What You Gotta Know Now

American POWs being forced to play Russian roulette in “The Deer Hunter” is the most disturbing scene of all movies for me.

The thought of home care providers submitting competitive bids for Medicare business with the level of information commonly held by these companies is equally disturbing. To avoid the Russian roulette-like risk, providers must have certain facts about their own business before concluding their bids for Medicare business are safe. Following are six questions that get to the necessary facts.

1. Is it necessary to be a competition area supplier? The law has already answered that question with a “no” for providers serving beneficiaries in smaller metropolitan statistical areas. Neither will all providers serving the top MSAs find it necessary to be a competition supplier. In earlier demonstration projects, a large number of providers decided not to participate. The most common reason was that the revenue gained from Medicare was an insignificant part of their business (less than 5-10 percent). If the answer to the first question is “no,” then answers to the following questions will still be helpful. For all others, accurate answers to the next questions are essential.
2. What is the revenue per HCPCS code from Medicare? This answer is essential because (a) bids will (in my opinion) be for product lines and their underlying HCPCS codes, and (b) the significance of the revenue and associated expenses and profits cannot be measured without it. The answer lies in your billing system. If the system does not accept the query to provide this answer, export data to an electronic spreadsheet and use its sorting capability to find the answer.
3. What is the total cost associated with each HCPCS code? The answer to this question reveals how profitable — or unprofitable — it is to provide a Medicare beneficiary with the products and services reimbursed under a certain HCPCS code. The costs fall into two categories. The first is the cost of goods, which should easily be extracted from your purchasing system. Second is the cost of activities, such as completing an intake form, collecting a CMN, completing a reorder ticket, delivery or set-up of equipment, etc. Because activity costs are not reported on financial statements, they require the process we know as activity-based costing. The answer we get from this is how much it costs to perform each activity one time. For example, getting reimbursed under some HCPCS codes never requires a reorder ticket or a CMN while others require multiple reorder tickets. Add activity costs to the cost of goods to determine the total cost associated with a HCPCS code.
4. What is the maximum acceptable discount the company can offer in a competitive bid? The discount is equal to the current reimbursement rate minus required profit and total costs.
5. Is the discount large enough to be competitive? If the answer to Question 4 produced a zero or even a negative result, it indicates that you cannot afford to make a price concession. Remember, the law says that contracts cannot be awarded unless Medicare saves money. So, a discount from the current reimbursement rate will be necessary. If there is room for a discount, the answer becomes much more subjective because it leads to “What is large enough?” To make the best effort at this answer, you must understand the capabilities, vulnerabilities and intentions of your rivals.
6. If the answer to Question 5 is “no,” the final question is “How will you become competitive and remain profitable?” The short answer is to reduce costs as a percentage of revenue. There are three ways that can be achieved, none of which are painless or risk-free.

First is to grow revenue, which should make a positive impact on the bottom line. Companies don’t hire a new president or rent additional space when they add the next customer; so, the next customer is slightly more profitable. Second is to negotiate a lower cost of goods. And third is to reduce activity costs. Most providers should be systematically working all three methods at the same time.

The potential for a “no” answer to Question 5 is why it is important for providers to know these things now rather than later. Becoming more competitive takes time. Waiting to answer these six questions can only be bad for your company and, ultimately, the customers you serve.

Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. He can be reached at 321/752-4514 or by e-mail at [email protected].