There is another document that corresponds with this letter. Please check this website for the letter of correction dated January 27, 1999.
November 2, 1998
Hon. Nancy-Ann Min DeParle
Administrator
Health Care Financing Administration
U.S. Department of Health & Human Services
Room 309-G, Hubert Humphrey Building
200 Independence Avenue, S.W.
Washington, DC 20201
Re: Implementation of 1997 Balanced Budget Act Requirements Relating to Home Medical Equipment Suppliers: Inherent Reasonableness and Competitive Bidding Demonstration Projects.
Dear Administrator DeParle:
The Balanced Budget Act of 1997 (BBA) contained numerous provisions that require the Health Care Financing Administration (HCFA) to implement a series of cost-cutting and anti-fraud measures designed to rein in physicians, home health agencies, home health equipment suppliers, hospitals, nursing homes, etc., that participate in the Medicare/Medicaid program. The Office of Advocacy has officially commented on the small business impact associated with several of HCFA’s regulations and interpretations of the BBA requirements. Presently, Advocacy would like to comment on the small business impact that will result from implementation of the above-captioned rules/policies.
The Office of the Chief Counsel for Advocacy of the U.S. Small Business Administration (SBA) was created in 1976 to represent the views and interests of small businesses in federal policy making activities.(1) The Chief Counsel participates in rulemakings when he deems it necessary to ensure proper representation of small business interests. In addition to these responsibilities the Chief Counsel monitors compliance with the Regulatory Flexibility Act (RFA), and works with federal agencies to ensure that their rulemakings analyze and substantiate the impact that their decisions will have on small businesses.
Inherent Reasonableness Authority
Under the BBA, HCFA was granted expanded inherent reasonableness authority. The authority was originally granted to HCFA in the mid-1980s to change Medicare reimbursements for durable medical equipment and other home health equipment supplies. The authority permitted HCFA to adjust (up or down) the reimbursements for individual items and services if the payments were found to be grossly deficient or excessive. However, central to HCFA’s authority at that time, was a requirement that such adjustments only be allowed after an opportunity for public notice and comment. The BBA has expanded the inherent reasonableness authority to require notice and comment only when the adjustment exceeds 15% in any one year. In other words, HCFA is no longer required to provide public notice and comment when the adjustment is below 15%.
Although Congress may have had good intentions when drafting the BBA, HCFA now has virtually unfettered discretion to make drastic payment reductions without public notice and comment or input by the affected industry. Based on the January 7, 1998 interim final rule(2)published by HCFA, the agency has certainly maximized its new authority. HCFA states,
"Under this authority, we (or a carrier) may determine that more than a 15-percent adjustment is warranted, but we may choose to apply only a 15-percent adjustment in any given year and use the ‘15-percent’ methodology. For example, we (or a carrier) may determine that a 25-percent reduction is warranted. However, the adjustment could be accomplished over 2 years—15 percent applied the first year, and 10 percent applied the following year." (Emphasis added).
63 Fed. Reg. at 688. Under HCFA’s interpretation of the BBA, if the agency wants to impose a reduction greater than 15%, the agency only has to spread out the reduction over successive years in order to bypass notice and comment procedures.(3) This is clearly HCFA’s interpretation because the BBA outlines specific guidelines for HCFA to follow when the payment reduction is either above or below 15%. To reiterate the requirements of the BBA, notice and comment are required if the reduction is greater than 15%, but notice and comment are not required if the reduction is less than 15%. If Congress intended for HCFA to skirt the notice and comment requirements when the reduction exceeds 15%, Congress probably would not have bothered to put in any notice and comment requirements in the first place.
This situation is compounded by the fact that HCFA has again issued its rule in final form with no opportunity for prior public notice and comment, and with no 30-day interim period prior to the rule’s effective date. Instead, HCFA relies (as it seems to do regularly) on the "good cause" exceptions to notice and comment specified in section 553(b)(3) of the Administrative Procedure Act.(4) In this case, HCFA claims that it is unnecessary to publish the regulation as a proposed rule because "it is not significantly changing the existing methodology for application of the inherent reasonableness process." 63 Fed. Reg. at 688. In addition, HCFA claims that, "it would be contrary to the public interest to delay implementation of these regulations by publishing a proposed rule . . . affording notice and opportunity for comment would postpone the time that limits may be established on grossly excessive charges and would unnecessarily impede further savings to the Medicare trust fund and beneficiaries." Id. Instead of using the exceptions to notice and comment judiciously, HCFA seems to be establishing a pattern of behavior for the sake of administrative convenience.
Even as HCFA attempts to explain its rationale for using the exceptions, the agency comes close to contradicting itself. If the methodology for application of the inherent reasonableness process is not changing significantly, how is the agency suddenly able to stop grossly excessive charges and save Medicare money? Could it be that the process is changing significantly (since the savings to Medicare will be so great)? Or, is the agency saying that the process is not changing significantly and that it does not presently have the inherent reasonableness authority to stop grossly excessive charges? This would be a false statement. The agency has the authority and has successfully used the authority in the past. The public interest/exigency argument, therefore, is not credible.
In addition, Congress placed no implementation deadline on the inherent reasonableness provisions contained in the BBA. Clearly, there is no exigency tied to implementing this regulation. The thousands of small businesses that will be impacted by this regulation and other interested parties should have been given an opportunity to comment on a proposed regulation. Post hoc comment periods attached to final rules lack genuineness and are frowned upon by the courts.(5)
HCFA acknowledged that the final rule would have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flexibility Act. However, this acknowledgement comes in the context of an interim final rule. Because interim final rules are not directly covered by the RFA, the agency is not required to do an analysis otherwise required by the RFA. Section 603 of the RFA requires agencies to prepare an initial regulatory flexibility analysis (IRFA) in a proposed rule whenever an agency determines that there will be a significant economic impact on a substantial number of small entities. The purpose of such an analysis is to help agencies determine the impact of a particular regulation on small entities and help identify less burdensome alternatives. Section 604 of the RFA requires agencies to prepare a final regulatory flexibility analysis (FRFA) in a final rule if the agency was required to prepare an IRFA in the proposed rule. In fact, HCFA did not prepare any analysis in connection with the instant regulation.
To summarize the chain of events that has occurred in this and other recent HCFA regulations: HCFA gets Congress to cede increased authority to the agency in the name of Medicare savings and elimination of fraud and abuse; HCFA expands or maximizes its new authority in a direct final or interim final rule; HCFA waives the proposed rule and the 30-day implementation period; in so doing, HCFA removes itself from the requirements of the RFA (which were designed to help agencies identify and reduce unnecessary burden on small entities). HCFA seems to have found the perfect formula for bypassing every significant analytical and procedural requirement designed to ensure administrative due process, public input and agency accountability.
Since the language in the BBA did not specify or require that HCFA should bypass notice and comment when the fee reduction falls below 15%,(6)the Office of Advocacy believes that HCFA should subject such reductions to notice and comment as a matter of good administrative policy.
Competitive Bidding
Section 4319 of the BBA permits HCFA to implement up to five demonstration projects under which competitive acquisition areas are established for contract award purposes for the furnishing of certain services and/or items. The BBA sets certain minimum limits that HCFA must follow in awarding contracts and establishing the areas. Under the BBA, HCFA may limit the number of contractors in a competitive acquisition area "to the number needed to meet projected demand for items and services covered under the contracts."
The first demonstration project announced by HCFA is located in Polk County, Florida. Under this demonstration project, a limited number of providers in the designated area will be reimbursed by Medicare for certain durable medical equipment and home medical equipment supplies (i.e., oxygen, hospital beds, enteral nutrition, etc.).
Although HCFA has broad authority to implement these demonstration projects, the Office of Advocacy urges the agency to consider modifying its request for bids to impose the least burden on the industry—an industry comprised of primarily small businesses. Because large national companies/franchises may initially offer services and products at prices below those of smaller companies, it may be difficult for small businesses to participate effectively or successfully in the bidding process unless HCFA takes certain precautionary steps to guard against unfair competition. Also, since HCFA is extending the opportunity to bid beyond Polk County, the impact on small businesses in Polk County will be at a particular disadvantage by having to compete with a larger pool.
Making the assumption that small businesses may not be able to offer the cheapest prices would seem to superficially buttress HCFA’s goal of establishing a limited number of providers so as to save Medicare dollars. However, it is important to emphasize that HCFA’s mission must be balanced with national objectives to preserve competition and to not use federal policy to upset regional economies. It is most important that HCFA consider the costs of its contracting policies and not dictate policy in a vacuum.
The SBA does not have data on the number of providers in Polk County, but HCFA estimates place the number at approximately 40-100 providers in the designated area. Of those providers, a substantial number are probably "small" as defined by SBA’s standards. SBA data does show that, nationwide, 80% of medical equipment suppliers have fewer than 20 employees.(7) Industry data shows that those providers with fewer than 20 employees average just under $3 million in annual revenue (even though SBA regulations define a small provider in this industry as one with less than $5 million in annual revenue).
If these small providers are excluded from participating in the bidding process, they will surely lose a significant percentage of their annual revenue. In such an event, only large national providers and/or franchises could withstand the reductions in reimbursement. Moreover, once the larger providers control the market, they are then able to control market prices and/or services.(8) Demonstration projects like the one in Polk County come dangerously close to fostering monopolistic markets. Every precaution should be taken to maintain competition in the marketplace.
Medicare savings are important, but it is equally important to maintain sight of the big picture. That is, how meaningful are Medicare savings if government guaranteed business loans default and unemployment rises because providers no longer have sufficient revenue to keep their doors open? The human cost is another factor—aside from job loss, employee benefits are typically vulnerable during periods of extreme revenue loss in small businesses.
If there are no limits on the discretion of HCFA’s contracting officers, there could be an impact on the business structure of the community. Every federal agency has a duty to not use tax dollars to harm local economies. HCFA should consider alternatives that foster competition while allowing the agency to accomplish their overall objective of Medicare savings. One alternative would be to allow small business goals/objectives in the solicitation for bids to ensure small business participation and market competition. HCFA should also consider expanding the number of allowable participants in the demonstration project to minimize adverse effects. These recommendations apply to this and future demonstration projects that the Secretary may establish.
Finally, it is important to realize that Congress did not mandate these demonstration projects and did not mandate the specific structure of the projects. Congress merely granted the authority for HCFA to implement the demonstration projects. It is within HCFA’s discretion, therefore, to give thoughtful consideration the alternatives outlined herein.
Conclusion
HCFA’s inherent reasonableness rule and competitive bidding demonstration program are examples of how HCFA’s administrative process/policies have a tremendous impact on the small businesses that the agency regulates. It is most disturbing that a trend of bypassing administrative procedures has emerged at HCFA. While the agency may be within its authority to regulate certain industries to protect the Medicare system from fraud, abuse and overspending, the agency is doing so with little regard to the impact on the industry. Small businesses do not deserve special regulatory treatment, but they are entitled to administrative due process. It seems that the agency’s goals could be achieved just as well by following the rules of administrative procedure and laws designed to enhance and preserve the regulatory process. Everyone benefits from dialogue and meaningful input—the regulators and the regulated.
Thank you for your consideration of these comments. Please do not hesitate to contact us if you have any questions at 202-205-6533.
Sincerely,
Jere W. Glover
Chief Counsel for Advocacy
Shawne Carter McGibbon
Asst. Chief Counsel for Advocacy
APPENDIX
Based on a search of the Federal Register from January 1, 1998 to October 15, 1998, it appears that HCFA published 37 final actions.(9) Of those 37, 13 were mere corrections, revisions or extensions of comment periods. Of the remaining 24, only 10 final rules had been published first as proposed rules, but a staggering 14 (or, 58.3%) were published as direct or interim final rules. All 24 substantive final rules are cited below:
ENDNOTES
1. Regulatory Flexibility Act, 5 U.S.C. § 601, as amended by the Small Business Regulatory Flexibility Act, Pub. L. No. 104-121, 110 Stat. 866 (1996).
2. Medicare Program; Application of Inherent Reasonableness to all Medicare Part B Services (Other than Physician Services); 63 Fed. Reg. 687.
3. Based on information from Medicare’s Durable Medical Equipment Regional Carrier (DMERC) from Region A, the proposed fee reductions in at least four categories exceed an average of 15% (based on the average of 10 surveyed states), but notice and comment will not be necessary because the reduction will be spread over successive years. Note the following reductions: Code A4252 (lancets, per box of 100) = 27.8%; Code A4311 (insertion tray w/o drainage bag w/ indwelling catheter) = 15.97%; Code A4338 (indwelling catheter, foley type, each) = 18.31%; Code B4150 (enteral formulae, category 1, semi-synthetic intact protein/protein isolates) = 16.39%.
4. See Appendix A. This appendix demonstrates that HCFA published final rules without proposed rules over 58% of the time in 1998 (between January 1 and October 15).
5. The third circuit said that: "If a period for comments, after issuance of a rule, could cure a violation of the APA’s requirements, an agency could negate at will the Congressional decision that notice and an opportunity for comment must precede promulgation. Provision of prior notice and comment allows effective participation in the rulemaking process while the decision maker is still receptive to information and argument. After the final rule is issued, the petitioner must come hat-in-hand and run the risk that the decision maker is likely to resist change." Sharon Steel Corp. v. EPA, 597 F.2d 377, 381 (3rd Cir. 1979).
6. Although notice and comment is specifically required for fee reductions exceeding 15%, the BBA does not specifically state that notice and comment is not required for fee reductions less than 15%.
7. Based on Standard Industrial Classification Code (SIC) 7352 for Medical Equipment Rental and Leasing.
8. The Department of Defense learned this lesson the hard way when it began paying $800 for hammers as a result of exclusive contracts with certain suppliers.
9. This figure does not include actions appearing in the "Notices" section of the Federal Register. Even though many of those "notices" may have the same impact as rules and look like rules in most respects, they were not counted for purposes of this demonstration.