Medicare reimbursement fees are arbitrary and artificial, bearing no resemblance to actual HME/DME market prices
by Wayne Stanfield
April 12, 2013

There is a very serious virus spreading through the reimbursement structure for the DME industry. It started several years ago as a treatable disease, but has now reached epidemic proportions. That disease is the driving down of DME fees to a level below the cost of doing business. It is a disease that has been driven by the fact that every insurer seems to feel that the fees set by Medicare are the “Gold Standard” for everyone. Lost in this spreading disease is the fact that Medicare fees are both arbitrary and artificial. They were set by the application of complex rules that tied fees to amounts billed during a period in the 1980s and then were tweaked and adjusted by all sorts of mechanisms that have left them bearing no resemblance to actual market prices.

Based on these Gold Standard rates, suppliers were offered managed care and private payer contracts to provide DME products and services below the usual rates. Suppliers could say no and often negotiate a better price, thus avoiding the impact of reduced fees. As time passed the “virus” became harder to treat as more insurers sought to reduce costs and became more aggressive in seeking discounts.

In 2011, Round 1 of the so-called “competitive” bidding program started and reduced fees for DME products by an average of 32 percent. This was tantamount to pouring gas on a fire—insurers saw the opportunity to cash in on the CMS manipulated bidding process that allowed suicide bids to set DME fees too low to sustain business operations. Consequently, more than 450 known business failures were reported.

Many insurers jumped on these prices and offered exclusive contracts to big companies at Round 1 rates and the die was cast for the future. Most other insurers and Medicare Advantage plans likely held back to see if Round 1 would really collapse as predicted, and it didn’t. The virus continued to spread until the Round 2 fees were released on Jan. 30, setting rates an average of 45 percent off current Medicare rates (72 percent for diabetic testing suppliers). It is likely that most insurers began to salivate. Round 1 didn’t fail and Round 2 set fees even lower. Some health insurers and Advantage plans now see the Medicare rates as the new Gold Standard and it took less than a month before the virus started really going wild.

Suppliers have long thought that the solution to the Medicare “suicide” bidding program might be shuffling patients to Medicare Advantage plans. If reports from several states are an indicator, companies selling Medicare Advantage plans may start adopting the Medicare Gold Standard pricing for their plans.

Right out of the chocks we heard that an Advantage plan in Arizona has contacted their preferred suppliers and started the ball rolling to move to the new Round 2 fees. The call came from the plan’s contract office and the statement was, “our new Medicare percentile contract rate is Medicare minus 46 percent,” based on the Round 2 bid prices. When told by the supplier that those prices were unsustainable, their response was that they would “negotiate,” but no timetable was set. The plan began shopping the other area providers to find someone who would take the 46 percent reduction. No word yet on what happened next.

If the virus spreads across Medicare Advantage plans, it may also infect Medicaid and private insurers, and suppliers banking on surviving with non-Medicare business could be in for a financial shock.

Non-Medicare payers may have been waiting for Round 2 to see what the rates would be. Since Round 1 did not fail, and Round 2 set prices even lower, these payers likely feel comfortable moving their fees to these new rates. Most don’t understand the program that set these unsustainably low fees; they just see CMS touting the program’s success and want a piece of the action. Already some payers, such as the United Mine Workers programs, use bid rates based on the patient’s zip code.

With the standard now set by the federal Medicare program, every other payer will simply say, “If it’s good enough for Medicare, it’s good enough for us.” This fact will make the survival of most DME suppliers impossible. Take 45 percent off total revenue and not one DME, large or small, can remain financially viable. Unlike Mark Twain, the reports of the death of the DME industry may not have been exaggerated. To stop this virus, suppliers simply have to fight back with every possible effort. The only treatment is a strong dose of Congressional intervention.