Observation Deck

A Threat to One and All

A Refresher on Competitive Bidding

• By John Shirvinsky
• Nov 01, 2009

How bad is the Medicare competitive bidding program for durable medical equipment and supplies (DME)? In more than three decades of representing the interests of various industry sectors before state and federal governments, this is easily the most insidious program that I have ever seen enacted into law.

Competitive bidding (CB) is a blunt instrument that will be used to bludgeon the home medical equipment and supplies industry. It is a program whose goal is not to merely reduce expenditures, but to decimate the ranks of suppliers.

Best estimates indicate that CMS will eliminate nine out of ten HME providers from the Medicare supplier roles in the first nine competitive bidding areas (CBAs). Given that Medicare beneficiaries typically comprise approximately 40 percent of an average HME provider’s patient base, it’s easy to see why the prognosis is so dire for the projected 90 percent that will fail to secure contracts.

But that only begins to describe the enormity of the CB aftermath — an aftermath that will sweep over-bid losers, bid “winners” and non-Round One providers alike. Economists predict that successful bidders are likely to fall into two categories, both of which are characterized by significant risk: The first are those who bid at possibly unsustainable levels as a means of buying market share and eliminating competitors. The second are those who bid at possibly unsustainable levels in a desperate attempt to simply stay in business.

Unsustainable meets irrational

The winning bids might well prove to be unsustainable and CMS is largely unconcerned by that prospect. Bid submissions will only be judged as “irrational” when they fail to cover the demonstrable cost of an item. Other costs — setup, delivery, emergency service, billing and employment — will mostly be ignored. Provider profitability over the three-year contract term will not be a consideration.

It doesn’t take psychic powers to predict that Round One bidding will set the pace for non-Medicare DME reimbursements nationwide. Every state Medicaid program and third-party insurer — each under pressure to reduce costs — can be expected to eagerly adopt the double-digit cuts anticipated from competitive bidding.

And therein lays the problem for all HME providers. It would be a mistake to underestimate the threat of CB. We are all in Round One.

To make matters worse, the Senate Finance Committee’s healthcare reform legislation sees CB as a magic bullet for reducing waste, fraud and abuse in the DME sector. It proposes to expand CMS’s authority to apply CB pricing to non-CBAs; and it would accelerate the program by increasing the number of Round Two CBAs from 70 to 100.

Overcoming the CB threat will take nothing short of all-out determination on the part of the HME industry to ensure its own survival in the healthcare marketplace. Since CB is mandated as a matter of law, the only recourse is to convince Congress to repeal that law.

Again, we are all in Round One. Repeal cannot be achieved on the efforts providers located in nine CBAs. To be successful, the HME industry needs to pull together in two specific ways: 1) Those outside the nine initial CBAs need to be aware of how quickly Round One pricing will hit them — if not from Medicare, then from every other health insurer; and 2) Round One providers need to be aware of the impact of the bid numbers that submit on their businesses as well as the industry at large.

Bidding smart

Face it, when the largest purchaser of DME in the world — which also happens to be the federal regulator of the DME industry — exerts this kind of market-manipulating pressure, the intimidation factor is extreme. That said, there are some valuable lessons that can be learned from the original bidding period that should inform Round One providers who are preparing to submit bids as this issue of HME Business goes to press.

Oxygen. In 2008 CMS announced that reimbursements for oxygen equipment and supplies would have been reduced by 27 percent under original Round One bidding. Oddly enough, in 2009 the Medicare oxygen benefit was reduced by that same number — 27 percent — due to the 9.5 percent MIPPA reduction and the revenues lost to the implementation of the 36-month cap. The cap carried additional expenses associated with months 37-60 such as continuation of service for patients who travel or move out of the service area; no reimbursement for emergency service; and no reimbursement for supplies.

Complex rehab. Although MIPPA excluded complex rehab from the new round of bidding, the 2008 results serve as a cautionary tale. Under the original bid numbers, complex rehab would have been reduced by a national average of 15 percent. Yet when the 9.5 percent MIPPA cuts were implemented, providers reported that even the smaller cut was devastating to their low-margin operations.

Diabetic supplies. Mail-order diabetic supplies represented the largest reduction of any original bid category at 43 percent. Reports at the time indicated that the low bids were made possible by reliance on certain Chinese-made test strips. Subsequent to the 2007 bid-submission deadline an investigation revealed that the test strips were “bogus” and resulted in faulty readings. Winning bid prices would have been locked in and contractual obligations would have been enforced irrespective of the inability to use the bogus test strips. Buyer beware.

The responsibility to bid smart and responsibly rests with each Round One provider. Each must fully understand the implications and multi-year commitments attached to CB bid contracts. Each must fully understand their costs and profit margins both today and through the end of the four-year contract period. And each must understand that bid prices must contemplate stricter supplier standards, new bonding expenses and stricter compliance enforcement and increased audit activity. The one equation that seems to be lost in all of the CB calculations is patient care, which doesn’t appear to bother CMS. Add that to the list of reasons to repeal the competitive bidding mandate.

John Shirvinsky is the Executive Director of the Pennsylvania Association of Medical Suppliers and can be reached via email at [email protected].

This article originally appeared in the November 2009 issue of HME Business.