Medicare Program; Competitive Acquisition for Certain Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) and Other Issues, 25654-25704 [06-3982]

Agencies

• Centers for Medicare & Medicaid Services
• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 71, Number 83 (Monday, May 1, 2006)]
[Proposed Rules]
[Pages 25654-25704]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-3982]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 411, 414, and 424



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

Federal Register / Vol. 71, No. 83 / Monday, May 1, 2006 / Proposed 
Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 414, and 424

[CMS-1270-P]
RIN 0938-AN14


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

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement competitive bidding 
programs for certain covered items of durable medical equipment, 
prosthetics, orthotics, and supplies (DMEPOS) throughout the United 
States in accordance with sections 1847(a) and (b) of the Social 
Security Act (the Act). These programs would change the way that 
Medicare pays for these items under Part B of the Medicare program by 
utilizing bids submitted by DMEPOS suppliers to establish applicable 
payment amounts. We would phase in these programs over several years.
    This proposed rule would also detail requirements for CMS approved 
accreditation organizations that will be applying quality standards for 
all DMEPOS suppliers, including DMEPOS suppliers that participate in 
the DMEPOS competitive bidding program. In addition, this rule proposes 
a new fee schedule for home dialysis supplies and equipment still paid 
on a reasonable charge basis. This proposed rule would also clarify our 
policy on the scope of the statutory eyeglass coverage exclusion. We 
are proposing to specify in regulations that the eyeglass exclusion 
encompasses all devices that use lenses to aid vision or provide 
magnification of images for impaired vision. Further, this proposed 
rule would implement a revised methodology for calculating fee schedule 
amounts for new DMEPOS items.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on June 30, 2006.

ADDRESSES: In commenting, please refer to file code CMS-1270-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to https://www.cms.hhs.gov/eRulemaking. 
(Attachments should be in Microsoft Word, WordPerfect, or Excel; 
however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address only: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1270-P, P.O. Box 8013, Baltimore, MD 21244-8013.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address only: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1270-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: 

Lorrie Ballantine, (410) 786-7543--Overall implementation.
Joel Kaiser, (410) 786-4499--Overall implementation.
Michael Keane, (410) 786-4495--Overall implementation.
Walter Rutemueller, (410) 786-5395--Overall implementation.
Linda Smith, (410) 786-5650--Quality Standards and Accreditation.

SUPPLEMENTARY INFORMATION: 
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-1270-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. CMS posts all electronic 
comments received before the close of the comment period on its public 
Web site as soon as possible after they have been received. Hard copy 
comments received timely will be available for public inspection as 
they are received, generally beginning approximately 3 weeks after 
publication of a document, at the headquarters of the Centers for 
Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, 
Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 
p.m. To schedule an appointment to view public comments, phone 1-800-
743-3951.

Table of Contents

I. Background
    A. Payment Under Reasonable Charges
    B. Payment Under Fee Schedules
    C. Healthcare Common Procedural Coding System (HCPCS)
    D. Medicare Competitive Bidding Demonstrations
    E. Medicare Prescription Drug, Improvement, and Modernization 
Act of 2003
    F. Deficit Reduction Act (DRA)
    G. Program Advisory and Oversight Committee
    H. Quality Standards for Suppliers of (DMEPOS)
    I. Accreditation for Suppliers of DMEPOS and Other Items
    J. Low Vision Aid Exclusion
    K. Establishing Fee Schedule Amounts for New DMEPOS Items
    L. New Fee Schedules for Home Dialysis Supplies and Equipment

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    M. Covered Item Updates for Class III DME for CYs 2007 and 2008
II. Provisions of the Proposed Regulations
    A. Purpose and Definitions (Proposed Sec.  414.400 and Sec.  
414.402)
    B. Implementation Contractor (Proposed Sec.  414.406)
    C. Payment Basis (Proposed Sec.  414.408)
    1. Payment Basis (Proposed Sec.  414.408(a))
    2. General Payment Rules (Proposed Sec.  414.408(c)-(j))
    3. Special Rules for Certain Rented Items of DME and Oxygen 
(Grandfathering of Suppliers) (Proposed Sec.  414.408(k))
    a. Process for Grandfathering Suppliers
    b. Payment Amounts to Grandfathered Suppliers
    (1) Grandfathering of Suppliers Furnishing Items Prior to the 
First Competitive Bidding Program in an Area (Proposed Sec.  
414.408(k))
    (2) Suppliers That Lose Their Contract Status in a Subsequent 
Competitive Bidding Program
    c. Payment for Accessories for Items Subject to Grandfathering
    4. Payment Adjustment to Account for Inflation (Proposed Sec.  
414.408(b))
    5. Authority to Adjust Payments in Other Areas (Proposed Sec.  
414.408(e))
    6. Requirement to Obtain Competitively Bid Items From a Contract 
Supplier (Proposed Sec.  414.408(f))
    7. Limitation on Beneficiary Liability for Items Furnished by 
Non Contract Suppliers (Proposed Sec.  414.408(f))
    D. Competitive Bidding Areas
    1. Proposed Methodology for MSA Selection for 2007 and 2009 
Competitive Bidding Programs (Proposed Sec.  414.410)
    a. MSAs for 2007
    b. MSAs for 2009
    2. Establishing Competitive Bidding Areas (Proposed Sec.  
414.410)
    a. Authority to Exempt Rural Areas and Areas With Low Population 
Density Within Urban Areas (Proposed Sec.  414.410(c))
    b. Establishing the Competitive Bidding Areas for 2007 and 2009 
(Proposed Sec.  414.410(b))
    c. Nationwide or Regional Mail Order Competitive Bidding Program 
(Proposed Sec.  414.410(d)(2))
    d. Additional Competitive Bidding Areas After 2009 (Proposed 
Sec.  414.410(d))
    E. Criteria for Item Selection
    F. Submission of Bids Under the Competitive Bidding Program 
(Proposed Sec.  414.412)
    1. Providers (Proposed Sec.  414.404 and 414.422)
    2. Physicians (Proposed Sec.  414.422)
    3. Product Categories for Bidding Purposes (Proposed Sec.  
414.412)
    4. Bidding Requirements (Proposed Sec.  414.408)
    a. Inexpensive or Other Routinely Purchased DME Items
    b. DME Items Requiring Frequent and Substantial Servicing
    c. Oxygen and Oxygen Equipment
    d. Capped Rental Items
    e. Enteral Equipment and Supplies
    f. Maintenance and Servicing of Enteral Infusion Pumps
    g. Supplies Used in Conjunction With DME
    h. OTS Orthotics
    G. Conditions for Awarding Contracts (Proposed Sec.  414.414)
    1. Quality Standards and Accreditation (Proposed Sec.  
414.414(c))
    2. Eligibility (Proposed Sec.  414.414(b))
    3. Financial Standards (Proposed Sec.  414.414(d))
    4. Evaluation of Bids (Proposed Sec.  414.414(e))
    a. Market Demand and Supplier Capacity (Proposed Sec.  
414.414(e))
    b. Composite Bids (Proposed Sec.  414.414(e))
    c. Determine the Pivotal Bid (Proposed Sec.  414.414(e))
    d. Assurance of Savings (Proposed Sec.  414.414(f))
    e. Assurance of Multiple Contractors (Proposed Sec.  414.414(g))
    f. Selection of New Suppliers After Bidding (Proposed Sec.  
414.414(h))
    H. Determining Single Payment Amounts for Individual Items 
(Proposed Sec.  414.416)
    1. Setting Single Payment Amounts for Individual Items (Proposed 
Sec.  414.416(b))
    2. Rebate Program (Proposed Sec.  414.416(c))
    I. Terms of Contracts (Proposed Sec.  414.422)
    1. Terms and Conditions of Contracts
    2. Furnishing of Items (Proposed Sec.  414.422(c))
    3. Repairs and Replacements of Patient Owned Items Subject to 
Competitive Bidding (Proposed Sec.  414.422(c))
    4. Furnishing Items to Beneficiaries Whose Permanent Residence 
Is Within a CBA
    5. Furnishing Items to Beneficiaries Whose Permanent Residence 
Is Outside a CBA
    6. Information Collection from the Supplier
    7. Change in Ownership (Proposed Sec.  414.422(d))
    8. Suspension or Termination of a Contract (Proposed Sec.  
414.422(f))
    J. Administrative or Judicial Review (Proposed Sec.  414.424)
    K. Opportunity for Participation by Small Suppliers
    L. Opportunity for Networks (Proposed Sec.  414.418)
    M. Education and Outreach
    1. Supplier Education
    2. Beneficiary Education
    N. Monitoring and Complaint Services for the Competitive Bidding 
Program
    O. Physician Authorization/Treating Practitioner and 
Consideration of Clinical Efficiency and Value of Items in 
Determining Categories for Bids (Proposed Sec.  414.420)
    P. Quality Standards and Accreditation for Suppliers of DMEPOS
    1. Special Payment Rules for Items Furnished by DMEPOS Suppliers 
and Issuance of DMEPOS Supplier Billing Privileges (Proposed Sec.  
424.57)
    2. Accreditation (Proposed Sec.  424.58)
    3. Ongoing Responsibilities of CMS Approved Accreditation 
Organizations
    4. Continuing Federal Oversight of Approved Accreditation 
Organizations
    a. Equivalency Review
    b. Validation Review
    c. Notice of Intent To Withdraw Approval for Deeming Authority
    d. Withdrawal of Approval for Deeming Authority
    e. Reconsideration
    Q. Low Vision Aid Exclusion (Proposed Sec.  414.15)
    R. Establishing Payment Amounts for New DMEPOS (Gap-filling) 
(Proposed Sec.  414.210(g))
    S. Fee Schedules for Home DialysIs Supplies and Equipment 
(Proposed Sec.  414.107)
    T. Fee Schedules for Therapeutic Shoes (Proposed Sec.  
414.228(c))
III. Collection of Information Requirements
IV. Response to Comments
V. Regulatory Impact AnalysIs
    A. Overall Impact
    B. Anticipated Affects
    C. Implementation Costs
    D. Program Savings
    E. Effect on Beneficiaries
    F. Effect on Suppliers
    1. Affected Suppliers
    2. Small Suppliers
    G. Accounting Statement
Regulation Text

I. Background

A. Payment Under Reasonable Charges

    Payment for most DMEPOS items, including supplies and equipment, 
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 most of these services was made on 
a reasonable charge basis by these carriers. The methodology for 
determining reasonable charges is set forth in section 1842(b) of the 
Social Security Act (Act) and 42 CFR part 405, subpart E of the 
regulations. Reasonable charge determinations are generally based on 
customary and prevailing charges derived from historic charge data, 
with the ``reasonable charge'' for an item being the lowest of the 
following factors:
     The supplier's actual charge for the item.
     The supplier's customary charge for the item.
     The prevailing charge in the locality for the item. The 
prevailing charge may not exceed the 75th percentile of the customary 
charges of suppliers in the locality.
     The inflation indexed charge (IIC). The IIC is defined in 
Sec.  405.509(a) as the lowest of the fee screens used to determine 
reasonable charges for services, including supplies, and equipment paid 
on a reasonable charge basis (excluding physicians' services) that is 
in effect on December 31 of the previous fee screen year, updated by 
the inflation adjustment factor. The inflation adjustment factor is 
based on the current change in the consumer price index for all urban 
consumers (CPI-U), as compiled by the Bureau of Labor Statistics, for 
the 12-month period ending June 30 each year.

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B. Payment Under Fee Schedules

    Section 4062 of the Omnibus Budget Reconciliation Act of 1987 (Pub. 
L. 100-203) (OBRA ``87) added section 1834 to the Act and implemented a 
fee schedule payment methodology for most durable medical equipment 
(DME), prosthetic devices, and orthotic devices furnished after January 
1, 1989. Specifically, sections 1834(a)(1)(A) and (B) and 1834(h)(1)(A) 
of the Act provide that Medicare payment for these items is equal to 80 
percent of the lesser of the actual charge for the item or the fee 
schedule amount for the item. We implemented this new payment 
methodology at 42 CFR part 414, subpart D of our regulations. Sections 
1834(a)(2) through (a)(5) and section 1834(a)(7) of the Act, as well as 
Sec.  414.200 through Sec.  414.232 (with the exception of Sec.  
414.228) of the regulations, set forth separate payment categories of 
DME and describe how the fee schedule for each of the following 
categories is established:
     Inexpensive or other routinely purchased items (section 
1834(a)(2) of the Act and Sec.  414.220 of the regulations);
     Items requiring frequent and substantial servicing 
(section 1834(a)(3) of the Act and Sec.  414.222);
     Customized items (section 1834(a)(4) of the Act and Sec.  
414.224);
     Oxygen and oxygen equipment (section 1834(a)(5) of the Act 
and Sec.  414.226);
     Other items of DME (section 1834(a)(7) of the Act and 
Sec.  414.229).
    Each category has its own unique payment rules. With the exception 
of customized items, a fee schedule amount is calculated for each item 
or category of DME that is identified by a code in the Healthcare 
Common Procedure Coding System (HCPCS). The Medicare payment amount for 
a customized item of DME is based on the Medicare carrier's individual 
consideration of that item. The fee schedule amounts for oxygen and 
oxygen equipment are monthly payment amounts. Payment under the DME 
benefit is made for supplies necessary for the effective use of DME 
(for example, lancets and test strips used with blood glucose 
monitors). These supplies are paid for using the same methodology that 
we use to pay for inexpensive or routinely purchased items.
    The fee schedule amounts for DME are generally adjusted annually by 
the change in the CPI-U for the 12-month period ending June 30 of the 
preceding year. The fee schedule amounts are also generally limited by 
a ceiling (upper limit) and floor (lower limit) equal to 100 percent 
and 85 percent, respectively, of the median of the statewide fee 
schedule amounts.
    Since 1994, Medicare has paid for most surgical dressings in 
accordance with section 1834(i) of the Act and Sec.  414.220(g) of the 
regulations, using the same methodology as is used for payment of 
inexpensive or routinely purchased DME.
    Under section 1834(h) of the Act and Sec.  414.228 of the 
regulations, payment for prosthetic and orthotic devices is made on a 
lump sum basis and is equal to the lower of the fee schedule amount 
calculated for the item or the actual charge for the item, less any 
unmet deductible. The fee schedule amounts are calculated using a 
weighted average of Medicare payments made in the States in each of 10 
CMS regions from July 1, 1986 through June 30, 1987, adjusted annually 
by the change in the CPI-U for the 12-month period ending June 30 of 
the preceding year. The regional fee schedule amounts are limited by a 
ceiling (upper limit) and floor (lower limit) equal to 120 percent and 
90 percent, respectively, of the average of the regional fee schedule 
amounts for each State.
    As authorized under section 1842(s) of the Act and 42 CFR, part 
414, subpart C of our regulations, Medicare pays for parenteral and 
enteral nutrition (PEN) nutrients, equipment and supplies on the basis 
of 80 percent of the lesser of the actual charge for the item, or the 
fee schedule amount for the item (Sec.  414.102(a)). The fee schedule 
amounts for PEN items are calculated on a nationwide basis and are the 
lesser of the reasonable charges for 1995, or the reasonable charges 
that would have been used in determining payment for these items in 
2002 under the former reasonable charge payment methodology (Sec.  
414.104(b)). The fee schedule amounts are generally adjusted annually 
by the percentage increase in the CPI-U for the 12-month period ending 
with June 30 of the preceding year (Sec.  414.102(c)). Under Sec.  
414.104(a), payment for PEN nutrients and supplies is made on a 
purchase basis, and payment for PEN equipment that is rented is made on 
a monthly basis. We are proposing to revise Sec.  414.1 of our 
regulations to specify that fee schedules were established for PEN 
items in accordance with our authority under section 1842(s) of Act.
    Section 627 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173) amended section 
1833(o)(2) of the Act to require implementation of fee schedule 
amounts, effective January 1, 2005, for the purpose of determining 
payment for custom molded shoes, extra-depth shoes, and inserts 
(collectively, ``therapeutic shoes''). We believe that this section of 
the MMA is largely self-implementing because it mandates use of the 
methodology set forth in section 1834(h) of the Act for prosthetic and 
orthotic devices in determining the fee schedule amounts for 
therapeutic shoes. We implemented that methodology through regulations 
at part 414, subpart D, and section 627 of the MMA provides that the 
same methodology shall apply to therapeutic shoes. Section 627 of the 
MMA was implemented through program instructions, and on January 1, 
2005, Medicare began paying for therapeutic shoes based on fee schedule 
amounts determined in accordance with section 1834(h) of the Act and 
part 414, subpart D of our regulations.

C. Healthcare Common Procedure Coding System (HCPCS)

    The Healthcare Common Procedure Coding System (HCPCS) is a 
standardized coding system used to process claims submitted to 
Medicare, Medicaid, and other health insurance programs by providers, 
physicians, and other suppliers. The HCPCS code set is divided into the 
following 2 principal subsystems, referred to as level I and level II 
of the HCPCS:
     Level I of the HCPCS codes is comprised of Current 
Procedural Terminology (CPT) codes. CPT codes are a uniform coding 
system consisting of descriptive terms and identifying codes that are 
used primarily to identify medical services and procedures furnished by 
physicians and other health care professionals which are billed to 
public or private health insurance programs. CPT codes are developed, 
published, and maintained by the American Medical Association. CPT 
codes do not include codes needed to separately report medical items 
that are regularly billed by suppliers other than physicians.
     Level II of the HCPCS codes is a standardized coding 
system used primarily to identify products and supplies that are not 
included in the CPT codes, such as DME, orthotics, prosthetics, and 
supplies when used outside a physician's office.
    HCPCS Level II Codes classify like items by category for the 
purpose of efficient claims processing. Assignment of a HCPCS code is 
not a coverage determination, and does not imply that any payer will 
cover the items in the code category. For some DMEPOS items, such as 
wheelchairs and wheelchair cushions, minimum performance

[[Page 25657]]

standards must be met before an item can be classified under a HCPCS 
code. In October of 2003, the Secretary delegated authority under the 
Health Insurance Portability and Accountability Act of 1996 (HIPAA) to 
CMS to maintain and distribute the HCPCS Level II Codes. The HCPCS 
Level II Codes will be used to describe the DME, orthotic, and enteral 
nutrition items furnished under the competitive bidding programs being 
proposed in this proposed rule, both for the purpose of requesting bids 
and for establishing payment amounts.

D. Medicare Competitive Bidding Demonstrations

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

E. Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (Pub. L. 108-173)

    Section 302(b)(1) of the MMA amended section 1847 of the Act to 
require the Secretary to establish and implement programs under which 
competitive bidding areas are established throughout the United States 
for contract award purposes for the furnishing of certain competitively 
priced items for which payment is made under Part B (the ``Medicare 
DMEPOS Competitive Bidding Program''). Competitive bidding provides a 
way to harness marketplace dynamics to create incentives for suppliers 
to provide quality items in an efficient manner and at a reasonable 
cost. In our view, the Medicare DMEPOS Competitive Bidding Program has 
five objectives, as follows:
     To implement competitive bidding programs for certain 
DMEPOS items.
     To assure beneficiary access to quality DMEPOS as a result 
of the program.
     To reduce the amount Medicare pays for DMEPOS and create a 
payment structure under competitive bidding that is more reflective of 
a competitive market.
     To limit the financial burden on beneficiaries by reducing 
their out-of-pocket expenses for DMEPOS they obtain through the 
program.
     To contract with suppliers who conduct business in a 
manner that is beneficial for the program and for Medicare 
beneficiaries.

F. Deficit Reduction Act of 2005 (Pub. L. 109-171)

    Section 5101(a) of the Deficit Reduction Act of 2005 (DRA) amended 
section 1834(a)(7)(A) of the Act to change the way Medicare pays for 
capped rental items. This section revised the period of payment for 
capped rental from 15 to 13 months. After rental payments are made for 
a 13 month period of continuous use, title to the capped rental items 
transfers from the supplier to the beneficiary. Once the title has 
transferred, amended section 1834(a)(7)(A)(iv) provides that reasonable 
and necessary maintenance and servicing payments (for parts and labor 
not covered by the supplier's or manufacturer's warranty, as determined 
by the Secretary to be appropriate for the particular item) will be 
made. These statutory changes apply only to capped rental items whose 
first rental month occurs on or after January 1, 2006.
    Section 5101(b) of the DRA also amended section 1834(a)(5) of the 
Act to limit monthly payments for oxygen equipment to a 36 month period 
of continuous use. Then ownership of the oxygen equipment will be 
transferred from the supplier to the beneficiary. Medicare will 
continue making monthly payments for oxygen contents when appropriate 
for beneficiary owned stationary and portable systems in the amounts 
recognized under section 1834(a)(9) after title to the equipment 
transfers to the beneficiary. However, under new section 
1834(a)(5)(F)(II)(bb), maintenance and servicing payments for 
beneficiary owned oxygen equipment (for parts and labor not covered by 
the supplier's or manufacturer's warranty)

[[Page 25658]]

will be made only if they are reasonable and necessary. These statutory 
changes went into effect on January 1, 2006. For beneficiaries 
receiving Medicare covered oxygen equipment as of December 31, 2005, 
the 36-month rental period begins January 1, 2006. In a future 
rulemaking, we will propose to revise regulations found in part 414, 
subpart D to incorporate these DRA provisions.

G. Program Advisory and Oversight Committee

    Section 1847(c) of the Act requires the Secretary to establish a 
Program Advisory and Oversight Committee (PAOC) that will provide 
advice to the Secretary with respect to the following functions, 
including--
     The implementation of the Medicare DMEPOS Competitive 
Bidding Program;
     The establishment of financial standards for entities 
seeking contracts under the Medicare DMEPOS Competitive Bidding 
Program, taking into account the needs of small providers;
     The establishment of requirements for collection of data 
for the efficient management of the Medicare DMEPOS Competitive Bidding 
Program;
     The development of proposals for efficient interaction 
among manufacturers, providers of services, suppliers (as defined in 
section 1861(d) of the Act) and individuals; and
     The establishment of quality standards for DMEPOS 
suppliers under section 1834(a)(20) of the Act.
    In addition, section 1847(c)(3)(B) of the Act authorizes the PAOC 
to perform additional functions to assist the Secretary in carrying out 
the Medicare DMEPOS Competitive Bidding Program as the Secretary may 
specify.
    As authorized under section 1847(c)(2) of the Act, the PAOC members 
were appointed by the Secretary of Health and Human Services and 
represent a broad mix of relevant industry, consumer, and government 
parties. Specifically, the membership roster includes two beneficiary/
consumer representatives, four manufacturer representatives, five 
supplier representatives, three certification/standards 
representatives, six Federal and State program representatives, one 
physician and one pharmacist. The representatives have expertise in a 
variety of subject matter areas, including DMEPOS, competitive bidding 
methodologies and processes, and rural and urban marketplace dynamics. 
The first PAOC meeting was announced in a Federal Register notice (CMS-
1279-N2, 69 FR 31125) and was held at CMS on October 6, 2004.
    We have held two additional PAOC meetings where we, along with our 
contractor RTI, presented material to both the PAOC and the public 
relating to the provisions that are outlined in this proposed rule. The 
topics that we presented include--
     Medicare's timeline for implementation of the Medicare 
DMEPOS Competitive Bidding Program;
     Results of the Medicare competitive bidding demonstration 
projects authorized by section 4319 of the BBA;
     Structure of the Medicare DMEPOS Competitive Bidding 
Program being proposed in this proposed rule;
     Existing non-Medicare competitive bidding programs for 
DMEPOS items;
     Program design options for the Medicare DMEPOS Competitive 
Bidding Program being proposed in this proposed rule;
     Criteria for selecting Metropolitan Statistical Areas 
(MSAs) in which competition under the Medicare DMEPOS Competitive 
Bidding Program will occur in both 2007 and 2009;
     Criteria for selecting items for competitive bidding;
     Bidding process overview;
     Methodology for setting single payment amounts for 
competitively bid items;
     Capacity of DMEPOS suppliers and beneficiary utilization 
of DMEPOS items;
     Financial capabilities of bidding suppliers;
     Exception authority under section 1847(a)(3) of the Act 
for rural areas and areas with low population density within urban 
areas that are not competitive; and
     Quality standards and accreditation procedures applicable 
to all DMEPOS suppliers.
    In addition to the PAOC meetings, we have designed and implemented 
a CMS Web site (https://cms.hhs.gov/suppliers/dmepos/compbid/paoc.asp) 
specifically for the public to have access to all PAOC presentations, 
minutes, and updates for the Medicare DMEPOS Competitive Bidding 
Program. In accordance with section 1847(c)(5) of the Act, the PAOC 
will continue to operate until December 31, 2009. Future PAOC meeting 
dates, as well as other information pertinent to the Medicare DMEPOS 
Competitive Bidding Program, can be found on our Web site.

H. Quality Standards for Suppliers of (DMEPOS)

    Section 302(a)(1) of the MMA added section 1834(a)(20) to the Act, 
which requires the Secretary to establish and implement quality 
standards for suppliers of certain items, including consumer service 
standards, to be applied by recognized independent accreditation 
organizations. Suppliers of DMEPOS must comply with the quality 
standards in order to furnish any item for which payment is made under 
Part B, and to receive and retain a provider or supplier billing number 
used to submit claims for reimbursement for any such item for which 
payment may be made under Medicare. Section 1834(a)(20)(D) of the Act 
requires us to apply these quality standards to suppliers of the 
following items for which we deem the standards to be appropriate:
     Covered items, as that term is defined in section 
1834(a)(13), for which payment may be made under section 1834(a);
     Prosthetic devices and orthotics and prosthetics described 
in section 1834(h)(4); and
     Items described in section 1842(s)(2) of the Act, which 
include medical supplies, home dialysis supplies and equipment, 
therapeutic shoes, parenteral and enteral nutrients, equipment, and 
supplies, electromyogram devices, salivation devices, blood products, 
and transfusion medicine.
    Section 1834(a)(20)(E) of the Act explicitly authorizes the 
Secretary to establish the quality standards by program instruction or 
otherwise after consultation with representatives of relevant parties. 
We consulted with the PAOC and determined that it is in the best 
interest of the industry and beneficiaries to publish the quality 
standards through program instructions and select the accreditation 
organizations in order to ensure that suppliers that wish to 
participate in competitive bidding will know what standards they must 
meet in order to be awarded a contract. The standards will be applied 
prospectively and will be published on our website. All suppliers of 
DMEPOS and other items to which section 1834(a)(20) of the Act applies 
will be required to meet the quality standards established under that 
section. Finally, section 1847(b)(2)(A)(i) of the Act requires an 
entity (a DMEPOS supplier) to meet the quality standards specified by 
the Secretary under section 1834(a)(20) of the Act before being awarded 
a contract under the Medicare DMEPOS Competitive Bidding Program.
    Since December 11, 2000, suppliers have been required to meet the 
Medicare enrollment standards at Sec.  424.57, satisfaction of which is 
required for these suppliers to participate in the Medicare program and

[[Page 25659]]

receive Medicare payments for DMEPOS and other items. Even with the 
implementation of the enrollment standards at Sec.  424.57, we believe 
there has not been sufficient oversight of suppliers of DMEPOS and 
other items related to the quality and provision of their products. The 
Department of Health and Human Services, Office of Inspector General 
(OIG), has conducted several investigations of suppliers of DMEPOS and 
other items to determine the legitimacy of their businesses and has 
uncovered many examples of fraud and abuse. Examples of the types of 
fraud and abuse that were discovered include--
     Billing for services not performed;
     Billing for a more expensive service than was rendered;
     Billing separately for several services that should be 
combined into one billing;
     Billing twice for the same service;
     Billing for more expensive equipment or supplies than were 
used;
     Offering or receiving kickbacks (that is, offering or 
accepting something in return for services);
     Offering or accepting a bribe to use a particular service 
or company;
     Providing unnecessary services; and
     Submitting false cost reports.
    The OIG began publicizing fraud alerts as a vehicle to identify 
fraudulent and abusive practices being committed by DMEPOS suppliers 
within the health care industry.
    To enhance the quality of services provided by suppliers of DMEPOS 
and further reduce fraudulent practices, we are developing quality 
standards, as required by section 1834(a)(20) of the Act, to address 
suppliers' accountability, business integrity, provision of quality 
products to beneficiaries, and performance management. These standards 
will measure the effect of suppliers' services on beneficiaries. The 
supplier quality standards will include product specific requirements 
that will focus on a consumer-directed model of service delivery for 
suppliers to improve beneficiary access to information about DMEPOS. We 
believe these requirements will empower beneficiaries to make better-
informed choices regarding equipment selection and the proper and safe 
use of DMEPOS, which we believe will lead to increased beneficiary 
satisfaction, safe and appropriate use of purchased equipment, and 
positive health outcomes. The supplier quality standards will provide 
more efficient processes and standardized materials for suppliers to 
increase consistency and continuity for supplier services to 
beneficiaries, beneficiary education, and responsiveness to beneficiary 
requests for equipment options. We are using contractor support and 
input from industry suppliers and national associations to develop the 
quality standards. Additionally, the contractors will meet with 
beneficiaries who use the specific products to solicit their input and 
assurance that their needs are being addressed by the quality standards 
requirements.
    The quality standards will include performance management 
requirements to ensure the development, implementation, monitoring, and 
evaluation of policies, procedures, and products so that suppliers can 
maintain compliance with regulatory requirements and our policy 
instructions. The quality standards will include language from current 
CMS standards and industry best practice standards for the following 
areas: Administration; financial management; human resource management; 
beneficiary services; performance management; environment and safety; 
beneficiary rights/ethics; and information management. Additionally, 
the supplier quality standards will include requirements for monitoring 
beneficiary satisfaction with products and suppliers' responses to 
beneficiary complaints. As is authorized under section 1834(a)(20)(E), 
we will be establishing the supplier quality standards through program 
instructions and will publish them on our Web site. Additionally, in a 
future rule, we will propose to address DMEPOS supplier requirements 
for enrollment and enforcement procedures.

I. Accreditation for Suppliers of DMEPOS and Other Items

    Section 1834(a)(20)(B) of the Act requires the Secretary, 
notwithstanding section 1865(b) of the Act, to designate and approve 
one or more independent accreditation organizations to apply the 
quality standards to suppliers of DMEPOS and other items. The Medicare 
program currently contracts with State Agencies to perform survey and 
review functions for providers and suppliers to approve their 
participation in or coverage under the Medicare program. Additionally, 
section 1865(b) of the Act sets forth the general procedures for CMS to 
designate national accreditation organizations to deem providers or 
suppliers to meet Medicare conditions of participation or coverage if 
they are accredited by a national accreditation organization approved 
by CMS. Many types of providers and suppliers have a choice between 
having the State Agency or the CMS approved accreditation organization 
survey them. If the provider or supplier selects the CMS-approved 
accreditation organization and is in compliance with the accreditation 
organization standards, it is generally deemed to meet the Medicare 
conditions of participation or coverage. CMS is responsible for the 
oversight and monitoring of the State Agencies and the approved 
accreditation organizations. The procedures, implemented by the 
Secretary, for designating private and national accreditation 
organizations and the Federal review process for accreditation 
organizations are located at 42 CFR parts 422 (for Medicare Advantage 
organizations) and 488 (for most providers and suppliers). Although, 
the statute itself does not require us to issue a rulemaking or provide 
notice in the Federal Register in order to designate and approve DMEPOS 
accreditation organizations, we believe that the Administrative 
Procedure Act does require us to give notice and an opportunity for 
comment before we institute our procedures for designating and 
supervising these organizations. To accommodate suppliers that wish to 
participate in the Medicare DMEPOS Competitive Bidding Program, we will 
phase-in the accreditation process and require accreditation 
organizations to prioritize their surveys to accredit suppliers in the 
selected MSAs and competitive bidding areas. We will provide further 
guidance in a Federal Register notice on the grandfathering-in of 
suppliers that have already been accredited, and the submission 
procedures for accreditation after this rule is finalized.

J. Low Vision Aid Exclusion

    Section 1862(a)(7) of the Act excludes payment where ``expenses are 
for * * * eyeglasses (other than eyewear described in section 
1861(s)(8)) or eye examinations for the purpose of prescribing, 
fitting, or changing eyeglasses, procedures performed (during the 
course of any eye examination) to determine the refractive state of the 
eyes * * *.'' The Medicare regulations at Sec.  411.15(b) exclude from 
coverage eyeglasses and contact lenses, except for--
     Post-surgical prosthetic lenses customarily used during 
convalescence for eye surgery in which the lens of the eye was removed 
(for example, cataract surgery);
     Prosthetic lenses for patients who lack the lens of the 
eye because of congenital absence or surgical removal; and
     One pair of conventional eyeglasses or conventional 
contact lenses furnished

[[Page 25660]]

after each cataract surgery during which an intraocular lens is 
inserted.
    From as early as 1980, we have clarified that we viewed closed 
circuit visual aid systems and other low vision devices to be subject 
to the eyeglass coverage exclusion at section 1862(a)(7) of the Act. We 
have also concurred with carrier policies that have excluded payment 
for low vision aids because of the eyeglass exclusion. Moreover, the 
Medicare Appeals Council has recognized that video magnifiers, or 
closed circuit televisions (CCTVs), are excluded from coverage by 
section 1862(a)(7) of the Act. However, we have never issued a 
regulation or national coverage decision that specifically states that 
the eyeglass exclusion at section 1862(a)(7) of the Act applies to low 
vision aids. We are proposing to revise Sec.  411.15(b), with certain 
specific exceptions, to expressly state that the eyeglass exclusion 
applies to all devices that use one or more lens for the primary 
purpose of aiding vision. In proposing this revision, we are mindful 
that three United States district courts have found that section 
1862(a)(7) of the Act does not prohibit payment for video magnifiers. 
(Collins v. Thompson, No 2:03-cv-265-FtM-29SPC (M.D. Fla. June 4, 
2004); Davidson v. Thompson, No. Civ. 04-32 LFG (D.N.M. 2004); Currier 
v. Thompson, 369 F. Supp. 2d 65 (D. Me. 2005).) The Currier court, 
however, recognized that the statute was ambiguous. Moreover, the 
Supreme Court has recently recognized that a prior judicial 
construction of an ambiguous statute does not categorically control an 
agency's contrary construction. (National Cable & Telecommunications 
Association v. Brand X Internet Services, 125 S. Ct. 2688, 2701 
(2005).) In section II.O. of this proposed rule, we explain the reasons 
for our interpretation of the statute that the eyeglass exclusion does 
apply to low vision aids.

K. Establishing Fee Schedule Amounts for New DMEPOS Items

    Since 1989, CMS and its contractors have used an administrative 
process known as gap-filling to establish fee schedule amounts for 
DMEPOS items when fee schedule base data is not available, such as when 
a new code is added to Level II of the HCPCS to describe a new category 
of items. For example, section 1834(a)(2)(B) of the Act requires that 
the fee schedules for inexpensive or routinely purchased DME (for 
example, canes) be based on average reasonable charges for the item 
from July 1, 1986 through June 30, 1987. When a new code for an item 
(for example, a new category of canes) falling under this category is 
added to the HCPCS, reasonable charge data from 1986/87 is not 
available and the gap-filling process is used to estimate 1986/87 
reasonable charges. Since 1989, fee schedule amounts have been gap-
filled using either--
     Fee schedule amounts for comparable items;
     Supplier or retail prices; or
     Wholesale or manufacturer prices plus a reasonable mark-
up.
    There is currently no methodology set forth in regulations for 
establishing fee schedule amounts for DMEPOS items in these situations. 
Therefore, in Sec.  414.210, we are proposing a modified version of our 
existing gap-filling process to be used in establishing fee schedule 
amounts for DMEPOS items to which are assigned new HCPCS Level II 
Codes. This process will be used to set payment amounts for all new 
DMEPOS items, even if those items fall within a product category that 
is subject to competitive bidding, until bids for those items are 
available for establishing payments in accordance with section 
1847(b)(5) of the Act.

L. New Fee Schedules for Home Dialysis Supplies and Equipment

    Section 1842(s)(1) of the Act gives the Secretary the authority to 
implement fee schedules to be used for payment under Medicare of 
specific items (listed in section 1842(s)(2) of the Act) still paid 
using the reasonable charge payment methodology described in section 
I.A. of this proposed rule. In Sec.  414.107, we are proposing to use 
this authority to implement a fee schedule payment methodology for home 
dialysis supplies and equipment, one of these specified items.

M. Covered Item Updates for Class III DME for CYs 2007 and 2008

    Sections 1834(a)(14)(H) and (I) of the Act give the Secretary 
discretion in determining the appropriate fee schedule update 
percentages for CYs 2007 and 2008, respectively, for DME which are 
``class III medical devices described in section 513(a)(1)(C) of the 
Federal Food, Drug, and Cosmetic Act (21 U.S.C. 360(c)(1)(C)).'' In 
making these determinations, the Secretary must take into account 
recommendations contained in a report from the Government 
Accountability Office (GAO) regarding the appropriate update 
percentages for these devices. The GAO report is mandated by section 
302(c)(1)(B) of the MMA and must be submitted to the Congress and 
transmitted to the Secretary by no later than March 1, 2006. Class III 
devices paid in accordance with the DME fee schedule payment 
methodology include osteogenesis or bone growth stimulators, 
implantable infusion pumps, external defibrillators, and ultraviolet 
light therapy systems. We are soliciting comments on how to determine 
the appropriate fee schedule percentage change for these devices for 
2007 and 2008 and will consider these comments in conjunction with the 
recommendations in the GAO report in determining the appropriate update 
percentage for these devices for 2007 and 2008.

II. Provisions of the Proposed Regulation

    We are proposing to add a new subpart F to part 414 to specify the 
requirements for the Medicare DMEPOS Competitive Bidding Program. 
Subpart F would set forth policies and procedures relating to the 
program in Sec. Sec.  414.400 through 414.446.

A. Purpose and Definitions (Proposed Sec.  414.400 and Sec.  414.402)

[If you choose to comment on issues in this section, please include the 
caption ``Use of terms'' at the beginning of your comments.]

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

[[Page 25661]]

implementation of a competitive bidding program.
    (1) An inexpensive or routinely purchased item described in Sec.  
414.220;
    (2) An item requiring frequent and substantial servicing as 
described in Sec.  414.222;
    (3) Oxygen and oxygen equipment described in Sec.  414.226; and
    (4) A capped rental item described in Sec.  414.229.
    Grandfathered supplier means a noncontract supplier that furnishes 
a grandfathered item.
    Item means one of the following products identified by a HCPCS 
code, other than class III devices under the Federal Food, Drug and 
Cosmetic Act and inhalation drugs, and includes the services directly 
related to the furnishing of that product to the beneficiary:
    (1) Durable medical equipment (DME), as defined in Sec.  414.202 
and further classified into the following categories:
    (a) Inexpensive or routinely purchased items, as specified in Sec.  
414.220(a);
    (b) Items requiring frequent and substantial servicing, as 
specified in Sec.  414.222(a);
    (c) Oxygen and oxygen equipment, as specified in Sec.  414.226(b); 
and
    (d) Other DME (capped rental items), as specified in Sec.  414.229.
    (2) Supplies necessary for the effective use of DME.
    (3) Enteral nutrients, equipment, and supplies.
    (4) Off-the-shelf orthotics, which are orthotics described in 
section 1861(s)(9) of the Act that require minimal self-adjustment for 
appropriate use and do not require expertise in trimming, bending, 
molding, assembling, or customizing to fit a beneficiary.
    Item weight is a number assigned to an item based on its 
beneficiary utilization rate in a competitive bidding area when 
compared to other items in the same product category.
    Metropolitan Statistical Area (MSA) has the same meaning as that 
given by the Office of Management and Budget.
    Nationwide competitive bidding area means a competitive bidding 
area that includes the United States and its territories.
    Noncontract supplier means a supplier that is located in a 
competitive bidding area or that furnishes items through the mail to 
beneficiaries in a competitive bidding area but that is not awarded a 
contract by CMS to furnish items included in the competitive bidding 
program for that area.
    Physician has the same meaning as in section 1861(r)(1) of the Act.
    Pivotal bid means the highest composite bid based on bids submitted 
by suppliers for a product category that will include a sufficient 
number of suppliers to meet beneficiary demand for the items in that 
product category.
    Product category means a grouping of related items that are 
included in a competitive bidding program.
    Single payment amount means the allowed payment for an item 
furnished under a competitive bidding program.
    Supplier means an entity with a valid Medicare supplier number, 
including an entity that furnishes items through the mail.
    Treating practitioner means a physician assistant, nurse 
practitioner, or clinical nurse specialist, as those terms are defined 
in section 1861(aa)(5) of the Act.
    Weighted bid means the item weight multiplied by the bid price 
submitted for that item.

B. Implementation Contractor (Proposed Sec.  414.406)

[If you choose to comment on issues in this section, please include the 
caption ``Implementation Contractor'' at the beginning of your 
comments.]

    Section 1847(b)(9) of the Act provides that the Secretary may 
contract with appropriate entities to implement the Medicare DMEPOS 
Competitive Bidding Program. Therefore, in proposed Sec.  414.406(a), 
we would designate one or more competitive bidding implementation 
contractors (CBICs) for the purpose of implementing the Medicare 
Competitive Bidding Program. Section 1847(a)(1)(C) of the Act also 
authorizes the Secretary to waive such provisions of the Federal 
Acquisition Regulation (FAR) as are necessary for the efficient 
implementation of this section, other than provisions relating to 
confidentiality of information and such other provisions as the 
Secretary determines appropriate. The Secretary is exercising this 
authority to waive all requirements of the FAR, other than provisions 
dealing with confidentiality, because of the need for expeditious 
implementation of a program of this significance and magnitude. 
However, this does not preclude us from voluntarily using or adapting 
certain provisions of the FAR for purposes of the competitive bidding 
contracts.
    We envision that the Medicare DMEPOS Competitive Bidding Program 
will have six primary functions, including overall oversight and 
decision making, operation design functions (including the design of 
both bidding and outreach material templates, as well as program 
processes), bidding and evaluation, access and quality monitoring, 
outreach and education, and claims processing. We considered the 
organizational structure and requirements necessary to conduct these 
functions, and have chosen to exercise our contracting authority under 
section 1847(b)(9) of the Act and contract with one or more CBICs to 
assist us with many of these functions.
    We considered several options in designing the most appropriate 
framework for implementing the Medicare DMEPOS Competitive Bidding 
Program. Since the implementation of competitive bidding involves many 
functions that are time limited and require specialized skills, for 
example, setting up bidding areas, reviewing bids, and setting single 
payment amounts, we believe that it would be prudent to initially 
implement most aspects of the Medicare Competitive Bidding Program 
through one or more CBICs. Processing of Medicare claims for most 
DMEPOS is currently done by four DME regional carriers (DMERCs). These 
DMERCs would continue to process claims for DMEPOS items subject to 
competitive bidding and would continue to perform other existing DMERC 
functions. We have evaluated the anticipated feasibility and cost of 
using one or more implementation contractor(s) to assist us with 
implementing the Medicare DMEPOS Competitive Bidding Program, 
concentrating on the potential for capturing economies of scale and 
scope, program consistency, existing resources and infrastructure, and 
the viability of implementation under the timeframe mandated by section 
1847(a)(1)(B) of the Act.
    We would contract with one or more CBICs to conduct some program 
functions at a national level and interact with the DMERC contractors. 
Specifically, we envision that the CBIC(s) would conduct certain 
functions related to competitive bidding, such as preparing the request 
for bids (RFB), performing bid evaluations, selecting qualified 
suppliers, and setting single payment amounts for all competitive 
bidding areas. Additionally, the CBIC(s) would be charged with 
educating the DMERCs on the bidding process and procedures. The CBIC(s) 
would also assist CMS and the DMERCs in monitoring program 
effectiveness, access, and quality. The DMERCs would continue to 
provide outreach and education to beneficiaries and suppliers in their 
regions, process claims, apply the single payment amounts set by the 
CBIC(s) for each competitive bidding area, and continue to be 
responsible for complaints related to claims processing. We would 
continue to be responsible for overall

[[Page 25662]]

oversight and decision making, as well as policy related outreach and 
education to the CBIC(s), DMERCs, suppliers, and beneficiaries.
    In our view, this approach would achieve economies of scale since 
the responsibility for producing program materials and evaluating bids 
would rest with the CBIC(s). As a result, we believe that this approach 
would both lower costs and ensure regional consistency in that the 
responsibility would not be divided between various entities.
    We considered two other alternatives for implementation of the 
Medicare DMEPOS Competitive Bidding Program. The first was to have each 
DMERC conduct competitive bidding in its respective area and be 
responsible for all activities related to competitive bidding. The 
second alternative was to have the CMS Consortium Contractor Management 
Officer (CCMO)/ Regional Offices (RO) and the DMERCs implement the 
program. However, we believe that by using one or more specialized 
CBICs, we can successfully implement and effectively manage this 
program.

C. Payment Basis (Proposed Sec.  414.408)

[If you choose to comment on issues in this section, please include the 
caption ``Payment Basis'' at the beginning of your comments.]

1. Payment Basis (Sec.  414.408(a))
    Section 1847(b)(5) of the Act mandates that a single payment amount 
be established for each item in each competitive bidding area based on 
the bids submitted and accepted for that item. Medicare payment for the 
item is then made on an assignment-related basis equal to 80 percent of 
the applicable single payment amount, less any unmet Part B deductible 
described in section 1833(b) of the Act. Section 1847(a)(6) of the Act 
requires that this payment basis be substituted for the payment basis 
otherwise applied under section 1834(a) of the Act for DME, section 
1834(h) of the Act for Off-The-Shelf (OTS) orthotics, or section 
1842(s) of the Act for enteral nutrition, as appropriate.
    We are proposing in Sec.  414.408 that payment to the contract 
supplier would be based on the single payment amount for the item in 
the competitive bidding area where the beneficiary maintains a 
permanent residence. If an item that is included in a competitive 
bidding program is furnished to a beneficiary who does not maintain a 
permanent residence in a competitive bidding area, the payment basis 
for the item would be 80 percent of the lesser of the actual charge for 
the item, or the applicable fee schedule amount for the item. We are 
also proposing that implementation of a competitive bidding program 
would not preclude the use of an Advanced Beneficiary Notice (ABN) to 
allow beneficiaries to make informed consumer choices regarding whether 
to obtain items for which Medicare might not make payment.
2. General Payment Rules (Proposed Sec.  414.408 (c-j))
    Section 1834(a) of the Act and Sec.  414.200 through Sec.  414.232 
(with the exception of Sec.  414.228) set forth the Medicare Part B 
payment methodology we use to pay for the rental or purchase of new and 
used DME. Each item of DME that is paid for under these sections is 
classified into a payment category, and each category has its own 
unique payment rules. Section 1842(s) of the Act provides authority for 
establishing a statewide or area wide fee schedule to be used for the 
payment of items described in section 1842(s)(2) of the Act. Under this 
authority, we implemented fee schedules for the payment of purchased 
and rented enteral nutrients, equipment, and supplies (see Sec.  
414.100 through Sec.  414.104). Section 1834(h) of the Act and Sec.  
414.228 of our regulations set forth the Medicare Part B payment 
methodology we use to pay for orthotics and prosthetics.
    Other than the rules governing calculation of the single payment 
amount and other proposed modifications to existing policies that are 
addressed in this regulation, we propose that the current requirements 
regarding the rental or purchase of DMEPOS items would continue to 
apply under the Medicare DMEPOS Competitive Bidding Program. While we 
believe that we have discretion under section 1847(a)(6) of the Act to 
adopt new rules that would govern these requirements, at this time we 
are proposing only to change the payment basis for these items.
3. Special Rules for Certain Rented Items of DME and Oxygen 
(Grandfathering of Suppliers) (Proposed Sec.  414.408(k))
a. Process for Grandfathering Suppliers
    Section 1847(a)(4) of the Act requires that in the case of covered 
DME items for which payment is made on a rental basis under section 
1834(a) of the Act, and in the case of oxygen for which payment is made 
under section 1834(a)(5) of the Act, the Secretary shall establish a 
``grandfathering'' process by which rental agreements for those covered 
items and supply arrangements with oxygen suppliers entered into before 
the start of a competitive bidding program may be continued. DME paid 
on a rental basis under section 1834(a) of the Act includes inexpensive 
or routinely purchased items furnished on a rental basis, items 
requiring frequent and substantial servicing, and capped rental items. 
Section 1834(a)(5) of the Act mandates that payment be made for oxygen 
and oxygen equipment on the basis of monthly payment amounts for oxygen 
and oxygen equipment (other than portable oxygen equipment) with 
separate add-on payments for portable oxygen equipment. We are 
proposing the grandfathering process described below for rented DME and 
oxygen and oxygen equipment when these items are included under a 
competitive bidd