THEORETICALLY, INHERENT REASONABLENESS could work in favor of the home medical equipment provider. Medicare reimbursement levels could be found to be "grossly deficient" and in need of an increase or two.

Of course, the Internal Revenue Service could also audit you, find you have paid too much tax and issue a juicy refund. Or theoretically, you could hit the lotto, and none of this would matter to you.

Reality says otherwise. Reality says there is only one direction Medicare reimbursement will go through inherent reasonableness. And it's not up.

Reality says the Health Care Financing Administration will find many HME fees to be "grossly excessive" and slash away as it is attempting to do with six products targeted in an Aug. 13 proposed notice.

"The General Accounting Office hasn't even finished investigating HCFA's last proposal to cut home health care rates, and here they come along again with yet another one," says Pam Bailey, president of the Washington-based Health Industry Manufacturers Association. "In a word, it's reckless. It suggests that HCFA is more interested in cutting spending than in doing things right."

Interpreting HCFA Authority THE INHERENT REASONABLENESS authority originates in the Social Security Act of 1986. Through this act, the secretary of the Department of Health and Human Services has the power to make "inherent reasonableness" adjustments in Part B fee schedule amounts, implemented through HCFA.

The authority was expanded through HCFA's interpretation of the Balanced Budget Act of 1997, which directs the secretary to create regulations that can determine whether reimbursement is "grossly excessive" or "grossly deficient" and prescribe factors to consider in determining an amount that is "realistic and equitable." The goal was to streamline the process of assessing and adjusting reimbursement levels.

However, HCFA's interpretation of the BBA is just that: It's interpretation. And some experts in the home care industry believe HCFA is far exceeding the powers afforded to it in the BBA by Congress. This is one of the major bones of contention the HME industry has with the BBA.

"From our view, IR has the potential to destabilize the entire industry especially if, once the industry adjusts to one change,HCFA follows with another one," says Asela Cuervo, vice president of legal and government affairs for the National Association for Medical Equipment Services, Alexandria, Va. "If this is how they plan to implement IR, it will wreak havoc on the industry."

HCFA's future plans to adjust the reimbursements levels of different products are unknown, but its current track record in attempting to use the IR authority is already raising industry concerns on several fronts.

"HCFA arrives at the latest inherent reasonableness cuts through simplistic calculations-they don't even attempt to do a market survey this time," notes Bailey. "HCFA's calculations, in reality, are little more than guesses. Yet such cuts can have devastating effects on patients and innovation. Therefore, we believe HCFA should withdraw this latest proposal until it can prove without a question that it has its own house in order and that the flaws that marked the last proposal are not repeated."

The Rules According to HCFA WHAT POWER HCFA has to calculate and impose IR cuts is a matter of keen debate.

An interim final rule issued Jan. 7, 1998, permitted HCFA and (for the first time) its four Durable Medical Equipment Regional Carriers to make inherent reasonableness adjustments without being required to follow the procedural safeguards set forth in the Social Security Act. Those safeguards provide the public with notice and the opportunity to comment, ensuring that regulatory decisions are informed by the views of any interested parties.

In presenting its interim final rule without demonstrating "good cause," HCFA stated that it didn't consider it necessary to publish the regulation as a proposed rule. It believes the rule "is not significantly changing the existing methodology for application of the inherent reasonableness process" and that a delay in implementation would impede further savings to Medicare.

With the new expedited procedure, however, many experts in the home care industry fear that the process will change significantly-and for the worse. They fear that HCFA's-and its DMERCs'-ability to make well-informed decisions will be compromised if they choose not to seek outside input. The DMERCs, for example, don't have to issue formal notices of change and publish their intent in the Federal Register, as previously required, but can simply announce the change in a DMERC bulletin.

"Now, when you're talking about a DMERC bulletin, you're talking about a process that's not nearly as rigorous as it previously was," says Cuervo, adding that this means the DMERCs could make IR decisions with potentially little or no regard for the ramifications they may have on the HME industry or Medicare beneficiaries.

Why HCFA and the DMERCs would want to do this is unclear. Industry leaders were reluctant to say outright that they thought IR decisions by HCFA or the DMERCs are self-serving. "But to some extent they would have to be or the decisions would be irrational," notes one industry association official.

Playing by Its Own Rules THE IR DEBATE also turns on the issue of just how much reimbursement levels can be cut.

HCFA's and (again for the first time) its DMERCs' expanded authority includes the ability to make IR adjustments of up to 15 percent per year. But HCFA has indicated it will just spread increases over several years if it wants cuts of more than 15 percent.

And to hear industry associations tell it, this again would skirt procedural safeguards intended by Congress to prevent unwarranted adjustments.

To illustrate, in September 1998, in their second attempt to apply their new IR authority-the first having been dropped because cuts exceeded the 15 percent allowed-the DMERCs proposed reductions between 3 and 32 percent for six items: blood glucose strips, Category I enteral formulas, albuterol, lancets, certain catheters and eyeglass frames. For the items that had proposed cuts of more than 15 percent-say 32 percent-the cuts would be spread out over a three-year period.

As might be imagined, the DMERCs' actions were not well received by the industry. "They need to follow the rules," says Cuervo. "They need to use the proce dures that Congress has mandated instead of pretending that it's not really a cut of more than 15 percent simply by splitting it up over time."

But the objections to the streamlined IR plan do not stop at the size of the allowable cuts. Many protest HCFA's interim final rule because it does not require the DMERCs to provide affected providers with information or data that led to their determination to make a cut. They do not have to explain why an existing payment amount is not inherently reasonable-nor why a proposed payment amount is.

Flawed From The Word Go THE HEALTH INDUSTRY Distributors Association calls this expansion of IR authority "an unprecedented transfer of power from Congress to an administrative agency." Like HIMA, it also accuses HCFA of using invalid statistics and non-representative data in the six Part B covered items listed in the September 1998 Supplier Bulletin, and therefore, failing to reflect the cost of doing business with Medicare.

NAMES agrees, charging that HCFA and the DMERCs are misinterpreting the extent of their authority under the streamlined IR process. "Industry groups have studied their methodology, and it is flawed," says Cuervo. "The latest indication I hear is that providers cannot afford to provide equipment and services at the prices HCFA has announced. When you factor in delivery and administration, it's just not realistic." NAMES also asserts that the DMERCs did not establish that current fees were grossly excessive and challenged HCFA's sampling method as flawed for including retail prices and excluding administrative expenses.

The DMERCs used Wal-Mart as a source to gather their price data, reasoning that if the price for items at Wal-Mart is below what is currently paid by Medicare, then there needs to be a reimbursement cut. However, there are multiple problems in using this logic, say industry officials.

First, the methodology doesn't take into account the subcategories of items. The DMERCs are trying to slap a one-price-fits-all tag on items, which is fine if there's only one item in each category. But what about products such as walkers? One patient simply may need a basic unit, while another may need one with a seat and hand brakes, and the price differential between the two products is legitimate, industry advocates say. What's more, they add, the method is inadequate because many Medicare items aren't even available at Wal-Mart or other mainstream retail stores.

Second, the home health industry claims that the sampling of prices was not random. According to Cuervo, prices in Los Angeles and New York City weren't taken into account. Rather, almost all the pricing information was taken from rural locations, which skews the data downward and falsely indicates the need for a cut.

Service is Priceless...and Incomparable POSSIBLY MOST IMPORTANT of the flaws associated with the current IR methodology is the failure to factor in, or the inability to put a price on, the service aspect the industry provides to patients. Patients need to be sure they get the correct items and know how to use them. As HME professionals are quick to point out, Wal-Mart cannot provide this type of individualized service.

"It's like comparing apples to walnuts," Cuervo says. "The service levels provided in the industry have to start to be recognized. I think when you do that there is less justification for these reductions. Until then, there can be no comparisons."

As the IR controversy continued to rage over the summer, HCFA reverted to the traditional IR notice method to announce its intentions to change fees for five HME items and one prosthetic device. The items are these: folding walker, adjustable; folding walker, wheeled; commode chair, stationary; transcutaneous electrical nerve stimulator, two lead; TENS, four lead; and vacuum erection system. HCFA would cut fees anywhere from 22 to 57 percent, again at no more than 15 percent a year.

HCFA called for new fees because, it said, the old ones were grossly excessive relative to the amounts paid for these items by the Department of Vet erans Affairs. But industry officials not only question how HCFA collected its data-by making phone calls to random VA hospitals-but also question the validity of using the VA as a source to collect price data.

"HCFA's not looking at the appropriate market values, and it's using a ridiculously unscientific way to conduct research," says Cara Bachenheimer, vice president of membership services for the Health Industry Distributors Association, Alexandria, Va.

Called to the Mat INDUSTRY PROTEST has had some effect on the implementation of the IR authority. In March of 1999, the DMERCs' proposed cuts were officially delayed by HCFA pending the release of a General Accounting Office study requested by Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Subcommittee on Health.

In suggesting that HCFA has tried to overstep its IR authority, Thomas has expressed concern on four points.

First, he inquired about the possible impact the change would have on patient access to services and on the role of the DMERCs. Second, Thomas questioned the legality of HCFA's delegating authority to the DMERCs to implement IR. Third, he questioned the use of retail prices to determine the reasonableness of HME prices and wondered whether HCFA was even comparing the same products. Fourth, he noted that an interim final rule can undermine due process procedures.

Meanwhile, the Small Business Administration has also weighed in, taking exception to proposed IR changes with a letter to HCFA administrator Nancy-Ann Min DeParle from Jere Glover, the SBA's chief counsel for advocacy. In part, the letter reads: "HCFA gets Congress to cede increased authority to the agency in the name of Medicare savings and elimination of fraud and abuse; HCFA expands or maximizes its new authority in a direct final or interim final rule; HCFA waives the proposed rule and the 30-day implementation period. In so doing, HCFA removes itself from the requirements of the Regulatory Flexibility Act [designed to help agencies identify and reduce unnecessary burden on small entities]."

Then came the strongly worded finale.

"HCFA seems to have found the perfect formula for bypassing every significant analytical and procedural requirement designed to ensure administrative due process, public input and agency accountability."

In the face of all this opposition, HCFA has blinked.

Proceeding With Caution WHEN SHE DELAYED the IR cuts pending the GAO report, Min DeParle wrote to Thomas that she shared "some of the concerns" raised by the industry.

This admission and the delay have not satisfied the home care industry. "The way HCFA interpreted the authority granted by the BBA, they're still playing games with the process," Cuervo says. "From reading the notice, it's not clear that HCFA took all of the required steps. We think there are very egregious shortcomings."

"The BBA gives HCFA unbridled authority without having to go through any sort of rational process," adds Bachenheimer. "HCFA's IR authority is the single most frightening authority it has now, and we can't allow it to use this authority in such a haphazard manner." HC

Language in the BBA may allow bureaucratic HCFA and its DMERCs the expanded IR authority to change reimbursement rates drastically and in an expedited fashion without adequate HME industry input.

Repeal of relevant

BBA provisions?

GAO investigative report on HCFA's interpretation of its IR authority?

Industry and individual lobbying efforts?

The support of Rep. Bill Thomas, R-Calif., chair of the House Ways and Means

Committee's Subcommittee on Health?

IR reimbursement cuts based on pricing from the Department of Veterans Affairs, Wal-Mart, and other inappropriate or incomplete data sources may put providers in the red because it does not account for the full-service component of an HME business operation.

HCFA wants to extend to the DMERCs its IR authority to cut Medicare reimbursements.

The DMERCs are currently trying to reduce payment by as much as 32 percent on six HME items.

HCFA is currently trying to reduce payment by as much as 57 percent-spread out over several years-on six additional HME items.