when transferring title to the equipment to the beneficiary, would also provide to the beneficiary any operating manuals published by the manufacturer which describe the servicing an owner may perform to properly maintain the equipment. We also believe that these owner manuals are commonly available at the various manufacturer Web sites. In addition, the Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) supplier standards at § 424.57(c)(12) require suppliers to provide the beneficiary with necessary information and instructions on how to use DME items safely and effectively. We believe that after receiving this information, and after becoming familiar with the equipment during the 13 or 36 month rental period, the beneficiary and/or caregiver should be very knowledgeable regarding the routine

maintenance required for the item. All non-routine maintenance of beneficiary-owned oxygen equipment and capped rental items which would need to be performed by authorized technicians would be covered as reasonable and necessary maintenance and servicing. Examples of the types of maintenance that would be covered are currently listed in program instructions at section 110.2.B of chapter 15 of the Medicare Benefit Policy Manual (Pub 100-02) and include “breaking down sealed components and performing tests which require specialized testing equipment not available to the beneficiary.”

We proposed that maintenance and servicing of beneficiary-owned oxygen equipment and capped rental items would be reasonable and necessary if it is non-routine maintenance and servicing necessary to make the equipment serviceable. Payment is currently made under the Medicare program for parts and labor associated with repairing beneficiary-owned DME. Medicare allowed payment amounts for replacement parts are currently paid based on the carrier's individual consideration of the item. With regard to replacement parts for beneficiary-owned oxygen equipment or capped rental equipment, we proposed that the carrier pay for the parts in a lump sum amount based on its consideration of the cost of the item, as is consistent with what our carriers currently do when evaluating maintenance and servicing claims for other beneficiary-owned DME. Currently, payment for labor is based on 15-minute increments in amounts that are established by the carriers and updated on an annual basis by the same factor specified in section 1834(a)(14) of the Act, which is used to update fee schedule amounts for DME. We proposed that the carriers use the same fee for labor that is currently used in paying for labor associated with repairing, maintaining, and servicing other beneficiary-owned DME, as we are not aware of any past problems associated with access to these services paid at these rates. We believe that the current methods and fees used by carriers in paying for maintenance and servicing of beneficiary-owned DME are reasonable given that we are not aware of any past problems associated with access to these services paid at these rates. In most cases, neither the Medicare program nor the beneficiary actually pays the full amount for repairing or maintaining an item since manufacturer warranties that cover all or part of these costs are widespread. For example, some manufacturers of commonly used oxygen concentrators offer full warranties that cover all parts and labor for 5 years. Rules in § 414.210(f) regarding replacement of DME that has been in continuous use for the equipment's reasonable useful lifetime provide that the beneficiary can elect to obtain replacement equipment after the reasonable useful lifetime for the equipment has expired. Therefore, we believe that the beneficiary should incur little, if any, expense for repair or maintenance of necessary equipment in cases where manufacturer warranties exist that cover parts and labor necessary to repair a new item during a 5-year period.

K. Payment for Replacement of Beneficiary-Owned Oxygen Equipment, Capped Rental Items, and Associated Supplies and Accessories

Medicare has traditionally paid for replacement beneficiary-owned DME after the expiration of the equipment's useful lifetime (see § 414.210(f) and § 414.229(g) of our regulations), and for replacement supplies and accessories used in conjunction with beneficiary-owned DME when these supplies and accessories are necessary for the effective use of the DME (see § 110.3 of Chapter 15 of the Medicare Benefit Policy Manual (pub. 100-02)). Examples of supplies include drugs and administration sets used with infusion pumps. Examples of accessories include masks and tubing used with respiratory equipment. We proposed to apply these policies to beneficiary-owned oxygen equipment, as well as the supplies and accessories used in conjunction with this equipment, and to continue to apply these policies to beneficiary-owned capped rental items, as well as the supplies and accessories used in conjunction with these items.

Specifically, we proposed to update § 414.210(f) and § 414.229(g) of our regulations to reflect that payment may be made for the replacement of beneficiary-owned oxygen equipment and capped rental DME in cases where the item is lost, stolen, or irreparably damaged, or in cases where the item has been in continuous use for its reasonable useful lifetime. We proposed that payment for the replacement be made on a rental basis in accordance with the payment rules in § 414.226 for oxygen equipment and § 414.229 for capped rental items. We also proposed to revise § 414.229 to reflect that these proposed changes to the replacement policy for beneficiary-owned capped rental items only apply to those items for which the first rental month occurs on or after January 1, 2007 since the DRA does not apply to capped rental items for which the first rental month occurs before January 1, 2006. The current rules will remain in place for capped rental items to which the DRA does not apply.

We are aware that some manufacturer warranties may cover replacement of oxygen or capped rental equipment within a certain time period after the item is furnished. As was our policy before the enactment of DRA (see § 110.2.C of Chapter 15 of the Medicare Benefit Policy Manual (pub. 100-02)), we proposed that Medicare not pay for the replacement of beneficiary-owned oxygen equipment or capped rental items covered by a manufacturer's or supplier's warranty. In cases where equipment replacement is not covered by a manufacturer's or supplier's warranty, we proposed that the supplier must still replace beneficiary-owned oxygen equipment or beneficiary-owned capped rental items at no cost to the beneficiary or to the Medicare program if: (1) The total accumulated costs, as illustrated in the example below, to repair the item after transfer of title to the beneficiary exceed 60 percent of the replacement cost; and (2) the item has been in continuous use for less than its reasonable useful lifetime, as established in accordance with the procedures set forth in proposed revised § 414.210(f). For example, a capped rental item that can be replaced for $1,000 (total of fee schedule payments after 13 rental months) and for which title has transferred to the beneficiary in accordance with section 1834(a)(7)(A)(ii) of the Act can be used to illustrate what we mean when we use the term “accumulated costs” above. In this example, if Medicare has paid a total of $500 for 3 repairs necessary to make the item functional, and a fourth repair costing $200 is needed in order to make the item functional, the accumulated costs for repair in this case will equal $700, which exceeds $600 or 60 percent of the $1,000 cost to replace the item. In this case, the supplier would be required to furnish a replacement item. The greater than 60 percent of cost threshold for replacement is consistent with the threshold repair costs that can result in the replacement of prosthetics (artificial limbs) in accordance with section 1834(h)(1)(G) of the Act. We believe this threshold should apply to oxygen equipment and capped rental items as well, because artificial limbs, like these items, are built to withstand repeated use.

We proposed that the supplier be responsible for the cost of the replacement equipment because we believe that the item in this case did not last for the entire reasonable useful

lifetime. After the beneficiary acquires title to the item, the supplier that transferred title would be responsible for furnishing the replacement item. We proposed this provision to safeguard the beneficiary from receiving, and the Medicare program from paying for, substandard equipment, and to avoid creating an incentive for suppliers to increase the number of claims submitted for repairs in an effort to recover revenue lost as a result of DRA section 5101. We believe that this requirement is not unreasonable since suppliers should be furnishing items in good working order and are otherwise bound by regulations at § 424.57(c)(15) to accept returns from beneficiaries of substandard items. Exceptions to this rule may be granted by CMS or the carrier as appropriate (for example, the supplier would not be responsible for replacing an item in need of repair due to beneficiary neglect or abuse).

L. Periods of Continuous Use

Rules that apply in determining a period of continuous use for rental of DME are found at § 414.230 of our regulations. We proposed that these rules would continue to apply in implementing section 5101 of the DRA, with one exception. The rules in § 414.230(f) provide that a new period of continuous use begins for new or additional equipment prescribed by a physician and found to be medically necessary, even if the new or additional equipment is similar to the old equipment.

Medicare payments for stationary and portable oxygen and oxygen equipment are currently modality neutral, which means that the same payment amounts apply to the different types of oxygen equipment furnished to Medicare beneficiaries. Since there is no distinction made between oxygen equipment modalities for payment purposes under the Medicare program, we do not believe that it is necessary or appropriate to begin a new period of continuous use when the beneficiary changes from one oxygen equipment modality to another. We proposed to revise § 414.230(f) of our regulations to designate the existing language in this section as paragraph (f)(1) and to add a new paragraph (f)(2) to reflect this exception, effective for oxygen equipment furnished on or after January 1, 2007. We also proposed to revise § 414.230(b) to incorporate section 5101(b)(2)(B) of the DRA, which provides that for all beneficiaries receiving oxygen equipment paid for under section 1834(a) on December 31, 2005, the period of continuous use begins on January 1, 2006.

M. Other Issues: Health Care Information Transparency, Health Information Technology, and Medicare Payment Structures

Both Medicare's payment structures and the actual delivery of post acute care have evolved significantly over the past decade. Before the BBA, HHAs and other post-acute settings such as inpatient rehabilitation facilities (IRFs) and skilled nursing facilities (SNFs) were paid on the basis of cost. Since that time, we have implemented various legislative mandates that established prospective payment systems in these settings. The PPS methodologies used in these settings rely on patient-level clinical information to provide pricing, support the provision of high quality services, and encourage the efficient delivery of care. CMS is exploring refinements to the existing provider-oriented “silos” to create a more seamless system for payment and delivery of post-acute care (PAC) under Medicare. This new model could feature more consistent payments for the same type of care across different sites of service, value based purchasing incentives, and the collection of uniform clinical assessment information to support quality and discharge planning functions.

CMS is considering a demonstration to determine whether incentive payments to HHAs impact improvements in the quality of care of Medicare beneficiaries.

Section 5008 of the Deficit Reduction Act of 2005 (DRA) provides for a demonstration on uniform assessment and data collection across different sites of service. This 3-year demonstration project is to be established by January 1, 2008. We are in the early stages of developing a standard, comprehensive assessment instrument to be completed at hospital discharge and ultimately integrated with PAC assessments. The demonstration will enable us to test the usefulness of this instrument, and analyze cost and outcomes across different PAC sites. The lessons learned from this demonstration will inform efforts to improve the post-acute payment systems.

We have evaluated the existing assessment instruments that managed care and other insurers use. These instruments will form the basis of our efforts to create a discharge assessment tool that can serve to facilitate post-hospital placement decisions; enhance the safety and quality of care during patient transfers through transmission of core information to a receiving provider; and provide baseline information for longitudinal follow-up of health and function.

In the April 25, 2006 Inpatient Prospective Payment System proposed rule (71 FR 23996), we discussed in detail the Health Care Information Transparency Initiative and our efforts to promote effective use of Health Information Technology (HIT) as a means to help improve health care quality and improve efficiency. Specifically, with regard to the transparency initiative, we discussed several potential options for making pricing and quality information available to the public (71 FR 24120 through 24121)

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A06-9068. Public record. Not legal advice.