Business Solutions

Round Two Reaction

CMS's announcement of the Round Two reimbursement rates has left the industry reeling. Where do we go from here?

• By David Kopf
• Mar 01, 2013

For many months — years, in fact — the home medical equipment industry has been watching the fuse on the competitive bidding powder keg slowly burn down. As that fuse has grown shorter and shorter, the tension has grown increasingly taught.

Just like in a Hollywood adventure movie, the industry has made many efforts to cut that fuse short. These efforts have included 2010’s H.R. 3790, the bill introduced by former Rep. Kendrick Meek (D.-Fla.) that called for the repeal of competitive bidding; and the more recent H.R. 6490, the lapsed 2012 bill launched into the House by Rep. Tom Price (R-Ga.), that would have replaced the Centers for Medicare and Medicaid’s competitive bidding program with the industry’s Market Pricing Program. The current strategy will see Rep. Price soon launch a revised version of H.R. 6490 into the 113th Congress.

And, just like in a Hollywood adventure movie, those efforts have been frustrated at every turn. Meanwhile, the fuse keeps burning down, growing closer and closer to the point of no return. It’s enough to put you off your popcorn, if not send you screaming from the cinema. Then tension is thick indeed.

Well, the scenario just turned explosive. At the end of January, several weeks beyond its scheduled Dec. 20, 2012 deadline, CMS released the Round Two reimbursement rates, and the shockwave was stunning: DME reimbursement saw an average 45 percent cut across the nine categories and 91 competitive bidding areas, and reimbursement for the national mail-order program for diabetic testing supplies was cut by an average of 72 percent.

The delay in the release of the reimbursement rates; the sheer size of the cuts; how they impact the efforts to stop competitive bidding; and other factors have generated a number of questions in the industry. HME Business sat down with various competitive bidding experts as well as providers to get their on competitive bidding and the fight to stop the program in order to get their perspective on this latest shocker in the run-up to Round Two’s July implementation.

Why The Delay?

An initial hang-up with the bid amounts is that CMS took considerably longer than expected to release the bid amounts. The agency was supposed to release the bid amounts at the end of fall, which would have been Dec. 20, 2012, but instead didn’t release them until Jan. 30. Initial thoughts were why did CMS take so long to release the bid amounts, and did the timing have any significance?

For starters, the size of Round Two being so much larger probably played a hand in the delays.

“We can only assume that the time was necessary once CMS sent out bona fide bid rationale letters in November,” says John Shirvinsky, executive director of the Pennsylvania Association of Medical Suppliers. “They had 91 bidding areas to review, so it will take time given the complicated nature of the bid process they designed.”

“The only reason I can imagine is it’s the workload,” agrees Cara Bachenheimer, senior vice president of Government Relations for Invacare Corp. “With 97 bid areas (remember, New York, Chicago and LA are subdivided into multiple bid areas) there was a massive amount of information that thousands and thousands of HME providers submitted.”

“I think CMS likely underestimated the significant volume of information and time that it would take to process and review the bid information,” says Seth Johnson, vice president of Government Affairs for Pride Mobility Products. “They also likely had issues that needed to be resolved internally that resulted in the delay.”

And that points to a larger problem, Johnson adds.

“The release of the Round Two information well over a month later than expected, should serve as a warning sign not only to CMS but also Congress that this program cannot be implemented July 1,” he notes.

Wayne Stanfield, president and CEO of the National Association of Independent Medical Equipment Suppliers, also chalks the delay up to “pure workload,” but adds with a sarcastic sting: “That and the fact that they had to manipulate the capacity numbers to get the price where they wanted it.”

And that’s the problem. No one knows if that could be the case or not, since no one knows a thing about how CMS is really doing anything.

“Because of the complete lack of transparency of the competitive bidding process, we can only speculate why it took CMS so long to release this information,” says Jay Witter IV, vice president of Legislative Affairs for the American Association for Homecare, who adds that particular flaw of the DME competitive biding program simply points to the industry’s option as a better way.

“This problem would not occur under the Market Pricing Program (MPP),” he added. “The bid process is transparent and bidders know the results (including the price) immediately after the auction.”

But could CMS’s delays have had any political timing? Without knowing what Round Two would do to reimbursement, it’s tough for the industry to advance any legislation in Congress with a pay-for that might not necessarily apply. It’s tough to say if that is or isn’t part of CMS’s actually modus operandi.

“The timing issue will have little impact on legislative considerations,” Shirvinsky says.

How Is 45 Percent Even Feasible?

Of course the biggest shocker is the size of the bid amounts. When Round One of competitive bidding was first bid in 2008, the average cut to DME was 26 percent. That alone was shocking enough to the industry. The size of those cuts, in addition to 2008’s massive problem with legitimate bids getting tossed by CMS, led to the industry securing a delay to Round One and a re-bid, per the Medicare Improvements for Patients and Providers Act. Of course, that came with a 9.5 percent cost on Round One’s categories.

When Round Two was bid again, the re-bid ushered in a whopping 32 percent average reimbursement cut to Round One’s categories and CBAs. This is what scuttled the Meek bill, which was expecting an 18 percent cut and had been scored based on that. No one was expecting such a massive cut.

And very few were expecting a 45 percent cut this time around. Were providers really willing to slash their revenues by that much to get a contract? Is that even sustainable? Needless to say, Round Two’s cuts took many by surprise.

“The Round Two payment rates are shockingly low, unsustainable and the direct result of Medicare ignoring the auction expert’s recommendations and strong communications from providers, beneficiaries, and even Congress to fix the fundamentally flawed bidding program prior to implementation,” Johnson says. “This type of result was predicted by the auction experts due to the fundamentally flawed structure of the Medicare bidding program.”

“I think everyone was shocked, really shocked. It refl ects the fact that the CMS bid program is fundamentally flawed, it incentives only desperately low bids in an effort to stay in business,” Bachenheimer agreed. “The program is anticompetitive, as it arbitrarily eliminates good competitors.”

“It’s unsustainable,” Stanfield agrees. “I predicted greater than Round One, but this much is appalling.

“There are no margins close to 45 percent in the DME industry and this will put both winner and losers out of business,” he adds.

Of course, while shocking as they are, the Round Two bid amounts did play right along with the argument many were making that some providers would engage in “suicide bidding” to get a contract, and that CMS’s bid system was almost engineered to encourage that.

“As we predicted, the flawed competitive bidding process resulted in suicide bidding,” Witter says. “The Round Two prices announced by CMS are unsustainable and are not based on true market prices. Rather than paying winners the clearing price (the last-accepted bid), Medicare’s bidding program pays winners the un-weighted median price among the winning bids resulting in fifty percent of the winning bidders being offered a contract price less than their bids. If a provider is offered a contract and declines it, its bid (no matter how low) is still included in the calculation to determine the single payment rate.”

“I am not surprised, but I am disappointed,” agrees Georgie Blackburn, vice president of Government Relations & Legislative Affairs for Blackburn’s Pharmacy. “CMS’s program is designed to drive extremely low bidding that is not binding. So firms bidding excessively low and accepting awards may be doing so in order to be acquired rather than take care of patients.”

Combine the low-ball bidding with an extremely Byzantine approach to scoring the bids, and the resulting system is not going to sit on solid ground. Especially if CMS is not thoroughly examining bids to see if providers’ past Medicare activity jibes with their bidding documentation.

“While it is evident that a relatively large amount of suppliers low-balled their bids (remember 45 percent is the median, which means half of the bidders bid below 45 percent, on average), I believe there is equal blame on the CMS capacity process,” says Mark Higley vice president of Development for the VGM Group Inc. “VGM emphasized the capacity offering conundrum/hazard throughout the Round Two process. This was an area where we had difficulty ascertaining whether HMEs were increasing their unit offerings on Form B (either by ignorance or in an attempt to shut other bidders out).

“As we know now, the demand was quickly satisfied with only 800 some companies,” Higley continues. “By example, assume there are 12 contracts awarded for oxygen in a CBA. The sixth lowest bidder (out of perhaps 75) sets the price. What happens when small suppliers offer four times or 10 times their current patient census? CMS has the authority to scale back the capacity offering to refl ect historical reimbursement applicable to that supplier. But to what extent was that authority used? The results suggest otherwise.”

To that point, VGM’s Higley adds that noted competitive bidding critic and University of Maryland Economics Professor Peter Cramton brought this topic to light in an online essay found at: www.cramton.umd.edu.

And the result of this flawed system? Providers, if they are getting contract offers, are often being offered contracts for amounts that they did not bid.

“Initial feedback from our members is that they were not awarded contracts,” says Rob Brant, president of the Accredited Medical Equipment Providers of America. “Others were awarded contracts but at rates far below what they bid at. The rates are a slap in the face to established providers who have been serving the patients in their communities. These companies know the cost to consistently collect documentation, provide equipment and supplies, adhere to 30 supplier standards, bill Medicare, deal with audits and denials. The Round Two rates appear to be created by bidders who simply looked at the rates from Round One and cut them by 20 percent.”

And, at the end of the day, that result creates an unsustainable situation, according to Shirvinksy.

“These bid amounts are not serious and cannot be sustained over time without doing irreparable damage to both
providers and the Medicare patients that we serve,” Shirvinsky says. “Most of were hoping for something better, but the results simply verify the educated predictions of the auction experts.”

Who Gets Hit Hardest?

A visit to the Competitive Bidding Implementation Contractor (CBIC) site at www.dmecompetitivebid. com will yield a spread sheet containing all the Round Two reimbursement amounts. Digging into them, it’s clear that some of the categories have been slammed with hefty haymakers when it comes to cuts. Diabetics is one of them

“Diabetics will have a significant impact since you can’t but any quality strips for $10.41 a box,” says Stanfield.”

“Remember, Medicare only pays 80 percent of the allowed rate, so providers only get $8.33 per box,” Brant explains. “So after paying about $6 for packaging and shipping, your left with only a few dollars per box for COGS. But Medicare believes that providers will take a $20 loss per box on One Touch, Accucheck and other brand name supplies — forget about and cost for collecting documentation, billing, dealing with denials. They also calculated overhead and profit in these ‘bona fide bids.’ How?”

Another hard-hit category is oxygen, which has already seen a cascade of reimbursement cuts and funding difficulties over the past five years.

“At less than $120 total for stationary and portable, no one can serve a patient for 60 months and make be profitable,” Stanfield says.

Round Two has “portable oxygen at $18 per month, for as many tanks as the patient needs,” Brant notes. “Medicare only pays 80 percent, or $14.40 per month in the New York City area, for example, with the highest cost of living in the country,” he says. “How?”

But as a whole, now matter how the reimbursement rates are examined, the obvious conclusion is that things are rough all over. Every single category is a point of pain. How can a “winning” provider make this situation work?

“Reimbursement rates for all categories in Round 2 are equally unrealistic,” Witter says. “These prices will be locked in for a 3 year period without any adjustment, no matter what the price is for gas or labor in 2016.”

“All the categories are severely under-priced in terms of the care and service required,” Blackburn says. “Those that sign contract at this level will have to do targeted and substantial marketing to capture market share to make the numbers work in their favor.”

“If these rates are implemented I think all product categories will be acutely and immediately impacted,” Johnson warns. “Grandfathering will help to a degree, but the average reduction in all categories, with the exception of standard wheelchairs, is in excess of 40 percent! Those levels of reductions are simply untenable.”

Was There Any Funny Business?

So far, these comments are taking the bid amounts at face value. But already some people in the industry are starting to get suspicious about at least some of the bid amounts. There are some quizzical similarities in bids for some of the categories. For instance, in the case of oxygen, under E1390, 33 percent of the Round Two bidders bid $90 to the penny, and two others bid $90.01. Does this represent a mere statistical anomaly or something else?

For Blackburn, the bids “demonstrates the irrational low bidding that took place in Round Two,” but that to her knowledge “no collusion existed within our industry among compliant providers who understand the antitrust laws.”

Altogether, Shirvinsky says the similarities might not pass the sniff test. And if they do, it illustrates Blackburn’s point about the identical numbers hinting at rampant low-ball bidding.

“Knowing the costs involved in delivering medical oxygen, the costs associated with compliance and the commitment to offering 24/7 care for 60 months while only being compensated for 36 months, rates this low are suspect,” he says. “According to the research conducted by economists and auction experts, the CMS bid program is designed to elicit low-ball bidding. Given that fact, it shouldn’t be too surprising that such bidding settles on nice round numbers safely below the last round of bidding.”

And oxygen isn’t the only category that raised such a red flag. Power mobility also had at least one unlikely set of bid similarities.

“How about 10 single K0823 power wheelchair payment rates at $1848.25?” Brant offers as an example. “A round number like $1800.00 I can see (and there were actually 19 of those), but $1848.25. I have to guess that the same company won those bids.

“Something smells like a dead fish rotting in the bottom of a bedside commode pan,” he jokes.

What About the Legislative Front?

Of course the big issue is how will the Round Two reimbursement rates affect the industry’s efforts to stop competitive bidding. Looking back, the Meek bill was essentially scuttled because its pay-for was completely thrown off by Round One’s bid amounts.

Now Rep. Price is working to revise his bill that would replace competitive bidding with the Market Pricing Program. Do the recently released Round Two bid amounts impact that legislative effort and the industry’s lobbying gameplan?

In turns out that the incredibly low rates, and the lack of transparency and flawed system that fostered them could surprisingly wind up playing in the industry’s favor.

“The prices announced are surprisingly low,” Blackburn says. “We don’t know who the winners are. We don’t know how their capacities were manipulated to reach the numbers supplying product. We don’t know anything except the single line pricing because this is not a transparent exercise. I think our arguments against CMS’s methodology are enhanced.”

“The announcement by CMS could well be the shot in the arm Congress needs to take action,” Johnson says. “We need to continue to push the Market Pricing Program alternative to correct the fundamental flaws with the Medicare bidding program. These levels of reduction were predicted by the auction experts due to the fundamentally flawed structure of the Medicare bidding program.”

Having the proof of a broken system sitting right in front of Congress then presents the perfect opportunity to pitch the benefits of the market pricing program, Witter explains.

“The legislation introduced by Congressman Tom Price will require CMS to make fundamental changes to ensure a financially sustainable bid program for HME items,” he explains. “MPP is a state-of-the-art auction system, which will establish market-based reimbursement rates around the country. These changes are consistent with Congress’ original intent: to create a program that is based on competition while maintaining beneficiary access to quality items and services.”

That said, one hang up with the effort could lie in how Price’s legislation ensures Congress is satisfied with the MPP from a budgetary perspective. There was some discussion prior to the release of the Round Two bid rates that the pending Price bill could possibly while the MPP is implemented entice Congress into support is to adopt Round Two pricing, but not the exclusive contracts. But a 45 percent cut is just not feasible.

“I can’t see how “winners” of bids at a 45 percent average discount can provide the services and products at profitable margins long term, let alone ask an industry to do that,” Blackburn argues. “To date, CMS has never shared Round One data when asked by several members of Congress. We now have 91 more MSA’s with even more catastrophic outcomes – 10 times the debris.

“We will never know how the capacities were determined and pricing was set unless committees of jurisdiction demand the data and give it close analysis,” she continues. “We feel certain there’s a reason CMS doesn’t want to share the information. It’s high time Congress demand accountability from CMS and it’s our job, every supplier, to communicate why to our legislators. The problems with their methodology will surface when those Hearings occur — if the data is in their hands.”

And the very face that the 45 percent average cut actually means the industry might be better offer taking a harder stance, in regard to the MPP, rather than try to make up for the incredibly low rates. If CMS is expecting the impossible through its bid program, then why try to make a fantasy into reality? Better to sit with lawmakers and tell them that they need to adopt a real plan: the MPP.

“The cuts are so absurdly large that it is unlikely that we can make reasonable accommodations to achieve budget neutrality,” Shirvinsky says. “This puts the HME industry in a position similar to the physicians and the SGR: The cuts are unreasonable.

“Given that CMS was conscientiously advised of the likelihood of such irresponsible results, Round 2 essentially turned into a form of entrapment that elicited irresponsible bidding,” he explains. “Responsible providers cannot be held accountable for an irresponsible outcome that was entirely avoidable had CMS paid the least bit of attention to good faith warnings from independent experts. That said, there are ways to provide for a significant offset in keeping with initial commitments that were made to congressional supporters.”

Just the same, now is the time to act, and the 45 percent cut should at least fire-up any providers still sitting on the sidelines to get involved in the industry’s lobbying and advocacy efforts.

“These low rates should motivate the industry to mount a swift and aggressive effort to stop this from going further,” Stanfield says. “It may be the Price bill or something else, but it will help, not hurt our efforts.”

“If anything, these bid amounts should inspire more providers, consumers and other stakeholders to scream even more loudly to Congress and insist that Congress step in and stop the current program, and replace it with the industry-supported Market Pricing Program, and program designed by expert economists who have real world experience in managing successful auctions,” Bachenheimer adds.

Where Do We Go From Here?

Despite all the questions, one thing is abundantly clear, the industry needs to continue fighting to stop competitive bidding. If the program means cuts as severe as these, the experts agree that providers must do everything they can to get involved in the effort to repeal competitive bidding and replace it with something better.

Blackburn says it comes down to taking the fight to lawmakers and convincing them that they must work to stop the program before it does any more harm.

“We know the MPP is true market based bid system unlike the current methodology,” Blackburn says. “… We know the MPP would work for CMS, for patients, for suppliers, for our local economies.

“We need to build upon the letters of support from advocacy groups for the MPP,” she continues. “We have audit experts denouncing CMS’s system and singing MPP’s praises. We need to make sure every House member and Senate member knows why and is paying attention to what these experts are predicting. We need to ask our senators and representatives for their immediate help. Our industry and the care of our elderly and disabled lie in the balance.”

“I am confident that even those in Congress who believe some payment changes are necessary understand the impact implementing a 45 percent average reduction in five months will have on the industry and beneficiary access to care,” Johnson notes. “We must communicate clearly and passionately to Congress what the impact will be if they fail to stop this program prior to implementation.

Moreover, providers need to enlist the help of other stakeholders in the fight in order to bring as much pressure as possible to bear on the situation.

“Providers and patients need to educate member of Congress about the dire need to address this important issue as soon as possible,” Witter says.

And raise questions about not only the sustainability of the program, but the trustworthiness of a non-transparent system using a methodology that forces providers to take contracts for amounts at which they did not bid.

“Providers need to get together with their neighbors who serve the community, meet with their U.S. Senators and Congressmen and ask who set these rates, because it does not appear to be the local established providers,” Brant says. “They need to explain this and the need for MPP.”

“Providers need to be contacting every Member of Congress they can reach, Representatives and Senators, and explain how fundamentally flawed the program is, and how this program must be stopped before July 1,” Bachenheimer adds.

And if providers are mad as hell? Then they need to tap into that anger and use it to fuel the fight, Shirvinksy says.

“This is war,” he says. “It is a battle for the very survival of our industry. We need to make non-stop calls and visits to congressional offices. Call week after week after week with the same message. The squeaky wheel gets the grease. We need to engage our employees; our families; our patients. We didn’t create this mess. They did. But we are the ones who need to exercise our rights as American citizens and make certain that they clean the mess up.”

We must take our case to Congress in a way we have never done before,” Bachenheimer says. “No one can afford to sit on the sidelines. There are resources everywhere to help — national, state and regional associations have talking points and other documents to make the case. It’s now or never.”

This article originally appeared in the March 2013 issue of HME Business.