Medicare and Medicaid Programs; Calendar Year 2026 Home Health Prospective Payment System (HH PPS) Rate Update; Requirements for the HH Quality Reporting Program and the HH Value-Based Purchasing Expanded Model; Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) Competitive Bidding Program Updates; DMEPOS Accreditation Requirements; Provider Enrollment; and Other Medicare and Medicaid Policies

In order to incentivize bidding entities to submit competitive bids and in order to ensure that the amounts to be paid to contract suppliers for an item under a competitive bidding program are expected to be less than the amounts that would otherwise be paid for the same item under subpart C or subpart D, we proposed to make modifications to the process for selecting the number of contract suppliers sufficient to furnish items and services in a competition and the methodology for establishing SPAs for lead and non-lead items. We also proposed, in lieu of self-reported supplier capacity, to estimate supplier capacity in accordance with 42 CFR 414.414(e)(2) using data on actual contract supplier capacity from previous rounds of the DMEPOS CBP.

We solicited comments on these proposals. 1. Background

The DMEPOS CBP is a program in which Medicare-enrolled DMEPOS suppliers submit bids and compete to receive a limited number of contract(s) to furnish DMEPOS items and services, identified by HCPCS codes, within different product categories in different CBAs throughout the nation. The bids from contract suppliers under the program are used to calculate SPAs to pay the contract suppliers in lieu of the payment amounts they would otherwise receive under the standard payment rules under sections 1834(a)(2) through (7), 1834(h), 1834(z), and 1842(s) of the Act. Section 1847(b)(5) of the Act provides that Medicare payment for competitively bid items and services is equal to 80 percent of the applicable SPA, less any unmet Part B deductible described in section 1833(b) of the Act. The contract supplier collects a coinsurance payment from the beneficiary equal to 20 percent of the applicable SPA as well as any unmet Part B deductible. The total payment made to the contract supplier by Medicare and the beneficiary cannot exceed the SPA. For DMEPOS items and services that are not paid for under the DMEPOS CBP, a non-participating supplier has the option to collect more than the Medicare allowed amount from the beneficiary, a practice referred to as

balance billing. Balance billing is not allowed under the DMEPOS CBP. a. Rules in Effect Prior to Round 2021 of the DMEPOS CBP

In accordance with the 2007 final rule (72 FR 17992), prior to Round 2021, bidding entities submitted a bid amount for each item in a product category. These bid amounts were combined into one composite bid for each bidding entity, aggregating their bids for all items in a product category. To compute a composite bid, historical DMEPOS utilization data was used to assign weights to each item in each product category based on the national volume of the item in proportion to the national volume of all items in the product category. The composite bid for a bidding entity equaled the item's weight multiplied by the item's bid amount and summed across all items in the product category, which was used to determine the expected costs for all items in the product category based upon expected volume. Once a composite bid was calculated for each entity that submitted a bid in the competition, the composite bids were arrayed in order from lowest to highest. CMS began the contract award process by awarding a contract to the supplier with the lowest composite bid and then awarding contracts to the next supplier in the array. This process was repeated until there were enough suppliers to meet the projected demand \57\ in the CBA for the items in the product category. The composite bid for the bidding entity where the cumulative capacity of the bidding entities for furnishing the items and services meets or exceeds projected demand is referred to as the pivotal bid. The array of bidding entities with bids at or below the pivotal bid are referred to as the winning contract suppliers or the winning array of suppliers. The bids for these contract suppliers are used to establish the SPAs for the items and services in the product category for each CBA.

\57\ As explained in the 2007 DMEPOS final rule (72 FR 18039), demand for items and services was projected using Medicare claims data for allowed services during the previous 2 years, trended forward to the contract period.

Prior to Round 2021, the SPA for each item in the product category was calculated based on the median of the winning contract suppliers' bids for each item. As explained in the 2007 final rule, we believed that setting the SPA based on the median of the contract suppliers' bids satisfies the statutory requirement that SPAs are to be based on bids submitted and accepted. This resulted in a single payment for an item under a DMEPOS CBP that was representative of all acceptable bids, not just the highest or the lowest of the winning bids for that item (72 FR 18045). Using the median of the winning bids as opposed to the lowest or highest bids is consistent with how Medicare has established allowed payment amounts for DMEPOS items since the beginning of the Medicare program. Under the reasonable charge payment methodology in place from 1966 through 1988, payment was based on the lower of the supplier's customary charge (the 50th percentile of charges from the supplier), or the prevailing charge for the item (the 75th percentile of customary charges for the item from suppliers in a given locality). The fee schedule amounts used to pay claims for DMEPOS beginning in 1989 are based on average reasonable charges for the items. The lowest or highest charges for an item were never used to establish the Medicare allowed payment amount for the DMEPOS item.

At the start of the DMEPOS CBP in 2011, CMS inflated demand for items and services in the CBAs so that more contracts would be awarded than needed to better ensure access to items and services under the new program. Prior to the finalization of the median of winning bids methodology, CMS explained to the PAOC that although a number of suppliers will be paid below what they bid, an approximately equal number of suppliers will be paid more than what they bid.\58\

\58\ As required by section 1847(c) of the Act, the Secretary of Health and Human Services established the PAOC, which advised the Secretary on a range of implementation topics for the DMEPOS CBP. The PAOC was comprised of a broad mix of relevant industry, consumer, and government parties. Specifically, the membership included beneficiary/consumer representatives, manufacturer representatives, supplier representatives, certification/standard representatives, Federal and State program representatives, a physician and a pharmacist.

From the inception of the DMEPOS CBP in 2011 and implementation of subsequent rounds through 2018, CMS implemented a very successful program using item weights, composite bids, and SPAs that were based on the median of the winning contract suppliers' bids for each item. Using the median of the winning bids resulted in 40 to 80 percent reductions in payment amounts under the program, even though more contracts were awarded than needed to meet an inflated demand target for items and services, because use of the median of winning bids reduces the impact of “outlier” bids at the top and bottom of the array of winning bids on the payment amount established for all contract suppliers. Suppliers accepted their contract offers at the median of the winning supplier bids approximately 92 percent of the time consistently from round to round, Medicare and taxpayers saved money, and access to quality items and service was preserved. Section 1834(a)(1)(F) of the Act requires CMS to adjust fee schedule amounts for DME items and services furnished in non-CBAs based on the SPA pricing. Sections 1834(h)(1)(H)(ii) and 1842(s)(3)(B) of the Act provide discretion to adjust fee schedule amounts for OTS orthotics and enteral nutrition, respectively, furnished in non-CBAs based on SPA pricing. Adjustments to the fee schedule amounts have been in place for these items and services for several years and contract suppliers have accepted payment at the adjusted rates as payment in full for approximately 99 percent of all claims with no significant downward trends in utilization, and no negative changes in beneficiary health outcomes, as determined by CMS's health outcome claims monitoring. b. Changes Implemented With Round 2021 of the DMEPOS CBP

To improve the competitiveness and sustainability of the program, significant changes to the DMEPOS CBP were made as part of the “Medicare Program; End-Stage Renal Disease Prospective Payment System, Payment for Renal Dialysis Services Furnished to Individuals With Acute Kidney Injury, End-Stage Renal Disease Quality Incentive Program, Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) Competitive Bidding Program (CBP) and Fee Schedule Amounts, and Technical Amendments To Correct Existing Regulations Related to the CBP for Certain DMEPOS,” published in the Federal Register on November 14, 2018, (83 FR 56922) (hereinafter referred to as (2018 ESRD & DMEPOS final rule). Effective January 1, 2019, and beginning with Round 2021, a “lead item” pricing methodology was established for submitting bids, calculating composite bids for bidding entities, determining pivotal bids, and calculating SPAs. The methodology for calculating SPAs was changed from the median of the winning contract suppliers' bid amounts for each item in the product category to the maximum winning contract supplier bid amount for a “lead item” in the product category, which is used to calculate the SPAs for all items in the product category. Under these rules, instead of submitting bid amounts for each item in the product category, the bidding entity submits a single bid amount for a “lead item” in the product category and this bid amount represents

the bidding entity's “composite bid” for furnishing all items in the product category. The “lead item” in each product category is defined in our regulations at Sec. 414.402 to mean the item, in a product category with multiple items, with the highest total nationwide Medicare allowed charges of any item in the product category prior to each competition. The bids for the lead item are used to establish the SPAs for both the lead item and all other items (non-lead items) in the product category. In accordance with Sec. 414.416(b)(1), the SPA for a lead item furnished under a CBP is equal to the maximum bid amount submitted for that item by bidding entities whose composite bids for the product category that includes the item are equal to or below the pivotal bid for that product category. Additionally, under Sec. 414.416(b)(2), the SPA for a lead item must be less than or equal to the amount that would otherwise be paid for the same item under the DMEPOS fee schedule. The SPAs for the non-lead items within the product category are determined by multiplying the lead item SPA by a relative ratio. The ratios are based on the historic differences in the fee schedule amounts for the lead item and non-lead items. In accordance with Sec. 414.416(b)(3), the SPA for a non-lead item in a product category furnished under a CBP is equal to the SPA for the lead item in the same product category multiplied by the ratio of the average of the 2015 fee schedule amounts for all areas (that is, all states, the District of Columbia, Puerto Rico, and the United States Virgin Islands) for the non-lead item to the average of the 2015 fee schedule amounts for all areas for the lead item.\59\

\59\ Calendar year 2015 is the last year the fee schedule amounts were not adjusted based on information from the CBP.

The lead item pricing methodology was adopted to prevent a phenomenon that had been occurring under the DMEPOS CBP known as “unbalanced bidding,” where bidding entities submitted low bid amounts for higher volume items under the product category because these bid amounts had a greater impact on their composite bid, and higher bid amounts for lower volume items under the product category because these bid amounts had a lesser impact on their composite bid. This resulted in skewed pricing results where SPAs for lower cost items with fewer features such as a manual hospital bed without side rails were higher than SPAs for higher cost items with more features such as a semi-electric hospital bed with side rails. Lead item pricing maintains the historic differences in prices for these items, while streamlining the bidding process and significantly decreasing the burden for bidding entities since they only have to submit one bid amount for each competition (product category and CBA). Previously, the bidding entity had to submit bid amounts for every item in the product category, which for some product categories such as standard power wheelchairs and standard manual wheelchairs was over a hundred separate bid amounts. c. Projecting Demand for Items and Services and Estimating Supplier Capacity for Furnishing Items and Services

In determining the number of contract suppliers for a competition, we aim to limit the number of contract suppliers to ensure they are incentivized to submit a competitive bid. As discussed in section B.1.d. of this final rule, awarding too many contracts decreases the incentive for a bidding entity to submit a competitive bid--given that bidding entities would be more likely to be awarded a contract regardless of the submitted bid amount. At the same time, in determining the number of contracts to award in a competition, we balance a number of other considerations set forth at sections 1847(b)(2)(A)(iv) and (b)(4)(B) of the Act. Section 1847(b)(4)(A) of the Act, allows the Secretary to limit the number of contract suppliers in a CBA to the number needed to meet projected demand for items and services covered under the contracts and also directs the Secretary to consider whether the bidders can furnish enough items or services to meet the anticipated needs of individuals within the contract's geographic area on a timely basis. Section 1847(b)(4)(B) of the Act also specifies that the Secretary shall award contracts to multiple entities submitting bids in each area for an item or service and section 1847(b)(2)(A)(iv) of the Act specifies that individuals must have access to multiple contract suppliers in the CBA or else contracts may not be awarded in that area. In balancing these considerations, we codified in current regulations at 42 CFR 414.414(e) our process for selecting the number of contract suppliers to be awarded a contract for a competition.

From 2011 through 2023, the methodologies and procedures used for projecting demand for items and services and estimating a supplier's capacity for furnishing items and services as a contract supplier remained virtually unchanged. These methodologies were designed to overestimate demand and underestimate capacity to ensure access under the program when it began. These methodologies inflated the projected demand target for items and services, awarded no capacity for contract suppliers new to an area or product category, and limited a contract supplier's estimated capacity to their historic levels if they did not meet certain financial standards. Soon after the program was implemented in 2011, it was apparent that more contracts were being awarded under the program than needed to meet demand for items and services; however, CMS decided to continue using these methodologies during each round of competition up to and including Round 2021. While more contracts were awarded than needed to meet demand, this was balanced by establishing SPAs using the median of winning bids rather than a higher amount such as the maximum winning bid, thus still achieving the goal of lowering payment amounts and achieving savings under the DMEPOS CBP.

Under current regulations at 42 CFR 414.414(e)(1), which were revised as part of the 2018 ESRD & DMEPOS final rule (83 FR 57018), we first calculate the expected beneficiary demand in the CBA for the lead item in the product category. This methodology accounts for actual historic beneficiary utilization of the lead item in the product category prior to each round of the DMEPOS CBP, while also considering the expected growth in the number of Medicare beneficiaries in the CBA as well as the expected growth in utilization of the lead item in the product category in the CBA. Specifically, under this methodology, CMS calculates the projected beneficiary demand for the lead item by multiplying the actual historic beneficiary utilization by a percent increase that is derived from increasing historic utilization by both the expected increase in number of beneficiaries and the expected increase in utilization, in general. If either the change in number of beneficiaries or the change in utilization in the CBA is expected to be negative, the negative trend is not included in the projection of demand and is instead set equal to one. In addition, the projected beneficiary demand is not reduced based on the number of items that would likely be furnished by grandfathered suppliers, which typically furnish approximately 15 percent of rented durable medical equipment items and related accessories (83 FR 57024). In accordance with section 1847(a)(4) of the Act and

regulations at 42 CFR 414.408(j), suppliers of rented DME and oxygen and oxygen equipment can become “grandfathered suppliers” and continue furnishing these items under the DMEPOS CBP if the rental agreement or supply arrangement with the beneficiary began prior to the start of the contract period. CMS has thus inflated the demand target in order to provide more contract suppliers for beneficiaries to choose from by using historic utilization, trending this forward by both the expected increase in number of beneficiaries and the expected increase in utilization and by not decreasing the number to account for fraudulent claims, decreases in the number of beneficiaries, or the percentage of demand that is accounted for by grandfathered suppliers or other non-contract suppliers under the exceptions at 42 CFR 414.404(b) for physicians, hospital outpatient departments, physical therapists, and occupational therapists. In the past, this did not compromise savings under the program when the median of winning bids was used to establish SPAs rather than a higher payment such as the maximum winning bids.

After determining the projected beneficiary demand, pursuant to 42 CFR 414.414(e)(2), we then calculate the total supplier capacity that would be sufficient to meet the expected beneficiary demand in the CBA for the lead item in the product category. The capacity is currently based on the bidding entity's self-reported projection of how many items they could furnish at the amounts they bid. If a bidding entity reported a capacity that was less than their historic capacity, the capacity for the bidding entity was adjusted up to the level of their historic capacity; however, the capacity was never increased above their historic capacity.

Pursuant to 42 CFR 414.414(e)(5), CMS then analyzes each eligible bidder's financial health to assess its ability to furnish its estimated capacity against the projected beneficiary demand in each competition.

If a bidder's financial score \60\ meets the minimum financial threshold required by CMS for a bidder to receive additional capacity beyond its historical amount, CMS accepts the bidder's capacity at the greater of its estimated or historical capacity (based on claims data). However, if a bidder's financial score does not meet this threshold, the bidder is a new supplier (does not have 12 months of actual financial statements and submits at least one month of pro forma statements), or the bidder is a specialty supplier, CMS only accepts its capacity at its historical amount.

\60\ CMS uses the required tax return extract and the required financial documents to calculate standard accounting ratios for each bidder. These ratios, along with the credit report and numerical credit score or rating, are used to compute the bidder's financial score. The methodology for computing bidders' financial scores has remained consistent throughout all rounds of the DMEPOS CBP.

If a bidder's accepted capacity is greater than 20 percent of projected beneficiary demand in the CBA, CMS adjusts the bidder's capacity to 20 percent of projected beneficiary demand to ensure at least five contracts are awarded for each competition, in accordance with 42 CFR 414.414(h).

Pursuant to 42 CFR 414.414(e)(3) and (4), we then array the composite bids from the lowest composite bid price to the highest composite bid price and calculate the pivotal bid for the product category using the projected beneficiary demand and supplier demand calculated in accordance with 42 CFR 414.414(e)(1) and (2), as discussed previously. The pivotal bid, as defined under 42 CFR 414.402, is the lowest composite bid based on bids submitted by bidding entities for a product category that includes a sufficient number of suppliers to meet beneficiary demand for the items in that product category. In accordance with 42 CFR 414.414(e)(5), contracts are awarded to all suppliers and networks whose composite bids are less than or equal to the pivotal bid for that product category (and that meet the supplier eligibility requirements specified in the regulations and the Request for Bids Instructions).

To ensure that the number of contract suppliers selected will meet beneficiary demand, CMS conducts a secondary analysis to determine if additional contract suppliers should be awarded contracts. Part of this analysis examines if bidding entities awarded contracts need (and are planning) to expand operations and need time to ramp up to meet projected beneficiary demand. To do so, CMS analyzes the most recent 12 months of claims data that was not available when we first conducted this analysis for all contract suppliers that should be awarded contracts under the initial analysis. Using this data allows CMS to account for any unforeseen increases in utilization as almost a year has passed since the original calculation of the projected beneficiary demand. This secondary analysis further scrutinizes bidders' capacity to confirm that they are capable of furnishing items at levels exceeding their historical capacity in the competition prior to calculating the final SPAs. This is performed by separating bidders into three groups that factor in each bidder's financial health, experience furnishing the lead item, and ramp-up revenue percentage.\61\ Expansion plans were required in rounds prior to Round 2021 for suppliers that were new to an area, new to a product category, or submitted an estimated capacity that represented substantial growth over current levels. Beginning with Round 2021, bidders were no longer required to submit expansion plans as part of this process in accordance with the 2018 ESRD & DMEPOS final rule (83 FR 57052).

\61\ Ramp-up revenue is determined by multiplying a bidder's projected growth (that is, taking the bidder's estimated capacity minus its historical capacity) by the preliminary SPA for the lead item. To determine if a bidder has sufficient ramp-up revenue to support its estimated capacity, its ramp-up revenue is divided by the bidder's actual revenue to produce a percentage. The purpose of this process is to act as a safeguard to ensure bidders are not over-estimating their ability to expand.

Group 1

Meets the minimum financial threshold required by CMS for a bidder to receive additional capacity beyond its historical amount; and

Has experience furnishing the lead item in the CBA; and

Has sufficient ramp-up revenue.

CMS accepts the higher of the estimated or historical capacity for Group 1 bidders. Group 2

Meets the minimum financial threshold required by CMS for a bidder to receive additional capacity beyond its historical amount; and

Does not have experience furnishing the lead item in the CBA, but has experience furnishing the lead item in other CBAs for which the bidder has submitted a bid; and

Has sufficient ramp-up revenue.

CMS uses an experience factor to determine the capacity for Group 2 bidders by dividing the CBAs in which a bid was submitted where the bidder has experience furnishing the lead item by the total CBAs in which a bid was submitted for the lead item.

Group 2 bidders will have their capacity adjusted by multiplying the bidder's estimated capacity, in each of the competitions where they do not have experience, by the experience factor. For example, if a bidder submitted 10 bids for enteral nutrition and only had experience in half of those competitions, the bidder would have its estimated capacity lowered by 50 percent for the competitions where it does not have experience.

Group 3

Does not meet the minimum financial threshold required by CMS for a bidder to receive additional capacity beyond its historical amount; or

Is a new supplier or a specialty supplier; or

Does not have experience furnishing the lead item in any CBA for which the bidder has submitted a bid; or

Does not have sufficient ramp-up revenue.

CMS accepts the historical capacity for Group 3 bidders, which is zero for bidders with no experience furnishing the lead item.

As initially stated, it is important to note that this secondary analysis is only used as a method for offering additional contracts and will not remove any bidding entities from the initial winning array (that is, bidding entities whose bids were at or below the pivotal bid). That is, the pivotal bid amount set during the initial capacity analysis is never lowered, even if this secondary analysis determines that beneficiary demand can be met with fewer suppliers. As a result, this secondary analysis removes the 20 percent of projected beneficiary demand limit (explained in the second bullet in Step 1 noted previously) because Step 1 already ensures that at least five contracts are awarded for each competition in accordance with Sec. 414.414(h).

If the secondary analysis determines that no additional bidders are needed to meet beneficiary demand, the preliminary SPAs established under the initial analysis are set as the final SPAs for the competition as explained in the next section. However, if the secondary analysis determines that additional bidders are needed to meet beneficiary demand, CMS continues through the array (bidders that are eligible for a contract offer are arranged by lowest to highest lead item bid amount) until bidder capacity meets or exceeds beneficiary demand for the competition. Once CMS adds enough bidders to where the cumulative accepted capacity of the bidders selected in the array meets beneficiary demand, the pivotal bid is increased accordingly, and the resulting SPAs are set as the final SPAs for the competition.

As established at 42 CFR 414.416(b)(1), the SPA for a lead item furnished under a competitive bidding program is equal to the maximum bid submitted for that item by suppliers whose composite bids for the product category that includes the item are equal to or below the pivotal bid for that product category. Once the pivotal bid is determined and the selection of winning contract suppliers is finalized, the SPAs are calculated based on the maximum submitted bid amount of contract suppliers in the winning array.

In order to ensure that small suppliers, meaning a supplier that generates gross revenue of $3.5 million or less in annual receipts including Medicare and non-Medicare revenue, have an opportunity to be considered for participation under the CBP in accordance with section 1847(b)(6)(D) of the Act, the special rules at Sec. 414.414(g) establish a goal of awarding at least 30 percent of the total number of contracts to small suppliers. CMS first determines which percentage of bidders in the winning array of bids are small suppliers. If less than 30 percent, CMS will offer a contract to the next eligible small supplier(s) until the 30 percent small supplier target is reached or there are no more eligible small suppliers for the competition. Additional contracts may be awarded when a bid disqualification is overturned. Additional contracts may also be awarded if needed to meet demand when a contract offer is declined. Finally, in accordance with Sec. 414.414(i), additional contracts may be awarded after CMS initially awards contracts, if necessary, to meet demand. d. Problems Associated With Awarding More Contracts Than Needed To Meet Demand for Items and Services

The current process for calculating total supplier capacity in accordance with 42 CFR 414.414(e)(2), which is calculated based upon the supplier's estimated capacity levels once awarded a contract, and for projecting beneficiary demand in accordance with 42 CFR 414.414(e)(1), which, as described previously is inflated above historic levels even in situations where the Medicare fee-for-service beneficiary population is declining in the CBA, results in the awarding of significantly more contracts than needed to meet actual demand for items and services in the CBA. Although access to multiple suppliers is mandated by section 1847 (b)(2)(A)(iv) of the Act, awarding an excess number of contracts can reduce the competitiveness of the program, which results in higher payment amounts--hurting potential savings. Large suppliers especially have limited to no incentive to submit competitive bids in such an environment (where excessive numbers of contracts are awarded). To highlight this issue, take for example if there were only two or three very large national chain suppliers that were all awarded contracts in most of the CBAs from 2011 through 2018. It is possible that any one of these suppliers alone would have been able to meet most of the actual demand for the particular item or service in many of the CBAs. If two chain suppliers become contract suppliers for a competition round after round regardless of what bid amount they submit, they would learn that they could submit a bid amount that is higher than they would be willing to accept and still be added as a contract supplier for the competition, which in turn would have a negative impact on savings under the competition. We observed this issue in the Round 2 Recompete (2016). We found that on average, 13 contracts were awarded per competition, but typically 4 contract suppliers were sufficient to meet the beneficiary demand in the CBA for the lead item in the product category. In general, 4 of the selected contract suppliers had no utilization and 5 of the contract suppliers had low utilization (that is, furnishing items and services to less than 5 percent of the applicable beneficiary population). Most DMEPOS product categories have historically been dominated by a few large national chain suppliers, and we have seen a downward trend in the total number of suppliers and more concentration among the large suppliers in terms of volume and market share. From 2022 to 2024, the number of medical supply companies enrolled as DMEPOS suppliers decreased by 7 percent from 6,438 to 5,973. Over this same 2-year period, Medicare Part B enrollment also decreased by 5 percent from 35.3 million to 33.4 million, while the number of allowed services attributed to enrolled DMEPOS suppliers grew from 1.97 billion to 2.11 billion. While savings were generally favorable under this approach, this evidence indicates that future competitions would have been increasingly strained to recompete items and services. 2. Current Issues

The lead item pricing and maximum winning bid amount SPA methodologies were implemented under Round 2021 of the DMEPOS CBP (refer to table FF-25 for an explanation of the CBP rounds). CMS competed 16 product categories in 130 CBAs in Round 2021, although the product category for non-invasive ventilators was removed in April 2020 following the exercise of the Defense Production Act due to the coronavirus disease 2019 (COVID-19) PHE. Of the remaining 15 product categories, 13 were included in previous rounds of the CBP, while OTS back and knee braces were competed for the first time. Within

the 130 CBAs, there were over 2,000 competitions and CMS received and reviewed over 49,000 bids. The Round 2021 contracts went into effect in 127 CBAs for the OTS back braces and OTS knee braces product categories, resulting in estimated Medicare savings of $934 million. Pursuant to 42 CFR 414.414(f), CMS announced that it would not award competitive bidding contracts for 13 product categories for Round 2021 that were previously competed because the payment amounts did not achieve expected savings.\62\

\62\ https://www.cms.gov/files/document/round-2021-dmepos-cbp-single-payment-amts-fact-sheet.pdf.

The competitions for contracts in Round 2021 were largely unsuccessful in achieving savings because the methodology for calculating SPAs was changed from the median of winning bid amounts used in previous rounds to the maximum winning bid amount, but CMS made no changes to how the number of contracts awarded in a competition is calculated. As discussed, the current process for selecting the number of contracts to award results in significantly more contracts than needed to meet actual demand for items and services in the CBA and this process has resulted in higher payment amounts than the payment amounts that would have been established if the number of contracts was limited to the number needed to meet actual demand for items and services in the CBA. By calculating SPAs based on the maximum bid amount submitted for that item by suppliers whose composite bids for the product category that includes the item are equal to or below the pivotal bid for that product category, CMS began setting payments based on the highest of the bid amounts from suppliers not needed to meet the demand for items and services in the CBA. In addition, these maximum winning bid amounts were often an outlier price (a bid amount from a single bidding entity that is significantly higher than the bid amounts from other bidding entities). Consequently, adjusting the methodology for setting the SPA without adjusting the number of contracts awarded eliminated the ability of the program to achieve savings because the SPAs that would have been used to pay contract suppliers would have resulted in total payments to contract suppliers that greatly exceeded the total amounts that would otherwise be paid. When the maximum winning bid amount is used to establish the SPA rather than a bid amount from lower in the winning array of bidders, it is more likely that an outlier bid amount will be selected as the SPA, which is not optimal.

Table FF-26 shows the actual bid amounts submitted for a Round 2021 competition (the competition is not identified to protect the confidentiality of the bidding entities). The bid amounts are for the bidding entities that would have been awarded contracts based on the current methodologies for projecting demand and determining supplier capacity for meeting demand.

[GRAPHIC] [TIFF OMITTED] TR02DE25.052

Pursuant to 42 CFR 414.414(f), contracts were not awarded for this product category and CBA because the total payments that would have been made to contract suppliers based on the maximum winning bid amount of $189.00 would have greatly exceeded the payment amounts that would have otherwise been made at $74.25, the adjusted fee schedule amount calculated in accordance with 42 CFR 414.210(g)(10) using bid amounts from previous rounds of competition. This table shows the impact of outlier pricing on the SPA that results when using the maximum winning bid method. The maximum winning bid of $189 is $39 (26 percent) higher than the next highest bid of $150. This real-life scenario demonstrates that just adding one additional bidding entity has a significant impact on the amount that all the contract suppliers would be paid, particularly when their bids do not include capacity numbers above their historical norms. In contrast, the median of winning bids is right in the middle of the array of bids and is not affected greatly by the outlier bid of $189. Removing the bidding entity with the $189 bid from the array only decreases the median by one dollar from $82.76 to $81.75. In this specific example, had the number of contracts awarded been limited to 14 rather than 36, then the payment amount would have been lower than the amount that would otherwise have been paid and contracts could have been awarded (assuming no other proposals in this rule were otherwise adopted and only the median bid methodology was in effect). Of the 36 bidding entities in this example, 9 were new bidding entities and the policy for new bidding entities is to count their capacity as zero, meaning they were not needed to meet demand. An additional 13 bidding entities did not indicate that they could expand their capacity beyond historic levels if awarded a contract. Removing 22 bidding entities from the list of winning range suppliers (the nine new bidding entities and the 13 bidding entities that indicated they could not expand their capacity) coincidentally leaves 14 bidding entities in the winning range. In order to have successful competitions in the future, the number of contracts awarded and the methodology used to

establish the payment amounts made to the contract suppliers must result in total payments to contract suppliers that do not exceed the amounts that would otherwise be paid, after also factoring in the impact of the CBP in reducing fraud, waste, and abuse as discussed in greater detail in section VII.D., titled “Bid Limits and Conditions for Awarding Contracts if Savings are Not Expected.”

The goal in this final rule is to find the right mix in terms of the number of contracts awarded and how to establish the SPAs using the bid amounts so that contracts are awarded to multiple suppliers but no more than needed to meet beneficiary demand for items and services, and to ensure the DMEPOS CBP will generate total payments to contract suppliers that are less than the total amounts that would otherwise be paid under the standard payment rules under sections 1834(a)(2) through (7), 1834(h), 1834(z), and 1842(s) of the Act. As noted previously, CMS must be cognizant of how the SPA methodology, and the methodology to select the number of awarded contracts can impact whether total payments to contract suppliers are less than the total amounts that would otherwise be paid under standard payment rules.

As explained in more detail later in this section, we believe certain changes to how CMS determines the number of awarded contracts and changes to the SPA methodology can increase the likelihood that the DMEPOS CBP program will generate savings. Regarding changes to how CMS determines the number of awarded contracts, we believe data on actual contract supplier capacity from previous rounds of the DMEPOS CBP should be used in lieu of self-reported supplier capacity, to determine the number of contracts needed to meet demand for items and services in a CBA in accordance with 42 CFR 414.414(e)(2).

Three options for determining SPAs are discussed later in this section and address how the number of contract suppliers would need to be limited in order to achieve savings at the median bid level if bid amounts higher than the median bid amounts are used to establish the SPA. These options include using the median of winning bid amounts, using the maximum winning bid amount but limiting the number of contract suppliers so that the maximum winning bid amount is approximately equal to the median of winning bid amounts, or using the 75th percentile of winning bid amounts but limiting the number of contract suppliers so that a maximum winning bid amount is approximately equal to the median of winning bid amounts. In addition to the change described previously, we evaluate how complementary changes to the methodology for calculating number of awarded contracts may or may not affect the competitiveness of the program. One option is to use the median of winning bids (median bid option). The second option is to continue using the maximum winning bid (maximum bid option) and limit the number of contracts awarded so that the maximum winning bid is approximately equal to where the median of winning bids would be under the median bid option. The third option, which we believe is the best approach, is to establish SPAs based on the 75th percentile of winning bids (75th percentile option) and limit the number of contracts awarded so that the 75th percentile of winning bids is approximately equal to where the median of winning bids would be under the median bid option. Using the 75th percentile approach pays more contract suppliers above their bid amount than below their bid amount, which was a criticism of the median bid option, and is less susceptible to outlier pricing than the maximum bid option.

Conceptually, where the SPA is based on the maximum winning bid rather than the median of winning bids, many contract suppliers are paid using a SPA that is significantly higher than the bid amount they submitted, therefore providing more money for them to furnish additional items and services (that is, to increase their capacity) and resulting in the need for fewer contract suppliers.

Round 2021 was not successful for the 13 product categories included under the CBP. In the previous competitions from 2011 through 2018, these product categories were paid with SPAs calculated based on the median of winning bids. However, CMS did not change the methodology for determining the number of contracts to award, continuing the practice of awarding more contracts than needed to meet demand, even though the bid amount used for calculating SPAs was changed from the median of winning bids to the maximum winning bid. If, in addition to adjusting the SPA methodology, CMS had revised the methodology for determining the number of contracts to award so that less contracts were awarded, it would have been more likely that that the maximum winning bid amounts would have been closer to the median of winning bid amounts in prior rounds. This is important because the fee schedule amounts for items included in prior competitions had already been adjusted in accordance with section 1834(a)(1)(F) of the Act based on the SPAs calculated using the median of winning bids, becoming the payment amounts that would otherwise be paid in the absence of implementation of the DMEPOS CBP. Under the requirements for awarding contracts under section 1847(b)(2)(A)(iii) of the Act, total payments to contract suppliers based on SPAs must not be expected to exceed the total amount that would otherwise be paid. Contracts could not be awarded under Round 2021 if the SPAs based on the maximum winning bids were significantly higher than the SPAs previously established for the items and services based on the median of winning bids, as this would have resulted in total payments to contract suppliers being greater than the adjusted fee schedule amounts that would otherwise be paid. As explained later in this section, this problem was further compounded by bidding entities submitting lower capacity estimates than in previous rounds of competition, with very few bidding entities providing estimates that they could increase their volume of business and market share if awarded a contract.

Prior to the opening of the bid window for Round 2021, CMS published a “Capacity and Demand” Fact Sheet to increase transparency regarding the DMEPOS CBP by explaining the methodology that CMS would utilize to calculate projected beneficiary demand for Round 2021, as well as how CMS would determine a bidder's capacity to meet projected demand. CMS also provided increased transparency by publishing a “Financial Scoring Methodology” Fact Sheet that explained how bidding entities would be evaluated to determine if they met the financial standards mandated by section 1847(b)(2)(A)(ii) of the Act. After receiving this detailed information, some industry consultants created and distributed information encouraging bidding entities to submit very low estimates of their capacity to furnish items if awarded a contract in order to significantly overinflate the total number of contracts awarded and drive up the maximum winning bids and SPAs. For example, when bidding to become contract suppliers for oxygen and oxygen equipment, 56 percent of the bidding entities “estimated” they could furnish less than one percent of the projected first year demand target and 1,496 out of 3,192 (47 percent) bidding entities submitting oxygen bids in Round 2021 “estimated” that they would not be able to provide one additional oxygen concentrator a month beyond what they have historically

furnished. Also, 261 out of 3,192 (8 percent) bidding entities submitted an estimated capacity of one concentrator a month. This is the lowest possible capacity number a bidding entity could provide as their estimated capacity because the DMEPOS Bidding System would not allow an estimated capacity entry of zero.

After the Round 2021 bid evaluation processes concluded, we estimated that if payments had been made using SPAs based on the maximum winning bids, this would have resulted in an increase of $1.2 billion in total payments to contract suppliers above the total amounts that would otherwise have been made over the 3-year contract performance period for Round 2021. As a result, CMS was prohibited from awarding contracts, per section 1847(b)(2)(A)(iii) of the Act, in all product categories except OTS back braces and OTS knee braces, which saved an estimated $934 million. The OTS back braces and OTS knee braces product categories were new, and payment using the SPAs based on maximum winning bid amounts did result in lower payments to contract suppliers than would otherwise be made in most of the 130 CBAs. We found as a result of this effort that the practice of providing very low-capacity estimates as part of the bid in order to increase SPAs affects the calculation of the SPA regardless of whether the SPA is based on the maximum winning bid amount or the median of winning bid amounts, but the effect is much more pronounced and subject to outlier bids when the SPA is based on the maximum winning bid. A median is calculated using all bids (low and high), whereas the maximum winning bid is based on one bid amount (the highest) and can change dramatically from one bidding entity to the next as shown in table FF- 26.

Very low bidding entity-reported estimates of their capacity for furnishing items would have resulted in the award of more contracts than needed to meet demand. The combination of the awarding of more contracts than needed to meet demand and the change in determining SPAs to use of the maximum winning bid in Round 2021 resulted in an inability to award contracts for almost all items and services because total payments to contract suppliers would have greatly exceeded payments that would have otherwise been made. It is therefore important to establish a more accurate methodology for determining the number of contract suppliers needed to incentivize competitive bids and meet projected demand for items and services, and to select a methodology for determining SPAs that does not result in situations where total payments to contract suppliers would exceed payments that would otherwise be made. Furthermore, CMS does not have a mechanism to address situations where bidding entities submit capacity estimates that do not accurately reflect their ability to increase their volume of business if awarded a contract. As seen in the bids for Round 2021, this resulted in capacity estimates that were arbitrary and would have resulted in an increase in the number of contracts awarded and thereby drive up the prices paid under the program. In order for pricing to be competitive, especially as markets consolidate and small suppliers may not be expanding their businesses, the number of contracts awarded has to be limited to the degree that large suppliers face the risk of not being awarded a contract, thereby creating an incentive to bid more competitively. Only a small number of bidders were excluded in past rounds of competition, greatly reducing the incentive for suppliers to bid competitively. Thus, we believe the methodology for determining the number of contracts to award for future rounds of the DMEPOS CBP cannot rely on self-reported capacity estimates from bidding entities as this methodology is not effective in limiting the number of contracts awarded to the number needed to meet projected demand for items and services in accordance with section 1847(b)(4)(A) of the Act.

In order to successfully recompete contracts for product categories previously bid under the methodology that established SPAs based on the median of winning bid amounts in accordance with section 1847(b)(2)(A)(iii) of the Act, there must be an expectation that total payments to contract suppliers will be less than the total amounts that would otherwise be paid. We have explored and summarized three options, which have been informed by simulations we conducted using bid and contracting information from previous rounds of the DMEPOS CBP. We explain additional details about these simulations in a later discussion.

The first possible option of accomplishing this is to implement the methodology for determining SPAs used under competitions prior to Round 2021 that established SPAs based on the median of winning bid amounts, and award the same number of contracts awarded under those pre-Round 2021 competitions, adjusted based on the percentage change in Medicare Part B enrollment in the CBAs. We refer to this as the “median bid” option.

A second option would be to maintain the current methodology that establishes SPAs based on the maximum winning bid amount. Based on our analysis of past bidding rounds, we believe that to meet the requirements of section 1847(b)(2)(A)(iii) of the Act and maintain the current methodology for determining SPAs based on maximum winning bid amounts, we would need to better ensure that the maximum winning bid amount is closer to the median winning bid amount that would be selected under the first option. We believe this could be achieved by reducing the number of contracts awarded under future competitions by approximately 50 percent below the number of contracts awarded in past bidding rounds. This would reduce the likelihood of basing the SPA on an outlier bid amount and could increase the likelihood that the SPAs established under this option would be roughly equivalent to the SPAs that would be established under the median bid option. We refer to this as the “maximum bid” option.

A third option would be to implement a methodology that uses the 75th percentile of winning bid amounts to establish a SPA, which is halfway between the median or 50th percentile of winning bid amounts and the maximum winning bid amount or 100th percentile of winning bid amounts. Similar to the process discussed for the second option, based on our analysis of past bidding rounds, we believe that to meet the requirements of section 1847(b)(2)(A)(iii) of the Act we would need to implement a process to better ensure that the selected bid amount is not influenced by outlier bid amounts and remains closer in value to the amount that would be selected under option one. We believe this could be achieved by reducing the number of contracts awarded under future competitions by approximately 25 percent below the number of contracts awarded in past bidding rounds. This would reduce the likelihood of basing the SPA on an outlier bid amount and better increase the likelihood that the SPAs established under this option would be roughly equivalent to the SPAs that would be established under the median bid option. We refer to this as the “75th percentile” option.

Reducing the number of contracts awarded in proportion to the position in the array of winning contract suppliers used to establish the SPA is necessary in order to comply with the requirements of the statute. Section 1847(b)(3)(B) of the Act requires that contracts be recompeted not less often than once every 3 years, while section

1847(b)(2)(A)(iii) of the Act prohibits the awarding of contracts under these competitions unless the total amounts to be paid to contract suppliers in a CBA are expected to be less that the total amounts that would otherwise be paid. Establishing SPAs using bid amounts from suppliers higher in the array of winning contract suppliers than the median of bid amounts increases the chances that the SPA will be based on an outlier price (a bid amount that is significantly higher than other bid amounts for contract suppliers in the winning array), and therefore increases the chances that the competitions will not be successful in generating payments that are less than the amounts that would otherwise be paid for the items and services. These risks must be considered to implement future competitions under the DMEPOS CBP that are successful in generating program savings for competitively priced DMEPOS items and services. Table FF-27 lists the three options discussed previously and the tradeoffs associated with each option. [GRAPHIC] [TIFF OMITTED] TR02DE25.053

The median bid option offers the highest number of contracts for suppliers, and, therefore, the greatest degree of choice for beneficiaries. Even though this option results in payment amounts that are higher than the bid amounts for approximately half of the suppliers in the winning array of bidding entities, much criticism has been provided by DMEPOS suppliers, manufacturers, and certain economists about the fact that this option results in payment amounts that are lower than the bid amounts for approximately half of the suppliers in the winning array of bidding entities. Despite that criticism, suppliers accepted the contracts at the median SPA rates 92 percent of the time, and as noted previously, beneficiary access was not compromised, suppliers in non-CBAs adjusted to using these rates, assignment rates remained high, and beneficiary health outcomes remained stable. Nevertheless, as noted previously, we were seeing some pressures in downward trends in regard to suppliers' willingness to expand capacity, indicating that the current structure might not have been sustainable for the long term.

The maximum bid option, which would base SPAs on the maximum winning bid amounts coupled with an approximate 50 percent reduction in the number of contracts awarded below past bidding rounds, offers the lowest number of contracts for suppliers, and, therefore, the smallest degree of choice for beneficiaries. While this option results in payment amounts that are equal to or higher than the bid amounts for all of the suppliers in the winning array of bidding entities, even with a reduction in the number of contract suppliers, it also presents the highest risk of establishing a SPA based on an outlier bid, resulting in a SPA that might not meet the statutory requirement for total payments to contract suppliers that are lower than the total amounts that would otherwise be made for the items and services in the CBA. We observed this in Round 2021. We believe the risk of additional unsuccessful competitions using this option is too great.

The 75th percentile option uses the bid amount in the array of winning bid amounts that is halfway between the median of the winning bid amounts (50th percentile) and maximum winning bid amount (100th percentile) to establish the SPA, and, therefore, serves a “middle ground” option. This option would be coupled with an approximate 25 percent reduction in the number of contracts awarded below past bidding rounds. It therefore results in more contracts and less risk of outlier prices than the maximum winning bid option, but fewer contracts and more risk of outlier prices than the median bid option. It is also an option that has never been attempted under the DMEPOS CBP. This option partly addresses the criticism provided by DMEPOS suppliers, manufacturers, and certain economists about paying contract suppliers less than their bid amount. However, as noted previously, the fact that 92 percent of suppliers accepted contracts at the median bid rates, and these amounts were proven to be adequate for items and services to be furnished with no negative impact on health outcomes, indicates that this criticism may be unfounded. While there is still a greater risk of outlier prices associated with this option than the median bid option, we believe this option would result in successful competitions, and we solicited comments on a proposal that this methodology replace the current maximum bid methodology in the regulations for calculating the SPAs for items and services under the CBP. In order for this option to enable the DMEPOS CBP to meet its statutory objectives, the number of contracts awarded must be reduced by approximately 25 percent from the current methodology so that total payments to contract suppliers based on SPAs equal to the 75th percentile of winning bid amounts are no greater than total payments to contract suppliers based on SPAs equal to the median (or 50th percentile) of winning bid amounts. We continue to maintain that, “One of the purposes of the program is to create a competitive bidding payment structure that is more reflective of a competitive market” (72 FR 18036).

We analyzed the performance of contract suppliers under the previous Round 2 Recompete and Round 1 2017 competitions and identified the number of contract suppliers in each competition that provided at least 5 percent of total contract supplier utilization during these rounds of competition. We believe these numbers represent the number of contract suppliers that made a meaningful contribution toward meeting demand for the items and services in each competition. Under the previous Round

2 Recompete and Round 1 2017 competitions, on average, only 28 percent of contract suppliers furnished at least 5 percent of the total number of items and services furnished by contract suppliers in each competition. This indicates that the vast majority of contracts awarded under these previous rounds were not necessary to ensure access and that there is sufficient experience and rationale for reducing the number of contracts offered under the DMEPOS CBP to determine a competitive price while maintaining access as mandated by section 1847(b)(4)(A) of the Act.

If under future competitions, the number of contracts awarded for each competition was limited to the number of contract suppliers that furnished at least 5 percent of the total number of items and services for the competition, this would reduce the number of contract suppliers in the winning array and increase the likelihood that total payments to contract suppliers under future rounds of competition would be lower than the amounts that would otherwise be paid. If we continue awarding the same number of contracts as in past rounds of competition and use the 75th percentile of winning bid amounts rather than the 50th percentile (median) of winning bid amounts to establish the SPAs, the SPAs would be prohibitively higher than they would otherwise be if we had used the median of winning bid amounts to establish SPAs. To counter this, we can reduce the number of contracts awarded so that the 75th percentile of winning bid amounts are more closely aligned to where the median of winning bid amounts would have fallen. Using the competition example under table FF-26, the 75th percentile of the 36 bid amounts is $105.00, which is much higher than the median of winning bid amounts of $82.76. Under this competition, if the number of suppliers in the winning array is reduced by 25 percent from 36 to 27, the 75th percentile of the 27 bid amount amounts is $89.95, which is only 9 percent higher than the median of winning bid amounts of $82.76. However, there is no way to know for sure if the contract suppliers in the winning array under future competitions with this type of cap on the number of contracts awarded would have the capacity to furnish all of the items and services needed in the competition. Although larger suppliers should have economies of scale that would allow them to bid lower than smaller suppliers, it is possible that all large suppliers could be outbid by small suppliers that collectively do not have the capacity to meet demand for the items and service covered under their contracts. We therefore solicited comments on a proposal to increase the number of contracts awarded to double the number of contract suppliers that previously furnished at least 5 percent of the items and services needed in the competition. This would mitigate the risk of awarding too few contracts such that the total supplier capacity would not be sufficient to meet the expected beneficiary demand, but would also increase the risk of awarding too many contracts, resulting in situations where total payments to contract suppliers at the 75th percentile of winning bid amounts could be greater than the payments that would otherwise be made based on fee schedule amounts adjusted using information from past rounds of the CBP where SPAs were established based on the median (or 50th percentile) of winning bid amounts rather than the 75th percentile of winning bid amounts.

CMS contracted with the Research Triangle Institute (RTI) to evaluate how the changes in Round 2021 impacted the DMEPOS CBP, and to consider ways in which the DMEPOS CBP can address the issues that occurred in Round 2021. RTI conducted a simulation of the 75th percentile option using bid and contracting information from previous rounds of the DMEPOS CBP. Specifically, RTI used the number of Round 2 Recompete and Round 1 2017 contracts in each of these successful competitions, as well as Round 2 Recompete and Round 1 2017 contract supplier utilization, to determine the number of contract suppliers that furnished at least 5 percent of total contract supplier utilization under each under these previous rounds. These numbers were then doubled to generate the target number of suppliers to include in the winning array in each competition under the simulation. The SPAs for the lead item in each competition were calculated based on the 75th percentile of bid amounts for suppliers in the winning array. If the 75th percentile fell directly on one of the suppliers in the winning array, that bidding entity's bid amount became the SPA for the competition under the simulation. Table FF-27 provides an example of this calculation. If the 75th percentile fell between 2 bidding entities (that is, there was an odd number of bids in the winning array), the SPA was determined using the amount that is 75 percent between the two bid amounts, rounded to the nearest cent. An example of this calculation is provided in Table FF-28. [GRAPHIC] [TIFF OMITTED] TR02DE25.054

The 75th percentile falls directly on the sixth winning supplier (8 x 75 percent = 6), resulting in the SPA of $6.50. [GRAPHIC] [TIFF OMITTED] TR02DE25.055

The 75th percentile falls between the 6th and 7th winning supplier with bid amounts of $6.50 and $7.00, respectively. The SPA is calculated using the amount that is 75 percent of the way between $6.50 and $7.00, rounded to the nearest cent, which is $6.88 ([($7.00-$6.50) * 75 percent] + $6.50).

After the SPAs were calculated, additional contracts were added for small suppliers, if necessary, to meet the 30 percent small supplier target in each competition.

The last step of the simulation involved a review of the utilization for the suppliers that would be awarded contracts in each competition under the simulation to determine if their combined historic capacity totaled at least 5 percent of the overall utilization for the lead item in the competition. If the suppliers that would be awarded contracts did not collectively provide at least 5 percent of the overall utilization for the lead item in the competition, one additional bidding entity that met all eligibility requirements as stated in the request for bids for the competition and furnished at least 5 percent of the overall utilization in the competition for the lead item, was awarded, if available. If bidding entities met these criteria, the bidding entity with the lowest bid amount was awarded a contract under the simulation.

The resulting SPAs and total number of contracts awarded under the simulation were then compared to the SPAs and total number of contracts awarded under the previous Round 2 Recompete and Round 1 2017 competitions. In 91 percent of the simulated competitions (1,539 of 1,690), both the SPAs and number of contracts awarded were lower than the SPAs and number of contracts awarded under Round 2 Recompete and Round 1 2017. Of the remaining 151 simulated competitions, 10 competitions resulted in the same number of contracts being awarded under Round 2 Recompete and Round 1 2017 competitions, while three competitions resulted in more contracts being awarded. Additionally, of the 151 simulated competitions, 105 competitions had higher SPAs than the Round 2 Recompete and Round 1 2017 competitions, while 41 competitions had SPAs that were the same as the Round 2 Recompete and Round 1 2017 competitions. Please note that there is overlap in how the simulation data for the remaining 151 competitions is presented. For example, a simulated competition that resulted in more contracts and a higher SPA compared to a Round 2 Recompete and Round 1 2017 competition could be counted in both the contract and SPA data mentioned previously.

In order to ensure beneficiary access to items and services under the simulation, a floor on the total number of contracts awarded was established, so that the number of contracts awarded under the simulation would be no less than 50 percent of the number of contracts awarded under the previous rounds, rounded up to the nearest whole number. Also, in order to ensure savings under the simulation, a ceiling on the total number of contracts awarded was established, so that the number of contracts awarded under the simulation would be no more than 75 percent of the number of contracts awarded under the previous rounds, rounded down to the nearest whole number. Note that modifications to the methodology for determining the number of contracts to award for product categories that have never been included under the CBP, as well as the product categories for OTS back braces and OTS knee braces included in Round 2021, are discussed later in this section. The simulation was run again using the floor and ceiling, and the results were analyzed. The simulated SPAs were mostly lower than the SPAs under the previous Round 2 Recompete and Round 1 2017 competitions. For all product categories and CBAs for both the Round 2 Recompete and Round 1 2017 competitions, the percentage reduction in the number of contracts awarded ranged from 33 percent for enteral nutrients, equipment, and supplies, to 41 percent for standard manual wheelchairs. In addition, the percentage reduction in SPAs ranged from 2.6 percent for hospital beds to 13.8 percent for group 2 support surfaces. To illustrate the results of the simulation, the simulation SPAs and number of contract suppliers is compared to the number of contracts and SPAs for Round 1 2017 for oxygen and oxygen equipment (lead item, HCPCS Level II code E1390) in table FF-29.

[GRAPHIC] [TIFF OMITTED] TR02DE25.056

Under the simulation, there was a 36 percent average reduction in the number of contracts awarded for oxygen and oxygen equipment in the Round 1 2017 CBAs under the simulation and a 6 percent average reduction in the SPAs. For comparison, the percentage of contract suppliers in each Round 2 Recompete and Round 1 2017 competition that furnished 5 percent or more of total contract supplier utilization was, on average, only 28 percent suggesting that the number of contracts awarded but not needed in a competition in the previous rounds was as high as 72 percent. Thus, we believe a reduction in the number of contracts awarded under the DMEPOS CBP of approximately 36 percent would not result in a shortage of contract suppliers.

We acknowledge the simulation uses supplier bids from past competitions and does not reflect how suppliers may actually bid in future competitions. However, we believe the balance of achieving savings while ensuring access to items and services under the program would be preserved if these changes are implemented. The suppliers competing for contracts would know that only a limited number of contracts would be offered, and we believe this would increase the level of competition under the program in terms of lower bid amounts that also result in adequate payment for all contract suppliers, while also mitigating some of the concerns of the supplier community associated with using the median winning bid.

If the maximum bid option were used, the reduction in the number of contracts awarded would need to be even greater, such as no more than 50 percent of the number of contracts awarded in the previous rounds of competition. Using the maximum bid option would mean fewer suppliers would be awarded contracts than under the other two options, providing less choice for beneficiaries and increasing the chances that the amount paid is an outlier price that is significantly higher than the bid amounts of other winning contract suppliers. Using the median bid option would minimize or eliminate the impact of outlier prices but would result in more contract suppliers being paid less than the amount they bid. We did not propose either of these options, but we solicited comments on these two options in addition to the proposed 75th percentile option. A summary of how the number of contracts to award in the next competition for items included in Round 2 Recompete, Round 1 2017, and Round 2021 of the DMEPOS CBP would be determined under the three options is summarized in Table F-30.

[GRAPHIC] [TIFF OMITTED] TR02DE25.057

As an example of how this would work for the 75th Percentile Proposal, in 2018, CMS had 29 contract suppliers to furnish continuous positive airway pressure (CPAP) items in the Miami, FL competitive bidding area, but only 9 contract suppliers furnished at least 5 percent of the total utilization for CPAP in the Miami, FL CBA. If Part B enrollment for the area has decreased by 5 percent since 2018, the CMS would do the following:

Double the number of contract suppliers furnishing at least 5% in 2018:

9 x 2 = 18

Adjust the result by the 5 percent decrease in Part B enrollment since 2018:

18 x 0.95 = 17.1 rounded to the nearest whole number, 17.

Determine the fewest number of contracts to award:

29 x 0.50 = 14.5 rounded up to the nearest whole number, 15.

Determine the highest number of contracts to award:

29 x 0.75 = 21.75 rounded down to the nearest whole number, 21.

Compare the result in Step 2 to the fewest and highest number of contracts and adjust up or down, if necessary:

No change needed as 17 is greater than 15 and less than 21.

Result: CMS would award 17 contracts for CPAP in the Miami, FL CBA.

In addition, as explained earlier, we did not propose any changes to the method of using the lead item to establish pricing under current regulations at 42 CFR 414.416, but did propose to change the methodology used for determining SPAs for lead items under Sec. 414.416(b)(1) to replace “maximum bid” with “75th percentile of bids”.

We also solicited comments on our proposal to change the way the SPAs are calculated for the non-lead items in a product category. Currently, to calculate the non-lead item, CMS multiplies the lead item SPA by a relative ratio, which is based on the average of the 2015 fee schedule amounts for all areas (that is, all states, the District of Columbia, Puerto Rico, the United States Virgin Islands) for the non- lead item divided by the average of the 2015 fee schedule amounts for all areas for the lead item. This formula uses average fee schedule amounts, which in some cases results in SPAs for non-lead items being higher than the fee schedule amount that would otherwise be paid because the 2015 fee schedule amounts for some areas are lower than the average of the 2015 fee schedule amounts for all areas. To address this situation for CBAs other than a nationwide or regional CBA, we solicited comments on a proposal to calculate the ratio based on the 2015 fee schedule amounts for each specific area rather than the average of the 2015 fee schedule amounts for all areas. For example, in the Miami/CPAP competition, the lead item SPA for the CPAP product category will be multiplied by a relative ratio, which will be based on the 2015 fee schedule amount for the CPAP non-lead item in Miami divided by the 2015 fee schedule amount for the CPAP lead item in Miami. For nationwide or regional CBAs, we would still need to use the average of the fee schedule amounts since these CBAs would include multiple areas with different fee schedule amounts.

For all three options, the number of winning contract suppliers for all subsequent competitions would be provided to bidders prior to bidding. For example, based on the Miami/CPAP 75th percentile option example noted previously, we would let bidding entities know that for the initial competition for these items last furnished by contract suppliers in 2018, a total of 17 contracts would be awarded for this competition. The SPA for the lead item would be based on the 75th percentile of the bids for the 17 lowest bidding entities for the CPAP product category in Miami. For subsequent rounds of competition, the number of contracts awarded would be based on the number of winning contract suppliers from the initial competition under the new rules (17 in this example), trended up or down based on the percentage change in Part B enrollment in the CBA since the first year (12-month period) of the last contract period.

We solicited comments on a proposal to slightly modify versions of the methodology discussed previously for determining the number of contracts to award for product categories that have not previously been included under the DMEPOS CBP. For product categories or CBAs that were not included in Round 2 Recompete, Round 1 2017, or Round 2021 of the DMEPOS CBP, the proposed methodology for determining the number of winning contract suppliers in the next competition under the 75th percentile option, as well as the

alternative options, are described in table FF-31. [GRAPHIC] [TIFF OMITTED] TR02DE25.058

The number of winners for the 75th percentile option would be 25 percent lower than the median option and 25 percent higher than the maximum option, which is in proportion to the percentage increase in the position in the winning array of bid amounts where the SPA would be set using the median option (50th percentile) and the percentage decrease in the position in the winning array of bid amounts where the SPA would be set using the maximum option (100th percentile). The number of winning contract suppliers for competitions following the initial competition under the new rules would be based on the number of winning contract suppliers from the initial competition under the new rules, trended up or down based on the percentage change in Part B enrollment in the CBA since the first year (12-month period) of the last contract period. For new product categories and CBAs, we use 3 percent of total utilization for the lead item rather than 5 percent as the measure of a contract supplier that made a meaningful contribution toward meeting total demand for the lead item. We believe the measure of meaningful supplier performance should be different for product categories and areas that have never been included under the CBP because there is no limit on the number of suppliers that can furnish items and services; therefore, overall utilization of the items and services is spread out over more contract suppliers. As noted previously, under the previous Round 2 Recompete and Round 1 2017 competitions, on average, only 28 percent of contract suppliers furnished at least 5 percent of the total number of items and services furnished by contract suppliers in each competition. For new product categories there is no limit on the number of suppliers furnishing items like there is under the DMEPOS CBP and therefore our claims data shows less concentration and a lower average volume of items furnished per supplier. However, data indicates that generally, there have been the same dominant, local suppliers in the competitive bidding areas providing the majority of DMEPOS, even prior to the implementation of the DMEPOS CBP.

We can illustrate how we would determine the number of contracts to award for new product categories being phased into the DMEPOS CBP using 2023 Medicare claims data. If competitions were held today for a nationwide remote item delivery (RID) CBP as proposed under section F using the 75th percentile methodology, then based on 2023 Medicare claims data for the lead items for the examples of potential future product categories in Table F-9 titled “Categories of Items Furnished from Remote Supplier Locations”, we would award the following numbers of RID CBP contracts: 7 for urological supplies; 8 for ostomy supplies; nine for class II continuous glucose monitors (CGMs); 9 for OTS upper extremity braces; 9 for OTS back braces; and 10 for OTS knee braces. By comparison, 11 contracts were awarded for the Round 2 Recompete national mail order CBP for diabetes testing supplies. Five contract suppliers furnished at least 3 percent of total contract supplier utilization (allowed services) for diabetes testing supplies. These 5 suppliers accounted for 92 percent of total contract supplier utilization (allowed services) from July 1, 2016, through December 31, 2018.

There could be situations where CMS is not able to award enough contracts to meet the target number of contracts in a competition, if for example, the target number of contracts for the competition is 10, but only 5 entities submitted a bid. In these instances, CMS plans to move forward with awarding contracts to all eligible bidding entities in the competition, as long as there are at least 2 or more eligible bidding entities to award contracts to, and we do not otherwise have data indicating that the bidding entities that would be awarded contracts would not be able to meet beneficiary demand. Once the competition is implemented, CMS will monitor for any potential access concerns, as it has done continually since 2011 (even during temporary gap periods in the DMEPOS CBP).

Finally, current regulations at 42 CFR 414.414(h) indicate that contracts are generally awarded to at least five suppliers satisfying the conditions for awarding contracts under Sec. 414.414(b) through (f). As the program is implemented in additional areas throughout the United States, we believe that five contract suppliers would be excessive for some areas and product categories. Therefore, in addition to proposing to revise the regulations to include the methodologies described previously for determining the number of contract suppliers needed for each competition, we proposed to indicate at Sec. 414.414(h)(1)(i)(C) that this number can be no lower than 2 for any competition as the statute mandates multiple contract suppliers (at least 2), per section 1847(b)(4)(B) of the Act. We solicited comments on these proposals. 3. Provisions of the Regulation

In the previous section, we discussed three options to calculate the SPAs for

items and services under the CBP (the current maximum bid methodology, the median bid methodology used in prior rounds of the CBP, and a 75th percentile methodology). Based on that discussion we solicited comments on our proposal to:

Change the methodology used for determining SPAs for lead items under the program by revising Sec. 414.416(b)(1) to replace “maximum bid” with “75th percentile of bids,” so that the SPA for the lead item in the product category would be based on the 75th percentile of bid amounts for the lead item that are equal to or below the pivotal bid for the product category. The pivotal bid is the bid amount of the last bidder selected when CMS arrays the bidders from the lowest bid to the highest bid, and beginning from the lowest bidder, selects bidders equal to the number of contracts determined in proposed paragraph (h) of Sec. 414.414.

Revise Sec. 414.416(b)(1) to indicate that in cases where there is an odd number of winning contract suppliers and the 75th percentile falls between 2 suppliers, the SPA for the lead item would be determined by going 75 percent of the way between the 2 bid amounts, rounded to the nearest cent.

Change the way the SPAs are calculated for the non-lead items in a product category in CBAs other than a nationwide or regional CBA by revising Sec. 414.416(b)(2). Specifically, the calculation would involve multiplying the lead item SPA by a relative ratio, which would be based on the 2015 fee schedule amount for the non-lead items in the applicable state divided by the 2015 fee schedule amounts for the lead item in the applicable state.

Change the methodology for calculating the number of contract suppliers sufficient to furnish items and services in a competition by revising Sec. 414.414(h). Specifically, for competitions included in the DMEPOS CBP in 2018 or 2023, the first time a competition is recompeted after 2023, the number of contract suppliers selected to furnish items and services is double the number of contract suppliers that furnished at least 5 percent of total allowed services for the lead item furnished by contract suppliers to the applicable beneficiary population during 2018 or 2023, adjusted up or down based on the percentage change in Part B enrollment in the CBA since 2018 or 2023, unless there would be less than 2 contract suppliers, in which case the number of contract suppliers will be 2. The number of suppliers awarded contracts would not be less than 50 percent of the total number of contract suppliers in 2018 or 2023 rounded up to the nearest whole number, or more than 75 percent of the total number of contract suppliers in 2018 or 2023 rounded down to the nearest whole number. After the first time a competition is recompeted after 2023, the number of contract suppliers selected to furnish items and services would be equal to the number of contract suppliers selected the first time a competition is recompeted after 2023, trended up or down based on the percentage change in Part B enrollment in the CBA since the first year (12-month period) of the most recent contract period.

For competitions not included in the DMEPOS CBP in 2018 or 2023, the first time a competition is conducted after 2023, the number of contract suppliers needed to furnish items and services would be 125 percent of the number of contract suppliers that furnished at least 3 percent of total utilization for the lead item in the product category and CBA during the most recent calendar year at the time of bidding, unless there would be less than 2 contract suppliers, in which case the number of contract suppliers will be 2.

For all subsequent recompetes for the competition, the number of contract suppliers needed to furnish items and services would be equal to the number of contracts awarded the first time a competition is held after 2023, trended up or down based on the percentage change in Part B enrollment in the CBA since the first year (12-month period) of the most recent contract period.

In previous sections we proposed using contract supplier capacity data from previous rounds of the DMEPOS CBP, as opposed to using supplier-reported capacity, to determine the number of contract suppliers needed to meet demand for items and services in a CBA. Therefore, we proposed to change the methodology for evaluating bids by revising Sec. 414.414(e). Specifically, CMS proposed to evaluate composite bids submitted for a lead item within a product category by: (1) calculating the number of contract suppliers selected to furnish the items and services in the competition based on the methodology described previously, (2) arraying the composite bids from the lowest composite bid price to the highest composite bid price, and (3) selecting the number of contract suppliers and networks that were calculated in #1 that meet basic supplier eligibility, quality standards and accreditation, and financial standards. We solicited comments on these proposals.

The following is a summary of the comments we received regarding establishing SPAs under the DMEPOS CBP and our responses.

Comment: Many commenters supported the current methodology for establishing SPAs based on maximum winning bid amounts and were opposed to significantly reducing the number of contracts awarded but provided no recommendations for changes that would keep total amounts paid to contract suppliers using maximum winning bid amounts less than total amounts that would otherwise be paid under the fee schedule to make this methodology viable in terms of generating or maintaining program savings in accordance with section 1847(b)(2)(A)(iii) of the Act. Some commenters suggested using other methodologies such as the 90th percentile of winning bid amounts. Many commenters believed use of the 75th percentile of winning bid amounts combined with the bid limits proposed at Sec. 414.412(b) and a reduction in the number of contract suppliers to achieve prices comparable to median bid amounts would result in payment amounts that are too low and are not sustainable.

Response: As discussed in the proposed rule, use of the maximum bid methodology does not reliably result in total payments to contract suppliers that are less than the total amounts that would otherwise be paid under the DMEPOS fee schedule. As discussed in the proposed rule, CMS did not award DMEPOS CBP supplier contracts for a Round 2021 competition because the SPA, under the current methodology, would have resulted in the CBP greatly exceeding the payment amounts that would have otherwise been made under the DMEPOS fee schedule (90 FR 29239). While use of the maximum bid methodology could, with more reliability, result in total payments to contract suppliers that are less than the total amounts that would otherwise be paid under the DMEPOS fee schedule if CMS reduced the number of awarded contracts, we do not believe this is an appropriate solution because it would still be susceptible to outlier pricing. For example, one small, inefficient supplier that has no purchasing power could have the maximum winning bid and this supplier's bid amount could be much higher than bids from other, larger, more efficient suppliers with greater purchasing power. Using the maximum winning bid in this case would result in an SPA that is not representative of the bids from the suppliers as a whole. We believe that use of the 90th percentile of winning bids as the methodology for establishing SPAs would still include a high risk of

outlier pricing and would also not be representative of the bids from the suppliers as a whole. Based on our research and the models run by RTI, we found that use of the 75th percentile of winning bids is less susceptible to outlier pricing, In addition, use of the 75th percentile of winning bids would better represent the bids from the suppliers as a whole, and would result in a majority of winning suppliers being paid more than their bid amounts. We do not believe prices comparable to updated median bid amounts from past rounds of competition would result in payment amounts that are too low and are not sustainable. The most recent median bid-based SPAs for DME and enteral nutrition used to make adjustments to the fee schedule amounts for these items in all areas including former CBAs have been in place since 2019 and there have been no access problems or negative health outcomes associated with the items and services furnished and paid for using these rates during these past seven years, including the years of the Covid-19 public health emergency.

Comment: A commenter supported the goal of creating a payment methodology that avoids outlier pricing, promotes sustainable supplier participation, and preserves beneficiary access. This commenter encouraged CMS to conduct impact analysis across a range of product categories, commit to ongoing analyses, and engage in stakeholder engagement. A few commenters stated that CMS did not provide sufficient rationale for setting the SPA at the 75th percentile of winning bids. A commenter was concerned that reliance on this untested pricing approach created significant risk for suppliers and beneficiaries. Several commenters urged CMS to increase transparency and allow for stakeholder and patient input before implementing changes to the DMEPOS CBP. A commenter requested comprehensive and transparent evaluation of patient outcomes, focusing on consequences for vulnerable populations.

Response: We thank the commenters for their comments. The DMEPOS CBP is a statutorily mandated program that we believe must be restored as soon as possible. We are confident that the proposed provisions will result in successful competitions under the DMEPOS CBP. We do not agree that sufficient rationale for use of the 75th percentile of winning bids has not been provided. As discussed in the proposed rule, we proposed setting the SPA at the 75th percentile of winning bids in part based on a careful evaluation with the Research Triangle Institute (90 FR 29243). We plan to continue closely monitoring health outcomes for beneficiaries under the DMEPOS CBP, as we have done for previous rounds of the DMEPOS CBP. We will continue to be transparent in implementing the DMEPOS CBP and welcome stakeholder input on all aspects of the DMEPOS CBP during all stages of implementation of the program.

Comment: Several commenters recommended paying each supplier based on their individual bid amount.

Response: The statute mandates we determine a single payment amount for each item or service in each competitive acquisition area. The statute therefore does not provide authority for paying each supplier based on their individual bid amount.

After consideration of the public comments, we are finalizing the changes to Sec. 414.416(b) as proposed, with a technical change in the proposed regulation text for Sec. 414.416(b)(1). The proposed rule's regulation text for Sec. 414.416(b)(1) incorrectly stated “(1) Notwithstanding paragraphs (b)(2) through (4) of this section, s single payment. . .” and should instead state “(1) Notwithstanding paragraphs (b)(2) through (3) of this section, a single payment. . .”.

The following is a summary of the comments we received regarding determining the number of contract suppliers under the DMEPOS CBP under proposed Sec. 414.414(h) and our responses.

Comment: Several commenters opposed the proposed method for determining the number of contract suppliers needed to meet demand for items and services in a CBA. A commenter stated that placing a limit on the number of contracts awarded without providing any basis as to how the limited number of contracts would meet demand for items and services in a competition or how CMS would address situations where contract suppliers are not able to meet demand for items and services in a competition is arbitrary and capricious. These commenters were concerned that CMS did not address concerns about contract suppliers being able to meet projected demand for items and services in a competition, or how CMS would deal with situations where contract suppliers fail to meet demand for items and services after implementation of contracts. A commenter stated that CMS must ensure that contracted suppliers have clearly demonstrated the capacity to supply needed volumes.

Response: We do not agree that the proposed methodology is arbitrary and capricious. The proposed methodology for previously bid product categories and areas relies on actual contract supplier capacity from previous rounds of competition to inform the program on the number of contract suppliers needed to meet demand for items and services in the same areas for the same product categories in subsequent rounds of competition. The number of contract suppliers from previous rounds of competition was greater than the number needed to meet demand by design. Setting payment based on the median of winning bids in previous rounds created savings while allowing for a surplus number of contract suppliers and more options for beneficiaries and referral agents. We believe that approximately half of the number of contracts awarded in past competitions were not needed to meet actual demand for items and services. We believe that a floor on the number of contract suppliers equal to 50 percent of the number from the previous round of competition provides an adequate safeguard for assuring enough contract suppliers to meet demand for items and services. Even if the proposed methodology for determining the number of contract suppliers needed based on past supplier performance and a decrease in beneficiary population in the CBA suggests less than 50 percent of the number of contract suppliers from the previous round of competition is needed to meet demand for items and services in a competition, we believe it is important to award contracts to no less than half the number of contracts awarded in the previous competition to better ensure access to items and services. Basing the number of contract suppliers on the number needed to meet demand in previous rounds, namely, the number of contract suppliers furnishing 5 percent or more of total contract supplier capacity, is directly linked to supplier capacity for meeting demand for the specific items in an area and is not arbitrary. This number is doubled under the proposed methodology to provide another safeguard for assuring enough contract suppliers to meet demand for items and services. Doubling the number of contract suppliers needed to meet demand for items and services in the previous competition round means that winning suppliers in the next competition for items previously bid, on average, only need to be able to produce half the average capacity of the suppliers that met demand for items and services in the previous competition to meet demand for items and services in the new competition. We believe this provides sufficient assurance that the

winning suppliers will be up to the task of furnishing the number of items and services needed. We believe the likelihood of the scenario occurring where winning suppliers will not be able to meet projected demand for items and services is low. We recognize that some commenters may be concerned about suppliers with demonstrated capacity of supplying the required items and services to beneficiaries being excluded from a competition. We believe such a scenario would be unlikely. In accordance with 42 CFR 414.414(b)(4), before awarding contracts, each bid is screened and evaluated to ensure that it is bona fide so that CMS can verify that the supplier can provide the product to the beneficiary for the bid amount, and those that fail are excluded from the competition (83 FR 57018). Suppliers must also meet various other financial standards. Based on our review of prior bid data, we believe the suppliers furnishing larger volumes of items and services under a product category in an area have a much greater chance to submit lower bid amounts that are bona fide due to their current purchasing power than suppliers furnishing smaller volumes of items and services under the same product category and area. In the event that CMS determines that additional contract suppliers are needed to meet beneficiary demand for items under a competitive bidding program, we remind commentors that under 42 CFR 414.414(i), CMS may award contracts to additional suppliers. The additional contract offers are made using the existing SPAs. For new product categories, the threshold for suppliers that provide a meaningful contribution towards meeting demand for items in an area is 3 percent rather than 5 percent to account for the greater pool of suppliers competing for business in a non- competitive bidding environment. Using national claims for the monthly supplies for a class II non-adjunctive CGM (HCPCS Level II code A4239) for a hypothetical nationwide remote item delivery CBP, eight suppliers furnished at least 3 percent of the total national allowed services for this code in 2024. Under the proposed methodology, this would result in an initial winning range of ten contract suppliers. The top ten suppliers for class II claims for code A4239 accounted for 67 percent of total national class II claims for code A4239. It is likely that many of these top suppliers could provide competitive bids and be strong candidates for contracts because of their ability to receive discounted rates for the volume of products they are already purchasing.

Comment: Some commenters were concerned about the change in the minimum number of contract suppliers from five to two and access to items and services with such a low number of contract suppliers. A commenter questioned how it is possible to meet the 30 percent small supplier target required by the statute with only two contract suppliers. A commenter recommended that CMS not include small suppliers in meeting the minimum number of winning contractors and that the addition of small suppliers should be beyond the two contract winners' threshold.

Response: The 30 percent small supplier target is not a specific statutory requirement. It is one of the rules established to address the mandate under section 1847(b)(6)(D) of the Act to take appropriate steps when developing procedures relating to bids and the awarding of contracts under the DMEPOS CBP to ensure that small suppliers of items and services have an opportunity to be considered for participation in the DMEPOS CBP. If there are only two winning suppliers for a competition and one of them is a small supplier, then the 30 percent small supplier target is met. If neither supplier is small, then the steps under current regulations at 42 CFR 414.414(g) would be followed and potentially more contracts offered in an attempt to meet the 30 percent small supplier target.

Section 1847(b)(4)(B) of the Act mandates that contracts must be awarded to multiple entities submitting bids in each area for an item or service, and mathematically, this would be two or more if the proposed methodology for determining the number of contract suppliers needed to meet demand for items and services in a competition produces a number this low. We believe that if the program is phased in for CBAs for lower volume product categories where two contract suppliers are all that is needed to meet demand for items and services in a competition, then awarding contracts to five suppliers under such a competition would be excessive.

After consideration of the public comments, we are finalizing the proposed changes with a few corrections to technical errors in the regulation text. First, the proposed section 414.414(h)(1) indicates that “. . . for competitions included in the DMEPOS CBP in 2018 or 2023, the first time a competition is recompeted after 2023, the number of contract suppliers selected to furnish items and services in the competition is no more than double the number of contract suppliers that furnished at least 5 percent of total allowed services for the lead item furnished by contract suppliers to the applicable beneficiary population during 2018 or 2023, adjusted up or down based on the percentage change in Part B enrollment in the CBA since 2018 or 2023, and rounded to the nearest whole number.” We are removing the words “no more than” prior to the word “double” since the proposed methodology as discussed in the preamble of the proposed rule is to use double the number in all cases during this step of the methodology for determining a sufficient number of contract suppliers (90 FR 29243). Second, the proposed Sec. 414.414 (h)(1)(i)(B) states “More than 75 percent of the total number of contract suppliers that furnished the lead in 2018 or 2023 rounded down to the nearest whole number; and”. We are adding the word “Not” prior to the word “more” since the proposed methodology as discussed in the preamble of the proposed rule is to limit the number of contract suppliers during this step of the methodology to no more than 75 percent of the total number of contract suppliers that furnished the lead item in 2018 or 2023 rounded down to the nearest whole number (90 FR 29244). In addition, we are adding the word “item” following the word “lead” as the defined term is “lead item”. Third, the proposed Sec. 414.414(h)(3)(i) stated that “for competitions not included in the DMEPOS CBP in 2018 or 2023, the first time a competition is conducted after 2023, the number of contract suppliers selected is at least 2, but no more than 125 percent of the number of suppliers that furnished at least 3 percent of total utilization for the lead item in the product category and CBA during the most recent calendar year, and rounded to the nearest whole number.” We are removing the words “at least 2, but no more than” prior to the phrase “125 percent” and at the end adding the phrase “unless there would be less than 2 contract suppliers, in which case the number of contract suppliers will be 2” since the proposed methodology, as discussed in the preamble of the proposed rule, is to use 125 percent of the number in all cases during this step of the methodology for determining a sufficient number of contract suppliers, unless there would be less than 2 contract suppliers, in which case the number of contract suppliers will be 2 (90 FR 29247).

CMS recognizes the increased challenge future price increases may

present for a supplier when formulating its bids. We solicited comments on our proposal to apply an annual update factor to SPAs as we believe it would give bidding entities more certainty and confidence in formulating their bids based on their costs at the time of bidding and would help ensure beneficiary access in the event that costs do increase significantly during a contract performance period. 1. Background

The fee schedule amounts for DME, orthotics, and enteral nutrition are updated by annual update factors specified in sections 1834(a)(14), 1834(h)(4)(A), and 1842(s)(1)(B) of the Act, respectively. The payment amounts for lymphedema compression treatment items are updated on an annual basis in accordance with regulations at 42 CFR 414.1650(c). In general, the annual update factors are established based on the percentage change in the Consumer Price Index for all Urban Consumers (CPI-U) calculated by the Bureau of Labor Statistics for the 12-month period ending with June of the previous year, although for certain years, the statute has mandated a “freeze” or zero percent update, or other percentage below the percentage change in the CPI-U, for DME, orthotics, and enteral nutrition. In addition, for 2011 and subsequent years, the update factors for DME, orthotics, and enteral nutrition are reduced by a productivity adjustment, which in some years can result in a negative percentage change or reduction in the fee schedule amounts.

In the 2006 proposed rule (71 FR 25663), we proposed to apply an annual inflation update to the SPAs established for a CBP (proposed 42 CFR 414.408(b)). Specifically, beginning with the second year of a contract entered into under a CBP, we proposed to update the SPAs by the percentage increase in the CPI-U for the 12-month period ending with June of the preceding calendar year. We stated that using the CPI- U index would be consistent with Medicare using this index to update the DME fee schedule and would obviate the need for the bidding entity to consider inflation in the cost of business when submitting its bids for furnishing competitively bid items under a multiyear contract. We did not finalize the proposal to apply an annual inflation update to SPAs. In the 2007 final rule (72 FR 18005), we stated that we believed it is more appropriate for bidding entities to address the possible effects of inflation or price increases when they formulate their bids because automatic payment adjustments to competitively bid items may result in higher payment amounts than would occur under the DMEPOS fee schedule payment amounts if these amounts are subject to legislative freezes or payment reductions. 2. Current Issues

As a result of the COVID-19 PHE, supply chain disruptions, and recent years' higher than normal inflation, we believe it would improve the CBP to add an annual inflation update to the SPAs as long as the updates are the same as the updates to the DMEPOS fee schedule amounts, which would prevent the SPAs from becoming higher than the fee schedule amounts during a contract period of 2 or 3 years in length. CMS has recognized the increased challenge future price increases may present for a supplier when formulating its bids. We believe that adding an annual update factor would address unforeseen changes and inflation, as described previously, giving bidding entities more certainty and confidence in formulating their bids based on their costs at the time of bidding. We believe this would reduce burden for bidding entities since they would no longer need to factor standard inflationary cost increases into their bid calculation. We also believe it would help to better ensure access to items and services under the program in the event that costs do increase significantly during the contract period. 3. Provisions of the Regulation

We proposed to amend 42 CFR 414.408 by revising paragraph (b) and its title to adjust the SPAs for the second and third years of a DMEPOS CBP supplier contract performance period by an inflation update equal to the percentage change in the CPI-U for the 12-month period ending 6 months prior to the beginning of the respective second or third year of the DMEPOS CBP supplier contract performance period. We proposed that in no case could the updated SPA for an item in the applicable CBA be greater than the unadjusted fee schedule amount for the item in such area or 110 percent of the adjusted fee schedule amount for the item in such area. We solicited comments on this proposal.

The following is a summary of the comments we received regarding applying an annual update factor to SPAs and our response to the comments.

Comment: Many commenters supported the proposal to apply an annual update factor to SPAs.

Response: We thank commenters for their support of the proposed change to apply an annual update factor to SPAs.

After consideration of the public comments, we are finalizing the proposed changes to Sec. 414.408(b).