Section 302(b)(1) of the Medicare Modernization Act (MMA) requires CMS to replace the current durable medical equipment (DME) payment methodology for certain items with a competitive acquisition process. This new bidding process will establish payment amounts for certain DME, enteral nutrition, and off-the-shelf orthotics. According to Congress, the intent of competitive bidding is to harness marketplace dynamics to create incentives for suppliers to provide high-quality items and services in an efficient manner at reasonable cost.

Congressional officials say the Medicare DME competitive bidding program has five objectives: (1) to operationalize competitive bidding for DME and to use this to determine appropriate prices for categories of DME covered by Medicare Part B; (2) to protect beneficiary access to high-quality DME throughout the program; (3) to reduce the amount Medicare pays for DME and bring the reimbursement amount more in line with that of a competitive market; (4) to limit the burden on beneficiaries by reducing their out-of-pocket expenses; and (5) to mitigate proliferation of certain DME items by contracting with suppliers that engage in a business model that is beneficial for the program and for Medicare beneficiaries.

Bidding will occur in 10 of the largest metropolitan statistical areas (MSAs) in 2007, in 80 of the largest MSAs in 2009, and in additional areas after 2009. Section 302 of the MMA also requires the establishment of quality standards and an accreditation rule.

Accreditation and Competitive Bidding

CMS issued an accreditation final rule on August 1, 2006, that establishes requirements for accreditation of DME suppliers and lays the groundwork for implementation of competitive bidding. This rule details the application process for accrediting organizations that would apply quality standards for all DME suppliers, including those that would participate in competitive bidding. CMS is phasing in the requirement for DME suppliers to become accredited, consistent with the statutory phase-in of the competitive bidding program.

In the December 18 meeting, CMS stated that all providers billing Part B within the first 10 MSAs must be accredited by spring 2007. This includes companies that have customers within the MSAs, but have their operation outside the MSAs. CMS further stated that providers billing Part B within the next 80 MSAs must be accredited by spring 2008. All providers nationwide must be accredited within the next 3 years. According to CMS, surveys will be unannounced and on-site.

On August 15, 2006, CMS released the long-awaited quality standards for DME suppliers. These standards are now in final form with no additional opportunity for public comment. Suppliers must meet these new quality standards to furnish any DME item for which Medicare Part B makes payment. They also must meet these standards to receive or retain a provider or supplier billing number used to submit claims for Medicare reimbursement.

The MMA specifies that the HHS Secretary may contract with appropriate entities to implement the competitive bidding program. It is the intention of CMS to contract with one or more competitive bidding implementation contractors (CBICs) to assist with various tasks. There are a number of functions for which the CBIC will be responsible: overall oversight and decision-making, operation design functions, bidding and evaluation, access and quality monitoring, outreach and education, and claims processing.

Medicare Administrative Contractors (MACs) will continue to process claims and perform other MAC functions. For example, MACs will continue to be responsible for outreach and education to beneficiaries and suppliers; processing claims; applying the single payment amount; and responding to complaints related to claims processing.

Tools and Tactics

  • Determine if you are located in a probable competitive bid area.
  • Understand the bid selection process.
  • Understand the product and service requirements.
  • Become accredited.
  • Pick the products you can provide.
  • Determine the percentage of the market you can handle.
  • Understand the “numbers” (financial and operational data).
  • Develop a bid for each HCPCS code.
  • Determine the amount of discount (off your usual and customary charge) that you can give.
  • Gather bid package forms and information.

The CBIC will perform certain functions at a national level, such as implementing the requests for bids (RFBs); conducting bid evaluations; selecting qualified suppliers; and setting single payment amounts for all competitive bid areas. The CBIC also will be responsible for educating the MACs on the bidding process and assisting the MACs in monitoring program effectiveness, access, and quality.

Payment will be based on the “single payment amount” for the item in the area where the beneficiary maintains a permanent residence. The use of ABNs will not be precluded for items that might not be covered by Medicare.


There will be a “grandfathering” process by which rental agreements for covered items and supply arrangements with oxygen suppliers (entered into before the start of a competitive bidding program) may be continued. This would apply only to those suppliers that began furnishing the item prior to implementation of the program. Beneficiaries will have the ability to decide whether they would like to continue renting the item from the grandfathered supplier or a contract supplier—provided the grandfathered supplier is willing to furnish the item under the same terms as the contract supplier.

If a supplier chooses to be a grandfathered supplier, then it must do so for all beneficiaries who request the services. The grandfathered supplier will receive the competitive bid payment amount for oxygen and items requiring frequent and substantial servicing. Grandfathering also will apply to suppliers that lose their contract status in a subsequent competitive bidding program.

Beneficiaries traveling from one competitive bid area to another will be required to obtain items from another contract supplier. Beneficiaries traveling from a competitive bid area to a non-competitive bid area will be required to obtain items only from a supplier with a valid supplier number. Payment will be based on the single payment amount for the item in the area where the beneficiary maintains their permanent residence.

The Phase-In

The MMA authorizes CMS to phase in competitive bidding beginning with the “highest cost and highest volume items, or those items that the Secretary determines have the largest savings potential.” CMS intends to conduct the bidding process using products grouped into categories. The categories to be included in the 2007 round of bidding will be chosen based on statistics for “policy groups” defined by the Statistical Analysis DMERC (SADMERC), but the specific products that will be included in the bidding program may not exactly correspond to the policy groups.

CMS says that its selection of products for competitive bidding will be based on annual Medicare DMEPOS allowed charges, annual growth in expenditures, number of suppliers (because CMS believes that a larger number of suppliers means more competition), savings in the DMEPOS demonstrations, and reports and studies. The highest priority will be given to items with high allowed charges or rapidly increasing allowed charges.

Submitting Bids

Suppliers will submit bids on individual products in a product category. CMS will calculate a weighted composite bid for each bidder from the individual product bids, and will award contracts based on the composite bids. CMS proposes to decide the number of suppliers selected for each product category based on expected demand and supplier capacity. The number of winning bidders for a category will be the minimum number of suppliers that together have the capacity to meet the expected demand for products in that category.

CMS proposes to set a single price for each item in each area, equal to the median of the bid prices of the winning bidders. CMS has added a provision that those suppliers that submitted bids below the final price will be permitted to give rebates to beneficiaries equal to the difference between the bid and the payment amount.

Suppliers that are not yet accredited will not necessarily be barred from participating in the competitive bidding process. There may be a grace period for suppliers that do not have time to become accredited before bids are due. CMS also says that if a supplier is already accredited by one of the accreditation organizations designated by CMS, it will be grandfathered for one accreditation cycle.

Setting the Stage

To improve your chance of being a successful bidder, you must fundamentally understand your operation. Realistically, what products can you provide and what geographical area can you cover? What direct and indirect costs are associated with your products? How efficient is your operation? Are you “lean and mean,” or do you have too many employees? Do you understand cost structure (both direct and indirect costs)? If you become a successful bidder, will you be able to increase your market share?

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, Amarillo, Tex. He represents HME companies, pharmacies, and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached via e-mail: .