It will be beneficial for your company to begin activity-based costing as a means to determine how much any particular item actually costs you to provide.
by Jane Bunch

It will be beneficial for your company to begin activity-based
costing as a means to determine how much any particular item
actually costs you to provide. A lot of effort must go into
figuring this calculation, and its accuracy will be directly
proportional to the amount of time and importance you give to
it.

I recommend that you be as accurate as possible when going
through this long and laborious process, because this calculation
is vital to your company's bottom line and, perhaps, its survival.
Also, make sure you include everyone in your organization in the
process, as your managers and employees may be able to identify
areas of cost that you may not be aware of.

Now, let's move on to how CMS' previous competitive
demonstration projects stack up in today's HME climate.

I have been closely following progression of the competitive
bid. Actually, I have been involved since 1999, when, in Polk
County, Fla., I helped a provider go through the bid process and,
ultimately, win his bid. I went through the same process in San
Antonio two years later with a different provider but with the same
result.

Since then, I have seen a number of changes that will make the
bids to be submitted in the first round later this year similar to
— but also different than — the Polk County and San
Antonio bids.

You probably know that in the first two rounds of bidding,
Medicare showed almost a 20 percent reduction in allowable (bids)
overall for the product categories that were selected. Do not be
fooled by this information, though. Those bids were based on
different criteria than exists today. When those bids were made,
oxygen was a monthly rental for as long as the beneficiary needed
the equipment, and DME capped rental ran for 15 months and then
went into maintenance.

That is no longer the case, and current reimbursement policies
will have a huge effect on how you determine your bid today.

With DME capped rental items, for example, the rental period was
two months longer in 1999 and 2001 than it is now at 13 months. The
maintenance and service fee you used to receive every six months on
continually rented items has gone away as well.

When you do a general calculation, taking into account the 25
percent reduction in the fourth month on, you will find that you
have already taken about a 12 percent reduction in what you will
receive (13 months vs. 15 months) on DME capped rental items.

That number increases again for every maintenance cycle for
which you are no longer paid. If your patient keeps the equipment
for five years, that means you could potentially miss out on five
maintenance payments, which, in effect, would cut your overall
reimbursement by about 38 percent. That is almost twice as much as
what the bid reduction did in the first two demonstration rounds.
That is a significant reduction, and you need to recognize it.

When you look at oxygen payment today, the reduction does not
show up until the 36th month, when the equipment is considered
purchased and the title must transfer to the beneficiary.

After that, your loss of revenue stacks up at an almost
exponential rate. You will still be paid for oxygen contents for
refills, but can you afford to continue to do that at the current
rate of reimbursement?

So the question is, how do you submit a bid in today's climate?
The answer is, very carefully.

The cost structure and profit goals of each HME company will be
different. You will need to perform an activity-based cost
accounting to confirm what your actual costs are, then reduce any
waste or duplication to get as lean and mean as possible. Then you
can make your bid based on the information you calculate.

I think you will find that in a lot of areas, you are not
working as efficiently as possible and will be able to eliminate a
good amount of waste. You can also work with your suppliers or join
buying groups to get the best price possible on equipment.

Most important, however, keep in mind that you are in business
to serve the beneficiary, your patient. Do not sacrifice care to
those you are servicing, or you may find that they are no longer
there to be serviced.

Jane Bunch is vice president, HME consulting, for Atlanta-based
CareCentric. A reimbursement specialist, Bunch delivers educational
seminars worldwide, helps develop corporate compliance plans and
serves as a consultant for fraud and abuse cases. She can be
reached at 678/264-4495 or via e-mail at jane.bunch@carecentric.com.