On Your Mark, Get Set Are You Going to Go?

How long did it take Noah to build the ark? Although biblical scholars say there is no definitive answer, most people believe it took around 100 years. Unfortunately, for HME providers in the 70 MSAs named in the second round of Medicare’s DMEPOS competitive bidding program, the length of time to prepare for this flood is much shorter.

Providers who wish to participate in round two must be accredited or have applied for accreditation by May 14, and although it had not been set at press time, most believe the deadline for bid submission will be sometime this summer.

For those who have not begun preparing, time is of the essence.

Chris Yule, president and CEO of Travis Medical in Austin, Texas, says he began getting ready for competitive bidding two years ago. Yule saw what happened during CMS’ competitive bidding demonstration project in San Antonio — and saw the need to make changes immediately. He assigned a company team to focus on the process and the preparations.

“Everybody is involved in it from the top to the bottom of the organization,” Yule says.

Lambert’s Health Care, Knoxville, Tenn., also got a hint of how the process might work when BlueCross BlueShield of Tennessee sent out a request for proposals to all of the state’s HME providers asking for proposals and pricing for its commercial insurance plans and its TennCare plan, a managed care program for Medicaid beneficiaries.

“The RFP asked for information on our quality improvement policies, statistical data about our operation, our claims collection and denial history and a long list of answers to questions about our finances and individual product group capabilities,” says Randy Wolfe, the company’s president and CEO. “Like Medicare, it is going to drastically reduce the size of its HME network and lower its prices.”

According to Wolfe, Lambert’s had only six weeks to provide the information.

“This whole process was very much like a 100-yard dash for everyone who participated in it in Tennessee. My company had to quickly review over 1,600 individual SKUs in our computer system to first make sure our cost information was correct, select which items we would then use to bid on and then determine by product group what our estimated operational variable costs were per unit of service,” explains Wolfe.

“After it was all completed, we realized that our work to prepare for the Medicare bid could not begin soon enough, and we began working on it that very week.”

Some providers already have experience with the bidding process. Wright & Filippis in Rochester Hills, Mich., has a national mail order diabetes supplies business, so it took part in round one. The company also has a location in Ohio, so it placed a bid in the Cleveland CBA as well.

John Wright, vice president of the 60-year-old company, acknowledges there were system-based issues that occurred in the first round and hopes those will be addressed for round two.

Robert Brown, vice president of operations for Andrew Brown’s Home Health Care Center in Scranton, Pa., plans to bid in round two and has already taken steps to determine how he will bid.

“I am looking at my own historical data as it relates to the competitive bidding items to ensure that I have the data on hand — or access to it — when CMS starts looking for it as part of the bid process, specifically units to Medicare and non-Medicare patients, my service area and my costs,” he says.

Brown says the numbers released from round one will give him an indication of the impact these would have on his business, and he will then determine whether he can “effectively bid” before committing to a price and service area.

Robert Steedley, president and COO, Barnes Healthcare Services/Optioncare, Valdosta, Ga., says preparations for bidding at his company also are underway.

“As the round two locations were just recently announced, we have slowly begun the process by engaging some of our partners … including various manufacturers that have dedicated staff to the legislative issues facing our industry,” says Steedley.

“Some of the tools include weekly conference calls, instruction and support staff for problematic areas and frequent discussions with close associates who were involved in round one.”

Preparing to Bid

The preparation and evaluation process for competitive bidding is multi-faceted. Yule says there are a number of steps that must occur before a company can be prepared to submit a bid.

“First of all, you become accredited, and second of all, you look at your cost structure associated with activity-based costing,” says Yule. “Third, you evaluate all of your manufacturer relationships and determine if you’re going to do business with them.”

He adds you must also obtain patient feedback and inform physicians and referral sources about the different products that may be affordable under the new pricing structure.

Accreditation, the first step, is mandatory, and one that faces many providers.

Madhavi Manduru-Rao, owner of Raleigh, N.C.-based Advanced Seating and Mobility, says it is her primary focus at the moment.

“We started the accreditation process in the middle of last year and submitted the application in January,” she says.

The company is now awaiting its audit and is confident it will pass, although the process has been both painful and expensive, according to Manduru-Rao.

“In addition to the cost of the application, you’ve got to add in the expenses for doing the improvements that are required by accreditation, and that is quite a bit of money,” she says. “You’ve got to get your shop up to tune, buy all the required materials to get up to speed, have all the training for your office staff and do tons of paperwork. It’s a lot of background work to get to the point of being accredited.”

For years, many providers have moved toward becoming more efficient and creating streamlined operations. This direction is even more important for providers who want to succeed in competitive bidding.

“We’ve worked very hard from a systems perspective to try to be more efficient. We are in the process of working with an outside consultant and putting some project teams together within the company to look at ways we can be more creative to gain efficiencies … Obviously, that’s going to be something that we have to look at more and more in the future,” says Wright.

He adds it is important to determine how to increase efficiency without jeopardizing patient care, which may be a likely fallout of the process if reimbursements — severely decreased in round one — follow the same pattern in round two.

“This is important to us, but I don’t want to minimize the fact that patient care will be impacted if the pricing gets too low,” says Wright.

Being efficient can come with a cost, though, cautions Wolfe.

“At this point, each department is trying to be open to any and all operational adjustments we can design or copy from others to make us more efficient and improve our productivity. The key, however, is not to lose our individual marketability in the process of driving cost out of our company,” he says.

“We have to find ways to drive out cost without driving away customers. Anyone can find the bottom level of service to make a profit; the key is to design your company in a way that does not reduce your competitive advantage while you lean up your operation.”

Some are concerned product innovation and availability will be affected by competitive bidding as pricing is decreased.

“What you’re seeing from the manufacturers’ standpoint is they are trying to do more with less and, unfortunately, options are going to be limited,” says Yule.

He says he has made “hard choices” regarding product options but has done so in a way that will not sacrifice the integrity of the choices available to beneficiaries.

For companies such as Advanced Seating and Mobility, which focuses on complex rehab, limitations on products from different manufacturers will be difficult, says Manduru-Rao.

“The client is the one who is going to suffer because we may not be able to do it for the price that they’re asking us to do it for,” she says.

Barnes’ Steedley agrees.

“Obviously, dealers will have to control payroll and inventory, so I am concerned the end users could receive some products that are substandard, not well instructed or not fitted completely for maximum benefit to achieve the desired or expected out-come,” he says.

Fear of the Unknown — And the Known

Across the country, providers are fearful about the number of honest, service-oriented home care companies they believe will be driven out of the HME business.

“I am most concerned about three years out. We will have fewer providers, and they will be less likely to work together because the government has put them in a cage and thrown red meat at them waiting to see who kills off the other first,” says Wolfe.

“Competitive bidding should be something you use for driveways, mayonnaise and office supplies — not health care services for sick seniors and those with disabilities living at home.”

Travis Medical’s Yule fears the effect on beneficiaries, small businesses and employees. “It is catastrophic, and I believe there could have been a much better attempt to look at ways to save dollars as far as utilization than creating a bid situation,” he says.

The experiences of providers in round one also create uncertainty — from the CBIC’s Web site failures to complaints of unjustified bid disqualifications. The process seems fraught with complications.

“I disagree with the project as a whole, so I have multiple hesitations. If the process we heard horror stories of in round one continues, I expect unnecessary, duplicate work just to produce a bid,” says Steedley.

“Also, smaller dealers didn’t bid on all lines and came up with their bids early, which makes me anxious wondering if they took all the costs into account. Other dealers our size [had] multiple detailed meetings reviewing, discussing and … trying to understand all the issues. There was one common theme: No one found the bid process straightforward or easy.”

The results of round one, specifically why providers were rejected and the pricing variations across the bid areas, have Manduru-Rao concerned, because what your competitors do impacts your company’s outcome.

“The biggest concern we have as an organization is that other companies will not be as careful with what they’re doing,” adds Wright. “Will there be companies that are throwing caution to the wind, if you will, and putting in some pricing that is way out of range with what should be with what the services are that we provide?

“It’s just so unfortunate that the pricing is being looked at in relationship to the product cost alone because there are so many other things involved, including service, and my fear is other companies that are out there will look at it just as it relates to the cost of the product,” he continues. “That’s just not the way we have done business.”

Plunging Ahead

Despite providers’ intent to bid, they still have to wrestle with the process.

Steedley acknowledges he is hesitant. “I feel like we are selling ourselves short, and participating in the bid process acknowledges CMS’ belief that our industry is paid too much for what we provide,” he says.

“I am hesitant that some companies like us that strive to be above board, provide a level of service that exceeds most expectations and employ exceptional staff to care for the needs in our area of expertise will lose their ability to provide service and products due to the pricing structure required to win a bid.”

Nonetheless, providers in the round two MSAs must consider how they will fare if they lose — or win — a bid, and what that means for their companies today.

“I have been able to talk to several providers who went through the bidding process last year. If I had to sum up what they all said, it is this: Start early and don’t slow down until you are done,” Wolfe advises.

Brown is looking forward to talking with those who bid in the first round. “Should the competitive bidding train not be slowed down, I plan on talking to winning and losing bidders in round one areas to get ideas on how to ensure I am protected when my pricing is submitted,” he says.

Wright is worried because the company does not want to lose its patient-centered reputation. “Our culture is a clinical approach and a patient care approach. Since 1944, our motto has been ‘First to Serve, First to Care,’ and that is something that we don’t take lightly,” he says, “so [accepting a bid] is something we’ll look at very closely.”

Numerous providers are looking at what options they will have if they do not win a bid or decide not to accept one.

“If anybody shouldn’t be concerned about competitive bidding, it probably should be me,” relates Wolfe, whose company has two large retail operations.

“Over the last 15 years, I have moved our business into other private pay revenue that has helped insulate us from Medicare. After personally doing this for over 30 years and being very involved with the regulatory and legislative process with state and national trade associations, I have known for a long time just how vulnerable HME providers are.

Thus, Wolfe says, “if we do not win Medicare bids, we very likely can make up the difference within the first 12 months. Based on that, we very much intend to stay in business with or without Medicare.”

Brown, who is a third-generation provider, has a diverse patient, product and payer mix, but he realizes the pricing created by Medicare competitive bidding will influence other payments as well.

“If I am unable to survive with the pricing that is announced for round one — and that is the benchmark pricing that Medicare is looking for in round two — I will have to look long and hard at where I will be able to prosper,” he says.

“While we do have private pay and some wholesale accounts, the ever-shrinking dollar for health care spending is looked at very critically from every angle.”

According to Yule, the bidding process should be “black and white” and without emotional involvement.

“Here’s my bid, here are my products, here’s my company — you’re either in or you’re out,” he states. “Any business that doesn’t have a clear understanding of what it takes to deliver a product or to purchase a product, if they don’t have a budget or cash flow analysis or the ratios of their debt equity, then they are in trouble.”

Continues Yule, “I’ll make a business decision based on whether or not I want to provide under that product category, depending on the service that I can provide to the beneficiary and depending on if there’s enough margin in there that I believe I can keep the business open under that particular product line — I don’t need Medicare as a loss leader.”

With rates from round one drastically lower than the industry had expected, competitive bidding places pressure on HME owners in round two to make decisions that are responsible. At the end of the day, say these providers, it comes down to deciding whether you can or can’t meet the bid price and effectively take care of your patients and employees.

“These are people’s lives that we’re talking about here — both patients and employees — and that’s certainly an issue,” Wright sums up.

“We are part of the health care team, and we are dealing with people’s lives; we are not just people dropping off a piece of equipment. So, for us to do that in the way it needs to be done, there has to be a dollar amount involved that’s sufficient.”

State Association Urges Caution When Considering Bids, Contracts

Following CMS’ announcement of round one bid pricing, the Pennsylvania Association of Medical Suppliers warned bid winners to “proceed with caution” before accepting a contract.

“PAMS is strongly urging all round one companies to exercise great caution and to use as much time as necessary to fully understand the implications and multi-year commitments that attach to these agreements,” the association said. “Companies should view these contract offers soberly, with great skepticism and in the clear light of day.”

According to John Shirvinsky, executive director of the state association, “We just want to make sure that everyone takes all the important considerations into account. A lot has changed since the bids were submitted, and a lot of the small companies that bid may not have understood their cost structure or what it would take to service a contract.

“The place you’re starting at is that you have to have profit margins in excess of these reductions,” he continued, “and I find it hard to believe that some [of the smaller companies] can do that.”

All HME companies participating in round two of the bidding program should also take the following considerations into account. Here’s why, according to PAMS:

• A 26 percent average cut in pricing presupposes an existing average profit margin in excess of 26 percent. Make sure that you fully understand your profit margin and ask yourself if it is large enough to sustain profitability for three years at this greatly reduced fee schedule. While reductions may vary by product category, the principle behind the question does not.
• Round one bidders will have 60 days to grow their business from very small to very large. This will likely include the hiring of new employees, expanding the vehicle fleet, the need to secure larger warehouse space and/or a distribution center depending on the product category involved and a larger inventory.
• In light of additional expenses that will need to be incurred, will increased volume in sales make up for the large loss in profit margin?
• If you “win” one or two product categories, how many product categories have you lost? Will higher volume at a reduced rate make up for Medicare sales volumes at higher margins that are lost completely?
• If you plan on using subcontractors, what are the terms for reimbursing your subcontractors? If you plan to operate on a normal business-to-business basis and you will pay for equipment as it is delivered, how will that affect your cash flow?
• Things have changed since the September 2007 bid submissions:
  • Gasoline prices have increased by 25 percent and are projected to exceed $4 per gallon by the July 4 holiday;
  • CMS has proposed and will implement new quality standards that will increase operating costs and limit your ability to realize possible savings by reducing expenses such as 24/7 service;
  • The shrinking value of the U.S. dollar will impact the cost of many of the items that are now imported from overseas; and
  • Rising gasoline prices will impact the costs of other goods and services purchased.

• Remember that while the reimbursement rates in your proposed contract may be fixed for three years, your other costs are not. Employment costs, health insurance, liability insurance, tax obligations, utilities and much more are all subject to increase over this three-year contract term.
• Finally, but by no means least important, remember the domino effect! What Medicare does to its reimbursement schedule is likely to be replicated by state Medicaid programs and private insurers. In other words, there is no guarantee that your business will not experience significant reimbursement cuts across the board in the very near future.

According to Shirvinsky, a Robert Morris University study of competitive bidding — which slammed the program, saying its implementation would result in “market failure,” lost jobs and prices that rise instead of fall — referred to something called the “winner’s curse.”

“The point they make is that sometimes low bids emerge as a result of mistaken calculations, and winning companies may be inadequately prepared to provide those services and sustain normal operations,” he said.

“Companies need to make sure they ran the right numbers. They need to fully take into account whether or not they can actually service these territories.”

As to the payment amounts CMS has put forth, Shirvinsky continued, “I’m skeptical about a lot of these numbers. I’m very concerned with how these bid numbers were arrived at. It doesn’t make a lot of sense … I’ve been giving it the sniff test, and I’m not liking what I smell.”

His advice for all providers: “If the reimbursement rates offered are inadequate to cover your expenses for the next three years, then the contract before you is of no real value.”