The Rest of the Story

On Jan. 8, Dave McCausland got mad. “I was listening to the CMS teleconference announcing the expansion of competitive bidding. When I heard [CMS Acting Administrator] Kerry Weems say that competitive bidding would reduce fraud and abuse and improve access to quality products, it just seemed to me that somebody had to balance the record. They are using sound-bite mentality to fuel the justification for what they are doing, and it just doesn’t add up.”

Before that Jan. 8 call, in fact, CMS sent out an announcement that included the following statement:

“The Centers for Medicare and Medicaid Services and the Office of the Inspector General will hold a news briefing to announce the expansion of a competitive bidding program designed to help lower Medicare beneficiaries’ out-of-pocket costs and reduce fraud and abuse while improving access to high quality durable medical equipment, prosthetics, orthotics and supplies (DMEPOS).”

“That seems to sum up the anticipated benefits associated with competitive bidding,” McCausland says. “Clearly, any program that could reduce beneficiaries’ costs, reduce fraud and abuse, improve access to goods and improve the quality of those goods is a program worth pursuing. Yet,” he continues, “will the competitive bidding of DMEPOS really produce all of these benefits? Is the DME industry really as bad as it is made out to be? Is there another side to this story that’s missing?”

According to McCausland, senior vice president of planning and government affairs for The ROHO Group, Belleville, Ill., those questions were worth pursuing. So he looked back at CMS data, researched congressional hearings on competitive bidding and sat down and did the math to get the answers.

In the following discussion of competitive bidding’s “alleged benefits,” as he labels them, McCausland pulls out all the stops for an in-depth look at the likely outcome of the program — an exercise that becomes more important following the recent announcement of round one pricing and contracts.

“Sadly,” McCausland says, “looking at some of the bid prices just reinforces that beneficiaries are not going to have access to the highest-quality products in some categories. They can’t. The money’s not there.

“Some of these numbers are frightening,” he says, “and they leave us with more questions than we had before.”

Alleged Benefit: Competitive bidding will significantly reduce Medicare expenditures.

Ever since competitive bidding was approved as a part of the Medicare Modernization Act of 2003, CMS has consistently forecast that the program, once it is fully implemented, would produce annual gross savings of $1 billion. This amount was reiterated in a Medicare fact sheet released March 20 in conjunction with CMS’ announcement of the winning bid rates for round one.

Likely Outcome: Sadly, based on all the reimbursement cuts that have occurred to DMEPOS since the MMA and the recent results of the round one bid rates, it is quite likely that the total “gross” savings will be much greater than $1 billion. We must discuss the difference between “gross” and “net” savings, but first, let’s look at what has occurred since the passage of the MMA and calculate some conservative estimates regarding the impact to DMEPOS expenditures.

• Gap fill reductions to powered mobility In 2007, Medicare implemented a new coverage policy for power mobility devices. All of the HCPCS codes included in this policy were subjected to the existing gap fill method to calculate new fee schedules. These calculations resulted in new allowables that were more than 25 percent lower than historic rates. You can see Medicare expenditures from 2004-2006 for the power wheelchair codes in existence prior to the new policy in Figure 1. Using this data, if we apply a 25 percent reduction, then the new PMD policy and the subsequent gap filled allowables will produce annual savings of approximately $231 million.
• 2005 FEHBP cuts to DME In 2005, allowables were reduced for a specific list of DME HCPCS codes based on how they compared to the rates paid for the same items by the various Federal Employee Health Benefit Plans. Figure 2 identifies the average allowed amounts for each of the affected codes for 2004-2006, and the variance between the average allowables for 2005 and 2006 as compared to 2004. Figure 3 takes these average reductions to the allowables for each HCPCS code times the number of allowed services for 2005 and 2006, respectively, to show the total savings produced each year from the cuts. Based on this analysis, it seems we can assume that the FEHBP allowable cuts implemented on specific DME and supply items should produce annual savings of at least $100 million.
• 2005 DRA cuts to DME and oxygen The Deficit Reduction Act of 2005 changed the capped rental rules for DME. The change eliminated months 14 and 15 of rental and mandated ownership transfer of a capped rental item to the beneficiary after 13 months. In addition, the DRA mandated that ownership of oxygen equipment must be transferred to the beneficiary after 36 months of rental. Determining the potential savings from these changes is difficult because data from 2007 and beyond will be necessary to analyze the impact. In addition, the estimates that are available vary significantly:
  • In a report to the Senate Finance Committee in October of 2005, the Congressional Budget Office calculated that the requirement to transfer title on DME after 13 months of rental would produce $2.16 billion in savings over the 10-year period from 2006 through 2015, or an average of $216 million per year.
  • In a cost report on the DRA released on Jan. 27, 2006, the CBO estimated the changes to DME and oxygen payment rules would produce a savings of $1.9 billion over the 10 years, or approximately $190 million per year. However, numerous groups within the HME industry have argued that this estimate is too low, as it failed to account for the additional savings produced by the 36-month cap on oxygen.
  • In July of 2007, Avalere Health published a study for the Council for Quality Respiratory Care that estimated annual savings from the change implemented to oxygen reimbursement alone would be between $400 million and $500 million.

  This leaves us with a wide disparity regarding the potential savings. But based on the data we have, it’s reasonable to assume the annual savings produced by the DRA changes to DME and oxygen will be in excess of $300 million, and potentially up to $700 million.

• Payment rates for round one of competitive bidding CMS’ March 20 announcement on round one pricing included this statement: “Medicare made approximately 889,000 payments for oxygen concentrators, 171,000 monthly payments for semi-electric hospital beds, and 2,000,000 payments for boxes of 50 test strips in 2006 in the 10 communities included in the first round of the DMEPOS competitive bidding program.”

Additionally, CMS said that Medicare should see an overall reduction of approximately 26 percent in the fee schedule amounts for the products included in round one.

If we can calculate a savings of over $129 million dollars from just three products in 10 bid areas, imagine what the savings amount will be if we extend this to 100 metropolitan areas! (That’s the number CMS uses for its $1 billion savings estimate, according to the Final Rule.)

Further, what is the savings from all those other product categories included in competitive bidding where we do not yet have enough data to estimate savings?

At any rate, adding up the total gross savings we’ve identified so far:

Once we add in FEHBP cuts to oxygen and the additional savings from all of the other products and product categories included in round one of competitive bidding, we are already over $1 billion in gross savings, and competitive bidding has only been implemented in 10 cities.

Some will argue these points reinforce the position that DMEPOS items were being reimbursed far too much. How else could providers take the significant, additional cuts to reimbursement in round one, after already experiencing all the other cuts? The reality is that providers, may not be able to tolerate these additional cuts and continue to provide the quality goods and services they have.

In addition, the winning bid rates are not a fair reflection for the following reasons:

• The Final Rule for competitive bidding states that a bidder must submit bid prices that do not exceed the current allowables. Even though there have been substantial cuts that may not even have been considered when competitive bidding was devised, all the cuts we’ve discussed are already reflected in the allowables that bidders must use in preparing their bids. And if they hope to win, they must bid even lower.
• Many providers are bidding out of fear for their livelihood and the livelihood of their staff. Human nature will drive bidders to enter even lower dollar amounts in the bids they submit in an attempt to save what they can.
• CMS and its Competitive Bidding Implementation Contractor sorted all the bidders for a product category from lowest to highest, based on their composite bid. Then they looked at what each bidder stated regarding the volume they were capable of handling (their capacity). Starting with the lowest bid, capacity was added up until they got to 100 percent. At this point, the CBIC could argue they had identified enough providers to handle the total capacity needs for the goods/services in the bidding area. While the numeric calculations may be correct, there are a myriad of factors that really haven’t been considered, including geographic distribution of the winning bidders; whether they can really manage the capacity they have stated; the relative quality, skill and experience of the winning bidders; and whether these companies have the infrastructure in place to implement the transition to service of the entire CBA before the July 1 implementation date.
• To compare apples to apples, we must recognize that the estimates we have discussed are “gross savings.” Identifying “net savings” is much more difficult and may not be known for years.

To calculate this figure, any additional expenses that are incurred by CMS (or any other governmental agency) in developing and administering competitive bidding must be deducted. For example, the 2009 federal budget submitted by the administration includes approximately $50 million to implement competitive bidding.

There also may be increases to other beneficiary health care costs (doctor visits, hospital or nursing home admissions, etc.) as a result of these DMEPOS cuts. Finally, what are the real savings should any of these cuts result in the loss of life?

Alleged Benefit: Competitive bidding will ensure and enhance the quality of goods and services provided to Medicare beneficiaries.

Likely Outcome: All HCPCS codes represent a group of products, not a single, unique item, so it is inevitable that features, performance, durability and cost will vary.

But under competitive bidding, the financial incentives to provide the cheapest product and the least amount of services may actually become a necessity. There is simply no way to ensure that the final bid rate for a range of products will cover a provider’s cost to deliver the “best” products and services.

Also under competitive bidding, the winning bidder’s need to meet and exceed the competition and to ensure that beneficiaries and referral sources are satisfied becomes much less important. With fewer provider choices available, beneficiaries and referral sources will likely be forced to take what they can get.

CMS may argue there is language in the Final Rule to avoid this outcome. Specifically, the rule requires that winning bidders offer the same goods and services to Medicare beneficiaries as they do to individuals covered by other payer sources. Yet how will this be enforced?

And with Medicare comprising such a large portion of business for most providers, will this rule maintain a level of quality for beneficiaries — or will it result in quality diminishing for all patients?

Alleged Benefit: Competitive bidding will ensure and enhance beneficiary access to goods and services.

Likely Outcome: Under competitive bidding, a bidder must commit to service the entire geographic area covered, so it could be argued that the beneficiary’s access is assured within the bid area. But how can reducing the number of providers allowed to deliver a specified good “enhance access?”

Further, some of the bidding areas are quite large, and, as of press time, we do not know how the winning bidders’ locations will be distributed within them. Beneficiaries and referral sources may be forced to utilize winning bidders that are located farther away than they are accustomed to, resulting in longer delivery times.

In addition, there has been a historic need for providers to compete based on their response time. With fewer providers serving a large geographic area, beneficiaries and referral sources will, once again, likely be forced to take what they can get.

Also, when considering access, what happens to those beneficiaries who live just outside of the boundaries of the bid area? Will the winning bidders service these beneficiaries? Will losing bidders continue to exist and will they service these beneficiaries?

Under any scenario, it would seem impossible to deliver on a claim that competitive bidding will enhance, let alone ensure access, for those beneficiaries that live just outside of a bid area.

Finally on the subject of access, one thing that referral sources and beneficiaries have historically been able to do is consider which provider most adequately addresses the needs of the individual. Nowhere is this more important than for those beneficiaries requiring a variety of products.

In such a case, identifying a provider that can address all of the patient’s needs makes everything simpler, from delivery to billing. However, under competitive bidding it is far more likely there will be different winning bidders for different product categories. That means a patient requiring oxygen, a hospital bed, a support surface and enteral nutrition may be required to utilize as many as four different providers.

Does such a situation ensure and enhance quality and access?

Alleged Benefit: Competitive bidding will reduce DMEPOS fraud and abuse.

Likely Outcome: Reducing fraud and abuse has been a primary justification for competitive bidding since it was first proposed. For example, Competitive bidding was included in Title III of the MMA; the title given to that section is “Combating Waste, Fraud and Abuse.” During that Jan. 8 teleconference, Acting Administrator Weems stated that “we expect the program will deter fraud by eliminating unscrupulous providers from the competitive bidding process.”

Clearly, fraud and abuse is a problem within the industry, but let’s consider the following questions:

• How does the fraud and abuse incurred in the DMEPOS industry compare to other health care segments? Total Medicare expenditures in 2006 were over $382 billion. During that same year, Medicare expenditures for DMEPOS items were approximately $12 billion. That means Medicare expenditures for DMEPOS represent slightly more than 3 percent of Medicare’s total expenditures. CMS has stated that 10 to 20 percent of Medicare dollars go to fraud and waste. If we assume only 10 percent, then that means the total associated with fraudulent claims in 2006 was approximately $38 billion. That is over three times more than the total Medicare expenditure for DMEPOS. Certainly this doesn’t justify or minimize the problems in the DMEPOS area, but it does put the issue into perspective.
• Is the HME industry fully responsible for the fraud and abuse problem in its market? The home care community has been calling for Medicare to crack down on fraud for years, and it hasn’t gone unnoticed by other sectors of government, either. HHS’ Office of Inspector General has reported on weaknesses in Medicare’s enrollment process for and oversight of DMEPOS suppliers for the past decade. Those involved in HME have been pushing for the implementation of quality standards and accreditation for some time, too. Only now is this being implemented by CMS as a part of competitive bidding.
• Is competitive bidding an effective way to curb fraud and abuse? There is something inherently wrong with drafting health care policy as a way to reduce crime. First, it penalizes those that are law-abiding while trying to stop the law-breakers. Further, since when have rules, regulations and laws been an effective deterrent to those willing to violate them?

In testimony during a congressional hearing on Medicare fraud, HHS Deputy Inspector General for Evaluation and Inspections Stuart Wright stated: “The DMEPOS fraud schemes we have uncovered generally fall into the following categories: (1) filing claims for equipment that was never delivered; (2) billing for high cost equipment when lower cost equipment was actually provided (upcoding); (3) billing for the component parts of a piece of equipment instead of the entire unit (unbundling); (4) delivering medical equipment to beneficiaries who do not need it; and (5) paying kickbacks to physicians and other sources in return for referring beneficiaries, access to beneficiaries Medicare numbers and/or signing certificates of medical necessity.”

How will competitive bidding curb any of these fraud schemes?

All that said, however, competitive bidding will probably reduce fraud and abuse. It all comes down to numbers.

Competitive bidding will dramatically reduce the number of Medicare providers and, as a result, it will be a lot easier for CMS to police those that remain. But is it really justifiable to eliminate a large number of law-abiding providers from a program just to make enforcement easier?

Bottom line, accreditation, quality standards and enforcement reduce fraud and abuse — not competitive bidding.

Alleged Benefit: Under competitive bidding, access to the Medicare program for small providers will be maintained.

In fact, according to the CMS announcement on March 20, 64 percent of all the providers offered contracts in round one are small providers, and the agency received more than 6,000 bids.

Likely Outcome: Based on a subsequent release of the number of contracts offered in round one, the earlier statements regarding small provider participation may fall under the category of “statistics can prove anything.”

A March 28 posting on the CBIC Web site showed the total number of contracts offered across all product categories and metropolitan areas is 1,335. This means small providers were offered approximately 854 contracts (64 percent of 1,335).

Let’s compare this to information included in the Regulatory Impact Analysis section of the Final Rule. The following are excerpts from that section:

• “We estimate that 28,960 suppliers will provide competitive bid items in the CBAs that we initially designate. If suppliers furnish products in more than one MSA, we counted them more than once because they are affected in more than one MSA … we estimate that 68 percent of suppliers will furnish products subject to competitive bidding and will be affected by competitive bidding during the initial round of competitive bidding.”
• “We also estimate that approximately 85 percent of registered DMEPOS suppliers are considered small according to the SBA definition.”
• “We now estimate that 81 percent (rather than 90 percent) of suppliers will submit bids.”
• “We also assume, based on the results of the demonstration, that at least 60 percent of bidding suppliers will be selected as winners in at least one product category.”

Based on this information and other data contained in the Final Rule, we can make the calculations shown in Figure 5.

Comparing this data to the recent announcements leaves us with these major questions:

• Why were CMS’ estimates in the Final Rule so overstated?
• Does it really matter that small providers were offered 64 percent of the contracts in the first 10 bidding areas when the total number of contracts offered (1,335) was only 14 percent of what CMS had originally forecast they would offer in the Final Rule (9,584)?
• In the Final Rule, CMS estimated 60 percent of the bids would be awarded contracts. CMS received over 6,000 bids but only 1,335 contracts were offered (22.5 percent). What happened?

If the CMS estimate included in the Final Rule regarding the total number of affected providers is correct, then here’s another statistical bullet point:

• Only 5 percent of the affected small providers were offered a contract in the first 10 CBAs (854 out of 16,762) while 16 percent of large providers were offered a contract (481 out of 2,958).

CMS also stated in the Final Rule that no less than 30 percent of the winning bidders would be small businesses. If they had offered contracts to bidders for 60 percent of the bids, and 30 percent had been small providers, then we end up with the following calculation based on the submission of 6,000 bids:

6,000 bids × 60% being awarded a contract = 3,600 contracts

3,600 contracts x× 30% being awarded to small providers = 1,080 contracts offered to small providers

So, it really appears that the situation for small providers may be even worse than predicted. This reinforces the numerous concerns that have been raised about whether small providers can compete within a competitive bidding atmosphere.

Beyond the statistics and the rhetoric, however, how can any program that focuses strictly on the amount bid to identify winners and losers really protect small providers that lack the buying power of larger firms? In and of itself, this puts small providers at a disadvantage.

There are also at least three additional provisions in the Final Rule that may well eliminate the ability of many small providers even to bid:

• Mandatory accreditation Any company wishing to be awarded a bid must be accredited. Granted, the industry has pushed for quality standards, accreditation and increased enforcement to curb fraud and abuse. But under the CMS requirements, a provider will have to expend the time, effort and capital to achieve accreditation without any guarantee that he will be able to continue in the Medicare program.
• Competitive bid areas A bidder must agree to service the entire geographic area that comprises the CBA. Think about the obstacle this one requirement places on a small, boutique provider in a metropolitan area like Chicago, Los Angeles or New York. Only large, multi-branch companies or networks will be able to cover the geography required to bid.
• Competitive bidding product categories A bidder must agree to offer products associated with each and every code included in the bid category. Depending on the size of the category, this will be difficult for a small provider.

In round one, for example, CMS bid two product categories associated with power mobility. The standard power wheelchair category contained 109 HCPCS codes, the complex rehab power wheelchair category had 142 and 80 codes were in both.

Numerous codes had similar coverage criteria. This redundancy and myriad of products will make it difficult for any provider to meet the product offering requirements. In the case of a small HME that focuses on a specific niche, this requirement may be prohibitive.

Clearly, any program that selects winners based on price, and which includes bidder requirements as described, does not protect small business.

The Rest of the Story: So, what are the “real” benefits associated with the competitive bidding? As we’ve seen, competitive bidding does not necessarily produce a “net” savings; it’s doubtful the program will really maintain (let alone enhance) quality and access; it will hurt small providers; and it’s not the most appropriate way to curb fraud and abuse.

If we assume, however, that competitive bidding is an interim step and that CMS will return to a fee-for-service system within a few years, then here’s what the environment might look like in that post-competitive bidding marketplace:

• Medicare allowables will be considerably lower, and these rates will be applied nationwide.
• The number of Medicare providers will be dramatically reduced, which will make enforcement easier.
• Providers will have to meet quality standards and be accredited.
• Surviving providers will once again have to compete based on quality and access.

The Oxford American Dictionary defines fraud as “deception, a dishonest trick, a thing that is not what it seems or pretends to be.”

Based on this description, we have to wonder about the methods being employed to justify competitive bidding … Machiavelli would be so proud.

J. David McCausland is senior vice president of planning and government affairs for The ROHO Group, Belleville, Ill., which distributes its products in 65 different countries. In 1996, he was chairman of an industry coalition that worked on developing a new support surface policy, was actively involved in development of a new seating policy in 2004, and has recently been named convener for an ISO standards workgroup charged with developing new standards for full support surfaces. McCausland can be reached by email at [email protected].