Be careful what you ask for

Wednesday, September 30, 2009

In early September, VGM analyst Alan Morris and I wrapped up our nine-city tour of the metropolitan areas that will be subject to national competitive bidding in 2011. We offered all-day workshops to hundreds of providers. Our 250-plus PowerPoint slides and our 40 or so reference files and bidding "toolkit" spreadsheets didn't appear to intimidate or overwhelm these fine business owners and managers. In short, they got it.

That's until we presented this slide: "CMS acknowledges, based on Round 1 experiences, that less than 400 entities are expected to be awarded contracts following the 2010 contracting period."

That's where these hard-working and dedicated providers stopped nodding in acknowledgment of the (arguably) new streamlined bidding system and began looking around the hotel ballroom. Four hundred? That's less than 45 providers per metro area.

Rewind to Sept. 10, 2007: I am in Boston for the HME Business Summit, attending a session titled "The Data Springboard: How the Numbers May Guide Us to Bid." Wallace Weeks, the presenter and a well-respected industry analyst, emphasized there are several sources of data and tools available to "take the guesswork out of submitting a competitive bid." He noted that detailed activity based costing; analysis of discounting ability; utilization trends and profitability of product categories; estimates of competitors' strengths and weakness; and so on are all integral to the proper submission of a winning bid.

In a true competitive bidding environment--Wallace is correct. But the HME providers in these first metro areas are not in a true competitive bidding environment. As a result, many of the HMEs completing these due diligence tasks will lose in one way or another. Either they will be shut out and waive three years of new Medicare business (by bidding above the pivotal price) or they will incur "winner's curse" (more on that later).

Why? HMEs in these first metro areas are subject to a rather ruthless CMS version of a sealed-bid auction. While the rational view holds that individual bidders will logically adjust their bids to reflect their own company, market evaluation and expectations, logic does not necessarily apply to the competitive bidding program--and this fact muddles the strategies of even the savviest HME bidding companies.

Let's use oxygen as an example. It's safe to assume that at least several dozen HMEs will bid the oxygen category in each metro area, and that most or all currently service the area (they're "incumbent suppliers" in economic lingo). It's probably also safe to assume that Medicare is the largest single payer for the majority of the bidders. Thus Medicare, in more economic lingo, is a key "status quo" customer. Economists believe people are significantly more averse to business losses relative to the status quo than they are attracted by potential gains (i.e. new business). The consequence of this "status quo bias" is that incumbent suppliers generally bid aggressively because of the strong preference not to lose the key customer. Further, economists believe that as the number of bidders increase or the bidding timeline expands (think of the recent CMS bidding window extensions), the more likely it is that bidders will overestimate the actual value of the customer, in this case Medicare. The result: a classic case of appropriate theory meeting ugly reality. HMEs accurately analyze their acquisition and process costs, tighten their belts, and determine their minimal acceptable margins and then discount oxygen another 10%. Or 20%. Or more.

The result? Suppliers that underestimate the number of suppliers that will submit low bids to maintain their oxygen "status quo" lose the deal. The ones that overestimate and bid at minimal or losing margins end up winners that have, effectively, overpaid. And that is what statisticians dub the "winner's curse."

I cannot, unfortunately, offer a simple remedy to mitigate this "curse." Rather, we must persist in our endeavors to derail the program. Options from stakeholders and our national association will be presented to the industry in the next several weeks and months. Take heed and acknowledge some may be painful.

But in the meantime, for those HMEs preparing to rebid in this year's Round 1, please note Wallace's hard-hitting summary of last year's Round 1:

"There is no justification for the industry offering such steep discounts. CMS has played the lack of transparency and cohesiveness in our industry to the detriment of many great businesses and the caring people who work in them. But the fault doesn't reside only in the predatory offices of our largest customer; it also resides in the hands of those who signed off on these low bids." hme

Mark Higley is vice president-development for The VGM Group.