ABA Health eSource
July 2008 Volume 4 Number 11

New Medicare Competitive Bidding Program Faces Significant Challenges
by Betty C. Pang and Shilpi Agarwal 1 , Latham & Watkins LLP, San Francisco, CA

Betty C. Pang and Shilpi AgarwalApproximately one year after publishing its final rule on the competitive bidding program for selected durable medical equipment, prosthetics, orthotics and supplies ("DMEPOS"), on May 19, 2008, the Centers for Medicare and Medicaid Services ("CMS") published the winning bidders for the first round of the program. The announcement was made in the midst of controversies, giving rise to efforts to either set aside or delay the July 1, 2008 implementation date. Legislators, medical suppliers, Medicare beneficiaries and several special interest groups have raised concerns about the potential outcomes of this new program, including the program's impact on beneficiary access to quality products and the ability to correct procedural flaws in the bid selection process. Despite the raised concerns, Round 2 of the program is already underway, and CMS has set in place a process in anticipation of proceeding with both Rounds 1 and 2 as scheduled.

This article will briefly discuss the program's new developments, civil litigation and legislative efforts to delay implementation of the program and the controversies and concerns to which the new program has given rise.

The New Competitive Bidding Program

Section 303 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA" 2 established a competitive acquisition program for DMEPOS--commonly referred to as "the Medicare DMEPOS competitive bidding program"--to be implemented by the Secretary of Health and Human Services. Under the program, the Secretary is to replace the existing DMEPOS fee schedule payment amounts with amounts derived from bids. The MMA requires the total amounts paid under competitive bidding to be less than the total amounts otherwise payable under existing payment formulas. Round 1 is projected to result in payment amounts that are an average of 26 percent less than Medicare's fee schedule rates for the 10 product categories subject to the program. 3

The program is to be phased in among geographic areas that include 10 of the largest metropolitan statistical areas ("MSAs") starting July 1, 2008, 70 additional MSAs in 2009, and additional areas thereafter. For Round 1, CMS concluded the bid evaluation process in March 2008 and announced the winning 325 suppliers, or about 32 percent of the 1,005 suppliers who bid in the competitive bidding areas ("CBAs"), in May 2008. 4

The extent of the program's complexity and intricacies has been highlighted with CMS's recent intensive educational campaign. A full year after issuing its final rule on the program in April 2007, and just two months prior to the program's commencement in July 2008, CMS issued revisions to its Medicare Claims Processing Manual; published a number of provider outreach articles through its Medicare Learning Network Matters publications [correct?] and "fact sheets" made publicly available on its website; distributed direct mailings to all beneficiaries in the Round 1 CBAs; and held a number of open door teleconference calls to reach beneficiaries, suppliers and providers. 5 In addition, to facilitate a smooth transition of the program, CMS will permit the "grandfathering" of rental agreements for durable medical equipment with non-contract suppliers that are in existence prior to the initiation of competitive bidding to the extent that the beneficiary chooses to continue with his or her current, non-contract supplier. 6

Because of the novelty in which Medicare will now pay for DMEPOS items under the competitive bidding program, CMS continues to face significant resistance and challenges from industry stakeholders, legislators and Medicare beneficiaries. However, recent failures of both litigation and legislative efforts reflect the significant momentum that the program has gained, and the difficulty with which it will be effectively challenged.

Civil Litigation

At least four lawsuits were filed seeking to avoid implementation with motions for a preliminary injunction. None of these suits were successful, however, and competitive bidding is now in place in the Round 1 CBAs, effective July 1, 2008.

In Hewitt v. Leavitt, three Medicare beneficiaries filed suit in the Federal district court in the Northern District of Texas. Plaintiffs argued that because Medicare beneficiaries within the CBAs will receive lower quality products and services, compared to non-Medicare beneficiaries, the competitive bidding program unconstitutionally creates two classes of beneficiaries. In addition, plaintiffs argued that the competitive bidding program discriminates against small suppliers, because the program inherently favors large suppliers and will arguably force smaller suppliers out of business. 7 In December 2007, the Texas court dismissed the plaintiffs' claims (without prejudice) as not ripe, 8 largely because the alleged injury to beneficiaries was prospective and speculative at the time the suit was filed. Contracts had not yet been awarded and the program had not yet been implemented.

In a second case, Premier Medical Supplies, Inc. v. Leavitt, brought in the Northern District of Ohio, plaintiffs argued that CMS failed to comply with the public notice and comment requirements of the MMA and the Administrative Procedures Act ("APA"), alleging that the agency implemented the bid submission process in a manner that was arbitrary, capricious, unreasonable, and in violation of procedural due process, as plaintiffs were precluded from the program. In addition, plaintiffs argued that CMS violated the Regulatory Flexibility Act ("RFA"), which requires all agencies to carefully scrutinize ways to minimize the economic impact on small entities. Although the court found that it did have jurisdiction to hear the case, the court held that the agency provided stakeholders adequate notice to comment on the bid submission process and therefore, plaintiffs failed to establish a likelihood of success on the merits. Plaintiffs also failed to show they suffered an irreparable harm, as their injuries were speculative. In addition, plaintiff beneficiaries failed to establish any nexus between their injuries and the alleged procedural violation.

In American Association for Homecare, et al. v. Leavitt, plaintiffs argued that CMS's failure to specify applicable financial standards for participating suppliers in the proposed rule or final rule to enable stakeholders to provide comments to such standards violates the MMA and APA. The plaintiffs also argued that CMS's decision to define small suppliers as having total annual revenue of $3.5 million or less without an adequate notice-and-comment period violates the MMA and Small Business Act ("SBA"). Plaintiffs urged that CMS be required to adopt the SBA definition of a small supplier or, alternatively, comply with the SBA and the notice-and-comment provisions of the MMA and APA in promulgating $3.5 million as the cutoff number for small suppliers. Plaintiffs contended that failure to provide for notice-and-comment regarding applicable financial standards and the definition of a small supplier as required by law makes CMS's rules arbitrary, capricious and an abuse of discretion. The court disagreed, finding that because the plaintiff's alleged injuries were "merely economic" and speculative, the plaintiff did not sufficiently demonstrate irreparable injury to warrant a preliminary injunction. Therefore, a procedural violation "standing alone" was insufficient to constitute irreparable harm.

Finally, in Scooters Unlimited and DME Inc., et al. v. Leavitt, plaintiffs filed a motion for a temporary restraining order in the Northern District of Texas on June 20, 2008. The plaintiffs failed to persuade the court that there would be a substantial likelihood of success on the merits, and the court denied their request for a temporary restraining order.

Legislative Opposition

In addition to the litigation efforts by industry stakeholders and beneficiaries, congressional leaders have also asked to delay and/or set aside the program altogether. On May 16, 2008, representatives from the Senate Finance Committee sent a letter to Health and Human Services Secretary Michael O. Leavitt questioning whether the program's projected savings are "at the expense of beneficiary access to high-quality products and services." 9 They also raised questions about the extent to which beneficiaries would be informed of how the new program would affect beneficiary services, and how potential inaccuracies in the implementation of the program could disrupt beneficiary access to medically necessary products. 10 House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA ) stated that the competitive bidding program was designed "with blinders on to the needs of beneficiaries and the small companies that make up most of the DME industry." 11

Legislators from both the Senate and the House also continue to probe the extent of small supplier participation and accounts that suggest the competitive bidding program will force many suppliers out of business. On May 21, the House Committee on Small Business Subcommittee on Urban and Rural Entrepreneurship held a hearing to investigate how CMS awarded bids for the negative pressure wound categories, approximately 60 percent of the suppliers were disqualified from consideration because of a failure to submit complete and accurate information. 12 Although CMS states that nearly two-thirds of those being offered contracts for the first phase of the competitive bidding program are small suppliers, 13 many of those suppliers do not currently operate in the CBAs. Industry stakeholders argue that their selection was based solely on supplier capacity to provide the products, not on any evaluation of their ability to provide high quality products or the support services necessary to ensure safe and effective use. 14

Congress is also urging CMS to delay the implementation of the program altogether. On May 6, the House Ways and Means Subcommittee on Health held a hearing to consider delaying implementation of Round 1. 15 In addition, on June 12, 2008, the House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) and Ranking Member Dave Camp (R-MI) introduced legislation that would delay for 18 months the competitive bidding program (with Round 1 commencing in 2009 and Round 2 commencing in 2011) and require CMS to improve the bidding process, including requiring CMS to notify bidders about paperwork discrepancies and give suppliers the opportunity to correct within a reasonable time frame; establish additional quality measures for DMEPOS suppliers, including requiring all suppliers to be accredited by October 1, 2009 to ensure that all suppliers, whether they are billing Medicare directly or are a subcontractor to a contract supplier, be subject to accreditation; and to make additional changes to the program, including establishing a separate ombudsman within CMS to handle supplier and beneficiary issues related to the competitive bidding program. 16 As of July 1, 2008, the House bill, as well as its companion bill in the Senate (S. 3144), introduced by Senate Finance Committee Chairman Max Baucus (D-MT) and Sen. Chuck Grassley (R-IA) on June 17, 2008, have not yet been passed.


Amidst the pressure from Medicare beneficiaries, legislators and industry stakeholders to delay implementation of the entire competitive bidding program, the program is now effective in the Round 1 CBAs and CMS has affirmed its commitment to proceed with Round 2 as scheduled. 17 The agency has published a number of guidance documents and conducted several open door sessions. Opponents to the program have initiated litigation and sought legislative intervention. They also argue that the current timeframe for implementing Round 2 leaves little time for CMS to evaluate the impact of the program on patient access and to develop any necessary program changes and improvements after evaluating the outcomes from Round 1. 18 However, recent outcomes of these efforts suggest that it has been difficult to frustrate the momentum of this new program. Because the program promises to become a paradigm shift in the manner in which Medicare pays for DMEPOS items, stakeholders will likely remain concerned with CMS moving forward with and expanding the competitive bidding program before sufficient experiences weigh in favor of doing so.

1 Betty C. Pang, MD is an associate and Shilpi Agarwal is a summer associate in the Health Care and Life Sciences Practice Group of Latham & Watkins, LLP.
2 Pub. L. No. 108-173, § 303, 117 Stat. 2239 (2003) (adding Section 1847 of the Social Security Act, codified at 42 U.S.C. § 1395w-3).
3 Press Release, CMS, "Medicare Announces over 320 Winning Suppliers Selected for Competitive Bidding Program for Durable Medical Equipment" (May 19, 2008), available at http://www.cms.hhs.gov/apps/media/press_releases.asp.
4 Id.
5 CMS, DMEPOS Competitive Bidding Program Milestones, available at http://www.cms.hhs.gov/DMEPOSCompetitiveBid/Downloads/DMEPOSTimeline.pdf.
6 Grandfathered suppliers of oxygen or items requiring frequent and substantial servicing will be paid the competitively bid payment amount for the item. In contrast, grandfathered suppliers of inexpensive or routinely purchased items or capped rental items will be paid at the fee schedule rate. Accessories or supplies for all four types of durable medical equipment may also be grandfathered, if an integral part to the base equipment. Payment for accessories or supplies included in the competitive bidding program would be based on the single payment amount for the item furnished. Beginning with the second competitive bidding program implemented in a given CBA, all grandfathered items will receive the single payment amount as determined under competitive bidding. The same rules apply for accessories that may be grandfathered. See 42 C.F.R. § 414.408(j).
7 Hewitt v. Leavitt, No. 3:07 Civ. 1038-K (N.D.Tx. Dec. 2, 2007).
8 Id.
9 Sen. Ken Salazar, et.al., Letter to Secretary Michael O. Leavitt (May 16, 2008).
10 Id.
11 "Stark and Camp Introduce Bill to Delay DME Competitive Bidding Program," available at http://www.house.gov/stark/news/110th/pressreleases/2008-06/12-DMEPOS.htm.
12 See Competitive Bidding for Durable Medical Equipment: Hearing Before the H. Comm. On Small Business Subcomm. On Rural and Urban Entrepreneurship, 110 th Cong. (May 21, 2008) (statement of Casey Hite, Vice-Pres., Aeroflow Healthcare), available at http://www.house.gov/smbiz/hearings/hearing-05-21-08-DME/Hite.pdf.
13 See Competitive Bidding for Durable Medical Equipment: Hearing Before the H. Comm. On Small Business Subcomm. On Rural and Urban Entrepreneurship, 110 th Cong. (May 21, 2008) (statement of Laurence Wilson, CMS), available at http://www.house.gov/smbiz/hearings/hearing-05-21-08-DME/Wilson.pdf.
14 See Competitive Bidding for Durable Medical Equipment: Hearing Before the H. Comm. On Small Business Subcomm. On Rural and Urban Entrepreneurship, 110 th Cong. (May 21, 2008) (statement of Linwood A. Staub on behalf of the Advanced Medical Technology Association), available at http://www.house.gov/smbiz/hearings/hearing-05-21-08-DME/Staub.pdf.
15 See Medicare's Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) Competitive Bidding Program: Hearing Before the H. Ways and Means Subcomm. on Health, 110 th Cong. (May 6, 2008), available at http://waysandmeans.house.gov/hearings.asp?formmode=detail&hearing=630.
16 See "Medicare DMEPOS Competitive Acquisition Reform Act of 2008," H.R. 6252, available at http://www.house.gov/stark/news/110th/legislation/DMEPOS/DMEPOS.pdf. See also " Medicare DMEPOS Competitive Acquisition Reform Act of 2008: Introduced by Reps. Stark, Camp, Rangel, Boehner, Dingell, Pallone and others," available at http://www.house.gov/stark/news/110th/legislation/DMEPOS/summary.pdf.
17 See CMS Transmittal 1502: Phase 1 of Manual Revisions to Reflect Payment Changes for DMEPOS Items as a Result of the DMEPOS Competitive Bidding Program and the Deficit Reduction Act (DRA) of 2005 (May 9, 2008), available at http://www.cms.hhs.gov/Transmittals/downloads/R1502CP.pdf.
18 Sen. Ken Salazar, et.al., Letter to Secretary Michael O. Leavitt (May 16, 2008).

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