Reeling in Profits After Round 2

Georgia Lay, owner of 280 Medical Supply in Chelsea, Ala., is doing some quick revamping of her operation after Round 2 of competitive bidding took a big bite out of her business.

“It hurt me pretty badly,” Lay said. “I bid on everything, but didn’t win on anything.” Moreover, losing a large portion of her Medicare business also meant a loss of other business that resulted from hospital referrals and discharged patients.

“A lot of the hospitals that were calling me for beds no longer call me for the other items because if they get the bed at another place, they’re also going to get everything that goes with it at that place,’’ she explained. “For instance, you need 
a bedside commode when you have that particular bed, and you’ll need a walker. You often need the cash items, like toilet seat risers.”

It has been a shock, even though she knew competitive bidding was coming.

Meanwhile, the owner of a company that was just awarded a government contract to supply oxygen, worries about how long he can survive with Medicare rates that have been cut far below his cost of operation.“There’s no way a company, even a national company, can stay in business doing this,’’ said Wayne Campbell, owner of Richmond Respiratory and Medical Supply in Chesterfield, Va.

One of those oxygen users, 80-year-old Mildred “Micky” Atkins, frets about using too much. Despite lungs ravaged by age and disease, she dials the flow back on her portable oxygen tank to the point that her breathing accelerates and her heart starts beating at an alarming rate. “It’s rough,’’ she said. “Medicare has cut back,” and Atkins is feeling the effects.

That scenario in Virginia is far from isolated. Thousands of patients and providers nationwide have been left stranded medically and financially by Round 2 of Medicare’s Competitive Bidding Program, according to HME industry experts. Still, government officials insist the program is a success, primarily because it saves money. It certainly is doing that, 
because Round 2 of competitive bidding has slashed reimbursement rates by 45 to 72 percent and erected geographic, financial and bureaucratic barriers between 
patients and home medical equipment such as wheelchairs, beds and oxygen.

“I’m hearing horrible stories,’’ said Jay Witter, vice president for government affairs at the American Association for Homecare. “It’s not just providers complaining now—it’s patients, hospitals and referral sources. It’s across the board.’’

The Competitive Bidding Program was started by Congress in 2008, when Round 1 rolled out in nine major metropolitan areas, a kind of litmus test to see if the system worked. It didn’t, and the Centers for Medicare & Medicaid Services (CMS) in 2009 had to rebid those contracts. Still, complaints and problems persisted. Experts on large-scale auctions said the system was poorly designed. It encouraged non-binding lowball bids, unsustainable prices and poor service. Nonetheless, CMS moved forward with Round 2, affecting 91 more metropolitan areas, which would institute the program in more than half the nation.

More than 2,500 providers submitted bids last year in Round 2 for a wide variety of medical equipment, and about 250 
providers submitted bids to supply mail-order diabetic equipment and test strips. CMS reported that 799 providers were awarded contracts for home medical equipment, and 18 providers were awarded contracts for mail-order diabetic equipment and strips. Contracts went into effect July 1, shutting out thousands of companies that had been providing home medical equipment and diabetic supplies to Medicare beneficiaries.

As Round 2 contracts were awarded, CMS estimated that the program would save the Medicare Part B Trust Fund $25.7 billion between 2013 and 2022. That’s about .0015 percent of the federal deficit. The program would also save 
beneficiaries $17.1 billion through lower co-pays and premiums, CMS claimed. That’s about $37 a year in savings per beneficiary.

Yet despite the dismal horizon, many HME providers are diving in to the retail waters, determined to steady their businesses with retail expansion and products designed for cash returns.

Moving Ahead With Expansion

“I was holding out,’’ Lay said, “thinking there is no way this is going to go through. But I had a plan in the back of my mind that I could use if it did happen.”

That plan in the back of her mind has now shifted to the front. She recently moved to a new, larger location and 
dramatically changed her product focus. For years she operated out of a 2,000-square-foot location in a medical center. It was expensive, and there is 
just no compelling need for that anymore.

Lay renovated an 8,000-square-foot building that once housed a lumber company. There, she has four times the space at a quarter of the rent. “I have floor space where I can actually work on equipment,” she said. New product lines include ramps, breast pumps and off-the-shelf braces. The ramps and braces are cash items; the 
breast pumps are expected to sell at a fast pace because Obamacare has made full coverage of them mandatory. “Before, women had to have a premature birth or an illness for insurance to cover it,’’ Lay explained. “And they only covered a certain percentage. Now they cover it 100 percent, and no diagnosis is required.”

She expects to retain some of her old products such as bandages and wound dressings. “I’m one of the few people around who carry them,’’ she said. 
“Customers will still seek me out for 
those kinds of items.”

Back-Up Bidder

Like Lay, Campbell said his company, Richmond Respiratory and Medical Supply in Chesterfield, Va., made a bid to supply oxygen to Medicare patients in the Richmond, Va., area, but it wasn’t 
accepted either—at first. Then, the company that actually won the bid decided that it wasn’t interested. So Campbell got a belated invitation from Medicare to 
provide oxygen, and he went through with it and accepted the contract.

Even though it was a terrible deal, Campbell thought holding the contract would make his company more attractive for a possible buyer. “We did have a couple offers,’’ he said. “But we decided not to take them and to brave the storm to see if we could get this turned around.”

In the meantime, the money just doesn’t add up, he said. For example, when averaged over the five-year contract time span, Campbell will be paid about $9/month to provide portable tanks and oxygen to a Medicare recipient. Portable tanks costs him about $75 each, and a regulator costs about $200. He could 
easily spend $500 equipping a patient, 
and refilling containers costs him $3.50 each. He is supposed to do all this for about $540 in reimbursement for five years of service.

His actual bid for the contract was much higher than what he is receiving, but lowball bids pulled the price down to levels that are unprofitable, he said. And the companies that made the lower bids may or may not have accepted the contracts. It’s hard to tell exactly how the numbers played out because the government keeps all that information confidential. It’s a mystery for everybody but CMS.

Campbell believes his only choice is to cut expenses to the bone, provide the best service possible and hang on tight.

Patient With Problems

One of Campbell’s longtime clients, Mildred Atkins, worries about Campbell’s situation, too. She knows there’s no way he can afford to keep up the high level of service that she had received before.

“I use an awful lot of oxygen,’’ she said. At age 80, she’s blind, fighting cancer and afflicted with diseased and damaged lungs. She uses an oxygen concentrator at home, but when she goes out, she needs portable oxygen tanks.

For example, when attending church, a portable tank will last her through Sunday school. Then, the next tank will last part of the way through the sermon. A final third tank will get her home. The situation is similar when she goes to the doctor; a couple visits a week and going to church can burn up to 10 tanks of oxygen.

Campbell had been delivering refilled tanks once a week. In the past, he was paid $17.80 a month and still losing money. He was able to justify the level of service Atkins needs by making a little more on the oxygen concentrator. But reimbursement for that has been slashed, too, he said. Atkins has 10 oxygen tanks. It costs Campbell $35 just to refill them weekly, and that doesn’t include his overhead.

Atkins would like to have more tanks. “But they can’t do that because it cuts into their inventory,’’ she said. “They won’t have the tanks left for other people.’’

So when Atkins goes out, she cuts her oxygen flow to the lowest possible level. It makes her breathe harder and makes her heart pound, she said. In addition, there’s a limit to how much Atkins can pay out of pocket for care. She pays normal Medicare premiums plus $556 a month for co-insurance. In addition, her medication can cost up to $730 a month. “That’s about all of my income,’’ she said.

What To Do

Unfortunately, similar stories about patients and providers are fairly common after implementation of Round 2 contracts, said Witter of AAHomecare. He has heard of seniors sharing diabetic test strips, and hospitals that are unable to release patients because critically needed home medical equipment is unavailable.

Experts said Round 2 caused the provider network to shrink dramatically. That means many Medicare beneficiaries now have to travel far from home for products, and old referral systems have been shattered, creating confusion at hospitals and clinics about exactly where to send patients for equipment.

People for Quality Care, a home care advocacy group, is collecting information from patients who are having difficulty getting the home medical equipment they need, and so far the organization has documented problems experienced by more than 1,200 patients, Witter said. Many patients are just getting frustrated with Medicare and paying cash for the equipment they need, he said.

Therefore, in addition to everything else, Round 2 is turning Medicare into a two-tiered care system, he said. “Those who have resources are paying cash, and those who don’t are waiting two or three weeks for equipment,’’ said Witter.

Round 2 opened the eyes of many 
patients to the problems within the competitive bidding system, he said. “The industry has known this was going to happen, but the patients haven’t been aware of it,’’ Witter said. “Now, they’re having access problems, and they’re speaking out.”

Meanwhile, AAHomecare is collecting a steady and powerful stream of information from providers about problems with deliveries, shortages and CMS.

All this is pressuring Congress, recently back after an August recess, to act. A House Resolution (HR 1717) proposes an alternative called Market Pricing Program, or MPP. Designed with the help of auction experts, MPP would create a rational system for establishing market-based prices for home medical equipment. It would be a far cry from a bailout for the HME industry because it, too, would drive down prices, but MPP would allow most companies to keep providing home medical equipment to Medicare beneficiaries.

It is crucial that providers and patients keep the pressure on, Witter said. “They need to contact members of Congress and demand that Round 2 stop,’’ he said. “If they’ve already contacted them, contact them again. We have legislation that members of the House can support, but Congress needs to hear the stories that we’re all hearing. The senators need to hear about problems. Congress created this; Congress can fix it.”

Round 1 Survivor

Even with all of the negative impacts, it is important to note that some HME companies survived through Round 1 contracts and lowball bidding.

“There’s life beyond competitive bidding,’’ said Georgie Blackburn, vice president of government relations and legislative affairs at Blackburn’s Physicians Pharmacy Inc., a large family-owned 
provider in Pittsburgh. Blackburn’s company accepted a contract in the Round 1 rebid for enteral nutrition and pumps. The company has managed to make it work financially.

“It pushed us to think outside the box because good providers are capable of doing so many more things,’’ Blackburn said. 
The company began power-purchasing products and cutting profit margins. “Our profitability has waned a little bit,” Blackburn said. “We’ve had to make cutbacks in some areas, but definitely not customer service. We haven’t cut staff, and we haven’t cut product. We’ve tried to cut from ownership down. Where we could squeeze a few more dollars, the owners took it on the shoulders. So far, so good.”

Still, Blackburn’s Physician Pharmacy is reluctant to expand upon that experience. The company has a large store in the Buffalo, N.Y., area, which fell under Round 2 bidding. The company submitted fair and reasonable bids for enteral nutrition and pumps. It didn’t get a contract. “We’re not going to sacrifice for the sake of saying we got an award,’’ Blackburn said.

Even so, the new customer type borne of the competitive bidding fallout—a Medicare beneficiary who has coverage for an item but would prefer to pay cash out of pocket—is good for providers. And once in the store, appealing to these customers with non-reimbursable retail products is an achievable goal.

Lay’s business, located south of Birmingham down the U.S. 280 corridor, is in a fairly affluent suburban area that has been growing for many years. Competitive bidding contracts were awarded primarily to providers operating in Birmingham. “That’s crazy,’’ Lay said. “Some of these older people can’t drive down there.” So Medicare beneficiaries come into her store and pay cash. “I’ve actually put some wheelchairs out on my floor that I marked down to $299,” she said. “A lot of people would rather buy that wheelchair than have it billed to insurance if they have to go somewhere else to get it.”

While most HME providers are feeling the strain of Medicare cuts, it’s important to remember that there are options. Especially for those hopeful business owners willing to embrace change, retail is one avenue that is proving successful.