Square Peg Round Hole

• By David Kopf
• May 13, 2008

Can competitive bidding fit the HME industry correctly?

On the face of things, the Centers for Medicare & Medicaid Service’s National Competitive Bidding (NCB) program for the HME industry looks like a good idea. Like many federal competitive bidding programs, the aim is to reduce costs for taxpayers while standardizing quality for the services they are used to getting.

Competitive bidding auctions are certainly nothing new for federal agencies. For instance, the bidding process for personal communications services (PCS) of the 1990s helped bring about the wireless revolution and resulting technological advancements Americans have been enjoying for nearly 15 years. Moreover, the competitive bidding processes implemented in those auctions were largely regarded as fair to telecommunications industry companies bidding on the wireless spectrum, as well.

However, CMS’s NCB hasn’t been embraced by HME providers, their patients and even some politicians. For instance, at the American Association for Homecare’s recent Washington Legislative Conference, Sen. Pat Roberts (R-Kan.), who has as constituents a large number of rural homecare patients that are dependent on homecare and HME providers, told providers attending the event that their industry was “under attack.” Roberts said that competitive bidding represented a “perfect storm” that could put small, rural providers of critical HME services such as oxygen, out of commission, and thusly those jeopardize the health and well-being of their patients.

Going Over Like a Lead Balloon
It would be easy to quickly label Roberts’ statements as the political exaggerations if it wasn’t for the fact that recent headlines are lending them a mega dose of credence. In the final days of March, CMS announced that it had distributed contract offers and refusals to providers who submitted bids for the 10 metropolitan service areas (MSAs) that comprised round one of NCB. It also said it was notifying those providers who did not make the cut.

Shortly thereafter, the American Association for Homecare announced it had received more than 150 complaints from providers who said they had been refused contracts due to “technicalities,” such as missing information when their bids were reviewed by the Competitive Bidding Implementation Contractor (CBIC), which is Palmetto GBA, a longtime CMS contractor/subcontractor.

Typical complaints state that a provider received notification that its bid was refused because its bid packet was missing one piece of information or another. For example, John Skoro, Managing Partner of Texas HME provider XMED Oxygen and Medical Equipment, who says that CBIC informed his company that its bid was missing financial documentation that he is certain XMED provided. Skoro says that CBIC informed XMED it was missing key financial information from 2004 and 2005.

“From our standpoint, we did everything right,” he says. “We’re confident we sent our documents... Those are the easiest documents to file.”

Besides the fact that financial records were some of the easiest pieces of information to retrieve and provide for its bid package, Skoro notes that it also included the necessary financial information from 2003 and 2006, which was not declared missing by CBIC.

That begs the question “why is only some information missing” and Skoro says he suspects that is because there is “systematic scanning issue” when documents are first received at CBIC. Given the number of complaints received by

AAHomecare, that could be a reasonable conclusion to draw.
More to the point, Skoro said that CBIC didn’t follow the processes it outline when it comes to the missing information. He says that according to a transcript of a June 6, 2007 teleconference, CBIC was supposed to notify XMED (and any other bidder) of an incomplete bid so that they bidder had an opportunity to supply the missing information. In Skoro’s case — and in the case of many other providers — no such notification was received.

Which raised Skoro’s eyebrow, because he said that XMED had in fact received that very type of follow-up during a problem with its Form B entry. It had entered zeros for some categories and their respective units of measure that it did not offer. It was notified that the zeros were causing a problem and that it needed to rectify its bid and resend. No muss, no fuss. So why didn’t XMED — and other providers — receive notification regarding their missing information? The industry is still waiting on an answer.

For now, all XMED can do is issue a challenge, which Skoro says it has done. Within 30 days (about the time you receive this magazine) XMED should receive an email regarding CBIC’s conclusion regarding the missing information. Skoro says XMED expects CBIC to come up with the information he is certain he supplied, and that XMED will get a contract. If it does not, Skoro says XMED will consider pursuing an injunction.

And XMED isn’t the only party considering an injunction. Both AAHomecare and the National Association of Independent Medical Equipment Suppliers have stated that they have sought legal counsel to explore options for bringing round one to a halt in the hopes of addressing the mounting volume of complaints over how round one NCB bids were handled — or mishandled, as the case may be. (Read our news section starting page 8 to get the full story).

But this is only recent news. The industry has been trying to alter NCB at the very least, and bring it to a halt in the best of all possible worlds for some time. Why? What is wrong with competitive bidding? Can it be fixed? What are the reasons for chucking it altogether?

What’s Wrong With Competitive Bidding?
Not surprisingly, at least two sets of economists have been analyzing CMS’s NCB both in terms of its applicability for the HME industry as well as its inner workings as a competitive bidding system.

It turns out that there are a fair number of economists who specialize in competitive bidding models, and seek them out to study their mechanics. Two such economists are Brett Katzman, Ph.D. with the University of Miami’s Department of Economics and Kerry Anne McGeary, Ph.D. of Drexel University’s Department of Economics & International Business. The pair studied the early competitive bidding demonstration projects in Polk County, Fla. and San Antonio, Texas circa 2001.

“Whenever you have an auction there are potential unintended consequences of these auctions, and one unintended consequence we found was that the rules did not elicit the behaviors from the bidders that they would actually want,” McGeary says. “In other words, they [CMS] wanted the bidders to be truthful about what they believed their costs of supplying these products to the beneficiaries were.

“But the way the rules were set up, there is really no incentive for them to do that,” she continues. “Actually the incentive is the opposite, because using the bids they have to win the right to supply the item and then they know these bids are going to have some bearing on what they are going to have to charge in the future.”

Instead what bidders wind up doing is trying to bid just low enough in such a competitive bidding system to win a contract, but that can carry a “curse” if the provider’s costs rise later on.

And in the case of the Polk County and San Antonio demonstration projects, prices did not always drop. For instance, while Polk County might have had an average price decrease of 25 percent on hospital beds, it also experienced a 20 percent price increase in surgical dressings and supplies. Overall, the two projects yielded a 9.22 percent price decrease across all sites, all rounds and all categories, McGeary says. Not exactly a staggering drop.

The other pair of economists to study CMS’s NCB were professors Brian O’Roark, Ph.D. and Stephen Foreman, Ph.D. of Robert Morris University’s Department of Finance and Economics, who analyzed their program for the Pennsylvania Association of Medical Suppliers. In their February study, “The Impact of Competitive Bidding on the Market for DME,” the professors reported that NCB will lead to reduced competition, lower quality of care, and higher costs.

The pair examined the current structure of the HME market and the likely structure of the market after implementation of competitive bidding. They factored in economic theory, the number of firms, employment figures and made some forecasts of likely outcomes, O’Roark says. Their overall forecast wasn’t all that sunny.

“You’re going to take an industry with a large number of providers and contract it,” Foreman says. “That is the very purpose of the competitive scheme. Right now price is regulated by CMS; it’s not competitive. So what you have now is quality competitive.

“What the competitive bidding process is more likely than not going to do is contract the market and give market power to the remaining market participants, who will likely use that market power in the near term to reduce quality and in the longer term increase price,” he continues. “Along the way you will lose employment in the industry and you may well lose consumer responsiveness.”

In short this is not good for patients or providers and takes a healthy industry and makes it work less efficiently, which is “not good for anybody,” Foreman says. “Why would we go this direction on purpose?” he says.

The Law of Unintended Consequences
Assistant Professor of Economics O’Roark chalks this up to the law of unintended consequences. In other words, what outcomes happen from implementing competitive bidding that were not considered and how it will affect a market or industry. The law is a somewhat inescapable fact of life, but good economists are the one who can highlight key unintended consequences before a decision is made, he explains.

“CMS really didn’t include much economic reasoning in the development of its plan,” O’Roark says. “The law of unintended consequences is not something political agents think about. Just a little common sense and some simple understanding of how markets work really would have at least prevented some of what we expect to see.”

“They claim it is a competitive set up,” O’Roark notes. “But the plan is essentially going to prevent firms from entering a market or remain in a market. When CMS is telling firms that they can’t contract with the biggest buyer in the industry, Medicare, competition doesn’t exist really; it withers on the vine.”

Besides regulating the number of providers, it CMS is also setting price. If bids come in beyond CMS price limits on a given category, then they are refused, which sets up another set of unintended consequences.

“So CMS has basically said ‘we’re going to take this auction framework and every time that we get a result we don’t like, we’re going to tweak it a little,’” McGeary says. “But every time they do that they just get another unintended result, because the overall design of the auction needs to be revamped.”

So, if provider costs to offer services rise — for instance, such a model does not factor in the continually rising fuel costs involved in delivering oxygen — but prices are limited, then quality can again suffer and the number of providers of a given service could again diminish.

Can Competitive Bidding Be Fixed?
Listening to the economists, it becomes quickly apparent that competitive bidding at the least will have little impact on driving costs down and could have much deeper long term effects, such as decreases care quality and possible price increases. So what’s the fix? Can NCB be reworked into a program that reduces Medicare costs while preserving the care quality the HME industry has worked so hard to foster?

“Basically, having the bids tied to prices is the major problem. Having them [the providers] win the right to supply by offering a bid and having that bid tied to prices is causing the problem,” McGeary says. “They need to divorce the winning of the contracts from the prices.”

“First of all, I’d throw it out,” Foreman says. “Lock, stock and barrel. I’d start again. It’s philosophically flawed very deeply.
“I wouldn’t do competitive bidding in this industry,” he continues. “Would we better off deregulating price? In other words qualify firms based on their quality, audit them for honesty, but deregulate price.“
If CMS did that, Foreman says that the HME industry has the potential to control its own prices through competition.

“We need to ask ‘Can you have perfect competition here?’” he explains. “The hallmarks of perfect competition are many buyers and sellers, homogenous products, perfect information and free entry and exit. You could have that in HME with many of these products, if not all.”

But if throwing out competitive bidding and relying on market forces isn’t an option, what’s Foreman’s fix for competitive bidding?

“If you’re going competitive bid, you have to do it in a way that makes more sense than this,” Foreman says, adding that one of the problems with this model in a Medicare-dominated market is that if, for example, competitive bidding reduced the number of providers in hotly competitive marketplace down to just a few providers, what are the chances those providers could dictate price a few years down the road? Again, it all comes back to competition.

Foreman says that because of this CMS needs to come up with a way to keep enough firms in the market to drive competition, and thusly keep prices in check, rather than try to squelch the population of providers.

“From a small business owner’s standpoint, I can understand why you would think this would be a bad idea,” McGeary says. “But I think a lot of that apprehension could be done away with if the rules were in place that were going to benefit the entire market — and that’s not what’s happening.”

But for all these expert observations, CMS seems committed to continuing with its schedule. Round one prices are set to go into effect July 1, and providers in the 70 MSAs that comprise round two of NCB (see “Round 2 MSAs Segmented by Region”) are already working on getting accredited.

Fighting Competitive Bidding
So, if competitive bidding is so badly in need of revising or replacing, but CMS keeps pushing ahead, what can the industry do to halt its course? For industry associations and political players, the answer is simple: fight. But has the competitive bidding train left the station?

“Depending on who’s train and what station you’re talking about... the CMS train has certainly left the station and we’re well on our way to implementation of round one,” says Tyler Wilson, president of the American Association for Homecare. “But to continue that analogy the track has been very bumpy and a lot of us thing there’s a derailment about to occur.

“For patients, this is going to be a disaster,” says Wayne Stanfield, President and CEO of The National Association of Independent Medical Equipment Suppliers. “There is a significant number of Medicare beneficiaries served by the medical equipment industry. I believe it to be in excess of 40 million people.

“If you take any of the competitive bidding areas and you take the number of providers serving any of those categories you will see a 95 percent decrease in the number of suppliers in those markets,” he continues. “That is significant. What happens to the beneficiary in those areas who can no longer obtain their services from a supplier of choice, but rather a supplier that has been selected by a flawed process from CMS?”

“CMS either doesn’t appreciate the magnitudes of the problems we face or they aren’t concerned about them,” Tyler adds. “Either way, we think the likelihood of CMS looking in the mirror and deciding this program is flawed is unlikely.”

So, the industry has been fighting competitive bidding on an number of fronts. For starters, associations such as AAHomecare have been trying to meet with CMS to try and get it to change its course. Both AAHomecare and the National Association of Independent Medical Supplier shave been trying to influence Congress through a number of means, such as meeting with various Congress members and staff and trying encouraging providers and their patients to contact or meet with their Congress members to tell them why competitive bidding will negatively impact their livelihoods and lives.

Lastly, both NAIMES and AAHomecare have been exploring legal challenges to competitive bidding to see if it can be stopped via a court order or injunction. (See our news section, starting page 8 to read more about their efforts.)
“We’ve gone Captiol Hill and raised our concerns in the House and in the Senate, and bring those concerns directly to CMS and the General Accountability Office,” Wilson said. “Will we be successful in getting the train halted in reasonable time for people to assess these problems and the implications is not clear.

“Legal challenges are an option,” He continues. “But there is statutory language in the Medicare Modernization Act that makes it difficult to get either judicial or administrative review.”

That language makes it only more difficult to get judicial review of a large agency, which is already a tall order, Stanfield explains. One of the paragraphs in the law removes regulatory, administrative and judicial review from anyone involved in the process and waved all requirements of the federal acquisition regulations except confidentiality, making it “lawsuit proof,” and as Stanfield notes, it could make it unconstitutional.

“That said, does that give the agency carte blanche to mismanage the program?” Tyler says. “That’s what we’re highlighting — are those problems serious enough where a court can step in?”

Whether or not a court would be able to step in and issue an injunction or temporary restraining order so that an equitable decision can be made, or if a case must be argued remains to be seen as no specific legal challenge has yet been made. For Tyler, he says the best option is to work through Congress and impress upon lawmakers for a change.

Getting Involved
And Congress is exactly where providers can help preserve their industry. “They have to let their Senate and House office know about their concerns,” Tyler says. “That can be a daunting process for people who are unfamiliar with Washington, and we lend our support.”

To that end, AA Homecare provides various resources to providers and organizes a yearly Washington Legislative Conference to facilitate state delegations of providers and industry members to meet with Congress members. It is also organizing a Fly-in this month to further efforts.

Stanfield says that concerted grassroots efforts by providers are a key element in helping influence Congress that seems to be making some good progress. “We had 120 plus Congress members sign on to a letter from Congressman Altmeyer’s office asking CMS to stop this process,” he says. “That didn’t do any good. We have had 170 signers on to HR.1845 and the fact that those numbers were there expressing implementation of competitive bidding didn’t have any effect.

“We’re not going to get heard until there is in excess of 250 Congress members willing to stand up and be counted,” Stanfield continues. “And that won’t happened until we have suppliers by the hundreds and patients by the thousands calling Congress at the district office level and visiting at the district office level telling them this has to be stopped.”

Monty Lankford, owner and operator of TLC Medical Oxygen & Hospital Equipment, Inc. and TLC MediSend, Inc. in Franklin, Tenn., has decided to take the ultimate step in involvement by running for Congress himself as a Republican candidate for his local district.

Lankford says that if providers turned up to the Legislative events and met with members of Congress in the same numbers that they do for industry trade shows they could stop competitive bidding in a week’s time. The key lies in educating Congress members about an incredibly complex industry that endures continual change.

“We have not been a part of Washington and educated lawmakers,” he says. “They need to be educated. They need to meet the patients. Let me tell you, there’s nothing like 15,000 people on Capitol Hill.”

Moreover, Lankford adds, the fact that the HME industry represents less than 2 percent of Medicare’s budget with minimal growth is a statistic that needs to be repeated until Congress members finally understand there are much bigger fish to fry when it comes to controlling healthcare costs.

“Growth in physicians costs is higher than the rate of inflation, and you look at us and we’re a straight line,” he says. “CMS doesn’t understand if a problem arises in the middle of the night because someone has lung disease calls your company and says ‘my machine isn’t working right.’ We have to employ people 24 hours a day so that they can go out in the middle and check that machine. But what if we told them to call an ambulance go to the emergency room?

“That could cost more than a year of my oxygen,” Lankford says. “We’re not the problem — we’re the solution to the problem.”

This article originally appeared in the May 2008 issue of HME Business.