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entitled 'Medicare: Divided Authority for Policies on Coverage of 
Procedures and Devices Results in Inequities' which was released on May 
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Report to the Chairman, Subcommittee on Health, Committee on Ways and 
Means, House of Representatives:

United States General Accounting Office:

GAO:

April 2003:

MEDICARE:

Divided Authority for Policies on Coverage of Procedures and Devices 
Results in Inequities:

GAO-03-175:

GAO Highlights:

Highlights of GAO-03-175, a report to the Chairman, Subcommittee on 
Health, Committee on Ways and Means, House of Representatives 

Why GAO Did This Study:

Critical choices on whether new technology will be covered for 
Medicare’s 40 million beneficiaries are made nationally by the Centers 
for Medicare & Medicaid Services (CMS)—the agency that administers 
Medicare—or locally by contractors that process and pay claims.

GAO was asked to review the degree to which new procedures and devices 
are incorporated into Medicare, the effect of Medicare coverage 
policy-making processes on beneficiaries, and to what extent CMS has 
addressed concerns about its national coverage process.

What GAO Found:

Medicare Covered Most New Procedures and Devices:

Medicare covered about 99 percent of the procedures and devices that 
were assigned codes by an American Medical Association panel or a 
committee of insurers in 2001.  About a quarter were introduced into 
the program without coverage policies that describe the circumstances 
for Medicare coverage or place restrictions on their use.  Another 
quarter were affected by national coverage policies and the rest were 
affected only by local coverage policies. 

Variations in Local Coverage Led to Inequities:

Because contractors can determine coverage for beneficiaries being 
treated in their jurisdictions, coverage inequities for beneficiaries 
with similar medical conditions have resulted.  For example, until 
recently, coverage for a new treatment for debilitating tremors, 
called bilateral deep brain stimulation (DBS), had been allowed only 
for beneficiaries treated in some states.  On April 1, 2003, CMS 
implemented a consistent national coverage policy on DBS, but coverage 
variation continues for other procedures.  

National Coverage Development Process Raises Concerns:

While CMS creates national coverage policies that apply equally to all 
Medicare beneficiaries, criticisms of its slow pace and its closed 
policy development process prompted CMS to take steps to make its 
process more understandable, open, and timely.  Nevertheless, the 
national process remains flawed because it lacks clear coverage 
criteria, remains closed in fundamental ways to physician and 
beneficiary input, and has not consistently met timeliness goals. 

What GAO Recommends:

GAO recommends that CMS eliminate development of new local Medicare 
coverage policies for procedures and devices that have been assigned 
codes; evaluate all current local policies on procedures and devices 
with established codes to determine if the policies should be 
incorporated into national policies or be rescinded; and establish a 
new, centrally managed process that is more open, understandable, and 
timely to develop national coverage policies, using expertise from 
other sources.  HHS disagreed with our recommendations to eliminate 
local coverage policy development for certain procedures and devices 
and to develop a new national process.  It also disagreed with the 
intent of our recommendation to evaluate its existing local policies.  

www.gao.gov/cgi-bin/getrpt?GAO-03-175.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Leslie G. Aronovitz at (312) 220-7600.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Medicare Covered Most Procedures and Devices Assigned Codes in 2001, 
Often Without National or Local Coverage Policy:

Variations in Local Coverage Policies Lead to Program Inequities and 
Inefficiencies:

National Coverage Policy Adds Consistency, But Current Policy 
Development Process Could Be Strengthened:

Conclusions:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendix I: Scope and Methodology:

Appendix II: Coding Assignment Process:

Appendix III: Process That CMS Follows to Develop National Coverage 
Policies:

Appendix IV: Process That Carriers and Fiscal Intermediaries 
Follow to Develop Local Coverage Policies:

Appendix V: Coverage Criteria for Medicare Claims 
Administration Contractors:

Appendix VI: Comments from the Department of Health and 
Human Services:

Appendix VII: GAO Contact and Staff Acknowledgments:

GAO Contact:

Acknowledgments:

Tables:

Table 1: Number and Percent of the New Coverable Procedure and Device 
Codes for 2001 That Were Affected by National or Local Coverage Policy:

Table 2: Variations in Local Coverage Policies in Northern and Southern 
California:

Table 3: Local Coverage Policies for Procedures with New Codes 
Developed or Revised by Four Carriers in Four States:

Figures:

Figure 1: Carrier Coverage for Bilateral DBS by State, as of July 31, 
2002:

Figure 2: Process for Adding, Deleting, and Revising CPT and HCPCS 
Level II Codes for Use in the Medicare Program:

Figure 3: Criteria for Claims Administration Contactors to Use to 
Determine Whether a Procedure or Device Is Reasonable and Necessary:

Abbreviations:

AMA: American Medical Association:

BIPA: Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000:

CAG: Coverage and Analysis Group:

CMM: Center for Medicare Management:

CMS: Centers for Medicare & Medicaid Services:

CPT: Current Procedural Terminology:

DBS: deep brain stimulation:

DME: durable medical equipment:

FDA: Food and Drug Administration:

HCFA: Health Care Financing Administration:

HCPCS: Healthcare Common Procedure Coding System:

HHS: Department of Health and Human Services:

MCAC: Medicare Coverage Advisory Committee:

NHIC: National Heritage Insurance Company:

OIG: Office of Inspector General:

SCHIP: State Children's Health Insurance Program:

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protection in the United States. It may be reproduced and distributed 
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United States General Accounting Office:

Washington, DC 20548:

April 11, 2003:

The Honorable Nancy L. Johnson
Chairman
Subcommittee on Health
Committee on Ways and Means
House of Representatives:

Dear Madam Chairman:

As health care technology evolves, beneficiaries, their families, 
physicians, and medical device manufacturers are interested in having 
the Medicare program cover new procedures[Footnote 1] and devices that 
could improve individuals' clinical outcomes. Such new procedures and 
devices are most commonly incremental improvements upon those currently 
available, but can also represent significant medical breakthroughs. 
Policies explaining whether, and under what circumstances, new 
procedures or devices will be covered can be made nationally by the 
Centers for Medicare & Medicaid Services (CMS)--the agency that 
administers Medicare--or locally by Medicare claims administration 
contractors in their service areas. These include 19 carriers, which 
pay part B claims for most physician, laboratory, and certain other 
services and items,[Footnote 2] and 27 fiscal:

intermediaries, which pay part A claims for inpatient hospital and 
related post-hospital services and part B claims submitted by part A 
providers.[Footnote 3],[Footnote 4]

Procedures and devices are identified by codes that are assigned to 
them by two committees outside of the Medicare program. When new 
procedures and devices are assigned codes, CMS decides whether they are 
among the types of health care benefits described in the Medicare 
statute and are reasonable and necessary for a beneficiary's treatment, 
and, therefore, eligible for Medicare payment. CMS notifies contractors 
whether each new code can be covered, and, based on this information, 
Medicare's automated claims processing systems pay or deny claims 
submitted with one of these codes.

CMS or its claims administration contractors sometimes create coverage 
policies to specify or limit when payment for a particular procedure or 
device will be made, such as by allowing coverage of a procedure only 
for certain specified diagnoses. CMS develops national coverage 
policies that apply to all beneficiaries across the country. Claims 
administration contractors issue local coverage policies that apply 
only to beneficiaries treated in their service areas or to providers 
they service.

Physicians and beneficiary advocates have raised concerns about whether 
local coverage policies that apply only in a contractor's service area 
lead to variations that result in inequitable coverage for 
beneficiaries. In addition, CMS has been criticized for the slow pace 
by which new procedures and devices are introduced into the program and 
for the lack of openness and understandability in the process it uses 
to make national coverage policies.

In light of these concerns, you asked us to examine:

1. To what extent are new procedures and devices incorporated into the 
Medicare program?

2. What has been the effect of the local coverage process on 
beneficiaries, carrier and fiscal intermediary efficiency, and 
stakeholders, including device manufacturers and physicians?

3. What has been the effect of the national coverage process on 
beneficiaries, physicians, and other providers, and to what degree has 
CMS addressed concerns about the process?

In preparing this report, we focused on new procedures and devices that 
are provided by physicians (and allied professionals under their 
supervision) or other providers and that could be billed under part B, 
including anesthesia and laboratory tests. We also included devices 
that could be used by beneficiaries in their homes. Claims for covered 
procedures and devices in our study are generally processed by 
carriers. We included some procedures that physicians would perform in 
an inpatient hospital setting--such as surgeries--that could also have 
related claims by hospitals under part A that would be processed by 
fiscal intermediaries. To determine the extent to which new procedures 
and devices are incorporated into Medicare, we selected 320 codes for 
procedures and devices that were new in 2001, analyzed information 
about these codes, and reviewed national and local policies that 
affected them. To evaluate the effects of the local and national 
coverage processes and concerns about the national coverage process, we 
(1) reviewed CMS, carrier, and fiscal intermediary coverage policies, 
including analyzing national coverage policies that CMS made from 
February 1999 through July 2002, and (2) interviewed CMS regional and 
headquarters officials; Food and Drug Administration (FDA) officials; 
Medicare staff at four carriers,[Footnote 5] which included one DME 
regional carrier[Footnote 6] and one that also served as a fiscal 
intermediary;[Footnote 7] and advocates representing physicians, 
suppliers, and beneficiaries. Appendix I contains more detail on our 
scope and methodology. Our work was conducted from October 2001 through 
March 2003 in accordance with generally accepted government auditing 
standards.

Results in Brief:

Medicare covered most--about 99 percent--of procedures and devices 
assigned codes in 2001. For procedures and devices with established 
codes, Medicare contractors' automated claims processing systems 
generally accept--and pay--claims, unless coverage policies define or 
restrict when Medicare will pay for their provision. About one quarter 
of the new codes for procedures and devices were introduced into 
Medicare without any coverage policies that affected their use. About 
one quarter of the new codes had associated national coverage policies, 
while the rest were affected only by local coverage policies developed 
by at least one claims administration contractor. More than half of the 
codes affected by national coverage policy were also affected by one or 
more local coverage policies.

Dividing authority to develop coverage policies has led to coverage 
inequities for Medicare beneficiaries with similar medical conditions 
based on the location where they receive treatment and to 
inefficiencies in program administration. For example, in July 2002, 
carriers provided coverage for a new treatment for Parkinson's disease 
for certain beneficiaries with debilitating tremors treated in Kansas, 
but not in Florida. On April 1, 2003, CMS implemented a national 
coverage policy for this treatment. Coverage varies by state for 
certain tests to diagnose or monitor an individual's response to 
treatment for cancer. One test is covered by carriers in Rhode Island 
and Pennsylvania, but is not covered in Florida and New Jersey. In 
addition to coverage inequities, having each carrier and fiscal 
intermediary separately develop policies for the same procedure or 
device results in duplication of efforts and program inefficiencies. 
For example, eight carriers have separately followed the extensive, 
required steps to develop local policies for a method of identifying a 
possible risk of sudden cardiac death. Despite these problems, some 
groups, including device manufacturers' representatives and physician 
groups, argue that local coverage policies have benefits. For example, 
they state that local policies can be developed more rapidly than 
national coverage policies and that the local coverage process is open 
to physician and public input.

Because CMS's national policies apply to all Medicare beneficiaries 
regardless of their treatment location, these policies promote coverage 
consistency for beneficiaries, physicians, and other providers. 
However, CMS's national coverage process had been criticized for being 
slow, not clear, and not open to public input. To address these 
concerns, CMS recently took steps to strengthen its national coverage 
process. In 1999, for example, the agency made the process more 
understandable by publishing the steps it takes to develop national 
coverage policies. Nevertheless, some problems persist. For example, 
CMS does not publish its draft national coverage policies for public 
comment. In addition, CMS does not always consult with experts outside 
the agency when it develops coverage policies.

Because of inequities and inefficiencies resulting from divided 
authority to develop coverage policy among CMS, carriers, and fiscal 
intermediaries, we are recommending that CMS eliminate claims 
administration contractors' development of new local coverage policies 
for procedures and devices that have established codes. We are also 
recommending that CMS establish a new process for making national 
coverage policy.

In commenting on a draft of this report, the Department of Health and 
Human Services (HHS) generally disagreed with our recommendations and 
expressed concerns about the effects of these proposed changes on the 
Medicare program and the resources that would be required to implement 
them. We believe our recommendations would lead to more consistent 
coverage policies for Medicare beneficiaries and would increase program 
efficiency through redirecting the resources that are currently devoted 
to duplicative policy making.

Background:

Medicare is the federal health insurance program that serves 40 million 
beneficiaries who are aged 65 years and older, certain disabled people 
under 65 years of age, and individuals with end-stage renal disease. 
The program is administered by CMS--formerly the Health Care Financing 
Administration (HCFA)[Footnote 8]--an agency within HHS. Most 
beneficiaries receive their care on a fee-for-service basis, with 
providers submitting claims for payment for each service provided. CMS 
contracts with claims administrators--health insurers--to process 
claims from nearly 1 million hospitals, physicians, and other health 
care providers. In fiscal year 2000, carriers processed about 740 
million claims and fiscal intermediaries processed about 151 million 
claims.

Medicare Payment for Claims Relies on Codes for Billing:

Medicare's payment systems for claims are highly automated and rely on 
codes to identify medical procedures and devices used in beneficiaries' 
diagnoses and treatments. Contractors identify specific procedures and 
devices billed on behalf of a beneficiary by Healthcare Common 
Procedure Coding System (HCPCS) codes, a series of five digits used by 
Medicare and other health insurance programs. The HCPCS also contains 
miscellaneous codes that can be used to bill for procedures and devices 
for which there are no established codes.[Footnote 9] The HCPCS 
contains three sets of codes--Levels I, II, and III. Level I consists 
of Current Procedural Terminology (CPT) codes used primarily to 
identify medical services and procedures furnished by physicians and 
other health care professionals. Level II codes represent products, 
supplies, and services not included in CPT codes, such as ambulance 
services and DME used in a beneficiary's home. Level III codes are 
"local" codes that have been developed by Medicare carriers and fiscal 
intermediaries, Medicaid state agencies, and private insurers for use 
only in their specific jurisdictions. Local codes are scheduled to be 
eliminated in December 2003.[Footnote 10]

A request for a new HCPCS code may be made by physicians or medical 
device manufacturers for procedures and devices that may be clinically 
different from existing treatment options--generally to better 
delineate a new procedure from a similar one or when the cost of a new 
procedure or device necessitates a different payment amount.

Two different entities are responsible for assigning new codes. The 
American Medical Association's (AMA) CPT Editorial Panel[Footnote 11] 
annually updates codes for procedures and other physician services--CPT 
codes. The HCPCS National Panel, which is composed of CMS and insurer 
representatives,[Footnote 12] annually updates codes for medical 
devices and other products--HCPCS Level II codes. Because the code sets 
maintained by the AMA CPT Editorial Panel and HCPCS National Panel are 
designed to serve multiple health insurers, not all of the codes are 
for services or items covered by Medicare.[Footnote 13] It usually 
takes at least 15 months from the date a new code is requested for a 
new code to be assigned and put into use.

Medicare's Statute Sets Out Broad Categories of Covered Services and 
Items:

To be eligible for coverage under Medicare, specific health care 
services must fit into 1 of about 55 categories of benefits described 
in statute. The Secretary of HHS has been delegated legal authority to 
specify which procedures, devices, and services are covered in the 
broad benefit categories and under what conditions. The Secretary 
delegates this responsibility to CMS, which, in turn, delegates some of 
this responsibility to its claims administration contractors.

The law states that Medicare cannot pay for any items or services that 
are not "reasonable and necessary" for the diagnosis and treatment of 
an illness or injury or to improve functioning of a malformed body 
part.[Footnote 14] The law excludes some services and items from 
coverage, such as routine physical checkups, most immunizations, 
cosmetic surgeries, hearing aids, eyeglasses, routine foot care, and 
routine dental care.[Footnote 15] Medicare law has been amended several 
times to add new coverage--including certain preventative health care 
services such as immunizations for pneumonia and influenza; mammogram, 
pap smear, and pelvic exam screenings; and tests for prostate and 
colorectal cancer.[Footnote 16]

Each year, CMS reviews new CPT codes and HCPCS Level II codes for 
procedures and devices to determine if these codes fit into a Medicare 
benefit category and can be covered because they are deemed reasonable 
and necessary for a beneficiary's diagnosis or treatment. Following its 
review, CMS provides information on new codes to claims administration 
contractors, including coverage, billing, and payment instructions. 
(See app. II for more detail on the coding assignment process.):

CMS and Claims Administration Contractors May Develop Policies Defining 
When New Procedures and Devices Are Covered:

Even when CMS determines that Medicare may cover a procedure or device, 
CMS or its claims administration contractors may develop policies that 
delineate the circumstances under which its use is considered 
reasonable and necessary, and thus covered. Using a process that began 
in 1999, CMSísCoverage and Analysis Group (CAG), which is located in 
the Office of Clinical Standards and Quality, develops national 
coverage policies, which are binding on Medicare contractors and apply 
to all beneficiaries. The agency has also compiled a body of national 
policy on Medicare coverage that is included in manuals and other 
written materials for claims administration contractors. In addition, 
claims administration contractors develop local coverage policies, 
which apply to beneficiaries being treated in their jurisdictions.

CAG begins the national coverage process when it receives a formal 
request from an outside partyóa device manufacturer, for instanceóor 
when CAG internally identifies the need to consider coverag [Footnote 
17]CAG internally identifies the need for national coverage policies 
under several circumstancesófor example, when a procedure or device is 
seemingly being used inappropriately, controversy exists about its 
clinical benefit, or new evidence of clinical effectiveness is 
available. Once CAG accepts a request to consider a national coverage 
policy, it may complete an analysis in-house or seek outside scientific 
help by requesting a technical assessment, referring the issue to an 
advisory committee, or both. After conducting its own analysis and 
reviewing any external input, CAG may arrive at several possible 
courses of action.(See app. III for more information on the process CMS 
uses to develop national coverage policies.) These include a national 
noncoverage policy, which precludes claims administration contractors 
from making Medicare payment; a coverage policy with specific 
restrictions; a policy that allows claims administration contractors to 
use their discretion when deciding whether to cover the procedure or 
device in their service areas; [Footnote 18]or a coverage policy with 
no national restrictions. By statute, CMS can issue policies on 
national coverage without using the notice and comment rulemaking 
procedures required for substantive changes.[Footnote 19] e.

In addition to CMS's national policies, carriers and fiscal 
intermediaries may develop coverage policies that apply to the claims 
they process, as long as their policies do not conflict with national 
coverage policy. Each contractor has at least one physician who serves 
as a medical director to help develop local coverage policies. Medicare 
claims administration contractors' role in determining coverage dates 
back to 1965, when the Medicare program was first authorized. At that 
time, the Congress arranged for many Medicare operations to be placed 
in the hands of private insurers to allow the program to be implemented 
rapidly by organizations already processing claims for hospitals and 
physicians. Nevertheless, claims administration contractors did not 
begin to develop written policies until the late 1970s.

Claims administration contractors develop local coverage policies for a 
number of reasons. Local policies specify conditions to automatically 
deny inappropriate claims through Medicare's automated claims 
processing systems.[Footnote 20] In addition, contractors may develop 
local policies to address their concerns about inappropriate 
utilization and improper billing for a particular procedure or 
device.[Footnote 21] Local coverage policies may specify acceptable 
diagnoses, guidelines on use, and documentation requirements. (See app. 
IV for more information on the process carriers and fiscal 
intermediaries use to develop local policies.):

Unlike other carriers and fiscal intermediaries that are allowed to 
develop their own local coverage policies, the four DME regional 
carriers are required to jointly develop and utilize one set of 
policies. Therefore, DME regional carriers' policies outlining 
beneficiaries' coverage for DME, prosthetics, orthotics, and supplies 
are identical across the nation. While DME regional carriers develop 
coverage policy that has national applicability, they follow a policy 
development process that is similar to that employed by carriers and 
fiscal intermediaries, as outlined in appendix IV.

Medicare Covered Most Procedures and Devices Assigned Codes in 2001, 
Often Without National or Local Coverage Policy:

Overall, Medicare covered most procedures and devices that had been 
assigned a code for 2001. Medicare's automated payment systems 
generally accept, and pay claims for, procedures and devices that have 
established codes, unless coverage policies have been developed to 
define or restrict when Medicare will pay for their provision. There 
were no coverage policies for about one quarter of procedures and 
devices we studied that were assigned codes in 2001. The remaining 
codes were affected by national or local coverage policies or both.

We selected for our study 320 codes for procedures and devices issued 
in 2001.[Footnote 22] Of these 320 codes, CMS identified 316 as 
coverable, and identified only 4--or about 1 percent--as 
noncoverable.[Footnote 23] The four noncoverable services and devices 
were a vision screening test, a type of rehabilitative physical 
exercise for arterial disease that is supervised by a nurse or an 
exercise physiologist, smoking cessation counseling, and a supportive 
garment. CMS determined that these services and devices were not 
allowable according to Medicare statute.

We found that, as of May 2002, there were no coverage policies for 25 
percent of the 316 coverable new codes for procedures and devices, and 
26 percent were affected by a national coverage policy. For example, 
national policy permitted a new battery-powered piece of inhalation 
therapy equipment to be covered only for patients with severely 
impaired breathing ability. To implement national coverage policies, 
contractors sometimes develop local coverage policies to provide more 
detailed billing requirements.[Footnote 24] As table 1 shows, 16 
percent of the 2001 codes for procedures and devices that were affected 
by national policy also had local policy developed by claims 
administration contractors.

Table 1: Number and Percent of the New Coverable Procedure and Device 
Codes for 2001 That Were Affected by National or Local Coverage Policy:

Type of coverage policy: National only; Number of codes affected: 33; 
Percent of codes affected: 10.

Type of coverage policy: Both national and local; Number of codes 
affected: 50; Percent of codes affected: 16.

Type of coverage policy: Local only; Number of codes affected: 154; 
Percent of codes affected: 49.

Type of coverage policy: No policy; Number of codes affected: 79; 
Percent of codes affected: 25.

Type of coverage policy: Total; Number of codes affected: 316; Percent 
of codes affected: 100.

Source: GAO analysis.

[End of table]

In the absence of a national coverage policy, contractors have broad 
discretion to develop local coverage policies that can define or 
restrict coverage for new procedures and devices. About 65 percent of 
the 316 new codes for procedures and devices were included in at least 
one local coverage policy that had been created by at least one claims 
administration contractor.[Footnote 25] For example, in the absence of 
a national coverage policy, as of December 2002, three carriers and two 
fiscal intermediaries had developed local coverage policies to define 
or restrict coverage for a new, minimally invasive surgery for 
abdominal aortic aneurysms.

While local coverage policies affected about 65 percent of the new 
codes for procedures and devices, each individual contractor's policies 
generally affected only a small number of the new codes. For example, 
we found that--on average--individual carriers had policies that 
affected 8 percent of the 316 procedure and device codes. Further, some 
of the new codes were incorporated into local policy by only one 
single-state carrier. For example, Blue Cross Blue Shield of Montana 
was the only carrier to develop a local policy that outlined how to 
bill for a new code for venous access catheters, which affected 
coverage only for beneficiaries in Montana. Similarly, 
HGSAdministrators was the only carrier to establish a local policy that 
outlined coverage for new codes involving certain cochlear implantation 
procedures, which affected coverage only for beneficiaries in 
Pennsylvania.

Variations in Local Coverage Policies Lead to Program Inequities and 
Inefficiencies:

Allowing carriers and fiscal intermediaries to make local coverage 
policies leads to different treatment for beneficiaries in different 
locations and to inefficiencies due to duplication in contractors' 
policy-making efforts. Because the authority to make local coverage 
policies is divided among carriers and fiscal intermediaries, Medicare 
can cover a procedure for a beneficiary receiving care in one locality 
and not cover that procedure for a beneficiary with a similar medical 
condition being treated in another location. Further, because more than 
one fiscal intermediary can pay part A claims for hospitals in a given 
area, Medicare can cover a procedure for a specific diagnosis in one 
hospital, but not in another hospital in the same local area. Local 
policy development is also inefficient because carriers and fiscal 
intermediaries duplicate many of the steps--such as identifying and 
assessing the medical literature to determine if the procedure or 
device has clinical benefit--taken by other carriers or fiscal 
intermediaries that have developed policies on the same procedures and 
devices. Despite these problems, some groups still support coverage 
policy developed at the local level.

Local Coverage Policy Leads to Coverage Variations that Can Affect 
Beneficiaries' Access to Treatment:

Because CMS gives claims administration contractors discretion to 
determine coverage and develop local coverage policy, beneficiaries' 
coverage for specific procedures and devices varies nationwide. One 
recent example of the impact on beneficiaries involves a surgical 
treatment--called deep brain stimulation (DBS)--for tremors associated 
with the two most common neurological disorders.[Footnote 26] DBS may 
produce significant improvement in physical functioning for people 
suffering from severe, debilitating tremors that can no longer be 
controlled by medication.[Footnote 27] There are two kinds of DBS--
unilateral brain stimulation of the thalamus and bilateral stimulation 
of other brain structures. Bilateral DBS can help reduce the typically 
more debilitating symptoms of Parkinson's disease, including stiffness 
and slowness. According to a survey of carriers we conducted, Medicare 
coverage of bilateral DBS varied considerably. (See fig. 1.) As of July 
31, 2002, carriers serving 30 states and part of another covered 
bilateral DBS, while carriers did not cover this procedure in 10 states 
and the District of Columbia. In 9 states and part of another, carriers 
indicated that they might approve the procedure on a case-by-case 
basis. For example, in Missouri, where two carriers serve different 
parts of the state, bilateral DBS was covered in the western part of 
the state and was covered on a case-by-case basis in the eastern part.

Figure 1: Carrier Coverage for Bilateral DBS by State, as of July 31, 
2002:

[See PDF for image]

[End of figure]

In October 2001, a beneficiary with Parkinson's disease requested that 
CMS issue a national coverage policy on bilateral DBS. At the time of 
his request, the beneficiary was not covered for bilateral DBS because 
he lived in Texas, where the carrier did not cover this 
surgery.[Footnote 28] On April 1, 2003, CMS implemented a national 
policy that covered DBS for all beneficiaries who meet certain coverage 
criteria.

While a national coverage policy will help ensure consistent bilateral 
DBS coverage, variations in coverage continue to be a concern for 
beneficiaries needing other procedures. For example, carriers vary in 
their coverage for tumor assay tests that are used to diagnose or 
monitor the response to treatment of cancer and were assigned codes in 
2001. Carriers in Florida and New Jersey have local policies that 
clearly prohibit coverage for one of these tests because they do not 
consider its clinical benefits to be proven. In contrast, carriers in 
other states--such as Rhode Island and Pennsylvania--cover this test 
for physicians to monitor the course of disease in patients with 
established diagnoses of certain types of cancers. In 2001, Medicare 
paid over $382,000 for this tumor assay test in 38 states.[Footnote 29]

We also found that part B coverage for treatment options can differ 
even for beneficiaries who are treated in the same state and are served 
by the same carrier. One reason that policies may vary within a 
carrier's service area is that, since 1990, more than 40 percent of 
Medicare carriers have left the program. As of October 2002, 11 of the 
remaining carriers have assumed responsibilities for administering 
their claims. For example, prior to December 1, 2000, National Heritage 
Insurance Company (NHIC) served northern California and another carrier 
served southern California. After NHIC assumed responsibility for 
claims administration in southern California, NHIC staff assessed local 
policies in its jurisdiction to understand the extent to which its 
policies varied. Our analysis of NHIC's data found that 38 percent of 
southern California's policies were not shared by northern California 
in September 2001. (See table 2.)[Footnote 30] We found that northern 
and southern California still had varying local coverage policies as of 
October 2002, including the examples in table 2.

Table 2: Variations in Local Coverage Policies in Northern and Southern 
California:

Region: Northern California; Total local coverage policies: 80; Number 
of local coverage policies limited to one region: 22; Percent of local 
coverage policies limited to one region: 28; Examples of local coverage 
policies limited to one region: * Whole body bone and/or joint imaging; 
* Extracapsular cataract removal.

Region: Southern California; Total local coverage policies: 145; Number 
of local coverage policies limited to one region: 55; Percent of local 
coverage policies limited to one region: 38; Examples of local coverage 
policies limited to one region: * Audiology testing; * Pap smear, 
diagnostic; * Vagus nerve stimulation for epilepsy.

Source: GAO analysis.

[End of table]

Coverage policies for part A services can also vary within each state 
because hospitals and other part A providers can choose their fiscal 
intermediary. As a result, different fiscal intermediaries may serve 
providers in the same state, or even in the same city. This can result 
in differential coverage of a procedure, if two fiscal intermediaries 
in the same state have differing policies. For example, the two fiscal 
intermediaries who pay hospital claims in Kansas each have local 
coverage policies on a specific type of cataract surgery. However, 
these policies are not identical. One fiscal intermediary's policy 
lists covered diagnoses that are not listed as covered in the other 
fiscal intermediary's policy, which leads to differences in claims 
payment.

Further, CMS does not require carriers and fiscal intermediaries that 
pay claims for services and items in the same geographic area to 
develop similar local coverage policies, even for the same treatments. 
This can lead to differences in coverage depending on location of 
service, such as whether a procedure is performed in a doctor's office 
and paid by the carrier, or performed in a hospital outpatient 
department and paid by the fiscal intermediary responsible for that 
hospital's claims.

Duplicative Efforts to Develop Local Policies by Carriers and Fiscal 
Intermediaries Result in Program Inefficiencies:

Allowing individual carriers and fiscal intermediaries to develop their 
own policies results not only in instances of inequitable coverage, but 
also is inefficient as each contractor takes parallel steps to develop 
policies on similar topics. For example, eight carriers have developed 
local coverage policies for a method of measuring changes in heartbeats 
on an electrocardiogram, which are a possible harbinger of sudden 
cardiac death. Further, two fiscal intermediaries have developed local 
coverage policies for a new, minimally invasive treatment for abdominal 
aortic aneurysms, and four fiscal intermediaries have developed 
policies for upper gastrointestinal endoscopy, which is a procedure 
using a lighted tube to visualize the esophagus, stomach, and part of 
the small intestine.

We identified duplicative efforts to develop policies for procedures 
and devices assigned codes in 2001 among the four carriers that we 
visited. As table 3 shows, we found that for six procedures, two 
carriers independently developed or revised their own coverage 
policies. For example, two carriers each developed new local coverage 
policies for a procedure to graft tissue-cultured skin, called 
bilaminate skin substitute.

Table 3: Local Coverage Policies for Procedures with New Codes 
Developed or Revised by Four Carriers in Four States:

Procedure addressed by local coverage policy: Bilaminate skin 
substitute; Carrier/state: National Heritage Insurance Company: 
Massachusetts: Yes; Carrier/state: Blue Cross Blue Shield of Rhode 
Island: Rhode Island: [Empty]; Carrier/state: Noridian Administrative 
Services: Nevada: [Empty]; Carrier/state: CIGNA HealthCare Medicare 
Administration: Tennessee: Yes.

Procedure addressed by local coverage policy: Percutaneous 
vertroplasty; Carrier/state: National Heritage Insurance Company: 
Massachusetts: Yes; Carrier/state: Blue Cross Blue Shield of Rhode 
Island: Rhode Island: [Empty]; Carrier/state: Noridian Administrative 
Services: Nevada: [Empty]; Carrier/state: CIGNA HealthCare Medicare 
Administration: Tennessee: Yes.

Procedure addressed by local coverage policy: Endoscopic 
ultrasonography, upper gastrointestinal tract; Carrier/state: National 
Heritage Insurance Company: Massachusetts: Yes; Carrier/state: Blue 
Cross Blue Shield of Rhode Island: Rhode Island: [Empty]; Carrier/
state: Noridian Administrative Services: Nevada: Yes; Carrier/state: 
CIGNA HealthCare Medicare Administration: Tennessee: [Empty].

Procedure addressed by local coverage policy: Ocular photodynamic 
therapy; Carrier/state: National Heritage Insurance Company: 
Massachusetts: Yes; Carrier/state: Blue Cross Blue Shield of Rhode 
Island: Rhode Island: [Empty]; Carrier/state: Noridian Administrative 
Services: Nevada: Yes; Carrier/state: CIGNA HealthCare Medicare 
Administration: Tennessee: [Empty].

Procedure addressed by local coverage policy: Magnetic resonance 
angiography; Carrier/state: National Heritage Insurance Company: 
Massachusetts: [Empty]; Carrier/state: Blue Cross Blue Shield of Rhode 
Island: Rhode Island: Yes; Carrier/state: Noridian Administrative 
Services: Nevada: [Empty]; Carrier/state: CIGNA HealthCare Medicare 
Administration: Tennessee: Yes.

Procedure addressed by local coverage policy: Immunoassay for tumor 
antigen; Carrier/state: National Heritage Insurance Company: 
Massachusetts: [Empty]; Carrier/state: Blue Cross Blue Shield of Rhode 
Island: Rhode Island: Yes; Carrier/state: Noridian Administrative 
Services: Nevada: [Empty]; Carrier/state: CIGNA HealthCare Medicare 
Administration: Tennessee: Yes.

Source: GAO analysis.

[End of table]

Although the carriers we visited attempt to build on the work of others 
or adapt policies developed by individual or groups of carrier medical 
directors, they still often duplicate research efforts. Each carrier 
ultimately has to arrive at, and justify, its own coverage policy, 
which means that the carrier medical director and other staff must 
review the evidence and other related policies. Each carrier also takes 
parallel steps to complete the process required to adopt the policy, 
such as consulting with experts, holding public and carrier advisory 
committee meetings, responding to input received, and posting draft 
local coverage policies on the carrier's Web site.[Footnote 31]

Each contractor that develops policy must devote staff time to this 
activity. One multistate carrier we visited developed or revised 21 
policies in fiscal year 2002, which was a full-time task for a 
registered nurse, with help from one of the carrier's medical directors 
and support staff. This carrier reported that its medical directors 
generally commit 10 to 30 percent of their time to policy development. 
Medical directors at other carriers also reported committing 
significant amounts of their time to developing policy. One carrier 
medical director told us that, because his resources for evidence 
gathering are limited, he often relies on physicians and suppliers for 
evidence even though he knows this could bias the selection of 
information to be considered.

Lack of information and communication from CMS regarding the 
development of national coverage policies has resulted in wasted local 
policy development efforts. Two medical directors stated that there are 
no designated points of contact at CMS headquarters and no established 
channel of communication between them and CMS staff who make national 
coverage policies. According to one carrier medical director, in the 
absence of detailed information on the status of CMS's efforts to 
develop a national policy on ocular photodynamic therapy, which is a 
new procedure that uses a laser-activated drug to treat macular 
degeneration, the carrier developed its own policy. Overall, to clarify 
their coverage, eight carriers developed local coverage policies for 
this treatment, which could have affected beneficiaries in 23 states 
and a portion of another state. While these carriers were obtaining 
comments on their draft policies, in November 2000 HCFA issued a 
national coverage policy on this therapy for beneficiaries with certain 
types of eye lesions.

Some Groups Contend that Local Coverage Policy has Benefits:

While critics view variations in local coverage policy as inequitable 
treatment of beneficiaries, device manufacturers' representatives, 
some physicians and physician groups, and claims administration 
contractors stated that the local coverage process has benefits. For 
example, supporters indicated that the local process results in 
coverage policy being made more rapidly than in the national process. 
However, comparative timeliness information is difficult to generate 
because claims administration contractors and CMS track different key 
dates for their processes. For example, CMS reports the date when a 
national coverage policy is requested and the agency's review is 
initiated. In contrast, contractors report the date that a draft local 
policy is released for comment--a point further along in the process 
than the initial request date tracked in the national process. 
Nevertheless, certain features of the local process may allow it to 
respond quickly in expanding coverage. For example, claims 
administration contractors can follow an expedited process when they 
expand coverage, such as when they add new diagnoses as coverable in an 
existing policy.

Supporters of local coverage policy have also argued that the steps 
Medicare claims administration contractors take to consult with 
physicians and the DME industry are a positive characteristic of the 
local process. As appendix IV shows, when contractors propose a new or 
more restrictive local coverage policy, carriers' and DME regional 
carriers' advisory committees[Footnote 32] routinely review and comment 
on draft local policies[Footnote 33] and contractors hold public 
hearings about proposed policies. Further, all contractors post draft 
policies on their Web sites and on a centralized Web site, 
draftLMRP.net, and inform the public of how to comment on draft 
policies and the closing dates for comments.[Footnote 34] Carrier 
medical directors, who regularly consult with practicing physicians on 
draft policies, told us that such consultations help them avoid 
unintended consequences, which might be obvious to practicing 
physicians or others, and could be beneficial for CMS.

National Coverage Policy Adds Consistency, But Current Policy 
Development Process Could Be Strengthened:

Developing national policy creates more consistent coverage for 
beneficiaries because it applies to all beneficiaries regardless of 
their treatment location. Further, because national coverage policy 
does not vary depending on location, it can be communicated more easily 
to physicians, other providers, suppliers, and the general public. 
However, concerns have been expressed about the openness, 
understandability, and slow pace of the national coverage process, and 
CMS has attempted to improve it--for example, by publishing the steps 
it takes to make national coverage policies[Footnote 35] and issuing 
coverage memorandums that outline the evidence considered to arrive at 
its policies. Nevertheless, some problems persist, such as the lack of 
consistent public, expert, or practitioner input on proposed coverage 
changes.

National Coverage Policy Promotes Programmatic Consistency:

Developing coverage policy with national applicability promotes 
coverage consistency because it applies to all beneficiaries regardless 
of where they receive treatment. Across the country, beneficiaries, 
physicians, other providers, and suppliers already have consistent 
coverage policies for DME, prosthetics, orthotics, and medical supplies 
because DME regional carriers develop identical policies. Companies 
providing DME in multiple states can do so knowing that one set of 
coverage rules applies. In addition, coverage for many laboratory 
services is subject to more consistent policies. The Balanced Budget 
Act of 1997 mandated that HCFA establish national coverage policies for 
laboratory tests[Footnote 36] and, as of November 2002, over 40 percent 
of laboratory services currently billed to carriers were subject to 
national coverage policies.

Having national coverage policy simplifies coverage for providers who 
serve beneficiaries in multiple states. In its report on Medicare 
laboratory payment policy, the Institute of Medicine noted that 
Medicare's current administration of laboratory claims through its 
carriers and fiscal intermediaries created inconsistency in the 
interpretation of policy and procedures and led to variable 
interpretations of medical necessity for the same tests given under the 
same circumstances in different locations. These inconsistencies 
created particular problems for laboratories that performed tests on 
specimens drawn from beneficiaries in many different states, because 
the laboratories had to deal with differing policies and procedures for 
similar claims.[Footnote 37]

Although national coverage policy could lead to greater programmatic 
consistency, Medicare still allows local variations in the application 
of its national policies. For example, HCFA issued a memorandum on 
national coverage of a noninvasive diagnostic test to measure heart 
function in 1998.[Footnote 38] The national coverage policy stated that 
Medicare would cover the test for beneficiaries with suspected or known 
cardiovascular disease. Some carriers chose to clarify this broad 
coverage description in order to automate claims denial by specifying 
the appropriate diagnoses and the diagnostic codes that would indicate 
medical necessity for performing this test, while other carriers did 
not. As a result, a beneficiary in Tennessee diagnosed with "shortness 
of breath" could have the test covered by Medicare, whereas a 
beneficiary with the same diagnosis in Michigan would not have the test 
covered.

We and others have recommended that CMS work toward a more consistent 
coverage approach. In 1996, we reported that carriers differed in their 
policies for six groups of medical procedures that could be 
inappropriately used.[Footnote 39] As a result, we recommended that the 
agency analyze expensive and inappropriately used services, identify 
local coverage policies for these services, and work with claims 
administration contractors to develop more consistent policies for 
them. Since then, the agency has encouraged claims administration 
contractors to develop policies to address expensive and 
inappropriately used services. More recently, the Medicare Payment 
Advisory Commission recommended that the local coverage policy-making 
process be abolished in favor of a single national process in order to 
develop more consistency in the program.[Footnote 40] The commission 
noted that eliminating local coverage policies would reduce the current 
complexity, inconsistency, and uncertainty in the Medicare program, 
along with the associated burden on providers and beneficiaries.

Concerns Remain about the Openness, Understandability, and Timeliness 
of CMS's National Coverage Process:

Over the years, the agency's national coverage process has been 
criticized for its lack of openness, lack of understandability, and 
slow pace. Critics have stated that the national coverage process was 
not open because meetings of scientific experts and clinicians advising 
the agency were not open to the public. Further, they have charged that 
the process was not understandable because the steps that the agency 
followed were not clear. In the late 1990s, the agency acknowledged 
that its advisory committee structure had flaws, its process was not 
always clear and understandable to outside parties, and its progress in 
developing policies was not easy to follow. To address these problems, 
the agency began developing a new coverage process. However, we found 
that the new national process 
1) does not routinely provide for consultation with experts or allow 
the public to comment on draft policies, 2) is conducted without clear 
criteria to guide policy making and make it more understandable to 
interested parties, and 3) generally does not meet agency-set time 
frames.

CMS Developed Its New National Coverage Process to Address Concerns 
about Openness and Understandability:

One of the first steps the agency took to make its national coverage 
process more open was to establish a new advisory committee. In 1993, 
HCFA had created the Technology Advisory Committee to provide it with 
expert advice concerning whether Medicare should cover specific 
technologies on a national basis.[Footnote 41] This panel included 
officials from HCFA, employees from other agencies within HHS, and 
carrier medical directors. However, under the Federal Advisory 
Committee Act, committees that include members who are not government 
employees and provide expert advice to the federal government are 
required to do so through open public meetings.[Footnote 42] Because 
the Technology Advisory Committee included carrier medical directors 
employed by private sector companies, the committee did not fall within 
the exception in the act for advisory committees made up wholly of 
government employees. In 1998, we found that, because meetings of the 
committee had been closed, the Technology Advisory Committee was in 
violation of the Federal Advisory Committee Act.[Footnote 43]

To make its advisory process more open and understandable, in 1998 HCFA 
established a new group--MCAC. When CMS chooses to ask MCAC for 
assistance, MCAC conducts open, public meetings to assess the 
scientific and clinical evidence of the effectiveness and 
appropriateness of services and items, such as DME, which are covered 
or eligible for coverage under Medicare.[Footnote 44] The committee--
with up to 120 members divided into specialty panels--includes experts 
in a broad range of medical, scientific, and other professional 
disciplines, as well as consumer and industry representatives as 
nonvoting members. MCAC does not advise CMS as to whether Medicare 
should cover a service or item. Instead, it discusses medical 
literature, technical assessments, and other information on the 
clinical effectiveness of medical services and items, and advises CMS 
on whether there is sufficient evidence to show that a service or item 
leads to an appropriate health outcome. When CMS uses MCAC assistance, 
interested parties have access to public meetings and transcripts, 
which can help make CMS's final coverage policy more understandable to 
them.

To further enhance openness and understandability, CMS routinely 
publishes technical assessment reports on procedures and devices that 
it is considering for coverage. Technical assessment reports are 
written evaluations of the clinical usefulness of medical 
interventions, based on a systematic review of the literature and a 
synthesis of the data from multiple studies. In December 1999, CMS 
instituted an agreement with HHS's Agency for Healthcare Research and 
Quality to obtain, as needed, technical assessment reports. The Agency 
for Healthcare Research and Quality generally contracts for technical 
assessments to be conducted by academic or research centers that 
specialize in evaluating medical evidence. CMS decides, on a case-by-
case basis, which issues will be referred to MCAC, to the Agency for 
Healthcare Research and Quality for an outside technical assessment 
report, or to both.[Footnote 45]

CMS took other steps to make its national coverage process more open 
and understandable. In January 1999, the agency created a Web site that 
provides information on pending and final national coverage policies--
including a tracking sheet that indicates the dates key actions were 
taken, such as referral to MCAC for a review of clinical evidence, and 
coverage memorandums that explain CMS's rationale in making a 
particular policy.[Footnote 46] In addition, in April 1999, to help the 
public understand its new process, the agency published a notice in the 
Federal Register outlining the procedural steps it would take in 
developing a national coverage policy.[Footnote 47] CMS also noted that 
it would reconsider coverage policies based on new scientific and 
medical information. This has allowed individuals to challenge earlier 
coverage policies. Such challenges have been the most common reason for 
external requestors to seek a national coverage policy. In fiscal years 
2000 and 2001, there were 12 external requests for CMS to review a 
previously adopted policy, compared to 5 external requests to create a 
policy for a new item or service.

National Coverage Process Not Always Open to Experts and the Public:

CMS has taken significant steps to improve its policy making through 
its new national coverage process. Nevertheless, the national process 
is not always open to outside scientific experts, practicing 
clinicians, beneficiaries, and others. CMS does not publish its draft 
national coverage policies, and it does not always consult with MCAC, 
specialty or practicing physician groups, and other experts when 
developing national coverage policies.

While CMS has recently taken steps to obtain comments on national 
policies as they are being developed, CMS does not post draft national 
coverage policies on its Web site or use other means to obtain and 
incorporate relevant input on draft policies before making them final. 
Beginning in October 2001, CMS was required by law to ensure that the 
public is afforded notice and opportunity to comment prior to 
implementation of a national coverage policy.[Footnote 48] CMS has not 
published a Federal Register notice revising its procedural steps to 
indicate how this notice and opportunity to comment will be provided. 
An agency official noted that the public may check on the status of 
national coverage policies that are being developed on the agency's Web 
site and may submit comments to CMS at any point in the policy 
development process. CMS noted on its Web site that, for each national 
coverage policy requested since April 2002, a 30-day comment period 
would occur starting from the date of the request. However, because the 
agency does not publish its draft national coverage policies, this 
comment process does not afford the public the opportunity to review 
them. Furthermore, the comment process does not require CMS to address 
in the public record any comments it has received before contractors 
implement the final policy.

Furthermore, CMS does not always openly consult with outside experts 
when developing national coverage policies. While MCAC provides a 
vehicle for CMS to obtain advisory opinions in an open forum, CMS has 
used the MCAC for less than one-sixth of its national coverage 
policies. CMS indicated that it calls upon the MCAC when CMS deems the 
evidence to be more difficult to assess or when the coverage issue is 
controversial or has potential to have a major impact on the Medicare 
program. Since MCAC was established, CMS has requested its input for 9 
of the 55 completed policies on national coverage--about 16 
percent.[Footnote 49] When CMS chooses not to ask for MCAC's views, 
there is no other provision for an open public discussion. And, when 
MCAC is not used, it is also not clear to the public how CMS is 
evaluating clinical evidence until the agency publishes a coverage 
memorandum explaining the rationale for the final policy.

Finally, while CMS sometimes contracts with the Agency for Healthcare 
Research and Quality for technical assessment reports, it does not 
routinely obtain input from other HHS agencies that could provide 
expertise, such as FDA.[Footnote 50] Because FDA considers evidence on 
safety and effectiveness before approving medical devices and drugs for 
marketing, routinely consulting with FDA officials who are familiar 
with such evidence could provide additional insight on coverage issues 
for CMS. However, when we began this review, FDA officials we 
interviewed reported little contact with CMS staff working on coverage 
matters. CMS officials responsible for coverage matters also reported 
having limited contact with FDA. However, during our review, CMS and 
FDA officials met to discuss how to coordinate more effectively, while 
allowing FDA to protect proprietary information that companies have 
provided to it during the course of its review.

CMS and FDA officials agreed that closer communication with FDA about 
its reviews of particular devices and drugs could prove beneficial to-
-and lack of coordination could hinder--CMS coverage policy making. For 
example, in October 2001, CMS announced that it intended to cover 
ocular photodynamic therapy, a laser procedure that requires a light-
sensitive drug, for patients with a certain type of age-related macular 
degeneration--a disease that can cause blindness. However, FDA had not 
added treatment for this type of macular degeneration as a labeled use 
of the drug. After its October 2001 announcement, CMS developed 
concerns about the underlying data from the clinical trial upon which 
the policy was based. After reconsideration, CMS rescinded its 
memorandum on coverage for beneficiaries with this type of the 
disease.[Footnote 51]

Recognizing the importance of having CMS work effectively with FDA, in 
November 2002 the HHS Secretary's Advisory Committee on Regulatory 
Reform[Footnote 52] issued a report that included five recommendations 
for improving interagency coordination, collaboration, and 
communication relating to new medical device technologies.[Footnote 53] 
One of the recommendations was to establish a process, with input from 
affected stakeholders, to enable early coordination between FDA and 
CMS. Further, the Advisory Committee recommended that, when 
appropriate, FDA and CMS should have parallel reviews, thereby 
promoting more timely patient access to innovative therapies. Such a 
parallel review could have CMS consult with device manufacturers during 
the design of a clinical trial developed under FDA auspices, so that 
the clinical trial could address issues of concern for both CMS and 
FDA.

Lack of Clear Criteria Raises Concerns about Understandability of 
National Coverage Process:

Critics of the national coverage process have also been concerned that 
the basis for CMS's policies was not understandable, and this continues 
to be a problem. The fundamental question in determining whether 
Medicare should cover a new procedure or device is whether it is 
"reasonable and necessary" for Medicare beneficiaries. However, the 
agency has not published the criteria that it uses in the national 
process to determine whether a service or item is reasonable and 
necessary, nor has it provided information that outlines the evidence 
needed to demonstrate that a procedure or device is clinically 
beneficial.[Footnote 54]

In May 2000, HCFA published a notice of intent to develop a regulation 
addressing the criteria for making coverage policies.[Footnote 55] This 
was not the agency's first attempt to develop such a regulation. In 
1989, HCFA had proposed a regulation that would better define when a 
service or item was "reasonable and necessary."[Footnote 56] The agency 
tried to include cost-effectiveness as part of the criteria, but this 
issue generated controversy and the proposed rule was never finalized. 
HCFA's approach in its May 2000 notice of intent was to solicit public 
input before the agency began developing a proposed rule. In addition 
to medical benefit, this notice proposed that an item or service would 
be covered only if it demonstrated "added value"--which meant that it 
substantially improved health outcomes; provided access to a 
beneficial, but different treatment option (for example, treating with 
a covered drug instead of surgery); or could substitute for an existing 
item or service at an equal or lower cost to the Medicare population. 
Proposing the "added value" criterion led to resistance, due to 
concerns that the agency was planning to use cost considerations as a 
basis for its coverage policies. CMS has not taken further regulatory 
action to define what criteria it would apply to determine whether a 
service or item was reasonable and necessary.

In response to questions we raised about the criteria it uses in its 
national coverage process, CMS officials did not cite specific criteria 
that are used. Instead, they stated that a set of case law criteria was 
evolving through the national policies they had made, and suggested the 
criteria could be inferred from reading the coverage memorandums on the 
CMS Web site. However, having beneficiaries, physicians, and device 
manufacturers infer criteria that may apply to coverage policies from 
coverage memorandums does not substitute for specifying, and making 
public, clear criteria. Interested parties may not be able to infer the 
criteria from CMS's coverage memorandums or may differ in their 
interpretations. In contrast, the agency has published guidance on 
criteria in a manual for claims administration contractors to use in 
developing their coverage policies. These criteria help contractors to 
determine when a procedure or device that fits into Medicare's benefit 
categories and is not excluded from coverage by statute may be covered 
because it is considered reasonable and necessary. (See app. V.):

In addition to not publishing the criteria for its national process, 
CMS has not published guidance on how it will consider evidence in 
making national coverage policies. Officials said that they are in the 
process of preparing guidance to help the public better understand the 
types of evidence used in making national policies. Agency officials 
stated that they employ an evidence-based approach in the national 
coverage process. Using this approach, clinical research results based 
on a strong methodology are given more weight than other types of 
evidence. The MCAC advisory input and technical assessments that CMS 
sometimes obtains are part of its evidence-based approach.

Issues of Timeliness Conflict with Need for Public Input:

The timeliness of the agency's coverage policy making has been a long-
standing issue. We reported in 1994 that, when complicated clinical 
issues were involved, it could take HCFA several years to develop 
national coverage policies.[Footnote 57] Device manufacturers raised 
the issue of timeliness of the national coverage process again during a 
hearing before the House Ways and Means Committee in l999.[Footnote 58] 
HCFA responded to concerns about timeliness by setting time frames for 
developing national coverage policies in its April 1999 Federal 
Register notice about its coverage procedures. In this notice, HCFA 
stated that it intended to respond in writing to requesters of national 
coverage policies within 90 calendar days of receiving the 
request.[Footnote 59] The agency noted that it generally expected to 
meet this 90-day time frame and would likely be able to respond in less 
time if the coverage issue was supported by clear medical and 
scientific evidence and was not complex or controversial. However, the 
notice further stated that the time frame could be longer if, for 
example, at a later time, the requester submitted subsequent medical 
and scientific information for consideration or if the coverage issue 
was referred to MCAC or required an outside technical assessment.

In practice, CMS has generally taken considerably longer than the 90-
day goal established in 1999. Our analysis of 55 national coverage 
policies showed that only 10 met the 90-day goal.[Footnote 60] Our 
analysis showed timeliness differences based on whether the coverage 
policy requester was an outside party or within CMS and whether the 
issue was referred to MCAC or for a technical assessment. Overall, the 
agency took an average of about 7½ months to issue a coverage 
memorandum for the 55 national coverage policies, with 12 taking a year 
or more.[Footnote 61] Policies responding to requests that were 
generated within the agency took longer than those that were requested 
by an outside party--such as a device manufacturer or a provider 
association. There were 28 internal requests, which took an average of 
about 251 days, and 27 external requests, which averaged about 188 days 
for CMS to issue a coverage memorandum.[Footnote 62]

Referring a coverage issue to MCAC or requesting a technical assessment 
report added months to the national coverage process. The agency 
requested technical assessments for most issues referred to MCAC to 
help that committee assess the evidence.[Footnote 63] While the 39 
policies that were processed without outside advice took an average of 
about 152 days, the 16 policies that were referred for MCAC advice, a 
technical assessment, or both averaged about 411 days--or over 8 months 
longer.

Conclusions:

As a national program affecting 40 million beneficiaries, Medicare 
needs consistent coverage policies. Giving contractors broad discretion 
to make local coverage policies for procedures and devices has led to 
inequitable variations in coverage for beneficiaries depending on where 
they are treated. In addition, dividing the authority for making 
coverage policy among local contractors has resulted in program 
inefficiencies. While developing policy through a national process 
offers the advantages of consistency and efficiency, concerns remain 
about the openness and timeliness of CMS's national coverage process. 
Further, concerns have been expressed about the process because the 
agency has not published clear criteria for judging if a particular 
procedure or device is reasonable and necessary for Medicare 
beneficiaries.

We believe that a more equitable and efficient way to develop coverage 
policy would be to eliminate development of local policy for procedures 
and devices that have established codes. Instead, Medicare coverage 
policies should be made through a new, single process that develops 
consistent, national coverage policies for procedures and devices. Such 
a process could also examine current local coverage policies on 
procedures and devices to determine whether these policies should be 
consolidated into national coverage policies that would be consistent 
for all beneficiaries or be eliminated.

Developing a new national coverage process would require careful design 
and implementation. The new process should address areas of long-
standing concern about openness, timeliness, and clarity of policy 
making. Key aspects of a new process would include routinely consulting 
with the public, clinicians, and other experts before finalizing 
coverage policies; leveraging the expertise of others within HHS, such 
as those within FDA; and closely adhering to established time frames to 
improve timeliness of policy issuance. We also believe that CMS needs 
to develop clear criteria for its national process to make its coverage 
policies more understandable to others.

Recommendations for Executive Action:

To ensure that all Medicare beneficiaries are treated equitably, we 
recommend that the Administrator of CMS:

* eliminate the ability of claims administration contractors to develop 
new coverage policies for procedures and devices that have established 
codes;

* develop and implement a plan to evaluate the merits of all existing 
local coverage policies that affect procedures and devices with 
established codes, with the intent of incorporating appropriate aspects 
of local policies into national coverage policies and eliminating the 
remainder;

* establish a new process for making national coverage policies that 
requires public input on draft policies, adheres to time frames, and 
provides for routine consultation with key HHS and external 
stakeholders with scientific, clinical, and programmatic expertise; 
and:

* promulgate written criteria for assessing whether a service or item 
is reasonable and necessary.

Agency Comments and Our Evaluation:

In its written comments, HHS generally disagreed with our 
recommendations and stated that our draft report did not provide an 
adequate analytic basis for our recommendations. (See app. VI for HHS's 
comments.) Specifically, HHS said that we did not demonstrate how 
developing coverage policy nationally would eliminate inequities 
related to differing coverage in different parts of the country and did 
not fully explore the weakness of developing consistent national policy 
for procedures and devices with established codes or the benefits of 
developing differing local policies.

Our report's findings and recommendations are based on considerable 
analytic work. For example, as we noted in our draft report, we 
assessed national and local policies that related to procedures and 
devices assigned 320 new codes in 2001; conducted site visits to four 
Medicare contractors that provided a basis for our analysis of the 
processes they followed to develop policy and the policies they chose 
to develop; analyzed the timeliness and process followed to develop 55 
national coverage policies; and conducted numerous interviews with, and 
analyzed documents provided by, CMS and FDA officials, carrier medical 
directors, experts on evidence-based medicine, and representatives of 
beneficiaries, physicians, and device manufacturers and suppliers. We 
believe that the evidence demonstrates that allowing coverage policies 
to be developed by different contractors leads to differing policies 
and inconsistent coverage for beneficiaries. Such inequities would be 
addressed by developing all policies nationally for procedures and 
devices with established codes. The draft report acknowledges both the 
weaknesses in the current national process and the strengths of the 
local processes.

In its comments on our specific recommendations, HHS disagreed with our 
first recommendation--that CMS eliminate claims administration 
contractors' ability to develop new coverage policies for procedures 
and devices that have established codes. The department argued that 
developing consistent policy nationally for procedures and devices with 
established codes would drastically alter the intended design of the 
Medicare program as a regionalized program, remove the Secretary's 
discretion to make coverage policies, and prevent Medicare from testing 
new, experimental treatments before enough clinical evidence is 
available to warrant national coverage. HHS also stated that CMS did 
not have the resources to develop sufficient national policies, so that 
the recommendation would increase Medicare payments in future years 
because contractors would not be able to prevent overuse of certain 
services and items.

In our opinion, developing consistent coverage policies nationally for 
procedures and devices with established codes would help modernize 
Medicare and is an appropriate role for CMS. As our draft report 
indicates, Medicare has already evolved into a program with a 
decreasing number of contractors who often serve multiple states and 
develop policies that are not specific to one locality's needs. 
Implementing our first recommendation would not remove the Secretary's 
discretion over coverage policies, although it would require greater 
commitment to fulfilling this responsibility. Following implementation 
of our recommendation, contractors would still be able to develop local 
policies for new procedures and devices entering the market and billed 
under miscellaneous codes. These coverage policies would allow for 
experimentation and could provide a basis for national policy making 
once the procedures or devices have codes assigned.

Removing the inefficient, duplicative policy making currently conducted 
by 19 carriers and 27 fiscal intermediaries could allow CMS to focus 
the $19.5 million allocated to local policy development and additional 
funds allocated to national policy development to achieve a more 
strategic approach to coverage policy. In addition, because similar 
types of improper or abusive billing practices may be taking place in 
several localities or may migrate from one locality to another, having 
consistent national coverage policies to prevent improper billing or 
overuse of services could result in program savings. It is also more 
equitable for both providers and beneficiaries. Contractors that have 
concerns about specific utilization problems would still have the 
opportunity to propose new policies to be adopted nationally. Such 
national policies would benefit other contractors that may experience 
similar utilization problems.

Regarding our second recommendation--which calls for CMS to develop and 
implement a plan to evaluate existing local coverage policies, with the 
intent of incorporating aspects of them into national policies or 
retiring them--HHS agreed that local coverage policies should be 
evaluated on a regular basis. It noted that CMS currently requires its 
contractors to separately evaluate their own policies. However, HHS did 
not respond to the intent of our recommendation, namely that one entity 
should review all policies for each procedure and device so that the 
best policy can be developed nationwide.

HHS disagreed with our third recommendation, that CMS develop a new 
process for making national coverage policies. The department indicated 
that, instead, a Federal Register notice will soon be published that 
incorporates process improvements and steps that have already been 
taken to streamline the MCAC process. HHS also indicated that it 
routinely communicates with FDA on coverage matters and has extensive 
contacts with experts at the National Institutes of Health.

As we recognized in our draft report, CMS has made improvements in its 
current national process. Because information on its newest planned 
process improvements has not been published, we cannot comment on 
whether these changes will fully address long-standing concerns about 
the openness, understandability, and timeliness of its policy making. 
CMS has made progress by streamlining the MCAC decision process and is 
working to improve its coordination with FDA. We believe that 
communication with FDA should be an integral part of the development of 
each Medicare coverage policy that involves drugs and devices, or 
procedures that rely on drugs and devices.

HHS disagreed with our fourth recommendation, which would require CMS 
to publish written criteria it would use to assess whether a service or 
item is reasonable and necessary. The department said it relies on 
publishing the rationale for each coverage policy: that is, it uses a 
case law approach and does not presently plan to engage in rule making 
on this subject. HHS is considering other options that might be 
helpful, but is not planning to issue guidance that would serve as 
written criteria. As a national program of great significance, we 
believe Medicare should be transparent in the criteria it uses for 
interpreting whether a service or item is reasonable and necessary and 
can be covered.

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
after its issue date. At that time, we will send copies of this report 
to the Secretary of HHS, the Administrators of CMS and FDA, appropriate 
congressional committees, and other interested parties. We will also 
make copies available to others on request. In addition, the report 
will be available at no charge on the GAO Web site at http://
www.gao.gov.

If you or your staff have any questions about this report, please call 
me at (312) 220-7600 or Sheila K. Avruch at (202) 512-7277. Other key 
contributors to this report are listed in appendix VII.

Sincerely yours,

Leslie G. Aronovitz
Director, Health Care--Program Administration and Integrity Issues:

Signed by Leslie G. Aronovitz:

[End of section]

Appendix I: Scope and Methodology:

To assess the extent that new procedures and devices are incorporated 
into the Medicare program, we analyzed new Current Procedural 
Terminology (CPT) and Healthcare Common Procedure Coding System (HCPCS) 
Level II codes from the HCPCS tape sent to contractors in October 2000. 
This tape included the codes adopted by the American Medical 
Association's CPT Editorial Panel and the codes adopted by the HCPCS 
National Panel. Most of these new codes became effective on January 1, 
2001. We selected the codes that represented procedures and devices 
used in a physician's or allied health professional's office, or by 
beneficiaries in the home, as well as anesthesia and laboratory 
services. We excluded codes that represented drugs, blood work, 
ambulance-related services, and devices used only in the inpatient 
hospital setting. We did not include codes added to identify items to 
which special Medicare hospital outpatient payment rates apply or codes 
that the Panel had adopted for other insurers, but not Medicare. We 
also did not analyze the extent to which Medicare covered new 
procedures and devices that were not assigned new codes in 2001. For 
the list of 320 codes in our scope, we reviewed the coverage status the 
Centers for Medicare & Medicaid Services (CMS) had given to each code, 
and we determined whether either national or local coverage policies 
existed in 2002 for these codes. As part of our research on local 
policies, we assessed coverage policies by carrier and fiscal 
intermediary. We analyzed payment data from the Medicare part B extract 
and summary system for the new codes. To determine the percentage of 
Medicare part B payments billed under miscellaneous codes, we also 
analyzed payment data from the Medicare part B extract and summary 
system for HCPCS Level I and II miscellaneous codes and all HCPCS codes 
billed.

To determine the effect of the local coverage process on beneficiaries, 
carrier and fiscal intermediary efficiency, and stakeholders, including 
device manufacturers and physicians, we interviewed key CMS officials 
and staff and reviewed documents. We conducted site visits at four 
carriers: Blue Cross Blue Shield of Rhode Island, CIGNA HealthCare 
Medicare Administration, National Heritage Insurance Company, and 
Noridian Administrative Services. CIGNA also serves as a durable 
medical equipment (DME) regional carrier and Blue Cross Blue Shield of 
Rhode Island also serves as a fiscal intermediary. We chose these 
carriers in order to include both multistate and single-state carriers 
and to include one carrier that was also a DME regional carrier and one 
that was also a fiscal intermediary. At these site visits, we used a 
structured protocol to interview contractor medical directors and other 
staff to assess their local policy development processes and to 
document policies developed in fiscal years 2000 and 2001. We also 
analyzed data on local coverage policies on LMRP.net, a CMS-sponsored 
Web site listing local policies by carrier, DME regional carrier, and 
fiscal intermediary, and surveyed carrier medical directors to 
determine whether deep brain stimulation, a surgical procedure to treat 
tremors associated with Parkinson's disease, was covered under part B 
for physicians' services in each state. This procedure was selected for 
study due to variation in its coverage at the time we did our work.

To evaluate the effects of the national coverage process on 
beneficiaries and other stakeholders and to identify concerns about it, 
we analyzed the national process in terms of its steps, time frames, 
criteria and evidence used, coordination with claims administration 
contractors, and coordination with the Food and Drug Administration 
(FDA) approval processes. We interviewed experts on evidence-based 
medicine, CMS and FDA officials, Medicare Coverage Advisory Committee 
(MCAC) executive committee members and MCAC panel members, and 
representatives of beneficiaries, physicians, and device manufacturers 
and suppliers, including the Center for Medicare Advocacy, AdvaMed, the 
AARP Foundation, the Medical Group Management Association, the National 
Institute for Health Care Management, the American College of 
Physicians-American Society of Internal Medicine, the American College 
of Cardiology, the American College of Chest Physicians, the Marshfield 
Clinic, and the American Academy of Family Physicians. We obtained 
their views on issues related to the national coverage process, such as 
the effectiveness of the national process and the implications of the 
process for beneficiaries and others. We also observed meetings of the 
MCAC executive committee, the MCAC medical and surgical procedures 
panel, and the MCAC diagnostic imaging panel, to understand their roles 
in the coverage policy-making process, and reviewed MCAC minutes from 
selected meetings held in 1999 through 2002, as well as selected 
meeting transcripts. We analyzed 55 national coverage policies, which 
were requested by external requestors or internally by CMS after 
January 1, 1999, and had a CMS coverage memorandum issued by July 31, 
2002, in order to determine the amount of time needed and the process 
used to make each policy. We also analyzed the support and rationale 
used to make some of these policies.

[End of section]

Appendix II: Coding Assignment Process:

Figure 2 shows the steps that occur for codes to be added for use in 
the Medicare program. Common Procedure Terminology (CPT) codes are used 
for medical services and procedures furnished by physicians and other 
health care professionals and Healthcare Common Procedure Coding System 
(HCPCS) Level II codes are used for other services, products, and 
supplies. When new codes are added, old codes may need to be deleted or 
revised so that the use of each code is clear.

Figure 2: Process for Adding, Deleting, and Revising CPT and HCPCS 
Level II Codes for Use in the Medicare Program:

[See PDF for image]

[End of figure]

[End of section]

Appendix III: Process That CMS Follows to Develop National Coverage 
Policies:

[See PDF for image]

[End of figure]

[End of section]

Appendix IV: Process That Carriers and Fiscal Intermediaries Follow to 
Develop Local Coverage Policies:

[See PDF for image]

[End of figure]

[A] Fiscal intermediaries may have advisory committees, but CMS does 
not require them to do so.

[End of section]

Appendix V: Coverage Criteria for Medicare Claims Administration 
Contractors:

Figure 3 shows the coverage criteria published for Medicare claims 
administration contractors to help them determine whether a procedure 
or device is reasonable and necessary. Criteria focus on whether 
services are appropriate and clinically beneficial. Contractor guidance 
also describes the different types of evidence that are used to 
determine whether a procedure is reasonable and necessary and an 
assessment of the relative quality of different types of evidence.

Figure 3: Criteria for Claims Administration Contactors to Use to 
Determine Whether a Procedure or Device Is Reasonable and Necessary:

[See PDF for image]

[A] Services provided in routine clinical trials on or after September 
19, 2000, and which meet the requirements of the Clinical Trials 
National Coverage Determination are considered reasonable and 
necessary. See Medicare Coverage Issues Manual, 30-1, Routine Costs of 
Clinical Trials (Sept. 19, 2000).

[End of figure]

[End of section]

Appendix VI: Comments from the Department of Health and Human Services:

Ms. Leslie G. Aronovitz 
Director, Health Care - Program Administration 
and Integrity Issues United States General
Accounting Office Washington, D.C. 20548:

MAR 24 2003:

Dear Ms. Aronovitz:

Enclosed are the department's comments on your draft report entitled, 
"Medicare: Divided Authority for Policies on Coverage of Procedures and 
Devices Results in Inequities." The comments represent the tentative 
position of the department and are subject to reevaluation when the 
final version of this report is received.

The department appreciates the opportunity to comment on this draft 
report before its publication.

Sincerely,

Dennis J. Duquette:

Acting Principal Deputy Inspector General:

Signed by Dennis J. Duquette:

Enclosure:

The Office of Inspector General (OIG) is transmitting the department's 
response to this draft report in our capacity as the department's 
designated focal point and coordinator for General Accounting Office 
reports. The OIG has not conducted an independent assessment of these 
comments and therefore expresses no opinion on them.

Comments of the Department of Health and Human Services on the General 
Accounting Office's (GAO) Draft Report, "MEDICARE: Divided Authority 
for Policies on Coverage of Procedures and Devices Results in 
Inequities" (GAO-03-175):

The Department of Health and Human Services (department) appreciates 
the opportunity to comment on this draft report.

This report responds to a request from the Chairman of the Subcommittee 
on Health, House Committee on Ways and Means. The GAO was asked to 
review the extent to which new procedures and devices are incorporated 
into Medicare, the effect of Medicare coverage policy-making processes 
on beneficiaries, and the degree to which the Centers for Medicare and 
Medicaid Services (CMS) has addressed concerns about its national 
coverage process.

Medicare is committed to having an open, understandable and predictable 
coverage process for benefits provided by the program. Medicare law 
provides for broad coverage of many medical and health care services, 
including care provided by hospitals, skilled-nursing facilities, home-
health agencies and physicians. The law does not provide an all-
inclusive list of services covered by Medicare and generally does not 
specify which medical devices, surgical procedures, or diagnostic 
services should be included or excluded from coverage. The Congress 
gave the Secretary of the Department of Health and Human Services the 
authority to decide which specific items and services Medicare can 
cover within these categories. The law states that Medicare cannot pay 
for any items or services that are not "reasonable and necessary" for 
the diagnosis and treatment of illness or injury. For more than 30 
years, the Medicare program has exercised this authority to determine 
whether specific services that meet one of the broadly defined benefit 
categories are covered under the program. Most Medicare coverage and 
policy decisions are made locally by Medicare contractors --the private 
companies that by law process and pay Medicare claims. The CMS also has 
authority to make coverage policies that apply nationwide. In the 
absence of national decisions for particular services, contractors have 
discretion to issue local Medicare coverage policies.

It is worth noting that the Medicare structure of coverage decisions at 
both the national and local level is not unique. Within the Federal 
Employees Health Benefits Program, in the Blue Cross and Blue Shield 
Service Benefit Plan (Plan), the Blue Cross Blue Shield Association's 
Technology Evaluation Center uses evidence based on technology to make 
national policy determinations on treatments or tests as to 
experimental/investigational and medical necessity. Absent such a 
determination, coverage may be adjudicated to reflect an individual 
Plan's local policy.

General Comments:

The GAO draft report does not provide an adequate analytic basis for 
the recommendations it proposes. It advocates developing a centralized 
national coverage policy without fully exploring the weaknesses of such 
an approach or recognizing possible benefits of the local coverage 
process. While GAO properly emphasizes the importance of consistent and 
equitable coverage for all beneficiaries, it does not demonstrate how a 
centralized national coverage policy will eliminate alleged inequities 
or link current inequities to the local coverage process. Moreover, the 
GAO report does not consider inequities that might arise in a 
centralized, national system and only briefly acknowledges some of the 
benefits to Medicare beneficiaries inherent in a coverage system with 
both local and national decision-making. In summary, the report does 
not adequately address and justify how establishment of a new, 
centralized process for making national coverage policies would result 
in more timely and equitable coverage decisions than continued 
evaluation and implementation of on-going improvements to the process 
currently in place. The report also does not note the enonnous resource 
implications of such a centralized process.

Although the department is highly respectful of GAO's work in this 
case, we feel strongly that GAO is incorrect, and that these changes 
would lead to a far more cumbersome and unwieldy Medicare program for 
beneficiaries, providers and suppliers. The department is anxious to 
debate this before Congress and will strongly work to discourage these 
changes.

With regard to GAO's specific recommendations:

GAO Recommendation for Executive Action:

The GAO recommends that the Administrator of CMS eliminate the ability 
of claims administration contractors to develop new coverage policies 
for procedures and devices that have established codes.

Department Response:

The department disagrees with this recommendation. It is important to 
note that Medicare was designed as a regionalized program that could 
accommodate local variations in treatment, utilization of care, and the 
needs of unique beneficiary populations. The GAO's recommendations 
would drastically alter the intended design of the program.

A system based on the GAO's recommendations would, in essence, remove 
the discretion for coverage determinations granted to the Secretary by 
Congress in section 1861(a)(1)(A) of the Social Security Act. It de 
facto delegates the CMS coverage process to the American Medical 
Association Current Procedural Technology (CPT) Editorial Panel because 
the volume of codes would prevent CMS from making coverage decisions on 
most items or services. There are 200 new CPT codes added every year 
and 8,000
existing codes. If contractors (including Durable Medical Equipment 
Regional Carriers) cannot make coverage decisions for established 
codes, then the only coverage policy will be National Coverage 
Decisions (NCDs). The CMS does not have the resources to make more than 
20-30 NCDs per year. Therefore, if Congress accepted this 
recommendation, we would be making unrestricted payment nationally for 
every new procedure regardless of whether it is medically reasonable 
and necessary; or indeed, safe for the Medicare population. This would 
be a very shortsighted result.

Although the report does describe some of the advantages of having 
local coverage policies (namely, that the process is faster and more 
open to comment from providers and manufacturers), it does not mention 
that allowing contractors to develop local coverage policies gives 
Medicare the opportunity to test new, experimental treatments before 
enough clinical evidence is available to warrant national coverage.

In addition, there are Healthcare Common Procedure Coding System 
(HCPCS) level 2 codes that we specifically create in order to allow 
payment but not to imply coverage. Providing these level 2 codes allow 
us to be responsive to new technology but not to waive our right to 
make coverage decisions. It may be more difficult to grant these level 
2 codes for new technology without the ability for our contractors to 
restrict coverage in those instances where evidence shows a new 
technology is not reasonable and necessary.

The implications of the elimination of local coverage decisions for 
total program expenditures would be significant. There would be 
significant distributional effects between services within payment 
systems (e.g., outpatient prospective payment system, physician fee 
schedule) due to unrestricted payment for certain services. There would 
also be increased aggregate payments for certain items and services 
(e.g., drugs, durable medical equipment). We specifically note that 
there is significant potential for aggregate payments under the 
physician fee schedule to increase thereby causing negative updates in 
future years to adjust for the additional payments. In addition, 
because all other payment systems (e.g., inpatient/outpatient 
prospective payment system) do not have a volume adjustment, total 
Medicare spending would also increase significantly.

We believe that the local medical review policies (LMRPs), developed by 
Medicare contractors allow for timely, accurate, and effective regional 
reaction to changes in the practice of medicine. By allowing 
contractors the discretion to develop LMRPs, the Medicare program is 
afforded flexibility to address needs that are not national in scope. 
This flexibility would be lost if all policy development were 
centralized nationally.

The LMRPs also allow contractors to quickly react to localized 
utilization variances. Often, abusive billing manifests itself 
differently in different geographic regions. An item or service abused 
in one region may be ordered appropriately in another region. The LMRPs 
allow the contractor in the affected area to develop policy to address 
the abusive billing while other providers remain unaffected.

Additionally, LMRPs are often used to provide additional educational 
guidance to the provider community. Without the LMRP process, it would 
not be possible to consider the unique needs of local providers and 
beneficiaries.

Finally, elimination of local coverage decisions would have a negative 
impact on the timeliness of claims processing. If a national policy 
process, such as that proposed by GAO, failed to result in a 
substantial number of policies (either coverage or non-coverage), 
contractors would need to individually review every claim for every 
service. This added workload would delay the decision-making process. 
As the report noted, the ability to automate coverage and non-coverage 
decisions significantly improved contractors' ability to process claims 
within statutorily defined timeframes. On all accounts, this change 
would stifle Medicare's responsiveness to our beneficiaries.

Recommendation for Executive Action:

The GAO recommends that the Administrator of CMS develop and implement 
a plan to evaluate the merits of all existing local coverage policies 
that affect procedures and devices with established codes, with the 
intent of incorporating appropriate aspects of local policies into 
national coverage policies and eliminating the remainder.

Department Response:

The department agrees that LMRPs should be evaluated on a regular 
basis, and that greater consistency among LMRPs should be fostered. The 
CMS is aggressively pursuing these through far more contractor and 
contractor medical officer coordination. Currently, all contractors are 
required to review all LMRPs at least annually to identify those 
policies that are obsolete, those that would benefit from 
nationalization, and those that would require revision.

Recommendation for Executive Action:

The GAO recommends that the Administrator of CMS establish a new 
process for making national coverage policies that requires public 
input on draft policies, adheres to timeframes, and provides for 
routine consultation with key HHS and external stakeholders with 
scientific, clinical, and programmatic expertise.

Department Response:

The department disagrees with this recommendation. We are sensitive to 
GAO's observations and acknowledge the benefits of timely policy making 
with input from both public and private sector stakeholders. We have 
made significant strides in these areas (as GAO notes) through 
implementation of the national coverage determination process announced 
in the April 17, 1999, Federal Register. In order to increase the 
opportunities for public participation in making national coverage 
determinations and to streamline the decision-making process, continued 
enhancement to the current process is warranted rather than 
establishment of a new process as GAO recommends. Such enhancements 
are
on the threshold of implementation in a soon-to-be published Federal 
Register Notice incorporating process improvements. Also, a recent 
change to the Charter of the Medicare Coverage Advisory Committee 
(MCAC) will further streamline the process by virtue of eliminating the 
need for Executive Committee ratification of MCAC panel 
recommendations. This single change alone will save an average of 2-3 
months from the national coverage determination process when MCAC 
consultation is invoked. We believe the CMS process has improved 
substantially in the past two years. The process is more open and 
transparent. Most of these "changes" seek to benefit manufacturers who 
already aggressively approach the agency - not patients. The process 
serves patients well, and exposing the agency to even more structured 
pressure from special interests will be counter productive.

Finally, we routinely communicate with the Food and Drug Administration 
on coverage matters and are working to improving coordination. We also 
have extensive contacts with experts in the National Institutes of 
Health.

Recommendation for Executive Action:

The GAO recommends that the Administrator of CMS promulgate written 
criteria for assessing whether a service or item is reasonable and 
necessary.

Department Response:

The department disagrees with this recommendation. The CMS does not 
presently plan to engage in rulemaking on this subject. As GAO notes, 
we currently publish the rationale for each National Coverage 
Determination on our Web site. This practice yields a "case law" type 
approach to helping stakeholders understand how CMS applies "reasonable 
and necessary" in specific clinical instances. We are examining other 
options that may help stakeholders understand this topic, and our 
process, but have no plans to issue any other specific document or 
guidance at this time.

[End of section]

Appendix VII: GAO Contact and Staff Acknowledgments:

GAO Contact:

Sheila K. Avruch, (202) 512-7277:

Acknowledgments:

The following staff members made important contributions to this work: 
Barrett Bader, Sandra Gove, Karen Kemper, Joy Kraybill, and Craig 
Winslow.

FOOTNOTES

[1] "Procedure" is used in this report to define all medical actions 
taken to prevent, diagnose, treat, or manage diseases, injuries, and 
impairments. This definition includes services such as counseling, 
evaluation, management of patients, surgery, and laboratory and other 
tests.

[2] Part B services include physician and outpatient hospital services, 
diagnostic tests, mental health services, outpatient physical and 
occupational therapy, ambulance services, some home health services, 
durable medical equipment (DME), prosthetics, orthotics, and medical 
supplies. 

[3] Related post-hospital services include some care provided by 
skilled nursing facilities and home health agencies. 

[4] In this report, we refer to carriers, DME regional carriers, and 
fiscal intermediaries as "claims administration contractors." Unless 
otherwise specified, the term "carrier" refers to a Medicare claims 
administration contractor that pays part B claims. The 19 carriers 
include 4 that also process DME claims and, in this role, are referred 
to as "DME regional carriers." Under part B, carriers pay claims for 
treatments provided to beneficiaries in their service areas, which can 
be portions of states, individual states, or multiple states. Under 
part A, hospitals and other providers have a choice of which fiscal 
intermediary to use, and, as a result, more than one fiscal 
intermediary may pay claims for services provided in any particular 
geographic area.

[5] We conducted Medicare carrier site visits at National Heritage 
Insurance Company, Blue Cross Blue Shield of Rhode Island, Noridian 
Administrative Services, and CIGNA HealthCare Medicare Administration.

[6] CIGNA also serves as one of four DME regional carriers that process 
all Medicare claims for DME, prosthetics, orthotics, and supplies.

[7] Blue Cross Blue Shield of Rhode Island serves as both the carrier 
and a fiscal intermediary in that state.

[8] This report will refer to HCFA in discussing actions taken before 
the agency's name was officially changed on July 1, 2001.

[9] Physicians and suppliers must provide additional documentation when 
submitting Medicare claims using a miscellaneous code. Contractors 
manually review these claims to determine what procedure or device is 
being billed, whether it should be covered, and the amount that should 
be paid. In 2001, miscellaneous codes accounted for less than one 
quarter of 1 percent of part B payments. 

[10] Local codes are scheduled to be eliminated as part of the 
establishment of standards and requirements for the transmission of 
health information under the Health Insurance Portability and 
Accountability Act of 1996. Pub. L. No. 106-191, § 262, 110 Stat. 1936, 
2021. 

[11] The CPT Editorial Panel is predominantly comprised of AMA-
appointed physicians, but also includes physicians nominated by CMS, 
the Blue Cross/Blue Shield Association, the American Hospital 
Association, the Health Insurance Association of America, and a 
nonvoting representative from the American Health Information 
Management Association.

[12] The HCPCS National Panel is comprised of representatives from CMS, 
the Blue Cross/Blue Shield Association, and the Health Insurance 
Association of America. 

[13] For additional information about codes, see U.S. General 
Accounting Office, HIPAA Standards: Dual Code Sets Are Acceptable for 
Reporting Medical Procedures, GAO-02-796 (Washington, D.C.: Aug. 9, 
2002).

[14] 42 U.S.C. § 1395y(a)(1)(A) (2000).

[15] Medicare does not cover outpatient, self-administered drugs. 
However, it does cover physician-administered drugs and drugs used in 
immunosuppressive therapy (for organ transplant recipients) and 
anticancer chemotherapy. 42 U.S.C. § 1395x(s)(2)(J) and (Q) (2000). 

[16] See U.S. General Accounting Office, Medicare: Beneficiary Use of 
Clinical Preventive Services, GAO-02-422 (Washington, D.C.: Apr. 12, 
2002).

[17] In 2001, CMS received 10 external requests for national coverage 
policies, and CMS staff internally decided to consider 8 additional 
national coverage policies.

[18] Some national policies specifically state that CMS is allowing 
carriers to use their own discretion when determining coverage. For 
example, a coverage memorandum regarding speech generating devices 
stated that "carriers. . . will make coverage decisions for claims for 
any [of these] devices on either a case-by-case basis or through a 
local policy." 

[19] 42 U.S.C. § 1395hh(a)(2) (2000).

[20] Even if the contractor has developed a policy that limits 
coverage, its medical director may make an individual coverage decision 
for a beneficiary with a rare condition or when a beneficiary has no 
other treatment options.

[21] Carriers have also developed local policy at the direction of CMS. 
For example, CMS program memorandum AB-01-129, dated September 15, 
2001, directed carriers to develop local medical policies for Doppler 
flow studies, a test that monitors a patient's blood flow and can be 
used during kidney dialysis.

[22] A total of 1,146 new codes were added to the HCPCS list for 2001. 
There were 826 new codes not included within the scope of our study, 
including 640 codes added to identify items to which special Medicare 
hospital outpatient payment rates apply; 113 codes developed for 
private health insurers or Medicaid; and 73 for other services, such as 
ambulance services, drugs, and blood-related services. 

[23] In October 2000, CMS identified 11 of the 320 new codes as 
noncoverable. Subsequently, CMS deemed 7 of these 11 codes as 
coverable. Specifically, in a national coverage policy that became 
effective in April 2001, CMS outlined conditions under which 
contractors could cover 4 of these codes used to bill for intestinal 
transplantation procedures. CMS also issued instructions that 3 codes 
for medical nutrition therapy could be covered after the Congress 
specified such therapy in statute as a Medicare benefit, effective 
January 2002. Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000, Pub. L. No. 106-554, app. F, § 105, 114 Stat. 
2761, 2763A-471.

[24] For example, when a national policy indicates a procedure is 
covered, claims administration contractors can supplement the policy by 
adding conditions that must be met, the only acceptable diagnoses for 
billing, or the frequency with which the procedure can be provided as a 
covered service. 

[25] We conducted this analysis in August 2002 by searching for the 
codes on LMRP.net. If a contractor revised its policies to update them 
with new codes and published the revisions on its local Web site, but 
neglected to update LMRP.net, such revisions would not appear in our 
analysis. 

[26] Essential tremor and Parkinson's disease are the two most common 
neurological disorders. Essential tremor affects about 1.5 million 
Americans; Parkinson's disease affects about 1 million. Tremor is a 
common symptom of both, but Parkinson's disease also causes rigidity, 
slowness of movement, and poor balance.

[27] One device manufacturer estimated that about 85,000 individuals 
with Parkinson's disease and 5,000 individuals with essential tremor 
are candidates for treatment with DBS. 

[28] The carrier began to cover this surgery on August 12, 2002.

[29] Based on claims analysis from part B summary data for 2001 claims 
extracted as of 
June 5, 2002.

[30] Until recently, beneficiaries in northern and southern California 
suffering from essential tremor and Parkinson's disease were covered 
differently for DBS. In June 2002, NHIC consolidated local policies in 
northern and southern California to cover bilateral stimulation.

[31] DraftLMRP.net, a CMS-sponsored Web site, allows the public to view 
draft local policies of carriers, DME regional carriers, and fiscal 
intermediaries posted to their Web sites during the required comment 
period. 

[32] Carriers' advisory committees are composed of physicians, a 
beneficiary representative, and representatives from other medical 
organizations. DME regional carriers' advisory work groups consist of 
physicians, other clinicians, beneficiaries, suppliers, and 
manufacturers.

[33] Fiscal intermediaries may have advisory committees, but CMS does 
not require them to do so.

[34] Claims administration contractors can expand coverage without such 
consultation--for example, they can add additional diagnoses for which 
a treatment would be considered medically necessary.

[35] 64 Fed. Reg. 22,619 (Apr. 27, 1999).

[36] Pub. L. No. 105-33, § 4554(b), 111 Stat. 251, 461.

[37] Institute of Medicine, National Academy of Sciences, Medicare 
Laboratory Payment Policy: Now and in the Future (Washington, D.C.: 
2000). 

[38] HCFA issued its coverage memorandum on this test--cardiac output 
monitoring by electrical bioimpedance--on September 22, 1998, with 
coverage effective for services performed on or after July 1, 1999.

[39] U.S. General Accounting Office, Medicare: Millions Can Be Saved by 
Screening Claims for Overused Services, GAO/HEHS-96-49 (Washington, 
D.C.: Jan. 30, 1996).

[40] Medicare Payment Advisory Commission, Reducing Medicare Complexity 
and Regulatory Burden (Washington, DC: December 2001).

[41] The Technology Advisory Committee was formed by merging two 
earlier advisory groups, the Physicians Panel, which HCFA established 
in 1980, and the Coverage/Payment Technical Advisory Group, which HCFA 
established in 1983. 

[42] 5 U.S.C. App. 5, § 10(a) (2000).

[43] U.S. General Accounting Office, Office of the General Counsel, B-
278940 (Washington, D.C.: Jan. 13, 1998).

[44] The first meeting of MCAC took place in September 1999. MCAC meets 
on a varying schedule, depending on requests for coverage policies. 

[45] The agency is currently developing guiding principles that will 
help it determine when referrals for technical assessment reports, MCAC 
assistance, or both should be made. 

[46] In December 2002, CMS launched a Medicare coverage database, which 
allows users to search for national coverage policies, documents 
related to national coverage policies, and local coverage policies. The 
database may be accessed at http://www.cms.hhs.gov/coverage/.

[47] 64 Fed. Reg. 22,619 (Apr. 27, 1999).

[48] BIPA § 522(b) and (c), 114 Stat. 2763A-546.

[49] MCAC was established on December 14, 1998. As of July 31, 2002, 
CMS had published 55 national coverage memorandums pertaining to 
requests after January 1, 1999. 

[50] Medicare generally will not cover new medical devices or drugs, or 
procedures that depend on new devices or drugs, until after FDA has 
approved the devices and drugs for marketing. However, FDA approval 
does not guarantee Medicare coverage because the Medicare statute 
requires that services and items fit into one of Medicare's benefit 
categories and be reasonable and necessary for beneficiaries' care in 
order to be covered. 

[51] Ocular photodynamic therapy is a new treatment that uses a light-
sensitive drug to guide a laser. On November 8, 2000, HCFA issued a 
memorandum announcing its intent to cover this therapy for patients 
with predominantly classic lesions in the eye. In May 2001, The 
Vitreous Society formally requested that HCFA also cover this treatment 
for patients with nonclassic lesions. On October 17, 2001, CMS issued a 
memorandum describing its intent to cover ocular photodynamic therapy 
for patients with nonclassic lesions, based on the results published in 
a clinical trial. FDA had not approved this use of the drug as a 
labeled use in the procedure for patients with nonclassic lesions. 
Because the drug had been found to be safe and effective for patients 
with classic lesions, physicians could still use the drug "off-label" 
for patients without classic lesions. Soon after CMS issued its October 
2001 memorandum indicating that it intended to cover this therapy for 
patients with nonclassic lesions, the agency decided to reconsider its 
stance. On March 28, 2002, CMS issued a new memorandum that rescinded 
the October 2001 memorandum on covering patients with nonclassic 
lesions, but maintained the coverage granted in November 2000 for those 
with classic lesions. 

[52] On June 8, 2001, the HHS Secretary announced a departmentwide 
initiative to reduce regulatory burdens in health care and respond 
faster to the concerns of health care providers, state and local 
governments, and individuals who are affected by HHS rules. As part of 
this initiative, HHS established the Secretary's Advisory Committee on 
Regulatory Reform to provide findings and recommendations regarding 
potential regulatory changes that would enable its programs to reduce 
burdens and costs associated with the department's regulations, while 
at the same time maintaining or enhancing effectiveness, efficiency, 
impact, and accessibility.

[53] Department of Health and Human Services, Bringing Common Sense to 
Health Care Regulation: Report of the Secretary's Advisory Committee on 
Regulatory Reform (Nov. 21, 2001). 

[54] In contrast to CMS, FDA has established definitions for the 
"safety" and "effectiveness" criteria that manufacturers must meet in 
order to receive FDA approval for a device. FDA has also established 
standards for the evidence it considers to be valid when deciding 
whether to approve a device for marketing. 21 C.F.R. § 860.7 (2002).

[55] 65 Fed. Reg. 31,124 (May 16, 2000).

[56] 54 Fed. Reg. 4,302 (Jan. 30, 1989).

[57] U.S. General Accounting Office, Medicare: Technology Assessment 
and Medical Coverage Decisions, GAO/HEHS-94-195FS (Washington, D.C.: 
July 20, 1994).

[58] Medicare Coverage Decisions and Beneficiary Appeals: Hearing 
Before the Subcommittee on Health of the House Committee on Ways and 
Means, 106th Cong. 80-81 (1999) (statement of Walter M. Rosebrough, 
Jr., on behalf of the Health Industry Manufacturers Association).

[59] 64 Fed. Reg. 22,619, 22,622 (Apr. 27, 1999). The notice also 
indicated that the agency would follow the same procedures and time 
frames when coverage policy questions were generated internally. After 
this notice was issued, BIPA established a new process for 
beneficiaries to directly appeal coverage policies. As part of this new 
coverage policy appeals process, BIPA also imposed timeliness 
requirements on the Secretary of HHS for responding to requests from 
beneficiaries that he develop coverage policies for an item or service 
they need. Specifically, BIPA requires that one of four actions be 
taken within 90 days: 1) issue a national coverage policy, 2) issue a 
national noncoverage policy, 3) determine that no national coverage or 
noncoverage policy is appropriate, or 4) issue a notice stating that 
the review is not complete, identifying the remaining review steps to 
be taken, and establishing a deadline by which the review will be 
completed. On August 22, 2002, CMS issued proposed regulations on 
BIPA's new coverage policy appeals process. 67 Fed. Reg. 54,534.

[60] We analyzed the 55 national coverage policies that were requested 
after January 1, 1999, and had a coverage memorandum issued by July 31, 
2002. Timeliness data are based on information posted on CMS's Web site 
that indicates the date of request for a national coverage policy and 
the date the coverage memorandum was issued. Publishing the coverage 
memorandum is the first step to implementing the policy. It has taken 
up to 9 additional months after publishing a coverage memorandum for 
CMS to issue the national instructions that constitute the coverage 
policy and for the claims administration contractors to implement 
necessary payment changes.

[61] In June 2002, CMS issued a report to the Congress on 10 national 
coverage policies that were published and implemented in fiscal year 
2001. See Department of Health and Human Services, Report to Congress 
on National Coverage Determinations (Washington, D.C.: June 2002). The 
report showed that the average time to implement 4 policies without a 
technical assessment or MCAC input was 96 days (not including 2 
emergency policies related to coverage of liver transplants) and the 
average time to implement 4 policies that had a technical assessment or 
MCAC input was almost 280 days.

[62] Two of the 27 external requests had coverage memorandums dated on 
the same day they were formally requested. Both of these involved 
temporary coverage of liver transplants in nonapproved hospitals during 
a flooding emergency in Houston, Tex.. When these two national coverage 
policies were excluded from our analysis, the average time frame to 
issue a coverage memorandum for the remaining 25 external requests 
increased to about 203 days. 

[63] As of July 31, 2002, all but two national coverage policies that 
had been reviewed by MCAC also had technical assessments. 

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