The Medicare Final Rule: Analysis, Commentary, and Opportunity in 2022 and Beyond

Published in Government Relations on January 03, 2022

Compiled by Mark J. Higley, Vice President of Regulatory Affairs

As we begin 2022 and look back on 2021, we recognize the challenges over the past two years by the COVID-19 pandemic and its effect on the DMEPOS industry. Coupled with supply chain issues, product recalls and surcharges, demanding demographic changes, and the uncertainty attributable to the reimbursement direction from the industry’s biggest payor (Medicare), it is perhaps somewhat remarkable that our businesses have overall fared pretty well. Valuations have never been higher, the decade long trend of a reduction in supplier locations has considerably eased, and a sampling of suppliers’ anticipated 2021 financial results suggests overall stable earnings, with many companies indicating single to double digit growth.

With that said, I’d like to dive a bit deeper into a few of the substantive issues that the industry experienced in 2021 and offer interpretation (“What does this mean to my business?”), take-aways, and clarifications. I’ll review issues due to the pandemic, the CARES Act, and begin with the details of the DME “Final Rule.”

More formally known as CMS-1738-F, Medicare Durable Medical Equipment, Prosthetics, Orthotics and Supplies Final Rule, the December 21 release was long awaited with keen interest by industry stakeholders. While the rule included an array of updates and finalizations relative to benefit categories, new items, glucose monitors and more, the primary focus and concerns to DME suppliers were the final methodology of fee schedule payment “adjustment” amounts for DME furnished in rural/non-contiguous (i.e., Alaska, Hawaii - other than metro Honolulu - and U.S. Territories), non-competitive bidding areas (non-CBAs), and the 130 CBAs during and after the COVID-19 public health emergency.

More than a year ago (October 2020), CMS had issued a proposed rule that addressed the fee schedule amounts of the three patient location categories noted above.

With regard to the rural and non-contiguous areas, the proposed rule was met with support by the industry. Somewhat simply stated, CMS would continue paying suppliers the higher rates required by the CARES Act[1] as compared to the other areas. Stakeholder comments to the agency argued, among other things, greater travel distances and costs and patient access concerns. CMS acknowledged “the unique logistical challenges and costs of furnishing items to beneficiaries in the non-contiguous areas, significantly lower volume of items furnished in these areas versus CBAs, and concerns about financial incentives for suppliers in surrounding urban areas to continue including outlying rural areas in their service areas.”

The final rule did not vary from the proposed rule: CMS will continue paying suppliers the 50/50 blend of adjusted and unadjusted fee schedule rates in these areas. “CMS will continue to monitor payments in rural and non-contiguous areas and all non-CBAs, as well as health outcomes, assignment rates, and other information, and may also consider our payment methodologies toward DMEPOS items and services furnished in rural and non-contiguous areas and non-CBAs in the context of any future changes to the DMEPOS CBP.”

What this means:

Unless modified by legislation (unlikely) or future rulemaking (possible, but the spirit of the CMS comments referenced above suggests otherwise), these higher payment amounts will continue in perpetuity.
Suppliers can access the January 2022 fee schedule at https://www.cms.gov/medicaremedicare-fee-service-paymentdmeposfeescheddmepos-fee-schedule/dme22 Open the ZIP file and access the reimbursement amounts for DME (and, in a separate file, PEN), as well as a listing of patient ZIP codes eligible for the 50/50 payment.
Also included within the file are:
- DMEPOS Rural ZIP code file
- DMEPOS Parenteral and Enteral Nutrition (PEN) fee schedule
- Former Competitive Bidding Areas (CBA) Fee schedule file
- Former CBA National Mail Order diabetic testing supply fee schedule
- Former CBA ZIP Code

How much is the increase?

By example, let’s look at some key product items. The left column is the “unadjusted” rate from 2015 (think “no competitive bidding decrease”), the next column is actual 2022 payment (after an inflation increase, which we will get to next), and the right column is the amount of reimbursement for the same item in the 130 “former” competitive bid areas

How much was the inflation increase? How was it determined?

The 2022 DMEPOS fee schedule increase is 5.1 percent for non-competitive bid items, 5% for competitive bid items in the 130 “former” CBAs, and 5.4% for competitive bid items in non-CBAs. This is larger than any annual Medicare increase in the last 30 years. The increase is based on the annual change to the Consumer Pricing Index for all urban areas (CPI-U) from June to June of the previous year adjusted by an annual productivity adjustment. The CPI-U from June 2020 to June 2021 was 5.4 percent. The adjustment is the change in the economy-wide productivity equal to the 10-year moving average of changes in annual economy-wide private non-farm business multi-factor productivity (MFP). The MFP adjustment is 0.3 percent and the CPIU percentage increase is 5.4 percent. Thus, the 5.4 percentage increase in the CPI-U is reduced by the 0.3 percentage increase in the MFP resulting in a net increase of 5.1 percent for the update factor.

Is this increase effective now?

Yes! To be clear, the “50-50 blend” is NOT dependent upon the pandemic being declared over. It is formally effective in February 2022, but you will receive the higher blend (plus the inflation add-on) January 1, 2022.

Let’s switch gears to the non-rural areas that were not among the 130 CBAs. The CARES Act required the calculation of new, higher fee schedule amounts in non-rural contiguous non-CBAs based on a blend of 75 percent of the adjusted fee schedule amount and 25 percent of the unadjusted fee schedule amount for the duration of the PHE. However, this Final Rule does not extend the “75/25” blend after the pandemic is declared over.

What this means:

When the pandemic is declared over (this could be several more series of 90-day extensions, perhaps into 2023), suppliers will no longer receive the blended rate. “For contiguous, non-rural areas, CMS will be paying suppliers 100 percent of the adjusted fee schedule rates using information from the DMEPOS CBP. For the former CBAs, CMS will be paying the single payment amounts (SPAs) established during DMEPOS CBP updated by an inflation adjustment factor on an annual basis.”

Can you explain that in simpler terms?

It is a bit complicated, but let’s start with the facts: Congress approved a certain reduction in DMEPOS payments to achieve additional Medicare savings effective January 1, 2016 for patient ZIP codes not in CBAs. The language of the legislation was something to the effect of (the rates will be) “based on information from the CBPs”, or the competitive bid areas. There is continuing stakeholder argument that the intent of the legislation was to reference the bid rates in the determination of an appropriate payment - but NOT – match the actual single payment amounts (SPAs) of the various CBAs. In CBAs contracting exists and suppliers with such contracts restrict other suppliers from servicing patients – effectively increasing the potential for increased market share. This is not the case in non-CBAs. Here is how it worked: The downward adjustments to the state fee schedules were based on the average of single payment amounts from CBPs located within the geographic region of the country where the state is located. The United States is divided into eight geographic regions based on the eight regions established by the Federal Bureau of Economic Analysis (BEA) for the purpose of conducting economic analyses. These regional single payment amounts (dubbed “RSPAs”) have certain floor and ceiling amounts but are essentially the average of the SPAs from the CBAs within the geographic regions. Here is a graphic:

So, by way of example, suppliers in non-rural areas in Texas will be paid – after the pandemic is declared over - the approximate average of the Southwest BEA region’s CBAs, which include CBAs in Oklahoma, Arizona and New Mexico, as well as Texas.

How much will be the decrease?

We will again look at some key product items. The left column is the same “unadjusted” rate from 2015, the next column is current 75/25 blended rate due to the CARES Act, and the right column is the approximate (due to varying regional rates) amount of reimbursement for the same item after the pandemic is declared over.

To be clear, these RSPA reductions are NOT in effect January 1, 2022 but only after the PHE is over. If the pandemic continues into 2023, there would be an additional CPI/U adjustment. There also exists the likelihood of successful Congressional legislation between now and then. Industry stakeholders have met with some success certain “champions” in the legislature to consider maintaining the blended rates or a variation thereof.

Finally, let’s summarize the payments for the 130 competitive bid areas after the pandemic is declared over. (Note: Readers may note in industry publications and releases the term “former competitive bid areas.” The most recent “round” (Round 2021) only included certain minimally adjusted knee and back braces. The items noted in the reimbursement examples above were removed from the program “due to insufficient savings”; however the 130 CBAs and their respective boundaries and ZIP codes remain in effect.)

In any case, CMS stated “this final rule does not change these already existing payment methodologies” in former CBAs, effectively allowing no increase in payment (ostensibly until the next round of bidding), with the exception of the inflation updates. CMS further offered, “Previous feedback from industry stakeholders expressed concern regarding beneficiary access to items and services furnished in rural and remote areas. For items that were included in Round 2021, but were removed from Round 2021 of the program, the agency also considered whether to simply extend application of the current fee schedule adjustment rules for non-CBAs and for CBAs and former CBAs until new single payment amounts (SPAs) were calculated for the items once competitive bidding of the items has been resumed.”

What this means:

There was no relief offered to the former CBAs during the pandemic. We will again look at some key product items. The left column is the same “unadjusted” rate from 2015, and the right column is the adjusted for inflation reimbursement amounts for 2022. (Again, you can access all codes via the ZIP file link referenced earlier in this document.) One item of note is that, in addition to the inflationary adjustment, certain oxygen codes received an increase due to the cessation of “budget neutrality” offset.

Is there any consideration by Congress to offer some relief for these CBAs?

As noted above, industry stakeholders have met with some success certain “champions” in the legislature to consider some variation of a “blend” applicable to items affected by previous bidding rounds within the 130 CBAs.
VGM’s John Gallagher, Vice President of Government Relations, recently offered analysis and input relative to continued efforts to mitigate the current reimbursement challenges within the non-rural areas. He commented, “We can move forward with our champions Rep. Cathy McMorris-Rodgers (R-WA), Rep. Markwayne Mullin (R-OK) and Rep. Paul Tonko (D-NY) on Energy & Commerce to bring forth legislative language to address legislation that will provide additional relief to HME providers particularly those that service patients outside of competitive bidding areas in non-rural areas by extending the Cares Act 75/25 Blend at least through the next round of bidding. Of equal importance, legislation that will correct/improve the competitive bidding program. Currently, the next round of the program is unlikely until at least 2024 - if then. In the meantime, HME providers remain burdened by the unsustainable low bid rates from 2016. Current supply chain and inflationary issues exacerbate the matter. CMS has failed with its Competitive Bidding Program. Congress needs to step in and direct CMS with a workable Competitive Bidding Auction system that works. The industry/VGM has been investigating and evaluating such an alternative auction opportunity with Dr. Ken Brown and the Economics Department at Missouri State University. We will offer more information and updates shortly. Moving into 2022, the Government Relations and Regulatory team will continue to fight for accessibility and fair reimbursement for quality goods and services. We hope you will join us.”

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Questions or comments? Please contact me at mark.higley@vgm.com or 319.504.9515

[1] Section 3712(a) of the CARES Act extended the current adjusted fee schedule methodology that pays for certain items furnished in rural and non-contiguous non-CBAs based on a 50/50 blend of adjusted and unadjusted fee schedule amounts through December 31, 2020 or through the duration of the PHE, whichever was later.

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