Medicare Program; Special Payment Limits for Home Oxygen

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

[BPD-845-PN]

RIN 0938-AH28

Medicare Program; Special Payment Limits for Home Oxygen

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

ACTION: Proposed notice.

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SUMMARY: This notice would establish special payment limits for home

oxygen. Currently, payment under the Medicare program for home oxygen

and other items of durable medical equipment is equal to 80 percent of

the lesser of the actual charge for the item or the fee schedule amount

for the item. Based on our experience and after consulting with

representatives of home oxygen suppliers, we have determined that the

Medicare fee schedule amounts for home oxygen are grossly excessive and

are not inherently reasonable because they are excessively high

relative to the payment amount for similar services by the Department

of Veterans Affairs which uses a true competitive payment methodology.

This notice would replace the use of the fee schedule amount and

proposes that payment for home oxygen be equal to 80 percent of the

lesser of the actual charge or a special payment limit set by HCFA,

which would vary by locality. It is intended to prevent continuation of

excessive payment. The special limit would be based on the average

payment amount for home oxygen services by the Department of Veterans

Affairs.

DATES: Comments will be considered if we receive them at the

appropriate address, as provided below, by 5 p.m. on September 15,

1997.

ADDRESSES: Mail written comments (1 original and 3 copies) to the

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: BPD-845-PN, P.O. Box 26676,

Baltimore, MD 21207-0476.

If you prefer, you may deliver your written comments (1 original

and 3 copies) to one of the following addresses: Room 309-G, Hubert H.

Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201,

or Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.

Because of staffing and resource limitations, we cannot accept

comments by facsimile (FAX) transmission. In commenting, please refer

to file code BPD-845-PN. Comments received timely will be available for

public inspection as they are received, generally beginning

approximately 3 weeks after publication of a document, in Room 309-G of

the Department's offices at 200 Independence Avenue, SW., Washington,

DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.

(phone: (202) 690-7890).

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FOR FURTHER INFORMATION CONTACT: William J. Long (410) 786-5655.

SUPPLEMENTARY INFORMATION:

I. Background

A. Payment Under Reasonable Charges

Payment for durable medical equipment (DME) furnished under Part B

of the Medicare program (Supplementary Medical Insurance) is made

through contractors known as Medicare carriers. Before January 1, 1989,

payment for DME was made on a reasonable charge basis by these

carriers. The methodology used by the carriers to establish reasonable

charges is set forth in sections 1833 and 1842(b) of the Social

Security Act (the Act) and 42 CFR part 405, subpart E of our

regulations. Reasonable charge determinations are generally based on

customary and prevailing charges derived from historic charge data. The

reasonable charge for an item of DME was generally set at the lowest of

the following factors--

The supplier's actual charge for the item.

The supplier's customary charge.

The prevailing charge in the locality for the item. (The

prevailing charge may not exceed the 75th percentile of the customary

charges of suppliers in the locality.)

The inflation indexed charge (IIC). (The IIC is defined in

Sec. 405.509(a) as the lowest of the fee screens used to determine

reasonable charges for services, supplies, and equipment paid on a

reasonable charge basis (excluding physician services) that is in

effect on December 31st of the previous fee screen year, updated by the

inflation adjustment factor.)

B. Exception to the Reasonable Charge Payment Methodology--Special

Reasonable Charge Limits

Section 1842(b)(3) of the Act requires that payments under Part B

of the Medicare program that are made on a charge basis must be

reasonable. Paragraphs (8) and (9) of section 1842(b) provide that we

may establish a special reasonable charge for a category of service if,

after appropriate consultation with representatives of affected

parties, we determine that the standard rules for calculating

reasonable charges result in grossly deficient or grossly excessive

charges.

The applicable regulations are located at Sec. 405.502(g) and

require us to consider the available information that is relevant to

the category of service and establish reasonable charge limits that are

realistic and equitable. The limit on the reasonable charge is an upper

limit to correct a grossly excessive charge or a lower limit to correct

a grossly

[[Page 38101]]

deficient charge. The limit is either a specific dollar amount or is

based on a special method to be used in determining the reasonable

charge.

Section 405.502(g)(1) provides the following examples of

circumstances that may result in grossly deficient or excessive

charges--

The marketplace is not competitive.

Medicare and Medicaid are the sole or primary source of

payment for a service.

The charges involve the use of new technology for which an

extensive charge history does not exist.

The charges do not reflect changing technology, increased

facility with that technology, or changes in acquisition, production,

or supplier costs.

The prevailing charges for a service in a particular

locality are substantially higher or lower than prevailing charges in

other comparable localities, taking into account the relative costs of

furnishing the services in the different localities.

Charges are grossly lower than or exceed acquisition or

production costs.

There have been increases in charges for a service that

cannot be explained by inflation or technology.

The prevailing charges for a service are substantially

higher or lower than the payments made for the service by other

purchasers in the same locality.

Section 405.502(g)(3) requires that we publish proposed payment

limits in the Federal Register. We then allow 60 days for receipt of

public comments on the proposal. After we have considered all timely

comments, we publish in the Federal Register a final notice announcing

the special payment limits and our analyses and responses to the

comments. Section 405.502(g)(3) also provides that the proposed and

final notices must set forth the criteria and circumstances, if any,

under which a carrier may grant an exception to the limit(s).

C. Durable Medical Equipment Fee Schedules

On December 22, 1987, the Congress passed section 4062 of the

Omnibus Budget Reconciliation Act of 1987, Public Law 100-203, which

added section 1834(a) to the Act. Section 1834(a) provides for a fee

schedule payment methodology for DME furnished on or after January 1,

1989. Section 4152(h) of the Omnibus Budget Reconciliation Act of 1990,

Public Law 101-508, delayed the effective date of the oxygen fee

schedule payment methodology until June 1, 1989. (This fee schedule

payment methodology is set forth in 42 CFR part 414, subpart D.)

Sections 1834(a)(1)(A) and (B) of the Act provide that Medicare payment

for DME is equal to 80 percent of the lesser of the actual charge for

the item or the fee schedule amount for the item. Section 1834(a) of

the Act classifies DME into the following payment categories:

Inexpensive or other routinely purchased DME.

Items requiring frequent and substantial servicing.

Customized items.

Oxygen and oxygen equipment.

Other items of DME (capped rental items).

There is a separate methodology for determining the fee schedule

payment amount for each category of DME and the fee schedules are

adjusted annually by a covered item update factor. The covered item

update factor is generally equal to the change in the Consumer Price

Index for all Urban Consumers (CPI-U) for the 12-month period ending

June 30 of the preceding year.

Section 1834(a)(10)(B) of the Act provides that we may apply the

special payment limits authority of paragraphs (8) and (9) of section

1842(b) to covered items of DME and suppliers of these items and

payments under section 1834(a) in the same manner as these provisions

apply to physician services and physician and reasonable charges under

section 1842(b).

D. Current Payment for Home Oxygen

Home oxygen is covered by the Medicare program as DME and is paid

for in accordance with the methodology specified in the oxygen and

oxygen equipment payment category. This methodology is contained in

sections 1834(a)(5) and (9) of the Act. Section 1834(a)(5) requires

that payment for oxygen and oxygen equipment be on a monthly basis. An

add-on for portable oxygen equipment is provided under this section as

well as a 50 percent increase in payments when the prescribed liter

flow is greater than 4 liters of oxygen per minute or a 50 percent

decrease in payments when the prescribed liter flow is less than 1

liter of oxygen per minute.

Section 1834(a)(9)(A) specifies how the monthly payment amount is

computed. Section 1834(a)(9)(A) requires that each Medicare carrier

compute a base local average monthly payment rate per beneficiary as an

amount equal to the total reasonable charges for all items of oxygen

and oxygen equipment (other than portable oxygen equipment) divided by

the total number of months for all beneficiaries receiving oxygen

during 1986. For 1989 and 1990, the base local average monthly payment

rate was equal to 95 percent of the base local average monthly payment

rate increased by the percentage increase in the CPI-U for the six-

month period ending with December 1987. For subsequent years, the

payment rate is increased by the covered item update, generally the

percentage increase in the CPI-U for the 12-month period ending with

June of the previous year.

In addition, section 1834(a)(9)(B) requires the computation of a

national limited monthly payment rate beginning in 1991. The national

limited monthly payment rate is defined as an amount not to exceed 100

percent of the median of all local monthly payment rates computed for

the item or less than 85 percent of the median.

Regulations implementing the statutory provisions of sections

1834(a)(9)(A) and (a)(9)(B) are contained in 42 CFR 414.226.

Currently, there are three types of oxygen delivery systems: gas,

liquid, and concentrators. As a result of the fee schedule methodology,

Medicare pays for home oxygen without regard to the type of system. The

fee schedule amounts are based on an average of the amounts paid for

all three types of oxygen delivery systems during the 1986 base period.

A major expectation under this modality neutral payment methodology was

that suppliers would be able to furnish the most cost effective and

medically appropriate system to their patients.

The current fee schedule amounts for home oxygen are a result of

the fee schedule methodology as specified in sections 1834(a)(5) and

(9) of the Act and Sec. 414.226 as discussed above.

Since the enactment of section 1834(a)(5), we have not utilized the

special reasonable charge limits located at Sec. 405.502(g) to

determine whether the standard fee schedule payment rules for oxygen

result in grossly deficient or excessive charges. However, as explained

below, we are proposing to reduce Medicare's payment amounts for home

oxygen because Medicare's payment amounts for oxygen are substantially

higher than the payments made by another purchaser in the same

locality.

E. Comparison With the Department of Veterans Affairs

The Department of Veterans Affairs (VA) also administers a national

program for the furnishing of oxygen to patients at home. The VA is

different from Medicare and most other payers in that it uses a

competitive bidding methodology for making payment, whereas Medicare

carriers use historical charge data to establish a base local average

monthly payment per

[[Page 38102]]

beneficiary that is used to determine a national limited monthly

payment rate.

The primary objective of a competitive bidding methodology is to

utilize competitive market forces in order to establish a payment

amount that is closer to suppliers' marginal costs of doing business

including a fair profit amount. Under competitive bidding, suppliers

are required to specify in advance the minimum price they will accept

for each product of service, and low bidders are awarded contracts on

either an exclusive or non-exclusive basis to provide these items to

program clients. In that bidders are in competition with one another,

each bidder's bid is likely to reflect its true costs plus a reasonable

rate of profit, because unrealistically high bid prices would ensure a

bidder's exclusion from a particular segment of the market and

unrealistically lower bids would result in reimbursement rates that are

below costs. Therefore, we conclude that a competitive bidding

methodology results in a bid that reflects a supplier's true costs plus

a reasonable profit. In contrast, suppliers do not reveal their true

costs to Medicare because Medicare reimbursement rates for oxygen

reflect a ``reasonable charge'' methodology driven by supplier charges

and then a modality neutral fee schedule derived from charges in a base

year. These payment rates are likely, over time, to have little, if

any, relationship to suppliers' costs.

No other payment methodology that we reviewed takes full advantage

of competitive market forces to the extent of the competitive bidding

methodology. Only in a competitive environment can buyers take full

advantage of the sellers' marginal costs of doing business in that the

potential for lost business is brought to bear on those suppliers whose

prices exceed their competitors' prices. The lowest bid is the best

indicator of the actual costs of supplying the product by an efficient

supplier, plus a reasonable profit. Thus, we believe that the VA's

competitive bidding payment methodology produces a payment amount that

takes advantage of true competitive forces and, therefore, is a better

measure upon which to compare current Medicare payment amounts.

Economic analyses of Medicare reimbursement arrangements have been

undertaken for a variety of health care providers and suppliers over

the past two decades. A principal motivation in these analyses is to

understand how reimbursement arrangements affect the price taxpayers

pay for the purchased good or service. In its 1990 ``Review of

Reimbursement Methods of Other Payers for Durable Medical Equipment,''

Abt Associates Inc., found ample evidence that competitive bidding

encourages suppliers to bid prices closer to their true costs while

Medicare's reimbursement methods offer no such incentives to suppliers.

Abt found that competitive bidding programs for oxygen concentrators at

VA Medical Centers obtained reimbursement levels as much as 70 percent

lower than Medicare. A similar procurement program for concentrators in

the Utah Medicaid program obtained a monthly rental price that was 42

percent below the average Medicare prices in the State for the 1986 to

1988 period. The Minnesota Medicaid program obtained a monthly rental

price for concentrators that was 60 percent below the Medicare prices

in the State for this same three-year period.

An examination of the payment outcomes produced by the Medicare

payment methodology and the reimbursement mechanisms for oxygen

concentrators in Utah and Minnesota indicates that while starting at a

lower level than Medicare, the competitive Medicaid payment levels

decreased from the mid- to late-1980's, while the corresponding

Medicare prices increased over the same period. We believe that the

differences in both the absolute amounts of these prices and the

opposing direction of price changes over time, demonstrate the inherent

inability of Medicare's formulaic, historical, charge-based

reimbursement methodology (whether fee schedule or reasonable charge)

to accurately reflect the true costs of suppliers in the home oxygen

market.

In its yearly home oxygen program report ``National Home Oxygen

Program, FY94 Cost Review'', the VA indicated that the weighted average

payment amount for oxygen concentrators is $125.96 per month. The VA

reports that this amount includes the costs of the portable/back-up

system and refills. In contrast, Medicare pays an average monthly

payment amount of approximately $280 for a stationary oxygen system

(including contents), regardless of the type of oxygen system, plus an

average of $45 per month for a portable system, for a total of $325 per

month. Thus Medicare is paying 2.6 times as much as the VA for an

oxygen concentrator plus portable system and portable refills.

II. Provisions of This Proposed Notice

Based on our experience and after consulting with representatives

of home oxygen suppliers, we have determined that the Medicare fee

schedule payment amounts for home oxygen are not inherently reasonable

because they are grossly excessive relative to the payment amount for

similar services by the VA which uses a true competitive payment

methodology. In accordance with section 1842(b)(8) of the Act, we are

proposing to replace the use of the current fee schedule payment with

special payment limits for home oxygen.

A. Special Payment Limits for Home Oxygen

For home oxygen services furnished to Medicare beneficiaries, we

propose a special payment limit.

The national limited monthly payment rate for stationary home

oxygen services for 1994 would be reduced by 40.11 percent, then

updated by the covered item update for years subsequent to 1994.

Similarly, the 1994 local stationary fee schedule amount for Alaska,

Hawaii, Puerto Rico, and the U.S. Virgin Islands, would be reduced by

40.11 percent, then updated by the covered item update for years

subsequent to 1994.

We arrived at the 40.11 percent adjustment by comparing what

Medicare would have paid for oxygen services in 1994 had it paid the

1994 VA weighted average payment amount for concentrators plus a 30

percent differential ($37.79). Using the VA weighted average of $125.96

for oxygen concentrators plus portable system, plus a 30 percent

differential (i.e., $125.96 + $37.79 = $163.75) instead of Medicare's

average payment amounts for a concentrator, i.e., approximately $325,

would yield a reduction of 40.11 percent in annual costs of stationary

oxygen.

The following chart illustrates this computation. Column B contains

Medicare expenditures for home oxygen by type of oxygen system. We

assumed the ratio of expenditures for portable equipment would be the

same as the ratio of patients using portable equipment, that is, 82.4

percent for concentrators, 16 percent for liquid, and 1.6 percent for

gas. We applied these ratios to total expenditures for portable

equipment, that is, $143 million. Similarly, column C contains the

number of Medicare beneficiary months by type of oxygen system.

Medicare's oxygen concentrator expenditures for 1994 would have been

$617,274,286, as reflected in column E, rather than the actual

$1,210,578,776 had the payment rate calculations been based on VA's

weighted average payment amount for concentrator plus portable systems

(i.e., $125.96) plus a 30 percent differential (i.e., $163.75).

Medicare's total expenditures for home oxygen for 1994 would have

been

[[Page 38103]]

$885,858,597 rather than the $1,479,163,088 had payment been based on

the VA's payment amount for home oxygen plus a 30 percent differential.

Thus, Medicare would have saved $593,304,490 (i.e., $1,479,163,088 less

$885,858,597) or 40.11 percent.

We would point out that this proposed adjustment does not apply to

Medicare's portable add-on even though such adjustment would be

justified in that the VA payment amounts for concentrators include

payment for portable oxygen equipment. We estimate that application of

this proposed adjustment to portable equipment would generate an

additional savings of 4 percent. We specifically solicit comments on

applying the adjustment to portable equipment.

We would also point out that the 40.11 percent reduction could be

further reduced since it does not take into account that the VA also

pays less for gas and liquid equipment and contents than Medicare.

Recomputation of Medicare Oxygen Expenditures

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1994

1994 Expenditures

Expenditures for Based on Revised

Oxygen 1994 Number of Revised Average 1994 VA Concent.

Type of Stationary Oxygen System (Stationary and Beneficiary Monthly Payment Pricing (C X D)

Contents and Months Source 1 Amount Source 2 for

Portable) Source Concentrators B

1 for Liquid and

Gas

A B C D E

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Total............................... 1,479,163,088 4,559,200 ................ 885,858,597

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Concentrators........................... 1,210,578,776 3,769,660 163.75 617,274,286

Liquid.................................. 249,994,932 728,900 ................ 249,994,932

Gas..................................... 18,589,379 60,640 ................ 18,589,379

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Inherent Reasonableness Adjustment

1994 Total Expenditures = (B)..................... 1,479,163,088

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Minus Total 1994 Expenditures Based on VA Concentrator

Prices = (E)......................................... 885,858,597

Amount That Would Have Reduced Total Expenditures had

Expenditures Been Based on VA Prices = (B--E)........ 593,304,490

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Result: Reduce 1994 Oxygen Fees By (40.11%)........... 593,304,490/B

Source 1: from 1994 HCFA data files

Source 2: based on weighted average VA monthly rental payment for

concentrators + 30 percent.

This formula recognizes that suppliers' costs of doing business

with Medicare are somewhat higher than the VA. The VA, by its very

nature is a provider as well as a payer of services. The VA's dual role

has resulted in a series of administrative features which reduces the

supplier's costs. In addition, the VA preauthorizes all services before

they are provided to patients thus effectively removing the need for

suppliers to add a cost factor for uncollectible services or bad debts.

Given that Medicare is a payer and not a provider of services, and

given the size and geographic distribution of Medicare's beneficiary

population, it would be difficult to duplicate these administrative

features for the Medicare program. Therefore, in the absence of such

features, some of the cost differences between Medicare and the VA

payments for oxygen can be explained by the higher costs of doing

business with Medicare. Another factor, less easy to quantify, is the

industry's assertion that an exact comparison of the VA's payment

allowances with Medicare's allowances is inappropriate because of the

dynamics of the oxygen marketplace. An economist described in some

detail the potential for a situation in which an industry may sell the

yield of excess capacity in a smaller market for less than the price at

which it could afford to sell the product to a larger market if the

demand were great enough to require additional manufacturing capacity.

This argument rests on the contention that the VA's consumption of

oxygen is so small in comparison to Medicare's that the industry's

pricing reflects the marginal value of excess productivity, not the

full cost of basic production. We also tentatively accept this argument

and have also made allowance for it since sections 1842(b)(8) and

(b)(9) require that a special payment limit be realistic and equitable.

The 30 percent differential is designed to be a proxy for these

costs and other factors identified and unidentified, that may affect

the differences between the prices the VA pays for oxygen and the

prices HCFA pays.

We arrived at the differential by taking account of factors

explicitly known to us and then by doubling the resultant estimate to

assure that we have more than offset the effect of estimating errors

and omissions.

We would note that the industry itself has previously indicated, in

writing, that there is a 15 percent cost disadvantage attributable to

furnishing oxygen services to Medicare beneficiaries as compared with

the VA. We are tentatively accepting the industry's finding and have

included this amount as part of the 30 percent cost differential.

We would expect this differential to be sustained only if the

comments we receive on this notice provide the necessary documentation

and support for the contentions that underlie it. In this connection,

we believe there is a real burden on the industry to provide

documentation to support these contentions. We would note that the

industry's only written contention--that the differential is 15

percent--would have led us to recommend a 45 percent reduction in the

price of stationary oxygen. Thus, we are particularly interested in

receiving comments and further data relating to the factors that

underlie the cost differential and the values assigned to them.

Commentors are encouraged to submit verifiable data.

We are also interested in receiving comments regarding the

implementation of this payment reduction. We realize that a 40.11

percent reduction in payment allowances for oxygen is significant. For

this reason, we would consider alternative implementation

methodologies, such as phasing in the 40.11 percent reduction over a

period of time.

B. Applicability

The initial special payment limits we propose would apply to home

oxygen furnished on or after the effective date of the published final

notice and before January 1, 1998. For home oxygen furnished in

calendar year 1997, the

[[Page 38104]]

special payment limits would be equal to the initial special payment

limits increased by the 1995, 1996, and 1997 covered item update

factors (the factor used to update other items of DME). The covered

item update for 1995, 1996, 1997, and each subsequent year, is defined

in section 1834(a)(14)(B) of the Act as the percentage increase in the

consumer price index-urban for the 12-month period ending with June of

the previous year. The covered item update factor for 1995, 1996, and

1997 is 2.5, 3.0, and 2.8 percent respectively. For each calendar year

after 1997, the special payment limits would be equal to the special

payment limits for the preceding calendar year increased by the covered

item update for the calendar year to which the limits would apply.

C. Proposed Payment for Home Oxygen

We propose that payment for a stationary home oxygen system, which

includes the oxygen delivery device and all supplies and accessories as

well as the contents for the portable system, equal 80 percent of the

lesser of the actual charge for the system or the appropriate special

payment limit, as described in section A. above.

D. Carrier-Granted Exceptions

We are not proposing any circumstances under which a carrier may

grant an exception to the application of the proposed special payment

limit. We solicit comments on any circumstances where such an exception

should be granted.

III. Other Provisions Considered Under This Proposed Notice

In developing this proposed notice, we also considered a number of

other factors and met with industry representatives. These other

factors as well as the industry representatives' major comments are

discussed below.

A. Technological Changes

Although we did not directly rely on technological changes to

determine either that our payments are grossly excessive or that our

proposed special payment limit is realistic and equitable, we did rely

on information regarding technological changes to conclude that

reliance on the VA's competitive bidding methodology was appropriate as

a basis of comparison with Medicare payments.

Under the modality neutral oxygen payment methodology that went

into effect in 1989, suppliers have greatly reduced their operating

costs by taking advantage of less costly means of oxygen delivery.

Suppliers have increased their use of less costly oxygen concentrators

and reduced their use of the more costly gas and liquid systems. The

Office of Inspector General's report ``Trends in Home Oxygen Use''

(OEI-03-91-00710), dated August 1991, found that oxygen concentrator

usage has increased since 1986, both in absolute terms and as a

percentage of total services for all types of systems. According to the

report, from 1986 to 1988 oxygen concentrator usage increased, while

gaseous system usage decreased and liquid system usage remained

constant. In 1986, the number of Medicare patients using oxygen

concentrators was 66 percent. By 1989, 78 percent of all Medicare

patients were using oxygen concentrators.

HCFA data for the period 1987 to 1994 indicates that Medicare

patients using concentrators increased from 68 percent to 82.7 percent.

The VA indicates that 80 percent of their patients used

concentrators in 1994.

Oxygen concentrators produce oxygen for patients by removing

impurities from room air, for example, nitrogen. Patients receive

oxygen from tubing attached to these concentrator machines. Unlike

compressed gas and liquid oxygen, which must be replaced or filled on a

regular basis, concentrators require no contents. Suppliers favor these

devices for home use of oxygen due to the decreased costs associated

with not having to make costly oxygen deliveries to the patient's home.

A 1993 study by ECRI, a nonprofit, healthcare research institute

located in Pennsylvania that evaluates the safety, performance, and

cost effectiveness of healthcare technology, found that suppliers chose

to maximize their profits and minimize the need for ongoing support by

providing oxygen concentrators to patients. ECRI pointed out in

testimony before the Senate Appropriations Subcommittee on Labor,

Health and Human Services on November 2, 1994, that it found that

suppliers are excessively reimbursed for oxygen services. ECRI

testified: ``The acquisition cost of oxygen concentrators, as reported

by the manufacturers to us in 1993, ranged from $965 to $1,175 for

units with a 5-liter per minute capacity.''

With regard to maintenance requirements of oxygen concentrators,

ECRI testified: ``They have, for all practical purposes, an unlimited

service life as all components may be replaced. We have estimated the

service frequency of the components through review of the service

manuals and interviews with service centers and DME providers.'' ECRI

goes on to estimate that the total annual cost for the maintenance of a

concentrator is $405.

Assuming an oxygen concentrator has a useful life of 5 years, an

oxygen supplier's equipment cost per month would be about $17 (i.e.,

$1,000 / 60 months) and another $34 in cost for maintenance (i.e., $405

/ 12 months) for a total cost of $51 per month to the supplier.

Another technological improvement in the provision of oxygen

services is the use of oxygen conserving devices. These devices, which

conserve oxygen when the patient is not inhaling, can reduce the amount

of oxygen normally consumed by up to 50 percent. We are unsure of the

extent to which these devices are used with oxygen equipment and

specifically request comments concerning the frequency with which these

devices are used.

By taking into account the increased use of less costly oxygen

concentrators by suppliers since the base year (i.e., 1986), we

estimate that suppliers are incurring 6.8 percent less in costs than

they would have if this increase had not taken place. We determined

this percentage decrease by computing the increased use of less costly

oxygen concentrators and applied the applicable charge for the less

costly concentrators to the increase in utilization of these systems.

We presented our analysis of the increased use of concentrators to the

industry representatives. Their comments and our responses are

discussed in C. below.

B. Payments Made by Other Purchasers

Similarly, we did not directly rely on payments made by other

purchasers to determine either that our payments are grossly excessive

or that our proposed special payment limit is realistic and equitable.

However, we did rely on such information to conclude that reliance on

the VA's competitive bidding methodology was appropriate as a basis of

comparison with Medicare payments.

Early this year, we requested payment data from other insurers to

compare Medicare's payment amounts. In most instances, the payment

amounts of other insurers are the same as or more than Medicare's

payment amounts. The reason for the payment similarities is that many

insurers use Medicare's current fee schedule payment methodology or its

previous reasonable charge methodology. In either case, the resulting

payment allowances are very near Medicare's current fees. This finding

does not necessarily indicate that Medicare's allowances are not

grossly excessive. The other insurers' payment allowances may also be

grossly

[[Page 38105]]

excessive. In other words, if Medicare's allowances are excessive using

a fee schedule or reasonable charge methodology, and other insurers use

the same or a similar methodology, then the other insurers' allowances

will also be excessive. It appears from the data of the other insurers

that Medicare is a model for other insurers when it comes to making

payment for home oxygen and that most other insurers duplicate

Medicare's payment methodology resulting in very similar payment

amounts.

Also, a number of Medicaid insurers, such as New York, Ohio, and

Minnesota pay significantly less for home oxygen than Medicare. All of

these States pay less than $200 per month for a stationary oxygen

system while the 1995 Medicare payment in each of these States is $308,

$308, and $262 per month respectively. This indicates to us that there

are a number of payers, typically those that use a different payment

methodology or base period other than Medicare's, that are paying

significantly less than Medicare yet attract a sufficient number of

suppliers to furnish home oxygen to their insured beneficiaries. This

further indicates to us that in at least these three States, the

Medicare payment amounts for home oxygen are grossly excessive in

comparison with these States' payment amounts.

However, because of the mixed reporting by insurers other than the

VA, we are unable to reach any definitive conclusions regarding the

reasonableness of Medicare's payments on a national basis with respect

to other payers other than the VA. We specifically solicit comments

with regard to payments by other insurers. We would point out that a

comparison to many insurers may be inappropriate due to the other

insurers' heavy reliance on Medicare's payment methodology. As such, a

comparison would merely mirror Medicare's payment amounts. We would

also point out, however, that some States pay significantly less than

what Medicare pays for the same service yet are able to attract a

sufficient number of suppliers to provide oxygen services. In

particular, the VA pays significantly less for home oxygen than does

Medicare and manages to attract a sufficient number of suppliers to

provide its patients with home oxygen.

Of the States responding to our request for payment data, 22 use a

fee schedule similar to Medicare's fee schedule. Two others use a

reasonable charge methodology and another State reports using a cost

methodology. Of the remaining States, three use a negotiated rate

methodology, two use a competitive bidding methodology, and a single

State pays based on a percent of the submitted charge.

C. Supplier Consultation

Section 1842(b)(9)(A) of the Act requires that we consult with

representatives of the suppliers likely to be affected by any change in

payment before making a determination that a fee schedule amount is not

inherently reasonable by reason of its grossly excessive or deficient

amount.

Over the past two and one half years, we had numerous discussions

with supplier representatives concerning Medicare payment amounts for

home oxygen services. We met with industry representatives to discuss

the use of VA data for purposes of comparing the VA payment amounts

with Medicare's payment amounts. On August 30, 1995, we held a public

meeting with supplier representatives to formally discuss issues

relating to Medicare payment for home oxygen. Since the August 30th

meeting, we had several rounds of discussions with industry

representatives. After publication of this proposed notice, we expect

to receive additional comments that will be considered in making a

determination regarding whether our payment amounts for home oxygen are

inherently reasonable. The following is a synopsis of the comments and

concerns of the supplier representatives as expressed at and since the

August 30th meeting.

The supplier representatives wanted to know if, after studying our

findings, they could submit additional comments. We indicated that we

would consider any comments they chose to submit from and including the

August 30th meeting until the end of the 60-day comment period. The

major comments we received are included in the discussion below. All

comments received during the 60-day comment period will be discussed in

a final notice. Moreover, we may elect to engage in further

consultation with industry representatives if the comments we receive

make such further consultation necessary or appropriate.

Some supplier representatives expressed concern with the data we

used in estimating that suppliers are incurring 6.8 percent less in

costs than they would have incurred had they not taken advantage of

less costly oxygen delivery systems. We indicated that we would share

these data with them and did meet with selected supplier

representatives on September 8, 1995 to review these data.

Some supplier representatives asserted that suppliers of oxygen

equipment are using more costly liquid oxygen systems as a percentage

of all oxygen systems than they were using during the base period and

that more patients are using portable systems than were used during the

base period. We agree with the supplier representatives that suppliers

of oxygen equipment are using more costly liquid oxygen systems than

used during the base period, however, since it is impossible to

ascertain from our data the amount of oxygen being used in portable

oxygen systems or to ascertain the extent of patients utilizing oxygen

conserving devices, we are unable to either validate or challenge the

supplier representatives' assertions at this time. Therefore, until we

are able to obtain sufficient data to address these assertions, we will

not use data that indicates that suppliers are using less costly oxygen

delivery systems in the inherent reasonableness process.

Some supplier representatives have challenged the VA data

indicating that we should conduct an independent recalculation and

verification of the VA data. We do not believe it would be appropriate

for us to conduct a recalculation and verification of a VA report. We

have discussed with the VA the information contained in its report on a

number of occasions. The VA indicated confidence in its report and we

have no evidence upon which to question either the VA's integrity or

the accuracy of its fundamental calculations.

In its FY 1994 report, which is used for analysis and decision

making in this notice, the developers of the report have included all

commercial costs for all facilities. In response to suggestions from

the oxygen industry and others, the VA's National Center for Cost

Containment worked closely with these facilities in the development and

reporting of data to assure the accuracy of these cost figures.

Therefore, the FY 1994 Cost Review represents an exacting effort to

gather accurate cost information from the 164 facilities that have home

oxygen programs. An improvement over previous year's analysis is the

development of ``weighted averages'' for each of the monthly average

costs per patient modality. This has provided for a more meaningful

comparison with Medicare data as well as an overview of the VA Home

Oxygen Program nationally, because weighted averages account for the

extreme variances in costs for a small number of facilities.

Some supplier representatives indicated that they believe that we

have been indiscriminately and inappropriately selective in our choice

of the VA program as the sole comparative payor to Medicare and that

[[Page 38106]]

we have ignored information solicited from other payers. We have

addressed this issue above indicating that the mixed reporting by these

other insurers did not furnish any conclusive information regarding the

reasonableness of Medicare's payments on a national basis. We would

point out that a comparison to many insurers may be inappropriate due

to the other insurers' heavy reliance on Medicare's payment

methodology. As such, a comparison would merely mirror Medicare's

payment amounts. We would also point out, however, that some States pay

significantly less than what Medicare pays for the same service yet are

able to attract a sufficient number of suppliers to provide oxygen

services. In particular, the VA pays significantly less for home oxygen

than does Medicare and manages to attract a sufficient number of

suppliers to provide its patients with home oxygen.

Some supplier representatives indicated that they believe that the

VA payment amount is ``unbundled,'' that is, it represents only the

cost of the oxygen concentrator and not the oxygen contents of a

portable system, accessories used with the concentrator, set-up and

delivery charges, etc. However, the VA report states: ``This year's

figures include costs for all components of the modalities including

refills to the portable/back-up or system itself, as appropriate.''

(See page vii of the FY 1994 VA report.) This assertion indicates to us

that the VA's payment amounts include not only the same bundle of

services as is included in Medicare's bundled rate for oxygen

concentrators but also the portable equipment that is paid separately

by Medicare.

Some supplier representatives indicated that our analysis failed to

consider supplier costs. We do not believe that we are required to

include an analysis of supplier costs. Although the regulations at

Sec. 405.502(g)(1)(iv) allow us to consider supplier costs as an

example of factors in making an inherent reasonableness determination,

they do not require such consideration. Moreover, we did not consider

supplier costs, in part, because, in our experience, such costs are

unattainable. A United States General Accounting Office Report to

Congress entitled: ``Medicare, Effect of Durable Medical Equipment Fee

Schedules on Six Suppliers' Profits'' (GAO/HRD-92-22), dated November,

1991, states: ``DME suppliers do not maintain records in a manner that

permits direct computation of costs and profits by DME item. * * *''

Although we have not evaluated supplier costs directly, we have

considered supplier costs indirectly by relying on the VA's competitive

bidding methodology to draw our conclusions regarding the relationship

of costs to Medicare payment.

As discussed previously, under the VA's competitive bidding

methodology, bidders make bids that reflect their true costs (plus a

reasonable rate of profit).

IV. Regulatory Impact Statement

A. Executive Order 12866

Executive Order 12866 (E.O. 12866) requires us to prepare an

analysis for any notice that meets one of the E.O. 12866 criteria for a

``significant regulatory action''; that is, that may--

Have an annual effect on the economy of $100 million or

more or adversely affect in a material way the economy, a sector of the

economy, productivity, competition, jobs, the environment, public

health or safety, or State, local, or tribal governments or

communities;

Create a serious inconsistency or otherwise interfere with

an action taken or planned by another agency;

Materially alter the budgetary impact of entitlements,

grants, user fees, or loan programs or the rights and obligations of

recipients thereof; or

Raise novel legal or policy issues arising out of legal

mandates, the President's priorities, or the principles set forth in

E.O. 12866.

This proposed notice would reduce unnecessary Medicare program

expenditures for home oxygen services. Currently, payment under the

Medicare program for home oxygen services is equal to 80 percent of the

lesser of the actual charge for the item or the fee schedule amount for

the item. Under this proposed notice, payment would be equal to 80

percent of the lesser of the actual charge or the appropriate special

payment limit proposed by this notice.

We are proposing special payment limits for home oxygen services

that would reduce the national limited monthly payment rate for home

oxygen services for 1994 by 40.11 percent, then updated by the covered

item update for years subsequent to 1994. Similarly, the 1994 local fee

schedule amount for Alaska, Hawaii, Puerto Rico, and the U.S. Virgin

Islands, would be reduced by 40.11 percent, then updated by the covered

item update for years subsequent to 1994.

We estimate that the proposed special payment limits would produce

the following savings:

[By fiscal year, savings in millions of dollars]

1997............................................................ $120

1998............................................................ 200

1999............................................................ 230

2000............................................................ 240

2001............................................................ 260

We have determined that the provisions of this proposed notice

would meet the $100 million criterion. Therefore, it is a significant

regulatory action and an impact analysis under E.O. 12866 is required.

We expect suppliers of home oxygen services and beneficiaries to be

affected by this special payment limit. We do not have sufficient data

to predict exactly the nature of the impact of this proposed notice or

the magnitude of such impact. Below, we discuss likely outcomes.

1. Suppliers

Suppliers of home oxygen would review the special payment limits to

determine what strategy would maximize their profits. In response to a

final notice that implemented the special payment limits as the

proposed notice, we expect them to compare this limit to their costs of

furnishing home oxygen to Medicare beneficiaries. We would expect that

as a result of this comparison, many suppliers may seek to economize by

reducing unnecessary expenditures. Many suppliers may consider whether

or not to continue to accept assignment on Medicare claims. Suppliers

that provide mostly home oxygen services would be more adversely

affected by the special payment limits than those suppliers that also

provide the full range of durable medical equipment in addition to

oxygen because they will have other revenue sources from which to

obtain income.

2. Beneficiaries

The effect of the proposed special payment limits on beneficiaries

depends on whether there is a significant local change in the

assignment rate. If the assignment rate were to remain the same,

beneficiaries may expect lower coinsurance since the fee schedule

amount for oxygen would be lower. However, if the assignment rate goes

down, beneficiaries may have to make a greater effort to find a

supplier that accepts assignment or have increased out-of-pocket

expenses.

3. Conclusion

The primary benefit expected to result from this proposal is the

anticipated reduction in the cost to the Medicare program of home

oxygen services and reduced coinsurance payments by beneficiaries to

the extent that suppliers continue to accept assignment. The

disadvantages that could result from this proposed special payment

limit

[[Page 38107]]

would be more initial out-of-pocket expenses for the beneficiary if the

assignment rate is reduced.

B. Regulatory Flexibility Act

We generally prepare a regulatory flexibility analysis that is

consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601

through 612), unless we certify that a notice would not have a

significant economic impact on a substantial number of small entities.

For purposes of the RFA, all suppliers are considered to be small

entities. Individuals and States are not included in the definition of

a small entity.

In addition, section 1102(b) of the Act requires us to prepare a

regulatory impact analysis if a notice may have a significant impact on

the operations of a substantial number of small rural hospitals. Such

an analysis must conform to the provisions of section 603 of the RFA.

For purposes of section 1102(b) of the Act, we define a small rural

hospital as a hospital that is located outside of a Metropolitan

Statistical Area and has fewer than 50 beds.

In determining whether to adjust payment rates under section

1842(b)(8)(A) and (9)(A) of the Act, we are required to consider the

potential impacts on quality, access, and beneficiary liability of the

adjustment, including the likely effects on assignment rates,

reasonable charge reductions on unassigned claims, and participation

rates of suppliers.

This proposed reduction in Medicare payment would affect suppliers

of home oxygen. These suppliers would have their payment allowances for

Medicare home oxygen patients reduced. Suppliers can choose to accept

assignment, which means they agree to accept Medicare's approved amount

as payment in full. It is possible that, as a consequence of our

reducing payments for home oxygen, the number of suppliers accepting

assignment of a beneficiary's claim for Medicare payment for these

services may decrease if suppliers choose instead to charge

beneficiaries the full difference between the amount charged and the

lower Medicare payment. Also, the number of suppliers who elect to

become or remain ``participating suppliers'' may decrease as a result

of reduced payments for home oxygen. Under the Medicare participation

program, a supplier that decides to become a ``participating supplier''

must agree to accept assignment for all covered services furnished to

Medicare beneficiaries. Participating suppliers benefit by being listed

in the Medicare Participating Physician/Supplier Directories, known as

Medpards, which are compiled by the Medicare carriers and furnished to

various senior citizen groups. A Medicare beneficiary can obtain the

Medpard for his or her State from the Medicare carrier.

Suppliers who do not accept assignment and charge more than the

Medicare approved amount can collect the balance; that is, the actual

charge minus Medicare payment, from the beneficiary. Therefore,

beneficiaries who receive services from suppliers who do not accept

assignment are exposed to greater financial liability than those who

receive services from a supplier taking assignment. As a result,

Medicare beneficiaries may choose to deal with suppliers who accept

assignment in order to reduce their financial liability. We expect that

this special payment limit would have minimal effects on the quality of

home oxygen services furnished to beneficiaries since we do not expect

suppliers to reduce the quality or the type of services provided. Also,

we expect only minimal effects on beneficiary access to home oxygen,

even in rural areas, since we do not expect many suppliers to

discontinue supplying oxygen.

Although a payment reduction of 40.11 percent for home oxygen

appears large, it is a result of Medicare's grossly excessive payment

allowances that have resulted in windfall profits. We would expect

suppliers to adjust to the elimination of this windfall accordingly.

In accordance with the provisions of Executive Order 12866, this

notice was reviewed by the Office of Management and Budget.

IV. Paperwork Reduction Act

This notice does not impose information collection and

recordkeeping requirements. Consequently, it need not be reviewed by

the Office of Management and Budget under the authority of the

Paperwork Reduction Act of 1995 (44 U.S.C. 3501 through 3511).

V. Response to Comments

Because of the large number of items of correspondence we normally

receive on Federal Register documents published for comment, we are not

able to acknowledge or respond to them individually. We will consider

all comments we receive by the date and time specified in the DATES

section of this preamble, and, if we proceed with a subsequent

document, we will respond to the comments in the preamble to that

document. Moreover, we may elect to engage in further consultation with

industry representatives if comments we receive make such further

consultation necessary or appropriate.

Authority: Sections 1834(a) and 1842(b) of the Social Security

Act (42 U.S.C. 1395m and 1395u).

(Catalog of Federal Domestic Assistance Program No. 93.774,

Medicare--Supplementary Medical Insurance Program)

Dated: April 14, 1997.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

Dated: May 6, 1997.

Donna E. Shalala,

Secretary.

[FR Doc. 97-18716 Filed 7-11-97; 1:30 pm]

BILLING CODE 4120-03-P