MECHANICSBURG, Pa.--In a notice sent Friday 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 notice 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.”
Here's why, according to the PAMS notice:
--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 margins 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.
--You will have 60 days to grow your business from very small to very large. This will likely include the hiring of new employees, expanding your 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
- 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 importantly, 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. Companies need to make sure they ran the right numbers,” he said. “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.”
In other words, he concluded, “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.”