Competitive Bidding Round 2; Lessons Learned from Round 1

Chris Rice’s company, Diamond Respiratory Care of Riverside, Calif., was awarded eight contracts in Round 1 of competitive bidding in 2008, an impressive feat in itself.  Then, two weeks into the three-year contract period, everything was thrown out because of wayward paperclips and staples, and the process started over.

Incredibly, in the 2009 rebid, Diamond repeated its sweep in all eight categories of HME products in which Rice submitted bids.

“We kind of pulled it off,” says Rice, who now oversees a very busy HME business and also launched BidPrep, a competitive bidding consultant service, in October at Medtrade. “I figured there were probably quite a few people out there who would want to know what I’ve done.”

That’s logical since competitive bidding is now spreading from its original nine metropolitan areas to another 91, encompassing about 75 percent of the nation’s HME providers. In fact, Medtrade 2011 in Atlanta was filled with experts talking about lessons learned in Round 1 of competitive bidding that could be applied to Round 2. They provided tips on getting organized, methods for focusing bids on key codes and how to avoid missteps with the complicated issue of HME capacity.

Speakers included Cara Bachenheimer, senior vice president, government relations, Invacare; Mark Higley, vice president, development, VGM Group; Alan Morris, alternate care programs, VGM & Associates; and Todd Tyson, president, Hi-Tech Healthcare.

Competitive bidding has three phases—registration, documentation and actual bidding. Registration is simple, about like signing up for a website, and must be completed by Feb. 9. Providers should be working toward a “hard document date”—when financial data, credit reports and information on licensing and accreditation are due. Financial data include the most recent year’s balance sheet, income sheet, cash flow statement and portion of a tax form. In Round 1, three years of financial data were required, but that was reduced for Round 2.

Higley said that in Round 1 many documents were lost because staples and paper clips clogged scanners, and kept electronic versions of some documents from being recorded. That’s why 40 percent of bidders were disqualified and the bid was done over again. “Write your bidder number on everything that goes in the box,” Higley said.

Rice said information on every document must match perfectly. The key document is on file at the National Supplier Clearinghouse. That information must be up to date and correct. Then, other documents submitted for competitive bidding must consistently reflect that information.

Morris said that in the rebid, about 10 percent of providers were disqualified because of mistakes in financial data, licensing, accreditation and other documentation.

Providers must bid on an entire competitive bidding area, or CBA, Morris noted. Thus, they must hold all local and state licenses for the entire CBA, some of which cover more than one state. Currently, 26 states require licensing to sell durable medical equipment, he said. “In the state of Texas, you need a bedding license,” he said.

And there are plenty of providers who bid outside their normal business locations, Morris said. Of contracts existing from Round 1 of competitive bidding, about 20 percent are held by companies headquartered outside CBAs in which they operate.

“There will be HME companies bidding in your backyard who are 500 miles from you,” Higley said.

Meanwhile providers should have been preparing their businesses for the coming storm. “I don’t think you can do enough,” Tyson said. “We focus to find ways of doing more with fewer resources. We’ve embraced every type of automation known to this industry.

It is essential for companies to conduct cost analyses. “If you don’t know what your costs are, and you go out there and bid blindly, you are going to hurt yourself and the industry in the end,” Tyson said.

Think about expansion. “We’ve actually opened a location in a CBA that we were not in before so we would get one more opportunity to bid,” Tyson said. “Now we’ve learned that with power wheelchairs and manual wheelchairs combined in one category we may not be prepared for that one bid area. So we’ve just now begun doing power wheelchairs just so we can learn.”

Focusing Bids on Key Codes Makes a Difference

Once the bidding window opens, providers will have 60 days to go on a website and fill out bid forms in eight categories of HME products:
• Oxygen, oxygen equipment and supplies.
• Standard (power and manual) wheelchairs.
• Scooters and related accessories.
• Enteral nutrients, equipment and supplies.
• Continuous positive airway pressure (CPAP) devices and respiratory assist devices (RADs) and related supplies and accessories.
• Hospital beds and related accessories.
• Walkers and related accessories.
• Negative pressure wound therapy pumps and related supplies and accessories.
• Support  surfaces (Group 2 mattresses and overlays).

Diabetic supplies were included in Round 1, but not Round 2. The Centers for Medicare & Medicaid Services will be conducting a national mail order competition for diabetic testing supplies at the same time as the Round 2 competition.

Each category of Round 2 includes a list of items with HCPCS codes, and the current fee being paid by Medicare for the items. Each item, except oxygen, will be bid as a unit, not a rental, and bids must be less than the current Medicare fee.

“You have to include a bid price for every HCPCS code in a category,” Bachenheimer said. “Your price is supposed to be a purchase price. There is one exception—oxygen. That is a monthly price.”

Contracts are for three years, and prices will not be updated during that time, she said. Bidders are required to provide service to an entire CBA, but sub-contracting is allowed.  “We’ve seen a lot of that,” Bachenheimer said.

“Save your data; save it often,” she said. Bidders must include manufacturer, make and model for items.  “But you’re not held to that.”

Now here’s a tricky part.

Contracts are awarded on the basis of composite bids. That means the bids for all items are added up into a composite, but items carry different weights, largely based upon sales volume.  That means bid amounts are adjusted as determined by weights assigned to items. For example, Rice said, in Round 1 for the CPAP category, the heaviest weighted item was filters.  “The tiny little $2 filter kind of ended up becoming the driver of CPAP,” he said.

Morris said the best strategy for bidders is to focus on items that have higher prices and heavier weights—in other words, the items that have the greatest impact on the composite bid. “It doesn’t make any sense to spend a lot of time on items that have low prices and carry little weight,” he said. “Extract the codes that mean a lot.”

Do not attempt to make low-ball bids. Several providers tried bidding a penny on each item in Round 1, and they were disqualified. Bids are examined to see if they are credible. “CMS can kick you out of a single product category for bidding too low on any one code,” Morris said. “It happened a lot in the first round.”

Over-calculating Capacity Won’t Help You, but Can Hurt Others

Few elements of competitive bidding have caused more consternation in the HME industry than the concept of capacity. It is important to understand because capacity is the basis for determining how many bidders are awarded contracts.

Here’s how it works. For each bid category, Medicare estiestimates the demand for items that will be used over the three-year contract period. Then, when providers submit bids they are asked basic questions about their capacity, or ability to provide a certain number of items during the contract period.

The capacity numbers submitted by providers have little or no direct relationship to the awarding of contracts, but they have a huge indirect impact. That’s because Medicare wants to ensure there is enough capacity to meet demand in a CBA. So Medicare uses its estimate of demand as a cutoff point for awarding contacts. Medicare starts with the lowest composite bid and that bidder’s capacity. Then Medicare adds ascending bids until it reaches the total demand estimate for the three-year contract.

For example, Medicare estimates that it needs 100 hospital beds in a CBA over three years. It has 10 bidders that all say they can provide 20 beds. The bottom five bidders get contracts. Then, Medicare takes those five bids and picks the median bid, which will be the middle bidder. That’s the fee for the next three years for all five contracts.

It’s simple, but gets complicated fast if bidders over-estimate capacity. Say that the three lowest bidders in the example above report capacity of 34 beds each. Then, total capacity is reached sooner, and only the three lowest bidders get contracts. The fee ends up lower, too, since the second lowest bid becomes the median.

It happened all the time in Round 1, Morris said. “You’re really not helping yourself, and you’re hurting the industry,” he said.

Rice agreed.  “Capacity is a huge Achilles heel for the industry,” he said.

Some bidders think that stating higher capacity will increase their chances of getting a bid, or that the capacity they put down will be the capacity that Medicare awards them. Those are misconceptions, Rice said.

But determining capacity can be difficult for providers, he said.

“If everybody just estimated their honest capacity, I think we would be OK,” Rice said. “The issue then becomes, can we get the data out of your software to make that happen? And I had one heck of a time doing it. You have to look for every HCPCS code that you bill just to Medicare and then start working your capacity numbers from that.”

Rice has mixed feelings about his own success with competitive bidding. Sure, he won, but he then watched as friends and colleagues struggled to stay in business.  “You don’t want to see your friend fail,” he said.

Some HME companies went out of business, many consolidated and others greatly increased retail operations to offset loss of Medicare business, he said.

For Rice, the life of his business went on because he succeeded at competitive bidding. But it is a new business climate. “Our margins dropped significantly, but our volume skyrocketed,” he said. “We quadrupled our daily patient intake pretty much since Jan. 1. So it’s a lot more work, a lot less money, but at the end of the year, we’re up.”

Many other winners at competitive bidding haven’t done as well, Rice said, because they only received contracts in one or two categories. “The driver for us is when the hospitals discharge somebody, they still want to make one phone call,” he said.  And since his company has so many contracts, it can provide that one-call service.

Click here for “Fall-Back Options for Unsuccessful HME Bidders.”

HomeCare, January 2012