B-271640 know to what extent suppliers are providing mostly low-cost items. Although the health care industry is moving toward the use of universal product numbers to more specifically identify medical equipment and supplies, HCFA has not explored this approach for improving information on products Medicare pays for. HCFA's Coding System Does Not Identify Specific Products HCFA's coding system for medical equipment and supplies provides insufficient information to identify the specific products suppliers provide to Medicare beneficiaries. The HCPCS coding system used by HCFA classifies medical equipment and supplies into general product groups, and, when suppliers bill Medicare, they specify the HCPCS code they believe best describes the specific equipment or supply item provided to a beneficiary. Suppliers and manufacturers may also petition HCFA or the carriers to establish new HCPCS codes for products they believe are not adequately described by or reimbursed under the HCPCS codes. Some HCPCS codes are used for products that differ widely in properties, uses, and performance. Yet Medicare pays the same fee-schedule allowance (with minor variations among states) for all products billed under the same HCPCS code. For example, the HCPCS code for latex foley catheters10 includes more than 200 short-term, medium-term, and long-term catheters. According to one manufacturer of foley catheters, specialized coatings affect the durability, function, and price of these catheters. Wholesale prices of these catheters range from $1.09 for a short-term catheter to $17.90 for a long-term catheter. Medicare's 1997 national floor and ceiling were $9.95 and $11.70, respectively, for all catheters in this HCPCS code. The fee-schedule system used in conjunction with the HCPCS codes provides a financial incentive for suppliers to provide low-cost items to Medicare beneficiaries, and these items may or may not meet the patient's medical needs. Suppliers can increase their profits by charging Medicare the full fee-schedule allowance for a low-cost product that technically fits the code description. For example, although multiple types of latex foley catheters may be classified under the same HCPCS code, information we gathered from some suppliers showed that the basic short-term catheter was both the least expensive and the 10A latex foley catheter is typically billed under HCPCS code A4338 (in-dwelling catheter, foley type; two-way latex with coating, such as Teflon, silicone-coated, silicone elastomer, or hydrophilic). B-271640 most commonly provided catheter. HCFA cannot readily perform this type of analysis because suppliers do not have to identify the specific products for which they submit claims. Industry groups and suppliers we contacted said they find the HCPCS coding system difficult to use. Suppliers and manufacturers often need help in deciding which HCPCS code is appropriate for specific products. In response, the statistical analysis contractor has set up a hot line to handle coding inquiries and medical policy and pricing questions; the hot line receives an average of 8,000 calls a month. Coding inquiries account for about 80 percent of the hot line's monthly calls. Coding inquiries about the HCPCS codes for ostomy and incontinence supplies are among the most prevalent. Product-Specific Codes Are Available to Track Utilization DOD and some hospital health care purchasing groups are beginning to require their suppliers to use product-specific codes, called universal product numbers, to identify individual medical products. This system requires manufacturers to bar code each product to identify characteristics such as the manufacturer identification number, product type, and packaging unit. Universal product numbers will enable these government and private purchasers to develop standard product groups, track market prices, and use prudent purchasing methods-paying for the medical equipment and supplies that meet quality standards at competitive market prices. Industry groups contend that Medicare, the nation's largest health care insurer, should be leading the effort to require the use of universal product numbers, especially because this coding system will allow HCFA to better classify products by HCPCS code, monitor suppliers' use of the billing codes, and adjust the Medicare fee schedule allowances to more current market-based prices. We met with HCFA officials to discuss the benefits of the bar coding system to the Medicare program, though HCFA has not yet explored using universal product numbers to track the cost and utilization of specific medical products. HCFA officials have not taken a position on using this coding system, according to discussions with us. At this time it is unclear whether the Secretary of HHS will promulgate universal product numbers as a product identification standard using the authority provided by the Health Insurance and Portability Act of 1996," "P.L. 104-191, 110 Stat. 1936 (1996). B-271640 MEDICARE'S FEE SCHEDULE OVERPAYS LARGE SUPPLIERS Medicare reimburses large suppliers who buy at volume discounts the same feeschedule allowances as individuals who buy single items at retail prices. Large suppliers who bill Medicare include home medical equipment and supply companies and distributors who submit claims on behalf of beneficiaries in nursing homes. Because these suppliers submit claims on behalf of many beneficiaries, they can negotiate volume discounts for the products they buy. Individual beneficiaries, on the other hand, lack the purchasing power to obtain volume discounts. Therefore, fee-schedule allowances that adequately reimburse individual beneficiaries usually overpay large suppliers, even after accounting for their administrative costs. The largest suppliers receive a significant portion of Medicare spending for many medical products. Although more than 150,000 suppliers bill Medicare for medical equipment and supplies, claims submitted by the top 10 suppliers often represent a large percentage of total allowed charges for certain HCPCS codes. For example, for one particular urological HCPCS code, the top 10 suppliers accounted for almost 55 percent of charges billed to Medicare between July 1, 1996, and September 30, 1996, according to our analysis. For five other HCPCS codes in our study, 10 suppliers accounted for 24 percent or more of total allowed charges. Medicare's fee schedule allowances are excessive compared with large suppliers' acquisition costs for some products. For example, one supplier reported that its weighted average cost for items billed in 1996 under the HCPCS code for a foley catheter was less than $1. Medicare's reimbursement for each catheter was between $10.06 and $11.83, the 1996 respective national floor and ceiling for this item. In the same year, another supplier's weighted average cost for a bedside drainage bag was about $2.25, though Medicare reimbursed the supplier between $7.65 and $9 for this item. On the other hand, for some products, such as ostomy supplies, new technology has increased product quality and prices, and the Medicare payment rates do not adequately reimburse either suppliers or individual beneficiaries for these items. In such cases suppliers often do not accept claim assignment-making the Medicare beneficiary responsible not only for the 20-percent copayment, but also for the difference between the supplier's charge and the Medicare allowance. Suppliers who bill Medicare on behalf of the beneficiary incur administrative costs associated with filing a claim. Most of these costs involve documenting B-271640 medical necessity for the initial claim. Subsequent claims to reorder items for the same beneficiary take less time because suppliers have already gathered much of the information for the initial claim. According to suppliers, urological and ostomy products are the types of items that are often reordered. Suppliers estimate that the average administrative cost for filing a Medicare claim for a reordered product is about $10. Because suppliers typically include several related supplies on a single claim, this administrative cost is disbursed among multiple items. For example, a claim for a foley catheter may also include an insertion tray, a bedside drainage bag, and a leg drainage bag if the patient is mobile. Disbursing the administrative cost among the three or four items reduces this cost to between $2.50 and $3.35 per item. Market competition to reduce product costs has driven suppliers to increase their purchasing power by consolidating with similar businesses or joining purchasing cooperatives. Hospitals, nursing homes, and suppliers have formed their own purchasing groups to get lower prices from manufacturers. The medical equipment and supplies market is constantly changing as suppliers seek to lower costs and gain new market share. Mergers, consolidations, acquisitions, and buying cooperatives have produced suppliers with greater purchasing power to lower product acquisition costs. Although competitive market pressures have driven suppliers to find new ways to reduce their product costs, Medicare's fee schedule does not account for the savings from these cost efficiencies. Some large suppliers have contractual arrangements and corporate affiliations with nursing facilities and home health agencies. These arrangements allow suppliers to take advantage of significant volume discounts from manufacturers and wholesalers. HCFA, however, has not considered establishing a separate fee schedule to account for discounts for nursing facilities and home health providers that furnish medical products to beneficiaries in their care. AGENCY COMMENTS We made a draft of this correspondence available for review by HCFA program officials, and we also discussed the issues with them. The agency officials with whom we spoke expressed uncertainty about the benefits of using universal product numbers in the Medicare program and about the need for a separate fee schedule for medical equipment and supplies furnished to patients in nursing homes or through home health providers. We will provide HHS and HCFA an opportunity to comment in writing on our final report, which we expect to provide you in September 1997. B-271640 As agreed with your office, unless you release its contents earlier, we plan no further distribution of this letter for 30 days. At that time we will make copies available to other congressional committees and members of the Congress with an interest in these matters and the Secretary of Health and Human Services. Please call William Reis at (617) 565-7488 or me at (202) 512-7114 if you or your staff have any questions about the information in this letter. Other contributors to this study were Teruni Rosengren, Suzanne Rubins, and Thomas Taydus. Sincerely yours, William JScanlon William J. Scanlon Director, Health Financing and (101502) |