Competitive Bidding Round Two

Coming up for Air: Respiratory & Round Two

• By Joseph Duffy
• Mar 01, 2014

Last July, CMS implemented competitive bidding Round Two in 91 metropolitan areas, followed by Round One re-compete rates in nine competitive bidding areas going into effect January 1, 2014. After about eight months of providers living with the effects of Round Two — which included the respiratory product categories oxygen supplies and equipment, CPAP devices, respiratory assist devices, and related supplies and accessories — the contracts are already over a fifth of the way into their three-year term. (Round Two contracts end June 30, 2016.)

So what’s the damage? Competitive bidding Round Two payment rates vary by each of the bid areas and by HCPCS codes. Overall, the payment reduction for the oxygen category (which includes numerous HCPCS codes) is approximately a 40-percent reduction off the 2013 Medicare fee schedules, says Joe Lewarski, vice President of Clinical Affairs for Invacare Corp.

While HME provider contract winners and losers face an unknown future fueled by Round Two and begin to discover how it is affecting their business, HME Business magazine spoke with industry experts and HME providers about living in a Round Two world, persevering and growing their respiratory business.

Round Two Troubles

Todd Tyson, BS, RRT, president of Hi-Tech Healthcare, says his company submitted 28 bids in Georgia, Alabama, Tennessee and South Carolina but received only eight contracts. They were initially awarded oxygen and NPWT in Georgia, oxygen and beds in Alabama, oxygen and beds in Chattanooga, and oxygen in Knoxville and Nashville. Hi-Tech tech was not initially offered a PAP/RAD in any of the competitive bidding areas in Georgia, Alabama, or Tennessee where they currently serve. But they later received a PAP/RAD contract in Chattanooga and Nashville after suppliers’ contracts were revoked for licensure issues in Tennessee.

It’s been a very busy eight months for Tyson’s company.

“We did not ‘win’ PAP and had to sell nearly 2,000 patients to a company from California,” says Tyson, who is a member of the American Association for Homecare. “The transition was extremely burdensome and confusing for patients and referral sources. We tried to subcontract PAP therapy but it was a miserable failure. The company aggravated referral sources for orders and documentation and limited the equipment offerings, which further dissatisfied MDs. They were extremely slow verifying insurance, which delayed therapy initiation, so we terminated the relationship.”

Tyson says his company has experienced approximately a 17-percent reduction in revenue so far under Round Two, with a 5 percent increase in volume. They previously had eight locations with 110 employees but have since closed their operations in Alabama and, overall, have instituted a 20-percent reduction in their workforce (20 employees).

“With all the audits and reimbursement reductions we are struggling to sustain,” he says. “We are seeing our revenues come back to previous competitive bidding levels but profits and cash flow are non-existent.”

Under Round Two, Hi-Tech Healthcare has been trying to acquire new patients. The company tried to assist more than 300 oxygen patients abandoned by a company that went out of business and Hi-Tech has been providing HST to companies. This has caused its non-Medicare PAP business to steadily increase.

Tyson says the company is subcontracting for a couple of product categories and expanding its Medicaid and managed care markets to diversify its payers and patients. High-Tech is continuing to provide PAP resupply for Medicare patients through the cap, then transitioning patients post-cap to a contracted provider.

Overall, Tyson says the he has seen a negative impact on respiratory providers throughout Georgia.

“We have seen several companies exit the business and abandon patients,” he says. “Medicare had to offer oxygen companies some relief by allowing oxygen patients who had been abandoned by non-contract companies exiting the business so that contract providers would take patients that were capped or grandfathered.”

Looking for Alternative Revenue Streams

David Baxter, president of Medical Necessities & Services, a provider in Tennessee, was a successful bid winner in the Nashville market. His company won wheelchairs, beds, oxygen and CPAP. In Chattanooga, it won oxygen and CPAP. So far, Baxter says company revenue is up 10 percent regarding Medicare business for CPAP and oxygen. However, that doesn’t reflect the overall revenue loss associated with cuts. And these cuts, says Baxter, have made it difficult to provide the high-level service that Medical Necessities & Services has provided in years past. Overall, the company’s net revenue is down about 5 percent in comparison to last year.

“We will continue to market to our referral sources and hope to continue to pick up market share,” says Baxter. “We are also purchasing other companies that want out of the business. We continue to try to grow with our two main product categories, CPAP and oxygen. We have added a couple of new lines to help generate some additional revenue. In addition, we have invested a lot of money in our CPAP replacement program to build that so we can capitalize on our initial investment of a new CPAP referral.”

Baxter says his company is moving toward a more product-specific business (mainly respiratory) and continues to grow its replacement supplies for PAP devices.

“I believe the most important solution for increasing business is to capitalize on your patient base,” he says. “We all spend money with marketing efforts to try to get new CPAP business and then we don’t have a great program in place to continue to build relationships with that patient and continue to generate revenue off of them. Our replacement for PAP supplies has been a huge lift in 2013 and we expect it to double again in 2014, which will help offset the loss of revenue in other areas.”

For HME provider 1st Class Medical, which bid in Round Two but didn’t win in any categories, Manager Caleb Umstead says that the company has lost a great number of oxygen referrals since Round Two and has decided to remove itself from that specific area, consolidate and reduce expenses. They will continue to maintain their grandfathered patients and have increased their visibility for non-Medicare patients.

“The industry as a business is not doing well, even though the demand for respiratory products has never been greater,” Umstead says. “Between audits and the ALJ (administrative law judge) shutdown, the immediate future of DME is not looking good.”

The immediate difference Umstead sees since the inception of Round Two has been the lack of additional services that oxygen recipients receive. He says many businesses have cut to the bare minimum and will continue to do so until the bleeding stops.

“Today it’s difficult to say what’s worse: winning the bid or losing the bid,” he says. “The options are very similar. Smarter and more efficient seem to be reoccurring trends in both scenarios. Losing the bid, however, forces you to reevaluate everything and focus on your strengths and strengthen your weaknesses.”

On a brighter note, Umstead says that new business is everywhere, and 1st Class Medical is looking for it, trying everything from referral sources to advertising. There is a huge disconnect between what is available and what Medicare has available to patients through Medicare, he says.

Umstead says his company began to subcontract with other companies but found that it was not a viable option because of the duplication of work and shrinking reimbursement. Instead they choose to focus on non-Medicare business involving third-party insurance and cash customers.

“In the years to come I believe that the competitive bidding system will stay in place and we will be more of a retail operation than an insurance-based system,” he says. “However the demand has never been more apparent and we want what we want. Many people say they can’t afford the monthly charges of healthcare, but yet we all have iPhones and data plans that can be more expensive than healthcare. My point is that our services are valuable; whether Medicare wants to pay for them is a different story. But as an industry, our services are needed. The only difference is, who will pay for the services in the future?”

Steve Nyhuis is the vice president of Airway Oxygen, with locations in Michigan and Indiana. They won most all categories they bid on within three competitive bidding areas in Michigan. Nyhuis says the company’s CPAP business has increased by 50 percent in the competitive bidding areas.

Overall, Nyhuis says its growth cycle has not changed in major markets due to the oversaturation of bid winners. In small markets, one or two bid winners could be capitalizing.

Despite seeing decreased profit margins for all DMEs, cut services for oxygen beneficiaries and industry job cuts due to service lines being eliminated by most companies, Nyhuis says under Round Two, his company maintained the same growth in 2013 as the prior year, which could be looked upon as an increase in volume due to a 37 percent reimbursement cut.

To deal with reimbursement rates, Nyhuis’s company has been cutting unnecessary operational functions and diversifying into other product lines. They are not subcontracting. He suggests that companies look at more cash sales, readmission programs, and non-delivery oxygen setups. He also says to integrate process functions with a software system.

“Not only will competitive bidding change the game of HME but also the face-to-face ruling and the recent memo from CMS stating that the ALJ cases will take over 24 months to be resolved,” Nyhuis says. “This equates to assets and services being on a patient and not getting paid for over two years. What line of business in the United States of America has to sustain this abuse from our government?”

Alternatives to Competitive Bidding

While many providers are finding their businesses rearranged by the implementation of Round Two, the fight continues to change the process.

“The industry is still working to replace the bidding program with the Market Pricing Program (MPP), which was introduced in Congress as HR 1717 and currently has 165 co-sponsors,” says Eli Diacopoulos, vice president and general manager of Home Respiratory for Philips. “The American Association for Homecare, of which Philips is a member, has been a strong advocate of this legislation and continues to recruit additional co-sponsors. Recently, the Senate Finance Committee included an amendment in their ‘doc fix’ bill that would require providers to provide proof that they meet applicable state licensure requirements before being allowed to submit bids. Congress has until March 15 to agree on a permanent doc fix bill and it is hoped that this amendment, along with key components of the MPP, will be included in the final legislation.”

But until something changes, the fight continues in the trenches.

“I am a respiratory therapist and founded Hi-Tech Healthcare in 1990,” says Tyson. “I never thought I would see a day when we could not treat patients appropriately as the physician prescribes and medical need dictates. I have been actively lobbying congress to repeal and replace the flawed competitive bidding program with little success. Sadly, patients don’t seem to care, and neither do the referral sources, that substandard care and equipment are now the new norm. It saddens me that 65 percent of companies awarded contracts are not even local — thanks to nonbinding bids — and that half of us offered contracts were offered prices at or below our cost secondary to the median price process. But we still have to believe the cup is half full and with the aging of our population, which is living much longer, there has to be a way to succeed going forward.”

Tyson says sleep is the fastest growing segment of his business and most all payers have mandated HST for diagnosis, so he sees a huge upside for the non-Medicare PAP and resupply business. He also suggests seeking out new payers and expanding into pediatrics, and offering new therapies, such as NPWT, will help companies to grow. Tyson recently outsourced the company billing and are centralizing the intake to assist with improved A/R efficiencies, qualifying criteria and documentation requirements to improve audits and payments.

Umstead suggests that providers focus on strengths and reduce weaknesses.

“Double down on things that work, eliminate the things that don’t work,” he says. “People want answers and choices, so give them both. Medicare is not your only option.”

“I think it is still a bit early to tell the true impact of Round Two and believe that in addition to all of the challenges associated with NCB, there are a number of other factors in play that have increased the complexity and difficulties for HME providers, most notably the audits,” says Lewarski. “I believe that many providers, both NCB contractors and non-contractors, are struggling with the new rates and/or lost revenue opportunities. Many companies are looking for alternative revenue streams outside of the Medicare and NCB focus, including ventilation, pediatrics and of course cash sales. Unfortunately, it does not appear there is a single, silver bullet.”

This article originally appeared in the March 2014 Respiratory & Sleep Management issue of HME Business.