Considering Bid Evaluation

Now that the competitive bidding final rule is out, providers located in the 10 metropolitan statistical areas where bidding will begin are forced to make key decisions about their companies.

Of course, this fact is not news. Everyone knew it was coming. The questions is, what did you do during the anxious wait before the final rule was released?

To prepare for your bid decision, I hope you were focused on creating operational efficiencies with the objective of eliminating extraneous and superfluous expenses. As we all know, the more efficiently you operate, the more attractive your bid.

However, because of the many financial requirements imposed by Medicare, whether your business is large or small, preparing a bid can make you feel as if you are playing a risky game of chance.

SUPPLIER CAPACITY

At press time, Medicare had yet to release its data on beneficiary capacity/demand. Although this information should be available by the time you read this article, you should have started planning, at a minimum, for the geographic demands of the competitive bidding area and your own utilization history.

This means that you should be generating and analyzing your management reports of HCPCS by revenue, utilization and zip code.

In the final rule, Medicare stated that it does not want any one supplier to have more than 20 percent of the suppliers’ total capacity. That is, if a supplier estimates that it can furnish more than 20 percent of the expected beneficiary demand for a specific product category in a CBA, Medicare will lower that capacity to 20 percent. This means there will be a minimum of five suppliers per product category to “provide beneficiaries with more variety and choice.”

So you must be wondering what CMS will do if the number of suppliers submitting bids is less than five. The answer is that there must be multiple contracts awarded (at least two) and, therefore, if there are fewer than five winning bidders, CMS will issue no less than two contracts.

Further, the final rule also explains that mail-order suppliers should be able to more easily expand to “meet large demands” and, therefore, the number of winning bidders might not need to be five. CMS states that if at least five suppliers are required, that would “dilute [our] savings.”

With these facts, how should you plan for growth or, at a minimum, how should you plan to meet the capacity demands?

The first step is to segregate utilization reports by HCPCS. This should be done for Medicare exclusively, and then again for all other payer types. This will give you an idea of your total capacity (you may want to run this report by month, year and previous years). The results should show you how much of each product you’ve dispensed, sorted by Medicare and other payers, over a given period of time. Using the previous two years’ data should give you a historical view.

From there, compare this information to the HCPCS listed on the competitive bidding Web site at www.dmecompetitivebid.com. You may find products that you have never dispensed, but you still have to bid on each of these products.

Work with your vendors/manufacturers and compare your cost of goods plus administrative expenses to the current Medicare allowable in the CBA for items with which you have no experience. After all, you will be expected to service the beneficiaries in the entire CBA for the entire product category for which you are bidding.

This may be a perfect opportunity to work with a subcontractor who might want to handle those HCPCS that you currently don’t provide. Alternatively, you may explain your projections for how you will handle those items that you have not historically provided.

With regard to how many of each item you estimate as your capacity, CMS considered the answers as solicited from the Program Advisory and Oversight Committee. It was felt that a “supplier’s capacity could easily be increased by up to 20 percent,” according to the PAOC commentary cited in the final rule.

Beyond that, Medicare would adjust the capacity if they conclude the “supplier’s financial and business expansion documentation do not support the projected capacity stated in its bid.”

Regardless, if you plan on growing to meet the capacity demands in the CBA and product category for which you are bidding, you will need to furnish Medicare with your financial plans for this projected growth. This might include, but is not limited to, letters from investors or lending agents.

ITEM WEIGHT

As mentioned, two years of historical data should give you a reasonable gauge as to how much of a particular product you supply, on average. In fact, Medicare is using two years of claim data to identify utilization trends.

Further, CMS will establish a “composite bid” by weighting each item in a product category. Specifically, they will multiply a supplier’s bid for each item in the category by the item’s weight and total these numbers across items. The weight will be based upon the utilization of one item compared with the others in the same category. All of this, of course, is based upon the historical national beneficiary utilization rates as gathered by CMS.

Once the composite bid is established, the “pivotal bid” will be the point where the beneficiary demand meets supplier capacity.

Small Supplier Provisions

Rather than using $6.5 million in revenue to define a small supplier by Small Business Administration standards, CMS decided to use $3.5 million or less in annual receipts to define a “small supplier.”

Not only that, but CMS decided to include 30 percent of qualified small suppliers — whose composite bids are at or lower than the pivotal bid for each product category in each CBA — as contract winners.

If the number of small suppliers winning contracts is lower than the 30 percent target, CMS will give the small supplier whose composite bid is above the pivotal bid, but closest to it, the option of accepting a contract at the single-payment amount (the winning pivotal bid amount).

If CMS still can’t hit its target, this method will be continued until the target number of 30 percent small suppliers is reached (or until there are no more composite bids submitted by small suppliers for the product category).

NETWORK CAPACITY

Not only is it critical to note the new definition of a small provider and its target 30 percent rate of inclusion in each CBA but it is also meaningful to note that networks have been more closely defined than originally established in the proposed rule.

Medicare has decided to limit the size of the network to no more than 20 suppliers so that each network member, per CMS, would generally be “responsible for furnishing items to no more than 5 percent of the geographic area of the CBA.” Further, to join a network, providers must meet the definition of a small supplier. And finally, the network cannot exceed 20 percent of the Medicare market within a CBA.

With all of these new considerations — capacity, weight, percentage of inclusion and more — you must now decide not just if you will bid but how you will bid.

Before you decide to bid in a network, you should first determine if you can meet the demands of the market with your own capacity (use your historic data). Compare this to the item weights of each product in the category as established by Medicare. Consider the zip codes in the CBA (you can locate these on the CBIC site), and decide whether you can possibly do this on your own.

Most important, once you decide to bid, don’t forget to include a profit in your bid price. Regardless of your size, capacity, weight, etc., you must be able to function within the realm of competitive bidding.

With the final rule’s small business considerations, if you are an efficiently run HME company that provides quality care to Medicare beneficiaries in your community (and you are in a CBA dispensing at least one of the competitive bid product categories), you have as much of a chance to win as anyone else.

Nonetheless, whether you ultimately win or lose, you will have afforded yourself an opportunity to streamline your business. This is truly an accomplishment and not a gamble.

Miriam Lieber is president of Lieber Consulting, Sherman Oaks, Calif., specializing in operations management and reimbursement for the HME industry. She can be reached at 818/789-0670 or by e-mail at [email protected].

How CMS Will Choose Bid Winners

• CMS will calculate the expected beneficiary demand in a competitive bidding area for the items in a product category, then will estimate the supplier capacity that is needed to meet that demand. To do this, CMS is asking bidders to state how many units they can supply at the bid price for the CBA (and is requiring documentation to support that capability).
• A “composite bid” will be figured for each supplier who bids in a product category to allow a comparison across all bidders. A composite bid is the sum of a supplier’s weighted bids for all the items in a product category.
• The composite bids will be ranked in order from the lowest to the highest.
• A “pivotal bid” will then be determined for the product category. Counting up from the lowest bid, the lowest-ranked composite bid that yields a sufficient number of suppliers to meet demand will become the “pivotal bid.” In other words, the pivotal — or cutoff — bid is the point at which supplier capacity can meet beneficiary demand.
• Qualified suppliers and networks whose composite bids are less than or equal to the pivotal bid will be selected as contract suppliers.
• CMS will award at least five contracts if there are five winning suppliers. If there are fewer than five winning suppliers, CMS will award at least two contracts if those suppliers have the capacity to meet demand for the product category.
• To meet its small supplier inclusion target, CMS will identify the number of small suppliers with bids at or below the pivotal bid. If that number is less than 30 percent, CMS will offer contracts to additional small suppliers whose composite bids are above, but closest to, the pivotal bid until the 30 percent target is reached, or until there are no more composite bids submitted by small suppliers for the product category.
• Contracts will be awarded for three years, and then will be recompeted.

What CMS Wants To See

According to CMS, supporting financial information will be used to determine a supplier’s “expected quality, potential capacity and ability to meet the market demand” for the duration of the three-year bid contract.

CMS wants to see the following financial documents along with bids:

• Compiled balance sheet (statement of financial position)
• Cash flow statement (statement of changes in financial position)
• Statement of operations (income statement)
• Current credit report (from Experian, Equifax or TransUnion), completed within 90 days before the date of bid submission
• Suppliers that submit individual tax returns that include business taxes must include Schedule C (the profit and loss statement) from their 1040 for the past three years
• Limited partnerships must submit Schedule L from their 1065 for the past three years
• Suppliers that submit corporate tax returns must include Schedule L from their tax return for the past three years

In addition:

• Publicly traded companies must submit a copy of their 10-K filing reports with the Securities Exchange Commission
• New suppliers must submit projected financial statements to substitute for any year for which they don’t have past financial information because they were not in business
• For networks, the primary supplier must submit a certified financial statement of each network and all hard copy documents in one complete package
• If a supplier submits bids as more than one type of entity (for example, as a network and also as an individual supplier), separate financial statements must be submitted to support each entity

According to CMS, all documents that are not prepared as part of a tax return must be certified as accurate by the supplier and must be prepared on an accrual or cash basis of accounting.

Look for HCPCS codes, item weights and product utilization data on the CBIC Web site at
www.dmecompetitivebid.com.