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«Evaluation of Medicare s Competitive Bidding Demonstration for DMEPOS First-Year Annual Evaluation Report HCFA Contract No. 500-95-0061/T.O. #3 ...»

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September 2000

(Revised January 2001)

Evaluation of Medicare s

Competitive Bidding

Demonstration for DMEPOS

First-Year Annual Evaluation Report

HCFA Contract No. 500-95-0061/T.O. #3

Prepared for

Ann Meadow, Sc.D.

Health Care Financing Administration

Office of Strategic Planning

Mail Stop C3-19-26

7500 Security Boulevard

Baltimore, MD 21244-1850

Prepared by

University of Wisconsin–Madison

Center for Health Systems Research and Analysis

610 Walnut Street

Madison, WI 53705 Research Triangle Institute Center for Economics Research 3040 Cornwallis Road Research Triangle Park, NC 27709 Northwestern University Institute for Health Services Research and Policy Studies 629 Noyes Street Evanston, IL 60208 RTI Project Number 7346-002-008 RTI Project Number 7346-002-008 Evaluation of Medicare s Competitive Bidding Demonstration for DMEPOS First-Year Annual Evaluation Report HCFA Contract No. 500-95-0061/T.O. #3 September 2000 (Revised January 2001) Prepared for Ann Meadow, Sc.D.

Health Care Financing Administration Office of Strategic Planning, Mail Stop C3-19-26 7500 Security Boulevard Baltimore, MD 21244-1850 Prepared by Sara Karon, Ph.D.

Kay Jewell, M.D.

University of Wisconsin–Madison Center for Health Systems Research and Analysis 610 Walnut Street Madison, WI 53705 Thomas Hoerger, Ph.D., Project Director

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3-1 Beneficiary Ratings of Access Variables, Polk and Brevard Counties........ 3-2 4-1 Beneficiary Ratings of Supplier Quality, Polk and Brevard Counties........ 4-4

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ES.1 Background and Methods ES.1.1 Background and Purpose The Balanced Budget Act of 1997 (BBA 97) (U.S. Congress, 1997) authorizes the Secretary of the Department of Health and Human Services to implement up to five demonstration projects of competitive bidding for Medicare Part B items and services, except physician services. On the basis of this authority, the Health Care Financing Administration (HCFA) planned and implemented the DMEPOS Competitive Bidding Demonstration to test the use of competitive bidding to set prices for durable medical equipment (DME) and prosthetics, orthotics, and supplies (POS). Bidding in the first demonstration site, Polk County, Florida, was conducted in early 1999, and the resulting prices took effect on October 1, 1999.

BBA 97 also requires that the demonstrations be evaluated for their impact on Medicare program payments, access, diversity of product selection, and quality. The purpose of this report is to describe the results to date of the evaluation of the DMEPOS Competitive Bidding Demonstration. We evaluate the impact of the demonstration on

• Medicare expenditures,

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This report focuses on the evaluation of the first demonstration site, Polk County, Florida.

We emphasize that the demonstration in Polk County will continue until September 30, 2002, and our evaluation will continue throughout this period. This evaluation report covers the period leading up to the demonstration and the first 9 of the 36 months that the demonstration prices will be in effect. Although we have learned a number of lessons from the evaluation so far, we caution that it is premature to make final conclusions about the long-term impact of the demonstration on many of the evaluation issues.

ES-1 ES.1.2 Demonstration Overview The Polk County DMEPOS Competitive Bidding Demonstration is scheduled to last for 3 years. It will have two rounds of bidding. The first round resulted in a fee schedule that will be in effect for 2 years, and the fee schedule based on the second round of bidding will be in effect for 1 year. Each of the five product categories included in the demonstration (oxygen supplies and equipment, hospital beds and accessories, enteral nutrition, urological supplies, and surgical dressings) is considered a separate competition, so suppliers are required to submit separate bids for each product category in which they wish to compete.

Demonstration suppliers are selected using a four-stage bid evaluation process. First, those bidders that meet the demonstration’s eligibility and quality standards are identified.

Second, a composite bid for each bidder is calculated from their bid submissions, and a cutoff composite price is chosen. Only those bids that are at or below this cutoff will be considered for further evaluation. In setting the cutoff, the supply capacity and geographic coverage provided by the bidders are considered. Finally, references from referral agents (hospital discharge planners, social workers, physician office staff, and home health workers who refer patients to DMEPOS suppliers) are evaluated and on-site inspections are made to verify that the remaining bidders meet general and product-specific quality and service requirements.

At the end of the bid evaluation process, multiple demonstration suppliers are selected in each category. Demonstration suppliers are not guaranteed to receive a set number of Medicare patients. These provisions of the demonstration are designed to promote competition between demonstration suppliers for patients. This competition, it is hoped, will encourage suppliers to maintain quality and service levels during the demonstration.

The new fee schedule is determined from the demonstration suppliers’ bids. The demonstration suppliers will be reimbursed according to this new fee schedule, minus the 20 percent beneficiary copayment and any applicable deductibles.

Several transition policies cover beneficiary/supplier relationships that existed prior to the demonstration. Beneficiaries may continue to receive oxygen supplies from their original supplier, regardless of whether the supplier is a demonstration supplier. However, payments will be made according to the new demonstration fee schedule. Those beneficiaries that have preexisting rental agreements for enteral pumps and hospital beds may continue to use their current supplier, and these suppliers will be paid the preexisting fees for the duration of the rental period. If beneficiaries use a nondemonstration supplier of urological supplies or surgical ES-2 dressings in error, then Medicare will cover the first 2 months of claims while the beneficiary locates a new supplier.

The demonstration includes quality standards for demonstration suppliers, and these standards exceed current standards. Also, HCFA designated an Ombudsman to receive, record, and respond to complaints from beneficiaries, physicians, suppliers, and other interested parties.

ES.1.3 Methods and Data This evaluation requires extensive descriptive and explanatory analyses to evaluate both the effectiveness of the implementation process and the impact of the demonstration on beneficiaries, providers, and the Medicare program. We are addressing the five evaluation areas using several sources of qualitative and quantitative data. Data sources include site visits and telephone discussions with key demonstration participants, focus groups, a review of documentation, surveys of beneficiaries and providers, bid analysis, and claims analysis. For many analyses, we are using an external comparison group composed of Medicare beneficiaries from Brevard County, Florida. Brevard County was chosen as the comparison county because it closely resembles Polk County in several key characteristics.

To date, we have conducted baseline surveys of Medicare beneficiaries in Polk and Brevard Counties prior to the start of the demonstration; analyzed bidding results and estimated potential reductions in Medicare allowed charges; and conducted a series of site visits to Polk County where we interviewed beneficiaries, DME suppliers, referral agents who refer beneficiaries to suppliers, and the demonstration Ombudsman. We also conducted a site visit to Columbia, South Carolina, where we interviewed staff of Palmetto Government Benefits Administrators (GBA), HCFA’s demonstration contractor. Later in the evaluation, we will conduct follow-up surveys of beneficiaries and a survey of suppliers, analyze utilization claims and expenditures data, and make additional site visits to Polk County.

ES.2 Medicare Expenditures Medicare allowed charges equal the product of price times the volume of utilization, summed across procedures. By comparing the demonstration prices to the Florida fee schedule that would have been in effect in the absence of the demonstration, we can calculate the demonstration’s impact on prices. We do not yet have sufficient claims data to estimate the demonstration’s impact on utilization. However, if we assume that utilization remains constant,

we can estimate annual allowed charges. The key findings in this section are as follows:

• Demonstration prices are lower than the existing Florida fee schedule for most items in every product category except surgical dressings. Demonstration prices are lower for

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• Assuming that utilization remains constant at 1998 levels, we estimate that the demonstration will reduce annual allowed charges in Polk County by nearly $1.3 million, or about 17 percent. Medicare expenditures (defined as allowed charges less copayments and deductibles) will fall by over $1 million annually, and beneficiary payments will fall by over $250,000 annually.

• Estimated annual allowed charges will fall by 16.4 percent for oxygen supplies, 29.4 percent for hospital beds and accessories, 15.8 percent for enteral nutrition, and 18 percent for urological supplies. Estimated annual allowed charges for surgical dressings will rise by 10.2 percent.

• The estimated increase in allowed charges for surgical dressings stems from the higher prices for surgical dressings in the competitively bid fee schedule compared to the Florida fee schedule. Our analysis suggests the higher prices were an unintended consequence of the weighting mechanism used to calculate each supplier’s composite bid. An alternative weighting mechanism based on volume is unlikely to have this unexpected impact on bid prices and will be used in HCFA’s future bidding competitions under the demonstration.

ES.3 Beneficiary Access Access can be defined as beneficiaries’ ability to locate and use, without undue burden, the services and products that are covered by the Medicare program. Competitive bidding reduces the number of approved suppliers in Polk County. Approved suppliers could adapt to the potential for increased market share by advertising, opening new locations to fill in geographic gaps left by unapproved suppliers, or improving service, thereby increasing beneficiary access.

Or they may respond to lower prices by offering lower quality products, delaying routine maintenance, or employing fewer service technicians and customer service representatives, thereby increasing the need for service calls, extending waiting times, and decreasing access. It is important to monitor the demonstration’s effect on beneficiary access to evaluate whether competitive bidding affects beneficiaries’ ability to obtain needed products and services.

The key findings in this section are as follows:

• Results from the baseline beneficiary survey indicate that access to DMEPOS was very good before the demonstration began.

• The demonstration design includes a number of features that promote beneficiary access.

• Twelve of the 16 demonstration suppliers agreed to serve all of Polk County. Thus, beneficiaries throughout the county can choose from a fairly wide selection of providers.

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• Through our latest site visits in May 2000, no systematic problems in beneficiary access had materialized.

• It is premature to evaluate the long-term effects of the demonstration on access.

ES.4 Quality and Product Selection If competitive bidding results in pressure on profit margins, then suppliers may attempt to restore profits by supplying less expensive and possibly lower quality products and services.

Lower quality may be manifested in a number of ways; for example, by offering lower-quality products, postponing preventive maintenance, delaying service calls, limiting product selection, or reducing inventory to the point that time needed to fill orders is increased. Consequently, our approach has been to evaluate the potential effect of the demonstration on the quality of products and services by obtaining information directly from Medicare beneficiaries, beneficiary organizations, referral agents, and suppliers.

The key findings in this section are as follows:

• Results from the baseline beneficiary survey indicate that the quality of services and equipment that beneficiaries received prior to the demonstration was very good.

• The demonstration design includes a number of features that promote quality.

• There have been no systematic reports of substantial changes in the quality of services or equipment provided to beneficiaries under the demonstration. A few referral agents tried more than one demonstration supplier before finding a supplier they were satisfied with, but this appears to have been a transitory problem. If referral agents were not satisfied with the initial demonstration supplier, they switched to another demonstration supplier that provided satisfactory service and quality.

• Many of the demonstration suppliers report that they underbid on urological supplies.

This resulted in a demonstration reimbursement schedule that sometimes does not cover the cost of purchasing certain items.

• We have observed no changes in product selection in the oxygen, hospital beds, and enteral nutrition product categories. Product selection may have improved in the surgical dressings category. The effects of the demonstration on product selection in the urological supplies category are unclear at this time.

• It is premature to evaluate the long-term effects of the demonstration on quality and product selection.

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