Medicare Durable Medical Equipment: The Competitive Bidding Program

Paulette C. Morgan
Specialist in Health Care Financing

The Medicare Supplementary Medical Insurance Program (Part B) currently covers a wide variety of durable medical equipment, prosthetics, orthotics, and other medical supplies (DMEPOS) if they are medically necessary and are prescribed by a physician. Durable medical equipment (DME) is equipment that (1) can withstand repeated use, (2) has an expected life of at least three years (effective for items classified as DME after January 1, 2012), (3) is used to serve a medical purpose, (4) generally is not useful in the absence of an illness or injury, and (5) is appropriate for use in the home. Examples include hospital beds, blood glucose monitors, and wheelchairs. Prosthetic and orthotic devices (PO) are items that replace all or part of an internal body organ, such as colostomy bags, as well as such items as leg braces and artificial legs, arms, and eyes. Medicare also covers some items or supplies (S), such as disposable surgical dressings that do not meet the definition of DME or PO.

Medicare generally pays for most DMEPOS on the basis of fee schedules. Medicare pays 80% of the fee schedule amount, while the beneficiary is responsible for the remaining 20%, plus any unmet deductible. Unless otherwise specified by Congress, fee schedule amounts are updated yearly by a measure of inflation and economy-wide productivity. However, studies by federal agencies have shown that Medicare pays above-market prices for certain items of DME. Such overpayments may be due partly to the fee schedule mechanism of payment, which does not reflect market changes, such as new and less-expensive technologies, changes in production or supplier costs, or geographic price variations.

Congress enacted legislation to establish a Medicare competitive acquisition program (competitive bidding) under which prices for selected DMEPOS sold in specified areas are determined by suppliers’ bids rather than fee schedules. The first round of the program began on July 1, 2008, but was suspended due to implementation concerns. Suppliers submitted new bids for the first round “rebid,” and payments based on winning suppliers’ bids went into place in the first nine areas on January 1, 2011. Round 2 is set to begin in 91 additional areas on July 1, 2013. The process for re-competing the contracts for Round 1 has started, and payments based on winning bids are expected to be in place on January 1, 2014. Starting in 2016, the Secretary of Health and Human Services (the Secretary) is required to either expand competitive bidding to additional areas, or apply information gained from the program to adjust fee schedule amounts in remaining areas.

Competitive bidding has been shown to decrease Medicare payments for DMEPOS, leading to savings for Medicare and lower beneficiary cost sharing. Evidence from the competitive bidding demonstration and the Round 1 Rebid also suggests, based on evaluations of the program thus far, that competition did not deteriorate beneficiary access to DMEPOS, or the quality and product selection available to them.

In general, the technical implementation concerns that halted the 2008 competition appear to have been addressed, however, concerns over the auction methodology have been raised, drawing into question whether the competitively bid payments are an accurate reflection of the market for DMEPOS. Finally, the competitive bidding program will result in fewer suppliers being allowed to sell competitively bid items to Medicare beneficiaries, though all suppliers may continue to sell non-competitively bid items to beneficiaries and may repair competitively bid and noncompetitively bid DMEPOS.


Date of Report: June 26, 2013
Number of Pages: 37
Order Number: R43123
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Pharmaceutical Patent Settlements: Issues in Innovation and Competitiveness

John R. Thomas
Visiting Scholar

Although brand-name pharmaceutical companies routinely procure patents on their innovative medications, such rights are not self-enforcing. Brand-name firms that wish to enforce their patents against generic competitors must therefore commence litigation in the federal courts. Such litigation ordinarily terminates in either a judgment of infringement, which typically blocks generic competition until such time as the patent expires, or a judgment that the patent is invalid or not infringed, which typically opens the market to generic entry.

As with other sorts of commercial litigation, however, the parties to pharmaceutical patent litigation may choose to settle their case. Certain of these settlements have called for the generic firm to neither challenge the brand-name company’s patents nor sell a generic version of the patented drug for a period of time. In exchange, the brand-name drug company agrees to compensate the generic firm, often with substantial monetary payments over a number of years. Because the payment flows counterintuitively, from the patent owner to the accused infringer, this compensation has been termed a “reverse” payment.

Since 2003, Congress has required that litigants notify federal antitrust authorities of their pharmaceutical patent settlements. That legislation did not dictate substantive standards for assessing the validity of these agreements under the antitrust law, however. That determination was left to judicial application of general antitrust principles. Facing different factual patterns, some lower courts had concluded that a particular reverse payment settlement constituted an antitrust violation, while others have upheld the agreement.

The June 17, 2013, decision of the U.S. Supreme Court in Federal Trade Commission v. Actavis, Inc. resolved this disagreement by holding that the legality of reverse payment settlements should be evaluated under the “rule of reason” approach. However, the Court declined to hold that such settlements should be presumptively illegal under a “quick look” analysis. The lower courts now face the potentially complex task of applying the rule of reason to reverse payment settlements going forward.

Congress possesses a number of alternatives for addressing reverse payment settlements. One possibility is to await further judicial developments. Another option is to regulate the settlement of pharmaceutical patent litigation in some manner. In the 113th Congress, the Preserve Access to Affordable Generics Act (S. 214) would establish a presumption of either legality or illegality under the antitrust laws, along with consideration of relevant factors to be weighed by the courts. Another proposal, the FAIR Generics Act (S. 504), would introduce reforms to the food and drug laws that would reduce incentives for generic firms to settle with brand-name companies.


Date of Report: June 28, 2013
Number of Pages: 18
Order Number: R42960
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Summary of Small Business Health Insurance Tax Credit Under the Patient Protection and Affordable Care Act (ACA)

Janemarie Mulvey
Specialist in Health Care Financing

Manon Scales
Research Associate

Annie L. Mach
Analyst in Health Care Financing

This report provides a description of the small business tax credit and illustrations of the phase-out for qualifying employers’ contributions toward their workers’ health insurance premiums, based on §1421 and §10105(e) of the Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended). This credit is available to qualifying for-profit and nonprofit employers with fewer than 25 full-time equivalent employees with average annual wages of less than $50,000.


Date of Report: July 8, 2013
Number of Pages: 8
Order Number: R41158
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Health Insurance Continuation Coverage Under COBRA

Janet Kinzer
Information Research Specialist

Health insurance helps to protect individuals and families against financial loss. Having health insurance also promotes access to regular health care. Most Americans with private health insurance are covered through an employer, or through the employer of a family member. A recent study by the Robert Wood Johnson Foundation found that in 2012, 59.5% of insured Americans had their insurance through an employer.

When an employee is terminated, his or her employer-sponsored health insurance usually ends within 30 to 60 days. If that health insurance is family coverage, then a worker’s family members can also become uninsured. Even if the worker finds another job with health benefits, a family can experience long periods of uninsurance, as they wait to qualify for the new benefit. This same problem is also faced by families that experience a reduction in hours in the workplace, the death of a worker, or a divorce.

In 1985, Congress passed legislation to provide the unemployed temporary access to their former employer’s health insurance. Under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA; P.L. 99-272), an employer with 20 or more employees who provided health insurance benefits must provide qualified employees and their families the option of continuing their coverage under the employer’s group health insurance plan in the case of certain events. The former employee is responsible for paying the entire premium. Employers who fail to provide the continued health insurance option are subject to penalties.

COBRA coverage usually lasts for 18 months, but it can be extended up to a total of 36 months, depending on the nature of the triggering event. Those who take up their COBRA benefits are required to pay up to 100% of the premium, which averaged $15,745 for a family in 2012, plus an additional 2% for the administrative costs incurred.

COBRA can be an important source of health insurance for the recently unemployed, but it also benefits the disabled, the retired, the divorced, and their families. For example, spouses and dependent children can also qualify for COBRA benefits in the event of divorce or the death of the family member with employer-sponsored health coverage. Since 2009, about 3 million individuals and families have used COBRA benefits each year.

Critics argue that COBRA addresses the health insurance problems of only a small number of Americans, and that the high cost of premiums makes COBRA coverage unaffordable to many who need it. Others maintain that COBRA has resulted in extra costs for employers, as well as the added administrative burden of providing benefits to people no longer working for them.

Implementation of Affordable Care Act provisions, such as the health insurance exchanges, insurance reforms, and premium subsidies for lower-income individuals in 2014, may make COBRA benefits less valuable for certain individuals and families.

This report provides background on COBRA, a brief explanation of the program, its origins, issues, and how the Affordable Care Act might impact COBRA.


Date of Report: July 11, 2013
Number of Pages: 15
Order Number: R40142
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Potential Employer Penalties Under the Patient Protection and Affordable Care Act (ACA)

Janemarie Mulvey
Specialist in Health Care Financing

On Tuesday July 2, 2013, the Obama Administration posted a blog on employer requirements and the ACA. Based on the White House blog, the administration (1) plans to revamp employer reporting requirements, and therefore suspend employer reporting requirements for 2014, and (2) because employer payments are dependent on the reporting requirements, no payments will be collected in 2014. The Administration noted that these changes were in response to employers’ concerns about the reporting requirement.

This report provides information on the statutory requirements and the proposed regulations issued to implement these statutory requirements in December 2012. This report does not yet reflect the proposed Administration changes. The report will be fully updated once additional information becomes available.

The White House blog posting is available at http://www.whitehouse.gov/blog/2013/07/02/we-relistening- businesses-about-health-care-law.

The Patient Protection and Affordable Care Act (ACA, P.L. 111-148), as amended, increases access to health insurance coverage, expands federal private health insurance market requirements, and requires the creation of health insurance exchanges to provide individuals and small employers with access to insurance. To ensure that employers continue to provide some degree of coverage, the ACA includes a “shared responsibility” provision. This provision does not explicitly mandate that an employer offer employees health insurance; however, the ACA imposes penalties on “large” employers if at least one of their full-time employees obtains a premium credit through the newly established exchange. According to the Congressional Budget Office (CBO), employers are projected to pay $130 billion in penalty payments over a 10-year period.

The ACA sets out a two-part calculation for determining, first, which firms are subject to the penalty (e.g., definition of large), and, second, to which workers within a firm the penalty is applied. Because the treatment of part-time and seasonal workers differs across these two parts of the calculation, this has led to some confusion among policymakers and employers. For example, part-time employees are included in what is termed a full-time equivalent calculation to determine if an employer has at least 50 full-time equivalent employees (FTEs) and is thus considered large for purposes of applying the penalty. However, the actual penalty, if applicable, is levied only on full-time workers (those working at least 30 hours a week on average). This report discusses these definitions and the application to the employer penalty in greater detail.

The potential employer penalty applies to all common law employers, including an employer that is a government entity (such as federal, state, local, or Indian Tribal government entities) and an employer that is a nonprofit organization that is exempt from federal income taxes. If a franchise is owned by one individual or entity, employees in each of the franchises must be aggregated to determine the number of both full-time equivalent and full-time employees.

The actual amount of the penalty varies depending on whether an employer currently offers insurance coverage or not. In order for employers who do provide health insurance coverage to avoid paying a penalty, health insurance coverage that is both affordable and adequate must be offered to the employee. Coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5% of the employee’s household income for the taxable
year. However, IRS has provided a safe harbor for employers to use the employee’s W-2 income for this calculation (since most employers do not readily have information on an employee’s household income). A health plan is considered to provide adequate coverage if the plan’s actuarial value (i.e., the share of the total allowed costs that the plan is expected to cover) is at least 60%. This report provides greater detail on these requirements.

The total penalty for any applicable large employer is based on its number of full-time employees. The ACA specified that working 30 hours or more a week is considered full-time. However, the statute did not specify what time period (i.e., monthly or annually) employers would use to determine if a worker is full-time. To address this issue, the Secretary of Health and Human Services (HHS) and the Secretary of Labor have published proposed regulations to provide guidance for employers to use to determine which employees are considered full-time employees for purposes of administering the ACA employer penalty provision. The proposed regulations provide employers some flexibility to designate certain measurement or look-back periods (up to 12 months) during which they will calculate whether a worker is full-time or not. Once an employee is determined to be full-time, there will then be an administrative period to enroll employees in a health plan, if necessary. If an employer penalty is levied under the ACA requirements, it applies only for the time period following the administrative period, which is called the stability period. Employers are not penalized if an employee enters the exchange and receives a premium credit during the measurement period. In addition, because of this latest guidance, it is unlikely that employers will pay a penalty for seasonal workers who do not work at least 30 hours, on average over a pre-specified time period (up to 12-months). This report describes these proposed regulations in greater detail and provides examples of potential dates when employers will need to begin measuring full-time status for their on-going employees.

Date of Report: July 3, 2013
Number of Pages: 18
Order Number: R41159
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