Medicare’s Saviors?

Like eager boy scouts who offer to usher an elderly woman across the street, federal lawmakers are lining up to guide Medicare into the 21st Century. The Democrats are reporting that, while the elderly woman would like to have help with her grocery bag, she otherwise is “just fine, thank you.” Republicans are insisting that, without substantial help, the elderly woman might never make it across the street.

Both parties are promising to add a prescription drug benefit to Medicare, but Republicans say that radical reform must accompany any such benefit. Away from the glare of television-camera lights, lawmakers on both sides of the aisle admit that budget cuts are inevitable.

If history has taught the home medical equipment industry anything, it is that Congress most likely will look to HME for cuts. Fortunately, the industry has laid the groundwork for a lively debate, and HME advocates say they are ready for the challenge.

Against this backdrop of uncertainty, state governments are experiencing the worst budget shortfalls since World War II, according to the National Governors Association. The economic downturn is causing Medicaid rosters to swell, even as tax revenues dwindle. Like their federal counterparts, however, state HME-industry leaders are prepared for a struggle. Armed with proposals to help state legislators find mutually agreeable savings, they are determined to avoid such pitfalls as competitive bidding.

The Federal Outlook HME’s future balances on the budget fulcrum

Imagine a long, narrow table, balancing on the tip of a pair of scissors. Stacked at one side of the table are about 76 million baby boomers, ready to hit retirement age; 40 million seniors calling for a Medicare prescription drug benefit; thousands of doctors begging for a boost in reimbursements; a few hundred military commanders decked-out in war attire; and a smattering of Wall Street analysts, shaking their heads in dismay.

At the other side of the table is a heavy stack of documents, including the budget allocations for every single government program, from Head Start to Medicare.

Surprisingly, the documents are dragging the left side of the table down, throwing the whole delicate arrangement out of balance.

The challenge, for the 108th Congress, is to move the scissors to the left — to cut government spending just enough to compensate for the burden that a looming war, prescription drugs, provider give-backs and a lagging economy are placing on the federal budget.

Fortunately for some lawmakers, partisan bickering no longer is a huge obstacle to making these cuts. In the wake of the 2002 elections, Republicans control the Senate, the House of Representatives and the White House.

Nonetheless, the lawmakers’ task is daunting. They will be looking everywhere for savings, reviving proposals that have been lying dormant on dusty congressional shelves. Among those dormant proposals are several initiatives that could affect the home medical equipment industry dramatically: sweeping Medicare reform, competitive bidding, the dissolution of the “average wholesale price” formula for drug reimbursements, and the use of the “inherent reasonableness” authority to cut Medicare HME reimbursements quickly and decisively.

“The budget is the common thread that will influence the development of the policy issues,” says Asela Cuervo, vice president of government relations for the Alexandria, Va.-based American Association for Homecare. “The need to save money on domestic programs like Medicare will drive cost-cutting policies like competitive bidding, AWP and IR — and the objective of Medicare-reform proposals is to save money.” Medicare Reform

Adding a prescription drug benefit to the current Medicare system would be “like throwing lead weights into a sinking ship,” Sen. John Breaux, D-La., told The New York Times recently.

In Breaux’s opinion, the only way to save the ship is to inject competition into the Medicare system, a conviction he shares with the Senate’s new Majority Leader, Bill Frist, R-Tenn., and with President Bush.

“It is now clear that the White House will be pushing for Medicare reform, using the Breaux-Frist privatization model,” says David Williams, director of government relations for Invacare, an Elyria, Ohio-based manufacturer. “This provides the HME industry with an argument against nationwide competitive bidding, because [HME] competitive bidding would be redundant under a privatized Medicare program that would incorporate the principles of true competitive bidding.”

Yet, despite the advantage this argument could give the HME industry in the competitive bidding debate, privatized Medicare is not a silver bullet, according to John Gallagher, vice president of government relations for The VGM Group, a Waterloo, Iowa-based buying group for HME-providers. “Everything hinges on the wording that comes out,” he says. “If they privatize Medicare by letting the market dictate free access, it bodes well for the HME industry. But if they swing toward government-mandated health care, it bodes ill for us.”

At the heart of Frist’s approach to Medicare reform is an attempt to generate competition among health plans. Modeled after the Federal Employees Health Benefits Program, Frist’s Medicare system might contribute a fixed amount of money for each beneficiary, requiring beneficiaries who choose more-expensive plans to pay more.

But the Center for Medicare Advocacy says privatization will shift the burden to beneficiaries, thus returning the Medicare program to the 1960s. “Instead of decreasing medical expenses for older people and people with disabilities, these proposals will result in Medicare beneficiaries having to pay more for their care, or doing without needed services,” CMA argues.

To ensure that a privatized Medicare system would not leave HME providers out in the cold, industry advocates must insist on a place at the negotiating table, the experts agree.

“The Medicare reform debate will be like an old-fashioned horse-trading session, with each member pushing for [his or her] ‘must-have’ benefits,” Williams says. “Our industry has yet to cultivate many true believers who will speak out on our behalf and draw a line in the sand around any cuts in HME reimbursements.”

Fortunately — or unfortunately, depending on one’s perspective — the 108th Congress is not likely to agree on sweeping Medicare reforms anytime soon, according to Tom Connaughton, AAHomecare’s president.

“There will be a heck of a fight to get this passed,” he says. “In the long term, if the administration is successful [at privatizing Medicare] it would change the model in which we’re dealing. But something in me says that [lawmakers] will come out with a prescription drug benefit and incremental reforms” this session, instead of sweeping reforms.

“Many believe that, with a Republican-controlled Congress and White House, issues will pass with great ease,” says Darren Jernigan, director of government affairs at Lebanon, Tenn.-based Permobil. “But do not underestimate the minority.” Competitive Bidding

By most accounts, the HME industry is better off than it was last summer, with regards to national competitive bidding, a program that would pit HME providers against each other in a bid to win the right to serve Medicare beneficiaries. Thanks to high-level and grassroots lobbying efforts, the industry succeeded in generating enough controversy around the issue to get lawmakers’ attention, Cuervo says.

Sen. Chuck Grassley, R-Iowa, who last year co-sponsored legislation that included a provision for competitive bidding, now admits that the program could be flawed. “[Grassley] understands it was a bad policy, particularly for rural and small communities,” says Gallagher, who met with the senator Christmas Eve to discuss HME-related issues. “Major cities just aren’t going to be able to provide the services to rural communities. But [Grassley] was brutally honest. He said the HME industry is going to have to come forward with some kind of savings.”

Even Sen. Bob Graham, D-Fla., who for nearly a decade has been one of competitive bidding’s most enthusiastic supporters, seems to be backing away from the issue. “He has heard from a great many of his constituents,” Gallagher says. “It looks like he’s stepping away from competitive bidding, because of his wish to put his hat into the ring for the presidential election.”

Nonetheless, the threat of HME competitive bidding still is very real, according to Cuervo. Lawmakers are willing to face a lot of controversy, if it means addressing more-pressing concerns. “As we saw last year, in response to the need to generate budget savings — to underwrite other programs like prescription drugs — Congress has latched on to competitive bidding as a way to save money and modernize Medicare,” she explains. “The Republican majority increases the likelihood that Congress will pass last year’s agenda on competitive bidding.”

Partisan lawmakers’ inability to compromise was the primary reason competitive bidding did not become a reality during the 107^th Congress, Jernigan agrees. But the Democrats still control nearly half of the Senate, and competitive bidding would require a bipartisan bill. Consequently, Jernigan’s prediction for competitive bidding is: “Not this session.” Average Wholesale Price

For years, government budget-watchers have targeted Medicare’s average wholesale pricing system, which sets drug reimbursements at AWP, minus 5 percent. The problem with the system — as the Office of Inspector General, the General Accounting Office and the Office of Management and Budget have explained — is that Medicare is the only entity still basing drug reimbursements on AWP, an arbitrary price that manufacturers set.

“At this point, [however], it is important to distinguish between Medicare drug reimbursements to physicians and its drug reimbursements to [HME] suppliers,” Cuervo says. Under Medicare Part B, “suppliers do not receive any payment for the services necessary to furnish respiratory and infusion drug therapies to Medicare beneficiaries, whereas physicians do.”

In a Mar. 14, 2002, letter to the Senate’s Subcommittee on Aging, Connaughton argued the above case convincingly. “The acquisition cost of the drug is only a fraction of the overall cost of caring for these patients at home,” Connaughton said.

These and other appeals have been successful in making Congress aware of the need to pay for the services required to furnish infusion and respiratory drug therapies safely, Cuervo continues.

Consequently, while Cuervo expects Congress to address AWP this session, she is confident that any new drug reimbursement system will consider auxiliary services.

But Gallagher wonders if the 108th Congress will have time to address AWP at all.

“It won’t be a huge issue right up front,” he says. “I don’t see it happening until after Congress addresses Medicare reform.” Then again, lawmakers may try to use AWP to offset the costs of other Medicare reforms, he adds.

Whatever happens, small HME providers should not dismiss the significance of the AWP issue, Williams cautions. “AWP is really an opportunity for the industry as a whole,” he says, “because resolving the issue will require CMS to acknowledge — for the first time — that there is a service component within the DME benefit.” Inherent Reasonableness

Some may wonder whether “inherent reasonableness” — the name Congress gave to Medicare’s reimbursement-setting authority — still is a legislative issue. After all, lawmakers gave Medicare the IR authority more than a decade ago, and then streamlined that authority in the 1997 Balanced Budget Act.

But the Centers for Medicare and Medicaid Services’ first attempt to use the authority was a bitter failure, plagued by the HME industry’s complaints about unsound procedures. Responding to these complaints, Congress prohibited CMS from using the IR authority, until the GAO could analyze the process whereby the agency determined what prices are “inherently reasonable.” Congress also required CMS to incorporate the GAO’s recommendations into a final IR rule.

Despite the July 2000 release of the GAO’s report, CMS remained relatively quiet about IR, until the end of 2002. Then, on Dec. 13, the agency published a final rule that addressed each of the GAO’s concerns.

The rule defined “grossly excessive” and “grossly deficient” as any reimbursement that requires more than a 15 percent adjustment. It also defined the procedure for determining reasonable prices, attempting to avoid further controversy about the agency’s price-setting methodology.

Now, just as the 108^th Congress faces some of the most difficult budget decisions in more than a decade, CMS is poised to act.

“I believe that certain members of the Senate will be applying pressure on CMS to use its inherent reasonableness authority to reduce spending on certain items covered under the [durable medical equipment, prosthetics and orthotics] benefit,” Williams says. “CMS will start off by using IR to attack something like supplies, but move quickly to [using] IR as a ‘rapid response approach’ to perceived over-expenditures identified by the GAO, the OMB or the Inspector General.”

But the HME industry also is poised to act, according to Cuervo, who says AAHomecare will be watching Medicare’s IR procedures like a hawk.

“It is unlikely that the DMERCs will undertake to perform IR in the first half of the year, because they first must comply with the procedural requirements of the final rule,” she explains. “But if they prove unable to implement the process required in the rule, we will go back to Congress and point that out.” Lesser-Known Issues

Lost in the shadows of competitive bidding and inherent reasonableness, a few important HME-related issues lately have all but escaped the industry’s notice. These include the regulatory fallout from the Health Insurance Portability and Accountability Act of 1996; lawmakers’ calls for reform of the Medicare appeals process; and Congress’ tendency to overreach its fraud-and-abuse-fighting authority.

Right about now, as they prepare to implement the standard electronic transactions and code sets that HIPAA requires, federal and state officials are realizing how expensive the act could be, Cuervo says.

“The rule requires all health care payers and providers, including DME companies, to use standard formats and code sets for certain electronic transactions,” she explains. “These changes impact the administration of, and payment for, DMEPOS, under state Medicaid programs.”

Committed to eliminating all local and special codes before HIPAA’s April 14, 2003, deadline, “CMS has responded to the projections of wholesale chaos by insisting that the best way to work through the problems is to create them,” Williams says.

But if HIPAA’s implementation becomes too chaotic, lawmakers may decide to reinsert themselves in the process, Gallagher explains. “It only takes one Senator to raise an issue and make a change,” he says. Although it doesn’t happen often, lawmakers “can go back and take a look at whether CMS is stepping beyond the stated purpose of the legislation.”

Another issue that could garner congressional attention is that of Medicare-appeals reform, according to Martin Szmal, director of government affairs for Exeter, Pa.-based Pride Mobility Products.

Two years ago, the Benefits Improvement and Protection Act directed CMS to reform the agency’s backlogged appeals process. However, on Oct. 7, 2002, CMS explained that the agency would not meet congressional deadlines for reform, in part because of a lack of funding.

During a year when Medicare reform tops the Republican agenda, the appeals process could find a place at the negotiating table, Szmal explains.

“The only thing I might add to this list [of lesser-known issues] is the ongoing effort by many members of Congress — as well as a large portion of the entrenched bureaucracy — to overreach in their efforts to eliminate fraud and abuse,” Williams says. “There is always a danger that some new OIG or GAO report will result in a new, aggressive attempt to ‘reform’ the system — an attempt that results in more paperwork and slower payments for providers.” Final Analysis

Many HME providers now are wondering, “Will I be better or worse off at the end of 2003 than I am now?”

Fortunately, the experts’ answers range from neutral to positive.

“I feel better about where the HME industry is today than I did in June of 2002,” Jernigan says. “I think the industry will do no better or worse than it is doing today. As long as we keep an eye on the issues and do what is best for all at the table, the counter-balance between the people and their government should prevail.”

Williams gives three reasons why the HME industry will be better off at the end of 2003 than it is today:

“The first is that, one way or another, we should know where the Congress stands on competitive bidding, and the industry can begin to plan for the future. Next, if we play our cards well and take advantage of newfound relationships with consumers and caregivers, we should be enjoying a better relationship with policymakers in both the Congress and the [Bush] administration. Finally, the demographics remain an immutable force that will drive the growth of the HME services industry.”

Similarly optimistic, Szmal predicts that appeals reforms will help the HME industry. “Reform of the Medicare appeals process will provide protection from the [improper] collection of overpayments, and from the extrapolation of claims,” he says.

In fact, there is no better time to be a part of the HME industry, according to Gallagher.

“I’ve never seen the industry this united,” he says. “Are there some hoops to jump through? Yes. But with the Republicans taking over, nothing is a done deal. There are fresh faces we can talk to — [lawmakers] who don’t yet have an agenda.”

One thing the HME industry has proven during the past decade is its ability to adapt and thrive, despite legislative hurdles, Cuervo says. “The industry will continue to demonstrate its adaptability this year and beyond,” she adds. “There may be new challenges, but, from my experience, suppliers will respond to the challenges they face.” Bill Frist
R-Tennessee SENATOR

Career Before Politics: heart-and-lung surgeon

Position of Power: Senate Majority Leader

Health Care Agenda: Medicare reform/privatization, health care for the uninsured, racial disparities in health care

Good or Bad for HME? “I think one of the most positive things going for the HME industry is having a physician as the Senate Majority Leader.”
— Darren Jernigan, Permobil

“Frist is going to have a lot of bridge-building to do. I think he will rely heavily on [Sen. Chuck] Grassley, R-Iowa.”
— John Gallagher, The VGM Group John Breaux
D-Louisiana SENATOR

Career Before Politics: lawyer, career politician

Position of Power: ranking member of the Senate’s Subcommittee on Social Security and Family Policy; sponsored Medicare-reform legislation with Sen. Bill Frist, R-Tenn., who now is the Senate Majority Leader

Health Care Agenda: Medicare reform/privatization, health care for the uninsured

Good or Bad for HME? “John Breaux will work with Frist on providing some form of prescription drug plan. The big question is whether there will be a stand-alone prescription drug bill or whether prescription drugs will be part of a Medicare overhaul bill.”
— Darren Jernigan, Permobil Dave Hobson
R-Ohio REPRESENTATIVE

Career Before Politics: small business owner

Position of Power: chairman of the House Appropriations Committee’s Military Construction Subcommittee

Health Care Agenda: access, security, affordability, choice and fairness in health care

Good or Bad for HME? “One of our staunchest allies is Rep. Dave Hobson. Mr. Hobson is not on either of the committees of jurisdiction, but he is in a position to wield tremendous influence on the issues of interest to our industry. Any member who has a military base in [his or her] district must respect and respond to [Hobson’s] requests, if [he or she] wants to receive Hobson’s attention on issues at home.”
— David Williams, Invacare Charles Grassley
R-Iowa SENATOR

Career Before Politics: farmer

Position of Power: Chairman, Senate Finance Committee

Health Care Agenda: rural Medicare/Medicaid providers and beneficiaries, fiscal discipline

Good or Bad for HME? “He understands [competitive bidding] was a bad policy, particularly for rural and small communities. But he was brutally honest. He said the HME industry is going to have to come forward with some kind of savings.”
— John Gallagher, The VGM Group

“Grassley is a big proponent of protecting rural areas and access to [durable medical equipment].”
— Darren Jernigan, Permobil Bob Graham
D-Florida SENATOR

Career Before Politics: lawyer, career politician

Position of Power: ranking member of the Senate Finance Committee’s Long-Term Growth, Debt and Deficit Reduction Subcommittee

Health Care Agenda: Medicare prescription drug plan, find savings to balance budget, competitive bidding

Good or Bad for HME? “If he’s thinking about running for president, he doesn’t want to anger anyone right now. But he has felt strongly about [competitive bidding] for eight years. You don’t change your spots after eight years of staunch support.”
— Joan Cross, FAMES Bill Thomas
R-California REPRESENTATIVE

Career Before Politics: career politician

Position of Power: chairman of the House Ways and Means Committee

Health Care Agenda: preserving Medicare, fiscal discipline, co-sponsored HIPAA

Good or Bad for HME? Thomas “fundamentally believe[s] that competitive bidding should begin immediately, especially in light of the fact that a transition from the current federally run fee-for-service system to a privatized Medicare program will take 8 to 10 years.”
— David Williams, Invacare Mary Landrieu
D-Louisiana SENATOR

Career Before Politics: career politician

Position of Power: member of the Senate Appropriations Committee and the Senate Committee on Small Business

Health Care Agenda: prescription drug benefit

Good or Bad for HME? “New voices are emerging from the ranks of the 108^th Congress that are anxious to advocate on our behalf. Senators George Voinovich, R-Ohio; Bob Bennett, R-Utah; Tim Johnson, D-S.D.; and Mary Landrieu, D-La., have all become staunch supporters of our industry.”
— David Williams, Invacare Tom Harkin
D-Iowa SENATOR

Career Before Politics: U.S. Navy

Position of Power: ranking member of the Senate Appropriations Committee’s Labor, Health and Human Services, and Education Appropriations Subcommittee

Health Care Agenda: rural health, patients’ rights, medical research

Good or Bad for HME? “You’re going to hear from Sen. Harkin. He was the one who came out [against HME spending] on NBC Nightly News‘ ‘Fleecing of America’ program. Since then, he’s received enough correspondence [that he realizes] it didn’t get him anywhere.”
— John Gallagher, The VGM Group Jim Nussle
R-Iowa REPRESENTATIVE

Career Before Politics: lawyer, Delaware County Attorney

Position of Power: Chairman of the House Budget Committee; senior member of the House Ways and Means Committee

Health Care Agenda: modernizing Medicare, fiscal discipline

Good or Bad for HME? “Nussle is supportive of small business and job creation, so his discussions with us have been very positive, in regards to not promoting competitive bidding. He will be in an excellent position to determine who the next Congressional Budget Office director will be.”
— John Gallagher, The VGM Group Tom Daschle
D-South Dakota SENATOR

Career Before Politics: U.S. Air Force intelligence officer

Position of Power: Senate Minority Leader

Health Care Agenda: prescription drugs

Good or Bad for HME? “Daschle [essentially] said before the November elections: ‘I’ve told them I don’t like competitive bidding, but I won’t be in the room when the decision is made.’”
— John Gallagher, The VGM Group George Voinovich
R-Ohio SENATOR

Career Before Politics: lawyer, career politician

Position of Power: chairman of the Committee on Governmental Affairs’ Subcommittee on Oversight of Government Management, Restructuring and the District of Columbia; chairman, Select Committee on Ethics

Health Care Agenda: prescription drug bill, rural health, fiscal discipline

Good or Bad for HME? “[Voinovich] says that, to some people, competitive bidding sounds wonderful, but it has not been proven. So, before you jump off a cliff and say, ‘We’re gonna save money,’ let’s find out what kind of care people will be getting.”
— John Gallagher, The VGM Group

Galoshes Weather State HME leaders prepare for the economic “perfect storm” ahead

When economic times are good, politicians spend. To expect otherwise would be like expecting a dog to shun a meat wagon, according to Robert Ackerman, executive director of the Sacramento-based California Association of Medical Product Suppliers.

“If you have more money, the Republicans want to give it back, and the Democrats want to spend it,” he explains. “In either scenario, when the high times turn around, you’re not prepared for it.”

This is exactly what happened during the late 90s, before Wall Street’s bubble burst. State legislators injected cash surpluses into government programs, extending benefits and services — most notably to Medicaid beneficiaries. When the economic tides turned, tax revenues dwindled, and surpluses became deficits. Today, “you can close your eyes and all the governors sound the same,” says Christine Lapaille, director of public affairs for the Washington-based National Governors’ Association. “‘We can’t afford the Medicaid program,’ they say.”

Every state but Alabama has cut, or is planning to cut, Medicaid spending during fiscal year 2003, according to a recent study from the Kaiser Family Foundation. But these cuts are just the beginning, Lapaille says. “States are expecting a combined budget shortfall upwards of $50 billion during fiscal year 2004,” she explains. “Last year, states cut the low-hanging fruit. They used all the rainy-day funds, raised fees for services and enacted sin taxes on items like cigarettes.”

Future cuts will go deeper, Lapaille adds. “States are dealing with a perfect storm of conditions, and cuts are the only choice many governors have.” The Local Forecast

Some politicians, like Virginia’s governor Mark Warner, are looking for creative ways to avoid Medicaid cuts. They are consolidating technological infrastructures, eliminating superfluous systems and working to make state governments run more efficiently. To control prescription drug prices, nine northeastern states recently agreed to form the Legislative Association on Prescription Drugs, a nonprofit buying group designed to eliminate scorporate middlemen.

Nonetheless, few home medical equipment industry leaders believe that such creative solutions will erase completely the massive deficits states are facing. Following is a summary of the economic climates that HME dealers across the country are reporting:

• The Midwest: “Overall, the budget shortfalls [in the Midwest] are not as severe as they are elsewhere,” says Rose Schafhauser, executive director of the Stillwater, Minn.-based Midwest Association for Medical Equipment Services. Minnesota is expecting a $4.56 billion deficit during the next two and a half years, and Kansas is reporting the biggest budget-deficit increase since The Great Depression, but good communication between HME leaders and state legislators is staving off severe cuts, for now.

  In Iowa — where providers have worked closely with the state’s Department of Health Services to control HME costs — government officials say they are not planning to cut HME to make up for budget shortfalls, Schafhauser explains.

  For some Midwestern providers, however, cuts could be inevitable. In Minnesota, the governor’s new budget calls for 6.7 million in health-spending cuts, and in Kansas, “the new governor has formed task forces that are doing a top-to-bottom review of government spending,” Schafhauser adds.

• The Northeast: All of the New England states are dealing with budget deficits, but Massachusetts’ budget problems are the most severe, according to Karyn Estrella, executive director of the New Bedford, Mass.-based New England Medical Equipment Dealers Association. “Massachusetts and Connecticut already have cut some services for [Medicaid] beneficiaries over the age of 21,” she says. “Other states may follow.”

  Fortunately, state officials in Massachusetts and Maine have expressed an interest in working with NEMED to find “spending efficiencies,” Estrella continues.

  “NEMED has developed a good working relationship with the Medicaid departments in New England during the past