Report 2002-109 Summary - December 2002

Department of Health Services


It Needs to Better Control the Pricing of Durable Medical Equipment and Medical Supplies and More Carefully Consider Its Plans to Reduce Expenditures on These Items


Our review of the Department of Health Services' (department) purchasing and contracting practices for durable medical equipment (DME) and medical supplies under the California Medical Assistance Program (Medi-Cal) revealed that:


Medicaid, a federal program funded and administered in partnership with the various states, provides health insurance to low-income families and to the aged, blind, and disabled. The Department of Health Services (department) administers California's Medicaid program, the California Medical Assistance Program (Medi-Cal), which provides medical assistance to 6.02 million beneficiaries in California. Medi-Cal's overall expenditures have risen sharply, 56 percent, since fiscal year 1993-94. While the department's expenditures for medical supplies have decreased, its expenditures for durable medical equipment (DME) and hearing aids have increased significantly from 1998 to 2001. Only some of this increase can be attributed to the increased number of beneficiaries utilizing the program's services. These increases, accompanied by the likely reduction in one of the department's two main funding sources, the federal medical assistance percentage, of approximately $222 million for fiscal year 2002-03, make it imperative that the department control costs to the program. Because the State's General Fund must pick up the difference between Medi-Cal's total direct program costs and the percentage the federal government reimburses Medi-Cal, savings on DME and medical supplies will translate into savings that the General Fund can use for other programs in a time of increasing budget constraints.

To ensure that Medi-Cal pays fair and reasonable prices for DME, medical supply, and hearing aid purchases, the department uses cost-control features such as requiring prior authorization on DME items over $100, setting maximum payment amounts for products, and conducting audits of providers of Medi-Cal services and products. However, expenditures for items with no established maximum payment amounts (unlisted items), have increased significantly, and they have driven much of the increase in DME expenditures. Unlisted wheelchairs have been a major contributor. For example, the department's policies require wheelchair providers to document why they are billing under a code that does not specify a maximum amount that can be paid (an unlisted code) instead of listed codes with maximum allowable product costs (MAPCs). The policy also requires providers to document that the requested wheelchair was the lowest-cost item among comparable wheelchairs that will meet the patient's needs. However, the department has not enforced these policies. In fiscal year 2001-02, the department paid an average of $3,121 for wheelchairs with unlisted codes compared to $622 for wheelchairs with listed codes.

Also, the department has limited the effectiveness of establishing maximum prices because it has not updated the prices for many of its medical supplies for more than 15 years, even though technological improvements in manufacturing these items may have caused the market prices of some of these items to go down. Both in updating prices and in authorizing purchases of unlisted items, the department lacks price comparison data to determine reasonable costs for items and price. It also lacks item comparison tables to determine which items with varying catalog prices are functionally equivalent. Consequently, staff in the department's field offices who review authorization requests for unlisted items cannot ensure that they are authorizing the lowest-cost item that meets the patient's medical needs.

Another barrier to ensuring fair costs, the department's billing codes, developed some years ago, do not give enough detailed information on products that providers are billing for. Thus, the codes fail to specify exactly which items Medi-Cal is covering. Because of this lack of product specificity, the department can neither ensure that beneficiaries are getting the quality they need nor can it control expenditures. In fiscal year 2001-02, the department paid providers $9.9 million for at least 14 types of waterproof sheets from various manufacturers. However, the same billing code was used for a waterproof sheet that costs 42 cents as one that costs $55, so the department risks paying the higher price but receiving the cheaper product.

To control rising costs, the department plans to implement two cost-saving measures. First, the department hopes to convert its billing codes to universal product numbers (UPNs), barcode numbers typically used for inventory purposes, initially only for its medical supplies. The department believes that UPNs may give it more relevant and current information on price and product descriptions, putting the department in a more favorable position for controlling or lowering prices through negotiations or competitive bids with providers and manufacturers. However, while the department is moving cautiously and piloting a limited number of medical supplies with these codes, it will need to thoroughly address the limitations of UPNs and the costs of implementation if it hopes to successfully use them to pay for all medical supply claims.

Second, the department plans to negotiate contracts with manufacturers of DME and medical supplies in fiscal year 2002-03. Among other savings, the department hopes to save $9 million by negotiating lower prices with manufacturers for blood glucose test strips. However, the department has not focused on clear objectives and appropriate staffing needs, has not contacted providers and manufacturers to ascertain their willingness to participate, and has not addressed the problem of how to determine reasonable prices.

Finally, while the department is not planning to engage in competitive bidding, we reviewed Medicare and other states' efforts at competitive bidding for DME or medical supply items. Although Medicare has had success with its competitive bidding pilot programs in two states, three of four state Medicaid agencies we contacted did not report success with competitive bidding, and the only state that had success with competitive bidding used it to acquire oxygen supplies for fewer than 5,000 beneficiaries.


To ensure that it receives a fair and reasonable price for DME, medical supplies, and hearing aids, the department should:

In order to realize savings for Medi-Cal, the department should continue to develop and use a UPN structure and negotiated contracts for its DME and medical supply items. However, the department should ensure that it adequately plans and considers possible limitations of its efforts. Further, the department should bring manufacturers and providers into its planning sessions as soon as possible.


The department concurs with our findings and recommendations. It believes the report provides additional guidance to consider as the department implements corrections and cost controls to its policies and procedures related to purchasing DME, medical supplies, and hearing aids. In addition, the department stated it is in the process of implementing negotiated contracting for DME and medical supplies in order to improve its cost controls.