CMS is responsible for the accurate and appropriate calculation and implementation of durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) prices.

Note: The beneficiary's permanent address according to the Social Security Administration (SSA), rather than the location of the DMEPOS supplier, will determine the amount allowed by Medicare for a particular service.

There are three DMEPOS payment methodologies:

  • Fee Schedules - applies to the allowed amount for inexpensive or other routinely purchased (IRP) items, those items that require frequent and substantial servicing, other prosthetic and orthotic devices, capped rental items, oxygen and oxygen supplies, and parenteral and enteral nutrition (PEN). Fee schedule amounts are updated in January and July of each year.
    Note: Fee schedules can change as the result of CMS revisions and/or through the application of inherent reasonableness, which is a review to determine if the existing prices are appropriate. The factors used to determine inherent reasonableness include, but are not limited to, price markup, and differences in charges, costs, and utilization.
  • Reasonable charge - applies to the allowed amount for certain dialysis equipment and supplies. Reasonable charge amounts are updated annually.
  • Drug Pricing - applies to the allowed amount for drugs billable to the DME MAC. Most fees determined under drug pricing are subject to quarterly updates.

Fee Schedules

Most payments of DME are based on a fee schedule. A standard fee is established for each DMEPOS item by state. Payment is calculated using either the fee schedule amount or the actual charge submitted on the claim, whichever is lower. The fee schedule allowances include the application of national floors and ceilings.

The DME fee schedules include items of DME, as well as supplies needed to use the DME. These are divided into the following categories:

  • Inexpensive and Routinely Purchased (IRP)
  • Items requiring frequent and substantial servicing
  • Customized items
  • Other prosthetic and orthotic devices
  • Capped rental items
  • Oxygen and oxygen equipment
  • Surgical dressings
  • Parenteral and Enteral Nutrition (PEN)
  • Therapeutic shoes and inserts

Gap Filling

The fee schedule for items for which charge data is not available is calculated based on:

  • Fee schedule amounts for comparable equipment
  • Fee schedule amounts of other DME MACs
  • Supplier price lists
  • Manufacturers wholesale price

Where supplier price lists are used, efforts are made to obtain prices in effect during the base year (1986-1987). Mail order catalogs are often used as sources of price information. A deflation factor is applied if the price information is from a period other than the base period. This is done in order to approximate the base year price for gap filling purposes.

Reasonable Charges

The manner in which reasonable charge allowances by Medicare are determined is stipulated by Medicare law and not left to the discretion of the DME MAC. Medicare law specifically states that the amount allowed by Medicare must be the lowest of:

  • The actual charge;
  • The supplier's customary charge or the 50th percentile of arrayed and weighted customary charges in the absence of a customary charge for the specific service rendered;
  • The prevailing charge; or
  • The Inflation-Indexed Charge (IIC).

Data regarding suppliers' fees is obtained by compiling information from claims that have been submitted in the preceding year. Records of all charges are kept on each claim processed during a calendar year. This information identifies the supplier, the type of service, the area in which the service was rendered, and the charge for that service. The data will be compiled using beneficiaries' state of residency, rather than the area from which the service was rendered. Beginning January of each year, the data accumulated from July 1st of the second preceding year through June 30th of the preceding year is arrayed to develop the current year's Annual Pricing Update of Medicare allowances. For example, data accumulated from July 1, 2011, to June 30, 2012, is arrayed to develop the Annual Pricing Update of Medicare allowances for 2013 for reasonable charge Healthcare Common Procedure Coding System (HCPCS) codes. The annual update reflects the changes in the fees most frequently charged by suppliers for a particular service, within a specific locality, during the 12-month period ending June 30th of the previous year. This time frame is referred to as the base year. The customary and reasonable charge effective for the new annual pricing update does not necessarily reflect the fees currently being charged.

Customary Charges

The customary charge is the charge that best represents the most frequently charged amount by a supplier for a particular service. In order to determine the customary charges for each individual supplier, the actual charges the supplier has submitted for services rendered during the year ending June 30th immediately preceding the start of the Annual Pricing Update (January of each year) for a given service, are arrayed in ascending order and the median charge is calculated. If the supplier does not have at least three charges for a procedure code, then the 50th percentile of all other suppliers' customary charges weighted by frequency will be used as the customary charge.

The lowest actual charge, which is high enough to include the median of the arrayed charge data, is then selected as the suppliers' customary charge for the service. For example, if ABC supplier charges $12 for a particular service 75 times during a calendar year and $15 twelve times for the same service, $12 would best represent the actual charge made by that supplier.

The following is an example of how charges for a supplier would be arrayed in order to determine the customary charge.

Charge Frequency Billed Cumulative Frequency
$10 20 times 20
$12 40 times 60
$14 35 times 95
$15 5 times 100

Based on the cumulative frequency of 100 submitted charges, the median charge would be the 50th charge. In this example, the median charge submitted is $12.50. There must be at least three billed charges for the same procedure by the same supplier to establish a customary for that procedure within the base year.

Prevailing Charges

The prevailing charge is the 75th percentile of all suppliers' customary charges, within the beneficiary state for a specific service or procedure, weighted by frequency. Prevailing charges are calculated in much the same way as customary charges. The customary charge for each procedure is arrayed in ascending order and weighted by how often the supplier rendered the services as reflected by the data used to calculate the customary charge. The prevailing charge is established at the 75th percentile of these cumulative services. There must be at least four customary charges for a given procedure to establish a prevailing charge for that service.
The proper procedure for establishing prevailing charges is illustrated in the following example:

Number of Supplies Rendered by Suppliers

Customary Charge With Customary Charges as Indicated Cumulative Services
TOTAL 100  
$5 27 27
$6 30 57
$7 25 82
$8 18 100

In this example, 75 percent of the total of 100 supplies falls at the 75th supply. The 75th supply falls within the cumulative frequency of 82 submitted supplies; therefore $7 becomes the prevailing charge.

Inflation-Indexed Charge for Non-Physician Services

The Inflation-Indexed Charge (IIC) is the lowest of the reasonable charges for the previous Annual Pricing Update year updated by an inflation index factor. (The inflation index factor is based on the change in the Consumer Price Index [CPI]). The reasonable charges include the prevailing charge, customary charge, lowest charge level (if applicable), and the IIC. The IIC calculation does not take into account any reasonable charge limitation resulting from the application of comparability, inherent reasonableness, or the 50th percentile in the absence of a customary charge.

Lowest Charge Level

The lowest charge level (LCL) is calculated the same way the prevailing charge is, except the LCL is based on the data derived from claims processed during the preceding months of July through September prior to the annual fee screen pricing update. LCL calculations must be derived based on at least 20 charges for an item and no less than four suppliers within the locality.
Note: The only charges subject to the LCL limitations are PEN services.

Drug Pricing

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MPDIMA) states that the drugs and biologicals not paid on a cost or prospective payment basis will be paid based on the Average Sale Price (ASP) drug payment system. The payment allowance limits are 106 percent of the ASP. This payment system is based on quarterly data submitted to CMS by manufacturers. CMS will supply the DME MAC with the ASP drug pricing files on a quarterly basis.

There are exceptions to this general rule as summarized below:

  • The payment allowance limits for infusion drugs furnished through a covered item of DME  will continue to be 95 percent of the AWP reflected in the published compendia as of October 1, 2003, regardless of whether or not the DME is implanted.
  • The payment allowance limits for drugs not included in the ASP Medicare Part B Drug Pricing File or Not Otherwise Classified (NOC) Pricing file are based on the published wholesale acquisition cost (WAC) or invoice pricing. This does not pertain to new drugs that are produced or distributed under a new drug application approved by the Food and Drug Administration (FDA).

Individual Consideration

Unusual services and items are generally reported to the DME MAC with miscellaneous HCPCS codes. It will be necessary in these situations for the supplier to furnish documentation describing the service or item, manufacturer name, product name and number, and the suggested retail price. When necessary, consultants' advice will be obtained.

Inherent Reasonableness

Where a review of customary and prevailing fees indicates excessive or deficient amounts, applying inherent reasonableness may be appropriate. We will always publish notice of proposed inherent reasonableness charges and provide a minimum of a 30-day comment period. This notice will include the HCPCS code, the current prevailing charge, and the proposed charge. We will also include source documentation that supports the proposed charge. After comments are reviewed, we will publish a final decision and responses to the issues raised in the comments.

Not Otherwise Classified (NOC)/Miscellaneous Codes

Items billed with any HCPCS code with a narrative description that indicates miscellaneous, NOC, unlisted, or non-specified, must also include the following information in loop 2400 (line note), segment NTE02 (NTE01=ADD) of the ANSI X12N, version 5010A1 professional electronic claim format or on Item 19 of the paper claim form in the narrative field.

Narrative added to claim:

  • Description of the item or service
  • Manufacturer name
  • Product name and number
  • Supplier Price List (PL) amount
  • HCPCS code of related item (if applicable)
  • If Repair part, HCPCS code of item being repaired

The NTE 2400 Field of an electronic claim is limited to 80 characters; therefore suppliers are encouraged to use our list of suggested abbreviations to condense all of the required information into this field.

Claims submitted to DME MAC without any of the required elements will be rejected as unprocessable. Appeal rights are not afforded and in order to correct these claim rejections, suppliers must correct the claim and provide all of the required additional information needed for adjudication and resubmit.

Separate instructions are available for drugs submitted under NOC codes. Refer to the specific Local Coverage Determination (i.e. Oral Anti-Cancer Drugs, Immunosuppressive Drugs, etc.) for instructions regarding the submission of a drug under a NOC HCPCS code. In addition, some NOC HCPCS codes have additional policy specific narrative requirements. Suppliers are strongly encouraged to review the policy requirements for billing a NOC code in addition to these general requirements.

For additional information on payment of DMEPOS, refer to Chapter 20 of Pub. 100-4, Medicare Claims Processing Manual.


Last Updated May 30 , 2024