PAMS Urges Caution in Accepting Round One Contracts

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.”