[Federal Register: December 13, 2002 (Volume 67, Number 240)]
[Rules and Regulations]
[Page 76684-76697]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13de02-9]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Center for Medicare & Medicaid Services
42 CFR Part 405
[CMS-1908-IFC]
RIN 0938-AJ97
Medicare Program; Application of Inherent Reasonableness to All
Medicare Part B Services (Other Than Physician Services)
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Interim final rule.
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SUMMARY: This interim final rule sets forth the process for
establishing a realistic and equitable payment amount for all Medicare
Part B services (other than physician services) when the existing
payment amounts are inherently unreasonable because they are either
grossly excessive or deficient. We also do not intend to apply this
rule to services paid under a prospective payment system, such as
outpatient hospital or home health. This rule describes the factors we
(or our carrier) will consider and the procedures we will follow in
establishing realistic and equitable payment amounts. This rule also
responds to the public comments we received on the interim final rule
with comment period that described the factors we will follow in
establishing realistic and equitable payment amounts. In addition, the
rule responds to a General Accounting Office report (as required by
section 223 of the Balanced Budget Refinement Act of 1999), and it
implements sections 1842(b)(8) and (b)(9) of the Social Security Act as
revised by section 4316 of the Balanced Budget Act of 1997.
DATES: Effective date: These regulations are effective on February 11,
2003.
Comment date: Comments will be considered if we receive them at the
appropriate address, as provided below, no later than 5 p.m. on
February 11, 2003.
ADDRESSES: In commenting, please refer to file code CMS-1908-IFC.
Because of staff and resource limitations, we cannot accept comments by
facsimile (FAX) transmission or e-mail. Mail written comments (one
original and three copies) to the following address only:
Centers for Medicare & Medicaid Services, Department of Health and
Human Services, Attention: CMS-1908-IFC, P.O. Box 8017, Baltimore, MD
21244-8017.
Please allow sufficient time for mailed comments to be timely
received in the event of delivery delays.
If you prefer, you may deliver (by hand or courier) your written
comments (one original and three copies) to one of the following
addresses:
Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201, or Room C5-14-03, 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 commenters 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 could be considered late.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.
FOR FURTHER INFORMATION CONTACT: William Long, (410) 786-5655.
SUPPLEMENTARY INFORMATION: Inspection of Public Comments: Comments
received timely will be available for public inspection as they are
received,
[[Page 76685]]
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, call telephone number: (410) 786-
7195.
I. Background
Title XVIII of the Social Security Act (the Act) contains various
methodologies for making payment under Part B of the Medicare program.
These payment methodologies vary among the different categories of
items and services covered under Part B.
Section 4316 of the Balanced Budget Act of 1997 (BBA), Pub. L. 105-
33, enacted on August 5, 1997, however, permits the Secretary to
deviate from the payment methodologies prescribed in title XVIII of the
Act if their application results in a payment amount that, because it
is determined to be grossly excessive or deficient, is not inherently
reasonable. Section 4316 of the BBA also requires the Secretary to
describe the factors to be considered in determining an amount that is
realistic and equitable.
The inherent reasonableness concept is not new to the statute. The
Secretary has always taken the position that the authority to regulate
unreasonable payment amounts is inherent in his authority to determine
reasonable charges according to section 1842 of the Act. Moreover,
effective September 10, 1986, section 9304(a) of the Consolidated
Omnibus Budget Reconciliation Act (COBRA) (Pub. L. 99-272) of 1985
added section 1842(b)(8) and (b)(9) of the Act. These provisions
expressly authorize the Secretary to deviate from the payment
methodologies prescribed in the Act if their application results in a
payment amount for a particular service or group of services, that is
determined to be grossly excessive or deficient and is therefore, not
inherently reasonable. The statute requires the Secretary to describe
in regulations the factors to be considered in determining an amount
that is realistic and equitable.
Regulations implementing this provision are contained in 42 CFR
405.502(g) and (h) and were published on August 11, 1986 in the Federal
Register (51 FR 28710). These regulations describe the factors to be
used in determining if the application of the reasonable charge
methodology results in a charge that is grossly excessive or grossly
deficient. The regulations also describe the factors to be considered
in establishing a reasonable charge that is realistic and equitable.
As implemented by the current regulations, section 1842(b)(8) of
the Act applies not only to our authority to establish national
reasonable charge limits, but also to our carriers' authority to
establish carrier-level reasonable charge limits on grossly excessive
or deficient charges.
Section 4316 of the BBA amends section 1842(b)(8) of the Act and
includes the following key differences:
[sbull] It excludes physician services from application of inherent
reasonableness.
[sbull] It extends the authority to establish special payment
limits to Medicare carriers regardless of the methodology used for
determining payment and simplifies the inherent reasonableness process
for adjustments to payment amounts that are 15 percent or less.
On January 7, 1998 we published in the Federal Register (63 FR 687)
an interim final rule implementing section 4316 of the BBA.
II. Provisions of the 1998 Interim Final Rule
In the January 7, 1998 interim final rule, we revised Sec.
405.502(g) and (h) by excluding references to physician services. We
also deleted specific references to the reasonable charge payment
methodology. We deleted these references because the inherent
reasonableness provisions apply to all Part B services, except
physician services, irrespective of the payment methodology. However,
we do not intend to apply this rule to services paid under a
prospective payment system, such as outpatient hospital or home health
services. We also reflected the change in the statute that permitted us
to simplify the process for making adjustments to payment amounts for a
category of items or services when the increase or decrease in the
payment amount is no more than 15 percent per year. (For purposes of
Sec. 405.502(g) and (h), a ``category of items or services'' may
consist of a single item or service or any number of items or
services.)
Although the BBA gives the Secretary discretion to reduce the
number of factors that are used to make inherent reasonableness
determinations, we retained all but one of the factors that appear in
Sec. 405.502(g)(1), because they remain as appropriate examples of
factors that may result in deficient or excessive payment amounts. We
removed the factor related to the use of new technology for which an
extensive charge history does not exist because there was already in
place an alternative process for establishing payment amounts for new
items or services for which an extensive charge history does not exist.
(We reinserted this example in the final regulation; however, due to
comments we received requesting that this example not be deleted.)
When we implemented section 9304(a) of COBRA of 1985, we
interpreted the statute as codifying both our authority and a carrier's
authority to establish realistic and equitable payment amounts. We
interpreted the provisions of section 4316 of the BBA in the same way.
Thus, the final regulations describe the circumstances and factors our
carriers and we would use in setting realistic and equitable payment
amounts if the existing payment amounts are grossly excessive or
deficient.
Section 4316 of the BBA amends section 1842(b)(8), adding
provisions that apply if a reduction or increase would vary the payment
amount by 15 percent or less ``during any year.'' (Other provisions
apply to larger increases and decreases.) Under this authority, we (or
a carrier) may determine that more than a 15-percent adjustment is
warranted, but we may choose to apply only a 15-percent adjustment in
any given year and use the ``15 percent'' methodology. For example, we
(or a carrier) may determine that a 25-percent reduction is warranted.
However, the adjustment could be accomplished over 2 years--15 percent
applied the first year, and 10 percent applied the following year.
Other than these BBA changes and some minor modifications, the
revised 1998 interim final regulations were the same as the final
regulations that were published in the Federal Register (53 FR 26067)
on July 11, 1988.
While amended section 1842(b)(8)(C) of the Act does not
specifically require that we include all the factors for making
inherent reasonableness determinations for a category of items or
services currently contained in Sec. 405.502(g), it permits the
Secretary to consider any additional factors determined to be
appropriate. The additional pre-BBA factors we may consider, in
accordance with current Sec. 405.502(g)(1), include the following:
[sbull] The market place is not competitive.
[sbull] The payment amounts in a particular locality grossly exceed
amounts paid in other localities for the category of items or services.
[sbull] The payment amounts grossly exceed acquisition or
production costs for the category of items or services.
[sbull] There have been increases in payment amounts that cannot be
explained by inflation or technology.
[[Page 76686]]
III. Balanced Budget Refinement Act of 1999
Section 223 of the Balanced Budget Refinement Act (BBRA) of 1999,
Pub. L. 106-113, enacted on November 29, 1999, prohibits the use of the
inherent reasonableness authority until the following events have
occurred:
Step 1: The Comptroller General releases a report regarding the
impact of the Secretary's fiscal intermediaries' and carriers' use of
the authority.
This report entitled ``Medicare Payments-Use of Revised `Inherent
Reasonableness' Generally Appropriate (GAO/HEHS-OO-79)'' was released
by the General Accounting Office (GAO) in July 2000. A discussion of
this report and our response to its recommendations is contained in
section IV of this regulation.
Step 2: The Secretary has published a notice of final rulemaking in
the Federal Register that relates to the authority and that responds to
the report and to comments received in response to the Secretary's
interim final regulation relating to the authority that was published
on January 7, 1998.
This regulation constitutes a notice of final rulemaking relating
to inherent reasonableness authority. In addition to responding to the
GAO Report, this regulation also responds to the comments received
regarding the interim final regulation that was published January 7,
1998. Section V of this regulation includes our responses to these
comments. However, we are issuing this regulation as an interim final
rule so that the public will have an additional opportunity to comment.
We are particularly interested in receiving comments on two provisions
that contain further specificity than found in the 1998 interim final
rule. These two provisions are the definitions of ``grossly excessive''
and ``grossly deficient'' in Sec. 405.502(g)(1)(ii) and the criteria
for using valid and reliable data in Sec. 405.502(g)(4). Comments on
the 1998 interim final rule are addressed in section V of this interim
final rule.
Step 3: In publishing the final regulation, the Secretary will
reevaluate the appropriateness of the criteria included in the interim
final regulation for identifying payments that are excessive or
deficient.
The criteria set forth in the interim final rule were never
intended to include every set of circumstances where inherent
reasonableness would be considered appropriate. We have reviewed the
criteria that were included in the interim final rule. These same
criteria were also included in the 1986 final regulation and are,
therefore, not new but have been in effect for over 10 years. These
criteria were originally established by the Congress. We believe the
criteria remain as appropriate today as they were when the Congress
established them, and we would need compelling reasons for determining
that any of the criteria are inappropriate. A more detailed discussion
of the criteria is contained in section V of this preamble. Once again,
we would point out that these criteria are furnished as examples of
situations of possible grossly excessive or deficient payment amounts
and we believe they are realistic and continue to be relevant. In
addition, the criteria were never intended to include every set of
circumstances for which inherent reasonableness would be considered
appropriate.
Step 4: Take appropriate steps to ensure the use of valid and
reliable data when exercising the authority.
The regulation has been revised to include a new section that
provides a methodology taken from the GAO report to ensure the use of
valid and reliable data (Sec. 405.502(g)(4)). The criteria include
doing the following:
[sbull] Develop written guidelines for data collection and
analysis;
[sbull] Ensure consistency in any survey to collect and analyze
pricing data.
[sbull] Develop a consistent set of survey questions to use when
requesting retail prices.
[sbull] Ensure that sampled prices fully represent the range of
prices nationally.
[sbull] Consider the geographic distribution of Medicare
beneficiaries.
[sbull] Consider relative prices in the various localities to
ensure that an appropriate mix of areas with high, medium, and low
consumer prices was included.
[sbull] Consider criteria to define populous State, less populous
State, urban area, and rural area.
[sbull] Consider a consistent approach in selecting retail outlets
within selected cities.
[sbull] Consider whether the distribution of sampled prices from
localities surveyed is fully representative of the distribution of the
U.S. population.
[sbull] Consider the products generally used by beneficiaries and
collect prices of these products.
[sbull] When using wholesale costs, consider the cost of the
services necessary to furnish a product to beneficiaries.
IV. Response to GAO Report
In July 2000, the GAO released a report entitled ``Medicare
Payments--Use of Revised `Inherent Reasonableness' Generally
Appropriate (GAO/HEHS-00-79).'' This interim final regulation responds
to the GAO report and, in section V, responds to the comments received
regarding the January 7, 1998 interim final regulation. In its report,
the GAO found that CMS's use of the revised inherent reasonableness
process was generally appropriate. Also, the GAO made four specific
recommendations that are discussed below.
Recommendation: In publishing the final rule on the inherent
reasonableness process, CMS should define with sufficient clarity the
terms ``grossly excessive'' and ``grossly deficient.''
Response: We concur with this recommendation. The GAO indicated
that the definition of these terms is needed so that it is clear to the
medical equipment industry precisely what constitutes grossly excessive
or grossly deficient. In its report, the GAO states that ``clearly an
adjustment of under 15 percent could qualify [as grossly excessive or
grossly deficient], because the inherent reasonableness authority
extends to situations in which the difference between a current and
proposed payment amount is under 15 percent.''
In addition, the statute provides two different processes once a
determination is made that a payment amount is grossly excessive or
deficient. That is, the statute specifies a process for adjustments of
15 percent or more in a given year and a simplified process for
adjustments of less than 15 percent in a given year. However, the
statute does not define what constitutes a grossly excessive or
deficient payment amount. Nevertheless, the statute places significant
importance on a 15 percent criterion. For this reason, we believe that
differences between current and proposed payment amounts of less than
15 percent should not be considered grossly excessive or grossly
deficient and therefore do not provide a sufficient basis for using
Inherent Reasonableness authority. This definition does not preclude
adjustments of less than 15 percent in a given year once it is
determined that an overall adjustment of 15 percent or more is
justified.
Recommendation: For future inherent reasonableness reviews based on
survey data, CMS or the carriers should develop and implement a more
structured survey design, including sample selection, survey
instrumentation, and data collection methods, and ensure that the
design is consistently used by all entities conducting the survey.
Response: In September of 1998, the carriers proposed reducing
payment
[[Page 76687]]
amounts for blood glucose test strips, lancets, intermittent urinary
catheters, basic enteral formula, albuterol sulfate (an inhalation
solution), and eyeglass frames. The basis for these payment reductions
was their determination that the current fees were grossly excessive.
The carriers based this determination on a comparison of the current
fees with the retail prices charged by suppliers. The retail data were
gathered from telephone inquiries and on-site visits to retailers. Each
DMERC obtained retail prices from four States in their region (three
populous States and one less populous State). Thus, the carriers
obtained prices from a total of 16 States across the country (12
populous States and 4 less populous States). Within each State, the
carriers obtained prices from three urban areas and two rural areas.
Within each urban area, the carriers obtained prices from four large
stores and one small store. Within each rural area, the carriers
selected one store. At least 200 observations were made for each of the
six items with over 1,000 observations being made for blood glucose
test strips.
The following are the GAO's main criticisms of this retail price
survey as stated in the report and our responses:
[sbull] The carriers' sampling plan was developed without fully
considering the geographic distribution of Medicare beneficiaries.
Based on this criticism from the GAO, in the future we will ensure
that greater consideration is given to survey design including the
geographic distribution of Medicare beneficiaries for the purpose of
conducting retail price surveys.
[sbull] The carriers did not consider relative prices in the
localities from which they sampled, which would have helped ensure that
an appropriate mix of areas with high, medium, and low consumer prices
was included.
The carriers surveyed both large and small States, urban and rural
areas, and independent and chain stores for this purpose. In the
future, we will take steps to ensure that consideration is given to
including areas with high, medium, and low consumer prices.
[sbull] The carriers did not establish criteria to define populous
State, less populous State, urban area, rural area, and, consequently,
each carrier used different criteria in selecting locations.
[sbull] We will adopt more standard definitions of what constitutes
populous States, less populous States, urban areas, and rural areas and
will ensure that the carriers use these definitions.
[sbull] The carriers were not consistent in how they chose retail
outlets within selected cities.
While the carriers surveyed both independent and chain stores, we
will instruct the carriers to be more consistent in the methodology
they use to make these selections.
[sbull] The carriers did not use consistent methods to collect and
analyze the pricing data and did not develop written guidelines for
data collection and analysis.
The carriers did use written spreadsheets to contain the basic
information that they were looking for when they contacted each retail
store. The method that was used was a simple example of price shopping,
namely, pricing data were collected by contacting retail stores to find
out how much they charge for a certain list of items. The carriers
followed general guidelines that were provided by CMS. We will issue
more detailed guidelines to the carriers to ensure that a more
standardized method is used when obtaining pricing information in the
future.
Also, based on these GAO criticisms of the carriers price survey,
the carriers will not finalize their September 1998 proposed
adjustments since the methodology used by the carriers' for making the
proposed adjustments does not reflect the revised regulatory criteria
recommended by GAO for making inherent reasonableness determinations.
Likewise, the CMS inherent reasonableness proposals that were published
in August 1999 will not be finalized since the methodology used for
making the proposed adjustments also do not reflect the revised
criteria recommended by GAO and adapted in this final regulation.
Recommendation: CMS and the carriers should collect and analyze
additional information to more precisely estimate any payment
reductions for glucose test strips, albuterol sulfate, and enteral
formulas, as well as for additional payment reductions in subsequent
years for lancets, eyeglass frames, latex Foley catheters, and catheter
insertion trays without drainage bags.
Response: See response to previous recommendation.
Recommendation: CMS should monitor indicators that could signal
potential problems with patient access to the product groups for which
it is reducing maximum payments and act quickly to rectify any problems
that arise.
Response: As stated in our comments on the draft report, we will
monitor patient access to items for which payment amounts are adjusted
using the inherent reasonableness process by periodically checking the
rate at which suppliers are accepting assignment for these items and by
monitoring any beneficiary complaints regarding access.
V. Comments and Responses
A. General
The January 7, 1998 interim final rule invited comments. The
specific comments and our responses to these comments follow:
Comment: Only the Congress should be permitted to revise payment
rates.
Response: The inherent reasonableness authority was first expressly
granted to the Secretary by the Congress in section 9304 of COBRA of
1985. The inherent reasonableness process was specifically established
by the Congress for the Secretary to use in adjusting unreasonable
payment amounts. In section 4316 of the BBA, the Congress further
modified the inherent reasonableness authority which allows the
Secretary to revise payment rates. Therefore, the Congress clearly
granted the Secretary the authority to revise payment rates using the
inherent reasonableness process.
Comment: The statute limits inherent reasonableness adjustments to
particular items, not categories of items.
Response: The regulations have always referred to inherent
reasonableness as applying to categories of services. While the statute
makes reference to particular items or services, we do not believe that
this precludes our applying inherent reasonableness to categories of
particular items or services that are similar in function and
technology, for example, durable medical equipment grouped together
under the same code in the Health Care Common Procedure Coding System
(HCPCS). It would be impractical to make separate inherent
reasonableness adjustments for each unique item or service. For
example, it would not be practical to make inherent reasonableness
determinations for every different manufacturer, brand name, or model
of a specific type of wheelchair described by a particular HCPCS code.
Moreover, if a category of items is so similar that payment is made
based on the same code and same payment determination, it seems to us
completely logical to apply the same limitation to the whole category.
Comment: The inherent reasonableness provision should not be
applied to hospital outpatient services.
Response: The statute applies inherent reasonableness to all Part B
items and services other than physicians' services as defined and paid
for under section 1848 of the Act. By statute, hospital outpatient
services,
[[Page 76688]]
therefore, are not excluded from the inherent reasonableness process.
However, we do not intend to apply this rule to services paid under a
prospective payment system, such as outpatient hospital or home health
services.
Comment: The inherent reasonableness provision should not be
applied to drugs administered in physicians' offices.
Response: The statute applies inherent reasonableness to all Part B
items and services other than physicians' services as defined and paid
for under section 1848 of the Act. Drugs are paid under section 1842(o)
of the Act and not section 1848 of the Act. The inherent reasonableness
authority can and should be used in cases for which the standard rules
for determining payment amounts for drugs result in grossly deficient
or excessive payment amounts. However, we do not intend to apply this
rule to services paid under a prospective payment system, such as
outpatient hospital or home health services. Further, no item or
service will be subjected to a change in payment under the inherent
reasonable authority until it is published by either CMS in the Federal
Register or its carriers in their own publication and consideration of
comments received in response to the proposed notice. (CMS notices are
published in the Federal Register.)
Comment: It would be inappropriate for CMS to change laboratory
payments while the Institute of Medicine is conducting a study on Part
B payments.
Response: Before applying inherent reasonableness to laboratory
services, we will consider the results of the study conducted by the
Institute of Medicine. As we noted above, the inherent reasonableness
authority can and should be used in cases where the standard rules for
determining payment amounts for laboratory services result in grossly
deficient or excessive payment amounts. Moreover, no item or service
will be subjected to a change in payment under the inherent
reasonableness authority until it is published by either CMS in the
Federal Register or its carriers in their own publication and
consideration of comments received in response to the proposed notice.
Comment: CMS should not ignore grossly deficient situations. CMS
should include the mechanisms for increasing deficient payments.
Response: We will monitor all complaints from beneficiaries,
suppliers, providers, and others regarding patient access to items and
services for which payment amounts may be adjusted using the inherent
reasonableness process. If we determine that a payment amount is
grossly deficient, then we will propose that the payment amount be
adjusted using the inherent reasonableness process.
Comment: CMS should increase payment allowances for items used by
ostomy patients.
Response: The inherent reasonableness authority was suspended by
the BBRA (see section III of this final rule for a discussion of the
BBRA). Before that statute, we were reviewing the payment amounts for
several ostomy items to determine if inherent reasonableness
adjustments were necessary. We intend to continue reviewing payment for
these items once the inherent reasonableness authority is restored.
Comment: If CMS or a carrier decides to reduce excessive payment
allowances by more than 15 percent spread out over 2 or more years, it
should repeat the review process each year; otherwise, this provision
contravenes congressional intent.
Response: As recommended in the GAO report, when adjustments of
more than 15 percent are spread out over multiple years, we will review
market prices in the years subsequent to the year that the initial 15
percent reduction is effective. The purpose of this review is to ensure
that further reductions continue to be appropriate. However, the GAO
does not recommend that a new proposed notice be published for each
year in which reductions are implemented in addition to the initial 15
percent reduction, and we agree that it is not necessary to publish
another notice.
Comment: Arbitrary adjustments to payment rates will affect patient
access, assignment rates, beneficiary liability, and quality of care.
Response: The purpose of the inherent reasonableness process is to
establish realistic and equitable payment amounts when it is determined
that the current payment methods result in amounts that are grossly
excessive or grossly deficient. If payment amounts are proposed using
the inherent reasonableness process that are not realistic and
equitable, then the public has an opportunity to address this during
the comment period. Information we or our carriers receive during the
comment period or at any other time that demonstrates that inherent
reasonableness adjustments will affect patient access, assignment
rates, beneficiary liability, or quality of care would result in our
appropriately adjusting the payment amount.
Whether attempting to adjust payments centrally through a Federal
Register notice or through the Medicare carriers, we believe that
payment adjustments can only be effective if they follow a defensible
process for doing so and are based on accurate information. As
described in Sec. 405.502(g)(1) through (g)(4) of this regulation, a
carrier proposing to establish a special payment limit for a category
of items or services must inform the affected suppliers and Medicaid
agencies of the proposed payment amounts and the factors considered in
proposing the particular limit. As part of its analysis, all carriers
must also consider the following elements:
[sbull] The effects on the Medicare program, including costs,
savings, assignment rates, beneficiary liability, and quality of care.
[sbull] What entities would be affected such as classes of
providers or suppliers and beneficiaries.
[sbull] How significantly would these entities be affected.
[sbull] How would the adjustment affect beneficiary access to items
or services.
The intent of these requirements is to assure that carriers collect
sufficient information on market prices and potential effects on
suppliers and beneficiaries before taking action.
Comment: Inherent reasonableness adjustments could cause other
payers to subsidize the Medicare program.
Response: The goal of the inherent reasonableness process is to
establish payment amounts that are realistic and equitable. When
Medicare has realistic and equitable payment amounts, this should not
result in other payers subsidizing the Medicare program, or conversely,
Medicare subsidizing other payers.
Comment: CMS needs to establish an inherent reasonableness appeals
procedure.
Response: The statute does not provide for an appeals process in
the case of inherent reasonableness adjustments to payment amounts.
Thus, the Congress obviously did not intend for a special appeal
process to be available. However, issues or concerns identified during
the public comment period on proposed inherent reasonableness
adjustments are given full consideration and a final determination is
published before the actual adjustments in payment are made. The
comment period, therefore, provides a mechanism for commenters to raise
issues and concerns regarding inherent reasonableness adjustments
before they are put in place. In addition, after an adjustment is made,
we will continue to monitor issues relating to patient access and take
corrective action if necessary.
[[Page 76689]]
B. Factors Used in Making an Inherent Reasonableness Determination
Comment: CMS should consider all the factors that may result in
grossly deficient or excessive payment and not limit consideration to
just one or two of the factors.
Response: The examples listed in Sec. 405.502(g)(1)(vii) are just
examples, and the regulation explicitly states that the list of
examples is not all-inclusive. When making an inherent reasonableness
determination, we can use one or more of the examples listed in the
regulation or an example that is not listed in the regulation. This
approach allows us to adapt the methodology we use to address the
various specific issues that may pertain to any particular case
regarding the use and availability of data as well as other factors
relevant to making an inherent reasonableness determination in that
case.
Comment: The regulation should include greater specificity and
guidance on the criteria and data that will be used to make payment
adjustments. It should define grossly deficient or excessive. It should
also define ``windfall profit.''
Response: Both Sec. 405.502(g)(1)(vii) and section 1842(b)(8)(C)
of the statute give examples of factors that can result in payment
amounts that are grossly excessive or grossly deficient. The Act and
regulation also give examples of methods that can be used in order to
establish reasonable payment amounts. It is not necessary or practical
to make these lists of examples all-inclusive. Moreover, having general
criteria allows us flexibility in adapting inherent reasonableness
applications to the wide array of items and services encompassed within
Medicare Part B, different marketing conditions, and the availability
of data. We define the terms ``grossly excessive'' and ``grossly
deficient'' in this rule in section IV dealing with the GAO report and
its recommendations. In this rule, we removed the term ``windfall'' and
we replaced it with the term ``excessive'' because for purposes of this
regulation they both have the same meaning. We define the term
excessive in Sec. 405.502(g)(1)(ii).
Comment: The factors to be considered should be rephrased to ensure
that they apply to deficient payment allowances as well as excessive
payment allowances.
Response: The factors in Sec. 405.502(g)(1)(vii) apply to both
excessive and deficient payment amounts.
Comment: CMS should specify that national inherent reasonableness
determinations are made by CMS, and carrier determinations are made by
carriers/intermediaries or groups of carriers/intermediaries without
regard to whether the determination applies in every carrier area or to
a particular geographic area.
Response: We agree with this comment, and we are revising Sec.
405.502(g)(3) of the regulation to provide further clarification on the
terms we use to distinguish between inherent reasonableness conducted
by CMS and inherent reasonableness conducted by the carriers.
Comment: CMS should use caution when comparing Medicare payment
amounts to other purchasers' payment amounts. Some suppliers may take a
loss on a small portion of business.
Response: We recognize that some suppliers' charges may reflect
marketing strategies and business practices independent of Medicare.
For example, some businesses may sell an item for less than cost in
order to increase customer traffic. Also, some suppliers may charge
excessive amounts for products in order to subsidize other products.
However, the purpose of inherent reasonableness is not to accommodate
marketing strategies, but to ensure that the Medicare payment amounts
for items or categories of items are realistic and equitable. In
addition, in identifying prices, we check a variety of suppliers and
types of suppliers. This levels out the effect of these marketing
strategies.
Comment: In comparing Medicare's allowances with other purchasers'
allowances, CMS should take into account volume commitments to
suppliers by other purchasers. It would be inappropriate to compare
laboratory prices charged to physicians and other large purchasers to
prices charged to Medicare because physicians and other purchasers can
guarantee the laboratory a certain volume of patients and need only
bill once per month. Billing Medicare for each patient is more
expensive.
Response: While the statute generally does not give CMS the
authority to negotiate volume discounts with suppliers, it also does
not permit CMS to subsidize the discounts that suppliers grant to other
purchasers. CMS's charge is to calculate a fair and equitable payment
amount, not to underwrite suppliers' profitability. Medicare is the
largest volume purchaser for many items and services. As a payer,
Medicare expenditures represent 17.6 percent of total national health
expenditures by all payers. Expenditures for Part B, excluding
physician services, are approximately $60 billion per year. Although
Medicare does not give specific volume guarantees to suppliers and does
not ask for volume discounts, there is a predictable volume of Medicare
business, and suppliers have the opportunity to profit from this. To
suggest that Medicare's payments be higher than other purchasers'
payments in light of the large Medicare volume is unwarranted.
Logically, it does not follow that a large purchaser such as Medicare
should be expected to pay more than other smaller purchasers.
Comment: CMS should not use the Veterans Administration's (VA)
prices for comparison as the VA program is vastly different than
Medicare.
Response: Section 1842(b)(8) of the Act provides that comparing
Medicare payments with payments made by other purchasers is an
appropriate way to determine whether or not Medicare payment amounts
are reasonable. The VA is a major purchaser of medical supplies and
devices. The VA payment amounts in some cases, such as for oxygen
equipment, are retail prices and can be compared with Medicare's
payment amount without adding a mark-up factor. In other cases, the VA
purchases items directly from manufacturers and supplies them to the VA
patients. In addition, the VA may directly provide certain services
that would otherwise be provided by suppliers under the Medicare
program. Therefore, in many cases, the VA payments represent wholesale
prices, and, thus, we have imputed a markup before comparing these
amounts to Medicare payment amounts. Using wholesale prices with a
markup has long been recognized in regulations at Sec. 405.502(g)(2)
as an appropriate method for determining reasonable payment amounts
under the inherent reasonableness authority. When we publish a proposed
inherent reasonableness notice, we will explain the criteria we used to
establish an appropriate markup.
Comment: In determining if the marketplace is not competitive, CMS
should consider if the lack of competition is a result of Medicare's
deficient payment allowances.
Response: The examples in Sec. 405.502(g)(1)(vii) are situations
for which adjustments in payment may be required, such as the one
referred to in this comment, may or may not result in excessive or
deficient payment amounts. That is, the number of suppliers for a
particular item does not in itself indicate whether or not our payment
amount is excessive or deficient. While the number of suppliers may in
certain cases be relevant and be considered, it would have to be
considered along with
[[Page 76690]]
other factors to determine if an inherent reasonableness adjustment is
warranted. We believe the language used in the regulation is consistent
with this interpretation.
Comment: In determining if the payment allowance in a locality is
different than the amount paid in other localities, CMS should consider
differences in costs in the other localities.
Response: For purposes of inherent reasonableness, it is not always
necessary to consider local variations in payment amounts which is
consistent with the Congress limiting the degree of local variation by
eliminating the reasonable charge payment methodology for most items
and services. In the past, the reasonable charge methodology in some
instances resulted in variations among areas as high as 300 percent. In
place of the reasonable charge payment methodology, the Congress has
established fee schedule payment methodologies with national payment
limits or caps for most items and services previously paid on a
reasonable charge basis. In the case of durable medical equipment (DME)
and prosthetics and orthotics, the Congress established a fee schedule
methodology with national floors and ceilings that allow maximum
variations only up to 15 percent for DME and 30 percent for prosthetics
and orthotics. (According to regulations at Sec. Sec. 442.220 and
442.228, for DME, the ceiling is equal to the weighted average of local
payment amounts; the floor is equal to 85 percent of the weighted
average. For prosthetics and orthotics, the ceiling is equal to 120
percent of the national average purchase price; the floor is equal to
90 percent of the national average.) Also, we note that for some items
covered by Medicare, items are available for an established price on a
national basis through catalogues or the internet. For this reason, the
regulatory provision pertaining to local variations in costs will
probably have limited applicability. However, when it is used, we will
take into account the relative costs of furnishing a category of items
or services in different locations as described in the regulation.
Comment: In determining whether the payment allowances are grossly
in excess of acquisition or production costs, CMS should consider other
types of relevant costs, for example, rent. CMS should consider all
direct and indirect costs, including any service component, in making
an inherent reasonableness determination.
Response: In some instances, it may be appropriate to use cost
rather than retail or wholesale prices in determining whether a payment
amount is grossly excessive or deficient. In those instances in which
we use cost data, we will consider both direct and indirect costs of
the supplier as well as any service component.
Comment: In determining if increases in payment amounts cannot be
explained by inflation or technology, CMS should also examine other
factors such as malpractice or product liability risks.
Response: If we determine that increases in payment amounts cannot
be explained by inflation or technology but can be explained by other
factors, we will consider these other factors when making an inherent
reasonableness determination.
Comment: By removing the example relating to increases in payment
amounts that cannot be explained by inflation or technology, in the
interim final rule with comment, CMS would never again consider making
an inherent reasonableness adjustment based on new technology.
Response: As indicated previously, the factors listed in Sec.
405.502(g)(1)(vii) are merely examples. There is no requirement that
any specific example must be used or that only the specific examples
listed in the regulation can be used. However, because this is a good
example, we are putting it back into the regulation.
Comment: CMS should consider improvements in technology in making
an inherent reasonableness determination.
Response: As indicated in Sec. 405.502(g)(1)(vii)(C) of this final
rule, improvements in technology are listed as a factor that we may
consider when making inherent reasonableness determinations.
Comment: CMS's gap-filling methodology does not result in adequate
payment levels for medical equipment and supplies, especially for new
technology.
Response: Section 1834 of the Act stipulates that the fee schedule
payment amounts for DME and prosthetics and orthotics be calculated
based on the average reasonable charge for the item from a base period,
for example, 1986 and 1987. These base fee schedule amounts are updated
on an annual basis by a factor legislated by the Congress. When the
reasonable charge data from the base period do not exist, for example,
when an item was not on the market at that time, the Medicare carriers
establish the base fee schedule amounts using a ``gap-filling''
methodology. This methodology is used to approximate historic
reasonable charges, from the base period. For example, Medicare
carriers may use fee schedule amounts for comparable items or supplier
price lists with prices for comparable items.
When base year data are not available and more current prices are
used, the carriers decrease the more current prices by a ``deflation''
factor in order to approximate the base year price for gap-filling
purposes. The deflation factors are based on the percentage change in
the consumer price index for all urban consumers (CPI-U) from the mid-
point of the fee schedule base period to the mid-point of the year that
the price is in effect. The gap-filling process is only used when the
base year data required by the statute for use in calculating the fee
schedules do not exist. We believe that this methodology does result in
adequate payment amounts by taking into account comparable prices,
retail prices, and inflationary factors. However, we can adjust gap-
filled fee schedule amounts that we determine are grossly excessive or
grossly deficient using the inherent reasonableness process.
Comment: For laboratory services, competitive pricing or changing
technology are not relevant to pricing under inherent reasonableness
since laboratory services are paid on a fee schedule basis.
Response: Fee schedules as payment methodologies do not preclude
the use of inherent reasonableness. The inherent reasonableness process
is the process that the Congress has established to address fee
schedule amounts or other payment amounts that are not reasonable for
various reasons. As indicated by previous GAO and the Office of
Inspector General (OIG) reports, fee schedule payment amounts may not
always be realistic and equitable. Inherent reasonableness, as
authorized by the statute, allows us to look at other factors such as
competitive pricing and changes in technology in order to determine
whether the fee schedule amounts are excessive or deficient.
Comment: The methodology for making inherent reasonableness
determinations should include valid statistical techniques.
Response: As mentioned previously, section 223(b) of the BBRA
requires that, in publishing this regulation, the Secretary will take
appropriate steps to ensure the use of valid and reliable data when
exercising inherent reasonableness authority. We have added a provision
in Sec. 405.502(g)(4) of the final regulation that defines the steps
we will take to ensure the use of valid and reliable data. See our
response
[[Page 76691]]
regarding this topic in section III of this regulation.
Comment: CMS does not have the authority under inherent
reasonableness to require that it receive the ``best price.''
Response: The commenter is referring to a methodology that we may
use in determining whether payment amounts are grossly excessive or
grossly deficient. As described in Sec. 405.502(g)(1)(vii)(D), one
methodology that may be used to make an inherent reasonableness
determination is whether the payment amount for an item or service is
substantially higher or lower than the payments made for the item or
service by other purchasers in the same locality. If we identify a
price and there are indications that the item or service is readily
available at that price, then, we believe, this price would be a
realistic and equitable payment amount. As the GAO observed in its
report on inherent reasonableness, ``retail prices represent the prices
generally available to individual beneficiaries, include a share of the
costs of maintaining retail space as well as other services, and are
generally higher than what a prudent large-volume purchaser would
pay.'' Therefore, using the best retail price available on the open
market for an item or service would be appropriate as long as
beneficiary access to the item or service is not significantly
affected.
Comment: CMS needs to find a ``pattern'' of excessive charges
before it can use its inherent reasonableness authority.
Response: We disagree with this comment. We do not believe that
identifying patterns of excessive charges is necessary to determine
that Medicare is paying a grossly excessive or deficient payment
amount. For example, even though multiple payers may be paying an
excessive amount for an item or service, a single payer may be paying
significantly less than the other payers. This may be the result of the
single payer using a more innovative payment methodology, such as
competitive bidding or negotiated rate setting. We do not believe we
should be precluded from comparing, in this case, Medicare's excessive
payment amount with another entity's significantly lower amount that
was a result of a more innovative payment methodology.
C. Factors Used in Establishing a Special Payment Amount
Comment: A payment amount should not be established based on bulk
purchasing.
Response: In an open market system, bulk purchasing ordinarily
results in a discounted price. Medicare pays for items on an individual
claim-by-claim basis and does not enter into contracts to purchase a
predetermined number of items. Nevertheless, a large volume of claims
is paid by Medicare and the total Medicare dollars that are paid out
for Part B items and services (other than physician services)
(approximately $60 billion dollars in fiscal year 2001) are
significant. Because Medicare may account for a significant part of the
market, we believe that Medicare should not be precluded from taking
into consideration discounts available to other payers when determining
what constitutes a reasonable payment amount for an item or service.
Comment: A payment amount should permit the small supplier to
continue to have reasonable revenues and profit margins. For example,
mail order catalogs should not be used for establishing a payment
amount because small dealers are unable to take advantage of discounted
pricing.
Response: The purpose of inherent reasonableness is to replace
grossly excessive and grossly deficient payment amounts with realistic
and equitable payment amounts. We recognize that small suppliers may be
necessary to provide service to beneficiaries and to ensure appropriate
access to items and services. However, there are instances in which
catalog prices are useful in determining whether adjustments in
payments are warranted. For example, in 1995, catalog prices were used
to reduce the Medicare payment amounts for home blood glucose monitors
and, since then, we have not received any complaints that beneficiaries
are having trouble obtaining home blood glucose monitors. Other items,
such as blood glucose test strips, are ordinarily purchased by Medicare
beneficiaries through catalogs.
Comment: A payment amount should reflect the ``added'' costs of
doing business with Medicare.
Response: In considering retail prices, we recognize that
businesses, in setting these prices, take into account the costs of
providing their customers with appropriate services. For example,
retail stores take into account the costs of processing VISA and
MasterCard claims, including the user fees that suppliers must pay to
accept credit cards and the costs of submitting bills to credit card
companies. Businesses generally do not charge VISA and MasterCard
customers more than other customers. Also, it should be noted that
there are distinct costs to service cash customers, such as necessary
security systems and the deposit of funds in banks. Ordinarily,
purchasers, whether they use coupons, obtain an American Association of
Retired Persons (AARP) discount, use a credit card, write a check, or
use private or public insurance, do not expect to pay more than the
retail price; nor does a customer needing help in selecting a
particular item expect to pay more than the retail price. Thus, retail
prices take into account these costs of doing business. However, if we
do not consider retail prices, but instead use wholesale prices as a
basis for calculating inherent reasonableness, we will include a markup
to make these prices comparable to retail prices.
Comment: CMS should establish single national payment amounts and
should not recognize any geographic variation.
Response: There are instances in which it is appropriate to
establish a single national payment amount (for example, home blood
glucose monitors). There may be other items that are available at the
same price on a national basis. However, in other instances, when there
is a significant labor or service component, it may not be appropriate
to establish a single national payment amount for an item or service.
The Congress seemed to recognize, to a limited extent, the need for
variation in payment amounts for some items and services. For example,
the Congress mandated both upper and lower limits for the fee schedule
amounts for DME, with a range in payment of 15 percent.
Comment: Reductions should not exceed 7 percent in 1 year and
should be limited to a total of 20 percent over 3 years.
Response: The statute provides us the authority to adjust payments
by as much as necessary in order to correct a grossly excessive or
grossly deficient payment amount. It would be inappropriate for
Medicare to spend excessive amounts for items and services, once it had
determined that the payment amount was grossly excessive or deficient.
D. Carrier Procedures
Comment: Inherent reasonableness decisions should not be made by
carriers but should be made through the formal rulemaking process or at
least published in the Federal Register. Carriers should not be
permitted to reprice items without national policy or greater CMS
scrutiny. The carriers are making de facto national policy under this
rule.
Response: Before the BBA, CMS requested an amendment to the
inherent reasonableness statutory requirements to allow carriers to
make inherent reasonableness adjustments so that we could respond
timely to frequent price
[[Page 76692]]
changes in the marketplace. We had specifically asked the Congress to
drop the requirement that all inherent reasonableness determinations
had to be made through publishing in the Federal Register so that
carriers could make their own inherent reasonableness determinations
without pursuing the cumbersome and lengthy Federal Register process.
The BBA gives us that latitude.
As authorized by section 1842(a) of the Act, carriers, under our
direction, have historically been used to make determinations regarding
payment amounts, coverage determinations, in the absence of a national
coverage determination, and utilization safeguards. Also, section
1842(b) of the Act specifies that inherent reasonableness adjustments
of more than 15 percent a year must be published in the Federal
Register. This clearly demonstrates that it was the intent of the
Congress that adjustments of 15 percent or less in a given year can be
made without publishing in the Federal Register. The regulations
specifically provide for inherent reasonableness adjustments to be made
by the Secretary or our carriers and includes specific instructions for
carrier use of inherent reasonableness. Specifically, carriers are able
to make inherent reasonableness determinations efficiently and respond
quickly to price changes in the market place. Before the BBA, we
completed only one inherent reasonableness adjustment because of the
cumbersome statutory requirements. Because of the cumbersome inherent
reasonableness process, we were not able to use inherent reasonableness
to address the numerous OIG, GAO, and newspaper reports that Medicare's
payments were excessive. The effect of the BBA was to facilitate the
implementation of inherent reasonableness determinations by allowing
carriers to make payment adjustments. The GAO concurs that the use of
carriers to make inherent reasonableness adjustments is appropriate.
The GAO states in its report on inherent reasonableness that:
CMS acted within its authority in delegating the revised
inherent reasonableness process to the carriers. The BBA was
important in removing the barriers that prevented the carriers from
conducting inherent reasonableness reviews. * * * Moreover,
delegation is proper because pricing Medicare goods and services is
already a responsibility of the carriers and the statute does not
specifically preclude delegation of this authority to the carriers.
Comment: CMS needs to ensure against arbitrary and capricious
decisions and carrier abuse of inherent reasonableness authority.
Carriers should seek CMS's review and approval of all inherent
reasonableness adjustments.
Response: The regulation requires that no payment adjustments may
take place without informing suppliers of the proposed payment amounts,
the factors considered in proposing the limit, and soliciting comments
from suppliers. After considering the comments received, the regulation
also requires the carriers to inform CMS of any inherent reasonableness
limitations it plans to establish. No limitations can take affect until
we have informed the carriers that we have received the carrier's
notification. This allows us the opportunity to review the carrier's
determination and ensure that arbitrary and capricious limitations are
not implemented. In cases where one or more of our carriers undertake
an adjustment using this inherent reasonableness authority that either
has an impact of $100 million or more in any one year, or has a
significant effect on a substantial number of small entities, the
carrier or carriers will notify providers of the planned adjustment and
the analysis on which it is based. In this way, affected parties would
be able to comment on the planned adjustment.
Comment: Carriers may abuse their inherent reasonableness authority
by reducing payment allowances by more than 15 percent over more than a
1-year period without the procedural protection of rulemaking, that is,
compliance with the Administrative Procedure Act (APA).
Response: The statute allows the carriers to make inherent
reasonableness adjustments of more than 15 percent over 2 or more years
as long as the adjustments do not exceed 15 percent in a single year.
This was confirmed in the GAO report on inherent reasonableness. In
addition, before implementing inherent reasonableness limits, the
carriers are required by the regulation to inform affected suppliers of
the factors it used in establishing the limit and to provide the
opportunity for suppliers to comment.
Comment: Allowing carriers to make independent payment decisions
will result in payment disparities between carriers.
Response: Inherent reasonableness is the authority for establishing
realistic and equitable payment amounts. In some cases, applying
inherent reasonableness may result in payment amounts that vary by
geographic area. In other cases, it may be justifiable to eliminate
payment disparities by establishing a single national payment amount.
In certain situations, the Congress has recognized the need for
variation in payment amounts.
Comment: Carriers should only be permitted to make inherent
reasonableness adjustments once every 5 years or be limited in the
number of items subject to inherent reasonableness.
Response: The statute does not limit the number of times that this
authority may be used, nor does it limit the number of items that can
be reviewed using this authority. In some cases, it may be necessary to
make more frequent adjustments than every 5 years to take into account
changes in technology or economics.
Comment: Section 4554 of the BBA requires that any advisory
committee established by a carrier for coverage and administrative
policies under Part B will include an individual to represent the
independent clinical laboratories.
Response: Section 4554 of the BBA, by its own terms, provides only
for laboratory representatives to be on carrier advisory committees for
coverage and administrative policies. This section does not implicate
Medicare payment policies, nor is there any implication that an
advisory committee would be part of an inherent reasonableness review
of payment levels by the carrier.
Comment: This rule should apply to intermediaries as well as
carriers.
Response: The inherent reasonableness authority applies to all Part
B items and services except physician services. Therefore, this rule
applies to both carriers and intermediaries who process Medicare Part B
claims. However, we do not intend to apply this rule to services paid
under a prospective payment system, such as outpatient hospital or home
health services.
Comment: A process should be put into place to allow suppliers to
formally petition carriers for inherent reasonableness reviews. The
petitions would be required to meet specific standards to be considered
for inherent reasonableness.
Response: Anyone has the opportunity to submit a request to CMS or
a Medicare carrier for an inherent reasonableness adjustment. The
regulations provide guidance on the criteria that will be used in
determining whether an adjustment in the Medicare payment amount(s) is
warranted. We do not believe that there would be an added benefit to
creating a formal process; we believe that it is best to keep the
process flexible so that we and the carriers can respond to the various
situations that could arise. For example,
[[Page 76693]]
the type and quantity of data needed in order to conduct an inherent
reasonableness review cannot be determined ahead of time and may vary
significantly depending on the item or service at issue.
Comment: Will carriers take into account suppliers' administrative
and service costs in making inherent reasonableness determinations?
Response: In those cases for which actual cost data are used as a
basis for an inherent reasonableness determination, administrative and
service costs would be taken into account. Conversely, when we or a
carrier use retail prices or data on payments made by other payers as a
basis for an inherent reasonableness determination, administrative and
service costs are typically included as part of the retail prices or
third party payer amounts.
Comment: Who at the DMERC has inherent reasonableness authority?
Response: Each carrier determines which of its staff or components
are best qualified to conduct inherent reasonableness reviews, as they
do in the case of other pricing issues.
Comment: Carriers should be required to provide affected parties
with the data and all relevant information they use to make inherent
reasonableness determinations.
Response: The carriers will publish the data and all relevant
information they use to make inherent reasonableness determinations in
the proposed notice to suppliers. Any additional background data used
by the carriers in making inherent reasonableness determinations that
are not published in the proposed notice will be made available.
Comment: Carriers need more guidance to ensure that they contact
all relevant parties when publishing an inherent reasonableness
adjustment.
Response: Carriers will be required to notify all suppliers and/or
organizations representing suppliers of any proposed inherent
reasonableness adjustments. Therefore, those parties that are directly
affected by the changes in payment will be notified of the proposed
adjustments and may respond to these proposed changes before they take
effect (see Sec. 405.502(g)(3)(ii)).
Comment: Carriers should provide a written response to comments on
inherent reasonableness adjustments.
Response: In the final notice of inherent reasonableness that is
sent to suppliers and/or organizations representing suppliers, the
carriers will be required to provide written responses to the comments
they received on the proposed notice of inherent reasonableness.
Comment: The sequence of steps a carrier will follow in making an
inherent reasonableness determination should be made clearer.
Response: We concur with this comment. We have revised Sec.
405.502(g)(3)(ii) to clarify the procedures a carrier must follow.
Comment: Interested parties should have the ability to comment on
decisions when the adjustment is less than 15 percent.
Response: All proposed inherent reasonableness adjustments will be
published and a comment period will be provided for all adjustments
regardless of the percentage change in payment; some will be published
on a carrier-wide basis, while those made by CMS will be published in
the Federal Register.
E. Impact
Comment: In compliance with the APA, the inherent reasonableness
rule should be withdrawn and published as a notice of proposed
rulemaking with a public comment period. This would give the industry
the opportunity to comment before implementation. Suppliers no longer
have the procedural safeguards that have been in place since 1986.
``Good cause'' does not exist to waive the proposed rulemaking process.
Response: Section 223 of the BBRA prohibits us from using the
inherent reasonableness authority until we respond to the GAO report
and publish a notice of final rulemaking that responds to comments
received on the January 7, 1998, interim final regulation on inherent
reasonableness. We are meeting the mandate of section 223 of the BBRA
by publishing this interim final rule and are therefore in compliance
with the statute. Moreover, consistent with both section 223 of the
BBRA and the APA, the 1998 interim final rule served the same purpose
as a notice of proposed rulemaking since this regulation invited public
comment. This interim final rule responds to the comments we received
on the 1998 interim final regulation.
Also, we note that the GAO report addressed this issue and
concluded that a notice of proposed rulemaking was not necessary.
Specifically, the GAO report states that ``going through the notice of
proposed rulemaking to issue inherent reasonableness regulations would
have serious financial implications for Medicare and its
beneficiaries.'' In addition, the GAO states that ``CMS's reliance on
the good cause exception to bypass formal notice and comment rulemaking
procedures seems reasonable.''
Comment: The rule does not comply with the Regulatory Flexibility
Act and will have a significant economic impact on a substantial number
of small entities. In addition, CMS indicates in the regulatory impact
statement that it has insufficient data to predict exactly the nature
of the impact of this rule; yet CMS certifies that the rule will not
have a significant impact on a substantial number of small entities.
Response: Because this rule does not include any actual proposed or
final inherent reasonableness determinations, it will have no impact on
Medicare's payment amounts. However, we believe that the rule, by
allowing us to conduct inherent reasonableness in the future, has the
potential to significantly impact small businesses. This belief is
based on a June 2002 OIG report indicating that Medicare may be
overpaying between $130 million and $958 million per year for 16 items
of medical equipment. In addition, in 2002, the GAO indicated that
Medicare may be overpaying for medical equipment by more than 20
percent. However, we are unable to predict the specific dollar impact
based on the future application of inherent reasonableness. Since we
recognize the potential for future payment adjustments, either upward
or downward, we will publish in the Federal Register impact statements
that will comply with Executive Order 12866 whenever CMS proposed
national limits and the dollar impact of inherent reasonableness
determinations exceeds $100 million in any one year, and will address
impact on small entities in accordance with the Regulatory Flexibility
Act. However, we believe that, if inherent reasonableness adjustments
are applied, then they will eliminate grossly excessive or deficient
payment amounts. If a payment amount is adjusted upward because it is
deficient, it will benefit suppliers and beneficiaries. A more generous
payment amount may result in greater availability of items and services
to Medicare beneficiaries. The converse may not be true if the payment
amount is adjusted downward. A lower payment amount should not
necessarily result in a lack of availability of items and services
since the revised payment amount would be realistic and equitable. We
believe that a realistic and equitable payment amount would ensure
continued availability of items and services. Thus, we believe that the
application of an adjustment will merely serve as a vehicle for
eliminating excessive profits. This adjustment will benefit the
Medicare program by
[[Page 76694]]
reducing costs and benefit beneficiaries by reducing coinsurance
payments.
Comment: The rule does not comply with the Contract With America
Advancement Act of 1996, which requires that a major rule must be
submitted to the Congress before that rule can become effective.
Response: Since this rule has been determined to be a major rule,
it is being submitted to the Congress consistent with the Contract With
American Advancement Act.
Comment: In making inherent reasonableness determinations, CMS
should have to consider the impact on quality of care, access issues,
and the financial viability of suppliers in the marketplace.
Response: We will consider the impact of future inherent
reasonableness adjustments, and as stated above, whenever CMS proposed
national limits and the dollar impact of inherent reasonableness
determinations exceed $100 million in any one year, we will analyze the
impact on quality of care, access issues, and the financial viability
of suppliers in the marketplace. However, we do not believe that using
the inherent reasonableness authority will have a negative impact
because the purpose of the authority is to ensure that Medicare makes
payments that are realistic and equitable, and better reflect market
prices.
F. Effective Date
Comment: The effective date should be 6 months following
publication of payment reductions.
Response: The effective date for payment adjustments will be
determined on a case-by-case basis, but in no case will the effective
date be sooner than 60 days after publication of the final notice of
inherent reasonableness. We believe that in most cases it would not be
in the best interest of the Medicare program to delay implementation of
inherent reasonableness adjustments more than 60 days as this would
result in the continuation of payment amounts that are either grossly
excessive or deficient.
Comment: All inherent reasonableness decisions should be made at
the same time so that suppliers can offset payment reductions with
payment increases.
Response: The purpose of inherent reasonableness is not to be
budget neutral or to make an equal number of increases and decreases in
payment. The purpose is to address situations in which the standard
payment rules result in grossly excessive or deficient amounts. It
would be unreasonable for us to delay making an increase in payment
because we have not yet identified an item or service that warranted a
decrease in payment. The converse is also true. We note that
historically the GAO and OIG have conducted studies that indicate that
Medicare's payment amounts are generally excessive.
Comment: Carriers should have to provide for a 60-day comment
period and a 60-day notification period before the effective date of an
inherent reasonableness determination.
Response: We concur with the commenter. We will inform carriers to
provide for a 60-day comment period and that any final carrier inherent
reasonableness determination may not be effective until 60 days
following public notice.
VI. Provisions of This Interim Final Regulation
In response to comments on the January 7, 1998 interim final rule,
we made the following changes in this interim final rule:
[sbull] Clarified Sec. 405.502(g)(1)(ii) by stating that a payment
amount will not be considered grossly excessive or grossly deficient if
the overall payment adjustment is less than 15 percent.
[sbull] Amended Sec. 405.502(g)(1)(iii) by clarifying the
difference between a national determination and a carrier
determination.
[sbull] Added Sec. 405.502(g)(2)(vii)(H) to include an example of
new technology that exists and is not reflected in the existing payment
allowance.
[sbull] Amended Sec. 405.502(g)(3)(ii) by adding ``proposed
payment amounts and the'' to the first sentence to provide suppliers
the opportunity to comment on the carrier's proposed payment allowances
as well as the factors the carrier considered; and adding a requirement
that a carrier notify us in writing of any final limits it plans to
establish.
[sbull] Added Sec. 405.502(g)(4) to include the criteria for using
valid and reliable data.
[sbull] Added Sec. 405.502(g)(5) to provide that when payment
adjustments of more than 15 percent are spread out over multiple years,
subsequent adjustments will be reviewed for their appropriateness.
However, because we are interested in receiving comments on this
rule, particularly the two provisions that contain further specificity
than found in the 1998 interim final rule, we are publishing this rule
as an interim final rule and are soliciting comments. These two
provisions are the definitions of ``grossly excessive'' and ``grossly
deficient'' in Sec. 405.502(g)(1)(ii) and the criteria for using valid
and reliable data in Sec. 405.502(g)(4). We already received comments
on the other provisions when we published the interim final rule in
January 1998. These comments are addressed in section V of this interim
final rule.
VII. Collection of Information Requirements
This document does not impose information collection and
recordkeeping requirements. Consequently, it does not need to be
reviewed by the Office of Management and Budget under the authority of
the Paperwork Reduction Act of 1995.
VIII. Regulatory Impact Statement
We have examined the impacts of this rule as required by Executive
Order 12866 (September 1993, Regulatory Planning and Review) and the
Regulatory Flexibility Act (RFA) (September 16, 1980 Public Law 96-
354). Executive Order 12866 directs agencies to assess all costs and
benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). A regulatory impact
analysis (RIA) must be prepared for major rules with economically
significant effects ($100 million or more annually). This regulation
has no immediate economic effect on current Medicare payments. However,
it establishes a process that could be used in the future to establish
reasonable and equitable payment amounts. Because this rule does not
include any actual inherent reasonableness determinations, it has no
immediate impact on Medicare's payment amounts. However, we do believe
that the future use of inherent reasonableness has the potential to
have significant impact; therefore it is a major rule. This belief is
based on a June 2002 OIG report indicating that Medicare may be
overpaying between $130 million and $958 million per year for 16 items
of medical equipment. In addition, the GAO recently indicated that
Medicare may be overpaying for medical equipment by more than 20
percent. However, these reports were not done to the specifications we
are establishing in this rule and, therefore, they may not be an
accurate estimate of the specific dollar impact that could result from
the future application of inherent reasonableness under these
requirements. Since we recognize the potential for future payment
adjustments, either upward or
[[Page 76695]]
downward, when CMS makes adjustments we will publish in the Federal
Register regulatory impact statements that will comply with Executive
Order 12866 and the Regulatory Flexibility Act whenever the dollar
impact of inherent reasonableness determinations exceed $100 million in
any one year. At this time, we lack sufficient data to conduct a
quantitative analysis of the impact of this rule.
We lack such data because until we publish this rule, and we are
able to conduct an inherent reasonableness study using the criteria
described in this rule, we are unable to determine whether Medicare is
overpaying or underpaying for items or services and to what degree. We
do not know if, or when, or for which services, we would make payment
adjustments, or the percentage adjustment we would make, or even the
particular industry that would be affected. Also, we do not know if
these adjustments would increase or decrease Medicare payment amounts.
As a result, we cannot anticipate the specific dollar effect or impact
on suppliers and beneficiaries.
The RFA requires agencies to analyze options for regulatory relief
of small businesses. For purposes of the RFA, small entities include
small businesses, nonprofit organizations and government agencies. Most
hospitals and most other providers and suppliers are small entities,
either by nonprofit status or by having revenues of $6 million to $26
million or less in any 1 year (see 65 FR 69432 for details). For
purposes of the RFA, all suppliers of Medicare Part B services are
considered to be small entities. Individuals and States are not
included in the definition of a small entity. Since this rule does not
include any actual inherent reasonableness determinations, it will not
have an impact on small businesses. However, it establishes a process
that could be used in the future to establish reasonable and equitable
payment amounts.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 604 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 100 beds.
Section 202 of the Unfunded Mandates Reform Act of 1995 also
requires that agencies assess anticipated costs and benefits before
issuing any rule that may result in expenditure in any 1 year by State,
local, or tribal governments, in the aggregate, or by the private
sector, of $110 million. This regulation does not mandate expenditures
by State, local, or tribal governments, or by the private sector.
Therefore, the requirements of section 202 do not apply.
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on State
and local governments, preempts State law, or otherwise has Federalism
implications. Since this regulation does not impose any costs on State
or local governments, the requirements of E.O. 13132 are not
applicable.
We do not expect suppliers of Part B services to be immediately
affected by this rule since the rule will have no immediate impact on
Medicare's payment amounts. However, we do believe that use of inherent
reasonableness has the potential to significantly impact small
businesses in the future. This belief is based on a June 2002 OIG
report indicating that Medicare may be overpaying between $130 million
and $958 million per year for 16 items of medical equipment. In
addition, the GAO recently indicated that Medicare may be overpaying
for medical equipment by more than 20 percent. However, we are still
unable to predict the specific dollar impact on the future application
of inherent reasonableness. Since we recognize the potential for future
payment adjustments, either upward or downward, when CMS makes
adjustments we will publish in the Federal Register impact statements
that will comply with Executive Order 12866 and the Regulatory
Flexibility Act whenever the dollar impact of inherent reasonableness
determinations exceed $100 million in any one year, or when the
adjustments will have a significant impact on a substantial number of
small entities. We do not have sufficient data to predict exactly the
nature of the future impact of this rule or the magnitude of the
impact. Below, we discuss likely outcomes. Should the provisions of
these regulations be applied, the resultant payment amounts will no
longer be grossly excessive or deficient. If a payment amount is
adjusted upward because it is deficient, it will benefit suppliers and
beneficiaries. A more generous payment amount may result in greater
availability of items and services to Medicare beneficiaries. The
converse may not be true if the payment amount is adjusted downward. A
lower payment amount should not necessarily result in a lack of
availability of items and services since the revised payment amount
would be realistic and equitable, and would better reflect market
prices for the given item or service. We believe that a realistic and
equitable payment amount would ensure continued availability of items
and services. This adjustment will benefit the Medicare program by
reducing costs, thereby protecting the Medicare trust fund, and benefit
beneficiaries by reducing coinsurance payments. In addition, this
regulation only specifies the criteria and methodology for determining
when a service or item is inherently unreasonable and does not result
in any adjustments.
After publication of this regulation, if CMS initiates an inherent
reasonableness determination that results in payment adjustments in
excess of $100 million in any one year, CMS will publish in the Federal
Register an analysis in compliance with Executive Order 12866. If the
CMS adjustment will have a significant impact on a substantial number
of small entities, we will also conduct an analysis in accordance with
the Regulatory Flexibility Act. In cases where one or more of our
carriers undertake an adjustment using this inherent reasonableness
authority that either has an impact of $100 million or more in any one
year, or has a significant effect on a substantial number of small
entities, the carrier or carriers will notify providers of the planned
adjustment and the analysis on which it is based. In this way, affected
parties would be able to comment on the planned adjustment.
In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.
List of Subjects in Part 405
Administrative practice and procedure, Health facilities, Health
professions, Kidney diseases, Medicare, Reporting and recordkeeping
requirements, Rural areas, X-rays.
For the reasons set forth in the preamble, 42 CFR chapter IV, part
405 is amended as set forth below:
PART 405--FEDERAL HEALTH INSURANCE FOR THE AGED AND DISABLED
Subpart E--Criteria for Determining Reasonable Charges
1. The authority citation for part 405, subpart E, continues to
read as follows:
[[Page 76696]]
Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).
2. In Sec. 405.502, paragraphs (g) and (h) are revised to read as
follows:
Sec. 405.502 Criteria for determining reasonable charges.
* * * * *
(g) Determination of payment amounts in special circumstances--(1)
General. (i) For purposes of this paragraph, a ``category of items or
services'' may consist of a single item or service or any number of
items or services.
(ii) CMS or a carrier may determine that the standard rules for
calculating payment amounts set forth in this subpart for a category of
items or services identified in section 1861(s) of the Act (other than
physician services paid under section 1848 of the Act and those items
and services for which payment is made under a prospective payment
system, such as outpatient hospital or home health) will result in
grossly deficient or excessive amounts. A payment amount will not be
considered grossly excessive or deficient if it is determined that an
overall payment adjustment of less than 15 percent is necessary to
produce a realistic and equitable payment amount. For CMS initiated
adjustments, CMS will publish in the Federal Register an analysis of
payment adjustments that exceed $100 million per year in compliance
with Executive Order 12866. If CMS makes adjustments that have a
significant effect on a substantial number of small entities, it will
publish an analysis in compliance with the Regulatory Flexibility Act.
(iii) If CMS or the carrier determines that the standard rules for
calculating payment amounts for a category of items or services will
result in grossly deficient or excessive amounts, CMS, or the carrier,
may establish special payment limits that are realistic and equitable
for a category of items or services. If CMS makes a determination, it
is considered a national determination. A carrier determination is one
made by a carrier/intermediary or groups of carriers/intermediaries
even if the determination applies to all State fees.
(iv) The limit on the payment amount is either an upper limit to
correct a grossly excessive payment amount or a lower limit to correct
a grossly deficient payment amount.
(v) The limit is either a specific dollar amount or is based on a
special method to be used in determining the payment amount.
(vi) Except as provided in paragraph (h) of this section, a payment
limit for a given year may not vary by more than 15 percent from the
payment amount established for the preceding year.
(vii) Examples of excessive or deficient payment amounts. Examples
of the factors that may result in grossly deficient or excessive
payment amounts include, but are not limited to, the following:
(A) The marketplace is not competitive. This includes circumstances
in which the marketplace for a category of items or services is not
truly competitive because a limited number of suppliers furnish the
item or service.
(B) Medicare and Medicaid are the sole or primary sources of
payment for a category of items or services.
(C) The payment amounts for a category of items or services do not
reflect changing technology, increased facility with that technology,
or changes in acquisition, production, or supplier costs.
(D) The payment amounts for a category of items or services in a
particular locality are grossly higher or lower than payment amounts in
other comparable localities for the category of items or services,
taking into account the relative costs of furnishing the category of
items or services in the different localities.
(E) Payment amounts for a category of items or services are grossly
higher or lower than acquisition or production costs for the category
of items or services.
(F) There have been increases in payment amounts for a category of
items or services that cannot be explained by inflation or technology.
(G) The payment amounts for a category of items or services are
grossly higher or lower than the payments made for the same category of
items or services by other purchasers in the same locality.
(H) A new technology exists which is not reflected in the existing
payment allowances.
(2) Establishing a limit. In establishing a payment limit for a
category of items or services, CMS or a carrier considers the available
information that is relevant to the category of items or services and
establishes a payment amount that is realistic and equitable. The
factors CMS or a carrier consider in establishing a specific dollar
amount or special payment method for a category of items or services
may include, but are not limited to, the following:
(i) Price markup. This is the relationship between the retail and
wholesale prices or manufacturer's costs of a category of items or
services. If information on a particular category of items or services
is not available, CMS or a carrier may consider the markup on a similar
category of items or services and information on general industry
pricing trends.
(ii) Differences in charges. CMS or a carrier may consider the
differences in charges for a category of items or services made to non-
Medicare and Medicare patients or to institutions and other large
volume purchasers.
(iii) Costs. CMS or a carrier may consider resources (for example,
overhead, time, acquisition costs, production costs, and complexity)
required to produce a category of items or services.
(iv) Use. CMS or a carrier may impute a reasonable rate of use for
a category of items or services and consider unit costs based on
efficient use.
(v) Payment amounts in other localities. CMS or a carrier may
consider payment amounts for a category of items or services furnished
in another locality.
(3) Notification of limits--(i) National limits. CMS publishes in
the Federal Register proposed and final notices announcing a special
payment limit described in paragraph (g) of this section before it
adopts the limit. The notices set forth the criteria and circumstances,
if any, under which a carrier may grant an exception to a payment limit
for a category of items or services.
(ii)(A) Carrier-level limits. A carrier proposing to establish a
special payment limit for a category of items or services must inform
the affected suppliers and Medicaid agencies of the proposed payment
amounts, the factors it considered in proposing the particular limit,
as described in paragraphs (g)(1) through (g)(4) of this section, and
solicit comments. The notice must also consider the following:
(1) The effects on the Medicare program, including costs, savings,
assignment rates, beneficiary liability, and quality of care.
(2) What entities would be affected such as classes of providers or
suppliers and beneficiaries.
(3) How significantly would these entities be affected.
(4) How would the adjustment affect beneficiary access to items or
services.
(B) The carrier must evaluate the comments it receives. The carrier
must notify CMS in writing of any final limits it plans to establish.
CMS will acknowledge in writing to the carrier that it received the
carrier's notification. After the carrier has received CMS's
acknowledgement, the carrier must inform the affected suppliers and
State Medicaid agencies of any final limits it
[[Page 76697]]
establishes. The effective date for a final payment limit may apply to
services furnished at least 60 days after the date that the carrier
notifies affected suppliers and State Medicaid agencies of the final
limit.
(4) Use of valid and reliable data. In determining whether a
payment amount is excessive or deficient and in establishing an
appropriate payment amount, valid and reliable data will be used. To
ensure the use of valid and reliable data, CMS or the carrier must meet
the following criteria to the extent applicable:
(i) Develop written guidelines for data collection and analysis;
(ii) Ensure consistency in any survey to collect and analyze
pricing data.
(iii) Develop a consistent set of survey questions to use when
requesting retail prices.
(iv) Ensure that sampled prices fully represent the range of prices
nationally.
(v) Consider the geographic distribution of Medicare beneficiaries.
(vi) Consider relative prices in the various localities to ensure
that an appropriate mix of areas with high, medium, and low consumer
prices was included.
(vii) Consider criteria to define populous State, less populous
State, urban area, and rural area.
(viii) Consider a consistent approach in selecting retail outlets
within selected cities.
(ix) Consider whether the distribution of sampled prices from
localities surveyed is fully representative of the distribution of the
U.S. population.
(x) Consider the products generally used by beneficiaries and
collect prices of these products.
(xi) When using wholesale costs, consider the cost of the services
necessary to furnish a product to beneficiaries.
(5) If CMS or a carrier makes a payment adjustment of more than 15
percent spread over multiple years, CMS or the carrier will review
market prices in the years subsequent to the year that the initial
reduction is effective in order to ensure that further reductions
continue to be appropriate.
(h) Special payment limit adjustments greater than 15 percent of
the payment amount. In addition to applying the general rules under
paragraphs (g)(1) through (g)(4) of this section, CMS applies the
following rules in establishing a payment adjustment greater than 15
percent of the payment amount for a category of items or services
within a year:
(1) Potential impact of special limit. CMS considers the potential
impact on quality, access, beneficiary liability, assignment rates, and
participation of suppliers.
(2) Supplier consultation. Before making a determination that a
payment amount for a category of items or services is not inherently
reasonable by reason of its grossly excessive or deficient amount, CMS
consults with representatives of the supplier industry likely to be
affected by the change in the payment amount.
(3) Publication of national limits. If CMS determines under
paragraph (h) of this section to establish a special payment limit for
a category of items or services, it publishes in the Federal Register
the proposed and final notices of a special payment limit before it
adopts the limit. The notices set forth the criteria and circumstances,
if any, under which a carrier may grant an exception to the limit for
the category of items or services.
(i) Proposed notice. The proposed notice--
(A) Explains the factors and data that CMS considered in
determining that the payment amount for a category of items or services
is grossly excessive or deficient;
(B) Specifies the proposed payment amount or methodology to be
established for a category of items or services;
(C) Explains the factors and data that CMS considered in
determining the payment amount or methodology, including the economic
justification for a uniform fee or payment limit if it is proposed;
(D) Explains the potential impacts of a limit on a category of
items or services as described in paragraph (h)(1) of this section; and
(E) Allows no less than 60 days for public comment on the proposed
payment limit for the category of items or services.
(ii) Final notice. The final notice--
(A) Explains the factors and data that CMS considered, including
the economic justification for any uniform fee or payment limit
established; and
(B) Responds to the public comments.
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance; Program No. 93.774, Medicare--
Supplementary Medical Insurance)
Dated: February 2, 2002.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
Approved: July 22, 2002.
Tommy G. Thompson,
Secretary.
[FR Doc. 02-31126 Filed 12-12-02; 8:45 am]
BILLING CODE 4120-01-P